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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
Commission File No. 333-76055
UNITED INDUSTRIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 43-1025604
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8825 Page Boulevard
St. Louis, Missouri 63114
(Address of principal executive office, including zip code)
(314) 427-0780
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10K. (N/A)
There is no established public market for the Registrant's common stock.
As of March 30, 2000, the Registrant had 27,650,000 Class A voting and
27,650,000 Class B non-voting shares of common stock outstanding.
Documents Incorporated by Reference: None
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PART I
Item 1. Business
General
United Industries Corporation (the "Company") is the leading manufacturer
and marketer of value-oriented branded products for the consumer lawn and
garden pesticide and household insecticide markets in the United States. The
Company manufactures and markets one of the broadest lines of pesticides in
the industry, including herbicides and indoor and outdoor insecticides, as
well as insect repellents and water-soluble fertilizers, under a variety of
brand names. The Company's "value" and "opening price point" brands generally
compete with higher priced premium brands.
In 1999, the Company generated net sales, income (loss) from continuing
operations and EBITDA of $304.0 million, $(9.3) million and $58.4 million,
respectively. The management team has grown the Company's business by
developing new products and acquiring strategic brands while also improving
operating efficiencies. As a result, from 1995 to 1999 the Company's:
. Net sales grew at a compound annual rate of 17.6%;
. EBITDA grew at a compound annual rate of 26.4%; and
. EBITDA margin increased from 14.4% to 19.2%.
Industry Overview
Retail sales of consumer lawn and garden pesticides and household
insecticides in the United States totaled $2.7 billion in 1999. Since 1995,
the market for these products has grown at an average annual rate of
approximately 3%. Historically, consumer lawn and garden care products have
been distributed through a variety of retail channels, including home
improvement centers, mass merchandisers, hardware stores, grocery and drug
stores, warehouse clubs and garden centers. In recent years, as home
improvement centers and mass merchandisers have added stores and expanded
their lawn and garden care departments, consumers have increasingly purchased
their lawn and garden care needs from these outlets due to their broader and
deeper product offerings, competitive prices and convenient locations and
hours.
Competitive Strengths
Leading Value-Oriented Brands. The Company is the leading manufacturer and
marketer of value-oriented branded products for the consumer lawn and garden
pesticide and household insecticide markets in the United States. The
Company's value and opening price point brands have driven a shift in the
industry by offering innovative products comparable or superior in quality to
premium brands at lower prices. As a result, the Company's products have
developed significant brand awareness and customer loyalty.
Strategic Partnerships With Leading Retailers. The Company has developed
"strategic partnerships" with a number of leading national retailers in the
fastest growing retail channels. The Company's four largest customers, Home
Depot, Wal*Mart, Lowes and Kmart, each hold significant positions in the lawn
and garden care market and have together opened approximately 1,000 net new
stores over the last five years. As a result, the Company has been able to
significantly increase sales as these retailers have added new stores and
captured market share.
Large, Exclusive Direct Sales Force. The Company has the largest direct
sales force in the industry, with approximately 270 sales representatives
dedicated to merchandising the Company's products. Each representative is
responsible for approximately 30 retail outlets and typically visits each
store on a weekly basis to merchandise shelf space, collect inventory data,
record orders and educate in-store personnel about the Company's products.
This process facilitates real time marketing, re-ordering and pricing
decisions, helping to maximize store-level profitability. In addition, the
Company's sales force helps to identify emerging trends and develop products
to meet consumers' needs.
Proprietary Management Information System. The Company's proprietary
management information system provides real time data on sales, orders and
inventories at each retail outlet, allowing targeted sales promotions and
efficient inventory management. With same-day order processing and
strategically located distribution centers throughout the United States, the
Company is generally able to deliver products to retailers within 72 hours of
an order, allowing retailers to maintain lower inventory levels, generate
higher turns and minimize costly returns.
Business Strategy
The Company plans to capitalize on its strengths and the favorable industry
trends to enhance its leadership position in value and opening price point
brands by implementing the following key elements of its business strategy:
Enhance Value Brand Position. The Company plans to maintain focus on
building its leading value brands for the consumer lawn and garden pesticide
and household insecticide markets. The Company's strategy is to provide
innovative products of comparable or superior quality to competitors at a
lower price to appeal to the segment of consumers that desire a better value.
Partner with Leading Retailers. The Company believes that its strong value
brand position coupled with its operational expertise will allow the Company
to partner with leading national retailers to develop opening price point
brands. The Company currently manufactures and markets the opening price point
brands for leading retailers such as Home Depot, Kmart and Lowes.
Maximize Category Profitability for Retailers. The Company focuses on
maximizing retailers' profitability in selling the Company's products by being
a low-cost provider and leveraging the Company's one-step distribution. The
Company is a low-cost provider as a result of its high level of vertical
integration and patented water-based aerosol technology. The Company has a
one-step distribution process through its approximately 270 person exclusive
direct sales force, the largest in the industry.
Leverage Distribution Network. The Company continually seeks to capitalize
on its strong distribution network and relationship with retailers. The
Company has increased its sales and improved operating leverage by supplying
complementary product lines to retailers. The Company adds new products either
through new product development or by acquiring product lines. The Company's
new product development strategy has been to introduce innovative products
that have superior performance, easy-to-understand packaging and value
pricing. New products generate additional sales and generally provide higher
margins to the Company and its retailers. The Company's brand acquisition
strategy has been to selectively acquire product lines that can benefit from
the Company's strong distribution network, product development expertise and
other competitive strengths. Acquired product lines such as Peters(R) and
Cutter(R) have experienced rapid growth upon integration into the Company's
distribution network.
Target Professional Market. While the primary end users of the Company's
products have historically been household consumers, the Company has begun to
target smaller independent pest control operators and lawn and garden care
professionals through its existing retail channels. Historically, these
professionals have purchased their pesticide and lawn and garden care products
from commercial distributors. The Company believes that these professionals
will increasingly utilize the home improvement center channel to take
advantage of the competitive prices, convenience of locations and hours,
delivery services and availability of credit offered. To benefit from and
further drive this trend, the Company developed Spectracide Pro(R), a group of
products designed specifically for the professional market. Launched in March
1999, this line of professional pesticides is supported by national
advertising in relevant trade magazines, in-store promotional campaigns, an
exclusive direct sales force and technical support. The Company believes that
it can capitalize on its strong relationships with leading national retailers
to gain a meaningful position in the professional market.
The Company's History
The Company was founded in 1969 and initially focused on metal works and
anchor and bolt production. In 1973, the Company acquired Spray Chem, a
contract manufacturer of liquid and aerosol insecticides and herbicides. In
1985, the Company acquired Real-Kill and entered into the manufacturing and
distribution of branded products. In 1988, the Company formed its core
businesses through the acquisition of certain assets of various businesses of
Chesebrough-
2
Ponds, a subsidiary of Unilever plc. The acquired brands included
Spectracide(R), Hot Shot(R), Rid-a-Bug(R), Bag-a-Bug(R) and No-Pest(R),
expanding the Company's products to include a wide array of value-oriented
indoor and outdoor pesticides. In 1994, the Company acquired assets relating
to the Cutter(R) brand from Miles, Inc. In 1995, the Company acquired assets
from Alljack Company and Celex Corporation, including a license to use the
Peters(R) brand name, the manufacturing rights of Kmart's opening price point
brands, Krid(R) and Kgro(R), and the Shootout(R) and Gro Best(R) brand names.
On January 20, 1999, pursuant to a Recapitalization Agreement with UIC
Holdings, L.L.C., which is owned by Thomas H. Lee Equity Fund IV, L.P., the
Company was recapitalized (the "Recapitalization") in a transaction in which:
(i) UIC Holdings, L.L.C. purchased common stock from the Company's existing
stockholders for approximately $254.7 million; (ii) the Company's senior
managers purchased common stock from the Company's existing stockholders for
approximately $5.7 million; and (iii) the Company used the net proceeds of a
Senior Subordinated Facility (which was subsequently refinanced by the
issuance of new notes) and borrowings under a Senior Credit Facility to redeem
a portion of the common stock held by the Company's existing stockholders.
Following the Recapitalization, UIC Holdings, L.L.C. owned approximately 91.9%
of the Company's issued and outstanding common stock, the existing
stockholders retained approximately 6.0% and the Company's senior managers
owned approximately 2.1%. On January 20, 1999, the total transaction value of
the Recapitalization was approximately $652.0 million, including related fees
and expenses, and the implied total equity value following the
Recapitalization was approximately $277.0 million. In December 1999, the
Company recorded a $7.2 million charge to equity to finalize costs associated
with the Recapitalization, increasing the total transaction value to $659.2
million.
Products
The Company manufactures and markets one of the broadest lines of
pesticides in the industry, including herbicides and indoor and outdoor
insecticides, as well as insect repellents and water soluble fertilizers,
under a variety of brand names. The Company's products have comparable or
superior quality and performance to premium brands, but are typically priced
at a 10% to 20% discount. The Company's value brands are targeted toward
consumers who want products and packaging that are comparable or superior to
premium brands, but at a lower price, while the Company's opening price point
brands are designed for consumers who want quality products and packaging, but
are extremely cost conscious. The following is a description of each of the
Company's major products.
Value Brands (80% of 1999 net sales)
The Company sells a broad line of value brands marketed under such names as
Spectracide(R), Spectracide Terminate(TM), Spectracide Pro(R), Hot Shot(R),
Cutter(R) and Peters(R). Below is a description of each of the Company's value
brands:
Spectracide(R). The Spectracide(R) product line primarily consists of
outdoor insect control products and herbicides, but also includes indoor
insect control products, specialty items such as plant disease control and
rose care products, and regional products such as fire ant killer and Japanese
beetle traps.
Spectracide Terminate(TM). Introduced in 1998, Spectracide Terminate(TM) is
the first ever do-it-yourself consumer termite killing system. The product is
based on professional bait stake technology and comes in 20 and 40 stake
packages to meet the needs of a wide range of property sizes.
Spectracide Pro(R). The Spectracide Pro(R) product line, which was
introduced in March 1999, targets smaller independent lawn and garden care
professionals and pest control operators. Many trade professionals are
increasingly purchasing their supplies at home improvement centers. To benefit
from this trend, the Company developed the Spectracide Pro(R) line, a group of
products designed specifically for the professional market.
Hot Shot(R). The Hot Shot(R) product line consists of household
insecticides, including items such as roach and ant killers, flying insect
killers, foggers, wasp and hornet killers, rodenticides, flea control products
and, most recently, a new line of roach and ant baits.
