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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported) August 10, 1998
---------------------------------
U.S. Industries, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 33-47101 22-3568449
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(State or other (Commission (I.R.S. Employer
jurisdiction of File No.) Identification No.)
incorporation)
101 Wood Avenue South
Iselin, New Jersey 08830
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (732) 767-0700
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U.S. INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Introductory Note ........................................................................ 3
Selected Financial Data .................................................................. 4
Fiscal Years Ended September 30, 1995, 1996 and 1997
Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................................... 5
Report of Independent Auditors ........................................................... 13
Report of Independent Accountants ........................................................ 14
Consolidated (Combined) Statements of Operations for
the fiscal years ended September 30, 1997, 1996 and 1995 ................................. 15
Consolidated Balance Sheets at September 30, 1997 and 1996 ............................... 16
Consolidated (Combined) Statements of Cash Flows for
the fiscal years ended September 30, 1997, 1996 and 1995 ................................. 17
Consolidated (Combined) Statements of Changes in Stockholders' Equity/Invested Capital for
the fiscal years ended September 30, 1997, 1996 and 1995 ................................. 18
Notes to Consolidated (Combined) Financial Statements .................................... 19
Three Months Ended December 31, 1997 and 1996
Managements Discussion and Analysis of Financial Condition and Results of Operation ...... 47
Consolidated Statements of Operations for the three
months ended December 31, 1997 and 1996 .................................................. 51
Consolidated Balance Sheets at December 31, 1997 and September 30, 1997 .................. 52
Consolidated Statements of Cash Flows for the three
months ended December 31, 1997 and 1996 .................................................. 53
Notes to Consolidated Financial Statements ............................................... 54
Periods Ended March 31, 1997 and 1998
Managements Discussion and Analysis of Financial Condition and Results of Operation ...... 59
Consolidated Statements of Operations for the three
and six months ended March 31, 1998 and 1997 ............................................. 64
Consolidated Balance Sheets at March 31, 1998 and September 30, 1997 ..................... 65
Consolidated Statements of Cash Flows for the six month ended
March 31, 1998 and 1997 ................................................................. 66
Notes to Consolidated Financial Statements ............................................... 67
Signatures ............................................................................... 73
Exhibit Index ............................................................................ 74
</TABLE>
<PAGE>
Item 5 Other Events
Introductory Note
As previously reported in the Current Reports on Form 8-K dated June 25,
1998 and effective June 11, 1998, pursuant to the Agreement and Plan of Merger,
dated as of February 16, 1998, as amended March 31, 1998 (the "Merger
Agreement"), among U.S. Industries, Inc., a Delaware Corporation ("Old USI"),
USI, Inc., a Delaware Corporation (the "Company"), Blue Merger Corp., a Delaware
Corporation ("Blue"), Zoro Merger Corp., a Pennsylvania Corporation ("Zoro"),
and Zurn Industries, Inc., a Pennsylvania Corporation ("Zurn"), Blue was merged
with and into Old USI and Zoro was merged with and into Zurn with each of Old
USI and Zurn continuing as a surviving corporation (the "Mergers"). Each of Old
USI and Zurn became a wholly owned subsidiary of the Company and former
stockholders of Old USI and former shareholders of Zurn became stockholders of
the Company. In connection with the Mergers, Old USI changed its name to "USI
Atlantic Corp." and the Company changed its name to "U.S.
Industries, Inc."
Pursuant to the Merger Agreement, (a) each outstanding share of common
stock, par value $.01 per share, of Old USI was converted into one share of
common stock, par value $.01 per share, of the Company ("Company Common Stock")
and (b) each outstanding share of common stock, par value $.50 per share, of
Zurn ("Zurn Common Stock") was converted into 1.6 shares of Company Common
Stock. Holders of Zurn Common Stock instead received an amount in cash equal to
the product obtained by multiplying (i) the fractional share interest to which
such holder would otherwise have been entitled (after taking into account all
shares of Zurn Common Stock held on June 11, 1998 by such holder) by (ii)
$27.00, the closing price for a share of Company Common Stock on the NYSE
Composite Transaction Tape on June 12, 1998.
Pursuant to the Merger Agreement, the Company issued to Zurn's
shareholders an aggregate of 20,439,910 shares of Company Common Stock and
$46,467.73 in cash, and to Old USI's stockholders an aggregate of 77,726,034
shares of Company Common Stock.
The following consolidated (combined) financial statements give
retroactive effect to the Mergers in a transaction accounted for as a pooling
of interests. The pooling of interests method of accounting requires the
restatement of all periods presented as if Old USI and Zurn had always
been combined. The consolidated (combined) financial statements of the
Company also give retroactive effect to the Company's realignment of its
business units, subsequent to completion of the Mergers, into four operating
units: Bath and Plumbing Products, Lighting Corporation of America, Hardware
and Tools and Diversified. The consolidated (combined) statement of changes
in stockholders' equity reflects the accounts of the Company as if the
additional common stock had been issued during the periods presented. The
consolidated (combined) financial statements, including the notes thereto,
should be read in conjunction with the historical consolidated financial
statements of Old USI and Zurn, included in their Annual Reports on Form 10-K
for the fiscal years ended September 30, 1997 and March 31, 1997,
respectively.
Prior to the filing of the Current Report on Form 8-K, the Company has
filed its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1998, which includes the date of consummation of the Zurn Merger.
Disclosure Regarding Forward-Looking Statements
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All statements other than statements of historical fact included in this
Report are forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934. Various
economic and competitive factors could cause actual results to differ materially
from the expectations reflected in such forward-looking statements, including
factors which are outside the control of the Company, such as interest rates,
foreign currency exchange rates, consumer spending patterns, availability of
consumer credit, levels of residential and commercial construction, levels of
automotive production, changes in raw material costs and instability in the
Asian markets, along with the other factors noted in this Report and in other
documents filed by the Company or its predecessor with the Securities and
Exchange Commission. In addition, the Company's future results are subject to
uncertainties relating to the Company's ability to consummate its business
strategy, including realizing marketing synergies and cost savings from the
integregation of its acquired businesses. All subsequent written and oral
forward-looking statements attributable to the Company are expressly qualified
in their entirety by the foregoing factors.
3
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SELECTED FINANCIAL DATA
Effective June 11, 1998, U.S. Industries, Inc. and Zurn Industries,
Inc. completed a merger that was accounted for as a pooling of interests. The
following tables sets forth the combined historical selected financial data of
the merged companies:
<TABLE>
<CAPTION>
Year Ended September 30,
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1997 1996 1995 (1) 1994 1993
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(in millions, except per share)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales...................................... $2,716 $2,364 $2,181 $2,080 $1,937
Operating income............................... 287 239 105 196 154
Income (loss) from continuing operations....... 136 104 (42) 53 25
Net income (loss).............................. 252 138 (72) 87 47
Income from continuing operations per share (2)
Basic....................................... 1.48 1.09 - - -
Diluted..................................... 1.43 1.07 - - -
Net income (loss) per share (2)................
Basic....................................... 2.73 1.45 - - -
Diluted..................................... 2.64 1.42 - - -
Cash dividend declared per share............... .05 - - - -
Balance Sheet Data (at period end):
Cash and cash equivalents...................... $67 $57 $67 $34 $31
Working capital................................ 651 697 721 1,159 1,310
Total assets................................... 2,538 2,502 2,232 2,608 2,709
Total debt (3)................................. 746 930 839 997 999
Stockholders' equity/Invested capital.......... 950 758 643 1,022 1,124
</TABLE>
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(1) USI changed its accounting policy for evaluating goodwill impairment in
fiscal 1995, resulting in a charge of $98 million, which affects
comparability between fiscal 1995 and previous fiscal years. Prior
periods have not been restated. Fiscal 1995 operating income includes
charges of $2 million to close certain underutilized facilities of the
lighting products operations. See Notes 11 and 12 to the Consolidated
(Combined) Financial Statements contained in the USI 1997 for 10-K1A,
which is incorporated by reference herein.
(2) All earnings per share data has been prepared in accordance with SFAS
128, which was adopted on December 31, 1997. The adoption of SFAS 128
did not have a material impact on the information previously presented.
(3) Amounts in fiscal 1994 and 1993 primarily represent intercompany notes
payable to Hanson plc.
4
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The Company's operations are grouped into four segments: Bath and
Plumbing Products, Lighting Corporation of America, Hardware and Tools and
Diversified. The results of all operations sold or classified as discontinued
are excluded from the table and discussion below. (See Note 4 to the
Consolidated (Combined) Financial Statements.) On June 11, 1998 U.S. Industries,
Inc. ("USI") merged with Zurn Industries, Inc. ("Zurn"). The merger was
accounted for as a pooling of interests. Prior to the merger, Zurn's financial
year ended on March 31. In recording the business combination Zurn's results of
operations, financial position and cash flows as of and for the year ended
September 30, 1997 have been restated to conform to USI's fiscal year end. For
the years ended September 30, 1996 and 1995 USI's results of operations and cash
flows have been combined with the results of operations and cash flows of Zurn
for the years ended March 31, 1997 and 1996, respectively, and the consolidated
balance sheet of USI as of September 30, 1996 has been combined with the balance
sheet of Zurn as of March 31, 1997.
<TABLE>
<CAPTION>
(in millions)
Fiscal Year Ended
September 30,
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1997 1996 1995 (1)
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<S> <C> <C> <C>
Net Sales
Bath and Plumbing Products............................................ $ 879 $ 685 $ 568
Lighting Corporation of America....................................... 538 508 492
Hardware and Tools.................................................... 308 238 200
Diversified........................................................... 991 933 921
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Total Net Sales................................................. $ 2,716 $ 2,364 $ 2,181
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Operating Income (Loss) (2)
Bath and Plumbing Products............................................ $ 101 $ 88 $ 77
Lighting Corporation of America....................................... 42 36 (74)
Hardware and Tools.................................................... 34 31 24
Diversified........................................................... 137 111 105
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Operating Income before corporate expenses 314 266 132
and management fees...................................................
Corporate expenses and management fees.................................. (27) (27) (27)
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Total Operating Income.......................................... $ 287 $ 239 $ 105
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</TABLE>
(1) Fiscal 1995 includes nonrecurring charges of $100 million related to
the Lighting Corporation of America to adopt a new method of evaluating
the recoverability of goodwill and measuring for permanent impairment
and to close underutilized facilities. (See Notes 11 and 12 to the
Consolidated (Combined) Financial Statements).
(2) Fiscal 1997 operating income for the Diversified operations includes
$2 million of equity earnings from the Company's investment in UPI.
5
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Fiscal 1997 Compared to Fiscal 1996
The Company had sales of $2,716 million and operating income of $287
million in fiscal 1997, increases of $352 million (14.9%) and $48 million
(20.1%), respectively, from fiscal 1996.
The Bath and Plumbing Products operations had sales and operating
income of $879 million and operating income of $101 million, increases of $194
million (28.3%) and $13 million (14.8%), respectively. The Bath and Plumbing
Products operations includes the results of Zurn. The increase in sales and
operating profit is primarily due to Zurn's acquisition of Eljer in January
1997.The bath and plumbing products operations had strong domestic sales to
large do- it-yourself (DIY) retailers and an increase in sales in the fire
protection business due to strong growth of construction activity on the West
Coast. An increase in operating profits from domestic bath operations was
substantially offset by a decline in operating income in European bath products
operations.
The Lighting Corporation of America had sales of $538 million and
operating income of $42 million, increases of $30 million (5.9%) and $6 million
(16.7%), respectively, from fiscal 1996. Particularly strong results were
reported by the Company's outdoor and residential lighting companies. The
outdoor lighting companies benefitted from new product introductions and
favorable market conditions in the high-end architectural and commercial outdoor
categories. In the residential lighting segment, sales and profits increased due
to the strong housing market. In commercial indoor lighting, operating income
was flat on slightly increased sales as competitive pricing conditions
continued.
The Hardware and Tools operations had sales of $308 million and
operating income of $34 million, increases of $70 million (29.4%) and $3 million
(9.7%), respectively. The operating income was negatively impacted due to a
difficult fourth quarter experienced by the company's ladder operations. Fourth
quarter sales and operating profits declined in the ladder business, due to
highly competitive market conditions in the DIY distribution channels, which
also resulted in a negative profit comparison for the full year. Sales and
operating income from lawn and garden products increased as the Company
benefited from new product introductions in the wheeled goods category. Also
adding to results were contributions from the acquisition of the assets of
Woodings-Verona Tool Works, Inc., a manufacturer of striking tools acquired in
January 1997, and the acquisition of IXL Manufacturing, Inc., a manufacturer of
handles for tools, acquired in July 1997.
The Diversified operations had sales of $991 million and operating
income of $137 million, increases of $58 million (6.2%) and $26 million (23.4%),
respectively. The significant increase in operating income was primarily due to
the increases in the toy, textile, metal automotive components and bearing
refurbishment businesses, partially offset by declines in vacuum cleaner sales
and footwear operations. Toy profits rose significantly due to lower advertising
costs and the absence of one-time charges associated with the exit from
promotional toys, and reduced manufacturing costs. Sales and profits also
increased in the core collectible and agricultural toy categories. Improved
tricot sales, reduced lace reserves and better manufacturing performance
contributed to the improved textile operations. For the full year, domestic and
international vacuum cleaner unit sales were lower due to continued domestic
weakness and weather related international weakness during the second half of
the year. Sales and operating profits in the footwear operations suffered from
the absence of promotional programs in child and infant shoe categories that
positively affected fiscal 1996. Sales in the automotive leather products
operations increased significantly, however the market was highly competitive
during the year and profitability was reduced by the poor quality of hides
available in the marketplace.
6
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Discontinued Operations and Extraordinary Loss
The Company had income from discontinued operations of $118 million in
fiscal 1997, consisting of gains on disposals of discontinued operations of $113
million, net of tax, and income from operations of discontinued operations of $5
million. The gains resulted from the sales, in separate transactions, of Tubular
Textile Machinery Division, SCM Metal Products, Inc., QPF, Inc., the Company's
equity investment in Ground Round Restaurants, Inc. ("Ground Round"), SunLite
Casual Furniture, Inc.'s resin outdoor furniture business and Odyssey Golf for
total consideration of $334 million. The income from operations of discontinued
operations consisted of the results of the above named companies, as well as
Tommy Armour Golf Company which was sold in November 1997 and SunLite Casual
Furniture's wrought iron and aluminum outdoor furniture business which was
discontinued in June 1998.
In fiscal 1996, the Company had income from discontinued operations of
$59 million, consisting of net gains on disposals of discontinued operations of
$58 million, net of taxes and income from operations of discontinued operations
of $1 million. The gains resulted from the sales, in separate transactions, of
Office Group America, Inc., Blue Mountain Industries, Farberware, Inc., Spartus
Electronics Corporation, Piedmont Moulding Corporation, Jade Holdings, Inc.,
Universal Gym Equipment, Inc. and Franklin Dyed Yarns for total cash
consideration of $241 million and notes of $6 million, which resulted in gains
of $68 million, net of tax. This was offset by a charge of $2 million, net of a
tax benefit of $1 million, to reduce the carrying value of the Company's equity
investment in Ground Round to its estimated realizable value and losses of $7.5
million, net of a tax benefit of $1.6 million, on the sale of Zurn's Lynx Golf,
Mechanical Power Transmission Segments and portions of the Power Systems segment
for total consideration of $68 million. The income from operations of
discontinued operations consisted of the results of the above named companies,
as well as companies noted in the preceding paragraph.
In conjunction with the repayment of all outstanding indebtedness under
a prior credit agreement, during the first quarter of fiscal 1997, a net of tax,
non-cash, extraordinary charge of $2 million was incurred to write off
unamortized deferred financing costs and for previously deferred losses
associated with interest rate protection agreements. During the first quarter of
fiscal 1996, a net of tax, non-cash, extraordinary charge of $25 million was
incurred to write off unamortized deferred financing costs and previously
deferred losses associated with interest rate protection agreements.
Gain on Sale of Subsidiary Stock
In January 1997, an initial public offering of 25% of the shares Jade
Technologies Singapore, Ltd. ("Jade"), a manufacturer of lead frames for the
electronics industry, was completed. Jade sold 8,000,000 shares at approximately
$.53 per share, generating cash proceeds of approximately $4 million. The
Company recorded a gain of approximately $1 million ($700,000 after provision
for deferred income taxes) in connection with the sale. Immediately after the
transaction, the Company owned approximately 75% of the outstanding shares of
Jade. The Company does not contemplate any significant repurchases of shares
within one year from the transaction or thereafter.
Interest and Taxes
Interest expense was $59 million for fiscal 1997, a $5 million (8%)
decrease from the prior fiscal year. The decrease reflects lower levels of debt
outstanding and lower borrowing costs in the first half of the year. Interest
income was $7 million for fiscal 1997, a $4 million (36%) decrease from fiscal
1996.
The provision for income taxes for continuing operations totaled $102
million for fiscal 1997 on pre-tax income of $238 million (a 42.9% effective tax
rate) compared to a $82 million provision on pre-tax income of $186 million for
fiscal 1996 (a 44.1% effective rate). The lower tax rate was primarily
attributable to the increased utilization of foreign tax credits partially
offset by the non deductible goodwill amortization from the Eljer acquisition.
7
<PAGE>
Fiscal 1996 Compared to Fiscal 1995
The Company had sales of $2,364 million and operating income of $239
million in fiscal 1996, increases of $183 million (8.4%) and $134 million
(127.6%), respectively, from fiscal 1995. For the years ended September 30, 1996
and 1995 USI's results of operations have been combined with the results of
operations of Zurn for the years ended March 31, 1997 and 1996, respectively.
During the third quarter of fiscal 1995, the Company recorded non-recurring
charges totaling $100 million to write-off permanently impaired goodwill from
previous acquisitions and to consolidate certain underutilized Lighting
Corporation of America Operations facilities. Excluding non-recurring charges,
operating income increased $34 million (16.6%) compared to fiscal 1995.
The Bath and Plumbing Products operations had sales and operating
income of $685 million and operating income of $88 million, increases of $117
million (20.6%) and $11 million (14.3%), respectively. The Bath and Plumbing
Products operations includes the results of Zurn. The increase in sales includes
approximately $60 million in sales for the period from January through March
1997 associated with the Eljer acquisition. While domestic bath sales increased,
market competition resulted in reduced margins leading to a flat domestic
operating income. Internationally, sales were down slightly but operating income
increased due to a shift in sales towards higher margin products and the net
beneficial effect of a stronger Italian lira. Fiscal 1996 sales also include a
partial year's contribution from a manufacturer of above-ground swimming pools
(acquired in April 1996).
The Lighting Corporation of America had sales of $508 million and
operating income of $36 million, increases of $16 million (3.3%) and $110
million (148.6%), respectively, from fiscal 1995. Fiscal 1995 results include
nonrecurring charges of $98 million to reflect the permanent impairment of
goodwill and $2 million to consolidate certain underutilized facilities.
Excluding non-recurring charges, operating income increased $10 million (38.5%)
over fiscal 1995. Strong sales at the Company's outdoor lighting subsidiaries,
cost reductions and reduced goodwill amortization resulted in increased
operating income, despite soft construction market conditions affecting the
Company's commercial lighting subsidiaries.
The Hardware and Tools operations had sales of $238 million and
operating income of $31 million, increases of $38 million (19.0%) and $7 million
(29.2%), respectively. The Company's domestic garden tool operations performed
well relative to the prior year, more than offsetting weak results at its
Canadian operation. The improvement resulted from strong spring tool sales,
successful product introductions, lower raw material costs, favorable weather
conditions and growth at key DIY accounts. Fiscal 1996 results include a full
year's contributions from the Company's plastic injection molding operations
(acquired in May 1995) and a partial year's contribution from its ladder
subsidiary (acquired in July 1996).
The Diversified operations had sales of $933 million and operating
income of $111 million, increases of $12 million (1.3%) and $6 million (5.7%),
respectively. Higher margin international sales of vacuum cleaners increased
dramatically compared to fiscal 1995, offsetting weaker domestic sales. Results
at the Company's toy subsidiary were substantially below those of the prior year
due to the failure of, and accelerated withdrawal from, the Company's
promotional toy category. This withdrawal, which resulted in a number of charges
for anticipated inventory mark-downs, was undertaken to reposition and focus the
subsidiary on its core product lines. The core product lines performed favorably
compared to the prior year. Additionally, weak market conditions for high margin
western footwear and resulting inventory liquidations adversely affected results
during fiscal 1996. In the textiles market, softness experienced throughout
fiscal 1996 caused shortfalls in sales of both tricot and lace. A $1 million
inventory charge taken during fiscal 1995 resulted in a relative improvement in
fiscal 1996. Fiscal 1996 results also reflect weaker performance at the
Company's premium automotive leather business and weakness in the semi-conductor
dependent lead frame market, which were more than offset by improvement at its
plastic and metal automotive components businesses and bearing refurbishment
business. The automotive leather business showed improved sales due to the
recovery of foreign sales lost in fiscal 1995 resulting from the threat of
tariff sanctions against certain Japanese automobiles supplied by the Company
and the building of inventories by domestic automobile manufacturers during the
fourth quarter of fiscal 1996 in anticipation of a potential strike by the
United Auto Workers union. However, the volume increases were more than offset
by the negative impact of contractual hide price pass throughs, lower prices for
sales of split hides (excess leather produced when hides are "split" during the
production of automotive and other premium leather) and high price concessions.
