<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-K
(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
Commission File No. 333-76055
UNITED INDUSTRIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 43-1025604
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8825 Page Boulevard
St. Louis, Missouri 63114
(Address of principal executive office, including zip code)
(314) 427-0780
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10K. (N/A)
There is no established public market for the Registrant's common stock.
As of March 30, 2000, the Registrant had 27,650,000 Class A voting and
27,650,000 Class B non-voting shares of common stock outstanding.
Documents Incorporated by Reference: None
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<PAGE>
PART I
Item 1. Business
General
United Industries Corporation (the "Company") is the leading manufacturer
and marketer of value-oriented branded products for the consumer lawn and
garden pesticide and household insecticide markets in the United States. The
Company manufactures and markets one of the broadest lines of pesticides in
the industry, including herbicides and indoor and outdoor insecticides, as
well as insect repellents and water-soluble fertilizers, under a variety of
brand names. The Company's "value" and "opening price point" brands generally
compete with higher priced premium brands.
In 1999, the Company generated net sales, income (loss) from continuing
operations and EBITDA of $304.0 million, $(9.3) million and $58.4 million,
respectively. The management team has grown the Company's business by
developing new products and acquiring strategic brands while also improving
operating efficiencies. As a result, from 1995 to 1999 the Company's:
. Net sales grew at a compound annual rate of 17.6%;
. EBITDA grew at a compound annual rate of 26.4%; and
. EBITDA margin increased from 14.4% to 19.2%.
Industry Overview
Retail sales of consumer lawn and garden pesticides and household
insecticides in the United States totaled $2.7 billion in 1999. Since 1995,
the market for these products has grown at an average annual rate of
approximately 3%. Historically, consumer lawn and garden care products have
been distributed through a variety of retail channels, including home
improvement centers, mass merchandisers, hardware stores, grocery and drug
stores, warehouse clubs and garden centers. In recent years, as home
improvement centers and mass merchandisers have added stores and expanded
their lawn and garden care departments, consumers have increasingly purchased
their lawn and garden care needs from these outlets due to their broader and
deeper product offerings, competitive prices and convenient locations and
hours.
Competitive Strengths
Leading Value-Oriented Brands. The Company is the leading manufacturer and
marketer of value-oriented branded products for the consumer lawn and garden
pesticide and household insecticide markets in the United States. The
Company's value and opening price point brands have driven a shift in the
industry by offering innovative products comparable or superior in quality to
premium brands at lower prices. As a result, the Company's products have
developed significant brand awareness and customer loyalty.
Strategic Partnerships With Leading Retailers. The Company has developed
"strategic partnerships" with a number of leading national retailers in the
fastest growing retail channels. The Company's four largest customers, Home
Depot, Wal*Mart, Lowes and Kmart, each hold significant positions in the lawn
and garden care market and have together opened approximately 1,000 net new
stores over the last five years. As a result, the Company has been able to
significantly increase sales as these retailers have added new stores and
captured market share.
Large, Exclusive Direct Sales Force. The Company has the largest direct
sales force in the industry, with approximately 270 sales representatives
dedicated to merchandising the Company's products. Each representative is
responsible for approximately 30 retail outlets and typically visits each
store on a weekly basis to merchandise shelf space, collect inventory data,
record orders and educate in-store personnel about the Company's products.
This process facilitates real time marketing, re-ordering and pricing
decisions, helping to maximize store-level profitability. In addition, the
Company's sales force helps to identify emerging trends and develop products
to meet consumers' needs.
Proprietary Management Information System. The Company's proprietary
management information system provides real time data on sales, orders and
inventories at each retail outlet, allowing targeted sales promotions and
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efficient inventory management. With same-day order processing and
strategically located distribution centers throughout the United States, the
Company is generally able to deliver products to retailers within 72 hours of
an order, allowing retailers to maintain lower inventory levels, generate
higher turns and minimize costly returns.
Business Strategy
The Company plans to capitalize on its strengths and the favorable industry
trends to enhance its leadership position in value and opening price point
brands by implementing the following key elements of its business strategy:
Enhance Value Brand Position. The Company plans to maintain focus on
building its leading value brands for the consumer lawn and garden pesticide
and household insecticide markets. The Company's strategy is to provide
innovative products of comparable or superior quality to competitors at a
lower price to appeal to the segment of consumers that desire a better value.
Partner with Leading Retailers. The Company believes that its strong value
brand position coupled with its operational expertise will allow the Company
to partner with leading national retailers to develop opening price point
brands. The Company currently manufactures and markets the opening price point
brands for leading retailers such as Home Depot, Kmart and Lowes.
Maximize Category Profitability for Retailers. The Company focuses on
maximizing retailers' profitability in selling the Company's products by being
a low-cost provider and leveraging the Company's one-step distribution. The
Company is a low-cost provider as a result of its high level of vertical
integration and patented water-based aerosol technology. The Company has a
one-step distribution process through its approximately 270 person exclusive
direct sales force, the largest in the industry.
Leverage Distribution Network. The Company continually seeks to capitalize
on its strong distribution network and relationship with retailers. The
Company has increased its sales and improved operating leverage by supplying
complementary product lines to retailers. The Company adds new products either
through new product development or by acquiring product lines. The Company's
new product development strategy has been to introduce innovative products
that have superior performance, easy-to-understand packaging and value
pricing. New products generate additional sales and generally provide higher
margins to the Company and its retailers. The Company's brand acquisition
strategy has been to selectively acquire product lines that can benefit from
the Company's strong distribution network, product development expertise and
other competitive strengths. Acquired product lines such as Peters(R) and
Cutter(R) have experienced rapid growth upon integration into the Company's
distribution network.
Target Professional Market. While the primary end users of the Company's
products have historically been household consumers, the Company has begun to
target smaller independent pest control operators and lawn and garden care
professionals through its existing retail channels. Historically, these
professionals have purchased their pesticide and lawn and garden care products
from commercial distributors. The Company believes that these professionals
will increasingly utilize the home improvement center channel to take
advantage of the competitive prices, convenience of locations and hours,
delivery services and availability of credit offered. To benefit from and
further drive this trend, the Company developed Spectracide Pro(R), a group of
products designed specifically for the professional market. Launched in March
1999, this line of professional pesticides is supported by national
advertising in relevant trade magazines, in-store promotional campaigns, an
exclusive direct sales force and technical support. The Company believes that
it can capitalize on its strong relationships with leading national retailers
to gain a meaningful position in the professional market.
The Company's History
The Company was founded in 1969 and initially focused on metal works and
anchor and bolt production. In 1973, the Company acquired Spray Chem, a
contract manufacturer of liquid and aerosol insecticides and herbicides. In
1985, the Company acquired Real-Kill and entered into the manufacturing and
distribution of branded products. In 1988, the Company formed its core
businesses through the acquisition of certain assets of various businesses of
Chesebrough-
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Ponds, a subsidiary of Unilever plc. The acquired brands included
Spectracide(R), Hot Shot(R), Rid-a-Bug(R), Bag-a-Bug(R) and No-Pest(R),
expanding the Company's products to include a wide array of value-oriented
indoor and outdoor pesticides. In 1994, the Company acquired assets relating
to the Cutter(R) brand from Miles, Inc. In 1995, the Company acquired assets
from Alljack Company and Celex Corporation, including a license to use the
Peters(R) brand name, the manufacturing rights of Kmart's opening price point
brands, Krid(R) and Kgro(R), and the Shootout(R) and Gro Best(R) brand names.
On January 20, 1999, pursuant to a Recapitalization Agreement with UIC
Holdings, L.L.C., which is owned by Thomas H. Lee Equity Fund IV, L.P., the
Company was recapitalized (the "Recapitalization") in a transaction in which:
(i) UIC Holdings, L.L.C. purchased common stock from the Company's existing
stockholders for approximately $254.7 million; (ii) the Company's senior
managers purchased common stock from the Company's existing stockholders for
approximately $5.7 million; and (iii) the Company used the net proceeds of a
Senior Subordinated Facility (which was subsequently refinanced by the
issuance of new notes) and borrowings under a Senior Credit Facility to redeem
a portion of the common stock held by the Company's existing stockholders.
Following the Recapitalization, UIC Holdings, L.L.C. owned approximately 91.9%
of the Company's issued and outstanding common stock, the existing
stockholders retained approximately 6.0% and the Company's senior managers
owned approximately 2.1%. On January 20, 1999, the total transaction value of
the Recapitalization was approximately $652.0 million, including related fees
and expenses, and the implied total equity value following the
Recapitalization was approximately $277.0 million. In December 1999, the
Company recorded a $7.2 million charge to equity to finalize costs associated
with the Recapitalization, increasing the total transaction value to $659.2
million.
Products
The Company manufactures and markets one of the broadest lines of
pesticides in the industry, including herbicides and indoor and outdoor
insecticides, as well as insect repellents and water soluble fertilizers,
under a variety of brand names. The Company's products have comparable or
superior quality and performance to premium brands, but are typically priced
at a 10% to 20% discount. The Company's value brands are targeted toward
consumers who want products and packaging that are comparable or superior to
premium brands, but at a lower price, while the Company's opening price point
brands are designed for consumers who want quality products and packaging, but
are extremely cost conscious. The following is a description of each of the
Company's major products.
Value Brands (80% of 1999 net sales)
The Company sells a broad line of value brands marketed under such names as
Spectracide(R), Spectracide Terminate(TM), Spectracide Pro(R), Hot Shot(R),
Cutter(R) and Peters(R). Below is a description of each of the Company's value
brands:
Spectracide(R). The Spectracide(R) product line primarily consists of
outdoor insect control products and herbicides, but also includes indoor
insect control products, specialty items such as plant disease control and
rose care products, and regional products such as fire ant killer and Japanese
beetle traps.
Spectracide Terminate(TM). Introduced in 1998, Spectracide Terminate(TM) is
the first ever do-it-yourself consumer termite killing system. The product is
based on professional bait stake technology and comes in 20 and 40 stake
packages to meet the needs of a wide range of property sizes.
Spectracide Pro(R). The Spectracide Pro(R) product line, which was
introduced in March 1999, targets smaller independent lawn and garden care
professionals and pest control operators. Many trade professionals are
increasingly purchasing their supplies at home improvement centers. To benefit
from this trend, the Company developed the Spectracide Pro(R) line, a group of
products designed specifically for the professional market.
Hot Shot(R). The Hot Shot(R) product line consists of household
insecticides, including items such as roach and ant killers, flying insect
killers, foggers, wasp and hornet killers, rodenticides, flea control products
and, most recently, a new line of roach and ant baits.
Cutter(R). Acquired from Miles, Inc. in 1994, the Cutter(R) product line
provides protection for the entire family, ranging from area repellent
citronella candles to products designed especially for use on children and the
outdoorsman. The Company has repositioned Cutter(R) as a value brand and
increased its distribution.
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Peters(R). The Peters(R) product line is a water-soluble fertilizer
available in all-purpose formulations as well as specialty formulations for
lawns, roses, tomatoes, orchids and azaleas. In 1999, the Company introduced
new high-impact packaging graphics and new all-weather packaging material and
merchandising displays to improve shelf appearance and allow the products to
be displayed in the live goods departments of home improvement centers and
mass merchandisers.
Other Value Brands. The Company also manufactures and markets regional
value brands in Florida and the Caribbean. Rid-a-Bug(R), sold exclusively in
Florida, is a leading household pesticide product in that state. Real-Kill(R),
marketed as a Spanish-labeled product throughout the Caribbean, has become the
leading brand of household insecticides in Puerto Rico. The Company also
manufactures private label products for hardware co-operatives and other
retailers and produce under contract pesticides and other products for other
customers.
Opening Price Point Brands (20% of 1999 net sales)
An important aspect of the Company's growth over the past few years has
resulted from the Company's introduction of opening price point brands at home
improvement centers and mass merchandisers. By introducing these products, the
Company has effectively acquired shelf space at the expense of its competitors
by displacing premium brands and lower quality regional brands. The Company's
strategic retail partners have also benefited from the Company's introduction
of opening price point brands through streamlined logistics, better inventory
control and higher margins. Below is a description of each of the Company's
opening price point brands.
Real-Kill(R). In 1997, the Company repositioned Real-Kill(R), relaunching
the brand exclusively at Home Depot as its opening price point brand. The
brand consists of indoor and outdoor pesticides.
No-Pest(R). In late 1997, the Company introduced No-Pest(R) exclusively at
Lowes as its opening price point brand. The brand consists of indoor and
outdoor pesticides.
Krid(R), Kgro(R), Shootout(R) and Gro Best(R). In late 1995, the Company
acquired the manufacturing operations, which produce the Kmart owned opening
price point brands, Krid(R) and Kgro(R), and the brand names, Shootout(R) and
Gro Best(R). These brands consist of indoor and outdoor pesticides and soluble
fertilizers.
Customers
The Company sells its products through all major retail channels, including
home improvement centers, mass merchandisers, hardware stores, grocery and
drug stores, wholesale clubs and garden centers. The Company is heavily
dependent on Home Depot, Wal*Mart, Lowes and Kmart for a substantial portion
of its sales. These four customers accounted for approximately 73%, 68% and
64% of net sales for 1999, 1998 and 1997, respectively.
The Company manufactures and supplies products to hundreds of customers
representing more than 70,000 retail stores across the United States and in
select locations in Canada, Puerto Rico and the Caribbean. The Company's
leadership position in the home improvement center and mass merchandiser
channels is a key element of its past and future success. Industry wide,
category sales continue to shift to the home improvement center and mass
merchandiser channels. Sales are seasonal as approximately 75% of shipments
will occur in the first two quarters of the fiscal year.
Sales and Marketing
The Company conducts sales activities through its exclusive direct sales
force, which consists of approximately 250 territory managers and 20 area
sales managers. Territory managers are typically responsible for 30 retail
stores and visit stores on a weekly basis to merchandise shelves and collect
inventory data. Territory managers' store visits generate close to 1,000 store
reports a day. The data collected includes real-time information on SKUs,
inventory levels and sales. This data is used by territory managers and
customers to develop promotional campaigns and merchandising plans that
maximize store level sales and profitability. This process facilitates real-
time marketing, re-ordering and pricing decisions. In addition, the Company
supports the Spectracide Terminate(TM) product through employing a seasonal
in-store sales force of approximately 100 people, and the Spectracide Pro(R)
line by an outside sales force of 20 people.
4
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The Company's marketing department leads the new product development
process and develops consumer support plans to help drive sales through the
Company's strong distribution network. To promote the Company's products to
consumers, the Company advertises on national and local television, radio and
print media; develops consumer promotions; and engages in market research
efforts.
Research and Development
In 1999, 1998 and 1997, the Company spent $1.0, $0.8 and $0.6 million,
respectively, on research and development. The Company's research and
development department has developed over 80 new products since 1996. Although
the Company's expertise is in applied formulation, items like the patented
water-based aerosol technology, the exclusive formulation of diquat fusillade
and the dual insect and disease control formulations were developed
internally.
Raw Materials and Suppliers
The key elements of the Company's products are various commodity and
specialty chemicals including diazinon, Dursban(R) and sulfluramid, as well as
packaging materials. The Company obtains raw materials from various suppliers.
No one vendor is considered to be essential to the Company's operations, and
the Company has never experienced a significant interruption of supply.
Several of the Company's agreements with suppliers provide for price
adjustments. In addition, some of the Company's agreements with suppliers
provide for exclusivity rights, subject to minimum purchase requirements.
Competition
The Company operates in a highly competitive market and competes against a
number of national and regional brands. The Company's principal national
competitors include: The Scotts Company, which markets products under the
Ortho(R), Roundup(R) and Miracle-Gro(R) brand names; S.C. Johnson & Son, Inc.,
which markets products under the Raid(R) and OFF!(R) brand names; and The
Clorox Company, which markets products under the Combat(R) and Black Flag(R)
brand names.
Intellectual Property
The Company operates and owns a substantial number of trademarks and
tradenames including the following: Spectracide(R), Spectracide Terminate(TM),
Spectracide Pro(R), Hot Shot(R), Rid-a-Bug(R), Bag-a-Bug(R), Real-Kill(R), No-
Pest(R), Shootout(R) and Gro Best(R). The Company licenses the Cutter(R)
trademark and other members of the Cutter(R) family of trademarks from Bayer
Corporation and the Peters(R) and Peters Professional(R) trademarks from The
Scotts Company. These licenses are, in effect, perpetual and exclusive.
Employees
As of March 30, 2000, the Company had approximately 878 full-time
employees. Approximately 300 of the Company's employees are covered by
collective bargaining agreements, which expire in August, 2002, with
Finishers, Maintenance Painters, Industrial and Allied Workers Local Union
980, AFL-CIO.
Environmental Matters
The Company is subject to federal, state, local and foreign laws and
regulations governing environmental matters. The Company's manufacturing
operations are subject to requirements regulating air emissions, wastewater
discharge, waste management, and the cleanup of contamination. Based on
assessments conducted by independent environmental consultants the Company
believes that it is in material compliance with these requirements and has no
material environmental liabilities. The Company may be subject to fines or
penalties if the Company fails to comply with these environmental laws and
regulations. The Company does not anticipate any material capital expenditures
for environmental controls in 2000.
The Company's pesticide products must be reviewed and registered by EPA and
similar state agencies or, in foreign jurisdictions, foreign agencies, before
they can be marketed. The Company devotes substantial resources to
5
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maintaining compliance with these registration requirements. If the Company
fails to comply, however, the affected pesticide could be suspended or
canceled, and the Company could be subject to fines or penalties.
Additionally, EPA is in the process of re-registering all pesticides and is
requiring manufacturers to supply EPA with additional data regarding their
pesticides. Where possible, the Company is working with trade associations to
reduce the Company's cost of developing this data.
The Company's fertilizer products must be reviewed and registered by each
state prior to sale. The states typically check the weight of the product and
the accuracy of the analysis statement on the packaging. Other consumer
products the Company markets are subject to the safety requirements of the
Consumer Product Safety Commission. If the Company fails to comply with any of
these requirements, the Company could be suspended or prohibited from
marketing the affected product.
Item 2. Properties
The Company has two manufacturing facilities located in Vinita Park,
Missouri and one Manufacturing facility in Plymouth, Michigan. Three types of
product categories are manufactured at these facilities: aerosols, liquids and
water-soluble fertilizers. The typical manufacturing process consists of four
stages: batch, fill, label and pack. The Company currently produces over 300
SKUs through the Company's four aerosol production lines, three liquid
production lines and two water-soluble fertilizer production lines. The
Company's production lines are flexible and can operate at a variety of
filling speeds and produce multiple shipping configurations. The Company uses
outside manufacturers for the production of granular insecticides, baits and
candles.
The Company has four distribution centers, located in Vinita Park,
Missouri; Allentown, Pennsylvania; Gainesville, Georgia; and Ontario,
California.
Item 3. Legal Proceedings
In March 1998, a judgement for $1.2 million was entered against the Company
for a lawsuit filed in 1992 by the spouse of a former employee claiming
benefits from a Company-owned key man life insurance policy. On August 24,
1999 the Missouri District Court of Appeals, Eastern District, affirmed the
trial court's decision. On December 1, 1999, after the Missouri Supreme Court
further reviewed the trial courts decision, the Company paid $1.3 million to
satisfy the judgement entered in this case, including legal costs of $.1
million
The Company is involved in litigation and arbitration proceedings in the
normal course of business that assert product liability and other claims. The
Company is contesting all such claims. When it appears probable in
management's judgment that the Company will incur monetary damages or other
costs in connection with such claims and proceedings, and such costs can be
reasonably estimated, appropriate liabilities are recorded in the financial
statements and charges are made against earnings.
Management believes the possibility of a material adverse effect on the
Company's consolidated financial position, results of operations and cash
flows from the claims and proceedings described above is remote.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the security holders during
the fourth quarter of the fiscal year covered by this Report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company does not have publicly held common stock. Pursuant to the
Recapitalization Agreement the Company's Senior Managers purchased
approximately 2.1% of the Company's issued and outstanding common stock.
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Item 6. Selected Financial Data
The selected historical financial data for the fiscal year ended December
31, 1999 and 1998 have been derived from audited financial statements included
elsewhere in this report. The historical financial data for the years ended
December 31, 1997, 1996 and 1995 have been derived from audited financial
statements which do not appear in this report. When you read this selected
historical financial data, it is important that you read along with it the
financial statements and related notes, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," all of which is
included in this report.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(000's)
<S> <C> <C> <C> <C> <C>
Statements of Operations:
Net sales................... $304,048 $282,676 $242,601 $199,495 $159,192
-------- -------- -------- -------- --------
Operating costs and
expenses:
Cost of goods sold......... 150,344 140,445 128,049 106,640 82,603
Advertising and promotion
expenses.................. 29,182 31,719 25,547 22,804 17,813
Selling, general and
administrative expenses... 70,886 61,066 52,092 46,276 38,629
Recapitalization
transaction fees.......... 10,690 -- -- -- --
Change of control bonuses.. 8,645 -- -- -- --
Severance charge........... 2,446 -- -- -- --
Non-recurring litigation
charges................... 1,647 2,321 -- -- --
-------- -------- -------- -------- --------
Total operating costs and
expenses................... 273,840 235,551 205,688 175,720 139,045
-------- -------- -------- -------- --------
Operating income............ 30,208 47,125 36,913 23,775 20,147
Interest expense............ 35,223 1,106 1,267 1,502 609
-------- -------- -------- -------- --------
(Loss) income before
provision for income taxes,
discontinued operations and
extraodinary item.......... (5,015) 46,019 35,646 22,273 19,538
Income tax expense.......... 4,257 992 726 447 289
-------- -------- -------- -------- --------
(Loss) income from
continuing operations...... $ (9,272) $ 45,027 $ 34,920 $ 21,826 $ 19,249
======== ======== ======== ======== ========
Other Financial Data:
Cash flow from continuing
operations................. $ 23,434 $ 50,763 $ 35,136 $ 27,741 $ 14,316
Cash used by investing
activities continuing
operations................. 3,038 3,628 5,138 6,384 19,253
Cash (used by) provided by
financing activities....... 20,396 49,088 32,329 23,645 (607)
EBITDA (1).................. 58,351 53,284 40,510 27,336 22,862
Depreciation and
amortization............... 4,715 3,838 3,597 3,561 2,715
Capital expenditures (2).... 3,038 3,628 5,138 6,384 4,726
Gross margin................ 50.6% 50.3% 47.2% 46.5% 48.1%
EBITDA margin............... 19.2 18.8 16.7 13.7 14.4
Ratio of earnings to fixed
charges (3)................ .9x 17.6x 13.9x 8.3x 12.4x
Balance Sheet Data:
Working Capital(4).......... $ 22,938 $ 30,042 $ 32,046 $ 26,919 $ 29,565
Total assets................ 241,878 94,161 97,441 84,254 82,979
Total debt.................. 369,255 4,645 3,997 13,960 16,200
Stockholder's equity
(deficit).................. (186,802) 58,257 64,449 46,829 45,864
</TABLE>
- -------
(1) EBITDA represents income from continuing operations before interest
expense, income tax expense, depreciation and amortization,
recapitalization transaction fees, change of control bonuses, severance
charges and non-recurring litigation charges. During 1999, the Company
accrued $10,690 for recapitalization transaction fees, $8,645 for change
of control bonuses and $2,446 for severance charges. For 1999 and 1998,
the Company accrued $1,647 and $2,321 for non-recurring litigation
charges, respectively. The Company has included information concerning
EBITDA because the Company believes it is used by certain investors as one
measure of a company's historical ability to fund operations and meet its
financial obligations. EBITDA is not intended to represent cash flow from
operations as defined by generally accepted accounting principles and
should not be used as an alternative to operating income or income from
continuing operations as an indicator of the Company's operating
performance or cash flow as a measure of liquidity. In addition, the
Company's definition of EBITDA may not be comparable to that reported by
other companies. EBITDA is calculated as follows:
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<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations (a)................. $(9,272) $45,027 $34,920 $21,826 $19,249
Interest expense................ 35,223 1,106 1,267 1,502 609
Income tax expense.............. 4,257 992 726 447 289
Depreciation and amortization... 4,715 3,838 3,597 3,561 2,715
Recapitalization transaction
fees (b)....................... 10,690 -- -- -- --
Change of control bonuses (c)... 8,645 -- -- -- --
Severance charges (c)........... 2,446 -- -- -- --
Non-recurring litigation charges
(c)............................ 1,647 2,321 -- -- --
------- ------- ------- ------- -------
EBITDA (c)...................... $58,351 $53,284 $40,510 $27,336 $22,862
======= ======= ======= ======= =======
</TABLE>
-------
(a) Does not reflect the elimination of stockholder salaries and certain
fringe benefits that were in effect prior to the recapitalization and
were reflective of the private ownership structure that existed prior
to the Recapitalization, offset by the salary and fringe benefit
structure that was implemented with the Recapitalization. The related
party transactions' amounts were $7,740, $3,061, $3,847, and $4,215 for
the years ended 1998, 1997, 1996, and 1995.
