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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the period ended March 31, 1998
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. 1-52
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)
1615 SOUTH CONGRESS AVENUE
SUITE 200 33445
DELRAY BEACH, FLORIDA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(561) 243-2100
(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 [ ] No [X]
On November 4, 1998 there were 100,857,462 shares of the registrant's
Common Stock ($.01 par value) outstanding.
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SUNBEAM CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT
ON FORM 10-Q/A
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited)
for the three months ended March 30, 1997 and March 31, 1998............. 2
Condensed Consolidated Balance Sheets
as of December 28, 1997 and March 31, 1998 (Unaudited)................... 3
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 30, 1997 and March 31, 1998............. 4
Notes to Condensed Consolidated Financial Statements (Unaudited)......... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 14
Item 6. Exhibits and Reports on Form 8-K ....................................... 15
SIGNATURES ............................................................................... 16
1
PART I. FINANCIAL INFORMATION
SUNBEAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 30,
1998 1997
--------- ---------
As restated, As restated,
see Note 8 see Note 8
(Unaudited)
Net sales ............................................. $ 247,601 $ 252,488
Cost of goods sold .................................... 213,828 194,237
Selling, general and administrative expense ........... 71,139 41,195
--------- ---------
Operating (loss) earnings ............................. (37,366) 17,056
Interest expense ...................................... 5,073 1,993
Other expense, net .................................... 3,165 77
--------- ---------
(Loss) earnings from continuing operations before
income taxes and extraordinary charge .............. (45,604) 14,986
Income tax (benefit) provision:
Current ............................................. 327 (1,052)
Deferred ............................................ (449) 7,011
--------- ---------
(122) 5,959
--------- ---------
(Loss) earnings from continuing operations ............ (45,482) 9,027
Loss from discontinued operations, net of taxes ....... -- (13,713)
Extraordinary charge from early extinguishment of debt,
net of taxes (Note 3) ............................... (8,624) --
--------- ---------
Net loss ............................................. $ (54,106) $ (4,686)
========= =========
Earnings per share:
(Loss) earnings from continuing operations:
Basic ........................................... $ (0.53) $ 0.11
Diluted ......................................... (0.53) 0.10
Loss from discontinued operations:
Basic .......................................... -- (0.17)
Diluted ........................................ -- (0.15)
Extraordinary charge:
Basic ......................................... (0.10) --
Diluted ....................................... (0.10) --
--------- ---------
Net loss:
Basic ......................................... $ (0.63) $ (0.06)
========= =========
Diluted ....................................... $ (0.63) $ (0.05)
========= =========
Weighted average common shares outstanding:
Basic ......................................... 86,390 84,187
Dilutive ...................................... 86,390 86,135
Dividends declared per share of common stock .......... $ .01 $ .01
See Notes to Condensed Consolidated Financial Statements.
2
SUNBEAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 28,
1998 1997
----------- -----------
As restated, As restated,
see Note 8 see Note 8
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 193,543 $ 52,298
Receivables, net ................................................ 500,671 228,460
Inventories ..................................................... 617,091 304,900
Prepaid expenses, deferred income taxes and other current assets 74,855 16,584
----------- -----------
Total current assets ........................................ 1,386,160 602,242
Property, plant and equipment, net ................................. 412,096 249,524
Trademarks, trade names, goodwill and other, net ................... 1,556,909 207,162
----------- -----------
$ 3,355,165 $ 1,058,928
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt ........... $ 62,139 $ 668
Accounts payable ................................................ 204,456 108,374
Other current liabilities ....................................... 218,554 124,085
----------- -----------
Total current liabilities ................................... 485,149 233,127
Long-term debt ..................................................... 1,637,820 194,580
Other long-term liabilities ........................................ 216,240 159,142
Minority interest .................................................. 55,191 --
Commitments and Contingencies (Note 10)
Shareholders' equity:
Preferred stock (2,000,000 shares authorized, none outstanding) -- --
Common stock (issued 100,824,578 and 89,984,425 shares) ......... 1,008 900
Additional paid-in capital ...................................... 966,631 479,200
Retained earnings ............................................... 34,829 89,801
Accumulated other comprehensive loss ............................ (32,878) (33,063)
Other shareholders' equity ...................................... (8,825) (1,714)
----------- -----------
960,765 535,124
Treasury stock, at cost (4,454,394 shares in 1997) .............. -- (63,045)
----------- -----------
Total shareholders' equity .................................. 960,765 472,079
----------- -----------
$ 3,355,165 $ 1,058,928
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
3
SUNBEAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
----------------------
MARCH 31, MARCH 30,
1998 1997
--------- ---------
As restated, As restated,
see Note 8 see Note 8
(Unaudited)
OPERATING ACTIVITIES:
Net loss ......................................................... $ (54,106) $ (4,686)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................................ 11,940 10,813
Deferred income taxes ........................................ (449) 7,011
Extraordinary charge from early extinguishment of debt ....... 8,624 --
Non-cash compensation charges ................................ 24,290 --
Loss on sale of discontinued operations, net of taxes ........ -- 13,713
Changes in working capital and other, net of acquisition ..... (125,025) (49,449)
--------- ---------
Net cash used in operating activities ................ (134,726) (22,598)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures ............................................. (19,480) (10,916)
Acquisition of Coleman, including acquisition costs,
net of cash acquired ........................................... (160,612) --
Proceeds from sale of divested operations and other assets ....... -- 70,404
--------- ---------
Net cash (used in) provided by investing activities .. (180,092) 59,488
--------- ---------
FINANCING ACTIVITIES:
Issuance of convertible subordinated debentures, net of
financing fees ................................................ 729,622 --
Payments of debt obligations, including prepayment penalties ..... (266,672) (26,322)
Other debt financing fees ........................................ (25,075) --
Proceeds from exercise of stock options .......................... 19,045 8,866
Other, net ....................................................... (857) (545)
--------- ---------
Net cash provided by (used in) financing activities 456,063 (18,001)
--------- ---------
Net increase in cash and cash equivalents ............................. 141,245 18,889
Cash and cash equivalents at beginning of period ...................... 52,298 11,526
--------- ---------
Cash and cash equivalents at end of period ............................ $ 193,543 $ 30,415
========= =========
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 ("Sunbeam" or the "Company") is a leading manufacturer
and marketer of branded consumer products. The Sunbeam(R) and Oster(R) brands
have been household names for generations, and the Company is a market share
leader in many of its product categories.
The Company markets its products through virtually every category of
retailer including mass merchandisers, catalog showrooms, warehouse clubs,
department stores, catalogs, television shopping channels, Company-owned outlet
stores, hardware stores, home centers, drug and grocery stores, pet supply
retailers, as well as independent distributors and the military. The Company
also sells its products to commercial end users such as hotels and other
institutions.
As further described in Note 2, on March 30, 1998, the Company, through a
wholly-owned subsidiary, acquired approximately 81% of the total number of then
outstanding shares of common stock of The Coleman Company, Inc. ("Coleman").
Coleman is a leading manufacturer and marketer of consumer products for the
worldwide outdoor recreation market. Its products have been sold domestically
under the Coleman(R) brand name since the 1920's.
PRESENTATION OF FISCAL PERIODS
To standardize the fiscal period ends of the Company and its acquired
entities, as further described in Notes 2 and 10, effective with its 1998 fiscal
year, the Company has changed its fiscal year end from the Sunday nearest
December 31 to a calendar year. Accordingly, quarterly reporting will follow the
calendar quarters. Excluding the impact of the Coleman acquisition which
occurred on March 30, 1998, the impact of this change in fiscal periods on net
sales for the first quarter of 1998 was to increase sales by approximately $4
million and the impact on operating results for the quarter was to increase
earnings by approximately $0.2 million.
BASIS OF PRESENTATION
The Condensed Consolidated Balance Sheet of the Company as of March 31,
1998 and the Condensed Consolidated Statements of Operations and Cash Flows for
the three months ended March 31, 1998 and March 30, 1997 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 28, 1997 Condensed Consolidated Balance Sheet was derived from
the Company's Annual Report on Form 10-K/A for the year ended December 28, 1997.
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 1997 Annual Report on Form 10-K/A. In the opinion of
management, the unaudited condensed consolidated financial statements furnished
herein include all adjustments (consisting of only recurring adjustments)
necessary for a fair presentation of the results of operations for the interim
periods presented. These interim results of operations are not necessarily
indicative of results for the entire year.
RESTATEMENT
On June 30, 1998, the Company announced that the Audit Committee of the
Board of Directors was initiating a review into the accuracy of prior financial
statements. The Audit Committee's review has since been completed and, as a
result of its findings, the Company has restated its previously issued financial
statements for 1996, 1997 and the first quarter of 1998. (See Note 8).
5
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
1. OPERATIONS AND BASIS OF PRESENTATION - (CONTINUED)
BASIC AND DILUTED LOSS PER COMMON SHARE
In 1997, the Company adopted SFAS No. 128, EARNINGS PER SHARE. Basic
earnings per common share calculations are determined by dividing earnings
available to common shareholders by the weighted average number of shares of
common stock outstanding. Diluted earnings per share are determined by dividing
earnings available to common shareholders by the weighted average number of
shares of common stock and dilutive common stock equivalents outstanding (all
related to outstanding stock options, restricted stock and the Zero Coupon
Convertible Senior Subordinated Debentures).
For the first quarter of 1998, 4,758,565 shares related to stock options,
(58,065) shares related to restricted stock and 13,150,000 shares related to the
conversion feature of the Zero Coupon Convertible Senior Subordinated Debentures
were not included in the diluted average common shares outstanding, as the
effect would have been antidilutive. For the first quarter of 1997, the dilutive
effect of 2,174,154 equivalent shares and (225,915) equivalent shares related to
restricted stock were used in determining the dilutive average shares
outstanding. SFAS No. 128 requires the use of dilutive potential common shares
in the determination of diluted earnings per share if an entity reports earnings
from continuing operations. Given Sunbeam's Loss from Discontinued Operations in
the first quarter of 1997, the use of dilutive potential common shares in the
determination of the diluted per share loss from discontinued operations and net
loss per share is antidilutive. (See Note 10.)
