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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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
incorporation or organization) Number)
5980 Miami Lakes Drive, Miami Lakes, Florida 33014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 362-2611
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
Common Stock $.10 Par Value New York Stock Exchange
Special Preferred Stock Rights New York Stock Exchange
Common Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 16, 1998, the aggregate market value of the voting stock
(based on the closing price as reported by NYSE of $28.875)
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held by non-affiliates of the Registrant was approximately $454,078,097.
APPLICABLE ONLY TO CORPORATE REGISTRANTS: Indicate the number of shares
outstanding of each of the Registrant's classes of common stock, as of the
latest practicable date.
18,704,390 Shares of Common Stock
(as of the close of business on March 16, 1998)
DOCUMENTS INCORPORATED BY REFERENCE
1. Windmere-Durable Holdings, Inc. 1997 Annual Report to Shareholders (for
the fiscal year ended December 31, 1997). Information contained in this
document has been incorporated by reference in PARTS I and II.
2. Windmere-Durable Holdings, Inc. Proxy Statement for its 1998 Annual
Meeting of Shareholders. Information contained in this document has
been incorporated by reference in PART III.
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'
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Windmere-Durable Holdings, Inc., (the "Company") through its subsidiaries and
investments, is a diversified manufacturer and distributor of a broad range of
personal care products, kitchen electric appliances, and seasonal products for
major retailers and appliance distributors in North America, Europe, and the Far
East. Products are manufactured under the Windmere and other Company-owned
brands, under private-label and licensed brand arrangements, and on an OEM basis
for other major consumer products companies. Additionally, Windmere-Durable is
one of the largest suppliers of hair care appliances to the professional salon
industry in the United States.
Windmere-Durable also owns a 50-percent equity interest in both Salton/Maxim
Housewares, Inc. ("Salton") and New M-Tech Corporation ("New M-Tech"), and
through them, the Company in 1997 entered into the White-Westinghouse contract
with Kmart Corporation. Salton is a designer and marketer of small kitchen
appliances which distributes primarily to department stores and upscale
retailers. New M-Tech designs, sources, manufactures and markets value-priced
brand-name consumer electronic products.
The Company's products are primarily manufactured by Durable Electrical Metal
Factory, Ltd. ("Durable"), its wholly-owned Hong Kong subsidiary, in Bao An
County, Guangdong Province of the People's Republic of China ("People's
Republic"), which is approximately 60 miles northwest of central Hong Kong, and
other unrelated factories in the People's Republic. Approximately 85% to 90% of
the Company's products are manufactured by Durable.
The Company was incorporated under the laws of the State of Florida in 1963. The
Company's executive offices are located at 5980 Miami Lakes Drive, Miami Lakes,
Florida 33014, (see Item 2. Properties), and its telephone number is (305)
362-2611.
PRODUCTS
The major portion of the Company's revenues are generated by the sale of
personal care products and appliances. The Company's personal care products
include hair dryers, curling irons, curling brushes, hairsetters, combs and
brushes, shears, mirrors and electric shavers. Appliances include toasters,
toaster ovens, can openers, blenders, hand mixers, waffle irons, steam irons,
electronic air cleaners, fans and air fresheners.
In 1997, 1996 and 1995, net sales of personal care products and appliances
represented approximately 49% and 42%, 59% and 41% and 63%
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and 37%, respectively, of the Company's total net sales. Appliance sales
increased by $29.1 million in 1997 reflecting the Company's growth in the
manufacture and distribution of kitchen electrics and the December 1996
acquisition of the seasonal products joint venture.
In early 1997, the Company launched an infomercial to promote sales of its
Litter Maid product. In late 1997, the Company began an initial roll out of the
product through retail distribution channels. Litter Maid sales for 1997,
totaled $13.4 million or 5% of total sales.
MARKETING AND DISTRIBUTION
The Company's products are sold principally by independent sales
representatives. The Company utilizes media advertising, cooperative advertising
and collateral materials to promote its products.
The Company's products are sold under various trademarks and registrations, some
of which include: Windmere, Jumbo Curl, Belson Pro, Curlmaster, Design Pro,
First Class Gourmet, Solid Gold, Windmere Salon, AirMoves, ESP, Electric Shock
Protection, VIP Pro, Setting Pretty, Skinni Mini, Clothes Shaver, Easy Styler,
Four Way Curls, Set Up, All Curl Trio, Mirror Go Lightly, Jerdon, First Class,
Plak Trac, Litter Maid, Smoke Catcher, Prelude, Belson, Pro Touch, Pro Star, Hot
Silver, Golden Touch, Profiles, Comare, Salon Designs, Premiere, Espree, Gold'n
Hot, Colossal Curl, Jumbo Air, Express Air, Euro Sport, Magnum, Superaire,
Healthy Vibes, Health Zone and Gentle Air. The Company believes that its
business has not been materially dependent on any one such trademark.
In the United States, the Company wholesales its line of consumer products
nationwide to retailers, including department stores, drug chains, catalog
stores and discount and variety stores. The Company also markets its consumer
and professional salon appliances, hair pieces and a wide variety of brushes and
other hair care accessories to beauticians, barbers and stylists through
distributors. In addition, certain items, including the Company's hair dryers,
curling irons and other personal care appliances, are sold through professional
beauty and barber retail store outlets.
The Company has the exclusive world-wide rights to use the Farberware brand name
on a broad range of small electric products. The Company has entered into an
agreement with Salton, whereby, Salton is the exclusive distributor of such
products.
In January 1997, the Company through its 50-percent interests in Salton and New
M-Tech entered into supply contracts with the Kmart Corporation for Kmart to
purchase, distribute, market and sell certain products under the
White-Westinghouse brand name licensed to Salton and New M-Tech. Under the terms
of the contract, Salton and New M-Tech will supply Kmart, either through the
Company or through other manufacturers, with a broad range of small electrical
appliances, consumer electronics and telephone products under the
White-Westinghouse brand name. Kmart will be the exclusive discount department
store to market these White-
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Westinghouse products. The Company has entered into an agreement guaranteeing
the performance of Salton and New M-Tech under the contract. Salton accounted
for 12.0% of the Company's 1997 sales.
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 the 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 and although
discussions are currently under way in an attempt to resolve these issues, there
can be no assurance that these negotiations will be successful. A failure to
resolve these disputes could have a material adverse effect on the Company's
business relationship with Salton.
MANUFACTURING:
The Company's manufacturing business is conducted by Durable. Durable, through
its twenty-five year relationship with the Company, has produced an extensive
product line, which includes not only the appliances sold to the Company and its
customers, but it has also become a contract manufacturer for a range of
products, such as toasters, steam irons, toaster ovens, can openers, blenders,
hand mixers and waffle irons, which it sells primarily to customers in the
United States, Canada and Europe. Some of its customers are Salton, Sunbeam and
Hamilton Beach.
Durable manufactures a number of the White-Westinghouse products supplied by
Salton to Kmart under the supplier contract.
The LitterMaid product is manufactured primarily by Durable. The Company is
currently investing in additional tooling in order to increase its production of
the product in 1998.
SUPPLIES
The Company's foreign sales and operations are subject to the usual risks
incident to operating abroad, including currency fluctuations, political
conditions and changes in foreign laws. A weakening or strengthening of the
United States dollar may result in higher or lower cost of goods for the Company
from suppliers in countries whose exchange rate does not parallel the United
States dollar, unlike Hong Kong the currency of which to date has fluctuated
substantially parallel to the United States dollar.
The recent financial crisis in Asia has resulted in a reduction in overall
demand for certain raw materials, causing a decline in the cost of these
materials. The Company has begun to benefit from these cost savings.
The Company generates approximately 85% to 90% of its revenues from products
manufactured by Durable in the People's Republic. Such products utilize raw
materials available from at least two and as many as nine or more independent
suppliers. The Company has no material dependence on any single foreign source
for such materials.
FOREIGN CONDITIONS
The supply and cost of the products manufactured by Durable 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.
The Company has a significant amount of its assets in the People's Republic,
primarily consisting of
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inventory, equipment and molds. 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
assurance that there will not be a material impact in the future.
Hong Kong underwent a transfer of control to the People's Republic in July 1997.
Durable is incorporated in Hong Kong and its executive, sales offices and its
senior executives are located or reside there. The Company also conducts
significant trading activities through subsidiaries incorporated in Hong Kong.
The Company's business has not been materially affected by the governmental
changes that have already occurred. Although the Company believes that its
operations will not be materially affected by any further governmental changes
occurring in Hong Kong, no assurance can be given that such changes will be
benign.
In 1997, President Clinton extended the People's Republic's most-favored-nation
(MFN) trading status for an additional year. The President announced in 1994
that the United States would, in the future, permanently de-link MFN renewal
from human rights issues, other than freedom of emigration provisions. Under
U.S. law, MFN status means that products are subject to the relatively low duty
rates set forth in Column 1 of the Harmonized Tariff Schedules of the United
States (HTSUS), that have resulted from several rounds of reciprocal tariff
negotiations conducted under the auspices of the General Agreement on Tariffs
and Trade (GATT) since 1945. Products from countries not eligible for MFN
treatment are subject to much higher rates of duty, averaging 30 percent ad
valorem, as set forth in Column 2 of the HTSUS. If MFN status for goods produced
in the People's Republic were removed, there would be a substantial increase in
tariffs imposed on goods of Chinese origin entering the United States, including
those manufactured by the Company, which could have a material adverse impact on
the Company's revenues and earnings.
SEASONALITY
The Company's business is generally seasonal. 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 the Company's products in the
late summer for "back to school" sales and in the fall for Christmas sales. In
typical years, the Company begins to accumulate inventory for its major selling
season in June and July and it continues to purchase products at accelerated
rates until November. The Company's major sales occur during August through
November. Sales are generally made on 60 to 90 day terms.
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Heaviest collections on its open accounts receivable are received from November
through March, at which time the Company is in its most liquid state. The
seasonal patterns of Salton and New M-Tech are similar to those of the Company.
BACKLOG
The Company's backlog of orders as of December 31, 1997, 1996 and 1995 was
approximately $35.7 million, $32.1 million and $22.2 million, respectively,
which orders are generally shipped within the next succeeding year.
COMPETITION
The Company encounters significant competition with respect to substantially all
of its products. Although the Company's prices for products distributed under
its labels are in general below or competitive with those of many nationally
advertised brands, the Company also competes through quality of product,
attractive packaging, breadth of product lines, speed of delivery and
maintenance of good customer relations. Many of the Company's major competitors
are substantially larger, have greater financial and other resources and spend
more for national advertising. Some of the Company's competitors include Conair,
Helen of Troy and Remington.
REGULATION
In the United States, Canada and Europe, most federal, state, provincial and
local authorities require Underwriters Laboratory, Inc. ("UL") or other safety
regulation certification prior to marketing electrical appliances in those
jurisdictions. All of the non-professional salon appliances marketed by the
Company have such certifications. The Company endeavors to have most of its
products designed to meet those requirements and to be so certified, although
there can be no assurance that those products, or additional electrical
appliances which may be developed by the Company, will meet such specifications.
Certain of the products sold by the Company in the United States are subject to
the cosmetic purity and labelling provisions of the Fair Packaging and Labelling
Act. The Company believes that in addition to complying with the Fair Packaging
and Labelling Act, it complies with the applicable rules and regulations of the
Federal Trade Commission and other federal and state agencies with respect to,
among other things, the content of advertising and other trade practices.
PATENTS
Although the Company does not believe that its business is materially dependent
upon patents and patent protection, from time to time, new products have been
introduced with unique features for which the Company has filed or obtained
licenses for patents and design registrations in the United States and in
several foreign countries.
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EMPLOYEES
At March 16, 1998, the Company's distribution business in the United States,
Canada, Europe and Hong Kong employed approximately 260 persons. Durable's
operations in Hong Kong and the People's Republic of China employed
approximately 12,000 persons. The Company enjoys satisfactory working relations
with these employees. The Company is not a party to any collective bargaining
agreement.
GEOGRAPHIC AREA FINANCIAL INFORMATION
Incorporated by reference to the Company's 1997 Annual Report to Shareholders,
under the caption, "Note N to Consolidated Financial Statements, Geographic Area
Information". Included as part of Exhibit 13.
ITEM 2. PROPERTIES
The executive offices of the Company, from which a significant amount of its
business activities are conducted, are currently located at 5980 Miami Lakes
Drive, Miami Lakes, Florida. All of the space in this approximately 140,000 sq.
ft. two-story office and warehouse facility is owned and occupied by the
Company. The Company also utilizes the services of public warehouses located in
Reno, Nevada and Memphis, Tennessee pursuant to short-term contracts.
