UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the period ended June 30, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ___________ to ___________
Commission File No. 1-000052
SUNBEAM CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 25-1638266
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
2381 EXECUTIVE CENTER DRIVE 33431
BOCA RATON, FL (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(561) 912-4100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
On August 17, 1999 there were 100,902,392 shares of the registrant's Common
Stock ($.01 par value) outstanding.
SUNBEAM CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT
ON FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
(Unaudited) for the three months and six months ended
June 30, 1999 and June 30, 1998................................................ 2
Condensed Consolidated Balance Sheets (Unaudited)
as of June 30, 1999 and December 31, 1998...................................... 3
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 30, 1999 and June 30, 1998....................... 4
Notes to Condensed Consolidated Financial Statements (Unaudited)............... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 34
Item 4. Submission of Matters to a Vote of Security Holders............................ 37
Item 6. Exhibits and Reports on Form 8-K .............................................. 38
SIGNATURE ........................................................................................ 39
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUNBEAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net sales ............................... $ 660,927 $ 578,488 $ 1,184,873 $ 826,089
Cost of goods sold ...................... 490,621 630,965 891,412 844,794
Selling, general and
administrative expense ............... 156,834 140,801 294,783 211,940
----------- ----------- ----------- -----------
Operating income (loss) ................. 13,472 (193,278) (1,322) (230,645)
Interest expense ........................ 45,044 42,408 86,950 47,480
Other expense, net ...................... 1,139 2,085 1,948 5,251
----------- ----------- ----------- -----------
Loss before income taxes, minority
interest and extraordinary charge .. (32,711) (237,771) (90,220) (283,376)
Income tax provision:
Current .............................. 6,797 3,272 6,645 3,598
Deferred ............................. 470 1,983 2,363 1,534
----------- ----------- ----------- -----------
7,267 5,255 9,008 5,132
Minority interest ....................... 6,968 (2,063) 8,457 (2,063)
----------- ----------- ----------- -----------
Loss before extraordinary charge ........ (46,946) (240,963) (107,685) (286,445)
Extraordinary charge from
early extinguishments of debt ........ -- (103,091) -- (111,715)
----------- ----------- ----------- -----------
Net loss ................................ $ (46,946) $ (344,054) $ (107,685) $ (398,160)
=========== =========== =========== ===========
Basic and diluted loss per share:
Loss from continuing operations before
extraordinary charge ............... $ (0.47) $ (2.39) $ (1.07) $ (3.06)
Extraordinary charge ................. -- (1.02) -- (1.20)
----------- ----------- ----------- -----------
Net loss ............................. $ (0.47) $ (3.41) $ (1.07) $ (4.26)
=========== =========== =========== ===========
Basic and diluted weighted average
common shares outstanding ............ 100,743 100,804 100,741 93,518
See Notes to Condensed Consolidated Financial Statements.
2
SUNBEAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(AMOUNTS IN THOUSANDS)
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 51,057 $ 61,432
Restricted investments ......................................... 71,764 74,386
Receivables, net ............................................... 443,792 361,774
Inventories .................................................... 503,545 519,189
Prepaid expenses, deferred income taxes and other current assets 71,224 74,187
----------- -----------
Total current assets ..................................... 1,141,382 1,090,968
Property, plant and equipment, net ................................ 452,100 455,172
Trademarks, trade names, goodwill and other, net .................. 1,810,732 1,859,377
----------- -----------
$ 3,404,214 $ 3,405,517
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt .......... $ 1,528,841 $ 119,103
Accounts payable ............................................... 197,916 162,173
Other current liabilities ...................................... 336,799 321,185
----------- -----------
Total current liabilities ....................... 2,063,556 602,461
Long-term debt, less current portion .............................. 807,288 2,142,362
Other long-term liabilities ....................................... 236,788 248,459
Deferred income taxes ............................................. 97,186 100,473
Minority interest ................................................. 57,322 51,325
Commitments and contingencies (Note 10)
Shareholders' equity:
Preferred stock (2,000,000 shares authorized, none outstanding) -- --
Common stock (100,746,400 and 100,739,053 shares issued) ....... 1,007 1,007
Additional paid-in capital ..................................... 1,123,455 1,123,457
Accumulated deficit ...................................... (917,680) (809,997)
Accumulated other comprehensive loss ........................... (64,708) (54,030)
----------- -----------
Total shareholders' equity ............................... 142,074 260,437
----------- -----------
$ 3,404,214 $ 3,405,517
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
3
SUNBEAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED
----------------------------
JUNE 30, JUNE 30,
1999 1998
----------- -----------
OPERATING ACTIVITIES:
Net loss .................................................... $ (107,685) $ (398,160)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ........................... 64,008 41,455
Non-cash interest charges ............................... 22,752 9,987
Deferred income taxes ................................... 2,363 1,534
Minority interest ....................................... 8,457 (2,063)
(Gain) loss on sale of property, plant and equipment .... (836) 2,501
Provision for fixed assets .............................. -- 29,587
Provision for excess and obsolete inventory ............. -- 83,986
Non-cash compensation charge ............................ -- 23,514
Extraordinary charge from early extinguishments of debt . -- 111,715
Changes in working capital and other, net of acquisitions (23,536) (121,627)
----------- -----------
Net cash used in operating activities ............. (34,477) (217,571)
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures ........................................ (33,555) (21,245)
Purchases of businesses, net of cash acquired ............... -- (379,159)
Other ....................................................... (350) 206
----------- -----------
Net cash used in investing activities ............. (33,905) (400,198)
----------- -----------
FINANCING ACTIVITIES:
Issuance of convertible subordinated debentures, net of
financing fees ........................................... -- 729,622
Net borrowings under revolving credit facilities ............ 62,090 1,325,151
Payments of debt obligations, including prepayment penalties (2,940) (1,463,829)
Proceeds from exercise of stock options ..................... 35 19,553
Other ....................................................... (1,178) (1,875)
----------- -----------
Net cash provided by financing activities ......... 58,007 608,622
----------- -----------
Net decrease in cash and cash equivalents ....................... (10,375) (9,147)
Cash and cash equivalents at beginning of period ................ 61,432 52,298
----------- -----------
Cash and cash equivalents at end of period ...................... $ 51,057 $ 43,151
=========== ===========
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 designer,
manufacturer and marketer of branded consumer products. The Company's primary
business is the manufacturing, marketing and distribution of durable household
and outdoor leisure consumer products through mass market and other distribution
channels in the United States and internationally. The Company also sells its
products to professional and commercial end users such as small businesses,
health care providers, hotels and other institutions. The Company's principal
products include household kitchen appliances; health monitoring and care
products for home use; scales for consumer and professional use for weight
management and business uses; electric blankets and throws; clippers and
trimmers for consumer, professional and animal uses; smoke and carbon monoxide
detectors; outdoor barbecue grills; camping equipment such as tents, lanterns,
sleeping bags and stoves; coolers; backpacks and book bags; and portable
generators and compressors.
In 1998 the Company acquired an indirect controlling interest in The
Coleman Company, Inc. ("Coleman") and all the outstanding common stock of
Signature Brands USA, Inc. ("Signature Brands") and First Alert, Inc. ("First
Alert").
BASIS OF PRESENTATION
The Condensed Consolidated Balance Sheet of the Company as of June 30,
1999 and the Condensed Consolidated Statements of Operations and Cash Flows for
the three and six months ended June 30, 1999 and 1998 are unaudited. The
unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions of Form 10-Q and Rule 10-01 of Regulation
S-X. The December 31, 1998 Condensed Consolidated Balance Sheet was derived from
the consolidated financial statements contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998. The condensed consolidated
financial statements contained herein should be read in conjunction with the
consolidated financial statements and related notes contained in the Company's
1998 Annual Report on Form 10-K. In the opinion of management, the unaudited
condensed consolidated financial statements contained herein include all
adjustments (consisting of only recurring adjustments) necessary for a fair
presentation of the results of operations for the interim periods presented.
These interim results of operations are not necessarily indicative of results
for the entire year or future periods.
BASIC AND DILUTED LOSS PER SHARE OF COMMON STOCK
Loss per common share calculations are determined by dividing loss
attributable to common shareholders by the weighted average number of shares of
common stock outstanding. Loss per share for the second quarter and six months
ended June 30, 1999 and 1998, is based only on the weighted average number of
common shares outstanding, as potential common shares have been excluded as a
result of the loss during the periods presented. Loss per share for the three
months and six months ended June 30, 1999 excluded 119,602 and 66,813 shares
related to stock options, respectively, as their effect would have been
anti-dilutive. Stock options to purchase 19,523,143 common shares and 19,143,458
common shares for the quarter and six months ended June 30, 1999, respectively,
were excluded from potential common shares as the option exercise prices were
greater than the average market price of the Company's common stock during each
of the respective periods presented. The second quarter and six months ended
June 30, 1998 loss per share excluded 1,904,281 and 3,436,684 shares
respectively, related to stock options, as their effect would have been
anti-dilutive. The quarter and six month 1998 periods also excluded 118,829 and
88,166, respectively, related to restricted stock. Stock options to purchase
11,023,426 common shares and 7,869,520 common shares for the three months and
six months ended June 30, 1998, respectively, were excluded from potential
common shares as the option exercise prices were greater than the average market
price of the Company's common stock during each of the respective periods
presented. Diluted average common shares outstanding for all periods presented
excluded 13,242,050 shares issuable upon the conversion of the Zero Coupon
Convertible Senior Subordinated Debentures due 2018 (the "Debentures"). In
addition, diluted average common shares outstanding for the periods ended June
30, 1999 excluded 23,000,000 shares issuable on the exercise of warrants.
5
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
1. OPERATIONS AND BASIS OF PRESENTATION - (CONTINUED)
NEW ACCOUNTING STANDARDS
Effective January 1, 1999, the Company adopted Statement of Position
98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE ("SOP 98-1"). SOP 98-1 requires computer software costs associated
with internal use software to be expensed as incurred until certain
capitalization criteria are met. Adoption of this statement did not have a
material impact on the Company's consolidated financial position, results of
operations, or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS No. 133"), ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which, as amended, is effective
for fiscal years beginning after June 15, 2000. SFAS No. 133 requires the
recognition of all derivatives in the Consolidated Balance Sheets as either
assets or liabilities measured at fair value. The Company has not yet
determined the impact SFAS No. 133 will have on its consolidated financial
position, results of operations, or cash flows.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
1999 presentation.
2. ACQUISITIONS
On March 30, 1998, the Company, through a wholly-owned subsidiary,
acquired approximately 81% of the total number of then outstanding shares of
common stock of Coleman from a subsidiary of MacAndrews & Forbes Holdings, Inc.
("M&F"), in exchange for 14,099,749 shares of the Company's common stock and
approximately $160 million in cash. In addition, the Company assumed
approximately $1,016 million in debt. The value of the common stock issued at
the date of acquisition was derived by using the average closing stock price as
reported on the New York Stock Exchange Composite Tape for the day before and
day of the public announcement of the acquisition. Immediately thereafter, as a
result of the exercise of employee stock options, Sunbeam's indirect beneficial
ownership of Coleman decreased to approximately 79% of the total number of the
outstanding shares of Coleman common stock. (See Note 11.)
On August 12, 1998, the Company announced that, following investigation
and negotiation conducted by a Special Committee of the Board consisting of four
outside directors not affiliated with M&F, the Company had entered into a
settlement agreement with a subsidiary of M&F pursuant to which the Company was
released from certain threatened claims of M&F and its subsidiaries arising from
the Coleman acquisition and M&F agreed to provide certain management personnel
and assistance to the Company in exchange for the issuance to the M&F affiliate
of a five-year warrant to purchase up to 23 million shares of the Company's
common stock at a cash exercise price of $7.00 per share, subject to
anti-dilution adjustments. The Company concluded that the agreement to issue
this warrant did not result in a new measurement date for the purposes of
determining the purchase price for Coleman and has accounted for the issuance of
this warrant in the third quarter of 1998 as a cost of settling a potential
claim.
The Company expects to acquire the remaining equity interest in Coleman
pursuant to a merger transaction in which the existing Coleman minority
shareholders will receive 0.5677 of a share of the Company's common stock and
$6.44 in cash for each share of Coleman common stock outstanding. In addition,
unexercised options under Coleman's stock option plans will be cashed out at a
price per share equal to the difference between $27.50 and the exercise price of
such options. The Company expects to issue approximately 6.7 million shares of
common stock and expend approximately $87 million in cash to complete the
Coleman acquisition. Although there can be no assurance, it is anticipated the
Coleman merger will occur in the second half of 1999. The acquisition of the
remaining outstanding shares of Coleman common stock will be accounted for under
the purchase method of accounting from the date of consummation of the Coleman
merger.
6
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
2. ACQUISITIONS - (CONTINUED)
On October 21, 1998, the Company announced that it had entered into a
Memorandum of Understanding to settle, subject to Court approval, class action
claims made by minority shareholders of Coleman relating to the Coleman merger.
Under the terms of the proposed settlement, if approved by the Court, the
Company will issue to the Coleman public shareholders, and plaintiff's counsel
in this action, warrants to purchase up to 4.98 million shares of the Company's
common stock at a cash exercise price of $7.00 per share, subject to certain
anti-dilution provisions. These warrants would generally have the same terms as
the warrants issued to a subsidiary of M&F and will be issued when the Coleman
merger is consummated. Issuance of these warrants will be accounted for as
additional purchase consideration. As a consequence of entering into the
Memorandum of Understanding and agreeing to issue additional consideration in
the form of warrants to purchase Sunbeam common stock, a new measurement date
was established for the remaining equity interest in Coleman. The total
consideration to be paid (cash, Sunbeam common stock and Sunbeam warrants) to
the Coleman shareholders will therefore be measured as of October 21, 1998.
There can be no assurance that the Court will approve the settlement as
proposed.
On April 6, 1998, the Company completed the acquisitions of First
Alert, valued at approximately $182 million (including $133 million of cash and
$49 million of assumed debt) and Signature Brands valued at approximately $255
million (reflecting cash paid, including the required retirement of defeasance
of debt).
All of these acquisitions were accounted for by the purchase method of
accounting. Accordingly, the results of operations of the acquired entities are
included in the accompanying Condensed Consolidated Statements of Operations
from their respective dates of acquisition.
The following pro forma financial information for the Company gives
effect to the Coleman and Signature Brands acquisitions as if they had occurred
at the beginning of the period presented. No pro forma adjustments have been
made for the First Alert acquisition as its effects are not significant. These
pro forma results have been prepared for informational purposes only and do not
purport to be indicative of the results of operations which actually would have
occurred had the acquisitions been consummated on the date indicated, or which
may result in the future. The pro forma results follow (in millions, except per
share data):
SIX MONTHS ENDED
JUNE 30, 1998
----------------
Net sales...................................................... $ 1,087.9
Loss before extraordinary charge............................... (307.6)
Basic and diluted loss per share from continuing operations
before extraordinary charge................................. (3.17)
3. DEBT
In order to finance the acquisitions described in Note 2 and to
refinance substantially all of the indebtedness of the Company and the acquired
companies, the Company consummated an offering of the Debentures at a yield to
maturity of 5.0% (approximately $2,014 million principal amount at maturity) in
March 1998, which resulted in approximately $730 million of net proceeds and
entered into a revolving and term credit facility ("New Credit Facility").
The Debentures are exchangeable for shares of the Company's common
stock at an initial conversion rate of 6.575 shares for each $1,000 principal
amount at maturity of the Debentures, subject to adjustment upon occurrence of
specified events. The Debentures are subordinated in right of payment to all
existing and future senior indebtedness of the Company. The Debentures are not
redeemable by the Company prior to March 25, 2003. On or after such date, the
Debentures are
7
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
3. DEBT - (CONTINUED)
redeemable for cash with at least 30 days notice, at the option of the Company.
