<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
---------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to ____________
Commission file number 0-10177
WINDMERE-DURABLE HOLDINGS, INC.
Exact name of Registrant as specified in its charter
FLORIDA 59-1028301
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5980 MIAMI LAKES DRIVE
MIAMI LAKES, FLORIDA 33014
(Address of principal executive offices)
Registrant's telephone number: (305) 362-2611
-------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title Of Each Class on which registered
------------------- -------------------
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 24, 1997, the aggregate market value of the voting stock of
the Registrant (based on the closing price as reported by NYSE of $14.375) held
by non-affiliates of the Registrant was $213,387,800.
As of March 24, 1997, the number of outstanding shares of Common Stock
of the Registrant was 17,475,038.
================================================================================
<PAGE> 2
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(d) Financial Statement Schedules
The following financial statements of Salton/Maxim Housewares,
Inc., a fifty percent owned subsidiary, are filed hereby as required by
Regulation S-X.
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Salton/Maxim Housewares, Inc.
Mount Prospect, Illinois
We have audited the accompanying balance sheets of Salton/Maxim Housewares, Inc.
as of June 28, 1997 and June 29, 1996 and the related statements of earnings, of
stockholders' equity and of cash flows for each of the three years in the period
ended June 28, 1997. Our audits also included the financial statement schedule
listed in the Index at Item 14 of the Annual Report on Form 10-K. These
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Salton/Maxim Housewares, Inc. as of June 28,
1997 and June 29, 1996 and the results of its operations and its cash flows for
each of the three years in the period ended June 28, 1997 in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
Deloitte & Touche LLP
September 24, 1997
Chicago, Illinois
2
<PAGE> 4
SALTON/MAXIM HOUSEWARES, INC.
BALANCE SHEETS
JUNE 28, 1997 AND JUNE 29, 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash $ 2,612,871 $ 3,983
Accounts receivable, less allowance:
1997--$2,400,000; 1996--$1,900,000 25,646,677 15,870,626
Inventories 41,967,801 28,287,965
Prepaid expenses and other current assets 3,717,062 1,934,006
Federal income taxes refundable 1,105,336
Deferred tax assets 1,734,414 1,949,315
------------ -----------
Total current assets 76,784,161 48,045,895
PROPERTY, PLANT AND EQUIPMENT:
Molds and tooling 14,827,525 12,373,478
Warehouse equipment 380,487 296,168
Office furniture and equipment 3,792,035 1,929,683
------------ -----------
19,000,047 14,599,329
Less accumulated depreciation (10,684,016) (8,367,736)
------------ -----------
8,316,031 6,231,593
INTANGIBLES, NET OF ACCUMULATED AMORTIZATION 4,880,006 3,670,533
NON-CURRENT DEFERRED TAX ASSETS 205,580 1,533,069
INVESTMENT IN WINDMERE COMMON STOCK 12,156,820
------------ -----------
TOTAL ASSETS $102,342,598 $59,481,090
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Revolving line of credit $ 37,977,230 $24,095,382
Accounts payable 17,361,238 10,057,195
Accrued expenses 2,757,790 1,164,851
Accrued interest payable 191,807 67,932
Current portion--Subordinated Debt 500,000 416,669
------------ -----------
Total current liabilities 58,788,065 35,802,029
LONG-TERM PORTION SUBORDINATED DEBT 500,000
DUE TO WINDMERE 4,932,730 3,254,286
------------ -----------
Total Liabilities 63,720,795 39,556,315
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized,
2,000,000 shares, no shares issued
Common Stock, $.01 par value; authorized,
20,000,000 shares; shares issued and
outstanding:
1997-13,029,144; 1996-6,508,572 130,291 65,086
Unrealized gains on securities available for sale 1,337,250
Additional paid-in capital 53,035,981 29,292,946
Less note receivable from stock issuance (10,847,620)
Accumulated deficit (5,034,099) (9,433,257)
------------ -----------
Total stockholders' equity 38,621,803 19,924,775
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $102,342,598 $59,481,090
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 5
SALTON/MAXIM HOUSEWARES, INC.
