<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
---------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to ____________
Commission file number 0-10177
WINDMERE-DURABLE HOLDINGS, INC.
Exact name of Registrant as specified in its charter
FLORIDA 59-1028301
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5980 MIAMI LAKES DRIVE
MIAMI LAKES, FLORIDA 33014
(Address of principal executive offices)
Registrant's telephone number: (305) 362-2611
-------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title Of Each Class on which registered
------------------- -------------------
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 S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 16, 1998, the aggregate market value of the voting stock of
the Registrant (based on the closing price as reported by NYSE of $28.875) held
by non-affiliates of the Registrant was approximately $454,078,097.
As of March 16, 1998, the number of outstanding shares of Common Stock
of the Registrant was 18,704,390.
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<PAGE> 2
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(d) Financial Statement Schedules
The following financial statements of Salton/Maxim Housewares,
Inc., a fifty percent owned subsidiary, are filed hereby as required by
Regulation S-X.
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Salton/Maxim Housewares, Inc.
Mount Prospect, Illinois
We have audited the accompanying consolidated balance sheets of Salton/Maxim
Housewares, Inc. (the "Company") as of June 27, 1998 and June 28, 1997 and the
related consolidated statements of earnings, of stockholders' equity and of cash
flows for each of the three years in the period ended June 27, 1998. Our audits
also included the financial statement schedule listed in the Index at Item 14.
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Salton/Maxim Housewares, Inc. as of
June 27, 1998 and June 28, 1997 and the results of its operations and its cash
flows for each of the three years in the period ended June 27, 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As described in Note 16 to the consolidated financial statements, subsequent to
June 27, 1998, the Company entered into a new debt agreement, issued preferred
shares, repurchased approximately 50% of its outstanding common shares, and
entered into a definitive merger agreement for the acquisition of Toastmaster
Inc.
Deloitte & Touche LLP
September 3, 1998
Chicago, Illinois
2
<PAGE> 4
SALTON/MAXIM HOUSEWARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS JUNE 27, JUNE 28,
1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash $ 661,214 $ 2,612,871
Accounts receivable, less allowance:
1998--$3,000,000; 1997--$2,400,000 43,224,852 25,646,677
Inventories 76,505,088 41,967,801
Prepaid expenses and other current assets 2,940,624 3,717,062
Federal income taxes refundable 1,105,336
Deferred income taxes 4,605,222 1,734,414
------------- -------------
Total current assets 127,937,000 76,784,161
PROPERTY, PLANT AND EQUIPMENT:
Molds and tooling 16,787,126 14,827,525
Warehouse equipment 452,715 380,487
Office furniture and equipment 5,341,755 3,792,035
------------- -------------
22,581,596 19,000,047
Less accumulated depreciation (14,266,296) (10,684,016)
------------- -------------
8,315,300 8,316,031
INTANGIBLES, NET OF ACCUMULATED AMORTIZATION 5,145,000 4,880,006
NON-CURRENT DEFERRED INCOME TAXES 205,580
INVESTMENT IN WINDMERE COMMON STOCK 12,156,820
------------- -------------
TOTAL ASSETS $ 141,397,300 $ 102,342,598
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 50,475,078 $ 37,977,230
Accounts payable 18,960,008 17,361,238
Accrued expenses 7,234,506 2,856,512
Income taxes payable 6,499,342 93,085
Current portion-Subordinated Debt 500,000
------------- -------------
Total current liabilities 83,168,934 58,788,065
NON-CURRENT DEFERRED INCOME TAXES 517,000
DUE TO WINDMERE 4,932,730
------------- -------------
Total Liabilities 83,685,934 63,720,795
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized,
2,000,000 shares, no shares issued
Common Stock, $.01 par value; authorized, 20,000,000 shares; shares issued and
outstanding:
1998-13,099,644; 1997-13,029,144 130,996 130,291
Unrealized gains on securities available for sale 1,337,250
Additional paid-in capital 53,480,678 53,035,981
Less note receivable from stock issuance (10,847,620) (10,847,620)
Retained earnings (Deficit) 14,947,312 (5,034,099)
------------- -------------
Total stockholders' equity 57,711,366 38,621,803
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 141,397,300 $ 102,342,598
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 5
SALTON/MAXIM HOUSEWARES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $ 305,598,750 $ 182,806,323 $ 99,202,415
Cost of goods sold 179,375,466 121,590,232 66,923,141
Distribution expenses 12,327,187 7,808,631 5,856,477
------------- ------------- ------------
Gross profit 113,896,097 53,407,460 26,422,797
