<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20509
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 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
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 _______ No ___X(1)____
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 its filing of its Form 10-Q for the
quarter ended June 30, 1997, which was required to be filed on
August 14, 1997 but was filed October 31, 1997. This Form 10-Q/A amends
the Company's report covering such period.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Item 1 to amended and restated to read as follows:
USA DETERGENTS, INC. AND SUBSIDIARIES
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1996 1997
(As restated- (Unaudited)
See Note 9)
<S> <C> <C>
Current assets:
Cash $ 2,373 $ 231
Accounts receivable, net of customer allowances and doubtful
accounts of $1,349 and $3,838, respectively 27,323 26,409
Inventories 28,830 20,508
Refundable income taxes 4,255 7,995
Deferred taxes 534 -
Prepaid expenses and other current assets 3,053 3,165
----------------------------
Total current assets 66,368 58,308
Property and equipment - net 26,783 41,919
Restricted funds 275 275
Other assets 2,800 2,606
Note receivable 2,250 -
----------------------------
Total assets $98,476 $103,108
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bridge loan $ 4,000 $ 10,000
Revolving credit line 29,305 28,923
EDA loan 1,806 1,653
Accounts payable 13,725 22,102
Accrued expenses 11,522 22,393
----------------------------
Total current liabilities 60,358 85,071
Non-current liabilities - 602
Deferred rent payable 1,284 1,252
Deferred taxes 735 -
----------------------------
Total liabilities 62,377 86,925
----------------------------
Stockholders' equity:
Preferred stock-no par value; authorized 1,000,000
shares, none issued - -
Common stock-$.01 par value; authorized 30,000,000 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 (11,808)
Total stockholders' equity 36,099 16,183
Total liabilities and stockholders' equity $98,476 $103,108
============================
</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 Six months
ended June 30, ended June 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 $43,328 $ 54,970 $76,773 $115,640
Cost of goods sold 28,978 46,767 52,064 96,112
----------- ---------- --------- ----------
Gross profit 14,350 8,203 24,709 19,528
Selling, general and administrative 9,864 20,956 17,378 40,109
Restructuring costs - 2,379 - 2,379
----------- ---------- --------- ----------
9,864 23,335 17,378 42,488
Income/(loss) from operations 4,486 (15,132) 7,331 (22,960)
Interest expense - net 153 677 320 1,123
----------- ---------- --------- ----------
Earnings/(loss) before income taxes 4,333 (15,809) 7,011 (24,083)
Provision/(benefit) for income taxes 1,675 (1,092) 2,886 (3,909)
----------- ---------- --------- ----------
Net income/(loss) $ 2,658 $(14,717) $ 4,125 $(20,174)
=========== ========== ========= ==========
Net income/(loss) per share $ 0.20 $ (1.07) $ 0.31 $ (1.46)
=========== ========== ========= ==========
Weighted average shares outstanding 13,479 13,794 13,436 13,779
=========== ========== ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
USA DETERGENTS, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six months
ended June 30,
------------------------------
1996 1997
(Unaudited) (Unaudited)
(As restated-
See Note 9)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $4,125 (20,174)
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 758 2,298
Change in the provision for customer allowances and doubtful accounts 267 2,489
Increase/(decrease) in deferred rent 117 (32)
Changes in operating assets and liabilities:
Increase in accounts receivable (5,036) (1,575)
(INCREASE)/DECREASE IN INVENTORIES (6,647) 8,322
Increase in prepaid expenses and other current assets (1,890) (112)
(INCREASE)/DECREASE IN OTHER ASSETS (2,631) 194
Increase in accounts payable and accrued expenses 4,975 19,248
Increase in refundable income taxes - (3,740)
Increase in prepaid income taxes (575) -
Decrease in taxes payable (182) -
Decrease in deferred tax asset 411 534
Increase/(decrease) in deferred tax liability 151 (735)
------------------------------
Net cash provided by/(used in) operating activities (6,157) 6,717
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,522) (17,434)
------------------------------
Net cash used in investing activities (3,522) (17,434)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long(term debt (177) (153)
Net proceeds/(repayments) from credit facility (1,535) 5,618
Increase in non(current liabilities - 602
Net proceeds from exercise of options 3 258
Net proceeds from sale of common shares 11,790 -
Decrease in note receivable - 2,250
------------------------------
Net cash provided by financing activities 10,081 8,575
------------------------------
Net increase/(decrease) in cash 402 (2,142)
Cash at beginning of period 61 2,373
------------------------------
Cash at June 30, $ 463 $ 231
==============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $314 $947
==============================
Income taxes $3,047 $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 SIX MONTHS ENDED JUNE 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 three months ended June 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% (7.19% as of June 30, 1997) or one percent below the
prime rate of PNC. All amounts outstanding under the PNC Facility, as of June
30, 1997 (approximately $28.9 million), were subject to the 7.19% 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 plus 1.5% (7.25% as of June 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 June 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 been pursuing other alternatives and is
3
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presently in negotiations with financial institutions to provide a secured
financing arrangement for the Company.
