-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DdMlknQ2ebgHYHlBozwjIo83wNZMxeDO5A1vvmvC85Hn68tlDN+cq29Et2A5lq07 11t4X7PE9n/lrXC4k4AHSQ== 0000950170-99-001640.txt : 19991109 0000950170-99-001640.hdr.sgml : 19991109 ACCESSION NUMBER: 0000950170-99-001640 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19991108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNBEAM CORP/FL/ CENTRAL INDEX KEY: 0000003662 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC HOUSEWARES & FANS [3634] IRS NUMBER: 251638266 STATE OF INCORPORATION: DE FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-00052 FILM NUMBER: 99743117 BUSINESS ADDRESS: STREET 1: 2381 EXECUTIVE CENTER DR CITY: BOCA RATON STATE: FL ZIP: 33431 BUSINESS PHONE: 5612432100 MAIL ADDRESS: STREET 1: 2381 EXECURIVE CENTER DR CITY: BOCA RATON STATE: FL ZIP: 33431 FORMER COMPANY: FORMER CONFORMED NAME: SUNBEAM OSTER COMPANY INC /DE/ DATE OF NAME CHANGE: 19931210 10-Q/A 1 ============================================= UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------- FORM 10-Q/A [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended March 31, 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 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 BOCA RATON, FLORIDA 33431 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (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 October 26, 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/A TABLE OF CONTENTS
PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 1999 and March 31, 1998...................... 2 Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 1999 and December 31, 1998........................................ 3 Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 1999 and March 31, 1998...................... 4 Notes to Condensed Consolidated Financial Statements (Unaudited).................. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................... 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................................. 29 Item 6. Exhibits and Reports on Form 8-K.................................................. 32 SIGNATURE............................................................................................. 33
1 PART I. FINANCIAL INFORMATION SUNBEAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED ------------------------------- MARCH 31, MARCH 31, 1999 1998 ----------- ----------- Net sales.................................................................... $ 523,946 $ 247,601 Cost of goods sold........................................................... 400,791 213,828 Selling, general and administrative expense.................................. 137,949 71,139 ----------- ----------- Operating loss............................................................... (14,794) (37,366) Interest expense............................................................. 41,906 5,073 Other expense, net........................................................... 808 3,165 ----------- ----------- Loss before income taxes, minority interest and extraordinary charge......... (57,508) (45,604) Income tax (benefit) provision: Current.................................................................... (151) 327 Deferred................................................................... 1,893 (449) ----------- ----------- 1,742 (122) ----------- ----------- Minority interest............................................................ 1,489 -- ----------- ----------- Loss before extraordinary charge............................................. (60,739) (45,482) Extraordinary charge from early extinguishment of debt....................... -- (8,624) ----------- ----------- Net loss..................................................................... $ (60,739) $ (54,106) =========== =========== Basic and diluted loss per share: Loss from continuing operations........................................... $ (0.60) $ (0.53) Extraordinary charge................................................. -- (0.10) ----------- ----------- Net loss.................................................................. $ (0.60) $ (0.63) =========== =========== Weighted average common shares outstanding................................... 100,740 86,390
See Notes to Condensed Consolidated Financial Statements. 2 SUNBEAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (AMOUNTS IN THOUSANDS)
MARCH 31, DECEMBER 31, 1999 1998 ------------- ------------- ASSETS Current assets: Cash and cash equivalents........................................... $ 46,163 $ 61,432 Restricted investments.............................................. 72,351 74,386 Receivables, net.................................................... 396,783 361,774 Inventories......................................................... 534,555 519,189 Prepaid expenses, deferred income taxes and other current assets.... 69,889 74,187 ------------- ------------- Total current assets............................................ 1,119,741 1,090,968 Property, plant and equipment, net .................................... 452,343 455,172 Trademarks, tradenames, goodwill and other, net........................ 1,827,019 1,859,377 ------------- ------------- $ 3,399,103 $ 3,405,517 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt and current portion of long-term debt............... $ 119,276 $ 119,103 Accounts payable.................................................... 177,478 162,173 Other current liabilities........................................... 318,972 321,185 ------------- ------------- Total current liabilities....................................... 615,726 602,461 Long-term debt, less current portion................................... 2,207,999 2,142,362 Other long-term liabilities............................................ 234,834 248,459 Deferred income taxes.................................................. 99,691 100,473 Minority interest...................................................... 50,620 51,325 Commitments and contingencies (Note 9) Shareholders' equity: Preferred stock (2,000,000 shares authorized, none outstanding)..... -- -- Common stock (100,739,053 shares issued)............................ 1,007 1,007 Additional paid-in capital.......................................... 1,123,419 1,123,457 Accumulated deficit................................................. (870,736) (809,997) Accumulated other comprehensive loss................................ (63,457) (54,030) ------------- ------------- Total shareholders' equity...................................... 190,233 260,437 ------------- ------------- $ 3,399,103 $ 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)
THREE MONTHS ENDED --------------------------------- MARCH 31, MARCH 31, 1999 1998 ----------- ----------- OPERATING ACTIVITIES: Net loss.......................................................... $ (60,739) $ (54,106) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.................................. 32,394 10,414 Non-cash interest charges...................................... 11,271 1,526 Deferred income taxes.......................................... 1,893 (449) Extraordinary charge from early extinguishment of debt......... -- 8,624 Non-cash compensation charges.................................. -- 24,290 Minority interest.............................................. 1,489 -- (Gain) loss on the sale of property, plant and equipment....... (568) 4 Changes in working capital and other, net of acquisitions...... (43,224) (125,029) ----------- ----------- Net cash used in operating activities................. (57,484) (134,726) ----------- ----------- INVESTING ACTIVITIES: Capital expenditures, net......................................... (16,288) (19,480) Acquisition of Coleman, including acquisition costs, net of cash acquired .......................................... -- (160,612) Other, net........................................................ (165) -- ----------- ----------- Net cash used in investing activities..................... (16,453) (180,092) ----------- ----------- FINANCING ACTIVITIES: Issuance of convertible subordinated debentures, net of financing fees................................................. -- 729,622 Net borrowings under revolving credit facilities.................. 61,468 -- Payments of debt obligations, including prepayment penalties...... (2,500) (266,672) Other debt financing fees......................................... (234) (25,075) Proceeds from exercise of stock options........................... -- 19,045 Other, net........................................................ (66) (857) ------------ ----------- Net cash provided by financing activities........... 58,668 456,063 ----------- ----------- Net (decrease) increase in cash and cash equivalents................... (15,269) 141,245 Cash and cash equivalents at beginning of period....................... 61,432 52,298 ----------- ----------- Cash and cash equivalents at end of period............................. $ 46,163 $ 193,543 =========== ===========