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997 and will be presented in the Company's Annual
Report on Form 10-K for the year ending December 31, 1998. Financial statement
disclosures for prior periods are required to be restated. The Company is in the
process of evaluating the disclosure requirements. The adoption of SFAS No. 131
will have no impact on consolidated results of operations, financial position or
cash flow.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE ("SOP 98-1"). SOP 98-1
requires computer software costs associated with internal use software to be
expensed as incurred until certain capitalization criteria are met. The Company
will adopt SOP 98-1 on January 1, 1999. Adoption of this Statement is not
expected to have a material impact on the Company's consolidated financial
position or results of operations, although actual charges incurred may be
material due to Year 2000 issues.
See Note 10 for new accounting standards issued subsequent to March 31,
1998.
2. ACQUISITION
On March 30, 1998, the Company, through a wholly-owned subsidiary, acquired
approximately 81% of the total number of then outstanding shares of common stock
of Coleman from a subsidiary of MacAndrews & Forbes Holdings, Inc. ("M&F"), in
exchange for 14,099,749 shares of the Company's common stock and approximately
$160 million in cash as well as the assumption of $1,016 million in debt. The
value of the common stock issued at the date of acquisition ($524 million) was
derived by using the average ending stock price as reported by the New York
Stock Exchange Composite Tape for the day before and day of the public
announcement of the acquisition discounted by 15% due to the restrictive nature
of the securities. (See Note 10.)
6
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
2. ACQUISITION - (CONTINUED)
The Coleman acquisition was accounted for under the purchase method of
accounting; and accordingly, the results of operations of Coleman for March 30
and March 31, 1998 are included in the accompanying Condensed Consolidated
Statement of Operations. The purchase price of Coleman has been allocated to
individual assets acquired and liabilities assumed based on preliminary
estimates of fair market value at the date of acquisition. The preliminary fair
value of tangible assets acquired was approximately $747 million (of which $27
million was cash) and approximately $1,331 million of liabilities were assumed.
The excess of purchase price over net tangible assets acquired of $1,270 million
has been classified as goodwill and is being amortized on a straight-line basis
over 40 years. The allocation of purchase price for the acquisition of Coleman
will be revised when additional information concerning asset and liability
valuations is obtained. Adjustments, which could be significant, will be made
during the allocation period based on detailed reviews of the fair values of
assets acquired and liabilities assumed and could result in a substantial change
in goodwill and other intangible assets.
The Company expects to acquire the remaining equity interest in Coleman
pursuant to a merger transaction in which the existing Coleman minority
shareholders will receive .5677 shares of the Company's common stock and $6.44
in cash for each share of Coleman common stock outstanding. In addition,
unexercised options under Coleman's stock option plans will be cashed out at a
price per share equal to the difference between $27.50 and the exercise price of
such options. The Company expects to issue approximately 6.7 million shares of
common stock and expend approximately $87 million in cash to complete the
Coleman acquisition. Although there can be no assurance, it is anticipated the
Coleman merger will occur in the first quarter of fiscal 1999. The acquisition
of the remaining outstanding shares of Coleman will be accounted for under the
purchase method of accounting on the date of consummation. Minority interest in
the results from Coleman's operations for March 30 and 31, 1998, is reflected in
Other Expense, net in the Condensed Consolidated Statement of Operations for the
three months ended March 31, 1998. (See Note 10.)
The following unaudited pro forma financial information for the Company
gives effect to the Coleman acquisition as if it had occurred at the beginning
of 1998. These pro forma results have been prepared for informational purposes
only and do not purport to be indicative of the results of operations which
actually would have occurred had the 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):
THREE MONTHS ENDED
MARCH 31, MARCH 30,
1998 1997
---------- ----------
Net sales (a) ................................................. $ 477.3 $ 548.0
Loss before extraordinary charge (a), (b), (c) ................ (64.7) (4.8)
Basic and diluted loss per share before extraordinary items (d) (0.65) (0.05)
(a) Adjusted to remove sales of $14.8 million and loss before extraordinary
charge of $0.8 million from Coleman operations for March 30 and 31, 1998
included in Sunbeam's results.
(b) Coleman's loss before extraordinary items has been adjusted to exclude
the following one time after tax benefits and charges: (i) a $15.8
million gain from the sale of Coleman Safety and Security Products, Inc.,
(ii) $7.1 million of costs incurred by Coleman associated with the
Company's acquisition of Coleman, (iii) the write off of $2.1 million of
capitalized costs associated with the installation of new software which
will be abandoned as a result of the acquisition by the Company, (iv) $1.3
million of costs to terminate a license agreement with a former affiliate
of Coleman, and (v) the write off of $1.7 million of unrealized deferred
tax assets as a result of the change of control of Coleman.
(c) In 1998 and 1997, respectively, after tax interest expense was increased
$11.5 million and $9.8 million, and goodwill amortization, after tax, was
increased $5.5 million in each year to reflect the pro forma effect of the
acquisition occurring at the beginning of the period. In addition, the
minority shareholder percentage was adjusted to reflect the change in the
portion of Coleman held by minority shareholders following the transaction.
The minority interest in Coleman's losses from continuing operations was
adjusted by $0.6 million in 1998 and $0.4 million in 1997 to reflect both
the change in the proportion of the ownership of Coleman held by minority
shareholders and the effects of the pro forma adjustments.
(d) The shares outstanding were adjusted in each period to reflect the pro
forma effect of the shares issued in the Coleman acquisition being
outstanding from the beginning of the period.
7
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
3. CREDIT FACILITIES, LONG-TERM DEBT AND FINANCIAL INSTRUMENTS
In order to finance the acquisitions described in Notes 2 and 10, and
refinance substantially all of the indebtedness of the Company and its acquired
entities, the Company consummated: (i) an offering (the "Offering") of Zero
Coupon Convertible Senior Subordinated Debentures due 2018 (the "Debentures") at
a yield to maturity of 5% (approximately $2,014 million principal amount at
maturity) in March 1998, which resulted in approximately $730 million of net
proceeds and, (ii) entered into a revolving and term credit facility ("New
Credit Facility"). (See Note 10.)
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. (See Note 10.)
The New Credit Facility provided for an 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 31, 2005; (ii) an $800 million term
loan maturing on March 31, 2005, and (iii) a $500 million term loan maturing
September 30, 2006. Interest accrues at a rate selected at the Company's option
of: (i) the London Interbank Offered Rate ("LIBOR") plus an agreed upon interest
margin which varies depending upon the Company's leverage ratio, as defined, and
other items or, (ii) the base rate of the administrative agent (generally the
higher of the prime commercial lending rate of the administrative agent or the
Federal Funds Rate plus 1/2 of 1%), plus an agreed upon interest margin which
varies depending upon the Company's leverage ratio, as defined, and other items.
The New Credit Facility contains certain covenants, including limitations on the
ability of the Company and its subsidiaries to engage in certain transactions
and the requirement to maintain certain financial covenants and ratios. (See
Note 10.)
The Company selectively uses derivatives to manage interest rate and
foreign exchange exposures that arise in the normal course of business. No
derivatives are entered into for trading or speculative purposes. Foreign
exchange option and forward contracts are used to hedge a portion of the
Company's underlying exposures denominated in foreign currency. Although the
market value of derivative contracts at any single point in time will vary with
changes in interest and/or foreign exchange rates, the differences between the
carrying value and fair value of such contracts at March 31, 1998 and March 30,
1997 were not considered to be material, either individually or in the
aggregate. The Company enters into derivative contracts with counterparties that
it believes to be creditworthy. The Company does not enter into any leveraged
derivative transactions. At March 31, 1998, the Company held an interest rate
swap agreement with a notional value of $25.0 million to exchange floating rate
interest for a fixed rate of 6.115%. (See Note 10.)
In March 1998, the Company prepaid a $75.0 million 7.85% industrial revenue
bond related to its Hattiesburg facility originally due in 2009. In connection
with the early extinguishment of this debt, the Company recognized an
extraordinary charge of $8.6 million ($0.10 per share) in the first quarter of
1998.
In December 1997, the Company entered into a receivables securitization
program under which the Company has received approximately $34.8 million from
the sale of trade accounts receivable in the first quarter of 1998. Costs of the
program, which primarily consist of the purchaser's financing cost of issuing
commercial paper backed by the receivables, totaled $0.6 million during the
first quarter of 1998. The Company, as agent for the purchaser of the
receivables, retains collection and administrative responsibilities for the
purchased receivables.
8
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
4. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME, effective
January 1, 1998. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in financial statements. The components
of the Company's comprehensive loss are as follows (in thousands):
THREE MONTHS ENDED
---------------------
MARCH 31, MARCH 30,
1998 1997
-------- --------
Net loss ............................................ $(54,106) $ (4,686)
Foreign currency translation adjustment, net of taxes 183 (186)
-------- --------
Comprehensive loss .................................. $(53,923) $ (4,872)
======== ========
5. SUPPLEMENTAL FINANCIAL STATEMENT DATA
Supplementary Balance Sheet data at the end of each period is as follows
(in thousands):
MARCH 31, DECEMBER 28,
1998 1997
--------- ---------
Receivables:
Trade .................... $ 521,755 $ 250,699
Sundry ................... 17,134 7,794
--------- ---------
538,889 258,493
Valuation allowance ...... (38,218) (30,033)
--------- ---------
$ 500,671 $ 228,460
========= =========
Inventories:
Finished goods ........... $ 426,590 $ 193,864
Work in process .......... 52,728 25,679
Raw materials and supplies 137,773 85,357
--------- ---------
$ 617,091 $ 304,900
========= =========
(See Note 10 regarding asset valuation/impairment in the remainder of
1998.)
The Supplementary Statement of Cash Flows data is as follows (in
thousands):
THREE MONTHS ENDED
--------------------
MARCH 31, MARCH 30,
1998 1997
-------- --------
Cash paid during the period for:
Interest ....................................... $ 5,442 $ 1,103
======== ========
Income taxes (refunds) ......................... $ 381 $(11,920)
======== ========
9
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
6. RESTRUCTURING AND ASSET IMPAIRMENT
At December 28, 1997, the Company, before consideration of the Coleman
acquisition, had $5.2 million in liabilities accrued related to a 1996
restructuring plan. The majority of these liabilities related to facility
closures and related exit costs. In the first quarter of 1998, this liability
was reduced by $0.5 million as a result of cash expenditures.
