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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2004
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 July 23, 2004
----- ----------------------------
Common Stock,
par value $.01 per share 27,219,344 shares
JARDEN CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2004
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Income for the three and six month
periods ended June 30, 2004 and June 30, 2003...................... 3
Condensed Consolidated Statements of Comprehensive Income for the
three and six month periods ended June 30, 2004 and June 30, 2003.. 4
Condensed Consolidated Balance Sheets at June 30, 2004 and December 31,
2003............................................................... 5
Condensed Consolidated Statements of Cash Flows for the six month
periods ended June 30, 2004 and June 30, 2003...................... 6
Notes to Condensed Consolidated Financial Statements.................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations...................................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............. 20
Item 4. Controls and Procedures................................................. 20
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders..................... 21
Item 6. Exhibits and Reports on Form 8-K........................................ 22
Signature
Certifications
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
JARDEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
------------------------------- ---------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003
--------------- --------------- ------------ --------------
Net sales....................................... $ 199,035 $ 130,769 $ 357,359 $ 228,215
Costs and expenses:
Cost of sales............................... 131,236 81,238 238,255 140,264
Selling, general and administrative expenses... 35,757 28,897 69,287 56,407
----------- ----------- ---------- -----------
Operating earnings.............................. 32,042 20,634 49,817 31,544
Interest expense, net........................... 6,075 4,267 11,695 8,219
----------- ----------- ---------- -----------
Income before taxes............................. 25,967 16,367 38,122 23,325
Provision for income taxes...................... 9,920 6,416 14,562 9,144
----------- ----------- ---------- -----------
Net income...................................... $ 16,047 $ 9,951 $ 23,560 $ 14,181
=========== =========== ========== ===========
Basic earnings per share........................ $ 0.59 $ 0.47 $ 0.87 $ 0.66
Diluted earnings per share...................... $ 0.57 $ 0.45 $ 0.83 $ 0.64
Weighted average shares outstanding:
Basic....................................... 27,171 21,339 27,108 21,363
Diluted..................................... 28,292 22,068 28,242 22,091
See accompanying notes to condensed consolidated financial statements.
3
JARDEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
---------------------------- -----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003
------------- ------------ ------------ --------------
Net income........................... $ 16,047 $ 9,951 $ 23,560 $ 14,181
Foreign currency translation......... (621) 1,950 (825) 3,328
Unrealized gain/(loss) on interest
rate swap....................... 73 (138) 65 (138)
----------- ---------- ----------- ------------
Comprehensive income................. $ 15,499 $ 11,763 $ 22,800 $ 17,371
=========== ========== =========== ============
See accompanying notes to condensed consolidated financial statements.
4
JARDEN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2004 2003
----------- -------------
(Unaudited) (Note 1)
Current assets:
Cash and cash equivalents................................... $ 4,493 $ 125,400
Accounts receivable, net.................................... 129,298 92,777
Inventories, net............................................ 157,825 105,573
Other current assets........................................ 24,871 23,369
----------- -----------
Total current assets.................................... 316,487 347,119
----------- -----------
Non-current assets:
Property, plant and equipment, at cost...................... 217,701 188,823
Accumulated depreciation.................................... (117,420) (109,704)
----------- -----------
100,281 79,119
Goodwill.................................................... 434,507 236,413
Other intangible assets, net................................ 133,865 79,413
Other assets................................................ 20,774 17,610
----------- -----------
Total assets.................................................... $1,005,914 $ 759,674
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt....... $ 22,446 $ 17,512
Accounts payable............................................ 50,614 34,211
Deferred consideration for acquisitions..................... 42,864 -
Other current liabilities................................... 59,558 53,357
----------- -----------
Total current liabilities............................... 175,482 105,080
----------- -----------
Non-current liabilities:
Long-term debt.............................................. 476,846 369,870
Other non-current liabilities............................... 78,206 34,819
----------- -----------
Total non-current liabilities........................... 555,052 404,689
----------- -----------
Commitments and contingencies................................... - -
Stockholders' equity:
Common stock ($.01 par value, 28,720 and 28,720 shares issued
and 27,220 and 27,007 shares outstanding at June 30,
2004 and December 31, 2003, respectively)............... 287 287
Additional paid-in capital.................................. 166,880 165,056
Retained earnings........................................... 124,370 100,811
Other stockholders' equity.................................. (16,157) (16,249)
----------- -----------
Total stockholders' equity.................................. 275,380 249,905
----------- -----------
Total liabilities and stockholders' equity...................... $1,005,914 $ 759,674
=========== ===========
See accompanying notes to condensed consolidated financial statements.
5
JARDEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTH PERIOD ENDED
--------------------------
JUNE 30, JUNE 30,
2004 2003
------------ ------------
Net cash provided by operations................................... $ 93 $ 15,193
Financing activities:
Proceeds from revolving credit borrowings..................... 8,900 78,000
Payments on revolving credit borrowings....................... (2,000) (71,700)
Proceeds from issuance of long-term debt...................... 116,000 10,000
Payments on long-term debt.................................... (5,289) (3,027)
Proceeds from bond issuance................................... - 31,950
Payments on seller notes...................................... (5,400) (10,000)
Debt issue and amendment costs................................ (2,010) (1,423)
Other......................................................... 1,715 3,520
---------- ----------
Net cash provided by financing activities................. 111,916 37,320
---------- ----------
Investing activities:
Additions to property, plant and equipment.................... (3,517) (4,569)
Acquisition of businesses, net of cash acquired............... (228,876) (100,019)
Other......................................................... (523) -
---------- ----------
Net cash used in investing activities..................... (232,916) (104,588)
---------- ----------
Decrease in cash and cash equivalents............................. (120,907) (52,075)
Cash and cash equivalents at beginning of period.................. 125,400 56,779
---------- ----------
Cash and cash equivalents at end of period........................ $ 4,493 $ 4,704
========== ==========
See accompanying notes to condensed consolidated financial statements.
6
JARDEN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Jarden Corporation (the "Company") have been prepared in accordance with
generally accepted accounting principles in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles in the
United States for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation
(consisting of normal recurring adjustments) have been included. Results of
operations for the periods shown are not necessarily indicative of results
for the year, particularly in view of the varying seasonality of certain of
our product line sales and the acquisitions the Company has completed
during 2004 (see Note 4).
The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles in the United States for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2003.
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. STOCK OPTIONS
As allowed for by Statement of Financial Accounting Standard No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure, the
Company accounts for the issuance of stock options using the intrinsic
value method in accordance with Accounting Principles Board ("APB") No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Generally for the Company's stock option plans, no compensation cost is
recognized in the Consolidated Statements of Income because the exercise
price of the Company's stock options equals the market price of the
underlying stock on the date of grant.
