- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NUMBER 0001-000052
------------------------
[LOGO]
SUNBEAM CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 25-1638266
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
2381 EXECUTIVE CENTER DRIVE 33431
BOCA RATON, FLORIDA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(561) 912-4100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EXCHANGE ON WHICH REGISTERED:
Common Stock, $0.01 Par Value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes / / No /x/
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K/A or any amendment to this Form 10-K/A. /x/
The aggregate market value of all classes of the registrant's voting stock
held by non-affiliates as of April 30, 1999 was approximately $372,048,943.
On April 30, 1999, there were 100,887,960 shares of the registrant's
Common Stock outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUNBEAM CORPORATION AND SUBSIDIARIES
ANNUAL REPORT
ON FORM 10-K/A
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS
General............................................................................................... 3
Products and Operations............................................................................... 3
Competition........................................................................................... 7
Customers............................................................................................. 8
Backlog............................................................................................... 8
Patents and Trademarks................................................................................ 8
Research and Development.............................................................................. 9
Employees............................................................................................. 9
Seasonality........................................................................................... 9
Raw Materials/Suppliers............................................................................... 9
Products Liability.................................................................................... 9
Environmental Matters................................................................................. 10
Regulatory Matters.................................................................................... 11
Significant 1998 Financial and Business Developments.................................................. 12
ITEM 2. PROPERTIES........................................................................................ 16
ITEM 3. LEGAL PROCEEDINGS................................................................................. 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................... 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................. 22
ITEM 6. SELECTED FINANCIAL DATA........................................................................... 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................... 54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............. 54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................... 54
ITEM 11. EXECUTIVE COMPENSATION........................................................................... 55
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................... 55
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................... 55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K........................................................................................ 55
SIGNATURES...................................................................................... 59
PART I
ITEM 1. BUSINESS
BUSINESS
GENERAL
The following is as of May 11, 1999.
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 ("Coleman") and all the outstanding common stock of Signature
Brands USA Inc., ("Signature Brands") and First Alert, Inc. ("First Alert").
(See "Significant 1998 Financial and Business Developments--The 1998
Acquisitions," below.)
PRODUCTS AND OPERATIONS
The Company's operations are managed through four groups: Household,
Outdoor Leisure, International and Corporate. The Household and Outdoor Leisure
operating groups encompass the following products:
o In the Household group:
(1) Appliances--including mixers, blenders, food steamers, breadmakers,
rice cookers, coffee makers, toasters, irons and garment steamers;
(2) Health products--including vaporizers, humidifiers, air cleaners,
massagers, hot and cold packs and blood pressure monitors;
(3) Scales;
(4) Personal care--including hair clippers and trimmers and related
products for the professional beauty, barber and veterinarian trade and sales of
products to commercial and institutional channels;
(5) Blankets--including electric blankets, heated throws and mattress pads;
and
(6) First Alert--including smoke and carbon monoxide detectors, fire
extinguishers and home safety equipment.
o In the Outdoor Leisure group:
(1) Outdoor recreation products--including tents, sleeping bags, coolers,
camping stoves, lanterns and outdoor heaters;
(2) Outdoor cooking products--including gas and charcoal outdoor grills and
grill parts and accessories;
(3) Powermate products--including portable power generators and air
compressors; and
(4) Eastpak products--including backpacks and bags.
The International group is managed through the following regional subdivisions:
3
(1) Europe--manufacture, sales and distribution of Campingaz(Registered)
products and sales and distribution in Europe, Africa and the Middle East of
other Company products;
(2) Latin America--manufacture, sales and distribution throughout Latin
America of small appliances, and sales and distribution of personal care
products, professional clippers and related products, camping products and
Powermate products;
(3) Japan--sales and distribution of primarily outdoor recreation products;
(4) Canada--sales and distribution of substantially all the Company's
products; and
(5) East Asia--sales and distribution in all areas of East Asia other than
Japan of substantially all of the Company's products.
The Corporate group provides certain management, accounting, legal, risk
management, treasury, human resources, tax and management information services
to all operating groups and also includes the operation of the Company's retail
stores and the conduct of the Company's licensing activities.
See Note 14 of Notes to Consolidated Financial Statements for financial
data concerning the Company's operating segments. Also, for a discussion of
certain risks affecting the Company's business, see the discussion in Item
7--"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, in particular, the discussion contained therein under the
subheading--"Cautionary Statements."
Household
The Company's Household group includes appliances, health products, scales,
personal care products, blankets and First Alert products. Net sales of
Household group products accounted for approximately 50%, 73% and 74% of the
Company's consolidated net sales in 1998, 1997 and 1996, respectively. Except as
discussed below, there were no Household group products or group of similar
products with sales that accounted for 10% or more of consolidated net sales in
any of the last three fiscal years.
Appliances. Small kitchen appliances include Mixmaster(Registered) stand
mixers, hand mixers, Osterizer(Registered) blenders, food processors, rice
cookers, food steamers, toasters, can openers, breadmakers, waffle makers, ice
cream makers, frying pans, deep fryers and culinary accessories, which are sold
primarily under the Sunbeam(Registered) and Oster(Registered) brand names. In
addition, the Company sells coffee makers under the Mr. Coffee(Registered),
Sunbeam and Oster brand names and, with respect to coffee and tea products, the
Mr. Coffee brand name. Other brand names or trademarks used in marketing
include: Toast Logic(Registered), Details(Registered) by Mr. Coffee for high end
coffeemakers sold in department and specialty stores, Mrs. Tea(Trademark), and
Iced Tea Pot(Trademark), Oster Designer(Registered) and Pause N
Serve(Registered). The Company holds the number one or two market positions in
coffee makers, mixers, and breadmakers. Appliances also encompass garment care
appliances consisting of irons and steamers. The Company manufactures a portion
of its appliances in its United States and Mexico plants and sources the balance
of its appliance products from domestic and foreign manufacturers.
Health. The Company markets many of its health products under the
Sunbeam(Registered) name and the trademark Health at Home(Registered). These
products include heating pads, bath scales, blood pressure and other
health-monitoring instruments, massagers, vaporizers, humidifiers and dental
care products. The Company assembles and/or manufactures its vaporizers,
humidifiers and heating pads at its United States and Mexico facilities. The
Company's other personal health products are sourced from manufacturers
primarily located in China.
Scales. The Company also designs, manufactures and markets scales for
consumer, office and professional use. The Company manufactures a complete line
of analog and digital floor scales, waist-high and eye-level scales for use in
weight monitoring by consumers. These consumer scales are sold under the brand
names Health o Meter(Registered), Sunbeam, Counselor(Registered) and
Borg(Registered). Other trademarks used in marketing the scales are
BigFoot(Registered) and Precious Metals(Registered). The Company also markets
professional scales such as traditional balance beam scales, pediatric scales,
wheelchair ramp scales, chair and sling scales and home healthcare scales using
the Pro Series(Registered) and Pro Plus Series(Registered) trademarks in
addition to the Health o Meter brand. The Company's line of scales also includes
letter and parcel scales for office use, marketed under the Pelouze(Registered)
4
brand name. The Company has a commanding share of the office scale market with
its Pelouze scales. The Company's Pelouze food scales include analog and digital
portion control scales, thermometers and timers for commercial and
non-commercial applications. Sunbeam manufactures approximately one-half of its
scales at a United States plant and sources the remaining scales from both
domestic and foreign suppliers.
Personal Care. The Company's personal care products include a broad line
of hair clippers and trimmers for animals and humans which are sold through
retail channels. The Company holds the number one or two position in its clipper
and trimmer product lines. The Company also markets a line of professional
barber, beauty and animal grooming products, including electric and battery
clippers, replacement blades and other grooming accessories sold to both
conventional retailers and through professional distributors. These products are
manufactured at the Company's United States and Mexico facilities.
Blankets. The Company's blanket products include electric blankets,
Cuddle-Up(Registered) heated throws and heated mattress pads. The Company holds
the number one market position in each of electric blankets, heated throws and
heated mattress pads. These products are manufactured at the Company's United
States and Mexico facilities. In 1996, sales of electric blankets accounted for
approximately 12% of consolidated net sales.
First Alert. The Company is a leading manufacturer and marketer of a broad
range of residential safety products, including residential use ionization and
photoelectric smoke detectors in which the Company has the leading market share.
Other products include carbon monoxide detectors, fire extinguishers,
rechargeable flashlights and lanterns, electric and electromechanical timers,
night lights, radon gas detectors, fire escape ladders and motion sensing
lighting controls. The Company's smoke detectors are battery-operated and carbon
monoxide detectors are available in both plug in and battery operated units and
in a combination unit. These products are marketed primarily under the First
Alert(Registered) brand name. The Company also uses the brand names Family
Gard(Registered) and Sure Grip(Registered) for certain of its products. The
Company markets certain of these products under the BRK(Registered) brand for
the electrical wholesale markets. The Company manufactures its smoke and carbon
monoxide detectors in its Mexico plant, manufactures fire extinguishers in its
United States plant and sources other products from domestic and foreign
suppliers.
In 1996, the Company's furniture business accounted for approximately 23%
of consolidated net sales. See Note 13 of Notes to Consolidated Financial
Statements for information relating to the divestiture of the Company's
furniture business.
Outdoor Leisure
The Company's Outdoor Leisure group includes products for outdoor
recreation and outdoor cooking, as well as the Powermate and Eastpak product
lines. Net sales of the Outdoor Leisure group accounted for approximately 50%,
25% and 26% of the Company's consolidated net sales in 1998, 1997 and 1996,
respectively. Except as discussed below, there were no other Outdoor Leisure
products or groups of similar products with sales that accounted for 10% or more
of consolidated net sales in any of the last three fiscal years.
Outdoor Recreation. Principal outdoor recreation products include a
comprehensive line of lanterns and stoves for outdoor recreational use,
fuel-related products such as disposable fuel cartridges, a broad range of
coolers and jugs, sleeping bags, backpacks, tents, outdoor folding furniture,
portable electric lights, camping accessories and other products. These products
are used predominantly in outdoor recreation, but many products have
applications in emergency preparedness and some are also used in home
improvement projects. The products are distributed predominantly through mass
merchandisers, home centers and other retail outlets. The Company believes it is
the leading manufacturer of lanterns and stoves for outdoor recreational use in
the world. The Company's liquid fuel appliances include single and dual
fuel-powered lanterns and stoves and a broad range of propane- and butane-fueled
lanterns and stoves. These products are manufactured at the Company's facilities
located in the United States and are marketed under the Coleman(Registered) and
Peak One(Registered) brand names.
The Company manufactures and sells a wide variety of insulated coolers and
jugs and reusable ice substitutes, including personal coolers for camping,
picnics or lunch box use; large coolers; beverage coolers
5
for use at work sites and recreational and social events; and soft-sided
coolers. The Company's cooler products are manufactured predominantly at the
Company's facilities located in the United States and are marketed under the
Coleman brand name worldwide. The Company designs, manufactures or sources, and
markets textile products, including tents, sleeping bags, backpacks and
rucksacks. The Company's tents and sleeping bags are marketed under the Coleman
and Peak One brand names. The Company manufactures and markets aluminum- and
steel-framed, portable, outdoor, folding furniture under the Coleman and Sierra
Trails(Registered) brand names. These products are manufactured predominantly at
the Company's facilities located in the United States. The Company designs and
markets electric lighting products that are manufactured by others and sold
under the Coleman, Powermate and Job-Pro(Registered) brand names. These products
include portable electric lights such as hand held spotlights, flashlights and
fluorescent lanterns and a line of rechargeable lanterns and flashlights. The
Company designs, sources and markets a variety of small accessories for camping
and outdoor use, such as cookware and utensils. These products are manufactured
by third-party vendors to Coleman's specifications and are marketed under the
Coleman brand name.
Outdoor Cooking. The Company is a leading supplier of outdoor barbecue
grills. The Company has one of the leading market share positions in the gas
grill industry. Outdoor barbecue grills consist of gas, electric and charcoal
models which are sold by the Company primarily under the Sunbeam and
Grillmaster(Registered) brand names. The Company's outdoor cooking products also
include smokers and replacement parts for grills and various accessories such as
cooking utensils, grill cleaning products and barbecue tools. Almost all of the
Company's grills are manufactured at the Company's United States facility. The
Company sources practically all of its accessories and a portion of its
replacement parts from various manufacturers, many of which are in East Asia. A
licensee of the Company produces gas barbecue grills under the Coleman name. In
1997 and 1996, sales of gas grills accounted for approximately 13% and 19%,
respectively, of consolidated net sales.
Powermate. The Company's principal Powermate products include portable
generators and portable and stationary air compressors. The Company is a leading
manufacturer and distributor of portable generators in the United States.
Generators are used for home improvement projects, small businesses, emergency
preparedness and outdoor recreation. These products are manufactured by the
Company at its United States facilities using engines manufactured by third
parties, are marketed under the Coleman Powermate(Registered) brand name and are
distributed predominantly through mass merchandisers and home center chains. The
Company also produces advanced, light-weight generators incorporating
proprietary technology. The Company's air compressors are manufactured at its
facilities located in the United States, are marketed under the Coleman
Powermate brand name and are distributed predominantly through mass
merchandisers and home center chains.
Eastpak. The Company designs, manufactures and distributes book bags,
backpacks and related goods throughout the United States under the Eastpak and
Timberland(Registered) brand names. The Company manufactures the majority of its
products in its plants located in Puerto Rico.
International
The Company markets a variety of products outside the United States. While
the Company sells many of the same products domestically and internationally, it
also sells products designed specifically to appeal to foreign markets. The
Company, through its foreign subsidiaries, has manufacturing facilities in
France, Indonesia, Italy, Mexico, and Venezuela, and sales administration
offices, warehouse and distribution facilities in Canada, Europe, the Mideast,
Asia and Latin America. The Company also sells its products directly to
international customers in certain other markets through the Company's sales
managers, independent distributors and commissioned sales representatives. The
products sold by the international group are sourced from the Company's
manufacturing operations or from vendors primarily located in Asia.
International sales accounted for approximately 23%, 21% and 19% of the
Company's consolidated net sales in 1998, 1997 and 1996, respectively. The
Company's international operations are managed through the following geographic
areas:
Europe. The Company's European operations are managed from Lyon, France
and the sales are dominated by the product lines acquired by the Company as part
of the Coleman acquisition, including the
6
Campingaz product lines and Eastpak products. The Company's European office also
manages the sale and distribution of Company products throughout Africa and the
Middle East.
Japan. The Company's sales in Japan are almost exclusively sales of
camping equipment such as tents, stoves, lanterns, sleeping bags and
accessories.
Latin America. The activities of the Company outside the United States
were primarily focused in Mexico and Latin America prior to the 1998 acquisition
of Coleman. The Company enjoys a strong market position in a number of product
lines in Latin America. The Oster brand has the leading market share in small
appliances in a number of Latin American countries. The Company's sales in Latin
America are derived primarily from household appliances, particularly the Oster
blender and the recently introduced Oster arepa maker.
Canada. The Company sells substantially all of its products in Canada
through a distribution sales office located in Toronto.
East Asia. During 1998, the Company's sales in East Asia were hampered by
the economic downturn particularly in South Korea where the Company had
developed a strong market for Eastpak bags, and in Indonesia where the company
sells Campingaz products. The Company has established a sales office in
Australia, from which it sells primarily clippers and appliances, and
distributes First Alert products in Australia and New Zealand. Sales offices
have also been established in Manila and Hong Kong.
The Company has sales and facilities in countries where economic growth has
slowed, primarily Japan, Korea and Latin America. The economies of other foreign
countries important to the Company's operations could also suffer instability in
the future. The following are among the factors that could negatively affect the
Company's operations in foreign markets: (1) access to markets; (2) currency
devaluation; (3) new tariffs; (4) changes in monetary and/or tax policies; (5)
inflation; and (6) governmental instability. See Item 7--"Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Foreign Operations and--Cautionary Statements."
Corporate
Retail. The Company sells many of its products through its retail outlet
stores which are operated under the Sunbeam, Oster and Camp Coleman(Registered)
names. In addition, the Company currently has 37 retail outlet stores in the
United States and Canada which primarily carry discontinued, overstock and
refurbished products for retail sale to consumers. Net sales from retail stores
were not significant in any of the last three fiscal years.
Licensing. The Company licenses the Sunbeam name and the Coleman name and
logo under two types of licensing arrangements: general merchandise licenses and
licenses to purchasers of businesses divested by the Company. The Company's
general merchandise licensing activities involve licensing the Sunbeam and/or
Coleman name and logo, for a royalty fee, to certain companies that manufacture
and sell products that complement the Company's product lines. Revenue from
licensing activities in 1998 in the amount of $4 million was generated primarily
from the license of the Coleman name. In addition, the Company licenses trade
names from third parties for use in connection with the Company's products.
Revenue from licensing activities was not significant in 1997 and 1996.
COMPETITION
The markets in which the Company operates are generally highly competitive,
based primarily on product quality, product innovation, price and customer
service and support, although the degree and nature of such competition vary by
location and product line. The Company believes that no other company produces
and markets the breadth of household appliance, camping and outdoor recreation
products marketed by the Company.
The Company competes with various manufacturers and distributors with
respect to its household appliances. Primary competitors in the kitchen
appliance area have been Black & Decker (which recently sold its appliance
division to Windmere), Hamilton Beach/Procter Silex, West Bend, Melita,
Salton-Maxim,
7
Cuisinart, Regal, Krups, Kitchen Aid, Braun and Rival. The Company's primary
competitor in the consumer scale market is Metro Corporation. The Company's
health care products compete with those of numerous small manufacturers and
distributors, none of which dominates the home health care market. The Company
has no domestic competitors for its electric blankets and heated throws and
enjoys a market share in excess of 90% for these products. The Company's primary
competitors for retail clippers and trimmers are Wahl and Conair; the primary
competitors in the professional products lines are Wahl and Andis. The Company
enjoys a leading market share with respect to its smoke and carbon monoxide
detectors where Ranco, American Sensor, Nighthawk and Siebe are the primary
competitors. The Company competes with Micro General with respect to its Pelouze
scales.
The Company's Outdoor Leisure products compete with numerous products sold
by other manufacturers. Lanterns and stoves compete with, among others, products
offered by Century Primus, American Camper and Dayton Hudson Corporation, while
Desa & Schau and Mr. Heater are the primary competitors for heaters. The primary
competitors for the Company's portable furniture are a variety of import
companies. The Company's insulated cooler and jug products compete with products
offered by Rubbermaid Incorporated, Igloo Products Corp. and The Thermos
Company. The Company's sleeping bags compete with, among others, American
Recreation, Slumberjack, Academy Broadway Corp. and MZH Inc, as well as certain
private label manufacturers. In the tent market, the Company competes with,
among others, Wenzel, Eureka and Mountain Safety Research, as well as certain
private label manufacturers. The Company competes with W.C. Bradley, Meco,
Fiesta, Ducane, Weber and Keanall for sales of outdoor grills and accessories.
The Company's backpack products compete with, among others, American Camper,
JanSport, Nike, Outdoor Products, The North Face, and Kelty, as well as certain
private label manufacturers. The Company's competition in the electric light
business includes, among others, Eveready and Rayovac Corporation. The Company's
camping accessories compete primarily with Coughlan's. The Company's primary
competitors in the generator business are Generac Corporation, Honda Motor Co.,
Ltd., Kawasaki and Yamaha. Primary competitors in the air compressor business
include DeVilbiss and Campbell Hausfield. In addition, the Company competes with
various other entities in international markets.
CUSTOMERS
The Company markets its products through virtually every category of
retailer including mass merchandisers, catalog showrooms, warehouse clubs,
department stores, catalogues, Company-owned outlet stores, television shopping
channels, hardware stores, home improvement centers, office products centers,
drug and grocery stores, and pet supply retailers, as well as independent
distributors and military post exchange outlets. In 1998, the Company sold
products to virtually all of the top 100 U.S. retailers, including
Wal-Mart/Sam's Club, Kmart, Price Costco, Target Stores and Home Depot.
Sunbeam's largest customer, Wal-Mart, accounted for approximately 18%, 20% and
19% of consolidated net sales in 1998, 1997 and 1996, respectively. The Company
has the majority of its U.S. customer sales on electronic data interchange (EDI)
systems.
BACKLOG
The amount of backlog orders at any point in time is not a significant
factor in the Company's business.
PATENTS AND TRADEMARKS
The Company believes that an integral part of its strength is its ability
to capitalize on the Sunbeam(Registered), Coleman(Registered),
Oster(Registered), Eastpak(Registered), Mr. Coffee(Registered), Health o
Meter(Registered), First Alert(Registered) and Campingaz(Registered) trademarks
which are registered in the United States and in numerous foreign countries.
Widely recognized throughout North America, Latin America and Europe, these
registered trademarks, along with Powermate(Registered), Pelouze(Registered),
Peak One(Registered), Osterizer(Registered), Mixmaster(Registered), Toast
Logic(Registered), Steammaster(Registered), Oskar(Registered),
Grillmaster(Registered) and "Blanket with a Brain(Registered)" brands are
important to the success of the Company's products. Other important trademarks
within Sunbeam include Oster Designer(Registered), Cuddle-Up(Registered) and
A5(Registered). The loss of any single trademark would not have a material
adverse effect on the Company's business; however, the Sunbeam, Coleman and
Mr. Coffee trademarks are integral to certain of the Company's continuing
operations and the Company aggressively monitors and protects these and other
brands.
8
The Company holds numerous design and utility patents covering a wide
variety of products, the loss of any one of which would not have a material
adverse effect on the Company's business taken as a whole.
RESEARCH AND DEVELOPMENT
New products and improvements to existing products are developed based upon
the perceived needs and demands of consumers. Research and development
expenditures are expensed as incurred. The amounts charged to operations for the
fiscal years ended 1998, 1997 and 1996 were $18.7 million, $5.7 million and
$6.5 million, respectively.
EMPLOYEES
As of December 31, 1998, the Company had approximately 14,200 full-time and
part-time employees of which approximately 6,900 are employed domestically. The
Company is a party to collective bargaining agreements with its hourly employees
located at the Aurora, Illinois, Glenwillow, Ohio and Bridgeview, Illinois
plants. The Company's Canadian warehouse employees are represented by a union,
as are all of the production employees at the Company's operations in France and
Italy. The Company has had no material labor-related work stoppages and, in the
opinion of management, relations with its employees are generally good.
SEASONALITY
The Company's consolidated sales are not expected to exhibit substantial
seasonality; however, sales are expected to be strongest during the second
quarter of the calendar year. 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.
RAW MATERIALS/SUPPLIERS
The raw materials used in the manufacture of the Company's products are
available from numerous suppliers in quantities sufficient to meet normal
requirements. The Company's primary raw materials include aluminum, steel,
plastic resin, copper, electrical components, various textiles or fabrics and
corrugated cardboard for cartons. The Company also purchases a substantial
number of finished products. The Company is not dependent upon any single
supplier for a material amount of such sourced products.
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.
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,
9
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 12 sites, seven 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.
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 December 31, 1998 and 1997, the
Company's environmental reserves were $25.0 million and $24.0 million,
respectively. 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.
The Company is not a party to any other administrative or judicial
proceeding to which a governmental authority is a party and which involves
potential monetary sanctions, exclusive of interest and costs, of $100,000 or
more.
10
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.
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 December 31, 1998.
REGULATORY MATTERS
The Company is subject to various laws and regulations in connection with
its business operations, including but not limited to laws related to relations
with employees, maintenance of safe manufacturing facilities, truth in packaging
and advertising, regulation of medical products and safety of consumer products.
The Company does not anticipate that its business or operations will be
materially adversely affected by compliance with any of these provisions.
11
SIGNIFICANT 1998 FINANCIAL AND BUSINESS DEVELOPMENTS
THE 1998 ACQUISITIONS
On March 2, 1998, the Company announced that it had entered into separate
agreements to acquire Coleman, Signature Brands and First Alert.
Coleman is a leading manufacturer and marketer of outdoor recreational
products. It manufactures and distributes widely diversified product lines for
camping, leisure time and hardware markets, under the Coleman(Registered),
Powermate(Registered), Campingaz(Registered) and Eastpak(Registered) brand
names. On March 30, 1998, the Company acquired approximately 81% of the then
outstanding shares of Coleman common stock 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
also assumed approximately $1,016 million in debt. Immediately after the
acquisition, as a result of the exercise of Coleman employee stock options, the
Company's ownership of Coleman decreased to about 79% 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 stockholders 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 they own. In the
aggregate, the remaining Coleman stockholders will receive approximately
6.7 million shares of the Company's common stock and $87 million in cash,
including cash outs of remaining Coleman options. Although there can be no
assurance, the Company anticipates that the Coleman merger will occur in the
second half of 1999.
In August 1998, the Company settled threatened claims by the M&F subsidiary
relating to the acquisition of the controlling interest in Coleman by issuing to
the M&F subsidiary a warrant expring August 24, 2003 to purchase up to 23
million shares of our common stock at $7 each. In October 1998, the Company
settled, subject to court approval, claims by the other Coleman stockholders by
agreeing to issue warrants to purchase up to approximately 4.98 million of the
Company's common shares at $7 each when the Coleman merger is completed. See
"Settlement of Coleman-Related Claims" below for more information on these
settlements.
On April 3, 1998, the Company acquired more than 90% of the stock of each
of Signature Brands and First Alert in cash tender offers. On April 6, 1998, the
Company acquired the remaining shares of each of Signature Brands and First
Alert in merger transactions. Signature Brands is a leading manufacturer of a
comprehensive line of consumer and professional products, including coffee
makers marketed under the Mr. Coffee(Registered) brand name and consumer health
products marketed under the Health o Meter(Registered),
Counselor(Registered) and Borg(Registered) brand names. First Alert is the
worldwide leader in residential safety equipment, including smoke and carbon
monoxide detectors marketed under the First Alert(Registered) brand name. The
Company paid about $255 million in cash, including the paying down of debt, to
acquire Signature Brands. The Company paid about $133 million in cash and
assumed about $49 million in debt--a total consideration of about
$182 million--to acquire First Alert.
For additional information, see Notes 2 and 15 of Notes to Consolidated
Financial Statements.
ISSUANCE OF ZERO COUPON CONVERTIBLE DEBENTURES AND NEW BANK CREDIT FACILITY
In order to finance the acquisitions of Coleman, Signature Brands and First
Alert and to repay substantially all of the outstanding indebtedness of the
Company and the three acquired companies, the Company completed an offering of
Zero Coupon Convertible Senior Subordinated Debentures due 2018 (the
"Debentures") at a yield to maturity of 5% (or approximately $2,014 million
principal amount at maturity) on March 25, 1998, which netted approximately $730
million of proceeds to the Company, and the Company borrowed approximately
$1,325 million under a new bank credit facility (the "New Credit Facility"). For
information regarding the Debentures and the New Credit Facility, see
Item 7--"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
12
PRESS RELEASES RELATING TO THE COMPANY'S FIRST QUARTER 1998 RESULTS
On March 19, 1998, the Company issued a press release stating that its net
sales for the first quarter of 1998 might be lower than the range of Wall Street
analysts' estimates of $285 million to $295 million, but that its net sales for
the quarter were expected to exceed 1997 first quarter net sales of
$253.4 million. On April 3, 1998, the Company issued a press release announcing
that net sales for the first quarter of 1998 were expected to be about 5% lower
than those achieved in the first quarter of 1997 and, due to the lower sales and
significant one-time charges, a loss was expected for the quarter.
On May 11, 1998, the Company announced its 1998 first quarter results and
made forecasts for the remainder of 1998 and beyond. The Company reported net
sales of $244.3 million for the quarter, as compared to $253.4 million in the
first quarter of 1997. Before one-time charges of $36.8 million for early
retirement of debt and compensation expense relating to new employment
agreements with three former executives, the Company reported a net loss from
continuing operations of $7.8 million in the first quarter of 1998 versus net
income from continuing operations of $20.6 million in the first quarter of 1997.
After one-time charges of $0.43 per share, we lost $0.52 per share in the 1998
quarter, compared with earnings per share of $0.08 in the comparable 1997
period. The Company also stated that it expected earnings per share in the range
of $1.00 for 1998 and $2.00 for 1999. On June 15, 1998, the Company announced
that these previously announced forecasts should not be relied upon.
Following each of these press releases, the market price of the Company's
common stock fell substantially. On October 20, 1998, we issued a press release
restating operating results for fiscal years 1996 and 1997, as well as the first
quarter of fiscal 1998. See "Restatement of Financial Results; Change of
Auditors" below and Item 3--"Legal Proceedings."
MANAGEMENT AND BOARD CHANGES
On June 15, 1998, the Company's board of directors removed Albert J. Dunlap
as the Company's Chairman and Chief Executive Officer. Three days later, the
Company terminated Russell A. Kersh as the Company's Vice Chairman and Chief
Financial Officer. On June 15, 1998, the Company's board elected Peter A.
Langerman as its non-executive Chairman of the board and Jerry W. Levin as its
new Chief Executive Officer. Mr. Langerman, an outside director of Sunbeam since
1990, is President and Chief Executive Officer of Franklin Mutual Advisers,
Inc., the investment adviser to Franklin Mutual Series Fund, Inc., which owns
about 16% of the Company's common stock. Mr. Levin was Chairman and Chief
Executive Officer of Coleman at the time the Company acquired its controlling
interest in Coleman, and previously was the Chairman and Chief Executive Officer
of Revlon, Inc., an affiliate of M&F.
In June 1998 Mr. Levin, Howard Gittis of M&F, and Lawrence Sondike of
Franklin Mutual Advisers, Inc. were elected to the Company's board. William T.
Rutter resigned from the board effective July 8, 1998, and Faith Whittlesey was
elected to fill the vacancy on the audit committee resulting from Mr. Rutter's
resignation. Messrs. Dunlap and Kersh resigned from the board effective
August 5, 1998. In January 1999, Mr. Sondike resigned from the board and in
February 1999, John H. Klein of Bi-Logix, Inc. was elected a director. In March
1999, Mr. Levin became Chairman of the board of directors, succeeding Mr.
Langerman, who remains a director. See Item 4--"Executive Officers of the
Registrant."
RESTATEMENT OF FINANCIAL RESULTS; CHANGE OF AUDITORS
On June 25, 1998, the Company announced that its then independent auditors,
Arthur Andersen, would not consent to the inclusion of their opinion on the
Company's 1997 financial statements in a registration statement that the Company
was planning to file with the SEC. On June 30, 1998, the Company announced that
the audit committee of the board of directors would review the accuracy of the
Company's prior financial statements and, therefore, those financial statements
should not be relied upon. The Company announced that Deloitte & Touche LLP had
been retained to assist the audit committee and Arthur Andersen in this review.
On August 6, 1998, the Company announced that the audit committee had determined
that the Company would be required to restate our financial statements for 1997,
the first quarter of 1998, and possibly 1996, and that the adjustments, while
not then quantified, would be material.
13
On October 20, 1998, the Company announced the restatement of its financial
results for a six-quarter period from the fourth quarter of 1996 through the
first quarter of 1998. The Company had to restate these financial results
because the previously issued financial statements generally overstated losses
for 1996, overstated profits for 1997 and understated losses for the first
quarter of 1998. The audit committee concluded that the Company had incorrectly
recognized revenue during these periods from "bill and hold" and guaranteed
sales transactions. The audit committee also concluded that some costs and
allowances for sales returns, co-op advertising, customer deductions and
reserves for product liability and warranty expense were not accrued or were
incorrectly recorded. Finally, the audit committee concluded that various costs
were incorrectly included in and charged to restructuring, asset impairment and
other costs.
On November 20, 1998, the Company announced that its audit committee had
recommended, and the board of directors had approved, the appointment of
Deloitte & Touche to replace Arthur Andersen as the independent auditors for
fiscal year 1998. Arthur Andersen will continue to provide us with limited
professional services.
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
The staff of the Division of Enforcement of the Securities and Exchange
Commission ("SEC") advised the Company in a letter dated June 17, 1998 that it
was conducting an informal inquiry into the Company's accounting policies and
procedures. On July 2, 1998, the SEC informed the Company that they were
commencing a formal investigation of the Company. The order indicates that the
SEC is investigating whether the Company, certain of its current or former
officers, directors, employees and certain other persons and entities violated
the federal securities laws and regulations by
o filing or causing to be filed inaccurate reports with the SEC,
o failing to maintain accurate books, records and accounts,
o failing to create or maintain adequate internal accounting controls, or
circumventing such controls,
o knowingly or recklessly making false or misleading statements in reports
filed with the SEC or in other public statements, or
o making false or misleading statements to an accountant in connection with
audits or examinations of our financial statements or reports filed with
the SEC.
At the time the formal order of investigation was issued, the SEC also
subpoenaed various documents from the Company. On November 4, 1998, the Company
received another SEC subpoena requiring the production of additional documents.
The Company has cooperated with the SEC and has furnished the SEC with documents
they requested. 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 liability. The Company cannot predict how long the SEC
investigation will continue or its outcome.
SETTLEMENT OF COLEMAN-RELATED CLAIMS
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 five-year warrants to purchase up to 23 million shares of the Company's
common stock at an exercise price of $7.00 per share, subject to anti-dilution
provisions.
On October 21, 1998, the Company announced that it had entered into a
Memorandum of Understanding to settle, subject to court approval, certain class
actions brought by shareholders of Coleman challenging the proposed Coleman
Merger. Under the terms of the proposed settlement, the Company will issue to
the Coleman public shareholders warrants expiring August 24, 2003 to purchase
4.98 million shares of the Company's common stock at $7.00 per share. These
warrants will generally have the same terms as the warrants previously issued to
M&F's subsidiary and will be issued when the Coleman Merger is consummated,
which is expected to be in 1999. There can be no assurance that the court will
approve the settlement proposed. See Item 3--"Legal Proceedings."
14
OPTIONS EXCHANGE
In August 1998, the Company approved an exchange plan of its outstanding
options held by the Company's employees to purchase shares of the Company's
common stock. The exchange plan, which has been completed, provided for the
outstanding options with exercise prices in excess of $10.00 per share to be
valued by reference to the generally accepted Black-Scholes option pricing
model, and permitted the Company's employees to exchange old options for new
options having an exercise price of $7 per share and a value equivalent to the
value of the old options. See Note 9 of Notes to Consolidated Financial
Statements.
