The document summarizes Jarden Corporation's 2004 annual report. It discusses record financial results in 2004, including 5% organic sales growth and 18% EBITDA margins. It also highlights acquisitions of The United States Playing Card Company and American Household, Inc., owner of brands like Coleman and Sunbeam. The acquisition of American Household tripled Jarden's revenue base and provides opportunities for margin expansion and earnings growth.
2. Table of Contents
02 Chairman’s Letter
04 Branded Consumables
06 Consumer Solutions
08 Outdoor Solutions
10 Other
11 Selected Financial Data
14 Management’s Discussion
and Analysis
36 Financial Statements
Winner of Jarden’s 2004 Annual Report Cover Design Concept Contest: Shannon Simpson, Jarden Plastic Solutions.
and Ball ® are registered trademarks of Ball Corporation, under limited license to Jarden Corporation.
3. Corporate Profile Jarden Corporation is a global provider
of consumer products used in and around the home, marketed under well-known brand names
including Ball,® Bee,® Bicycle,® Campingaz,® Coleman,® Crawford,® Diamond,® First Alert,® FoodSaver,® Forster,®
, , ,
Health o meter,® Hoyle,® Kerr,® Lehigh,® Loew-Cornell,® Mr.Coffee,® Oster,® Sunbeam® and VillaWare. Jarden
, ®
operates through four business segments: Branded Consumables, Consumer Solutions, Outdoor Solutions
and Other and is a market leader in several targeted consumer categories, including home canning, home
vacuum packaging, kitchen matches, rope, cord and twine, playing cards, coffee makers, blenders, toasters,
smoke alarms, scales, camping tents and lanterns, coolers and sleeping bags. Headquartered in Rye, N.Y.,
Jarden has over 9,000 employees worldwide.
Corporate Strategy Our objective is to build a world-class
consumer products company that enjoys leading positions in markets for branded con-
sumer products. We will seek to achieve this objective by continuing our tradition of product innovation,
new product introductions and providing the consumer the experience and value they associate with our
brands. We plan to leverage and expand our domestic and international distribution channels, increase
brand awareness through co-branding and cross-selling initiatives and pursue strategic acquisitions, all while
driving margin improvement.
NET SALES (DOLLARS IN MILLIONS)
$900
$839
$600
$588
$367
$300
$000
’02 ’03 ’04
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4. We once again generated record
financial results in 2004.
Dear Fellow Shareholders: In last year’s letter to shareholders,
I stated my belief that the best was yet to come for Jarden. We entered 2004
with a strong platform for growth and horizons full of opportunity and I’m
very pleased to say that, as optimistic and confident as we felt at that time,
we surpassed our expectations for progress during 2004.
First and foremost, we once again generated record financial results in 2004. Organic sales growth at Jarden,
adjusting for the impact of acquisitions, was approximately 5%, at the high end of our target range. EBITDA margins,
excluding non-cash restricted stock charges, were approximately 18%, consistent with our long-term strategy of main-
taining an EBITDA margin in excess of 15%. With over $70 million of cash flow from operations, we continued the strong
cash generation that has become a Jarden trademark and one of our primary financial objectives. We firmly believe that
strong cash flow not only demonstrates the strength of our business, but also provides the capacity for future investment,
including increased marketing programs and acquisitions.
This continued peer-leading performance was the result not only of our ability to effectively execute accretive
acquisitions, but also the delivery of strong operating results in the face of a tough trading climate. Our rapid pace of
growth was recognized by FORTUNE magazine in their September 2004 issue, ranking Jarden as the 19th fastest growing
company in America.
During 2004, we completed the acquisition of The United States Playing Card Company and signed a definitive
agreement to acquire American Household, Inc. USPC expanded our distribution and added diversity to our Branded
Consumables division. USPC is the world’s largest manufacturer and distributor of playing cards. During 2004, USPC
extended its traditional playing card offering to include poker chips and poker sets, capitalizing on the surge in
popularity of the game of poker. In fact, our poker chip sets were recognized as one of the hottest items for the 2004
holiday season by a number of our major retail customers.
Our agreement to acquire AHI was announced in September 2004 and closed in January 2005. This was a watershed
event for Jarden, tripling our revenue base as well as providing significant international distribution and a new portfolio
of market-leading global brands. AHI met most of our traditional acquisition criteria, including market leadership, brand
strength, complementary distribution channels and, of course, attractive valuation. The only significant aspect that
deviated from our historical acquisition criteria was in adjusted EBITDA margins, where AHI had a run rate of
approximately 7% EBITDA margins in 2004. However, we view this as a significant opportunity for Jarden in two regards.
First, all of the businesses within the “new” Jarden should benefit from the synergies arising from the combination with AHI.
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5. Second, we believe there is enormous potential to improve the underlying operating performance of AHI’s Coleman and
Sunbeam businesses. Both of these opportunities should drive margin expansion towards our stated goal of bringing
Jarden’s overall EBITDA margin back above 15% within five years, a performance that would yield healthy compound
growth and a doubling of our earnings per share over the same time horizon.
Operating highlights during the year were led by a record number of new product introductions. These included our
World Poker Tour™ poker kits, a new line of premium plastic cutlery under the Signature brand, a line of FoodSaver®
accessories including the WineSaver,™ a new category of safety matches under the Diamond MatchGuard® brand and a
unique, easy-to-hold Loew-Cornell® paint brush line. New product introductions are the lifeblood of any consumer
products company and we were delighted that 2004 demonstrated that these products can drive organic top-line growth.
Despite the impact of significant raw material cost increases, all of our business segments delivered record levels of
sales during 2004. To accomplish this, while at the same time protecting margins, we had to conduct business smarter
and more cost effectively than ever. We accomplished this by building on synergies arising from the growth of Jarden and
programs within our manufacturing facilities to continue to increase productivity. We run Six Sigma and other programs
to improve operating performance in our manufacturing facilities and have created our own culture of cost consciousness
and efficiency across all of our businesses. Dollars saved on manufacturing or sourcing products can be reinvested in new
product development to help grow the business in the future.
While we have been aggressive in pursuing strategies to grow the company, we have maintained a conservative
balance sheet, financing both acquisitions and organic growth in order to ensure financial flexibility. To this end, we
placed $300 million of preferred equity and $50 million of common equity with Warburg Pincus and
Catterton Partners as part of the AHI acquisition. We are delighted to have Warburg Pincus and
Catterton as shareholders and believe that they will help create value for Jarden in the future
beyond the provision of capital.
The successful operation of our business segments is driven by the collective skills, knowledge
and commitment of our employees worldwide and the pride they take in their work. As we
emphasize every year, our most important assets go home every night. Many of our brands have
been in existence for over 100 years and have become part of the fabric of the communities in
which they operate, as well as the hearts of the consumers who buy our products. We take
our responsibility to the future of these businesses as seriously as we take our
commitment to shareholders to deliver exceptional performance. We have
entered 2005 with enormous enthusiasm as well as a detailed action plan for
the tasks that lie ahead and I look forward to reporting to you on our progress.
Respectfully yours,
Martin E. Franklin
Chairman and Chief Executive Officer
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6. Branded Consumables
Jarden Branded Consumables is the foundation on which the growth of Jarden Corporation, as a global leader in
consumer products, has been built. With a cadre of strong niche brands, focused brand managers and a dedicated
work force we have built a portfolio of products used by consumers in and around their homes, some for well over
100 years. Our goal is to expand the markets served by our core brands and to continue profitable growth, while
serving the consumer’s expanding range of needs.
Our focus on new product initiatives and product line extensions has successfully generated increased sales for retail-
ers and driven value for our investors. We have grown our revenue base by being market leaders and have been
opportunistic in identifying acquisitions that increase value, while simultaneously creating cross-selling opportunities
for sister company brands. We strive to maintain our track record of strong financial performance by focusing on
continuous operational improvements, leveraging our resources and creating healthy partnerships with suppliers.
Many of our brands, including Ball, Bee, Bernardin, Bicycle, Crawford, Diamond, Forster,® Hoyle, Kerr,® Lehigh,
, ,
® ® ® ® ® ® ® ®
Leslie-Locke and Loew-Cornell, hold the 1 and 2 market positions in their respective product categories. We
® ® # #
consider ourselves the stewards of trusted products that have served families for generations and we are committed
to responding to the needs of these families, as well as those of new consumers, with innovation into the future.
— James E. Lillie, President, Branded Consumables
7. Branded Consumables–An extensive portfolio of high quality, well regarded, affordable
consumable products with strong brand recognition that are used primarily in and
around the home.
Highlights
2004 revenue of $473 million, an increase of 83% from the prior year.
•
Record 2004 operating profit of $76 million.
