<PAGE>
SECOND PROSPECTUS SUPPLEMENT DATED DECEMBER 13, 1999
(to prospectus dated November 11, 1999)
SUNBEAM CORPORATION
$2,014,000,000
ZERO COUPON CONVERTIBLE SENIOR SUBORDINATED DEBENTURES DUE 2018
AND
SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THE DEBENTURES
RECENT DEVELOPMENTS
On November 19, 1999, Sunbeam Corporation released the information
contained in Part I hereof, in a filing with the Securities and Exchange
Commission. In addition, on November 19, 1999, The Coleman Company, Inc.
released the information contained in Part II hereof, in a filing with the
Securities and Exchange Commission.
<PAGE>
PART I
SUNBEAM CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Condensed Consolidated Statements of Operations (Unaudited)
for the three months and nine months ended
September 30, 1999 and September 30, 1998........................................ 1
Condensed Consolidated Balance Sheets (Unaudited)
as of September 30, 1999 and December 31, 1998................................... 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended September 30, 1999 and September 30, 1998.............. 3
Notes to Condensed Consolidated Financial Statements (Unaudited)...................... 4
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................ 29
</TABLE>
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ---------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales ............................... $ 601,554 $ 496,039 $ 1,786,428 $ 1,322,129
Cost of goods sold ...................... 442,764 428,629 1,334,177 1,273,424
Selling, general and administrative
expense ............................ 154,480 228,441 449,263 440,381
----------- ----------- ----------- -----------
Operating income (loss) ................. 4,310 (161,031) 2,988 (391,676)
Interest expense, net ................... 48,334 42,677 136,631 88,476
Other income, net ....................... (5,219) (10,995) (4,619) (4,065)
----------- ----------- ----------- -----------
Loss before income taxes, minority
interest and extraordinary charge .. (38,805) (192,713) (129,024) (476,087)
Income tax provision (benefit):
Current .............................. (5,276) 396 1,370 3,995
Deferred ............................. 8,928 (2,814) 11,291 (1,280)
----------- ----------- ----------- -----------
3,652 (2,418) 12,661 2,715
Minority interest ....................... 4,897 (1,384) 13,354 (3,447)
----------- ----------- ----------- -----------
Loss before extraordinary charge ........ (47,354) (188,911) (155,039) (475,355)
Extraordinary charge from
early extinguishments of debt ........ -- -- -- (111,715)
----------- ----------- ----------- -----------
Net loss ................................ $ (47,354) $ (188,911) $ (155,039) $ (587,070)
=========== =========== =========== ===========
Basic and diluted loss per share:
Loss from continuing operations before
extraordinary charge ............... $ (0.47) $ (1.88) $ (1.54) $ (4.96)
Extraordinary charge ................. -- -- -- (1.16)
----------- ----------- ----------- -----------
Net loss ............................. $ (0.47) $ (1.88) $ (1.54) $ (6.12)
=========== =========== =========== ===========
Basic and diluted weighted average common
shares outstanding ................... 100,746 100,722 100,743 95,919
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
S2PI-1
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 29,088 $ 61,432
Restricted investments.............................................. -- 74,386
Receivables, net.................................................... 443,223 361,774
Inventories......................................................... 507,821 519,189
Prepaid expenses, deferred income taxes and other current assets.... 70,681 74,187
------------- -------------
Total current assets.......................................... 1,050,813 1,090,968
Property, plant and equipment, net..................................... 457,293 455,172
Trademarks, tradenames, goodwill and other, net........................ 1,809,868 1,859,377
------------- -------------
$ 3,317,974 $ 3,405,517
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt............... $ 1,505,576 $ 119,103
Accounts payable.................................................... 188,899 162,173
Other current liabilities........................................... 303,075 321,185
------------- -------------
Total current liabilities..................................... 1,997,550 602,461
Long-term debt, less current portion................................... 817,128 2,142,362
Other long-term liabilities............................................ 231,898 248,459
Deferred income taxes.................................................. 111,516 100,473
Minority interest...................................................... 65,195 51,325
Commitments and contingencies
Shareholders' equity:
Preferred stock (2,000,000 shares authorized, none outstanding) .... -- --
Common stock (100,746,400 and 100,739,053 shares issued)............ 1,007 1,007
Additional paid-in capital.......................................... 1,122,896 1,123,457
Accumulated deficit................................................. (965,036) (809,997)
Accumulated other comprehensive loss................................ (64,180) (54,030)
------------- -------------
Total shareholders' equity.................................... 94,687 260,437
------------- -------------
$ 3,317,974 $ 3,405,517
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
S2PI-2
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss........................................................... $ (155,039) $ (587,070)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................................. 93,917 70,123
Non-cash interest charges...................................... 34,120 19,387
Deferred income taxes.......................................... 11,291 (1,280)
Minority interest.............................................. 13,354 (3,447)
(Gain) loss on sale of property, plant and equipment........... (3,405) 2,406
Provision for fixed assets..................................... -- 32,642
Provision for excess and obsolete inventory.................... -- 86,167
Warrants charged to expense.................................... -- 70,000
Non-cash compensation charge................................... -- 23,359
Extraordinary charge from early extinguishments of debt........ -- 111,715
Changes in working capital and other, net of acquisitions...... (67,409) (48,697)
-------------- -------------
Net cash used in operating activities.................... (73,171) (224,695)
-------------- -------------
INVESTING ACTIVITIES:
Capital expenditures............................................... (63,205) (32,766)
Purchases of businesses, net of cash acquired...................... -- (379,159)
Other.............................................................. 4,838 307
-------------- ------------
Net cash used in investing activities.................... (58,367) (411,618)
-------------- -------------
FINANCING ACTIVITIES:
Issuance of convertible subordinated debentures, net of
financing fees.................................................. -- 729,622
Net borrowings under revolving credit facilities................... 105,025 1,353,041
Payments of debt obligations, including prepayment penalties....... (2,940) (1,464,245)
Proceeds from exercise of stock options............................ 35 19,553
Other.............................................................. (2,926) (1,875)
-------------- -------------
Net cash provided by financing activities................ 99,194 636,096
-------------- -------------
Net decrease in cash and cash equivalents.............................. (32,344) (217)
Cash and cash equivalents at beginning of period....................... 61,432 52,298
-------------- -------------
Cash and cash equivalents at end of period............................. $ 29,088 $ 52,081
============== =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
S2PI-3
<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 September 30,
1999 and the Condensed Consolidated Statements of Operations and Cash Flows for
the three and nine months ended September 30, 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.
S2PI-4
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
1. OPERATIONS AND BASIS OF PRESENTATION - (CONTINUED)
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 nine months ended September 30,
1999 and 1998, 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 during the periods presented. Loss per share for the nine months ended
September 30, 1999 excluded 78,562 shares related to stock options, as their
effect would have been anti-dilutive. Stock options to purchase 19,420,292
common shares for the nine months ended September 30, 1999, 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 the period. The nine
months ended September 30, 1998 loss per share excluded 3,017,516 shares related
to stock options, as their effect would have been anti-dilutive. The nine month
1998 period also excluded 63,016 related to restricted stock. Stock options to
purchase 9,609,033 common shares for the nine months ended September 30, 1998
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 the
period. Diluted average common shares outstanding for all periods presented
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 for the periods ended
September 30, 1999 excluded 23,000,000 shares issuable on the exercise of
warrants.
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.
S2PI-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 ("NYSE") 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 10.)
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. Accordingly, a $70.0 million non-cash SG&A expense was recorded in the
third quarter of 1998, based upon a valuation performed as of August 1998 using
facts existing at that time. The valuation was conducted by an independent
consultant engaged by the special committee of the board of directors.
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 fourth quarter of 1999 or early in the first
quarter of 2000. 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.
S2PI-6
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
2. ACQUISITIONS - (CONTINUED)
On October 21, 1998, the Company announced that it had entered into a
Memorandum of Understanding to settle, class action claims made by minority
shareholders of Coleman relating to the Coleman merger. Under the terms of the
settlement, 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.
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 approximately $255
million (reflecting cash paid, including the required retirement of 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 September 30, 1999, 113 employees were
terminated and paid benefits of approximately $7 million. The four remaining
employees are expected to be terminated by March 31, 2000. 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.
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 date indicated, or which may result
in the future. The pro forma results follow (in millions, except per share
data):
NINE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
Net sales................................................... $ 1,584.0
Loss before extraordinary charge............................ (498.1)
Basic and diluted loss per share from continuing operations
before extraordinary charge............................... (4.78)
S2PI-7
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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, as
amended, was declared effective on November 8, 1999. The Company's failure to
file the registration statement by June 23, 1998 did not constitute default
under the terms of the Debentures. From June 23, 1998 until the registration
statement was declared effective, the Company was 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 has made total payments
for liquidated damages since June 23, 1998 of $4.5 million, of which $1.5
million related to damages for the period through December 31, 1998. A final
payment of approximately $0.5 million, representing liquidated damages from
September 26, 1999 until the registration statement was declared effective, will
be payable on March 25, 2000.
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, 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.
S2PI-8
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
3. DEBT - (CONTINUED)
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 is classified as current in the September 30, 1999 Condensed
Consolidated Balance Sheet.
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 following description of the New Credit Facility reflects its
significant terms as amended April 15, 1999.
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); (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
September 30, 1999). As of September 30, 1999, approximately $1.5 billion was
outstanding and approximately $0.2 billion was available for borrowing under the
New Credit Facility.
S2PI-9
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
3. DEBT - (CONTINUED)
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 loans
and 2.50% for base rate loans. 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 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, as amended November 16, 1999, if the Company's registration statement
in connection with the Coleman merger is not declared effective by the SEC on or
before January 10, 2000, or if the merger
S2PI-10
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
3. DEBT - (CONTINUED)
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 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 this date exceeds $125 million, but the Company is
not required to prepay more than $69.3 million 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 September 30, 1999 and the March 31, 2000 scheduled term
loan payments of $69.3 million each until April 10, 2000 as a result of the
satisfaction by the Company 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. As a result of repayment of
certain indebtedness assumed in the Coleman acquisition, the Company also
recognized an extraordinary charge in the second quarter of 1998. The debt
assumed in connection with the Coleman acquisition was repaid as a result of the
requirements under the terms of the New Credit Facility. These extraordinary
charges consisted of redemption premiums ($106.9 million), unamortized debt
discount ($13.8 million) and unamortized deferred financing costs ($1.7 million)
and were net of an income tax benefit ($10.7 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, $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 December 31, 1998. The
prepayment penalty is reflected as part of the acquisition price of Signature
Brands. This debt was redeemed in August, 1999 utilizing the proceeds from
investments restricted for this purpose.
4. ACCOUNTS RECEIVABLE SECURITIZATION
The Company has entered into a receivables securitization program that
expires in March 2000. The Company has received $228.4 million and $130.6
million in the first nine months of each 1999 and 1998, respectively, for the
sale of trade accounts receivable. Trade accounts receivable at September 30,
1999 and 1998 reflect a reduction of $36.9 million and $10.5 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 $1.7 million and $1.9 million in the
first nine months 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.
S2PI-11
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
5. COMPREHENSIVE LOSS
The components of the Company's comprehensive loss are as follows (in
thousands):
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
Net loss....................................... $ (155,039) (587,070)
Foreign currency translation adjustment,
net of taxes............................... (10,150) 154
Change in minimum pension liability............ -- (266)
----------- ----------
Comprehensive loss............................. $ (165,189) $ (587,182)
=========== ==========
As of September 30, 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 September 30, 1999....................... $ (22,172) $ (42,008) $ (64,180)
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
September 30, 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):
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
Receivables:
Trade................................. $ 475,595 $ 407,452
Sundry................................ 10,090 7,347
---------- ----------
485,685 414,799
Valuation allowance................... (42,462) (53,025)
---------- ----------
$ 443,223 $ 361,774
========== ==========
Inventories:
Finished goods........................ $ 353,561 $ 370,622
Work in process....................... 46,191 39,143
Raw materials and supplies............ 108,069 109,424
---------- ----------
$ 507,821 $ 519,189
========== ==========
S2PI-12
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Supplementary Statements of Cash Flows data is as follows (in thousands):
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
-------------- -------------
Cash paid (received) during the period for:
Interest........................... $ 125,642 $ 37,796
============= ==========
Income taxes, net of refunds....... $ 2,145 $ (13,077)
============= ==========
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 substantially disposed of by December 31, 1999. Depreciation expense
associated with these assets approximated $2.6 million in the first half of
1998.
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 had been eliminated and the
severance payments had been made by June 30, 1999. Subsequent to the decisions
made in conjunction with the acquisitions, management decided to discontinue
certain SKU's within product lines (principally generators, compressors and
propane cylinders). As a result, in the third quarter of 1998, the Company
recorded as Cost of Goods Sold, an additional provision for impairment of fixed
assets of $3.1 million in an acquired entity, relating to assets taken out of
service for which there was no remaining value. These fixed assets were taken
out of service at the time of the write-down and consequently were not
depreciated further after the write-down. Depreciation expense associated with
these assets approximated $0.8 million in 1998.
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, during 1998, when the facts
and circumstances were known that such sales volume would not materialize, the
Company recorded $48.6 million in charges (of which $46.4 million and $2.2
million were recorded in the second and third quarters, respectively) to
properly state this inventory at the lower-of-cost-or-market. This inventory
primarily related to certain appliances, grills and grill accessories.
S2PI-13
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
7. ASSET IMPAIRMENT AND OTHER CHARGES -(CONTINUED)
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 $86.2 million
through September 30, 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 nine months ended September
30, 1999, 8 positions were eliminated and $0.1 million of the severance was
paid. The remaining positions are expected to be eliminated by December 31,
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
nine months ended September 30, 1999, the Company expended $0.2 million
for lease payments and termination fees and $0.4 million relating to
discontinued operations, respectively. It is anticipated that the
remaining restructuring accrual of $1.1 million ($1.0 million relating
to lease payments and termination fees and $0.1 million to discontinued
operations) will be paid through 2006.
S2PI-14
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
8. SHAREHOLDERS' EQUITY
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 the
Company's common stock. 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
litigation as to the Company's obligations to these individuals under prior
agreements and arising from their termination. (See Note 10).
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 per share 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 of Coleman: (1) the holders of the voting
preferred stock would receive a preferential distribution equal to $10.35 per
share, 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 Coleman 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
S2PI-15
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
8. SHAREHOLDERS' EQUITY - (CONTINUED)
PURCHASE OF COLEMAN PREFERRED STOCK - (Continued)
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 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 the Company were used by Coleman to make a partial repayment
of loans outstanding from Sunbeam under the Intercompany Note.
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 is
largely due 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
HOUSEHOLD LEISURE INTERNATIONAL CORPORATE TOTAL
------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1999
Net sales to unaffiliated customers...... $ 555,207 $ 774,698 $ 444,305 $ 12,218 $ 1,786,428
Intersegment net sales................... 57,070 126,681 6,896 -- 190,647
Segment earnings (loss).................. 22,363 71,877 41,021 (93,872) 41,389
Segment depreciation expense............. 19,436 27,654 4,034 4,392 55,516
NINE MONTHS ENDED SEPTEMBER 30, 1998
Net sales to unaffiliated customers...... $ 454,974 $ 524,409 $ 328,628 $ 14,118 $ 1,322,129
Intersegment net sales................... 50,103 76,538 53,143 -- 179,784
Segment (loss) earnings.................. (29,608) (41,520) 11,541 (78,425) (138,012)
Segment depreciation expense............. 19,778 18,260 3,812 3,087 44,937
SEGMENT ASSETS
September 30, 1999....................... $ 787,956 $ 1,771,883 $ 403,609 $ 354,526 $ 3,317,974
December 31, 1998........................ 864,745 1,782,994 413,755 344,023 3,405,517
</TABLE>
S2PI-16
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
9. SEGMENT, CUSTOMER AND GEOGRAPHIC DATA - (CONTINUED)
Reconciliation of selected segment information to Sunbeam's consolidated
totals:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
Net sales:
Net sales for reportable segments.................... $ 1,977,075 $ 1,501,916
Elimination of intersegment net sales................ (190,647) (179,787)
----------- -----------
Consolidated net sales............................ $ 1,786,428 $ 1,322,129
=========== ===========
Segment earnings (loss):
Total earnings (loss) for reportable segments........ $ 41,389 $ (138,012)
Unallocated amounts:
Interest expense.................................. (136,631) (88,476)
Other income, net................................. 4,619 4,065
Amortization of intangible assets................. (38,401) (25,186)
Former employees deferred
compensation (Note 8) and severance........... -- (34,410)
Provision for inventory (Note 7).................. -- (86,167)
Asset impairment (Note 7)......................... -- (32,642)
Issuance of warrants (Note 2)..................... -- (70,000)
Office relocation expense......................... -- (4,011)
Other charges..................................... -- (1,248)
----------- ------------
(170,413) (338,075)
----------- ------------
Consolidated loss before income taxes,
minority interest and extraordinary charge..... $ (129,024) $ (476,087)
============ ============
</TABLE>
S2PI-17
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
On April 23, 1998, two class action lawsuits were filed on behalf of
purchasers of the Company's common stock in the U.S. District Court for the
Southern District of Florida against the Company and some of its present and
former directors and former officers alleging violations of the federal
securities laws as discussed below. After that date, approximately fifteen
similar class actions were filed in the same Court. One of the lawsuits also
named as defendant Arthur Andersen, the Company's independent accountants for
the period covered by the lawsuit.