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 March 31, 1999 and the Condensed Consolidated Statements of Operations and Cash Flows for the three months ended March 31, 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/A 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/A. 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 three months ended March 31, 1999 and 1998, respectively, 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 from operations during both periods presented. Loss per share for the three months ended March 31, 1999 and 1998 excluded 25,458 and 4,758,565 shares related to stock options, respectively, as their effect would have been anti-dilutive. Stock options to purchase 18,961,063 common shares and 4,622,989 common shares at March 31, 1999 and 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 as of March 31, 1999 and March 31, 1998, respectively 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 as of March 31, 1999 excluded 23,000,000 shares issuable on the exercise of warrants. Diluted average common shares outstanding as of March 31, 1998 also excluded (58,065) shares related to restricted stock. 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. 5 SUNBEAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 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 subsidiary of a warrant expiring August 24, 2003 to purchase up to 23 million shares of the Company's common stock at a cash exercise price of $7.00 per share, subject to 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. 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 $255 million, (reflecting cash paid, including the required retirement or defeasance of debt). As of the date of the acquisition of Coleman, management of the Company determined approximately 117 employees of Coleman would need to be involuntarily terminated in order to eliminate duplicate activities and functions and fully integrate Coleman into Sunbeam's operations. The Company recognized a liability of approximately $8 million representing severance and benefit costs related to 117 employees pursuant to the termination plan. This liability was included in the allocation of purchase price. As of March 31, 1999, 110 employees were terminated and paid benefits of approximately $6 million. Remaining termination costs are expected to be paid by December 31, 2000 and no additional charges are anticipated in future periods related to this issue. 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. 6 SUNBEAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 2. ACQUISITIONS - (CONTINUED) 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 dates indicated, or which may result in the future. The pro forma results follow (in millions, except per share data):
THREE MONTHS ENDED MARCH 31, 1998 ------------------ Net sales............................................................. $ 509.4 Loss before extraordinary charge...................................... (71.0) Basic and diluted loss per share from continuing operations before extraordinary charge.......................................... (0.79)
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 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, was paid 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, 7 SUNBEAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 3. DEBT - (CONTINUED) 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 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 March 31, 1999). As of March 31, 1999, approximately $1.5 billion was outstanding and approximately $0.1 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 4.00% for LIBOR borrowings and 2.50% for base rate borrowings. The interest margin is subject to potential decreases in the future, including a decrease to 3.00% for LIBOR loans and 1.75% for base rate loans upon consummation of the Coleman merger and the effectiveness of the pledge of substantially all of Coleman's and its domestic subsidiaries' assets to secure the obligations under the New Credit Facility. 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 8 SUNBEAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 3. DEBT - (CONTINUED) 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 (effective as of October 25, 1999, the bank lenders agreed to extend this date to November 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 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. This extraordinary charge consisted of redemption premiums ($7.8 million) and unamortized deferred financing costs ($0.8 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, $72.4 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 March 31, 1999 and December 31, 1998, respectively, and $70.0 million is reflected as short-term debt in the Condensed Consolidated Balance Sheets at March 31, 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 approximately $60.1 million and $34.8 million for the sale of trade accounts receivable in the first quarter of 1999 and 1998, respectively. Trade accounts receivable at March 31, 1999 and 1998 reflect a reduction of $29.5 million and $34.4 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 $0.4 million and $0.6 million during the first quarter 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. 5. COMPREHENSIVE LOSS The components of the Company's comprehensive loss are as follows (in thousands):
THREE MONTHS ENDED ------------------------------- MARCH 31, MARCH 31, 1999 1998 ------------------------------- Net loss..................................................... $ (60,739) $ (54,106) Foreign currency translation adjustment, net of taxes........ (9,427) 183 ---------- ----------- Comprehensive loss........................................... $ ( 70,166) $ (53,923) ========== ===========
9 SUNBEAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 5. COMPREHENSIVE LOSS - (CONTINUED) As of March 31, 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 March 31, 1999................................ $ (21,449) $ (42,008) $ (63,457) 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 March 31, 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):
MARCH 31, DECEMBER 31, 1999 1998 ---------- ----------- Receivables: Trade...................................................... $ 440,006 $ 407,452 Sundry..................................................... 9,590 7,347 ---------- ----------- 449,596 414,799 Valuation allowance........................................ (52,813) (53,025) ---------- ----------- $ 396,783 $ 361,774 ========== =========== Inventories: Finished goods............................................. $ 361,185 $ 370,622 Work in process............................................ 57,981 39,143 Raw materials and supplies................................. 115,389 109,424 ---------- ----------- $ 534,555 $ 519,189 ========== ===========
Supplementary Statements of Cash Flows data is as follows (in thousands):
THREE MONTHS ENDED ----------------------------- MARCH 31, MARCH 31, 1999 1998 ---------- ----------- Cash paid during the period for: Interest................................................... $ 29,668 $ 5,442 =========== ========== Income taxes, net of refunds............................... $ 184 $ 381 =========== ==========
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. 10 SUNBEAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 7. ASSET IMPAIRMENT AND OTHER CHARGES- (CONTINUED) 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 March 31, 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 three months ended March 31, 1999, no severance payments were made. These 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 three months ended March 31, 1999, the Company expended $0.3 million relating to discontinued operations. It is anticipated that the remaining restructuring accrual of $1.4 million ($1.2 million relating to lease payments and termination fees and $0.2 million to discontinued operations) will be paid through 2006. 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 common shares. 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.) 11 SUNBEAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 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 relates to an expansion of centralized services related to the acquisitions, Year 2000 expenses and increased costs associated with outside services and insurance.
