<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM TO ______________ TO ______________
COMMISSION FILE NO. 333-76055
------------------------
UNITED INDUSTRIES CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 43-1025604
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
</TABLE>
8825 PAGE BOULEVARD
ST. LOUIS, MISSOURI 63114
(Address of principal executive office, including zip code)
(314) 427-0780
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /.
There is no established public market for the Registrant's common stock.
As of November 15, 2000, the Registrant had 27,650,000 Class A voting and
27,650,000 Class B non-voting shares of common stock outstanding and 15,000
non-voting shares of Class A Preferred Stock outstanding.
Documents Incorporated by Reference: None
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<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED INDUSTRIES CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31
2000 1999 1999
------------- ------------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 17,146 $ 11,853 $ --
Accounts receivable (less allowance for doubtful
accounts of $875 at September 30, 2000, $535 at
September 30, 1999 and $1,031 at December 31,
1999).............................................. 31,376 32,750 19,165
Inventories.......................................... 31,799 35,987 53,243
Prepaid expenses..................................... 2,666 1,352 3,501
--------- --------- ---------
Total current assets............................. 82,987 81,942 75,909
Equipment and leasehold improvements, net.............. 25,871 27,567 27,860
Deferred income tax.................................... 116,268 107,574 116,268
Other assets........................................... 19,806 21,018 20,870
--------- --------- ---------
Total assets..................................... $ 244,932 $ 238,101 $ 240,907
========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt and capital
lease obligations.................................. $ 11,846 $ 12,165 $ 12,178
Accounts payable..................................... 11,789 13,024 25,507
Accrued expenses..................................... 23,049 19,876 27,464
Short-term borrowings................................ 15,000 -- --
--------- --------- ---------
Total current liabilities........................ 61,684 45,065 65,149
Long-term debt......................................... 343,375 352,000 349,125
Capital lease obligations.............................. 5,261 8,127 7,952
Other liabilities...................................... 6,725 5,377 5,483
--------- --------- ---------
Total liabilities................................ 417,045 410,569 427,709
Stockholders' deficit..................................
Common stock......................................... 554 554 554
Additional paid-in capital........................... 126,865 116,687 126,865
Accumulated deficit.................................. (296,832) (287,009) (311,521)
--------- --------- ---------
Common stock held in grantor trust................... (2,700) (2,700) (2,700)
--------- --------- ---------
Total stockholders' deficit...................... (172,113) (172,468) (186,802)
--------- --------- ---------
Total liabilities and stockholders' deficit...... $ 244,932 $ 238,101 $ 240,907
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
UNITED INDUSTRIES CORPORATION
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales........................................ $ 51,080 $53,536 $263,134 $281,819
-------- ------- -------- --------
Operating costs and expenses:
Cost of goods sold............................. 26,563 25,224 132,535 137,925
Advertising and promotion expenses............. 4,021 4,115 23,489 29,024
Selling, general and administrative expenses... 15,078 16,425 51,974 54,331
Recapitalization transaction fees.............. -- -- -- 10,690
Change of control bonuses...................... -- -- -- 8,645
Severance charges.............................. -- -- -- 1,606
Durshan related expenses (see note 11)......... 8,000 -- 8,000 --
Non-recurring litigation charges............... -- -- -- 1,500
-------- ------- -------- --------
Total operating costs and expenses............. 53,662 45,764 215,998 243,721
-------- ------- -------- --------
Operating income (loss).......................... (2,582) 7,772 47,136 38,098
Interest expense................................. 10,120 9,020 31,204 26,388
-------- ------- -------- --------
Income (loss) before provision for income taxes,
and extraordinary item......................... (12,702) (1,248) 15,932 11,710
Income tax expense (benefit)..................... (5,120) 1,693 1,243 9,468
-------- ------- -------- --------
Income (loss) before extraordinary item.......... (7,582) (2,941) 14,689 2,242
Extraordinary loss from early extinguishment of
debt, net of income tax benefit of $1,425...... -- -- -- (2,325)
-------- ------- -------- --------
Net income (loss)................................ $ (7,582) $(2,941) $ 14,689 $ (83)
======== ======= ======== ========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
UNITED INDUSTRIES CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
2000 1999
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 14,689 $ (83)
Loss from early extinguishment of debt.................. -- 3,750
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Non cash reduction of capital lease obligation........ (1,182) --
Deferred compensation................................. -- 2,700
Depreciation and amortization......................... 4,088 3,468
Recapitalization transaction fees..................... -- 10,690
Amortization of deferred financing fees............... 1,779 1,493
Provision for deferred income tex expense............. 1,243 8,043
Changes in assets and liabilities:
Increase in accounts receivable..................... (12,211) (15,575)
Decrease in inventories............................. 21,444 5,457
Decrease in prepaid expenses........................ 835 820
Decrease in accounts payable and accrued expenses... (13,437) (3,649)
Increase in Dursban related expenses................ 7,479 --
Decrease in other assets............................ (75) (413)
Other, net.......................................... -- 188
-------- ---------
Net cash provided by operating activities......... 24,652 16,889
Investing activities:
Purchase of equipment and leasehold improvements.......... (3,175) (1,499)
-------- ---------
Net cash used for investing activities............ (3,175) (1,499)
Financing activities:
Redemption of treasury stock.............................. (12,175) (337,896)
Transaction costs related to redemption of treasury
stock................................................... -- (11,378)
Recapitalization transactions with affiliate.............. -- (5,700)
Issuance of common stock.................................. -- 1,990
Shareholder equity contribution........................... -- 8,425
Debt issuance costs....................................... (924) (19,271)
Proceeds from the issuance of short-term debt............. 15,000 520,205
Payments on debt.......................................... (6,232) (160,162)
Repayment of note receivable from employee................ -- 250
-------- ---------
Net cash used for financing activities............ (4,331) (3,537)
Net increase in cash and cash equivalents................... 17,146 11,853
Cash and cash equivalents - beginning of period............. -- --
-------- ---------
Cash and cash equivalents - end of period................... $ 17,146 $ 11,853
======== =========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions for Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting principles
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for any quarter are not necessarily indicative of the results for any
other quarter or for the full year. These statements should be read in
conjunction with the financial statements and notes thereto included in the
annual report on Form 10-K of United Industries Corporation (the "Company") for
the year ended December 31, 1999. Certain balance sheet accounts have been
reclassified from the September 30, 1999 and December 31, 1999 balance sheets in
order to provide a consistent comparison with the September 30, 2000 balance
sheet.
