UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the period ended June 30, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ___________ to ___________
Commission File No. 1-000052
Sunbeam Corporation
(Exact name of registrant as specified in its charter)
Delaware 25-1638266
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2381 Executive Center Drive 33431
Boca Raton, FL (Zip Code)
(Address of principal executive offices)
(561) 912-4100
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
On August 14, 2000, there were 107,533,763 shares of the registrant's Common
Stock ($.01 par value) outstanding.
SUNBEAM CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT
ON FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Condensed Consolidated Statements of Operations
(Unaudited) for the three months and six months ended
June 30, 2000 and June 30, 1999........................ 2
Condensed Consolidated Balance Sheets (Unaudited)
as of June 30, 2000 and December 31, 1999.............. 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the six months ended June 30, 2000
and June 30, 1999...................................... 4
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 21
PART II. OTHER INFORMATION
Item 1. Litigation............................................. 35
Item 6. Exhibits and Reports on Form 8-K....................... 38
SIGNATURE ................................................................ 39
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SUNBEAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands, except per share amounts)
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ -----------
Net sales................................. $ 609,643 $ 660,927 $ 1,148,696 $ 1,184,873
Cost of goods sold........................ 457,598 487,203 863,363 884,694
Selling, general and administrative expense 170,353 160,252 306,185 301,501
------------ ------------ ------------ -----------
Operating (loss) income................... (18,308) 13,472 (20,852) (1,322)
Interest expense.......................... 53,374 45,457 105,861 88,298
Other expense, net........................ 2,090 726 4,700 600
------------ ------------ ------------ -----------
Loss before income taxes, minority
interest and extraordinary charge.... (73,772) (32,711) (131,413) (90,220)
Income tax provision:
Current................................ 2,162 6,797 3,903 6,645
Deferred............................... 4,110 470 4,037 2,363
------------ ------------ ------------ -----------
6,272 7,267 7,940 9,008
Minority interest......................... 164 6,968 255 8,457
------------ ------------ ------------ -----------
Net loss.................................. $ (80,208) $ (46,946) $ (139,608) $ (107,685)
============ ============ =========== ===========
Basic and diluted net loss per share...... $ (0.75) $ (0.47) $ (1.30) $ (1.07)
============ ============ ============ ===========
Basic and diluted weighted average common
shares outstanding..................... 107,423 100,743 107,239 100,741
See Notes to Condensed Consolidated Financial Statements.
2
SUNBEAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands)
June 30, December 31,
2000 1999
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 25,908 $ 40,799
Receivables, net..................................................... 299,762 364,338
Inventories.......................................................... 518,504 460,680
Prepaid expenses, deferred income taxes and other current assets..... 65,978 72,130
-------------- -------------
Total current assets........................................... 910,152 937,947
Property, plant and equipment, net...................................... 439,896 447,116
Trademarks, tradenames, goodwill and other, net......................... 1,728,421 1,747,286
-------------- -------------
$ 3,078,469 $ 3,132,349
============== =============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Short-term debt and current portion of long-term debt................ $ 1,543,141 $ 139,806
Accounts payable..................................................... 196,650 185,610
Other current liabilities............................................ 286,538 300,809
-------------- -------------
Total current liabilities...................................... 2,026,329 626,225
Long-term debt, less current portion.................................... 847,748 2,164,002
Other long-term liabilities............................................. 243,006 241,264
Deferred income taxes................................................... 109,851 93,288
Minority interest....................................................... -- 66,910
Commitments and contingencies (Note 9)
Shareholders' deficiency:
Preferred stock (2,000,000 shares authorized, none outstanding) ..... -- --
Common stock (107,422,500 and 100,746,400 shares issued
and outstanding)..................................................... 1,074 1,007
Additional paid-in capital........................................... 1,179,621 1,122,455
Accumulated deficit.................................................. (1,249,124) (1,109,516)
Accumulated other comprehensive loss................................. (80,036) (73,286)
-------------- -------------
Total shareholders' deficiency................................. (148,465) (59,340)
-------------- -------------
$ 3,078,469 $ 3,132,349
============== =============
See Notes to Condensed Consolidated Financial Statements.
3
SUNBEAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
Six Months Ended
--------------------------------
June 30, June 30,
2000 1999
-------------- -------------
Operating Activities:
Net loss........................................................... $ (139,608) $ (107,685)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................................. 64,251 64,008
Non-cash interest charges...................................... 22,959 22,752
Deferred income taxes.......................................... 4,037 2,363
Minority interest.............................................. 255 8,457
Loss (gain) on sale of property, plant and equipment........... 493 (836)
Changes in working capital and other, net of acquisitions...... (15,053) (23,536)
-------------- -------------
Net cash used in operating activities.................... (62,666) (34,477)
-------------- -------------
Investing Activities:
Capital expenditures............................................... (29,946) (34,945)
Net proceeds from sale of Eastpak assets........................... 89,928 --
Net purchase of Coleman minority interest.......................... (83,445) --
Net proceeds from other asset sales................................ 7,793 1,390
Other.............................................................. (584) (350)
-------------- -------------
Net cash used in investing activities.................... (16,254) (33,905)
-------------- -------------
Financing Activities:
Net borrowings under revolving credit facilities................... 111,520 62,090
Net repayments of term credit facilities........................... (44,025) (2,500)
Other.............................................................. (3,466) (1,583)
-------------- -------------
Net cash provided by financing activities................ 64,029 58,007
-------------- -------------
Net decrease in cash and cash equivalents.............................. (14,891) (10,375)
Cash and cash equivalents at beginning of period....................... 40,799 61,432
-------------- -------------
Cash and cash equivalents at end of period............................. $ 25,908 $ 51,057
============== =============
See Notes to Condensed Consolidated Financial Statements.
4
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Operations and Basis of Presentation
Organization
Sunbeam Corporation and its wholly-owned subsidiaries ("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. The Company, through its
Thalia Products Inc. ("Thalia") subsidiary, is developing Home Linking
Technology (TM), or HLT (TM), which is designed to allow products to communicate
with each other.
See Note 3 for information relevant to management's plan to fund its capital and
debt service requirements.
Basis of Presentation
The Condensed Consolidated Balance Sheet of the Company as of June 30, 2000 and
the Condensed Consolidated Statements of Operations and Cash Flows for the three
and six months ended June 30, 2000 and 1999 are unaudited. The unaudited
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions of Form 10-Q and Rule 10-01 of Regulation S-X. The
December 31, 1999 Condensed Consolidated Balance Sheet was derived from the
consolidated financial statements contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999. The condensed consolidated
financial statements contained herein should be read in conjunction with the
consolidated financial statements and related notes contained in the Company's
1999 Annual Report on Form 10-K. In the opinion of management, the unaudited
condensed consolidated financial statements contained herein include all
adjustments (consisting of only recurring adjustments) necessary for a fair
presentation of the results of operations for the interim periods presented.
These interim results of operations are not necessarily indicative of results
for future periods.
Basic And Diluted Loss Per Share Of Common Stock
Basic loss per common share calculations are determined by dividing loss
available to common shareholders by the weighted average number of shares of
common stock outstanding. Diluted loss per share is determined by dividing loss
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, warrants and the Zero Coupon Convertible Senior
Subordinated Debentures due 2018 (the "Debentures")).
For the six months ended June 30, 2000 and 1999, respectively, 3,143 and 66,813
shares related to stock options were not included in diluted average common
shares outstanding because their effect would be antidilutive. Stock options to
purchase 25,489,141 and 19,143,458 common shares were excluded from potential
common shares at June 30, 2000 and 1999, respectively, as the option exercise
prices were greater than the average market price of the Company's common stock
during the period. Diluted average common shares outstanding as of June 30, 2000
and 1999 excludes 13,242,050 shares issuable upon conversion of the Debentures
and 27,480,549 and 23,000,000 shares issuable on the exercise of warrants as of
June 30, 2000 and June 30, 1999, respectively, due to antidilution.
5
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
1. Operations and Basis of Presentation - (Continued)
New Accounting Standards
In July 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Hedging Activities (an amendment of FASB Statement No. 133)
which amends SFAS No. 133, to provide additional guidance and to exclude certain
provisions, which were determined by the FASB to be a burden on corporations.
SFAS No. 133 requires the recognition of all derivatives in the Company's
Consolidated Balance Sheets as either assets or liabilities measured at fair
value and is effective for fiscal years beginning after June 15, 2000. The
Company will adopt SFAS No. 133 for the 2001 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.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." In June 2000, the SEC staff amended SAB 101 to provide registrants
with additional time to implement SAB 101. The Company will be required to adopt
SAB 101 by the fourth quarter of fiscal 2000. The Company has not completed its
determination of the impact of the adoption of SAB 101 on its consolidated
financial position or results of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 2000
presentation.
2. Acquisitions
On March 30, 1998, pursuant to a merger agreement dated as of February 27, 1998,
the Company, through a wholly-owned subsidiary, acquired approximately 81% of
the total number of then outstanding shares of common stock of The Coleman
Company, Inc. ("Coleman") 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. Immediately thereafter, as a result of the
exercise of employee stock options, the Company's indirect beneficial ownership
of Coleman decreased to approximately 79% of the total number of the outstanding
shares of Coleman common stock.
In January 2000, pursuant to a merger agreement dated as of February 27, 1998,
the Company acquired the remaining publicly held Coleman shares in a merger
transaction in which the remaining Coleman stockholders (other than stockholders
who are seeking appraisal rights under Delaware law) received 0.5677 of a share
of the Company's common stock and $6.44 in cash for each share of Coleman common
stock they owned, aggregating approximately 6.7 million shares of the Company's
common stock and $87 million in cash. The approximate $87 million aggregate cash
payment included $4.8 million related to the cash out of remaining Coleman
employee options, in accordance with the merger agreement, which occurred in
December 1999. In addition, pursuant to a court approved settlement of claims by
Coleman public stockholders the Company issued to such Coleman public
stockholders (other than such stockholders who are seeking appraisal rights
under Delaware law), warrants expiring August 24, 2003 to purchase 4.98 million
shares of the Company's common stock at $7.00 per share less approximately
498,000 warrants issued to the plaintiffs' attorneys for their fees and
expenses. These warrants, which generally have the same terms as the warrants
previously issued to M&F's subsidiary (see Note 9), were issued when the
consideration was paid for the Coleman merger. The total consideration given for
the purchase of the remaining publicly held Coleman shares was valued at $146
million.
The acquisition of Coleman was accounted for using the purchase method of
accounting, and accordingly, the financial position and results of operations of
Coleman are included in the accompanying Condensed Consolidated Statements of
Operations from the respective dates of acquisition. Prior to the completion of
the merger on January 6, 2000, approximately 20% of Coleman's results of
operations and net equity allocable to the public shareholders was reported as
minority interest.
6
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
2. Acquisitions - (Continued)
The purchase price paid for the publicly held Coleman shares has been allocated
based on the estimated fair value of tangible and identified intangible assets
acquired and liabilities assumed as follows (in millions):
Value of common stock issued...................................... $ 44
Value of warrants issued.......................................... 14
Cash paid including expenses and mandatory redemption of debt,
net of cash acquired.......................................... 88
------
Net cash paid and equity issued................................... 146
Fair value of total liabilities assumed, including debt........... 19
------
165
Fair value of assets acquired..................................... 157
------
Excess of purchase price over fair value of net assets acquired... $ 8
======
The excess of purchase price over the fair value of net assets acquired has been
classified as goodwill. Goodwill related to the Coleman acquisition is being
amortized on a straight-line basis over 40 years. Approximately $1.1 billion of
goodwill was recorded by the Company in connection with the acquisition of
Coleman. Goodwill has been allocated to the various operating businesses of
Coleman based on the estimated fair value of Coleman's component businesses.
As of the date of the acquisition of approximately 81% of Coleman, in March
1998, the then management of the Company determined that approximately 117
employees of Coleman would need to be involuntarily terminated in order to
eliminate duplicate activities and functions and fully integrate Coleman into
the Company's operations. The Company recognized a liability of approximately $8
million representing severance and benefit costs related to the 117 employees
pursuant to the termination plan. This liability was included in the allocation
of purchase price. As of June 30, 2000, the Company had paid all of the
severance benefits and no additional charges are anticipated in future periods
related to this matter.
The following unaudited pro forma financial information for the Company gives
effect to the purchase of the publicly held shares of Coleman common stock as if
the transaction had occurred at the beginning of the period presented. No pro
forma information has been presented for the period ending June 30, 2000 because
the transaction occurred at the beginning of the period. The pro forma results
for the period ending June 30, 1999 have been prepared for informational
purposes only and do not purport to be indicative of the results of operations
that actually would have occurred had the acquisition been consummated on the
date indicated, or which may result in the future. The unaudited pro forma
results follow (in millions, except per share data):
Six Months Ended
June 30, 1999
------------------
Net sales....................................................... $ 1,184.9
Net loss........................................................ (105.4)
Basic and diluted loss per share from continuing operations..... (0.98)
3. Debt
In March 1998, the Company replaced its $250 million syndicated unsecured
five-year revolving credit facility with a revolving and term credit facility
(the "Credit Facility"). The Credit Facility provided for aggregate borrowings
of up to $1.7 billion and in addition to other customary covenants, required the
Company to maintain specified consolidated leverage, interest coverage and fixed
charge coverage ratios as of the end of each fiscal quarter occurring after
March 31, 1998 and on or prior to the latest stated maturity date for any of the
borrowings under the Credit Facility.
7
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
3. Debt - (Continued)
As a result of, among other things, its operating losses incurred during the
first half of 1998, the Company did not achieve the specified financial ratios
for June 30, 1998 and it appeared unlikely that the Company would achieve the
specified financial ratios for September 30, 1998. Consequently, the Company and
its lenders entered into an agreement dated as of June 30, 1998 that waived
through December 31, 1998 all defaults arising from the failure of the Company
to satisfy the specified financial ratios for June 30, 1998 and September 30,
1998. Pursuant to an agreement with the Company dated as of October 19, 1998,
the Company's lenders extended all of the waivers 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. In
April 1999, such waivers were extended through April 10, 2000 and on April 10,
2000 such waivers were extended through April 14, 2000.
On April 14, 2000, the Company and its lenders entered into an amendment to the
Credit Facility that, among other things, waived until April 10, 2001 all
defaults arising from any failure by the Company to satisfy certain financial
ratios for any fiscal quarter end occurring through March 31, 2001. As part of
the April 14, 2000 amendment, the Company agreed to a minimum cumulative
earnings before interest, taxes, depreciation and amortization ("EBITDA")
covenant that is based on consolidated EBITDA and is tested at the end of each
month occurring on or prior to March 31, 2001. In anticipation of the expiration
of the waiver on April 10, 2001, the Company intends to negotiate with its
lenders regarding a further amendment to the Credit Facility, further waiver of
the covenants and other terms, or refinancing of the 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 a particular action
or alternative available to the Company. 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, 2001. 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 Credit
Facility, which would likely have a material adverse effect on the Company.
