<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 MARCH 31, 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
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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 MAY 7, 1998
----- ----------------------------
Common Stock, $.10 Par Value 18,758,336
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WINDMERE-DURABLE HOLDINGS, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM Consolidated Statements of Earnings for the 3
Three Months Ended March 31, 1998 and
1997
Consolidated Balance Sheets as of 4-5
March 31, 1998, December 31, 1997
and March 31, 1997
Consolidated Statements of Cash Flows 6-7
for the Three Months Ended March 31, 1998
and 1997
Notes to Consolidated Financial Statements 8-11
ITEM 2. Management's Discussion and Analysis of 12-15
Financial Condition and Results of
Operations
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 16
ITEM 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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 March 31,
----------------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C> <C> <C>
Sales and Other Revenues $ 55,394 100.0% $ 51,412 100.0%
Cost of Goods Sold 42,511 76.7 40,593 79.0
-------- ----- -------- -----
Gross Profit 12,883 23.3 10,819 21.0
Selling, General and
Administrative Expenses 11,706 21.1 9,697 18.9
-------- ----- -------- -----
Operating Profit 1,177 2.2 1,122 2.1
Other (Income) Expense
Interest Expense 1,045 1.9 624 1.2
Interest and Other Income (681) (1.2) (477) (.9)
-------- ---- -------- -----
364 .7 147 .3
-------- ---- -------- -----
Earnings Before Equity in Net
Earnings of Joint Ventures
and Income Taxes 813 1.5 975 1.8
Equity in Net Earnings
of Joint Ventures 445 .8 (490) (.9)
-------- ---- -------- -----
Earnings Before Income Taxes 1,257 2.3 485 .9
Provision for Income Taxes 121 .2 164 .3
-------- ---- -------- -----
Net Earnings $ 1,136 2.1% $ 321 .6%
======== ==== ======== =====
Earnings Per Share - basic $ .06 $ .02
======== ========
Earnings Per Share - diluted $ .06 $ .02
======== ========
Dividends Per Common Share $ .00 $ .05
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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WINDMERE-DURABLE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
3/31/98 12/31/97 3/31/97
------- -------- -------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash & Cash Equivalents $ 2,491 $ 8,224 $ 9,188
Accounts and Other Receivables,
less allowances of $1,068,
$1,111 and $1,193, respectively 38,506 43,338 32,492
Receivables from Affiliates (Note 2) 17,303 15,291 17,108
Inventories
Raw Materials 16,330 13,327 13,856
Work-in-process 21,711 21,062 21,077
Finished Goods 61,728 67,783 50,112
-------- -------- --------
Total Inventories 99,769 102,172 85,045
Prepaid Expenses 7,032 4,618 4,903
Refundable Income Taxes 3,950 5,043 --
Future Income Tax Benefits 1,274 1,274 3,274
-------- -------- --------
Total Current Assets 179,325 179,960 152,010
INVESTMENTS IN JOINT VENTURES
(NOTE 2) 43,699 43,091 34,880
PROPERTY, PLANT & EQUIPMENT -
AT COST, less accumulated
depreciation of $52,014,
$50,329 and $46,959, respectively 38,009 37,199 33,139
Notes Receivable from Affiliate 7,872 7,799 --
OTHER ASSETS 13,766 13,798 13,867
-------- -------- --------
TOTAL ASSETS $273,671 $281,847 $233,896
======== ======== ========
</TABLE>
4
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WINDMERE-DURABLE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
CONTINUED
<TABLE>
<CAPTION>
3/31/98 12/31/97 3/31/97
------- -------- -------
<S> <C> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Notes and Acceptances Payable $ 45,452 $ 42,982 $ 26,846
Current Maturities of Long-Term
Debt 3,365 3,815 815
Accounts Payable and
Accrued Expenses 16,109 26,838 18,757
Deferred Income, current portion 165 247 352
------- -------- --------
Total Current Liabilities 65,091 73,882 46,770
LONG-TERM DEBT 15,866 16,070 19,681
DEFERRED INCOME, less current
portion 1,031 1,074 165
STOCKHOLDERS' 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:
18,722, 18,119 and
17,478, respectively 1,872 1,812 1,748
Paid-in Capital 40,668 41,024 35,986
Retained Earnings 150,223 149,088 130,431
Unrealized Foreign Currency