STATEMENTS OF EARNINGS
YEARS ENDED JUNE 28, 1997, JUNE 29, 1996, AND JULY 1, 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Net sales $182,806,323 $99,202,415 $76,991,270
Cost of goods sold 121,590,232 66,923,141 55,551,782
Distribution expenses 7,808,631 5,856,477 4,569,681
------------ ----------- -----------
Gross profit 53,407,460 26,422,797 16,869,807
Selling, general and administrative expenses 42,944,341 21,342,872 13,142,207
------------ ----------- -----------
Operating income 10,463,119 5,079,925 3,727,600
Interest expense, net 4,063,197 3,934,325 3,056,570
------------ ----------- -----------
Income before income taxes 6,399,922 1,145,600 671,030
Income tax expense (benefit) 2,000,764 (3,449,884) 20,000
------------ ----------- -----------
Net income $ 4,399,158 $ 4,595,484 $ 651,030
============ =========== ===========
Weighted average common and common
equivalent shares outstanding 13,082,254 6,628,236 5,901,133
Net income per common and common
equivalent share $ 0.34 $ 0.69 $ 0.11
</TABLE>
See Notes To Consolidated Financial Statements
4
<PAGE> 6
SALTON/MAXIM HOUSEWARES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 28, 1997, JUNE 29, 1996, AND JULY 1, 1995
<TABLE>
Unrealized
Gains on Less Note
Securities Additional Receivable Total
Common Held for Paid In from sales Accumulated Stockholders'
Shares Stock Sale Capital of stock Deficit Equity
------ ----- ---- ------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, July 2, 1994 5,100,000 $ 51,000 $ 25,364,875 $(14,679,771) $ 10,736,104
Class Action lawsuit
settlement 394,520 3,945 896,055 900,000
Conversion of
subordinated debt
and related accrued
interest to equity 1,014,052 10,141 3,032,016 3,042,157
Net income for fiscal
1995 651,030 651,030
------------ ------------ ------------ ------------ ------------
BALANCE, July 1, 1995 6,508,572 65,086 29,292,946 (14,028,741) 15,329,291
Net income for
fiscal 1996 4,595,484 4,595,484
------------ ------------ ------------ ------------ ------------
BALANCE, June 29, 1996 6,508,572 65,086 29,292,946 (9,433,257) 19,924,775
Issuance of
common stock 6,508,572 65,085 23,650,352 $(10,847,620) 12,867,817
Issuance of warrants 82,303 82,303
Unrealized gains on
securities available
for sale $ 1,337,250 1,337,250
Employee stock option
shares exercised 12,000 120 10,380 10,500
Net income fiscal 1997 4,399,158 4,399,158
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE, June 28, 1997 13,029,144 $ 130,291 $ 1,337,250 $ 53,035,981 $(10,847,620) $ (5,034,099) $ 38,621,803
============ ============ ============ ============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE> 7
SALTON/MAXIM HOUSEWARES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 28, 1997, JUNE 29, 1996, AND JULY 1, 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $4,399,158 $4,595,484 $651,030
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Change in deferred taxes 822,332 (3,482,384)
Depreciation and amortization 3,136,060 2,195,510 1,986,369
Changes in assets and liabilities:
Accounts receivable (9,776,051) (2,395,175) (2,323,909)
Inventories (13,679,836) (8,847,133) 617,614
Prepaid expenses and other current assets (1,783,056) (892,342) 562,545
Federal income tax refund (1,105,336)
Accounts payable 7,304,043 4,650,026 2,056,488
Accrued expenses 1,592,939 546,215 39,134
Accrued class action lawsuit settlement
fees (100,000)
Accrued interest 123,875 59,206 44,186
---------- ---------- ----------
Net cash provided by (used in) operating
activities (8,965,872) (3,570,593) 3,533,457
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,608,389) (4,279,838) (2,327,490)
Block acquisition and related payments (1,739,280)
---------- ---------- ----------
Net cash used in investing activities (6,347,669) (4,279,838) (2,327,490)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit 13,881,848 6,234,938 1,071,384
Repayment of subordinated note payable to
bank (416,999) (583,331)
Proceeds from subordinated debt and due to
Windmere 4,932,730 3,254,286 1,000,000
Offering costs associated with stock issue (485,650)
Common stock issued 10,500
Payment for product line acquisitions (814,939) (2,529,571)
Financing costs (242,389) (743,431)
---------- --------- ----------
Net cash provided by (used in) financing
activities 17,922,429 7,848,565 (1,201,618)
---------- --------- ----------
NET INCREASE (DECREASE) IN CASH 2,608,888 (1,866) 4,349
CASH -- Beginning of Year 3,983 5,849 1,500
---------- --------- ----------
CASH -- End of Year $2,612,871 $3,983 $5,849
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $3,939,322 $3,510,123 $2,780,008
Income taxes $1,697,500 $10,000 $20,000
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: A
long-term debt obligation of $3,254,286 was canceled by the consummation of
a transaction with Windmere-Durable Holdings, Inc.("Windmere"). In
addition, the Company received a $10,847,620 note receivable and 748,112
shares of Windmere common stock in exchange for 6,508,572 newly issued
shares of common stock of the Company.