On June 16, 1998, the court entered an order consolidating all these suits
and all similar class actions subsequently filed (collectively, the
"Consolidated Federal Actions") and providing time periods for the filing of a
consolidated amended complaint and defendants' response thereto. On June 22,
1998, two groups of plaintiffs made motions to be appointed lead plaintiffs and
to have their selection of counsel approved as lead counsel. On July 20, 1998,
the court entered an order appointing lead plaintiffs and lead counsel. This
order also stated that it shall apply to all subsequently filed actions that are
consolidated with the other actions. On August 28, 1998, plaintiffs in one of
the subsequently filed actions filed an objection to having their action
consolidated pursuant to the June 16, 1998 order, arguing that the class period
in their action differs from the class periods in the originally filed
consolidated actions. On December 9, 1998, the court entered an order overruling
plaintiffs' objections and affirming its prior order appointing lead plaintiffs
and lead counsel.
On January 6, 1999, plaintiffs filed a consolidated amended class action
complaint against the Company, some of its present and former directors and
former officers, and Arthur Andersen. The consolidated amended class action
complaint alleges that, in violation of section 10(b) of the Exchange Act and
SEC Rule 10b-5, defendants made material misrepresentations and omissions
regarding the Company's business operations, future prospects and anticipated
earnings per share, in an effort to artificially inflate the price of the
Company's common stock and call options, and that, in violation of section 20(a)
of the Exchange Act, the individual defendants exercised influence and control
over the Company, causing the Company to make material misrepresentations and
omissions. The consolidated amended complaint seeks an unspecified award of
money damages. On February 5, 1999, plaintiffs moved for an order certifying a
class consisting of
S2PI-18
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES - (Continued)
LITIGATION - (Continued)
all persons and entities who purchased the Company's common stock or who
purchased call options or sold put options with respect to the Company's common
stock during the period April 23, 1997 through June 30, 1998, excluding the
defendants, their affiliates, and employees of the Company. Defendants' response
to the motion for class certification was filed on May 6, 1999. On March 8,
1999, all defendants who had been served with the consolidated amended class
action complaint moved to dismiss it. Under the Private Securities Litigation
Reform Act of 1995, all discovery in the consolidated action is stayed pending
resolution of the motions to dismiss.
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, the Company'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 shareholders
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 shareholders 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
approved the settlement on November 12, 1999. Under the terms of the settlement,
the Company will issue to Coleman minority shareholders and plaintiffs' counsel
in this action warrants to purchase up to approximately 4.98 million shares of
the Company's common stock at $7 per share, subject to anti-dilution
adjustments. Coleman minority shareholders 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 in the
fourth quarter of 1999 or early in the first quarter of 2000. Issuance of these
warrants will be accounted for as additional purchase consideration.
S2PI-19
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES - (Continued)
LITIGATION - (Continued)
During the months of August and October 1998, purported class action and
derivative lawsuits were filed in the Court of Chancery of the State of Delaware
in New Castle County and in the U.S. District Court for the Southern District of
Florida by shareholders of the Company against the Company, MacAndrews & Forbes
and some of the Company's present and former directors. These complaints allege
that the defendants breached their fiduciary duties when the Company entered
into a settlement agreement with the MacAndrews & Forbes subsidiary that sold
the Company a controlling interest in Coleman. In the settlement agreement the
MacAndrews & Forbes subsidiary released the Company from threatened claims
arising out of the Company's acquisition of its interest in Coleman, and
MacAndrews & Forbes agreed to provide management support to the Company. Under
the settlement agreement, the MacAndrews & Forbes subsidiary was granted a
warrant expiring August 24, 2003 to purchase up to an additional 23 million
shares of the Company's common stock at an exercise price of $7 per share,
subject to anti-dilution provisions. The plaintiffs have requested an injunction
against the issuance of stock to MacAndrews & Forbes upon the exercise of its
warrant and unspecified money damages. These complaints also allege that the
rights of the minority shareholders have been compromised, as the settlement
would normally require shareholder approval under the rules and regulations of
the NYSE. The audit committee of the Company's board of directors determined
that obtaining such shareholder approval would have seriously jeopardized the
financial viability of the Company which is an allowable exception to the NYSE
shareholder approval requirements. By order of the Delaware Court of Chancery
dated January 7, 1999, the derivative actions filed in that court were
consolidated, and the Company and the other defendants have moved to dismiss
these actions. The action filed in the U.S. District Court for the Southern
District of Florida has been dismissed.
On September 16, 1998, an action was filed in the 56th Judicial District
Court of Galveston County, Texas alleging various claims in violation of the
Texas Securities Act and Texas Business and Commercial Code as well as common
law fraud as a result of the Company's alleged misstatements and omissions
regarding the Company's financial condition and prospects during a period
beginning May 1, 1998 and ending June 16, 1998, in which the U.S. National Bank
of Galveston, Kempner Capital Management, Inc. and Legacy Trust Company engaged
in transactions in the Company's common stock on their own behalf and on behalf
of their respective clients. The Company is the only named defendant in this
action. The complaint requests recovery of compensatory damages, punitive
damages and expenses in an unspecified amount. This action 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 in the above action
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 the Company's 1996 and 1997 financial
statements. On September 29, 1999, Arthur Andersen filed a motion for leave to
join the Company and certain of its former officers as responsible third parties
and contribution defendants. Their motion was denied.
S2PI-20
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES - (Continued)
LITIGATION - (Continued)
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 the Company and some of the Company's former
officers and directors, alleging violations of the federal securities laws and
common law fraud. The complaint alleges that the Company's offering memorandum
used for the marketing of the Debentures contained false and misleading
information regarding the Company's financial position and that the defendants
engaged in a plan to inflate the Company's earnings for the purpose of
defrauding the plaintiffs and others. The plaintiffs seek a declaration that
defendants violated federal securities laws and either unspecified monetary
damages or rescission of their purchase of the Debentures. 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 reconsideration of the court
order, which motion the court denied on May 24, 1999. The plaintiffs have
appealed to the Texas Court of Appeals the order dismissing the case and that
appeal is pending.
On April 12, 1999, a class action lawsuit was filed in the U.S. District
Court for the Southern District of Florida. The lawsuit was filed on behalf of
persons who purchased Debentures during the period of March 20, 1998 through
June 30, 1998, inclusive, but after the initial offering of such Debentures. The
complaint asserts that the Company made material omissions and
misrepresentations that had the effect of inflating the market price of the
Debentures. The complaint names as defendants the Company, its former auditor,
Arthur Andersen, and two former Company officers, Messrs. Dunlap and Kersh. The
plaintiff is an institution which allegedly acquired in excess of $150,000,000
face amount of the Debentures and now seeks unspecified money damages. The
Company was served on April 16, 1999 in connection with this pending lawsuit.
The Company has requested that this action be coordinated with the Consolidated
Federal Actions.
S2PI-21
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES - (Continued)
LITIGATION - (Continued)
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 the Company. Messrs. Dunlap and Kersh are requesting
a finding by the arbitrators that the Company terminated their employment
without cause and that they should be awarded certain benefits based upon 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 shareholders. On March 19, 1999, the
plaintiff in the April 7, 1998 action discussed above moved for an injunction on
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 the Company and
Messrs. Dunlap and Kersh. An answer was filed by Messrs. Dunlap and Kersh
generally denying the Company's counterclaims. 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 has filed
a motion with the Judicial Panel on Multidistrict Litigation to consolidate this
action with the Consolidated Federal Actions.
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.
S2PI-22
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES - (Continued)
LITIGATION - (Continued)
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 the 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
the Company in the U.S. District Court for the Southern District of New York
requesting a declaratory judgment of the court that the directors' and officers'
liability insurance policy for excess coverage issued by American Alliance was
invalid and/or had been properly canceled by American Alliance. American
Alliance has filed a motion for summary judgment on the ground that coverage was
never bound. The Company has opposed that motion. As a result of a motion made
by the Company, this case has been transferred to the U.S. District Court for
the Southern District of Florida for coordination and consolidation of pre-trial
proceedings with the various actions pending in that court. On October 20, 1998,
an action was filed by Federal Insurance Company in the U.S. District Court for
the Middle District of Florida requesting the same relief as that requested by
American in the previously filed action as to additional coverage levels under
the Company's directors' and officers' liability insurance policy. 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 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.
S2PI-23
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES - (Continued)
LITIGATION - (Continued)
By letter dated June 17, 1998, the staff of the Division of Enforcement of
the SEC advised the Company that it was conducting an informal inquiry into the
Company's accounting policies and procedures and requested that the Company
produce certain documents. On July 2, 1998, the SEC issued a Formal Order of
Private Investigation, designating SEC officers to take testimony and pursuant
to which a subpoena was served on the Company requiring the production of
certain documents. On November 4, 1998, another SEC subpoena requiring the
production of additional documents was received by the Company. 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 SEC has not commenced any civil or administrative proceedings as a
result of its investigation, and the Company cannot predict at this time whether
the SEC will seek to impose any monetary or other penalties against the Company.
Under these circumstances, the Company cannot estimate the duration of the
investigation or its outcome.
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 for defending such actions. 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 plaintiffs 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 loss
and records the minimum end of the range. As of September 30, 1999, the Company
had established accruals for litigation matters of $22.6 million (representing
$11.3 million and $11.3 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 settlement amounts and legal fees,
respectively). It is anticipated that the $22.6 million accrual will be paid as
follows: $5.2 million in 1999, $14.9 million in 2000, and $2.5 million in 2001.
The Company believes, based on information known to the Company on September 30,
1999, that anticipated probable costs of litigation matters existing as of
September 30, 1999 have been adequately reserved, to the extent determinable.
S2PI-24
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES - (Continued)
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, was a defendant
in the case Gordon v. BRK Brands, Inc., et al. 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) 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's obligation under the settlement is to pay
the balance of its self-insured retention.
The Company is party to various personal injury and property damage
lawsuits relating to its products and incidental to its business. Annually, the
Company sets its product liability insurance program based on the Company's
current and historical claims experience and the availability and cost of
insurance. The Company's program for 1999 was comprised of a self-insurance
retention of $3.5 million per occurrence, and was limited to $28.0 million in
the aggregate.
Cumulative amounts estimated to be payable by the Company with respect to
pending and potential claims for all years in which the Company is liable under
its self-insurance retention have been accrued as liabilities. Such accrued
liabilities are necessarily based on estimates (which include actuarial
determinations made by independent actuarial consultants as to liability
exposure, taking into account prior experience, numbers of claims and other
relevant factors); thus, the Company's ultimate liability may exceed or be less
than the amounts accrued. The methods of making such estimates and establishing
the resulting liability are reviewed continually and any adjustments resulting
therefrom are reflected in current operating results.
S2PI-25
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES - (Continued)
PRODUCTS LIABILITY - (Continued)
Historically, product liability awards have rarely exceeded the Company's
individual per occurrence self-insured retention. There can be no assurance,
however, that the Company's future product liability experience will be
consistent with its past experience. Based on existing information, the Company
believes that the ultimate conclusion of the various pending product liability
claims and lawsuits of the Company, 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.
ENVIRONMENTAL MATTERS
The Company's operations, like those of comparable businesses, are subject
to certain federal, state, local and foreign environmental laws and regulations
in addition to laws and regulations regarding labeling and packaging of products
and the sales of products containing certain environmentally sensitive
materials. The Company believes it is in substantial compliance with all
environmental laws and regulations which are applicable to its operations.
Compliance with environmental laws and regulations involves certain continuing
costs; however, such costs of ongoing compliance have not resulted, and are not
anticipated to result, in a material increase in the Company's capital
expenditures or to have a material adverse effect on the Company's results of
operations, financial condition or competitive position.
In addition to ongoing environmental compliance at its operations, the
Company also is actively engaged in environmental remediation activities many of
which related to divested operations. As of December 31, 1998, the Company has
been identified by the United States Environmental Protection Agency ("EPA") or
a state environmental agency as a potentially responsible party ("PRP") in
connection with seven sites subject to the federal Superfund Act and five sites
subject to state Superfund laws comparable to the federal law (collectively the
"Environmental Sites"), exclusive of sites at which the Company has been
designated (or expects to be designated) as a de minimis (less than 1%)
participant.
The Superfund Act, and related state environmental remediation laws,
generally authorize governmental authorities to remediate a Superfund site and
to assess the costs against the PRPs or to order the PRPs to remediate the site
at their expense. Liability under the Superfund Act is joint and several and is
imposed on a strict basis, without regard to degree of negligence or
culpability. As a result, the Company recognizes its responsibility to determine
whether other PRPs at a Superfund site are financially capable of paying their
respective shares of the ultimate cost of remediation of the site. Whenever the
Company has determined that a particular PRP is not financially responsible, it
has assumed for purposes of establishing reserve amounts that such PRP will not
pay its respective share of the costs of remediation. To minimize the Company's
potential liability with respect to the Environmental Sites, the Company has
actively participated in steering committees and other groups of PRPs
established with respect to such sites. The Company currently is engaged in
active remediation activities at 11 sites, six of which are among the
Environmental Sites referred to above, and five of which have not been
designated as Superfund sites under federal or state law. The remediation
efforts in which the Company is involved include facility investigations,
including soil and groundwater investigations, corrective measure studies,
including feasibility studies, groundwater monitoring, extraction and treatment,
soil sampling, excavation and treatment relating to environmental clean-ups. In
certain instances, the Company has entered into agreements with governmental
authorities to undertake additional investigatory activities and in other
instances has agreed to implement appropriate remedial actions. The Company has
also established reserve amounts for certain non-compliance matters including
those involving air emissions.
S2PI-26
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES - (Continued)
ENVIRONMENTAL MATTERS - (Continued)
The Company has established reserves to cover the anticipated probable
costs of investigation and remediation, based upon periodic reviews of all sites
for which the Company has, or may have remediation responsibility. The Company
accrues environmental investigation and remediation costs when it is both
probable that a liability has been incurred and the amount can be reasonably
estimated and the Company's responsibility is established. Generally, the timing
of these accruals coincides with the earlier of formal commitment to an
investigation plan, completion of a feasibility study or the Company's
commitment to a formal plan of action. As of September 30, 1999 and December 31,
1998, the Company's environmental reserves were $23.3 million (representing
$21.6 million for the estimated costs of facility investigations, corrective
measure studies or known remedial measures, and $1.7 million for estimated legal
costs) and $25.0 million, (representing $22.9 million for the estimated costs of
facility investigations, corrective measure studies or known remedial measures,
and $2.1 million for estimated legal costs) respectively. It is anticipated that
the $23.3 million accrual at September 30, 1999 will be paid as follows: $5.2
million in 1999, $3.9 million in 2000, $1.8 million in 2001, $2.0 million in
2002, $0.6 million in 2003 and $9.8 million, thereafter. The Company has accrued
its best estimate of investigation and remediation costs based upon facts known
to the Company at such dates and because of the inherent difficulties in
estimating the ultimate amount of environmental costs, which are further
described below, these estimates may materially change in the future as a result
of the uncertainties described below. Estimated costs, which are based upon
experience with similar sites and technical evaluations, are judgmental in
nature and are recorded at undiscounted amounts without considering the impact
of inflation and are adjusted periodically to reflect changes in applicable laws
or regulations, changes in available technologies and receipt by the Company of
new information. It is difficult to estimate the ultimate level of future
environmental expenditures due to a number of uncertainties surrounding
environmental liabilities. These uncertainties include the applicability of laws
and regulations, changes in environmental remediation requirements, the
enactment of additional regulations, uncertainties surrounding remediation
procedures including the development of new technology, the identification of
new sites for which the Company could be a PRP, information relating to the
exact nature and extent of the contamination at each site and the extent of
required cleanup efforts, the uncertainties with respect to the ultimate outcome
of issues which may be actively contested and the varying costs of alternative
remediation strategies. The Company continues to pursue the recovery of some
environmental remediation costs from certain of its liability insurance
carriers; however, such potential recoveries have not been offset against
potential liabilities and have not been considered in determining the Company's
environmental reserves.
Due to uncertainty over remedial measures to be adopted at some sites, the
possibility of changes in environmental laws and regulations and the fact that
joint and several liability with the right of contribution is possible at
federal and state Superfund sites, the Company's ultimate future liability with
respect to sites at which remediation has not been completed may vary from the
amounts reserved as of September 30, 1999.
The Company believes, based on existing information for sites where costs
are estimable, that the costs of completing environmental remediation of all
sites for which the Company has a remediation responsibility have been
adequately reserved and that the ultimate resolution of these matters will not
have a material adverse effect upon the Company's financial condition, results
of operations or cash flows.
S2PI-27
<PAGE>
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES - (Continued)
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 has accrued the minimum liability and an offsetting
asset which is being amortized and included in interest expense through April
10, 2000, the term of the current amendment extension period.
The Company has not accrued 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
On November 9, 1999, the Company announced a plan to divest Eastpak and
certain non-essential assets. Net proceeds from these assets sales are estimated
to be $200 million and will be primarily used to pay down debt.
S2PI-28
<PAGE>
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, 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.
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 ("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 Coleman 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 of a
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 employee stock 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 fourth
quarter of 1999 or early in the first quarter of 2000, although there can be no
assurance that the merger will occur during that time. See the discussion below
under the heading "Issuance of Warrants to M&F" 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 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 approximately $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.
