<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 28, 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 0-19557
SALTON/MAXIM HOUSEWARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-3777824
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION
MOUNT PROSPECT, ILLINOIS 60056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES (ZIP CODE)
(847) 803-4600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether this registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares of the Registrant's Common Stock outstanding as of April
27, 1998 was 13,072,144.
<PAGE> 2
SALTON/MAXIM HOUSEWARES, INC.
FORM 10-Q
QUARTER ENDED MARCH 28, 1998
INDEX
PART I FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
Balance Sheets-March 28, 1998
(Unaudited) and June 28, 1997
Statements of Operations (Unaudited)
Thirteen weeks ended
March 28, 1998 and
March 29, 1997
And Thirty-nine weeks ended
March 28, 1998 and
March 29, 1997
Statements of Cash Flows (Unaudited)
Thirty-nine weeks ended
March 28, 1998 and
March 29, 1997
Notes to Financial
Statements (Unaudited)
Item 2: MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II OTHER INFORMATION
Item 1: Legal Proceedings
Item 6: Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE> 3
SALTON/MAXIM HOUSEWARES, INC.
BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
ASSETS MARCH 28, JUNE 28,
1998 1997
--------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 774 $ 2,613
Accounts receivable, net of allowances 46,846 25,647
Inventories 63,139 41,968
Prepaid expenses and other current assets 3,283 3,717
Federal income taxes refundable - 1,105
Deferred tax assets 1,122 1,734
-------- --------
TOTAL CURRENT ASSETS 115,164 76,784
PROPERTY, PLANT AND EQUIPMENT:
Molds and tooling 17,014 14,828
Warehouse equipment 457 380
Office furniture and equipment 4,983 3,792
-------- --------
22,454 19,000
Less accumulated depreciation (13,155) (10,684)
-------- --------
9,299 8,316
INTANGIBLES, NET 4,831 4,880
NON-CURRENT DEFERRED TAX ASSET - 206
INVESTMENT-WINDMERE 18,259 12,157
-------- --------
TOTAL ASSETS $147,553 $102,343
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 18,657 $ 17,361
Accrued expenses 8,936 2,758
Revolving line of credit 62,155 37,977
Accrued interest 130 192
Current portion - Subordinated debt - 500
-------- --------
TOTAL CURRENT LIABILITIES 89,878 58,788
Non-Current Deferred Tax Liability 2,604 -
Due to Windmere - 4,933
-------- --------
TOTAL LIABILITIES 92,482 63,721
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized,
2,000,000 shares; no shares issued
Common stock, $.01 par value; authorized,
20,000,000 shares; issued and outstanding,
1998-13,072,144 shares,1997-13,017,144 shares 131 130
Unrealized gains on securities
available for sale 5,294 1,337
Additional paid-in capital 53,178 53,036
Less Note Receivable - Windmere (10,848) (10,848)
Retained Earnings(Accumulated deficit) 7,316 (5,034)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 55,071 38,622
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $147,553 $102,343
======== ========
</TABLE>
<PAGE> 4
SALTON/MAXIM HOUSEWARES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
-------------------------- -------------------------
3/28/98 3/29/97 3/28/98 3/29/97
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 68,099 $ 41,690 $ 236,025 $ 135,389
Cost of goods sold 39,336 27,188 141,643 89,166
Distribution expenses 2,604 1,920 8,397 5,925
----------- ----------- ----------- -----------
GROSS PROFIT 26,159 12,582 85,985 40,298
Selling, general and administrative expenses 21,417 12,528 62,961 30,285
----------- ----------- ----------- -----------
OPERATING INCOME 4,742 54 23,024 10,013
Interest expense (1,282) (941) (4,244) (3,040)
Realized gain on sale of marketable securities 724 - 724 0
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 4,184 (887) 19,504 6,973
Income taxes 1,406 (210) 7,154 2,544
----------- ----------- ----------- -----------
NET INCOME $ 2,778 $ (677) $ 12,350 $ 4,429
=========== =========== =========== ===========
Weighted average common shares outstanding 13,072,144 13,015,497 13,056,016 12,778,735
Weighted average common and common
equivalent shares outstanding 13,522,358 13,264,028 13,491,944 13,031,591
Net income per common share : Basic $0.21 ($0.05) $0.95 $0.35
Net income per common share : Diluted $0.21 ($0.05) $0.92 $0.34
</TABLE>
<PAGE> 5
SALTON/MAXIM HOUSEWARES, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
39 WEEKS ENDED
---------------------------