OUTDOOR THREE MONTHS ENDED MARCH 31, 1999 HOUSEHOLD LEISURE INTERNATIONAL CORPORATE TOTAL ------------ ------------ ------------- ------------ ----------- Net sales to unaffiliated customers... $ 164,078 $ 218,733 $ 139,557 $ 1,578 $ 523,946 Intersegment net sales................ 19,192 42,664 4,750 -- 66,606 Segment earnings (loss)............... 8,520 9,169 9,777 (28,449) (983) Segment depreciation expense.......... 6,545 9,259 1,297 1,482 18,583 THREE MONTHS ENDED MARCH 31, 1998 Net sales to unaffiliated customers... $ 98,597 $ 85,985 $ 60,750 $ 2,269 $ 247,601 Intersegment net sales................ 20,673 4,967 19,731 -- 45,371 Segment (loss) earnings............... (3,239) (3,393) 12,422 (10,492) (4,702) Segment depreciation expense.......... 4,685 2,598 107 1,048 8,438 SEGMENT ASSETS March 31, 1999........................ 801,008 1,826,434 435,345 336,316 3,399,103 December 31, 1998..................... 864,745 1,782,994 413,755 344,023 3,405,517
Reconciliation of selected segment information to Sunbeam's consolidated totals for the three months ended:
MARCH 31, 1999 MARCH 31, 1998 -------------- -------------- Net sales: Net sales for reportable segments................. $ 590,552 $ 292,972 Elimination of intersegment net sales............. (66,606) (45,371) -------------- ------------- Consolidated net sales....................... $ 523,946 $ 247,601 ============== ============= Segment loss: Total loss for reportable segments................ $ (983) $ (4,702) Unallocated amounts: Interest expense.............................. (41,906) (5,073) Other expense, net............................ (808) (3,165) Amortization of intangible assets............. (13,811) (1,976) Former employees deferred compensation and severance (Note 8)...... -- (30,688) -------------- ------------- (56,525) (41,414) -------------- ------------- Consolidated loss before income taxes, minority interest and extraordinary charge $ (57,508) $ (45,604) ============== =============
12 SUNBEAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 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 a declaration that the individual defendants have violated fiduciary duties, an injunction against the payment of compensation to Messrs. Dunlap and Kersh or the imposition of a constructive trust on such payments, and unspecified money damages. The defendants have each moved to dismiss the 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 minority stockholders as a result of the decline in the market value of the Company's common stock. On October 21, 1998, the Company announced that it had entered into a memorandum of understanding to settle, subject to court approval, the class actions. The court hearing on the settlement was held on September 29, 1999, but the court has not yet ruled on the settlement. Under the terms of the proposed settlement, if approved by the court, the Company will issue to Coleman minority 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 minority stockholders who elect an 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 consideration. There can be no assurance that the court will approve the settlement as proposed. On September 16, 1998, an action was filed in the 56th Judicial District Court of Galveston County, Texas alleging various claims in violation of the Texas Securities Act and Texas Business and Commercial Code as well as common law fraud as a result of the Company's alleged misstatements and omissions regarding Sunbeam's financial condition and prospects during a period beginning May 1, 1998 and ending June 16, 1998, in which the U.S. National Bank of Galveston, Kempner Capital Management, Inc. and Legacy Trust Company engaged in transactions in Sunbeam common stock on their own behalf and on behalf of their respective clients. Sunbeam is the only named defendant in this action. The complaint requests recovery of compensatory damages, punitive damages and expenses in an unspecified amount. This action was removed to the U.S. District Court for the Southern District of Texas and subsequently transferred to the Southern District of Florida and consolidated with the Consolidated Federal Actions. Plaintiffs in this action have objected to the consolidation and have sought reconsideration by the Southern District of Florida of the order of the Southern District of Texas denying plaintiffs' motion to remand the case to state court and transferring it to Florida. A similar suit was brought by the same group of plaintiffs against Arthur Andersen. In that action, the plaintiffs allege that Arthur Andersen violated the Texas Securities Act, committed statutory and common law fraud and was negligent in its audits of Sunbeam's 1996 and 1997 financial statements. In September 1999, Arthur Andersen had filed a motion for leave to join the Company and certain of its former officers as responsible third parties and contribution defendants, which motion was denied. On October 30, 1998, a class action lawsuit was filed on behalf of certain purchasers of the debentures in the U.S. District Court for the Southern District of Florida against Sunbeam and some of Sunbeam's former officers and directors, alleging violations of the federal securities laws and common law fraud. The complaint alleges that Sunbeam's offering memorandum used for the marketing of the debentures contained false and misleading information regarding Sunbeam's financial position and that the defendants engaged in a plan to inflate Sunbeam's earnings for the purpose of defrauding the plaintiffs and others. The plaintiffs seek a declaration that defendants violated federal securities laws and either unspecified monetary damages or rescission of their purchase of the debentures. This action has been transferred to the Southern District of Florida, where the Consolidated Federal Actions are pending, and the parties have negotiated a proposed coordination plan in order to coordinate proceedings in this action with those in the Consolidated Federal Actions. The Company has been named as a defendant in an action filed in the District Court of Tarrant County, Texas, 48th Judicial District, on November 20, 1998. 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 13 SUNBEAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 10. COMMITMENTS AND CONTINGENCIES - (CONTINUED) 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 took place 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 an injunction on the similar grounds. 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. Discovery is pending. On May 24, 1999, an action naming the Company as defendant was filed in the Circuit Court for Ozaukee County, Wisconsin. Prior to service of the complaint, the plaintiff dismissed its claims, voluntarily, without prejudice. The plaintiff in this action was a purchaser of the Debentures. The plaintiff alleged 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 plaintiff sought rescission, as well as compensatory and exemplary damages in an unspecified amount. On September 13, 1999, an action naming the Company and Arthur Andersen as defendants was filed in the Circuit Court for Montgomery County, Alabama. The plaintiffs in this action are purchasers of the Company's common stock during the period March 19, 1998 through May 6, 1998. The plaintiffs allege, among other things, that the defendants violated the Alabama Security Laws and SEC Rule 10b-5. The plaintiffs seek compensatory and punitive damages in an unspecified amount. The Company has removed this case to the U.S. District Court for the District of Alabama. In addition, Arthur Andersen has filed a cross claim against the Company for contribution and indemnity. 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 flows. 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. That motion was granted. 