Cutter(R). Acquired from Miles, Inc. in 1994, the Cutter(R) product line
provides protection for the entire family, ranging from area repellent
citronella candles to products designed especially for use on children and the
outdoorsman. The Company has repositioned Cutter(R) as a value brand and
increased its distribution.
3
Peters(R). The Peters(R) product line is a water-soluble fertilizer
available in all-purpose formulations as well as specialty formulations for
lawns, roses, tomatoes, orchids and azaleas. In 1999, the Company introduced
new high-impact packaging graphics and new all-weather packaging material and
merchandising displays to improve shelf appearance and allow the products to
be displayed in the live goods departments of home improvement centers and
mass merchandisers.
Other Value Brands. The Company also manufactures and markets regional
value brands in Florida and the Caribbean. Rid-a-Bug(R), sold exclusively in
Florida, is a leading household pesticide product in that state. Real-Kill(R),
marketed as a Spanish-labeled product throughout the Caribbean, has become the
leading brand of household insecticides in Puerto Rico. The Company also
manufactures private label products for hardware co-operatives and other
retailers and produce under contract pesticides and other products for other
customers.
Opening Price Point Brands (20% of 1999 net sales)
An important aspect of the Company's growth over the past few years has
resulted from the Company's introduction of opening price point brands at home
improvement centers and mass merchandisers. By introducing these products, the
Company has effectively acquired shelf space at the expense of its competitors
by displacing premium brands and lower quality regional brands. The Company's
strategic retail partners have also benefited from the Company's introduction
of opening price point brands through streamlined logistics, better inventory
control and higher margins. Below is a description of each of the Company's
opening price point brands.
Real-Kill(R). In 1997, the Company repositioned Real-Kill(R), relaunching
the brand exclusively at Home Depot as its opening price point brand. The
brand consists of indoor and outdoor pesticides.
No-Pest(R). In late 1997, the Company introduced No-Pest(R) exclusively at
Lowes as its opening price point brand. The brand consists of indoor and
outdoor pesticides.
Krid(R), Kgro(R), Shootout(R) and Gro Best(R). In late 1995, the Company
acquired the manufacturing operations, which produce the Kmart owned opening
price point brands, Krid(R) and Kgro(R), and the brand names, Shootout(R) and
Gro Best(R). These brands consist of indoor and outdoor pesticides and soluble
fertilizers.
Customers
The Company sells its products through all major retail channels, including
home improvement centers, mass merchandisers, hardware stores, grocery and
drug stores, wholesale clubs and garden centers. The Company is heavily
dependent on Home Depot, Wal*Mart, Lowes and Kmart for a substantial portion
of its sales. These four customers accounted for approximately 73%, 68% and
64% of net sales for 1999, 1998 and 1997, respectively.
The Company manufactures and supplies products to hundreds of customers
representing more than 70,000 retail stores across the United States and in
select locations in Canada, Puerto Rico and the Caribbean. The Company's
leadership position in the home improvement center and mass merchandiser
channels is a key element of its past and future success. Industry wide,
category sales continue to shift to the home improvement center and mass
merchandiser channels. Sales are seasonal as approximately 75% of shipments
will occur in the first two quarters of the fiscal year.
Sales and Marketing
The Company conducts sales activities through its exclusive direct sales
force, which consists of approximately 250 territory managers and 20 area
sales managers. Territory managers are typically responsible for 30 retail
stores and visit stores on a weekly basis to merchandise shelves and collect
inventory data. Territory managers' store visits generate close to 1,000 store
reports a day. The data collected includes real-time information on SKUs,
inventory levels and sales. This data is used by territory managers and
customers to develop promotional campaigns and merchandising plans that
maximize store level sales and profitability. This process facilitates real-
time marketing, re-ordering and pricing decisions. In addition, the Company
supports the Spectracide Terminate(TM) product through employing a seasonal
in-store sales force of approximately 100 people, and the Spectracide Pro(R)
line by an outside sales force of 20 people.
4
The Company's marketing department leads the new product development
process and develops consumer support plans to help drive sales through the
Company's strong distribution network. To promote the Company's products to
consumers, the Company advertises on national and local television, radio and
print media; develops consumer promotions; and engages in market research
efforts.
Research and Development
In 1999, 1998 and 1997, the Company spent $1.0, $0.8 and $0.6 million,
respectively, on research and development. The Company's research and
development department has developed over 80 new products since 1996. Although
the Company's expertise is in applied formulation, items like the patented
water-based aerosol technology, the exclusive formulation of diquat fusillade
and the dual insect and disease control formulations were developed
internally.
Raw Materials and Suppliers
The key elements of the Company's products are various commodity and
specialty chemicals including diazinon, Dursban(R) and sulfluramid, as well as
packaging materials. The Company obtains raw materials from various suppliers.
No one vendor is considered to be essential to the Company's operations, and
the Company has never experienced a significant interruption of supply.
Several of the Company's agreements with suppliers provide for price
adjustments. In addition, some of the Company's agreements with suppliers
provide for exclusivity rights, subject to minimum purchase requirements.
Competition
The Company operates in a highly competitive market and competes against a
number of national and regional brands. The Company's principal national
competitors include: The Scotts Company, which markets products under the
Ortho(R), Roundup(R) and Miracle-Gro(R) brand names; S.C. Johnson & Son, Inc.,
which markets products under the Raid(R) and OFF!(R) brand names; and The
Clorox Company, which markets products under the Combat(R) and Black Flag(R)
brand names.
Intellectual Property
The Company operates and owns a substantial number of trademarks and
tradenames including the following: Spectracide(R), Spectracide Terminate(TM),
Spectracide Pro(R), Hot Shot(R), Rid-a-Bug(R), Bag-a-Bug(R), Real-Kill(R), No-
Pest(R), Shootout(R) and Gro Best(R). The Company licenses the Cutter(R)
trademark and other members of the Cutter(R) family of trademarks from Bayer
Corporation and the Peters(R) and Peters Professional(R) trademarks from The
Scotts Company. These licenses are, in effect, perpetual and exclusive.
Employees
As of March 30, 2000, the Company had approximately 878 full-time
employees. Approximately 300 of the Company's employees are covered by
collective bargaining agreements, which expire in August, 2002, with
Finishers, Maintenance Painters, Industrial and Allied Workers Local Union
980, AFL-CIO.
Environmental Matters
The Company is subject to federal, state, local and foreign laws and
regulations governing environmental matters. The Company's manufacturing
operations are subject to requirements regulating air emissions, wastewater
discharge, waste management, and the cleanup of contamination. Based on
assessments conducted by independent environmental consultants the Company
believes that it is in material compliance with these requirements and has no
material environmental liabilities. The Company may be subject to fines or
penalties if the Company fails to comply with these environmental laws and
regulations. The Company does not anticipate any material capital expenditures
for environmental controls in 2000.
The Company's pesticide products must be reviewed and registered by EPA and
similar state agencies or, in foreign jurisdictions, foreign agencies, before
they can be marketed. The Company devotes substantial resources to
5
maintaining compliance with these registration requirements. If the Company
fails to comply, however, the affected pesticide could be suspended or
canceled, and the Company could be subject to fines or penalties.
Additionally, EPA is in the process of re-registering all pesticides and is
requiring manufacturers to supply EPA with additional data regarding their
pesticides. Where possible, the Company is working with trade associations to
reduce the Company's cost of developing this data.
The Company's fertilizer products must be reviewed and registered by each
state prior to sale. The states typically check the weight of the product and
the accuracy of the analysis statement on the packaging. Other consumer
products the Company markets are subject to the safety requirements of the
Consumer Product Safety Commission. If the Company fails to comply with any of
these requirements, the Company could be suspended or prohibited from
marketing the affected product.
Item 2. Properties
The Company has two manufacturing facilities located in Vinita Park,
Missouri and one Manufacturing facility in Plymouth, Michigan. Three types of
product categories are manufactured at these facilities: aerosols, liquids and
water-soluble fertilizers. The typical manufacturing process consists of four
stages: batch, fill, label and pack. The Company currently produces over 300
SKUs through the Company's four aerosol production lines, three liquid
production lines and two water-soluble fertilizer production lines. The
Company's production lines are flexible and can operate at a variety of
filling speeds and produce multiple shipping configurations. The Company uses
outside manufacturers for the production of granular insecticides, baits and
candles.
The Company has four distribution centers, located in Vinita Park,
Missouri; Allentown, Pennsylvania; Gainesville, Georgia; and Ontario,
California.
Item 3. Legal Proceedings
In March 1998, a judgement for $1.2 million was entered against the Company
for a lawsuit filed in 1992 by the spouse of a former employee claiming
benefits from a Company-owned key man life insurance policy. On August 24,
1999 the Missouri District Court of Appeals, Eastern District, affirmed the
trial court's decision. On December 1, 1999, after the Missouri Supreme Court
further reviewed the trial courts decision, the Company paid $1.3 million to
satisfy the judgement entered in this case, including legal costs of $.1
million
The Company is involved in litigation and arbitration proceedings in the
normal course of business that assert product liability and other claims. The
Company is contesting all such claims. When it appears probable in
management's judgment that the Company will incur monetary damages or other
costs in connection with such claims and proceedings, and such costs can be
reasonably estimated, appropriate liabilities are recorded in the financial
statements and charges are made against earnings.
Management believes the possibility of a material adverse effect on the
Company's consolidated financial position, results of operations and cash
flows from the claims and proceedings described above is remote.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the security holders during
the fourth quarter of the fiscal year covered by this Report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company does not have publicly held common stock. Pursuant to the
Recapitalization Agreement the Company's Senior Managers purchased
approximately 2.1% of the Company's issued and outstanding common stock.
6
Item 6. Selected Financial Data
The selected historical financial data for the fiscal year ended December
31, 1999 and 1998 have been derived from audited financial statements included
elsewhere in this report. The historical financial data for the years ended
December 31, 1997, 1996 and 1995 have been derived from audited financial
statements which do not appear in this report. When you read this selected
historical financial data, it is important that you read along with it the
financial statements and related notes, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," all of which is
included in this report.