See Notes to Consolidated Financial Statements.
6
<PAGE> 8
SALTON/MAXIM HOUSEWARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 28, 1997, JUNE 29, 1996, AND JULY 1, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Salton/Maxim Housewares, Inc.("SMHI") and its subsidiaries (the "Company")
principally import, distribute and sell kitchen and home appliances under the
brand names of Salton(R), Maxim(R), Breadman(R), Juiceman(R), Salton
Creations(R), Salton Time(R), White-Westinghouse(R) and Farberware(R) through
major retail markets and direct marketing distribution channels in the United
States. The Company also designs and markets tabletop products, including china,
crystal and glassware.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of SMHI and its subsidiaries, Home Creations Direct, Ltd.
and Salton Hong Kong, Ltd. Salton Hong Kong, Ltd. is a foreign corporation
which was organized under the laws of Hong Kong in fiscal year 1997.
Intercompany balances and transactions are eliminated in consolidation.
USE OF ESTIMATES -- In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates.
ACCOUNTING PERIOD -- The Company's fiscal year ends on the Saturday closest
to June 30. The fiscal years ended June 28, 1997, June 29, 1996 and July 1, 1995
each consisted of 52 weeks.
INVENTORIES -- Inventories are stated at the lower of cost or market. Cost
is determined on the first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are stated
at cost. Expenditures for maintenance costs and repairs are charged against
income. Depreciation is provided on the straight-line basis over the estimated
useful lives of the assets, not to exceed 5 years. For tax purposes, assets are
depreciated using accelerated methods.
INTANGIBLE ASSETS -- Intangible assets, which are amortized over their
estimated useful lives, consist of:
USEFUL LIFE JUNE 28, JUNE 29,
(IN YEARS) 1997 1996
----------- ---- ----
Goodwill 10-40 $1,926,454 $ 295,238
Financing and organization costs 2-5 171,778 411,129
Patents and trademarks 5-20 2,781,774 2,964,166
---------- ----------
Intangible assets, net $4,880,006 $3,670,533
========== ==========
Accumulated amortization of intangible assets was $3,770,866 at June 28,
1997, and $2,951,087 at June 29, 1996.
Long-lived assets are reviewed for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. If such review indicates that the carrying amount of
long-lived assets is not recoverable, the carrying amount of such assets is
reduced to estimated recoverable value.
REVENUE RECOGNITION -- The Company recognizes revenues when goods are
shipped to its customers.
7
<PAGE> 9
DISTRIBUTION EXPENSES -- Distribution expenses consist primarily of
freight, warehousing, and handling costs of products sold.
ADVERTISING -- The Company sponsors various programs under which it
participates in the cost of advertising and other promotional efforts for
Company products undertaken by its retail customers. Advertising and promotion
costs associated with these programs are recognized in the period in which the
advertising or other promotion is performed by the retailer.
The Company's tradenames and, in some instances, specific products, also
are promoted from time to time through direct marketing channels, primarily
television. Advertising and promotion costs are expensed in the period in which
direct customer response occurs.
INCOME TAXES -- The Company accounts for income taxes using the asset and
liability approach. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
management does not expect to be realized.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE -- Net income per common
share is computed based upon the weighted average number of common and common
equivalent shares (which include dilutive stock options) outstanding.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying values of financial
instruments included in current assets and liabilities approximate fair values
due to the short-term maturities of these instruments. Investment in Windmere
common stock is accounted for as "available for sale" and is carried at fair
value.
ACCOUNTING PRONOUNCEMENTS -- The Company will be required to adopt
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per
Share" in fiscal 1998. The Company believes that the adoption of this statement
will not have a material effect on the Company's financial statements.
