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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ---- SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended JUNE 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ---- SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 1-10177
WINDMERE-DURABLE HOLDINGS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 59-1028301
- ------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
5980 MIAMI LAKES DRIVE, MIAMI LAKES, FLORIDA 33014
-------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(305) 362-2611
---------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirement for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Class On August 11, 1998
----- ----------------------------
Common Stock, $.10 Par Value 21,857,811
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WINDMERE-DURABLE HOLDINGS, INC.
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Statements of Operations for the 3-4
Six Months Ended June 30, 1998 and
1997
Consolidated Balance Sheets as of 5-6
June 30, 1998, December 31, 1997
and June 30, 1997
Consolidated Statements of Cash Flows 7-8
for the Six Months Ended June 30, 1998
and 1997
Notes to Consolidated Financial Statements 9-18
Item 2. Management's Discussion and Analysis of 19-26
Financial Condition and Results of
Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 4. Submission of Matters to a Vote of
Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 27-29
SIGNATURES 30
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WINDMERE-DURABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Per Share Information)
Three Months Ended June 30,
---------------------------------------
1998 1997
---------------- ---------------
Sales and Other Revenues $ 62,568 100.0% $ 60,063 100.0%
Cost of Goods Sold 54,218 86.7 47,057 78.3
-------- ----- -------- -----
Gross Profit 8,350 13.3 13,006 21.7
Selling, General and
Administrative Expenses 12,826 20.5 11,650 19.4
Repositioning Charge 9,914 15.8 0 0
-------- ----- -------- -----
Operating Profit (Loss) (14,390) (23.0) 1,356 2.3
Other (Income) Expense
Interest Expense 1,426 2.3 709 1.2
Interest and Other Income (1,517) (2.4) (487) ( .8)
-------- ----- -------- -----
(91) (.1) 222 .4
-------- ----- -------- -----
Earnings (Loss) Before Equity in Net
Earnings (Loss) of Joint Ventures
and Income Taxes (14,299) (22.9) 1,134 1.9
Equity in Net Earnings
of Joint Ventures 751 1.2 611 1.0
-------- ----- -------- -----
Earnings (Loss) Before
Income Taxes (13,548) (21.7) 1,745 2.9
Provision (Benefit) for
Income Taxes (5,684) (9.1) (196) .3
-------- ----- -------- -----
Net Earnings (Loss) $ (7,864) (12.6)% $ 1,941 3.2%
======== ===== ======== =====
Earnings (Loss) Per Share - basic $ (.42) $ .11
======== ========
Earnings (Loss) Per Share -
diluted $ (.42) $ .10
======== ========
Dividends Per Common Share $ .00 $ .05
======== ========
The accompanying notes are an integral part of these statements.
3
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WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Per Share Information)
Six Months Ended June 30,
-------------------------------------
1998 1997
--------------- --------------
Sales and Other Revenues $117,962 100.0% $111,475 100.0%
Cost of Goods Sold 96,729 82.0 87,650 78.6
-------- ----- -------- -----
Gross Profit 21,233 18.0 23,825 21.4
Selling, General and
Administrative Expenses 24,532 20.8 21,347 19.1
Repositioning Charge 9,914 8.4 0 0
-------- ----- -------- -----
Operating Profit (Loss) (13,213) (11.2) 2,478 2.3
Other (Income) Expense
Interest Expense 2,471 2.2 1,333 1.2
Interest and Other Income (2,198) (1.9) (964) (.8)
-------- ----- -------- -----
273 .2 369 .4
-------- ----- -------- -----
Earnings (Loss) Before Equity in
Net Earnings of Joint
Ventures and Income Taxes (13,486) (11.4) 2,109 1.9
Equity in Net Earnings
of Joint Ventures 1,196 1.0 120 .1
-------- ----- -------- -----
Earnings (Loss) Before
Income Taxes (12,290) (10.4) 2,229 2.0
Provision (Benefit) for
Income Taxes (5,563) (4.7) (31) .0
-------- ----- -------- -----
Net Earnings (Loss) $ (6,727) (5.7)% $ 2,260 2.0%
========= ===== ======== =====
Earnings (Loss) Per Share - basic $ (.36) $ .13
======== ========
Earnings (Loss) Per Share - diluted $ (.36) $ .12
======== ========
Dividends Per Common Share $ .00 $ .10
======== ========
The accompanying notes are an integral part of these statements.
4
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WINDMERE-DURABLE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In Thousands)
6/30/98 12/31/97 6/30/97
-------- -------- --------
ASSETS
CURRENT ASSETS
Cash & Cash Equivalents $ 12,178 $ 8,224 $ 4,354
Accounts and Other Receivables,
less allowances of $4,448,
$1,111 and $1,146, respectively 84,212 43,338 35,646
Receivables from Affiliates (Note 2) 21,078 15,291 14,255
Inventories
Raw Materials 13,499 13,327 16,826
Work-in-process 22,191 21,062 21,704
Finished Goods 139,952 67,783 52,290
-------- -------- --------
Total Inventories 175,642 102,172 90,820
Prepaid Expenses 14,423 4,618 5,579
Refundable Income Taxes 4,131 5,043 -
Future Income Tax Benefits 974 1,274 3,404
-------- -------- --------
Total Current Assets 312,638 179,960 154,058
INVESTMENTS IN JOINT VENTURES
(NOTE 2) 44,796 43,091 35,860
PROPERTY, PLANT & EQUIPMENT -
AT COST, less accumulated
depreciation of $54,008,
$50,329 and $48,218, respectively 82,612 37,199 34,504
Notes Receivable from Affiliate 8,104 7,799 -
OTHER ASSETS 237,211 13,798 13,199
-------- -------- --------
TOTAL ASSETS $685,361 $281,847 $237,621
======== ======== ========
5
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WINDMERE-DURABLE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In Thousands)
Continued
6/30/98 12/31/97 6/30/97
------- -------- -------
LIABILITIES
CURRENT LIABILITIES
Notes and Acceptances Payable $ 14,747 $ 42,982 $ 29,269
Current Maturities of Long-Term
Debt 44,293 3,815 815
Accounts Payable and
Accrued Expenses 91,758 26,838 18,840
Deferred Income, current portion 265 247 330
-------- -------- --------
Total Current Liabilities 151,063 73,882 49,254
LONG-TERM DEBT 349,185 16,070 19,477
DEFERRED INCOME, less current
portion 990 1,074 83
STOCKHOLDERS' EQUITY (Note 3)
Special Preferred Stock -
authorized 40,000,000 shares of
$.01 par value; none issued
Common Stock - authorized
40,000,000 shares of $.10 par
value; shares outstanding:
18,800, 18,119 and
17,478, respectively 1,880 1,812 1,756
Paid-in Capital 41,260 41,024 36,431
Retained Earnings 142,360 149,087 131,513
Unrealized Foreign Currency
Translation Adjustment (1,377) (1,102) (893)
-------- -------- --------
Total Shareholders' Equity 184,123 190,821 168,807
-------- -------- --------
TOTAL LIABILITIES &
SHAREHOLDERS' EQUITY $685,361 $281,847 $237,621
======== ======== ========
The accompanying notes are an integral part of these statements.
