<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended SEPTEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 1-10177
WINDMERE-DURABLE HOLDINGS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 59-1028301
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
5980 MIAMI LAKES DRIVE, MIAMI LAKES, FLORIDA 33014
-------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(305) 362-2611
---------------------------------------------------
(Registrant's telephone number, including area code)
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 report(s), and (2) has been subject to such filing
requirement for the past 90 days. Yes X No
---- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
CLASS On November 4, 1998
- ---------------------------- ----------------------------
Common Stock, $.10 Par Value 22,090,966
<PAGE> 2
WINDMERE-DURABLE HOLDINGS, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Statements of Earnings for the
Three and Nine Months Ended September 30, 1998
and 1997 3-4
Consolidated Balance Sheets as of
September 30, 1998, December 31, 1997
and September 30, 1997 5-6
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1998
and 1997 7-8
Notes to Consolidated Financial Statements 9-19
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 20-29
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 30
ITEM 5. Other Information 30
ITEM 6. Exhibits and Reports on Form 8-K 30-31
SIGNATURES 32
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WINDMERE-DURABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------------
1998 1997
---------------- -----------------
<S> <C> <C> <C> <C>
Sales and Other Revenues $160,453 100.0% $ 79,976 100.0%
Cost of Goods Sold 105,439 65.7 62,017 77.5
-------- ----- -------- -----
Gross Profit 55,014 34.3 17,959 22.5
Selling, General and
Administrative Expenses 39,026 24.3 12,288 15.4
-------- ----- ------- ----
Operating Profit 15,988 10.0 5,671 7.1
Other (Income) Expense
Interest Expense 8,104 5.1 861 1.1
Interest and Other Income (464) (.3) (601) (.8)
Gain on sale of equity interest (42,651) (26.6) -- --
-------- ----- ------- -----
(35,011) (21.8) 260 .3
-------- ----- ------- -----
Earnings Before Equity in Net
Earnings of Joint Ventures
and Income Taxes 50,999 31.8 5,411 6.8
Equity in Net Earnings
of Joint Ventures 362 .2 3,664 4.6
-------- ----- ------- -----
Earnings Before
Income Taxes 51,361 32.0 9,075 11.4
Provision for
Income Taxes 16,401 10.2 558 .7
-------- ----- ------- -----
Net Earnings $ 34,960 21.8% $ 8,517 10.7%
======== ===== ======= =====
Earnings Per Share - basic $ 1.65 $. 48
======== =======
Earnings Per Share - diluted $ 1.58 $. 43
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------
1998 1997
---------------- --------------
<S> <C> <C> <C> <C>
Sales and Other Revenues $278,415 100.0% $191,451 100.0%
Cost of Goods Sold 202,168 72.6 149,667 78.2
-------- ----- -------- -----
Gross Profit 76,247 27.4 41,784 21.8
Selling, General and
Administrative Expenses 63,558 22.8 33,635 17.5
Repositioning Charge 9,914 3.6 -- --
-------- ----- -------- -----
Operating Profit 2,775 1.0 8,149 4.3
Other (Income) Expense
Interest Expense 10,575 3.8 2,194 1.2
Interest and Other Income (2,662) (.9) (1,565) ( .8)
Gain on sale of equity interest (42,651) (15.3) -- --
-------- ----- -------- -----
(34,738) (12.4) 629 .4
-------- ----- -------- -----
Earnings Before Equity in
Net Earnings of Joint
Ventures and Income Taxes 37,513 13.4 7,520 3.9
Equity in Net Earnings
of Joint Ventures 1,558 .6 3,784 2.0
-------- ----- -------- -----
Earnings Before
Income Taxes 39,071 14.0 11,304 5.9
Provision for
Income Taxes 10,838 3.9 527 .3
-------- ----- -------- -----
Net Earnings $ 28,233 10.1% $ 10,777 5.6%
======== ===== ======== =====
Earnings Per Share - basic $ 1.45 $ .61
======== =======
Earnings Per Share - diluted $ 1.34 $ .55
======== =======
Dividends Per Common Share $. 00 $ .10
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
WINDMERE-DURABLE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
9/30/98 12/31/97 9/30/97
-------- -------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash & Cash Equivalents $ 12,826 $ 8,224 $ 6,352
Accounts and Other Receivables,
less allowances of $4,908,
$1,111 and $1,122, respectively 143,947 43,338 50,281
Receivables from Affiliates (Note 2) 7,513 15,291 16,749
Inventories
Raw Materials 13,110 13,327 19,317
Work-in-process 20,656 21,062 21,622
Finished Goods 149,424 67,783 57,870
-------- -------- --------
Total Inventories 183,190 102,172 98,809
Prepaid Expenses 20,981 4,618 5,633
Refundable Income Taxes 3,867 5,043 --
Future Income Tax Benefits 13,837 1,274 2,791
-------- -------- --------
Total Current Assets 386,161 179,960 180,615
INVESTMENTS IN JOINT VENTURES
(NOTE 2) 15,788 43,091 39,621
PROPERTY, PLANT & EQUIPMENT -
AT COST, less accumulated
depreciation of $54,388,
$50,329 and $48,218, respectively 90,960 37,199 36,676
Notes Receivable from Affiliate 23,005 7,799 --
OTHER ASSETS 259,781 13,798 12,973
-------- -------- --------
TOTAL ASSETS $775,695 $281,847 $269,885
======== ======== ========
</TABLE>
5
<PAGE> 6
WINDMERE-DURABLE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
CONTINUED
<TABLE>
<CAPTION>
9/30/98 12/31/97 9/30/97
--------- -------- --------
<S> <C> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Notes and Acceptances Payable $ 998 $ 42,982 $ 45,453
Current Maturities of Long-Term
Debt 8,630 3,815 3,815
Acounts Payable and
Accrued Expenses 140,561 26,838 25,263
Income taxes payable 16,049 -- --
Deferred Income, current portion -- 247 330
-------- -------- --------
Total Current Liabilities 166,238 73,882 74,861
LONG-TERM DEBT 262,370 16,070 16,274
DEFERRED INCOME TAXES 13,022 -- --
DEFERRED INCOME, less current
portion 16,043 1,074 15
SHAREHOLDERS' EQUITY (Note 3)
Special Preferred Stock -
authorized 40,000,000 shares of
$.01 par value; none issued
Common Stock - authorized
40,000,000 shares of $.10 par
value; shares outstanding:
22,090, 18,119 and
17,800, respectively 2,209 1,812 1,780
Paid-in Capital 139,723 41,024 37,747
Retained Earnings 177,320 149,087 140,029
Unrealized Foreign Currency
Translation Adjustment (1,230) (1,102) (821)
-------- -------- --------
Total Shareholders' Equity 318,022 190,821 178,735
-------- -------- --------
TOTAL LIABILITIES &
SHAREHOLDERS' EQUITY $775,695 $281,847 $269,885
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
WINDMERE-DURABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 28,233 $ 10,777
Adjustments to reconcile net earnings
to net cash used in operating
activities:
Depreciation of property, plant and
equipment 7,712 4,956
Amortization of intangible assets 3,626 824
Amortization of deferred income (248) (321)
Repositioning charge 17,600 0
Loss on disposal of fixed assets 617 0
Net change in allowance for losses
on accounts receivable 3,797 0
Equity in net earnings of joint ventures (1,588) (4,332)
Gain on sale of equity interest (42,651) --
Changes in assets and liabilities
Increase in accounts and other
receivables (63,877) (12,687)
Increase in inventories (10,632) (9,295)
Increase in prepaid expenses (12,171) (1,882)
(Increase) decrease in other assets (29,956) 615
Increase (decrease) in accounts payable
and accrued expenses 39,424 (1,072)
Increase in current and
deferred income taxes 11,634 441
Increase in deferred income 14,970 --
Increase (decrease) in other accounts 128 (34)
--------- --------
Net cash used in
operating activities (33,382) (12,010)
Cash flows from investing activities:
Additions to property, plant and
equipment - net (13,887) (8,872)
Purchase of net assets - Household
Products Group (319,626) --
Proceeds from sale of equity interest
in Salton - net 72,279 --
Investments in joint ventures -- (198)
Increase in receivable accounts
and notes from affiliates (8,165) (4,610)
--------- --------
Net cash used in
investing activities (269,399) (13,680)
</TABLE>
7
<PAGE> 8
WINDMERE-DURABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
CONTINUED
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from financing activities:
Notes and acceptances $ (41,984) $ 23,570
Proceeds from issuance of long term debt 507,000 0
Payments of long-term debt (255,885) (611)
Exercise of stock options
and warrants 2,962 2,017
Proceeds from sale of common
stock - net 97,636 --
Cash dividends paid -- (1,713)
Payment of withholding tax on
stock option exercises (2,346) --
--------- --------
Net cash provided by
financing activities 307,383 23,263
--------- --------
Increase (decrease) in cash
and cash equivalents 4,602 (2,427)
Cash and cash equivalents at
beginning of year 8,224 8,779
--------- --------
Cash and cash equivalents at end
of quarter $ 12,826 $ 6,352
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 5,060 $ 963
Income taxes $ 0 $ 11
</TABLE>
Non-cash investing and financing activities:
In August 1998, holders of the $2.0 million of convertible notes issued in
connection with Newtech acquisition converted the notes into 133,333 shares of
Common Stock.
