10-Q 1 g65027e10-q.txt APPLICA, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER 1-10177 APPLICA INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) FLORIDA 59-1028301 ------------------------------- ---------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 5980 MIAMI LAKES DRIVE, MIAMI LAKES, FLORIDA 33014 -------------------------------------------- ------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (305) 362-2611 ---------------------------------------------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ----------------------------------------- FORMER NAME, IF CHANGED SINCE LAST REPORT Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirement for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: NUMBER OF SHARES OUTSTANDING CLASS ON NOVEMBER 8, 2000 ----- ---------------------------- Common Stock, $.10 par value 23,035,355 1 2 APPLICA INCORPORATED INDEX PART I. FINANCIAL INFORMATION ITEM 1. Consolidated Statements of Earnings for the Three Months Ended September 30, 2000 and 1999............ 3 Consolidated Statements of Operations for the Nine Months Ended September 30, 2000 and 1999......................... 4 Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999......................................... 5-6 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999......................... 7 Notes to Consolidated Financial Statements................ 8-13 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 14-20 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk...................................................... 21 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings.................................... 22 ITEM 6. Exhibits and Reports on Form 8-K..................... 22 SIGNATURES............................................................... 23 2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS APPLICA INCORPORATED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE INFORMATION)
THREE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------------ 2000 1999 ----------------------------- ----------------------------- Sales and Other Revenues...... $199,397 100.0% $204,229 100.0% Cost of Goods Sold............ 132,649 66.5 135,367 66.3 -------- ----- -------- ----- Gross Profit............. 66,748 33.5 68,862 33.7 Selling, General and Administrative Expenses.. 48,071 24.1 43,623 21.4 -------- ----- -------- ----- Operating Profit......... 18,677 9.4 25,239 12.3 Other (Income) Expense Interest Expense......... 8,160 4.1 7,212 3.5 Interest and Other Income (708) (.4) (580) (.3) -------- ----- -------- ----- 7,452 3.7 6,632 3.2 -------- ----- -------- ----- Earnings before Equity in Net Loss of Joint Ventures and Income Taxes 11,225 5.7 18,607 9.1 Equity in Net Loss of Joint Ventures........ (128) (.1) - - - - -------- ----- -------- ----- Earnings Before Income Taxes............. 11,097 5.6 18,607 9.1 Provision (Benefit) for Income Taxes............. 2,798 1.4 4,634 2.3 -------- ----- -------- ----- Net Earnings.................. $ 8,299 4.2% $ 13,973 6.8% ======== ===== ======== ===== Earnings Per Share - basic.. $ .36 $ .62 ======== ======== Earnings Per Share - diluted $ .35 .59 ======== ========
The accompanying notes are an integral part of these statements. 3 4 APPLICA INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE INFORMATION)
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------------------------------- 2000 1999 --------------------------- --------------------------- Sales and Other Revenues...... $517,499 100.0% $472,250 100.0% Cost of Goods Sold............ 354,156 68.4 321,004 68.0 -------- ----- -------- ----- Gross Profit............. 163,343 31.6 151,246 32.0 Selling, General and Administrative Expenses.. 135,936 26.3 125,497 26.6 -------- ----- -------- ----- Operating Profit......... 27,407 5.3 25,749 5.4 Other (Income) Expense Interest Expense......... 22,225 4.3 19,947 4.2 Interest and Other Income (1,673) (.3) (1,604) (.3) -------- ----- -------- ----- 20,552 4.0 18,343 3.9 Earnings before Equity in Net Loss of Joint Ventures and Income Taxes 6,855 1.3 7,406 1.5 Equity in Net Loss of Joint Ventures........ (128) - (12,894) (2.7) -------- ---- -------- ----- Earnings (Loss) Before Income Taxes............. 6,727 1.3 (5,488) (1.2) Provision (Benefit) for Income Taxes............. 1,701 .3 (2,366) (.5) -------- ----- -------- ----- Net Earnings (Loss)........... $ 5,026 1.0% $ (3,122) (.7)% ======== ===== ======== ===== Earnings (Loss) Per Share - basic......................... $ .22 $ (.14) ======== ======== Earnings (Loss) Per Share - diluted....................... $ .21 $ (.14) ======== ========
The accompanying notes are an integral part of these statements. 4 5 APPLICA INCORPORATED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
(Unaudited) 9/30/00 12/31/99 ASSETS --------- --------- CURRENT ASSETS Cash & Cash Equivalents...................... $ 9,784 $ 13,768 Accounts and Other Receivables, less allowances of $9,326 and $8,761, respectively......................... 194,424 172,500 Receivables from Affiliates (Note 1)......... 2,837 3,533 Other Receivables............................ - 12,962 Inventories Raw Materials................................ 8,513 9,045 Work-in-process.............................. 22,237 18,547 Finished Goods............................... 194,063 136,114 --------- --------- Total Inventories............................ 224,813 163,706 Prepaid Expenses............................. 9,011 12,703 Refundable Income Taxes...................... 6,647 1,122 Future Income Tax Benefits................... 8,490 8,490 --------- --------- Total Current Assets......................... 456,006 388,784 INVESTMENT IN JOINT VENTURE (NOTE 2)................................ 2,174 2,608 PROPERTY, PLANT & EQUIPMENT - AT COST, less accumulated Depreciation of $81,276 and $69,597, respectively........................ 81,190 75,983 LONG-TERM FUTURE INCOME TAX BENEFITS......... 2,050 2,049 OTHER ASSETS................................. 231,104 243,249 --------- --------- TOTAL ASSETS................................. $ 772,524 $ 712,673 ========= =========
