<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
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 MAY 12, 1999
----- -----------------------------
Common Stock, $.10 Par Value 22,114,066
<PAGE> 2
WINDMERE-DURABLE HOLDINGS, INC.
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Statements of Earnings for the
Three Months Ended March 31, 1999 and 1998 3
Consolidated Balance Sheets as of
March 31, 1999, and December 31, 1998 4-5
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1999
and 1998 6-7
Notes to Consolidated Financial Statements 8-17
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-27
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 27
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 28
ITEM 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WINDMERE-DURABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------------------
1999 1998
------------------------- -------------------------
<S> <C> <C> <C> <C>
Sales and Other Revenues $ 118,853 100.0% $ 55,394 100.0%
Cost of Goods Sold 85,153 71.6 42,511 76.7
--------- --------- --------- ---------
Gross Profit 33,700 28.4 12,883 23.3
Selling, General and
Administrative Expenses 35,870 30.2 11,706 21.1
--------- --------- --------- ---------
Operating Profit (Loss) (2,170) (1.8) 1,177 2.2
Other (Income) Expense
Interest Expense 6,205 5.2 1,045 1.9
Interest and Other Income (289) (.2) (680) (1.2)
--------- --------- --------- ---------
5,916 5.0 365 .7
Earnings (Loss) before Equity
in Net Earnings (Loss) of Joint
Ventures and Income Taxes (8,086) (6.8) 812 1.5
Equity in Net Earnings (Loss)
of Joint Ventures (519) (.4) 445 .8
--------- --------- --------- ---------
Earnings (Loss) Before
Income Taxes (8,605) (7.2) 1,257 2.3
Provision (Benefit) for
Income Taxes (2,076) (1.7) 121 .2
--------- --------- --------- ---------
Net Earnings (Loss) $ (6,529) (5.5)% $ 1,136 2.1%
========= ========= ========= =========
Earnings Per Share - basic $ (.30) $ .06
========= =========
Earnings Per Share - diluted $ (.30) $ .06
========= =========
</TABLE>
3
The accompanying notes are an integral part of these statements.
<PAGE> 4
WINDMERE-DURABLE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
3/31/99 12/31/98
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash & Cash Equivalents $ 13,794 $ 20,415
Accounts and Other Receivables,
less allowances of $8,474,
$7,367 and $1,068, respectively 127,104 165,837
Receivables from Affiliates (Note 2) 4,270 5,589
Inventories
Raw Materials 10,002 12,648
Work-in-process 22,732 28,727
Finished Goods 122,539 124,090
-------- --------
Total Inventories 155,273 165,465
Prepaid Expenses 17,615 16,709
Refundable Income Taxes 6,555 6,555
Future Income Tax Benefits 24,170 18,277
-------- --------
Total Current Assets 348,781 398,847
INVESTMENTS IN JOINT VENTURES
(NOTE 2) 15,182 15,708
PROPERTY, PLANT & EQUIPMENT -
AT COST, less accumulated
depreciation of $62,554,
$59,524 and $52,014, respectively 76,422 76,077
Notes Receivable from Affiliate 7,789 7,891
OTHER ASSETS 241,831 244,214
-------- --------
TOTAL ASSETS $690,005 $742,737
======== ========
</TABLE>
4
<PAGE> 5
WINDMERE-DURABLE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
CONTINUED
<TABLE>
<CAPTION>
3/31/99 12/31/98
--------- ---------
<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Current Maturities of Long-Term
Debt $ 7,842 $ 8,630
Accounts Payable and
Accrued Expenses 94,191 119,611
Income taxes payable -- 2,693
Deferred Income, current portion 637 479
--------- ---------
Total Current Liabilities 102,670 131,413
LONG-TERM DEBT 256,280 272,370
DEFERRED INCOME TAXES 12,131 12,132
DEFERRED INCOME, less current
portion 1,464 2,804
SHAREHOLDERS' EQUITY (Note 3)
Special Preferred Stock -
authorized 40,000,000 shares of
$.01 par value; none issued
Common Stock - authorized
40,000,000 shares of $.10 par
value; shares outstanding:
22,091, 22,091 and
18,722, respectively 2,209 2,209
Paid-in Capital 145,184 145,161
Retained Earnings 171,310 177,839
Unrealized Foreign Currency
Translation Adjustment (1,243) (1,191)
--------- ---------
Total Shareholders' Equity 317,460 324,018
--------- ---------
TOTAL LIABILITIES &
SHAREHOLDERS' EQUITY $ 690,005 $ 742,737
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
WINDMERE-DURABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (Loss) $ (6,529) $ 1,136
Adjustments to reconcile net earnings (loss)
to net cash used in operating
activities:
Depreciation of property, plant and
equipment 4,400 1,861
Amortization of intangible assets 4,330 213
Amortization of deferred income -- (125)
Net change in allowance for losses
on accounts receivable 1,107 (44)
Equity in net earnings (loss) of joint ventures 526 (608)
Changes in assets and liabilities
Decrease in accounts and other
receivables 37,626 4,875
Decrease in inventories 10,192 2,403
Increase in prepaid expenses (906) (2,414)
Increase in other assets (1,845) (180)
Decrease in accounts payable
and accrued expenses (25,420) (10,729)
Increase in current and
deferred income taxes (8,587) 1,093
Decrease in deferred income (1,181) --
Increase (decrease) in other accounts (52) 22
-------- --------
Net cash provided by (used in)
operating activities 13,661 (2,497)
Cash flows from investing activities:
Additions to property, plant and
equipment - net (4,745) (2,671)
(Decrease) increase in receivable accounts
and notes from affiliates 1,318 (2,085)
-------- --------
Net cash used in
investing activities (3,427) (4,756)
</TABLE>
6
<PAGE> 7
WINDMERE-DURABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
CONTINUED
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
------- --------
<S> <C> <C>
Cash flows from financing activities:
Net borrowings under lines of credit $ -- $ 2,470
Payments of long-term debt - net (16,878) (654)
------- -------
Exercise of stock options
and warrants 23 2,050
Payment of withholding tax on
stock option exercises -- (2,346)
------- -------
Net cash provided by (used in)
financing activities (16,855) 1,520
------- -------
Decrease in cash
and cash equivalents (6,621) (5,733)
Cash and cash equivalents at
beginning of year 20,415 8,224
------- -------
Cash and cash equivalents at end
of quarter $ 13,794 $ 2,491
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 9,615 $1,643
Income taxes $2,505 $ 29
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE> 8
WINDMERE-DURABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
INTERIM REPORTING
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the Company's financial position as of March 31, 1999
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, 1998.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified for comparability.