(b) As of December 31, 1999, the Company incurred $31,312 in fees and
expenses associated with the Recapitalization. Fees and expenses that
could be specifically identified as relating to the issuance of debt
were capitalized and will be amortized over the life of the debt as
interest expense. The fees and expenses that could be specifically
identified as relating to the equity transactions were charged directly
to equity. Other transaction fees were allocated between debt and
Recapitalization transaction fees expense based on United's estimate of
the effort spent in the activity giving rise to the fee or expense.
(c) During 1999, the Company recorded various charges as follows: (a)
change of control bonuses paid to certain members of senior management
amounting to $8,645; (b) $2,446 of severance charges incurred as a
result of the President and Chief Executive Officer and Senior Vice
President, Sales terminating their employment with the Company; and (c)
$1,500 of non-recurring litigation charges to primarily reserve for the
expected cost of an adverse judgement on a counterclaim filed by
defendants in the case of United Industries Corporation vs. John
Allman, Craig Jackman et al. This case was settled in July 1999. In
1998, the Company recorded non-recurring litigation charges of $2,321
related to two separate lawsuits. In March 1998, a judgment was entered
against us for a lawsuit filed by the spouse of a former employee
claiming benefits from a United-owned key man life insurance policy.
The Company recorded a charge of $1,200 for this case in the first
quarter of 1998 and an additional $147 in the fourth quarter of 1999.
The Company also incurred costs pertaining to certain litigation
concerning the advertising of the Company's Spectracide TerminateTM
product for which a settlement was negotiated. Costs related to this
case amounted to $1,121.
(2) Capital expenditures for 1995 exclude $8,272 of expenditures related to
acquisitions. Capital expenditures for 1999 exclude a capital lease
obligation of $9,215.
(3) For purposes of this calculation, earnings are defined as income before
provision for income taxes, discontinued operations and extraordinary item
plus fixed charges. Fixed charges include interest expense on all
indebtedness (including amortization of deferred financing costs) and the
portion of operating lease rental expense which management believes is
representative of the interest factor of rent expense (approximately one-
third of rent expense).
(4) Working capital is defined as current assets (excluding cash and cash
equivalents) less current liabilities (excluding short-term debt and
current portion of long-term debt).
Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the historical
financial information included in the audited financial statements and the
related notes to the audited financial statements.
Results of Operations
The following discussion regarding results of operations refers to net
sales, cost of goods sold, advertising and promotion expense and selling and
general and administrative expenses which the Company defines as follows:
. Net sales are gross sales of products sold to customers upon shipment of
product less any customer discounts from list price and customer returns.
. Cost of goods sold includes chemicals, container and packaging material
costs as well as direct labor, outside labor, manufacturing overhead and
freight.
8
<PAGE>
. Advertising and promotion expense includes the cost of advertising of
products through national and regional media as well as the advertising
and promotion of products through cooperative programs with retailers.
. Selling and general and administrative expenses include all costs
associated with the selling and distribution of product, product
registrations, and administrative functions such as finance, information
systems and human resources.
The following table sets forth the percentage relationship of certain items
in the Company's income statement to net sales for 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net sales:
Value brands................................ 80.0% 82.3% 81.4%
Opening price point brands.................. 20.0 17.7 18.6
------- ------- -------
Total net sales............................... 100.0 100.0 100.0
Operating costs and expenses:
Cost of goods sold.......................... 49.4 49.7 52.8
Advertising and promotion expenses.......... 9.6 11.2 10.5
Selling, general and administrative
expenses................................... 23.3 21.6 21.5
Recapitalization transaction fees........... 3.5 -- --
Change of control bonuses................... 2.8 -- --
Severance charges........................... 0.8 -- --
Non-recurring litigation charges............ 0.6 0.8 --
------- ------- -------
Total operating costs and expenses............ 90.0 83.3 84.8
------- ------- -------
Operating income.............................. 10.0 16.7 15.2
Interest expense.............................. 11.6 0.4 0.5
------- ------- -------
(Loss) income before provision for income
taxes, discontinued operations and
extraordinary item........................... (1.6) 16.3 14.7
Income tax expense............................ 1.4 0.4 0.3
------- ------- -------
(Loss) income from continuing operations,
before extraordinary item.................... (3.0) 15.9 14.4
======= ======= =======
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
Net Sales. Net sales increased 7.5% to $304.0 million for 1999 from $282.7
million for 1998. This increase was driven by a combination of factors
including:
. the continued shift of consumers' preferences toward value and opening
price point brands;
. the introduction of Spectracide Pro(R); and
. expanded distribution at home improvement centers and mass merchandisers
due to continued store expansion.
Net sales of the Company's value brands increased 4.6% to $243.3 million
for 1999 from $232.6 million for 1998. This increase was a result of continued
growth of core value brands including Spectracide(R), Bag-a-Bug(R) and
Cutter(R). Net sales of opening price point brands increased 21.2% to $60.7
million for 1999 from $50.1 million for 1998 driven by the continued rapid
pace of store openings by the Company's top retail customers. The net sales
growth described above was primarily driven by sales volume. Selling price
changes did not have a material impact on 1999 net sales growth. The 1999
trend of opening price point brands growing at a greater percentage rate than
value brands will continue in 2000, as some branded SKU's previously sold to
Home Depot have been deleted or have been converted to our opening price point
brand at Home Depot.
Gross Profit. Gross profit increased 8.1% to $153.7 million for 1999
compared to $142.2 million for 1998. As a percentage of sales, gross profit
increased slightly to 50.6% for 1999 as compared to 50.3% for 1998. In March
1999,
9
<PAGE>
the Company recorded a charge of $1.1 million to cost of goods sold for the
write-off of the Company's "Citri-Glow" candle inventory. The Company
discontinued the production of this product line during 1999 and chose to
dispose of the inventory by selling it through discount channels at prices
below cost. If this charge had not been recorded, gross profit for 1999 would
have been 50.9% of sales and would have increased 8.9% to $154.8 million as
compared to $142.2 million for 1998. The 1999 gross profit trend should
continue into 2000.
Advertising and Promotion Expenses. Advertising and promotion expenses
decreased 7.9% to $29.2 million for 1999 compared to $31.7 million for 1998.
As a percentage of net sales, advertising and promotion expenses decreased
9.6% for 1999 from 11.2% for 1998. Advertising and promotion expenses
decreased as a percentage of net sales growth since most of the Company's
first, second and third quarter 1999 growth was due to store expansion by home
improvement centers. For 1999, the Company recorded a charge of $.9 million
related to deductions taken by customers for advertising and promotional
spending in excess of contractual obligations for which the Company elected
not to pursue collection. This charge has been included in advertising and
promotion expense for 1999. If this charge had not been recorded in 1999,
advertising and promotional expenses would have decreased 10.7% to $28.3 as
compared to $31.7 million for 1998. As a percentage of sales, advertising and
promotional expenses would have decreased to 9.3% for 1999 from 11.2% for
1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 16.0% to $70.9 million for 1999 from $61.1
million for 1998. As a percentage of net sales, selling, general and
administrative expenses increased to 23.3% for 1999 from 21.6% for 1998. The
overall increase in selling, general and administrative expenses was related
to higher selling, marketing and distribution costs to support the growth in
sales. The Company is continuing to seek ways to reduce costs.
Recapitalization Transaction Fees. As of December 31, 1999, the Company
recorded $31.3 million in fees and expenses associated with the
Recapitalization. Fees and expenses that could be specifically identified as
relating to the issuance of debt were capitalized and will be amortized over
the life of the debt as interest expense. The fees and expenses that could be
specifically identified as relating to the equity transactions were charged
directly to equity. Other transaction fees were allocated between debt and
recapitalization transaction fees expense based on the Company's estimate of
the effort spent in the activity giving rise to the fee or expense. For 1999,
the Company recorded a charge of $10.7 million for Recapitalization
transaction fees.
Change of Control Bonuses. During 1999, the Company recorded charges for
change of control bonuses paid to some members of senior management amounting
to $8.6 million, which were contractually required as a result of the
Recapitalization.
Severance Charges. During 1999, the Company recorded severance charges of
$2.4 million as a result of the Company's President and Chief Executive
Officer and Senior Vice President, Sales terminating their employment with the
Company.
Non-recurring Litigation Charges. The Company recorded non-recurring
litigation charges of $1.6 million for 1999 and $2.3 million for 1998. In
March 1999, the Company took a charge of $1.5 million to primarily reserve for
the expected cost of an adverse judgment on a counterclaim filed by defendants
in the case of United Industries Corporation vs. John Allman, Craig Jackman et
al., pending in the U.S. District Court in Detroit, Michigan; Case No. 97-
76147. The Company alleged that defendants breached contracts by failing to
perform various services. Defendants counterclaimed for sales commissions
allegedly earned by them but not paid to them by the Company. On July 29,
1999, the Company paid $900 in liquidating damages and $112 in past
commissions. The remaining amounts accrued in connection with the $1,500
charge were primarily be used to cover legal cost associated with this case.
Charges recorded as of December 31, 1998 of $2.3 million were related to
two separate lawsuits. During 1998, the Company incurred $1.1 million in
settlement costs pertaining to certain litigation concerning the advertising
of the Company's Spectracide Terminate(TM) product. In 1992, the spouse of a
former employee filed suit against the Company claiming benefits from a
Company-owned key man life insurance policy. On December 1, 1999, after the
Missouri Supreme Court further reviewed the trial courts decision, the Company
paid $1.3 million in settlement of this case including legal costs of $.1
million. Settlement and legal costs in excess of the original charge of $1.2
million recorded in 1998 were charged to non-recurring litigation charges in
the fourth quarter of 1999.
10
<PAGE>
Several of the Company's debt covenants are based upon EBITDA. EBITDA for
1999 was $58.4 million, which excludes charges recorded for Recapitalization
transaction fees, change of control bonuses, a severance charge and non-
recurring litigation charges. If the Company had excluded the $1.1 million
write-off of the Company's "Citri-Glow" candle inventory and the $.9 million
charge related to advertising deductions taken by customers in excess of
contractual obligations, EBITDA would have been $60.4 million for 1999.
Operating Income. Operating income decreased 35.9% to $30.2 million for
1999 from $47.1 million for 1998. As a percentage of net sales, operating
income decreased to 9.9% for 1999 from 16.7% for 1998, primarily as a result
of the factors discussed above.
Income tax expense. In conjunction with the Recapitalization, the Company
converted from an "S" corporation to a "C" corporation. The one-time impact of
this conversion was $2.1 million. The Company's effective income tax rate
reflects the one time impact of the conversion from an "S" corporation to a
"C" corporation, offset by the estimated fiscal year 1999 benefit related to
the step up in tax basis in conjunction with the Recapitalization.
FISCAL 1998 COMPARED TO FISCAL 1997
Net Sales. Net sales increased 16.5% to $282.7 million in 1998 from $242.6
million in 1997. This increase was driven by a combination of factors
including:
. the continued shift of consumers' preferences toward value and opening
price point brands;
. the introduction of Spectracide Terminate(TM); and
. expanded distribution at home improvement centers and mass merchandisers
through increased shelf space and rapid store expansion.
Net sales of the Company's value brands increased 17.8% to $232.6 million
in 1998 from $197.5 million in 1997. This increase was a result of continued
growth of core value brands including Spectracide(R), Hot Shot(R) and
Peters(R), and the introduction of Spectracide Terminate(TM). Net sales of
opening price point brands increased 11.1% to $50.1 million in 1998 from $45.1
million in 1997 driven by the continued rapid pace of store openings by the
Company's top retail customers. Net sales of other brands decreased 11.4% to
$16.0 million in 1998 from $18.1 million in 1997 due to the Company's effort
to shift away from other brands with reduced margins. The net sales growth
described above was primarily driven by sales volume. Selling Price changes
did not have a material impact on 1998 net sales growth.
Gross Profit. Gross profit increased 24.2% to $142.2 million in 1998
compared to $114.6 million in 1997. As a percentage of net sales, gross profit
increased to 50.3% in 1998 compared to 47.2% in 1997. The improvement in gross
profit as a percentage of net sales was a result of a more profitable sales
mix, mainly attributable to the introduction of Spectracide Terminate(TM), and
volume efficiencies.
Advertising and Promotion Expenses. Advertising and promotion expenses
increased 24.2% to $31.7 million in 1998 from $25.5 million in 1997. As a
percentage of net sales, advertising and promotion expenses increased to 11.2%
in 1998 from 10.5% in 1997. The overall increase in advertising and promotion
expenses was primarily related to the launch of Spectracide Terminate(TM).
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 17.2% to $61.1 million in 1998 from $52.1
million in 1997. As a percentage of net sales, selling, general and
administrative expenses increased slightly to 21.6% in 1998 from 21.5% in
1997. The overall increase in selling, general and administrative expenses was
related to higher selling, marketing and distribution costs to support the
launch of Spectracide Terminate(TM) and the rapid growth in sales, as well as
higher related party expenses.
Non-recurring Litigation Charges. Non-recurring litigation charges totalled
$2.3 million in 1998 and were related to two separate lawsuits. In March 1998,
a judgment was entered against United for a lawsuit filed in 1992 by the
spouse of a former employee claiming benefits from a company-owned key man
life insurance policy. The Company recorded a charge of $1.2 million for this
case in the first quarter of 1998. In October 1998, the FTC and several state
attorneys general filed a lawsuit concerning the advertising of the Company's
Spectracide Terminate(TM) product. The
11
<PAGE>
FTC and attorneys general alleged that deceptive and unsubstantiated claims
were made regarding this product. In February 1999, a settlement agreement
with the FTC was negotiated. The settlement reached includes an agreement that
the advertising for this product be modified and the other parties be
reimbursed for certain costs incurred. The settlement also confirmed the
Company denial of liability and wrongdoing in the matter. Total charges of
$1.1 million included $0.4 million paid to 10 states attorneys general for
reimbursement of their legal expenses and $0.7 million for legal expenses
incurred for the Company's defense.
Operating Income. Operating income increased 27.7% to $47.1 million in 1998
from $36.9 million in 1997. As a percentage of net sales, operating income
increased to 16.7% in 1998 from 15.2% in 1997 as a result of improved gross
margins as discussed above.
Liquidity and Capital Resources
Historically, the Company has utilized internally generated funds and
borrowings under credit facilities to meet ongoing working capital and capital
expenditure requirements. As a result of the Recapitalization, the Company
significantly increased cash requirements for debt service relating to the
Company's notes and Senior Credit Facility. As of December 31, 1999, the
Company had total debt outstanding of $369.3 million. As of December 31, 1998,
on a pro forma basis, the Company would have had long-term debt outstanding of
approximately $375.0 million and up to $110.0 million available under the
Company's Revolving Credit Facility. The Company will rely on internally
generated funds and, to the extent necessary, borrowings under the Company's
Revolving Credit Facility to meet liquidity needs.
The Company's Senior Credit Facility consists of:
. The $110.0 million Revolving Credit Facility, under which no borrowings
were outstanding at the closing of the Recapitalization and at December
31, 1999;
. The $75.0 million Term Loan A ($62.5 million outstanding at December 31,
1999); and
. The $150.0 million Term Loan B ($148.1 million outstanding at December
31, 1999).
The Company's Revolving Credit Facility and Term Loan A matures on January
20, 2005, and Term Loan B matures on January 20, 2006. As of December 31,
1999, the Company had $210.6 million outstanding under the Senior Credit
Facility. The Revolving Credit Facility is subject to a clean-down period
during which the aggregate amount outstanding under the revolving credit
facility shall not exceed $10.0 million for 30 consecutive days occurring
during the period August 1 and November 30 in a calendar year.
On January 24, 2000 the Senior Credit Facility agreement was amended to
provide new provisions for financial covenant requirements and a waiver of the
covenant requirements at December 31, 1999. The amendment contains provisions
for the increase in interest rates upon reaching certain maximum leverage
ratios. As part of the amended agreement, the Company paid bank fees of $862,
which will be reflected as deferred financing fees in January 2000 and
amortized over the life of the debt as interest expense.
The Senior Subordinated Facility was redeemed through the issuance of 9
7/8% Senior Subordinated Notes due April 1, 2009. In connection with this
redemption, the Company incurred an extraordinary loss from the early
extinguishment of debt, net of tax of $2,325. In the fourth quarter of 1999,
the Company exchanged the 9 7/8% Senior Subordinated Notes for new notes
registered under the Securities Act of 1933. The new notes are substantially
identical to the old notes.
The Company's principal liquidity requirements are for working capital,
capital expenditures and debt service under the Senior Credit Facility and the
notes. Cash flow from continuing operations provided net cash of approximately
$23.4 million, $50.8 million, and $35.1 million in 1999, 1998 and 1997,
respectively. Net cash used by operating activities fluctuates during the year
as the seasonal nature of the Company's sales results in a significant
increase in working capital (primarily accounts receivable and inventory)
during the first half of the year, with the second and third quarters being
significant cash collection periods.
Capital expenditures are related to the enhancement of the Company's
existing facilities and the construction of additional production and
distribution capacity. Cash used for capital expenditures in 1999, 1998 and
1997 was $3.0
12
<PAGE>
million, $3.6 million and $5.1 million, respectively. In addition, the Company
entered into a capital lease agreement in March 1999 for $9.2 million. Cash
used for capital expenditures in fiscal 2000 is expected to be less than $5.0
million.
Principal on the Term Loan A is required to be repaid quarterly in annual
amounts of $10.0 million for years one through four and $17.5 million for
years five and six after the closing of the Senior Credit Facility. Principal
on the Term Loan B is required to be repaid quarterly in annual amounts of
$1.5 million for the first six years and $141.0 million for the seventh year
after the closing of the Senior Credit Facility. On December 31, 1999,
principal payments on Term Loans A and B of $2.5 million and $.4 million,
respectively, were paid.
The Company believes that cash flow from operations, together with
available borrowings under the Revolving Credit Facility, will be adequate to
meet the anticipated requirements for working capital, capital expenditures
and scheduled principal and interest payments for at least the next year.
However, the Company cannot ensure that sufficient cash flow will be generated
from operations to repay the notes and amounts outstanding under the Senior
Credit Facility at maturity without requiring additional financing. The
Company's ability to meet debt service and clean-down obligations and reduce
debt will be dependent on the Company's future performance, which in turn,
will be subject to general economic conditions and to financial, business and
other factors, including factors beyond the Company's control. Because a
portion of the Company's debt bears interest at floating rates, the Company's
financial condition is and will continue to be affected by changes in
prevailing interest rates.
Seasonality
The Company's business is highly seasonal because the Company's products
are used primarily in the spring and summer. For the past two years,
approximately 75% of the Company's net sales have occurred in the first and
second quarters. The Company's working capital needs, and correspondingly the
Company's borrowings, peak near the end of the Company's first quarter.
Recently Issued Accounting Pronouncements
The Financial Accounting Standard Board issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" in June 1998. SFAS 133
provides standards on accounting and disclosure for derivative instruments and
requires that all derivatives be measured at fair value and reported as either
assets or liabilities on the balance sheet. The Company will be required to
adopt this statement no later than the beginning of fiscal year 2001. The
Company has not completed the analysis to determine the impact of this
statement on the Company's financial statements; however, the impact is not
expected to be material.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements." This Staff Accounting Bulletin
summarizes certain of the staff's views on applying Generally Accepted
Accounting Principles to revenue recognition in financial statements. The
Company will be required to adopt this statement no later than the second
quarter of 2000. The Company has not yet completed the analysis to determine
the impact of this statement on the Company's financial statements; however,
the impact is not expected to be material.
Year 2000 Compliance
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. Costs related to
the year 2000 issue were included in the $2.5 million management information
systems upgrade that occurred in 1999. The Company does not anticipate any
additional costs relating to the year 2000 issue which would have a material
adverse effect on the Company's financial condition or results of operations.
Through February 2000, the Company has not experienced any significant year
2000 business systems issues. Thorough testing of the business systems and
plant and building infrastructure systems during the January 1st 2000 weekend
uncovered very few date related issues. Almost all of these issues were minor
and were related to reporting or queries. The Company has not experienced any
significant product or service supply problems arising from the Company's
vendors' Y2K preparations.
13
<PAGE>
Although there is no guarantee that all year 2000 issues have been
identified and resolved, the Company believes that any issues arising will be
insignificant. The Company continues to monitor and correct any issues related
to the year 2000.
Forward Looking Statements
This report and other public reports or statements made from time to time
by the Company or its management may contain "forward-looking statements
concerning possible future events, objectives, strategies, trends or results.
