the branded consumables segment's operating earnings increased by $3.3 million from the first six months of 2002 to the first six months of 2003, due to the addition of the Diamond Brands product lines, partially offset by a decrease in operating earnings caused by a decrease in net sales for the remainder of this segment as discussed above. Partially offsetting these effects was a decrease in our other business segment's operating earnings from $3.7 million in the first six months of 2002 to $2.9 million in the first six months of 2003 due to the effect of its lower net sales. Operating earnings in the first six months of 2003 for our plastic consumables segment was comparable with the same period in the prior year for the same factors as discussed above under the net sales explanation.
Gross margin percentages on a consolidated basis increased to 38.5% in the first six months of 2003 from 35.9% in the first six months of 2002. Such increase is principally the result of including the higher gross margins of the acquired consumer solutions business for the full six month period in 2003 but only part of the six month period in 2002.
Selling, general and administrative expenses increased to $56.3 million in the first six months of 2003 from $32.8 million in the first six months of 2002, or, as a percentage of net sales, increased to 24.7% in the first six months of 2003 from 21.6% in the first six months of 2002. This increase was principally due to the acquisition of the consumer solutions business and the additional selling, general and administrative expenses related to the new product lines in the branded consumables segment, primarily resulting from the Diamond Acquisition.
Net interest expense increased to $8.2 million for the first six months of 2003 compared to $5.0 million in the same period last year. This increase resulted from higher levels of outstanding debt in 2003 compared to the same period in 2002, principally due to the financing of the Tilia Acquisition and the Diamond Acquisition and the issuance of the New Notes. Our weighted average interest rate in the first six months of 2003 was comparable to the first six months of 2002.
Our effective tax rate for the first six months of 2003 was 39.2% compared to an effective tax rate of 9.4% in the first six months of 2002. At December 31, 2001, we had federal net operating losses that were recorded as a deferred tax asset with a valuation allowance of $5.4 million. Due to the impact of the Job Creation Act and the tax refunds that we received as a result, a net $4.9 million of this valuation allowance was released in the first six months of 2002 resulting in an income tax provision of $1.6 million. Excluding the release of this valuation allowance our effective tax rate was approximately 38.4% in the first six months of 2002. Our net income for the first six months of 2002 would have been $10.4 million or $0.74 per diluted share if this valuation allowance release was excluded.
During the first six months of 2003, the following changes were made to our capital structure:
| • | we entered into a $37 million interest rate swap to receive a floating rate of interest and pay a fixed rate of interest; |
| • | we received $3.2 million of cash proceeds, including $1 million of accrued interest, for unwinding our $75 million interest rate swap and contemporaneously replacing it with a new $75 million interest rate swap; |
| • | in connection with the Diamond Acquisition, we increased our term loan facility by $10 million and our revolving credit facility by $20 million; and |
| • | we repaid $10 million of seller debt financing. |
Specifically, on May 8, 2003, pursuant to an indenture dated January 29, 2003, as supplemented by a first supplemental indenture, dated May 8, 2003, we issued $30 million of New Notes under our shelf registration statement. The net proceeds of approximately $32.0 million of the offering were used to reduce the outstanding revolver balances under our senior credit facility. The New Notes were issued at a price of 106.5% of face value.
The New Notes will mature on May 1, 2012, however, on or after May 1, 2007, we may redeem all or part of the New Notes at any time at a redemption price ranging from 100% to 104.875% of the principal amount, plus accrued and unpaid interest and liquidated damages, if any. Prior to May 1, 2005, we may redeem up to 35% of the aggregate principal amount of the New Notes with the net cash proceeds from certain public equity offerings at a redemption price of 109.75% of the principal amount, plus accrued and unpaid interest and liquidated damages, if any. Interest on the New Notes accrues at the rate of 9.75% per annum and is payable semi-annually in arrears on May 1 and November 1, commencing on November 1, 2003.
On May 6, 2003, we entered into a $30 million interest rate swap ("New Swap") to receive a fixed rate of interest and pay a variable rate of interest based upon LIBOR. The New Swap is a swap against our 9¾% senior subordinated notes issued under an indenture dated April 24, 2002 ("Notes").
As disclosed in our 2003 Proxy Statement, our board of directors approved, on February 6, 2003, the granting of additional restricted shares of common stock to Messrs. Franklin and Ashken. Accordingly, during the second quarter of 2003, restricted shares of common stock in the aggregate amounts of 150,000 shares and 50,000 shares were issued to Martin E. Franklin, our Chairman and Chief Executive Officer, and Ian G.H. Ashken, our Vice Chairman, Chief Financial Officer and Secretary, respectively, under our 2003 Stock Incentive Plan. These shares were issued out of our treasury stock account. The restrictions on these shares shall lapse upon our common stock achieving a set price of $40, or on a change in control.