8
<PAGE>
Discontinued Operations and Extraordinary Loss
In fiscal 1996, income from discontinued operations of $59 million
consisted of gains on disposals of discontinued operations of $58 million and
income from operations of discontinued operations of $1 million. The gains
resulted from the sales, in separate transactions, of Office Group America,
Inc., Blue Mountain Industries, Farberware, Inc., Spartus Electronics
Corporation, Piedmont Moulding Corporation, Jade Holdings, Inc., Universal Gym
Equipment, Inc., and Franklin Dyed Yarns for cash of $241 million and notes of
$6 million, which resulted in gains of $68 million, net of tax. This was offset
by a charge of $2 million, net of a tax benefit of $1 million, to reduce the
carrying value of the Company's equity investment in Ground Round to its
estimated realizable value and the net loss of $7.5 million, net of a tax
benefit of $1.6 million, on the sale of the Lynx Golf and Mechanical Power
Transmission segments and portions of the Power Systems segment of $9 million
for total proceeds of $68 million. The income from operations of discontinued
operations consisted of the results of the above named companies, as well as
companies not yet disposed of as of September 30, 1996.
In fiscal 1995, the Company had a loss from discontinued operations of
$30 million consisting of losses on disposals of discontinued operations of $44
million and income from operations of discontinued operations of $4 million.
Losses on dispositions reflect non-cash charges of $53 million, net of tax,
recorded at the time of adoption of a formal plan of disposal to reduce the
carrying value of several discontinued operations to their expected net
realizable value, a $1 million loss, net of tax, related to the Company's
disposition of its equity investment in Beazer Homes USA, Inc. ("Beazer Homes")
and a gain of $11 million on the sale of Bear Archery, Inc., Valley Recreation
Products, Inc., Teters Floral Products, Inc., MW Manufacturers, Inc., Brown
Moulding Company, Inc. and Halkey-Roberts Corporation for $200 million. Income
from operations of discontinued operations consisted of the results of the
above-named companies, as well as companies not yet disposed of as of September
30, 1995.
During the first quarter of fiscal 1996, a net of tax, non-cash,
extraordinary charge of $25 million was incurred to write-off unamortized
deferred financing costs and accrue for previously deferred losses associated
with interest rate protection agreements.
Interest and Taxes
Interest expense was $64 million for fiscal 1996, a $38 million
(37.3%) decrease from fiscal 1995. The decrease reflects lower levels of debt
outstanding and lower average interest rates. Prior to May 31, 1995,
outstanding indebtedness was comprised primarily of notes payable to Hanson
with interest at fixed rates which were higher than those incurred under the
Company's credit facilities and indebtedness of Zurn Industries. Interest
income was $11 million for fiscal 1996, unchanged from fiscal 1995.
The provision for income taxes totaled $82 million for fiscal 1996 on
pre-tax income of $186 million (a 44.1% effective tax rate) compared to a $54
million provision on a pre-tax income of $12 million for fiscal 1995. The fiscal
1995 pre-tax income included significant nondeductible non-recurring charges.
9
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of liquidity and capital resources are
cash from operations, external borrowings and proceeds from the sales of
non-core businesses and assets. For fiscal 1997 cash from operations and
proceeds from the sales of non-core businesses and assets exceeded the cash used
for capital expenditures, acquisitions, common stock repurchases and dividends
leading to an overall decrease in outstanding debt at year-end.
Net cash provided by operating activities was $57 million for fiscal
1997 compared to $143 million for fiscal 1996. Of these amounts $135 million and
$163 million, respectively, were provided by continuing operations. The decrease
in cash provided from operations is primarily attributable to increased tax
payments, and certain other working capital requirements. Discontinued
operations used $78 million and $20 million of cash in 1997 and 1996,
respectively. The use of cash by discontinued operations in fiscal 1997 is
primarily attributable to the increased working capital requirements of the
Company's Power Systems segment and its golf operations prior to their sale.
Net cash provided by investing activities was $97 million for fiscal
1997 compared to $62 million for fiscal 1996. Fiscal 1997 included proceeds $442
million from the sale of net assets held for disposition, real estate and
marketable securities, partially offset due to expenditures of $269 million
related to the acquisition of companies and capital expenditures of $76 million.
Net cash used in financing activities was $139 million for fiscal 1997
compared to $215 million for fiscal 1996. Fiscal 1997 activity consists of
long-term debt and notes payable repayments in excess of new borrowings totaling
$75 million and the purchase of $67 million of the Company's common stock for
treasury, partially offset by stock option proceeds.
At September 30, 1997 the Company had current maturities of long-term
debt and short-term notes payable aggregating $39 million. The Company had $200
million of unused availability under uncommitted short-term lines of credit and
$400 million of unused credit available under the Existing Credit facility (as
defined below) at September 30, 1997. The Company believes that cash provided by
operations and availability under unused credit facilities will provide adequate
support for cash needs for working capital, capital expenditures for existing
businesses and future principal payments under the term loan facility.
Total stockholders' equity increased by $192 million from September
1996 to September 1997, principally due to net income for fiscal 1997, partially
offset by purchases $67 million of the Company's Common Stock for treasury.
10
<PAGE>
Senior Notes and Credit Facility
In fiscal 1997, USI American Holdings, Inc. ("USIAH"), a wholly owned
subsidiary of the Company, issued $125 million aggregate principal amount of
7.25% Senior Notes due December 1, 2006 (the "Notes"). The net cash proceeds
were $123 million after transaction fees and discounts. The Notes bear interest
at 7.25% payable semiannually on June 1 and December 1, commencing June 1, 1997,
and are redeemable at the option of USIAH in whole or in part, at a redemption
price equal to the greater of (i) 100% of the principal amount to be redeemed,
or (ii) the sum of the present values of the remaining scheduled payments of
principal and interest on the Notes to be redeemed, discounted at a rate based
on the yield to maturity of the Comparable U.S. Government securities plus 10
basis points, plus, in each case, accrued interest to the date of redemption.
The Notes are fully and unconditionally guaranteed by USI. The Notes are
unsecured but the indenture places restrictions on, among other things, liens,
and subsidiary indebtedness (which are generally limited, together, to 10% of
consolidated net tangible assets, as defined) and dividends and the purchase of
Common Stock for treasury (based on a formula set forth in the indenture). At
September 30, 1997, these restrictions limited dividends and purchases of Common
Stock to $157 million. USIAH has exchanged the Notes, which were not registered
under the Securities Act of 1933 at the time of issuance, for registered notes
having substantially the same terms as the Notes. See Note 17 to the
Consolidated Combined Financial Statements for the summary information of USIAH.
The proceeds from the sale of the Notes were used to repay borrowings under the
Company's existing credit agreement (the "Previous Credit Agreement"), the
remainder of which was repaid using proceeds from the initial borrowing under a
credit agreement date December 12, 1996 (the "Credit Agreement").
The Credit Agreement consists of a five year revolving line of credit
of up to an aggregate amount of $750 million. The revolving credit commitment
will be permanently reduced by $100 million on December 12, 1999 and by an
additional $150 million on December 12, 2000. The Credit Agreement includes (i)
committed advances ("Committed Advances") and (ii) uncommitted bid option
advances. The Committed Advances are at lower borrowing spreads than the
previous credit agreement and bear interest based on, at the option of the
Company, (i) specified spreads over London Interbank Offer Rate ("LIBOR") or
(ii) the higher of the rate of interest publicly announced by Bank of America in
San Francisco, California as its reference rate or 50 basis points above federal
funds rate in effect on such date (the "Base Rate"). The spreads on the
LIBOR-based borrowings range between 15 and 62.5 basis points, based on the
Company's senior unsecured debt rating for the relevant period. At September 30,
1997 three-month LIBOR was 5.72% per annum and the spread over LIBOR was 25
basis points. A facility fee, regardless of the amount utilized, is payable on a
quarterly basis in arrears under the Credit Agreement on the full amount of the
facility. The facility fee ranges between 7.5 and 25 basis points per annum,
based upon the Company's senior unsecured debt ratings for the relevant period.
At September 30, 1997, the facility fee was 12.5 basis points per annum.
Zurn Industries, Inc., prior to giving effect to the merger, was an
obligor under a $250 million secured credit facility. The facility consisted of
a $200 million term loan, payable by excess annual cash flow and proceeds from
sales of assets and investments to be applied in inverse order. The facility
also included a $50 million revolving loan sub-limit to be used for general
corporate purposes and letters of credit. Interest was at prime or Eurodollar
rates plus 0% to 1.5% and .75% to 2.5% respectively, based on the defined ratio
of total debt to earnings before interest, taxes, depreciation and amortization.
Fees up to .375% are payable on utilized loan commitments. All amounts under the
facility become due upon a change in control. As a result of the merger with the
Company the facility became due and was repaid by the Company on June 11, 1998.
The Company used proceeds from a short-term committed note, made available from
one of its lenders, to repay the borrowings under the Zurn Facility. The
short-term committed note bears interest at a rate of approximately 5.88% per
annum and has a maturity date of September 11, 1998. The Company expects to
refinance this obligation and a portion of its obligations under its existing
credit agreement with a $300 million to $500 million debt offering in early
August
Interest paid, including amounts under swap agreements, during fiscal
1997, 1996 and 1995 was $63 million, $67 million, and $92 million, respectively
(which included interest paid to Hanson of $60 million in 1995).
11
<PAGE>
The Credit Agreement places restrictions on, among other things, liens,
mergers, consolidations and additional indebtedness. Its financial covenants
require the Company to comply with a maximum ratio of total funded debt to
capital and a consolidated leverage ratio.
Risk Management
To manage its interest rate exposure, the Company entered into interest
rate protection agreements to receive a floating rate based on three-month LIBOR
and pay a weighted average fixed rate. Currently, the fixed interest rates under
the interest rate protection agreements range from 6.07% to 6.77% per annum. Net
payments under the agreements amounted to approximately $5 million, $7 million
and $2 million for fiscal 1997, 1996 and 1995, respectively. All interest rate
protection agreements are of notional amounts and maturities that relate to
specific portions of outstanding debt, and accordingly, are accounted for as
hedge transactions. The aggregate notional amounts and periods covered by such
agreements are as follows:
<TABLE>
<CAPTION>
<S> <C>
September 30, 1997 through May 28, 1999.................................$300 million
May 29, 1999 through September 30, 1999.................................$200 million
October 1, 1999 through September 30, 2000..............................$100 million
</TABLE>
To protect the U.S. dollar value of its anticipated profits denominated
in foreign currencies, from time to time, the Company purchases foreign currency
option contracts. The contracts are purchased and settled in U.S. dollars. The
Company had no exposure with respect to these foreign currency options contracts
other than the cost of such options. The cost of such foreign currency options
was not material and was charged to operations over the period of the options.
The interest rate protection agreements and foreign exchange options
described above were the only derivative instruments held or entered into by the
Company at or during fiscal 1997 and 1996. See Notes 2 and 5 to the Consolidated
(Combined) Financial Statements.
Foreign Currency Matters
The functional currency of each of the Company's foreign operations is
the local currency, with the exception of Brazil. Because Brazil's economy
historically has been hyperinflationary, the functional currency of the
Company's operations in Brazil has been the U.S. dollar. Effective October 1,
1997, Brazil will no longer be considered hyperinflationary. Interest earned on
deposits in Brazil substantially offset foreign currency translation losses
incurred as a result of remeasurement, which were $1 million, $1 million and $2
million in fiscal 1997, 1996 and 1995, respectively. Historically, the net
impact of currency translation has not been material to the Company's financial
position. See "Risk Management" above for information concerning certain foreign
currency option contracts purchased to protect the U.S. dollar value of
anticipated foreign currency earnings.
Effect of Inflation
Because of the relatively low level of inflation experienced in the
Company's principal markets, inflation did not have a material impact on its
results of operations in fiscal 1997, 1996 or 1995.
12
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
U.S. Industries, Inc.
We have audited the consolidated balance sheets of U.S. Industries,
Inc. (formed as a result of the merger of U.S. Industries, Inc. and Zurn
Industries, Inc., see Note 1) as of September 30, 1997 and 1996 and the related
consolidated (combined) statements of operations, cash flows, and changes in
stockholders' equity/invested capital for each of the three years in the period
ended September 30, 1997. The consolidated (combined) financial statements give
retroactive effect to the merger of U.S. Industries, Inc. and Zurn Industries,
Inc. on June 11, 1998, which has been accounted for using the pooling of
interests method as described in the notes to the consolidated (combined)
financial statements. These financial statements are the responsibility of the
management of U.S. Industries, Inc. Our responsibility is to express an opinion
on these supplemental financial statements based on our audits. We did not audit
the financial statements of certain subsidiaries/combined companies (U.S.
Industries' Automotive Group and Jacuzzi Companies in 1997 and 1996, and the
Automotive Group Companies in 1995) which statements reflect 22% of consolidated
total assets as of September 30, 1997 and 1996, and 27%, 26% and 26% of
consolidated (combined) revenues for the years ended September 30, 1997, 1996
and 1995, respectively. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to data
included for these companies, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of U.S. Industries, Inc. at
September 30, 1997 and 1996, and the consolidated (combined) results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1997, after giving retroactive effect to the merger of Zurn
Industries, Inc., as described in the notes to the consolidated (combined)
financial statements, in conformity with generally accepted accounting
principles.
As discussed in Note 11 to the financial statements, in 1995, the Company
changed its method of accounting for goodwill impairment.
/s/ Ernst & Young LLP
New York, New York
June 26, 1998
13
<PAGE>
REPORT OF PRICE WATERHOUSE LLP
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
U.S. Industries, Inc.
We have audited the accompanying combined balance sheets of the U.S.
Industries Automotive Group and Jacuzzi Companies as of September 30, 1997 and
1996, and the related combined statements of operations and cash flows for the
years then ended (not presented separately herein). Our audit also included
Financial Statement Schedule II of the U.S. Industries Automotive Group and
Jacuzzi Companies for the years ended September 30, 1997 and 1996 (not presented
separately herein). We have also audited the accompanying combined balance sheet
of the U.S. Industries Automotive Group as of September 30, 1995, and the
related combined statements of operations and cash flows for the year then ended
(not presented separately herein). Our audit also included Financial Statement
Schedule II of the U.S. Industries Automotive Group for the year ended September
30, 1995 (not presented separately herein). These financial statements and
schedules are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements audited by us present
fairly, in all material respects, the combined financial position of the U.S.
Industries Automotive Group and Jacuzzi Companies at September 30, 1997 and
1996, and the results of their operations and cash flows for the years then
ended and the combined financial position of the U.S. Industries Automotive
Group at September 30, 1995, and the results of their combined operations and
cash flows for the year then ended in conformity with generally accepted
accounting principles. Also, the financial statement schedules referred to
above, when considered in relation to the basic combined financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSE LLP
Morristown, New Jersey
November 14, 1997
14
<PAGE>
U.S. INDUSTRIES, INC.
CONSOLIDATED (COMBINED) STATEMENTS OF OPERATIONS
(in millions except per share)
<TABLE>
<CAPTION>
For the fiscal years ended
September 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales.................................................................... $ 2,716 $ 2,364 $ 2,181
Operating costs and expenses:
Cost of products sold............................................... 1,857 1,613 1,494
Selling, general and administrative expenses........................ 572 512 482
Goodwill impairment and non-recurring charges....................... - - 100
---------- ----------- ------------
Operating income 287 239 105
Interest expense............................................................. 59 64 102
Interest income.............................................................. (7) (11) (11)
Gain on sale of subsidiary shares............................................ (1) - -
Other (income) expense, net.................................................. (2) - 2
---------- ----------- ------------
Income before income taxes, discontinued operations and extraordinary loss... 238 186 12
Provision for income taxes................................................... 102 82 54
---------- ----------- ------------
Income (loss) from continuing operations............................ 136 104 (42)
---------- ----------- ------------
Discontinued operations:
Income from operations (net of income taxes of $3, $3 and $21)...... 5 1 14
Gain (loss) on disposals (net of income taxes of $68, $8 and $(4)).. 113 58 (44)
---------- ----------- ------------
Income (loss) from discontinued operations.......................... 118 59 (30)
---------- ----------- ------------
Income (loss) before extraordinary loss...................................... 254 163 (72)
Extraordinary loss from early extinguishment of debt
(net of income tax benefits of $1 and $16)............................... (2) (25) -
---------- ----------- ------------
Net income (loss)............................................................ $ 252 $ 138 $ (72)
---------- ----------- ------------
---------- ----------- ------------
Earnings per basic share:
Income from continuing operations................................... $ 1.48 $ 1.09
Income from discontinued operations................................. 1.27 .62
Extraordinary loss.................................................. (0.02) (0.26)
---------- -----------
Net income.......................................................... $ 2.73 $ 1.45
---------- -----------
---------- -----------
Earnings per diluted share:
Income from continuing operations................................... $ 1.43 $ 1.07
Income from discontinued operations................................. 1.23 .61
Extraordinary loss.................................................. (0.02) (0.26)
---------- -----------
Net income.......................................................... $ 2.64 $ 1.42
---------- -----------
---------- -----------
</TABLE>
See notes to consolidated (combined) financial statements.
15
<PAGE>
U.S. INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in millions except share data)
<TABLE>
<CAPTION>
At September 30,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................................. $ 67 $ 57
Trade receivables, net..................................................................... 502 465
Inventories................................................................................ 501 482
Deferred income taxes...................................................................... 107 101
Other current assets....................................................................... 55 61
Net assets held for disposition............................................................ 69 135
---------- ----------
Total current assets.................................................................. 1,301 1,301
Property, plant and equipment, net............................................................ 422 388
Deferred income taxes......................................................................... 3 23
Other assets.................................................................................. 212 193
Goodwill, net................................................................................. 600 597
---------- ----------
$ 2,538 $ 2,502
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.............................................................................. $ 4 $ 1
Current maturities of long-term debt....................................................... 41 51
Trade accounts payable..................................................................... 189 204
Accrued expenses and other liabilities..................................................... 344 288
Income taxes payable....................................................................... 72 60
---------- ----------
Total current liabilities............................................................. 650 604
Long-term debt................................................................................ 701 878
Other liabilities............................................................................. 237 262
---------- ----------
Total liabilities.......................................................................... 1,588 1,744
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock (par value $.01) per share, authorized 300,000,000 shares; issued 101,109,040 1 1
and 100,714,390, respectively; outstanding 94,496,490, and 96,851,941, respectively)....
Paid in capital............................................................................ 612 605
Retained earnings ......................................................................... 470 226
Unearned restricted stock.................................................................. (16) (19)
Other equity............................................................................... (6) (5)
Treasury stock (6,612,550 and 3,862,449 shares, respectively) at cost...................... (111) (50)
---------- ----------
Total stockholders' equity............................................................ 950 758
---------- ----------
$ 2,538 $ 2,502
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated (combined) financial statements.
16
<PAGE>
U.S. INDUSTRIES, INC.
CONSOLIDATED (COMBINED) STATEMENTS OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
For the fiscal years ended
September 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Income (loss) from continuing operations.............................................. $ 136 $ 104 $ (42)
Adjustments to reconcile income (loss) from continuing operations to net
cash provided by operating activities of continuing operations:
Depreciation and amortization...................................................... 75 64 58
Provision for deferred income taxes................................................ 24 14 14
Provision for doubtful accounts.................................................... 2 5 10
Gain on sale of excess real estate................................................. (3) (5) (7)
Gain on sale of subsidiary stock................................................... (1) - -
Goodwill impairment & non-recurring charges........................................ - - 100
Changes in operating assets and liabilities, excluding the effects of
acquisitions and dispositions:
(Increase) decrease in trade receivables........................................... (22) (15) 5
Increase in inventories............................................................ (12) (18) (4)
Decrease (increase) in other current assets........................................ 8 30 (3)
Increase in other non-current assets............................................... (53) (11) (34)
(Decrease) increase in trade accounts payable...................................... (14) 15 12
(Decrease) increase in income taxes payable........................................ (21) 1 31
Increase (decrease) in accrued expenses and other liabilities...................... 15 (15) 13
Increase (decrease) in other non-current liabilities............................... 3 (7) 1
Other, net......................................................................... (2) 1 1
------ ------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS................. 135 163 155
------ ------- ---------
Income (loss) from discontinued operations............................................ 118 59 (30)
Adjustments to reconcile income (loss) from discontinued operations to net cash
used in discontinued operations:
(Gain) loss on disposal of discontinued operations................................. (113) (58) 44
Increase in net assets held for disposition........................................ (83) (21) (41)
------ ------- ---------
NET CASH USED IN DISCONTINUED OPERATIONS........................................... (78) (20) (27)
------ ------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......................................... 57 143 128
------ ------- ---------
INVESTING ACTIVITIES:
Proceeds from sale of net assets held for disposition................................. 390 314 247
Proceeds from sale of excess real estate.............................................. 28 31 55
Proceeds from sale of subsidiary stock................................................ 4 - -
Proceeds from collection of other notes receivable.................................... - 7 2
Acquisition of companies, net of cash acquired........................................ (269) (239) (19)
Purchase of investments............................................................... (5) (12) -
Proceeds from sale of investments........................................................ - 2 2
Proceeds from sale of marketable securities.............................................. 24 6 35
Purchases of property, plant and equipment............................................ (76) (51) (72)
Proceeds from sale of property, plant and equipment................................... 2 4 1
Other net............................................................................. (1) - -
------ ------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES.......................................... 97 62 251
<PAGE>
FINANCING ACTIVITIES:
Proceeds from long-term debt.......................................................... 1,626 1,135 1,423
Repayment of long-term debt........................................................... (1,705) (1,296) (472)
Proceeds from (repayment of) notes payable............................................ 4 (3) 4
Payment of dividends..................................................................... (4) (5) (6)
Purchase of treasury stock............................................................ (67) (46) -
Proceeds from exercise of stock options............................................... 7 - -
Net cash transfers from affiliate..................................................... - - 90
Return of capital to Hanson, net of tax............................................... - - (477)
Repayment of debt to Hanson........................................................... - - (873)
Long-term debt issue costs............................................................ - - (33)
------ ------- ---------
NET CASH USED IN FINANCING ACTIVITIES.............................................. (139) (215) (344)
Effect of exchange rate changes on cash.................................................. (5) - (2)
------ ------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................... 10 (10) 33
Cash and cash equivalents at beginning of year........................................... 57 67 34
------ ------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR........................................... $ 67 $ 57 $ 67
</TABLE>
See notes to consolidated (combined) financial statements.