6
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WINDMERE-DURABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
Six Months Ended June 30,
-------------------------
1998 1997
--------- --------
Cash flows from operating activities:
Net earnings $ (6,727) $ 2,260
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation of property, plant and
equipment 3,863 3,202
Amortization of intangible assets 496 561
Amortization of deferred income (248) (253)
Repositioning charge 17,600 0
Loss on disposal of fixed assets 609 0
Net change in allowance for losses
on accounts receivable 146 17
Equity in net loss of joint ventures (1,705) (422)
Changes in assets and liabilities
Decrease in accounts and other
receivables 2,608) 1,938
(Increase) decrease in inventories 4,236 (1,306)
Increase in prepaid expenses (5,613) (1,828)
(Increase) decrease in other assets (29,897) 585
Increase (decrease) in accounts payable
and accrued expenses 5,022 (7,495)
Increase in current and
deferred income taxes 1,394 (172)
Decrease in other accounts (275) (111)
--------- --------
Net cash used in
operating activities (8,491) (3,024)
Cash flows from investing activities:
Additions to property, plant and
equipment - net (7,499) (4,946)
Purchase of net assets - Household
Products Group (319,626) 0
Investments in joint ventures 0 (250)
Increase in receivable accounts
and notes from affiliates (6,092) (2,146)
--------- --------
Net cash used in
investing activities $(333,217) $ (7,342)
7
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WINDMERE-DURABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
Continued
Six Months Ended June 30,
-------------------------
1998 1997
--------- --------
Cash flows from financing activities:
Notes and acceptance $ (28,235) $ 7,386
Proceeds from issuance of long term debt 377,000 0
Payments of long-term debt (3,407) (408)
Exercise of stock options
and warrants 2,650 677
Cash dividends paid -- (1,714)
Payment of withholding tax on
stock option exercises (2,346) --
--------- --------
Net cash provided by
financing activities 345,662 5,941
--------- --------
Increase (decrease) in cash
and cash equivalents 3,954 (4,425)
Cash and cash equivalents at
beginning of year 8,224 8,779
--------- --------
Cash and cash equivalents at end
of quarter $ 12,178 $ 4,354
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 2,997 $ 830
Income taxes $ 3 $ 6
The accompanying notes are an integral part of these statements.
8
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WINDMERE-DURABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
Interim Reporting
In the opinion of the Company, the accompanying unaudited
consolidated financial statements contain all normal recurring
adjustments necessary to present fairly the Company's
financial position as of June 30, 1998 and 1997, and the
results of its operations and changes in financial position
for the interim periods. Results for interim periods should
not be considered indicative of results for a full year.
Reference should be made to the financial statements contained
in the registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
Reclassifications
Certain prior period amounts have been reclassified for
comparability.
Receivables from Affiliates
Receivables from Affiliates include accounts receivable which
arise in the ordinary course of business and are settled as
trade obligations, as well as the current portion of notes
receivable due from certain of the Company's joint venture
partners ("affiliates"). Notes receivable from these
affiliates are due upon demand and bear interest at prevailing
market interest rates.
Repositioning Charge
The Company in connection with its acquisition of the Black &
Decker Household Products Group incurred a one-time
repositioning charge totaling $17.6 million, $11.4 million
after tax, of which $7.7 million is included in cost of goods
sold. The charge is primarily non-cash and consists of
writeoffs of inventory, goodwill and tooling associated with
the Company's decision to exit certain personal care and other
non-core, low-margin products. Also included are costs
associated with the integration of the acquisition.
2. INVESTMENTS IN JOINT VENTURES
Investments in joint ventures consist of the Company's
interests in joint ventures, accounted for under the equity
method. Included are the Company's 50-percent interests in
Salton/Maxim Housewares, Inc.("Salton"), Newtech Electronics
Industries, Inc. ("Newtech"), Breakroom of Tennessee, Inc. and
Anasazi Partners, L.P. ("Anasazi"). The Company sold its
equity interest in Salton on July 28, 1998.
Summarized financial information of the unconsolidated
companies is as follows: (In Thousands)
9
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Six Six
Months Ended Year Ended Months Ended
6/30/98 12/31/97 6/30/97
------- -------- -------
EARNINGS
Sales $200,757 $467,549 $125,342
Gross Profit $ 52,448 $108,100 $ 29,804
Net Earnings $ 2,756 $ 15,885 $ 846
BALANCE SHEET
Current Assets $181,546 $169,300 $106,995
Noncurrent Assets $ 44,506 $ 38,781 $ 35,727
Current Liabilities $146,368 $132,550 $ 87,806
Shareholders' Equity $ 76,072 $ 61,581 $ 54,529
Notes receivable from affiliates totaled $11.7 million at June
30, 1998 which includes $8.1 million from the 1997 sale of one
of the Company's manufacturing subsidiaries.
All sales made by joint ventures in the three month periods
ended June 30, 1998 and 1997 were to entities other than
members of the consolidated group. Sales made by the Company
to the joint ventures in the three month periods ended June
30, 1998 and 1997 accounted for 16.7% and 16.1% of total
sales, respectively. Included in Receivables from Affiliates
at June 30, 1998 is $11.0 million due the Company from the
joint ventures for trade receivables.
Note: Profits earned by the Company's manufacturing subsidiary
on sales to joint ventures are included in the consolidated
earnings results and are not part of the above table.
3. ACQUISITION
On June 26, 1998 the Company consummated its acquisition of
the Black & Decker Household Products Group ("HPG") for $319.6
million in cash, and assumed certain related liabilities ("HPG
Acquisition"). The acquisition includes the cooking, garment
care, food preparation and beverage categories. The
acquisition has been accounted for as a purchase and
accordingly, the acquired assets and liabilities have been
recorded at their estimated fair values at the date of
acquisition. The excess of the consideration paid over the
estimated fair value of net assets acquired in the amount of
$207.3 million has been allocated between goodwill and other
intangible assets and is being amortized on a straightline
basis over periods of 6.5 to 40 years. As part of the HPG
Acquisition, the Company licensed the Black & Decker(R) brand
for use in marketing HPG products in North America, Central
America, South America (excluding Brazil), and the Caribbean
under a licensing arrangement with a minimum term of six and
one-half years. For the first five years, the license will be
on a royalty-free basis. Renewals, if mutually agreed upon,
will be at specified minimum royalty payments. In addition,
the Company purchased subbrands from The Black & Decker
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Corporation, including Toast 'R Oven(TM), ProFinish(R), Quick
'N Easy(R), Spacemaker(R), and KT Kitchentools(TM).
To facilitate the acquisition, the Company entered into credit
agreements providing it with an aggregate amount of $345
million in Senior Secured Credit Facilities and $185.0 million
in Senior Subordinated Loans. The Company subsequently repaid
the Senior Subordinated Loans in conjunction with the
completion of its public offerings described in Note 8.
The following unaudited proforma summary presents the
consolidated results of operations of the Company as if the
acquisition had occurred at the beginning of the 1998 period.
Data for the 1997 period is not readily available.
(In thousands - except per share data)
Six Months Ended June 30,
1998
----
Net Sales $241,262
Net Loss $(10,207) (1)
Loss Per Share $ (.55) (1)
-----------
(1) Includes a one-time, primarily non-cash repositioning
charge of $11.4 million or $.61 per share, after tax.
4. LONG-TERM DEBT
Senior Secured Credit Facilities
The Senior Credit Facilities, consist of a $160.0 million
Senior Secured Revolving Credit Facility, a $90.0 million
Tranche A Term Loan, a $75.0 million Tranche B Term Loan and a
$20.0 million Tranche C Term Loan. The Company paid the
purchase price of the HPG Acquisition, in part, with
borrowings of $185.0 million under the Term Loans and $7.0
million under the Senior Secured Revolving Credit Facility.
