<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the quarterly period ended SEPTEMBER 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission File Number: 1-988
THE COLEMAN COMPANY, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3639257
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2111 E. 37TH STREET NORTH, WICHITA, KANSAS 67219
------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
316-832-2700
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirement for the past 90 days. X Yes No
----- -----
The number of shares outstanding of the registrant's par value $ .01 common
stock was 55,827,490 shares as of November 6, 1998, of which 44,067,520 shares
were held by Coleman Worldwide Corporation, an indirect wholly-owned subsidiary
of Sunbeam Corporation.
Exhibit Index on Page 19
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations
Three months ended September 30, 1998 and 1997 and
Nine months ended September 30, 1998 and 1997 . . . . . . . . 3
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997. . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997 . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 19
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
2
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues . . . . . . . . . . . . . . . . . . . $245,324 $252,434 $816,230 $931,412
Cost of sales. . . . . . . . . . . . . . . . . . . 180,844 182,567 589,328 678,590
-------- -------- -------- --------
Gross profit . . . . . . . . . . . . . . . . . . . 64,480 69,867 226,902 252,822
Selling, general and administrative expenses . . . 65,064 69,127 206,929 205,111
Interest expense, net. . . . . . . . . . . . . . . 8,480 9,855 26,403 31,594
Amortization of goodwill and deferred charges. . . 2,646 3,027 8,313 8,654
Gain on sale of business . . . . . . . . . . . . . (408) -- (25,098) --
Other (income) expense, net. . . . . . . . . . . . (1,511) 703 33 1,500
-------- -------- -------- --------
(Loss) earnings before income taxes,
minority interest and extraordinary item. . . . (9,791) (12,845) 10,322 5,963
Income tax (benefit) expense . . . . . . . . . . . (2,875) (5,060) 13,315 2,087
Minority interest. . . . . . . . . . . . . . . . . (92) 292 (332) 1,135
-------- -------- -------- --------
(Loss) earnings before extraordinary item. . . . . (7,008) (8,077) (3,325) 2,741
Extraordinary loss on early extinguishment
of debt, net of income tax benefit . . . . . . . -- -- (17,538) --
-------- -------- -------- --------
Net (loss) earnings. . . . . . . . . . . . . . . . $ (7,008) $ (8,077) $(20,863) $ 2,741
-------- -------- -------- --------
-------- -------- -------- --------
Basic and diluted (loss) earnings per share:
(Loss) earnings before extraordinary item . . $ (0.13) $ (0.15) $ (0.06) $ 0.05
Extraordinary item. . . . . . . . . . . . . . -- -- (0.32) --
-------- -------- -------- --------
Net (loss) earnings . . . . . . . . . . . . $ (0.13) $ (0.15) $ (0.38) $ 0.05
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . 55,827 53,377 55,135 53,316
-------- -------- -------- --------
-------- -------- -------- --------
Dilutive. . . . . . . . . . . . . . . . . . . 55,827 53,377 55,135 53,489
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . $ 20,105 $ 13,031
Accounts and notes receivable, less allowance of $8,833 in 1998
and $8,930 in 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 191,914 194,616
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202,279 236,327
Deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 22,591 26,378
Prepaid assets and other . . . . . . . . . . . . . . . . . . . . . . . . 14,927 21,344
-------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 451,816 491,696
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . 153,958 175,494
Intangible assets related to businesses acquired, net. . . . . . . . . . . 293,215 332,468
Deferred tax assets and other. . . . . . . . . . . . . . . . . . . . . . . 46,487 42,106
-------- ----------
$945,476 $1,041,764
-------- ----------
-------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable . . . . . . . . . . . . . . . . . . . . . . . $123,445 $ 158,878
Debt to affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . . 381,042 --
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . 105,295 94,319
-------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . 609,782 253,197
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208 477,276
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,530 69,586
Minority interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 958 1,236
Contingencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders' equity:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 558 534
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 217,594 172,072
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,433 80,296
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . (6,587) (12,433)
-------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 270,998 240,469
-------- ----------
$945,476 $1,041,764
-------- ----------
-------- ----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (20,863) $ 2,741
Adjustments to reconcile net (loss) earnings to net cash flows
from operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . 26,766 29,680
Non-cash restructuring and other charges. . . . . . . . . . . . . . . . . . . 5,713 16,774
Minority interest in earnings of Camping Gaz. . . . . . . . . . . . . . . . . 332 1,135
Gain on sale of business. . . . . . . . . . . . . . . . . . . . . . . . . . . (25,098) --
Extraordinary loss on early extinguishment of debt. . . . . . . . . . . . . . 29,012 --
Change in assets and liabilities, net of effects from sale of business:
(Increase) decrease in receivables. . . . . . . . . . . . . . . . . . . . (13,015) 1,112
Decrease in inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 16,115 28,092
Decrease in accounts payable . . . . . . . . . . . . . . . . . . . . . . . (18,519) (8,977)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,478 (9,437)
--------- --------
Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . . . . 10,921 61,120
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,648) (19,075)
Net proceeds from sale of business and fixed assets. . . . . . . . . . . . . . . . . 98,817 4,151
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (618) (1,000)
--------- --------
Net cash provided (used) by investing activities . . . . . . . . . . . . . . . . . . 81,551 (15,924)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments of revolving credit agreement borrowings. . . . . . . . . . . . . . . . (52,578) (91,741)
Net change in short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . (12,165) 39,648
Repayment of long-term debt, including redemption costs. . . . . . . . . . . . . . . (447,250) (2,807)
Net increase in borrowings from affiliate. . . . . . . . . . . . . . . . . . . . . . 381,042 --
Debt refinancing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (766)
Proceeds from stock options exercised including tax benefits . . . . . . . . . . . . 45,546 1,783
--------- --------
Net cash used by financing activities. . . . . . . . . . . . . . . . . . . . . . . . (85,405) (53,883)
--------- --------
Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . . . . . . . . 7 1,284
--------- --------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . 7,074 (7,403)
Cash and cash equivalents at beginning of the period . . . . . . . . . . . . . . . . 13,031 17,299
--------- --------
Cash and cash equivalents at end of the period . . . . . . . . . . . . . . . . . . . $ 20,105 $ 9,896
--------- --------
--------- --------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(Unaudited)
1. BACKGROUND
The Coleman Company, Inc. ("Coleman" or the "Company") is a leading
manufacturer and marketer of consumer products for outdoor recreation and home
hardware use on a global basis.
