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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the period ended March 31, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ___________ to ___________
Commission File No. 1-000052
SUNBEAM
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)
2381 EXECUTIVE CENTER DRIVE
BOCA RATON, FLORIDA 33431
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(561) 912-4100
(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 [X] No [ ]
On October 26, 1999 there were 100,902,392 shares of the registrant's Common
Stock ($.01 par value) outstanding.
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<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT
ON FORM 10-Q/A
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited)
for the three months ended March 31, 1999 and March 31, 1998...................... 2
Condensed Consolidated Balance Sheets (Unaudited)
as of March 31, 1999 and December 31, 1998........................................ 3
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 1999 and March 31, 1998...................... 4
Notes to Condensed Consolidated Financial Statements (Unaudited).................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 29
Item 6. Exhibits and Reports on Form 8-K.................................................. 32
SIGNATURE............................................................................................. 33
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
SUNBEAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
MARCH 31, MARCH 31,
1999 1998
----------- -----------
<S> <C> <C>
Net sales.................................................................... $ 523,946 $ 247,601
Cost of goods sold........................................................... 400,791 213,828
Selling, general and administrative expense.................................. 137,949 71,139
----------- -----------
Operating loss............................................................... (14,794) (37,366)
Interest expense............................................................. 41,906 5,073
Other expense, net........................................................... 808 3,165
----------- -----------
Loss before income taxes, minority interest and extraordinary charge......... (57,508) (45,604)
Income tax (benefit) provision:
Current.................................................................... (151) 327
Deferred................................................................... 1,893 (449)
----------- -----------
1,742 (122)
----------- -----------
Minority interest............................................................ 1,489 --
----------- -----------
Loss before extraordinary charge............................................. (60,739) (45,482)
Extraordinary charge from early extinguishment of debt....................... -- (8,624)
----------- -----------
Net loss..................................................................... $ (60,739) $ (54,106)
=========== ===========
Basic and diluted loss per share:
Loss from continuing operations........................................... $ (0.60) $ (0.53)
Extraordinary charge................................................. -- (0.10)
----------- -----------
Net loss.................................................................. $ (0.60) $ (0.63)
=========== ===========
Weighted average common shares outstanding................................... 100,740 86,390
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 46,163 $ 61,432
Restricted investments.............................................. 72,351 74,386
Receivables, net.................................................... 396,783 361,774
Inventories......................................................... 534,555 519,189
Prepaid expenses, deferred income taxes and other current assets.... 69,889 74,187
------------- -------------
Total current assets............................................ 1,119,741 1,090,968
Property, plant and equipment, net .................................... 452,343 455,172
Trademarks, tradenames, goodwill and other, net........................ 1,827,019 1,859,377
------------- -------------
$ 3,399,103 $ 3,405,517
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt............... $ 119,276 $ 119,103
Accounts payable.................................................... 177,478 162,173
Other current liabilities........................................... 318,972 321,185
------------- -------------
Total current liabilities....................................... 615,726 602,461
Long-term debt, less current portion................................... 2,207,999 2,142,362
Other long-term liabilities............................................ 234,834 248,459
Deferred income taxes.................................................. 99,691 100,473
Minority interest...................................................... 50,620 51,325
Commitments and contingencies (Note 9)
Shareholders' equity:
Preferred stock (2,000,000 shares authorized, none outstanding)..... -- --
Common stock (100,739,053 shares issued)............................ 1,007 1,007
Additional paid-in capital.......................................... 1,123,419 1,123,457
Accumulated deficit................................................. (870,736) (809,997)
Accumulated other comprehensive loss................................ (63,457) (54,030)
------------- -------------
Total shareholders' equity...................................... 190,233 260,437
------------- -------------
$ 3,399,103 $ 3,405,517
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------
MARCH 31, MARCH 31,
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.......................................................... $ (60,739) $ (54,106)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................................. 32,394 10,414
Non-cash interest charges...................................... 11,271 1,526
Deferred income taxes.......................................... 1,893 (449)
Extraordinary charge from early extinguishment of debt......... -- 8,624
Non-cash compensation charges.................................. -- 24,290
Minority interest.............................................. 1,489 --
(Gain) loss on the sale of property, plant and equipment....... (568) 4
Changes in working capital and other, net of acquisitions...... (43,224) (125,029)
----------- -----------
Net cash used in operating activities................. (57,484) (134,726)
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures, net......................................... (16,288) (19,480)
Acquisition of Coleman, including acquisition costs,
net of cash acquired .......................................... -- (160,612)
Other, net........................................................ (165) --
----------- -----------
Net cash used in investing activities..................... (16,453) (180,092)
----------- -----------
FINANCING ACTIVITIES:
Issuance of convertible subordinated debentures, net of
financing fees................................................. -- 729,622
Net borrowings under revolving credit facilities.................. 61,468 --
Payments of debt obligations, including prepayment penalties...... (2,500) (266,672)
Other debt financing fees......................................... (234) (25,075)
Proceeds from exercise of stock options........................... -- 19,045
Other, net........................................................ (66) (857)
------------ -----------
Net cash provided by financing activities........... 58,668 456,063
----------- -----------
Net (decrease) increase in cash and cash equivalents................... (15,269) 141,245
Cash and cash equivalents at beginning of period....................... 61,432 52,298
----------- -----------
Cash and cash equivalents at end of period............................. $ 46,163 $ 193,543
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
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 designer,
manufacturer and marketer of branded consumer products. The Company's primary
business is the manufacturing, marketing and distribution of durable household
and outdoor leisure consumer products through mass market and other distribution
channels in the United States and internationally. The Company also sells its
products to professional and commercial end users such as small businesses,
health care providers, hotels and other institutions. The Company's principal
products include household kitchen appliances; health monitoring and care
products for home use; scales for consumer and professional use for weight
management and business uses; electric blankets and throws; clippers and
trimmers for consumer, professional and animal uses; smoke and carbon monoxide
detectors; outdoor barbecue grills; camping equipment such as tents, lanterns,
sleeping bags and stoves; coolers; backpacks and book bags; and portable
generators and compressors.
In 1998 the Company acquired an indirect controlling interest in The
Coleman Company, Inc. ("Coleman") and all the outstanding common stock of
Signature Brands USA, Inc. ("Signature Brands") and First Alert, Inc. ("First
Alert").
BASIS OF PRESENTATION
The Condensed Consolidated Balance Sheet of the Company as of March 31,
1999 and the Condensed Consolidated Statements of Operations and Cash Flows for
the three months ended March 31, 1999 and 1998 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 31, 1998 Condensed Consolidated Balance Sheet was derived from the
consolidated financial statements contained in the Company's Annual Report on
Form 10-K/A for the year ended December 31, 1998. 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
1998 Annual Report on Form 10-K/A. In the opinion of management, the unaudited
condensed consolidated financial statements contained 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 or future periods.
BASIC AND DILUTED LOSS PER SHARE OF COMMON STOCK
Loss per common share calculations are determined by dividing
loss attributable to common shareholders by the weighted average number of
shares of common stock outstanding. Loss per share for the three months ended
March 31, 1999 and 1998, respectively, is based only on the weighted average
number of common shares outstanding as potential common shares have been
excluded as a result of the loss from operations during both periods presented.
Loss per share for the three months ended March 31, 1999 and 1998 excluded
25,458 and 4,758,565 shares related to stock options, respectively, as their
effect would have been anti-dilutive. Stock options to purchase 18,961,063
common shares and 4,622,989 common shares at March 31, 1999 and 1998,
respectively, were excluded from potential common shares as the option exercise
prices were greater than the average market price of the Company's common stock
during each of the respective periods presented. Diluted average common shares
outstanding as of March 31, 1999 and March 31, 1998, respectively excluded
13,242,050 shares issuable upon the conversion of the Zero Coupon Convertible
Senior Subordinated Debentures due 2018 (the "Debentures"). In addition, diluted
average common shares outstanding as of March 31, 1999 excluded 23,000,000
shares issuable on the exercise of warrants. Diluted average common shares
outstanding as of March 31, 1998 also excluded (58,065) shares related to
restricted stock.
NEW ACCOUNTING STANDARDS
Effective January 1, 1999, the Company adopted 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. Adoption of this statement did not have a
material impact on the Company's consolidated financial position, results of
operations, or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS No. 133"), ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which, as amended, is effective
for fiscal years beginning after June 15, 2000. SFAS No. 133 requires the
recognition of all derivatives in the Consolidated Balance Sheets as either
assets or liabilities measured at fair value. The Company has not yet determined
the impact SFAS No. 133 will have on its consolidated financial position,
results of operations, or cash flows.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
1999 presentation.
5
<PAGE>
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. In addition, the Company assumed
approximately $1,016 million in debt. The value of the common stock issued at
the date of acquisition was derived by using the average closing stock price as
reported on the New York Stock Exchange Composite Tape for the day before and
day of the public announcement of the acquisition. Immediately thereafter, as a
result of the exercise of employee stock options, Sunbeam's indirect beneficial
ownership of Coleman decreased to approximately 79% of the total number of the
outstanding shares of Coleman common stock. (See Note 11.)
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 subsidiaries 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 a warrant expiring August 24, 2003 to purchase up to 23 million shares of the
Company's common stock at a cash exercise price of $7.00 per share, subject to
anti-dilution adjustments. The Company concluded that the agreement to issue
this warrant did not result in a new measurement date for the purposes of
determining the purchase price for Coleman and has accounted for the issuance of
this warrant in the third quarter of 1998 as a cost of settling a potential
claim.
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 0.5677 of a share 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 second half of 1999. The acquisition of the
remaining outstanding shares of Coleman common stock will be accounted for under
the purchase method of accounting from the date of consummation of the Coleman
merger.
On October 21, 1998, the Company announced that it had entered into a
Memorandum of Understanding to settle, subject to Court approval, class action
claims made by minority shareholders of Coleman relating to the Coleman merger.
Under the terms of the proposed settlement, if approved by the Court, the
Company will issue to the Coleman public shareholders, and plaintiff's counsel
in this action, warrants to purchase up to 4.98 million shares of the Company's
common stock at a cash exercise price of $7.00 per share, subject to certain
anti-dilution provisions. These warrants would generally have the same terms as
the warrants issued to a subsidiary of M&F and will be issued when the Coleman
merger is consummated. Issuance of these warrants will be accounted for as
additional purchase consideration. As a consequence of entering into the
Memorandum of Understanding and agreeing to issue additional consideration in
the form of warrants to purchase Sunbeam common stock, a new measurement date
was established for the remaining equity interest in Coleman. The total
consideration to be paid (cash, Sunbeam common stock and Sunbeam warrants) to
the Coleman shareholders will therefore be measured as of October 21, 1998.
There can be no assurance that the Court will approve the settlement as
proposed.
On April 6, 1998, the Company completed the acquisitions of First
Alert, valued at approximately $182 million (including $133 million of cash and
$49 million of assumed debt) and Signature Brands valued at $255 million,
(reflecting cash paid, including the required retirement or defeasance of debt).
As of the date of the acquisition of Coleman, management of the Company
determined approximately 117 employees of Coleman would need to be involuntarily
terminated in order to eliminate duplicate activities and functions and fully
integrate Coleman into Sunbeam's operations. The Company recognized a liability
of approximately $8 million representing severance and benefit costs related to
117 employees pursuant to the termination plan. This liability was included in
the allocation of purchase price. As of March 31, 1999, 110 employees were
terminated and paid benefits of approximately $6 million. Remaining termination
costs are expected to be paid by December 31, 2000 and no additional charges are
anticipated in future periods related to this issue.
All of these acquisitions were accounted for by the purchase method of
accounting. Accordingly, the results of operations of the acquired entities are
included in the accompanying Condensed Consolidated Statements of Operations
from their respective dates of acquisition.
6
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
2. ACQUISITIONS - (CONTINUED)
The following pro forma financial information for the Company gives
effect to the Coleman and Signature Brands acquisitions as if they had occurred
at the beginning of the period presented. No pro forma adjustments have been
made for the First Alert acquisition as its effects are not significant. 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 pro forma results follow (in millions, except per
share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998
------------------
<S> <C>
Net sales............................................................. $ 509.4
Loss before extraordinary charge...................................... (71.0)
Basic and diluted loss per share from continuing operations
before extraordinary charge.......................................... (0.79)
</TABLE>
3. DEBT
In order to finance the acquisitions described in Note 2 and to
refinance substantially all of the indebtedness of the Company and the acquired
companies, the Company consummated an offering of the Debentures at a yield to
maturity of 5.0% (approximately $2,014 million principal amount at maturity) in
March 1998, which resulted in approximately $730 million of net proceeds and
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
specified events. The Debentures are subordinated in right of payment to all
existing and future senior indebtedness of the Company. The Debentures are not
redeemable by the Company prior to March 25, 2003. On or after such date, the
Debentures are redeemable for cash with at least 30 days notice, at the option
of the Company. The Company is required to purchase Debentures at the option of
the holder as of March 25, 2003, March 25, 2008 and March 25, 2013, at purchase
prices equal to the issue price plus accrued original discount to such dates.
The Company may, at its option, elect to pay any such purchase price in cash or
common stock, or any combination thereof. However, the New Credit Facility
prohibits the Company from redeeming or repurchasing Debentures for cash. The
Company was required to file a registration statement with the SEC to register
the Debentures by June 23, 1998. This registration statement was filed on
February 4, 1999 and the SEC has not declared the registration statement
effective. The Company's failure to file the registration statement by June 23,
1998 did not constitute default under the terms of the Debentures. As part of
the normal review process by the SEC, a number of comments have been made by the
staff of the Division of Corporation Finance relating to the registration
statement and the restated 1996 and 1997 financial statements included therein.
The Company has filed amendments to this registration statement. From June 23,
1998 until the registration statement is 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 $500,000 to the Debenture holders on
September 25, 1998 and an additional $2 million was paid on March 25, 1999. An
additional cash payment of approximately $2 million, representing the Company's
liability to debenture holders through June 30, 1999, was paid on September 25,
1999.
