<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 JUNE 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 __________
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 August 14, 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
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED INDUSTRIES CORPORATION
BALANCE SHEETS
JUNE 30, 2000, JUNE 30, 1999 AND DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
2000 1999 1999
--------- --------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ -- $ -- $ --
Accounts receivable (less allowance for doubtful accounts
of ($1,609 at June 30, 2000, $2,272 at June 30, 1999
and $1,031 at December 31, 1999)....................... 76,041 77,002 19,165
Inventories.............................................. 38,899 41,111 53,243
Prepaid expenses......................................... 2,924 1,456 3,501
--------- --------- ---------
Total current assets................................... 117,864 119,569 75,909
Equipment and leasehold improvements, net.................. 26,336 28,107 27,860
Deferred income tax........................................ 116,268 109,466 116,268
Other assets............................................... 20,489 20,681 20,870
--------- --------- ---------
Total assets........................................... $ 280,957 $ 277,823 $ 240,907
========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt and capital lease
obligations............................................ $ 11,846 $ 12,152 $ 12,178
Accounts payable......................................... 24,109 27,885 25,507
Accrued expenses......................................... 27,840 33,302 27,464
Short-term borrowings.................................... 21,050 -- --
--------- --------- ---------
Total current liabilities.............................. 84,845 73,339 65,149
Long-term debt............................................. 343,375 360,625 349,125
Capital lease obligations.................................. 5,345 8,298 7,952
Other liabilities.......................................... 11,922 5,384 5,483
--------- --------- ---------
Total liabilities...................................... 445,487 447,646 427,709
Commitments and contingencies (see Notes 9 & 10)
Stockholders' deficit
Common stock............................................. 554 554 554
Additional paid-in capital............................... 126,865 116,392 126,865
Accumulated deficit...................................... (289,249) (283,546) (311,521)
Common stock held in grantor trust....................... (2,700) (2,700) (2,700)
Treasury stock........................................... -- (523) --
--------- --------- ---------
Total stockholders' deficit............................ (164,530) (169,823) (186,802)
--------- --------- ---------
Total liabilities and stockholders' deficit............ $ 280,957 $ 277,823 $ 240,907
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
UNITED INDUSTRIES CORPORATION
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net sales................................. $123,508 $131,690 $212,054 $228,283
-------- -------- -------- --------
Operating costs and expenses:
Cost of goods sold...................... 62,135 64,646 105,971 112,701
Advertising and promotion expenses...... 9,721 13,271 19,468 24,909
Selling, general and administrative
expenses.............................. 17,353 19,586 36,896 37,906
Recapitalization transaction fees....... -- -- -- 10,690
Change of control bonuses............... -- -- -- 8,645
Severance charges....................... -- 1,606 -- 1,606
Non-recurring litigation charges........ -- -- -- 1,500
-------- -------- -------- --------
Total operating costs and expenses.... 89,209 99,109 162,335 197,957
-------- -------- -------- --------
Operating income.......................... 34,299 32,581 49,719 30,326
Interest expense.......................... 10,479 9,462 21,084 17,368
-------- -------- -------- --------
Income before provision for income taxes,
and extraordinary item.................. 23,820 23,119 28,635 12,958
Income tax expense........................ 5,365 5,056 6,363 7,775
-------- -------- -------- --------
Income before extraordinary item.......... 18,455 18,063 22,272 5,183
Extraordinary loss from early
extinguishment of debt, net of income
tax benefit of $1,425................... -- -- -- (2,325)
-------- -------- -------- --------
Net income................................ $ 18,455 $ 18,063 $ 22,272 $ 2,858
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
UNITED INDUSTRIES CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $22,272 $ 2,858
Loss from early extinguishment of debt.................. -- 3,750
Adjustments to reconcile net income (loss) to net cash
provided/(used) for operating activities:
Non cash reduction of capital lease obligation.......... (1,182) --
Deferred compensation................................... -- 2,700
Depreciation and amortization........................... 2,881 2,158
Recapitalization transaction fees....................... -- 10,690
Amortization of deferred financing fees................. 1,140 995
Provision for deferred income tax expense............... 6,363 6,350
Changes in assets and liabilities:
Increase in accounts receivable....................... (56,876) (59,352)
Decrease in inventories............................... 14,344 333
Decrease in prepaid expenses.......................... 577 716
Increase in accounts payable and accrued expenses..... 11,153 24,162
Decrease in other assets.............................. 33 535
Other, net............................................ 77 588
------- --------
Net cash provided/(used) for operating activities... 782 (3,517)
Investing activities:
Purchases of equipment and leasehold improvements......... (2,606) (784)
------- --------
Net cash used for investing activities.............. (2,606) (784)
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....................................... (903) (18,605)
Proceeds from the issuance of debt........................ 21,050 581,760
Payments on debt.......................................... (6,148) (214,545)
Repayment of note receivable from employee................ -- 250
------- --------
Net cash provided by financing activities........... 1,824 4,301
Net increase (decrease) in cash and cash equivalents........ -- --
Cash and cash equivalents--beginning of period.............. -- --
------- --------
Cash and cash equivalents--end of period.................... $ -- $ --
======= ========
</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 U.S. generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included.