NOTE 2--RECAPITALIZATION OF THE COMPANY AND NON-RECURRING CHARGES
On January 20, 1999, pursuant to a Recapitalization agreement with UIC
Holdings, L.L.C. (the "Equity Investor"), which is owned by Thomas H. Lee Equity
Fund IV, L.P. ("THL Fund IV" and, together with its affiliates, the "THL
Parties"), the Company was recapitalized (the "Recapitalization") in a
transaction in which: (i) the Equity Investor purchased common stock from the
Company's existing stockholders for approximately $254,700; (ii) the Company's
senior managers purchased common stock from the Company's existing stockholders
for approximately $5,700; and (iii) the Company used the net proceeds of a
senior subordinated facility (the "Senior Subordinated Facility") and borrowings
under a Senior Credit Facility (the "Senior Credit Facility") to redeem a
portion of the common stock held by the Company's existing stockholders.
Following the Recapitalization, the Equity Investor owned approximately 91.9% of
the Company's issued and outstanding common stock, the existing stockholders
retained approximately 6.0% and the Company's senior managers owned
approximately 2.1%. On January 20, 1999, the total transaction value of the
Recapitalization was approximately $652,000, including related fees and
expenses, and the implied total equity value following the Recapitalization was
approximately $277,000. The total consideration paid to redeem the Company's
common stock was subject to both upward and downward adjustments based on the
Company's working capital on the date of the Recapitalization and excess taxes
of certain stockholders arising from the Company's Section 338(h)(10) election.
In December 1999, the Company recorded a $7,200 charge to equity to finalize the
costs associated with the Recapitalization increasing the total transaction
value to $659,200.
On January 20, 1999, the Recapitalization was funded by: (i) $225,000 of
borrowings under the Senior Credit Facility; (ii) $150,000 of borrowings under
the Senior Subordinated Facility; (iii) $254,700 equity investment by the THL
Parties through the Equity Investor; (iv) $5,700 equity investment by the
Company's senior management team; and (v) equity retained by the Company's
existing stockholders having an implied fair market value of approximately
$16,600.
The Recapitalization was accounted for as a leveraged recapitalization,
which had no impact on the Company's historical basis of assets and liabilities
for financial reporting purposes.
During 1999, the Company recorded $31,312 in fees and expenses associated
with the Recapitalization. The total fees and expenses consist of: (i) fees and
expenses related to the debt and
5
<PAGE>
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 2--RECAPITALIZATION OF THE COMPANY AND NON-RECURRING CHARGES (CONTINUED)
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>
DEBT EQUITY 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 the first nine months of 1999, the Company recorded various
non-recurring charges as follows: (i) change of control bonuses to some members
of senior management totaling $8,645, which were contractually required as a
result of the Recapitalization (senior management reinvested $2,700 of their
change in control bonuses in the Company's common stock through a Grantor
Trust); (ii) $1,100 to cost of goods sold for the write-off of its "Citri-Glow"
candle inventory (the Company discontinued this product line during 1999 and
chose to dispose of the inventory by selling it through discount channels at
prices below cost); and (iii) $900 related to deductions taken by customers for
advertising and promotional spending in excess of contractual obligations for
which the Company elected not to pursue collection.
NOTE 3--COMMON STOCK AND STOCK SPLIT
On January 20, 1999, the Company's Board of Directors declared an
83,378.37838 to 1 stock split and increased the Company's authorized capital to
65,000 shares, of which 32,500 have been designated as Class A Voting Common
Stock and 32,500 have been designated as Class B Non-Voting Common Stock. As of
January 20, 1999, there were 27,600 shares of Class A Voting Common Stock
outstanding and 27,600 shares of Class B Non-Voting Common Stock outstanding. In
conjunction with the stock split, the Company's board of directors reduced the
par value of both the Class A Voting shares and Class B Non-Voting shares to
$0.01 per share.