The Company is required to purchase Debentures at the option of the holder as of
March 25, 2003, March 25, 2008 and March 25, 2013, at purchase prices equal to
the issue price plus accrued original discount to such dates. The Company may,
at its option, elect to pay any such purchase price in cash or common stock, or
any combination thereof. However, the New Credit Facility prohibits the Company
from redeeming or repurchasing Debentures for cash. The Company was required to
file a registration statement with the SEC to register the Debentures by June
23, 1998. This registration statement was filed on February 4, 1999 and the SEC
has not declared the registration statement effective. The Company's failure to
file the registration statement by June 23, 1998 did not constitute default
under the terms of the Debentures. As part of the normal review process by the
SEC, a number of comments have been made by the staff of the Division of
Corporation Finance relating to the registration statement and the restated 1996
and 1997 financial statements included therein. The Company has filed amendments
to this registration statement. From June 23, 1998 until the registration
statement is declared effective, the Company is required to pay to the Debenture
holders cash liquidated damages accruing, for each day during such period, at a
rate per annum equal to 0.25% during the first 90 days and 0.50% thereafter
multiplied by the total of the issue price of the Debentures plus the original
issue discount thereon on such day. The Company made its first payment of
approximately $500,000 to the Debenture holders on September 25, 1998 and an
additional $2 million was paid on March 25, 1999. An additional cash payment of
approximately $2 million, representing the Company's liability to debenture
holders through June 30, 1999, will be due on September 25, 1999.
Concurrent with the acquisitions, the Company replaced its $250 million
syndicated unsecured five-year revolving credit facility with the New Credit
Facility. The New Credit Facility provided for aggregate borrowings of up to
$1.7 billion and in addition to other customary covenants, required the Company
to maintain specified consolidated leverage, interest coverage and fixed charge
coverage ratios as of the end of each fiscal quarter occurring after March 31,
1998 and on or prior to the latest stated maturity date for any of the
borrowings under the New Credit Facility.
As a result of, among other things, its operating losses incurred
during the first half of 1998, the Company did not achieve the specified
financial ratios for June 30, 1998 and it appeared unlikely that the Company
would achieve the specified financial ratios for September 30, 1998.
Consequently, the Company and its lenders entered into an agreement dated as of
June 30, 1998 that waived through December 31, 1998 all defaults arising from
the failure of the Company to satisfy the specified financial ratios for June
30, 1998 and September 30, 1998. Pursuant to an agreement with the Company dated
as of October 19, 1998, the Company's lenders extended all of the waivers under
the June 30, 1998 agreement through April 10, 1999 and also waived through such
date all defaults arising from any failure by the Company to satisfy the
specified financial ratios for December 31, 1998. As part of the October 19,
1998 agreement, the Company agreed to a minimum monthly earnings before
interest, taxes, depreciation and amortization ("EBITDA") covenant (as defined
in the New Credit Facility) which covenant the Company has been able to satisfy.
On April 10, 1999, among other things, the lenders extended all of the
waivers set forth in the October 19, 1998 agreement through April 15, 1999. On
April 15, 1999, the Company and its lenders entered into a comprehensive
amendment to the New Credit Facility that, among other things, extended all of
the waivers under the April 10, 1999 agreement until April 10, 2000 and waived
until such date all defaults arising from any failure by the Company to satisfy
the specified financial ratios for any fiscal quarter end occurring during 1999
and for March 31, 2000. The Company intends to negotiate with its lenders an
amendment to the New Credit Facility, or to negotiate further waiver of such
covenants and other terms beyond April 10, 2000, or to refinance the New Credit
Facility. There can be no assurance that an amendment, further waiver of
existing covenants and other terms, or refinancing will be entered into by April
10, 2000. The failure to obtain such an amendment, further waiver or debt
refinancing would likely result in violation of the existing covenants and
compliance with other terms, which would permit the bank lenders to accelerate
the maturity of all outstanding borrowings under the New Credit Facility and
could otherwise have a material adverse effect on the Company. Accordingly, debt
related to the New Credit Facility and all debt containing cross-default
provisions was classified as current in the Condensed Consolidated Balance Sheet
in the second quarter of 1999. The following description of the New Credit
Facility reflects its significant terms as amended April 15, 1999.
As part of the April 15, 1999 New Credit Facility amendment, the
Company agreed to a minimum cumulative EBITDA covenant that is based on
post-December 31, 1998 consolidated EBITDA and is tested at the end of each
month
8
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
3. DEBT - (CONTINUED)
occurring on or prior to March 31, 2000, as well as a covenant limiting the
amount of revolving loans (other than those used to fund the Coleman merger)
that may be outstanding under the New Credit Facility as of the end of each such
month. The minimum cumulative EBITDA was initially $6.3 million for the period
January 1, 1999 through April 30, 1999 and generally grows on a monthly basis
until it reaches $121.0 million for the period from January 1, 1999 through
March 31, 2000.
The New Credit Facility provides for aggregate borrowings of up to $1.7
billion through: (i) a revolving credit facility in an aggregate principal
amount of up to $400.0 million maturing March 30, 2005, ($52.5 million of which
may only be used to complete the Coleman merger if the Coleman merger is not
completed prior to August 31, 1999); (ii) up to $800.0 million in term loans
maturing on March 30, 2005, (of which $35.0 million may only be used to complete
the Coleman merger); and (iii) a $500.0 million term loan maturing September 30,
2006, (of which $5.0 million has already been repaid through June 30, 1999). As
of June 30, 1999, approximately $1.4 billion was outstanding and approximately
$0.2 billion was available for borrowing under the New Credit Facility. The
remaining $0.1 billion of the $1.7 billion New Credit Facility was committed for
outstanding letters of credit.
Under the New Credit Facility, interest accrues, at the Company's
option: (i) at the London Interbank Offered Rate ("LIBOR"); or (ii) at the base
rate of the administrative agent which is generally the higher of the prime
commercial lending rate of the administrative agent or the Federal Funds Rate
plus 0.50%; in each case plus an interest margin which is currently 3.25% for
LIBOR borrowings and 2.00% for base rate borrowings. The applicable interest
margin is subject to upward or downward adjustment upon the occurrence of
specified events, including a 0.25% increase on September 1, 1999 if the Coleman
merger has not occurred by then and an additional 0.25% to 0.50% increase on
October 1, 1999 if the Coleman merger has not occurred by then. Borrowings under
the New Credit Facility are secured by a pledge of the stock of the Company's
material subsidiaries, including Coleman, and by a security interest in
substantially all of the assets of the Company and its material domestic
subsidiaries, other than Coleman and its material subsidiaries except as
described below. Currently, Coleman's inventory and related assets are pledged
to secure its obligations for letters of credit issued for its account under the
New Credit Facility. Additionally, as security for Coleman's note payable to the
Company, Coleman pledged substantially all of its domestic assets, other than
real property, including 66% of the stock of its direct foreign subsidiaries and
domestic holding companies for its foreign subsidiaries, and all of the stock of
its other direct domestic subsidiaries (but not the assets of Coleman's
subsidiaries). The pledge runs in favor of the Company's lending banks, to which
the Coleman note has been pledged as security for the Company's obligations to
them. Upon completion of the Coleman merger, substantially all of Coleman's
assets and the assets of Coleman's domestic subsidiaries will be pledged to
secure the obligations under the New Credit Facility. In addition, borrowings
under the New Credit Facility are guaranteed by a number of the Company's
wholly-owned material domestic subsidiaries and these subsidiary guarantees are
secured as described above. Upon completion of the Coleman merger, Coleman and
each of its United States subsidiaries will become guarantors of the obligations
under the New Credit Facility. To the extent extensions of credit are made to
any subsidiaries of the Company, the obligations of such subsidiaries are
guaranteed by the Company.
In addition to the above described ratios and tests, the New Credit
Facility contains covenants customary for credit facilities of a similar nature,
including limitations on the ability of the Company and its subsidiaries,
including Coleman, to, among other things, (i) declare dividends or repurchase
stock, (ii) prepay, redeem or repurchase debt, incur liens and engage in
sale-leaseback transactions, (iii) make loans and investments, (iv) incur
additional debt, including revolving loans under the New Credit Facility, (v)
amend or otherwise alter material agreements or enter into restrictive
agreements, (vi) make capital and year 2000 compliance expenditures, (vii)
engage in mergers, acquisitions and asset sales, (viii) engage in certain
transactions with affiliates, (ix) settle certain litigation, (x) alter its cash
management system and (xi) alter the businesses they conduct. The Company is
also required to comply with specified financial covenants and ratios. The New
Credit Facility provides for events of default customary for transactions of
this type, including nonpayment,misrepresentation, breach of covenant,
cross-defaults, bankruptcy, material adverse change arising from compliance with
ERISA, material adverse judgments, entering into guarantees and change of
ownership and control. It is also an event of default under the New Credit
Facility if the Company's registration statement in connection with the Coleman
merger is not declared effective by the SEC on or before October 30, 1999 or if
the merger does not occur within 25 business days of the effectiveness of the
registration statement or if the cash consideration (including any payments on
9
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
3. DEBT - (CONTINUED)
account of the exercise of any appraisal rights, but excluding related legal,
accounting and other customary fees and expenses) to consummate the Coleman
merger exceeds $87.5 million. Although there can be no assurance, the Company
anticipates that it will satisfy these conditions. Furthermore, the New Credit
Facility requires the Company to prepay term loans on each of September 30, 1999
and December 31, 1999 to the extent that cash on hand in the Company's
concentration accounts plus the aggregate amount of unused revolving loan
commitments on these dates (excluding, for the September measurement date, $52.5
million reserved for the Coleman merger), exceeds $115 million and $125 million,
respectively, but the Company is not required to prepay more than $69.3 million
in the aggregate as a result of the provision. Unless waived by the bank
lenders, the failure to satisfy any of the financial ratios and tests contained
in the New Credit Facility or the occurrence of any other event of default under
the New Credit Facility would entitle the bank lenders to (a) receive a 2.00%
increase in the interest rate applicable to outstanding loans and increase the
trade letter of credit fees to 1.00% and (b) accelerate the maturity of the
outstanding borrowings under the New Credit Facility and exercise all or any of
their other rights and remedies. Any such acceleration or other exercise rights
and remedies would likely have a material adverse effect on the Company. The New
Credit Facility also includes provisions for the deferral of the 1999 scheduled
term loan payments of $69.3 million until April 10, 2000 as a result of the
satisfaction by the Company on May 14, 1999 of the agreed upon conditions to the
deferral.
In March 1998, the Company prepaid a $75.0 million 7.85% industrial
revenue bond related to its Hattiesburg facility originally due in 2009. In
connection with the early extinguishment of this debt, the Company recognized an
extraordinary charge in the first quarter of 1998. As a result of repayment of
certain indebtedness assumed in the Coleman acquisition, the Company also
recognized an extraordinary charge in the second quarter of 1998. The debt
assumed in connection with the Coleman acquisition was repaid as a result of the
requirements under the terms of the New Credit Facility. These extraordinary
charges consisted of redemption premiums ($106.9 million), unamortized debt
discount ($13.8 million) and unamortized deferred financing costs ($1.7 million)
and were net of an income tax benefit ($10.7 million).
In connection with the acquisition of Signature Brands, the Company was
required to defease $70.0 million of acquired debt. Cash was placed with a
trustee to provide for the defeasance, including the related prepayment penalty.
This cash was used to purchase Treasury Notes. Accordingly, $71.8 million and
$74.4 million of restricted investments held by the trustee for the August 1999
liquidation of this acquired debt are reflected as an asset at June 30, 1999 and
December 31, 1998, respectively, and $70.0 million is reflected as short-term
debt in the Condensed Consolidated Balance Sheets at June 30, 1999 and December
31, 1998. The prepayment penalty is reflected as part of the acquisition price
of Signature Brands. On July 13, 1999, this debt was called for redemption. The
effective date of redemption was August 15, 1999.
4. ACCOUNTS RECEIVABLE SECURITIZATION
The Company has entered into a receivables securitization program that
expires in March 2000. The Company has received $86.2 million and $49.2 million
in the second quarters of 1999 and 1998, respectively, and $146.3 million and
$84.0 million in the first half of each 1999 and 1998, respectively, for the
sale of trade accounts receivable. Trade accounts receivable at June 30, 1999
and 1998 reflect a reduction of $38.9 million and $40.2 million, respectively,
for receivables sold under this program. Costs of the program, which primarily
consist of the purchaser's financing cost of issuing commercial paper backed by
the receivables, totaled $0.6 million and $0.9 million during the second
quarters of 1999 and 1998, respectively, and $1.0 million and $1.5 million in
the first halves of 1999 and 1998, respectively, and have been classified as
interest expense in the accompanying Condensed Consolidated Statements of
Operations. The Company, through a wholly-owned subsidiary, retains collection
and administrative responsibilities for the purchased receivables. This
agreement contains cross-default provisions that provide the purchaser of the
receivables an option to cease purchasing receivables from the Company if the
Company is in default under the New Credit Facility.
10
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
5. COMPREHENSIVE LOSS
The components of the Company's comprehensive loss are as follows (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
--------- --------- --------- ---------
Net loss .......................... $ (46,946) $(344,054) $(107,685) $(398,160)
Foreign currency translation
adjustment, net of taxes ....... (1,251) (1,424) (10,678) (1,241)
Change in minimum pension liability -- (132) -- (132)
--------- --------- --------- ---------
Comprehensive loss ................ $ (48,197) $(345,610) $(118,363) $(399,533)
========= ========= ========= =========
As of June 30, 1999 and December 31, 1998, "Accumulated other
comprehensive loss," as reflected in the Condensed Consolidated Balance Sheets
is comprised of the following:
CURRENCY MINIMUM
TRANSLATION PENSION
ADJUSTMENTS LIABILITY TOTAL
----------- --------- --------
Balance at June 30, 1999 ... $(22,700) $(42,008) $(64,708)
Balance at December 31, 1998 (12,022) (42,008) (54,030)
The accumulated other comprehensive loss associated with the minimum
pension liability is net of deferred taxes of approximately $5 million as of
June 30, 1999 and December 31, 1998.
6. SUPPLEMENTARY FINANCIAL STATEMENT DATA
Supplementary Balance Sheet data at the end of each period is as
follows (in thousands):
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
Receivables:
Trade .................... $ 479,147 $ 407,452
Sundry ................... 8,510 7,347
--------- ---------
487,657 414,799
Valuation allowance ...... (43,865) (53,025)
--------- ---------
$ 443,792 $ 361,774
========= =========
Inventories:
Finished goods ........... $ 328,591 $ 370,622
Work in process .......... 77,004 39,143
Raw materials and supplies 97,950 109,424
--------- ---------
$ 503,545 $ 519,189
========= =========
Supplementary Statements of Cash Flows data is as follows (in
thousands):
SIX MONTHS ENDED
----------------------
JUNE 30, JUNE 30,
1999 1998
-------- --------
Cash paid (received) during the period for:
Interest ................................ $ 67,446 $ 26,219
======== ========
Income taxes, net of refunds............. $ (6,358) $ (6,934)
======== ========
11
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
7. ASSET IMPAIRMENT AND OTHER CHARGES
In the second quarter of 1998, decisions were made to outsource or
discontinue a substantial number of products previously made by the Company
(principally breadmakers, toasters and certain other appliances, air and water
filtration products and the elimination of certain stock keeping units ("SKU's")
within existing product lines, primarily relating to appliances, grills and
grill accessories). As a result, certain facilities and equipment would either
no longer be used or would be utilized in a significantly different manner.
Accordingly, a charge of $29.6 million was recorded in Cost of Goods Sold to
write certain of these assets down to their estimated fair market value.
Approximately 80% of this charge related to machinery, equipment and tooling at
the Company's Mexico City, Mexico and Hattiesburg, Mississippi manufacturing
plants, the estimated fair value for which was derived through an auction
process. The remainder of this charge related to tooling and equipment at
various other facilities, which either had a nominal value or the fair market
value of which was derived through an auction process. These assets were taken
out of service at the time of the write-down and consequently were not
depreciated further after the write-down. The net carrying value of these assets
after the write-down approximated $2.2 million and these assets are expected to
be disposed of by September 30, 1999. Depreciation expense associated with these
assets approximated $2.6 million in the first half of 1998.
Personnel at the Mexico City facility were notified in the second
quarter of 1998 that the plant was scheduled for closure at year-end 1998,
accordingly, at that time, a liability of $1.8 million was recorded in Cost of
Goods Sold primarily for employee severance. The employee severance related to
approximately 1,200 positions of which 100 employees, representing a $0.4
million severance obligation remained to be terminated at December 31, 1998.