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant dates for awards under those plans,
the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated (in thousands of dollars, except per share
data):
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
----------------- --------------- ------------------------------
JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2004 JUNE 30, 2003
----------------- --------------- ------------------------------
Net income, as reported............................ $ 16,047 $ 9,951 $ 23,560 $ 14,181
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects....... (620) (470) (1,263) (894)
---------- --------- ---------- ----------
Pro forma net income.............................. $ 15,427 $ 9,481 $ 22,297 $ 13,287
========== ========= ========== ==========
Basic earnings per share:
As reported...................................... $ 0.59 $ 0.47 $ 0.87 $ 0.66
Pro forma........................................ $ 0.57 $ 0.44 $ 0.82 $ 0.62
Diluted earnings per share:
As reported...................................... $ 0.57 $ 0.45 $ 0.83 $ 0.64
Pro forma ....................................... $ 0.55 $ 0.43 $ 0.79 $ 0.60
7
The Company granted 111,500 stock options, including a grant of 25,000
stock options to an executive officer of the Company, in the six month
period ended June 30, 2004. The stock options that were granted have a four
year vesting period with the exception of 37,500 stock options granted to
directors of the Company in the first six months of 2004, which have a one
year vesting period. The fair value of each option granted is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 2004: no dividend
yield, expected volatility of 32 percent, risk-free interest rate of 3.1
percent and expected life of 7.0 years.
3. INVENTORIES
Inventories at June 30, 2004 and December 31, 2003 were comprised of the
following (in thousands):
JUNE 30, DECEMBER 31,
2004 2003
-------------- --------------
Raw materials and supplies.............................. $ 18,050 $ 15,254
Work in process......................................... 13,520 6,653
Finished goods.......................................... 126,255 83,666
---------- ----------
Total inventories................................... $ 157,825 $ 105,573
========== ==========
4. ACQUISITIONS
On June 28, 2004, the Company acquired approximately 75.4% of the issued
and outstanding stock of United States Playing Card Company and its
subsidiaries ("USPC" and "USPC Acquisition"), with the remaining 24.6%
subject to a put/call agreement starting in the fourth quarter of 2004.
USPC is the world's largest manufacturer and distributor of playing cards
and a leader in marketing children's card games, collectible tins, puzzles
and card accessories for the North American retail market and is also the
largest supplier of premium playing cards to casinos worldwide. USPC's
portfolio of owned brands includes Aviator(R), Bee(R), Bicycle(R) and
Hoyle(R). In addition, USPC has an extensive list of licensed brands,
including Disney(R), Harley-Davidson(R), NASCAR(R) and World Poker
Tour(TM). USPC's international holdings include Naipes Heraclio
Fournier, S.A., a leading playing card manufacturer in Europe. The purchase
price (including an estimate of the call price expected to be paid for the
remaining 24.6% of the shares) was approximately $237.8 million, including
transaction expenses and an estimate of the deferred consideration to be
paid when the put/call agreement is exercised of approximately $34.1
million. Such consideration and the current portion of a $15.1 million
holdback of consideration deferred for purposes of guaranteeing potential
indemnification liabilities of the sellers is accrued as of June 30, 2004
and included in "Deferred Consideration for Acquisitions" on the Condensed
Consolidated Balance Sheet included herein. The holdback amount is secured
by a stand-by letter of credit under our senior credit facility. The cash
portion of the purchase price funded on June 28, 2004 was financed using a
combination of cash on hand, new debt financing (see Note 6) and borrowings
under the Company's existing revolving credit facility. The goodwill and
other intangibles amounts recorded in connection with the USPC Acquisition
are discussed in detail in Note 5. Based on management's intention to
exercise the put/call agreement resulting in 100% ownership of USPC within
the current year, the Company has not accounted for the 24.6% minority
interest in USPC. Therefore, the Company's Condensed Consolidated Financial
Statements reflect 100% of the assets and liabilities of USPC as of June
30, 2004 and 100% of the results of USPC for the period from June 28, 2004
through June 30, 2004. In connection with the USPC Acquisition, the Company
has preliminarily allocated approximately $159.1 million to goodwill and
approximately $51.1 million to other intangibles. In addition, the USPC
Acquisition includes an earn-out provision with a potential payment in cash
or Company common stock, at the Company's sole discretion, up to $10
million payable in 2007, provided that certain earnings performance targets
are met. If paid, the Company expects to capitalize the cost of the
earn-out. The USPC business is included in the branded consumables segment
(see Note 10).
On September 2, 2003, the Company acquired all of the issued and
outstanding stock of Lehigh Consumer Products Corporation and its
subsidiary ("Lehigh" and the "Lehigh Acquisition"). Lehigh is the largest
supplier of rope, cord and twine for the U.S. consumer marketplace and a
leader in innovative storage and organization products and workshop
accessories for the home and garage as well as in the security screen door
and ornamental metal fencing market. The purchase price of the transaction
was approximately $157.6 million, including transaction expenses. In
connection with the Lehigh Acquisition, the Company has preliminarily
allocated approximately $108.5 million to goodwill and approximately $3.4
million to trademarks (see Note 5). Lehigh is included in the branded
consumables segment from September 2, 2003 (see Note 10).
8
On February 7, 2003, the Company completed its acquisition of the business
of Diamond Brands International, Inc. and its subsidiaries ("Diamond
Brands" and the "Diamond Acquisition"), a manufacturer and distributor of
niche household products, including clothespins, kitchen matches, plastic
cutlery and toothpicks under the Diamond(R) and Forster(R) trademarks. The
purchase price of this transaction was approximately $91.5 million,
including transaction expenses. The acquired plastic manufacturing
operation is included in the plastic consumables segment from February 1,
2003 and the acquired wood manufacturing operation and branded product
distribution business is included in the branded consumables segment from
February 1, 2003 (see Note 10).
The USPC Acquisition, the Lehigh Acquisition and the Diamond Acquisition
were all entered into as part of the Company's strategy of acquiring
branded consumer products businesses with leading market positions in niche
markets for products used in and around the home.
The following unaudited pro forma financial information gives pro forma
effect to the USPC Acquisition, the Lehigh Acquisition and the Diamond
Acquisition with the related financings as if they had been consummated as
of the beginning of the period presented and as if the Company had acquired
100% of USPC. The pro forma net income for the six month period ended June
30, 2003 includes $1.5 million of reorganization expenses incurred by
Diamond Brands prior to February 7, 2003 (in thousands, except per share
data):
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
------------------------------------ -----------------------------------------
JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2004 JUNE 30, 2003
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
--------------- --------------- ----------------- ------------------
Net sales....................... $ 231,251 $ 201,935 $ 420,538 $ 364,633
Net income...................... 19,340 16,803 29,941 25,118
Diluted earnings per share...... 0.68 0.62 1.06 0.93
During the first quarter of 2004, the Company also completed a tuck-in
acquisition of Loew-Cornell, Inc. ("Loew-Cornell"), a leading marketer and
distributor of paintbrushes and other arts and crafts products. The
acquired business is included in the branded consumables segment from March
18, 2004. Additionally, the Company completed two other tuck-in
acquisitions in 2003, one in the branded consumables segment and the other
in the consumer solutions segment.