In January 1998, the Company entered into a long-term operating lease for a
562,000 square foot warehouse facility in Arkansas. The Company intends to
consolidate its products from the public warehouses into the new facility during
1998.
Durable owns approximately 40,000 sq. ft. of office space in Hong Kong, of which
24,000 sq. ft. is used for its and the Company's trading companies'
headquarters. Durable also utilizes facilities of 2,000,000 sq. ft. in the
People's Republic which it operates under contracts with the local government.
The contracts require such periodic adjustments such that terms of between one
and five years exist at all times. Certain facilities have contract terms
extending beyond five years.
ITEM 3. LEGAL PROCEEDINGS
On March 27, 1997, the Company paid $4,500,000 to settle the lawsuit filed in
April 1994 by Izumi relating to the Phillips settlement in 1992.
The Company, its 50-percent owned joint venture partners Salton/Maxim
Housewares, Inc. and New M-Tech Corporation, 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
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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/Maxim and New M-Tech 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 also subject to other legal proceedings, product liability and
other 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. However, as the outcome of litigation or other legal
claims is difficult to predict, significant changes in the estimated exposures
could occur.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Incorporated by reference to the Company's 1997 Annual Report to Shareholders
under the caption AQuarterly Stock Quotations and Dividends per Share.@ (Exhibit
13)
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
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<S> <C> <C> <C>
Net sales $261,885 $197,004 $187,777
Equity in net earnings (loss)
of joint ventures $ 7,353 $ 2,299 $ (393)
Earnings (loss) before taxes,
minority interest and
extraordinary item $ 20,758 $ 3,672 $ (3,165)
Provision for taxes
(benefits) $ 923 $ (280) $ (1,281)
Net earnings (loss) $ 19,835 $ 451 * $ (1,884)**
Working capital $106,078 $105,565 $127,626
Current ratio 2.4 to 1 3.1 to 1 7.5 to 1
Property, plant and
equipment, net $ 37,199 $ 32,760 $ 30,485
Total assets $281,847 $237,279 $188,012
Long-term debt, deferred
liabilities and minority
interest $ 17,144 $ 20,132 $ 3,519
Stockholders' equity $190,821 $167,695 $164,931
Per share data:
Net earnings (loss)-basic $ 1.12 $ .03 * $ (.11)**
Net earnings (loss)-diluted $ 1.00 $ .03 * $ (.11)**
Cash dividends paid $ .10 $ .20 $ .20
Book value at year end $ 10.53 $ 9.61 $ 9.87
Return on average equity 11.1% .3% --
</TABLE>
*Includes extraordinary charge for the settlement of Izumi litigation of
$3,500,000 or $.20 per share.
**Includes a non-recurring loss on the sale of an other asset of $5,280,000, or
$.31 per share.
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***Includes a non-recurring gain on the sale of Hong Kong office space of
$7,810,500, or $.45 per share.
****Includes cumulative effect of accounting change benefit of $1,731,100, or
$.11 per share.
1994 1993
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Net sales $181,112 $170,661
Equity in net earnings (loss)
of joint ventures $ 91 $ (504)
Earnings (loss) before taxes
and minority interest $ 23,131 $ 12,305
Provision for taxes
(benefits) $ 2,595 $ 1,365
Net earnings (loss) $ 20,537*** $ 11,469****
Working capital $129,281 $117,961
Current ratio 7.0 to 1 5.8 to 1
Property, plant and
equipment, net $ 28,449 $ 25,022
Total assets $197,124 $180,479
Long-term debt, deferred
liabilities and minority
interest $ 4,932 $ 9,492
Stockholders' equity $170,625 $146,587
Per share data:
Net earnings (loss)-basic $ 1.24*** $ .74****
Net earnings (loss)-diluted $ 1.17*** $ .71****
Cash dividends paid $ .15 $ -
Book value at year end $ 10.20 $ 9.29
Return on average equity 12.9% 8.2%
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Year Ended December 31, 1997 compared with Year Ended December 31, 1996
Sales and Other Revenues
Sales and Other Revenues ("Revenues") increased by $64.9 million to $261.9
million, an increase of 32.9% over Revenues for the year ended 1996. The
increase is primarily the result of a $47.7 million increase in distribution
sales, and a $17.1 million increase in manufacturing sales. The increase in
distribution sales includes $16.5 million in seasonal product sales resulting
from the Company's December 1996 acquisition of the remainder of its seasonal
products joint venture and $9.4 million in kitchen product sales. Also
contributing to the 1997 revenue growth is the increase in LitterMaid
distribution sales of $11.9 million.
Fees earned by the Company under various marketing arrangements with its joint
ventures totaled $3.3 million for 1997 and are classified as Sales and Other
Revenues. Salton accounted for 12% of the Company's sales in 1997. No such fees
were earned in 1996. See "Commitments and Contingencies."
Set forth below is a table indicating the revenues that the Company derived from
its distribution and manufacturing operations for the periods indicated:
Year Ended December 31,
--------------------------------------------
1997 1996
----------------- ------------------
Distribution $194,147,300 74% $146,431,800 74%
Manufacturing 67,737,800 26 50,571,800 26
----------- --- ----------- ---
Total Sales $261,885,100 100% $197,003,600 100%
=========== === =========== ===
Gross Profit Margin
The Company's gross margin percentage increased in 1997 to 24.6% of sales from
20.2% in 1996. The better absorption of fixed manufacturing overhead costs and
decreases in certain raw material costs contributed significantly to the
increase as did the higher margins related to sales of LitterMaid.
Selling, General and Administrative Expenses
Selling, general and administrative costs increased by $10.9 million for the
year ended December 31, 1997 compared to the year ended December 31, 1996, yet
decreased as a percentage of sales to 19.2% from 20.0% for the same periods as
fixed expenses were spread over the Company's increased sales. The increase in
costs is primarily the result of expenses related to LitterMaid, Inc., Bay Books
& Tapes, Inc. and the Company's now wholly-owned seasonal products company,
whose operations, due to their respective acquisition dates, were not fully
reflected in the 1996 financial statements.
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Equity in Net Earnings of Joint Ventures
The Company's equity in net earnings of joint ventures was $7.4 million for the
year ended December 31, 1997 as compared to $2.3 million for the same period in
1996. Included in 1997 are the results of operations of the Company's interests
in Salton, New M-Tech and various other ventures, which were not acquired until
the second or third quarters of 1996. In December 1996, the Company acquired the
remainder of its seasonal products joint venture. The Company's equity in
earnings of Salton and New M-Tech totaled $6.8 million for 1997.
Interest Expense
Interest expense increased by $2.0 million to $3.4 million in 1997. The increase
is the result of the amounts paid on notes payable issued in conjunction with
the Salton and New M-Tech acquisitions as well as the increased level of
borrowing under the Company's line of credit facility.
Taxes
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 Internal Revenue Service has completed its examination of the Company's
1992 tax return. No Material assessments were made. The Internal Revenue
Service is presently examining the Company's 1994 and 1995 income tax returns
and the Company's 401(k) Plan filings. It is also examining the Company's
compliance with the requirements supporting the deductibility of interest paid
on the Industrial Development Revenue Bonds. Management believes that adequate
provision for taxes has been made for the years under examination and those not
yet examined.
Earnings Per Share
The Company adopted Financial Accounting Standards No. 128 (FAS 128), "Earnings
Per Share" in 1997. FAS 128 requires dual presentation of basic and diluted
earnings per share on the face of the income statement as well as the
restatement of prior periods presented.
Basic net earnings per share equals net earnings divided by the weighted average
shares outstanding during the year. The computation of diluted net earnings per
share includes dilutive common stock equivalents in the weighted average shares
outstanding. The reconciliation between the computations is as follows:
Net Income
(Before
Extraordinary Basic Basic Diluted Diluted
Item) Shares Eps Shares Eps
----- ------ --- ------ ---
1997 $19,835,300 17,654,772 $1.12 19,776,183 $1.00
1996 3,951,400 16,846,418 $ .23 17,558,275 $ .23
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The increase in the number of shares used in the computations of both basic and
diluted net earnings per share was due primarily to the additional dilutive
effect of stock option and warrant exercises, the Company's higher average stock
price in 1997 and inclusion of the additional shares issued upon the acquisition
of Salton for a full year.
Supplier Contract
In January 1997, the Company through its 50-percent interests in Salton and New
M-Tech entered into supply contracts with the Kmart Corporation for Kmart to
purchase, distribute, market and sell certain products under the
White-Westinghouse brand name licensed to Salton and New M-Tech. Under the terms
of the contract, Salton and New M-Tech will supply Kmart, either through the
Company or other manufacturers, with a broad range of small electrical
appliances, consumer electronics and telephone products under the
White-Westinghouse brand name. Kmart will be the exclusive discount department
store to market these White-Westinghouse products.
Year Ended December 31, 1996 compared with Year Ended December 31, 1995
Net Sales
Net sales were $197.0 million and $187.8 million for the years ended December
31, 1996 and 1995, respectively. Manufacturing sales increased by $10.4 million
due primarily to increased shipments of kitchen electric appliances. A kitchen
electric appliance distributor and a national retail beauty supply chain
accounted for 10.9% and 10.3%, respectively, of the Company's 1996 sales.
Set forth below is a table indicating the revenues that the Company derived from
its distribution and manufacturing operations for the periods indicated:
Year Ended December 31,
--------------------------------------------
1996 1995
----------------- ------------------
Distribution $146,431,800 74% $147,576,000 79%
Manufacturing 50,571,800 26 40,200,900 21
----------- --- ----------- ---
Total Sales $197,003,600 100% $187,776,900 100%
=========== === =========== ===
Gross Profit Margin
The Company's gross margin percentage decreased in 1996 to 20.2% of sales from
the 21.8% level in the prior year. The decrease is primarily attributed to the
continued effect of remaining higher cost raw material inventories and a greater
concentration of manufacturing sales. Lower margin kitchen electric products
which comprised 82% of manufacturing sales in both 1996 and 1995, accounted for
31% and 25% of the Company's total sales in those years, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales were 20.0%
in both 1996 and 1995. Commencement of operations at the Company's newly
acquired LitterMaid, Inc. and Bay Books & Tapes, Inc. businesses resulted in a
$1.6 million increase in expenses. Travel,
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legal and selling expenses increased by $1.2 million and advertising costs
decreased by $1.0 million.
Unusual or Non-Recurring Items
In 1995, the Company incurred a non-recurring pre-tax loss of $8.0 million on
the sale of an other asset. This transaction reduced 1995 net earnings by $5.3
million, or $.31 per share, on an after-tax basis.
Equity in Net Earnings (Loss) of Joint Ventures
The Company's equity in net earnings (loss) of joint ventures was $2.3 million
and $(.4) million in 1996 and 1995, respectively. The increase in 1996 primarily
reflects the results of operations of the Company's newly acquired interests in
Salton/Maxim Housewares, Inc. and New M-Tech Corporation. The Company's equity
in the net earnings of Salton and New M-Tech totaled $3.2 million for 1996 which
was partially offset by losses of $.9 million at certain of the Company's other
joint ventures.
Interest Expense
Interest expense increased by $.8 million to $1.4 million in 1996. The increase
is the result of the amounts paid on notes payable issued in conjunction with
the Salton and New M-Tech acquisitions as well as the increased level of
borrowing under the Company's line of credit facility.
Taxes
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 made a
provision in its 1995 second quarter of $.4 million, or $.02 per share, as a
result of its settlement of a Hong Kong tax audit.
Extraordinary Item
On March 27, 1997, the Company paid $4.5 million to settle the lawsuit filed in
April 1994 by Izumi. An accrual of $5.3 million, including $800,000 in estimated
legal expenses has been recorded as of December 31, 1996. The transaction
resulted in an after tax charge of $3.5 million or $.20 per share and has been
recorded as an extraordinary item.
Earnings Per Share
The average number of common shares and common equivalent shares used in
computing per share results was 17,620,000, in 1996 as compared to 17,227,000 in
1995. The decrease was primarily due to the non-inclusion of the dilutive effect
of stock options and warrants in those 1996 quarters in which the Company
sustained losses, offset by the additional shares issued upon the acquisition of
Salton/Maxim and upon the exercise of stock options and warrants.
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Liquidity and Capital Resources
At December 31, 1997, the Company's working capital was $106.1 million, as
compared to $105.6 million at the end of 1996. At December 31, 1997 and 1996,
the Company's current ratio was 2.4 to 1 and 3.1 to 1, respectively, and its
quick ratio was 1.0 to 1 and 1.3 to 1, respectively.