Substantially all of these remaining positions have been eliminated and the
severance payments have been made as of June 30, 1999.
During 1997 and the first half of 1998, the Company built inventories
in anticipation of 1998 sales volumes which did not materialize. As a result, it
has been and will continue to be necessary to dispose of some portions of excess
inventories at amounts less than cost. Accordingly, in the second quarter of
1998, when the facts and circumstances were known that such sales volume would
not materialize, the Company recorded $46.4 million in charges to properly state
this inventory at the lower-of-cost-or-market. This inventory primarily related
to certain appliances, grills and grill accessories.
The Company also recorded a charge during the second quarter of 1998 of
$11.0 million for excess inventories for raw material and work in process that
will not be used due to outsourcing the production of breadmakers, toasters, and
certain other appliances. In addition, during the second quarter of 1998, the
Company made the decision to exit certain product lines, primarily air and water
filtration products and eliminate certain SKU's within existing product lines,
primarily relating to appliances, grills and grill accessories. As a result of
this decision, a $26.6 million charge was recorded during the second quarter to
properly state this inventory at the lower-of-cost-or market. Total charges for
excess inventory recorded at the lower-of-cost-or-market, based upon
management's best estimate of net realizable value, amounted to $84.0 million
during the second quarter of 1998.
In the fourth quarter of 1998, in connection with management's decision
to outsource the production of certain appliances (principally irons) the
Company recorded $0.4 million of severance costs related to the elimination of
approximately 45 production positions. During the six months ended June 30,
1999, 8 positions were eliminated and $0.1 million severance paid. The remaining
positions are expected to be eliminated by September 30, 1999.
At December 31, 1998, the Company had $1.7 million of restructuring
accruals relating to its 1996 restructuring plan. This $1.7 million was
comprised of $1.2 million relating to lease payments and termination fees and
$0.5 million relating to discontinued operations. During the six months ended
June 30, 1999, the Company expended $0.1 million for lease payments and
termination fees and $0.4 million relating to discontinued operations,
respectively. It is anticipated that the remaining restructuring accrual of $1.2
million ($1.1 million relating to lease payments and termination fees and $0.1
million to discontinued operations) will be paid through 2006.
12
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
8. COMPENSATORY STOCK GRANTS
On February 20, 1998, the Company entered into new three-year
employment agreements with its then Chairman and Chief Executive Officer and two
other senior officers of the Company (the "February 1998 Employment
Agreements"). These agreements replaced previous employment agreements entered
into in July 1996 that were scheduled to expire in July 1999. The new employment
agreements provided for, among other items, the acceleration of vesting of
restricted stock and the forfeiture of unvested restricted stock that had been
granted under the July 1996 agreement, new restricted stock grants and options
to purchase the Company's common stock. In addition, the new employment
agreements provided for income tax gross-ups with respect to any tax assessed on
the restricted stock grants and acceleration of vesting of restricted stock.
Compensation expense attributed to the equity grant, the acceleration of vesting
of restricted stock and the related income tax gross-ups was recognized in the
first quarter of 1998 and compensation expense related to the new restricted
stock grants and related tax gross-ups was amortized to expense beginning in the
first quarter of 1998 with amortization to continue over the period in which the
restrictions lapse. Total compensation expense recognized in the first quarter
of 1998 related to these items was approximately $31 million.
On June 15, 1998, the Company's Board of Directors announced the
removal of the then Chairman and Chief Executive Officer and subsequently
announced the removal or resignation of other senior officers, including the
Company's then Chief Financial Officer. The Company and certain of its former
officers are in disagreement as to the Company's obligations to these
individuals under prior agreements and arising from their termination. (See Note
10).
9. SEGMENT, CUSTOMER AND GEOGRAPHIC DATA
The following tables include selected financial information with
respect to Sunbeam's four operating segments. Corporate expenses include, among
other items, expenses for services which are provided in varying levels to the
three operating groups and for Year 2000 efforts. The increase from 1998 to 1999
is largely due to an expansion of centralized services related to the
acquisitions, Year 2000 expenses and increased costs associated with outside
services and insurance.
OUTDOOR
HOUSEHOLD LEISURE INTERNATIONAL CORPORATE TOTAL
----------- ----------- ------------- ----------- -----------
SIX MONTHS ENDED JUNE 30, 1999
Net sales to unaffiliated customers $ 315,338 $ 556,824 $ 305,289 $ 7,422 $ 1,184,873
Intersegment net sales ............ 34,923 84,853 5,867 -- 125,643
Segment earnings (loss) ........... 8,159 47,435 29,015 (58,812) 25,797
Segment depreciation expense ...... 13,164 17,933 2,742 3,050 36,889
SIX MONTHS ENDED JUNE 30, 1998
Net sales to unaffiliated customers $ 232,503 $ 370,466 $ 214,896 $ 8,224 $ 826,089
Intersegment net sales ............ 35,996 51,329 35,247 -- 122,572
Segment (loss) earnings ........... (40,049) (15,908) 7,950 (23,475) (71,482)
Segment depreciation expense ...... 12,822 10,646 2,223 2,020 27,711
SEGMENT ASSETS
June 30, 1999 ..................... $ 797,155 $ 1,808,084 $ 455,787 $ 343,188 $ 3,404,214
December 31, 1998 ................. 864,745 1,782,994 413,755 344,023 3,405,517
13
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
9. SEGMENT, CUSTOMER AND GEOGRAPHIC DATA - (CONTINUED)
Reconciliation of selected segment information to Sunbeam's
consolidated totals:
SIX MONTHS ENDED
----------------------------
JUNE 30, JUNE 30,
1999 1998
----------- -----------
Net sales:
Net sales for reportable segments .............. $ 1,310,516 $ 948,661
Elimination of intersegment net sales .......... (125,643) (122,572)
----------- -----------
Consolidated net sales ...................... $ 1,184,873 $ 826,089
=========== ===========
Segment earnings (loss):
Total earnings (loss) for reportable segments .. $ 25,797 $ (71,482)
Unallocated amounts:
Interest expense ............................ (86,950) (47,480)
Other expense, net .......................... (1,948) (5,251)
Amortization of intangible assets ........... (27,119) (13,744)
Former employees deferred
compensation and severance (Note 8) ..... -- (30,688)
Provision for inventory (Note 7) ............ -- (83,986)
Asset impairment (Note 7) ................... -- (29,587)
Other charges ............................... -- (1,158)
----------- -----------
(116,017) (211,894)
----------- -----------
Consolidated loss before income taxes,
minority interest and extraordinary charge $ (90,220) $ (283,376)
=========== ===========
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
On April 7, 1998, a purported derivative action was filed in the
Circuit Court for the Fifteenth Judicial Circuit in and for Palm Beach County,
Florida against the Company and some of its present and former directors and
former officers. The action alleged that the individual defendants breached
their fiduciary duties and wasted corporate assets when the Company granted
stock options on or about February 2, 1998 at an exercise price of $36.85 to
three of its officers and directors who were subsequently terminated by the
Company. On June 25, 1998, all defendants filed a motion to dismiss the
complaint for failure to make a pre-suit demand on the Company's board of
directors. On October 22, 1998, the plaintiff amended the complaint against all
but one of the defendants named in the original complaint. On February 19, 1999,
plaintiffs filed a second amended derivative complaint nominally on behalf of
the Company against some of its present and former directors and former officers
and Arthur Andersen. The second amended complaint alleges, among other things,
that Messrs. Dunlap and Kersh, Sunbeam's former Chairman and Chief Executive
Officer and former Chief Financial Officer, respectively, caused the Company to
employ fraudulent accounting procedures in order to enable them to secure new
employment contracts, and seeks an award of damages and other declaratory and
equitable relief. The defendants have each moved to dismiss the second amended
complaint in whole or in part.
On June 25, 1998, four purported class actions were filed in the Court
of Chancery of the State of Delaware in New Castle County by minority
stockholders of Coleman against Coleman, the Company and certain of the
Company's and Coleman's present and former officers and directors. An additional
class action was filed on August 10, 1998, against the same parties. The
complaints in these class actions allege, in essence, that the existing exchange
ratio for the proposed Coleman merger is no longer fair to Coleman public
stockholders as a result of the decline in the market value of the common stock.
On October 21, 1998, the Company announced that it had entered into a memorandum
of understanding to
14
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
settle, subject to court approval, the class actions. Under the terms of the
proposed settlement, if approved by the court, the Company will issue to Coleman
public stockholders and plaintiffs' counsel in this action warrants to purchase
up to approximately 4.98 million shares of the Company common stock at $7 per
share, subject to anti-dilution adjustments. Coleman public stockholders who
elect appraisal under Delaware law will not receive warrants. These warrants
will generally have the same terms as the warrant issued to the MacAndrews &
Forbes subsidiary and will be issued when the Coleman merger is consummated,
which is now expected to occur during the second half of 1999. As a consequence
of entering the Memorandum of Understanding and agreeing to issue additional
consideration in the form of warrants to purchase the Company common stock, a
new measurement date was established. The total consideration to be paid (cash,
the Company common stock, and the Company warrants) to the Coleman shareholders
will therefore be measured as of October 21, 1998. There can be no assurance
that the court will approve the settlement as proposed.
The Company has been named as a defendant in an action filed in the
District Court of Tarrant County, Texas, 48th Judicial District, on November 20,
1998. The Company was served in this action through the Secretary of State of
Texas on January 15, 1999. The plaintiffs in this action are purchasers of the
Debentures. The plaintiffs allege that the Company violated the Texas Securities
Act and the Texas Business & Commercial Code and committed state common law
fraud by materially misstating the financial position of the Company in
connection with the offering and sale of the Debentures. The complaint seeks
rescission, as well as compensatory and exemplary damages in an unspecified
amount. The Company specially appeared to assert an objection to the Texas
court's exercise of personal jurisdiction over the Company, and a hearing on
this objection took place on April 15, 1999. On April 23, 1999, the court
entered an order granting the Company's special appearance and dismissing the
case without prejudice. The plaintiffs moved for reconsideration of the court
order, which motion the court denied on May 24, 1999. The plaintiffs have
appealed the order dismissing the case to the Texas Court of Appeals, and a
hearing on such appeal will be heard on October 20, 1999.
On February 9, 1999, Messrs. Dunlap and Kersh filed with the American
Arbitration Association demands for arbitration of claims under their respective
employment agreements with Sunbeam. Messrs. Dunlap and Kersh are requesting a
finding by the arbitrators that Sunbeam terminated their employment without
cause and that they should be awarded the corresponding benefits provided by
their respective employment agreements. On March 12, 1999, the Company asked the
Circuit Court for the Fifteenth Judicial Circuit in and for Palm Beach County,
Florida to issue an injunction prohibiting Messrs. Dunlap and Kersh from
pursuing their arbitration proceedings against the Company on the grounds, among
others, that the simultaneous litigation of the action filed in that court on
April 7, 1998, described above, and the arbitration proceedings would subject
the Company to the threat of inconsistent adjudications with respect to certain
rights to compensation asserted by Messrs. Dunlap and Kersh and would cause
irreparable harm to the Company and its stockholders. On March 19, 1999, the
plaintiff in the April 7, 1998 action discussed above moved for a similar
injunction on the grounds, among others, that the arbitration proceedings
threatened irreparable harm to the Company and its stockholders. On May 11,
1999, the court denied the motions for a preliminary injunction filed by the
Company and the plaintiff. The Company has answered the arbitration demands of
Messrs. Dunlap and Kersh and has filed counterclaims seeking, among other
things, the return of all consideration paid, or to be paid, under the February
1998 Employment Agreements between Sunbeam and Messrs. Dunlap and Kersh. An
answer was filed by Messrs. Dunlap and Kersh generally denying the Company's
counterclaim. A preliminary conference was held in the arbitration on August 4,
1999. A second conference is set for August 30, 1999 to establish a schedule for
discovery and the hearing and to resolve other preliminary matters.
On May 24, 1999, an action naming the Company as defendant was filed in
the Circuit Court for Ozaukee County, Wisconsin. The Company has not yet been
served with the complaint in this action. The plaintiffs in this action are
purchasers of the Debentures. They allege that the Company violated the
Wisconsin Uniform Securities Act and committed acts of false advertising and
misrepresentation in connection with the offering and sale of the Debentures.
The plaintiffs
15
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
seek rescission, as well as compensatory and exemplary damages in an unspecified
amount. The Company has removed this case to the United States District Court
for the District of Wisconsin and the plaintiff has sought to have the case
remanded to state court. This action is now subject to a motion before the
Judicial Panel on Multidistrict Litigation to transfer for coordination or
consolidation of pretrial proceedings with those of the other actions proceeding
in the Southern District of Florida.
The Company intends to vigorously defend each of the foregoing lawsuits
other than those as to which a memorandum of understanding to settle has been
reached, but cannot predict the outcome and is not currently able to evaluate
the likelihood of the Company's success in each case or the range of potential
loss. However, if the Company were to lose these lawsuits, judgments would
likely have a material adverse effect on the Company's consolidated financial
position, results of operations and cash flow.
On March 23, 1999, Messrs. Dunlap and Kersh filed a complaint in the
Court of Chancery of the State of Delaware seeking an order directing the
Company to advance attorneys' fees and other expenses incurred in connection
with various state and federal class and derivative actions and an investigation
instituted by the SEC. The complaint alleges that such advancements are required
by the Company's by-laws and by a forbearance agreement entered into between the
Company and Messrs. Dunlap and Kersh in August, 1998. A trial of this summary
proceeding was held on June 15 and 16, 1999. On June 23, 1999, the court issued
a memorandum opinion directing the Company to pay about $1.4 million on account
of expenses incurred to date and to advance reasonable future expenses in those
actions and investigations. Messrs. Dunlap and Kersh have agreed to repay all
amounts advanced to them if it is ultimately determined that they are not
entitled to indemnification under Delaware law.
On July 2, 1998, the American Alliance Insurance Company filed suit
against Sunbeam in the U.S. District Court for the Southern District of New York
requesting a declaratory judgment of the court that the directors' and officers'
liability insurance policy for excess coverage issued by American Alliance was
invalid and/or had been properly canceled by American Alliance. The Company's
motion to transfer such action to the federal district court in which the
Consolidated Federal Actions are currently pending was denied. The Company has
filed a motion with the Judicial Panel on Multidistrict Litigation to transfer
this action for coordination or consolidation of pretrial proceedings with the
various actions pending in the Southern District of Florida. American Alliance
has filed a motion for summary judgment on the ground that coverage was never
bound. The Company has opposed that 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. This action has been
transferred to the U.S. District Court for the Southern District of Florida and
is currently in discovery. The Company is seeking a stay of discovery to
coordinate discovery in this action with any discovery which may occur in the
Consolidated Federal Actions. Plaintiff has moved to compel production of
various documents. On December 22, 1998, an action was filed by Executive Risk
Indemnity, Inc. in the Circuit Court of the Seventeenth Judicial Circuit in and
for Broward County, Florida requesting the same relief as that requested by
American and Federal in their previously filed actions as to additional coverage
levels under the Company's directors' and officers' liability insurance policy.
On April 15, 1999 the Company filed an action in the U.S. District Court for the
Southern District of Florida against National Union Fire Insurance Company of
Pittsburgh, PA, Gulf Insurance Company and St. Paul Mercury Insurance Company
requesting, among other things, a declaratory judgment that National Union is
not entitled to rescind its liability insurance policy to the Company and a
declaratory judgment that the Company is entitled to coverage from these
insurance companies for the various lawsuits described herein under liability
insurance policies issued by each of the defendants. In response to the
Company's complaint, defendants St. Paul and Gulf have answered and asserted
counterclaims seeking rescission and declaratory relief that no coverage is
available to the Company. Sunbeam has denied the allegations of Gulf's and St.
Paul's counterclaims. Defendant National Union has filed a motion to dismiss or
stay the claims filed by the Company against National Union on the basis, among
others, that the Company must submit the dispute to arbitration or mediation.
The Company has filed a response opposing that motion. The Company intends to
pursue recovery from all of its insurers if damages are awarded against the
Company or its indemnified officers and/or directors under any of the foregoing
actions and to recover attorney's fees covered under those policies. The
Company's failure to obtain such insurance recoveries following an adverse
judgment in any of the actions described above could have a material adverse
effect on the Company's financial position, results of operations and cash
flows.