Such statements are identified either by the context in which they appear or
by use of words such as "anticipate," "believe," "estimate," "expect," "plan"
or the like. Readers are cautioned that any forward-looking statement reflects
only the beliefs of the Company or its management at the time the statement is
made. In addition, readers should keep in mind that, because all forward
looking statements deal with the future, they are subject to risks,
uncertainties and developments that might cause actual events or results to
differ materially from those envisioned or reflected in any forward-looking
statement. Moreover, the Company does not have and does not undertake any duty
to update any forward-looking statement to reflect events or circumstances
after the date on which the statement was made. For all of these reasons,
forward-looking statements should not be relied upon as a prediction of actual
future events, objectives, strategies, trends or results. It is not possible
to anticipate and list all of the risks, uncertainties and developments which
may affect the future operations or performance of the Company, or which
otherwise may cause actual events or results to differ from forward-looking
statements. However, some of these risks and uncertainties include the
following: general economic and market conditions and risks, such as the rate
of economic growth in the United States, inflation, interest rates, taxation,
and the like; risks and uncertainties which could affect industries or markets
in which the Company participates, such as growth rates and opportunities in
those industries, or changes in demand for certain products, or unfavorable
weather patterns, etc.; and factors which could impact costs, including but
not limited to the availability and pricing of raw materials, the availability
of labor and wage rates.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate
We are exposed to market risks relating to changes in interest rates. We do
not enter into derivatives or other financial instruments for trading or
speculative purposes. We enter into financial instruments to manage and reduce
the impact of changes in interest rates.
We manage our interest rate risk by balancing the amount of our fixed and
variable debt. For fixed rate debt, interest rate changes affect the fair
market value of such debt but do not impact earnings or cash flows. Conversely
for variable rate debt, interest rate changes generally do not affect the fair
market value of such debt but do impact future earnings and cash flows,
assuming other factors are held constant. At December 31, 1999, we had
variable rate debt of $210.6 million.
Interest ranges from 200 to 375 basis points above LIBOR depending on
certain financial ratios. LIBOR was 6.21% on December 31, 1999.
Exchange Rate
The Company does not use derivative instruments to hedge against its
foreign currency exposures related to transactions denominated in currencies
other than the United States dollar. Substantially all foreign transactions
are denominated in United States dollars.
Commodity Price
The Company does not use derivative instruments to hedge its exposures to
changes in commodity prices. The Company utilizes various commodity and
specialty chemicals in its production process. Purchasing procedures and
arrangements with major customers serve to mitigate its exposure to price
changes in commodity and specialty chemicals.
14
<PAGE>
Item 8. Financial Statements and Supplementary Data
The Financial Statements and supplementary data included in this Report are
listed in Item 14 and begin immediately after Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Set forth below is the name, age and position of each of the Company's
executive officers and directors. The Company's board of directors presently
consists of seven directors who are elected annually. Executive officers serve
at the discretion of the board of directors and, in the case of Messrs. Caulk,
Bender and Johnston, pursuant to employment agreements.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
David A. Jones.......... 50 Chairman of the Board; Director
Robert L. Caulk......... 48 President and Chief Executive Officer; Director
Richard A. Bender....... 50 Senior Vice President, Human Resources & Operations
Daniel J. Johnston...... 41 Senior Vice President, Chief Financial Officer, Information
Systems, Legal & Administration; Director
Matthew M. McCarthy..... 52 Vice President, General Counsel and Secretary
David C. Pratt.......... 55 Director
C. Hunter Boll.......... 44 Director
Scott A. Schoen......... 41 Director
Charles A. Brizius...... 31 Director
</TABLE>
David A. Jones became a director of the Company in January 1999 in
connection with the Recapitalization and was appointed Chairman of the Board
in June 1999. Mr. Jones has been the President, Chief Executive Officer and a
Director of Rayovac Corporation since March 1996. Between February 1995 and
March 1996, Mr. Jones was Chief Operating Officer, Chief Executive Officer and
Chairman of the Board of Directors of Thermoscan, Inc. From 1989 to 1994, he
served as President and Chief Executive Officer of The Regina Company, a
manufacturer of vacuum cleaners and other floor care equipment.
Robert L. Caulk joined the Company in November 1999 as the Company's
President and Chief Executive Officer. Prior to joining the Company, Mr. Caulk
spent five years from 1995-1999 as the President and Executive Vice President
of Clopay Corporation, a marketer and distributor of garage doors. Between
1989 and 1994, Mr. Caulk was President, Vice President/General Manager and
Director of Corporate Acquisitions and Planning at Johnson Worldwide
Associates, a manufacturer of outdoor recreational products. From 1980 to
1989, Mr. Caulk held various management positions at S.C. Johnson & Son, Inc.
Richard A. Bender has served as the Company's Senior Vice President, Human
Resources and Operations since 1996. Mr. Bender joined us in 1988 as Vice
President of Human Resources. He has held various positions during his tenure
with us, including responsibilities in the Company's former metals group
division, administration, management information systems, product supply and
distribution. Prior to joining the Company, Mr. Bender was a general manager
in an automotive related private business and spent 13 years in various roles
including sales, plant operations and human resources at Colgate-Palmolive Co.
Daniel J. Johnston has served as the Company's Senior Vice President,
Finance and MIS and Chief Financial Officer since 1997. Mr. Johnston joined us
in 1994 as Controller and then worked as Assistant to the Chairman. Prior
15
<PAGE>
to joining us, he spent five years from 1990 to 1994 at Cooper Industries,
Inc. in various financial functions at its corporate office and Bussmann
Division. Prior to joining Cooper Industries, Inc., he was employed by
PriceWaterhouse, LLP from 1982 to 1990.
Matthew M. McCarthy has served as the Company's Vice President and General
Counsel since 1994, as well as the Company's Secretary since 1999. Prior to
joining us, Mr. McCarthy was Vice President, General Counsel and Secretary
from 1986 to 1994 for Wetterau Incorporated, a food wholesaler and retailer
based in St. Louis. From 1975 to 1986 Mr. McCarthy served in various in-house
corporate legal functions at Wetterau and at General Grocer Company, both St.
Louis area food distributors.
David C. Pratt was the Company's President and Chief Executive Officer from
the Company's inception until the Recapitalization and thereafter served as
Chairman of the Board until Mr. Jones' acceptance of that position. Mr. Pratt
has continued as a director and consultant of the Company.
C. Hunter Boll became a director of the Company in January 1999 in
connection with the Recapitalization. Mr. Boll is a managing director of
Thomas H. Lee Company where he has been employed since 1986. Mr. Boll is also
a Principal Managing Director and Member of Thomas H. Lee Advisors, LLC, the
general partner of Thomas H. Lee Partners, L.P., which controls the general
partner of Thomas H. Lee Equity Fund IV, L.P. and Vice President of Thomas H.
Lee Advisors I and T. H. Lee Mezzanine II, affiliates of ML-Lee Acquisition
Fund, L.P., ML-Lee Acquisition Fund II, L.P. and ML-Lee Acquisition Fund II
(Retirement Accounts), L.P., respectively. Mr. Boll also serves as a director
of Cott Corporation., The Smith & Wollensky Restaurant Group, Inc., Freedom
Securities Corporation, Metris Companies, Inc., Big V Supermarkets, Inc.,
TransWestern Publishing, L.P. and several private corporations.
Scott A. Schoen became a director of the Company in January 1999 in
connection with the Recapitalization. He is a Managing Director of Thomas H.
Lee Company, which he joined in 1986. In addition, Mr. Schoen is a Principal
Managing Director and Member of Thomas H. Lee Advisors, LLC, the general
partner of Thomas H. Lee Partners, L.P., which controls the general partner of
Thomas H. Lee Equity Fund IV, LP and Vice President of Thomas H. Lee Advisors
I and T. H. Lee Mezzanine II, affiliates of ML-Lee Acquisition Fund, L.P., ML-
Lee Acquisition Fund II, L.P. and ML-Lee Acquisition Fund II (Retirement
Accounts), L.P., respectively. He is also a director of Rayovac Corporation,
Syratech Corporation, TransWestern Publishing, L.P., Wyndham International
Inc. and several private corporations.
Charles A. Brizius became a director of the Company in January 1999 in
connection with the Recapitalization. Mr. Brizius worked at Thomas H. Lee
Company from 1993 to 1995, rejoined in 1997 and currently serves as an
Associate. Mr. Brizius is a Member of Thomas H. Lee Advisors, LLC, the general
partner of Thomas H. Lee Partners, L.P., which controls the general partner of
Thomas H. Lee Equity Fund IV, L.P. From 1991 to 1993, Mr. Brizius worked at
Morgan Stanley & Co. Incorporated in the Corporate Finance Department. He is
also a director of Eye Care Centers of America, Inc. and Big V Supermarkets,
Inc.
Item 11. Executive Compensation
Compensation of Executive Officers
The following table sets forth the compensation of the Company's Current
Chief Executive Officer and other individuals who either served, or acted in a
similar capacity, as the Company's Chief Executive Officer during 1999 and the
four other most highly compensated executive officers serving as executive
officers at the end of 1999 (collectively, the "Named Executive Officers").
16
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------
Other
Annual All Other
Name and Principal Compensation Compensation
Position Year Salary ($) Bonus ($) ($) (f) ($) (g)
- ------------------ ---- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Caulk......... (a) 1999 100,000 30,247 -- --
President and Chief
Executive Officer
David A. Jones.......... (b) 1999
Chairman of the Board;
Acting President and
Chief Executive Officer
Stephen R. Brian........ (c) 1999 196,184 100,000 123,894 --
President and Chief
Executive Officer
David C. Pratt.......... (d) 1999 13,960 17,758 2,444 --
President and Chief
Executive Officer 1998 250,000 2,771,061 42,740 --
Richard A. Bender....... 1999 300,000 120,000 -- 2,808,490
Senior Vice President, 1998 100,000 260,143 24,018 --
Human Resources
Operations
Daniel J. Johnston...... 1999 300,000 120,000 -- 2,808,490
Senior Vice President,
Chief Financial
Officer, 1998 100,000 251,809 4,716 --
Information Systems,
Legal and
Administration
Matthew M. McCarthy..... 1999 179,000 46,504 5,880 --
Vice President, General
Counsel and Secretary 1998 125,000 105,079 5,880 --
William P. Johnson...... (e) 1999 300,000 65,000 -- 2,808,490
Senior Vice President,
Sales 1998 100,000 251,809 4,716 --
</TABLE>
- -------
(a) Mr. Caulk joined the Company in November 1999.
(b) Mr. Jones was acting President and Chief Executive Officer from June 1999
to November 1999. Compensation was paid through the Chairman's Agreement
as identified in Compensation of Directors.
(c) Mr. Brian held this position from January 20, 1999 until June 29, 1999.
(d) Mr. Pratt resigned as President and Chief Executive Officer on January 20,
1999 in connection with the Recapitalization.
(e) Mr. Johnson resigned from this position in December of 1999.
(f) Includes deferred compensation under Long-term incentive compensation
Plan, which was terminated in 1998, automobile allowance, relocation and
country club dues.
(g) Includes change of control bonuses paid as a result of the
Recapitalization. Mr. Bender contributed $700,000 while Messrs. Johnston
and Johnson contributed $1,000,000 of the change of control bonuses to a
grantor trust established pursuant to the Company's Deferred Compensation
Plan.
Stock Option Grants
The following table sets forth information with respect to the Named
Executive Officers concerning options granted during 1999.
<TABLE>
<CAPTION>
Number of % of Total
Securities Options Granted to Exercise Grant Date
Underlying Employees in or Base Expiration Present Value
Name Options Granted Fiscal Year Price ($/SH) Date ($)
- ---- --------------- ------------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Robert L. Caulk......... 266,667 9.0% 5.00 01/21/04 370,667
533,333 18.0% 5.00 01/21/09 1,296,000
David A. Jones.......... 200,000 6.8% 5.00 01/21/04 278,000
400,000 13.5% 5.00 01/21/09 972,000
Richard A. Bender....... 200,000 6.8% 5.00 01/21/04 278,000
400,000 13.5% 5.00 01/21/09 972,000
Daniel J. Johnston...... 200,000 6.8% 5.00 01/21/04 278,800
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Number of % of Total
Securities Options Granted to Exercise Grant Date
Underlying Employees in or Base Expiration Present Value
Name Options Granted Fiscal Year Price ($/SH) Date ($)
- ---- --------------- ------------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
400,000 13.5% 5.00 01/21/09 972,000
Matthew M. McCarthy..... 5,000 0.2% 5.00 01/21/04 6,950
10,000 0.3% 5.00 01/21/09 24,300
Stephen R. Brian(a)..... -0- -- -- -- --
William P. Johnson(a)... -0- -- -- -- --
David C. Pratt.......... -0- -- -- -- --
</TABLE>
(a)Options were granted during 1999 and subsequently cancelled upon
resignation.
The fair value of the options estimated at the date of grant using the
Black-Scholes option-pricing model was $2.08. The weighted average fair value
of the 1999 options granted is estimated on the date of grant using the
following assumption: expected volatility of 0%, risk-free interest rate of
6.765%, no dividend yield and an expected life of 5 or 10 years.
Stock Option Exercises and Holdings
The following table sets forth information with respect to the Named
Executive Officers concerning unexercised options held as of December 31,
1999.
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-the Money
Unexercised Options at
Options at FY-End FY-End ($)
Shares
Acquired on Value Exercisable/ Exercisable/
Exercise(a) Realized Unexercisable Unexercisable(b)
----------- -------- ----------------- ----------------
<S> <C> <C> <C> <C>
Robert L. Caulk......... -- -- --/800,000 --/--
David A. Jones.......... -- -- --/600,000 --/--
Richard A. Bender....... -- -- --/600,000 --/--
Daniel J. Johnston...... -- -- --/600,000 --/--
Matthew M. McCarthy..... -- -- --/ 15,000 --/--
Stephen R. Brian........ -- -- --/-- --/--
William P. Johnson...... -- -- --/-- --/--
David C. Pratt.......... -- -- --/-- --/--
</TABLE>
- -------
(a) As of December 31, 1999, no options were vested.
(b) There is currently no active trading market for the Common Stock and thus
the fair market value as of December 31, 1999 is not readily determinable.
Compensation of Directors
During 1999, the Company entered into a consulting agreement with David C.
Pratt. This consulting agreement provides that Mr. Pratt:
. receive a consulting payment of $15,000 per month,
. act as Chairman of the Company's board of directors for four months
beginning on 1/21/99,
. remain a member of the Company's board of directors after his term as
Chairman has ended,
. receive a directorship fee of $25,000 per year, and
. receive Company-paid health and the welfare benefits for four months
beginning on 1/2/99.
18
<PAGE>
On July 20, 1999, the Company entered into a chairman's agreement and a
stock option agreement with David A. Jones. These agreements provide that Mr.
Jones:
. receive an annual payment for services rendered of $300,000, which
supersedes his consulting payments and directorship fees, plus
participation in the Company's incentive compensation plan;
. receive a one-time special bonus, which is contemplated to be between
$300,000 and $500,000, after the date which is six months after the date
that the Company hires a new full-time CEO;
. receive options pursuant to the 1999 Stock Option Plan to purchase an
additional 300,000 shares of common stock; and
. receive annual incentive compensation to be determined in accordance with
the Company's attainment of certain levels of EBITDA.
Employment Agreements
Messrs. Caulk, Bender and Johnston each entered into an employment
agreement with the Company. The Caulk agreement provides for employment until
October 2002 and the Bender and Johnston agreements until December 2001 unless
terminated earlier. The employment agreements provide for annual incentive
compensation to be determined in accordance with the Company's attainment of
certain EBITDA targets. Each employment agreement may be terminated by us at
any time with or without cause. If the employment agreement is terminated by
us for cause or by the executive without good reason, the terminated executive
will be entitled to any unpaid base salary through the date of termination
plus any unpaid incentive compensation. If we terminate the employment
agreement without cause or if the executive terminates the employment
agreement for good reason or the executive dies or becomes disabled, he will
be entitled to any unpaid base salary through the date of termination, any
unpaid incentive compensation and, under certain conditions, his base salary
through the later of the contract period and the first anniversary of his
termination. Each employment agreement provides for non-compete,
nonsolicitation and confidentiality provisions through the later of one year
after the executive's date of termination or the last date severance payments
are owed to the executive.
In connection with entering his employment agreement, Mr. Johnston
purchased $1.0 million of common stock, and Mr. Bender purchased $700,000 of
common stock. Messrs. Johnston and Bender purchased their common stock out of
the proceeds of a bonus paid at the closing of the recapitalization. Under
some circumstances, we have the right to repurchase the shares owned by
Messrs. Johnston and Bender.
1999 Stock Option Plan
In connection with the Recapitalization, the Company instituted the 1999
Stock Option Plan, which is administered by a committee of the Company's board
of directors. The 1999 Stock Option Plan was designed as an incentive to
selected employees, officers and directors to acquire proprietary interest in
the Company. The options are not designed to be incentive stock options within
the meaning of Section 422 of the U.S. Internal Revenue Code of 1986, as
amended. The option pool under the 1999 Stock Option Plan consists of an
aggregate of 4,000,000 shares of the Company's common stock that may consist
of shares of the Company's Class A Voting Common Stock, the Company's Class B
Non-Voting Common Stock or some combination of Class A Voting Common Stock and
Class B Non-Voting Common Stock. The options to purchase shares of common
stock are subject to vesting schedules, which are both time and performance
based. Unvested options are forfeited upon termination of employment.
Deferred Compensation Plan
On January 20, 1999, the Company established the United Industries
Corporation Deferred Compensation Plan ("the Plan"). A committee of the
Company's board of directors administers the Plan. Messrs. Bender, Johnson and
Johnston are eligible to participate in the Plan. The Plan provides for the
establishment of a grantor trust for the purpose of accumulating the assets
contributed pursuant to the Plan. The grantor trust used the funds contributed
to it to purchase:
. 70,000 shares of the Company's Class A Voting Common Stock and 70,000
shares of the Company's Class B Non-Voting Common Stock for the benefit
of Mr. Bender; and
19
<PAGE>
. 100,000 shares of the Company's Class A Voting Common Stock and 100,000
shares of the Company's Class B Non-Voting Common Stock for the benefit
of Mr. Johnston.
. 100,000 shares of the Company's Class A Voting Common Stock and 100,000
shares of the Company's Class B Non-Voting Common Stock for the benefit
of Mr. Johnson.
401(k) Plan
The Company maintains a 401(k) defined contribution plan. The plan allows
for discretionary participant elective contributions. The Company is required
to match 50% of each participant's contributions up to 6% of the employee's
salary for those employees having less than 10 years of service and 75% of
each participant's contributions up to 6% of the employee's salary for those
employees having 10 or more years of service.
Severance Agreements
In January 1999, in conjunction with the Company's Recapitalization,
Stephen R. Brian was hired as the Company's President and Chief Executive
Officer. Prior to joining the Company, Mr. Brian served as the President of
Home Products International. Mr. Brian announced his resignation in June 1999,
citing personal and family reasons for his departure. In connection with the
resignation of Mr. Brian, the Company entered into a severance agreement with
Mr. Brian, which provides that Mr. Brian will continue to receive his base
salary of $437,000 and benefits through January 31, 2002. Mr. Brian's benefits
consist of (a) whatever, if any, health, hospitalization, sick pay, life
insurance, disability insurance, profit sharing, pension, 401(k), and deferred
compensation plans and programs that the Company may have in effect from time
to time. In addition, the severance agreement provides that Mr. Brian will
receive a $95,000 bonus in respect of fiscal year 1999, use of an apartment
leased by the Company for a period of three months at Mr. Brian's expense, and
transition expenses with respect to his relocation away from St. Louis. On his
resignation, the Company (a) repurchased from Mr. Brian 100,000 shares of
common stock in exchange for a promissory note in the amount of $500,000, plus
accrued and unpaid interest, and (b) terminated his right to options under an
option agreement. The Company purchased from Mr. Brian the right to acquire
all of Mr. Brian's and his spouse's rights and obligations under a St. Louis
real estate sales contract. Unless the Company chooses to exercise this
option, the Company has no further liability or obligation under this real
estate contract and no contractual relationship with the builder. The
noncompetition and nonsolicitation provisions under Mr. Brian's original
employment agreement will continue in effect through January 31, 2002.
William P. Johnson served as the Company's Senior Vice President, Sales
since 1998. Mr. Johnson announced his resignation in December 1999. In
connection with the resignation of Mr. Johnson, the Company entered into a
severance agreement with Mr. Johnson, which provides that Mr. Johnson will
continue to receive his base salary of $300,000 and benefits through December
31, 2001. Upon his resignation, the Company terminated his right to options
under an option agreement. The noncompetition and nonsolicitation provisions
under Mr. Johnson's original employment agreement will continue in effect
through December 31, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Class A Voting Common Stock by each of the
Company's directors and Named Executive Officers, by all of the Company's
directors and executive officers as a group, and by each owner of more than 5%
of the outstanding shares of Class A Voting Common Stock. Each directors and
Named Executive Officer owns an equal number of the Company's Class B Non-
Voting Common Stock.
20
<PAGE>
<TABLE>
<CAPTION>
Number of Percent of
Name of Beneficial Owner (1) Shares Class
- ---------------------------- ---------- ----------
<S> <C> <C>
UIC Holdings, L.L.C...................................... 25,468,000 92.1%
c/o Thomas H. Lee Company
75 State Street
Boston, Massachusetts 02109
David C. Pratt (2)....................................... 1,325,108 4.8%
Robert L. Caulk.......................................... -- *
Richard A. Bender........................................ -- *
Daniel J. Johnston....................................... -- *
William P. Johnson....................................... -- *
Stephen R. Brian......................................... 100,000 *
Matthew M. McCarthy...................................... 1,000 *
David A. Jones........................................... 100,000 *
C. Hunter Boll (3)....................................... 25,468,000 92.1%
Scott A. Schoen (3)...................................... 25,468,000 92.1%
Charles A. Brizius (3)................................... 25,468,000 92.1%
All Directors and Executive Officers as a Group (9
persons) (3)............................................ 26,869,108 97.2%
</TABLE>
- -------
*Denotes less than one percent.
(1) Beneficial owner generally means any person who, directly or indirectly,
has or shares voting power or investment power with respect to a security.
All of the parties listed above are party to a stockholders agreement,
pursuant to which they have agreed to vote their shares in the election of
directors in accordance with the terms of the stockholders agreement. The
number of shares indicated in this table does not include the shares of
Class A Voting Common Stock that are held by other stockholders subject to
the stockholders agreement. Unless otherwise indicated, the Company
believes that each person has sole voting and investment power with regard
to their shares listed as beneficially owned. The calculation of
beneficial ownership is based on 27,650,000 shares outstanding.
(2) Includes 134,756 shares of the Company's Class A Voting Common Stock held
by the David C. Pratt Grantor Retained Interest Trust and 157,216 shares
of the Company's Class A Voting Common Stock held by the 1994 Ryder Pratt
Grantor Retained Annuity Trust.
(3) All of the equity interests in UIC Holdings, L.L.C. are controlled by the
Thomas H. Lee Equity Fund IV, L.P. and its affiliates, which may therefore
be deemed the beneficial owner of the shares held by UIC Holdings, L.L.C.
All of the shares beneficially owned by the Thomas H. Lee Equity Fund IV,
L.P. and its affiliates may be deemed to be beneficially owned by THL
Equity Advisors IV, L.L.C. ("Advisors"), Thomas H. Lee Equity Fund IV,
L.P. the general partner of THL Fund IV, by THL Equity Trust IV, the
general partner of Advisors, by THL and by Messrs. Boll, Schoen and
Brizius and the other officers of Thomas H. Lee Equity Fund IV, L.P. Each
of these persons disclaims beneficial ownership of such shares.