Operating results for any quarter are not necessarily indicative of the results
for any other quarter or for the full year. These statements should be read in
conjunction with the financial statements and notes thereto included in the
annual report on Form 10-K of United Industries Corporation (the "Company") for
the year ended December 31, 1999. Certain balance sheet accounts have been
reclassified from the June 30, 1999 and December 31, 1999 balance sheets in
order to provide a consistent comparison with the June 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 equity transactions, including bank commitment
fees and underwriting discounts and commissions;
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)
(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
TRANSACTION
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 six 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>
JUNE 30, JUNE 30, DECEMBER 31,
2000 1999 1999
-------- -------- ------------
<S> <C> <C> <C>
Raw materials................................. $ 7,494 $ 6,584 $ 9,916
Finished goods................................ 32,391 35,687 44,149
Allowance for obsolete and slow-moving
inventory................................... (986) (1,160) (822)
------- ------- -------
Total inventories............................. $38,899 $41,111 $53,243
======= ======= =======
</TABLE>
NOTE 5--EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
2000 1999 1999
-------- -------- ------------
<S> <C> <C> <C>
Machinery and equipment....................... $27,421 $25,375 $26,791
Office furniture and equipment................ 9,784 8,857 9,606
Automobiles, trucks and aircraft.............. 6,290 9,537 9,573
Leasehold improvements........................ 6,956 6,904 6,848
------- ------- -------
50,451 50,673 52,818
Less: accumulated depreciation................ 24,115 22,566 24,958
------- ------- -------
$26,336 $28,107 $27,860
======= ======= =======
</TABLE>
NOTE 6--OTHER ASSETS
Other assets are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
2000 1999 1999
-------- -------- ------------
<S> <C> <C> <C>
Goodwill...................................... $ 7,988 $ 7,988 $ 7,988
Accumulated amortization...................... (2,075) (1,854) (1,964)
------- ------- -------
5,913 6,134 6,024
------- ------- -------
Deferred financing fees....................... 17,087 14,846 16,184
Accumulated amortization...................... (3,131) (986) (1,991)
------- ------- -------
13,956 13,860 14,193
------- ------- -------
Other......................................... 620 687 653
------- ------- -------
Total other assets............................ $20,489 $20,681 $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>
JUNE 30, JUNE 30, DECEMBER 31,
2000 1999 1999
-------- -------- ------------
<S> <C> <C> <C>
Recapitalization costs........................ $ -- $ 5,800 $13,000
Advertising and promotional expenses.......... 11,615 12,091 4,799
Interest expense.............................. 4,109 4,453 3,840
Cash overdraft................................ 6,586 5,205 2,078
Severance charges............................. 1,168 1,306 1,805
Settlement charges and litigation expenses.... -- 2,419 114
Other......................................... 4,362 2,028 1,828
------- ------- -------
Total accrued expenses........................ $27,840 $33,302 $27,464
======= ======= =======
</TABLE>
NOTE 8--LONG-TERM DEBT AND CREDIT FACILITIES
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
2000 1999 1999
-------- -------- ------------
<S> <C> <C> <C>
Senior Credit Facility
Term loan A............................. $ 57,500 $ 72,500 $ 62,500
Term loan B............................. 147,375 149,625 148,125
Revolving credit facility............... 21,050 -- --
9 7/8% Series B Registered Senior
Subordinated Notes........................ 150,000 150,000 150,000
-------- -------- --------
375,925 372,125 360,625
Less portion due within one year............ (32,550) (11,500) (11,500)
-------- -------- --------
Total long-term debt net of current
portion................................... $343,375 $360,625 $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. On June 30, 2000, $21,050 was
outstanding under the $110,000 revolving credit facility. There were no
compensating balance requirements for the $110,000 revolving credit facility at
June 30, 2000.