Selling, general and administrative expenses 84,216,473 42,944,341 21,342,872
------------- ------------- ------------
Operating income 29,679,624 10,463,119 5,079,925
Interest expense, net (5,333,109) (4,063,197) (3,934,325)
Costs associated with refinancing (1,132,814)
Realized gain on marketable securities 8,972,488
------------- ------------- ------------
Income before income taxes 32,186,189 6,399,922 1,145,600
Income tax expense (benefit) 12,204,778 2,000,764 (3,449,884)
------------- ------------- ------------
Net income $ 19,981,411 $ 4,399,158 $ 4,595,484
============= ============= ============
Weighted average common shares outstanding 13,062,465 12,840,279 6,508,572
Weighted average common and common
equivalent shares outstanding 13,506,263 13,082,254 6,628,236
Net income per common share: Basic $ 1.53 $ 0.34 $ 0.71
Net income per common share: Diluted $ 1.48 $ 0.34 $ 0.69
</TABLE>
See Notes To Consolidated Financial Statements
4
<PAGE> 6
SALTON/MAXIM HOUSEWARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
<TABLE>
<CAPTION>
Unrealized
Gains on Less Note
Securities Additional Receivable Retained Total
Common Held for Paid In from sales Earnings Stockholders'
Shares Stock Sale Capital of stock (Deficit) Equity
---------- ------- ---------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, July 1, 1995 6,508,572 $65,086 $29,292,946 $(14,028,741) $ 15,329,291
Net income for
fiscal 1996 4,595,484 4,595,484
---------- ------- ----------- ----------- ----------
BALANCE, June 29, 1996 6,508,572 65,086 29,292,946 (9,433,257) 19,924,775
Issuance of
common stock 6,508,572 65,085 23,650,352 $(10,847,620) 12,867,817
Issuance of warrants 82,303 82,303
Unrealized gains on
securities available
for sale $1,337,250 1,337,250
Employee stock option
shares exercised 12,000 120 10,380 10,500
Net income fiscal 1997 4,399,158 4,399,158
---------- -------- ---------- ----------- ------------ ------------ -----------
BALANCE, June 28, 1997 13,029,144 130,291 1,337,250 53,035,981 (10,847,620) (5,034,099) 38,621,803
Issuance of
common stock, net
of issuance costs 25,000 250 300,531 300,781
Sale of securities (1,337,250) (1,337,250)
Stock option shares
exercised 45,500 455 144,166 144,621
Net income fiscal 1998 19,981,411 19,981,411
---------- -------- ---------- ----------- ------------ ------------ -----------
BALANCE, June 27, 1998 13,099,644 $130,996 $53,480,678 $(10,847,620) $ 14,947,312 $57,711,366
========== ======== ========== =========== ============= ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE> 7
SALTON/MAXIM HOUSEWARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 19,981,411 $ 4,399,158 $ 4,595,484
Adjustments to reconcile net income to net cash
(used in) operating activities:
Gain on sale of marketable securities (8,972,488)
Deferred income taxes (1,428,170) 822,332 (3,482,384)
Depreciation and amortization 4,300,647 3,136,060 2,195,510
Changes in assets and liabilities, net of acquisition:
Accounts receivable (17,578,175) (9,776,051) (2,395,175)
Inventories (34,537,287) (13,679,836) (8,847,133)
Prepaid expenses and other current assets 776,438 (1,783,056) (892,342)
Federal income tax refund 1,105,336 (1,105,336)
Accounts payable 1,598,770 7,304,043 4,650,026
Taxes payable 6,406,257 81,085 22,500
Accrued expenses 3,245,180 1,635,729 582,921
------------ ------------ -----------
Net cash used in operating activities (25,102,081) (8,965,872) (3,570,593)
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,564,910) (4,608,389) (4,279,838)
Proceeds from the sale of marketable securities 19,072,000
Block acquisition and related payments (1,739,280)
------------ ------------ -----------
Net cash provided by (used in) investing
activities 14,507,090 (6,347,669) (4,279,838)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit 12,497,848 13,881,848 6,234,938
(Repayment) proceeds from subordinated debt
and due to Windmere (5,432,730) 4,515,731 2,670,955
Offering costs associated with stock issue (485,650)
Common stock issued 445,402 10,500
Payment for product line acquisitions (814,939)
Financing costs 1,132,814 (242,389)
------------ ------------ -----------
Net cash provided by financing activities 8,643,334 17,922,429 7,848,565
------------ ------------ -----------
NET (DECREASE) INCREASE IN CASH (1,951,657) 2,608,888 (1,866)
CASH - Beginning of Year 2,612,871 3,983 5,849
------------ ------------ -----------
CASH - End of Year $ 661,214 $ 2,612,871 $ 3,983
============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 5,893,266 $ 3,939,322 $ 3,510,123
Income taxes $ 5,798,521 $ 1,697,500 $ 10,000
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
During fiscal 1997, a long-term debt obligation of $3,254,286 was canceled by
the consummation of a transaction with Windmere-Durable Holdings,
Inc.("Windmere"). In addition, the Company received a $10,847,620 note
receivable and 748,112 shares of Windmere common stock in exchange for 6,508,572
newly issued shares of common stock of the Company.
See Notes to Consolidated Financial Statements.
