<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20509
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997.
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ............... to ....................
Commission file number 0-26568
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USA Detergents, Inc.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2935430
---------- ------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1735 Jersey Avenue, North Brunswick, New Jersey 08902
-------------------------------------------------------
(Address of principal executive offices - Zip code)
(732) 828-1800
----------------
(Registrant's telephone number, including area code)
--------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was
required to file reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X](1) No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Stock No. of Shares Outstanding Date
-------------- ------------------------- ----
Common 13,795,029 October 31, 1997
(1) The Company was delinquent in the filing of its Form 10-Q for the quarter
ended June 30, 1997, which Form has since been filed.
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USA DETERGENTS, INC. AND SUBSIDIARIES
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------- ---------------
(AS RESTATED
SEE NOTE 9) (UNAUDITED)
<S> <C> <C>
Current assets:
Cash ........................................................... $ 2,373 $ --
Accounts receivable, net of customer allowances and doubtful
accounts of $1,349 and $3,838, respectively ................... 27,323 23,412
Inventories .................................................... 28,830 18,713
Refundable income taxes ........................................ 4,255 7,995
Deferred taxes ................................................. 534 --
Prepaid expenses and other current assets ...................... 3,053 3,252
-------------- ---------------
Total current assets ......................................... 66,368 53,372
Property and equipment--net .................................... 26,783 45,566
Restricted funds ............................................... 275 275
Other assets ................................................... 2,800 2,454
Note receivable ................................................ 2,250 --
-------------- ---------------
Total assets ................................................. $98,476 $101,667
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bridge loan .................................................... $ 4,000 $ 10,000
Revolving credit line .......................................... 29,305 29,998
EDA loan ....................................................... 1,806 1,540
Accounts payable ............................................... 13,725 23,300
Accrued expenses ............................................... 11,522 19,817
-------------- ---------------
Total current liabilities .................................... 60,358 84,655
Non-current liabilities ........................................ -- 602
Deferred rent payable .......................................... 1,284 1,272
Deferred taxes ................................................. 735 --
-------------- ---------------
Total liabilities ............................................ 62,377 86,529
-------------- ---------------
Stockholders' equity:
Preferred stock--no par value; authorized 1,000,000 shares,
none issued.................................................... -- --
Common stock--$.01 par value; authorized 30,000,00 shares,
issued and outstanding 13,752,570 and 13,795,029 shares,
respectively .................................................. 138 138
Additional paid-in capital ..................................... 27,595 27,853
Retained earnings/(deficit) .................................... 8,366 (12,853)
-------------- ---------------
Total stockholders' equity ................................... 36,099 15,138
-------------- ---------------
Total liabilities and stockholders' equity ................... $98,476 $101,667
============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
2
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USA DETERGENTS, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT NET INCOME/(LOSS) PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------------
1996 1997 1996 1997
------------- ----------- ------------------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------- ----------- ------------------- -----------
(AS RESTATED (AS RESTATED
SEE NOTE 9) SEE NOTE 9)
<S> <C> <C> <C> <C>
Net sales ............................ $47,447 $57,345 $124,220 $172,985
Cost of goods sold ................... 32,368 41,073 84,432 137,185
------------- ----------- ------------------- -----------
Gross profit ......................... 15,079 16,272 39,788 35,800
Selling, general and administrative . 12,146 16,556 29,524 56,665
Restructuring costs .................. -- -- -- 2,379
------------- ----------- ------------------- -----------
12,146 16,556 29,524 59,044
Income/(loss) from operations ....... 2,933 (284) 10,264 (23,244)
Interest expense--net ................ 161 761 481 1,884
------------- ----------- ------------------- -----------
Earnings/(loss) before income taxes . 2,772 (1,045) 9,783 (25,128)
Provision/(benefit) for income taxes 1,071 -- 3,957 (3,909)
------------- ----------- ------------------- -----------
Net income/(loss)..................... $ 1,701 $(1,045) $ 5,826 $(21,219)
============= =========== =================== ===========
Netincome/(loss) per share ........... $ 0.12 $ (0.08) $ 0.43 $ (1.54)
============= =========== =================== ===========
Weighted average shares outstanding . 13,732 13,795 13,534 13,785
============= =========== =================== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
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USA DETERGENTS, INC. AND SUBSICIARIES
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------
1996 1997
------------- -----------
(UNAUDITED) (UNAUDITED)
(AS RESTATED
SEE NOTE 9)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) .............................................. $ 5,826 (21,219)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization .................................. 1,185 3,502
Change in the provision for customer allowances and doubtful
accounts ...................................................... 210 2,489
Increase/(decrease) in deferred rent ........................... 153 (12)
Changes in operating assets and liabilities:
(Increase)/decrease in accounts receivable ..................... (8,291) 1,422
(Increase)/decrease in inventories ............................. (7,557) 10,117
Increase in prepaid expenses and other current assets ......... (2,030) (199)
(Increase)/decrease in other assets ............................ (2,524) 346
Increase in accounts payable and accrued expenses .............. 8,261 17,870
Increase in refundable income taxes ............................ -- (3,740)
Increase in prepaid income taxes ............................... (671) --
Decrease in taxes payable ...................................... (182) --
Decrease in deferred tax asset ................................. 380 534
Decrease in deferred tax liability ............................. (243) (735)
------------- -----------
Net cash provided by/(used in) operating activities .......... (5,483) 10,375
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ............................. (11,113) (22,285)
------------- -----------
Net cash used in investing activities ......................... (11,113) (22,285)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt ................................... (229) (266)
Net proceeds from credit facility .............................. 5,198 6,693
(Decrease)/increase in non-current liabilities ................. (24) 602
Net proceeds from exercise of options .......................... 221 258
Net proceeds from sale of common shares ........................ 11,790 --
Decrease in note receivable .................................... -- 2,250
------------- -----------
Net cash provided by financing activities ..................... 16,956 9,537
------------- -----------
Net increase/(decrease) in cash ................................. 360 (2,373)
Cash at beginning of period ..................................... 61 2,373
------------- -----------
Cash at September 30, ........................................... $ 421 $ --
============= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ....................................................... $ 455 $ 1,703
============= ===========
Income taxes ................................................... $ 4,673 $ 32
============= ===========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
USA DETERGENTS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared by the Company pursuant to the Rules of the Securities and
Exchange Commission ("SEC") and in the opinion of management, include all
adjustments, (consisting of normal recurring accruals) necessary for the fair
presentation of financial position, results of operations and cash flows.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules. The
Company believes the disclosures made are adequate to make such financial
statements not misleading. The results for the interim periods presented are
not necessarily indicative of the results to be expected for the full year.