The accompanying notes are an integral part of these statements.
8
<PAGE> 9
WINDMERE-DURABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
INTERIM REPORTING
In the opinion of the Company, the accompanying unaudited
consolidated financial statements contain all normal recurring
adjustments necessary to present fairly the Company's
financial position as of September 30, 1998 and 1997, and the
results of its operations and changes in financial position
for the interim periods. Results for interim periods should
not be considered indicative of results for a full year.
Reference should be made to the financial statements contained
in the registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified for
comparability.
RECEIVABLES FROM AFFILIATES
Receivables from Affiliates include accounts receivable which
arise in the ordinary course of business and are settled as
trade obligations, as well as the current portion of notes
receivable due from certain of the Company's joint venture
partners and other affiliates ("Affiliates"). Notes receivable
from these Affiliates bear interest at prevailing market
interest rates.
REPOSITIONING CHARGE
The Company in connection with its acquisition of the Black &
Decker Household Products Group incurred a one-time
repositioning charge totaling $17.6 million, $11.4 million
after tax, of which $7.7 million is included in cost of goods
sold. The charge is primarily non-cash and consists of
writeoffs of inventory, goodwill and tooling associated with
the Company's decision to exit certain personal care and other
non-core, low-margin products. Also included are costs
associated with the integration of the acquisition.
INTEREST RATE AND DEBT RISK MANAGEMENT
The Company uses interest rate swaps of one to four years in
duration to reduce the impact of changes in interest rates on
its floating rate debt. The notational amounts of the swap
agreements are used to measure interest to be paid or received
and do not represent the amount of exposure to credit loss.
The differential paid or received on the agreements is
recognized as an adjustment of interest expense.
As of September 30, 1998, the Company had purchased swaps on
$70 million notational principal amount with a market value of
approximately ($1.7 million). The market value represents the
9
<PAGE> 10
amount the Company would have to pay to exit the contracts at
September 30, 1998. The Company does not intend to exit such
contracts at this time.
2. INVESTMENTS IN JOINT VENTURES
Investments in Joint Ventures consist of the Company's
interests in joint ventures, accounted for under the equity
method. Included are the Company's 50-percent interests in
Newtech Electronics Industries, Inc. ("Newtech"), Breakroom of
Tennessee, Inc. and Anasazi Partners, L.P. ("Anasazi").
On July 28, 1998, the Company consummated the sale of its
6,535,072 shares of Salton/Maxim stock ("Salton"). The shares
were sold for $12 per share in cash plus a six and one-half
year, $15 million subordinated promissory note bearing
interest at 4% per annum. The note is to be offset by 5% of
the total purchase price paid by Salton for product purchases
from the Company and its affiliates during the term of the
note.
In addition, Salton repurchased for approximately $3.3 million
an option owned by the Company to purchase 458,000 shares of
Salton stock. The Company's after-tax proceeds from the
transaction were approximately $50 million following the
repayment of a $10.8 million note due Salton, resulting in an
after-tax gain of approximately $28.0 million.
Furthermore, the arrangements between the Company and
Salton/Maxim pertaining to the Kmart contract will continue
with certain modifications.
Summarized financial information of the unconsolidated
companies is as follows: (In Thousands)
Nine Nine
Months Ended Year Ended Months Ended
9/30/98 12/31/97 9/30/97
------------ ---------- ------------
EARNINGS
--------
Sales $299,009 $467,549 $276,125
Gross Profit $ 70,264 $108,100 $ 61,901
Net Earnings $ 11,055 $ 15,885 $ 8,651
BALANCE SHEET
-------------
Current Assets $ 96,066 $169,300 $175,572
Noncurrent Assets $ 12,245 $ 38,781 $ 37,772
Current Liabilities $ 86,240 $132,550 $145,046
Shareholders' Equity $ 21,208 $ 61,581 $ 66,661
Notes receivable from affiliates totaled $26.6 million at
September 30, 1998 which includes $8.5 million from the 1997
sale of one of the Company's manufacturing subsidiaries and
$15.0 million from the sale of the Company's equity interest
in Salton.
Holders of the $2.0 million of 8% convertible notes issued in
connection with the 1996 Newtech acquisition exercised their
options to convert the notes into 133,333 shares of the
Company's common stock at a price of $15 per share.
10
<PAGE> 11
All sales made by joint ventures in the three month periods
ended June 30, 1998 and 1997 were to entities other than
members of the consolidated group.
Note: Profits earned by the Company's manufacturing subsidiary
on sales to joint ventures are included in the consolidated
earnings results and are not part of the above table.
3. ACQUISITION
On June 26, 1998 the Company consummated its acquisition of
the Black & Decker Household Products Group ("HPG") for $319.6
million in cash, and assumed certain related liabilities ("HPG
Acquisition"). The acquisition includes the cooking, garment
care, food preparation and beverage categories. The
acquisition has been accounted for as a purchase and
accordingly, the acquired assets and liabilities have been
recorded at their estimated fair values at the date of
acquisition. The excess of the consideration paid over the
estimated fair value of net assets acquired in the amount of
$232.3 million has been allocated between goodwill and other
intangible assets and is being amortized on a straightline
basis over periods of 6.5 to 40 years. As part of the HPG
Acquisition, the Company licensed the BLACK & DECKER(R) brand
for use in marketing HPG products in North America, Central
America, South America (excluding Brazil), and the Caribbean
under a licensing arrangement with a minimum term of six and
one-half years. For the first five years, the license will be
on a royalty-free basis. Renewals, if mutually agreed upon,
will be at specified minimum royalty payments. In addition,
the Company purchased subbrands from The Black & Decker
Corporation, including TOAST 'R OVEN(TM), PROFINISH(R), QUICK
'N EASY(R), SPACEMAKER(R), and KT KITCHENTOOLS(TM).
To facilitate the acquisition, the Company entered into credit
agreements providing it with an aggregate amount of $345
million in Senior Secured Credit Facilities and $185.0 million
in Senior Subordinated Loans (Note 5). The Company
subsequently repaid the Senior Subordinated Loans in
conjunction with the completion of its public offerings
described in Note 4.
In connection with the acquisition, the Company will incur
costs to exit certain activities and costs to terminate or
relocate certain employees. Accrued acquisition liabilities
for exit costs and employee termination and relocation costs
are recognized in accordance with EITF 95-3, "Recognition of
Liabilities in Connection With a Purchase Business
Combination." The Company has not finalized its plans to exit
activities and to terminate or relocate employees.
Accordingly, unresolved issues could result in additional
liabilities with respect to the acquisition. These
adjustments will be reported primarily as an increase or
decrease in goodwill.
The following unaudited proforma summary presents the
consolidated results of operations of the Company as if the
acquisition had occurred at the beginning of the 1998 period.
Data for the 1997 period is not readily available.
11
<PAGE> 12
(In thousands - except per share data)
Nine Months Ended September 30,
-------------------------------
1998
----
Net Sales $402,015
Net Earnings $ 20,181(1)
Earnings Per Share $ .96(1)
------------------
(1) Includes a one-time, primarily non-cash repositioning
charge of $11.4 million, after tax and an after-tax gain on
the sale of the Company's equity interest in Salton of $27.7
million.
4. PUBLIC OFFERINGS
On July 27, 1998, the Company completed a public offering of
3,041,000 shares of its Common Stock. Net proceeds from the
sale of the stock aggregated approximately $98,000,000. In
conjunction with the Common Stock offering the Company granted
the underwriters a 30 day option to purchase up to 456,150
additional shares of Common Stock to cover any over
allotments, which was not exercised.