Translation Adjustment (1,080) (1,102) (885)
-------- -------- --------
Total Shareholders' Equity 191,683 190,821 167,280
-------- -------- --------
TOTAL LIABILITIES &
SHAREHOLDERS' EQUITY $273,671 $281,847 $233,896
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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WINDMERE-DURABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,136 $ 321
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation of property, plant and
equipment 1,861 1,622
Amortization of intangible assets 213 264
Amortization of deferred income (125) (149)
Net change in allowance for losses
on accounts receivable (44) (57)
Equity in net earnings (loss) of joint ventures (608) 310
Changes in assets and liabilities
Decrease in accounts and other
receivables 4,875 5,166
Decrease in inventories 2,403 4,469
Increase in prepaid expenses (2,414) (1,152)
(Increase) decrease in other assets (180) 148
Decrease in accounts payable
and accrued expenses (10,729) (7,578)
Decrease in current and
deferred income taxes 1,093 -
(Increase) decrease in other accounts 22 (146)
-------- -------
Net cash provided by (used in)
operating activities (2,497) 3,218
Cash flows from investing activities:
Additions to property, plant and
equipment - net (2,671) (2,001)
Increase in receivable accounts
and notes from affiliates (2,085) (4,935)
-------- -------
Net cash used in
investing activities $ (4,756) $(6,936)
</TABLE>
6
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WINDMERE-DURABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
CONTINUED
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net borrowings under lines of credit $ 2,470 $ 4,963
Payments of long-term debt (654) (204)
Exercise of stock options
and warrants 2,050 223
Cash dividends paid -- (855)
Payment of withholding tax on stock
option exercises (2,346) --
-------- -------
Net cash provided by
financing activities 1,520 4,127
-------- -------
(Decrease) increase in cash
and cash equivalents (5,733) 409
Cash and cash equivalents at
beginning of year 8,224 8,779
-------- -------
Cash and cash equivalents at end
of quarter $ 2,491 $ 9,188
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 1,643 $ 117
Income taxes $ 29 $ 68
</TABLE>
The accompanying notes are an integral part of these statements.
7
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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 March 31, 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 ("affiliates"). Notes receivable
from these affiliates are due upon demand and bear interest at
prevailing market interest rates.
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 Salton/Maxim Housewares,
Inc.("Salton"), Newtech Electronics Industries, Inc. ("Newtech"), PX
Distributors, Inc. ("PX"), Breakroom of Tennessee, Inc. and Anasazi
Partners, L.P. ("Anasazi").
Summarized financial information of the unconsolidated companies is as
follows: (In Thousands)
Three Three
Months Ended Year Ended Months Ended
3/31/98 12/31/97 3/31/97
--------- --------- ----------
EARNINGS
Sales $107,064 $467,549 $ 50,177
Gross Profit $ 29,746 $108,100 $ 14,055
Net Earnings (Loss) $ 1,541 $ 15,885 $ (619)
BALANCE SHEET
Current Assets $172,539 $169,300 $ 78,215
Noncurrent Assets $ 41,679 $ 38,781 $ 34,011
Current Liabilities $140,171 $132,550 $ 60,241
Shareholders' Equity $ 74,047 $ 61,581 $ 51,098
8
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Notes receivable from affiliates totaled $16.7 million at March 31,
1998 which includes $8.1 million, of which $.3 million is short term,
from the 1997 sale of one of the Company's manufacturing subsidiaries.
The Company has also provided a $9.0 million corporate guarantee as
support for a credit facility obtained by one of its joint ventures.
All sales made by joint ventures in the three month periods ended March
31, 1998 and 1997 were to entities other than members of the
consolidated group. Sales totaling $6.3 million and $7.7 million were
made by the Company to the joint ventures in the three month periods
ended March 31, 1998 and 1997, respectively. Included in Receivables
from Affiliates at March 31, 1998 is $6.7 million due the Company from
the joint ventures for trade receivables.