These financial statements should be read in conjunction with the Company's
December 31, 1996 restated Form 10-KA which, when completed, will include
restated financial information for the year ended December 31, 1996 and each
of the four quarters of 1996. The Company is in the process of restating its
financial statements for the year ended December 31, 1996, each of the four
quarters of 1996 and the quarter ended March 31, 1997, as a result of errors
discovered for those periods subsequent to the issuance of such financial
statements (see Note 9).
1
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NOTE 2 - PLANT ACQUISITION
During the nine months ended September 30, 1997, the Company
exercised its purchase option, by the cancellation of a $2,250,000 promissory
note, to acquire a powder plant facility located in Chicago. Pursuant to the
terms of a supply contract, this facility previously provided the Company with
the facility's entire powder production output on an exclusive basis.
2
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NOTE 3 - DEBT
In December 1996, the Company entered into a credit facility (the
"PNC Facility") with PNC Bank, N.A. ("PNC") consisting of a $20 million
capital expenditure facility for the purchase of capital assets and/or
leasehold improvements and a $10 million traditional revolving facility.
Borrowings under the PNC Facility bear interest, at the Company's option, at
LIBOR plus .50% to 1.5% (7.07% as of September 30, 1997) or one percent below
the prime rate of PNC. All amounts outstanding under the PNC Facility, as of
September 30, 1997 (approximately $30.0 million), were subject to the 7.07%
LIBOR-based interest rate. On March 24, 1997, the Company obtained a
commitment from PNC and a second lender to replace the PNC Facility with a $55
million credit facility. In conjunction with this commitment, PNC extended to
the Company a $10 million bridge loan (the "Bridge Loan") to acquire a
distribution center in North Brunswick bearing interest at LIBOR + 1.5% (7.25%
as of September 30, 1997), to be repaid from the anticipated proceeds of the
replacement facility. The PNC Facility and Bridge Loan are secured by a
substantial portion of the Company's assets. The PNC Facility, among other
things, requires the Company to maintain specified debt to equity ratios,
current ratios, minimum consolidated tangible net worth and debt service ratio
levels. At September 30, 1997, the Company was not in compliance with various
covenants and other material provisions contained in the PNC Facility and the
Bridge Loan, including all of the required financial covenants of the PNC
Facility. In addition, based in
3
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part on the Company's performance in the first quarter of fiscal 1997, the
commitment for the $55 million facility was withdrawn. As discussed below, the
Company has executed a commitment letter with General Electric Capital
Corporation ("GE Capital") for a credit facility totaling up to $52 million.
On June 30, 1997, the Company obtained a forbearance agreement from
PNC which provided that PNC would forbear exercising the rights and remedies
available to it under the PNC Facility and Bridge Loan until July 7, 1997.
Although the forbearance agreement has expired, PNC is continuing to cooperate
with the Company during its current discussions with PNC and GE Capital to
amend and/or replace the PNC Facility and Bridge Loan.
In connection with these discussions, PNC has expressed a willingness
to postpone a debt payment of $10 million to the first quarter of 1998 and the
balance of the principal indebtedness to the second quarter of 1998, under
terms and conditions which are currently being negotiated. The Company must
obtain additional sources of financing in order to meet its anticipated near
term commitments, including, to the extent the postponement is agreed to by
PNC, the payment of the $10 million of debt being postponed until the first
quarter of 1998. There can be no assurance that PNC will continue to cooperate
4
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with the Company and postpone the payment of amounts due PNC under the PNC
Facility and Bridge Loan, or that the Company will be successful in obtaining
the alternative sources of financing.
In November 1997, the Company entered into a commitment letter with GE
Capital to provide the Company with a credit facility totaling up to $52
million. The financing agreement would include a three year revolving credit
facility of up to $45 million, subject to availability based on eligible
accounts receivable and inventory; a three year term loan of $4 million with
quarterly amortization payments; and a three year term loan of $3 million with
quarterly amortization payments. The credit facility will be secured by
substantially all the assets of the Company.