Concurrent with the acquisitions, the Company replaced its $250 million
syndicated unsecured five-year revolving credit facility with the New Credit
Facility. The New Credit Facility provided for aggregate borrowings of up to
$1.7 billion and in addition to other customary covenants, required the Company
to maintain specified consolidated leverage, interest coverage and fixed charge
coverage ratios as of the end of each fiscal quarter occurring after March 31,
1998 and on or prior to the latest stated maturity date for any of the
borrowings under the New Credit Facility.
As a result of, among other things, its operating losses incurred
during the first half of 1998, the Company did not achieve the specified
financial ratios for June 30, 1998 and it appeared unlikely that the Company
would achieve the specified financial ratios for September 30, 1998.
Consequently, the Company and its lenders entered into an agreement dated as of
June 30, 1998 that waived through December 31, 1998 all defaults arising from
the failure of the Company to satisfy the specified financial ratios for June
30, 1998 and September 30, 1998. Pursuant to an agreement with the Company dated
as of October 19, 1998, the Company's lenders extended all of the waivers under
the June 30, 1998 agreement through April 10, 1999 and also waived through such
date all defaults arising from any failure by the Company to satisfy the
specified financial ratios for December 31, 1998. As part of the October 19,
1998 agreement,
7
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
3. DEBT - (CONTINUED)
the Company agreed to a minimum monthly earnings before interest, taxes,
depreciation and amortization ("EBITDA") covenant (as defined in the New Credit
Facility) which covenant the Company has been able to satisfy.
On April 10, 1999, among other things, the lenders extended all of the
waivers set forth in the October 19, 1998 agreement through April 15, 1999. On
April 15, 1999, the Company and its lenders entered into a comprehensive
amendment to the New Credit Facility that, among other things, extended all of
the waivers under the April 10, 1999 agreement until April 10, 2000 and waived
until such date all defaults arising from any failure by the Company to satisfy
the specified financial ratios for any fiscal quarter end occurring during 1999
and for March 31, 2000. The Company intends to negotiate with its lenders an
amendment to the New Credit Facility, or to negotiate further waiver of such
covenants and other terms beyond April 10, 2000, or to refinance the New Credit
Facility. There can be no assurance that an amendment, further waiver of
existing covenants and other terms, or refinancing will be entered into by
April 10, 2000. The failure to obtain such an amendment, further waiver or debt
refinancing would likely result in violation of the existing covenants and
compliance with other terms, which would permit the bank lenders to accelerate
the maturity of all outstanding borrowings under the New Credit Facility and
could otherwise have a material adverse effect on the Company. Accordingly,
debt related to the New Credit Facility and all debt containing cross-default
provisions was classified as current in the Condensed Consolidated Balance
Sheet in the second quarter of 1999. The following description of the New
Credit Facility reflects its significant terms as amended April 15, 1999.
As part of the April 15, 1999 New Credit Facility amendment, the
Company agreed to a minimum cumulative EBITDA covenant that is based on
post-December 31, 1998 consolidated EBITDA and is tested at the end of each
month occurring on or prior to March 31, 2000, as well as a covenant limiting
the amount of revolving loans (other than those used to fund the Coleman merger)
that may be outstanding under the New Credit Facility as of the end of each such
month. The minimum cumulative EBITDA was initially $6.3 million for the period
January 1, 1999 through April 30, 1999 and generally grows on a monthly basis
until it reaches $121.0 million for the period from January 1, 1999 through
March 31, 2000.
The New Credit Facility provides for aggregate borrowings of up to $1.7
billion through: (i) a revolving credit facility in an aggregate principal
amount of up to $400.0 million maturing March 30, 2005, ($52.5 million of which
may only be used to complete the Coleman merger if the Coleman merger is not
completed prior to August 31, 1999); (ii) up to $800.0 million in term loans
maturing on March 30, 2005, (of which $35.0 million may only be used to complete
the Coleman merger); and (iii) a $500.0 million term loan maturing September 30,
2006, (of which $5.0 million has already been repaid through March 31, 1999). As
of March 31, 1999, approximately $1.5 billion was outstanding and approximately
$0.1 billion was available for borrowing under the New Credit Facility. The
remaining $0.1 billion of the $1.7 billion New Credit Facility was committed for
outstanding letters of credit.
Under the New Credit Facility, interest accrues, at the Company's
option: (i) at the London Interbank Offered Rate ("LIBOR"); or (ii) at the base
rate of the administrative agent which is generally the higher of the prime
commercial lending rate of the administrative agent or the Federal Funds Rate
plus 0.50%; in each case plus an interest margin which is currently 4.00% for
LIBOR borrowings and 2.50% for base rate borrowings. The interest margin is
subject to potential decreases in the future, including a decrease to 3.00% for
LIBOR loans and 1.75% for base rate loans upon consummation of the Coleman
merger and the effectiveness of the pledge of substantially all of Coleman's
and its domestic subsidiaries' assets to secure the obligations under the New
Credit Facility. Borrowings under the New Credit Facility are secured by a
pledge of the stock of the Company's material subsidiaries, including Coleman,
and by a security interest in substantially all of the assets of the Company
and its material domestic subsidiaries, other than Coleman and its material
subsidiaries except as described below. Currently, Coleman's inventory and
related assets are pledged to secure its obligations for letters of credit
issued for its account under the New Credit Facility. Additionally, as security
for Coleman's note payable to the Company, Coleman pledged substantially all of
its domestic assets, other than real property, including 66% of the stock of
its direct foreign subsidiaries and domestic holding companies for its foreign
subsidiaries, and all of the stock of its other direct domestic subsidiaries
(but not the assets of Coleman's subsidiaries). The pledge runs in favor of the
Company's lending banks, to which the Coleman note has been pledged as security
for the Company's obligations to them. Upon completion of the Coleman merger,
substantially all of Coleman's assets and the assets of Coleman's domestic
subsidiaries will be pledged to secure the obligations under the New Credit
Facility. In addition, borrowings under the New Credit Facility are guaranteed
by a number of the Company's wholly-owned material domestic subsidiaries and
these subsidiary guarantees are secured as described above. Upon completion of
the Coleman merger, Coleman and each of its United States subsidiaries will
become guarantors of the obligations under the New Credit Facility. To the
extent extensions of credit are made to any subsidiaries of the Company, the
obligations of such subsidiaries are guaranteed by the Company.
In addition to the above described ratios and tests, the New Credit
Facility contains covenants customary for credit facilities of a similar nature,
including limitations on the ability of the Company and its subsidiaries,
including Coleman, to, among other things, (i) declare dividends or repurchase
stock, (ii) prepay, redeem or repurchase debt, incur liens and engage in
sale-leaseback transactions, (iii) make loans and investments, (iv) incur
additional debt, including revolving loans under the New Credit Facility, (v)
amend or otherwise alter material agreements or enter into restrictive
agreements, (vi) make capital and year 2000 compliance expenditures, (vii)
engage in
8
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
3. DEBT - (CONTINUED)
mergers, acquisitions and asset sales, (viii) engage in certain transactions
with affiliates, (ix) settle certain litigation, (x) alter its cash management
system and (xi) alter the businesses they conduct. The Company is also required
to comply with specified financial covenants and ratios. The New Credit Facility
provides for events of default customary for transactions of this type,
including nonpayment, misrepresentation, breach of covenant, cross-defaults,
bankruptcy, material adverse change arising from compliance with ERISA, material
adverse judgments, entering into guarantees and change of ownership and control.
It is also an event of default under the New Credit Facility if the Company's
registration statement in connection with the Coleman merger is not declared
effective by the SEC on or before October 30, 1999 (effective as of October 25,
1999, the bank lenders agreed to extend this date to November 30, 1999), or if
the merger does not occur within 25 business days of the effectiveness of the
registration statement or if the cash consideration (including any payments on
account of the exercise of any appraisal rights, but excluding related legal,
accounting and other customary fees and expenses) to consummate the Coleman
merger exceeds $87.5 million. Although there can be no assurance, the Company
anticipates that it will satisfy these conditions. Furthermore, the New Credit
Facility requires the Company to prepay term loans on each of September 30, 1999
and December 31, 1999 to the extent that cash on hand in the Company's
concentration accounts plus the aggregate amount of unused revolving loan
commitments on these dates (excluding, for the September measurement date, $52.5
million reserved for the Coleman merger), exceeds $115 million and $125 million,
respectively, but the Company is not required to prepay more than $69.3 million
in the aggregate as a result of the provision. Unless waived by the bank
lenders, the failure to satisfy any of the financial ratios and tests contained
in the New Credit Facility or the occurrence of any other event of default under
the New Credit Facility would entitle the bank lenders to (a) receive a 2.00%
increase in the interest rate applicable to outstanding loans and increase the
trade letter of credit fees to 1.00% and (b) accelerate the maturity of the
outstanding borrowings under the New Credit Facility and exercise all or any of
their other rights and remedies. Any such acceleration or other exercise rights
and remedies would likely have a material adverse effect on the Company. The New
Credit Facility also includes provisions for the deferral of the 1999 scheduled
term loan payments of $69.3 million until April 10, 2000 as a result of the
satisfaction by the Company on May 14, 1999 of the agreed upon conditions to the
deferral.
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 in the first quarter of 1998. This extraordinary charge
consisted of redemption premiums ($7.8 million) and unamortized deferred
financing costs ($0.8 million).
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 the related prepayment penalty.
This cash was used to purchase Treasury Notes. Accordingly, $72.4 million and
$74.4 million of restricted investments held by the trustee for the August 1999
liquidation of this acquired debt are reflected as an asset at March 31, 1999
and December 31, 1998, respectively, and $70.0 million is reflected as
short-term debt in the Condensed Consolidated Balance Sheets at March 31, 1999
and December 31, 1998. The prepayment penalty is reflected as part of the
acquisition price of Signature Brands. On July 13, 1999, this debt was called
for redemption. The effective date of redemption was August 15, 1999.
4. ACCOUNTS RECEIVABLE SECURITIZATION
The Company has entered into a receivables securitization program that
expires in March 2000. The Company has received approximately $60.1 million and
$34.8 million for the sale of trade accounts receivable in the first quarter of
1999 and 1998, respectively. Trade accounts receivable at March 31, 1999 and
1998 reflect a reduction of $29.5 million and $34.4 million, respectively, for
receivables sold under this program. 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 and $0.6 million during the first quarter
of 1999 and 1998, respectively, and have been classified as interest expense in
the accompanying Condensed Consolidated Statements of Operations. The Company,
through a wholly-owned subsidiary, retains collection and administrative
responsibilities for the purchased receivables. This agreement contains
cross-default provisions that 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.
5. COMPREHENSIVE LOSS
The components of the Company's comprehensive loss are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
MARCH 31, MARCH 31,
1999 1998
-------------------------------
<S> <C> <C>
Net loss..................................................... $ (60,739) $ (54,106)
Foreign currency translation adjustment, net of taxes........ (9,427) 183
---------- -----------
Comprehensive loss........................................... $ ( 70,166) $ (53,923)
========== ===========
</TABLE>
9
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
5. COMPREHENSIVE LOSS - (CONTINUED)
As of March 31, 1999 and December 31, 1998, "Accumulated other
comprehensive loss," as reflected in the Condensed Consolidated Balance Sheets
is comprised of the following:
<TABLE>
<CAPTION>
CURRENCY MINIMUM
TRANSLATION PENSION
ADJUSTMENTS LIABILITY TOTAL
----------- --------- -----
<S> <C> <C> <C>
Balance at March 31, 1999................................ $ (21,449) $ (42,008) $ (63,457)
Balance at December 31, 1998............................. (12,022) (42,008) (54,030)
</TABLE>
The accumulated other comprehensive loss associated with the minimum
pension liability is net of deferred taxes of approximately $5 million as of
March 31, 1999 and December 31, 1998.
6. SUPPLEMENTARY FINANCIAL STATEMENT DATA
Supplementary Balance Sheet data at the end of each period is as
follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- -----------
Receivables:
<S> <C> <C>
Trade...................................................... $ 440,006 $ 407,452
Sundry..................................................... 9,590 7,347
---------- -----------
449,596 414,799
Valuation allowance........................................ (52,813) (53,025)
---------- -----------
$ 396,783 $ 361,774
========== ===========
Inventories:
Finished goods............................................. $ 361,185 $ 370,622
Work in process............................................ 57,981 39,143
Raw materials and supplies................................. 115,389 109,424
---------- -----------
$ 534,555 $ 519,189
========== ===========
</TABLE>
Supplementary Statements of Cash Flows data is as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
MARCH 31, MARCH 31,
1999 1998
---------- -----------
Cash paid during the period for:
<S> <C> <C>
Interest................................................... $ 29,668 $ 5,442
=========== ==========
Income taxes, net of refunds............................... $ 184 $ 381
=========== ==========
</TABLE>
7. ASSET IMPAIRMENT AND OTHER CHARGES
In the second quarter of 1998, decisions were made to outsource or
discontinue a substantial number of products previously made by the Company
(principally breadmakers, toasters and certain other appliances, air and water
filtration products and the elimination of certain stock keeping units ("SKU's")
within existing product lines, primarily relating to appliances, grills and
grill accessories). As a result, certain facilities and equipment would either
no longer be used or would be utilized in a significantly different manner.
Accordingly, a charge of $29.6 million was recorded in Cost of Goods Sold to
write certain of these assets down to their estimated fair market value.
Approximately 80% of this charge related to machinery, equipment and tooling at
the Company's Mexico City, Mexico and Hattiesburg, Mississippi manufacturing
plants, the estimated fair value for which was derived through an auction
process. The remainder of this charge related to tooling and equipment at
various other facilities, which either had a nominal value or the fair market
value of which was derived through an auction process. These assets were taken
out of service at the time of the write-down and consequently were not
depreciated further after the write-down. The net carrying value of these assets
after the write-down approximated $2.2 million and these assets are expected to
be disposed of by September 30, 1999. Depreciation expense associated with these
assets approximated $2.6 million in the first half of 1998.