NEW YORK STOCK EXCHANGE LISTING
In May 1998, the New York Stock Exchange ("NYSE") advised the Company that
it did not meet their continuing listing standards because the Company did not
have tangible net assets of at least $12.0 million and average annual net income
of at least $0.6 million for 1995, 1996 and 1997. The Company met with NYSE
officials, and in March 1999, the NYSE informed the Company that its common
stock would not be de-listed at that time, although the NYSE would continue to
monitor the Company's financial condition and operating performance. 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
$12.0 million at September 30, 1998 and an annual net income of at least
$0.6 million for fiscal year 1997, 1996 and 1995. 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. The NYSE
subsequently advised both the Company and Coleman that the NYSE had revised its
continuing listing standards, and that the Company and Coleman are 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.
MATTERS INVOLVING FORMER MANAGEMENT
In early August 1998, the Company entered into a six-month agreement with
Messrs. Dunlap and Kersh in which all parties agreed not to assert claims
against each other and to exchange information relating to the pending
stockholder lawsuits. The Company also agreed to pay a portion of the accrued
vacation and employment benefits of Messrs. Dunlap and Kersh.
After the agreement expired, by letters dated February 9, 1999,
Messrs. Dunlap and Kersh submitted demands for arbitration to the American
Arbitration Association alleging that the Company terminated their employment
without cause. Messrs. Dunlap and Kersh are seeking lump sum payments of about
$5,250,000 and $2,296,875, respectively. Messrs. Dunlap and Kersh also are
seeking:
o amounts for accrued but unused vacation;
o amounts in respect of certain benefit plans;
o a ruling that their options to acquire shares of the Company's common
stock are fully vested and that they will receive the economic equivalent
of their participation in the Company's program for repricing of options;
and
o in the case of Mr. Kersh, more than $3 million, including tax gross-ups,
with respect to his restricted stock.
The Company is vigorously contesting the claims of Messrs. Dunlap and
Kersh. To date, the Company has not made any severance payments to either of
Messrs. Dunlap or Kersh. See Item 3--"Legal Proceedings."
15
ITEM 2. PROPERTIES
The Company's principal properties as of December 31, 1998 are as follows:
SQUARE OWNED/
BUILDING LOCATION PRINCIPAL USE FOOTAGE LEASED
- --------------------------- ------------------------------------------------------------- --------- ----------
UNITED STATES
Aurora, IL First Alert offices, manufacture of fire extinguishers....... 236,000 Leased(1)
Boca Raton, FL Corporate headquarters....................................... 100,626 Leased
Bridgeview, IL Offices and manufacture of scales............................ 157,000 Owned
Glenwillow, OH Manufacture of Mr. Coffee products, distribution warehouse
and offices................................................ 458,000 Leased
Hattiesburg, MS Manufacture of molded plastic parts, humidifiers, vaporizers,
warehouse/distribution, and offices........................ 725,000 Owned
Haverhill, MA Office and warehouse/distribution............................ 111,750 Leased
Kearney, NE Manufacture/assembly of portable generators; office and
warehouse.................................................. 155,000 Leased(1)
Lake City, SC Manufacture of sleeping bags................................. 168,000 Owned
Maize, KS Manufacture of propane cylinders and machined parts.......... 232,760 Leased
McMinnville, TN Manufacture of clippers, trimmers and blades................. 169,400 Leased
Neosho, MO Manufacture of outdoor barbecue grills....................... 669,700 Owned
New Braunfels, TX Manufacture of insulated coolers and other plastic
products................................................... 338,000 Owned
Pocola, OK Manufacture of outdoor folding furniture and
warehouse.................................................. 186,000 Owned
Springfield, MN Manufacture of air compressors............................... 166,000 Owned
Waynesboro, MS Manufacture of electric blankets............................. 853,714 Leased
Wichita, KS Manufacture of lanterns and stoves and insulated coolers and
jugs; research and development and design operations;
office and warehouse....................................... 1,197,000 Owned
Morovis and Orocovis, Manufacture of daypacks, sports bags, and related products;
Puerto Rico office and warehouse....................................... 110,000 Leased
INTERNATIONAL
Acuna, Mexico Manufacture of appliances.................................... 110,000 Owned
Barquisimeto, Venezuela Manufacture of appliances.................................... 75,686 Owned
Brussels, Belgium European headquarters........................................ 14,721 Leased
Centenaro di Lonato, Italy Manufacture of butane lanterns, stoves, heaters and grills;
office and warehouse....................................... 77,000 Owned
Juarez, Mexico Manufacture of smoke and carbon monoxide detectors........... 109,000 Leased
Matamoros, Mexico Manufacture of controls...................................... 91,542 Owned
Mississauga, Canada Sales and distribution office................................ 19,891 Leased
St. Genis Laval, France Manufacture of lanterns and stoves, filling of gas cylinders,
and assembly of grills; office and
warehouse.................................................. 2,070,000 Owned(2)
Tlalnepantla, Mexico Manufacture of appliances.................................... 297,927 Owned
- ------------------
(1) The owned facilities at Kearney, Nebraska reside on land leased under three
leases that expire in 2007 with options to extend each for three additional
ten-year periods.
(2) The warehouse portion of St. Genis Laval, France is leased for terms that
expire in 2004; the remaining facility is owned.
The Company also maintains leased sales and administrative offices in the
United States, Europe, Asia and Latin America, among other sites. The Company
leases various warehouse facilities and/or accesses public warehouse facilities
as needed on a short term lease basis. The Company also maintains gas filling
plants in Indonesia, the Philippines and the United Kingdom. The Company also
leases a total of 173,570 square feet for the operation of its retail outlet
stores. Company management considers the Company's facilities to be suitable for
the Company's operations, and believes that the Company's facilities provide
sufficient capacity for its production requirements.
16
ITEM 3. LEGAL PROCEEDINGS
The information included in this item is as of May 11, 1999.
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 LLP, 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 which
are consolidated herewith." On August 28, 1998, plaintiffs in one of the
subsequently filed actions filed an objection to having their action
consolidated pursuant to the June 16, 1998 Order, arguing that the class period
in their action differs from the class periods in the originally filed
consolidated actions. On 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 LLP. 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 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
all persons and entities who purchased Sunbeam common stock or who purchased
call options or sold put options with respect to Sunbeam common stock during the
period April 23, 1997 through June 30, 1998, excluding the defendants, their
affiliates, and employees of Sunbeam. Defendants have filed a response to the
motion for class certification. 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 at an exercise price of $36.85 to three of its officers and directors
(who were subsequently terminated) on or about February 2, 1998. On June 25,
1998, all defendants filed a motion to dismiss the complaint for failure to make
a presuit demand on Sunbeam'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 Sunbeam against some of its present
and former directors and former officers and Arthur Andersen LLP. The second
amended complaint alleges, among other things, that Messrs. Dunlap and Kersh
(the Company's former Chairman and Chief Executive Officer and Chief Financial
Officer, respectively) caused Sunbeam to employ fraudulent accounting procedures
in order to enable them to secure new employment contracts, and seeks an award
of damages and other declaratory and equitable relief. The plaintiff has agreed
that defendants need not respond to the second amended complaint until May 14,
1999. As described below, the Company and the plaintiffs have moved the Court
for injunctive relief against Messrs. Dunlap and Kersh with respect to the
arbitration action brought by them.
17
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 some 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's minority shareholders as a result
of the decline in the market value of the 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. Under the terms of the
proposed settlement, if approved by the court the Company will issue to the
Coleman minority shareholders, and plaintiff's counsel in this action, warrants
to purchase up to approximately 4.98 million shares of the Company's common
stock at a cash exercise price of $7 per share, subject to certain anti-dilution
provisions. These warrants will generally have the same terms as the warrants
issued to an affiliate of M&F (see Note 2) and will be issued when the Coleman
merger is consummated, which is now expected to be during the second half of
1999. There can be no assurance that the Court will approve the settlement as
proposed.
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, M&F and certain of
the Company's present and former directors. These complaints allege that the
defendants breached their fiduciary duties when the Company entered into a
settlement agreement whereby M&F and its affiliates released the Company from
certain claims they may have had arising out of the Company's acquisition of
M&F's interest in Coleman, and M&F agreed to provide management support to the
Company. Under the settlement agreement, M&F was granted a warrant expiring
August 24, 2003 to purchase up to an additional 23 million shares of Sunbeam's
common stock at an exercise price of $7 per share, subject to certain
anti-dilution provisions. The plaintiffs have requested an injunction against
issuance of stock to M&F pursuant to exercise of the warrants and unspecified
money damages. These complaints also allege that the rights of the public
shareholders have been compromised, as the settlement would normally require
shareholders' approval under the rules and regulations of the New York Stock
Exchange ("NYSE"). The Audit Committee of the Company's board of directors
determined that obtaining such shareholders' approval would have seriously
jeopardized the financial viability of the Company, which is an allowable
exception to the NYSE shareholders' approval requirements. By Order of the Court
of Chancery dated January 7, 1999, the derivative actions filed in that Court
were consolidated and the Company has moved to dismiss such action. 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 & Commercial Code as well as common law
fraud as a result of the Company's alleged misstatements and omissions regarding
the Company's financial condition and prospects during a period beginning
May 1, 1998 and ending June 16, 1998, in which the plaintiffs engaged in
transactions in the Company's common stock. The Company is the only named
defendant in this action. The complaint requests recovery of compensatory
damages, punitive damages and expenses in an unspecified amount. This action was
removed to the U.S. District Court for the Southern District of Texas and
subsequently has been transferred to the Southern District of Florida, the forum
for the Consolidated Federal Actions.
On October 30, 1998, a class action lawsuit was filed on behalf of certain
purchasers of the Debentures in the U.S. District Court of 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. This action has been transferred to the Southern District of Florida,
the forum for the Consolidated Federal Actions, and the parties have negotiated
a proposed coordination plan in order to coordinate proceedings in this action
with those in the Consolidated Federal Actions.
The Company has been named as a defendant in an action filed in the
District Court of Tarrant County, Texas, 48th Judicial District, on November 20,
1998, which was served on the Company through the
18
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 was held on April 15, 1999. The Court has issued a letter
ruling advising the parties that it would grant the Company's special appearance
and sustain the challenge to personal jurisdiction. The plaintiffs have moved
for reconsideration of this decision. Plaintiffs had also moved for partial
summary judgment on their Texas Securities Act claims, but, in light of the
Court's decision on the special appearance, the hearing on the summary judgment
motion has been cancelled.
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 the 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 Sunbeam 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 LLP and two former Sunbeam 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 will advise the Court of the pending Consolidated Federal Actions
and request transfer of the action.
On February 9, 1999, Messrs. Dunlap and Kersh filed with the American
Arbitration Association demands for arbitration of claims under their respective
employment agreements with Sunbeam. Messrs. Dunlap and Kersh are requesting a
finding by the arbitrator that they were terminated by the Company without cause
and should be awarded the corresponding benefits set forth in their respective
employment agreements. On March 12, 1999, Sunbeam 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 Sunbeam on the ground that the simultaneous litigation of
the April 7, 1998 action and these arbitration proceedings would subject Sunbeam
to the threat of inconsistent adjudications with respect to certain rights to
compensation asserted by Messrs. Dunlap and Kersh. On March 19, 1999, the
plaintiff in the April 7, 1998 action discussed above moved for a similar
injunction on the ground that the arbitration proceedings threatened irreparable
harm to Sunbeam and its shareholders. On March 26, 1999, Messrs., Dunlap and
Kersh filed a response in opposition to the motions for injunctive relief. A
hearing on the motions for injunctive relief has been held and, as a result of
Sunbeam's motion for preliminary injunction, administration of the arbitrations
has been suspended until May 10, 1999.
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 Sunbeam 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
Sunbeam's by-laws and by a forebearance agreement entered into between Sunbeam
and Messrs. Dunlap and Kersh in August 1998. The Company has filed its answer to
the complaint and the Court of Chancery has scheduled a trial of this summary
proceeding to be held on June 15, 1999.
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 foregoing actions were determined adversely to the
Company, such judgements would likely have a material adverse effect on the
Company's financial position, results of operations and cash flows.
On July 2, 1998, the American Insurance Company ("American") filed suit
against the Company in the U.S. District Court for the Southern District of New
York requesting a declaratory judgment of the Court that the directors' and
officers' liability insurance policy for excess coverage issued by American was
invalid and/or had been properly canceled by American. The Company's motion to
transfer such action to the federal district court in which the Consolidated
Federal Actions are currently pending was recently denied. The case
19
is now in discovery. 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. 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 the 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 liability insurance policy to the Company
and a declaratory judgment that the Company is entitled to coverage from these
insurance companies for various lawsuits described herein under liability
insurance policies issued by each of the defendants. The Company intends to
pursue recovery from all of its insurers if damages are awarded against the
Company or its indemnified officers and/or directors under any of the foregoing
actions. The Company's failure to obtain such insurance recoveries following an
adverse judgement in any of the foregoing actions could have a material adverse
effect on the Company's financial position, results of operations and cash
flows.
The Company and its subsidiaries are also involved in various lawsuits
arising from time to time that 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.
In the fourth quarter of 1996, the Company recorded a $12.0 million charge
related to a case for which an adverse development arose near year-end. In 1997,
this case was favorably resolved and, as a result, $8.1 million of the charge
established in 1996 was reversed into income primarily in the fourth quarter of
1997.
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 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 December 31, 1998 Sunbeam 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) and $9.9 million as
of December 28, 1997 (representing $3.0 million and $6.9 million for estimated
damages or settlement amounts and legal fees, respectively). It is anticipated
that the $31.2 million accrual will be paid as follows: $22.4 million in 1999,
$7.5 million in 2000, and $1.3 million in 2001. The Company believes, based on
information known at December 31, 1998, that anticipated probable costs of
litigation matters existing as of December 31, 1998 have been adequately
reserved to the extent determinable.
20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended December 31, 1998, there were no matters submitted
to a vote of the Company's security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of May 11, 1999, the executive officers of the Company are as follows:
NAME AGE POSITION
- ----------------------------------------------- --- -----------------------------------------------
Jerry W. Levin................................. 55 Chairman of the Board, President, Chief
Executive Officer and Director
Paul E. Shapiro................................ 58 Executive Vice President and Chief
Administrative Officer
Bobby G. Jenkins............................... 37 Executive Vice President and Chief Financial
Officer
Karen K. Clark................................. 38 Senior Vice President, Finance
Janet G. Kelley................................ 46 Senior Vice President and General Counsel
Jack D. Hall................................... 55 President, International
Jerry W. Levin was appointed Chief Executive Officer, President and a
director of Sunbeam in June of 1998 and was elected as Chairman of the Sunbeam
board of directors on March 29, 1999. Mr. Levin has served as Chairman of the
Board and Chief Executive Officer of Coleman since August 1998 and as Chief
Executive Officer of Coleman from June 1998 to August 1998. Mr. Levin previously
held the position of Chairman and Chief Executive Officer of Coleman from
February 1997 until March 1998. Mr. Levin was also the Chairman of Coleman from
1989 to 1991. Mr. Levin was Chairman of Revlon, Inc. from November 1995 until
June 1998, Chief Executive Officer of Revlon, Inc. from 1992 until January 1997,
and President of Revlon, Inc. from 1991 to 1995. Mr. Levin has been Executive
Vice President of MacAndrews & Forbes since March 1989. For 15 years prior to
joining MacAndrews & Forbes, Mr. Levin held various senior executive positions
with the Pillsbury Company. Mr. Levin is also a member of the boards of
directors of Revlon, Inc.; Ecolab, Inc.; and U.S. Bancorp. For a description of
arrangements entered into by Sunbeam and MacAndrews & Forbes relating to the
appointment of Mr. Levin as an officer of Sunbeam, see "--Other
Transactions--Services Provided by MacAndrews & Forbes."
Paul E. Shapiro joined Sunbeam as Executive Vice President and Chief
Administrative Officer in June 1998. Mr. Shapiro was also appointed Executive
Vice President and Chief Administrative Officer and a director of Coleman on
June 19, 1998. Mr. Shapiro previously held the position of Executive Vice
President and General Counsel of Coleman from July 1997 until March 1998. Before
joining Coleman, he was Executive Vice President, General Counsel and Chief
Administrative Officer of Marvel Entertainment Group, Inc. Marvel and several of
its subsidiaries filed voluntary petitions for reorganization under Chapter 11
of the United States Bankruptcy Code ("Chapter 11") in 1996; Mr. Shapiro served
as an executive officer of Marvel at the time of such filing. He had previously
spent over 25 years in private law practice and as a business executive, most
recently as a shareholder in the law firm of Greenberg Traurig. Mr. Shapiro is
also a member of the board of directors of Toll Brothers, Inc. For a description
of arrangements entered into by Sunbeam and MacAndrews & Forbes relating to the
appointment of Mr. Shapiro as an officer of Sunbeam, see "--Other
Transactions--Services Provided by MacAndrews & Forbes."
Bobby G. Jenkins joined Sunbeam as Executive Vice President and Chief
Financial Officer in June 1998. Mr. Jenkins also serves as Executive Vice
President of Coleman. He was appointed to that position in August 1998.
Mr. Jenkins was Chief Financial Officer of Coleman's Outdoor Recreation division
from September 1997 to May 1998. Mr. Jenkins was Executive Vice President and
Chief Financial Officer of Marvel from December 1993 through June 1997.
Mr. Jenkins served as an executive officer of Marvel at the time of the 1996
Chapter 11 filings of Marvel and several of its subsidiaries. Mr. Jenkins was
Assistant Vice President of Finance at Turner Broadcasting System from August
1992 to November 1993. Prior to that, Mr. Jenkins was with Price
Waterhouse LLP, last serving as Senior Audit Manager. For a description of
arrangements entered into by Sunbeam and MacAndrews & Forbes relating to the
appointment of Mr. Jenkins as an officer of Sunbeam, see "--Other
Transactions--Services Provided by MacAndrews & Forbes."
21
Karen K. Clark joined Sunbeam in April of 1998 as Vice President,
Operations Finance and served as Vice President, Finance from June 1998 until
her appointment as Senior Vice President, Finance in April 1999. Ms. Clark also
serves as Vice President, Finance of Coleman, a position she has held since
1997. She was Corporate Controller for Precision Castparts Corp. from 1994 to
1997 and prior to that held various positions in public accounting and industry.
Janet G. Kelley joined Sunbeam in March 1994 and was named General Counsel
in April of 1998 and Senior Vice President, General Counsel and Secretary in
April, 1999. From 1994 to 1998, Ms. Kelley served as Group Counsel and Associate
General Counsel. Ms. Kelley also serves as Vice President, General Counsel and
Secretary of Coleman, a position she was appointed to in August 1998. Prior to
joining Sunbeam, she was a partner in the law firm of Wyatt, Tarrant & Combs in
Louisville, Kentucky.
Jack D. Hall joined Sunbeam in October 1998 as President, International.
Prior to joining Sunbeam, Mr. Hall held various positions with Revlon, Inc.,
most recently serving as Executive Vice President, Worldwide Sales and Marketing
Development. Prior to joining Revlon, he spent six years with International
Playtex Inc. in a variety of sales positions.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Sunbeam's common stock has been listed for trading on the New York Stock
Exchange under the symbol "SOC" since August 19, 1992. The following table
provides the high and low sales prices of the common stock for the quarters
indicated as reported on the NYSE Composite Transactions Tape.
PRICE RANGE
OF
COMMON
STOCK DIVIDENDS
----------- PER
HIGH LOW COMMON SHARE
---- --- ------------
Year Ended December 31, 1997
First Quarter..................................................................... $34 1/2 $24 5/8 $ 0.01
Second Quarter.................................................................... 40 3/4 30 0.01
Third Quarter..................................................................... 45 3/4 35 3/8 0.01
Fourth Quarter.................................................................... 50 7/16 37 0.01
Year Ended December 31, 1998
First Quarter..................................................................... $53 $35 7/16 $ 0.01
Second Quarter.................................................................... 45 9/16 8 3/16 --
Third Quarter..................................................................... 10 3/8 5 1/8 --
Fourth Quarter.................................................................... 7 5/16 4 5/8 --
Year Ending December 31, 1999
First Quarter..................................................................... $ 7 1/2 $5 1/2 --
Second Quarter through April 30, 1999............................................. 5 3/4 5 1/8 --
As of April 21, 1999, there were approximately 4,569 holders of record of
shares of common stock.
Sunbeam stopped paying dividends on its common stock after the first
quarter of 1998 and has no intention of paying dividends in the foreseeable
future. Moreover, Sunbeam's bank credit facility, as amended in April 1999,
prohibits the payment of cash dividends.
See Item 1--"Significant 1998 Financial and Business Developments--New York
Stock Exchange Listing."
RECENT SALES OF UNREGISTERED SECURITIES
Effective February 1, 1998, pursuant to their respective employment
agreements (the "1998 Agreements"), Sunbeam granted certain options (the "1998
Options") to Messrs. Dunlap and Kersh and to David C. Fannin, former officers of
the Company, in consideration for services rendered or to be rendered by
22
these former executives. The grants were made pursuant to Section 4(2) under the
Securities Act of 1933. The following table specifies the number of shares of
common stock underlying these options.
Albert J. Dunlap............................................. 3,750,000
Russell A. Kersh............................................. 1,125,000
David C. Fannin.............................................. 750,000
The 1998 Options had a term of 10 years and an exercise price of $36.85 per
share. The 1998 Agreement with Mr. Dunlap provided that one-third of
Mr. Dunlap's 1998 Options would vest immediately, while the remaining two-thirds
would vest in subsequent years. The 1998 Agreement with Mr. Kersh provided that
one-fourth of Mr. Kersh's 1998 Options would vest immediately, while the
remaining three-fourths would vest in subsequent years. All of Mr. Fannin's 1998
Options were cancelled pursuant to his termination agreement.
As of February 1, 1998, Sunbeam also granted to Mr. Dunlap 300,000 shares
of unregistered common stock and granted 150,000 and 30,000 shares of restricted
unregistered common stock to Messrs. Kersh and Fannin, respectively. These
shares were granted in consideration for services rendered or to be rendered by
these former executives. The grants were made pursuant to Section 4(2) under the
Securities Act of 1933.
The 1998 Agreement with Mr. Dunlap provided for immediate vesting of the
restricted common stock granted to him; whereas the 1998 Agreement with
Mr. Kersh provided for the immediate vesting of 37,500 shares of the 150,000
restricted shares of common stock granted to him. Of Mr. Fannin's 30,000
restricted shares, 7,500 were vested and the remainder were forfeited pursuant
to his termination agreement with the Company.
The Company and Messrs. Dunlap and Kersh are currently engaged in disputes
with respect to the obligations of the Company under their respective employment
agreements, including the status of the foregoing option and stock grants. See
Item 3--"Legal Proceedings."
On March 25, 1998, the Company sold approximately $2,014 million aggregate
principal amount of Debentures to the sole initial purchaser, Morgan Stanley &
Co. Incorporated, pursuant to Section 4(2) under the Securities Act of 1933. The
Debentures were then resold to qualified institutional buyers in reliance on
Rule 144A under the Securities Act and a limited number of "institutional
accredited investors" as defined in Rule 501(A)(1), (2), (3) or (7) under the
Securities Act. Sunbeam sold the Debentures for $750.0 million. The underwriting
discounts and commissions totaled $20.4 million. See Item 7--"Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
On March 30, 1998, the Company acquired from an affiliate of M&F indirect
beneficial ownership of 44,067,520 shares of common stock of Coleman, or
approximately 81% (79% after the exercise of certain stock options immediately
after the acquisition) of the then outstanding shares of Coleman common stock,
for 14,099,749 shares of Sunbeam common stock, in addition to approximately
$160 million in cash. In addition, the Company assumed approximately
$1,016 million of debt. Sunbeam issued these shares to the M&F affiliate
pursuant to Section 4(2) of the Securities Act. See Item 1--"Significant 1998
Financial and Business Developments--The 1998 Acquisitions."
On August 12, 1998, the Company announced that it had entered into a
settlement agreement with an affiliate of M&F, pursuant to which Sunbeam was
released from certain threatened claims of M&F and its affiliates arising from
the acquisition of Coleman and M&F agreed to provide certain management
personnel and assistance to Sunbeam in exchange for the issuance to the M&F
affiliate of a warrant expiring August 24, 2003 to purchase up to 23 million
shares of Sunbeam common stock at a cash exercise price of $7 per share, subject
to antidilution provisions. The issuance of the warrant was made in accordance
with Section 4(2) of the Securities Act. See Item 1--"Significant 1998 Financial
and Business Developments--Settlement of Coleman--Related Claims."
23
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of certain financial information relating to the
Company. The summary should be read in conjunction with the Consolidated
Financial Statements of the Company. All amounts in the table are expressed in
millions, except per share data.
FISCAL YEARS ENDED
---------------------------------------------------------------------------
DECEMBER 31, DECEMBER 28, DECEMBER 29, DECEMBER 31, JANUARY 1,
1998 (1)(2) 1997 (3) 1996 (4) 1995 1995
------------ ------------ ------------ ------------ -----------
STATEMENT OF OPERATIONS DATA:
Net sales................................. $1,836.9 $1,073.1 $ 984.2 $1,016.9 $ 1,044.3
Cost of goods sold........................ 1,788.8 831.0 896.9 809.1 764.4
Selling, general and administrative
expense................................. 718.1 152.6 221.7 137.5 128.9
Restructuring and asset impairment
(benefit) charges....................... -- (14.6) 110.1 -- --
-------- -------- -------- -------- ---------
Operating (loss) earnings................. $ (670.0) $ 104.1 $ (244.5) $ 70.3 $ 151.0
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
(Loss) earnings from continuing operations
before extraordinary charge............. $ (775.5) $ 52.3 $ (170.2) $ 37.6 $ 85.3
Earnings from discontinued operations, net
of taxes (5)............................ -- -- 0.8 12.9 21.7
Loss on sale of discontinued operations,
net of taxes (5)........................ -- (14.0) (39.1) -- --
Extraordinary charge from early
extinguishments of debt................. (122.4) -- -- -- --
-------- -------- -------- -------- ---------
Net (loss) earnings....................... $ (897.9) $ 38.3 $ (208.5) $ 50.5 $ 107.0
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
PER SHARE DATA:
Weighted average common shares
outstanding:
Basic................................... 97.1 84.9 82.9 81.6 82.6
Diluted................................. 97.1 87.5 82.9 82.8 82.6
(Loss) earnings per share from continuing
operations before extraordinary charge:
Basic................................... $ (7.99) $ 0.62 $ (2.05) $ 0.46 $ 1.03
Diluted................................. (7.99) 0.60 (2.05) 0.45 1.03
Net (loss) earnings per share:
Basic................................... (9.25) 0.45 (2.51) 0.62 1.30
Diluted................................. (9.25) 0.44 (2.51) 0.61 1.30
Cash dividends declared per share......... 0.01 0.04 0.04 0.04 0.04
BALANCE SHEET DATA (AT PERIOD END):
Working capital........................... 488.5 369.1 359.9 411.7 294.8
Total assets.............................. 3,405.5 1,058.9 1,059.4 1,158.7 1,008.9
Long-term debt............................ 2,142.4 194.6 201.1 161.6 124.0
Shareholders' equity...................... 260.4 472.1 415.0 601.0 454.7
- ------------------
(1) On March 30, 1998, the Company acquired approximately 81% of the then
outstanding shares of common stock of Coleman. On April 6, 1998, the Company
completed the cash acquisitions of First Alert and Signature Brands. The
acquisitions were accounted for under the purchase method of accounting and,
accordingly, the financial position and results of operations of each
acquired entity is included in the Consolidated Financial Statements from
the respective dates of acquisition.
(2) Includes charges of $70.0 million related to the issuance of warrants, $62.5
million related to the write-off of goodwill, $122.4 million related to the
early extinguishments of debt, $39.4 million related to fixed asset
impairments, $30.7 million of compensation expense recorded in connection
with new employment agreements with the Company's former Chairman and Chief
Executive Officer and two other former
(Footnotes continued on next page)
24
(Footnotes continued from previous page)
senior officers and $95.8 million related to excess and obsolete inventory
reserves. See Notes 2, 3, 8, 11 and 17 of Notes to Consolidated Financial
Statements.
(3) Includes the reversal of $28.0 million pre-tax liabilities no longer
required and of $13.3 million tax liabilities no longer required. See Note
17 of Notes to Consolidated Financial Statements.
(4) Includes special charges of $239.2 million before taxes. See Notes 12 and 13
of Notes to Consolidated Financial Statements.
(5) Represents earnings from the Company's furniture business, net of taxes, and
the estimated loss on disposal. See Note 13 of Notes to Consolidated
Financial Statements.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1998 ACQUISITIONS.
On March 30, 1998, the Company, through a wholly-owned subsidiary, acquired
approximately 81% of the outstanding shares of common stock of Coleman from a
subsidiary of M&F in exchange for 14,099,749 shares of the Company's common
stock and approximately $160 million in cash. In addition, the Company assumed
approximately $1,016 million in debt. Immediately afterwards, as a result of the
exercise of Coleman employee stock options, the Company's indirect beneficial
ownership of Coleman decreased to approximately 79%. The Company's agreement for
the acquisition of the remaining publicly held Coleman shares in 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 cash outs of unexercised Coleman employee stock options equal
to the difference between $27.50 per share and the exercise price of the
options.
The Company expects to complete the Coleman merger during the second half of
1999, although there can be no assurance that the merger will occur during that
time. See Notes 2 and 15 of Notes to Consolidated Financial Statements and
Item 1--"Significant 1998 Financial and Business Developments--Settlement of
Coleman-Related Claims" for information regarding the settlement of 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 approximately 4.98
million shares of the Company'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 $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 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.
FISCAL YEAR
To standardize the fiscal period ends of the Company and the acquired
entities, effective with its 1998 fiscal year, the Company has changed its
fiscal year end from the Sunday nearest December 31 to a calendar year. See
Note 1 of Notes to Consolidated Financial Statements.
ASSET IMPAIRMENT AND OTHER CHARGES
Goodwill
When changes in circumstances indicate that the carrying value of goodwill
may not be recoverable, the Company estimates future cash flows using the
recoverability method--undiscounted future cash flows and including related
interest charges--as a basis for recording any impairment loss. An impairment
loss is then recorded to adjust the carrying value of goodwill to the
recoverable amount. The impairment loss taken is no greater than the amount by
which the carrying value of the net assets of the business exceeds its fair
value. Due to First Alert's financial performance in 1998 and its prospects for
1999 and beyond, the Company determined that the goodwill relating to this
acquisition was impaired. Accordingly, based on its
26
determination of fair value, the Company has written off the net carrying value
of goodwill of $62.5 million in the fourth quarter of 1998.
Fixed Asset Impairment and Excess and Obsolete Inventory Reserves
In the second quarter of 1998, the Company decided to outsource or
discontinue a substantial number of products--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--previously made by the Company, resulting in some facilities and
equipment that will either no longer be used or will be 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. Approximately 80% of this charge related to
machinery, equipment and tooling at the Company's Mexico City and Hattiesburg,
Mississippi manufacturing plants, the estimated fair value for which was derived
through an auction process. The remainder of this charge related to tooling and
equipment at various other facilities, which either had a nominal value or the
fair market value of which was derived through an auction process. These assets
were taken out of service at the time of the write-down and consequently were
not depreciated further after the write-down. The net carrying value of these
assets after the write-down approximated $2.2 million and these assets are
expected to be disposed of by September 30, 1999. Depreciation expense
associated with these assets approximated $2.6 million in 1998, $4.2 million in
1997 and $3.5 million in 1996.
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 was related to
approximately 1,200 positions of which approximately 1,100 were terminated, and
$1.4 million paid in severance, as of December 31, 1998. Substantially all of
the remaining positions are expected to be eliminated and severance payments
made by July 31, 1999. 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. The asset impairment resulted from
management's decision, during the third quarter, to discontinue certain SKU's
within product lines, principally generators, compressors and propane cylinders.
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. In the
fourth quarter of 1998, the Company recorded a $7.1 million charge as a result
of management's decision, during the fourth quarter, to outsource the production
of some appliances (principally irons). This charge to Cost of Goods Sold
primarily consists of a provision for certain tooling and equipment
($6.7 million) and severance and related benefits ($0.4 million). This tooling
and equipment, which had no remaining value, was written off and depreciation of
this equipment was discontinued at the time of the write-down. Depreciation
expense associated with these assets approximated $2.4 million in 1998, $2.3
million in 1997 and $0.9 million in 1996. The severance costs related to
approximately 45 production employees, none of whom were terminated as of
December 31, 1998. It is anticipated that these employees' positions will be
eliminated and the severance obligation paid by September 30, 1999.
During 1997 and the first half of 1998, the Company built inventories in
anticipation of 1998 sales volumes which did not materialize. As a result, it
has been and will continue to be necessary to dispose of some portions of excess
inventories at amounts less than cost. Accordingly, during 1998, when it became
evident that the anticipated sales volumes would not materialize, the Company
recorded $58.2 million in charges (of which $46.4 million, $2.2 million and
$9.6 million, were recorded during the second, third and fourth quarters,
respectively) to properly state this inventory at the lower-of-cost-or-market.
This inventory primarily related to some appliances, grills and grill
accessories. The Company also recorded a charge of $11.0 million during the
second quarter for excess inventories for raw materials and work in process
which will not be used due to outsourcing the production of breadmakers,
toasters and some other appliances. In addition, during 1998, the Company made
the decision to exit some product lines, primarily air and water filtration
products, and to eliminate some SKU's within existing product lines, primarily
relating to
27
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
inventories recorded at the lower-of-cost-or-market, based upon management's
best estimate of net realizable value, amounted to approximately $95.8 million
at December 31, 1998. See Note 12 of Notes to Consolidated Financial Statements
for asset impairment and other charges recorded in conjunction with a 1996
restructuring plan.