Year Ended December 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(000's)
Statements of Operations:
Net sales................... $304,048 $282,676 $242,601 $199,495 $159,192
-------- -------- -------- -------- --------
Operating costs and
expenses:
Cost of goods sold......... 150,344 140,445 128,049 106,640 82,603
Advertising and promotion
expenses.................. 29,182 31,719 25,547 22,804 17,813
Selling, general and
administrative expenses... 70,886 61,066 52,092 46,276 38,629
Recapitalization
transaction fees.......... 10,690 -- -- -- --
Change of control bonuses.. 8,645 -- -- -- --
Severance charge........... 2,446 -- -- -- --
Non-recurring litigation
charges................... 1,647 2,321 -- -- --
-------- -------- -------- -------- --------
Total operating costs and
expenses................... 273,840 235,551 205,688 175,720 139,045
-------- -------- -------- -------- --------
Operating income............ 30,208 47,125 36,913 23,775 20,147
Interest expense............ 35,223 1,106 1,267 1,502 609
-------- -------- -------- -------- --------
(Loss) income before
provision for income taxes,
discontinued operations and
extraodinary item.......... (5,015) 46,019 35,646 22,273 19,538
Income tax expense.......... 4,257 992 726 447 289
-------- -------- -------- -------- --------
(Loss) income from
continuing operations...... $ (9,272) $ 45,027 $ 34,920 $ 21,826 $ 19,249
======== ======== ======== ======== ========
Other Financial Data:
Cash flow from continuing
operations................. $ 23,434 $ 50,763 $ 35,136 $ 27,741 $ 14,316
Cash used by investing
activities continuing
operations................. 3,038 3,628 5,138 6,384 19,253
Cash (used by) provided by
financing activities....... 20,396 49,088 32,329 23,645 (607)
EBITDA (1).................. 58,351 53,284 40,510 27,336 22,862
Depreciation and
amortization............... 4,715 3,838 3,597 3,561 2,715
Capital expenditures (2).... 3,038 3,628 5,138 6,384 4,726
Gross margin................ 50.6% 50.3% 47.2% 46.5% 48.1%
EBITDA margin............... 19.2 18.8 16.7 13.7 14.4
Ratio of earnings to fixed
charges (3)................ .9x 17.6x 13.9x 8.3x 12.4x
Balance Sheet Data:
Working Capital(4).......... $ 22,938 $ 30,042 $ 32,046 $ 26,919 $ 29,565
Total assets................ 241,878 94,161 97,441 84,254 82,979
Total debt.................. 369,255 4,645 3,997 13,960 16,200
Stockholder's equity
(deficit).................. (186,802) 58,257 64,449 46,829 45,864
- -------
(1) EBITDA represents income from continuing operations before interest
expense, income tax expense, depreciation and amortization,
recapitalization transaction fees, change of control bonuses, severance
charges and non-recurring litigation charges. During 1999, the Company
accrued $10,690 for recapitalization transaction fees, $8,645 for change
of control bonuses and $2,446 for severance charges. For 1999 and 1998,
the Company accrued $1,647 and $2,321 for non-recurring litigation
charges, respectively. The Company has included information concerning
EBITDA because the Company believes it is used by certain investors as one
measure of a company's historical ability to fund operations and meet its
financial obligations. EBITDA is not intended to represent cash flow from
operations as defined by generally accepted accounting principles and
should not be used as an alternative to operating income or income from
continuing operations as an indicator of the Company's operating
performance or cash flow as a measure of liquidity. In addition, the
Company's definition of EBITDA may not be comparable to that reported by
other companies. EBITDA is calculated as follows:
7
Year Ended December 31,
----------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Income (loss) from continuing
operations (a)................. $(9,272) $45,027 $34,920 $21,826 $19,249
Interest expense................ 35,223 1,106 1,267 1,502 609
Income tax expense.............. 4,257 992 726 447 289
Depreciation and amortization... 4,715 3,838 3,597 3,561 2,715
Recapitalization transaction
fees (b)....................... 10,690 -- -- -- --
Change of control bonuses (c)... 8,645 -- -- -- --
Severance charges (c)........... 2,446 -- -- -- --
Non-recurring litigation charges
(c)............................ 1,647 2,321 -- -- --
------- ------- ------- ------- -------
EBITDA (c)...................... $58,351 $53,284 $40,510 $27,336 $22,862
======= ======= ======= ======= =======
-------
(a) Does not reflect the elimination of stockholder salaries and certain
fringe benefits that were in effect prior to the recapitalization and
were reflective of the private ownership structure that existed prior
to the Recapitalization, offset by the salary and fringe benefit
structure that was implemented with the Recapitalization. The related
party transactions' amounts were $7,740, $3,061, $3,847, and $4,215 for
the years ended 1998, 1997, 1996, and 1995.
(b) As of December 31, 1999, the Company incurred $31,312 in fees and
expenses associated with the Recapitalization. Fees and expenses that
could be specifically identified as relating to the issuance of debt
were capitalized and will be amortized over the life of the debt as
interest expense. The fees and expenses that could be specifically
identified as relating to the equity transactions were charged directly
to equity. Other transaction fees were allocated between debt and
Recapitalization transaction fees expense based on United's estimate of
the effort spent in the activity giving rise to the fee or expense.
(c) During 1999, the Company recorded various charges as follows: (a)
change of control bonuses paid to certain members of senior management
amounting to $8,645; (b) $2,446 of severance charges incurred as a
result of the President and Chief Executive Officer and Senior Vice
President, Sales terminating their employment with the Company; and (c)
$1,500 of non-recurring litigation charges to primarily reserve for the
expected cost of an adverse judgement on a counterclaim filed by
defendants in the case of United Industries Corporation vs. John
Allman, Craig Jackman et al. This case was settled in July 1999. In
1998, the Company recorded non-recurring litigation charges of $2,321
related to two separate lawsuits. In March 1998, a judgment was entered
against us for a lawsuit filed by the spouse of a former employee
claiming benefits from a United-owned key man life insurance policy.
The Company recorded a charge of $1,200 for this case in the first
quarter of 1998 and an additional $147 in the fourth quarter of 1999.
The Company also incurred costs pertaining to certain litigation
concerning the advertising of the Company's Spectracide TerminateTM
product for which a settlement was negotiated. Costs related to this
case amounted to $1,121.
(2) Capital expenditures for 1995 exclude $8,272 of expenditures related to
acquisitions. Capital expenditures for 1999 exclude a capital lease
obligation of $9,215.
(3) For purposes of this calculation, earnings are defined as income before
provision for income taxes, discontinued operations and extraordinary item
plus fixed charges. Fixed charges include interest expense on all
indebtedness (including amortization of deferred financing costs) and the
portion of operating lease rental expense which management believes is
representative of the interest factor of rent expense (approximately one-
third of rent expense).
(4) Working capital is defined as current assets (excluding cash and cash
equivalents) less current liabilities (excluding short-term debt and
current portion of long-term debt).
Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the historical
financial information included in the audited financial statements and the
related notes to the audited financial statements.
Results of Operations
The following discussion regarding results of operations refers to net
sales, cost of goods sold, advertising and promotion expense and selling and
general and administrative expenses which the Company defines as follows:
. Net sales are gross sales of products sold to customers upon shipment of
product less any customer discounts from list price and customer returns.
. Cost of goods sold includes chemicals, container and packaging material
costs as well as direct labor, outside labor, manufacturing overhead and
freight.
8
. Advertising and promotion expense includes the cost of advertising of
products through national and regional media as well as the advertising
and promotion of products through cooperative programs with retailers.
. Selling and general and administrative expenses include all costs
associated with the selling and distribution of product, product
registrations, and administrative functions such as finance, information
systems and human resources.
The following table sets forth the percentage relationship of certain items
in the Company's income statement to net sales for 1999, 1998 and 1997:
Year Ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
Net sales:
Value brands................................ 80.0% 82.3% 81.4%
Opening price point brands.................. 20.0 17.7 18.6
------- ------- -------
Total net sales............................... 100.0 100.0 100.0
Operating costs and expenses:
Cost of goods sold.......................... 49.4 49.7 52.8
Advertising and promotion expenses.......... 9.6 11.2 10.5
Selling, general and administrative
expenses................................... 23.3 21.6 21.5
Recapitalization transaction fees........... 3.5 -- --
Change of control bonuses................... 2.8 -- --
Severance charges........................... 0.8 -- --
Non-recurring litigation charges............ 0.6 0.8 --
------- ------- -------
Total operating costs and expenses............ 90.0 83.3 84.8
------- ------- -------
Operating income.............................. 10.0 16.7 15.2
Interest expense.............................. 11.6 0.4 0.5
------- ------- -------
(Loss) income before provision for income
taxes, discontinued operations and
extraordinary item........................... (1.6) 16.3 14.7
Income tax expense............................ 1.4 0.4 0.3
------- ------- -------
(Loss) income from continuing operations,
before extraordinary item.................... (3.0) 15.9 14.4
======= ======= =======
FISCAL 1999 COMPARED TO FISCAL 1998
Net Sales. Net sales increased 7.5% to $304.0 million for 1999 from $282.7
million for 1998. This increase was driven by a combination of factors
including:
. the continued shift of consumers' preferences toward value and opening
price point brands;
. the introduction of Spectracide Pro(R); and
. expanded distribution at home improvement centers and mass merchandisers
due to continued store expansion.
Net sales of the Company's value brands increased 4.6% to $243.3 million
for 1999 from $232.6 million for 1998. This increase was a result of continued
growth of core value brands including Spectracide(R), Bag-a-Bug(R) and
Cutter(R). Net sales of opening price point brands increased 21.2% to $60.7
million for 1999 from $50.1 million for 1998 driven by the continued rapid
pace of store openings by the Company's top retail customers. The net sales
growth described above was primarily driven by sales volume. Selling price
changes did not have a material impact on 1999 net sales growth. The 1999
trend of opening price point brands growing at a greater percentage rate than
value brands will continue in 2000, as some branded SKU's previously sold to
Home Depot have been deleted or have been converted to our opening price point
brand at Home Depot.
Gross Profit. Gross profit increased 8.1% to $153.7 million for 1999
compared to $142.2 million for 1998. As a percentage of sales, gross profit
increased slightly to 50.6% for 1999 as compared to 50.3% for 1998. In March
1999,
9
the Company recorded a charge of $1.1 million to cost of goods sold for the
write-off of the Company's "Citri-Glow" candle inventory. The Company
discontinued the production of this product line during 1999 and chose to
dispose of the inventory by selling it through discount channels at prices
below cost. If this charge had not been recorded, gross profit for 1999 would
have been 50.9% of sales and would have increased 8.9% to $154.8 million as
compared to $142.2 million for 1998. The 1999 gross profit trend should
continue into 2000.
Advertising and Promotion Expenses. Advertising and promotion expenses
decreased 7.9% to $29.2 million for 1999 compared to $31.7 million for 1998.
