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 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 No. 1-52
[GRAPHIC OMITTED]
SUNBEAM CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 25-1638266
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
1615 SOUTH CONGRESS AVENUE
SUITE 200 33445
DELRAY BEACH, FLORIDA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(561) 243-2100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required 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 [ ] No [ X ]
On December 4, 1998 there were 100,887,545 shares of the registrant's
Common Stock ($.01 par value) outstanding.
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SUNBEAM CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT
ON FORM 10-Q
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
Condensed Consolidated Statements of Operations (Unaudited)
for the three months and nine months ended September 30, 1998
and September 28, 1997............................................ 2
Condensed Consolidated Balance Sheets
as of September 30, 1998 (Unaudited) and December 28, 1997........ 3
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended September 30, 1998 and September
28, 1997.......................................................... 4
Notes to Condensed Consolidated Financial Statements (Unaudited).. 5
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................... 26
SIGNATURES ............................................................... 27
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1
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PART I. FINANCIAL INFORMATION
SUNBEAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
------------------ ------------------
September 30, September 28, September 30, September 28,
1998 1997 1998 1997
------------- ------------- ------------- -------------
As restated As restated
see Note 8 see Note 8
(Unaudited) (Unaudited)
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Net sales .................................................. $ 496,039 $286,819 $1,322,129 $810,698
Cost of goods sold.......................................... 428,629 210,359 1,273,424 620,646
Selling, general and administrative expense................. 228,441 31,362 440,381 111,051
--------- -------- ---------- --------
Operating (loss) earnings................................... (161,031) 45,098 (391,676) 79,001
Interest expense............................................ 42,669 2,850 90,149 7,816
Other income, net........................................... (10,987) (1,307) (5,738) (894)
--------- -------- ---------- --------
(Loss) earnings from continuing operations before
income taxes, minority interest and extraordinary charges. (192,713) 43,555 (476,087) 72,079
Income taxes (benefit):
Current................................................... 396 18,580 3,995 12,873
Deferred.................................................. (2,814) (2,476) (1,280) 14,006
--------- -------- ---------- --------
(2,418) 16,104 2,715 26,879
--------- -------- ---------- --------
Minority interest........................................... (1,384) - (3,447) -
--------- -------- ---------- --------
(Loss) earnings from continuing operations before
extraordinary item........................................ (188,911) 27,451 (475,355) 45,200
Loss from discontinued operations, net of taxes............. - (2,683) - (16,396)
Extraordinary charges from early extinguishment
of debt, net of taxes (Note 3)........................... - - (111,715) -
--------- -------- ---------- --------
Net (loss) earnings......................................... $ (188,911) $ 24,768 $ (587,070) $ 28,804
========= ======== ========== ========
(Loss) earnings per share:
(Loss) earnings from continuing operations before
extraordinary charges:................................
Basic............................................... $ (1.88) $ 0.32 $ (4.96) $ 0.53
Diluted............................................. (1.88) 0.31 (4.96) 0.52
Loss from discontinued operations:
Basic............................................... - (0.03) - (0.19)
Diluted............................................. - (0.03) - (0.19)
Extraordinary charge:
Basic............................................... - - (1.16) -
Diluted............................................. - - (1.16) -
--------- -------- ---------- --------
Net (loss) earnings:
Basic............................................... $ (1.88) $ 0.29 $ (6.12) $ 0.34
========= ======== ========== ========
Diluted............................................. $ (1.88) $ 0.28 $ (6.12) $ 0.33
========= ======== ========== ========
Weighted average common shares outstanding:
Basic............................................... 100,722 85,283 95,919 84,762
Diluted............................................. 100,722 88,075 95,919 87,216
Dividends declared per share of common stock .............. $ 0.00 $ 0.01 $ 0.02 $ 0.03
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See Notes to Condensed Consolidated Financial Statements.
2
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SUNBEAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
September 30, December 28,
1998 1997
------------- ------------
ASSETS (Unaudited)
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Current assets:
Cash and cash equivalents........................ $ 52,081 $ 52,298
Restricted investments (Note 3).................. 83,681 --
Receivables, net................................. 435,081 228,460
Inventories...................................... 647,335 304,900
Prepaid expenses, deferred income taxes and
other current assets............................ 65,579 16,584
----------- -----------
Total current assets..................... 1,283,757 602,242
Property, plant and equipment, net ................ 407,047 249,524
Trademarks, trade names, goodwill and other, net... 1,812,938 207,162
----------- -----------
$3,503,742 $1,058,928
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of
long-term debt (Note 3)........................ $1,509,545 $ 668
Accounts payable................................. 158,859 108,374
Other current liabilities........................ 281,867 124,085
----------- -----------
Total current liabilities................ 1,950,271 233,127
Long-term debt..................................... 778,791 194,580
Other long-term liabilities........................ 217,085 159,142
Minority interest.................................. 58,043 --
Commitments and contingencies (Note 10)
Shareholders' equity:
Preferred stock (2,000,000 shares authorized,
none outstanding)........................ -- --
Common stock (100,708,970 and 89,984,425
shares issued and outstanding) .......... 1,007 900
Additional paid-in capital................. 1,030,862 479,200
(Accumulated deficit) retained earnings.... (499,143) 89,801
Accumulated other comprehensive loss....... (33,174) (33,062)
Other shareholders' equity................. -- (1,715)
----------- -----------
499,552 535,124
Treasury stock, at cost (4,454,394
shares in 1997) .......................... -- (63,045)
----------- -----------
Total shareholders' equity .............. 499,552 472,079
----------- -----------
$3,503,742 $1,058,928
=========== ===========
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See Notes to Condensed Consolidated Financial Statements.
3
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SUNBEAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended
----------------------------------
September 30, September 28,
1998 1997
------------- -------------
As Restated
see Note 8
(Unaudited) (Unaudited)
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OPERATING ACTIVITIES:
Net (loss) earnings................................................. $ (587,070) $ 28,804
Adjustments to reconcile net (loss) earnings to net cash
used in operating activities:
Depreciation and amortization................................... 89,510 31,107
Deferred income taxes........................................... (1,280) 14,006
Minority interest in loss from Coleman.......................... (3,447) --
Loss on sale of property, plant and equipment................... 2,406 --
Provision for fixed assets...................................... 32,642 --
Provision for excess and obsolete inventory..................... 86,167 --
Warrants charged to expense (see Note 2)........................ 70,000 --
Non-cash compensation charges................................... 23,359 --
Loss on sale of discontinued operations, net of taxes........... -- 16,396
Restructuring and asset impairment benefit...................... (2,900) (5,749)
Extraordinary charge from early extinguishment of debt.......... 111,715 --
Changes in working capital and other, net of acquisitions....... (45,797) (144,464)
----------- ----------
Net cash used in operating activities................... (224,695) (59,900)
----------- ----------
INVESTING ACTIVITIES:
Capital expenditures................................................ (32,766) (40,996)
Acquisitions of Coleman, Signature Brands and First Alert,
net of cash acquired.............................................. (379,159) --
Proceeds from sales of divested operations and other assets......... 307 90,922
----------- ----------
Net cash (used in) provided by investing activities.......... (411,618) 49,926
----------- ----------
FINANCING ACTIVITIES:
Issuance of convertible subordinated debentures, net of
financing fees............................................. 729,622 --
Net borrowings under revolving credit facility...................... 1,353,041 10,000
Payments of debt obligations, including prepayment penalties........ (1,464,245) (11,882)
Proceeds from exercise of stock options............................. 19,553 25,453
Other, net.......................................................... (1,875) (2,312)
----------- ----------
Net cash provided by financing activities.................... 636,096 21,259
----------- ----------
Net (decrease) increase in cash and cash equivalents................. (217) 11,285
Cash and cash equivalents at beginning of period..................... 52,298 11,526
----------- ----------
Cash and cash equivalents at end of period........................... $ 52,081 $ 22,811
=========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
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SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. OPERATIONS AND BASIS OF PRESENTATION
ORGANIZATION
Sunbeam Corporation ("Sunbeam" or the "Company") is a leading manufacturer
and marketer of branded consumer products. The Sunbeam/registered trademark/ and
Oster/registered trademark/ brands have been household names for generations,
and the Company is a market share leader in many of its product categories.
The Company markets its products through virtually every category of
retailer including mass merchandisers, catalog showrooms, warehouse clubs,
department stores, catalogs, television shopping channels, Company-owned outlet
stores, hardware stores, home centers, drug and grocery stores, pet supply
retailers, as well as independent distributors and the military. The Company
also sells its products to commercial end users such as hotels and other
institutions.
As further described in Note 2, on March 30, 1998, the Company, through a
wholly-owned subsidiary, acquired approximately 81% of the total number of then
outstanding shares of common stock of The Coleman Company, Inc. ("Coleman").
Coleman is a leading manufacturer and marketer of consumer products for the
worldwide outdoor recreation market. Its products have been sold domestically
under the Coleman/registered trademark/ brand name since the 1920's.
As further described in Note 2, on April 6, 1998, the Company completed the
cash acquisitions of First Alert, Inc. ("First Alert"), a leading manufacturer
of smoke and carbon monoxide detectors, and Signature Brands USA, Inc.
("Signature Brands"), a leading manufacturer of consumer and professional
products.
PRESENTATION OF FISCAL PERIODS
To standardize the fiscal period ends of the Company and its acquired
entities, effective with its 1998 fiscal year, the Company has changed its
fiscal year end from the Sunday nearest December 31 to a calendar year.
Accordingly, quarterly reporting will follow the calendar quarters. The impact
of this change in fiscal periods on net sales for the first quarter and third
quarters of 1998 was to increase sales by approximately $4 million and $2
million, respectively, and the impact on operating results for the periods was
to increase the net loss by approximately $0.2 million in the first quarter and
by $1.3 million in the third quarter.
BASIS OF PRESENTATION
The Condensed Consolidated Balance Sheet of the Company as of September 30,
1998 and the Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 1998 and September 28, 1997, and the Condensed
Consolidated Statements of Cash Flows for the nine months ended September 30,
1998 and September 28, 1997 are unaudited. The unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions of Form 10-Q and Rule 10-01 of Regulation S-X. The December 28,
1997 Condensed Consolidated Balance Sheet was derived from the Company's Annual
Report on Form 10-K/A for the year ended December 28, 1997. The condensed
consolidated financial statements contained herein should be read in conjunction
with the consolidated financial statements and related notes contained in the
Company's 1997 Annual Report on Form 10-K/A. In the opinion of management, the
unaudited condensed consolidated financial statements furnished herein include
all adjustments (consisting of only recurring adjustments) necessary for a fair
presentation of the results of operations for the interim periods presented.
These interim results of operations are not necessarily indicative of results
for the entire year.
RESTATEMENT
On June 30, 1998, the Company announced that the Audit Committee of the
Board of Directors was initiating a review into the accuracy of prior financial
statements. The Audit Committee's review has since been completed and, as a
result of its findings, the Company has restated its previously issued financial
statements for 1996, 1997 and the first quarter of 1998. (See Note 8).
