10-Q 1 file001.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) --- OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 2002 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ JARDEN CORPORATION DELAWARE 0-21052 35-1828377 State of Incorporation Commission File Number IRS Identification Number 555 THEODORE FREMD AVENUE RYE, NEW YORK 10580 REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 967-9400 ------------------------------------------------------------------ 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 --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 27, 2002 ----- ------------------------------- Common Stock, par value $.01 per share 14,311,343 shares 1 JARDEN CORPORATION Quarterly Report on Form 10-Q For the period ended September 30, 2002 INDEX
Page Number ----------- PART I. FINANCIAL INFORMATION: Item 1. Financial Statements (Unaudited) Consolidated Statements of Operations for the three and nine month periods ended September 30, 2002 and 2001 3 Consolidated Statements of Comprehensive Income (Loss) for the three and nine month periods ended September 30, 2002 and 2001 4 Consolidated Balance Sheets at September 30, 2002 and December 31, 2001 5 Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2002 and 2001 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 Item 4. Disclosure Controls and Procedures 21 PART II. OTHER INFORMATION: Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 22 Signature
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements JARDEN CORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
Three month Nine month period ended period ended ------------ ------------ September 30, September 30, September 30, September 30, 2002 2001 2002 2001 ---- ---- ---- ---- Net sales .............................................. $ 110,398 $ 90,477 $ 263,075 $ 250,102 Costs and expenses Cost of sales ....................................... 61,886 68,299 159,790 188,312 Selling, general and administrative expenses ........ 24,887 14,352 57,811 40,626 Goodwill amortization ............................... -- 1,626 -- 4,876 Special charges (credits) and reorganization expenses -- 3,901 -- 233 Loss on divestiture of assets ....................... -- 119,725 -- 119,725 --------- --------- --------- --------- Operating earnings (loss) .............................. 23,625 (117,426) 45,474 (103,670) Interest expense, net .................................. 3,817 2,180 8,803 8,351 --------- --------- --------- --------- Income (loss) before taxes and minority interest ....... 19,808 (119,606) 36,671 (112,021) Income tax provision (benefit) ......................... 8,076 (36,496) 9,660 (33,606) Minority interest in consolidated subsidiary ........... -- (78) -- (256) --------- --------- --------- --------- Net income (loss) ...................................... $ 11,732 $ (83,032) $ 27,011 $ (78,159) ========= ========= ========= ========= Basic earnings (loss) per share ........................ $ 0.83 $ (6.52) $ 1.95 $ (6.15) Diluted earnings (loss) per share ...................... $ 0.80 $ (6.52) $ 1.89 $ (6.15) Weighted average shares outstanding: Basic .............................................. 14,131 12,736 13,855 12,708 Diluted ............................................ 14,695 12,736 14,271 12,708
See accompanying notes to unaudited consolidated financial statements. 3 JARDEN CORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands)
Three month Nine month period ended period ended -------------------------------------- ------------------------------------- September 30, September 30, September 30, September 30, 2002 2001 2002 2001 ------------------ ----------------- ----------------- ---------------- Net income (loss) ........................ $ 11,732 $(83,032) $ 27,011 $(78,159) Foreign currency translation ............. (914) (319) 210 (369) Interest rate swap unrealized gain (loss): Transition adjustment ................ -- -- -- 45 Change during period ................. -- (116) -- (981) Maturity of interest rate swaps ....... -- -- 524 -- -------- -------- -------- -------- Comprehensive income (loss) .............. $ 10,818 $(83,467) $ 27,745 $(79,464) ======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements. 4 JARDEN CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts)
September 30, December 31, 2002 2001 -------------- ------------- (Unaudited) (Note 1) ASSETS Current assets: Cash and cash equivalents ........................................... $ 60,925 $ 6,376 Accounts receivable, net ............................................ 41,149 13,628 Income taxes receivable ............................................. 1,448 16,252 Inventories, net .................................................... 49,852 26,994 Deferred taxes on income ............................................ 6,383 4,832 Prepaid expenses and other current assets ........................... 7,281 3,134 --------- --------- Total current assets ........................................ 167,038 71,216 --------- --------- Noncurrent assets: Property, plant and equipment, at cost .................................. 138,070 131,244 Accumulated depreciation ................................................ (94,304) (87,701) --------- --------- 43,766 43,543 Intangibles, net ........................................................ 121,168 15,487 Deferred taxes on income ................................................ 2,165 25,417 Other assets ............................................................ 13,873 5,282 --------- --------- Total assets ............................................................ $ 348,010 $ 160,945 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt and current portion of long-term debt ............... $ 15,360 $ 28,500 Accounts payable .................................................... 17,488 14,197 Accrued salaries, wages and employee benefits ....................... 12,244 9,252 Other current liabilities ........................................... 21,842 11,232 --------- --------- Total current liabilities ................................... 66,934 63,181 --------- --------- Noncurrent liabilities: Long-term debt ...................................................... 201,930 56,375 Other noncurrent liabilities ........................................ 9,357 6,260 --------- --------- Total noncurrent liabilities ................................ 211,287 62,635 --------- --------- Commitments and contingencies ........................................... -- -- Stockholders' equity: Common stock ($.01 par value, 15,926 and 15,926 shares issued and 14,299 and 12,796 shares outstanding at September 30, 2002 and December 31, 2001, respectively) ...................... 159 159 Additional paid-in capital .......................................... 34,872 41,694 Retained earnings ................................................... 59,735 32,724 Notes receivable for stock purchases ................................ (5,058) -- Accumulated other comprehensive loss: Cumulative translation adjustment ................................ (731) (941) Minimum pension liability ........................................ (397) (397) Interest rate swap ............................................... -- (524) --------- --------- 88,580 72,715 Less treasury stock (1,628 and 3,130 shares at cost at September 30, 2002 and December 31, 2001, respectively) ............................. (18,791) (37,586) --------- --------- Total stockholders' equity ................................. 69,789 35,129 --------- --------- Total liabilities and stockholders' equity .............................. $ 348,010 $ 160,945 ========= =========