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 14 SUNBEAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 10. COMMITMENTS AND CONTINGENCIES - (CONTINUED) relief as that requested by American Alliance in the previously filed action as to additional coverage levels under the Company's directors' and officers' liability insurance policy. This action has been transferred to the U.S. District Court for the Southern District of Florida and is currently in discovery. The Company is seeking a stay of discovery to coordinate discovery in this action with any discovery that 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 Alliance 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 directors' and officers' liability insurance policies to the Company and a declaratory judgment that the Company is entitled to coverage from these insurance companies for the various lawsuits described herein under directors' and officers' liability insurance policies issued by each of the defendants. In response to the Company's complaint, defendants St. Paul and Gulf have answered and asserted counterclaims seeking rescission and declaratory relief that no coverage is available to the Company. The Company 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 attorneys' fees covered under those policies. The Company's failure to obtain such insurance recoveries following an adverse judgment in any of the actions described above could have a material adverse effect on the Company's financial position, results of operations and cash flows. The Company and its subsidiaries are also involved in various other lawsuits arising from time to time which the Company considers to be ordinary routine litigation incidental to its business. In the opinion of the Company, the resolution of these routine matters, and of certain matters relating to prior operations, individually or in the aggregate, will not have a material adverse effect upon the financial position, results of operations or cash flows of the Company. Amounts accrued for litigation matters represent the anticipated costs (damages and/or settlement amounts) in connection with pending litigation and claims and related anticipated legal fees. 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 cost to be incurred, the Company evaluates the range of probable losses and records the minimum end of the range. As of March 31, 1999 the Company had established accruals for litigation matters of $26.2 million (representing $12.4 million and $13.8 million for estimated damages or settlement amounts and legal fees, respectively). As of December 31, 1998, the Company had established accruals for litigation matters of $31.2 million (representing $17.5 million and $13.7 million for estimated damages or settlements and legal fees, respectively.) It is anticipated that the $26.2 million accrual will be paid as follows: $17.7 million in 1999, $7.2 million in 2000 and $1.3 million in 2001. The Company believes, based on information known to the Company on March 31, 1999, that anticipated probable costs of litigation matters existing as of March 31, 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 consolidated financial position, results of operations, or cash flows. Some of the product lines the Company acquired in the 1998 acquisitions have increased its exposure to product liability and related claims. BRK Brands, Inc., a wholly owned subsidiary of the Company, 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 plaintiff's smoke detector (which had been manufactured by a predecessor of BRK Brands, Inc.) did not alarm quickly enough. In July 1999, the jury in the Gordon case awarded $20 million in compensatory damages and $30 million in punitive damages. This case has been settled and BRK Brands, Inc.'s obligation under the settlement is limited to payment of the balance of its self-insured retention. 15 SUNBEAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 10. COMMITMENTS AND CONTINGENCIES - (CONTINUED) 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 will accrue the minimum liability and an offsetting asset in the second quarter of 1999, which will be amortized and included in interest expense through April 10, 2000, the term of the current amendment extension period. The Company will not accrue for amounts in excess of the $4.2 million as there are numerous uncertainties which may individually or in the aggregate impact the level of aggregate availability at September 30, 2000. These uncertainties include, but are not limited to: the ability to obtain an amendment or further waiver of existing covenants from the lenders under the New Credit Facility for the period beyond April 10, 2000; proceeds from the sales of assets or businesses, if any; changes in debt structure, including the effects of refinancing, if any; and cash flows generated or used by future operations. Given these uncertainties, the Company is currently not able to predict the probable level of aggregate availability at September 30, 2000. As events develop, the Company will periodically review the expected aggregate availability at September 30, 2000. If it becomes likely than an amount in excess of $4.2 million will be paid, the Company will recognize that change in estimate over the remaining period of the New Credit Facility Amendment. 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 16 SUNBEAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 11. SUBSEQUENT EVENT - (CONTINUED) price and the terms of the tax sharing agreement were approved on Coleman's behalf by Coleman's then sole independent director. The net proceeds from the issuance of the shares by Coleman of its voting preferred stock to Coleman Worldwide were used by Coleman to make a partial repayment of loans outstanding from Sunbeam under the Intercompany Note. 17 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/A, 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/A for the year ended December 31, 1998. 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 M&F, in exchange for 14,099,749 shares of the Company's common stock and approximately $160 million in cash. In addition, the Company assumed approximately $1,016 million in debt. Immediately thereafter, as a result of the exercise of employee stock options, 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 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 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 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. There can be no assurance that the Court will approve the settlement as proposed. On April 6, 1998, the Company completed the cash acquisitions of First Alert, a leading manufacturer of smoke and carbon monoxide detectors, and Signature Brands, a leading manufacturer of consumer and professional products. The First Alert and the Signature Brands acquisitions were valued at approximately $182 million (including $133 million of cash and $49 million of assumed debt) and $255 million (reflecting cash paid, including the required retirement or defeasance of debt), respectively. The acquisitions were recorded under the purchase method of accounting and accordingly, the financial position and results of operations of each acquired entity are included in the 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. THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 Results of operations for the three months ended March 31, 1999 include the results of the three acquired companies for the entire period as compared to results of operations for the three months ended March 31, 1998, which only included the results of Coleman from March 30, 1998. The acquired entities generated net sales of $347.8 million for the three months ended March 31, 1999, with a corresponding gross margin of $99.9 million, or 28.7% of net sales. Selling, General and Administrative ("SG&A") costs recorded by the acquired entities were $84.7 million in the period, yielding operating income of $15.2 million. Results for the first quarter of 1998 included net sales from Coleman of approximately $15 million, with a corresponding gross margin of approximately $4 million, and SG&A expenses of approximately $4 million. For the acquired entities, net sales for the three months ended March 31, 1999 were approximately $30 million higher than their results for the full first quarter a year ago. This increase was attributable to increased net sales at Coleman (approximately $26 million) and Signature Brands (approximately $5 million), partially offset by a decrease in net sales at First Alert (approximately $1 million). Excluding the revenue of Coleman's safety and security business and spa business, both of which were sold in 1998, Coleman's net sales in the first three months of 1999 would have been approximately $47 million higher than the same period in 1998. The increase in Coleman net sales is reflective of strong retail replenishment demand in its outdoor recreation