Cash and cash equivalents decreased by $556,000 during 1997. The Company and its
joint ventures are experiencing accelerated growth. Net operating cash flow was
strongly impacted by the increase in inventory levels needed to meet future
sales demands and the increase in accounts receivable balances resulting from
strong quarterly sales activity. Investing expenditures of $11.3 million in
additions to property, plant and equipment and an $11.0 million increase in
receivables from affiliates are also a result of the accelerated growth. The
Company anticipates that capital expenditure requirements for 1998 will total
approximately $8.0 million.
Certain of the Company's foreign subsidiaries (the "Subsidiaries") have $14.6
million in trade finance lines of credit, payable on demand, which are
collateralized 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 December 31, 1997, the subsidiaries were utilizing, including letters of
credit, approximately $3.4 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, guaranteed by the Company, of which $1.5
million was outstanding as of December 31, 1997. Outstanding borrowings by the
Company's Hong Kong subsidiaries are primarily in U.S. dollars.
The Company has a $45.0 million line of credit from a domestic bank,
collateralized by domestic accounts receivable and inventory. At December 31,
1997, outstanding borrowings under this credit line totaled $41.5 million and
bear interest at LIBOR plus 1.50%. The Company is currently negotiating with its
domestic lender to increase its line of credit so that it may take advantage of
future opportunities for growth. While management believes a new facility will
be in place in the second quarter of 1998, there can be no assurance as to the
outcome of the negotiations.
The $43.0 million borrowed under the Company's lines of credit at December 31,
1997, an increase of $21.1 million since the beginning of the year, is the
primary funding source used by the Company to support its increased working
capital requirements as well as to support its seasonal borrowing needs.
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. Outstanding
at December 31, 1997, are contracts to purchase Hong Kong dollars forward
totaling $7,000,000. There is no significant unrealized gain or loss on these
contracts. All contracts have terms of six months or less.
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In August 1997, the Board of Directors reevaluated the dividend policy in light
of the Company's strategic repositioning for growth and the resultant cash
requirements and eliminated the Company's quarterly cash dividend.
The Company believes that its cash on hand and internally generated funds,
together with its credit lines, will provide sufficient funding to meet the
Company's capital requirements and its operating needs for the foreseeable
future.
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.
Recent Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standard No. 130
(SFAS 130), "Reporting Comprehensive Income," and No. 131 (SFAS 131),
"Disclosures About Segments of an Enterprise and Related Information." These
statements are effective for fiscal years commencing after December 15, 1997.
The Company will be required to comply with the provisions of these statements
in 1998. The Company has not assessed the effect that these new standards will
have on its consolidated financial statements and/or disclosures.
Year 2000 Issues
The Company has implemented a Year 2000 program to ensure that its computer
systems and applications will function properly beyond 1999. The Company
believes that it has allocated adequate resources for this purpose and expects
its Year 2000 date conversion program to be completed successfully on a timely
basis. Although the ability of third parties with whom the Company transacts
business to address their Year 2000 issues is outside the Company's control, the
Company is discussing with its vendors and customers the possibility of any
interface difficulties which may affect the Company. The Company currently does
not expect the costs necessary to address this matter to be material to its
financial condition or results of operations.
Legal Proceedings
On March 27, 1997, the Company paid $4,500,000 to settle the lawsuit filed in
April 1994 by Izumi relating to the Phillips settlement in 1992.
The Company, its 50-percent owned joint venture partners Salton/Maxim
Housewares, Inc. and New M-Tech Corporation, 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
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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,
un-specified 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/Maxim and
New M-Tech 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 also subject to other legal proceedings, product liability and
other 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. However, as the outcome of litigation or other legal
claims is difficult to predict, significant changes in the estimated exposures
could occur.
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 the 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 and although
discussions are currently under way in an attempt to resolve these issues, there
can be no assurance that these negotiations will be successful. A failure to
resolve these disputes could have a material adverse effect on the Company's
business relationship with Salton.
Manufacturing Operations
The Company's products are primarily manufactured by Durable, its wholly-owned
Hong Kong subsidiary, in Bao An County, Guandong 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
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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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference to the Company's 1997 Annual Report to Shareholders
(Exhibit 13). See also PART IV, ITEM 14(a)1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the Company's Proxy Statement for its 1998 Annual
Meeting of Shareholders under the captions "Election of Directors" and
"Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's Proxy Statement for its 1998 Annual
Meeting of Shareholders under the captions "Executive Compensation" and "Certain
Transactions".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Company's Proxy Statement for its 1998 Annual
Meeting of Shareholders under the caption "Security Ownership".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by Reference to the Company's Proxy Statement for its 1998 Annual
Meeting of Shareholders under the captions "Executive Compensation" and "Certain
Transactions".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a)1. FINANCIAL STATEMENTS
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<PAGE> 20
The following consolidated financial statements of Windmere-Durable
Holdings, Inc. and subsidiaries are incorporated by reference in PART II,
ITEM 8:
AUDITOR'S REPORT Exhibit 13
CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 31, 1997 AND 1996 Exhibit 13
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996
AND 1995 Exhibit 13
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY - THREE YEARS ENDED
DECEMBER 31, 1997 Exhibit 13
CONSOLIDATED STATEMENTS OF
CASH FLOWS - YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995 Exhibit 13
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Exhibit 13
2. FINANCIAL STATEMENT SCHEDULES
AUDITOR'S REPORT Filed herewith
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES -
YEARS ENDED DECEMBER 31,
1997, 1996 AND 1995 Filed herewith
Individual financial statements of the Company have been omitted since
consolidated financial statements have been presented, and all subsidiaries
included in the consolidated financial statements are wholly-owned. All other
schedules have been omitted since the required information is not present or not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the consolidated financial statements or
the notes thereto.
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3. EXHIBITS
(3) Articles of Incorporation and By-Laws.
3.1 Amended and Restated Articles of Incorporation of the Company
filed with the Florida Secretary of State on May 17, 1984.
Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1984.
3.2 Articles of Amendment to the Articles of Incorporation of the
Company filed with the Florida Secretary of State on May 16, 1986.
Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1986.
3.3 Articles of Amendment to the Articles of Incorporation of the
Company filed with the Florida Secretary of State on June 23,
1986. Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1987.
3.4 By-Laws as amended through October 11, 1991. Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991.
3.5 Amendment to October 11, 1991 By-Laws. Incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992.
3.6 Articles of Amendment to the Amended and Restated Articles of
Incorporation of the Company filed with the Florida Secretary of
State on June 21, 1996. Filed herewith.
(10) Material Contracts
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.1 Employment Agreement dated as of January 27, 1983, between Belvin
Friedson and the Company. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December
31, 1982.
10.2 Employment Agreement, First Amendment, dated as of February 27,
1987, between Belvin Friedson and the Company. Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1986.
10.3 Employment Agreement, Second Amendment, dated as of December 16,
1992, between Belvin Friedson and the Company. Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992.
10.4 Employment Agreements dated as of July 18, 1983, between David M.
Friedson, Barbara Friedson Garrett and Arnold Thaler,
respectively, and the Company. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December
31, 1983.
10.5 Employment Agreement, First Amendment, dated as of January 17,
1985, between David M. Friedson and the Company. Incorporated
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by reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1984.
10.6 Employment Agreement, Second Amendment and Nonqualified Stock
Option, dated as of September 30, 1985, between David M. Friedson
and the Company. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1985.
10.7 Employment Agreement (Third Amendment) and Nonqualified Stock
Option (First Amendment) dated as of October 28, 1987, between
David M. Friedson and the Company. Incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1987.
10.8 Employment Agreement (Fourth Amendment) and Nonqualified Stock
Option (Second Amendment) dated as of October 26, 1987, between
David M. Friedson and the Company. Incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1987.
10.9 Employment Agreement (Fifth Amendment) dated as of December 16,
1992, between David M. Friedson and the Company. Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992.
10.10 Nonqualified Stock Option dated as of January 5, 1987, granted by
the Company to Barbara Friedson Garrett. Incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1986.
10.11 Employment Agreement (First Amendment) and Nonqualified Stock
Option (First Amendment) dated as of October 26, 1987, between
Barbara Friedson Garrett and the Company. Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1987.
10.12 Employment Agreement (Second Amendment) and Nonqualified Stock
Option (Second Amendment) dated as of October 26, 1987 between
Barbara Friedson Garrett and the Company. Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1987.
10.13 Employment Agreement (Third Amendment) dated as of December 16,
1992, between Barbara Friedson Garrett and the Company.
Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1992.
10.14 Nonqualified Stock Option dated as of January 5, 1987, granted by
the Company to Arnold Thaler. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December
31, 1986.
10.15 Employment Agreement (First Amendment) and Nonqualified Stock
Option (First Amendment) dated as of October 26, 1987 between
Arnold Thaler and the Company. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December
31, 1987.
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10.16 Employment Agreement (Second Amendment) and Nonqualified Stock
Option (Second Amendment) dated as of October 26, 1987 between
Arnold Thaler and the Company. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December
31, 1987.
10.17 Employment Agreement (Third Amendment) dated as of December 16,
1992, between Arnold Thaler and the Company. Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992.
10.18 Employment Agreement dated May 31, 1987, between Robert Gorman and
the Company. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1987.
10.19 Employment Agreement (First Amendment) dated as of December 16,
1992, between Robert Gorman and the Company. Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992.
10.20 1982 Employees Incentive Stock Option Plan. Incorporated by
reference to Exhibit 4 to Post-Effective Amendment No. 1 to the
Company's Form S-8 Registration Statement No. 2-92540.
10.21 Amendment to 1982 Employees Incentive Stock Option Plan.
Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1987.
10.22 1992 Employees Incentive Stock Option Plan. Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992.
10.23 Employment Agreement dated as of October 26, 1987 between Burton
A. Honig and the Company. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December
31, 1987.
10.24 Employment Agreement (First Amendment) dated as of December 16,
1992, between Burton A. Honig and the Company. Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992.
10.25 Consulting Agreement dated January 1, 1989 between Mr. Lai Kin,
Chairman of Durable, and the Company. Incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1988.
10.26 Employment Agreement dated January 3, 1989, between Harry Schulman
and the Company. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1988.
10.27 Employment Agreement (First Amendment) dated as of June 4, 1990,
between Harry Schulman and the Company. Incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992.
10.28 Employment Agreement (Second Amendment) dated as of December 16,
1992, between Harry Schulman and the Company. Incorporated by
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reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992.
10.29 1988 Director Stock Option Plan. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December
31, 1988.
10.30 1989 Employees 401(k) Profit Sharing Plan and Trust. Incorporated
by reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1989.
10.31 Consulting Agreement, dated March 30, 1987, between Paragon
Industries, Paragon Sales, Inc., William Weber, Jacqueline K.
Weber and the Company. Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1990.
10.32 Amendment to Consulting Agreement, dated May 29, 1990, between
Paragon Industries, Paragon Sales, Inc., William Weber, Jacqueline
K. Weber and the Company. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December
31, 1990.
10.33 Second Amended and Restated Employment Agreement dated January 1,
1991, between David O'Neill and the Company. Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991.
10.34 Second Amended and Restated Employment Agreement (First Amendment)
dated December 16, 1992, between David O'Neill and the Company.
Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1992.
OTHER MATERIAL CONTRACTS
10.35 Installment Purchase Contract dated as of May 1, 1985, between the
Dade County Industrial Development Authority and the Company.
Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1985.
10.36 Asset Purchase Agreement dated September 30, 1988 between Sally
Beauty Company, Alberto-Culver Company, the Company and certain of
the Company's affiliates. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December
31, 1988.
10.37 Joint Venture Agreement, dated March 30, 1987, between Paragon
Sales, Inc., William Weber, Jacqueline K. Weber and the Company.
Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1990.
10.38 Amendment to Joint Venture Agreement, dated May 29, 1990, between
Paragon Sales, Inc., William Weber, Jacqueline K. Weber and the
Company. Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1990.
10.39 Exclusive Sales Agreement dated May 29, 1992 among the Company,
American International Industries and Zvi and Betty Ryzman.
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Incorporated by reference to the Company's Form S-2 Registration
Statement No. 33-51776.
10.40 Settlement Agreement dated May 6, 1992 between North American
Philips Corporation and the Company. Incorporated by reference to
the Company's Form S-2 Registration Statement No. 33-51776.
10.41 Letter of Credit Agreement dated July 31, 1992 between NationsBank
and the Company. Incorporated by reference to the Company's Form
S-2 Registration Statement No. 33-51776.
10.42 Agreement dated May 28, 1991, between Xingiao Economic Development
Corporation and Durable. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December
31, 1991.