See accompanying notes to unaudited consolidated financial statements. 5 JARDEN CORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Nine month period ended ------------------------------------ September 30, September 30, 2002 2001 ----------------- ----------------- Cash flows from operating activities Net income (loss) .............................................................. $ 27,011 $ (78,159) Reconciliation of net income (loss) to net cash provided by operating activities Depreciation ............................................................... 6,857 11,203 Amortization ............................................................... 393 5,065 Loss on divestiture of assets .............................................. -- 119,725 Special charges (credits) and reorganization expenses ...................... -- (3,750) Deferred employee benefits ................................................. (1,731) 216 Deferred income taxes ...................................................... 9,349 -- Non-cash compensation expense .............................................. 587 -- Non-cash interest expense .................................................. 1,482 333 Other, net ................................................................. (21) (524) Changes in working capital components (including tax refunds of $38,458 in 2002) 24,349 (11,338) --------- --------- Net cash provided by operating activities ............................... 68,276 42,771 --------- --------- Cash flows from financing activities Proceeds from revolving credit borrowings ..................................... 25,200 29,150 Payments on revolving credit borrowings ....................................... (34,600) (45,150) Proceeds from bond issuance ................................................... 147,654 -- Payments on long-term debt .................................................... (76,725) (19,027) Proceeds from issuance of senior long-term debt ............................... 50,000 -- Debt issue and amendment costs ................................................ (7,374) (637) Other ......................................................................... 8,175 518 --------- --------- Net cash provided by (used in) financing activities .................. 112,330 (35,146) --------- --------- Cash flows from investing activities Additions to property, plant and equipment ..................................... (4,972) (8,343) Acquisition of Tilia, net of cash acquired ..................................... (121,085) -- Proceeds from the surrender of insurance contracts ............................. -- 6,706 Insurance proceeds from property casualty ...................................... -- 1,535 Loans to former officers ....................................................... -- (4,059) Other, net ..................................................................... -- 61 --------- --------- Net cash used in investing activities .............................. (126,057) (4,100) --------- --------- Net increase in cash and cash equivalents .......................................... 54,549 3,525 Cash and cash equivalents, beginning of period ..................................... 6,376 3,303 --------- --------- Cash and cash equivalents, end of period ........................................... $ 60,925 $ 6,828 ========= =========
See accompanying notes to unaudited consolidated financial statements. 6 JARDEN CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 1. PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS Certain information and footnote disclosures, including significant accounting policies normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments considered necessary for a fair presentation of the results for the interim periods presented. Results of operations for the periods shown are not necessarily indicative of results for the year, particularly in view of the seasonality for home food preservation products. The accompanying unaudited consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements of Jarden Corporation (formerly Alltrista Corporation) (the "Company" or "Jarden") included in the Company's latest annual report. On a stand alone basis, without the consolidation of its subsidiaries, the Company has no independent assets or operations. The guarantees by its subsidiaries of the 9 3/4% senior subordinated notes ("Notes"), which are discussed in Note 4, are full and unconditional and joint and several. The subsidiaries that are not guarantors of the Notes are minor. There are no significant restrictions on the Company's or the guarantors' ability to obtain funds from their respective subsidiaries by dividend or loan. The Company recognizes revenue when title transfers. In most cases, title transfers when product is shipped. For certain customers, depending on the agreed terms of sale, title transfers when the product is received by the customer. All earnings per share amounts have been retroactively adjusted to give effect to a 2-for-1 split of the Company's common stock that was effected in the second quarter of 2002. Certain reclassifications have been made in the Company's financial statements of prior years to conform to the current year presentation. These reclassifications have no impact on previously reported net income. 2. INVENTORIES Inventories at September 30, 2002 and December 31, 2001 were comprised of the following (in thousands): September 30, December 31, 2002 2001 --------------- -------------- Raw materials and supplies............ $ 4,106 $ 5,563 Work in process....................... 5,752 4,746 Finished goods........................ 39,994 16,685 ------- ------- Total inventories................ $49,852 $26,994 ======= ======= 3. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized, but will be subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives. The Company applied the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. The Company has performed the first of the required impairment tests of goodwill and indefinite lived intangible assets and, based on the results, has not recorded any charges related to the adoption of SFAS No. 142. 7 During the nine month period ended September 30, 2002, in connection with the acquisition of the business of Tilia International, Inc. and its subsidiaries Tilia, Inc. and Tilia Canada, Inc. (collectively "Tilia"), the Company capitalized the following intangible assets: $49.7 million of goodwill, $50.9 million for the FoodSaver(R) brand and $5.5 million for Tilia's manufacturing process expertise (see Note 4). Such capitalized amounts and certain working capital and deferred tax balances are preliminary and will be finalized by the Company during 2002. The only intangible asset subject to amortization is the manufacturing process expertise, which will be amortized over a period of 8 years at approximately $0.7 million per year. As a result of the adoption of SFAS No. 142 the Company did not record goodwill amortization and no impairment losses were recognized for the three and nine month periods ended September 30, 2002. Amortization of the intangible asset for the Tilia manufacturing processes in the amounts of $0.1 million and $0.4 million were recorded in both the three and nine month periods ended September 30, 2002, respectively, and were included in selling, general and administrative expenses. Goodwill amortization of approximately $1.6 million and $4.9 million had been recorded in the three and nine month periods ended September 30, 2001, respectively. As of September 30, 2002, $15.5 million of the Company's intangible assets are included in the assets of the domestic consumables segment and $105.7 million are included in the vacuum packaging segment. For the three and nine month periods ended September 30, 2001, goodwill amortization of $1.3 million and $4.0 million, respectively, related to entities that were disposed of in 2001, which had been included in the other segment. The remaining goodwill amortization for the 2001 periods related to the domestic consumables segment. Net income and earnings per share amounts on an adjusted basis to reflect the add back of goodwill and other intangible assets amortization would be as follows (in thousands, except for per share amounts):
Three month period ended Nine month period ended --------------------------------- -------------------------------- September 30, September 30, September 30, September 30, 2002 2001 2002 2001 ------------- --------------- ------------- -------------- Reported net income (loss) ................. $11,732 $ (83,032) $ 27,011 $ (78,159) Add back: goodwill amortization (net of tax expense of $622 and $1,866, respectively) ..................... - 1,004 - 3,010 ------------- --------------- ------------- -------------- Adjusted net income (loss) ............. $11,732 $ (82,028) $ 27,011 $ (75,149) ============= =============== ============= ============== Basic earnings (loss) per share: Reported net income (loss) .............. $ 0.83 $ (6.52) $ 1.95 $ (6.15) Goodwill amortization ................... - 0.08 - 0.24 ------------- --------------- ------------- -------------- Adjusted net income (loss) .............. $ 0.83 $ (6.44) $ 1.95 $ (5.91) ============= =============== ============= ============== Diluted earnings (loss) per share: Reported net income (loss) .............. $ 0.80 $ (6.52) $ 1.89 $ (6.15) Goodwill amortization ................... - 0.08 - 0.24 ------------- --------------- ------------- -------------- Adjusted net income (loss) .............. $ 0.80 $ (6.44) $ 1.89 $ (5.91) ============= =============== ============= ==============