products as compared with unusually weak retail replenishment demand in the first quarter of 1998. Additionally, increased generator revenues attributable to increased awareness of power shortages from poor weather conditions and other events contributed to the higher net sales. Excluding: (i) 18 the effects of purchase accounting of approximately $9 million recognized in 1999; (ii) acquisition costs of approximately $18 million which were incurred in the first quarter of 1998; and (iii) approximately $3 million of costs recorded in 1999 related to Year 2000 compliance efforts, operating profit for these three companies improved by approximately $36 million as compared to the same period in the prior year, resulting primarily from higher net sales and a reduction in expenses largely attributable to reduced headcount and the centralization of certain management and administration functions, resulting from the acquisition by Sunbeam. Consolidated net sales for the three months ended March 31, 1999 were $523.9 million, an increase of $276.3 million versus the three months ended March 31, 1998. After excluding $347.8 million of net sales generated by the acquired entities in the 1999 period and approximately $15 million in the 1998 period, as discussed above, net sales of $176.1 million decreased approximately 24% from net sales of $233.0 million in 1998. The Company believes the decrease in product sales were largely driven by increases in retail inventory levels from channel loading which took place in the first quarter of 1998, but not in the 1999 period. The adverse effect of the 1998 channel loading was partially offset by lower estimated provisions for customer returns and customer allowances of approximately $7 million. Domestic sales, excluding the acquired companies, declined approximately 15% or $26 million from 1998. The Company believes this sales decline is attributable to the channel loading that took place in the first quarter of 1998 versus no similar loading in the same period in 1999. The channel loading that took place in 1998 led to relatively lower sales of appliances, primarily blenders, breadmakers, handmixers and irons in 1999, as well as lower sales of outdoor cooking products. Partially offsetting the adverse effects of channel loading was a benefit from reduced costs in 1999 from customer returns and allowances. International sales, excluding the acquired companies, represented 17% of net sales for 1999 and decreased approximately $31 million as compared with the net sales for the same period a year ago. The Company believes this sales decline was largely attributable to the previously discussed impact of increasing retail inventory levels in the first quarter of 1998. Sales were also adversely impacted in 1999 by a decision to stop selling to certain export distributors in Latin America. Additionally, poor economic conditions in that region contributed to lower sales in 1999. Excluding the effect of the gross margin generated from the inclusion of the acquired entities' operations of $99.9 million in 1999 and approximately $4 million in 1998, as discussed above, gross margin was $23.2 million or 13.2% of sales for 1999 versus a gross margin of $29.7 million or 12.7% of net sales for 1998. Lower sales volume and unfavorable manufacturing efficiencies resulting from lower production levels in 1999 accounted for approximately $18 million of the change between years. This was partially offset by a lower relative rate of product returns, reduced customer allowances of approximately $7 million, and improved product mix of approximately $2 million during the first quarter of 1999 as compared to the same period in 1998. Excluding the effects of: (i) $84.7 million of SG&A charges in 1999 and approximately $4 million in 1998 resulting from the inclusion of the acquired entities; (ii) approximately $31 million of 1998 compensation expense recorded in connection with new employment agreements with the three former senior officers; (iii) a $3.0 million benefit in 1998 from the reversal of reserves no longer required, and (iv) $5.3 million of costs recorded in the 1999 period related to Year 2000 compliance efforts, SG&A expenses were approximately $47.9 million in the first quarter of 1999, 22.0% higher than the same period in 1998. This increase of approximately $9 million is primarily due to an increase in corporate administrative costs of approximately $5 million, reflecting additional personnel and related relocation, travel and related costs and increases in postretirement benefit costs. Increases in insurance and higher costs associated with outside services account for the remainder of the increase in SG&A. Operating results for the first quarters of 1999 and 1998 for the Sunbeam business before the 1998 acquisitions on a comparable basis as described above, were a loss of $24.7 million in 1999 and a loss of $9.6 million in 1998. On the same basis, operating margins as a percent of net sales decreased to a loss of 15.0% from a loss of 4.1% in the prior year. This change resulted from the factors discussed above. Interest expense increased from $5.1 million in the first quarter of 1998 to $41.9 million in the first quarter of 1999 primarily related to higher borrowing levels in 1999 resulting from borrowings for the acquisitions that were outstanding for the entire quarter. Other expense, net of $0.8 million for the first three months of 1999 included approximately $1.0 million relating to liquidating damages expensed related to holders of the Zero Coupon Convertible Senior Subordinated Debentures due 2018 (the "Debentures") (see Note 3 to the condensed consolidated financial statements), partially offset by favorable foreign exchange. Other expense, net of $3.2 million for the first three months of 1998 primarily represents foreign exchange losses, largely arising from Sunbeam's operations in Mexico. The minority interest reported in 1999 relates to the minority interest held in Coleman by minority shareholders. The Company provided for deferred tax expense in 1999 primarily due to taxable income in foreign jurisdictions. Deferred tax assets resulting from operating losses, incurred predominantly in domestic jurisdictions, were recorded and valuation allowances were established for substantially all such deferred tax assets. The Company's losses and related valuation allowances caused the reported tax rate to differ from the statutory rate. 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 19 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 from the issuance of the shares by Coleman of its voting preferred stock to Coleman Worldwide were used by Coleman to make a partial repayment of loans outstanding from Sunbeam under the Intercompany Note. (See Note 10 to the Condensed Consolidated Financial Statements.) In 1998, the Company prepaid an industrial revenue bond related to its Hattiesburg facility. In connection with this early extinguishment of debt, the Company recognized an extraordinary charge of $8.6 million, consisting primarily of redemption premiums ($7.8 million) and unamortized deferred financing costs ($0.8 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. 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% (approximately $2,014 million principal amount at maturity), 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 20 approximately $2 million, representing the Company's liability to debenture holders through June 30, 1999, was paid on September 25, 1999. Concurrent with the acquisitions, the Company replaced its $250 million syndicated unsecured five-year revolving credit facility with the bank credit facility. The bank credit facility provided for aggregate borrowings of up to $1.7 billion and in addition to other customary covenants, required 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. 