The restated restructuring reserve details and activity as of and for the
quarter ended March 30, 1997 are as follows (in millions):
RESERVE BALANCE ACCRUAL BALANCE
AT DECEMBER 29, CASH NON-CASH AT MARCH 30,
1996 REDUCTIONS REDUCTIONS 1997
--------------- ---------- ---------- ---------------
Severance and other employee costs .... $ 19.1 $ 3.2 $ -- $ 15.9
Closure and consolidation of facilities
and related exit costs ............... 32.6 1.4 1.3 29.9
----- ---- ---- -----
Total ............................. 51.7 $ 4.6 $ 1.3 $ 45.8
===== ==== ==== =====
7. DISCONTINUED OPERATIONS
The Company's discontinued furniture business, which was sold in March
1997, had revenues of $51.6 million in the first quarter of 1997 prior to the
sale and nominal earnings. As a result of the sale of the Company's furniture
business assets (primarily inventory, property, plant and equipment), the
Company received $69.0 million in cash, retained approximately $50.0 million in
accounts receivable and retained certain liabilities. The final purchase price
for the furniture business was subject to a post-closing adjustment based on the
terms of the Asset Purchase Agreement and in the first quarter of 1997, after
completion of the sale, the Company recorded an additional loss on disposal of
$22.5 million pre-tax.
10
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
8. RESTATEMENT
Subsequent to the issuance of the Company's condensed consolidated
financial statements for the three months ended March 31, 1998, it was
determined that for the years ended December 29, 1996 and December 28, 1997 and
the three months ended March 31, 1998, certain revenue was improperly recognized
(principally "bill and hold" and guaranteed sales transactions), certain costs
and allowances were not accrued or were improperly recorded (principally
allowances for returns, cooperative advertising, and customer charge-backs as
well as deductions and reserves for product liability and warranty expense) and
certain costs were inappropriately included in, and subsequently charged to,
restructuring, asset impairment and other costs within the Consolidated
Statements of Operations. As a result, the consolidated financial statements as
of December 28, 1997 and December 29, 1996 and for the years then ended were
restated and a Form 10-K/A was filed with the Securities and Exchange Commission
on November 12, 1998. The accompanying condensed consolidated financial
statements as of March 31, 1998 and March 30, 1997 and for the three months then
ended, present restated results.
A summary of the effects of the restatement for the three months ended
March 31, 1998 and March 30, 1997 follows (in thousands, except per share data):
Condensed Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED
-----------------------------------------------------------
MARCH 31, 1998 MARCH 30, 1997
-------------------------- --------------------------
As Previously As As Previously As
Reported Restated Reported Restated
Net sales .............................................. $ 244,296 $ 247,601 $ 253,450 $ 252,488
Cost of goods sold ..................................... 211,459 213,828 185,698 194,237
Selling, general and administrative expense ............ 68,841 71,139 33,009 41,195
--------- --------- --------- ---------
Operating (loss) earnings .............................. (36,004) (37,366) 34,743 17,056
Interest expense ....................................... 5,072 5,073 1,993 1,993
Other expense, net ..................................... 2,367 3,165 113 77
--------- --------- --------- ---------
(Loss) earnings from continuing operations before income
taxes and extraordinary charge ..................... (43,443) (45,604) 32,637 14,986
Income tax (benefit) provision ......................... (4,458) (122) 12,076 5,959
--------- --------- --------- ---------
(Loss) earnings from continuing operations ............. (38,985) (45,482) 20,561 9,027
Loss from discontinued operations, net of taxes ........ -- -- (13,713) (13,713)
Extraordinary charge from early extinguishment of debt . (5,608) (8,624) -- --
--------- --------- --------- ---------
Net (loss) earnings .................................... $ (44,593) $ (54,106) $ 6,848 $ (4,686)
========= ========= ========= =========
Earnings per share:
(Loss) earnings from continuing operations:
Basic ........................................ $ (0.45) $ (0.53) $ 0.24 $ 0.11
Diluted ...................................... (0.45) (0.53) 0.24 0.10
Loss from discontinued operations:
Basic ........................................ -- -- (0.16) (0.17)
Diluted ...................................... -- -- (0.16) (0.15)
Extraordinary item:
Basic ........................................ (0.07) (0.10) -- --
Diluted ...................................... (0.07) (0.10) -- --
--------- --------- --------- ---------
Net (loss) earning:
Basic ........................................ $ (0.52) $ (0.63) $ 0.08 $ (0.06)
========= ========= ========= =========
Diluted ...................................... $ (0.52) $ (0.63) $ 0.08 $ (0.05)
========= ========= ========= =========
11
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
8. RESTATEMENT - (CONTINUED)
Condensed Consolidated Balance Sheets
(Unaudited)
AS OF AS OF
MARCH 31, 1998 MARCH 30, 1997
--------------------------- ---------------------------
As Previously As As Previously As
Reported Restated Reported Restated
ASSETS
Cash and cash equivalents ........................... $ 193,543 $ 193,543 $ 30,415 $ 30,415
Receivables, net .................................... 562,294 500,671 296,716 289,509
Inventories ......................................... 575,109 617,091 148,011 148,011
Prepaid expenses, deferred income taxes and other
current assets .................................... 107,692 74,855 134,512 128,359
----------- ----------- ----------- -----------
Total current assets ........................... 1,438,638 1,386,160 609,654 596,294
Property, plant and equipment, net .................. 403,179 412,096 217,453 226,627
Trademarks, trade names, goodwill and other, net .... 1,601,605 1,556,909 226,048 226,048
----------- ----------- ----------- -----------
Total assets ................................... $ 3,443,422 $ 3,355,165 $ 1,053,155 $ 1,048,969
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt and current portion of long-term debt $ 62,139 $ 62,139 $ 848 $ 848
Accounts payable .................................... 205,217 204,456 100,648 98,262
Other current liabilities ........................... 179,373 218,554 158,658 145,614
----------- ----------- ----------- -----------
Total current liabilities ...................... 446,729 485,149 260,154 244,724
Long-term debt ...................................... 1,637,820 1,637,820 175,235 175,235
Other long-term liabilities ......................... 269,334 216,240 204,606 207,603
Minority interest ................................... 55,191 55,191 -- --
Shareholders' equity:
Common stock ...................................... 1,008 1,008 892 892
Additional paid-in capital ........................ 975,778 966,631 458,690 458,690
Retained earnings ................................. 95,675 34,829 41,125 49,372
Accumulated other comprehensive loss .............. (29,288) (32,878) (18,460) (18,460)
Other shareholders' equity ........................ (8,825) (8,825) ( 5,699) ( 5,699)
Treasury stock .................................... -- -- (63,388) (63,388)
----------- ----------- ----------- -----------
Total shareholders' equity ..................... 1,034,348 960,765 413,160 421,407
----------- ----------- ----------- -----------
Total liabilities and shareholders' equity ..... $ 3,443,422 $ 3,355,165 $ 1,053,155 $ 1,048,969
=========== =========== =========== ===========
12
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
9. NEW EMPLOYMENT AGREEMENTS
On February 20, 1998 the Company entered into new three-year employment
agreements with its then Chairman and Chief Executive Officer and two other
senior officers of the Company. These agreements replaced previous employment
agreements entered into in July 1996 that were scheduled to expire in July 1999.
The new employment agreement for the Company's then Chairman provided for,
among other items, the acceleration of vesting of 200,000 shares of restricted
stock and the forfeiture of the remaining 133,333 shares of unvested restricted
stock granted under the July 1996 agreement, a new equity grant of 300,000
shares of unrestricted stock, a new grant of a ten-year option to purchase
3,750,000 shares of the Company's common stock with an exercise price equal to
the fair market value of the stock at the date of grant and exercisable in three
equal annual installments beginning on the date of grant and the acceleration of
vesting of 833,333 outstanding stock options granted under the July 1996
agreement. In addition, the new employment agreement with the then Chairman and
Chief Executive Officer provided for income tax gross-ups with respect to any
tax assessed on the equity grant and acceleration of vesting of restricted
stock.
The new employment agreements with the two other then senior officers
provided for, among other items, the grant of a total of 180,000 shares of
restricted stock that vest in four equal annual installments beginning the date
of grant, the acceleration of vesting of 44,000 shares of restricted stock and
the forfeiture of the remaining 29,332 shares of unvested restricted stock
granted under the July 1996 agreements, new grants of ten-year options to
purchase a total of 1,875,000 shares of the Company's common stock with an
exercise price equal to the fair market value of the stock at the date of grant
and exercisable in four equal annual installments beginning on the date of grant
and the acceleration of vesting of 383,334 outstanding stock options granted
under the July 1996 agreements. In addition, the new employment agreements
provided for income tax gross-ups with respect to any tax assessed on the
restricted stock grants and acceleration of vesting of restricted stock.
Compensation expense attributed to the equity grant, the acceleration of
vesting of restricted stock and the related income tax gross-ups was recognized
in the first quarter of 1998 and compensation expense related to the new
restricted stock grants and related tax gross-ups was amortized to expense
beginning in the first quarter of 1998 with amortization to continue over the
period in which the restrictions lapse. Total compensation expense recognized in
the first quarter of 1998 related to these items was approximately $31 million.
(See Note 10.)
10. SUBSEQUENT EVENTS
SENIOR MANAGEMENT CHANGES
On June 15, 1998, the Company's Board of Directors announced the removal of
the then Chairman and Chief Executive Officer and subsequently announced the
removal or resignation of other senior officers, including the Company's then
Chief Financial Officer. In connection with the removal or resignation of the
senior officers and the termination of their restricted stock grants, the
unamortized portion of the deferred compensation expense attributable to the
restricted stock grants will be reversed and compensation expense of
approximately $0.9 million recognized in the first quarter of 1998 for unvested
restricted stock grants will be reversed into income in the second and third
quarters of 1998. Other costs related to the resignations and terminations will
be recognized, as appropriate, in 1998. The Company and certain of its former
officers are in disagreement as to the Company's obligations to these
individuals under prior employment agreements and arising from their
terminations. The Board of Directors has installed a new Chief Executive Officer
and senior management team.