17
<PAGE>
U.S. INDUSTRIES, INC.
CONSOLIDATED (COMBINED) STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY/INVESTED CAPITAL
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1997, 1996 and 1995
(in millions, except share data)
<TABLE>
<CAPTION>
Retained Unearned
Invested Common Paid in Earnings/ Restricted Other Treasury
Capital Stock Capital (Deficit) Stock Equity Stock Total
------- ----- ------- --------- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance previously stated at September 30,
1994................................. $ 803 $ 803
Adjustments for pooling of interests.......... 42 185 (3) (5) 219
------- ----- ------- --------- ----- ------ ----- -----
Balance restated at September 30, 1994........ 803 42 185 (3) (5) 1,022
Net income through date of Demerger........... 15 15
Net transfers_Hanson.......................... 190 190
------- ----- ------- --------- ----- ------ ----- -----
Balance at date of Demerger................... 1,008 42 185 (3) (5) 1,227
------- ----- ------- --------- ----- ------ ----- -----
Return of invested capital to Hanson - Note 1 (494) (494)
Issuance of stock............................. (514) 1 516 (3) -
Issuance of restricted stock.................. 26 (26) -
Net loss ..................................... (87) (87)
Cash dividend declared ($0.25 per share) Zurn. (5) (5)
Amortization of unearned restricted stock..... 2 2
Translation adjustment........................ 1 1
Minimum pension liability adjustment.......... (1) (1)
------- ----- ------- --------- ----- ------ ----- -----
Balance at September 30, 1995................. - 1 584 93 (24) (6) (5) 643
Net income.................................... 138 138
Cash dividend declared ($0.25 per share) (5) (5)
Zurn.......................................
Amortization of unearned restricted stock..... 7 7
Purchase of 3,581,386 shares of common stock.. (46) (46)
Common stock issued (58,707 shares) upon - - -
exercise of options...........................
Common stock issued (35,993 shares) to - - -
employee and directors........................
Treasury stock issued (93,000 shares) 1 (2) 1 -
to employees and directors.............
Forfeiture of 25,460 shares of - - -
unearned restricted stock.............
Deferred tax benefit--Note 9.................. 20 - 20
Translation adjustment........................ (1) (1)
Minimum pension liability adjustment.......... 2 2
------- ----- ------- --------- ----- ------ ----- -----
Balance at September 30, 1996................. - 1 605 226 (19) (5) (50) 758
------- ----- ------- --------- ----- ------ ----- -----
Net income.................................... 252 252
Less net income for Zurn for the six months (2) (2)
ended March 31, 1997.........................
Cash dividend declared ($0.05 per share) (4) (4)
Cash dividend declared ($0.12 per share) (2) (2)
Zurn......................................
Amortization of unearned restricted stock..... 7 7
Purchase of 3,134,343 shares of common stock . (67) (67)
Common stock issued to employees and - - -
directors (11,360 shares)..................
Common stock issued (336,714 shares) upon - 3 3
exercise of options.........................
Common stock issued (46,576 shares) to Zurn 1 1
pension plans...............................
Treasury stock issued (550,307 shares) to 1 (5) 6 2
employees and directors.....................
Forfeiture of 166,065 shares of unearned - (1) 1 -
restricted stock............................
Income tax benefit relating to stock plans.... 3 3
Translation adjustment........................ (2) (2)
Minimum pension liability adjustment.......... 1 1
------- ----- ------- --------- ----- ------ ----- -----
Balance at September 30, 1997................. $ - $ 1 $ 612 $ 470 $ (16) $ (6) $(111) $ 950
------- ----- ------- --------- ----- ------ ----- -----
------- ----- ------- --------- ----- ------ ----- -----
</TABLE>
See notes to consolidated (combined)financial statements.
18
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS
Note 1_Basis of Presentation
On June 11, 1998, U.S. Industries, Inc. ("USI") merged with
("the Merger") Zurn Industries, Inc. ("Zurn"), hereafter collectively
referred to as the Company, by exchanging approximately 20 million
shares of its common stock for all of the common stock of Zurn. Each
share of Zurn common stock was exchanged for 1.6 shares of USI common
stock. Outstanding Zurn employee stock options were converted at the
same exchange ratio into options to purchase approximately 2 million
shares of USI common stock.
The consolidated (combined) financial statements give
retroactive effect to the merger in a transaction accounted for as a
pooling of interests. The pooling of interests method of accounting
requires the restatement of all periods presented as if USI and Zurn
had always been combined. The consolidated (combined) statement of
changes in stockholders' equity reflects the accounts of the Company as
if the additional common stock had been issued during the periods
presented. The consolidated (combined) financial statements, including
the notes thereto, should be read in conjunction with the historical
consolidated financial statements of USI and Zurn, included in their
Annual Reports on Form 10-K for the fiscal years ended September 30,
1997 and March 31, 1997, respectively.
The Company manufactures and distributes a broad range of
consumer and industrial products that are grouped into four segments:
Bath and Plumbing Products, Lighting Corporation of America, Hardware
and Tools and Diversified.
USI has been a publicly-owned entity since May 31, 1995, at
which time Hanson PLC ("Hanson") paid a dividend to its shareholders of
USI's common stock. The financial information for the period prior to
May 31, 1995, reflect management fees that were paid by subsidiaries of
the Company to Hanson for services. Subsequently all such services have
been provided by USI.
Prior to the merger, Zurn's financial year ended on March 31.
In recording the business combination, Zurn's results of operations,
financial position and cash flows for the year ended September 30, 1997
have been restated to conform to USI's fiscal year end. For the years
ended September 30, 1996 and 1995 USI's results of operations and cash
flows have been combined with the results of operations and cash flows
of Zurn for the years ended March 31, 1997 and March 31, 1996,
respectively, and the consolidated balance sheet of USI as of September
30, 1996 has been combined with the balance sheet of Zurn as of March
31, 1997. The Company's results for the years ended September 30, 1997
and 1996 both include Zurn's results for the six months ended March 31,
1997. Zurn's net sales, operating income and net income for the six
months then ended were $190 million, $16 million and $2 million,
respectively.
There were no transactions between USI and Zurn prior to the
combination. Certain reclassifications have been made to the Zurn
financial statements to conform to USI's presentations.
19
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 1-Basis of Presentation (Continued)
The results of operations for the separate companies and the
combined amounts presented in the consolidated financial statements
follow.
<TABLE>
<CAPTION>
(in millions)
Fiscal Year Ended
September 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Sales
USI....................................................... $ 2,204 $ 2,011 $ 1,896
Zurn 512 353 285
-------------- ------------ ------------
Combined......................... $ 2,716 $ 2,364 $ 2,181
-------------- ------------ ------------
-------------- ------------ ------------
Income (Loss) from Continuing Operations
USI....................................................... $ 112 $ 82 $ (64)
Zurn 24 22 22
-------------- ------------ ------------
Combined......................... $ 136 $ 104 $ (42)
-------------- ------------ ------------
-------------- ------------ ------------
Net Income (Loss)
USI....................................................... $ 236 $ 133 $ (89)
Zurn 16 5 17
-------------- ------------ ------------
Combined......................... $ 252 $ 138 $ (72)
-------------- ------------ ------------
-------------- ------------ ------------
</TABLE>
During fiscal 1998, the Company has adopted a plan to dispose
of SunLite, its outdoor furniture operation, and has reclassified this
operation as discontinued in the accompanying financial statements.
In January 1997, an initial public offering of 25% of the
shares of the Company's wholly-owned subsidiary Jade Technologies
Singapore Ltd ("Jade"), a manufacturer of leadframes for the
electronics industry, was completed. Jade sold 8,000,000 shares at
approximately $0.53 per share, generating cash proceeds of
approximately $4 million. The Company recorded a gain of approximately
$1 million ($700,000 after provision for deferred income taxes) in
connection with the sale. Immediately after the transaction, the
Company owned approximately 75% of the outstanding shares of Jade.
Note 2_Accounting Policies
Fiscal Year: USI's fiscal year ends on the Saturday nearest to
September 30. All USI fiscal year data contained herein reflect results
of operations for the 52-week periods ended on the Saturday nearest to
September 30, but are presented as of such date for convenience. As
noted above, the results of operation and cash flow for Zurn for the
fiscal year ended September 30, 1997 have been restated to conform to
USI's year end. The results of operations for the fiscal years ended
September 30, 1996 and 1995 have been combined with the results of
operations and cash flow of Zurn for the years ended March 31, 1997 and
1996, respectively.
Principles of Consolidation: The consolidated (combined)
financial statements include the accounts of the Company and its
subsidiaries. Intercompany accounts and transactions are eliminated.
Companies which are 20% to 50% owned are accounted for using the equity
method.
20
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 2-Accounting Policies (Continued)
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Cash Equivalents: Cash equivalents represent short-term
investments which have maturities of ninety days or less when
purchased.
Depreciation and Amortization:
<TABLE>
<CAPTION>
(in millions)
Fiscal Year Ended
at September 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Depreciation.................................................... $ 52 $ 44 $ 38
Amortization of goodwill........................................ 17 13 16
Amortization of deferred financing costs........................ 1 2 2
Amortization of unearned restricted stock....................... 7 7 2
Amortization of deferred income................................. (2) (2) -
----------- ----------- ----------
$ 75 $ 64 $ 58
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
Trade Receivables and Concentrations of Credit Risk:
<TABLE>
<CAPTION>
(in millions)
At September 30,
1997 1996
---- ----
<S> <C> <C>
Trade receivables.............................................................. $ 539 $ 509
Allowance for doubtful accounts................................................ (37) (44)
------------ ---------
$ 502 $ 465
------------ ---------
------------ ---------
</TABLE>
The Company operates in the United States and, to a lesser
extent, in Europe, South America, Canada and Asia. The Company performs
periodic credit evaluations of its customers' financial condition and
generally does not require collateral. Credit losses have consistently
been within management's expectations.
Engineering and Construction Contracts:
Revenue and costs on long-term contracts are recognized by the
cost-to-cost percentage-of-completion method, commencing when progress
is sufficient to determine earnings with reasonable accuracy, based on
estimates of total sales value and cost at completion. Earnings
adjustments arising from changes in estimates are recognized currently.
Estimated losses are recorded when identified.
21
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 2-Accounting Policies (Continued)
Inventories:
<TABLE>
<CAPTION>
(in millions)
At September 30,
1997 1996
---- ----
<S> <C> <C>
Finished products.................................................................. $ 260 $ 265
In-process products................................................................ 106 91
Raw materials...................................................................... 135 126
--------- ---------
$ 501 $ 482
--------- ---------
--------- ---------
</TABLE>
Inventories are valued at the lower of cost, determined under
both the first-in, first-out and last-in, first-out methods, or market.
The percentage of inventory under each method follows:
<TABLE>
<CAPTION>
September 30,
1997 1996
---- ----
<S> <C> <C>
First-in, first-out (FIFO) method..................................................... 79% 76%
Last-in, first-out (LIFO) method...................................................... 21% 24%
</TABLE>
The increase in the carrying value of the inventory if only
the FIFO method, which approximates replacement costs, had been used,
would be $7 million and $6 million at September 30, 1997 and 1996,
respectively.
Property Plant and Equipment:
<TABLE>
<CAPTION>
(in millions)
1997 1996
---- ----
<S> <C> <C>
Land and buildings................................................................... $ 237 $ 229
Machinery, equipment and furniture................................................... 650 583
Accumulated depreciation............................................................. (465) (424)
---------- ------
$ 422 $ 388
---------- ------
---------- ------
</TABLE>
Property, plant and equipment is stated on the basis of cost
less accumulated depreciation provided under the straight-line method.
Other assets: Excess properties held for sale primarily
consist of other land and buildings no longer used in operations which
are included in other assets and carried at the lower of cost or fair
value less costs to sell. The carrying value of such properties was $44
million and $51 million as of September 30, 1997 and 1996,
respectively. The income (loss), net, from excess properties of $1
million, ($1) million and ($5) million in fiscal 1997, 1996 and 1995,
respectively, is included in other expense, net and includes net gains
on the sale of these properties, adjustments to fair value and the
carrying costs incurred in the period.
22
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 2-Accounting Policies (Continued)
Goodwill: Goodwill represents the excess of the purchase price
over the fair value of net assets acquired. The Company reviews
operating results and other relevant facts every fiscal quarter for
each of its businesses to determine if there are indications that the
carrying value of an enterprise may be impaired. The fair value
methodology is used by the Company to ascertain the recoverability of
the carrying value of an enterprise, when there are indications of
impairment. In the event that such fair value is below the carrying
value of an enterprise, for those companies with goodwill, the Company
first writes off the goodwill and then other long-lived assets to the
extent such differential exists.
The fair value methodology is applied to determine the
recoverable value for each business on a stand alone basis using ranges
of fair values obtained from independent appraisers. In developing
these ranges, the independent appraisers consider (a) publicly
available information, (b) financial projections of each business, (c)
the future prospects of each business as discussed with senior
operating and financial management, (d) publicly available information
regarding comparable publicly traded companies in each industry, (e)
market prices, capitalizations and trading multiples of comparable
public companies and (f) other information deemed relevant. In
reviewing these valuations and considering the need to record a charge
for impairment of enterprise value and goodwill to the extent it is
part of the enterprise value, the Company also evaluates solicited and
unsolicited bids for the businesses of the Company.
Goodwill is amortized straight-line over periods not exceeding
forty years. Accumulated amortization aggregated $294 million and $277
million, at September 30, 1997 and 1996, respectively. Amortization and
adjustments to the carrying value of goodwill amounted to $17 million,
$13 million and $114 million for fiscal 1997, 1996 and 1995,
respectively.
Foreign Currency Translation and Options: The functional
currency of each of the Company's foreign operations is the local
currency with the exception of operations in Brazil which have
historically operated in a hyperinflationary economy. Assets and
liabilities of foreign subsidiaries are translated at the exchange
rates in effect at the balance sheet dates, while revenue, expenses and
cash flows are translated at average exchange rates for the period.
Except for companies operating in hyperinflationary economies,
translation gains and losses are reported as a component of
Stockholders' Equity. Losses resulting from the translation of the
financial statements of companies operating in highly inflationary
economies are included in Other expense, net and aggregated $1 million,
$1 million and $2 million for fiscal 1997, 1996, and 1995,
respectively.
To protect the U.S. dollar value of its anticipated profits
denominated in foreign currencies, from time to time, the Company
purchases foreign currency option contracts. The contracts are
purchased and settled in U.S. dollars, and marked to market at the end
of each period and any resulting gain or loss is recognized immediately
in income.
Income Taxes: Deferred tax assets and liabilities are computed
based on the difference between the financial reporting and tax bases
of assets and liabilities using enacted tax rates and laws. Deferred
income tax expense or benefit is based on the changes in the asset or
liability from period to period.
The Company files a consolidated federal income tax return.
Prior to May 31, 1995, USI provided for income taxes as if it filed
separate income tax returns and included United States taxes currently
payable in Invested Capital. USI entered into a tax sharing and
indemnification agreement in which Hanson generally agreed to indemnify
USI for all federal and state income tax liabilities in respect to
periods prior to May 31, 1995.
Prior to the Merger, Zurn filed a separate consolidated
federal income tax return.
23
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 2-Accounting Policies (Continued)
Revenue Recognition: Revenue is recognized upon shipment of
product to the customer. Provisions are made for warranty and return
costs at the time of sale. Such provisions have not been material.
Advertising Costs: Advertising costs are expensed as incurred.
Such amounts totaled $45 million, $54 million and $54 million for
fiscal 1997, 1996, and 1995, respectively.
Research and Development Costs: Research and development costs
are expensed as incurred. Such amounts totaled $16 million for fiscal
1997, and $15 million for 1996 and 1995.
Fair Value of Financial Instruments: The fair value of all
short-term financial instruments approximated their carrying value due
to their short maturity. The Company's 7.25% Senior Notes are currently
traded at a price which approximates par value based on quoted market
prices for such securities. The fair value of all other long-term
financial instruments, excluding interest rate protection agreements
discussed below, approximated carrying value as they were based on
terms that continue to be available to the Company. Accordingly, fair
value of these financial instruments approximates book carrying amounts
at each fiscal year-end, as they are based upon floating rate interest.
The Company uses interest rate protection agreements to hedge
the risk on a portion of its floating rate borrowings. Under the terms
of these agreements, the Company makes payments to counterparties at
fixed rates and in return receives payments at variable rates based on
LIBOR. The interest differential paid or received is recognized as a
component of interest expense. Gains and losses from the disposition of
hedge agreements are deferred and amortized over the term of the
underlying debt. Gains and losses on interest rate protection
agreements in which the underlying debt has been terminated are written
off in conjunction with the termination. At September 30, 1997, the
Company had several such agreements covering various periods. The
notional amount of these agreements do not exceed $300 million for any
future period. The Company would have been required to pay
approximately $3 million and $4 million to settle all outstanding
agreements based upon their fair value as of September 30, 1997 and
1996, respectively. These fair values are based upon estimates received
from financial institutions.
Stock Based Compensation: In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation", which establishes a fair value method of accounting for
stock-based compensation plans. SFAS 123 encourages, but does not
require, adoption of a fair value method; it allows for a company to
continue to report under Accounting Principles Board Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees". The Company
intends to continue to account for its stock-based compensation under
APB 25. (See Note 10).
Earnings Per Share: Fiscal 1995 earnings per share information
is not presented as such information is not indicative of the Company's
continuing capital structure.
In February 1997, the FASB issued Statement No. 128 ("SFAS
128"), "Earnings Per Share" which was adopted on December 31, 1997. The
Company has restated all prior periods. The adoption of SFAS 128 did
not have a material impact on the earnings per share information
previously presented.
24
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 2-Accounting Policies (Continued)
The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share calculation:
<TABLE>
<CAPTION>
(in millions except per share)
Income From
Continuing Per Share
Operations Shares Amount
---------- ------ ------
(For the Fiscal Year Ended
September 30, 1997)
<S> <C> <C> <C>
Basic Earnings Per Share $ 136 92.5 $ 1.48
----
Effect of dilutive securities
Stock options 1.5
Nonvested stock 1.5
----- ----- ----
Diluted Earnings Per Share $ 136 95.5 $ 1.43
----- ----- ----
</TABLE>
<TABLE>
<CAPTION>
(For the Fiscal Year Ended
September 30, 1996)
<S> <C> <C> <C> <C>
Basic Earnings Per Share $ 104 95.2 $ 1.09
----
Effect of dilutive securities
Stock options 0.9
Nonvested stock 1.0
Diluted Earnings Per Share $ 104 97.1 $ 1.07
----- ----- ----
</TABLE>
Diluted common shares include shares that would be outstanding
assuming the fulfillment of conditions that would remove the
restriction on nonvested shares and the exercise of stock options.
Options to purchase 1.6 million and .9 million shares in the years
ended September 30, 1997 and 1996, respectively, were not included in
the computation of earnings per share because the option's exercise
price was greater than the average market price of the common shares.
Note 3_Acquisitions
In January 1997, Zurn purchased the stock of Eljer Industries,
Inc. ("Eljer") for $172 million in cash plus the assumption of debt.
Eljer manufactures and distributes china and cast iron plumbing
fixtures, flexible plumbing systems, and heating, ventilation and air
conditioning products. The transaction has been accounted for as a
purchase, resulting in goodwill of $193 million. The results of Eljer
are included in the Bath and Plumbing Products operations.
25
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 3-Acquisitions (Continued)
Presented below are the unaudited pro forma results of the
Company giving effect to the acquisition of Eljer by Zurn in January
1997, as if it had occurred as of the beginning of the fiscal year
ended September 30, 1996.