The commitment by GE Capital to extend the credit facility is subject
to various conditions, including among other things the satisfactory completion
by GE Capital of its due diligence examination of the Company, evidence that
USA Detergents will have excess Availability (as defined) of not less than $5
million at the time of the loan closing and the execution of definitive credit
facility documentation. The commitment by GE Capital expires on January 31,
1998. There can be no assurance that the various conditions to the closing of
the credit facility will be satisfied and that the facility will be available
to the Company as expected.
The Company also has a loan facility of $2.75 million from the New
Jersey Economic Development Authority (the "EDA Loan"). As of September 30,
1997, the Company had used approximately $2.5 million of the EDA Loan for
purchases of machinery and equipment and improvements to the Company's North
Brunswick manufacturing facility. The remaining funds are restricted for the
duration of the EDA Loan. The EDA Loan is payable in monthly installments of
approximately $26,000 through November 1, 2002. Interest on the EDA Loan is
payable at a variable rate (4.10% at September 30, 1997). As a result of
several factors, including those relating to the Company's historical
financial statements, amounts owed under the EDA Loan, at the option of the
issuing lender thereunder, may be declared immediately due and payable. There
can be no assurance that all such amounts in the future will not be declared
immediately due and payable.
In as much as the Company is not in compliance with the terms of the
PNC Facility, the Bridge Loan and the EDA Loan, approximately $31.2 million of
debt as of September 30, 1997 has been reclassified to current liabilities.
5
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NOTE 4 - COMMITTMENTS AND CONTINGENCIES
On May 5, 1997, a securities class action lawsuit entitled Feldbaum
v. USA Detergents, Inc. et al., No. 97-CV-3227, was filed in the U.S. District
Court for the Eastern District of Pennsylvania against the Company and certain
of its current and former officers and directors; the Feldbaum case
subsequently was transferred to the U.S. District Court for the District of
New Jersey. On May 15, 1997, a second securities class action lawsuit entitled
Einhorn v. USA Detergents, Inc. et al., No. 97-2459, was filed against the
Company and certain of its current and former officers and directors in the
U.S. District Court for the District of New Jersey. Since the Einhorn lawsuit
was filed, twelve additional securities class action lawsuits have been filed
in the U.S. District Court for the District of New Jersey against the Company
and certain of its current and former officers and directors. The class
actions purport to be brought on behalf of all persons who purchased the
Company's common stock between June 5, 1996, at the earliest, and May 8, 1997,
at the latest (the "putative class period"). The class actions generally
allege that, during the putative class period, the defendants made false or
misleading public statements and engaged in improper accounting practices,
which caused the price of the Company's common stock to be artificially
inflated. The class actions assert that the defendants' conduct violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and SEC Rule
10b-5 promulgated thereunder, as well as state common law. The class actions
do not specify an amount of damages. In June and July 1997, the
6
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U.S. District Court for the District of New Jersey entered orders
consolidating all of the pending class actions with the Einhorn case. In
August 1997, the court entered an order establishing a master docket for the
consolidated class actions, In re USA Detergents, Inc. Securities Litigation,
Master File No. 97-CV-2459 (MTB), and appointed lead plaintiffs and lead
plaintiffs' co-lead counsel. Lead plaintiffs will file a consolidated amended
class action complaint within thirty days after the Company issues its
restated financial statements. The Company intends to defend this action
vigorously. An unfavorable outcome in the litigation could have a material
adverse effect on the Company's financial condition and results of operations.
On September 12, 1997, the Company became aware of a claim by the
North Brunswick Water Company ("NBWC") covering, among other things, unpaid
water and sewer charges aggregating approximately $5,000,000. On October 20,
1997, the Company commenced an action in the Superior Court of New Jersey,
Chancery Division, Middlesex County, challenging NBWC's claim and requesting
injunctive relief to prevent NBWC from taking any steps to discontinue service
pending the resolution of the claim. Pursuant to a Consent Order dated October
21, 1997, the Company agreed to pay $535,000 to NBWC, subject to refund,
pending the resolution of the matter. Through October 21, 1997, $279,627 of
this amount has been paid. Based on a preliminary assessment made by
independent counsel for the Company, of the underlying basis for NBWC's claim,
management believes that the Company's obligation, if
7
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any, to NBWC will not have a significant impact on the Company's results of
operations or financial position beyond amounts already provided.
On October 16, 1997, the Company signed a letter of intent setting
forth the terms of a proposed sale and leaseback by the Company of its
Harrisonville, Missouri plant and North Brunswick distribution facility. The
aggregate purchase price for the facilities is specified to be $23,200,000 and
the initial lease term is expected to be 20 years followed by two five year
renewal options. The initial annual aggregate fixed rentals will approximate
$2,600,000 and will be subject to escalation in the fifth year and every
fourth year thereafter based on increases in the Consumer Price Index capped
at 2.25% per year for the first eight years and 3% per year thereafter. The
completion of this transaction is subject to, among other things, the
finalization of a definitive binding agreement between the Company and the
purchaser. There can be no assurance that this transaction will ultimately be
completed. Should the transaction be completed, the lease will be accounted
for as a financing lease.
8
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NOTE 5 - RESTRUCTURING COSTS
In May 1997, the Company, as part of its cost-reduction strategy,
decided to close its Edison, New Jersey facility and move its candle
manufacturing operations to the Company's North Brunswick, New Jersey facility
at an estimated cost of $2.4 million. These restructuring costs include the
cost of moving the candle line and inventory, write-off of related leasehold
improvements and a portion of the future lease commitment and associated lease
expenses. The Company expects the property to be re-leased within the next
year thereby eliminating or substantially reducing the then remaining lease
obligation.