13
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. SUBSEQUENT EVENTS - (CONTINUED)
COLEMAN ACQUISITION
On August 12, 1998, the Company announced that, following investigation and
negotiation conducted by a Special Committee of the Board consisting of four
outside directors not affiliated with M&F, the Company had entered into a
settlement agreement with a subsidiary of M&F pursuant to which the Company was
released from certain threatened claims of M&F and its affiliates arising from
the Coleman acquisition and M&F agreed to provide certain management personnel
and assistance to the Company in exchange for the issuance to the M&F subsidiary
of five-year warrants to purchase up to 23 million shares of the Company's
common stock at an exercise price of $7.00 per share, subject to anti-dilution
provisions. The financial statement impact of the settlement, which will be
material in amount, will be recorded in the third quarter of 1998. (See
Litigation, below.)
OTHER ACQUISITIONS
On April 6, 1998, the Company completed the cash acquisitions of First
Alert, Inc. ("First Alert"), a leading manufacturer of smoke and carbon monoxide
detectors, and Signature Brands USA, Inc. ("Signature Brands"), a leading
manufacturer of a comprehensive line of consumer and professional products. The
First Alert and the Signature Brands acquisitions were valued at approximately
$178 million and $253 million, respectively, including the assumption of debt.
These acquisitions will be accounted for by the purchase method of accounting
and the results of operations of the acquired entities will be included in the
Company's Consolidated Statement of Operations from the respective acquisition
dates.
DEBENTURES, NEW CREDIT FACILITY AND FINANCIAL INSTRUMENTS
The Company was required to file a registration statement with the
Securities and Exchange Commission to register the Debentures by June 23, 1998,
which registration statement has not been filed. From June 23, 1998 until the
day on which the registration statement is filed and declared effective, the
Company is required to pay to the Debenture holders cash liquidated damages
accruing, for each day during such period, at a rate per annum equal to 0.25%
during the first 90 days and 0.50% thereafter multiplied by the total of the
issue price of the Debentures plus the original issue discount thereon on such
day. The Company made its first payment of approximately $525,000 to the
Debenture holders on September 25, 1998.
At June 30, 1998, the Company was not in compliance with the financial
covenants and ratios required under the New Credit Facility. The Company and its
lenders entered into an agreement dated June 30, 1998, which provided that
compliance with the covenants would be waived through December 31, 1998.
Borrowings under the New Credit Facility are secured by certain of the Company's
assets, including its stock interest in Coleman and certain other subsidiaries
and certain of the Company's tangible and intangible personal property. Pursuant
to an amendment dated October 19, 1998, the Company is not required to comply
with the original financial covenants and ratios under the New Credit Facility
until April 10, 1999, but will be required to comply with an earnings before
interest, taxes, depreciation and amortization covenant, the amounts of which
are to be determined, beginning February 1999. Concurrent with each of these
amendments, interest margin was increased. The margin continues to increase
monthly through March 1999 to a maximum of 400 basis points over LIBOR. At
September 30, 1998, following the scheduled repayment of a portion of the term
loan, the New Credit Facility was reduced to $1,698 million in total, of which
approximately $1,453 million was outstanding and approximately $245 million was
available. In addition, the Company's cash balance available for debt repayment
at September 30, 1998 was approximately $43 million.
14
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. SUBSEQUENT EVENTS - (CONTINUED)
The Company is working closely with its bank lenders and hopes to reach
agreement with the bank lenders on a further amendment to the New Credit
Facility containing revised financial covenants which the bank lenders and the
Company find mutually acceptable. There can be no assurance that such an
amendment, or a further waiver of the existing financial covenants, will be
entered into with the bank lenders by April 10, 1999. The failure to obtain such
an amendment or further waiver would result in violation of the existing
covenants, which would permit the bank lenders to accelerate the maturity of all
outstanding borrowing under the New Credit Facility.
The Company selectively uses derivatives to manage interest rate and
foreign exchange exposures that arise in the normal course of business. In the
second quarter of 1998, the Company entered into two swap transactions in a
notional amount of $150 million each, in connection with the New Credit
Facility. The swap agreements are contracts to exchange floating rate for fixed
interest payments periodically over the life of the agreements without the
exchange of the underlying notional principal amounts. The swaps expire in June
2001 and 2003 and have strike rates of 5.75% and 5.58%, respectively. The
notional amounts of the agreements do not represent the amount of exposure to
credit loss.
As a result of repayment of certain indebtedness assumed in the Coleman
acquisition, the Company will recognize an extraordinary charge of approximately
$104 million in the second quarter of 1998.
SEC INVESTIGATION
By letter dated June 17, 1998, the staff of the Division of Enforcement of
the SEC advised the Company that it was conducting an informal inquiry into the
Company's accounting policies and procedures and requested that the Company
produce certain documents. On July 2, 1998, the SEC issued a Formal Order of
Private Investigation, designating officers to take testimony and pursuant to
which a subpoena duces tecum was served on the Company requiring the production
of certain documents. On November 4, 1998, another SEC subpoena duces tecum
requiring the production of further documents was received by the Company. The
Company has provided numerous documents to the SEC staff and continues to
cooperate fully with the SEC staff. The Company cannot predict the term of such
investigation or its potential outcome.
LITIGATION
On April 23, 1998, two class action lawsuits were filed on behalf of
purchasers of the Company's common stock in the U. S. District Court for the
Southern District of Florida against the Company and certain of its present and
former officers and directors alleging violations of the federal securities laws
as discussed below (the "Consolidated Federal Actions"). Since that date,
approximately fifteen similar class actions have been filed in the same Court.
One of the lawsuits also names as defendant Arthur Andersen LLP, the Company's
independent accountants for the period covered by the lawsuit.
15
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. SUBSEQUENT EVENTS - (CONTINUED)
The complaints in the Consolidated Federal Actions allege to varying
degrees that the defendants (i) failed to disclose that the Company pre-sold
approximately $50 million of products pursuant to its "early buy" marketing
program in an effort to boost its 1997 sales and net income figures and (ii)
made material misrepresentations regarding the Company's business operations,
future prospects and anticipated earnings per share, in an effort to
artificially inflate the price of the Company stock long enough for the Company
to complete a $2 billion debt financing (supported with stock incentives)
necessary to complete the acquisitions of Coleman, Signature Brands and First
Alert, and for the individual defendants to enter into lucrative long-term
employment agreements with the Company. Each complaint alleges two counts of
securities fraud; one count against all defendants and one count against the
individual defendants.
On June 16, 1998, the Court entered an Order consolidating all such filed
and all such subsequently filed class actions and providing time periods for the
filing of a Consolidated Amended Complaint and defendants' response thereto. On
June 22, 1998, two groups of plaintiffs made motions to be appointed lead
plaintiffs and to have their selection of counsel approved as lead counsel. On
July 20, 1998, the Court entered an Order appointing lead plaintiffs and lead
counsel (the "Smith Plaintiffs' Group"). This Order also stated that it "shall
apply to all subsequently filed actions which are consolidated herewith". On
August 28, 1998, plaintiffs in one of the subsequently filed actions filed an
objection to having their action consolidated pursuant to the June 16, 1998
Order, arguing that the class period in their action differs from the class
periods in the originally filed consolidated actions. On September 29, 1998, the
Smith Plaintiffs' Group filed its memorandum in opposition to this objection.
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 certain of its present and former officers and
directors. The action alleged that the individual defendants breached their
fiduciary duties and wasted corporate assets when the Company granted stock
options to three of its officers and directors on or about February 2, 1998 at
an exercise price of $36.85. On June 25, 1998, all defendants filed a motion to
dismiss the complaint for failure to make a presuit demand on the board of
directors of the Company. On October 22, 1998, the plaintiff amended the
complaint against all but one of the defendants named in the original complaint.
The amended complaint no longer challenges the stock options, but instead
alleges that the individual defendants breached their fiduciary duties by
failing to have in place adequate accounting and sales controls, which failure
caused the inaccurate reporting of financial information to the public, thereby
causing an artificial inflation of the Company's financial statements and stock
price.
On June 25, 1998, four purported class actions were filed in the Court of
Chancery of the State of Delaware in New Castle County by minority shareholders
of Coleman against the Company and certain of the Company's present and former
officers and directors. An additional class action was filed on August 10, 1998,
against the same parties. All of the plaintiffs are represented by the same
Delaware counsel and have agreed to consolidate the class actions. These actions
allege, in essence, that the existing exchange ratio for the proposed merger
between the Company and Coleman is no longer fair to Coleman shareholders as a
result of the recent decline in the market value of the Company stock. On
October 21, 1998, the Company announced that it had entered into a Memorandum of
Understanding to settle, subject to court approval, certain class actions
brought by shareholders of Coleman challenging the proposed Coleman Merger.
Under the terms of the proposed settlement, the Company will issue to the
Coleman public shareholders five-year warrants to purchase 4.98 million shares
of the Company's common stock at $7.00 per share. These warrants will generally
have the same terms as the warrants previously issued to a subsidiary of M&F and
will be issued when the Coleman Merger is consummated, which is now expected to
be in the first quarter of 1999. There can be no assurance that the Court will
approve the settlement as proposed.
16
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. SUBSEQUENT EVENTS - (CONTINUED)
During the months of August and October 1998, purported class and
derivative actions were filed in the Court of Chancery of the State of Delaware
in New Castle County and in the U. S. District Court for the Southern District
of Florida by shareholders of the Company against the Company, M&F and certain
of the Company's present and former directors. These complaints allege that the
defendants breached their fiduciary duties when the Company entered into a
settlement agreement with M&F whereby M&F released the Company from any claims
it may have had arising out of the Company's acquisition of its interest in
Coleman and agreed to provide management support to the Company (the "Settlement
Agreement"). Pursuant to the Settlement Agreement, M&F was granted five-year
warrants to purchase an additional 23 million shares of the Company's common
stock at an exercise price of $7.00 per share. These complaints also allege that
the rights of the public shareholders have been compromised, as the settlement
would normally require shareholder approval under the rules and regulations of
the New York Stock Exchange ("NYSE"). The Audit Committee of the Company's board
determined that obtaining such shareholder approval would have seriously
jeopardized the financial viability of the Company which is an allowable
exception to the NYSE shareholder approval requirements.
