-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F/hiXmSj2PDyzRo7W3DSdYWR35ldHEPMg3iLWZgHPJCm6bwgpEu07T7jVZGHYede yXF4moN5nfB5LPW9UedWkg== 0000950144-98-003904.txt : 19980401 0000950144-98-003904.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950144-98-003904 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WINDMERE DURABLE HOLDINGS INC CENTRAL INDEX KEY: 0000217084 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC HOUSEWARES & FANS [3634] IRS NUMBER: 591028301 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10177 FILM NUMBER: 98582654 BUSINESS ADDRESS: STREET 1: 5980 MIAMI LAKES DR CITY: MIAMI LAKES STATE: FL ZIP: 33014 BUSINESS PHONE: 3053622611 MAIL ADDRESS: STREET 1: 5980 MIAMI LAKES DRIVE CITY: MIAMI LAKES STATE: FL ZIP: 33014 FORMER COMPANY: FORMER CONFORMED NAME: WINDMERE CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SAVE WAY INDUSTRIES INC DATE OF NAME CHANGE: 19830815 FORMER COMPANY: FORMER CONFORMED NAME: SAVE WAY BARBER & BEAUTY SUPPLIES INC DATE OF NAME CHANGE: 19770626 10-K405 1 WINDMERE-DURABLE HOLDINGS 10-K405 12/31/97 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-10177 WINDMERE-DURABLE HOLDINGS, INC. (Exact name of Registrant as specified in its charter) Florida 59-1028301 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 5980 Miami Lakes Drive, Miami Lakes, Florida 33014 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (305) 362-2611 Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - ------------------- ----------------------------------------- Common Stock $.10 Par Value New York Stock Exchange Special Preferred Stock Rights New York Stock Exchange Common Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 16, 1998, the aggregate market value of the voting stock (based on the closing price as reported by NYSE of $28.875) 1 2 held by non-affiliates of the Registrant was approximately $454,078,097. APPLICABLE ONLY TO CORPORATE REGISTRANTS: Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. 18,704,390 Shares of Common Stock (as of the close of business on March 16, 1998) DOCUMENTS INCORPORATED BY REFERENCE 1. Windmere-Durable Holdings, Inc. 1997 Annual Report to Shareholders (for the fiscal year ended December 31, 1997). Information contained in this document has been incorporated by reference in PARTS I and II. 2. Windmere-Durable Holdings, Inc. Proxy Statement for its 1998 Annual Meeting of Shareholders. Information contained in this document has been incorporated by reference in PART III. 2 3 ' PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL Windmere-Durable Holdings, Inc., (the "Company") through its subsidiaries and investments, is a diversified manufacturer and distributor of a broad range of personal care products, kitchen electric appliances, and seasonal products for major retailers and appliance distributors in North America, Europe, and the Far East. Products are manufactured under the Windmere and other Company-owned brands, under private-label and licensed brand arrangements, and on an OEM basis for other major consumer products companies. Additionally, Windmere-Durable is one of the largest suppliers of hair care appliances to the professional salon industry in the United States. Windmere-Durable also owns a 50-percent equity interest in both Salton/Maxim Housewares, Inc. ("Salton") and New M-Tech Corporation ("New M-Tech"), and through them, the Company in 1997 entered into the White-Westinghouse contract with Kmart Corporation. Salton is a designer and marketer of small kitchen appliances which distributes primarily to department stores and upscale retailers. New M-Tech designs, sources, manufactures and markets value-priced brand-name consumer electronic products. The Company's products are primarily manufactured by Durable Electrical Metal Factory, Ltd. ("Durable"), its wholly-owned Hong Kong subsidiary, in Bao An County, Guangdong Province of the People's Republic of China ("People's Republic"), which is approximately 60 miles northwest of central Hong Kong, and other unrelated factories in the People's Republic. Approximately 85% to 90% of the Company's products are manufactured by Durable. The Company was incorporated under the laws of the State of Florida in 1963. The Company's executive offices are located at 5980 Miami Lakes Drive, Miami Lakes, Florida 33014, (see Item 2. Properties), and its telephone number is (305) 362-2611. PRODUCTS The major portion of the Company's revenues are generated by the sale of personal care products and appliances. The Company's personal care products include hair dryers, curling irons, curling brushes, hairsetters, combs and brushes, shears, mirrors and electric shavers. Appliances include toasters, toaster ovens, can openers, blenders, hand mixers, waffle irons, steam irons, electronic air cleaners, fans and air fresheners. In 1997, 1996 and 1995, net sales of personal care products and appliances represented approximately 49% and 42%, 59% and 41% and 63% 3 4 and 37%, respectively, of the Company's total net sales. Appliance sales increased by $29.1 million in 1997 reflecting the Company's growth in the manufacture and distribution of kitchen electrics and the December 1996 acquisition of the seasonal products joint venture. In early 1997, the Company launched an infomercial to promote sales of its Litter Maid product. In late 1997, the Company began an initial roll out of the product through retail distribution channels. Litter Maid sales for 1997, totaled $13.4 million or 5% of total sales. MARKETING AND DISTRIBUTION The Company's products are sold principally by independent sales representatives. The Company utilizes media advertising, cooperative advertising and collateral materials to promote its products. The Company's products are sold under various trademarks and registrations, some of which include: Windmere, Jumbo Curl, Belson Pro, Curlmaster, Design Pro, First Class Gourmet, Solid Gold, Windmere Salon, AirMoves, ESP, Electric Shock Protection, VIP Pro, Setting Pretty, Skinni Mini, Clothes Shaver, Easy Styler, Four Way Curls, Set Up, All Curl Trio, Mirror Go Lightly, Jerdon, First Class, Plak Trac, Litter Maid, Smoke Catcher, Prelude, Belson, Pro Touch, Pro Star, Hot Silver, Golden Touch, Profiles, Comare, Salon Designs, Premiere, Espree, Gold'n Hot, Colossal Curl, Jumbo Air, Express Air, Euro Sport, Magnum, Superaire, Healthy Vibes, Health Zone and Gentle Air. The Company believes that its business has not been materially dependent on any one such trademark. In the United States, the Company wholesales its line of consumer products nationwide to retailers, including department stores, drug chains, catalog stores and discount and variety stores. The Company also markets its consumer and professional salon appliances, hair pieces and a wide variety of brushes and other hair care accessories to beauticians, barbers and stylists through distributors. In addition, certain items, including the Company's hair dryers, curling irons and other personal care appliances, are sold through professional beauty and barber retail store outlets. The Company has the exclusive world-wide rights to use the Farberware brand name on a broad range of small electric products. The Company has entered into an agreement with Salton, whereby, Salton is the exclusive distributor of such products. In January 1997, the Company through its 50-percent interests in Salton and New M-Tech entered into supply contracts with the Kmart Corporation for Kmart to purchase, distribute, market and sell certain products under the White-Westinghouse brand name licensed to Salton and New M-Tech. Under the terms of the contract, Salton and New M-Tech will supply Kmart, either through the Company or through other manufacturers, with a broad range of small electrical appliances, consumer electronics and telephone products under the White-Westinghouse brand name. Kmart will be the exclusive discount department store to market these White- 4 5 Westinghouse products. The Company has entered into an agreement guaranteeing the performance of Salton and New M-Tech under the contract. Salton accounted for 12.0% of the Company's 1997 sales. In December 1997, the employment agreements of the senior members of Salton's management expired. Disagreements arose between the management and the members of the Salton board of directors who have been designated by the Company under the Stockholders' Agreement between the two companies, dated July 11, 1996 (the "Windmere Directors"), as to the provisions to be contained in new agreements or the terms under which management would continue to be employed by Salton if no agreements were executed. During the course of these discussions, Salton alleged that certain actions of the Company would breach the terms of the July 11, 1996 Marketing Cooperation Agreement between the Company and Salton and violate fiduciary duties to Salton. The Company and the Windmere Directors, after being advised by legal counsel, vehemently disagree with the allegations and although discussions are currently under way in an attempt to resolve these issues, there can be no assurance that these negotiations will be successful. A failure to resolve these disputes could have a material adverse effect on the Company's business relationship with Salton. MANUFACTURING: The Company's manufacturing business is conducted by Durable. Durable, through its twenty-five year relationship with the Company, has produced an extensive product line, which includes not only the appliances sold to the Company and its customers, but it has also become a contract manufacturer for a range of products, such as toasters, steam irons, toaster ovens, can openers, blenders, hand mixers and waffle irons, which it sells primarily to customers in the United States, Canada and Europe. Some of its customers are Salton, Sunbeam and Hamilton Beach. Durable manufactures a number of the White-Westinghouse products supplied by Salton to Kmart under the supplier contract. The LitterMaid product is manufactured primarily by Durable. The Company is currently investing in additional tooling in order to increase its production of the product in 1998. SUPPLIES The Company's foreign sales and operations are subject to the usual risks incident to operating abroad, including currency fluctuations, political conditions and changes in foreign laws. A weakening or strengthening of the United States dollar may result in higher or lower cost of goods for the Company from suppliers in countries whose exchange rate does not parallel the United States dollar, unlike Hong Kong the currency of which to date has fluctuated substantially parallel to the United States dollar. The recent financial crisis in Asia has resulted in a reduction in overall demand for certain raw materials, causing a decline in the cost of these materials. The Company has begun to benefit from these cost savings. The Company generates approximately 85% to 90% of its revenues from products manufactured by Durable in the People's Republic. Such products utilize raw materials available from at least two and as many as nine or more independent suppliers. The Company has no material dependence on any single foreign source for such materials. FOREIGN CONDITIONS The supply and cost of the products manufactured by Durable can be adversely affected, among other reasons, by changes in foreign currency exchange rates, increased import duties, imposition of tariffs, imposition of import quotas, interruptions in sea or air transportation and political or economic changes. The Company has a significant amount of its assets in the People's Republic, primarily consisting of 5 6 inventory, equipment and molds. From time to time, the Company explores opportunities to diversify its sourcing and/or production of certain products to other low-cost locations or with other third parties or joint venture partners in order to reduce its dependence on production in the People's Republic and/or reduce Durable's dependence on the Company's existing distribution base. However, at the present time, the Company intends to continue its production in the People's Republic. Recent months have seen an unusually rapid devaluation of certain Asian-Pacific currencies. While there has not been a material impact on the currencies in Hong Kong or the People's Republic, where the Company has operations, there can be no assurance that there will not be a material impact in the future. Hong Kong underwent a transfer of control to the People's Republic in July 1997. Durable is incorporated in Hong Kong and its executive, sales offices and its senior executives are located or reside there. The Company also conducts significant trading activities through subsidiaries incorporated in Hong Kong. The Company's business has not been materially affected by the governmental changes that have already occurred. Although the Company believes that its operations will not be materially affected by any further governmental changes occurring in Hong Kong, no assurance can be given that such changes will be benign. In 1997, President Clinton extended the People's Republic's most-favored-nation (MFN) trading status for an additional year. The President announced in 1994 that the United States would, in the future, permanently de-link MFN renewal from human rights issues, other than freedom of emigration provisions. Under U.S. law, MFN status means that products are subject to the relatively low duty rates set forth in Column 1 of the Harmonized Tariff Schedules of the United States (HTSUS), that have resulted from several rounds of reciprocal tariff negotiations conducted under the auspices of the General Agreement on Tariffs and Trade (GATT) since 1945. Products from countries not eligible for MFN treatment are subject to much higher rates of duty, averaging 30 percent ad valorem, as set forth in Column 2 of the HTSUS. If MFN status for goods produced in the People's Republic were removed, there would be a substantial increase in tariffs imposed on goods of Chinese origin entering the United States, including those manufactured by the Company, which could have a material adverse impact on the Company's revenues and earnings. SEASONALITY The Company's business is generally seasonal. The Company has historically experienced higher revenues in the third and fourth quarters of each fiscal year primarily due to increased demand by customers for the Company's products in the late summer for "back to school" sales and in the fall for Christmas sales. In typical years, the Company begins to accumulate inventory for its major selling season in June and July and it continues to purchase products at accelerated rates until November. The Company's major sales occur during August through November. Sales are generally made on 60 to 90 day terms. 