S2PI-29
<PAGE>
NON-RECURRING CHARGES
Consolidated operating results for 1999 and 1998 were impacted by a number
of largely non-recurring charges. Operating income, adjusted for these items, is
summarized in the following table and succeeding narrative.
<TABLE>
<CAPTION>
COMBINED HISTORICAL
THREE MONTHS ENDED NINE MONTHS ENDED RESULTS
---------------------------- ---------------------------- NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998 1998
------------- ------------- ------------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
(Amounts in millions)
Net sales - As reported..................... $ 601.6 $ 496.0 $ 1,786.4 $ 1,322.1 $ 1,624.0
Gross margin - As reported.................. 158.8 67.4 452.3 48.7 123.8
Non-recurring items:
Provision for inventory................. - 2.2 - 86.2 86.2
Asset impairment........................ - 3.1 - 32.7 32.7
Purchase accounting..................... - 7.6 - 28.1 28.1
------- ------- --------- --------- ---------
Adjusted gross margin................. 158.8 80.3 452.3 195.7 270.8
Selling, general and administrative
expense ("SG&A") - As reported........... 154.5 228.4 449.3 440.4 541.3
Non-recurring items:
Issuance of warrants to M&F............. - (70.0) - (70.0) (70.0)
Former employees' deferred
compensation/severance............... - (3.8) - (34.4) (34.4)
Year 2000 and system initiatives
expenses.............................. (5.2) (2.1) (18.7) (2.1) (2.1)
Restatement related expenses............ - (10.8) - (10.8) (10.8)
Office relocation expense............... - (4.0) - (4.0) (4.0)
------- ------- --------- --------- ---------
Adjusted SG&A expense................. 149.3 137.7 430.6 319.1 420.0
------- ------- --------- --------- ---------
Adjusted operating income (loss)............ $ 9.5 $ (57.4) $ 21.7 $ (123.4) $ (149.2)
======= ======= ======== ======== =========
</TABLE>
The combined results from operations for the nine months ended September
30, 1998 include the combined historical results of Coleman, Signature Brands
and First Alert from the beginning of 1998 to their respective acquisition
dates. The combined historical results do not include pro forma purchase
accounting adjustments including those relating to the amortization of the
purchase price of these acquisitions. Certain amounts included in the historical
results of the acquired companies have been reclassified to conform to the
Company's presentation. Presentation of these combined results is made to
enhance comparability between the periods presented and such amounts are not
necessarily indicative of the combined results that would have occurred had
these acquisitions been consummated at the beginning of 1998.
PROVISION FOR INVENTORY
In the second and third quarters of 1998, the Company recorded charges
totaling $86.2 million as a result of the following:
o Inventories were built during 1997 and the first half of 1998 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, during 1998, when the facts and circumstances were known
that such sales volume would not materialize, the Company recorded
$48.6 million in charges (of which $46.4 million and $2.2 million were
recorded in the second and third quarters, respectively) to properly
state this inventory at the lower-of-cost-or-market. This inventory
primarily related to certain appliances, grills and grill accessories.
o A charge of $11.0 million was recorded during the second quarter of
1998 for excess inventories for raw material and work in process that
will not be used due to outsourcing the production of breadmakers,
toasters, and some other appliances.
S2PI-30
<PAGE>
o In the second quarter of 1998, the Company made the decision to exit
certain product lines, primarily air and water filtration products and
eliminate some stock keeping units ("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 of 1998 to properly state this inventory at
the lower-of-cost-or market.
These charges to record excess inventories at the lower-of-cost-or-market
were based upon management's best estimate of net realizable value. (See Note 7
to the Condensed Consolidated Financial Statements.)
In addition to the charge taken in 1998, the excess and obsolete inventory
referenced above has impacted the Company's operating results in several ways,
with two primary effects. First, gross margins have been impacted by sales, at
below normal prices, of obsolete inventory into non-traditional channels and
excess inventory into traditional channels. In addition, due to the high levels
of excess inventory at the end of 1998, the Company's usage of its manufacturing
facilities has been lower than normal, resulting in lower fixed cost absorption,
which in turn, reduced gross margins in 1999.
ASSET IMPAIRMENT
During 1998, management made decisions 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 some SKU's within existing product lines,
primarily relating to appliances, grills and grill accessories). As a result,
some facilities and equipment held by the Company at such time are either no
longer used or are utilized in a significantly different manner. Accordingly, a
charge of $29.6 million was recorded in Cost of Goods Sold to write some of
these assets down to their estimated fair market value. Subsequent to the
decisions made in conjunction with the acquisitions, management decided to
discontinue certain SKU's within product lines, principally generators,
compressors and propane cylinders. As a result, in the third quarter of 1998,
the Company recorded in Cost of Goods Sold an additional provision for
impairment of fixed assets of $3.1 million in an acquired entity relating to
assets taken out of service for which there was no remaining value. These assets
are expected to be substantially disposed of by December 31, 1999. (See Note 7
to the Condensed Consolidated Financial Statements.)
PURCHASE ACCOUNTING
The Company recorded the 1998 acquisitions using the purchase method of
accounting. In accordance with this accounting method, inventory pertaining to
the acquisitions was recorded at fair value. The fair value of the inventory
exceeded the book value reflected on the balance sheets of the acquired
companies as of the respective acquisition dates. The excess of the fair value
of inventory over its pre-acquisition book value was recorded in cost of sales
as the inventory was sold. The non-recurring impact of this purchase accounting
adjustment was $20.5 million and $7.6 million in the second and third quarters
of 1998, respectively.
S2PI-31
<PAGE>
ISSUANCE OF WARRANTS TO M&F
On August 12, 1998, the Company announced that, following investigation and
negotiation conducted by a Special Committee of the Board of Directors
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
accounted for the issuance of this warrant in the third quarter of 1998 as a
cost of settling a potential claim. Accordingly, a $70.0 million non-cash SG&A
expense was recorded in the third quarter of 1998, based upon a valuation
performed as of August 1998 using facts existing at that time. The valuation was
conducted by an independent consultant engaged by the special committee of the
board of directors.
FORMER EMPLOYEES' DEFERRED COMPENSATION/SEVERANCE
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 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
executives' prior employment agreements, 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. Total compensation
expense recognized in the first quarter of 1998 related to these items was
approximately $31 million. The Company also recognized approximately $3.8
million of severance for former employees in the third quarter of 1998. (See
Note 8 to the Condensed Consolidated Financial Statements.)
YEAR 2000 AND SYSTEMS INITIATIVES EXPENSES
See "Year 2000 Readiness Disclosure" within this Item II - "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
RESTATEMENT RELATED EXPENSES
On June 30, 1998, the Company announced that the Audit Committee was
initiating a review into the accuracy of the Company's prior financial
statements. The Audit Committee's review was completed and, as a result of its
findings, the Company was required to restate its previously issued consolidated
financial statements for 1996 and 1997 and the first quarter of 1998. In
connection with the restatement efforts, the Company incurred $10.8 million of
costs in the third quarter of 1998 principally representing legal and accounting
and auditing costs of $6.1 million and $4.7 million, respectively.
OFFICE RELOCATION EXPENSE
In 1998, the Company made the decision to relocate the corporate
headquarters and exit several existing building leases in connection with a plan
to consolidate office space. Accordingly, a charge of $4.0 million was recorded
in the third quarter primarily related to lease termination fees and
cancellation penalties.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Consolidated net sales for the three months ended September 30, 1999 and
1998 were $601.6 million and $496.0 million respectively, an increase of $105.6
million or approximately 21%. This increase was driven primarily by the Outdoor
Leisure group where net sales increased $62.5 million to $221.1 million
S2PI-32
<PAGE>
in the third quarter of 1999. This increase was predominately driven by strong
retail replenishment demand of outdoor recreation products and
Powermate/registered trademark/ generators (aggregating approximately $58
million. The increase in outdoor recreation products and Powermate/registered
trademark/ generators is believed to be partially attributable to heightened
consumer sensitivity to the need for emergency preparedness. This increased
sensitivity is believed to be reflective of a combination of factors including
weather conditions and Year 2000 considerations. Outdoor cooking product net
sales increases in the 1999 period as compared to the third quarter of 1998
accounted for the balance of the sales increase. The increase in outdoor cooking
product sales was largely the result of strong retail conditions. Household net
sales increased $20.7 million to $239.9 million in 1999. After adjusting for the
Company's estimate of the effect of reduced shipments in the year ago quarter to
allow trade inventories to return to normal levels, which impacted all segments,
but which was most significant for the Household segment. Household segment
sales were essentially flat as compared to the third quarter in 1998. Within the
Household segment, net sales of personal care and health products increased as a
result of a strengthening retail environment largely offset by decreases in
sales of appliances and timing of First Alert product sales. International net
sales increased $25.3 million to $139.0 million. This increase in net sales was
largely driven by improved net sales in Canada of approximately $12 million,
resulting predominantly from strong retail demand for Powermate/registered
trademark/. Net sales increases in Europe, Japan and Asia Pacific, resulting
primarily from increased sales of outdoor recreation products and reduced levels
of sales returns, account for the remainder of the increase in International net
sales.
Gross margin for the third quarter in 1999 was $158.8 million or $91.4
million higher than the comparable period in 1998. Excluding the effects of 1998
non-recurring items, as summarized above under "Non-Recurring Charges", gross
margin was $80.3 million in the third quarter of 1998. As a percentage of net
sales, gross margin improved to approximately 26% in the third quarter of 1999
as compared to the third quarter 1998 gross margin of approximately 14% and 1998
adjusted gross margin of approximately 16%. Three-quarters of the increase in
gross margin dollars was generated through higher sales volumes, volume-related
manufacturing fixed cost absorption improvements and improvements in
manufacturing performance driven by the Outdoor Leisure group which contributed
over 50% of the improvement in total gross margin dollars in the third quarter
of 1999. Decreases in customer allowances, which are deductions from gross sales
to arrive at net sales, along with improvements in the product sales mix
accounted for the remainder of the improvement in gross margin in the third
quarter.
SG&A expense in the third quarter of 1999 was $154.5 million, representing
a 32.4% decrease over the same period in the prior year. Excluding the effects
of non-recurring items, as summarized above under "Non-Recurring Charges", SG&A
expense for 1999 was approximately $12 million higher than the same period in
1998. The increase in SG&A expense was driven predominantly by higher net sales
during the quarter and costs related to additional personnel, which together
account for approximately $20 million. Approximately two-thirds of this increase
is attributable to higher levels of selling and administrative costs primarily
in the Outdoor Leisure and International segments driven by increased net sales.
The remaining increase in SG&A expense is primarily related to additional
personnel, largely as a result of the Company building staffing levels to
support future growth, a process that commenced in the third quarter of 1998. In
addition, SG&A expense in 1999 includes costs associated with certain redundant
operations resulting from the Company's 1998 acquisitions which operations the
Company is integrating, as well as the decision to bring in-house certain
functions that had previously been outsourced. The Company is in the process of
fully integrating certain of these functions and expects that when this process
has been completed consolidated SG&A expense for these functions will be
reduced. Partially offsetting these increases in SG&A expense are certain 1998
expenses which did not reoccur in 1999. These 1998 expenses include increases
associated with restructuring reserve at Coleman (approximately $7 million) and
higher bad debt expense (approximately $3 million).
Consolidated operating results for the third quarters of 1999 and 1998,
were a profit of $4.3 million in 1999 and a loss of $161.0 million in 1998.
Operating results, as adjusted, were a profit of $9.5 million and a loss of
$57.4 million in the third quarter of 1999 and 1998, respectively. This change
S2PI-33
<PAGE>
resulted from the factors discussed above.
Interest expense, net in the third quarter of 1999 was $48.3 million as
compared to $42.7 million in the same period in the prior year. Approximately
40% of this increase is attributable to higher levels of borrowings during the
third quarter of 1999. The increased level of borrowings was attributable to
capital expenditures since the third quarter of 1998. The balance of the
increase was driven by the amortization of the loan commitment fee
(approximately $1 million) the Company is obligated to pay under the terms of
the New Credit Facility and the debenture expense related to liquidated damages
payable to debenture holders (approximately $1 million). See Notes 3 and 10 to
the Condensed Consolidated Financial Statements.
Other income, net of $5.2 million for the third quarter of 1999 included a
gain of approximately $4 million relating to the sale of the Mexico City
facility. This gain was partially offset by losses from other miscellaneous
asset sales of approximately $1.5 million. The balance of other income, net in
1999 resulted from favorable foreign exchange rates, primarily from the
Company's operations in Japan. Other income, net of $11.0 million for the third
quarter of 1998 included $8.0 million from the settlement of a lawsuit. The
balance of other income, net in 1999 resulted from favorable foreign exchange
rates, primarily from Mexico.
The minority interest reported for the third quarter of 1999 and 1998
relates to the minority interest held in Coleman by public shareholders.
Tax expense recorded in the third quarter of 1999 ($3.7 million) related
primarily to taxes on foreign income. Income taxes in the third quarter of 1998
reflect tax benefits on earnings of foreign operations. No net tax benefit was
recorded due to the Company's U.S. losses in either year as it is management's
assessment that the Company cannot demonstrate that it is more likely than not
that deferred tax assets resulting from these losses would be realized through
future taxable income.
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. 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 the Company were used by Coleman to make a partial
repayment of loans outstanding from Sunbeam under the Intercompany Note. (See
Note 8 to the Condensed Consolidated Financial Statements.)
On November 9, 1999, the Company announced a plan to divest Eastpak and
also plans to divest certain non-essential assets. Proceeds from these assets
sales are estimated to be $200 million and will be primarily used to pay down
debt.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Net sales for the nine months ended September 30, 1999 and 1998 were
$1,786.4 million and $1,322.1 million respectively, an increase of $464.3
million. Results for the nine months ended September 30, 1998 include Coleman,
Signature Brands and First Alert from their respective acquisition dates. After
adjusting 1998 sales to include sales of the acquired companies for the periods
from the beginning of 1998 through the respective dates of acquisition, combined
historical net sales would be $1,624.0 million. 1999 net sales increased
approximately $162 million or approximately 10% over 1998 combined historical
net sales. Information that adjusts for the results of the acquisitions prior to
the actual acquisition dates (the "combined historical" information) is provided
S2PI-34
<PAGE>
for informational purposes only and is to enhance comparability of the period
presented. This information is not necessarily indicative of what the combined
results would have been had these acquisitions occurred at the beginning of the
periods presented or the results for any future period. The increase in net
sales is driven by the Outdoor Leisure group which had an increase of
approximately $123 million in 1999 as compared to the combined historical net
sales in the same period in the prior year. This increase over combined
historical net sales was largely due to sales of outdoor recreation products and
Powermate/registered trademark/ generators. The higher level of sales of these
products is believed to be partially attributable to heightened consumer
sensitivity to the need for emergency preparedness. The Company believes that
this heightened sensitivity is reflective of a combination of factors, including
weather conditions and Year 2000 considerations. Household net sales in 1999
increased approximately $11 million compared to 1998 combined historical net
sales. The Company believes that the decrease in shipments in the prior year in
order to allow trade inventories to return to a normal level is primarily
responsible for this increase. This factor affects the year to year comparisons
for each of the operating groups. Adjusting for the effect on 1998 of loading,
the Company believes that Household net sales in 1999 were approximately the
same as in the prior year. Within the Household segment, net sales of personal
care products increased as a result of a strengthening retail environment
largely offset by decreases in sales of appliances. International net sales in
1999 increased $30.3 million over 1998 combined historical net sales. Higher
sales in Canada, Europe and Japan resulted predominantly from strong retail
demand of Powermate/registered trademark/ and outdoor recreation products. This
increase was partially offset by the impact of weak economic conditions in Latin
America.
Gross margin for the first nine months of 1999 was $452.3 million or $403.6
million higher than the comparable period in 1998. Adjusting for the combined
results of the acquired companies and excluding the effects of 1998
non-recurring items, which are summarized above under the heading "Non-Recurring
Charges", gross margin for the first nine months of 1999 increased approximately
$182 million over the 1998 combined historical gross margin. As a percentage of
net sales, gross margin improved to approximately 25% in the first nine months
of 1999 as compared to approximately 4% in the 1998 period. The gross margin
percentage for the 1998 period adjusted for the non-recurring charges and for
the effect of the acquired companies was approximately 17% of combined
historical net sales. The Household group contributed approximately 30% of the
1999 gross margin improvement over the 1998 combined historical gross margin.
The improvement in the Household group's gross margin resulted primarily from
lower sales deduction rates, improved manufacturing processes and controls,
additional sales volume, and improved product mix. The Outdoor Leisure group
contributed approximately 50% of the 1999 gross margin improvement over the 1998
combined historical gross margin. Approximately 80% of the improvement in the
Outdoor Leisure group's gross margin resulted from additional volume and related
improved manufacturing overhead absorption, as well as improvements in
manufacturing. The balance of the increase resulted from improved product mix.
The International group contributed approximately 20% of the 1999 gross margin
improvement over 1998 combined historical gross margin. Approximately 40% of the
improvement in the International group's gross margin resulted from the shut
down of the Mexico City manufacturing facility which had experienced high
material usage costs and employee benefit costs in the prior year. The remaining
improvement resulted from increased sales volume, a lower level of product
returns and improved product mix.