The Senior Secured Revolving Credit Facility includes (a) a
$20 million sublimit for the issuance of letters of credit and
(b) a $10 million sublimit for swing line loans (the "Swing
Line Loans"). All amounts outstanding under the Senior Secured
Revolving Credit Facility are payable on June 26, 2003. The
Tranche A Term Loan is payable in quarterly installments,
ranging from $2.0 million for the quarter ended March 31, 1999
to $6.5 million for the quarter ended March 31, 2003, and all
remaining amounts owing due the following quarter. The Tranche
B Term Loan is payable in annual installments of $630,000,
with all remaining amounts owing thereunder due June 26, 2004.
The Tranche C Term Loan was paid on July 27, 1998 with the
proceeds from the Company's offerings (Note 8).
Interest accrues on the loans made under the Senior Secured
Revolving Credit Facility and the Tranche A Term Loan (other
than Swing Line Loans) at either LIBOR (adjusted for any
reserves) or the base rate, which is the
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higher of NationsBank, N.A.'s prime rate and the federal funds
rate plus 0.50% (the "Base Rate"), at the Company's option,
plus a specified margin which will be determined by the
leverage ratio of the Company and its subsidiaries that
initially will be set at 2.25%, or the Base Rate, plus a
specified margin of 1.25%, at the Company's option. Interest
accrues on the Tranche B Term Loan at either LIBOR (adjusted
for any reserves) plus a specified margin which will be
determined by the leverage ratio of the Company and its
subsidiaries that initially is at 3.00%, or the Base Rate plus
a specified margin of 2.00%, at the Company's option. Swing
Line Loans will bear interest at the Base Rate.
The aggregate amount outstanding under the Senior Credit
Facilities will be prepaid by amounts equal to the net
proceeds, or a specified portion thereof, from certain
indebtedness and equity issuances and specified asset sales by
the Company and its subsidiaries, and by a specified
percentage of cash flow in excess of certain expenditures,
costs and payments. The Company may at its option reduce the
amount available under the Senior Credit Facilities to the
extent such amounts are unused or prepaid in certain minimum
amounts.
The Senior Credit Facilities are secured by a security
interest in substantially all of the real and personal
property, tangible and intangible, of the Company and its
domestic subsidiaries, as well as a pledge of all of the stock
of such domestic subsidiaries, a pledge of not less than 65%
of the voting stock of each direct foreign subsidiary of the
Company and each direct foreign subsidiary of each domestic
subsidiary of the Company, and a pledge of all of the capital
stock of any subsidiary of a subsidiary of the Company that is
a borrower under the Senior Credit Facilities. The Senior
Credit Facilities will be guaranteed by all of the current and
future domestic subsidiaries of the Company.
The Senior Credit Facilities contain a number of significant
covenants that, among other things, will restrict the ability
of the Company to dispose of assets, incur additional
indebtedness, prepay other indebtedness, pay dividends,
repurchase or redeem capital stock, enter into certain
investments or create new subsidiaries, enter into sale and
lease-back transactions, make certain acquisitions, engage in
mergers or consolidations, create liens, or engage in certain
transactions with affiliates, and that will otherwise restrict
corporate and business activities. In addition, under the
Senior Credit Facilities, the Company is required to comply
with specified financial ratios and tests, including a minimum
net worth test, a fixed charge coverage ratio, an interest
coverage ratio, a leverage ratio and a minimum EBITDA
requirement.
10% Senior Subordinated Notes Due 2008
The Senior Subordinated Notes were issued in July 1998, bear
interest at a rate of 10%, payable semiannually and mature on
July 31, 2008.
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The notes are general unsecured obligations of the Company and
rank subordinate in right of payment to all senior debt of the
Company and rank pari passu in right of payment to all future
subordinated indebtedness of the Company.
The notes may be redeemed at the option of the Company, in
whole or in part, on or after July 31, 2003 at various
redemption prices and up to 35% of the original aggregate
principal amount of the notes may be redeemed with the net
proceeds of an offering of common stock of the Company on or
before July 31, 2001.
The indenture pursuant to which the notes are issued contains
certain covenants that, among other things, limit the ability
of the Company to incur additional indebtedness and issue
preferred stock, pay dividends or make other certain
restricted payments, apply net proceeds from certain asset
sales, and sell stock of subsidiaries.
5. STOCKHOLDERS' EQUITY
Earnings per Share
In 1997, the Company adopted Financial Accounting Standards
No. 128 (SFAS 128), "Earnings Per Share." Basic shares for the
three month periods ended June 30, 1998 and 1997 were
18,765,412 and 17,515,271, respectively.
Included in diluted shares are common stock equivalents
relating to options, warrants and convertible debt of
1,941,892 for the three month period ended June 30, 1997. All
common stock equivalents have been excluded from the per share
calculation for the 1998 period, as the Company incurred a net
loss and their inclusion would have been anti-dilutive.
Stock Options
On April 30, 1998, the Company's Compensation Committee of its
Board of Directors approved the 1998 Stock Option Plan,
subject to ratification by the shareholders of the Company.
The 1998 plan provides for the granting of incentive stock
options to employees and nonqualified stock options to
employees, consultants and directors. A total of 3.0 million
shares have been reserved under the plan of which
approximately 2.5 million have been granted to date.
6. RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" (SFAS 130),
effective January 1, 1998. SFAS 130 establishes standards for
reporting and display of comprehensive income and its
components in financial statements. Differences between net
earnings and comprehensive earnings for the three month
periods ended June 30, 1998 and 1997 were insignificant and,
therefore, have not been separately disclosed.
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131 "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131). The Company
has not
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assessed the effect this new standard will have on its
consolidated financial statements and/or disclosures.
7. COMMITMENTS AND CONTINGENCIES
The Company, its 50-percent owned joint venture partners
Salton and Newtech, White Consolidated Industries, Inc.
("White Consolidated"), and certain other parties have been
named as defendants in litigation filed by Westinghouse
Electric Corporation ("Westinghouse") in the United States
District Court for the Western District in Pennsylvania on
December 18, 1996. The action arises from a dispute between
Westinghouse and White Consolidated over rights to use the
"Westinghouse" trademark for consumer products, based on
transactions between Westinghouse and White Consolidated in
the 1970's and the parties' subsequent conduct. Prior to the
filing of Westinghouse's complaint against the Company, White
Consolidated, on November 14, 1996, filed a complaint in the
United States District Court for the Northern District of Ohio
against Westinghouse and another corporation for trademark
infringement, dilution, false designation or origin and false
advertisement, seeking both injunctive relief and damages. It
was subsequently determined that the entire dispute will be
heard in the United States District Court for the Western
District of Pennsylvania. The action by Westinghouse seeks,
among other things, a preliminary injunction enjoining the
defendants from using the trademark, unspecified damages and
attorneys' fees. Pursuant to the Indemnification Agreement
dated January 23, 1997 by and among White Consolidated, Kmart
Corporation, and the Company, White Consolidated is defending
and indemnifying the Company for all costs and expenses for
claims, damages, and losses, including the costs of
litigation. Pursuant to the license agreements with White
Consolidated, White Consolidated is defending and indemnifying
Salton and Newtech for all costs and expenses for claims,
damages, and losses, including the costs of litigation. On
April 9, 1997, on joint motion of the parties, the court
issued an order staying future proceedings until the earlier
of July 1, 1997 or five days after hearing before the court in
order to give the parties an opportunity to pursue settlement
discussions. Subsequently, after a status hearing before the
Court on July 15, 1997, and in accordance with the Court's
memorandum order of July 17, 1997, counsel for the parties in
the litigation pending in the United States District Court for
the Western District of Pennsylvania reported to the Court in
a letter that the parties had agreed to pursue an expedited
mini-trial/mediation proceeding in an effort to resolve their
disputes. A mediation proceeding occurred and the parties were
unable to reach a mediated settlement. Discovery is proceeding
and the matter is likely to be tried in early 1999.