The adoption of SFAS No. 141 did not have a material impact on the Company's results of operations or financial position. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective for fiscal years beginning after December 15, 2001. This standard superceded Statement of Financial Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and provided a single accounting model for long-lived assets to be disposed of. The new standard also superceded the provisions of APB Opinion No. 30 with regard to reporting the effects of a disposal of a segment of a business and required expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are incurred. SFAS No. 144 was effective for the Company beginning with the first quarter of 2002 and its adoption did not have a material impact on the Company's results of operations or financial position. In April 2002, the FASB issued SFAS No. 145, Recision of SFAS Nos. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections as of April 2000. SFAS No. 145 revises the criteria for classifying the extinguishment of debt as extraordinary and the accounting treatment of certain lease modifications. SFAS No. 145 is effective in fiscal 2003 and is not expected to have a material impact on the Company's consolidated financial statements. 8 In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 provides guidance on the timing of the recognition of costs associated with exit or disposal activities. The new guidance requires costs associated with exit or disposal activities to be recognized when incurred. Previous guidance required recognition of costs at the date of commitment to an exit or disposal plan. The provisions of the statement are to be adopted prospectively after December 31, 2002. Although SFAS No. 146 may impact the accounting for costs related to exit or disposal activities the Company may enter into in the future, particularly the timing of recognition of these costs, the adoption of the statement will not have an impact on the Company's present financial condition or results of operations. 4. ACQUISITIONS AND DIVESTITURES Effective November 26, 2001, the Company sold the assets of its Triangle, TriEnda and Synergy World plastic thermoforming operations ("TPD Assets") to Wilbert, Inc. for $21.0 million in cash, a $1.9 million non-interest bearing one-year note as well as the assumption of certain identified liabilities. In connection with this sale, the Company recorded a pre-tax loss of approximately $120 million in the third quarter of 2001 to reflect the write-down of the net assets to be sold. Effective November 1, 2001, the Company sold its majority interest in Microlin, LLC ("Microlin"), for $1,000 in cash plus contingent consideration based upon future performance through December 31, 2012 and the cancellation of future funding requirements. The combined net sales of TPD Assets and Microlin included in the Company's historical results were $14.9 million and $51.9 million for the three and nine month periods ended September 30, 2001, respectively. Operating losses associated with these businesses were $5.1 million and $10.1 million for the three and nine month periods ended September 30, 2001, respectively. On April 24, 2002, the Company completed its acquisition of the business of Tilia, pursuant to an asset purchase agreement (the "Acquisition"). Based in San Francisco, California, Tilia is a developer, manufacturer and marketer of a patented vacuum packaging system for home use, primarily for food storage, under the FoodSaver(R) brand. The Acquisition was entered into as part of the Company's plan to pursue growth in food preservation and branded domestic consumer products. Pursuant to the Acquisition, the Company acquired Tilia for approximately $145 million in cash and $15 million in seller debt financing. Note 3 includes a discussion of the intangible assets that were recorded in connection with the Acquisition. As of September 30, 2002, the Company had incurred transaction fees in the amount of approximately $4.5 million, including transaction bonuses paid to certain officers in the aggregate amount of $0.9 million, principally consisting of transaction bonuses paid to Martin E. Franklin, our Chairman and Chief Executive Officer, in the amount of $0.5 million and Ian Ashken, our Vice Chairman, Chief Financial Officer, and Secretary, in the amount of $0.3 million. In addition, the Acquisition includes an earn-out provision with a potential payment in cash or Company common stock of up to $25 million payable in 2005, provided that certain earnings performance targets are met. Due to the Company having effective control of the business of Tilia as of April 1, 2002, the results of Tilia have been included in the Company's results from such date. The Company recorded $0.6 million of imputed interest expense in the second quarter of 2002 to reflect the financing that would have been required for the period from the effective date (April 1, 2002) to the date of closing (April 24, 2002). The imputed interest expense reduced the amount of goodwill recorded. The Acquisition was financed by (i) an offering of $150 million of Notes to qualified institutional buyers in a private placement pursuant to Rule 144A under the Securities Act of 1933, (ii) a refinancing of the Company's existing indebtedness with a new $100 million five-year senior secured credit facility, which includes a $50 million term loan facility and a $50 million revolving credit facility ("New Credit Agreement") and (iii) cash on hand. The Notes were issued at a discount such that the Company received approximately $147.7 million in net proceeds. The Notes will mature on May 1, 2012, however, on or after May 1, 2007, the Company may redeem all or part of the Notes at any time at a redemption price ranging from 100% to 104.875% of the principal amount, plus accrued and unpaid interest and liquidated damages, if any. Prior to May 1, 2005, the Company may redeem up to 35% of the aggregate principal amount of the Notes with the net cash proceeds from certain public equity offerings at a redemption price of 109.75% of the principal amount, plus accrued and unpaid interest and liquidated damages, if any. Interest on the Notes accrues at the rate of 9.75% per annum and is payable semi-annually in arrears on May 1 and November 1, commencing on November 1, 2002. On October 28, 2002, the Company commenced an offering to the holders of the Notes to exchange the Notes for 9 3/4% senior subordinated notes (the "New Notes"), which are registered under the Securities Act of 1933, as amended, and are 9 substantially similar to the Notes except that the mandatory redemption provisions and the transfer restrictions applicable to the Notes are not applicable to the New Notes. The Company expects to complete the exchange offer in December 2002. The revolving credit facility and the term loan facility bear interest at a rate equal to (i) the Eurodollar Rate pursuant to an agreed formula or (ii) a Base Rate equal to the higher of (a) the Bank of America prime rate and (b) the federal funds rate plus .50%, plus, in each case, an applicable margin ranging from 2.00% to 2.75% for Eurodollar Rate loans and from .75% to 1.5% for Base Rate loans. The New Credit Agreement contains certain restrictions on the conduct of the Company's business, including, among other things restrictions, generally, on: incurring debt; making investments; exceeding certain agreed upon capital expenditures; creating or suffering liens; completing certain mergers; consolidations and sales of assets and with permitted exceptions, acquisitions; declaring dividends; redeeming or prepaying other debt; and certain transactions with affiliates. The New Credit Agreement also requires the Company to maintain certain financial covenants. As of September 30, 2002, the Company had $48.7 million outstanding under the term loan facility and zero outstanding under the $50 million revolving credit facility of the New Credit Agreement. Net availability under the revolving credit agreement was approximately $45.8 million as of September 30, 2002, after deducting $4.2 million of issued letters of credit. As of September 30, 2002, the Company had incurred costs in connection with the issuance of the Notes and the New Credit Agreement of approximately $7.4 million. The following unaudited pro forma financial information gives pro forma effect to the sale of the TPD Assets and Microlin with the related tax refunds and the acquisition of Tilia with the related financings as if they had been consummated as of the beginning of each period presented. The unaudited pro forma information presented does not exclude special charges (credits) and reorganization expenses from the three and nine month periods ended September 30, 2001 or the net $4.9 million income tax valuation allowance released from the nine month period ended September 30, 2002 (in thousands, except per share data).