RESTATEMENTS
On June 30, 1998, the Company announced that the audit committee of its
board of directors was initiating a review into the accuracy of the Company's
prior financial statements. The audit committee's review has since been
completed and, as a result of its findings, the Company has restated its
previously issued consolidated financial statements for 1996 and 1997 and the
first quarter of 1998. Based upon the review, it was determined that some
revenue had been inappropriately recognized, some costs and allowances had not
been accrued or were improperly recorded, and some costs were inappropriately
included in, and subsequently charged to, restructuring, asset impairment and
other costs within the Consolidated Statement of Operations for the years ended
December 29, 1996 and December 28, 1997 and the three months ended March 31,
1998. The financial statements for the years ended December 28, 1997 and
December 29, 1996 were restated, audited and filed on Form 10-K/A with the SEC
on November 9, 1998. The accompanying Consolidated Financial Statements present
the restated results.
In connection with the restatements referred to above, Arthur Andersen
advised Sunbeam that it believed there were material weaknesses in Sunbeam's
internal controls. In order to address these material weaknesses, Sunbeam has
increased the number of senior financial personnel and has implemented
comprehensive review procedures of operating and financial information.
Additionally, as explained in more detail under "--Year 2000 Readiness
Disclosure" within Item 7, the Company is in the process of significantly
enhancing its operating systems. The Company anticipates that its systems
enhancements will be completed in 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 28, 1997
Results of operations for the year ended December 31, 1998 include the
results of Coleman from March 30, 1998 and of Signature Brands and First Alert
from April 6, 1998, the respective dates of the acquisitions. The acquired
companies generated net sales of $1,009.0 million from the acquisition dates
noted above through December 31, 1998, with corresponding gross margin of $205.1
million, or 20% of sales. SG&A costs recorded by the acquired companies were
$329.9 million in the period, yielding an operating loss of $124.8 million.
For the acquired companies, net sales from the dates of the acquisitions
through fiscal year-end were approximately $152 million lower than the same
period in the prior year. This decline was caused by lower net sales at Coleman
($81.5 million), Signature Brands ($31.2 million) and First Alert
($39.2 million). Excluding the effects of Coleman's sale of its safety and
security business in March 1998 and the discontinuation of its pressure washer
business during 1997, Coleman's 1998 sales would have been approximately
$4 million lower than in 1997. The Company believes that Signature Brands'
decline, primarily in its coffee and tea products, resulted largely from lost
distribution and insufficient attention to the business during part of 1998. The
Company believes that all of the acquired businesses were, to some extent,
impacted by the disruption that arose from the integration with the Company and
the related management changes, both at the acquired companies and at the
Company. First Alert's sales decline related predominantly to increased
inventory positions in the domestic channel in 1997 as compared to 1998 with the
remaining decrease primarily related to more favorable weather conditions in the
fourth quarter of 1997 as compared to the same period in 1998 which affected
consumer shopping patterns. Excluding the effects from purchase accounting and
the write-off of First Alert's goodwill, as discussed in Note 2 of Notes to
Consolidated Financial Statements, operating profit for these three companies
declined by approximately $45 million since the acquisitions in 1998 as compared
to the same period in the prior year, resulting primarily from lower net sales.
Although there can be no assurance, management anticipates that results from
28
the acquired companies will significantly improve during 1999 due to, among
other things, the absence of the factors causing disruption and insufficient
focus at these three companies during 1998.
Consolidated net sales for the year ended December 31, 1998 were
$1,836.9 million, an increase of $763.8 million versus the year ended December
28, 1997. After excluding:
o $1,009.0 million of sales generated by the acquired companies;
o $5.5 million of sales in 1998 resulting from the change in fiscal year
end, as described in Note 1 to the Consolidated Financial Statements;
o $12.7 million in 1998 and $31.3 million in 1997 from sales of excess or
discontinued inventory for which the inventory carrying value was
substantially equivalent to the sales value;
o $4.2 million from 1997 sales relating to divested product lines which are
not classified as discontinued operations--time and temperature products
and Counselor and Borg branded scales; and
o a $5.4 million benefit in 1997 from the reduction of cooperative
advertising accruals no longer required (cooperative advertising costs
are recorded as deductions in determining net sales);
net sales on an adjusted basis ("Adjusted Sales") of $809.7 million in 1998
decreased approximately 22% from Adjusted Sales of $1,032.2 million in 1997.
Product sales were adversely impacted by a number of factors, with the largest
being changes in retail inventory levels from channel loading which took place
in 1997. Sunbeam believes the year-to-year effect of these inventory reductions
amounted to over $100 million. Additionally, losses in distribution of outdoor
cooking products estimated at approximately $60 million, the estimated effect of
price discounting on appliance and grill products of approximately $14 million,
and estimated higher provisions for customer returns and allowances of
approximately $30 million contributed to the lower sales in 1998. The increase
in customer returns and allowances resulted from:
o increased returns of approximately $16 million principally resulting from
channel loading and other aggressive sales practices (estimated at
approximately $9 million) which began in the fourth quarter of 1997 and
continued in the first quarter of 1998, a blanket recall ($3.0 million)
and the discontinuance of certain product lines (approximately
$4 million) principally air and water products; and
o additional customer allowances of approximately $14 million primarily to
induce sales during the first quarter of 1998.
The remaining sales decline was due in part to exiting some product SKU's.
Domestic Adjusted Sales declined approximately 21% or $170 million from
1997. The Company believes more than half of the sales decline was due to
increased retail inventory levels in 1997 versus decreased inventory positions
at customers in 1998. Excluding this effect, sales were still lower than the
prior year throughout the business, with the most significant decline occurring
in outdoor cooking products sales. During 1997, the Company lost a significant
portion of its outdoor cooking products distribution, including the majority of
its grill parts and accessories products distribution. The outdoor cooking
products sales decline was attributable predominantly to this lost distribution
and to price discounting. The majority of the remaining sales decline was due to
higher provisions for customer returns and allowances.
International Adjusted Sales, which represented 22% of Adjusted Sales for
1998, decreased approximately 24% compared with the International Adjusted Sales
for the same period a year ago. The Company believes this sales decline was
primarily attributable to decreasing customer inventory levels as compared with
the prior year. Sales were also adversely impacted by a decision to stop selling
to some export distributors in Latin America and by poor economic conditions in
that region. In addition, lost distribution in Canada contributed to the sales
decline from the prior year.
29
Excluding the effects of:
o the gross margin generated from the inclusion of the acquired companies'
operations in the period of $205.1 million;
o $0.8 million from the impact of the change in fiscal year-end;
o $128.4 million in 1998 in charges recorded in the second and fourth
quarters related to excess inventory and fixed assets impairments;
o $15.8 million from the benefit in 1997 from the reversal of reserves no
longer required, including $5.4 million of cooperative advertising
accruals; and
o a $2.8 million benefit recorded in the second quarter of 1997 resulting
from capitalizing some manufacturing supplies inventories which were
previously expensed;
there was a negative gross margin of $29.4 million for 1998 versus a gross
margin of $223.5 million for 1997. This reduction in gross margin was
principally attributable to the following:
o approximately $145 million related to lower sales volume and unfavorable
manufacturing efficiencies resulting from lower production levels
associated with the lower sales volumes and high inventory levels in
1998;
o approximately $65 million related to lower price realization, higher
costs of customer returns and allowances, and adverse sales mix in 1998;
o approximately $12 million related to higher costs in 1998 associated with
warranty, of which $3.0 million related to a blanket recall, with the
remaining increase attributable to increased provisions in response to
higher overall warranty expense experience; and
o approximately $20 million related to unfavorable inventory adjustments,
of which the most significant single factor was physical inventory
adjustments in the domestic business.
Adverse product sales mix was due in part to the loss of a majority of the
grill accessory products distribution as accessories generate significantly
better margins than the average margins on sales of most of the Company's other
products.
Excluding the effects of the following, SG&A expenses were approximately
$254 million in 1998, approximately $105 million, or 70%, higher than in 1997:
o $329.9 million of SG&A charges in the acquired companies, including the
$62.5 million goodwill write-off related to First Alert;
o $70.0 million recorded in the third quarter of 1998 related to the
issuance of a warrant to a subsidiary of MacAndrews & Forbes, as
discussed below;
o $2.3 million of SG&A expense in 1998 from the change in the fiscal
period;
o a $3.0 million benefit in 1998 and a $12.1 million benefit in 1997 from
the reversal of reserves no longer required. The 1998 benefit consists of
a $3.0 million reversal in the first quarter of 1998 of environmental
reserves which are no longer required as a result of a favorable
development at a remediation site. The 1997 benefit consists primarily of
a $8.1 million reversal of litigation reserves, established in 1996,
which were no longer required in the fourth quarter of 1997 due to a
favorable settlement during 1997. The remaining $4.0 million 1997 benefit
consists of reversals of other accruals primarily relating to consulting
fees, health insurance and advertising. For further information see
Note 17 of Notes to Consolidated Financial Statements and further in this
Management's Discussion and Analysis;
30
o approximately $31 million of 1998 compensation expense recorded in
connection with new February 1998 employment agreements with Sunbeam's
former Chairman and Chief Executive Officer and two other former senior
officers and approximately $3 million of severance in 1998 for some
former employees. The new employment agreements provided for Sunbeam to
pay these former employees amounts which reimbursed them for their
personal tax liabilities resulting from shares issued in connection with
the accelerated vesting of restricted stock granted under their July 1996
agreements ($6.9 million), as well as on the new unrestricted stock
grants under the February 1998 agreements ($9.8 million). The charge also
includes the value, at approximately $39 per share, of 300,000 restricted
shares and 45,000 restricted shares which vested in February 1998 for
Sunbeam's then Chairman and Chief Executive Officer and two other then
senior officers, respectively ($13.6 million). In addition, $0.4 million
was expensed during 1998 relating to the amortization of the 1996
restricted stock awards. See Note 8 of Notes to Consolidated Financial
Statements for information regarding the terms of these employment
agreements;
o $20.4 million, $6.1 million, and $4.0 million of costs recorded in 1998
related to costs associated with the restatement efforts, principally
representing legal, accounting and auditing, and consulting costs of
$14.1 million, $5.7 million and $0.6 million, respectively, Year 2000
compliance efforts and a corporate office relocation, respectively; and
o $15.8 million of restructuring related charges recorded in 1997, charged
to operations as incurred, represent employee relocation and recruiting
($6.2 million), equipment relocation and installation ($5.6 million) and
package redesign costs ($4.0 million).
The increase of approximately $105 million in SG&A expense in 1998 over
1997 is principally due to several factors:
o Corporate administrative costs increased by approximately $47 million,
reflecting additional personnel and related relocation, travel and other
costs, as well as increased outside provider fees, telecommunications
expense and insurance.
o Higher allowances for accounts receivable in 1998, accounting for
approximately $20 million of the increase, related primarily to
collection issues with customers in the United States and in Latin
America, including several major customers who have filed and/or
threatened bankruptcy.
o Advertising, marketing and selling expenses increased by approximately
$13 million, reflecting a national television campaign for grills and
increased activity in market research, package design and sales efforts.
Higher inventory levels in 1998 and costs associated with outsourcing
small parts fulfillment led to higher distribution and warehousing costs
of approximately $12 million.
o Increased environmental reserves for divested and closed facilities added
approximately $5 million. Approximately half of the environmental reserve
increase reflected revisions to estimates of costs to remediate existing
sites. These revisions were based on obtaining additional information in
the fourth quarter of 1998 about costs of planned remediation actions and
costs associated with additional remediation actions. The remaining
amount was to provide for revisions to reserves for estimated losses for
damages related to environmental sites. These revisions were based on
obtaining additional information in the fourth quarter of 1998 regarding
the level of damages sought and the costs and probability of defending
the Company's position in these actions.
o Settlement of a patent infringement action resulted in additional expense
of approximately $4 million. Remaining legal expenses recorded in the
year of approximately $1 million for investigation, defense and
settlement of both new and previously existing issues were nearly equal
to amounts incurred for similar items in 1997. Additionally, as described
above, SG&A includes $14.1 million of legal costs recorded in 1998
associated with the restatement efforts. 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
31
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 December 31, 1998 and
December 28, 1997, 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)
and $9.9 million (representing $3.0 million and $6.9 million for
estimated damages or settlement amounts and legal fees, respectively),
respectively. It is anticipated that the $31.2 million accrual will be
paid as follows: $22.4 million in 1999, $7.5 million in 2000, and
$1.3 million in 2001. The Company believes, based on information known to
it on December 31, 1998, that anticipated probable costs of litigation
matters existing as of December 31, 1998 have been adequately reserved to
the extent determinable.
During 1997, the Company determined that the amounts accrued at
December 29, 1996 for Restructuring and Asset Impairment Charges recorded in
fiscal 1996 exceeded amounts ultimately required. Accordingly, the 1997
Consolidated Statement of Operations reflects the reversal of accruals no longer
required, resulting in a Restructuring and Asset Impairment Benefit of
$14.6 million. This reversal was reflected in the third ($5.8 million) and
fourth ($8.8 million) quarters of 1997 when it became evident that such accruals
were no longer required.
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
affiliates arising from the Coleman acquisition and M&F agreed to provide
certain management personnel and assistance to the Company in exchange for the
issuance to the M&F subsidiary of a warrant expiring August 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 antidilution 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 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 on a valuation performed as of August 1998 using facts
existing at that time. The valuation was conducted by an independent consultant
engaged by the special committee of the board of directors.
Operating results for 1998 and 1997, on an adjusted basis as described
above, were a loss of approximately $283 million in 1998 and a profit of
approximately $74 million in 1997. This change resulted from the factors
discussed above.
Interest expense increased from $11.4 million for the twelve months of 1997
to $131.1 million for the same period in 1998. Approximately 70% of the change
related to higher borrowing levels in 1998 for the acquisitions, with the
remainder due to increased borrowings to fund working capital, capital
expenditures and the operating losses.
Other income, net increased in 1998 by $4.8 million due to approximately
$8 million from the settlement of a lawsuit, and approximately $4 million of
increased net gains from foreign exchange in the period. The foreign exchange
net gains were primarily from Mexico. Increased losses on sales of fixed assets
of approximately $5 million and increased expenses related to the bank credit
facility partially offset the above mentioned income. The increased credit
facility expenses largely related to unused facility fees.
The minority interest reported in 1998 relates to the minority interest
held in Coleman by public shareholders.
During 1998, the current tax provision arose largely from taxes on the
earnings of foreign subsidiaries as well as franchise taxes. Deferred tax
benefits were recognized in 1998 principally due to net operating losses
32
incurred subsequent to the acquisitions. These benefits were realized through
the use of deferred tax credits that were established in connection with the
acquisitions to the extent that such credits are expected to be realized in the
loss carryforward period. Throughout 1998, the Company increased the income tax
valuation allowance on deferred tax assets to $290.5 million. This increase
reflects management's assessment that it is more likely than not that these
deferred tax assets will not be realized through future taxable income. This
assessment, which was initially made in the fourth quarter of 1997, resulted
from the significant leverage undertaken by the Company in connection with its
acquisitions and the continuing decline in the Company's net sales and earnings,
as well as the operating losses incurred throughout the 1998 year. The 1997
effective tax rate was higher than the federal statutory income tax rate
primarily due to state taxes, the effects of foreign earnings and dividends
taxed at other rates and the impact of providing a valuation allowance on
deferred tax assets.
In 1998, the Company prepaid debt assumed in the acquisitions and prepaid
an industrial revenue bond related to its Hattiesburg facility. The debt assumed
in connection with the Coleman acquisition was repaid as a result of the
requirements under the terms of the Company's new credit facility. In connection
with these early extinguishments of debt, the Company recognized an
extraordinary charge of $122.4 million, consisting of redemption premiums
($106.9 million), unamortized debt discount ($13.8 million) and unamortized
deferred financing costs ($1.7 million).
The Company's discontinued furniture business, which was sold in March
1997, had revenues of $51.6 million in the first quarter of 1997 prior to the
sale and nominal earnings for that period. As a result of the sale of the
Company's furniture business assets (primarily inventory, property, plant and
equipment), the Company received $69.0 million in cash, retained approximately
$50 million in accounts receivable and retained some liabilities. The final
purchase price for the furniture business was subject to a post-closing
adjustment based on the terms of the sale agreement and in the first quarter of
1997, after completion of the sale, the Company recorded an additional loss on
disposal of $14.0 million net of applicable income tax benefits of
$8.5 million.
YEAR ENDED DECEMBER 28, 1997 COMPARED TO YEAR ENDED DECEMBER 29, 1996
1996 Restructuring Plan and Other Charges and Benefits
In November 1996, the Company announced the details of a restructuring
plan. The plan included:
o the consolidation of administrative functions;
o the reduction of manufacturing and warehouse facilities;
o the centralization of the Company's procurement function;
o the reduction of the Company's product offerings and SKUs; and
o the elimination of some businesses and product lines.
As part of the restructuring plan, the Company consolidated six divisional
and regional headquarters functions into a single worldwide corporate
headquarters and outsourced some back office activities resulting in a reduction
in total back-office/administrative headcount. Overall, the restructuring plan
called for a reduction in the number of production facilities from 26 to 8 and
the elimination of over 6,000 positions from the Company's workforce, including
3,300 from the disposition of some business operations and the elimination of
approximately 2,800 other positions, some of which were outsourced. The Company
completed the major phases of the restructuring plan by July 1997.
The 1996 restructuring plan was unable to improve earnings over the long
term for a number of reasons, including, but not limited to, its failure to
realize some of the anticipated costs savings and the negative impact that
implementation of the restructuring plan had on sales, product quality, customer
service, research and development and the introduction of new products. The
Company's current strategy is to create
33
innovative new products that anticipate consumer needs, develop effective
marketing and advertising programs, build relationships, create the right
culture and choose the right people.
In conjunction with the implementation of the restructuring plan, the
Company recorded a pre-tax charge of $239.2 million in the fourth quarter of
1996. This amount is recorded as follows in the Consolidated Statements of
Operations:
o $110.1 million recorded in Restructuring and Asset Impairment Charges, as
further described below;
o $60.8 million in Cost of Goods Sold related principally to inventory
write-downs to net realizable value as a result of a reduction in SKU's
and costs of inventory liquidation programs;
o $10.1 million in SG&A expense, for period costs, which were charged to
operations as incurred, principally relating to employee relocation and
recruiting, equipment relocation and installation ($3.2 million),
transitional fees relating to outsourcing arrangements ($4.9 million) and
package redesign costs ($2.0 million); and
o $58.2 million ($39.1 million net of taxes) in Loss on Sale of
Discontinued Operations related to the divestiture of its furniture
business.
In 1997, upon completion of the sale of the furniture business, the Company
recorded an additional pre-tax loss of $22.5 million from discontinued
operations ($14.0 million net of taxes) due primarily to lower than anticipated
sales proceeds relating to the post closing adjustment that was part of the sale
agreement.
Amounts included in Restructuring and Asset Impairment Charges in 1996 in
the accompanying Consolidated Statements of Operations included anticipated cash
charges such as severance and other employee costs of $24.7 million, lease
obligations of $12.6 million and other exit costs associated with facility
closures and related to the implementation of the restructuring plan of $4.1
million, principally representing costs related to clean-up and restoration of
owned and leased facilities for either sale or return to the landlord.
Included in Restructuring and Asset Impairment Charges of $110.1 million in
1996 was $68.7 million of non-cash charges principally consisting of:
o asset write-downs to net realizable value of $22.5 million for disposals
of excess facilities and equipment and product lines;
o write-offs of redundant computer systems of $12.3 million from the
administrative back-office consolidations and outsourcing initiatives;
o write-off of intangibles of $10.1 million relating to discontinued
product lines;
o write-off of capitalized product and package design costs and other
expenses of $9.0 million related to exited product lines and SKU
reductions. Prior to 1996, the Company had capitalized certain costs
related to international product development and package design, which
were amortized over the period of related benefit. The product
development costs ($1.9 million) related to international operations and
represented the costs necessary to modify products for introduction to
the international markets. As the restructuring plan included the closure
of the International Group office and elimination of a number of products
to which these costs pertained, the related capitalized costs were
written off. Additionally, in connection with the restructuring plan, as
a result of the elimination of many products and SKU's, the Company
updated its package designs. Accordingly, the unamortized balance of the
capitalized package design costs which had been capitalized prior to 1996
($5.0 million) was written off. The Company discontinued incurring costs
of a significant nature relating to these items and consequently has
discontinued capitalizing such costs subsequent to 1995; and
o asset write-downs of $14.8 million related to the divestiture of some
non-core products and businesses.
34
The asset write-downs of $22.5 million and write-offs of $12.3 million discussed
above included equipment taken out of service in 1996 (either abandoned in 1996
or sold in 1997) and, accordingly, depreciation was not recorded subsequent to
the date of the impairment charge. The asset write-downs of $14.8 million
related to the divestiture of non-core products and businesses resulted from
divesting the time and temperature business in March 1997 and Counselor and Borg
scale product lines in May 1997 and the sale of the textile mill in Biddeford,
Maine in May 1997. These charges primarily represented the estimated non-cash
losses resulting from the sale or abandonment of facilities and equipment, based
on the estimated net proceeds from the sale of these assets compared to their
recorded net book value, related to exiting these product lines.
The $24.7 million for severance and other employee costs, including COBRA
and other fringe benefits, related to approximately 3,700 positions that were
planned to be eliminated as a result of the restructuring plan, excluding
approximately 2,400 employees terminated from the furniture business for which
severance was included in Loss on Sale of Discontinued Operations. See Note 13
of Notes to Consolidated Financial Statements. The furniture business was sold
in 1997. In 1996 and 1997, approximately 1,200 employees and 1,800 employees,
respectively, were terminated from continuing operations. Due largely to
attrition, the remaining planned terminations were not required. In 1997, the
Company determined that its severance and employee benefit costs were less than
originally accrued principally due to lower than expected COBRA and workers
compensation costs and, accordingly, reversed accruals of $7.9 million in the
third ($2.1 million) and fourth ($5.8 million) quarters. At December 31, 1997,
the balance accrued of $1.2 million represented the remaining severance and
employee benefit costs for some employees terminated during 1997. During 1998,
all amounts were expended.
The amounts accrued at December 29, 1996 for Restructuring and Asset
Impairment Charges recorded in fiscal 1996, exceeded amounts ultimately required
principally due to reductions in anticipated severance and employee benefit
costs of $7.9 million, as discussed above, and reductions in estimated lease
payments of $6.7 million ($3.7 million and $3.0 million recognized in the third
and fourth quarters, respectively) resulting from better than anticipated
rentals received under sub-leases and favorable negotiation of lease
terminations. Accordingly, the fiscal 1997 Consolidated Statement of Operations
included $14.6 million of benefit ($5.8 million in the third quarter and
$8.8 million in the fourth quarter of 1997) related to the reversal of accruals
no longer required, which were recorded as these reduced obligations became
known.
In 1996, in conjunction with the initiation of the restructuring plan, the
Company recorded additional charges totaling $129.1 million, reflected in Cost
of Goods Sold, SG&A expense, and Loss on Sale of Discontinued Operations. The
charge included in Cost of Goods Sold of $60.8 million principally represented
inventory write-downs to net realizable value and anticipated losses on the
disposition of the inventory as a result of the significant reduction in SKU's
provided for in the restructuring plan. The write-down to net realizable value,
based upon management's best estimates, included $26.9 million related to raw
materials, work-in process and finished goods for discontinued outdoor cooking
products, principally grills and grill accessories and the balance related to
raw materials, work-in process and finished goods for other discontinued
products including appliances ($27.8 million), clippers ($1.0 million) and
blankets ($5.1 million). For inventory which management determined was saleable,
the estimated write-down was based upon the difference between the expected net
sales proceeds of the inventory, depending upon distribution channel, and the
recorded value of the inventory. In the case of abandoned inventory, the write-
down was equal to the recorded value of the inventory. The resulting difference
between carrying value and estimated net realizable value represented the
$60.8 million write-down necessary to record the inventory at its net realizable
value. SG&A expense included period costs, charged to operations as incurred, in
1997 and 1996 of $15.8 million and $10.1 million, respectively, relating to
employee relocation and recruiting and equipment installation and relocation
($11.8 million in 1997 and $3.2 million in 1996) transitional fees relating to
outsourcing arrangements ($4.9 million in 1996), and package redesign costs
($4.0 million in 1997 and $2.0 million in 1996) expended as a result of the
implementation of the restructuring plan. The 1996 Loss on Sale of Discontinued
Operations related to the divestiture of the Company's furniture business. In
1996, the Company decided to divest its furniture operations and recorded an
estimated pre-tax loss of $58.2 million related to the sale of assets, primarily
fixed assets and inventory. In 1997, the Company recorded an additional pre-tax
loss of $22.5 million due primarily to lower than anticipated sales proceeds
resulting from the post closing adjustment as provided for in the sale
agreement. See Notes 12 and 13 of Notes to Consolidated Financial Statements.
35
At December 28, 1997, the Company had $5.2 million in liabilities accrued
related to the 1996 restructuring plan, including $1.2 million of severance
related costs and $4.0 million related to facility closures, which principally
represented future lease payments, net of sub-leases, on exited facilities.
During 1998, this liability was reduced by $4.0 million as a result of cash
expenditures. At December 28, 1997, the Company had $3.0 million of warranty
liabilities related to the discontinued furniture operations. During 1998, $2.5
million of this liability was liquidated.
The charges and benefit described above are included in the following
categories in the 1997 and 1996 Consolidated Statements of Operations (in
millions):
1997 1996
------ ------
Restructuring and impairment (benefit) charge.................................................. $(14.6) $110.1
Cost of goods sold............................................................................. -- 60.8
Selling, general and administrative expense.................................................... 15.8 10.1
Loss on sale of discontinued operations........................................................ 22.5 58.2
------ ------
$ 23.7 $239.2
------ ------
------ ------
These charges and benefit consisted of the following (in millions):
1997 1996
------ ------
Write-downs:
Fixed assets held for disposal, not in use................................................... $ -- $ 34.8
Fixed assets held for disposal, used until disposed.......................................... -- 14.8
Inventory on hand............................................................................ -- 60.8
Other assets, principally trademarks and intangible assets................................... -- 19.1
------ ------
-- 129.5
------ ------
Restructuring accruals (including amounts expended in 1996):
Employee severance pay and fringes........................................................... (7.9) 24.7
Lease payments and termination fees.......................................................... (6.7) 12.6
Other exit activity costs, principally facility closure expenses............................. -- 4.1
------ ------
(14.6) 41.4
------ ------
Other related period costs, charged to operations as incurred:
Employee relocation; equipment relocation and installation and other......................... 11.8 3.2
Transitional fees related to outsourcing arrangements........................................ -- 4.9
Package redesign............................................................................. 4.0 2.0
------ ------
15.8 10.1
------ ------
Charges included in continuing operations.................................................... 1.2 181.0
Loss on sale of discontinued operations...................................................... 22.5 58.2
------ ------
$ 23.7 $239.2
------ ------
------ ------
At December 29, 1996, the net realizable value of the remaining inventory
written-down as part of the restructuring and asset impairment charges was
approximately $37.3 million. During 1997, this inventory, a portion of which was
product of discontinued operations, was sold for amounts substantially
equivalent to its net carrying value.
As further discussed in Note 15 of Notes to Consolidated Financial
Statements, during the fourth quarter of 1996, the Company charged SG&A for
increases of $9.0 million in environmental reserves and $12.0 million in
litigation reserves. In the fourth quarter of 1996, the Company performed a
comprehensive review of all environmental exposures in an attempt by the then
new senior management team to accelerate the resolution and settlement of
environmental claims. As a result, upon the conclusion of the review, the
Company recorded additional environmental reserves of $9.0 million in the fourth
quarter of 1996. The litigation charge of $12.0 million was recorded due to an
unfavorable court ruling in January 1997, which held that the Company was liable
for environmental remediation costs related to the operations of a successor
company. As a result of this ruling, the Company provided for this liability in
the fourth quarter of 1996. In
36
the fourth quarter of 1997, this case was settled and, as a result, $8.1 million
of the charge was reversed into income, primarily in the fourth quarter of 1997.
As described in Note 8 of Notes to Consolidated Financial Statements, the
Company also charged $7.7 million to SG&A expenses in 1996 for compensation
costs associated with restricted stock awards and other costs related to the
employment of the then new senior management team.
During the first, second, third and fourth quarters of 1997, approximately
$0.5 million, $4.5 million, $1.5 million and $21.5 million, respectively, of
pre-tax liabilities provided in prior years and determined to be no longer
required were reversed and taken into income. These amounts were primarily
related to:
o the litigation reserve of $8.1 million discussed above, resulting in a
reduction in SG&A expenses;
o inventory valuation allowances of $7.0 million, resulting in a reduction
in Cost of Goods Sold;
o cooperative advertising allowances of $5.4 million, resulting in an
increase in net sales;
o liabilities for exiting of facilities and plant consolidations provided
for prior to 1996 of $3.5 million, resulting in a decrease in Cost of
Goods Sold; and
o consulting fee accruals of $1.3 million, which resulted in a decrease in
SG&A expenses.
These liabilities were provided for by the Company, principally in 1996, based
upon its best available estimate at the time of the probable liabilities. When
information became available that the amounts provided were in excess of what
was required, the Company reduced the applicable reserves and recorded increases
in Net Sales of $5.4 million, reductions in Cost of Goods Sold of $10.5 million
and reductions in SG&A expenses of $12.1 million.
Additionally, effective in the second quarter of fiscal 1997, the Company
changed its method of accounting to capitalize manufacturing supplies
inventories, whereas, previously these inventories were charged to operations
when purchased. This change reduced Cost of Goods Sold in fiscal 1997 by $2.8
million.
Results of Operations for 1997 Compared to 1996
Net sales for 1997 were $1,073.1 million, an increase of $88.9 million or
9% over 1996. After excluding the following, Adjusted Sales increased 8% over
the prior year to $1,032.2 million from $953.4 million in 1996:
o $4.2 million and $30.8 million in 1997 and 1996, respectively, related to
divested product lines which were not classified as discontinued
operations (time and temperature products, decorative bedding and
Counselor and Borg branded scales);
o $31.3 million of sales in 1997 of discontinued inventory which resulted
primarily from the reduction of SKU's as part of the 1996 restructuring
plan and for which the inventory carrying value was substantially
equivalent to the sales value; and
o a $5.4 million benefit from the reduction of cooperative advertising
accruals no longer required in 1997.
Adjusted Sales, on a worldwide basis, increased during 1997 primarily from
new product introductions, expanded distribution, particularly with Sunbeam's
top ten customers, international geographic expansion and increased inventory
positions at some customers. Adjusted Sales growth was approximately 19% for
appliances and approximately 12% in outdoor cooking. Adjusted Sales for health
products increased approximately 5% while Adjusted Sales of personal care
products and blankets decreased approximately 13% during 1997.
Sales increases in appliances of approximately $69 million were driven by
new products, such as redesigned blenders and mixers, coffeemakers, irons, deep
fryers and toasters, and by increased distribution with large national mass
retailers, combined with higher inventory levels at some customers. Sales of
outdoor cooking products increased approximately $30 million in 1997 attributed
to increased merchandising and advertising programs, new distribution and higher
inventory levels at some customers. During 1997, the Company lost a significant
portion of its outdoor cooking products distribution, including the majority of
its grill accessory products distribution. Accessories, which accounted for just
over 10% of the outdoor cooking
37
sales volume in 1997, generate significantly better margins than the average
margins on sales of grills. These distribution changes are expected to adversely
impact outdoor cooking sales and margins in the future, until such time as the
distribution is regained.
Sales of personal care products and blankets suffered during the fourth
quarter of 1997 as a result of lower than expected retail sell through of
electric blankets in key northern markets in late 1997 coupled with the
inability to service demand for king and queen sized blankets due to shortages
of blanket shells. The Company shifted to a more level production for blankets
in 1998 in order to more adequately service the seasonal demand for bedding
products. Sales of health products as well as personal care and bedding products
were impacted by increased inventory positions at customers in 1997.
International sales, which represented 21% of total revenues in 1997, grew
25% during the year. This sales growth was driven primarily by 54 new 220 volt
product introductions and a general improvement in demand in export operations
and in Mexico. Net sales growth of approximately 35% was achieved in the Latin
American export sales organization. Most of this growth came from increased
business with three exporters. In Mexico and Venezuela, sales grew 30% and 24%,
respectively. Canada accounted for the majority of the remaining international
sales growth.
Excluding the effects of:
o charges of $60.8 million to Cost of Goods Sold related to the
restructuring plan in 1996;
o the $15.9 million benefit of reducing reserves no longer required in
1997; and
o the $2.8 million benefit in 1997 of capitalizing manufacturing supplies
inventories;
gross margin as a percent of Adjusted Sales would have been approximately 22% in
1997, an improvement of approximately 6 percentage points from 16% in 1996. This
increase reflects the results of lower overhead spending, improved factory
utilization and labor cost benefits resulting from the Company's restructuring
plan, coupled with reductions in materials costs. The lower overhead spending
resulted from a reduction in the number of facilities operated by the Company.
With fewer facilities used for production purposes, the capacity of the
remaining plants was more fully utilized. The labor cost benefits were realized
principally from shifting production to Mexico. In addition, a broad based
program to obtain lower costs for materials contributed to the 1997 margin
improvement.
Excluding the impact of:
o the restructuring and asset impairment period costs to SG&A expense of
$15.8 million in 1997 and $10.1 million in 1996;
o the 1996 charges for the environmental accrual of $9.0 million,
litigation accrual of $12.0 million and restricted stock grant
compensation of $7.7 million; and
o the 1997 benefit from the reversal of reserves no longer required of
$12.1 million;
SG&A improved to 14% of Adjusted Sales in 1997, down 5 percentage points from
19% in 1996. This improvement was partially the result of benefits from the
consolidation of six divisional and regional headquarters into one corporate
headquarters and one administrative operations center, reduced staffing levels,
a reduction in the number of warehouses, and Company-wide cost control
initiatives. Higher expenditures in 1996 for market research, new packaging and
other discretionary charges and higher bad debt expenses associated with some of
the Company's customers also contributed to the decrease in SG&A expense from
1996 to 1997. The expense for doubtful accounts and cash discounts was
$17.3 million in 1997 as compared to $27.1 million in 1996. The principal factor
in the decrease in bad debt expenses during this period was the acceleration of
the consolidation of the U.S. retail industry and the related competitive
environment, which resulted in a number of troubled retailers and related
bankruptcies during 1996. This resulted in the significant amount of bad debt
write-offs--$19.9 million--in 1996.