10
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
7. ASSET IMPAIRMENT AND OTHER CHARGES- (CONTINUED)
Personnel at the Mexico City facility were notified in the second
quarter of 1998 that the plant was scheduled for closure at year-end 1998,
accordingly, at that time, a liability of $1.8 million was recorded in Cost of
Goods Sold primarily for employee severance. The employee severance related to
approximately 1,200 positions of which 100 employees, representing a $0.4
million severance obligation remained to be terminated at December 31, 1998.
Substantially all of these remaining positions have been eliminated and the
severance payments have been made as of March 31, 1999.
During 1997 and the first half of 1998, the Company built inventories
in anticipation of 1998 sales volumes which did not materialize. As a result, it
has been and will continue to be necessary to dispose of some portions of excess
inventories at amounts less than cost. Accordingly, in the second quarter of
1998, when the facts and circumstances were known that such sales volume would
not materialize, the Company recorded $46.4 million in charges to properly state
this inventory at the lower-of-cost-or-market. This inventory primarily related
to certain appliances, grills and grill accessories.
The Company also recorded a charge during the second quarter of 1998 of
$11.0 million for excess inventories for raw material and work in process that
will not be used due to outsourcing the production of breadmakers, toasters, and
certain other appliances. In addition, during the second quarter of 1998, the
Company made the decision to exit certain product lines, primarily air and water
filtration products and eliminate certain SKU's within existing product lines,
primarily relating to appliances, grills and grill accessories. As a result of
this decision, a $26.6 million charge was recorded during the second quarter to
properly state this inventory at the lower-of-cost-or market. Total charges for
excess inventory recorded at the lower-of-cost-or-market, based upon
management's best estimate of net realizable value, amounted to $84.0 million
during the second quarter of 1998.
In the fourth quarter of 1998, in connection with management's decision
to outsource the production of certain appliances (principally irons) the
Company recorded $0.4 million of severance costs related to the elimination of
approximately 45 production positions. During the three months ended March 31,
1999, no severance payments were made. These positions are expected to be
eliminated by September 30, 1999.
At December 31, 1998, the Company had $1.7 million of restructuring
accruals relating to its 1996 restructuring plan. This $1.7 million was
comprised of $1.2 million relating to lease payments and termination fees and
$0.5 million relating to discontinued operations. During the three months ended
March 31, 1999, the Company expended $0.3 million relating to discontinued
operations. It is anticipated that the remaining restructuring accrual of $1.4
million ($1.2 million relating to lease payments and termination fees and $0.2
million to discontinued operations) will be paid through 2006.
8. COMPENSATORY STOCK GRANTS
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 (the "February 1998 Employment
Agreements"). These agreements replaced previous employment agreements entered
into in July 1996 that were scheduled to expire in July 1999. The new employment
agreements provided for, among other items, the acceleration of vesting of
restricted stock and the forfeiture of unvested restricted stock that had been
granted under the July 1996 agreement, new restricted stock grants and options
to purchase common shares. 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.
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. The Company and certain of its former
officers are in disagreement as to the Company's obligations to these
individuals under prior agreements and arising from their termination. (See Note
10.)
11
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
9. SEGMENT, CUSTOMER AND GEOGRAPHIC DATA
The following tables include selected financial information with
respect to Sunbeam's four operating segments. Corporate expenses include, among
other items, expenses for services which are provided in varying levels to the
three operating groups and for Year 2000 efforts. The increase from 1998 to 1999
relates to an expansion of centralized services related to the acquisitions,
Year 2000 expenses and increased costs associated with outside services and
insurance.
<TABLE>
<CAPTION>
OUTDOOR
THREE MONTHS ENDED MARCH 31, 1999 HOUSEHOLD LEISURE INTERNATIONAL CORPORATE TOTAL
------------ ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net sales to unaffiliated customers... $ 164,078 $ 218,733 $ 139,557 $ 1,578 $ 523,946
Intersegment net sales................ 19,192 42,664 4,750 -- 66,606
Segment earnings (loss)............... 8,520 9,169 9,777 (28,449) (983)
Segment depreciation expense.......... 6,545 9,259 1,297 1,482 18,583
THREE MONTHS ENDED MARCH 31, 1998
Net sales to unaffiliated customers... $ 98,597 $ 85,985 $ 60,750 $ 2,269 $ 247,601
Intersegment net sales................ 20,673 4,967 19,731 -- 45,371
Segment (loss) earnings............... (3,239) (3,393) 12,422 (10,492) (4,702)
Segment depreciation expense.......... 4,685 2,598 107 1,048 8,438
SEGMENT ASSETS
March 31, 1999........................ 801,008 1,826,434 435,345 336,316 3,399,103
December 31, 1998..................... 864,745 1,782,994 413,755 344,023 3,405,517
</TABLE>
Reconciliation of selected segment information to Sunbeam's consolidated totals
for the three months ended:
<TABLE>
<CAPTION>
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Net sales:
Net sales for reportable segments................. $ 590,552 $ 292,972
Elimination of intersegment net sales............. (66,606) (45,371)
-------------- -------------
Consolidated net sales....................... $ 523,946 $ 247,601
============== =============
Segment loss:
Total loss for reportable segments................ $ (983) $ (4,702)
Unallocated amounts:
Interest expense.............................. (41,906) (5,073)
Other expense, net............................ (808) (3,165)
Amortization of intangible assets............. (13,811) (1,976)
Former employees deferred
compensation and severance (Note 8)...... -- (30,688)
-------------- -------------
(56,525) (41,414)
-------------- -------------
Consolidated loss before income taxes,
minority interest and extraordinary charge $ (57,508) $ (45,604)
============== =============
</TABLE>
12
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
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 some of its present and former directors and
former officers. The action alleged that the individual defendants breached
their fiduciary duties and wasted corporate assets when the Company granted
stock options on or about February 2, 1998 at an exercise price of $36.85 to
three of its officers and directors who were subsequently terminated by the
Company. On June 25, 1998, all defendants filed a motion to dismiss the
complaint for failure to make a pre-suit demand on the Company's board of
directors. On October 22, 1998, the plaintiff amended the complaint against all
but one of the defendants named in the original complaint. On February 19, 1999,
plaintiffs filed a second amended derivative complaint nominally on behalf of
the Company against some of its present and former directors and former officers
and Arthur Andersen. The second amended complaint alleges, among other things,
that Messrs. Dunlap and Kersh, Sunbeam's former Chairman and Chief Executive
Officer and former Chief Financial Officer, respectively, caused the Company to
employ fraudulent accounting procedures in order to enable them to secure new
employment contracts, and seeks a declaration that the individual defendants
have violated fiduciary duties, an injunction against the payment of
compensation to Messrs. Dunlap and Kersh or the imposition of a constructive
trust on such payments, and unspecified money damages. The defendants have each
moved to dismiss the second amended complaint in whole or in part.
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
stockholders of Coleman against Coleman, the Company and certain of the
Company's and Coleman's present and former officers and directors. An additional
class action was filed on August 10, 1998, against the same parties. The
complaints in these class actions allege, in essence, that the existing exchange
ratio for the proposed Coleman merger is no longer fair to Coleman minority
stockholders as a result of the decline in the market value of the Company's
common stock. On October 21, 1998, the Company announced that it had entered
into a memorandum of understanding to settle, subject to court approval, the
class actions. The court hearing on the settlement was held on September 29,
1999, but the court has not yet ruled on the settlement. Under the terms of the
proposed settlement, if approved by the court, the Company will issue to Coleman
minority stockholders and plaintiffs' counsel in this action warrants to
purchase up to approximately 4.98 million shares of the Company common stock at
$7 per share, subject to anti-dilution adjustments. Coleman minority
stockholders who elect an appraisal under Delaware law will not receive
warrants. These warrants will generally have the same terms as the warrant
issued to the MacAndrews & Forbes subsidiary and will be issued when the Coleman
merger is consummated, which is now expected to occur during the second half of
1999. Issuance of these warrants will be accounted for as additional
consideration. There can be no assurance that the court will approve the
settlement as proposed.
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 Sunbeam's financial condition and prospects during a period
beginning May 1, 1998 and ending June 16, 1998, in which the U.S. National Bank
of Galveston, Kempner Capital Management, Inc. and Legacy Trust Company engaged
in transactions in Sunbeam common stock on their own behalf and on behalf of
their respective clients. Sunbeam 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 was removed to the U.S. District
Court for the Southern District of Texas and subsequently transferred to the
Southern District of Florida and consolidated with the Consolidated Federal
Actions. Plaintiffs in this action have objected to the consolidation and have
sought reconsideration by the Southern District of Florida of the order of the
Southern District of Texas denying plaintiffs' motion to remand the case to
state court and transferring it to Florida. A similar suit was brought by the
same group of plaintiffs against Arthur Andersen. In that action, the plaintiffs
allege that Arthur Andersen violated the Texas Securities Act, committed
statutory and common law fraud and was negligent in its audits of Sunbeam's 1996
and 1997 financial statements. In September 1999, Arthur Andersen had filed a
motion for leave to join the Company and certain of its former officers as
responsible third parties and contribution defendants, which motion was denied.
On October 30, 1998, a class action lawsuit was filed on behalf of
certain purchasers of the debentures in the U.S. District Court for the Southern
District of Florida against Sunbeam and some of Sunbeam's former officers and
directors, alleging violations of the federal securities laws and common law
fraud. The complaint alleges that Sunbeam's offering memorandum used for the
marketing of the debentures contained false and misleading information regarding
Sunbeam's financial position and that the defendants engaged in a plan to
inflate Sunbeam's earnings for the purpose of defrauding the plaintiffs and
others. The plaintiffs seek a declaration that defendants violated federal
securities laws and either unspecified monetary damages or rescission of their
purchase of the debentures. This action has been transferred to the Southern
District of Florida, where the Consolidated Federal Actions are pending, and the
parties have negotiated a proposed coordination plan in order to coordinate
proceedings in this action with those in the Consolidated Federal Actions.
The Company has been named as a defendant in an action filed in the
District Court of Tarrant County, Texas, 48th Judicial District, on November 20,
1998. The Company was served in this action through the Secretary of State of
Texas on January 15, 1999. The plaintiffs in this action are purchasers of the
Debentures. The plaintiffs allege that the Company violated the Texas Securities
Act
13
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
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
specially appeared to assert an objection to the Texas court's exercise of
personal jurisdiction over the Company, and a hearing on this objection took
place on April 15, 1999. On April 23, 1999, the court entered an order granting
the Company's special appearance and dismissing the case without prejudice. The
plaintiffs moved for reconsideration of the court order, which motion the court
denied on May 24, 1999. The plaintiffs have appealed the order dismissing the
case to the Texas Court of Appeals, and a hearing on such appeal took place
on October 20, 1999.
On February 9, 1999, Messrs. Dunlap and Kersh filed with the American
Arbitration Association demands for arbitration of claims under their respective
employment agreements with Sunbeam. Messrs. Dunlap and Kersh are requesting a
finding by the arbitrators that Sunbeam terminated their employment without
cause and that they should be awarded the corresponding benefits provided by
their respective employment agreements. On March 12, 1999, the Company asked the
Circuit Court for the Fifteenth Judicial Circuit in and for Palm Beach County,
Florida to issue an injunction prohibiting Messrs. Dunlap and Kersh from
pursuing their arbitration proceedings against the Company on the grounds, among
others, that the simultaneous litigation of the action filed in that court on
April 7, 1998, described above, and the arbitration proceedings would subject
the Company to the threat of inconsistent adjudications with respect to certain
rights to compensation asserted by Messrs. Dunlap and Kersh and would cause
irreparable harm to the Company and its stockholders. On March 19, 1999, the
plaintiff in the April 7, 1998 action discussed above moved for an injunction on
the similar grounds. On May 11, 1999, the court denied the motions for a
preliminary injunction filed by the Company and the plaintiff. The Company has
answered the arbitration demands of Messrs. Dunlap and Kersh and has filed
counterclaims seeking, among other things, the return of all consideration paid,
or to be paid, under the February 1998 Employment Agreements between Sunbeam and
Messrs. Dunlap and Kersh. An answer was filed by Messrs. Dunlap and Kersh
generally denying the Company's counterclaim. Discovery is pending.
On May 24, 1999, an action naming the Company as defendant was filed in
the Circuit Court for Ozaukee County, Wisconsin. Prior to service of the
complaint, the plaintiff dismissed its claims, voluntarily, without prejudice.
The plaintiff in this action was a purchaser of the Debentures. The plaintiff
alleged that the Company violated the Wisconsin Uniform Securities Act and
committed acts of false advertising and misrepresentation in connection with the
offering and sale of the Debentures. The plaintiff sought rescission, as well as
compensatory and exemplary damages in an unspecified amount.
On September 13, 1999, an action naming the Company and Arthur Andersen
as defendants was filed in the Circuit Court for Montgomery County, Alabama. The
plaintiffs in this action are purchasers of the Company's common stock during
the period March 19, 1998 through May 6, 1998. The plaintiffs allege, among
other things, that the defendants violated the Alabama Security Laws and SEC
Rule 10b-5. The plaintiffs seek compensatory and punitive damages in an
unspecified amount. The Company has removed this case to the U.S. District Court
for the District of Alabama. In addition, Arthur Andersen has filed a cross
claim against the Company for contribution and indemnity.
The Company intends to vigorously defend each of the foregoing lawsuits
other than those as to which a memorandum of understanding to settle has been
reached, 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 Company were to lose these lawsuits, judgments would
likely have a material adverse effect on the Company's consolidated financial
position, results of operations and cash flows.
On March 23, 1999, Messrs. Dunlap and Kersh filed a complaint in the
Court of Chancery of the State of Delaware seeking an order directing the
Company to advance attorneys' fees and other expenses incurred in connection
with various state and federal class and derivative actions and an investigation
instituted by the SEC. The complaint alleges that such advancements are required
by the Company's by-laws and by a forbearance agreement entered into between the
Company and Messrs. Dunlap and Kersh in August, 1998. A trial of this summary
proceeding was held on June 15 and 16, 1999. On June 23, 1999, the court issued
a memorandum opinion directing the Company to pay about $1.4 million on account
of expenses incurred to date and to advance reasonable future expenses in those
actions and investigations. Messrs. Dunlap and Kersh have agreed to repay all
amounts advanced to them if it is ultimately determined that they are not
entitled to indemnification under Delaware law.