During 2002, Messrs. Franklin and Ashken exercised 600,000 and 300,000 non-qualified stock options, respectively, which had been granted under our 2001 Stock Option Plan. These shares were issued out of our treasury stock account. The exercises were accomplished via loans from us under our Executive Loan Program. The principal amounts of the loans were $3.3 million and $1.6 million, respectively, and bore interest at 4.125% per annum. The loans were due on January 23, 2007 and were classified within the stockholders' equity section. The loans could be repaid in cash, shares of our common stock, or a combination thereof. In February 2003, Mr. Ashken surrendered to us shares of our common stock to repay $0.3 million of his loan. On April 29, 2003, Messrs. Franklin and Ashken each surrendered to us shares of our common stock to repay in full all remaining principal amounts and accrued interest owed under their respective loans. We will not make any additional loans under the Executive Loan Program.
Effective April 2, 2003, we entered into an interest rate swap that converted $37 million of floating rate interest payments under our term loan facility for a fixed obligation that carries an interest rate, including applicable margin, of 4% per annum. The swap has interest payment dates that are the same as the term loan facility and it matures on September 30, 2004. The swap is considered to be a cash flow hedge and is also considered to be an effective hedge against changes in the fair value of our floating-rate debt obligation for both tax and accounting purposes. Gains and losses related to the effective portion of the interest rate swap are reported as a component of other comprehensive income and will be reclassified into earnings in the same period that the hedged transaction affects earnings.
17
In March 2003, we unwound a $75 million interest rate swap to receive a fixed rate of interest and pay a variable rate of interest based upon LIBOR and contemporaneously entered into a new $75 million interest rate swap ("Replacement Swap"). Like the swap that it replaced, the Replacement Swap is a swap against our Notes. The Replacement Swap has a maturity date that is the same as the Notes. Interest is payable semi-annually in arrears on May 1 and November 1. We accrue interest on the swap at an effective rate of 7.03%.
In return for unwinding the swap, we received $3.2 million of cash proceeds. Of this amount, approximately $1 million of such proceeds related to accrued interest that was owed to us at such time. The remaining $2.2 million of proceeds is being amortized over the remaining life of the Notes as a credit to interest expense and the unamortized balances are included in our Consolidated Balance Sheet as an increase to the value of the long-term debt.
Pursuant to the Diamond Acquisition, in February 2003, we amended our senior secured credit facility ("Credit Agreement") increasing our term loan facility by $10 million and our revolving loan facility by $20 million.
We repaid seller debt financing, incurred in connection with the Tilia Acquisition, in the principal amount of $10 million on March 31, 2003.
In January 2003, we filed a shelf registration statement, which was declared effective by the Securities and Exchange Commission on January 31, 2003. This shelf registration statement is intended to facilitate our access to growth capital for future acquisitions and allows us to sell over time up to $150 million of common stock, preferred stock, warrants, debt securities, or any combination of these securities in one or more separate offerings in amounts, at prices and on terms to be determined at the time of the sale. The $30 million of New Notes issued in May 2003, were issued under our shelf registration statement, leaving $120 million available under this registration statement.
As of June 30, 2003, we had $54.5 million outstanding under the term loan facility of the Credit Agreement and $6.3 million outstanding under the revolving credit facility of the Credit Agreement. Net availability under the revolving credit agreement was approximately $50.9 million as of June 30, 2003, after deducting $12.8 million of issued letters of credit. We are required to pay commitment fees on the unused balance of the revolving credit facility.
As of June 30, 2003, our long-term debt included approximately $8.4 million of non-debt balances arising from interest rate swap transactions that we had entered into.
Working capital decreased to approximately $71.5 million at June 30, 2003 from approximately $101.6 million at December 31, 2002 due primarily to the use of cash on hand and draw downs under our Credit Agreement to finance our acquisitions. This was partially offset by the working capital from the acquisitions.
Cash flow from operations in the first six months of 2002 included $38.5 million in tax refunds. Excluding the effect of tax refunds, the Company generated cash flow from operations of $14.8 million in the first six months of 2003, compared to $8.7 million in the first six months of 2002.