RECEIVABLES FROM AFFILIATES
Receivables from Affiliates include accounts receivable which arise in the
ordinary course of business and are settled as trade obligations, as well
as the current portion of notes receivable due from certain of the
Company's joint venture partners and other affiliates ("Affiliates").
Notes receivable from these Affiliates bear interest at prevailing market
interest rates.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses forward exchange contracts to reduce fluctuations in
foreign currency cash flows related to third party raw material and other
operating purchases. The terms of the currency instruments used are
generally consistent with the timing of the committed or anticipated
transactions being hedged. Outstanding at March 31, 1999 and 1998 are
$20,000,000 and $23,000,000, respectively, in contracts to purchase Hong
Kong dollars, forward. Also outstanding are option contracts to sell
$9,000,000 in Canadian dollars, forward. There is no significant
unrealized gain or loss on these contracts. All contracts have terms of
six months or less.
The Company uses interest rate swaps of one to four years in duration to
reduce the impact of changes in interest rates on its floating rate debt.
The notational amounts of the swap agreements are used to measure interest
to be paid or received and do not represent the amount of exposure to
credit loss. The differential paid or received on the agreements is
recognized as an adjustment of interest expense.
As of March 31, 1999, the Company had purchased swaps on $70 million
notional principal amount with a market value of approximately ($600,000).
The market value represents the amount the Company would have to pay to
exit the contracts at March 31,
8
<PAGE> 9
1999. The Company does not intend to exit such contracts at this time.
2. INVESTMENTS IN JOINT VENTURES
Investments in Joint Ventures consist of the Company's interests in joint
ventures, accounted for under the equity method. Included are the
Company's 50-percent interests in Newtech Electronics Industries, Inc.
("Newtech"), Breakroom of Tennessee, Inc. and Anasazi Partners, L.P.
("Anasazi").
On July 28, 1998, the Company consummated the sale of its equity interest
in Salton Products, Inc. ("Salton"). Financial information for Salton has,
therefore, been excluded from the 1999 period results.
Arrangements between the Company and Salton pertaining to the Kmart
contract, pursuant to which Salton provides Kmart with products under the
White-Westinghouse brand name, are continuing with certain modifications.
Summarized financial information of the unconsolidated companies is as
follows: (In Thousands)
<TABLE>
<CAPTION>
Three Three
Months Ended Year Ended Months Ended
3/31/99 12/31/98 3/31/98
------------ ---------- ------------
<S> <C> <C> <C>
EARNINGS
Sales $ 29,945 $346,280 $107,064
Gross Profit $ 2,422 $ 50,986 $ 29,746
Net Earnings (Loss) $ (792) $ 5,919 $ 1,541
BALANCE SHEET
Current Assets $ 34,188 $ 58,248 $172,539
Noncurrent Assets $ 10,172 $ 12,079 $ 41,679
Current Liabilities $ 24,425 $ 49,220 $140,171
</TABLE>
Notes receivable from affiliates at March 31, 1999 include approximately
$8.1 million from the 1997 sale of one of the Company's manufacturing
subsidiaries and $15.0 million from the sale of the Company's equity
interest in Salton. The $15.0 million note has been recorded net of
related deferred income for anticipated future purchases by Salton from
the Company.
All sales made by joint ventures in the three month periods ended March
31, 1999 and 1998 were to entities other than members of the consolidated
group. Sales made by the Company to Salton in the three month periods
ended March 31, 1999 and 1998 totaled $7.9 million and $6.4 million,
respectively.
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.
9
<PAGE> 10
3. SHAREHOLDERS' EQUITY
EARNINGS PER SHARE
In 1997, the Company adopted Financial Accounting Standards No. 128 (SFAS
128), "Earnings Per Share." Basic shares for the three month periods ended
March 31, 1999 and 1998 were 22,090,966 and 18,413,731, respectively.
Included in diluted shares are common stock equivalents relating to
options, warrants and convertible debt of 1,779,910 for the three month
period ended March 31, 1998. All common stock equivalents have been
excluded from the per share calculation for the 1999 period, as the
Company incurred a net loss and their inclusion would have been
anti-dilutive.
4. COMMITMENTS AND CONTINGENCIES
The Company, Salton, 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, an injunction enjoining
the defendants from using the trademark, unspecified damages and
attorney's 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. White Consolidated and Westinghouse
reached a partial settlement in late April 1999 under which, among other
things, White Consolidated will withdraw its claims against Westinghouse.
The partial settlement does not resolve the dispute insofar as it relates
to the products licensed by White Consolidated to Salton or Newtech, or
manufactured by the Company, and the litigation is proceeding as to those
matters. The parties have filed cross-motions for summary judgement. Trial
is currently scheduled for June 1999.
10
<PAGE> 11
The Company is also a party to SHERLEIGH ASSOCIATES LLC AND SHERLEIGH
ASSOCIATES INC. PROFIT SHARING PLAN, ON THEIR OWN BEHALF AND ON BEHALF OF
ALL OTHERS SIMILARLY SITUATED V. WINDMERE-DURABLE HOLDINGS, INC., DAVID M.