10.43 Agreement dated May 28, 1991, between Bogang Economic Development
Company and Durable. Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1991.
10.44 Agreement dated May 28, 1991, between Wanfeng Economic Development
Corporation and Durable. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December
31, 1991.
10.45 Warrant Agreement dated October 1, 1992, between American Stock
Transfer and Trust Company and the Company. Incorporated by
reference to the Company's Form S-2 Registration Statement No.
33-51776.
10.46 Stock Purchase Agreement dated May 29, 1992 between Glamour
Industries, Inc. and the Company. Incorporated by reference to the
Company's Form S-2 Registration Statement No. 33-51776.
10.47 Trademark Licensing Agreement dated January 11, 1994, between
Helene Curtis, Inc. and the Company. Incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1993.
10.48 Stock Acquisition Agreement dated April 1, 1994, between Durable,
PPC Industries 1980 Limited, Ourimbah Investment, Limited and the
Company. Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994.
10.49 1995 Common Stock Purchase Rights Agreement dated March 6, 1995
between American Stock Transfer and Trust Company and the Company.
Incorporated by reference to the Company's Form 8-A Registration
Statement filed March 7, 1995.
10.50 Facility Letter dated June 3, 1995, from the Bank of East Asia,
Limited to Durable, Durable Electric Limited and PPC Industries
1980 Limited. Incorporated by reference to the Company's Form 10-Q
dated June 30, 1995.
10.51 Amended and Restated Letter Agreement dated July 28, 1995, between
NationsBank and the Company. Incorporated by reference to the
Company's Form 10-Q dated June 30, 1995.
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10.52 Amendment No. 1 to Amended and Restated Letter Agreement, dated
March 1, 1996, between NationsBank and the Company. Incorporated
by reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995.
10.53 Credit Agreement dated October 11, 1996, between Windmere
Corporation, NationsBank National Association (South) and National
Bank of Canada.
10.54 Amendment Agreement No. 1 to the Credit Agreement (October 11,
1996) dated January 31, 1997.
10.55 Letter Agreement dated April 30, 1997 between Windmere Corporation
and Salton/Maxim Housewares, Inc. Incorporated by reference to the
Company's Form 10-Q dated March 31, 1997.
10.56 1996 Stock Option Plan. Incorporated by reference to the Company's
Proxy Statement dated April 17, 1997.
10.57 1997 Cash Bonus Performance Plan for Executive Officers.
Incorporated by reference to the Company's Proxy Statement dated
April 18, 1997.
10.58 Amendment Agreement No. 3 to the Credit Agreement (October 11,
1996) dated July 27, 1997. Incorporated by reference to the
Company's Form 10-Q dated September 30, 1997.
10.59 Amendment Agreement No. 4 to the Credit Agreement (October 11,
1996) dated August 21, 1997. Incorporated by reference to the
Company's Form 10-Q dated September 30, 1997.
(13) Annual Report to Security Holders for the year ended December 31,
1997. Exhibit 13.
(21) Subsidiaries of the Registrant. Filed herewith.
(23) Consents of experts and counsel. Filed herewith.
(b) REPORTS ON FORM 8-K
None.
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REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Windmere-Durable Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Windmere-Durable
Holdings, Inc. and Subsidiaries (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Windmere-Durable
Holdings, Inc. and Subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
We have also audited Schedule II of Windmere-Durable Holdings, Inc. and
Subsidiaries for each of the three years in the period ended December 31, 1997.
In our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
GRANT THORNTON LLP
Miami, Florida
February 10, 1998
27
<PAGE> 28
WINDMERE CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CHANGES IN ALLOWANCE FOR POSSIBLE
LOSSES ON ACCOUNTS RECEIVABLE:
Years Ended December 31,
-------------------------------
1997 1996 1995
---- ---- ----
Balance at beginning
of period $1,129,000 $1,158,000 $1,338,100
Addition - Charged to
costs and expenses 433,000 930,000 894,700
Addition - Charged to
other accounts (a) 62,700 4,000 31,600
Deductions (b) (513,400) (963,000) (1,106,400)
---------- --------- ---------
Balance at end
of period $1,111,300 $1,129,000 $1,158,000
========== ========== ==========
(a) Recoveries of amounts previously written off against the reserve.
(b) Write-off of accounts receivable against the reserve.
28
<PAGE> 29
PART IV. ITEM 3. (21).
SUBSIDIARIES OF THE REGISTRANT
NAME INCORPORATED IN
- ---- ---------------
Consumer Products Americas, Inc. Florida
EDI Masters, Inc. Florida
Fortune Products, Inc. Florida
Jerdon Products, Inc. Florida
Windmere Fan Products, Inc. Florida
Bay Books & Tapes, Inc. Florida
LitterMaid, Inc. Florida
Windmere Corporation Florida
Windmere Holdings Corporation Delaware
Windmere Holdings Corporation II Delaware
Goal Making Company Limited British Virgin Islands
Remdale Investments Limited British Virgin Islands
PPC Industries, Ltd. British Virgin Islands
Windmere Consumer Products, Inc. Canada
Durable Electric, Ltd. Hong Kong
Durable Electrical Metal Factory, Ltd. Hong Kong
PPC Industries (1980) Ltd. Hong Kong
Sandgate Services, Ltd. Hong Kong
Parawind, Ltd. Hong Kong
PPC Product Services, Ltd. Hong Kong
Each of the above subsidiaries is wholly-owned and is included in the
consolidated financial statements as of December 31, 1997.
29
<PAGE> 30
AUDITOR'S CONSENT
We have issued our report dated February 10, 1998, accompanying the consolidated
financial statements and schedules incorporated by reference in the Form 10-K
for the year ended December 31, 1997. We hereby consent to the incorporation by
reference of the aforementioned report in the Registration Statements of
Windmere-Durable Holdings, Inc. on Form S-8 (File No. 33-7681, effective
September 30, 1986), Form S-8 (File No. 33-36424, effective August 17, 1990),
Form S-2 (File No. 33-51776, effective January 19, 1993), Form S-8 (File No.
33-58574, effective February 22, 1993) and on Form S-3 (File No. 333-6759,
effective July 10, 1996).
GRANT THORNTON LLP
Miami, Florida
March 27, 1998
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WINDMERE-DURABLE HOLDINGS, INC.
(REGISTRANT)
BY: /s/ DATE: 3-31-98
----------------------------------
David M. Friedson, Chairman,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.
BY: /s/ DATE: 3-31-98
--------------------------------- ----------------------------
David M. Friedson, Chairman,
President and Chief Executive Officer
BY: /s/ DATE: 3-27-98
---------------------------------- ----------------------------
Harry D. Schulman, Senior Vice
President - Finance and Administration
and Chief Financial Officer
BY: /s/ DATE: 3-27-98
---------------------------------- ----------------------------
Burton A. Honig, Vice President -
Finance (Principal Accounting Officer)
BY: /s/ DATE: 3-27-98
---------------------------------- ----------------------------
Bertley Sager, Director
BY: /s/ DATE: 3-30-98
---------------------------------- ----------------------------
Jerald I. Rosen, Director
BY: /s/ DATE: 3-30-98
---------------------------------- ----------------------------
Harold Strauss, Director
BY: /s/ DATE: 3-31-98
---------------------------------- ----------------------------
Lai Kin, Director
BY: /s/ DATE: 3-31-98
---------------------------------- ----------------------------
Raymond So, Director
BY: /s/ DATE: 3-27-98
---------------------------------- ----------------------------
Leonard Glazer, Director
BY: /s/ DATE: 3-27-98
---------------------------------- ----------------------------
Barbara Friedson Garrett, Director
BY: /s/ DATE: 3-27-98
---------------------------------- ----------------------------
Felix S. Sabates, Director
BY: /s/ DATE: 3-27-98
---------------------------------- ----------------------------
Arnold Thaler, Director
31
<PAGE> 32
BY: /s/ DATE: 3-27-98
---------------------------------- ----------------------------
Thomas J. Kane, Director
BY: /s/ DATE: 3-27-98
---------------------------------- ----------------------------
Susan J. Ganz, Director
BY: /s/ DATE: 3-31-98
---------------------------------- ----------------------------
Desmond Lai, Director
32
<PAGE> 33
FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
WINDMERE-DURABLE HOLDINGS, INC.
AND SUBSIDIARIES
DECEMBER 31, 1997 AND 1996
<PAGE> 34
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Windmere-Durable Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Windmere-Durable
Holdings, Inc. and Subsidiaries (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Windmere-Durable
Holdings, Inc. and Subsidiaries at December 31, 1997 and 1996, and the
consolidated results of its operations and its consolidated cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Miami, Florida
February 10, 1998
<PAGE> 35
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
ASSETS 1997 1996
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (Note A) $ 8,223,900 $ 8,779,500
Accounts and other receivables, less allowances of $1,111,300
in 1997 and $1,128,700 in 1996 (Note E) 43,338,000 37,601,200
Receivables from affiliates (Notes A, C and P) 15,291,200 12,138,800
Inventories (Notes A and E) 102,172,400 89,514,000
Prepaid expenses 4,617,600 3,751,100
Refundable income taxes (Notes A and I) 5,043,100 --
Future income tax benefits (Notes A, I and S) 1,274,100 3,231,800
------------- -------------
Total current assets 179,960,300 155,016,400
INVESTMENTS IN JOINT VENTURES (Notes A, C and J) 43,090,800 35,290,800
PROPERTY, PLANT AND EQUIPMENT - AT COST,
less accumulated depreciation (Notes A and D) 37,199,400 32,759,800
NOTES RECEIVABLE FROM AFFILIATE (Note P) 7,798,800 --
OTHER ASSETS (Notes A, I and J) 13,797,800 14,211,900
------------- -------------
$ 281,847,100 $ 237,278,900
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes and acceptances payable (Note E) $ 42,981,600 $ 21,882,500
Current maturities of long-term debt (Note G) 3,814,800 814,800
Accounts payable 14,600,500 12,106,500
Accrued expenses (Notes F and R) 12,237,800 14,228,700
Deferred income, current portion (Note A) 247,500 419,400
------------- -------------
Total current liabilities 73,882,200 49,451,900
LONG-TERM DEBT, less current maturities (Note G) 16,069,800 19,884,700
DEFERRED INCOME, less current portion (Note A) 1,073,800 247,500
COMMITMENTS AND CONTINGENCIES (Note K) -- --
STOCKHOLDERS' EQUITY (Notes A, L and M)
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;
issued 18,119,147 in 1997 and 17,445,146 in 1996 1,811,900 1,744,500
Paid-in capital 41,024,100 35,765,900
Retained earnings 149,087,500 130,965,100
Unrealized foreign currency translation adjustment (1,102,200) (780,700)
------------- -------------
Total stockholders' equity 190,821,300 167,694,800
------------- -------------
$ 281,847,100 $ 237,278,900
============= =============
</TABLE>
The accompanying notes are an integral part of these statements
2
<PAGE> 36
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995
------------- -------------- --------------
<S> <C> <C> <C>
Sales and other revenues (Note R) $ 261,885,100 $ 197,003,600 $ 187,776,900
Cost of goods sold 197,507,200 157,278,400 146,907,300
------------- ------------- -------------
Gross profit 64,377,900 39,725,200 40,869,600
Selling, general and administrative expenses 50,349,200 39,425,100 37,625,100
Unusual or non-recurring items (Note B) -- -- 8,000,000
------------- ------------- -------------
Operating profit (loss) 14,028,700 300,100 (4,755,500)
Other (income) expense
Interest expense 3,351,100 1,345,900 578,300
Interest and other income (2,727,500) (2,418,800) (2,561,800)
------------- ------------- -------------
623,600 (1,072,900) (1,983,500)
------------- ------------- -------------
Earnings (loss) before equity in net earnings
(loss) of joint ventures, income taxes
and extraordinary item 13,405,100 1,373,000 (2,772,000)
Equity in net earnings (loss) of joint ventures
(Notes A, C and J) 7,353,200 2,298,700 (392,600)
------------- ------------- -------------
Earnings (loss) before income taxes
and extraordinary item 20,758,300 3,671,700 (3,164,600)
Income taxes (benefit) (Notes A and I)
Current (3,272,000) (716,300) (1,242,700)
Deferred 4,195,000 436,600 (38,100)
------------- ------------- -------------
923,000 (279,700) (1,280,800)
------------- ------------- -------------
Earnings (loss) before extraordinary item 19,835,300 3,951,400 (1,883,800)
Extraordinary item (Note S) -- (3,500,000) --
------------- ------------- -------------
Net earnings (loss) $ 19,835,300 $ 451,400 $ (1,883,800)
============= ============= =============
Per share data (Notes A, L and S)
Earnings (loss) per common share - basic
before effect of extraordinary item $ 1.12 $ .23 $ (.11)
Extraordinary item -- (.20) --
------------- ------------- -------------
Net earnings $ 1.12 $ .03 $ (.11)
============= ============= =============
Earnings (loss) per common share - diluted $ 1.00 $ .23 $ (.11)
Extraordinary item -- (.20) --
------------- ------------- -------------
Net earnings $ 1.00 $ .03 $ (.11)
============= ============= =============
Dividends per common share $ .10 $ .20 $ .20
