re-compute Sunbeam’s operating cash flows for 1997(i.e., compute a new cash flows amount based on your adjustments tothe original data). Clearly label the components of yourcomputations.ACG6175 – Final ExaminationNamePanther ID Number• There are TWO parts to this examination. Part1 = 13 points. Part 2 = 7 points. Total = 20points.• Write your answers in Standard English.• Separately label each of your answers./ 20SUNBEAM COMPLETES RECORD YEARFOR SALES, EARNINGS & GLOBAL EXPANSIONDELRAY BEACH, FLORIDA JANUARY 28, 1998 – Sunbeam Corporation (NYSE:SOC) todayannounced record sales and earnings for its fourth quarter and full year 1997.Sales for the quarter were $338 million, reflecting a 30.6% increase over theprior year period on a comparable basis. Before the 1996 special charges takenby the Company to restructure and reposition Sunbeam, earnings per share(diluted) from continuing operations of $0.47 were $0.50 ahead of the loss of$0.03 reported in the fourth quarter last year. Including these chargesearnings per share (diluted) rose $2.76 above the reported $2.29 loss reportedin 1996. On a year to date basis, revenue of $1.168 billion was 22.4% above1996 on a comparable basis.Albert J. Dunlap, Sunbeam’s Chairman and Chief Executive Officer, said "Iam very proud of the dramatic turnaround that we have achieved at Sunbeam insuch a short period of time as we continue to execute against our three yeargrowth plans. Our continuous sales increases of 13%, 17%, 28% and 31% in thefour quarters of 1997, for an overall sales increase of 22% for the year, are aclear indication that our strategy is working."The Company’s three year strategy to achieve $1 billion in revenuegrowth, which it embarked upon in 1997, was fueled by the addition of 25international distribution/license agreements, the introduction of 35 new U.S.products and 54 new international products along with the contribution from 22factory outlet stores. "We experienced sales growth in all major channels ofdistribution, in all regions of the world and in each of our five globalbusinesses, and we gained market share in all of our key product categories,reversing a three year downward trend, " said Mr. Dunlap.Required:PART 1 – There are a number of interesting differences between Sunbeam’s1997 and 1996 balance sheets (e.g., receivables increased by $82 million,inventories increased by $94 million, and pre-paid expenses decreased by $23million, while long-term productive assets and liabilities remainedrelatively unchanged), and between its 1997 and 1996 income statements(e.g., during 1997 the company engaged in a number of "buy and hold"transactions, gross margin increased dramatically and SG&A declined).a. (maximum 7 points out of 13) – Adjust Sunbeam’s 1997 Earning beforeinterest and taxes for one-time events and apparent (e.g., doubtfulaccounts, depreciation expense, and etc.) changes in accountingpolicy. You may want to compute some comparative ratios tofacilitate your analysis. Be sure to provide the details of andclearly label any computations.b. (maximum 4 points out of 13) – Utilizing your adjusted numbers from1)a. (above) re-compute Sunbeam’s operating cash flows for 1997(i.e., compute a new cash flows amount based on your adjustments tothe original data). Clearly labelthe componentsof yourcomputations.c. (maximum 2 points out of 13) – Summarize your findings in 1)a. and1)b. (above), paying particular attention to any evidence of fraud(be careful not to let 20-20 hindsight – i.e., information that youare aware of, but is not included in this case – influence yourconclusions).SELECTED DATA FROM: SUNBEAM CORPORATION AND SUBSIDIARIESANNUAL REPORT ON FORM 10-KGENERALSunbeam Corporation is a leading designer, manufacturer and marketer ofbranded consumer products. The Company’s primary business is the manufacture,marketing and distribution of durable household consumer products through massmarket and other distributors in the United States and internationally.RESTRUCTURING AND GROWTH PLANIn the Fall of 1996, under newly elected Chairman, Albert J. Dunlap, theCompany announced a major restructuring and growth plan. The restructuringportion of the plan was completed during 1997, resulting in a significantreduction in employees, facilities and costs, all of which is anticipated togenerate approximately $225 million in annual savings for the Company. TheCompany’s restructuring plan included the closure of 18 factories, 43warehouses and 5 headquarters, resulting in the consolidation of all corporateoffices into a single headquarters office located in Delray Beach, Florida andan operations center at its Hattiesburg manufacturing and distributionfacility.The Company’s operating results for 1996 include the effects of a pre-taxspecialchargeof$337.6millionrecordedinconjunctionwiththeimplementation of its restructuring and growth plan announced in November 1996.Approximately 20% of the charge was for cash items primarily for severancecosts and lease and other facility exit costs.ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONSSales of Outdoor Cooking products increased in 1997 after three straightyears of declines as a result of increased merchandising and advertisingprograms, new distribution and the introduction of an entirely new line ofgrills and accessories for the 1998 season that began to ship in the fourthquarter of 1997 under a new "early buy" marketing program that included amongother things, extended credit terms with due dates in the second quarter of1998. The Company sold approximately $50.0 million of Outdoor Cooking Productsunder this program in the fourth quarter of 1997. The early buy program forOutdoor Cooking products is designed to improve customer service levels andproduction efficiencies with more level seasonal production and distributionactivities that have historically peaked in the first half of each year and todrive additional retail sell-through of Outdoor Cooking products by reducingthe likelihood of retail stock-outs during the important first and secondquarter 1998 selling season.Selling, general and administrative ("SG&A") expenses, excluding theimpact of special charges described above, were 17.6% of sales in 1996primarily as a result of an inflated cost structure that has been realigned for1997 and beyond. In addition, a $12.0 million fourth quarter 1996 mediaadvertising campaign and one-time expenditures for market research, newpackaging, and other growth plan initiatives resulted in higher than normalSG&A spending in 1996. Also included in 1996 SG&A costs were $7.7 million ofcompensation expense resulting from restricted stock awards made in connectionwith the employment of a new senior management team.LIQUIDITY AND CAPITAL RESOURCESAs of December 28, 1997, the Company had cash and cash equivalents of$52.4 million and total debt of $195.2 million. Cash used in operatingactivities during 1997 was $8.2 million compared to $14.2 million provided byoperating activities in 1996. This decrease is primarily attributable to anincrease in earnings before non-cash charges in 1997 and the utilization of taxbenefits generated from the implementation of the Company’s restructuring plan,offset by higher accounts receivable due to increased sales in 1997 and certainseasonal dating terms, increased inventory levels in 1997 necessary to supportcontinued anticipated sales growth and the Company’s initiatives to improvecustomer service levels and 1997 cash expenditures required to implement therestructuring plan.In addition, cash used in operating activities reflects $59 million ofproceeds from the sale of trade accounts receivable under the Company’srevolving trade accounts receivable securitization program entered into inDecember 1997 as more fully described in Note 3 to the Company’s consolidatedfinancial statements.Cash provided by investing activities also reflects $91.0 million inproceeds from sales of businesses, assets and product categories determined tobe non-core to the Company’s ongoing operations in conjunction with the 1996restructuring plan. Cash used in investing activities for 1995 includes thepurchase of a portion of the Company’s furniture business, which wassubsequently divested in full in March 1997.Cash provided by financing activities totaled $16.4 million in 1997 andreflects net borrowings of $5.0 million under the Company’s revolving creditfacility, $12.2 million of debt repayments related to the divested furnitureoperations and other assets sold and $26.6 million in cash proceeds from theexercise of stock options, substantially all by former employees of theCompany. In 1996, cash provided by financing activities of $45.3 million wasprimarily from increased revolving credit facility borrowings to supportworking capital and capital spending requirements, $11.5 million in newissuances of long-term debt and $4.6 million in proceeds from the sale oftreasury shares to certain executives of the Company. In July 1997, the Companyreduced the amount of available borrowings under its September 1996 unsecuredfive year revolving credit facility from $500 million to $250 million.SUNBEAM CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in millions, except EPS)YEAR ENDEDTHREE MONTHS ENDED—————————————————-DECEMBER 28,DECEMBER 29,DECEMBER 28,DECEMBER 29,1997199619971996——————————————–Net salesCost of goods