MARCH 28, MARCH 29,
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income: $12,350 $ 4,429
Adjustments to reconcile net income
to net cash used in operating activities:
Gain on sale of maketable securities (724)
Changes in deferred taxes 612 737
Depreciation and amortization 2,890 2,286
Changes in assets and liabilities:
Accounts receivable (21,199) (12,921)
Inventories (21,171) (6,491)
Federal income taxes refundable 1,105
Prepaid expenses and other
current assets 434 (2,372)
Accounts payable 1,296 6,932
Accrued expenses 6,116 889
------- -------
NET CASH USED IN
OPERATING ACTIVITIES (18,291) (6,511)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,823) (3,491)
Proceeds from the sale of marketable securities 1,388
Block acquisition and related payments (2,015)
------- -------
NET CASH USED IN INVESTING
ACTIVITIES (2,435) (5,506)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit 24,178 7,937
Proceeds from subordinated debt and due to Windmere 4,583
Common stock issued 142
Offering costs associated with stock issue (486)
Repayments of subordinated debt and due to Windmere (5,433)
NET CASH PROVIDED BY ------- -------
FINANCING ACTIVITIES 18,887 12,034
------- -------
NET INCREASE/(DECREASE) IN CASH (1,840) 17
Cash, beginning of period 2,613 4
------- -------
CASH, END OF PERIOD $773 $21
======= =======
CASH PAID DURING THE PERIOD FOR:
INTEREST $4,306 $3,049
INCOME TAXES $4,128 $1,058
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
In the quarter ended September 28, 1996 a long-term debt obligation of
$3,254,286 was canceled by the consummation of a transaction with
Windmere-Durable Holdings, Inc. ("Windmere") In addition, the Company received
a $10,847,620 note receivable and 748,112 shares of Windmere common stock in
exchange for 6,508,572 newly issued shares of common stock of the Company.
<PAGE> 6
SALTON/MAXIM HOUSEWARES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. FINANCIAL STATEMENTS
The financial statements have been prepared from the Company's books
without audit and are subject to year end adjustments. The interim financial
statements reflect all adjustments (consisting of only normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of financial information. The interim financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in the Salton/Maxim Housewares, Inc. 1997 Annual Report to
Shareholders on Form 10-K. The results of operations for the interim periods
should not be considered indicative of results to be expected for the full
year.
Certain items in the 1997 financial statements have been reclassified to
conform with the current year presentation.
2. EARNINGS PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standards No.
128-Earnings per Share in the second quarter. Basic net income per common
share is computed based upon the weighted average number of common shares
outstanding. Diluted net income per common share is computed based upon the
weighted average number of common shares outstanding, adjusted for dilutive
common stock equivalents applying the treasury stock method.
3. EVENTS OF THE THIRTY-NINE WEEKS ENDED MARCH 28, 1998.
On June 30, 1997, the Company amended and extended its revolving credit
facility (the "Amended Facility") with its lender to September, 30, 2000. The
Amended Facility provides for borrowings up to $75,000,000 and it bears
interest at 1% over the lender's established prime rate, payable monthly, and
includes a provision which provides the Company the ability to reduce its
borrowing rate, based on the London InterBank Offered Rate (LIBOR), on up to
75% of outstanding borrowings. The Company may further reduce its interest
rate by meeting certain performance provisions.
The Amended Facility is secured by a first lien on substantially all the
Company's assets. Credit availability is based on a formula related to trade
accounts receivable, inventories and outstanding letters of credit. It
contains restrictive financial covenants, the more significant of which require
the Company to maintain specified ratios of total liabilities to net worth,
minimum tangible net worth, and minimum earnings before interest, taxes,
depreciation and amortization. Other covenants also limit the Company's
activities in mergers or acquisitions
<PAGE> 7
and sales of substantial assets. Compliance with these covenants effectively
restricts the ability of the Company to pay dividends, and also requires the
Company to apply cash receipts to pay down borrowings under the Facility.