Coleman is a subsidiary of Coleman Worldwide Corporation ("Coleman
Worldwide"). Coleman Worldwide is a subsidiary of Laser Acquisition Corp.
("Laser"), a wholly-owned subsidiary of Sunbeam Corporation ("Sunbeam").
Coleman Worldwide owns 44,067,520 shares of the common stock of Coleman which
represent approximately 79% of the outstanding Coleman common stock as of
September 30, 1998.
On February 27, 1998, CLN Holdings Inc. ("CLN Holdings") and Coleman
(Parent) Holdings Inc. ("Parent Holdings"), the then parent company of CLN
Holdings, entered into an Agreement and Plan of Merger (as amended, the
"Holdings Merger Agreement") with Sunbeam and Laser. On March 30, 1998,
pursuant to the Holdings Merger Agreement, CLN Holdings was merged with and
into Laser, with Laser continuing as the surviving corporation and as a
wholly-owned subsidiary of Sunbeam (the "Holdings Merger"). In the Holdings
Merger, Parent Holdings received 14,099,749 shares of Sunbeam common stock
and $159,957 in cash in exchange for all of the outstanding shares of CLN
Holdings. In addition, Sunbeam assumed $1,015,598 of debt. As a result of
the Holdings Merger, Sunbeam became the indirect owner of the 44,067,520
shares of Coleman common stock held by Coleman Worldwide (the "Sunbeam
Acquisition"). On August 12, 1998, Sunbeam announced that it had entered into
a settlement agreement with Parent Holdings, a subsidiary of MacAndrews &
Forbes Holdings Inc. ("M&F") pursuant to which Sunbeam was released from
certain threatened claims of M&F and its affiliates arising from the Sunbeam
Acquisition and M&F agreed to provide certain management personnel and
assistance to Sunbeam in exchange for the issuance to M&F of five-year
warrants to purchase up to 23 million shares of Sunbeam common stock at an
exercise price of $ 7.00 per share, subject to anti-dilution provisions.
Coincident with the execution of the Holdings Merger Agreement, the
Company, Sunbeam and Camper Acquisition Corp. ("CAC"), a wholly-owned
subsidiary of Sunbeam, entered into an Agreement and Plan of Merger (the
"Coleman Merger Agreement" and with the Holdings Merger Agreement,
collectively, the "Merger Agreements"), providing that among other things,
CAC will be merged with and into Coleman, with Coleman continuing as the
surviving corporation (the "Coleman Merger"). Pursuant to the Coleman Merger
Agreement, each share of the Company's common stock issued and outstanding
immediately prior to the effective time of the Coleman Merger (other than
shares held indirectly by Sunbeam and dissenting shares, if any) will be
converted into the right to receive (a) 0.5677 of a share of Sunbeam common
stock, with cash paid in lieu of fractional shares, and (b) $6.44 in cash,
without interest. In addition, outstanding stock options of Coleman
immediately vested upon consummation of the Holdings Merger Agreement and
unexercised stock options at the time of the Coleman Merger will be cashed
out by Sunbeam at a price per share equal to the difference between $27.50
per share and the exercise price of such options. On October 21, 1998,
Sunbeam announced it had entered into a memorandum of understanding to
settle, subject to court approval, certain class actions brought by
shareholders of Coleman challenging the proposed Coleman Merger. Under the
terms of the proposed settlement, Sunbeam will issue to the Coleman public
shareholders five-year warrants to purchase up to 4.98 million shares of
Sunbeam common stock at $7.00 per share. These warrants will generally have
the same terms as the warrants previously issued to Parent Holdings and will
be issued when the Coleman Merger is consummated, which is now expected to be
in the first quarter of 1999. There can be no assurance that the court will
approve the settlement as proposed.
6
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(Unaudited)
The consummation of the Coleman Merger is contingent upon several
conditions including, among other things, the filing of a registration
statement under the Securities Act of 1933 (the "Securities Act") for the
purpose of registering the shares of Sunbeam common stock to be issued in the
Coleman Merger (the "Registration Statement") and that the Registration
Statement shall have become effective in accordance with the provisions of
the Securities Act. Due to Sunbeam's restatement of its financial statements,
Sunbeam has been unable to file the Registration Statement. Coleman
anticipates the Registration Statement will be filed in December 1998 but is
uncertain when the Registration Statement will become effective. However, it
is anticipated the Coleman Merger will be completed during the first quarter
of 1999. Upon consummation of the Coleman Merger, Coleman will become an
indirect wholly-owned subsidiary of Sunbeam. As a result of the Sunbeam
Acquisition, all previous arrangements with Parent Holdings and its
affiliates for the provision of services were terminated.
2. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Coleman include the accounts of the Company and its subsidiaries after
elimination of all material intercompany accounts and transactions, and have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals and one-time
adjustments related to the acquisition of Coleman by Sunbeam) considered
necessary for a fair presentation have been included. Operating results for
the nine months ended September 30, 1998 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1998. The
balance sheet at December 31, 1997 has been derived from the audited
financial statements for that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer
to the consolidated financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the year ended December 31, 1997.
3. INVENTORIES
The components of inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Raw material and supplies. . . . . $ 49,919 $ 59,406
Work-in-process. . . . . . . . . . 5,751 7,813
Finished goods . . . . . . . . . . 146,609 169,108
-------- --------
$202,279 $236,327
-------- --------
-------- --------
</TABLE>
4. LONG-TERM AND AFFILIATE DEBT
In March 1998, in connection with the Sunbeam Acquisition, the Company
repaid all outstanding indebtedness under the Company's credit agreement and the
credit agreement was terminated. In connection with
7
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(Unaudited)
the termination of this agreement, the Company recorded an extraordinary loss
of $2,038 which represents a write-off of the related unamortized financing
costs associated with the credit agreement.