6
<PAGE>
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 4--INVENTORIES
Inventories are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
2000 1999 1999
-------------- -------------- -------------
<S> <C> <C> <C>
Raw materials.......................................... $ 7,715 $ 5,899 $ 9,916
Finished goods......................................... 25,071 30,919 44,149
Allowance for obsolete and slow-moving inventory....... (987) (831) (822)
------- ------- -------
Total inventories...................................... $31,799 $35,987 $53,243
======= ======= =======
</TABLE>
NOTE 5--EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Equipment and leasehold improvements, net are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
2000 1999 1999
-------------- -------------- -------------
<S> <C> <C> <C>
Machinery and equipment................................ $27,514 $25,763 $26,791
Office furniture and equipment......................... 10,227 9,182 9,606
Automobiles, trucks and aircraft....................... 6,412 9,574 9,573
Leasehold improvements................................. 6,985 6,834 6,848
------- ------- -------
51,138 51,353 52,818
Less: accumulated depreciation......................... 25,267 23,786 24,958
------- ------- -------
$25,871 $27,567 $27,860
======= ======= =======
</TABLE>
NOTE 6--OTHER ASSETS
Other assets are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
2000 1999 1999
-------------- -------------- -------------
<S> <C> <C> <C>
Goodwill............................................... $ 7,988 $ 7,988 $ 7,988
Accumulated amortization............................... (2,130) (1,909) (1,964)
------- ------- -------
5,858 6,079 6,024
------- ------- -------
Deferred financing fees................................ 17,108 15,534 16,184
Accumulated amortization............................... (3,770) (1,506) (1,991)
------- ------- -------
13,338 14,028 14,193
------- ------- -------
Other.................................................. 610 911 653
------- ------- -------
Total other assets..................................... $19,806 $21,018 $20,870
======= ======= =======
</TABLE>
7
<PAGE>
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 7--ACCRUED EXPENSES
Accrued expenses are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
2000 1999 1999
-------------- -------------- -------------
<S> <C> <C> <C>
Recapitalization costs................................. $ -- $ 5,800 $13,000
Advertising and promotional............................ 8,009 10,150 4,799
Dursban................................................ 7,479 -- --
Interest............................................... 3,782 -- 3,840
Cash overdraft......................................... -- -- 2,078
Severance charges...................................... 952 1,115 1,805
Settlement charges and litigation...................... -- 1,200 114
Other.................................................. 2,827 1,611 1,828
------- ------- -------
Total accrued expenses................................. $23,049 $19,876 $27,464
======= ======= =======
</TABLE>
NOTE 8--LONG-TERM DEBT AND CREDIT FACILITIES
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
2000 1999 1999
-------------- -------------- -------------
<S> <C> <C> <C>
Senior Credit Facility:
Term loan A.......................................... $ 57,500 $ 65,000 $ 62,500
Term loan B.......................................... 147,375 148,500 148,125
Revolving credit facility.............................. 15,000 -- --
9 7/8% Series B Registered Senior Subordinated Notes... 150,000 150,000 150,000
-------- -------- --------
369,875 363,500 360,625
Less portion due within one year....................... (26,500) (11,500) (11,500)
-------- -------- --------
Total long-term debt net of current portion............ $343,375 $352,000 $349,125
======== ======== ========
</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"); (ii) a $75,000 term loan
facility ("Term Loan A"); and (iii) a $150,000 term loan facility ("Term Loan
B"). The Revolving Credit Facility and Term Loan A matures on January 20, 2005,
and Term Loan B matures on January 20, 2006.
The Revolving Credit Facility is subject to a clean-down period during which
the aggregate amount outstanding under the Revolving Credit Facility shall not
exceed $10,000 for 30 consecutive days occurring during the period between
August 1 and November 30 in each calendar year. In 2000, the actual clean-down
period began on August 2. On September 30, 2000, $15,000 was outstanding under
the $110,000 revolving credit facility. There were no compensating balance
requirements for the $110,000 revolving credit facility at September 30, 2000.
8
<PAGE>
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 8--LONG-TERM DEBT AND CREDIT FACILITIES (CONTINUED)
The principal amount of Term Loan A is to be repaid in twenty-three
consecutive quarterly installments commencing March 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 March 30, 1999 with a final installment due
January 20, 2006. $1,500 will be paid in each of the first six years and
$141,000 will be payable in year seven.
The Senior Credit Facility agreement contains restrictive affirmative,
negative and financial covenants. Affirmative and negative covenants put
restrictions on levels of investments, indebtedness, insurance and capital
expenditures. Financial covenants require the maintenance of certain financial
ratios at defined levels. At December 31, 1999, the Company was not in
compliance with certain financial covenants. On January 24, 2000 the Senior
Credit Facility agreement was amended to provide new provisions for financial
covenant requirements and a waiver of the covenant requirements at December 31,
1999. The amendment contains provisions for the increase in interest rates upon
reaching certain maximum leverage ratios. As part of the amended agreement, the
Company paid bank fees of $862, which were reflected as deferred financing fees
in January 2000 and will be amortized over the life of the debt as interest
expense. At September 30, 2000, the Company was not in compliance with certain
financial covenants. See subsequent event footnote.
Under the January 24, 2000 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 6.62% at September 30, 2000.
The Senior Credit Facility may be prepaid at any time in whole or in part
without premium or penalty. During 1999, principal payments on Term Loans A and
B of $12,500 and $1,875, respectively, were paid, which included optional
principal prepayments of $5,000 and $675 on Term Loan A and Term Loan B,
respectively. According to the Senior Credit Facility agreement, each prepayment
on Term Loan A and Term Loan B can be applied to the next principal repayment
installments. In the nine months ended September 30, 2000, principal payments on
Term Loans A and B of $5,000 and $750, respectively, were paid. The optional
principal payments were applied September 2000.