5
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SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
1. OPERATIONS AND BASIS OF PRESENTATION - (CONTINUED)
BASIC AND DILUTED LOSS PER COMMON SHARE
In 1997, the Company adopted SFAS No. 128, EARNINGS PER SHARE. Basic
earnings per common share calculations are determined by dividing earnings
available to common shareholders by the weighted average number of shares of
common stock outstanding. Diluted earnings per share are determined by dividing
earnings available to common shareholders by the weighted average number of
shares of common stock and dilutive common stock equivalents outstanding (all
related to outstanding stock options, restricted stock and the Zero Coupon
Convertible Senior Subordinated Debentures).
For the third quarter and first nine months of 1998, respectively, 39,090
and 3,017,516 shares related to stock options, 12,717 and 63,016 shares related
to restricted stock and 13,150,000 shares in each period related to the
conversion feature of the Zero Coupon Convertible Senior Subordinated Debentures
were not included in the diluted average common shares outstanding, as the
effect would have been antidilutive. For the third quarter and first nine months
of 1997, respectively, the dilutive effect of 2,886,577 and 2,602,749 equivalent
shares related to stock options and (94,224) and (148,360) equivalent shares
related to restricted stock were used in determining the dilutive average shares
outstanding. SFAS No. 128 requires the use of dilutive potential common shares
in the determination of diluted earnings per share if an entity reports earnings
from continuing operations. The use of dilutive potential common shares in the
determination of the diluted per share loss from discontinued operations is
antidilutive. (See Note 9.)
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997 and will be presented in the Company's Annual
Report on Form 10-K for the year ending December 31, 1998. Financial statement
disclosures for prior periods are required to be restated. The Company is in the
process of evaluating the disclosure requirements. The adoption of SFAS No. 131
will have no impact on consolidated results of operations, financial position or
cash flow.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE ("SOP 98-1"). SOP 98-1
requires computer software costs associated with internal use software to be
expensed as incurred until certain capitalization criteria are met. The Company
will adopt SOP 98-1 on January 1, 1999. Adoption of this Statement is not
expected to have a material impact on the Company's consolidated financial
position or results of operations, although actual charges incurred may be
material due to Year 2000 issues.
In April 1998, the AICPA issued Statement of Position 98-5, REPORTING ON
THE COSTS OF START-UP ACTIVITIES ("SOP 98-5"). SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. The Company will adopt SOP 98-5 beginning January 1, 1999.
Adoption of the Statement is not expected to have a material impact on the
Company's consolidated financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES for fiscal years beginning after June 15,
1999. SFAS No. 133 requires the recognition of all derivatives in the
Consolidated Balance Sheet as either assets or liabilities measured at fair
value. The Company will adopt SFAS No. 133 effective for the 2000 calendar year
end. The Company has not yet determined the impact SFAS No. 133 will have on its
consolidated financial position or results of operations when such statement
is adopted.
6
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SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
2. ACQUISITIONS
On March 30, 1998, the Company, through a wholly-owned subsidiary, acquired
approximately 81% of the total number of then outstanding shares of common stock
of Coleman from a subsidiary of MacAndrews & Forbes Holdings, Inc. ("M&F"), in
exchange for 14,099,749 shares of the Company's common stock and approximately
$160 million in cash as well as the assumption of $1,016 million in debt. The
value of the common stock issued at the date of acquisition ($524 million) was
derived by using the average ending stock price as reported by the New York
Stock Exchange Composite Tape for the day before and day of the public
announcement of the acquisition, discounted by 15% due to the restrictive nature
of the securities.
On August 12, 1998, the Company announced that, following investigation and
negotiation conducted by a Special Committee of the Board consisting of four
outside directors not affiliated with M&F, the Company had entered into a
settlement agreement with a subsidiary of M&F pursuant to which the Company was
released from certain threatened claims of M&F and its affiliates arising from
the Coleman acquisition and M&F agreed to provide certain management personnel
and assistance to the Company in exchange for the issuance to the M&F subsidiary
of five-year warrants to purchase up to 23 million shares of the Company's
common stock at an exercise price of $7.00 per share, subject to anti-dilution
provisions. Accordingly, a $70 million non-cash Selling, General and
Administrative ("SG&A") expense was recorded in the third quarter of 1998, based
on a valuation performed as of August 1998 using facts existing at that time.
The valuation was conducted by an independent consultant engaged by the Special
Committee of the Board of Directors. (See Note 10.)
The Coleman acquisition was accounted for under the purchase method of
accounting; accordingly, the results of operations of Coleman are included in
the accompanying Condensed Consolidated Statement of Operations from the date of
acquisition. The purchase price of Coleman has been allocated to individual
assets acquired and liabilities assumed based on preliminary estimates of fair
market value at the date of acquisition. The preliminary fair value of tangible
assets acquired was approximately $747 million (of which $27 million was cash)
and approximately $1,331 million of liabilities were assumed. The excess of
purchase price over net tangible assets acquired of $1,270 million has been
classified as goodwill and is being amortized on a straight-line basis over 40
years. The allocation of purchase price for the acquisition of Coleman will be
revised when additional information concerning asset and liability valuations is
obtained. Adjustments, which could be significant, will be made during the
allocation period based on detailed reviews of the fair values of assets
acquired and liabilities assumed and could result in a substantial change in
goodwill and other intangible assets.
The Company expects to acquire the remaining equity interest in Coleman
pursuant to a merger transaction in which the existing Coleman minority
shareholders will receive .5677 shares of the Company's common stock and $6.44
in cash for each share of Coleman common stock outstanding. In addition,
unexercised options under Coleman's stock option plans will be cashed out at a
price per share equal to the difference between $27.50 and the exercise price of
such options. The Company expects to issue approximately 6.7 million shares of
common stock and expend approximately $87 million in cash to complete the
Coleman acquisition. Although there can be no assurance, it is anticipated the
Coleman merger will occur in the first half of fiscal 1999. The acquisition of
the remaining outstanding shares of Coleman will be accounted for under the
purchase method of accounting on the date of consummation. (See Note 10.)
On April 6, 1998, the Company completed the cash acquisitions of First
Alert and Signature Brands, valued at approximately $178 million and $253
million, respectively, including the assumption of debt. These acquisitions were
accounted for by the purchase method of accounting and the results of operations
of the acquired entities were included in the Company's Consolidated Statements
of Operations from the date of the acquisitions. The preliminary fair value of
tangible assets acquired in the First Alert acquisition was approximately $127
million (of which $4 million was cash) and approximately $79 million of
liabilities were assumed, resulting in an excess of purchase price over net
tangible assets of $89 million. For the Signature Brands acquisition, the
preliminary fair value of tangible assets acquired was approximately $117
million (of which $8 million was cash) and approximately $229 million of
liabilities were assumed, resulting in an excess of purchase price over net
tangible assets of $205 million. The excess of purchase price over net tangible
assets acquired has been classified as goodwill and is being amortized on a
straight-line basis over 40 years. The allocation of purchase price for the
acquisitions will be revised when additional information concerning asset and
liability valuations is obtained. Adjustments, which could be significant, will
be made during the allocation period based on detailed reviews of the fair
values of assets acquired and liabilities assumed and could result in a
substantial change in goodwill and other intangible assets.
7
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SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
2. ACQUISITIONS - (CONTINUED)
The following unaudited pro forma financial information for the Company
gives effect to the three acquisitions as if they had occurred at the beginning
of the periods presented. These pro forma results have been prepared for
informational purposes only and do not purport to be indicative of the results
of operations which actually would have occurred had the acquisitions been
consummated on the dates indicated, or which may result in the future. The
unaudited pro forma results follow (in millions, except per share data):
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Nine Months Ended
-------------------------------
September 30, September 28,
1998 1997
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Net sales........................................................ $1,630.6 $1,964.6
Loss from continuing operations before
extraordinary charge (a), (b)............................... (505.8) (54.0)
Basic and diluted loss per share from continuing operations
before extraordinary items.................................. (5.03) (0.55)
</TABLE>
(a) Coleman's loss before extraordinary items have been adjusted to exclude
the following one time after tax benefits and charges: (i) a $15.8
million gain from the sale of Coleman Safety and Security Products,
Inc., (ii) $7.1 million of costs incurred by Coleman associated with the
Company's acquisition of Coleman, (iii) the write off of $2.1 million of
capitalized costs associated with the installation of new software which
will be abandoned as a result of the acquisition by the Company, (iv)
$1.3 million of costs to terminate a license agreement with a former
affiliate of Coleman, and (v) the write off of $1.7 million of
unrealized deferred tax assets as a result of the change of control of
Coleman.
(b) In 1998 and 1997, respectively, after tax interest expense was increased
$15.6 million and $42.2 million, and goodwill amortization, after tax,
was increased $6.3 million in 1998 and $19.9 million in 1997 to reflect
the pro forma effect of the acquisition occurring at the beginning of
the period. In addition, the minority shareholder percentage was
adjusted to reflect the change in the portion of Coleman held by
minority shareholders following the transaction. The minority interest
in Coleman's losses from continuing operations was adjusted by $1.2
million in 1998 and $4.2 million in 1997 to reflect both the change in
the proportion of the ownership of Coleman held by minority shareholders
and the effects of the pro forma adjustments.
3. CREDIT FACILITIES, LONG-TERM DEBT AND FINANCIAL INSTRUMENTS
In order to finance the acquisitions described in Note 2 and refinance
substantially all of the indebtedness of the Company and its acquired entities,
the Company consummated: (i) an offering (the "Offering") of Zero Coupon
Convertible Senior Subordinated Debentures due 2018 (the "Debentures") at a
yield to maturity of 5% (approximately $2,014 million principal amount at
maturity) in March 1998, which resulted in approximately $730 million of net
proceeds and, (ii) entered into a revolving and term credit facility ("New
Credit Facility").
The Debentures are exchangeable for shares of the Company's common stock at
an initial conversion rate of 6.575 shares for each $1,000 principal amount at
maturity of the Debentures, subject to adjustment upon occurrence of certain
events. The Company was required to file a registration statement with the
Securities and Exchange Commission to register the Debentures by June 23, 1998,
which registration statement has not been filed. From June 23, 1998 until the
registration statement is filed and declared effective, the Company is required
to pay to the Debenture holders cash liquidated damages accruing, for each day
during such period, at a rate per annum equal to 0.25% during the first 90 days
and 0.50% thereafter multiplied by the total of the issue price of the
Debentures plus the original issue discount thereon on such day. The Company
made its first payment of approximately $525,000 to the Debenture holders on
September 25, 1998. (See Note 10.)