16
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
Amounts accrued for litigation matters represent the anticipated costs
(damages and/or settlement amounts) in connection with pending litigation and
claims and related anticipated legal fees. The costs are accrued when it is both
probable that an asset has been impaired or a liability has been incurred and
the amount can be reasonably estimated. The accruals are based upon the Company
's assessment, after consultation with counsel, of probable loss based on the
facts and circumstances of each case, the legal issues involved, the nature of
the claim made, the nature of the damages sought and any relevant information
about the plaintiff, and other significant factors which vary by case. When it
is not possible to estimate a specific expected amount of loss to be incurred,
the Company evaluates the range of possible losses and records the minimum end
of the range. As of June 30, 1999 and December 31, 1998, the Company had
established accruals for litigation matters of $28.7 million and $31.2 million,
respectively. The Company believes, based on facts known to the Company at June
30, 1999, that anticipated probable costs of litigation matters existing as of
June 30, 1999 have been adequately reserved to the extent determinable.
PRODUCTS LIABILITY
As a consumer goods manufacturer and distributor, the Company faces the
constant risks of product liability and related lawsuits involving claims for
substantial money damages, product recall actions and higher than anticipated
rates of warranty returns or other returns of goods. These claims could result
in liabilities that could have a material adverse effect on the Company's
financial position, results of operations and cash flows. Some of the product
lines the Company acquired in the 1998 acquisitions have increased its exposure
to product liability and related claims.
BRK Brands, Inc. is a defendant in the case Gordon v. BRK Brands, Inc.,
et al. ("Gordon") in the Circuit Court for the City of St Louis. In Gordon, the
plaintiff alleged, among other things, that the smoke detector of plaintiff
(which had been manufactured by a predecessor company to the present BRK Brands,
Inc., which is a wholly owned subsidiary of Sunbeam) did not alarm quickly
enough. The jury in the Gordon case awarded $20 million in compensatory damages
and $30 million in punitive damages. BRK Brands, Inc. intends to appeal and
believes that it has numerous grounds for and will prevail upon appeal. At this
point, the Company believes that the damages are covered by insurance, subject
to self-insured retentions under such insurance policies. The payment of the
self-insured retention will not have a material effect on the Company's
consolidated financial position, results of operations, or cash flow.
Nevertheless, it is possible that the outcome of this case could have a material
adverse effect on the Company's consolidated financial position, results of
operations, or cash flow.
ENVIRONMENTAL MATTERS
With respect to one of seven sites at which the Company has been
identified by the United States Environmental Protection Agency ("EPA") as a
potentially responsible party, the Company received notice from the EPA that the
Company has completed all required removal activities and that such removal
activities were completed to EPA's satisfaction. EPA's approval of the Company's
removal activities at this site effectively concludes its obligations to EPA at
this site. The EPA's approval of the Company's removal activities did not have
any impact on the Company's environmental accruals since these activities were
completed for the amount accrued.
COMMITMENT FEE
Under the terms of the April 15, 1999 amendment to the New Credit
Facility, the Company is obligated to pay a loan commitment fee of between $4.2
million and $17.0 million. The ultimate amount of the fee is determined based on
multiplying the sum of the outstanding borrowings and amounts available for
borrowings as of April 15, 1999 by a factor that is determined at the earlier of
September 30, 2000 or upon repayment of the New Credit Facility. This fee is
payable at the earlier of September 30, 2000 or upon repayment of the New Credit
Facility. At a minimum, the Company is obligated under these terms to pay $4.2
million. The ultimate amount due could be as high as $17.0 million if the sum of
the outstanding borrowings and amounts available for borrowings at September 30,
2000 (the "aggregate availability") exceeds $1.2 billion. If the aggregate
availability is between $1.0 billion and $1.2 billion, a fee of $8.4 million
will be due. If the aggregate availability is $1.0 billion or less, the $4.2
million minimum will be due. Under any circumstances, the $4.2 million will be
due; therefore, the Company has accrued the minimum liability and an offsetting
asset which is being amortized and included in interest expense through April
10, 2000, the term of the current amendment extension period.
17
SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
The Company has not accrued for amounts in excess of the $4.2 million
as there are numerous uncertainties which may individually or in the aggregate
impact the level of aggregate availability at September 30, 2000. These
uncertainties include, but are not limited to: the ability to obtain an
amendment or further waiver of existing covenants from the lenders under the New
Credit Facility for the period beyond April 10, 2000; proceeds from the sales of
assets or businesses, if any; changes in debt structure, including the effects
of refinancing, if any; and cash flows generated or used by future operations.
Given these uncertainties, the Company is currently not able to predict the
probable level of aggregate availability at September 30, 2000. As events
develop, the Company will periodically review the expected aggregate
availability at September 30, 2000. If it becomes likely than an amount in
excess of $4.2 million will be paid, the Company will recognize that change in
estimate over the remaining period of the New Credit Facility Amendment.
11. SUBSEQUENT EVENT
PURCHASE OF COLEMAN PREFERRED STOCK
On July 12, 1999, the Company acquired 3,000,000 shares of a newly
created series of Coleman voting preferred stock for an aggregate purchase price
of approximately $31 million. These shares, together with the shares of Coleman
common stock the Company owns, enable Sunbeam to exercise 80.01% of the total
voting power of Coleman's outstanding capital stock as of July 12, 1999. This
class of preferred stock was created by Coleman and acquired by the Company in
order to enable Coleman and the Company to file consolidated federal income tax
returns, and in certain jurisdictions, consolidated state income tax returns,
prior to the consummation of the Coleman merger. The issue price per share of
the voting preferred stock was equal to 110% of the average closing price per
share of common stock of Coleman over the five trading days prior to the date of
issuance of the voting preferred stock. Except for as required by law, the
holders of the voting preferred stock vote as a single class with the holders of
the Coleman common stock on all matters submitted to a vote of the holders of
Coleman common stock, with each share of voting preferred stock and each share
of Coleman common stock having one vote. The voting preferred stock has an
annual dividend equal to 7% of $10.35, the issue price of the voting preferred
stock, which accrues but will not be paid in cash unless a liquidation of
Coleman occurs or certain transactions are consummated as described below. In
addition, the voting preferred stock will participate ratably with the Coleman
common stock in all other dividends and distributions (other than liquidating
distributions) made by Coleman to the holders of its common stock. The voting
preferred stock will participate with the Coleman common stock in any merger,
consolidation, or any other transaction (other than a merger of a wholly owned
subsidiary of the Company with Coleman, including the Coleman merger) and will
receive on a per share basis the same type and amount of consideration as the
Coleman common stock. On liquidations: (1) the holders of the voting preferred
stock would receive a preferential distribution equal to $10.35, plus accrued
and unpaid dividends, (2) next, the holders of the Coleman common stock would
receive an amount equal to $10.35 per share of common stock and (3) any assets
remaining after such distributions would be shared by the holders of voting
preferred stock and the Coleman common stock on a share for share basis. In
connection with the issuance of the shares of preferred stock, Coleman entered
into a tax sharing agreement with the Company pursuant to which Coleman will pay
to Sunbeam amounts equal to the federal and state income taxes that would have
been payable by Coleman had Coleman not been included in the consolidated income
tax return of the Company. The terms of the voting preferred stock, their issue
price and the terms of the tax sharing agreement were approved on Coleman's
behalf by Coleman's sole independent director. The net proceeds of preferred
stock were used by Coleman to make a partial repayment on the note payable to
Sunbeam.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
accompanying condensed consolidated financial statements and the related
footnotes included in this quarterly report on Form 10-Q, as well as the
consolidated financial statements, related footnotes and management's discussion
and analysis of financial condition and results of operations in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
ACQUISITIONS
On March 30, 1998, the Company, through a wholly-owned subsidiary,
acquired approximately 81% of the total number of then outstanding shares of
common stock of Coleman from a subsidiary of MacAndrews & Forbes ("M&F"), in
exchange for 14,099,749 shares of the Company's common stock and approximately
$160 million in cash. In addition, the Company assumed approximately $1,016
million in debt. Immediately thereafter, as a result of the exercise of Coleman
employee stock options, Sunbeam's indirect beneficial ownership of Coleman
decreased to approximately 79% of the total number of the outstanding shares of
Coleman common stock. The Company's agreement for the acquisition of the
remaining publicly held Coleman shares pursuant to a merger transaction provides
that the remaining Coleman shareholders will receive:
o approximately 6.7 million shares of Sunbeam common stock (0.5677 of
a share for each outstanding Coleman share); and,
o approximately $87 million in cash ($6.44 for each outstanding
Coleman share and the cash-out of unexercised Coleman employee stock
options for an amount equal to the difference between $27.50 per
share and the exercise price of such options).
The Company expects to complete the Coleman merger during the second
half of 1999, although there can be no assurance that the merger will occur
during that time. See Note 2 to the Condensed Consolidated Financial Statements
for information regarding the settlement claims relating to the Coleman
acquisition, the terms of which provide for the issuance at the time of the
merger of warrants to purchase up to 4.98 million shares of Sunbeam's common
stock at $7 per share.
On April 6, 1998, the Company completed the cash acquisitions of First
Alert, a leading manufacturer of smoke and carbon monoxide detectors, and
Signature Brands, a leading manufacturer of consumer and professional products.
The First Alert and the Signature Brands acquisitions were valued at
approximately $182 million (including $133 million of cash and $49 million of
assumed debt) and approximately $255 million (reflecting cash paid, including
the required retirement or defeasance of debt), respectively.
The acquisitions were recorded under the purchase method of accounting
and accordingly, the financial position and results of operations of each
acquired entity are included in the Condensed Consolidated Financial Statements
from the respective dates of acquisition. The purchase prices of the acquired
entities have been allocated to individual assets acquired and liabilities
assumed based on estimates of fair values determined by independent appraisals
at the dates of acquisition.
19
1998 CHARGES
Consolidated operating results for 1998 were impacted by a number of
largely non-recurring charges. Operating income, adjusted for these items, is
summarized in the following table and succeeding narrative.
AS REPORTED COMBINED
------------------------------------------------------ HISTORICAL
THREE MONTHS ENDED SIX MONTHS ENDED RESULTS
---------------------- ------------------------- SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998 1998
-------- -------- ---------- -------- ----------
(Amounts in millions)
Net sales - As reported ........... $ 660.9 $ 578.5 $ 1,184.9 $ 826.1 $ 1,127.9
Gross margin - As reported ........ 170.3 (52.5) 293.5 (18.7) 56.3
Non-recurring adjustments:
Provision for inventory ...... -- 84.0 -- 84.0 84.0
Asset impairment ............. -- 29.6 -- 29.6 29.6
Purchase accounting .......... -- 20.5 -- 20.5 20.5
Adjusted gross margin ..... 170.3 81.6 293.5 115.4 190.4
-------- -------- ---------- -------- ----------
Selling, general and administrative 156.8 140.8 294.8 211.9 312.9
expense ("SG&A") - As reported
Former employees' deferred
compensation .............. -- -- -- (30.7) (30.7)
Adjusted SG&A expense ..... 156.8 140.8 294.8 181.2 282.2
-------- -------- ---------- -------- ----------
Adjusted operating income (loss) .. $ 13.5 $ (59.2) $ (1.3) $ (65.8) $ (91.8)
======== ======== ========== ======== ==========
The combined historical results from operations for the six months
ended June 30, 1998 include the historical results of Coleman, Signature Brands
and First Alert from the beginning of 1998 to their respective acquisition
dates. The combined historical results do not include pro forma purchase
accounting adjustments including those relating to the amortization of the
purchase price of these acquisitions. Presentation of these combined historical
results is to enhance comparability between the periods presented and not
necessarily indicative of the combined results that would have occurred had
these acquisitions been consummated at the beginning of 1998.
Provision For Inventory
- -----------------------
In the second quarter of 1998, the Company recorded a charge of $84.0
million as a result of the following:
o Inventories were built during 1997 and the first half of 1998 in
anticipation of 1998 sales volumes which did not materialize. As a
result, it has been and will continue to be necessary to dispose of
some portions of excess inventories at amounts less than cost.
Accordingly, in the second quarter of 1998, when the facts and
circumstances were known that such sales volume would not
materialize, the Company recorded $46.4 million in charges to
properly state this inventory at the lower-of-cost-or-market. This
inventory primarily related to certain appliances, grills and grill
accessories.
o A charge of $11.0 million was recorded during the second quarter of
1998 for excess inventories for raw material and work in process
that will not be used due to outsourcing the production of
breadmakers, toasters, and certain other appliances.
o In the second quarter of 1998, the Company made the decision to exit
certain product lines, primarily air and water filtration products
and eliminate certain stock keeping units ("SKU's") within existing
product lines, primarily relating to appliances, grills and grill
accessories. As a result of this decision, a $26.6 million charge
was recorded during the second quarter of 1998 to properly state
this inventory at the lower-of-cost-or market.
These charges to record excess inventories at the
lower-of-cost-or-market were based upon management's best estimate of net
realizable value. (See Note 7 to the Condensed Consolidated Financial
Statements.)
20
In addition to the charge taken in 1998, the excess and obsolete
inventory referenced above has impacted the Company's operating results in
several ways, with two primary effects. First, gross margins have been impacted
by sales, at below normal prices, of obsolete inventory into non-traditional
channels and excess inventory into traditional channels. In addition, due to the
high levels of excess inventory at the end of 1998, the Company's usage of its
manufacturing facilities has been lower than normal, resulting in lower gross
margins in 1999.
Asset Impairment
- ----------------
Management made decisions to outsource or discontinue a substantial
number of products previously made by the Company (principally breadmakers,
toasters and certain other appliances, air and water filtration products and the
elimination of certain SKU's within existing product lines, primarily relating
to appliances, grills and grill accessories). As a result, certain facilities
and equipment would either no longer be used or would be utilized in a
significantly different manner. Accordingly, a charge of $29.6 million was
recorded in Cost of Goods Sold to write certain of these assets down to their
estimated fair market value. (See Note 7 to the Condensed Consolidated Financial
Statements.)
Purchase Accounting
- -------------------
The Company recorded the 1998 acquisitions using the purchase method of
accounting. In accordance with this accounting method, inventory pertaining to
the acquisitions was recorded at fair value. The fair value of the inventory
exceeded the book value reflected on the balance sheets of the acquired
companies as of the respective acquisition dates. The excess of the fair value
of inventory over its pre-acquisition book value was recorded in cost of sales
as the inventory was sold. The adjustment above removes this non-recurring
impact ($20.5 million).
Former Employees' Deferred Compensation
- ---------------------------------------
On February 20, 1998, the Company entered into new three-year
employment agreements with its then Chairman and Chief Executive Officer and two
other senior officers of the Company. The new employment agreements provided
for, among other items, the acceleration of vesting of restricted stock and the
forfeiture of unvested restricted stock that had been granted under the
executives' prior employment agreements, new restricted stock grants and options
to purchase common shares. Total compensation expense recognized in the first
quarter of 1998 related to these items was approximately $31 million. (See Note
8 to the Condensed Consolidated Financial Statements.)
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Consolidated net sales for the three months ended June 30, 1999 and
1998 were $660.9 million and $578.5 million respectively, an increase of $82.4
million or approximately 14%. This increase was driven primarily by the Outdoor
Leisure group where net sales increased $53.6 million to $338.1 million in the
second quarter of 1999. This increase was predominately driven by strong retail
replenishment demand of outdoor recreation products and Powermate(R) generators
(aggregating approximately $51 million). The increase in outdoor recreation
products and Powermate(R) generators is believed to be partially attributable to
heightened consumer sensitivity to the need for emergency preparedness. This
increased sensitivity is believed to be reflective of a combination of factors
including weather conditions and Year 2000 considerations. Outdoor cooking
product net sales increased approximately $9 million in the 1999 period as
compared to the second quarter of 1998, largely as a result of reduced shipments
in the year ago quarter to allow trade inventories to return to appropriate
levels. This factor affects the year to year comparisons for each of the
operating groups. These improvements were partially offset by weaknesses in net
sales of Eastpak(R) products. Household net sales increased $17.4 million to
$151.3 million in 1999. Despite the lack of significant new product
introductions, overall net sales of appliances, personal care, and health
products increased approximately $14 million as a result of a strengthening
retail environment in the current year and the effect of reduced shipments in
the year ago quarter. During 1998 sales of coffee makers and smoke and carbon
monoxide detectors were adversely effected by the disruption that arose from the
integration with Sunbeam and the related management changes. Results for the
second quarter of 1999 reflect improvement in the sales of coffee makers and
smoke and carbon monoxide detectors (approximately $3 million) from the prior
year quarter, accounting for the remaining increase. International net sales
increased $11.6 million to $165.7 million. The increase in net sales was largely
driven by improved net sales in Canada of approximately $10 million, resulting
predominantly from strong retail demand for Powermate(R) and outdoor recreation
products and the effect of reduced shipments in the year ago quarter, as
discussed above. In addition, net sales increased in Europe and Japan by
approximately $5 million in the second quarter of 1999 as compared to the same
period in 1998, partially offset
21
by declining net sales of the Company's products in Latin America. The Company
believes that weak economic conditions contributed to the decline in Latin
American net sales.