Item 13. Certain Relationships and Related Transactions
Professional Services Agreement
In connection with the Recapitalization, the Company entered into a
professional services agreement with Thomas H. Lee Capital, LLC and THL Equity
Advisors IV, LLC. The agreement has a term of three years and automatically
extends for successive one year periods thereafter, unless the parties give 30
days' notice prior to the end of the term. The agreement provides for a
financial advisory fee of $12.0 million in connection with structuring,
negotiating and arranging the Recapitalization and structuring, negotiating
and arranging the debt financing, which was paid at the closing of the
Recapitalization. In addition, Thomas H. Lee Capital, LLC and THL Equity
Advisors IV, LLC will initially receive an aggregate of $62,500 per month for
management and other consulting services provided to us. The agreement also
provides that the Company will reimburse reasonable out-of-pocket expenses
incurred in connection with management advisory services. The Company believes
that the terms of the professional services agreement are comparable to those
that would have been obtained by unaffiliated sources.
21
<PAGE>
Stockholders Agreement
In connection with the Recapitalization, the Company entered into a
stockholders agreement with UIC Holdings, L.L.C., and other stockholders of
the Company. Under the stockholders agreement, the stockholders are required
to vote their shares of capital stock of the Company for any sale or
reorganization of the Company that has been approved by the Company's board of
directors or a majority of the stockholders. The stockholders agreement also
grants the stockholders the right to effect the registration of their common
stock they hold for sale to the public, subject to some conditions and
limitations. If the Company proposes to register any of the Company's
securities under the Securities Act of 1933, as amended, the stockholders are
entitled to notice of such registration, subject to some conditions and
limitations. Fees, costs and expenses of registration effected on behalf of
the stockholders under the stockholders agreement, other than underwriting
discounts and commissions, will be paid by the Company.
Recapitalization Agreement
The Company's Recapitalization Agreement with UIC Holdings, L.L.C., which
is owned by Thomas H. Lee Equity Fund IV, L.P., contains customary provisions,
including representations and warranties with respect to the condition and
operations of the business, covenants with respect to the conduct of the
business prior to the Recapitalization closing date and various closing
conditions, including the continued accuracy of the representations and
warranties. In general, the representations and warranties made in the
Recapitalization agreement survive until the earlier of 10 days following the
delivery of the Company's December 31, 1999, audited financial statements or
April 15, 2000. Representations and warranties with respect to tax matters
survive until 30 days after the expiration of the applicable statute of
limitations; representations with respect to environmental matters survive
until December 31, 2002. Representations and warranties regarding ownership of
stock do not expire. The total consideration paid to redeem the Company's
common stock was subject to adjustments based on the excess taxes of the
Company's previous stockholders arising from the Company's Section 338(h)(10)
election.
Pursuant to the Recapitalization Agreement and in consideration of payments
received under the Recapitalization Agreement, David C. Pratt and Mark R.
Gale, the Company's former Vice President and Secretary, agreed that for a
period ending on the fourth anniversary of the Recapitalization closing date
not to own, control, participate or engage in any line of business in which
the Company is actively engaged or any line of business competitive with the
Company anywhere in the United States and any other country in which the
Company were doing business at the closing of the Recapitalization.
In addition, each of the stockholders of the Company has agreed that for a
period ending on the fourth anniversary of the Recapitalization closing date
not to contact, approach or solicit for the purpose of offering employment to
or hiring any person employed by us during the four year period.
Pursuant to the Recapitalization, the Company redeemed a portion of the
Company's common stock held by the Company's stockholders, and UIC Holdings,
L.L.C. and certain members of the Company's senior management purchased a
portion of the Company's common stock from the Company's stockholders. In the
Recapitalization, Messrs. Bender and Johnston collectively received an
aggregate of approximately $4.0 million in cash and an additional $1.7 million
with which the officers purchased the Company's common stock through grantor
trusts.
Lease Agreements
The Company leases six facilities in St. Louis from an affiliate of David
C. Pratt. Five of the leases expire on December 31, 2010. The Company has
options to terminate these leases on a year-to-year basis with advance notice
of at least 12 months. One of the leases is a sublease agreement expiring on
December 31, 2005, but may be extended for two additional five-year periods
beginning January 1, 2006. The Company believes that the terms of these leases
are similar to those negotiated by unrelated parties at arms length.
22
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
<TABLE>
<CAPTION>
Page of
10-K
-------
<S> <C> <C>
1. Financial Statements and Financial Statement Schedules Covered by Report of Independent Accountants. 24
The Financial Statements listed below are included in this Report:
Balance Sheets at December 31, 1999 and 1998 25
Statements of Operations for the years ended December 31, 1999, 1998 and 1997 26
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 27
Statements of Shareholders' (Deficit) Equity for the years ended December 31, 1999, 1998 and 1997 28
Notes to Consolidated Financial Statements 29
Financial Schedules not included have been omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
2. Exhibits--See Exhibit Index.
3. Reports on Form 8-K filed during the last quarter of 1999:
None.
</TABLE>
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENTS
Board of Directors
United Industries Corporation
St. Louis, Missouri
In our opinion, the accompanying balance sheets and the related statements
of operations, shareholders' (deficit) equity and cash flows present fairly,
in all material respects, the financial position of United Industries
Corporation at December 31, 1999 and 1998, and the results of its operations
and its cash flows for the years ended December 31, 1999 and 1998 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above. The financial statements of
the Company for the year ended December 31, 1997 were audited by other
independent accountants whose report dated February 25, 1998 expressed an
unqualified opinion on those statements.
/S/ PRICEWATERHOUSECOOPERS LLP
St. Louis, Missouri
February 17, 2000
24
<PAGE>
UNITED INDUSTRIES CORPORATION
BALANCE SHEETS
December 31, 1999 and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
--------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $ -- $ --
Accounts receivable (less allowance for doubtful
accounts of $60 at December 31, 1999 and 1998)......... 20,136 17,650
Inventories............................................. 53,243 41,444
Prepaid expenses........................................ 3,501 2,172
--------- --------
Total current assets.................................. 76,880 61,266
Equipment and leasehold improvements, net................. 27,860 20,156
Deferred income tax....................................... 116,268 --
Other assets.............................................. 20,870 6,948
Investment in discontinued operations..................... -- 5,791
--------- --------
Total assets.......................................... $ 241,878 $ 94,161
========= ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt and capital lease
obligation............................................. $ 12,178 $ 929
Accounts payable........................................ 25,507 18,519
Accrued expenses........................................ 28,435 12,705
--------- --------
Total current liabilities............................. 66,120 32,153
Long-term debt............................................ 349,125 3,716
Capital lease obligation.................................. 7,952 --
Other liabilities......................................... 5,483 35
--------- --------
Total liabilities..................................... 428,680 35,904
Commitments and contingencies (see notes 16 & 17) -- --
Stockholders' (deficit) equity:
Common stock............................................ 554 2
Additional paid-in capital.............................. 126,865 972
(Accumulated Deficit)/retained earnings................. (311,521) 70,193
Common stock held in grantor trust...................... (2,700) --
Treasury stock.......................................... -- (12,910)
--------- --------
Total stockholders' (deficit) equity.................. (186,802) 58,257
--------- --------
Total liabilities and stockholders' (deficit) equity.. $ 241,878 $ 94,161
========= ========
</TABLE>
See accompanying notes to financial statements.
25
<PAGE>
UNITED INDUSTRIES CORPORATION
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999, 1998 & 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
For the years ended
December 31,
---------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales......................................... $304,048 $282,676 $242,601
-------- -------- --------
Operating costs and expenses:
Cost of goods sold.............................. 150,344 140,445 128,049
Advertising and promotion expenses.............. 29,182 31,719 25,547
Selling, general and administrative expenses.... 70,886 61,066 52,092
Recapitalization transaction fees............... 10,690 -- --
Change of control bonuses....................... 8,645 -- --
Severance charges............................... 2,446 -- --
Non-recurring litigation charges................ 1,647 2,321 --
-------- -------- --------
Total operating costs and expenses............ 273,840 235,551 205,688
-------- -------- --------
Operating income.................................. 30,208 47,125 36,913
Interest expense.................................. 35,223 1,106 1,267
-------- -------- --------
(Loss) income before provision for income taxes,
discontinued operations and extraordinary item... (5,015) 46,019 35,646
Income tax expense................................ 4,257 992 726
-------- -------- --------
(Loss) income from continuing operations, before
extraordinary item............................... (9,272) 45,027 34,920
Income from discontinued operations, net of tax... -- 1,714 1,923
-------- -------- --------
(Loss) income before extraordinary item........... (9,272) 46,741 36,843
Extraordinary loss from early extinguishment of
debt, net of income tax
benefit of $1,425................................ 2,325 -- --
-------- -------- --------
Net (loss) income................................. $(11,597) $ 46,741 $ 36,843
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
26
<PAGE>
UNITED INDUSTRIES CORPORATION
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 & 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
For the years ended
December 31,
-----------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income............................... $ (11,597) $ 46,741 $ 36,843
Loss from early extinguishment of debt.......... 3,750 -- --
Adjustments to reconcile net income to net cash
provided by operating activities:
Income from discontinued operations............. -- (1,714) (1,923)
Deferred compensation........................... 2,700 -- --
Depreciation and amortization................... 4,715 3,838 3,597
Loss on disposal of equipment................... 54 31 97
Recapitalization transaction fees............... 10,690 -- --
Amortization of deferred financing fees......... 1,991 -- --
Provision for deferred income tax expense....... 2,832 -- --
Changes in assets and liabilities:
(Increase) in accounts receivable.............. (2,486) (124) (5,410)
(Increase) decrease in inventories............. (11,799) 193 (6,608)
(Increase) decrease in prepaid expenses........ (57) (476) 92
Increase in accounts payable and accrued
expenses...................................... 22,718 2,411 8,565
Decrease in other assets....................... 52 -- --
Other, net..................................... (129) (137) (117)
--------- -------- --------
Cash flow from continuing operations.......... 23,434 50,763 35,136
Cash flow from discontinued operations........ -- 1,858 1,896
--------- -------- --------
Net cash provided by operating activities..... 23,434 52,621 37,032
Investing activities:
Purchases of equipment and leasehold
improvements................................... (3,038) (3,628) (5,138)
--------- -------- --------
Cash used by investing activities--continuing
operations..................................... (3,038) (3,628) (5,138)
Cash used by investing activities--discontinued
operations..................................... -- (221) (422)
--------- -------- --------
Net cash used by investing activities......... (3,038) (3,849) (5,560)
Financing activities:
Redemption of treasury stock.................... (350,895) -- --
Transaction costs related to the redemption of
common stock................................... (11,378) -- --
Recapitalization transactions/redemptions with
affiliate...................................... (4,249) -- --
Issuance of common stock........................ 1,990 -- --
Shareholder equity contribution................. 8,425 -- --
Debt issuance costs............................. (19,934) -- --
Proceeds from the issuance of debt.............. 670,205 -- --
Payment on debt................................. (314,810) (3,997) (10,177)
Repayment of note receivable from employee...... 250 -- --
Issuance of treasury stock...................... -- (1,173) --
Net advances from (to) affiliates............... -- 3,428 (3,144)
Distributions paid.............................. -- (47,346) (19,008)
--------- -------- --------
Net cash provided by financing activities..... (20,396) (49,088) (32,329)
Net increase (decrease) in cash and cash
equivalents..................................... -- (316) (857)
Cash and cash equivalents--beginning of period... -- 316 1,173
--------- -------- --------
Cash and cash equivalents--end of period......... $ -- $ -- $ 316
========= ======== ========
Supplemental disclosure of cash flow information:
Interest paid................................... $ 31,383 $ 1,584 $ 1,308
Income taxes paid............................... $ 371 $ 567 $ 612
Noncash financing activity:
Execution of capital lease...................... $ 9,215 $ -- $ --
Retirement of treasury stock.................... $ 12,910 $ -- $ --
Treasury stock reissued for shareholder notes... $ -- $ 4,645 $ --
</TABLE>
See accompanying notes to financial statements.
27
<PAGE>
UNITED INDUSTRIES CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT) EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Common
Stock
Accumulated Class A voting Class B voting Retained held in
other common stocks common stock Additional earnings Grant Treasury stock
comprehensive ------------------ ------------------ paid-in (accumulated or --------------
income Shares Amount Shares Amount capital deficit) Trust Shares Amount
------------- ---------- ------ ---------- ------ ---------- ------------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1997. $ -- 1,000 $ 1 1,000 $ 1 $ 972 $ 52,963 $ -- (400) $(7,109)
Net income...... 36,843
Other
comprehensive
income..........
Distributions
paid............ (19,008)
Treasury stock
cost adjustment. (214)
Balance at
December 31,
1997............ -- 1,000 1 1,000 1 972 70,798 (400) (7,323)
--------- ---------- ---- ---------- ---- -------- --------- ------- ---- -------
Balance at
January 1, 1998. 1,000 1 1,000 1 972 70,798 -- (400) (7,323)
Net income...... 46,741
Other
comprehensive
income..........
Distributions
paid............ (47,346)
Treasury stock
purchased....... (120) (5,818)
Treasury stock
cost adjustment. 231
Balance at
December 31,
1998............ -- 1,000 1 1,000 1 972 70,193 -- (520) (12,910)
--------- ---------- ---- ---------- ---- -------- --------- ------- ---- -------
Balance at
January 1, 1999. -- 1,000 1 1,000 1 972 70,193 -- (520) (12,910)
Net income
(loss).......... (11,597)
Other
comprehensive
income..........
83,378.37838-
for-1 stock
split and
Treasury stock
redemption...... 27,699,000 277 27,699,000 277 (554) (363,805) 520 12,910
Stock received
and redeemed in
settlement of
shareholder note
purchased....... (50,000) (1) (50,000) (1) (521) --
Common stock
issued.......... 274,000 3 274,000 3 2,738
Spin-off of the
Metals Business. -- (5,791)
Fees and
expenses related
to the
Recapitalization
and equity
transactions.... (688)
Recapitalization
transactions/redemptions
with affiliate.. (544,000) (6) (544,000) (6) (4,237)
Equity
contributed by
senior managers. 270,000 3 270,000 3 2,694 (2,700)
Shareholder
capital
contribution.... 8,425
Tax benefit from
Recapitalization. 117,515
--------- ---------- ---- ---------- ---- -------- --------- ------- ---- -------
Balance at
December 31,
1999............ $ -- 27,650,000 $277 27,650,000 $277 $126,865 $(311,521) $(2,700) $-- $ --
========= ========== ==== ========== ==== ======== ========= ======= ==== =======
<CAPTION>
Total
Shareholders'
(Deficit)
Equity
-------------
<S> <C>
Balance at
January 1, 1997. $ 46,828
Net income...... 36,843
Other
comprehensive
income..........
Distributions
paid............ (19,008)
Treasury stock
cost adjustment. (214)
Balance at
December 31,
1997............ 64,449
-------------
Balance at
January 1, 1998. 64,449
Net income...... 46,741
Other
comprehensive
income..........
Distributions
paid............ (47,346)
Treasury stock
purchased....... (5,818)
Treasury stock
cost adjustment. 231
Balance at
December 31,
1998............ 58,257
-------------
Balance at
January 1, 1999. 58,257
Net income
(loss).......... (11,597)
Other
comprehensive
income.......... --
83,378.37838-
for-1 stock
split and
Treasury stock
redemption...... (350,895)
Stock received
and redeemed in
settlement of
shareholder note
purchased....... (523)
Common stock
issued.......... 2,744
Spin-off of the
Metals Business. (5,791)
Fees and
expenses related
to the
Recapitalization
and equity
transactions.... (688)
Recapitalization
transactions/redemptions
with affiliate.. (4,249)
Equity
contributed by
senior managers. --
Shareholder
capital
contribution.... 8,425
Tax benefit from
Recapitalization. 117,515
-------------
Balance at
December 31,
1999............ $(186,802)
=============
</TABLE>
See accompanying notes to financial statements.
28
<PAGE>
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)
Note 1--Summary of Significant Accounting Policies
Estimates and assumptions
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investment instruments purchased
with an original maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market, with cost being
determined using the first-in, first-out method. Cost includes raw materials,
direct labor and overhead. Provision for potentially obsolete or slow-moving
finished goods and raw materials is made based on management's analysis of
inventory levels and future sales forecasts.
Equipment and leasehold improvements
Expenditures for equipment and leasehold improvements and those which
substantially increase the useful lives of equipment are capitalized.
Maintenance, repairs and minor renewals are expensed as incurred. When
equipment is retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the accounts and gains or losses on
the dispositions are reflected in earnings. Depreciation is computed on the
straight-line basis by charges to costs or expenses at rates based on the
estimated useful lives of the assets. Machinery and equipment are depreciated
over periods ranging from three to twelve years. Office furniture and
equipment are depreciated over periods ranging from five to ten years.
Automobiles and trucks are depreciated over periods ranging from three to
seven years. Leasehold improvements are amortized over periods ranging from
five to thirty-nine years. Property under capital lease is amortized over the
term of the lease.
Impairment of long-lived assets
The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining useful lives of equipment and leasehold
improvements may warrant revision or that the remaining balance of equipment
and leasehold improvements may not be recoverable. The measurement of possible
impairment is based on the ability to recover the balance of the equipment and
leasehold improvements from expected future operating cash flows on a
undiscounted basis. In the opinion of management, no such impairment existed
as of December 31, 1999 and 1998.
Goodwill
Goodwill is included in other assets and represents the excess of cost over
the net tangible assets of acquired businesses and is amortized over 40 years.
Subsequent to the acquisition, the Company continually evaluates whether later
events and circumstances have occurred that indicate the remaining useful life
of an intangible asset may warrant revision or that the remaining balance of
an intangible asset may not be recoverable. The measurement of possible
impairment is based on the ability to recover the balance of intangible assets
from expected future operating cash flows
29
<PAGE>
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
on an undiscounted basis. In the opinion of management, no such impairment
existed as of December 31, 1999 and 1998.
Advertising and promotion expenses
The Company advertises and promotes its products through national and
regional media. Products are also advertised and promoted through cooperative
programs with retailers. The Company expenses advertising and promotion costs
as incurred, although costs incurred during interim periods are generally
expensed ratably in relation to revenues.
Research and development
Research and development costs are expensed as incurred and approximated
$1,038, $776 and $592 for 1999, 1998 and 1997, respectively.
Revenue recognition
The Company recognizes revenue upon shipment of its products. Sales are net
of discounts and allowances.
Comprehensive income
Comprehensive income is defined as the total of net income and all other
non-owner changes in equity. The Company has no other items that affect
comprehensive income other than net income.
Income taxes
In conjunction with the Recapitalization, the Company converted from an "S"
corporation to a "C" corporation. As a "C" corporation, the Company accounts
for income taxes under the asset and liability method. Under this method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial reporting basis
and the tax basis of the Company's assets and liabilities at enacted tax rates
expected to be in effect when such amounts are recovered or settled.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Compensation cost for stock options, if any,
is measured as the excess of the fair market value of the Company's stock at
the date of grant over the amount an employee must pay to acquire stock.
Earnings per share
In accordance with generally accepted accounting principles, earnings per
share information is not presented since the Company does not have publicly
held common stock.
Note 2--Recapitalization of the Company and non-recurring charges
On January 20, 1999, pursuant to a Recapitalization agreement with UIC
Holdings, L.L.C. (the "Equity Investor"), which is owned by Thomas H. Lee
Equity Fund IV, L.P. ("THL Fund IV" and, together with its affiliates, the
"THL Parties"), the Company was recapitalized (the "Recapitalization") in a
transaction in which: (i) the Equity Investor purchased common stock from the
Company's existing stockholders for approximately $254.7 million; (ii) the
Company's senior managers purchased common stock from the Company's existing
stockholders for approximately $5.7 million; and (iii) the Company used the
net proceeds of a senior subordinated facility (the "Senior Subordinated
30
<PAGE>
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Facility") and borrowings under a Senior Credit Facility (the "Senior Credit
Facility") to redeem a portion of the common stock held by the Company's
existing stockholders. Following the Recapitalization, the Equity Investor
owned approximately 91.9% of the Company's issued and outstanding common
stock, the existing stockholders retained approximately 6.0% and the Company's
senior managers owned approximately 2.1%. On January 20, 1999, the total
transaction value of the Recapitalization was approximately $652.0 million,
including related fees and expenses, and the implied total equity value
following the Recapitalization was approximately $277.0 million. The total
consideration paid to redeem the Company's common stock was subject to both
upward and downward adjustments based on the Company's working capital on the
date of the Recapitalization and excess taxes of certain stockholders arising
from the Company's Section 338(h)(10) election. In December 1999, the Company
recorded a $7.2 million charge to equity to finalize the costs associated with
the Recapitalization increasing the total transaction value to $659.2 million.
On January 20, 1999, the Recapitalization was funded by: (i) $225.0 million
of borrowings under the Senior Credit Facility; (ii) $150.0 million of
borrowings under the Senior Subordinated Facility; (iii) $254.7 million equity
investment by the THL Parties through the Equity Investor; (iv) $5.7 million
equity investment by the Company's senior management team; and (v) equity
retained by the Company's existing stockholders having an implied fair market
value of approximately $16.6 million.
The Recapitalization was accounted for as a leveraged recapitalization,
which had no impact on the Company's historical basis of assets and
liabilities for financial reporting purposes.
During 1999, the Company recorded $31,312 in fees and expenses associated
with the Recapitalization. The total fees and expenses consist of: (i) fees
and expenses related to the debt and equity transactions, including bank
commitment fees and underwriting discounts and commissions; (ii) professional,
advisory and investment banking fees and expenses; and (iii) miscellaneous
fees and expenses such as printing and filing fees. The fees and expenses that
could be specifically identified as relating to the issuance of debt were
capitalized and will be amortized over the life of the debt as interest
expense. The fees and expenses that could be specifically identified as
relating to the equity transactions were charged directly to equity. Other
transaction fees were allocated between debt and Recapitalization transaction
fees based on the Company's estimate of the effort spent in the activity
giving rise to the fee or expense. The allocation of fees and expenses to the
debt, equity and Recapitalization transaction fees is as follows:
<TABLE>
<CAPTION>
Recapitalization
Debt Equity Transaction Fees Totals
------- ------ ---------------- -------
<S> <C> <C> <C> <C>
Direct costs..................... $17,205 $688 $ -- $17,893
Allocated costs.................. 2,729 -- 10,690 13,419
------- ---- ------- -------
Total fees and expenses.......... $19,934 $688 $10,690 $31,312
======= ==== ======= =======
</TABLE>
During 1999, the Company recorded various non-recurring charges as follows
(i) change of control bonuses to some members of senior management totaling
$8,645, which were contractually required as a result of the Recapitalization
(senior management reinvested $2,700 of their change in control bonuses in the
Company's common stock through a Grantor Trust); (ii) $2,446 of severance
charges incurred as a result of the President and Chief Executive Officer and
the Senior Vice President, Sales terminating their employment with the
Company; (iii) $1,100 to cost of goods sold for the write-off of its "Citri-
Glow" candle inventory (the Company discontinued this product line during 1999
and chose to dispose of the inventory by selling it through discount channels
at prices below cost); and (iv) $900 related to deductions taken by customers
for advertising and promotional spending in excess of contractual obligations
for which the Company elected not to pursue collection.