6
<PAGE> 8
SALTON/MAXIM HOUSEWARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Salton/Maxim Housewares, Inc.("SMHI") and its subsidiaries ("Salton" or
the "Company") is a leading marketer of a broad range of kitchen and home
appliances, personal and beauty care appliances and decorative quartz wall and
alarm clocks under the brand names of Salton(R), Maxim(R), Breadman(R),
Juiceman(R), Salton Creations(R), Salton Time(R), White-Westinghouse(R) and
Farberware(R). The Company also designs and markets a broad range of tabletop
products, including china, crystal and glassware, under the brand names
Block(R)China, Atlantis(R)Crystal and Gear.(R)
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of SMHI and its subsidiaries, Home Creations Direct, Ltd.
and Salton Hong Kong, Ltd. Salton Hong Kong, Ltd. is a foreign corporation which
was organized under the laws of Hong Kong in fiscal year 1997. Intercompany
balances and transactions are eliminated in consolidation.
USE OF ESTIMATES - In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant estimates
include the allowance for doubtful accounts, reserve for returns and allowances,
and depreciation and amortization, among others.
ACCOUNTING PERIOD - The Company's fiscal year ends on the Saturday
closest to June 30. The fiscal years ended June 27, 1998, June 28, 1997 and June
29, 1996 each consisted of 52 weeks.
INVENTORIES - Inventories are stated at the lower of cost or market.
Cost is determined on the first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
stated at cost. Expenditures for maintenance costs and repairs are charged
against income. Depreciation is provided on the straight-line basis over the
estimated useful lives of the assets, not to exceed 5 years. For tax purposes,
assets are depreciated using accelerated methods.
INTANGIBLE ASSETS - Intangible assets, which are amortized over their
estimated useful lives, consist of:
USEFUL LIFE JUNE 27, JUNE 28,
(IN YEARS) 1998 1997
------------ ---------- ----------
Goodwill 10-40 $2,116,773 $1,926,454
Financing and organization costs 2-5 109,231 171,778
Patents and trademarks 5-20 2,918,996 2,781,774
---------- ----------
Intangible assets, net $5,145,000 $4,880,006
========== ==========
Accumulated amortization of intangible assets was $4,722,608 at
June 27, 1998, and $3,770,866 at June 28, 1997.
LONG-LIVED ASSETS - Long-lived assets are reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. If such review indicates
that the carrying amount of long-lived assets is not recoverable, the carrying
amount of such assets is reduced to estimated recoverable value.
7
<PAGE> 9
REVENUE RECOGNITION - The Company recognizes revenues when goods are
shipped to its customers.
DISTRIBUTION EXPENSES - Distribution expenses consist primarily of
freight, warehousing, and handling costs of products sold.
ADVERTISING - The Company sponsors various programs under which it
participates in the cost of advertising and other promotional efforts for
Company products undertaken by its retail customers. Advertising and promotion
costs associated with these programs are recognized in the period in which the
advertising or other promotion by the retailer occurs.
The Company's tradenames and, in some instances, specific products,
also are promoted from time to time through direct marketing channels, primarily
television. Advertising and promotion costs are expensed in the period in which
direct customer response occurs.
INCOME TAXES - The Company accounts for income taxes using the asset
and liability approach. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
management does not expect to be realized.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE - The Company adopted
Statement of Financial Accounting Standards No. 128-Earnings per Share (SFAS
128) in fiscal 1998. Basic net income per common share is computed based upon
the weighted average number of common shares outstanding. Diluted net income per
common share is computed based upon the weighted average number of common shares
outstanding, adjusted for dilutive common stock equivalents applying the
treasury stock method. All earnings per share data presented in these financial
statements have been restated to conform with SFAS 128.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying values of financial
instruments included in current assets and liabilities approximate fair values
due to the short-term maturities of these instruments. During fiscal 1997, the
investment in Windmere common stock was accounted for as "available for sale"
and was carried at fair value. The stock was sold during fiscal 1998. See note 2
"Windmere Transaction."
ACCOUNTING PRONOUNCEMENTS - The Company adopted Statement of Financial
Accounting Standards No. 128-Earnings per Share in Fiscal 1998. In June 1997,
the FASB issued Statement of Financial Accounting Standard No. 130 (SFAS 130),
"Reporting Comprehensive Income," No. 131 (SFAS 131), "Disclosures About
Segments of an Enterprise and Related Information," No. 132 (SFAS 132),
"Employer's Disclosures about Pensions and other Post Retirement Benefits which
Revises Current Disclosure Requirements for Employers' Pensions and other
Retiree Benefits" and No. 133 (SFAS 133), "Accounting for Derivative Instruments
and Hedging Activities." 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 fiscal 1999. The Company has not assessed
the effect that these new standards will have on its consolidated financial
statements.