The results of Loew-Cornell and the other two tuck-in acquisitions in 2003
did not have a material effect on the Company's results of operations for
either the three or the six month periods ended June 30, 2004 and June 30,
2003 and are not included in the pro forma financial information presented
herein.
5. INTANGIBLES
As of June 30, 2004 and December 31, 2003, the Company had recorded the
following amounts for intangible assets (millions of dollars):
BRANDED CONSUMER
CONSUMABLES SOLUTIONS TOTAL
------------- ----------- -----------
June 30, 2004
- -------------
Intangible assets not subject to amortization:
Goodwill.................................................. $ 361.7 $ 72.8 $ 434.5
Trademarks................................................ 72.1 56.1 128.2
------- -------- -------
Intangible assets not subject to amortization........... 433.8 128.9 562.7
------- -------- -------
Intangible assets subject to amortization:
Manufacturing processes and expertise..................... - 6.5 6.5
Non-compete agreements.................................... 1.1 - 1.1
Accumulated amortization.................................. - (1.9) (1.9)
------- -------- -------
Net amount of intangible assets subject to amortization. 1.1 4.6 5.7
------- -------- -------
Total goodwill and other intangible assets.............. $ 434.9 $ 133.5 $ 568.4
======= ======== =======
9
BRANDED CONSUMER
CONSUMABLES SOLUTIONS TOTAL
------------- ------------ -----------
December 31, 2003
- -----------------
Intangible assets not subject to amortization:
Goodwill...................................................... $ 167.3 $ 69.1 $ 236.4
Trademarks.................................................... 18.9 55.9 74.8
-------- ------- -------
Intangible assets not subject to amortization.............. 186.2 125.0 311.2
-------- ------- -------
Intangible assets subject to amortization:
Manufacturing processes and expertise......................... - 6.0 6.0
Accumulated amortization...................................... - (1.4) (1.4)
-------- ------- -------
Net amount of intangible assets subject to amortization.... - 4.6 4.6
-------- ------- --------
Total goodwill and other intangible assets.................. $ 186.2 $ 129.6 $ 315.8
======== ======== ========
Certain working capital balances recorded in connection with the USPC
Acquisition and the Lehigh Acquisition are preliminary and when finalized
within one year of the respective dates of acquisition may result in
changes to the intangible balances shown above. The Company intends to
obtain a third party valuation for the fixed assets acquired in connection
with the USPC Acquisition.
In the branded consumables segment, the only intangible assets which have a
definitive life and are currently subject to amortization are two
non-compete agreements in the aggregate amount of approximately $1.1
million, which were assumed by the Company in connection with the USPC
Acquisition and which will be fully amortized by February 2005 and March
2006, respectively.
In the consumer solutions segment, the only intangible assets which have a
definitive life and are currently subject to amortization are the
manufacturing processes and expertise, which are being amortized over a
period of 7-8 years. Amortization for the manufacturing processes and
expertise in the aggregate amount of $0.5 million was recorded in the first
six months of 2004 and is included in Selling, General and Administrative
expenses in the Condensed Consolidated Statements of Income.
A portion of the consumer solutions segment's goodwill is recorded on a
Canadian subsidiary's books. Due to the effect of foreign currency
translations the amount of goodwill recorded decreased by approximately
$0.6 million in the first six months of 2004.
Approximately $216 million of the goodwill and other intangible assets
recorded by the Company is not deductible for income tax purposes.
6. DEBT AND DERIVATIVE FINANCIAL INSTRUMENTS
On June 28, 2004, in connection with its USPC Acquisition, the Company
completed an add-on to its Term B loan facility ("Term B Add-on") under its
amended and restated senior credit facility ("Amended Credit Agreement").
The gross proceeds from the Term B Add-on offering were $116 million and
were used to partially fund the USPC acquisition. The spread on the Term B
Add-on debt is 2.25% over London Interbank Offered Rate ("LIBOR").
Additionally, under this offering the spread on the Company's existing Term
B loan facility was reduced from 2.75% over LIBOR to 2.25% over LIBOR. The
Company's Amended Credit Agreement matures on April 24, 2008.
In connection with its USPC Acquisition, the Company assumed approximately
$2.3 million of debt relating to a Spanish subsidiary. This debt relates to
bank notes that are payable in equal quarterly, semi-annual or annual
installments through 2007 with varying rates of interest ranging from 3.25%
to 4.5%.
In April 2004, the Company repaid seller debt financing incurred in
connection with a 2002 acquisition, which included both principal and
accrued interest thereon, in the amount of approximately $5.4 million.
As of June 30, 2004, the Company had $310.3 million outstanding under its
term loan facilities and $6.9 million outstanding under its revolving
credit facility. As of June 30, 2004, net availability under the revolving
credit agreement was approximately $42.2 million, after deducting $20.9
million of issued letters of credit. As discussed in Note 4 above, the
letters of credit outstanding include an amount of approximately $15.2
million securing the USPC holdback amount. The Company is required to pay
commitment fees on the unused balance of the revolving credit facility.
10
As of June 30, 2004, the fair market value of the Company's interest rate
swaps, which are accounted for as fair value hedges, was negative in an
amount of approximately $5.5 million and is included as a liability in the
Condensed Consolidated Balance Sheet, with a corresponding offset to
long-term debt.
7. 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 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.
8. EQUITY
During the first six months of 2004, the Company issued 24,750 restricted
shares of common stock to certain employees under the Company's 2003 Stock
Incentive Plan. The restrictions on these shares will lapse ratably over
five years of employment with the Company.
In August 2004, the Company's board of directors approved the granting of
an aggregate of 140,000 restricted shares of the Company's common stock to
three executive officers of the Company. The restrictions on these shares
lapse ratably over a three year period commencing January 1, 2005 and would
lapse immediately in the event of a change in control. Non-cash
compensation expense will be recognized ratably over the lapsing period
based upon the fair market value of the Company's common stock on the date
of grant. The Company issued these shares out of its treasury account.
9. 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. A
computation of earnings per share is as follows (in thousands, except per
share data):
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
---------------------------------- ------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003
----------------- ---------------- --------------- -------------
Net income......................................... $ 16,047 $ 9,951 $ 23,560 $ 14,181
-------- -------- -------- --------
Weighted average shares outstanding................ 27,171 21,339 27,108 21,363
Additional shares assuming conversion of
stock options and restricted stock............. 1,121 729 1,134 728
-------- -------- -------- --------
Weighted average shares outstanding
assuming conversion............................ 28,292 22,068 28,242 22,091
-------- --------- -------- --------
Basic earnings per share........................... $ 0.59 $ 0.47 $ 0.87 $ 0.66
Diluted earnings per share......................... $ 0.57 $ 0.45 $ 0.83 $ 0.64
11
10. SEGMENT INFORMATION
The Company reports four business segments: branded consumables, consumer
solutions, plastic consumables and other.