6 7 Heaviest collections on its open accounts receivable are received from November through March, at which time the Company is in its most liquid state. The seasonal patterns of Salton and New M-Tech are similar to those of the Company. BACKLOG The Company's backlog of orders as of December 31, 1997, 1996 and 1995 was approximately $35.7 million, $32.1 million and $22.2 million, respectively, which orders are generally shipped within the next succeeding year. COMPETITION The Company encounters significant competition with respect to substantially all of its products. Although the Company's prices for products distributed under its labels are in general below or competitive with those of many nationally advertised brands, the Company also competes through quality of product, attractive packaging, breadth of product lines, speed of delivery and maintenance of good customer relations. Many of the Company's major competitors are substantially larger, have greater financial and other resources and spend more for national advertising. Some of the Company's competitors include Conair, Helen of Troy and Remington. REGULATION In the United States, Canada and Europe, most federal, state, provincial and local authorities require Underwriters Laboratory, Inc. ("UL") or other safety regulation certification prior to marketing electrical appliances in those jurisdictions. All of the non-professional salon appliances marketed by the Company have such certifications. The Company endeavors to have most of its products designed to meet those requirements and to be so certified, although there can be no assurance that those products, or additional electrical appliances which may be developed by the Company, will meet such specifications. Certain of the products sold by the Company in the United States are subject to the cosmetic purity and labelling provisions of the Fair Packaging and Labelling Act. The Company believes that in addition to complying with the Fair Packaging and Labelling Act, it complies with the applicable rules and regulations of the Federal Trade Commission and other federal and state agencies with respect to, among other things, the content of advertising and other trade practices. PATENTS Although the Company does not believe that its business is materially dependent upon patents and patent protection, from time to time, new products have been introduced with unique features for which the Company has filed or obtained licenses for patents and design registrations in the United States and in several foreign countries. 7 8 EMPLOYEES At March 16, 1998, the Company's distribution business in the United States, Canada, Europe and Hong Kong employed approximately 260 persons. Durable's operations in Hong Kong and the People's Republic of China employed approximately 12,000 persons. The Company enjoys satisfactory working relations with these employees. The Company is not a party to any collective bargaining agreement. GEOGRAPHIC AREA FINANCIAL INFORMATION Incorporated by reference to the Company's 1997 Annual Report to Shareholders, under the caption, "Note N to Consolidated Financial Statements, Geographic Area Information". Included as part of Exhibit 13. ITEM 2. PROPERTIES The executive offices of the Company, from which a significant amount of its business activities are conducted, are currently located at 5980 Miami Lakes Drive, Miami Lakes, Florida. All of the space in this approximately 140,000 sq. ft. two-story office and warehouse facility is owned and occupied by the Company. The Company also utilizes the services of public warehouses located in Reno, Nevada and Memphis, Tennessee pursuant to short-term contracts. In January 1998, the Company entered into a long-term operating lease for a 562,000 square foot warehouse facility in Arkansas. The Company intends to consolidate its products from the public warehouses into the new facility during 1998. Durable owns approximately 40,000 sq. ft. of office space in Hong Kong, of which 24,000 sq. ft. is used for its and the Company's trading companies' headquarters. Durable also utilizes facilities of 2,000,000 sq. ft. in the People's Republic which it operates under contracts with the local government. The contracts require such periodic adjustments such that terms of between one and five years exist at all times. Certain facilities have contract terms extending beyond five years. ITEM 3. LEGAL PROCEEDINGS On March 27, 1997, the Company paid $4,500,000 to settle the lawsuit filed in April 1994 by Izumi relating to the Phillips settlement in 1992. The Company, its 50-percent owned joint venture partners Salton/Maxim Housewares, Inc. and New M-Tech Corporation, White Consolidated Industries, Inc. ("White Consolidated"), and certain other parties have been named as defendants in litigation filed by Westinghouse Electric Corporation ("Westinghouse") in the United States District Court for the Western District in Pennsylvania on December 18, 1996. The action 8 9 arises from a dispute between Westinghouse and White Consolidated over rights to use the "Westinghouse" trademark for consumer products based on transactions between Westinghouse and White Consolidated in the 1970's and the parties= subsequent conduct. Prior to the filing of Westinghouse's complaint against the Company, White Consolidated, on November 14, 1996, filed a complaint in the United States District Court for the Northern District of Ohio against Westinghouse and another corporation for trademark infringement, dilution, false designation or origin and false advertisement, seeking both injunctive relief and damages. Procedural motions concerning the jurisdiction in which the dispute should be heard have been filed by the parties. The action by Westinghouse seeks, among other things, a preliminary injunction enjoining the defendants from using the trademark, unspecified damages and attorneys= fees. Pursuant to the Indemnification Agreement dated January 23, 1997 by and among White Consolidated, Kmart Corporation, and the Company, White Consolidated is defending and indemnifying the Company for all costs and expenses for claims, damages, and losses, including the costs of litigation. Pursuant to the license agreements with White Consolidated, White Consolidated is defending and indemnifying Salton/Maxim and New M-Tech for all costs and expenses for claims, damages, and losses, including the costs of litigation. On April 9, 1997, on joint motion of the parties, the court issued an order staying future proceedings until the earlier of July 1, 1997 or five days after hearing before the court in order to give the parties an opportunity to pursue settlement discussions. Subsequently, after a status hearing before the court on July 15, 1997, and in accordance with the court's memorandum order of July 17, 1997, counsel for the parties in the litigation pending in the United States District Court for the Western District of Pennsylvania reported to the court in a letter that the parties had agreed to pursue an expedited mini-trial/mediation proceeding in an effort to resolve their disputes. A mediation proceeding occurred and the parties were unable to reach a mediated settlement. Discovery is proceeding and the matter is likely to be tried in late 1998. The Company is also subject to other legal proceedings, product liability and other claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability, if any, in excess of applicable insurance coverage, is not likely to have a material effect on the financial position of the Company. However, as the outcome of litigation or other legal claims is difficult to predict, significant changes in the estimated exposures could occur. 9 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Incorporated by reference to the Company's 1997 Annual Report to Shareholders under the caption AQuarterly Stock Quotations and Dividends per Share.@ (Exhibit 13) ITEM 6. SELECTED FINANCIAL DATA (Dollars in thousands, except per share data)
1997 1996 1995 ---- ---- ---- Net sales $261,885 $197,004 $187,777 Equity in net earnings (loss) of joint ventures $ 7,353 $ 2,299 $ (393) Earnings (loss) before taxes, minority interest and extraordinary item $ 20,758 $ 3,672 $ (3,165) Provision for taxes (benefits) $ 923 $ (280) $ (1,281) Net earnings (loss) $ 19,835 $ 451 * $ (1,884)** Working capital $106,078 $105,565 $127,626 Current ratio 2.4 to 1 3.1 to 1 7.5 to 1 Property, plant and equipment, net $ 37,199 $ 32,760 $ 30,485 Total assets $281,847 $237,279 $188,012 Long-term debt, deferred liabilities and minority interest $ 17,144 $ 20,132 $ 3,519 Stockholders' equity $190,821 $167,695 $164,931 Per share data: Net earnings (loss)-basic $ 1.12 $ .03 * $ (.11)** Net earnings (loss)-diluted $ 1.00 $ .03 * $ (.11)** Cash dividends paid $ .10 $ .20 $ .20 Book value at year end $ 10.53 $ 9.61 $ 9.87 Return on average equity 11.1% .3% --
*Includes extraordinary charge for the settlement of Izumi litigation of $3,500,000 or $.20 per share. **Includes a non-recurring loss on the sale of an other asset of $5,280,000, or $.31 per share. 10 11 ***Includes a non-recurring gain on the sale of Hong Kong office space of $7,810,500, or $.45 per share. ****Includes cumulative effect of accounting change benefit of $1,731,100, or $.11 per share. 1994 1993 ---- ---- Net sales $181,112 $170,661 Equity in net earnings (loss) of joint ventures $ 91 $ (504) Earnings (loss) before taxes and minority interest $ 23,131 $ 12,305 Provision for taxes (benefits) $ 2,595 $ 1,365 Net earnings (loss) $ 20,537*** $ 11,469**** Working capital $129,281 $117,961 Current ratio 7.0 to 1 5.8 to 1 Property, plant and equipment, net $ 28,449 $ 25,022 Total assets $197,124 $180,479 Long-term debt, deferred liabilities and minority interest $ 4,932 $ 9,492 Stockholders' equity $170,625 $146,587 Per share data: Net earnings (loss)-basic $ 1.24*** $ .74**** Net earnings (loss)-diluted $ 1.17*** $ .71**** Cash dividends paid $ .15 $ - Book value at year end $ 10.20 $ 9.29 Return on average equity 12.9% 8.2% 11 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Year Ended December 31, 1997 compared with Year Ended December 31, 1996 Sales and Other Revenues Sales and Other Revenues ("Revenues") increased by $64.9 million to $261.9 million, an increase of 32.9% over Revenues for the year ended 1996. The increase is primarily the result of a $47.7 million increase in distribution sales, and a $17.1 million increase in manufacturing sales. The increase in distribution sales includes $16.5 million in seasonal product sales resulting from the Company's December 1996 acquisition of the remainder of its seasonal products joint venture and $9.4 million in kitchen product sales. Also contributing to the 1997 revenue growth is the increase in LitterMaid distribution sales of $11.9 million. Fees earned by the Company under various marketing arrangements with its joint ventures totaled $3.3 million for 1997 and are classified as Sales and Other Revenues. Salton accounted for 12% of the Company's sales in 1997. No such fees were earned in 1996. See "Commitments and Contingencies." Set forth below is a table indicating the revenues that the Company derived from its distribution and manufacturing operations for the periods indicated: Year Ended December 31, -------------------------------------------- 1997 1996 ----------------- ------------------ Distribution $194,147,300 74% $146,431,800 74% Manufacturing 67,737,800 26 50,571,800 26 ----------- --- ----------- --- Total Sales $261,885,100 100% $197,003,600 100% =========== === =========== === Gross Profit Margin The Company's gross margin percentage increased in 1997 to 24.6% of sales from 20.2% in 1996. The better absorption of fixed manufacturing overhead costs and decreases in certain raw material costs contributed significantly to the increase as did the higher margins related to sales of LitterMaid. Selling, General and Administrative Expenses Selling, general and administrative costs increased by $10.9 million for the year ended December 31, 1997 compared to the year ended December 31, 1996, yet decreased as a percentage of sales to 19.2% from 20.0% for the same periods as fixed expenses were spread over the Company's increased sales. The increase in costs is primarily the result of expenses related to LitterMaid, Inc., Bay Books & Tapes, Inc. and the Company's now wholly-owned seasonal products company, whose operations, due to their respective acquisition dates, were not fully reflected in the 1996 financial statements. 12 13 Equity in Net Earnings of Joint Ventures The Company's equity in net earnings of joint ventures was $7.4 million for the year ended December 31, 1997 as compared to $2.3 million for the same period in 1996. Included in 1997 are the results of operations of the Company's interests in Salton, New M-Tech and various other ventures, which were not acquired until the second or third quarters of 1996. In December 1996, the Company acquired the remainder of its seasonal products joint venture. The Company's equity in earnings of Salton and New M-Tech totaled $6.8 million for 1997. Interest Expense Interest expense increased by $2.0 million to $3.4 million in 1997. The increase is the result of the amounts paid on notes payable issued in conjunction with the Salton and New M-Tech acquisitions as well as the increased level of borrowing under the Company's line of credit facility. Taxes The Company's tax expense is based on the earnings of each of its foreign and domestic operations and it includes such additional U.S. taxes as are applicable to the repatriation of foreign earnings. Foreign earnings, other than in Canada, are generally taxed at rates lower than in the United States. The Internal Revenue Service has completed its examination of the Company's 1992 tax return. No Material assessments were made. The Internal Revenue Service is presently examining the Company's 1994 and 1995 income tax returns and the Company's 401(k) Plan filings. It is also examining the Company's compliance with the requirements supporting the deductibility of interest paid on the Industrial Development Revenue Bonds. Management believes that adequate provision for taxes has been made for the years under examination and those not yet examined. Earnings Per Share The Company adopted Financial Accounting Standards No. 128 (FAS 128), "Earnings Per Share" in 1997. FAS 128 requires dual presentation of basic and diluted earnings per share on the face of the income statement as well as the restatement of prior periods presented. Basic net earnings per share equals net earnings divided by the weighted average shares outstanding during the year. The computation of diluted net earnings per share includes dilutive common stock equivalents in the weighted average shares outstanding. The reconciliation between the computations is as follows: Net Income (Before Extraordinary Basic Basic Diluted Diluted Item) Shares Eps Shares Eps ----- ------ --- ------ --- 1997 $19,835,300 17,654,772 $1.12 19,776,183 $1.00 1996 3,951,400 16,846,418 $ .23 17,558,275 $ .23 13 14 The increase in the number of shares used in the computations of both basic and diluted net earnings per share was due primarily to the additional dilutive effect of stock option and warrant exercises, the Company's higher average stock price in 1997 and inclusion of the additional shares issued upon the acquisition of Salton for a full year. Supplier Contract In January 1997, the Company through its 50-percent interests in Salton and New M-Tech entered into supply contracts with the Kmart Corporation for Kmart to purchase, distribute, market and sell certain products under the White-Westinghouse brand name licensed to Salton and New M-Tech. Under the terms of the contract, Salton and New M-Tech will supply Kmart, either through the Company or other manufacturers, with a broad range of small electrical appliances, consumer electronics and telephone products under the White-Westinghouse brand name. Kmart will be the exclusive discount department store to market these White-Westinghouse products. Year Ended December 31, 1996 compared with Year Ended December 31, 1995 Net Sales Net sales were $197.0 million and $187.8 million for the years ended December 31, 1996 and 1995, respectively. Manufacturing sales increased by $10.4 million due primarily to increased shipments of kitchen electric appliances. A kitchen electric appliance distributor and a national retail beauty supply chain accounted for 10.9% and 10.3%, respectively, of the Company's 1996 sales. Set forth below is a table indicating the revenues that the Company derived from its distribution and manufacturing operations for the periods indicated: Year Ended December 31, -------------------------------------------- 1996 1995 ----------------- ------------------ Distribution $146,431,800 74% $147,576,000 79% Manufacturing 50,571,800 26 40,200,900 21 ----------- --- ----------- --- Total Sales $197,003,600 100% $187,776,900 100% =========== === =========== === Gross Profit Margin The Company's gross margin percentage decreased in 1996 to 20.2% of sales from the 21.8% level in the prior year. The decrease is primarily attributed