8
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SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
3. CREDIT FACILITIES, LONG-TERM DEBT AND FINANCIAL INSTRUMENTS - (CONTINUED)
The New Credit Facility provided for aggregate borrowings of up to $1.7
billion pursuant to: (i) a revolving credit facility in an aggregate principal
amount of up to $400 million, maturing March 31, 2005; (ii) an $800 million term
loan maturing on March 31, 2005, and (iii) a $500 million term loan maturing
September 30, 2006. Interest accrues at a rate selected at the Company's option
of: (i) the London Interbank Offered Rate ("LIBOR") plus an agreed upon interest
margin which varies depending upon the Company's leverage ratio, as defined, and
other items or, (ii) the base rate of the administrative agent (generally the
higher of the prime commercial lending rate of the administrative agent or the
Federal Funds Rate plus 1/2 of 1%), plus an agreed upon interest margin which
varies depending upon the Company's leverage ratio, as defined, and other items.
The New Credit Facility contains certain covenants, including limitations on the
ability of the Company and its subsidiaries to engage in certain transactions
and the requirement to maintain certain financial covenants and ratios.
At June 30, 1998, the Company was not in compliance with the financial
covenants and ratios required under the New Credit Facility. The Company and its
lenders entered into an agreement dated June 30, 1998, which provided that
compliance with the covenants would be waived through December 31, 1998.
Borrowings under the New Credit Facility are secured by the Company's assets,
including its stock interest in Coleman. Pursuant to an amendment dated October
19, 1998, the Company is not required to comply with the original financial
covenants and ratios under the New Credit Facility until April 10, 1999, but
will be required to comply with an earnings before interest, taxes, depreciation
and amortization covenant, the amounts of which are to be determined, beginning
February 1999. Concurrent with each of these amendments, interest margin was
increased. The margin continues to increase monthly through March 1999 to a
maximum of 400 basis points over LIBOR. At the end of November 1998, following
the scheduled repayment of a portion of the term loan, the New Credit Facility
was reduced to $1,698 million in total, of which approximately $1,421 million
was outstanding and approximately $277 million was available. In addition, at
the same time, the Company's cash balance available for debt repayment was
approximately $22 million.
The Company is working closely with its bank lenders in an effort to reach
agreement on a further amendment to the New Credit Facility containing mutually
acceptable revised financial covenants. There can be no assurance that such an
amendment, or a further waiver of the existing financial covenants, will be
entered into with the bank lenders by April 10, 1999. The failure to obtain such
an amendment or further waiver would result in violation of the existing
covenants, which would permit the bank lenders to accelerate the maturity of all
outstanding borrowing under the New Credit Facility. Accordingly, the debt
related to the New Credit Facility and all debt containing cross-default
provisions is classified as current in the Condensed Consolidated Balance Sheet
as of September 30, 1998.
The Company selectively uses derivatives to manage interest rate and
foreign exchange exposures that arise in the normal course of business. No
derivatives are entered into for trading or speculative purposes. Foreign
exchange option and forward contracts are used to hedge a portion of the
Company's underlying exposures denominated in foreign currency. Although the
market value of derivative contracts at any single point in time will vary with
changes in interest and/or foreign exchange rates, the differences between the
carrying value and fair value of such contracts at September 30, 1998 and
September 28, 1997 were not considered to be material, either individually or in
the aggregate. The Company enters into derivative contracts with counterparties
that it believes to be creditworthy. The Company does not enter into any
leveraged derivative transactions. At September 30, 1998, the Company held three
interest rate swap agreements, one with a notional value of $25 million and two
in a notional amount of $150 million each. The swap agreements are contracts to
exchange floating rate for fixed interest payments periodically over the life of
the agreements without the exchange of the underlying notional principal
amounts. The swaps expire in January 2003, June 2001 and June 2003 and have
strike rates of 6.115%, 5.75% and 5.58%, respectively. The notional amounts of
the agreements do not represent the amount of exposure to credit loss.
In March 1998, the Company prepaid a $75.0 million 7.85% industrial revenue
bond related to its Hattiesburg facility originally due in 2009. In connection
with the early extinguishment of this debt, the Company recognized an
extraordinary charge of $8.6 million in the first quarter of 1998. As a result
of repayment of certain indebtedness assumed in the Coleman acquisition, the
Company recognized an extraordinary charge of $103.1 million, net of income
taxes of $10.7 million, in the second quarter of 1998. In connection with the
acquisition of Signature Brands, the Company was required to defease $70.0
million of acquired debt. Cash was placed with a trustee to provide for the
defeasance, including $5.6 million for the related prepayment penalty. This cash
was used to purchase Treasury notes. Accordingly, $83.7 million of restricted
investments held by the trustee for the August 1999 liquidation of acquired debt
are reflected as an asset in the balance sheet at September 30, 1998.
9
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
3. CREDIT FACILITIES, LONG-TERM DEBT AND FINANCIAL INSTRUMENTS - (CONTINUED)
In December 1997, the Company entered into a receivables securitization
program under which the Company has received approximately $130.6 million from
the sale of trade accounts receivable through the third quarter of 1998. Costs
of the program, which primarily consist of the purchaser's financing cost of
issuing commercial paper backed by the receivables, totaled $0.4 million during
the third quarter of 1998 and $1.9 million for the year-to-date. The Company, as
agent for the purchaser of the receivables, retains collection and
administrative responsibilities for the purchased receivables. This agreement
contains cross-default provisions which provide the purchaser of the receivables
an option to cease purchasing receivables from the Company if the Company is in
default under the New Credit Facility.
4. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME, effective
January 1, 1998. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in financial statements. The components
of the Company's comprehensive (loss) income are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ---------------------
Sept. 30, Sept. 28, Sept. 30, Sept. 28,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net (loss) earnings............................. $(188,911) $24,768 $(587,070) $28,804
Foreign currency translation adjustment......... 1,395 (272) 154 (279)
Change in minimum pension liability............. (134) - (266) -
--------- ------- --------- -------
Comprehensive (loss) income................ $(187,650) $24,496 $(587,182) $28,525
========= ======= ========= =======
</TABLE>
5. SUPPLEMENTAL FINANCIAL STATEMENT DATA
Supplementary Balance Sheet data at the end of each period is as follows
(in thousands):
<TABLE>
<CAPTION>
September 30, December 28,
1998 1997
------------- ------------
<S> <C> <C>
Receivables:
Trade............................................ $467,313 $250,699
Sundry........................................... 6,997 7,794
-------- --------
474,310 258,493
Valuation allowance.............................. (39,229) (30,033)
--------- ---------
$435,081 $228,460
======== ========
Inventories:
Finished goods................................... $465,998 $193,864
Work in process.................................. 36,073 25,679
Raw materials and supplies....................... 145,264 85,357
-------- --------
$647,335 $304,900
======== ========
</TABLE>
The Supplementary Statement of Cash Flows data is as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ----------------------
Sept. 30, Sept. 28, Sept. 30, Sept. 28,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash paid during the period for:
Interest............................... $11,577 $ 1,109 $ 37,796 $ 8,385
======= ======== ======== =========
Income tax (refunds) payments ......... $(6,143) $(32,643) $(13,077) $ (44,595)
======= ======== ======== =========
</TABLE>
10
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
6. RESTRUCTURING AND ASSET IMPAIRMENT, INVENTORY PROVISION AND RELATED
LIABILITIES
In 1997 and the first half of 1998, the Company built inventories in
anticipation of 1998 sales volumes which have not materialized. As a result, it
has been and will continue to be necessary to dispose of some portions of this
excess inventory at amounts less than cost. Accordingly, in the second quarter
of 1998, the Company recorded $46.4 million in charges to properly state this
inventory at lower-of-cost-or-market. Of this charge, a nominal amount related
to an acquired entity. The Company also recorded a charge of $11.0 million for
excess inventories for raw materials and work in process which will not be used
due to outsourcing the production of the related products. Additionally, the
Company decided to discontinue certain product lines in the second quarter of
1998 and, accordingly, recorded a charge of $26.6 million to properly state this
inventory at lower-of-cost-or-market. In the third quarter, the Company recorded
an additional charge of $2.2 million in an acquired entity.
In the second quarter of 1998, as a result of decisions to outsource or
discontinue a substantial number of products previously made by the Company,
certain facilities and equipment will either no longer be used or will be used
in a significantly different manner. Accordingly, a charge of $29.6 million was
recorded to write certain of these assets down to reflect the fair market value
of items held for disposition. Approximately 80% of this charge related to
machinery, equipment and tooling at the Company's Mexico City and Hattiesburg,
Mississippi manufacturing plants. Personnel at the Mexico City facility were
notified in the second quarter of 1998 that the plant is scheduled for closure
at year-end 1998, accordingly, a liability of $1.8 million was recorded in cost
of goods sold primarily for employee severance and other facility closure costs.
In the third quarter, the Company recorded an additional provision for fixed
assets of $3.1 million in an acquired entity. The Company is in the process of
assessing the impairment of certain other assets to be retained by the Company
which will be used in a significantly different manner as a result of the
decisions to outsource or discontinue certain products. Additionally, the
Company is in the process of assessing the expected future performance of its
business operations. These assessments are expected to be completed in the
fourth quarter and are expected to result in material adjustments to the
valuation of assets used in the business.
At December 28, 1997, the Company, before consideration of the Coleman
acquisition, had $5.2 million in liabilities accrued related to a 1996
restructuring plan. The majority of these liabilities related to facility
closures and related exit costs. During the first three quarters of 1998 this
liability was reduced by $0.7 million as a result of cash expenditures.
The restated restructuring reserve details and activity as of and for the
nine months ended September 28, 1997 are as follows (in millions):
<TABLE>
<CAPTION>
RESERVE BALANCE ACCRUAL BALANCE
AT DECEMBER 29, CASH NON-CASH AT SEPT. 28,
1996 REDUCTIONS REDUCTIONS REVERSALS 1997
--------------- ---------- ---------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Severance and other employee costs ........ $ 19.1 $ 8.3 $ - $1.9 $ 8.9
Closure and consolidation of facilities
and related exit costs .................. 32.6 5.7 10.7 3.9 12.3
------- ------- ------- ---- -----
Total .................................. $ 51.7 $ 14.0 $ 10.7 $5.8 $21.2
======= ======= ======= ==== =====
</TABLE>
7. DISCONTINUED OPERATIONS
The Company's discontinued furniture business, which was sold in March
1997, had revenues of $51.6 million in the first quarter of 1997 prior to the
sale and nominal earnings in that period. As a result of the sale of the
Company's furniture business assets (primarily inventory, property, plant and
equipment), the Company received $69.0 million in cash, retained approximately
$50.0 million in accounts receivable and retained certain liabilities. The final
purchase price for the furniture business was subject to a post-closing
adjustment based on the terms of the Asset Purchase Agreement and in the first
quarter of 1997, after completion of the sale, the Company recorded an
additional loss on disposal of $22.5 million pre-tax.