Accordingly, debt related to the Credit Facility and all debt containing
cross-default provisions is classified as current in the June 30, 2000 Condensed
Consolidated Balance Sheet.
The Company and its lenders entered into an amendment to the Credit Facility on
August 10, 2000 in order to (i) adjust downward the cumulative EBITDA test for
July 31, 2000 and each remaining month-end through March 31, 2001 and (ii)
provide the Company with a supplemental $50 million reducing revolving credit
facility (the "Supplemental Revolver") having a final maturity of December 31,
2000. The minimum cumulative EBITDA as set forth in the August 10, 2000
amendment is $69.0 million for the period from January 1, 2000 through July 31,
2000 and generally increases on a monthly basis until it reaches $180.0 million
for the period from August 1, 2000 through March 31, 2001. The availability
under the Supplemental Revolver reduces by $10 million on the last day of each
month during the year 2000 commencing with August 31, 2000. Outstanding loans
under the Supplemental Revolver cannot exceed at any time the lesser of the
availability under the Supplemental Revolver or the borrowing base calculated by
reference to the domestic inventory of the Company's Powermate subsidiary and
outdoor cooking strategic business unit. The Company paid a facility fee to its
lenders of $62,500 for the Supplemental Revolver.
The following description of the Credit Facility reflects the significant terms
of the Credit Facility as amended to date.
In addition to the Supplemental Revolver, the Credit Facility provided for
aggregate borrowings of up to $1.7 billion pursuant to: (i) a revolving credit
facility in an aggregate principal amount of up to $400 million maturing March
30, 2005 ($52.5 million of which was used to complete the Coleman merger which
occurred on January 6, 2000); (ii) up to $800.0 million in term loans maturing
on March 30, 2005 (all of which has been borrowed, of which $35.0 million was
used to complete the Coleman merger which occurred on January 6, 2000 and of
which $76.2 million has been repaid) and (iii) a $500.0 million term loan
maturing September 30, 2006 (all of which has been borrowed and of which $7.9
million has been repaid). As of June 30, 2000, of the remaining $1.616 billion
Credit Facility, $1.497 billion was outstanding under the Credit Facility and
approximately $63 million was available for borrowing. The remaining $56.0
million of the $1.616 billion Credit Facility was committed for outstanding
letters of credit.
8
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
3. Debt - (Continued)
Pursuant to the 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 was 3.00% for LIBOR borrowings and
1.75% for base rate borrowings at June 30, 2000. The applicable interest margins
are subject to further downward adjustment upon the reduction of the aggregate
borrowings under the Credit Facility. Borrowings under the Credit Facility are
secured by a pledge of the stock of the Company's material subsidiaries and by a
security interest in substantially all of the assets of the Company and its
material domestic subsidiaries. In addition, borrowings under the Credit
Facility are guaranteed by a number of the Company's wholly-owned material
domestic subsidiaries and these subsidiary guarantees are secured by
substantially all of the material domestic subsidiaries' assets. 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
being entitled to the benefits of the foregoing described collateral and
guaranties, outstanding borrowings from time to time under the Supplemental
Revolver will be secured by substantially all of the assets and 100% of the
stock of the Company's Canadian subsidiary and will be guaranteed by the
Canadian subsidiary.
Under terms of the April 14, 2000 amendment to the Credit Facility, the Company
was obligated to pay the bank lenders an amendment fee for the April 14, 2000
amendment of 0.50% of the commitments under the Credit Facility as of April 14,
2000, totaling $8.5 million. This fee was paid on May 26, 2000, the closing date
of the sale of the Company's Eastpak business ("Eastpak"). (See Note 7.) On
November 30, 2000, the Company also must pay an amendment fee previously agreed
to for the April 15, 1999 amendment equal to 0.50% of the commitments under the
Credit Facility as of April 15, 1999, totaling $8.5 million. An additional
amendment fee relating to the April 15, 1999 amendment equal to $8.5 million
will be payable to the bank lenders if the aggregate loan and commitment
exposure under the Credit Facility is equal to or more than $1.2 billion on
November 30, 2000, with such fee being payable on June 30, 2001. The $17 million
amendment fee associated with the April 15, 1999 amendment was amortized to
interest expense using the straight-line method over the one-year term of the
amendment. The $8.5 million amendment fee associated with the April 14, 2000
amendment is being amortized to interest expense using the straight-line method
over the one year term of that amendment.
In addition to the above described EBITDA and other tests and ratios, the Credit
Facility contains covenants customary for credit facilities of a similar nature,
including limitations on the ability of the Company and its subsidiaries,
including Coleman, to, among other things, (i) declare dividends or repurchase
stock, (ii) prepay, redeem or repurchase debt, incur liens and engage in
sale-leaseback transactions, (iii) make loans and investments, (iv) incur
additional debt, (v) amend or otherwise alter material agreements or enter into
restrictive agreements, (vi) make capital expenditures, (vii) fail to maintain
its trade receivable securitization programs, (viii) engage in mergers,
acquisitions and asset sales, (ix) engage in certain transactions with
affiliates, (x) settle certain litigation, (xi) alter its cash management system
and (xii) alter the businesses they conduct. The 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. Furthermore, the
Credit Facility requires the Company to prepay loans under the Credit Facility
on December 31, 2000 to the extent that cash on hand in the Company's
concentration accounts plus the aggregate amount of unused revolving loan
commitments on that date exceed $185.0 million.
Unless waived by the bank lenders, the failure of the Company to satisfy any of
the financial ratios and tests contained in the Credit Facility or the
occurrence of any other event of default under the 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) declare the outstanding borrowings under the Credit Facility immediately due
and payable and exercise all or any of their other rights and remedies. Any such
acceleration or other exercise of rights and remedies would likely have a
material adverse effect on the Company.
Pursuant to the April 14, 2000 amendment, term loan payments originally
scheduled for September 30, 1999 and March 31, 2000 in the amount of $69.3
million on each date are to be made as follows: (i) $69.3 million upon sale of
Eastpak, which occurred May 26, 2000, (ii) $30.8 million on November 30, 2000
($9.8 million of which has already been paid with the proceeds of the sale of
Eastpak and certain other asset sales) and (iii) $38.5 million on April 10,
2001. In addition, the April 14, 2000 amendment provides that the payment dates
for the $69.3 million term loan payments originally scheduled for each of
September 30, 2000 and March 31, 2001 are deferred until April 10, 2001.
9
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
3. Debt - (Continued)
In March 1998, the Company completed an offering of Debentures due 2018 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. However, the Credit Facility prohibits the Company from
redeeming or repurchasing debentures for cash.
In July 2000, the Company announced an offer to acquire all of the currently
outstanding Debentures in exchange (the "Exchange Offer") for newly issued 11.0%
Senior Secured Subordinated Debentures due 2011 ("Secured Notes") and shares of
Sunbeam common stock. Pursuant to the terms of the Exchange Offer, the Company
is offering to issue $173.00 principal amount at maturity of Secured Notes
($149.06 principal amount at issuance) bearing interest at 11% per annum and 17
shares of Sunbeam common stock in exchange for each $1,000 principal amount at
maturity of Debentures. Interest on the Secured Notes will be payable
semi-annually. The Secured Notes will be partially cash pay until June 15, 2002,
and fully cash pay thereafter and will mature on June 15, 2011. The projected
principal amount at maturity of the Secured Notes to be issued in the Exchange
Offer reflects accretion of original issue discount in respect of 85% and 70% of
the aggregate interest payable by the Company under the Secured Notes during
years one and two following issuance, respectively, and assumes no prior
optional redemptions. The Secured Notes will be senior in right of payment to
all of the Company's subordinated debt, including any Debentures that remain
outstanding after the Exchange Offer. If 100% of the outstanding Debentures are
exchanged in the Exchange Offer, the Company will issue $348.4 million aggregate
principal amount at maturity of Secured Notes ($300.2 million principal amount
at issuance) and 34,238,000 shares of the Company's common stock. In addition,
depending upon the principal amount of Debentures that are exchanged, the
Company will recognize an extraordinary gain from the early extinguishment of
debt of up to approximately $400 million if 100% of the Debentures are
exchanged. The Exchange Offer, which currently expires at 5:00 pm (Eastern
Daylight Time) on September 12, 2000, is subject to a number of terms and
conditions. Furthermore, the Company has the right to terminate the Exchange
Offer, extend the expiration date for the Exchange Offer and/or amend any of the
terms or conditions of the Exchange Offer.
The Company believes its borrowing capacity under the Credit Facility, foreign
working capital lines, cash flow from the operations of the Company, existing
cash and cash equivalent balances, proceeds from its receivable securitization
programs, the sale of Eastpak (see Note 7), the proposed sale of its worldwide
professional clipper business ("Professional Clippers") (see Note 7), and sales
of other non-core assets will be sufficient to support planned working capital
needs, planned capital expenditures and scheduled debt service to April 2001.
Although management believes they will be successful in obtaining such
liquidity, there can be no assurance that the aforementioned sources of funds
will be available or if available will be sufficient to meet the Company's cash
requirements on a consolidated basis. If the Company is unable to satisfy such
cash requirements, the Company could be required to adopt one or more
alternatives, such as reducing or delaying capital expenditures, borrowing
additional funds, restructuring indebtedness, selling other assets or operations
or issuing additional shares of capital stock in the Company, and some of such
actions would require the consent of the lenders. In addition to the effect on
the Company's liquidity, lower than anticipated cash flows from operations, to
the extent caused by lower EBITDA, would also result in non-compliance with the
cumulative EBITDA covenant set forth in the August 10, 2000 amendment to the
Credit Facility. If the Company is unable to satisfy such cumulative EBITDA
covenant, the Company would be required to seek a waiver or amendment of such
covenant from its lenders. There can be no assurance that any of such actions
could be effected, or if so, on terms favorable to the Company, that such
actions would enable the Company to continue to satisfy its cash requirements
and/or that such actions would be permitted under the terms of the Credit
Facility. See "Cautionary Statements".
10
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
4. Accounts Receivable Securitization
The Company has entered into a receivable securitization program, which expires
March 2001, to sell without recourse, through a wholly-owned subsidiary, certain
trade accounts receivable. In March 2000, the Company entered into an amendment
to such receivables program to increase this program to $100 million from $70
million. In April 2000, the Company's Coleman and Powermate subsidiaries entered
into an additional revolving trade accounts receivable securitization program to
sell, without recourse, through a wholly-owned subsidiary of Coleman, up to a
maximum of $95 million in trade accounts receivables. These trade accounts
receivable programs contain cross-default provisions that provide the purchasers
of the receivables an option to cease purchasing receivables if the Company is
in default under the Credit Facility. In addition, these agreements contain
various other covenants customary for these types of programs, including
financial covenants. During the first half of 2000 and 1999, the Company
received approximately $456.3 million and $146.3 million, respectively, under
these arrangements. At June 30, 2000 and 1999, the Company had reduced accounts
receivable by approximately $117.0 million and $38.9 million, respectively, for
receivables sold under these programs. Costs of the programs, which primarily
consist of the purchasers' financing cost of issuing commercial paper backed by
the receivables, totaled $3.3 million and $1.0 million during the first half of
2000 and 1999, respectively, and have been classified as interest expense in the
accompanying Condensed Consolidated Statements of Operations. The Company,
through wholly-owned subsidiaries, retains collection and administrative
responsibilities for the purchased receivables.
5. Comprehensive Loss
The components of the Company's comprehensive loss are as follows (in
thousands):
Three Months Ended Six Months Ended
---------------------------- ---------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---------- ---------- ---------- ---------
Net loss......................................... $ (80,208) $ (46,946) $(139,608) $(107,685)
Foreign currency translation adjustment,
net of taxes (162) (1,251) (6,750) (10,678)
Change in minimum pension liability.............. -- -- -- --
---------- ---------- ---------- ---------
Comprehensive loss............................... $ (80,370) $ (48,197) $(146,358) $(118,363)
========== ========== ========== =========
As of June 30, 2000 and December 31, 1999, "Accumulated other comprehensive
loss," as reflected in the Condensed Consolidated Balance Sheets is comprised of
the following:
Currency Minimum
Translation Pension
Adjustments Liability Total
----------- --------- -----
Balance at June 30, 2000.................... $ (31,995) $(48,041) $ (80,036)
Balance at December 31, 1999................ (25,245) (48,041) (73,286)
11
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
6. Supplementary Financial Statement Data
Supplementary Balance Sheet data at the end of each period is as follows (in
thousands):
June 30, December 31,
2000 1999
----------- ------------
Receivables:
Trade........................ $ 326,967 $ 404,905
Sundry....................... 15,134 3,777
----------- ----------
342,101 408,682
Valuation allowance.......... (42,339) (44,344)
----------- ----------
$ 299,762 $ 364,338
=========== ==========
Inventories:
Finished goods............... $ 364,348 $ 330,179
Work in process.............. 64,944 30,691
Raw materials and supplies... 89,212 99,810
----------- ----------
$ 518,504 $ 460,680
=========== ==========
Supplementary Statements of Cash Flows data for each period is as follows (in
thousands):
Six Months Ended
-----------------------
June 30, June 30,
2000 1999
---------- ----------
Cash paid (received) during the period for:
Interest................................ $ 60,570 $ 62,084
========== ==========
Income taxes, net of refunds............ $ 1,796 $ (6,358)
========== ==========
7. Asset Impairment and Other Charges
On August 14, 2000, the Company announced that it intends to sell its
Professional Clippers business, which manufacturers and markets professional
barber, beauty and animal grooming products under the Oster(R) brand name.
In March 2000, the Company announced its intention to shut down operations at
its Glenwillow facility, which manufactures and distributes Mr. Coffee brand
coffee makers and coffee filters. These operations were fully consolidated into
other existing facilities and the Glenwillow facility was closed as of June 30,
2000. As a result of this decision, the Company recorded a charge of $5.1
million ($3.3 million and $1.8 million in the first and second quarters,
respectively) primarily related to the write-off of fixed assets and leasehold
improvements, severance costs and contract and lease termination fees. This
charge was recorded in SG&A ($0.6 million in each of the first and second
quarters of 2000) and Cost of Goods Sold ($2.7 million and $1.2 million in the
first and second quarters of 2000, respectively). The closing of this facility
resulted in the elimination of approximately 300 positions. The Company incurred
additional incremental costs during the second quarter of 2000 of approximately
$2.5 million (included in Cost of Goods Sold), primarily related to relocation
of certain manufacturing equipment and machinery to other Company manufacturing
locations and higher warehousing costs as a result of increased inventory levels
to avoid customer supply issues during the plant shut-down. Such amounts were
charged to operations as incurred. At June 30, 2000, the Company had $0.9
million of accruals relating to the closing of the Glenwillow facility. It is
anticipated that the remaining accrual, which is primarily for severance, will
be paid by December 31, 2000.