The Company and the other 50 percent owner in Newtech have
entered into an agreement whereby the Company will transfer
5.0% of its interest in Newtech to a third party if and when a
liquidity event for the Company occurs. Pursuant to the
agreement, a liquidity event will occur if Newtech sells
equity interests in a public offering, Newtech is sold to a
third party, or if there is an other disposition of the
Company's interest or other similar event. On May 14, 1998,
Newtech filed a Form S-1
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Registration Statement to publicly offer shares of its common
stock with the Securities and Exchange Commission. There can
be no assurance that such offering will be consummated.
8. SUBSEQUENT EVENTS
Public Offerings
On July 27, 1998, the Company completed a public offering of
3,041,000 shares of its Common Stock. Net proceeds from the
sale of the stock aggregated approximately $97,000,000. In
conjunction with the Common Stock offering the Company has
granted the underwriters a 30 day option to purchase up to
456,150 additional shares of Common Stock to cover any over
allotments.
The Company simultaneously completed a public offering of
$130.0 million in aggregate principal of its 10% Senior
Subordinated Notes due 2008. Net proceeds from the offering
totaled approximately $125,000,000, including related costs of
approximately $5.0 million, which are being amortized over the
10 year term of the notes.
Proceeds from both offerings were used to pay, in total,
outstanding principal and accrued interest under the $185.0
million Senior Subordinated Loans borrowed in connection with
the June 26, 1996 acquisition of The Black & Decker Household
Products Group as well as the $20.0 million Tranche C Term
Loan and $12.0 million in revolving loans under the Senior
Secured Credit Facilities.
Sale of Salton Shares
On July 28, 1998, the Company consummated the sale of its
6,535,072 shares of Salton stock.
The shares were sold for $12 per share in cash plus a six and
one-half year, $15 million subordinated promissory note
bearing interest at 4% per annum. The note is to be offset by
5% of the total purchase price paid by Salton for product
purchases from the Company and its affiliates during the term
of the note.
In addition, Salton repurchased for approximately $3.3 million
an option owned by the Company to purchase 458,000 shares of
Salton stock. The Company's after-tax proceeds from the
transaction were approximately $50 million following the
repayment of a $10.8 million note due Salton, resulting in a
capital gain of $29.0 million.
Furthermore, the arrangements between the Company and
Salton/Maxim pertaining to the Kmart contract will continue
with certain modifications.
In accordance with the provisions of the Company's Senior
Secured Credit Facilities $26.0 million of the net proceeds
from the Salton transaction were used to repay $14.0 million
and $12.0 million of the Tranche A Term Loan and the Tranche B
Term Loan, respectively.
15
<PAGE> 16
Newtech
Holders of the $2.0 million of 8% convertible notes issued in
connection with the 1996 Newtech acquisition were notified by
the Company that the conditions required for conversion of the
notes had been met as of August 3, 1998. The notes are
convertible into shares of the Company's common stock at a
price of $15 per share. On August 13, 1998, the Company
received notice from the holders of their intent to exercise
the conversion option.
9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following condensed consolidating financial information
presents the results of operations, financial position and
cash flows of the Company (on a stand alone basis), the
guarantor subsidiaries (on a combined basis), the
non-guarantor subsidiaries (on a combined basis) and the
eliminations necessary to arrive at the consolidated results
of the Company. The results of operations and cash flows
presented below assume as if the guarantor subsidiaries were
in place for all periods presented. The Company and subsidiary
guarantors have accounted for investments in their repsective
subsidiaries on an unconsolidated basis using the equity
method of accounting. The Subsidiary Guarantors are
wholly-owned subsidiaries of the Company and have fully and
unconditionally guaranteed the Notes on a joint and several
basis. The guarantors include the following: Windmere
Corporation, Windmere Holdings Corporation, Windmere Holdings
Corporation II, Jerdon Products, Inc., Fortune Products, Inc.,
Bay Books & Tapes, Inc., Windmere Innovative Pet Products,
Inc., EDI Masters, Inc., and Windmere Fan Products, Inc. The
Notes contain certain covenants which, among other things,
will restrict the ability of the Subsidiary Guarantors to make
distributions to Windmere-Durable Holdings Inc. The Company
has not presented separate financial statements and other
disclosures concerning the guarantors and non-guarantor
subsidiaries because it has determined they would not be
material to investors.
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998
Windmere Durable Non
Holdings, Inc. Guarantors Guarantors Eliminations Consolidated
---------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Net Sales 0 89,754 62,652 (34,444) 117,962
Cost of goods sold 0 78,716 52,757 (34,744) 96,729
Gross Profit 0 11,038 9,895 300 21,233
Operating Expenses (313) 22,971 1,694 180 24,532
Repositioning charge 0 (9,914) 0 0 (9,914)
Operating Income 313 (21,846) 8,201 120 (13,213)
Other (income) expense, net 215 1,153 (1,813) 717 273
Earnings before equity in
net earnings of joint
ventures and income taxes 98 (23,000) 10,013 (597) (13,486)
Provision for income taxes 0 48 156 (5,766) (5,563)
Equity in (earnings)
joint ventures 151 1,045 0 0 1,196
Net earnings 249 (22,003) 9,858 5,169 (6,727)
=== ====== ===== ===== =====
Balance Sheet
Cash and cash equivalents 3,529 8,649 12,178
Accounts receivable 79,773 5,061 (622) 84,212
Receivables from affiliate 1,616 (16,821) 37,935 (1,652) 21,078
Inventories 132,056 42,593 993 175,642
Other current assets 13,836 4,208 (2,647) 15,397
Refundable income taxes 2,475 191 1,465 4,131
Total current assets 1,616 214,848 98,636 (2,462) 312,638
Investments in joint
ventures 80,731 52,028 59,477 (147,440) 44,796
Property plant and
equipment net 0 51,852 30,760 0 82,612
Notes receivable from
affiliate 0 0 19,455 (11,351) 8,104
Other assets 0 224,754 585 11,872 237,211
Total assets 82,347 543,482 208,913 (149,381) 685,361
====== ======= ======= ======= =======
Notes and acceptance
payable 0 16,350 9,747 (11,350) 14,747
Current maturities of
long term debt 0 44,293 0 0 44,293
Accounts payable and
accrued expense 218 76,734 15,428 (622) 91,758
Deferred income, less
current portion 0 733 (469) 265
Total current liabilities 218 138,110 25,176 (12,441) 151,063
Long term debt 10,848 338,337 0 0 349,185
Deferred income, less
current portion 0 125 0 865 990
Deferred income taxes 0 0 2,147 (2,147) 0
Total liabilities 11,066 476,572 27,323 (13,723) 501,238
Shareholders' equity 71,281 66,910 181,590 (135,658) 184,123
Total liabilities and
shareholder equity 82,347 543,482 208,913 (149,381) 685,361
====== ======= ======= ======= =======
Cash Flow Information
Net cash provided (used)
in operating activities 0 (24,352) 15,861 0 (8,491)
Net cash provided (used)
in investing activities 0 (328,952) (4,265) 0 (333,217)