sold$1,168.2$984.2837.7900.6(a)———————-Gross profit (deficit)330.583.6% of sales28.3%8.5%Selling, general &administrative expense 131.1214.0(b)Restructuring, impairmentand other costs154.9———————-Operating earnings/(loss) 199.4(285.3)% of sales17.1%-29.0%Interest expense andother, net10.217.3———————-Earnings (loss) from continuing operationsbefore income taxes189.2(302.6)Income taxes (benefit)66.1(105.9)———————-EARNINGS (LOSS) FROMCONTINUING OPERATIONS123.1(196.7)Earnings (loss) from discontinued operations,net of tax(13.7)(32.4)———————-Loss on sale of discontinuedoperations, net(13.7)(32.4)Net earnings (loss)$109.4($228.3)========================(a) Includes special charges of $92.3(b) Includes special charges of $42.5$338.1238.7———–99.429.4%32.7$268.9309.3(a)———–(40.4)-15.0%94.(b)———–66.719.7%154.9———–(289.4)-107.6%4.1————4.0————62.620.9————(293.4)(103.0)————41.7(190.4)————(32.4)————$41.7============(32.4)($234.7)============SUNBEAM CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(in millions)December 28,1997———–ASSETSCurrent assets:Cash and cash equivalents$52.4Receivables, net295.5Inventories256.2Net assets of discontinued operations and other assetsheld for saleDeferred income taxes36.7Prepaid expenses and other current assets17.2———–Total current assets658.0Property, plant and equipment, netTrademarks and trade names, netOther assetsLIABILITIES AND SHAREHOLDERS’ EQUITYCurrent liabilities:Accounts payableRestructuring accrualOther current liabilitiesTotal current liabilities$11.5213.4162.3-102.93.740.4———–624.1240.9194.427.0———–$1,120.3============220.1200.328.2———–$1,072.7============105.610.981.6———–198.1107.363.8100.4———–271.5Long-term debtDeferred income taxesNon-operating and other long-term liabilitiesShareholders’ equityDecember 29,1996————194.654.6141.1531.9———–$1,120.3============201.152.3152.5395.3———–$1,072.7============SUNBEAM CORPORATION AND SUBSIDIARIES – CONSOLIDATED STATEMENTS OF CASH FLOWS(DOLLARS IN THOUSANDS)FISCAL YEARS ENDEDDECEMBER 28,1997DECEMBER 29,1996DECEMBER 31,1995_OPERATING ACTIVITIES:Net earnings (loss) …….$ 109,415$ (228,262)$50,511Adjustments to reconcile net earnings (loss) to net cash provided by (used in)operating activities:Depreciation and amortization38,57747,42944,174Restructuring, impairment & other-154,869-Other non-cash special charges-128,800-Loss on sale of discontinuedoperations, net of taxes …13,71332,430-Deferred income taxes …….57,783(77,828)25,146Increase (decrease) in cash from changesin working capital:Receivables, net …………(84,576)(13,829)(4,499)Inventories ……………..(100,810)(11,651)(4,874)Account payable ………….(1,585)14,7359,245Restructuring accrual …….(43,378)–Prepaid expenses and other currentAssets and liabilities …..(9,004)2,737(8,821)Income taxes payable ……..52,844(21,942)(18,452)Payment of other long-term andnon-operating liabilities ..(14,682)(27,089)(21,719)Other, net ………………(26,546)13,76410,805Net cash provided by (used in)operating activities …….(8,249)14,16381,516INVESTING ACTIVITIES:Capital expenditures …….(58,258)Decrease in restricted investments-Proceeds from sale of divestedOperations and other assets90,982Purchase of businesses-Other, net ……………..-Net cash provided by (used in)investing activities ……32,724FINANCING ACTIVITIES:Net borrowings (revolving credit)5,000Issuance of long-term debt .-Payments of debt obligations(12,157)Proceeds from exercise ofstock options ………….26,613Purchase of treasury stock..-Sale of treasury stock …..-Payments of common dividends(3,399)Other financing activities .320Net cash provided by financing16,377Net increase (decrease) incash and cash equivalents .40,852Cash and cash equivalentsat beginning of year ……11,526Cash and cash equivalentsat end of year …………$52,378(75,336)–(140,053)45,755–(860)-(13,053)–(76,196)(107,351)30,00011,500(1,794)40,000-(5,417)4,684-4,578(3,318)(364)45,2869,818(13,091)-(3,268)(264)27,778(16,747)1,94328,273$11,52626,330$28,273SUNBEAM CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIESREVENUE RECOGNITIONThe Company recognizes revenues from product sales principally at the timeof shipment to customers. In limited circumstances, at the customers requestthe Company may sell seasonal product on a bill and hold basis provided thatthe goods are completed, packaged and ready for shipment, such goods aresegregated and the risks of ownership and legal title have passed to thecustomer. The amount of such bill and hold sales at December 29, 1997 wasapproximately 3% of consolidated revenues.RECLASSIFICATIONIn December 1997, the Company entered into a revolving trade accountsreceivable securitization program to sell without recourse, through a whollyowned subsidiary, certain trade accounts receivable. The maximum