On September 16, 1998, an action was filed in the 56th Judicial District
Court of Galveston County, Texas alleging various claims in violation of the
Texas Securities Act and Texas Business and Commercial Code as well as common
law fraud as a result of the Company's alleged misstatements and omissions
regarding the Company's financial condition and prospects during a period
beginning May 1, 1998 and ending June 16, 1998, in which the plaintiffs engaged
in transactions in the Company's stock. The Company is the only named defendant
in this action. The complaint requests recovery of compensatory damages,
punitive damages and expenses in an unspecified amount. This action has been
removed to the U.S. District Court for the Southern District of Texas and the
Company has filed a motion to transfer this case to the Southern District of
Florida, the forum for the Consolidated Federal Actions. Plaintiffs have moved
to remand the case to Texas state court.
On October 30, 1998, a class action lawsuit was filed on behalf of certain
purchasers of the Company's Debentures in the U.S. District Court of the
Southern District of Florida against the Company and its prior Chief Executive
Officer and Chief Financial Officer, alleging violations of the federal
securities laws and common law fraud. The complaint alleges that the Company's
offering memorandum used for the marketing of the Debentures contained false and
misleading information regarding the Company's financial position and that the
defendants engaged in a plan to inflate the Company's earnings for the purpose
of defrauding the plaintiffs and others. The Company is seeking to consolidate
this lawsuit with the other 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.
However, if the foregoing actions were determined adversely to the Company, such
judgments would likely have a material adverse effect on the Company's financial
position, results of operations and cash flows.
On July 2, 1998, the American Insurance Company ("American") filed suit
against the Company in the U.S. District Court for the Southern District of New
York requesting a declaratory judgment of the court that the directors' and
officers' liability insurance policy for excess coverage issued by American was
invalid and/or had been properly cancelled by American. The Company has moved to
transfer such action to the federal district court in which the Consolidated
Federal Actions are currently pending; American is opposing such motion. On
October 20, 1998, an action was filed by Federal Insurance Company in the U.S.
District Court for the Middle District of Florida requesting the same relief as
that requested by American in the previously filed action as to additional
coverage levels under the Company's directors' and officers' liability insurance
policy. The Company intends to pursue recovery from all of its insurers if
damages are awarded against the Company or its indemnified officers and/or
directors under any of the foregoing actions. The Company's failure to obtain
such insurance recoveries following an adverse judgement against the Company in
any of the foregoing actions could have a material adverse impact on the
Company's financial position, results of operations and cash flow.
17
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. SUBSEQUENT EVENTS - (CONTINUED)
The Company and its subsidiaries are also involved in various 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 of the Predecessor, individually or in the aggregate, will not have a
material adverse effect upon the financial position or results of operations of
the Company.
ASSET IMPAIRMENT, INVENTORY RESERVES AND RELATED LIABILITIES
In 1998, as a result of decisions to outsource a substantial number of
products previously made by the Company, certain facilities and equipment will
either no longer be used or will be used in a significantly different manner.
Accordingly, certain assets recorded at March 31, 1998 will be written down in
future periods to reflect the fair market value of items held for disposition or
to reflect impairment for items where the future utility is altered by the
sourcing change. Personnel at the Mexico City manufacturing plant were notified
in the second quarter of 1998 that the plant is scheduled for closure at
year-end 1998. Accordingly, a liability related to plant closure will be
recorded in the second quarter. As certain inventories built in 1997 and the
first quarter of 1998 in anticipation of 1998 sales volumes exceed the actual
requirements, it will be necessary to dispose of some portions of excess
inventories at amounts less than cost. The Company is also in the process of
assessing the expected future performance of its business operations and the
impact of this assessment on the valuation of assets in the business. This
assessment is expected to be completed in the fourth quarter.
NEW ACCOUNTING STANDARDS
In April 1998, the AICPA issued Statement of Position 98-5, REPORTING ON
THE COSTS OF START-UP ACTIVITIES ("SOP 98-5"). SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. The Company will adopt SOP 98-5 beginning January 1, 1999.
Adoption of the Statement is not expected to have a material impact on the
Company's consolidated financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES for fiscal years beginning after June 15,
1999. SFAS No. 133 requires the recognition of all derivatives in the
Consolidated Balance Sheet as either assets or liabilities measured at fair
value. The Company will adopt SFAS No. 133 effective for the 2000 calendar year
end. The Company has not yet determined the impact SFAS No. 133 will have on its
financial position or results of operations when such statement is adopted.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On June 30, 1998, the Company announced that the Audit Committee of the
Board of Directors was initiating a review into the accuracy of prior financial
statements. The Audit Committee's review has since been completed and, as a
result of its findings, the Company has restated its previously issued
consolidated financial statements for 1996 and 1997 and the first quarters of
1998 and 1997 (see Note 8 to the accompanying condensed consolidated financial
statements and the Company's Annual Report on Form 10-K/A for the year ended
December 28, 1997). The following discussion should be read in conjunction with
the accompanying condensed consolidated financial statements as of and for the
three months ended March 31, 1998 and March 30, 1997.
OVERVIEW
On March 30, 1998, the Company, through a wholly-owned subsidiary, acquired
approximately 81% of the total number of then outstanding shares of common stock
of The Coleman Company, Inc. ("Coleman"), in exchange for 14,099,749 shares of
the Company's common stock and approximately $160 million in cash as well as the
assumption of $1,016 million in debt. The Company expects to acquire the
remaining equity interest in Coleman pursuant to a merger transaction in which
the existing Coleman minority shareholders will receive approximately 6.7
million shares of common stock and approximately $87 million in cash. Although
there can be no assurance, it is anticipated the Coleman merger will occur in
the first quarter of fiscal 1999. (See Note 10 to the condensed consolidated
financial statements and Part II, Item 1. "Legal Proceedings"). Coleman is a
leading manufacturer and marketer of consumer products for the worldwide outdoor
recreation market. Its products have been sold domestically under the Coleman
/registered trademark/ brand name since the 1920's.
The Coleman acquisition was recorded under the purchase method of
accounting; and accordingly, the results of operations of Coleman for March 30
and 31, 1998 are included in the accompanying Condensed Consolidated Statement
of Operations. The purchase price of Coleman has been allocated to individual
assets acquired and liabilities assumed based on preliminary estimates of fair
market value at the date of acquisition. The allocation of purchase price for
the acquisition of Coleman will be revised when additional information
concerning asset and liability valuations is obtained. Adjustments, which could
be significant, will be made during the allocation period based on detailed
reviews of the fair values of assets acquired and liabilities assumed and could
result in a substantial change in goodwill and other intangible assets.
To standardize the fiscal period ends of the Company, Coleman and two
companies acquired after March 31, 1998, effective with its 1998 fiscal year,
the Company has changed its fiscal year end from the Sunday nearest December 31
to a calendar year. (See Notes 1 and 10 to the condensed consolidated financial
statements.)
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 30, 1997
Net sales is comprised of gross sales less provisions for estimated
customer returns, discounts, promotional allowances, cooperative advertising
allowances and costs incurred by the Company to ship product to customers. Net
sales for the three months ended March 31, 1998 were $247.6 million, a decrease
of $4.9 million or 2% versus the three months ended March 30, 1997. After
excluding: (i) $14.8 million of Coleman's sales for March 30 and 31, 1998, (ii)
approximately $4 million in 1998 sales resulting from the change in year end
described above, (iii) $4.2 million from 1997 sales relating to divested product
lines which are not classified as discontinued operations (time and temperature
products and Counselor /registered trademark/ and Borg /registered trademark/
branded scales), and (iv) $13.7 million from 1997 sales of discontinued
inventory which resulted primarily from the reduction of SKU's as part of the
1996 restructuring plan and for which the inventory carrying value was
substantially equivalent to the sales value, net sales on an adjusted basis
("Adjusted Sales") reflected a 2% decrease from the first quarter of 1997.
Overall, product sales were adversely impacted by price discounting and
approximately $13 million of higher provisions for estimated returns, costs to
ship products to customers, rebates and other customer allowances.
Domestic Adjusted Sales declined approximately $10 million from the first
quarter of 1997. Outdoor Cooking category sales accounted for the majority of
this decline. During 1997, the Company lost a significant portion of its Outdoor
Cooking products distribution, including the majority of its grill accessory
products distribution. As compared with the first quarter of 1997, the Outdoor
Cooking products sales decline was also attributed to a lower than anticipated
retail sell-through during the early stages of the 1998 retail selling season.
Based on the sales levels achieved in the first quarter of 1998, distribution
losses and retail inventory levels for Outdoor Cooking products, and a
significant sales decline experienced subsequent to the first quarter as
compared with the same period in the prior year, sales for the remainder of 1998
will be significantly lower as compared to the prior year. Adjusted Sales for
Appliance category products increased approximately $7 million but were offset
by declines in other product categories, primarily Away From Home products.
International sales, which represented 26% of Adjusted Sales in the first
quarter of 1998, grew approximately 16% over the first quarter of 1997's
Adjusted Sales. This sales growth was attributed to improved distribution, new
product sales and increased retail inventory levels in Latin America, including
Mexico and Venezuela, offset by declines in sales of Outdoor Cooking products in
Europe and Canada.
Excluding $4.1 million of gross margin generated from the inclusion of the
Coleman operations for two days in the first quarter of 1998 and approximately
$0.6 million in gross margin from the change in the fiscal period, gross margin
declined to $29.1 million, or 12.7% of Adjusted Sales in 1998 versus $58.3
million, or 24.8% of Adjusted Sales for the same period a year ago. The margin
erosion was due to lower price realization and higher costs of customer
allowances, rebates and similar incentives in 1998, coupled with a higher
product return reserve and an adverse product sales mix in 1998. The adverse
product sales mix was due in part to the loss of a majority of the grill
accessory products distribution. Accessories generate significantly better
margins than the average margins on sales of grills. During the first quarter of
each year, grill and grill accessory sales are traditionally a higher portion of
overall sales in the period than during other quarters of the year.