Gross margin for the second quarter in 1999 was $170.3 million or
$222.8 million higher than the comparable period in 1998. Excluding the effects
of 1998 non-recurring adjustments, as summarized above under "1998 Charges",
gross margin for 1998 was $81.6 million in the second quarter of 1998. As a
percentage of net sales, gross margin improved to approximately 26% in the
second quarter of 1999 as compared to the second quarter 1998 gross margin of
negative 9% and 1998 adjusted gross margin of approximately 14%. The three
operating groups contributed nearly equally to the margin improvements in the
1999 period. Approximately half of the Outdoor Leisure group's margin
improvement resulted from additional volume and an improved product mix with the
remaining improvement resulting from favorable overhead absorption as a result
of higher manufacturing volumes. The improvement in the Household group was
driven by appliances and personal care products which benefited from improved
manufacturing efficiencies and cost benefits achieved from sourcing additional
finished goods from third party vendors. Approximately 70% of the improvement in
the International group's gross margin resulted from the benefit of the shut
down of the Mexico City manufacturing facility which had experienced high
material usage costs and employee benefit costs in the second quarter a year
ago. The remaining improvement in the International group resulted from gross
margin generated by higher sales volumes and a lower level of product returns.
SG&A expense in the second quarter of 1999 was $156.8 million,
representing an 11.4% increase over the same period in the prior year. Excluding
the effect of Year 2000 compliance efforts ($5.4 million) recorded in the second
quarter of 1999, SG&A expense increased approximately $11 million (approximately
8%) in 1999 as compared to the same period in 1998. This increase is largely
attributable to higher levels of selling and administrative costs primarily in
the Outdoor Leisure and International segments driven by increased net sales. In
addition, SG&A expense in the second quarter of 1999 reflects costs associated
with certain redundant operations resulting from the Company's 1998 acquisitions
and the decision to bring in-house certain operating activities that are
currently outsourced. The Company is in the process of fully integrating certain
of these functions and expects that when this process has been completed
consolidated SG&A expense for these functions will be reduced.
Consolidated operating results for the second quarters of 1999 and
1998, were a profit of $13.5 million in 1999 and a loss of $193.3 million in
1998. Operating results for the second quarter of 1998, as adjusted, were a loss
of $59.2 million. This change resulted from the factors discussed above.
Interest expense in the second quarter of 1999 was $45.0 million as
compared to $42.4 million in the same period in the prior year. Approximately
half of this increase is attributable to higher levels of borrowings during the
second quarter of 1999. The increased level of borrowings was attributable to
capital expenditures since the second quarter of 1998. The balance of the
increase was driven by the impact of higher interest rates during the 1999
period and the amortization of the loan commitment fee (approximately $1
million) the Company is obligated to pay under the terms of the New Credit
Facility. See Note 10 to the Condensed Consolidated Financial Statements for a
discussion of the loan commitment fee.
Other expense, net of $1.1 million for the second quarter of 1999
included approximately $2 million relating to the bank credit facility and the
debentures. The increased credit facility expenses primarily related to unused
facility fees and the debenture expense related to liquidated damages payable to
debenture holders. (See Note 3 to Condensed Consolidated Financial Statements.)
Other expense, net of $2.1 million for the second quarter of 1998 primarily
represents foreign exchange losses principally at the Company's operations in
Mexico, Venezuela and Canada. Other expense for this period also includes
approximately $0.5 million related to unused facility fees. Expenses during the
second quarter of 1999 and 1998 were partially offset by interest income of $1.1
million and $1.4 million, respectively.
The minority interest reported for the second quarter of 1999 and 1998
relates to the minority interest held in Coleman by public shareholders.
Approximately $6 million of the $7.3 million income tax expense
recorded in the second quarter of 1999 related to a U.S. tax liability generated
by Coleman as a separate U.S. tax filing entity. As discussed below, in July
1999, the Company acquired a sufficient ownership interest in Coleman to permit
it and Coleman to file consolidated U.S. tax returns with Coleman for all future
periods. The remaining tax expense recorded in the second quarter of 1999
related to taxes on foreign income. Tax expense recorded for the second quarter
of 1998 was nearly all related to foreign taxes. No net tax benefit was recorded
on the Company's losses in either year as it is management's assessment that the
Company cannot demonstrate that it is more likely than not that deferred tax
assets resulting from these losses would be realized through future taxable
income.
22
On July 12, 1999, the Company acquired 3,000,000 shares of a newly
created series of Coleman voting preferred stock for an aggregate purchase price
of approximately $31 million. These shares, together with the shares of Coleman
common stock the Company owns, enable Sunbeam to exercise 80.01% of the total
voting power of Coleman's outstanding capital stock as of July 12, 1999. This
class of preferred stock was created by Coleman and acquired by the Company in
order to enable Coleman and the Company to file consolidated federal income tax
returns, and in certain jurisdictions, consolidated state income tax returns,
prior to the consummation of the Coleman merger. In connection with the issuance
of the shares of preferred stock, the Company entered into a tax sharing
agreement with Coleman, pursuant to which Coleman will pay to Sunbeam amounts
equal to the federal and state income taxes that would have been payable by
Coleman had Coleman not been included in the consolidated income tax return of
the Company. The net proceeds of preferred stock were used by Coleman to make a
partial repayment on the note payable to Sunbeam. (See Note 11 to the Condensed
Consolidated Financial Statements.)
As a result of repayment of certain indebtedness assumed in the Coleman
acquisition, the Company recognized an extraordinary charge in the second
quarter of 1998. The debt assumed in connection with the Coleman acquisition was
repaid as a result of the requirements under the terms of the New Credit
Facility. This extraordinary charge consisted of redemption premiums ($99.1
million), unamortized debt discount ($13.8 million) and unamortized deferred
financing costs ($0.9 million) and was net of income taxes ($10.7 million). (See
Note 3 to the Condensed Consolidated Financial Statements.)
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net sales for the six months ended June 30, 1999 and 1998 were $1,184.9
million and $826.1 million respectively, an increase of $358.8 million. Results
for the six months ended June 30, 1998 include Coleman, Signature Brands and
First Alert from their respective acquisition dates. After adjusting 1998 sales
to include sales of the acquired companies for the periods from the beginning of
1998 through the respective dates of acquisition, combined historical net sales
would be $1,127.9 million. 1999 net sales increased approximately $57 million or
approximately 5% over 1998 combined historical net sales. Information that
adjusts for the results of the acquisitions prior to the actual acquisition
dates (the "combined historical" information) is provided for informational
purposes only and is to enhance comparability of the period presented. This
information is not necessarily indicative of what the combined results would
have been had these acquisitions occurred at the beginning of the periods
presented. The increase in net sales is driven by the Outdoor Leisure group
which had an increase of approximately $59 million in 1999 as compared to the
combined historical net sales in the same period in the prior year. This
increase over combined historical net sales was largely due to sales of outdoor
recreation products and Powermate(R) generators. The higher level of sales of
these products is believed to be partially attributable to heightened consumer
sensitivity to the need for emergency preparedness. The Company believes that
this heightened sensitivity is reflective of a combination of factors, including
weather conditions and Year 2000 considerations. Household net sales in 1999
decreased approximately $7 million compared to 1998 combined historical net
sales. The Company believes that the channel loading that took place in the
first quarter of 1998 was primarily responsible for this decrease. International
net sales in 1999 increased $5.0 million over 1998 combined historical net
sales. Higher sales in Canada and Europe resulted predominantly from strong
retail demand of Powermate(R) and outdoor recreation products. This increase was
partially offset by the impact of weak economic conditions in Latin America.
Gross margin for the first half of 1999 was $293.5 million or $312.2
million higher than the comparable period in 1998. Adjusting for the combined
results of the acquired companies and excluding the effects of 1998
non-recurring adjustments, which are summarized above under the heading "1998
Charges", gross margin for the first half of 1999 increased approximately $103
million over the 1998 combined historical gross margin, with each of the
operating groups contributing to the margin improvement. As a percentage of net
sales, gross margin improved to approximately 25% in the first half of 1999 as
compared to a negative 2% in the first half of 1998. The gross margin percentage
for the 1998 period adjusted for the non-recurring charges and for the effect of
the acquired companies was approximately 17% of combined historical net sales.
The Household group contributed approximately $42 million of the 1999 gross
margin improvement over the 1998 combined historical gross margin. The
improvement in the Household group's gross margin resulted primarily from
improved manufacturing processes and controls and reduced sales returns and
allowances. The Outdoor Leisure group's gross margin in 1999 improved by
approximately $41 million over 1998 combined historical gross margin.
Approximately 70% of the improvement in the Outdoor Leisure group's gross margin
resulted from additional volume and improved mix. The remaining improvement
resulted from improved manufacturing overhead absorption. The International
group contributed approximately $20 million of the 1999 gross margin improvement
over 1998 combined historical gross margin. Approximately 75% of the improvement
in the International group's gross margin resulted from the shut down of the
Mexico City manufacturing facility which had experienced high material usage
costs and employee benefit costs in the prior year. The remaining improvement
resulted from a lower level of product returns.
23
SG&A expense for the first six months of 1999 was $294.8 million, an
increase of $82.9 million or 39.1% over the same period in the prior year. After
adjusting 1998 SG&A expense to include the acquired companies' SG&A expense for
the period from the beginning of 1998 through the respective dates of
acquisition ($101.0 million), combined historical SG&A expense was $312.9
million. Since the combined historical 1998 SG&A expenses were derived by adding
the acquired companies' pre-acquisition period costs to the reported six months'
results of Sunbeam, the combined historical SG&A expenses include $19.0 million
of amortization of intangibles expense representing both pre- and
post-acquisition periods, as well as approximately $12 million of transaction
costs incurred by the acquired companies relating the them being purchased by
Sunbeam. Excluding these costs, and the 1998 non-recurring charges of $30.7
million, as described above under "1998 Charges", adjusted 1998 SG&A expenses
were approximately $251 million. The 1999 SG&A expenses included $27.1 million
of amortization of intangibles expense and $13.5 million of costs for Year 2000
compliance efforts. Excluding these costs, the adjusted 1999 SG&A costs were
$254.2 million, nearly flat with a year ago.
Operating results for the first halves of 1999 and 1998, were a loss of
$1.3 million in 1999 and a loss of $230.6 million in 1998. Adjusted for the
historical results of the acquired companies and excluding 1998 non-recurring
charges, as previously described, operating results for the 1999 and 1998
periods were losses of $1.3 million and $91.8 million, respectively. This change
resulted from the factors discussed above.
Interest expense increased from $47.5 million in the first half of 1998
to $87.0 million in the first half of 1999. Nearly all of the change related to
higher borrowing levels in 1999 resulting primarily from borrowings for the
acquisitions that were outstanding for the entire 1999 six month period as
compared to only a portion of the 1998 period.
Other expense, net of $1.9 million for the first half of 1999 included
approximately $4 million relating to the bank credit facility and the
debentures. The credit facility expenses primarily related to unused facility
fees and the debenture expense related to liquidated damages payable to
debenture holders. (See Note 3 to Condensed Consolidated Financial Statements.)
Other expense, net of $5.3 million for the first half of 1998 primarily
represented foreign exchange losses principally at the Company's operations in
Mexico, Venezuela and Canada. Other expense for this period also includes
approximately $1.0 million relating to an unused facility fee. Expenses during
both periods were partially offset by interest income of $1.7 million.
The minority interest reported in 1999 and 1998 relates to the minority
interest held in Coleman by public shareholders.
Approximately $6 million of the $9.0 million income tax expense
recorded in 1999 related to a U.S. tax liability generated by Coleman as a
separate U.S. tax filing entity. As previously discussed, in July 1999, the
Company acquired a sufficient ownership interest in Coleman to permit it to file
consolidated U.S. tax returns with Coleman for all future periods. The remaining
tax expense recorded in 1999 related to taxes on foreign income. Tax expense
recorded in 1998 was nearly all related to foreign taxes. No net tax benefit was
recorded on the Company's losses in either year as it is management's assessment
that the Company cannot demonstrate that it is more likely than not that
deferred tax assets resulting from these losses would be realized through future
taxable income.
In March 1998, the Company prepaid a $75.0 million 7.85% industrial
revenue bond related to its Hattiesburg facility originally due in 2009. In
connection with the early extinguishment of this debt, the Company recognized an
extraordinary charge in the first quarter of 1998. As a result of repayment of
certain indebtedness assumed in the Coleman acquisition, the Company also
recognized and extraordinary charge in the second quarter of 1998. The debt
assumed in connection with the Coleman acquisition was repaid as a result of the
requirements under the terms of the New Credit Facility. These extraordinary
charges consisted of redemption premiums ($106.9 million), unamortized debt
discount ($13.8 million) and unamortized deferred financing costs ($1.7 million)
and were net of income taxes ($10.7 million).
FOREIGN OPERATIONS
Approximately 75% of the Company's business is conducted in U.S.
dollars (including both domestic sales, U.S. dollar denominated export sales,
primarily to certain Latin American markets, Asian sales and the majority of
European sales). The Company's non-U.S. dollar denominated sales are made
principally by subsidiaries in Europe, Canada, Japan, Latin America and Mexico.
Mexico reverted to a hyperinflationary status for accounting purposes in 1997;
therefore, translation adjustments related to Mexican net monetary assets were
included as a component of net (loss) earnings. Mexico is not considered
hyperinflationary as of January 1, 1999. This change in Mexico's
hyperinflationary status is not expected to have a material effect on the
Company's financial results. Translation adjustments resulting from the
Company's non-U.S.
24
denominated subsidiaries have not had a material impact on the Company's
financial condition, results of operations, or cash flows.
While revenues generated in Asia have traditionally not been
significant, economic instability in this region is expected to have a negative
effect on earnings. Economic instability and the political environment in Latin
America have also affected sales in that region. It is anticipated that sales in
and exports to these regions will continue to be impacted so long as the
economic environments in those regions remain unsettled.
On a limited basis, the Company selectively uses derivatives (foreign
exchange option and forward contracts) to manage foreign exchange exposures that
arise in the normal course of business. No derivative contracts are entered into
for trading or speculative purposes. The use of derivatives has not had a
material impact on the Company's financial results.
SEASONALITY
Sunbeam's consolidated sales are not expected to exhibit substantial
seasonality; however, sales are expected to be strongest during the second
quarter of the calendar year. Furthermore, sales of a number of products,
including warming blankets, vaporizers, humidifiers, grills, First Alert
products, camping and generator products may be impacted by unseasonable weather
conditions.
LIQUIDITY AND CAPITAL RESOURCES
DEBT INSTRUMENTS
In order to finance the acquisition of Coleman, First Alert and
Signature Brands and to refinance substantially all of the indebtedness of the
Company and the three acquired companies, the Company consummated an offering in
March 1998 of zero coupon debentures having a yield to maturity of 5%, which
resulted in approximately $730 million of net proceeds and borrowed about $1,325
million under its new bank credit facility.
The debentures are exchangeable for shares of the Company 's common
stock at an initial conversion rate of 6.575 shares for each $1,000 principal
amount at maturity of the debentures, subject to adjustments upon occurrence of
specified events. The debentures are subordinated in right of payment to all
existing and future senior indebtedness of the Company. The debentures are not
redeemable by the Company prior to March 25, 2003. On or after such date, the
debentures are redeemable for cash with at least 30 days notice, at the option
of the Company. The Company is required to purchase debentures at the option of
the holder as of March 25, 2003, March 25, 2008 and March 25, 2013, at purchase
prices equal to the issue price plus accrued original discount to such dates.