Net cash provided (used)
in financing activities 0 356,833 (9,794) 0 347,039
Effect of exchange rate 0 (1,377) 0 (1,377)
Cash at beginning 0 0 8,224 0 8,224
Cash at end 0 3,529 8,649 0 12,178
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997
Windmere Durable Non
Holdings, Inc. Guarantors Guarantors Eliminations Consolidated
---------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Net Sales 0 77,760 65,876 (32,161) 111,475
Cost of goods sold 0 60,813 59,568 (32,731) 87,650
Gross profit 0 16,947 6,308 570 23,825
Operating expenses (0) 18,632 2,535 180 21,347
Operating income 0 (1,685) 3,773 390 2,478
Other (income) expense, net 215 909 (755) 0 369
Earnings before equity in net
earnings (loss) of joint
ventures and income tax 215 (2,593) 4,528 390 2,109
Provision for income taxes 0 6 122 (159) (31)
Equity in net earnings loss
of joint ventures 162 (42) 0 0 120
Net earnings (53) (2,642) 4,406 549 2,260
=== ===== ===== === =======
Balance Sheet
Cash & cash equivalents 0 270 4,084 0 4,354
Accounts receivables 0 27,487 7,798 360 35,646
Receivables from affiliates 29,876 (33,404) 18,352 (569) 14,255
Inventories 0 44,703 45,768 349 90,820
Other current assets 0 5,998 2,948 37 8,983
Total current assets 29,876 45,054 78,950 178 154,058
Investment in joint
ventures 46,391 43,493 46,199 (100,223) 35,860
Property and plant and
equipment net 0 7,303 27,201 0 34,505
Other assets 0 5,352 12,465 (4,618) 13,199
Total assets 76,267 101,202 164,816 (104,663) 237,622
====== ======= ======= ======= =======
Notes and acceptance payable 0 36,850 3,769 (11,350) 29,269
Current maturities of
long term debt 0 815 0 0 815
Accounts payable and
accrued expenses 218 3,571 15,052 0 18,841
Deferred income, current
portion 0 2,102 (343) (1,429) 330
Total current liabilities 218 43,338 18,479 (12,780) 49,254
Long term debt 10,848 8,630 0 0 19,477
Deferred income, less
current portion 0 83 0 0 83
Deferred income taxes 0 (186) 68 117 (0)
Total liabilities 11,065 51,865 18,547 (12,662) 68,815
Shareholders' equity 65,202 49,337 146,269 (92,001) 168,807
76,267 101,202 164,816 (104,663) 237,622
====== ======= ======= ======= =======
Cash Flow Information
Net cash provided (used)
in operating activities 165 (9,223) 11,215 (5,181) (3,024)
Net cash provided (used)
in investing activities 871 (748) (14,827) 7,362 (7,342)
Net cash provided (used)
in financing activities 677 7,128 336 (2,200) 5,941
Effect of exchange rate 0 (781) (113) 0 (894)
Cash at beginning 0 2,117 6,662 0 8,880
Cash at end 0 270 4,084 0 4,354
</TABLE>
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Sales and Other Revenues ("Sales") for the second quarter of 1998 increased by
$2.5 million or 4.2% over Sales for the same period in 1997. The increase is
primarily the result of increases in distribution sales of the Company's
LitterMaid product as well as private label kitchen and seasonal products. Sales
to Salton accounted for 16.7% of total sales for the 1998 period.
Fees earned by the Company under marketing arrangements with its joint ventures
in the 1998 and 1997 periods totaled $.9 million and $.4 million, respectively
and are classified as Sales and Other Revenues.
COMPARATIVE REVENUE RESULTS
----------------------------
(In Thousands) Three Months Ended
June 30, 1998 June 30, 1997
------------------- ---------------------
DISTRIBUTION $ 46,982 75.1% $ 39,574 65.9%
MANUFACTURING 15,586 24.9 20,489 34.1
--------- ----- --------- -----
Total Sales $ 62,568 100.0% $ 60,063 100.0%
========= ===== ========= =====
The Company in connection with its acquisition of the Black & Decker Household
Products Group incurred a one-time repositioning charge totaling $17.6 million,
$11.4 million after tax, of which $7.7 million is included in cost of goods
sold. The charge is primarily non cash and consists of writeoffs of inventory,
goodwill and tooling associated with the Company's decision to exit certain
personal care and other non-core, low-margin products. Also included are costs
associated with the integration of the acquisition.
Excluding the portion of the repositioning charge recorded as cost of goods sold
in the 1998 period, the Company's gross profit margin increased to 25.6% of
sales from 21.7% in the 1997 period. Increased productivity, a more profitable
product mix, and lower raw material costs which includes the effect of volume
purchase discounts, at the Company's manufacturing subsidiary contributed
significantly to the margin improvement.
Selling, general and administrative costs increased by $1.2 million in the
second quarter of 1998 compared to the same period of 1997. The increase is
primarily the result of the Company's increased investment in development of the
LitterMaid business.
Interest expense increased by $.7 million to $1.4 million in the 1998 period.
The change is the result of the increased level of borrowing throughout the
period under the Company's credit facilities as well as amounts borrowed on June
26, 1998 in conjunction with the acquisition of the Black & Decker Household
Products Group.
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<PAGE> 18
The Company's tax expense is based on the earnings of each of its foreign and
domestic operations, and it includes such additional U.S. taxes as are
applicable to the repatriation of foreign earnings. Foreign earnings, other than
in Canada, are generally taxed at rates lower than in the United States.
In 1997, the Company adopted Financial Accounting Standards No. 128 (FAS 128),
"Earnings Per Share". Basic shares for the three month periods ended June 30,
1998 and 1997 were 18,765,412 and 17,515,271, respectively. The increase in
number of shares was primarily due to the effect of stock option and warrant
exercises.
Included in diluted shares are common stock equivalents relating to options,
warrants and convertible debt of 1,941,892 for the three month period ended June
30, 1997. All common stock equivalents have been excluded from the per share
calculation for the 1998 period, as their inclusion would have been
anti-dilutive.
Results of Operations
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Sales and Other Revenues for the 1998 six month period increased by $6.5 million
or 5.8% over Sales for the same period in 1997. The increase is primarily the
result of increases in distribution sales of the Company's LitterMaid product as
well as private label kitchen and seasonal products.
Fees earned by the Company under marketing arrangements with its joint ventures
totaled $1.6 million in the 1998 period and are classified as Sales and Other
Revenues.
COMPARATIVE REVENUE RESULTS
---------------------------
Six Months Ended
June 30, 1998 June 30, 1997
------------------ ------------------
DISTRIBUTION $ 92,231 78.2% $ 79,189 71.0%
MANUFACTURING 25,731 21.8 32,286 29.0
-------- ----- -------- -----
Total Sales $117,962 100.0% $111,475 100.0%
======== ===== ======== =====
Excluding the portion of the repositioning charge recorded as cost of goods sold
in the 1998 period, the Company's gross profit margin increased to 24.5% of
sales from 21.4% in the 1997 period. Increased productivity, a more profitable
product mix, and lower raw material costs, which includes the effect of volume
purchase discounts, at the Company's manufacturing subsidiary contributed
significantly to the margin improvement.