As a percentage of net sales, advertising and promotion expenses decreased
9.6% for 1999 from 11.2% for 1998. Advertising and promotion expenses
decreased as a percentage of net sales growth since most of the Company's
first, second and third quarter 1999 growth was due to store expansion by home
improvement centers. For 1999, the Company recorded a charge of $.9 million
related to deductions taken by customers for advertising and promotional
spending in excess of contractual obligations for which the Company elected
not to pursue collection. This charge has been included in advertising and
promotion expense for 1999. If this charge had not been recorded in 1999,
advertising and promotional expenses would have decreased 10.7% to $28.3 as
compared to $31.7 million for 1998. As a percentage of sales, advertising and
promotional expenses would have decreased to 9.3% for 1999 from 11.2% for
1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 16.0% to $70.9 million for 1999 from $61.1
million for 1998. As a percentage of net sales, selling, general and
administrative expenses increased to 23.3% for 1999 from 21.6% for 1998. The
overall increase in selling, general and administrative expenses was related
to higher selling, marketing and distribution costs to support the growth in
sales. The Company is continuing to seek ways to reduce costs.
Recapitalization Transaction Fees. As of December 31, 1999, the Company
recorded $31.3 million in fees and expenses associated with the
Recapitalization. Fees and expenses that could be specifically identified as
relating to the issuance of debt were capitalized and will be amortized over
the life of the debt as interest expense. The fees and expenses that could be
specifically identified as relating to the equity transactions were charged
directly to equity. Other transaction fees were allocated between debt and
recapitalization transaction fees expense based on the Company's estimate of
the effort spent in the activity giving rise to the fee or expense. For 1999,
the Company recorded a charge of $10.7 million for Recapitalization
transaction fees.
Change of Control Bonuses. During 1999, the Company recorded charges for
change of control bonuses paid to some members of senior management amounting
to $8.6 million, which were contractually required as a result of the
Recapitalization.
Severance Charges. During 1999, the Company recorded severance charges of
$2.4 million as a result of the Company's President and Chief Executive
Officer and Senior Vice President, Sales terminating their employment with the
Company.
Non-recurring Litigation Charges. The Company recorded non-recurring
litigation charges of $1.6 million for 1999 and $2.3 million for 1998. In
March 1999, the Company took a charge of $1.5 million to primarily reserve for
the expected cost of an adverse judgment on a counterclaim filed by defendants
in the case of United Industries Corporation vs. John Allman, Craig Jackman et
al., pending in the U.S. District Court in Detroit, Michigan; Case No. 97-
76147. The Company alleged that defendants breached contracts by failing to
perform various services. Defendants counterclaimed for sales commissions
allegedly earned by them but not paid to them by the Company. On July 29,
1999, the Company paid $900 in liquidating damages and $112 in past
commissions. The remaining amounts accrued in connection with the $1,500
charge were primarily be used to cover legal cost associated with this case.
Charges recorded as of December 31, 1998 of $2.3 million were related to
two separate lawsuits. During 1998, the Company incurred $1.1 million in
settlement costs pertaining to certain litigation concerning the advertising
of the Company's Spectracide Terminate(TM) product. In 1992, the spouse of a
former employee filed suit against the Company claiming benefits from a
Company-owned key man life insurance policy. On December 1, 1999, after the
Missouri Supreme Court further reviewed the trial courts decision, the Company
paid $1.3 million in settlement of this case including legal costs of $.1
million. Settlement and legal costs in excess of the original charge of $1.2
million recorded in 1998 were charged to non-recurring litigation charges in
the fourth quarter of 1999.
10
Several of the Company's debt covenants are based upon EBITDA. EBITDA for
1999 was $58.4 million, which excludes charges recorded for Recapitalization
transaction fees, change of control bonuses, a severance charge and non-
recurring litigation charges. If the Company had excluded the $1.1 million
write-off of the Company's "Citri-Glow" candle inventory and the $.9 million
charge related to advertising deductions taken by customers in excess of
contractual obligations, EBITDA would have been $60.4 million for 1999.
Operating Income. Operating income decreased 35.9% to $30.2 million for
1999 from $47.1 million for 1998. As a percentage of net sales, operating
income decreased to 9.9% for 1999 from 16.7% for 1998, primarily as a result
of the factors discussed above.
Income tax expense. In conjunction with the Recapitalization, the Company
converted from an "S" corporation to a "C" corporation. The one-time impact of
this conversion was $2.1 million. The Company's effective income tax rate
reflects the one time impact of the conversion from an "S" corporation to a
"C" corporation, offset by the estimated fiscal year 1999 benefit related to
the step up in tax basis in conjunction with the Recapitalization.
FISCAL 1998 COMPARED TO FISCAL 1997
Net Sales. Net sales increased 16.5% to $282.7 million in 1998 from $242.6
million in 1997. This increase was driven by a combination of factors
including:
. the continued shift of consumers' preferences toward value and opening
price point brands;
. the introduction of Spectracide Terminate(TM); and
. expanded distribution at home improvement centers and mass merchandisers
through increased shelf space and rapid store expansion.
Net sales of the Company's value brands increased 17.8% to $232.6 million
in 1998 from $197.5 million in 1997. This increase was a result of continued
growth of core value brands including Spectracide(R), Hot Shot(R) and
Peters(R), and the introduction of Spectracide Terminate(TM). Net sales of
opening price point brands increased 11.1% to $50.1 million in 1998 from $45.1
million in 1997 driven by the continued rapid pace of store openings by the
Company's top retail customers. Net sales of other brands decreased 11.4% to
$16.0 million in 1998 from $18.1 million in 1997 due to the Company's effort
to shift away from other brands with reduced margins. The net sales growth
described above was primarily driven by sales volume. Selling Price changes
did not have a material impact on 1998 net sales growth.
Gross Profit. Gross profit increased 24.2% to $142.2 million in 1998
compared to $114.6 million in 1997. As a percentage of net sales, gross profit
increased to 50.3% in 1998 compared to 47.2% in 1997. The improvement in gross
profit as a percentage of net sales was a result of a more profitable sales
mix, mainly attributable to the introduction of Spectracide Terminate(TM), and
volume efficiencies.
Advertising and Promotion Expenses. Advertising and promotion expenses
increased 24.2% to $31.7 million in 1998 from $25.5 million in 1997. As a
percentage of net sales, advertising and promotion expenses increased to 11.2%
in 1998 from 10.5% in 1997. The overall increase in advertising and promotion
expenses was primarily related to the launch of Spectracide Terminate(TM).
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 17.2% to $61.1 million in 1998 from $52.1
million in 1997. As a percentage of net sales, selling, general and
administrative expenses increased slightly to 21.6% in 1998 from 21.5% in
1997. The overall increase in selling, general and administrative expenses was
related to higher selling, marketing and distribution costs to support the
launch of Spectracide Terminate(TM) and the rapid growth in sales, as well as
higher related party expenses.
Non-recurring Litigation Charges. Non-recurring litigation charges totalled
$2.3 million in 1998 and were related to two separate lawsuits. In March 1998,
a judgment was entered against United for a lawsuit filed in 1992 by the
spouse of a former employee claiming benefits from a company-owned key man
life insurance policy. The Company recorded a charge of $1.2 million for this
case in the first quarter of 1998. In October 1998, the FTC and several state
attorneys general filed a lawsuit concerning the advertising of the Company's
Spectracide Terminate(TM) product. The
11
FTC and attorneys general alleged that deceptive and unsubstantiated claims
were made regarding this product. In February 1999, a settlement agreement
with the FTC was negotiated. The settlement reached includes an agreement that
the advertising for this product be modified and the other parties be
reimbursed for certain costs incurred. The settlement also confirmed the
Company denial of liability and wrongdoing in the matter. Total charges of
$1.1 million included $0.4 million paid to 10 states attorneys general for
reimbursement of their legal expenses and $0.7 million for legal expenses
incurred for the Company's defense.
Operating Income. Operating income increased 27.7% to $47.1 million in 1998
from $36.9 million in 1997. As a percentage of net sales, operating income
increased to 16.7% in 1998 from 15.2% in 1997 as a result of improved gross
margins as discussed above.
Liquidity and Capital Resources
Historically, the Company has utilized internally generated funds and
borrowings under credit facilities to meet ongoing working capital and capital
expenditure requirements. As a result of the Recapitalization, the Company
significantly increased cash requirements for debt service relating to the
Company's notes and Senior Credit Facility. As of December 31, 1999, the
Company had total debt outstanding of $369.3 million. As of December 31, 1998,
on a pro forma basis, the Company would have had long-term debt outstanding of
approximately $375.0 million and up to $110.0 million available under the
Company's Revolving Credit Facility. The Company will rely on internally
generated funds and, to the extent necessary, borrowings under the Company's
Revolving Credit Facility to meet liquidity needs.
The Company's Senior Credit Facility consists of:
. The $110.0 million Revolving Credit Facility, under which no borrowings
were outstanding at the closing of the Recapitalization and at December
31, 1999;
. The $75.0 million Term Loan A ($62.5 million outstanding at December 31,
1999); and
. The $150.0 million Term Loan B ($148.1 million outstanding at December
31, 1999).
The Company's Revolving Credit Facility and Term Loan A matures on January
20, 2005, and Term Loan B matures on January 20, 2006. As of December 31,
1999, the Company had $210.6 million outstanding under the Senior Credit
Facility. The Revolving Credit Facility is subject to a clean-down period
during which the aggregate amount outstanding under the revolving credit
facility shall not exceed $10.0 million for 30 consecutive days occurring
during the period August 1 and November 30 in a calendar year.
On January 24, 2000 the Senior Credit Facility agreement was amended to
provide new provisions for financial covenant requirements and a waiver of the
covenant requirements at December 31, 1999. The amendment contains provisions
for the increase in interest rates upon reaching certain maximum leverage
ratios. As part of the amended agreement, the Company paid bank fees of $862,
which will be reflected as deferred financing fees in January 2000 and
amortized over the life of the debt as interest expense.
The Senior Subordinated Facility was redeemed through the issuance of 9
7/8% Senior Subordinated Notes due April 1, 2009. In connection with this
redemption, the Company incurred an extraordinary loss from the early
extinguishment of debt, net of tax of $2,325. In the fourth quarter of 1999,
the Company exchanged the 9 7/8% Senior Subordinated Notes for new notes
registered under the Securities Act of 1933. The new notes are substantially
identical to the old notes.
The Company's principal liquidity requirements are for working capital,
capital expenditures and debt service under the Senior Credit Facility and the
notes. Cash flow from continuing operations provided net cash of approximately
$23.4 million, $50.8 million, and $35.1 million in 1999, 1998 and 1997,
respectively. Net cash used by operating activities fluctuates during the year
as the seasonal nature of the Company's sales results in a significant
increase in working capital (primarily accounts receivable and inventory)
during the first half of the year, with the second and third quarters being
significant cash collection periods.