(continued) 5 6 APPLICA INCORPORATED CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN THOUSANDS)
(Unaudited) LIABILITIES 9/30/00 12/31/99 --------- ---------- CURRENT LIABILITIES Notes and acceptances payable......................... $ - $ 898 Current Maturities of Long-Term Debt.................. 18,342 13,587 Accounts Payable and Accrued Expenses................. 94,060 95,103 Income taxes payable.................................. 728 4,723 Deferred Income, current portion...................... 292 585 Other current liabilities............................. - 10,573 --------- --------- Total Current Liabilities............................. 113,422 125,469 LONG-TERM DEBT........................................ 309,036 243,571 DEFERRED INCOME, less current portion................. - 236 SHAREHOLDERS' EQUITY (Note 2) Special Preferred Stock - Authorized 40,000 shares of $.01 par value; none issued........................... - - Common Stock - authorized: 75,000 and 40,000, respectively, shares of $.10 par value; shares outstanding: 23,039 and 22,640, respectively....................... 2,304 2,264 Paid-in Capital....................................... 151,672 149,548 Retained Earnings..................................... 199,708 194,682 Accumulated Other Comprehensive Loss.................. (2,122) (1,601) Note receivable - officer............................. (1,496) (1,496) --------- --------- Total Shareholders' Equity............................ 350,066 343,397 --------- --------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY.............. $ 772,524 $ 712,673 ========= =========
The accompanying notes are an integral part of these statements. 6 7 APPLICA INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------- 2000 1999 ---------------- ---------- Cash flows from operating activities: Net (loss) earnings....................................................... $ 5,026 $ (3,122) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation of property, plant and equipment............................. 14,234 13,108 Amortization of intangible assets......................................... 14,465 12,627 Amortization of deferred income........................................... (529) - Net loss on disposal of fixed assets...................................... - 2,204 Equity in net earnings of joint ventures.................................. 434 371 Write down of investment in joint venture................................. - 12,574 Net change in allowance for losses on accounts receivable................. 565 603 Changes in assets and liabilities Increase in accounts and other receivables................................ (22,489) (32,700) Increase in inventories................................................... (61,107) (10,409) Decrease in prepaid expenses.............................................. 3,692 6,814 (Increase) Decrease in other assets....................................... (2,320) 5,894 Decrease in other receivables............................................. 12,962 - Decrease in accounts payable and accrued expenses......................... (1,043) (2,219) Decrease in current and deferred income taxes............................. (9,521) (9,462) Decrease in other liabilities............................................. (10,573) - Decrease in deferred income............................................... - (1,541) Decrease in other accounts................................................ (521) (289) -------- -------- Net cash used in operating activities...................................................... (56,725) (5,547) Cash flows from investing activities: Additions to property, plant and equipment - net.......................... (19,441) (17,101) Purchase of net assets from joint venture................................. - (15,059) Decrease in receivable accounts and notes from affiliates................................................. 696 2,344 -------- -------- Net cash used in investing activities..................................... (18,745) (29,816) Cash flows from financing activities: Net borrowings under notes and acceptances payable........................ $ (898) $ 28,949 Long-term debt - net...................................................... 70,220 (9,962) Exercise of stock options and warrants.................................... 2,164 1,490 -------- -------- Net cash provided by financing activities................................. 71,486 20,477 Decrease in cash and cash equivalents...................................................... (3,984) (14,886) Cash and cash equivalents at beginning of year............................ 13,768 20,415 -------- -------- Cash and cash equivalents at end of quarter............................... $ 9,784 $ 5,529 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for: Interest.................................................................. $ 23,332 $ 24,470 Income taxes.............................................................. $ 8,758 $ 5,621