•
We expanded our already strong portfolio of highly recognized brands with the additions of Bicycle, Bee, Hoyle, Kem®
® ® ®
•
and Loew-Cornell during the course of 2004.
®
Our acquisitions of The United States Playing Card Company and Loew-Cornell established Jarden as the leading provider
•
of playing cards and expanded our presence in the growing arts and crafts market.
We introduced over 40 creative, new products at retail in 2004.
•
Products and Brands
We develop, manufacture, market and distribute a broad array of branded products, many of which are consumable in nature,
including home canning jars, jar closures and related accessories, kitchen matches and related flame products, toothpicks,
plastic cutlery, a wide variety of rope, cord and twine, garage storage products, ornamental security doors and fencing, arts and
crafts paint brushes and playing cards, poker chips and poker sets, all marketed under an expanding portfolio of highly
recognized brands.
Distribution
Our leading market positions and array of consumable products enable us to penetrate a variety of sales channels, either by
selling directly to our customers, through select distributors or through sister company relationships. Our customers range in
size from small shops to major retailers across multiple channels including grocery stores, mass merchants, warehouse home
centers, club stores, department stores, drug stores, convenience stores, value retailers, hardware stores and craft stores.
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8. Consumer Solutions
At Jarden Consumer Solutions we are committed to building on the strengths that have driven our success in recent
years—unmatched consumer acumen, innovative products, speed to market, operational excellence and brand devel-
opment. These attributes manifest themselves in the quality products that enhance our consumers’ lives every day.
With a global business platform that is scalable and growing, Jarden Consumer Solutions intends to continue to
accelerate return on investment and shareholder value. The legacy and strength of our brands provide a market
advantage today that will become even more important as we expand and develop new opportunities. Sunbeam, ®
Mr. Coffee, Oster, Health o meter, First Alert and FoodSaver are all leaders in their respective markets.
® ® ® ® ®
Our people are our greatest assets and are guided by an uncompromising commitment to the highest ethical
standards. Deep industry knowledge, diversity, entrepreneurial spirit and creativity are the fundamental drivers
of our culture. We recruit and retain the best people who are recognized as insightful leaders in understanding
consumer behavior and are dedicated to superior customer and consumer service.
Jarden Consumer Solutions is well positioned for continued growth and success. We are excited about the
opportunities in front of us and will work tirelessly to develop them into superior results.
–Andy Hill, President & CEO, Jarden Consumer Solutions
9. Consumer Solutions–A leading global consumer products company built around
a dynamic portfolio of differentiated, world-class brands and winning people,
dedicated to delivering superior value and innovation to our consumers.
Highlights
Pro forma annualized 2004 revenue of $1.2 billion; actual 2004 revenue of $222 million.
•
Continue to lead the niche home vacuum packaging market by providing product innovation and promoting FoodSaver®
•
products directly to consumers.
Launched more than 300 new products in 2004, increased our brand penetration through licensing and entered key new
•
product categories.
Key marketing initiatives including celebrity partnerships and direct-to-consumer advertising enhanced brand awareness.
•
Pro forma segment sales outside of the United States and Canada in 2004 would have been approximately 14% including the
•
AHI acquisition, compared to less than 3% on a historical basis.
We are expanding our revenue from consumables such as FoodSaver® bags to include Oster® clipper blades, Mr. Coffee®
•
coffee filters and Sunbeam® humidifier filters.
Products and Brands
With the addition of the Sunbeam, Oster,® Mr. Coffee, Health o meter,® First Alert® and BRK® brands to our FoodSaver®
® ®
and VillaWare brands, Consumer Solutions has solidified its position as a leading designer, manufacturer and marketer of
®
a diverse portfolio of consumer products. We have market-leading positions in a number of product categories, including toast-
ers, irons, blenders, drip coffee makers, stand mixers, warming blankets, home vacuum packaging machines, smoke alarms,
carbon monoxide alarms, hotel room amenities and professional animal care clippers and blades, among others.
Distribution
We sell our products through a diverse array of retailers and channels both domestically and throughout the world, with
particular strength in Latin America. Our commitment to servicing our customers and the end consumer has resulted in solid
relationships with mass merchants, warehouse clubs and specialty retailers.
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10. Outdoor Solutions
The Coleman Company, Inc., is a worldwide leader in the outdoor recreation and leisure industry, providing prod-
ucts for a wide array of markets, including family and extreme camping, backyard recreation, hiking and tailgating.
For more than 100 years, Coleman has maintained a highly recognized and respected brand, with a reputation for
providing value and quality.
Jarden’s acquisition of Coleman has created an environment to take the business back to its core roots of providing
innovative, high-quality products to the markets we serve. We plan to bring new vigor to our product development
and growth efforts to ensure our consumers enjoy the same authentic Coleman experience they enjoyed when the
business was run by the Coleman family. In addition to putting new product development on the fast track, we intend
to service our customers better and to drive margin improvement throughout the business.
I believe Coleman is poised for significant growth due to the power of the brand, the underlying commitment and
creativity of our employees and the increasing efficiency of our sourcing, whether through owned manufacturing or
third-party suppliers. Coleman provides a growth platform for Jarden’s Outdoor Solutions segment and offers cross-
selling opportunities for other Jarden businesses to penetrate new markets.
The opportunities are clear; Coleman has the brand and consumer acceptance to drive profitable growth. Our goal
in the coming years is to execute on our strategy, transforming this tremendous opportunity into a reality.
–Gary Kiedaisch, President and CEO, The Coleman Company, Inc.
11. Outdoor Solutions–Quality products designed to maximize the enjoyment of outdoor
leisure experiences.
Highlights
Acquired in January 2005; pro forma annualized 2004 revenue of $837 million.
•
Coleman continued its role as an innovator in the industry by introducing more than 250 new products in 2004.
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We sustained our efforts to strengthen our brand recognition through our retail-sale licensing business. In April 2004, License!
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Magazine listed Coleman® as the seventh largest trademark/brand licensor in the world and the 36th leading licensor overall.
Truly a global company, Outdoor Solutions provides other Jarden portfolio companies channel and geographic expansion
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opportunities, primarily in Europe and Japan.
New executive management team and organization, led by Gary Kiedaisch as President and CEO, appointed by Jarden in
•
January 2005.
Through its Continuous Improvement/Six Sigma programs, Coleman completed more than 75 cost savings projects during
•
2004 and certified 53 Green Belts and 35 Black Belts.
Products and Brands
Created as a result of our acquisition of American Household in 2005, Outdoor Solutions today consists entirely of The
Coleman Company, Inc. Since the invention of the Coleman® Arc Lamp in 1903, Coleman has been dedicated to providing
innovative products designed to maximize the enjoyment of outdoor leisure experiences. From camping to tailgating to emer-
gency products, through its Coleman® and Campingaz® brands, Outdoor Solutions is a leading global designer, manufacturer
and marketer of camp stoves, lanterns, sleeping bags, tents, camp fuels, coolers and other related outdoor-activity products.
Distribution
Our commitment to servicing our customers and the end consumer has resulted in strong brand recognition among campers.
In fact, the Coleman® brand is often viewed as synonymous with authentic camping and other active outdoor leisure experi-
ences. Our camping and outdoor products are distributed globally under the Coleman® and Campingaz® brands through mass
merchants, club stores, sporting goods stores and specialty camping stores.
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12. Other
Through our Jarden Plastic Solutions business, we manufacture, market and distribute a wide variety of state-of-the-
art injection molded and thermoformed products as well as a variety of plastic consumer products and consumer
products components, including closures, contact lens packaging, plastic cutlery, refrigerator door liners, surgical
devices and syringes. This business services certain of the internal needs of our three primary segments, as well as a
number of third-party customers.
Jarden Zinc Products is the largest North American producer of niche products fabricated from solid zinc strip.
Jarden Zinc Products is the sole source supplier of copper-plated zinc penny blanks to both the United States Mint
and the Royal Canadian Mint, as well as brass and bronze finished coinage to other international markets. In
addition, we manufacture a line of industrial zinc products marketed globally for use in plumbing, automotive and
electrical components, architectural markets and corrosion protection.
13. Selected Financial Data
The following tables set forth our selected financial data as of and for the years ended December 31,
2004, 2003, 2002, 2001 and 2000. The selected financial data set forth below has been derived from our
audited consolidated financial statements and related notes thereto where applicable for the respective
fiscal years. The selected financial data should be read in conjunction with “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” as well as our consolidated financial
statements and notes thereto. These historical results are not necessarily indicative of the results to be
expected in the future. The results of Tilia, Diamond Brands, Lehigh and USPC are included from April
1, 2002, February 1, 2003, September 2, 2003, and June 28, 2004, respectively. 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.