Sunbeam may, at its option, elect to pay any such purchase price in cash or
common stock or any combination thereof. However, the bank credit facility
prohibits the Company from redeeming or repurchasing debentures for cash. The
Company was required to file a registration statement with the SEC to register
the debentures by June 23, 1998. This registration statement was filed on
February 4, 1999 and the SEC has not declared the registration statement
effective. The Company 's failure to file the registration statement by June 23,
1998 did not constitute default under the terms of the debentures. As part of
the normal review process by the SEC, a number of comments have been made by the
staff of the Division of Corporation Finance relating to the registration
statement and the restated 1996 and 1997 financial statements included therein.
The Company has filed amendments to this registration statement. From June 23,
1998 until the registration statement is declared effective, the Company is
required to pay to the debenture holders cash liquidated damages accruing, for
each day during such period, at a rate per annum equal to 0.25% during the first
90 days and 0.50% thereafter multiplied by the total of the issue price of the
debentures plus the original issue discount thereon on such day. The Company
made its first payment of approximately $500,000 to the debenture holders on
September 25, 1998 and an additional $2 million was paid on March 25, 1999. An
additional cash payment of approximately $2 million, representing the Company's
liability to debenture holders through June 30, 1999, will be due on September
25, 1999.
Concurrent with the acquisitions, the Company replaced its $250 million
syndicated unsecured five-year revolving credit facility with the bank credit
facility. The bank credit facility provided for aggregate borrowings of up to
$1.7 billion and in addition to other customary covenants, required the Company
to maintain specified consolidated leverage, interest coverage and fixed charge
coverage ratios as of the end of each fiscal quarter occurring after March 31,
1998 and on or prior to the latest stated maturity date for any of the
borrowings under the bank credit facility.
25
As a result of, among other things, its operating losses incurred
during the first half of 1998, the Company did not achieve the specified
financial ratios for June 30, 1998 and it appeared unlikely that the Company
would achieve the specified financial ratios for September 30, 1998.
Consequently, the Company and its lenders entered into an agreement dated as of
June 30, 1998 that waived through December 31, 1998 all defaults arising from
the failure of the Company to satisfy the specified financial ratios for June
30, 1998 and September 30, 1998. Pursuant to an agreement with the Company dated
as of October 19, 1998, the Company 's lenders extended all of the waivers under
the June 30 agreement through April 10, 1999 and also waived through such date
all defaults arising from any failure by the Company to satisfy the specified
financial ratios for December 31, 1998. As part of the October 19, 1998
agreement, the Company agreed to a minimum monthly earnings before interest,
taxes, depreciation and amortization ("EBITDA") covenant (as defined in the bank
credit facility) which covenant the Company had been able to satisfy.
On April 10, 1999, among other things, the lenders extended all of the
waivers set forth in the October 19, 1998 agreement through April 15, 1999. On
April 15, 1999, the Company and its lenders entered into a comprehensive
amendment to the bank credit facility that, among other things, extended all of
the waivers under the April 10, 1999 agreement until April 10, 2000 and waived
until such date all defaults arising from any failure by the Company to satisfy
the specified financial ratios for any fiscal quarter end occurring during 1999
and for March 31, 2000. Following is a description of the significant terms of
the bank credit facility as amended April 15, 1999. As part of the April 15,
1999 bank credit facility amendment, the Company agreed to a minimum cumulative
EBITDA covenant that is based on post-December 31, 1998 consolidated EBITDA and
is tested at the end of each month occurring on or prior to March 31, 2000, as
well as a covenant limiting the amount of revolving loans (other than those used
to fund the Coleman merger) that may be outstanding under the bank credit
facility as of the end of each such month. The minimum cumulative EBITDA was
initially $6.3 million for the period January 1, 1999 through April 30, 1999 and
generally grows on a monthly basis until it reaches $121.0 million for the
period from January 1, 1999 through March 31, 2000.
The bank credit facility provides for aggregate borrowings of up to
$1.7 billion through:
o a revolving credit facility in an aggregate principal amount of up
to $400.0 million maturing March 30, 2005, $52.5 million of which
may only be used to complete the Coleman merger if the Coleman
merger is not completed prior to August 31, 1999;
o up to $800.0 million in term loans maturing on March 30, 2005, of
which $35.0 million may only be used to complete the Coleman merger;
and
o a $500.0 million term loan maturing September 30, 2006, of which
$5.0 million has already been repaid through June 30, 1999.
As of June 30, 1999, approximately $1.4 billion was outstanding and
approximately $0.2 billion was available for borrowing under the bank credit
facility. The remaining $0.1 billion of the $1.7 billion bank credit facility
was committed for outstanding letters of credit.
Under the bank credit facility, interest accrues, at the Company 's
option:
o at the London Interbank Offered Rate ("LIBOR");
o or at the base rate of the administrative agent which is generally
the higher of the prime commercial lending rate of the
administrative agent or the Federal Funds Rate plus 0.50%;
in each case plus an interest margin which is currently 3.25% for LIBOR
borrowings and 2.00% for base rate borrowings. The applicable interest margin is
subject to downward or upward adjustment upon the occurrence of specified events
including a 0.25% increase on September 1, 1999 if the Coleman merger has not
occurred by then and an additional 0.25% to 0.50% increase on October 1, 1999 if
the Coleman merger has not occurred by then.
Borrowings under the bank credit facility are secured by a pledge of
the stock of the Company's material subsidiaries, including Coleman, and by a
security interest in substantially all of the assets of the Company and its
material domestic subsidiaries, other than Coleman and its material subsidiaries
except as described below. Currently, Coleman's inventory and related assets are
pledged to secure its obligations for letters of credit issued for its account
under the bank credit facility. Additionally, as security for Coleman's note
payable to the Company, Coleman pledged substantially all of its domestic
assets, other than real property, including 66% of the stock of its direct
foreign subsidiaries and domestic holding companies for its foreign subsidiaries
and all of the stock of its other direct domestic subsidiaries but not the
assets of Coleman's subsidiaries. The pledge runs in favor of the Company 's
lending banks, to
26
which the Coleman note has been pledged as security for the Company 's
obligations to them. Upon completion of the Coleman merger, substantially all of
Coleman's assets and the assets of Coleman's domestic subsidiaries will be
pledged to secure the obligations under the bank credit facility.
In addition, borrowings under the bank credit facility are guaranteed
by a number of the Company 's wholly-owned material domestic subsidiaries and
these subsidiary guarantees are secured as described above. Upon completion of
the Coleman merger, Coleman and each of its United States subsidiaries will
become guarantors of the obligations under the bank credit facility. To the
extent extensions of credit are made to any subsidiaries of the Company, the
obligations of such subsidiaries are guaranteed by the Company.
In addition to the above described financial ratios and tests, the bank
credit facility contains covenants customary for credit facilities of a similar
nature, including limitations on the ability of the Company and its
subsidiaries, including Coleman, to, among other things:
o declare dividends or repurchase stock;
o prepay, redeem or repurchase debt, incur liens and engage in
sale-leaseback transactions;
o make loans and investments;
o incur additional debt (including revolving loans under the bank
credit facility);
o amend or otherwise alter material agreements or enter into
restrictive agreements;
o make capital and Year 2000 compliance expenditures;
o engage in mergers, acquisitions and asset sales;
o engage in transactions with specified affiliates;
o settle specified litigation;
o alter its cash management system; and
o alter the businesses they conduct.
Sunbeam is also required to comply with specified financial covenants and
ratios.
The bank credit facility provides for events of default customary for
transactions of this type, including nonpayment, misrepresentation, breach of
covenant, cross-defaults, bankruptcy, material adverse change arising from
compliance with ERISA, material adverse judgments, entering into guarantees and
change of ownership and control. It is also an event of default under the bank
credit facility if the Company 's registration statement in connection with the
Coleman merger is not declared effective by the SEC on or before October 30,
1999 or if the merger does not occur within 25 business days of the
effectiveness of the registration statement or if the cash
consideration--including any payments on account of the exercise of any
appraisal rights, but excluding related legal, accounting and other customary
fees and expenses--to consummate the Coleman merger exceeds $87.5 million.
Although there can be no assurance, the Company anticipates that it will satisfy
these conditions. Furthermore, the bank credit facility requires the Company to
prepay term loans under the bank credit facility on each of September 30, 1999
and December 31, 1999 to the extent that cash on hand in the Company 's
concentration accounts plus the aggregate amount of unused revolving loan
commitments on these dates (excluding, for the September measurement date, $52.5
million reserved for the Coleman merger), exceeds $115 million and $125 million,
respectively, but the Company is not required to prepay more than $69.3 million
in the aggregate as a result of the provision.
Unless waived by the bank lenders, the failure of the Company to
satisfy any of the financial ratios and tests contained in the bank credit
facility or the occurrence of any other event of default under the bank credit
facility would entitle the bank lenders to (a) receive a 2.00% increase in the
interest rate applicable to outstanding loans and increase the trade letter of
credit fees to 1.00% and (b) accelerate the maturity of the outstanding
borrowings under the bank credit facility and exercise all or any of their other
rights and remedies. Any such acceleration or other exercise of rights and
remedies would likely have a material adverse effect on the Company.
The bank credit facility also includes provisions for the deferral of
the 1999 scheduled term loan payments of $69.3 million until April 10, 2000 as a
result of the satisfaction by the Company on May 14, 1999 of the agreed upon
conditions to the deferral. See Note 3 to the Condensed Consolidated Financial
Statements.
CASH FLOWS
As of June 30, 1999, the Company had cash and cash equivalents of $51.1
million and total debt of $2.3 billion. Because the waivers granted by the
Company's lenders expire on April 10, 2000, the borrowings under the bank credit
facility, as well as other debt containing cross-default provisions, are
classified as short-term in the June 30, 1999
27
Condensed Consolidated Balance Sheet. Cash used in operating activities during
the first half of 1999 was $34.5 million compared to $217.6 million in the first
half of 1998. This change is primarily attributable to working capital
improvements and improved operating results. The majority of the working capital
improvements are attributable to the Company's management of inventory levels.
Inventories generated approximately $78 million of additional cash flow versus
the same period in the prior year. The inventory change in the 1998 period
reflects inventory changes of the acquired companies from their respective dates
of acquisition. Increases in accounts payable generated approximately $41
million of cash in the first six months of 1999 whereas payables used
approximately $25 million in the same period of 1998, resulting in an
improvement in cash flow period-to-period of approximately $66 million. The
increase in payables in the current period resulted from payables balances
having been reduced to a low level by year-end 1998. This reduction in payables,
which included an effort to reduce delinquent payables, began in the second
quarter of 1998. These cash flow improvements are partially offset by increases
in accounts receivable. The increase in receivables during the first half of
1999 is largely due to the seasonal selling period of the Company's Outdoor
Leisure division which experienced a stronger second quarter in 1999 than in
1998. The Company participates in an accounts receivable securitization program
to finance a portion of its accounts receivable. See Note 4 to the Condensed
Consolidated Financial Statements.
In the first half of 1999, cash used in investing activities was driven
by capital expenditures of $33.6 million, primarily for information systems,
including expenditures for Year 2000 readiness and equipment and tooling for new
products. Capital spending in the comparable 1998 period was $21.2 million and
was primarily for several manufacturing efficiency initiatives, equipment and
tooling for new products and management information systems and software
licenses. The new product capital spending in the 1998 period principally
related to the appliance category and included costs related to water and air
filtration products which were discontinued in the second quarter, blenders,
standmixers and irons. Cash used in investing activities in the first half of
1998 also reflects $379.2 million for the acquisitions of the shares of Coleman
from a subsidiary of MacAndrews & Forbes, as well as the acquisitions of
Signature Brands and First Alert. The Company anticipates 1999 capital spending
to be less than 5% of net sales. Capital expenditures in the current year are
expected to primarily relate to information systems and related support,
including expenditures for Year 2000 readiness, new product introductions and
capacity additions.
Cash provided by financing activities totaled $58.0 million in the
first half of 1999 and reflected net borrowings under the Company's bank credit
facility. Cash provided by financing activities in the first half of 1998 was
$608.6 million and reflected net proceeds from the debentures of $729.6 million,
the cancellation and repayment of all outstanding balances under the Company's
$250 million September 1996 revolving credit facility, the repayment of certain
debt assumed in connection with the Coleman, Signature Brands and First Alert
acquisitions, and the early extinguishment of the $75.0 million Hattiesburg
bond. In addition, cash provided by financing activities in 1998 is net of $25.1
million of financing fees related to Sunbeam's $1.7 billion bank credit facility
and $19.6 million of proceeds from the exercise of stock options. See Note 3 to
the Condensed Consolidated Financial Statements.
At June 30, 1999, standby and commercial letters of credit aggregated
$67.9 million and were predominately for insurance, pension, environmental,
workers' compensation, and international trade activities. In addition, as of
June 30, 1999, surety bonds with a contract value of $66.5 million were
outstanding largely for the Company's pension plans and as a result of
litigation judgments that are currently under appeal. For additional information
relating to the debentures, the bank credit facility and the repayment of debt,
see Note 3 to the Condensed Consolidated Financial Statements.
The Company expects to acquire the remaining equity interest in Coleman
in a merger transaction in which the existing Coleman minority shareholders will
receive 0.5677 of a share of the Company 's common stock and $6.44 in cash for
each share of Coleman common stock outstanding. In addition, unexercised options
under Coleman's stock option plans will be cashed out at a price per share equal
to the difference between $27.50 and the exercise price of such options. The
Company expects to issue approximately 6.7 million shares of common stock and
expend approximately $87 million in cash, including cash paid to option holders,
to complete the Coleman transaction. Under a proposed settlement of certain
litigation relating to the Coleman merger, the Company will also issue warrants
to purchase up to 4.98 million shares of the Company's common stock to the
Coleman public stockholders and the plaintiff's litigation counsel upon
consummation of the Coleman merger. See Notes 2 and 10 to the Condensed
Consolidated Financial Statements. Although there can be no assurance, it is
anticipated that the Coleman merger will occur in the second half of fiscal
1999.
The Company believes its borrowing capacity under the bank credit
facility, cash flow from the combined operations of the Company and its acquired
companies, existing cash and cash equivalent balances, and its receivable
securitization program will be sufficient to support working capital needs,
capital expenditure and Year 2000 compliance spending, and debt service through
April 10, 2000. The Company intends to negotiate with its lenders on an
amendment to the bank credit facility, negotiate with its lenders on further
28
waiver of such covenants and other terms or refinance the bank credit facility.
Any decisions with respect to such amendment, waiver, or refinancing will be
made based on a review from time to time of the advisability of particular
transactions. There can be no assurance that an amendment, further waiver of
existing covenants and other terms, or refinancing will be entered into by April
10, 2000. The failure to obtain such an amendment, further waiver or debt
refinancing would likely result in violation of existing covenants and
compliance with other terms, which would permit the bank lenders to accelerate
the maturity of all outstanding borrowings under the bank credit facility, which
would likely have a material adverse effect on the Company.
By letter dated June 17, 1998, the staff of the Division of Enforcement
of the SEC advised the Company that it was conducting an informal inquiry into
the Company 's accounting policies and procedures and requested that the Company
produce documents. On July 2, 1998, the SEC issued a Formal Order of Private
Investigation, designating officers to take testimony and pursuant to which a
subpoena was served on Sunbeam requiring the production of documents. On
November 4, 1998, the Company received another SEC subpoena requiring the
production of additional documents. The Company has provided numerous documents
to the SEC staff and continues to cooperate fully with the SEC staff. The
Company cannot predict the term of such investigation or its potential outcome.
The Company is involved in significant litigation, including class and
derivative actions, relating to events which led to the restatement of its
consolidated financial statements, the issuance of the MacAndrews & Forbes
warrant, the sale of the debentures and the employment agreements of Messrs.