FRIEDSON, HARRY D. SCHULMAN AND NATIONSBANC MONTGOMERY SECURITIES LLC,
98-2273-CIV-LENARD which was filed in the United States District Court,
Southern District of Florida on October 8, 1998.
This matter is a class action complaint, which is a consolidation of eight
separate class action complaints with substantially similar allegations.
The complaints were purportedly filed on behalf of those security holders
of the Company who purchased such securities during a certain period in
the second and third quarter of 1998, alleging violations of the federal
securities laws (including Rule 10b-5 promulgated pursuant to the
Securities Exchange Act of 1934, as amended) in connection with the
acquisition by the Company of certain product categories of the Household
Products Group of The Black & Decker Corporation. Among other things, the
plaintiffs allege that the Company and certain of its directors and
officers, along with NationsBanc Montgomery Securities LLC, provided false
information in connection with a public offering of debt and equity
securities. The plaintiffs seek, among other relief, to be declared a
class, to be awarded compensatory damages, rescission rights, unspecified
damages and attorneys' fees and costs. The court is presently considering
the appointment of lead counsel. The Company has filed a motion to
dismiss, which has been stayed pending further order of the court. Because
these matters are in their preliminary stages, management is unable at
this time to determine what effect these lawsuits will have on the
financial condition, results of operations or liquidity of the Company.
By Order dated March 9, 1999, in addition to consolidating the
above-referenced cases, the Court provisionally certified a class of
plaintiffs who purchased Windmere stock between May 12, 1998 and September
22, 1998, provisionally certified Sherleigh Associates LLC and Sherleigh
Associates, Inc. Profit Sharing Plan as lead plaintiff in this matter and
is currently reviewing bids for lead counsel which bids are still under
consideration by the Court.
The Company is currently advancing the legal expenses of the directors and
officers who were named as defendants. Such defendants have agreed to
repay the Company for all or any portion of such advances to which they
are ultimately found not to be entitled pursuant to applicable law. Based
on the information currently available to the Company, management does not
believe that the indemnification of the officers and directors named as
defendants in the above-listed matters will have a material adverse effect
on the financial condition, results of operations or liquidity of the
Company. However, the actual effects of such indemnification on the
Company cannot be finally determined until the amount of such
indemnification, if any, is fixed.
11
<PAGE> 12
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. However, as the outcome of litigation or other
claims is difficult to predict, significant changes in the estimated
exposures could occur.
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 March 25, 1999, the Company, pursuant to the terms of the applicable
Shareholders' Agreement, offered to purchase the shares of Newtech not
owned by it for a total of $1.0 million. The other shareholders of Newtech
have until May 25, 1999 to accept the Company's offer or purchase the
shares of Newtech owned by the Company for $1.0 million. On May 7, 1999,
Newtech advised the Company that it is in default with its senior lenders.
The Company and Newtech are currently in negotiations with the senior
lenders to determine the appropriate course of action. The outcome of
these negotiations and its impact on the Company's financial statements
has not yet been determined. The Company has an investment in and
receivables from Newtech aggregating approximately $22.0 million.
5. BUSINESS SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable
segments is shown in the following table. Corporate related items, results
of insignificant operations and, as it relates to segment profit (loss),
income and expense not allocated to reportable segments are included in
the reconciliations to consolidated results.
12
<PAGE> 13
Segment information for the three month periods ended March 31, are as
follows: (In Thousands)
<TABLE>
<CAPTION>
HOUSEHOLD
WINDMERE PRODUCTS DURABLE
GROUP GROUP MANUFACTURING TOTAL
--------- --------- ------------- ---------
<S> <C> <C> <C> <C>
1999
Net Sales $ 47,390 $ 65,150 $ 28,142 $ 140,682
Intersegment net
sales -- -- 23,518 23,518
Operating earnings
(loss) (2,774) (1,267) 2,728 (1,311)
1998
Net Sales 45,890 -- 24,724 70,614
Intersegment net
sales -- -- 14,676 14,676
Operating earnings
(loss) (2,045) -- 1,799 (246)
</TABLE>
Reconciliation to consolidated amounts:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Revenues
Total revenues for reportable segments $ 140,682 $ 70,614
Other revenues (loss) 1,689 (544)
Eliminations of intersegment revenues (23,518) (14,676)
--------- ---------
Total consolidated revenues $ 118,853 $ 55,394
========= =========
Operating earnings (loss)
Total earnings (loss) for
reportable segments $ (1,311) $ (246)
Other earnings 1,353 2,283
Corporate headquarters expense (2,212) (737)
Interest expense - net (5,916) (488)
Equity in net earnings (loss) of
joint ventures (519) 445
--------- ---------
Consolidated earnings (loss) before
income taxes $ (8,605) $ 1,257
========= =========
</TABLE>
6. 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 of the Company's
Senior Subordinated Notes ("Notes") (on a combined basis), the
non-guarantor subsidiaries (on a combined basis) and the eliminations
necessary to arrive at the consolidated results of the Company. The
results of operations and cash flows presented below assume as if the
guarantor subsidiaries were in place for all periods presented. The
Company and subsidiary guarantors have accounted for investments in their
respective subsidiaries on an unconsolidated basis using the equity method
of accounting. The Subsidiary Guarantors are wholly-owned subsidiaries of
the Company and have fully and unconditionally guaranteed the Notes on a
joint and several basis. The guarantors include the following: Windmere
Corporation, Windmere Holdings
13
<PAGE> 14
Corporation, Windmere Holdings Corporation II, Jerdon Products, Inc.,
Fortune Products, Inc., Bay Books & Tapes, Inc., Windmere Innovative Pet
Products, Inc., EDI Masters, Inc., Windmere Fan Products, Inc., Household
Products, Inc., HP Delaware, Inc., HP Americas, Inc., HPG LLC, HP
Intellectual Corp., WD Delaware, Inc. and WD Delaware II, Inc. The Notes
contain certain covenants which, among other things, will restrict the
ability of the Subsidiary Guarantors to make distributions to
Windmere-Durable Holdings, Inc. The Company has not presented separate
financial statements and other disclosures concerning the guarantors and
non-guarantor subsidiaries because it has determined they would not be
material to investors.
Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Windmere Durable Non
Holdings, Inc. Guarantors Guarantors Eliminations Consolidated
---------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Net Sales 0 91,517 50,854 (23,518) 118,853
Cost of goods sold 0 68,821 40,163 (23,831) 85,153
-------- -------- -------- -------- --------
Gross Profit 0 22,696 10,691 313 33,700
Operating Expenses (176) 29,856 6,100 90 35,870
-------- -------- -------- -------- --------
Operating Profit (Loss) 176 (7,160) 4,591 223 (2,170)
Other (income) expense, net 5,986 248 (318) 0 5,916
-------- -------- -------- -------- --------
Earnings (loss) before income
taxes and equity in earnings
(loss) of joint ventures (5,810) (7,408) 4,909 223 (8,086)
Provision (Benefit) for
income taxes 0 1,692 60 (3,828) (2,076)
Equity in net earnings (loss)
of joint ventures 393 (912) 0 0 (519)
-------- -------- -------- -------- --------
Net earnings (loss) (5,417) (10,012) 4,849 4,051 (6,529)
======== ======== ======== ======== ========
Balance Sheet
Cash 10 (1,100) 14,884 0 13,794
Accounts and other receivables 0 75,919 47,005 4,180 127,104
Receivables from affiliates 1,744 4,207 1,357 (3,038) 4,270
Inventories 0 89,570 63,754 1,949 155,273
Other current assets 0 25,914 4,596 17,830 48,340
-------- -------- -------- -------- --------
Total current assets 1,754 194,510 131,596 20,921 348,781
Investments in
joint ventures 426,306 22,252 70,500 (503,876) 15,182
Property, plant and
equipment, net 0 12,587 63,835 0 76,422
Other assets 0 601,226 20,280 (371,886) 249,620
-------- -------- -------- -------- --------
Total assets 428,060 830,575 286,211 (854,841) 690,005
======== ======== ======== ======== ========
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
Windmere Durable Non
Holdings, Inc. Guarantors Guarantors Eliminations Consolidated
---------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
LIABILITIES:
Accounts payable and
accrued expenses 3 74,393 36,872 (17,077) 94,191
Current maturities
of long term debt 7,842 0 0 0 7,842
Deferred income, current
Portion 0 637 0 0 637
Income taxes payable 0 394 900 (1,294) 0
-------- -------- -------- -------- --------
Total current
liabilities 7,845 75,424 37,772 (18,371) 102,670
Long term debt 256,280 370,918 0 (370,918) 256,280
Deferred income, less
current portion 0 17,943 0 (16,479) 1,464
Deferred income taxes 0 16,253 2,984 (7,106) 12,131
-------- -------- -------- -------- --------
Total liabilities 264,125 480,538 40,756 (412,874) 372,545
Shareholders' equity 163,935 350,037 245,455 (441,967) 317,460
-------- -------- -------- -------- --------
Total liabilities
and shareholders'
equity 428,060 830,575 286,211 (854,841) 690,005
======== ======== ======== ======== ========
Cash Flow Information
Net cash provided by (used
in) operating activities (5,414) 116,007 (43,382) (53,498) 13,713
Net cash provided by (used
in) investing activities 10,279 (20,548) 5,305 1,537 (3,427)
Net cash provided by
(used in) financing
activities (4,855) (99,642) 35,681 51,961 (16,855)
Effect of exchange rate 0 0 (52) 0 (52)
Cash at beginning 0 3,083 17,332 0 20,415
Cash at end 10 (1,100) 14,884 0 13,794
</TABLE>
Three Months Ended March 31, 1998
<TABLE>
<CAPTION>
Windmere Durable Non
Holdings, Inc. Guarantors Guarantors Eliminations Consolidated
---------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Net Sales 0 44,507 25,563 (14,676) 55,394
Cost of goods sold 0 35,037 22,450 (14,976) 42,511
------- ------- ------- ------- -------
Gross profit 0 9,470 3,113 300 12,883
Operating expenses (154) 10,375 1,395 90 11,706
------- ------- ------- ------- -------
Operating profit (Loss) 154 (905) 1,718 210 1,177
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
Windmere Durable Non
Holdings, Inc. Guarantors Guarantors Eliminations Consolidated
---------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
0ther (income) expense,
net 107 358 (460) 360 365
-------- -------- -------- -------- --------
Earnings (loss) before income
taxes and equity in earnings
(loss) of joint ventures 47 (1,263) 2,178 (150) 812
Provision (Benefit) for
income taxes 0 43 94 (16) 121
Equity in net earnings (loss)
of joint ventures 122 323 0 0 445
-------- -------- -------- -------- --------
Net earnings (loss) 169 (983) 2,084 (134) 1,136
======== ======== ======== ======== ========
Balance Sheet
Cash 0 (1,593) 4,084 0 2,491
Accounts and other receivables 0 27,955 9,709 842 38,506
Receivables from affiliates 793 (7,305) 24,112 (297) 17,303
Inventories 0 54,458 45,672 (361) 99,769
Other current assets 0 15,589 1,324 (4,657) 12,256
-------- -------- -------- -------- --------
Total current assets 793 89,104 84,901 (4,473) 170,325
Investment in joint
ventures 80,701 51,021 46,200 (134,223) 43,699
Property, plant and
equipment, net 0 7,429 30,580 0 38,009
Other assets 0 4,632 20,137 (3,131) 21,638
-------- -------- -------- -------- --------
Total assets 81,494 152,186 181,818 (141,827) 273,671
======== ======== ======== ======== ========
Notes and acceptances payable 0 50,350 6,452 (11,350) 45,452
Accounts payable and
accrued expenses 45 4,635 12,051 (622) 16,109
Current maturities of
long term debt 0 3,365 0 0 3,365
Income taxes payable and
other current liabilities 0 948 (134) (649) 165
-------- -------- -------- -------- --------
Total current liabilities 45 59,298 18,369 (12,621) 65,091
Long term debt 10,848 5,018 0 0 15,866
Deferred income 0 125 0 906 1,031
Deferred income taxes 0 (186) 2,154 (1,968) 0
-------- -------- -------- -------- --------
Total liabilities 10,893 64,255 20,523 (13,683) 81,988
Shareholders' equity 70,601 87,931 161,295 (128,144) 191,683
-------- -------- -------- -------- --------
Total liabilities
and shareholders