For the year ended December 31,
2004 2003 2002 2001 2000
(a) (b) (c) (d) (e) (f) (g) (h)
(dollars in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 838,609 $587,657 $367,104 $ 304,276 $356,123
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . 563,210 374,614 223,663 237,357 280,671
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . . . 146,901 119,760 78,332 47,829 49,686
Restricted stock charges . . . . . . . . . . . . . . 32,415 21,833 — — —
Goodwill amortization . . . . . . . . . . . . . . . — — — 5,153 6,404
Special charges and reorganization
expenses (i) . . . . . . . . . . . . . . . . . . . . . . — — — 4,978 380
Loss on divestiture of assets and product
lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 122,887 —
Operating earnings (loss) . . . . . . . . . . . . . . . . . 96,083 71,450 65,109 (113,928) 18,982
Interest expense, net . . . . . . . . . . . . . . . . . . . . . 27,608 19,184 12,611 11,791 11,917
Income tax provision (benefit) . . . . . . . . . . . . 26,041 20,488 16,189 (40,443) 2,402
Minority interest in gain (loss) of
consolidated subsidiary . . . . . . . . . . . . . . . . . — — — 153 (259)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ 42,434 $ 31,778 $ 36,309 $ (85,429) $ 4,922
Basic earnings (loss) per share . . . . . . . . . . . . $ 1.55 $ 1.40 $ 1.74 $ (4.47) $ 0.26
Diluted earnings (loss) per share . . . . . . . . . . $ 1.49 $ 1.35 $ 1.68 $ (4.47) $ 0.26
As of and for the year ended December 31,
2004 2003 2002 2001 2000
(a) (b) (c) (d) (e) (f) (g) (h)
(dollars in thousands)
OTHER FINANCIAL DATA:
EBITDA (j) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 115,258 $ 86,495 $ 75,110 $ (95,284) $ 40,552
Cash flows from operations (k) . . . . . . . . . . . . 70,415 73,821 71,013 39,857 19,144
Depreciation and amortization . . . . . . . . . . . . 19,175 15,045 10,001 18,797 21,311
Capital expenditures . . . . . . . . . . . . . . . . . . . . . 10,761 12,822 9,277 9,707 13,637
BALANCE SHEET DATA:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 20,665 $125,400 $ 56,779 $ 6,376 $ 3,303
Working capital (m) . . . . . . . . . . . . . . . . . . . . . 181,371 242,039 101,557 8,035 22,975
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,042,381 759,674 366,765 162,234 310,429
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487,451 387,382 216,955 84,875 137,060
Total stockholders’ equity . . . . . . . . . . . . . . . . 333,951 249,905 76,764 35,129 118,221
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14. Selected Financial Data (cont’d)
(a) 2004 includes a non-cash restricted stock charge of $32.4 million. As a result, the Company’s
operating earnings and earnings before interest, taxes, depreciation and amortization (“EBITDA”) (see
item (j) below) of $96.1 million and $115.3 million, respectively, were each reduced by such amount.
Also, the Company’s net income of $42.4 million included a reduction of $20.0 million reflecting the
amount of the non-cash restricted stock charge, net of related tax benefit. Given that the Company’s
diluted weighted average shares for the year were 28.5 million, the non-cash restricted stock charge, net
of related tax benefits also reduced the Company’s diluted earnings per share by $0.71.
(b) The results of USPC are included from June 28, 2004.
(c) 2003 includes a non-cash restricted stock charge of $21.8 million. As a result, the Company’s
EBITDA (see item (j) below) of $71.5 million and $86.5 million, respectively, were each reduced by such
amount. Also, the Company’s net income of $31.8 million included a reduction of $13.3 million
reflecting the amount of the non-cash restricted stock charge, net of related tax benefit. Given that the
Company’s diluted weighted average shares for the year were 23.5 million, the non-cash restricted stock
charge, net of related tax benefits also reduced the Company’s diluted earnings per share by $0.56.
(d) The results of Diamond Brands and Lehigh are included from February 1, 2003 and September 2,
2003, respectively.
(e) The results of Tilia are included from April 1, 2002.
(f) 2002 includes a net release of a $4.4 million tax valuation allowance. As a result, the Company’s net
income of $36.3 million included the benefit of this release. Given that the Company’s diluted weighted
average shares for the year were 21.6 million, the net release of the tax valuation allowance, improved
the Company’s diluted earnings per share by $0.20.
(g) 2001 includes a $121.1 million pretax loss on the sale of thermoforming assets, a $2.3 million pretax
charge associated with corporate restructuring, a $1.4 million pretax loss on the sale of the Company’s
interest in Microlin, LLC, $2.6 million of pretax separation costs related to the management
reorganization, $1.4 million of pretax costs to evaluate strategic options, $1.4 million of pretax costs to
exit facilities, a $2.4 million pretax charge for stock option compensation, $4.1 million of pretax income
associated with the discharge of deferred compensation obligations and a $1.0 million pretax gain
related to an insurance recovery.
(h) 2000 includes $1.6 million of pretax income associated with the reduction in long-term
performance-based compensation, $1.4 million in pretax litigation charges, net of recoveries and $0.6
million of pretax costs to evaluate strategic options.
(i) Special charges and reorganization expenses, net were comprised of costs to evaluate strategic
options, discharge of deferred compensation obligations, separation costs for former officers, stock
option compensation, corporate restructuring costs, costs to exit facilities, reduction of long-term
performance based compensation, litigation charges and items related to our divested thermoforming
operations.
(j) For the years ended December 31, 2004 and 2003, EBITDA includes non-cash restricted stock
charges of $32.4 million and $21.8 million, respectively. For the year ended December 31, 2001, EBITDA
includes a $122.9 million loss on divestiture of assets and product lines. EBITDA, a non-GAAP financial
measure, is presented in this Form 10-K because the Company’s credit facility and senior subordinated
notes contain financial and other covenants which are based on or refer to the Company’s EBITDA. In
this regard, GAAP refers to generally accepted accounting principles in the United States. Additionally,
EBITDA is a basis upon which our management assesses financial performance and we believe it is
frequently used by securities analysts, investors and other interested parties in measuring the operating
performance and creditworthiness of companies with comparable market capitalization to the Company,
many of which present EBITDA when reporting their results. Furthermore, EBITDA is one of the factors
used to determine the total amount of bonuses available to be awarded to executive officers and other
employees. EBITDA is widely used by the Company to evaluate potential acquisition candidates. While
EBITDA is frequently used as a measure of operations and the ability to meet debt service requirements,
it is not necessarily comparable to other similarly titled captions of other companies due to potential
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15. Selected Financial Data (cont’d)
inconsistencies in the method of calculation. Because of these limitations, EBITDA should not be
considered a primary measure of the Company’s performance and should be reviewed in conjunction
with, and not as substitute for, financial measurements prepared in accordance with GAAP that are
presented in this Form 10-K. A reconciliation of the calculation of EBITDA, is presented below.
(k) For the year ended December 31, 2002, cash flows from operations included $38.6 million of income
tax refunds resulting primarily from the 2001 loss on divestiture of assets.
(m) Working capital is defined as current assets (including cash and cash equivalents) less current
liabilities.
Reconciliation of non-GAAP Measure
For the year ended December 31,
2004 2003 2002 2001 2000
(dollars in thousands)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,434 $31,778 $36,309 $(85,429) $ 4,922
Income tax provision (benefit) . . . . . . . . . . . . . . . . . . 26,041 20,488 16,189 (40,443) 2,402
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . 27,608 19,184 12,611 11,791 11,917
Depreciation and amortization . . . . . . . . . . . . . . . . . . 19,175 15,045 10,001 18,797 21,311
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $115,258 $86,495 $75,110 $(95,284) $40,552
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16. 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. The entire MD&A should
be read in conjunction with Item 6., Selected Financial Data and Item 8., Financial Statements and Supplementary
Data appearing elsewhere in this Form 10-K.
Overview
We are a leading provider of market leading branded consumer products used in and around the
home, marketed under well-known brand names including Ball®, Bee®, Bicycle®, Crawford®, Diamond®,
FoodSaver®, Forster®, Hoyle®, Kerr®, Lehigh®, Leslie-Locke®, Loew-Cornell® and VillaWare®. As a result
of our acquisition of American Household, Inc. (“AHI”) on January 24, 2005 (“AHI Acquisition”) we
also provide global consumer products through the Campingaz®, Coleman®, First Alert®, Health o
meter®, Mr. Coffee®, Oster® and Sunbeam® brands (see “Recent Developments”). See Item 1. Business
and Note 5. Business Segment Information in Item 8. Financial Statements and Supplementary Data,
both included herein, for a discussion of each of our segment’s products.