Capital expenditures are related to the enhancement of the Company's
existing facilities and the construction of additional production and
distribution capacity. Cash used for capital expenditures in 1999, 1998 and
1997 was $3.0
12
million, $3.6 million and $5.1 million, respectively. In addition, the Company
entered into a capital lease agreement in March 1999 for $9.2 million. Cash
used for capital expenditures in fiscal 2000 is expected to be less than $5.0
million.
Principal on the Term Loan A is required to be repaid quarterly in annual
amounts of $10.0 million for years one through four and $17.5 million for
years five and six after the closing of the Senior Credit Facility. Principal
on the Term Loan B is required to be repaid quarterly in annual amounts of
$1.5 million for the first six years and $141.0 million for the seventh year
after the closing of the Senior Credit Facility. On December 31, 1999,
principal payments on Term Loans A and B of $2.5 million and $.4 million,
respectively, were paid.
The Company believes that cash flow from operations, together with
available borrowings under the Revolving Credit Facility, will be adequate to
meet the anticipated requirements for working capital, capital expenditures
and scheduled principal and interest payments for at least the next year.
However, the Company cannot ensure that sufficient cash flow will be generated
from operations to repay the notes and amounts outstanding under the Senior
Credit Facility at maturity without requiring additional financing. The
Company's ability to meet debt service and clean-down obligations and reduce
debt will be dependent on the Company's future performance, which in turn,
will be subject to general economic conditions and to financial, business and
other factors, including factors beyond the Company's control. Because a
portion of the Company's debt bears interest at floating rates, the Company's
financial condition is and will continue to be affected by changes in
prevailing interest rates.
Seasonality
The Company's business is highly seasonal because the Company's products
are used primarily in the spring and summer. For the past two years,
approximately 75% of the Company's net sales have occurred in the first and
second quarters. The Company's working capital needs, and correspondingly the
Company's borrowings, peak near the end of the Company's first quarter.
Recently Issued Accounting Pronouncements
The Financial Accounting Standard Board issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" in June 1998. SFAS 133
provides standards on accounting and disclosure for derivative instruments and
requires that all derivatives be measured at fair value and reported as either
assets or liabilities on the balance sheet. The Company will be required to
adopt this statement no later than the beginning of fiscal year 2001. The
Company has not completed the analysis to determine the impact of this
statement on the Company's financial statements; however, the impact is not
expected to be material.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements." This Staff Accounting Bulletin
summarizes certain of the staff's views on applying Generally Accepted
Accounting Principles to revenue recognition in financial statements. The
Company will be required to adopt this statement no later than the second
quarter of 2000. The Company has not yet completed the analysis to determine
the impact of this statement on the Company's financial statements; however,
the impact is not expected to be material.
Year 2000 Compliance
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. Costs related to
the year 2000 issue were included in the $2.5 million management information
systems upgrade that occurred in 1999. The Company does not anticipate any
additional costs relating to the year 2000 issue which would have a material
adverse effect on the Company's financial condition or results of operations.
Through February 2000, the Company has not experienced any significant year
2000 business systems issues. Thorough testing of the business systems and
plant and building infrastructure systems during the January 1st 2000 weekend
uncovered very few date related issues. Almost all of these issues were minor
and were related to reporting or queries. The Company has not experienced any
significant product or service supply problems arising from the Company's
vendors' Y2K preparations.
13
Although there is no guarantee that all year 2000 issues have been
identified and resolved, the Company believes that any issues arising will be
insignificant. The Company continues to monitor and correct any issues related
to the year 2000.
Forward Looking Statements
This report and other public reports or statements made from time to time
by the Company or its management may contain "forward-looking statements
concerning possible future events, objectives, strategies, trends or results.
Such statements are identified either by the context in which they appear or
by use of words such as "anticipate," "believe," "estimate," "expect," "plan"
or the like. Readers are cautioned that any forward-looking statement reflects
only the beliefs of the Company or its management at the time the statement is
made. In addition, readers should keep in mind that, because all forward
looking statements deal with the future, they are subject to risks,
uncertainties and developments that might cause actual events or results to
differ materially from those envisioned or reflected in any forward-looking
statement. Moreover, the Company does not have and does not undertake any duty
to update any forward-looking statement to reflect events or circumstances
after the date on which the statement was made. For all of these reasons,
forward-looking statements should not be relied upon as a prediction of actual
future events, objectives, strategies, trends or results. It is not possible
to anticipate and list all of the risks, uncertainties and developments which
may affect the future operations or performance of the Company, or which
otherwise may cause actual events or results to differ from forward-looking
statements. However, some of these risks and uncertainties include the
following: general economic and market conditions and risks, such as the rate
of economic growth in the United States, inflation, interest rates, taxation,
and the like; risks and uncertainties which could affect industries or markets
in which the Company participates, such as growth rates and opportunities in
those industries, or changes in demand for certain products, or unfavorable
weather patterns, etc.; and factors which could impact costs, including but
not limited to the availability and pricing of raw materials, the availability
of labor and wage rates.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate
We are exposed to market risks relating to changes in interest rates. We do
not enter into derivatives or other financial instruments for trading or
speculative purposes. We enter into financial instruments to manage and reduce
the impact of changes in interest rates.
We manage our interest rate risk by balancing the amount of our fixed and
variable debt. For fixed rate debt, interest rate changes affect the fair
market value of such debt but do not impact earnings or cash flows. Conversely
for variable rate debt, interest rate changes generally do not affect the fair
market value of such debt but do impact future earnings and cash flows,
assuming other factors are held constant. At December 31, 1999, we had
variable rate debt of $210.6 million.
Interest ranges from 200 to 375 basis points above LIBOR depending on
certain financial ratios. LIBOR was 6.21% on December 31, 1999.
Exchange Rate
The Company does not use derivative instruments to hedge against its
foreign currency exposures related to transactions denominated in currencies
other than the United States dollar. Substantially all foreign transactions
are denominated in United States dollars.
Commodity Price
The Company does not use derivative instruments to hedge its exposures to
changes in commodity prices. The Company utilizes various commodity and
specialty chemicals in its production process. Purchasing procedures and
arrangements with major customers serve to mitigate its exposure to price
changes in commodity and specialty chemicals.
14
Item 8. Financial Statements and Supplementary Data
The Financial Statements and supplementary data included in this Report are
listed in Item 14 and begin immediately after Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Set forth below is the name, age and position of each of the Company's
executive officers and directors. The Company's board of directors presently
consists of seven directors who are elected annually. Executive officers serve
at the discretion of the board of directors and, in the case of Messrs. Caulk,
Bender and Johnston, pursuant to employment agreements.
Name Age Position
- ---- --- --------
David A. Jones.......... 50 Chairman of the Board; Director
Robert L. Caulk......... 48 President and Chief Executive Officer; Director
Richard A. Bender....... 50 Senior Vice President, Human Resources & Operations
Daniel J. Johnston...... 41 Senior Vice President, Chief Financial Officer, Information
Systems, Legal & Administration; Director
Matthew M. McCarthy..... 52 Vice President, General Counsel and Secretary
David C. Pratt.......... 55 Director
C. Hunter Boll.......... 44 Director
Scott A. Schoen......... 41 Director
Charles A. Brizius...... 31 Director
David A. Jones became a director of the Company in January 1999 in
connection with the Recapitalization and was appointed Chairman of the Board
in June 1999. Mr. Jones has been the President, Chief Executive Officer and a
Director of Rayovac Corporation since March 1996. Between February 1995 and
March 1996, Mr. Jones was Chief Operating Officer, Chief Executive Officer and
Chairman of the Board of Directors of Thermoscan, Inc. From 1989 to 1994, he
served as President and Chief Executive Officer of The Regina Company, a
manufacturer of vacuum cleaners and other floor care equipment.
Robert L. Caulk joined the Company in November 1999 as the Company's
President and Chief Executive Officer. Prior to joining the Company, Mr. Caulk
spent five years from 1995-1999 as the President and Executive Vice President
of Clopay Corporation, a marketer and distributor of garage doors. Between
1989 and 1994, Mr. Caulk was President, Vice President/General Manager and
Director of Corporate Acquisitions and Planning at Johnson Worldwide
Associates, a manufacturer of outdoor recreational products. From 1980 to
1989, Mr. Caulk held various management positions at S.C. Johnson & Son, Inc.
Richard A. Bender has served as the Company's Senior Vice President, Human
Resources and Operations since 1996. Mr. Bender joined us in 1988 as Vice
President of Human Resources. He has held various positions during his tenure
with us, including responsibilities in the Company's former metals group
division, administration, management information systems, product supply and
distribution. Prior to joining the Company, Mr. Bender was a general manager
in an automotive related private business and spent 13 years in various roles
including sales, plant operations and human resources at Colgate-Palmolive Co.
Daniel J. Johnston has served as the Company's Senior Vice President,
Finance and MIS and Chief Financial Officer since 1997. Mr. Johnston joined us
in 1994 as Controller and then worked as Assistant to the Chairman. Prior
15
to joining us, he spent five years from 1990 to 1994 at Cooper Industries,
Inc. in various financial functions at its corporate office and Bussmann
Division. Prior to joining Cooper Industries, Inc., he was employed by
PriceWaterhouse, LLP from 1982 to 1990.
Matthew M. McCarthy has served as the Company's Vice President and General
Counsel since 1994, as well as the Company's Secretary since 1999. Prior to
joining us, Mr. McCarthy was Vice President, General Counsel and Secretary
from 1986 to 1994 for Wetterau Incorporated, a food wholesaler and retailer
based in St. Louis. From 1975 to 1986 Mr. McCarthy served in various in-house
corporate legal functions at Wetterau and at General Grocer Company, both St.
Louis area food distributors.
David C. Pratt was the Company's President and Chief Executive Officer from
the Company's inception until the Recapitalization and thereafter served as
Chairman of the Board until Mr. Jones' acceptance of that position. Mr. Pratt
has continued as a director and consultant of the Company.
C. Hunter Boll became a director of the Company in January 1999 in
connection with the Recapitalization. Mr. Boll is a managing director of
Thomas H. Lee Company where he has been employed since 1986. Mr. Boll is also
a Principal Managing Director and Member of Thomas H. Lee Advisors, LLC, the
general partner of Thomas H. Lee Partners, L.P., which controls the general
partner of Thomas H. Lee Equity Fund IV, L.P. and Vice President of Thomas H.