Note 3--Discontinued operations
In connection with the Recapitalization, the Company formed a wholly owned
subsidiary DW Wej-it, Inc., a Delaware corporation ("DW"). All of the
company's assets and liabilities related to the Company's business of
manufacturing and marketing construction anchoring fasteners and providing
contract manufacturing services in metals
31
<PAGE>
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
fabrication (collectively referred to as the "Metals Business") were
contributed to DW. Effective January 1, 1999, the Company distributed all of
the shares of capital stock of DW owned by the Company to its shareholders.
<TABLE>
<S> <C> <C>
=== ===
</TABLE>
The Metals Business is accounted for as a discontinued operation in the
accompanying financial statements. The investment in discontinued operations
at December 31, 1998 is primarily comprised of cash, accounts receivable,
inventory, fixed assets, accounts payable and accrued expenses. Operating
results for the Metals Business have been included in the Statements of
Operations for 1998 and 1997.
Results for discontinued operations are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998 1997
---- ------- -------
<S> <C> <C> <C>
Net sales........................................... $-- $18,038 $18,757
Income before income taxes.......................... -- 1,751 1,963
Income tax expense.................................. -- 37 40
---- ------- -------
Income from discontinued operations................. $-- $ 1,714 $ 1,923
==== ======= =======
</TABLE>
Note 4--Common stock and stock split
The Company's articles of incorporation previously authorized 20,000 shares
of $1.00 par value Class A Voting shares and 20,000 shares of $1.00 par value
Class B Non-Voting shares. At December 31, 1998, 740 Class A Voting shares and
740 Class B Non-Voting shares were outstanding.
On January 20, 1999, the Company's Board of Directors declared an
83,378.37838 to 1 stock split and increased the Company's authorized capital
to 65.0 million shares, of which 32.5 million have been designated as Class A
Voting Common Stock and 32.5 million have been designated as Class B Non-
Voting Common Stock. As of January 20, 1999, there were 27.6 million shares of
Class A Voting Common Stock outstanding and 27.6 million shares of Class B
Non-Voting Common Stock outstanding. In conjunction with the stock split, the
Company's board of directors reduced the par value of both the Class A Voting
shares and Class B Non-Voting shares to $0.01 per share.
Note 5--Inventories
Inventories are as follows:
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
<S> <C> <C>
Raw materials........................................... $ 9,916 $ 7,748
Finished goods.......................................... 44,149 33,696
Allowance for obsolete and slow-moving inventory........ (822) --
------- -------
Total inventories....................................... $53,243 $41,444
======= =======
</TABLE>
32
<PAGE>
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 6--Equipment and leasehold improvements
Equipment and leasehold improvements are as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
<S> <C> <C>
Machinery and equipment.................................. $26,791 $30,243
Office furniture and equipment........................... 9,606 3,316
Automobiles, trucks and aircraft......................... 9,573 322
Leasehold improvements................................... 6,848 6,793
------- -------
52,818 40,674
Less: accumulated depreciation........................... 24,958 20,518
------- -------
$27,860 $20,156
======= =======
</TABLE>
Depreciation expense was $4,495, $3,624 and $3,377 in 1999, 1998 and 1997,
respectively.
Note 7--Other assets
Other assets are as follows:
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
<S> <C> <C>
Goodwill................................................ $ 7,988 $ 7,988
Accumulated amortization................................ (1,964) (1,744)
------- -------
6,024 6,244
------- -------
Deferred financing fees................................. 16,184 --
Accumulated amortization................................ (1,991) --
------- -------
14,193 --
------- -------
Other................................................... 653 704
------- -------
Total other assets...................................... $20,870 $ 6,948
======= =======
</TABLE>
Note 8--Accrued expenses
Accrued expenses are as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
<S> <C> <C>
Amounts due certain shareholders for recapitalization
costs.................................................. $13,000 $ --
Advertising and promotional expenses.................... 4,799 5,018
Interest expense........................................ 3,840 --
Cash overdraft.......................................... 2,078 3,148
Severance charges....................................... 1,805 --
Settlement charges and litigation expenses.............. 114 2,321
Other................................................... 2,799 2,218
------- -------
Total accrued expenses.................................. $28,435 $12,705
======= =======
</TABLE>
33
<PAGE>
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 9--Long-term debt and credit facilities
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
-------- ------
<S> <C> <C>
Senior Credit Facility:
Term loan A.......................................... $ 62,500 $ --
Term loan B.......................................... 148,125 --
Revolving credit facility............................ -- --
9 7/8% Series B Registered Senior Subordinated Notes... 150,000 --
Former stockholder note, unsecured, payable in annual
principal instalments of $929 plus interest at the
six-month U.S. Treasury Bill rate in effect on the
first day of each annual period....................... -- 4,645
-------- ------
360,625 4,645
Less portion due within one year....................... (11,500) (929)
-------- ------
Total long-term debt net of current portion............ $349,125 $3,716
======== ======
</TABLE>
The Senior Credit Facility was provided by NationsBank, N.A., Morgan
Stanley Senior Funding, Inc. and CIBC Inc. and consists of (i) a $110,000
revolving credit facility (the "revolving credit facility"), under which no
borrowings were outstanding at the closing of the Recapitalization; (ii) a
$75,000 term loan facility ("Term Loan A"); and (iii) a $150,000 term loan
facility ("Term Loan B"). The revolving credit facility and Term Loan A mature
six years from the closing date of the Senior Credit Facility, and Term Loan B
matures seven years from the closing date of the Senior Credit Facility. The
revolving credit facility is subject to a clean-down period during which the
aggregate amount outstanding under the revolving credit facility shall not
exceed $10.0 million for 30 consecutive days occurring during the period
between August 1 and November 30 in each calendar year.
The principal amount of Term Loan A is to be repaid in twenty-three
consecutive quarterly installments commencing June 30, 1999 with a final
installment due January 20, 2005. $10,000 will be payable in each of the first
four years and $17,500 will be repaid in each of the last two years. The
principal amount of Term Loan B is to be repaid in twenty-seven consecutive
quarterly installments commencing June 30, 1999 with a final installment due
January 20, 2006. $1,500 will be paid in each of the first six years and
$141,000 will be payable in year seven.
The Senior Credit Facility agreement contains restrictive affirmative,
negative and financial covenants. Affirmative and negative convenants put
restrictions on levels of investments, indebtedness, insurance and capital
expenditures. Financial covenants require the maintenance of certain financial
ratios at defined levels. At December 31, 1999, the Company was not in
compliance with certain financial covenants. On January 24, 2000 the Senior
Credit Facility agreement was amended to provide new provisions for financial
covenant requirements and a waiver of the covenant requirements at December
31, 1999. The amendment contains provisions for the increase in interest rates
upon reaching certain maximum leverage ratios. As part of the amended
agreement, the Company paid bank fees of $862, which will be reflected as
deferred financing fees in January 2000 and amortized over the life of the
debt as interest expense.
Under the new covenants, interest on the revolving credit facility, Term
Loan A and Term Loan B ranges from 200 to 375 basis points above LIBOR
depending on certain financial ratios. Unused commitments under the revolving
credit facility are subject to a 50 basis point annual commitment fee. LIBOR
was 6.21% at December 31, 1999.
The Senior Credit Facility may be prepaid at any time in whole or in part
without premium or penalty. During 1999, principal payments on Term Loans A
and B of $12.5 million and $1.9 million, respectively, were paid, which
included optional principal prepayments of $5.0 million and $0.7 on Term Loan
A and Term Loan B, respectively. According to the Senior Credit Facility
Agreement, each prepayment on Term Loan A and Term Loan B can be applied
34
<PAGE>
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
to the next principal repayment installments. Management intends to pay a full
year of principal repayment installments in 2000 in accordance with the Senior
Credit Facility agreement.
Obligations under the Senior Credit Facility are secured by substantially
all of the properties and assets of the Company and substantially all of the
properties and assets of the Company's future domestic subsidiaries.
The Senior Subordinated Facility was redeemed through the issuance of 9
7/8% Senior Subordinated Notes due April 1, 2009. In connection with this
redemption, the Company incurred an extraordinary loss from the early
extinguishment of debt, net of tax of $2,325. In the fourth quarter of 1999,
the Company exchanged the 9 7/8% Senior Subordinated Notes for new notes
registered under the securities act of 1933. The new notes are substantially
identical to the old notes.
No borrowings were outstanding under the $110.0 million revolving credit
facility at December 31, 1999.
There were no compensating balance requirements for the $110.0 million
revolving credit facility at December 31, 1999.
The carrying amount of the Company's obligation under the Senior Credit
Facility approximates fair value because the interest rates are based on
floating interest rates identified by reference to market rates. The fair
value of the 9 7/8% Senior Subordinated Notes was $137,250 at December 31,
1999 based on the quoted market price of the notes at that date.
Aggregate maturities under the Senior Credit Facility (excluding the
revolving credit facility) and the Senior Subordinated Notes are as follows:
<TABLE>
<S> <C>
2000............................................................. $ 11,500
2001............................................................. 11,500
2002............................................................. 11,500
2003............................................................. 17,125
2004............................................................. 18,375
Thereafter....................................................... 290,625
--------
$360,625
========
</TABLE>
The Company entered into a capital lease agreement in March 1999 for $9.2
million.
Prior to the Recapitalization, the Company had available an unsecured
seasonal working capital line of credit with a bank. The agreement provided
the Company with a maximum $80,000 line of credit. Interest on outstanding
borrowings were payable monthly at a rate not to exceed the bank's LIBOR rate
plus 0.75% or the bank's prime rate less 1.75%. No borrowings were outstanding
at December 31, 1998. This agreement was canceled in conjunction with the
Recapitalization.
The long-term debt outstanding at December 31, 1998 was repaid in
conjunction with the Recapitalization on January 20, 1999.
Note 10--Treasury stock
On January 20, 1999, the Company redeemed all of its treasury stock. (See
Note 2--Recapitalization of the Company and non-recurring charges.)
On January 30, 1998, the Company purchased 120 shares, which represented
all of the outstanding Common stock of three stockholders for cash of $1,173
and shareholder notes totaling $4,645. In 1998, the Treasury stock was
revalued, resulting in a decrease of $231 in treasury stock.
35
<PAGE>
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
During 1997, the cost of the treasury stock purchased in 1996 was revalued,
resulting in an increase of $214 in treasury stock and long-term debt.
Note 11--Income taxes
Prior to the Recapitalization, the Company had elected "S" corporation
status under provisions of the Internal Revenue Code, and similar provisions
of Missouri tax law. As such, the Company was not liable for federal or
Missouri state income taxes, but rather the stockholders included their
distributive share of the taxable income of the Company on their respective
income tax returns. The Company was under a contractual obligation to its
stockholders to distribute a percentage of net income equal to 110% of the
highest personal income tax rates to provide the stockholders with funds to
make their personal quarterly estimated income tax payments.
In conjunction with the Recapitalization, the Company converted to a "C"
corporation and was subject to federal income tax in 1999. The impact of the
conversion to a "C" corporation was a charge of $2,062, which has been
reflected as income tax expense in the accompanying financial statements.
The income tax expense was allocated as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1999
-----------------
<S> <C>
Income from continuing operations....................... $ 4,257
Extraordinary item...................................... (1,425)
-------
Total income tax expense............................ $ 2,832
=======
</TABLE>
Income tax expense is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1999
-----------------
<S> <C>
Current:
Federal............................................... $ --
State and local....................................... --
-------
Total current....................................... --
=======
Deferred:
Federal............................................... 2,569
State and local....................................... 549
C-Corporation conversion charge....................... 2,000
Valuation allowance release........................... (2,286)
-------
Total deferred...................................... 2,832
-------
Income tax expenses..................................... $ 2,832
=======
</TABLE>
Income tax expense attributable to the loss from continuing operations
differed from the amounts computed by applying the U.S. Federal income tax
rate of 35% to the loss from operations by the following amounts:
<TABLE>
<CAPTION>
Year Ended
December 31, 1999
-----------------
<S> <C>
Computed "expected" tax benefit......................... $(1,755)
Tax effect of:
Non-deductible recapitalization transaction fees...... 3,742
Valuation allowance release........................... (2,286)
C-Corporation conversion charge....................... 2,000
Pre-Recapitalization loss as an "S" corporation....... 1,684
Non-deductible goodwill............................... 77
Non-deductible meals & entertainment expenses......... 35
State and local taxes (net of Federal tax benefit).... 760
-------
Total tax expense on income from continuing
operations......................................... $ 4,257
=======
</TABLE>
36
<PAGE>
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Deferred tax assets:
Goodwill................................................... $ 219,361
NOL carryforward........................................... 10,954
Inventories................................................ 186
Deferred compensation...................................... 1,026
Severance accruals......................................... 686
Other accruals............................................. 485
---------
Gross deferred tax assets.................................. 232,698
---------
Valuation allowance........................................ (115,158)
---------
Total deferred tax assets.................................... 117,540
---------
Deferred tax liabilities:
Equipment and leasehold improvements....................... (2,858)
---------
Net deferred tax assets.................................... $ 114,682
=========
</TABLE>
The temporary difference for goodwill results from the step up in tax basis
due to the Recapitalization while maintaining historical basis for book
purposes. This benefit will be realized over 15 years. Based on historical
levels of income and the length of time required to utilize this benefit, a
valuation allowance representing 50% of the total benefit has been
established. The valuation allowance release of $2,286 was recorded to 1999
income tax expense to maintain the 50% valuation allowance against goodwill
and the NOL carryforward created in 1999.
Deferred income tax assets and liabilities are reflected in the balance
sheet as follows:
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Prepaid expenses............................................. $ 1,272
Deferred income tax.......................................... 116,268
Other liabilities............................................ (2,858)
--------
$114,682
========
</TABLE>
Note 12--Stock options
In connection with the Recapitalization, the Company instituted the 1999
Stock Option Plan (the Plan), which is administered by a committee of the
Company's Board of Directors. The Plan was designed as an incentive plan for
selected employees and directors of the Company. The option pool under the
Plan consists of an aggregate of 4,000,000 shares of the Company's common
stock that may consist of shares of the Company's Class A Voting Common Stock,
par value $0.01, the Company's Class B Non-Voting Common Stock, par value
$0.01, or some combination of Class A Voting Common Stock and Class B Non-
Voting Common Stock. A portion of the options become exercisable ratably over
a five-year period beginning on the date of grant. The remaining portion the
options are vested based upon attainment of certain financial and performance
objectives, with a maximum vesting period of 10 years.
Changes in stock options outstanding at December 31, 1999 are summarized
below:
<TABLE>
<CAPTION>
Shares Price
--------- -----
<S> <C> <C>
Outstanding at December 31, 1998......................... -- $ --
Granted in connection with the Recapitalization.......... 2,955,000 5.00
Exercised................................................ -- --
Cancelled................................................ -- --
--------- -----
Outstanding at December 31, 1999......................... 2,955,000 $5.00
--------- -----
</TABLE>
At December 31, 1999, 1,045,000 shares were available for future grants
under the Plan.
37
<PAGE>
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company has elected to account for stock options under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and not the fair value method as provided by FAS 123, "Accounting
and Disclosure of Stock-Based Compensation." Under APB 25, because the
exercise price of the Company's employee stock options equals the estimated
fair value of the underlying stock on the grant date, no compensation expense
is recognized.
Pro Forma information regarding net income and earnings per share is
required by FASB Statement No. 123, which also requires that the information
be determined as if the Company accounted for its employee stock options
subsequent to December 31, 1994 under the fair value method. The weighted
average fair value of the options estimated at the date of grant using the
Black-Scholes option-pricing model was $2.08. The fair value of the 1999
options granted is estimated on the date of grant using the following
assumptions: expected volatility of 0%, risk-free interest rate of 6.765%, no
dividend yield and an expected life of 5 or 10 years.
Because the Company's employee stock options have characteristics different
than those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
judgment, applying the provisions of FAS 123 does not necessarily provide a
reliable single measure of the fair value of its stock options. It is also not
likely that the current pro forma net income will be representative of pro
forma net income in future years. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options
vesting period.
The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Pro forma Net Income/(Loss)..................................... $(12,064)
</TABLE>
Note 13--Deferred compensation plans
The Company has a 401(k) savings plan, which covers substantially all of
its employees with six months or more continuous service. The 401(k) feature
allows participants to defer a portion of eligible compensation on a tax-
deferred basis. The plan provides for the Company to match 50% of each
employees voluntary contribution up to 6% of gross earnings. The matching
amount increases to 75% after ten years of service. The matching contribution
amounted to $467, $239 and $347 for 1999, 1998 and 1997, respectively.
The Company also sponsors a deferred compensation plan for certain members
of senior management. The plan allows participants to contribute an unlimited
amount of earnings to the plan. The Company does not match contributions to
this plan.
Note 14--Transactions with related parties
In connection with the Recapitalization Agreement, the Company entered into
a professional service agreement with the Thomas H. Lee Company. The agreement
extends for a term of three years, beginning January 20, 1999, and
automatically extends for successive one-year periods thereafter, unless the
parties give 30 days' notice prior to the end of the term. Under the
agreement, the Thomas H. Lee Company will receive $62.5 per month for
management and other consulting services provided to the Company. The
agreement also provides that the Company will reimburse out-of-pocket expenses
incurred in connection with management advisory services. During 1999, the
Company paid $710 under this agreement, which is reflected in selling, general
and administrative expenses in the accompanying statement of operations.
Prior to the Recapitalization, the Company occasionally advanced funds or
received funds from a company with common ownership to the Company. The
advances were unsecured and bore interest at the Company's borrowing rate. The
amounts due from the affiliated company bore interest at 10.5% per year and
were repaid in 1998. In addition, the
38
<PAGE>
Company guaranteed the debt of an affiliated company. The guaranteed debt
amounted to approximately $4,833 at December 31, 1998. This debt guarantee was
terminated in connection with the Recapitalization.
Note 15--Concentration of credit risks, exposures and financial instruments
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of trade accounts receivable.
The Company is heavily dependent on four customers for a substantial majority
of its sales. These four customers accounted for approximately 73%, 68% and
64% of net sales for 1999, 1998 and 1997, respectively. At December 31, 1999,
1998 and 1997, accounts receivable from these four customers were 71%, 56% and
51%, respectively, of total accounts receivable. (See Note 18--Segment
information)
The Company performs ongoing credit evaluations of its customers' financial
conditions and generally does not require collateral from its customers. The
Company maintains allowances for potential credit losses, and such losses have
generally been within management's expectations.
The Company does not use any derivative financial instruments to hedge its
exposure to interest rate changes. The Company does utilize various commodity
and specialty chemicals in its production process. The Company does not use
derivative commodity instruments to hedge its exposures to changes in
commodity prices.
The carrying value of cash and short-term financial instruments
approximates fair value due to the short maturity of those instruments.
Note 16--Commitments
The Company leases the majority of its operating facilities from a company
owned by a significant shareholder of the Company under various operating
leases expiring December 31, 2010. Rent expense under these operating leases
was approximately $2,415 during 1999. The Company has options to terminate the
leases on a year-to-year basis by giving advance notice of at least twelve
months. The Company leases a portion of its operating facilities from the same
company under a sublease agreement expiring on December 31, 2005 with minimum
annual rentals ranging from $578 to $653. The Company has two five-year
options to renew this lease, beginning January 1, 2006. Management believes
that the terms and expenses associated with the related party leases described
above are similar to those negotiated by unrelated parties at arm's length.
Aggregate rent expense amounted to $5,228, $4,367 and $4,320 for 1999, 1998
and 1997, respectively.
The Company is obligated under other operating leases for use of warehouse
space. The leases expire at various dates through December 1, 2006. Five of
the leases provide as many as five five-year options to renew.
The following is a summary of future minimum payments under the operating
leases described above that have initial or remaining noncancelable lease
terms in excess of one year at December 31, 1999.
<TABLE>
<CAPTION>
Operating Leases
-----------------
Affiliate Other Total
--------- ------- -------
<S> <C> <C> <C>
Year Ended December 31,
2000........................................... $ 2,536 $ 2,229 $ 4,765
2001........................................... 2,612 2,307 4,919
2002........................................... 2,690 2,368 5,058
2003........................................... 2,771 2,282 5,053
2004........................................... 2,854 1,860 4,714
Thereafter..................................... 2,939 1,542 4,481
------- ------- -------
Total minimum lease payments................... $16,402 $12,588 $28,990
======= ======= =======
</TABLE>
Note 17--Contingencies
In March 1999, the Company recorded a non-recurring litigation charge of
$1,500 to primarily reserve for the expected cost of an adverse judgement on a
counterclaim filed by defendants in the case of United Industries
39
<PAGE>
Corporation vs. John Allman, Craig Jackman et al., pending in the U.S.
District Court in Detroit, Michigan; Case No. 97-76147. The Company alleged
that defendants breached contracts by failing to perform various services.
Defendants counterclaimed for sales commissions allegedly earned by them but
not paid to them by the Company. On July 29, 1999, the Company paid $900 in
liquidated damages and $112 in past commissions. The remaining amounts accrued
in connection with the $1,500 charge were primarily used to cover legal costs
associated with this case.
In October 1998, the FTC and several state attorneys general filed a suit
against the Company seeking to enjoin the Company's advertising of Spectracide
Terminate(TM) as a "termite home defense system." The suit alleged that the
Company made deceptive and unsubstantiated claims regarding Spectracide
Terminate(TM); the Company denied the allegations. The Company entered into a
settlement agreement regarding its advertising claims with the FTC and the
state attorney generals involved in the litigation. All parties without any
issues of fact or law having been adjudicated entered into the settlement
agreement. As part of the settlement, the Company agreed that it would not,
without competent and reliable scientific evidence, represent to consumers
that: (a) use of Spectracide Terminate(TM) alone is effective in preventing
terminate infestations or eliminating active termite infestations; (b)
Spectracide Terminate(TM) provides "protection for you home against
subterranean termites"; and (c) Spectracide Terminate(TM) is a "termite home
defense system" or make any representations comparing the performance of
Spectracide Terminate(TM) to other termite control methods. The Company
further agreed to apply to the federal EPA to rename the product as
"Spectracide Terminate(TM)" (without reference to "termite home defense
system"). The agreement provides that the Company may describe the product as
a "do-it-yourself termite killing system for subterranean termites." Finally,
in virtually any advertisement that indicates, either expressly or implicitly,
that Spectracide Terminate(TM) kills termites or prevents termite damage or
infestation, the Company agreed to make the following disclosure: "Not
recommended as sole protection against termites, and for active infestations,
get a professional inspection." The Company recorded non-recurring litigation
charges from this suit totaling $1,121, including $400 paid to 10 states'
attorneys general for reimbursement of their legal expenses and $721 for other
legal expenses the Company incurred in connection with this were paid in the
first quarter of 1999.