The Company simultaneously completed a public offering of
$130.0 million in aggregate principal of its 10% Senior
Subordinated Notes due 2008. Net proceeds from the offering
totaled approximately $125,000,000, including related costs of
approximately $5.0 million, which are being amortized over the
10 year term of the notes.
Proceeds from both offerings were used to pay, in total,
outstanding principal and accrued interest under the $185.0
million Senior Subordinated Loans borrowed in connection with
the June 26, 1998 acquisition of The Black & Decker Household
Products Group as well as the $20.0 million Tranche C Term
Loan and $12.0 million in revolving loans under the Senior
Secured Credit Facilities.
5. LONG-TERM DEBT
SENIOR SECURED CREDIT FACILITIES
The Senior Credit Facilities, consist of a $160.0 million
Senior Secured Revolving Credit Facility, a $90.0 million
Tranche A Term Loan, a $75.0 million Tranche B Term Loan and a
$20.0 million Tranche C Term Loan. The Company paid the
purchase price of the HPG Acquisition, in part, with
borrowings of $185.0 million under the Term Loans and $7.0
million under the Senior Secured Revolving Credit Facility.
The Senior Secured Revolving Credit Facility includes (a) a
$20 million sublimit for the issuance of letters of credit and
(b) a $10 million sublimit for swing line loans (the "Swing
Line Loans"). All amounts outstanding under the Senior Secured
Revolving Credit Facility are payable on June 26, 2003. The
Tranche A Term Loan is payable in quarterly installments,
ranging from $2.0 million for the quarter ended March 31, 1999
to $6.5 million for the quarter ended March 31, 2003, and all
remaining amounts owing due the following quarter. The Tranche
B Term Loan is payable in annual installments of $630,000,
with all remaining amounts owing thereunder due June 26, 2004.
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<PAGE> 13
The Tranche C Term Loan was paid on July 27, 1998 with the
proceeds from the Company's offerings (Note 4). In accordance
with the provisions of the Company's Senior Secured Credit
Facilities $26.0 million of the net proceeds from the Salton
transaction were used to repay $14.0 million and $12.0 million
of the Tranche A Term Loan and the Tranche B Term Loan,
respectively.
Interest accrues on the loans made under the Senior Secured
Revolving Credit Facility and the Tranche A Term Loan (other
than Swing Line Loans) at either LIBOR (adjusted for any
reserves) or the Base Rate, which is the higher of
NationsBank, N.A.'s prime rate and the federal funds rate plus
0.50% (the "Base Rate"), at the Company's option, plus a
specified margin which will be determined by the leverage
ratio of the Company and its subsidiaries that initially has
been set at 2.25%, or the Base Rate, plus a specified margin
of 1.50%, at the Company's option. Interest accrues on the
Tranche B Term Loan at either LIBOR (adjusted for any
reserves) plus a specified margin which will be determined by
the leverage ratio of the Company and its subsidiaries that
initially is at 3.00%, or the Base Rate plus a specified
margin of 2.00%, at the Company's option. Swing Line Loans
will bear interest at the Base Rate.
The aggregate amount outstanding under the Senior Credit
Facilities will be prepaid by amounts equal to the net
proceeds, or a specified portion thereof, from certain
indebtedness and equity issuances and specified asset sales by
the Company and its subsidiaries, and by a specified
percentage of cash flow in excess of certain expenditures,
costs and payments. The Company may at its option reduce the
amount available under the Senior Credit Facilities to the
extent such amounts are unused or prepaid in certain minimum
amounts.
The Senior Credit Facilities are secured by a security
interest in substantially all of the real and personal
property, tangible and intangible, of the Company and its
domestic subsidiaries, as well as a pledge of all of the stock
of such domestic subsidiaries, a pledge of not less than 65%
of the voting stock of each direct foreign subsidiary of the
Company and each direct foreign subsidiary of each domestic
subsidiary of the Company, and a pledge of all of the capital
stock of any subsidiary of a subsidiary of the Company that is
a borrower under the Senior Credit Facilities. The Senior
Credit Facilities are guaranteed by all of the current and
will be guaranteed by all of the future domestic subsidiaries
of the Company.
The Senior Credit Facilities contain a number of significant
covenants that, among other things, will restrict the ability
of the Company to dispose of assets, incur additional
indebtedness, prepay other indebtedness, pay dividends,
repurchase or redeem capital stock, enter into certain
investments or create new subsidiaries, enter into sale and
lease-back transactions, make certain acquisitions, engage in
mergers or consolidations, create liens, or engage in certain
transactions with affiliates, and that will otherwise restrict
corporate and business activities.
13
<PAGE> 14
In addition, under the Senior Credit Facilities, the Company
is required to comply with specified financial ratios and
tests, including a minimum net worth test, a fixed charge
coverage ratio, an interest coverage ratio, a leverage ratio
and a minimum EBITDA requirement.
10% SENIOR SUBORDINATED NOTES DUE 2008
The $130.0 million in Senior Subordinated Notes were issued in
July 1998, bear interest at a rate of 10%, payable
semiannually and mature on July 31, 2008.
The Notes are general unsecured obligations of the Company and
rank subordinate in right of payment to all senior debt of the
Company and rank pari passu in right of payment to all future
subordinated indebtedness of the Company.
The Notes may be redeemed at the option of the Company, in
whole or in part, on or after July 31, 2003 at various
redemption prices and up to 35% of the original aggregate
principal amount of the notes may be redeemed with the net
proceeds of an offering of common stock of the Company on or
before July 31, 2001.
The indenture pursuant to which the Notes are issued contains
certain covenants that, among other things, limit the ability
of the Company to incur additional indebtedness and issue
preferred stock, pay dividends or make other certain
restricted payments, apply net proceeds from certain asset
sales, and sell stock of subsidiaries.
6. SHAREHOLDERS' EQUITY
EARNINGS PER SHARE
In 1997, the Company adopted Financial Accounting Standards
No. 128 (SFAS 128), "Earnings Per Share." Basic shares for the
three month periods ended September 30, 1998 and 1997 were
21,132,969 and 17,664,295, respectively. Basic shares for the
nine month periods ended September 30, 1998 and 1997 were
19,437,363 and 17,548,353, respectively.
Included in diluted shares are common stock equivalents
relating to options, warrants and convertible debt of 997,061
and 2,391,927 for the three month periods ended September 30,
1998 and 1997, respectively, and 1,561,771 and 2,063,054 for
the nine month periods, respectively.
STOCK OPTIONS
On April 30, 1998, the Company's Compensation Committee of its
Board of Directors approved the 1998 Stock Option Plan,
subject to ratification by the shareholders of the Company.
The 1998 plan provides for the granting of incentive stock
options to employees and nonqualified stock options to
employees, consultants and directors. A total of 3.0 million
shares have been reserved under the plan of which
approximately 2.5 million have been granted to date.
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<PAGE> 15
7. RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" (SFAS 130),
effective January 1, 1998. SFAS 130 establishes standards for
reporting and display of comprehensive income and its
components in financial statements. Differences between net
earnings and comprehensive earnings for the three month
periods ended September 30, 1998 and 1997 were insignificant
and, therefore, have not been separately disclosed.
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131 "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131). The Company
has not assessed the effect this new standard will have on its
consolidated financial statements and/or disclosures.
8. COMMITMENTS AND CONTINGENCIES
The Company, its 50-percent owned joint venture partners
Salton and Newtech, White Consolidated Industries, Inc.
("White Consolidated"), 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 in 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. Prior to the
filing of Westinghouse's complaint against the Company, White
Consolidated, on November 14, 1996, filed a complaint in the
United States District Court for the Northern District of Ohio
against Westinghouse and another corporation for trademark
infringement, dilution, false designation or origin and false
advertisement, seeking both injunctive relief and damages. It
was subsequently determined that the entire dispute will be
heard in the United States District Court for the Western
District of Pennsylvania. The action by Westinghouse seeks,
among other things, a preliminary injunction enjoining the
defendants from using the trademark, unspecified damages and
attorneys' fees. Pursuant to the Indemnification Agreement
dated January 23, 1997 by and among White Consolidated, Kmart
Corporation, and the Company, White Consolidated is defending
and indemnifying the Company for all costs and expenses for
claims, damages, and losses, including the costs of
litigation. Pursuant to the license agreements with White
Consolidated, White Consolidated is defending and indemnifying
Salton and Newtech for all costs and expenses for claims,
damages, and losses, including the costs of litigation. On
April 9, 1997, on joint motion of the parties, the court
issued an order staying future proceedings until the earlier
of July 1, 1997 or five days after hearing before the court in
order to give the parties an opportunity to pursue settlement
discussions. Subsequently, after a status hearing before the
Court on July 15, 1997, and in accordance with the Court's
memorandum order of July 17, 1997, counsel for the parties in
the litigation pending in the United States District Court for
the Western District of Pennsylvania reported to the Court in
a letter that the parties had agreed to pursue an expedited
mini-trial/mediation proceeding in an effort to resolve their
disputes. A mediation proceeding occurred and the parties were
unable to reach a mediated settlement. Discovery is proceeding
and the matter is likely to be tried in early 1999.