Lee Advisors I and T. H. Lee Mezzanine II, affiliates of ML-Lee Acquisition
Fund, L.P., ML-Lee Acquisition Fund II, L.P. and ML-Lee Acquisition Fund II
(Retirement Accounts), L.P., respectively. Mr. Boll also serves as a director
of Cott Corporation., The Smith & Wollensky Restaurant Group, Inc., Freedom
Securities Corporation, Metris Companies, Inc., Big V Supermarkets, Inc.,
TransWestern Publishing, L.P. and several private corporations.
Scott A. Schoen became a director of the Company in January 1999 in
connection with the Recapitalization. He is a Managing Director of Thomas H.
Lee Company, which he joined in 1986. In addition, Mr. Schoen is a Principal
Managing Director and Member of Thomas H. Lee Advisors, LLC, the general
partner of Thomas H. Lee Partners, L.P., which controls the general partner of
Thomas H. Lee Equity Fund IV, LP and Vice President of Thomas H. Lee Advisors
I and T. H. Lee Mezzanine II, affiliates of ML-Lee Acquisition Fund, L.P., ML-
Lee Acquisition Fund II, L.P. and ML-Lee Acquisition Fund II (Retirement
Accounts), L.P., respectively. He is also a director of Rayovac Corporation,
Syratech Corporation, TransWestern Publishing, L.P., Wyndham International
Inc. and several private corporations.
Charles A. Brizius became a director of the Company in January 1999 in
connection with the Recapitalization. Mr. Brizius worked at Thomas H. Lee
Company from 1993 to 1995, rejoined in 1997 and currently serves as an
Associate. Mr. Brizius is a Member of Thomas H. Lee Advisors, LLC, the general
partner of Thomas H. Lee Partners, L.P., which controls the general partner of
Thomas H. Lee Equity Fund IV, L.P. From 1991 to 1993, Mr. Brizius worked at
Morgan Stanley & Co. Incorporated in the Corporate Finance Department. He is
also a director of Eye Care Centers of America, Inc. and Big V Supermarkets,
Inc.
Item 11. Executive Compensation
Compensation of Executive Officers
The following table sets forth the compensation of the Company's Current
Chief Executive Officer and other individuals who either served, or acted in a
similar capacity, as the Company's Chief Executive Officer during 1999 and the
four other most highly compensated executive officers serving as executive
officers at the end of 1999 (collectively, the "Named Executive Officers").
16
Summary Compensation Table
Annual Compensation
---------------------------------
Other
Annual All Other
Name and Principal Compensation Compensation
Position Year Salary ($) Bonus ($) ($) (f) ($) (g)
- ------------------ ---- ---------- --------- ------------ ------------
Robert L. Caulk......... (a) 1999 100,000 30,247 -- --
President and Chief
Executive Officer
David A. Jones.......... (b) 1999
Chairman of the Board;
Acting President and
Chief Executive Officer
Stephen R. Brian........ (c) 1999 196,184 100,000 123,894 --
President and Chief
Executive Officer
David C. Pratt.......... (d) 1999 13,960 17,758 2,444 --
President and Chief
Executive Officer 1998 250,000 2,771,061 42,740 --
Richard A. Bender....... 1999 300,000 120,000 -- 2,808,490
Senior Vice President, 1998 100,000 260,143 24,018 --
Human Resources
Operations
Daniel J. Johnston...... 1999 300,000 120,000 -- 2,808,490
Senior Vice President,
Chief Financial
Officer, 1998 100,000 251,809 4,716 --
Information Systems,
Legal and
Administration
Matthew M. McCarthy..... 1999 179,000 46,504 5,880 --
Vice President, General
Counsel and Secretary 1998 125,000 105,079 5,880 --
William P. Johnson...... (e) 1999 300,000 65,000 -- 2,808,490
Senior Vice President,
Sales 1998 100,000 251,809 4,716 --
- -------
(a) Mr. Caulk joined the Company in November 1999.
(b) Mr. Jones was acting President and Chief Executive Officer from June 1999
to November 1999. Compensation was paid through the Chairman's Agreement
as identified in Compensation of Directors.
(c) Mr. Brian held this position from January 20, 1999 until June 29, 1999.
(d) Mr. Pratt resigned as President and Chief Executive Officer on January 20,
1999 in connection with the Recapitalization.
(e) Mr. Johnson resigned from this position in December of 1999.
(f) Includes deferred compensation under Long-term incentive compensation
Plan, which was terminated in 1998, automobile allowance, relocation and
country club dues.
(g) Includes change of control bonuses paid as a result of the
Recapitalization. Mr. Bender contributed $700,000 while Messrs. Johnston
and Johnson contributed $1,000,000 of the change of control bonuses to a
grantor trust established pursuant to the Company's Deferred Compensation
Plan.
Stock Option Grants
The following table sets forth information with respect to the Named
Executive Officers concerning options granted during 1999.
Number of % of Total
Securities Options Granted to Exercise Grant Date
Underlying Employees in or Base Expiration Present Value
Name Options Granted Fiscal Year Price ($/SH) Date ($)
- ---- --------------- ------------------ ------------ ---------- -------------
Robert L. Caulk......... 266,667 9.0% 5.00 01/21/04 370,667
533,333 18.0% 5.00 01/21/09 1,296,000
David A. Jones.......... 200,000 6.8% 5.00 01/21/04 278,000
400,000 13.5% 5.00 01/21/09 972,000
Richard A. Bender....... 200,000 6.8% 5.00 01/21/04 278,000
400,000 13.5% 5.00 01/21/09 972,000
Daniel J. Johnston...... 200,000 6.8% 5.00 01/21/04 278,800
17
Number of % of Total
Securities Options Granted to Exercise Grant Date
Underlying Employees in or Base Expiration Present Value
Name Options Granted Fiscal Year Price ($/SH) Date ($)
- ---- --------------- ------------------ ------------ ---------- -------------
400,000 13.5% 5.00 01/21/09 972,000
Matthew M. McCarthy..... 5,000 0.2% 5.00 01/21/04 6,950
10,000 0.3% 5.00 01/21/09 24,300
Stephen R. Brian(a)..... -0- -- -- -- --
William P. Johnson(a)... -0- -- -- -- --
David C. Pratt.......... -0- -- -- -- --
(a)Options were granted during 1999 and subsequently cancelled upon
resignation.
The fair value of the options estimated at the date of grant using the
Black-Scholes option-pricing model was $2.08. The weighted average fair value
of the 1999 options granted is estimated on the date of grant using the
following assumption: expected volatility of 0%, risk-free interest rate of
6.765%, no dividend yield and an expected life of 5 or 10 years.
Stock Option Exercises and Holdings
The following table sets forth information with respect to the Named
Executive Officers concerning unexercised options held as of December 31,
1999.
Number of Value of
Securities Unexercised
Underlying In-the Money
Unexercised Options at
Options at FY-End FY-End ($)
Shares
Acquired on Value Exercisable/ Exercisable/
Exercise(a) Realized Unexercisable Unexercisable(b)
----------- -------- ----------------- ----------------
Robert L. Caulk......... -- -- --/800,000 --/--
David A. Jones.......... -- -- --/600,000 --/--
Richard A. Bender....... -- -- --/600,000 --/--
Daniel J. Johnston...... -- -- --/600,000 --/--
Matthew M. McCarthy..... -- -- --/ 15,000 --/--
Stephen R. Brian........ -- -- --/-- --/--
William P. Johnson...... -- -- --/-- --/--
David C. Pratt.......... -- -- --/-- --/--
- -------
(a) As of December 31, 1999, no options were vested.
(b) There is currently no active trading market for the Common Stock and thus
the fair market value as of December 31, 1999 is not readily determinable.
Compensation of Directors
During 1999, the Company entered into a consulting agreement with David C.
Pratt. This consulting agreement provides that Mr. Pratt:
. receive a consulting payment of $15,000 per month,
. act as Chairman of the Company's board of directors for four months
beginning on 1/21/99,
. remain a member of the Company's board of directors after his term as
Chairman has ended,
. receive a directorship fee of $25,000 per year, and
. receive Company-paid health and the welfare benefits for four months
beginning on 1/2/99.
18
On July 20, 1999, the Company entered into a chairman's agreement and a
stock option agreement with David A. Jones. These agreements provide that Mr.
Jones:
. receive an annual payment for services rendered of $300,000, which
supersedes his consulting payments and directorship fees, plus
participation in the Company's incentive compensation plan;
. receive a one-time special bonus, which is contemplated to be between
$300,000 and $500,000, after the date which is six months after the date
that the Company hires a new full-time CEO;
. receive options pursuant to the 1999 Stock Option Plan to purchase an
additional 300,000 shares of common stock; and
. receive annual incentive compensation to be determined in accordance with
the Company's attainment of certain levels of EBITDA.
Employment Agreements
Messrs. Caulk, Bender and Johnston each entered into an employment
agreement with the Company. The Caulk agreement provides for employment until
October 2002 and the Bender and Johnston agreements until December 2001 unless
terminated earlier. The employment agreements provide for annual incentive
compensation to be determined in accordance with the Company's attainment of
certain EBITDA targets. Each employment agreement may be terminated by us at
any time with or without cause. If the employment agreement is terminated by
us for cause or by the executive without good reason, the terminated executive
will be entitled to any unpaid base salary through the date of termination
plus any unpaid incentive compensation. If we terminate the employment
agreement without cause or if the executive terminates the employment
agreement for good reason or the executive dies or becomes disabled, he will
be entitled to any unpaid base salary through the date of termination, any
unpaid incentive compensation and, under certain conditions, his base salary
through the later of the contract period and the first anniversary of his
termination. Each employment agreement provides for non-compete,
nonsolicitation and confidentiality provisions through the later of one year
after the executive's date of termination or the last date severance payments
are owed to the executive.
In connection with entering his employment agreement, Mr. Johnston
purchased $1.0 million of common stock, and Mr. Bender purchased $700,000 of
common stock. Messrs. Johnston and Bender purchased their common stock out of
the proceeds of a bonus paid at the closing of the recapitalization. Under
some circumstances, we have the right to repurchase the shares owned by
Messrs. Johnston and Bender.
1999 Stock Option Plan
In connection with the Recapitalization, the Company instituted the 1999
Stock Option Plan, which is administered by a committee of the Company's board
of directors. The 1999 Stock Option Plan was designed as an incentive to
selected employees, officers and directors to acquire proprietary interest in
the Company. The options are not designed to be incentive stock options within
the meaning of Section 422 of the U.S. Internal Revenue Code of 1986, as
amended. The option pool under the 1999 Stock Option Plan consists of an
aggregate of 4,000,000 shares of the Company's common stock that may consist
of shares of the Company's Class A Voting Common Stock, the Company's Class B
Non-Voting Common Stock or some combination of Class A Voting Common Stock and
Class B Non-Voting Common Stock. The options to purchase shares of common
stock are subject to vesting schedules, which are both time and performance
based. Unvested options are forfeited upon termination of employment.