<TABLE>
<CAPTION>
(in millions except per share)
Fiscal Year Ended
September 30,
1997 1996
--- ------------- -------------
<S> <C> <C>
Net Sales $ 2,836 $ 2,677
Income from continuing operations.............................................. 134 106
Income before extraordinary loss............................................... 252 165
Net income..................................................................... 250 140
Basic earnings per share
Income from continuing operations........................................... 1.45 1.11
Income before extraordinary loss............................................ 2.72 1.74
Net income.................................................................. 2.70 1.47
Diluted earnings per share
Income from continuing operations........................................... 1.40 1.09
Income before extraordinary loss............................................ 2.64 1.70
Net income.................................................................. 2.62 1.44
The following is a summary of the fair value of the assets and
liabilities assumed after allocation of the purchase price:
</TABLE>
<TABLE>
<CAPTION>
September 30,
1997
(in millions)
<S> <C>
Current assets................................................................. $201
Property, plant and equipment.................................................. 70
Goodwill....................................................................... 193
Other assets................................................................... 15
Current liabilities............................................................ (190)
Long-term liabilities.......................................................... (113)
------------------
$176
------------------
------------------
</TABLE>
The proforma effect of the acquisitions and the aggregate
assets acquired and liabilities assumed detailed below is not material.
In July 1997, the Company purchased IXL Manufacturing Company,
Inc. ("IXL") for $12 million and the assumption of $1.3 million of
debt. IXL manufactures fiberglass and wood handles for striking tools
and lawn and garden tools. The transaction has been accounted for as a
purchase, resulting in goodwill of $6 million. The results of IXL are
included in the Hardware and Tools operations.
26
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 3-Acquisitions (Continued)
In May 1997, the Company purchased Britains Petite Limited
("Britains") for $9 million in cash. Britains, located in Nottingham,
England, is a manufacturer of military soldier collectibles, metal and
plastic models of agricultural vehicles, figures, animals, buildings
and accessories and preschool plastic toys. The transaction has been
accounted for as a purchase, resulting in goodwill of $5 million. The
results of Britains are included in the Diversified operations.
In April 1997, the Company purchased certain assets of the
outdoor furniture division of Sunbeam Corporation for $60 million in
cash. The acquired business, now known as SunLite Casual Furniture,
Inc. ("SunLite"), manufactures casual outdoor furniture. The
transaction has been accounted for as a purchase, resulting in goodwill
of $14 million. SunLite has since been discontinued.
In January 1997, the Company purchased the assets of
Woodings-Verona Tool Works, Inc. ("Woodings-Verona") for $5 million in
cash plus the assumption of $1 million of debt. Woodings-Verona
manufactures hot-forged heavy striking tools including sledge hammers,
axes, bars, picks and railroad tools. The transaction has been
accounted for as a purchase. The results of Woodings-Verona are
included in the Hardware and Tools operations.
In July 1996, the Company purchased the assets of Keller
Industries, Inc. ("Keller"), for $37 million in cash plus the
assumption of certain liabilities. Keller is a leading manufacturer and
marketer of ladders in the United States. The transaction has been
accounted for as a purchase, resulting in goodwill of $30 million. The
results of Keller are included in the Hardware and Tools operations.
In July 1996, the Company joined a consortium of companies to
acquire an equity interest in United Pacific Industries Limited
("UPI"), a limited liability company incorporated in Bermuda and listed
on the Stock Exchange of Hong Kong. UPI manufactures voltage converters
and other electronic components. In fiscal 1997, the Company purchased
additional shares in UPI. The Company's investment of approximately $12
million results in beneficial ownership of approximately 22.3% of UPI.
The results of UPI are included in the Diversified segment.
In April 1996, the Company purchased the assets of a Canadian
manufacturer of above-ground swimming pools and equipment for $12
million and the assumption of $12 million in debt. The transaction has
been accounted for as a purchase, resulting in goodwill of $9 million.
The results of the acquired business, now known as Atlantic Pools, Inc.
("Atlantic"), are included in the Bath and Plumbing Products
operations.
In May 1995, the Company acquired the assets of Southeastern
Plastics, Inc., a plastic injection molder for $11 million, in a
transaction accounted for as a purchase. The transaction resulted in
goodwill of $4 million. The result of operations of Southeastern
Plastics, Inc. are included in the Hardware and Tools operations.
In March 1995, the Company acquired Odyssey Sports, Inc.
("Odyssey"), a manufacturer and marketer of golf putters, for $16
million in a transaction accounted for as a purchase, resulting in
goodwill of $14 million.
Odyssey has since been sold. (See Note 4).
27
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 4_Dispositions and Discontinued Operations
In fiscal 1997, the Company adopted formal plans to dispose of
SCM Metals Products, Inc. ("SCM Metals"), QPF, Inc., Odyssey and Tommy
Armour Golf Company ("Armour Golf"). The Company also decided to retain
Bearing Inspection, Inc. ("Bearing"), which was previously designated a
discontinued operation. In addition, during fiscal 1997, Zurn sold its
Mechanical Power Transmissions segment and portions of its Power
Systems segment. The remainder of the power systems segment is
expected to be disposed of in fiscal 1998. During fiscal 1996, the
Company adopted formal plans to dispose of Farberware Inc.
("Farberware"), Franklin Dyed Yarn Division ("Franklin"), Tubular
Textile Machinery Division ("Tube-Tex") and its equity investment in
Ground Round Restaurants, Inc. ("Ground Round"). In addition, during
fiscal 1996, Zurn sold Lynx Golf. During fiscal 1995, the Company
adopted a formal plan to dispose of Jade Holdings, Inc., Piedmont
Moulding Corporation, Spartus Corporation, Universal Gym Equipment,
Inc., Bear Archery, Inc., Valley Recreation Products, Inc., Teters
Floral Products, Inc., MW Manufacturers, Inc., Brown Moulding, Inc. and
Halkey-Roberts Corporation (collectively with Farberware, Franklin,
Tube-Tex, Ground Round, Lynx Golf, the Mechanical Power Transmission
segment and the Power Systems segment, the "Discontinued Operations").
Each was sold prior to September 30, 1997 with the exception
of Armour Golf, which was substantially sold in November 1997 and
certain portions of the Power Systems segment and SunLite. At September
30, 1997, the Company has accrued approximately $7 million for
contingencies relating to the discontinued operations. All businesses
sold since May 31, 1995 meet the criteria for classification as
discontinued operations and have been classified as such for all
periods presented.
In fiscal 1997, the Company, in separate transactions, sold
Tube-Tex, SCM Metals, certain assets of QPF, Inc., Odyssey, SunLite
resin furniture business, Lynx Golf, Zurn's Mechanical Power Systems
segment and the equity interest in Ground Round for an aggregate of
$388 million in cash and notes of $3 million and recorded gains of $113
million, net of tax.
In fiscal 1996, the Company, in separate transactions, sold
the Office Furniture Group and Blue Mountain Industries, Farberware,
Spartus, Piedmont, Jade, Universal and Franklin for an aggregate of
$241 million in cash and notes for $6 million and recorded gains of $68
million, net of tax. The Company also entered into a non-compete
agreement with the purchaser of the Office Furniture Group for five
years for $11 million. Also during fiscal 1996, the Company recorded a
charge of $2 million, net of a tax benefit of $1 million, to reduce the
carrying value of its equity investment in Ground Round to its
estimated realizable value.
In fiscal 1995, management estimated losses on disposals of
these businesses which it had designated as discontinued operations.
The expected proceeds from the sale of these operations were determined
based on estimates of fair value obtained from independent appraisers.
The estimated net-of-tax loss on the disposal totaled $50.4 million and
was recorded during the third quarter of fiscal 1995. The Company
subsequently recorded an additional charge of $3 million, net-of-tax,
to revise its original estimate of phase-out losses. In September 1995,
the Company sold Bear Archery, Inc., Valley Recreation Products, Inc.,
Teters Floral Products, Inc., MW Manufacturers, Inc., Brown Moulding
Company, Inc. and Halkey-Roberts Corporation for $200 million,
resulting in a gain of $11 million, net-of-tax.
Prior to May 31, 1995, Hanson recorded a $10.5 million charge
to reflect a permanent impairment in its carrying value of Beazer Homes
USA, Inc. ("Beazer Homes"). In June 1995, the Company sold 1,000,000
shares of common stock of Beazer Homes to Beazer Homes for $16 million,
realizing a $3.1 million pre-tax gain. The Company also sold Beazer
Homes an option for $500,000 to purchase the Company's remaining
1,749,267 shares at an agreed upon formula price. In August 1995,
Beazer Homes exercised the option and purchased the remaining shares
for $28.2 million, resulting in an additional pre-tax gain of $5.7
million. The cumulative net-of-tax impact of these events was a loss of
$1 million included in the loss from discontinued operations in fiscal
1995.
28
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 4-Dispositions and Discontinued Operations (Continued)
Net assets held for disposition consists of the following:
<TABLE>
<CAPTION>
(in millions)
At September 30,
1997 1996
<S> <C> <C>
Net current assets........................................................ $ 28 $ 72
Property, plant and equipment............................................. 25 69
Other non-current assets and liabilities, net............................. 16 (6)
-------------- -------------
Net assets held for disposition........................................... $ 69 $ 135
-------------- -------------
-------------- -------------
</TABLE>
The following summarizes the operating results of the
businesses classified as discontinued operations:
<TABLE>
<CAPTION>
(in millions)
For the Fiscal Years Ended
September 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales........................................................... $ 119 $ 544 $ 1,203
Pre-tax income...................................................... 8 4 35
</TABLE>
Note 5_Long-Term Debt
Long term debt consists of the following:
<TABLE>
<CAPTION>
(in millions)
At September 30,
1997 1996
<S> <C> <C> <C>
7.25% Senior Notes, net................................................... $ 123 $ -
Term loan................................................................. - 370
Revolving credit facility................................................. 350 250
Other long-term debt...................................................... 79 113
Zurn debt................................................................. 190 196
-------------- -------------
742 929
Less current maturities................................................... (41) (51)
-------------- -------------
Long term debt............................................................ $ 701 $ 878
-------------- -------------
-------------- -------------
</TABLE>
During fiscal 1997, USI American Holdings, Inc. ("USIAH"), a
wholly owned subsidiary of USI, issued $125 million aggregate principal
amount of 7.25% Senior Notes due December 1, 2006 (the "Notes"). The
net cash proceeds were $123 million after transaction fees and
discounts. The Notes bear interest at 7.25% payable semiannually on
June 1 and December 1, commencing June 1, 1997, and are redeemable at
any time at the option of USIAH, in whole or in part, at a redemption
price equal to the greater of (i) 100% of the principal amount to be
redeemed, or (ii) the sum of the present values of the remaining
scheduled payments of principal and interest on the Notes to be
redeemed, discounted at a rate based on the yield to maturity of
comparable U.S. Government securities plus 10 basis points, plus, in
each case, accrued interest to the date of redemption. The Notes are
fully and unconditionally guaranteed by USI. The Notes are unsecured
but the indenture places restrictions on, among other things, liens,
subsidiary indebtedness and dividends.
29
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 5-Long-Term Debt (Continued)
USIAH has exchanged the Notes, which were not registered under
the Securities Act of 1933 at the time of issuance, for registered
notes having substantially the same terms as the Notes. See Note 17 for
summary financial information of USIAH. The proceeds from the sale of
the Notes were used to repay a portion of the term loan under USI's
then existing credit agreement (the "Previous Credit Agreement"), the
remainder of which was repaid using proceeds from the initial borrowing
under a credit agreement dated as of December 12, 1996 (the "Credit
Agreement").
The Credit Agreement consists of a five year unsecured
revolving line of credit of up to an aggregate amount of $750 million.
The revolving credit commitment will be permanently reduced by $100
million on December 12, 1999 and by an additional $150 million on
December 12, 2000. The Credit Agreement includes (i) committed advances
("Committed Advances") and (ii) uncommitted bid option advances. The
Committed Advances are at lower borrowing spreads than the Previous
Credit Agreement and bear interest based on, at the option of USI, (i)
specified spreads over the London Interbank Offered Rate ("LIBOR") or
(ii) the higher of the rate of interest publicly announced by Bank of
America in San Francisco, California as its reference rate or 50 basis
points above the federal funds rate in effect on such date (the "Base
Rate"). The spreads on the LIBOR-based borrowings range between 15 and
62.5 basis points, based upon USI's senior unsecured debt ratings for
the relevant period. At September 30, 1997 three-month LIBOR was 5.72%
per annum and the spread over LIBOR was 25 basis points. A facility fee
is payable on a quarterly basis in arrears under the Credit Agreement
on the full amount of the facility, regardless of the amount utilized.
The facility fee ranges between 7.5 and 25 basis points per annum,
based upon USI's senior unsecured debt ratings for the relevant period.
At September 30, 1997, the facility fee was 12.5 basis points per
annum.
The Credit Agreement places restrictions on, among other
things, liens, mergers, consolidations and additional indebtedness. Its
financial covenants require USI to comply with a maximum ratio of total
funded debt to capital and a consolidated leverage ratio. The maximum
ratios are currently .65:1.00 and 3.5:1.0, respectively. On January 1,
1998, the maximum ratio of total funded debt to capital permitted will
be reduced to .60:1.00. At September 30, 1997, the terms of the Credit
Agreement and Notes limit the payment of dividends and purchase of
treasury stock by USI to $157 million.
Other long-term debt at September 30, 1997 includes $59
million of notes payable with maturities due within one year which USI
expects to repay using borrowings under the Credit Agreement. All of
this amount was borrowed under uncommitted short-term lines of credit.
The amount of uncommitted borrowings are limited based on restrictions
on unsecured indebtedness under the Credit Agreement. Availability for
uncommitted short-term lines of credit at September 30, 1997 is limited
to $200 million. Subsequent to year-end, this availability has been
reduced to $135 million as a result of the Siemens acquisition. (See
Note 18).
Prior to the merger, Zurn entered into a $250 million credit
agreement in January 1997 with a group of banks for revolving loans and
letters of credit up to $50 million and up to $200 million in term
loans to acquire Eljer, refinance existing debt of Eljer subsidiaries,
and fund a trust in connection with the U.S. Brass bankruptcy
settlement. Interest is at prime or Eurodollar rates plus 0% to 1.5%
and .75% to 2.5%, respectively, based on the defined ratio of debt to
earnings before interest, taxes, depreciation, and amortization. Fees
up to .375% are payable on unutilized loan commitments. All amounts
become due if there is a change in control, as defined. In connection
with the Merger, all amounts under the credit agreement were refinanced
on June 11, 1998. As required by the credit agreement, Zurn entered
into two-year 8.78% fixed interest rate swaps for $10.5 million and a
10.5% interest rate cap for $20 million.
Interest paid, including amounts under swap agreements, during
fiscal 1997, 1996 and 1995 was $63 million, $67 million, and $92
million, respectively (which included interest paid to Hanson of $60
million in 1995).
30
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 5-Long-Term Debt (Continued)
In conjunction with the fiscal 1997 repayment of outstanding
indebtedness under the Previous Credit Agreement, a net-of-tax,
non-cash, extraordinary charge of $2 million was incurred to write-off
unamortized deferred financing costs and previously deferred losses
associated with interest rate protection agreements. In fiscal 1996, in
connection with entering into the Previous Credit Agreement, the
Company recorded a net-of-tax, non-cash extraordinary charge of $25
million to write-off unamortized deferred financing costs and
previously deferred losses associated with interest rate protection
agreements.
On December 12, 1996 the Company paid approximately $2 million
to settle interest rate protection agreements entered into in
connection with the Notes. This amount is being amortized over the life
of the Notes as deferred financing costs.
To manage its exposure to floating interest rates, the Company
entered into interest rate protection agreements with major banks
whereby the Company receives a floating rate based on three-month LIBOR
and pays a weighted average fixed rate. Currently the fixed interest
rates under the interest rate protection agreements range from 6.07% to
6.77% per annum. Net payments under the agreements amounted to
approximately $5 million, $7 million and $2 million for the years ended
September 30, 1997, 1996 and 1995, respectively. Such amounts are
included in interest expense. All interest rate protection agreements
are of notional amounts and maturities that relate to specific portions
of outstanding debt, and accordingly, are accounted for as hedge
transactions. The aggregate notional amounts and periods covered by
such agreements are as follows:
<TABLE>
<CAPTION>
<S> <C>
September 30, 1997 through May 28, 1999.................................$300 million
May 29, 1999 through September 30, 1999.................................$200 million
October 1, 1999 through September 30, 2000..............................$100 million
</TABLE>
The Company had standby letters of credit of $18 million at
September 30, 1997. The fair value of these letters of credit is
estimated to be the same as the contract value based on the nature of
the fee arrangements with the issuable banks.
Note 6_Pension Plans
Domestic Benefit Plans
The Company and its subsidiaries have noncontributory defined
benefit pension plans covering substantially all of its United States
employees. The benefits under these plans are based primarily on years
of credited service and compensation as defined under the respective
plan provisions. The Company's funding policy is to contribute amounts
to the plans sufficient to meet the minimum funding requirements set
forth in the Employee Retirement Income Security Act of 1974, plus such
additional amounts as the Company may determine to be appropriate from
time to time.
The Company and its subsidiaries also sponsor defined
contribution plans and also participate in multi-employer plans, which
provide defined benefits to union employees of the Company's
subsidiaries. Contributions relating to defined contribution plans are
made based upon the respective plans' provisions. Contributions
relating to multi-employer plans are based on negotiated collective
bargaining agreements.
31
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 6-Pension Plans (Continued)
Net periodic pension cost for the Company's defined benefit
plans covering employees in the United States and the total
contributions charged to pension expense for defined contribution and
multi-employer plans covering employees in the United States are:
<TABLE>
<CAPTION>
(in millions)
For the Fiscal Years Ended September 30,
1997 1996 1995
<S> <C> <C> <C>
Defined benefit plans:
Service cost_benefits earned during the period...................$ 12 $ 13 $ 10
Interest cost on projected benefit obligation.................... 26 27 26
Actual return on plan assets..................................... (119) (66) (77)
Net amortization and deferral.................................... 78 26 39
Net periodic pension income for defined benefit plans.... (3) - (2)
Defined contribution plans....................................... 4 7 6
Multi-employer plans............................................. 2 2 3
-------------- -------------- -------------
Net pension expense......................................$ 3 $ 9 $ 7
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
Assumptions used in the accounting for the defined benefit plans
were as follows:
<TABLE>
<CAPTION>
For the Fiscal Years Ended September 30,
----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rates....................................... 7.00 to 7.50% 7.50 to 7.75% 7.25 to 7.75%
Rates of increase in compensation levels.............................. 4.10 to 4.50% 4.50 to 7.75% 4.35 to 7.50%
Expected long-term rate of return on assets........................... 9.0% 9.0% 9.0%
</TABLE>
The change in the weighted average discount rate from 7.75%
for fiscal 1996 to 7.5% for fiscal 1997 and other actuarial assumptions
caused the projected benefit obligation at September 30, 1997 to
increase by approximately $15 million.
32
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 6-Pension Plans (Continued)
The funded status and amounts recognized in the consolidated
balance sheets at September 30, 1997 and 1996 for the Company's defined
benefit pension plans covering employees in the United States are:
<TABLE>
<CAPTION>
1997 1996
---- ----
Plans Whose Plans Whose Plans Whose Plans Whose
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Exceed Accumulated Benefits Exceed
Benefits Assets Benefits Assets
-------- ------ -------- ------
(in millions)
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation............................. $ (308) $ (48) $ (247) $ (83)
Nonvested benefit obligation.......................... (12) (4) (6) (12)
---------------- ------------ ------------- ---------------
Accumulated benefit obligation........................... (320) (52) (253) (95)
(351) (56) (282) (101)
Projected benefit obligation.............................
Plan assets at fair value................................ 606 32 454 73
---------------- ------------ ------------- ---------------
Projected benefit obligation less than (or in excess of) 255 (24) 172 (28)
plan assets...........................................
Add (deduct):
Unrecognized prior service cost....................... 7 5 1 10
Unrecognized net (gain) loss.......................... (163) 7 (92) 4
Unrecognized net (asset) obligation at date of (7) - (11) 1
adoption, net of amortization......................
Adjustment required to recognize minimum liability.... - (8) - (9)
---------------- ------------ ------------- ---------------
Prepaid (accrued) pension costs.......................... $ 92 $ (20) $ 70 $ (22)
---------------- ------------ ------------- ---------------
---------------- ------------ ------------- ---------------
</TABLE>
USI's plan assets are included in a master trust which
principally invests in listed stocks and bonds, including common stock
of USI which, at market value, comprises 2.7% and less than 1% of the
master trust's assets at September 30, 1997 and 1996, respectively.
Zurn's plan assets are invested primarily in listed stocks,
bonds and cash equivalents.
Foreign Benefit Arrangements
Pension and other employee benefits of the Company's foreign
subsidiaries are primarily provided by government sponsored plans and
are being accrued currently over the period of active employment. The
costs of such plans were not significant during fiscal 1997, 1996 and
1995.
33
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 7_Postretirement Plans
The Company provides health care and life insurance benefits
to certain groups of retirees.