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; 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 March 31, 1999, approximately $1.5 billion was outstanding and approximately $0.1 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 4.00% for LIBOR borrowings and 2.50% for base rate borrowings. The interest margin is subject to potential decreases in the future, including a decrease to 3.00% for LIBOR loans and 1.75% for base rate loans upon consummation of the Coleman merger and the effectiveness of the pledge of substantially all of Coleman's and its domestic subsidiaries' assets to secure the obligations under the bank credit facility. Under the terms of the April 15, 1999 amendment to the bank credit facility, the Company is obligated to pay the bank lenders a loan commitment fee of between 0.25% to 1.00% of the commitments under the bank credit facility as of April 15, 1999. The percentage used to calculate the fee will be determined by reference to the bank lenders' aggregate commmitments and loan exposure under the bank credit facility as they may be reduced on or before September 30, 2000. The fee is payable on the earlier of September 30, 2000 and the date the commitments are terminated and the loans and other amount payable under the bank credit facility are repaid. (See Note 10 to the Condensed Consolidated Financial Statements.) 21 Borrowings under the bank credit facility are secured by a pledge of the stock of the Company's material subsidiaries, including Coleman, and by a security interest in substantially all of the assets of the Company and its material domestic subsidiaries, other than Coleman and its material subsidiaries except as described below. Currently, Coleman's inventory and related assets are pledged to secure its obligations for letters of credit issued for its account under the bank credit facility. Additionally, as security for Coleman's note payable to the Company, Coleman pledged substantially all of its domestic assets, other than real property, including 66% of the stock of its direct foreign subsidiaries and domestic holding companies for its foreign subsidiaries and all of the stock of its other direct domestic subsidiaries but not the assets of Coleman's subsidiaries. The pledge runs in favor of the Company 's lending banks, to which the Coleman 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 (effective as of October 25, 1999, the bank lenders agreed to extend this date to November 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 March 31, 1999, the Company had cash and cash equivalents of $46.2 million, working capital excluding cash and cash equivalents of $385.5 million and total debt of $2.3 billion. Cash used in operating activities during the first quarter of 1999 was $57.5 million compared to $134.7 million in the first quarter of 1998. This change is primarily attributable to working capital improvements partially offset by lower earnings after giving effect to non-cash charges. The majority of the working capital improvements are attributable 22 the Company's management of inventory levels and accounts receivable. Inventories and receivables increased $65.9 million and $57.1 million, respectively, in the first quarter of 1998 as compared to $20.9 million and $35.8 million, respectively, in the first quarter of 1999. In 1998, the Company built inventory levels in anticipation of sales volumes that did not materialize and offered extended credit terms to its customers. The increase in inventory during the first quarter of 1999 is largely due to the seasonal inventory build in the Company's Outdoor Leisure division. The Company participates in an accounts receivable securitization program to finance a portion of its accounts receivable. (See Note 4 of Notes to Condensed Consolidated Financial Statements.) In the first quarter of 1999, cash used in investing activities was driven by capital expenditures of $16.3 million, primarily for information systems and equipment and tooling for new products. Capital spending in the comparable 1998 period was $19.5 million and was primarily for capacity expansion initiatives, including the Neosho grill manufacturing facility, and equipment and tooling for new products. 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, blenders, standmixers and irons. Cash used in investing activities in the first quarter of 1998 reflects $160.6 million for the acquisition of approximately 81% of Coleman. The Company anticipates 1999 capital spending to be approximately 4% to 5% of net sales, primarily related to information systems and related support, including expenditures for Year 2000 readiness, new product introductions and capacity additions. Cash provided by financing activities totaled $58.7 million in the first quarter of 1999 and reflects net borrowings under the Company's New Credit Facility. Cash provided by financing activities in the first quarter of 1998 was $456.1 million and reflects net proceeds from the Debentures of $729.6 million, the cancellation and repayment of all outstanding balances under the Company's $250 million September 1996 revolving credit facility, the repayment of certain Coleman debt and the early extinguishment of the $75.0 million Hattiesburg bond. In addition, cash provided by financing activities is net of $25.1 million of financing fees related to the Company's $1.7 billion New Credit Facility and $19.0 million of proceeds from the exercise of stock options. (See Note 3 to the Condensed Consolidated Financial Statements.) At March 31, 1999, standby and commercial letters of credit aggregated $75.1 million and were predominately for insurance, pension, environmental, workers' compensation, and international trade activities. In addition, as of March 31, 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 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, $6.44 in cash for each share of Coleman common stock outstanding and warrants to purchase common stock of the Company at a cash exercise price of $7.00 per share. 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.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 New 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 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 New Credit Facility, negotiate with its lenders on further waiver of such covenants and other terms or refinance the New 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 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. Accordingly, debt related to the New Credit Facility and all debt containing cross-default provisions will be classified as current in the Condensed Consolidated Balance Sheet in the second quarter of 1999. In May 1998, the NYSE advised the Company that it did not meet the continuing listing standards of the NYSE because the Company did not have tangible net assets of at least $12 million and average annual net income of at least $0.6 million for 1995, 1996 and 1997. Representatives from the Company met with NYSE officials, and in March 1999, the NYSE informed the Company that the Company's common stock would not be delisted at that time, although the NYSE would, however, continue to monitor Sunbeam's financial condition and operations. On August 5, 1999, the NYSE advised the Company that the NYSE had revised its continuing listing standards, and that the Company is in compliance with the revised standards. In April 1999, the NYSE advised Coleman that it did not meet the NYSE's continuing listing standards because Coleman did not have tangible net assets of at least $12 million as of September 30, 1998 and average annual net income of at least $0.6 million for 1995, 1996 and 1997. At that time, Coleman requested the NYSE to continue to list the Coleman common stock until completion of the merger. The NYSE subsequently advised Coleman that Coleman also failed to satisfy certain non-financial continuing listing standards. 23 On August 5, 1999, the NYSE advised Coleman that the NYSE had revised its continuing listing standards, and that Coleman is in compliance with the revised financial standards. Coleman and the NYSE have agreed upon a program whereby Coleman will correct the deficiencies in its non-financial continuing listing standards by the end of 1999. Coleman is currently complying with such program. If Coleman were to be delisted from the NYSE, it would adversely affect Coleman's ability to sell its capital stock to third parties or use its capital stock as collateral for loans. Sunbeam's bank credit facility currently restricts Coleman from taking such actions. By letter dated June 17, 1998, the staff of the Division of Enforcement of the SEC advised the Company that it was conducting an informal inquiry into 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 with the SEC staff. The Company has, however, declined to provide the SEC with material that the Company believes is subject to the attorney-client privilege and the work product immunity. The Company cannot predict the term of such investigation or its potential outcome. 