Results of Operations
‰ Our net sales increased by $251.0 million in 2004 or, in percentage terms, by 42.7% over 2003;
‰ Our operating income increased from $71.5 million in 2003 to $96.1 million in 2004 or, in
percentage terms, by 34.5% over the prior year. Such increase was after non-cash restricted stock
charges in 2004 and 2003 of $32.4 million and $21.8 million, respectively, which had the effect
of reducing our operating income reported under generally accepted accounting principles in
the United States (“GAAP”) in both years;
‰ Our net income increased from $31.8 million in 2003 to $42.4 million in 2004 or, in percentage
terms, by 33.5% over the prior year. Such increase was after non-cash restricted stock charges,
net of related tax benefits, in 2004 and 2003 of $20.0 million and $13.3 million, respectively,
which had the effect of reducing our net income reported under GAAP in both years;
‰ Our diluted earnings per share increased from $1.35 in 2003 to $1.49 in 2004 or, in percentage
terms, by 10.4% over the prior year. Given our diluted weighted average shares outstanding in
2004 and 2003 of 28.5 million and 23.5 million, respectively, the effect of the non-cash restricted
stock charges discussed above was to reduce our diluted earnings per share amounts reported
under GAAP by $0.71 and $0.56 in 2004 and 2003, respectively; and
‰ The increases to our net sales, operating income, net income and diluted earnings per share
discussed above, are principally the result of acquisitions we completed in 2004 and 2003, which
are described in “Acquisition Activities” below. In addition, on an overall basis we had organic
growth of approximately 5% in 2004.
Liquidity and Capital Resources
‰ In taking advantage of cash on hand to partially fund the acquisitions of Bicycle Holding, Inc.
and its wholly-owned subsidiary United States Playing Card Company (collectively “USPC” and
“USPC Acquisition”) and to fund the acquisition of Loew-Cornell, Inc. (“Loew-Cornell” and
“Loew-Cornell Acquisition”), our liquidity, as measured by cash and cash equivalents on hand
and availability under our debt facility was lower at December 31, 2004 than at December 31,
2003;
‰ We ended 2004 with a lower net debt-to-total capitalization ratio than as of December 31, 2003
due to a significant increase in our market capitalization, which was only partially offset by the
additional debt incurred to partially fund the USPC Acquisition;
14
17. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(cont’d)
‰ We increased total stockholder’s equity to approximately $334.0 million at December 31, 2004
from approximately $249.9 million at December 31, 2003, primarily due to net income and
restricted common stock issuances;
‰ Cash flow generated from operations was approximately $70.4 million in 2004 compared to
$73.8 million in December 31, 2003. The decrease of $3.4 million was principally due to an
increase in working capital, partially offset by an increase of $17.4 million in cash operating
income;
‰ As of December 31, 2004, we had $20.7 million of cash and cash equivalents on hand and
nothing drawn down under our revolving credit facility; and
‰ On January 24, 2005 we completed our acquisition of AHI, a privately held company, for
approximately $745.6 million in cash for the equity and the repayment of approximately $100
million of indebtedness (“AHI Acquisition”). The AHI Acquisition was funded through a
combination of new debt and equity financing (see “Financial Condition, Liquidity and Capital
Resources” and “Recent Developments”).
We intend the discussion of our financial condition and results of operations, including our
acquisition and disposition 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 expanding sales of
our existing brands. Our strategy to achieve future growth is through internal growth as well as to
consider future acquisitions of businesses or brands that complement our existing product portfolio (see
“Recent Developments” below).
2004 Activity
On June 28, 2004 we acquired approximately 75.4% of the issued and outstanding stock of USPC
and subsequently acquired the remaining 24.6% pursuant to a put/call agreement (“Put/Call
Agreement”) on October 4, 2004. USPC is a manufacturer and distributor of playing cards and related
games and accessories. USPC’s portfolio of owned brands includes Aviator®, Bee®, Bicycle® and Hoyle®.
In addition, USPC has an extensive list of licensed brands, including Disney®, Harley-Davidson®,
Mattel®, NASCAR® and World Poker Tour™. USPC’s international holdings include Naipes Heraclio
Fournier, S.A., a leading playing card manufacturer in Europe. The aggregate purchase price was
approximately $237.9 million, including transaction expenses and deferred consideration amounts. 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 cash portion of the October 4,
2004 exercise of the Put/Call Agreement was funded by a combination of cash on hand and borrowings
under our existing revolving credit facility.
As of December 31, 2004, in connection with the USPC Acquisition, we had accrued approximately
$20 million of deferred consideration for purposes of guaranteeing potential indemnification liabilities
of the sellers, of which $10 million is included as part of Deferred Consideration for Acquisitions on our
15
18. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(cont’d)
Consolidated Balance Sheet. The remaining $10 million is included in Other Non-current Liabilities on
our Consolidated Balance Sheet. The holdback amount is secured by a stand-by letter of credit under
our senior credit facility.
We also accrued approximately $3.0 million for a planned and ongoing restructuring related to
USPC. In addition, the USPC Acquisition includes an earn-out provision with a potential payment in
cash of up to $2 million and an additional potential payment of up to $8 million (for a potential total of
up to $10 million) in either cash or our common stock, at our sole discretion, payable in 2007, provided
that certain earnings performance targets are met. If paid, we expect to capitalize the cost of the earn-
out. USPC is included in our branded consumables segment from June 28, 2004.
During the first quarter of 2004, we completed the tuck-in acquisition of Loew-Cornell. Loew-
Cornell is a leading marketer and distributor of paintbrushes and other arts and crafts products. The
Loew-Cornell Acquisition includes an earn-out provision with a payment in cash or our common stock,
at our sole discretion, based on earnings performance targets. As of December 31, 2004, the outcome of
the contingent earn-out is not determinable beyond a reasonable doubt. Therefore, only the
prepayment of the contingent consideration ($0.5 million to be paid in equal installments during 2005
and 2006) has been recorded as part of Deferred Consideration for Acquisitions on our Consolidated
Balance Sheet. Loew-Cornell is included in the branded consumables segment from March 18, 2004.
2003 Activity
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 a leading
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 $157.5 million, including transaction expenses. In addition, the Lehigh Acquisition
includes a contingent consideration provision with a potential payment in cash or our common stock, at
our sole discretion, of up to $25 million payable in 2006, provided that certain earnings performance
targets are met. Since this consideration is not payable beyond a reasonable doubt, no amount has been
accrued in our Consolidated Balance Sheet as of December 31, 2004. 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 plastic cutlery, clothespins,
kitchen matches and toothpicks under the Diamond® and Forster® 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.
We also completed two tuck-in acquisitions in 2003. In the fourth quarter of 2003, we completed
our acquisition of the VillaWare Manufacturing Company (“VillaWare”). VillaWare’s results are included
in the consumer solutions segment from October 3, 2003. In the second quarter of 2003, we completed
our acquisition of O.W.D., Incorporated and Tupper Lake Plastics, Incorporated (collectively “OWD”).
The branded product distribution operation acquired in the acquisition of OWD is included in the
branded consumables segment from April 1, 2003. The plastic manufacturing operation acquired in the
acquisition of OWD is included in the plastic consumables segment from April 1, 2003.
16
19. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(cont’d)
2002 Activity
On April 24, 2002, we completed our acquisition of the business of Tilia International, Inc. and its
subsidiaries (“Tilia” and the “Tilia Acquisition”). We acquired the business of Tilia for approximately
$145 million in cash and $15 million in seller debt financing. In addition, the Tilia Acquisition includes
an earn-out provision with a potential payment in cash or our common stock, at our sole discretion, of
up to $25 million payable in 2005, provided that certain earnings performance targets are met. At
December 31, 2004, we estimated that the earn-out payment, payable in the second quarter of 2005,
could be approximately $17.3 million and we have accrued this amount in Deferred Consideration for
Acquisitions on our Consolidated Balance Sheet. We have capitalized this earn-out accrual into goodwill.
Tilia is included in the consumer solutions segment from April 1, 2002.
Pro forma financial information for 2004 and 2003, relating to the USPC Acquisition, the Lehigh
Acquisition and the Diamond Acquisition has been included in Item 8. Financial Statements and
Supplementary Data.
The results of Loew-Cornell, VillaWare and OWD did not have a material effect on our results for
the years ended December 31, 2004 and 2003 and are not included in the pro forma financial
information presented in Item 8., Financial Statements and Supplementary Data.
Results of Operations – Comparing 2004 to 2003
We reported net sales of $838.6 million in 2004, a 42.7% increase from net sales of $587.7 million in
2003.
In 2004, our branded consumables segment reported net sales of $473.1 million compared to
$257.9 million in 2003. This increase of 83.5% was principally a result of acquisitions. Excluding the
effects of acquisitions, net sales of our branded consumables segment were $7.4 million or 2.9% higher
than 2003, principally due to higher home canning sales and home improvement sales. Our consumer
solutions segment reported net sales of $222.2 million compared to $216.1 million in net sales in 2003.