SG&A expense for the first nine months of 1999 was $449.3 million, an
increase of $8.9 million or 2.0% over the same period in the prior year. After
adjusting 1998 SG&A expense to include the acquired companies' SG&A expense for
the period from the beginning of 1998 through the respective dates of
acquisition ($100.9 million), combined historical SG&A expense was $541.3
million. Since the combined historical 1998 SG&A expenses were derived by adding
the acquired companies' pre-acquisition period costs to the reported nine
months' results of Sunbeam, the combined historical SG&A expenses include $30.4
million of amortization of intangibles expense representing both pre- and
post-acquisition periods, as well as approximately $12 million of transaction
costs incurred by the acquired companies relating to them being purchased by
Sunbeam. Excluding these costs and the effects of 1998 non-recurring charges, as
described above under "Non-Recurring Charges", adjusted 1998 SG&A expenses were
approximately $378 million. Excluding
S2PI-35
<PAGE>
amortization of intangibles expense of $38.4 million for the first nine
months of 1999 and the non-recurring charges, as described above under
"Non-Recurring Charges", adjusted 1999 SG&A costs were $392.2 million,
an increase of approximately $14 million over adjusted 1998 SG&A
expense. As previously discussed, this increase is primarily
attributable to higher levels of selling and administrative costs driven
by increased net sales, headcount increases to support future growth and
costs associated with certain redundant operations resulting from the
Company's 1998 acquisitions which operations the Company is integrating
and the decision to bring in-house certain functions that had previously
been outsourced. The Company is in the process of fully integrating
certain of these functions and expects that when this process has been
completed consolidated SG&A expense for these functions will be reduced.
Partially offsetting these increases in SG&A expense are certain 1998
expenses which did not reoccur in 1999. These 1998 expenses include
increases associated with restructuring reserve at Coleman
(approximately $7 million) and higher bad debt expense (approximately $5
million).
Operating results for the first nine months of 1999 and 1998, were a profit
of $3.0 million in 1999 and a loss of $391.7 million in 1998. Adjusted for the
historical results of the acquired companies and excluding non-recurring
charges, as previously described, operating results for the 1999 and 1998
periods were a profit of $21.7 million and a loss of $149.2 million,
respectively. This change resulted from the factors discussed above.
Interest expense increased from $88.5 million in 1998 to $136.6 million in
1999. Approximately 75% of the change related to higher borrowing levels in 1999
resulting primarily from borrowings for the acquisitions that were outstanding
for the entire 1999 nine month period as compared to only a portion of the 1998
period. The balance of this increase was primarily driven by the amortization of
the loan commitment fee (approximately $2 million) the Company is obligated to
pay under the terms of the New Credit Facility and the expense related to
liquidated damages payable to debenture holders (approximately $3 million).
Other income, net of $4.6 million in 1999 included a gain of approximately
$4 million relating to the sale of the Mexico City facility. This gain was
partially offset by losses from other miscellaneous asset sales of approximately
$0.3 million. The remaining other income, net in 1999 resulted from favorable
foreign exchange rates, primarily from the Company's operations in Japan. Other
income, net of $4.1 million in 1998 included $8.0 million from the settlement of
a lawsuit partially offset by net foreign exchange losses, primarily from
Mexico.
The minority interest reported in 1999 and 1998 relates to the minority
interest held in Coleman by public shareholders.
Approximately $6 million of the $12.7 million income tax expense recorded
in 1999 related to U.S. tax liability generated by Coleman as a separate U.S.
tax filing entity. As previously discussed, in July 1999, the Company acquired a
sufficient ownership interest in Coleman to permit it to file consolidated U.S.
tax returns with Coleman for all future periods. The remaining tax expense
recorded in 1999 related to taxes on foreign income and was partially offset by
the favorable resolution of an income tax audit. Tax expense recorded in 1998
was nearly all related to foreign taxes. No net tax benefit was recorded on the
Company's losses in either year as it is management's assessment that the
Company cannot demonstrate that it is more likely than not that deferred tax
assets resulting from these losses would be realized through future taxable
income.
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. As a result of repayment of
certain indebtedness assumed in the Coleman acquisition, the Company also
recognized an extraordinary charge in the second quarter of 1998. The debt
assumed in connection with the Coleman acquisition was repaid as a result of the
requirements under the terms of the New Credit Facility. These extraordinary
charges consisted of redemption premiums ($106.9 million), unamortized debt
discount ($13.8 million) and unamortized deferred financing costs ($1.7 million)
and were net of income taxes ($10.7 million).
S2PI-36
<PAGE>
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. dollar 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%, 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, as amended, was declared effective on November 8, 1999.
The Company 's failure to file the registration statement by June 23, 1998 did
not constitute default under the terms of the debentures. From June 23, 1998
until the registration statement was declared effective, the Company was
required to pay to the debenture holders cash liquidated damages accruing, for
S2PI-37
<PAGE>
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 has
made total payments for liquidated damages since June 23, 1998 of $4.5 million,
of which $1.5 million related to damages for the period through December 31,
1998. A final payment of approximately $0.5 million, representing liquidated
damages from September 26, 1999 until the registration statement was declared
effective, will be payable on March 25, 2000.
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 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 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.
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. Following is a description of the significant terms of the bank credit
facility as amended April 15, 1999.
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 September 30, 1999.
S2PI-38
<PAGE>
As of September 30, 1999, approximately $1.5 billion was outstanding and
approximately $0.2 billion was available for borrowing under the bank credit
facility.
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 applicable interest margin is
subject to downward adjustment upon the occurrence of specified events including
a 1.00% decrease for LIBOR borrowings and a 0.75% decrease for base rate
borrowings concurrent with the effective date of the Coleman merger.
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 commitments 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.)
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;
S2P1-39
<PAGE>
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, as amended November 16, 1999, if the Company 's registration
statement in connection with the Coleman merger is not declared effective by the
SEC on or before January 10, 2000, 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 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 this date exceeds $125
million, but the Company is not required to prepay more than $69.3 million in
the aggregate as a result of this 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
September 30, 1999 and the March 31, 2000 scheduled term loan payments of $69.3
million each until April 10, 2000 as a result of the satisfaction by the Company
of the agreed upon conditions to the deferral. (See Note 3 to the Condensed
Consolidated Financial Statements.)
CASH FLOWS
As of September 30, 1999, the Company had cash and cash equivalents of
$29.1 million and total debt of $2.3 billion. Because the waivers granted by the
Company's lenders expire on April 10, 2000, the borrowings under the bank credit
facility, as well as other debt containing cross-default provisions, are
classified as current in the September 30, 1999 Condensed Consolidated Balance
Sheet. Cash used in operating activities during the first nine months of 1999
was $73.2 million compared to $224.7 million in the first nine months of 1998.
This change is primarily attributable to improved operating results after giving
effect to non-cash items, partially offset by increased working capital needs
during the 1999 period. The increase in cash used for working capital during the
1999 period was primarily driven by accounts receivable, which increased $159.4
million as compared to the 1998 period, primarily attributable to the Company's
Outdoor Leisure division which experienced stronger second and third quarters
sales in 1999 than in 1998. Additionally, working capital for the 1998 period
was positively affected by the timing of the Company's acquisition of Coleman,
which was at the peak of its inventory build for the 1998 selling season. Cash
used for this acquired inventory is not reflected in working capital for the
1998 period. As a result of the effect of Company's management of inventory
levels in 1999, cash flow improved approximately $81 million as compared to 1998
despite the favorable impact of the inventory acquired in connection with the
1998 acquisitions. Increases in accounts payable of approximately $30 million in
the first nine months of 1999 positively impacted cash flow whereas payables
used approximately $76 million of cash in the same period of 1998, resulting in
an improvement in cash flow period-to-period of approximately $106 million. The
S2PI-40
<PAGE>
increase in payables in the current period resulted from payable balances having
been reduced to a low level by year-end 1998. This reduction in payables, which
included an effort to reduce delinquent payables, began in the second quarter of
1998. Decreases in other liabilities, primarily accrued interest, account for
the majority of the balance of the cash used for working capital in 1999. The
Company participates in an accounts receivable securitization program to finance
a portion of its accounts receivable. See Note 4 to the Condensed Consolidated
Financial Statements.
In the first nine months of 1999, cash used in investing activities was
driven by capital expenditures of $63.2 million, primarily for information
systems, including expenditures for Year 2000 readiness and equipment and
tooling for new products. Capital spending in the comparable 1998 period was
$32.8 million and was primarily for several manufacturing efficiency
initiatives, equipment and tooling for new products and management information
systems and software licenses. 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 which were discontinued in the second
quarter, blenders, standmixers and irons. Cash used in investing activities in
the first nine months of 1998 also reflects $379.2 million for the acquisitions
of the shares of Coleman from a subsidiary of MacAndrews & Forbes, as well as
the acquisitions of Signature Brands and First Alert. The Company anticipates
1999 capital spending to be less than 5% of net sales. Capital expenditures in
the current year are expected to primarily relate to information systems and
related support, including expenditures for Year 2000 readiness, new product
introductions and capacity additions.
Cash provided by financing activities totaled $99.2 million in the first
nine months of 1999 and reflected net borrowings under the Company's bank credit
facility. Cash provided by financing activities in the first nine months of 1998
was $636.1 million and reflected net proceeds from the debentures of $729.6
million, the cancellation and repayment of all outstanding balances under the
Company's $250 million September 1996 revolving credit facility, the repayment
of certain debt assumed in connection with the Coleman, Signature Brands and
First Alert acquisitions, and the early extinguishment of the $75.0 million
Hattiesburg industrial revenue bond. In addition, cash provided by financing
activities in 1998 is net of $26.2 million of financing fees related to
Sunbeam's $1.7 billion bank credit facility and $19.6 million of proceeds from
the exercise of stock options. See Note 3 to the Condensed Consolidated
Financial Statements.
At September 30, 1999, standby and commercial letters of credit aggregated
$68.9 million and were predominately for insurance, pension, environmental,
workers' compensation, and international trade activities. In addition, as of
September 30, 1999, surety bonds with a contract value of $67.5 million were
outstanding largely for the Company's pension plans and as a result of
litigation judgments that are currently under appeal.
The Company expects to acquire the remaining equity interest in Coleman in
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, including cash paid to option holders,
to complete the Coleman transaction. Under a 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
shareholders and the plaintiff's litigation counsel upon consummation of the
Coleman merger. (See Notes 2 and 10 to the Condensed Consolidated Financial
Statements.) Although there can be no assurance, it is anticipated that the
Coleman merger will occur in the fourth quarter of 1999 or early in the first
quarter of 2000.
The Company believes its borrowing capacity under the bank 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 expenditure and Year 2000 compliance spending, and debt service through
S2PI-41
<PAGE>
April 10, 2000. The Company intends to negotiate with its lenders on an
amendment to the bank credit facility, negotiate with its lenders on further
waiver of such covenants and other terms or refinance the bank 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 existing covenants and
non-compliance with other terms, which would permit the bank lenders to
accelerate the maturity of all outstanding borrowings under the bank credit
facility, which would likely have a material adverse effect on the Company.
Accordingly, debt related to the bank credit facility and all debt containing
cross-default provisions is classified as current in the September 30, 1999
Condensed Consolidated Balance Sheet.
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 $600,000 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 and average annual net income of at least $600,000 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. 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 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 duration of such investigation or its 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
S2PI-42
<PAGE>
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 September 30, 1999 the Company had established accruals for
litigation matters of $22.6 million (representing $11.3 million and $11.3
million for estimated damages or settlement amounts and legal fees,
respectively) and $31.2 million as of December 31, 1998 (representing $17.5
million and $13.7 million for estimated damages or settlements and legal fees,
respectively.) It is anticipated that the $22.6 million accrual will be paid as
follows: $5.2 million in 1999, $14.9 million in 2000 and $2.5 million in 2001.
The Company believes, based on information known to the Company on September 30,
1999, that anticipated probable costs of litigation matters existing as of
September 30, 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, results of operations and cash flows. 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 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.
S2PI-43
<PAGE>
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 had 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 was 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 had been identified by
Sunbeam as not 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
S2PI-44
<PAGE>
version of this uniform information system is Year 2000 ready, the Company
upgraded 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 replaced their non-Year 2000 ready
systems with this new uniform system. In addition, Coleman Europe has also
replaced 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 has analyzed these items to assess any Year
2000 issues and is testing and correcting such times, if necessary.
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 has contacted 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.
Sunbeam 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 issues and 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 has designed and documented 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 minor increases in the Company's
inventory requirements to protect against supply disruption.
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
S2PI-45
<PAGE>
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 potential impact
on Sunbeam's operations could be material. However, the Company believes that it
has mitigated such risks through the development and implementation of the
contingency plans discussed above.
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.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
Through the first nine months of 1999, including costs incurred in 1998,
Sunbeam had expended approximately $60 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 $64 million. This estimate includes the
following categories:
o uniform international business and accounting systems $44 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
The amount to be incurred for Year 2000 issues during 1999 of approximately
$44 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
S2PI-46
<PAGE>
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, thereby deferring the non-critical systems enhancements. 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 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," "will," "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 bank credit facility,
including financial covenants and covenants relating to the completion of the
Coleman merger, or to enter into an amendment to its bank credit facility
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 and/or term loan
facility or Sunbeam'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 acceptable 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 coverage on its directors' and officers'
liability insurance, (xvii) the possibility of a recession in the United States
S2PI-48
<PAGE>
or other countries resulting in a decrease in consumer 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.
S2PI-48
<PAGE>
PART II
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
Condensed Consolidated Statements of Operations
Three months ended September 30, 1999 and 1998 and
Nine months ended September 30, 1999 and 1998.......................... 1
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998............................... 2
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998.......................... 3
Notes to Condensed Consolidated Financial Statements........................ 4
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 16
Quantitative and Qualitative Disclosures About Market Risk.................. 29
Legal Proceedings........................................................... 32
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net revenues............................................ $ 335,901 $ 245,324 $ 1,017,516 $ 816,230
Cost of sales........................................... 223,100 179,818 691,699 587,232
----------- ----------- ------------- ------------
Gross profit............................................ 112,801 65,506 325,817 228,998
Selling, general and administrative expenses............ 72,002 59,508 201,705 192,158
Restructuring (credits) charges......................... (147) 6,582 (165) 16,867
Interest expense, net................................... 3,961 8,480 16,406 26,403
Amortization of goodwill and deferred charges........... 2,250 2,646 7,189 8,313
Gain on sale of business................................ -- (408) -- (25,098)
Other (income) expense, net............................. (2,793) (1,511) (2,721) 33
----------- ----------- ------------- ------------
Earnings (loss) before income taxes,
minority interest and extraordinary item............. 37,528 (9,791) 103,403 10,322
Income tax expense (benefit)............................ 14,448 (2,875) 39,810 13,315
Minority interest....................................... 827 92 1,404 332
----------- ----------- ------------- ------------
Earnings (loss) before extraordinary item............... 22,253 (7,008) 62,189 (3,325)
Extraordinary loss on early extinguishment
of debt, net of income tax benefit.................... -- -- -- (17,538)
----------- ----------- ------------- ------------
Net earnings (loss)..................................... 22,253 (7,008) 62,189 (20,863)
Participating preferred stock dividends and
allocated earnings................................... (1,466) -- (1,466) --
----------- ----------- ------------- ------------
Net earnings (loss) available for common
shareholders......................................... $ 20,787 $ (7,008) $ 60,723 $ (20,863)
=========== =========== ============= ============
Basic and diluted earnings (loss) per share:
Earnings before extraordinary item.................... $ 0.37 $ (0.13) $ 1.09 $ (0.06)
Extraordinary item.................................... -- -- -- (0.32)
----------- ----------- ------------- ------------
Net earnings (loss)................................. $ 0.37 $ (0.13) $ 1.09 $ (0.38)
=========== =========== ============= ============
Weighted average common shares outstanding:
Basic and diluted ................................... 55,827 55,827 55,827 55,135
=========== =========== ============= ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
S2PII-1
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 20,305 $ 23,413
Accounts and notes receivable, less allowance
of $9,083 in 1999 and $8,894 in 1998............................... 249,530 162,108
Inventories.......................................................... 242,346 230,126
Deferred tax assets.................................................. 28,221 26,926
Prepaid expenses and other current assets............................ 15,693 19,627
---------------- ------------
Total current assets............................................... 556,095 462,200
Property, plant and equipment, less accumulated depreciation
of $136,220 in 1999 and $122,868 in 1998............................. 141,278 145,823
Goodwill, net........................................................... 267,656 282,015
Deferred tax assets and other assets.................................... 32,505 43,219
---------------- ------------
$ 997,534 $ 933,257
================ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable........................................... $ 152,954 $ 146,064
Debt payable to affiliate............................................ 303,193 --
Other current liabilities............................................ 126,782 101,224
---------------- ------------
Total current liabilities.......................................... 582,929 247,288
Debt payable to affiliate............................................... -- 365,063
Long-term debt.......................................................... 389 362
Other liabilities....................................................... 84,746 75,231
Minority interest....................................................... 9,358 6,698
Contingencies...........................................................