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 37
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Unrealized
Foreign
Currency
Common Paid-in Retained Translation
Stock Capital Earnings Adjustment
----- ------- -------- ----------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $ 1,673,400 $ 30,648,700 $ 139,088,800 $ (785,900)
Net loss -- -- (1,883,800) --
Cash dividends - $.20 per share -- -- (3,353,600) --
Purchase and retirement of
139,600 shares of common stock (14,000) (997,400) -- --
Exercise of stock options
and warrants 11,900 414,400 -- --
Tax benefit resulting from
exercise of stock options -- 242,800 -- --
Cost of intercompany recapitalization -- (135,500) -- --
Unrealized foreign currency
translation adjustment -- -- -- 20,700
------------- ------------- ------------- -------------
Balance at December 31, 1995 1,671,300 30,173,000 133,851,400 (765,200)
Net earnings -- -- 451,400 --
Cash dividends - $.20 per share -- -- (3,337,700) --
Purchase and retirement of
463,000 shares of common stock (46,300) (3,721,800) -- --
Exercise of stock options and warrants 44,700 2,531,500 -- --
Tax benefit resulting from exercise
of stock options -- 183,600 -- --
Fair value of options to non-employees -- 617,000 -- --
Issuance of 748,112 shares -
acquisition of 50% of Salton/Maxim
Housewares, Inc. 74,800 5,982,600 -- --
Unrealized foreign currency
translation adjustment -- -- -- (15,500)
------------- ------------- ------------- -------------
Balance at December 31, 1996 1,744,500 35,765,900 130,965,100 (780,700)
Net earnings -- -- 19,835,300 --
Cash dividends - $.10 per share -- -- (1,712,900) --
Exercise of stock options and warrants 67,400 1,675,200 -- --
Tax benefit resulting from exercise
of stock options -- 3,493,000 -- --
Fair value of options to non-employees -- 90,000 -- --
Unrealized foreign currency
translation adjustment -- -- -- (321,500)
------------- ------------- ------------- -------------
Balance at December 31, 1997 $ 1,811,900 $ 41,024,100 $ 149,087,500 $ (1,102,200)
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE> 38
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings (loss) $ 19,835,300 $ 451,400 $ (1,883,800)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities
Depreciation of property, plant and equipment 6,856,600 6,377,900 6,218,300
Amortization of intangible assets 840,700 613,400 561,100
Loss on sale of other asset (Note B) -- -- 8,000,000
Net change in allowance for losses on
accounts receivable (17,400) (29,300) (180,100)
Consulting expense on non-employee stock options 90,000 68,000 --
Amortization of deferred income (334,400) (598,100) (598,100)
Undistributed equity in (earnings) loss of joint ventures (7,537,300) (2,762,700) 392,600
Gain on sale of assets 988,800 -- --
Changes in assets and liabilities
Decrease (increase) in accounts and other receivables (5,719,400) 149,600 2,316,100
Decrease (increase) in inventories (12,658,400) 534,700 (4,735,200)
Decrease (increase) in prepaid expenses (866,500) (709,600) 5,836,900
Increase in accounts payable and accrued expenses 503,100 7,714,400 1,005,800
(Decrease) in current and deferred income taxes (2,250,000) (1,405,300) (1,829,300)
(Increase) decrease in other assets 2,231,000 (783,600) (1,073,300)
Decrease (increase) in other accounts (321,500) (14,000) 20,700
------------ ------------ ------------
Net cash provided by operating activities 1,640,600 9,606,800 14,051,700
Cash flows from investing activities
Proceeds from fixed asset sales -- -- 129,600
Additions to property, plant and equipment (11,296,200) (8,618,200) (8,383,500)
(Decrease) increase in short-term investments -- -- 2,500,000
Purchase of assets - LitterMaid(TM), Inc. -- (2,246,000) --
Purchase of assets - Bay Books and Tapes, Inc. -- (1,180,000) --
Investments in joint ventures (262,700) (7,745,400) --
Decrease (increase) in receivable accounts and
notes from affiliates (10,951,200) (15,301,600) 2,068,900
------------ ------------ ------------
Net cash used in investing activities (22,510,100) (35,091,200) (3,685,000)
Cash flows from financing activities
Net borrowings under lines of credit 21,099,100 21,840,200 (697,800)
Payments of long-term debt (814,900) (814,800) (814,900)
Exercises of stock options and warrants 1,742,600 2,576,200 426,300
Cash dividends paid (1,712,900) (3,337,700) (3,353,600)
Purchases of common stock -- (3,768,100) (1,011,400)
Cost of intercompany recapitalization -- -- (135,500)
------------ ------------ ------------
Net cash provided by (used in) financing activities 20,313,900 16,495,800 (5,586,900)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (555,600) (8,988,600) 4,779,800
Cash and cash equivalents at beginning of year 8,779,500 17,768,100 12,988,300
------------ ------------ ------------
Cash and cash equivalents at end of year $ 8,223,900 $ 8,779,500 $ 17,768,100
============ ============ ============
(continued)
</TABLE>
5
<PAGE> 39
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 3,187,200 $ 1,488,200 $ 488,500
Income taxes $ 33,700 $ 548,400 $ 2,181,800
Non-cash investing and financing activities:
Tax benefit resulting from exercise of stock options $ 3,493,000 $ 183,600 $ 242,800
Valuation of non-employee stock options under SFAS 123
(LitterMaid(TM)acquisition) $ -- $ 549,000 $ --
In 1996, the Company purchased a 50-percent interest in
New M-Tech Corporation in exchange for $3,000,000 in
cash and $7,000,000 in long-term promissory notes.
In 1996, the Company purchased a 50-percent interest in
Salton/Maxim Housewares, Inc. in exchange for $3,254,300
in cash, 748,112 shares of Windmere common stock (valued
at $6,057,000) and a $10,847,700 promissory note.
In 1996, the Company acquired the remaining 50-percent of its
seasonal products joint venture for a nominal amount. In
conjunction with the acquisition, the Company obtained the
following assets and liabilities:
Cash $ 1,102,300
Accounts receivable 1,124,200
Inventory 10,305,100
Prepaid and other assets 74,600
Less liabilities assumed (13,883,600)
-------------
Goodwill $ 1,277,400
=============
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 40
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Windmere-Durable Holdings, Inc. and Subsidiaries (the "Company") is
principally engaged in the manufacture and sale of personal care, kitchen
electric and seasonal products. In preparing financial statements in
conformity with generally accepted accounting principles, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from
those estimates. A summary of the Company's significant accounting policies
consistently applied in the preparation of the accompanying consolidated
financial statements follows.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Intercompany balances and transactions
are eliminated in consolidation. The Company reflects its investments in
its 50%-owned joint ventures at cost plus its equity in undistributed net
earnings.
FOREIGN CURRENCY TRANSLATION
Balance sheet accounts of the Company's foreign operations are translated
at the exchange rate in effect at each year end and income statement
accounts are translated at the average exchange rates prevailing during the
year. Adjustments resulting from this translation process are accumulated
in a separate component of stockholders' equity and are not included in the
determination of net earnings. The Company's foreign manufacturing
subsidiary utilizes the local currency as its functional currency, and the
other foreign subsidiaries primarily utilize the U.S. dollar as their
functional currency.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less at the time of purchase to be cash equivalents. Cash
balances at December 31, 1997 include $4,741,000 held in foreign banks by
the Company's Hong Kong and Canadian subsidiaries.
(continued)
7
<PAGE> 41
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
INVENTORIES
Inventories are stated at the lower of cost or market; cost is determined
by the first-in, first-out method. Inventories are comprised of the
following:
1997 1996
------------- --------------
Raw materials $ 13,327,400 $ 13,824,300
Work in process 21,062,400 20,551,900
Finished goods 67,782,600 55,137,800
------------- --------------
$ 102,172,400 $ 89,514,000
============= ==============
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 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 (Note C).
PROPERTY, PLANT AND EQUIPMENT
Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to their estimated operating service
lives using accelerated and straight-line methods.
INTANGIBLE ASSETS
Intangible assets, consisting primarily of goodwill, are being amortized on
a straight-line basis over periods ranging from 7-20 years. Intangible
assets were $13,955,300 and $13,704,600 at December 31, 1997 and 1996,
respectively, and the related accumulated amortization was $3,502,000 and
$2,700,700, respectively.
On an ongoing basis, management reviews the valuation and amortization of
goodwill. As part of this review, the Company estimates the value and
future benefits of the net income generated by the related subsidiaries to
determine that no impairment has occurred.
(continued)
8
<PAGE> 42
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist primarily of cash and cash equivalents,
accounts receivable, notes receivable, accounts payable, notes payable and
bank debt. At December 31, 1997, the fair value of these instruments
approximates the carrying amount of these items.
DERIVATIVE FINANCIAL INSTRUMENTS
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. Gains and losses on forward exchange
contracts are deferred and recognized in income when the related
transactions being hedged are recognized. Such gains and losses are
reported on the same financial statement line as the hedged transaction.
The Company does not use derivative financial instruments for trading or
speculative purposes. Outstanding at December 31, 1997, are $7,000,000 in
contracts to purchase Hong Kong dollars forward. There is no significant
unrealized gain or loss on these contracts. All contracts have terms of six
months or less. A deposit of $500,000 is held by the issuer as collateral
on the contracts. No such contracts existed at December 31, 1996.
INCOME TAXES
No provision has been made for U.S. taxes on undistributed earnings of
foreign subsidiaries and joint ventures of approximately $125,000,000 at
December 31, 1997, as it is anticipated that such earnings will be
reinvested in their respective operations or in other foreign operations.
Deferred taxes have been provided on temporary differences in reporting
certain transactions for financial accounting and tax purposes.
ADVERTISING COSTS
Advertising costs are expensed as incurred and are included in selling,
general and administrative expenses.
(continued)
9
<PAGE> 43
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
EARNINGS PER SHARE
The Company adopted Financial Accounting Standards No. 128 (FAS 128),
"Earnings Per Share" in 1997. FAS 128 requires dual presentation of basic
and diluted earnings per share on the face of the income statement as well
as the restatement of prior periods presented.
Basic net earnings per share equals net earnings divided by the weighted
average shares outstanding during the year. The computation of diluted net
earnings per share includes dilutive common stock equivalents in the
weighted average shares outstanding. The reconciliation between the
computations is as follows:
<TABLE>
<CAPTION>
Net Earnings
(Before
Extraordinary Basic Basic Diluted Diluted
Item) Shares Eps Shares Eps
------------- ---------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
1997 $ 19,835,300 17,654,772 $ 1.12 19,776,183 $ 1.00
1996 $ 3,951,400 16,846,418 $ .23 17,558,275 $ .23
1995 $ (1,883,800) 16,758,955 $ (.11) 17,236,873 $ (.11)
</TABLE>
Included in diluted shares are common stock equivalents relating to
options, warrants and convertible debt of 2,121,411, 711,857, and 477,918
for 1997, 1996 and 1995, respectively. Options to purchase 34,000 shares of
common stock at prices ranging from $18.38 to $24.19, which were
outstanding during 1997, were not included in the computation of diluted
EPS because the options' exercise prices were greater than the annual
average market price of the common shares. These options were granted in
1997 and become exercisable over the next six years.
Basic and diluted earnings per share for 1996 are $.03 after the effect of
the extraordinary charge of $3,500,000 or $.20 per share for settlement of
the Izumi case (Note S).
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 130 (SFAS 130). "Reporting Comprehensive Income," and No. 131 (SFAS
131), "Disclosures About Segments of an Enterprise and Related
Information." These statements are effective for fiscal years commencing
after December 15, 1997. The Company will be required to comply with the
provisions of these statements in 1998. The Company has not assessed the
effect that these new standards will have on its consolidated financial
statements and/or disclosures.
(continued)
10
<PAGE> 44
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
RECLASSIFICATIONS
Certain prior year amounts within the accompanying financial statements
have been reclassified for comparability.