The following table presents the plans' unfunded status
reconciled with amounts recognized in the Company's consolidated
balance sheets:
<TABLE>
<CAPTION>
(in millions)
At September 30,
1997 1996
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................................ $ (48) $ (48)
Fully eligible active plan participants................................. (6) (5)
Other active plan participants.......................................... (10) (10)
---------------- -------------
(64) (63)
Unrecognized gain....................................................... (8) (11)
---------------- -------------
$ (72) $ (74)
---------------- -------------
---------------- -------------
</TABLE>
Net periodic postretirement benefit cost includes the following
components:
<TABLE>
<CAPTION>
(in millions)
For the Fiscal Years Ended
September 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost............................................................. $ 1 $ 1 $ 1
Interest cost............................................................ 4 3 3
---------- ---------- -----------
Net periodic postretirement benefit cost................................. $ 5 $ 4 $ 4
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The weighted average annual assumed rate of increase in the
health care cost trend rate ranged from 9.0% to 10.5% for fiscal 1997
and is assumed to decrease .5% a year to 5.5%. The effect of increasing
the assumed health care cost trend rate by 1% in each year would
increase the accumulated postretirement benefit obligation as of
September 30, 1997 by $5.6 million and the aggregate of service and
interest components of net periodic post retirement benefit for 1997 by
$0.5 million.
The weighted average discount rate used was 7.50% and 7.50 to
7.75% at September 30, 1997 and 1996, respectively, for USI and 7.50%
at September 30, 1997 and 1996 for Zurn.
34
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 8_Leases
Rental expense for operating leases is:
<TABLE>
<CAPTION>
(in millions)
For the Fiscal Years Ended September 30,
1997 1996 1995
<S> <C> <C> <C>
Minimum rentals...................................................... $ 24 $ 24 $ 23
Contingent rentals................................................... 1 2 1
------------- -------------- ------------
$ 25 $ 26 $ 24
------------- -------------- ------------
------------- -------------- ------------
</TABLE>
Future minimum rental commitments under noncancellable operating leases
as of September 30, 1997 are:
<TABLE>
<CAPTION>
(in millions)
-------------
<S> <C>
1998..................................................................................... $28
1999..................................................................................... 20
2000..................................................................................... 14
2001..................................................................................... 9
2002..................................................................................... 8
Thereafter............................................................................... 28
</TABLE>
Note 9_Income Taxes
Income before income taxes, discontinued operations and extraordinary
loss consists of:
<TABLE>
<CAPTION>
(in millions)
For the Fiscal Years Ended September 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
United States........................................................ $ 187 $ 131 $ (40)
Foreign.............................................................. 51 55 52
------------- ------------- ------------
$ 238 $ 186 $ 12
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
The provisions for federal, foreign, and state income taxes
attributable to income from continuing operations consist of:
<TABLE>
<CAPTION>
(in millions)
For the Fiscal Years Ended September 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal........................................................... $ 52 $ 39 $ 15
Foreign........................................................... 18 23 19
State............................................................. 8 6 6
------------- ------------- ------------
78 68 40
Deferred.......................................................... 24 14 14
------------- ------------- ------------
$ 102 $ 82 $ 54
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
35
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 9-Income Taxes (Continued)
The Company's effective income tax provision attributable to continuing
operations differs from the statutory federal income tax provision as follows:
<TABLE>
<CAPTION>
(in millions)
For the Fiscal Years Ended September 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed "expected" income tax provision ....................... $ 84 $ 65 $ 4
Foreign income tax differential................................. 2 4 1
State income taxes (net of federal benefit)..................... 6 5 5
Goodwill amortization........................................... 6 4 6
Goodwill impairment............................................. - - 34
Miscellaneous................................................... 4 4 4
------------- ------------ -------------
$ 102 $ 82 $ 54
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
<TABLE>
<CAPTION>
(in millions)
At September 30,
1997 1996
---- ----
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment................................................. $ 28 $ 21
Inventory..................................................................... 3 6
Net pension assets............................................................ 17 13
Other......................................................................... 4 3
------------ -------------
Total deferred tax liabilities................................................ 52 43
------------ -------------
Deferred tax assets:
Accruals and allowances....................................................... 115 120
Postretirement benefits....................................................... 26 24
Deductible goodwill........................................................... 21 23
------------ -------------
Total deferred tax assets..................................................... 162 167
------------ -------------
Net deferred tax asset........................................................ $ 110 $ 124
------------ -------------
------------ -------------
</TABLE>
In addition to the $24 million deferred tax provision in 1997, the
deferred taxes were effected by the impact of acquisitions and reclassifications
of discontinued businesses.
36
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 9-Income Taxes (Continued)
The classification of the deferred tax balances is:
<TABLE>
<CAPTION>
(in millions)
At September 30,
1997 1996
---- ----
<S> <C> <C>
Current asset............................................................. $ 111 $ 107
Current liability......................................................... (4) (6)
------------- --------------
107 101
Noncurrent asset.......................................................... 51 60
Noncurrent liability...................................................... (48) (37)
------------- --------------
3 23
------------- --------------
Net deferred tax asset.................................................... $ 110 $ 124
------------- --------------
------------- --------------
</TABLE>
As a result of the Demerger, certain tax liabilities with respect to
undistributed earnings of foreign subsidiaries arose which did not exist when
these subsidiaries were held by Hanson. Such amounts, approximating $17 million,
have been charged directly to paid in capital in fiscal 1995. The Demerger also
resulted in changes to the tax basis of the assets and liabilities received and
assumed. The determination of the full extent of the net tax benefit to be
realized was finalized in late fiscal 1996 and such benefit has been credited
directly to paid in capital in that year.
Income taxes paid during fiscal 1997 and fiscal 1996 were $93 million
and $63 million, respectively.
Note 10_Stock Option Plan
The Company's stock-based compensation plans consist of USI's and
Zurn's respective plans that were in effect prior to the merger, as adjusted to
give effect to the exchange ratio in the merger.
Prior to the Demerger, USI adopted a stock incentive plan (the "Stock
Option Plan") providing for awards of restricted common stock and grants of
options to purchase common stock to key employees of USI and its designated
subsidiaries, at prices equal to the fair market value of the shares at the date
of grant, and for formula grants of Common Stock to non-employee directors of
USI.
In June 1995, a total of 2,764,995 restricted shares of Common Stock
were awarded to certain key employees and a total of 9,000 shares of common
stock were issued to non-employee directors. As holders of restricted stock have
all the rights of other stockholders, subject to certain restrictions and
forfeiture provisions, such restricted stock is considered to be issued and
outstanding. Restrictions on the shares will expire over seven years. Unearned
restricted stock of $26 million was recorded at June 8, 1995 based on the market
value of the shares on the date of issuance and is included as a separate
component of stockholders' equity.
In fiscal 1996, a total of 108,260 incentive shares were awarded to
certain key employees and a total of 20,733 shares of common stock were issued
to non-employee directors. The incentive shares are substantially identical in
terms of issuance and restrictions to the restricted stock discussed above.
Based on the market value of the shares on the various dates of issuance, $2
million of additional unearned restricted stock was recorded during fiscal 1996.
37
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 10-Stock Option Plan (Continued)
In fiscal 1997, a total of 195,750 restricted shares of Common Stock
were awarded to certain key employees. The restrictions on the shares will
expire after seven years. The expiration of the restrictions can be accelerated
under certain circumstances. Based on the market value of the shares on the
various dates of issuance, $5 million of additional unearned restricted stock
was recorded during fiscal 1997. Additionally, 166,065 and 25,460 restricted
shares were forfeited in fiscal 1997 and 1996, respectively.
Zurn's 1996 Employee Stock Plan provides for awarding no more than
800,000 shares of common stock (776,000 available at September 30, 1997), with
maximum award limits for each participant during any twelve-month period, in the
form of nonqualified and incentive stock options to purchase common stock at its
market value on the award date (200,000 share limit); stock equivalent units
based on common stock fair market values with settlement in common stock or cash
on the achievement of established performance goals (24,000 share limit);
performance units denominated in cash with settlement in common stock or cash
not exceeding $300,000 per participant per year on the achievement of specific
business objectives; and annual incentive stock awards (48,000 share limit) to
insiders, as defined, in settlement of incentive compensation plan awards. Under
Zurn's previous stock option plans, nonqualified stock options were granted to
key employees to purchase shares of common stock at its market value on the
grant date.
Another plan provides to each director who is not employed by Zurn an
annual award of 800 shares of common stock ($52,000 total fair value in fiscal
1997). The plan also provided for the annual distribution of a nonqualified
option for 3,200 shares of common stock at its market value on the distribution
date. In fiscal 1996, 2,638 shares of restricted common stock ($34,000 fair
value) were issued to directors for their unvested accrued pension benefits upon
the termination of future service accruals under the directors pension plan.
Under the Company's stock option plans, the independent directors,
officers and employees may be granted options to purchase the Company's stock at
no less than the fair market value of the date of the option grant. The Company
has adopted the disclosure-only provisions of SFAS 123. Accordingly, no
compensation cost has been recognized for the stock option plans. Had
compensation cost for the Company's stock option plan been determined based on
the fair market value at the grant date for awards in fiscal 1997 and 1996,
consistent with the provision of SFAS 123, the Company's net income and income
per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(in millions, except per share)
1997 1996
---- ----
<S> <C> <C>
Net income - as reported................................... $252 $138
Net income - pro forma..................................... $250 $137
Net income per share -- as reported basic.......... $2.73 $1.45
-- as reported diluted........ $2.64 $1.42
Net income per share -- as pro forma basic.......... $2.70 $1.44
-- as pro forma diluted...... $2.61 $1.41
</TABLE>
38
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 10-Stock Option Plan (Continued)
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over the
vesting period, and additional options may be granted in future years. The fair
value for these options was estimated at the date of grant using the
Black-Scholes model with the following assumptions:
<TABLE>
<CAPTION>
USI Plans Zurn Plans
<S> <C> <C>
Expected dividend yield at date of grant........ 0% 2%
Expected stock price volatility................. 36% 26%
Risk-free interest rate:
1997................................. 5.85% 6.84%
1996................................. 5.89% 6.60%
Expected life of options........................ 4 years 7 years
</TABLE>
The weighted-average fair value of options, calculated using the
Black-Scholes option pricing model, granted during 1997 and 1996 is $6.87 and
$4.61, respectively.
A summary of the Company's stock option activity and related
information for the years ended September 30 follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of year 6,419,176 $ 11.94 5,890,495 $ 11.95 1,516,400 $ 19.54
Granted...................... 1,019,312 18.82 837,573 13.02 4,390,095 9.34
Exercised.................... (681,523) 9.76 (69,907) 9.52 - -
Forfeited.................... (338,574) 11.74 (216,938) 12.69 (16,000) 16.98
Purchased by Company......... (40,714) 9.31 (22,047) 8.75 - -
--------------- ------------ --------------- -------------- ---------------- -------------
Outstanding-end of year...... 6,377,677 13.45 6,419,176 11.94 5,890,495 11.95
--------------- ------------ --------------- -------------- ---------------- -------------
--------------- ------------ --------------- -------------- ---------------- -------------
Exercisable at end of year... 2,713,998 $ 14.70 2,046,295 $ 15.12 875,200 $ 21.74
--------------- ------------ --------------- -------------- ---------------- -------------
--------------- ------------ --------------- -------------- ---------------- -------------
</TABLE>
39
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 10-Stock Option Plan (Continued)
The following table summarizes the status of the stock options
outstanding and exercisable at September 30, 1997:
<TABLE>
<CAPTION>
Stock Options Stock Options
Outstanding Exercisable
Weighted Weighted Weighted
Number Remaining Average Number Average
Range of of Contractual Exercise of Exercise
Exercise Prices Options Life Price Options Price
- --------------- ------- ---- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
$8.75 to $12.19..................... 3,290,514 7.68 years $ 9.26 1,317,045 $ 9.25
$12.97 to $20.50.................... 2,191,913 7.67 years $ 15.71 572,953 $ 14.99
$20.86 to $28.36.................... 895,250 3.47 years $ 23.30 824,000 $ 23.20
------------- ------------- ------------ -------------- -------------
Total............................... 6,377,677 7.09 years $ 13.45 2,713,998 $ 14.70
------------- ------------- ------------ -------------- -------------
------------- ------------- ------------ -------------- -------------
</TABLE>
Options granted under the Stock Option Plan vest annually in four equal
installments from the date of grant. The Company had authorization under the
Stock Option Plan to grant 455,309 additional options at September 30, 1997.
Note 11_Change in Method of Evaluating Goodwill Impairment
Prior to the Demerger, the recoverability of goodwill of the Company's
businesses was evaluated by Hanson using projected undiscounted cash flows. At
June 6, 1995, goodwill from acquisitions, prior to restatement for
discontinuance of operations, aggregated $616.2 million, net of accumulated
amortization of $238.3 million. During the quarter ended June 30, 1995, as a
result of a comprehensive review of accounting policies, the Company adopted a
new policy for evaluating the recoverability of goodwill and measuring its
impairment based on the fair value approach. The Company believes that, in its
circumstances, the fair value method of evaluating the recoverability of
goodwill and measuring its impairment is preferable to the projected
undiscounted cash flow method. At the time of adoption of this method, the
Company anticipated that some of its businesses would be sold to meet debt
repayment requirements and, therefore, would not be owned for a period of time
sufficient to recover their goodwill through operations. The Company has, in
fact, disposed of several businesses since adoption of this method (see Note 4).
The Company believes that the fair value approach is a better indicator
of the extent to which the goodwill may not be recoverable and, therefore, may
be impaired. The change in the method of evaluating the recoverability of
goodwill resulted in the recording of a pre-tax charge to continuing operations
of $98 million to reflect permanent goodwill impairment in the quarter ended
June 30, 1995, resulting in a reduction in goodwill amortization expense of
approximately $1.65 million quarterly and approximately $6.6 million annually
(see Note 2).
Note 12_Nonrecurring Charges
During June 1995, the Company incurred nonrecurring charges aggregating
$2 million associated with the closing of underutilized facilities of the
Lighting Products Operations. The charge includes accruals for lease costs of
vacated facilities and severance payments related to a facility that the Company
is closing.
40
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 13_Commitments and Contingencies
The Company is subject to a wide range of environmental protection
laws. The Company has remedial and investigatory activities underway at
approximately 40 sites. In addition, the Company has been named as a PRP at 17
"Superfund" sites pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA") or comparable statutes.
It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. The Company accrues for losses
associated with environmental remediation obligations when such losses are
probable and reasonably estimable. This practice is followed whether the claims
are asserted or unasserted. Reserves for estimated losses from environmental
remediation are, depending on the site, based primarily upon internal or third
party environmental studies, and estimates as to the number, participation level
and financial viability of any other PRP's, the extent of contamination and the
nature of required remedial actions. Such accruals are adjusted as further
information develops or circumstances change. Costs of future expenditures for
environmental remediation obligations are not discounted to their present fair
value. Recoveries of environmental remediation costs from other parties are
recognized as assets when their receipt is deemed probable. Management expects
that the amount reserved will be paid out over the periods of remediation for
the applicable sites which range up to 30 years and that such reserves are
adequate based on all current data. Each of the sites in question is at various
stages of investigation or remediation; however, no information currently
available reasonably suggests that projected expenditures associated with
remedial action or compliance with environmental laws for any single site or for
all sites in the aggregate, will have a material adverse affect on the Company's
financial condition, results of operations or cash flows.
At September 30, 1997, the Company had accrued approximately $22
million for various environmental related liabilities of which the Company is
aware. The Company believes that the range of liability for such matters is
between approximately $12 million and $27 million.
United States Brass Corporation, an Eljer indirect wholly-owned
subsidiary, filed in 1994 a voluntary petition for reorganization under
Chapter 11 of the United States Bankruptcy Code for the purpose of
systemically resolving issues resulting from sales of polybutylene plumbing
systems and related litigation. On February 24, 1998, the United States
Bankruptcy Court for the Eastern District of Texas confirmed the Chapter 11
Bankruptcy Plan of Reorganization filed by US Brass. On March 19, 1998 the
plan became effective and the US Brass Trust was funded with approximately
$50 million in cash and a $20 million noninterest bearing note, payable over
ten years to pay claims resulting from US Brass polybutylene plumbing
systems. As a result, US Brass emerged from bankruptcy and future US Brass
polybutylene plumbing systems claims were enjoined and channeled to the Trust
and a national class action settlement fund.
Also, certain of the Company's subsidiaries are defendants or
plaintiffs in lawsuits that have arisen in the normal course of business. While
certain of these matters involve substantial amounts, it is management's
opinion, based on the advice of counsel, that the ultimate resolution of such
litigation and environmental matters will not have a material adverse effect on
the Company's financial condition, results of operations or cash flows.
41
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 14_Segment Data
The Company's continuing operations are classified into four business
segments: Bath and Plumbing Products, Lighting Corporation of America, Hardware
and Tools and Diversified. These operations are conducted primarily in the
United States, and to a lesser extent, in other regions of the world. Export
sales represented 12%, 13% and 12% of the Company's total net sales for fiscal
years 1997, 1996 and 1995, respectively. The principal international markets
served by the Company include Europe, and to a lesser extent South America,
Canada and Asia.
<TABLE>
<CAPTION>
(in millions)
For the Fiscal Years Ended
September 30,
-------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Sales
Bath and Plumbing Products................................ $ 879 $ 685 $ 568
Lighting Corporation of America........................... 538 508 492
Hardware and Tools........................................ 308 238 200
Diversified............................................... 991 933 921
----------------- --------------- ---------------
----------------- --------------- ---------------
Total Net Sales.............................................. $ 2,716 $ 2,364 $ 2,181
Operating Income (Loss)
Bath and Plumbing Products................................ $ 101 $ 88 $ 77
Lighting Corporation of America........................... 42 36 (74)
Hardware and Tools........................................ 34 31 24
Diversified............................................... 137 111 105
----------------- --------------- ----------------
Operating Income before corporate 314 266 132
expenses and management fees.................................
Corporate expenses and management fees.................... (27) (27) (27)
----------------- --------------- ----------------
Total Operating Income....................................... $ 287 $ 239 $ 105
----------------- --------------- ---------------
----------------- --------------- ---------------
</TABLE>
Fiscal 1995 operating income includes non-recurring charges of $100
million related to the Lighting Corporation of America. Fiscal 1997 operating
income for the Diversified Segment includes approximately $2 million of equity
earnings from the Company's investment in UPI.
42
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 14_Segment Data (Continued)
<TABLE>
<CAPTION>
(in millions)
For the Fiscal Years Ended
September 30,
-------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Identifiable Assets at September 30
Bath and Plumbing Products................................ $ 1,064 $ 1,057 $ 642
Lighting Corporation of America........................... 282 281 270
Hardware and Tools........................................ 233 191 112
Diversified............................................... 764 727 701
-------------- --------------- -------------
2,343 2,256 1,725
Corporate................................................. 126 111 153
-------------- --------------- -------------
Total for continuing operations........................... 2,469 2,367 1,878
Net assets held for disposition........................... 69 135 354
-------------- --------------- -------------
Total Identifiable Assets.......................................... $ 2,538 $ 2,502 $ 2,232
-------------- --------------- -------------
-------------- --------------- -------------
Depreciation and Goodwill Amortization
Bath and Plumbing Products................................ $ 22 $ 15 $ 11
Lighting Corporation of America........................... 10 9 13
Hardware and Tools........................................ 7 4 3
Diversified............................................... 30 29 27
-------------- --------------- -------------
Total Depreciation and Goodwill Amortization....................... $ 69 $ 57 $ 54
-------------- --------------- -------------
-------------- --------------- -------------
Capital Expenditures
Bath and Plumbing Products................................ $ 18 $ 14 $ 12
Lighting Corporation of America........................... 13 10 8
Hardware and Tools........................................ 9 8 10
Diversified............................................... 25 19 31
-------------- --------------- -------------
65 51 61
Corporate................................................. 11 - 11
-------------- --------------- -------------
Total Capital Expenditures $ 76 $ 51 $ 72
-------------- --------------- -------------
-------------- --------------- -------------
</TABLE>
43
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 15_Geographic Areas_Financial Data
The following table presents certain data by geographic areas:
<TABLE>
<CAPTION>
(in millions)
For the Fiscal Years Ended
September 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Sales
United States............................................................. $ $2,400 $ 2,135 $ 1,982
Foreign................................................................... 316 229 199
Operating Earnings
United States............................................................. $ 237 $ 185 $ 61
Foreign................................................................... 50 54 44
Identifiable Assets
United States............................................................. $ 2,254 $ 2,287 $ 2,037
Foreign................................................................... 284 215 195
</TABLE>
The Company's foreign operations are based predominantly in Europe, and to
a lesser extent in South America, Canada and Asia. United States export sales to
customers throughout the world were $327 million, $297 million and $261 million
for the fiscal years ended September 30, 1997, 1996 and 1995, respectively.
Fiscal 1995 United States operating income includes nonrecurring charges of $100
million to write off permanently impaired goodwill and to consolidate
underutilized Lighting Products and Systems Operations facilities (see notes 2,
11 and 12).