19
Due to the level of Outdoor Cooking products sales in the first quarter and
the levels of retail inventories for these products, the Company began the
season-end ramp down of production at the Neosho Outdoor Cooking products
facility earlier than previously planned. As a result, operating results for the
1998 grill season will be adversely impacted due to unabsorbed fixed factory
overhead during the second and third quarters and higher inventory carrying
costs.
Excluding the effect of: (i) $3.7 million of selling, general and
administrative ("SG&A") charges from Coleman, (ii) approximately $0.8 million of
SG&A expenses in 1998 from the change in the fiscal period, (iii) a $3.0 million
benefit in the first quarter of 1998 and a $0.5 million benefit in the first
quarter of 1997 from the reversal of reserves no longer required, (iv) $31.2
million of charges recorded in 1998 related to compensation for former
executives, and (v) $4.1 million of restructuring related charges recorded in
1997, SG&A expenses were 2% higher in 1998 than 1997. Higher distribution and
warehousing costs due to increased levels of inventory were primarily
responsible for the increase in costs between years.
Operating results for the first quarters of 1998 and 1997, on a comparable
basis as described above, were a loss of $9.4 million in 1998 and a profit of
$20.7 million in 1997. On the same basis, operating margins as a percent of
Adjusted Sales decreased to a loss of 4.1% from a profit of 8.8% in the prior
year. This change resulted from the factors discussed above.
Interest expense increased from $2.0 million in the first quarter of 1997
to $5.1 million in the first quarter of 1998 primarily related to higher
borrowing levels in 1998 for the acquisitions and increased working capital.
(See Note 3 to the condensed consolidated financial statements.)
Other expense, net of $3.2 million in 1998 and $0.1 million in 1997
primarily represents foreign exchange losses. Losses in both years arose from
Sunbeam's operations in Mexico. In addition, the 1998 losses were impacted by
Sunbeam's operations in Venezuela and Coleman's operations in Japan.
The effective income tax rate was 0.3% in the first quarter of 1998, as
compared to 39.8% in the first quarter of 1997. The 1998 rate is lower than the
statutory federal rate principally as a result of a valuation allowance for
deferred tax assets provided in 1998. The 1997 rate was higher than the federal
statutory income tax rate primarily due to state and local taxes plus the effect
of foreign earnings taxed at other rates.
The Company's loss per share from continuing operations in the first
quarter of 1998, excluding: (i) Coleman's results for March 30 and 31, 1998,
(ii) the effect of the change in fiscal periods, (iii) the reversals of reserves
no longer required in each year's first quarter, (iv) the restructuring related
charges in 1997, and (v) the 1998 charge related to management compensation was
a loss of $0.20 per share versus earnings per share from continuing operations
in the first quarter of 1997 of $0.13 per share. Due to increased inventory
positions at certain customers from sales in 1997 and the first quarter of 1998,
as well as increased inventory positions at the Company, sales and operating
income will be materially affected during the remainder of 1998. In addition,
1998 results will be impacted materially by charges related to, among other
items, a change in management, changes in business operations resulting in part
from acquisitions in 1998, interest costs associated with higher debt levels,
costs associated with litigation and asset impairment costs, as well as costs
related to Year 2000 issues. (See "Liquidity and Capital Resources", below, and
Note 10 to the condensed consolidated financial statements.)
In March 1998, the Company prepaid a $75.0 million 7.85% industrial revenue
bond related to its Hattiesburg facility originally due in 2009. In connection
with the early extinguishment of this debt, the Company recognized an
extraordinary charge of $8.6 million ($0.10 per share) in the first quarter of
1998.
The Company's discontinued furniture business, which was sold in March
1997, had revenues of $51.6 million in the first quarter of 1997 prior to the
sale and nominal earnings. As a result of the sale of the Company's furniture
business assets (primarily inventory, property, plant and equipment), the
Company received $69.0 million in cash, retained approximately $50.0 million in
accounts receivable and retained certain liabilities. The final purchase price
for the furniture business was subject to a post-closing adjustment based on the
terms of the Asset Purchase Agreement and in the first quarter of 1997, after
completion of the sale, the Company recorded an additional loss on disposal of
$22.5 million pre-tax.
FOREIGN OPERATIONS
Approximately 90% of the Company's business is conducted in U.S. dollars
(including both domestic sales, U.S. dollar denominated export sales, primarily
to certain Latin American markets, Asian sales and the majority of European
sales). The Company's exposure to market risk from changes in foreign currency
and interest rates is generally insignificant. The Company's non-U.S. dollar
denominated sales are made principally by subsidiaries in Mexico, Venezuela and
Canada. Venezuela is considered a hyperinflationary economy for accounting
purposes for 1998 and 1997 and Mexico reverted to a hyperinflationary status for
accounting purposes in 1997; therefore, translation adjustments related to
Venezuelan and Mexican net monetary assets are included as a component of net
earnings. Mexico is not expected to be hyperinflationary at some point in 1998.
While Sunbeam's revenues generated in Asia have traditionally not been
significant, economic instability in this region is expected to have a negative
effect on Coleman's earnings. It is anticipated that sales in and exports to
this region will continue to decline so long as the economic environment remains
unsettled. It is not anticipated that this impact will be materially adverse to
the Company's results of operations taken as a whole.
On a limited basis, the Company selectively uses derivatives (foreign
exchange option and forward contracts) to manage foreign exchange exposures that
arise in the normal course of business. No derivative contracts are entered into
for trading or speculative purposes. The use of derivatives did not have a
material impact on the Company's financial results in 1998 and 1997. (See Note 3
to the condensed consolidated financial statements.)
20
SEASONALITY
On a consolidated basis, the Company's sales have not traditionally
exhibited substantial seasonality; however, sales have been strongest during the
fourth quarter of the calendar year. Additionally, sales of Outdoor Cooking
products are strongest in the first half of the year, while sales of Appliances
and Personal Care and Comfort products are strongest in the second half of the
year. Furthermore, sales of a number of the Company's traditional products,
including warming blankets, vaporizers, humidifiers and grills may be impacted
by unseasonable weather conditions. After considering the seasonality of the
acquired entities, the Company's consolidated sales are not expected to exhibit
substantial seasonality; however, sales are expected to be strongest during the
second quarter of the calendar year. Additionally, sales of many products sold
by Coleman may be impacted by unseasonable weather conditions.
LIQUIDITY AND CAPITAL RESOURCES
In order to finance the acquisition of Coleman in the first quarter of 1998
and the anticipated acquisitions of 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 acquired entities, the Company
consummated: (i) an offering (the "Offering") of Zero Coupon Convertible Senior
Subordinated Debentures due 2018 (the "Debentures") at a yield to maturity of 5%
(approximately $2,014 million principal amount at maturity) in March 1998, which
resulted in approximately $730 million of net proceeds and, (ii) entered into a
revolving and term credit facility ("New Credit Facility"). (See Note 10.)
The New Credit Facility provided for an 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 31, 2005; (ii) an $800 million term
loan maturing on March 31, 2005, and (iii) a $500 million term loan maturing
September 30, 2006. Interest accrues at a rate selected at the Company's option
of: (i) the London Interbank Offered Rate ("LIBOR") plus an agreed upon interest
margin which varies depending upon the Company's leverage ratio, as defined, and
other items or, (ii) the base rate of the administrative agent (generally the
higher of the prime commercial lending rate of the administrative agent or the
Federal Funds Rate plus 1/2 of 1%), plus an agreed upon interest margin which
varies depending upon the Company's leverage ratio, as defined, and other items.
(See Notes 3 and 10 to the condensed consolidated financial statements.)
As of March 31, 1998, the Company had cash and cash equivalents of $193.5
million, working capital excluding cash and cash equivalents of $707.5 million
and total debt of $1.7 billion. Cash used in operating activities during the
first quarter of 1998 was $134.7 million compared to $22.6 million in the first
quarter of 1997. This increase is primarily attributable to lower earnings
before non-cash charges and an increased investment in working capital. The
majority of the increase in working capital is a result of higher inventory and
receivables levels in 1998. Inventories increased $312.2 million from December
28, 1997, of which $246.3 million related to Coleman and $65.9 million related
to Sunbeam's household and grill products. Receivables increased $272.2 million
from December 28, 1997, with $215.1 million due to the Coleman acquisition and
$57.1 million from Sunbeam's historical operating units. Extended dating terms
contributed to the increase in Sunbeam's receivables. Cash used in operating
activities for the 1998 first quarter reflects proceeds of $34.8 million from
the Company's revolving trade accounts receivable securitization program entered
into in December 1997. The Company expects to continue to use the securitization
program to finance a portion of its accounts receivable. The Company anticipates
that cash used in operating activities will increase in the second and third
quarters of 1998, principally from losses incurred in operations and increases
in inventory. As certain inventories built in 1997 and the first quarter of 1998
in anticipation of 1998 sales volumes exceed the actual requirements, it will be
necessary to dispose of some portions of excess inventories at amounts less than
cost.
Cash used in investing activities in the first quarter of 1998 reflects
$160.6 million for the acquisition of approximately 81% of Coleman. In the first
quarter of 1997, cash provided by investing activities reflected $70.4 million
in proceeds from the sales of divested operations. Capital spending totaled
$19.5 million in 1998 and was primarily for capacity expansion initiatives
primarily at the Neosho grill manufacturing facility, and equipment and tooling
for new products. Capital spending in 1997 was $10.9 million and was primarily
attributable to manufacturing capacity expansion and equipment to manufacture
new products. The new product capital spending in 1998 principally related to
the Appliance category and included costs related to water and air filtration
products, blenders, standmixers and irons. The Company anticipates 1998 capital
spending to be approximately 5% of sales, primarily related to new product
introductions, capacity additions and certain facility rationalization
initiatives.
Cash provided by financing activities totaled $456.1 million in the first
quarter of 1998 and reflects net proceeds from the Debentures of $729.6 million,
the cancellation and repayment of all outstanding balances under the Company's
$250 million September 1996 revolving credit facility, the repayment of certain
Coleman debt and the early extinguishment of the $75.0 million Hattiesburg bond.