Selling, general and administrative costs increased by $3.2 million in the six
months ended June 30, 1998 compared to the same period of 1997. The increase is
primarily the result of the Company's increased investment in development of the
LitterMaid business including $1.9 million in advertising expenditures.
Interest expense increased by $1.1 million in the 1998 period. The change is the
result of the increased level of borrowing throughout the year under the
Company's credit facilities as well as amounts borrowed on June 26, 1998 in
conjunction with the acquisition of the Black & Decker Household Products Group.
20
<PAGE> 19
The Company's equity in net earnings of joint ventures was $1.2 million for the
six months ended June 30, 1998 as compared to $.1 million for the same period in
1997.
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.
Basic shares for the six month periods ended June 30, 1998 and 1997 were
18,589,560 and 17,490,383. The increase in number of shares was primarily due to
the additional dilutive effect of stock option and warrant exercises.
Included in diluted shares are common stock equivalents relating to options,
warrants and convertible debt of 1,941,892 for the three month period ended June
30, 1997. All common stock equivalents have been excluded from the per share
calculation for the 1998 period, as their inclusion would have been
anti-dilutive.
Liquidity & Capital Resources
At June 30, 1998, the Company's current ratio and quick ratio were 2.1 to 1 and
.91 to 1 as compared to 3.1 to 1 and 1.1 to 1 at June 30, 1997. The Company had
working capital of $161.6 million and $104.8 million at June 30, 1998 and 1997,
respectively.
Cash balances increased by approximately $4.0 million for the six month period
ended June 30, 1998. The increase is primarily the result of proceeds received
from the issuance of long term debt in excess of amounts required for the
purchase of the Black & Decker Household Products Group and company operations.
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.
Certain of the Company's foreign subsidiaries (the "subsidiaries") have $21.4
million in trade finance lines of credit, payable on demand, which are secured
by the subsidiaries' tangible and intangible property located in Hong Kong and
in the People's Republic of China, as well as a Company guarantee. At June 30,
1998, the subsidiaries were utilizing, including letters of credit,
approximately $11.5 million of these credit lines, most of which were
subsequently paid with proceeds from the sale of the Salton shares. Outstanding
borrowings by the Company's Hong Kong subsidiaries are primarily in U.S.
dollars.
The Company's primary sources of liquidity are its cash flow from operations and
borrowings under the Senior Secured Credit Facilities. The Company is currently
borrowing $139.0 million under the term loan portion of its Senior Secured
Credit Facilities. In addition, the entire $160.0 million is available for
future borrowings under the Senior Secured Revolving Credit Facility. Advances
under the Senior Secured Revolving Credit Facility are based upon percentages of
outstanding eligible accounts receivable and inventories. The Company is
21
<PAGE> 20
currently entering its peak manufacturing season and expects to borrow
additional amounts under the Senior Secured Revolving Credit Facility in order
to meet its working capital requirements.
Under the Senior Secured Revolving Credit Facility, the Company may elect to
borrow at either LIBOR (adjusted for any reserves) or the Base Rate (as
defined). Interest will accrue on the Senior Secured Revolving Credit Facility
and the Tranche A Term Loan at either LIBOR (adjusted for any reserves) plus a
specified margin which will be determined by the leverage ratio of the Company
and its subsidiaries that initially will be set at 2.25%, or the Base Rate, plus
a specified margin of 1.50%. Interest will accrue on the Tranche B Term Loan at
either LIBOR (adjusted for any reserves) plus a specified margin which will be
determined by the leverage ratio of the Company and its subsidiaries that
initially will be set at 3.00%, or the Base Rate plus a specified margin of
2.00%.
The Senior Secured Credit Facilities contain a number of significant covenants
that, among other things, restrict the ability of the Company to dispose of
assets, incur additional indebtedness, prepay other indebtedness, pay dividends,
repurchase or redeem capital stock, enter into certain investments or create new
subsidiaries, enter into sale and lease-back transactions, make certain
acquisitions, engage in mergers or consolidations, create liens, or engage in
certain transactions with affiliates, and that will otherwise restrict corporate
and business activities. In addition, under the Senior Credit Facilities, the
Company is required to comply with specified financial ratios and tests,
including a minimum net worth test, a fixed charge coverage ratio, an interest
coverage ratio, a leverage ratio and a minimum EBITDA requirement.
The Company's ability to make scheduled payments of principal of, or to pay the
interest on, or to refinance, its indebtedness (including the Notes), or to fund
planned capital expenditures, product research and development expenses and
marketing expenses will depend on its future performance, which, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory, and international and United States domestic political factors and
other factors that are beyond the Company's control. Based upon the current
level of operations and anticipated cost savings and revenue growth, management
believes that cash flow from operations and available cash, together with
available borrowings under the Senior Secured Credit Facilities, will be
adequate to meet the Company's future liquidity needs for at least the next
several years. The Company may, however, need to refinance all or a portion of
the principal of the Notes on or prior to maturity. There can be no assurance
that the Company's business will generate sufficient cash flow from operations,
that anticipated revenue growth and operating improvements will be realized or
that future borrowings will be available under the Senior Credit Facilities in
an amount sufficient to enable the Company to service its indebtedness,
including the Notes, or to fund its other liquidity needs. In addition, there
can be no assurance that the Company will be able to effect any such refinancing
on commercially reasonable terms or at all.
The Company's aggregate capital expenditures for the six months ended June 30,
1998 were $7.5 million. The Company anticipates that the total capital
expenditures for the remainder of 1998 and for 1999 will be approximately $13.5
million and $29.0 million, respectively, which includes the cost of new tooling.
22
<PAGE> 21
The Company plans to fund those capital expenditures from cash flow from
operations and, if necessary, borrowings under the Senior Secured Revolving
Credit Facility.
Subsequent Events
Public Offerings
On July 27, 1998, the Company completed a public offering of 3,041,000 shares of
its Common Stock. Net proceeds from the sale of the stock aggregated
approximately $97,000,000. In conjunction with the Common Stock offering the
Company has granted the underwriters a 30 day option to purchase up to 456,150
additional shares of Common Stock to cover any over allotments.
The Company simultaneously completed a public offering of $130.0 million in
aggregate principal of its 10% Senior Subordinated Notes due 2008 (the "Notes").
Net proceeds from the offering totaled approximately $125,000,000, including
related costs of approximately $5.0 million, which are being amortized over the
10 year term of the notes.
Proceeds from both offerings were used to pay, in total, outstanding principal
and accrued interest under the $185.0 million Senior Subordinated loans borrowed
in connection with the June 26, 1996 acquisition of the Black & Decker Household
Products Group as well as the $20.0 million Tranche C Term Loan and $12.0
million in revolving loans under the Senior Secured Credit Facilities.
Sale of Salton Shares
On July 28, 1998, the Company consummated the sale of its 6,535,072 shares of
Salton stock.
The shares were sold for $12 per share in cash plus a six and one-half year, $15
million subordinated promissory note bearing interest at 4% per annum. The note
is to be offset by 5% of the total purchase price paid by Salton for product
purchases from the Company and its affiliates during the term of the note.