15
<PAGE> 16
The Company is also a party to legal proceedings which are
class action complaints, on behalf of those security holders
of the Company who purchased such securities during a certain
period in the second and third quarter of 1998, alleging
violations of the federal securities laws (including Rule
10b-5 promulgated pursuant to the Securities Exchange Act of
1934, as amended) in connection with the acquisition by the
Company of certain product categories of the Household
Products Group of The Black & Decker Corporation. Among other
things, the plaintiffs allege that the Company and certain of
its directors and officers, along with NationsBanc Montgomery
Securities LLC, provided false information in connection with
a public offering of debt and equity securities. The
plaintiffs seek, among other relief, to be declared a class,
to be awarded compensatory damages, rescission rights,
unspecified damages and attorneys' fees and costs. The Company
has obtained an extension to move against, answer or otherwise
respond in each of the proceedings. Because these matters are
in their preliminary stages, management is unable at this time
to determine what effect these lawsuits will have on the
financial condition, results of operations or liquidity of the
Company.
The Company is currently advancing the legal expenses of the
directors and officers who were named as defendants. Such
defendants have agreed to repay the Company for all or any
portion of such advances to which they are ultimately found
not to be entitled pursuant to applicable law. Based on the
information currently available to the Company, management
does not believe that the indemnification of the officers and
directors named as defendants in the above-listed matters will
have a material adverse effect on the financial condition,
results of operations or liquidity of the Company. However,
the actual effects of such indemnification on the Company
cannot be finally determined until the amount of such
indemnification, if any, is fixed.
The Company and the other 50 percent owner in Newtech have
entered into an agreement whereby the Company will transfer
5.0% of its interest in Newtech to a third party if and when a
liquidity event for the Company occurs. Pursuant to the
agreement, a liquidity event will occur if Newtech sells
equity interests in a public offering, Newtech is sold to a
third party, or if there is an other disposition of the
Company's interest or other similar event. On May 14, 1998,
Newtech filed a Form S-1 Registration Statement to publicly
offer shares of its common stock with the Securities and
Exchange Commission. There can be no assurance that such
offering will be consummated.
The Company is subject to other legal proceedings and claims
which arise in the ordinary course of its business. In the
opinion of management, the amount of ultimate liability, if
any, in excess of applicable insurance coverage, is not likely
to have a material effect on the financial position of the
Company.
16
<PAGE> 17
9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following condensed consolidating financial information
presents the results of operations, financial position and
cash flows of the Company (on a stand alone basis), the
guarantor subsidiaries (on a combined basis), the
non-guarantor subsidiaries (on a combined basis) and the
eliminations necessary to arrive at the consolidated results
of the Company. The results of operations and cash flows
presented below assume as if the guarantor subsidiaries were
in place for all periods presented. The Company and subsidiary
guarantors have accounted for investments in their respective
subsidiaries on an unconsolidated basis using the equity
method of accounting. The Subsidiary Guarantors are
wholly-owned subsidiaries of the Company and have fully and
unconditionally guaranteed the Notes on a joint and several
basis. The guarantors include the following: Windmere
Corporation, Windmere Holdings Corporation, Windmere Holdings
Corporation II, Jerdon Products, Inc., Fortune Products, Inc.,
Bay Books & Tapes, Inc., Windmere Innovative Pet Products,
Inc., EDI Masters, Inc., Windmere Fan Products, Inc.,
Household Products, Inc., HP Delaware, Inc., HP Americas,
Inc., HPG LLC, HP Intellectual Corp., WD Delaware, Inc. and WD
Delaware II, Inc. The Notes contain certain covenants which,
among other things, will restrict the ability of the
Subsidiary Guarantors to make distributions to
Windmere-Durable Holdings, Inc. The Company has not presented
separate financial statements and other disclosures concerning
the guarantors and non-guarantor subsidiaries because it has
determined they would not be material to investors.
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
----------------------------------------------------------------------
None
Windmere Durable ------------------------
Holdings, Inc. Guarantors Guarantors Eliminations Consolidated
---------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Net Sales 0 236,790,682 103,131,771 (61,507,790) 278,414,663
Cost of goods sold 0 180,914,314 83,465,524 (62,211,552) 202,168,286
Gross Profit 0 55,876,368 19,666,247 703,762 76,246,377
Operating Expenses (448,497) 61,316,288 2,459,626 270,243 63,557,660
Repositioning Charge 0 9,913,988 0 0 9,913,988
Operating Income 448,497 27,297,092 17,206,621 433,519 45,425,729
Other (income) expense,
net (276,986) (35,083,528) 1,698,917 (1,076,403) (34,738,000)
Earnings before income
taxes and minority interest
in subsidiaries 211,511 19,038,568 18,905,539 (642,884) 37,512,733
Provision for income taxes 0 15,353,537 1,250,634 (5,766,384) 10,838,000
Equity in earnings of affiliated
companies, net of tax 150,951 1,406,783 0 0 1,557,734
Minority interest 0 0 0 0 0
Net earnings 362,462 5,091,815 17,654,905 5,123,500 28,232,467
======= ========= ========== ========= ==========
Balance Sheet
Cash 0 5,254,032 7,572,180 0 12,826,212
Accounts receivables 0 123,103,204 21,465,688 (622,372) 143,946,520
Intercompany
Receivables 24,761,456 (20,296,114) 3,584,831 (537,599) 7,512,574
Inventories 0 137,772,923 45,134,227 282,655 183,189,805
Other current assets 0 37,316,538 2,549,812 (1,181,847) 38,684,503
Total current assets 24,761,456 283,150,583 80,306,738 (2,059,163) 386,159,614
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Investments in
affiliated companies 414,426,670 23,020,600 70,476,650 (492,135,475) 15,788,445
Property and equipment,
net 0 59,474,928 31,485,227 0 90,960,155
Other assets 0 617,283,750 19,940,434 (354,438,280) 282,785,904
----------- ----------- ----------- ------------ -----------
Total assets 439,188,126 982,929,861 202,209,049 (848,632,917) 775,694,118
=========== =========== =========== ============ ===========
LIABILITIES:
Notes payable 0 11,350,207 998,444 (11,350,207) 998,444
Accounts payable and
accrued expenses 1,066 132,078,934 9,102,782 (622,071) 140,560,710
Current maturities
of L.T. 8,630,000 0 0 0 8,630,000
Deferred income S.T. 0 0 0 0 0
Deferred income taxes 0 15,838,868 865,616 (655,644) 16,048,840
----------- ----------- ----------- ------------ -----------
Total current
liabilities 8,631,066 159,268,009 10,966,842 (12,628,223) 166,237,694
Long term debt 260,370,000 356,869,293 0 (354,869,293) 262,370,000
Deferred income, less
current portion 0 15,218,367 0 824,010 16,042,377
Deferred income taxes 0 12,836,352 2,145,685 (1,960,037) 13,022,000
Total liabilities 269,001,066 544,192,022 13,112,528 (368,633,543) 457,672,071
Shareholders' equity 170,187,060 438,737,840 189,096,521 (479,999,374) 318,022,047
Total liabilities and
shareholder equity 439,188,126 982,929,861 202,209,049 (848,632,917) 775,694,118
=========== =========== =========== ============ ===========
Cash Flow Information
Net cash provided (used)
in operating
activities 40,684,662 (613,451,297) (5,983,456) 545,368,164 (33,381,927)
Net cash provided
(used) in investing
activities (398,520,952) 30,606,355 (1,885,068) 100,400,562 (269,399,103)
Net cash provided
(used) in financing
activities 357,836,290 588,098,974 7,216,822 (645,768,726) 307,383,360
Cash at beginning 0 0 8,223,882 0 8,223,882
Cash at end 0 5,254,032 7,572,180 0 12,826,211
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997
----------------------------------------------------------------------
None
Windmere Durable ------------------------
Holdings, Inc. Guarantors Guarantors Eliminations Consolidated
---------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Net Sales 0 136,975,478 116,066,766 (61,590,964) 191,451,279
Cost of goods sold 0 106,675,357 105,153,283 (62,160,964) 149,667,676