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. 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 March 31, 1999 the Company had established accruals for litigation matters of $26.2 million (representing $12.4 million and $13.8 million for estimated damages or settlement amounts and legal fees, respectively). As of December 31, 1998, the Company had established accruals for litigation matters of $31.2 million (representing $17.5 million and $13.7 million for estimated damages or settlements and legal fees, respectively.) It is anticipated that the $26.2 million accrual will be paid as follows: $17.7 million in 1999, $7.2 million in 2000 and $1.3 million in 2001. The Company believes, based on information known to the Company at March 31, 1999, that anticipated probable costs of litigation matters existing as of March 31, 1999 have been adequately reserved to the extent determinable. As a consumer goods manufacturer and distributor, the Company faces the constant risks of product liability and related lawsuits involving claims for substantial money damages, product recall actions and higher than anticipated rates of warranty returns or other returns of goods. These claims could result in liabilities that could have a material adverse effect on the Company's financial position 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 condensed 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 is effective for fiscal years beginning after June 15, 24 2000. SFAS No. 133 requires the recognition of all derivatives in the Consolidated Balance Sheets as either assets or liabilities measured at fair value. The Company has not yet determined the impact SFAS No. 133 will have on its consolidated financial position, results of operations, or cash flows. YEAR 2000 READINESS DISCLOSURE The 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, payroll processing and billings and collections. 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 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. 25 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 7% 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 has re-surveyed these companies 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 is in the process of completing a verification of the Year 2000 survey responses for the most critical vendors to the Company. The Company has responded to numerous customer inquiries about the Company's Year 2000 readiness. The Company has verified that all of the Company's major customers have planned programs to deal with Year 2000 issuesand is currently completing the process of contacting its major customers to confirm they are implementing their planned programs to address 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. The Company has designed its Year 2000 contingency plan and is in the process of implementing it. The development of the contingency plan included a process whereby the Company's critical IT and non-IT systems were evaluated for Year 2000 readiness. As a result of this evaluation, the Company does not expect to require additional operational equipment or significant process contingency measures. Although the Company does not currently believe there is significant risk associated with its third party suppliers, the contingency plan includes the continuing evaluation of the readiness of the Company's suppliers and consideration of the Company's inventory requirements to protect against supply disruption. This evaluation process may result in an increase in inventory during the later months of 1999. 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. 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. 26 THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES During the quarter ended March 31, 1999, Sunbeam had expended approximately $17 million to address Year 2000 issues of which approximately 50% 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. The bank credit facility does not permit the Company to spend more than $50 million on Year 2000 testing and remediation in 1999. Because Year 2000 readiness is critical to the business, Sunbeam has redeployed some resources from non-critical system enhancements to address Year 2000 issues. In addition, due to the importance of IT systems to the Company's business, management has deferred non-critical systems enhancements as much as possible. The Company does not expect these redeployments and deferrals to have a material impact on the Company's financial condition, results of operations, or cash flows. CAUTIONARY STATEMENTS Certain statements in this Quarterly Report on Form 10-Q/A may constitute "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995, as the same may be amended from time to time (herein the "Act") and in releases made by the 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," "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 credit agreement, including financial covenants and covenants relating to the completion of the Coleman merger, or to enter into an amendment to its credit agreement containing financial covenants which it and its bank lenders find mutually acceptable, or to continue to obtain waivers from its bank lenders with respect to its compliance with the existing covenants contained in such agreement, and to continue to have access to its revolving credit facility, or the Company's ability to refinance its indebtedness at acceptable rates with acceptable terms; (iii) Sunbeam's ability to integrate the recently acquired Coleman, Signature Brands and First Alert companies and expenses associated with such integration, (iv) Sunbeam's sourcing of products from international vendors, including the ability to select reliable vendors and to avoid delays in shipments, (v) Sunbeam's ability to maintain and increase market share for its products at anticipated margins, (vi) Sunbeam's ability to successfully introduce new products and to provide on-time delivery and a satisfactory level of customer service, (vii) changes in 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 available coverage on its directors' and officers' liability insurance, (xvii) the possibility of a recession in the United States or other countries resulting in a decrease in consumer 27 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. 28 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 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 a declaration that the individual defendants have violated fiduciary duties, an injunction against the payment of compensation to Messrs. Dunlap and Kersh or the imposition of a constructive trust on such payments, and unspecified money damages. The defendants have each moved to dismiss the 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 minority stockholders as a result of the decline in the market value of the Company's common stock. On October 21, 1998, the Company announced that it had entered into a memorandum of understanding to settle, subject to court approval, the class actions. The court hearing on the settlement was held on September 29, 1999, but the court has not yet ruled on the settlement. Under the terms of the proposed settlement, if approved by the court, the Company will issue to Coleman minority 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 minority stockholders who elect an 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. On September 16, 1998, an action was filed in the 56th Judicial District Court of Galveston County, Texas alleging various claims in violation of the Texas Securities Act and Texas Business and Commercial Code as well as common law fraud as a result of Sunbeam's alleged misstatements and omissions regarding Sunbeam's financial condition and prospects during a period beginning May 1, 1998 and ending June 16, 1998, in which the U.S. National Bank of Galveston, Kempner Capital Management, Inc. and Legacy Trust Company engaged in transactions in Sunbeam common stock on their own behalf and on behalf of their respective clients. Sunbeam is the only named defendant in this action. The complaint requests recovery of compensatory damages, punitive damages and expenses in an unspecified amount. This action was removed to the U.S. District Court for the Southern District of