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. 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 March 31, 1998 and 1997 were 18,413,731 and 17,465,494,
respectively. Included in diluted shares are common stock equivalents
relating to options, warrants and convertible debt of 1,779,910 and
1,855,345 for the three month periods ended March 31, 1998 and 1997,
respectively.
4. RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 130
(SFAS 130), "Reporting Comprehensive Income", 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 March 31, 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 (SFAS 131), "Disclosures About Segments of an
Enterprise and Related Information." The Company has not assessed the
effect this new standard will have on its consolidated financial
statements and/or disclosures.
5. MARKETING COOPERATION AGREEMENT
On April 30, 1997, the Company entered into a Letter Agreement with
Salton pursuant to the Marketing Cooperation Agreement included as part
of the original Stock Purchase Agreement. Fees earned by the Company
under marketing arrangements with its joint ventures totaled $.7
million for the three month period ended March 31, 1998 and are
classified as Sales and Other Revenues. Fees earned in the 1997 period
were insignificant.
6. COMMITMENTS AND CONTINGENCIES
The Company, its 50-percent owned joint venture partners Salton and
Newtech, White Consolidated Industries, Inc. ("White
9
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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. Procedural motions concerning the jurisdiction in
which the dispute should be heard have been filed by the parties. 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 late 1998.
In December 1997, the employment agreements of the senior members of
Salton's management expired. Disagreements arose between the management
and the members of the Salton board of directors who have been
designated by the Company under the Stockholders' Agreement between the
two companies, dated July 11, 1996 (the "Windmere Directors"), as to
provisions to be contained in new agreements or the terms under which
management would continue to be employed by Salton if no agreements
were executed. During the course of these discussions, Salton alleged
that certain actions of the Company would breach the terms of the July
11, 1996 Marketing Cooperation Agreement between the Company and Salton
and violate fiduciary duties to Salton. The Company and the Windmere
Directors, after being advised by legal counsel, vehemently disagree
with the allegations.
10
<PAGE> 11
On May 7, 1998, the Company announced that it had entered into an
agreement which grants Salton the right to purchase the Company's
6,535,072 shares of Salton for $12 per share in cash and a six and
one-half year, $15 million subordinated promissory note bearing
interest at 4% per annum.
The note is 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. The aggregate value of the transaction would be equivalent
to $14.27 per share of Salton common stock. If Salton fails to exercise
their right on or prior to June 30, 1998 or to close the purchase on or
prior to October 30, 1998, then the Company will have the right to
acquire all of the shares of Salton which it does not own in a tender
offer and/or merger for $14.27 per share in cash or in registered
shares of its common stock.
The agreement further provides that in the event Salton acquires the
Company's 50% interest in Salton: (i) the Company will simultaneously
pay in full its $10.8 million promissory note to Salton; (ii) Salton
will repurchase for approximately $3.3 million an option owned by the
Company to purchase up to 458,500 shares of Salton stock; and (iii)
various contractual and other arrangements, including those relating to
Kmart, will continue subject to certain modifications.
The Company and the other 50 percent owner in Newtech have entered into
an agreement whereby each party will transfer 5.0% of their 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.
7. SUBSEQUENT EVENTS
On May 11, 1998 the Company announced that it had signed a definitive
agreement to acquire The Black & Decker Corporation's Household
Products Group, which includes the Cooking, Garment Care, Food
Preparation and Beverage categories.