On July 2, 1998, the American Alliance Insurance Company filed suit
against Sunbeam 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 Alliance was
invalid and/or had been properly canceled by American Alliance . The Company's
motion to transfer such action to the federal district court in which the
Consolidated Federal Actions are currently pending was denied. The Company has
filed a motion with the Judicial Panel on Multidistrict Litigation to transfer
this action for coordination or consolidation of pretrial proceedings with the
various actions pending in the Southern District of Florida. That motion was
granted. American Alliance has filed a motion for summary judgment on the ground
that coverage was never bound. The Company has opposed that 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
14
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
relief as that requested by American Alliance in the previously filed action as
to additional coverage levels under the Company's directors' and officers'
liability insurance policy. This action has been transferred to the U.S.
District Court for the Southern District of Florida and is currently in
discovery. The Company is seeking a stay of discovery to coordinate discovery in
this action with any discovery that may occur in the Consolidated Federal
Actions. Plaintiff has moved to compel production of various documents. On
December 22, 1998, an action was filed by Executive Risk Indemnity, Inc. in the
Circuit Court of the Seventeenth Judicial Circuit in and for Broward County,
Florida requesting the same relief as that requested by American Alliance and
Federal in their previously filed actions as to additional coverage levels under
the Company's directors' and officers' liability insurance policy. On April 15,
1999, the Company filed an action in the U.S. District Court for the Southern
District of Florida against National Union Fire Insurance Company of Pittsburgh,
PA, Gulf Insurance Company and St. Paul Mercury Insurance Company requesting,
among other things, a declaratory judgment that National Union is not entitled
to rescind its directors' and officers' liability insurance policies to the
Company and a declaratory judgment that the Company is entitled to coverage from
these insurance companies for the various lawsuits described herein under
directors' and officers' liability insurance policies issued by each of the
defendants. In response to the Company's complaint, defendants St. Paul and Gulf
have answered and asserted counterclaims seeking rescission and declaratory
relief that no coverage is available to the Company. The Company has denied the
allegations of Gulf's and St. Paul's counterclaims. Defendant National Union has
filed a motion to dismiss or stay the claims filed by the Company against
National Union on the basis, among others, that the Company must submit the
dispute to arbitration or mediation. The Company has filed a response opposing
that motion. 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 and to recover attorneys' fees
covered under those policies. The Company's failure to obtain such insurance
recoveries following an adverse judgment in any of the actions described above
could have a material adverse effect on the Company's financial position,
results of operations and cash flows.
The Company and its subsidiaries are also involved in various other
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, 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.
Amounts accrued for litigation matters represent the anticipated costs
(damages and/or settlement amounts) in connection with pending litigation and
claims and related anticipated legal fees. The costs are accrued when it is both
probable that an asset has been impaired or a liability has been incurred and
the amount can be reasonably estimated. The accruals are based upon the Company
's assessment, after consultation with counsel, of probable loss based on the
facts and circumstances of each case, the legal issues involved, the nature of
the claim made, the nature of the damages sought and any relevant information
about the plaintiff, and other significant factors which vary by case. When it
is not possible to estimate a specific expected cost to be incurred, the Company
evaluates the range of probable losses and records the minimum end of the range.
As of March 31, 1999 the Company had established accruals for litigation matters
of $26.2 million (representing $12.4 million and $13.8 million for estimated
damages or settlement amounts and legal fees, respectively). As of December 31,
1998, the Company had established accruals for litigation matters of $31.2
million (representing $17.5 million and $13.7 million for estimated damages or
settlements and legal fees, respectively.) It is anticipated that the $26.2
million accrual will be paid as follows: $17.7 million in 1999, $7.2 million in
2000 and $1.3 million in 2001. The Company believes, based on information known
to the Company on March 31, 1999, that anticipated probable costs of litigation
matters existing as of March 31, 1999 have been adequately reserved to the
extent determinable.
PRODUCTS LIABILITY
As a consumer goods manufacturer and distributor, the Company faces the
constant risks of product liability and related lawsuits involving claims for
substantial money damages, product recall actions and higher than anticipated
rates of warranty returns or other returns of goods. These claims could result
in liabilities that could have a material adverse effect on the Company's
consolidated financial position, results of operations, or cash flows. Some of
the product lines the Company acquired in the 1998 acquisitions have increased
its exposure to product liability and related claims.
BRK Brands, Inc., a wholly owned subsidiary of the Company, is a
defendant in the case Gordon v. BRK Brands, Inc., et al. ("Gordon") in the
Circuit Court for the City of St Louis. In Gordon, the plaintiff alleged, among
other things, that the plaintiff's smoke detector (which had been manufactured
by a predecessor of BRK Brands, Inc.) did not alarm quickly enough. In July
1999, the jury in the Gordon case awarded $20 million in compensatory damages
and $30 million in punitive damages. This case has been settled and BRK Brands,
Inc.'s obligation under the settlement is limited to payment of the balance of
its self-insured retention.
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SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
ENVIRONMENTAL MATTERS
With respect to one of seven sites at which the Company has been
identified by the United States Environmental Protection Agency ("EPA") as a
potentially responsible party, the Company received notice from the EPA that the
Company has completed all required removal activities and that such removal
activities were completed to EPA's satisfaction. EPA's approval of the Company's
removal activities at this site effectively concludes its obligations to EPA at
this site. The EPA's approval of the Company's removal activities did not have
any impact on the Company's environmental accruals since these activities were
completed for the amount accrued.
COMMITMENT FEE
Under the terms of the April 15, 1999 amendment to the New Credit
Facility, the Company is obligated to pay a loan commitment fee of between $4.2
million and $17.0 million. The ultimate amount of the fee is determined based on
multiplying the sum of the outstanding borrowings and amounts available for
borrowings as of April 15, 1999 by a factor that is determined at the earlier of
September 30, 2000 or upon repayment of the New Credit Facility. This fee is
payable at the earlier of September 30, 2000 or upon repayment of the New Credit
Facility. At a minimum, the Company is obligated under these terms to pay $4.2
million. The ultimate amount due could be as high as $17.0 million if the sum of
the outstanding borrowings and amounts available for borrowings at September 30,
2000 (the "aggregate availability") exceeds $1.2 billion. If the aggregate
availability is between $1.0 billion and $1.2 billion, a fee of $8.4 million
will be due. If the aggregate availability is $1.0 billion or less, the $4.2
million minimum will be due. Under any circumstances, the $4.2 million will be
due; therefore, the Company will accrue the minimum liability and an offsetting
asset in the second quarter of 1999, which will be amortized and included in
interest expense through April 10, 2000, the term of the current amendment
extension period.
The Company will not accrue for amounts in excess of the $4.2 million
as there are numerous uncertainties which may individually or in the aggregate
impact the level of aggregate availability at September 30, 2000. These
uncertainties include, but are not limited to: the ability to obtain an
amendment or further waiver of existing covenants from the lenders under the New
Credit Facility for the period beyond April 10, 2000; proceeds from the sales of
assets or businesses, if any; changes in debt structure, including the effects
of refinancing, if any; and cash flows generated or used by future operations.
Given these uncertainties, the Company is currently not able to predict the
probable level of aggregate availability at September 30, 2000. As events
develop, the Company will periodically review the expected aggregate
availability at September 30, 2000. If it becomes likely than an amount in
excess of $4.2 million will be paid, the Company will recognize that change in
estimate over the remaining period of the New Credit Facility Amendment.
11. SUBSEQUENT EVENT
PURCHASE OF COLEMAN PREFERRED STOCK
On July 12, 1999, the Company acquired 3,000,000 shares of a newly
created series of Coleman voting preferred stock for an aggregate purchase price
of approximately $31 million. These shares, together with the shares of Coleman
common stock the Company owns, enable Sunbeam to exercise 80.01% of the total
voting power of Coleman's outstanding capital stock as of July 12, 1999. This
class of preferred stock was created by Coleman and acquired by the Company in
order to enable Coleman and the Company to file consolidated federal income tax
returns, and in certain jurisdictions, consolidated state income tax returns,
prior to the consummation of the Coleman merger. The issue price per share of
the voting preferred stock was equal to 110% of the average closing price per
share of common stock of Coleman over the five trading days prior to the date of
issuance of the voting preferred stock. Except for as required by law, the
holders of the voting preferred stock vote as a single class with the holders of
the Coleman common stock on all matters submitted to a vote of the holders of
Coleman common stock, with each share of voting preferred stock and each share
of Coleman common stock having one vote. The voting preferred stock has an
annual dividend equal to 7% of $10.35, the issue price of the voting preferred
stock, which accrues but will not be paid in cash unless a liquidation of
Coleman occurs or certain transactions are consummated as described below. In
addition, the voting preferred stock will participate ratably with the Coleman
common stock in all other dividends and distributions (other than liquidating
distributions) made by Coleman to the holders of its common stock. The voting
preferred stock will participate with the Coleman common stock in any merger,
consolidation, or any other transaction (other than a merger of a wholly owned
subsidiary of the Company with Coleman, including the Coleman merger) and will
receive on a per share basis the same type and amount of consideration as the
Coleman common stock. On liquidations: (1) the holders of the voting preferred
stock would receive a preferential distribution equal to $10.35, plus accrued
and unpaid dividends, (2) next, the holders of the Coleman common stock would
receive an amount equal to $10.35 per share of common stock and (3) any assets
remaining after such distributions would be shared by the holders of voting
preferred stock and the Coleman common stock on a share for share basis. In
connection with the issuance of the shares of preferred stock, Coleman entered
into a tax sharing agreement with the Company pursuant to which Coleman will pay
to Sunbeam amounts equal to the federal and state income taxes that would have
been payable by Coleman had Coleman not been included in the consolidated income
tax return of the Company. The terms of the voting preferred stock, their issue
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SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
11. SUBSEQUENT EVENT - (CONTINUED)
price and the terms of the tax sharing agreement were approved on Coleman's
behalf by Coleman's then sole independent director. The net proceeds from the
issuance of the shares by Coleman of its voting preferred stock to Coleman
Worldwide were used by Coleman to make a partial repayment of loans outstanding
from Sunbeam under the Intercompany Note.
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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 and the related
footnotes included in this quarterly report on Form 10-Q/A, as well as the
consolidated financial statements, related footnotes and management's discussion
and analysis of financial condition and results of operations in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1998.
1998 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 M&F, in exchange for 14,099,749
shares of the Company's common stock and approximately $160 million in cash. In
addition, the Company assumed approximately $1,016 million in debt. Immediately
thereafter, as a result of the exercise of employee stock options, Sunbeam's
indirect beneficial ownership of Coleman decreased to approximately 79% of the
total number of the outstanding shares of Coleman common stock. The Company's
agreement for the acquisition of the remaining publicly held Coleman shares
pursuant to a merger transaction provides that the remaining Coleman
shareholders will receive:
o approximately 6.7 million shares of Sunbeam common stock (0.5677
share for each outstanding Coleman share); and,
o approximately $87 million in cash ($6.44 for each outstanding
Coleman share and the cash-out of unexercised Coleman options for
an amount equal to the difference between $27.50 per share and the
exercise price of such options).
The Company expects to complete the Coleman merger during the second half of
1999, although there can be no assurance that the merger will occur during that
time. See Note 2 to the Condensed Consolidated Financial Statements for
information regarding the settlement claims relating to the Coleman acquisition,
the terms of which provide for the issuance at the time of the merger of
warrants to purchase up to 4.98 million shares of Sunbeam's common stock at $7
per share.
On October 21, 1998, the Company announced that it had entered into a
Memorandum of Understanding to settle, subject to Court approval, class action
claims made by minority shareholders of Coleman relating to the Coleman merger.
Under the terms of the proposed settlement, if approved by the Court, the
Company will issue to the Coleman public shareholders, and plaintiff's counsel
in this action, warrants to purchase up to 4.98 million shares of the Company's
common stock at a cash exercise price of $7.00 per share, subject to certain
anti-dilution provisions. These warrants would generally have the same terms as
the warrants issued to a subsidiary of M&F and will be issued when the Coleman
merger is consummated. 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.
On April 6, 1998, the Company completed the cash acquisitions of First
Alert, a leading manufacturer of smoke and carbon monoxide detectors, and
Signature Brands, a leading manufacturer of consumer and professional products.
The First Alert and the Signature Brands acquisitions were valued at
approximately $182 million (including $133 million of cash and $49 million of
assumed debt) and $255 million (reflecting cash paid, including the required
retirement or defeasance of debt), respectively.
The acquisitions were recorded under the purchase method of accounting
and accordingly, the financial position and results of operations of each
acquired entity are included in the Condensed Consolidated Financial Statements
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 estimates of fair values (determined by independent appraisals)
at the dates of acquisition.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Results of operations for the three months ended March 31, 1999 include
the results of the three acquired companies for the entire period as compared
to results of operations for the three months ended March 31, 1998, which only
included the results of Coleman from March 30, 1998. The acquired entities
generated net sales of $347.8 million for the three months ended March 31,
1999, with a corresponding gross margin of $99.9 million, or 28.7% of net
sales. Selling, General and Administrative ("SG&A") costs recorded by the
acquired entities were $84.7 million in the period, yielding operating income
of $15.2 million. Results for the first quarter of 1998 included net sales from
Coleman of approximately $15 million, with a corresponding gross margin of
approximately $4 million, and SG&A expenses of approximately $4 million.