The Company, White Consolidated, Inc. ("White Consolidated"),
Windmere-Durable Holdings, Inc. ("Windmere") 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 of 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. The action seeks, among other things, a preliminary injunction
enjoining the defendants from using the trademark, unspecified damages and
attorneys' fees. Pursuant to the Company's license agreements with White
Consolidated, White Consolidated is defending the Company and is obligated to
indemnify the Company from and against any and all claims, losses and damages
arising out of the action, including the costs of litigation. This action is
scheduled for trial in Pittsburgh, Pennsylvania on or about September 14, 1998
or as soon thereafter as the Court's schedule permits. Due to the inherent
uncertainties of the litigation process, the Company is unable to predict the
outcome of this litigation. If the outcome of this litigation is adverse to
the Company, it could terminate or otherwise adversely affect the Company's
ability to market and sell products under the White-Westinghouse brand name to
Kmart Corporation and other retailers.
During the period ended March 28, 1998, certain of the Company's
customers, namely HomePlace Stores, Inc. and Venture, filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. These customers owed the Company
amounts aggregating approximately $2.4 million. Provision of approximately
$1.0 million was made in the quarter ended December 27, 1997, for the estimated
potential losses from these Chapter 11 bankruptcy filings.
On May 6, 1998, the Company entered into a Stock Agreement (the "Stock
Agreement") with Windmere-Durable Holdings, Inc. ("Windmere"), the 50%
stockholder of the Company. Subject to the terms and conditions of the Stock
Agreement, Windmere has granted the Company the right (the "Salton Option") to
purchase the 6,535,072 shares of common stock of the Company owned by Windmere
for $12 per share in cash plus a $15 million subordinated promissory note. The
note, which is payable six and one-half years from the closing date of the
Salton Option and bears interest at 4% per annum payable annually, and is
subject to offsets of 5% of the total purchase price paid by the Company for
product purchases from Windmere and its affiliates during the term of the note.
The principal amount of the note is also subject to reduction in the event the
Company's distribution and marketing agreement with Kmart Corporation is
terminated for any reason. The Salton Option must be exercised by the Company
on or prior to June 30, 1998 and must close on or prior to October 30, 1998.
<PAGE> 8
The Stock Agreement provides for various commercial and other arrangements
between the parties in the event that the Company acquires Windmere's 50%
interest in the Company including: (i) Windmere's simultaneous payment in full
of its promissory note in the principal amount of $10,847,620, which note was
issued to the Company in July, 1996; (ii) the Company's repurchase for
approximately $3.3 million of Windmere's option to purchase up to 458,500
shares of the Company, which option was granted to Windmere in July, 1996; and
(iii) the continuation of various commercial and other arrangements, including
those relating to Kmart, subject to certain modifications.
If the Company fails to exercise the Salton Option on or prior to June 30,
1998 or to close the purchase of Windmere's 50% interest on or prior to October
30, 1998, then Windmere has the right (the "Windmere Option") to tender an
offer to acquire all of the shares of the Company it does not own in a tender
offer and/or merger for $14.27 per share in cash or in registered shares of
Windmere common stock. The Windmere Option must (i) be exercised by Windmere
within 65 days of the earlier of the Company's failure to exercise the Salton
Option or failure to close the purchase of Windmere's 50% interest and (ii)
close within 150 days of Windmere's exercise of the Windmere Option. Except
for the exercise and consummation of the Windmere Option, the provisions of the
Stockholder Agreement dated July 11, 1996 between the Company and Windmere
remain in full force and effect.
In connection with the Stock Agreement, Leonhard Driemann (the Chief
Executive Officer of the Company), David Sabin (the Chairman of the Company)
and William B. Rue (the Chief Operating Officer of the Company) and their
respective affiliates have agreed to tender the shares of the Company they own
and/or to vote for any merger with Windmere in the event the Windmere Option is
exercised by Windmere.
The Stock Agreement and the rights and obligations of the parties
thereunder may be terminated on or prior to May 18, 1998 by: (i) the Company
if a special committee of the Board of Directors of the Company consisting of
Messrs. Frank Devine and Bert Doornmalen does not determine that the
transactions contemplated by the Stock Agreement are in the best interests of
the Company and its stockholders (other than Windmere); or (ii) Windmere if the
Board of Directors of Windmere does not determine that the transactions
contemplated by the Stock Agreement are in the best interests of Windmere and
its stockholders.