The principal amount of Term Loan A is to be repaid in twenty-three
consecutive quarterly installments commencing June 30, 1999 with a final
installment due January 20, 2005. $10,000 will be payable in
8
<PAGE>
UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 8--LONG-TERM DEBT AND CREDIT FACILITIES (CONTINUED)
each of the first four years and $17,500 will be repaid in each of the last two
years. The principal amount of Term Loan B is to be repaid in twenty-seven
consecutive quarterly installments commencing June 30, 1999 with a final
installment due January 20, 2006. $1,500 will be paid in each of the first six
years and $141,000 will be payable in year seven.
The Senior Credit Facility agreement contains restrictive affirmative,
negative and financial covenants. Affirmative and negative covenants put
restrictions on levels of investments, indebtedness, insurance and capital
expenditures. Financial covenants require the maintenance of certain financial
ratios at defined levels. At December 31, 1999, the Company was not in
compliance with certain financial covenants. On January 24, 2000 the Senior
Credit Facility agreement was amended to provide new provisions for financial
covenant requirements and a waiver of the covenant requirements at December 31,
1999. The amendment contains provisions for the increase in interest rates upon
reaching certain maximum leverage ratios. As part of the amended agreement, the
Company paid bank fees of $862, which were reflected as deferred financing fees
in January 2000 and will be amortized over the life of the debt as interest
expense. At June 30, 2000, the Company was in compliance with all covenants.
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 6.69%
at June 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 $750 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 six months ended June 30, 2000, principal payments on Term
Loans A and B of $5,000 and $750, respectively, were paid.
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>
Remainder of year 2000............................. $ 5,750
2001............................................... 11,500
2002............................................... 11,500
2003............................................... 17,125
2004............................................... 18,375
Thereafter......................................... 290,625
--------
$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. Five 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 consolidated financial position, results of operations and cash flows
from the claims and proceedings described above is remote.
10
<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 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.
11
<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 income statement to net sales for the three months ended
June 30, 2000 and June 30, 1999 (percentages are calculated based on actual
data, but columns may not add due to rounding):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Net sales:
Value bands........................................... 74.2% 79.1%
Opening price point bands............................. 25.8 20.9
----- -----
Total net sales......................................... 100.0 100.0
Operating costs and expenses
Cost of goods sold.................................... 50.3 49.1
Advertising and operation expenses.................... 7.9 10.1
Selling, general and administrative expenses.......... 14.1 14.9
Recapitalization transaction fees..................... -- --
Change of control bonuses............................. -- --
Severance charge...................................... -- 1.2
Non-recurring litigation charges...................... -- --
----- -----
Total operating costs and expenses...................... 72.2 75.3
Operating income........................................ 27.8 24.7
Interest expense........................................ 8.5 7.2
----- -----
Income before provision for income taxes
and extraordinary item................................ 19.3 17.6
Income tax expense...................................... 4.3 3.8
----- -----
Income before extraordinary item........................ 14.9% 13.7%
===== =====
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
NET SALES. Net sales decreased 6.2% to $123.5 million for the three months
ended June 30, 2000 from $131.7 million for the three months ended June 30,
1999. This decrease was driven by a combination of factors including:
- Decline in value brand sales due to the elimination of item listings at
Home Depot, partially offset by gains at other customers.
- Retail inventory balancing issues affecting shipments of Spectracide
Terminate.-TM-
- Extreme weather conditions in our major markets in the United States.
Net sales of the Company's value brands decreased 12.0% to $91.7 million for
the three months ended June 30, 2000 from $104.1 million for the three months
ended June 30, 1999. Value brand sales to Home Depot were impacted by Home
Depot's strategy to move more listings to opening price point brands. 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 trend continues to show improved
consumer acceptance. Net sales of opening price point brands increased 15.5% to
$31.8 million for the three months ended June 30, 2000 from $27.6 million for
the three months ended June 30, 1999. The
12
<PAGE>
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 8.5% to $61.4 million for the three
months ended June 30, 2000 compared to $67.0 million for the three months ended
June 30, 1999. As a percentage of sales, gross profit decreased to 49.7% as
compared to 50.9% for the three months ended June 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 largely by lower material costs
primarily driven by supplier rebates.
ADVERTISING AND PROMOTION EXPENSES. Advertising and promotion expenses
decreased 26.8% to $9.7 million for the three months ended June 30, 2000
compared to $13.3 million for the three months ended June 30, 1999. As a
percentage of net sales, advertising and promotion expenses decreased to 7.9%
for the three months ended June 30, 2000 from 10.1% for the three months ended
June 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 11.4% to $17.4 million for the three months
ended June 30, 2000 from $19.6 million for the three months ended June 30, 1999.