11
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
8. RESTATEMENT
Subsequent to the issuance of the Company's condensed consolidated
financial statements for the three months ended March 31, 1998, it was
determined that for the years ended December 29, 1996 and December 28, 1997 and
the three months ended March 31, 1998, certain revenue was improperly recognized
(principally "bill and hold" and guaranteed sales transactions), certain costs
and allowances were not accrued or were improperly recorded (principally
allowances for returns, cooperative advertising, and customer charge-backs as
well as deductions and reserves for product liability and warranty expense) and
certain costs were inappropriately included in, and subsequently charged to,
restructuring, asset impairment and other costs within the Consolidated
Statements of Operations. As a result, the consolidated financial statements as
of December 28, 1997 and December 29, 1996 and for the years then ended were
restated and a Form 10-K/A was filed with the Securities and Exchange Commission
("SEC") on November 12, 1998. The condensed consolidated financial statements as
of March 31, 1998 and March 30, 1997 and for the three months then ended were
restated and a Form 10-Q/A was filed with the SEC on November 25, 1998.
A summary of the effects of the restatement as of and for the three and
nine months ended September 28, 1997 follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
September 28, 1997 September 28, 1997
--------------------- ---------------------
As Previously As As Previously As
Reported Restated Reported Restated
<S> <C> <C> <C> <C>
Net sales .................................................... $289,033 $286,819 $830,092 $810,698
Cost of goods sold ........................................... 200,242 210,359 599,021 620,646
Selling, general and administrative expense .................. 33,863 31,362 98,430 111,051
-------- -------- -------- --------
Operating earnings ........................................... 54,928 45,098 132,641 79,001
Interest expense.............................................. 2,850 2,850 7,816 7,816
Other (income) expense, net................................... (1,347) (1,307) (1,718) (894)
-------- -------- -------- --------
Earnings from continuing operations before income taxes ...... 53,425 43,555 126,543 72,079
Income taxes.................................................. 18,853 16,104 45,176 26,879
-------- -------- -------- --------
Earnings from continuing operations........................... 34,572 27,451 81,367 45,200
Loss from discontinued operations, net of taxes............... - (2,683) (13,713) (16,396)
-------- -------- -------- --------
Net earnings.................................................. $ 34,572 $ 24,768 $ 67,654 $ 28,804
======== ======== ======== ========
Earnings (loss) per share:
Earnings from continuing operations:
Basic............................................... $ 0.39 $ 0.32 $ 0.96 $ 0.53
Diluted............................................. 0.39 0.31 0.93 0.52
Loss from discontinued operations:
Basic............................................... - (0.03) (0.16) (0.19)
Diluted............................................. - (0.03) (0.16) (0.19)
-------- -------- -------- --------
Net earnings:
Basic................................................ $ 0.39 $ 0.29 $ 0.80 $ 0.34
======== ======== ======== ========
Diluted.............................................. $ 0.39 $ 0.28 $ 0.77 $ 0.33
======== ======== ======== ========
</TABLE>
12
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
8. RESTATEMENT - (CONTINUED)
<TABLE>
<CAPTION>
Condensed Consolidated Balance Sheet
(Unaudited)
As of
September 28, 1997
-------------------------
As Previously As
Reported Restated
<S> <C> <C>
ASSETS
Cash and cash equivalents ......................................... $ 22,811 $ 22,811
Receivables, net .................................................. 309,095 300,025
Inventories . ..................................................... 290,876 291,727
Prepaid expenses, deferred income taxes and other current assets... 69,770 72,541
---------- ----------
Total current assets ......................................... 692,552 687,104
Property, plant and equipment, net ................................ 229,152 238,271
Trademarks, trade names, goodwill and other, net .................. 223,367 223,367
---------- ----------
Total assets ................................................. $1,145,071 $1,148,742
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt and current portion of long-term debt ............. $ 668 $ 668
Accounts payable .................................................. 132,686 135,006
Other current liabilities ......................................... 112,643 123,241
---------- ----------
Total current liabilities .................................... 245,997 258,915
Long-term debt .................................................... 199,855 199,855
Other long-term liabilities ....................................... 201,403 211,226
Shareholders' equity:
Common stock..................................................... 899 899
Additional paid-in capital....................................... 481,679 481,679
Retained earnings ............................................... 100,229 81,159
Accumulated other comprehensive loss ............................ (18,553) (18,553)
Other shareholders' equity....................................... (3,307) (3,307)
Treasury stock .................................................. (63,131) (63,131)
---------- ----------
Total shareholders' equity.................................. 497,816 478,746
---------- ----------
Total liabilities and shareholders' equity.............. $1,145,071 $1,148,742
========== ==========
</TABLE>
9. NEW EMPLOYMENT AGREEMENTS
On February 20, 1998 the Company entered into new three-year employment
agreements with its then Chairman and Chief Executive Officer and two other
senior officers of the Company. These agreements replaced previous employment
agreements entered into in July 1996 that were scheduled to expire in July 1999.
The new employment agreement for the Company's then Chairman provided for,
among other items, the acceleration of vesting of 200,000 shares of restricted
stock and the forfeiture of the remaining 133,333 shares of unvested restricted
stock granted under the July 1996 agreement, a new equity grant of 300,000
shares of unrestricted stock, a new grant of a ten-year option to purchase
3,750,000 shares of the Company's common stock with an exercise price equal to
the fair market value of the stock at the date of grant and exercisable in three
equal annual installments beginning on the date of grant and the acceleration of
vesting of 833,333 outstanding stock options granted under the July 1996
agreement. In addition, the new employment agreement with the then Chairman and
Chief Executive Officer provided for income tax gross-ups with respect to any
tax assessed on the equity grant and acceleration of vesting of restricted
stock.
The new employment agreements with the two other then senior officers
provided for, among other items, the grant of a total of 180,000 shares of
restricted stock that vest in four equal annual installments beginning the date
of grant, the acceleration of vesting of 44,000 shares of restricted stock and
the forfeiture of the remaining 29,332 shares of unvested restricted stock
granted under the July 1996 agreements, new grants of ten-year options to
purchase a total of 1,875,000 shares of the Company's common stock with an
exercise price equal to the fair market value of the stock at the date of grant
and exercisable in four equal annual installments beginning on the date of grant
and the acceleration of vesting of 383,334 outstanding stock options granted
under the July 1996 agreements. In addition, the new employment agreements
provided for income tax gross-ups with respect to any tax assessed on the
restricted stock grants and acceleration of vesting of restricted stock.
13
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
9. NEW EMPLOYMENT AGREEMENTS - (CONTINUED)
Compensation expense attributed to the equity grant, the acceleration of
vesting of restricted stock and the related income tax gross-ups was recognized
in the first quarter of 1998 and compensation expense related to the new
restricted stock grants and related tax gross-ups was amortized to expense
beginning in the first quarter of 1998 with amortization to continue over the
period in which the restrictions lapse. Total compensation expense recognized in
the first quarter of 1998 related to these items was approximately $31 million.
On June 15, 1998, the Company's Board of Directors announced the removal of
the then Chairman and Chief Executive Officer and subsequently announced the
removal or resignation of other senior officers, including the Company's then
Chief Financial Officer. In connection with the removal or resignation of the
senior officers and the termination of their restricted stock grants, the
unamortized portion of the deferred compensation expense attributable to the
restricted stock grants was reversed. Of the approximately $0.9 million
compensation expense recognized in the first quarter of 1998 for unvested
restricted stock grants, $0.8 million was reversed into income in the second
quarter of 1998 and the remainder was reversed into income in the third quarter.
The Company and certain of its former officers are in disagreement as to the
Company's obligations to these individuals under prior employment agreements and
arising from their terminations. The Board of Directors has installed a new
Chief Executive Officer and senior management team.
10. COMMITMENTS AND CONTINGENCIES
SEC INVESTIGATION
By letter dated June 17, 1998, the staff of the Division of Enforcement of
the SEC advised the Company that it was conducting an informal inquiry into the
Company's accounting policies and procedures and requested that the Company
produce certain documents. On July 2, 1998, the SEC issued a Formal Order of
Private Investigation, designating officers to take testimony and pursuant to
which a subpoena duces tecum was served on the Company requiring the production
of certain documents. On November 4, 1998, another SEC subpoena duces tecum
requiring the production of further documents was received by the Company. The
Company has provided numerous documents to the SEC staff and continues to
cooperate fully with the SEC staff. The Company cannot predict the term of such
investigation or its potential outcome.
LITIGATION
On April 23, 1998, two class action lawsuits were filed on behalf of
purchasers of the Company's common stock in the U. S. District Court for the
Southern District of Florida against the Company and certain of its present and
former officers and directors alleging violations of the federal securities laws
as discussed below (the "Consolidated Federal Actions"). Since that date,
approximately fifteen similar class actions have been filed in the same Court.
One of the lawsuits also names as defendant Arthur Andersen LLP, the Company's
independent accountants for the period covered by the lawsuit.
The complaints in the Consolidated Federal Actions allege to varying
degrees that the defendants (i) failed to disclose that the Company pre-sold
approximately $50 million of products pursuant to its "early buy" marketing
program in an effort to boost its 1997 sales and net income figures and (ii)
made material misrepresentations regarding the Company's business operations,
future prospects and anticipated earnings per share, in an effort to
artificially inflate the price of the Company stock long enough for the Company
to complete a $2 billion debt financing (supported with stock incentives)
necessary to complete the acquisitions of Coleman, Signature Brands and First
Alert, and for the individual defendants to enter into lucrative long-term
employment agreements with the Company. Each complaint alleges two counts of
securities fraud; one count against all defendants and one count against the
individual defendants.
On June 16, 1998, the Court entered an Order consolidating all such filed
and all such subsequently filed class actions and providing time periods for the
filing of a Consolidated Amended Complaint and defendants' response thereto. On
June 22, 1998, two groups of plaintiffs made motions to be appointed lead
plaintiffs and to have their selection of counsel approved as lead counsel. On
July 20, 1998, the Court entered an Order appointing lead plaintiffs and lead
counsel (the "Smith Plaintiffs' Group"). This Order also stated that it "shall
apply to all subsequently filed actions which are consolidated herewith". On
August 28, 1998, plaintiffs in one of the subsequently filed actions filed an
objection to having their action consolidated pursuant to the June 16, 1998
Order, arguing that the class period in their action differs from the class
periods in the originally filed consolidated actions. On September 29, 1998, the
Smith Plaintiffs' Group filed its memorandum in opposition to this objection. On
December 9, 1998, the Court entered an Order overruling plaintiff's objections
and affirming its prior Order appointing lead plaintiffs and lead counsel.
14
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
On April 7, 1998, a purported derivative action was filed in the Circuit
Court for the Fifteenth Judicial Circuit in and for Palm Beach County, Florida
against the Company and certain of its present and former officers and
directors. The action alleged that the individual defendants breached their
fiduciary duties and wasted corporate assets when the Company granted stock
options to three of its officers and directors on or about February 2, 1998 at
an exercise price of $36.85. On June 25, 1998, all defendants filed a motion to
dismiss the complaint for failure to make a presuit demand on the board of
directors of the Company. On October 22, 1998, the plaintiff amended the
complaint against all but one of the defendants named in the original complaint.