NOTE B - UNUSUAL OR NON-RECURRING ITEMS
In 1995, the Company incurred a non-recurring pre-tax loss of $8,000,000 on
the sale of an other asset. This transaction reduced 1995 net earnings by
$5,280,000, or $.31 per share, on an after-tax basis.
NOTE C - 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"), New
M-Tech Corporation ("New M-Tech"), PX Distributors, Inc. ("PX"), Breakroom
of Tennessee, Inc. and Anasazi Partners, L.P. ("Anasazi").
In December 1996, the Company acquired the remaining 50 percent of its
seasonal products joint venture for a nominal amount. The results of
operations of the joint venture have been excluded from the summarized
financial information below for 1997.
Summarized financial information of the unconsolidated companies is as
follows:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Current assets $ 189,169,000 $ 85,536,000
Non-current assets 41,623,000 32,524,000
-------------- --------------
Total assets $ 230,792,000 $ 118,060,000
============== ==============
Current liabilities $ 158,045,000 $ 65,991,000
Non-current liabilities 2,544,000 889,000
-------------- --------------
Total liabilities $ 160,589,000 $ 66,880,000
============== ==============
Sales $ 467,549,000 $ 162,368,000
============== ==============
Gross profit $ 105,941,000 $ 34,312,000
============== ==============
Net earnings (loss) $ 15,885,000 $ 5,552,000
============== ==============
</TABLE>
(continued)
11
<PAGE> 45
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE C - INVESTMENTS IN JOINT VENTURES - Continued
All sales made by joint ventures, other than sales of $1,250,000 and
$935,000 by Salton to the Company in 1997 and 1996, respectively, were to
entities other than members of the consolidated group. Included in the
Company's sales are sales made to joint ventures of approximately
$37,226,200, $17,855,400 and $7,485,300 in 1997, 1996 and 1995,
respectively.
Commencing in 1997, the Company provided New M-Tech with certain
administrative services for a monthly management fee. In 1997, the total
amount received from New M-Tech for such fees was approximately $93,200.
The Company's loans to certain of its joint ventures totaled $9,854,100 and
$8,045,800 at December 31, 1997 and 1996, respectively. The 1997 amount
excludes notes receivable totaling $8,183,000 from the sale of assets by
the Company's manufacturing subsidiary (Note P). The Company also has
provided a $9.0 million corporate guarantee as support for a credit
facility obtained by one of its joint ventures.
NOTE D - PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment:
<TABLE>
<CAPTION>
USEFUL LIVES 1997 1996
------------ --------------- ----------------
<S> <C> <C> <C>
Building 15 - 50 years $ 7,784,400 $ 6,315,400
Building improvements 8 - 31 years 1,925,600 2,220,200
Computer equipment 3 - 5 years 6,045,500 5,173,300
Furniture and equipment 3 - 8 years 59,128,200 54,853,600
Leasehold improvements 8 years 9,984,600 8,443,700
Land and land improvements 15 - 31 years 2,660,100 2,660,100
--------------- ----------------
(Improvements only) 87,528,400 79,666,300
Less accumulated depreciation
and amortization 50,329,000 46,906,500
--------------- ----------------
$ 37,199,400 $ 32,759,800
=============== ================
</TABLE>
NOTE E - NOTES AND ACCEPTANCES PAYABLE
The Company's foreign subsidiaries (the "subsidiaries") have $14,600,000 in
trade finance lines of credit, payable on demand, which are collateralized
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
December 31, 1997, the subsidiaries were utilizing, including letters of
credit, approximately $3,400,000 of these credit lines. These subsidiaries
also have available an additional $5,000,000 line of credit which is
supported by a domestic standby letter of credit. As of December 31, 1997,
$1,500,000 was being utilized under this facility.
(continued)
12
<PAGE> 46
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE E - NOTES AND ACCEPTANCES PAYABLE - Continued
The Company has a $45,000,000 line of credit from a domestic bank, which is
collateralized by domestic accounts receivable and inventory. At December
31, 1997, there was $41,500,000 outstanding under this credit line.
Borrowings under the line bear interest at LIBOR plus 1.5 percent, (7.2% at
December 31, 1997).
NOTE F - ACCRUED EXPENSES
Accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
--------------- ----------------
<S> <C> <C>
Advertising allowances $ 1,307,200 $ 1,075,600
Salaries and bonuses 2,823,600 1,879,300
Volume rebates 1,586,000 1,325,600
Extraordinary litigation settlement - 5,300,000
Other 6,521,000 4,648,200
--------------- ----------------
$ 12,237,800 $ 14,228,700
=============== ================
NOTE G - LONG-TERM DEBT
Long-term debt is summarized as follows:
1997 1996
--------------- ----------------
Note payable to Salton (Note J) $ 10,847,700 $ 10,847,700
Notes payable to New M-Tech
Corporation (Note J) 7,000,000 7,000,000
Industrial development revenue bonds 2,036,900 2,851,800
--------------- ----------------
19,884,600 20,699,500
Less current maturities 3,814,800 814,800
--------------- ----------------
Total long-term debt $ 16,069,800 $ 19,884,700
=============== ================
</TABLE>
In 1985, the Company received proceeds of $7,500,000 from the issuance of
tax-exempt industrial development revenue bonds. The bonds are being paid
off in equal quarterly principal payments of $203,700 through May 2000. At
December 31, 1997, the interest rate on the bonds was 6.70-percent. The
bonds include certain covenants which provide, among other things,
restrictions relating to the maintenance of minimum levels of working
capital, net worth and other financial ratios. These bonds are unsecured
(Note I).
13
<PAGE> 47
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE H - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan for its employees to which the Company makes
discretionary contributions at rates dependent on the level of each
employee's contributions. Contributions made by the Company are limited to
the maximum allowable for federal income tax purposes. The amounts charged
to earnings for this plan during the three years ended December 31, 1997
were not significant.
The Company does not provide any health or other benefits to retirees.
NOTE I - INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ----------------
<S> <C> <C> <C>
Current
Federal $ (3,274,000) $ (748,200) $ (1,392,300)
Foreign (2,100) 183,800
State 2,000 34,000 (34,200)
--------------- --------------- ----------------
(3,272,000) (716,300) (1,242,700)
Deferred 4,195,000 436,600 (38,100)
--------------- --------------- ----------------
$ 923,000 $ (279,700) $ (1,280,800)
=============== =============== ================
</TABLE>
The analysis of the deferred income tax provision (benefit) representing
the tax effects of temporary differences between tax and financial
reporting is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ----------------
<S> <C> <C> <C>
Intercompany profit in inventory $ (13,900) $ (2,700) $ (72,500)
Differences in timing between
financial and tax reporting 1,879,000 145,700 49,300
Utilization of net operating loss
carryforward 1,678,200 356,200 220,100
Deferred income 157,300 224,300 224,300
Depreciation and amortization 567,200 (246,900) (303,800)
Other (72,700) (40,000) (155,500)
--------------- --------------- ----------------
$ 4,195,100 $ 436,600 $ (38,100)
=============== =============== ================
</TABLE>
(continued)
14
<PAGE> 48
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE I - INCOME TAXES - Continued
The United States and foreign components of earnings (loss) before income
taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
United States $ 7,521,200 $ (2,253,800) $ (8,056,300)
Foreign 13,237,100 5,925,500 4,891,700
------------- ------------- -------------
$ 20,758,300 $ 3,671,700 $ (3,164,600)
============= ============= =============
</TABLE>
The differences between the statutory rates and the tax rates computed on
pre-tax profits are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ---------
% % %
--------- ---------- ---------
<S> <C> <C> <C>
Tax expense (benefit) at statutory rates 34.0% 34.0% (34.0)%
State taxes, net of federal tax benefit -- .6 (.7)
Foreign (income) loss not subject to tax -- (6.4) 2.6
Provision for prior years' Hong Kong
income taxes -- (.6) 12.3
Net tax rate differential on undistributed
foreign earnings (23.5) (17.3) (25.6)
Equity in joint venture earnings not
subject to U.S. tax or already taxed (11.1) (25.7) (4.2)
Effect of gross up of foreign taxes,
net of foreign tax credit (.2) (4.0) (4.1)
Federal withholding taxes 1.2 6.7 7.8
Other 4.1 5.1 5.4
---- ---- ----
4.5% (7.6)% (40.5)%
==== ===== ======
</TABLE>
In 1995, the Company reached an agreement with the Hong Kong Inland Revenue
Department concerning the taxes assessed against the Company's consolidated
Hong Kong subsidiaries through 1991. The assessment, including interest
charges and net of U.S. foreign tax credits, approximated $1,400,000. The
Company made a provision in 1995 of $400,000 or $.02 per share, to increase
its contingency reserve to the settlement amount. Security deposits of
approximately $3,000,000 were refunded to the Company during 1995. Hong
Kong tax returns for the fiscal years 1992 through 1996 have been audited
and accepted as filed.
(continued)
15
<PAGE> 49
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE I - INCOME TAXES - Continued
The Internal Revenue Service has completed its examination of the Company's
1992 tax return. No material assessments were made. The Internal Revenue
Service is presently examining the Company's 1994 and 1995 income tax
returns and the Company's 401 (k) Plan filings. It is also examining the
Company's compliance with the requirements supporting the deductibility of
interest paid on the Industrial Development Revenue Bonds. Management
believes that adequate provision for taxes has been made for the years
under examination and those not yet examined.
The Company's future income tax benefits at December 31, 1997, arise
primarily from the Company's and its subsidiaries', net operating loss
carryforwards. Valuation allowances have not been recorded limiting such
benefits based on management's current estimate that future profits will be
sufficient to realize these benefits.
The primary components of future income tax benefits at December 31, 1997
are as follows:
Net operating loss and other carryforwards $ 4,489,800
Depreciation and amortization (1,743,500)
Deferred income 131,800
Differences in timing between financial
and tax reporting 1,079,400
Extraordinary litigation settlement -
Other (25,800)
-------------
3,931,700
Less amount included in other assets 1,274,100
-------------
$ 2,657,600
=============
The tax benefits resulting from the exercise of stock options have been
recorded as additions to paid-in capital in the amounts of $3,493,000 and
$183,600 in 1997 and 1996, respectively.
The amounts and expiration years of the Company's tax carryforwards are as
follows:
Expiration
Amount Years
----------- ----------
Federal net operating losses:
U.S. $ 8,752,300 2012
Canada $ 721,400 2003
Hong Kong $ 100,900 Unlimited
States/Provincial net operating losses:
Florida $19,960,600 2012
Ontario $ 87,300 2003
The Company also has U.S. tax credit carryforwards of $466,900, many of
which do not expire.
NOTE J - ACQUISITIONS
SALTON/MAXIM HOUSEWARES, INC.
On July 11, 1996, Windmere completed its acquisition of 50-percent of
Salton. The Company received 6,508,572 shares of Salton common stock
(market value at date of acquisition of approximately $36.2 million) in
exchange for a cash payment of $3,254,300, a $10,847,700 promissory note
and 748,112 shares of Windmere stock (market value at date of agreement of
approximately $6,057,000). The total cost in excess of net assets acquired
is not deemed to be material.
(continued)
16
<PAGE> 50
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE J - ACQUISITIONS - Continued
In addition, the Company received an option to purchase 453,000 shares of
Salton common stock at an exercise price of $4.83 per share. The option
becomes exercisable only if and to the extent that options to purchase
shares of Salton common stock outstanding at the date of the stock purchase
agreement are exercised. During 1997, the Company exercised 26,500 options
under the terms of the agreement.
The $10,847,700 promissory note bears interest at a rate of 8-percent per
annum, payable quarterly, and matures in July 2001. The note is
subordinated to the Company's current and future indebtedness to its senior
lender and is collateralized by certain of the Company's domestic assets.
LITTERMAID(TM)
In 1996, the Company purchased certain assets and marketing rights,
including patents, for the LitterMaid(TM), computerized, infrared,
automatic self-cleaning cat litter box. The purchase price of the assets
included $2,200,000 in cash and options to purchase 150,000 shares of the
Company's common stock. The total fair value of the options as determined
under SFAS 123, is $549,000 and has been included in the cost of the assets
acquired (Note L).
NEW M-TECH CORPORATION
In April 1996, the Company acquired a 50-percent interest in New M-Tech
Corporation, a consumer electronics company for $10,000,000. Payment
consisted of $3,000,000 in cash and $7,000,000 in unsecured promissory
notes. The promissory notes bear interest at 8% per annum and consist of a
$3,000,000 promissory note maturing in 1998, and two $2,000,000 promissory
notes maturing in 2001, one of which is convertible into shares of the
Company's common stock at a price of $15 per share. Conversion may occur at
any time during the term of the convertible promissory note, and may be
required under certain circumstances. The notes are subordinated to the
Company's current and future indebtedness to its senior lender. The total
cost in excess of net assets acquired of $5,300,000 has resulted in
goodwill and is being amortized over 20 years on a straight-line basis.