Stockholders' equity:
Preferred stock...................................................... 30 --
Common stock......................................................... 558 558
Additional paid-in capital........................................... 254,276 221,730
Retained earnings.................................................... 84,166 21,977
Accumulated other comprehensive loss................................. (18,918) (5,650)
---------------- ------------
Total stockholders' equity......................................... 320,112 238,615
---------------- ------------
$ 997,534 $ 933,257
================ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
S2PII-2
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-----------------------------
1999 1998
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)............................................................. $ 62,189 $ (20,863)
Adjustments to reconcile net earnings (loss) to net cash flows
from operating activities:
Depreciation and amortization.............................................. 24,404 26,766
Deferred income taxes...................................................... 23,743 (17,247)
Non-cash restructuring and other charges................................... -- 5,713
Minority interest.......................................................... 1,404 332
Gain on sale of business................................................... -- (25,098)
Extraordinary loss on early extinguishment of debt........................ -- 29,012
Changes in assets and liabilities, net of effects from sale of business:
Receivables........................................................... (89,600) (13,015)
Inventories........................................................... (16,369) 16,115
Accounts payable...................................................... 19,702 (18,519)
Prepaid expenses and other current assets and liabilities............. 32,455 24,125
Other, net............................................................ (75) 3,600
------------- ------------
Net cash provided by operating activities....................................... 57,853 10,921
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................ (19,554) (16,648)
Net proceeds from sale of business and fixed assets............................. 1,337 98,817
Other, net...................................................................... (703) (618)
------------- ------------
Net cash (used) provided by investing activities................................ (18,920) 81,551
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments of revolving credit agreement borrowings........................... -- (52,578)
Net change in short-term borrowings............................................. (8,475) (12,165)
Repayment of long-term debt, including redemption costs......................... (166) (447,250)
Net (decrease) increase in borrowings from affiliate............................ (61,870) 381,042
Proceeds from preferred stock issuance.......................................... 31,061 --
Proceeds from stock options exercised including tax benefits.................... -- 45,546
------------- ------------
Net cash used by financing activities........................................... (39,450) (85,405)
------------- ------------
Effect of exchange rate changes on cash......................................... (2,591) 7
------------- ------------
Net (decrease) increase in cash and cash equivalents............................ (3,108) 7,074
Cash and cash equivalents at beginning of the period............................ 23,413 13,031
------------- ------------
Cash and cash equivalents at end of the period.................................. $ 20,305 $ 20,105
============= ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
S2PII-3
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
1. BACKGROUND
The Coleman Company, Inc. ("Coleman" or the "Company") is a global
manufacturer and marketer of consumer products for outdoor recreation and home
hardware use.
Coleman is a subsidiary of Coleman Worldwide Corporation ("Coleman
Worldwide"). Coleman Worldwide is an indirect wholly-owned subsidiary of Laser
Acquisition Corp. ("Laser"), an indirect wholly-owned subsidiary of Sunbeam
Corporation ("Sunbeam"). On March 30, 1998, through its wholly-owned subsidiary
Laser, Sunbeam acquired Coleman Worldwide (the "Sunbeam Acquisition"), then a
wholly-owned subsidiary of MacAndrews & Forbes Holdings, Inc. ("M&F"), pursuant
to a merger agreement with a wholly-owned subsidiary of M&F. Coleman Worldwide
owns 44,067,520 shares of the common stock of Coleman (approximately 79% of the
outstanding Coleman common stock as of September 30, 1999) and also owns
3,000,000 shares of voting preferred stock of Coleman (100% of the outstanding
preferred stock of Coleman as of September 30, 1999). The shares of preferred
stock, together with the Coleman common stock owned by Coleman Worldwide, enable
Coleman Worldwide to exercise 80.01% of the total voting power of Coleman's
outstanding capital stock as of November 17, 1999.
Coleman, Sunbeam and Camper Acquisition Corp. ("CAC"), a wholly-owned
subsidiary of Sunbeam, have also entered into an Agreement and Plan of Merger
(the "Coleman Merger Agreement"), providing that among other things, CAC will be
merged with and into Coleman, with Coleman continuing as the surviving
corporation (the "Coleman Merger"). Pursuant to the Coleman Merger Agreement,
each share of the Company's common stock issued and outstanding immediately
prior to the effective time of the Coleman Merger (other than shares held
indirectly by Sunbeam and shares, if any, for which appraisal rights have been
exercised) will be converted into the right to receive (i) 0.5677 of a share of
Sunbeam common stock, with cash paid in lieu of fractional shares, and (ii)
$6.44 in cash, without interest. In addition, unexercised stock options at the
time of the Coleman Merger will be cashed out by Sunbeam at a price per share
equal to the difference between $27.50 per share and the exercise price of such
options. In October 1998, Coleman and Sunbeam entered into a memorandum of
understanding to settle, subject to court approval, certain class actions
brought by minority shareholders of Coleman against Coleman, Sunbeam and certain
of their current and former officers and directors challenging the proposed
Coleman Merger. The court approved the settlement on November 12, 1999. Under
the terms of the settlement, Sunbeam will issue to the Coleman minority
shareholders and plaintiffs' counsel in this action warrants to purchase up to
approximately 4.98 million shares of Sunbeam common stock at $7.00 per share,
subject to certain anti-dilution adjustments. Any shareholder who does not
exercise appraisal rights under Delaware law will receive the warrants. These
warrants will be issued when the Coleman Merger is consummated, which is now
expected to occur in the fourth quarter of 1999 or early in the first quarter of
2000.
The consummation of the Coleman Merger is conditional upon a registration
statement under the Securities Act of 1933 (the "Securities Act") to register
the shares of Sunbeam common stock to be issued in the Coleman Merger (the
"Registration Statement") becoming effective in accordance
S2PII-4
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
with the provisions of the Securities Act. Sunbeam has filed the Registration
Statement, but is uncertain when the Registration Statement will become
effective. However, it is anticipated the Coleman Merger will be completed in
the fourth quarter of 1999 or early in the first quarter of 2000. Upon
consummation of the Coleman Merger, Coleman will become an indirect wholly-owned
subsidiary of Sunbeam and Coleman will cease to be a separate reporting company.
However, in the event Coleman's separate consolidated financial statements are
included in a Securities and Exchange Commission filing for periods subsequent
to the consummation of the Coleman Merger, those separate consolidated financial
statements would reflect the allocation of the purchase price paid by Sunbeam,
for all of Coleman's common stock, to the fair value (determined by independent
appraisals) of Coleman's tangible and intangible assets acquired and liabilities
assumed under the purchase method of accounting.
2. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Coleman include the accounts of the Company and its subsidiaries after
elimination of all material intercompany accounts and transactions, and have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, these statements include all
adjustments necessary for a fair presentation of results of operations,
financial position and cash flows. The balance sheet at December 31, 1998 has
been derived from the audited financial statements for that date but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K/A for the year
ended December 31, 1998. Operating results for the nine months ended September
30, 1999 are not necessarily indicative of the results that may be expected for
future periods including the year ended December 31, 1999.
3. INVENTORIES
The components of inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Raw material and supplies......................... $ 45,438 $ 45,395
Work-in-process................................... 8,763 6,539
Finished goods.................................... 188,145 178,192
--------------- ---------------
$ 242,346 $ 230,126
=============== ===============
</TABLE>
4. DEBT PAYABLE TO AFFILIATE
Sunbeam's credit facility (the "Sunbeam Credit Facility") provides that
Sunbeam will not
S2PII-5
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
contribute capital to Coleman or, with some exceptions, permit Coleman to borrow
money from any source other than Sunbeam. Therefore, the Company's ability to
meet its cash operating requirements, including capital expenditures and other
obligations, is dependent upon a combination of cash flows from operations and
loans to the Company from Sunbeam. Sunbeam has informed the Company it has the
positive intent and ability to fund the Company's requirements for borrowed
funds through April 10, 2000. Prior to April 15, 1999, amounts loaned by Sunbeam
to Coleman were represented by a promissory note (the "Old Intercompany Note"),
were due on demand and bore interest at a floating rate equivalent to the
weighted average interest rate incurred by Sunbeam on its outstanding
convertible debt and borrowings under its bank credit facility.
On April 15, 1999, Coleman, Sunbeam and, as to certain agreements, the
lenders under the Sunbeam Credit Facility, amended and restated the Old
Intercompany Note (the "Intercompany Note"), entered into intercompany security
and pledge agreements, and entered into an amendment to the Sunbeam Credit
Facility and certain other agreements (collectively, the "Agreements"). The
Intercompany Note is due April 15, 2000. The Intercompany Note bears interest at
an annual rate equal to (i) 4% if the three month London Interbank Offering Rate
("LIBOR") quoted on the Telerate system is less than 6%, or (ii) 5% if the three
month LIBOR quoted on the Telerate system is 6% or higher, subject to increases
during an event of default, and interest will be payable by adding the amount of
such interest to the principal balance of the Intercompany Note. In addition,
the Intercompany Note provides that an event of default under the Sunbeam Credit
Facility will constitute an event of default under the Intercompany Note and
that in certain circumstances the payment on the Intercompany Note will be
subordinate to Coleman's obligations under the Sunbeam Credit Facility. Pursuant
to the Agreements, Coleman has pledged to Sunbeam substantially all of its
domestic assets, other than its real property, including 66% of its ownership
interest in its direct foreign subsidiaries and domestic holding companies for
its foreign subsidiaries and all of its ownership interest in its other direct
domestic subsidiaries (but Coleman's subsidiaries have not pledged their assets
or stock of their subsidiaries), as security for the Intercompany Note. Sunbeam
has pledged the Intercompany Note as security for the Sunbeam Credit Facility
and assigned to such lenders the security pledged by Coleman for the
Intercompany Note. Coleman also gave the lending banks a direct pledge of the
assets securing the Intercompany Note to secure the obligations under the
Sunbeam Credit Facility, subject to a cap equal to the balance due from time to
time on the Intercompany Note.
As of September 30, 1999 the amount borrowed by the Company under the
Intercompany Note amounted to $303,193 and the applicable interest rate was 4%.
The weighted average interest rate charged by Sunbeam for amounts borrowed under
the Old Intercompany Note and the Intercompany Note during the nine months ended
September 30, 1999 was 5.3% and the total interest charged by Sunbeam to Coleman
was $15,276. Sunbeam also charged to Coleman a pro-rata share of amortized debt
issuance costs and unused bank credit facility commitment fees totaling $319.
Net amounts advanced from Sunbeam along with the related unpaid interest and
other costs are reflected as debt payable to affiliate in the Company's
consolidated balance sheet. Coleman is also a borrower under the Sunbeam Credit
Facility for purposes of letters of credit issued for its account.
The Sunbeam Credit Facility provides for aggregate borrowings of up to
$1,700,000 pursuant
S2PII-6
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
to (i) a revolving credit facility in an aggregate principal amount of up to
$400,000 (subject to certain reductions) maturing on March 30, 2005, of which
$52,500 may only be used to complete the Coleman Merger, (ii) up to $800,000 in
term loans maturing on March 30, 2005, of which $35,000 may only be used to
complete the Coleman Merger, and (iii) a $500,000 term loan maturing on
September 30, 2006, of which $5,000 has already been repaid through September
30, 1999. At September 30, 1999, Sunbeam had $1,467,000 of outstanding debt
under the Sunbeam Credit Facility and approximately $165,000 available for
borrowing. As a result of Sunbeam's operating losses during 1998, among other
things, Sunbeam was not in compliance with the financial covenants and other
terms contained in the Sunbeam Credit Facility. In April 1999, Sunbeam and its
lenders entered into an amendment to the Sunbeam Credit Facility which amended
and added certain financial covenants and other terms and waived compliance with
certain other financial covenants and other terms through April 10, 2000.
Interest accrues at a rate selected at Sunbeam's option of: (i) LIBOR plus an
interest rate margin which varies depending upon the occurrence of certain
specified events or, (ii) the base rate of the administrative agent (generally
the higher of the prime commercial lending rate of the administrative agent or
the Federal Funds Rate plus one-half of 1%), plus an interest rate margin which
varies depending upon the occurrence of certain specified events.
Borrowings under the Sunbeam Credit Facility are secured by a pledge of the
stock of Sunbeam's material subsidiaries, including Coleman, and by a security
interest in substantially all of the assets of Sunbeam and its material
subsidiaries, other than Coleman and its subsidiaries except as otherwise
described herein. Currently, Coleman's inventory and related assets are pledged
to secure its obligations for letters of credit issued for its account under the
Sunbeam Credit Facility.
The Sunbeam Credit Facility contains covenants customary for credit
facilities of a similar nature, including limitations on the ability of Sunbeam
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
Sunbeam 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 mergers, acquisitions and asset sales, (viii)
engage in certain transactions with affiliates, (ix) alter its fiscal year or
accounting policies, (x) enter into hedging agreements, (xi) settle certain
litigation, (xii) alter its cash management system and (xiii) alter the
businesses they conduct. Sunbeam is also required to comply with specified
financial covenants and ratios. The Sunbeam 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. The Sunbeam
Credit Facility, as amended, also provides it is an event default if the
registration statement for the shares of Sunbeam common stock to be issued in
the Coleman Merger is not declared effective by January 10, 2000, if Sunbeam
fails to complete the Coleman Merger within 25 business days after the related
registration statement is declared effective by the SEC, or if Sunbeam has to
pay more than $87,500 (excluding expenses) in cash to complete the Coleman
Merger (including any payments made with respect to appraisal rights). If an
event of default occurs under the Sunbeam Credit Facility or Sunbeam is unable
to obtain a waiver or amendment of certain financial covenants
S2PII-7
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
after April 10, 2000, the Company may be required to reduce, delay or cancel
capital or other expenditures and/or seek loans or capital contributions from,
or sell assets or capital stock to, lending institutions and/or other third
parties or affiliates. The Sunbeam Credit Facility also requires Sunbeam to
prepay term loans under the Sunbeam Credit Facility on December 31, 1999 to the
extent that cash on hand in Sunbeam's concentration accounts plus the aggregate
amount of unused revolving loan commitments on that date exceeds $125,000 but
Sunbeam is not required to prepay more than $69,300 in the aggregate as a result
of the provision.
5. RESTRUCTURING CHARGES (DOLLARS IN MILLIONS)
The Company reviews the adequacy of its restructuring reserves and adjusts
the reserves as the various activities are completed or additional information
becomes available which allows the Company to refine its estimates. The Company
decreased its restructuring reserves by $0.1 during the nine months ended
September 30, 1999 and increased its restructuring reserves by $6.7 during the
nine months ended September 30, 1998 as a result of these reviews. In addition,
during the nine months ended September 30, 1998, the Company recorded additional
restructuring charges totaling $10.4 which included, (i) $9.0 of severance
benefits related to approximately 104 employees whose employment with the
Company was terminated following the acquisition of the Company by Sunbeam, (ii)
$1.1 of severance benefits for approximately 110 employees at the Company's
manufacturing facility in Cedar City, Utah which was closed during June 1998,
(iii) recognition of a net gain of $0.1 related to the disposition of the
Company's manufacturing facility in Cedar City, Utah, and (iv) $0.4 of exit
costs related to closing an operation in Europe.
The following tables provide an analysis of the changes in the Company's
restructuring reserves since December 31, 1998. For a detailed description of
the Company's restructuring activities, see Note 3 to the consolidated financial
statements included in the Company's Annual Report on Form 10-K/A for the year
ended December 31, 1998.
INTEGRATION OF CAMPING GAZ AND COLEMAN
<TABLE>
<CAPTION>
Balance at (Credits) Balance at
December 31, to Cash Non-Cash September 30,
1998 Income Reductions Reductions 1999
------------ --------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Charges included in cost of sales:
Write-down of inventory................ $ .4 $ -- $ -- $ .4 $ --
------- ------ -------- -------- -------
Total included in cost of sales.... .4 -- -- .4 --
------- ------ -------- -------- -------
Charges included in restructuring:
Write-downs:
Fixed assets held for disposal,
not in use......................... 7.5 -- -- .7 6.8
Other assets......................... .2 -- -- .2 --
------- ------ -------- -------- -------
................................... 7.7 -- -- .9 6.8
------- ------ -------- -------- -------
</TABLE>
S2PII-8
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<S> <C> <C> <C> <C> <C>
Restructuring accruals:
Employee severance pay and
fringes........................... .1 -- -- -- .1
Other exit activity costs, primarily
sales agent termination costs
and claims brought by
terminated employees............... .7 (.2) .1 .3 .1
------- ----- -------- -------- -------
.8 (.2) .1 .3 .2
------- ----- -------- -------- -------
Totals included in restructuring... 8.5 (.2) .1 1.2 7.0
------- ----- -------- -------- -------
Totals .................................. $ 8.9 $ (.2) $ .1 $ 1.6 $ 7.0
======= ===== ======== ======== =======
</TABLE>
The reserves remaining at September 30, 1999 principally relate to the
write down of a vacated warehouse and an accrual for claims brought by foreign
employees terminated as part of the restructuring plan. The timing of the
resolution of the claims brought by foreign employees will vary depending upon
local practices. The Company continues to assess the propriety of the carrying
value of the related balances and make adjustments to the recorded amounts as
appropriate given current facts and circumstances.