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 Company's previous Senior Subordinated Facility was redeemed through the
issuance of 9 7/8% Senior Subordinated Notes due April 1, 2009. In connection
with this redemption, the Company incurred an extraordinary loss from the early
extinguishment of debt, net of tax of $2,325. In the fourth quarter of 1999, the
Company exchanged the 9 7/8% Senior Subordinated Notes for new notes registered
under the Securities Act of 1933. The new notes are substantially identical to
the old notes.
The carrying amount of the Company's obligation under the Senior Credit
Facility approximates fair value because the interest rates are based on
floating interest rates identified by reference to market rates.
9
<PAGE>
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 8--LONG-TERM DEBT AND CREDIT FACILITIES (CONTINUED)
Aggregate maturities under the Senior Credit Facility (excluding the
revolving credit facility) and the Senior Subordinated Notes are as follows:
<TABLE>
<S> <C>
2000 Remainder of year...................................... $ 2,875
2001........................................................ 11,500
2002........................................................ 11,500
2003........................................................ 17,125
2004........................................................ 18,375
Thereafter.................................................. 293,500
--------
$354,875
========
</TABLE>
The company entered into a capital lease agreement in March 1999 for $9,215,
which was cancelled in May of 2000. A new capital lease agreement was entered
into in March of 2000 for $5,869. The effect of the two capital lease
transactions was a non-cash gain of $1,182.
NOTE 9--COMMITMENTS
The Company leases the majority of its operating facilities from a company
owned by a significant shareholder of the Company under various operating leases
expiring December 31, 2010. The Company has options to terminate the leases on a
year-to-year basis by giving advance notice of at least twelve months. The
Company leases a portion of its operating facilities from the same company under
a sublease agreement expiring on December 31, 2005 with minimum annual rentals
ranging from $578 to $653. The Company has two five-year options to renew this
lease, beginning January 1, 2006. Management believes that the terms and
expenses associated with the related party leases described above are similar to
those negotiated by unrelated parties at arm's length.
The Company is obligated under other operating leases for use of warehouse
space. The leases expire at various dates through December 1, 2006. Several of
the leases provide as many as five five-year options to renew.
NOTE 10--CONTINGENCIES
The Company is involved in litigation and arbitration proceedings in the
normal course of business that assert product liability and other claims. The
Company is contesting all such claims. When it appears probable in management's
judgment that the Company will incur monetary damages or other costs in
connection with such claims and proceedings, and such costs can be reasonably
estimated, appropriate liabilities are recorded in the financial statements and
charges are made against earnings.
Management believes the possibility of a material adverse effect on the
Company's financial position, results of operations and cash flows from the
claims and proceedings described above is remote.
10
<PAGE>
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 11--DURSBAN RELATED EXPENSES
On September 7, 2000 the US Environmental Protection Agency and
manufacturers of chlorpyrifos (the active ingredient in Dursban pesticidal
products) entered into a voluntary agreement that provides for phasing out most
nonresidential uses and virtually all residential uses of Dursban. Formulation
of new Dursban products intended for residential use must cease by December 1,
2000, and formulators can no longer sell such products to retailers after
February 1, 2001. Retailers will no longer be able to sell Dursban products
after December 31, 2001.
The Company has assessed the potential financial impact of the Dursban
agreement on its operations. A charge of $8,000 was booked in September of 2000
for costs associated with this agreement. The Company currently has a
replacement chemical for the active ingredient in Dursban, which chemical is
already being used in production of new pesticidal products.
Details of this charge and the accrual balances remaining are as follows:
<TABLE>
<CAPTION>
THIRD
QUARTER AMOUNTS UTILIZED THIRD QUARTER
2000 CHARGE DURING THIRD QUARTER 2000 ACCRUAL BALANCE
----------- -------------------- --------------------
<S> <C> <C> <C>
Returns..................................... $5,415 $ 68 $5,347
Inventory................................... 1,370 -- 1,370
Disposal and related costs.................. 1,215 453 762
------ ---- ------
$8,000 $521 $7,479
====== ==== ======
</TABLE>
NOTE 12--SUBSEQUENT EVENT
On November 9, 2000, the Senior Credit Facility was amended to provide new
financial covenants and a waiver of certain covenants at September 30, 2000. As
a condition to the effectiveness of this amendment and waiver, the Company
agreed to the following items:
1. The Company agreed to terminate $30,000 of the unused portion of the
Revolving Credit Facility under the credit agreement, thereby reducing the
Revolving Credit Facility from $110,000 to $80,000.
2. The Company agreed to sell Common Stock and/or permitted Preferred Stock to
the Equity Investors for net cash proceeds equal to $15,000, which net cash
proceeds have been applied to the prepayment of Term Loan advances.
3. Interest rate increase will range from 25 to 75 basis points higher than
previous Revolving Credit Facility.
On November 8, 2000, the Company Board of Directors, authorized the creation
of 15,000 shares of Class A Preferred Stock to be sold to UIC Holdings LLC at a
price of $1,000 per share.
11
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute "forward-looking statements
within the meaning of Section27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Act of 1934, as amended." All statements other
than statements of historical facts included in this report regarding the
Company's financial position, business strategy, budgets and plans and
objectives of management for future operations are forward-looking statements.
