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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.
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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