In the branded consumables segment, the Company markets, distributes and in
certain cases manufactures a broad line of branded products that includes
arts and crafts paintbrushes, children's card games, clothespins,
collectible tins, food preparation kits, home canning jars, jar closures,
kitchen matches, other craft items, plastic cutlery, playing cards and card
accessories, puzzles, rope, cord and twine, storage and workshop
accessories, toothpicks and other accessories marketed under the
Aviator(R), Ball(R), Bee(R), Bernardin(R), Bicycle(R), Crawford(R),
Diamond(R), Forster(R), Hoyle(R), Kerr(R), Lehigh(R), Leslie-Locke(R) and
Loew-Cornell(R) brand names. As discussed in Note 4, the Diamond Brands
wood manufacturing operation and branded product distribution business, the
Lehigh home improvement business, the Loew-Cornell arts and crafts business
and the USPC playing cards business have been included in the branded
consumables segment effective February 1, 2003, September 2, 2003, March
18, 2004 and June 28, 2004, respectively.
In the consumer solutions segment, the Company sources, markets and
distributes an array of innovative kitchen products under the market
leading FoodSaver(R) brand name, as well as the VillaWare(R) brand name.
The plastic consumables segment manufactures, markets and distributes a
wide variety of consumer and medical plastic products, including products
sold to retailers by the Company's branded consumables segment (plastic
cutlery) and consumer solutions segment (containers). As discussed in Note
4, the Diamond Brands plastic manufacturing operation is included in the
plastic consumables segment effective February 1, 2003. The other segment
is primarily a producer of zinc strip.
Net sales, operating earnings, depreciation and amortization, and assets
employed in operations by segment are summarized as follows (in thousands
of dollars):
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
------------------------------------- ----------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003
----------------- ------------------ --------------- ---------------
Net sales:
Branded consumables (1)........................ $ 122,719 $ 70,211 $ 197,617 $ 100,381
Consumer solutions............................. 36,180 34,624 81,354 75,549
Plastic consumables (2)........................ 34,532 26,736 68,182 50,231
Other.......................................... 19,911 9,253 38,716 17,872
Intercompany (3).............................. (14,307) (10,055) (28,510) (15,818)
--------- --------- --------- ---------
Total net sales............................ $ 199,035 $ 130,769 $ 357,359 $ 228,215
========= ========= ========= =========
Operating earnings:
Branded consumables (1)........................ $ 22,495 $ 11,868 $ 28,787 $ 13,127
Consumer solutions ............................ 3,507 4,520 9,904 11,464
Plastic consumables (2)........................ 3,095 2,646 5,901 5,084
Other.......................................... 2,626 1,952 5,490 2,916
Intercompany (3).............................. 319 (352) (265) (1,047)
--------- --------- --------- ---------
Total operating earnings................... 32,042 20,634 49,817 31,544
Interest expense, net.......................... 6,075 4,267 11,695 8,219
--------- --------- --------- ---------
Income before taxes............................ $ 25,967 $ 16,367 $ 38,122 $ 23,325
========= ========= ========= =========
Depreciation and amortization:
Branded consumables (1)........................ $ 1,156 $ 1,051 $ 2,434 $ 1,868
Consumer solutions ............................ 828 530 1,676 1,043
Plastic consumables (2)........................ 1,837 1,700 3,702 3,196
Other.......................................... 468 543 957 1,076
Corporate (4).................................. 35 20 67 47
--------- --------- --------- ---------
Total depreciation and amortization ....... $ 4,324 $ 3,844 $ 8,836 $ 7,230
========= ========= ========= =========
12
AS OF
-------------------------------------
JUNE 30, DECEMBER 31,
2004 2003
----------------- ----------------
Assets employed in operations:
Branded consumables (1)........................ $ 680,586 $ 310,451
Consumer solutions ............................ 211,589 216,289
Plastic consumables (2)........................ 59,002 62,623
Other.......................................... 14,385 13,867
---------- ----------
Total assets employed in operations........ 965,562 603,230
Corporate (4).................................. 40,352 156,444
---------- ----------
Total assets............................... $1,005,914 $ 759,674
========== ==========
(1) The USPC business, Loew-Cornell business, Lehigh business and the
Diamond Brands wood manufacturing operation and branded product
distribution business are included in the branded consumables segment
effective June 28, 2004, March 18, 2004, September 2, 2003 and February 1,
2003, respectively.
(2) The Diamond Brands plastic manufacturing operation is included in the
plastic consumables segment effective February 1, 2003.
(3) Intersegment sales are recorded at cost plus an agreed upon
intercompany profit on intersegment sales.
(4) Corporate assets primarily include cash and cash equivalents, amounts
relating to benefit plans, deferred tax assets and corporate facilities and
equipment.
Within the branded consumables segment are four product lines: kitchen
products, home improvement products, playing card products and other
specialty products. Kitchen products include food preparation kits, home
canning and accessories, kitchen matches, plastic cutlery, straws and
toothpicks. Home improvement products include rope, cord and twine, storage
and organizational products for the home and garage and security door and
fencing products. Playing card products include children's card games,
collectible tins, playing cards and card accessories and puzzles. Other
specialty products include arts and crafts paintbrushes, book and
advertising matches, institutional plastic cutlery and sticks, laundry care
products, lighters and fire starters, other craft items and other
commercial products. Net sales of these products for the three and six
month periods ended June 30, 2004 and 2003, respectively, were as follows
(in millions):
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
--------------------------------- ------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003
----------------- --------------- --------------- --------------
Kitchen products.................................. $ 70.4 $ 63.8 $ 107.7 $ 89.5
Home improvement products......................... 38.3 - 68.8 -
Playing cards products............................ 1.6 - 1.6 -
Other specialty products.......................... 12.4 6.4 19.5 10.9
-------- -------- -------- -------
Total branded consumables net sales............... $ 122.7 $ 70.2 $ 197.6 $ 100.4
======== ======== ======== =======
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following "Overview" section is a brief summary of the significant issues
addressed in Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A"). Investors should read the relevant sections of
this MD&A for a complete discussion of the issues summarized below.
OVERVIEW
We are a leading provider of niche consumer products used in and around the
home, under well-known brand names including Aviator(R), Ball(R), Bee(R),
Bernardin(R), Bicycle(R), Crawford(R), Diamond(R), FoodSaver(R), Forster(R),
Hoyle(R), Kerr(R), Lehigh(R), Leslie-Locke(R), Loew-Cornell(R) and VillaWare(R).
In North America, we are the market leader in several consumer categories,
including home canning, home vacuum packaging, kitchen matches, plastic cutlery,
playing cards, rope, cord and twine and toothpicks. We also manufacture zinc
strip and a wide array of plastic products for third party consumer product and
medical companies as well as our own businesses.