In addition, Salton repurchased for approximately $3.3 million an option owned
by the Company to purchase 458,000 shares of Salton stock. The Company's
after-tax proceeds from the transaction were approximately $50 million following
the repayment of a $10.8 million note due Salton resulting in a capital gain of
$29.0 million.
In accordance with the provisions of the Company's Senior Secured Credit
Facilities $26.0 million of the net proceeds from the Salton transaction were
used to repay $14.0 million and $12.0 million of the Tranche A Term Loan and the
Tranche B Term Loan, respectively. Proceeds from the public offerings and the
sale of Salton shares reduced the Company's debt to capitalization from
approximately 69.0 percent to approximately 47.0 percent on a proforma, as
adjusted basis.
23
<PAGE> 22
Currency Matters
The Company uses forward exchange contracts to reduce fluctuations in foreign
currency, cash flows related to third party raw material and other operating
purchases. The terms of the currency instruments used are generally consistent
with the timing of the committed or anticipated transactions being hedged. The
purpose of the Company's foreign currency management activity is to protect the
Company from the risk that eventual cash flows from foreign currency denominated
transactions may be adversely affected by changes in exchange rates. At June 30,
1998, the Company had outstanding $25.0 million in contracts to purchase Hong
Kong dollars forward. A deposit of $500,000 is held by the issuer as collateral
on the contracts. There is no significant unrealized gain or loss on these
contracts. All contracts have terms of six months or less.
Recent months have seen an unusually rapid devaluation of certain Asian- Pacific
currencies. While there has not been a material impact on the currencies in Hong
Kong or the People's Republic, where the Company has operations, there can be no
assurances that there will not be a material impact in the future. The December
1994 devaluation of the peso had a number of effects on the Mexican economy that
adversely affected the financial condition of businesses in Mexico. There can be
no assurance that the peso to dollar foreign exchange rate will not be volatile
in the future and will not have a material adverse effect on the Company.
Recent Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standard No. 130
"Reporting Comprehensive Income," (SFAS 130) and No. 131 "Disclosures About
Segments of an Enterprise and Related Information" (SFAS 131). 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.
Seasonality
The Company's business is highly seasonal, with operating results varying from
quarter to quarter. The Company has historically experienced higher revenues in
the third and fourth quarters of each fiscal year primarily due to increased
demand by customers for products in the late summer for "back- to-school" sales
and in the fall for holiday sales. The Company's major sales occur during August
through November. Sales are generally made on 60 to 90 day terms. Heaviest
collections on its open accounts receivable are received from November through
March, at which time the Company is in its most liquid state.
Year 2000 Issues
The Company uses a significant number of computer software programs and
operating systems across its entire organization, including applications used in
financial business systems, manufacturing, and various administrative functions.
To the extent that the Company's software applications contain source code that
is unable to appropriately interpret the upcoming calendar year 2000 and beyond,
modification or replacement of such applications will
24
<PAGE> 23
be necessary. The Company has initiated a review of its computer systems and
programs to identity those that are not Year 2000 compliant. Key systems and
programs, including those that interact with customers and suppliers, are being
assessed and plans are being developed to address and implement required system
and program modifications by December 31, 1999. The Company also has begun to
address whether significant customers and suppliers may have Year 2000
compliance issues which will affect their interaction with the Company. The cost
of implementing required system changes is not expected to be material to the
Company's consolidated financial statements. No assurance can be given, however,
that all of the Company's systems, the systems of acquired businesses, and those
of significant customers and suppliers, will be Year 2000 compliant and that the
failure to achieve Year 2000 compliance will not have a material adverse effect
on the Company's operations.
Legal Proceedings
The Company, its 50-percent owned joint venture partners Salton and Newtech,
White Consolidated Industries, Inc. ("White Consolidated"), and certain other
parties have been named as defendants in litigation filed by Westinghouse
Electric Corporation ("Westinghouse") in the United Stated District Court for
the Western District in Pennsylvania on December 18, 1996. The action arises
from a dispute between Westinghouse and White Consolidated over rights to use
the "Westinghouse" trademark for consumer products, based on transactions
between Westinghouse and White Consolidated in the 1970's and the parties'
subsequent conduct. Prior to the filing of Westinghouse's complaint against the
Company, White Consolidated, on November 14, 1996, filed a complaint in the
United States District Court for the Northern District of Ohio against
Westinghouse and another corporation for trademark infringement, dilution, false
designation or origin and false advertisement, seeking both injunctive relief
and damages. It was subsequently determined that the entire dispute will be
heard in the United States District Court for the Western District of
Pennsylvania. The action by Westinghouse seeks, among other things, a
preliminary injunction enjoining the defendants from using the trademark,
unspecified damages and attorneys' fees. Pursuant to the Indemnification
Agreement dated January 23, 1997 by and among White Consolidated, Kmart
Corporation, and the Company, White Consolidated is defending and indemnifying
the Company for all costs and expenses for claims, damages, and losses,
including the costs of litigation. Pursuant to the license agreements with White
Consolidated, White Consolidated is defending and indemnifying Salton and
Newtech for all costs and expenses for claims, damages, and losses, including
the costs of litigation. On April 9, 1997, on joint motion of the parties, the
court issued an order staying future proceedings until the earlier of July 1,
1997 or five days after hearing before the court in order to give the parties an
opportunity to pursue settlement discussions. Subsequently, after a status
hearing before the Court on July 15, 1997, and in accordance with the Court's
memorandum order of July 17, 1997, counsel for the parties in the litigation
pending in the United States District Court for the Western District of
Pennsylvania reported to the Court in a letter that the parties had agreed to
pursue an expedited mini-trial/mediation proceeding in an effort to resolve
their disputes. A mediation proceeding occurred and the parties were unable to
reach a mediated settlement. Discovery is proceeding and the matter is likely to
be tried in early 1999.
25
<PAGE> 24
The Company is subject to other legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability, if any, in excess of applicable insurance coverage, is not
likely to have a material effect on the financial position of the Company.
Commitments and Contingencies
The Company and the other 50 percent owner in Newtech have entered into an
agreement whereby the Company will transfer 5.0% of its interest in Newtech to
a third party if and when a liquidity event for the Company occurs. Pursuant to
the agreement, a liquidity event would occur if Newtech sells equity interests
in a public offering, Newtech is sold to a third party, or if there is an other
disposition of the Company's interest or other similar event. On May 14, 1998,
Newtech filed a Form S-1 Registration Statement to publicly offer shares of its
common stock with the Securities and Exchange Commission. There can be no
assurance that such offering will be consummated.
Manufacturing Operations
The Company's products are manufactured primarily at the Company's facilities in
the PRC, Mexico and the United States. Prior to the HPG acquisition,
approximately 85-percent to 90-percent of the Company's products were
manufactured by Durable, its wholly-owned Hong Kong subsidiary in Bao An County,
Guangdong Province of the People's Republic of China, which is approximately 60
miles northwest of Central, Hong Kong. The Company has a significant amount of
its assets in the People's Republic, primarily consisting of inventory,
equipment and molds. The supply and cost of products, as well as finished
products, can be adversely affected, among other reasons, by changes in foreign
currency exchange rates, increased import duties, imposition of tariffs,
imposition of import quotas, interruptions in sea or air transportation and
political or economic changes. From time to time, the Company explores
opportunities to diversify its sourcing and/or production of certain products to
other low-cost locations or with other third parties or joint venture partners
in order to reduce its dependence on production in the People's Republic and/or
reduce Durable's dependence on the Company's existing distribution base.