2. WINDMERE TRANSACTION
On July 11, 1996, the Company consummated a transaction (the "Windmere
Transaction") with Windmere-Durable Holdings, Inc. ("Windmere"), pursuant to a
Stock Purchase Agreement dated February 27, 1996, as amended (the "Stock
Purchase Agreement"). Windmere is a corporation engaged principally in
manufacturing and distributing a wide variety of personal care products and
household appliances. Pursuant to the Stock Purchase Agreement, Windmere
purchased from the Company 6,508,572 newly issued shares of Common Stock (the
"Purchase"), which represented 50% of the outstanding shares of Common Stock of
the Company on February 27, 1996 after giving effect to the Purchase. As
consideration for the purchase, Windmere paid the Company: (i) $3,254,286 in
cancellation of a loan, as described below; (ii) a subordinated promissory note
in the aggregate principal amount of $10,847,620 (the "Note"), which Note is
payable July 11, 2001, bears interest at 8%, payable quarterly, and is secured
by certain assets of Windmere and its domestic subsidiaries and guaranteed by
such domestic subsidiaries; and (iii) 748,112 shares of Windmere's common
8
<PAGE> 10
stock. Windmere's common stock is traded on the New York Stock Exchange. A
portion of the consideration for the Purchase was paid by the cancellation of
the Company's obligation to repay a loan in the principal amount of $3,254,286
which Windmere had made to the Company in April 1996. Windmere was also granted
an option to purchase up to 485,000 shares of Common Stock at $4.83 per share,
which option was exercisable only if and to the extent that options to purchase
shares of Common Stock which were outstanding on February 27, 1996 were
exercised. Accordingly, Windmere exercised options to purchase 26,500 shares of
Common Stock during 1998.
During fiscal 1998 the Company sold 748,112 shares of Windmere's common
stock, realizing a gain of $8,972,488.
Subsequent to year-end the Company repurchased its common shares held
by Windmere. See note 16 "Subsequent Events."
3. BLOCK CHINA ACQUISITION
On July 1, 1996, the Company acquired substantially all of the assets
and certain liabilities of Block China Corporation, a tabletop product company,
in a transaction accounted for as a purchase. The Block China Division of the
Company designs and markets tabletop products, including china, crystal and
glassware. The consideration paid by the Company consisted of $1,485,000 in cash
and a warrant to purchase 25,000 shares of Common Stock with an exercise price
of $4.75. The consideration also included an earn-out of up to $500,000 and
150,000 shares of Common Stock based on financial performance over a three-year
period of the Division. The operating results of Block China before its
acquisition by the Company are not material. During 1998, the Company paid
$83,333 and issued 25,000 shares of common stock to Block China under the
earn-out.
4. REVOLVING LINE OF CREDIT AND LETTERS OF CREDIT
During the 1998 fiscal year, the Company increased its revolving line of
credit (the "Facility") with a commercial lender (the "Lender") from $50,000,000
to $75,000,000. Borrowings under this Facility bore interest at 1% over the
Lender's established prime rate, payable monthly, and included a provision which
provided the Company with the ability to reduce its borrowing rate, based on the
London InterBank Offered Rate (LIBOR), on up to 75% of outstanding borrowings.
The Facility had an expiration date of September 30, 2000. Under the terms of
the Facility, the Company must pay fees and related expenses to the Lender upon
early termination. Subsequent to year end, the Company entered into a new credit
agreement (the "New Credit Agreement") with an investment banking firm described
in note 16 "Subsequent Events." Accordingly, the Company accrued $1,132,814 in
termination fees and related expenses.
The Facility was secured by a first lien on substantially all the
Company's assets. Credit availability was based on a formula related to trade
accounts receivable, inventories and outstanding letters of credit and it
contained restrictive financial covenants, the more significant of which
required the Company to maintain specified ratios of total liabilities to net
worth, minimum tangible net worth, and minimum earnings before interest, taxes,
depreciation and amortization. Other covenants also limited the Company's
activities in mergers or acquisitions and sales of substantial assets.
Compliance with these covenants effectively restricted the ability of the
Company to pay dividends, and also required the Company to apply cash receipts
to pay down borrowings under the Facility.
Information regarding short-term borrowings under the Facility is:
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1998 1997
<S> <C> <C>
Balance at end of fiscal period $50,475,078 $37,977,230
Interest rate at end of fiscal period 9.43% 10.5%
Maximum amount outstanding at any month-end $68,521,548 $43,632,702
Average amount outstanding $56,374,193 $35,191,494
Weighted average interest rate during fiscal period 9.48% 10.5%
Outstanding letters of credit at end of fiscal period $5,566,840 $2,915,815
</TABLE>
9
<PAGE> 11
5. SUBORDINATED DEBT AND DUE TO WINDMERE
SUBORDINATED DEBT
The Company had 10% subordinated notes payable aggregating $500,000.
The notes were repaid in fiscal 1998.
WINDMERE TRANSACTIONS AND DUE TO WINDMERE
The Company owed Windmere, including Durable Electrical Metal Factory,
Ltd., a wholly owned subsidiary of Windmere ("Durable"), approximately
$4,838,000 at June 27, 1998, primarily for trade accounts payable and interest.
The Company had amounts due to Windmere, including Durable, of
approximately $9,141,000, including notes payable of $4,932,730 at June 27,
1997. These amounts primarily represented working capital advances by Windmere
to the Company to fund the development of the White-Westinghouse(R) and
Farberware(R) product lines, as well as interest and trade accounts payable.