amount ofreceivables that can be sold through this program is $70 million. At December28, 1997, the Company had received approximately $59 million from the sale oftrade accounts receivable. The proceeds from the sale were used to reduceborrowings under the Company’s revolving credit facility. Costs of the program,which primarily consist of the purchaser’s financing cost of issuing commercialpaper backed by the receivables, totaled $.2 million during 1997, and have beenclassified as interest expense in the accompanying Consolidated Statements ofOperations. The Company, as agent for the purchaser of the receivables, retainscollection and administrative responsibilities for the purchased receivables.7. SUPPLEMENTARY FINANCIAL STATEMENT DATASupplementary Balance Sheet data at the end of each fiscal year is asfollows (in thousands):19971996_Receivables:Trade ……………………………..$ 305,219$ 227,043Sundry …………………………….7,7942,412 _313,013229,455Valuations allowances ……………….(17,463)(16,017)_$ 295,550$ 213,438 _Inventories:Finished goods ………………………$ 142,976$84,813Work in process ……………………..26,23725,167Raw materials and supplies ……………86,96752,272_$ 256,180$ 162,252_Property, plant and equipment:Land ………………………………..$1,793$2,524Buildings and improvements …………….98,05495,619Machinery and equipment ……………….245,824258,199_345,671356,342Accumulated depreciation and amortization ..(104,774)(136,254)$ 240,897$ 220,088_Trademarks and trade names:Gross ………………………………..$ 237,095$ 245,307Accumulated amortization ……………….(42,723)(45,045)_$ 194,372$ 200,262 _8. RESTRUCTURING, IMPAIRMENT AND OTHER COSTSAmounts included in Restructuring, Impairment and Other Costs in 1996 inthe accompanying Consolidated Statement of Operations include cash items suchas severance and other employee costs of $43.0 million, lease obligations andother exit costs associated with facility closures of $12.6 million, $7.5million of start-up costs on back office outsourcing initiatives and othercosts related to the implementation of the restructuring and growth plan. Noncash Restructuring, Impairment and Other Costs in 1996 include $91.8 millionrelated to asset [property, plant & equipment] write-downs to net realizablevalue for disposals of excess facilities and equipment and non-core productlines, write-offs of redundant computer systems from the administrative backoffice consolidations and outsourcing initiatives and intangible, packaging andother asset write-downs related to exited product lines and SKU reductions.9. DISCONTINUED OPERATIONS AND OTHER ASSETS HELD FOR SALEAs part of the restructuring plan and redefinition of its core businesses,the Company also announced the divestiture of the furniture business, by a saleof assets. In February 1997, the Company entered into an agreement to sell thebusiness to U.S. Industries, Inc. which was completed on March 17, 1997. Inconnection with the sale of these assets (primarily inventory, property, plantand equipment), the Company received $69 million in cash. The Company retainedaccounts receivable related to the furniture business of approximately $50.0million as of the closing date.11. CUSTOMER AND GEOGRAPHIC DATAClasses of products which contributed more than 10% to consolidated saleswere outdoor home use durable products $325.8 million in 1997 and $256.9million in 1996, and indoor home use durable products $769.6 million in 1997and $680.7 million in 1996. Sales of outdoor cooking products accounted forapproximately 34% of the Company’s domestic net sales in 1997. The Company’slargest customer (Wal-Mart) accounted for approximately 21% of consolidated netsales in 1997 and 19% in 1996 and 1995.VALUATION AND QUALIFYING ACCOUNTS: FISCAL YEARS 1997, 1996 AND 1995(DOLLARS IN THOUSANDS)BALANCE ATBEGINNINGOF PERIODCHARGED TOCOSTS ANDEXPENSESAllowance for doubtfulaccounts and cash discounts:Fiscal year endedDecember 28, 1997..$16,017$ 8,411Fiscal year endedDecember 29, 1996 …… $12,326$23,369DEDUCTIONS(2,000)(a)8,948 (b)17 (c)$(233)(a)19,911 (b)– (c)$715(a)6,988 (b)38 (c)BALANCE ATEND OFPERIOD _$$17,463$16,017Fiscal year endedDecember 31, 1995 …… $ 9,416$10,651$12,326—————Notes: (a) Reclassified to/from accrued liabilities for customer deductions.(b) Accounts written off as uncollectible.(c) Foreign currency translation adjustment.PART 2 – (7 Points)You read in your text about the factors that Michael Porter identifies asinfluencing and directing competitive strategy.Required:a) (maximum 4 out of 7 points) identify each of those specific factorsb) (maximum 3 out of 7 points) provide specific examples of accountinginformation that might be useful for assessing each factor. Be sure toexplain (briefly) how each example might be used