Indian School of Business

PGPpro FSAN Group Assignment 3

Sunbeam Corp was engaged in making and selling small appliances such as coffee-makers, irons, etc.
It was in financial difficulty until it hired Al Dunlap in 1995. In 1996 Dunlap restructured operations
leading to a loss that year. In 1997 Sunbeam reported a profit. Given the statement of cash flows for
years ending 1995-1997, as well as its income statement, balance sheet, and excerpts from the notes
to the accounts, identify the red flags for manipulation of income in 1997, stating the possible
manipulation as clearly as possible.

STATEMENT OF CASH FLOWS 1997 1996 1995

OPERATING ACTIVITIES:
Net earnings (loss) 109,415 (228,262) 50,511

Adjustments to reconcile net earnings (loss) to net cash

provided by (used in) operating activities:

Depreciation and amortization 38,577 47,429 44,174

Restructuring, impairment and other costs -- 154,869 --
Other non-cash special charges -- 128,800 --
Loss on sale of discontinued operations, net of taxes 13,713 32,430 --
Deferred income taxes 57,783 (77,828) 25,146

Increase (decrease) in cash from changes

in working capital:

Receivables, net (84,576) (13,829) (4,499)

Inventories (1,00,810) (11,651) (4,874)
Account payable (1,585) 14,735 9,245
Restructuring accrual (43,378) -- --
Prepaid expenses and other current assets and liabilities (9,004) 2,737 (8,821)
Income taxes payable 52,844 (21,942) (18,452)
Payment of other long-term and non-operating liabilities (14,682) (27,089) (21,719)
Other, net (26,546) 13,764 10,805
---------- ---------- ----------
Net cash provided by (used in) operating activities: (8,249) 14,163 81,516
======= ======= =======

INVESTING ACTIVITIES:
Capital expenditures (58,258) (75,336) (140,053)
Decrease in investments restricted for plant construction -- -- 45,755
Proceeds from sale of divested operations and other assets 90,982 -- --
Purchase of businesses -- -- (13,053)
Other, net -- (860) --
 13,713 32,430 --
--------------- --------------- ---------------
Net cash provided by (used in) investing activities: 32,724 (76,196) (107,351)
========= ========= =========

FINANCING ACTIVITIES:
Net borrowings under revolving credit facility 5,000 30,000 40,000
Issuance of long-term debt -- 11,500 --
Payments of debt obligations (12,157) (1,794) (5,417)
Proceeds from exercise of stock options 26,613 4,684 9,818
Purchase of common stock for treasury -- -- (13,091)
Sale of treasury stock -- 4,578 --
Payments of dividends on common stock (3,399) (3,318) (3,268)
Other financing activities 320 (364) (264)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities: 16,377 45,286 27,778
========= ========= =========
Net increase (decrease) in cash and cash equivalents 40,772 (16,747) 1,943
Cash and cash equivalents at beginning of year 11,526 28,273 26,330
--------------- --------------- ---------------
Cash and cash equivalents at end of year 52,298 11,526 28,273
========= ========= =========
Consolidated Income Statement ($’m) 1997 1996 1995

Net sales 1,168.2 984.2 1,016.9

Cost of goods sold 837.7 900.6 809.1
Selling, general and administrative expense 131.1 214.0 137.5
Restructuring and asset impairment (benefit) charges 154.9

Operating earnings (loss) 199.4 (285.2) 70.2

Interest expense 11.4 13.6 9.4
Other (income) expense, net (1.2) 3.7 0.2

Earnings (loss) from continuing operations before income taxes 189.3 (302.6) 60.6
Income taxes (benefit) 66.2 (105.9) 23

Earnings (loss) from continuing operations 123.1 (196.7) 37.6

Loss from discontinued operations, net (13.7) (31.6) (12.9)
------------------ ----------------- -----------------
Net earnings (loss) 109.4 (228.3) 50.5
=========== =========== ===========

Earnings (loss) per share of common stock from continuing

operations:
Basic ($) 1.45 (2.37) 0.46
Diluted ($) 1.41 (2.37) 0.45
Loss from discontinued operations:
Basic ($) (0.16) (0.38) 0.16
Diluted ($) (0.16) (0.38) 0.16
Net earnings (loss) per share of common stock:
Basic ($) 1.29 (2.75) 0.62
Diluted ($) 1.25 (2.75) 0.61