In January 2000, the Company entered into a long-term licensing agreement with
Helen of Troy Ltd. that will allow this company to market and distribute Sunbeam
branded retail human hair clippers and trimmers. In connection with this
agreement, Helen of Troy Ltd. purchased the inventory of these retail clippers
and trimmers in the first quarter of 2000 for $4.4 million. Helen of Troy Ltd.
also entered into a licensing agreement to market and distribute Oster(R)
branded retail hair clippers and trimmers through April 30, 2001. The Company
also agreed to continue to manufacture Oster branded hair clippers and trimmers
for Helen of Troy Ltd. until December 31, 2000. Helen of Troy Ltd., a marketing
and distribution company in the personal care industry, also holds licenses for
other Sunbeam branded personal care products, including hair dryers, curling
irons and personal spa products.
12
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
7. Asset Impairment and Other Charges - (Continued)
In the first quarter of 2000, in connection with the Company's on-going review
of its businesses, the decision was made to close the remaining Sunbeam retail
stores. As a result of this decision, a charge of $2.5 million, primarily
related to the write-off of leasehold improvements, severance and lease
termination fees was recorded in the first quarter of 2000. This charge was
recorded in SG&A ($2.2 million) and Cost of Goods Sold ($0.3 million). The
majority of these stores were closed during the second quarter of 2000 and
resulted in the elimination of approximately 60 positions. The Company does not
anticipate incurring future additional incremental costs. At June 30, 2000 the
Company had $0.5 million of accruals relating to the closing of Sunbeam's retail
stores. It is anticipated that the remaining accrual balance, which is primarily
for severance, will be paid by December 31, 2000.
During the fourth quarter of 1999, the Company announced its intent to sell
Eastpak. In March 2000, the Company entered into the Eastpak Sale Agreement with
VF Corporation, which provides for the sale of Eastpak. The sale of Eastpak
closed on May 26, 2000, resulting in proceeds of $89.9 million. The final
purchase price is subject to certain post-closing adjustments and retention of
certain liabilities. The post-closing settlement is expected to be finalized in
the third quarter and could impact the final accounting for the transaction.
Eastpak, a wholly-owned subsidiary of Coleman, was acquired by the Company in
March 1998. Net sales from Eastpak were approximately 5% of consolidated net
sales in both the first half of 2000 and 1999. Operating income in the first
half of 2000 and 1999 was not significant. In the fourth quarter of 1999, as a
result of the Company's change in business strategy for Eastpak, an evaluation
for impairment of Eastpak's long-lived assets was performed pursuant to SFAS No.
121. Based upon this analysis, the Company determined that the fair market value
of Eastpak's long-lived assets, including intangibles, was less than the
carrying value. Accordingly, during the fourth quarter of 1999, the Company
adjusted the carrying value of Eastpak's net assets to its estimated fair value
(less estimated costs of sale) resulting in a non-cash impairment charge of $52
million. This charge reduced the goodwill associated with Eastpak. The fair
market value of Eastpak was determined based upon the purchase price in the
Eastpak Sale Agreement (before adjustment). This charge is reflected in SG&A in
the fourth quarter of 1999 Consolidated Statements of Operations. Eastpak's
results of operations are included in the Company's Outdoor Leisure business
group through May 26, 2000.
In the fourth quarter of 1999, in connection with the completion of the
Company's strategic planning process for 2000, the decision was made to
discontinue a number of products, primarily scales, humidifiers and certain
camping stoves, lights and air mattresses, resulting in equipment and tooling
that will no longer be utilized by the Company and inventory levels in excess of
anticipated sales volume. In addition, as part of the business planning process,
which was completed in the fourth quarter of 1999, the Company identified
certain other assets that would no longer be required for ongoing operations.
Accordingly, a charge of $8.0 million was recorded in the fourth quarter of 1999
in Cost of Goods Sold to write certain of these fixed assets down to their
estimated fair market values. Substantially all of this charge related to
machinery, equipment and tooling at the Company's Hattiesburg, Mississippi
manufacturing facility. These assets were taken out of service at the time of
the write-down and were not depreciated further after the write-down. These
assets had either a nominal salvage value or no significant remaining carrying
value as of December 31, 1999 and are expected to be disposed by September 30,
2000. Depreciation expense associated with these assets approximated $0.9
million for the year ended 1999. During the fourth quarter of 1999 the Company
also decided to discontinue certain grill and grill accessory stock keeping
units ("SKUs"). As a result of this decision, the Company reduced the economic
useful life associated with the machinery, equipment and tooling used for these
SKUs. Approximately $3 million of additional depreciation expense was recorded
over the fourth quarter of 1999 from the time the decision was made to exit the
product line until production ceased at December 31, 1999 and resulted in the
affected assets being fully depreciated. Depreciation expense associated with
these assets was $4.6 million for the year ended 1999. These assets were
disposed of during the first half of 2000, and the Company did not generate
significant proceeds as a result of the disposals. Additionally, as a result of
the Company's decision to discontinue certain camping stoves, lights, air
mattresses, scales and humidifiers, a $3.0 million charge was recorded during
the fourth quarter of 1999 to properly state this inventory at the
lower-of-cost-or-market. The Company also recognized approximately $0.8 million
related to certain other product lines to properly state the inventory at the
lower-of-cost-or-market. These charges for excess inventories were based upon
management's best estimate of net realizable value.
At June 30, 2000 and December 31, 1999, the Company had $0.6 and $0.9 million of
restructuring accruals, respectively relating to its 1996 restructuring plan.
The $0.6 million accrued at June 30, 2000 was comprised of $0.4 million relating
to lease payments and termination fees and $0.2 million relating to discontinued
operations. It is anticipated that the remaining restructuring accrual of $0.6
million will be paid through 2006.
13
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
8. Segment, Customer and Geographic Data
The following tables include selected financial information with respect to
Sunbeam's four operating segments. Corporate expenses include, among other
items, expenses for services which are provided in varying levels to the three
operating groups and for Year 2000 efforts.
Outdoor
Household Leisure International Corporate Total
----------- ----------- ------------- ----------- -----------
Six Months Ended June 30, 2000
Net sales to unaffiliated customers.......... $ 302,558 $ 525,083 $ 318,330 $ 2,725 $ 1,148,696
Intersegment net sales....................... 37,732 85,384 1,229 -- 124,345
Segment earnings (loss)...................... 6,346 35,431 34,792 (44,061) 32,508
Segment depreciation expense................. 12,180 18,093 2,749 4,509 37,531
Six Months Ended June 30, 1999
Net sales to unaffiliated customers.......... $ 315,338 $ 556,824 $ 305,289 $ 7,422 $ 1,184,873
Intersegment net sales....................... 34,923 84,853 5,867 -- 125,643
Segment earnings (loss)...................... 5,715 51,345 33,359 (45,548) 44,871
Segment depreciation expense................. 13,164 17,933 2,742 3,050 36,889
Segment Assets
June 30, 2000................................ $ 641,755 $ 1,710,726 $ 403,321 $ 322,667 $ 3,078,469
December 31, 1999............................ 707,436 1,707,559 385,200 332,154 3,132,349
Set forth below is a reconciliation of selected segment information to Sunbeam's
consolidated totals:
Six Months Ended
June 30, 2000 June 30, 1999
------------- -------------
Net sales:
Net sales for reportable segments............................................... $ 1,273,041 $ 1,310,516
Elimination of intersegment net sales........................................... (124,345) (125,643)
------------ ------------
Consolidated net sales....................................................... $ 1,148,696 $ 1,184,873
============ ============
Segment earnings (loss):
Total earnings for reportable segments.......................................... $ 32,508 $ 44,871
Unallocated amounts:
Interest expense............................................................. (105,861) (88,298)
Other expense, net........................................................... (4,700) (600)
Amortization of intangible assets............................................ (26,720) (27,119)
Year 2000 related expenses................................................... -- (13,505)
Glenwillow closing (Note 7)................................................. (7,572) --
Retail stores closings (Note 7).............................................. (2,544) --
Restatement-related litigation expense (Note 9).............................. (21,916) (3,636)
Purchase accounting adjustment............................................... (4,280) --
Insurance recovery........................................................... 10,000 --
Other charges................................................................ (328) (1,933)
------------ ------------
(163,921) (135,091)
------------ ------------
Consolidated loss before income taxes,
minority interest and extraordinary charge................................ $ (131,413) $ (90,220)
============ ============
14
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
9. Commitments and Contingencies
Litigation
On April 23, 1998, two class action lawsuits were filed on behalf of purchasers
of the Company's common stock in the U.S. District Court for the Southern
District of Florida against the Company and some of its present and former
directors and former officers alleging violations of the federal securities laws
as discussed below. After that date, approximately fifteen similar class actions
were filed in the same court. One of the lawsuits also named as defendant Arthur
Andersen LLP ("Arthur Andersen"), the Company's independent accountants for the
period covered by the lawsuit.
On June 16, 1998, the court entered an order consolidating all these suits and
all similar class actions subsequently filed (collectively, the "Consolidated
Federal Actions"). On January 6, 1999, plaintiffs filed a consolidated amended
class action complaint against the Company, some of its present and former
directors and former officers, and Arthur Andersen. The consolidated amended
class action complaint alleges, among other things, that defendants made
material misrepresentations and omissions regarding the Company's business
operations and future prospects in an effort to artificially inflate the price
of the Company's common stock and call options, and that, in violation of
section 20(a) of the Exchange Act, the individual defendants exercised influence
and control over the Company, causing the Company to make material
misrepresentations and omissions. The consolidated amended complaint seeks an
unspecified award of money damages. In February 1999, plaintiffs moved for an
order certifying a class consisting of all persons and entities who purchased
the Company's common stock or who purchased call options or sold put options
with respect to the Company's common stock during the period April 23, 1997
through June 30, 1998, excluding the defendants, their affiliates, and employees
of the Company. Defendants have opposed that motion. In March 1999, all
defendants who had been served with the consolidated amended class action
complaint moved to dismiss it and the court granted the motion only as to
certain non-employee current and former directors and a former officer, and
denied it as to the other defendants. Arthur Andersen has filed counterclaims
against the Company, and a third-party complaint against a former director of
the Company and against unnamed third party corporations. On July 31, 2000, the
court dismissed the former director from Arthur Anderson's counterclaims. On
June 30, 2000, the plaintiffs filed a second amended complaint against most of
the same defendants (although two of the Company's former outside directors were
not included as defendants in the second amended complaint) alleging the same
principal claims as the prior amended complaint described above.
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 in
February 1998 to three of its now former officers and directors. In June 1998,
all defendants filed a motion to dismiss the complaint for failure to make a
pre-suit demand on the Company's board of directors. In February 1999,
plaintiffs filed an amended derivative complaint nominally on behalf of the
Company against some of its present and former directors and former officers and
Arthur Andersen. This amended complaint alleges, among other things, that
Messrs. Dunlap and Kersh, the Company's former Chairman and Chief Executive
Officer and former Chief Financial Officer, respectively, caused the Company to
employ fraudulent accounting procedures in order to enable them to secure new
employment contracts, and seeks a declaration that the individual defendants
have violated fiduciary duties, an injunction against the payment of
compensation to Messrs. Dunlap and Kersh or the imposition of a constructive
trust on such payments, and unspecified money damages. The defendants have each
moved to dismiss the amended complaint in whole or in part.
During 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 stockholders of the
Company against the Company, MacAndrews & Forbes and some of the Company's
present and former directors. These complaints allege, among other things, that
the defendants breached their fiduciary duties when the Company entered into a
settlement agreement with the MacAndrews & Forbes subsidiary that sold the
Company a controlling interest in Coleman. In such settlement agreement, the
MacAndrews & Forbes subsidiary released the Company from threatened claims
arising out of the Company's acquisition of its interest in Coleman, and
MacAndrews & Forbes agreed to provide management support to the Company. Under
the settlement agreement, the MacAndrews & Forbes subsidiary was granted a
warrant expiring August 24, 2003 to purchase up to an additional 23 million
shares of the Company's common stock at an exercise price of $7 per share,
subject to anti-dilution provisions. The derivative actions filed in the
Delaware Court of Chancery were consolidated. The plaintiffs voluntarily
dismissed this action. The action filed in the U.S. District Court for the
Southern District of Florida has been dismissed. In April 2000, a complaint was
filed in the U.S. District Court for the Southern
15
9. Commitments and Contingencies - (Continued)
District of Florida against the Company, certain current and former directors,
Messrs. Dunlap and Kersh and MacAndrews & Forbes alleging, among other things,
that certain of the defendants breached their fiduciary duty when the Company
entered into a settlement agreement with MacAndrews & Forbes, and certain of the
defendants breached their fiduciary duty and wasted corporate assets by, among
other things, issuing materially false and misleading statements regarding the
Company's financial condition. The plaintiff in this action seeks, among other
things, recission of the warrants issued to MacAndrews & Forbes and an
injunction preventing the issuance of warrants and damages. The defendants,
other than Messrs. Dunlap and Kersh, have filed a motion to dismiss this
complaint.
In September 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 U.S. National Bank of Galveston,
Kempner Capital Management, Inc. and Legacy Trust Company engaged in
transactions in the Company's common stock on their own behalf and on behalf of
their respective clients. The Company is the only named defendant in this
action. The complaint requests recovery of compensatory damages, punitive
damages and expenses in an unspecified amount. This action was subsequently
transferred to the U.S. District Court for the Southern District of Florida and
consolidated with the Consolidated Federal Actions. On July 7, 2000, the
plaintiffs in this case filed a motion for partial summary judgment on their
Texas state law claims, and the Company has filed a motion to strike such
summary judgment motion as being barred by the Order consolidating such case
with the Consolidated Federal Actions. If the Company's motion is denied, the
Company intends to oppose the plaintiffs' summary judgment motion.
In October 1998, a class action lawsuit was filed in the U.S. District Court for
the Southern District of Florida on behalf of certain purchasers of the
Debentures against the Company and certain of the Company's former officers and
directors. In April 1999, a class action lawsuit was filed in the U.S. District
Court for the Southern District of Florida on behalf of persons who purchased
Debentures during the period of March 20, 1998 through June 30, 1998, inclusive,
but after the initial offering of such Debentures against the Company, Arthur
Andersen, the Company's former auditor, and certain former officers and
directors. The court consolidated the two cases and the plaintiffs have filed a
consolidated class action on behalf of persons who purchased Debentures in the
initial offering and in the market during the period March 20, 1998 through June
30, 1998. The amended complaint alleges, among other things, violations of the
federal and state securities laws and common law fraud. The plaintiffs seek,
among other things, either unspecified monetary damages or rescission of their
purchase of the Debentures. This action is coordinated with the Consolidated
Federal Actions.
The Company has been named as a defendant in an action filed in the District
Court of Tarrant County, Texas, 48th Judicial District, on November 20, 1998.
The plaintiffs in this action are purchasers of the debentures. The plaintiffs
allege that the Company violated the Texas Securities Act and the Texas Business
& Commercial Code and committed state common law fraud by materially misstating
the financial position of the Company in connection with the offering and sale
of the Debentures. The complaint seeks rescission, as well as compensatory and
exemplary damages in an unspecified amount. The Company specially appeared to
assert an objection to the Texas court's exercise of personal jurisdiction over
the Company, and a hearing on this objection took place in April 1999. Following
the hearing, the court entered an order granting the Company's special
appearance and dismissing the case without prejudice. The plaintiffs appealed,
which appeal was denied. The plaintiffs have appealed to the Texas Supreme
Court.