EXIT LOW-MARGIN PRODUCT LINES
<TABLE>
Charges
Balance at (Credits) Balance at
December 31, to Non-Cash September 30,
1998 Income Reductions 1999
---------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Charges included in cost of sales:
Write-down of inventory...................... $ .4 $ .1 $ .5 $ --
--------- -------- -------- ------
Total included in cost of sales............ .4 .1 .5 --
--------- -------- -------- ------
Charges included in restructuring:
Write-downs:
Fixed assets held for disposal,
not in use............................... .1 (.1) -- --
--------- -------- ------- ------
.1 (.1) -- --
--------- -------- ------- ------
Restructuring accruals:
Other exit activity costs, primarily
product buyback costs.................... .6 -- .6 --
--------- -------- -------- ------
.6 -- .6 --
--------- -------- -------- ------
Totals included in restructuring......... .7 (.1) .6 --
--------- -------- -------- ------
Totals ........................................ $ 1.1 $ -- $ 1.1 $ --
========= ======== ======== ======
</TABLE>
S2PII-9
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
CLOSE AND RELOCATE CERTAIN ADMINISTRATIVE AND SALES OFFICES
<TABLE>
<CAPTION>
Balance at Charges Balance at
December 31, to Cash September 30,
1998 Income Reductions 1999
---------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Restructuring accruals:
Employee severance pay and fringes........... $ 3.4 $ .2 $ .5 $ 3.1
--------- --------- -------- ------
Totals ........................................ $ 3.4 $ .2 $ .5 $ 3.1
========= ========= ======== ======
</TABLE>
The unpaid severance costs at September 30, 1999 principally relate to
claims brought by employees terminated as part of the restructuring plan. The
timing of the resolution of the claims brought by the terminated employees will
vary depending upon local practices. The Company continues to assess the
propriety of the carrying value of the related balances and make adjustments to
the recorded amounts as appropriate given current facts and circumstances.
CLOSE FACILITIES
<TABLE>
<CAPTION>
Balance at (Credits) Balance at
December 31, to Cash September 30,
1998 Income Reductions 1999
---------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Charges included in restructuring:
Write-downs:
Fixed assets held for disposal,
not in use............................... $ .2 $ -- $ -- $ .2
--------- --------- ------- ------
.2 -- -- .2
--------- --------- ------- ------
Restructuring accruals:
Employee severance pay and fringes......... 1.3 (.1) .7 .5
Other exit activity costs,
primarily lease termination costs........ .6 -- .4 .2
--------- --------- -------- ------
1.9 (.1) 1.1 .7
--------- ---------- -------- ------
Totals included in restructuring......... 2.1 (.1) 1.1 .9
--------- ---------- -------- ------
Totals ........................................ $ 2.1 $ (.1) $ 1.1 $ .9
========= ========== ======== ======
</TABLE>
During the nine months ended September 30, 1999, of those employees
expected to be terminated, 13 employees left the Company and 5 employees remain
to be terminated. Remaining termination costs are expected to be paid by
December 31, 2000 in accordance with the long-term severance arrangements. The
fixed assets held for disposal at September 30, 1999, will be disposed of during
1999. The remaining reserve balance for other exit activity costs at September
30, 1999, principally relates to leases with fixed terms running through 2001.
S2PII-10
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
EMPLOYEE TERMINATION AND SEVERANCE
<TABLE>
Balance at Balance at
December 31, Cash September 30,
1998 Reductions 1999
---------- ---------- -----------
<S> <C> <C> <C>
Charges included in restructuring:
Restructuring accruals:
Employee severance pay and fringes......... $ 3.4 $ 2.4 $ 1.0
--------- ----------- --------
Totals ........................................ $ 3.4 $ 2.4 $ 1.0
========= =========== ========
</TABLE>
During the nine months ended September 30, 1999, of those employees
expected to be terminated, 4 employees left the Company and 4 employees remain
to be terminated. The 4 remaining employees are expected to be terminated by
March 31, 2000. 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.
6. OTHER CHARGES
During the first nine months of 1998, the Company recorded other charges
totaling $13,357 ($12,931 in the first quarter of 1998 and $426 in the second
quarter of 1998) which consisted of (i) $7,242 of costs associated with the
acquisition of the Company by Sunbeam including advisory fees, (ii) $3,890 of
charges associated with abandoning a company-wide enterprise resource computer
software system, and (iii) $2,225 of costs associated with terminating a
licensing services agreement with an affiliate of Coleman (Parent) Holdings,
Inc., the then indirect parent company of Coleman Worldwide. These costs were
recorded in selling, general and administrative expenses.
7. COMPREHENSIVE INCOME
The components of the Company's comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ -------------------------
1999 1998 1999 1998
------------ --------- ----------- ------------
<S> <C> <C> <C> <C>
Net earnings (loss)........................................ $ 22,253 $ (7,008) $ 62,189 $ (20,863)
Foreign currency translation adjustment, net of tax........ 1,219 10,154 (13,268) 6,351
Minimum pension liability adjustment, net of tax........... -- (168) -- (505)
------------ --------- ----------- ------------
Comprehensive income (loss)................................ $ 23,472 $ 2,978 $ 48,921 $ (15,017)
============ ========= =========== ============
</TABLE>
8. PREFERRED STOCK
On July 12, 1999, Coleman Worldwide acquired 3,000,000 shares of a newly
created series of Coleman voting preferred stock for an aggregate purchase price
of approximately $31,061. These shares, together with the shares of Coleman
common stock owned by Coleman Worldwide, enable
S2PII-11
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Coleman Worldwide to exercise 80.01% of the total voting power of Coleman's
outstanding capital stock as of November 17, 1999. Coleman created these shares
of preferred stock and Coleman Worldwide acquired them in order to enable
Coleman and Sunbeam 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 per share, the issue price of the voting preferred stock,
which accrues but will not be paid in cash unless a liquidation occurs or
certain transactions are consummated as described below. At September 30, 1999,
the accrued and unpaid dividends amounted to $483. 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 Sunbeam
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.
Upon liquidation of the Company: (1) the holders of the voting preferred stock
would receive a preferential distribution equal to $10.35 per share, plus
accrued and unpaid dividends, (2) next, the holders of the Coleman common stock
would receive an amount equal to $10.35 per share, and (3) any assets remaining
after such distributions would be shared by the holders of the 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 Sunbeam 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 Sunbeam. The terms of the voting preferred stock, their issue price and the
terms of the tax sharing agreement were approved on Coleman's behalf by
Coleman's 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.
9. BASIC AND DILUTED EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing net earnings (loss)
available to common shareholders (the numerator) by the weighted average number
of common shares outstanding (the denominator). The computation of diluted
earnings per share is similar to the computation of basic earnings per share
except the denominator is increased to include the number of additional common
shares that would have been outstanding if the potentially dilutive common
shares had been issued. The numerator in calculating both basic and diluted
earnings per share is earnings (loss) less participating preferred stock
dividends of $483 and participating preferred stock allocated earnings of $983
for both the three month and nine month periods ended September 30, 1999. The
participating preferred stock allocated earnings amount is computed by using the
"two class" method as described in Statement of Financial Accounting Standards
("SFAS") No. 128, "Earning per
S2PII-12
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Share" due to the fact that the participating preferred stock is not convertible
into a class of common stock. Diluted earnings per share for the three month and
nine month periods ended September 30, 1999 is based only on the weighted
average number of common shares outstanding during the three month and nine
month periods ended September 30, 1999 because there were no dilutive common
share equivalents. Stock options to purchase 923,670 shares of common stock were
outstanding at September 30, 1999 but were not included in the computation of
common share equivalents because the option exercise price was greater than the
average market price of Coleman's common stock during each of the respective
periods. Diluted earnings per share for the three month period ended September
30, 1998 is based only on the weighted average number of common shares
outstanding during the three month period ended September 30, 1998 because there
were no dilutive common share equivalents. Diluted earnings per share for the
nine month period ended September 30, 1998 is based only on the weighted average
number of common shares outstanding during the nine month period ended September
30, 1998 as the inclusion of 769,601 common share equivalents would have been
antidilutive.
10. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities Deferral of the Effective Date of
FASB Statement No. 133". The provisions of SFAS No. 133 will now be effective
for the Company's fiscal year beginning January 1, 2001. Earlier application of
the provisions of SFAS No. 133 is encouraged; however, the Company has not
determined if it will apply the provisions of SFAS No. 133 prior to January 1,
2001, nor has the Company estimated the impact of applying the provisions of
SFAS No. 133 on the Company's statement of financial position or on the
statement of operations.
S2PII-13
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
11. SEGMENT INFORMATION
For detailed information regarding the Company's reportable segments, see
Note 19 to the consolidated financial statements included in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1998.
INFORMATION ABOUT SEGMENT REVENUES, PROFITS AND ASSETS
<TABLE>
<CAPTION>
Outdoor All
Recreation Powermate Eastpak International Other Total
---------- ---------- ---------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended September 30, 1999:
Revenues from external customers.... $ 113,308 $ 80,747 $ 16,492 $ 121,423 $ 3,931 $ 335,901
Intersegment revenues................ 10,278 15,333 14,978 101 -- 40,690
Segment profit (loss)................ 18,834 13,221 (2,165) 13,431 1,122 44,443
Three Months Ended September 30, 1998:
Revenues from external customers..... 76,528 55,703 14,554 87,713 10,826 245,324
Intersegment revenues................ 15,920 1,839 7,572 12 -- 25,343
Segment profit (loss)................ 676 2,024 (1,829) 2,996 (169) 3,698
Nine Months Ended September 30, 1999:
Revenues from external customers..... 370,856 218,741 35,377 384,723 7,819 1,017,516
Intersegment revenues................ 52,888 29,297 38,669 163 -- 121,017
Segment profit (loss)................ 61,667 36,654 (5,194) 38,164 (283) 131,008
Nine Months Ended September 30, 1998:
Revenues from external customers..... 282,663 152,755 40,919 293,323 46,570 816,230
Intersegment revenues................ 68,421 3,404 26,756 124 -- 98,705
Segment profit (loss)................ 14,351 8,070 (3,149) 23,174 3,658 46,104
Segment Assets:
September 30, 1999................... 236,318 149,288 100,417 371,484 4,641 862,148
September 30, 1998................... 229,593 139,679 98,960 335,058 17,046 820,336
</TABLE>
S2PII-14
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
RECONCILIATION OF SELECTED SEGMENT INFORMATION TO THE COMPANY'S CONSOLIDATED
TOTALS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- ----------------------------
1999 1998 1999 1998
------------ ----------- -------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Total revenues for reportable segments................ $ 372,660 $ 259,841 $ 1,130,714 $ 868,365
Other revenues........................................ 3,931 10,826 7,819 46,570
Elimination of intersegment revenues.................. (40,690) (25,343) (121,017) (98,705)
------------ ----------- -------------- ------------
Total consolidated revenues........................ $ 335,901 $ 245,324 $ 1,017,516 $ 816,230
============ =========== ============== ============
PROFIT OR LOSS:
Total segment profit.................................. $ 44,443 $ 3,698 $ 131,008 $ 46,104
Unallocated items:
Corporate expenses................................. (3,497) (4,341) (6,731) (22,550)
Corporate restructuring credit (charge)............ -- 59 -- (3,581)
Interest expense, net.............................. (3,961) (8,480) (16,406) (26,403)
Amortization of goodwill
and deferred charges............................ (2,250) (2,646) (7,189) (8,313)
Gain on sale of business........................... -- 408 -- 25,098
Other income (expense), net........................ 2,793 1,511 2,721 (33)
------------ ----------- -------------- ------------
Earnings before income taxes, minority
interest and extraordinary item............... $ 37,528 $ (9,791) $ 103,403 $ 10,322
============ =========== ============== ============
</TABLE>
S2PII-15
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and the related footnotes included elsewhere
in this quarterly report on Form 10-Q, as well as the consolidated financial
statements and related notes, 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.
RESULTS OF OPERATIONS
RESTRUCTURING CHARGES
The Company reviews the adequacy of its restructuring reserves and adjusts
the reserves as the various activities are completed or additional information
becomes available which allows the Company to refine its estimates. The Company
decreased the restructuring reserves by $0.1 million during the nine months
ended September 30, 1999 and increased the restructuring reserves by $6.7
million during the nine months ended September 30, 1999 as a result of these
reviews. In addition, during the nine months ended September 30, 1998, the
Company recorded additional restructuring charges totaling $10.4 million which
included, (i) $9.0 million of severance benefits related to approximately 104
employees whose employment with the Company was terminated following the Sunbeam
Acquisition, (ii) $1.1 million of severance benefits for approximately 110
employees at the Company's manufacturing facility in Cedar City, Utah which was
closed during June 1998, (iii) recognition of a net gain of $0.1 million related
to the disposition of the Company's manufacturing facility in Cedar City, Utah,
and (iv) $0.4 million of exit costs related to closing an operation in Europe.
The following tables (dollars in millions) provide an analysis of the
changes in the Company's restructuring reserves since December 31, 1998. For a
detailed description of the Company's restructuring activities see Note 3 to the
consolidated financial statements included in the Company's Annual Report on
Form 10-K/A for the year ended December 31, 1998.
INTEGRATION OF CAMPING GAZ AND COLEMAN
<TABLE>
<CAPTION>
Balance at (Credits) Balance at
December 31, to Cash Non-Cash September 30,
1998 Income Reductions Reductions 1999
------------ -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Charges included in cost of sales:
Write-down of inventory................ $ .4 $ -- $ -- $ .4 $ --
------- ------ -------- -------- -------
Total included in cost of sales.... .4 -- -- .4 --
------- ------ -------- -------- -------
Charges included in restructuring:
Write-downs:
Fixed assets held for disposal,
not in use......................... 7.5 -- -- .7 6.8
Other assets......................... .2 -- -- .2 --
................................... ------- ------ -------- -------- -------
7.7 -- -- .9 6.8
------- ------ -------- -------- -------
</TABLE>
S2PII-16
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<S> <C> <C> <C> <C> <C>
Restructuring accruals:
Employee severance pay and
fringes........................... .1 -- -- -- .1
Other exit activity costs, primarily
sales agent termination costs
and claims brought by
terminated employees............... .7 (.2) .1 .3 .1
------- ----- -------- -------- -------
.8 (.2) .1 .3 .2
------- ----- -------- -------- -------
Totals included in restructuring... 8.5 (.2) .1 1.2 7.0
------- ----- -------- -------- -------
Totals ................................... $ 8.9 $ (.2) $ .1 $ 1.6 $ 7.0
======= ===== ======== ======== =======
</TABLE>
The reserves remaining at September 30, 1999 principally relate to the
write down of a vacated warehouse and an accrual for claims brought by foreign
employees terminated as part of the restructuring plan. The timing of the
resolution of the claims brought by foreign employees will vary depending upon
local practices. The Company continues to assess the propriety of the carrying
value of the related balances and make adjustments to the recorded amounts as
appropriate given current facts and circumstances.
EXIT LOW-MARGIN PRODUCT LINES
<TABLE>
<CAPTION>
Charges
Balance at (Credits) Balance at
December 31, to Non-Cash September 30,
1998 Income Reductions 1999
------------ -------- ---------- -------------
<S> <C> <C> <C> <C>
Charges included in cost of sales:
Write-down of inventory...................... $ .4 $ .1 $ .5 $ --
--------- -------- -------- ------
Total included in cost of sales............ .4 .1 .5 --
--------- -------- -------- ------
Charges included in restructuring:
Write-downs:
Fixed assets held for disposal,
not in use............................... .1 (.1) -- --
--------- -------- ------- ------
.1 (.1) -- --
--------- -------- ------- ------
Restructuring accruals:
Other exit activity costs, primarily
product buyback costs.................... .6 -- .6 --
--------- -------- -------- ------
.6 -- .6 --
--------- -------- -------- ------
Totals included in restructuring......... .7 (.1) .6 --
--------- -------- -------- ------
Totals ......................................... $ 1.1 $ -- $ 1.1 $ --
========= ======== ======== ======
</TABLE>
S2PII-17
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
CLOSE AND RELOCATE CERTAIN ADMINISTRATIVE AND SALES OFFICES
<TABLE>
<CAPTION>
Balance at Charges Balance at
December 31, to Cash September 30,
1998 Income Reductions 1999
------------ -------- ---------- ------------
<S> <C> <C> <C> <C>
Restructuring accruals:
Employee severance pay and fringes.......... $ 3.4 $ .2 $ .5 $ 3.1
------- ----- ----- ------
Totals ........................................ $ 3.4 $ .2 $ .5 $ 3.1
======= ===== ===== ======
</TABLE>
The unpaid severance costs at September 30, 1999 principally relate to
claims brought by employees terminated as part of the restructuring plan. The
timing of the resolution of the claims brought by the terminated employees will
vary depending upon local practices. The Company continues to assess the
propriety of the carrying value of the related balances and make adjustments to
the recorded amounts as appropriate given current facts and circumstances.
CLOSE FACILITIES
<TABLE>
<CAPTION>
Balance at (Credits) Balance at
December 31, to Cash September 30,
1998 Income Reductions 1999
------------ --------- ---------- ------------
<S> <C> <C> <C> <C>
Charges included in restructuring:
Write-downs:
Fixed assets held for disposal,
not in use............................... $ .2 $ -- $ -- $ .2
------- ----- ----- ------
.2 -- -- .2
------- ----- ----- ------
Restructuring accruals:
Employee severance pay and fringes......... 1.3 (.1) .7 .5
Other exit activity costs,
primarily lease termination costs........ .6 -- .4 .2
------- ----- ----- ------
1.9 (.1) 1.1 .7
------- ----- ----- ------
Totals included in restructuring......... 2.1 (.1) 1.1 .9
------- ----- ----- ------
Totals ......................................... $ 2.1 $ (.1) $ 1.1 $ .9
======= ===== ===== ======
</TABLE>
S2PII-18
<PAGE>
During the nine months ended September 30, 1999, of those employees
expected to be terminated, 13 employees left the Company and 5 employees remain
to be terminated. Remaining termination costs are expected to be paid by
December 31, 2000 in accordance with the long-term severance arrangements. The
fixed assets held for disposal at September 30, 1999, will be disposed of during
1999. The remaining reserve balance for other exit activity costs at September
30, 1999, principally relates to leases with fixed terms running through 2001.