Results of Operations
o Our net sales for the second quarter ended June 30, 2004 increased to
$199.0 million or 52.2% over the same period in 2003. Our net sales for the
six months ended June 30, 2004 increased to $357.4 million or 56.6% over
the same period in 2003;
o Our operating income for the second quarter ended June 30, 2004 increased
to $32.0 million or 55.3% over the same period in 2003. Our operating
income for the six months ended June 30, 2004 increased to $49.8 million or
57.9% over the same period in 2003;
o Our net income for the second quarter ended June 30, 2004 increased to
$16.0 million or 61.3% over the same period in 2003. Our net income for the
six months ended June 30, 2004 increased to $23.6 million or 66.1% over the
same period in 2003; and
o The increases to our net sales, operating income and net income are
principally the result of the acquisitions we completed in 2004 and 2003,
which are described in detail in "Acquisition Activities" below. In
addition, on an overall basis we had significant organic growth in three of
our four business segments in both the second quarter and first six months
of 2004 compared to the same period in 2003.
Liquidity and Capital Resources
o We ended the second quarter of 2004 with a higher net debt-to-total
capitalization ratio, than as of December 31, 2003 due to the additional
debt incurred to partially fund the acquisition of United States Playing
Card Company and its subsidiaries ("USPC" and "USPC Acquisition"),
partially offset by an increase in our market capitalization;
o Our liquidity, as measured by cash and cash equivalents on hand and
availability under our debt facility, was lower at June 30, 2004 than at
December 31, 2003, due to the use of cash on hand during the first half of
2004 to fund the USPC Acquisition and the acquisition of Loew-Cornell, Inc.
("Loew-Cornell" and "Loew-Cornell Acquisition"); and
o Our cash flows from operations in the first six months of 2004 was flat due
to higher inventory amounts as a result of early buys of certain commodity
items in order to take advantage of pricing trends in raw materials,
increasing commodity costs which increases the dollar value of the same
quantity of inventory, the addition of a number of new product stock
keeping units for launch in the third quarter of 2004 and continuing sales
growth requiring greater levels of inventory. Accounts receivable were also
higher, primarily due to strong sales during the quarter.
We intend for the discussion of our financial condition and results of
operations (including our acquisition activities) that follows to provide
information that will assist in understanding our financial statements, the
changes in certain key items in those financial statements from year to year,
and the primary factors that accounted for those changes, as well as how certain
accounting principles, policies and estimates affect our financial statements.
ACQUISITION ACTIVITIES
We have grown through strategic acquisitions of complementary businesses and by
expanding sales of our existing product lines. Our strategy to achieve future
growth is to sustain profitable internal growth, acquire new businesses or
brands that complement our existing product portfolio and expand our
international business.
14
On June 28, 2004, we acquired approximately 75.4% of the issued and outstanding
stock of USPC, with the remaining 24.6% subject to a put/call agreement starting
in the fourth quarter of 2004. USPC is the world's largest manufacturer and
distributor of playing cards and a leader in marketing children's card games,
collectible tins, puzzles and card accessories for the North American retail
market and is also the largest supplier of premium playing cards to casinos
worldwide. USPC's portfolio of owned brands includes Aviator(R), Bee(R),
Bicycle(R) and Hoyle(R). In addition, USPC has an extensive list of licensed
brands, including Disney(R), Harley-Davidson(R), NASCAR(R) and World Poker
Tour(TM). USPC's international holdings include Naipes Heraclio Fournier, S.A.,
a leading playing card manufacturer in Europe. The purchase price (including an
estimate of the call price expected to be paid for the remaining 24.6% of the
shares) was approximately $237.8 million, including transaction expenses and an
estimate of the deferred consideration to be paid when the put/call agreement is
exercised of approximately $34.1 million. Such consideration and the current
portion of a $15.1 million holdback of consideration deferred for purposes of
guaranteeing potential indemnification liabilities of the sellers is accrued as
of June 30, 2004 and included in "Deferred Consideration for Acquisitions" on
the Condensed Consolidated Balance Sheet included herein. The holdback amount is
secured by a stand-by letter of credit under our senior credit facility. The
cash portion of the purchase price funded on June 28, 2004 was financed using a
combination of cash on hand, new debt financing (see discussion in "Financial
Condition, Liquidity and Capital Resources" below) and borrowings under our
existing revolving credit facility. The goodwill and other intangibles amounts
recorded in connection with the USPC Acquisition are discussed in detail in Note
5 of the Condensed Consolidated Financial Statements included herein. Based on
our intention to exercise the put/call agreement resulting in 100% ownership of
USPC within the current year, we have not accounted for the 24.6% minority
interest in USPC. Therefore, our Condensed Consolidated Financial Statements
reflect 100% of the assets and liabilities of USPC as of June 30, 2004 and 100%
of the results of USPC for the period from June 28, 2004 through June 30, 2004.
In addition, the USPC Acquisition includes an earn-out provision with a
potential payment in cash or our common stock, at our sole discretion, up to $10
million payable in 2007, provided that certain earnings performance targets are
met. If paid, we expect to capitalize the cost of the earn-out. The USPC
business is included in our branded consumables segment.
On September 2, 2003, we acquired all of the issued and outstanding stock of
Lehigh Consumer Products Corporation and its subsidiary ("Lehigh" and the
"Lehigh Acquisition"). Lehigh is the largest supplier of rope, cord and twine in
the U.S. consumer marketplace and a leader in innovative storage and
organization products and workshop accessories for the home and garage as well
as in the security screen door and ornamental metal fencing market. The purchase
price of the transaction was approximately $157.6 million, including transaction
expenses. Lehigh is included in the branded consumables segment from September
2, 2003.
On February 7, 2003, we completed our acquisition of the business of Diamond
Brands International, Inc. and its subsidiaries ("Diamond Brands" and the
"Diamond Acquisition"), a manufacturer and distributor of niche household
products, including clothespins, kitchen matches, plastic cutlery and toothpicks
under the Diamond(R) and Forster(R) trademarks. The purchase price of this
transaction was approximately $91.5 million, including transaction expenses. The
acquired plastic manufacturing operation is included in the plastic consumables
segment from February 1, 2003. The acquired wood manufacturing operation and
branded product distribution business is included in the branded consumables
segment from February 1, 2003.
The USPC Acquisition, the Lehigh Acquisition and the Diamond Acquisition were
all entered into as part of our strategy of acquiring branded consumer products
businesses with leading market positions in niche markets for products used in
and around the home.
For the three and six month periods ended June 30, 2004 and June 30, 2003, pro
forma financial information reflecting the USPC Acquisition, the Lehigh
Acquisition and the Diamond Acquisition has been included in Note 4 to our
Condensed Consolidated Financial Statements.
During the first quarter of 2004, we completed a tuck-in acquisition of
Loew-Cornell, a leading marketer and distributor of paintbrushes and other arts
and crafts products. The acquired business is included in the branded
consumables segment from March 18, 2004. Additionally, we completed two other
tuck-in acquisitions in 2003, one in the branded consumables segment and the
other in the consumer solutions segment.
The results of Loew-Cornell and the other two tuck-in acquisitions in 2003 did
not have a material effect on our results of operations for either the three or
the six month periods ended June 30, 2004 and June 30, 2003 and are not included
in the pro forma financial information presented in Note 4 to our Condensed
Consolidated Financial Statements.