Consolidated Balance Sheet ($’m) 1997 1996 1995

ASSETS
Cash and cash equivalents 52.4 11.5 28.3
Receivables, net 295.6 213.4 216.2
Inventories 256.2 162.3 209.1
Net assets of discontinued operations and other assets held for
sale -- 102.8 101.6
Deferred income taxes 36.7 93.7 26.3
Prepaid expenses and other current assets 17.2 40.4 19.5
---------- ---------- ----------
Total current assets 658.0 624.2 601.1
Property, plant and equipment, net 240.9 220.1 287.1
Trademarks, trade names, goodwill and other net 221.4 228.5 270.5
---------- ---------- ----------
Total assets 1,120.3 1,072.7 1,158.7
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of long-term debt 0.7 0.9 1.2
Accounts payable 105.6 107.3 94.2
Restructuring accrual 10.9 63.8 13.8
Other current liabilities 80.9 99.5 80.2
---------- ---------- ----------
Total current liabilities 198.1 271.6 189.3
Long-term debt 194.6 201.1 161.1
Other long-term liabilities 141.1 152.5 50.1
Deferred income taxes 54.6 52.3 76.9
Preferred stock -- -- --
Common stock 0.9 0.9 0.9
Paid-in capital 483.4 447.9 441.8
Retained earnings 141.1 35.1 266.7
Other -30.4 -25.3 -24.9
Treasury stock -63.0 -63.4 -83.4
---------- ---------- ----------
Total shareholders' equity 531.9 395.3 601.0
---------- ---------- ----------
Total liabilities and shareholders' equity 1,120.3 1,072.7 1,158.7
========== ========== ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Sunbeam Corporation ("Sunbeam" or the "Company") is a leading manufacturer and marketer of

branded consumer products. The Sunbeam/registered trademark/and Oster/registered trademark/
brands have been household names for generations, and the Company is a market share leader in
many of its product categories.

The Company markets its products through virtually every category of retailer including mass
merchandisers, catalog showrooms, warehouse clubs, department stores, catalogs, television
shopping channels, Company-owned outlet stores, hardware stores, home centers, drug and grocery
stores, pet supply retailers, as well as independent distributors and the military. The Company also
sells its products to commercial end users such as hotels and other institutions.

Approximately 79% of total Company sales are generated in the United States. The remaining sales
are generated primarily in Latin America, Mexico, Canada, Europe and Asia.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and all majority-
owned subsidiaries that it controls. All material intercompany balances and transactions have been
eliminated.

PRESENTATION OF FISCAL PERIODS

The Company's fiscal year ends on the Sunday nearest December 31. Fiscal
years 1997, 1996 and 1995 ended on December 28, 1997, December 29, 1996, and December 31,
1995 respectively, which encompassed 52-week periods.

USE OF ESTIMATES

The preparation of the consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates. Significant accounting estimates include the establishment of the
allowance for doubtful accounts, reserves for sales returns and allowances, product warranty, product
liability, excess and obsolete inventory, litigation and environmental exposures.

CONCENTRATIONS OF CREDIT RISK

Substantially all of the Company's trade receivables are due from retailers and distributors located
throughout the United States, Latin America and Canada. Approximately 36% of the Company's sales
in 1997 were to its five largest customers. The Company establishes its credit policies based on an
ongoing evaluation of its customers' creditworthiness and competitive market conditions and
establishes its allowance for doubtful accounts based on an assessment of exposures to credit losses
at each balance sheet date. The Company believes its allowance for doubtful accounts is sufficient
based on the credit exposures outstanding at December 28, 1997. However, certain retailers filed for
bankruptcy protection in the last several years and it is possible that additional credit losses could be
incurred if the trends of retail consolidation continue.

INVENTORIES

Inventories are stated at the lower of cost or market with cost being determined principally by the
first-in, first-out method.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at cost. The Company provides for depreciation using
primarily the straight-line method in amounts that allocate the cost of property, plant and
equipment over the following useful lives:

Buildings and improvements ............... 20 to 40 years

Machinery, equipment and tooling ......... 3 to 15 years
Furniture and fixtures ................... 3 to 10 years

Leasehold improvements are amortized on a straight-line basis over the shorter of its estimated
useful life or the term of the lease.

LONG-LIVED ASSETS

The Company accounts for long-lived assets pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF.

CAPITALIZED INTEREST

Interest costs for the construction of certain long-term assets are capitalized and amortized over the
related assets' estimated useful lives. Total interest costs during 1997 and 1996 amounted to $12.3
million and $14.0 million respectively, of which $0.9 million and $0.4 million respectively, was
capitalized into the construction cost of the long-term assets.

AMORTIZATION PERIODS

Trademarks, trade names and goodwill are being amortized on a straight-line basis over 20 to 40
years.

REVENUE RECOGNITION

The Company recognizes revenues from product sales principally at the time of shipment to
customers. In limited circumstances, at the customers’ request the Company may sell seasonal
product on a bill and hold basis provided that the goods are completed, packaged and ready for
shipment, such goods are segregated and the risks of ownership and legal title have passed to the
customer. The amount of such bill and hold sales at December 29, 1997 was approximately 3% of
consolidated revenues.
Net sales is comprised of gross sales less provisions for expected customer returns, discounts,
promotional allowances and cooperative advertising.

WARRANTY COSTS

The Company provides for warranty costs in amounts it estimates will be needed to cover future
warranty obligations for products sold during the year. Estimates of warranty costs are periodically
reviewed and adjusted, when necessary, to consider actual experience.