However, at the present time, the Company intends to continue its production in
the People's Republic.
The Mexican government exercises significant influence over many aspects of the
Mexican economy. Accordingly, the actions of the Mexican government concerning
the economy could have a significant effect on private sector entities in
general and the Company in particular. In addition, during the 1980s and 1990s,
Mexico experienced periods of slow or negative growth, high inflation,
significant devaluations of the peso and limited availability of foreign
exchange. As a result of the Company's reliance upon manufacturing facilities in
Mexico, economic conditions in Mexico could adversely affect the Company's
business, financial condition and results of operations.
26
<PAGE> 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See "Legal Proceedings" in Part I, Item 2 of this report.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on May
12, 1998, the shareholders of the Company voted to elect
Leonard Glazer, Harold Strauss, Ph.D., Lai Kin, Raymond So and
Arnold Thaler, as Directors of the Company for three year
terms. Continuing members of the Board of Directors of the
Company include: Barbara Friedson Garrett, Susan J. Ganz,
Thomas J. Kane, Felix S. Sabates, David M. Friedson, Jerald I.
Rosen, Wendy Sager Pomerantz and Desmond Lai.
The number of votes cast for or withheld, and the number of
broker non-votes, with respect to each of the nominees were as
follows:
Nominee For Against
Leonard Glazer 13,450,486 171,183
Harold Strauss, Ph.D. 13,460,733 168,936
Lai Kin 13,457,533 172,136
Raymond So 13,462,247 167,422
Arnold Thaler 13,462,022 167,647
In addition, the shareholders of the Company voted to
reappoint Grant Thornton LLP, independent certified public
accountants, as the Company's auditors for the fiscal year
ending December 31, 1998. The shareholders cast 13,613,918
votes in favor of the reappointment of Grant Thornton LLP,
11,326 votes against and 4,425 shareholders withheld
authority.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
4.1 Supplemental Indenture dated as of July 27, 1998,
among the Company, the Guarantors named therein and
State Street Bank & Trust Company, as Trustee,
relating to the issuance by the Company of $130
million in 10% Senior Subordinated Notes due 2008
(incorporated by reference to the Company's Form 8-K
dated July 27, 1998.
10.60 Transaction Agreement dated as of May 10, 1998 by and
between the Company and The Black & Decker
Corporation, together with Amendment No. 1 thereto,
dated as of June 26, 1998 (incorporated by reference
to the Company's Form 8-K dated June 26, 1998).
10.61 Credit Agreement by and among the Company and
NationsBanc, National Association and the other
lenders parties thereto from time to time dated June
26, 1998 (incorporated by reference to the Company's
Form 8-K dated July 16, 1998).
27
<PAGE> 26
10.62 Amended and Restated Credit Agreement by and among
the Company and NationsBanc, National Association and
the other lenders parties thereto from time to time
dated August 7, 1998 (incorporated by reference to
the Company's Form 8-K dated August 7, 1998).
27 Financial Data Schedule (for SEC use only).
b. Reports on Form 8-K:
1. Form 8-K dated May 8, 1998 reporting under "Item 5.
Other Information," that the Company had entered into
a Stock Agreement dated as of May 6, 1998 with
Salton/Maxim Housewares, Inc. with respect to the
shares of Salton owned by the Company and attaching a
press release dated May 6, 1998, relating thereto.
2. Form 8-K dated May 12, 1998 reporting under "Item 5.
Other Information," that the Company had issued a
press release relating to the execution by the
Company of a definitive agreement (the "Transaction
Agreement") to acquire certain assets and certain
liabilities of the Household Products Group of The
Black & Decker Corporation, as amended by Form 8-K/A
dated May 13, 1998.
3. Form 8-K dated May 20, 1998 filing corrected Schedule
I to Exhibit A to the Stock Agreement referred to in
item 1 above.
4. Form 8-K dated June 26, 1998 reporting under "Item 2.
Acquisition or Disposition of Assets" (i) the
consummation of the acquisition of the cooking,
garment care, food preparation and beverage
businesses of the Household Products Group of The
Black & Decker Corporation, (ii) the entering into by
the Company of an agreement for Senior Credit
Facilities in the amount of $345,000,000 with
NationsBanc, National Association and the other
lender parties thereto from time to time, and an
agreement for Senior Subordinated Loans in the amount
of $185,000,000, (iii) attaching copies of the
definitive Transaction Agreement, together with
Amendment No. 1 dated as of June 26, 1998 thereto and
(iv) attaching the following financial statements
with respect to the acquisition: The combined
statements of financial position of the Black &
Decker Household Products Group as of December 31,
1997 and 1996, and the related combined statements of
operations, changes in owner's net investment and
cash flows for each of the three years in the period
ended December 31, 1997, as well as the combined
statement of financial position as of March 29, 1998,
and the related combined statement of operations,
changes in owner's net investment and cash flows for
each of the three months in the period ended March
29, 1998, and the notes thereto together with the
unaudited pro forma combined balance sheet of the
Company as of March 31, 1998, and the related
unaudited statements of operations for the fiscal
year ended December 31, 1997 and the three months and
twelve months ended March 31, 1998, and the notes
thereto.
28
<PAGE> 27
5. Form 8-K dated June 29, 1998 reporting under "Item 5.
Other Information," that the Company had received
notice from Salton/Maxim of Salton's intent to
repurchase the shares of Salton owned by the Company
and attaching a copy of the press release related
thereto.
6. Form 8-K dated July 16, 1998, reporting under "Item
5. Other Information," the execution of the Credit
Agreement and the agreement for Senior Subordinated
Loans referred to in item 4 above and attaching
copies thereof.
7. Form 8-K dated July 21, 1998 reporting under "Item 5.
Other Information," that Salton/Maxim Housewares,
Inc. had given the Company notice of its intent to
close, on July 27, 1998, on the purchase of the
shares of Salton owned by the Company and attaching a
copy of the press release related thereto.
8. Form 8-K dated July 27, 1998, reporting under "Item
5. Other Information," that the Company has completed
an offering of 3,041,000 shares of its Common Stock
and $130 million of its 10% Senior Subordinated Notes
due 2008 and attaching (i) the Underwriting
Agreements, dated July 22, 1998 among the Company,
NationsBank Montgomery Securities LLC and Raymond
James & Associates, Inc. (relating to the sale of
Common Stock) and among the Company, the Guarantors
named therein and NationsBanc Montgomery Securities
LLC relating to the sale of the Senior Subordinated
Notes) and (ii) the Supplemental Indenture dated as
of July 27, 1998 among the Company, the Guarantors
named therein and State Street Bank & Trust Company,
as Trustee, relating to the issuance of the Senior
Subordinated Notes.
9. Form 8-K dated July 28, 1998, reporting under "Item
5. Other Information," that Salton/Maxim Housewares,
Inc. had completed the acquisition of the Salton
shares owned by the Company and attaching a copy of
the press release related thereto.
29
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WINDMERE-DURABLE HOLDINGS, INC.
(Registrant)
August 14, 1998 By: /s/ Harry D. Schulman
---------------------------------
Harry D. Schulman
Senior Vice President -
Finance and Administration and
Chief Financial Officer
(Duly authorized to sign on
behalf of the Registrant)
August 14, 1998 By: /s/ Terry L. Polistina
----------------------------------
Terry L. Polistina
Senior Vice President - Finance
(Duly authorized to sign on
behalf of the Registrant)
30
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