9
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NOTE 6 - STOCKHOLDERS' EQUITY
During the nine months ended September 30, 1997, the Company obtained
proceeds approximating $258,000 from the exercise of 42,459 stock options.
10
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NOTE 7 - INCOME TAXES
The income tax benefit for the three and nine month periods ended
September 30, 1997 is less than the statutory rate due to a net operating loss
carryforward of approximately $12,450,000 for which no benefit has been
recognized.
11
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NOTE 8 - NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number
of shares outstanding during the periods presented. Common stock equivalents
have not been included in the computation of net income per share as the
impact is either not significant or, with respect to loss periods,
anti-dilutive.
12
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NOTE 9 - RESTATEMENT OF FINANCIAL INFORMATION
The Company is in the process of restating its financial statements
for the year ended December 31, 1996, each of the four quarters of 1996 and
the quarter ended March 31, 1997, as a result of errors and irregularities
discovered for those periods subsequent to the issuance of such financial
statements. The financial statements for the year ended December 31, 1996
require restatement principally with respect to unrecorded vendor invoices,
shipping cut-offs, vendor rebates, slotting costs and capitalized labor. The
quarter and nine months ended September 30, 1996 will be restated principally
for shipping cut-offs, slotting costs and the write-off of certain costs
previously written-off in the fourth quarter of 1996.
The impact of the restatements on the Company's balance sheets and
statements of operations for the year ended December 31, 1996 and the three
and nine months ended September 30, 1996 are summarized as follows:
13
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<TABLE>
<CAPTION>
Year Ended Year Ended Three Months Ended Three Months Ended
December 31, 1996 December 31, 1996 September 30, 1996 September 30, 1996
----------------- ----------------- ------------------ ------------------
(As originally (As Restated) (As originally (As Restated)
Reported) Reported)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations
- -----------------------
Net sales $ 174,031 $ 172,424 $ 48,105 $ 47,447
Gross profit 58,693 50,926 16,387 15,079
Selling, general and
administrative 43,046 43,878 11,057 12,146
Operating income 15,647 7,048 5,330 2,993
Net income 8,867 3,707 3,152 1,701
Net income per share $ .65 $ .27 $ .23 $ .12
December 31, 1996
-----------------------------------------
(As originally (As Restated)
Reported)
(in thousands, except per share data)
Balance Sheet
- -------------
Current assets 64,976 66,368
Total assets 98,904 98,476
Current liabilities 24,414 60,358
Total liabilities 57,645 62,377
Stockholders' equity 41,259 36,099
</TABLE>
[RESTUBBED TABLE CONTINUED FROM ABOVE]
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
(As originally (As Restated)
Reported)
Statement of Operations
- -----------------------
Net sales $ 125,087 $ 124,220
Gross profit 42,493 39,788
Selling, general and
administrative 29,003 29,524
Operating income 13,490 10,264
Net income 7,943 5,826
Net income per share $ .59 $ .43
September 30, 1996
------------------------------------------
(As originally (As Restated)
Reported)
Balance Sheet
- -------------
Current assets 47,621 45,725
Total assets 73,980 71,361
Current liabilities 29,707 31,128
Total liabilities 33,734 33,232
Stockholders' equity 40,246 38,129
All comparisons to the three and nine months ended September 30, 1996 are
based on amounts as restated.
14
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company is in the process of restating its financial statements for the
year ended December 31, 1996, each of the four quarters of 1996 and the
quarter ended March 31, 1997, as a result of errors and irregularities
discovered for those periods subsequent to the issuance of such financial
statements. The financial statements for the year ended December 31, 1996
require restatement principally with respect to unrecorded vendor invoices,
shipping cut-offs, vendor rebates, slotting costs and capitalized labor. The
quarter and nine months ended September 30, 1996 will be restated principally
for shipping cut-offs, slotting costs, capitalized labor and the write-off of
certain costs previously written-off in the fourth quarter of 1996.
The impact of the restatements on the Company's balance sheets and statements
of operations for the year ended December 31, 1996 and the three and nine
months ended September 30, 1996 are summarized as follows:
15
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<TABLE>
<CAPTION>
Year Ended Year Ended Three Months Ended Three Months Ended
December 31, 1996 December 31, 1996 September 30, 1996 September 30, 1996
----------------- ----------------- ------------------ ------------------
(As originally (As Restated) (As originally (As Restated)
Reported) Reported)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations
- -----------------------
Net sales $ 174,031 $ 172,424 $ 48,105 $ 47,447
Gross profit 58,693 50,926 16,387 15,079
Selling, general and
administrative 43,046 43,878 11,057 12,146
Operating income 15,647 7,048 5,330 2,993
Net income 8,867 3,707 3,152 1,701
Net income per share $ .65 $ .27 $ .23 $ .12
December 31, 1996
----------------------------------------
(As originally (As Restated)
Reported)
Balance Sheet
- -------------
Current assets 64,976 66,368
Total assets 98,904 98,476
Current liabilities 24,414 60,358
Total liabilities 57,645 62,377
Stockholders' equity 41,259 36,099
</TABLE>
[RESTUBBED TABLE CONTINUED FROM ABOVE]
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
(As originally (As Restated)
Reported)
Statement of Operations
- -----------------------
Net sales $ 125,087 $ 124,220
Gross profit 42,493 39,788
Selling, general and
administrative 29,003 29,524
Operating income 13,490 10,264
Net income 7,943 5,826
Net income per share $ .59 $ .43
September 30, 1996
------------------------------------------
(As originally (As Restated)
Reported)
Balance Sheet
- -------------
Current assets 47,621 45,725
Total assets 73,980 71,361
Current liabilities 29,707 31,128
Total liabilities 33,734 33,232
Stockholders' equity 40,246 38,129
All comparisons to the three and nine months ended September 30, 1996 are
based on amounts as restated.