In addition, cash provided by financing activities is net of $25.1 million of
financing fees related to the Company's $1.7 billion New Credit Facility and
$19.0 million of proceeds from the exercise of stock options. (See Note 3 to the
condensed consolidated financial statements.)
In April 1998, the Company drew from the term loans under the New Credit
Facility to fund the acquisitions of Signature Brands and First Alert as further
described in Note 10 to the condensed consolidated financial statements and to
refinance certain debt of the acquired companies. The Company drew an additional
$550 million of term loans and $50 million of revolving loans in May 1998 to
finance the prepayment of certain debt assumed in connection with the Coleman
acquisition. In connection with these debt refinancings, the Company expects to
record an extraordinary charge of approximately $104 million in the second
quarter of 1998.
At June 30, 1998, the Company was not in compliance with the covenants and
ratios under the New Credit Facility. The Company and its lenders entered into
an agreement dated June 30, 1998, which provided that compliance with the
covenants would be waived through December 31, 1998. Subsequently, pursuant to
an amendment dated October 19, 1998, the Company is not required to comply with
the original financial covenants and ratios under the New Credit Facility until
April 10, 1999, but will be required to comply with an earnings before interest,
taxes, depreciation and amortization covenant, the amounts of which are to be
determined, beginning February 1999. At September 30, 1998, following the
scheduled repayment of a portion of the term loan, the New Credit Facility was
reduced to $1,698 million in total, of which approximately $1,453 million was
outstanding and approximately $245 million was available. In addition, the
Company's cash balance available for debt repayment at September 30, 1998 was
approximately $43 million.
21
The Company is working closely with its bank lenders and hopes to reach
agreement with the bank lenders on a further amendment to the New Credit
Facility containing revised financial covenants which the bank lenders and the
Company find mutually acceptable. There can be no assurance that such an
amendment, or a further waiver of the existing financial covenants, will be
entered into with the bank lenders by April 10, 1999. The failure to obtain such
an amendment or further waiver would result in violation of the existing
covenants, which would permit the bank lenders to accelerate the maturity of all
outstanding borrowing under the New Credit Facility.
The Company expects to acquire the remaining equity interest in Coleman
pursuant to a merger transaction in which the existing Coleman minority
shareholders will receive approximately 6.7 million shares of common stock and
approximately $87 million in cash. In addition, as a result of litigation
related to the merger consideration, the Company has entered into a memorandum
of understanding (subject to court approval) pursuant to which the holders of
the remaining equity interest in Coleman will also receive five-year warrants to
purchase 4.98 million shares of Sunbeam common stock at $7.00 per share. There
can be no assurance that the court will approve the settlement as proposed.
Although there can be no assurance, it is anticipated the Coleman merger will
occur in the first quarter of fiscal 1999. (See Note 10 to the condensed
consolidated financial statements.)
The Company believes its borrowing capacity under the New Credit Agreement,
cash flow from the combined operations of the Company and its acquired
companies, existing cash and cash equivalent balances, and its receivable
securitization program will be sufficient to support working capital needs,
capital spending, and debt service for the foreseeable future. However, if the
Company is unable to satisfactorily amend the financial covenants and ratio
requirements of the New Credit Facility or obtain a further waiver of the
existing covenants and ratio requirements prior to April 10, 1999, the Company
expects it would, at that time, be in default of the requirements under the New
Credit Facility and, as noted above, the lenders could then require the
repayment of all amounts then outstanding under the New Credit Facility.
NEW ACCOUNTING STANDARDS
See Notes 1 and 10 to the Company's condensed consolidated financial
statements for a discussion of Statement of Financial Accounting Standards
("SFAS") No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, Statement of Position ("SOP") 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE and SOP 98-5, REPORTING
ON THE COSTS OF START-UP ACTIVITIES, which are required to be adopted for
periods beginning after December 15, 1997. The adoption of these standards is
not expected to have a material effect on the Company's consolidated results of
operations, financial position, or cash flows, although actual charges incurred
may be material due to Year 2000 issues, as discussed below.
YEAR 2000
The Company is in the process of assessing the impact of the Year 2000 on
its operations, including the Coleman, First Alert and Signature Brands
companies which were acquired by the Company in the spring of 1998. The Company
established a Year 2000 Program Management Office in the third quarter of 1998
to conduct such assessment with assistance from three consulting firms. The
Company's assessment encompasses the Company's information technology functions
along with the impact of the effects of noncompliance by its vendors, service
providers, customers, and financial institutions. Additionally, the Company is
assessing the impact of noncompliance of embedded microprocessors in its
products as well as equipment, such as security and telephone systems and
controls for lighting, heating/ventilation, and facility access.
The Company relies on its information technology functions to perform many
tasks that are critical to its operations. Significant transactions that could
be impacted by Year 2000 noncompliance include, among others, purchases of
materials, production management, order entry and fulfillment, and payroll
processing. Systems and applications that have been identified by the Company to
date as not currently Year 2000 compliant and which are critical to the
Company's operations include its financial software systems, which process the
order entry, purchasing, production management, general ledger, accounts
receivable, and accounts payable functions, and critical applications in the
Company's manufacturing and distribution facilities, such as the warehouse
management application. The Company plans to complete corrective work with
respect to the Company's systems by the second quarter of 1999 with final
testing and implementation of such systems occurring in the third quarter of
1999. Management believes that, although there are significant systems that will
need to be modified or replaced, the Company's information systems environment
will be made Year 2000 compliant prior to January 1, 2000. The Company's failure
to timely complete such corrective work could have a material adverse impact on
the Company. The Company is not able to estimate possible lost profits arising
from such failure.
22
The Company is in the process of contacting its vendors and suppliers of
products and services to determine their Year 2000 readiness and plans. This
review includes third party providers to whom the Company has outsourced the
processing of its cash receipt and cash disbursement transactions. The Company
plans to complete this review during the fourth quarter of 1998. The failure of
certain of these third party suppliers to become Year 2000 compliant could have
a material adverse impact on the Company.
The Company's preliminary assessment of the total costs to address and
remedy Year 2000 issues, including costs for the acquired companies, is at least
$50 million. This estimate includes the costs of software and hardware
modifications and replacements and fees to third party consultants, but excludes
internal resources. The Company expects these expenditures to be financed
through operating cash flows or borrowings, as applicable. Through March 31,
1998, the Company had expended less than $1 million related to new systems and
remediation to address Year 2000 issues, of which the majority was for software
licenses and was therefore recorded as capital expenditures. Of the remaining
estimated expenditures, it is anticipated that approximately 25% will be
incurred by year-end 1998, with the remainder in 1999. A significant portion of
these expenditures will enhance the Company's operating systems in addition to
resolving the Year 2000 issues. As the Company completes its assessment of the
Year 2000 issues, the actual expenditures incurred or to be incurred may differ
materially from the amounts shown above.
After completing the assessment of the Year 2000 on its operations, the
Company plans to establish a contingency plan for addressing any effects of the
Year 2000 on its operations, whether due to noncompliance of the Company's
systems or those of third parties. The Company expects to complete such
contingency plan by September 30, 1999; such contingency plan will address
alternative processes, such as manual procedures to replace those processed by
noncompliant systems, potential alternative service providers, and plans to
address compliance issues as they arise. Subject to the nature of the systems
and applications which are not made Year 2000 compliant, the impact of such
non-compliance on the Company's operations could be material if appropriate
contingency plans cannot be developed prior to January 1, 2000.
SUBSEQUENT EVENTS
See Note 10 of Notes to the condensed consolidated financial statements for
information relating to, among other matters, a change in management, litigation
and anticipated asset impairment, inventory reserves and related liabilities.
RESTATEMENT OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 30, 1997
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1996
The results of operations previously reported for the three months ended
March 30, 1997 as compared with the three months ended March 31, 1996 generally
understated the level of expenses incurred in 1997. Gross margin was previously
reported to have improved 5.8 percentage points from the level achieved in 1996.
After restatement, the gross margin improvement was 2.2 percentage points.
Operating income was previously reported to have improved $19.2 million or
123.9% from 1996's first quarter to the first quarter of 1997. After reflecting
the results of the restatement, operating earnings were $17.1 million for the
first quarter of 1997, an improvement of $1.5 million or 9.9% from the prior
year. On November 12, 1998, the Company filed a Form 10-K/A setting forth its
restated financial statements for December 28, 1997 and December 29, 1996, and
the fiscal years then ended. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the fiscal years 1997 and 1998 as well
as 1996 and 1995 are contained therein. (See Note 8 to the condensed
consolidated financial statements.)
23
CAUTIONARY STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q/A may constitute
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995, as the same may be amended from time to time
(herein the "Act") and in releases made by the Securities and Exchange
Commission ("SEC") from time to time. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance, or achievements of the Company to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. When used in this Quarterly Report
on Form 10-Q/A, the word "estimate," "project," "intend," "expect" and similar
expressions, when used in connection with the Company, including its management,
are intended to identify forward-looking statements. These forward-looking
statements were based on various factors and were derived utilizing numerous
important assumptions and other important factors that could cause actual
results to differ materially from those in the forward-looking statements. These
Cautionary Statements are being made pursuant to the Act, with the intention of
obtaining the benefits of the "Safe Harbor" provisions of the Act. The Company
cautions investors that any forward-looking statements made by the Company are
not guarantees of future performance. Important assumptions and other important
factors that could cause actual results to differ materially from those in the
forward-looking statements with respect to the Company include, but are not
limited to risks associated with (i) high leverage, (ii) Sunbeam's ability to
enter into an amendment to its credit agreement containing financial covenants
which it and its bank lenders find mutually acceptable, or to continue to obtain
waivers from its bank lenders with respect to its compliance with the existing
covenants contained in such agreement, and to continue to have access to its
revolving credit facility, (iii) Sunbeam's ability to integrate the recently
acquired Coleman, Signature Brands and First Alert companies and expenses
associated with such integration, (iv) Sunbeam's sourcing of products from
international vendors, including the ability to select reliable vendors and to
avoid delays in shipments, (v) Sunbeam's ability to maintain and increase market
share for its products at anticipated margins, (vi) Sunbeam's ability to
successfully introduce new products and to provide on-time delivery and a
satisfactory level of customer service, (vii) changes in laws and regulations,
including changes in tax rates, accounting standards, environmental laws,
occupational, health and safety laws, (viii) access to foreign markets together
with foreign economic conditions, including currency fluctuations, (ix)
uncertainty as to the effect of competition in existing and potential future
lines of business, (x) fluctuations in the cost and availability of raw
materials and/or products, (xi) changes in the availability and relative costs
of labor, (xii) effectiveness of advertising and marketing programs, (xiii)
economic uncertainty in Japan, Korea and other Asian countries, as well as in
Mexico, Venezuela, and other Latin American countries, (xiv) product quality,
including excess warranty costs, product liability expenses and costs of product
recalls, (xv) weather conditions which can have an unfavorable impact upon sales
of Sunbeam's products, (xvi) the numerous lawsuits against the Company and the
SEC investigation into the Company's accounting practices and policies, and
uncertainty regarding the Company's available coverage on its directors' and
officers' liability insurance, (xvii) the possibility of a recession in the
United States or other countries resulting in a decrease in consumer demands for
the Company's products, and (xviii) failure of the Company and/or its suppliers
of goods or services to timely complete the remediation of computer systems to
effectively process Year 2000 information. Other factors and assumptions not
included in the foregoing may cause the Company's actual results to materially
differ from those projected. The Company assumes no obligation to update any
forward-looking statements or these Cautionary Statements to reflect actual
results or changes in other factors affecting such forward-looking statements.