Texas and subsequently transferred to the Southern District of Florida and consolidated with the Consolidated Federal Actions. Plaintiffs in this action have objected to the consolidation and have sought reconsideration by the Southern District of Florida of the order of the Southern District of Texas denying plaintiffs' motion to remand the case to state court and transferring it to Florida. A similar suit was brought by the same group of plaintiffs against Arthur Andersen. In that action, the plaintiffs allege that Arthur Andersen violated the Texas Securities Act, committed statutory and common law fraud and was negligent in its audits of Sunbeam's 1996 and 1997 financial statements. In September 1999, Arthur Andersen had filed a motion for leave to join Sunbeam and certain of its former officers as responsible third parties and contribution defendants, which motion was denied. On October 30, 1998, a class action lawsuit was filed on behalf of certain purchasers of the debentures in the U.S. District Court for the Southern District of Florida against Sunbeam and some of Sunbeam's former officers and directors, alleging violations of the federal securities laws and common law fraud. The complaint alleges that Sunbeam's offering memorandum used for the marketing of the debentures contained false and misleading information regarding Sunbeam's financial position and that the defendants engaged in a plan to inflate Sunbeam's earnings for the purpose of defrauding the plaintiffs and others. The plaintiffs seek a declaration that defendants violated federal securities laws and either unspecified monetary damages or rescission of their purchase of the debentures. This action has been transferred to the Southern District of Florida, where the Consolidated Federal Actions are pending, and the parties have negotiated a proposed coordination plan in order to coordinate proceedings in this action with those in the Consolidated Federal Actions. The Company has been named as a defendant in an action filed in the District Court of Tarrant County, Texas, 48th Judicial District, on November 20, 1998. 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 29 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 took place 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 an injunction on the similar grounds. 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. Discovery is pending. On May 24, 1999, an action naming the Company as defendant was filed in the Circuit Court for Ozaukee County, Wisconsin. Prior to service of the complaint, the plaintiff dismissed its claims voluntarily, without prejudice. The plaintiff in this action was a purchaser of the Debentures. The plaintiff alleged 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 plaintiff sought rescission, as well as compensatory and exemplary damages in an unspecified amount. On September 13, 1999, an action naming the Company and Arthur Andersen as defendants was filed in the Circuit Court for Montgomery County, Alabama. The plaintiffs in this action are purchasers of the Company's common stock during the period March 19, 1998 through May 6, 1998. The plaintiffs allege, among other things, that the defendants violated the Alabama Security Laws and SEC Rule 10b-5. The plaintiffs seek compensatory and punitive damages in an unspecified amount. The Company has removed this case to the U.S. District Court for the District of Alabama. In addition, Arthur Andersen has filed a cross claim against the Company for contribution and indemnity. 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 flows. 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. That motion was granted. 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 Alliance in the previously filed action as to additional coverage levels under the Company's directors' and officers' liability insurance policy. This action has been transferred to the U.S. District Court for the Southern District of Florida and is currently in discovery. The Company is seeking a stay of discovery to coordinate discovery in this action with any discovery that 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 Alliance 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 directors' and officers' liability insurance policies to the Company and a declaratory judgment that the Company is entitled to coverage from these insurance companies for the various lawsuits described herein under directors' and officers' liability insurance policies issued by each of the defendants. In response to the Company's complaint, 30 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 attorneys' fees covered under those policies. The Company's failure to obtain such insurance recoveries following an adverse judgment in any of the actions described above could have a material adverse effect on the Company's financial position, results of operations and cash flows. The Company and its subsidiaries are also involved in various other lawsuits arising from time to time which the Company considers to be ordinary routine litigation incidental to its business. In the opinion of the Company, the resolution of these routine matters, and of certain matters relating to prior operations, individually or in the aggregate, will not have a material adverse effect upon the financial position, results of operations or cash flows of the Company. Amounts accrued for litigation matters represent the anticipated costs (damages and/or settlement amounts) in connection with pending litigation and claims and related anticipated legal fees. 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 cost to be incurred, the Company evaluates the range of probable losses and records the minimum end of the range. As of March 31, 1999 the Company had established accruals for litigation matters of $26.2 million (representing $12.4 million and $13.8 million for estimated damages or settlement amounts and legal fees, respectively). As of December 31, 1998, the Company had established accruals for litigation matters of $31.2 million (representing $17.5 million and $13.7 million for estimated damages or settlements and legal fees, respectively.) It is anticipated that the $26.2 million accrual will be paid as follows: $17.7 million in 1999, $7.2 million in 2000 and $1.3 million in 2001. The Company believes, based on information known to the Company on March 31, 1999, that anticipated probable costs of litigation matters existing as of March 31, 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 consolidated financial position, results of operations, or cash flows. Some of the product lines the Company acquired in the 1998 acquisitions have increased its exposure to product liability and related claims. BRK Brands, Inc., a wholly owned subsidiary of the Company, 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 plaintiff's smoke detector (which had been manufactured by a predecessor of BRK Brands, Inc.) did not alarm quickly enough. In July 1999, the jury in the Gordon case awarded $20 million in compensatory damages and $30 million in punitive damages. This case has been settled and BRK Brands, Inc.'s obligation under the settlement is limited to payment of the balance of its self-insured retention. 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. 31 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT NO. DESCRIPTION 27 Financial Data Schedule, submitted electronically to the Securities and Exchange Commission for information only and not filed. (b) Report on Form 8-K No reports on Form 8-K were filed through March 31, 1999. 32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUNBEAM CORPORATION BY: /s/ BOBBY G. JENKINS ------------------------- Bobby G. Jenkins Executive Vice President, and Chief Financial Officer (Principal Financial Officer) Dated: November 4, 1999 33 EXHIBITS INDEX EXHIBIT DESCRIPTION 27 Financial Data Schedule EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTREACTED FROM THE SUNBEAM COPORATION FINANCIAL STATEMENTS FOR THE PERIODS ENDED MARCH 31, 1999 AND MARCH 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 DEC-31-1998 MAR-31-1999 46,163 72,351 449,596 52,813 534,555 1,119,741 604,230 151,887 3,399,103 615,726 2,207,999 0 0 1,007 189,226 3,399,103 523,946 523,946 400,791 0 808 0 41,906 (57,508) 1,742 (60,739) 0 0 0 (60,739) (0.60) (0.60)
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