to the continued effect of remaining higher cost raw material inventories and a greater concentration of manufacturing sales. Lower margin kitchen electric products which comprised 82% of manufacturing sales in both 1996 and 1995, accounted for 31% and 25% of the Company's total sales in those years, respectively. Selling, General and Administrative Expenses Selling, general and administrative expenses as a percentage of sales were 20.0% in both 1996 and 1995. Commencement of operations at the Company's newly acquired LitterMaid, Inc. and Bay Books & Tapes, Inc. businesses resulted in a $1.6 million increase in expenses. Travel, 14 15 legal and selling expenses increased by $1.2 million and advertising costs decreased by $1.0 million. Unusual or Non-Recurring Items In 1995, the Company incurred a non-recurring pre-tax loss of $8.0 million on the sale of an other asset. This transaction reduced 1995 net earnings by $5.3 million, or $.31 per share, on an after-tax basis. Equity in Net Earnings (Loss) of Joint Ventures The Company's equity in net earnings (loss) of joint ventures was $2.3 million and $(.4) million in 1996 and 1995, respectively. The increase in 1996 primarily reflects the results of operations of the Company's newly acquired interests in Salton/Maxim Housewares, Inc. and New M-Tech Corporation. The Company's equity in the net earnings of Salton and New M-Tech totaled $3.2 million for 1996 which was partially offset by losses of $.9 million at certain of the Company's other joint ventures. Interest Expense Interest expense increased by $.8 million to $1.4 million in 1996. The increase is the result of the amounts paid on notes payable issued in conjunction with the Salton and New M-Tech acquisitions as well as the increased level of borrowing under the Company's line of credit facility. Taxes The Company's tax expense is based on the earnings of each of its foreign and domestic operations and it includes such additional U.S. taxes as are applicable to the repatriation of foreign earnings. Foreign earnings, other than in Canada, are generally taxed at rates lower than in the United States. The Company made a provision in its 1995 second quarter of $.4 million, or $.02 per share, as a result of its settlement of a Hong Kong tax audit. Extraordinary Item On March 27, 1997, the Company paid $4.5 million to settle the lawsuit filed in April 1994 by Izumi. An accrual of $5.3 million, including $800,000 in estimated legal expenses has been recorded as of December 31, 1996. The transaction resulted in an after tax charge of $3.5 million or $.20 per share and has been recorded as an extraordinary item. Earnings Per Share The average number of common shares and common equivalent shares used in computing per share results was 17,620,000, in 1996 as compared to 17,227,000 in 1995. The decrease was primarily due to the non-inclusion of the dilutive effect of stock options and warrants in those 1996 quarters in which the Company sustained losses, offset by the additional shares issued upon the acquisition of Salton/Maxim and upon the exercise of stock options and warrants. 15 16 Liquidity and Capital Resources At December 31, 1997, the Company's working capital was $106.1 million, as compared to $105.6 million at the end of 1996. At December 31, 1997 and 1996, the Company's current ratio was 2.4 to 1 and 3.1 to 1, respectively, and its quick ratio was 1.0 to 1 and 1.3 to 1, respectively. Cash and cash equivalents decreased by $556,000 during 1997. The Company and its joint ventures are experiencing accelerated growth. Net operating cash flow was strongly impacted by the increase in inventory levels needed to meet future sales demands and the increase in accounts receivable balances resulting from strong quarterly sales activity. Investing expenditures of $11.3 million in additions to property, plant and equipment and an $11.0 million increase in receivables from affiliates are also a result of the accelerated growth. The Company anticipates that capital expenditure requirements for 1998 will total approximately $8.0 million. Certain of the Company's foreign subsidiaries (the "Subsidiaries") have $14.6 million in trade finance lines of credit, payable on demand, which are collateralized by the subsidiaries= tangible and intangible property located in Hong Kong and in the People's Republic of China, as well as a Company guarantee. At December 31, 1997, the subsidiaries were utilizing, including letters of credit, approximately $3.4 million of these credit lines. These subsidiaries also have available a $5.0 million revolving line of credit which is supported by a domestic standby letter of credit, guaranteed by the Company, of which $1.5 million was outstanding as of December 31, 1997. Outstanding borrowings by the Company's Hong Kong subsidiaries are primarily in U.S. dollars. The Company has a $45.0 million line of credit from a domestic bank, collateralized by domestic accounts receivable and inventory. At December 31, 1997, outstanding borrowings under this credit line totaled $41.5 million and bear interest at LIBOR plus 1.50%. The Company is currently negotiating with its domestic lender to increase its line of credit so that it may take advantage of future opportunities for growth. While management believes a new facility will be in place in the second quarter of 1998, there can be no assurance as to the outcome of the negotiations. The $43.0 million borrowed under the Company's lines of credit at December 31, 1997, an increase of $21.1 million since the beginning of the year, is the primary funding source used by the Company to support its increased working capital requirements as well as to support its seasonal borrowing needs. The Company uses forward exchange contracts to reduce fluctuations in foreign currency cash flows related to third party raw material and other operating purchases. The terms of the currency instruments used are generally consistent with the timing of the committed or anticipated transactions being hedged. The purpose of the Company's foreign currency management activity is to protect the Company from the risk that eventual cash flows from foreign currency denominated transactions may be adversely affected by changes in exchange rates. Outstanding at December 31, 1997, are contracts to purchase Hong Kong dollars forward totaling $7,000,000. There is no significant unrealized gain or loss on these contracts. All contracts have terms of six months or less. 16 17 In August 1997, the Board of Directors reevaluated the dividend policy in light of the Company's strategic repositioning for growth and the resultant cash requirements and eliminated the Company's quarterly cash dividend. The Company believes that its cash on hand and internally generated funds, together with its credit lines, will provide sufficient funding to meet the Company's capital requirements and its operating needs for the foreseeable future. No provision for U.S. taxes has been made on undistributed earnings of the Company's foreign subsidiaries and joint ventures because management plans to reinvest such earnings in their respective operations or in other foreign operations. Repatriating those earnings or using them in some other manner which would give rise to a U.S. tax liability would reduce after tax earnings and available working capital. Recent Accounting Pronouncements In June 1997, the FASB issued Statement of Financial Accounting Standard No. 130 (SFAS 130), "Reporting Comprehensive Income," and No. 131 (SFAS 131), "Disclosures About Segments of an Enterprise and Related Information." These statements are effective for fiscal years commencing after December 15, 1997. The Company will be required to comply with the provisions of these statements in 1998. The Company has not assessed the effect that these new standards will have on its consolidated financial statements and/or disclosures. Year 2000 Issues The Company has implemented a Year 2000 program to ensure that its computer systems and applications will function properly beyond 1999. The Company believes that it has allocated adequate resources for this purpose and expects its Year 2000 date conversion program to be completed successfully on a timely basis. Although the ability of third parties with whom the Company transacts business to address their Year 2000 issues is outside the Company's control, the Company is discussing with its vendors and customers the possibility of any interface difficulties which may affect the Company. The Company currently does not expect the costs necessary to address this matter to be material to its financial condition or results of operations. Legal Proceedings On March 27, 1997, the Company paid $4,500,000 to settle the lawsuit filed in April 1994 by Izumi relating to the Phillips settlement in 1992. The Company, its 50-percent owned joint venture partners Salton/Maxim Housewares, Inc. and New M-Tech Corporation, White Consolidated Industries, Inc. ("White Consolidated"), and certain other parties have been named as defendants in litigation filed by Westinghouse Electric Corporation ("Westinghouse") in the United States District Court for the Western District in Pennsylvania on December 18, 1996. The action arises from a dispute between Westinghouse and White Consolidated over rights to use the "Westinghouse" trademark for consumer products based on transactions between Westinghouse and White Consolidated in the 1970's and the parties' subsequent conduct. Prior to the filing of Westinghouse's complaint against the Company, White Consolidated, on 17 18 November 14, 1996, filed a complaint in the United States District Court for the Northern District of Ohio against Westinghouse and another corporation for trademark infringement, dilution, false designation or origin and false advertisement, seeking both injunctive relief and damages. Procedural motions concerning the jurisdiction in which the dispute should be heard have been filed by the parties. The action by Westinghouse seeks, among other things, a preliminary injunction enjoining the defendants from using the trademark, un-specified damages and attorneys= fees. Pursuant to the Indemnification Agreement dated January 23, 1997 by and among White Consolidated, Kmart Corporation, and the Company, White Consolidated is defending and indemnifying the Company for all costs and expenses for claims, damages, and losses, including the costs of litigation. Pursuant to the license agreements with White Consolidated, White Consolidated is defending and indemnifying Salton/Maxim and New M-Tech for all costs and expenses for claims, damages, and losses, including the costs of litigation. On April 9, 1997, on joint motion of the parties, the court issued an order staying future proceedings until the earlier of July 1, 1997 or five days after hearing before the court in order to give the parties an opportunity to pursue settlement discussions. Subsequently, after a status hearing before the court on July 15, 1997, and in accordance with the court's memorandum order of July 17, 1997, counsel for the parties in the litigation pending in the United States District Court for the Western District of Pennsylvania reported to the court in a letter that the parties had agreed to pursue an expedited mini-trial/mediation proceeding in an effort to resolve their disputes. A mediation proceeding occurred and the parties were unable to reach a mediated settlement. Discovery is proceeding and the matter is likely to be tried in late 1998. The Company is also subject to other legal proceedings, product liability and other claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability, if any, in excess of applicable insurance coverage, is not likely to have a material effect on the financial position of the Company. However, as the outcome of litigation or other legal claims is difficult to predict, significant changes in the estimated exposures could occur. Commitments and Contingencies In December 1997, the employment agreements of the senior members of Salton's management expired. Disagreements arose between the management and the members of the Salton board of directors who have been designated by the Company under the Stockholders' Agreement between the two companies, dated July 11, 1996 (the "Windmere Directors"), as to the provisions to be contained in new agreements or the terms under which management would continue to be employed by Salton if no agreements were executed. During the course of these discussions, Salton alleged that certain actions of the Company would breach the terms of the July 11, 1996 Marketing Cooperation Agreement between the Company and Salton and violate fiduciary duties to Salton. The Company and the Windmere Directors, after being advised by legal counsel, vehemently disagree with the allegations and although discussions are currently under way in an attempt to resolve these issues, there can be no assurance that these negotiations will be successful. A failure to resolve these disputes could have a material adverse effect on the Company's business relationship with Salton. Manufacturing Operations The Company's products are primarily manufactured by Durable, its wholly-owned Hong Kong subsidiary, in Bao An County, Guandong Province of the People's Republic of China, which is approximately 60 miles northwest of central Hong Kong. The Company has a significant amount of its assets in the People's Republic, primarily consisting of inventory, equipment and molds. Substantially all of the Company's products are manufactured by Durable and unrelated factories in the People's Republic. Approximately 85-percent to 90-percent of the Company's revenues are currently derived from products manufactured by Durable. The supply and cost of these products, as well as finished products, can be adversely affected, among other reasons, by changes in foreign currency exchange rates, increased import duties, imposition of tariffs, imposition of import quotas, interruptions in sea or air transportation and political or economic changes. From time to time, the Company explores opportunities to diversify its sourcing and/or production of certain products to other low-cost locations or with other third parties or joint venture partners in order to reduce its dependence on production in the People's Republic and/or reduce Durable's dependence 18 19 on the Company's existing distribution base. However, at the present time, the Company intends to continue its production in the People's Republic. Recent months have seen an unusually rapid devaluation of certain Asian-Pacific currencies. While there has not been a material impact on the currencies in Hong Kong or the People's Republic, where the Company has operations, there can be no assurances that there will not be a material impact in the future. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated by reference to the Company's 1997 Annual Report to Shareholders (Exhibit 13). See also PART IV, ITEM 14(a)1 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference to the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders under the captions "Election of Directors" and "Executive Officers". ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders under the captions "Executive Compensation" and "Certain Transactions". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders under the caption "Security Ownership". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by Reference to the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders under the captions "Executive Compensation" and "Certain Transactions". PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)1. FINANCIAL STATEMENTS 19 20 The following consolidated financial statements of Windmere-Durable Holdings, Inc. and subsidiaries are incorporated by reference in PART II, ITEM 8: AUDITOR'S REPORT Exhibit 13 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1996 Exhibit 13 CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 Exhibit 13 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - THREE YEARS ENDED DECEMBER 31, 1997 Exhibit 13 CONSOLIDATED STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 Exhibit 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Exhibit 13 2. FINANCIAL STATEMENT SCHEDULES AUDITOR'S REPORT Filed herewith SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES - YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 Filed herewith Individual financial statements of the Company have been omitted since consolidated financial statements have been presented, and all subsidiaries included in the consolidated financial statements are wholly-owned. All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements or the notes thereto. 20 21 3. EXHIBITS (3) Articles of Incorporation and By-Laws. 3.1 Amended and Restated Articles of Incorporation of the Company filed with the Florida Secretary of State on May 17, 1984. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1984. 3.2 Articles of Amendment to the Articles of Incorporation of the Company filed with the Florida Secretary of State on May 16, 1986. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1986. 3.3 Articles of Amendment to the Articles of Incorporation of the Company filed with the Florida Secretary of State on June 23, 1986. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1987. 3.4 By-Laws as amended through October 11, 1991. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. 3.5 Amendment to October 11, 1991 By-Laws. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 3.6 Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company filed with the Florida Secretary of State on June 21, 1996. Filed herewith. (10) Material Contracts EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS 10.1 Employment Agreement dated as of January 27, 1983, between Belvin Friedson and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1982. 10.2 Employment Agreement, First Amendment, dated as of February 27, 1987, between Belvin Friedson and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1986. 10.3 Employment Agreement, Second Amendment, dated as of December 16, 1992, between Belvin Friedson and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 10.4 Employment Agreements dated as of July 18, 1983, between David M. Friedson, Barbara Friedson Garrett and Arnold Thaler, respectively, and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1983. 10.5 Employment Agreement, First Amendment, dated as of January 17, 1985, between David M. Friedson and the Company. Incorporated 21 22 by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1984. 10.6 Employment Agreement, Second Amendment and Nonqualified Stock Option, dated as of September 30, 1985, between David M. Friedson and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1985. 10.7 Employment Agreement (Third Amendment) and Nonqualified Stock Option (First Amendment) dated as of October 28, 1987, between David M. Friedson and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1987. 10.8 Employment Agreement (Fourth Amendment) and Nonqualified Stock Option (Second Amendment) dated as of October 26, 1987, between David M. Friedson and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1987. 10.9 Employment Agreement (Fifth Amendment) dated as of December 16, 1992, between David M. Friedson and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 10.10 Nonqualified Stock Option dated as of January 5, 1987, granted by the Company to Barbara Friedson Garrett. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1986. 10.11 Employment Agreement (First Amendment) and Nonqualified Stock Option (First Amendment) dated as of October 26, 1987, between Barbara Friedson Garrett and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1987. 10.12 Employment Agreement (Second Amendment) and Nonqualified Stock Option (Second Amendment) dated as of October 26, 1987 between Barbara Friedson Garrett and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1987. 10.13 Employment Agreement (Third Amendment) dated as of December 16, 1992, between Barbara Friedson Garrett and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 10.14 Nonqualified Stock Option dated as of January 5, 1987, granted by the Company to Arnold Thaler. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1986. 10.15 Employment Agreement (First Amendment) and Nonqualified Stock Option (First Amendment) dated as of October 26, 1987 between Arnold Thaler and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1987. 22 23 10.16 Employment Agreement (Second Amendment) and Nonqualified Stock Option (Second Amendment) dated as of October 26, 1987 between Arnold Thaler and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1987. 10.17 Employment Agreement (Third Amendment) dated as of December 16, 1992, between Arnold Thaler and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 10.18 Employment Agreement dated May 31, 1987, between Robert Gorman and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1987. 10.19 Employment Agreement (First Amendment) dated as of December 16, 1992, between Robert Gorman and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 10.20 1982 Employees Incentive Stock Option Plan. Incorporated by reference to Exhibit 4 to Post-Effective Amendment No. 1 to the Company's Form S-8 Registration Statement No. 2-92540. 10.21 Amendment to 1982 Employees Incentive Stock Option Plan. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1987. 10.22 1992 Employees Incentive Stock Option Plan. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 10.23 Employment Agreement dated as of October 26, 1987 between Burton A. Honig and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1987. 10.24 Employment Agreement (First Amendment) dated as of December 16, 1992, between Burton A. Honig and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 10.25 Consulting Agreement dated January 1, 1989 between Mr. Lai Kin, Chairman of Durable, and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1988. 10.26 Employment Agreement dated January 3, 1989, between Harry Schulman and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1988. 10.27 Employment Agreement (First Amendment) dated as of June 4, 1990, between Harry Schulman and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 10.28 Employment Agreement (Second Amendment) dated as of December 16, 1992, between Harry Schulman and the Company. Incorporated by 23 24 reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 10.29 1988 Director Stock Option Plan. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1988. 10.30 1989 Employees 401(k) Profit Sharing Plan and Trust. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1989. 10.31 Consulting Agreement, dated March 30, 1987, between Paragon Industries, Paragon Sales, Inc., William Weber, Jacqueline K. Weber and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990. 10.32 Amendment to Consulting Agreement, dated May 29, 1990, between Paragon Industries, Paragon Sales, Inc., William Weber, Jacqueline K. Weber and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990. 10.33 Second Amended and Restated Employment Agreement dated January 1, 1991, between David O'Neill and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. 10.34 Second Amended and Restated Employment Agreement (First Amendment) dated December 16, 1992, between David O'Neill and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. OTHER MATERIAL CONTRACTS 10.35 Installment Purchase Contract dated as of May 1, 1985, between the Dade County Industrial Development Authority and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1985. 10.36 Asset Purchase Agreement dated September 30, 1988 between Sally Beauty Company, Alberto-Culver Company, the Company and certain of the Company's affiliates. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1988. 10.37 Joint Venture Agreement, dated March 30, 1987, between Paragon Sales, Inc., William Weber, Jacqueline K. Weber and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990. 10.38 Amendment to Joint Venture Agreement, dated May 29, 1990, between Paragon Sales, Inc., William Weber, Jacqueline K. Weber and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990. 10.39 Exclusive Sales Agreement dated May 29, 1992 among the Company, American International Industries and Zvi and Betty Ryzman. 24 25 Incorporated by reference to the Company's Form S-2 Registration Statement No. 33-51776. 10.40 Settlement Agreement dated May 6, 1992 between North American Philips Corporation and the Company. Incorporated by reference to the Company's Form S-2 Registration Statement No. 33-51776. 10.41 Letter of Credit Agreement dated July 31, 1992 between NationsBank and the Company. Incorporated by reference to the Company's Form S-2 Registration Statement No. 33-51776. 10.42 Agreement dated May 28, 1991, between Xingiao Economic Development Corporation and Durable. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. 10.43 Agreement dated May 28, 1991, between Bogang Economic Development Company and Durable. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. 10.44 Agreement dated May 28, 1991, between Wanfeng Economic Development Corporation and Durable. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. 10.45 Warrant Agreement dated October 1, 1992, between American Stock Transfer and Trust Company and the Company. Incorporated by reference to the Company's Form S-2 Registration Statement No. 33-51776. 10.46 Stock Purchase Agreement dated May 29, 1992 between Glamour Industries, Inc. and the Company. Incorporated by reference to the Company's Form S-2 Registration Statement No. 33-51776. 10.47 Trademark Licensing Agreement dated January 11, 1994, between Helene Curtis, Inc. and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. 10.48 Stock Acquisition Agreement dated April 1, 1994, between Durable, PPC Industries 1980 Limited, Ourimbah Investment, Limited and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.49 1995 Common Stock Purchase Rights Agreement dated March 6, 1995 between American Stock Transfer and Trust Company and the Company. Incorporated by reference to the Company's Form 8-A Registration Statement filed March 7, 1995. 10.50 Facility Letter dated June 3, 1995, from the Bank of East Asia, Limited to Durable, Durable Electric Limited and PPC Industries 1980 Limited. Incorporated by reference to the Company's Form 10-Q dated June 30, 1995. 10.51 Amended and Restated Letter Agreement dated July 28, 1995, between NationsBank and the Company. Incorporated by reference to the Company's Form 10-Q dated June 30, 1995. 25 26 10.52 Amendment No. 1 to Amended and Restated Letter Agreement, dated March 1, 1996, between NationsBank and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.53 Credit Agreement dated October 11, 1996, between Windmere Corporation, NationsBank National Association (South) and National Bank of Canada. 10.54 Amendment Agreement No. 1 to the Credit Agreement (October 11, 1996) dated January 31, 1997. 10.55 Letter Agreement dated April 30, 1997 between Windmere Corporation and Salton/Maxim Housewares, Inc. Incorporated by reference to the Company's Form 10-Q dated March 31, 1997. 10.56 1996 Stock Option Plan. Incorporated by reference to the Company's Proxy Statement dated April 17, 1997. 10.57 1997 Cash Bonus Performance Plan for Executive Officers. Incorporated by reference to the Company's Proxy Statement dated April 18, 1997. 10.58 Amendment Agreement No. 3 to the Credit Agreement (October 11, 1996) dated July 27, 1997. Incorporated by reference to the Company's Form 10-Q dated September 30, 1997. 10.59 Amendment Agreement No. 4 to the Credit Agreement (October 11, 1996) dated August 21, 1997. Incorporated by reference to the Company's Form 10-Q dated September 30, 1997. (13) Annual Report to Security Holders for the year ended December 31, 1997. Exhibit 13. (21) Subsidiaries of the Registrant. Filed herewith. (23) Consents of experts and counsel. Filed herewith. (b) REPORTS ON FORM 8-K None. 26 27 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders Windmere-Durable Holdings, Inc. We have audited the accompanying consolidated balance sheets of Windmere-Durable Holdings, Inc. and Subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Windmere-Durable Holdings, Inc. and Subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. We have also audited Schedule II of Windmere-Durable Holdings, Inc. and Subsidiaries for each of the three years in the period ended December 31, 1997. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP Miami, Florida February 10, 1998 27 28 WINDMERE CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS CHANGES IN ALLOWANCE FOR POSSIBLE LOSSES ON ACCOUNTS RECEIVABLE: Years Ended December 31, ------------------------------- 1997 1996 1995 ---- ---- ---- Balance at beginning of period $1,129,000 $1,158,000 $1,338,100 Addition - Charged to costs and expenses 433,000 930,000 894,700 Addition - Charged to other accounts (a) 62,700 4,000 31,600 Deductions (b) (513,400) (963,000) (1,106,400) ---------- --------- --------- Balance at end of period $1,111,300 $1,129,000 $1,158,000 ========== ========== ========== (a) Recoveries of amounts previously written off against the reserve. (b) Write-off of accounts receivable against the reserve. 28 29 PART IV. ITEM 3. (21). SUBSIDIARIES OF THE REGISTRANT NAME INCORPORATED IN - ---- --------------- Consumer Products Americas, Inc. Florida EDI Masters, Inc. Florida Fortune Products, Inc. Florida Jerdon Products, Inc. Florida Windmere Fan Products, Inc. Florida Bay Books & Tapes, Inc. Florida LitterMaid, Inc. Florida Windmere Corporation Florida Windmere Holdings Corporation Delaware Windmere Holdings Corporation II Delaware Goal Making Company Limited British Virgin Islands Remdale Investments Limited British Virgin Islands PPC Industries, Ltd. British Virgin Islands Windmere Consumer Products, Inc. Canada Durable Electric, Ltd. Hong Kong Durable Electrical Metal Factory, Ltd. Hong Kong PPC Industries (1980) Ltd. Hong Kong Sandgate Services, Ltd. Hong Kong Parawind, Ltd. Hong Kong PPC Product Services, Ltd. Hong Kong Each of the above subsidiaries is wholly-owned and is included in the consolidated financial statements as of December 31, 1997. 29 30 AUDITOR'S CONSENT We have issued our report dated February 10, 1998, accompanying the consolidated financial statements and schedules incorporated by reference in the Form 10-K for the year ended December 31, 1997. We hereby consent to the incorporation by reference of the aforementioned report in the Registration Statements of Windmere-Durable Holdings, Inc. on Form S-8 (File No. 33-7681, effective September 30, 1986), Form S-8 (File No. 33-36424, effective August 17, 1990), Form S-2 (File No. 33-51776, effective January 19, 1993), Form S-8 (File No. 33-58574, effective February 22, 1993) and on Form S-3 (File No. 333-6759, effective July 10, 1996). GRANT THORNTON LLP Miami, Florida March 27, 1998 30 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WINDMERE-DURABLE HOLDINGS, INC. (REGISTRANT) BY: /s/ DATE: 3-31-98 ---------------------------------- David M. Friedson, Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. BY: /s/ DATE: 3-31-98 --------------------------------- ---------------------------- David M. Friedson, Chairman, President and Chief Executive Officer BY: /s/ DATE: 3-27-98 ---------------------------------- ---------------------------- Harry D. Schulman, Senior Vice President - Finance and Administration and Chief Financial Officer BY: /s/ DATE: 3-27-98 ---------------------------------- ---------------------------- Burton A. Honig, Vice President - Finance (Principal Accounting Officer) BY: /s/ DATE: 3-27-98 ---------------------------------- ---------------------------- Bertley Sager, Director BY: /s/ DATE: 3-30-98 ---------------------------------- ---------------------------- Jerald I. Rosen, Director BY: /s/ DATE: 3-30-98 ---------------------------------- ---------------------------- Harold Strauss, Director BY: /s/ DATE: 3-31-98 ---------------------------------- ---------------------------- Lai Kin, Director BY: /s/ DATE: 3-31-98 ---------------------------------- ---------------------------- Raymond So, Director BY: /s/ DATE: 3-27-98 ---------------------------------- ---------------------------- Leonard Glazer, Director BY: /s/ DATE: 3-27-98 ---------------------------------- ---------------------------- Barbara Friedson Garrett, Director BY: /s/ DATE: 3-27-98 ---------------------------------- ---------------------------- Felix S. Sabates, Director BY: /s/ DATE: 3-27-98 ---------------------------------- ---------------------------- Arnold Thaler, Director 31 32 BY: /s/ DATE: 3-27-98 ---------------------------------- ---------------------------- Thomas J. Kane, Director BY: /s/ DATE: 3-27-98 ---------------------------------- ---------------------------- Susan J. Ganz, Director BY: /s/ DATE: 3-31-98 ---------------------------------- ---------------------------- Desmond Lai, Director 32 33 FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES DECEMBER 31, 1997 AND 1996 34 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders Windmere-Durable Holdings, Inc. We have audited the accompanying consolidated balance sheets of Windmere-Durable Holdings, Inc. and Subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Windmere-Durable Holdings, Inc. and Subsidiaries at December 31, 1997 and 1996, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Miami, Florida February 10, 1998 35 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31,