Three month period ended Nine month period ended -------------------------------- ------------------------------ September 30, September 30, September 30, September 30, 2002 2001 2002 2001 As reported Pro Forma Pro Forma Pro Forma ------------- -------------- ------------- ------------- Net sales........................ $110,398 $124,418 $301,600 $319,216 Net income....................... 11,732 7,045 28,400 17,672 Diluted earnings per share....... 0.80 0.55 1.99 1.39
5. INCOME TAXES As a result of the losses arising from the sale of the TPD Assets, the Company recovered in January 2002 approximately $15.7 million of federal income taxes paid in 1999 and 2000 by utilizing the carryback of a tax net operating loss generated in 2001. On March 9, 2002, The Job Creation and Workers Assistance Act of 2002 was enacted which provides, in part, for the carryback of 2001 net operating losses for five years instead of the previous two year period. As a result, the Company filed for an additional refund of $22.8 million, of which $22.2 million was received in March 2002 and the remainder was received in April 2002. At December 31, 2001, the federal net operating losses were recorded as a deferred tax asset with a valuation allowance of $5.4 million. For the nine month period ended September 30, 2002, the Company's tax expense includes a $4.9 million release of the valuation allowance, resulting in a reduction of the Company's effective tax rate. 6. CONTINGENCIES The Company is involved in various legal disputes in the ordinary course of business. In addition, the Environmental Protection Agency has designated the Company as a potentially responsible party, along with numerous other companies, for the clean up of several hazardous waste sites. Based on currently available information, the Company does not believe that the disposition of any of the legal or environmental disputes the Company is currently involved in will require material capital or operating expenditures or will otherwise have a material adverse effect upon the financial condition, results of operations, cash flows or competitive position of the Company. It is possible, that as additional information becomes available, the impact on the Company of an adverse determination could have a different effect. 10 7. EXECUTIVE LOAN PROGRAM On January 24, 2002, Martin E. Franklin, Chairman and Chief Executive Officer, and Ian G.H. Ashken, Vice Chairman, Chief Financial Officer and Secretary exercised 600,000 and 300,000 non-qualified stock options, respectively, which had been granted under the Company's 2001 Stock Option Plan. The Company issued these shares out of its treasury stock account. The exercises were accomplished via loans from the Company under its Executive Loan Program. The principal amounts of the loans are $3.3 million and $1.6 million, respectively, and bear interest at 4.125% per annum. The loans are due on January 23, 2007 and are classified within the stockholders' equity section. The loans may be repaid in cash, shares of the Company's common stock, or a combination thereof. 8. RESTRICTED STOCK PROGRAM AND PERFORMANCE SHARE PLAN During the first quarter of 2002, restricted shares of common stock in the aggregate amount of 143,500 were issued to certain officers and key employees of the Company under its 1998 Long-Term Equity Incentive Plan, as amended and restated. The restrictions on 140,000 of these shares shall lapse upon the Company's common stock achieving a set price, currently $35 per share, or on a change in control. The restrictions on the remaining 3,500 shares will lapse ratably over five years of employment with the Company. During the third quarter of 2002, shares of common stock in the aggregate amount of 30,006 were issued to certain officers of the Company under its 1998 Performance Share Plan. In connection with these stock issuances, the Company recorded a non-cash compensation expense charge of approximately $0.6 million. 9. SPECIAL CHARGES (CREDITS) AND REORGANIZATION EXPENSES During the first and second quarters of 2001, certain participants in the Company's deferred compensation plans agreed to forego balances in those plans in exchange for loans from the Company in the same amounts. The loans, which were completed during the second quarter of 2001, bear interest at the applicable federal rate and require the individuals to secure a life insurance policy having the death benefit equivalent to the amount of the loan payable to the Company. All accrued interest and principal on the loans will be payable upon the death of the participant and their spouse. The Company recognized $4.1 million of pre-tax income in the nine month period ended September 30, 2001, related to the discharge of the deferred compensation obligations. The Company's divested TPD Assets division recognized a gain of $1.0 million from an insurance recovery in the nine month period ended September 30, 2001. The Company also incurred $1.4 million of costs in the nine month period ended September 30, 2001, to evaluate strategic options. In August 2001, the Company announced that it would be consolidating its home canning metal closure production from its Bernardin Ltd. Toronto, Ontario facility into its Muncie, Indiana manufacturing operation. During the third quarter of 2001, the Company incurred costs to exit the Toronto facility in the amount of $0.7 million, which included a $0.3 million loss on the sale and disposal of equipment, and $0.4 million of employee severance costs. Also in August 2001, the Company announced that it had vacated its former Triangle Plastics facility in Independence, Iowa and integrated personnel and capabilities into its other operating and distribution facilities in the area. The total cost to exit this Iowa facility of $0.6 million was recorded in the third quarter of 2001 and included $0.4 million of future lease obligations and an additional $0.2 million of costs related to the leased facility. In September 2001, the Company announced a management reorganization, which included the departure from the Company of certain executive officers. In connection with this reorganization, the Company paid separation costs of approximately $2.6 million. 11 10. EARNINGS PER SHARE CALCULATION Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share are calculated based on the weighted average number of outstanding common shares plus the dilutive effect of stock options as if they were exercised and restricted common stock. Due to the net loss for the three month and nine month periods ended September 30, 2001, the effect of the potential exercise of stock options was not considered in the diluted earnings per share calculation for those periods since it would be antidilutive. A computation of earnings per share is as follows (in thousands, except per share data):
Three month Nine month period ended period ended ---------------------------------- ----------------------------------- September 30, September 30, September 30, September 30, 2002 2001 2002 2001 ---------------- ---------------- ---------------- ----------------- Net income (loss)................................ $ 11,732 $ (83,032) $ 27,011 $ (78,159) ---------------- ---------------- ---------------- ----------------- Weighted average shares outstanding.............. 14,131 12,736 13,855 12,708 Additional shares assuming conversion of stock options and restricted common stock.... 564 - 416 - ---------------- ---------------- ---------------- ----------------- Weighted average shares outstanding assuming conversion.......................... 14,695 12,736 14,271 12,708 ---------------- ---------------- ---------------- ----------------- Basic earnings (loss) per share.................. $ 0.83 $ (6.52) $ 1.95 $ (6.15) ---------------- ---------------- ---------------- ----------------- Diluted earnings (loss) per share................ $ 0.80 $ (6.52) $ 1.89 $ (6.15) ---------------- ---------------- ---------------- -----------------
11. SEGMENT INFORMATION Following the sale of the TPD Assets and Microlin and the third quarter 2001 appointment of new executive management, the Company reorganized its business into two segments: consumer products and materials based, to reflect the new business and management strategy. Subsequent to the issuance of the Company's June 30, 2002 consolidated financial statements and the acquisition of Tilia, the Company revised its business segment information to report five business segments within these two groups. Prior periods have been reclassified to conform to the current segment definitions. The consumer products group consists of the vacuum packaging and domestic consumables segments. In the vacuum packaging segment, which was acquired in April 2002, the Company is a developer, manufacturer and marketer of the FoodSaver(R) line which is the U.S. market leader in home vacuum packaging systems and accessories. In the domestic consumables segment, the Company markets a line of home food preservation products under the Ball(R), Kerr(R) and Bernardin(R) brands, including home canning jars, metal closures, and accessories, which are distributed through a wide variety of retail outlets. The materials based group consists of the metals, injection molded plastics and other segments. The metals segment is the largest producer of zinc strip in the United States. The injection molded plastics segment manufactures injection molded plastic parts used in medical, pharmaceutical and consumer products. The other segment includes the manufacturing of non-injection molded plastic parts and other immaterial business activities. For the three and nine month periods ended September 30, 2001, the other segment also included the businesses which comprised the TPD Assets and Microlin. 12 Net sales, operating earnings and assets employed in operations by segment are summarized as follows (in thousands):