The restructuring accrual, which existed at January 1, 1996 ($13.8
million), was initially established as part of a "rightsizing program" during
fiscal 1992. During 1996, approximately $3 million of this accrual was utilized
and the remaining $10.8 million became part of the reserve requirements of the
1996 restructuring plan. In effect, in 1996, Sunbeam reversed the $10.8 million
prior year accrual determined to be no longer required and provided a
corresponding amount in connection with the 1996 restructuring charge.
38
Operating results for 1997 and 1996, on a comparable basis as described
above, were earnings of $74.5 million in 1997 and a loss of $34.8 million in
1996. On the same basis, operating margin increased 11 percentage points to 7%
of Adjusted Sales in 1997 versus a loss of 4% in 1996. This improvement resulted
from the factors discussed above.
Interest expense decreased from $13.6 million in 1996 to $11.4 million in
1997 primarily as a result of lower average borrowing levels in 1997.
The 1997 effective income tax rate for continuing operations was higher
than the federal statutory income tax rate primarily due to state taxes plus the
effect of foreign earnings and dividends taxed at other rates and the increase
to the valuation reserve for deferred tax assets, offset in part by the reversal
of tax liabilities no longer required. During the fourth quarter of 1997,
approximately $13.3 million of tax liabilities related to the 1993 and 1994 tax
years were determined to be no longer required and were reversed and taken into
income. These accruals were no longer required because during the fourth quarter
of 1997 the Company reached a resolution with the Internal Revenue Service on
its audits of the 1993 and 1994 tax years. Additionally, in the fourth quarter
of 1997, the Company increased the valuation allowance by $23.2 million
reflecting management's assessment that it was more likely than not that the
deferred tax asset will not be realized through future taxable income. Of this
amount, $18.9 million related to deferred tax assets, the majority of which was
recognized as a benefit in the first three quarters of 1997. The remainder
related to minimum pension liabilities and was therefore recorded as an
adjustment to shareholders' equity. This assessment was made as a result of the
significant leverage incurred by the Company to finance the acquisitions and the
significant decline in net sales and earnings from anticipated levels during the
fourth quarter of 1997 and the first quarter of 1998. For 1996, the effective
income tax rate for continuing operations equaled the federal statutory income
tax rate.
The Company's diluted earnings per share from continuing operations was
$0.60 per share in 1997 versus a loss per share from continuing operations in
1996 of $2.05. The Company's share base utilized in the diluted earnings per
share calculation increased approximately 6% during 1997 as a result of an
increase in the number of shares of common stock outstanding due to the exercise
of stock options in 1997 and the inclusion of common stock equivalents in the
1997 calculation.
The Company's discontinued furniture business, which was sold in March
1997, had revenues of $51.6 million in the first quarter of 1997 prior to the
sale and nominal earnings. In 1996, the discontinued furniture business had net
income of $0.8 million on revenues of $227.5 million and an estimated loss on
disposal of the business of $39.1 million, net of applicable income tax
benefits. The sale of the Company's furniture business assets--primarily
inventory, property, plant and equipment--was completed in March 1997. The
Company received $69.0 million in cash, retained approximately $50.0 million in
accounts receivable and retained some liabilities related to the furniture
business. The final purchase price for the furniture business was subject to a
post-closing adjustment under the terms of the sale agreement, and in the first
quarter of 1997, after completion of the sale, the Company recorded an
additional pre-tax loss on disposal of $22.5 million. Although the discontinued
furniture business was profitable, net income had declined from $21.7 million in
1994 to $0.8 million in 1996. This decline, along with the Company's
announcement that it intended to divest this line of business contributed to the
loss on the sale. See discussion of restructuring and asset impairment (benefit)
charges in Note 12 and discontinued operations in Note 13 of Notes to the
Consolidated Financial Statements for further information regarding sale of the
furniture business.
39
SUMMARY OF (LOSS) EARNINGS FROM CONTINUING OPERATIONS
A reconciliation of operating (loss) earnings to adjusted (loss) earnings
from continuing operations for 1998, 1997 and 1996, on a comparable basis
follows (in millions):
1998 1997 1996
------- ------- -------
Operating (loss) earnings, as reported............................................ $(670.0) $ 104.1 $(244.5)
Add (deduct):
Loss from acquisitions.......................................................... 124.8 -- --
Issuance of warrants to M&F..................................................... 70.0 -- --
Restructuring, asset impairment and related charges............................. -- 1.2 181.0
Fixed asset and inventory charges............................................... 128.4 -- --
Environmental reserve increase principally related to divested operations....... -- -- 9.0
Litigation reserve increase relating to divested operation...................... -- -- 12.0
Restricted stock and other management compensation/severance.................... 34.4 -- 7.7
Reversals of accruals no longer required........................................ (3.0) (28.0) --
Capitalization of manufacturing supplies inventories............................ -- (2.8) --
Restatement related expenses.................................................... 20.4 -- --
Year 2000 and systems initiatives expenses...................................... 6.1 -- --
Change in fiscal year-end effect and office relocation expense.................. 5.5 -- --
------- ------- -------
Adjusted operating (loss) earnings from continuing operations before income
taxes, minority interest and extraordinary charge............................. (283.4) 74.5 (34.8)
Interest expense................................................................ 131.1 11.4 13.6
Other (income) expense, net..................................................... (4.8) -- 3.7
------- ------- -------
Adjusted (loss) earnings from continuing operations before income taxes and
minority interest............................................................. (409.7) 63.1 (52.1)
Adjusted income tax (benefit) expense........................................... (10.1) 56.3 (18.2)
Minority interest............................................................... (10.7) -- --
------- ------- -------
Adjusted (loss) earnings from continuing operations............................. $(388.9) $ 6.8 $ (33.9)
------- ------- -------
------- ------- -------
After consideration of the adjustments above, 1998 and 1996 results from
continuing operations reflect losses and 1997 continuing operations are
marginally profitable. Due to a variety of factors, including increased
inventory positions at some customers and manufacturing and sourcing activities
during 1997 and the first half of 1998 which increased the Company's inventory
position, the results for each of 1998 and 1997 are not indicative of future
results. Results for 1999 are expected to be impacted by the continuing effects
of the Company's excess inventory position, as well as costs related to Year
2000 compliance efforts.
FOREIGN OPERATIONS
Approximately 80% of the Company's business is conducted in U.S. dollars,
including domestic sales, U.S. dollar denominated export sales, primarily to
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 are included as a component
of net (loss) earnings. Mexico is no longer considered hyperinflationary as of
January 1, 1999. This change in Mexico's hyperinflationary status is not
expected to have a material effect on the Company's financial results.
Translation adjustments resulting from the Company's non-U.S. denominated
subsidiaries have not had a material impact on the Company's financial
condition, results of operations or cash flows.
While revenues generated in Asia have traditionally not been significant,
economic instability in this region is expected to have a negative effect on
earnings. Economic instability and the political environment in Latin America
have also affected sales in that region. It is anticipated that sales in and
exports to these regions will continue to decline so long as the economic
environments in those regions remain unsettled.
On a limited basis, the Company selectively uses derivatives--foreign
exchange option and forward contracts--to manage foreign exchange exposures that
arise in the normal course of business. No derivative
40
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.
See Note 4 of Notes to Consolidated Financial Statements.
EXPOSURE TO MARKET RISK
Qualitative Information
The Company uses a variety of derivative financial instruments to manage
its foreign currency and interest rate exposures. The Company 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.
With respect to foreign currency exposures, the Company is most vulnerable
to changes in rates between the United States dollar/Japanese yen, Canadian
dollar, German deutschemark, Mexican peso and Venezuelan bolivar exchange rates.
The Company principally uses forward and option contracts to reduce risks
arising from firm commitments, intercompany sales transactions and intercompany
receivable and payable balances. The Company generally uses interest rate swaps
to fix some of its variable rate debt. The Company manages credit risk related
to these derivative contracts through credit approvals, exposure limits and
threshold amounts and other monitoring procedures.
Quantitative Information
Below are tables of information related to the Company's investments in
market risk sensitive instruments. All of the instruments in the following
tables have been entered into by the Company for purposes other than trading
purposes.
Interest Rate Sensitivity. The table below provides information about the
Company'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 (weighted) December 31, 1998 average interest rates.
Included in the debt position are the debentures, which carry no intervening
cash flows but mature in 2018. For interest rate swaps, the table presents
notional amounts and weighted average interest rates for the contracts at the
current time. Notional amounts are used to calculate the contractual payments to
be exchanged under the contracts.
EXPECTED MATURITY DATE
---------------------------------------------------------------------
DECEMBER 31, FAIR
1998 1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE(1)
------------ ---- ------ ---- ---- ---- ---------- ------ --------
(US$ EQUIVALENT IN MILLIONS)
DOMESTIC LIABILITIES
Debentures(2)................ $ 779 $ -- $ -- $ -- $ -- $ -- $2,014 $2,014 $ 240
Other........................ 80 71 1 1 1 1 5 80 79
------ ---- ------ ---- ---- ---- ------ ------ ------
Total fixed rate debt (US$).. 859 71 1 1 1 1 2,019 2,094 319
Average interest rate........ 5.64%
Variable rate debt (US$)..... $1,357 $ 3 $1,354(3) $ -- $ -- $ -- $ -- $1,357 $1,357
Average interest rate........ 8.47%
INTEREST RATE DERIVATIVES
Interest rate swaps:
Variable to fixed (US$)... $ 325 $ -- $ -- $150 $ -- $175 $ -- $ 325 $ (7)
Average pay rate.......... 5.70%
Average receive rate...... 5.21%
- ------------------
(1) The fair value of fixed rate debt is estimated using either reported
transaction values or discounted cash flow analysis. The carrying value of
variable rate debt is assumed to approximate market value based on the
periodic adjustments of the interest rates to the current market rates in
accordance with the terms of the agreements. The fair value of the interest
rate swaps is based on estimates of the cost of terminating the swaps.
(Footnotes continued on next page)
41
(Footnotes continued from previous page)
(2) The total amount of debentures maturing in future periods exceeds the
balance as of December 31, 1998 due to the accretion of the debentures. See
Note 3 of Notes to Sunbeam's Consolidated Financial Statements.
(3) Represents bank credit facility debt. See Item 7 "--Liquidity and Capital
Resources" and Note 3 of Notes to Consolidated Financial Statements.
Exchange Rate Sensitivity. The table below provides information about
Sunbeam's derivative financial instruments, other financial instruments and
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 currency forward exchange
agreements and foreign currency purchased put option contracts. For debt
obligations, the table presents 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. None of
the instruments listed in the table have maturity dates beyond 1999.
DECEMBER 31,
1998 FAIR VALUE
------------ ----------
(US$ EQUIVALENT IN
MILLIONS)
ON BALANCE SHEET FINANCIAL INSTRUMENTS
US$ Functional Currency
Short-term debt:
Variable rate credit lines (Europe, Japan and Asia)............................... $ 45.8 $ 45.8
Weighted average interest rate.................................................... 2.8%
US$ FUNCTIONAL CURRENCY
Forward Exchange Agreements
(Receive US$/pay DM)
Contract amount................................................................... $ 12.0 $ 12.2
Average contractual exchange rate................................................. 1.62
(Receive US$/pay JPY)
Contract amount................................................................... $ 14.9 $ 14.2
Average contractual exchange rate................................................. 116.11
(Receive US$/pay GBP)
Contract amount................................................................... $ 4.0 $ 4.1
Average contractual exchange rate................................................. 1.68
Purchased Put Option Agreements
(Receive US$/pay DM)
Contract amount................................................................... $ 18.4 $ 0.1
Average strike price.............................................................. 1.80
(Receive US$/pay JPY)
Contract amount................................................................... $ 12.4 $ 0.2
Average strike price.............................................................. 125.0
(Receive US$/pay GBP)
Contract amount................................................................... $ 1.5 --
Average strike price.............................................................. 1.62
EURO CONVERSION
On January 1, 1999, certain member countries of the European Union
established fixed conversion rates between their existing currencies and the
European Union's common currency (the "Euro"). The transition period for the
introduction of the Euro is between January 1, 1999 and January 1, 2002. The
Company has been preparing for the introduction of the Euro and continues to
evaluate and address the many issues
42
involved, including the conversion of information technology systems,
recalculating currency risk, strategies concerning continuity of contracts, and
impacts on the processes for preparing taxation and accounting records. Based on
the work to date, the Company believes the Euro conversion will not have a
material impact on its results of operations.
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 Sunbeam and the
three acquired companies, the Company consummated an offering of debentures at a
yield to maturity of 5%--approximately $2,014 million principal amount at
maturity--in March 1998, which resulted in approximately $730 million of net
proceeds and 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. The Company may,
at its option, elect to pay any such purchase price in cash or common stock or
any combination thereof. However, the bank credit facility prohibits the Company
from redeeming or repurchasing debentures for cash. The Company was required to
file a registration statement with the SEC to register the debentures by
June 23, 1998. This registration statement was filed on February 4, 1999 and the
SEC has not declared the registration statement effective. The Company's failure
to file the registration statement by June 23, 1998 did not constitute default
under the terms of the debentures. As part of the normal review process by the
SEC, a number of comments have been made by the staff of the Division of
Corporation Finance relating to the registration statement and the restated 1996
and 1997 financial statements included therein. The Company has filed an
amendment to this registration statement. From June 23, 1998 until the
registration statement is declared effective, the Company is required to pay to
the debenture holders cash liquidated damages accruing, for each day during such
period, at a rate per annum equal to 0.25% during the first 90 days and 0.50%
thereafter multiplied by the total of the issue price of the debentures plus the
original issue discount thereon on such day. The Company made its first payment
of approximately $500,000 to the debenture holders on September 25, 1998 and an
additional $2 million was paid on March 25, 1999. An additional cash payment of
approximately $2 million, representing the Company's liability to debenture
holders through June 30, 1999, will be paid on September 25, 1999.
Concurrent with the acquisitions, the Company replaced its $250 million
syndicated unsecured five-year revolving credit facility with the bank credit
facility. The bank credit facility provided for aggregate borrowings of up to
$1.7 billion and in addition to other customary covenants, required Sunbeam 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
43
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 for each of February, March and April of 1999,
which covenant the Company was 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 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 million for the period from January 1, 1999 through
March 31, 2000. The following description of the bank credit facility reflects
the terms of the bank credit facility as amended to date.
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 March 31, 1999.)
As of December 31, 1998, approximately $1.4 billion was outstanding and
approximately $0.2 billion was available for borrowing under the bank credit
facility. The remaining $0.1 billion of the $1.7 billion bank credit facility
was committed for outstanding letters of credit.
Under the bank credit facility, interest accrues, at Sunbeam's option:
o at the London Interbank Offered Rate ("LIBOR"); or
o 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 3.75% for LIBOR
borrowings and 2.50% for base rate borrowings. The applicable interest margin is
subject to upward or downward adjustment upon the occurrence of specified
events.
Under an April 15, 1999 amendment to the bank credit facility, we agreed 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 15 to the 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
44
note has been pledged as security for the Company's obligations to them. Upon
completion of the Coleman merger, substantially all of Coleman's assets and the
assets of Coleman's domestic subsidiaries will be pledged to secure the
obligations under the bank credit facility.
In addition, borrowings under the bank credit facility are guaranteed by a
number of the Company's wholly-owned material domestic subsidiaries and these
subsidiary guarantees are secured as described above. Upon completion of the
Coleman merger, Coleman and each of its United States subsidiaries will become
guarantors of the obligations under the bank credit facility. To the extent
extensions of credit are made to any subsidiaries of the Company, the
obligations of such subsidiaries are guaranteed by the Company.
In addition to the above described financial ratios and tests, the bank
credit facility contains covenants customary for credit facilities of a similar
nature, including limitations on the ability of the Company and its
subsidiaries, including Coleman, to, among other things:
o declare dividends or repurchase stock;
o prepay, redeem or repurchase debt, incur liens and engage in
sale-leaseback transactions;
o make loans and investments;
o incur additional debt, including revolving loans under the bank credit
facility;
o amend or otherwise alter material agreements or enter into restrictive
agreements;
o make capital and Year 2000 compliance expenditures;
o engage in mergers, acquisitions and asset sales;
o engage in certain transactions with affiliates;
o settle certain litigation;
o alter its cash management system; and
o alter the businesses they conduct.
The Company is also required to comply with specified financial covenants and
ratios.
The bank credit facility provides for events of default customary for
transactions of this type, including nonpayment, misrepresentation, breach of
covenant, cross-defaults, bankruptcy, material adverse change arising from
compliance with ERISA, material adverse judgments, entering into guarantees and
change of ownership and control. It is also an event of default under the bank
credit facility if the Company's registration statement in connection with the
Coleman merger is not declared effective by the SEC on or before October 30,
1999 or if the merger does not occur within 25 business days of the
effectiveness of the registration statement or if the cash
consideration--including any payments on account of the exercise of any
appraisal rights, but excluding related legal, accounting and other customary
fees and expenses--to consummate the Coleman merger exceeds $87.5 million.
Although there can be no assurance, the Company anticipates that it will satisfy
these conditions. Furthermore, the bank credit facility requires the Company to
prepay term loans under the bank credit facility on each of September 30, 1999
and December 31, 1999 to the extent that cash on hand in the Company's
concentration accounts plus the aggregate amount of unused revolving loan
commitments on these dates (excluding, for the September 30, 1999 measurement
date, $52.5 million reserved for the Coleman merger), exceeds $115 million and
$125 million, respectively, but Sunbeam is not required to prepay more than
$69.3 million in the aggregate as a result of the provision.
Unless waived by the bank lenders, the failure of the Company to satisfy
any of the financial ratios and tests contained in the bank credit facility or
the occurrence of any other event of default under the bank credit facility
would entitle the bank lenders to (a) receive a 2.00% increase in the interest
rate applicable to outstanding loans and increase the trade letter of credit
fees to 1.00% and (b) accelerate the maturity of the outstanding borrowings
under the bank credit facility and exercise all or any of their other rights and
remedies. Any such acceleration or other exercise of rights and remedies would
likely have a material adverse effect on Sunbeam.
The bank credit facility also includes provisions for the deferral of the
1999 scheduled term loan payments of $69.3 million until April 10, 2000 subject
to delivery of certain collateral documents and the filing of an amendment to
the Company's registration statement on Form S-4 relating to the Coleman merger.
If these conditions are met, and there are no events of default, the scheduled
loan payments will be extended until April 10, 2000. The Company anticipates
that it will satisfy these conditions and, accordingly, has
45
classified these amounts as long-term in the Consolidated Balance Sheet. See
Note 3 of Notes to Consolidated Financial Statements.
Cash Flows
As of December 31, 1998, Sunbeam had cash and cash equivalents of $61.4
million, working capital excluding cash and cash equivalents of $427.1 million
and total debt of $2.3 billion. Cash used in operating activities during 1998
was $190.4 million compared to $6.0 million used in operating activities in
1997. This change is primarily attributable to lower earnings after giving
effect to non-cash charges partially offset by improvements in working capital.
During 1998, $184.2 million in cash was generated by reducing receivables,
including through the revolving trade accounts receivable securitization program
described below, and reducing inventories, which was partially offset by a $68.2
million reduction in accounts payable levels. In the fourth quarter of 1998,
cash provided by operating activities totaled $34.3 million, principally due to
cash generated by reducing receivables and inventories of $181.9 million. The
decrease in cash provided by operations from 1996 to 1997 is primarily
attributable to increased inventory levels in 1997 and spending in 1997 related
to the restructuring initiatives accrued for in 1996, largely offset by an
increase in cash generated by earnings in 1997 and an income tax refund (net of
payments) in 1997. Cash used in operating activities reflects proceeds of $200.0
million in 1998 and $58.9 million in 1997 from the Company's revolving trade
accounts receivable securitization program, described below.
Cash used in investing activities in 1998 reflects $522.4 million for the
acquisitions. In 1997, cash provided by investing activities reflected $91.0
million in proceeds from the sales of divested operations and other assets.
Capital spending totaled $53.7 million in 1998 and was primarily for
manufacturing efficiency initiatives, equipment and tooling for new products,
and management information systems hardware and software licenses. The new
product capital spending principally related to the air and water filtration
products which were discontinued in the second quarter of 1998, electric
blankets, grills, clippers and appliances. Capital spending in 1997 was $60.5
million and was primarily attributable to manufacturing capacity expansion, cost
reduction initiatives and equipment to manufacture new products. The new product
capital spending in 1997 principally related to appliances and included costs
related to blenders, toasters, stand mixers, slow cookers and a soft serve ice
cream product. Capital spending in 1996 was $75.3 million, including
$14.5 million related to the discontinued furniture business, and was primarily
attributable to equipment for new product development and cost reduction
initiatives. As discussed above, the Company's capital and Year 2000 compliance
expenditures are limited under the terms of the bank credit facility.
Cash provided by financing activities totaled $766.2 million in 1998 and
reflects:
o the net proceeds from the sale of debentures of $729.6 million;
o the cancellation and repayment of all outstanding balances under the
Company's $250 million September 1996 revolving credit facility;
o the repayment of debt in connection with the acquisitions;
o the early extinguishment of the $75.0 million Hattiesburg industrial
revenue bond; and
o net borrowings under the bank credit facility.
In addition, cash provided by financing activities during 1998 includes
$19.6 million of proceeds from the exercise of stock options.
During 1997, cash provided by financing activities of $16.4 million
reflected:
o net borrowings of $5.0 million under the Company's September 1996
revolving credit facility;
o $12.2 million of debt repayments related to the divested furniture
business and other assets sold; and
o $26.6 million in cash proceeds from the exercise of stock options.
During 1996, cash provided by financing activities of $45.3 million
primarily reflected:
o revolving credit facility borrowings of $30.0 million to support working
capital and capital spending requirements;
o $11.5 million in new issuances of long-term debt; and
o $4.6 million in proceeds from the sale of treasury shares to certain
executives of the Company.
In December 1997, the Company entered into a revolving trade accounts
receivable securitization program, which as amended expires in March 2000, to
sell without recourse, through a wholly-owned
46
subsidiary, up to a maximum of $70 million in trade accounts receivable. The
Company, as agent for the purchaser of the receivables, retains collection and
administrative responsibilities for the purchased receivables. For the year
ended December 31, 1998, the Company sold approximately $200 million of accounts
receivable under this program. At December 31, 1998, the Company had reduced
accounts receivable by $20.0 million for receivables sold under this program.
The Company expects to continue to utilize the securitization program to finance
a portion of its accounts receivable. See Note 5 of Notes to Consolidated
Financial Statements.
At December 31, 1998, standby and commercial letters of credit aggregated
$82.3 million and were predominately for insurance, pension, environmental,
workers' compensation, and international trade activities. In addition, as of
December 31, 1998, surety bonds with a contract value of $26.5 million were
outstanding largely as a result of litigation judgments that are currently under
appeal.
For additional information relating to the debentures, the bank credit
facility and the repayment of debt, see Note 3 of Notes to Consolidated and
Consolidated Financial Statements.
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 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. See Note 2 and Note 15 to Consolidated
Financial Statements. Although there can be no assurance, it is anticipated that
the Coleman merger will occur in the second half of fiscal 1999.
The Company believes its borrowing capacity under the 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
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
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 was classified as current in the second quarter of 1999.
In May 1998, the NYSE advised the Company that it did not meet the NYSE's
continuing listing standards because the Company did not have tangible net
assets of $12.0 million at December 31, 1997 and average annual net income of at
least $0.6 million for fiscal years 1997, 1996 and 1995. The Company
representatives 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 the Company's financial
condition and operations. The NYSE subsequently 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 assets of at
least $12.0 million at September 30, 1998 and an 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 merger. The NYSE subsequently advised Coleman that Coleman also failed to
satisfy certain non-financial continuing listing standards. The NYSE
subsequently 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
47
be delisted from the NYSE, it could adversely affect the market price of
Coleman's common stock and Coleman's ability to sell its capital stock to third
parties. However, the Company'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
Sunbeam'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 the Company 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 liability. The
Company cannot predict the term of such investigation or its potential outcome.
The Company is involved in significant litigation, including class and
derivative actions, relating to events which led to the restatement of its
consolidated financial statements, the issuance of the MacAndrews & Forbes
warrant, the sale of the debentures and the employment agreements, of Messrs.
Dunlap and Kersh. The Company intends to vigorously defend each of the actions,
but cannot predict the outcome and is not currently able to evaluate the
likelihood of the Company's success in each case or the range of potential loss.
However, if the Company were to lose these suits, judgments would likely have a
material adverse effect on the Company's financial position, results of
operations and cash flows. Additionally, the Company's insurance carriers have
filed various suits requesting a declaratory judgment that the directors' and
officers' liability insurance policies for excess coverage was invalid and/or
had been properly canceled by the carriers or have advised the Company 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 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 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) and
$9.9 million as of December 28, 1997, (representing $3.0 million and
$6.9 million for estimated damages or settlement amounts and legal fees,
respectively). It is anticipated that the $31.2 million accrual will be paid as
follows: $22.4 million in 1999, $7.5 million in 2000, and $1.3 million in 2001.
The Company believes, based on information known to the Company on December 31,
1998, that anticipated probable costs of litigation matters existing as of
December 31, 1998 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 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 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.
48
For additional information relating to litigation, see Item 3--Legal
Proceedings.
NEW ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1
requires computer software costs associated with internal use software to be
expensed as incurred until certain capitalization criteria are met. The Company
adopted SOP 98-1 effective January 1, 1999. Adoption of this statement did not
have a material impact on the Company's consolidated financial position, results
of operations, or cash flows. Actual charges incurred due to systems projects
may be material.
In April 1998, the AICPA issued Statement of Position 98-5, Reporting on
the Cost of Start-up Activities ("SOP 98-5"). SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. The Company adopted SOP 98-5 beginning January 1, 1999.
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 FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which 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.
YEAR 2000 READINESS DISCLOSURE
The following disclosure is as of May 11, 1999.
The Company is preparing for the impact of the Year 2000 on its operations.
Year 2000 issues could include potential problems in the information technology
("IT") and non-IT systems that the Company uses in its operations and problems
in the Company's products. Year 2000 system failures could affect routine but
critical operations such as forecasting, purchasing, production, order
processing, inventory control, shipping, billing and collection. In addition,
system failures could affect the Company's security, payroll operations, or
employee safety. The Company may also be exposed to potential risks from third
parties with whom the Company interacts who fail to adequately address their own
Year 2000 issues.
Sunbeam's Approach to Year 2000 Issues
While the Company's Year 2000 readiness planning has been underway for over
one year, during the third quarter of 1998 the Company established a
cross-functional project team consisting of senior managers, assisted by three
external consulting firms which were retained to provide consulting services and
to assist the Company in implementing its Year 2000 strategy. This team is
headed 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 Sunbeam'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 the Company's
Year 2000 readiness program, the Company established a Year 2000 program
management office 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
49
quarters of 1998. Sunbeam 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 the Company's Year
2000 readiness program is structured to replace, upgrade or remediate, as
necessary, those items identified during Phase 1 as requiring corrective action.
The Company 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:
o purchases of materials;
o production management;
o order entry and fulfillment;
o payroll processing; and
o billing and collections.
Systems and applications that have been identified by the Company to date
as not currently Year 2000 ready and which are critical to the Company's
operations include:
o financial software systems, which process:
o order entry;
o purchasing;
o production management;
o general ledger;
o accounts receivable; and
o accounts payable functions;
o payroll applications; and
o critical applications in the Company's manufacturing and distribution
facilities, such as warehouse management applications.
Recognizing how dependent the entire company is on IT, the Company decided in
1997 to replace its primary business applications with a uniform international
business and accounting information system to address the systems or
applications listed above as well as to improve internal reporting processes.
Based upon representations from the manufacturer that the current version of
this uniform information system is Year 2000 ready, the Company has been
actively upgrading its business sites that currently utilize this uniform system
to the Year 2000 ready version. In addition to the pre-acquisition Sunbeam
locations which had already utilized an earlier non-Year 2000 ready version of
this uniform business and accounting information system, Eastpak, Mr. Coffee,
Health-o-Meter, and Sunbeam Latin America are replacing their current non-Year
2000 ready systems with this new uniform system. In addition, Coleman Europe is
also replacing key business components with this new system.
The Company is also actively replacing and/or upgrading a number of
business systems that are not Year 2000 ready, including those that use
localized business system packages which were not candidates to be replaced by
the uniform business and accounting information system. For example, at Coleman
approximately 2,000 mainframe software programs that are used in lieu of
Sunbeam's uniform business and accounting information system have been
remediated and tested to be Year 2000 ready. With respect to the Company's
non-IT systems, including time and attendance, security, and in-line
manufacturing hardware, the Company is actively analyzing these items to assess
any Year 2000 issues. To date, no material issues have been discovered, and the
Company will continue to review, test and correct, if necessary, such items.
The Company has largely implemented the corrective work described above and
expects to complete final testing and implementation of such systems in the
third quarter and early fourth quarter of 1999.
Phase 3--Customers, Suppliers and Business Partners. The third phase of
the Company'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 five months of 1999, "high risk"
vendors were contacted directly and the number of non-respondents has
50
since decreased substantially. In fact, currently only 13% 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 will re-survey these
companies in late August to determine the appropriate course of action.
Furthermore, the Company is in the process of contacting alternate vendors who
are Year 2000 ready to replace critical vendors deemed "high risk" in the event
that these vendors are not found to be Year 2000 ready. The Company has not
independently verified the responses of vendors and does not anticipate
undertaking such independent verification process.
Beginning in the second quarter of 1999, the Company began contacting its
major customers to confirm their preparations for Year 2000 issues. Sunbeam has
already responded to numerous customer inquiries and believes that all of the
Company's major customers have established programs to deal with 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 in the process of providing Year 2000 information on a
Company web site.
Phase 4--Contingency Planning. This phase will involve contingency
planning for unresolved Year 2000 issues, particularly any issues arising with
third party suppliers. The Company's Year 2000 readiness program is ongoing and
its ultimate scope, as well as the consideration of contingency plans, will
continue to be evaluated as new information becomes available. As a
precautionary measure, the Company plans to establish a contingency plan for
addressing any effects of the Year 2000 on its operations, whether due to the
Company's systems or those of third parties not being ready for any Year 2000
issues. The Company expects to substantially complete such contingency plan by
September 30, 1999; such contingency plan will address alternative processes,
such as manual procedures, electronic spreadsheets, potential alternative
service providers, and plans to address Year 2000 readiness issues as they
arise. Such contingency plans may also require an increase in inventory during
the second half of 1999 to protect against supply interruption.
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 the Company's Year 2000 program was
developed and is monitored with the help of independent consultants, the Company
did not engage another independent third party to verify the program's overall
approach or total cost; based on this, 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, the Company's information systems environment will be made
Year 2000 ready prior to January 1, 2000. The Company'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
some of these third parties to become Year 2000 ready could also have a material
adverse impact on the Company. For example, the failure of some 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
51
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.
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 Sunbeam's Year 2000 Issues
Through December 31, 1998 the Company had expended approximately
$19 million to address Year 2000 issues of which approximately 50% was recorded
as capital expenditures and the remainder as SG&A expense. The Company's current
assessment of the total costs to address and remedy Year 2000 issues and enhance
its operating systems, including costs for the acquired companies, is
approximately $60 million.
This estimate includes the following categories:
o uniform international business and accounting system $40 million
o localized business system software upgrades and remediation $ 9 million
o Year 2000 readiness assessment and tracking $ 6 million
o upgrade of personal computers and related software $ 5 million
The amount to be incurred for Year 2000 issues during 1999 of approximately
$41 million represents over 50% of the Company's total 1999 budget for
information systems and related support, including Year 2000 costs. A large
majority of these costs are expected to be incremental expenditures that will
not recur in the Year 2000 or thereafter. Fees and expenses related to third
party consultants, who are involved in the program management office 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. The Company expects these expenditures to be financed
through operating cash flows or borrowings, as applicable. A significant portion
of these expenditures will enhance the Company's operating systems in addition
to resolving the Year 2000 issues. As the Company completes its assessment of
the Year 2000 issues, the actual expenditures incurred or to be incurred may
differ materially from the amounts shown above. The bank credit facility does
not permit the Company to spend more than $50 million on Year 2000 testing and
remediation during 1999.
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 IT systems to the Company's
business, management has deferred non-critical systems enhancements as much as
possible. The Company does not expect these redeployments and deferrals to have
a material impact on the Company's financial condition, results of operations or
cash flows.
EFFECTS OF INFLATION
For each of the three years in the period ended December 31, 1998 the
Company's cost of raw materials and other product remained relatively stable. To
the extent possible, the Company's objective is to offset the impact of
inflation through productivity enhancements, cost reductions and price
increases.
CAUTIONARY STATEMENTS
Certain statements in this prospectus 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 SEC. These forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance, or achievements of the Company to be materially different from any
future results, performance, or achievements expressed or implied by such
forward-looking statements. Statements that are not historical fact are
forward-looking statements. Forward-looking statements can be identified by,
among other things, the use of forward-looking language, such as the word
"estimate," "project," "intend," "expect," "believe," "may," "well," "should,"
"seeks," "plans," "scheduled to," "anticipates," or "intends," or the negative
of these terms or other variations of these terms or comparable language, or by
discussions of strategy or intentions, when used
52
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:
o high leverage;
o The Company's ability to comply with the terms of its bank credit
facility, including financial covenants and covenants related to the
completion of the Coleman merger, or to enter into an amendment to its
credit agreement containing financial covenants which it and its bank
lenders find mutually acceptable, or to continue to obtain waivers from
its bank lenders with respect to its compliance with the existing
covenants contained in the bank credit facility, and to continue to have
access to its revolving credit facility, or the Company's ability to
refinance its indebtedness at acceptable rates with acceptable terms;
o The Company's ability to integrate the recently acquired Coleman,
Signature Brands and First Alert companies and expenses associated with
such integration;
o The Company's sourcing of products from international vendors, including
the ability to select reliable vendors and to avoid delays in shipments;
o The Company's ability to maintain and increase market share for its
products at anticipated margins;
o The Company's ability to successfully introduce new products and to
provide on-time delivery and a satisfactory level of customer service;
o changes in domestic and/or foreign laws and regulations, including
changes in tax laws, accounting standards, environmental laws,
occupational, health and safety laws;
o access to foreign markets together with foreign economic conditions,
including currency fluctuations and trade, monetary and/or tax policies;
o uncertainty as to the effect of competition in existing and potential
future lines of business;
o fluctuations in the cost and availability of raw materials and/or
products;
o changes in the availability and costs of labor;
o effectiveness of advertising and marketing programs;
o economic uncertainty in Japan, Korea and other Asian countries, as well
as in Mexico, Venezuela, and other Latin American countries;
o product quality, including excess warranty costs, product liability
expenses and costs of product recalls;
o weather conditions which can have an unfavorable impact upon sales of
certain of Sunbeam's products;
o the numerous lawsuits against the Company and the SEC investigation into
Sunbeam's accounting practices and policies, and uncertainty regarding
Sunbeam's available coverage on its directors' and officers' liability
insurance;
o the possibility of a recession in the United States or other countries
resulting in a decrease in consumer demands for the Company's products;
o actions by competitors including business combinations, new product
offerings and promotional activities; and
o 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 list above may cause the
Company's actual results to materially differ from those projected.