The amended complaint no longer challenges the stock options, but instead
alleges that the individual defendants breached their fiduciary duties by
failing to have in place adequate accounting and sales controls, which failure
caused the inaccurate reporting of financial information to the public, thereby
causing an artificial inflation of the Company's financial statements and stock
price.
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 the Company and certain of the Company's present and former
officers and directors. 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 merger
between the Company and Coleman is no longer fair to Coleman shareholders as a
result of the recent decline in the market value of the Company stock. On
October 21, 1998, the Company announced that 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, the Company will issue to the
Coleman public shareholders five-year warrants to purchase 4.98 million shares
of the Company's common stock at $7.00 per share. These warrants will generally
have the same terms as the warrants previously issued to a subsidiary of M&F and
will be issued when the Coleman Merger is consummated, which is now expected to
be in the first half of 1999. Issuance of these warrants will be accounted for
as additional purchase consideration. There can be no assurance that the Court
will approve the settlement as proposed.
During the months of August and October 1998, purported class and
derivative actions were filed in the Court of Chancery of the State of Delaware
in New Castle County and in the U. S. District Court for the Southern District
of Florida by shareholders of the Company against the Company, M&F and certain
of the Company's present and former directors. These complaints allege that the
defendants breached their fiduciary duties when the Company entered into a
settlement agreement with M&F whereby M&F released the Company from any claims
it may have had arising out of the Company's acquisition of its interest in
Coleman and agreed to provide management support to the Company (the "Settlement
Agreement"). Pursuant to the Settlement Agreement, M&F was granted five-year
warrants to purchase an additional 23 million shares of the Company's common
stock at an exercise price of $7.00 per share. These complaints also allege that
the rights of the public shareholders have been compromised, as the settlement
would normally require shareholder approval under the rules and regulations of
the New York Stock Exchange ("NYSE"). The Audit Committee of the Company's board
determined that obtaining such shareholder approval would have seriously
jeopardized the financial viability of the Company which is an allowable
exception to the NYSE shareholder approval requirements. The Company has moved
to dismiss each of the complaints to which it is a party.
On September 16, 1998, an action was filed in the 56th Judicial District
Court of Galveston County, Texas alleging various claims in violation of the
Texas Securities Act and Texas Business and Commercial Code as well as common
law fraud as a result of the Company's alleged misstatements and omissions
regarding the Company's financial condition and prospects during a period
beginning May 1, 1998 and ending June 16, 1998, in which the plaintiffs engaged
in transactions in the Company's stock. The Company is the only named defendant
in this action. The complaint requests recovery of compensatory damages,
punitive damages and expenses in an unspecified amount. This action has been
removed to the U.S. District Court for the Southern District of Texas and the
Company has filed a motion to transfer this case to the Southern District of
Florida, the forum for the Consolidated Federal Actions. Plaintiffs have moved
to remand the case to Texas state court.
On October 30, 1998, a class action lawsuit was filed on behalf of certain
purchasers of the Company's Debentures in the U.S. District Court of the
Southern District of Florida against the Company and its prior Chief Executive
Officer and Chief Financial Officer, alleging violations of the federal
securities laws and common law fraud. The complaint alleges that the Company's
offering memorandum used for the marketing of the Debentures contained false and
misleading information regarding the Company's financial position and that the
defendants engaged in a plan to inflate the Company's earnings for the purpose
of defrauding the plaintiffs and others. The Company is seeking to consolidate
this lawsuit with the other Consolidated Federal Actions.
15
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
The Company has been named as a defendant in an action filed by HBK
Investments, L.P., et al. in the District Court of Tarrant County, Texas, 48th
Judicial District, on November 20, 1998. The plaintiffs in this action are
purchasers of the Debentures. The plaintiffs allege that the Company violated
the Texas Securities Act and the Texas Business & Commercial Code and committed
state common law fraud by materially misstating the financial position of the
Company in connection with the offering and sale of the Debentures. The
complaint seeks rescission, as well as compensatory and exemplary damages in an
unspecified amount.
The Company intends to vigorously defend each of the foregoing lawsuits,
but cannot predict the outcome and is not currently able to evaluate the
likelihood of the Company's success in each case or the range of potential loss.
However, if the foregoing actions were determined adversely to the Company, such
judgments would likely have a material adverse effect on the Company's financial
position, results of operations and cash flows.
On July 2, 1998, the American Insurance Company ("American") filed suit
against the Company in the U.S. District Court for the Southern District of New
York requesting a declaratory judgment of the court that the directors' and
officers' liability insurance policy for excess coverage issued by American was
invalid and/or had been properly cancelled by American. The Company has moved to
transfer such action to the federal district court in which the Consolidated
Federal Actions are currently pending; American is opposing such motion. On
October 20, 1998, an action was filed by Federal Insurance Company in the U.S.
District Court for the Middle District of Florida requesting the same relief as
that requested by American in the previously filed action as to additional
coverage levels under the Company's directors' and officers' liability insurance
policy. The Company intends to pursue recovery from all of its insurers if
damages are awarded against the Company or its indemnified officers and/or
directors under any of the foregoing actions. The Company's failure to obtain
such insurance recoveries following an adverse judgement against the Company in
any of the foregoing actions could have a material adverse impact on the
Company's financial position, results of operations and cash flows.
The Company and its subsidiaries are also involved in various lawsuits
arising from time to time which the Company considers to be ordinary routine
litigation incidental to its business. In the opinion of the Company, the
resolution of these routine matters, and of certain matters relating to prior
operations of the Predecessor, individually or in the aggregate, will not have a
material adverse effect upon the financial position, results of operations or
cash flows of the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
condensed consolidated financial statements as of and for the three and nine
months ended September 30, 1998 and September 28, 1997.
ACQUISITIONS
On March 30, 1998, the Company, through a wholly-owned subsidiary, acquired
approximately 81% of the total number of then outstanding shares of common stock
of The Coleman Company, Inc. ("Coleman"), in exchange for 14,099,749 shares of
the Company's common stock and approximately $160 million in cash as well as the
assumption of $1,016 million in debt. The Company expects to acquire the
remaining equity interest in Coleman pursuant to a merger transaction in which
the existing Coleman minority shareholders will receive approximately 6.7
million shares of common stock and approximately $87 million in cash. Although
there can be no assurance, it is anticipated the Coleman merger will occur in
the first half of fiscal 1999. (See Note 2 to the condensed consolidated
financial statements.) Coleman is a leading manufacturer and marketer of
consumer products for the worldwide outdoor recreation market. Its products have
been sold domestically under the Coleman /registered trademark/ brand name since
the 1920's.
On April 6, 1998, the Company completed the cash acquisitions of First
Alert, Inc. ("First Alert"), a leading manufacturer of smoke and carbon monoxide
detectors, and Signature Brands USA, Inc. ("Signature Brands"), a leading
manufacturer of consumer and professional products. The First Alert and the
Signature Brands acquisitions were valued at approximately $178 million and $253
million, respectively, including the assumption of debt.
The acquisitions were recorded under the purchase method of accounting; and
accordingly, the results of operations of each acquired entity are included in
the accompanying Condensed Consolidated Statements of Operations from the
respective dates of acquisition. The purchase prices of the acquired entities
have been allocated to individual assets acquired and liabilities assumed based
on preliminary estimates of fair market values at the dates of acquisition. The
purchase price allocations for the acquisitions will be revised when additional
information concerning asset and liability valuations is obtained. Adjustments,
which could be significant, will be made during the allocation periods based on
detailed reviews of the fair values of assets acquired and liabilities assumed
and could result in a substantial change in goodwill and other intangible
assets.
To standardize the fiscal period ends of the Company and the acquired
entities, effective with its 1998 fiscal year, the Company has changed its
fiscal year end from the Sunday nearest December 31 to a calendar year. (See
Note 1 to the condensed consolidated financial statements.)
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
28, 1997
Results of operations for the three months ended September 30, 1998 include
the results of the acquired entities for the entire period. The acquired
entities generated net sales of $326.1 million in the quarter with corresponding
gross margin of $75.2 million, or 23% of sales. SG&A costs recorded by the
acquired entities were $84.3 million in the period, yielding an operating loss
of $9.1 million. Included in cost of sales of the acquired entities for the
quarter was approximately $10 million of expense related to purchase accounting
adjustments which require adjusting the values of acquired inventories to fair
market value at the date of acquisition. Accordingly, as these inventories are
sold, the purchase accounting adjustments related to these inventories (in this
case, increases in inventory values) are reflected in cost of sales. A year ago,
for the full quarter, these businesses generated sales approximately $18 million
higher than occurred in the third quarter of 1998. The majority of this decrease
occurred at Coleman where sales were impacted by fewer product lines resulting
from the sale of a portion of the business and exiting the pressure washer
business during 1997. First Alert sales were adversely impacted by higher
returns, as compared with the same period a year ago. Additionally, each
acquired business experienced a general disruption due to the acquisitions and
management changes. Excluding the impact of the purchase accounting adjustments
described above, gross margins in the acquired entities were $19 million lower
in 1998 as compared with their results in the prior year. Lower sales in the
acquired entities accounted for approximately 30% of this change. Coleman
recorded $5.3 million in third quarter charges for excess and obsolete inventory
and a provision for fixed assets, as described in Note 3 to the condensed
consolidated financial statements. In addition, an adverse sales mix at
Signature Brands and recent developments on existing environmental remediation
at Coleman which resulted in an increase in the environmental provision
accounted for the majority of the remaining decrease in margins as compared with
those reported by the acquired entities a year ago.
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Net sales as reported by Sunbeam is comprised of gross sales less provisions
for estimated customer returns, discounts, promotional allowances, cooperative
advertising allowances and costs incurred by the Company to ship product to
customers. Net sales for the three months ended September 30, 1998 were $496.0
million, an increase of $209.2 million versus the three months ended September
28, 1997. After excluding: (i) $326.1 million from 1998 sales generated by the
acquired entities, as discussed above; (ii) approximately $2 million from 1998
sales related to the change in fiscal period, as discussed in Note 1 to the
condensed consolidated financial statements, and (iii) $5.4 million from 1998
and $7.6 million from 1997 sales of excess or discontinued inventory for which
the inventory carrying value was substantially equivalent to the sales value,
net sales on an adjusted basis ("Adjusted Sales") were $162.6 million in 1998, a
42% decrease from $279.2 million in the third quarter of 1997. Overall, Adjusted
Sales for the third quarter of 1998 as compared with the prior year were
adversely impacted by increasing retail inventory positions in 1997 as compared
with decreasing retail inventory positions in 1998, distribution losses and
sales timing issues. In addition, the historical Sunbeam operations were
adversely impacted by disruption from acquisition activities and management
changes in the period.
Domestic Adjusted Sales declined approximately $89 million from the third
quarter of 1997. The Company believes approximately half of the decline in sales
between years was attributable to the changes in retail inventory positions.