BREAKROOM OF TENNESSEE, INC.
In May 1996, the Company agreed to contribute inventory valued at $250,000
in exchange for a 50-percent interest in Breakroom of Tennessee, Inc., a
joint venture formed to market and distribute office products.
(continued)
17
<PAGE> 51
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE J - ACQUISITIONS - Continued
BAY BOOKS & TAPES, INC.
In June 1996, the Company acquired the assets of the books and video
publishing division of KQED, Inc., consisting mostly of inventory, for
$1,180,000 in cash. Bay Books & Tapes, Inc. publishes public television
companion books and videos.
ANASAZI PARTNERS, L.P.
In June 1996, the Company acquired a 50-percent interest in an investment
partnership for $1,250,000. Payments as of December 31, 1997, include a
$1,500,000 capital contribution to the partnership and loans totaling
$1,500,000 to the partnership's other equity partner. Such loans bear
interest at a rate of 8-percent per annum, are unsecured and are payable
upon demand.
The partnership's investments include certain privately traded securities
whose values have been estimated by the General Partner in the absence of
readily ascertainable market values. Fair value of these securities may
differ significantly from the values that would have been used had a ready
market for the securities existed.
PRO FORMA
The results of operations on a pro forma basis as though Salton and New
M-Tech had been acquired as of the beginning of the year ended December 31,
1996 is as follows: (In Thousands except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
-------- --------
<S> <C> <C>
Equity in net earnings (loss) of joint ventures $ 2,152 $ (905)
Net loss $ (306) $ (2,482)
Loss per common and common equivalent share $ (.02) $ (.14)
</TABLE>
18
<PAGE> 52
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE K - COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company, its 50-percent owned joint venture partners Salton/Maxim
Housewares, Inc. and New M-Tech Corporation, 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. 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/Maxim and New M-Tech 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 also subject to other legal proceedings, product liability
and other 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. However, as the outcome of
litigation or other legal claims is difficult to predict, significant
changes in the estimated exposures could occur.
(continued)
19
<PAGE> 53
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE K - COMMITMENTS AND CONTINGENCIES - Continued
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with several of its
executive officers for periods ranging from two to five years. The
agreements provide the employees with an option to terminate their
agreements and receive lump sum payments of up to five years compensation
if there is a change in control of the Company.
LEASES
In January 1998, the Company entered into a long-term operating lease for a
warehouse facility. Future minimum payments under the lease, which
commences April 1998, are as follows:
1998 $ 472,500
1999 1,161,600
2000 1,338,800
2001 1,338,800
2002 1,338,800
Thereafter 7,028,400
-------------
$ 12,678,900
=============
OTHER
In April 1994, the Company purchased from Ourimbah Investment, Limited
("Ourimbah") the remaining 20% of the issued and outstanding capital stock
of Durable (the "Purchased Shares") which had not, prior to such purchase,
been owned, directly or indirectly, by the Company. In connection with such
purchase, the Company agreed to make an additional payment to Ourimbah for
the Purchased Shares upon the occurrence of a change of control of the
Company on or before July 1, 1999. Any such additional payment will be in
an amount with respect to each Purchased Share equal to the greater of (i)
the same multiple of earnings per share of Durable as the highest multiple
of earnings per share paid for the shares of common stock of the Company
received in connection with such change of control or (ii) the same
multiple of net asset value per share of Durable as the highest multiple of
price per net asset value per share paid for the shares of common stock of
the Company received in connection with such change of control. For
purposes of determining whether any such additional payment is required, a
change of control will be deemed to have occurred upon (i) the acquisition
by any person of 50% or more of the then
(continued)
20
<PAGE> 54
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE K - COMMITMENTS AND CONTINGENCIES - Continued
OTHER - Continued
outstanding shares of common stock of the Company, (ii) a change in the
majority of the members of the Company's board of directors who are serving
as of the date of the purchase agreement or (iii) the approval by the
Company's shareholders of (A) a reorganization, merger or consolidation in
which the shareholders of the Company prior to such transaction do not,
immediately thereafter, own more than 50% of the combined voting power of
the Company following such transaction, (B) a liquidation of dissolution of
the Company or (C) a sale of all or substantially all of the Company's
assets. No change of control will be deemed to have occurred in connection
with any transaction approved by a majority of the members of the board of
directors.
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 the 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 and although
discussions are currently under way in an attempt to resolve these issues,
there can be no assurance that these negotiations will be successful. A
failure to resolve these disputes could have a material adverse effect on
the Company's business relationship with Salton.
NOTE L - STOCKHOLDERS' EQUITY
STOCK OPTIONS
The Company's 1982 and 1992 Employees' Incentive Stock Option Plans provide
for granting of options of not more than 1,200,000 shares and 500,000
shares, respectively, of common stock. Options granted under the plans are
exercisable in equal annual installments during a five or six year period
beginning one year after the date the option is granted. The Company has
also granted stock options which are classified as non-qualified, and which
are not included in the 1982 or 1992 Employees' Incentive Stock Option
Plans.
In May 1997, the Company's shareholders approved and ratified the 1996
Stock Option Plan. The 1996 plan provides for the granting of incentive
stock options for employees and non-qualified stock options for employees,
consultants and directors. A total of 850,000 shares of common stock have
been reserved under the 1996 plan.
The exercise price of all options granted by the Company equals the market
price at the date of grant. No compensation expense has been recognized.
Prior to December 31, 1995, the Company accounted for non-qualified options
under APB Opinion 25 and related Interpretations. Commencing January 1,
1996, the Company accounts for non-qualified options issued to
non-employees, under SFAS 123, Accounting for Stock Based Compensation.
(continued)
21
<PAGE> 55
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE L - STOCKHOLDERS' EQUITY - Continued
During 1997, the Company issued options to purchase 25,000 shares to
non-employee sales representatives.
During 1996, the Company issued options to purchase 97,500 shares of common
stock to non-employee sales representatives. These sales representatives
included Top Sales and TJK (Note P), each of which received options to
purchase 25,000 shares. The options were issued with an exercise price that
was equal to the market price on the date of the grant. The total fair
value of the options, as determined under SFAS 123, was $357,000 which is
to be amortized over the vesting period of the options. The 1997 and 1996
expense associated with non-employee stock options totaled $90,000 and
$68,000, respectively.
In connection with the 1996 purchase of certain assets of LitterMaid(TM),
the Company issued options for the purchase of 150,000 shares of common
stock. The total fair value of the options, as determined under SFAS 123,
was $549,000 and has been included in the cost of purchasing the assets.
Had compensation cost for the Employees' Incentive Stock Option Plans and
non-qualified options issued to employees been determined based on the fair
value of the options at the grant dates consistent with the method of SFAS
123, the Company's net earnings (loss) and earnings (loss) per share would
have been changed to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net earnings (loss)
As reported $ 19,835,300 $ 451,400 $ (1,883,800)
Pro forma $ 18,911,900 $ (2,846,400) $ (1,935,700)
Basic earnings (loss) per share
As reported $ 1.12 $ .03 $ (.11)
Pro forma $ 1.07 $ (.17) $ (.11)
Diluted earnings (loss) per share
As reported $ 1.00 $ .03 $ (.11)
Pro forma $ .96 $ (.17) $ (.11)
</TABLE>
The above pro forma disclosures may not be representative of the effects on
reported net earnings for future years as options vest over several years
and the Company may continue to grant options to employees.
(continued)
22
<PAGE> 56
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE L - STOCKHOLDERS' EQUITY - Continued
The fair value of each option grant is estimated on the date of grant using
the binomial option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996, respectively: dividend yield
of 0.0 percent for all years; expected volatility of 37.85 percent and
43.97 percent; risk-free interest rates of 5.33 percent and 5.56 percent;
and expected holding periods of 4 and 6.34 years.
A summary of the status of the Company's fixed stock options as of December
31, 1997 and 1996, and changes during the years ending on those dates is as
follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- ------------------------------
Weighted- Weighted-
Shares Average Shares Average
(000) Exercise Price (000) Exercise Price
----------- ------------------ ----------- ---------------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 3,369 $ 7.03 1,866 $ 5.95
Granted 235 14.94 1,758 7.89
Exercised (764) 6.45 (221) 4.20
Forfeited (27) 8.68 (34) 6.16
----------- ----------- ----------- ----------
Outstanding at
end of year 2,813 7.77 3,369 7.03
=========== ===========
Options exercisable at
end of year 1,625 1,563
Weighted-average fair value
of options granted during
the year $ 5.54 $ 4.04
</TABLE>
The following information applies to options outstanding at December 31,
1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- ----------------------------
- - Weighted-
Average Weighted - Weighted-
Range Of Shares Remaining Average Shares Average
Exercise Prices (000) Contractual Life Exercise Price (000) Exercise Price
--------------- ----------- ----------------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$2.875 - $3.693 228 2.72 $ 3.28 228 $ 3.15
$4.500 - $6.375 102 12.85 5.88 101 4.72
$7.000 - $10.375 2,159 17.17 7.19 1,359 7.37
$10.875 - $14.875 290 6.15 13.88 62 12.46
$18.375 - $24.188 34 6.00 19.23 - -
-------- ---------
$2.875 - $24.188 2,813 14.52 7.77 1,750 6.76
======== =========
</TABLE>
(continued)
23
<PAGE> 57
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE L - STOCKHOLDERS' EQUITY - Continued
WARRANTS
As part of a lawsuit settlement, warrants to purchase 750,423 shares of the
Company's common stock have been issued. The warrants which had an exercise
price of $7.50 per share expired on January 19, 1998. Upon expiration,
565,796 warrants had been exercised.
COMMON STOCK PURCHASE RIGHTS PLAN
In March 1995, the Company implemented a Common Stock Purchase Rights Plan
and distributed one Right for each share of the Company's common stock
outstanding. The Rights are not exercisable or transferable, apart from the
Company's common stock, until after a person or group acquires, or has the
right to acquire, beneficial ownership of 15 percent or more of the
Company's common stock (which threshold may, under certain circumstances,
be reduced to 10 percent) or announces a tender or exchange offer to
acquire such percentage of the Company's common stock. Each Right entitles
the holder to purchase one quarter of one share of common stock at an
exercise price of $25.00 per full share and contains provisions that
entitle the holder in the event of specific transactions, to purchase
common stock of the Company or any acquiring or surviving entity at
one-half of market price as determined under the terms of the Rights
Agreement. The Rights will expire in March 2005, unless previously
exercised or redeemed at the option of the Company for $.00001 per Right.
STOCK PURCHASE PROGRAM
The $3.8 million purchase in 1996 of 463,000 shares of the Company's common
stock completed the Company's purchase of 1,000,000 shares of its common
stock under the 1994 stock purchase program. In 1996, the Company's Board
of Directors authorized a new stock purchase program, whereby, the Company
can purchase up to 10-percent of its outstanding shares (approximately 1.6
million shares). No shares have been purchased under the new program.
DIVIDENDS
In August 1997, the Board of Directors re-evaluated the dividend policy in
light of the Company's strategic repositioning for growth and the resultant
cash requirements and eliminated the Company's quarterly cash dividend.
24
<PAGE> 58
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE M - SPECIAL PREFERRED STOCK
During 1986, the Company was authorized to issue 40,000,000 shares of $.01
par value special preferred stock purchase rights for each share of common
stock, par value $.10 per share. These rights entitled the holder to
purchase one share of special preferred stock at a price of $.01 under
certain conditions in connection with preserving for the Company and its
stockholders the benefits of any recovery in the Company's lawsuit with
North American Philips Corporation, et al. In 1992, these conditions ceased
to apply, therefore, the special preferred stock rights remain outstanding
but have no continuing application.