The consummation of the transactions contemplated by the agreement is
subject to a number of further conditions, including the termination of all
applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and, if required by the form of transaction,
stockholder approval. There can be no assurance that the Company will purchase
Windmere's 50% interest or, if the Company fails to exercise or close its right
to purchase such interest, that Windmere will acquire any of the shares of the
Company which it does not own.
In the event that the Company exercises the Salton Option, it will have to
issue debt and/or equity securities and use new or existing credit lines to
fund the cash portion of the purchase price for the
<PAGE> 9
shares of common stock of the Company owned by Windmere. The purchase of
Windmere's 50% interest in the Company would significantly reduce the number of
outstanding shares in determining the Company's earnings per share; however, the
incurrence of additional debt by the Company would have an adverse effect on the
Company's reported net income and cash flow. While the Company is exploring
additional and new sources of funds, there can be no assurance as to whether the
Company will be able to obtain such funds.
<PAGE> 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
THIRTEEN WEEKS ENDED MARCH 28, 1998 COMPARED WITH THIRTEEN WEEKS ENDED
MARCH 29, 1997.
Net sales for the quarter ended March 28, 1998 were $68.1 million, an
increase of approximately $26.4 million or 63.3% compared to net sales of $41.7
million for the quarter ended March 29, 1997. This increase is primarily
attributable to increased sales of the Juiceman juice extractors, George
Foreman Grills, Farberware products and White-Westinghouse sales under the
Kmart program. Net sales of White-Westinghouse products to Kmart approximated
15.1% of net sales in this quarter. The White-Westinghouse program with Kmart
commenced in calendar year 1997.
During the quarter, certain of the Company's customers, namely HomePlace
Stores, Inc. and Venture, filed for protection under Chapter 11 of the U. S.
Bankruptcy Code. These customers owed the Company amounts aggregating
approximately $2.4 million. A provision of approximately $1.0 million was made
in the previous quarter for the estimated potential losses from these Chapter
11 bankruptcy filings.
Gross profit in the third quarter of fiscal 1998 was $26.2 million or
38.4% of net sales as compared to $12.6 million or 30.2% in 1997. Cost of
goods sold during the period decreased to 57.8% of net sales compared to 65.2%
in 1997. Distribution expenses were $2.6 million or 3.8% of net sales in 1998
compared to $1.9 million or 4.6% of net sales in the same period in 1997. Gross
profit and costs of goods sold in 1998 as a percentage of net sales were
improved primarily due to a more favorable mix of sales in their respective
channels of distribution when compared to 1997.
Selling, general and administrative expenses increased to $21.4 million or
31.5% of net sales in the third quarter of fiscal 1998 compared to $12.5
million or 30.1% of net sales for the same period in 1997. Expenditures for
television (primarily for increased sales and promotional activity in the form
of half hour television programs called infomercials for the Juiceman Juice
Extractors and George Foreman Grills), royalty expenses, certain other media
and cooperative advertising coverages, and trade show expenses, were $15.2
million or 22.3% of net sales in the current quarter compared to $8.6 million
or 20.6% of net sales in the comparable prior year quarter. The remaining
selling, general and administrative costs were $6.2 million or 9.1% of net
sales in the current quarter compared to $3.9 million or 9.4% of net sales in
the comparable prior year quarter. These increases were primarily attributable
to higher costs for additional personnel, sales commissions and various other
costs related to the higher level of sales.
Net interest expense was approximately $1.3 million for the quarter
compared to $941,000 for the same quarter in 1997. The Company's rate of
interest on amounts outstanding was a weighted average annual rate of 9.2% in
the quarter ended March 28, 1998 compared to 11.1% in the comparable prior
<PAGE> 11
year quarter. The average amount outstanding under the Company's revolving line
of credit increased about $27.7 million when compared to the average amount
outstanding in the same period a year ago. This increase was used primarily to
finance higher net sales and increases in accounts receivable and inventory.
Interest expense was offset by interest income earned on the note receivable
from Windmere in both periods.
The Company had income before income taxes of $4.2 million in the third
quarter of fiscal 1998 compared to a net loss before income taxes of $887,000
in the third quarter of 1997. The Company had net income after income taxes in
the third quarter of 1998 of $2.8 million compared to a net loss after income
taxes of $677,000 in the third quarter of 1997. Basic earnings per common
share were $.21 per share on weighted average common shares outstanding of
13,072,144 compared to a net loss of $.05 per share on weighted average common
shares outstanding of 13,015,497 in the third quarter of 1997. Diluted
earnings per common share were $.21 per share on weighted average common shares
outstanding, including dilutive common stock equivalents, of 13,522,358 in the
third quarter of 1998 compared to a net loss of $0.05 per share on weighted
average common shares outstanding, including dilutive common stock equivalents,
of 13,264,028 in the third quarter of 1997.