2. WINDMERE TRANSACTION
On July 11, 1996, the Company consummated a transaction (the "Windmere
Transaction") with Windmere-Durable Holdings, Inc. ("Windmere"), pursuant to a
Stock Purchase Agreement dated February 27, 1996, as amended (the "Stock
Purchase Agreement"). Windmere is a corporation engaged principally in
manufacturing and distributing a wide variety of personal care products and
household appliances. Pursuant to the Stock Purchase Agreement, Windmere
purchased from the Company 6,508,572 newly issued shares of Common Stock (the
"Purchase"), which represented 50% of the outstanding shares of Common Stock of
the Company on February 27, 1996 after giving effect to the Purchase. As
consideration for the purchase, Windmere paid the Company: (i) $3,254,286 in
cancellation of a loan, as described below; (ii) a subordinated promissory note
in the aggregate principal amount of $10,847,620 (the "Note"), which Note is
payable July 11, 2001, bears interest at 8%, payable quarterly, and is secured
by certain assets of Windmere and its domestic subsidiaries and guaranteed by
such domestic subsidiaries; and (iii) 748,112 shares of Windmere's common stock.
Windmere's common stock is traded on the NYSE. A portion of the consideration
for the Purchase was paid by the cancellation of the Company's obligation to
repay a loan in the principal amount of $3,254,286 which Windmere had made to
the Company in April 1996. Windmere was also granted an option to purchase up to
485,000 shares of Common Stock at $4.83 per share, which option is exercisable
only if and to the extent that options to purchase shares of Common Stock which
were outstanding on February 27, 1996 are exercised.
3. BLOCK CHINA ACQUISITION
On July 1, 1996, the Company acquired substantially all of the assets and
certain liabilities of Block China Corporation, a tabletop product company in a
transaction accounted for as a purchase. The Block China Division of the Company
designs and markets tabletop products, including china, crystal and glassware.
The consideration paid by the Company consisted of $1,485,000 in cash and a
warrant to purchase 25,000 shares of Common Stock with an exercise price of
$4.75. The consideration also included an earn-out of up to $500,000 and 150,000
shares of Common Stock based on financial performance over a three-year period
of the Division. The operating results of Block China before its acquisition by
the Company are not material.
8
<PAGE> 10
4. REVOLVING LINE OF CREDIT AND LETTERS OF CREDIT
During the 1997 fiscal year, the Company had a $45,000,000 revolving line
of credit (the "Facility") with a commercial lender (the "Lender"). Borrowings
under this Facility bore interest at 2% over the Lender's established prime
rate, payable monthly.
On June 30, 1997, the Company amended its Facility (the "Amended Facility")
with the lender. It expires on September 30, 2000 and provides for borrowings up
to $75,000,000. The Amended Facility bears interest at 1% over the Lender's
established prime rate, payable monthly and includes a provision which provides
the Company the ability to reduce its borrowing rate, based on the London
InterBank Offered Rate (LIBOR), on up to 75% of outstanding borrowings. The
Company may further reduce its interest rate by meeting certain performance
provisions.
The Amended Facility is secured by a first lien on substantially all the
Company's assets. Credit availability is based on a formula related to trade
accounts receivable, inventories and outstanding letters of credit. The Amended
Facility contains restrictive financial covenants, the more significant of which
require the Company to maintain specified ratios of total liabilities to net
worth, minimum tangible net worth, and minimum earnings before interest, taxes,
depreciation and amortization. Other covenants also limit the Company's
activities in mergers or acquisitions and sales of substantial assets.
Compliance with these covenants effectively restricts the ability of the Company
to pay dividends, and also requires the Company to apply cash receipts to pay
down borrowings under the Facility.
Information regarding short-term borrowings under revolving lines of credit
is:
JUNE 28, JUNE 29,
1997 1996
---- ----
Balance at end of fiscal period $37,977,230 $24,095,382
Interest rate at end of fiscal period 10.5% 10.25%
Maximum amount outstanding at any month-end $43,632,702 $37,494,590
Average amount outstanding $35,191,494 $25,891,256
Weighted average interest rate during fiscal period 10.5% 11.1%
Outstanding letters of credit at end of fiscal period $2,915,815 $1,242,335
5. SUBORDINATED DEBT AND DUE TO WINDMERE
SUBORDINATED DEBT
The Company has 10% subordinated notes payable aggregating $500,000. The
notes have an effective maturity date of September 1, 1997.