Capital expenditures were $4.6 million in the first six months of 2003 compared to $3.1 million for the first six months of 2002 and are largely related to maintaining facilities, tooling projects, improving manufacturing efficiencies, new information systems and a portion of the costs of the installation of new packaging lines for the branded consumables segment. As of June 30, 2003, we have capital expenditure commitments in the aggregate for all of our segments of approximately $7.2 million, of which $1.9 million relates to the completion of the new packaging lines for the branded consumables segment and $3.0 million relates to the installation of a new management information system for the consumer solutions segment. Additionally, as of June 30, 2003, our other segment had forward buy contracts for the remainder of 2003 to purchase zinc ingots in the aggregate amount of approximately $1.8 million, which are expected to be used in operations in 2003.
We believe that cash generated from our operations and our availability under our Credit Agreement are adequate to satisfy our working capital and capital expenditure requirements for the foreseeable future. However, we may raise additional capital from time to time to take advantage of favorable conditions in the capital markets or in connection with our corporate development activities.
18
Contingencies
We are involved in various legal disputes in the ordinary course of business. In addition, the Environmental Protection Agency has designated our Company as a potentially responsible party, along with numerous other companies, for the clean up of several hazardous waste sites. Based on currently available information, we do not believe that the disposition of any of the legal or environmental disputes our Company is currently involved in will require material capital or operating expenses or will otherwise have a material adverse effect upon the financial condition, results of operations, cash flows or competitive position of our Company. It is possible, that as additional information becomes available, the impact on our Company of an adverse determination could have a different effect.
Forward-Looking Information
From time to time, we may make or publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products and similar matters. Such statements are necessarily estimates reflecting management's best judgment based on current information. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Such statements are usually identified by the use of words or phrases such as "believes", "anticipates", "expects", "estimates", "planned", "outlook", and "goal". Because forward-looking statements involve risks and uncertainties, our actual results could differ materially. Please see the Company's Annual Report on Form 10-K for 2002 for a list of factors which could cause the Company's actual results to differ materially from those projected in the Company's forward-looking statements and certain risks and uncertainties that may affect the operations, performance and results of our business.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
In general, business enterprises can be exposed to market risks including fluctuations in commodity prices, foreign currency values, and interest rates that can affect the cost of operating, investing, and financing. The Company's exposures to these risks are low. Historically, the majority of the Company's zinc business has been conducted on a tolling basis whereby customers supply zinc to the Company for processing, or supply contracts provide for fluctuations in the price of zinc to be passed on to the customer. The Company's plastic consumables business purchases resin from regular commercial sources of supply and, in most cases, multiple sources. The supply and demand for plastic resins is subject to cyclical and other market factors. With many of our customers, we have the ability to pass through price increases with an increase in our selling price and certain of our customers purchase the resin used in products we manufacture for them.
The Company, from time to time, invests in short-term financial instruments with original maturities usually less than fifty days.
The Company is exposed to short-term interest rate variations with respect to Eurodollar or Base Rate on certain of its term and revolving debt obligations and six month LIBOR in arrears on certain of its interest rate swaps. The spreads on the interest rate swaps range from 523 to 528 basis points. Settlements on the interest rate swaps are made on May 1 and November 1. The Company is exposed to credit loss in the event of non-performance by the other party to its current existing swaps, a large financial institution. However, the Company does not anticipate non-performance by the other party.
Changes in Eurodollar or LIBOR interest rates would affect the earnings of the Company either positively or negatively depending on the changes in short-term interest rates. Assuming that Eurodollar and LIBOR rates each increased 100 basis points over period end rates on the outstanding term debt and interest rate swaps, the Company's interest expense would have increased by approximately $0.7 million for the six month period ended June 30, 2003 and $0.3 million for the six month period ended June 30, 2002. The amount was determined by considering the impact of the hypothetical interest rates on the Company's borrowing cost, short-term investment rates, interest rate swaps and estimated cash flow. Actual changes in rates may differ from the assumptions used in computing this exposure.
The Company does not invest or trade in any derivative financial or commodity instruments, nor does it invest in any foreign financial instruments.
19
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.