equity 81,494 152,186 181,818 (141,827) 273,671
======== ======== ======== ======== ========
Net cash used in operating activities 0 (522) (1,997) 0 (2,519)
Net cash used in investing activities 0 (2,399) (2,357) 0 (4,756)
Net cash provided by financing activities 0 1,329 191 0 1,520
Effect of exchange rate 0 0 22 0 22
Cash at beginning 0 0 8,224 0 8,224
Cash at end 0 (1,592) 4,083 0 2,491
</TABLE>
16
<PAGE> 17
7. Related Party Transactions
On April 14, 1999, the Company sold 210,000 shares of authorized, but
unissued Common Stock at the fair market value of $7.125 per share to its
Chief Executive Officer in exchange for a promissory note. The note is on
a full recourse basis, with a maturity of three years from the date of
purchase and bears interest at LIBOR plus 2.75%. The transaction requires
a waiver of certain provisions under the Company's Senior Credit
Agreement. In the event such waiver is not obtained, the sale of the
shares will be rescinded.
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. Such statements
are indicated by words or phrases such as "anticipate," "projects," "management
believes," "the Company believes," "intends," "expects," and similar words or
phrases. Such forward-looking statements are subject to certain risks,
uncertainties or assumptions and may be affected by certain other factors.
Should one or more of these risks, uncertainties or other factors materialize,
or should underlying assumptions prove incorrect, actual results, performance,
or achievements of the Company may vary materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements in this paragraph. The
Company disclaims any obligation to publicly announce the results of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
The Company, through its subsidiaries, is a leading diversified manufacturer and
distributor of a broad range of branded and private label small household
appliances, including electric housewares (kitchen and garment care), personal
care, and other products. The Company manufactures and markets products under
the Windmere(R) and other Company-owned brand names, under private-label brand
names, under licensed brand names, such as Black & Decker(R) and, pursuant to
licenses held by affiliates such as, the White-Westinghouse(R) brand name. The
Company's customers for such products include mass merchandisers, specialty
retailers and appliance distributors primarily in North America, Latin America
and the Caribbean. In addition, the Company manufactures products on an OEM
basis for other major consumer products companies. The Company also manufactures
and markets the LitterMaid(R) self-cleaning cat litter box.
Results of Operations
The operating results of the Company expressed as a percentage of sales and
other revenues are set forth below:
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
----------- ------------
Net Sales 100.0% 100.0%
Cost of goods sold 71.6 76.7
------- -------
Gross Profit 28.4 23.3
Selling, general and
administrative expenses 30.2 21.1
Other (income) expense - net 5.0 .7
Earnings (loss) before income taxes
and equity in earnings (loss) of
joint ventures (.4) .8
------- -------
Earnings (loss) before taxes (7.2) 2.3
Provision (benefit) for income taxes (1.7) .2
------- -------
Net earnings (loss) (5.5)% 2.1%
======= =======
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<PAGE> 19
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Sales and other revenues
Sales and other revenues ("Revenues") for the Company increased by $63.5 million
to $118.9 million, an increase of 115% over Revenues for the first quarter of
1998. The increase is primarily the result of its June 26, 1998 acquisition of
the Black & Decker Household Products Group (HPG) which contributed $65.2
million in distribution sales. Sales to Walmart accounted for 18% of total sales
for the 1999 period. In the 1998 period, sales to a national retail beauty
supply chain accounted for 10.2% of total sales.
Fees earned by the Company under marketing arrangements with its joint ventures
totaled $300,000 for the 1999 period as compared to $655,000 for 1998 and are
classified as Revenues.
Gross Profit Margin
The Company's gross profit margin increased to 28.4% of Revenues from 23.3% in
the 1998 period. The increase is attributable primarily to the June 26, 1998
acquisition. Partially offsetting the increase is approximately $760,000 in
unabsorbed overhead from the Asheboro facility, which is scheduled to be closed
in the second quarter of 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the Company increased by $24.2
million in the first quarter of 1999. As a percentage of sales, costs increased
to 30.2% from 20.1% in the 1998 period. The increase is primarily due to the
June 26, 1998 acquisition of HPG.
Equity in Net Earnings of Joint Ventures
The Company's equity in net earnings of joint ventures decreased to a loss of
$519,000 in the 1999 first quarter as compared to income of $445,000 in the 1998
period. The decrease is primarily the result of the July 1998 sale of the
Company's equity interest in Salton as well as weaker performance by Newtech.
Interest Expense
Interest expense increased to $6.2 million in 1999 from $1.1 million in 1998.
The change is the result of amounts borrowed in conjunction with the acquisition
of the Black & Decker Household Products Group.
Taxes
The Company's tax expense is based on the earnings of each of its foreign and
domestic operations and it includes such additional U.S. taxes as are applicable
to any repatriation of foreign earnings. Foreign earnings, other than in Canada,
Mexico and certain other countries in Latin America, are generally taxed at
rates lower than in the United States.