In March 1998, a judgement for $1,200 was entered against the Company for a
lawsuit filed in 1992 by the spouse of a former employee claiming benefits
from a Company-owned key man life insurance policy. The Company has reflected
the judgement amount as non-recurring litigation charges for 1998. On August
24, 1999 the Missouri District Court of Appeals, Eastern District, affirmed
the trial court's decision. On December 1, 1999, after the Missouri Supreme
Court further reviewed the trial courts decision, the Company paid $1,347 in
settlement of this case including legal costs of $88. Settlement and legal
costs in excess of the original charge of $1,200 recorded in 1998 were charged
to non-recurring litigation charges in the fourth quarter of 1999.
The Company is involved in litigation and arbitration proceedings in the
normal course of business that assert product liability and other claims. The
Company is contesting all such claims. When it appears probable in
management's judgment that the Company will incur monetary damages or other
costs in connection with such claims and proceedings, and such costs can be
reasonably estimated, appropriate liabilities are recorded in the financial
statements and charges are made against earnings.
Management believes the possibility of a material adverse effect on the
Company's consolidated financial position, results of operations and cash
flows from the claims and proceedings described above is remote.
Note 18--Segment information
The Company operates in one segment consisting of the manufacturing,
marketing and distribution of lawn and garden care and insect control products
to retail channels principally in the United States. (See Note 3--Discontinued
operations--for a discussion of the spin-off of the Metals Business.) The
Company's product lines include herbicides, household insecticides, insect
repellents and water-soluble fertilizers under a variety of brand names. The
product lines are as follows:
Value brands
. Spectracide(R)--consumer lawn and garden pesticides;
. Spectracide Terminate(TM)--consumer termite killing system;
40
<PAGE>
. Spectracide Pro(R)--professional lawn and garden and pest control
products;
. Hot Shot(R)--household insecticides;
. Cutter(R)--consumer insect repellents; and
. Peters(R)--consumer water-soluble fertilizers.
Opening price point brands
. Real-Kill(R)--opening price point brand at Home Depot;
. No-Pest(R)--opening price point brand at Lowe's; and
. Krid(R), Kgro(R), Shootout(R) and Gro Best(R) --opening price point brand
at Kmart.
The Company sells and distributes both its value and opening price point
brands to its four largest customers. Net sales to the Company's four largest
customers were as follows:
<TABLE>
<CAPTION>
For the year
ended December
31,
--------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Customer A................................................. 31% 26% 19%
Customer B................................................. 15% 17% 18%
Customer C................................................. 15% 14% 10%
Customer D................................................. 12% 11% 17%
</TABLE>
No other customers represented more than 10% of 1999 or 1998 net sales.
Note 19--Unaudited quarterly financial information
<TABLE>
<CAPTION>
Year Ended December 31, 1999
----------------------------------------------
First Second Third Fourth Total
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales................... $ 96,593 $131,690 $53,536 $ 22,229 $304,048
Operating (loss) income..... (2,255) 32,581 7,772 (7,890) 30,208
(Loss) income from
continuing operations...... (12,880) 18,063 (2,941) (11,514) (9,272)
Net (loss) income........... $(15,205) $ 18,063 $(2,941) $(11,514) $(11,597)
<CAPTION>
Year Ended December 31, 1998
----------------------------------------------
First Second Third Fourth Total
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales................... $ 82,288 $126,938 $47,952 $ 25,498 $282,676
Operating (loss) income..... 15,476 29,816 4,220 (2,387) 47,125
(Loss) income from
continuing operations...... 14,989 28,470 4,237 (2,669) 45,027
Income from discontinued
operations, net of tax..... 420 534 424 336 1,714
Net (loss) income........... $ 15,409 $ 29,004 $ 4,661 $ (2,333) $ 46,741
</TABLE>
Due to the seasonal nature of the Company's business, net sales in the
first and second quarters exceed net sales in the third and fourth quarters.
During the first quarter of 1999, the Company recorded various non-
recurring charges to operations as follows: (i) $10,690 in recapitalization
transaction fees and expenses; (ii) change of control bonuses to some members
of senior management totaling $8,645; (iii) $1,100 to cost of goods sold for
the write-off of its "Citri-Glow" candle inventory; (iv) $900 related to
deductions taken by customers for advertising and promotional spending in
excess of contractual obligations; and (v) $1,500 to primarily reserve for the
expected cost of an adverse judgement on a counterclaim.
In the second quarter of 1999, the Company recorded a severance charge of
$1,606 as a result of the President and Chief Executive Officer terminating
employment with the Company. In the fourth quarter of 1999, the Company
recorded a severance charge of $840 as a result of the Senior Vice President,
Sales terminating employment with the Company.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
United Industries Corporation
/s/ Robert L. Caulk
By: ___________________________________
Robert L. Caulk,
President and Chief Executive
Officer
Dated: March 30, 2000
* * *
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<C> <S> <C>
/s/ David A. Jones Chairman of the Board and a Director March 30, 2002
____________________________________
David A. Jones
/s/ Daniel J. Johnston Senior Vice President, Finance and MIS March 30, 2002
____________________________________ and Chief Financial Officer (Principal
Daniel J. Johnston Financial and Accounting Officer)
/s/ Matthew M. McCarthy Vice President, General Counsel & March 30, 2002
____________________________________ Secretary
Matthew McCarthy
/s/ C. Hunter Boll Director March 30, 2002
____________________________________
Hunter Boll
/s/ Scott A. Schoen Director March 30, 2002
____________________________________
Scott A. Schoen
/s/ Charles A. Brizius Director March 30, 2002
____________________________________
Charles A. Brizius
/s/ David C. Pratt Director March 30, 2002
____________________________________
David C. Pratt
</TABLE>
42
<PAGE>
EXHIBIT INDEX
(a) Exhibits.
<TABLE>
<CAPTION>
<C> <S> <C>
3.1 Amended and Restated Certificate of Incorporation of the
Company, dated January 13, 1999.*
3.2 Certificate of Amendment of the Company, dated January 20,
1999.*
3.3 By-laws of the Company.*
4.1 Securities Purchase Agreement, dated as of March 19, 1999,
among the Company, CIBC Oppenheimer Corp. and NationsBanc
Montgomery Securities LLC.*
4.2 Indenture, dated as of March 24, 1999, between the Company
and State Street Bank and Trust Company as Trustee with
respect to the 9 7/8% Senior Subordinated Notes due 2009
(including the form of 9 7/8% Senior Subordinated Notes).*
4.3 Registration Rights Agreement, dated as of March 24, 1999,
among the Company, CIBC Oppenheimer Corp. and NationsBanc
Montgomery Securities LLC.*
10.1 United Industries Corporation Deferred Compensation Plan.*
10.2 Management Agreement, dated as of October 25, 1999,
between the Company and Robert L. Caulk.
10.3 Management Agreement, dated as of January 20, 1999,
between the Company and Richard A. Bender.+*
10.4 Management Agreement, dated as of January 20, 1999,
between the Company and Daniel J. Johnston.+*
10.5 Consulting Agreement, dated as of January 20, 1999,
between the Company and David A. Jones.*
10.6 United Industries Corporation 1999 Stock Option Plan.*
10.7 Stock Option Agreement, dated as of October 25, 1999,
between the Company and Robert L. Caulk.
10.8 Stock Option Agreement, dated as of January 20, 1999,
between the Company and Richard A. Bender.+*
10.9 Stock Option Agreement, dated as of January 20, 1999,
between the Company and Daniel J. Johnston.+*
10.10 Stock Option Agreement, dated as of January 20, 1999,
between the Company and David A. Jones.+*
10.11 Chairman's Agreement, dated as of July 21, 1999, between
the Company and David A. Jones.
10.12 Stockholders Agreement, dated as of January 20, 1999,
among the Company and the Stockholders (as defined
therein).+*
10.13 Professional Services Agreement, dated as of January 20,
1999, between THL Equity Advisors IV, L.L.C., Thomas H.
Lee Capital, L.L.C. and the Company.*
10.14 Amended and Restated Credit Agreement dated as of March
24, 1999 among the Company, NationsBanc Montgomery
Securities LLC, Morgan Stanley Senior Funding, Inc.,
Canadian Imperial Bank of Commerce, NationsBank, N.A..,
the Initial Lenders (as defined therein), the Swing Line
Bank (as defined therein) and the Initial Issuing Bank (as
defined therein).+*
10.15 Office Lease, dated as of June 15, 1987, between Mid-
County Trade Center Investment Company Limited
Partnership, Moran Foods and Moran Foods Inc.+*
10.16 First Amendment dated as of August 31, 1987 to Office
Lease, dated as of June 15, 1987, between Mid-County Trade
Center Investment Company Limited Partnership, Moran Foods
and Moran Foods Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
10.17 Second Amendment dated as of March 2, 1990 to Office
Lease, dated as of June 15, 1987, between Mid-County Trade
Center Investment Company Limited Partnership, Moran Foods
and Moran Foods Inc.
10.18 Third Amendment dated as of April 3, 1992 to Office Lease,
dated as of June 15, 1987, between Mid-County Trade Center
Investment Company Limited Partnership, Moran Foods and
Moran Foods Inc.
10.19 Fourth Amendment dated as of June 6, 1994 to Office Lease,
dated as of June 15, 1987, between Mid-County Trade Center
Investment Company Limited Partnership, Moran Foods and
Moran Foods Inc.
10.20 Fifth Amendment dated as of October 1, 1996 to Office
Lease, dated as of June 15, 1987, between Mid-County Trade
Center Investment Company Limited Partnership, Moran Foods
and Moran Foods Inc.
10.21 Lease, dated as of October 13, 1995, between First
Industrial Financing Partnership LP and Rex Realty Co.+
10.22 Sublease, dated as of October 13, 1995, between Rex Realty
Co. and the Company.+
10.23 Lease, dated as of December 1, 1995, between Rex Realty
Co. and the Company.+
10.24 Lease, dated as of November 27, 1989, between Rex Realty
Co. and the Company.+
12.1 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges.
27.1 Financial Data Schedule.*
</TABLE>
- --------
*Previously filed in the Company's Form S-4, dated October 6, 1999, or
amendment thereto.
+The Company agrees to furnish supplementally to the Commission a copy of any
omitted schedule or exhibit to such agreement upon request by the
Commission.
2
<PAGE>
UNITED INDUSTRIES CORPORATION
October 25, 1999
Mr. Robert L. Caulk
8551 Chaucer Place
Cincinnati OH 45249
RE: Revised Offer of Employment
Dear Bob:
This letter shall supercede our October 4, 1999 offer letter. The purpose of
this letter is to summarize the specifics of our offer to you, which offer has
been revised to reflect recent discussions between the parties and their
respective counsel:
1. POSITION: You will be the President and Chief Executive Officer of United
Industries Corporation ("UIC"). You will also become a member of the UIC
Board of Directors immediately upon your starting work with us.
2. REPORTING STRUCTURE: You will report to UIC's Board of Directors.
3. START DATE: Bearing in mind that we have our next Board meeting on Wednesday,
October 27th, we request that you start no later than Monday October 25th.
Please let us know what start date you can confirm for us as soon as possible.
4. BASE SALARY: Your base salary will be at the annualized rate of $400,000.00,
payable in equal monthly increments. Subsequent increases in base salary shall
be as determined by the Compensation Committee of the Board.
5. INCENTIVE COMPENSATION: You will be a participant in an incentive
compensation plan (description of the plan, which was faxed to you on October
13th, is attached as "Item 5 Exhibit"), with payment based on UIC's attainment
of certain financial and operational targets. Notwithstanding the provisions of
the plan attached as Item 5 Exhibit, you will be eligible to receive a target
bonus of thirty percent (30%) of your base salary if UIC achieves at least 90%
of Target EBITDA, sixty percent (60%) of your base salary if UIC achieves at
least 100% of Target EBITDA, and 90% of base salary if UIC achieves 110% of
Target EBITDA. Your participation for fiscal 1999 (same as calendar 1999) will
reflect an appropriate partial year proration from your start date through
year-end. Notwithstanding the provisions of the above referenced incentive
compensation plan, UIC agrees to guarantee that with respect to the year 2000
you will be paid incentive compensation of no less than 50% of the maximum
incentive compensation payable under the plan (i.e., 1/2 of 60% of base salary
for the year 2000).
6. SIGNING BONUS: You will be paid a $50,000 signing bonus within five (5)
business days after your start date. This payment shows our good faith effort to
compensate you for the bonus you anticipate forfeiting upon your resigning from
Clopay.
7. STOCK OPTIONS: Per the terms of UIC's 1999 Stock Option Plan, you will be
granted stock options to purchase 800,000 shares of UIC stock when you sign the
"United Industries Corporation Stock Option
1
<PAGE>
MR. ROBERT L. CAULK
OCTOBER 25, 1999
Agreement" which will be substantially in the form attached as "Item 7 Exhibit",
except that the definition of Cause in Section 4.3(a)(i) thereof shall be
revised to be as set forth in "Item 10 Exhibit" to Section 10 ("Severance") of
this letter.
8. STOCK PURCHASE: Per the terms of UIC's 1999 Stock Purchase Plan, you will be
given the opportunity to purchase up to $500,000 of UIC stock at the current
price of $5.00 per share upon your signing the "United Industries Corporation
Executive Stock Purchase Agreement" which will be substantially in the form
attached as "Item 8-A Exhibit". The Company will loan you up to fifty percent
(50%) (the principal amount of $250,000) of the purchase price of UIC stock you
may purchase in accordance with this Section 8. The loan will be at UIC's
borrowing rate and will be evidenced by a promissory note (the "Note")
substantially in the form attached to this letter as "Item 8-B Exhibit". The
loan will be with recourse, secured by a pledge to the Company of all UIC stock
you purchase under this Section, and as evidence of the security for the loan
you will enter into a Pledge Agreement substantially in the form attached to
this letter as "Item 8-C Exhibit".
Notwithstanding the provisions of Section 2 ("Repurchase Option") of the
Executive Stock Purchase Agreement (Item 8-A Exhibit), if you cease employment
at UIC, UIC agrees upon its receipt of your written request to repurchase UIC
stock (at Fair Market Value as defined in the referenced Plan) which you may
have purchased pursuant to the Executive Stock Purchase Agreement, unless you
are terminated for Cause, as defined in "Item 10 Exhibit" attached.
9. CHANGE OF CONTROL: In the event there is a Sale of UIC (as defined in Section
4.1 of the Stock Option Agreement referenced in Item 7 above), vesting of your
options will be accelerated as provided in the Stock Option Agreement. Please
refer to the Stock Option Agreement for further details.
10. SEVERANCE: If you are terminated by UIC (a) without Cause, or (b) because of
Constructive Termination (as defined in "Item 10 Exhibit" attached), or (c)
within 90 days of a Change of Control (as defined in Section 4.1 of the Stock
Option Agreement referenced in Item 7 above), you will receive severance pay
equal to (i) three (3) years' base salary less amounts of base salary UIC will
have paid to you from your starting date through date of termination, but in any
event no less than one (1) year's base salary, plus (ii) incentive compensation
earned but unpaid as of the date of termination (prorated for the period of time
during the applicable bonus year that you worked from January 1st to date of
termination). As you will be paid on a monthly basis during your employment at
UIC, your severance payments will be paid out to you monthly, in that number of
installments equal to 36 less the number of months you were paid your base
salary through date of termination (but in any event no less than 12
installments). However, you will not receive such severance payments if you are
terminated for Cause, as defined in "Item 10 Exhibit" attached.
11. RELOCATION EXPENSES: You will receive the benefits and reimbursement for
expenses as set forth in "Item 11 Exhibit, Relocation Reimbursement" attached.
UIC will also arrange to provide you with a no-interest bridge loan of up to
$250,000 for up to one (1) year to assist you in the sale of your Cincinnati
Ohio residence. If you resign or are terminated for Cause (as defined in Item 10
Exhibit) before completing twelve (12) months with the Company, you must repay
to UIC the full amount of your relocation expenses previously paid by UIC.
12. VACATIONS: You will be entitled to four weeks of paid vacation per year.
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MR. ROBERT L. CAULK
OCTOBER 25, 1999
13. OTHER BENEFITS (INCLUDING UIC'S EXECUTIVE DEFERRED COMPENSATION PLAN):
Unless otherwise specified in this letter, your benefits will consist of
whatever benefit programs may be in effect from time to time for UIC executives,
subject to eligibility requirements as specified in the applicable benefit
plans. Benefit programs may be increased, decreased, changed or discontinued at
any time. Details of UIC's benefit programs are explained in the "Benefits
Basics" brochure included as "Item 13 Exhibit". UIC will waive the one-year
service requirement for Short Term Disability insurance (page 10 of Item 13
Exhibit), and you will be covered immediately as of the date you start work at
UIC.
Also included in the Item 13 Exhibit is a copy of the UIC Executive Deferred
Compensation Plan. The current Plan does not provide for UIC common stock as one
of the various investment options available to Plan participants. However, UIC
will use its best efforts to obtain the consent of the Plan trustee (Commerce
Bank in St. Louis) to amend the Plan to permit participants to elect to have UIC
common stock purchased with the amount of deferred compensation as may be
designated by Plan participants. In your case, such designation may include any
bonus payouts you may receive with respect to fiscal 1999 and fiscal 2000.
14. NONCOMPETITION, CONFIDENTIALITY, AND OTHER OBLIGATIONS TO UIC: Attached to
this letter is "Item 14 Exhibit" which states your obligations regarding (a)
business ethics, (b) confidentiality, (c) protection of intellectual property
interests, (d) nonsolicitation and noncompetition, and (e) termination. You
agree that you will devote your full time and attention to the business and
affairs of the Company.
15. NO BREACH OF EXISTING COVENANTS: By signing this letter, you are confirming
to UIC that you are not subject to any noncompetition covenants or other legal
obligations which prevent you from joining our team.
16. ARBITRATION OF UIC STOCK VALUATION: Notwithstanding any provision to the
contrary in the UIC 1999 Stock Option Plan or the UIC 1999 Stock Purchase Plan,
UIC agrees to submit to arbitration any disputes between you and UIC regarding
the fair market value of UIC common stock. The arbitration shall be conducted in
St. Louis MO in accordance with the rules of the American Arbitration
Association.
If this letter is acceptable to you, please sign and return the enclosed copy of
this letter to my attention at UIC's office in St. Louis, with a copy to Matthew
M. McCarthy, UIC's Vice President, General Counsel and Secretary, also at UIC's
office. I look forward to hearing promptly of your acceptance of our offer.
Sincerely yours,
David A. Jones, Chairman of the Board
Accepted this __ day of October, 1999:
---------------------------------
Robert L. Caulk
cc (w/encls): Irv Berliner, Esq.
Matthew M. McCarthy, Esq. -- UIC
attachments
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UNITED INDUSTRIES CORPORATION
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (the "Agreement") is entered into
as of ________, 1999, by and between UNITED INDUSTRIES CORPORATION, a Delaware
corporation (the "Company"), and Robert L. Caulk ("Optionee") pursuant to the
United Industries Corporation 1999 Stock Option Plan (the "Plan"). The Company
and Optionee are referred to collectively herein as the "Parties." Capitalized
terms used but not defined herein shall have the meaning set forth in the Plan.
THE PARTIES AGREE AS FOLLOWS:
1. Grant of Options and Effective Date.
1.1 Grant. The Company hereby grants to Optionee pursuant to
the Plan an option (the "Option") to purchase all or any part
of an aggregate of 400,000 shares (the "Class A Shares") of
the Company's Class A Voting Common Stock, par value $0.01 per
share, and 400,000 shares (the "Class B Shares" and, together
with the Class A Shares (the"Shares") of the Company's Class B
Non-Voting Common Stock, par value $0.01 per share
(collectively, "Common Stock"), on the terms and conditions
set forth herein and in the Plan as in effect on the Grant
Date (as defined below), the terms of which are incorporated
herein by reference.
1.2 Grant Date. The Grant Date of this Option is _______,
1999 (the "Grant Date").
2. Exercise Price. The exercise price for the Shares of
Common Stock covered by this Option shall be $5.00 per share
(the "Exercise Price").
3. Adjustment and Termination of Options. Subject to the restrictions,
and under the circumstances described, in the Plan and this Agreement, the
Company shall adjust the number and kind of Shares and the Exercise Price
thereof, and this Option shall be terminated in certain circumstances, in
accordance with the provisions of the Plan.
4. Exercise of Options.
4.1 When Exercisable.
(a) Rate of Exercise for 5-Year Options. Optionee's
right to exercise this Option as to 266,666 of the Shares
(133,333 Class A Shares and 133,333 Class B Shares) subject
thereto (the "5 Year Options") shall vest ratably over the
five (5) year
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period commencing on the Grant Date in accordance with the
following schedule if (but only if) Optionee is employed by
the Company or any of its Subsidiaries as of each such date:
Cumulative Shares of
Date 5 Year Option Vested
---- --------------------
1st Anniversary of Grant Date 26,666
2nd Anniversary of Grant Date 53,333
3rd Anniversary of Grant Date 80,000
4th Anniversary of Grant Date 106,666
5th Anniversary of Grant Date 133,333
Notwithstanding any provision to the contrary in this Section 4.1(a), but
subject to the other restrictions in the Plan and this Agreement, in the event
of a Sale (as defined below) prior to the fifth anniversary of the Grant Date,
the 5 Year Options shall become vested and immediately exercisable.
(b) Rate of Exercise on TARSAP Options.
(i) Optionee shall not be vested with the right to
exercise this Option with respect to 533,334 of the Shares
(266,667 Class A Shares and 266,667 Class B Shares) (the
"TARSAP Shares") subject thereto (the "TARSAP Options") until
ten (10) years after the Grant Date, at which time Optionee
shall acquire the vested right to exercise the TARSAP Options
and purchase one hundred percent (100%) of the TARSAP Shares
if (but only if) Optionee is an employee of the Company or any
of its Subsidiaries as of such date.