Gross profit 0 30,300,120 10,913,483 570,000 41,783,603
Operating expenses 0 29,521,931 3,843,279 270,243 33,635,453
Operating income 0 777,690 7,070,204 299,757 8,147,650
Other (income) expense,
net 324,537 1,447,111 (1,143,020) 0 628,627
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Earnings before equity in net
earnings (loss) of joint
ventures and income tax (324,537) (669,421) 8,213,224 299,757 7,519,023
Provision for income taxes 0 9,099 183,882 333,805 526,786
Equity in net earnings loss
of joint ventures 87,349 3,696,998 0 0 3,784,347
---------- ----------- ----------- ----------- -----------
Net earnings (237,189) 3,018,979 8,029,342 (34,048) 10,777,084
========== =========== =========== =========== ===========
Balance Sheet
Cash & cash equivalents 0 155,478 6,196,485 0 6,351,963
Accounts receivables 0 38,556,265 11,365,913 358,822 50,281,000
Receivables from
affiliates 30,941,789 (32,525,764) 18,008,379 324,843 16,749,248
Inventories 0 48,709,774 50,643,594 (544,368) 98,809,000
Other current assets 0 5,827,499 3,172,182 (575,672) 8,424,009
Total current assets 30,941,789 60,723,253 89,386,553 (436,375) 180,615,220
Investment in joint
ventures 46,265,002 47,379,290 46,199,154 (100,222,849) 39,620,596
Property and plant and
equipment net 0 7,201,146 29,474,963 0 36,676,109
Other assets 0 5,035,628 12,525,799 (4,588,358) 12,973,069
Total assets 77,206,791 120,339,317 177,586,469 (105,247,582) 269,884,994
========== =========== =========== =========== ===========
Notes and acceptance payable 0 49,850,207 6,952,701 (11,350,207) 45,452,701
Current maturities of
long term debt 0 3,814,815 0 0 3,814,815
Accounts payable 0 3,212,530 16,115,201 0 19,327,731
Accrued expenses 2,068 1,107,906 4,826,781 0 5,936,754
Current maturities of L.T. 0 3,814,815 0 0 3,814,815
Deferred income current
portion 0 330,002 0 0 330,002
Deferred income taxes 0 1,772,059 (341,377) (1,430,523) 158
Total current liabilities 2,068 60,087,518 27,553,305 (12,780,730) 74,862,161
Long term debt 10,847,620 5,425,926 0 0 16,273,546
Deferred income, less
current portion 0 14,679 0 0 14,679
Deferred income taxes 0 (185,648) 68,401 117,247 0
Total liabilities 10,849,688 65,342,476 27,621,707 (12,663,483) 91,150,387
Shareholders' equity 66,357,104 54,996,841 149,964,762 (92,584,099) 178,734,607
Total liabilities
and shareholders
Equity 77,206,791 120,339,317 177,586,469 (105,247,582) 269,884,994
========== =========== =========== =========== ===========
Net cash provided (used)
in operating activities (235,122) (17,426,085) 11,336,937 (5,686,031) (12,010,301)
Net cash provided (used)
in investing activities (68,721) (6,624,086) (14,873,425) 7,885,930 (13,680,302)
Net cash provided (used)
in financing activities 303,843 22,088,889 3,070,225 (2,199,899) 23,263,058
Cash at beginning 0 2,116,760 6,662,748 0 8,779,508
Cash at end 0 155,478 6,196,485 0 6,351,963
</TABLE>
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1997
Sales and Other Revenues ("Sales") for the third quarter of 1998 increased by
$80.5 million, more than double Sales for the same period in 1997. The increase
in sales is the result of the June 26, 1998 acquisition of the Black & Decker
Household Products Group, now the Company's Household Products, Inc. subsidiary.
All Household Products, Inc. sales are distribution sales. Although contributing
significantly to total sales for the period, Household Products, Inc.
experienced softness in the domestic market for its higher-end product lines and
weaker than expected sales in Latin America and Canada. Sales to Walmart
accounted for 14% of total Company sales in the 1998 third quarter.
<TABLE>
<CAPTION>
COMPARATIVE REVENUE RESULTS
------------------------------------------------------
(In Thousands) THREE MONTHS ENDED
------------------------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
--------------------- -------------------
<S> <C> <C> <C> <C>
DISTRIBUTION $ 147,488 91.9% $ 59,799 74.8%
MANUFACTURING 12,965 8.1 20,177 25.2
------- ----- ------- ----
Total Sales $ 160,453 100.0% $ 79,976 100.0%
======= ===== ======= =====
</TABLE>
The Company's gross profit margin increased to 34.3% of sales from 22.5% in the
1997 period. While the increase is attributable primarily to the June 26, 1998
acquisition, increased productivity, a more profitable product mix and lower raw
material costs, which include the effect of volume purchase discounts, at the
Company's manufacturing operations also contributed significantly to the margin
improvement.
Selling, general and administrative expenses increased by $26.7 million and as a
percentage of sales to 24.3% from 15.4% for the year ago quarter. The increase
is due to the June 26, 1998 acquisition of the Black & Decker Household Products
Group. Expenses incurred to integrate and delink Household Products, Inc. from
Black & Decker were higher than anticipated.
Interest expense increased by $7.2 million to $8.1 million in the 1998 period.
The change is the result of amounts borrowed in conjunction with the June 26,
1998 acquisition of the Black & Decker Household Products Group.
On July 28, 1998, the Company consummated the sale of its 6,535,072 shares of
Salton/Maxim stock. The sale of the stock resulted in an after-tax capital gain
of $27.7 million.
The Company's equity in net earnings of joint ventures decreased $3.3 million to
$362,000 in the 1998 period. The decrease is primarily the result of the July
1998 sale of the Company's equity interest in Salton as well as weaker profits
at Newtech.
The Company's tax expense is based on the earnings of each of its foreign and
domestic operations, and it includes such additional U.S. taxes as are
applicable to the repatriation of foreign earnings. Foreign earnings, other than
in Canada, are generally taxed at rates lower than in the United States.
20
<PAGE> 21
The Company's effective tax rate for the third quarter has increased to 32%
compared to 10% in the prior year because of the gain on the sale of the
Salton/Maxim stock. The gain increases the proportion of the Company's income
taxable in the U.S. which is generally taxed at rates higher than its foreign
income.
In 1997, the Company adopted Financial Accounting Standards No. 128 (FAS 128),
"Earnings Per Share". Basic shares for the three month periods ended September
30, 1998 and 1997 were 21,132,969 and 17,664,295, respectively. The increase in
number of shares was primarily due to the July 1998 public offering of 3,041,000
shares of the Company's common stock.
Included in diluted shares are common stock equivalents relating to options,
warrants and convertible debt of 997,061, and 2,391,927 for the three month
period ended September 30, 1998 and 1997, respectively.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1997
Sales and Other Revenues for the 1998 nine month period increased by $87.0
million or 45.4% over sales for the same period in 1997. The increase is
primarily the result of the June 26, 1998 acquisition of Household Products,
Inc. (See discussion of three month period results). Sales to Walmart accounted
for 11% of total sales for the nine month period ended September 30, 1998.
<TABLE>
<CAPTION>
COMPARATIVE REVENUE RESULTS
-------------------------------------------------------
NINE MONTHS ENDED
-------------------------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------------ --------------------
<S> <C> <C> <C> <C>
DISTRIBUTION $ 239,719 86.1% $ 138,988 72.6%
MANUFACTURING 38,696 13.9 52,463 27.4
------- ----- ------ ----
Total Sales $ 278,415 100.0% $ 191,451 100.0%
======= ===== ======= =====
</TABLE>
The Company in connection with its acquisition of the Black & Decker Household
Products Group incurred a one-time repositioning charge totaling $17.6 million,
$11.4 million after tax, of which $7.7 million is included in cost of goods
sold. The charge is primarily non-cash and consists of writeoffs of inventory,
goodwill and tooling associated with the Company's decision to exit certain
personal care and other non-core, low-margin products. Also included are costs
associated with the integration of the acquisition.
Excluding the portion of the repositioning charge recorded as cost of goods sold
in the 1998 period, the Company's gross profit margin increased to 30.2% of
sales from 21.8% in the 1997 period. While the increase is attributable
primarily to the June 26, 1998 acquisition, increased productivity, a more
profitable product mix and lower raw material costs, which include the effect of
volume purchase discounts, at the Company's manufacturing operations also
contributed significantly to the margin improvement.