On February 9, 1999, Messrs. Dunlap and Kersh filed with the American
Arbitration Association demands for arbitration of claims under their respective
employment agreements with the Company. Messrs. Dunlap and Kersh are requesting
a finding by the arbitrator that the Company terminated their employment without
cause and that they should be awarded certain benefits based upon their
respective employment agreements. The Company has answered the arbitration
demands of Messrs. Dunlap and Kersh and has filed counterclaims seeking, among
other things, the return of all consideration paid, or to be paid, under the
February 1998 Employment Agreements between the Company and Messrs. Dunlap and
Kersh. An answer was filed by Messrs. Dunlap and Kersh generally denying the
Company's counterclaim. Discovery is pending and the arbitration hearings are
scheduled to commence in the middle of September 2000.
16
9. Commitments and Contingencies - (Continued)
On September 13, 1999, an action naming the Company and Arthur Andersen as
defendants was filed in the Circuit Court for Montgomery County, Alabama. The
plaintiffs in this action are purchasers of the Company's common stock during
the period March 19, 1998 through May 6, 1998. The plaintiffs allege, among
other things, that the defendants violated the Alabama Securities Laws. The
plaintiffs seek compensatory and punitive damages in an unspecified amount.
Arthur Andersen has filed a cross claim against the Company for contribution and
indemnity. The Company has filed a motion to dismiss. In May 2000, the
plaintiffs in this action filed an amended complaint, which added allegations of
violations of the federal securities laws. This action was transferred to and
consolidated with the Consolidated Federal Actions.
The Company intends to vigorously defend each of the foregoing lawsuits, but
cannot predict the outcome and is not currently able to evaluate the likelihood
of the Company's success in each case or the range of potential loss, if any.
However, if the Company were to lose one or more of these lawsuits, judgments
would likely have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
In July 1998, the American Alliance Insurance Company ("American Alliance")
filed suit against the Company in the U.S. District Court for the Southern
District of New York requesting a declaratory judgment of the court that the
directors' and officers' liability insurance policy for excess coverage issued
by American Alliance was invalid and/or had been properly canceled by American
Alliance. As a result of a motion made by the Company, this case has been
transferred to the U.S. District Court for the Southern District of Florida for
coordination and consolidation of pre-trial proceedings with the various actions
pending in that court. In October 1998, an action was filed by Federal Insurance
Company ("Federal Insurance") in the U.S. District Court for the Middle District
of Florida requesting the same relief as that requested by American Alliance in
the previously filed action as to additional coverage levels under the Company's
directors' and officers' liability insurance policy. This action has been
transferred to the U.S. District Court for the Southern District of Florida.
Discovery in the cases brought by American Alliance and Federal Insurance is
underway and coordinated with the discovery in the Consolidated Federal Actions.
In December 1998, an action was filed by Executive Risk Indemnity, Inc. in the
Circuit Court of the Seventeenth Judicial Circuit in and for Broward County,
Florida requesting the same relief as that requested by American Alliance and
Federal Insurance in their previously filed actions as to additional coverage
levels under the Company's directors' and officers' liability insurance policy.
In April 1999, the Company filed an action in the U.S. District Court for the
Southern District of Florida against National Union Fire Insurance Company of
Pittsburgh, PA ("National Union"), Gulf Insurance Company ("Gulf") and St. Paul
Mercury Insurance Company ("St. Paul") requesting, among other things, a
declaratory judgment that National Union is not entitled to rescind its
directors' and officers' liability insurance policies to the Company and a
declaratory judgment that the Company is entitled to coverage from these
insurance companies for the various lawsuits described herein under directors'
and officers' liability insurance policies issued by each of the defendants. The
Company has settled its litigation with National Union. In response to the
Company's complaint, defendants St. Paul and Gulf have answered and asserted
counterclaims seeking rescission and declaratory relief that no coverage is
available to the Company. The Company intends to pursue recovery from all of its
insurers if damages are awarded against the Company or its indemnified officers
and/or directors under any of the foregoing actions and to recover attorneys'
fees covered under those policies. The Company's failure to obtain such
insurance recoveries following an adverse judgment in any of the actions
described above could have a material adverse effect on the Company's financial
position, results of operations or cash flows.
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. In July 1998, the SEC issued a Formal Order of
Private Investigation, designating SEC officers to take testimony and pursuant
to which a subpoena was served on the Company requiring the production of
certain documents. In November 1998, another SEC subpoena requiring the
production of additional documents was received by the Company. The Company has
provided numerous documents to the SEC staff and continues to cooperate with the
SEC staff. The Company has, however, declined to provide the SEC with material
that the Company believes is subject to the attorney-client privilege and the
work product immunity. The SEC has not commenced any civil or administrative
proceedings as a result of its investigation, and the Company cannot predict at
this time whether the SEC will seek to impose any monetary or other penalties
against the Company. Under these circumstances, the Company cannot estimate the
duration of the investigation or its outcome.
17
9. Commitments and Contingencies - (Continued)
The Company and its subsidiaries are also involved in various other lawsuits
arising from time to time which the Company considers to be ordinary routine
litigation incidental to its business. In the opinion of the Company, the
resolution of these routine matters, and of certain matters relating to prior
operations, individually or in the aggregate, will not have a material adverse
effect upon the financial position, results of operations or cash flows of the
Company.
Amounts accrued for litigation matters represent the anticipated costs (damages
and/or settlement amounts) in connection with pending litigation and claims and
related anticipated legal fees for defending such actions. The costs are accrued
when it is both probable that an asset has been impaired or a liability has been
incurred and the amount can be reasonably estimated. The accruals are based upon
the Company's assessment, after consultation with counsel, of probable loss
based on the facts and circumstances of each case, the legal issues involved,
the nature of the claim made, the nature of the damages sought and any relevant
information about the plaintiffs and other significant factors which vary by
case. When it is not possible to estimate a specific expected cost to be
incurred, the Company evaluates the range of probable loss and records the
minimum end of the range. As of June 30, 2000, the Company had established
accruals for litigation matters of $40.7 million (representing $10.1 million and
$30.6 million for estimated damages or settlement amounts and legal fees,
respectively), and $24.3 million as of December 31, 1999 (representing $9.6
million and $14.7 million for estimated damages or settlement amounts and legal
fees, respectively). It is anticipated that the $40.7 million accrual at June
30, 2000 will be paid as follows: $22.3 million in 2000, and $18.4 million in
2001. The Company believes, based on information available on June 30, 2000,
that anticipated probable costs of litigation matters existing as of June 30,
2000 have been adequately reserved to the extent determinable.
The Company recorded an additional $21.9 million and $3.7 million in the second
quarter of 2000 and 1999, respectively, for defense costs for
restatement-related litigation. The $21.9 million charge reflects the Company's
current estimate of additional defense costs through June 2001. The Company's
estimate of the additional defense costs was based primarily upon actual defense
costs experienced in the second quarter of 2000 and a projection of expected
future costs through the various trial dates of such litigations based on such
costs to date (which are considered to be representative of the expected future
costs).
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 competitive
position, results of operations, financial condition or cash flows.
In addition to ongoing environmental compliance at its operations, the Company
also is actively engaged in environmental remediation activities, many of which
relate to divested operations. As of June 30, 2000, 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 thirteen sites, seven of which are among the
Environmental Sites referred to above, and six of which have not been designated
as Superfund sites under federal or state law. The remediation efforts in which
the
18
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
9. Commitments and Contingencies - (Continued)
Company is involved include facility investigations, including soil and
groundwater investigations, corrective measure studies, including feasibility
studies, groundwater monitoring, extraction and treatment and 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 probable
that a liability has been incurred, the amount of the liability can be
reasonably estimated and the Company's responsibility for the liability 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 June 30, 2000 and
December 31, 1999, the Company's environmental reserves were $19.6 million
(representing $17.6 million for the estimated costs of facility investigations,
corrective measure studies, or known remedial measures, and $2.0 million for
estimated legal costs) and $19.9 million (representing $18.2 million for the
estimated costs of facility investigations, corrective measure studies, or known
remedial measures, and $1.7 million for estimated legal costs), respectively. It
is anticipated that the $19.6 million accrual at June 30, 2000 will be paid as
follows: $2.8 million in 2000, $3.3 million in 2001, $2.6 million in 2002, $0.7
million in 2003, $0.7 million in 2004 and $9.5 million thereafter. The Company
has accrued its best estimate of investigation and remediation costs based upon
facts known to the Company at such dates and because of the inherent
difficulties in estimating the ultimate amount of environmental costs, which are
further described below, these estimates may materially change in the future as
a result of the uncertainties described below. Estimated costs, which are based
upon experience with similar sites and technical evaluations, are judgmental in
nature and are recorded at undiscounted amounts without considering the impact
of inflation and are adjusted periodically to reflect changes in applicable laws
or regulations, changes in available technologies and receipt by the Company of
new information. It is difficult to estimate the ultimate level of future
environmental expenditures due to a number of uncertainties surrounding
environmental liabilities. These uncertainties include the applicability of laws
and regulations, changes in environmental remediation requirements, the
enactment of additional regulations, uncertainties surrounding remediation
procedures including the development of new technology, the identification of
new sites for which the Company could be a PRP, information relating to the
exact nature and extent of the contamination at each site and the extent of
required cleanup efforts, the uncertainties with respect to the ultimate outcome
of issues which may be actively contested and the varying costs of alternative
remediation strategies. The Company continues to pursue the recovery of some
environmental remediation costs from certain of its liability insurance
carriers; however, such potential recoveries have not been offset against
potential liabilities and have not been considered in determining the Company's
environmental reserves.
Due to uncertainty over remedial measures to be adopted at some sites, the
possibility of changes in environmental laws and regulations and the fact that
joint and several liability with the right of contribution is possible at
federal and state Superfund sites, the Company's ultimate future liability with
respect to sites at which remediation has not been completed may vary from the
amounts reserved as of June 30, 2000.
The Company believes, based on information available as of June 30, 2000 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.
Product Liability Matters
As a consumer goods manufacturer and distributor, the Company and/or its
subsidiaries face 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.
19
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
9. Commitments and Contingencies - (Continued)
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 which is an occurrence based
program based on the Company's current and historical claims experience and the
availability and cost of insurance. The Company's program for 2000 is comprised
of a self-insurance retention of $3.5 million per occurrence, and is limited to
$28.0 million in the aggregate.
Cumulative amounts estimated to be payable by the Company with respect to
pending and potential claims for all years in which the Company is liable under
its self-insurance retention have been accrued as liabilities. Such accrued
liabilities are necessarily based on estimates (which include actuarial
determinations made by independent actuarial consultants as to liability
exposure, taking into account prior experience, numbers of claims and other
relevant factors); thus, the Company's ultimate liability may exceed or be less
than the amounts accrued. The methods of making such estimates and establishing
the resulting liability are reviewed on a regular basis 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.
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the accompanying
condensed consolidated financial statements and the related footnotes included
in this quarterly report on Form 10-Q, as well as the consolidated financial
statements, related footnotes and management's discussion and analysis of
financial condition and results of operations in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
Exchange Offer
In July 2000, the Company announced an offer to acquire all of the currently
outstanding zero coupon debentures due 2018 (the "Debentures") in exchange (the
"Exchange Offer") for newly issued 11.0% Senior Secured Subordinated Debentures
due 2011 ("Secured Notes") and shares of Sunbeam common stock. Pursuant to the
terms of the Exchange Offer, the Company is offering to issue $173.00 principal
amount at maturity of Secured Notes ($149.06 principal amount at issuance)
bearing interest at 11% per annum and 17 shares of Sunbeam common stock in
exchange for each $1,000 principal amount at maturity of Debentures. Interest on
the Secured Notes will be payable semi-annually. The Secured Notes will be
partially cash pay until June 15, 2002, and fully cash pay thereafter and will
mature on June 15, 2011. The projected principal amount at maturity of the
Secured Notes to be issued in the Exchange Offer reflects accretion of original
issue discount in respect of 85% and 70% of the aggregate interest payable by
the Company under the Secured Notes during years one and two following issuance,
respectively, and assumes no prior optional redemptions. The Secured Notes will
be senior in right of payment to all of the Company's subordinated debt,
including any Debentures that remain outstanding after the Exchange Offer. If
100% of the outstanding Debentures are exchanged in the Exchange Offer, the
Company will issue $348.4 million aggregate principal amount at maturity of
Secured Notes ($300.2 million principal amount at issuance) and 34,238,000
shares of the Company's common stock. In addition, depending upon the principal
amount of Debentures that are exchanged, the Company will recognize an
extraordinary gain from the early extinguishment of debt of up to approximately
$400 million if 100% of the Debentures are exchanged. The Exchange Offer, which
currently expires at 5:00 pm (Eastern Daylight Time) on September 12, 2000, is
subject to a number of terms and conditions. The Company has the right to
terminate the Exchange Offer, extend the expiration date for the Exchange Offer
or amend any of the terms or conditions of the Exchange Offer.
Acquisitions
On March 30, 1998, pursuant to a merger agreement dated as of February 27, 1998,
the Company, through a wholly-owned subsidiary, acquired approximately 81% of
the total number of then outstanding shares of common stock of The Coleman
Company, Inc. ("Coleman") from an affiliate of MacAndrews & Forbes ("M&F"), in
exchange for 14,099,749 shares of the Company's common stock and approximately
$160 million in cash. In addition, the Company assumed approximately $1,016
million in debt of Coleman and its parent corporations. Immediately thereafter,
as a result of the exercise of Coleman employee stock options, the Company's
indirect beneficial ownership of Coleman decreased to approximately 79%.
In January 2000, pursuant to a merger agreement dated as of February 27, 1998,
the Company acquired the remaining publicly held Coleman shares in a merger
transaction in which the remaining Coleman stockholders (other than stockholders
who are seeking appraisal rights under Delaware law) received 0.5677 of a share
of the Company's common stock and $6.44 in cash for each share of Coleman common
stock they owned, aggregating approximately 6.7 million shares of the Company's
common stock and $87 million in cash. The approximate $87 million aggregate cash
payment included $4.8 million related to the cash out of remaining Coleman
employee options, in accordance with the merger agreement, which occurred in
December 1999. In addition, pursuant to a court approved settlement of claims by
Coleman public stockholders the Company issued to such Coleman public
stockholders (other than such stockholders who are seeking appraisal rights
under Delaware law), warrants expiring August 24, 2003 to purchase 4.98 million
shares of the Company's common stock at $7.00 per share less approximately
498,000 warrants issued to the plaintiffs' attorneys for their fees and
expenses. These warrants, which generally have the same terms as the warrants
previously issued to M&F's subsidiary (see Note 9 to the Condensed Consolidated
Financial Statements) were issued when the consideration was paid for the
Coleman merger. The total consideration given for the purchase of the remaining
publicly held Coleman shares was valued at $146 million.