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 other prospective
third party lenders 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 is exploring
alternative sources of financing and is currently in discussions with another
financial institution to provide a secured financing package. 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
alternative sources of financing.
4
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The Company also has a loan facility of $2.75 million from the New
Jersey Economic Development Authority (the "EDA Loan"). As of June 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 (4.15% at June 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 $30.2 million of
debt as of June 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 any, to
7
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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 six months ended June 30, 1997, the Company obtained
proceeds approximating $258,000 from the exercise of 42,459 stock options.
NOTE 7 - INCOME TAXES
The income tax benefit for the three and six month periods ended
June 30, 1997 is less than the statutory rate due to a net operating loss
carryforward of approximately $10,200,000 for which no benefit has been
recognized.
10
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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,
antidilutive.
11
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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 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 six
months ended June 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 six months ended June 30, 1996 are summarized as follows:
12
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<TABLE>
<CAPTION>
Year Ended Year Ended Three Months Ended Three Months Ended
December 31, 1996 December 31, 1996 June 30, 1996 June 30, 1996
----------------- ----------------- ------------------ ------------------
(As originally Reported) (As Restated) (As originally Reported) (As Restated)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations
- -----------------------
Net sales $174,031 $172,424 42,915 43,328
Gross profit 58,693 50,926 14,564 14,350
Selling, general and
administrative 43,046 43,878 9,994 9,864
Operating income 15,647 7,048 4,570 4,486
Net income 8,867 3,707 2,703 2,658
Net income per share $.65 $.27 $.20 $.20
Balance Sheet December 31, 1996
- ----------------------- ---------------------------------
(As originally (As Restated)
Reported)
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)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1996
---------------- ----------------
(As originally Reported) (As Restated)
<S> <C> <C>
Statement of Operations
- -----------------------
Net sales $76,982 $76,773
Gross profit 26,106 24,709
Selling, general and
administrative 17,946 17,378
Operating income 8,160 7,331
Net income 4,791 4,125
Net income per share $.36 $.31
Balance Sheet June 30, 1996
- --------------------- ----------------------------------------------
(As originally (As Restated)
Reported)
Current assets 41,466 40,878
Total assets 60,295 59,457
Current liabilities 19,373 21,185
Total liabilities 23,420 23,247
Stockholders' equity 36,875 36,210
</TABLE>
All comparisons to the three and six months ended June 30, 1996 are based
on amounts as restated.
13
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Item 2 is amended and restated to read as follows:
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 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 six
months ended June 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 six
months ended June 30, 1996 are summarized as follows:
14
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<TABLE>
<CAPTION>
Year Ended Year Ended Three Months Ended Three Months Ended
December 31, 1996 December 31, 1996 June 30, 1996 June 30, 1996
---------- ---------- ------------------ ------------------
(As originally Reported) (As Restated) (As originally Reported) (As Restated)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations
- -----------------------
Net sales $174,031 $172,424 42,915 43,328
Gross profit 58,643 50,926 14,564 14,350
Selling, general and
administrative 43,046 43,878 9,994 9,864
Operating income 15,647 7,048 4,570 4,486
Net income 8,867 3,707 2,703 2,658
Net income per share $.65 $.27 $.20 $.20
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 FROM ABOVE)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
6/30/1996 6/30/1996
---------------- ----------------
(As originally Reported) (As Restated)
<C> <C>
Statement of Operations
- -----------------------
Net sales $76,982 $76,773
Gross profit 26,106 24,709
Selling, general and
administrative 17,946 17,378
Operating income 8,160 7,331
Net income 4,791 4,125
Net income per share $.36 $.31
Balance Sheet
- -----------------------
Current assets 41,466 40,878
Total assets 60,295 59,457
Current liabilities 19,373 21,185
Total liabilities 23,420 23,247
Stockholders' equity 36,875 36,210
</TABLE>
All comparisons to the three and six months ended June 30, 1996 are based on
amounts as restated.
15
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THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Net sales for the three months ended June 30, 1997 increased 26.9% to
$55.0 million from $43.3 million for the three months ended June 30, 1996. The
increase is primarily the result of an increase in unit sales of laundry
products and candles.
Gross profit decreased 42.8% to $8.2 million in the three months
ended June 30, 1997 from $14.4 million for the comparable period in 1996.
Gross profit decreased as a percentage of net sales to 14.9% in the three
months ended June 30, 1997 from 33.1% for the comparable period in 1996. The
decrease as a percentage of net sales was primarily attributable to an
increase in materials and labor costs of 8.7% and 2.5% 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 6.0% 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
16
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began in the latter part of 1996, continued to have a significant impact on
the first and second quarters of 1997.
Selling, general and administrative expenses increased 112.4% to
$21.0 million in the three months ended June 30, 1997 from $9.9 million for
the comparable period in 1996. As a percentage of net sales, these expenses
increased to 38.1% in the three months ended June 30, 1997 from 22.8% for the
comparable period in 1996. The increase as a percentage of net sales was
primarily due to increases of 9.5% in marketing funds (co-op advertising,
promotional allowances and slotting amortization), 2.4% in freight to
customers, 1.4% in professional fees, 1.2% in administrative personnel
and .8% in commissions.