Selling, general and administrative costs increased by $29.9 million and as a
percentage of sales to 22.8% from 17.5% in the nine months ended September 30,
1998 compared to the same period of 1997. The increase is due to the June 26,
1998 acquisition of the Black & Decker Household Products Group. Expenses
incurred to integrate and delink Household Products, Inc. from Black & Decker
were higher than anticipated.
Interest expense increased by $8.4 million in the 1998 period. The
change is the result of the increased level of borrowing throughout the year
under the Company's credit facilities as well as amounts borrowed in conjunction
with the acquisition of the Black & Decker Household Products Group.
21
<PAGE> 22
The Company's equity in net earnings of joint ventures was $1.6 million for the
nine months ended September 30, 1998 as compared to $3.8 million for the same
period in 1997. The decrease is primarily the result of the July 1998 sale of
the Company's equity interest in Salton.
The Company's tax expense is based on the earnings of each of its foreign and
domestic operations, and it includes such additional U.S. taxes as are
applicable to the repatriation of foreign earnings. Foreign earnings, other than
in Canada, are generally taxed at rates lower than in the United States.
The Company's effective tax rate for the 1998 nine month period has increased to
29% compared to 7% in the prior year because of the gain on the sale of the
Salton/Maxim stock. The gain increases the proportion of the Company's income
taxable in the U.S. which is generally taxed at rates higher than its foreign
income.
Basic shares for the nine month periods ended September 30, 1998 and 1997 were
19,437,363 and 17,548,353, respectively. The increase in number of shares was
primarily due to the July 1998 public offering of 3,041,000 of the Company's
common stock.
Included in diluted shares are common stock equivalents relating to options,
warrants and convertible debt of 1,561,771 and 2,063,054 for the nine month
periods ended September 30, 1998 and 1997.
LIQUIDITY & CAPITAL RESOURCES
At September 30, 1998, the Company's current ratio and quick ratio were 2.3 to 1
and 1.2 to 1 as compared to 2.4 to 1 and 1.1 to 1 at September 30, 1997. The
Company had working capital of $219.9 million and $105.8 million at September
30, 1998 and 1997, respectively.
Cash balances increased by approximately $4.6 million for the nine month period
ended September 30, 1998. The net use of cash in operating activities is a
result of the increased growth in sales as a result of the June 26, 1998
acquisition of the Black & Decker Household Products Group, resulting in higher
accounts receivable balances.
Cash used in investing activities is primarily the result of the payment of
$319.6 to purchase the net assets of the Household Products Group offset by the
net proceeds from the sale of the Company's equity interest in Salton.
Financing activities provided cash flows of $307.4 million primarily as a result
of the borrowings and proceeds from the public offerings of Common Stock and
10% Senior Subordinated Notes made in conjunction with the acquisition of the
Black & Decker Household Products Group.
No provision for U.S. taxes has been made on undistributed earnings of the
Company's foreign subsidiaries and joint ventures because management plans to
reinvest such earnings in their respective operations or in other foreign
operations. Repatriating those earnings or using them in some other manner which
would give rise to a U.S. tax liability would reduce after tax earnings and
available working capital.
22
<PAGE> 23
Certain of the Company's foreign subsidiaries (the "subsidiaries") have $21.4
million in trade finance lines of credit, payable on demand, which are secured
by the subsidiaries' tangible and intangible property located in Hong Kong and
in the People's Republic of China, as well as a Company guarantee. At September
30, 1998, the subsidiaries were utilizing, including letters of credit,
approximately $1.0 million of these credit lines. Outstanding borrowings by the
Company's Hong Kong subsidiaries are primarily in U.S. dollars.
The Company's primary sources of liquidity are its cash flow from operations and
borrowings under the Senior Secured Credit Facilities. The Company is currently
borrowing $139.0 million under the term loan portion of its Senior Secured
Credit Facilities. In addition, $145.0 million is available for future
borrowings under the Senior Secured Revolving Credit Facility and other credit
facilities. Advances under the Senior Secured Revolving Credit Facility are
based upon percentages of outstanding eligible accounts receivable and
inventories.
Under the Senior Secured Revolving Credit Facility, the Company may elect to
borrow at either LIBOR (adjusted for any reserves) or the Base Rate (as
defined). Interest will accrue on the Senior Secured Revolving Credit Facility
and the Tranche A Term Loan at either LIBOR (adjusted for any reserves) plus a
specified margin which will be determined by the leverage ratio of the Company
and its subsidiaries that initially has been set at 2.25%, or the Base Rate,
plus a specified margin of 1.50%. Interest will accrue on the Tranche B Term
Loan at either LIBOR (adjusted for any reserves) plus a specified margin which
will be determined by the leverage ratio of the Company and its subsidiaries
that initially has been set at 3.00%, or the Base Rate plus a specified margin
of 2.00%.
The Senior Secured Credit Facilities contain a number of significant covenants
that, among other things, restrict the ability of the Company to dispose of
assets, incur additional indebtedness, prepay other indebtedness, pay dividends,
repurchase or redeem capital stock, enter into certain investments or create new
subsidiaries, enter into sale and lease-back transactions, make certain
acquisitions, engage in mergers or consolidations, create liens, or engage in
certain transactions with affiliates, and that will otherwise restrict corporate
and business activities. In addition, under the Senior Credit Facilities, the
Company is required to comply with specified financial ratios and tests,
including a minimum net worth test, a fixed charge coverage ratio, an interest
coverage ratio, a leverage ratio and a minimum EBITDA requirement.
The indenture pursuant to which the 10% Senior Subordinated Notes are issued
contains certain covenants that, among other things, limit the ability of the
Company to incur additional indebtedness and issue preferred stock, pay
dividends or make other certain restricted payments, apply net proceeds from
certain asset sales, and sell stock of subsidiaries.
The Company's ability to make scheduled payments of principal of, or to pay the
interest on, or to refinance, its indebtedness, or to fund planned capital
expenditures, product research and development expenses and marketing expenses
will depend on its future performance, which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory, and
international and United States domestic political factors and other factors
that are beyond the Company's control. Based upon the current level of
operations and anticipated cost savings and revenue growth, management believes
that cash flow from operations and available cash, together with available
borrowings under the Senior Credit and other facilities, will be adequate to
meet the Company's future liquidity needs for at least the next several years.
The Company may, however, need to refinance all or a portion of the principal of
the indebtedness on or prior to maturity. There can be no assurance that the
Company's business will generate sufficient cash flow from operations, that
anticipated revenue
23
<PAGE> 24
growth and operating improvements will be realized or that future borrowings
will be available under the Senior Secured Credit Facilities in an amount
sufficient to enable the Company to service its indebtedness, including the
Notes, or to fund its other liquidity needs. In addition, there can be no
assurance that the Company will be able to effect any such refinancing on
commercially reasonable terms or at all.
The Company's aggregate capital expenditures for the nine months ended September
30, 1998 were $13.9 million. The Company anticipates that the total capital
expenditures for the remainder of 1998 and for 1999 will be approximately $7.1
million and $25.0 million, respectively, which includes the cost of new tooling.
The Company plans to fund those capital expenditures from cash flow from
operations and, if necessary, borrowings under the Senior Secured Revolving
Credit Facility.
At September 30, 1998, debt as a percent of total capitalization was 46 percent.
PUBLIC OFFERINGS
On July 27, 1998, the Company completed a public offering of 3,041,000 shares of
its Common Stock. Net proceeds from the sale of the stock aggregated
approximately $98,000,000. In conjunction with the Common Stock offering the
Company granted the underwriters a 30 day option to purchase up to 456,150
additional shares of Common Stock to cover any over allotments, which was not
exercised.
The Company simultaneously completed a public offering of $130.0 million in
aggregate principal of its 10% Senior Subordinated Notes due 2008 (the "Notes").
Net proceeds from the offering totaled approximately $125,000,000, including
related costs of approximately $5.0 million, which are being amortized over the
10 year term of the notes.
Proceeds from both offerings were used to pay, in total, outstanding principal
and accrued interest under the $185.0 million Senior Subordinated Loans borrowed
in connection with the June 26, 1998 acquisition of the Black & Decker Household
Products Group as well as the $20.0 million Tranche C Term Loan and $12.0
million in revolving loans under the Senior Secured Credit Facilities.