53
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item appears in Item 14(a) of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 20, 1998, the audit committee recommended and Sunbeam's board
approved the appointment of Deloitte & Touche as its independent auditors for
1998, to replace Arthur Andersen, Sunbeam's former auditor. Arthur Andersen is
continuing to provide certain professional services to Sunbeam.
On June 25, 1998, Sunbeam announced that Arthur Andersen would not consent
to the inclusion of its opinion on Sunbeam's 1997 financial statements in a
registration statement Sunbeam was planning to file with the SEC. On June 30,
1998, Sunbeam announced that the audit committee of its board of directors would
conduct a review of Sunbeam's prior financial statements and that, therefore,
those financial statements should not be relied upon. Sunbeam also announced
that Deloitte & Touche had been retained to assist the audit committee and
Arthur Andersen in their review of Sunbeam's prior financial statements. On
August 6, 1998, Sunbeam announced that the audit committee had determined that
Sunbeam would be required to restate its financial statements for 1997, the
first quarter of 1998 and possibly 1996, and that the adjustments, while not
then quantified, would be material. On October 20, 1998 Sunbeam announced the
restatement of its financial results for a six-quarter period from the fourth
quarter of 1996 through the first quarter of 1998. On November 12, 1998, Sunbeam
filed a Form 10-K/A for the year ended December 28, 1997, which contains an
unqualified opinion by Arthur Andersen on Sunbeam's restated consolidated
financial statements as of December 29, 1996 and December 28, 1997 and for each
of the three years in the period ended December 28, 1997.
Arthur Andersen's report on Sunbeam's financial statements for the two
fiscal years of Sunbeam ended December 28, 1997 contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles. In connection with its audits for those periods
and through November 20, 1998, there were no disagreements with Arthur Andersen
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of Arthur Andersen would have caused Arthur Andersen to make
reference thereto in their report on the financial statements for such years.
Sunbeam has not consulted with Deloitte & Touche on any matter that was either
the subject of a disagreement or a reportable event between Sunbeam and Arthur
Andersen.
In connection with the restatements referred to above, in a letter dated
October 16, 1998, Arthur Andersen advised Sunbeam that there existed the
following conditions that Arthur Andersen believed to be material weaknesses in
Sunbeam's internal controls:
"In our opinion, [Sunbeam's] design and effectiveness of its
internal control were inadequate to detect material misstatements in
the preparation of [Sunbeam's] 1997 annual (before audit) and
quarterly financial statements."
As part of its audit of Sunbeam's 1997 consolidated financial statements
that led to the restatement of these financial statements, Arthur Andersen was
required to consider Sunbeam's internal controls in determining the scope of its
audit procedures. Arthur Andersen has advised management of its concerns
regarding Sunbeam's internal controls. Management is addressing these concerns
and although Sunbeam has not yet fully implemented all additional planned
controls, management believes that the interim measures Sunbeam has adopted to
prevent material misstatements in its financial statements will be effective
until the remainder of the additional controls can be implemented.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Information regarding the Company's directors is incorporated by reference
to the information set forth under "Proposal 1--To Elect the Following Eight
Directors of the Company for a Term of One Year" in the Company's Proxy
Statement for the 1999 Annual Meeting of Shareholders (the "Proxy Statement"),
which
54
Proxy Statement has been filed with the SEC pursuant to Regulation 14A.
Information regarding executive officers of the Registrant is included under a
separate caption in Part I hereof. Information regarding compliance with
Section 16(a) of the Exchange Act is incorporated by references to the
information included under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding this item is incorporated by reference to the
information included under the captions "Executive Compensation" and "Directors'
Compensation" in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding this item is incorporated by reference to the
information included under the captions "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in the Company's Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding this item is incorporated by reference to the
information included under the caption "Certain Relationships and Related
Transactions" in the Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The consolidated financial statements, related notes thereto and the
report of independent certified public accountants required by Item 8 are listed
on page F-1 herein.
2. The listing of financial statement schedules appears on page F-1 herein.
3. The exhibits listed in the accompanying index to exhibits are filed as
part of this report and include the management contracts or compensatory plans
or arrangements required pursuant to Item 601, which are designated as Exhibits
10.a to 10.g, 10.w to 10.z, 10.dd and 10.ee and 10.gg to 10.jj.
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
3.a -- Amended and Restated Certificate of Incorporation of Sunbeam(3)
3.b -- By-laws of Sunbeam, as amended(11)
4.a -- Indenture dated as of March 25, 1998, by and among the Company and Bank of New York, Trust, with
respect to the Zero Coupon Convertible Senior Subordinated Debentures
due 2018(8)
4.b -- Registration Rights Agreement dated March 25, 1998, by and among the Company and Morgan Stanley &
Co., Inc., with respect to the Zero Coupon Convertible Senior Subordinated Debentures due 2018(8)
4.c -- Registration Rights Agreement, dated as of March 29, 1998, between the Company and Coleman
(Parent) Holdings, Inc.(9)
4.d -- Settlement Agreement, dated as of August 12, 1998, by and between the Company and Coleman (Parent)
Holdings, Inc.(10)
4.e -- Amendment to Registration Rights Agreement, dated as of August 12, 1998, between the Company and
Coleman (Parent) Holding, Inc.*
10.a -- Employment Agreement dated as of February 20, 1998, by and between Sunbeam and
Albert J. Dunlap(7)
10.b -- Employment Agreement dated as of February 20, 1998, by and between Sunbeam and Russell A. Kersh(7)
10.c -- Employment Agreement dated as of February 20, 1998, by and between Sunbeam and
David C. Fannin(7)
55
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
10.d -- Employment Agreement dated as of January 1, 1997, by and between Sunbeam and
Donald Uzzi(5)
10.e -- Sunbeam Executive Benefit Replacement Plan(7)
10.f -- Amended and Restated Sunbeam Corporation Stock Option Plan*
10.g -- Performance Based Compensation Plan(7)
10.h -- Tax Sharing Agreement dated as of October 31, 1990, by and among Sunbeam, SAIL, SOHO, Montey and
the subsidiaries of Sunbeam listed therein(1)
10.i -- Receivables Sale and Contribution Agreement dated as of December 4, 1997, between Sunbeam
Products, Inc. and Sunbeam Asset Diversification, Inc.(7)
10.j -- Receivables Purchase and Servicing Agreement dated as of December 4, 1997, between Sunbeam
Products, Inc., Llama Retail, L.P., Capital USA, LLC and Sunbeam Asset Diversification, Inc.(7)
10.k -- Agreement and Plan of Merger among Sunbeam Corporation, Laser Acquisition Corp., CLN Holdings,
Inc., and Coleman (Parent) Holdings, Inc. dated as of February 27, 1998(7)
10.l -- Agreement and Plan of Merger among Sunbeam Corporation, Camper Acquisition Corp., and The Coleman
Company, Inc. dated as of February 27, 1998(7)
10.m -- Agreement and Plan of Merger between Sunbeam Corporation, Java Acquisition Corp., and Signature
Brands USA, Inc. dated as of February 28, 1998(7)
10.n -- Stock Purchase Agreement among Java Acquisition Corp. and the Sellers named therein dated as of
February 28, 1998(7)
10.o -- Agreement and Plan of Merger by and among Sunbeam Corporation, Sentinel Acquisition Corp., and
First Alert, Inc. dated as of February 28, 1998(7)
10.p -- Stock Sale Agreement among Sunbeam Corporation and the Shareholders named therein dated as of
February 28, 1998(7)
10.q -- Credit Agreement dated as of March 30, 1998, among Sunbeam Corporation, the Borrowers referred to
therein, the Lenders party thereto, Morgan Stanley Senior Funding, Inc., Bank of America National
Trust and Savings Association and First Union National Bank(8)
10.r -- First Amendment to Credit Agreement dated as of May 8, 1998, among Sunbeam Corporation, the
Subsidiary Borrowers referred to therein, the Lenders party thereto, Morgan Stanley Senior
Funding, Inc., Bank America National Trust and Savings Association and First Union National
Bank(8)
10.s -- Second Amendment to Credit Agreement dated as of March 30, 1998, among the Company, the Subsidiary
Borrowers referred to therein, the Lenders party thereto, Morgan Stanley Senior Funding, Inc.,
Bank America National Trust and Savings Association and First Union National Bank(11)
10.t -- Third Amendment to Credit Agreement dated as of October 19, 1998, among the Company, the
Subsidiary Borrowers referred to therein, the Lenders party thereto, Morgan Stanley Senior
Funding, Inc., Bank America National Trust and Savings Association and First Union National
Bank(11)
10.u -- Fourth Amendment to Credit Agreement dated as of April , 1998, among the Company, the Subsidiary
Borrowers referred to therein, the Lenders party thereto, Morgan Stanley Senior Funding, Inc.,
Bank America National Trust and Savings Association and First Union National Bank*
10.v -- Fifth Amendment to Credit Agreement, Third Waiver and Agreement dated April 15, 1999; among the
Company, the Subsidiary Borrowers referred to therein, the Lenders party thereto, Morgan Stanley
Senior Funding, Inc., Bank America National Trust and Savings Association and First Union National
Bank(13)
10.w -- Employment Agreement between the Company and Jerry W. Levin dated June 15, 1998(11)
56
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
10.x -- Employment Agreement between the Company and Paul Shapiro dated June 15, 1998(11)
10.y -- Employment Agreement between the Company and Bobby Jenkins dated June 15, 1998(11)
10.z -- Agreement between the Company and David Fannin dated August 20, 1998(11)
10.aa -- First Amendment to Receivables Sale and Contribution Agreement dated April 2, 1998, between
Sunbeam Products, Inc. and Sunbeam Asset Diversification, Inc.(11)
10.bb -- First Amendment to Receivables Purchase and Servicing Agreement dated April 2, 1998, between Llama
Retail Funding, L.P., Capital USA, L.L.C., Sunbeam Products, Inc. and Sunbeam Asset
Diversification, Inc.(11)
10.cc -- Second Amendment to Receivables Purchase and Servicing Agreement dated July 29,1998, between Llama
Retail Funding, L.P., Capital USA, L.L.C., Sunbeam Products, Inc. and Sunbeam Asset
Diversification, Inc.(11)
10.dd -- Sunbeam Corporation Management Incentive Compensation Plan*
10.ee -- Sunbeam Corporation Stock Option Repricing Plan*
10.ff -- Amendment No.1 to Agreement and Plan of Merger, dated as of March 29, 1998, among the Company,
Laser Acquisition Corp., Coleman(Parent) Holdings, Inc., and CLN Holdings, Inc.(13)
10.gg -- Employment Agreement dated as of August 31, 1998 between the Company and Karen K. Clark.*
10.hh -- Employment Agreement dated as of October 1, 1998 between the Company and Jack Hall.*
10.ii -- Employment Agreement dated as of December 16, 1998 between the Company and Janet G. Kelley.*
10.jj -- Compensation and Indemnification Agreement entered into as of June 29, 1998, between the Company
and each of Howard G. Kristol, Charles M. Elson, Peter A. Langerman and Faith Whittlesey.*
10.kk -- Agreement between Sunbeam Asset Diversification, Inc. and Capital USA, LLC amending the
Receivables Purchase Agreement among Llama Retail Funding, L.P., Sunbeam Asset Diversification,
Inc., Capital USA, LLC and Sunbeam Products, Inc.*
21. -- Subsidiaries of the Registrant(7)
23.1 -- Independent Auditors' Consent--Deloitte & Touche LLP
23.2 -- Consent of Independent Certified Public Accountants--Arthur Andersen LLP
27. -- Financial Data Schedule, submitted electronically to the Securities and Exchange Commission for
information only and not filed.
- ------------------
(1) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1990.
(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended July 3, 1994.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996.
(4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 29, 1996.
(5) Incorporated by reference to the Company's Annual report on Form 10-K for
the fiscal year ended December 29, 1996.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 30, 1997.
(Footnotes continued on next page)
57
(Footnotes continued from previous page)
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 28, 1997.
(8) Incorporated by reference to the Company's Report on Form 10-Q/A for the
quarter ended March 30, 1998.
(9) Incorporated by reference to the Company's Report on Form 8-K filed April
13, 1998.
(10) Incorporated by reference to the Company's Report on Form 8-K filed August
14, 1998.
(11) Incorporated by reference to the Company's Report on Form 10-KA filed
November 12, 1998.
(12) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended June 30, 1998.
(13) Incorporated by reference to the Annual Report on Form 10-K filed by the
Coleman Company, Inc. on April 15, 1999.
- ------------------
* Filed with this Report.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SUNBEAM CORPORATION
By: /s/ BOBBY G. JENKINS
-----------------------------
Bobby G. Jenkins
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Dated: November 4, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
NAME AND SIGNATURE TITLE DATE
- ------------------------------------------- ------------------------------------------- ----------------
/s/ JERRY W. LEVIN Chairman of the Board and November 4, 1999
------------------------- President and Chief Executive Officer
Jerry W. Levin (Principal Executive Officer)
/s/ CHARLES M. ELSON Director November 4, 1999
-------------------------
Charles M. Elson
/s/ HOWARD GITTIS Director November 4, 1999
-------------------------
Howard Gittis
/s/ JOHN H. KLEIN Director November 4, 1999
-------------------------
John H. Klein
/s/ HOWARD G. KRISTOL Director November 4, 1999
-------------------------
Howard G. Kristol
/s/ PETER A. LANGERMAN Director November 4, 1999
-------------------------
Peter A. Langerman
/s/ FAITH WHITTLESEY Director November 4, 1999
-------------------------
Faith Whittlesey
/s/ KAREN CLARK Vice President, Finance November 4, 1999
------------------------- (Principal Accounting Officer)
Karen Clark
59
SUNBEAM CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
FINANCIAL STATEMENTS:
Report of Independent Auditor's Report.................................................................... F-2
Report of Independent Certified Public Accountants........................................................ F-3
Consolidated Statements of Operations for the Fiscal Years Ended December 31, 1998, December 28, 1997 and
December 29, 1996....................................................................................... F-4
Consolidated Balance Sheets as of December 31, 1998 and December 28, 1997................................. F-5
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended December 31, 1998,
December 28, 1997 and December 29, 1996................................................................. F-6
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 1998, December 28, 1997 and
December 29, 1996....................................................................................... F-7
Notes to Consolidated Financial Statements................................................................ F-8
FINANCIAL STATEMENT SCHEDULE:*
II. Valuation and Qualifying Accounts..................................................................... F-52
* All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore not included
herein.
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Sunbeam Corporation and subsidiaries:
We have audited the accompanying consolidated balance sheet of Sunbeam
Corporation and subsidiaries (the "Company") as of December 31, 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year then ended. Our audit also included the financial statement
schedule as of and for the year ended December 31, 1998, listed in the Index to
Financial Statements. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audit. We did not audit the consolidated financial
statements of The Coleman Company, Inc. and subsidiaries (consolidated
subsidiaries), which statements reflect total assets constituting 27% of
consolidated total assets as of December 31, 1998, and total revenues
constituting 40% of consolidated total revenues for the year then ended. Those
consolidated financial statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for The Coleman Company, Inc. and subsidiaries, is based solely on the
report of such other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors,
such consolidated financial statements present fairly, in all material respects,
the financial position of Sunbeam Corporation and subsidiaries as of
December 31, 1998, and the results of their operations and their cash flows for
the year then ended in conformity with generally accepted accounting principles.
Also, in our opinion, based on our audit and (as to the amounts included for The
Coleman Company, Inc. and subsidiaries) the report of other auditors, such
financial statement schedule as of and for the year ended December 31, 1998,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
April 16, 1999
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Sunbeam Corporation:
We have audited the accompanying consolidated balance sheet of Sunbeam
Corporation (a Delaware corporation) and subsidiaries as of December 28, 1997
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the two fiscal years in the period ended December 28,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sunbeam Corporation and
subsidiaries as of December 28, 1997, and the results of their operations and
their cash flows for each of the two fiscal years in the period ended
December 28, 1997 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II for each of the two years in
the period ended December 28, 1997 is presented for the purpose of complying
with the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This Schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
October 16, 1998
F-3
SUNBEAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 28, DECEMBER 29,
1998 1997 1996
------------ ------------ ------------
Net sales............................................................. $1,836,871 $1,073,090 $ 984,236
Cost of goods sold.................................................... 1,788,819 830,956 896,938
Selling, general and administrative expense........................... 718,077 152,653 221,655
Restructuring and asset impairment (benefit) charges.................. -- (14,582) 110,122
---------- ---------- ----------
Operating (loss) earnings............................................. (670,025) 104,063 (244,479)
Interest expense...................................................... 131,091 11,381 13,588
Other (income) expense, net........................................... (4,768) 12 3,738
---------- ---------- ----------
(Loss) earnings from continuing operations before income taxes,
minority interest and extraordinary charge ......................... (796,348) 92,670 (261,805)
Income taxes (benefit):
Current............................................................. 8,667 1,528 (22,419)
Deferred............................................................ (18,797) 38,824 (69,206)
---------- ---------- ----------
(10,130) 40,352 (91,625)
---------- ---------- ----------
Minority interest..................................................... (10,681) -- --
---------- ---------- ----------
(Loss) earnings from continuing operations before extraordinary
charge.............................................................. (775,537) 52,318 (170,180)
Earnings from discontinued operations, net of taxes................... -- -- 839
Loss on sale of discontinued operations, net of taxes................. -- (14,017) (39,140)
Extraordinary charge from early extinguishments of debt............... (122,386) -- --
---------- ---------- ----------
Net (loss) earnings................................................... $ (897,923) $ 38,301 $ (208,481)
---------- ---------- ----------
---------- ---------- ----------
(Loss) earnings per share:
(Loss) earnings from continuing operations before extraordinary
charge:
Basic............................................................ $ (7.99) $ 0.62 $ (2.05)
---------- ---------- ----------
---------- ---------- ----------
Diluted.......................................................... (7.99) 0.60 (2.05)
---------- ---------- ----------
---------- ---------- ----------
(Loss) from sale of discontinued operations:
Basic............................................................ $ -- $ (0.17) $ (0.46)
---------- ---------- ----------
---------- ---------- ----------
Diluted.......................................................... -- (0.16) (0.46)
---------- ---------- ----------
---------- ---------- ----------
Extraordinary charge:
Basic............................................................ $ (1.26) $ -- $ --
---------- ---------- ----------
---------- ---------- ----------
Diluted.......................................................... (1.26) -- --
---------- ---------- ----------
---------- ---------- ----------
Net (loss) earnings:
Basic............................................................ $ (9.25) $ 0.45 $ (2.51)
---------- ---------- ----------
---------- ---------- ----------
Diluted.......................................................... (9.25) 0.44 (2.51)
---------- ---------- ----------
---------- ---------- ----------
Weighted average common shares outstanding:
Basic............................................................ 97,121 84,945 82,925
Diluted.......................................................... 97,121 87,542 82,925
See Notes to Consolidated Financial Statements.
F-4
SUNBEAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
DECEMBER 31, DECEMBER 28,
1998 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 61,432 $ 52,298
Restricted investments............................................................. 74,386 --
Receivables, net................................................................... 361,774 228,460
Inventories........................................................................ 519,189 304,900
Prepaid expenses and other current assets.......................................... 74,187 16,584
---------- ----------
Total current assets............................................................ 1,090,968 602,242
Property, plant and equipment, net................................................... 455,172 249,524
Trademarks, tradenames, goodwill and other, net...................................... 1,859,377 207,162
---------- ----------
$3,405,517 $1,058,928
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt.............................. $ 119,103 $ 668
Accounts payable................................................................... 162,173 108,374
Other current liabilities.......................................................... 321,185 124,085
---------- ----------
Total current liabilities....................................................... 602,461 233,127
Long-term debt, less current portion................................................. 2,142,362 194,580
Other long-term liabilities.......................................................... 248,459 154,300
Deferred income taxes................................................................ 100,473 4,842
Minority interest.................................................................... 51,325 --
Commitments and contingencies (Notes 3 and 15)
Shareholders' equity:
Preferred stock (2,000,000 shares authorized, none outstanding).................... -- --
Common stock (100,739,053 and 89,984,425 shares issued)............................ 1,007 900
Additional paid-in capital......................................................... 1,123,457 479,200
(Accumulated deficit) retained earnings............................................ (809,997) 89,801
Accumulated other comprehensive loss............................................... (54,030) (33,063)
---------- ----------
Other shareholders' equity......................................................... -- (1,714)
---------- ----------
260,437 535,124
Treasury stock, at cost (4,454,394 shares in 1997)................................. -- (63,045)
---------- ----------
Total shareholders' equity...................................................... 260,437 472,079
---------- ----------
$3,405,517 $1,058,928
---------- ----------
---------- ----------
See Notes to Consolidated Financial Statements.
F-5
SUNBEAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(ACCUMULATED ACCUMULATED
ADDITIONAL DEFICIT) OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE UNEARNED TREASURY SHAREHOLDERS'
STOCK CAPITAL EARNINGS (LOSS) INCOME COMPENSATION STOCK EQUITY
------ ---------- ------------ ------------- ------------ -------- -------------
Balance at January 1, 1996...... $ 878 $ 441,786 $ 266,698 $ (24,483) $ (397) $(83,449) $ 601,033
Comprehensive loss:
Net loss...................... -- -- (208,481) -- -- -- (208,481)
Minimum pension liability (net
of tax of $2,672)........... -- -- -- 4,963 -- -- 4,963
Translation adjustments....... -- -- -- 1,246 -- -- 1,246
---------
Comprehensive loss.......... (202,272)
Common dividends ($0.04 per
share)........................ -- -- (3,318) -- -- -- (3,318)
Exercise of stock options....... 6 7,313 -- -- -- -- 7,319
Grant of restricted stock....... -- (1,120) -- -- (14,346) 15,466 --
Amortization of unearned
compensation.................. -- -- -- -- 7,707 -- 7,707
Retirement and sale of treasury
shares........................ -- (31) -- -- -- 4,595 4,564
------ ---------- ---------- --------- -------- -------- ---------
Balance at December 29, 1996.... 884 447,948 54,899 (18,274) (7,036) (63,388) 415,033
Comprehensive income:
Net earnings.................. -- -- 38,301 -- -- -- 38,301
Minimum pension liability..... -- -- -- (14,050) -- -- (14,050)
Translation adjustments....... -- -- -- (739) -- -- (739)
---------
Comprehensive income........ 23,512
Common dividends ($0.04 per
share)........................ -- -- (3,399) -- -- -- (3,399)
Exercise of stock options....... 16 30,496 -- -- -- -- 30,512
Amortization of unearned
compensation.................. -- -- -- -- 5,322 -- 5,322
Other stock issuances........... -- 756 -- -- -- 343 1,099
------ ---------- ---------- --------- -------- -------- ---------
Balance at December 28, 1997.... 900 479,200 89,801 (33,063) (1,714) (63,045) 472,079
Comprehensive loss:
Net loss...................... -- -- (897,923) -- -- -- (897,923)
Minimum pension liability..... -- -- -- (21,795) -- -- (21,795)
Translation adjustments....... -- -- -- 828 -- -- 828
---------
Comprehensive loss.......... (918,890)
Common dividends ($0.02 per
share)........................ -- -- (1,875) -- -- -- (1,875)
Exercise of stock options....... 9 18,383 -- -- -- -- 18,392
Grant of restricted stock....... 4 18,880 -- -- (32,500) -- (13,616)
Cancellation of restricted
stock......................... (1) (5,228) -- -- 10,182 (2,250) 2,703
Amortization of unearned
compensation.................. -- -- -- -- 24,032 -- 24,032
Acquisition of Coleman.......... 95 541,428 -- -- -- 65,200 606,723
Warrants issued................. -- 70,000 -- -- -- -- 70,000
Other stock issuances........... -- 794 -- -- -- 95 889
------ ---------- ---------- --------- -------- -------- ---------
Balance at December 31, 1998.... $1,007 $1,123,457 $ (809,997) $ (54,030) $ -- $ -- $ 260,437
------ ---------- ---------- --------- -------- -------- ---------
------ ---------- ---------- --------- -------- -------- ---------
See Notes to Consolidated Financial Statements.
F-6
SUNBEAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
FISCAL YEAR ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 28, DECEMBER 29,
1998 1997 1996
------------ ------------ ------------
OPERATING ACTIVITIES:
Net (loss) earnings................................................. $ (897,923) $ 38,301 $ (208,481)
Adjustments to reconcile net (loss) earnings to net cash (used in)
provided by operating activities:
Depreciation and amortization.................................. 107,865 39,757 47,429
Non-cash interest charges...................................... 32,531 -- --
Restructuring and asset impairment (benefit) charges........... -- (14,582) 110,122
Other non-cash special charges................................. -- -- 10,047
Loss on sale of discontinued operations, net of taxes.......... -- 14,017 39,140
Deferred income taxes.......................................... (18,797) 38,824 (69,206)
Minority interest.............................................. (10,681) -- --
Loss on sale of property, plant and equipment.................. 3,260 -- --
Provision for fixed assets..................................... 39,404 -- --
Provision for excess and obsolete inventory.................... 95,830 -- 60,800
Goodwill impairment............................................ 62,490 -- --
Issuance of warrants........................................... 70,000 -- --
Non-cash compensation charge................................... 13,118 -- --
Extraordinary charge from early extinguishments of debt........ 122,386 -- --
Changes in operating assets and liabilities, exclusive of impact of
divestitures and acquisitions:
Receivables, net............................................... 147,045 1,044 (845)
Inventories.................................................... 37,112 (140,555) 11,289
Accounts payable............................................... (68,187) 4,261 11,029
Restructuring accrual.......................................... (3,894) (31,957) --
Prepaid expenses and other current assets and liabilities...... 50,622 (16,092) 39,657
Income taxes payable........................................... 15,758 52,052 (21,942)
Change in other long-term and non-operating liabilities........ 13,994 (1,401) (27,089)
Other, net..................................................... (2,347) 10,288 12,213
------------ ---------- ----------
Net cash (used in) provided by operating activities.......... (190,414) (6,043) 14,163
------------ ---------- ----------
INVESTING ACTIVITIES:
Capital expenditures................................................ (53,686) (60,544) (75,336)
Proceeds from sale of divested operations and other assets.......... 9,575 90,982 --
Purchases of businesses, net of cash acquired....................... (522,412) -- --
Other, net.......................................................... (139) -- (860)
------------ ---------- ----------
Net cash (used in) provided by investing activities.......... (566,662) 30,438 (76,196)
------------ ---------- ----------
FINANCING ACTIVITIES:
Issuance of convertible senior subordinated debentures, net of
financing fees.................................................... 729,622 -- --
Net borrowings under revolving credit facility...................... 1,205,675 5,000 30,000
Issuance of long-term debt.......................................... -- -- 11,500
Payments of debt obligations, including prepayment penalties........ (1,186,796) (12,157) (1,794)
Proceeds from exercise of stock options............................. 19,553 26,613 4,684
Sale of treasury stock.............................................. -- -- 4,578
Payments of dividends on common stock............................... (1,875) (3,399) (3,318)
Other, net.......................................................... 31 320 (364)
------------ ---------- ----------
Net cash provided by financing activities.................... 766,210 16,377 45,286
------------ ---------- ----------
Net increase (decrease) in cash and cash equivalents......... 9,134 40,772 (16,747)
Cash and cash equivalents at beginning of year...................... 52,298 11,526 28,273
------------ ---------- ----------
Cash and cash equivalents at end of year............................ $ 61,432 $ 52,298 $ 11,526
------------ ---------- ----------
------------ ---------- ----------
See Notes to Consolidated Financial Statements.
F-7
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
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").
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries that it controls. All material intercompany
balances and transactions have been eliminated.
Presentation of Fiscal Periods
To standardize the fiscal period ends of the Company and its acquired
entities, effective with its 1998 fiscal year, the Company has changed its
fiscal year end from the Sunday nearest December 31 to a calendar year. The
impact of this change in fiscal period on net sales for 1998 was to increase
sales by approximately $5.5 million, and the impact on operating results for the
period was to increase the net loss by approximately $1.5 million.
Fiscal years 1997 and 1996 ended on December 28, 1997 and December 29,
1996, respectively, which encompassed 52-week periods.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. Significant accounting estimates include the establishment of the
allowance for doubtful accounts, tax valuation allowances, reserves for sales
returns and allowances, product warranty, product liability, excess and obsolete
inventory, litigation and environmental exposures.
Cash and Cash Equivalents
The Company considers highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Concentrations of Credit Risk
Substantially all of the Company's trade receivables are due from retailers
and distributors located throughout the United States, Europe, Latin America,
Canada, and Japan. Approximately 38% of the Company's sales in 1998 were to its
five largest customers. The Company establishes its credit policies based on an
ongoing evaluation of its customers' creditworthiness and competitive market
conditions and establishes its allowance for
F-8
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
doubtful accounts based on an assessment of exposures to credit losses at each
balance sheet date. The Company believes its allowance for doubtful accounts is
sufficient based on the credit exposures outstanding at December 31, 1998.
However, certain retailers filed for bankruptcy protection in the last several
years and it is possible that additional credit losses could be incurred if
other retailers seek bankruptcy protection or if the trends of retail
consolidation continue.
Inventories
Inventories are stated at the lower-of-cost-or-market with cost being
determined principally by the first-in, first-out method.
In certain instances, the Company receives rebates from vendors based on
the volume of merchandise purchased. Vendor rebates are recorded as reductions
in the price of the purchased merchandise and are recognized in operations as
the related inventories are sold.
Effective in fiscal 1997, as a consequence of the initial outsourcing of
the supplies inventories management function, the Company began capitalizing the
cost of manufacturing supplies, whereas previously the cost of these supplies
was charged to operations when purchased. This change, which management believes
is preferable in that it provides for a more appropriate matching of revenues
and expenses, increased pre-tax operating earnings in fiscal 1997 by
$2.8 million. Additional disclosures pursuant to Accounting Principles Board
("APB") Opinion No. 20, Accounting Changes, are not provided since supplies
inventories were not monitored for financial reporting purposes prior to the
initial outsourcing of the inventory management function and, consequently, the
information is not available.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The Company provides for
depreciation using primarily the straight-line method in amounts that allocate
the cost of property, plant and equipment over the following useful lives:
Buildings and improvements................................................... 5 to 45 years
Machinery, equipment and tooling............................................. 3 to 15 years
Furniture and fixtures....................................................... 3 to 10 years
Leasehold improvements are amortized on a straight-line basis over the
shorter of its estimated useful life or the term of the lease.
Long-lived Assets
The Company accounts for long-lived assets pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The Company
periodically evaluates factors, events and circumstances which include, but are
not limited to, the historical and projected operating performance of the
business operations, specific industry trends and general economic conditions to
assess whether the remaining estimated useful lives of long-lived assets may
warrant revision or whether the remaining asset values are recoverable through
future operations. When such factors, events or circumstances indicate that
long-lived assets should be evaluated for possible impairment, the Company uses
an estimate of cash flows (undiscounted and without interest charges) over the
remaining lives of the assets to measure recoverability. If the estimated cash
flows are less than the carrying value of the asset, the loss is measured as the
amount by which the carrying value of the asset exceeds fair value.
With respect to enterprise level goodwill, the Company reviews impairment
when changes in circumstances, similar to those described above for long-lived
assets, indicate that the carrying value may not be recoverable. Under these
circumstances, the Company estimates future cash flows using the recoverability
method
F-9
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(undiscounted and including related interest charges), as a basis for recording
any impairment loss. An impairment loss is then recorded to adjust the carrying
value of goodwill to the recoverable amount. The impairment loss taken is no
greater than the amount by which the carrying value of the net assets of the
business exceeds its fair value.
Derivative Financial Instruments
The Company enters into interest rate swap agreements and foreign exchange
rate contracts as part of the management of its interest rate and foreign
currency exchange rate exposures. The Company has no derivative financial
instruments held for trading purposes and none of the instruments is leveraged.
All financial instruments are put into place to hedge specific exposures. To
qualify as a hedge, the item to be hedged must expose the Company to price,
interest rate or foreign currency exchange rate risk and the hedging instrument
must reduce that exposure. Any contracts held or issued that do not meet the
requirements of a hedge are recorded at fair value in the Consolidated Balance
Sheets and any changes in that fair value recognized in operations.
Interest rate swap agreements--Interest rate differentials to be paid or
received as a result of interest rate swap agreements are accrued and recognized
as an adjustment of interest expense related to the designated debt. Amounts
receivable or payable under the agreements are included in receivables or other
current liabilities in the Consolidated Balance Sheets. The fair value of the
swap agreements and changes in the fair value as a result of changes in market
interest rates are not recognized in the financial statements. Related premiums
are amortized to interest expense ratably during the life of the swap agreement.
Gains and losses on termination of interest rate swap agreements are
deferred and amortized as an adjustment to interest expense over the original
period of interest exposure, provided the designated liability continues to
exist. Realized and unrealized changes in the fair value of interest rate swaps
designated with liabilities that no longer exist are recorded as a component of
the gain or loss arising from the disposition of the designated liability.
Foreign currency options and forward contracts--Foreign currency contracts
designated and effective as hedges are marked to market with realized and
unrealized gains and losses deferred and recognized in operations when the
designated transaction occurs. Foreign currency contracts not designated as
hedges, failing to be hedges or failing to continue as effective hedges are
included in operations as foreign exchange gains or losses.