Deferred Compensation Plan
On January 20, 1999, the Company established the United Industries
Corporation Deferred Compensation Plan ("the Plan"). A committee of the
Company's board of directors administers the Plan. Messrs. Bender, Johnson and
Johnston are eligible to participate in the Plan. The Plan provides for the
establishment of a grantor trust for the purpose of accumulating the assets
contributed pursuant to the Plan. The grantor trust used the funds contributed
to it to purchase:
. 70,000 shares of the Company's Class A Voting Common Stock and 70,000
shares of the Company's Class B Non-Voting Common Stock for the benefit
of Mr. Bender; and
19
. 100,000 shares of the Company's Class A Voting Common Stock and 100,000
shares of the Company's Class B Non-Voting Common Stock for the benefit
of Mr. Johnston.
. 100,000 shares of the Company's Class A Voting Common Stock and 100,000
shares of the Company's Class B Non-Voting Common Stock for the benefit
of Mr. Johnson.
401(k) Plan
The Company maintains a 401(k) defined contribution plan. The plan allows
for discretionary participant elective contributions. The Company is required
to match 50% of each participant's contributions up to 6% of the employee's
salary for those employees having less than 10 years of service and 75% of
each participant's contributions up to 6% of the employee's salary for those
employees having 10 or more years of service.
Severance Agreements
In January 1999, in conjunction with the Company's Recapitalization,
Stephen R. Brian was hired as the Company's President and Chief Executive
Officer. Prior to joining the Company, Mr. Brian served as the President of
Home Products International. Mr. Brian announced his resignation in June 1999,
citing personal and family reasons for his departure. In connection with the
resignation of Mr. Brian, the Company entered into a severance agreement with
Mr. Brian, which provides that Mr. Brian will continue to receive his base
salary of $437,000 and benefits through January 31, 2002. Mr. Brian's benefits
consist of (a) whatever, if any, health, hospitalization, sick pay, life
insurance, disability insurance, profit sharing, pension, 401(k), and deferred
compensation plans and programs that the Company may have in effect from time
to time. In addition, the severance agreement provides that Mr. Brian will
receive a $95,000 bonus in respect of fiscal year 1999, use of an apartment
leased by the Company for a period of three months at Mr. Brian's expense, and
transition expenses with respect to his relocation away from St. Louis. On his
resignation, the Company (a) repurchased from Mr. Brian 100,000 shares of
common stock in exchange for a promissory note in the amount of $500,000, plus
accrued and unpaid interest, and (b) terminated his right to options under an
option agreement. The Company purchased from Mr. Brian the right to acquire
all of Mr. Brian's and his spouse's rights and obligations under a St. Louis
real estate sales contract. Unless the Company chooses to exercise this
option, the Company has no further liability or obligation under this real
estate contract and no contractual relationship with the builder. The
noncompetition and nonsolicitation provisions under Mr. Brian's original
employment agreement will continue in effect through January 31, 2002.
William P. Johnson served as the Company's Senior Vice President, Sales
since 1998. Mr. Johnson announced his resignation in December 1999. In
connection with the resignation of Mr. Johnson, the Company entered into a
severance agreement with Mr. Johnson, which provides that Mr. Johnson will
continue to receive his base salary of $300,000 and benefits through December
31, 2001. Upon his resignation, the Company terminated his right to options
under an option agreement. The noncompetition and nonsolicitation provisions
under Mr. Johnson's original employment agreement will continue in effect
through December 31, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Class A Voting Common Stock by each of the
Company's directors and Named Executive Officers, by all of the Company's
directors and executive officers as a group, and by each owner of more than 5%
of the outstanding shares of Class A Voting Common Stock. Each directors and
Named Executive Officer owns an equal number of the Company's Class B Non-
Voting Common Stock.
20
Number of Percent of
Name of Beneficial Owner (1) Shares Class
- ---------------------------- ---------- ----------
UIC Holdings, L.L.C...................................... 25,468,000 92.1%
c/o Thomas H. Lee Company
75 State Street
Boston, Massachusetts 02109
David C. Pratt (2)....................................... 1,325,108 4.8%
Robert L. Caulk.......................................... -- *
Richard A. Bender........................................ -- *
Daniel J. Johnston....................................... -- *
William P. Johnson....................................... -- *
Stephen R. Brian......................................... 100,000 *
Matthew M. McCarthy...................................... 1,000 *
David A. Jones........................................... 100,000 *
C. Hunter Boll (3)....................................... 25,468,000 92.1%
Scott A. Schoen (3)...................................... 25,468,000 92.1%
Charles A. Brizius (3)................................... 25,468,000 92.1%
All Directors and Executive Officers as a Group (9
persons) (3)............................................ 26,869,108 97.2%
- -------
*Denotes less than one percent.
(1) Beneficial owner generally means any person who, directly or indirectly,
has or shares voting power or investment power with respect to a security.
All of the parties listed above are party to a stockholders agreement,
pursuant to which they have agreed to vote their shares in the election of
directors in accordance with the terms of the stockholders agreement. The
number of shares indicated in this table does not include the shares of
Class A Voting Common Stock that are held by other stockholders subject to
the stockholders agreement. Unless otherwise indicated, the Company
believes that each person has sole voting and investment power with regard
to their shares listed as beneficially owned. The calculation of
beneficial ownership is based on 27,650,000 shares outstanding.
(2) Includes 134,756 shares of the Company's Class A Voting Common Stock held
by the David C. Pratt Grantor Retained Interest Trust and 157,216 shares
of the Company's Class A Voting Common Stock held by the 1994 Ryder Pratt
Grantor Retained Annuity Trust.
(3) All of the equity interests in UIC Holdings, L.L.C. are controlled by the
Thomas H. Lee Equity Fund IV, L.P. and its affiliates, which may therefore
be deemed the beneficial owner of the shares held by UIC Holdings, L.L.C.
All of the shares beneficially owned by the Thomas H. Lee Equity Fund IV,
L.P. and its affiliates may be deemed to be beneficially owned by THL
Equity Advisors IV, L.L.C. ("Advisors"), Thomas H. Lee Equity Fund IV,
L.P. the general partner of THL Fund IV, by THL Equity Trust IV, the
general partner of Advisors, by THL and by Messrs. Boll, Schoen and
Brizius and the other officers of Thomas H. Lee Equity Fund IV, L.P. Each
of these persons disclaims beneficial ownership of such shares.
Item 13. Certain Relationships and Related Transactions
Professional Services Agreement
In connection with the Recapitalization, the Company entered into a
professional services agreement with Thomas H. Lee Capital, LLC and THL Equity
Advisors IV, LLC. The agreement has a term of three years and automatically
extends for successive one year periods thereafter, unless the parties give 30
days' notice prior to the end of the term. The agreement provides for a
financial advisory fee of $12.0 million in connection with structuring,
negotiating and arranging the Recapitalization and structuring, negotiating
and arranging the debt financing, which was paid at the closing of the
Recapitalization. In addition, Thomas H. Lee Capital, LLC and THL Equity
Advisors IV, LLC will initially receive an aggregate of $62,500 per month for
management and other consulting services provided to us. The agreement also
provides that the Company will reimburse reasonable out-of-pocket expenses
incurred in connection with management advisory services. The Company believes
that the terms of the professional services agreement are comparable to those
that would have been obtained by unaffiliated sources.
21
Stockholders Agreement
In connection with the Recapitalization, the Company entered into a
stockholders agreement with UIC Holdings, L.L.C., and other stockholders of
the Company. Under the stockholders agreement, the stockholders are required
to vote their shares of capital stock of the Company for any sale or
reorganization of the Company that has been approved by the Company's board of
directors or a majority of the stockholders. The stockholders agreement also
grants the stockholders the right to effect the registration of their common
stock they hold for sale to the public, subject to some conditions and
limitations. If the Company proposes to register any of the Company's
securities under the Securities Act of 1933, as amended, the stockholders are
entitled to notice of such registration, subject to some conditions and
limitations. Fees, costs and expenses of registration effected on behalf of
the stockholders under the stockholders agreement, other than underwriting
discounts and commissions, will be paid by the Company.
Recapitalization Agreement
The Company's Recapitalization Agreement with UIC Holdings, L.L.C., which
is owned by Thomas H. Lee Equity Fund IV, L.P., contains customary provisions,
including representations and warranties with respect to the condition and
operations of the business, covenants with respect to the conduct of the
business prior to the Recapitalization closing date and various closing
conditions, including the continued accuracy of the representations and
warranties. In general, the representations and warranties made in the
Recapitalization agreement survive until the earlier of 10 days following the
delivery of the Company's December 31, 1999, audited financial statements or
April 15, 2000. Representations and warranties with respect to tax matters
survive until 30 days after the expiration of the applicable statute of
limitations; representations with respect to environmental matters survive
until December 31, 2002. Representations and warranties regarding ownership of
stock do not expire. The total consideration paid to redeem the Company's
common stock was subject to adjustments based on the excess taxes of the
Company's previous stockholders arising from the Company's Section 338(h)(10)
election.
Pursuant to the Recapitalization Agreement and in consideration of payments
received under the Recapitalization Agreement, David C. Pratt and Mark R.
Gale, the Company's former Vice President and Secretary, agreed that for a
period ending on the fourth anniversary of the Recapitalization closing date
not to own, control, participate or engage in any line of business in which
the Company is actively engaged or any line of business competitive with the
Company anywhere in the United States and any other country in which the
Company were doing business at the closing of the Recapitalization.
In addition, each of the stockholders of the Company has agreed that for a
period ending on the fourth anniversary of the Recapitalization closing date
not to contact, approach or solicit for the purpose of offering employment to
or hiring any person employed by us during the four year period.
Pursuant to the Recapitalization, the Company redeemed a portion of the
Company's common stock held by the Company's stockholders, and UIC Holdings,
L.L.C. and certain members of the Company's senior management purchased a
portion of the Company's common stock from the Company's stockholders. In the
Recapitalization, Messrs. Bender and Johnston collectively received an
aggregate of approximately $4.0 million in cash and an additional $1.7 million
with which the officers purchased the Company's common stock through grantor
trusts.