Note 16_Quarterly Financial Data (unaudited)
Summarized quarterly financial information for the fiscal years ended
September 30, 1997 and 1996 is as follows (in millions, except per share):
<TABLE>
<CAPTION>
1997 1996
---- ----
Quarter Ended Dec. 31 March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30
- ------------- ------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................................. $578 $664 $735 $739 $538 $571 $586 $669
Gross profit.............................. 185 207 232 235 175 181 177 218
Income from continuing operations......... 26 29 38 43 20 21 25 38
Income before extraordinary loss.......... 30 103 41 80 83 17 31 32
Net income................................ 28 103 41 80 58 17 31 32
Basic per share...........................
Income from continuing operations .... $0.28 $0.31 $0.41 $0.47 $0.20 $0.22 $0.26 $0.40
Income before extraordinary loss ...... $0.32 $1.11 $0.44 $0.87 $0.86 $0.18 $0.33 $0.34
Net income............................. $0.30 $1.11 $0.44 $0.87 $0.60 $0.18 $0.33 $0.34
Diluted per share.........................
Income from continuing operations .... $0.27 $0.30 $0.40 $0.46 $0.20 $0.22 $0.26 $0.39
Income before extraordinary loss ...... $0.31 $1.07 $0.43 $0.85 $0.85 $0.18 $0.32 $0.33
Net income............................. $0.29 $1.07 $0.43 $0.85 $0.59 $0.18 $0.32 $0.33
</TABLE>
44
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 16-Quarterly Financial Data (Unaudited) (Continued)
Amounts above have been restated from the amounts previously reported in
the Company's reports on Form 10-Q due to the merger with Zurn accounted for on
a pooling of interests basis and the disposal of businesses. See Notes 3 and 4
regarding transactions that affect comparability of quarterly data.
Note 17-Summarized Financial Information of Subsidiary
Summarized consolidated financial information of USIAH, the issuer of the
Notes, is as follows:
<TABLE>
<CAPTION>
(in millions)
For the Fiscal Years Ended
September 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income Statement Data:
Net Sales $2,204 $2,011 $1,896
Gross Profit 707 648 607
Income from continuing operations 115 84 (63)
Net income 239 135 (88)
</TABLE>
<TABLE>
<CAPTION>
(in millions)
At September 30,
1997 1996
---- ----
<S> <C> <C>
Balance Sheet Data:
Current assets $947 $953
Non-current assets 859 823
Current liabilities 395 365
Non-current liabilities 703 884
</TABLE>
Note 18_Subsequent Events (unaudited)
In October 1997, the Company purchased the assets of Siemens Lighting, a
division of Siemens AG, for $67 million. The acquired business is a leading
European manufacturer and marketer of standard and customized indoor and outdoor
lighting products for commercial and industrial use. Siemens Lighting (renamed
SiTeco Beleuchtungstechnik GmbH ) operates manufacturing facilities in Germany,
Austria and Slovenia.
In November 1997, the Company sold the assets of Tommy Armour Golf to
TearDrop Golf Company for $10 million cash, certain convertible preferred stock
of TearDrop Golf, and one million shares of Common Stock of TearDrop Golf.
In December 1997, the Company purchased Spear & Jackson plc ("Spear &
Jackson") for $11 million in cash and $96 million in the Company's Common Stock,
resulting in goodwill of approximately $63 million. Spear & Jackson,
manufactures and distributes hand tools, lawn and garden tools, saws, cutting
and industrial tools. The purchase price is subject to a cash contingency,
payable on or before June 2000. The cash contingency is based upon certain
performance criteria and the market value of the Company's stock and, at
present, could approximate $65 million.
45
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Continued)
Note 18-Subsequent Events (Unaudited) (Continued)
In January 1998, the Company acquired certain semiconductor leadframe
assets from Philips Electronics for approximately $14 million in cash. The
acquired manufacturing facilities are located in the Netherlands.
In May 1998, USI purchased certain metal components assets from Phillips
Components B.V. ("Phillips") for approximately $30 million. The Company and
Phillips have entered into a multi-year supply agreement. The acquired
operations are located in the Netherlands.
In June 1998, USI acquired Sundance Spas for approximately $35 million in
cash. Sundance Spas, based in Chino, California, is a manufacturer of high
quality self-contained spas.
The above acquisitions have been accounted for as purchases and their
results of operations will be included in the financial statements from the date
of acquisition.
46
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operation
The Company's operations are grouped into four segments: Bath and Plumbing
Products, Lighting Corporation of America, Hardware and Tools and Diversified.
The results of all operations sold or classified as discontinued, including
SunLite which was discontinued in fiscal 1998, are excluded from the table below
for all periods presented and are discussed separately under "Discontinued
Operations". The Results of Operations have been restated in accordance with
pooling of interests accounting to include Zurn's operations.
Results of Operations
<TABLE>
<CAPTION>
(in millions)
Three Months Ended
December 31,
1997 1996
---- ----
<S> <C> <C>
Net Sales
Bath and Plumbing Products ..................... ............... $ 227 $ 134
Lighting Corporation of America................. ............... 189 131
Hardware and Tools.............................. ............... 69 65
Diversified..................................... ............... 259 248
------------ -----------
Total Net Sales................................................. . $ 744 $ 578
------------ -----------
------------ -----------
Operating Income
Bath and Plumbing Products ........................................ . $ 24 $ 12
Lighting Corporation of America ................................... . 12 10
Hardware and Tools................................................. . 3 7
Diversified........................................................ . 38 34
------------ -----------
77 63
Corporate expenses..................................................... . (7) (7)
------------ -----------
Total Operating Income........................................... . $ 70 $ 56
------------ -----------
------------ -----------
</TABLE>
47
<PAGE>
Merger with Zurn Industries, Inc.
On June 11, 1998, U.S. Industries, Inc. ("USI") merged with (the "Merger")
Zurn Industries, Inc. ("Zurn"), hereafter collectively referred to as the
Company, by exchanging approximately 20 million shares of its common stock for
all of the common stock of Zurn. Each share of Zurn common stock was exchanged
for 1.6 shares of USI common stock. Outstanding Zurn employee stock options were
converted at the same exchange ratio into options to purchase approximately 2
million shares of USI common stock.
Zurn manufactures and distributes plumbing and heating, ventilating and air
conditioning (HVAC) products for the construction and remodeling markets in the
United States, Canada and Europe, with significant suppliers being located in
China and the Pacific Rim. It designs and installs fire sprinkler systems in the
states of California, Hawaii, Texas, Utah and Washington. Zurn also constructs a
wide variety of systems to control and treat water and wastewater principally
for government agencies in southern California.
The merger has been accounted for as a pooling of interest under Accounting
Principles Board Opinion No. 16. All prior period financial statements have been
restated to present the results of operations, financial position and cash flows
of USI and Zurn as a single entity. There were no transactions between USI and
Zurn prior to the combination. Certain reclassifications have been made to the
Zurn financial statements to conform to USI's presentations.
Three Months Ended December 31, 1997
Compared to Three Months Ended December 31, 1996
Introduction
The Company had sales of $744 million and operating income of $70 million
for the quarter ended December 31, 1997. Sales increased $166 million (28.7%)
and operating income increased $14 million (25.0%) over the first quarter of
fiscal 1997.
The Bath and Plumbing Products Operations had sales of $227 million and
operating income of $24 million for the quarter ended December 31, 1997,
increases of $93 million (69.4%) and $12 million (100.0%), respectively, from
the first quarter of fiscal 1997. The increase in sales and operating profits
was primarily due to the first-time inclusion of Eljer, which was acquired by
Zurn in a purchase transaction in January of 1997. The domestic bath operations
contributed with an increase in sales and profits while foreign operations
recorded slightly higher sales and lower profits due to weakness in the
Brazilian, Italian and Asian markets.
The Lighting Products Operations had sales of $189 million and operating
income of $12 million for the quarter ended December 31, 1997, increases of $58
million (44.3%) and $2 million (20.0%), respectively, over the first quarter of
fiscal 1997. The increase in sales and operating profits was due to the October
1997 acquisition of SiTeco, formerly Siemens Lighting, and the strength of
specialty and architectural outdoor lighting.
The Hardware and Tools Operations had sales of $69 million and operating
income of $3 million for the quarter ended December 31, 1997, an increase of $4
million (6.2%), and a decrease of $4 million (57.1%), respectively, from the
first quarter of fiscal 1997. The increase in sales was primarily due to the
first-time inclusion of Spear & Jackson, which was acquired in December 1997,
partially offset by reduced sales of ladders. Sales of winter tools were lower
due to mild winter weather conditions. Operating profits were lower due to
reduced contributions from ladder operations and the winter tool line, partially
offset by the contribution from Spear & Jackson.
48
<PAGE>
The Diversified Operations had sales of $259 million and operating income
of $38 million, increases of $11 million (4.4%) and $4 million (11.8%),
respectively. The increase in sales was primarily due to strong sales of
automotive leather partially offset by reduced sales of vacuum cleaning systems,
toys, and to a lesser extent, footwear. The increase in operating income was due
to increased operating profit in the toy, textile, footwear, fabricated metal
auto components, electronic leadframes, and aircraft bearing refurbishment
operations, along with increased equity earnings from an investment. The
increase in the toy operating income resulted from lower obsolescence and
markdown exposures and reduced advertising expenditures associated with the exit
from the promotional toy business. The increase in the footwear operating income
includes the impact of a favorable settlement of certain environmental claims.
These contributions were partially offset by lower profits from vacuum cleaning
systems, automotive leather sales and plastic automotive parts operations.
Revenue and operating income from high margin vacuum cleaning systems declined
due to lower sales in the United States and certain foreign markets,
particularly Poland, the Czech Republic, Austria and Turkey. Lower profits from
automotive leather sales were a result of reduced yields, and lower scrap and
hide prices.
Discontinued Operations and Extraordinary Loss
For the quarter ended December 31, 1997, the Company recorded a loss from
discontinued operations of $1 million from the Company's outdoor furniture
operations. In the comparable period of the prior year, the Company reported
income from discontinued operations of $4 million, consisting of a gain on
disposal of $1 million and income from discontinued operations of $3 million.
The gain on disposal resulted from the sale of the assets of Tubular Textile
Machinery (Tube-Tex). The income from discontinued operations consisted of
Tube-Tex, QPF, Inc., SCM Metal Products, Inc. and the Armour Golf operations
(Tommy Armour Golf and Odyssey Golf) as well as Zurn's Lynx Golf, its Mechanical
Power Transmission segment and portions of its Power system Segment. The sales
of Tube-Tex, QPF, Inc., SCM Metal Products, Inc. and Odyssey Golf were completed
in fiscal 1997. The sale of substantially all of the remaining assets of Tommy
Armour Golf was completed in November 1997.
USI's management is evaluating its exposure to contingencies related to
Zurn's discontinued Power Systems segment and considering how and when those
matters could be resolved. This review will be completed by the end of fiscal
1998. Discontinued operations are not expected to have a material impact on the
future operations and liquidity of the Company.
In conjunction with the repayment of all outstanding indebtedness under a
prior credit agreement, during the first quarter of fiscal 1997, a net-of-tax,
non-cash, extraordinary charge of $2 million was incurred to write off
unamortized deferred financing costs and for previously deferred losses
associated with interest rate protection agreements.
Interest and Taxes
Interest expense was $16 million for the quarter ended December 31, 1997, a
$4 million (33.0%) increase from the comparable period of fiscal 1997. The
increase is primarily due to the increase indebtedness from Zurn's acquisition
of Eljer, along with a higher average interest rate for Zurn's indebtedness.
Interest income was $2 million for the quarter ended December 31, 1997, which is
unchanged from the comparable period of fiscal 1997.
The provision for income taxes on continuing operations was $24 million for
the quarter ended December 31, 1997, on pre-tax income of $56 million (a 42.9%
effective tax rate) as compared to a $20 million provision on pre-tax income of
$46 million (a 43.5% effective tax rate) in the comparable period of fiscal
1997. The decrease in the effective tax rate is attributable to the increased
utilization of foreign tax credits.
49
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of liquidity and capital resources are cash
and cash equivalents, cash provided from operations and available borrowings
under the Company's revolving credit facility.
Cash from operating activities of continuing operations was $2 million more
than the comparable period of the prior fiscal year. The increase in income and
non cash items from continuing operations was partially offset by increased
working capital requirements primarily due to tax payments.
Cash used by discontinued operations in the first quarter of fiscal 1998
primarily consists of tax payments in connection with the sale of certain
discontinued operations as well as the seasonal working capital requirements of
the outdoor furniture operations.
Investing activities used net cash of $28 million in the three months ended
December 31, 1997 compared to net cash used of $4 million for the comparable
period of fiscal 1997. The three months ended December 31, 1997 included net
cash used for the acquisitions of SiTeco and Spear & Jackson of $34 million and
capital expenditures of $17 million, partially offset by the cash proceeds from
the sale of Tommy Armour Golf of $10 million, proceeds from real estate
transactions of $6 million and proceeds from sales of fixed assets of $10
million. The prior year included proceeds of $21 million from the sale of net
assets held for disposition, which resulted in an after tax gain of $1 million,
and $3 million from real estate transactions. These amounts were offset by
capital expenditures of $22 million and a net purchase of marketable securities
of $9 million.
Financing activities provided net cash of $30 million in the three months
ended December 31, 1997. This included proceeds from long-term debt and notes
payable in excess of repayments of $53 million, primarily used to finance
acquisitions, the purchase of $20 million of the Company's common stock for
treasury and dividend payments of $5 million. The prior period included net
proceeds under long-term debt and notes payable in excess of repayments of $26
million and the purchase of $25 million of the Company's common stock for
treasury.
At December 31, 1997 the Company has short-term debt of $64 million
denominated in German Marks and $49 million denominated in British Pounds. These
borrowings have been designated as hedges of the Company's net investments in
SiTeco and Spear & Jackson, acquisitions made during the first quarter of fiscal
1998. The Company refinanced this debt on a long-term basis during the second
quarter of fiscal 1998 and, accordingly, this amount has been classified as
other long-term debt. Other long-term debt also includes $64 million of notes
payable maturing within one year which the Company expects to repay using
borrowings under its revolving credit facility.
In accordance with the terms of the Zurn Credit Agreement, the Zurn
borrowings under the Credit Agreement were refinanced in June 1998, with
proceeds from a short-term committed note made available from one of the
Company's lenders which bears interest at a rate of approximately 5.88% per
annum and has a maturity date of September 11, 1998. The Company presently
expects to refinance this obligation as well as a portion of its obligations
under its existing credit agreement with a portion of the proceeds from a
$300 million to $500 million, in aggregate, principal amount of debt
securities offered to qualified institutional investors in a transaction
exempt from registration requirements of the Securities Act of 1934.
50
<PAGE>
U.S. INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions except per share)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1996
---- ----
<S> <C> <C>
Net sales $ 744 $ 578
Operating costs and expenses:
Cost of products sold 511 393
Selling, general and administrative expenses 163 129
---------- ----------
Operating income 70 56
Interest expense 16 12
Interest income (2) (2)
---------- ----------
Income before income taxes, discontinued operations and
extraordinary loss 56 46
Provision for income taxes 24 20
---------- ----------
Income from continuing operations 32 26
Income (loss) from discontinued operations, net of tax (1) 4
---------- ----------
Income before extraordinary loss 31 30
Extraordinary loss, net of tax - (2)
---------- ----------
Net income $ 31 $ 28
---------- ----------
---------- ----------
Earnings per basic share:
Income from continuing operations $ 0.34 $ 0.28
Income (loss) from discontinued operations (0.01) 0.04
Extraordinary loss - (0.02)
---------- ----------
Net income $ 0.33 $ 0.30
---------- ----------
---------- ----------
Earnings per diluted share:
Income from continuing operations $ 0.33 $ 0.27
Income (loss) from discontinued operations (0.01) 0.04
Extraordinary loss - (0.02)
---------- ----------
---------- ----------
Net income $ 0.32 $ 0.29
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
51
<PAGE>
U.S. INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 61 $ 67
Trade receivables, net 500 502
Inventories 570 501
Deferred income taxes 107 107
Other current assets
63 55
Net assets held for disposition 58 69
-------------- --------------
Total current assets 1,359 1,301
Property, plant and equipment, net 503 422
Deferred income taxes 1 3
Other assets 221 212
Goodwill, net 660 600
-------------- --------------
$ 2,744 $ 2,538
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 10 $ 4
Current maturities of long-term debt 25 41
Trade accounts payable 179 189
Accrued expenses and other liabilities 342 344
Income taxes payable 76 72
-------------- --------------
Total current liabilities 632 650
Long-term debt 803 701
Other liabilities 255 237
-------------- --------------
Total liabilities
1,690 1,588
Commitments and contingencies
Stockholders' equity 1,054 950
-------------- --------------
$ 2,744 $ 2,538
-------------- --------------
-------------- --------------
</TABLE>
See notes to consolidated financial statements.
52
<PAGE>
U.S. INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions-unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Income from continuing operations $ 32 $ 26
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities of continuing operations:
Depreciation and amortization 24 15
Provision for doubtful accounts 1 2
Gain on sale of excess real estate (3) (1)
Changes in operating assets and liabilities, excluding the effects of
acquisitions and dispositions (25)
(15)
---------- ----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES OF CONTINUING OPERATIONS
29 27
---------- ----------
Income (loss) from discontinued operations (1) 4
(Increase) decrease in net assets held for disposition 8
(34)
---------- ----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
OF DISCONTINUED OPERATIONS
(35) 12
---------- ----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
(6) 39
---------- ----------
INVESTING ACTIVITIES:
Proceeds from sale of net assets held for disposition 10 21
Acquisition of companies, net of cash acquired (34) -
Purchases of property, plant and equipment (17) (22)
Change in marketable securities - (9)
Proceeds from sale of excess real estate 6 3
Proceeds from sales of fixed assets 10 -
Other changes in investing activities
(3) 3
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (28)
(4)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from long-term debt 332 878
Repayment of long-term debt (275) (854)
Repayment of notes payable, net (4) 2
Payment of dividends (5) (1)
Proceeds from exercise of stock options 2 -
Purchase of treasury stock (20) (25)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 30 -
---------- ----------
Effect of exchange rate changes on cash (2) -
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (6) 35
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 67 56
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 61 $ 91
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
53
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Note 1-Basis of Presentation
U.S. Industries, Inc. ("USI") manufactures and distributes a broad range of
consumer and industrial products. The accompanying financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information, Article 10 of Regulation S-X and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The interim financial data for the three
months ended December 31, 1997 and 1996 are unaudited and, in the opinion of
management, reflect all necessary adjustments for a fair presentation of the
financial position and results of operations for the interim periods on a
consistent basis. Such adjustments were of a normal and recurring nature. The
results of operations for the three month period ended December 31, 1997 are not
necessarily indicative of those for the full fiscal year ending October 3, 1998.
For further information, refer to the Consolidated (Combined) Financial
Statements and footnotes thereto included in the USI Annual Report on Form 10-KA
for the year ended September 30, 1997, Zurn Industries, Inc. ("Zurn"), Annual
Report on Form 10-K for the year ended March 31, 1997, and the Consolidated
(Combined) Financial Statements for the fiscal year ended September 30, 1997,
1996 and 1995, and notes thereto included elsewhere in their Form 8-K.
On June 11, 1998, USI merged with (the "Merger") Zurn, hereafter
collectively referred to as the Company, by exchanging approximately 20 million
shares of its common stock for all of the common stock of Zurn. Each share of
Zurn common stock was exchanged for 1.6 shares of USI common stock. Outstanding
Zurn employee stock options were converted at the same exchange ratio into
options to purchase approximately 2 million shares of USI common stock.
The merger has been accounted for as a pooling of interests under
Accounting Principles Board Opinion No. 16. All prior period financial
statements have been restated to present the results of operations, financial
position and cash flows of USI and Zurn as a single entity. There were no
transactions between USI and Zurn prior to the combination. Certain
reclassifications have been made to the Zurn financial statements to conform to
USI's presentations.
The Company's fiscal year ends on the Saturday nearest to September 30. All
three month data contained herein reflect results of operations for the 14-week
period and 13-week period ended on the Saturday closest to December 31, 1997 and
1996, respectively, but are presented as of such date for convenience.
The results of operations for the separate companies and combined amounts
in the accompanying financial statements are as follows:
<TABLE>
<CAPTION>
(in millions)
Three Months Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Net Sales
USI $ 591 $ 512
Zurn 153 66
----------- -----------
$ 744 $ 578
----------- -----------
----------- -----------
Income from Continuing Operations
USI $ 25 $ 21
Zurn 7 5
----------- -----------
$ 32 $ 26
----------- -----------
----------- -----------
Net Income
USI $ 24 $ 21
Zurn 7 7
----------- -----------
$ 31 $ 28
----------- -----------
----------- -----------
</TABLE>
54
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997
Note 1-Basis of Presentations (Continued)
During fiscal 1998, the Company has adopted a plan to dispose of SunLite,
its outdoor furniture operation, and has reclassified this operation as
discontinued in the accompanying financial statements.