In addition, the Company's various senior notes aggregating $360,000
were redeemed on April 21, 1998 at a cost of $ 383,395. The $23,395 of
redemption costs in excess of carrying value along with the write-off of the
related unamortized financing costs of $2,694 and unamortized deferred
interest rate swap losses of $885 are reflected as an extraordinary loss on
early extinguishment of debt.
The Company relies upon borrowings from Sunbeam for the Company's
liquidity needs. Amounts advanced from Sunbeam are due on demand and bear
interest at a floating rate which is equal to the weighted average interest
rate incurred by Sunbeam on its outstanding convertible debt and borrowings
under its bank credit facility. The weighted average interest rate charged
by Sunbeam on amounts advanced during the nine months ended September 30,
1998 was 7.1%. Sunbeam also charged to Coleman a pro-rata share of amortized
debt issuance costs and unused bank credit facility commitment fees totaling
$609. Net amounts advanced from Sunbeam along with the related unpaid
interest and other costs are reflected as affiliate debt in the condensed
consolidated balance sheet. Sunbeam has recently announced certain matters
that could negatively affect its ability to continue to make loans or capital
contributions to the Company. These announcements have included (i)
Sunbeam's necessity to obtain waivers of non-compliance on certain debt
covenants, which waivers have been obtained through April 10, 1999, (ii)
certain shareholder and other lawsuits, (iii) an investigation by the
Securities and Exchange Commission, and (iv) Sunbeam's restatement of certain
historical financial statements. No assurance can be given that Sunbeam will
be able or willing to continue to make capital contributions or loans to the
Company should they be needed.
5. SALE OF BUSINESS
On March 24, 1998, the Company sold Coleman Safety & Security Products,
Inc. ("CSS"), a wholly-owned subsidiary of the Company, which manufactures
and sells safety and security products, to Ranco Incorporated of Delaware
("Ranco"), a wholly-owned subsidiary of Siebe plc, for approximately $95,798,
net of fees and expenses. In connection with the sale of CSS, the Company
recorded a pre-tax gain of $26,137 during the first quarter of 1998. The net
proceeds from the sale of CSS were reduced as a result of post-closing
adjustments during the second and third quarters of 1998, which reduced the
recorded gain by $1,039.
On October 13, 1998, the Company sold Coleman Spas, Inc. ("Spas"), a
wholly-owned subsidiary of the Company, which manufactures and markets
portable spas and related products for the consumer market, to MAAX Holdings
Inc., a wholly-owned subsidiary of MAAX Inc., for approximately $17,040, net
of fees and expenses. The Company will record a pre-tax gain of
approximately $7,700 in the fourth quarter of 1998. The net proceeds from
the sale of Spas are subject to certain post-closing adjustments which could
change the pre-tax gain.
6. RESTRUCTURING AND OTHER CHARGES
During the nine months ended September 30, 1998, the Company recorded
pre-tax charges totaling $30,500 which included (i) $7,242 of costs
associated with the acquisition of Coleman by Sunbeam, (ii) the write-off of
$3,890 of capitalized costs associated with the installation of a
company-wide enterprise resource computer software system which was abandoned
following the Sunbeam Acquisition, (iii) $2,225 of costs to terminate a
licensing services agreement with an affiliate of Parent Holdings, (iv)
$9,140 of severance benefits related to
8
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(Unaudited)
approximately 84 employees whose employment with the Company was terminated
following the Sunbeam Acquisition, (v) $1,071 of severance benefits for
approximately 110 employees at the Company's manufacturing facility in Cedar
City, Utah which was closed during June 1998, (vi) $247 of asset writedowns
and other costs to consolidate certain operations in Europe, (vii)
recognition of a net gain of $71 related to the disposition of the Company's
manufacturing facility in Cedar City, Utah, and (viii) $6,756 of certain
other adjustments related primarily to revised estimates of costs for
severance benefits of employees terminated during 1997 and an increase in the
reserve for impaired fixed assets associated with prior years' restructuring
initiatives. During the nine months ended September 30, 1997, the Company
recorded pre-tax charges totaling $36,023 which consisted of (i) $14,532 to
close and relocate certain administrative and sales offices, (ii) $16,009 to
exit various low margin products, including pressure washers, and (iii)
$5,482 to close several manufacturing facilities.
7. INCOME TAXES
The provision for income taxes for the nine months ended September 30,
1998 reflects, among other things, (i) the write-off of approximately $5.5
million of deferred tax assets that became unrealizable as a result of the
Sunbeam Acquisition, (ii) $0.4 million of tax expense due to the impact of
decreased foreign tax rates on deferred tax assets, and (iii) the impact of
$7.2 million of non-deductible costs associated with the Sunbeam Acquisition.
Excluding these items, the provision for income taxes would have resulted in
an effective income tax rate of approximately 42% for the 1998 period
compared to an effective income tax rate of approximately 35% for the 1997
period. In each period, the comparable effective income tax rates differ
from the federal statutory rate primarily due to state income taxes, foreign
operations and nondeductible amortization.
8. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for the reporting and display of comprehensive
income and its components in financial statements; however, the adoption of this
Statement had no impact on the Company's net income or shareholders' equity.
SFAS No. 130 requires foreign currency translation adjustments and minimum
pension liability adjustments, which prior to adoption were reported separately
in shareholders' equity, to be included in other comprehensive income. The
components of the Company's comprehensive loss are as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- ----------------------
1998 1997 1998 1997
------- -------- -------- --------
<S> <C> <C> <C> <C>
Net (loss) income. . . . . . . . . . . . . . . . . . . $(7,008) $ (8,077) $(20,863) $ 2,741
Foreign currency translation adjustment, net of tax. . 10,154 (2,966) 6,351 (10,756)
Minimum pension liability adjustment, net of tax . . . (168) (169) (505) (505)
------- -------- -------- --------
Comprehensive income (loss). . . . . . . . . . . . . . $ 2,978 $(11,212) $(15,017) $ (8,520)
------- -------- -------- --------
------- -------- -------- --------
</TABLE>
9. BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share," which establishes new standards for
computing and presenting basic and diluted earnings per share. As required by
SFAS No. 128, the Company adopted the provisions of the new standard with
retroactive effect
9
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(Unaudited)
beginning in 1997. Accordingly, all net earnings (loss) per common share
amounts for all prior periods have been restated to comply with SFAS No. 128.