This increase of 2.8% was principally the result of the tuck-in acquisition of VillaWare in the fourth
quarter of 2003. Net sales of our FoodSaver® branded machines were lower in 2004 compared to 2003
due to a market shift to lower priced FoodSaver® machines, partially offset by sales volume increases for
FoodSaver® machines and increased bag unit sales.
In 2004, our plastic consumables segment reported net sales of $128.1 million compared to $109.1
million in 2003. The principal reason for this increase of 17.5% was both an increase in sales of plastic
cutlery to our branded consumables segment, as well as a full year effect of these sales due to the
addition of the plastic manufacturing business acquired in the Diamond Acquisition in February 2003.
Excluding intercompany sales, net sales for the plastic consumables segment were higher due to
increased sales to certain existing OEM customers and new international sales. In 2004, our other
segment reported net sales of $67.5 million compared to $42.8 million in 2003. The principal reasons
for this increase of 57.7% were a full year’s effect on net sales resulting from the effects of purchasing
rather than tolling zinc on behalf of certain customers, increases in the price of zinc which were passed
through to customers and strength in industrial zinc and low denomination coinage sales.
We reported operating earnings of $96.1 million in 2004 compared to operating earnings of $71.5
million in 2003. This increase of $24.6 million included non-cash restricted stock charges of
approximately $32.4 million and $21.8 million in 2004 and 2003, respectively. Excluding these non-cash
17
20. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(cont’d)
restricted stock charges, our operating earnings would have been 37.8% higher than 2003. The principal
reason for this increase was the effect of our 2003 and 2004 acquisitions. Due to the integration of
certain of our acquisitions it is no longer possible to compare the operating earnings, exclusive of
acquisitions, in the branded consumables segment with the prior year. The operating earnings of our
consumer solutions segment decreased by $5.5 million principally due to the sales effects discussed
above. The operating earnings of our plastic consumables segment decreased by $2.9 million due to
higher plastic resin prices which were not passed through to our branded consumables segment with
respect to plastic cutlery products and higher validation costs incurred for new business development
projects, partially offset by the sales effects discussed above. Operating earnings of our other segment
increased by $3.5 million due primarily to the sales effects discussed above.
Gross margin percentages on a consolidated basis decreased to 32.8% in 2004 from 36.3% in 2003.
The principal reasons for this decrease are the impact of the acquisitions completed in the last sixteen
months which have relatively lower gross margins, higher distribution costs in our branded consumables
segment, a shift to lower priced FoodSaver® machines in our consumer solutions segment and the effect
of the contractual tolling changes in our other segment as discussed above.
Selling, general and administrative expenses decreased as a percentage of net sales from 20.4% in
2003 to 17.5% in 2004. The decrease in percentage terms was principally due to the inclusion of the
acquisitions completed during 2003 and 2004, which have relatively lower selling, general and
administrative expenses as a percentage of net sales and to spending not increasing at the same rate as
organic growth. The increase in dollar terms, from $119.8 million in 2003 to $146.9 million in 2004, was
principally the result of the acquisitions completed during 2003 and 2004, higher sales and marketing
expenses in our branded consumables segment and higher validation costs incurred for new business
development projects and higher employee compensation costs in our plastic consumables segment,
partially offset by lower media spending, lower legal costs and lower employee compensation costs in the
consumer solutions segment.
During the fourth quarters of 2004 and 2003, we recorded non-cash restricted stock charges of
approximately $32.4 million and $21.8 million, respectively, relating to the lapsing of restrictions over
restricted stock issuances to certain executive officers.
Net interest expense increased to $27.6 million in 2004 compared to $19.2 million in 2003. This
increase was primarily due to higher levels of outstanding debt in 2004 compared to 2003, resulting from
the additional debt financing required to fund the acquisitions completed in the last sixteen months.
Our effective tax rate in 2004 was 38.0% compared to an effective tax rate of 39.2% in 2003.
Our diluted earnings per share increased from $1.35 in 2003 to $1.49 in 2004 or, in percentage
terms, by 10.4% over the prior year. Given our diluted weighted average shares outstanding in 2004 and
2003 of 28.5 million and 23.5 million, respectively, the effect of the non-cash restricted stock charges
discussed above was to reduce our diluted earnings per share amounts reported under GAAP by $0.71
and $0.56 in 2004 and 2003, respectively.
Results of Operations – Comparing 2003 to 2002
We reported net sales of $587.7 million in 2003, a 60.1% increase from net sales of $367.1 million in
2002.
18
21. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(cont’d)
In 2003, our branded consumables segment reported net sales of $257.9 million compared to
$111.2 million in 2002. This increase of 131.8% was principally the result of the Diamond Acquisition,
effective February 1, 2003, and the Lehigh Acquisition, effective September 2, 2003. In addition, the
acquisition of OWD in the second quarter of 2003 contributed to this increase. Excluding the effect of
acquisitions, net sales for our branded consumables segment in 2003 were comparable to 2002.
Our consumer solutions segment reported net sales of $216.1 million in 2003 compared to $145.3
million in net sales in 2002. This increase of 48.7% was principally the result of this segment being
acquired in April 2002 and, therefore, net sales for 2003 reflect sales for the full year but net sales for
2002 reflect sales for only nine months of the year. Additionally, the acquisition of VillaWare in the
fourth quarter of 2003 contributed to this increase. Furthermore, the year-on-year increase is a result of
organic U.S. retail and international sales growth of over 10% for this segment in the last three quarters
of 2003 compared to the same period in 2002.
In 2003, our plastic consumables segment reported net sales of $109.1 million compared to $70.6
million in 2002. The principal reason for this increase of 54.5% was intercompany sales generated by the
addition of the plastic manufacturing business acquired in the Diamond Acquisition. In addition, the
intercompany sales resulting from the acquisition of OWD in the second quarter of 2003 also
contributed to this increase. Excluding intercompany sales, net sales for the plastic consumables
segment increased slightly in 2003 due to higher sales volumes with a number of customers, partially
offset by the loss of sales to one large customer and a contractual sales price reduction with another
large customer.
In 2003, our other segment reported net sales of $42.8 million compared to $41.0 million in 2002.
The principal reason for this increase of 4.3% was an increase in sales to a major customer as a result of
a contractual change whereby this segment took on the responsibility of purchasing the raw material
inventory for the customer.
We reported operating earnings of $71.5 million in 2003 compared to operating earnings of $65.1
million in 2002. This increase of $6.4 million, or 9.7%, occurred despite the 2003 operating earnings
being negatively impacted, as a result of a non-cash restricted stock charge of approximately $21.8
million. Excluding this non-cash restricted stock charge, our operating earnings would have been 43.3%
higher than 2002. The principal reason for this increase was that the branded consumables segment’s
operating earnings increased by $18.5 million from 2002 to 2003, due to the addition of the acquired
Diamond Brands and Lehigh product lines, as well as an increase in organic operating earnings due to a
favorable home canning sales mix resulting from increased sales of premium products. Also, the
operating earnings of the consumer solutions segment increased by $10.9 million, principally due to (i)
the acquisition of this business in April 2002; (ii) the acquisition of VillaWare in the fourth quarter of
2003 and (iii) increased organic net sales of over 10% in the final three quarters of 2003 relative to the
comparable prior year periods, partially offset by increased litigation costs arising from an action that we
took against certain competitors who we believe had infringed on our intellectual property. Operating
earnings in 2003 for our plastic consumables segment were approximately $0.5 million higher than the
same period in the prior year due to the earnings effect from the intercompany sales, partially offset by
lower gross margins resulting from the changes in net sales discussed above. Operating earnings in 2003
for our other segment were $0.8 million lower compared to the same period in the prior year due to a
greater amount of net sales having lower gross margins principally due to the contractual change with
one major customer as discussed above.
Gross margin percentages on a consolidated basis decreased to 36.3% in 2003 from 39.1% in 2002.
The primary reason for these lower gross margins is the addition of the relatively lower gross margin
19
22. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(cont’d)
Diamond Brands and Lehigh product lines. This effect is partially offset by the benefit of including the
higher gross margins of the acquired consumer solutions business for the full year in 2003 but only nine
months of the year in 2002.
Selling, general and administrative expenses increased to $119.8 million in 2003 from $78.3 million
in 2002, or, as a percentage of net sales, decreased to 20.4% in 2003 from 21.3% in 2002. The increase in
dollar terms was principally the result of the acquisitions completed during 2003 and 2002. Also, the
selling, general and administrative expenses increased, in part, due to higher marketing expenditures
and legal costs. The decrease in percentage terms was principally due to the addition of the Diamond
Brands and Lehigh product lines, which have relatively lower selling, general and administrative
expenses as a percentage of net sales compared to those of our consumer solutions segment.