15
RESULTS OF OPERATIONS - COMPARISON OF SECOND QUARTER 2004 TO SECOND QUARTER 2003
We reported net sales of $199.0 million for the second quarter of 2004, a 52.2%
increase from net sales of $130.8 million in the second quarter of 2003.
In the second quarter of 2004, our branded consumables segment reported net
sales of $122.7 million compared to $70.2 million in the second quarter of 2003.
This increase of 74.8% was principally a result of acquisitions. Excluding the
effect of acquisitions, net sales of our branded consumables segment were
approximately 9% higher in the second quarter of 2004 compared to the same
period in 2003, partly due to the 2003 period being negatively affected by a
weaker retail environment. In the second quarter of 2004, our consumer solutions
segment recorded net sales of $36.2 million compared to $34.6 million in the
second quarter of 2003. This increase of 4.5% was principally the result of the
tuck-in acquisition of VillaWare Manufacturing Company ("VillaWare") in the
fourth quarter of 2003, partially offset by lower revenues from FoodSaver(R)
products primarily due to lower average sales prices on FoodSaver(R) machines.
In the second quarter of 2004, our plastic consumables segment reported net
sales of $34.5 million compared to $26.7 million in the second quarter of 2002.
The principal reason for this increase of 29.2% was an increase in intercompany
sales. Excluding the effect of intercompany sales, net sales of our plastics
consumables segment were approximately 20% higher in the second quarter of 2004
compared to the same period in 2003 principally due to increased sales to
certain existing OEM customers and new international sales. In the second
quarter of 2004, our other segment reported net sales of $19.9 million compared
to $9.3 million in the second quarter of 2003. The principal reasons for this
increase of 115.2% were due to the increase in net sales resulting from
contractual changes with two major customers whereby this segment took on the
responsibility of purchasing the raw material inventory for the customers,
increased volume sales of low denomination coinage and industrial zinc, and the
effect of increases in the price of zinc which were passed through to customers.
We reported operating earnings of $32.0 million in the second quarter of 2004
compared to operating earnings of $20.6 million in the second quarter of 2003.
The principal reason for this increase of $11.4 million, or 55.3%, was an
increase in the operating earnings of the branded consumables segment of $10.6
million, primarily due to the effect of 2003 and 2004 acquisitions now included
in this segment. Exclusive of the effect of acquisitions, operating earnings of
the branded consumables segment were $0.5 million higher than the comparative
period in the prior year primarily due to higher sales volumes and favorable
home canning sales mix being partially offset by unfavorable flatware sales mix
and higher overall freight costs. The operating earnings of the consumer
solutions segment decreased by $1.0 million principally due to higher legal
costs and the sales effects discussed above. The operating earnings of the
plastic consumables segment increased by $0.4 million due to the sales effects
discussed above, partially offset by higher plastic resin prices which could not
be passed through with respect to plastic cutlery sales and higher validation
costs incurred for new business development projects. The operating earnings of
the other segment increased by $0.7 million due to the sales effects discussed
above and positive manufacturing variances resulting from the increased sales
volume.
Gross margin percentages on a consolidated basis decreased to 34.1% in the
second quarter of 2004 from 37.9% in the second quarter of 2003. The principal
reasons for this decrease are the inclusion in the branded consumables segment
of the relatively lower gross margin Lehigh business, higher freight costs in
our branded consumables segment, lower average selling prices in our consumer
solutions segment and the effect of the contractual changes for two major
customers in our other segment as discussed above.
Selling, general and administrative expenses increased to $35.8 million in the
second quarter of 2004 from $28.9 million in the second quarter of 2003, or, as
a percentage of net sales, decreased to 18.0% in the second quarter of 2004 from
22.1% in the second quarter of 2003. The increase in dollar terms was
principally the result of the acquisitions completed during 2003 and 2004,
higher legal costs in our consumer solutions segment, and higher validation
costs incurred for new business development projects in our plastic consumables
segment, partially offset by lower media spending in the consumer solutions
segment. The decrease in percentage terms was principally due to the inclusion
of the Lehigh business which has relatively lower selling, general and
administrative expenses as a percentage of net sales. In addition, we had
significant growth in our branded consumables, plastic consumables and other
segment's net sales and all of these segments have lower selling, general and
administrative expenses as a percentage of net sales than our consumer solutions
segment.
Net interest expense increased to $6.1 million for the second quarter of 2004
compared to $4.3 million in the same period last year. This increase resulted
from higher levels of outstanding debt in the second quarter of 2004 compared to
the same period in 2003.
Our effective tax rate for the second quarter of 2004 was 38.2% compared to an
effective tax rate of 39.2% in 2003.
16
RESULTS OF OPERATIONS - COMPARISON OF YEAR TO DATE 2004 TO YEAR TO DATE 2003
We reported net sales of $357.4 million in the first six months of 2004, a 56.6%
increase from net sales of $228.2 million in the first six months of 2003.
In the first six months of 2004, our branded consumables segment reported net
sales of $197.6 million compared to $100.4 million in the first six months of
2003. This increase of 96.7% was principally a result of acquisitions. Excluding
the effect of acquisitions, net sales of our branded consumables segment were
approximately 8% higher in the first six months of 2004 compared to the same
period in 2003. In the first six months of 2004, our consumer solutions segment
reported net sales of $81.4 million compared to $75.5 million in net sales for
the first six months of 2003. This increase of 7.7% was principally the result
of the acquisition of VillaWare in the fourth quarter of 2003. Excluding the
effect of this acquisition, net sales of our consumer solutions segment were
lower in the first six months of 2004 compared to the same period in 2003 due to
lower average sales prices on FoodSaver(R) machines, partially offset by sales
volume increases for FoodSaver(R) machines and increased bag unit sales.
In the first six months of 2004, our plastic consumables segment reported net
sales of $68.2 million compared to $50.2 million in the first six months of
2003. The principal reason for this increase of 35.7% was both an increase in
intercompany sales as well as a full six month period effect of the intercompany
sales generated by the addition of the plastic manufacturing business acquired
in the Diamond Acquisition in February 2003. Excluding the effect of
intercompany sales, net sales of our plastics consumables segment were
approximately 15% higher in the first six months of 2004 compared to the same
period in 2003 principally due to increased sales to certain existing OEM
customers and new international sales. In the first six months of 2004, our
other segment reported net sales of $38.7 million compared to $17.9 million in
the first six months of 2003. The principal reason for this increase of 116.6%
was due to the effect on net sales resulting from contractual changes with two
major customers whereby this segment took on the responsibility of purchasing
the raw material inventory for the customers, increased volume sales of low
denomination coinage and industrial zinc, and the effect of increases in the
price of zinc which were passed through to customers.
We reported operating earnings of $49.8 million in the first six months of 2004
compared to operating earnings of $31.5 million in the first six months of 2003.