THIRTY-NINE WEEKS ENDED MARCH 28, 1998 COMPARED WITH THIRTY-NINE WEEKS
ENDED MARCH 29, 1997.
Net sales in the first nine months of fiscal year 1998 were $236.0
million, an increase of approximately $100.6 million or 74.3%, compared to net
sales of $135.4 million in the first nine months of fiscal year 1997. This
increase is primarily attributable to increased sales of the Juiceman juice
extractors, George Foreman Grills, Farberware products and White-Westinghouse
sales under the Kmart program. Net sales of White-Westinghouse products to
Kmart approximated 17.2% of net sales. The White-Westinghouse program to Kmart
commenced in calendar year 1997.
In the period ended March 28, 1998, certain of the Company's customers,
namely HomePlace Stores, Inc. and Venture, filed for protection under Chapter
11 of the U.S. Bankruptcy Code. These customers owed the Company amounts
aggregating approximately $2.4 million. Provision of approximately $1.0
million was made in the period for the estimated potential losses from these
Chapter 11 bankruptcy filings.
Gross profit in the first nine months of 1998 was $86.0 million or 36.4%
of net sales as compared to $40.3 million or 29.8% in the first nine months of
1997. Costs of goods sold during the period decreased to 60% of net sales
compared to 65.9% in 1997. Distribution expenses were approximately $8.4
million or 3.6% of net sales in 1998 compared to $5.9 million or 4.4% of net
sales in the same period in 1997. Gross profit and cost of goods sold in 1998
as a percentage of net sales were improved primarily due to a more favorable
mix of sales in their respective channels of distribution when compared to
1997.
Selling, general and administrative expenses increased to $63.0 million or
26.7% of net sales in the first nine months of fiscal 1998 compared to $30.3
million or 22.4% of net sales for the same period in 1997. Expenditures for
television (primarily for increased sales and promotional activity in the form
of half hour television programs called infomercials for the Juiceman Juice
Extractors and George Foreman Grills), royalty expenses, certain other
<PAGE> 12
media and cooperative advertising coverages, and trade show expenses, were $44.8
million or 19.0% of net sales in the current period when compared to $19.7
million or 14.5% of net sales in the comparable prior year period. The
remaining selling, general and administrative costs were $18.1 million or 7.7%
of net sales in the current half, compared to $10.6 million or 7.8% of net sales
in the same period in fiscal 1997. These increases were primarily attributable
to higher costs for additional personnel, sales commissions and various other
costs related to the higher level of sales.
Net interest expense was approximately $4.2 million for the first nine
months of fiscal 1998 compared to $3.0 million for the same period in fiscal
1997. The Company's rate of interest on amounts outstanding was a weighted
average annual rate of 9.4% in the first half of fiscal 1998 compared to 10.9%
in the same period in fiscal 1997. The average amount outstanding under the
Company's revolving line of credit increased about $24.8 million when compared
to the average amount outstanding in the same period in fiscal 1997. This
increase was used primarily to finance higher net sales and an increase in
accounts receivable and inventory. Interest expense was offset in both periods
by interest income earned on the note receivable from Windmere.
The Company had income before income taxes of $19.5 million in the first
nine months of fiscal 1998 compared to income before income taxes of $7.0
million in the first nine months of 1997. The Company had net income after
income taxes in the first nine months of 1998 of $12.4 million compared to net
income after income taxes of $4.4 million in the first half of 1997. Basic
earnings per common share were $.95 per share on weighted average common shares
outstanding of 13,056,016 compared to $.35 per share on weighted average common
shares outstanding of 12,778,735 in the first nine months of 1997. Diluted
earnings per common share were $.92 per share on weighted average common shares
outstanding, including dilutive common stock equivalents, of 13,491,944 in the
first nine months of 1998 compared to $.34 per share on weighted average common
shares outstanding, including dilutive common stock equivalents, of 13,031,591
in the first nine months of 1997.