Discounts or premiums on forward contracts designated and effective as
hedges are accreted or amortized to expense using the straight-line method over
the term of the related contract. Discounts or premiums on forward contracts not
designated or effective as hedges are included in the mark to market adjustment
and recognized in income as foreign exchange gains or losses. Initial premiums
paid for purchased option contracts are amortized over the related option
period.
Capitalized Interest
Interest costs for the construction of certain long-term assets are
capitalized and amortized over the related assets' estimated useful lives. Total
interest costs during 1998, 1997 and 1996 amounted to $131.9 million, $12.3
million and $14.0 million, respectively, of which $0.8 million, $0.9 million and
$0.4 million, respectively, was capitalized as a cost of the related long-term
assets.
F-10
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Deferred Financing Costs
Costs incurred in connection with obtaining financing are deferred and
amortized as a charge to interest expense over the terms of the related
borrowings using the interest method.
Amortization Periods
Trademarks, tradenames and goodwill are being amortized on a straight-line
basis over 20 to 40 years.
Revenue Recognition
The Company recognizes sales and related cost of goods sold from product
sales at the latter of the time of shipment or when title passes to the
customers. In some situations, the Company has shipped product with the right of
return where the Company is unable to reasonably estimate the level of returns
and/or the sale is contingent upon the resale of the product. In these
situations, the Company does not recognize revenue upon product shipment, but
rather when the buyer of the product informs the Company that the product has
been sold. Net sales is comprised of gross sales less provisions for estimated
customer returns, discounts, promotional allowances, cooperative advertising
allowances and costs incurred by the Company to ship product to customers.
Reserves for estimated returns are established by the Company concurrently with
the recognition of revenue. Reserves are established based on a variety of
factors, including historical return rates, estimates of customer inventory
levels, the market for the product and projected economic conditions. The
Company monitors these reserves and makes adjustments to them when management
believes that actual returns or costs to be incurred differ from amounts
recorded.
Warranty Costs
The Company provides for warranty costs in amounts it estimates will be
needed to cover future warranty obligations for products sold during the year.
Estimates of warranty costs are periodically reviewed and adjusted, when
necessary, to consider actual experience.
Product Liability
The Company provides for product liability costs it estimates will be
needed to cover future product liability costs for product sold during the year.
Estimates of product liability costs are periodically reviewed and adjusted,
when necessary, to consider actual experience, and other relevant factors.
Legal Costs
The Company records charges for the costs it anticipates incurring in
connection with litigation and claims against the Company when management can
reasonably estimate these costs.
Income Taxes
The Company accounts for income taxes under the liability method in
accordance with SFAS No. 109, Accounting for Income Taxes. The provision for
income taxes includes deferred income taxes resulting from items reported in
different periods for income tax and financial statement purposes. Deferred tax
assets and liabilities represent the expected future tax consequences of the
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. The effects of changes in tax
rates on deferred tax assets and liabilities are recognized in the period that
includes the enactment date.
F-11
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Advertising Costs
Media advertising costs included in Selling, General and Administrative
Expense ("SG&A") are expensed as incurred. Allowances provided to customers for
cooperative advertising are charged to operations, as earned, based on revenues
and are included as a deduction from gross sales in determining net sales. The
amounts charged to operations for media and cooperative advertising during 1998,
1997 and 1996 were $124.5 million, $55.7 million and $78.7 million,
respectively.
Research and Development
Research and development expenditures are expensed in the period incurred.
The amounts charged against operations during 1998, 1997 and 1996 were
$18.7 million, $5.7 million and $6.5 million, respectively.
Foreign Currency Translation
The assets and liabilities of subsidiaries, other than those operating in
highly inflationary economies, are translated into U.S. dollars with resulting
translation gains and losses accumulated in a separate component of
shareholders' equity. Income and expense items are converted into U.S. dollars
at average rates of exchange prevailing during the year.
For subsidiaries operating in highly inflationary economies (Venezuela and
Mexico), inventories and property, plant and equipment are translated at the
rate of exchange on the date the assets were acquired, while other assets and
liabilities are translated at year-end exchange rates. Translation adjustments
for those operations are included in Other (Income) Expense, Net in the
accompanying Consolidated Statements of Operations. Effective January 1, 1999,
Mexico will no longer be considered highly inflationary.
Stock-Based Compensation Plans
SFAS No. 123, Accounting for Stock-Based Compensation allows either
adoption of a fair value method for accounting for stock-based compensation
plans or continuation of accounting under APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations with supplemental
disclosures.
The Company has chosen to account for its stock options using the intrinsic
value based method prescribed in APB Opinion No. 25 and, accordingly, does not
recognize compensation expense for stock option grants made at an exercise price
equal to or in excess of the fair market value of the stock at the date of
grant. Pro forma net income and earnings per share amounts as if the fair value
method had been adopted are presented in Note 9. SFAS No. 123 does not impact
the Company's results of operations, financial position or cash flows.
Basic and Diluted (Loss) Earnings Per Share Of Common Stock
Basic (loss) earnings per common share calculations are determined by
dividing (loss) earnings available to common shareholders by the weighted
average number of shares of common stock outstanding. Diluted (loss) earnings
per share are determined by dividing (loss) earnings available to common
shareholders by the weighted average number of shares of common stock and
dilutive common stock equivalents outstanding (all related to outstanding stock
options, restricted stock, warrants and the Zero Coupon Convertible Senior
Subordinated Debentures).
For the years ended December 31, 1998 and December 29, 1996, respectively,
1,902,177 and 1,552,684 shares related to stock options, were not included in
diluted average common shares outstanding because their effect would be
antidilutive. Diluted average common shares outstanding as of December 29, 1996
also excluded (78,654) shares related to restricted stock. Diluted average
common shares outstanding as of December 31, 1998 also excluded 13,242,050
shares related to the conversion feature of the Zero Coupon Convertible Senior
Subordinated Debentures (see Note 3) and 23,000,000 shares issuable on the
exercise of warrants, due to
F-12
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
antidilution. For the year ended December 28, 1997, the dilutive effect of
2,718,649 equivalent shares related to stock options and (120,923) equivalent
shares of restricted stock were used in determining the dilutive average shares
outstanding.
New Accounting Standards
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1
requires computer software costs associated with internal use software to be
expensed as incurred until certain capitalization criteria are met. The Company
will adopt SOP 98-1 on January 1, 1999. Adoption of this statement is not
expected to have a material impact on the Company's consolidated financial
position, results of operations, or cash flows. Actual charges incurred due to
systems projects may be material.
In April 1998, the AICPA issued Statement of Position 98-5, Reporting on
the Cost of Start-Up Activities ("SOP 98-5"). SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. The Company will adopt SOP 98-5 beginning January 1, 1999.
Adoption of this statement is not expected to have a material impact on the
Company's consolidated financial position, results of operations, or cash flows.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for fiscal years
beginning after June 15, 1999. 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 will adopt SFAS No. 133 for the 2000 fiscal
year. The Company has not yet determined the impact SFAS No. 133 will have on
its consolidated financial position, results of operations or cash flows.
Reclassification
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
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 an affiliate of MacAndrews & Forbes Holdings, Inc. ("M&F"), in
exchange for 14,099,749 shares of the Company's common stock and approximately
$160 million in cash. In addition, the Company assumed approximately
$1,016 million in debt. The value of the common stock issued at the date of
acquisition was derived by using the average closing stock price as reported on
the New York Stock Exchange Composite Tape for the day before and day of the
public announcement of the acquisition. Immediately thereafter, as a result of
the exercise of employee stock options, Sunbeam's indirect beneficial ownership
of Coleman decreased to approximately 79% of the total number of the outstanding
shares of Coleman common stock.
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 an affiliate of M&F pursuant to which the Company was
released from certain threatened claims of M&F and its affiliates arising from
the Coleman acquisition and M&F agreed to provide certain management personnel
and assistance to the Company in exchange for the issuance to the M&F affiliate
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
antidilution 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 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 on a
F-13
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITIONS--(CONTINUED)
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 shares of the Company's common stock and $6.44
in cash for each share of Coleman common stock outstanding. In addition,
unexercised options under Coleman's stock option plans will be cashed out at a
price per share equal to the difference between $27.50 and the exercise price of
such options. The Company expects to issue approximately 6.7 million shares of
common stock and expend approximately $87 million in cash to complete the
Coleman acquisition. Although there can be no assurance, it is anticipated the
Coleman merger will occur in the second half of 1999. The acquisition of the
remaining outstanding shares of Coleman common stock will be accounted for under
the purchase method of accounting on the date of consummation of the Coleman
merger. (Also see Note 15 for information regarding the proposed issuance of
warrants related to this transaction.)
On April 6, 1998, the Company completed the acquisitions of First Alert,
valued at approximately $182 million (including $133 million of cash and
$49 million of assumed debt) and Signature Brands valued at $255 million,
(reflecting cash paid, including the required retirement or defeasance of debt).
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 Consolidated Statements of Operations from their
respective dates of acquisition.
In each acquisition, the purchase price paid has been allocated to the fair
value (determined by independent appraisals) of tangible and identified
intangible assets acquired and liabilities assumed as follows (in millions):
SIGNATURE FIRST
COLEMAN BRANDS ALERT TOTAL
------- --------- ----- ------
Value of common stock issued..................................... $ 607 $ -- $-- $ 607
Cash paid including expenses and mandatory redemption of debt,
net of cash acquired........................................... 160 255 133 548
Cash received from sale of Coleman Spas, Inc..................... (17) -- -- (17)
Cash received from stock option proceeds......................... (9) -- -- (9)
------- ----- --- ------
Net cash paid and equity issued.................................. 741 255 133 1,129
Fair value of total liabilities assumed, including debt.......... 1,455 83 103 1,641
------- ----- --- ------
2,196 338 236 2,770
Fair value of assets acquired.................................... 1,113 191 172 1,476
------- ----- --- ------
Excess of purchase price over fair value of net assets
acquired....................................................... $1,083 $ 147 $64 $1,294
------- ----- --- ------
------- ----- --- ------
The excess of purchase price over the fair value of net assets acquired has
been classified as goodwill. Goodwill related to the Coleman and Signature
Brands acquisitions is being amortized on a straight-line basis over 40 years.
During the fourth quarter of 1998, as a result of the significant loss incurred
by First Alert, as well as its future prospects, the Company determined that the
goodwill relating to this acquisition was impaired and, based on the
determination of fair value, has written-off the net carrying value of goodwill
approximating $62.5 million. This one-time charge is reflected in SG&A expense
in the Consolidated Statements of Operations.
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 December 31, 1998, the
F-14
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITIONS--(CONTINUED)
Company had paid severance benefits of approximately $5 million and 8 employees
remained to be terminated. 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.
The following unaudited 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 periods presented. No pro forma adjustments
have been made for the First Alert acquisition as its effects are not
significant. These pro forma results have been prepared for informational
purposes only and do not purport to be indicative of the results of operations
which actually would have occurred had the acquisitions been consummated on the
dates indicated, or which may result in the future. The unaudited pro forma
results follow (in millions, except per share data):
FISCAL YEARS ENDED
----------------------------
DECEMBER 31, DECEMBER 28,
1998 1997
------------ ------------
Net sales........................................................ $2,098.7 $2,408.9
Net loss from continuing operations before extraordinary
charge......................................................... (801.1) (23.6)
Basic and diluted loss per share from continuing operations
before extraordinary charge.................................... (7.96) (0.24)
3. DEBT
Debt at the end of each fiscal year consists of the following (in
thousands):
1998 1997
---------- --------
Term loans, due in installments through 2006, average interest rate
of 8.47% for 1998................................................. $1,262,500 $ --
Revolving credit facility, average interest rate of 8.55% for 1998
and 5.99% for 1997................................................ 94,000 110,000
Zero coupon convertible senior subordinated debentures, net of
unamortized discount of $1,234,845, due 2018...................... 779,155 --
Senior subordinated notes, bearing interest at 13.0%, payable
semiannually, due August 1999..................................... 70,000 --
Hattiesburg industrial revenue bond due 2009, fixed interest rate of
7.85%............................................................. -- 75,000
Other lines of credit, including foreign facilities................. 45,803 --
Other long-term borrowings, due through 2012, weighted average
interest rate of 3.89% and 3.92%, at December 31, 1998 and
December 28, 1997, respectively................................... 10,007 10,248
---------- --------
2,261,465 195,248
Less short-term debt and current portion of long-term debt.......... 119,103 668
---------- --------
Long-term debt...................................................... $2,142,362 $194,580
---------- --------
---------- --------
Concurrent with the acquisitions, the Company replaced its $250 million
syndicated unsecured five-year revolving credit facility with a revolving and
term credit facility (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 Sunbeam 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.
F-15
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. DEBT--(CONTINUED)
As a result of, among other things, its operating losses incurred during
the first half of 1998, Sunbeam did not achieve the specified financial ratios
for June 30, 1998 and it appeared unlikely that Sunbeam would achieve the
specified financial ratios for September 30, 1998. Consequently, Sunbeam 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 Sunbeam to satisfy
the specified financial ratios for June 30, 1998 and September 30, 1998.
Pursuant to an agreement with Sunbeam dated as of October 19, 1998, Sunbeam'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 Sunbeam to satisfy the specified financial ratios for December 31,
1998. As part of the October 19, 1998 agreement, Sunbeam agreed to a minimum
monthly earnings before interest, taxes, depreciation and amortization
("EBITDA") covenant for each of February, March and April of 1999, which
covenant Sunbeam was 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, Sunbeam 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 Sunbeam 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 amendment, Sunbeam 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 million for the period from January 1, 1999 through March 31, 2000. The
following description of the New Credit Facility reflects the terms of the New
Credit Facility as amended.
The New Credit Facility provides for aggregate borrowings of up to
$1.7 billion pursuant to: (i) a revolving credit facility in an aggregate
principal amount of up to $400 million maturing March 30, 2005 ($52.5 million of
which may only be used to complete the Coleman merger); (ii) up to $800 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 million term loan maturing
September 30, 2006 (of which $5.0 million has already been repaid through
March 31, 1999). As of December 31, 1998, $1.4 billion was outstanding and
$0.3 billion was available for borrowing under the New Credit Facility.
Pursuant to 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 3.75% for
LIBOR borrowings and 2.50% for base rate borrowings. The applicable interest
margin is subject to upward or downward adjustment upon the occurrence of
certain events. 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 Sunbeam 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
Sunbeam's lending banks, to which the Coleman note has been pledged as security
for Sunbeam'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
F-16
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. DEBT--(CONTINUED)
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 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 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. Sunbeam is also required to comply
with specified financial covenants and ratios. The New Credit Facility provides
for events of default customary for transactions of this type, including
nonpayment, misrepresentation, breach of covenant, cross-defaults, bankruptcy,
material adverse change arising from compliance with ERISA, material adverse
judgments, entering into guarantees and change of ownership and control. It is
also an event of default under the New Credit Facility if Sunbeam's registration
statement in connection with the Coleman merger is not declared effective by the
Securities and Exchange Commission ("SEC") on or before October 30, 1999 or if
the merger does not occur within 25 business days of the effectiveness of the
registration statement or if the cash consideration (including any payments on
account of the exercise of any appraisal rights, but excluding related legal,
accounting and other customary fees and expenses) to consummate the Coleman
merger exceeds $87.5 million. Although there can be no assurance, the Company
anticipates that it will satisfy these conditions. Unless waived by the bank
lenders, the failure of Sunbeam 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 of rights and remedies would likely have a material adverse
effect on Sunbeam. The New Credit Facility also includes provisions for the
deferral of the 1999 scheduled term loan payments of $69.3 million, subject to
delivery of certain collateral documents and the filing of an amendment to the
Company's registration statement on Form S-4 relating to the Coleman merger. If
these conditions are met, and there are no events of default, the scheduled loan
payments will be extended until April 10, 2000. The Company anticipates that it
will satisfy these conditions and, accordingly, has classified these amounts as
long-term in the Consolidated Balance Sheet.
In March 1998, the Company completed an offering of Zero Coupon Convertible
Senior Subordinated Debentures due 2018 (the "Debentures") at a yield to
maturity of 5.0% (approximately $2,014 million principal amount at maturity)
which resulted in approximately $730 million of net proceeds. The Debentures are
exchangeable for shares of the Company's common stock at an initial conversion
rate of 6.575 shares for each $1,000 principal amount at maturity of the
Debentures, subject to adjustment upon occurrence of certain events. The
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. 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 February 4, 1999 and the SEC has not declared
the registration statement effective. Sunbeam's failure to file the registration
statement by June 23, 1998 did not
F-17
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. DEBT--(CONTINUED)
constitute a default under the terms of the Debentures. As part of the normal
review process by the SEC, a number of comments have been made by the staff of
the division of Corporation Finance relating to the registration statement and
the restated 1996 and 1997 financial statements included therein. The Company
expects to resolve these comments when it files an amendment to the registration
statement. From June 23, 1998 until the registration statement is declared
effective, the Company is required to pay to the Debenture holders cash
liquidated damages accruing, for each day during such period, at a rate per
annum equal to 0.25% during the first 90 days and 0.50% thereafter multiplied by
the total of the issue price of the Debentures plus the original issue discount
thereon on such day. The Company made its first payment of approximately
$0.5 million to the Debenture holders on September 25, 1998. As of December 31,
1998 the Company had accrued additional payments totaling $1.0 million. The
Company made a payment to Debenture holders in March 1999 of approximately
$2.0 million. This amount included liquidated damages that accrued during the
first quarter of 1999.
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 and $70.0 million is reflected as
short-term debt in the Consolidated Balance Sheet at December 31, 1998. The
prepayment penalty is reflected as part of the acquisition price of Signature
Brands.
In March 1998, the Company prepaid the $75.0 million 7.85% industrial
revenue bond related to its Hattiesburg facility originally due in 2009. In
connection with the early extinguishment of this debt, the Company recognized an
extraordinary charge of $7.5 million. As a result of repayment of certain
indebtedness assumed in the Coleman acquisition, the Company also recognized an
extraordinary charge of $114.9 million. 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 Credit Agreement. These extraordinary charges
consisted of redemption premiums ($106.9 million), unamortized debt discount
($13.8 million) and unamortized deferred financing costs ($1.7 million).
During 1997, the Company repaid $12.2 million of long-term borrowings
related to the divested furniture operations and other assets sold.
At December 31, 1998, the aggregate annual maturities on short-term and
long-term debt in each of the years 1999-2003, and thereafter, were $119
million, $1,355 million, $1 million, $1 million, $1 million, and $5 million,
respectively. In addition, the fully accreted Debenture amount of
$2,014 million matures in 2018. The total of annual debt maturities for all
years presented does not agree to the balance of debt outstanding at
December 31, 1998 as a result of the accretion of discount on the Debentures.
The outstanding balances relating to the New Credit Facility are included in the
maturity schedule in 2000, consistent with the expiration of the covenant
waiver. Sunbeam has made no decision with respect to the repayment or
refinancing of indebtedness incurred or to be incurred under the New Credit
Facility and may repay such indebtedness out of its internally generated funds
or from proceeds of a subsequent financing. Any decisions with respect to such
repayment or refinancing will be made based on a review from time to time of the
advisability of particular transactions, as well as on prevailing interest rates
and financial and economic conditions.
F-18
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The fair value of the Company's financial instruments as of December 31,
1998 and December 28, 1997 was estimated based upon the following methods and
assumptions:
Cash and Cash Equivalents--The carrying amount of cash and cash equivalents
is assumed to approximate fair value as cash equivalents include all highly
liquid, short-term investments with original maturities of three months or less.
Short and Long Term Debt--The fair value of the Company's fixed rate debt
is estimated using either reported transaction values or discounted cash flow
analysis. The fair value of the Company's fixed rate debt was $319 million as of
December 31, 1998 as compared to the carrying value of $859 million. The
carrying value of the Company's variable rate debt is assumed to approximate
market based upon periodic adjustments of the interest rate to the current
market rate in accordance with the terms of the debt agreements. The carrying
value of the Company's various debt outstanding as of December 28, 1997
approximated market.
Letters of Credit and Surety Bonds--The Company utilizes stand-by letters
of credit to back certain financing instruments and insurance policies and
commercial letters of credit guaranteeing various international trade
activities. In addition, the Company also entered into surety bonds largely as a
result of litigation judgements that are currently under appeal. The contract
amounts of the letters of credit and surety bonds approximate their fair values.
The contract value of letters of credit were $82.3 million and $29.0 million as
of December 31, 1998 and December 28, 1997, respectively. Contract values for
surety bonds as of December 31, 1998 were approximately $26.5 million and were
not significant at December 28, 1997.
Derivative Financial Instruments--The Company utilizes interest rate swap
agreements to reduce the impact on interest expense of fluctuating interest
rates on its floating rate debt. The use of derivatives did not have a material
impact on the Company's operations in 1998, 1997 and 1996. At December 31, 1998,
the Company held three floating to fixed interest rate swap agreements, one with
a notional value of $25 million and two with notional amounts of $150 million
each. The swap agreements are contracts to exchange floating rate for fixed
interest payments periodically over the lives of the agreements without the
exchange of the underlying notional principal amounts. The swaps expire in
January 2003, June 2001 and June 2003, respectively. Under these agreements, the
Company received an average floating rate of 5.64%, 5.59% and 5.59%,
respectively, and paid an average fixed rate of 6.12%, 5.75% and 5.58%,
respectively, during 1998. The fair value of the interest rate swaps at
December 31, 1998 is estimated to be $7.3 million. This estimate is based upon
quotes received from the Company's lending institutions and represents the cash
requirement if the existing agreements had been terminated at the end of the
year. Interest rate swaps are off-balance-sheet instruments and therefore have
no carrying value. The Company had no swap agreements outstanding at
December 28, 1997.
In order to mitigate the transaction exposures that may arise from changes
in foreign exchange rates, the Company purchases foreign currency option and
forward contracts to hedge specific transactions, principally the purchases of
inventories. The option contracts typically expire within one year. The options
are accounted for as hedges pursuant to SFAS No. 52, Foreign Currency
Translation, accordingly gains and losses thereon are deferred and recorded in
operations in the period in which the underlying transaction is recorded. At
December 31, 1998, the Company held purchased option contracts with a notional
value of $32.3 million and a fair value of $0.3 million and forward contracts
with a notional value of $30.9 million and a fair value of $30.5 million. The
Company did not hold any such contracts at December 28, 1997.
F-19
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. FINANCIAL INSTRUMENTS--(CONTINUED)
The table below summarizes by currency, the contractual amounts, carrying
amounts and related unrealized gain (loss) of the Company's forward exchange and
option contracts at December 31, 1998 (in millions):
CARRYING RECOGNIZED
PURCHASED AMOUNT UNREALIZED DEFERRED
FORWARD OPTION TOTAL ASSET GAIN UNREALIZED
CONTRACTS CONTRACTS CONTRACTS (LIABILITY) (LOSS) GAIN (LOSS)
--------- --------- --------- ----------- ---------- -----------
December 31, 1998
Currency:
Deutschemark.................. $12.0 $18.4 $30.4 $ 0.3 $ 0.2 $--
Yen........................... $14.9 $12.4 $27.3 $(0.3) $ (0.7) $--
Pound sterling................ $ 4.0 $ 1.5 $ 5.5 $ 0.1 $ 0.1 $--
----- ----- ----- ----- ------ ---
Total........................... $30.9 $32.3 $63.2 $ 0.1 $ (0.4) $--
----- ----- ----- ----- ------ ---
----- ----- ----- ----- ------ ---
The fair values of the Company's foreign currency contracts were based on
quoted market prices of comparable contracts, adjusted through interpolation
where necessary for maturity differences.
Exposure to market risk on interest rate and foreign currency financial
instruments results from fluctuations in interest and currency rates,
respectively, during the periods in which the contracts are outstanding. The
counterparties to the Company's interest rate swap agreements and currency
exchange contracts consist of a diversified group of major financial
institutions, each of which is rated investment grade A or better. The Company
is exposed to credit risk to the extent of potential nonperformance by
counterparties on financial instruments. The Company believes the risk of
incurred losses due to credit risk is remote.
5. ACCOUNTS RECEIVABLE SECURITIZATION
In December 1997, the Company entered into a receivable securitization
program, that expires March 2000, to sell without recourse, through a wholly
owned subsidiary, certain trade accounts receivable, up to a maximum of
$70.0 million. During 1998, the Company has received approximately
$200.0 million under this arrangement. At December 31, 1998, the Company had
reduced accounts receivable by $20.0 million for receivables sold under this
program. At December 28, 1997, the Company had received $58.9 million under this
arrangement, of which $39.1 million related to sales recorded in fiscal 1997 and
the balance related to sales to be recognized in the first quarter of 1998.
During 1997, the Company sold $19.8 million of receivables related to bill and
hold and consignment sales that had been initially recognized in its
Consolidated Financial Statements and were subsequently reversed in the
restatement process. The conditions for recognizing these sales were met in the
first quarter of 1998. Accordingly, at December 28, 1997, the accompanying
Consolidated Balance Sheet reflects a reduction in accounts receivable of $39.1
million and an increase in other current liabilities of $19.8 million. Proceeds
from the sales of receivables were used to reduce borrowings under the Company's
revolving credit facility or to provide cash flow for working capital purposes,
thereby reducing the need to borrow under the credit facility. Costs of the
program, which primarily consist of the purchaser's financing cost of issuing
commercial paper backed by the receivables, totaled $2.3 million and $0.2
million during 1998 and 1997, respectively, and have been classified as interest
expense in the accompanying 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.
F-20
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
(Loss) earnings from continuing operations before income taxes, minority
interest and extraordinary charge for each fiscal year is summarized as follows
(in thousands):
1998 1997 1996
--------- ------- ---------
Domestic........................................................... $(723,179) $80,946 $(244,255)
Foreign............................................................ (73,169) 11,724 (17,550)
--------- ------- ---------
$(796,348) $92,670 $(261,805)
--------- ------- ---------
--------- ------- ---------
Income tax provisions include current and deferred taxes (tax benefits) for
each fiscal year as follows (in thousands):
1998 1997 1996
-------- ------- --------
Current:
Federal............................................................ $ 1,203 $(3,421) $(22,924)
State.............................................................. 275 3,266 (202)
Foreign............................................................ 7,189 1,683 707
-------- ------- --------
8,667 1,528 (22,419)
-------- ------- --------
Deferred:
Federal............................................................ (6,343) 30,554 (57,211)
State.............................................................. (1,316) 3,962 (11,050)
Foreign............................................................ (11,138) 4,308 (945)
-------- ------- --------
(18,797) 38,824 (69,206)
-------- ------- --------
$(10,130) $40,352 $(91,625)
-------- ------- --------
-------- ------- --------
The effective tax rate on earnings (loss) before income taxes, minority
interest and extraordinary charges varies from the current statutory federal
income tax rate as follows:
1998 1997 1996
------ ------ ------
(Benefit) provision at statutory rate....................................... (35.0)% 35.0 % (35.0)%
State taxes, net............................................................ -- 5.1 (2.8)
Amortization of intangible assets and goodwill.............................. 4.3 -- --
Warrants issued in settlement of claim...................................... 3.1 -- --
Foreign earnings and dividends taxed at other rates......................... 2.7 2.0 2.3
Valuation allowance......................................................... 23.6 20.4 --
Reversal of tax liabilities no longer required.............................. -- (14.4) --
Other, net.................................................................. -- (4.6) 0.5
------ ------ ------
Effective tax rate (benefit) provision...................................... (1.3)% 43.5 % (35.0)%
------ ------ ------
------ ------ ------
F-21
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES--(CONTINUED)
Significant components of the Company's deferred tax liabilities and assets
are as follows:
DECEMBER 31, DECEMBER 28,
1998 1997
------------ -------------
Deferred tax assets:
Receivables................................................... $ 19,180 $ 10,516
Postretirement benefits other than pensions................... 22,714 11,430
Reserves for self-insurance and warranty costs................ 40,765 33,426
Pension liabilities........................................... 16,334 2,811
Inventories................................................... 27,822 14,437
Net operating loss carryforwards.............................. 322,273 --
Tax credits................................................... 13,510 12,955
Other, net.................................................... 89,577 33,388
-------- ---------
Total deferred tax assets.................................. 552,175 118,963
Valuation allowance........................................... 290,520 23,215
-------- ---------
Net deferred tax assets.................................... 261,655 95,748
-------- ---------
Deferred tax liabilities:
Depreciation.................................................. 43,377 22,532
Acquired intangible assets.................................... 244,378 68,311
Other, net.................................................... 19,850 9,747
-------- ---------
Total deferred tax liabilities............................. 307,605 100,590
-------- ---------
Net deferred tax liabilities............................... $(45,950) $ (4,842)
-------- ---------
-------- ---------
The Company establishes valuation allowances in accordance with the
provisions of SFAS No. 109. The Company continually reviews the adequacy of the
valuation allowances and recognizes tax benefits when it is more likely than not
that the benefits will be realized. In the fourth quarter of 1997, the Company
increased the valuation allowance by $23.2 million, reflecting management's
assessment that it was more likely than not that the deferred tax assets would
not be realized through future taxable income. Of this amount, approximately
$18.9 million related to deferred tax assets, the majority of which was
recognized as a benefit in the first three quarters of 1997. The remainder
related to minimum pension liabilities and was therefore recorded as an
adjustment in shareholders' equity. This assessment was made as a result of the
significant leverage undertaken by the Company as part of the acquisitions (see
Note 2) and the significant decline in net sales and earnings from anticipated
levels during the fourth quarter of 1997 and the first quarter of 1998.
Throughout 1998, the Company increased the valuation allowance to
$290.5 million, which increase reflects management's assessment that it is more
likely than not that the deferred tax asset will not be realized through future
taxable income. As described above, this assessment was made as a result of the
significant leverage undertaken by the Company and the continuing decline in
Sunbeam's net sales and earnings, as well as the operating losses incurred
throughout the 1998 year. At December 31, 1998, the Company had net operating
loss carryforwards ("NOL's") of approximately $725 million for domestic income
tax purposes and $169 million for foreign income tax purposes. The domestic
NOL's begin expiring in 2018. Of the foreign tax NOL's, $3 million, $4 million,
$19 million, $18 million and $16 million expire in the years ending
December 31, 1999 through 2003, respectively, and $91 million of such NOL's have
an unlimited life.
The Company has not provided U.S. income taxes on undistributed foreign
earnings of approximately $32 million at December 31, 1998, as the Company
intends to permanently reinvest these earnings in the future growth of the
business. Determination of the amount of unrecognized deferred U.S. income tax
liability is not practicable because of the complexities associated with its
hypothetical calculation.
F-22
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. EMPLOYEE BENEFIT PLANS
Pension and Other Postretirement Benefit Plans
The Company sponsors several defined benefit pension plans covering
eligible U.S. salaried and hourly employees. Benefit accruals under such plans
covering all U.S. salaried employees were frozen, effective December 31, 1990.
Accordingly, no credit in the pension formula is given for service or
compensation after that date. However, these employees continue to earn service
toward vesting in their interest in the frozen plans as of December 31, 1990.
The Company also provides health care and life insurance benefits to certain
former employees who retired from the Company prior to March 31, 1991. The
Company has consistently followed a policy of funding the cost of postretirement
health care and life insurance benefits on a pay-as-you-go basis.
As a result of the Company's acquisitions of Coleman and First Alert (see
Note 2), the liabilities for their respective defined benefit pension plans (the
"Plans") were assumed and have been accounted for in accordance with Accounting
Principles Board Opinion No.16 ("APB 16"), Accounting for Business Combinations.
Effective January 1, 1999, the Coleman and First Alert salaried pension plans
were amended to change the pension benefit formula to a cash balance formula
from the existing benefit calculation. The benefits accrued under these plans as
of December 31, 1998 were frozen and converted to the new cash balance plan
using a 7.0% interest rate assumption. The effect of the amendment of the Plans
is reflected in the projected benefit obligation as of the date of acquisition
as required by APB 16. Under the cash balance plan, the Company will credit
certain participants' accounts annually. At the date of acquisition the pension
benefit obligation and the fair value of the plan assets attributable to these
Plans were $43.4 million and $27.7 million, respectively, and are reflected in
the table below.
In addition, Coleman provided certain unfunded postretirement health and
life insurance benefits for certain retired employees. At the date of
acquisition the postretirement benefit obligation associated with this plan was
$19.5 million as reflected in the table below, and has been accounted for in
accordance with APB 16.
The Company funds all pension plans in amounts consistent with applicable
laws and regulations. Pension plan assets include corporate and U.S. government
bonds, corporate stocks, mutual funds, fixed income securities, and cash
equivalents.
Employees of non-U.S. subsidiaries generally receive retirement benefits
from Company sponsored plans or from statutory plans administered by
governmental agencies in their countries. The assets, liabilities and pension
costs of the Company's non-U.S. defined benefit retirement plans are not
material to the consolidated financial statements.
On January 1, 1998, the Company adopted SFAS No. 132, Employers'
Disclosures About Pensions and Other Postretirement Benefits ("SFAS No. 132").
This statement revises employers' disclosures about pension and other
postretirement benefit plans. SFAS No. 132 does not change the method of
accounting for such plans.