For the acquired entities, net sales for the three months ended March
31, 1999 were approximately $30 million higher than their results for the full
first quarter a year ago. This increase was attributable to increased net sales
at Coleman (approximately $26 million) and Signature Brands (approximately $5
million), partially offset by a decrease in net sales at First Alert
(approximately $1 million). Excluding the revenue of Coleman's safety and
security business and spa business, both of which were sold in 1998, Coleman's
net sales in the first three months of 1999 would have been approximately $47
million higher than the same period in 1998. The increase in Coleman net sales
is reflective of strong retail replenishment demand in its outdoor recreation
products as compared with unusually weak retail replenishment demand in the
first quarter of 1998. Additionally, increased generator revenues attributable
to increased awareness of power shortages from poor weather conditions and other
events contributed to the higher net sales. Excluding: (i)
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the effects of purchase accounting of approximately $9 million recognized in
1999; (ii) acquisition costs of approximately $18 million which were incurred in
the first quarter of 1998; and (iii) approximately $3 million of costs recorded
in 1999 related to Year 2000 compliance efforts, operating profit for these
three companies improved by approximately $36 million as compared to the same
period in the prior year, resulting primarily from higher net sales and a
reduction in expenses largely attributable to reduced headcount and the
centralization of certain management and administration functions, resulting
from the acquisition by Sunbeam.
Consolidated net sales for the three months ended March 31, 1999 were
$523.9 million, an increase of $276.3 million versus the three months ended
March 31, 1998. After excluding $347.8 million of net sales generated by the
acquired entities in the 1999 period and approximately $15 million in the 1998
period, as discussed above, net sales of $176.1 million decreased approximately
24% from net sales of $233.0 million in 1998. The Company believes the decrease
in product sales were largely driven by increases in retail inventory levels
from channel loading which took place in the first quarter of 1998, but not in
the 1999 period. The adverse effect of the 1998 channel loading was partially
offset by lower estimated provisions for customer returns and customer
allowances of approximately $7 million.
Domestic sales, excluding the acquired companies, declined
approximately 15% or $26 million from 1998. The Company believes this sales
decline is attributable to the channel loading that took place in the first
quarter of 1998 versus no similar loading in the same period in 1999. The
channel loading that took place in 1998 led to relatively lower sales of
appliances, primarily blenders, breadmakers, handmixers and irons in 1999, as
well as lower sales of outdoor cooking products. Partially offsetting the
adverse effects of channel loading was a benefit from reduced costs in 1999 from
customer returns and allowances.
International sales, excluding the acquired companies, represented 17%
of net sales for 1999 and decreased approximately $31 million as compared with
the net sales for the same period a year ago. The Company believes this sales
decline was largely attributable to the previously discussed impact of
increasing retail inventory levels in the first quarter of 1998. Sales were also
adversely impacted in 1999 by a decision to stop selling to certain export
distributors in Latin America. Additionally, poor economic conditions in that
region contributed to lower sales in 1999.
Excluding the effect of the gross margin generated from the inclusion
of the acquired entities' operations of $99.9 million in 1999 and approximately
$4 million in 1998, as discussed above, gross margin was $23.2 million or 13.2%
of sales for 1999 versus a gross margin of $29.7 million or 12.7% of net sales
for 1998. Lower sales volume and unfavorable manufacturing efficiencies
resulting from lower production levels in 1999 accounted for approximately $18
million of the change between years. This was partially offset by a lower
relative rate of product returns, reduced customer allowances of approximately
$7 million, and improved product mix of approximately $2 million during the
first quarter of 1999 as compared to the same period in 1998.
Excluding the effects of: (i) $84.7 million of SG&A charges in 1999 and
approximately $4 million in 1998 resulting from the inclusion of the acquired
entities; (ii) approximately $31 million of 1998 compensation expense recorded
in connection with new employment agreements with the three former senior
officers; (iii) a $3.0 million benefit in 1998 from the reversal of reserves no
longer required, and (iv) $5.3 million of costs recorded in the 1999 period
related to Year 2000 compliance efforts, SG&A expenses were approximately $47.9
million in the first quarter of 1999, 22.0% higher than the same period in 1998.
This increase of approximately $9 million is primarily due to an increase in
corporate administrative costs of approximately $5 million, reflecting
additional personnel and related relocation, travel and related costs and
increases in postretirement benefit costs. Increases in insurance and higher
costs associated with outside services account for the remainder of the increase
in SG&A.
Operating results for the first quarters of 1999 and 1998 for the
Sunbeam business before the 1998 acquisitions on a comparable basis as described
above, were a loss of $24.7 million in 1999 and a loss of $9.6 million in 1998.
On the same basis, operating margins as a percent of net sales decreased to a
loss of 15.0% from a loss of 4.1% in the prior year. This change resulted from
the factors discussed above.
Interest expense increased from $5.1 million in the first quarter of
1998 to $41.9 million in the first quarter of 1999 primarily related to higher
borrowing levels in 1999 resulting from borrowings for the acquisitions that
were outstanding for the entire quarter.
Other expense, net of $0.8 million for the first three months of 1999
included approximately $1.0 million relating to liquidating damages expensed
related to holders of the Zero Coupon Convertible Senior Subordinated Debentures
due 2018 (the "Debentures") (see Note 3 to the condensed consolidated financial
statements), partially offset by favorable foreign exchange. Other expense, net
of $3.2 million for the first three months of 1998 primarily represents foreign
exchange losses, largely arising from Sunbeam's operations in Mexico.
The minority interest reported in 1999 relates to the minority interest
held in Coleman by minority shareholders.
The Company provided for deferred tax expense in 1999 primarily due to
taxable income in foreign jurisdictions. Deferred tax assets resulting from
operating losses, incurred predominantly in domestic jurisdictions, were
recorded and valuation allowances were established for substantially all such
deferred tax assets. The Company's losses and related valuation allowances
caused the reported tax rate to differ from the statutory rate.
On July 12, 1999, the Company acquired 3,000,000 shares of a newly
created series of Coleman voting preferred stock for an aggregate purchase price
of approximately $31 million. These shares, together with the shares of Coleman
common stock the Company owns, enable Sunbeam to exercise 80.01% of the total
voting power of Coleman's outstanding capital stock as of July 12, 1999. This
class of preferred stock was created by Coleman and acquired by the Company in
order to enable Coleman and the Company to file
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consolidated federal income tax returns, and in certain jurisdictions,
consolidated state income tax returns, prior to the consummation of the Coleman
merger. In connection with the issuance of the shares of preferred stock, the
Company entered into a tax sharing agreement with Coleman, pursuant to which
Coleman will pay to Sunbeam amounts equal to the federal and state income taxes
that would have been payable by Coleman had Coleman not been included in the
consolidated income tax return of the Company. The net proceeds from the
issuance of the shares by Coleman of its voting preferred stock to Coleman
Worldwide were used by Coleman to make a partial repayment of loans outstanding
from Sunbeam under the Intercompany Note. (See Note 10 to the Condensed
Consolidated Financial Statements.) In 1998, the Company prepaid an industrial
revenue bond related to its Hattiesburg facility. In connection with this early
extinguishment of debt, the Company recognized an extraordinary charge of $8.6
million, consisting primarily of redemption premiums ($7.8 million) and
unamortized deferred financing costs ($0.8 million).
FOREIGN OPERATIONS
Approximately 75% 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, Canada, Japan, Latin America and Mexico.
Mexico reverted to a hyperinflationary status for accounting purposes in 1997;
therefore, translation adjustments related to Mexican net monetary assets were
included as a component of net (loss) earnings. Mexico is not considered
hyperinflationary as of January 1, 1999. This change in Mexico's
hyperinflationary status is not expected to have a material effect on the
Company's financial results. Translation adjustments resulting from the
Company's non-U.S. denominated subsidiaries have not had a material impact on
the Company's financial condition, results of operations, or cash flows.
While revenues generated in Asia have traditionally not been
significant, economic instability in this region is expected to have a negative
effect on 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 be impacted 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 has not had a
material impact on the Company's financial results.
SEASONALITY
Sunbeam'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. Furthermore, sales of a number of products,
including warming blankets, vaporizers, humidifiers, grills, First Alert
products, camping and generator products may be impacted by unseasonable weather
conditions.
LIQUIDITY AND CAPITAL RESOURCES
DEBT INSTRUMENTS
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 three acquired companies, the Company consummated an offering in
March 1998 of zero coupon debentures having a yield to maturity of 5%
(approximately $2,014 million principal amount at maturity), which resulted in
approximately $730 million of net proceeds and borrowed about $1,325 million
under its new bank 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 adjustments upon occurrence of
specified events. The debentures are subordinated in right of payment to all
existing and future senior indebtedness of the Company. The debentures are not
redeemable by the Company prior to March 25, 2003. On or after such date, the
debentures are redeemable for cash with at least 30 days notice, at the option
of the Company. The Company is required to purchase debentures at the option of
the holder as of March 25, 2003, March 25, 2008 and March 25, 2013, at purchase
prices equal to the issue price plus accrued original discount to such dates.
Sunbeam may, at its option, elect to pay any such purchase price in cash or
common stock or any combination thereof. However, the bank credit facility
prohibits the Company from redeeming or repurchasing debentures for cash. The
Company was required to file a registration statement with the SEC to register
the debentures by June 23, 1998. This registration statement was filed on
February 4, 1999 and the SEC has not declared the registration statement
effective. The Company 's failure to file the registration statement by June 23,
1998 did not constitute default under the terms of the debentures. As part of
the normal review process by the SEC, a number of comments have been made by the
staff of the Division of Corporation Finance relating to the registration
statement and the restated 1996 and 1997 financial statements included therein.
The Company has filed amendments to this registration statement. From June 23,
1998 until the registration statement is 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 $500,000 to the debenture holders on
September 25, 1998 and an additional $2 million was paid on March 25, 1999. An
additional cash payment of
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approximately $2 million, representing the Company's liability to debenture
holders through June 30, 1999, was paid on September 25, 1999.
Concurrent with the acquisitions, the Company replaced its $250 million
syndicated unsecured five-year revolving credit facility with the bank credit
facility. The bank credit facility provided for aggregate borrowings of up to
$1.7 billion and in addition to other customary covenants, required the Company
to maintain specified consolidated leverage, interest coverage and fixed charge
coverage ratios as of the end of each fiscal quarter occurring after March 31,
1998 and on or prior to the latest stated maturity date for any of the
borrowings under the bank credit facility.
As a result of, among other things, its operating losses incurred
during the first half of 1998, the Company did not achieve the specified
financial ratios for June 30, 1998 and it appeared unlikely that the Company
would achieve the specified financial ratios for September 30, 1998.
Consequently, the Company and its lenders entered into an agreement dated as of
June 30, 1998 that waived through December 31, 1998 all defaults arising from
the failure of the Company to satisfy the specified financial ratios for June
30, 1998 and September 30, 1998. Pursuant to an agreement with the Company dated
as of October 19, 1998, the Company 's lenders extended all of the waivers under
the June 30 agreement through April 10, 1999 and also waived through such date
all defaults arising from any failure by the Company to satisfy the specified
financial ratios for December 31, 1998. As part of the October 19, 1998
agreement, the Company agreed to a minimum monthly earnings before interest,
taxes, depreciation and amortization ("EBITDA") covenant (as defined in the bank
credit facility) which covenant the Company had been able to satisfy.
On April 10, 1999, among other things, the lenders extended all of the
waivers set forth in the October 19, 1998 agreement through April 15, 1999. On
April 15, 1999, the Company and its lenders entered into a comprehensive
amendment to the bank credit facility that, among other things, extended all of
the waivers under the April 10, 1999 agreement until April 10, 2000 and waived
until such date all defaults arising from any failure by the Company to satisfy
the specified financial ratios for any fiscal quarter end occurring during 1999
and for March 31, 2000. Following is a description of the significant terms of
the bank credit facility as amended April 15, 1999. As part of the April 15,
1999 bank credit facility amendment, the Company agreed to a minimum cumulative
EBITDA covenant that is based on post-December 31, 1998 consolidated EBITDA and
is tested at the end of each month occurring on or prior to March 31, 2000, as
well as a covenant limiting the amount of revolving loans (other than those used
to fund the Coleman merger) that may be outstanding under the bank credit
facility as of the end of each such month. The minimum cumulative EBITDA was
initially $6.3 million for the period January 1, 1999 through April 30, 1999 and
generally grows on a monthly basis until it reaches $121.0 million for the
period from January 1, 1999 through March 31, 2000.
The bank credit facility provides for aggregate borrowings of up to $1.7 billion
through:
o a revolving credit facility in an aggregate principal amount of up
to $400.0 million maturing March 30, 2005, $52.5 million of which
may only be used to complete the Coleman merger;
o up to $800.0 million in term loans maturing on March 30, 2005, of
which $35.0 million may only be used to complete the Coleman
merger; and
o a $500.0 million term loan maturing September 30, 2006, of which
$5.0 million has already been repaid through June 30, 1999.
As of March 31, 1999, approximately $1.5 billion was outstanding and
approximately $0.1 billion was available for borrowing under the bank credit
facility. The remaining $0.1 billion of the $1.7 billion bank credit facility
was committed for outstanding letters of credit.
Under the bank credit facility, interest accrues, at the Company 's
option:
o at the London Interbank Offered Rate ("LIBOR");
o or at the base rate of the administrative agent which is generally
the higher of the prime commercial lending rate of the
administrative agent or the Federal Funds Rate plus 0.50%;
in each case plus an interest margin which is currently 4.00% for LIBOR
borrowings and 2.50% for base rate borrowings. The interest margin is subject to
potential decreases in the future, including a decrease to 3.00% for LIBOR loans
and 1.75% for base rate loans upon consummation of the Coleman merger and the
effectiveness of the pledge of substantially all of Coleman's and its domestic
subsidiaries' assets to secure the obligations under the bank credit facility.
Under the terms of the April 15, 1999 amendment to the bank credit
facility, the Company is obligated to pay the bank lenders a loan commitment fee
of between 0.25% to 1.00% of the commitments under the bank credit facility as
of April 15, 1999. The percentage used to calculate the fee will be determined
by reference to the bank lenders' aggregate commmitments and loan exposure under
the bank credit facility as they may be reduced on or before September 30, 2000.
The fee is payable on the earlier of September 30, 2000 and the date the
commitments are terminated and the loans and other amount payable under the bank
credit facility are repaid. (See Note 10 to the Condensed Consolidated Financial
Statements.)