The principal reason for this increase of $18.3 million, or 57.9%, was an
increase in the operating earnings of the branded consumables segment of $15.7
million, primarily due to the effect of 2003 and 2004 acquisitions now included
in this segment. Due to the integration of certain of the Company's acquisitions
it is no longer possible to compare the operating earnings in this segment
exclusive of acquisitions for the first six months of the year. The operating
earnings of the consumer solutions segment decreased by $1.6 million principally
due to higher legal costs as well as the sales effects discussed above. The
operating earnings of the plastic consumables segment increased by $0.8 million
due to the sales effects discussed above, partially offset by higher plastic
resin prices which could not be passed through with respect to plastic cutlery
sales and higher validation costs incurred for new business development
projects. The operating earnings of the other segment increased by $2.6 million
due to the sales effects discussed above and positive manufacturing variances
resulting from the increased sales volume.
Gross margin percentages on a consolidated basis decreased to 33.3% in the first
six months of 2004 from 38.5% in the first six months of 2003. The principal
reasons for this decrease are the inclusion in the branded consumables segment
of the relatively lower gross margin Diamond Brands and Lehigh businesses,
higher freight costs in our branded consumables segment, lower average selling
prices in our consumer solutions segment, and the effect of the contractual
changes for two major customers in our other segment as discussed above.
Selling, general and administrative expenses increased to $69.3 million in the
first six months of 2004 from $56.4 million in the first six months of 2003, or,
as a percentage of net sales, increased to 19.4% in the first six months of 2004
from 24.7% in the first six months of 2003. The increase in dollar terms was
principally the result of the acquisitions completed during 2003 and 2004,
higher legal costs in our consumer solutions segment, and higher validation
costs incurred for new business development projects in our plastic consumables
segment partially offset by lower media spending in the consumer solutions
segment. The decrease in percentage terms was principally due to the inclusion
of the Lehigh business which has relatively lower selling, general and
administrative expenses as a percentage of net sales. In addition, we had
significant growth in our branded consumables, plastic consumables and other
segment's net sales and all of these segments have lower selling, general and
administrative expenses as a percentage of net sales than our consumer solutions
segment.
Net interest expense increased to $11.7 million for the first six months of 2004
compared to $8.2 million in the same period last year. This increase primarily
resulted from higher levels of outstanding debt in the first six months of 2004
compared to the same period in 2003.
17
Our effective tax rate for the first six months of 2004 was 38.2% compared to an
effective tax rate of 39.2% in the first six months of 2003.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
On June 28, 2004, in connection with our USPC Acquisition, we completed an
add-on to our Term B loan facility ("Term B Add-on") under our amended and
restated senior credit facility ("Amended Credit Agreement"). The gross proceeds
from the Term B Add-on offering were $116 million and were used to partially
fund the USPC acquisition. The spread on the Term B Add-on debt is 2.25% over
London Interbank Offered Rate ("LIBOR"). Additionally, under this offering the
spread on our existing Term B loan facility was reduced from 2.75% over LIBOR to
2.25% over LIBOR. Our Amended Credit Agreement matures on April 24, 2008.
In connection with our USPC Acquisition, we assumed approximately $2.3 million
of debt relating to a Spanish subsidiary. This debt relates to bank notes that
are payable in equal quarterly, semi-annual or annual installments through 2007
with varying rates of interest ranging from 3.25% to 4.5%.
In April 2004, we repaid seller debt financing incurred in connection with a
2002 acquisition, which included both principal and accrued interest thereon, in
the amount of approximately $5.4 million.
During the first six months of 2004, we issued 24,750 restricted shares of
common stock to certain employees under our 2003 Stock Incentive Plan. The
restrictions on these shares will lapse ratably over five years of employment
with us.
In August 2004, our board of directors approved the granting of an aggregate of
140,000 restricted shares of common stock to three executive officers of our
Company. The restrictions on these shares lapse ratably over a three year period
commencing January 1, 2005 and would lapse immediately in the event of a change
in control. Non-cash compensation expense will be recognized ratably over the
lapsing period based upon the fair market value of our common stock on the date
of grant. We issued these shares out of its treasury account.
As of June 30, 2004, we had $310.3 million outstanding under our term loan
facilities and $6.9 million outstanding under our revolving credit facility. As
of June 30, 2004, net availability under our revolving credit agreement was
approximately $42.2 million, after deducting $20.9 million of issued letters of
credit. The letters of credit outstanding include an amount of approximately
$15.2 million securing the USPC holdback amount (see "Acquisition Activities").
We are required to pay commitment fees on the unused balance of the revolving
credit facility.
As of June 30, 2004, the fair market value of our interest rate swaps, which are
accounted for as fair value hedges, was negative in an amount of approximately
$5.5 million and is included as a liability in the Condensed Consolidated
Balance Sheet, with a corresponding offset to long-term debt.
Net current assets decreased to approximately $141 million at June 30, 2004 from
approximately $242 million at December 31, 2003, due primarily to the use of
cash on hand to finance the USPC Acquisition and the Loew-Cornell Acquisition
and the establishment of the Deferred Consideration for Acquisitions balance
(see "Acquisition Activities" above), partially offset by the working capital
balances of USPC and Loew-Cornell.
Our cash flow from operations was flat in the first six months of 2004, compared
to a cash flow from operations of $15.2 million in the first six months of 2003.
This decrease in cash flow from operations is primarily due to higher inventory
amounts as a result of early buys of certain commodity items in order to take
advantage of pricing trends in raw materials, increasing commodity costs which
increases the dollar value of the same quantity of inventory, the addition of a
number of new product stock keeping units for launch in the third quarter of
2004 and continuing sales growth requiring greater levels of inventory. Accounts
receivable amounts were also higher due to strong sales during the quarter.
Capital expenditures were $3.5 million in the first six months of 2004 compared
to $4.6 million for the first six months of 2003 and are largely related to
maintaining facilities, tooling projects and improving manufacturing
efficiencies. As of June 30, 2004, we had capital expenditure commitments in the
aggregate for all our segments of approximately $2.7 million. As of June 30,
2004, our other segment had forward buy contracts through September 2004 to
purchase zinc ingots in the aggregate amount of approximately $3.3 million,
which are expected to be used in operations in 2004.
We believe that our cash and cash equivalents on hand, cash generated from our
operations and our availability under our senior credit facility is 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.
18
RELATED PARTY TRANSACTIONS
On July 27, 2004, the agreement between one of our Company's wholly owned
subsidiaries and NewRoads, Inc. ("NewRoads"), a third party provider of pick,
pack and ship services, order fulfillment, warehousing and other services to the
retail industry was terminated. Pursuant to this agreement, NewRoads had agreed
to provide such services to our Company's consumer solutions segment. Mr. Martin
Franklin's, our Chairman and Chief Executive Officer, brother-in-law was the
executive chairman of the board of NewRoads at the time of the agreement being
consummated. Mr. Franklin has an indirect ownership interest of less than 1/2%
in NewRoads. Our consumer solutions segment now uses a different third party
provider for these services.