Liquidity and Capital Resources
In the first nine months of fiscal 1998, the Company used net cash of
$18.3 million in operating activities and net cash of approximately $2.4
million in investing activities. This resulted primarily from the growth in
sales in the period and higher levels of inventory and receivables. In
addition, the Company had increased investment in capital assets, primarily
tooling of about $3.8 million. This investment was funded in part by the sale
of marketable securities of $1.4 million. Financing activities provided cash
of $18.9 million for these purposes primarily from increased line of credit
proceeds of $24.2 million, offset by repayments of notes of approximately $5.4
million. At March 28, 1998, the Company had approximately $59.2 million
outstanding as drawings under its revolving line of credit. Typically, given
the seasonal nature of the Company's business, the Company's borrowings tend to
be the highest in mid-summer to fall. The Company had the ability at March 28,
1998 to borrow a total of $75 million. The Company will continue to incur
short-term borrowings in order to finance working capital requirements. The
Company's ability to fund its operating activities is directly dependent upon
its rate of growth, ability to effectively manage its inventory, the terms
under which it extends credit to its customers and its ability to collect under
such terms and its ability to access external sources of financing. The
Company believes that its internally generated funds, together with funds
<PAGE> 13
available under its revolving credit agreement and other potential external
financing sources, will provide sufficient funding to meet the Company's
capital requirements and its operating needs for at least the next 12 months.
The Company from time to time explores additional or new sources of
financing. While the Company has been able to maintain access to external
financing sources, no assurance can be given that such access will continue or
that the Company will be successful in obtaining new or replacement sources of
financing.
On May 6, 1998, the Company entered into a Stock Agreement (the "Stock
Agreement") with Windmere-Durable Holdings, Inc. ("Windmere"), the 50%
stockholder of the Company. Subject to the terms and conditions of the Stock
Agreement, Windmere has granted the Company the right (the "Salton Option") to
purchase the 6,535,072 shares of common stock of the Company owned by Windmere
for $12 per share in cash plus a $15 million subordinated promissory note. The
note, which is payable six and one-half years from the closing date of the
Salton Option and bears interest at 4% per annum payable annually, and is
subject to offsets of 5% of the total purchase price paid by the Company for
product purchases from Windmere and its affiliates during the term of the note.
The principal amount of the note is also subject to reduction in the event the
Company's distribution and marketing agreement with Kmart Corporation is
terminated for any reason. The Salton Option must be exercised by the Company
on or prior to June 30, 1998 and must close on or prior to October 30, 1998.
The Stock Agreement provides for various commercial and other arrangements
between the parties in the event that the Company acquires Windmere's 50%
interest in the Company including: (i) Windmere's simultaneous payment in full
of its promissory note in the principal amount of $10,847,620, which note was
issued to the Company in July, 1996; (ii) the Company's repurchase for
approximately $3.3 million of Windmere's option to purchase up to 458,500
shares of the Company, which option was granted to Windmere in July, 1996; and
(iii) the continuation of various commercial and other arrangements, including
those relating to Kmart, subject to certain modifications.
If the Company fails to exercise the Salton Option on or prior to June 30,
1998 or to close the purchase of Windmere's 50% interest on or prior to October
30, 1998, then Windmere has the right (the "Windmere Option") to tender an
offer to acquire all of the shares of the Company it does not own in a tender
offer and/or merger for $14.27 per share in cash or in registered shares of
Windmere common stock. The Windmere Option must (i) be exercised by Windmere
within 65 days of the earlier of the Company's failure to exercise the Salton
Option or failure to close the purchase of Windmere's 50% interest and (ii)
close within 150 days of Windmere's exercise of the Windmere Option. Except
for the exercise and consummation of the Windmere Option, the provisions of the
Stockholder Agreement dated July 11, 1996 between the Company and Windmere
remain in full force and effect.
In connection with the Stock Agreement, Leonhard Driemann (the Chief
Executive Officer of the Company), David Sabin (the Chairman of the Company)
and William B. Rue (the Chief Operating Officer of the Company) and their
respective affiliates have agreed to tender the shares of the Company they own
and/or to vote for any merger with Windmere in the event the Windmere Option is
exercised by Windmere.