The basic earnings (loss) per common share has been computed based upon
the weighted average shares of outstanding common stock. Diluted earnings
(loss) per common share has been computed based upon the sum of the weighted
average shares of outstanding common stock and the weighted average
incremental shares that would have been outstanding assuming dilutive
potential common stock had been issued. The Company's outstanding common
stock options represent the only dilutive potential common stock. The
amounts of earnings (loss) used in the calculations of basic and diluted
earnings (loss) per common share were the same for all periods presented.
The number of shares used in the calculation of diluted earnings per common
share included 172,782 incremental shares for the nine month period ended
September 30, 1997 to recognize the effect of dilutive stock options. The
number of shares used in the calculation of diluted earnings per common share
for the three month periods ended September 30, 1998 and 1997 and for the
nine month period ended September 30, 1998 does not include any incremental
shares that would have been outstanding assuming the exercise of any stock
options because the effect of these shares would have been antidilutive.
10. RELATED PARTY TRANSACTIONS
In connection with the Sunbeam Acquisition, the Company terminated a
licensing services agreement with an affiliate of Parent Holdings and
recorded $2,000 of expense related to payments to be made under the terms of
the termination agreement and $225 of expense related to certain receivables
from an affiliate of Parent Holdings which were forgiven as part of the same
termination agreement.
During the second and third quarters of 1998, the Company provided
certain management services to Sunbeam and its affiliates and also received
certain management services from Sunbeam and its affiliates. These services
included, among other things, (i) general administrative, legal and financial
services, (ii) factory management and inventory control services, and (iii)
sales and marketing services. For the nine months ended September 30, 1998,
the cost of the services provided by the Company and charged to Sunbeam and
its affiliates in the amount of $1,081 has been reflected as a reduction in
selling, general and administration ("SG&A") expenses and the $1,156 of
charges to Coleman for services received by Coleman from Sunbeam and its
affiliates has been included in SG&A expenses. The cost of the services are
assessed based on actual usage or other allocation methods which management
believes are reasonable.
11. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". SFAS No. 131 establishes
standards for reporting information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company will apply the provisions
of SFAS No. 131 beginning January 1, 1998; however, financial statement
disclosures for interim periods in 1998 are not required to be presented in
interim financial statements issued in 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for
10
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(Unaudited)
hedging activities. It requires an entity to recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. SFAS No. 133 will be effective for
the Company's fiscal year beginning January 1, 2000. Earlier application of
the provisions of SFAS No. 133 are encouraged; however, the Company has not
determined if it will apply the provisions of SFAS No. 133 prior to January 1,
2000, nor has the Company estimated the impact of applying the provision
of SFAS No. 133 on the Company's statement of financial position or on the
statement of operations.
12. CONTINGENCIES
On June 25, 1998, four purported class actions were filed in the Court of
Chancery of the State of Delaware in New Castle County by minority shareholders
of Coleman against Coleman, certain of Sunbeam's present and former officers and
directors and, as a nominal party, Sunbeam. An additional class action was
filed on August 10, 1998 against the same parties. All of the plaintiffs are
represented by the same Delaware counsel and have agreed to consolidate the
class actions. These actions allege, in essence, that the existing exchange
ratio for the proposed Coleman Merger is no longer fair to Coleman shareholders
as a result of the recent decline in the market value of Sunbeam stock. On or
about October 21, 1998, the parties signed a memorandum of understanding to
settle these class actions, subject to Court approval. See "Footnote 1 -
Background" above.
11
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On February 27, 1998, CLN Holdings Inc. ("CLN Holdings") and
Coleman (Parent) Holdings Inc. ("Parent Holdings"), the then parent company
of CLN Holdings, entered into an Agreement and Plan of Merger (as amended,
the "Holdings Merger Agreement") with Sunbeam Corporation ("Sunbeam") and
Laser Acquisition Corp. ("Laser"), a wholly-owned subsidiary of Sunbeam. On
March 30, 1998, pursuant to the Holdings Merger Agreement, CLN Holdings was
merged with and into Laser, with Laser continuing as the surviving
corporation and as a wholly-owned subsidiary of Sunbeam (the "Holdings
Merger"). In the Holdings Merger, Parent Holdings received 14,099,749 shares
of Sunbeam common stock and $160.0 million in cash in exchange for all of the
outstanding shares of CLN Holdings. In addition, Sunbeam assumed $1,015.6
million of debt. As a result of the Holdings Merger, Sunbeam became the
indirect owner of the 44,067,520 shares of Coleman common stock held by
Coleman Worldwide Corporation ("Coleman Worldwide") (the "Sunbeam
Acquisition"). On August 12, 1998, Sunbeam announced that it had entered
into a settlement agreement with Parent Holdings, a subsidiary of MacAndrews
& Forbes Holdings Inc. ("M&F") pursuant to which Sunbeam was released from
certain threatened claims of M&F and its affiliates arising from the Sunbeam
Acquisition and M&F agreed to provide certain management personnel and
assistance to Sunbeam in exchange for the issuance to M&F of five-year
warrants to purchase up to 23 million shares of Sunbeam common stock at an
exercise price of $7.00 per share, subject to anti-dilution provisions.