Note 2-Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
(in millions)
December 31, September 30,
1997 1997
(unaudited)
<S> <C> <C>
Finished products $ 289 $ 260
Work-in process 112 106
Raw materials 169 135
----------------- -----------------
$ 570 $ 501
----------------- -----------------
----------------- -----------------
</TABLE>
Note 3-Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
(in millions)
December 31, September 30,
1997 1997
(unaudited)
<S> <C> <C>
7.25% Senior Notes, net $ 123 $ 123
Revolving credit facility 350 350
Other long-term debt 203 79
Zurn Debt 152 190
----------------- -----------------
828 742
Less current maturities 25 41
----------------- -----------------
Long-term debt $ 803 $ 701
----------------- -----------------
----------------- -----------------
</TABLE>
At December 31, 1997 the Company has short-term debt of $64 million
denominated in German Marks and $49 million denominated in British Pounds. These
borrowings have been designated as hedges of the Company's net investments in
SiTeco and Spear & Jackson, acquisitions made during the first quarter of fiscal
1998 (see Note 6). The Company refinanced this debt on a long-term basis during
the second quarter of fiscal 1998 and, accordingly, this amount has been
classified as other long-term debt. Other long-term debt also includes $64
million of notes payable maturing within one year which the Company expects to
repay using borrowings under its revolving credit facility.
In accordance with the terms of the Zurn Credit Agreement, the Zurn
borrowings under the Credit Agreement were refinanced in June 1998, with
proceeds from a short-term committed note made available from one of the
Company's lenders which bears interest at a rate of approximately 5.88% per
annum and has a maturity date of September 11, 1998. The Company expects to
refinance this obligation and a portion of its obligations under its existing
credit agreement with a $300 million to $500 million debt offering in early
August.
55
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997
Note 4-Commitments and Contingencies
The Company is subject to a wide range of environmental protection laws.
The Company has remedial and investigatory activities underway at approximately
39 sites. In addition, the Company has been named as a Potentially Responsible
Party ("PRP") at 17 "Superfund" sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or
comparable statutes.
It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. The Company accrues for losses
associated with environmental remediation obligations when such losses are
probable and reasonably estimable. This practice is followed whether the claims
are asserted or unasserted. Accruals for estimated losses from environmental
remediation are, depending on the site, based primarily upon internal or third
party environmental studies, and estimates as to the number, participation level
and financial viability of any other PRP's, to the extent of contamination and
the nature of required remedial actions. Such accruals are adjusted as further
information develops or circumstances change. Costs of future expenditures for
environmental remediation obligations are not discounted to their present fair
value. Recoveries of environmental remediation costs from other parties are
recognized as assets when their receipt is deemed probable. Management expects
that the amount accrued will be paid out over the periods of remediation for the
applicable sites which range up to 30 years and that all such reserves are
adequate based on all current data. Each of the sites in question is at various
stages of investigation or remediation; however, no information currently
available reasonably suggests that projected expenditures associated with
remedial action or compliance with environmental laws, for any single site or
for all sites in the aggregate, will have a material adverse affect on the
Company's financial condition, results of operations or cash flows.
At December 31, 1997, the Company had accrued $26 million for known
environmental related matters. The Company believes that the range of liability
for such matters is between $13 million and $28 million.
United States Brass Corporation ("US Brass"), a Zurn indirect wholly-owned
subsidiary, filed in 1994 a voluntary petition for reorganization under Chapter
11 of the United States Bankruptcy Code for the purpose of systemically
resolving issues resulting from sales of polybutylene plumbing systems and
related litigation. On February 24, 1998, the United States Bankruptcy Court for
the Eastern District of Texas confirmed the Chapter 11 Bankruptcy Plan of
Reorganization filed by US Brass. On March 19, 1998, the plan became effective
and the US Brass Trust was funded with approximately $50 million in cash and a
$20 million noninterest bearing note, payable over ten years to pay claims
resulting from US Brass polybutylene plumbing systems. As a result, US Brass
emerged from bankruptcy and future US Brass polybutylene plumbing system claims
were enjoined and channeled to the Trust and a national class action
settlement fund.
In the normal course of business, financial and performance guarantees are
made in connection with major engineering and construction contracts and a
liability is recognized when a probable loss occurs.
Also, certain of the Company's subsidiaries are defendants or plaintiffs in
lawsuits that have arisen in the normal course of business. While certain of
these matters involve substantial amounts, it is management's opinion, based on
the advice of counsel, that the ultimate resolution of such litigation and
environmental matters will not have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
56
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997
Note 5-Earnings Per Share
In February 1997, the FASB issued Statement No. 128 ("SFAS 128"), "Earnings Per
Share" which was adopted on December 31, 1997. The Company has restated all
prior periods. The adoption of SFAS 128 did not have a material impact on the
earnings per share information previously presented.
<TABLE>
<CAPTION>
(in millions except per share) (in millions except per share)
Income from Income from Per Share
Continuing Per Share Continuing Amount
Operations Shares Amount Operations Shares
(For the Three Months Ended (For the Three Months Ended
December 31, 1997) December 31, 1996)
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $ 32 92.8 $ 0.34 $ 26 93.2 $ 0.28
Effect of dilutive securities
Stock options 1.7 1.4
Nonvested restricted stock 1.6 1.4
--------- ---------- ---------- ---------- ---------- --------
Diluted earnings per share $ 32 96.1 $ 0.33 $ 26 96.0 $ 0.27
--------- ---------- ---------- ---------- ---------- --------
--------- ---------- ---------- ---------- ---------- --------
</TABLE>
Diluted common shares include shares that would be outstanding assuming the
fulfillment of conditions that would remove the restriction on nonvested shares
and the exercise of stock options. Options to purchase 32,100 shares in the
three months ended December 31, 1997 and options to purchase 1,161,266 shares in
the three months ended December 31, 1996 were not included in the computation of
earnings per share because the options exercise prices were greater than the
average market price of the common share.
Note 6-Acquisitions
In October 1997, the Company purchased Siemens Lighting, a division of
Siemens A.G., for $67 million in cash. Siemens Lighting is a leading European
manufacturer and marketer of standard and customized indoor and outdoor lighting
products for commercial and industrial use. Siemens Lighting (renamed SiTeco
Beleuchtungstechnik GmbH, "SiTeco") operates manufacturing facilities in
Germany, Austria and Slovenia.
In December 1997, the Company purchased Spear & Jackson plc ("Spear &
Jackson") for $11 million in cash and $96 million in the Company's Common
Stock, resulting in preliminary goodwill of approximately $65 million. Spear
& Jackson manufactures and distributes hand tools, lawn and garden tools,
saws, cutting and industrial tools. The purchase price is subject to a cash
contingency, payable on or before June, 2000. The additional purchase price
is based upon certain performance criteria and the market value of the
Company's stock and, assuming the performance criteria were met, currently
approximates $65 million.
These transactions have been accounted for as purchases and their results
are included in the financial statements from their respective dates of
acquisition. The allocation of purchase price is preliminary and subject to
adjustment upon receipt of final valuation information and management's final
estimates as to the fair value of the respective assets acquired and liabilities
assumed.
57
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997
Note 7-Summarized Financial Information of Subsidiary
Summarized consolidated financial information of USI American Holdings,
Inc. ("USIAH"), the issuer of the 7.25% Senior Notes, is as follows:
<TABLE>
<CAPTION>
(in millions - unaudited)
Three Months Ended
December 31,
1997 1996
<S> <C> <C>
Income Statement Data:
Net sales $ 591 $ 512
Gross profit 185 165
Income from continuing operations 26 22
Net income 25 22
</TABLE>
<TABLE>
<CAPTION>
(in millions)
December 31, September 30,
1997 1997
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Current assets $ 1,028 $ 947
Non-current assets 1,013 859
Current liabilities 395 395
Non-current liabilities 844 703
</TABLE>
Separate consolidated financial statements of USIAH are not presented as
management has determined that they would not be material to investors.
Note 8-Subsequent Events
In January 1998, the Company acquired certain semiconductor leadframe
assets from Phillips Electronics for approximately $14 million in cash. The
acquired manufacturing facilities are located in the Netherlands.
In May 1998, the Company purchased certain metal component assets from
Phillips Components, B.V., ("Phillips") for approximately $31 million in cash,
subject to customary post closing adjustments. The Company and Philips have
entered into a multi-year supply agreement. The acquired operations are located
in the Netherlands.
In June 1998, the Company purchased the assets of Sundance Spas from Clark
Manufacturing, Inc., for approximately $32 million in cash, subject to customary
post closing adjustments. Sundance Spas, based in Chino, California, is a
manufacturer of high quality self-contained bath spas.
The above acquisitions were accounted for as purchases and the results of
their operations will be included in the financial statements from the date of
acquisition.
58
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company's operations are grouped into four segments: Bath and Plumbing
Products, Lighting Corporation of America, Hardware and Tools and Diversified.
The results of all operations sold or classified as discontinued, including
SunLite which was discontinued in fiscal 1998, are excluded from the table below
for all periods presented and are discussed separately under "Discontinued
Operations". The Results of Operations have been restated in accordance with
pooling of interests accounting to include the results of Zurn's operations.
Results of Operations
<TABLE>
<CAPTION>
(in millions) (in millions)
Three Months Ended Six Months Ended
March 31, March 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Sales
Bath and Plumbing Products .............. $ 252 $ 211 $ 479 $ 345
Lighting Corporation of America.......... 190 134 379 265
Hardware and Tools....................... 120 85 189 150
Diversified.............................. 264 234 523 482
--------- ---------- ---------- -----------
Total Net Sales $ 826 $ 664 $ 1,570 $ 1,242
--------- ---------- ---------- -----------
--------- ---------- ---------- -----------
Operating Income
Bath and Plumbing Products............... $ 27 $ 22 $ 51 $ 34
Lighting Corporation of America ............ 12 9 24 19
Hardware and Tools....................... 11 10 14 17
Diversified ................................ 37 28 75 62
--------- ---------- ---------- -----------
Total Net Sales ......... $ 87 $ 69 $ 164 $ 132
Corporate expenses......................... (6) (6) (13) (13)
--------- ---------- ---------- -----------
Total Operating Income..................... $ 81 $ 63 $ 151 $ 119
--------- ---------- ---------- -----------
--------- ---------- ---------- -----------
</TABLE>
59
<PAGE>
Merger with Zurn Industries, Inc.
On June 11, 1998, U.S. Industries, Inc. ("USI") merged with (the "Merger")
Zurn Industries, Inc. ("Zurn"), hereafter collectively referred to as the
Company, by exchanging approximately 20 million shares of its common stock for
all of the common stock of Zurn. Each share of Zurn common stock was exchanged
for 1.6 shares of USI common stock. Outstanding Zurn employee stock options were
converted at the same exchange ratio into options to purchase approximately 2
million shares of USI common stock.
Zurn manufactures and distributes plumbing and heating, ventilating and air
conditioning (HVAC) products for the construction and remodeling markets in the
United States, Canada and Europe, with Significant suppliers being located in
China and the Pacific Rim. It designs and installs fire sprinkler systems in the
states of California, Hawaii, Texas, Utah and Washington. Zurn also constructs a
wide variety of systems to control and treat water and wastewater principally
for government agencies in southern California.
The merger has been accounted for as a pooling of interests under
Accounting Principles Board Opinion No. 16. All prior period financial
statements presented have been restated to present the results of operations,
financial position and cash flows of USI and Zurn as a single entity. There were
no transactions between USI and Zurn prior to the combination. Certain
reclassifications have been made to the Zurn financial statements to conform to
USI's presentations.
Three Months Ended March 31, 1998
Compared to Three Months Ended March 31, 1997
Introduction
The Company had sales of $826 million and operating income of $81 million
for the quarter ended March 31, 1998. Sales and operating income increased $161
million (24.2%) and $18 million (26%), respectively, over the second quarter of
fiscal 1997.
The Bath and Plumbing Products operations had sales of $252 million and
operating income of $27 million for the quarter ended March 31, 1998, increases
of $41 million (19.4%) and $5 million (22.7%), respectively, from the second
quarter of fiscal 1997. Significant increases in sales and operating profits in
the North American bath and plumbing operations resulted from continued strength
in residential construction and the impact of a full quarter of operations from
Zurn's acquisition of Eljer, partially offset by the impact of reduced sales of
heating ventilation and air conditioning products due to the unseasonably warm
weather in North America. European bath operations improved substantially from
the prior year, but were offset by declines in the Brazil and Asia and the
European HVAC market.
The Lighting Corporation of America had sales of $190 million and operating
income of $12 million for the quarter ended March 31, 1998, increases of $56
million (41.8%) and $3 million (33.3%), respectively, over the second quarter of
fiscal 1997. The increase in sales and operating income is primarily due to the
October 1997 acquisition of SiTeco Lighting, formerly Siemens Lighting, and
higher sales of outdoor and residential lighting. Sales of commercial indoor
florescent fixtures continue to be affected by price competition.
The Hardware and Tools Operations had sales of $120 million and operating
income of $11 million for the quarter ended March 31, 1998, increases of $35
million (41.2%), and $1 million (10.0%) from the second quarter of fiscal 1997.
The increase in sales is primarily attributable to the first time inclusion of
Spear & Jackson, which was acquired in December 1997, partially offset by
reduced sales of ladders. Operating profits were impacted by sharp reductions in
sales of ladders, partially offset by the contribution from Spear & Jackson.
60
<PAGE>
The Diversified Operations had sales of $264 million and operating income
of $37 million, increases of $30 million (12.8%) and $9 million (32.1%),
respectively. The sales increases includes the significant increase in sales of
automotive leather, while hide quality and low scrap prices resulted in flat
operating income. The Company's leadframes, fabricated metal automotive parts
and refurbished aircraft bearing businesses had increased sales and operating
income. The January 1998 acquisition of the leadframe business of Philips
contributed to the improvement. The Company's toy business realized a gain on
sale of an investment in one of its suppliers. Sales and operating income
increases in the above mentioned businesses were partially offset by sharp
reductions in sales and operating income from high margin vacuum cleaners.
Discontinued Operations and Extraordinary Loss
For the quarter ended March 31, 1998, the Company recorded a loss from
discontinued operations of $7 million, net of tax from the operating losses
associated with the Company's outdoor furniture operations and losses from the
discontinued operations of Zurn. In the comparable period of the prior year, the
Company reported income from discontinued operations of $74 million, consisting
of net gains on disposals of discontinued operations of $72 million and income
from discontinued operations of $2 million. The net gains resulted from gains on
the dispositions of SCM Metals Products, Inc. and QPF Inc. partially offset by a
loss from the sale of portions of the Zurn's Power Systems segment. The income
from operations of discontinued operations consisted of the results of the
companies sold and the Armour Golf Operations (Tommy Armour Golf and Odyssey
Golf).
USI's management is evaluating its exposure to contingencies related to
Zurn's discontinued Power Systems segment and considering how and when those
matters could be resolved. This review will be completed by the end of fiscal
1998. Discontinued operations are not expected to have a material impact on the
future operations or liquidity of the Company.
Interest and Taxes
Interest expense was $17 million for the quarter ended March 31, 1998, a $2
million (13.3%) increase from the comparable period of fiscal 1997. The increase
in interest expense was due to the higher average debt levels for the comparable
periods. Interest income was $2 million for the quarter ended March 31, 1998, a
$1 million increase from the comparable period of fiscal 1997.
The provision for income taxes on continuing operations was $27 million for
the quarter ended March 31, 1998, on pre-tax income of $67 million (a 40.3%
effective tax rate) as compared to a $21 million provision on pre-tax income of
$50 million (a 42.0% effective tax rate) in the comparable period of fiscal
1997. The decrease in the effective tax rate is primarily attributable to the
increased utilization of foreign tax credits.
Six Months Ended March 31, 1998
Compared to Six Months Ended March 31, 1997
Introduction
The Company had sales of $1,570 million and operating income of $151
million for the six months ended March 31, 1998. Sales and operating income
increased $327 million (26.3%) and $32 million (24.2%), respectively, over the
comparable period of fiscal 1997.
The Bath and Plumbing Products operations had sales of $479 million and
operating income of $51 million for the six months ended March 31, 1998,
increases of $134 million (38.8%) and $17 million (50.0%), respectively, from
the six months ended March 31, 1997. The improvement in sales and operating
income is due to the January 1997 acquisition of Eljer, continued strength in
North American building and improved European bath operations. These gains were
partially offset by reduced sales and profits in South America and Asia.
61
<PAGE>
The Lighting Corporation of America had sales of $379 million and operating
income of $24 million for the six months ended March 31, 1998, increases of $114
million (43.0%) and $5 million (26.3%), respectively, over the comparable period
of fiscal 1997. The increase in sales and operating profits was due to the
October 1997 acquisition of SiTeco and the strength of outdoor and residential
lighting. These gains were partially offset by softness in the commercial indoor
fixtures business which is experiencing intense price competition.
The Hardware and Tools Operations had sales of $189 million and operating
income of $14 million for the six months ended March 31, 1998, an increase of
$39 million (26.0%) and a decrease of $3 million (17.6%), respectively, from the
comparable period of fiscal 1997. The increase in sales was primarily due to the
first-time inclusion of Spear & Jackson, acquired in December 1997, which was
offset in large part by reduced sales of ladders. Sales of winter tools were
lower due to unusually mild winter weather conditions. Operating profits were
lower due to reduced contributions from ladder operations and the winter tool
line, partially offset by the contribution from Spear & Jackson.
The Diversified Operations had sales of $523 million and operating income
of $75 million for the six months ended March 31, 1998, increases of $41 million
(8.5%) and $13 million (21.0%), respectively, from the comparable period of the
prior year. The increase in sales and operating income includes the impact of
strong sales of leadframes, which includes the January 1998 acquisition of
Phillips' leadframe business, and strong sales of fabricated metal automotive
parts and refurbished aircraft bearings. While sales of automotive leather
increased significantly, hide quality and low scrap prices resulted in a flat
operating income contribution. Operating income was also impacted by a favorable
settlement of certain environmental obligations in the footwear operations and a
gain on the sale of an investment in a supplier of the company's toy business.
The Company's toy business also benefitted from reduced obsolescence and
markdown exposures associated with the exit from the promotional toy business.
These increases were offset by reduced revenue and operating income from high
margin vacuum cleaners which declined due to lower sales in certain foreign
markets particularly Poland and the Czech Republic.
Discontinued Operations and Extraordinary Loss
For the six months ended March 31, 1998, the Company recorded a loss from
discontinued operations of $8 million which primarily consisted of the operating
losses associated with the Company's outdoor furniture operations and losses
from the discontinued operations of Zurn.
For the six months ended March 31, 1997, the Company reported income from
discontinued operations of $78 million, consisting of net gains on disposals of
discontinued operations of $75 million and income from operations of
discontinued operations of $3 million. The gains on dispositions resulted from
the sales of Tubular Textile Machinery, SCM Metals Products, Inc. and the assets
of QPF, Inc. partially offset by losses on the sale of Lynx Golf, the Mechanical
Power Transmission Segment and portions of the Power System Segment. The income
from operations of discontinued operations consisted of the results of the above
named companies as well as the Armour Golf Operations (Tommy Armour Golf and
Odyssey Golf).
USI's management is evaluating its exposure to contingencies related to
Zurn's discontinued Power Systems segment and considering how and when those
matters could be resolved. This review will be completed by the end of fiscal
1998. Discontinued operations are not expected to have a material impact on the
future operations or liquidity of the Company.
In conjunction with the repayment of all outstanding indebtedness under a
prior credit agreement, during the six months ended March 31, 1997, a
net-of-tax, non-cash, extraordinary charge of $2 million was incurred to write
off unamortized deferred financing costs and for previously deferred losses
associated with interest rate protection agreements.
62
<PAGE>
Interest and Taxes
Interest expense was $33 million for the six months ended March 31, 1998, a
$6 million (22.2%) increase from the comparable period of fiscal 1997 which
includes the impact of higher average debt levels associated with the Eljer
acquisition. Interest income was $4 million for the six months ended March 31,
1998, a decrease of $1 million from the comparable period of the prior year.
The provision for income taxes on continuing operations was $51 million for
the six months ended March 31, 1998, on pre-tax income of $123 million (a 41.5%
effective tax rate) as compared to a $41 million provision on pre-tax income of
$96 million (a 42.7% effective tax rate) in the comparable period of fiscal
1997. The decrease in the effective tax rate is primarily attributable to the
increased utilization of foreign tax credits.
Liquidity and Capital Resources
The Company's primary sources of liquidity and capital resources are cash
and cash equivalents, cash provided from operations and available borrowings
under the Company's revolving credit facility.
Net cash provided by operating activities was $27 million and $1 million
for the six months ended March 31, 1998 and 1997, respectively. The increase
from the prior comparable period is due to reduced working capital requirements
of the Zurn bath and plumbing products operations partially offset by reduced
cash flows from the reduction in sales of vacuum cleaners and ladders.
Cash used in discontinued operations in the first six months of 1998 is
primarily due to cash used in the operations of the Company's outdoor furniture
business and tax payments in connection with the sale of discontinued
operations.
Investing activities used net cash of $124 million in the six months ended
March 31, 1998 compared to cash provided by investing activities of $54 million
for the comparable period of fiscal 1997. The six months ended March 31, 1998
included net cash used for acquisitions of $103 million and capital expenditures
of $50 million, partially offset by the cash proceeds from the sale of Tommy
Armour Golf of $10 million as well as proceeds from the sale of fixed assets and
excess real estate of $12 million and $9 million, respectively. The prior year
included proceeds of $238 million from the sale of net assets held for
disposition, which resulted in an after tax gain of $83 million, which were
substantially offset by Zurn's purchase of Eljer and capital expenditures of $37
million.