ASSETS 1997 1996 ------------- ------------- CURRENT ASSETS Cash and cash equivalents (Note A) $ 8,223,900 $ 8,779,500 Accounts and other receivables, less allowances of $1,111,300 in 1997 and $1,128,700 in 1996 (Note E) 43,338,000 37,601,200 Receivables from affiliates (Notes A, C and P) 15,291,200 12,138,800 Inventories (Notes A and E) 102,172,400 89,514,000 Prepaid expenses 4,617,600 3,751,100 Refundable income taxes (Notes A and I) 5,043,100 -- Future income tax benefits (Notes A, I and S) 1,274,100 3,231,800 ------------- ------------- Total current assets 179,960,300 155,016,400 INVESTMENTS IN JOINT VENTURES (Notes A, C and J) 43,090,800 35,290,800 PROPERTY, PLANT AND EQUIPMENT - AT COST, less accumulated depreciation (Notes A and D) 37,199,400 32,759,800 NOTES RECEIVABLE FROM AFFILIATE (Note P) 7,798,800 -- OTHER ASSETS (Notes A, I and J) 13,797,800 14,211,900 ------------- ------------- $ 281,847,100 $ 237,278,900 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes and acceptances payable (Note E) $ 42,981,600 $ 21,882,500 Current maturities of long-term debt (Note G) 3,814,800 814,800 Accounts payable 14,600,500 12,106,500 Accrued expenses (Notes F and R) 12,237,800 14,228,700 Deferred income, current portion (Note A) 247,500 419,400 ------------- ------------- Total current liabilities 73,882,200 49,451,900 LONG-TERM DEBT, less current maturities (Note G) 16,069,800 19,884,700 DEFERRED INCOME, less current portion (Note A) 1,073,800 247,500 COMMITMENTS AND CONTINGENCIES (Note K) -- -- STOCKHOLDERS' EQUITY (Notes A, L and M) Special preferred stock - authorized 40,000,000 shares of $.01 par value; none issued -- Common stock - authorized 40,000,000 shares of $.10 par value; issued 18,119,147 in 1997 and 17,445,146 in 1996 1,811,900 1,744,500 Paid-in capital 41,024,100 35,765,900 Retained earnings 149,087,500 130,965,100 Unrealized foreign currency translation adjustment (1,102,200) (780,700) ------------- ------------- Total stockholders' equity 190,821,300 167,694,800 ------------- ------------- $ 281,847,100 $ 237,278,900 ============= =============
The accompanying notes are an integral part of these statements 2 36 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31,
1997 1996 1995 ------------- -------------- -------------- Sales and other revenues (Note R) $ 261,885,100 $ 197,003,600 $ 187,776,900 Cost of goods sold 197,507,200 157,278,400 146,907,300 ------------- ------------- ------------- Gross profit 64,377,900 39,725,200 40,869,600 Selling, general and administrative expenses 50,349,200 39,425,100 37,625,100 Unusual or non-recurring items (Note B) -- -- 8,000,000 ------------- ------------- ------------- Operating profit (loss) 14,028,700 300,100 (4,755,500) Other (income) expense Interest expense 3,351,100 1,345,900 578,300 Interest and other income (2,727,500) (2,418,800) (2,561,800) ------------- ------------- ------------- 623,600 (1,072,900) (1,983,500) ------------- ------------- ------------- Earnings (loss) before equity in net earnings (loss) of joint ventures, income taxes and extraordinary item 13,405,100 1,373,000 (2,772,000) Equity in net earnings (loss) of joint ventures (Notes A, C and J) 7,353,200 2,298,700 (392,600) ------------- ------------- ------------- Earnings (loss) before income taxes and extraordinary item 20,758,300 3,671,700 (3,164,600) Income taxes (benefit) (Notes A and I) Current (3,272,000) (716,300) (1,242,700) Deferred 4,195,000 436,600 (38,100) ------------- ------------- ------------- 923,000 (279,700) (1,280,800) ------------- ------------- ------------- Earnings (loss) before extraordinary item 19,835,300 3,951,400 (1,883,800) Extraordinary item (Note S) -- (3,500,000) -- ------------- ------------- ------------- Net earnings (loss) $ 19,835,300 $ 451,400 $ (1,883,800) ============= ============= ============= Per share data (Notes A, L and S) Earnings (loss) per common share - basic before effect of extraordinary item $ 1.12 $ .23 $ (.11) Extraordinary item -- (.20) -- ------------- ------------- ------------- Net earnings $ 1.12 $ .03 $ (.11) ============= ============= ============= Earnings (loss) per common share - diluted $ 1.00 $ .23 $ (.11) Extraordinary item -- (.20) -- ------------- ------------- ------------- Net earnings $ 1.00 $ .03 $ (.11) ============= ============= ============= Dividends per common share $ .10 $ .20 $ .20 ============= ============= =============
The accompanying notes are an integral part of these statements. 3 37 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY THREE YEARS ENDED DECEMBER 31, 1997
Unrealized Foreign Currency Common Paid-in Retained Translation Stock Capital Earnings Adjustment ----- ------- -------- ---------- Balance at January 1, 1995 $ 1,673,400 $ 30,648,700 $ 139,088,800 $ (785,900) Net loss -- -- (1,883,800) -- Cash dividends - $.20 per share -- -- (3,353,600) -- Purchase and retirement of 139,600 shares of common stock (14,000) (997,400) -- -- Exercise of stock options and warrants 11,900 414,400 -- -- Tax benefit resulting from exercise of stock options -- 242,800 -- -- Cost of intercompany recapitalization -- (135,500) -- -- Unrealized foreign currency translation adjustment -- -- -- 20,700 ------------- ------------- ------------- ------------- Balance at December 31, 1995 1,671,300 30,173,000 133,851,400 (765,200) Net earnings -- -- 451,400 -- Cash dividends - $.20 per share -- -- (3,337,700) -- Purchase and retirement of 463,000 shares of common stock (46,300) (3,721,800) -- -- Exercise of stock options and warrants 44,700 2,531,500 -- -- Tax benefit resulting from exercise of stock options -- 183,600 -- -- Fair value of options to non-employees -- 617,000 -- -- Issuance of 748,112 shares - acquisition of 50% of Salton/Maxim Housewares, Inc. 74,800 5,982,600 -- -- Unrealized foreign currency translation adjustment -- -- -- (15,500) ------------- ------------- ------------- ------------- Balance at December 31, 1996 1,744,500 35,765,900 130,965,100 (780,700) Net earnings -- -- 19,835,300 -- Cash dividends - $.10 per share -- -- (1,712,900) -- Exercise of stock options and warrants 67,400 1,675,200 -- -- Tax benefit resulting from exercise of stock options -- 3,493,000 -- -- Fair value of options to non-employees -- 90,000 -- -- Unrealized foreign currency translation adjustment -- -- -- (321,500) ------------- ------------- ------------- ------------- Balance at December 31, 1997 $ 1,811,900 $ 41,024,100 $ 149,087,500 $ (1,102,200) ============= ============= ============= =============
The accompanying notes are an integral part of this statement. 4 38 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995 ------------ ------------ ------------ Cash flows from operating activities Net earnings (loss) $ 19,835,300 $ 451,400 $ (1,883,800) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities Depreciation of property, plant and equipment 6,856,600 6,377,900 6,218,300 Amortization of intangible assets 840,700 613,400 561,100 Loss on sale of other asset (Note B) -- -- 8,000,000 Net change in allowance for losses on accounts receivable (17,400) (29,300) (180,100) Consulting expense on non-employee stock options 90,000 68,000 -- Amortization of deferred income (334,400) (598,100) (598,100) Undistributed equity in (earnings) loss of joint ventures (7,537,300) (2,762,700) 392,600 Gain on sale of assets 988,800 -- -- Changes in assets and liabilities Decrease (increase) in accounts and other receivables (5,719,400) 149,600 2,316,100 Decrease (increase) in inventories (12,658,400) 534,700 (4,735,200) Decrease (increase) in prepaid expenses (866,500) (709,600) 5,836,900 Increase in accounts payable and accrued expenses 503,100 7,714,400 1,005,800 (Decrease) in current and deferred income taxes (2,250,000) (1,405,300) (1,829,300) (Increase) decrease in other assets 2,231,000 (783,600) (1,073,300) Decrease (increase) in other accounts (321,500) (14,000) 20,700 ------------ ------------ ------------ Net cash provided by operating activities 1,640,600 9,606,800 14,051,700 Cash flows from investing activities Proceeds from fixed asset sales -- -- 129,600 Additions to property, plant and equipment (11,296,200) (8,618,200) (8,383,500) (Decrease) increase in short-term investments -- -- 2,500,000 Purchase of assets - LitterMaid(TM), Inc. -- (2,246,000) -- Purchase of assets - Bay Books and Tapes, Inc. -- (1,180,000) -- Investments in joint ventures (262,700) (7,745,400) -- Decrease (increase) in receivable accounts and notes from affiliates (10,951,200) (15,301,600) 2,068,900 ------------ ------------ ------------ Net cash used in investing activities (22,510,100) (35,091,200) (3,685,000) Cash flows from financing activities Net borrowings under lines of credit 21,099,100 21,840,200 (697,800) Payments of long-term debt (814,900) (814,800) (814,900) Exercises of stock options and warrants 1,742,600 2,576,200 426,300 Cash dividends paid (1,712,900) (3,337,700) (3,353,600) Purchases of common stock -- (3,768,100) (1,011,400) Cost of intercompany recapitalization -- -- (135,500) ------------ ------------ ------------ Net cash provided by (used in) financing activities 20,313,900 16,495,800 (5,586,900) ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents (555,600) (8,988,600) 4,779,800 Cash and cash equivalents at beginning of year 8,779,500 17,768,100 12,988,300 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 8,223,900 $ 8,779,500 $ 17,768,100 ============ ============ ============ (continued)
5 39 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995 ------------- ------------- ------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 3,187,200 $ 1,488,200 $ 488,500 Income taxes $ 33,700 $ 548,400 $ 2,181,800 Non-cash investing and financing activities: Tax benefit resulting from exercise of stock options $ 3,493,000 $ 183,600 $ 242,800 Valuation of non-employee stock options under SFAS 123 (LitterMaid(TM)acquisition) $ -- $ 549,000 $ -- In 1996, the Company purchased a 50-percent interest in New M-Tech Corporation in exchange for $3,000,000 in cash and $7,000,000 in long-term promissory notes. In 1996, the Company purchased a 50-percent interest in Salton/Maxim Housewares, Inc. in exchange for $3,254,300 in cash, 748,112 shares of Windmere common stock (valued at $6,057,000) and a $10,847,700 promissory note. In 1996, the Company acquired the remaining 50-percent of its seasonal products joint venture for a nominal amount. In conjunction with the acquisition, the Company obtained the following assets and liabilities: Cash $ 1,102,300 Accounts receivable 1,124,200 Inventory 10,305,100 Prepaid and other assets 74,600 Less liabilities assumed (13,883,600) ------------- Goodwill $ 1,277,400 =============
The accompanying notes are an integral part of these statements. 6 40 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE A - SUMMARY OF ACCOUNTING POLICIES Windmere-Durable Holdings, Inc. and Subsidiaries (the "Company") is principally engaged in the manufacture and sale of personal care, kitchen electric and seasonal products. In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. A summary of the Company's significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions are eliminated in consolidation. The Company reflects its investments in its 50%-owned joint ventures at cost plus its equity in undistributed net earnings. FOREIGN CURRENCY TRANSLATION Balance sheet accounts of the Company's foreign operations are translated at the exchange rate in effect at each year end and income statement accounts are translated at the average exchange rates prevailing during the year. Adjustments resulting from this translation process are accumulated in a separate component of stockholders' equity and are not included in the determination of net earnings. The Company's foreign manufacturing subsidiary utilizes the local currency as its functional currency, and the other foreign subsidiaries primarily utilize the U.S. dollar as their functional currency. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Cash balances at December 31, 1997 include $4,741,000 held in foreign banks by the Company's Hong Kong and Canadian subsidiaries. (continued) 7 41 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued INVENTORIES Inventories are stated at the lower of cost or market; cost is determined by the first-in, first-out method. Inventories are comprised of the following: 1997 1996 ------------- -------------- Raw materials $ 13,327,400 $ 13,824,300 Work in process 21,062,400 20,551,900 Finished goods 67,782,600 55,137,800 ------------- -------------- $ 102,172,400 $ 89,514,000 ============= ============== RECEIVABLES FROM AFFILIATES Receivables from affiliates include accounts receivable which arise in the ordinary course of business and are settled as trade obligations, as well as notes receivable due from certain of the Company's joint venture partners ("affiliates"). Notes receivable from these affiliates are due upon demand and bear interest at prevailing market interest rates (Note C). PROPERTY, PLANT AND EQUIPMENT Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to their estimated operating service lives using accelerated and straight-line methods. INTANGIBLE ASSETS Intangible assets, consisting primarily of goodwill, are being amortized on a straight-line basis over periods ranging from 7-20 years. Intangible assets were $13,955,300 and $13,704,600 at December 31, 1997 and 1996, respectively, and the related accumulated amortization was $3,502,000 and $2,700,700, respectively. On an ongoing basis, management reviews the valuation and amortization of goodwill. As part of this review, the Company estimates the value and future benefits of the net income generated by the related subsidiaries to determine that no impairment has occurred. (continued) 8 42 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments consist primarily of cash and cash equivalents, accounts receivable, notes receivable, accounts payable, notes payable and bank debt. At December 31, 1997, the fair value of these instruments approximates the carrying amount of these items. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses forward exchange contracts to reduce fluctuations in foreign currency cash flows related to third party raw material and other operating purchases. The terms of the currency instruments used are generally consistent with the timing of the committed or anticipated transactions being hedged. The purpose of the Company's foreign currency management activity is to protect the Company from the risk that eventual cash flows from foreign currency denominated transactions may be adversely affected by changes in exchange rates. Gains and losses on forward exchange contracts are deferred and recognized in income when the related transactions being hedged are recognized. Such gains and losses are reported on the same financial statement line as the hedged transaction. The Company does not use derivative financial instruments for trading or speculative purposes. Outstanding at December 31, 1997, are $7,000,000 in contracts to purchase Hong Kong dollars forward. There is no significant unrealized gain or loss on these contracts. All contracts have terms of six months or less. A deposit of $500,000 is held by the issuer as collateral on the contracts. No such contracts existed at December 31, 1996. INCOME TAXES No provision has been made for U.S. taxes on undistributed earnings of foreign subsidiaries and joint ventures of approximately $125,000,000 at December 31, 1997, as it is anticipated that such earnings will be reinvested in their respective operations or in other foreign operations. Deferred taxes have been provided on temporary differences in reporting certain transactions for financial accounting and tax purposes. ADVERTISING COSTS Advertising costs are expensed as incurred and are included in selling, general and administrative expenses. (continued) 9 43 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued EARNINGS PER SHARE The Company adopted Financial Accounting Standards No. 128 (FAS 128), "Earnings Per Share" in 1997. FAS 128 requires dual presentation of basic and diluted earnings per share on the face of the income statement as well as the restatement of prior periods presented. Basic net earnings per share equals net earnings divided by the weighted average shares outstanding during the year. The computation of diluted net earnings per share includes dilutive common stock equivalents in the weighted average shares outstanding. The reconciliation between the computations is as follows:
Net Earnings (Before Extraordinary Basic Basic Diluted Diluted Item) Shares Eps Shares Eps ------------- ---------- ------- ------ ------- 1997 $ 19,835,300 17,654,772 $ 1.12 19,776,183 $ 1.00 1996 $ 3,951,400 16,846,418 $ .23 17,558,275 $ .23 1995 $ (1,883,800) 16,758,955 $ (.11) 17,236,873 $ (.11)
Included in diluted shares are common stock equivalents relating to options, warrants and convertible debt of 2,121,411, 711,857, and 477,918 for 1997, 1996 and 1995, respectively. Options to purchase 34,000 shares of common stock at prices ranging from $18.38 to $24.19, which were outstanding during 1997, were not included in the computation of diluted EPS because the options' exercise prices were greater than the annual average market price of the common shares. These options were granted in 1997 and become exercisable over the next six years. Basic and diluted earnings per share for 1996 are $.03 after the effect of the extraordinary charge of $3,500,000 or $.20 per share for settlement of the Izumi case (Note S). RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued Statement of Financial Accounting Standard No. 130 (SFAS 130). "Reporting Comprehensive Income," and No. 131 (SFAS 131), "Disclosures About Segments of an Enterprise and Related Information." These statements are effective for fiscal years commencing after December 15, 1997. The Company will be required to comply with the provisions of these statements in 1998. The Company has not assessed the effect that these new standards will have on its consolidated financial statements and/or disclosures. (continued) 10 44 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued RECLASSIFICATIONS Certain prior year amounts within the accompanying financial statements have been reclassified for comparability. NOTE B - UNUSUAL OR NON-RECURRING ITEMS In 1995, the Company incurred a non-recurring pre-tax loss of $8,000,000 on the sale of an other asset. This transaction reduced 1995 net earnings by $5,280,000, or $.31 per share, on an after-tax basis. NOTE C - INVESTMENTS IN JOINT VENTURES Investments in joint ventures consist of the Company's interests in joint ventures, accounted for under the equity method. Included are the Company's 50-percent interests in Salton/Maxim Housewares, Inc. ("Salton"), New M-Tech Corporation ("New M-Tech"), PX Distributors, Inc. ("PX"), Breakroom of Tennessee, Inc. and Anasazi Partners, L.P. ("Anasazi"). In December 1996, the Company acquired the remaining 50 percent of its seasonal products joint venture for a nominal amount. The results of operations of the joint venture have been excluded from the summarized financial information below for 1997. Summarized financial information of the unconsolidated companies is as follows:
1997 1996 -------------- -------------- Current assets $ 189,169,000 $ 85,536,000 Non-current assets 41,623,000 32,524,000 -------------- -------------- Total assets $ 230,792,000 $ 118,060,000 ============== ============== Current liabilities $ 158,045,000 $ 65,991,000 Non-current liabilities 2,544,000 889,000 -------------- -------------- Total liabilities $ 160,589,000 $ 66,880,000 ============== ============== Sales $ 467,549,000 $ 162,368,000 ============== ============== Gross profit $ 105,941,000 $ 34,312,000 ============== ============== Net earnings (loss) $ 15,885,000 $ 5,552,000 ============== ==============
(continued) 11 45 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE C - INVESTMENTS IN JOINT VENTURES - Continued All sales made by joint ventures, other than sales of $1,250,000 and $935,000 by Salton to the Company in 1997 and 1996, respectively, were to entities other than members of the consolidated group. Included in the Company's sales are sales made to joint ventures of approximately $37,226,200, $17,855,400 and $7,485,300 in 1997, 1996 and 1995, respectively. Commencing in 1997, the Company provided New M-Tech with certain administrative services for a monthly management fee. In 1997, the total amount received from New M-Tech for such fees was approximately $93,200. The Company's loans to certain of its joint ventures totaled $9,854,100 and $8,045,800 at December 31, 1997 and 1996, respectively. The 1997 amount excludes notes receivable totaling $8,183,000 from the sale of assets by the Company's manufacturing subsidiary (Note P). The Company also has provided a $9.0 million corporate guarantee as support for a credit facility obtained by one of its joint ventures. NOTE D - PROPERTY, PLANT AND EQUIPMENT The following is a summary of property, plant and equipment:
USEFUL LIVES 1997 1996 ------------ --------------- ---------------- Building 15 - 50 years $ 7,784,400 $ 6,315,400 Building improvements 8 - 31 years 1,925,600 2,220,200 Computer equipment 3 - 5 years 6,045,500 5,173,300 Furniture and equipment 3 - 8 years 59,128,200 54,853,600 Leasehold improvements 8 years 9,984,600 8,443,700 Land and land improvements 15 - 31 years 2,660,100 2,660,100 --------------- ---------------- (Improvements only) 87,528,400 79,666,300 Less accumulated depreciation and amortization 50,329,000 46,906,500 --------------- ---------------- $ 37,199,400 $ 32,759,800 =============== ================
NOTE E - NOTES AND ACCEPTANCES PAYABLE The Company's foreign subsidiaries (the "subsidiaries") have $14,600,000 in trade finance lines of credit, payable on demand, which are collateralized by the subsidiaries' tangible and intangible property located in Hong Kong and in the People's Republic of China, as well as a Company guarantee. At December 31, 1997, the subsidiaries were utilizing, including letters of credit, approximately $3,400,000 of these credit lines. These subsidiaries also have available an additional $5,000,000 line of credit which is supported by a domestic standby letter of credit. As of December 31, 1997, $1,500,000 was being utilized under this facility. (continued) 12 46 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE E - NOTES AND ACCEPTANCES PAYABLE - Continued The Company has a $45,000,000 line of credit from a domestic bank, which is collateralized by domestic accounts receivable and inventory. At December 31, 1997, there was $41,500,000 outstanding under this credit line. Borrowings under the line bear interest at LIBOR plus 1.5 percent, (7.2% at December 31, 1997). NOTE F - ACCRUED EXPENSES Accrued expenses are summarized as follows:
1997 1996 --------------- ---------------- Advertising allowances $ 1,307,200 $ 1,075,600 Salaries and bonuses 2,823,600 1,879,300 Volume rebates 1,586,000 1,325,600 Extraordinary litigation settlement - 5,300,000 Other 6,521,000 4,648,200 --------------- ---------------- $ 12,237,800 $ 14,228,700 =============== ================ NOTE G - LONG-TERM DEBT Long-term debt is summarized as follows: 1997 1996 --------------- ---------------- Note payable to Salton (Note J) $ 10,847,700 $ 10,847,700 Notes payable to New M-Tech Corporation (Note J) 7,000,000 7,000,000 Industrial development revenue bonds 2,036,900 2,851,800 --------------- ---------------- 19,884,600 20,699,500 Less current maturities 3,814,800 814,800 --------------- ---------------- Total long-term debt $ 16,069,800 $ 19,884,700 =============== ================
In 1985, the Company received proceeds of $7,500,000 from the issuance of tax-exempt industrial development revenue bonds. The bonds are being paid off in equal quarterly principal payments of $203,700 through May 2000. At December 31, 1997, the interest rate on the bonds was 6.70-percent. The bonds include certain covenants which provide, among other things, restrictions relating to the maintenance of minimum levels of working capital, net worth and other financial ratios. These bonds are unsecured (Note I). 13 47 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE H - EMPLOYEE BENEFIT PLANS The Company has a 401(k) plan for its employees to which the Company makes discretionary contributions at rates dependent on the level of each employee's contributions. Contributions made by the Company are limited to the maximum allowable for federal income tax purposes. The amounts charged to earnings for this plan during the three years ended December 31, 1997 were not significant. The Company does not provide any health or other benefits to retirees. NOTE I - INCOME TAXES Income tax expense (benefit) consists of the following:
1997 1996 1995 --------------- --------------- ---------------- Current Federal $ (3,274,000) $ (748,200) $ (1,392,300) Foreign (2,100) 183,800 State 2,000 34,000 (34,200) --------------- --------------- ---------------- (3,272,000) (716,300) (1,242,700) Deferred 4,195,000 436,600 (38,100) --------------- --------------- ---------------- $ 923,000 $ (279,700) $ (1,280,800) =============== =============== ================
The analysis of the deferred income tax provision (benefit) representing the tax effects of temporary differences between tax and financial reporting is as follows:
1997 1996 1995 --------------- --------------- ---------------- Intercompany profit in inventory $ (13,900) $ (2,700) $ (72,500) Differences in timing between financial and tax reporting 1,879,000 145,700 49,300 Utilization of net operating loss carryforward 1,678,200 356,200 220,100 Deferred income 157,300 224,300 224,300 Depreciation and amortization 567,200 (246,900) (303,800) Other (72,700) (40,000) (155,500) --------------- --------------- ---------------- $ 4,195,100 $ 436,600 $ (38,100) =============== =============== ================
(continued) 14 48 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE I - INCOME TAXES - Continued The United States and foreign components of earnings (loss) before income taxes are as follows:
1997 1996 1995 ------------- ------------- ------------- United States $ 7,521,200 $ (2,253,800) $ (8,056,300) Foreign 13,237,100 5,925,500 4,891,700 ------------- ------------- ------------- $ 20,758,300 $ 3,671,700 $ (3,164,600) ============= ============= =============
The differences between the statutory rates and the tax rates computed on pre-tax profits are as follows:
1997 1996 1995 --------- ---------- --------- % % % --------- ---------- --------- Tax expense (benefit) at statutory rates 34.0% 34.0% (34.0)% State taxes, net of federal tax benefit -- .6 (.7) Foreign (income) loss not subject to tax -- (6.4) 2.6 Provision for prior years' Hong Kong income taxes -- (.6) 12.3 Net tax rate differential on undistributed foreign earnings (23.5) (17.3) (25.6) Equity in joint venture earnings not subject to U.S. tax or already taxed (11.1) (25.7) (4.2) Effect of gross up of foreign taxes, net of foreign tax credit (.2) (4.0) (4.1) Federal withholding taxes 1.2 6.7 7.8 Other 4.1 5.1 5.4 ---- ---- ---- 4.5% (7.6)% (40.5)% ==== ===== ======
In 1995, the Company reached an agreement with the Hong Kong Inland Revenue Department concerning the taxes assessed against the Company's consolidated Hong Kong subsidiaries through 1991. The assessment, including interest charges and net of U.S. foreign tax credits, approximated $1,400,000. The Company made a provision in 1995 of $400,000 or $.02 per share, to increase its contingency reserve to the settlement amount. Security deposits of approximately $3,000,000 were refunded to the Company during 1995. Hong Kong tax returns for the fiscal years 1992 through 1996 have been audited and accepted as filed. (continued) 15 49 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE I - INCOME TAXES - Continued The Internal Revenue Service has completed its examination of the Company's 1992 tax return. No material assessments were made. The Internal Revenue Service is presently examining the Company's 1994 and 1995 income tax returns and the Company's 401 (k) Plan filings. It is also examining the Company's compliance with the requirements supporting the deductibility of interest paid on the Industrial Development Revenue Bonds. Management believes that adequate provision for taxes has been made for the years under examination and those not yet examined. The Company's future income tax benefits at December 31, 1997, arise primarily from the Company's and its subsidiaries', net operating loss carryforwards. Valuation allowances have not been recorded limiting such benefits based on management's current estimate that future profits will be sufficient to realize these benefits. The primary components of future income tax benefits at December 31, 1997 are as follows: Net operating loss and other carryforwards $ 4,489,800 Depreciation and amortization (1,743,500) Deferred income 131,800 Differences in timing between financial and tax reporting 1,079,400 Extraordinary litigation settlement - Other (25,800) ------------- 3,931,700 Less amount included in other assets 1,274,100 ------------- $ 2,657,600 ============= The tax benefits resulting from the exercise of stock options have been recorded as additions to paid-in capital in the amounts of $3,493,000 and $183,600 in 1997 and 1996, respectively. The amounts and expiration years of the Company's tax carryforwards are as follows: Expiration Amount Years ----------- ---------- Federal net operating losses: U.S. $ 8,752,300 2012 Canada $ 721,400 2003 Hong Kong $ 100,900 Unlimited States/Provincial net operating losses: Florida $19,960,600 2012 Ontario $ 87,300 2003 The Company also has U.S. tax credit carryforwards of $466,900, many of which do not expire. NOTE J - ACQUISITIONS SALTON/MAXIM HOUSEWARES, INC. On July 11, 1996, Windmere completed its acquisition of 50-percent of Salton. The Company received 6,508,572 shares of Salton common stock (market value at date of acquisition of approximately $36.2 million) in exchange for a cash payment of $3,254,300, a $10,847,700 promissory note and 748,112 shares of Windmere stock (market value at date of agreement