16
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THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Net sales for the three months ended September 30, 1997 increased
20.9% to $57.3 million from $47.4 million for the three months ended September
30, 1996. The increase is primarily the result of an increase in unit sales of
laundry products and candles.
Gross profit increased 7.9% to $16.3 million in the three months
ended September 30, 1997 from $15.1 million for the comparable period in 1996.
Gross profit decreased as a percentage of net sales to 28.4% in the three
months ended September 30, 1997 from 31.8% for the comparable period in 1996.
The decrease in gross profit as a percentage of net sales was primarily
attributable to additional costs of 4.1% as a percentage of net sales relating
to increased levels of warehouse, distribution and freight-in costs associated
with the expansion of the business from a local single-plant operation to a
national multi-plant manufacturer. These unanticipated increased costs, which
began in the latter part of 1996, continued to have a significant impact on
the first three quarters of 1997. The decrease in gross profit as a percentage
of net sales was partially offset by a decrease in materials of .4% as
percentage of net sales.
Selling, general and administrative expenses increased 36.3% to $16.6
million in the three months ended September 30, 1997 from $12.1 million for
the comparable period in 1996. As a percentage of net sales, these expenses
17
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increased to 29.0% in the three months ended September 30, 1997 from 25.6% for
the comparable period in 1996. The increase as a percentage of net sales was
primarily due to increases of 2.1% in marketing funds, (co-op advertising,
promotional allowances and slotting amortization) .7% in freight to customers,
.3% in commissions and .2% in administrative personnel.
Interest expense-net increased to $.8 million in the three months
ended September 30, 1997 from $.2 million for the comparable period in 1996,
primarily as a result of higher average outstanding borrowings.
There was no income tax benefit for the three months ended September
30, 1997 compared to a provision which approximates 38.6% for the three months
ended September 30, 1996. This decrease principally relates to a net operating
loss carryforward of approximately $12,450,000 for which no benefit has been
recognized.
18
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NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Net sales for the nine months ended September 30, 1997 increased
39.3% to $173.0 million from $124.2 million for the nine months ended
September 30, 1996. The increase is primarily the result of an increase in
unit sales of laundry products and candles.
Gross profit decreased 10.0% to $35.8 million in the nine months
ended September 30, 1997 from $39.8 million for the comparable period in 1996.
Gross profit decreased as a percentage of net sales to 20.7% in the nine
months ended September 30, 1997 from 32.0% for the comparable period in 1996.
The decrease as a percentage of net sales was primarily attributable to an
increase in material and labor costs of 5.0% and 1.4% of net sales,
respectively, due to manufacturing inefficiencies caused by a high level of
production line changeovers to meet customer demands, inefficient production
runs during the start up and validation of new production lines, the
write-down of raw materials and finished goods inventory associated with
discontinued product in the second quarter and sales of close-out products at
reduced sales value. The decrease in gross profit as a percentage of net sales
was also affected by additional costs of 5.1% as a percentage of net sales
relating to increased levels of warehouse, distribution and freight-in costs,
associated with the expansion of the business from a local single-plant
operation to a multi-plant national manufacturer. These unanticipated
19
<PAGE>
increased costs, which began in the latter part of 1996, continued to have a
significant impact on the results of operations for the first nine months of
1997.
Management has implemented various cost reduction programs during the
second and third quarter of 1997, the benefits from which have begun to be
realized in the third quarter of 1997 and are expected to continue to be
realized in future periods. Such programs include the shut-down of the
Company's Edison candle facility, consolidation of candle manufacturing
operations in North Brunswick, reduction in temporary labor, automation of
manufacturing facilities related to spray products, product rationalization,
increased use of high speed fillers and cartoners and improved production
planning and control.
Selling, general and administrative expenses increased 92% to $56.7
million in the nine months ended September 30, 1997 from $29.5 million for the
comparable period in 1996. As a percentage of net sales, these expenses
increased to 32.8% in the nine months ended September 30, 1997 from 23.8% for
the comparable period in 1996. The increase as a percentage of net sales was
primarily due to increases of 6.4% in marketing funds (co-op advertising,
promotional allowances and slotting amortization), 1.4% in freight to
customers, .7% in professional fees and .7% in administrative personnel.
In May 1997, the Company, as part of its cost-reduction strategy,
decided to close its Edison, New Jersey facility and move its candle
manufacturing operations
20
<PAGE>
to the Company's North Brunswick, New Jersey facility at an estimated cost of
$2.4 million. These restructuring costs include the cost of moving the candle
line and inventory, write-off of related leasehold improvements and a portion
of the future lease commitment and associated lease expenses. The Company
expects the property to be re-leased within the next year thereby eliminating
or substantially reducing the then remaining lease obligation.
Interest expense-net increased to $1.9 million in the nine months
ended September 30, 1997 from $.5 million for the comparable period in 1996,
primarily as a result of higher average outstanding borrowings.