Coincident with the execution of the Holdings Merger Agreement, the
Company, Sunbeam and Camper Acquisition Corp. ("CAC"), a wholly-owned
subsidiary of Sunbeam, entered into an Agreement and Plan of Merger (the
"Coleman Merger Agreement" and with the Holdings Merger Agreement,
collectively, the "Merger Agreements"), providing that among other things,
CAC will be merged with and into Coleman, with Coleman continuing as the
surviving corporation (the "Coleman Merger"). Pursuant to the Coleman Merger
Agreement, each share of the Company's common stock issued and outstanding
immediately prior to the effective time of the Coleman Merger (other than
shares held indirectly by Sunbeam and dissenting shares, if any) will be
converted into the right to receive (a) 0.5677 of a share of Sunbeam common
stock, with cash paid in lieu of fractional shares, and (b) $6.44 in cash,
without interest. In addition, outstanding stock options of Coleman
immediately vested upon consummation of the Holdings Merger Agreement, and
unexercised stock options at the time of the Coleman Merger will be cashed
out by Sunbeam at a price per share equal to the difference between $27.50
per share and the exercise price of such options. On October 21, 1998,
Sunbeam announced it had entered into a memorandum of understanding to
settle, subject to court approval, certain class actions brought by
shareholders of Coleman challenging the proposed Coleman Merger. Under the
terms of the proposed settlement, Sunbeam will issue to the Coleman public
shareholders five-year warrants to purchase up to 4.98 million shares of
Sunbeam common stock at $7.00 per share. These warrants will generally have
the same terms as the warrants previously issued to Parent Holdings and will
be issued when the Coleman Merger is consummated, which is now expected to be
in the first quarter of 1999. There can be no assurance that the court will
approve the settlement as proposed. See "Item 1. Legal Proceedings" in "Part
II. Other Information".
The consummation of the Coleman Merger is contingent upon several
conditions including, among other things, the filing of a registration
statement under the Securities Act of 1933 (the "Securities Act") for the
purpose of registering the shares of Sunbeam common stock to be issued in the
Coleman Merger (the "Registration Statement") and that the Registration
Statement shall have become effective in accordance with the provisions of
the Securities Act. Due to Sunbeam's restatement of its financial statements,
Sunbeam has been unable to file the Registration Statement. Coleman
anticipates the Registration Statement will be filed in December 1998 but is
uncertain when the Registration Statement will become effective. However, it
is anticipated the Coleman Merger will be completed during the first quarter
of 1999. Upon consummation of the Coleman Merger, Coleman will become an
indirect wholly-owned subsidiary of Sunbeam. As a result of the Sunbeam
acquisition, all previous arrangements with Parent Holdings and its
affiliates for the provision of services were terminated.
12
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
RESTRUCTURING AND OTHER CHARGES
During first nine months of 1997, the Company undertook several
restructuring initiatives to strengthen its business operations, including
(i) exiting various low-margin products, including pressure washers, (ii)
closing and relocating certain administrative and sales offices, and (iii)
closing several manufacturing facilities. During the first quarter of 1997,
the Company recorded restructuring and other charges of $4.0 million,
primarily in selling, general and administrative ("SG&A") expenses, related
primarily to severance costs. During the second quarter of 1997, the Company
recorded total restructuring charges of $18.6 million. The 1997 second
quarter restructuring charges included $13.5 million related to exiting
certain products and facilities of which $10.3 million was reflected in cost
of sales and $3.2 million in SG&A expenses. This $13.5 million restructuring
charge included $9.9 million of charges related primarily to the write down
of inventory and fixed assets to estimated realizable value and $3.6 million
of liabilities for other exit costs, including carrying costs of idle
facilities and relocation costs. The costs associated with the second quarter
restructuring charge of $18.6 million also included $5.1 million of
termination costs for 389 factory and administrative employees of which $1.1
million was reflected in cost of sales and $4.0 million in SG&A expenses.
During the third quarter of 1997, the Company recorded total restructuring
charges of $13.4 million. The 1997 third quarter restructuring charges
included $11.6 million related to exiting certain products and facilities of
which $8.9 million was reflected in cost of sales and $2.7 million in SG&A
expenses. This $11.6 million restructuring charge included $6.8 million of
charges related primarily to the write down of inventory and fixed assets to
estimated realizable value and $4.8 million of liabilities for other exit
costs, including carrying costs of idle facilities and relocation costs. The
costs associated with the third quarter restructuring charge of $13.4 million
also included $1.8 million of termination costs for approximately 100 factory
and administrative employees of which $0.1 million was reflected in cost of
sales and $1.7 million in SG&A expenses.
During the first quarter of 1998, the Company increased its
estimate of costs to complete the restructuring initiatives previously
announced in 1997 by $0.7 million. In addition, as a result of the Sunbeam
Acquisition, Coleman recorded $12.9 million of other charges in SG&A which
included (i) $7.1 million of costs associated with the acquisition of Coleman
by Sunbeam, (ii) the write-off of $3.6 million of capitalized costs
associated with the installation of a company-wide enterprise resource
computer software system which was abandoned following the Sunbeam
Acquisition, and (iii) $2.2 million of expense relating to the early
termination of a licensing services agreement with an affiliate of Parent
Holdings. At the end of the first quarter of 1998, the majority of Coleman
common stock was acquired by Sunbeam. Subsequent to the Sunbeam Acquisition,
the Company terminated certain employees, adopted a different focus in
information system planning and implemented certain other strategies. As a
result of these actions, during the second quarter the Company recorded $9.0
million of restructuring and other charges in SG&A which included (i) $8.2
million of severance benefits related to approximately 76 employees whose
employment with the Company was terminated following the Sunbeam Acquisition,
(ii) an increase in severance benefits related to employees terminated during
1997 in the amount of $0.4 million, and (iii) additional costs associated
with the Sunbeam Acquisition, including an abandoned software system, in the
amount of $0.4 million. In addition, the Company recorded a charge to cost
of sales in the amount of $1.0 million related to $1.1 million of severance
benefits for approximately 110 employees at the Company's manufacturing
facility in Cedar City, Utah which was closed during June 1998, partially
offset by a recognition of a net gain of $0.1 million related to the
disposition of the company's manufacturing facility in Cedar City, Utah.