(ii) Acceleration of TARSAP Options. Notwithstanding
the foregoing, if on and after the publication of each written
determination by the Board of Directors of the Company (the
"Board") or a committee thereof which is authorized to do so
that the Company has met at least ninety percent (90%) of its
objective for EBITDA (as defined below) (100% of the Company's
objective referred to herein as the "Performance Goals") with
respect to any fiscal year commencing with the fiscal year
ending December 31, 1999 and continuing for each of the four
fiscal years thereafter (which Performance Goals are set forth
on Annex I attached hereto), then (subject to the other
restrictions in the Plan and this Agreement), Optionee shall
acquire the vested right to exercise the TARSAP Options to
purchase ten percent (10%) of the TARSAP Shares, and for each
additional one percent (1%) achievement over ninety percent
(90%) of the Performance Goals for any such fiscal year, as so
determined, Optionee shall acquire the
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vested right to exercise the TARSAP Options to purchase an
additional one percent (1%) of the TARSAP Shares, but no more
than twenty percent (20%) of the TARSAP Shares in respect of
each full fiscal year. Additionally, on and after publication
of a written determination by the Board or a committee thereof
which is authorized to do so that the Company has met at least
eighty seven and one-half percent (87.5 %) of its Performance
Goals for the fiscal year ending December 31, 2003 and at
least ninety percent (90%) of its cumulative Performance Goals
for the five fiscal years ending December 31, 2003 ("Five Year
Performance Goals"), then subject to the other restrictions in
the Plan and this Agreement, (i) Optionee shall acquire the
vested right to exercise the TARSAP Options to purchase fifty
percent (50%) of the TARSAP Shares as to which Optionee had
not otherwise acquired the vested right to exercise, and (ii)
for each additional one percent (1%) achievement over ninety
percent (90%) of the Five Year Performance Goals, as so
determined, Optionee shall acquire the vested right to
exercise this TARSAP Option to purchase an additional five
percent (5%) of the TARSAP Shares as to which Optionee has not
otherwise acquired the vested right to exercise (such
additional exercise rights pursuant to clauses (i) and (ii)
above are referred to herein as the "Additional Exercise
Rights"). Such determinations shall be made by the Board or
such committee within ten (10) days after receipt of audited
financial statements for each fiscal year. The Board's or
committee's determination as to whether the Company has met
such objectives shall be final and not subject to dispute. In
addition, the Board or a committee thereof shall have complete
discretion to modify such objectives from time to time for any
year or years to reflect business combinations or
dispositions, fiscal year changes, purchases or sales of
assets or any other circumstances the Board or committee
thereof deems relevant. For purposes hereof, "EBITDA" shall
mean earnings before interest, taxes, depreciation and
amortization, excluding any non-recurring or extraordinary
items, as determined in accordance with generally accepted
accounting principles, consistently applied.
(iii) Acceleration Upon Sale. Notwithstanding any
provision to the contrary in this Section 4.1(b), but subject
to the other restrictions in the Plan and this Agreement, in
the event of a Sale (as defined below) prior to December 31,
2003, the TARSAP Options shall become vested and immediately
exercisable to the extent set forth below. On and after
publication of a written determination by the Board or a
committee thereof which is authorized to do so that the
Company has met at least eighty seven and one-half percent
(87.5 %) of its Performance Goals for the last twelve (12)
full months and at least ninety percent (90%) of its
cumulative Performance Goals for the completed fiscal years
(if any) and the Interim Period (as defined below) (based on
months elapsed), the Board or such committee shall treat the
percentage of cumulative Performance Goals achieved through
the completed fiscal years (if any) and Interim Period as the
percentage of Five Year Performance Goals achieved and on that
basis
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shall determine the Additional Exercise Rights with respect to
all TARSAP Options as to which Optionee had not otherwise
acquired the vested right to exercise consistent with the
method set forth in the second sentence of Section 4.1(b)(ii)
above. The percentage of Five Year Performance Goals for such
period shall be computed by dividing (i) the sum of EBITDA
achieved for the completed fiscal years (if any) and the
Interim Period by (ii) the annual Performance Goals for the
completed fiscal years (if any) and the monthly Performance
Goals for the Interim Period. For purposes hereof, the term
"Interim Period" shall mean the period beginning on the first
day of the then current fiscal year and ending on the last
full month of that uncompleted fiscal year.
For purposes hereof, the term "Sale" shall mean:
(w) the acquisition by any individual,
entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act) (a
"Person") of beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of
voting securities of (a) the Company or (b) the
surviving entity in any reorganization, merger or
consolidation (each an "Acquisition") involving the
Company (any such entity referred to herein as the
"Corporation") where such Acquisition causes such
Person to own more than fifty percent (50%) of the
combined voting power of the then outstanding voting
securities of the Corporation entitled to vote
generally in the election of directors, other than
acquisitions by the Thomas H. Lee Company or its
affiliates;
(x) approval by the shareholders of the
Company of a complete liquidation or dissolution of
the Company;
(y) the acquisition by a third party not
affiliated with the Company of all or substantially
all of the Company's assets; or
(z) individuals who constitute the Board on
the date of the Company's initial public sale of
equity securities registered under the Securities Act
(the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board
thereafter. Any person becoming a director subsequent
to such date whose, election, or nomination for
election, is, at any time, approved by a vote of at
least a majority of the directors comprising the
Incumbent Board shall be considered a member of the
Incumbent Board.
The accelerated vesting provided in this Section 4.1(b)(iii)
shall take effect immediately prior to but contingent upon the Sale giving rise
to such accelerated vesting. The phrase "immediately prior to the Sale" shall be
understood to mean sufficiently in advance of a Sale to permit the Optionee
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<PAGE>
to take all steps reasonably necessary to permit the Optionee to become a
shareholder of the Company as of the consummation of such Sale with respect to
the TARSAP Shares subject to the accelerated vesting provided in this Section
4.1(b)(iii). The Board or committee thereof may in good faith shorten the
Interim Period or make approximations of EBITDA during the Interim Period in
order to comply with the preceding sentence.
(c) Partial Exercise. Subject to the other
restrictions in the Plan and this Agreement, the Options may
be exercised for all or a part of the Shares with respect to
which each Option is exercisable under Section 4.1(a) and (b)
above.
4.2 Method of Exercise; Stockholders Agreement. Subject to
Section 4.1 and the other restrictions in the Plan and this Agreement,
Options are exercisable from time to time by Optionee, who shall
complete, execute and deliver to the Company a Form of Exercise and
Stock Transfer Power substantially in the form attached hereto or in
such other form as the Company may require. Except as otherwise
permitted by Section 6(d) of the Plan, such notice shall be accompanied
by payment in full for the Shares to be purchased. Payment of the
Exercise Price may be made: (i) in cash, (ii) in shares of Common Stock
which either (A) were purchased by Optionee in other than a
compensatory transaction, (B) have been held by Optionee free and clear
for at least six (6) months prior to the use thereof to pay part or all
of the Exercise Price or (C) otherwise are considered "mature" shares
for purposes of generally accepted accounting principles, as determined
by the Company's outside auditors, or (iii) so long as the Common Stock
is publicly traded, by delivery to the Committee of irrevocable
instructions to a stockbroker to deliver promptly to the Company an
amount of sale or loan proceeds sufficient to pay a portion of the
Exercise Price subject to this clause (iii), or a combination of the
methods specified in clauses (i), (ii) and (iii), or in the sole
discretion of the Committee, through a cashless exercise procedure.
Optionee shall also execute and deliver to the Company a copy of the
Company's Stockholders Agreement, dated as of January 20, 1999, in the
form in effect at the time of exercise (as amended and modified from
time to time, the "Stockholders Agreement"), if Optionee has not
previously done so. Upon due exercise of any Option and (if required)
execution and delivery of the Stockholders Agreement, subject to the
terms and conditions in this Agreement, the Company shall issue in the
name of Optionee and deliver to Optionee a certificate for the Shares
in respect of which such Option shall have been exercised, but no
Shares will be issued until arrangements satisfactory to Company have
been made for appropriate income tax withholding, if any, pursuant to
Section 12 hereof.
4.3 Exercise After Termination of Employment; Termination
of Options.
(a) Definitions. The following definitions shall be
applied to the capitalized terms used in this Section 4.3 and
in Section 4.4 below for all purposes, unless otherwise
clearly indicated:
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(i) "Cause" for termination by the Company
of Optionee's employment with the Company means (a)
misappropriation of the Company's property, interests
or opportunities; (b) violation of reasonable
directions of the Company to Optionee which
directions are consistent with Optionee's duties and
responsibilities; (c) misconduct which causes damage
to the Company or its finances or to its business
relationships or reputation in the industry or the
community; (d) breach or nonperformance by Optionee
of his obligations provided for in this Agreement or
in other material agreement between Optionee and the
Company (including, without limitation, any
employment or noncompetition agreement) or reasonably
implied by his position; (e) the habitual drug
addiction or habitual intoxication of Optionee which
negatively impacts his job performance or Optionee's
failure of a Company-required drug test; or (f)
failure of Optionee to reasonably cooperate with an
examining physician as may be required by any
agreement between Optionee and the Company.
(ii) "Fair Market Value" of each Share means
the fair value of such share determined in good faith
by the Board, based on the assumption of an
arms-length transaction between a willing buyer and a
willing seller, taking into account all reasonable
and customary factors relevant to value including,
without limitation, the fact that there may be no
public market for the Company's securities, but not
including any minority discount; provided that the
"Fair Market Value" of each Share shall not be less
than the Original Cost of such Share.
(iii) "Original Cost" for each Share shall
be equal to $5.00 (as proportionately adjusted for
all subsequent stock splits, stock dividends and
other recapitalizations).
(iv) "Public Offering" means the sale in an
underwritten public offering registered under the
Securities Act of shares of any class of the
Company's Common Stock.
(v) "Termination Date" means the date on
which Optionee's employment with the Company
terminates, whether pursuant to an employment
agreement between Optionee and the Company or
otherwise.
(b) Termination by Optionee. Upon any termination of
employment by Optionee, the Options may, to the extent
exercisable and not terminated pursuant to
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<PAGE>
Section 4.3(e), be exercised only within thirty (30) days
after the date of such employment termination. This Section
4.3(b) shall not, however, extend the term of the Options
beyond that specified in Section 4.3(e). For purposes of this
Section 4.3(b), the extent to which the Options are
exercisable shall be determined as of the date of termination
of employment.
(c) Termination by Virtue of Death or Disability or
Without Cause. Upon any termination of employment of Optionee
by virtue of Optionee's death or Disability or upon any
termination of employment by the Company without Cause, the
Options may, to the extent exercisable and not terminated
pursuant to Section 4.3(e), be exercised only within twelve
(12) months after the date of such termination. This Section
4.3 (c) shall not extend the term of the Options beyond that
specified in Section 4.3(e). For purposes of this Section
4.3(c), the extent to which the Options are exercisable shall
be determined as of the date of termination of employment.
(d) Termination for Cause. The Option shall
terminate immediately upon termination by the Company of
the employment of Optionee for Cause.
(e) Other Termination. The Options shall not be
exercisable after the earliest of (i) a Sale (provided that
Optionee has at least five (5) business days prior to the Sale
to exercise the Options or the Options are treated as
exercised in connection with such Sale) or (ii) October 25,
2009.
4.4 Repurchase Option.
(a) Right of Repurchase. In the event Optionee ceases
to be employed by the Company and its Subsidiaries for any
reason (the " Termination"), the Shares (whether held by
Optionee or one or more of Optionee's transferees) shall be
subject to repurchase by the Company pursuant to the terms and
conditions set forth in this Section 4.4 (the " Repurchase
Option").
(b) Purchase Price. Any repurchase of Shares pursuant
to the Repurchase Option shall be at the " Repurchase Price"
described in this Section 4.4(b) determined as of the
Termination Date. If Optionee's employment is terminated by
Optionee prior to the fifth anniversary hereof or by the
Company for Cause, the Repurchase Price for all of the Shares
shall be the lower of (i) the Fair Market Value therefor and
(ii) the Original Cost therefor. If Optionee's employment is
terminated for any other reason (including, without
limitation, as a result of Optionee's retirement in good
standing from the Company at or after age 65 in accordance
with the Company's retirement policies as in effect at that
time), the Repurchase Price for all Shares shall be the Fair
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<PAGE>
Market Value therefor.
(c) Repurchase by the Company. The Company may elect
to purchase all or any portion of the Shares at the Repurchase
Price by delivering written notice (the " Repurchase Notice")
to Optionee (i) within 120 days after the Termination Date,
and (ii) for Shares acquired by Optionee after the Termination
Date pursuant to Section 4.3 above, then within 120 days after
the issuance of such Shares. The Repurchase Notice shall set
forth the number of Shares to be acquired from Optionee and/or
his or her transferees (if any), the aggregate consideration
to be paid for such securities, and the time and place for the
closing of the transaction (the " Repurchase Closing"). The
Company may, in its sole discretion, assign its rights
pursuant to this Section 4.4 to the holders of its capital
stock (other than Optionee and any other stockholder whose
Shares are being repurchased) pro rata on the basis of the
number of Shares owned (with subsequent re-offer in the event
of under subscription); provided that any such assignees shall
comply with the terms of this Section 4.4.
(d) Repurchase Closing. The closing of the purchase
of the Shares pursuant to the Repurchase Option shall take
place on the date designated by the Company in the Repurchase
Notice which date shall not be more than 60 days nor less than
10 days after the delivery of such notice. Subject to Section
4.4(e), the Company shall pay for the Shares to be purchased
pursuant to the Repurchase Option by delivery of a check or
wire transfer of funds. The Company shall be entitled to
receive customary representations and warranties regarding
good title to such securities, free and clear of any liens or
encumbrances, power and authority, due execution, and
enforceability.
(e) Certain Restrictions. Notwithstanding anything to
the contrary contained in this Agreement, all repurchases of
Shares by the Company shall be subject to applicable
restrictions contained in the Delaware General Corporation Law
and in the Company's and its Subsidiaries' debt and equity
financing agreements. If any such restrictions prohibit the
repurchase of Shares hereunder which the Company is otherwise
entitled or required to make, the time periods provided in
this Section 4.4 shall be suspended, and the Company shall
make such repurchases as soon as it is permitted to do so
under such restrictions with interest at an annual rate of 7%.
In addition, the Company may pay the Repurchase Price for such
Shares by offsetting any bona fide debts owed by Optionee to
the Company.
(f) Termination of Repurchase Option. The Repurchase
Option set forth in this Section 4.4 shall continue with
respect to all Shares following any Transfer thereof; provided
that such Repurchase Option shall terminate effective
immediately after the consummation of a Sale of the Company or
a Public Offering of the Company's equity
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securities in which the Company receives net proceeds of at
least $100 million; and provided further that, with respect to
each Share, the Repurchase Option with respect to such Share
shall terminate immediately upon the Transfer of such Share
pursuant to a Public Sale.
5. Non-transferability of Options. The Options shall not be
transferable or assignable except upon Optionee's death by will or the laws of
descent and distribution and shall be exercisable, during Optionee's lifetime,
only by Optionee.
6. Purchase for Investment; Other Representations of Optionee;
Legends.
6.1 Investment Intent. As provided in the Plan, in the event
that the offering of Shares with respect to which the Options are being
exercised is not registered under the Securities Act, but an exemption
is available that requires an investment representation or other
representation, Optionee, if electing to purchase Shares, will be
required to represent that such Shares are being acquired for
investment and not with a view to distribution thereof, and to make
such other reasonable and customary representations regarding matters
relevant to compliance with applicable securities laws as are deemed
necessary by counsel to the Company. Stock certificates evidencing such
unregistered Shares that are acquired upon exercise of the Options
shall bear restrictive legends in substantially the following form and
such other restrictive legends as are required or advisable under the
provisions of any applicable laws or are provided for in the
Stockholders Agreement or any other agreement to which Optionee is a
party:
THE SHARES REPRESENTED BY THIS STOCK CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), NOR UNDER ANY STATE SECURITIES LAWS AND SHALL NOT BE
TRANSFERRED AT ANY TIME IN THE ABSENCE OF (I) AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS
WITH RESPECT TO SUCH SHARES AT SUCH TIME, OR (II) AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY AND ITS COUNSEL, TO THE EFFECT THAT SUCH
TRANSFER AT SUCH TIME WILL NOT VIOLATE THE SECURITIES ACT OR ANY
APPLICABLE STATE SECURITIES LAWS.
6.2 Other Representations. Optionee hereby represents
and warrants to the Company as follows:
(a) Access to Information. Because of Optionee's
business relationship with the Company and with the management
of the Company, Optionee has had access to all
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material and relevant information concerning the Company,
thereby enabling Optionee to make an informed investment
decision with respect to his investment in the Company, and
all pertinent data and information requested by Optionee from
the Company or its representatives concerning the business and
financial condition of the Company and the terms and
conditions of this Agreement have been furnished. Optionee
acknowledges that Optionee has had the opportunity to ask
questions of and receive answers from and to obtain additional
information from the Company and its representatives
concerning the present and proposed business and financial
condition of the Company.
(b) Financial Sophistication. Optionee has
such knowledge and experience in financial and business
matters that Optionee is capable of evaluating the merits and
risks of investing in the Shares.
(c) Understanding the Investment Risks.
Optionee understands that:
(i) An investment in the Shares
represents a highly speculative investment, and
there can be no assurance as to the success of the
Company in its business; and
(ii) There is at present no market for the
Shares and there can be no assurance that a market
will develop in the future.
(d) Understanding of the Nature of the Shares.
Optionee understands and agrees that:
(i) There can be no assurance that the
Shares will be registered under the Securities Act or
any state securities laws and if they are not so
registered, they will only be issued and sold in
reliance upon certain exemptions contained in the
Securities Act and applicable state securities laws,
and the representations and warranties of Optionee
contained herein, which will have to be renewed as to
the Shares at the times of exercise of the Options,
are essential to any claim of exemption by the
Company under the Securities Act and such state laws;
(ii) If the Shares are not so registered,
the Shares will be "restricted securities" as that
term is defined in Rule 144 promulgated under the
Securities Act;
(iii) The Option cannot be exercised and the
Shares will not be sold to Optionee and Optionee
cannot resell or transfer the Shares without
registration
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under the Securities Act and applicable
state securities laws unless the Company receives an
opinion of counsel acceptable to it (as to both
counsel and the opinion) that such registration is
not necessary, the cost of such opinion to be borne
by the Company;
(iv) Only the Company can register the
Shares under the Securities Act and applicable
state securities laws;
(v) The Company has not made any
representations to Optionee that the Company will
register the Shares under the Securities Act or any
applicable state securities laws, or with respect to
compliance with any exemption therefrom;
(vi) Optionee is aware of the conditions
for Optionee's obtaining an exemption for the resale
of the Shares under the Securities Act and any
applicable state securities laws; and
(vii) The Company may, from time to time,
make stop transfer notations in its transfer records
to ensure compliance with the Securities Act and any
applicable state securities laws, and any additional
restrictions imposed by state securities
administrators.
(e) Investment Intent. Optionee acknowledges that:
(i) Optionee is acquiring the Option
for Optionee's own account and not on behalf of
any other person;
(ii) Optionee is acquiring the option for
investment and not with a view to distribution or
with the intent to divide Optionee's participation
with others or resell or otherwise distribute the
Options or the Shares;
(iii) Neither Optionee nor anyone acting on
Optionee's behalf has paid or will pay a commission
or other remuneration to any person in connection
with the acquisition of the Options or the Shares;
and
(iv) At the time of exercise of any Option,
Optionee will have to make all the representations
and warranties contained in this Section 6 with
respect to the Shares to be issued and other
representations concerning investment intent as a
condition of the issuance of the Shares by the
Company.
11
<PAGE>
7. Restriction on Issuance of Shares. The Company shall not be
obligated to sell or issue any Shares pursuant to this Agreement if such
issuance would result in the violation of any laws, including the Securities Act
or any applicable state securities laws. The Company agrees to use its
reasonable best efforts to qualify for available exemptions under the Securities
Act or any applicable state securities laws which will enable it to issue Shares
hereunder in compliance with applicable law.
8. Rights as a Shareholder. Optionee shall have no rights as a
shareholder with respect to any Shares covered by the Options until the date of
exercise and payment of the Exercise Price in accordance with the terms of this
Agreement. Subject to Section 3 hereof, no adjustment shall be made for
dividends or other rights for which the record date is prior to the date such
stock certificate is issued.
9. No Employment Rights. This Agreement shall not confer upon
Optionee any right with respect to the continuance as an employee of the Company
or any Subsidiary, nor shall it interfere in any way with the right of the
Company or any Subsidiary to terminate such employment at any time.
10. GOVERNING LAW. ALL ISSUES AND QUESTIONS CONCERNING THE
CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT SHALL
BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
DELAWARE, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW RULES OR
PROVISIONS (WHETHER OF THE STATE OF DELAWARE OR ANY OTHER JURISDICTION) THAT
WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE
OF DELAWARE.
11. Notices. All notices and other communications under this
Agreement shall be in writing, and shall be deemed to have been duly given on
the date of delivery if delivered personally or when received if mailed to the
party to whom notice is to be given, by certified mail, return receipt
requested, postage prepaid, or by reputable overnight courier service (charges
prepaid), or transmitted by facsimile with answer-back confirmation to the
following address, or any other address specified, by notice duly given:
To Optionee at: Robert L. Caulk
8825 Page Boulevard
St. Louis MO 63114
To the Company at: United Industries Corporation
8825 Page Boulevard
St. Louis, MO 63114
Attention: General Counsel
Telecopy: (314) 253-5947
12. Withholdings. Except to the extent prohibited by applicable
law, Optionee may satisfy
12
<PAGE>
any required withholding obligation upon the exercise of an Option hereunder by
either of the following methods, or by a combination of such methods: (a)
tendering a cash payment or (b) delivering to the Company previously acquired
Shares, or having the Company withhold Shares otherwise deliverable upon the
exercise of an Option, in either case having an aggregate Fair Market Value,
determined as of the date the withholding obligation arises, less than or equal
to the amount of the total withholding obligation.
13. Pro Rata Exercise. The Shares of Common Stock covered by this
Option shall only be exercised, if at all, ratably among the Class A Shares and
Class B Shares, based on the aggregate number of Class A Shares and Class B
Shares subject to the Options granted hereunder.
14. Registration of Shares. At any time after UIC Holdings,
L.L.C., together with its affiliates, holds less than 25% of the Common Stock
held by such entities as of the date hereof, Optionee shall have the right to
cause the Company to register all of the Shares on a Form S-8, along with a Form
S-3 reoffer prospectus, under the Securities Act of 1933, as amended from time
to time, or any successor form thereto, and the Company shall use its reasonable
best efforts to comply with such request in a timely manner.
15. Rule 701 Offering. THE GRANT OF THE OPTION HEREUNDER (AND THE
PURCHASE AND SALE OF SHARES UPON ANY EXERCISE OF THE OPTION PURSUANT TO THE
TERMS HEREOF) IS MADE PURSUANT TO AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, PROVIDED BY RULE 701,
PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION.
* * * * *
13
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
UNITED INDUSTRIES CORPORATION
By:
Name: Matthew M. McCarthy
Title: Vice President, General Counsel & Secretary
OPTIONEE:
Robert L. Caulk
14
<PAGE>
ANNEX I
The Performance Goal with respect to each fiscal year from 1999 through 2003 are
as determined by the Board of Directors.