The income tax benefit for the nine months ended September 30, 1997
approximates 15.6% compared to a provision which approximates 40.4% for the
nine months ended September 30, 1996. This decrease principally relates to a
net operating loss carry forward of approximately $12,450,000 for which no
benefit has been recognized.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements principally arise from the
funding of working capital needs which include inventory, accounts receivable,
capital expenditures and debt service.
In December 1996, the Company entered into a credit facility (the
"PNC Facility") with PNC Bank, N.A. ("PNC") consisting of a $20 million
capital expenditure facility for the purchase of capital assets and/or
leasehold improvements and a $10 million traditional revolving facility.
Borrowings under the PNC Facility bear interest, at the Company's option, at
LIBOR plus .50% to 1.5% (7.07% as of September 30, 1997) or one percent below
the prime rate of PNC. All amounts outstanding under the PNC Facility, as of
September 30, 1997 (approximately $30.0 million), were subject to the 7.07%
LIBOR-based interest rate. On March 24, 1997, the Company obtained a
commitment from PNC and a second lender to replace the PNC Facility with a $55
million credit facility. In conjunction with this commitment, PNC extended to
the Company a $10 million bridge loan (the "Bridge Loan") to acquire a
distribution center in North Brunswick bearing interest at LIBOR + 1.5% (7.25%
as of September 30, 1997), to be repaid from the anticipated proceeds of the
replacement facility. The PNC Facility and Bridge Loan are secured by a
substantial portion of the Company's assets. The PNC Facility, among other
things, requires the
22
<PAGE>
Company to maintain specified debt to equity ratios, current ratios, minimum
consolidated tangible net worth and debt service ratio levels. At September
30, 1997, the Company was not in compliance with various covenants and other
material provisions contained in the PNC Facility and the Bridge Loan,
including all of the required financial covenants of the PNC Facility. In
addition, based in part on the Company's performance in the first quarter of
fiscal 1997, the commitment for the $55 million facility was withdrawn. As
discussed below, the Company has executed a commitment letter with General
Electric Capital Corporation ("GE Capital") for a credit facility totaling up
to $52 million.
On June 30, 1997, the Company obtained a forbearance agreement from
PNC which provided that PNC would forbear exercising the rights and remedies
available to it under the PNC Facility and Bridge Loan until July 7, 1997.
Although the forbearance agreement has expired, PNC is continuing to cooperate
with the Company during its current discussions with PNC and GE Capital to
amend and/or replace the PNC Facility and Bridge Loan.
In connection with these discussions, PNC has expressed a willingness
to postpone a debt payment of $10 million to the first quarter of 1998 and the
balance of the principal indebtedness to the second quarter of 1998, under
terms and conditions which are currently being negotiated.
23
<PAGE>
The Company must obtain additional sources of financing in order to meet its
anticipated near term commitments, including, to the extent the postponement is
agreed to by PNC, the payment of the $10 million of debt being postponed until
the first quarter of 1998. There can be no assurance that PNC will continue to
cooperate with the Company and postpone the payment of amounts due PNC under
the PNC Facility and Bridge Loan, or that the Company will be successful in
obtaining the alternative sources of financing.
In November 1997, the Company entered into a commitment letter with GE
Capital to provide the Company with a credit facility totaling up to $52
million. The financing agreement would include a three year revolving credit
facility of up to $45 million, subject to availability based on eligible
accounts receivable and inventory; a three year term loan of $4 million with
quarterly amortization payments; and a three year term loan of $3 million with
quarterly amortization payments. The credit facility will be secured by
substantially all the assets of the Company.
The commitment by GE Capital to extend the credit facility is subject
to various conditions, including among other things the satisfactory completion
by GE Capital of its due diligence examination of the Company, evidence that
USA Detergents will have excess Availability (as defined) of not less than $5
million at the time of the loan closing and the execution of definitive credit
facility documentation. The commitment by GE Capital expires on January 31,
1998. There can be no assurance that the various conditions to the closing of
the credit facility will be satisfied and that the facility will be available
to the Company as expected.
The Company also has a loan facility of $2.75 million from the New
Jersey Economic Development Authority (the "EDA Loan"). As of September 30,
1997, the Company had used approximately $2.5 million of the EDA Loan for
purchases of machinery and equipment and improvements to the Company's North
Brunswick manufacturing facility. The remaining funds are restricted for the
duration of the EDA Loan. The EDA Loan is payable in monthly installments of
approximately $26,000 through November 1, 2002. Interest on the EDA Loan is
payable at a variable rate (4.10% at September 30, 1997). As a result of
several factors, including those relating to the Company's historical
financial statements, amounts owed under the EDA Loan, at the option of the
issuing lender thereunder, may be declared immediately due and payable. There
can be no assurance that all such amounts in the future will not be declared
immediately due and payable.
24
<PAGE>
In as much as the Company is not in compliance with the terms of the
PNC Facility, the Bridge Loan and the EDA Loan, approximately $31.2 million of
debt as of September 30, 1997 has been reclassified to current liabilities.