SALE OF SALTON SHARES
On July 28, 1998, the Company consummated the sale of its 6,535,072 shares of
Salton stock. The shares were sold for $12 per share in cash plus a six and
one-half year, $15 million subordinated promissory note bearing interest at 4%
per annum. The note is to be offset by 5% of the total purchase price paid by
Salton for product purchases from the Company and its affiliates during the term
of the note.
In addition, Salton repurchased for approximately $3.3 million an option owned
by the Company to purchase 458,000 shares of Salton stock. The Company's
after-tax proceeds from the transaction were approximately $50 million following
the repayment of a $10.8 million note due Salton resulting in an after-tax gain
of approximately $28.0 million.
24
<PAGE> 25
In accordance with the provisions of the Company's Senior Secured Credit
Facilities $26.0 million of the net proceeds from the Salton transaction were
used to repay $14.0 million and $12.0 million of the Tranche A Term Loan and the
Tranche B Term Loan, respectively.
CURRENCY MATTERS
The Company uses forward exchange contracts to reduce fluctuations in foreign
currency, cash flows related to third party raw material and other operating
purchases. The terms of the currency instruments used are generally consistent
with the timing of the committed or anticipated transactions being hedged. The
purpose of the Company's foreign currency management activity is to protect the
Company from the risk that eventual cash flows from foreign currency denominated
transactions may be adversely affected by changes in exchange rates. There is no
significant unrealized gain or loss on these contracts. All contracts have terms
of six months or less.
Recent months have seen an unusually rapid devaluation of certain Asian-Pacific
currencies. While there has not been a material impact on the currencies in Hong
Kong or the People's Republic, where the Company has operations, there can be no
assurances that there will not be a material impact in the future. The December
1994 devaluation of the peso had a number of effects on the Mexican economy that
adversely affected the financial condition of businesses in Mexico. There can be
no assurance that the peso to dollar foreign exchange rate will not be volatile
in the future and will not have a material adverse effect on the Company.
The Company uses interest rate swaps of one to four years in duration to reduce
the impact of changes in interest rates on its floating rate debt. The
notational amounts of the agreements are used to measure interest to be paid or
received and do not represent the amount of exposure to credit loss. The
differential paid or received on the agreements is recognized as an adjustment
of interest expense.
As of September 30, 1998, the Company had purchased interest rate swaps on $70
million notational principal amount with a market value of approximately ($1.7
million). The market value represents the amount the Company would have to pay
to exit the contracts at September 30, 1998. The Company does not intend to exit
such contracts at this time.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" (SFAS 130), effective January 1, 1998. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in financial statements. Differences between net earnings and
comprehensive earnings for the three month periods ended September 30, 1998 and
1997 were insignificant and, therefore, have not been separately disclosed.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 "Disclosures About Segments of an Enterprise and Related Information" (SFAS
131). The Company has not assessed the effect this new standard will have on its
consolidated financial statements and/or disclosures.
25
<PAGE> 26
SEASONALITY
The Company's business is highly seasonal, with operating results varying from
quarter to quarter. The Company has historically experienced higher revenues in
the third and fourth quarters of each fiscal year primarily due to increased
demand by customers for products in the late summer for "back-to-school" sales
and in the fall for holiday sales. The Company's major sales occur during August
through November. Sales are generally made on 60 to 90 day terms. Heaviest
collections on its open accounts receivable are received from November through
March, at which time the Company is in its most liquid state.
YEAR 2000 ISSUES
The Company uses a significant number of computer software programs and
operating systems across its entire organization, including applications used in
financial business systems, manufacturing, and various administrative functions.
To the extent that the Company's software applications contain source code that
is unable to appropriately interpret the upcoming calendar year 2000 and beyond,
modification or replacement of such applications will be necessary. The Company
has initiated a review of its computer systems and programs to identity those
that are not Year 2000 compliant. Key systems and programs, including those that
interact with customers and suppliers, are being assessed and plans are being
developed to address and implement required system and program modifications by
December 31, 1999. The Company also has begun to address whether significant
customers and suppliers may have Year 2000 compliance issues which will affect
their interaction with the Company. The cost of implementing required system
changes is not expected to be material to the Company's consolidated financial
statements. No assurance can be given, however, that all of the Company's
systems, the systems of acquired businesses, and those of significant customers
and suppliers, will be Year 2000 compliant and that the failure to achieve Year
2000 compliance will not have a material adverse effect on the Company's
operations.
LEGAL PROCEEDINGS
The Company, its 50-percent owned joint venture partners Salton and Newtech,
White Consolidated Industries, Inc. ("White Consolidated"), and certain other
parties have been named as defendants in litigation filed by Westinghouse
Electric Corporation ("Westinghouse") in the United Stated District Court for
the Western District in 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. Prior to the filing of Westinghouse's complaint against the
Company, White Consolidated, on November 14, 1996, filed a complaint in the
United States District Court for the Northern District of Ohio against
Westinghouse and another corporation for trademark infringement, dilution, false
designation or origin and false advertisement, seeking both injunctive relief
and damages. It was subsequently determined that the entire dispute will be
heard in the United States District Court for the Western District of
Pennsylvania. The action by Westinghouse seeks, among other things, a
preliminary injunction enjoining the defendants from using the trademark,
unspecified damages and attorneys' fees. Pursuant to the Indemnification
Agreement dated January 23, 1997 by and among White Consolidated, Kmart
Corporation, and the Company, White Consolidated is defending and indemnifying
the Company for all costs and expenses for claims, damages, and losses,
including the costs of litigation. Pursuant to the license
26
<PAGE> 27
agreements with White Consolidated, White Consolidated is defending and
indemnifying Salton and Newtech for all costs and expenses for claims, damages,
and losses, including the costs of litigation. On April 9, 1997, on joint motion
of the parties, the court issued an order staying future proceedings until the
earlier of July 1, 1997 or five days after hearing before the court in order to
give the parties an opportunity to pursue settlement discussions. Subsequently,
after a status hearing before the Court on July 15, 1997, and in accordance with
the Court's memorandum order of July 17, 1997, counsel for the parties in the
litigation pending in the United States District Court for the Western District
of Pennsylvania reported to the Court in a letter that the parties had agreed to
pursue an expedited mini-trial/mediation proceeding in an effort to resolve
their disputes. A mediation proceeding occurred and the parties were unable to
reach a mediated settlement. Discovery is proceeding and the matter is likely to
be tried in early 1999.
The Company is also a party to the following legal proceedings:
1. CONCETTA BRUNO AND RICHARD EHRLICH, ON BEHALF OF THEMSELVES AND ALL
OTHERS SIMILARLY SITUATED V. WINDMERE-DURABLE HOLDINGS, INC., DAVID
FRIEDSON, HARRY D. SCHULMAN AND NATIONSBANC MONTGOMERY SECURITIES LLC,
Case No. CV 98-5974
Date suit instituted: 9/25/98
Name of Court: United States District Court, Eastern District
of New York
2. RALPH CASEY, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED V.
WINDMERE-DURABLE HOLDINGS, INC., DAVID M. FRIEDSON, HARRY D. SCHULMAN
AND NATIONSBANC MONTGOMERY SECURITIES LLC, Case No.