<PAGE> 14
The Stock Agreement and the rights and obligations of the parties
thereunder may be terminated on or prior to May 18, 1998 by: (i) the Company
if a special committee of the Board of Directors of the Company consisting of
Messrs. Frank Devine and Bert Doornmalen does not determine that the
transactions contemplated by the Stock Agreement are in the best interests of
the Company and its stockholders (other than Windmere); or (ii) Windmere if the
Board of Directors of Windmere does not determine that the transactions
contemplated by the Stock Agreement are in the best interests of Windmere and
its stockholders.
The consummation of the transactions contemplated by the agreement is
subject to a number of further conditions, including the termination of all
applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and, if required by the form of transaction,
stockholder approval. There can be no assurance that the Company will purchase
Windmere's 50% interest or, if the Company fails to exercise or close its right
to purchase such interest, that Windmere will acquire any of the shares of the
Company which it does not own.
In the event that the Company exercises the Salton Option, it will have to
issue debt and/or equity securities and use new or existing credit lines to
fund the cash portion of the purchase price for the shares of common stock of
the Company owned by Windmere. The purchase of Windmere's 50% interest in the
Company would significantly reduce the number of outstanding shares in
determining the Company's earnings per share; however, the incurrence of
additional debt by the Company would have an adverse effect on the Company's
reported net income and cash flow. While the Company is exploring additional
and new sources of funds, there can be no assurance as to whether the Company
will be able to obtain such funds.
Except for historical information contained herein, the matters discussed
are forward-looking statements that are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
set forth in the forward-looking statements. These factors (the "Cautionary
Statements") include, without limitation, economic conditions and the retail
environment; the Company's dependence on the timely development, introduction
and customer acceptance of products; competitive developments, introduction and
customer acceptance of products, competitive products and pricing; the impact
on the Company of the possible transactions contemplated by the Stock Agreement
dated May 6, 1998 between the Company and Windmere-Durable Holdings, Inc., the
50% stockholder of the Company (including, without limitation, the Company's
possible purchase of Windmere's 50% interest or Windmere's possible purchase of
shares of the Company which it does not own); the Company's relationship and
contractual arrangements with key customers, suppliers and licensors;
dependence on foreign suppliers and supply and manufacturing constraints;
cancellation or reduction of orders; risks relating to pending legal
proceedings; and other risks and uncertainties detailed from time to time in
the Company's filings with the Securities and Exchange Commission. 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. The Company does not undertake any
obligation to release publicly any revisions to such forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
<PAGE> 15
PART II: OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS
The Company, White Consolidated, Inc. ("White Consolidated"),
Windmere-Durable Holdings, Inc. 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 of
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. The
action seeks, among other things, a preliminary injunction enjoining the
defendants from using the trademark, unspecified damages and attorneys' fees.
Pursuant to the Company's license agreements with White Consolidated, White
Consolidated is defending the Company and is obligated to indemnify the Company
from and against any and all claims, losses and damages arising out of the
action, including the costs of litigation. This action is scheduled for trial
in Pittsburgh, Pennsylvania on or about September 14, 1998 or as soon thereafter
as the Court's schedule permits. Due to the inherent uncertainties of the
litigation process, the Company is unable to predict the outcome of this
litigation. If the outcome of this litigation is adverse to the Company, it
could terminate or otherwise adversely affect the Company's ability to market
and sell products under the White-Westinghouse brand name to Kmart Corporation
and other retailers.
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
B. Reports on Form 8-K
(i) Current report on Form 8-K dated
April 1, 1998 reporting under Item 5, Other Events,
certain disputes with Windmere-Durable Holdings, Inc.,
the 50% stockholder of the Company.
(ii) Current report on Form 8-K dated
May 6, 1998 reporting under Item 5, Other Events,
information related to the Company's announcement that
it has entered into a Stock Agreement dated May 6, 1998
with Windmere-Durable Holdings, Inc.
<PAGE> 16
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.
SALTON/MAXIM HOUSEWARES, INC.
Date: May 8, 1998 /s/ William B. Rue
---------------------------
William B. Rue
Senior Vice President and
Chief Operating Officer
(Duly Authorized Officer of
the Registrant)
<PAGE> 17
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.1 Stock Agreement, dated as of May 6, 1998, by and between
Salton/Maxim Housewares, Inc., Windmere-Durable Holdings,
Inc. and the Salton Executive related parties (as defined
therein) (incorporated herein by reference to Exhibit 2.1
The Company's current report on Form 8-K dated May 6, 1998
(File No. 0-19557)
27.1 Financial Data Schedule
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