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Borrowings under the bank credit facility are secured by a pledge of
the stock of the Company's material subsidiaries, including Coleman, and by a
security interest in substantially all of the assets of the Company and its
material domestic subsidiaries, other than Coleman and its material subsidiaries
except as described below. Currently, Coleman's inventory and related assets are
pledged to secure its obligations for letters of credit issued for its account
under the bank credit facility. Additionally, as security for Coleman's note
payable to the Company, Coleman pledged substantially all of its domestic
assets, other than real property, including 66% of the stock of its direct
foreign subsidiaries and domestic holding companies for its foreign subsidiaries
and all of the stock of its other direct domestic subsidiaries but not the
assets of Coleman's subsidiaries. The pledge runs in favor of the Company 's
lending banks, to which the Coleman note has been pledged as security for the
Company 's obligations to them. Upon completion of the Coleman merger,
substantially all of Coleman's assets and the assets of Coleman's domestic
subsidiaries will be pledged to secure the obligations under the bank credit
facility.
In addition, borrowings under the bank credit facility are guaranteed
by a number of the Company 's wholly-owned material domestic subsidiaries and
these subsidiary guarantees are secured as described above. Upon completion of
the Coleman merger, Coleman and each of its United States subsidiaries will
become guarantors of the obligations under the bank credit facility. To the
extent extensions of credit are made to any subsidiaries of the Company, the
obligations of such subsidiaries are guaranteed by the Company.
In addition to the above described financial ratios and tests, the bank
credit facility contains covenants customary for credit facilities of a similar
nature, including limitations on the ability of the Company and its
subsidiaries, including Coleman, to, among other things:
o declare dividends or repurchase stock;
o prepay, redeem or repurchase debt, incur liens and engage in
sale-leaseback transactions;
o make loans and investments;
o incur additional debt (including revolving loans under the bank
credit facility);
o amend or otherwise alter material agreements or enter into
restrictive agreements;
o make capital and Year 2000 compliance expenditures;
o engage in mergers, acquisitions and asset sales;
o engage in transactions with specified affiliates;
o settle specified litigation;
o alter its cash management system; and
o alter the businesses they conduct.
Sunbeam is also required to comply with specified financial covenants and
ratios.
The bank credit facility provides for events of default customary for
transactions of this type, including nonpayment, misrepresentation, breach of
covenant, cross-defaults, bankruptcy, material adverse change arising from
compliance with ERISA, material adverse judgments, entering into guarantees and
change of ownership and control. It is also an event of default under the bank
credit facility if the Company 's registration statement in connection with the
Coleman merger is not declared effective by the SEC on or before October 30,
1999 (effective as of October 25, 1999, the bank lenders agreed to extend this
date to November 30, 1999), or if the merger does not occur within 25 business
days of the effectiveness of the registration statement or if the cash
consideration--including any payments on account of the exercise of any
appraisal rights, but excluding related legal, accounting and other customary
fees and expenses--to consummate the Coleman merger exceeds $87.5 million.
Although there can be no assurance, the Company anticipates that it will satisfy
these conditions. Furthermore, the bank credit facility requires the Company to
prepay term loans under the bank credit facility on each of September 30, 1999
and December 31, 1999 to the extent that cash on hand in the Company 's
concentration accounts plus the aggregate amount of unused revolving loan
commitments on these dates (excluding, for the September measurement date, $52.5
million reserved for the Coleman merger), exceeds $115 million and $125 million,
respectively, but the Company is not required to prepay more than $69.3 million
in the aggregate as a result of the provision.
Unless waived by the bank lenders, the failure of the Company to
satisfy any of the financial ratios and tests contained in the bank credit
facility or the occurrence of any other event of default under the bank credit
facility would entitle the bank lenders to (a) receive a 2.00% increase in the
interest rate applicable to outstanding loans and increase the trade letter of
credit fees to 1.00% and (b) accelerate the maturity of the outstanding
borrowings under the bank credit facility and exercise all or any of their other
rights and remedies. Any such acceleration or other exercise of rights and
remedies would likely have a material adverse effect on the Company.
The bank credit facility also includes provisions for the deferral of
the 1999 scheduled term loan payments of $69.3 million until April 10, 2000 as a
result of the satisfaction by the Company on May 14, 1999 of the agreed upon
conditions to the deferral. (See Note 3 to the Condensed Consolidated Financial
Statements.)
CASH FLOWS
As of March 31, 1999, the Company had cash and cash equivalents of
$46.2 million, working capital excluding cash and cash equivalents of $385.5
million and total debt of $2.3 billion. Cash used in operating activities during
the first quarter of 1999 was $57.5 million compared to $134.7 million in the
first quarter of 1998. This change is primarily attributable to working capital
improvements partially offset by lower earnings after giving effect to non-cash
charges. The majority of the working capital improvements are attributable
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<PAGE>
the Company's management of inventory levels and accounts receivable.
Inventories and receivables increased $65.9 million and $57.1 million,
respectively, in the first quarter of 1998 as compared to $20.9 million and
$35.8 million, respectively, in the first quarter of 1999. In 1998, the Company
built inventory levels in anticipation of sales volumes that did not materialize
and offered extended credit terms to its customers. The increase in inventory
during the first quarter of 1999 is largely due to the seasonal inventory build
in the Company's Outdoor Leisure division. The Company participates in an
accounts receivable securitization program to finance a portion of its accounts
receivable. (See Note 4 of Notes to Condensed Consolidated Financial
Statements.)
In the first quarter of 1999, cash used in investing activities was
driven by capital expenditures of $16.3 million, primarily for information
systems and equipment and tooling for new products. Capital spending in the
comparable 1998 period was $19.5 million and was primarily for capacity
expansion initiatives, including the Neosho grill manufacturing facility, and
equipment and tooling for new products. The new product capital spending in the
1998 period principally related to the appliance category and included costs
related to water and air filtration products, blenders, standmixers and irons.
Cash used in investing activities in the first quarter of 1998 reflects $160.6
million for the acquisition of approximately 81% of Coleman. The Company
anticipates 1999 capital spending to be approximately 4% to 5% of net sales,
primarily related to information systems and related support, including
expenditures for Year 2000 readiness, new product introductions and capacity
additions.
Cash provided by financing activities totaled $58.7 million in the
first quarter of 1999 and reflects net borrowings under the Company's New Credit
Facility. Cash provided by financing activities in the first quarter of 1998 was
$456.1 million 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
Coleman debt and the early extinguishment of the $75.0 million Hattiesburg bond.
In addition, cash provided by financing activities is net of $25.1 million of
financing fees related to the Company's $1.7 billion New Credit Facility and
$19.0 million of proceeds from the exercise of stock options. (See Note 3 to the
Condensed Consolidated Financial Statements.)
At March 31, 1999, standby and commercial letters of credit aggregated
$75.1 million and were predominately for insurance, pension, environmental,
workers' compensation, and international trade activities. In addition, as of
March 31, 1999, surety bonds with a contract value of $66.5 million were
outstanding largely for the Company's pension plans and as a result of
litigation judgments that are currently under appeal. For additional information
relating to the debentures, the bank credit facility and the repayment of debt,
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 0.5677 of a share of the Company's common stock, $6.44
in cash for each share of Coleman common stock outstanding and warrants to
purchase common stock of the Company at a cash exercise price of $7.00 per
share. 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,
including cash paid to option holders, to complete the Coleman transaction.
Under a proposed settlement of certain litigation relating to the Coleman
merger, the Company will also issue warrants to purchase up to 4.98 million
shares of the Company's common stock to the Coleman public stockholders and the
plaintiff's litigation counsel upon consummation of the Coleman merger.Although
there can be no assurance, it is anticipated that the Coleman merger will occur
in the second half of fiscal 1999.
The Company believes its borrowing capacity under the New Credit
Facility, 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 and Year 2000 compliance spending, and debt service through April 10,
2000. The Company intends to negotiate with its lenders on an amendment to the
New Credit Facility, negotiate with its lenders on further waiver of such
covenants and other terms or refinance the New Credit Facility. Any decisions
with respect to such amendment, waiver, or refinancing will be made based on a
review from time to time of the advisability of particular transactions. There
can be no assurance that an amendment, further waiver of existing covenants and
other terms, or refinancing will be entered into by April 10, 2000. The failure
to obtain such an amendment, further waiver or debt refinancing would likely
result in violation of the existing covenants and compliance with other terms,
which would permit the bank lenders to accelerate the maturity of all
outstanding borrowings under the New Credit Facility. Accordingly, debt related
to the New Credit Facility and all debt containing cross-default provisions will
be classified as current in the Condensed Consolidated Balance Sheet in the
second quarter of 1999.
In May 1998, the NYSE advised the Company that it did not meet the
continuing listing standards of the NYSE because the Company did not have
tangible net assets of at least $12 million and average annual net income of at
least $0.6 million for 1995, 1996 and 1997. Representatives from the Company met
with NYSE officials, and in March 1999, the NYSE informed the Company that the
Company's common stock would not be delisted at that time, although the NYSE
would, however, continue to monitor Sunbeam's financial condition and
operations. On August 5, 1999, the NYSE advised the Company that the NYSE had
revised its continuing listing standards, and that the Company is in compliance
with the revised standards.
In April 1999, the NYSE advised Coleman that it did not meet the NYSE's
continuing listing standards because Coleman did not have tangible net assets of
at least $12 million as of September 30, 1998 and average annual net income of
at least $0.6 million for 1995, 1996 and 1997. At that time, Coleman requested
the NYSE to continue to list the Coleman common stock until completion of the
merger. The NYSE subsequently advised Coleman that Coleman also failed to
satisfy certain non-financial continuing listing standards.
23
<PAGE>
On August 5, 1999, the NYSE advised Coleman that the NYSE had revised its
continuing listing standards, and that Coleman is in compliance with the revised
financial standards. Coleman and the NYSE have agreed upon a program whereby
Coleman will correct the deficiencies in its non-financial continuing listing
standards by the end of 1999. Coleman is currently complying with such program.
If Coleman were to be delisted from the NYSE, it would adversely affect
Coleman's ability to sell its capital stock to third parties or use its capital
stock as collateral for loans. Sunbeam's bank credit facility currently
restricts Coleman from taking such actions.
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 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 was served on Sunbeam requiring the production of documents. On
November 4, 1998, the Company received another SEC subpoena requiring the
production of additional documents. The Company has provided numerous documents
to the SEC staff and continues to cooperate with the SEC staff. The Company has,
however, declined to provide the SEC with material that the Company believes is
subject to the attorney-client privilege and the work product immunity. The
Company cannot predict the term of such investigation or its potential outcome.
The Company is involved in significant litigation, including class and
derivative actions, relating to events which led to the restatement of its
consolidated financial statements, the issuance of the MacAndrews & Forbes
warrant, the sale of the debentures and the employment agreements of Messrs.
Dunlap and Kersh. Sunbeam intends to vigorously defend each of the actions, 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 Company were to lose these suits, judgments would likely have a material
adverse effect on the Company 's financial position, results of operations and
cash flows. Additionally, the Company's insurance carriers have filed various
suits requesting a declaratory judgment that the directors' and officers'
liability insurance policies for excess coverage was invalid and/or had been
properly canceled by the carriers or have advised Sunbeam of their intent to
deny coverage under such policies. 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 and to
recover attorneys' fees covered under those policies. The Company 's failure to
obtain such insurance recoveries following an adverse judgment against the
Company on any of the foregoing actions could have a material adverse effect on
the Company 's financial position, results of operations and cash flows.
Amounts accrued for litigation matters represent the anticipated costs
(damages and/or settlement amounts) in connection with pending litigation and
claims and related anticipated legal fees. The costs are accrued when it is both
probable that an asset has been impaired or a liability has been incurred and
the amount can be reasonably estimated. The accruals are based upon the Company
's assessment, after consultation with counsel, of probable loss based on the
facts and circumstances of each case, the legal issues involved, the nature of
the claim made, the nature of the damages sought and any relevant information
about the plaintiff, and other significant factors which vary by case. When it
is not possible to estimate a specific expected amount of loss to be incurred,
the Company evaluates the range of possible losses and records the minimum end
of the range. As of March 31, 1999 the Company had established accruals for
litigation matters of $26.2 million (representing $12.4 million and $13.8
million for estimated damages or settlement amounts and legal fees,
respectively). As of December 31, 1998, the Company had established accruals for
litigation matters of $31.2 million (representing $17.5 million and $13.7
million for estimated damages or settlements and legal fees, respectively.) It
is anticipated that the $26.2 million accrual will be paid as follows: $17.7
million in 1999, $7.2 million in 2000 and $1.3 million in 2001. The Company
believes, based on information known to the Company at March 31, 1999, that
anticipated probable costs of litigation matters existing as of March 31, 1999
have been adequately reserved to the extent determinable.
As a consumer goods manufacturer and distributor, the Company faces the
constant risks of product liability and related lawsuits involving claims for
substantial money damages, product recall actions and higher than anticipated
rates of warranty returns or other returns of goods. These claims could result
in liabilities that could have a material adverse effect on the Company's
financial position and results of operations. Some of the product lines the
Company acquired in the 1998 acquisitions have increased its exposure to product
liability and related claims.
The Company and its subsidiaries are also involved in various lawsuits
from time to time that Sunbeam considers to be ordinary routine litigation
incidental to its business. In the opinion of the Company, the resolution of
these routine matters, and of matters relating to prior operations, individually
or in the aggregate, will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
See Note 10 to the Condensed Consolidated Financial Statements.
NEW ACCOUNTING STANDARDS
Effective January 1, 1999, the Company adopted 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. Adoption of this statement did not have a
material impact on the Company's condensed consolidated financial position,
results of operations, or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS No. 133"), ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is effective for fiscal
years beginning after June 15,
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<PAGE>
2000. SFAS No. 133 requires the recognition of all derivatives in the
Consolidated Balance Sheets as either assets or liabilities measured at fair
value. The Company has not yet determined the impact SFAS No. 133 will have on
its consolidated financial position, results of operations, or cash flows.