ADVERTISING COSTS

Media advertising costs included in Selling, General and Administrative Expense ("SG&A") are
expensed as incurred. Co-operative advertising costs are expensed ratably over the year in relation
to revenues

FOREIGN CURRENCY TRANSLATION

The assets and liabilities of subsidiaries, other than those operating in highly inflationary economies,
are translated into U.S. dollars at year-end exchange rates, with resulting translation gains and losses
accumulated in a separate component of shareholders' equity. Income and expense items are
converted into U.S. dollars at average rates of exchange prevailing during the year.

For subsidiaries operating in highly inflationary economies (Venezuela and Mexico), inventories and
property, plant and equipment are translated at the rate of exchange on the date the assets were
acquired, while other assets and liabilities are translated at year-end exchange rates. Translation
adjustments for those operations are included in "Other Expense, net" in the accompanying
Consolidated Statements of Operations.

STOCK-BASED COMPENSATION PLANS

SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION allows either adoption of a fair value
method for accounting for stock-based compensation plans or continuation of accounting under
Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
and related interpretations with supplemental disclosures.

The Company has chosen to account for its stock options using the intrinsic value based method
prescribed in APB Opinion No. 25 and, accordingly, does not recognize compensation expense for
stock option grants made at an exercise price equal to or in excess of the fair market value of the stock
at the date of grant. Pro forma net income and earnings per share amounts as if the fair value method
had been adopted are presented in Note 5. SFAS No. 123 does not impact the Company's results of
operations, financial position or cash flows.

EARNINGS PER SHARE OF COMMON STOCK

In 1997, the Company adopted SFAS No. 128, EARNINGS PER SHARE. Basic earnings per common share
calculations are determined by dividing earnings available to common shareholders by the weighted
average number of shares of common stock outstanding. Diluted earnings per share are determined
by dividing earnings available to common shareholders by the weighted average number of shares of
common stock and dilutive common stock equivalents outstanding (all related to outstanding stock
options and restricted stock discussed in Note 5).
The Company's reported primary earnings per share for 1995 has been restated to comply with the
requirements of SFAS No. 128. SFAS No. 128 had no impact on the Company's reported loss per share
for 1996 and no impact on the diluted earnings per share reported in 1995. The effect of this
accounting change on previously reported earnings per share (EPS) for 1995 was as follows:

Earnings per share from continuing operations

Primary EPS as reported .................... $0.45
Effect of SFAS No. 128 ..................... $0.01
Basic EPS as restated ...................... $0.46
Earnings per share
Primary EPS as reported .................... $0.61
Effect of SFAS No. 128 ..................... $0.01
Basic EPS as restated ...................... $0.62

RECLASSIFICATION

Certain prior year amounts have been reclassified to conform with the 1997 presentation.

NEW ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The adoption of SFAS No. 130 will have no
impact on the Company's consolidated results of operations, financial position or cash flows.

In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers.

SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997.
Financial statement disclosures for prior periods are required to be restated. The Company is in the
process of evaluating the disclosure requirements. The adoption of SFAS No. 131 will have no impact
on consolidated results of operations, financial position or cash flow.

3. CREDIT FACILITIES AND LONG-TERM DEBT

In December 1997, the Company entered into a revolving trade accounts receivable securitization
program to sell without recourse, through a wholly-owned subsidiary, certain trade accounts
receivable. The maximum amount of receivables that can be sold through this program is $70 million.
At December
28, 1997, the Company had received approximately $59 million from the sale of trade accounts
receivable. The proceeds from the sale were used to reduce borrowings under the Company's
revolving credit facility. Costs of the program, which primarily consist of the purchaser's financing cost
of issuing commercial paper backed by the receivables, totaled $.2 million during 1997, and have been
classified as interest expense in the accompanying Consolidated Statements of Operations. The
Company, as agent for the purchaser of the receivables, retains collection and administrative
responsibilities for the purchased receivables.

7. SUPPLEMENTARY FINANCIAL STATEMENT DATA

Supplementary Balance Sheet data at the end of each fiscal year is as follows (in thousands):

Supplementary Balance Sheet ($’000) 1997 1996

Receivables:

Trade 305,219 227,043

Sundry 7,794 2,412
---------- ----------
313,013 229,455
Valuation Allowance (17,463) (16,017)
---------- ----------
295,550 213,438
======= =======

Inventories:
Finished goods 142,976 84,813
Work in process 26,237 25,167
Raw materials and supplies 86,967 52,272
---------- ----------
256,180 162,252
======= =======

Property, Plant and Equipment:

Land 1,793 2,524
Buildings and improvements 98,054 95,619
Machinery and equipment 245,824 258,199
---------- ----------
345,671 356,342
---------- ----------
Accumulated depreciation and amortization (104,774) (136,254)
---------- ----------
240,897 220088
======= =======

Trademarks and trade names :

Gross 237,095 245,307
Accumulated amortization (42,723) (45,045)
---------- ----------
194,372 200,262