The Company and Windmere entered into a Marketing Cooperation Agreement
on July 11, 1996 (the "Marketing Cooperation Agreement"). Pursuant to this
agreement, until Windmere's interest in the Company is less than 30% for at
least ten consecutive days, each of the Company and Windmere has agreed to
participate in a variety of mutually satisfactory marketing cooperation efforts
designed to expand the market penetration of each party. Consequently, the
Company entered into a letter agreement dated April 30, 1997 (the "Letter
Agreement") with Windmere. The Letter Agreement provides that the Company will
pay to Windmere a fee in consideration of Windmere's marketing cooperation
efforts in connection with the Company's supply contract with Kmart and
Windmere's guarantee of the Company's obligations under such contract. See note
16 "Subsequent Events."
6. CAPITAL STOCK
The Company has authorized 20,000,000 shares of $.01 par value common
stock, at June 27, 1998 there were 13,099,644 shares issued and outstanding. As
more fully described in Note 2 "Windmere Transaction" on July 11, 1996, Windmere
purchased from the Company 6,508,572 newly issued shares of common stock which
represented 50% of the outstanding shares of common stock of the Company. During
fiscal 1998, Windmere exercised its option to buy 26,500 shares of Salton common
stock.
The Company has authorized 2,000,000 shares of $.01 par value preferred
stock. At June 27, 1998, no shares of preferred stock were issued.
Subsequent to year end, the Company repurchased the 6,535,072 shares of
common stock issued to Windmere and issued 40,000 shares of preferred stock as
described in note 16 "Subsequent Events."
7. EARNINGS PER SHARE
(in thousands, except earnings per share)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
June 27,1998 June 28,1997 June 29,1996
------------ ------------ ------------
<S> <C> <C> <C>
Net Income* $ 19,981 $ 4,399 $ 4,595
Average common shares outstanding 13,062 12,840 6,509
Earnings per share-basic $ 1.53 $ 0.34 $ 0.71
Dilutive stock options 444 242 119
Average common and common
equivalent shares outstanding 13,506 13,082 6,628
Earnings per share-diluted $ 1.48 $ 0.34 $ 0.69
</TABLE>
* Net income is the same for purposes of calculating basic and diluted EPS
10
<PAGE> 12
Options to purchase 141,440, 130,000 and 130,000 shares of common stock
at prices of $12.25, $12.00 and $12.00 per share were outstanding at June 27,
1998, June 28, 1997 and June 29, 1996, respectively, but were not included in
the computation of diluted EPS because the options exercise prices were greater
than the average market price of the common shares.
8. PROFIT SHARING PLAN
The Company has a 401 (k) defined contribution plan that covers
eligible employees. The employees are eligible for benefits upon completion of a
specified number of years of service. Under the terms of the plan the company
currently matches a portion of the employee contributions. The Company's
discretionary matching contribution is based on a portion of a maximum of 6% of
participants' eligible wages, as defined. The Company's matching contributions
were approximately $97,000, $69,000, and $66,136 in 1998, 1997, and 1996,
respectively.
9. STOCK OPTION PLANS
In October 1995, SFAS No. 123, "Accounting For Stock-Based
Compensation," was issued and is effective for financial statements for fiscal
years beginning after December 15, 1995. As permitted by the statement, the
Company will continue to measure compensation cost for stock option plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting For
Stock Issued to Employees." Accordingly, no compensation cost has been
recognized for the Company's fixed stock option plans. Had compensation cost for
the Company's stock option plans been determined consistent with the fair value
method outlined in SFAS No. 123, the impact on the Company's net income and
earnings per common share would have been as follows:
<TABLE>
<CAPTION>
Net Income 1998 1997
---- ----
<S> <C> <C>
As reported $19,981,411 $4,399,158
Pro forma $18,940,500 $4,192,582
Net income per common share: Basic
As reported $ 1.53 $ 0.34
Pro forma $ 1.45 $ 0.33
Net income per common share: Diluted
As reported $ 1.48 $ 0.34
Pro forma $ 1.40 $ 0.32
</TABLE>
Options to purchase common stock of the Company have been granted to
employees under the 1992 and 1995 stock option plans at prices equal to the fair
market value of the stock on the dates the options were granted. Options have
also been granted to non-employee directors of the company, which are
exercisable one year after the date of grant. All options granted expire 10
years from the date of grant.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The following assumptions were
used during the respective years to estimate the fair value of options granted:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Dividend yield 0.0% 0.0%
Expected volatility 61.74% 65.96%
Risk-free interest rate 5.38% 6.11%
Expected life of options 7.42 years 7.92 years
</TABLE>
In addition, on July 11, 1996 Windmere was granted an option to
purchase up to 485,000 shares of common stock at $4.83 per share. This option is
exercisable only if and to the extent that options to purchase shares of common
stock which were outstanding on February 27, 1996 are exercised. During fiscal
1998, Windmere exercised their option to purchase 26,500 shares of Salton common
stock. Subsequent to year-end, the Company repurchased the remaining options.