Financing activities provided net cash of $154 million and $25 million in
the six months ended March 31, 1998 and 1997, respectively. The current period
included proceeds from long-term debt and notes payable in excess of repayments
of $187 million, primarily used to finance acquisitions and operations, the
purchase of $35 million of the Company's Common Stock for treasury, dividend
payments of $10 million and $48 million to finance the US Brass settlement. The
prior period included proceeds of long-term debt and notes payable in excess of
repayments of $52 million primarily used to finance acquisitions and the
purchase of $27 million in treasury stock.
During the second quarter of fiscal 1998, USI American Holdings, Inc.
("USIAH"), a wholly owned subsidiary of the Company amended the revolving credit
facility to allow a portion of the available facility to be used for borrowings
in currencies other than the U.S. dollar and to eliminate the previous
restriction limiting certain unsecured indebtedness to $200 million. The maximum
amount which may be borrowed under the facility has not changed and the
Company's ability to incur indebtedness outside of the facility is still limited
by certain restrictions and covenants contained therein. Upon completion of the
Zurn merger, the Company repaid approximately $210 million of Zurn's
indebtedness.
At March 31, 1998 the Company has long-term debt of $63 million denominated
in German marks and $50 million denominated in British pounds. These borrowings
are hedges of the Company's net investments in SiTeco and Spear & Jackson,
respectively. Other long-term debt also includes $50 million of notes payable
maturing within one year which the Company expects to repay using borrowings
under its revolving credit facility.
63
<PAGE>
U.S. INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 826 $ 664 $ 1,570 $ 1,242
Operating costs and expenses:
Cost of products sold 577 457 1,088 850
Selling, general and administrative expenses 168 144 331 273
---------- ----------- ----------- -----------
Operating income 81 63 151 119
Interest expense 17 15 33 27
Interest income (2) (1) (4) (3)
Other (income) expense, net (1) (1) (1) (1)
---------- ----------- ----------- -----------
Income before income taxes, discontinued operations and
extraordinary loss 67 50 123 96
Provision for income taxes 27 21 51 41
---------- ----------- ----------- -----------
Income from continuing operations 40 29 72 55
Income (loss) from discontinued operations, net of tax (7) 74 (8) 78
---------- ----------- ----------- -----------
Income before extraordinary loss 33 103 64 133
Extraordinary loss, net of tax - - - (2)
---------- ----------- ----------- -----------
Net income $ 33 $ 103 $ 64 $ 131
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
Earnings per basic share:
Income from continuing operations $ 0.42 $ 0.31 $ 0.77 $ 0.59
- - -
Income (loss) from discontinued operations (0.07) 0.80 (.09) 0.84
Extraordinary loss - - - (0.02)
---------- ----------- ----------- -----------
Net income $ 0.35 $ 1.11 $ 0.68 $ 1.41
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
Earnings per diluted share:
Income from continuing operations $ 0.41 $ 0.30 $ 0.74 $ 0.57
-
Income (loss) from discontinued operations (0.07) 0.77 (0.08) 0.81
Extraordinary loss - - - (0.02)
---------- ----------- ----------- -----------
Net income $ 0.34 $ 1.07 $ 0.66 $ 1.36
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
64
<PAGE>
U.S. INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 61 $ 67
Trade receivables, net 592 502
Inventories and contracts in progress 568 501
Deferred income taxes 83 107
Other current assets 77
55
Net assets held for disposition 75 69
-------------- ---------------
Total current assets 1,456 1,301
Property, plant and equipment, net 517 422
Deferred income taxes 6 3
Other assets 208 212
Goodwill, net 657 600
-------------- ---------------
$ 2,844 $ 2,538
-------------- ---------------
-------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 6 $ 4
Current maturities of long-term debt 34 41
Trade accounts payable 214 189
Accrued expenses and other liabilities 266 344
Income taxes payable 59
72
-------------- ---------------
Total current liabilities 579 650
Long-term debt 945 701
Other liabilities 247
237
-------------- ---------------
Total liabilities 1,771
1,588
Commitments and contingencies
Stockholders' equity 1,073 950
-------------- ---------------
$ 2,844 $ 2,538
-------------- ---------------
-------------- ---------------
</TABLE>
See notes to consolidated financial statements.
65
<PAGE>
U.S. INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions-unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
1998 1997
---- -----
<S> <C> <C>
OPERATING ACTIVITIES:
Income from continuing operations $ 72 $ 55
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities of continuing operations:
Depreciation and amortization 45 31
Provision for doubtful accounts 2 3
Gain on sale of excess real estate (3) (1)
Gain on sale of subsidiary stock - (1)
Changes in operating assets and liabilities, excluding the effects of
acquisitions and dispositions (89) (86)
---------- ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES OF CONTINUING OPERATIONS 27 1
---------- ------------
Income (loss) from discontinued operations (8) 78
Increase in net assets held for disposition (52) (109)
---------- ------------
NET CASH USED IN OPERATING ACTIVITIES
OF DISCONTINUED OPERATIONS (60) (31)
---------- ------------
NET CASH USED IN OPERATING ACTIVITIES (33) (30)
---------- ------------
INVESTING ACTIVITIES:
Proceeds from sale of net assets held for disposition 10 238
Acquisition of companies, net of cash acquired (103) (246)
Purchases of property, plant and equipment (50) (37)
Proceeds from sale of fixed assets 12 -
Change in marketable securities and investments (7) 23
Proceeds from sale of excess real estate 9 5
Other changes in investing activities 5 9
---------- ------------
NET CASH (USED IN) INVESTING ACTIVITIES (124) (8)
---------- ------------
FINANCING ACTIVITIES:
Proceeds from long-term debt 676 1,232
Repayment of long-term debt (486) (1,181)
Repayment of notes payable, net (3) 1
Payment of dividends (10) (2)
Proceeds from exercise of stock options 12 2
Purchase of treasury stock (35) (27)
---------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 154 25
---------- ------------
Effect of exchange rate changes on cash (3) (5)
---------- ------------
DECREASE IN CASH AND CASH EQUIVALENTS (6) (18)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 67 56
---------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 61 $ 38
---------- ------------
---------- ------------
</TABLE>
See notes to consolidated financial statements.
66
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
Note 1-Basis of Presentation
U.S. Industries, Inc. ("USI") manufactures and distributes a broad range of
consumer and industrial products. The accompanying financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information, Article 10 of Regulation S-X and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The interim financial data for the three and
six months ended March 31, 1998 and 1997 are unaudited and, in the opinion of
management, reflect all necessary adjustments for a fair presentation of the
financial position and results of operations for the interim periods on a
consistent basis. Such adjustments were of a normal and recurring nature. The
results of operations for the three and six month periods ended March 31, 1998
are not necessarily indicative of those for the full fiscal year ending October
3, 1998. For further information, refer to the Consolidated (Combined) Financial
Statements and footnotes thereto included in USI's Annual Report on Form 10-KA
for the fiscal year ended September 27, 1997, Zurn Industries, Inc. ("Zurn"),
Annual Report on Form 10-K for the year ended March 31, 1997, and the
Consolidated (Combined) Financial Statements for the fiscal year ended September
30, 1997, 1996 and 1995, and notes thereto included elsewhere in this Form 8-K.
On June 11, 1998, USI merged with (the "Merger") Zurn, hereafter
collectively referred to as the Company, by exchanging approximately 20 million
shares of its common stock for all of the common stock of Zurn. Each share of
Zurn common stock was exchanged for 1.6 shares of USI common stock. Outstanding
Zurn employee stock options were converted at the same exchange ratio into
options to purchase approximately 2 million shares of USI common stock.
The merger has been accounted for as a pooling of interests under
Accounting Principles Board Opinion No. 16. All prior period financial
statements have been restated to present the results of operations, financial
position and cash flows of USI and Zurn as a single entity. There were no
transactions between USI and Zurn prior to the combination. Certain
reclassifications have been made to the Zurn financial statements to conform to
USI's presentations.
The Company's fiscal year ends on the Saturday nearest to September 30. All
three and six month data contained herein reflect results of operations for the
13-week and 27 and 26-week periods ended on the Saturday closest to March 31,
1998 and 1997, respectively, but are presented as of such date for convenience.
67
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998
Note 1-Basis of Presentation (Continued)
The results of operations for the separate companies and combined amounts
in the accompanying financial statements follow:
<TABLE>
<CAPTION>
(in millions) (in millions)
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------ --------------------------
1998 1997 1998 1997
-------------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net Sales
USI $ 667 $ 540 $ 1,258 $ 1,052
Zurn 159 124 312 190
-------------- ----------- ----------- ----------
$ 826 $ 664 $ 1,570 $ 1,242
-------------- ----------- ----------- ----------
-------------- ----------- ----------- ----------
Income from Continuing Operations
USI $ 33 $ 24 $ 58 $ 45
Zurn 7 5 14 10
-------------- ----------- ----------- ----------
$ 40 $ 29 $ 72 $ 55
-------------- ----------- ----------- ----------
-------------- ----------- ----------- ----------
Net Income (Loss)
USI $ 30 $ 108 $ 54 $ 129
Zurn 3 (5) 10 2
-------------- ----------- ----------- ----------
$ 33 $ 103 $ 64 $ 131
-------------- ----------- ----------- ----------
-------------- ----------- ----------- ----------
</TABLE>
The Company has adopted a plan to dispose of SunLite and has reflected its
operations as discontinued in the accompanying financial statements.
Note 2-Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
(in millions)
March 31, September 30,
1998 1997
(unaudited)
<S> <C> <C>
Finished products $ 284 $ 260
Work-in process 113 106
Raw materials 171 135
----------------- -----------------
$ 568 $ 501
----------------- -----------------
----------------- -----------------
</TABLE>
68
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998
Note 3-Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
(in millions)
March 31, September 30,
1998 1997
(unaudited)
<S> <C> <C>
7.25% Senior Notes, net $ 123 $ 123
Revolving credit facility 542 350
Other long-term debt 94 79
Zurn debt 220 190
----------------- -------------------
979 742
Less current maturities (34) (41)
----------------- -------------------
Long-term debt $ 945 $ 701
----------------- -------------------
----------------- -------------------
</TABLE>
During the second quarter of fiscal 1998, USI American Holdings, Inc.
("USIAH"), a wholly owned subsidiary of the Company amended its credit agreement
(the "Credit Agreement") to allow a portion of the available facility to be used
for borrowings in currencies other than the U.S. dollar and to eliminate the
previous restriction limiting certain unsecured indebtedness to $200 million.
The maximum amount which may be borrowed under the Credit Agreement has not
changed and the Company's ability to incur indebtedness outside of the Credit
Agreement is still limited by certain restrictions and covenants contained
therein.
At March 31, 1998, the Company had long-term indebtedness under the
revolving credit facility of $63 million and $50 million denominated in German
marks and British pounds, respectively. These borrowings are hedges of the
Company's net investments in SiTeco and Spear & Jackson, respectively.
Other long-term debt includes $50 million of notes payable maturing within
one year which the Company expects to repay using borrowings under the Credit
Agreement.
In accordance with the terms of the Zurn Credit Agreement, the Zurn
borrowings under the Credit Agreement were repaid in June, 1998, with
proceeds from a short-term committed note made available from one of the
Company's lenders which bears interest at a rate of approximately 5.88% per
annum and has a maturity date of September 11, 1998. The Company expects to
refinance this obligation and a portion of its obligations under its existing
credit agreement with a $300 million to $500 million debt offering in early
August.
Note 4-Commitments and Contingencies
The Company is subject to a wide range of environmental protection laws.
The Company has remedial and investigatory activities underway at approximately
36 sites. In addition, the Company has been named as a Potentially Responsible
Party ("PRP") at 17 "Superfund" sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or
comparable statutes.
It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. The Company accrues for losses
associated with environmental remediation obligations when such losses are
probable and reasonably estimable. This practice is followed whether the claims
are asserted or unasserted. Accruals for estimated losses from environmental
remediation are, depending on the site, based primarily upon internal or third
party environmental studies, and estimates as to the number, participation level
and financial viability of any other PRP's,
69
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998
Note 4-Commitments and Contingencies (Continued)
to the extent of contamination and the nature of required remedial actions. Such
accruals are adjusted as further information develops or circumstances change.
Costs of future expenditures for environmental remediation obligations are not
discounted to their present fair value. Recoveries of environmental remediation
costs from other parties are recognized as assets when their receipt is deemed
probable. Management expects that the amount accrued will be paid out over the
periods of remediation for the applicable sites which range up to 30 years and
that all such reserves are adequate based on all current data. Each of the sites
in question is at various stages of investigation or remediation; however, no
information currently available reasonably suggests that projected expenditures
associated with remedial action or compliance with environmental laws, for any
single site or for all sites in the aggregate, will have a material adverse
affect on the Company's financial condition, results of operations or cash
flows.
At March 31, 1998, the Company had accrued approximately $24 million for
various environmental related liabilities of which the Company is aware. The
Company believes that the range of liability for such matters is between
approximately $11 million and $26 million.
United States Brass Corporation ("US Brass"), a Zurn indirect wholly-owned
subsidiary, filed in 1994 a voluntary petition for reorganization under Chapter
11 of the United States Bankruptcy Code for the purpose of systemically
resolving issues resulting from sales of polybutylene plumbing systems and
related litigation. On February 24, 1998, the United States Bankruptcy Court for
the Eastern District of Texas confirmed the Chapter 11 Bankruptcy Plan of
Reorganization filed by US Brass. On March 19, 1998, the plan became effective
and the US Brass Trust was funded with approximately $50 million in cash and a
$20 million noninterest bearing note, payable over ten years to pay claims
resulting from US Brass polybutylene plumbing systems. As a result, US Brass
emerged from bankruptcy and future US Brass polybutylene plumbing system claims
were enjoined and channeled to the Trust and a national class action
settlement fund.
In the normal course of business, financial and performance guarantees are
made in connection with major engineering and construction contracts and a
liability is recognized when a probable loss occurs.
Also, certain of the Company's subsidiaries are defendants or plaintiffs in
lawsuits that have arisen in the normal course of business. While certain of
these matters involve substantial amounts, it is management's opinion, based on
the advice of counsel, that the ultimate resolution of such litigation and
environmental matters will not have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
Note 5-Earnings Per Share
In February 1997, the FASB issued Statement No. 128 ("SFAS 128"), "Earnings
Per Share" which was adopted on December 31, 1997. The Company has restated all
prior periods. The adoption of SFAS 128 did not have a material impact on the
earnings per share information previously presented.
<TABLE>
<CAPTION>
(in millions except per share) (in millions except per share)
Income From Income From
Continuing Per Share Continuing Per Share
Operations Shares Amount Operations Shares Amount
(For the Three Months Ended (For the Six Months Ended
March 31, 1998) March 31, 1998)
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share $ 40 94.8 $ 0.42 $ 72 93.8 $ 0.77
Effect of dilutive securities
Stock options 1.8 1.7
Nonvested restricted stock 1.3 1.5
--- ---- ---- --- ----- ----
Diluted Earnings Per Share $ 40 97.9 $ 0.41 $ 72 97.0 $ 0.74
--- ---- ---- --- ----- ----
--- ---- ---- --- ----- ----
</TABLE>
70
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998
Note 5-Earnings Per Share (Continued)
<TABLE>
<CAPTION>
(in millions except per share) (in millions except per share)
(For the Three Months Ended (For the Six Months Ended
March 31, 1997) March 31, 1997)
--------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share $ 29 92.8 $ 0.31 $ 55 93.0 $ 0.59
Effect of dilutive securities
Stock options 1.6 1.5
Nonvested restricted stock 1.4 1.4
--- --- ----- ---- ----
Diluted Earnings Per Share $ 29 95.8 $ 0.30 $ 55 95.9 $ 0.57
--- ---- ---- ----- ---- ----
--- ---- ---- ----- ---- ----
</TABLE>
Diluted common shares include shares that would be outstanding assuming the
fulfillment of conditions that would remove the restriction on nonvested shares
and the exercise of stock options. Options to purchase 69,100 shares in the
three and six months ended March 31, 1998 and options to purchase 188,900 shares
and 521,700 shares in the three and six months ended March 31, 1997,
respectively, were not included in the computation of earnings per share because
the options exercise prices were greater than the average market price of the
common shares.
Note 6-Acquisitions
In January 1998, the Company acquired certain semiconductor leadframe
assets of Philips Electronics, for $14 million in cash. The acquired
manufacturing facilities are located in the Netherlands.
In December 1997, the Company purchased Spear & Jackson plc ("Spear &
Jackson") for $11 million in cash and $96 million in the Company's Common
Stock, resulting in goodwill of approximately $63 million. Spear & Jackson,
manufactures and distributes hand tools, lawn and garden tools, saws, cutting
and industrial tools. The purchase price is subject to a cash contingency,
payable on or before June 2000. The additional purchase price is based upon
certain performance criteria and the market value of the Company's stock and,
assuming the performance criteria were met, currently approximates $65 million.
In October 1997, the Company purchased Siemens Lighting, a division of
Siemens A.G., for $67 million in cash. Siemens Lighting is a leading European
manufacturer and marketer of standard and customized indoor and outdoor lighting
products for commercial and industrial use. Siemens Lighting (renamed SiTeco
Beleuchtungstechnik GmbH) ("SiTeco") operates manufacturing facilities in
Germany, Austria and Slovenia.
In March 1997, the Company purchased certain assets of the outdoor
furniture division of Sunbeam Corporation for $60 million in cash, resulting in
goodwill of $14 million. The acquired business, now known as SunLite Casual
Furniture, Inc. ("SunLite"), manufactures casual outdoor furniture. SunLite has
since been discontinued.
In January 1997, the Company purchased the assets of Woodings-Verona Tool
Works, Inc. ("Woodings-Verona") for $5 million in cash plus the assumption of
$1.2 million of debt. Woodings-Verona manufactures hot-forged heavy striking
tools including sledge hammers, axes, bars, picks and railroad tools.
In January 1997, the Company purchased the stock of Eljer Industries, Inc.
("Eljer") for $172 million in cash plus the assumption of debt resulting in
goodwill of $193 million. Eljer manufactures and distributed china and cast iron
plumbing fixtures, flexible plumbing systems, and heating, ventilation and air
conditioning products.
71
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998
Note 6-Acquisitions (Continued)
These transactions have been accounted for as purchases and their results
are included in the financial statements from their respective dates of
acquisition. The allocation of purchase price may be subject to adjustment upon
receipt of final valuation information and management's final estimates as to
the fair value of the respective assets acquired and liabilities assumed.
Note 7-Summarized Financial Information of Subsidiary
Summarized consolidated financial information of USI American Holdings,
Inc. ("USIAH"), the issuer of the 7.25% Senior Notes, is as follows:
<TABLE>
<CAPTION>
(in millions - unaudited) (in millions - unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales $ 667 $ 540 $ 1,258 $ 1,052
Gross profit 204 169 389 335
Income from continuing operations 34 25 60 47
Net income 31 109 56 131
</TABLE>
<TABLE>
<CAPTION>
(in millions)
March 31, September 30,
1998 1997
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Current assets $ 1,134 $ 947
Non-current assets 1,026 859
Current liabilities 421 395
Non-current liabilities 926 703
</TABLE>
Note 8-Subsequent Events
In May 1998, the Company purchased certain metal component assets from
Philips Components, B.V., ("Philips"), for approximately $31 million in cash,
subject to customary post closing adjustments. The Company and Philips entered
into a multi-year supply agreement. The acquired operations are located in the
Netherlands.
In June 1998, the Company purchased the assets of Sundance Spas for
approximately $32 million in cash, subject to customary post closing
adjustments. Sundance Spas, based in Chino, California, is a manufacturer of
high quality self-contained bath spas.
72
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
U.S. Industries, Inc.
Dated: August 10, 1998 By: /s/ James O'Leary
--------------------------------------
Name: James O'Leary
Title: Senior Vice President
and Chief Financial Officer
73
<PAGE>
EXHIBIT/INDEX
<TABLE>
<CAPTION>
Exhibit No. Page
<S> <C>
23.1 Consent of Ernst & Young LLP, dated as of August 6, 1998. 76
23.2 Consent of Preicewaterhouse Coopers LLP, dated as of August 6, 1998. 77
</TABLE>
74
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements on
Form S-8 Nos. 333-47101, 333-56615 and 333-56675 of U.S. Industries, Inc., of
our report dated June 26, 1998 with respect to the consolidated combined
financial statements of U.S. Industries, Inc. included in this current Report
on Form 8-K of U.S. Industries, Inc.
/s/ Ernst & Young LLP
New York, New York
August 7, 1998
75
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-47101, 333-56615 and 333-56675) of U.S.
Industries, Inc. of our report dated November 14, 1997 relating to the combined
financial statements of U.S. Industries Automotive Groups and Jacuzzi Companies
for the year ended September 30, 1997, included in this Current Report on Form
8-K of U.S. Industries Inc.
/s/ Pricewaterhouse Coopers LLP
Florham Park, New Jersey
August 6, 1998
77