The Company had a $1,000,000 promissory note payable at the prime rate of
interest to a bank. The note was subordinated to the commercial lender and was
secured by subordinated liens on substantially all of the Company's assets. At
June 29, 1996, approximately $417,000 remained outstanding under the note and
the note was repaid in fiscal year 1997.
DUE TO WINDMERE
The Company had amounts due to Windmere, including Durable Electrical Metal
Factory, Ltd., a wholly owned subsidiary of Windmere ("Durable"), totaling
approximately $9,141,000, including notes payable of $4,932,730, at June 28,
1997. These amounts primarily represented working capital advances by Windmere
to the Company to fund the development of the White-Westinghouse(R) and
Farberware(R) product lines, as well as interest and trade accounts payable.
9
<PAGE> 11
The Company and Windmere entered into a Marketing Cooperation Agreement on
July 11, 1996 (the "Marketing Cooperation Agreement"). Pursuant to this
agreement, until Windmere's interest in the Company is less than 30% for at
least ten consecutive days, each of the Company and Windmere has agreed to
participate in a variety of mutually satisfactory marketing cooperation efforts
designed to expand the market penetration of each party. Consequently, the
Company entered into a letter agreement dated April 30, 1997 (the "Letter
Agreement") with Windmere. The Letter Agreement provides that the Company pay to
Windmere a fee in consideration of Windmere's marketing cooperation efforts in
connection with the Company's supply contract with Kmart and Windmere's
guarantee of the Company's obligations under such contract.
Windmere and the Company entered into a loan agreement dated April 8, 1996
pursuant to which Windmere loaned $3,254,286 to the Company (the "Loan"). The
principal balance of the Loan, together with all interest accrued thereon at 8%
per annum, was due and payable upon the closing of the Windmere Transaction,
described in Note 2, provided, however, that upon the request of the Company,
Windmere agreed that $3,254,286 of the consideration payable by Windmere in the
Windmere Transaction would be applied against the total amount outstanding and
due under the Loan.
On July 11, 1996, the Company requested that the cash portion of the
Windmere Transaction be applied to the Loan, thereby effectively canceling the
Loan. In addition, the Company paid Windmere approximately $54,000 in interest
at that date under the Loan.
The effect of all transactions with Windmere was to reduce 1997 net income
by approximately $126,000.
6. CAPITAL STOCK
The Company has authorized 20,000,000 shares of $.01 par value common
stock. At June 29, 1996 and July 1, 1995, there were 6,508,572 shares issued and
outstanding. As more fully described in Note 2 "Windmere Transaction" on July
11, 1996, Windmere purchased from the Company 6,508,572 newly issued shares of
common stock which represented 50% of the outstanding shares of common stock of
the Company on February 27, 1996 after giving effect to the transaction.
The Company has authorized 2,000,000 shares of $.01 par value preferred
stock. To date, no shares of preferred stock have been issued.
7. STOCK OPTION PLANS
In October 1995, SFAS No. 123, "Accounting For Stock-Based Compensation,"
was issued and is effective for financial statements for fiscal years beginning
after December 1995. As permitted by the statement, the Company will continue to
measure compensation cost for stock option plans in accordance with Accounting
Principles Board Opinion No. 25, "Accounting For Stock Issued to Employees."