The acquisition of Coleman was accounted for using the purchase method of
accounting, and accordingly, the financial position and results of operations of
Coleman are included in the accompanying Condensed Consolidated Statements of
Operations from the respective dates of acquisition. Prior to the completion of
the merger on January 6, 2000, the approximate 20% of Coleman's results of
operations and net equity allocable to the public shareholders was reported as
minority interest.
21
Divestitures
Clippers Businesses
On August 14, 2000, the Company announced that it intends to sell its worldwide
professional clipper business which manufacturers and markets professional
barber, beauty and animal grooming products under the Oster(R) brand name
("Professional Clippers").
In January 2000, the Company entered into a long-term licensing agreement with
Helen of Troy Ltd. that will allow this company to market and distribute Sunbeam
branded retail human hair clippers and trimmers. In connection with this
agreement, Helen of Troy Ltd. purchased the inventory of these retail clippers
and trimmers in the first quarter of 2000 for $4.4 million. Helen of Troy Ltd.
also entered into a licensing agreement to market and distribute Oster(R)
branded hair clippers and trimmers through April 30, 2001. The Company also
agreed to continue to manufacture Oster branded hair clippers and trimmers until
December 31, 2000. Helen of Troy Ltd., a marketing and distribution company in
the personal care industry, also holds licenses for other Sunbeam branded
personal care products, including hair dryers, curling irons and personal spa
products.
Eastpak Business
During the fourth quarter of 1999, the Company announced its intent to sell
Eastpak. In March 2000, the Company entered into the Eastpak Sale Agreement with
VF Corporation, which provides for the sale of Eastpak. The sale of Eastpak
closed on May 26, 2000, resulting in proceeds of $89.9 million. The final
purchase price is subject to certain post-closing adjustments and retention of
certain liabilities. The post-closing settlement is expected to be finalized in
the third quarter and could impact the final accounting for the transaction.
Eastpak, a wholly-owned subsidiary of Coleman, was acquired by the Company in
March 1998. Net sales from Eastpak were approximately 5% of consolidated net
sales in both the first half of 2000 and 1999. Operating income in the first
half of 2000 and 1999 was not significant. In the fourth quarter of 1999, as a
result of the Company's change in business strategy for Eastpak, an evaluation
for impairment of Eastpak's long-lived assets was performed pursuant to SFAS No.
121. Based upon this analysis, the Company determined that the fair market value
of Eastpak's long-lived assets, including intangibles, was less than the
carrying value. Accordingly, during the fourth quarter of 1999, the Company
adjusted the carrying value of Eastpak's net assets to its estimated fair value
(less estimated costs of sale) resulting in a non-cash impairment charge of $52
million. This charge reduced the goodwill associated with Eastpak. The fair
market value of Eastpak was determined based upon the purchase price in the
Eastpak Sale Agreement (before adjustment). This charge is reflected in SG&A in
the fourth quarter of 1999 Consolidated Statements of Operations. Eastpak's
results are included in the Company's Outdoor Leisure business group through May
26, 2000.
22
Significant and Unusual Charges
Consolidated operating results for 2000 and 1999 were impacted by a number of
significant and unusual charges. Operating income (loss), adjusted for these
items, is summarized in the following table and succeeding narrative.
As Reported
----------------------------------------------
Three Months Ended Six Months Ended
--------------------- ----------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- -------- --------- ---------
(Amounts in millions)
Net sales - As reported...................... $ 609.6 $ 660.9 $1,148.7 $1,184.9
Divested businesses...................... (21.4) (34.0) (44.5) (57.4)
Adjusted net sales..................... 588.2 626.9 1,104.2 1,127.5
Gross margin - As reported................... 152.0 173.7 285.3 300.2
Divested businesses...................... (6.8) (12.2) (15.0) (21.2)
Significant and unusual adjustments:
Glenwillow plant closure................. 3.7 - 6.4 -
Retail store closings.................... - - 0.3 -
Purchase accounting...................... - - 4.3 -
-------- -------- --------- ---------
Adjusted gross margin.................. 148.9 161.5 281.3 279.0
Adjusted gross margin percentage....... 25.3% 25.8% 25.5% 24.7%
Selling, general and administrative
expense ("SG&A") - As reported............ 170.4 160.3 306.2 301.5
Divested businesses...................... (5.7) (9.4) (13.7) (17.9)
Significant and unusal adjustments:
Glenwillow plant closure................. (0.6) - (1.2) -
Retail store closings.................... - - (2.2) -
Restatement related litigation........... (21.9) (3.7) (21.9) (3.7)
Environmental reserve adjustments........ (0.3) (0.5) (0.3) (0.5)
Insurance recovery....................... - - 10.0 -
Year 2000 and systems initiatives
expenses.............................. - (5.4) - (13.5)
Contract termination expense and other... - (0.3) - (1.4)
-------- -------- --------- ---------
Adjusted SG&A expense.................. 141.9 141.0 276.9 264.5
-------- -------- --------- ---------
Adjusted operating income.................... $ 7.0 $ 20.5 $ 4.4 $ 14.5
======== ======== ========= =========
The results from operations for the three and six month periods ending June 30,
2000 and 1999 are adjusted to exclude the results of the Retail Clipper business
and the Eastpak business, which were divested in the first and second quarters
of 2000, respectively. Presentation of results for the periods presented
excluding the divested businesses is provided to enhance comparability between
the periods presented.
Glenwillow plant closure
In March 2000, the Company announced its intention to shut down operations at
its Glenwillow facility, which manufactures and distributes Mr. Coffee brand
coffee makers and coffee filters. These operations were fully consolidated into
other existing facilities and the Glenwillow facility was closed as of June 30,
2000. As a result of this decision, the Company recorded a charge of $5.1
million ($3.3 million and $1.8 million in the first and second quarters,
respectively) primarily related to the write-off of fixed assets and leasehold
improvements, severance costs and contract and lease termination fees. This
charge was recorded in SG&A ($0.6 million in each of the first and second
quarters of 2000) and Cost of Goods Sold ($2.7 million and $1.2 million in the
first and second quarters of 2000, respectively). The closing of this facility
resulted in the elimination of approximately 300 positions. The Company incurred
additional incremental costs during the second quarter of 2000 of approximately
$2.5 million (included in Cost of Goods Sold), primarily related to relocation
of certain manufacturing equipment and machinery to other Company manufacturing
locations and higher warehousing costs as a result of increased inventory levels
to avoid customer supply issues during the plant shut-down. Such amounts were
charged to operations as incurred. At June 30, 2000, the Company had $0.9
million of accruals relating to the closing of the Glenwillow facility. It is
anticipated that the remaining accrual, which is primarily for severance, will
be paid by December 31, 2000.
23
Retail store closings
In the first quarter of 2000, in connection with the Company's on-going review
of its businesses, the decision was made to close the remaining Sunbeam retail
stores. As a result of this decision, a charge of $2.5 million, primarily
related to the write-off of leasehold improvements, severance and lease
termination fees was recorded in the first quarter of 2000. This charge was
recorded in SG&A ($2.2 million) and Cost of Goods Sold ($0.3 million). The
majority of these stores were closed during the second quarter of 2000 and
resulted in the elimination of approximately 60 positions. The Company does not
anticipate incurring future additional incremental costs. At June 30, 2000 the
Company had $0.5 million of accruals relating to the closing of Sunbeam's retail
stores. It is anticipated that the remaining accrual balance, which is primarily
for severance, will be paid by December 31, 2000.
Purchase accounting
The Company recorded the Coleman acquisition using the purchase method of
accounting. In accordance with this accounting method, inventory pertaining to
the acquisition of the remaining approximately 20% minority interest in Coleman
was recorded at fair value. The fair value of the inventory exceeded the book
value reflected on the balance sheet of the acquired company as of the
acquisition date. The excess of the fair value of inventory over its
pre-acquisition book value was recorded in cost of sales as the inventory was
sold. The non-recurring impact of this purchase accounting adjustment was $4.3
million in the first quarter of 2000.
Restatement-related litigation
By letter dated June 17, 1998, the staff of the Division of Enforcement of the
Securities and Exchange Commission ("SEC") advised the Company that it was
conducting an informal inquiry into the Company's accounting policies. The
Company is also 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 warrant to M&F, the sale
of the Debentures and the employment agreements of Messrs. Dunlap and Kersh. The
foregoing investigation and litigation are collectively referred to as
"restatement-related litigation". The Company recorded an additional $21.9
million and $3.7 million in the second quarter of 2000 and 1999, respectively,
for defense costs for restatement-related litigation. The $21.9 million charge
reflects the Company's current estimate of additional defense costs through June
2001. The Company's estimate of the additional defense costs was based primarily
upon actual defense costs experienced in the second quarter of 2000 and a
projection of expected future costs through the various trial dates of such
litigations based on such costs to date (which are considered to be
representative of the expected future costs).
Insurance recovery
In the first quarter of 2000, the Company settled one of its claims related to
its directors' and officers' liability insurance policies pursuant to which,
among other things, the insurer reimbursed the Company for $10 million of
defense costs, which was the limit of the policy at issue. This reimbursement is
included in SG&A in the first quarter of 2000.
Environmental Reserve Adjustments
During the second quarter of 2000 and 1999, the Company recorded additional
environmental reserves of $0.3 million and $0.5 million, respectively, primarily
related to divested operations.
Year 2000 and systems initiatives expenses
See "Year 2000 Disclosure" within this Item II - "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Contract termination and other
In the first quarter of 1999, the Company recorded a charge of $0.8 million
relating to the renegotiations of a contract with one of the Company's trademark
licensees. In addition, approximately $0.6 million was recorded ($0.3 million in
both the first and second quarters of 1999) as a result of management's
strategic decision to close a warehouse in Mexico.
24
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Consolidated net sales for the three months ended June 30, 2000 and 1999 were
$609.6 million and $660.9 million respectively, a decrease of $51.3 million or
approximately 8%. Excluding the impact of divested businesses, net sales for the
second quarter of 2000 decreased $38.7 million or 6.2% as compared to the same
period in the prior year. This variance was primarily due to a decrease in
revenue from products with unusually high 1999 sales which the Company believes
was driven by year 2000 concerns ("Year 2000 Products") in the Outdoor Leisure
business. The Company believes that sales of its products were also adversely
affected by a reduction in retailer replenishment during May and June 2000 due
to weaker retail sales during such time period, and the Company is unable to
predict whether such weaker retail sales will continue. Net sales for the
Outdoor Leisure group decreased $42.5 million to $295.6 million in the second
quarter of 2000. Excluding the domestic net sales of Eastpak for both the 2000
and 1999 periods, net sales decreased $36.3 million or 11.1% as compared to the
second quarter of 1999. This decrease is largely attributable to the reduction
in sales of Year 2000 Products, specifically Powermate(R) generators and to a
lesser extent, Coleman cooking and lighting products. The Company believes that
the decline in revenue from Powermate is a result of a combination of factors
that have impacted the portable generator category generally during 2000,
including weather conditions and the effect of Year 2000 related sales in the
second half of 1999. Excluding Year 2000 Products sales from both periods
presented, revenue from Coleman products increased over the prior year, largely
driven by sales of inflatable furniture and coolers. Subject to weather
conditions in the second half, which could positively impact sales of Powermate
and Coleman products, sales of Year 2000 Products by Powermate and Coleman are
expected to continue to lag behind 1999 for the balance of the year as a result
of the positive impact that Year 2000 related concerns had on 1999 sales levels.
Outdoor cooking product net sales increased approximately $8 million in the 2000
period as compared to the second quarter of 1999 largely due to the introduction
of Coleman(R) branded gas grills and grill accessories. Household net sales
decreased $13.5 million, or 8.9%, to $137.7 million in the second quarter of
2000 as compared to the same period in the prior year. Excluding the net sales
of the Retail Clipper business for both the 2000 and 1999 periods, net sales
decreased $11.5 million or approximately 8% as compared to the second quarter of
1999. The decrease in revenue in the second quarter of 2000 as compared to the
same period in the prior year is primarily attributable to decreases in sales of
health products and retail scales. Partially offsetting this decrease is
continued improvement in sales of appliances, primarily driven by increased
sales of blenders and beverage brewers. International net sales increased $8.5
million to $174.2 million in the second quarter of 2000. Excluding the
international net sales of Eastpak for both the 2000 and 1999 periods, net sales
increased $12.9 million or 8.5% as compared to the second quarter of 1999. Net
sales in Latin America increased as a result of higher levels of sales of
appliances. Increased net sales in Japan and Asia Pacific driven by sales of
outdoor recreation products, partially offset by decreases in net sales in
Canada as a result of lower levels of sales of Powermate generators, account for
the remainder of the International sales increase.
Gross margin for the second quarter in 2000 was $152.0 million or $21.7 million
lower than the comparable period in 1999. Excluding the effects of divestitures
and significant and unusual items, as summarized above under "Significant and
unusual charges", adjusted gross margin was $148.9 million in the second quarter
of 2000 or $12.6 million lower than the comparable period in 1999. As a
percentage of adjusted net sales, adjusted gross margin was approximately 25.3%
in the second quarter of 2000 which is consistent with second quarter 1999
adjusted gross margin. The $12.6 million decrease in gross margin, as adjusted
for unusual charges, is largely reflective of the lower sales experienced during
the second quarter of 2000 as compared to the same period in the prior year.
Excluding the gross margins on the Year 2000 Products, which are higher than the
overall average gross margin on the products the Company offers, adjusted gross
margin in the second quarter of 2000 improved over the same period in the prior
year.
SG&A expense in the second quarter of 2000 was $170.4 million, representing a
6.3% increase over the same period in the prior year. Excluding the effects of
divestitures and significant and unusual items, as summarized above under
"Significant and Unusual Charges", SG&A expense for 2000 was consistent with the
same period in 1999. As a percentage of adjusted net sales, SG&A as adjusted for
the effects of significant and unusual items, increased to 24.1% in the second
quarter of 2000 from 22.5% in the same period in the prior year. This increase
is largely attributable to increased spending related to research and
development ("R&D") costs and advertising and marketing, which increased $3.1
million and $7.9 million, respectively, in the second quarter of 2000 as
compared to the same period in the prior year and lower net sales. The higher
levels of R&D costs relate to new product development, including "Smart
Products", which the Company plans to offer through its Thalia subsidiary in
2001. The increases in advertising and marketing relate to new product
introductions, including Coleman branded grills and grill accessories and
outdoor recreation products. The variance in advertising and marketing expenses
on a year-over-year basis are also impacted by the timing of 1999 programs for
the Outdoor Leisure group, which largely occurred in the second half of the
year. This increase in SG&A is partially offset by certain 1999 expenses which
did not reoccur in 2000 and by the reduction of volume driven selling and
administrative costs as a result of the lower levels of sales in the second
quarter of 2000 as compared to the same period in the prior year. These 1999
expenses include higher bad debt expense (approximately $4 million) and higher
costs associated with Sunbeam retail stores.