F-23
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. EMPLOYEE BENEFIT PLANS--(CONTINUED)
The following table includes disclosures of the funded status and amounts
recognized in the Company's Consolidated Balance Sheets at the end of each
fiscal year as required by SFAS No. 132 (in thousands):
POSTRETIREMENT
PENSION BENEFITS BENEFITS
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
Change in Benefit Obligation:
Benefit obligation at beginning of year......................... $127,229 $122,754 $ 14,220 $ 14,555
Acquisitions.................................................... 43,404 -- 19,477 --
Service cost.................................................... 1,551 157 689 --
Interest cost................................................... 10,875 8,970 2,088 996
Amendments...................................................... -- 84 -- --
Actuarial loss.................................................. 20,456 10,630 4,069 --
Settlement...................................................... -- (1,732) -- --
Benefits paid................................................... (15,018) (13,634) (1,677) (1,331)
-------- -------- -------- --------
Benefit obligation at end of year............................... $188,497 $127,229 $ 38,866 $ 14,220
-------- -------- -------- --------
-------- -------- -------- --------
Change in Plan Assets:
Fair value of plan assets at beginning of year.................. $116,485 $116,522 $ -- $ --
Acquisitions.................................................... 27,657 -- -- --
Actual return on plan assets.................................... 6,424 12,511 -- --
Employer contributions.......................................... 8,889 2,818 1,677 1,331
Settlement...................................................... -- (1,732) -- --
Benefits paid................................................... (15,018) (13,634) (1,677) (1,331)
-------- -------- -------- --------
Fair value of plan assets at end of year........................ $144,437 $116,485 $ -- $ --
-------- -------- -------- --------
-------- -------- -------- --------
Reconciliation of Funded Status:
Funded status................................................... $(44,060) $(10,744) $(38,866) $(14,220)
Unrecognized net actuarial loss/(gain).......................... 48,616 25,192 3,829 (240)
Unrecognized prior service cost................................. -- -- (12,991) (15,934)
-------- -------- -------- --------
Net amount recognized........................................... $ 4,556 $ 14,448 $(48,028) $(30,394)
-------- -------- -------- --------
-------- -------- -------- --------
Amount Recognized in the Consolidated Balance Sheets Consist of:
Accrued benefit liability....................................... $(42,431) $(10,744) $(48,028) $(30,394)
Accumulated other comprehensive income.......................... 46,987 25,192 -- --
-------- -------- -------- --------
Net amount recognized........................................... $ 4,556 $ 14,448 $(48,028) $(30,394)
-------- -------- -------- --------
-------- -------- -------- --------
In determining the actuarial present value of the benefit obligation, the
weighted average discount rate was 6.75% and 7.25% as of December 31, 1998 and
December 28, 1997, respectively; the expected return on plan assets ranged from
6.75% to 9.00% for 1998 and was 7.25% for 1997. The expected increase in future
compensation levels was 4.00% for Coleman for 1998.
The assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation were 7.0% to 8.0% for the plans for 1999 and
were assumed to decrease gradually to 5.0% by 2003 and remain at that level
thereafter.
F-24
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. EMPLOYEE BENEFIT PLANS--(CONTINUED)
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total of service and interest cost components.................. $ 508 $ (424)
Effect on the postretirement benefit obligation.......................... $6,035 $ (5,144)
Net pension expense and periodic postretirement benefit include the
following components (in thousands):
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------- -----------------------------
1998 1997 1996 1998 1997 1996
-------- ------- -------- ------- ------- -------
Components of net periodic pension benefit cost:
Service cost.................................. $ 1,551 $ 157 $ 411 $ 689 $ -- $ --
Interest cost................................. 10,875 8,970 9,071 2,088 996 1,041
Expected return of market value of assets..... (10,127) (8,586) (816) -- -- --
Amortization of unrecognized prior service
cost....................................... -- -- -- (2,943) (2,942) (2,942)
Recognized net actuarial loss (gain).......... 735 414 (7,518) -- -- --
-------- ------- -------- ------- ------- -------
Net periodic benefit cost (benefit)........... 3,034 955 1,148 (166) (1,946) (1,901)
Settlement charge............................. -- 615 -- -- -- --
Curtailment charge............................ -- 106 -- -- -- --
-------- ------- -------- ------- ------- -------
Total expense (benefit)....................... $ 3,034 $ 1,676 $ 1,148 $ (166) $(1,946) $(1,901)
-------- ------- -------- ------- ------- -------
-------- ------- -------- ------- ------- -------
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the plans with accumulated benefit obligations in
excess of plan assets were $186.4 million, $161.6 million and $125.5 million at
December 31, 1998 and $127.2 million, $127.2 million and $116.5 million at
December 28, 1997, respectively.
Defined Contribution Plans
As a result of the Company's acquisitions of Coleman, First Alert and
Signature Brands, the Company amended its Savings & Investment and Profit
Sharing Plan ("Savings Plan") to assume the assets of the respective savings
plans at each of the acquired companies and establish parity with the benefits
provided by Sunbeam. Effective January 1, 1999, all eligible employees could
participate in the Savings Plan. Company contributions to these plans include
employer matching contributions as well as discretionary contributions depending
on the performance of the Company, in an amount up to 10% of eligible
compensation. The Company provided $1.9 million in 1998, $1.8 million in 1997
and $1.7 million in 1996 for its defined contribution plans.
8. SHAREHOLDERS' EQUITY
Common Stock
At December 31, 1998, the Company had 500,000,000 shares of $0.01 par value
common stock authorized and there were 14,094,158 shares of common stock
reserved for issuance upon the exercise of outstanding stock options.
F-25
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. SHAREHOLDERS' EQUITY--(CONTINUED)
Compensatory Stock Grants
In July 1996, the Company granted 1,100,000 shares of restricted stock in
connection with the employment of a then new Chairman and Chief Executive
Officer and two other senior officers of the Company. Compensation expense
attributable to the restricted stock awards was amortized to expense beginning
in 1996 over the periods in which the restrictions lapse (which in the case of
333,333 shares, was immediately upon the date of grant, in the case of 666,667
shares, was to be amortized equally over two years from the date of grant and in
the case of the remaining 100,000 shares, was equally over three years from the
date of grant). These restricted stock awards resulted in a $7.7 million charge
to SG&A expense in 1996.
On February 20, 1998, the Company entered into new three-year employment
agreements with its then Chairman and Chief Executive Officer and two other then
senior officers of the Company. These agreements replaced previous employment
agreements entered into in July 1996 that were scheduled to expire in July 1999.
The new employment agreement for the Company's then Chairman and Chief
Executive Officer provided for, among other items, the acceleration of vesting
of 200,000 shares of restricted stock and the forfeiture of the remaining
133,334 shares of unvested restricted stock granted under the July 1996
agreement, a new equity grant of 300,000 shares of unrestricted stock, a new
grant of a ten-year option to purchase 3,750,000 shares of the Company's common
stock with an exercise price equal to the fair market value of the stock at the
date of grant and exercisable in three equal annual installments beginning on
the date of grant and the acceleration of vesting of 833,333 outstanding stock
options granted under the July 1996 agreement, as further described in Note 9.
In addition, the new employment agreement with the then Chairman and Chief
Executive Officer provided for income tax gross-ups with respect to any tax
assessed on the equity grant and acceleration of vesting of restricted stock.
The new employment agreements with the two other then senior officers
provided for, among other items, the grant of a total of 180,000 shares of
restricted stock that were to vest in four equal annual installments beginning
on the date of grant, the acceleration of vesting of 44,000 shares of restricted
stock and the forfeiture of the remaining 29,332 shares of unvested restricted
stock granted under the July 1996 agreements, new grants of ten-year options to
purchase a total of 1,875,000 shares of the Company's common stock with an
exercise price equal to the fair market value of the stock at the date of grant
and exercisable in four equal annual installments beginning on the date of grant
and the acceleration of vesting of 383,334 outstanding stock options granted
under the July 1996 agreements. In addition, the new employment agreements
provided for income tax gross-ups with respect to any tax assessed on the
restricted stock grants and acceleration of vesting of restricted stock.
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
1998 related to these items was approximately $31 million.
On June 15, 1998, the Company's board of directors announced the removal of
the then Chairman and Chief Executive Officer and subsequently announced the
removal or resignation of other senior officers, including the Company's then
Chief Financial Officer. In connection with the removal or resignation of the
senior officers and the termination of their restricted stock grants, the
unamortized portion of the deferred compensation expense attributable to the
restricted stock grants was reversed. The Company and certain of its former
officers are in disagreement as to the Company's obligations to these
individuals under prior employment agreements and arising from their
terminations. (See Note 15.)
F-26
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. SHAREHOLDERS' EQUITY--(CONTINUED)
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss consist of the
following (in thousands):
CURRENCY MINIMUM
TRANSLATION PENSION
ADJUSTMENTS LIABILITY TOTAL
----------- -------- --------
Balance at December 29, 1996....................................... $ (12,111) $ (6,163) $(18,274)
Balance at December 28, 1997....................................... (12,850) (20,213) (33,063)
Balance at December 31, 1998....................................... (12,022) (42,008) (54,030)
The accumulated other comprehensive loss associated with the minimum
pension liability is net of deferred income taxes of approximately $5.0 million
in 1998, 1997 and 1996.
9. EMPLOYEE STOCK OPTIONS AND AWARDS
The Company has one stock-based compensation plan, the Amended and Restated
Sunbeam Corporation Stock Option Plan (the "Plan"). Under the Plan, all
employees are eligible for grants of options to purchase up to an aggregate of
16,300,000 shares of the Company's common stock at an exercise price equal to or
in excess of the fair market value of the stock on the date of grant. The term
of each option commences on the date of grant and expires on the tenth
anniversary of the date of grant subject to earlier cancellation. Options
generally become exercisable over a three to five year period.
The Plan also provides for the grant of restricted stock awards of up to
200,000 shares, in the aggregate, to employees and non-employee directors. The
Plan provides that each non-employee director of the Company is automatically
granted 1,500 shares of restricted common stock upon his or her initial election
or appointment and upon each subsequent re-election to the Company's board of
directors. In the event of an election or appointment to the Company's board of
directors at any time other than at the annual meeting of stockholders, the
director receives a prorated amount of restricted common shares. These
restricted common shares vest immediately upon the non-employee director's
acceptance of his or her election or appointment to the Company's board of
directors. The Company granted 6,000, 6,000, and 7,818 shares of restricted
stock to non-employee directors in 1998, 1997 and 1996, respectively, and
recognized compensation expense related to these grants of $0.2 million in each
of 1998, 1997 and 1996. See Note 8 for a discussion of restricted stock awards
made outside the Plan.
In July 1996, options to purchase an aggregate of 3,000,000 shares (of
which 2,750,000 options were outstanding at December 28, 1997) were granted
outside of the Plan at exercise prices equal to the fair market value of the
Company's common stock on the dates of grant in connection with the employment
of a then new Chairman and Chief Executive Officer and two other senior officers
of the Company. These outstanding options have terms of ten years and, with
respect to options for 2,500,000 shares, were exercisable in three annual
installments beginning July 17, 1996. Options for the remaining 250,000 shares
still outstanding were exercisable in three annual installments beginning on the
first anniversary of the July 22, 1996 grant date. On February 20, 1998 the
vesting provisions of the options granted outside the Plan were accelerated.
Additional stock option grants outside the Plan were made in February 1998, with
a portion thereof subsequently terminated in connection with the removal of the
then Chairman and Chief Executive Officer. The then Chairman and Chief Executive
Officer and another senior officer are disputing termination of their stock
option grants. (See Notes 8 and 15.)
In the third and fourth quarters of 1998, options to purchase an aggregate
of 4,200,000 shares were granted outside of the Plan in connection with the
employment of the new Chief Executive Officer and certain members of the new
senior management team. The options were granted to certain senior executives at
exercise prices equal to or greater than the fair market value of the Company's
common stock on the dates of the grant. The senior officers were granted options
to purchase 3,200,000 shares of common stock at a price of $7.00 per share;
500,000 shares of common stock at a price of $10.50 per share and 500,000 shares
at a price of $14.00 per share.
F-27
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. EMPLOYEE STOCK OPTIONS AND AWARDS--(CONTINUED)
All of these outstanding options have terms of ten years and become fully
exercisable at the end of two to three year periods if the executive remains
employed by the Company as of such date. These grants are subject the
shareholder approval at the 1999 Annual Meeting. A measurement date pursuant to
APB Opinion No. 25 will be established for these grants upon shareholder
approval. These options have been included in the following tables summarizing
the Company's stock option activity for the year ended December 31, 1998.
In August 1998, the Company approved a plan to exchange outstanding common
stock options held by the Company's employees. The exchange program, which has
been completed, provided for outstanding options with exercise prices in excess
of $10.00 per share to be exchanged for new options on a voluntary basis in an
exchange ratio ranging from approximately two to three old options for one new
option, (as determined by reference to a Black-Scholes option pricing model)
with the exercise price of the new options set at $7.00 per share. These options
were repriced at an exercise price approximating the market value of the
Company's common stock at the date of the repricing and, consequently, there was
no related compensation expense.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock options. Accordingly, no compensation cost has been
recognized for outstanding stock options. Had compensation cost for the
Company's outstanding stock options been determined based on the fair value at
the grant dates for those options consistent with SFAS No. 123, the Company's
net (loss) earnings and basic and diluted (loss) earnings per share would have
differed as reflected by the pro forma amounts indicated below (in thousands
except per share amounts):
1998 1997 1996
----------- ------- ---------
Net (loss) earnings:
As reported.................................................... $ (897,923) $38,301 $(208,481)
Pro forma...................................................... (1,023,932) 14,524 (218,405)
Basic (loss) earnings per share:
As reported.................................................... (9.25) 0.45 (2.51)
Pro forma...................................................... (10.54) 0.17 (2.63)
Diluted (loss) earnings per share:
As reported.................................................... (9.25) 0.44 (2.51)
Pro forma...................................................... (10.54) 0.17 (2.63)
The Company's pro forma net loss for 1998 includes approximately
$68 million of compensation cost relating to options issued to the former
Chairman and Chief Executive Officer (3,750,000) and a former senior officer
(1,125,000) in connection with their February 1998 employment agreements. These
options are included in the outstanding and exercisable options issued outside
the plan in the following table. The Company and these individuals are in
dispute regarding the status of these options.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
1998 1997 1996
--------- ------- ---------
Expected volatility................................................ 52.80% 34.19% 36.78%
Risk-free interest rate............................................ 4.68% 6.36% 6.34%
Dividend yield..................................................... 0.0% 0.1% 0.1%
Expected life...................................................... 6 years 6 years 5 years
F-28
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. EMPLOYEE STOCK OPTIONS AND AWARDS--(CONTINUED)
A summary of the status of the Company's outstanding stock options as of
December 31, 1998, December 28, 1997 and December 29, 1996, and changes during
the years ended on those dates is presented below:
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- -------------- ---------- -------------- ---------- --------------
Plan options
Outstanding at beginning
of year............... 6,654,068 $25.61 6,271,837 $19.43 4,610,387 $16.67
Granted.................. 6,663,998 17.13 3,105,263 32.40 4,061,450 20.39
Exercised................ (879,088) 22.25 (1,549,196) 17.20 (622,994) 7.51
Canceled................. (6,826,070) 27.75 (1,173,836) 21.10 (1,777,006) 18.64
---------- ---------- ----------
Outstanding at end of
year.................. 5,612,908 $13.32 6,654,068 $25.61 6,271,837 $19.43
---------- ---------- ----------
---------- ---------- ----------
Options exercisable at
year-end.............. 1,717,545 $20.91 1,547,198 $19.13 1,655,450 $16.13
Weighted-average fair
value of options
granted during the
year.................. $10.47 $15.46 $14.76
Options outside plan
Outstanding at beginning
of year............... 2,750,000 $12.43 2,750,000 $12.43 692,500 $16.70
Granted.................. 9,825,000 24.62 -- -- 3,000,000 12.65
Canceled................. (750,000) 36.85 -- -- (942,500) 16.27
---------- ---------- ----------
Outstanding at end of
year.................. 11,825,000 $21.01 2,750,000 $12.43 2,750,000 $12.43
---------- ---------- ----------
---------- ---------- ----------
Options exercisable at
year-end.............. 7,625,000 $28.04 1,750,000 $12.35 833,333 $12.25
Weighted-average fair
value of options
granted during the
year.................. $13.71 N/A $ 5.99
Included in the outstanding and exercisable options issued outside the
plan, as presented above, are options issued to the former Chairman and Chief
Executive Officer (3,750,000) and a former senior officer (1,125,000) in
connection with their February 1998 employment agreements. The Company and these
individuals are in a dispute regarding the status of these options.
F-29
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. EMPLOYEE STOCK OPTIONS AND AWARDS--(CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998:
OPTIONS OUTSTANDING
-----------------------------------------------------------
NUMBER WEIGHTED-AVERAGE
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/98 CONTRACTUAL LIFE (YEARS) EXERCISE PRICE
- ----------------------------------------------- ----------- ------------------------ ----------------
$5.00 to 7.00.................................. 6,076,805 9.2 $ 6.91
$7.01 to $14.00................................ 4,048,200 8.3 11.80
$14.01 to $15.00............................... 642,124 7.6 14.43
$15.01 to $23.15............................... 697,697 7.2 19.47
$23.16 to $26.71............................... 733,714 8.3 25.07
$26.72 to $36.85............................... 4,951,590 9.1 36.55
$36.86 and over................................ 287,778 8.9 40.32
-----------
$5.00 to $50.77................................ 17,437,908 8.7 18.49
-----------
-----------
OPTIONS EXERCISABLE
-------------------------------
NUMBER
RANGE OF EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/98 EXERCISE PRICE
- ------------------------------------------------------------------------- ----------- ----------------
$5.00 to $7.00........................................................... 95,895 $ 5.01
$7.01 to $14.00.......................................................... 2,500,000 12.25
$14.01 to $15.00......................................................... 571,290 14.41
$15.01 to $23.15......................................................... 627,488 19.30
$23.16 to $26.71......................................................... 540,055 25.10
$26.72 to $36.85......................................................... 4,906,961 36.62
$36.86 and over.......................................................... 100,856 40.60
---------
$5.00 to $50.77.......................................................... 9,342,545 26.62
---------
---------
F-30
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. SUPPLEMENTARY FINANCIAL STATEMENT DATA
Supplementary Balance Sheet data at the end of each fiscal year is as
follows (in thousands):
1998 1997
---------- ---------
Receivables:
Trade...................................................................... $ 407,452 $ 250,699
Sundry..................................................................... 7,347 7,794
---------- ---------
414,799 258,493
Valuation allowance.......................................................... (53,025) (30,033)
---------- ---------
$ 361,774 $ 228,460
---------- ---------
---------- ---------
Inventories:
Finished goods............................................................. $ 370,622 $ 193,864
Work in process............................................................ 39,143 25,679
Raw materials and supplies................................................. 109,424 85,357
---------- ---------
$ 519,189 $ 304,900
---------- ---------
---------- ---------
Prepaid expenses and other current assets:
Deferred income taxes...................................................... $ 40,756 $ --
Prepaid expenses and other................................................. 33,431 16,584
---------- ---------
$ 74,187 $ 16,584
---------- ---------
---------- ---------
Property, plant and equipment:
Land....................................................................... $ 10,664 $ 1,793
Buildings and improvements................................................. 168,685 98,054
Machinery and equipment.................................................... 395,763 248,138
Furniture and fixtures..................................................... 18,208 7,327
---------- ---------
593,320 355,312
Accumulated depreciation and amortization.................................... (138,148) (105,788)
---------- ---------
$ 455,172 $ 249,524
---------- ---------
---------- ---------
Trademarks, tradenames, goodwill and other:
Trademarks and tradenames.................................................. $ 597,515 $ 237,095
Goodwill................................................................... 1,254,880 24,687
Deferred financing costs................................................... 47,325 983
Other intangible assets.................................................... 28,012 424
---------- ---------
1,927,732 263,189
Accumulated amortization................................................... (101,783) (56,880)
---------- ---------
1,825,949 206,309
Other assets................................................................. 33,428 853
---------- ---------
$1,859,377 $ 207,162
---------- ---------
---------- ---------
F-31
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. SUPPLEMENTARY FINANCIAL STATEMENT DATA--(CONTINUED)
1998 1997
---------- ---------
Other current liabilities:
Payrolls, commissions and employee benefits................................ $ 61,294 $ 12,227
Advertising and sales promotion............................................ 56,288 34,749
Product warranty........................................................... 50,287 21,498
Accounts receivable securitization liability............................... -- 19,750
Sales returns.............................................................. 16,972 7,846
Interest................................................................... 26,202 941
Other...................................................................... 110,142 27,074
---------- ---------
$ 321,185 $ 124,085
---------- ---------
---------- ---------
Other long-term liabilities:
Accrued postretirement benefit obligation.................................. $ 48,028 $ 30,394
Accrued pension............................................................ 42,431 10,744
Product liability and workers compensation................................. 71,868 41,901
Other...................................................................... 86,132 71,261
---------- ---------
$ 248,459 $ 154,300
---------- ---------
---------- ---------
Supplementary Statements of Operations and Cash Flows data for each fiscal
year are summarized as follows (in thousands):
1998 1997 1996
-------- -------- --------
Other (income) expense, net:
Interest income.................................................... $ (2,897) $ (2,561) $ (1,255)
Other, net......................................................... (1,871) 2,573 4,993
-------- -------- --------
$ (4,768) $ 12 $ 3,738
-------- -------- --------
-------- -------- --------
Cash paid (received) during the period for:
Interest........................................................... $ 81,291 $ 13,058 $ 13,397
-------- -------- --------
-------- -------- --------
Income taxes (net of refunds)...................................... $(17,358) $(44,508) $ (540)
-------- -------- --------
-------- -------- --------
11. ASSET IMPAIRMENT AND OTHER CHARGES
In the fourth quarter of 1998, the Company recorded a $62.5 million charge
for the write-off of the carrying value of First Alert's goodwill (see Note 2).
In the second quarter of 1998, as a result of decisions to outsource or
discontinue a substantial number of products previously made by the Company
(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), certain facilities and equipment will either no longer be
used or will 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 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
F-32
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. ASSET IMPAIRMENT AND OTHER CHARGES--(CONTINUED)
million and these assets are expected to be disposed of by September 30, 1999.
Depreciation expense associated with these assets approximated $2.6 million in
1998, $4.2 million in 1997 and $3.5 million in 1996.
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 approximately 1,100 were terminated, and
$1.4 million paid in severance, as of December 31, 1998. It is anticipated that
the remaining 100 employees will be terminated and the balance of the severance
obligation ($0.4 million) paid by July 31, 1999. 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. The asset
impairment resulted from management's decision, during the third quarter, to
discontinue certain SKU's within product lines (principally generators,
compressors and propane cylinders) subsequent to the acquisition. 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. In the fourth
quarter of 1998, the Company recorded a $7.1 million charge as a result of
management's decision, during the fourth quarter, to outsource the production of
certain appliances (principally irons). This charge to Cost of Goods Sold
primarily consists of a provision for certain tooling and equipment
($6.7 million) and severance and related benefits ($0.4 million). This tooling
and equipment, which had no remaining value, was written off. These fixed assets
were taken out of service at the time of the write-down, and consequently
depreciation was discontinued at the time of the write-down. Depreciation
expense associated with these assets approximated $2.4 million in 1998, $2.3
million in 1997 and $0.9 million in 1996. The severance costs related to
approximately 45 production employees, none of whom were terminated, as of
December 31, 1998. It is anticipated that these employees will be terminated and
the severance obligation paid by September 30, 1999.
During 1997 and the first half of 1998, the Company built inventories in
anticipation of 1998 sales volumes which did not materialize. As a result, it
has been and will continue to be necessary to dispose of some portions of excess
inventories at amounts less than cost. Accordingly, during 1998, when the facts
and circumstances were known that such sales volume would not materialize, the
Company recorded $58.2 million in charges (of which $46.4 million, $2.2 million
and $9.6 million, were recorded during the second, third and fourth 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. The Company also recorded a charge of $11.0 million during the
second quarter for excess inventories for raw materials and work in process that
will not be used due to outsourcing the production of breadmakers, toasters and
certain other appliances. In addition, during 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 inventories recorded at the lower-of-cost-or-market, based on
management's best estimate of net realizable value, amounted to approximately
$95.8 million at December 31, 1998. (See Note 12 for asset impairment and other
charges recorded in conjunction with a 1996 restructuring plan.)
12. RESTRUCTURING
In November 1996, the Company announced the details of a restructuring
plan. The plan included the consolidation of administrative functions within the
Company, the reduction of manufacturing and warehouse facilities, the
centralization of the Company's procurement function, and reduction of the
Company's product offerings and SKU's. The Company also announced plans to
divest several lines of business (see Note 13).
As part of the restructuring plan, the Company consolidated six divisional
and regional headquarter's functions into a single worldwide corporate
headquarters and outsourced certain back office activities resulting in
F-33
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. RESTRUCTURING--(CONTINUED)
a reduction in total back-office/administrative headcount. Overall, the
restructuring plan called for a reduction in the number of production facilities
from 26 to 8 and the elimination of over 6,000 positions from the Company's
workforce, including 3,300 from the disposition of certain business operations
and the elimination of approximately 2,800 other positions, some of which were
outsourced. The Company completed the major phases of the restructuring plan by
July 1997.
In conjunction with the implementation of the restructuring plan, the
Company recorded a pre-tax charge of $239.2 million in the fourth quarter of
1996. This amount is recorded as follows in the accompanying Consolidated
Statements of Operations: $110.1 million in Restructuring and Asset Impairment
Charges, as further described below; $60.8 million in Cost of Goods Sold related
principally to inventory write-downs to net realizable value as a result of a
reduction in SKU's and costs of inventory liquidation programs; $10.1 million in
SG&A expense, for period costs which were charged to operations as incurred,
principally relating to employee relocation and recruiting and equipment
relocation and installation ($3.2 million), transitional fees relating to
outsourcing arrangements ($4.9 million) and package redesign costs ($2.0
million), and $58.2 million ($39.1 million net of taxes) in Loss on Sale of
Discontinued Operations related to the divestiture of its furniture business. In
1997, upon completion of the sale of the furniture business, the Company
recorded an additional pre-tax loss of $22.5 million from discontinued
operations ($14.0 million net of taxes) due primarily to lower than anticipated
sales proceeds relating to the post closing adjustment process that was part of
the sale agreement.
Amounts included in Restructuring and Asset Impairment Charges in 1996 in
the accompanying Consolidated Statements of Operations included cash items such
as severance and other employee costs of $24.7 million, lease obligations of
$12.6 million and other exit costs associated with facility closures and related
to the implementation of the restructuring plan of $4.1 million, principally
representing costs related to clean-up and restoration of facilities owned and
leased for either sale or return to the landlord.
Included in Restructuring and Asset Impairment Charges in 1996 was
$68.7 million of non-cash charges (classified within the $110.1 million
restructuring charge) principally consisting of: (a) asset write-downs to net
realizable value for disposals of excess facilities and equipment and certain
product lines ($22.5 million); (b) write-offs of redundant computer systems from
the administrative back-office consolidations and outsourcing initiatives
($12.3 million); (c) write-off of intangibles relating to discontinued product
lines ($10.1 million); (d) write-off of capitalized product and package design
costs and other expenses related to exited product lines and SKU reductions
($9.0 million) (Prior to 1996, Sunbeam had capitalized certain costs related to
international product development and package design, which were amortized over
the period of related benefit. The product development costs ($1.9 million)
related to international operations and represented the costs necessary to
modify products for introduction to the international markets. As the
restructuring plan included the closure of International Group office and
elimination of a number of products to which these costs pertained, the related
capitalized costs were written off. Additionally, in connection with the
restructuring plan, as a result of the elimination of many products and SKU's,
Sunbeam updated its package designs. Accordingly, the unamortized balance of the
capitalized package design costs which had been capitalized prior to 1996,
($5.0 million) was written off. Sunbeam discontinued incurring costs of a
significant nature relating to these items and consequently has discontinued
capitalizing such costs subsequent to 1995 and (e) asset write-downs related to
the divestiture of certain non-core products and businesses ($14.8 million). The
asset write-downs of $34.8 million (representing (a) and (b) discussed above)
included equipment taken out of service in 1996 (either abandoned in 1996 or
sold in 1997) and accordingly, depreciation was not recorded subsequent to the
date of the impairment charge. The asset write-downs of $14.8 million related to
the divestiture of non-core products and businesses resulted from divesting of
the time and temperature business (sold in March 1997) and Counselor(Registered)
and Borg(Registered) scale product lines (sold in May 1997) and the sale of the
textile mill in Biddeford, Maine in May 1997. These charges primarily
represented the estimated non-cash losses resulting from the sale or abandonment
of facilities and equipment related to exiting these product lines. The Company
continued to record depreciation expense on these fixed assets, based on
historical rates, until such time that the assets were disposed of. For these
fixed assets, the
F-34
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. RESTRUCTURING--(CONTINUED)
impairment charges represented write-downs to net realizable values (based on
the estimated net proceeds from the sale of these assets compared to their
recorded net book value), less estimated depreciation expense at historical
rates through the period of estimated use. The net carrying value of these
assets at December 29, 1996 approximated $42.5 million.
The $24.7 million for severance and other employee costs, including COBRA
and other fringe benefits, related to approximately 3,700 positions that were
planned to be eliminated as a result of the restructuring plan, excluding
approximately 2,400 employees terminated from the furniture business for which
severance was included in Loss on Sale of Discontinued Operations (see
Note 13). The furniture business was sold in 1997. In 1996 and 1997,
approximately 1,200 employees and 1,800 employees, respectively, were terminated
from continuing operations. Due largely to attrition, the remaining planned
terminations were not required. In 1997, the Company determined that its
severance and employee benefit costs were less than originally accrued
principally due to lower than expected COBRA and workers compensation costs, and
accordingly reversed accruals of $7.9 million in the third quarter ($2.1
million) and fourth quarter ($5.8 million). At December 31, 1997, the balance
accrued of $1.2 million represented the remaining severance and employee benefit
costs for certain employees terminated during 1997. During 1998, all amounts
were expended.
The amounts accrued at December 29, 1996, for Restructuring and Asset
Impairment Charges recorded in fiscal 1996, exceeded amounts ultimately required
principally due to reductions in anticipated severance and employee benefit
costs of $7.9 million, as discussed above, and reductions in estimated lease
payments of $6.7 million ($3.7 million and $3.0 million recognized in the third
and fourth quarters, respectively) resulting from better than anticipated
rentals received under sub-leases and favorable negotiation of lease
terminations. Accordingly, the fiscal 1997 Consolidated Statement of Operations
included $14.6 million of benefit ($5.8 million in the third quarter and
$8.8 million in the fourth quarter of 1997) related to the reversal of accruals
no longer required, which were recorded as these reduced obligations became
known.
In 1996, in conjunction with the initiation of the restructuring plan, the
Company recorded additional charges totaling $129.1 million, reflected in Cost
of Goods Sold; SG&A expense and Loss on Sale of Discontinued Operations. The
charge included in Cost of Goods Sold ($60.8 million) principally represented
inventory write-downs to net realizable value, based upon management's best
estimates, and anticipated losses on the disposition of the inventory as a
result of the significant reduction in SKU's provided for in the restructuring
plan. The write-down included $26.9 million related to raw materials, work-in
process and finished goods for discontinued outdoor cooking products,
principally grills and grills accessories and the balance related to raw
materials, work-in-process and finished goods for other discontinued products
including appliances ($27.8 million), clippers ($1.0 million) and blankets ($5.1
million). For inventory which management determined was salable, the estimated
write-down was based upon the difference between the expected net sales proceeds
of the inventory, depending on distribution channel, and the recorded value of
the inventory. In the case of abandoned inventory, the write-down was equal to
the recorded value of the inventory. The resulting difference between carrying
value and estimated net realizable value represented the $60.8 million
write-down necessary to record the inventory at its net realizable value. SG&A
expense included period costs, charged to operations as incurred, in 1997 and
1996 of $15.8 million and $10.1 million, respectively, relating to employee
relocation and recruiting and equipment relocation and installation
($11.8 million in 1997 and $3.2 million in 1996), transitional fees related to
outsourcing arrangements ($4.9 million in 1996) and package redesign costs ($4.0
million in 1997 and $2.0 million in 1996) expended as a result of the
implementation of the restructuring plan. The Loss on Sale of Discontinued
Operations of $58.2 million is discussed further in Note 13.
At December 28, 1997, the Company had $5.2 million in liabilities accrued
related to the 1996 restructuring plan, including $1.2 million of severance
related costs and $4.0 million related to facility closures, which principally
represented future lease payments (net of sub-leases) on exited facilities.
During 1998, this liability was reduced by $4.0 million as a result of cash
expenditures. At December 28, 1997, the Company had
F-35
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. RESTRUCTURING--(CONTINUED)
$3.0 million of warranty liabilities related to the discontinued furniture
operations. During 1998, $2.5 million of this liability was liquidated.