Accordingly, no compensation cost has been recognized for its fixed stock option
plans. Had compensation cost for the company's stock option plans been
determined consistent with the fair value method outlined in SFAS No. 123, the
impact on the Company's net income and earnings per common share would have been
as follows:
1997 1996
Net Income ---- ----
As reported $4,399,158 $4,595,484
Pro forma $4,192,582 $4,509,515
Primary earnings per share
As reported $0.34 $0.69
Pro forma $0.32 $0.68
10
<PAGE> 12
Options to purchase common stock of the Company have been granted to
employees under the 1992 and 1995 stock option plans at prices equal to the fair
market value of the stock on the dates the options were granted. Options have
also been granted to non-employee directors of the company, which are
exercisable one year after the date of grant. All options granted expire 10
years from the date of grant.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. The following assumptions were used
during the respective years to estimate the fair value of options granted:
1997 1996
---- ----
Dividend yield 0.0% 0.0%
Expected volatility 65.96% 62.37%
Risk-free interest rate 6.11% 6.11%
Expected life of options 7.92 years 7.69 years
In addition, on July 11, 1996 Windmere was granted an option to purchase up
to 485,000 shares of common stock at $4.83 per share. This option is
excercisable only if and to the extent that options to purchase shares of common
stock which were outstanding on February 27, 1996 are exercised. A summary of
the Company's fixed stock options for the fiscal years ended June 28, 1997 and
June 29, 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Weighted- Weighted-
Shares Average Shares Average
(000) Exercise Price (000) Exercise Price
------- -------------- ----- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 485 $4.827 271 $6.664
Granted 493 4.881 214 2.500
Exercised (12) 0.875
Expired
Forfeited
----- ------ --- ------
Outstanding at end of year 966 $4.904 485 $4.827
Options exercisable at end of year 958 $4.878 271 $6.664
Weighted-average fair value of
options granted during the year $4.542 $1.920
</TABLE>
The following information summarizes the stock options outstanding at June
28, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Shares Contractual Exercise Shares Exercise
Range of Exercise Prices (000) Life (years) Price (000) Price
------------------------ ------ ------------ -------- ------- --------
<S> <C> <C> <C> <C> <C>
$0.875 - $2.500 323 7.77 $2.052 323 $2.052
$4.830 - $5.375 505 8.91 4.852 505 4.852
$8.000 - $12.000 138 4.65 11.768 130 12.000
------------------------------------- ---------------------------------------
$0.875 - $12.000 966 N/A N/A 958 $4.878
</TABLE>
8. RELATED PARTY TRANSACTIONS
The Company purchased inventory from Durable of $23,511,000, $3,200,000,
and $2,089,000 in 1997, 1996, and 1995, respectively. The Company owed Durable
approximately $3,120,000 at June 28, 1997 for current charges.
The Company recorded inventory purchases and commissions with Markpeak,
Ltd., a Hong Kong company, of approximately $7,815,000 and $432,000 respectively
in 1997, $10,233,000 and $739,000, respectively in 1996, and $8,314,000 and
$563,000, respectively in 1995. At June 28, 1997, the Company owed Markpeak,
Ltd. approximately $1,475,000 for current charges. A director of the Company is
the Managing Director of Markpeak, Ltd.
11
<PAGE> 13
During fiscal year 1997, the Company had purchases of approximately
$162,000 as compared to sales of approximately $919,000 in fiscal year 1996,
from Duquesne Financial Corporation ("Duquesne"). The Chairman of the Company is
an executive officer of Duquesne. As of June 28, 1997, the Company owed Duquesne
approximately $7,000 related to inventory purchases.
The Company paid Shapiro, Devine and Craparo, Inc. ("SDC"), a manufacturers
representation firm, commissions of approximately $241,000, $160,000 and
$196,000 in 1997, 1996 and 1995, respectively. A director of the Company was a
co-founder of SDC. At June 28, 1997, the Company owed SDC approximately $31,400
for current commissions.
9. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under long-term
operating leases. Rental expense under all leases was approximately $1,183,000
$665,000, and $633,000, for the fiscal periods ended June 28, 1997, June 29,
1996, and July 1, 1995, respectively.
The future minimum rental commitments as of June 28, 1997 were as follows:
Fiscal Year Ending
1998 $1,564,286
1999 2,666,095
2000 2,077,444
2001 1,967,532
2002 1,119,470
----------
Total $9,394,827
==========
The Company has employment agreements with its three executive officers
which are in effect until December 15, 1997.
The Company has license agreements with White Consolidated Industries,
Inc.("White Consolidated"), which require minimum royalty payments through the
year 2011. The current level of royalty payments are in excess of the minimum
requirements. The Company also has various license agreements with other parties
for periods usually not exceeding three years. The agreements are then typically
renewable upon mutual consent. These license agreements require royalty payments
based on the sales of licensed product in the period. Total royalties paid under
these agreements, including the White Consolidated agreement, were $6,300,000 in
fiscal year 1997, $1,600,000 in fiscal year 1996 and $453,000 in fiscal year
1995.
10. LEGAL PROCEEDINGS
The Company, White Consolidated, Windmere and certain other parties have
been named as defendants in litigation filed by Westinghouse Electric
Corporation ("Westinghouse") in the United States District Court for the Western
District of Pennsylvania on December 18, 1996. The action arises from a dispute
between Westinghouse and White Consolidated over rights to use the
"Westinghouse" trademark for consumer products, based on transactions between
Westinghouse and White Consolidated in the 1970's and the parties' subsequent
conduct. Procedural motions concerning the jurisdiction in which the dispute
should be heard have been filed by the parties. The action seeks, among other
things, a preliminary injunction enjoining the defendants from using the
trademark, unspecified damages and attorneys' fees. Pursuant to the Company's
license agreements with White Consolidated, White Consolidated is defending the
Company and is obligated to indemnify the Company from and against any and all
claims, losses and damages arising out of the action, including the costs of
litigation.