20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual meeting of stockholders on May 8, 2003. Of the 14,444,385 shares of common stock entitled to vote at the meeting, 13,190,866 shares of common stock were present in person or by proxy and entitled to vote. Such number of shares represented approximately 91.3% of our outstanding shares of common stock. Listed below are the matters voted upon at our annual meeting of stockholders and the respective voting results:
| | | | | | | | | | | | | | |
| | | Voted
FOR | | Withheld | | Abstained/
Broker
Non-Votes |
| Election of Class I Directors for three-year terms expiring in 2006: | | | | | | | | | | | | |
| Martin E. Franklin | | | 12,361,915 | | | | 828,951 | | | | — | |
| René-Pierre Azria | | | 12,650,411 | | | | 540,455 | | | | — | |
|
| | | | | | | | | | | | | | |
| | | Voted
FOR | | Voted
AGAINST | | Abstained |
| Ratification and approval of the Jarden Corporation 2003 Stock Incentive Plan | | | 5,992,602 | | | | 5,564,533 | | | | 13,785 | |
| Ratification and approval of the Jarden Corporation 2003 Employee Stock Purchase Plan | | | 10,488,974 | | | | 1,022,737 | | | | 59,209 | |
| Ratification of the appointment of Ernst & Young LLP as our independent auditors for the year ending December 31, 2003 | | | 12,504,744 | | | | 677,341 | | | | 8,781 | |
|
Additionally, for each of the votes to ratify and approve the Jarden Corporation 2003 Stock Incentive Plan and the 2003 Employee Stock Purchase Plan there were 1,619,946 votes withheld and broker non-votes.
Our board of directors is currently comprised of each of the Class I Directors listed in the table above, including Martin E. Franklin and René-Pierre Azria, the Class II Directors, including Ian G.H. Ashken, Richard L. Molen, and Lynda W. Popwell, and the Class III Directors, including Douglas W. Huemme, Robert L. Wood, and Irwin D. Simon.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
| | | | | | |
| Exhibit | | Description |
| | | |
| 1.1 | | Underwriting Agreement, dated as of May 1, 2003, among the Company, Alltrista Newco Corporation, Alltrista Plastics Corporation, Alltrista Zinc Products, L.P., Hearthmark, Inc., Quoin Corporation, Tilia, Inc., Tilia Direct, Inc., Tilia International, Inc., CIBC World Markets Corp., and Banc of America Securities LLC (filed as Exhibit 1.1 to the Company's Current Report on Form 8-K, filed with the Commission on May 7, 2003 and incorporated herein by reference). |
| | | | |
| *4.1 | | First Supplemental Indenture, dated as of May 8, 2003, to Indenture dated as of January 29, 2003, among the Company, Alltrista Newco Corporation, Alltrista Plastics Corporation, Alltrista Zinc Products, L.P., Hearthmark, Inc., Quoin Corporation, Tilia, Inc., Tilia Direct, Inc., Tilia International, Inc., and The Bank of New York, and form of note attached as Exhibit A thereto. |
|
21
| | | | | | |
| Exhibit | | Description |
| | | | |
| *4.2 | | Registration Rights Agreement, dated as of May 8, 2003, among the Company, Alltrista Newco Corporation, Alltrista Plastics Corporation, Alltrista Zinc Products, L.P., Hearthmark, Inc., Quoin Corporation, Tilia, Inc., Tilia Direct, Inc., Tilia International, Inc., TriEnda Corporation, X Properties, LLC, CIBC World Markets Corp., and Banc of America Securities LLC. |
| | | | |
| *+10.1 | | Restricted Stock Agreement, dated as of May 8, 2003, between the Company and Martin E. Franklin. |
| | | | |
| *+10.2 | | Restricted Stock Agreement, dated as of May 8, 2003, between the Company and Ian G.H. Ashken. |
| | | | |
| *31.1 | | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | |
| *31.2 | | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | |
| *32.1 | | Certifications Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
* Filed herewith.
+ This Exhibit represents a management contract or a compensatory plan.
b. Reports on Form 8-K
The Company filed a Form 8-K on April 28, 2003, with respect to Items 7 and 9, relating to a press release, dated April 28, 2003, announcing the Company's earnings for the three month period ended March 31, 2003.
The Company filed a Form 8-K on May 7, 2003, with respect to Items 5 and 7, disclosing that on May 1, 2003, the Company and certain of its subsidiaries entered into an Underwriting Agreement with CIBC World Markets Corp. and Banc of America Securities LLC relating to the issuance of $30 million of 9¾% Senior Subordinated Notes due 2012 under the Company's Registration Statement on Form S-3 (File No. 333-102387) and intended to consummate the sale of the notes on May 8, 2003.
22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | |
| | | JARDEN CORPORATION |
| | |
| | |
| Date: August 12, 2003 | | By: | | /s/ Ian G. H. Ashken |
| | | | | Ian G. H. Ashken
Vice Chairman,
Chief Financial Officer and Secretary |
|
23
![[X]](https://capedge.com/proxy/10-Q/0000950136-03-001987/xbox.gif){kind=small}
![[ ]](https://capedge.com/proxy/10-Q/0000950136-03-001987/ebox.gif){kind=small}