YEAR 2000 READINESS DISCLOSURE
The Company is preparing for the impact of the Year 2000 on its
operations. Year 2000 issues could include potential problems in the information
technology ("IT") and non-IT systems that the Company uses in its operations and
problems in the Company's products. Year 2000 system failures could affect
routine but critical operations such as forecasting, purchasing, production,
order processing, inventory control, shipping, billing and collection. In
addition, system failures could affect the Company's security, payroll
operations, or employee safety. The Company may also be exposed to potential
risks from third parties with whom the Company interacts who fail to adequately
address their own Year 2000 issues.
SUNBEAM'S APPROACH TO YEAR 2000 ISSUES
While the Company's Year 2000 readiness planning has been underway for
over one year, during the third quarter of 1998 the Company established a
cross-functional project team consisting of senior managers, assisted by three
external consulting firms which were retained to provide consulting services and
to assist the Company in implementing its Year 2000 strategy. This team is
sponsored by the Company's Chief Financial Officer who reports directly to the
Company's Chief Executive Officer on this issue. The Audit Committee of the
Board of Directors is advised periodically on the status of the Company's Year
2000 readiness program.
The Year 2000 project team has developed a phased approach to identify
and resolve Year 2000 issues with many of these activities conducted in
parallel. The Company's approach and the anticipated timing of each phase are
described below.
PHASE 1 - INVENTORY AND ASSESSMENT: During the first phase of Sunbeam's
Year 2000 readiness program, the Company established a Year 2000 Program
Management Office ("PMO") to centralize the management of all of the Company's
Year 2000 projects. Through this office, the Company developed a corporate-wide,
uniform strategy for assessing and addressing the Year 2000 issues.
The Company has completed an inventory of its hardware and software
systems, manufacturing equipment, electronic data interchange,
telecommunications and other technical assets potentially subject to Year 2000
problems, such as security systems and controls for lighting, air conditioning,
ventilation and facility access. This inventory was then entered into the
Company's Year 2000 database along with a determination of the item's level of
criticality to operations. For those inventory items anticipated to have a
significant effect on the business if not corrected, the Company's Year 2000
program envisions repair or replacement and testing of such items. All
information relative to each item is being tracked in the Company's Year 2000
database. The Company completed most of this phase during the third and fourth
quarters of 1998. The Company has completed a review of the readiness of
embedded microprocessors in its products and determined that none of the
Company's products have Year 2000 date sensitive systems.
PHASE 2 - CORRECTION AND TESTING: The second phase of Sunbeam's Year
2000 readiness program is structured to replace, upgrade or remediate (as
necessary) those items identified during Phase 1 as requiring corrective action.
Sunbeam relies on its IT functions to perform many tasks that are
critical to its operations. Significant transactions that could be impacted by
not being ready for any Year 2000 issues include, among others, purchases of
materials, production management, order entry and fulfillment, payroll
processing and billings and collections. Systems and applications that have been
identified by Sunbeam to date as not currently Year 2000 ready and which are
critical to Sunbeam's operations include its financial software systems, which
process the order entry, purchasing, production management, general ledger,
accounts receivable, and accounts payable functions, payroll applications, and
critical applications in the Company's manufacturing and distribution
facilities, such as warehouse management applications. Recognizing how dependent
the entire company is on IT, Sunbeam decided in 1997 to replace its primary
business applications with a uniform international business and accounting
information system to address the systems or applications listed above as well
as to improve internal reporting processes. Based upon representations from the
manufacturer that the current version of this uniform information system is Year
2000 ready, the Company has been actively upgrading its business sites that
currently utilize this uniform system to the Year 2000 ready version. In
addition to the pre-acquisition Sunbeam locations which had already utilized an
earlier non-Year 2000 ready version of this uniform business and accounting
information system, Eastpak, Mr. Coffee, Health-o-Meter and Sunbeam Latin
America are replacing their current non-Year 2000 ready systems with this new
uniform system. In addition, Coleman Europe is also replacing key business
components with this new system.
The Company is also actively replacing and/or upgrading a number of
business systems that are not Year 2000 ready, including those that use
localized business system packages which were not candidates to be replaced by
the uniform business and accounting information system. For example, at Coleman
approximately 2,000 mainframe software programs that are used in lieu of
Sunbeam's uniform business and accounting information system have been
remediated and tested to be Year 2000 ready. With respect to the Company's
non-IT systems (for example, time and attendance, security, and in-line
manufacturing hardware) the Company is actively analyzing these items to assess
any Year 2000 issues. To date, no material issues have been discovered, and the
Company will continue to review, test and correct, if necessary, such items.
25
<PAGE>
Sunbeam has largely implemented the corrective work described above and
expects to complete final testing and implementation of such systems in the
third quarter and early fourth quarter of 1999.
PHASE 3 - CUSTOMERS, SUPPLIERS AND BUSINESS PARTNERS: The third phase
of Sunbeam's Year 2000 readiness program which was initiated during the third
and fourth quarters of 1998 is designed to assess and interact with the
Company's customers, suppliers, and business partners. As part of this effort,
the Company surveyed 1,100 vendors and suppliers, a portion of which did not
provide an initial response. During the first half of 1999, "high risk" vendors
were contacted directly and the number of non-respondents has since decreased
substantially. In fact, currently only 7% of the Company's vendors who were
surveyed are categorized as "high risk" which includes non-respondents. Based on
the most recent responses to the survey and continued evaluation, the Company
believes that there is only a low to a medium risk of Year 2000 issues for the
remaining vendors. The Company will continue to monitor the Year 2000 progress
of the "high risk" vendors and has re-surveyed these companies to determine the
appropriate course of action. Furthermore, the Company is in the process of
contacting alternate vendors who are Year 2000 ready to replace critical vendors
deemed "high risk" in the event that these vendors are not found to be Year 2000
ready. The Company is in the process of completing a verification of the Year
2000 survey responses for the most critical vendors to the Company.
The Company has responded to numerous customer inquiries about the
Company's Year 2000 readiness. The Company has verified that all of the
Company's major customers have planned programs to deal with Year 2000 issuesand
is currently completing the process of contacting its major customers to confirm
they are implementing their planned programs to address Year 2000 issues. In
order to improve the Company's communication with its customers, suppliers and
business partners, the Company has set up a Sunbeam Year 2000 telephone number
and is providing Year 2000 information on a Company web site.
PHASE 4 - CONTINGENCY PLANNING: This phase involves contingency
planning for unresolved Year 2000 issues, particularly any issues arising with
third party suppliers. The Company's Year 2000 readiness program is ongoing and
its ultimate scope, as well as the consideration of contingency plans, will
continue to be evaluated as new information becomes available. The Company has
designed its Year 2000 contingency plan and is in the process of implementing
it. The development of the contingency plan included a process whereby the
Company's critical IT and non-IT systems were evaluated for Year 2000 readiness.
As a result of this evaluation, the Company does not expect to require
additional operational equipment or significant process contingency measures.
Although the Company does not currently believe there is significant risk
associated with its third party suppliers, the contingency plan includes the
continuing evaluation of the readiness of the Company's suppliers and
consideration of the Company's inventory requirements to protect against supply
disruption. This evaluation process may result in an increase in inventory
during the later months of 1999.
THE RISKS OF SUNBEAM'S YEAR 2000 APPROACH
The independent consultants assisting the Company in its Year 2000
readiness program have reviewed and concurred with the Company's approach, have
assisted in developing cost estimates and have monitored costs for the largest
single component (upgrade or installation of the Company's uniform system) of
the Company's Year 2000 program. Since Sunbeam's Year 2000 program was developed
and is monitored with the help of independent consultants, the Company did not
engage another independent third party to verify the program's overall approach
or total cost as the Company believes that the Company's exposure in this regard
is mitigated. In addition, through the use of external third-party diagnostic
software packages that are designed to analyze the Year 2000 readiness of
business software programs, the Company was able to identify potential Year 2000
issues at Coleman. Given this, the Company believes that it has also mitigated
its risk by validating and verifying key program components.
Management believes that, although there are significant systems that
are being modified or replaced, including the uniform business and accounting
information system, Sunbeam's information systems environment will be made Year
2000 ready prior to January 1, 2000. Sunbeam's failure to timely complete such
corrective work could have a material adverse impact on the Company.
With respect to customers, suppliers and business partners, the failure
of certain of these third parties to become Year 2000 ready could also have a
material adverse impact on Sunbeam. For example, the failure of certain of the
Company's principal suppliers to have Year 2000 ready internal systems could
impact the Company's ability to manufacture and/or ship its products or to
maintain adequate inventory levels for production.
At this time, the Company believes that the most likely "worst-case"
scenario relating to Year 2000 involves potential disruptions in areas in which
the Company's operations must rely on third parties, such as suppliers, whose
systems may not work properly after January 1, 2000. While such system failures
could either directly or indirectly affect important operations of the Company
and its subsidiaries in a significant manner, the Company cannot at present
estimate either the likelihood or the potential cost of such failures. Subject
to the nature of the goods or services provided to the Company by third parties
whose operations are not made ready for Year 2000 issues, the impact on
Sunbeam's operations could be material if appropriate contingency plans cannot
be developed prior to January 1, 2000.
The nature and focus of the Company's efforts to address the Year 2000
problem may be revised periodically as interim goals are achieved or new issues
are identified. In addition, it is important to note that the description of the
Company's efforts and assessments necessarily involves estimates and projections
with respect to activities required in the future. These estimates and
projections are subject to change as work continues, and such changes may be
substantial.
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THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
During the quarter ended March 31, 1999, Sunbeam had expended
approximately $17 million to address Year 2000 issues of which approximately 50%
was recorded as capital expenditures and the remainder as SG&A expense.
Sunbeam's current assessment of the total costs to address and remedy Year 2000
issues and enhance its operating systems, including costs for the acquired
companies, is approximately $60 million. This estimate includes the following
categories:
<TABLE>
<CAPTION>
<S> <C>
o uniform international business and accounting systems $ 40 million
o localized business system software upgrades and remediation $ 9 million
o Year 2000 readiness assessment and tracking $ 6 million
o upgrade of personal computers and related software $ 5 million
</TABLE>
The amount to be incurred for Year 2000 issues during 1999 of
approximately $41 million represents over 50% of the Company's total 1999 budget
for information systems and related support, including Year 2000 costs. A large
majority of these costs are expected to be incremental expenditures that will
not recur in the Year 2000 or thereafter. Fees and expenses related to third
party consultants, who are involved in the PMO as well as the modification and
replacement of software, represent approximately 75% of the total estimated
cost. The balance of the total estimated cost relates primarily to software
license fees and new hardware, but excludes the costs associated with Company
employees. Sunbeam expects these expenditures to be financed through operating
cash flows or borrowings, as applicable. A significant portion of these
expenditures will enhance Sunbeam's operating systems in addition to resolving
the Year 2000 issues. As Sunbeam completes its assessment of the Year 2000
issues, the actual expenditures incurred or to be incurred may differ materially
from the amounts shown above. The bank credit facility does not permit the
Company to spend more than $50 million on Year 2000 testing and remediation in
1999.
Because Year 2000 readiness is critical to the business, Sunbeam has
redeployed some resources from non-critical system enhancements to address Year
2000 issues. In addition, due to the importance of IT systems to the Company's
business, management has deferred non-critical systems enhancements as much as
possible. The Company does not expect these redeployments and deferrals to have
a material impact on the Company's financial condition, results of operations,
or cash flows.
CAUTIONARY STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q/A 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 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. Statements that are not historical fact are forward-looking
statements. Forward-looking statements can be identified by, among other things,
the use of forward-looking language, such as the word "estimate," "project,"
"intend," "expect," "believe," "may," "well," "should," "seeks," "plans,"
"scheduled to," "anticipates," or "intends," or the negative of these terms or
other variations of these terms or comparable language, or by discussions of
strategy or intentions, when used in connection with the Company, including its
management. 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 comply with the terms of its credit
agreement, including financial covenants and covenants relating to the
completion of the Coleman merger, or 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, or
the Company's ability to refinance its indebtedness at acceptable rates with
acceptable terms; (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 domestic and/or foreign laws and
regulations, including changes in tax rates, accounting standards, environmental
laws, occupational, health and safety laws, (viii) access to foreign markets
together with foreign economic conditions, including currency fluctuations and
trade, monetary and/or tax policies, (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 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 certain 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
27
<PAGE>
demands for the Company's products, (xviii) actions by competitors including
business combinations, new product offerings and marketing and promotional
activities, and (xix) failure of the Company and/or its suppliers of goods or
services to timely complete the remediation of computer systems to effectively
process Year 2000 information. Other factors and assumptions not included in the
foregoing may cause the Company's actual results to materially differ from those
projected. The Company assumes no obligation to update any forward-looking
statements or these cautionary statements.
28
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 some of its present and former directors and
former officers. The action alleged that the individual defendants breached
their fiduciary duties and wasted corporate assets when the Company granted
stock options on or about February 2, 1998 at an exercise price of $36.85 to
three of its officers and directors who were subsequently terminated by the
Company. On June 25, 1998, all defendants filed a motion to dismiss the
complaint for failure to make a pre-suit demand on the Company's board of
directors. On October 22, 1998, the plaintiff amended the complaint against all
but one of the defendants named in the original complaint. On February 19, 1999,
plaintiffs filed a second amended derivative complaint nominally on behalf of
the Company against some of its present and former directors and former officers
and Arthur Andersen. The second amended complaint alleges, among other things,
that Messrs. Dunlap and Kersh, Sunbeam's former Chairman and Chief Executive
Officer and former Chief Financial Officer, respectively, caused the Company to
employ fraudulent accounting procedures in order to enable them to secure new
employment contracts, and seeks a declaration that the individual defendants
have violated fiduciary duties, an injunction against the payment of
compensation to Messrs. Dunlap and Kersh or the imposition of a constructive
trust on such payments, and unspecified money damages. The defendants have each
moved to dismiss the second amended complaint in whole or in part.