In July 2004, our Company's board of directors approved the granting of 10,000
restricted shares of common stock to Mr. Jonathan Franklin, a consultant to our
Company, who is the brother of Mr. Franklin. The restrictions on 5,000 of these
shares lapsed immediately and we recorded a non-cash compensation charge in the
second quarter of 2004 based on the fair market value of our Company's common
stock on the date of grant. The restrictions on the remaining 5,000 of these
shares lapse ratably over a four year period. Non-cash compensation expense will
be recognized based on the market value of our Company's common stock at the
time of the lapsing. All of the shares which still have a restriction remaining
will have the restrictions lapse immediately upon the event of a change in
control. We issued these shares out of our treasury account.
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 expenses 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.
FORWARD-LOOKING INFORMATION
Our disclosure and analysis in this report contains forward looking information
about our Company's financial results and estimates and business prospects. 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 phrases such as "believes", "anticipates", "expects", "estimates",
"planned", "outlook", and "goal". Because forward-looking statements involve
risks and uncertainties, our actual results could differ materially. We cannot
guarantee that any forward-looking statement will be realized, although we
believe we have been prudent in our plans and assumptions. Achievement of future
results is subject to risks, uncertainties and inaccurate assumptions. Should
known or unknown risks or uncertainties materialize, or should underlying
assumptions prove inaccurate, actual results could vary materially from past
results and those anticipated, estimated or projected. Investors should bear
this in mind as they consider forward-looking statements.
We undertake no obligation to publicly update forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our Forms 10-Q, 8-K and 10-K reports to the Securities and Exchange
Commission. Please see our Company's Annual Report on Form 10-K for 2003 for a
list of factors which could cause our Company's actual results to differ
materially from those projected in our Company's forward-looking statements and
certain risks and uncertainties that may affect the operations, performance and
results of our business. You should understand that it is not possible to
predict or identify all such factors. Consequently, you should not consider any
such list to be a complete set of all potential risks or uncertainties.
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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 relatively low. The Company's plastic consumables
business purchases resin from regular commercial sources of supply and, in most
cases, multiple sources. The supply and demand for plastic resins is subject to
cyclical and other market factors. With many of our external customers, we have
the ability to pass through price increases with an increase in our selling
price and certain of our external customers purchase the resin used in products
we manufacture for them. This pass-through pricing is not applicable to plastic
cutlery, which we supply to our branded consumables segment. Plastic cutlery is
principally made of polystyrene and for each $0.01 change in the price of
polystyrene the material cost in our plastics consumables segment will change by
approximately $0.5 million per annum. The Company's zinc business has sales
arrangements with a majority of its customers such that sales are priced either
based upon supply contracts that provide for fluctuations in the price of zinc
to be passed on to the customer or are conducted on a tolling basis whereby
customers supply zinc to the Company for processing. Such arrangements as well
as the zinc business utilizing forward buy contracts reduce the exposure of this
business to changes in the price of zinc.
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 certain of its term and revolving debt obligations
and six month LIBOR in arrears on certain of its interest rate swaps. The
spreads on the interest rate swaps range from 523 to 528 basis points.
Settlements on the interest rate swaps are made on May 1 and November 1. The
Company is exposed to credit loss in the event of non-performance by the other
party to its current existing swaps, a large financial institution. However, the
Company does not anticipate non-performance by the other party.
Changes in Eurodollar or LIBOR interest rates would affect the earnings of the
Company either positively or negatively depending on the direction of the
change. Assuming that Eurodollar and LIBOR rates each increased 100 basis points
over period end rates on the outstanding term debt and interest rate swaps, the
Company's interest expense would have increased by approximately $1.4 million
for the six month period ended June 30, 2004 and $0.7 million for the six month
period ended June 30, 2003. 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 swaps and estimated cash flow. Actual changes in
rates may differ from the assumptions used in computing this exposure.
Other than the short-term forward buys of zinc discussed above in "Financial
Condition, Liquidity and Capital Resources", 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. CONTROLS AND PROCEDURES
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 as of the end of the period covered
by this report. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual meeting of stockholders on May 11, 2004. Of the 27,189,783
shares of common stock entitled to vote at the meeting, 25,310,651 shares of
common stock were present in person or by proxy and entitled to vote. Such
number of shares represented approximately 93.1% of our outstanding shares of
common stock. Listed below are the matters voted upon at our annual meeting of
stockholders and the respective voting results:
Voted Voted
FOR AGAINST
------------- -------------
Election of Class II Directors for three-year terms expiring in 2007:
Ian G.H. Ashken................................................. 23,764,146 -
Richard L. Molen................................................ 23,920,747 -
Voted Voted
FOR AGAINST Abstained
------------- ------------- ------------
Ratification of the appointment of Ernst & Young LLP as our
independent auditors for the year ending December 31, 2004............ 24,930,162 372,165 8,324
Our board of directors is currently comprised of each of the Class II Directors
listed in the table above, including Ian G.H. Ashken and Richard L. Molen, the
Class I Directors, including Martin E. Franklin and Rene-Pierre Azria, and the
Class III Directors, including Douglas W. Huemme, Robert L. Wood, and Irwin D.
Simon.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit Description
------- -----------
* 4.1 Fourth Supplemental Indenture to the April 2002 Indenture, dated as of April 16, 2004, among
the Company, the guarantors named therein and The Bank of New York, as trustee.
* 4.2 Fifth Supplemental Indenture to the April 2002 Indenture, dated as of July 23, 2004, among the
Company, the guarantors named therein and The Bank of New York, as trustee.
10.1 Second Amended and Restated Credit Agreement, dated as of June 11, 2004, among the Company, the
lenders party thereto, Canadian Imperial Bank of Commerce., as Administrative Agent, Citigroup
North America, Inc., as Syndication Agent, and National City Bank of Indiana and Bank of
America, N.A., as Co-Documentation Agents (filed as Exhibit 10.1 to the Company's Current
Report on Form 8-K, filed with the Commission on July 13, 2004, and incorporated herein by
reference).
10.2 Securities Purchase Agreement, dated as of February 24, 2004, as amended and restated as of
April 19, 2004, by and among Bicycle Holding, Inc. the sellers identified therein, the seller
representative identified therein and Jarden Corporation (filed as Exhibit 10.1 to the Company's
Quarterly Report on form 10-Q filed with the Commission on May 7, 2004, and incorporated herein
by reference).
10.3 Put and Call Agreement, dated as of February 24, 2004, as amended and restated as of April 19, 2004,
by and among the shareholders of Bicycle Holding, Inc. set forth on the signature pages thereto
and Jarden Corporation (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q,
filed with the Commission on May 7, 2004, and incorporated herein by reference).
* 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
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Exhibit Description
------- -----------
* 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
* 32.1 Certifications 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
We filed a Form 8-K on April 29, 2004, with respect to Items 7 and 12, relating
to a press release, dated April 29, 2004, announcing our earnings for the three
month period ended March 31, 2004.
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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: August 9, 2004 By: /s/ Ian G.H. Ashken
--------------------------------------
Ian G.H. Ashken
Vice Chairman,
Chief Financial Officer and Secretary
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