Although the management of the Company believes that the expectations reflected
in such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company, or
industry results to be materially different from those contemplated or
projected, forecasted, estimated or budgeted in or expressed or implied by such
forward-looking statements. Such factors include, among others, the risk and
other factors set forth under "Risk Factors" in the Company's Registration
Statement on Form S-4 filed with the Commission and in the Company's Annual
Report on Form 10-K for 1999 as well as the following: general economic and
business conditions; governmental regulations; industry trends; the loss of
major customers or suppliers; cost and availability of raw materials; changes in
business strategy or development plans; availability and quality of management;
and availability, terms and deployment of capital.
OVERVIEW
The Company is the leading manufacturer and marketer of value-oriented
branded products for the consumer lawn and garden pesticide and household
insecticide markets in the United States. The Company manufactures and markets
one of the broadest lines of pesticides in the industry, including herbicides
and indoor and outdoor insecticides, as well as insect repellents and
water-soluble fertilizers, under a variety of brand names. The Company believes
that the key drivers of growth for the $2.7 billion consumer lawn and garden
pesticide and household insecticide retail markets include: (a) the aging of the
United States population; (b) growth in the home improvement center and mass
merchandiser channels; and (c) shifting consumers preferences' toward
value-oriented branded products.
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the historical
financial information included in the unaudited quarterly financial statements
and the related notes to the unaudited quarterly financial statements.
RESULTS OF OPERATIONS
The following discussion regarding results of operations refers to net
sales, cost of goods sold, advertising and promotion expense and selling,
general and administrative expenses which the Company defines as follows:
- Net sales are gross sales of products sold to customers upon shipment of
product less any customer discounts from list price and customer returns.
- Cost of goods sold includes chemicals, container and packaging material
costs as well as direct labor, outside labor, manufacturing overhead and
freight.
- Advertising and promotion expense includes the cost of advertising of
products through national and regional media as well as the advertising
and promotion of products through cooperative programs with retailers.
12
<PAGE>
- Selling, 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 statement of operations to net sales for the three months ended
September 30, 2000 and September 30, 1999 (percentages are calculated based on
actual data, but columns may not add due to rounding):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Net Sales:
Value brands.............................................. 74.7% 77.8%
Opening price point brands................................ 25.3 22.2
----- -----
Total net sales............................................. 100.0 100.0
Operating costs and expenses:
Cost of goods sold........................................ 52.0 47.1
Advertising and promotion expenses........................ 7.9 7.7
Selling, general and administrative expenses.............. 29.5 30.6
Recapitalization transaction fees......................... -- --
Change of control bonuses................................. -- --
Severance charge.......................................... -- --
Dursban related expenses.................................. 15.7 --
Non-recurring litigation charges.......................... -- --
----- -----
Total operating costs and expenses.......................... 105.1 85.4
----- -----
Operating income (loss)..................................... (5.1) 14.6
Interest expense............................................ 19.8 16.8
----- -----
Income (loss) before provision for income taxes and
extraordinary item........................................ (24.9) (2.2)
Income tax expense (benefit)................................ (10.0) 3.2
----- -----
Loss before extraordinary item.............................. (14.9)% (5.4)%
===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
NET SALES. Net sales decreased 4.6% to $51.1 million for the three months
ended September 30, 2000 from $53.5 million for the three months ended
September 30, 1999. This decrease was driven by a combination of factors
including:
- Lost sales opportunity due to voluntary phase-out of Dursban between EPA
and manufacturer.
- Extreme weather conditions in our major markets in the United States.
- Decline in value brand sales due to the elimination of item listings at
Home Depot, partially offset by gains at other customers.
- Retail inventory balancing issues affecting shipments of Spectracide
Terminate-TM-.
Net sales of the Company's value brands decreased 8.4% to $38.1 million for the
three months ended September 30, 2000 from $41.7 million for the three months
ended September 30, 1999. Value brand sales to Home Depot were impacted by Home
Depot's strategy to move more listings to opening price point brands, as well as
overall category sales performed below market trends at Home Depot. The extreme
drought in the South and Southwest combined with unusually wet weather in the
Northeast severely impacted customer point-of-sales in all seasonal goods.
Spectracide Terminate-TM- shipments
13
<PAGE>
were impacted by high retail inventory levels. However, retail point-of-sale
trend continues to show improved consumer acceptance. Net sales of opening price
point brands increased 9.0% to $12.9 million for the three months ended
September 30, 2000 from $11.9 million for the three months ended September 30,
1999. The increase was driven primarily by an increase in opening price point
listings at Home Depot and continued same store and new store growth at Lowes.
GROSS PROFIT. Gross profit decreased 13.4% to $24.5 million for the three
months ended September 30, 2000, compared to $28.3 million for the three months
ended September 30, 1999. As a percentage of sales, gross profit decreased to
48.0% as compared to 52.9% for the three months ended September 30, 1999. The
decrease in gross profit as a percentage of sales was the result of a change in
sales mix to slightly lower margin products, offset by lower material costs
primarily driven by supplier rebates.
ADVERTISING AND PROMOTION EXPENSES. Advertising and promotion expenses
decreased 2.3% to $4.0 million for the three months ended September 30, 2000,
compared to $4.1 million for the three months ended September 30, 1999. As a
percentage of net sales, advertising and promotion expenses increased to 7.9%
for the three months ended September 30, 2000 from 7.7% for the three months
ended September 30, 1999. The reduction in advertising and promotion expense is
due to the shift from media spending to supporting in store retail selling
programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 8.2% to $15.1 million for the three months
ended September 30, 2000 from $16.4 million for the three months ended
September 30, 1999. As a percentage of net sales, selling, general and
administrative expenses decreased to 29.5% for the three months ended
September 30, 2000 from 30.7% for the three months ended September 30, 1999. The
overall decrease in selling, general and administrative expenses was primarily
due to reduction of marketing and sales expenses related to sales volume
decrease and other cost reduction efforts.