Excluding the impact of the change in retail inventories between periods, the
decline in sales was attributable to lower sales levels throughout the business.
The single largest component of this decrease in sales was attributable to
timing issues related to sales of Personal Care and Comfort products. This
decrease as compared with a year ago is expected to be largely recovered in the
fourth quarter. Appliance product sales were adversely impacted by significant
price reductions for breadmakers. Distribution losses for grills, appliances and
Health at Home products accounted for the majority of the remaining sales
decrease as compared with last year's third quarter.
International sales, which represented 19% of Adjusted Sales in the third
quarter of 1998, were just over half the level achieved in the third quarter of
1997's Adjusted Sales. The Company believes this sales decline was due to three
key reasons: decreasing customer inventory levels as compared with the prior
year; a decision to stop selling to certain Latin American export distributors,
and poor economic conditions in Latin America.
Excluding: (i) the gross margin generated from the inclusion of the acquired
entities' operations in the quarter, as discussed above, and (ii) the impact in
1998 of the change in the fiscal period, as discussed in Note 1 to the condensed
consolidated financial statements, gross margin declined to a loss of $8.0
million for the third quarter of 1998 versus a profit of $76.5 million for the
same period a year ago. The decrease in sales volume between periods, coupled
with adverse manufacturing variances and increases in estimated warranty
reserves accounted for the majority of the decrease in margins. The adverse
manufacturing variances as compared with the third quarter of 1997 arose from
lower manufacturing activities in the current year resulting from the high
levels of inventory on hand and a less robust demand forecast than existed a
year ago. Operating results will be adversely impacted due to higher inventory
carrying costs and unabsorbed fixed factory overhead during the remainder of the
year.
Excluding the effect of: (i) $84.3 million of SG&A charges from the acquired
entities; (ii) $70 million related to warrants issued in the period, as
discussed in Note 2 to the condensed consolidated financial statements; (iii)
approximately $1.5 million of costs due to the change in fiscal periods; (iii)
$16.9 million of costs incurred in 1998 related to the restatement efforts and
related litigation, Year 2000 remediation and costs of relocating the corporate
office; (iv) $4.0 million in 1998 for severance and other costs resulting from
the change in management, net of the reversal of certain compensation costs
recorded in the first quarter as discussed in Note 9 to the condensed
consolidated financial statements; (v) $7.3 million of benefit in the third
quarter of 1997 from the reversal of reserves no longer required, including the
restructuring reserve reversal, as shown in Note 6 to the condensed consolidated
financial statements; and (vi) $2.5 million of restructuring related charges
recorded in 1997, SG&A expenses were $51.7 million in 1998, approximately 43%
higher than the same period in 1997. Higher freight and warehousing costs
resulting from the higher inventory levels in 1998 along with higher costs
related to customer service resulted in nearly $4 million of the increase in
costs between years. Increases in required legal and environmental reserves led
to approximately $4 million higher costs between years. Travel and relocation,
higher outside service costs and other general SG&A cost increases between years
account for the remaining change.
Operating results for the third quarters of 1998 and 1997, on an adjusted
basis as described above, were a loss of $59.7 million in 1998 and a profit of
$40.3 million in 1997. This change resulted from the factors discussed above.
Interest expense increased from $2.9 million in the third quarter of 1997 to
$42.7 million in the third quarter of 1998 primarily related to higher borrowing
levels in 1998 for the acquisitions. (See Note 3 to the condensed consolidated
financial statements.)
Other income, net in 1998 of $11.0 million included approximately $8 million
from the settlement of a lawsuit. The remaining other income, net in 1998 and
the $1.3 million recognized in 1997 were from favorable foreign exchange,
primarily from Mexico.
The minority interest reported for the third quarter of 1998 relates to the
minority interest held in Coleman by public shareholders.
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Income taxes in the third quarter of 1998 reflect taxes benefits on earnings
of foreign operations. A valuation allowance has been provided in 1998 for
deferred tax assets generated by Sunbeam's operations. The 1997 rate was higher
than the federal statutory income tax rate primarily due to state and local
taxes plus the effect of foreign earnings taxed at other rates.
Due to increased inventory positions at certain customers which resulted
from sales in 1997 and the first quarter of 1998, as well as increased inventory
positions at the Company, sales and operating income will be affected in the
fourth quarter of 1998 and into 1999. Future results are also expected to be
impacted materially by charges related to, among other items, changes in
business operations resulting in part from acquisitions in 1998, interest costs
associated with higher debt levels, asset impairment costs, as well as costs
related to Year 2000 issues. (See "Liquidity and Capital Resources", below, and
Notes 2, 3, 6, and 10 to the condensed consolidated financial statements.)
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
28, 1997
Results of operations for the nine months ended September 30, 1998 include
the results of Coleman for March 30 and 31, 1998 and the entire second and third
quarters and of Signature Brands and First Alert from April 6, 1998. The
acquired entities generated net sales of $717.2 million in the period since the
acquisitions with corresponding gross margin of $158.3 million, or 22% of sales.
SG&A costs recorded by the acquired entities were $163.9 million in the period,
yielding an operating loss of $5.6 million. Included in cost of sales of the
acquired entities was approximately $30 million of expense related to purchase
accounting adjustments which require adjusting the values of acquired
inventories to fair market value at the date of acquisition. Accordingly, as
these inventories are sold, the purchase accounting adjustments related to these
inventories (in this case, increases in inventory values) are reflected in cost
of sales. A year ago, on a year-to-date basis, sales of the acquired entities
were approximately $140 million higher than in the comparable nine months of
1998 due to: a decrease in product lines at Coleman resulting from the sale of a
portion of the business, a program to reduce SKU's and exiting the pressure
washer business in 1997; softness in demand resulting from the domestic retail
channel's efforts to lower inventory levels; adverse economic conditions in
Japan and Southeast Asia; product availability issues at Signature Brands;
higher sales returns at First Alert, and general disruption in the acquired
entities due to the acquisitions and management changes. Excluding the impact of
the purchase accounting adjustments described above, gross margins generated by
the acquired entities were $65 million lower in 1998 than for the prior
year-to-date period. Approximately 60% of the change resulted from the lower
sales in 1998. An adverse sales mix at Signature Brands and charges at Coleman
and Signature Brands in 1998 related to inventory reserves, provisions for fixed
assets and environmental remediation accounted for the majority of the remaining
decline in margins as compared with operations in the acquired entities for the
first nine months of 1997.
Net sales for the nine months ended September 30, 1998 were $1,322.1
million, an increase of $511.4 million versus the nine months ended September
28, 1997. After excluding: (i) $717.2 million of sales generated by the acquired
entities, as discussed above; (ii) approximately $6 million of higher sales in
1998 resulting from the change in fiscal year end, as described in Note 1 to the
condensed consolidated financial statements; (iii) $5.4 million in 1998 and
$25.7 million from 1997 sales of excess or discontinued inventory for which the
inventory carrying value was substantially equivalent to the sales value; (iv)
$4.2 million from 1997 sales relating to divested product lines which are not
classified as discontinued operations (time and temperature products and
Counselor / registered trademark/ and Borg /registered trademark/ branded
scales), and (v) a $4.0 million benefit from the reduction of cooperative
advertising accruals no longer required in 1997, net sales on an adjusted basis
("Adjusted Sales") of $594.0 million decreased approximately 24% from $776.8
million in the first nine months of 1997. Overall, product sales were adversely
impacted by changes in retail inventory levels, price discounting and higher
provisions for estimated returns, costs to ship products to customers, rebates
and other customer allowances.
Domestic Adjusted Sales declined approximately 25% or $149 million from the
first three quarters of 1997. The Company believes more than half of the sales
decline was due to increasing retail inventory levels in 1997 versus decreasing
inventory positions at customers in 1998. Excluding this effect, sales were
still lower than the prior year throughout the business, with the most
significant decline occurring in Outdoor Cooking products sales. During 1997,
the Company lost a significant portion of its Outdoor Cooking products
distribution, including the majority of its grill parts and accessories products
distribution. The Outdoor Cooking products sales decline was attributable to
this lost distribution, to price discounting and higher customer allowances.
Appliance Adjusted Sales declined between years as a result of higher provisions
for returns, freight and co-operative advertising allowances in 1998, lost
distribution and price erosion on breadmakers. The sales decline in Personal
Care and Comfort products arose principally in the third quarter and was
primarily due to sales timing issues which are generally expected to be
recovered in the fourth quarter.
International sales, which represented 23% of Adjusted Sales for the first
three quarters of 1998, decreased approximately 20% compared with the Adjusted
Sales for the same period a year ago. The Company believes this sales decline
was primarily attributable to decreasing customer inventory levels as compared
with the prior year. Sales were also adversely impacted by a decision to stop
selling to certain export distributors in Latin America and by poor economic
conditions in that region. In addition, lost distribution in Canada contributed
to the sales decline from the prior year.
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Excluding: (i) the gross margin generated from the inclusion of the acquired
entities' operations in the period, as discussed above; (ii) the impact of the
change in fiscal year-end as discussed in Note 1 to the condensed consolidated
financial statements; (iii) $109.8 million in charges recorded in the second
quarter of 1998 related to excess inventory and fixed assets; (iii) $4.0 million
from the benefit in 1997 of reducing the cooperative advertising accrual no
longer required, and (iv) a $2.8 million benefit recorded in the second quarter
of 1997 resulting from capitalizing certain manufacturing supplies inventories
which were previously expensed, gross margin declined to a loss of $0.6 million
for the first nine months of 1998 versus $183.2 million for the same period a
year ago. Lower sales volume and unfavorable manufacturing efficiencies from
lower production levels associated with the lower sales volumes and high
inventory levels in 1998 accounted for approximately 50% of the change between
years. Approximately 30% of the decrease is attributable to lower price
realization and higher costs of customer allowances, rebates and similar
incentives in 1998, higher product return reserves and an adverse product sales
mix in 1998. The adverse product sales mix was due in part to the loss of a
majority of the grill accessory products distribution. Accessories generate
significantly better margins than the average margins on sales of grills. During
the first half of each year, grill and grill accessory sales are traditionally a
higher portion of overall sales in the period than during other quarters of the
year. Costs associated with a blanket recall, higher warranty reserves and
certain adjustments related to physical inventories drove the remaining
increases in cost of goods sold.
Excluding the effect of: (i) $163.9 million of SG&A charges in the acquired
entities; (ii) $70 million recorded in the second quarter of 1998 related to the
issuance of warrants; (iii) approximately $2.3 million of SG&A expense in 1998
from the change in the fiscal period; (iv) a $5.9 million benefit in the first
nine months of 1998 and an $8.2 million benefit in the same period in 1997 from
the reversal of reserves no longer required; (v) $34.4 million of charges
recorded in 1998 related to compensation and severance for certain former
employees; (vi) $16.9 million of costs incurred in 1998 related to the
restatement efforts, Year 2000 remediation and the corporate office relocation,
and (vii) $11.9 million of restructuring related charges recorded in 1997, SG&A
expenses were $158.8 million in 1998, 48% higher than the same period in 1997.