Pursuant to the terms of the acquisition agreement, the Company will
purchase the assets and assume certain liabilities of The Black &
Decker Household Products Group for $315 million in cash. In connection
with the transaction, the Company and Black & Decker have established a
long-term licensing arrangement which will allow Windmere to continue
to market products under the Black & Decker brand name in the Cooking,
Garment Care, Food Preparation and Beverage categories in North and
Latin America, excluding Brazil, Uruguay and Paraguay, for a minimum of
six and one-half years on a royalty-free basis with potential renewal
periods upon mutual agreement. The Company has received a commitment
from its senior lender in the amount of the transaction plus
transaction fees as well as an additional working capital facility. The
transaction is expected to close within 60 days, subject to the receipt
of regulatory and other necessary approvals.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Sales and Other Revenues ("Sales") for the first quarter of 1998 increased by
$4.0 million or 7.7% over Sales for the same period in 1997. The increase is
primarily the result of increases in distribution sales of the Company's
LitterMaid product as well as private label kitchen and seasonal products. Sales
to a national retail beauty supply chain accounted for 10.2% of total sales for
the 1998 period.
Fees earned by the Company under marketing arrangements with its joint ventures
in the 1998 period totaled $.7 million and are classified as Sales and Other
Revenues. Fees earned in the 1997 period were not significant.
COMPARATIVE REVENUE RESULTS
---------------------------
(In Thousands) Three Months Ended
------------------------------------------------
MARCH 31, 1998 MARCH 31, 1997
------------------- ---------------------
DISTRIBUTION $ 45,249 81.7% $ 39,615 79.4%
MANUFACTURING 10,145 18.3 11,797 20.6
--------- ----- --------- -----
Total Sales $ 55,394 100.0% $ 51,412 100.0%
========= ===== ========= ======
The Company's gross profit margin increased to 23.3% of sales in the 1998 period
as compared to 21.0% of sales in 1997. Decreases in certain raw material prices
contributed significantly as did the higher margins related to sales of
LitterMaid.
Selling, general and administrative costs increased by $2.0 million in the first
quarter of 1998 compared to the same period of 1997. The increase is primarily
the result of the Company's increased investment in development of the
LitterMaid business including $1.2 million in advertising expenditures.
The Company's equity in net earnings of joint ventures was $.5 million for the
first quarter of 1998 as compared to a loss of $.5 million for the same period
in 1997.
Interest expense increase by $.4 million to $1.0 million in the 1998 period. The
increase is the result of the increased level of borrowing under the Company's
credit facilities.
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.
In 1997, the Company adopted Financial Accounting Standards No. 128 (FAS 128),
"Earnings Per Share". Basic shares for the three month periods ended March 31,
1998 and 1997 were 18,413,731 and 17,465,494, respectively. Included in diluted
shares are common stock equivalents relating to options, warrants and
convertible debt of 1,779,910 and 1,855,345 for the three month periods ended
March 31, 1998 and 1997, respectively. The increase in number of shares was
primarily due to the additional dilutive effect of stock option exercises and
the Company's higher average stock price in 1998.
LIQUIDITY & CAPITAL RESOURCES
At March 31, 1998, the Company's current ratio and quick ratio were 2.6 to 1 and
1.1 to 1 as compared to 3.3 to 1 and 1.1 to 1 at March 31, 1997. Working capital
at both dates was $105.2 million.
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Cash balances decreased by $5.7 million during the three months ended March 31,
1998. Cash of $2.5 million used in operating activities is the net result of
collections for year end 1997 sales and decreases in inventory balances offset
by payments made to vendors prior to the annual closing of the Company's
manufacturing facilities for Chinese New Year. The $4.8 million in cash used in
investing activities reflects capital expenditures of $2.7 million and an
increase of $2.1 million due from affiliates.
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 March 31,
1998, the subsidiaries were utilizing, including letters of credit,
approximately $7.0 million of these credit lines. These subsidiaries also have
available a $5.0 million revolving line of credit which is supported by a
domestic standby letter of credit, of which $4.3 million was outstanding as of
March 31, 1998. Outstanding borrowings by the Company's Hong Kong subsidiaries
are primarily in U.S. dollars.
The Company has a $55.0 million line of credit from a domestic bank, secured by
domestic accounts receivable and inventory. At March 31, 1998, outstanding
borrowings under this credit line totaled $39.0 million.
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.
On May 11, 1998 the Company announced that it had signed a definitive agreement
to acquire The Black & Decker Corporation's Household Products Group, which will
include the Cooking, Garment Care, Food Preparation and Beverage categories.