During the fourth quarter of 2003, we recorded a non-cash restricted stock charge of approximately
$21.8 million relating to the lapsing of restrictions over restricted stock issuances to certain officers.
Net interest expense increased to $19.2 million in 2003 compared to $12.6 million in 2002. This
increase resulted from higher levels of outstanding debt in 2003 compared to the same period in 2002,
principally due to (i) the principal on the $150 million of our 9 3⁄4% senior subordinated notes (“Notes”)
issued in connection with the Tilia Acquisition being outstanding for the entire twelve months of 2003 as
compared to only nine months of 2002, (ii) the additional respective financings in 2003 in connection
with the Diamond Acquisition and the Lehigh Acquisition, and (iii) the issuance of an additional $30
million principal amount of Notes in 2003. Our weighted average interest rate in 2003 of 6.2% was lower
than our weighted average interest rate of 7.0% in 2002.
Our effective tax rate in 2003 was 39.2% compared to an effective tax rate of 30.8% in 2002. 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 $4.4 million of this valuation allowance was released in 2002 resulting in an
income tax provision of $16.2 million. Excluding the release of this valuation allowance our effective tax
rate would also have been approximately 39.2% in 2002.
Our net income in 2003 of $31.8 million included a reduction of $13.3 million reflecting the
amount of the restricted stock charge discussed above, net of related tax benefit. Given that our diluted
weighted average shares in 2003 were 23.5 million, the non-cash restricted stock charge, net of related
tax benefits also had the effect of reducing our diluted earnings per share by $0.56 to $1.35. Our net
income in 2002 of $36.3 million included the benefit of the valuation allowance release discussed above.
Given that our diluted weighted average shares in 2002 were 21.6 million, the net release of the tax
valuation allowance had the effect of improving our diluted earnings per share by $0.20 to $1.68.
Financial Condition, Liquidity and Capital Resources
2004 Activity
During 2004, the following changes were made to our capital resources:
‰ we completed a $116 million add-on to our Term B loan facility (“Term B Add-on”) under a
Second Amended Credit Agreement, to partially fund the USPC Acquisition;
‰ we repaid $5.4 million of seller debt financing;
20
23. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(cont’d)
‰ we issued an aggregate of 955,080 restricted shares of common stock under our 2003 Stock
Incentive Plan, of which, in conjunction with the AHI transaction, the restrictions on 735,000 of
these shares were lapsed at the time of issuance and we accelerated the granting of a further
140,000 of these shares; and
‰ in anticipation of the additional floating rate debt financing required to complete the AHI
Acquisition, we entered into two interest rate swaps that converted an aggregate of $300 million
of existing floating rate interest payments under our term loan facility for a fixed obligation.
Specifically, in December 2004, in anticipation of the additional floating rate debt financing
required to complete the AHI Acquisition, we entered into two interest rate swaps, effective in January
2005, that converted an aggregate of $300 million of floating rate interest payments under our term loan
facility for a fixed obligation. The first interest rate swap, for $150 million of notional value, carries a
fixed interest rate of 3.625% per annum for a term of three years. The second interest rate swap, also for
$150 million of notional value, carries a fixed interest rate of 4.0675% per annum for a term of five
years. The swaps have interest payment dates that are the same as our term loan facilities. The swaps are
considered to be cash flow hedges and are also considered to be effective hedges against changes in
future interest payments of our floating-rate debt obligations for both tax and accounting purposes.
Gains and losses related to the effective portion of the interest rate swap will be reported as a component
of other comprehensive income and will be reclassified into earnings in the same period that the
hedged transaction affects earnings. As of December 31, 2004, the fair value of these interest rate swaps,
which was unfavorable in the amount of approximately $0.5 million, was included as an unrealized loss
in Accumulated Other Comprehensive Income on our Consolidated Balance Sheet.
On June 28, 2004, in connection with the USPC Acquisition, we completed our $116 million Term
B Add-on under the Second Amended Credit Agreement. The proceeds from the Term B Add-on were
used to partially fund the USPC Acquisition. The spread on the Term B Add-on was 2.25% over London
Interbank Offered Rate (“LIBOR”). Additionally, under this Second Amended Credit Agreement, the
spread on our existing Term B loan facility was reduced from 2.75% over LIBOR to 2.25% over LIBOR.
The Second Amended Credit Agreement did not significantly change the restrictions on the
conduct of our business or the financial covenants required in our previous senior credit facility
(“Amended Credit Agreement”) (see “2003 Activity” below). The Second Amended Credit Agreement,
which matures on April 24, 2008, also did not change the pricing and principal terms of our $70 million
revolving credit facility.
As of December 31, 2004, we had $302.9 million outstanding under our term loan facilities and no
outstanding amounts under the revolving credit facility of our Second Amended Credit Agreement. As
of December 31, 2004, net availability under the revolving credit facility was approximately $44.2 million,
after deducting $25.8 million of issued letters of credit. The letters of credit outstanding include an
amount of approximately $20 million securing a holdback on the USPC Acquisition (see “Acquisition
Activities” above). We are required to pay commitment fees on the unused balance of the revolving
credit facility.
As of December 31, 2004, we also had other debt outstanding in the amount of approximately $1.5
million, which principally consists of bank notes that are payable in equal quarterly installments through
April 2007 with rates of interest at Euro Interbank Offered Rate plus 1.00%.
21
24. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(cont’d)
In August 2004, our board of directors (“Board”) approved the granting of an aggregate of 140,000
restricted shares of our common stock to three of our executive officers. The restrictions on these shares
were to lapse ratably over a three-year period commencing January 1, 2005, and would lapse immediately
in the event of a change in control.
Following the signing of the AHI transaction, during October 2004, our Board amended the terms
of all of the 140,000 restricted shares of common stock issued in August 2004 to lapse immediately. Also
in conjunction with the AHI transaction, in October 2004, our Board accelerated the granting of an
aggregate amount of 735,000 restricted shares of common stock under our 2003 Stock Incentive Plan to
two of our executive officers that would otherwise have been granted to these executive officers in 2005-
2007 pursuant to such executives’ respective employment agreements. The Board approved that the
restrictions on these shares lapse upon issuance. We record non-cash compensation expense for our
issued and outstanding restricted stock either when the restrictions lapse or ratably over time, when the
passage of time is the only restriction. As such, we recorded a non-cash compensation expense for all
these restricted stock issuances and restriction lapses of approximately $32.4 million in the fourth
quarter of 2004.
In July 2004, our Board approved a grant of 10,000 restricted shares of our common stock to Mr.
Jonathan Franklin, who was a consultant to us and who is a brother of Mr. Martin E. Franklin, our
Chairman and Chief Executive Officer. The restrictions on 5,000 of these shares lapsed immediately and
we recorded a non-cash compensation charge based on the fair market value of our 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 is being recognized on these shares based on the market value
of our 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.
In April 2004, we repaid the remaining seller debt financing incurred in connection with the Tilia
Acquisition, which included both principal and accrued interest thereon, in the amount of
approximately $5.4 million.
During 2004, we incurred costs in connection with the issuance of the Second Amended Credit
Agreement of approximately $2.3 million.
In addition, during 2004, we issued 70,080 restricted shares of our common stock to certain other
officers and employees under our 2003 Stock Incentive Plan. The restrictions on 26,750 of these shares
will lapse ratably over five years of employment with us. The restrictions on the remaining 43,330 of
these shares will lapse upon the latter of either our stock price achieving a volume weighted average of
$64 per share for ten consecutive business days or November 1, 2008.
We issued all of the restricted shares discussed above out of our treasury account.
2003 Activity
On September 30, 2003, we completed a public offering (“Offering”) of approximately 4.8 million
shares of our common stock at $24.67 per share. Proceeds from the Offering, net of underwriting fees
and related expenses, totaled approximately $112.3 million. The net proceeds of the Offering were used
for a combination of general corporate purposes, acquisitions and debt repayment.
During 2003, we amended and restated our existing senior credit facility (“Amended Credit
Agreement”). The Amended Credit Agreement provided for up to $280 million of senior secured loans,
22
25. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(cont’d)
consisting of a $70 million revolving credit facility, a $60 million term loan facility, and a new $150
million five-year term loan facility. The new term loan facility bore interest at a rate equal to (i) the
Eurodollar Rate (as determined by the Administrative Agent) 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
0.50%, plus, in each case, an applicable margin of 2.75% per annum for Eurodollar loans and 1.75% per
annum for Base Rate loans. The pricing and principal of the revolving credit facility and the previously
existing term loan did not change. The revolving credit facility continued to have a $15 million letters of
credit sublimit and a $10 million swing line loans sublimit. On September 2, 2003, we drew down the full
amount of the new $150 million term loan facility, which funds were used principally to pay the majority
of the cash consideration for the Lehigh Acquisition. Our Amended Credit Agreement was scheduled to
mature on April 24, 2008.