During the third quarter of 1998, the Company recorded $6.7 million of
restructuring and other charges in SG&A which included (i) an increase in
severance benefits related to employees terminated during 1997 in the amount
of $3.8 million, (ii) an increase in the reserve for impaired fixed assets of
$1.8 million, (iii) an additional $0.8 million of severance for employees
terminated during 1998, (iv) $0.3 million related to consolidation of
facilities in Europe. In addition, the Company recorded a charge to cost of
sales in the amount of $0.2 million related to consolidation of facilities in
13
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
Europe. An analysis of the reserves for restructuring and other charges is
outlined in the following table (dollars in millions):
<TABLE>
<CAPTION>
1998 Charges During Balance
Balance at Additional Nine Months at
12/31/97 Reserves Ended 9/30/98 9/30/98
---------- ---------- -------------- -------
<S> <C> <C> <C> <C>
Impairment of fixed assets . . . . . . . . . . . . . . . . . $ 8.1 $ 1.3 $ (0.8) $ 8.6
Inventory and other asset impairments. . . . . . . . . . . . 8.4 4.1 (9.7) 2.8
Termination costs. . . . . . . . . . . . . . . . . . . . . . 2.8 15.3 (6.6) 11.5
Idle facilities, relocation and other exit costs . . . . . . 8.7 9.8 (14.6) 3.9
----- ----- ------ -----
$28.0 $30.5 $(31.7) $26.8
----- ----- ------ -----
----- ----- ------ -----
</TABLE>
The Company expects to incur additional restructuring and other charges
as a result of the Sunbeam Acquisition. During the second quarter of 1998,
certain restructuring initiatives involving Coleman's operations were
announced. These initiatives may continue to evolve and change as current
management clarifies its plan for the Coleman operations. The restructuring
initiatives related to Coleman include, among other things, (i) combining the
Company's headquarters with Sunbeam's headquarters in Florida, (ii) the
consolidation of certain factories, warehouses, and sales offices, and (iii)
the divestiture of the spa business. Until such time as the final steps are
taken to complete the Sunbeam Acquisition, some of the restructuring and
other initiatives may be modified or delayed in implementation.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net revenues of $245.3 million in the three-month period ended September
30, 1998 were $7.1 million or 2.8% less than in the three-month period ended
September 30, 1997 with outdoor recreation products decreasing $0.2 million
or 0.1% and hardware products decreasing $6.9 million or 9.7%.
Geographically, United States and Canadian revenues increased 3.1% while
international revenues decreased 12.7%.
Outdoor recreation products revenues decreased $0.2 million or 0.1%. The
outdoor recreation products revenue decrease primarily reflects lower sales
of backpacks and related products because of adverse economic conditions in
southeast Asia and high retail inventories in the United States. The lower
sales of backpacks and related products were largely offset by higher sales
of outdoor appliances, fuel, and coolers and jugs. The hardware products
revenues decrease of $6.9 million reflects the loss of pressure washer
revenues due to exiting this business in 1997 and the loss of Coleman Safety
& Security Products, Inc. ("CSS") revenues in 1998 due to the sale of this
business in March 1998. Excluding the revenues of each of these operations,
the hardware products revenues in 1998 would have increased by $19.0 million
as compared to 1997 revenues as an increase in generator revenues
attributable to storm activity was partially offset by a decline in
compressor revenues.
Gross margins, excluding the impact of restructuring and other charges
of $0.2 million in 1998 and $9.0 million in 1997, which are more fully
described above, decreased as a percent of sales by 4.9 percentage points to
26.3% in 1998 from 31.2% in 1997. Cost of sales in 1998 includes $4.5
million of charges related to writedowns of returned goods inventory and
certain fixed assets related to discontinued SKUs and also a $1.7 million
charge resulting from an increase in the Company's reserves for estimated
costs of environmental remediation efforts. Gross margins were also
negatively impacted by the effects of product mix including the loss of the
CSS business and lower sales of backpacks and related products which tend to
have higher gross margin percentages than the Company's average and higher
sales of hardware products which tend to have lower gross margin percentages.
14
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
SG&A expenses, excluding the impact of restructuring and other charges
of $6.7 million in 1998 and $4.5 million in 1997, which are more fully
described above, were $58.3 million in 1998 compared to $64.7 million in
1997, a decrease of $6.4 million which is primarily due to the sale of CSS in
March 1998.
Interest expense was $8.5 million in 1998 compared with $9.9 million in
1997, a decrease of $1.4 million. The decrease in interest expense reflects
the favorable effects of lower borrowings as the proceeds from the sale of
CSS were primarily used to reduce outstanding debt.
Minority interest represents the interest of minority shareholders in
certain subsidiary operations of Camping Gaz.
The Company recorded a provision for income tax benefit of $2.9 million
in 1998 compared to a provision for income tax benefit of $5.1 million in
1997. Excluding the tax benefits associated with the restructuring and other
charges of $2.5 million in 1998 and $4.0 million in 1997, the income tax
benefit in 1998 was negatively impacted by nondeductible items whereas the
income tax benefit in 1997 was favorably impacted by the cumulative effect of
the decrease in the Company's expected annual effective income tax rate from
38.0% to 35.0%.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
Net revenues of $816.2 million in the nine-month period ended September
30, 1998 were $115.2 million or 12.4% less than in the nine-month period
ended September 30, 1997 with outdoor recreation products decreasing $69.2
million or 9.8% and hardware products decreasing $46.0 million or 20.4%.
Geographically, United States and Canadian revenues decreased 11.9% while
international revenues decreased 13.4%.
Outdoor recreation products revenues decreased $69.2 million or 9.8%.
The sales decrease occurred in nearly all product categories, primarily
reflecting the effects of the SKU reduction program in 1997, softness in
demand resulting from the domestic retail channel's efforts to lower
inventory levels, and adverse economic conditions in Japan and Southeast
Asia. The hardware products revenues decrease of $46.0 million reflects the
loss of pressure washer revenues due to exiting this business in 1997 and the
loss of CSS revenues in 1998 due to the sale of this business in March 1998.
Excluding the revenues of each of these operations, the hardware products
revenues would show an increase of $21.6 million, or 15.1%, over comparable
1997 revenues reflecting an increase in generator revenues as a result of
storms which were partially offset by a decline in compressor revenues.
Gross margins, excluding the impact of restructuring and other charges
of $1.1 million in 1998 and $20.0 million in 1997, which are more fully
described above, decreased as a percent of sales by 1.4 percentage points to
27.9% in 1998 from 29.3% in 1997. This decrease is principally related to a
second quarter 1998 increase of $3.2 million in the Company's inventory
reserves for slow moving products and the third quarter 1998 charges totaling
$6.2 million which are more fully described above in the analysis of
operations for the three months ended September 30, 1998.
SG&A expenses, excluding the impact of restructuring and other charges
of $29.4 million in 1998 and $16.0 million in 1997, which are more fully
described above, were $177.6 million in 1998 compared to $189.1 million in
1997, a decrease of $11.5 million which is primarily due to the sale of CSS
in March 1998.