The Company is a party to various other legal actions and proceedings
incident to its normal business operations. Management believes that the outcome
of all the Company's litigation will not have a material adverse effect on its
financial condition or results of operations.
12
<PAGE> 14
11. SUPPLY CONTRACT AND MAJOR CUSTOMERS
The Company entered into a major supply contract with Kmart Corporation
("Kmart") on January 31, 1997. Under the contract, the Company supplies Kmart
with small kitchen appliances, personal care products, heaters, fans and
electrical air cleaners and humidifiers under the White-Westinghouse brand name.
In fiscal year 1997, sales to Kmart approximated 16% of total net sales of the
Company.
The Company's net sales in the aggregate to its five largest customers
during the fiscal years ended June 28, 1997, June 29, 1996 and July 1, 1995 were
47%, 55% and 52% of total net sales in these periods, respectively. In addition
to Kmart, one customer accounted for 9%, 15%, and 11% of total net sales during
the fiscal years ended June 28, 1997, June 29, 1996, and July 1, 1995,
respectively. Another customer accounted for 9%, 13%, and 15%, respectively,
over the same fiscal years.
Although the Company has long-established relationships with many of its
customers, with the exception of Kmart Corporation, it does not have long-term
contracts with any of its customers. A significant concentration of the
Company's business activity is with department stores, upscale mass
merchandisers, specialty stores, and warehouse clubs whose ability to meet their
obligations to the Company is dependent upon prevailing economic conditions
within the retail industry.
12. INCOME TAXES
Deferred taxes based upon differences between the financial statement and
tax bases of assets and liabilities and available tax carryforwards consisted
of:
Fiscal Year Ended
June 28, 1997 June 29, 1996
------------- -------------
Allowance for doubtful accounts $ 960,000 $ 776,340
Depreciation and amortization (1,060,680) (759,000)
Other deferred items, net (302,415) (208,282)
Net operating loss carry-forwards 2,349,579 2,659,323
Inventory reserves and capitalization 713,568 1,014,003
Unrealized gains on securities available for sale (720,058)
----------- ----------
Net deferred tax asset $ 1,939,994 $3,482,384
=========== ==========
During 1996, the Company re-assessed the measurement of deferred tax assets
based on available evidence and concluded that a valuation allowance was
unnecessary. Accordingly, the valuation allowance of $3,463,066 was eliminated
in the fourth quarter of fiscal 1996.
The Company has net loss carry-forwards at June 28, 1997 expiring as
follows:
YEAR CARRY-FORWARD EXPIRES AMOUNT
- -------------------------- ------
2007 $ 768,000
2008 2,336,000
2009 2,665,000
2010 60,000
2011 45,000
----------
Total $5,874,000
==========
As a result of certain transactions, the Company's ability to utilize its
net operating loss carryforwards to offset otherwise taxable income is limited
annually under Internal Revenue Code Section 382. The amount of such annual
limitation is approximately $2,000,000.
13
<PAGE> 15
A reconciliation of the statutory federal income tax rate to the effective
rate was as follows:
Fiscal Years Ended
------------------
June 28, June 29, July 1,
1997 1996 1995
---- ---- ---
Statutory federal income tax rate 35.0% 35.0% 35.0%
Effective state tax rate 4.8% 4.8% 4.8%
Permanent differences 2.3%
Effect of foreign tax rate (8.8)%
Utilization of operating loss carryforwards (34.6)% (36.8%)
Change in valuation allowance (296.9)
Other (2.0)% (9.4)% %
------ ------- -----
Effective income tax rate 31.3% (301.1)% 3.0%
====== ======= =====
U.S. income taxes were not provided on certain unremitted earnings of
Salton Hong Kong, Ltd. which the Company considers to be permanent investments.
The cumulative amount of U.S. income taxes which have not been provided
totaled approximately $699,000 at June 28, 1997.
*****
14
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WINDMERE-DURABLE HOLDINGS, INC.
By: /s/ HARRY SCHULMAN
-----------------------------
Harry Schulman, Vice President
Dated: September 29, 1997