24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 certain of its present and
former officers and directors alleging violations of the federal securities laws
as discussed below (the "Consolidated Federal Actions"). Since that date,
approximately fifteen similar class actions have been filed in the same Court.
One of the lawsuits also names as defendant Arthur Andersen LLP, the Company's
independent accountants.
The complaints in the Consolidated Federal Actions allege to varying
degrees that the defendants (i) failed to disclose that the Company pre-sold
approximately $50 million of products pursuant to its "early buy" marketing
program in an effort to boost its 1997 sales and net income figures and (ii)
made material misrepresentations regarding the Company's business operations,
future prospects and anticipated earnings per share, in an effort to
artificially inflate the price of the Company stock long enough for the Company
to complete a $2 billion debt financing (supported with stock incentives)
necessary to complete the acquisitions of Coleman, Signature Brands and First
Alert, and for the individual defendants to enter into lucrative long-term
employment agreements with the Company. Each complaint alleges two counts of
securities fraud; one count against all defendants and one count against the
individual defendants.
On June 16, 1998, the Court entered an Order consolidating all such filed
and all such subsequently filed class actions and providing time periods for the
filing of a Consolidated Amended Complaint and defendants' response thereto. On
June 22, 1998, two groups of plaintiffs made motions to be appointed lead
plaintiffs and to have their selection of counsel approved as lead counsel. On
July 20, 1998, the Court entered an Order appointing lead plaintiffs and lead
counsel (the "Smith Plaintiffs' Group"). This Order also stated that it "shall
apply to all subsequently filed actions which are consolidated herewith". On
August 28, 1998, plaintiffs in one of the subsequently filed actions filed an
objection to having their action consolidated pursuant to the June 16, 1998
Order, arguing that the class period in their action differs from the class
periods in the originally filed consolidated actions. On September 29, 1998, the
Smith Plaintiffs' Group filed its memorandum in opposition to this objection.
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 certain of its present and former officers and
directors. The action alleged that the individual defendants breached their
fiduciary duties and wasted corporate assets when the Company granted stock
options to three of its officers and directors on or about February 2, 1998 at
an exercise price of $36.85. On June 25, 1998, all defendants filed a motion to
dismiss the complaint for failure to make a presuit demand on the board of
directors of the Company. On October 22, 1998, plaintiff filed an amended
complaint against all but one of the defendants named in the original complaint.
The amended complaint no longer challenges the stock options, but instead
alleges that the individual defendants breached their fiduciary duties by
failing to have in place adequate accounting and sales controls, which failure
caused the inaccurate reporting of financial information to the public, thereby
causing an artificial inflation of the Company's financial statements and stock
price.
On June 25, 1998, four purported class actions were filed in the Court of
Chancery of the State of Delaware in New Castle County by minority shareholders
of Coleman against the Company and certain of the Company's present and former
officers and directors. An additional class action was filed on August 10, 1998,
against the same parties. All of the plaintiffs are represented by the same
Delaware counsel and have agreed to consolidate the class actions. These actions
allege, in essence, that the existing exchange ratio for the proposed merger
between the Company and Coleman is no longer fair to Coleman shareholders as a
result of the recent decline in the market value of the Company stock. On or
about October 21, 1998, the parties signed a memorandum of understanding to
settle these class actions, subject to court approval.
During the months of August and October 1998, purported class and
derivative actions were filed in the Court of Chancery of the State of Delaware
in New Castle County and in the U. S. District Court for the Southern District
of Florida by shareholders of the Company against the Company, M&F and certain
of the Company's present and former directors. These complaints allege that the
defendants breached their fiduciary duties when the Company entered into a
settlement agreement whereby M&F released the Company from any claims it may
have had arising out of the Company's acquisition of its interest in Coleman and
agreed to provide management support to the Company (the "Settlement
Agreement"). Pursuant to the Settlement Agreement, a M&F subsidiary was granted
five-year warrants to purchase up to an additional 23 million shares of the
Company's common stock at an exercise price of $7.00 per share. These complaints
also allege that the rights of the public shareholders have been compromised, as
the settlement would normally require shareholder approval under the rules and
regulations of the New York Stock Exchange ("NYSE"). The Audit Committee of the
Company's board determined that obtaining such shareholder approval would have
seriously jeopardized the financial viability of the Company which is an
allowable exception to the NYSE shareholder approval requirement. An amended
complaint has been filed on this action.
On September 16, 1998, an action was filed in the 56th Judicial District
Court of Galveston County, Texas alleging various claims in violation of the
Texas Securities Act and Texas Business and Commercial Code as well as common
law fraud as a result of the Company's alleged misstatements and omissions
regarding the Company's financial condition and prospects during a period
beginning May 1, 1998 and ending June 16, 1998, in which the plaintiffs engaged
in transactions in the Company's stock. The Company is the only named defendant
in this action. The complaint requests recovery of compensatory damages,
punitive damages and expenses in an unspecified amount. This action has been
removed to the U.S. District Court for the Southern District of Texas and the
Company has filed a motion to transfer this case to the Southern District of
Florida, the forum for the Consolidated Federal Actions. Plaintiffs have moved
to remand the case to Texas state court.
On October 30, 1998, a class action lawsuit was filed on behalf of certain
purchasers of the Company's Debentures in the U.S. District Court of the
Southern District of Florida against the Company and its prior Chief Executive
Officer and Chief Financial Officer, alleging violations of the federal
securities laws and common law fraud. The complaint alleges that the Company's
offering memorandum used for the marketing of the Debentures
25
contained false and misleading information regarding the Company's financial
position and that the defendants engaged in a plan to inflate the Company's
earnings for the purpose of defrauding the plaintiffs and others. The Company is
seeking to consolidate this lawsuit with the other 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.
However, if the foregoing actions were determined adversely to the Company, such
judgments would likely have a material adverse effect on the Company's financial
position, results of operations and cash flow.
On July 2, 1998, the American Insurance Company ("American") filed suit
against the Company in the U.S. District Court for the Southern District of New
York requesting a declaratory judgment of the court that the directors' and
officers' liability insurance policy for excess coverage issued by American was
invalid and/or had been properly cancelled by American. The Company has moved to
transfer such action to the federal district court in which the Consolidated
Federal Actions are currently pending; American is opposing such motion. On
October 20, 1998, an action was filed by Federal Insurance Company in the U.S.
District Court for the Middle District of Florida requesting the same relief as
that requested by American in the previously filed action as to additional
coverage levels under the Company's directors' and officers' liability insurance
policy. The Company intends to pursue recovery from all of its insurers if
damages are awarded against the Company or its indemnified officers and/or
directors under any of the foregoing actions. The Company's failure to obtain
such insurance recoveries following an adverse judgement against the Company in
any of the lawsuits referred to above could have a material adverse effect on
the Company's financial position, results of operations and cash flow.
The Company and its subsidiaries are also involved in various 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 of the Company's predecessor, individually or in the aggregate, will
not have a material adverse effect upon the financial position or results of
operations of the Company.
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits*
3 Bylaws of Sunbeam Corporation, as amended.
10.a Credit Agreement dated as of March 30, 1998, among Sunbeam Corporation,
the Subsidiary Borrowers referred to therein, the Lenders party
thereto, Morgan Stanley Senior Funding, Inc., Bank America National
Trust and Savings Association and First Union National Bank.
10.b First Amendment to Credit Agreement dated as of May 8, 1998, among
Sunbeam Corporation, the Subsidiary Borrowers referred to therein, the
Lenders party thereto, Morgan Stanley Senior Funding, Inc., Bank
America National Trust and Savings Association and First Union National
Bank.
10.c Indenture, dated as of March 25, 1998, by and among the Company and
Bank of New York, as Trustee, with respect to the Zero Coupon
Convertible Senior Subordinated Debentures due 2018.
10.d Registration Rights Agreement dated March 25, 1998, by and among the
Company and Morgan Stanley & Co., Inc., with respect to the Zero Coupon
Convertible Senior Subordinated Debentures due 2018.
27 Financial Data Schedule, submitted electronically to the Securities and
Exchange Commission for information only and not filed.
99.a Press Release dated May 11, 1998, regarding first quarter 1998 earning
and restructure of the Sunbeam acquired companies.
* All of the foregoing Exhibits were filed with the Company's report on Form
10-Q for the first quarter of 1998.
(b) Reports on Form 8-K
The Company filed Reports on Form 8-K on April 13, 1998 as amended by Form 8-K/A
filed on May 11, 1998.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNBEAM CORPORATION
BY: /S/ BOBBY G. JENKINS
------------------------
Bobby G. Jenkins
Executive Vice President, and
Chief Financial Officer
(Principal Financial Officer)
Dated: November 25, 1998
28
EXHIBIT INDEX
EXHIBIT DESCRIPTION
27 Financial Data Schedule
29