On March 24, 1998, the Company sold CSS to Ranco for approximately $96.2
million, net of fees and expenses. In connection with the sale of CSS, the
Company recorded a pre-tax gain of $26.1 million during the first quarter of
1998. The net proceeds from the sale of CSS were reduced as a result of
post-closing adjustments during the second and third quarters of 1998, which
reduced the recorded gain by $1.0 million.
15
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
Interest expense was $26.4 million in 1998 compared with $31.6 million
in 1997, a decrease of $5.2 million. The decrease in interest expense
reflects the favorable effects of lower borrowings as the proceeds from the
sale of CSS were primarily used to reduce outstanding debt and from
improvements in managing working capital.
Minority interest represents the interest of minority shareholders in
certain subsidiary operations of Camping Gaz.
The Company recorded a provision for income tax expense of $13.3 million
in 1998 compared to a provision for income tax expense of $2.1 million in
1997. The 1998 income tax provision reflects, among other things, (i) the
write-off of approximately $5.5 million of deferred tax assets that became
unrealizable as a result of the Sunbeam Acquisition, (ii) $0.4 million of tax
expense due to the impact of decreased foreign tax rates on deferred tax
assets, and (iii) the impact of $7.2 million of non-deductible costs
associated with the Sunbeam Acquisition. Excluding these items, the 1998
effective income tax rate would have been approximately 42%, which is higher
than the statutory Federal income tax rate primarily because of state income
taxes, nondeductible amortization and foreign operations.
In March 1998, in connection with the Sunbeam Acquisition, the Company
repaid all outstanding indebtedness under the Company's credit agreement and
the credit agreement was terminated. In connection with the termination of
this agreement, the Company recorded an extraordinary loss of $2.0 million
which represents a write-off of the related unamortized financing costs
associated with the credit agreement. In April 1998, as a result of the
Sunbeam Acquisition, the Company repaid the $360.0 million outstanding
indebtedness under the Company's various senior notes. The $23.4 million of
redemption costs in excess of carrying value along with the write-off of
related unamortized financing costs of $2.7 million and unamortized deferred
interest rate swap losses of $0.9 million are reflected as extraordinary loss
on early extinguishment of debt. The total $29.0 million of charges were
reduced by $11.5 million of tax benefits for a net after-tax charge of $17.5
million or $0.32 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided $10.9 million and $61.1
million of cash during the nine months ended September 30, 1998 and 1997,
respectively. During the 1998 period, receivables increased $13.0 million and
inventories decreased approximately $16.1 million as a result of the
seasonality of the Company's sales. The Company's capital expenditures were
$16.6 million in the nine months ended September 30, 1998. During the first
nine months of 1998, the $45.5 million of proceeds from stock option
exercises along with $381.0 million of borrowings from Sunbeam and the
proceeds from the sale of the Company's safety and security business and
sales of fixed assets of $98.8 million of cash were used to, among other
things, (i) repay the $116.0 million outstanding indebtedness under the
Company's credit agreement (ii) redeem the Company's various senior notes at
a cost of $383.4 million, and (iii) fund the Company's operating activities
and capital expenditures.
The Company's ability to meet its current cash operating requirements,
including projected capital expenditures and other obligations, is dependent
upon a combination of cash flows from operations and capital contributions or
loans to the Company from Sunbeam or its affiliates. Sunbeam has recently
announced certain matters that could negatively affect its ability to
continue to make loans or make capital contributions to the Company. These
announcements have included (i) Sunbeam's necessity to obtain waivers of
non-compliance on certain debt covenants, which waivers have been obtained
through April 10, 1999, (ii) certain shareholder lawsuits, (iii) an
investigation by the Securities and Exchange Commission, and (iv) Sunbeam's
restatement of
16
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
certain historical financial statements. No assurance can be given that
Sunbeam will be able or willing to continue to make capital contributions or
loans to the Company should they be needed.
The Company periodically uses a variety of derivative financial
instruments to manage its foreign currency exposures. The Company does not
speculate on foreign currency rates. Instead it uses derivatives when
implementing its risk management strategies to reduce the possible effects of
these exposures. With respect to foreign currency exposures, the Company
principally uses forward and option contracts to reduce risks arising from
firm commitments, anticipated intercompany sales transactions and
intercompany receivable and payable balances. The Company manages credit
risk related to these derivative contracts through credit approvals, exposure
limits and other monitoring procedures.
SEASONALITY
The Company's sales generally are highest in the second quarter of the
year and lowest in the fourth quarter. As a result of this seasonality, the
Company has generally incurred a loss in the fourth quarter. The Company's
sales may be affected by weather conditions, especially during the second and
third quarters of the year. The Company's annual results are generally
dependent on its results during the second quarter.
YEAR 2000
The Company is continuing the process of assessing the impact of the
Year 2000 on its operations, including the impact of the effects of
noncompliance by its vendors, service providers, customers and financial
institutions. Additionally, the Company is assessing the impact of
noncompliance of embedded microprocessors in its products as well as
equipment, such as security and telephone systems and controls for lighting,
heating/ventilation, and facility access. The Company is being assisted in
its review and remediation work by Sunbeam's Year 2000 Program Management
Office.
The Company relies on its information technology functions to perform
many tasks that are critical to its operations. Systems and applications
that have been identified by the Company to date as not currently Year 2000
compliant that are critical to the Company's operations include certain of
its financial packages, which process order entry, purchasing, production
management, general ledger, accounts receivable, and accounts payable
functions. The Company is completing testing of Year 2000 compliant
software for these functions, which testing is expected to be completed by
the first quarter of 1999. In addition, the Company is currently testing to
confirm its belief that the Company's warehouse management application is
Year 2000 compliant. The Company has identified one location with
significant Year 2000 issues; failure to complete a timely conversion of this
location to a Year 2000 compliant system could have a material impact on the
Company's operations. Management of the Company believes that, although there
are significant systems that are being or will be modified or replaced, its
information systems environment will be made Year 2000 compliant prior to
January 1, 2000.