On May 5, 1997, a securities class action lawsuit entitled Feldbaum
v. USA Detergents, Inc. et al., No. 97-CV-3227, was filed in the U.S. District
Court for the Eastern District of Pennsylvania against the Company and certain
of its current and former officers and directors; the Feldbaum case
subsequently was transferred to the U.S. District Court for the District of
New Jersey. On May 15, 1997, a second securities class action lawsuit entitled
Einhorn v. USA Detergents, Inc. et al., No. 97-2459, was filed against the
Company and certain of its current and former officers and directors in the
U.S. District Court for the District of New Jersey. Since the Einhorn lawsuit
was filed, twelve additional securities class action lawsuits have been filed
in the U.S. District Court for the District of New Jersey against the Company
and certain of its current and former officers and directors. The class
actions purport to be brought on behalf of all persons who purchased the
Company's common stock between June 5, 1996, at the earliest, and May 8, 1997,
at the latest (the "putative class period"). The class actions generally
allege that, during the putative class period, the defendants made false or
misleading public statements and engaged in improper accounting practices,
which caused the price of the Company's common stock to be artificially
inflated. The class actions assert that the defendants' conduct violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and SEC Rule
10b-5 promulgated thereunder, as well as state common law. The
25
<PAGE>
class actions do not specify an amount of damages. In June and July 1997, the
U.S. District Court for the District of New Jersey entered orders
consolidating all of the pending class actions with the Einhorn case. In
August 1997, the court entered an order establishing a master docket for the
consolidated class actions, In re USA Detergents, Inc. Securities Litigation,
Master File No. 97-CV-2459 (MTB), and appointed lead plaintiffs and lead
plaintiffs' co-lead counsel. Lead plaintiffs will file a consolidated amended
class action complaint within thirty days after the Company issues its
restated financial statements. The Company intends to defend this action
vigorously. An unfavorable outcome in the litigation could have a material
adverse effect on the Company's financial condition and results of operations.
During the nine months ended September 30, 1997, the Company
exercised its purchase option, by the cancellation of a $2,250,000 promissory
note, to acquire a powder plant facility located in Chicago. Pursuant to the
terms of a supply contract, this plant previously provided the Company with
the facility's entire powder production output on an exclusive basis.
On September 12, 1997, the Company became aware of a claim by the
North Brunswick Water Company ("NBWC") covering, among other things, unpaid
water and sewer charges aggregating approximately $5,000,000. On October 20,
1997, the Company commenced an action in the Superior Court of New Jersey,
Chancery Division, Middlesex County, challenging NBWC's claim and requesting
injunctive relief to prevent NBWC from taking any steps to discontinue service
pending the resolution of the claim.
26
<PAGE>
Pursuant to a Consent Order dated October 21, 1997, the Company agreed to pay
$535,000 to NBWC, subject to refund, pending the resolution of the matter.
Through October 21, 1997, $279,627 of this amount has been paid. Based on a
preliminary assessment made by independent counsel for the Company, of the
underlying basis for NBWC's claim, management believes that the Company's
obligation, if any, to NBWC will not have a significant impact on the
Company's results of operations or financial position beyond amounts already
provided.
On October 16, 1997, the Company signed a letter of intent setting
forth the terms of a proposed sale and leaseback by the Company of its
Harrisonville, Missouri plant and North Brunswick distribution facility. The
aggregate purchase price for the facilities is specified to be $23,200,000 and
the initial lease term is expected to be 20 years followed by two five year
renewal options. The initial annual aggregate fixed rentals will approximate
$2,600,000 and will be subject to escalation in the fifth year and every
fourth year thereafter based on increases in the Consumer Price Index capped
at 2.25% per year for the first eight years and 3% per year thereafter. The
completion of this transaction is subject to, among other things, the
finalization of a definitive binding agreement between the Company and the
purchaser. There can be no assurance that this transaction will ultimately be
completed. Should the transaction be completed, the lease will be accounted
for as a financing lease.
During the nine months ended September 30, 1997, the Company obtained
proceeds approximating $258,000 from the exercise of 42,459 stock options.
27
<PAGE>
At September 30, 1997, the Company's working capital deficiency was
$31.3 million compared to restated working capital of $6.0 million at December
31, 1996. The decrease in working capital was primarily attributable to
operating losses adjusted for, among other things, an increase in accounts
payable and accrued expenses of $17.9 million, a decrease in inventory of
$10.1 million, an increase in bank debt of $6.7 million, a decrease in cash of
$2.4 million, a decrease in net accounts receivable of $3.9 million and an
increase in refundable income taxes of $3.7 million.
Net cash provided by operating activities for the first
nine months of 1997 was $10.4 million compared to net cash used in operating
activities of $5.5 million for the comparable period of 1996. The increase in
cash provided by operating activities resulted primarily from operating losses
of $21.2 million offset by a decrease in inventory of $10.1 million, an
increase in accounts payable and accrued expenses of $17.9 million, a decrease
in accounts receivable of $1.4 million, an increase in refundable income taxes
of $3.7 million, depreciation of $3.5 million and an increase in provisions for
customer allowances and doubtful accounts of $2.5 million.
Net cash used in investing activities for the nine months ended
September 30, 1997 was $22.3 million relating primarily to the acquisition of
a distribution center, a powder production facility and production equipment.
28
<PAGE>
The Company anticipates that capital expenditures for the balance of 1997 will
be between $2 million and $4 million, which includes expenditures to upgrade
the Company's North Brunswick, New Jersey distribution facility, enhance the
Company's information systems and limited expenditures associated with the
Company's other manufacturing and distribution capabilities.
The increase provided by financing activities in the current nine
month period was $9.5 million which resulted primarily from a net increase in
bank debt of $6.7 million, cancellation of notes receivable of $2.3 million
related to the acquisition of a powder plant facility located in Chicago and
an increase of $.6 million in non-current liabilities related to the
acquisition of management information systems.