EMPLOYEE TERMINATION AND SEVERANCE
<TABLE>
<CAPTION>
Balance at Balance at
December 31, Cash September 30,
1998 Reductions 1999
------------ ---------- -------------
<S> <C> <C> <C>
Charges included in restructuring:
Restructuring accruals:
Employee severance pay and fringes......... $ 3.4 $ 2.4 $ 1.0
------- ------- ------
Totals ......................................... $ 3.4 $ 2.4 $ 1.0
======= ======= ======
</TABLE>
S2PII-19
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
During the nine months ended September 30, 1999, of those employees
expected to be terminated, 4 employees left the Company and 4 employees remain
to be terminated. The 4 remaining employees are expected to be terminated by
March 31, 2000. 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.
OTHER CHARGES
During the first nine months of 1998, the Company recorded other charges
totaling $13.4 million ($12.9 million in the first quarter and $0.5 million in
the second quarter) which consisted of (i) $7.3 million of costs associated with
the Sunbeam Acquisition, (ii) $3.9 million of charges associated with abandoning
a company-wide enterprise resource computer software system, and (iii) $2.2
million of costs associated with terminating a licensing services agreement with
an affiliate of Coleman (Parent) Holdings, Inc., the then indirect parent
company of Coleman Worldwide. These costs were recorded in selling, general and
administrative ("SG&A") expenses.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net revenues of $335.9 million for the three months ended September 30,
1999 were $90.6 million, or 36.9%, greater than for the three months ended
September 30, 1998. The outdoor recreation products revenues, reflecting both
United States and foreign non-hardware products, increased $52.8 million.
Revenues for the 1999 period include $12.1 million of revenues from sales of
Sunbeam grills and other Sunbeam appliances which Coleman began selling
primarily in Europe and Canada in late 1998 and early 1999, respectively. In
addition, revenues for the 1998 period include $8.5 million of revenues from
sales of the Company's spa related products, a business which was sold during
1998. Adjusting revenues for the 1999 period to exclude the Sunbeam product
revenues and adjusting the 1998 period to exclude the spa related product
revenues results in comparable outdoor recreation 1999 period products revenues
increasing $49.2 million, or 28.2%, over 1998 period revenues. This increase
occurred in nearly all product categories, primarily reflecting strong retail
replenishment demand and what the Company believes is heightened consumer
sensitivity to the need for emergency preparedness, including Year 2000
considerations. The hardware products revenues increase of $37.8 million
includes $6.7 million of revenues from sales of Sunbeam's First Alert products
which Coleman began selling internationally, primarily in Europe, in late 1998.
Excluding the revenues from these First Alert products, the hardware products
revenues reflected an increase of $31.1 million, or 49.9%, over comparable 1998
revenues primarily reflecting an increase in generator sales attributable to
what the Company believes is heightened consumer sensitivity to the need for
emergency preparedness, including power shortages arising from poor weather
conditions and Year 2000 considerations. Geographically, United States revenues
increased $59.6 million, or 38.5%, and foreign revenues increased $31.0 million,
or 34.3%, over the 1998 period revenues. The United States revenues for the 1998
period include revenues from the Company's spa business which was sold during
1998. Excluding these revenues from the 1998 period, United States revenues in
1999 reflected an increase of $68.1 million, or 46.6%, over the 1998 period
revenues. Excluding the Sunbeam product revenues from the foreign revenues in
the 1999 period, foreign revenues in 1999 reflected an increase of $12.2
million, or 13.5%, over the 1998 period revenues.
S2PII-20
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
Gross profit for the three months ended September 30, 1999 was $112.8
million as compared to $65.5 million for the three months ended September 30,
1998. Higher sales volume and favorable manufacturing efficiencies resulting
from higher production levels associated with the higher sales volume in the
1999 period accounted for primarily all of the increase in gross profit.
Although the Company has experienced improved gross margins in 1999, the Company
continues to rationalize its international production capabilities. The Company
is evaluating the elimination of at least one international manufacturing
facility and expects to complete that evaluation by December 31, 1999.
SG&A expenses were $72.0 million for the three months ended September 30,
1999 compared to $59.5 million for the 1998 period. The overall dollar increase
in SG&A expenses is primarily due to increased selling costs associated with the
increase in 1999 sales partially offset by the reduction in SG&A expenses
associated with the Company's spa business which was sold during 1998 and whose
total SG&A expenses during the third quarter of 1998 were $1.3 million. SG&A
expenses as a percent of net revenues decreased to 21.4% in 1999 from 24.2% in
1998 as revenues grew faster than SG&A expenses.
Interest expense was $4.0 million for the three months ended September 30,
1999 compared with $8.5 million in the 1998 period, a decrease of $4.5 million.
Approximately 34% of this decrease is attributable to lower borrowings with the
balance of the decrease primarily attributable to a reduction in the interest
rate on amounts borrowed from Sunbeam as a result of the amendment to the
intercompany note between Sunbeam and Coleman (See "--Liquidity and Capital
Resources").
Minority interest represents the interest of minority shareholders in the
Company's subsidiary operations in the Philippines, Indonesia, and Canada.
The Company recorded a provision for income tax expense of $14.4 million or
38.5% of pre-tax earnings in 1999 compared to a provision for income tax benefit
of $2.9 million or 29.4% of pretax earnings in 1998. The 1998 income tax benefit
was negatively impacted by nondeductible items.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998
Net revenues of $1,017.5 million for the nine months ended September 30,
1999 were $201.3 million, or 24.7%, greater than for the nine months ended
September 30, 1998. The outdoor recreation products revenues, reflecting both
United States and foreign non-hardware products, increased $114.6 million.
Revenues for the 1999 period include $31.3 million of revenues from sales of
Sunbeam grills and other Sunbeam appliances which Coleman began selling
primarily in Europe and Canada in late 1998 and early 1999, respectively. In
addition, revenues for the 1998 period include $22.0 million of revenues from
sales of the Company's spa related products, a business which was sold during
1998. Adjusting revenues for the 1999 period to exclude the Sunbeam product
revenues and adjusting the 1998 period to exclude the spa related product
revenues results in comparable outdoor recreation products 1999 period revenues
increasing $105.3 million, or 17.2%, over 1998 period revenues. This increase
occurred in nearly all product categories, primarily reflecting strong retail
replenishment demand and what the Company believes is heightened consumer
sensitivity to emergency preparedness, including Year 2000 considerations. The
Company experienced unusually weak retail replenishment demand in the first half
of 1998. The hardware products revenues increase of $86.7 million includes $19.8
million of revenues from sales of
S2PII-21
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
Sunbeam's First Alert products which Coleman began selling internationally,
primarily in Europe, in late 1998. In addition, revenues for the 1998 period
include $16.3 million of revenues from the Company's safety and security
business which was sold in March 1998. Excluding the revenues from these First
Alert products and the safety and security business products, the hardware
products revenues reflected an increase of $83.2 million, or 50.6%, over
comparable 1998 revenues primarily reflecting an increase in generator sales
attributable to what the Company believes is heightened consumer sensitivity to
the need for emergency preparedness, including power shortages arising from poor
weather conditions and Year 2000 considerations. Geographically, United States
revenues increased $122.0 million, or 23.9%, and foreign revenues increased
$79.3 million, or 25.9%, over the 1998 period revenues. The United States
revenues for the 1998 period includes revenues from the Company's safety and
security business and spa business, both of which were sold during 1998.
Excluding these revenues from the 1998 period, United States revenues in 1999
reflected an increase of $160.3 million or 34.0%, over the 1998 period revenues.
Excluding the Sunbeam product revenues from the foreign revenues in the 1999
period, foreign revenues in 1999 reflected an increase of $28.2 million, or
9.2%, over the 1998 period revenues.
Gross profit for the nine months ended September 30, 1999 was $325.8
million as compared to $229.0 million for the nine months ended September 30,
1998. Higher sales volume and favorable manufacturing efficiencies resulting
from higher production levels associated with the higher sales volume in the
1999 period accounted for primarily all of the increase in gross profit.
SG&A expenses, excluding the impact of $13.4 million of other charges in
the nine months ended September 30, 1998 as described above, were $201.7 million
for the nine months ended September 30, 1999 compared to $178.8 million in the
1998 period. The overall dollar increase in SG&A expenses is primarily due to
increased selling costs associated with the increase in 1999 sales partially
offset by the reduction in SG&A expenses associated with the Company's safety
and security business and spa business, both of which were sold during 1998, and
whose total SG&A expenses during the 1998 period were $8.2 million. SG&A
expenses as a percent of net revenues decreased to 19.8% in 1999 from 21.9% in
1998 as revenues grew faster than SG&A expenses.
Interest expense was $16.4 million for the nine months ended September 30,
1999 compared with $26.4 million in the 1998 period, a decrease of $10.0
million. Approximately 48% of this decrease is attributable to lower borrowings
with the balance of the decrease primarily attributable to a reduction in the
interest rate on amounts borrowed from Sunbeam as a result of the amendment to
the intercompany note between Sunbeam and Coleman (See "--Liquidity and Capital
Resources").
Minority interest represents the interest of minority shareholders in the
Company's subsidiary operations in the Philippines, Indonesia, and Canada.
The Company recorded a provision for income tax expense of $39.8 million or
38.5% of pre-tax earnings in 1999 compared to a provision for income tax expense
of $13.3 million in 1998. The 1999 income tax provision reflects $1.2 million of
tax expense due to the impact of decreased foreign tax rates on deferred tax
assets. Excluding this item, the 1999 effective income tax rate would have been
approximately 37.3%. The 1998 income tax provision reflects, among other things,
(i) the write-off of approximately $5.5 million deferred tax assets that became
unrealizable as a result of the Sunbeam Acquisition, (ii) $0.4 million of tax
expense due to the impact of decreased foreign tax rates on deferred tax assets,
and (iii) the impact of $7.2 million non-deductible costs associated
S2PII-22
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
with the Sunbeam Acquisition. Excluding these items, the 1998 effective income
tax rate would have been approximately 42.0% which is higher than the statutory
Federal income tax rate primarily because of state income taxes, nondeductible
amortization and foreign operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided $57.9 million and $10.9 million
of cash during the nine months ended September 30, 1999 and 1998, respectively.
Cash provided by operating activities increased in the 1999 period over the 1998
period due to higher earnings after giving effect to non-cash items offset in
part by higher working capital needs during the 1999 period. Receivables,
inventories and accounts payables increased $89.6 million, $16.3 million and
$19.7 million, respectively, in the nine months ended September 30, 1999 as
compared to a $13.0 million increase in receivables and a $16.1 million and
$18.5 million decrease in inventories and account payables, respectively, in the
nine months ended September 30, 1998. The overall net increase in receivables,
inventories and accounts payables in 1999 as compared to 1998 is largely due to
a higher level of business activity in 1999. The Company may also increase
inventory during the fourth quarter of 1999 as a contingency against supply
disruption from suppliers for Year 2000 issues. The Company's capital
expenditures were $19.6 million and $16.6 million in the nine months ended
September 30, 1999 and 1998, respectively. Capital expenditures for the nine
months ended September 30, 1999 includes approximately $4.6 million of
capitalized costs incurred to address Year 2000 issues.
On July 12, 1999, Coleman Worldwide acquired 3,000,000 shares of a newly
created series of Coleman voting preferred stock for an aggregate purchase price
of approximately $31.1 million. These shares, together with the shares of
Coleman common stock owned by Coleman Worldwide, enable Coleman Worldwide to
exercise 80.01% of the total voting power of Coleman's outstanding capital stock
as of November 17, 1999. Coleman created these shares of preferred stock and
Coleman Worldwide acquired them in order to enable Coleman and Sunbeam to file
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,
Coleman entered into a tax sharing agreement with Sunbeam 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 Sunbeam. The net proceeds from the issuance of
the shares by Coleman of its voting preferred stock to Coleman Worldwide and a
portion of the cash provided by operations were used by Coleman to repay a
portion of the loans outstanding from Sunbeam under the Intercompany Note.
During the nine months ended September 30, 1998, the $45.5 million of proceeds
from stock option exercises along with $381.0 million of net borrowings from
Sunbeam and the proceeds from the sale of the Company's safety and security
business and sales of fixed assets of $98.8 million were used to, among other
things, (i) repay the $116.0 million outstanding indebtedness under the
Company's then existing credit agreement (ii) redeem the Company's various
senior notes at a cost of $383.4 million, and (iii) fund the Company's operating
activities and capital expenditures.
On November 9, 1999, Sunbeam announced a plan to divest Coleman's Eastpak
business and certain other non-essential Sunbeam and Coleman assets. Sunbeam
said net proceeds from these sales, estimated at $200 million, will be used to
primarily pay down Sunbeam debt.
The Company's uses of cash for 1999 are expected to be primarily for
working capital and capital expenditure requirements. The Company's ability to
meet its cash operating requirements,
S2PII-23
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
including capital expenditures and other obligations, is dependent upon a
combination of cash flows from operations and loans to the Company from Sunbeam.
Sunbeam has informed the Company it has the positive intent and ability to fund
the Company's requirements for borrowed funds through April 10, 2000. Prior to
April 15, 1999, amounts loaned by Sunbeam to Coleman were represented by a
promissory note (the "Old Intercompany Note"), were due on demand and bore
interest at a floating rate equivalent to the weighted average interest rate
incurred by Sunbeam on its outstanding convertible debt and borrowings under its
bank credit facility.
On April 15, 1999, Coleman, Sunbeam and, as to certain agreements, the
lenders under the Sunbeam Credit Facility, amended and restated the Old
Intercompany Note (the "Intercompany Note"), entered into intercompany security
and pledge agreements, and entered into an amendment to the Sunbeam Credit
Facility and certain other agreements (collectively, the "Agreements"). The
Intercompany Note is due April 15, 2000. The Intercompany Note bears interest at
an annual rate equal to (i) 4% if the three month London Interbank Offering Rate
("LIBOR") quoted on the Telerate system is less than 6%, or (ii) 5% if the three
month LIBOR quoted on the Telerate system is 6% or higher, subject to increases
during an event of default, and interest will be payable by adding the amount of
such interest to the principal balance of the Intercompany Note. In addition,
the Intercompany Note provides that an event of default under the Sunbeam Credit
Facility will constitute an event of default under the Intercompany Note and
that in certain circumstances the payment on the Intercompany Note will be
subordinate to Coleman's obligations under the Sunbeam Credit Facility. Pursuant
to the Agreements, Coleman has pledged to Sunbeam substantially all of its
domestic assets, other than its real property, including 66% of its ownership
interest in its direct foreign subsidiaries and domestic holding companies for
its foreign subsidiaries and all of its ownership interest in its other direct
domestic subsidiaries (but Coleman's subsidiaries have not pledged their assets
or stock of their subsidiaries), as security for the Intercompany Note. Sunbeam
has pledged the Intercompany Note as security for the Sunbeam Credit Facility
and assigned to such lenders the security pledged by Coleman for the
Intercompany Note. Coleman also gave the lending banks a direct pledge of the
assets securing the Intercompany Note to secure the obligations under the
Sunbeam Credit Facility, subject to a cap equal to the balance due from time to
time on the Intercompany Note.
As of September 30, 1999 the amount borrowed by the Company under the
Intercompany Note amounted to $303.2 million and the applicable interest rate
was 4%. The weighted average interest rate charged by Sunbeam for amounts
borrowed under the Old Intercompany Note and the Intercompany Note during the
nine months ended September 30, 1999 was 5.3% and the total interest charged by
Sunbeam to Coleman was $15.3 million. Sunbeam also charged to Coleman a pro-rata
share of amortized debt issuance costs and unused bank credit facility
commitment fees totaling $0.3 million. Net amounts advanced from Sunbeam along
with the related unpaid interest and other costs are reflected as debt payable
to affiliate in the Company's consolidated balance sheet. Coleman is also a
borrower under the Sunbeam Credit Facility for purposes of letters of credit
issued for its account.
The Sunbeam Credit Facility provides for aggregate borrowings of up to
$1,700.0 million pursuant to (i) a revolving credit facility in an aggregate
principal amount of up to $400.0 million (subject to certain reductions)
maturing on March 30, 2005, of which $52.5 million may only be used to complete
the Coleman Merger, (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 on September 30, 2006, of
which $5.0 million has already been
S2PII-24
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
repaid through September 30, 1999. At September 30, 1999, Sunbeam had $1,467.5
million of outstanding debt under the Sunbeam Credit Facility and approximately
$165.0 million available for borrowing. As a result of Sunbeam's operating
losses during 1998, among other things, Sunbeam was not in compliance with the
financial covenants and other terms contained in the Sunbeam Credit Facility. In
April 1999, Sunbeam and its lenders entered into an amendment to the Sunbeam
Credit Facility which amended and added certain financial covenants and other
terms and waived compliance with certain other financial covenants and other
terms through April 10, 2000. At the end of September 1999, approximately $185.0
million was available to the Company under the Sunbeam Credit Facility either
through letters of credit borrowings or loans from Sunbeam. In addition, at the
same time, Sunbeam's cash balance available for debt repayment was approximately
$24.1 million.