As of September 30, 1998, the Company had expended $0.7 million related
to remediation of Year 2000 issues which was recorded as SG&A expenses. The
Company's preliminary assessment of the total costs to address and remedy
Year 2000 issues is $10.0 million. This estimate includes the costs of
software and hardware modifications and replacements and fees to third party
consultants but excludes internal resources which are not separately tracked
by the Company with respect to the allocation of time to the Year 2000
issues. The Company expects these expenditures to be financed through
operating cash flows or borrowings, as applicable. There can be no assurance
that these preliminary estimates will not change as the Company completes its
assessment of the Year 2000 impact.
The Company is in the process of contacting its vendors and suppliers of
products and services to determine their Year 2000 readiness and plans. This
review includes third party providers to whom the Company has outsourced the
processing of its cash receipt and cash disbursement transactions and its
payroll. The Company plans to complete this review during the fourth quarter
of 1998. The failure of certain of these third party suppliers to become Year
2000 compliant could have a material adverse impact on the Company.
After completing the assessment of the Year 2000 on its operations, the
Company plans to establish a contingency plan for addressing any effects of
the Year 2000 on its operations, whether due to noncompliance by the
Company's systems or those of third parties. The Company expects that such
contingency plan will
17
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
address alternative processes, such as manual procedures to replace those
processed by noncompliant systems, potential alternative service providers,
and plans to address compliance issues as they arise. Subject to the nature
of the systems and applications which are not made Year 2000 compliant, the
impact of such non-compliance on the Company's operations could be material
if appropriate contingency plans cannot be developed prior to January 1, 2000.
EURO CONVERSION
On January 1, 1999, certain member countries of the European Union are
scheduled to establish fixed conversion rates between their existing
currencies and the European Union's common currency (the "Euro"). The
transition period for the introduction of the Euro will be between January 1,
1999 and January 1, 2002. The Company has been preparing for the
introduction of the Euro and is currently evaluating methods to address the
many issues involved with the introduction of the Euro, including the
conversion of information technology systems, recalculating currency risk,
strategies concerning continuity of contracts, and impacts on the processes
for preparing taxation and accounting records. Based on the work to date,
the Company believes the Euro conversion will not have a material impact on
its consolidated financial statements.
CAUTIONARY STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q may constitute
"forward looking" statements within the meaning of The Private Securities
Litigation Reform Act of 1995, as the same may be amended from time to time
(the "Act") and in releases made by the Securities and Exchange Commission
from time to time. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. When used in this Quarterly Report on Form 10-Q,
the words "estimate", "project", "intend", "expect" and similar expressions,
when used in connection with the Company, including its management, are
intended to identify forward-looking statements. These forward-looking
statements were based on various factors and were derived utilizing numerous
important assumptions and other important factors that could cause actual
results to differ materially from those in the forward-looking statements.
These Cautionary Statements are being made pursuant to the Act, with the
intention of obtaining the benefits of the "Safe Harbor" provisions of the
Act. The Company cautions investors that any forward-looking statements made
by the Company are not guarantees of future performance. Important
assumptions and other important factors that could cause actual results to
differ materially from those contained in the forward-looking statements with
respect to the Company include, but are not limited to risks associated with
(i) unanticipated costs or delays in developing new products, (ii) a decrease
in the public's interest in camping and related activities, (iii) economic
uncertainty in Japan, Korea, and other Asian countries, (iv) weather
conditions which can have an unfavorable impact upon sales of Coleman's
products, (v) significant adverse market or economic conditions which
negatively affect demand for the Company's products, (vi) disruptions or
delays resulting from the transactions contemplated by the Merger Agreements,
(vii) changes in Sunbeam's ability to provide financing to the Company,
(viii) changes in operating philosophy following the Sunbeam Acquisition, and
(ix) failure of the Company and/or its suppliers of goods or services to
timely complete the remediation of computer systems to effectively process
Year 2000 information. Other factors and assumptions not included in the
foregoing may cause the Company's actual results to materially differ from
those projected. The Company assumes no obligation to update any
forward-looking statements or these Cautionary Statements to reflect actual
results or changes in other factors affecting such forward-looking
statements.
18
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 25, 1998, four purported class actions were filed in the Court
of Chancery of the State of Delaware in New Castle County by minority
shareholders of Coleman against Coleman, certain of Sunbeam's present and
former officers and directors and, as a nominal party, Sunbeam. An
additional class action was filed on August 10, 1998 against the same
parties. All of the plaintiffs are represented by the same Delaware counsel
and have agreed to consolidate the class actions. These actions allege, in
essence, that the existing exchange ratio for the proposed Coleman Merger is
no longer fair to Coleman shareholders as a result of the recent decline in
the market value of Sunbeam stock. On or about October 21, 1998, the parties
signed a memorandum of understanding to settle these class actions, subject
to Court approval. Under the terms of the proposed settlement, Sunbeam will
issue to the Coleman public shareholders five-year warrants to purchase up to
4.98 million shares of Sunbeam common stock at $7.00 per share. These
warrants will be issued when the Coleman Merger is consummated, which is now
expected to be in the first quarter of 1999. There can be no assurance that
the court will approve the settlement as proposed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule, submitted electronically to
the Securities and Exchange Commission for information
only and not filed.
(b) Report on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
19
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE COLEMAN COMPANY, INC.
Date: November 10, 1998 By: /s/ Gwen C. Wisler
----------------------------- ------------------------
Gwen C. Wisler
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS FILED IN THE COMPANY'S FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 20,105
<SECURITIES> 0
<RECEIVABLES> 200,747
<ALLOWANCES> 8,833
<INVENTORY> 202,279
<CURRENT-ASSETS> 451,816
<PP&E> 277,332
<DEPRECIATION> 123,374
<TOTAL-ASSETS> 945,476
<CURRENT-LIABILITIES> 609,782
<BONDS> 208
0
0
<COMMON> 558
<OTHER-SE> 270,440
<TOTAL-LIABILITY-AND-EQUITY> 945,476
<SALES> 810,008
<TOTAL-REVENUES> 816,230
<CGS> 589,328
<TOTAL-COSTS> 589,328
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,753
<INTEREST-EXPENSE> 26,403
<INCOME-PRETAX> 10,322
<INCOME-TAX> 13,315
<INCOME-CONTINUING> (3,325)
<DISCONTINUED> 0
<EXTRAORDINARY> (17,538)
<CHANGES> 0
<NET-INCOME> (20,863)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
</TABLE>