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.
Interest expense-net increased to $.7 million in the three months
ended June 30, 1997 from $.2 million for the comparable period in 1996,
primarily as a result of higher average outstanding borrowings.
17
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The income tax benefit for the three months ended June 30, 1997
approximates 6.9% compared to a provision which approximates 38.7% for the
three months ended June 30, 1996. This decrease principally relates to a net
operating loss carryforward of approximately $10,200,000 for which no benefit
has been recognized.
18
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SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Net sales for the six months ended June 30, 1997 increased 50.6% to
$115.6 million from $76.8 million for the six months ended June 30, 1996. The
increase is primarily the result of an increase in unit sales of laundry
products and candles.
Gross profit decreased 21% to $19.5 million in the six months ended
June 30, 1997 from $24.7 million for the comparable period in 1996. Gross
profit decreased as a percentage of net sales to 16.9% in the six months ended
June 30, 1997 from 32.2% 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 7.7% and 1.7% 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 5.6% 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 increased costs, which
began in the
19
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latter part of 1996, continued to have a significant impact on the first six
months of 1997.
Management has implemented various cost reduction programs during the
six months ended June 30, 1997, the benefits from which are expected to be
realized in the third quarter of 1997 and 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,
production rationalization, increased use of high speed fillers and cartoners
and improved production planning and control.
Selling, general and administrative expenses increased 130.8% to
$40.1 million in the six months ended June 30, 1997 from $17.4 million for the
comparable period in 1996. As a percentage of net sales, these expenses
increased to 34.7% in the six months ended June 30, 1997 from 22.6% for the
comparable period in 1996. The increase as a percentage of net sales was
primarily due to increases of 8.7% in marketing funds (co-op advertising,
promotional allowances and slotting amortization), 1.8% in freight to
customers, .6% in professional fees and .5% in sales commissions.
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
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$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 $1.1 million in the six months
ended June 30, 1997 from $.3 million for the comparable period in 1996,
primarily as a result of higher average outstanding borrowings.
The income tax benefit for the six months ended June 30, 1997
approximates 16.2% compared to a provision which approximates 41.2% for the
six months ended June 30, 1996. This decrease principally relates to a net
operating loss carry forward of approximately $10,200,000 for which no benefit
has been recognized.
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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% (7.19% as of June 30, 1997) or one percent below the
prime rate of PNC. All amounts outstanding under the PNC Facility, as of June
30, 1997 (approximately $28.9 million), were subject to the 7.19% 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 plus 1.5% (7.25% as of June 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 June 30,
1997, the Company was not in compliance with various covenants and other
material provisions
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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 been pursuing other alternatives and is presently in negotiations
with financial institutions to provide a secured financing arrangement for the
Company.
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 other prospective
third party lenders 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 is exploring
alternative sources of financing and is currently in discussions with another
financial institution to provide a secured financing package. 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
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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 alternative
sources of financing.
The Company also has a loan facility of $2.75 million from the New
Jersey Economic Development Authority (the "EDA Loan"). As of June 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 (4.15% at June 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 $30.2 million of
debt as of June 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
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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 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
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outcome in the litigation could have a material adverse effect on the
Company's financial condition and results of operations.
During the three months ended June 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. 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.
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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 six months ended June 30, 1997, the Company obtained
proceeds approximating $258,000 from the exercise of 42,459 stock options.
At June 30, 1997, the Company's working capital deficiency was $26.8
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 $19.2 million, a decrease in inventory of $8.3 million,
an increase in bank debt of $5.6 million, a decrease in cash of $2.1 million
and an increase in net accounts receivable of $1.6 million and an increase in
refundable income taxes of $3.7 million.
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Net cash provided by/ (used in) operating activities for the first
six months of 1997 was $6.7 million compared to ($6.2) million for the
comparable period of 1996. The increase in cash provided by operating
activities resulted primarily from operating losses of $20.2 million offset
by a decrease in inventory of $8.3 million, an increase in accounts payable
and accrued expenses of $19.2 million, an increase in accounts receivable
of $1.5 million, an increase in refundable income taxes of $3.7 million and
depreciation of $2.3 million and an increase in provisions for customer
allowances and doubtful accounts of $2.5 million.
Net cash used in investing activities for the six months ended June
30, 1997 was $17.4 million relating primarily to the acquisition of a
distribution center, the acquisition of a powder production facility and
production equipment. The Company anticipates that capital expenditures for
the balance of 1997 will be between $6 million and $8 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.
Net cash provided by financing activities for the first six months
of 1997 was $8.6 million compared to $10 million for the comparable period
of 1996. Such amount for the current six month period provided by financing
activities resulted primarily from a net increase in bank debt of $5.6 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 six months ended June 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 six months of 1997 includes continuing its
cost reduction programs. Such programs include the shut-down of the Company's
Edison candle facility,
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consolidation of candle manufacturing operations in North Brunswick, reduction
in 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 June 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. When
implemented, SFAS No. 128 requires
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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; and changes in
economic conditions. 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 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 and the
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industry in which it operates. 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.
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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