DURSBAN RELATED EXPENSES. The Company recorded a non-recurring expense of
$8.0 million as a result of the EPA and manufacturers voluntary phase-out of the
active chemical in the Company's products.
OPERATING INCOME (LOSS). Operating income (loss) decreased to $(2.6)
million for the three months ended September 30, 2000 from $7.8 million for the
three months ended September 30, 1999. As a percentage of net sales, operating
income decreased to (5.1)% for the three months ended September 30, 2000 from
14.5% for the three months ended September 30, 1999.
INCOME TAX EXPENSE. For the three months ended September 30, 2000, the
Company's effective income tax rate reflects the estimated utilization of the
goodwill deduction in fiscal year 2000 and a reduction in the taxable income
estimate for fiscal year 2000 taxable income. The goodwill deduction is related
to the step-up in tax basis in conjunction with the Recapitalization.
14
<PAGE>
The following table sets forth the percentage relationship of certain items
in the Company's income statement to net sales for the nine months ended
September 30, 2000 and September 30, 1999 (percentages are calculated based on
actual data, but columns may not add due to rounding):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Net Sales:
Value brands.............................................. 75.7% 80.2%
Opening price point brands................................ 24.3 19.8
----- -----
Total net sales............................................. 100.0 100.0
Operating costs and expenses:
Cost of goods sold........................................ 50.4 48.9
Advertising and promotion expenses........................ 8.9 10.3
Selling, general and administrative expenses.............. 19.8 19.3
Recapitalization transaction fees......................... -- 3.8
Change of control bonuses................................. -- 3.1
Severance charge.......................................... -- 0.6
Dursban related expenses.................................. 3.0 --
Non-recurring litigation charges.......................... -- 0.5
----- -----
Total operating costs and expenses.......................... 82.1 86.5
----- -----
Operating income............................................ 17.9 13.5
Interest expense............................................ 11.9 9.4
----- -----
Income before provision for income taxes and extraordinary
item...................................................... 6.1 4.1
Income tax expense.......................................... 0.5 3.3
----- -----
Loss before extraordinary item.............................. 5.6% 0.8%
===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
NET SALES. Net sales decreased 6.7% to $263.1 million for the nine months
ended September 30, 2000 from $281.8 million for the nine months ended
September 30, 1999. This decrease was driven by a combination of factors
including:
- Extreme weather conditions in our major markets in the United States.
- Decline in value brand sales due to the elimination of item listings at
Home Depot, partially offset by gains at other customers.
- Retail inventory balancing issues affecting shipments of Spectracide
Terminate-TM-.
- Lost sales opportunity due to voluntary phase-out of Dursban between EPA
and manufacturer.
- 1999 Spectracide Pro-Registered Trademark- sales reflected initial sell in
to stock retail shelves.
Net sales of the Company's value brands decreased 11.9% to $199.2 million for
the nine months ended September 30, 2000 from $226.1 million for the nine months
ended September 30, 1999. Value brand sales to Home Depot were impacted by Home
Depot's strategy to move more listings to opening price point brands as well as
overall category sales performed below market trends at Home Depot. The declines
at Home Depot were partially offset by the continual same store and new store
growth at Lowes. The extreme drought in the South and Southwest combined with
unusually wet weather in the Northeast severely impacted customer Point-of-Sales
in all seasonal goods. Spectracide Terminate-TM- shipments were impacted by high
retail inventory levels. However, retail point-of-sale trends continue
15
<PAGE>
to show improved consumer acceptance. Spectracide Pro's net sales decreased
38.6% to $3.6 million for the nine months ended September 30, 2000 from
$5.9 million for the nine months ended September 30, 1999, as the first half of
1999 reflected the initial sell in to stock retail shelves. Net sales of opening
price point brands increased 14.8% to $63.9 million for the nine months ended
September 30, 2000 from $55.7 million for the nine months ended September 30,
1999. The increase was driven by an increase in opening price point listings at
Home Depot and continued same store and new store growth at Lowes.
GROSS PROFIT. Gross profit decreased 9.2% to $130.6 million for the nine
months ended September 30, 2000 compared to $143.9 million for the nine months
ended September 30, 1999. As a percentage of sales, gross profit decreased to
49.6% as compared to 51.1% for the nine months ended September 30, 1999. The
minimal decrease in gross profit as a percentage of sales was the result of a
change in sales mix to slightly lower margin products, offset by lower material
costs primarily driven by supplier rebates.
ADVERTISING AND PROMOTION EXPENSES. Advertising and promotion expenses
decreased 19.1% to $23.5 million for the nine months ended September 30, 2000,
compared to $29.0 million for the nine months ended September 30, 1999. As a
percentage of net sales, advertising and promotion expenses decreased to 8.9%
for nine months ended September 30, 2000 from 10.3% for the nine months ended
September 30, 1999. The reduction in advertising and promotion expense is due to
the shift from media spending to supporting in store retail selling programs.