25
Consolidated operating results for the second quarters of 2000 and 1999, were a
loss of $18.3 million in 2000 and a profit of $13.5 million in 1999. Operating
results for the second quarters of 2000 and 1999, as adjusted, were a profit of
$7.0 million and a profit of $20.5 million. The variance in operating results
for the second quarter of 2000 as compared to the same period in the prior year
resulted from the factors discussed above.
Interest expense in the second quarter of 2000 was $53.4 million as compared to
$45.5 million in the same period in the prior year. Approximately half of this
increase is attributable to higher levels of borrowings during the second
quarter of 2000. The increased level of borrowings was primarily attributable to
borrowings to fund the completion of the Coleman merger in January 2000 and for
working capital purposes. The balance of the increase was driven by the impact
of higher interest rates during the 2000 period and the amortization of the loan
amendment fee (approximately $1.6 million) the Company is obligated to pay under
the terms of the Credit Facility. See Note 3 to the Condensed Consolidated
Financial Statements for a discussion of the loan amendment fee.
Other expense, net of $2.1 million for the second quarter of 2000 included
approximately $2 million representing foreign exchange losses principally at the
Company's operations in Mexico and Europe. Other expense, net of $0.7 million
for the second quarter of 1999 includes approximately $0.5 million related to
unused facility fees.
The minority interest reported for the second quarter of 1999 primarily relates
to the minority interest held in Coleman by minority shareholders.
Tax expense recorded in the second quarter of 2000 totaled $6.3 million, of
which $1.3 million related to Eastpak and the remainder related primarily to
taxes on foreign income. Approximately $6 million of the $7.3 million income tax
expense recorded in the second quarter of 1999 related to a U.S. tax liability
generated by Coleman as a separate U.S. tax filing entity. In July 1999, the
Company acquired a sufficient ownership interest in Coleman to permit it and
Coleman to file consolidated U.S. tax returns with Coleman for all future
periods. The remaining tax expense recorded in the second quarter of 1999
related to taxes on foreign income. No net tax benefit was recorded on the
Company's losses in either year as it is management's assessment that the
Company cannot demonstrate that it is more likely than not that deferred tax
assets resulting from these losses would be realized through future taxable
income.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Net sales for the six months ended June 30, 2000 and 1999 were $1,148.7 million
and $1,184.9 million respectively, representing a decrease of $36.2 million or
approximately 3%. Excluding the impact of divested businesses, adjusted net
sales for the first half of 2000 decreased $23.3 million or 2.1% as compared to
the same period in the prior year. This variance was primarily due to decreases
in revenue from Year 2000 Products in the Outdoor Leisure business. The Company
believes that sales of its products were also adversely affected by a reduction
in retailer replenishment during May and June 2000 due to weaker retail sales
during such time period, and the Company is unable to predict whether such
weaker retail sales will continue. These decreases in revenues were partially
offset by increases in sales of outdoor cooking products and revenue increases
in the International business segment. Net sales for the Outdoor Leisure group
decreased $31.7 million to $525.1 million in the first half of 2000. Excluding
the domestic net sales of Eastpak for both the 2000 and 1999 periods, net sales
decreased $25.7 million or 4.7% as compared to the first half of 1999. This
decrease is largely attributable to the reduction in sales of Year 2000
Products, as discussed above. Excluding the sales of Year 2000 Products, revenue
from Coleman products increased over the prior year, largely driven by sales of
inflatable furniture and coolers. Outdoor cooking product net sales increased
approximately $25 million in the 2000 period as compared to the first half of
1999 largely due to the introduction of Coleman(R) branded gas grills and grill
accessories. Household net sales decreased $12.8 million, or 4%, to $302.6
million in the first half of 2000 as compared to the same period in the prior
year. Excluding the net sales of the Retail Clipper business for both the 2000
and 1999 periods, net sales decreased $10.6 million or 3.5% as compared to the
first half of 1999. The decrease in revenue in the second quarter of 2000 as
compared to the same period in the prior year is primarily attributable to
decreases in sales of health products, retail scales and First Alert products.
Partially offsetting these decreases is strength in sales of appliances,
primarily driven by increased sales of blenders and Mr. Coffee products.
International net sales increased $13.0 million to $318.3 million in the first
half of 2000. Excluding the international net sales of Eastpak for both the 2000
and 1999 periods, net sales increased $17.7 million or 6.4% as compared to the
first half of 1999. The variance in International net sales in the 2000 period
is primarily attributable to increases in net sales in Latin America resulting
from higher levels of sales of appliances and increased net sales in Japan
driven by sales of outdoor recreation products. These increases are partially
offset by decreases in net sales in Canada as a result of lower levels of sales
of Powermate generators.
Gross margin for the first half of 2000 was $285.3 million or $14.9 million
lower than the comparable period in 1999. Excluding the effects of divested
businesses and significant and unusual items, as summarized above under
"Significant and unusual charges", adjusted gross margin was $281.3 million in
the first half of 2000 or $2.3 million higher than the
26
comparable period in 1999. As a percentage of adjusted net sales, adjusted gross
margin was 25.5% in the first half of 2000, consistent with adjusted gross
margin for the same period in 1999. Excluding the gross margins on the Year 2000
Products which are higher than the overall average gross margin on the products
the Company offers, adjusted gross margin as a percent of sales in the first
half of 2000 improved over the same period in the prior year.
SG&A expense for the first six months of 2000 was $306.2 million, an increase of
$4.7 million or 1.6% over the same period in the prior year. Excluding the
effects of divested businesses and significant and unusual items, as summarized
above under "Significant and Unusual Charges", SG&A expense for 2000 was
approximately $12.4 million, or 4.7% higher than the same period in 1999. As a
percentage of adjusted net sales, SG&A as adjusted for the effects of
significant and unusual items, increased to 25.1% in the first half of 2000 from
23.5% in the same period in the prior year. This increase is largely
attributable to the previously discussed increased spending related to research
and development ("R&D") costs and advertising and marketing, which increased
$6.0 million and $12.3 million, respectively, in the second half of 2000 as
compared to the same period in the prior year. This increase in SG&A is
partially offset by certain 1999 expenses which did not reoccur in 2000 and by
the reduction of volume driven selling and administrative costs as a result of
the lower levels of sales in the second half of 2000 as compared to the same
period in the prior year. These 1999 expenses include higher bad debt expense
(approximately $4 million) and higher costs associated with Sunbeam retail
stores.
Operating results for the first halves of 2000 and 1999, were losses of $20.9
million and $1.3 million in 2000 and 1999, respectively. Operating results, as
adjusted, were income of $4.4 million and $14.5 million in the first half of
2000 and 1999, respectively. The variance in operating results for the first
half of 2000 as compared to the same period in the prior year resulted from the
factors discussed above.
Interest expense increased to $105.9 million in the first half of 2000 from
$88.3 million in the first half of 1999. Approximately half of this increase is
due to higher levels of borrowings during the first half of 2000. The increased
level of borrowings was primarily due to borrowings to fund the completion of
the Coleman merger in January 2000 and for working capital purposes. The balance
of the increase was driven by the impact of higher interest rates during the
2000 period and the amortization of the loan amendment fee ($5.8 million) the
Company is obligated to pay under the terms of the Credit Facility. These
increases are partially offset by the decrease in interest expense related to
liquidated damages payable to debenture holders (approximately $1 million)
included in 1999. See Note 3 to the Condensed Consolidated Financial Statements
for a discussion of the loan amendment fee.
Other expense, net of $4.7 million for the first half of 2000 included
approximately $4 million representing foreign exchange losses principally at the
Company's operations in Mexico and Europe. Other expense, net for this period
also includes approximately $0.5 million losses on sales of miscellaneous fixed
assets. Other expense, net of $0.6 million for the first half of 1999 includes
approximately $1.0 million relating to an unused facility fee partially offset
by miscellaneous gains on sales of fixed assets.
The minority interest reported in 1999 primarily relates to the minority
interest held in Coleman by minority shareholders.
Tax expense recorded in the first half of 2000 totaled $7.9 million, of which
$2.1 million related to Eastpak and the remainder related primarily to taxes on
foreign income. Approximately $6 million of the $9.0 million income tax expense
recorded in 1999 related to a U.S. tax liability generated by Coleman as a
separate U.S. tax filing entity. In July 1999, the Company acquired a sufficient
ownership interest in Coleman to permit it to file consolidated U.S. tax returns
with Coleman for all future periods. The remaining tax expense recorded in 1999
related to taxes on foreign income. Tax expense recorded in 1998 was nearly all
related to foreign taxes. No net tax benefit was recorded on the Company's
losses in either year as it is management's assessment that the Company cannot
demonstrate that it is more likely than not that deferred tax assets resulting
from these losses would be realized through future taxable income.
Foreign Operations
After adjusting for the divestiture of Retail Clippers and Eastpak,
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. 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.
On a limited basis, the Company selectively uses derivatives, primarily foreign
exchange option and forward contracts, to manage foreign exchange exposures that
arise in the normal course of business. No derivative contracts are entered into
for trading or speculative purposes. The use of derivatives has not had a
material impact on the Company's financial results.
27
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 and weakest in the first quarter. 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 1998 acquisitions of Coleman, First Alert, Inc. ("First
Alert") and Signature Brands USA, Inc. ("Signature Brands") and to refinance
substantially all of the indebtedness of the Company and the three acquired
companies, the Company consummated an offering in March 1998 of Debentures due
2018 having a yield to maturity of 5% (approximately $2,014 million principle
amount at maturity), which resulted in approximately $730 million of net
proceeds to the Company, and borrowed about $1,325 million under its 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 Credit Facility prohibits the Company from
redeeming or repurchasing debentures for cash. The Company is not required to
make any further liquidated damages payments to the Debenture holders.
In July 2000, the Company announced the Exchange Offer to acquire all of the
currently outstanding Debentures in exchange for the Secured Notes and shares of
Sunbeam common stock. See additional discussion at "Exchange Offer" within Item
2.
Concurrent with the 1998 acquisitions, the Company replaced its $250 million
syndicated unsecured five-year revolving credit facility with the Credit
Facility. The Credit Facility provided for aggregate borrowings of up to $1.7
billion and in addition to other customary covenants, required the Company to
maintain specified consolidated leverage, interest coverage and fixed charge
coverage ratios as of the end of each fiscal quarter occurring after March 31,
1998 and on or prior to the latest stated maturity date for any of the
borrowings under the Credit Facility.
As a result of, among other things, its operating losses incurred during the
first half of 1998, the Company did not achieve the specified financial ratios
for June 30, 1998 and it appeared unlikely that the Company would achieve the
specified financial ratios for September 30, 1998. Consequently, the Company and
its lenders entered into an agreement dated as of June 30, 1998 that waived
through December 31, 1998 all defaults arising from the failure of the Company
to satisfy the specified financial ratios for June 30, 1998 and September 30,
1998. Pursuant to an agreement with the Company dated as of October 19, 1998,
the Company's lenders extended all of the waivers 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. In
April 1999, such waivers were extended through April 10, 2000 and on April 10,
2000 such waivers were extended through April 14, 2000.
On April 14, 2000, the Company and its lenders entered into an amendment to the
Credit Facility that, among other things, waived until April 10, 2001 all
defaults arising from any failure by the Company to satisfy certain financial
ratios for any fiscal quarter end occurring through March 31, 2001. As part of
the April 14, 2000 amendment, the Company agreed to a minimum cumulative
earnings before interest, taxes, depreciation and amortization ("EBITDA")
covenant that is based on consolidated EBITDA and is tested at the end of each
month occurring on or prior to March 31, 2001. In anticipation of the expiration
of the waiver on April 10, 2001, the Company intends to negotiate with its
lenders regarding a further amendment to the Credit Facility, further waiver of
the covenants and other terms, or refinancing of the 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 a particular action
or alternative available to the Company. 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, 2001. 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
28
would permit the bank lenders to accelerate the maturity of all outstanding
borrowings under the Credit Facility, which would likely have a material adverse
effect on the Company. Accordingly, debt related to the Credit Facility and all
debt containing cross-default provisions is classified as current in the June
30, 2000 Condensed Consolidated Balance Sheet.
The Company and its lenders entered into an amendment to the Credit Facility on
August 10, 2000 in order to (i) adjust downwards the cumulative EBITDA test for
July 31, 2000 and each remaining month-end through March 31, 2001 and (ii)
provide the Company with a supplemental $50 million reducing revolving credit
facility (the "Supplemental Revolver") having a final maturity date of December
31, 2000. The minimum cumulative EBITDA as set forth in the August 10, 2000
amendment is $69.0 million for the period from January 1, 2000 through July 31,
2000 and generally increases on a monthly basis until it reaches $180.0 million
for the period from August 1, 2000 through March 31, 2001. The availability
under the Supplemental Revolver reduces by $10 million on the last day of each
month during the year 2000 commencing with August 31, 2000. Outstanding loans
under the Supplemental Revolver cannot exceed at any time the lesser of the
availability under the Supplemental Revolver or the borrowing base calculated by
reference to the domestic inventory of the Company's Powermate subsidiary and
outdoor cooking strategic business unit. The Company paid a facility fee to its
lenders of $62,500 for the Supplemental Revolver.
The following description of the Credit Facility reflects the significant terms
of the Credit Facility as amended to date.
In addition to the Supplemental Revolver, the Credit Facility provided for
aggregate borrowings of up to $1.7 billion pursuant to: (i) a revolving credit
facility in an aggregate principal amount of up to $400 million maturing March
30, 2005 ($52.5 million of which was used to complete the Coleman merger which
occurred on January 6, 2000); (ii) up to $800.0 million in term loans maturing
on March 30, 2005 (all of which has been borrowed, and of which $35.0 million
was used to complete the Coleman merger which occurred on January 6, 2000 and of
which $76.2 million has been repaid) and (iii) a $500.0 million term loan
maturing September 30, 2006 (all of which has been borrowed and of which $7.9
million has been repaid). As of June 30, 2000, of the remaining then $1.616
billion Credit Facility, $1.497 billion was outstanding under the Credit
Facility and approximately $63 million was available for borrowing. The
remaining $56.0 million of the $1.616 billion Credit Facility was committed for
outstanding letters of credit.
Pursuant to the 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 was 3.00% for LIBOR borrowings and
1.75% for base rate borrowings at June 30, 2000. The applicable interest margins
are subject to further downward adjustment upon the reduction of the aggregate
borrowings under the Credit Facility. Borrowings under the Credit Facility are
secured by a pledge of the stock of the Company's material subsidiaries and by a
security interest in substantially all of the assets of the Company and its
material domestic subsidiaries. In addition, borrowings under the Credit
Facility are guaranteed by a number of the Company's wholly-owned material
domestic subsidiaries and these subsidiary guarantees are secured by
substantially all of the material domestic subsidiaries' assets. 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
being entitled to the benefits of the foregoing described collateral and
guaranties, outstanding borrowings from time to time under the Supplemental
Revolver will be secured by substantially all of the assets and 100% of the
stock of the Company's Canadian subsidiary and will be guaranteed by the
Canadian subsidiary.