The Amended Credit Agreement contained certain restrictions on the conduct of our business,
including, among other things restrictions, generally, on:
‰ incurring debt;
‰ disposing of certain assets;
‰ 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 Amended Credit Agreement also included financial covenants that required us to maintain
certain leverage and fixed charge ratios and a minimum net worth.
On May 8, 2003, we issued an additional $30 million of Notes (bringing to a total $180 million of
Notes issued and outstanding, including the 2002 issuance discussed below). The net proceeds of the
offering were used to reduce the outstanding revolver balances under our senior credit facility. The
Notes were issued at a price of 106.5% of face value and we received approximately $32.0 million in
gross proceeds from the issuance. As a result of an exchange offer completed on December 2, 2003, all
of the Notes are governed by an indenture, dated as of April 24, 2002, as supplemented (“April 2002
Indenture”). Significant terms of the Notes and the April 2002 Indenture are discussed under “2002
Activity.”
On May 6, 2003, we entered into a $30 million interest rate swap (“New Swap”) to receive a fixed
rate of interest and pay a variable rate of interest based upon LIBOR. The New Swap is a swap against
our Notes.
During the fourth quarter of 2003, we recorded a non-cash restricted stock charge of approximately
$21.8 million related to the lapsing of restrictions over all the restricted stock issuances to three of our
executive officers, discussed immediately below and in “2002 Activity” also below. We received a tax
deduction for this non-cash restricted stock charge.
23
26. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(cont’d)
During 2003, we issued an aggregate amount of 562,500 shares of restricted stock to three of our
executive officers. We issued these shares under our 2003 Stock Incentive Plan and out of our treasury
stock account. During 2003, all of these restricted stock issuances either provided or were amended to
provide that the restrictions lapse upon the earlier of (i) a change in control; or (ii) the earlier of our
common stock achieving a closing price of $28 (up from $23.33) or us achieving annualized revenues of
$800 million. However, if such restrictions were to lapse during a period when these officers were subject
to additional contractual limitations on the sale of securities, the restrictions on such shares would
continue until the expiration or waiver of such additional contractual limitations. As discussed above,
during the fourth quarter of 2003, all such restrictions lapsed, which resulted in a restricted stock
charge.
During 2003, we also issued 7,200 shares of our restricted stock to certain other officers and
employees. The restrictions on these shares will lapse ratably over five years of employment with us.
In January 2002, two executive officers exercised 900,000 and 450,000 non-qualified stock options,
respectively, which had been granted under our 2001 Stock Option Plan. These shares were issued out
of our treasury stock account. The exercises were accomplished via loans from us under our Executive
Loan Program. The principal amounts of the loans were $3.3 million and $1.6 million, respectively, and
bore interest at 4.125% per annum. The loans were due on January 23, 2007 and were classified within
the Stockholders’ Equity section of our Consolidated Balance Sheet. The loans could be repaid in cash,
shares of our common stock, or a combination thereof. In February 2003, one of the executive officers
surrendered to us shares of our common stock to repay $0.3 million of his loan. On April 29, 2003, both
of the executive officers each surrendered to us shares of our common stock to repay in full all
remaining principal amounts and accrued interest owed under their respective loans. We will not make
any additional loans under the Executive Loan Program.
Effective April 2, 2003, we entered into an interest rate swap that converted $37 million of floating
rate interest payments under our term loan facility for a fixed obligation that carries an interest rate,
including applicable margin, of 4.25% per annum. The swap had interest payment dates that were the
same as the term loan facility and it matured on September 30, 2004.
In March 2003, we unwound a $75 million interest rate swap to receive a fixed rate of interest and
pay a variable rate of interest based upon LIBOR and contemporaneously entered into a new $75
million interest rate swap (“Second Replacement Swap”). Like the swap that it replaced, the Second
Replacement Swap is a swap against our Notes. The Second Replacement Swap has a maturity date that
is the same as the Notes. Interest is payable semi-annually in arrears on May 1 and November 1. As of
December 31, 2004, we have accrued interest (including the applicable spread) on the swap at an
effective rate of 7.84%.
In return for unwinding the swap, we received $3.2 million of cash proceeds. Of this amount,
approximately $1 million of such proceeds related to accrued interest that was owed to us at such time.
The remaining $2.2 million of proceeds is being amortized over the remaining life of the Notes as a
credit to interest expense and the unamortized balances are included in our Consolidated Balance Sheet
as an increase to the value of the long-term debt. We are exposed to credit loss in the event of non-
performance by the other party to the Second Replacement Swap, a large financial institution, however,
we do not anticipate non-performance by the other party. The fair market value of our interest rate
swaps as of December 31, 2004, was unfavorable in an amount of approximately $2.0 million and is
included as a non-current liability in our Consolidated Balance Sheet, with a corresponding offset to
long-term debt.
24
27. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(cont’d)
During 2003, we repaid seller debt financing, incurred in connection with the Tilia Acquisition, in
the principal amount of $10 million.
In January 2003, we filed a shelf registration statement, which was declared effective by the
Securities and Exchange Commission on January 31, 2003. This shelf registration statement was
intended to facilitate our access to growth capital for future acquisitions and allowed us to sell over time
up to $150 million of common stock, preferred stock, warrants, debt securities, or any combination of
these securities in one or more separate offerings in amounts, at prices and on terms to be determined
at the time of the sale. The equity offering completed in September 2003 and the $30 million of Notes
issued in May 2003, were covered by our shelf registration statement and, in the aggregate, constituted
the issuance of approximately $150 million in registered securities. Accordingly, no further issuances will
be made under this registration statement.
During 2003, we incurred costs in connection with the issuance of the Notes and the Amended
Credit Agreement of approximately $5.9 million.
2002 Activity
In April 2002, in connection with the Tilia Acquisition we made 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, as amended. The Notes were issued at a discount such that we received approximately $147.7
million in net proceeds. The Notes are scheduled to mature on May 1, 2012, however, on or after May 1,
2007, we can 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, with
the first payment having occurred on November 1, 2002. The April 2002 Indenture governing the Notes
also contains certain restrictions on the conduct of our business.
Prior to the Amended Credit Agreement, we entered into a credit agreement in connection with
the Tilia Acquisition (“Old Credit Agreement”). The Old Credit Agreement was scheduled to mature on
April 24, 2007. The revolving credit facility and the term loan facility bore 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 Old Credit Agreement contained restrictions on the conduct of our business similar to the
Amended Credit Agreement. The Old Credit Agreement was replaced by the Amended Credit
Agreement.
Until it was replaced by the Old Credit Agreement on April 24, 2002, our senior credit facility, as
amended 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 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 the first quarter of 2002, approximately $38 million of
tax refunds we received were used to repay a portion of the outstanding amounts under this credit
agreement.
25
28. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(cont’d)
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 Swap had a maturity date that was the same as the Notes. Interest was payable semi-annually
in arrears on May 1 and November 1, commencing on November 1, 2002. The initial effective rate of
interest that we established on this swap was 6.05%.
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 (“First Replacement Swap”).
The First Replacement Swap had the same terms as the Initial Swap, except that we were required to pay
a variable rate of interest based upon 6 month LIBOR in arrears. The spread on this contract was 470
basis points. Based upon this contract, we paid an effective interest rate of 6.32% on November 1, 2002.
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 is being
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 Second Replacement Swap. The First
Replacement Swap was superseded by the Second Replacement Swap, as discussed above.
All of our swaps have been and, where applicable, are considered to be effective hedges against
changes in the fair value of our fixed-rate debt obligation for both tax and accounting purposes.
During 2002, we issued an aggregate of 210,000 shares of restricted stock to two of our executive
officers under our 1998 Long-Term Equity Incentive Plan, as amended and restated, and out of our
treasury stock account. During 2003, the restricted stock issuances were amended to provide that the
restrictions would lapse upon the same terms as the 2003 restricted stock issuances discussed in “2003
Activity” above. Also, as discussed in “2003 Activity” above, during the fourth quarter of 2003 all such
restrictions lapsed and we recorded a restricted stock charge.
During 2002, shares of our common stock in the aggregate amount of 45,009 were issued to certain
of our other officers under our 1998 Performance Share Plan. In connection with these stock issuances,
we recorded a non-cash compensation expense charge of approximately $0.6 million.
During 2002, we also issued 5,250 of shares of our restricted stock to certain of our other officers
and employees. The restrictions on these shares will lapse ratably over five years of employment with us.
During 2002, we incurred costs in connection with the issuance of the Notes and the Old Credit
Agreement of approximately $7.4 million.