Additionally, a $0.9 million charge was taken in 1999 for customer deductions
taken in excess of contractual obligations, which the Company elected not to
pursue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 4.3% to $52.0 million for the nine months
ended September 30, 2000 from $54.3 million for the nine months ended
September 30, 1999. As a percentage of net sales, selling, general and
administrative expenses increased to 19.8% for the nine months ended
September 30, 2000 from 19.3% for the nine months ended September 30, 1999. The
overall decrease in selling, general and administrative expenses was primarily
due to a reduction of marketing and sales expenses related to sales volume
decrease, termination of a capital lease and other cost reduction efforts.
RECAPITALIZATION TRANSACTION FEES. No charges were recorded for the nine
months ended September 30, 2000. For the nine months ended September 30, 1999,
the Company recorded a charge of $10.7 million for recapitalization transaction
fees. As of September 30, 2000, the Company recorded $32.2 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.
CHANGE OF CONTROL BONUSES. No charges were recorded for the nine months
ended September 30, 2000. For the nine months ended September 30, 1999, the
Company recorded charges for change of control bonuses paid to some members of
senior management amounting to $8.6 million, which were contractually required
as a result of the Recapitalization.
SEVERANCE CHARGES. No charges were recorded for the nine months ended
September 30, 2000. For the nine months ended September 30, 1999, the Company
recorded severance charges of $1.6 million as a result of the Company's
President and Chief Executive Officer terminating employment with the Company.
16
<PAGE>
NON-RECURRING LITIGATION CHARGES. No charges were recorded for the nine
months ended September 30, 2000. For the nine months ended September 30, 1999,
the Company took a charge of $1.5 million to primarily reserve for the expected
cost of an adverse judgement on a counterclaim filed by defendants in the case
of United Industries Corporation vs. John Allman, Craig Jackman et al. The
Company alleged that defendants breached contracts by failing to perform various
services. Defendants counterclaimed for sales commissions allegedly earned by
them but not paid by the Company. On July 29, 1999, the Company paid
$0.9 million in liquidating damages and $0.1 million in past commissions. The
remaining amounts accrued in connection with the $1.5 million charge were
primarily used to cover legal cost associated with the claim.
DURSBAN RELATED EXPENSES. The Company recorded a non-recurring expense of
$8.0 million as a result of the EPA and manufacturers voluntary phase-out of the
active chemical in the Company's products.
OPERATING INCOME. Operating income increased to $47.1 million for the nine
months ended September 30, 2000 from $38.1 million for the nine months ended
September 30, 1999. As a percentage of net sales, operating income increased to
17.9% for the nine months ended September 30, 2000 and a reduction in the
estimates for fiscal year 2000 taxable income. Operating income was 13.5% for
the nine months ended September 30, 1999. Operating income in 1999 was primarily
negatively impacted by recapitalization transaction fees of $10.7 million and
change of control bonuses as a result of the recapitalization of $8.6 million.
INCOME TAX EXPENSE. For the nine months ended September 30, 2000, the
Company's effective income tax rate reflects the estimated utilization of the
goodwill deduction in fiscal year 2000. The goodwill deduction is related to the
step-up in tax basis in conjunction with the Recapitalization. For the nine
months ended September 30, 1999, income tax expense included the one-time impact
of the conversion of the Company from an "S" corporation to a "C" corporation of
$2.1 million. This conversion was in conjunction with the Recapitalization.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has utilized internally generated funds and
borrowings under credit facilities to meet ongoing working capital and capital
expenditure requirements. As a result of the Recapitalization, the Company has
significantly increased cash requirements for debt service relating to the
Company's notes and Senior Credit Facility. As of December 31, 1999, the Company
had total debt and capital lease obligations outstanding of $369.3 million. As
of September 30, 2000, the Company had total debt and capital lease obligations
outstanding of $375.5 million. The Company will rely on internally generated
funds and, to the extent necessary, borrowings under the Company's Revolving
Credit Facility to meet liquidity needs.
The Company's Senior Credit Facility consists of:
- The September 30, 2000, $110.0 million Revolving Credit Facility, under
which no borrowings were outstanding at the closing of the
Recapitalization. As of September 30, 2000, $15.0 million was outstanding.
The amount is a current liability and will be paid by funds from
operations;
- The $75.0 million Term Loan A ($57.5 million outstanding at September 30,
2000); and
- The $150.0 million Term Loan B ($147.4 million outstanding at
September 30, 2000).
The Company's Revolving Credit Facility and the Term Loan A matures on
January 20, 2005, and the Term Loan B matures on January 20, 2006. The Revolving
Credit Facility is subject to a clean-down period during which the aggregate
amount outstanding under the revolving credit facility shall not exceed
$10.0 million for 30 consecutive days occurring during the period August 1 and
November 30 in a calendar year.
17
<PAGE>
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 an increase in interest rates upon reaching certain maximum leverage ratios.
As part of the amended agreement, the Company paid bank fees of $0.9 million,
which were reflected as deferred financing fees in January 2000 and will be
amortized over the life of the debt as interest expense.
On November 9, 2000, the Senior Credit Facility was amended to provide new
financial covenants and a waiver of certain covenants at September 30, 2000. As
a condition to the effectiveness of this amendment and waiver, the Company
agreed to the following items:
1. The Company agreed to terminate $30,000 of the unused portion of the
Revolving Credit Facility under the credit agreement, thereby reducing the
Revolving Credit Facility from $110,000 to $80,000.
2. The Company agreed to sell Common Stock and/or permitted Preferred Stock to
the Equity Investors for net cash proceeds equal to $15,000, which net cash
proceeds have been applied to the prepayment of Term Loan advances.
3. Interest rate increase will range from 25 to 75 basis points higher than
previous Revolving Credit Facility.