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<PAGE> 20
EARNINGS PER SHARE
In 1997, the Company adopted Financial Accounting Standards No. 128 (SFAS) 128),
"Earnings Per Share." Basic shares for the three month periods ended March 31,
1999 and 1998 were 22,090,966 and 18,413,731, respectively.
Included in diluted shares are common stock equivalents relating to options,
warrants and convertible debt of 1,779,910 for the three month period ended
March 31, 1998. All common stock equivalents have been excluded from the per
share calculation for the 1999 period, as the Company incurred a net loss and
their inclusion would have been anti-dilutive. The increase in the number of
basic shares is primarily due to the July 1998 public offering of 3,041,000
shares of the Company's common stock.
Windmere Group
Windmere Group sales decreased by $1.5 million to $47.4 million in the first
quarter of 1999. The decrease in Windmere Group sales is attributable to
weakness in personal care and seasonal product sales partially offset by growth
in LitterMaid sales. LitterMaid distribution sales increased by $3.5 million or
137% over 1998 sales.
Selling, general and administrative expenses for the Windmere Group increased by
approximately $700,000 to 22.4% of segment sales from 21.6% in the 1998 period.
Group expenses for 1998 represented 8.9% of total Company sales as compared to
17.9% in the 1998 period. Contributing significantly to the increase were costs
directly associated with the increase in sales volume such as commissions and
approximately $500,000 related to the write-off of product design costs in
conjunction with a change in accounting regulations.
Household Products Group
Selling, general and administrative expenses for the Household Products Group
totaled $22.1 million or 34.0% of segment sales and 18.6% of total Company
sales. Included in selling, general and administrative expenses was
approximately $4.5 million in costs under contracts where Black & Decker is
providing services to the Company. These services were to be provided during a
transition period during which the Company would be putting in place its own
personnel and systems. Now and until the contracts are completed, which is
scheduled for the end of the 1999 second quarter, there will be some duplication
of operating costs. Also included is approximately $3.5 million in amortization
of intangibles recorded in conjunction with the acquisition.
Durable Manufacturing
Sales at the Company's China based manufacturing subsidiary increased by $3.4
million or 13.8% to $28.1 million in the 1999 period.
Operating earnings for Durable Manufacturing increased by $900,000 to $2.7
million in the 1999 first quarter. Better absorption of fixed overhead as a
result of increased sales volume in addition to increased productivity,
20
<PAGE> 21
contributed to the improved results.
Liquidity and Capital Resources
At March 31, 1999, the Company's working capital was $246.1 million, as compared
to $105.2 million at March 31, 1998. At March 31, 1999 and 1998, the Company's
current ratio was 3.4 to 1 and 2.6 to 1, respectively, and its quick ratio was
1.7 to 1 and 1.1 to 1, respectively. The improvement in ratios is primarily the
result of the acquisition.
Cash balances increased by approximately $6.6 million for the first quarter
ended March 31, 1999. The net cash provided by operating activities is primarily
the result of the increased growth in sales resulting from the June 26, 1998
acquisition of HPG and the resultant cash collections in the period.
Cash used in investing activities totaled approximately $3.4 million for the
period and is primarily the result of $4.7 million in capital expenditures at
the Company's manufacturing facilities.
Funds used in financing activities totaled approximately $16.9 million in the
period. Funds generated in operations were used to repay borrowings under the
Company's credit facilities including a $4.0 million prepayment of the Company's
Senior Secured Term debt.
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 have approximately $26.0 million
in trade finance lines of credit, payable on demand, which are secured by the
subsidiaries' tangible and intangible property, as well as a Company guarantee.
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 $133.2 million under the term loan portion of its Senior Secured
Credit Facilities. The Senior Secured Revolving Credit Facility as amended,
provides for borrowings by the Company of up to $110.0 million through December
31, 1999 and $160.0 million thereafter and through the remainder of the term of
the loan. As of May 10, 1999, the Company is not borrowing under the Senior
Secured Revolving Credit Facility and has approximately $117.8 million available
for future borrowings, under all its credit facilities. Advances under the
Senior Secured Revolving Credit Facility are based upon percentages of
outstanding eligible accounts receivable and inventories.
The Company's aggregate capital expenditures for the quarter ended March 31,
1999 were $4.7 million. The Company anticipates that the total capital
expenditures for 1999 will be approximately $25.0 million, which includes the
cost of new tooling. The Company plans to fund those capital expenditures from
cash flow from operations and, if necessary, borrowings under the Senior Secured
Revolving Credit Facility.
21
<PAGE> 22
At March 31, 1999, debt as a percent of total capitalization was 45 percent.
The Company's ability to make scheduled payments of principal of, or to pay the
interest on, or to refinance, its indebtedness, or to fund planned capital
expenditures, product research and development expenses and marketing expenses
will depend on its future performance, which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory, and
international and United States domestic political factors and other factors
that are beyond the Company's control. Based upon the current level of
operations and anticipated cost savings and revenue growth, management believes
that cash flow from operations and available cash, together with available
borrowings under the Senior Credit and other facilities, will be adequate to
meet the Company's future liquidity needs for at least the next several years.
The Company may, however, need to refinance all or a portion of the principal of
the indebtedness on or prior to maturity. There can be no assurance that the
Company's business will generate sufficient cash flow from operations, that
anticipated revenue growth and operating improvements will be realized or that
future borrowings will be available under the Senior Secured Credit Facilities
in an amount sufficient to enable the Company to service its indebtedness,
including the Senior Subordinated 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.
CURRENCY MATTERS
While the Company transacts business predominantly in U.S. dollars and most of
its revenues are collected in U.S. dollars, a portion of the Company's costs,
such as payroll, rent and indirect operations costs, are denominated in other
currencies, such as Chinese renminbi, Hong Kong dollars and Mexican pesos.