Borrowings under the Sunbeam Credit Facility are secured by a pledge of the
stock of Sunbeam's material subsidiaries, including Coleman, and by a security
interest in substantially all of the assets of Sunbeam and its material
subsidiaries, other than Coleman and its subsidiaries except as otherwise
described herein. Currently, Coleman's inventory and related assets are pledged
to secure its obligations for letters of credit issued for its account under the
Sunbeam Credit Facility.
The Sunbeam Credit Facility contains covenants customary for credit
facilities of a similar nature, and events of default customary for transactions
of this type. The Sunbeam Credit Facility requires the Registration Statement be
declared effective by January 10, 2000, and that the Coleman Merger be
consummated no more than 25 business days after the Registration Statement is
declared effective. Sunbeam has filed the Registration Statement, but is
uncertain when the Registration Statement will become effective. However, it is
anticipated the Coleman Merger will be completed in the fourth quarter of 1999
or early in the first quarter of 2000. Sunbeam is also required to maximize its
subsidiaries' utilization of available foreign credit facilities and Sunbeam's
accounts receivable facility and to comply with specified financial covenants
and ratios. If an event of default occurs under the Sunbeam Credit Facility or
Sunbeam is unable to obtain a waiver or amendment of certain financial covenants
after April 10, 2000, the Company may be required to reduce, delay or cancel
capital or other expenditures and/or seek loans or capital contributions from,
or sell assets or capital stock to, lending institutions and/or other third
parties or affiliates. There can be no assurance that any of such transactions
could be consummated or if consummated, would be on favorable terms or in
amounts sufficient to permit the Company to meets its cash requirements, or that
any of such transactions would be permitted under Sunbeam's debt instruments
then in effect. See Note 14 to the consolidated financial statements in the
Company's Annual Report on Form 10-K/A for the year ended December 31, 1998.
In April 1999, the New York Stock Exchange ("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 $12.0 million at September 30, 1998 and
average annual net income of at least $0.6 million for fiscal years 1997, 1996
and 1995. At that time, Coleman requested the NYSE to continue to list the
Coleman common stock until completion of the Coleman Merger. The NYSE
subsequently advised Coleman that Coleman also failed to satisfy certain
non-financial continuing listing standards. 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 could adversely affect the market price
S2PII-25
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
of Coleman's common stock and Coleman's ability to sell its capital stock to
third parties. However, Sunbeam's bank credit facility currently restricts
Coleman from taking such actions.
SEASONALITY
The Company's sales generally are highest in the second quarter of the year
and lowest in the fourth quarter. As a result of this seasonality, the Company
has generally incurred a loss in the fourth quarter. The Company's sales may be
affected by weather conditions, especially during the second and third quarters
of the year.
YEAR 2000 READINESS DISCLOSURE
The Company is preparing for the impact of the Year 2000 on its operations.
The Company is being assisted in its review and remediation work by Sunbeam's
Year 2000 Program Management Office and consulting firms employed by Sunbeam.
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, heating,
ventilation and facility access. Additionally, the Company is assessing the
effects of noncompliance by its vendors, service providers, customers and
financial institutions.
The Company relies on its information technology functions to perform many
tasks that are critical to its operations. Significant transactions that could
be impacted by not being ready for any Year 2000 issues include, among others,
purchases of materials, production management, order entry and fulfillment,
payroll processing, and billing and collections. Systems and applications that
were identified by the Company as not currently Year 2000 ready and which are
critical to the Company's operations include certain of its financial software
systems which process 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.
The Company's corrective work to achieve Year 2000 readiness has included
the following: (i) installation of Year 2000 ready JD Edwards software which has
been completed in one location; (ii) installation of Year 2000 ready JBA
software in another location which has recently been completed; (iii)
remediation of software codes for existing programs in another location which
has been completed and tested to be Year 2000 ready; and (iv) installation of
Year 2000 ready JD Edwards software which is substantially complete in another
location.
The Company has contacted its major vendors and suppliers of products and
services to determine their Year 2000 readiness, and is continuing to monitor
their status with respect to such plans. This review includes third party
providers to whom the Company has outsourced the processing of its cash receipt
transactions and its payroll. The Company is currently assessing the vendor
responses and will conduct additional reviews, including on-site meetings, if
deemed necessary, with any major suppliers who have not indicated their
readiness for the Year 2000. The Company has verified that all of the Company's
major customers have planned programs to deal with Year 2000 issues and is
currently completing the process of contacting its major customers to confirm
they are implementing their planned programs to address Year 2000 issues.
The Company has substantially completed all its Year 2000 corrective work.
Coleman's Year 2000 readiness program is ongoing and its ultimate scope, as well
as the consideration of
S2PII-26
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
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 information technology and other 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 fourth quarter of
1999.
The Company's Year 2000 program was developed and is monitored with the
help of independent consultants. Therefore, with the exception of certain
aspects of the Company's Year 2000 readiness program, the Company did not engage
another independent third party to verify the program's overall approach or
total cost. However, the Company believes that through its use of various
external consulting firms which perform significant roles within the Year 2000
program, 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 in the software code of business
software programs which the Company has remediated, the Company believes that it
has also mitigated its risk by validating and verifying key program components.
Management believes Coleman's information systems environment will be made
Year 2000 ready prior to January 1, 2000. Coleman's failure to timely complete
such corrective work could have a material adverse impact on Coleman. With
respect to customers and suppliers, the failure of some of these third parties
to become Year 2000 ready could also have a material adverse impact on Coleman.
For example, the failure of some of Coleman's principal suppliers to have Year
2000 ready internal systems could impact Coleman's ability to manufacture and/or
ship its products or to maintain adequate inventory levels for production.
At this time, Coleman 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 the
Company's operations could be material if appropriate contingency plans cannot
be developed prior to January 1, 2000.
As of September 30, 1999, including costs incurred in 1998, the Company had
expended approximately $11.3 million to address Year 2000 issues of which
approximately $5.7 million was recorded as SG&A expenses and the remainder as
capital expenditures. The Company's current assessment of the total costs to
address and remedy Year 2000 issues is approximately $14.0 million. This
estimate includes the costs of software and hardware modifications and
replacements, and fees to third party consultants, but excludes the costs
associated with Company employees. There can be no assurance that these current
estimates will not change as the Company completes its assessment of the Year
2000 issues. The Company expects these expenditures to be financed through
operating cash flows or borrowings, as applicable.
S2PII-27
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
Because Year 2000 readiness is critical to the business, the Company has
redeployed some resources from non-critical system enhancements to address Year
2000 issues. In addition, due to the importance of information technology
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 or results of operations.
CAUTIONARY STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q may constitute
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995, as the same may be amended from time to time (the
"Act") and in releases made by the Securities and Exchange Commission ("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 facts, including
statements about the Company's beliefs and expectations, are forward-looking
statements. Forward-looking statements can be identified by, among other things,
the use of forward-looking language, such as the word "believe," "expect,"
"estimate", "project", "may," "will," "should," "seek," "plan," "scheduled to,"
"anticipate" or "intend" or the negative of those terms, or other variations of
those terms or comparable language, or by discussions of strategy or intentions.
Forward-looking statements speak only as of the date they are made, and the
Company undertakes no obligation to update them. 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:
- high leverage,
- Sunbeam having sufficient borrowing capacity or other funds to lend
to the Company to satisfy the Company's cash needs,
- unavailability of sufficient cash flows from operations and
borrowings from Sunbeam, and the inability of the Company to secure
loans or capital contributions from, or sell assets or capital
stock to, lending institutions and/or other third parties or
affiliates,
- Sunbeam's ability to comply with the terms of the Sunbeam Credit
Facility, and to continue to have access to its revolving credit
facility,
- the Company's ability to repay the Intercompany Note when due on
April 15, 2000 or the Company's ability to refinance the
Intercompany Note at acceptable rates with acceptable terms,
- Coleman's ability to maintain and increase market share for its
products at acceptable margins,
S2PII-28
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
- Coleman's ability to successfully introduce new products and to
provide on-time delivery and a satisfactory level of customer
service,
- changes in domestic and/or foreign laws and regulations, including
changes in tax laws, accounting standards, environmental laws,
occupational, health and safety laws,
- access to foreign markets together with foreign economic and
political conditions, including currency fluctuations, and trade,
monetary, fiscal and/or tax policies,
- uncertainty as to the effect of competition in existing and
potential future lines of business,
- fluctuations in the cost and/or availability of raw materials
and/or products,
- changes in the availability and/or costs of labor,
- effectiveness of advertising and marketing programs,
- product quality, including excess warranty costs, product liability
expenses and costs of product recalls,
- weather conditions which can have an unfavorable impact upon sales
of certain of Coleman's products,
- the possibility of a recession in the United States or other
countries resulting in a decrease in consumer demands for Coleman's
products,
- changes in consumer preferences or a decrease in the public's
interest in camping and related activities,
- combinations or other actions by retail customers that adversely
affect sales or profitability,
- actions by competitors including business combinations, new product
offerings and marketing and promotional activities,
- failure of Coleman and/or its customers and suppliers of goods or
services to timely complete the remediation of computer systems to
effectively process Year 2000 information, and
- Coleman's sourcing of products from international vendors,
including the ability to select reliable vendors and avoid delays
in shipments.
Other factors and assumptions not included in the foregoing may cause the
Company's actual results to materially differ from those projected. The Company
assumes no obligation to update any forward-looking statements or these
cautionary statements to reflect actual results or changes in other factors
affecting such forward-looking statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUALITATIVE INFORMATION
Coleman uses a variety of derivative financial instruments to manage its
foreign currency and interest rate exposures. Coleman does not speculate on
interest rates or foreign currency rates. Instead, it uses derivatives when
implementing its risk management strategies to reduce the possible effects of
these exposures. See also Note 12 to the Consolidated Financial Statements in
the Company's Annual Report on Form 10-K/A for the year ended December 31, 1998.
The Company's international operations are located primarily in Europe,
Japan and Canada, which are not considered to be highly inflationary
environments. With respect to foreign currency
S2PII-29
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
exposures, the Company principally uses forward and option contracts to reduce
risks arising from firm commitments, anticipated intercompany sales transactions
and intercompany receivable and payable balances. Coleman is most vulnerable to
changes in United States dollar/Japanese yen (JPY), United States
dollar/Canadian dollar (CAD), United States dollar/German Deutschemark (DM), and
United States dollar/British Pound (GBP) exchange rates.
The Company's interest income and expense are most sensitive to changes in
the general level of U.S. interest rates. In this regard, changes in U.S.
interest rates affect the interest earned on the Company's cash equivalents and
short-term investments as well as interest paid on its debt. To mitigate the
impact of fluctuations in U.S. interest rates, the Company maintains a portion
of its debt as fixed rate in nature by entering into interest rate swap
transactions.
Coleman manages credit risk related to its derivative instruments through
credit approvals, exposure limits, threshold amounts and other monitoring
procedures.
QUANTITATIVE INFORMATION
Set forth below are tabular presentations of certain information related to
Coleman's investments in market risk sensitive instruments. All of the
instruments set forth in the following tables have been entered into by Coleman
for purposes other than trading.
INTEREST RATE SENSITIVITY. The table below provides information about
Coleman's derivative financial instruments and other financial instruments that
are sensitive to changes in interest rates, including interest rate swaps and
debt obligations.
For debt obligations, the table presents principal cash flows by expected
maturity date and related September 30, 1999 weighted average interest rates.
For interest rate swaps, the table presents notional amounts and weighted
average interest rates for the contracts at September 30, 1999. Notional amounts
are used to calculate the contractual payments to be exchanged under the
contracts.
<TABLE>
<CAPTION>
Expected Maturity Date
Balance ------------------------------------------------------------
at There- Fair
9/30/99 1999 2000 2001 2002 2003 after Total Value
------- ---- ---- ---- ---- ---- ------- ------ -----
(US$ Equivalent in Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Debt:
Fixed Rate.................. $ 0.6 $ 0.1 $ 0.2 $ 0.2 $ 0.1 $ -- $ -- $ 0.6 $ 0.6
Average Interest Rate....... 5.10%
Interest Rate Derivatives:
Interest Rate Swaps:
Variable to Fixed (US$).. $ 25.0 $ -- $ -- $ -- $ -- $ 25.0 $ -- $ 25.0 $ 0.0
Average Pay Rate......... 6.12%
Average Receive Rate..... 5.37%
</TABLE>
EXCHANGE RATE SENSITIVITY. The table below provides information about
Coleman's foreign currency derivative financial instruments and other financial
instruments, including forward exchange agreements, by functional currency and
presents such information in U.S. dollar equivalents. The table summarizes
information on instruments and transactions that are sensitive to foreign
currency exchange rates, including foreign currency variable rate credit lines,
foreign
S2PII-30
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
currency forward exchange agreements and foreign currency purchased put option
contracts. For debt obligations, the table represents principal cash flows and
related weighted average interest rates by expected maturity dates. For foreign
currency forward exchange agreements and foreign currency put option contracts,
the table presents the notional amounts and weighted average exchange rates by
expected (contractual) maturity dates. These notional amounts generally are used
to calculate the contractual payments to be exchanged under the contract.
<TABLE>
<CAPTION>
Balance
at Fair
9/30/99 (1) Value
----------- ---------
(US$ Equivalent in Millions)
<S> <C> <C>
Foreign Currency Short-Term Debt:
Variable Rate Credit Lines (Europe, Japan and Asia)...... $ 36.7 $ 36.7
Weighted Average Interest Rate........................... 2.2%
Forward Exchange Agreements:
(Receive US$/Pay DM)
Contract Amount....................................... $ 3.0 $ 3.3
Average Contractual Exchange Rate..................... 1.61
(Receive US$/Pay JPY)
Contract Amount....................................... $ 3.0 $ 2.7
Average Contractual Exchange Rate..................... 113.6
(Receive US$/Pay GBP)
Contract Amount....................................... $ 1.0 $ 1.0
Average Contractual Exchange Rate..................... .60
(Receive US$/Pay CAD)
Contract Amount....................................... $ 3.4 $ 3.4
Average Contractual Exchange Rate..................... 1.46
Purchased Put Option Agreements:
(Receive US$/Pay DM)
Contract Amount....................................... $ 4.3 $ 0.1
Average Strike Price.................................. 1.80
(Receive US$/Pay JPY)
Contract Amount....................................... $ 1.0 $ 0.0
Average Strike Price.................................. 125.00
(Receive US$/Pay GBP)
Contract Amount....................................... $ 0.3 $ 0.0
Average Strike Price.................................. .62
(Receive US$/Pay CAD)
Contract Amount....................................... $ 6.1 $ 0.0
Average Strike Price.................................. 1.53
</TABLE>
- -------------------
(1) None of the instruments listed in the table have maturity dates beyond 1999.
S2PII-31
<PAGE>
THE COLEMAN COMPANY, INC. AND SUBSIDIARIES
LEGAL PROCEEDINGS
Eastpak Corporation is a defendant in a case entitled HENRY BELKIN V.
EASTPAK, INC., AND EASTPAK CORPORATION (collectively the "Eastpak Defendants")
in the Superior Court for Middlesex County, Massachusetts. Mr. Belkin alleges in
the lawsuit that he and one or both of the Eastpak Defendants had entered into a
Sales Management Agreement ("SMA") which had a term expiring in the year 2003.
Mr. Belkin alleges, among other things, that one or both of the Eastpak
Defendants terminated the SMA without cause and claims substantial damages from
lost commissions. The trial is expected to commence in January 2000. The Eastpak
Defendants intend to vigorously defend the foregoing lawsuit, but cannot predict
the outcome.
S2PII-32
<PAGE>
ADDITIONAL SELLING SECURITYHOLDERS
The following represents an addendum to the table of selling
securityholders appearing in the November 11, 1999 prospectus on pages 131-32.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT AT COMMON STOCK COMMON
MATURITY OF DEBENTURES PERCENT OF TOTAL OWNED PRIOR TO STOCK TO BE
BENEFICIALLY OWNED AND OUTSTANDING ORIGINAL DEBENTURES REGISTERED
SELLING SECURITYHOLDERS OFFERED HEREBY DEBENTURES OFFERING HEREBY
- -------------------------------------- ----------------------- --------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Angelo, Gordon & Co., L.P. $ 1,500,000 - - -
Ari Storch 100,000 - - -
Glenbrook Partners, L.P. 1,000,000 - - -
John M. Angelo, Michael L. Gordon &
Fred Berger TTEES of the AG Savings &
Investment Plan DTD 1/1/89 FBO David
Kamin 20,000 - - -
John M. Angelo, Michael L. Gordon &
Fred Berger TTEES of the AG Savings &
Investment Plan DTD 1/1/89 FBO
Charles E. Perilman 125,000 - - -
John M. Angelo, Michael L. Gordon &
Fred Berger TTEES of the AG Savings &
Investment Plan DTD 1/1/89 FBO Gary
Wolf 200,000 - - -
MichaelAngelo, L.P. 12,000,000 - - -
Ramius, L.P. 3,500,000 - - -
Ramius Securities, LLC 1,500,000 - - -
RCG Baldwin, L.P. 2,000,000 - - -
RCG Multi Strategy Account, L.P. 20,500,000 1.0 - -
Triarc Companies Inc. 2,000,000 - - -
</TABLE>