Under terms of the April 14, 2000 amendment to the Credit Facility, the Company
was obligated to pay the bank lenders an amendment fee for the April 14, 2000
amendment of 0.50% of the commitments under the Credit Facility as of April 14,
2000, totaling $8.5 million. This fee was paid on May 26, 2000, the closing date
of the sale of Eastpak. (See Note 7.) On November 30, 2000, the Company also
must pay an amendment fee previously agreed to for the April 15, 1999 amendment
equal to 0.50% of the commitments under the Credit Facility as of April 15,
1999, totaling $8.5 million. An additional amendment fee relating to the April
15, 1999 amendment equal to $8.5 million will be payable to the bank lenders if
the aggregate loan and commitment exposure under the Credit Facility is equal to
or more than $1.2 billion on November 30, 2000, with such fee being payable on
June 30, 2001. The $17 million amendment fee associated with the April 15, 1999
amendment was amortized to interest expense using the straight-line method over
the one-year term of the amendment. The $8.5 million amendment fee associated
with the April 14, 2000 amendment is being amortized to interest expense using
the straight-line method over the one year term of that amendment.
In addition to the above described EBITDA and other tests and ratios, the Credit
Facility contains covenants customary for credit facilities of a similar nature,
including limitations on the ability of the Company and its subsidiaries,
including Coleman, to, among other things, (i) declare dividends or repurchase
stock, (ii) prepay, redeem or repurchase debt, incur liens and engage in
sale-leaseback transactions, (iii) make loans and investments, (iv) incur
additional debt, (v) amend or otherwise alter material agreements or enter into
restrictive agreements, (vi) make capital expenditures, (vii) fail to maintain
29
its trade receivable securitization programs, (viii) engage in mergers,
acquisitions and asset sales, (ix) engage in certain transactions with
affiliates, (x) settle certain litigation, (xi) alter its cash management system
and (xii) alter the businesses they conduct. The 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. Furthermore, the
Credit Facility requires the Company to prepay loans under the Credit Facility
on December 31, 2000 to the extent that the cash on hand in the Company's
concentration accounts plus the aggregate amount of unused revolving loan
commitments on that date exceed $185.0 million.
Unless waived by the bank lenders, the failure of the Company to satisfy any of
the financial ratios and tests contained in the Credit Facility or the
occurrence of any other event of default under the 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) declare the outstanding borrowings under the Credit Facility immediately due
and payable and exercise all or any of their other rights and remedies. Any such
acceleration or other exercise of rights and remedies would likely have a
material adverse effect on the Company.
Pursuant to the April 14, 2000 amendment, term loan payments originally
scheduled for September 30, 1999 and March 31, 2000 in the amount of $69.3
million on each date are to be made as follows: (i) $69.3 million on the sale of
Eastpak, which occurred on May 26, 2000, (ii) $30.8 million on November 30, 2000
($9.8 million of which has already been paid with the proceeds of the sale of
Eastpak and certain other asset sales) and (iii) $38.5 million on April 10,
2001. In addition, the April 14, 2000 amendment provides that the payment dates
for the $69.3 million term loan payments originally scheduled for each of
September 30, 2000 and March 31, 2001 are deferred until April 10, 2001. (See
Note 3 to the Condensed Consolidated Financial Statements.)
Cash Flows
As of June 30, 2000, the Company had cash and cash equivalents of $25.9 million
and total debt of $2.4 billion. Cash used in operating activities during the
first half of 2000 was $62.7 million, compared to the $34.5 million used in the
first half of 1999. This change is primarily attributable to a decrease in
operating results after giving effect to non-cash items, partially offset by
decreased working capital needs during the 2000 period. During the first half of
2000, inventory levels increased approximately $89 million due to the seasonal
inventory build in the Company's Outdoor Leisure (Coleman products and
Powermate) and Household groups (primarily bedding products) and as a result of
the decrease in sales of Year 2000 Products and reduced sales resulting from
weakening retail conditions during the 2000 period as compared to the same
period in 1999. In the first six months of 1999, inventory levels decreased by
$9 million primarily due to the fact that 1998 year-end inventory levels were
high and the Company was actively working to reduce inventory to the appropriate
level. Accounts receivable decreased approximately $54 million from December 31,
1999 largely as a result of the impact of the increase in the existing accounts
receivable securitization program from $70 million to $100 million, effective
March 31, 2000 and the new program entered into in April 2000 for the sale of
Coleman's and Powermate's trade account receivables. (See Note 4 to the
Condensed Consolidated Financial Statements.) The decrease in accounts
receivable was also impacted by the lower level of sales in the 2000 period as
compared to the same period in 1999. Accounts receivable increased by
approximately $88 million in the same period in the prior year largely due to
the seasonal selling period of the Outdoor Leisure group. Accounts payable
increased during the first half of 2000 by approximately $12 million as a result
of the aforementioned inventory build. During the first six months of 1999,
accounts payable increased $41 million. The increase in payables in the 1999
period resulted from payables balances being at a low level at year-end 1998 due
to a decrease in purchasing as a result of the excess levels of inventory in
December 1998.
Cash used in investing activities in the first half of 2000 reflects $83.4
million for the purchase of the remaining approximate 20% interest in Coleman
and proceeds of $89.9 million relating to the sale of Eastpak. Capital spending
for the first half of 2000 totaled $29.9 million, primarily for equipment and
tooling for new products and the expansion of the Company's Neosho, Missouri
warehouse. Investing activities for the 2000 period also includes approximately
$8 million from the sale of assets, including the sale of the former Coleman
headquarters building (approximately $5 million). Capital spending in the
comparable 1999 period was $34.9 million and was primarily for information
systems, including expenditures relating to Year 2000 readiness and equipment
and tooling for new products. The Company anticipates 2000 capital spending to
be less than 5% of net sales.
Cash provided by financing activities totaled $64.0 million in the first half of
2000 and reflected net borrowings under the Company's Credit Facility.
Approximately $83 million of the borrowings under the Credit Facility resulted
from the Company's purchase of the remaining 20% interest in Coleman. These
borrowings were partially offset by repayments of approximately $79 million made
with proceeds of the sale of Eastpak. The balance of the increased borrowings
under the Credit Facility was used to fund the Company's working capital
requirements. Cash provided by financing activities
30
totaled $58.0 million in the first half of 1999 and reflects net borrowings
under the Company's Credit Facility. See Note 3 to the Condensed Consolidated
Financial Statements.
At June 30, 2000, standby and commercial letters of credit aggregated $56.0
million and were predominately for insurance policies, workers' compensation,
and international trade activities. In addition, as of June 30, 2000, surety
bonds with a contract value of $78.3 million were outstanding largely for the
Company's pension plans and as a result of environmental issues and litigation
judgments that are currently under appeal.
The Company believes its borrowing capacity under the Credit Facility including
its Supplemental Revolver, foreign working capital lines, cash flow from the
operations of the Company, existing cash and cash equivalent balances, proceeds
from its receivable securitization programs, the sale of Eastpak, the proposed
sale of the Professional Clippers business and other non-core assets will be
sufficient to support planned working capital needs, planned capital
expenditures and scheduled debt service to April 2001. Although management
believes they will be successful in accomplishing the above, there can be no
assurance that the aforementioned sources of funds will be sufficient to meet
the Company's cash requirements on a consolidated basis. If the Company is
unable to satisfy such cash requirements, the Company could be required to adopt
one or more alternatives, such as reducing or delaying capital expenditures,
borrowing additional funds, restructuring indebtedness, selling other assets or
operations or issuing additional shares of capital stock in the Company, and
some of such actions would require the consent of the lenders. In addition to
the effect on the Company's liquidity, lower than anticipated cash flows from
operations, to the extent caused by lower EBITDA, would also result in
non-compliance with the cumulative EBITDA covenant set forth in the August 10,
2000 amendment to the Credit Facility. If the Company is unable to satisfy such
cumulative EBITDA covenant, the Company would be required to seek a waiver or
amendment of such covenant from its lenders. There can be no assurance that any
of such actions could be effected, or if so, on terms favorable to the Company,
that such actions would enable the Company to continue to satisfy its cash
requirements and/or that such actions would be permitted under the terms of the
Credit Facility. See "Cautionary Statements".
By letter dated June 17, 1998, the staff of the Division of Enforcement of the
SEC advised the Company that it was conducting an informal inquiry into the
Company 's accounting policies and procedures and requested that the Company
produce documents. On July 2, 1998, the SEC issued a Formal Order of Private
Investigation, designating officers to take testimony and pursuant to which a
subpoena was served on 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 immunity. The SEC
has not commenced any civil or administrative proceedings as a result of its
investigations and the Company cannot predict at this time whether the SEC will
seek to impose any monetary or other penalties against the Company. Under these
circumstances, the Company cannot estimate the duration of such investigation or
its outcome.
The Company is involved in significant litigation, including class and
derivative actions, relating to events which led to the restatement of its
consolidated financial statements, the issuance of the warrant to a subsidiary
of M&F, 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, the resulting judgments would
likely have a material adverse effect on the Company's financial position,
results of operations or cash flows. Additionally, the Company's insurance
carriers, on the one hand, and the Company on the other, have filed various
suits against each other requesting a declaratory judgment on the validity of
the directors' and officers' liability insurance policies or have advised the
Company of their intent to deny coverage under such policies. The Company is
defending these claims and pursuing recovery from its insurers. See Part 2-
Other Information. 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 or 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 for defending such actions. The costs are accrued
when it is both probable that an asset has been impaired or a liability has been
incurred and the amount can be reasonably estimated. The accruals are based upon
the Company's assessment, after consultation with counsel, of probable loss
based on the facts and circumstances of each case, the legal issues involved,
the nature of the claim made, the nature of the damages sought and any relevant
information about the plaintiff, and other significant factors which vary by
case. When it is not possible to estimate a specific expected amount of cost to
be incurred, the Company evaluates the range of probable loss and records the
minimum end of the range. As of June 30, 2000 the Company had established
accruals for litigation matters of $40.7 million (representing $10.1 million and
$30.6 million for estimated damages or settlement amounts and
31
legal fees, respectively) and $24.3 million as of December 31, 1999
(representing $9.6 million and $14.7 million for estimated damages or
settlements and legal fees, respectively.) It is anticipated that the $40.7
million accrual will be paid as follows: $22.3 million in 2000, and $18.4
million in 2001. The Company believes, based on information available to the
Company on June 30, 2000, that anticipated probable costs of litigation matters
existing as of June 30, 2000 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 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.
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 certain matters relating to prior operations, individually or in
the aggregate, will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
See Note 9 to the Condensed Consolidated Financial Statements.
New Accounting Standards
In July 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Hedging Activities (an amendment of FASB Statement No. 133)
which amends SFAS No. 133, to provide additional guidance and to exclude certain
provisions, which were determined by the FASB to be a burden on corporations.
SFAS No. 133 requires the recognition of all derivatives in the Company's
Consolidated Balance Sheets as either assets or liabilities measured at fair
value and is effective for fiscal years beginning after June 15, 2000. The
Company will adopt SFAS No. 133 for the 2001 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.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements." In June 2000, the SEC staff
amended SAB 101 to provide registrants with additional time to implement SAB
101. The Company will be required to adopt SAB 101 by the fourth quarter of
fiscal 2000. The Company has not completed its determination of the impact of
the adoption of SAB 101 on its consolidated financial position or results of
operations.
Year 2000 Disclosure
As a result of the Company's readiness planning, systems corrections and testing
as well as the contingency plans that were developed, the Company was adequately
prepared for the impact of Year 2000 on its operations and experienced no major
Year 2000 issues. The Company initiated a global contingency planning effort to
support the Company's critical business operations. Critical sites were
identified worldwide, and local procedures were developed to maintain business
continuity if a Year 2000 issue should have arisen. For example, this included
having identified disaster-recovery facilities, alternative suppliers,
stockpiling critical materials or having a documented manual procedure.
Additionally, the Company established a Year 2000 Command Center to deal with
unexpected Year 2000 issues and possible disruptions as they occurred. The Year
2000 executive team, with worldwide coordination and oversight by the corporate
Project Management Office oversaw these efforts.
The Costs to Address Sunbeam's Year 2000 Issues
Through June 30, 2000, including costs incurred in 1999 and 1998, the Company
had expended approximately $67 million to address Year 2000 issues of which
approximately 50% was recorded as capital expenditures and the remainder as SG&A
expense. The Company does not expect to incur material additional costs related
to Year 2000.
The $67 million expenditure includes the following categories:
o uniform international business and accounting system $47 million
o localized business system software upgrades and remediation $9 million
o Year 2000 readiness assessment and tracking $6 million
32
o upgrade of personal computers and related software $5 million
The amount incurred for Year 2000 issues during 1999 of approximately $48
million represented over 50% of the Company's total 1999 budget for information
systems and related support, including Year 2000 costs. A majority of these
costs were incremental expenditures that will not recur in the Year 2000 or
thereafter. Fees and expenses related to third party consultants, who were
involved in the program management office as well as the modification and
replacement of software, represented approximately 75% of the total cost. The
balance of the total cost related primarily to software license fees and new
hardware, but excluded the costs associated with Company employees. The Company
financed these expenditures through operating cash flows or borrowings, as
applicable. A significant portion of these expenditures enhanced the Company's
operating systems in addition to resolving Year 2000 issues.
Because Year 2000 readiness was critical to the business, the Company redeployed
some resources from non-critical system enhancements to address Year 2000
issues. In addition, due to the importance of information technology systems to
the Company's business, management deferred non-critical systems enhancements as
much as possible. These redeployments and deferrals did not have a material
impact on the Company's financial condition, results of operations or cash
flows.
Cautionary Statements
Certain statements in this Quarterly Report on Form 10-Q may constitute
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995, as the same may be amended from time to time (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 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 continue to have access to its revolving
credit facility and its supplemental revolver including the Company's
ability to (i) comply with the terms of its Credit Facility, including
the cumulative EBITDA and other financial covenants, or (ii) enter into
an amendment to its credit agreement containing financial covenants
which it and its bank lenders find mutually acceptable or obtain
waivers of compliance from such covenants;
o the prices at which the Company is able to sell receivables under its
trade accounts receivables securitization programs and/or the Company's
ability to continue to sell receivables under either of such programs;
o the Company's ability to continue to have access to foreign working
capital lines or the amount of credit available to the Company under
such lines;
o the Company's ability to refinance its indebtedness, including the
Credit Facility and/or the Debentures, including consummating the
Exchange Offer at acceptable rates with acceptable other terms;
o the Company's ability to consummate the sale of its Professional
Clipper business and certain other non-core assets and if consummated,
the terms of such sales;
o weather conditions, including the absence of severe storms such as
hurricanes, which can have an unfavorable impact upon sales of
Powermate generators and certain of the Company's other products;
o economic uncertainty in Japan, Korea and other Asian countries, as well
as in Mexico, Venezuela, and other Latin
33
American countries;
o the possibility of a slowdown in economic growth or retail sales of the
United States and/or other countries or a recession in the United
States or other countries resulting in a decrease in consumer demands
for the Company's products;
o the Company's ability to fully integrate the Coleman, and Signature
Brands businesses and expenses associated with such integration;
o the Company's sourcing of products from international vendors,
including the ability to select reliable vendors and obtain on-time
delivery and quality products from such vendors;
o the Company's ability to maintain and increase market share for its
products at acceptable 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 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 product quality, including excess warranty costs;
o product liability expenses consisting of insurance, litigation fees and
damages and/or settlement costs, as well as other costs including
Sunbeam's First Alert subsidiary and costs including legal fees and
penalties (if any) and lost business and/or goodwill of product
recalls;
o the numerous lawsuits against the Company and the SEC investigation
into the Company's accounting practices and policies, and uncertainty
regarding the Company's available coverage under its directors' and
officers' liability insurance; and
o actions by competitors in existing and/or future lines of businesses
including business combinations, new product offerings and promotional
activities.