Dunlap and Kersh. Sunbeam intends to vigorously defend each of the actions, but
cannot predict the outcome and is not currently able to evaluate the likelihood
of the Company 's success in each case or the range of potential loss. However,
if the Company were to lose these suits, judgments would likely have a material
adverse effect on the Company 's financial position, results of operations and
cash flows. Additionally, the Company's insurance carriers have filed various
suits requesting a declaratory judgment that the directors' and officers'
liability insurance policies for excess coverage was invalid and/or had been
properly canceled by the carriers or have advised Sunbeam of their intent to
deny coverage under such policies. The Company intends to pursue recovery from
all of its insurers if damages are awarded against the Company or its
indemnified officers and/or directors under any of the foregoing actions and to
recover attorneys' fees covered under those policies. The Company 's failure to
obtain such insurance recoveries following an adverse judgment against the
Company on any of the foregoing actions could have a material adverse effect on
the Company 's financial position, results of operations and cash flows.
As a consumer goods manufacturer and distributor, the Company faces the
constant risks of product liability and related lawsuits involving claims for
substantial money damages, product recall actions and higher than anticipated
rates of warranty returns or other returns of goods. These claims could result
in liabilities that could have a material adverse effect on the Company's
financial position and results of operations. Some of the product lines the
Company acquired in the 1998 acquisitions have increased its exposure to product
liability and related claims.
The Company and its subsidiaries are also involved in various lawsuits
from time to time that Sunbeam considers to be ordinary routine litigation
incidental to its business. In the opinion of the Company, the resolution of
these routine matters, and of matters relating to prior operations, individually
or in the aggregate, will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
See Note 10 to the Condensed Consolidated Financial Statements.
NEW ACCOUNTING STANDARDS
Effective January 1, 1999, the Company adopted Statement of Position
98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE ("SOP 98-1"). SOP 98-1 requires computer software costs associated
with internal use software to be expensed as incurred until certain
capitalization criteria are met. Adoption of this statement did not have a
material impact on the Company's consolidated financial position, results of
operations, or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS No. 133"), ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which, as amended, is effective
for fiscal years beginning after June 15, 2000. SFAS No. 133 requires the
recognition of all derivatives in the Consolidated Balance Sheets as either
assets or liabilities measured at fair value. The Company has not yet determined
the impact SFAS No. 133 will have on its consolidated financial position,
results of operations, or cash flows.
29
YEAR 2000 READINESS DISCLOSURE
The Company is preparing for the impact of the Year 2000 on its
operations. Year 2000 issues could include potential problems in the information
technology ("IT") and non-IT systems that the Company uses in its operations and
problems in the Company's products. Year 2000 system failures could affect
routine but critical operations such as forecasting, purchasing, production,
order processing, inventory control, shipping, billing and collection. In
addition, system failures could affect the Company's security, payroll
operations, or employee safety. The Company may also be exposed to potential
risks from third parties with whom the Company interacts who fail to adequately
address their own Year 2000 issues.
SUNBEAM'S APPROACH TO YEAR 2000 ISSUES
While the Company's Year 2000 readiness planning has been underway for
over one year, during the third quarter of 1998 the Company established a
cross-functional project team consisting of senior managers, assisted by three
external consulting firms which were retained to provide consulting services and
to assist the Company in implementing its Year 2000 strategy. This team is
sponsored by the Company's Chief Financial Officer who reports directly to the
Company's Chief Executive Officer on this issue. The Audit Committee of the
Board of Directors is advised periodically on the status of the Company's Year
2000 readiness program.
The Year 2000 project team has developed a phased approach to identify
and resolve Year 2000 issues with many of these activities conducted in
parallel. The Company's approach and the anticipated timing of each phase are
described below.
PHASE 1 - INVENTORY AND ASSESSMENT: During the first phase of Sunbeam's
Year 2000 readiness program, the Company established a Year 2000 Program
Management Office ("PMO") to centralize the management of all of the Company's
Year 2000 projects. Through this office, the Company developed a corporate-wide,
uniform strategy for assessing and addressing the Year 2000 issues.
The Company has completed an inventory of its hardware and software
systems, manufacturing equipment, electronic data interchange,
telecommunications and other technical assets potentially subject to Year 2000
problems, such as security systems and controls for lighting, air conditioning,
ventilation and facility access. This inventory was then entered into the
Company's Year 2000 database along with a determination of the item's level of
criticality to operations. For those inventory items anticipated to have a
significant effect on the business if not corrected, the Company's Year 2000
program envisions repair or replacement and testing of such items. All
information relative to each item is being tracked in the Company's Year 2000
database. The Company completed most of this phase during the third and fourth
quarters of 1998. The Company has completed a review of the readiness of
embedded microprocessors in its products and determined that none of the
Company's products have Year 2000 date sensitive systems.
PHASE 2 - CORRECTION AND TESTING: The second phase of Sunbeam's Year
2000 readiness program is structured to replace, upgrade or remediate (as
necessary) those items identified during Phase 1 as requiring corrective action.
Sunbeam relies on its IT functions to perform many tasks that are
critical to its operations. Significant transactions that could be impacted by
not being ready for any Year 2000 issues include, among others, purchases of
materials, production management, order entry and fulfillment, and payroll
processing. Systems and applications that have been identified by Sunbeam to
date as not currently Year 2000 ready and which are critical to Sunbeam's
operations include its financial software systems, which process the order
entry, purchasing, production management, general ledger, accounts receivable,
and accounts payable functions, payroll applications, and critical applications
in the Company's manufacturing and distribution facilities, such as warehouse
management applications. Recognizing how dependent the entire company is on IT,
Sunbeam decided in 1997 to replace its primary business applications with a
uniform international business and accounting information system to address the
systems or applications listed above as well as to improve internal reporting
processes. Based upon representations from the manufacturer that the current
version of this uniform information system is Year 2000 ready, the Company has
been actively upgrading its business sites that currently utilize this uniform
system to the Year 2000 ready version. In addition to the pre-acquisition
Sunbeam locations which had already utilized an earlier non-Year 2000 ready
version of this uniform business and accounting information system, Eastpak, Mr.
Coffee, Health-o-Meter and Sunbeam Latin America are replacing their current
non-Year 2000 ready systems with this new uniform system. In addition, Coleman
Europe is also replacing key business components with this new system.
The Company is also actively replacing and/or upgrading a number of
business systems that are not Year 2000
30
ready, including those that use localized business system packages which were
not candidates to be replaced by the uniform business and accounting information
system. For example, at Coleman approximately 2,000 mainframe software programs
that are used in lieu of Sunbeam's uniform business and accounting information
system have been remediated and tested to be Year 2000 ready. With respect to
the Company's non-IT systems (for example, time and attendance, security, and
in-line manufacturing hardware) the Company is actively analyzing these items to
assess any Year 2000 issues. To date, no material issues have been discovered,
and the Company will continue to review, test and correct, if necessary, such
items.
Sunbeam has largely implemented the corrective work described above and
expects to complete final testing and implementation of such systems in the
third quarter and early fourth quarter of 1999.
PHASE 3 - CUSTOMERS, SUPPLIERS AND BUSINESS PARTNERS: The third phase
of Sunbeam's Year 2000 readiness program which was initiated during the third
and fourth quarters of 1998 is designed to assess and interact with the
Company's customers, suppliers, and business partners. As part of this effort,
the Company surveyed 1,100 vendors and suppliers, a portion of which did not
provide an initial response. During the first half of 1999, "high risk" vendors
were contacted directly and the number of non-respondents has since decreased
substantially. In fact, currently only 13% of the Company's vendors who were
surveyed are categorized as "high risk" which includes non-respondents. Based on
the most recent responses to the survey and continued evaluation, the Company
believes that there is only a low to a medium risk of Year 2000 issues for the
remaining vendors. The Company will continue to monitor the Year 2000 progress
of the "high risk" vendors and will re-survey these companies in late August to
determine the appropriate course of action. Furthermore, the Company is in the
process of contacting alternate vendors who are Year 2000 ready to replace
critical vendors deemed "high risk" in the event that these vendors are not
found to be Year 2000 ready. The Company has not independently verified the
responses of vendors and does not anticipate undertaking such independent
verification process.
Beginning in the second quarter of 1999, Sunbeam contacted its major
customers to confirm their preparations for Year 2000 issues. The Company has
already responded to numerous customer inquiries about the Company's Year 2000
readiness and believes that all of the Company's major customers have
established programs to deal with Year 2000 issues. In order to improve the
Company's communication with its customers, suppliers and business partners, the
Company has set up a Sunbeam Year 2000 telephone number and is providing Year
2000 information on a Company web site.
PHASE 4 - CONTINGENCY PLANNING: This phase involves contingency
planning for unresolved Year 2000 issues, particularly any issues arising with
third party suppliers. The Company's Year 2000 readiness program is ongoing and
its ultimate scope, as well as the consideration of contingency plans, will
continue to be evaluated as new information becomes available. As a
precautionary measure, Sunbeam plans to establish a contingency plan for
addressing any effects of the Year 2000 on its operations, whether due to
Sunbeam's systems or those of third parties not being ready for any Year 2000
issues. Sunbeam expects to complete such contingency plan by September 30, 1999;
such contingency plan will address alternative processes, such as manual
procedures, electronic spreadsheets, potential alternative service providers,
and plans to address Year 2000 readiness issues as they arise. Such contingency
plans may also require an increase in inventory during the second half of 1999
to protect against supply interruption.
THE RISKS OF SUNBEAM'S YEAR 2000 APPROACH
The independent consultants assisting the Company in its Year 2000
readiness program have reviewed and concurred with the Company's approach, have
assisted in developing cost estimates and have monitored costs for the largest
single component (upgrade or installation of the Company's uniform system) of
the Company's Year 2000 program. Since Sunbeam's Year 2000 program was developed
and is monitored with the help of independent consultants, the Company did not
engage another independent third party to verify the program's overall approach
or total cost as the Company believes that the Company's exposure in this regard
is mitigated. In addition, through the use of external third-party diagnostic
software packages that are designed to analyze the Year 2000 readiness of
business software programs, the Company was able to identify potential Year 2000
issues at Coleman. Given this, the Company believes that it has also mitigated
its risk by validating and verifying key program components.
Management believes that, although there are significant systems that
are being modified or replaced, including the uniform business and accounting
information system, Sunbeam's information systems environment will be made Year
2000 ready prior to January 1, 2000. Sunbeam's failure to timely complete such
corrective work could have a material adverse impact on the Company.
31
With respect to customers, suppliers and business partners, the failure
of certain of these third parties to become Year 2000 ready could also have a
material adverse impact on Sunbeam. For example, the failure of certain of the
Company's principal suppliers to have Year 2000 ready internal systems could
impact the Company's ability to manufacture and/or ship its products or to
maintain adequate inventory levels for production.
At this time, the Company believes that the most likely "worst-case"
scenario relating to Year 2000 involves potential disruptions in areas in which
the Company's operations must rely on third parties, such as suppliers, whose
systems may not work properly after January 1, 2000. While such system failures
could either directly or indirectly affect important operations of the Company
and its subsidiaries in a significant manner, the Company cannot at present
estimate either the likelihood or the potential cost of such failures. Subject
to the nature of the goods or services provided to the Company by third parties
whose operations are not made ready for Year 2000 issues, the impact on
Sunbeam's operations could be material if appropriate contingency plans cannot
be developed prior to January 1, 2000.
The nature and focus of the Company's efforts to address the Year 2000
problem may be revised periodically as interim goals are achieved or new issues
are identified. In addition, it is important to note that the description of the
Company's efforts and assessments necessarily involves estimates and projections
with respect to activities required in the future. These estimates and
projections are subject to change as work continues, and such changes may be
substantial.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
Through the first half of 1999, including costs incurred in 1998,
Sunbeam had expended approximately $50 million to address Year 2000 issues of
which approximately 45% was recorded as capital expenditures and the remainder
as SG&A expense. Sunbeam's current assessment of the total costs to address and
remedy Year 2000 issues and enhance its operating systems, including costs for
the acquired companies, is approximately $60 million. This estimate includes the
following categories:
o uniform international business and accounting systems $40 million
o localized business system software upgrades
and remediation $ 9 million
o Year 2000 readiness assessment and tracking $ 6 million
o upgrade of personal computers and related software $ 5 million
The amount to be incurred for Year 2000 issues during 1999 of
approximately $41 million represents over 50% of the Company's total 1999 budget
for information systems and related support, including Year 2000 costs. A large
majority of these costs are expected to be incremental expenditures that will
not recur in the Year 2000 or thereafter. Fees and expenses related to third
party consultants, who are involved in the PMO as well as the modification and
replacement of software, represent approximately 75% of the total estimated
cost. The balance of the total estimated cost relates primarily to software
license fees and new hardware, but excludes the costs associated with Company
employees. Sunbeam expects these expenditures to be financed through operating
cash flows or borrowings, as applicable. A significant portion of these
expenditures will enhance Sunbeam's operating systems in addition to resolving
the Year 2000 issues. As Sunbeam completes its assessment of the Year 2000
issues, the actual expenditures incurred or to be incurred may differ materially
from the amounts shown above.
Because Year 2000 readiness is critical to the business, Sunbeam has
redeployed some resources from non-critical system enhancements to address Year
2000 issues, thereby deferring the non-critical systems enhancements. The
Company does not expect these redeployments and deferrals to have a material
impact on the Company's financial condition, results of operations, or cash
flows.
CAUTIONARY STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q may constitute
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995, as the same may be amended from time to time
(herein the "Act") and in releases made by the SEC from time to time. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance, or achievements
of the Company to be materially different from any future results, performance,
or achievements expressed or implied by such forward-looking statements.
Statements that are not historical fact are forward-looking statements.
Forward-looking statements can be identified by, among other things, the use of
forward-looking language, such as the word "estimate,"
32
"project," "intend," "expect," "believe," "may," "well," "should," "seeks,"
"plans," "scheduled to," "anticipates," or "intends," or the negative of these
terms or other variations of these terms or comparable language, or by
discussions of strategy or intentions, when used in connection with the Company,
including its management. These forward-looking statements were based on various
factors and were derived utilizing numerous important assumptions and other
important factors that could cause actual results to differ materially from
those in the forward-looking statements. These Cautionary Statements are being
made pursuant to the Act, with the intention of obtaining the benefits of the
"Safe Harbor" provisions of the Act. The Company cautions investors that any
forward-looking statements made by the Company are not guarantees of future
performance. Important assumptions and other important factors that could cause
actual results to differ materially from those in the forward-looking statements
with respect to the Company include, but are not limited to risks associated
with (i) high leverage, (ii) Sunbeam's ability to comply with the terms of its
bank credit facility, including financial covenants and covenants relating to
the completion of the Coleman merger, or to enter into an amendment to its bank
credit facility containing financial covenants which it and its bank lenders
find mutually acceptable, or to continue to obtain waivers from its bank lenders
with respect to its compliance with the existing covenants contained in such
agreement, and to continue to have access to its revolving credit facility, or
Sunbeam's ability to refinance its indebtedness at acceptable rates with
acceptable terms, (iii) Sunbeam's ability to integrate the recently acquired
Coleman, Signature Brands and First Alert companies and expenses associated with
such integration, (iv) Sunbeam's sourcing of products from international
vendors, including the ability to select reliable vendors and to avoid delays in
shipments, (v) Sunbeam's ability to maintain and increase market share for its
products at acceptable margins, (vi) Sunbeam's ability to successfully introduce
new products and to provide on-time delivery and a satisfactory level of
customer service, (vii) changes in domestic and/or foreign laws and regulations,
including changes in tax rates, accounting standards, environmental laws,
occupational, health and safety laws, (viii) access to foreign markets together
with foreign economic conditions, including currency fluctuations and trade,
monetary and/or tax policies, (ix) uncertainty as to the effect of competition
in existing and potential future lines of business, (x) fluctuations in the cost
and availability of raw materials and/or products, (xi) changes in the
availability and costs of labor, (xii) effectiveness of advertising and
marketing programs, (xiii) economic uncertainty in Japan, Korea and other Asian
countries, as well as in Mexico, Venezuela, and other Latin American countries,
(xiv) product quality, including excess warranty costs, product liability
expenses and costs of product recalls, (xv) weather conditions which can have an
unfavorable impact upon sales of certain of Sunbeam's products, (xvi) the
numerous lawsuits against the Company and the SEC investigation into the
Company's accounting practices and policies, and uncertainty regarding the
Company's coverage on its directors' and officers' liability insurance, (xvii)
the possibility of a recession in the United States or other countries resulting
in a decrease in consumer demands for the Company's products, (xviii) actions by
competitors including business combinations, new product offerings and marketing
and promotional activities, and (xix) failure of the Company and/or its
suppliers of goods or services to timely complete the remediation of computer
systems to effectively process Year 2000 information. Other factors and
assumptions not included in the foregoing may cause the Company's actual results
to materially differ from those projected. The Company assumes no obligation to
update any forward-looking statements or these cautionary statements.