Three month Nine month period ended period ended ------------------------------------ -------------------------------------- September 30, September 30, September 30, September 30, 2002 2001 2002 2001 ---------------- ----------------- ------------------ ------------------ Net sales: Vacuum packaging ............................ $ 46,102 $ -- $ 77,444 $ -- Domestic consumables ........................ 35,548 43,609 99,581 105,760 --------- --------- --------- --------- Total consumer products group ........... 81,650 43,609 177,025 105,760 --------- --------- --------- --------- Metals ...................................... 11,988 12,226 32,718 38,002 Injection molded plastics ................... 10,459 11,488 32,170 31,442 Other ....................................... 6,585 23,274 21,948 75,545 --------- --------- --------- --------- Total materials based group ............. 29,032 46,988 86,836 144,989 --------- --------- --------- --------- Intercompany ............................... (284) (120) (786) (647) --------- --------- --------- --------- Total net sales ..................... $ 110,398 $ 90,477 $ 263,075 $ 250,102 ========= ========= ========= ========= Operating earnings (loss): Vacuum packaging ............................ $ 10,764 $ -- $ 13,961 $ -- Domestic consumables ........................ 9,044 8,579 18,899 16,650 --------- --------- --------- --------- Total consumer products group ........... 19,808 8,579 32,860 16,650 --------- --------- --------- --------- Metals ...................................... 2,280 1,657 5,965 6,319 Injection molded plastics ................... 55 149 1,631 693 Other ....................................... 1,481 (4,184) 5,013 (7,393) --------- --------- --------- --------- Total materials based group ............. 3,816 (2,378) 12,609 (381) --------- --------- --------- --------- Intercompany ............................. 1 (1) 5 19 Unallocated corporate expenses (1) ....... -- (3,901) -- (233) Loss on divestiture of assets ............ -- (119,725) -- (119,725) --------- --------- --------- --------- Total operating earnings (loss) ..... 23,625 (117,426) 45,474 (103,670) Interest expense, net .......................... 3,817 2,180 8,803 8,351 --------- --------- --------- --------- Income (loss) before taxes and minority interest $ 19,808 $(119,606) $ 36,671 $(112,021) ========= ========= ========= =========
September 30, December 31, 2002 2001 ------------------ ---------------- Assets employed in operations: Vacuum packaging ......................... $160,491 $ -- Domestic consumables ..................... 50,372 50,943 -------- -------- Total consumer products group ........ 210,863 50,943 -------- -------- Metals ................................... 15,411 15,096 Injection molded plastics ................ 27,940 28,715 Other .................................... 12,699 11,341 -------- -------- Total materials based group .......... 56,050 55,152 -------- -------- Total assets employed in operations 266,913 106,095 Corporate (2) ......................... 81,097 54,850 -------- -------- Total assets ...................... $348,010 $160,945 ======== ========
(1) Unallocated corporate expenses in 2001 are comprised of special charges (credits) and reorganization expenses. (2) Corporate assets primarily include cash and cash equivalents, amounts relating to benefit plans, deferred tax assets and corporate facilities and equipment. 13 12. DERIVATIVE FINANCIAL INSTRUMENTS The Company's derivative activities do not create additional risk because gains and losses on derivative contracts offset losses and gains on the assets, liabilities and transactions being hedged. As derivative contracts are initiated, the Company designates the instruments individually as either a fair value hedge or a cash flow hedge. Management reviews the correlation and effectiveness of its derivatives on a periodic basis. Under its prior senior credit facility, as amended ("Old Credit Agreement"), the Company used interest rate swaps to manage a portion of its exposure to short-term interest rate variations with respect to the London Interbank Offered Rate ("LIBOR") on its term debt obligations. The Company designated the interest rate swaps as cash flow hedges. Gains and losses related to the effective portion of the interest rate swaps were reported as a component of other comprehensive income and reclassified into earnings in the same period the hedged transaction affected earnings. Because the terms of the swaps exactly matched the terms of the underlying debt, the swaps were perfectly effective. The interest rate swap agreements expired in March 2002. In conjunction with the Notes (see Note 4), on April 24, 2002, the Company entered into a $75 million interest rate swap ("Initial Swap") to receive a fixed rate of interest and pay a variable rate of interest based upon LIBOR. The initial effective rate of interest on this swap was 6.05% and was due to be recalculated effective November 1, 2002. This contract was considered to be an effective hedge against changes in the fair value of the Company's fixed-rate debt obligation for both tax and accounting purposes. Effective September 12, 2002, the Company entered into an agreement, whereby it unwound the Initial Swap and contemporaneously entered into a new $75 million interest rate swap ("Replacement Swap"). The Replacement Swap has the same terms as the Initial Swap, except that the Company will pay a variable rate of interest based upon 6 month LIBOR in arrears. The spread on this contract is 470 basis points and, based on the 6 month LIBOR rate at the commencement of the contract, the Company is recording interest at an effective rate of 6.52%. In return for unwinding the Initial Swap, the Company received $5.4 million in cash proceeds, of which $1 million related to accrued interest that was owed to the Company. The remaining $4.4 million of proceeds will be amortized over the remaining life of the Notes as a credit to interest expense and is included in the Company's consolidated balance sheet as an increase to the value of the long-term debt. Such amortization offsets the increased effective rate of interest that the Company pays on the Replacement Swap. The Replacement Swap is also considered to be an effective hedge against changes in the fair value of the Company's fixed-rate debt obligation for both tax and accounting purposes. Accordingly, the interest rate swap contract will be reflected at fair value in the Company's consolidated balance sheet and the related portion of fixed-rate debt being hedged will be reflected at an amount equal to the sum of its carrying value plus an adjustment representing the change in fair value of the debt obligations attributable to the interest rate risk being hedged. The fair market value of the interest rate swap as of September 30, 2002 was approximately $1.6 million and is included as an asset within other assets in the consolidated balance sheet, with a corresponding offset to long-term debt. In addition, changes during any accounting period in the fair value of this interest rate swap, as well as offsetting changes in the adjusted carrying value of the related portion of fixed-rate debt being hedged, will be recognized as adjustments to interest expense in the Company's consolidated statements of income. The net effect of this accounting on the Company's operating results is that interest expense on the portion of fixed-rate debt being hedged is generally recorded based on variable interest rates. The Company is exposed to credit loss, in the event of non-performance by the counter party, a large financial institution, however, the Company does not anticipate non-performance by the counter party. The Company's long-term debt includes approximately $6.0 million of non-debt balances arising from the interest rate swap transactions described above. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT AND CORPORATE OFFICE REORGANIZATION On September 24, 2001, our board of directors appointed Martin E. Franklin as our Chairman and Chief Executive Officer and Ian G.H. Ashken as our Vice Chairman, Chief Financial Officer and Secretary. On October 15, 2001, we announced the closing of our Indianapolis, Indiana corporate office. In the first quarter of 2002, corporate functions were transitioned to our new headquarters in Rye, New York and our consumer products location in Muncie, Indiana. Following the sale of our Triangle, TriEnda and Synergy World plastic thermoforming operations ("TPD Assets") and the third quarter 2001 appointment of new executive management, we reorganized our business segments into two groups: consumer products and materials based. Within these two groups there are currently a total of five business segments, two of which are in the consumer products group and three of which are in the materials based group. Prior periods have been reclassified to conform to the current segment definitions. ACQUISITION AND RELATED FINANCING On April 24, 2002, we completed our acquisition of the business of Tilia International, Inc. and its subsidiaries Tilia, Inc. and Tilia Canada, Inc. (collectively "Tilia"), pursuant to an asset purchase agreement (the "Acquisition"). Based in San Francisco, California, Tilia is a developer, manufacturer and marketer of a patented vacuum packaging system for home use, primarily for food storage, under the FoodSaver(R) brand. The Acquisition was entered into as part of our plan to pursue growth in food preservation and branded domestic consumer products. Pursuant to the Acquisition, we acquired Tilia for approximately $145 million in cash and $15 million in seller debt financing. Note 3 of the accompanying financial statements includes a discussion of the intangible assets that were recorded in connection with the Acquisition. As of September 30, 2002, we had incurred transaction fees in the amount of approximately $4.5 million, including transaction bonuses paid to certain officers in the aggregate amount of $0.9 million, principally