NOTE N - GEOGRAPHIC AREA INFORMATION
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUES
United States operations $ 179,756,100 $ 127,093,600 $ 126,959,000
International operations
Sales to unaffiliated customers 82,129,000 69,910,000 60,817,900
Transfers between geographical
areas 96,842,700 82,809,500 83,517,400
Eliminations (96,842,700) (82,809,500) (83,517,400)
-------------- -------------- --------------
$ 261,885,100 $ 197,003,600 $ 187,776,900
============== ============== ==============
OPERATING PROFIT
United States operations $ (474,300) $ (3,831,000) $ (7,774,000)
International operations 15,033,000 5,020,100 1,854,500
Eliminations (530,000) (889,000) 1,164,000
-------------- -------------- --------------
Operating profit (loss) 14,028,700 300,100 (4,755,500)
Equity in net earnings (loss)
of joint ventures 7,353,200 2,298,700 (392,600)
Interest expense (3,351,100) (1,345,900) (578,300)
Interest and other income 2,727,500 2,418,800 2,561,800
-------------- -------------- --------------
Consolidated earnings (loss)
before income taxes
and extraordinary item $ 20,758,300 $ 3,671,700 $ (3,164,600)
============== ============== ==============
</TABLE>
(continued)
25
<PAGE> 59
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE N - GEOGRAPHIC AREA INFORMATION - Continued
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS
United States operations $ 248,795,800 $ 180,503,900 $ 101,555,700
International operations 174,944,900 159,785,100 145,714,800
Eliminations (141,893,600) (103,010,100) (59,258,600)
--------------- --------------- ---------------
Consolidated assets $ 281,847,100 $ 237,278,900 $ 188,011,900
=============== =============== ===============
</TABLE>
Transfers between geographic areas are billed at negotiated prices. In
1995, the United States operations' operating profit includes an $8,000,000
loss on the sale of an other asset. All United States revenues are derived
from sales to unaffiliated customers. Included in domestic revenues and
operating profit are certain sales derived from direct product shipments
from Hong Kong to customers located in the United States.
International operations are conducted in Canada, Hong Kong, Europe and the
People's Republic of China.
NOTE O - CONCENTRATION OF CREDIT AND OTHER RISKS
The Company sells on credit terms to a majority of its customers, most of
which are U.S. and Canadian retailers and distributors located throughout
those countries.
Salton accounted for 12.0% of 1997 sales. A kitchen electric appliance
distributor and a national retail beauty supply chain accounted for 10.9%
and 10.3%, respectively, of 1996 sales. In 1995, Wal-Mart Stores, Inc. and
a kitchen electric appliance distributor accounted for 13.1% and 11.4%,
respectively, of the Company's sales.
The Company's allowance for doubtful accounts is based on management's
estimates of the creditworthiness of its customers, and, in the opinion of
management is believed to be set in an amount sufficient to respond to
normal business conditions. Should such conditions deteriorate or any major
credit customer default on its obligations to the Company, this allowance
may need to be increased which may have an adverse impact upon the
Company's earnings.
(continued)
26
<PAGE> 60
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE O - CONCENTRATION OF CREDIT AND OTHER RISKS - Continued
The Company produces the vast majority of its products in its facilities in
the People's Republic of China ("PRC"). The supply and cost of the products
manufactured by Durable 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. The Company has a
significant amount of its assets in the People's Republic, primarily
consisting of inventory, equipment and molds. 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 Peoples'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 assurance that there will not be a material
impact in the future.
Hong Kong underwent a transfer of control to the People's Republic in July
1997. Durable is incorporated in Hong Kong and its executive, sales offices
and its senior executives are located or reside there. The Company also
conducts significant trading activities through subsidiaries incorporated
in Hong Kong. The Company's business has not been materially affected by
the governmental changes that have already occurred. Although the Company
believes that its operations will not be materially affected by any further
governmental changes occurring in Hong Kong, no assurance can be given that
such changes will be benign.
In 1997, President Clinton extended the People's Republic's most-favored
nation (MFN) trading status for an additional year. The President announced
in 1994 that the United States would, in the future, permanently de-link
MFN renewal from human rights issues, other than freedom of emigration
provisions. Under U.S. law, MFN status means that products are subject to
the relatively low duty rates set forth in Column 1 of the Harmonized
Tariff Schedules of the United States (HTSUS), that have resulted from
several rounds of reciprocal tariff negotiations conduct under the auspices
of the General Agreement on Tariffs and Trade (GATT) since 1945. Products
from countries not eligible for MFN treatment are subject to much higher
rates of duty, averaging 30 percent ad valorem, as set forth in Column 2 of
the HTSUS. If MFN status for goods produced in the People's Republic were
removed there would be a substantial increase in tariffs imposed on goods
of Chinese origin entering the United States, including those manufactured
by the Company, which could have a material adverse impact on the Company's
revenues and earnings.
27
<PAGE> 61
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE P - RELATED PARTY TRANSACTIONS
The Company has used the services of Top Sales Company, Inc. ("Top Sales"),
an independent sales representative, since 1978. A member of the Company's
Board of Directors is the sole shareholder and Chief Executive Officer of
Top Sales. The Company made commission payments to Top Sales of $531,100,
$693,300 and $556,400 in 1997, 1996 and 1995, respectively. In 1996, the
President of TJK Sales Inc. ("TJK"), an independent sales representative,
became a member of the Company's Board of Directors. Commission payments to
TJK totaled $427,000 and $469,000 in 1997 and 1996, respectively.
In 1986, the Company made a non-interest bearing loan of $78,000 to a
director of the Company. The entire amount of such loan was outstanding at
December 31, 1997.
The Company loaned $300,000 to Lion Redcliff Import and Export, Ltd., which
is 50-percent owned by an entity whose President is also a Director of the
Company. Pursuant to the note, periodic principal payments are made by the
debtor. The remaining obligation of $150,000 at December 31, 1997, was paid
in March 1998.
Included in receivables from affiliates is $584,500 due the Company's
President and Chief Executive Officer. Such amount is due upon demand and
bears interest at the prevailing market rate.
On October 1, 1997, one of the Company's wholly-owned subsidiaries sold
certain assets to New M-Tech for $1,977,600 of which a gain of $988,800 has
been recorded as Other Income. The Company has recorded a note receivable
from New M-Tech as payment for the assets. The note is payable in 24
quarterly installments, which commenced December 31, 1997 and bears
interest at a rate of prime plus one percent (9.5% at December 31, 1997).
On November 1, 1997, New M-Tech purchased all the common stock of the
subsidiary for $1,300 and assumed indebtedness totaling $6,220,000 due the
Company's wholly-owned manufacturing subsidiary. The note evidencing the
indebtedness matures on October 31, 2003, bears interest at a rate of prime
plus one percent and is collateralized by inventory and fixed assets.
28
<PAGE> 62
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE Q - SUPPLIER CONTRACT
In January 1997, the Company through its 50-percent interests in Salton and
New M-Tech entered into supply contracts with the Kmart Corporation for
Kmart to purchase, distribute, market and sell certain products under the
White-Westinghouse brand name licensed to Salton and New M-Tech. Under the
terms of the contract, Salton and New M-Tech will supply Kmart, either
through the Company or other manufacturers, with a broad range of small
electrical appliances, consumer electronics and telephone products under
the White-Westinghouse brand name. Kmart will be the exclusive discount
department store to market these White-Westinghouse products. The Company
has entered into an agreement guaranteeing the performance of Salton and
New M-Tech under the Kmart contract.
NOTE R - MARKETING COOPERATION AGREEMENT
The Company has entered into various agreements pursuant to the Marketing
Cooperation Agreement executed as part of the 1996 acquisition of Salton.
In the fourth quarter of 1996, the Company entered into a license
agreement, pursuant to which, it holds the exclusive world-wide rights to
use the Farberware name on a broad range of small electric products. Under
the Company's marketing cooperation agreement with Salton, Salton is to be
the exclusive distributor of the Farberware products. The license agreement
expires December 31, 2095 and calls for quarterly royalty payments of
10-percent of net sales as defined in the agreement.
On April 30, 1997, the parties entered into an agreement under which fees
are paid to the Company in consideration of its efforts in connection with
the supply contract with Kmart.
Fees earned by the Company under various marketing arrangements with its
joint ventures totaled $3.3 million for 1997, and are classified as Sales
and Other Revenues. No such fees were earned in 1996.
NOTE S - EXTRAORDINARY ITEM
On March 27, 1997, the Company paid $4,500,000 to settle the lawsuit filed
in April 1994 by Izumi relating to the Phillips settlement in 1992. An
accrual of $5,300,000, including $800,000 in estimated legal expenses, was
recorded as of December 31, 1996. The transaction resulted in an after tax
charge of $3,500,000 and has been recorded as an extraordinary item, to
correspond with the extraordinary gain recorded from the settlement in
1992.
29
<PAGE> 63
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL DATA
QUARTERLY FINANCIAL DATA (UNAUDITED)
The quarterly results for the years 1997 and 1996 are set forth in the following
tabulation. (In Thousands)
<TABLE>
<CAPTION>
Net Earnings
Gross Earnings (Loss)
Sales Profit (Loss) Per Share
--------------- --------------- -------------- ---------
<S> <C> <C> <C> <C>
1997
First quarter $ 51,412 $ 10,819 $ 321 $ .02
Second quarter 60,063 13,006 1,941 .10
Third quarter 79,976 17,959 8,517 .43
Fourth quarter 70,434 22,54 9,056 .45
--------------- --------------- --------------- ----
Total $ 261,885 $ 64,378 $ 19,835 $ 1.00
=============== =============== =============== ======
1996
First quarter $ 40,440 $ 8,603 $ 296 $ .02
Second quarter 39,503 8,349 (442) (.03)
Third quarter 56,181 10,415 1,701 .10
Fourth quarter 60,880 12,358 (1,104) * (.06)
--------------- --------------- --------------- -----
Total $ 197,004 $ 39,725 $ 451 $ .03 *
=============== =============== =============== =====
</TABLE>
* Differs by $.01 from earnings per share for the year-ended 1996, due to the
effect of the change in common shares and common equivalent shares
outstanding from quarter to quarter. Includes an after tax extraordinary
charge for the settlement of the Izumi case of $3,500,000 or $.20 per
share.
QUARTERLY STOCK QUOTATIONS AND DIVIDENDS PER SHARE
The Company's common stock is traded on the New York Stock Exchange under the
symbol WND. High and low market prices and dividends paid per share in 1997 and
1996, by quarters, are as follows:
Market Price
--------------------- Cash
High Low Dividends
-------- ------ ----------
1997
----
Fourth quarter 26-11/16 19-5/8 $ -
Third quarter 24-1/8 16-1/4 -
Second quarter 16-9/16 12-7/8 .05
First quarter 14-5/8 12 .05
----------
$ .10
==========
1996
----
Fourth quarter 16-3/4 12-5/8 $ .05
Third quarter 15-3/8 11-1/4 .05
Second quarter 14-3/4 9-5/8 .05
First quarter 11 6-7/8 .05
----------
$ .20
==========
The approximate number of holders of common stock of the Company, as of December
31, 1997, was 1,400. This number does not include any adjustment for
stockholders owning common stock in the Depository Trust name or otherwise in
"Street" name, which the Company believes represents an additional 6,500
stockholders.
30
<PAGE> 64
WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- ----------------------- -------- --------
Additions
---------
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Description of Period Expenses Accounts Deductions Period
----------- --------- -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Reserves deducted from assets to which
they apply:
Allowance for possible losses on
accounts receivable $1,129,000 $ 433,000 $ 62,700(a) $ (513,400)(b) $1,111,300
========== ========== =========== ============= ==========
YEAR ENDED DECEMBER 31, 1996
Reserves duducted from assets to which
they apply:
Allowance for possible losses on
accounts receivable $1,158,000 $ 930,000 $ 4,000(a) $ (963,000)(b) $1,129,000
========== ========== =========== ============== ==========
YEAR ENDED DECEMBER 31, 1995
Reserves duducted from assets to which
they apply:
Allowance for possible losses on
accounts receivable $1,338,100 $ 894,700 $ 31,600(a) $ 1,106,400 (b) $1,158,000
========== ========== =========== ============== ==========
</TABLE>
(a) Recoveries of amounts previously written off against the reserve.
(b) Write-off of accounts receivable against the reserve.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,223,900
<SECURITIES> 0
<RECEIVABLES> 44,449,300
<ALLOWANCES> 1,111,300
<INVENTORY> 102,172,400
<CURRENT-ASSETS> 179,960,300
<PP&E> 87,528,400
<DEPRECIATION> 50,329,000
<TOTAL-ASSETS> 281,847,100
<CURRENT-LIABILITIES> 73,882,200
<BONDS> 2,036,900
0
0
<COMMON> 1,811,900
<OTHER-SE> 189,009,400
<TOTAL-LIABILITY-AND-EQUITY> 281,847,100
<SALES> 261,885,100
<TOTAL-REVENUES> 261,885,100
<CGS> 197,507,200
<TOTAL-COSTS> 197,507,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 433,000
<INTEREST-EXPENSE> 3,351,100
<INCOME-PRETAX> 20,758,300
<INCOME-TAX> 923,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 19,835,300
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,835,300
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.00
</TABLE>