Pursuant to the terms of the acquisition agreement, the Company will purchase
the assets and assume certain liabilities of The Black & Decker Household
Products Group for $315 million in cash. In connection with the transaction, the
Company and Black & Decker have established a long-term licensing arrangement
which will allow Windmere to continue to market products under the Black &
Decker brand name in the Cooking, Garment Care, Food Preparation and Beverage
categories in North and Latin America, excluding Brazil, Uruguay and Paraguay,
for a minimum of six and one-half years on a royalty-free basis with potential
renewal periods upon mutual agreement. The Company has received a commitment
from its senior lender in the amount of the transaction plus transaction fees as
well as an additional working capital facility. The transaction is expected to
close within 60 days, subject to the receipt of regulatory and other necessary
approvals. The Company believes that its cash on hand and internally generated
funds, together with its credit lines, including funds committed in conjunction
with the acquisition of the Black & Decker Household Products Group, will
provide sufficient funding to meet the Company's capital requirements and its
operating needs for the foreseeable future.
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
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<PAGE> 14
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. Procedural motions concerning the
jurisdiction in which the dispute should be heard have been filed by the
parties. 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 late 1998.
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
In December 1997, the employment agreements of the senior members of Salton's
management expired. Disagreements arose between the management and the members
of the Salton board of directors who have been designated by the Company under
the Stockholders' Agreement between the two companies, dated July 11, 1996 (the
"Windmere Directors"), as to provisions to be contained in new agreements or the
terms under which management would continue to be employed by Salton if no
agreements were executed. During the course of these discussions, Salton alleged
that certain actions of the Company would breach the terms of the July 11, 1996
Marketing Cooperation Agreement between the Company and Salton and violate
fiduciary duties to Salton. The Company and the Windmere Directors, after being
advised by legal counsel, vehemently disagree with the allegations.
On May 7, 1998, the Company announced that it had entered into an agreement
which grants Salton the right to purchase the Company's 6,535,072 shares of
Salton for $12 per share in cash and a six and one-half year, $15 million
subordinated promissory note bearing interest at 4% per annum.
The note is 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. The
aggregate value of the transaction would be equivalent to $14.27 per share of
Salton common stock. If Salton fails to exercise their right
14
<PAGE> 15
on or prior to June 30, 1998 or to close the purchase on or prior to October 30,
1998, then the Company will have the right to acquire all of the shares of
Salton which it does not own in a tender offer and/or merger for $14.27 per
share in cash or in registered shares of its common stock.
The agreement further provides that in the event Salton acquires the Company's
50% interest in Salton: (i) the Company will simultaneously pay in full its
$10.8 million promissory note to Salton; (ii) Salton will repurchase for
approximately $3.3 million an option owned by the Company to purchase up to
458,500 shares of Salton stock; and (iii) various contractual and other
arrangements, including those relating to Kmart, will continue subject to
certain modifications.
The Company and the other 50 percent owner in Newtech have entered into an
agreement whereby each party will transfer 5.0% of their 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.
MANUFACTURING OPERATIONS
The Company's products are primarily manufactured by Durable, its wholly-owned
Hong Kong subsidiary, 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. Substantially
all of the Company's products are manufactured by Durable and unrelated
factories in the People's Republic. Approximately 85- percent to 90-percent of
the Company's revenues are currently derived from products manufactured by
Durable. The supply and cost of these 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.
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.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
See "Legal Proceedings" in Part I, Item 2 of this report.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(b) There were no reports on Form 8-K filed for the three months
ended March 31, 1998.
16
<PAGE> 17
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)
May 15, 1998 By: /s/ Harry D. Schulman
---------------------------------------
Harry D. Schulman
Senior Vice President -
Finance and Administration and
Chief Financial Officer
(Duly authorized to sign on
behalf of the Registrant)
May 15, 1998 By: /s/ Burton A. Honig
--------------------------------------
Burton A. Honig
Vice President - Finance
(Duly authorized to sign on
behalf of the Registrant)
17
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