98-2273-CIV-GRAHAM
Date Suit Instituted: November 9, 1998
Name of Court: United States District Court, Southern District
of Florida
3. GILBERT KUNKEN, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED
V. WINDMERE-DURABLE HOLDINGS, INC., DAVID M. FRIEDSON, HARRY D.
SCHULMAN, AND LAI KIN Case No. 98-2316-CIV-MOORE
Date Suit Instituted: October 5, 1998
Name of Court: United States District Court, Southern District
of Florida
4. JONATHAN CHARIFF, INC. ON BEHALF OF ITSELF AND ALL OTHERS SIMILARLY
SITUATED V. WINDMERE-DURABLE HOLDINGS, INC., DAVID M. FRIEDSON, HARRY
D. SCHULMAN AND NATIONSBANC MONTGOMERY SECURITIES LLC, Case No.
98-2344-CIV-MORENO
Date Suit Instituted: October 7, 1998
Name of Court: United States District Court, Southern District
of Florida
5. SHERLEIGH ASSOCIATES LLC AND SHERLEIGH ASSOCIATES INC. PROFIT SHARING
PLAN, ON THEIR OWN BEHALF AND ON BEHALF OF ALL OTHERS SIMILARLY
SITUATED V. WINDMERE-DURABLE HOLDINGS, INC., DAVID M. FRIEDSON AND
NATIONSBANC MONTGOMERY SECURITIES LLC, 98-2367-CIV-GRAHAM
27
<PAGE> 28
Date Suit Instituted: October 8, 1998
Name of Court: United States District Court, Southern District
of Florida
6. KAM CHU TAM, MON TAY YAN AND MING HEUNG YAN, ON BEHALF OF THEMSELVES
AND ALL OTHERS SIMILARLY SITUATED V. WINDMERE-DURABLE HOLDINGS, INC.,
DAVID FRIEDSON, HARRY D. SCHULMAN AND NATIONSBANC MONTGOMERY SECURITIES
LLC, Case No. CV 98-6360
Date Suit Instituted: October 20, 1998
Name of Court: United States District Court, Eastern District
of New York
Each of these matters is a class action complaint, purportedly on behalf of
those security holders of the Company who purchased such securities during a
certain period in the second and third quarter of 1998, alleging violations of
the federal securities laws (including Rule 10b-5 promulgated pursuant to the
Securities Exchange Act of 1934, as amended) in connection with the acquisition
by the Company of certain product categories of the Household Products Group of
The Black & Decker Corporation. Among other things, the plaintiffs allege that
the Company and certain of its directors and officers, along with NationsBanc
Montgomery Securities LLC, provided false information in connection with a
public offering of debt and equity securities. The plaintiffs seek, among other
relief, to be declared a class, to be awarded compensatory damages, rescission
rights, unspecified damages and attorneys' fees and costs. The Company has
obtained an extension to move against, answer or otherwise respond in each of
the Litigation Matters. Because these matters are in their preliminary stages,
management is unable at this time to determine what effect these lawsuits will
have on the financial condition, results of operations or liquidity of the
Company.
The Company is currently advancing the legal expenses of the directors and
officers who were named as defendants. Such defendants have agreed to repay the
Company for all or any portion of such advances to which they are ultimately
found not to be entitled pursuant to applicable law. Based on the information
currently available to the Company, management does not believe that the
indemnification of the officers and directors named as defendants in the
above-listed matters will have a material adverse effect on the financial
condition, results of operations or liquidity of the Company. However, the
actual effects of such indemnification on the Company cannot be finally
determined until the amount of such indemnification, if any, is fixed. The
Company is subject to other legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability, if any, in excess of applicable insurance coverage, is not
likely to have a material effect on the financial position of the Company.
COMMITMENTS AND CONTINGENCIES
The Company and the other 50 percent owner in Newtech have entered into an
agreement whereby the Company will transfer 5.0% of its interest in Newtech to a
third party if and when a liquidity event for the Company occurs. Pursuant to
the agreement, a liquidity event would occur if Newtech sells equity interests
in a public offering, Newtech is sold to a third party, or if there is an other
disposition of the Company?s interest or other similar event. On May 14, 1998,
Newtech filed a Form S-1 Registration Statement to publicly offer shares of its
common stock with the Securities and Exchange Commission. There can be no
assurance that such offering will be consummated.
28
<PAGE> 29
MANUFACTURING OPERATIONS
The Company's products are manufactured primarily at the Company's facilities in
the PRC, Mexico and the United States. In October 1998, the Company announced
its intention to close the Asheboro, North Carolina plant. Prior to the HPG
acquisition, approximately 85-percent to 90-percent of the Company's products
were manufactured by Durable, its wholly-owned Hong Kong subsidiary operating in
Bao An County, Guangdong Province of the People's Republic of China, which is
approximately 60 miles northwest of Central, Hong Kong. The Company has a
significant amount of its assets in the People's Republic, primarily consisting
of inventory, equipment and molds. The supply and cost of products, as well as
finished products, can be adversely affected, among other reasons, by changes in
foreign currency exchange rates, increased import duties, imposition of tariffs,
imposition of import quotas, interruptions in sea or air transportation and
political or economic changes. From time to time, the Company explores
opportunities to diversify its sourcing and/or production of certain products to
other low-cost locations or with other third parties or joint venture partners
in order to reduce its dependence on production in the People's Republic and/or
reduce Durable's dependence on the Company's existing distribution base.
However, at the present time, the Company intends to continue its production in
the People's Republic and Mexico.
The Mexican government exercises significant influence over many aspects of the
Mexican economy. Accordingly, the actions of the Mexican government concerning
the economy could have a significant effect on private sector entities in
general and the Company in particular. In addition, during the 1980s and 1990s,
Mexico experienced periods of slow or negative growth, high inflation,
significant devaluations of the peso and limited availability of foreign
exchange. As a result of the Company's reliance upon manufacturing facilities in
Mexico, economic conditions in Mexico could adversely affect the Company's
business, financial condition and results of operations.
FORWARD LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q are forward-looking statements that
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those set forth in the forward-looking statements.
These factors include economic conditions and the retail environment; the
Company's dependence on the timely development, introduction and customer
acceptance of products; competitive products and pricing; reliance on key
customers; dependence on foreign suppliers and supply and manufacturing
constraints; cancellation or reduction of orders; the outcome of pending
litigation; and other risks and uncertainties detailed from time to time in the
Company's Securities and Exchange Commission filings.
29
<PAGE> 30
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
See "Legal Proceedings" in Part I, Item 2 of this report.
ITEM 5. Other Information
The deadline for submission of proposals by shareholders pursuant to
Rule 14a-8 issued under the Securities Exchange Act of 1934 (the "Act")
for inclusion in the proxy statement for the Company's 1999 Annual
Meeting of Shareholders is December 21, 1998. Any proposals submitted
other than pursuant to Rule 14a-8 of the Act must be received by the
Company no later than March 6, 1999 or such proposals will be
considered untimely, and the Company may confer discretionary voting
with respect to such matters in its proxy for the 1999 Annual Meeting
of Shareholders.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1....Financial Data Schedule (for S.E.C. USE ONLY).
27.2....Financial Data Schedule (for S.E.C. USE ONLY).
(b) Reports on Form 8-K:
1. Form 8-K dated July 16, 1998, reporting under "Item 5. Other
Information," the execution of the Credit Agreement and the agreement
for Senior Subordinated Loans referred to in the 8-K filed June 26,
1998 regarding the acquisition of the Household Products Group from
Black & Decker.
2. Form 8-K dated July 21, 1998 reporting under "Item 5. Other
Information," that Salton/Maxim Housewares, Inc. had given the Company
notice of its intent to close, on July 27, 1998, on the purchase of the
shares of Salton owned by the Company and attaching a copy of the press
release related thereto.
3. Form 8-K dated July 27, 1998, reporting under "Item 5. Other
Information," that the Company has completed an offering of 3,041,000
shares of its Common Stock and $130 million of its 10% Senior
Subordinated Notes due 2008 and attaching (i) the Underwriting
Agreements, dated July 22, 1998 among the Company, NationsBank
Montgomery Securities LLC and Raymond James & Associates, Inc.
(relating to the sale of Common Stock) and among the Company, the
Guarantors named therein and NationsBanc Montgomery Securities LLC
relating to the sale of the Senior Subordinated Notes) and (ii) the
Supplemental Indenture dated as of July 27, 1998 among the Company, the
Guarantors named therein and State Street Bank & Trust Company, as
Trustee, relating to the issuance of the Senior Subordinated Notes.
4. Form 8-K dated July 28, 1998, reporting under "Item 5. Other
Information," that Salton/Maxim Housewares, Inc. had completed the
acquisition of the Salton shares owned by the Company and attaching a
copy of the press release related thereto.
30
<PAGE> 31
5. Form 8-K/A dated August 14, 1998, reporting under "Item Acquisition or
Disposition of Assets," the unaudited proforma financial information
for the completed acquisition of the Salton shares owned by the
Company.
6. Form 8-K dated August 24, 1998 reporting under "Item 5. Other Events,"
the signing of The Amended and Restated Credit Agreement by and Among
Windmere-Durable Holdings, Inc. and NationsBank, National Association,
and the other Lenders Party Thereto from Time to Time dated August 7,
1998.
7. Form 8-K dated October 2, 1998 reporting under "Item 5. Other Events,"
the issuance of a press release dated September 29, 1998 announcing
that Windmere-Durable Holdings received notice that a class action
lawsuit had been filed on September 25, 1998.
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WINDMERE-DURABLE HOLDINGS, INC.
(Registrant)
November 13, 1998 By: /s/ Harry D. Schulman
-------------------------------
Harry D. Schulman
Chief Financial Officer
(Duly authorized to sign on
behalf of the Registrant)
November 13, 1998 By: /s/ Terry L. Polistina
-------------------------------
Terry L. Polistina
Senior Vice President - Finance
(Duly authorized to sign on
behalf of the Registrant)
32
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