Lease Agreements
The Company leases six facilities in St. Louis from an affiliate of David
C. Pratt. Five of the leases expire on December 31, 2010. The Company has
options to terminate these leases on a year-to-year basis with advance notice
of at least 12 months. One of the leases is a sublease agreement expiring on
December 31, 2005, but may be extended for two additional five-year periods
beginning January 1, 2006. The Company believes that the terms of these leases
are similar to those negotiated by unrelated parties at arms length.
22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
Page of
10-K
-------
1. Financial Statements and Financial Statement Schedules Covered by Report of Independent Accountants. 24
The Financial Statements listed below are included in this Report:
Balance Sheets at December 31, 1999 and 1998 25
Statements of Operations for the years ended December 31, 1999, 1998 and 1997 26
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 27
Statements of Shareholders' (Deficit) Equity for the years ended December 31, 1999, 1998 and 1997 28
Notes to Consolidated Financial Statements 29
Financial Schedules not included have been omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
2. Exhibits--See Exhibit Index.
3. Reports on Form 8-K filed during the last quarter of 1999:
None.
23
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENTS
Board of Directors
United Industries Corporation
St. Louis, Missouri
In our opinion, the accompanying balance sheets and the related statements
of operations, shareholders' (deficit) equity and cash flows present fairly,
in all material respects, the financial position of United Industries
Corporation at December 31, 1999 and 1998, and the results of its operations
and its cash flows for the years ended December 31, 1999 and 1998 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above. The financial statements of
the Company for the year ended December 31, 1997 were audited by other
independent accountants whose report dated February 25, 1998 expressed an
unqualified opinion on those statements.
/S/ PRICEWATERHOUSECOOPERS LLP
St. Louis, Missouri
February 17, 2000
24
UNITED INDUSTRIES CORPORATION
BALANCE SHEETS
December 31, 1999 and 1998
(Dollars in thousands)
December 31,
-------------------
1999 1998
--------- --------
ASSETS
Current assets:
Cash and cash equivalents............................... $ -- $ --
Accounts receivable (less allowance for doubtful
accounts of $60 at December 31, 1999 and 1998)......... 20,136 17,650
Inventories............................................. 53,243 41,444
Prepaid expenses........................................ 3,501 2,172
--------- --------
Total current assets.................................. 76,880 61,266
Equipment and leasehold improvements, net................. 27,860 20,156
Deferred income tax....................................... 116,268 --
Other assets.............................................. 20,870 6,948
Investment in discontinued operations..................... -- 5,791
--------- --------
Total assets.......................................... $ 241,878 $ 94,161
========= ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease
obligation............................................. $ 12,178 $ 929
Accounts payable........................................ 25,507 18,519
Accrued expenses........................................ 28,435 12,705
--------- --------
Total current liabilities............................. 66,120 32,153
Long-term debt............................................ 349,125 3,716
Capital lease obligation.................................. 7,952 --
Other liabilities......................................... 5,483 35
--------- --------
Total liabilities..................................... 428,680 35,904
Commitments and contingencies (see notes 16 & 17) -- --
Stockholders' (deficit) equity:
Common stock............................................ 554 2
Additional paid-in capital.............................. 126,865 972
(Accumulated Deficit)/retained earnings................. (311,521) 70,193
Common stock held in grantor trust...................... (2,700) --
Treasury stock.......................................... -- (12,910)
--------- --------
Total stockholders' (deficit) equity.................. (186,802) 58,257
--------- --------
Total liabilities and stockholders' (deficit) equity.. $ 241,878 $ 94,161
========= ========
See accompanying notes to financial statements.
25
UNITED INDUSTRIES CORPORATION
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999, 1998 & 1997
(Dollars in thousands)
For the years ended
December 31,
---------------------------
1999 1998 1997
-------- -------- --------
Net sales......................................... $304,048 $282,676 $242,601
-------- -------- --------
Operating costs and expenses:
Cost of goods sold.............................. 150,344 140,445 128,049
Advertising and promotion expenses.............. 29,182 31,719 25,547
Selling, general and administrative expenses.... 70,886 61,066 52,092
Recapitalization transaction fees............... 10,690 -- --
Change of control bonuses....................... 8,645 -- --
Severance charges............................... 2,446 -- --
Non-recurring litigation charges................ 1,647 2,321 --
-------- -------- --------
Total operating costs and expenses............ 273,840 235,551 205,688
-------- -------- --------
Operating income.................................. 30,208 47,125 36,913
Interest expense.................................. 35,223 1,106 1,267
-------- -------- --------
(Loss) income before provision for income taxes,
discontinued operations and extraordinary item... (5,015) 46,019 35,646
Income tax expense................................ 4,257 992 726
-------- -------- --------
(Loss) income from continuing operations, before
extraordinary item............................... (9,272) 45,027 34,920
Income from discontinued operations, net of tax... -- 1,714 1,923
-------- -------- --------
(Loss) income before extraordinary item........... (9,272) 46,741 36,843
Extraordinary loss from early extinguishment of
debt, net of income tax
benefit of $1,425................................ 2,325 -- --
-------- -------- --------
Net (loss) income................................. $(11,597) $ 46,741 $ 36,843
======== ======== ========
See accompanying notes to financial statements.
26
UNITED INDUSTRIES CORPORATION
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 & 1997
(Dollars in thousands)
For the years ended
December 31,
-----------------------------
1999 1998 1997
--------- -------- --------
Cash flows from operating activities:
Net (loss) income............................... $ (11,597) $ 46,741 $ 36,843
Loss from early extinguishment of debt.......... 3,750 -- --
Adjustments to reconcile net income to net cash
provided by operating activities:
Income from discontinued operations............. -- (1,714) (1,923)
Deferred compensation........................... 2,700 -- --
Depreciation and amortization................... 4,715 3,838 3,597
Loss on disposal of equipment................... 54 31 97
Recapitalization transaction fees............... 10,690 -- --
Amortization of deferred financing fees......... 1,991 -- --
Provision for deferred income tax expense....... 2,832 -- --
Changes in assets and liabilities:
(Increase) in accounts receivable.............. (2,486) (124) (5,410)
(Increase) decrease in inventories............. (11,799) 193 (6,608)
(Increase) decrease in prepaid expenses........ (57) (476) 92
Increase in accounts payable and accrued
expenses...................................... 22,718 2,411 8,565
Decrease in other assets....................... 52 -- --
Other, net..................................... (129) (137) (117)
--------- -------- --------
Cash flow from continuing operations.......... 23,434 50,763 35,136
Cash flow from discontinued operations........ -- 1,858 1,896
--------- -------- --------
Net cash provided by operating activities..... 23,434 52,621 37,032
Investing activities:
Purchases of equipment and leasehold
improvements................................... (3,038) (3,628) (5,138)
--------- -------- --------
Cash used by investing activities--continuing
operations..................................... (3,038) (3,628) (5,138)
Cash used by investing activities--discontinued
operations..................................... -- (221) (422)
--------- -------- --------
Net cash used by investing activities......... (3,038) (3,849) (5,560)
Financing activities:
Redemption of treasury stock.................... (350,895) -- --
Transaction costs related to the redemption of
common stock................................... (11,378) -- --
Recapitalization transactions/redemptions with
affiliate...................................... (4,249) -- --
Issuance of common stock........................ 1,990 -- --
Shareholder equity contribution................. 8,425 -- --
Debt issuance costs............................. (19,934) -- --
Proceeds from the issuance of debt.............. 670,205 -- --
Payment on debt................................. (314,810) (3,997) (10,177)
Repayment of note receivable from employee...... 250 -- --
Issuance of treasury stock...................... -- (1,173) --
Net advances from (to) affiliates............... -- 3,428 (3,144)
Distributions paid.............................. -- (47,346) (19,008)
--------- -------- --------
Net cash provided by financing activities..... (20,396) (49,088) (32,329)
Net increase (decrease) in cash and cash
equivalents..................................... -- (316) (857)
Cash and cash equivalents--beginning of period... -- 316 1,173
--------- -------- --------
Cash and cash equivalents--end of period......... $ -- $ -- $ 316
========= ======== ========
Supplemental disclosure of cash flow information:
Interest paid................................... $ 31,383 $ 1,584 $ 1,308
Income taxes paid............................... $ 371 $ 567 $ 612
Noncash financing activity:
Execution of capital lease...................... $ 9,215 $ -- $ --
Retirement of treasury stock.................... $ 12,910 $ -- $ --
Treasury stock reissued for shareholder notes... $ -- $ 4,645 $ --
See accompanying notes to financial statements.
27
UNITED INDUSTRIES CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT) EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
(Dollars in thousands)
Common
Stock
Accumulated Class A voting Class B voting Retained held in
other common stocks common stock Additional earnings Grant Treasury stock
comprehensive ------------------ ------------------ paid-in (accumulated or --------------
income Shares Amount Shares Amount capital deficit) Trust Shares Amount
------------- ---------- ------ ---------- ------ ---------- ------------ ------- ------ -------
Balance at
January 1, 1997. $ -- 1,000 $ 1 1,000 $ 1 $ 972 $ 52,963 $ -- (400) $(7,109)
Net income...... 36,843
Other
comprehensive
income..........
Distributions
paid............ (19,008)
Treasury stock
cost adjustment. (214)
Balance at
December 31,
1997............ -- 1,000 1 1,000 1 972 70,798 (400) (7,323)
--------- ---------- ---- ---------- ---- -------- --------- ------- ---- -------
Balance at
January 1, 1998. 1,000 1 1,000 1 972 70,798 -- (400) (7,323)
Net income...... 46,741
Other
comprehensive
income..........
Distributions
paid............ (47,346)
Treasury stock
purchased....... (120) (5,818)
Treasury stock
cost adjustment. 231
Balance at
December 31,
1998............ -- 1,000 1 1,000 1 972 70,193 -- (520) (12,910)
--------- ---------- ---- ---------- ---- -------- --------- ------- ---- -------
Balance at
January 1, 1999. -- 1,000 1 1,000 1 972 70,193 -- (520) (12,910)
Net income
(loss).......... (11,597)
Other
comprehensive
income..........
83,378.37838-
for-1 stock
split and
Treasury stock
redemption...... 27,699,000 277 27,699,000 277 (554) (363,805) 520 12,910
Stock received
and redeemed in
settlement of
shareholder note
purchased....... (50,000) (1) (50,000) (1) (521) --
Common stock
issued.......... 274,000 3 274,000 3 2,738
Spin-off of the
Metals Business. -- (5,791)
Fees and
expenses related
to the
Recapitalization
and equity
transactions.... (688)
Recapitalization
transactions/redemptions
with affiliate.. (544,000)