As a percentage of net sales, selling, general and administrative expenses
decreased to 14.1% for the three months ended June 30, 2000 from 14.9% for the
three months ended June 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, termination of capital lease, and
other cost reduction efforts.
SEVERANCE CHARGES. No non-recurring charges were recorded for the three
months ended June 30, 2000. For the three months ended June 30, 1999, the
Company recorded non-recurring severance charges of $1.6 million as a result of
the Company's President and Chief Executive Officer terminating employment with
the Company. As a percentage of sales, non-recurring severance charges were 1.2%
for the three months ended June 30, 1999.
OPERATING INCOME. Operating income increased to $34.3 million for the three
months ended June 30, 2000 from $32.6 million for the three months ended
June 30, 1999. As a percentage of net sales, operating income increased to 27.8%
for the three months ended June 30, 2000 from 24.7% for the three months ended
June 30, 1999.
INCOME TAX EXPENSE. For the three months ended June 30, 2000, the Company's
effective income tax rate reflects the estimated utilization of the goodwill
deduction in fiscal year 2000. This benefit is related to the step up in tax
basis in conjunction with the Recapitalization.
13
<PAGE>
The following table sets forth the percentage relationship of certain items in
the Company's income statement to net sales for the six months ended June 30,
2000 and June 30, 1999 (percentages are calculated based on actual data, but
columns may not add due to rounding):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Net sales:
Value bands............................................. 76.0% 80.8%
Opening price point bands............................... 24.0 19.2
----- -----
Total net sales........................................... 100.0 100.0
Operating costs and expenses
Cost of goods sold...................................... 50.0 49.4
Advertising and operation expenses...................... 9.2 10.9
Selling, general and administrative expenses............ 17.4 16.6
Recapitalization transaction fees....................... -- 4.7
Change of control bonuses............................... -- 3.8
Severance charge........................................ -- 0.7
Non-recurring litigation charges........................ -- 0.7
----- -----
Total operating costs and expenses........................ 76.6 86.7
Operating income.......................................... 23.4 13.3
Interest expense.......................................... 9.9 7.6
----- -----
Income before provision for income taxes
and extraordinary item.................................. 13.5 5.7
Income tax expense........................................ 3.0 3.4
----- -----
Income before extraordinary item.......................... 10.5% 2.3%
===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
NET SALES. Net sales decreased 7.1% to $212.1 million for the six months
ended June 30, 2000 from $228.3 million for the six months ended June 30, 1999.
This decrease was driven by a combination of factors including:
- Decline in value brand sales due to the elimination of item listings at
Home Depot, partially offset by gains at other customers.
- Retail inventory balancing issues affecting shipments of Spectracide
Terminate.-TM-
- Extreme weather conditions in our major markets in the United States.
- 1999 Spectracide Pro-Registered Trademark- sales reflected initial sell in
to stock retail shelves.
Net sales of the Company's value brands decreased 12.7% to $161.1 million for
the six months ended June 30, 2000 from $184.5 million for the six months ended
June 30, 1999. Value brand sales to Home Depot were impacted by Home Depot's
strategy to move more listings to opening price point brands. 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 to show
improved consumer acceptance. Spectracide Pro's net sales decreased 38.6% to
$3.6 million for the six months ended June 30, 2000 from $5.9 million for the
six months ended June 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 16.4% to
14
<PAGE>
$51.0 million for the six months ended June 30, 2000 from $43.8 million for the
six months ended June 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 8.2% to $106.1 million for the six
months ended June 30, 2000 compared to $115.6 million for the six months ended
June 30, 1999. As a percentage of sales, gross profit decreased to 50.0% as
compared to 50.6% for the six months ended June 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 largely by lower material costs
primarily driven by supplier rebates.
ADVERTISING AND PROMOTION EXPENSES. Advertising and promotion expenses
decreased 21.8% to $19.5 million for the six months ended June 30, 2000 compared
to $24.9 million for the six months ended June 30, 1999. As a percentage of net
sales, advertising and promotion expenses decreased to 9.2% for six months ended
June 30, 2000 from 10.9% for the six months ended June 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 2.7% to $36.9 million for the six months ended
June 30, 2000 from $37.9 million for the six months ended June 30, 1999. As a
percentage of net sales, selling, general and administrative expenses increased
to 17.4% for the six months ended June 30, 2000 from 16.6% for the six months
ended June 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 capital lease, and other cost
reduction efforts.