Working Capital
Working capital (defined as current assets less current liabilities) decreased to approximately $181.4
million at December 31, 2004, from approximately $242.0 million at December 31, 2003, due primarily to:
‰ the use of cash on hand to finance our 2004 acquisitions; and
‰ the increase in our Deferred Consideration for Acquisitions balance on our Consolidated
Balance Sheet principally due to the contractual terms of our USPC Acquisition (see
“Acquisition Activities – 2004 Activity” above) and the recording of a contingent earn-out for our
Tilia Acquisition (see “Acquisition Activities – 2002 Activity” above); partially offset by
‰ the addition of the working capital of our 2004 acquired businesses; and
‰ higher inventory balances (see “Cash Flows from Operations” below).
26
29. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(cont’d)
Cash Flows from Operations
Cash flow generated from operations was approximately $70.4 million for the year ended December
31, 2004, compared to $73.8 million for the year ended December 31, 2003. This decrease of
approximately $3.4 million was principally due to an increase in working capital, partially offset by an
increase of $17.4 million in net income, excluding the non-cash restricted stock charges. The increase in
working capital is principally 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 increase the dollar value of the same quantity of inventory, the addition of a large number of
new product SKUs and continuing sales growth requiring greater levels of inventory.
Our statement of cash flows is prepared using the indirect method. Under this method, net income
is reconciled to cash flows from operating activities by adjusting net income for those items that impact
net income but do not result in actual cash receipts or payments during the period. These reconciling
items include depreciation and amortization, changes in deferred tax items, non-cash compensation,
non-cash interest expense, charges in reserves against accounts receivable and inventory and changes in
the balance sheet for working capital from the beginning to the end of the period.
Capital Expenditures
Capital expenditures were $10.8 million in 2004 compared to $12.8 million for 2003 and are largely
related to maintaining facilities, information systems, tooling projects and improving manufacturing
efficiencies. As of December 31, 2004, we had capital expenditure commitments in the aggregate for all
our segments of approximately $4.3 million.
Cash and Financing Availability
After taking into account the AHI Acquisition and its related financing in January 2005 (see “Recent
Developments” below), 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.
Contractual Obligations and Commercial Commitments
The following table includes aggregate information about our contractual obligations as of
December 31, 2004, and the periods in which payments are due. Certain of these amounts are not
required to be included in our consolidated balance sheet:
Payments Due by Period (millions of dollars)
Less than After 5
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years years
Long-term debt, including scheduled interest
payments (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $631.3 $45.1 $211.0 $159.1 $216.1
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.9 6.7 7.4 2.2 3.6
Unconditional purchase obligations . . . . . . . . . . . . 4.3 4.3 — — —
Other non-current obligations . . . . . . . . . . . . . . . . . 0.2 0.1 0.1 — —
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $655.7 $56.2 $218.5 $161.3 $219.7
27
30. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(cont’d)
(1) The debt amounts are based on the principal payments that will be due upon their maturity as well
as scheduled interest payments. Interest payments on our variable debt have been calculated based on
their scheduled payment dates and using the weighted average interest rate on our variable debt as of
December 31, 2004. Interest payments on our fixed rate debt are calculated based on their scheduled
payment dates. The debt amounts exclude approximately $3.2 million of non-debt balances arising from
the interest rate swap transactions described in Item 8., Note 15., Financial Statements and
Supplementary Data.
Commercial commitments are items that we could be obligated to pay in the future and are not
included in the above table:
‰ As of December 31, 2004, we had $25.8 million in standby and commercial letters of credit of
which $20.0 million expire in 2006, with the remainder expiring in 2005;
‰ In connection with a 2003 acquisition, we may be obligated to make future payments of up to
approximately $1.5 million in 2005;
‰ In connection with the Tilia Acquisition, we are obligated to pay an earn-out in cash or our
common stock, at our discretion, of up to $25 million in 2005, provided that certain earnings
performance targets are met. At December 31, 2004, we estimated that the earn-out payment,
payable in the second quarter of 2005, could be approximately $17.3 million and we have
accrued this amount in Deferred Consideration for Acquisitions on our Consolidated Balance
Sheet;
‰ In connection with the Lehigh Acquisition, we may be obligated to pay contingent consideration
in cash or our common stock, at our discretion, of up to $25 million in 2006, provided that
certain earnings performance targets are met;
‰ In connection with the USPC Acquisition, we may be obligated to pay an earn-out provision with
a potential payment in cash of up to $2 million and an additional potential payment of up to $8
million (for a potential total of up to $10 million) in either cash or our common stock in 2007,
at our discretion, provided that certain earnings performance targets are met;
‰ In connection with the Loew-Cornell Acquisition, we may be obligated to pay an earn-out
provision with a potential payment in cash or our common stock, at our discretion, beginning
with advance payments in 2005 and 2006. As of December 31, 2004, an amount of $0.5 million
in relation to this earn-out was accrued in Deferred Consideration for Acquisitions on our
Consolidated Balance Sheet. The balance on the earn-out is to be paid during 2007 through
2009 based on a defined formula as applied to Loew-Cornell’s earnings; and
‰ In connection with a contract we have entered into to acquire additional intellectual property,
we may be obligated to pay up to $7.0 million between 2005 and 2010, providing certain
contractual obligations, including the issuance of patents amongst other things, are satisfied.
Other than as discussed specifically above, these amounts are not required to be included in our
Consolidated Balance Sheet.
Off-Balance-Sheet Arrangements
As of December 31, 2004, we did not have any significant off-balance-sheet arrangements, as defined
in Item 303(a)(4)(ii) of SEC Regulation S-K.
28
31. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(cont’d)
Recent Developments
On January 24, 2005, we completed our acquisition of AHI, a privately held company, for
approximately $745.6 million in cash for the equity and the repayment of approximately $100 million of
indebtedness. AHI is the parent of The Coleman Company, Inc. (“Coleman”) and Sunbeam Products,
Inc. (“SPI”), leading producers of global consumer products through brands such as BRK®,
Campingaz®, Coleman®, First Alert®, Health o meter®, Mr. Coffee®, Oster® and Sunbeam®. Product
lines added include appliances, personal care and wellness, home safety equipment and outdoor leisure
and camping products. Had AHI been a part of us from January 1, 2004, our unaudited pro forma
consolidated net sales (including the pro forma effect of the USPC Acquisition) for 2004 would have
been $2.7 billion. The SPI business will be integrated within our existing consumer solutions segment in
2005 and the Coleman business will form a new segment of our Company called “outdoor solutions.”
In connection with the AHI Acquisition, we issued $350 million of equity securities pursuant to a
purchase agreement (“Equity Purchase Agreement”). The securities issued were as follows:
(i) 714,286 shares of our common stock for approximately $21.4 million, at a price of $30 per
share;
(ii) 128,571 shares or approximately $128.6 million of a new class of our preferred stock, Series B
Convertible Participating Preferred Stock (“Series B Preferred Stock”), par value $.01 per
share, at a price of $1,000 per share; and
(iii) 200,000 shares or approximately $200 million of a new class of our preferred stock, Series C
Mandatory Convertible Participating Preferred Stock (“Series C Preferred Stock”), par value
$.01 per share, at a price of $1,000 per share.
In accordance with the Equity Purchase Agreement and a related Assignment and Joinder
Agreement, approximately $300 million of our equity securities were issued to Warburg Pincus Private
Equity VIII, LP and its affiliates and approximately $50 million was issued to Catterton Partners V, LP
and its affiliates, both private equity investors (collectively “Private Equity Investors”). The cash raised in
connection with the Equity Purchase Agreement was used to fund a portion of the cash purchase price
of AHI.
The terms of the Equity Purchase Agreement require shareholder approval of the mandatory
conversion of the Series C Preferred Stock into a combination of Series B Preferred Stock and our
common stock. Subsequent to shareholder approval and mandatory conversion, our total new equity
issued to the Private Equity Investors, will consist of $300 million of Series B Preferred Stock and
1,666,667 shares of our common stock valued at $50 million, without taking into effect any other
conversion, market value increases or the accrual of dividends.
Additionally, the AHI Acquisition was also funded through a new $1.05 billion senior credit facility,
consisting of a term loan facility in the aggregate principal amount of $850 million and a revolving credit
facility with an aggregate commitment of $200 million. This facility replaces our Second Amended
Credit Agreement.
On January 24, 2005, we entered into two interest rate swaps, effective on January 26, 2005, that
converted an aggregate of $125 million of floating rate interest payments (excluding our 2% applicable
margin) under its term loan facility for a fixed obligation. Both interest rate swaps carry a fixed interest
rate of 4.025% per annum for a term of five years. The swaps have interest payment dates that are the
same as the term loan facility. The swaps are considered to be cash flow hedges and are also considered
to be effective hedges against changes in future interest payments of our floating-rate debt obligation for
29