This increase is due in part to approximately $8 million in higher advertising
and marketing costs between years due to a national television advertising
campaign for grills, package redesign costs and market research. Higher
inventory levels in 1998 and costs associated with outsourcing small parts
fulfillment led to higher distribution and warehousing costs which were $10
million greater than a year ago. Corporate administrative costs were
approximately $28 million higher between years, resulting primarily from
increases in outside service provider fees, including telephone charges, travel
and relocation fees, higher legal and environmental reserves and other general
administrative costs. Higher bad debt charges in 1998 accounted for the majority
of the remaining increase in SG&A costs between years. These bad debt charges
resulted nearly equally from collection issues with certain customers in the
U.S. and in Latin America.
Operating results for the first three quarters of 1998 and 1997, on an
adjusted basis as described above, were a loss of $159.4 million in 1998 and a
profit of $75.8 million in 1997. This change resulted from the factors discussed
above.
Interest expense increased from $7.8 million in the first nine months of
1997 to $90.1 million for the same period in 1998. Approximately 80% of the
change related to higher borrowing levels in 1998 for the acquisitions, with the
remainder due to increased borrowings to fund working capital and the operating
losses. (See Note 3 to the condensed consolidated financial statements.)
Other income, in 1998 net of $5.7 million included approximately $8 million
from the settlement of a lawsuit. Excluding this amount, there was approximately
$2.3 million of net losses from foreign exchange in the period. In 1998, net
foreign exchange gains accounted for the majority of the $0.9 million other
income. The foreign exchange gains and losses in each year are primarily from
results in Mexico.
The minority interest reported in 1998 relates to the minority interest held
in Coleman by public shareholders.
Income taxes in 1998 reflect taxes on earnings of foreign subsidiaries and
franchise taxes. A valuation allowance has been provided in 1998 for deferred
tax assets generated by Sunbeam's operations. The 1997 rate was higher than the
federal statutory income tax rate primarily due to state and local taxes plus
the effect of foreign earnings taxed at other rates.
In 1998, the Company prepaid certain debt assumed in the acquisitions and
prepaid an industrial revenue bond related to its Hattiesburg facility. In
connection with the early extinguishment of this debt, the Company recognized an
extraordinary charge of $111.7 million ($1.16 per share).
The Company's discontinued furniture business, which was sold in March 1997,
had revenues of $51.6 million in the first quarter of 1997 prior to the sale and
nominal earnings for that period. As a result of the sale of the Company's
furniture business assets (primarily inventory, property, plant and equipment),
the Company received $69.0 million in cash, retained approximately $50.0 million
in accounts receivable and retained certain liabilities. The final purchase
price for the furniture business was subject to a post-closing adjustment based
on the terms of the Asset Purchase Agreement and in the first quarter of 1997,
after completion of the sale, the Company recorded an additional loss on
disposal of $22.5 million pre-tax.
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FOREIGN OPERATIONS
Approximately 80% of the Company's business is conducted in U.S. dollars
(including both domestic sales, U.S. dollar denominated export sales, primarily
to certain Latin American markets, Asian sales and the majority of European
sales). The Company's non-U.S. dollar denominated sales are made principally by
subsidiaries in Europe, Japan and Mexico. Mexico reverted to a hyperinflationary
status for accounting purposes in 1997; therefore, translation adjustments
related to Mexican net monetary assets are included as a component of net
earnings. Mexico is not expected to be considered hyperinflationary as of
January 1, 1999.
While Sunbeam's revenues generated in Asia have traditionally not been
significant, economic instability in this region is expected to have a negative
effect on Coleman's earnings. Economic instability and the political environment
in Latin America have also affected sales in that region. It is anticipated that
sales in and exports to these regions will continue to decline so long as the
economic environments in those regions remain unsettled.
On a limited basis, the Company selectively uses derivatives (foreign
exchange option and forward contracts) to manage foreign exchange exposures that
arise in the normal course of business. No derivative contracts are entered into
for trading or speculative purposes. The use of derivatives did not have a
material impact on the Company's financial results in 1998 and 1997. (See Note 3
to the condensed consolidated financial statements.)
SEASONALITY
On a consolidated basis, the Company's sales have not traditionally
exhibited substantial seasonality; however, sales have been strongest during the
fourth quarter of the calendar year. Additionally, sales of Outdoor Cooking
products are strongest in the first half of the year, while sales of Appliances
and Personal Care and Comfort products are strongest in the second half of the
year. Furthermore, sales of a number of the Company's traditional products,
including warming blankets, vaporizers, humidifiers and grills may be impacted
by unseasonable weather conditions. After considering the seasonality of the
acquired entities, the Company's consolidated sales are not expected to exhibit
substantial seasonality; however, sales are expected to be strongest during the
second quarter of the calendar year. Additionally, sales of many products sold
by the Company may be impacted by unseasonable weather conditions.
LIQUIDITY AND CAPITAL RESOURCES
In order to finance the acquisition of Coleman, First Alert and Signature
Brands and to refinance substantially all of the indebtedness of the Company and
the acquired entities, the Company consummated: (i) an offering (the "Offering")
of Zero Coupon Convertible Senior Subordinated Debentures due 2018 (the
"Debentures") at a yield to maturity of 5% (approximately $2,014 million
principal amount at maturity) in March 1998, which resulted in approximately
$730 million of net proceeds and, (ii) entered into a revolving and term credit
facility ("New Credit Facility").
The Company was required to file a registration statement with the
Securities and Exchange Commission to register the Debentures by June 23, 1998,
which registration statement has not been filed. From June 23, 1998 until the
day on which the registration statement is filed and declared effective, the
Company is required to pay to the Debenture holders cash liquidated damages
accruing, for each day during such period, at a rate per annum equal to 0.25%
during the first 90 days and 0.50% thereafter multiplied by the total of the
issue price of the Debentures plus the original issue discount thereon on such
day. The Company made its first payment of approximately $525,000 to the
Debenture holders on September 25, 1998. (See Note 3.)
The New Credit Facility provided for aggregate borrowings of up to $1.7
billion pursuant to: (i) a revolving credit facility in an aggregate principal
amount of up to $400 million, maturing March 31, 2005; (ii) an $800 million term
loan maturing on March 31, 2005, and (iii) a $500 million term loan maturing
September 30, 2006. Interest accrues at a rate selected at the Company's option
of: (i) the London Interbank Offered Rate ("LIBOR") plus an agreed upon interest
margin which varies depending upon the Company's leverage ratio, as defined, and
other items or, (ii) the base rate of the administrative agent (generally the
higher of the prime commercial lending rate of the administrative agent or the
Federal Funds Rate plus 1/2 of 1%), plus an agreed upon interest margin which
varies depending upon thE Company's leverage ratio, as defined, and other items.
The New Credit Facility contains certain covenants, including limitations on the
ability of the Company and its subsidiaries to engage in certain transactions
and the requirement to maintain certain financial covenants and ratios.
At June 30, 1998, the Company was not in compliance with the financial
covenants and ratios required under the New Credit Facility. The Company and its
lenders entered into an agreement dated June 30, 1998, which provided that
compliance with the covenants would be waived through December 31, 1998.
Borrowings under the New Credit Facility are secured by the Company's assets,
including its stock interest in Coleman. Pursuant to an amendment dated October
19, 1998, the Company is not required to comply with the original financial
covenants and ratios under the New Credit Facility until April 10, 1999, but
will be required to comply with an earnings before interest, taxes, depreciation
and amortization covenant, the amounts of which are to be determined, beginning
February 1999. Concurrent with each of these amendments, interest margin was
increased. The
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margin continues to increase monthly through March 1999 to a maximum of 400
basis points over LIBOR. At the end of November 1998, following the scheduled
repayment of a portion of the term loan, the New Credit Facility was reduced to
$1,698 million in total, of which approximately $1,421 million was outstanding
and approximately $277 million was available. In addition, at the same time, the
Company's cash balance available for debt repayment was approximately $22
million.
The Company is working closely with its bank lenders in an effort to reach
agreement on a further amendment to the New Credit Facility containing mutually
acceptable revised financial covenants. There can be no assurance that such an
amendment, or a further waiver of the existing financial covenants, will be
entered into with the bank lenders by April 10, 1999. The failure to obtain such
an amendment or further waiver would result in violation of the existing
covenants, which would permit the bank lenders to accelerate the maturity of all
outstanding borrowings under the New Credit Facility. Accordingly, the debt
related to the New Credit Facility and all debt containing cross-default
provisions is classified as current in the Condensed Consolidated Balance Sheet
as of September 30, 1998.
At September 30, 1998, the Company had cash and cash equivalents of
$52.1 million. Cash used in operating activities during the first three quarters
of 1998 was $224.7 million compared to $59.9 million for the same period in
1997. This increase is attributable to lower earnings before non-cash charges.
Year-to-date 1998, $75.7 million in cash was generated by reducing receivables
and a similar amount was used as inventories increased. The majority of this
cash generation was from Coleman as that operation reduced receivables balances
generated in its peak second quarter period. The remaining cash usage for
working capital resulted primarily from reducing accounts payable levels.
Cash used in investing activities in the first nine months of 1998 reflects
$379.2 million for the acquisitions. In the first three quarters of 1997, cash
provided by investing activities reflected $90.9 million in proceeds from the
sales of divested operations and other assets. Capital spending totaled $32.8
million in 1998 and was primarily for manufacturing efficiency initiatives,
equipment and tooling for new products, and management information systems
hardware and software licenses. The new product capital spending principally
related to the air and water filtration products which were discontinued in the
second quarter, electric blankets, grills, clippers and appliances. As the
Company completes its assessment of expected future performance of its business
operations, valuation adjustments may be required for certain of the assets
acquired in 1998. Capital spending in 1997 was $41.0 million and was primarily
attributable to manufacturing capacity expansion, cost reduction initiatives and
equipment to manufacture new products. The Company anticipates 1998 capital
spending to be approximately 5% of sales, primarily related to new product
introductions, capacity additions and certain facility rationalization
initiatives.
Cash provided by financing activities totaled $636.1 million in the first
nine months of 1998 and reflects net proceeds from the Debentures of $729.6
million, the cancellation and repayment of all outstanding balances under the
Company's $250 million September 1996 revolving credit facility, the repayment
of certain debt acquired with the acquisitions and the early extinguishment of
the $75.0 million Hattiesburg industrial revenue bond. In addition, cash
provided by financing activities includes $19.6 million of proceeds from the
exercise of stock options. (See Note 3 to the condensed consolidated financial
statements.)