The following table sets forth the details and the activity from the
charges (in millions):
ADDITIONS
ACCRUAL BALANCE CHARGED TO CASH NON-CASH ACCRUAL BALANCE
JANUARY 1, 1996 INCOME REDUCTIONS REDUCTIONS DECEMBER 29, 1996
--------------- ---------- ---------- ---------- -----------------
Write-downs:
Fixed assets, held for disposal, not
in use.............................. $ -- $ 34.8 $ -- $ 34.8 $ --
Fixed assets, held for disposal, used
until disposed...................... 11.3 14.8 -- 11.3 14.8
Inventory on hand..................... -- 60.8 -- 60.8 --
Other assets, principally trademarks
and intangible assets............... -- 19.1 -- 18.0 1.1
----- ------ ------ ------ -------
11.3 129.5 -- 124.9 15.9
----- ------ ------ ------ -------
Restructuring accruals:
Employee severance pay and fringes.... -- 24.7 5.6 -- 19.1
Lease payments and termination fees... 2.5 12.6 2.5 -- 12.6
Other exit activity costs, principally
facility closure expense............ -- 4.1 -- -- 4.1
----- ------ ------ ------ -------
2.5 41.4 8.1 -- 35.8
----- ------ ------ ------ -------
Total restructuring and asset impairment
accrual............................... 13.8 170.9 8.1 124.9 51.7
----- ------ ------ ------ -------
Other related period costs charged to
operations as incurred:
Employee relocation; equipment
relocation and installation and
other............................... -- 3.2 3.2 -- --
Transitional fees related to
outsourcing arrangements............ -- 4.9 4.9 -- --
Package redesign...................... -- 2.0 2.0 -- --
----- ------ ------ ------ -------
-- 10.1 10.1 -- --
----- ------ ------ ------ -------
Total included in continuing
operations............................ 13.8 181.0 18.2 124.9 51.7
Total included in discontinued
operations............................ -- 58.2 -- -- 58.2
----- ------ ------ ------ -------
$13.8 $239.2 $ 18.2 $124.9 $ 109.9
----- ------ ------ ------ -------
----- ------ ------ ------ -------
F-36
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. RESTRUCTURING--(CONTINUED)
ACCRUAL BALANCE ADDITIONS ACCRUAL BALANCE
DECEMBER 30, CHARGED TO CASH NON-CASH DECEMBER 28,
1996 INCOME REDUCTIONS REDUCTIONS REVERSALS 1997
--------------- ---------- ---------- ---------- --------- ---------------
Write-downs:
Fixed assets, held for
disposal, used until
disposed.................. $ 14.8 $ -- $ -- $ 14.8 $ -- $ --
Other assets, principally
trademarks and intangible
assets.................... 1.1 -- -- 1.1 -- --
------- ------ ------ ------ ----- -----
15.9 -- -- 15.9 -- --
------- ------ ------ ------ ----- -----
Restructuring accruals:
Employee severance pay and
fringes................... 19.1 -- 10.0 -- 7.9 1.2
Lease payments and
termination fees.......... 12.6 -- 2.6 -- 6.7 3.3
Other exit activity costs,
principally facility
closure expenses.......... 4.1 -- 3.4 -- -- 0.7
------- ------ ------ ------ ----- -----
35.8 -- 16.0 -- 14.6 5.2
------- ------ ------ ------ ----- -----
Total restructuring and asset
impairment accrual........... 51.7 -- 16.0 15.9 14.6 5.2
Discontinued operations........ 58.2 22.5 6.1 71.6 -- 3.0
------- ------ ------ ------ ----- -----
$ 109.9 $ 22.5 $ 22.1 $ 87.5 $14.6 $ 8.2
------- ------ ------ ------ ----- -----
------- ------ ------ ------ ----- -----
ACCRUAL BALANCE
DECEMBER 29, CASH ACCRUAL BALANCE
1997 REDUCTIONS DECEMBER 31, 1998
--------------- ---------- -----------------
Restructuring accruals:
Employees severance pay and fringes............................ $ 1.2 $1.2 $ --
Leases payments and termination fees........................... 3.3 2.1 1.2
Other exit activity costs, principally facility closure
expenses.................................................... 0.7 0.7 --
----- ---- -----
Total restructuring accrual...................................... 5.2 4.0 1.2
----- ---- -----
Discontinued operations.......................................... 3.0 2.5 0.5
----- ---- -----
$ 8.2 $6.5 $ 1.7
----- ---- -----
----- ---- -----
The restructuring accrual, which existed at January 1, 1996
($13.8 million), was initially established as part of a "rightsizing program"
during fiscal 1992. During 1996 approximately $3 million of this accrual was
utilized and the remaining $10.8 million became part of the reserve requirements
of the 1996 restructuring plan. In effect, in 1996, the Company reversed the
$10.8 million prior year accrual determined to be no longer required and
provided a corresponding amount in connection with the 1996 restructuring
charge.
F-37
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. DISCONTINUED OPERATIONS
As part of the 1996 restructuring plan, the Company also announced the
divestiture of the furniture business, by a sale of assets. In February 1997,
the Company entered into an agreement to sell the business to U.S. Industries,
Inc. in a transaction that was completed on March 17, 1997. In connection with
the furniture divestiture, the Company recorded a provision for estimated losses
to be incurred on the sale of $39.1 million in 1996, net of applicable income
tax benefits of $19.9 million. Although the discontinued furniture operations
were profitable, net income had declined from $21.7 million in 1994 to
$0.8 million in 1996. This decline, along with the Company's announcement that
it intended to divest this line of business contributed to the loss on sale.
Revenues for the discontinued furniture business were $51.6 million in the first
quarter of 1997, $227.5 million in 1996 and $185.6 million in 1995. Results of
operations were nominal in 1997 and 1996, down from $12.9 million (net of
$7.9 million in taxes) in 1995. In connection with the sale of these assets
(primarily inventory, property, plant and equipment), the Company received
$69.0 million in cash. The Company retained accounts receivable related to the
furniture business of approximately $50 million as of the closing date and
retained certain liabilities. The final purchase price for the furniture
business was subject to a post-closing adjustment based on the terms of the
asset purchase agreement and in the first quarter of 1997, after completion of
the sale, the Company recorded an additional loss of $14.0 million, net of
applicable income tax benefits of $8.5 million.
In addition to the furniture business divestiture, the Company also
completed the sale of other product lines and assets in 1997 as part of its
restructuring plan, including time and temperature products,
Counselor(Registered) and Borg(Registered) scales and a textile facility. Losses
incurred on the disposal of these assets, which consist primarily of write-downs
of assets to net realizable value, are included in Restructuring and Asset
Impairment Charges in 1996 in the Consolidated Statements of Operations.
14. SEGMENT, CUSTOMER AND GEOGRAPHIC DATA
Throughout 1998 Sunbeam's operations were managed through four reportable
segments: Household, Outdoor Leisure, International and Corporate. Reportable
segments are identified by the Company based upon the distinct products
manufactured (Household and Outdoor Leisure) or based upon the geographic region
in which its products are distributed (International). The Company's reportable
segments are all separately managed.
The Household group consists of appliances (including mixers, blenders,
food steamers, bread makers, rice cookers, coffee makers, toasters, irons and
garment steamers), health products (including vaporizers, humidifiers, air
cleaners, massagers, hot and cold packs and blood pressure monitors), scales,
personal care products (including hair clippers and trimmers and related
products for the professional beauty, barber and veterinarian trade and sales of
products to commercial and institutional channels), blankets (including electric
blankets, heated throws and mattress pads) and First Alert(Registered) products
(smoke and carbon monoxide detectors, fire extinguishers and home safety
equipment).
The Outdoor Leisure group includes outdoor recreation products (which
encompass tents, sleeping bags, coolers, camping stoves, lanterns and outdoor
heaters), outdoor cooking products (including gas and charcoal outdoor grills
and grill parts and accessories), Powermate(Registered) products (including
portable power generators and air compressors), and Eastpak(Registered) products
(including backpacks and bags).
The International group is managed through five regional subdivisions:
Europe, Latin America, Japan, Canada and East Asia. Europe includes the
manufacture, sales and distribution of Campingaz(Registered) products and sales
and distribution in Europe, Africa and the Middle East of other Company
products. The Latin American region includes the manufacture, sales and
distribution throughout Latin America of small appliances, and sales and
distribution of personal care products, professional clippers and related
products, camping products and Powermate products. Japan includes the sales and
distribution of primarily outdoor recreation products. Canada includes sales of
substantially all the Company's products and East Asia encompasses sales and
distribution in all areas of East Asia other than Japan of substantially all the
Company's products.
F-38
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. SEGMENT, CUSTOMER AND GEOGRAPHIC DATA--(CONTINUED)
The Company's Corporate group provides certain management, accounting,
legal, risk management, treasury, human resources, tax and management
information services to all operating groups and also includes the operation of
the Company's retail stores and the conduct of the Company's licensing
activities.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies (see Note 1) except
that certain bad debt expense is recorded at a consolidated level and included
in the Corporate group. Sunbeam evaluates performance and allocates resources
based upon profit or loss from operations before amortization, income taxes,
minority interest, interest expense, non-recurring gains and losses and foreign
exchange gains and losses. Intersegment sales and transfers are primarily
recorded at cost.
The following tables include selected financial information with respect to
Sunbeam's four operating segments. Business segment information for prior years
has been reclassified to conform to the current year presentation.
OUTDOOR
HOUSEHOLD LEISURE INTERNATIONAL CORPORATE TOTAL
--------- ---------- ------------- --------- ----------
YEAR ENDED DECEMBER 31, 1998
Net sales to unaffiliated customers......... $ 714,568 $ 677,526 $ 413,864 $ 30,913 $1,836,871
Intersegment net sales...................... 62,971 111,583 98,120 -- 272,674
Segment operating loss...................... (66,376) (71,612) (29,941) (150,975) (318,904)
Segment assets.............................. 864,745 1,782,994 413,755 344,023 3,405,517
Segment depreciation expense................ 24,086 32,759 2,448 4,742 64,035
YEAR ENDED DECEMBER 28, 1997
Net sales to unaffiliated customers......... $ 568,921 $ 258,484 $ 229,572 $ 16,113 $1,073,090
Intersegment net sales...................... 100,355 3,520 64,549 -- 168,424
Segment operating earnings (loss)........... 73,210 8,205 43,793 (42,915) 82,293
Segment assets.............................. 510,183 141,332 167,591 239,822 1,058,928
Segment depreciation expense................ 15,358 9,494 3,204 3,872 31,928
YEAR ENDED DECEMBER 29, 1996
Net sales to unaffiliated customers......... $ 555,215 $ 245,600 $ 183,267 $ 154 $ 984,236
Intersegment net sales...................... 48,961 8,940 30,012 -- 87,913
Segment operating (loss) earnings........... (37,598) 39,970 5,567 (62,355) (54,416)
Segment assets.............................. 352,253 215,757 89,360 402,078 1,059,448
Segment depreciation expense................ 25,950 9,180 2,464 741 38,335
F-39
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. SEGMENT, CUSTOMER AND GEOGRAPHIC DATA--(CONTINUED)
Reconciliation of selected segment information to Sunbeam's consolidated
totals for the years ended:
DECEMBER 31, 1998 DECEMBER 28, 1997 DECEMBER 29, 1996
----------------- ----------------- -----------------
Net sales:
Net sales for reportable segments....................... $ 2,109,545 $ 1,241,514 $ 1,072,149
Elimination of intersegment net sales................... (272,674) (168,424) (87,913)
----------- ----------- -----------
Consolidated net sales................................ $ 1,836,871 $ 1,073,090 $ 984,236
----------- ----------- -----------
----------- ----------- -----------
Segment (loss) earnings:
Total (loss) earnings for reportable segments........... $ (318,904) $ 82,293 $ (54,416)
Unallocated amounts:
Interest expense...................................... (131,091) (11,381) (13,588)
Other (income) expense, net........................... 4,768 (12) (3,738)
Amortization of intangible assets..................... (43,830) (7,829) (9,094)
Provision for inventory (Notes 11 and 12)............. (95,830) -- (60,800)
Asset impairment (Notes 2 and 11)..................... (101,894) -- --
Issuance of warrants (Note 2)......................... (70,000) -- --
Former employees deferred compensation and severance
(Note 8)........................................... (30,688) -- --
Restructuring benefit (charges) (Note 12)............. -- 14,582 (110,122)
Restructuring related charges (Note 12)............... -- (15,800) (10,047)
Reversals of reserves no longer required (Note 17).... -- 27,963 --
Other (charges) benefit............................... (8,879) 2,854 --
----------- ----------- -----------
(477,444) 10,377 (207,389)
----------- ----------- -----------
Consolidated (loss) earnings from continuing
operations before income taxes, minority interest
and extraordinary charge......................... $ (796,348) $ 92,670 $ (261,805)
----------- ----------- -----------
----------- ----------- -----------
F-40
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. SEGMENT, CUSTOMER AND GEOGRAPHIC DATA--(CONTINUED)
Enterprise-Wide Disclosures
Net sales from the Company's Household products represented 50%, 73% and
74% of consolidated net sales in 1998, 1997 and 1996, respectively. Net sales
from the Company's Outdoor Leisure products category represented 50%, 25% and
26% of consolidated net sales in 1998, 1997 and 1996, respectively.
FISCAL YEARS ENDED
--------------------------------------
1998 1997 1996
---------- ---------- ----------
Geographic Area Data
Net sales to unaffiliated customers:
United States............................................... $1,423,007 $ 843,518 $ 800,969
Europe...................................................... 170,910 17,415 18,872
Latin America............................................... 158,670 164,044 125,072
Other....................................................... 84,284 48,113 39,323
---------- ---------- ----------
Total net sales............................................... $1,836,871 $1,073,090 $ 984,236
---------- ---------- ----------
---------- ---------- ----------
Identifiable assets:
United States............................................... $2,991,762 $ 891,337 $ 970,088
Europe...................................................... 244,670 9,703 15,476
Latin America............................................... 80,943 127,036 54,921
Other....................................................... 88,142 30,852 18,963
---------- ---------- ----------
Total identifiable assets..................................... $3,405,517 $1,058,928 $1,059,448
---------- ---------- ----------
---------- ---------- ----------
Revenue from one retail customer in the United States in Sunbeam's
Household and Outdoor Leisure segments accounted for approximately 18%, 20% and
19% of consolidated net sales in 1998, 1997 and 1996, respectively. Receivables
from this customer approximated $62.6 million and $51.9 million at December 31,
1998 and December 27, 1997, respectively. The Company establishes its credit
policies based on an ongoing evaluation of its customers' creditworthiness and
competitive market conditions and establishes its allowance for doubtful
accounts based on an assessment of exposures to credit losses at each balance
sheet date. The Company believes its allowance for doubtful accounts is
sufficient based on the credit exposures outstanding.
15. COMMITMENTS AND CONTINGENCIES
SEC Investigation
By letter dated June 17, 1998, the staff of the Division of Enforcement of
the SEC advised the Company that it was conducting an informal inquiry into the
Company's accounting policies and procedures and requested that the Company
produce certain documents. On July 2, 1998, the SEC issued a Formal Order of
Private Investigation, designating officers to take testimony and pursuant to
which a subpoena duces tecum was served on the Company requiring the production
of certain documents. On November 4, 1998, the Company received another SEC
subpoena duces tecum requiring the production of further documents. The Company
has provided numerous documents to the SEC staff and continues to cooperate
with the SEC staff. The Company has, however, declined to provide the SEC with
material that the Company believes is subject to the attorney-client privilege
and the work product immunity. The Company cannot predict the term of such
investigation or its potential outcome.
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
F-41
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
named as defendant Arthur Andersen LLP, 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 which
are consolidated herewith." On August 28, 1998, plaintiffs in one of the
subsequently filed actions filed an objection to having their action
consolidated pursuant to the June 16, 1998 Order, arguing that the class period
in their action differs from the class periods in the originally filed
consolidated actions. On 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 LLP. 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 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
all persons and entities who purchased Sunbeam common stock or who purchased
call options or sold put options with respect to Sunbeam common stock during the
period April 23, 1997 through June 30, 1998, excluding the defendants, their
affiliates, and employees of Sunbeam. Defendants have filed a response to the
motion for class certification. 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 at an exercise price of $36.85 to three of its officers and directors
(who were subsequently terminated) on or about February 2, 1998. On June 25,
1998, all defendants filed a motion to dismiss the complaint for failure to make
a presuit demand on Sunbeam'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 Sunbeam against some of its present
and former directors and former officers and Arthur Andersen LLP. The second
amended complaint alleges, among other things, that Messrs. Dunlap and Kersh
(the Company's former Chairman and Chief Executive Officer and Chief Financial
Officer, respectively) caused Sunbeam to employ fraudulent accounting procedures
in order to enable them to secure new employment contracts, and seeks an award
of damages and other declaratory and equitable relief. The plaintiff has agreed
that defendants need not respond to the second amended complaint until May 14,
1999. As described below, the Company and the plaintiffs have moved the Court
for injunctive relief against Messrs. Dunlap and Kersh with respect to the
arbitration action brought by them.
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 some 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
F-42
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
existing exchange ratio for the proposed Coleman merger is no longer fair to
Coleman's public shareholders as a result of the decline in the market value of
the 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. Under the terms of the proposed settlement, if approved by the
court the Company will issue to the Coleman public shareholders, and plaintiff's
counsel in this action, warrants to purchase up to approximately 4.98 million
shares of the Company's common stock at a cash exercise price of $7 per share,
subject to certain anti-dilution provisions. These warrants will generally have
the same terms as the warrants issued to an affiliate of M&F (see Note 2) and
will be issued when the Coleman merger is consummated, which is now expected to
be during the second half of 1999. As a consequence of entering 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. The total consideration to be paid (cash, Sunbeam common stock, and
Sunbeam warrants) to the Coleman shareholders will therefore be measured as of
October 21, 1998. There can be no assurance that the Court will approve the
settlement as proposed.
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, M&F and certain of
the Company's present and former directors. These complaints allege that the
defendants breached their fiduciary duties when the Company entered into a
settlement agreement whereby M&F and its affiliates released the Company from
certain claims they may have had arising out of the Company's acquisition of
M&F's interest in Coleman, and M&F agreed to provide management support to the
Company. Under the settlement agreement, M&F was granted a five-year warrant to
purchase up to an additional 23 million shares of Sunbeam's common stock at an
exercise price of $7 per share, subject to certain anti-dilution provisions. The
plaintiffs have requested an injunction against issuance of stock to M&F
pursuant to exercise of the warrants and unspecified money damages. These
complaints also allege that the rights of the public shareholders have been
compromised, as the settlement would normally require shareholders' approval
under the rules and regulations of the New York Stock Exchange ("NYSE"). The
Audit Committee of the Company's board of directors determined that obtaining
such shareholders' approval would have seriously jeopardized the financial
viability of the Company, which is an allowable exception to the NYSE
shareholders' approval requirements. By Order of the Court of Chancery dated
January 7, 1999, the derivative actions filed in that Court were consolidated
and the Company has moved to dismiss such action. 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 & Commercial Code as well as common law
fraud as a result of the Company's alleged misstatements and omissions regarding
the Company's financial condition and prospects during a period beginning
May 1, 1998 and ending June 16, 1998, in which the plaintiffs engaged in
transactions in the Company's common stock. The Company is the only named
defendant in this action. The complaint requests recovery of compensatory
damages, punitive damages and expenses in an unspecified amount. This action was
removed to the U.S. District Court for the Southern District of Texas and
subsequently has been transferred to the Southern District of Florida, the forum
for the Consolidated Federal Actions.
On October 30, 1998, a class action lawsuit was filed on behalf of certain
purchasers of the Debentures in the U.S. District Court of 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. This action has been transferred to the Southern District of Florida,
the forum for the Consolidated Federal Actions, and the
F-43
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
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, which was served on the Company 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 was held on April 15, 1999. The Court has issued a letter ruling
advising the parties that it would grant the Company's special appearance and
sustain the challenge to personal jurisdiction. The plaintiffs have moved for
reconsideration of this decision. Plaintiffs had also moved for partial summary
judgment on their Texas Securities Act claims, but, in light of the Court's
decision on the special appearance, the hearing on the summary judgment motion
has been cancelled.
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 the 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 Sunbeam 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 LLP and two former Sunbeam 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 will advise the Court of the pending Consolidated Federal Actions
and request transfer of the action.
On February 9, 1999, Messrs. Dunlap and Kersh filed with the American
Arbitration Association demands for arbitration of claims under their respective
employment agreements with Sunbeam. Messrs. Dunlap and Kersh are requesting a
finding by the arbitrator that they were terminated by the Company without cause
and should be awarded the corresponding benefits set forth in their respective
employment agreements. On March 12, 1999, Sunbeam 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 Sunbeam on the ground that the simultaneous litigation of
the April 7, 1998 action and these arbitration proceedings would subject Sunbeam
to the threat of inconsistent adjudications with respect to certain rights to
compensation asserted by Messrs. Dunlap and Kersh. On March 19, 1999, the
plaintiff in the April 7, 1998 action discussed above moved for a similar
injunction on the ground that the arbitration proceedings threatened irreparable
harm to Sunbeam and its shareholders. On March 26, 1999, Messrs., Dunlap and
Kersh filed a response in opposition to the motions for injunctive relief. A
hearing on the motions for injunctive relief has been held and, as a result of
Sunbeam's motion for preliminary injunction, administration of the arbitrations
has been suspended until May 10, 1999.
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 Sunbeam 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
Sunbeam's by-laws and by a forebearance agreement entered into between Sunbeam
and Messrs. Dunlap and Kersh in August 1998. The Company has filed its answer to
the complaint and the Court of Chancery has scheduled a trial of this summary
proceeding to be held on June 15, 1999.
F-44
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
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 foregoing actions were determined adversely to the
Company, such judgements would likely have a material adverse effect on the
Company's financial position, results of operations and cash flows.
On July 2, 1998, the American Insurance Company ("American") filed suit
against the Company in the U.S. District Court for the Southern District of New
York requesting a declaratory judgment of the Court that the directors' and
officers' liability insurance policy for excess coverage issued by American was
invalid and/or had been properly canceled by American. The Company's motion to
transfer such action to the federal district court in which the Consolidated
Federal Actions are currently pending was recently denied. The case is now in
discovery. 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. 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 the 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 liability insurance policy to the Company
and a declaratory judgment that the Company is entitled to coverage from these
insurance companies for various lawsuits described herein under liability
insurance policies issued by each of the defendants. The Company intends to
pursue recovery from all of its insurers if damages are awarded against the
Company or its indemnified officers and/or directors under any of the foregoing
actions. The Company's failure to obtain such insurance recoveries following an
adverse judgement in any of the foregoing actions could have a material adverse
effect on the Company's financial position, results of operations and cash
flows.
The Company and its subsidiaries are also involved in various lawsuits
arising from time to time that 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.
In the fourth quarter of 1996, the Company recorded a $12.0 million charge
related to a case for which an adverse development arose near year-end. In 1997,
this case was favorably resolved and, as a result, $8.1 million of the charge
established in 1996 was reversed into income primarily in the fourth quarter of
1997.
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 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 December 31, 1998 Sunbeam 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) and $9.9 million as
of December 28, 1997 (representing $3.0 million and $6.9 million for estimated
damages or settlement amounts and legal fees, respectively). It is anticipated
that the $31.2 million accrual will be paid as follows: $22.4 million in
F-45
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
1999, $7.5 million in 2000, and $1.3 million in 2001. The Company believes,
based on information known at December 31, 1998, that anticipated probable costs
of litigation matters existing as of December 31, 1998 have been adequately
reserved to the extent determinable.
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
("Environmental Laws"). The Company believes it is in substantial compliance
with all Environmental Laws which are applicable to its operations. Compliance
with Environmental Laws 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 certain environmental remediation activities
many of which relate 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 12 sites, seven 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.
The Company has established reserves, in accordance with SFAS No. 5,
Accounting for Contingencies, 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 feasibility study or the Company's commitment
to a formal plan of action. As of December 31, 1998 and 1997, the Company's
environmental reserves were $25.0 million (representing $22.9 million for the
estimated costs of facility investigations, corrective measure studies and known
remedial measures and $2.1 million for estimated legal
F-46
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
costs) and $24.0 million, (representing $21.8 million for the estimated cost of
facility investigations, corrective measure studies and known remedial measures
and $2.2 million for estimated legal costs), respectively. It is anticipated
that the $25.0 million accrual at December 31, 1998 will be paid as follows:
$5.3 million in 1999, $4.9 million in 2000, $3.2 million in 2001, $1.0 million
in 2002, $1.0 million in 2003 and $9.6 million thereafter. The Company has
accrued its best estimate of investigation and remediation costs (based upon a
range of exposure of $13.0 million to $46.3 million) based upon facts known to
the Company 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 December 31, 1998.
In the fourth quarter of 1996, the Company performed a comprehensive review
of all environmental exposures in an attempt by the then new senior management
team to accelerate the resolution and settlement of environmental claims. As a
result, upon conclusion of the review, the Company recorded additional
environmental reserves of approximately $9.0 million in the fourth quarter of
1996.
The Company believes, based on existing information, 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.
Product Liability Matters
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 Sunbeam's financial
position, results of operations and cash flows. Some of the product lines
Sunbeam acquired in the 1998 acquisitions have increased its exposure to product
liabilities and related claims.
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 1998 was comprised of a self-insurance
retention of $2.5 million per occurrence.
F-47
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
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 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
periodically and any adjustments resulting therefrom are reflected in current
operating results.
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.
Commitment Fee
Under the terms of the April 15, 1999 amendment to the New Credit Facility,
the Company is obligated to pay a loan commitment fee of between $4.2 million
and $17.0 million. The ultimate amount of the fee is determined based on
multiplying the sum of the outstanding borrowings and amounts available for
borrowings as of April 15, 1999 by a factor that is determined at the earlier of
September 30, 2000 or upon repayment of the New Credit Facility. This fee is
payable at the earlier of September 30, 2000 or upon repayment of the New Credit
Facility. At a minimum, the Company is obligated under these terms to pay
$4.2 million. The ultimate amount due could be as high as $17.0 million if the
sum of the outstanding borrowings and amounts available for borrowings at
September 30, 2000 (the "aggregate availability") exceeds $1.2 billion. If the
aggregate availability is between $1.0 billion and $1.2 billion, a fee of
$8.4 million will be due. If the aggregate availability is $1.0 billion or less,
the $4.2 million minimum will be due. Under any circumstances, the $4.2 million
will be due; therefore, the Company will accrue the minimum liability and record
an offsetting asset in the second quarter of 1999, which will be amortized and
included in interest expense through April 10, 2000, the term of the current
amendment extension period.
The Company will not accrue for amounts in excess of the $4.2 million as
there are numerous uncertainties which may individually or in the aggregate
impact the level of aggregate availability at September 30, 2000. These
uncertainties include, but are not limited to: the ability to obtain an
amendment or further waiver of existing covenants from the lenders under the New
Credit Facility for the period beyond April 10, 2000; proceeds from the sales of
assets or businesses, if any; changes in debt structure, including the effects
of refinancing, if any; and cash flows generated or used by future operations.
Given these uncertainties, the Company is currently not able to predict the
probable level of aggregate availability at September 30, 2000. As events
develop, the Company will periodically review the expected aggregate
availability at September 30, 2000. If it becomes likely than an amount in
excess of $4.2 million will be paid, the Company will recognize that change in
estimate over the remaining period of the New Credit Facility Amendment.
Leases
The Company rents certain facilities, equipment and retail stores under
operating leases. Rental expense for operating leases amounted to $28.1 million
in 1998, $7.4 million for 1997 and $8.0 million for 1996. The minimum future
rentals due under noncancelable operating leases as of December 31, 1998
aggregated to $167.6 million. The amounts payable in each of the years 1999-2003
and thereafter are $34.6 million, $33.7 million, $17.1 million, $13.5 million,
$9.7 million and $59.0 million, respectively.
In connection with a warehouse expansion related to the electric blanket
business, the Company entered into a $5 million capital lease obligation in
1996.
F-48
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Certain Debt Obligations
Responsibility for servicing certain debt obligations of the Company's
predecessor were assumed by third parties in connection with the acquisition of
former businesses, although the Company's predecessor remained the primary
obligor in accordance with the respective loan documents. Such obligations,
which amounted to approximately $17.3 million at December 31, 1998, and the
corresponding receivables from the third parties, are not included in the
Consolidated Balance Sheets since these transactions occurred prior to the
issuance of SFAS No. 76, Extinguishment of Debt. Management believes that the
third parties will continue to meet their obligations pursuant to the assumption
agreements.
Purchase and other Commitments
In conjunction with the sale of the Biddeford, Maine textile mill in 1997,
the Company entered into a five-year agreement to purchase blanket shells from
the mill. The agreement provides for a minimum purchase commitment each year of
the contract. As of December 31, 1998, the Company had remaining minimum
commitments under the contract of approximately $104 million.
In connection with Coleman's 1995 purchase of substantially all of the
assets of Active Technologies, Inc. ("ATI"), the Company may be required to make
payments to the predecessor owner of ATI of up to $18.8 million based on the
Company's sales of ATI related products and royalties received by the Company
for licensing arrangements related to ATI patents. As of December 31, 1998, the
amounts paid under the terms of this agreement have been immaterial.
16. RELATED PARTY TRANSACTIONS
Services Provided by M&F
Pursuant to the settlement agreement with M&F, M&F agreed to make certain
executive management personnel available to the Company and to provide certain
management assistance to Sunbeam. The Company does not reimburse M&F for such
services, other than reimbursement of out-of-pocket expenses paid to third
parties. (See Note 2.)
Liquidation of Options
The Company expects to acquire the remaining approximately 20% equity
interest in Coleman in the second half of 1999. Upon the consummation of the
merger transaction, the unexercised options under Coleman's stock option plans
will be cashed out at a price per share equal to the difference between $27.50
per share and the exercise price of such options. Ronald O. Perelman, the sole
stockholder of M&F, holds 500,000 options for which he will receive a net
payment of $6,750,000. Mr. Shapiro and Ms. Clark, executive officers of the
Company, hold 77,500 and 25,000 options, respectively, for which they will
receive net payments of $823,000 and $275,005, respectively.
Arrangements Between Coleman and M&F
Coleman and an affiliate of M&F are parties to a cross-indemnification
agreement pursuant to which Coleman has agreed to indemnify such affiliate, its
officers, directors, employees, control persons, agents and representatives
against all past, present and future liabilities, including product liability
and environmental matters, related to the initial assets of Coleman, which
Coleman acquired from such affiliate in December 1991. In addition, pursuant to
this cross-indemnification agreement, the M&F affiliate has agreed to indemnify
Coleman and its officers, directors, employees, agents and representatives
against all other liabilities of such M&F affiliate or any of its subsidiaries,
including liabilities relating to the assets it did not transfer to Coleman in
December 1991. This cross-indemnification agreement will survive the Coleman
merger.
F-49
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. RELATED PARTY TRANSACTIONS--(CONTINUED)
Coleman previously was included in the consolidated tax group for the M&F
companies and was a party to a tax sharing agreement with a M&F affiliate,
pursuant to which Coleman paid to such affiliate the amount of taxes which would
have been paid by Coleman if it were required to file separate federal, state or
local income tax returns. The tax sharing agreement was terminated upon the
acquisition of Coleman; however, the acquisition agreement provides for certain
tax indemnities and tax sharing payments among the Company and the M&F
affiliates relating to periods prior to the acquisition.
Lease of Office Space
During 1998, the Company sublet office space in New York City from an
affiliate of M&F. The expense for such rent during 1998 was approximately
$130,000. The lease was terminated in 1999.
17. UNAUDITED QUARTERLY FINANCIAL DATA
FISCAL 1998(A)
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE
DATA)
Net sales............................................................. $ 247.6 $ 578.5 $ 496.0 $ 514.8
Gross profit (loss)................................................... 33.8 (52.5) 67.4 (0.6)
Operating loss........................................................ (37.4) (193.3) (161.0) (278.3)
Loss from continuing operations before extraordinary charge........... (45.6) (241.0) (188.9) (300.0)
Basic and diluted loss per share from continuing operations before
extraordinary charge................................................ (0.53) (2.39) (1.88) (2.98)
Extraordinary charge.................................................. (8.6) (103.1) -- (10.7)
Net loss.............................................................. (54.1) (344.1) (188.9) (310.8)
Basic and diluted loss per share...................................... (0.63) (3.41) (1.88) (3.09)
FISCAL 1997(A)(B)
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE
DATA)
Net sales............................................................. $ 252.5 $ 271.4 $ 286.8 $ 262.4
Gross profit.......................................................... 58.3 55.3 76.5 52.1
Operating earnings.................................................... 17.1 16.8 45.1 25.1
Earnings from continuing operations................................... 9.0 8.7 27.5 7.1
Basic earnings per share from continuing operations................... 0.11 0.10 0.32 0.08
Diluted earnings per share from continuing operations................. 0.11 0.10 0.31 0.08
(Loss) on sale of discontinued operations, net of taxes............... (13.7) -- (2.7) 2.4
Net (loss) earnings................................................... (4.7) 8.7 24.8 9.5
Basic (loss) earnings per share....................................... (0.06) 0.10 0.29 0.11
Diluted (loss) earnings per share..................................... (0.06) 0.10 0.28 0.11
- ------------------
(a) Due to the net loss incurred, earnings per share calculations exclude common
stock equivalents for all four quarters and for the year in 1998 and for the
first and third quarters in 1997. Earnings (loss) per share are computed
independently for each of the quarters presented. Therefore, the sum of the
quarterly earnings (loss) per share in 1998 and 1997 does not equal the
total computed for the year.
(b) Each quarter consists of a 13-week period.
F-50
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. UNAUDITED QUARTERLY FINANCIAL DATA--(CONTINUED)
During 1998, significant unusual charges affected the respective quarters
as follows:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Compensation agreements with former senior officers (Note 8)............... $31.2 $ -- $ -- $ --
Excess and obsolete inventory reserves (Note 11)........................... -- 84.0 2.2 9.6
Facilities impairment charges (Note 11).................................... -- 29.6 3.1 6.7
Warrants issued to M&F (Note 2)............................................ -- -- 70.0 --
Costs associated with financial statement restatement...................... -- -- 10.8 9.6
Goodwill impairment (Note 2)............................................... -- -- -- 62.5
----- ------- ----- -----
Total...................................................................... $31.2 $113.6 $86.1 $88.4
----- ------- ----- -----
----- ------- ----- -----
During the first, second, third and fourth quarters of fiscal 1997,
approximately $0.5 million, $4.5 million, $1.5 million and $21.5 million,
respectively, of pre-tax liabilities no longer required were reversed and taken
into income. Included in these reserves is the $8.1 million litigation reserve
reversal discussed in Note 15. Also, during the third and fourth quarters of
fiscal 1997, approximately $5.8 million and $8.8 million, respectively, of
restructuring reserves no longer required were reversed and taken into income,
as discussed in Note 12. Additionally, during the fourth quarter of fiscal 1997,
approximately $13.3 million of tax liabilities related to the 1993 and 1994 tax
years were determined to be no longer required and were reversed and taken into
income. These accruals were no longer required because during the fourth quarter
of 1997 the Company reached a resolution with the Internal Revenue Service on
its audits of the 1993 and 1994 tax years.
F-51
SUNBEAM CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO RESERVES BALANCE AT
BEGINNING COSTS AND FROM END OF
DESCRIPTION OF PERIOD EXPENSES ACQUISITIONS DEDUCTIONS PERIOD
- ------------------------------------------------ ---------- ---------- ------------ ---------- ----------
Allowance for doubtful accounts and cash
discounts:
$ 25,050 (b)
Fiscal year ended December 31, 1998........... $ 30,033 $ 32,919 $ 15,216 93 (c) $ 53,025
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
$ (2,000)(a)
8,948 (b)
Fiscal year ended December 28, 1997........... $ 19,701 $ 17,297 $ -- 17 (c) $ 30,033
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
$ (233)(a)
19,911 (b)
Fiscal year ended December 29, 1996........... $ 12,326 $ 27,053 $ -- -- (c) $ 19,701
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Notes:(a) Reclassified to/from accrued liabilities for customer deductions.
(b) Accounts written off as uncollectible.
(c) Foreign currency translation adjustment.
(d) Reserve balances of acquired companies at acquisition date.
F-52