consisting of transaction bonuses paid to Martin E. Franklin, our Chairman and Chief Executive Officer, in the amount of $0.5 million and Ian Ashken, our Vice Chairman, Chief Financial Officer, and Secretary, in the amount of $0.3 million. In addition, the Acquisition includes an earn-out provision with a potential payment in cash or our common stock of up to $25 million payable in 2005, provided that certain earnings performance targets are met. Due to the Company having effective control of the business of Tilia as of April 1, 2002, the results of Tilia have been included in the Company's results from such date. The Company recorded $0.6 million of imputed interest expense in the second quarter of 2002 to reflect the financing that would have been required for the period from the effective date (April 1, 2002) to the date of closing (April 24, 2002). The imputed interest expense reduced the amount of goodwill recorded. The Acquisition was financed by (i) an offering of $150 million of 9 3/4% senior subordinated notes ("Notes") to qualified institutional buyers in a private placement pursuant to Rule 144A under the Securities Act of 1933, (ii) a refinancing of our existing indebtedness with a new $100 million five-year senior secured credit facility, which includes a $50 million term loan facility and a $50 million revolving credit facility ("New Credit Agreement") and (iii) cash on hand. See "Financial Condition, Liquidity and Capital Resources" below for further information. DIVESTITURES Effective November 26, 2001, we sold the TPD Assets to Wilbert, Inc. for $21.0 million in cash, a $1.9 million non-interest bearing one-year note as well as the assumption of certain identified liabilities. In connection with this sale, we recorded a pre-tax loss of approximately $120 million in the third quarter of 2001 to reflect the write-down of the net assets to be sold. As a result of the losses arising from the sale of the TPD Assets, we recovered in January 2002 approximately $15.7 million of federal income taxes paid in 1999 and 2000 by utilizing the carryback of a tax net operating loss generated in 2001. On March 9, 2002, The Job Creation and Workers Assistance Act of 2002 was enacted which provides, in part, for the carryback of 2001 net operating losses for five years instead of the previous two year period. As a result, we filed for an additional refund of $22.8 million, of which $22.2 million was received in March 2002 and the remainder was received in April 2002. Effective November 1, 2001, we sold our majority interest in Microlin, LLC, a developer of proprietary battery and fluid delivery technology, for $1,000 in cash plus contingent consideration based upon future performance through December 31, 2012 and the cancellation of future funding requirements. 15 The combined net sales of TPD Assets and Microlin included in the Company's historical results were $14.9 million and $51.9 million for the three and nine month periods ended September 30, 2001, respectively. Operating losses associated with these businesses were $5.1 million and $10.1 million for the three and nine month periods ended September 30, 2001, respectively. RESULTS OF OPERATIONS - COMPARISON OF THIRD QUARTER 2002 TO THIRD QUARTER 2001 We reported net sales of $110.4 million for the third quarter of 2002, a 22.0% increase from net sales of $90.5 million in the third quarter of 2001. We reported third quarter 2002 operating earnings of $23.6 million. In the third quarter of 2001, we reported an operating loss of $117.4 million, which included a write down of $119.7 million for the thermoforming assets held for sale. In the third quarter of 2002, our consumer products group reported $81.7 million in net sales and $19.8 million in operating earnings. Net sales of our consumer products group increased by $38.0 million or 87.2% in the third quarter of 2002 compared to the third quarter of 2001. This increase was principally the result of the addition of the vacuum packaging business. Sales of our domestic consumables segment were $8.1 million lower than the third quarter of 2001, principally due to severe drought weather conditions in the South, Southeast and West Central regions of the United States. Due in part to these severe drought weather conditions, sales of the domestic consumables segment in the fourth quarter of 2002 are expected to be below levels for the comparable prior year period. In the third quarter of 2002, our materials based group reported $29.0 million in net sales and $3.8 million in operating earnings. Net sales within the materials based group decreased by $18.0 million or 38.2% in the third quarter of 2002 compared to the third quarter of 2001, of which the divestiture of the TPD Assets and Microlin accounted for $14.9 million of such change in the other segment. The remaining decrease in the other segment is principally due to sales volume declines. Sales of the metals and injection molded plastics segments were slightly lower than the comparable prior year period. Gross margin percentages increased to 43.9% in the third quarter of 2002 from 24.5% in the third quarter of 2001, reflecting the higher gross margins of the acquired vacuum packaging business, the lower gross margins of the disposed TPD Assets and Microlin businesses, a $1.5 million charge for slow moving inventory in the domestic consumables segment in 2001 and cost efficiency improvements in all our segments. Selling, general and administrative expenses increased from $14.4 million in the third quarter of 2001 to $24.9 million in the third quarter of 2002. Expenses within our consumer products group principally increased as a result of the addition of the vacuum packaging business. Partially offsetting this effect, expenses within the domestic consumables segment decreased due to lower selling expenses related to the reduced sales for the quarter. Expenses within our materials based group decreased primarily due to the divestiture of TPD Assets and Microlin. Selling, general and administrative expenses as a percentage of net sales increased from 15.9% in the third quarter of 2001 to 22.5% for the third quarter of 2002. The increase in the percentage resulted primarily from the higher percentage of the acquired vacuum packaging business, partially offset by the higher percentage of the divested TPD Assets and Microlin businesses and lower selling, general and administrative costs as a percentage of sales in the domestic consumables segment in the third quarter of 2002 versus the comparable period in 2001. We incurred net special charges (credits) and reorganization expenses of $3.9 million in the third quarter of 2001, consisting of $1.3 million in costs to exit facilities and $2.6 million in separation costs for former executive officers. As a result of the adoption of SFAS No. 142, we did not record goodwill amortization for the three month period ended September 30, 2002. Goodwill amortization of approximately $1.6 million had been recorded in the three month period ended September 30, 2001. Net interest expense increased to $3.8 million for the third quarter of 2002 compared to $2.2 million in the same period last year primarily due to higher average borrowings outstanding, which was partially offset by a lower weighted average interest rate. Our effective tax rate was approximately 40.8% and 30.5% in the third quarter of 2002 and the third quarter of 2001, respectively. The effective tax rate in the third quarter of 2002 was set in order to bring our year to date effective tax rate to approximately 39.7%, which is our current estimate for the effective tax rate for the full year of 2002. The rate in the third quarter of 2001 was lower than the statutory federal rate as it included a valuation allowance for tax benefits associated with the loss on the sale of the thermoforming assets that at the time was considered to be potentially unrealizable. 16 RESULTS OF OPERATIONS - COMPARISON OF YEAR TO DATE 2002 TO YEAR TO DATE 2001 We reported net sales of $263.1 million for the first nine months of 2002, a 5.2% increase from net sales of $250.1 million in the first nine months of 2001. We reported operating earnings of $45.5 million for the first nine months of 2002. In the first nine months of 2001, we reported an operating loss of $103.7 million, which included a write down of $119.7 million for the thermoforming assets held for sale. In the first nine months of 2002, our consumer products group reported $177.0 million in net sales and $32.9 million in operating earnings. Net sales of our consumer products group increased by $71.3 million or 67.4% in the first nine months of 2002 compared to the first nine months of 2001. This increase was principally the result of the addition of the vacuum packaging business. Sales of our domestic consumables segment were $6.2 million lower than the third quarter of 2001, principally due to severe drought weather conditions in the South, Southeast and West Central regions of the United States during the third quarter. In the first nine months of 2002, our materials based group reported $86.8 million in net sales and $12.6 million in operating earnings. Net sales within the materials based group decreased by $58.2 million or 40.1% in the first nine months of 2002 compared to the first nine months of 2001, of which the divestiture of the TPD Assets and Microlin accounted for $51.9 million of such change in the other segment. The remaining decrease in the other segment is principally due to sales volume declines. In the metals segment, sales of zinc products decreased $5.3 million, due primarily to reduced sales to the U.S. Mint in connection with its inventory reduction program for all coinage. Sales of the injection molded plastics segment were slightly higher than the comparable prior year period. Gross margin percentages increased to 39.3% in the first nine months of 2002 from 24.7% in the first nine months of 2001, reflecting