See note 16 "Subsequent Events." A summary of the
11
<PAGE> 13
Company's fixed stock options for the fiscal years ended June 27, 1998 and June
28, 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
Weighted- Weighted-
Shares Average Shares Average
(000) Exercise Price (000) Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 966 $ 4.90 485 $ 4.83
Granted 206 10.82 493 4.88
Exercised (46) 3.11 (12) .88
Expired
Forfeited
------ -------------- ------ ---------
Outstanding at end of year 1,126 $ 6.06 966 $ 4.90
Options exercisable at end
of year 1,118 $ 6.05 958 $ 4.88
Weighted-average fair value of
options granted during the year $ 8.14 $ 4.54
</TABLE>
The following information summarizes the stock options outstanding at
June 27, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Shares Contractual Exercise Shares Exercise
Range of Exercise Prices (000) Life (years) Price (000) Price
------------------------ ------ ------------ --------- ------ ---------
<S> <C> <C> <C> <C> <C>
$0.875 - $2.500 300 6.84 $2.12 300 $2.12
$3.438 - $5.375 490 7.91 4.83 482 4.83
$8.000 - $12.250 336 7.20 11.38 336 11.38
------------------------ ------ ------------ --------- ------ ---------
$0.875 - $12.250 1,126 N/A N/A 1,118 $6.05
</TABLE>
10. RELATED PARTY TRANSACTIONS
The Company purchased inventory from Durable of approximately
$27,068,000, $23,511,000, and $3,200,000 in fiscal years ended June 27, 1998,
June 28, 1997, and June 29, 1996, respectively.
The Company purchased inventory and paid commissions to Markpeak, Ltd.,
a Hong Kong company, of approximately $15,699,000 and $272,000 respectively in
1998, $7,815,000 and $432,000, respectively in 1997, and $10,233,000 and
$739,000, respectively in 1996. A director of the Company is the Managing
Director of Markpeak, Ltd.
The Company paid Shapiro, Devine and Craparo, Inc. ("SDC"), a
manufacturers representation firm, commissions of approximately $290,000,
$241,000 and $160,000 in 1998, 1997 and 1996, respectively. A director of the
Company was a co-founder of SDC. At June 27, 1998, the Company owed SDC
approximately $38,000 for current commissions.
11. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under long-term
operating leases. Rental expense under all leases was approximately $1,564,000,
$1,183,000, and $665,000, for the fiscal years ended June 27, 1998, June 28,
1997, and June 29, 1996, respectively.
12
<PAGE> 14
The future minimum rental commitments as of June 27, 1998 were as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Fiscal Year Ending
1999 $2,666,095
2000 2,075,056
2001 1,938,911
2002 915,798
2003 36,400
Thereafter 157,733
----------
Total $7,789,993
==========
</TABLE>
The Company has employment agreements with its three executive officers
that are in effect until June 30, 2001. Such agreements provide for minimum
salary levels as well as for incentive bonuses that are payable if the Company
achieves specified target performance goals. The agreements also provide for
lump sum severance payments upon termination of employment under certain
circumstances. The Company's aggregate commitment for future salaries at June
30, 1998, excluding bonuses, was approximately $1,350,000.
The Company has license agreements with White Consolidated Industries,
Inc. ("White Consolidated"), which require minimum royalty payments through the
year 2011. The current level of royalty payments are in excess of the minimum
requirements. The Company also has various license agreements with other parties
for periods usually not exceeding three years. The agreements are then typically
renewable upon mutual consent. These license agreements require royalty payments
based on the sales of licensed product in the period. Total royalties paid under
these agreements, including the White Consolidated Industries, Inc. agreement,
were $20,266,000 in fiscal year 1998, $6,300,000 in fiscal year 1997 and
$1,600,000 in fiscal year 1996.
12. LEGAL PROCEEDINGS
The Company, White Consolidated, and certain other parties have been
named as defendants in litigation filed by Westinghouse Electric Corporation
(now known as CBS Corporation ("CBS")) in the United States District Court for
the Western District of Pennsylvania on December 18, 1996. The action arises
from a dispute between CBS and White Consolidated over rights to use the
"Westinghouse" trademark for consumer products, based on transactions between
CBS and White Consolidated in the 1970's and the parties' subsequent conduct.
The action seeks, among other things, an injunction enjoining the defendants
from using the trademark, unspecified damages and attorneys' fees. Pursuant to
the Company's license agreements with White Consolidated, White Consolidated is
defending the Company and is obligated to indemnify the Company from and against
any and all claims, losses and damages arising out of the action, including the
costs of litigation. An adverse decision in the litigation could result in
Salton being limited in further use of the White-Westinghouse(R) name and
therefore the possible termination or significant modification of the supply
contract between Salton and Kmart Corporation described in note 13.
The Company is a party to various other legal actions and proceedings
incident to its normal business operations. Management believes that the outcome
of such litigation will not have a material adverse effect on its financial
condition or annual results of operations.
13. SUPPLY CONTRACT AND MAJOR CUSTOMERS
The Company entered into a major supply contract with Kmart Corporation
("Kmart") on January 31, 1997. Under the contract, the Company supplies Kmart
with small kitchen appliances, personal care products, heaters, fans and
electrical air cleaners and humidifiers under the White-Westinghouse(R) brand
name. Sales to Kmart approximated 19% and 16% of total net sales of the Company
in fiscal years 1998 and 1997, respectively.