33
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 Sunbeam and some of its present and former directors and former
officers. The action alleged that the individual defendants breached their
fiduciary duties and wasted corporate assets when Sunbeam granted stock options
on or about February 2, 1998 at an exercise price of $36.85 to three of its
officers and directors who were subsequently terminated by Sunbeam. On June 25,
1998, all defendants filed a motion to dismiss the complaint for failure to make
a pre-suit demand on Sunbeam's board of directors. On October 22, 1998, the
plaintiff amended the complaint against all but one of the defendants named in
the original complaint. On February 19, 1999, plaintiffs filed a second amended
derivative complaint nominally on behalf of Sunbeam against some of its present
and former directors and former officers and Arthur Andersen. The second amended
complaint alleges, among other things, that Messrs. Dunlap and Kersh, Sunbeam's
former Chairman and Chief Executive Officer and former Chief Financial Officer,
respectively, caused Sunbeam to employ fraudulent accounting procedures in order
to enable them to secure new employment contracts, and seeks an award of damages
and other declaratory and equitable relief. The defendants have each moved to
dismiss the second amended complaint in whole or in part.
On June 25, 1998, four purported class actions were filed in the Court
of Chancery of the State of Delaware in New Castle County by minority
stockholders of Coleman against Coleman, Sunbeam and certain of Sunbeam's and
Coleman's present and former officers and directors. An additional class action
was filed on August 10, 1998, against the same parties. The complaints in these
class actions allege, in essence, that the existing exchange ratio for the
proposed Coleman merger is no longer fair to Coleman public stockholders as a
result of the decline in the market value of the common stock. On October 21,
1998, Sunbeam announced that it had entered into a memorandum of understanding
to settle, subject to court approval, the class actions. Under the terms of the
proposed settlement, if approved by the court, Sunbeam will issue to Coleman
public stockholders and plaintiffs' counsel in this action warrants to purchase
up to approximately 4.98 million shares of Sunbeam common stock at $7 per share,
subject to anti-dilution adjustments. Coleman public stockholders who elect
appraisal under Delaware law will not receive warrants. These warrants will
generally have the same terms as the warrant issued to the MacAndrews & Forbes
subsidiary and will be issued when the Coleman merger is consummated, which is
now expected to occur during the second half of 1999. Issuance of these warrants
will be accounted for as additional purchase consideration. There can be no
assurance that the court will approve the settlement as proposed.
Sunbeam has been named as a defendant in an action filed in the
District Court of Tarrant County, Texas, 48th Judicial District, on November 20,
1998. Sunbeam was served in this action through the Secretary of State of Texas
on January 15, 1999. The plaintiffs in this action are purchasers of the
debentures. The plaintiffs allege that Sunbeam violated the Texas Securities Act
and the Texas Business & Commercial Code and committed state common law fraud by
materially misstating the financial position of Sunbeam in connection with the
offering and sale of the debentures. The complaint seeks rescission, as well as
compensatory and exemplary damages in an unspecified amount. Sunbeam specially
appeared to assert an objection to the Texas court's exercise of personal
jurisdiction over Sunbeam, and a hearing on this objection took place on April
15, 1999. On April 23, 1999, the court entered an order granting Sunbeam's
special appearance and dismissing the case without prejudice. The plaintiffs
moved for reconsideration of the court order, which motion the court denied on
May 24, 1999. The plaintiffs have appealed the order dismissing the case to the
Texas Court of Appeals, and a hearing on such appeal will be heard on October
20, 1999.
On February 9, 1999, Messrs. Dunlap and Kersh filed with the American
Arbitration Association demands for arbitration of claims under their respective
employment agreements with Sunbeam. Messrs. Dunlap and Kersh are requesting a
finding by the arbitrators that Sunbeam terminated their employment without
cause and that they should be awarded the corresponding benefits provided by
their respective employment agreements. On March 12, 1999, Sunbeam asked the
Circuit Court for the Fifteenth Judicial Circuit in and for Palm Beach County,
Florida to issue an injunction prohibiting Messrs. Dunlap and Kersh from
pursuing their arbitration proceedings against Sunbeam on the grounds, among
others, that the simultaneous litigation of the action filed in that court on
April 7, 1998, described above, and the arbitration proceedings would subject
Sunbeam to the threat of inconsistent adjudications with respect to certain
rights to compensation asserted by Messrs. Dunlap and Kersh and would cause
irreparable harm to Sunbeam and its stockholders. On March 19, 1999, the
plaintiff in the April 7, 1998 action discussed above moved for a similar
injunction on the grounds, among others, that the arbitration proceedings
threatened irreparable harm to Sunbeam and its stockholders. On May 11, 1999,
the court denied the motions for a preliminary injunction filed by Sunbeam and
the plaintiff. Sunbeam has answered the arbitration demands of Messrs. Dunlap
and Kersh and has filed counterclaims seeking, among other things,
34
the return of all consideration paid, or to be paid, under the February 1998
Employment Agreements between Sunbeam and Messrs. Dunlap and Kersh. An answer
was filed by Messrs. Dunlap and Kersh generally denying Sunbeam's counterclaim.
A preliminary conference was held in the arbitration on August 4, 1999. A second
conference is set for August 30, 1999 to establish a schedule for discovery and
the hearing and to resolve other preliminary matters.
On May 24, 1999, an action naming Sunbeam as defendant was filed in the
Circuit Court for Ozaukee County, Wisconsin. Sunbeam has not yet been served
with the complaint in this action. The plaintiffs in this action are purchasers
of the debentures. They allege that Sunbeam violated the Wisconsin Uniform
Securities Act and committed acts of false advertising and misrepresentation in
connection with the offering and sale of the debentures. The plaintiffs seek
rescission, as well as compensatory and exemplary damages in an unspecified
amount. Sunbeam has removed this case to the United States District Court for
the District of Wisconsin and the plaintiff has sought to have the case remanded
to state court. This action is now subject to a motion before the Judicial Panel
on Multidistrict Litigation to transfer for coordination or consolidation of
pretrial proceedings with those of the other actions proceeding in the Southern
District of Florida.
Sunbeam intends to vigorously defend each of the foregoing lawsuits
other than those as to which a memorandum of understanding to settle has been
reached, but cannot predict the outcome and is not currently able to evaluate
the likelihood of Sunbeam's success in each case or the range of potential loss.
However, if Sunbeam were to lose these lawsuits, judgments would likely have a
material adverse effect on Sunbeam's consolidated financial position, results of
operations and cash flow.
On March 23, 1999, Messrs. Dunlap and Kersh filed a complaint in the
Court of Chancery of the State of Delaware seeking an order directing Sunbeam to
advance attorneys' fees and other expenses incurred in connection with various
state and federal class and derivative actions and an investigation instituted
by the SEC. The complaint alleges that such advancements are required by
Sunbeam's by-laws and by a forbearance agreement entered into between Sunbeam
and Messrs. Dunlap and Kersh in August, 1998. A trial of this summary proceeding
was held on June 15 and 16, 1999. On June 23, 1999, the court issued a
memorandum opinion directing Sunbeam to pay about $1.4 million on account of
expenses incurred to date and to advance the reasonable future expenses in those
actions and investigations. Messrs. Dunlap and Kersh have agreed to repay all
amounts advanced to them if it is ultimately determined that they are not
entitled to indemnification under Delaware law.
On July 2, 1998, the American Alliance Insurance Company filed suit
against Sunbeam in the U.S. District Court for the Southern District of New York
requesting a declaratory judgment of the court that the directors' and officers'
liability insurance policy for excess coverage issued by American Alliance was
invalid and/or had been properly canceled by American Alliance. Sunbeam's motion
to transfer such action to the federal district court in which the Consolidated
Federal Actions are currently pending was denied. Sunbeam has filed a motion
with the Judicial Panel on Multidistrict Litigation to transfer this action for
coordination or consolidation of pretrial proceedings with the various actions
pending in the Southern District of Florida. American Alliance has filed a
motion for summary judgment on the ground that coverage was never bound. Sunbeam
has opposed that 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 Sunbeam's directors' and officers'
liability insurance policy. This action has been transferred to the U.S.
District Court for the Southern District of Florida and is currently in
discovery. Sunbeam is seeking a stay of discovery to coordinate discovery in
this action with any discovery which may occur in the Consolidated Federal
Actions. Plaintiff has moved to compel production of various documents. On
December 22, 1998, an action was filed by Executive Risk Indemnity, Inc. in the
Circuit Court of the Seventeenth Judicial Circuit in and for Broward County,
Florida requesting the same relief as that requested by American and Federal in
their previously filed actions as to additional coverage levels under Sunbeam's
directors' and officers' liability insurance policy. On April 15, 1999 Sunbeam
filed an action in the U.S. District Court for the Southern District of Florida
against National Union Fire Insurance Company of Pittsburgh, PA, Gulf Insurance
Company and St. Paul Mercury Insurance Company requesting, among other things, a
declaratory judgment that National Union is not entitled to rescind its
liability insurance policy to Sunbeam and a declaratory judgment that Sunbeam is
entitled to coverage from these insurance companies for the various lawsuits
described herein under liability insurance policies issued by each of the
defendants. In response to Sunbeam's complaint, defendants St. Paul and Gulf
have answered and asserted counterclaims seeking rescission and declaratory
relief that no coverage is available to Sunbeam. Sunbeam has denied the
allegations of Gulf's and St. Paul's counterclaims. Defendant National Union has
filed a motion to dismiss or stay the claims filed by Sunbeam against National
Union on the basis, among others, that Sunbeam must submit the dispute to
arbitration or mediation. Sunbeam has filed a response opposing that motion.
Sunbeam intends to pursue recovery from all of its insurers if damages are
awarded against Sunbeam or its indemnified officers and/or directors under any
of the foregoing actions and to recover attorney's fees covered under those
policies. Sunbeam's failure to obtain such insurance
35
recoveries following an adverse judgment in any of the actions described above
could have a material adverse effect on Sunbeam's financial position, results of
operations and cash flows.
Amounts accrued for litigation matters represent the anticipated costs
(damages and/or settlement amounts) in connection with pending litigation and
claims and related anticipated legal fees. The costs are accrued when it is both
probable that an asset has been impaired or a liability has been incurred and
the amount can be reasonably estimated. The accruals are based upon Sunbeam's
assessment, after consultation with counsel, of probable loss based on the facts
and circumstances of each case, the legal issues involved, the nature of the
claim made, the nature of the damages sought and any relevant information about
the plaintiff, and other significant factors which vary by case. When it is not
possible to estimate a specific expected amount of loss to be incurred, Sunbeam
evaluates the range of possible losses and records the minimum end of the range.
As of June 30, 1999 and December 31, 1998, Sunbeam had established accruals for
litigation matters of $28.7 million and $31.2 million, respectively. Sunbeam
believes, based on facts know to Sunbeam at June 30, 1999, that anticipated
probable costs of litigation matters existing as of June 30, 1999 have been
adequately reserved to the extent determinable.
PRODUCTS LIABILITY
As a consumer goods manufacturer and distributor, Sunbeam faces the
constant risks of product liability and related lawsuits involving claims for
substantial money damages, product recall actions and higher than anticipated
rates of warranty returns or other returns of goods. These claims could result
in liabilities that could have a material adverse effect on Sunbeam's financial
position, results of operations and cash flows. Some of the product lines
Sunbeam acquired in the 1998 acquisitions have increased its exposure to product
liability and related claims.
BRK Brands, Inc. is a defendant in the case Gordon v. BRK Brands, Inc.,
et al. ("Gordon") in the Circuit Court for the City of St. Louis. In Gordon, the
plaintiff alleged, among other things, that the smoke detector of plaintiff
(which had been manufactured by a predecessor company to the present BRK Brands,
Inc., which is a wholly owned subsidiary of Sunbeam) did not alarm quickly
enough. The jury in the Gordon case awarded $20 million in compensatory damages
and $30 million in punitive damages. BRK Brands, Inc. intends to appeal and
believes that it has numerous grounds for and will prevail upon appeal. At this
point, Sunbeam believes that the damages are covered by insurance, subject to
self-insured retentions under such insurance policies. The payment of the
self-insured retention will not have a material effect on the Company's
consolidated financial position, results of operations, or cash flow.
Nevertheless, it is possible that the outcome of this case could have a material
adverse effect on the Company's consolidated financial position, results of
operations, or cash flows.
ENVIRONMENTAL MATTERS
With respect to one of seven sites at which the Company has been
identified by the United States Environmental Protection Agency ("EPA") as a
potentially responsible party, the Company received notice from the EPA that the
Company has completed all required removal activities and that such removal
activities were completed to EPA's satisfaction. EPA's approval of the Company's
removal activities at this site effectively concludes its obligations to EPA at
this site. The EPA's approval of the Company's removal activities did not have
any impact on the Company's environmental accruals since these activities were
completed for the amount accrued.
36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 annual meeting of shareholders was held on June 29, 1999.
Directors elected at the meeting were Philip E. Beekman, Charles M. Elson,
Howard Gittis, John H. Klein, Howard G. Kristol, Peter A. Langerman, Jerry W.
Levin, and Faith Whittlesey, constituting the entire board of directors. All of
the directors were elected without opposition. Other matters voted on and
approved at the meeting were proposals to (i) approve a grant of stock options
to Jerry W. Levin, (ii) approve a grant of stock options to Paul E. Shapiro,
(iii) approve a grant of stock options to Bobby G. Jenkins, (iv) approve a grant
of stock options to Jack D. Hall, and (v) ratify and adopt the Sunbeam
Corporation Management Incentive Plan.
The tabulation of votes for each matter is as follows:
1. ELECTION OF DIRECTORS
NOMINEES
FOR AGAINST OR
DIRECTORS FOR WITHHELD ABSTAINED
--------- ---------- ---------- ---------
Philip E. Beekman 91,476,552 3,006,135 --
Charles M. Elson 91,444,839 3,037,848 --
Howard Gittis 91,399,637 3,083,050 --
John H. Klein 91,474,468 3,008,219 --
Howard G. Kristol 91,409,975 3,072,712 --
Peter A. Langerman 91,370,258 3,112,429 --
Jerry W. Levin 91,410,441 3,072,246 --
Faith Whittlesey 83,533,800 10,948,887 --
2. GRANT OF STOCK OPTIONS TO JERRY W. LEVIN
79,029,223 14,608,214 845,250
3. GRANT OF STOCK OPTIONS TO PAUL E. SHAPIRO
78,895,993 14,715,541 871,153
4. GRANT OF STOCK OPTIONS TO BOBBY G. JENKINS
78,903,598 14,702,980 876,109
5. GRANT OF STOCK OPTIONS TO JACK D. HALL
78,909,831 14,711,844 861,012
6. RATIFICATION AND ADOPTION OF MANAGEMENT INCENTIVE PLAN
AGAINST OR BROKER
FOR WITHHELD ABSTAINED NON-VOTES
---------- ---------- --------- ----------
54,625,355 5,449,183 900,010 33,508,139
37
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1 Tax Sharing Agreement dated as of July 12, 1999, by
and among Sunbeam Corporation, the Coleman Company,
and the subsidiaries named therein. (Incorporated by
reference to Exhibit 10.1 to the Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999 of the
Coleman Company, Inc.)
27 Financial Data Schedule, submitted electronically to
the Securities and Exchange Commission for information
only and not filed.
(b) Report on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
1999.
38
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNBEAM CORPORATION
BY: /s/ BOBBY G. JENKINS
------------------------------------
Bobby G. Jenkins
Executive Vice President, and
Chief Financial Officer
(Principal Financial Officer)
Dated: August 19, 1999
39
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
27 Financial Data Schedule, submitted electronically to
the Securities and Exchange Commission for information
only and not filed.