For the nine months ended September 30, 1997, the Company
has experienced significant operating losses relating to, among other things,
its geographic expansion of its manufacturing and distribution facilities. In
addition, the Company has also experienced difficulty in meeting its liquidity
needs. The Company requires the availability of sufficient cash flow and
borrowing capacity to finance its operations, meet its debt service
obligations and fund future capital expenditure requirements. The Company's
operating plan for the remaining three months of 1997 includes continuing its
cost reduction programs. Such programs include the shut-down of the Company's
Edison candle facility, consolidation of candle manufacturing operation in
North Brunswick, reduction in
29
<PAGE>
temporary labor, automation of manufacturing facilities related to spray
products, production rationalization; increased use of high speed fillers and
cartoners and improved production planning and control. Management believes
that the corrective actions taken through September 30, 1997 and the ongoing
cost reduction programs currently in place, will have a positive impact on
operating results for the balance of 1997 and enable the Company to return to
profitability in the fourth quarter of 1997 or the first quarter of 1998.
Additionally, management is optimistic about its ability to reach a
satisfactory interim understanding with PNC and to ultimately replace the PNC
Facility and Bridge Loan with a permanent financing facility which will more
adequately support ongoing operations, debt service and capital expenditure
requirements. There can be no assurance that the Company will be successful in
these efforts.
INFLATION
The Company does not believe that the relatively moderate rates of
inflation which recently have been experienced in the United States have had a
significant effect on net sales or profitability.
NEW ACCOUNTING PRINCIPLE
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share." This
pronouncement must be implemented for annual and interim periods ending after
December 15, 1997. SFAS No. 128 does not permit early application.
30
<PAGE>
When implemented, SFAS No. 128 requires restatement of all prior period
earnings per share data. SFAS No. 128 calls for the calculation of basic
earnings per share, which is calculated using only weighted average shares
outstanding during the period and does not consider the assumed exercise of
shares utilizing the treasury stock method. In addition, SFAS No. 128 requires
the disclosure of diluted earnings per share. The historical effect of stock
options has not been included in the computation of earnings/(loss) per share
as the impact was not material or antidilutive. The Company believes that the
adoption of SFAS No. 128 will not have an impact on basic earnings per share
as compared with previously reported restated earnings per share amounts or
have a material effect on previously reported restated primary earnings per
share as compared with diluted earnings per share.
The Company's quarterly and annual operating results are affected by
a wide variety of factors that could materially and adversely affect revenues
and profitability, including competition from other suppliers of laundry and
household cleaning products; changes in consumer preferences and spending
habits; the inability to successfully manage growth; seasonality; the ability
to introduce and the timing of the introduction of new products; the inability
to obtain adequate supplies or materials at acceptable prices; the inability to
reduce expenses to a level commensurate with revenues; and the inability to
negotiate acceptable credit terms with current or prospective lenders. As a
result of these and other factors, the Company may experience material
fluctuations in future operating results on a quarterly or annual basis, which
could materially and adversely affect its business, financial condition,
operating results, and stock price. Furthermore, this document and other
documents
31
<PAGE>
filed by the Company with the Securities and Exchange Commission (the "SEC")
contain certain forward looking statements with respect to the business of the
Company, including prospective financing arrangements. These forward-looking
statements are subject to certain risks and uncertainties, including those
mentioned above, which may cause actual results to differ significantly from
these forward-looking statements. An investment in the Company involves
various risks, including those mentioned above and those which are detailed
from time to time in the Company's SEC filings.
32
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
Reference is made to the Company's Report on Form 10-Q for the
quarter ended June 30, 1997. See also Item 2 of this report for
a description of legal proceedings.
Item 2. Changes in Securities:
None
Item 3. Defaults Upon Senior Securities:
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
During the quarter for which this report is filed, the Company
filed the following Current Reports on Form 8-K:
1. Report dated August 12, 1997, attaching a press release
regarding the discovery of a number of errors in the Company's
1996 financial statements requiring the restatement of such
financial statements and the Company's inability to file its
report on Form 10-Q containing the Company's 1997 second
quarter results until a review was completed.
2. Report dated August 12, 1997, attaching a press release
regarding the postponement of the Company's Annual Meeting.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USA DETERGENTS, INC.
(Registrant)
November 13, 1997 /s/ Uri Evan
-----------------------
Uri Evan
Chairman and CEO
November 13, 1997 /s/ Giulio Perillo
-----------------------
Giulio Perillo
President
November 13, 1997 /s/ Richard D. Coslow
-------------------------
Richard D. Coslow
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form 10-Q for the quarterly period ended September 30, 1997, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 27,250
<ALLOWANCES> 3,838
<INVENTORY> 18,713
<CURRENT-ASSETS> 53,372
<PP&E> 53,226
<DEPRECIATION> 7,660
<TOTAL-ASSETS> 101,667
<CURRENT-LIABILITIES> 84,655
<BONDS> 0
0
0
<COMMON> 138
<OTHER-SE> 15,000
<TOTAL-LIABILITY-AND-EQUITY> 101,667
<SALES> 172,985
<TOTAL-REVENUES> 172,985
<CGS> 137,185
<TOTAL-COSTS> 56,665
<OTHER-EXPENSES> 2,379
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,884
<INCOME-PRETAX> (25,128)
<INCOME-TAX> 3,909
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
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<NET-INCOME> (21,219)
<EPS-PRIMARY> (1.54)
<EPS-DILUTED> 0
</TABLE>