the higher gross margins of the acquired vacuum packaging business, the lower gross margins of the disposed TPD Assets and Microlin businesses, a $1.5 million charge for slow moving inventory in the domestic consumables segment in 2001 and cost efficiency increases in all of our divisions. Selling, general and administrative expenses increased from $40.6 million in the first nine months of 2001 to $57.8 million in the first nine months of 2002. Expenses within our consumer products group principally increased as a result of the acquisition of the vacuum packaging business. Partially offsetting this effect, expenses within the domestic consumables segment decreased due to lower selling expenses related to the reduced sales year to date in 2002 compared to the corresponding period in 2001. Expenses within our materials based group decreased primarily due to the divestiture of TPD Assets and Microlin and lower expenses in the remaining divisions. Selling, general and administrative expenses as a percentage of net sales increased from 16.2% in the first nine months of 2001 to 22.0% for the first nine months of 2002. The increase in the percentage resulted from the higher percentage of the acquired vacuum packaging business, partially offset by lower selling, general and administrative costs as a percentage of sales in the domestic consumables segment in the first nine months of 2002 versus the comparable period in 2001. We incurred net special charges (credits) and reorganization expenses of $0.2 million in the first nine months of 2001, consisting of $1.3 million in costs to exit facilities, $2.6 million in separation costs for former executive officers and $1.4 million of costs to evaluate strategic options, partially offset by $4.1 million in pre-tax income related to the discharge of certain deferred compensation obligations and $1 million of gain from insurance recovery. As a result of the adoption of SFAS No. 142, we did not record goodwill amortization for the nine month period ended September 30, 2002. Goodwill amortization of approximately $4.9 million had been recorded in the nine month period ended September 30, 2001. Net interest expense of $8.8 million for the first nine months of 2002 was higher than the $8.4 million recorded in the same period last year primarily due to the additional indebtedness assumed as part of the Tilia transaction. During the nine months ended September 30, 2002, we had a lower weighted average interest rate than the corresponding period, which was offset by higher average borrowings outstanding. At December 31, 2001, we had federal net operating losses that were recorded as a deferred tax asset with a valuation allowance of $5.4 million. Due to the impact of the Job Creation Act and the tax refunds that we received as a result, a net $4.9 million of this valuation allowance was released in the first nine months of 2002 resulting in an income tax provision of $9.7 million. Excluding the release of this valuation allowance, our effective tax rate was approximately 39.7% in the first nine months of 2002. Our net income for the first nine months of 2002 would have been $22.1 million or $1.55 diluted earnings per share if this valuation allowance release was excluded. Our effective tax rate was 30.0% for the first nine months of 2001. This effective tax rate was lower than the statutory federal rate as it included a valuation allowance for tax 17 benefits associated with the loss on the sale of the thermoforming assets, which at the time was considered to be potentially unrealizable. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Until April 24, 2002, our senior credit facility, as amended ("Old Credit Agreement"), provided for a revolving credit facility of $40 million and a term loan which amortized periodically as required by the terms of the agreement. Interest on borrowings under the Old Credit Agreement's term loan and the revolving credit facilities were based upon fixed increments over adjusted LIBOR or the agent bank's alternate borrowing rate as defined in the agreement. The agreement also required the payment of commitment fees on the unused balance. During first quarter 2002, $15 million of the tax refunds we received were used to repay a portion of the term loan. In May 1999, we entered into a three-year interest rate swap with an initial notional value of $90 million. The swap effectively fixed the interest rate on approximately 60% of our term debt at a maximum rate of 7.98% for the three-year period. The swap matured and was terminated in March 2002. The Old Credit Agreement was replaced as a result of the Acquisition, which was financed by (i) the offering of $150 million of Notes, (ii) the New Credit Agreement and (iii) cash on hand. The Notes were issued at a discount such that we received approximately $147.7 million in net proceeds. The Notes will mature on May 1, 2012, however, on or after May 1, 2007, we may redeem all or part of the Notes at any time at a redemption price ranging from 100% to 104.875% of the principal amount, plus accrued and unpaid interest and liquidated damages, if any. Prior to May 1, 2005, we may redeem up to 35% of the aggregate principal amount of the Notes with the net cash proceeds from certain public equity offerings at a redemption price of 109.75% of the principal amount, plus accrued and unpaid interest and liquidated damages, if any. Interest on the Notes accrues at the rate of 9.75% per annum and is payable semi-annually in arrears on May 1 and November 1, commencing on November 1, 2002. On October 28, 2002, the Company commenced an offering to the holders of the Notes to exchange the Notes for 9 3/4% senior subordinated notes (the "New Notes"), which are registered under the Securities Act of 1933, as amended, and are substantially similar to the Notes except that the mandatory redemption provisions and the transfer restrictions applicable to the Notes are not applicable to the New Notes. The Company expects to complete the exchange offer in December 2002. In conjunction with the Notes, on April 24, 2002, we entered into a $75 million interest rate swap ("Initial Swap") to receive a fixed rate of interest and pay a variable rate of interest based upon LIBOR. The initial effective rate of interest on this swap was 6.05%. This contract was considered to be an effective hedge against changes in the fair value of our fixed-rate debt obligation for both tax and accounting purposes. Effective September 12, 2002, we entered into an agreement, whereby we unwound the Initial Swap and contemporaneously entered into a new $75 million interest rate swap ("Replacement Swap"). The Replacement Swap has the same terms as the Initial Swap, except that we will pay a variable rate of interest based upon 6 month LIBOR in arrears. The spread on this contract is 470 basis points and, based on the 6 month LIBOR rate at the commencement of the contract, we are recording interest at an effective rate of 6.52%. In return for unwinding the Initial Swap, we received $5.4 million in cash proceeds, of which $1 million related to accrued interest that was owed to us. The remaining $4.4 million of proceeds will be amortized over the remaining life of the Notes as a credit to interest expense and is included in our consolidated balance sheet as an increase to the value of the long-term debt. Such amortization amount offsets the increased effective rate of interest that we pay on the Replacement Swap. The Replacement Swap is also considered to be an effective hedge against changes in the fair value of our fixed-rate debt obligation for both tax and accounting purposes. The fair market value of the interest rate swap as of September 30, 2002 was approximately $1.6 million and is included as an asset within other assets in the consolidated balance sheet, with a corresponding offset to long-term debt. We are exposed to credit loss in the event of non-performance by the counter party, a large financial institution, however, we do not anticipate non-performance by the counter party. The revolving credit facility and the term loan facility bear interest at a rate equal to (i) the Eurodollar Rate pursuant to an agreed formula or (ii) a Base Rate equal to the higher of (a) the Bank of America prime rate and (b) the federal funds rate plus .50%, plus, in each case, an applicable margin ranging from 2.00% to 2.75% for Eurodollar Rate loans and from .75% to 1.5% for Base Rate loans. The New Credit Agreement contains certain restrictions on the conduct of our business, including, among other things restrictions, generally, on: 18 o incurring debt; o making investments; o exceeding certain agreed upon capital expenditures; o creating or suffering liens; o completing certain mergers; o consolidations and sales of assets and with permitted exceptions, acquisitions; o declaring dividends; o redeeming or prepaying other debt; and o certain transactions with affiliates. The New Credit Agreement also requires our Company to maintain certain financial covenants. As of September 30, 2002, we had drawn down $50 million under the term loan facility, of which approximately $1.3 million had subsequently been repaid based upon the repayment terms of the New Credit Agreement. As of September 30, 2002, we had not drawn down the $50 million available under the revolving credit facility of the New Credit Agreement, although we have used an amount of approximately $4.2 million of availability for the issuance of letters of credit. As of September 30, 2002, we had incurred costs in connection with the issuance of the Notes and the New Credit Agreement of approximately $7.4 million. Working capital (defined as current assets less current liabilities) increased to $100.0 million at September 30, 2002 from $18.4 million at September 30, 2001 due primarily to: the tax refunds of $38.5 million that we received, the working capital of the acquired vacuum packaging business, a lower amount