The Company's net sales in the aggregate to its five largest customers
during the fiscal years ended June 27, 1998, June 28, 1997 and June 29, 1996
were 47%, 47% and 55% of total net sales in these periods, respectively. In
addition to Kmart, one customer
13
<PAGE> 15
accounted for 7%, 9%, and 15% of total net sales during the fiscal years ended
June 27, 1998, June 28, 1997, and June 29, 1996, respectively. Another customer
accounted for 8%, 9%, and 13%, respectively, over the same fiscal years.
Although the Company has long-established relationships with many of
its customers, with the exception of Kmart Corporation, it does not have
long-term contracts with any of its customers. A significant concentration of
the Company's business activity is with department stores, upscale mass
merchandisers, specialty stores, and warehouse clubs whose ability to meet their
obligations to the Company is dependent upon prevailing economic conditions
within the retail industry.
14. INCOME TAXES
Federal, state and foreign taxes were approximately as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended
June 27,1998 June 28,1997 June 29,1996
------------ ------------ ------------
<S> <C> <C> <C>
Federal
Current $ 10,080,000 $ 371,000 $ 32,000
Deferred (1,134,000) 822,000 (2,711,000)
State
Current 2,699,000 303,000
Deferred (294,000) (771,000)
Foreign
Current 854,000 505,000
Deferred ------------ --------------- ------------
Total $ 12,205,000 $ 2,001,000 $ (3,450,000)
============ =============== ============
</TABLE>
Deferred taxes based upon differences between the financial statement
and tax bases of assets and liabilities and available tax carryforwards
consisted of:
<TABLE>
<CAPTION>
Fiscal Year Ended
June 27, 1998 June 28, 1997
------------- -------------
<S> <C> <C>
Allowance for doubtful accounts $1,309,065 $ 960,000
Depreciation and amortization (1,099,679) (1,060,680)
Other deferred items, net 175,940 (302,415)
Net operating loss carry-forwards 1,764,253 2,349,579
Inventory reserves and capitalization 1,938,643 713,568
Unrealized gains on securities available for sale -- (720,058)
---------- ----------
Net deferred tax asset $4,088,222 $1,939,994
========== ==========
</TABLE>
During 1996, the Company re-assessed the measurement of deferred tax
assets based on available evidence and concluded that a valuation allowance was
unnecessary. Accordingly, a valuation allowance of $3,463,066 was eliminated in
the fourth quarter of fiscal 1996.
The Company has net loss carry-forwards at June 27, 1998 expiring as
follows:
<TABLE>
<CAPTION>
YEAR CARRY-FORWARD EXPIRES AMOUNT
-------------------------- ------
<S> <C> <C>
2008 $1,273,000
2009 2,665,000
2110 60,000
2111 45,000
----------
Total $4,043,000
==========
</TABLE>
14
<PAGE> 16
As a result of certain transactions, the Company's ability to utilize
its net operating loss carryforwards to offset otherwise taxable income is
limited annually under Internal Revenue Code Section 382. The amount of such
annual limitation is approximately $2,000,000.
A reconciliation of the statutory federal income tax rate to the
effective rate was as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------
June 27, June 28, June 29,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Effective state tax rate 4.9 4.8 4.8
Permanent differences 0.3 2.3
Effect of foreign tax rate (2.1) (8.8)
Utilization of operating loss carryforwards (34.6)
Change in valuation allowance (296.9)
Other (0.2) (2.0) (9.4)
---- ---- ------
Effective income tax rate 37.9% 31.3% (301.1)%
==== ==== =======
</TABLE>
U.S. income taxes were not provided on certain unremitted earnings of
Salton Hong Kong, Ltd. which the Company considers to be permanent investments.
The cumulative amount of U.S. income taxes which have not been provided totaled
approximately $854,000 at June 27, 1998.
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Unaudited quarterly financial data is as follows (amounts in thousands,
except per share data).
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1998
<S> <C> <C> <C> <C>
Net sales $65,773 $102,153 $68,099 $69,574
Gross profit 24,797 35,029 26,159 27,911
Net income 4,124 5,448 2,778 7,631
Earnings per share: Basic 0.32 0.42 0.21 0.58
Earnings per share: Diluted 0.31 0.40 0.21 0.56
1997
Net sales $34,862 $58,837 $41,690 $47,417
Gross profit 9,689 18,027 12,582 13,109
Net income (loss) 1,129 3,977 (677) (30)
Earnings (loss) per share:Basic 0.09 0.31 (0.05) (0.00)
Earnings (loss) per share: Diluted 0.09 0.30 (0.05) (0.00)
</TABLE>
16. SUBSEQUENT EVENTS
THE NEW CREDIT AGREEMENT
The Company entered into the New Credit Agreement dated as of July 27,
1998 with an investment banking firm. This agreement provides for $215.0 million
in senior secured credit facilities consisting of a Tranche A $90.0 million term
loan, a $75.0 million Delayed Draw Term Loan, and a five year $50.0 million
senior secured revolving credit facility maturing on July 27, 2003. In addition,
the New Credit Agreement allows the Company to undertake a subordinated notes
offering of up to $125 million. Proceeds of the offering, if undertaken, would
be required to be used to repay the Tranche A $90 million term loan, amounts
outstanding, if any, under the Delayed Draw Term Loan and amounts outstanding
under the senior secured Revolving Credit Facility, respectively, up to a total
15
<PAGE> 17
of $115 million. Any excess amount would be available as cash to the Company. On
July 28, 1998, the Company borrowed the Tranche A term loan in order to complete
the repurchase subsequently described in this note.