of approximately $6,057,000). The total cost in excess of net assets acquired is not deemed to be material. (continued) 16 50 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE J - ACQUISITIONS - Continued In addition, the Company received an option to purchase 453,000 shares of Salton common stock at an exercise price of $4.83 per share. The option becomes exercisable only if and to the extent that options to purchase shares of Salton common stock outstanding at the date of the stock purchase agreement are exercised. During 1997, the Company exercised 26,500 options under the terms of the agreement. The $10,847,700 promissory note bears interest at a rate of 8-percent per annum, payable quarterly, and matures in July 2001. The note is subordinated to the Company's current and future indebtedness to its senior lender and is collateralized by certain of the Company's domestic assets. LITTERMAID(TM) In 1996, the Company purchased certain assets and marketing rights, including patents, for the LitterMaid(TM), computerized, infrared, automatic self-cleaning cat litter box. The purchase price of the assets included $2,200,000 in cash and options to purchase 150,000 shares of the Company's common stock. The total fair value of the options as determined under SFAS 123, is $549,000 and has been included in the cost of the assets acquired (Note L). NEW M-TECH CORPORATION In April 1996, the Company acquired a 50-percent interest in New M-Tech Corporation, a consumer electronics company for $10,000,000. Payment consisted of $3,000,000 in cash and $7,000,000 in unsecured promissory notes. The promissory notes bear interest at 8% per annum and consist of a $3,000,000 promissory note maturing in 1998, and two $2,000,000 promissory notes maturing in 2001, one of which is convertible into shares of the Company's common stock at a price of $15 per share. Conversion may occur at any time during the term of the convertible promissory note, and may be required under certain circumstances. The notes are subordinated to the Company's current and future indebtedness to its senior lender. The total cost in excess of net assets acquired of $5,300,000 has resulted in goodwill and is being amortized over 20 years on a straight-line basis. BREAKROOM OF TENNESSEE, INC. In May 1996, the Company agreed to contribute inventory valued at $250,000 in exchange for a 50-percent interest in Breakroom of Tennessee, Inc., a joint venture formed to market and distribute office products. (continued) 17 51 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE J - ACQUISITIONS - Continued BAY BOOKS & TAPES, INC. In June 1996, the Company acquired the assets of the books and video publishing division of KQED, Inc., consisting mostly of inventory, for $1,180,000 in cash. Bay Books & Tapes, Inc. publishes public television companion books and videos. ANASAZI PARTNERS, L.P. In June 1996, the Company acquired a 50-percent interest in an investment partnership for $1,250,000. Payments as of December 31, 1997, include a $1,500,000 capital contribution to the partnership and loans totaling $1,500,000 to the partnership's other equity partner. Such loans bear interest at a rate of 8-percent per annum, are unsecured and are payable upon demand. The partnership's investments include certain privately traded securities whose values have been estimated by the General Partner in the absence of readily ascertainable market values. Fair value of these securities may differ significantly from the values that would have been used had a ready market for the securities existed. PRO FORMA The results of operations on a pro forma basis as though Salton and New M-Tech had been acquired as of the beginning of the year ended December 31, 1996 is as follows: (In Thousands except per share amounts)
YEAR ENDED DECEMBER 31, ------------------------ 1996 1995 -------- -------- Equity in net earnings (loss) of joint ventures $ 2,152 $ (905) Net loss $ (306) $ (2,482) Loss per common and common equivalent share $ (.02) $ (.14)
18 52 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE K - COMMITMENTS AND CONTINGENCIES LITIGATION The Company, its 50-percent owned joint venture partners Salton/Maxim Housewares, Inc. and New M-Tech Corporation, White Consolidated Industries, Inc. ("White Consolidated"), and certain other parties have been named as defendants in litigation filed by Westinghouse Electric Corporation ("Westinghouse") in the United States District Court for the Western District in Pennsylvania on December 18, 1996. The action arises from a dispute between Westinghouse and White Consolidated over rights to use the "Westinghouse" trademark for consumer products, based on transactions between Westinghouse and White Consolidated in the 1970's and the parties' subsequent conduct. Prior to the filing of Westinghouse's complaint against the Company, White Consolidated, on November 14, 1996, filed a complaint in the United States District Court for the Northern District of Ohio against Westinghouse and another corporation for trademark infringement, dilution, false designation or origin and false advertisement, seeking both injunctive relief and damages. Procedural motions concerning the jurisdiction in which the dispute should be heard have been filed by the parties. The action by Westinghouse seeks, among other things, a preliminary injunction enjoining the defendants from using the trademark, unspecified damages and attorneys' fees. Pursuant to the Indemnification Agreement dated January 23, 1997 by and among White Consolidated, Kmart Corporation, and the Company, White Consolidated is defending and indemnifying the Company for all costs and expenses for claims, damages, and losses, including the costs of litigation. Pursuant to the license agreements with White Consolidated, White Consolidated is defending and indemnifying Salton/Maxim and New M-Tech for all costs and expenses for claims, damages, and losses, including the costs of litigation. On April 9, 1997, on joint motion of the parties, the court issued an order staying future proceedings until the earlier of July 1, 1997 or five days after hearing before the court in order to give the parties an opportunity to pursue settlement discussions. Subsequently, after a status hearing before the court on July 15, 1997, and in accordance with the court's memorandum order of July 17, 1997, counsel for the parties in the litigation pending in the United States District Court for the Western District of Pennsylvania reported to the court in a letter that the parties had agreed to pursue an expedited mini-trial/mediation proceeding in an effort to resolve their disputes. A mediation proceeding occurred and the parties were unable to reach a mediated settlement. Discovery is proceeding and the matter is likely to be tried in late 1998. The Company is also subject to other legal proceedings, product liability and other claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability, if any, in excess of applicable insurance coverage, is not likely to have a material effect on the financial position of the Company. However, as the outcome of litigation or other legal claims is difficult to predict, significant changes in the estimated exposures could occur. (continued) 19 53 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE K - COMMITMENTS AND CONTINGENCIES - Continued EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with several of its executive officers for periods ranging from two to five years. The agreements provide the employees with an option to terminate their agreements and receive lump sum payments of up to five years compensation if there is a change in control of the Company. LEASES In January 1998, the Company entered into a long-term operating lease for a warehouse facility. Future minimum payments under the lease, which commences April 1998, are as follows: 1998 $ 472,500 1999 1,161,600 2000 1,338,800 2001 1,338,800 2002 1,338,800 Thereafter 7,028,400 ------------- $ 12,678,900 ============= OTHER In April 1994, the Company purchased from Ourimbah Investment, Limited ("Ourimbah") the remaining 20% of the issued and outstanding capital stock of Durable (the "Purchased Shares") which had not, prior to such purchase, been owned, directly or indirectly, by the Company. In connection with such purchase, the Company agreed to make an additional payment to Ourimbah for the Purchased Shares upon the occurrence of a change of control of the Company on or before July 1, 1999. Any such additional payment will be in an amount with respect to each Purchased Share equal to the greater of (i) the same multiple of earnings per share of Durable as the highest multiple of earnings per share paid for the shares of common stock of the Company received in connection with such change of control or (ii) the same multiple of net asset value per share of Durable as the highest multiple of price per net asset value per share paid for the shares of common stock of the Company received in connection with such change of control. For purposes of determining whether any such additional payment is required, a change of control will be deemed to have occurred upon (i) the acquisition by any person of 50% or more of the then (continued) 20 54 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE K - COMMITMENTS AND CONTINGENCIES - Continued OTHER - Continued outstanding shares of common stock of the Company, (ii) a change in the majority of the members of the Company's board of directors who are serving as of the date of the purchase agreement or (iii) the approval by the Company's shareholders of (A) a reorganization, merger or consolidation in which the shareholders of the Company prior to such transaction do not, immediately thereafter, own more than 50% of the combined voting power of the Company following such transaction, (B) a liquidation of dissolution of the Company or (C) a sale of all or substantially all of the Company's assets. No change of control will be deemed to have occurred in connection with any transaction approved by a majority of the members of the board of directors. In December 1997, the employment agreements of the senior members of Salton's management expired. Disagreements arose between the management and the members of the Salton board of directors who have been designated by the Company under the Stockholders' Agreement between the two companies, dated July 11, 1996 (the "Windmere Directors"), as to the provisions to be contained in new agreements or the terms under which management would continue to be employed by Salton if no agreements were executed. During the course of these discussions, Salton alleged that certain actions of the Company would breach the terms of the July 11, 1996 Marketing Cooperation Agreement between the Company and Salton and violate fiduciary duties to Salton. The Company and the Windmere Directors, after being advised by legal counsel, vehemently disagree with the allegations and although discussions are currently under way in an attempt to resolve these issues, there can be no assurance that these negotiations will be successful. A failure to resolve these disputes could have a material adverse effect on the Company's business relationship with Salton. NOTE L - STOCKHOLDERS' EQUITY STOCK OPTIONS The Company's 1982 and 1992 Employees' Incentive Stock Option Plans provide for granting of options of not more than 1,200,000 shares and 500,000 shares, respectively, of common stock. Options granted under the plans are exercisable in equal annual installments during a five or six year period beginning one year after the date the option is granted. The Company has also granted stock options which are classified as non-qualified, and which are not included in the 1982 or 1992 Employees' Incentive Stock Option Plans. In May 1997, the Company's shareholders approved and ratified the 1996 Stock Option Plan. The 1996 plan provides for the granting of incentive stock options for employees and non-qualified stock options for employees, consultants and directors. A total of 850,000 shares of common stock have been reserved under the 1996 plan. The exercise price of all options granted by the Company equals the market price at the date of grant. No compensation expense has been recognized. Prior to December 31, 1995, the Company accounted for non-qualified options under APB Opinion 25 and related Interpretations. Commencing January 1, 1996, the Company accounts for non-qualified options issued to non-employees, under SFAS 123, Accounting for Stock Based Compensation. (continued) 21 55 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE L - STOCKHOLDERS' EQUITY - Continued During 1997, the Company issued options to purchase 25,000 shares to non-employee sales representatives. During 1996, the Company issued options to purchase 97,500 shares of common stock to non-employee sales representatives. These sales representatives included Top Sales and TJK (Note P), each of which received options to purchase 25,000 shares. The options were issued with an exercise price that was equal to the market price on the date of the grant. The total fair value of the options, as determined under SFAS 123, was $357,000 which is to be amortized over the vesting period of the options. The 1997 and 1996 expense associated with non-employee stock options totaled $90,000 and $68,000, respectively. In connection with the 1996 purchase of certain assets of LitterMaid(TM), the Company issued options for the purchase of 150,000 shares of common stock. The total fair value of the options, as determined under SFAS 123, was $549,000 and has been included in the cost of purchasing the assets. Had compensation cost for the Employees' Incentive Stock Option Plans and non-qualified options issued to employees been determined based on the fair value of the options at the grant dates consistent with the method of SFAS 123, the Company's net earnings (loss) and earnings (loss) per share would have been changed to the pro forma amounts indicated below.
1997 1996 1995 ------------ ------------ ------------ Net earnings (loss) As reported $ 19,835,300 $ 451,400 $ (1,883,800) Pro forma $ 18,911,900 $ (2,846,400) $ (1,935,700) Basic earnings (loss) per share As reported $ 1.12 $ .03 $ (.11) Pro forma $ 1.07 $ (.17) $ (.11) Diluted earnings (loss) per share As reported $ 1.00 $ .03 $ (.11) Pro forma $ .96 $ (.17) $ (.11)
The above pro forma disclosures may not be representative of the effects on reported net earnings for future years as options vest over several years and the Company may continue to grant options to employees. (continued) 22 56 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE L - STOCKHOLDERS' EQUITY - Continued The fair value of each option grant is estimated on the date of grant using the binomial option-pricing model with the following weighted-average assumptions used for grants in 1997 and 1996, respectively: dividend yield of 0.0 percent for all years; expected volatility of 37.85 percent and 43.97 percent; risk-free interest rates of 5.33 percent and 5.56 percent; and expected holding periods of 4 and 6.34 years. A summary of the status of the Company's fixed stock options as of December 31, 1997 and 1996, and changes during the years ending on those dates is as follows:
1997 1996 --------------------------------- ------------------------------ Weighted- Weighted- Shares Average Shares Average (000) Exercise Price (000) Exercise Price ----------- ------------------ ----------- --------------- Outstanding at beginning of year 3,369 $ 7.03 1,866 $ 5.95 Granted 235 14.94 1,758 7.89 Exercised (764) 6.45 (221) 4.20 Forfeited (27) 8.68 (34) 6.16 ----------- ----------- ----------- ---------- Outstanding at end of year 2,813 7.77 3,369 7.03 =========== =========== Options exercisable at end of year 1,625 1,563 Weighted-average fair value of options granted during the year $ 5.54 $ 4.04
The following information applies to options outstanding at December 31, 1997.