Changes in the relation of these and other currencies to the U.S. dollar will
affect the Company's cost of goods sold and operating margins and could result
in exchange losses. The impact of future exchange rate fluctuations on the
Company's results of operations cannot be accurately predicted.
The Company uses forward exchange contracts to reduce fluctuations in foreign
currency cash flows related to third party raw material and other operating
purchases as well as trade receivables. The purpose of the Company's foreign
currency management activity is to reduce the risk that eventual cash flows from
foreign currency denominated transactions may be adversely affected by changes
in exchange rates.
Durable uses the Hong Kong dollar as its functional currency. The Hong Kong
dollar has historically been "pegged" to a fixed exchange rate vis-a-vis the
U.S. dollar. If the Hong Kong dollar were to be significantly devalued against
the U.S. dollar and the exchange rate allowed to fluctuate, the Company could
experience significant changes in its currency translation account which would
impact the Company's future comprehensive income. The Company has acquired the
Queretaro property and related assets from The Black & Decker Corporation.
Because the operations of such facilities are primarily peso-denominated and the
revenues derived from products manufactured at such facilities are primarily
dollar-denominated, the Company
22
<PAGE> 23
is now subject to fluctuations in the value of the peso. 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. The
devaluation caused the peso value of dollar denominated indebtedness associated
with businesses in Mexico to increase significantly, and also greatly increased
the rate of inflation, resulting in a sharp rise in nominal interest rates on
peso-denominated financing. There can be no assurance that the peso to dollar
foreign exchange rate will not be volatile in the future and that financial
markets will not have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company uses interest rate swaps of one to four years in duration to reduce
the impact of changes in interest rates on its floating rate debt. The notional
amounts of the agreements are used to measure interest to be paid or received
and do not represent the amount of exposure to credit loss. The differential
paid or received on the agreements is recognized as an adjustment of interest
expense.
As of March 31, 1999, the Company had purchased interest rate swaps on $70
million notional principal amount with a market value of approximately
($600,000). The market value represents the amount the Company would have to pay
to exit the contracts at March 31, 1999. The Company does not intend to exit
such contracts at this time.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards (FAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities." FAS No.
133 establishes standards for accounting and reporting for derivative
instruments, and conforms the requirements for treatment of different types of
hedging activities. This statement is effective for all fixed quarters of years
beginning after June 1999. The Company has not completed its evaluations of FAS
No. 133.
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 45 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 administrative functions. A
complete evaluation has been performed to identify whether any of the Company's
software applications contain source code that is unable to interpret the
upcoming year 2000 and beyond. The appropriate modifications have been made and
the Company now believes that its critical systems are
23
<PAGE> 24
Year 2000 compliant. The Company has received communications from its major
suppliers and trading partners, some of who have filed reports with the
Securities and Exchange Commission, and believes that they are also Year 2000
Compliant. The cost of implementing required system changes is not 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 not experience Year 2000
compliance difficulties. Difficulties that arise may result in unfavorable
business consequences including disruption in product shipments, delays in
receipt of materials, delay in customer receipts and payments to suppliers.
LEGAL PROCEEDINGS
The Company, Salton, 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, an injunction enjoining the defendants from using the trademark,
unspecified damages and attorney's 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. White Consolidated and Westinghouse reached a partial
settlement in late April 1999 under which, among other things, White
Consolidated will withdraw its claims against Westinghouse. The partial
settlement does not resolve the dispute insofar as it relates to the products
licensed by White Consolidated to Salton or Newtech, or manufactured by the
Company, and the litigation is proceeding as to those matters. The parties have
filed cross-motions for summary judgement. Trial is currently scheduled for June
1999.
The Company is also a party to SHERLEIGH ASSOCIATES LLC AND SHERLEIGH ASSOCIATES
INC. PROFIT SHARING PLAN, ON THEIR OWN BEHALF AND ON BEHALF OF ALL OTHERS
SIMILARLY SITUATED V. WINDMERE-DURABLE HOLDINGS, INC., DAVID M. FRIEDSON, HARRY
D. SCHULMAN AND NATIONSBANC MONTGOMERY SECURITIES LLC, 98-2273-CIV-LENARD which
was filed in the United States District Court, Southern District of Florida on
October 8, 1998.
This matter is a class action complaint, which is a consolidation of eight
separate class action complaints with substantially similar allegations. The
24
<PAGE> 25
complaints were purportedly filed on behalf of those security holders of the
Company who purchased such securities during a certain period in the second and
third quarter of 1998, alleging violations of the federal securities laws
(including Rule 10b-5 promulgated pursuant to the Securities Exchange Act of
1934, as amended) in connection with the acquisition by the Company of certain
product categories of the Household Products Group of The Black & Decker
Corporation. Among other things, the plaintiffs allege that the Company and
certain of its directors and officers, along with NationsBanc Montgomery
Securities LLC, provided false information in connection with a public offering
of debt and equity securities. The plaintiffs seek, among other relief, to be
declared a class, to be awarded compensatory damages, rescission rights,
unspecified damages and attorneys' fees and costs. The court is presently
considering the appointment of lead counsel. The Company has filed a motion to
dismiss the matter, which has been stayed pending further order of the court.
Because these matters are in their preliminary stages, management is unable at
this time to determine what effect these lawsuits will have on the financial
condition, results of operations or liquidity of the Company.
By Order dated March 9, 1999, in addition to consolidating the above-referenced
cases, the Court provisionally certified a class of plaintiffs who purchased
Windmere stock between May 12, 1998 and September 22, 1998, provisionally
certified Sherleigh Associates LLC and Sherleigh Associates, Inc. Profit Sharing
Plan as lead plaintiff in this matter and is currently reviewing bids for lead
counsel which bids are still under consideration by the Court.