The Company's borrowings under the New Credit Agreement are at an
established base rate (equivalent to the prime rate of interest) plus an
applicable margin or, at the Company's election, a eurodollar rate (equivalent
to the LIBOR rate) plus an applicable margin based on a range of ratios of total
debt to earnings before interest, taxes, depreciation and amortization. At July
28, 1998, the base rate plus applicable margin was 9.6% and the eurodollar rate
plus applicable margin was 7.8%.
The New Credit Agreement contains certain limitations restricting
company activity and financial covenants, the most significant of which are, as
defined, minimum interest coverages, fixed charge coverages and maximum total
leverage.
The Tranche A term loan matures in twenty consecutive installments
commencing on September 30, 1998.
The future maturities are:
1999 $ 3,750,000
2000 5,000,000
2001 20,000,000
2002 25,000,000
2003 28,750,000
Thereafter 7,500,000
-----------
$90,000,000
===========
The commitment for the Delayed Draw Term Loan expires on July 27, 1999.
This loan, if drawn, matures in sixteen consecutive quarterly installments,
commencing on September 30, 1999. Future installment payments would be made
quarterly in accordance with the following table:
Installments Principal Amount
------------ ----------------
1 through 4 $ 2,500,000
5 through 12 5,000,000
13 through 16 6,250,000
In addition to the preceding maturity schedules, the Company is
required to make additional mandatory payments of 50% of the defined annual
excess cash flow of the Company, 100% of the net proceeds of any sale or
disposition of certain assets, and 100% of the net proceeds of the incurrence of
certain indebtedness. All such amounts are first applied to the prepayment of
outstanding term loans and secondly to the reduction of the Revolving Credit
Facility.
THE PREFERRED STOCK
On July 28, 1998, Salton also issued $40 million of convertible
preferred stock to a private investment firm in connection with a Stock Purchase
Agreement dated July 15, 1998. The convertible preferred stock is generally
non-dividend bearing and is convertible into 2,352,941 shares of Salton common
stock (reflecting a $17 per share conversion price). The holders of the
convertible preferred stock are entitled to one vote for each share of Salton
common stock that the holder would receive upon conversion of the convertible
preferred stock.
16
<PAGE> 18
In connection with the convertible preferred stock issuance, two
individuals representing the private investment firm were appointed to serve on
the Company's Board of Directors.
THE REPURCHASE
On July 28, 1998, the Company repurchased (the "Repurchase") 6,535,072
shares of Salton common stock owned by Windmere pursuant to a Stock Agreement
dated as of May 6, 1998 (the "Windmere Stock Agreement") by and among Salton,
Windmere and the executive officers of Salton. Prior to the Repurchase, Windmere
owned approximately 50% of Salton's outstanding common stock. The price for the
Repurchase was $12 per share in cash plus a $15 million subordinated promissory
note. The note, which has a term of six and one-half years and bears interest at
4% per annum payable annually, is subject to offsets of 5% of the total purchase
price paid by Salton for product purchases from Windmere and its affiliates
during the term of the note. The principal amount of the note is also subject to
reduction in the event Salton's supply agreement with Kmart is terminated for
any reason.
The Company (i) paid the cash portion of the purchase price for the
Repurchase, (ii) refinanced the Facility described in note 4 and (iii) paid
certain related fees and expenses in connection with the Repurchase with the net
proceeds from the Convertible Preferred Stock Issuance and borrowings of $90
million under the Tranche A term loan.
In connection with the Repurchase: (i) Windmere repaid in full its
promissory note in the principal amount of $10,847,620, that was issued to
Salton in July, 1996; (ii) Salton repurchased for approximately $3.3 million
Windmere's option to purchase up to 458,500 shares of Salton, that was granted
to Windmere in July, 1996; and (iii) Windmere and Salton agreed to continue
various commercial and other arrangements, including an agreement relating to
Salton's supply agreement with Kmart, subject to certain modifications.
Effective upon the closing of the Repurchase, each of the persons who
had been designated by Windmere to serve on Salton's Board of Directors resigned
from Salton's Board of Directors.
THE TOASTMASTER TRANSACTION
On August 26, 1998, the Company entered into a definitive merger
agreement ("Agreement") for the acquisition of Toastmaster Inc. The Agreement
provides for Toastmaster Inc. shareholders to receive $7.00 per share in cash,
for a total purchase price, including related costs, of approximately $60.0
million. The Company intends to finance the transaction through available credit
facilities.
The transaction is expected to close in the last calendar quarter of
1998, and is subject to, among other things, the approval of the holders of 66
2/3 % of the outstanding shares of Toastmaster Inc. common stock.
*****
17
<PAGE> 19
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WINDMERE-DURABLE HOLDINGS, INC.
By: /s/ HARRY SCHULMAN
-----------------------------
Harry Schulman, Vice President
Dated: October 22, 1998