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
stockholders of Coleman against Coleman, the Company and certain of the
Company's and Coleman's present and former officers and directors. An additional
class action was filed on August 10, 1998, against the same parties. The
complaints in these class actions allege, in essence, that the existing exchange
ratio for the proposed Coleman merger is no longer fair to Coleman minority
stockholders as a result of the decline in the market value of the Company's
common stock. On October 21, 1998, the Company announced that it had entered
into a memorandum of understanding to settle, subject to court approval, the
class actions. The court hearing on the settlement was held on September 29,
1999, but the court has not yet ruled on the settlement. Under the terms of the
proposed settlement, if approved by the court, the Company will issue to Coleman
minority stockholders and plaintiffs' counsel in this action warrants to
purchase up to approximately 4.98 million shares of the Company common stock at
$7 per share, subject to anti-dilution adjustments. Coleman minority
stockholders who elect an appraisal under Delaware law will not receive
warrants. These warrants will generally have the same terms as the warrant
issued to the MacAndrews & Forbes subsidiary and will be issued when the Coleman
merger is consummated, which is now expected to occur during the second 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.
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 Sunbeam's alleged misstatements and omissions
regarding Sunbeam's financial condition and prospects during a period beginning
May 1, 1998 and ending June 16, 1998, in which the U.S. National Bank of
Galveston, Kempner Capital Management, Inc. and Legacy Trust Company engaged in
transactions in Sunbeam common stock on their own behalf and on behalf of their
respective clients. Sunbeam 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 was removed to the U.S. District
Court for the Southern District of Texas and subsequently transferred to the
Southern District of Florida and consolidated with the Consolidated Federal
Actions. Plaintiffs in this action have objected to the consolidation and have
sought reconsideration by the Southern District of Florida of the order of the
Southern District of Texas denying plaintiffs' motion to remand the case to
state court and transferring it to Florida. A similar suit was brought by the
same group of plaintiffs against Arthur Andersen. In that action, the plaintiffs
allege that Arthur Andersen violated the Texas Securities Act, committed
statutory and common law fraud and was negligent in its audits of Sunbeam's 1996
and 1997 financial statements. In September 1999, Arthur Andersen had filed a
motion for leave to join Sunbeam and certain of its former officers as
responsible third parties and contribution defendants, which motion was denied.
On October 30, 1998, a class action lawsuit was filed on behalf of
certain purchasers of the debentures in the U.S. District Court for the Southern
District of Florida against Sunbeam and some of Sunbeam's former officers and
directors, alleging violations of the federal securities laws and common law
fraud. The complaint alleges that Sunbeam's offering memorandum used for the
marketing of the debentures contained false and misleading information regarding
Sunbeam's financial position and that the defendants engaged in a plan to
inflate Sunbeam's earnings for the purpose of defrauding the plaintiffs and
others. The plaintiffs seek a declaration that defendants violated federal
securities laws and either unspecified monetary damages or rescission of their
purchase of the debentures. This action has been transferred to the Southern
District of Florida, where the Consolidated Federal Actions are pending, and the
parties have negotiated a proposed coordination plan in order to coordinate
proceedings in this action with those in the Consolidated Federal Actions.
The Company has been named as a defendant in an action filed in the
District Court of Tarrant County, Texas, 48th Judicial District, on November 20,
1998. The Company was served in this action through the Secretary of State of
Texas on January 15, 1999. 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 specially appeared to assert an objection to the Texas
court's exercise of personal jurisdiction over the Company, and a hearing on
this objection took place on April 15, 1999. On April 23, 1999, the court
entered an order granting the Company's special appearance and dismissing the
case without prejudice. The plaintiffs moved for
29
<PAGE>
reconsideration of the court order, which motion the court denied on May 24,
1999. The plaintiffs have appealed the order dismissing the case to the Texas
Court of Appeals, and a hearing on such appeal took place on October 20, 1999.
On February 9, 1999, Messrs. Dunlap and Kersh filed with the American
Arbitration Association demands for arbitration of claims under their respective
employment agreements with Sunbeam. Messrs. Dunlap and Kersh are requesting a
finding by the arbitrators that Sunbeam terminated their employment without
cause and that they should be awarded the corresponding benefits provided by
their respective employment agreements. On March 12, 1999, the Company asked the
Circuit Court for the Fifteenth Judicial Circuit in and for Palm Beach County,
Florida to issue an injunction prohibiting Messrs. Dunlap and Kersh from
pursuing their arbitration proceedings against the Company on the grounds, among
others, that the simultaneous litigation of the action filed in that court on
April 7, 1998, described above, and the arbitration proceedings would subject
the Company to the threat of inconsistent adjudications with respect to certain
rights to compensation asserted by Messrs. Dunlap and Kersh and would cause
irreparable harm to the Company and its stockholders. On March 19, 1999, the
plaintiff in the April 7, 1998 action discussed above moved for an injunction on
the similar grounds. On May 11, 1999, the court denied the motions for a
preliminary injunction filed by the Company and the plaintiff. The Company has
answered the arbitration demands of Messrs. Dunlap and Kersh and has filed
counterclaims seeking, among other things, the return of all consideration paid,
or to be paid, under the February 1998 Employment Agreements between Sunbeam and
Messrs. Dunlap and Kersh. An answer was filed by Messrs. Dunlap and Kersh
generally denying the Company's counterclaim. Discovery is pending.
On May 24, 1999, an action naming the Company as defendant was filed in
the Circuit Court for Ozaukee County, Wisconsin. Prior to service of the
complaint, the plaintiff dismissed its claims voluntarily, without prejudice.
The plaintiff in this action was a purchaser of the Debentures. The plaintiff
alleged that the Company violated the Wisconsin Uniform Securities Act and
committed acts of false advertising and misrepresentation in connection with the
offering and sale of the Debentures. The plaintiff sought rescission, as well as
compensatory and exemplary damages in an unspecified amount.
On September 13, 1999, an action naming the Company and Arthur Andersen
as defendants was filed in the Circuit Court for Montgomery County, Alabama. The
plaintiffs in this action are purchasers of the Company's common stock during
the period March 19, 1998 through May 6, 1998. The plaintiffs allege, among
other things, that the defendants violated the Alabama Security Laws and SEC
Rule 10b-5. The plaintiffs seek compensatory and punitive damages in an
unspecified amount. The Company has removed this case to the U.S. District Court
for the District of Alabama. In addition, Arthur Andersen has filed a cross
claim against the Company for contribution and indemnity.
The Company intends to vigorously defend each of the foregoing lawsuits
other than those as to which a memorandum of understanding to settle has been
reached, 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 Company were to lose these lawsuits, judgments would
likely have a material adverse effect on the Company's consolidated financial
position, results of operations and cash flows.
On March 23, 1999, Messrs. Dunlap and Kersh filed a complaint in the
Court of Chancery of the State of Delaware seeking an order directing the
Company to advance attorneys' fees and other expenses incurred in connection
with various state and federal class and derivative actions and an investigation
instituted by the SEC. The complaint alleges that such advancements are required
by the Company's by-laws and by a forbearance agreement entered into between the
Company and Messrs. Dunlap and Kersh in August, 1998. A trial of this summary
proceeding was held on June 15 and 16, 1999. On June 23, 1999, the court issued
a memorandum opinion directing the Company to pay about $1.4 million on account
of expenses incurred to date and to advance reasonable future expenses in those
actions and investigations. Messrs. Dunlap and Kersh have agreed to repay all
amounts advanced to them if it is ultimately determined that they are not
entitled to indemnification under Delaware law.
On July 2, 1998, the American Alliance Insurance Company filed suit
against Sunbeam 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 Alliance was
invalid and/or had been properly canceled by American Alliance. The Company's
motion to transfer such action to the federal district court in which the
Consolidated Federal Actions are currently pending was denied. The Company has
filed a motion with the Judicial Panel on Multidistrict Litigation to transfer
this action for coordination or consolidation of pretrial proceedings with the
various actions pending in the Southern District of Florida. That motion was
granted. American Alliance has filed a motion for summary judgment on the ground
that coverage was never bound. The Company has opposed that 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 Alliance in the previously filed action as to additional
coverage levels under the Company's directors' and officers' liability insurance
policy. This action has been transferred to the U.S. District Court for the
Southern District of Florida and is currently in discovery. The Company is
seeking a stay of discovery to coordinate discovery in this action with any
discovery that may occur in the Consolidated Federal Actions. Plaintiff has
moved to compel production of various documents. On December 22, 1998, an action
was filed by Executive Risk Indemnity, Inc. in the Circuit Court of the
Seventeenth Judicial Circuit in and for Broward County, Florida requesting the
same relief as that requested by American Alliance and Federal in their
previously filed actions as to additional coverage levels under the Company's
directors' and officers' liability insurance policy. On April 15, 1999, the
Company filed an action in the U.S. District Court for the Southern District of
Florida against National Union Fire Insurance Company of Pittsburgh, PA, Gulf
Insurance Company and St. Paul Mercury Insurance Company requesting, among other
things, a declaratory judgment that National Union is not entitled to rescind
its directors' and officers' liability insurance policies to the Company and a
declaratory judgment that the Company is entitled to coverage from these
insurance companies for the various lawsuits described herein under directors'
and officers' liability insurance policies issued by each of the defendants. In
response to the Company's complaint,
30
<PAGE>
defendants St. Paul and Gulf have answered and asserted counterclaims seeking
rescission and declaratory relief that no coverage is available to the Company.
Sunbeam has denied the allegations of Gulf's and St. Paul's counterclaims.
Defendant National Union has filed a motion to dismiss or stay the claims filed
by the Company against National Union on the basis, among others, that the
Company must submit the dispute to arbitration or mediation. The Company has
filed a response opposing that motion. 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 and to
recover attorneys' fees covered under those policies. The Company's failure to
obtain such insurance recoveries following an adverse judgment in any of the
actions described above could have a material adverse effect on the Company's
financial position, results of operations and cash flows.
The Company and its subsidiaries are also involved in various other
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, 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.
Amounts accrued for litigation matters represent the anticipated costs
(damages and/or settlement amounts) in connection with pending litigation and
claims and related anticipated legal fees. The costs are accrued when it is both
probable that an asset has been impaired or a liability has been incurred and
the amount can be reasonably estimated. The accruals are based upon the Company
's assessment, after consultation with counsel, of probable loss based on the
facts and circumstances of each case, the legal issues involved, the nature of
the claim made, the nature of the damages sought and any relevant information
about the plaintiff, and other significant factors which vary by case. When it
is not possible to estimate a specific expected cost to be incurred, the Company
evaluates the range of probable losses and records the minimum end of the range.
As of March 31, 1999 the Company had established accruals for litigation matters
of $26.2 million (representing $12.4 million and $13.8 million for estimated
damages or settlement amounts and legal fees, respectively). As of December 31,
1998, the Company had established accruals for litigation matters of $31.2
million (representing $17.5 million and $13.7 million for estimated damages or
settlements and legal fees, respectively.) It is anticipated that the $26.2
million accrual will be paid as follows: $17.7 million in 1999, $7.2 million in
2000 and $1.3 million in 2001. The Company believes, based on information known
to the Company on March 31, 1999, that anticipated probable costs of litigation
matters existing as of March 31, 1999 have been adequately reserved to the
extent determinable.
PRODUCTS LIABILITY
As a consumer goods manufacturer and distributor, the Company faces the
constant risks of product liability and related lawsuits involving claims for
substantial money damages, product recall actions and higher than anticipated
rates of warranty returns or other returns of goods. These claims could result
in liabilities that could have a material adverse effect on the Company's
consolidated financial position, results of operations, or cash flows. Some of
the product lines the Company acquired in the 1998 acquisitions have increased
its exposure to product liability and related claims.
BRK Brands, Inc., a wholly owned subsidiary of the Company, is a
defendant in the case Gordon v. BRK Brands, Inc., et al. ("Gordon") in the
Circuit Court for the City of St Louis. In Gordon, the plaintiff alleged, among
other things, that the plaintiff's smoke detector (which had been manufactured
by a predecessor of BRK Brands, Inc.) did not alarm quickly enough. In July
1999, the jury in the Gordon case awarded $20 million in compensatory damages
and $30 million in punitive damages. This case has been settled and BRK Brands,
Inc.'s obligation under the settlement is limited to payment of the balance of
its self-insured retention.
ENVIRONMENTAL MATTERS
With respect to one of seven sites at which the Company has been
identified by the United States Environmental Protection Agency ("EPA") as a
potentially responsible party, the Company received notice from the EPA that the
Company has completed all required removal activities and that such removal
activities were completed to EPA's satisfaction. EPA's approval of the Company's
removal activities at this site effectively concludes its obligations to EPA at
this site. The EPA's approval of the Company's removal activities did not have
any impact on the Company's environmental accruals since these activities were
completed for the amount accrued.
31
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule, submitted electronically
to the Securities and Exchange Commission for
information only and not filed.
(b) Report on Form 8-K
No reports on Form 8-K were filed through March 31, 1999.
32
<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: November 4, 1999
33
<PAGE>
EXHIBITS INDEX
EXHIBIT DESCRIPTION
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTREACTED FROM THE SUNBEAM COPORATION FINANCIAL STATEMENTS FOR THE PERIODS
ENDED MARCH 31, 1999 AND MARCH 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 46,163
<SECURITIES> 72,351
<RECEIVABLES> 449,596
<ALLOWANCES> 52,813
<INVENTORY> 534,555
<CURRENT-ASSETS> 1,119,741
<PP&E> 604,230
<DEPRECIATION> 151,887
<TOTAL-ASSETS> 3,399,103
<CURRENT-LIABILITIES> 615,726
<BONDS> 2,207,999
0
0
<COMMON> 1,007
<OTHER-SE> 189,226
<TOTAL-LIABILITY-AND-EQUITY> 3,399,103
<SALES> 523,946
<TOTAL-REVENUES> 523,946
<CGS> 400,791
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 808
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,906
<INCOME-PRETAX> (57,508)
<INCOME-TAX> 1,742
<INCOME-CONTINUING> (60,739)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (60,739)
<EPS-BASIC> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