The Company is currently advancing the legal expenses of the directors and
officers who were named as defendants. Such defendants have agreed to repay the
Company for all or any portion of such advances to which they are ultimately
found not to be entitled pursuant to applicable law. Based on the information
currently available to the Company, management does not believe that the
indemnification of the officers and directors named as defendants in the
above-listed matters will have a material adverse effect on the financial
condition, results of operations or liquidity of the Company. However, the
actual effects of such indemnification on the Company cannot be finally
determined until the amount of such indemnification, if any, is fixed.
The Company is subject to other legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability, if any, in excess of applicable insurance coverage, is not
likely to have a material effect on the financial position of the Company.
However, as the outcome of litigation or other claims is difficult to predict,
significant changes in the estimated exposures could occur.
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.
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<PAGE> 26
On March 25, 1999, the Company, pursuant to the terms of the applicable
Shareholders' Agreement, offered to purchase the shares of Newtech not owned by
it for a total of $1.0 million. The other shareholders of Newtech have until May
25, 1999 to accept the Company's offer or purchase the shares of Newtech owned
by the Company for $1.0 million. On May 7, 1999, Newtech advised the Company
that it is in default with its senior lenders. The Company and Newtech are
currently in negotiations with the senior lenders to determine the appropriate
course of action. The outcome of these negotiations and its impact on the
Company's financial statements has not yet been determined. The Company has an
investment in and receivables from Newtech aggregating approximately
$22,000,000.
MANUFACTURING OPERATIONS
The Company's products are manufactured primarily at the Company's facilities in
the PRC, Mexico and the United States. In October 1998, the Company announced
its intention to close the Asheboro, North Carolina plant. The Company has
ceased manufacturing at the Asheboro facility as of March 31, 1999 and is
scheduled to completely exit the facility by June 30, 1999. Prior to the HPG
acquisition, the majority of the Company's products were manufactured by
Durable, its wholly-owned Hong Kong subsidiary operating in Bao An County,
Guangdong Province of the People's Republic of China, which is approximately 60
miles northwest of Central, Hong Kong. The Company has a significant amount of
its assets in the People's Republic, primarily consisting of inventory,
equipment and molds. The supply and cost of products, as well as finished
products, can be adversely affected, among other reasons, by changes in foreign
currency exchange rates, increased import duties, imposition of tariffs,
imposition of import quotas, interruptions in sea or air transportation and
political or economic changes. From time to time, the Company explores
opportunities to diversify its sourcing and/or production of certain products to
other low-cost locations or with other third parties or joint venture partners
in order to reduce its dependence on production in the People's Republic and/or
reduce Durable's dependence on the Company's existing distribution base.
However, at the present time, the Company intends to continue its production in
the People's Republic and Mexico.
The Mexican government exercises significant influence over many aspects of the
Mexican economy. Accordingly, the actions of the Mexican government concerning
the economy could have a significant effect on private sector entities in
general and the Company in particular. In addition, during the 1980s and 1990s,
Mexico experienced periods of slow or negative growth, high inflation,
significant devaluations of the peso and limited availability of foreign
exchange. As a result of the Company's reliance upon manufacturing facilities in
Mexico, economic conditions in Mexico could adversely affect the Company's
business, financial condition and results of operations.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk exposure is to changing interest rates, debt
obligations issued at a fixed rate and fluctuations in the currency exchange
rates. The Company's policy is to manage interest rate risk through the use of a
combination of fixed and floating rate instruments, with respect to both its
liquid assets and its debt instruments.
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<PAGE> 27
The Senior Credit Facilities accrue interest at variable rates; however, the
company has purchased interest rate protection for such loans in the form of
interest rate swaps. Based on the current amount of variable rate, as well as
underlying swaps, the exposure to interest rate risk is not material. Fixed-rate
debt obligations issued by the Company are not callable until July 31, 2003.
The Company is subject to foreign currency exchange rate risk relating to
receipts from customers and payments to suppliers in foreign currencies. As a
general policy, the Company hedges foreign currency commitments of future
payments and receipts by purchasing foreign currency-forward and option
contracts. As of March 31, 1999, the notional value of such derivatives was
approximately $26 million, with no significant unrealized gain or loss. The
majority of the Company's receipts and expenditures are contracted in U.S.
dollars, and the Company does not consider the market risk exposure relating to
currency exchange to be material at this time.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
See "Legal Proceedings" in Part I, Item 2 of this report.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WINDMERE-DURABLE HOLDINGS, INC.
(Registrant)
May 14, 1999 By: /s/ Harry D. Schulman
----------------------------------
Harry D. Schulman
Chief Financial Officer
(Duly authorized to sign on
behalf of the Registrant)
May 14, 1999 By: /s/ Terry L. Polistina
----------------------------------
Terry L. Polistina
Senior Vice President - Finance
(Duly authorized to sign on
behalf of the Registrant)
29
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 13,794
<SECURITIES> 0
<RECEIVABLES> 135,578
<ALLOWANCES> 8,474
<INVENTORY> 155,273
<CURRENT-ASSETS> 348,781
<PP&E> 138,976
<DEPRECIATION> 62,554
<TOTAL-ASSETS> 690,005
<CURRENT-LIABILITIES> 102,670
<BONDS> 130,000
0
0
<COMMON> 2,209
<OTHER-SE> 315,251
<TOTAL-LIABILITY-AND-EQUITY> 690,005
<SALES> 118,853
<TOTAL-REVENUES> 118,853
<CGS> 85,153
<TOTAL-COSTS> 85,153
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,107
<INTEREST-EXPENSE> 6,205
<INCOME-PRETAX> (8,605)
<INCOME-TAX> (2,076)
<INCOME-CONTINUING> (6,529)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,529)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