RECAPITALIZATION TRANSACTION FEES. No charges were recorded for the six
months ended June 30, 2000. For the six months ended June 30, 1999, the Company
recorded a charge of $10.7 million for recapitalization transaction fees. As of
June 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 six months
ended June 30, 2000. For the six months ended June 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 six months ended
June 30, 2000. For the six months ended June 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.
NON-RECURRING LITIGATION CHARGES. No charges were recorded for the six
months ended June 30, 2000. For the six months ended June 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.
15
<PAGE>
OPERATING INCOME. Operating income increased to $49.7 million for the six
months ended June 30, 2000 from $30.3 million for the six months ended
June 30, 1999. As a percentage of net sales, operating income increased to 23.4%
for the six months ended June 30, 2000. Operating income was 13.3% for the six
months ended June 30, 1999. Operating income in 1999 was primarily negatively
impacted due to costs associated with recapitalization transaction fees of
$10.7 million and change of control bonuses as a result of the recapitalization
of $8.6 million.
INCOME TAX EXPENSE. For the six months ended June 30, 2000, the Company's
effective income tax rate reflects the estimated utilization of the goodwill
deduction in fiscal year 2000. This benefit is related to the step up in tax
basis in conjunction with the Recapitalization. For the six months ended
June 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 outstanding of $369.3 million. As of June 30, 2000, the Company
had total debt outstanding of $381.6 million. The Company will rely on
internally generated funds and, to the extent necessary, borrowings under the
Company's Revolving Credit Facility to meet liquidity needs.
The Company's Senior Credit Facility consists of:
- The $110.0 million Revolving Credit Facility, under which no borrowings
were outstanding at the closing of the Recapitalization. As of June 30,
2000, $21.1 million was outstanding. The amount is a current liability and
will primarily be paid by funds from operations;
- The $75.0 million Term Loan A ($57.5 million outstanding at June 30,
2000); and
- The $150.0 million Term Loan B ($147.4 million outstanding at June 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.
On January 24, 2000 The Senior Credit Facility agreement was amended to
provide new provisions for financial covenant requirements and a waiver of the
covenant requirements at December 31, 1999. The amendment contains provisions
for the increase in interest rates upon reaching certain maximum leverage
ratios. As part of the amended agreement, the Company paid bank fees of
$0.9 million, which will be reflected as deferred financing fees in
January 2000 and amortized over the life of the debt as interest expense. At
June 30, 2000, the company was in compliance with all covenants.
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/(used) by operating activities was $0.8 million and
$(3.5) million for the six months ended June 30, 2000 and 1999, respectively.
Net cash
16
<PAGE>
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 $2.6 million and
$0.8 million for the six months ended June 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 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. For the six months ended
June 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 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 JUNE 7, 2000 DURSBAN AGREEMENT
On June 7, 2000 the US Environmental Protection Agency and manufacturers of
chlorpyrifos (the active ingredient in Dursban pesticidal products) entered into
a voluntary agreement which 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 is currently assessing the potential financial impact of the
Dursban agreement on its operations. A future charge to operations during the
second half of this year may be made, but the amount cannot yet be reasonably
determined, primarily because the Company does not yet know the extent to which
retailers will attempt to return Dursban products. The Company currently has
replacement chemicals for Dursban, which are presently being used in production
of new pesticidal products.
SIGNIFICANT CUSTOMER
Subsequent to the second quarter, Kmart has notified the Company that the
contract to manufacture the KGro private label products will not be renewed.
This KGro business has low margins that drive high
17
<PAGE>
operating cost. The Company does not expect this matter to have a significant
impact on our 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 June 30, 2000, variable rate debt was
$226.0 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 6.69% as of
June 30, 2000.
EXCHANGE RATE
The Company does not use derivative instruments to hedge against foreign
currency exposures related to transactions denominated in other than the
Company's functional currency. Substantially all foreign currency transactions
are denominated in United States dollars.
COMMODITY PRICE
The Company does not use derivative instruments to hedge its exposures to
changes in commodity prices. The Company utilizes various commodity and
specialty chemicals in its production process. Purchasing procedures and
arrangements with major customers serve to mitigate its exposure to price
changes in commodity and specialty chemicals.
18
<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. None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule
(b) Report on Form 8-K
None
19
<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.
<TABLE>
<S> <C> <C>
UNITED INDUSTRIES CORPORATION
Dated: August 14, 2000 By: /S/ DANIEL J. JOHNSTON
-------------------------------------
Name: Daniel J. Johnston
Title: CHIEF FINANCIAL OFFICER
</TABLE>
20