The Company expects to acquire the remaining equity interest in Coleman
pursuant to a merger transaction in which the existing Coleman minority
shareholders will receive approximately 6.7 million shares of common stock and
approximately $87 million in cash. In addition, as a result of litigation
related to the merger consideration, the Company has entered into a memorandum
of understanding (subject to court approval) pursuant to which the holders of
the remaining equity interest in Coleman will also receive five-year warrants to
purchase 4.98 million shares of Sunbeam common stock at $7.00 per share. There
can be no assurance that the court will approve the settlement as proposed.
Although there can be no assurance, it is anticipated the Coleman merger will
occur in the first half of fiscal 1999. (See Note 10 to the condensed
consolidated financial statements.)
The Company believes its borrowing capacity under the New Credit Agreement,
cash flow from the combined operations of the Company and its acquired
companies, existing cash and cash equivalent balances, and its receivable
securitization program will be sufficient to support working capital needs,
capital spending, and debt service for the foreseeable future. However, if the
Company is unable to satisfactorily amend the financial covenants and ratio
requirements of the New Credit Facility or obtain a further waiver of the
existing covenants and ratio requirements prior to April 10, 1999, the Company
expects it would, at that time, be in default of the requirements under the New
Credit Facility and, as noted above, the lenders could then require the
repayment of all amounts then outstanding under the New Credit Facility.
NEW ACCOUNTING STANDARDS
See Note 1 to the Company's condensed consolidated financial statements for
a discussion of Statement of Financial Accounting Standards ("SFAS") No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, Statement of
Position ("SOP") 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED
OR OBTAINED FOR INTERNAL USE and SOP 98-5, REPORTING ON THE COSTS OF START-UP
ACTIVITIES, which are
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<PAGE>
required to be adopted for periods beginning after December 15, 1997. The
adoption of these standards is not expected to have a material effect on the
Company's consolidated results of operations, financial position, or cash flows,
although actual charges incurred may be material due to Year 2000 issues, as
discussed below.
YEAR 2000 READINESS DISCLOSURE AND OPERATING SYSTEM ENHANCEMENTS
The Company is in the process of assessing the impact of the Year 2000 on
its operations, including the Coleman, First Alert and Signature Brands
companies which were acquired by the Company in the spring of 1998. The Company
established a Year 2000 Program Management Office in the third quarter of 1998
to conduct such assessment with assistance from three consulting firms. The
Company's assessment encompasses the Company's information technology functions
along with the impact of the effects of noncompliance by its vendors, service
providers, customers, and financial institutions. The assessment of the
Company's information technology functions is substantially complete.
Additionally, the Company is assessing the impact of noncompliance of embedded
microprocessors in its products as well as equipment, such as manufacturing
equipment, security and telephone systems and controls for lighting,
heating/ventilation, and facility access.
The Company relies on its information technology functions to perform many
tasks that are critical to its operations. Significant transactions that could
be impacted by Year 2000 noncompliance include, among others, purchases of
materials, production management, order entry and fulfillment, and payroll
processing. Systems and applications that have been identified by the Company to
date as not currently Year 2000 compliant and which are critical to the
Company's operations include its financial software systems, which process the
order entry, purchasing, production management, general ledger, accounts
receivable, and accounts payable functions, and critical applications in the
Company's manufacturing and distribution facilities, such as the warehouse
management application. The Company plans to complete corrective work with
respect to the Company's systems by the second quarter of 1999 with final
testing and implementation of such systems occurring in the second and third
quarters of 1999. Management believes that, although there are significant
systems that will need to be modified or replaced, the Company's information
systems environment will be made Year 2000 compliant prior to January 1, 2000.
The Company's failure to timely complete such corrective work could have a
material adverse impact on the Company. The Company is not able to estimate
possible lost profits arising from such failure.
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. The Company
plans to complete this review during the first quarter of 1999. The failure of
certain of these third party suppliers to become Year 2000 compliant could have
a material adverse impact on the Company.
The Company's preliminary assessment of the total costs to address
and remedy Year 2000 issues and enhance its operating systems, including costs
for the acquired companies, is $50 million. This estimate includes the costs of
software and hardware modifications and replacements and fees to third party
consultants, but excludes internal resources. The Company expects these
expenditures to be financed through operating cash flows or borrowings, as
applicable. Through September 30, 1998, the Company had expended approximately
$10 million related to new systems and remediation to address Year 2000 issues
of which approximately half was recorded as capital expenditures. Of the total
costs, it is anticipated that approximately 25% to 30% will be incurred by
year-end 1998, with the remainder in 1999. A significant portion of these
expenditures will enhance the Company's operating systems in addition to
resolving the Year 2000 issues. As the Company completes its assessment of the
Year 2000 issues, the actual expenditures incurred or to be incurred may differ
materially from the amounts shown above.
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 of the Company's
systems or those of third parties. The Company expects to complete such
contingency plan by September 30, 1999; such contingency plan will 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.
OTHER MATTERS
See Notes 3, 6, and 10 of Notes to the condensed consolidated financial
statements for information relating to, among other matters, litigation,
financing and potential asset impairment issues.
23
<PAGE>
RESTATEMENT OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 28,
1997 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 29, 1996
The results of operations previously reported for the three months ended
September 28, 1997 as compared with the three months ended September 29, 1996
generally understated the level of expenses incurred in that year. Gross margin
was previously reported to have improved 18.3 percentage points from the level
achieved in the third quarter of 1996. After restatement, the gross margin
improvement was 14.3 percentage points. Operating income was previously reported
to have improved $75.6 million to 19.0% of sales, up 27.9 percentage points from
1996's third quarter. After reflecting the results of the restatement, operating
earnings were $45.1 million for the third quarter of 1997, an improvement of
$65.8 million. Operating earnings were 15.7% of sales in 1997, after
restatement, up 24.6 percentage points from the prior year. On November 12,
1998, the Company filed a Form 10-K/A setting forth the restated financial
statements for December 28, 1997 and December 29. 1996, and the fiscal years
then ended. Management's Discussion and Analysis of Financial Condition and
Results of Operations for the fiscal years 1997 and 1996 as well as 1996 and
1995 are contained therein. (See Note 8 to the condensed consolidated financial
statements.)
RESTATEMENT OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 28,
1997 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 29, 1996
The results of operations previously reported for the nine months ended
September 28, 1997 as compared with the nine months ended September 29, 1996
generally overstated sales in 1997 and understated the level of expenses
incurred in 1997. Gross margin was previously reported to have improved 10.5
percentage points from the level achieved in 1996. After restatement, the gross
margin improvement was 6.1 percentage points. Operating income for the first
nine months of 1997 was previously reported to have improved $128.6 million to
16.0% of sales, up 15.5 percentage points from 1996's first nine months'
results. After reflecting the results of the restatement, operating earnings
were $79.0 million for the first three quarters of 1997, an improvement of $75.0
million from the prior year. As a percent of sales, operating earnings, after
restatement, were 9.7%, an improvement of 10.2 percentage points versus the
first nine months of 1996.
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
(herein the "Act") and in releases made by the Securities and Exchange
Commission ("SEC") 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 in the
forward-looking statements with respect to the Company include, but are not
limited to risks associated with (i) high leverage, (ii) Sunbeam's ability to
enter into an amendment to its credit agreement containing financial covenants
which it and its bank lenders find mutually acceptable, or to continue to obtain
waivers from its bank lenders with respect to its compliance with the existing
covenants contained in such agreement, and to continue to have access to its
revolving credit facility, (iii) Sunbeam's ability to integrate the recently
acquired Coleman, Signature Brands and First Alert companies and expenses
associated with such integration, (iv) Sunbeam's sourcing of products from
international vendors, including the ability to select reliable vendors and to
avoid delays in shipments, (v) Sunbeam's ability to maintain and increase market
share for its products at anticipated margins, (vi) Sunbeam's ability to
successfully introduce new products and to provide on-time delivery and a
satisfactory level of customer service, (vii) changes in laws and regulations,
including changes in tax laws, accounting standards, environmental laws,
occupational, health and safety laws, (viii) access to foreign markets together
with foreign economic conditions, including currency fluctuations, (ix)
uncertainty as to the effect of competition in existing and potential future
lines of business, (x) fluctuations in the cost and availability of raw
materials and/or products, (xi) changes in the availability and relative costs
of labor, (xii) effectiveness of advertising and marketing programs, (xiii)
economic uncertainty in Japan, Korea and other Asian countries, as well as in
Mexico, Venezuela, and other Latin American countries, (xiv) product quality,
including excess warranty costs, product liability expenses and costs of product
recalls, (xv) weather conditions which can have an unfavorable impact upon sales
of Sunbeam's products, (xvi) the numerous lawsuits against the Company and the
SEC investigation into the Company's accounting practices and policies, and
uncertainty regarding the Company's available coverage on its directors' and
officers' liability insurance, (xvii) the possibility of a recession in the
United States or other countries resulting in a decrease in consumer demands for
the Company's products, (xviii) failure of the Company and/or its suppliers of
goods or services to timely complete the remediation of computer systems
24
<PAGE>
to effectively process Year 2000 information and (xix) any material error in
evaluating historical levels of retail inventories and the related impact on
operations of changes therein. 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.
25
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K on August 14, 1998.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNBEAM CORPORATION
BY: /S/ BOBBY G. JENKINS
--------------------------------------
Bobby G. Jenkins
Executive Vice President, and
Chief Financial Officer
(Principal Financial Officer)
Dated: December 22, 1998
27
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SUNBEAM
CORPORATION FINANCIAL STATEMENTS FOR THE PERIODS ENDED SEPTEMBER 30, 1998 AND
SEPTEMBER 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-28-1997
<PERIOD-END> SEP-30-1998 SEP-28-1997
<CASH> 52,081 22,811
<SECURITIES> 0 0
<RECEIVABLES> 475,633 325,172
<ALLOWANCES> 39,229 25,147
<INVENTORY> 647,335 291,727
<CURRENT-ASSETS> 1,283,757 687,104
<PP&E> 677,268 336,631
<DEPRECIATION> 270,221 98,360
<TOTAL-ASSETS> 3,503,742 1,148,742
<CURRENT-LIABILITIES> 1,950,271 258,915
<BONDS> 778,791 199,855
0 0
0 0
<COMMON> 1,007 899
<OTHER-SE> 498,545 477,847
<TOTAL-LIABILITY-AND-EQUITY> 3,435,186 1,148,742
<SALES> 1,322,129 810,698
<TOTAL-REVENUES> 1,322,129 810,698
<CGS> 1,273,424 620,646
<TOTAL-COSTS> 1,273,424 620,646
<OTHER-EXPENSES> (5,738) (894)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 90,149 7,816
<INCOME-PRETAX> (476,087) 72,079
<INCOME-TAX> 2,715 26,879
<INCOME-CONTINUING> (475,355) 45,200
<DISCONTINUED> 0 (16,396)
<EXTRAORDINARY> (111,715) 0
<CHANGES> 0 0
<NET-INCOME> (587,070) 28,804
<EPS-PRIMARY> (6.12) .34
<EPS-DILUTED> (6.12) .33
</TABLE>