of current portion of debt, and increased cash on hand amounts caused by our favorable operating results, partially offset by $21.7 million in net assets held for sale relating to the TPD Assets. Accounts receivable, accounts payable and inventories increased in the nine-month period ended September 30, 2002, due primarily to the acquisition of the vacuum packaging business and the customary build-up in anticipation of seasonal home food preservation activity. Capital expenditures were $5.0 million in the first nine months of 2002 compared to $8.3 million for the same period in 2001 and are largely related to maintaining facilities, tooling projects, improving manufacturing efficiencies and the installation of new packaging lines for the domestic consumables segment. As of September 30, 2002, we have capital expenditure commitments of approximately $6.0 million, of which $4.5 million relates to the installation of the new packaging line. As of September 30, 2002, we had forward buy contracts to purchase zinc ingots in the aggregate amount of approximately $1.5 million. The Company is in the process of making a proposal to purchase the business assets of Diamond Brands, Inc., a manufacturer and distributor of kitchen matches, toothpicks and specialty plastic cutlery under the Diamond Brands(R) and Forster(R) brands. There can be no assurances that the Company's proposal will be accepted or that the transaction will be consummated. However, if the proposal is accepted and the transaction is consummated, the Company anticipates using cash on hand and revolving credit facility availability to finance the transaction. We believe that our existing funds, cash generated from our operations and our debt facility, are adequate to satisfy our working capital and capital expenditure requirements for the foreseeable future. However, we may raise additional capital from time to time to take advantage of favorable conditions in the capital markets or in connection with our corporate development activities. CONTINGENCIES We are involved in various legal disputes in the ordinary course of business. In addition, the Environmental Protection Agency has designated our Company as a potentially responsible party, along with numerous other companies, for the clean up of several hazardous waste sites. Based on currently available information, we do not believe that the disposition of any of the legal or environmental disputes our Company is currently involved in will require material capital or operating expenditures or will otherwise have a material adverse effect upon the financial condition, results of operations, cash flows or competitive position of our Company. It is possible, that as additional information becomes available, the impact on our Company of an adverse determination could have a different effect. 19 FORWARD-LOOKING INFORMATION From time to time, we may make or publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, and similar matters. Such statements are necessarily estimates reflecting management's best judgment based on current information. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Such statements are usually identified by the use of words or phases such as "believes," "anticipates," "expects," "estimates," "planned," "outlook," and "goal." Because forward-looking statements involve risks and uncertainties, our actual results could differ materially. In order to comply with the terms of the safe harbor, we note that a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in forward-looking statements. While it is impossible to identify all such factors, the risks and uncertainties that may affect the operations, performance and results of our business include the following: o Our significant indebtedness could adversely affect our financial health, and prevent us from fulfilling our obligations under the Notes and the New Credit Agreement; o We will require a significant amount of cash to service our indebtedness. Our ability to generate cash depends on many factors beyond our control; o Reductions, cancellations or delays in customer purchases would adversely affect our profitability; o We may be adversely affected by the financial health of the U.S. retail industry; o We may be adversely affected by the trend towards retail trade consolidation; o Sales of some of our products are seasonal and weather related; o Competition in our industries may hinder our ability to execute our business strategy, achieve profitability, or maintain relationships with existing customers; o If we fail to develop new or expand existing customer relationships, our ability to grow our business will be impaired; o Our operations are subject to a number of Federal, state and local environmental regulations; o We may be adversely affected by remediation obligations mandated by applicable environmental laws; o We depend on key personnel; o We enter into contracts with the United States government and other governments; o Our operating results can be adversely affected by changes in the cost or availability of raw materials; o Our business could be adversely affected because of risks which are particular to international operations; o We depend on our patents and proprietary rights; o We may be adversely affected by problems that may arise between certain of our vendors, customers, and transportation services that we rely on and their respective labor unions that represent certain of their employees; o Certain of our employees are represented by labor unions; and o Any other factors which may be identified from time to time in our periodic SEC filings and other public announcements. 20 Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in the forward-looking statement, we do not intend to update forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK In general, business enterprises can be exposed to market risks including fluctuations in commodity prices, foreign currency values, and interest rates that can affect the cost of operating, investing, and financing. The Company's exposures to these risks are low. The majority of the Company's zinc business is conducted on a tolling basis whereby customers supply zinc to the Company for processing, or supply contracts provide for fluctuations in the price of zinc to be passed on to the customer. The Company, from time to time, invests in short-term financial instruments with original maturities usually less than fifty days. The Company is exposed to short-term interest rate variations with respect to Eurodollar or Base Rate on its term and revolving debt obligations and 6 month LIBOR in arrears on its interest rate swap. The spread on the interest rate swap is 470 basis points. Settlements on the interest rate swap are made on May 1 and November 1, with the first one being due on November 1, 2002. The Company is exposed to credit loss in the event of non-performance by the counter party, a large financial institution, however, the Company does not anticipate non-performance by the counter party. Changes in Eurodollar or LIBOR interest rates would affect the earnings of the Company either positively or negatively depending on the changes in short-term interest rates. Assuming that Eurodollar and LIBOR rates each increased 100 basis points over period end rates on the outstanding term debt and interest rate swap, the Company's interest expense would have increased by approximately $0.4 million for both the nine month periods ended September 30, 2002 and September 30, 2001, respectively. The amount was determined by considering the impact of the hypothetical interest rates on the Company's borrowing cost, short-term investment rates, interest rate swap and estimated cash flow. Actual changes in rates may differ from the assumptions used in computing this exposure. The Company does not invest or trade in any derivative financial or commodity instruments, nor does it invest in any foreign financial instruments. ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES Within 90 days prior to the filing of this report, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation. 21 PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION On October 24, 2002, Rene-Pierre Azria was appointed as a member of the Company's board of directors to fill the vacancy resulting from the resignation of David L. Swift from the Company's board of directors on the same date. The Company is in the process of making a proposal to purchase the business assets of Diamond Brands, Inc., a manufacturer and distributor of kitchen matches, toothpicks and specialty plastic cutlery under the Diamond Brands(R) and Forster(R) brands. There can be no assurances that the Company's proposal will be accepted or that the transaction will be consummated. However, if the proposal is accepted and the transaction is consummated, the Company anticipates using cash on hand and revolving credit facility availability to finance the transaction. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. EXHIBITS Exhibit Description ------- ----------- 99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * * Filed herewith. b. REPORTS ON FORM 8-K No reports on Form 8-K have been filed during the quarter for which this report is filed. 22 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. JARDEN CORPORATION Date: November 6, 2002 By: /s/ Ian G.H. Ashken ---------------- -------------------- Ian G.H. Ashken Vice Chairman, Chief Financial Officer and Secretary 23 CERTIFICATION I, Martin E. Franklin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Jarden Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 6, 2002 /s/ Martin E. Franklin ---------------------- Martin E. Franklin Chief Executive Officer 24 CERTIFICATION I, Ian Ashken, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Jarden Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 6, 2002 /s/ Ian G.H. Ashken ------------------- Ian G.H. Ashken Chief Financial Officer 25