Other factors and assumptions not included in the list above may also cause the
Company's actual results to materially differ from those projected.
34
PART II. OTHER INFORMATION
Item 1. 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 ("Arthur Andersen"), the Company's independent accountants for the
period covered by the lawsuit.
On June 16, 1998, the court entered an order consolidating all these suits and
all similar class actions subsequently filed (collectively, the "Consolidated
Federal Actions"). On January 6, 1999, plaintiffs filed a consolidated amended
class action complaint against the Company, some of its present and former
directors and former officers, and Arthur Andersen. The consolidated amended
class action complaint alleges, among other things, that defendants made
material misrepresentations and omissions regarding the Company's business
operations and future prospects in an effort to artificially inflate the price
of the Company's common stock and call options, and that, in violation of
section 20(a) of the Exchange Act, the individual defendants exercised influence
and control over the Company, causing the Company to make material
misrepresentations and omissions. The consolidated amended complaint seeks an
unspecified award of money damages. In February 1999, plaintiffs moved for an
order certifying a class consisting of all persons and entities who purchased
the Company's common stock or who purchased call options or sold put options
with respect to the Company's common stock during the period April 23, 1997
through June 30, 1998, excluding the defendants, their affiliates, and employees
of the Company. Defendants have opposed that motion. In March 1999, all
defendants who had been served with the consolidated amended class action
complaint moved to dismiss it and the court granted the motion only as to
certain non-employee current and former directors and a former officer, and
denied it as to the other defendants. Arthur Andersen has filed counterclaims
against the Company, and a third-party complaint against a former director of
the Company and against unnamed third party corporations. On July 31, 2000, the
court dismissed the former director from Arthur Anderson's counterclaims. On
June 30, 2000, the plaintiffs filed a second amended complaint against most of
the same defendants (although two of the Company's former outside directors were
not included as defendants in the second amended complaint) alleging the same
principal claims as the prior amended complaint described above.
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 in
February 1998 to three of its now former officers and directors. In June 1998,
all defendants filed a motion to dismiss the complaint for failure to make a
pre-suit demand on the Company's board of directors. In February 1999,
plaintiffs filed an amended derivative complaint nominally on behalf of the
Company against some of its present and former directors and former officers and
Arthur Andersen. This amended complaint alleges, among other things, that
Messrs. Dunlap and Kersh, the Company's former Chairman and Chief Executive
Officer and former Chief Financial Officer, respectively, caused the Company to
employ fraudulent accounting procedures in order to enable them to secure new
employment contracts, and seeks a declaration that the individual defendants
have violated fiduciary duties, an injunction against the payment of
compensation to Messrs. Dunlap and Kersh or the imposition of a constructive
trust on such payments, and unspecified money damages. The defendants have each
moved to dismiss the amended complaint in whole or in part.
During 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 stockholders of the
Company against the Company, MacAndrews & Forbes and some of the Company's
present and former directors. These complaints allege, among other things, that
the defendants breached their fiduciary duties when the Company entered into a
settlement agreement with the MacAndrews & Forbes subsidiary that sold the
Company a controlling interest in Coleman. In such settlement agreement, the
MacAndrews & Forbes subsidiary released the Company from threatened claims
arising out of the Company's acquisition of its interest in Coleman, and
MacAndrews & Forbes agreed to provide management support to the Company. Under
the settlement agreement, the MacAndrews & Forbes subsidiary was granted a
warrant expiring August 24, 2003 to purchase up to an additional 23 million
shares of the Company's common stock at an exercise price of $7 per share,
subject to anti-dilution provisions. The derivative actions filed in the
Delaware Court of Chancery were consolidated. The plaintiffs voluntarily
dismissed this action. The action filed in the U.S. District Court for the
Southern District of Florida has been dismissed. In April 2000, a complaint was
filed in the U.S. District Court for the Southern District of Florida against
the Company, certain current and former directors, Messrs. Dunlap and Kersh and
MacAndrews & Forbes alleging, among other things, that certain of the defendants
breached their fiduciary duty when the Company entered into a settlement
agreement with MacAndrews & Forbes, and certain of the defendants breached their
fiduciary duty and wasted corporate assets by, among other things, issuing
materially false and misleading statements regarding the
35
Company's financial condition. The plaintiff in this action seeks, among other
things, recission of the warrants issued to MacAndrews & Forbes and an
injunction preventing the issuance of warrants and damages. The defendants,
other than Messrs. Dunlap and Kersh, have filed a motion to dismiss this
complaint.
In September 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 U.S. National Bank of Galveston,
Kempner Capital Management, Inc. and Legacy Trust Company engaged in
transactions in the Company's common stock on their own behalf and on behalf of
their respective clients. The Company is the only named defendant in this
action. The complaint requests recovery of compensatory damages, punitive
damages and expenses in an unspecified amount. This action was subsequently
transferred to the U.S. District Court for the Southern District of Florida and
consolidated with the Consolidated Federal Actions. On July 7, 2000, the
plaintiffs in this case filed a motion for partial summary judgment on their
Texas state law claims, and the Company has filed a motion to strike such
summary judgment motion as being barred by the Order consolidating such case
with the Consolidated Federal Actions. If the Company's motion is denied, the
Company intends to oppose the plaintiffs' summary judgment motion.
In October 1998, a class action lawsuit was filed in the U.S. District Court for
the Southern District of Florida on behalf of certain purchasers of the
Debentures against the Company and certain of the Company's former officers and
directors. In April 1999, a class action lawsuit was filed in the U.S. District
Court for the Southern District of Florida on behalf of persons who purchased
Debentures during the period of March 20, 1998 through June 30, 1998, inclusive,
but after the initial offering of such Debentures against the Company, Arthur
Andersen, the Company's former auditor, and certain former officers and
directors. The court consolidated the two cases and the plaintiffs have filed a
consolidated class action on behalf of persons who purchased Debentures in the
initial offering and in the market during the period March 20, 1998 through June
30, 1998. The amended complaint alleges, among other things, violations of the
federal and state securities laws and common law fraud. The plaintiffs seek,
among other things, either unspecified monetary damages or rescission of their
purchase of the Debentures. This action is coordinated with the Consolidated
Federal Actions.
The Company has been named as a defendant in an action filed in the District
Court of Tarrant County, Texas, 48th Judicial District, on November 20, 1998.
The plaintiffs in this action are purchasers of the debentures. The plaintiffs
allege that the Company violated the Texas Securities Act and the Texas Business
& Commercial Code and committed state common law fraud by materially misstating
the financial position of the Company in connection with the offering and sale
of the Debentures. The complaint seeks rescission, as well as compensatory and
exemplary damages in an unspecified amount. The Company specially appeared to
assert an objection to the Texas court's exercise of personal jurisdiction over
the Company, and a hearing on this objection took place in April 1999. Following
the hearing, the court entered an order granting the Company's special
appearance and dismissing the case without prejudice. The plaintiffs appealed,
which appeal was denied. The plaintiffs have appealed to the Texas Supreme
Court.
On February 9, 1999, Messrs. Dunlap and Kersh filed with the American
Arbitration Association demands for arbitration of claims under their respective
employment agreements with the Company. Messrs. Dunlap and Kersh are requesting
a finding by the arbitrator that the Company terminated their employment without
cause and that they should be awarded certain benefits based upon their
respective employment agreements. The Company has answered the arbitration
demands of Messrs. Dunlap and Kersh and has filed counterclaims seeking, among
other things, the return of all consideration paid, or to be paid, under the
February 1998 Employment Agreements between the Company and Messrs. Dunlap and
Kersh. An answer was filed by Messrs. Dunlap and Kersh generally denying the
Company's counterclaim. Discovery is pending and the arbitration hearings are
scheduled to commence in the middle of September 2000.
On September 13, 1999, an action naming the Company and Arthur Andersen as
defendants was filed in the Circuit Court for Montgomery County, Alabama. The
plaintiffs in this action are purchasers of the Company's common stock during
the period March 19, 1998 through May 6, 1998. The plaintiffs allege, among
other things, that the defendants violated the Alabama Securities Laws. The
plaintiffs seek compensatory and punitive damages in an unspecified amount.
Arthur Andersen has filed a cross claim against the Company for contribution and
indemnity. The Company has filed a motion to dismiss. In May 2000, the
plaintiffs in this action filed an amended complaint, which added allegations of
violations of the federal securities laws. This action was transferred to and
consolidated with the Consolidated Federal Actions.
The Company intends to vigorously defend each of the foregoing lawsuits, but
cannot predict the outcome and is not currently able to evaluate the likelihood
of the Company's success in each case or the range of potential loss, if any.
However, if the Company were to lose one or more of these lawsuits, judgments
would likely have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
36
In July 1998, the American Alliance Insurance Company ("American Alliance")
filed suit against the Company in the U.S. District Court for the Southern
District of New York requesting a declaratory judgment of the court that the
directors' and officers' liability insurance policy for excess coverage issued
by American Alliance was invalid and/or had been properly canceled by American
Alliance. As a result of a motion made by the Company, this case has been
transferred to the U.S. District Court for the Southern District of Florida for
coordination and consolidation of pre-trial proceedings with the various actions
pending in that court. In October 1998, an action was filed by Federal Insurance
Company ("Federal Insurance") in the U.S. District Court for the Middle District
of Florida requesting the same relief as that requested by American Alliance in
the previously filed action as to additional coverage levels under the Company's
directors' and officers' liability insurance policy. This action has been
transferred to the U.S. District Court for the Southern District of Florida.
Discovery in the cases brought by American Alliance and Federal Insurance is
underway and coordinated with the discovery in the Consolidated Federal Actions.
In December 1998, an action was filed by Executive Risk Indemnity, Inc. in the
Circuit Court of the Seventeenth Judicial Circuit in and for Broward County,
Florida requesting the same relief as that requested by American Alliance and
Federal Insurance in their previously filed actions as to additional coverage
levels under the Company's directors' and officers' liability insurance policy.
In April 1999, the Company filed an action in the U.S. District Court for the
Southern District of Florida against National Union Fire Insurance Company of
Pittsburgh, PA ("National Union"), Gulf Insurance Company ("Gulf") and St. Paul
Mercury Insurance Company ("St. Paul") requesting, among other things, a
declaratory judgment that National Union is not entitled to rescind its
directors' and officers' liability insurance policies to the Company and a
declaratory judgment that the Company is entitled to coverage from these
insurance companies for the various lawsuits described herein under directors'
and officers' liability insurance policies issued by each of the defendants. The
Company has settled its litigation with National Union. In response to the
Company's complaint, defendants St. Paul and Gulf have answered and asserted
counterclaims seeking rescission and declaratory relief that no coverage is
available to the Company. The Company intends to pursue recovery from all of its
insurers if damages are awarded against the Company or its indemnified officers
and/or directors under any of the foregoing actions and to recover attorneys'
fees covered under those policies. The Company's failure to obtain such
insurance recoveries following an adverse judgment in any of the actions
described above could have a material adverse effect on the Company's financial
position, results of operations or cash flows.
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. In July 1998, the SEC issued a Formal Order of
Private Investigation, designating SEC officers to take testimony and pursuant
to which a subpoena was served on the Company requiring the production of
certain documents. In November 1998, another SEC subpoena requiring the
production of additional documents was received by the Company. The Company has
provided numerous documents to the SEC staff and continues to cooperate with the
SEC staff. The Company has, however, declined to provide the SEC with material
that the Company believes is subject to the attorney-client privilege and the
work product immunity. The SEC has not commenced any civil or administrative
proceedings as a result of its investigation, and the Company cannot predict at
this time whether the SEC will seek to impose any monetary or other penalties
against the Company. Under these circumstances, the Company cannot estimate the
duration of the investigation or its outcome.
The Company and its subsidiaries are also involved in various other lawsuits
arising from time to time which the Company considers to be ordinary routine
litigation incidental to its business. In the opinion of the Company, the
resolution of these routine matters, and of certain matters relating to prior
operations, individually or in the aggregate, will not have a material adverse
effect upon the financial position, results of operations or cash flows of the
Company.
Amounts accrued for litigation matters represent the anticipated costs (damages
and/or settlement amounts) in connection with pending litigation and claims and
related anticipated legal fees for defending such actions. The costs are accrued
when it is both probable that an asset has been impaired or a liability has been
incurred and the amount can be reasonably estimated. The accruals are based upon
the Company's assessment, after consultation with counsel, of probable loss
based on the facts and circumstances of each case, the legal issues involved,
the nature of the claim made, the nature of the damages sought and any relevant
information about the plaintiffs and other significant factors which vary by
case. When it is not possible to estimate a specific expected cost to be
incurred, the Company evaluates the range of probable loss and records the
minimum end of the range. As of June 30, 2000, the Company had established
accruals for litigation matters of $40.7 million (representing $10.1 million and
$30.6 million for estimated damages or settlement amounts and legal fees,
respectively), and $24.3 million as of December 31, 1999 (representing $9.6
million and $14.7 million for estimated damages or settlement amounts and legal
fees, respectively). It is anticipated that the $40.7 million accrual at June
30, 2000 will be paid as follows: $22.3 million in 2000, and $18.4 million in
2001. The Company believes, based on information available on June 30, 2000,
that anticipated probable costs of litigation matters existing as of June 30,
2000 have been adequately reserved to the extent determinable.
37
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
---------- ------------------------------------------------------
27 Financial Data Schedule, submitted electronically to
the Securities and Exchange Commission for information
only and not filed.
(b) Report on Form 8-K
No reports on Form 8-K were filed through June 30, 2000.
38
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNBEAM CORPORATION
By: /s/ BOBBY G. JENKINS
-----------------------------
Bobby G. Jenkins
Executive Vice President, and
Chief Financial Officer
(Principal Financial Officer)
August 16, 2000
39
Exhibit Index
Exhibit No. Description
- ---------- ---------------------------------------------------------------
27 Financial Data Schedule, submitted electronically to the
Securities and Exchange Commission for information only and not
filed.