On November 8, 2000, the Company Board of Directors, authorized the creation
of 15,000 shares of Class A Preferred Stock to be sold to UIC Holdings LLC at a
price of $1,000 per share.
The Company's previous Senior Subordinated Facility was redeemed through the
issuance of 9 7/8% Senior Subordinated Notes due April 1, 2009. In connection
with this redemption, the Company incurred an extraordinary loss from the early
extinguishment of debt, net of tax, of $2.3 million. In the fourth quarter of
1999, the Company exchanged the 9 7/8% Senior Subordinated Notes for new notes
registered under the Securities Act of 1933. The new notes are substantially
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. Net cash provided by operating activities was $24.7 million and
$16.9 million for the nine months ended September 30, 2000 and 1999,
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) during the first half of the
year, with the second and third quarters being significant cash collection
periods.
Capital expenditures are related to the enhancement of the Company's
existing facilities and the construction of additional production and
distribution capacity. Cash used for capital expenditures was $3.2 million and
$1.5 million for the nine months ended September 30, 2000 and 1999,
respectively. In addition, the Company entered into a capital lease agreement in
March 2000 for $5.9 million. Cash used for capital expenditures for the
remainder of 2000 is expected to be less than $5.0 million.
Principal on 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 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. For the nine months ended September 30, 2000,
principal payments on Term Loans A and B of $5,000 and $750, 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 two years. However, the
Company cannot ensure that sufficient cash flow will be generated from
operations
18
<PAGE>
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.
IMPACT OF SEPTEMBER 7, 2000 DURSBAN AGREEMENT
On September 7, 2000, the U.S. Environmental Protection Agency and
manufacturers of chlorpyrifos (the active ingredient in Dursban pesticidal
products) entered into a voluntary agreement that provides for phasing out most
nonresidential uses and virtually all residential uses of Dursban. Formulation
of new Dursban products intended for residential use must cease by December 1,
2000, and formulators can no longer sell such products to retailers after
February 1, 2001. Retailers will no longer be able to sell Dursban products
after December 31, 2001.
The Company has assessed the potential financial impact of the Dursban
agreement on its operations. A charge of $8,000 was recorded in September of
2000 for costs associated with this agreement. The Company currently has
replacement chemicals for Dursban, which are currently being used in production
of new pesticidal products.
SIGNIFICANT CUSTOMER
During the third quarter, Kmart notified the Company that the contract to
manufacture KGro private label products will not be renewed. Historically, the
KGro business has had low margins and high operating costs. The Company does not
expect this development to have a significant impact on EBITDA for 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE
The Company is exposed to market risks relating to changes in interest
rates. The Company does not enter into derivatives or other financial
instruments for trading or speculative purposes. The Company enters into
financial instruments to manage and reduce the impact of changes in interest
rates.
The Company manages interest rate risk by balancing the amount of fixed and
variable debt. For fixed rate debt, interest rate changes affect the fair market
value of such debt but do not impact earnings or cash flows. Conversely, for
variable rate debt, interest rate changes generally do not affect the fair
market value of such debt but do impact future earnings and cash flows, assuming
other factors are held constant. At September 30, 2000, variable rate debt was
$219.9 million.
Interest on Term Loan A and Term Loan B ranges from 200 to 375 basis points
above LIBOR depending on certain financial ratios. LIBOR was 6.62% as of
September 30, 2000.
19
<PAGE>
EXCHANGE RATE
The Company does not use derivative instruments to hedge against foreign
currency exposures related to transactions denominated in currencies other than
the Company's functional currency. Substantially all foreign currency
transactions are denominated in United States dollars.
COMMODITY PRICES
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 the Company's exposure to
price changes in commodity and specialty chemicals.
20
<PAGE>
PART II
OTHER INFORMATION
THERE IS NO INFORMATION REQUIRED TO BE REPORTED UNDER ANY ITEMS.
ITEM 1. LEGAL PROCEEDINGS. The Company has no reportable legal proceedings in
the current period.
ITEM 2. CHANGES IN SECURITIES. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were
submitted.
ITEM 5. OTHER INFORMATION.
On November 9, 2000, the Senior Credit Facility was amended to provide new
financial covenants and a waiver of certain covenants at September 30, 2000. As
a condition to the effectiveness of this amendment and waiver, the Company
agreed to the following items:
1. The Company agreed to terminate $30,000 of the unused portion of the
Revolving Credit Facility under the credit agreement, thereby reducing the
Revolving Credit Facility from $110,000 to $80,000.
2. The Company agreed to sell Common Stock and/or permitted Preferred Stock to
the Equity Investors for net cash proceeds equal to $15,000, which net cash
proceeds have been applied to the prepayment of Term Loan advances.
3. Interest rate increase will range from 25 to 75 basis points higher than
previous Revolving Credit Facility.
On November 8, 2000, the Company Board of Directors, authorized the creation
of 15,000 shares of Class A Preferred Stock to be sold to UIC Holdings LLC at a
price of $1,000 per share.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule
(b) Report on Form 8-K
None
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) f 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.
<TABLE>
<S> <C> <C>
UNITED INDUSTRIES CORPORATION
Dated: November 15, 2000 By: /s/ DANIEL J. JOHNSTON
-----------------------------------------
Name: Daniel J. Johnston
Title: Chief Financial Officer
(Duly authorized officer and principal
officer of the registrant)
</TABLE>
22