Options Outstanding Options Exercisable -------------------------------------------------- ---------------------------- - - Weighted- Average Weighted - Weighted- Range Of Shares Remaining Average Shares Average Exercise Prices (000) Contractual Life Exercise Price (000) Exercise Price --------------- ----------- ----------------- ----------------- ----------- --------------- $2.875 - $3.693 228 2.72 $ 3.28 228 $ 3.15 $4.500 - $6.375 102 12.85 5.88 101 4.72 $7.000 - $10.375 2,159 17.17 7.19 1,359 7.37 $10.875 - $14.875 290 6.15 13.88 62 12.46 $18.375 - $24.188 34 6.00 19.23 - - -------- --------- $2.875 - $24.188 2,813 14.52 7.77 1,750 6.76 ======== =========
(continued) 23 57 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE L - STOCKHOLDERS' EQUITY - Continued WARRANTS As part of a lawsuit settlement, warrants to purchase 750,423 shares of the Company's common stock have been issued. The warrants which had an exercise price of $7.50 per share expired on January 19, 1998. Upon expiration, 565,796 warrants had been exercised. COMMON STOCK PURCHASE RIGHTS PLAN In March 1995, the Company implemented a Common Stock Purchase Rights Plan and distributed one Right for each share of the Company's common stock outstanding. The Rights are not exercisable or transferable, apart from the Company's common stock, until after a person or group acquires, or has the right to acquire, beneficial ownership of 15 percent or more of the Company's common stock (which threshold may, under certain circumstances, be reduced to 10 percent) or announces a tender or exchange offer to acquire such percentage of the Company's common stock. Each Right entitles the holder to purchase one quarter of one share of common stock at an exercise price of $25.00 per full share and contains provisions that entitle the holder in the event of specific transactions, to purchase common stock of the Company or any acquiring or surviving entity at one-half of market price as determined under the terms of the Rights Agreement. The Rights will expire in March 2005, unless previously exercised or redeemed at the option of the Company for $.00001 per Right. STOCK PURCHASE PROGRAM The $3.8 million purchase in 1996 of 463,000 shares of the Company's common stock completed the Company's purchase of 1,000,000 shares of its common stock under the 1994 stock purchase program. In 1996, the Company's Board of Directors authorized a new stock purchase program, whereby, the Company can purchase up to 10-percent of its outstanding shares (approximately 1.6 million shares). No shares have been purchased under the new program. DIVIDENDS In August 1997, the Board of Directors re-evaluated the dividend policy in light of the Company's strategic repositioning for growth and the resultant cash requirements and eliminated the Company's quarterly cash dividend. 24 58 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE M - SPECIAL PREFERRED STOCK During 1986, the Company was authorized to issue 40,000,000 shares of $.01 par value special preferred stock purchase rights for each share of common stock, par value $.10 per share. These rights entitled the holder to purchase one share of special preferred stock at a price of $.01 under certain conditions in connection with preserving for the Company and its stockholders the benefits of any recovery in the Company's lawsuit with North American Philips Corporation, et al. In 1992, these conditions ceased to apply, therefore, the special preferred stock rights remain outstanding but have no continuing application. NOTE N - GEOGRAPHIC AREA INFORMATION
1997 1996 1995 -------------- -------------- -------------- REVENUES United States operations $ 179,756,100 $ 127,093,600 $ 126,959,000 International operations Sales to unaffiliated customers 82,129,000 69,910,000 60,817,900 Transfers between geographical areas 96,842,700 82,809,500 83,517,400 Eliminations (96,842,700) (82,809,500) (83,517,400) -------------- -------------- -------------- $ 261,885,100 $ 197,003,600 $ 187,776,900 ============== ============== ============== OPERATING PROFIT United States operations $ (474,300) $ (3,831,000) $ (7,774,000) International operations 15,033,000 5,020,100 1,854,500 Eliminations (530,000) (889,000) 1,164,000 -------------- -------------- -------------- Operating profit (loss) 14,028,700 300,100 (4,755,500) Equity in net earnings (loss) of joint ventures 7,353,200 2,298,700 (392,600) Interest expense (3,351,100) (1,345,900) (578,300) Interest and other income 2,727,500 2,418,800 2,561,800 -------------- -------------- -------------- Consolidated earnings (loss) before income taxes and extraordinary item $ 20,758,300 $ 3,671,700 $ (3,164,600) ============== ============== ==============
(continued) 25 59 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE N - GEOGRAPHIC AREA INFORMATION - Continued
1997 1996 1995 --------------- --------------- --------------- IDENTIFIABLE ASSETS United States operations $ 248,795,800 $ 180,503,900 $ 101,555,700 International operations 174,944,900 159,785,100 145,714,800 Eliminations (141,893,600) (103,010,100) (59,258,600) --------------- --------------- --------------- Consolidated assets $ 281,847,100 $ 237,278,900 $ 188,011,900 =============== =============== ===============
Transfers between geographic areas are billed at negotiated prices. In 1995, the United States operations' operating profit includes an $8,000,000 loss on the sale of an other asset. All United States revenues are derived from sales to unaffiliated customers. Included in domestic revenues and operating profit are certain sales derived from direct product shipments from Hong Kong to customers located in the United States. International operations are conducted in Canada, Hong Kong, Europe and the People's Republic of China. NOTE O - CONCENTRATION OF CREDIT AND OTHER RISKS The Company sells on credit terms to a majority of its customers, most of which are U.S. and Canadian retailers and distributors located throughout those countries. Salton accounted for 12.0% of 1997 sales. A kitchen electric appliance distributor and a national retail beauty supply chain accounted for 10.9% and 10.3%, respectively, of 1996 sales. In 1995, Wal-Mart Stores, Inc. and a kitchen electric appliance distributor accounted for 13.1% and 11.4%, respectively, of the Company's sales. The Company's allowance for doubtful accounts is based on management's estimates of the creditworthiness of its customers, and, in the opinion of management is believed to be set in an amount sufficient to respond to normal business conditions. Should such conditions deteriorate or any major credit customer default on its obligations to the Company, this allowance may need to be increased which may have an adverse impact upon the Company's earnings. (continued) 26 60 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE O - CONCENTRATION OF CREDIT AND OTHER RISKS - Continued The Company produces the vast majority of its products in its facilities in the People's Republic of China ("PRC"). The supply and cost of the products manufactured by Durable can be adversely affected, among other reasons, by changes in foreign currency exchange rates, increased import duties, imposition of tariffs, imposition of import quotas, interruptions in sea or air transportation and political or economic changes. The Company has a significant amount of its assets in the People's Republic, primarily consisting of inventory, equipment and molds. From time to time, the Company explores opportunities to diversify its sourcing and/or production of certain products to other low-cost locations or with other third parties or joint venture partners in order to reduce its dependence on production in the People's Republic and/or reduce Durable's dependence on the Company's existing distribution base. However, at the present time, the Company intends to continue its production in the Peoples's Republic. Recent months have seen an unusually rapid devaluation of certain Asian-Pacific currencies. While there has not been a material impact on the currencies in Hong Kong or the People's Republic, where the Company has operations, there can be no assurance that there will not be a material impact in the future. Hong Kong underwent a transfer of control to the People's Republic in July 1997. Durable is incorporated in Hong Kong and its executive, sales offices and its senior executives are located or reside there. The Company also conducts significant trading activities through subsidiaries incorporated in Hong Kong. The Company's business has not been materially affected by the governmental changes that have already occurred. Although the Company believes that its operations will not be materially affected by any further governmental changes occurring in Hong Kong, no assurance can be given that such changes will be benign. In 1997, President Clinton extended the People's Republic's most-favored nation (MFN) trading status for an additional year. The President announced in 1994 that the United States would, in the future, permanently de-link MFN renewal from human rights issues, other than freedom of emigration provisions. Under U.S. law, MFN status means that products are subject to the relatively low duty rates set forth in Column 1 of the Harmonized Tariff Schedules of the United States (HTSUS), that have resulted from several rounds of reciprocal tariff negotiations conduct under the auspices of the General Agreement on Tariffs and Trade (GATT) since 1945. Products from countries not eligible for MFN treatment are subject to much higher rates of duty, averaging 30 percent ad valorem, as set forth in Column 2 of the HTSUS. If MFN status for goods produced in the People's Republic were removed there would be a substantial increase in tariffs imposed on goods of Chinese origin entering the United States, including those manufactured by the Company, which could have a material adverse impact on the Company's revenues and earnings. 27 61 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE P - RELATED PARTY TRANSACTIONS The Company has used the services of Top Sales Company, Inc. ("Top Sales"), an independent sales representative, since 1978. A member of the Company's Board of Directors is the sole shareholder and Chief Executive Officer of Top Sales. The Company made commission payments to Top Sales of $531,100, $693,300 and $556,400 in 1997, 1996 and 1995, respectively. In 1996, the President of TJK Sales Inc. ("TJK"), an independent sales representative, became a member of the Company's Board of Directors. Commission payments to TJK totaled $427,000 and $469,000 in 1997 and 1996, respectively. In 1986, the Company made a non-interest bearing loan of $78,000 to a director of the Company. The entire amount of such loan was outstanding at December 31, 1997. The Company loaned $300,000 to Lion Redcliff Import and Export, Ltd., which is 50-percent owned by an entity whose President is also a Director of the Company. Pursuant to the note, periodic principal payments are made by the debtor. The remaining obligation of $150,000 at December 31, 1997, was paid in March 1998. Included in receivables from affiliates is $584,500 due the Company's President and Chief Executive Officer. Such amount is due upon demand and bears interest at the prevailing market rate. On October 1, 1997, one of the Company's wholly-owned subsidiaries sold certain assets to New M-Tech for $1,977,600 of which a gain of $988,800 has been recorded as Other Income. The Company has recorded a note receivable from New M-Tech as payment for the assets. The note is payable in 24 quarterly installments, which commenced December 31, 1997 and bears interest at a rate of prime plus one percent (9.5% at December 31, 1997). On November 1, 1997, New M-Tech purchased all the common stock of the subsidiary for $1,300 and assumed indebtedness totaling $6,220,000 due the Company's wholly-owned manufacturing subsidiary. The note evidencing the indebtedness matures on October 31, 2003, bears interest at a rate of prime plus one percent and is collateralized by inventory and fixed assets. 28 62 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE Q - SUPPLIER CONTRACT In January 1997, the Company through its 50-percent interests in Salton and New M-Tech entered into supply contracts with the Kmart Corporation for Kmart to purchase, distribute, market and sell certain products under the White-Westinghouse brand name licensed to Salton and New M-Tech. Under the terms of the contract, Salton and New M-Tech will supply Kmart, either through the Company or other manufacturers, with a broad range of small electrical appliances, consumer electronics and telephone products under the White-Westinghouse brand name. Kmart will be the exclusive discount department store to market these White-Westinghouse products. The Company has entered into an agreement guaranteeing the performance of Salton and New M-Tech under the Kmart contract. NOTE R - MARKETING COOPERATION AGREEMENT The Company has entered into various agreements pursuant to the Marketing Cooperation Agreement executed as part of the 1996 acquisition of Salton. In the fourth quarter of 1996, the Company entered into a license agreement, pursuant to which, it holds the exclusive world-wide rights to use the Farberware name on a broad range of small electric products. Under the Company's marketing cooperation agreement with Salton, Salton is to be the exclusive distributor of the Farberware products. The license agreement expires December 31, 2095 and calls for quarterly royalty payments of 10-percent of net sales as defined in the agreement. On April 30, 1997, the parties entered into an agreement under which fees are paid to the Company in consideration of its efforts in connection with the supply contract with Kmart. Fees earned by the Company under various marketing arrangements with its joint ventures totaled $3.3 million for 1997, and are classified as Sales and Other Revenues. No such fees were earned in 1996. NOTE S - EXTRAORDINARY ITEM On March 27, 1997, the Company paid $4,500,000 to settle the lawsuit filed in April 1994 by Izumi relating to the Phillips settlement in 1992. An accrual of $5,300,000, including $800,000 in estimated legal expenses, was recorded as of December 31, 1996. The transaction resulted in an after tax charge of $3,500,000 and has been recorded as an extraordinary item, to correspond with the extraordinary gain recorded from the settlement in 1992. 29 63 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA QUARTERLY FINANCIAL DATA (UNAUDITED) The quarterly results for the years 1997 and 1996 are set forth in the following tabulation. (In Thousands)
Net Earnings Gross Earnings (Loss) Sales Profit (Loss) Per Share --------------- --------------- -------------- --------- 1997 First quarter $ 51,412 $ 10,819 $ 321 $ .02 Second quarter 60,063 13,006 1,941 .10 Third quarter 79,976 17,959 8,517 .43 Fourth quarter 70,434 22,54 9,056 .45 --------------- --------------- --------------- ---- Total $ 261,885 $ 64,378 $ 19,835 $ 1.00 =============== =============== =============== ====== 1996 First quarter $ 40,440 $ 8,603 $ 296 $ .02 Second quarter 39,503 8,349 (442) (.03) Third quarter 56,181 10,415 1,701 .10 Fourth quarter 60,880 12,358 (1,104) * (.06) --------------- --------------- --------------- ----- Total $ 197,004 $ 39,725 $ 451 $ .03 * =============== =============== =============== =====
* Differs by $.01 from earnings per share for the year-ended 1996, due to the effect of the change in common shares and common equivalent shares outstanding from quarter to quarter. Includes an after tax extraordinary charge for the settlement of the Izumi case of $3,500,000 or $.20 per share. QUARTERLY STOCK QUOTATIONS AND DIVIDENDS PER SHARE The Company's common stock is traded on the New York Stock Exchange under the symbol WND. High and low market prices and dividends paid per share in 1997 and 1996, by quarters, are as follows: Market Price --------------------- Cash High Low Dividends -------- ------ ---------- 1997 ---- Fourth quarter 26-11/16 19-5/8 $ - Third quarter 24-1/8 16-1/4 - Second quarter 16-9/16 12-7/8 .05 First quarter 14-5/8 12 .05 ---------- $ .10 ========== 1996 ---- Fourth quarter 16-3/4 12-5/8 $ .05 Third quarter 15-3/8 11-1/4 .05 Second quarter 14-3/4 9-5/8 .05 First quarter 11 6-7/8 .05 ---------- $ .20 ========== The approximate number of holders of common stock of the Company, as of December 31, 1997, was 1,400. This number does not include any adjustment for stockholders owning common stock in the Depository Trust name or otherwise in "Street" name, which the Company believes represents an additional 6,500 stockholders. 30 64 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 1997, 1996 AND 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- ----------------------- -------- -------- Additions --------- Balance at Charged to Charged Balance at Beginning Costs and to Other End of Description of Period Expenses Accounts Deductions Period ----------- --------- -------- -------- ---------- ------ YEAR ENDED DECEMBER 31, 1997 Reserves deducted from assets to which they apply: Allowance for possible losses on accounts receivable $1,129,000 $ 433,000 $ 62,700(a) $ (513,400)(b) $1,111,300 ========== ========== =========== ============= ========== YEAR ENDED DECEMBER 31, 1996 Reserves duducted from assets to which they apply: Allowance for possible losses on accounts receivable $1,158,000 $ 930,000 $ 4,000(a) $ (963,000)(b) $1,129,000 ========== ========== =========== ============== ========== YEAR ENDED DECEMBER 31, 1995 Reserves duducted from assets to which they apply: Allowance for possible losses on accounts receivable $1,338,100 $ 894,700 $ 31,600(a) $ 1,106,400 (b) $1,158,000 ========== ========== =========== ============== ==========
(a) Recoveries of amounts previously written off against the reserve. (b) Write-off of accounts receivable against the reserve. EX-27 2 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1997 DEC-31-1997 DEC-31-1997 8,223,900 0 44,449,300 1,111,300 102,172,400 179,960,300 87,528,400 50,329,000 281,847,100 73,882,200 2,036,900 0 0 1,811,900 189,009,400 281,847,100 261,885,100 261,885,100 197,507,200 197,507,200 0 433,000 3,351,100 20,758,300 923,000 0 19,835,300 0 0 19,835,300 1.12 1.00
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