Fiscal Year Performance Goal
----------- ----------------
1999 $
2000
2001
2002
2003
Aggregate $
=
UNITED INDUSTRIES CORPORATION
FORM OF EXERCISE AND STOCK TRANSFER POWER
United Industries Corporation
8825 Page Boulevard
St. Louis, MO 63114
Ladies and Gentlemen:
Reference is made to the Stock Option Agreement between United
Industries Corporation (the "Company") and me (the "Option Agreement"), whereby
on ________________, 1999, I was granted an option to purchase all or any part
of an aggregate of 400,000 shares (the "Class A Shares") of the Company's Class
A Voting Common Stock, par value $0.01 per share and 400,000 shares (the "Class
B Shares" and, together with the Class A Shares (the "Shares") of the Company's
Class B Non-Voting Common Stock, par value $0.01 per share (collectively,
"Common Stock"), at $5.00 per share. I hereby exercise my right to purchase
Shares (on a pro rata basis among the Class A Shares and the Class B Shares)
(the "Exercised Shares") of Common Stock at said price and deliver to you
herewith the full purchase price of such Exercised Shares, as follows:
p Cash or check in the amount $ ;
<PAGE>
p Previously owned shares of Common Stock having a Fair Market
Value (as defined in the Option Agreement) equal to $_______
as of the date hereof, and otherwise in accordance with
Section 4.2 of the Option Agreement; and/or
p If the Common Stock is publicly traded, by delivery to the
Company of the attached copy of irrevocable broker
instructions to deliver promptly to the Company $_______ of
loan proceeds, or $_________ of proceeds of the sale of
Exercised Shares of Common Stock deliverable upon exercise of
the option represented by the Option Agreement.
I understand that no Exercised Shares will be issued until
arrangements satisfactory to the Company have been made for appropriate income
tax withholding, if any, and I have executed the Company's Stockholders
Agreement (the "Stockholders Agreement").
PAGE 1A - STOCK EXERCISE FORM
In the event that the Exercised Shares have not been
registered under the Securities Act of 1933, as amended from time to time, upon
the date hereof, I hereby represent and warrant to the Company as follows:
1. Because of my business relationship with the Company and with the
management of the Company, I have had access to all material and
relevant information concerning the Company, thereby enabling me to
make an informed investment decision with respect to my investment in
the Company, and all pertinent data and information requested by me
from the Company or its representatives concerning the business and
financial condition of the Company and the terms and conditions of the
Option Agreement have been furnished. I acknowledge that I have had the
opportunity to ask questions of and receive answers from and to obtain
additional information from the Company and its representatives
concerning the present and proposed business and financial condition of
the Company.
2. I have such knowledge and experience in financial and business matters
that I am capable of evaluating the merits and risks of investing in
the Exercised Shares.
3. I understand that:
(a) An investment in the Exercised Shares represents a highly
speculative investment, and there can be no assurance as
to the success of the company in its business; and
(b) There is at present no market for the Exercised Shares and
there can be no assurance that a market will develop in
the future.
<PAGE>
4. I understand and agree that:
(a) There can be no assurance that the Exercised Shares will be
registered under the Securities Act of 1933, as amended (the
"Securities Act"), or any state securities laws and if they
are not so registered, they will only be issued and sold in
reliance upon certain exemptions contained in the Securities
Act and applicable state securities laws, and my
representations and warranties contained herein are essential
to any claim of exemption by the Company under the Securities
Act and such state laws;
(b) If the Exercised Shares are not so registered, the Exercised
Shares will be "restricted securities" as that term is defined
in Rule 144 promulgated under the Securities Act;
PAGE 2A - STOCK EXERCISE FORM
(c) I cannot resell or transfer the Exercised Shares without
registration under the Securities Act and applicable state
securities laws unless the Company receives an opinion of
counsel acceptable to it (as to both counsel and the opinion)
that such registration is not necessary, the cost of such
opinion to be borne by the Company;
(d) Only the Company can register the Exercised Shares under the
Securities Act and applicable state securities laws;
(e) The Company has not made any representations to me that the
Company will register the Exercised Shares under the
Securities Act or any applicable state securities laws, or
with respect to compliance with any exemption therefrom;
(f) I am aware of the conditions for obtaining an exemption for
the resale of the Exercised Shares under the Securities
Act and any applicable state securities laws;
(g) The Company may, from time to time, make stop transfer
notations in its transfer records to ensure compliance with
the Securities Act, and any applicable state securities laws,
and any additional restrictions imposed by state securities
administrators; and
(h) I understand that stock certificates evidencing the Exercised
Shares shall bear restrictive legends as more particularly
described in the Option Agreement and the Stockholders
Agreement.
<PAGE>
5. I acknowledge that:
(a) I am acquiring the Exercised Shares for my own account and not
on behalf of any other person;
(b) I am acquiring the Exercised Shares for investment and not
with a view to distribution or with the intent to divide my
participation with others or resell or otherwise distribute
the Exercised Shares; and
(c) Neither I nor anyone acting on my behalf has paid or will pay
a commission or other remuneration to any person in connection
with the acquisition of the Exercised Shares.
PAGE 3A - STOCK EXERCISE FORM
6. I acknowledge and understand that an investment in the Shares involves
a high degree of risk and my entire investment could be lost, and that
these risks include, but are not limited to, the following:
(a) The manufacture and sale of the Company's products is highly
competitive, and the Company competes with a number of other
companies, some of which may be larger and better capitalized.
In response to such competition, the Company may be required
to lower selling prices to maintain or increase market share,
and such measures could adversely affect the Company's gross
margins and operating results.
(b) The Company may be a party to administrative actions and
lawsuits, including product liability claims involving its
products. An adverse final judgment in any such proceeding or
related actions could have a material adverse effect on the
Company's financial condition.
(c) UIC Holdings, L.L.C., owns in excess of 90% of the voting
shares of the Company. Accordingly, the UIC Holdings, L.L.C.
may elect the Company's directors and amend the Company's
certificate of incorporation, effect a merger, sale of assets
or other business acquisition or disposition, and otherwise
control the outcome of many actions requiring stockholder
approval.
(d) The Company is highly leveraged and is capitalized with a
significant amount of senior and subordinated debt. The rights
of the holders of the Common Stock are junior to the rights
held by the senior lenders and the holders of subordinated
debt
<PAGE>
of the Company. Any proceeds on a sale of the Company or
on liquidation, dissolution or winding up of the Company would
first be used to pay outstanding debt incurred by the Company.
There is no guarantee that the Company can repay its
obligations to those with rights senior to the holders of
Common Stock or that any money will be available for
distribution to holders of Common Stock.
(e) Upon termination of employment, the Company has the right (but
not the obligation) to purchase all or a portion of the
Exercised Shares. As a result, I could be required to hold the
Exercised Shares for a period of time after the termination of
my employment with the Company.
(f) The financial performance of the Company is largely
dependent on the capabilities of its senior management. The
retention of the key members of
PAGE 4A - STOCK EXERCISE FORM
management is critical to the success of the Company. Loss of
key personnel could lead to poor execution of operating
strategies, lost sales and could adversely impact the
Company's operating results.
Signature
Robert L. Caulk
Address: 8825 Page Blvd.
St. Louis MO 63114
Social Security No.: xxx-xx-xxxx
<PAGE>
PAGE 5A - STOCK EXERCISE FORM
<PAGE>
EXHIBIT 10.11
UNITED INDUSTRIES CORPORATION
CHAIRMAN'S AGREEMENT
THIS CHAIRMAN'S AGREEMENT (this " Agreement"), dated as of July __,
1999, is entered into by and among United Industries Corporation, a Delaware
corporation (the " Company") and David Jones (" Executive"). Certain capitalized
terms used but not otherwise defined herein are defined in Section 9.
Executive and the Company are parties to that certain Consulting
Agreement (the " Consulting Agreement") and that certain Stock Option Agreement
(the " January Option Agreement"), both dated as of January 20, 1999.
The Company and Executive desire to enter into an agreement
relating to Executive's engagement by the Company in the positions of board
member and chairman. Simultaneously with the execution of this Agreement, the
parties hereto have entered into a Stock Option Agreement (the " Stock Option
Agreement").
The parties hereto, in exchange for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
intending to be legally bound, hereby agree as follows:
PART I. BOARD MEMBERSHIP TERMS
1. Board Membership and Duties.
a. The Company hereby engages Executive, and Executive hereby
accepts such engagement with the Company, as a member of the Board and as the
Company's Chairman on the terms and conditions specified herein.
b. Executive shall devote his best efforts to the interests of the
Company, which interests may change from time to time, and shall devote such
time to his position as the duties and responsibilities of his position
reasonably require.
Executive shall perform such duties and functions commensurate with his
position as may be reasonably assigned or delegated to him from time to time by
the Board. Executive acknowledges that such duties and functions may or may not
involve performance of services for or on behalf of affiliates of the Company.
2. Term and Termination.
a. Term. The " Term" of Executive's engagement by the Company is from
the date hereof until the " Termination Date", which is defined as the earlier
of (i) the date of termination of Executive's engagement pursuant to any one or
more of Sections 2(b), 2(c) or 2(d) of this
1
<PAGE>
Agreement and (ii) the " Payout Date", which shall be the later of (x) the
one-year anniversary hereof and (y) the date which is six months after the date
that a new chief executive officer is hired by the Company (provided that if
such chief executive officer is not still employed by the Company at the end of
such six-month period, this clause (y) shall apply to his successor). Executive
is an independent contractor and not an employee of the Company and his
engagement by the Company may be terminated by Executive, in his sole and
arbitrary discretion, at any time with or without good reason, or by the
Company, in the Company's sole and arbitrary discretion, at any time with or
without cause, by delivery of a written termination notice to the other party,
in each case subject to the consequences in Section 4.
(b). Death. If Executive dies during the Term, the Termination Date
shall be the date of his death.
(c). Termination By Executive. If Executive terminates his engagement
by the Company, the Termination Date shall be the date on which Executive's
termination notice is given to the Company, or such later date indicated on such
termination notice, which may not be more than thirty (30) days nor less than
fourteen (14) days from its receipt by the Company; provided that upon receipt
of Executive's termination notice, the Company may, in its sole discretion,
request that Executive cease some or all of his services prior to the date
referenced in such notice and Executive shall promptly comply with such request,
it being understood that such request will not change the Termination Date
specified in this Section 2(c).
(d). Termination by the Company. If the Company terminates Executive's
engagement (or if until Executive is removed by a vote of the directors or
stockholders of the Company in accordance with the Company's constituent
documents), the Termination Date shall be the date on which the Company's notice
is given to Executive, or such later date indicated in such termination notice,
which may not be more than thirty (30) days from its receipt by Executive. The
Company may, in its sole discretion, elect to remove Executive from the position
of Chairman without removing him from his position as a member of the Board, in
which case the Term shall continue until later terminated pursuant to this
Section 2.
3. Compensation.
a. During the Term, Executive's compensation for his services hereunder
shall consist of (a) Base Salary plus (b) Incentive Compensation, if any.
b. " Base Salary" shall be paid by the Company to Executive at an
annual rate of $300,000, payable in arrears in equal monthly installments,
subject to periodic review by the compensation committee of the Board for
increase only, any such increased salary thereafter constituting "Base Salary."
2
<PAGE>
c. " Incentive Compensation," if any, is equal to the sum of the
following three amounts, up to a maximum of 60% of Base Salary in any given
year, it being understood that no Incentive Compensation is required to be paid
in any year in which the Company's actual EBITDA for the year in question is not
at least 90% of Target EBITDA for such year:
i. If the Company's actual EBITDA for the year in question equals
or exceeds 90% of Target EBITDA for such year, Incentive
Compensation will equal the product of (A) Base Salary
multiplied by (B) 25%; plus
ii. Incentive Compensation will increase by an amount equal to the
product of (A) Base Salary multiplied by (B) 2.5% multiplied
by (C) the number of percentage points by which the Company's
actual EBITDA for the year in question exceeds 90% of Target
EBITDA for such year (for example, if the Company's actual
EBITDA was 93% of Target EBITDA for the year in question, the
number derived in clause (C) would be 3 (i.e., 93%-90% = 3)),
up to a maximum of 25% of Base Salary in any year; plus
iii. Incentive Compensation will increase by an amount equal to the
product of (A) Base Salary multiplied by (B) 2% multiplied by
(C) the number of percentage points by which the Company's
actual EBITDA for the year in question exceeds 100% of the
Target EBITDA for such year (for example, if the Company's
actual EBITDA was 103% of Target EBITDA for the year in
question, the number derived in clause (C) would be 3 (i.e.,
103%-100% = 3)).
All Incentive Compensation due hereunder shall be payable promptly after the
Company has received audited financial statements from its independent
accountants for the year in question which set forth such accountant's
determination of actual EBITDA for such year and not later than at or about the
time bonuses are paid to the Company's other senior executives whose bonuses are
determined based on the receipt of the Company's audited financial statements..
The formula for determining Incentive Compensation provided for in this Section
3 shall not be changed during the Term without Executive's consent.
d. Stock Options. The Company shall grant Executive options to purchase
300,000 shares of Common Stock, all on the terms and conditions contained in the
Company's 1999 Stock Option Plan approved by the Board and in the Stock Option
Agreement.
4. Termination Provisions.
a. If Executive terminates his engagement by the Company, then:
i. Executive shall be entitled to Base Salary for the
period ending on the Termination Date; and
3
<PAGE>
ii. Executive shall be entitled to any unpaid Incentive
Compensation for any calendar year ending prior to the year in which the
Termination Date occurs, as well as any Incentive Compensation for the calendar
year in which the Termination Date occurs pro-rated based on the portion of Base
Salary paid to Executive by the Company in such year.
b. If the Company terminates Executive's engagement or if Executive's
services terminate by reason of his death, then in either such case:
i. Executive shall be entitled to Base Salary for the period
ending on the Payout Date; and
ii. Executive shall be entitled to any unpaid Incentive
Compensation for any calendar year ending prior to the year in
which Executive is last entitled to receive his Base Salary
pursuant to Section 4(b)(i), as well as Incentive Compensation
for the calendar year in which Executive is last entitled to
receive his Base Salary pursuant to Section 4(b)(i) pro-rated
based on the portion of Base Salary paid to Executive the
Company in such year.
c. Any amounts owed by the Company to Executive pursuant to
Section 4(b) shall be paid at such times and in such manner as if the
termination giving rise to such payments had not occurred (with the Company
retaining the right to prepay all or any portion of such amount at any time in
its sole discretion). The Company's obligation to make any payments pursuant to
Section 4(b) shall be conditioned upon Executive's continued and continuing
compliance with the terms and conditions of this Agreement.
5. Expenses. The Company shall reimburse Executive for all reasonable
expenses incurred in the performance of his duties in accordance with the
expense reimbursement policy of the Company with respect to members of the Board
in effect at the time.
6. Confidential Information. Executive acknowledges that the information,
observations and data relating to the business of the Company and its
subsidiaries which Executive shall obtain during the course of his association
with the Company and its subsidiaries and his performance under this Agreement
are the property of the Company and its subsidiaries. Executive agrees that he
shall not use for his own purposes or disclose to any third party any of such
information, observations or data without the prior written consent of the
Board, unless and to the extent that (i) the aforementioned matters become
generally known to or generally available for use by the public, in each case
other than as a result of Executive's acts or omissions, (ii) disclosure is
compelled by law or judicial, administrative or regulatory action or proceeding
or (iii) disclosure is reasonably necessary in order for Executive to enforce
his rights under this Agreement or to defend himself in any judicial,
administrative or regulatory action or proceeding to which the Company or its
affiliates are directly or indirectly a party.
4
<PAGE>
7. Special Bonus. Promptly after the Payout Date, the Compensation
Committee of the Board shall consider and grant the payment of a one-time
special bonus for Executive if and only if a new chief executive officer has
been hired by the Company and has been employed by the Company for at least six
months as of the Payout Date. Such bonus shall be a minimum of $300,000 and may,
in the Compensation Committee's sole discretion, be increased to a maximum of
$500,000. The Compensation Committee shall use its reasonable discretion in
determining the appropriateness and magnitude of such bonus based upon the
Company's performance during the Term and the success of the transition to the
new chief executive officer of the Company.
8. Status of Consulting Agreement. Executive and the Company acknowledge
and agree that beginning on the date hereof and ending on the Payout Date, all
of Executive's and the Company's rights and obligations under the Consulting
Agreement shall be suspended, including, without limitation, the rendering of
services by Executive and the payment of compensation by the Company. Beginning
on the first day after the Payout Date, the Consulting Agreement shall be
reinstated and shall continue in full force and effect for the remainder of the
Consulting Period (as defined therein), if any, in accordance with its terms.
9. Survival. Section 4 and Sections 6 through 13 shall survive and
continue in full force in accordance with their terms notwithstanding the
termination of the Term.
10. Definitions. The following definitions shall be applied to the
capitalized terms used in this Agreement for all purposes, unless otherwise
clearly indicated:
a. Defined Terms.
"Board" means the Company's board of directors.
"Business" means the business conducted by the Company including,
without limitation, (a) the production and sale of termiticide products and (b)
the business conducted by the Company's Spectrum and Chemsico Divisions.
"EBITDA" means, for a given period, the consolidated Company's
accounting earnings of the Company and its consolidated Subsidiaries before
taking into account any interest expense, provision for income taxes or
depreciation or amortization expense, excluding for this purpose extraordinary
gains and losses unless included in the determination of Target EBITDA.
"Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
5
<PAGE>
"Target EBITDA" means the annual performance goal for the
Company approved by the Board in its reasonable discretion with the input of
Executive, with Target EBITDA for fiscal 1999 being $85,400,000 or such lower
target as the Board (or a committee thereof) may determine in its reasonable
discretion. The Board shall use reasonable efforts to determine Target EBITDA
for any fiscal year after 1999 no later than the 90th day of the fiscal year of
the Company to which it relates.
b. Other Definitions. The terms set forth below are defined on the
following pages of this Agreement:
Agreement:
Base Salary:
Company:
Consulting Agreement:
Executive:
Incentive Compensation:
January Option Agreement:
Payout Date:
Stock Option Agreement:
Term:
Termination Date:
Indemnification. Without prejudice to (or enlargement or other modification of)
any existing rights of indemnification as an officer or director enjoyed by
Executive, the Company will defend and indemnify and hold Executive harmless for
serving as a director and Chairman to the same extent as the Company indemnifies
its officers and directors under the Company's articles of incorporation and
bylaws as in effect on the date hereof, and Executive shall be entitled to the
protection of any insurance policies the Company may elect to maintain generally
for the benefit of its directors or officers (and to the extent the Company
maintains such an insurance policy or policies, Executive shall be covered by
such policy or policies, in accordance with its or their terms to the maximum
extent of the coverage provided for any other Company officer or director). No
amendment to the Company's Certificate of Incorporation or bylaws after the date
of this Agreement which reduces the scope of indemnification of officers and
directors shall affect the rights of Executive under this Agreement.
11. Notices. Any notice provided for in this Agreement must be in writing
and must be either personally delivered, mailed by first class mail (postage
prepaid and return receipt requested) or sent by reputable overnight courier
service (charges prepaid) to the recipient at the address below indicated:
6
<PAGE>
To the Company
United Industries Corporation
8825 Page Boulevard
St. Louis, MO 63114
Telecopy: (314) 253-5941
Attention: Chief Financial Officer
with a copy to
Thomas H. Lee Equity Fund IV, L.P.
c/o Thomas H. Lee Company
75 State Street
Boston, MA 02109
Telecopy: (617) 227-3514
Attention: C. Hunter Boll
Scott Schoen
To Executive
David Jones
4596 Signature Drive
Middleton, WI 53562
Telecopy: (608) 828-9721
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
12. General Provisions.
a. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
b. Complete Agreement. This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the complete
7
<PAGE>
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way,
other than the Consulting Agreement and the January Option Agreement.
c. Counterparts. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
d. Successors and Assigns. Except as otherwise provided herein, this
Agreement shall bind and inure to the benefit of and be enforceable by
Executive, the Company and their respective successors and assigns; provided
that the rights and obligations of Executive under this Agreement shall not be
assignable.
e. Governing Law. All issues and questions concerning the construction,
validity, enforcement and interpretation of this Agreement and the exhibits and
schedules hereto shall be governed by, and construed in accordance with, the
laws of the State of Delaware, without giving effect to any choice of law or
conflict of law rules or provisions (whether of the State of Delaware or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Delaware.
f. Remedies. Each of the parties to this Agreement shall be entitled to
enforce its rights under this Agreement specifically, to recover damages and
costs (including reasonable attorney's fees) caused by any breach of any
provision of this Agreement and to exercise all other rights existing in its
favor. The parties hereto agree and acknowledge that money damages would not be
an adequate remedy for any breach of the provisions of this Agreement and that
any party may in its sole discretion apply to any court of law or equity of
competent jurisdiction (without posting any bond or deposit) for specific
performance and/or other injunctive relief in order to enforce or prevent any
violations of the provisions of this Agreement.
g. Amendment and Waiver. The provisions of this Agreement may be
amended and waived only with the prior written consent of the Company and
Executive.
h. Third-Party Beneficiary. There are no beneficiaries to this
Agreement other than the signatories hereto.
i. Business Days. If any time period for giving notice or taking action
hereunder expires on a day which is a Saturday, Sunday or legal holiday in the
state in which the Company's chief executive office is located, the time period
shall be automatically extended to the business day immediately following such
Saturday, Sunday or legal holiday.
j. Assignment. Nothing in this Agreement shall preclude the Company
from consolidating or merging into or with, or transferring all or substantially
all of its assets to, another corporation; provided that the Company will
require any successor
8
<PAGE>
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business or assets of the Company to assume this
Agreement. As used in this Agreement, "Company" shall mean the Company, as
defined above, and any successor to its business and/or assets as aforesaid
which assumes this Agreement by operation of law or otherwise.
k. Tax Returns. It is intended that the fees paid to Executive
hereunder shall constitute revenues to Executive and (unless otherwise required
by law) the Company will not withhold any amounts therefrom as federal income
tax withholding from wages or as employee contributions under the Federal
Insurance Contribution Act or any other state or federal law. Executive shall
file all tax returns and reports required to be filed by him on the basis that
Executive is an independent contractor, rather than an employee, as defined in
Treasury Regulation ss.31.3121(d)_1(c)(2).
l. Mitigation by Executive. In no event shall Executive be obligated to
seek other employment or take any other action by way of mitigation of the
amounts payable to Executive under any of the provisions of this Agreement and
such amounts shall not be reduced whether or not Executive obtains other
employment.
* * * *
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
UNITED INDUSTRIES CORPORATION
By:
------------------------
Its:
------------------------
- -----------------------------
DAVID JONES
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
balance sheets and statements of operations for the year ended December 31, 1999
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 20,196
<ALLOWANCES> 60
<INVENTORY> 53,243
<CURRENT-ASSETS> 76,880
<PP&E> 52,818
<DEPRECIATION> 24,958
<TOTAL-ASSETS> 241,878
<CURRENT-LIABILITIES> 66,120
<BONDS> 0
0
0
<COMMON> 553
<OTHER-SE> (187,355)
<TOTAL-LIABILITY-AND-EQUITY> 241,878
<SALES> 304,048
<TOTAL-REVENUES> 304,048
<CGS> 150,344
<TOTAL-COSTS> 273,840
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,223
<INCOME-PRETAX> (5,015)
<INCOME-TAX> 4,257
<INCOME-CONTINUING> (9,272)
<DISCONTINUED> 0
<EXTRAORDINARY> 2,325
<CHANGES> 0
<NET-INCOME> (11,597)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