The accompanying notes are an integral part of these statements. 7 8 APPLICA INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF ACCOUNTING POLICIES INTERIM REPORTING In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all normal recurring adjustments necessary to present fairly the Company's financial position as of September 30, 2000 and the results of its operations and changes in financial position for the interim periods. Results for interim periods should not be considered indicative of results for a full year. Reference should be made to the financial statements contained in the registrant's Annual Report on Form 10-K for the year ended December 31, 1999. RECLASSIFICATIONS Certain prior period amounts have been reclassified for comparability. RECEIVABLES FROM AFFILIATES Receivables from Affiliates include the current portion of receivables due from the Company's joint venture partner and a Company officer. These receivables are due upon demand and bear interest at prevailing market interest rates. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses forward exchange contracts to reduce fluctuations in foreign currency cash flows related to third party raw material and other operating purchases. The terms of the currency instruments used are generally consistent with the timing of the committed or anticipated transactions being hedged. Outstanding at September 30, 2000 was $18,300,000 notional amount in contracts and/or options to purchase foreign currency, forward. There is no significant unrealized gain or loss on these contracts. All contracts have terms of six months or less. The Company uses interest rate derivatives of one to eight years in duration to reduce the impact of changes in interest rates on its floating rate debt. The notional amounts of the agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The differential paid or received on the agreements is recognized as an adjustment of interest expense. Outstanding at September 30, 2000, were interest rate swaps on $180,000,000 notional principal amount with a market value of approximately ($1,473,000). The market value represents the amount the Company would have to pay to exit the contracts at September 30, 2000. The Company does not intend to exit the contracts at this time. 2. SHAREHOLDERS' EQUITY EARNINGS PER SHARE Basic shares for the three and nine month periods ended September 30, 2000 were 23,035,355 and 22,917,044, respectively. Basic shares for the three and nine month periods ended September 30, 1999 were 22,478,303 and 22,290,429, respectively. Included in diluted shares are common stock equivalents relating to options of 539,762 and 1,327,338 for the three month periods ended September 30, 2000 and 1999, respectively and 971,795 for the nine month period ended September 30, 2000. All common stock equivalents have been excluded from the per share calculation in the nine month period ended September 30, 1999 as their inclusion would have been anti-dilutive. OTHER On May 9, 2000, the shareholders of the Company voted to change the name of the Company to Applica Incorporated. The name change was effective on May 10, 2000. In addition, the shareholders voted to approve the Second Amended and Restated Articles of Incorporation of the Company, which increases the authorized number of shares of Common Stock from 40,000,000 to 75,000,000 and eliminates the Company's Special Preferred Stock. 8 9 3. COMMITMENTS AND CONTINGENCIES The Company is a defendant in SHERLEIGH ASSOCIATES LLC AND SHERLEIGH ASSOCIATES INC. PROFIT SHARING PLAN, ON THEIR OWN BEHALF AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED V. WINDMERE-DURABLE HOLDINGS, INC., DAVID M. FRIEDSON, HARRY D. SCHULMAN AND NATIONSBANC MONTGOMERY SECURITIES LLC, 98-2273-CIV-LENARD which was filed in the United States District Court, Southern District of Florida on October 8, 1998. This matter is a class action complaint, which is the consolidation of eight separate class action complaints with substantially similar allegations. By Order dated March 9, 1999, in addition to consolidating the above-referenced cases, the Court provisionally certified the class of plaintiffs who purchased stock between May 12, 1998 and September 22, 1998, and provisionally certified Sherleigh Associates LLC and Sherleigh Associates, Inc. Profit Sharing Plan as lead plaintiff. On June 30, 1999, a consolidated amended class action complaint was filed. The consolidated amended class action complaint alleges violations of the federal securities laws (including Rule 10b-5 promulgated pursuant to the Securities Exchange Act of 1934, as amended) in connection with the acquisition by the Company of certain product categories of the Household Products Group of the Black & Decker Corporation. Among other things, the plaintiffs allege that the Company and certain of its directors and officers, along with NationsBanc Montgomery Securities LLC, provided false information in connection with a public offering of debt and equity securities. The plaintiffs seek, among other relief, to be awarded compensatory damages, rescission rights, unspecified damages and attorneys' fees and costs. The defendants moved to dismiss the consolidated class action complaint, but such motion was denied. Discovery procedures have been initiated. The Company is currently paying the legal expenses of the directors and officers who were named as defendants. Such defendants have agreed to repay the Company for all or any portion of such amounts to which they are ultimately found not to be entitled pursuant to applicable law. Based on the information currently available to the Company, management does not believe that the indemnification of the officers and directors named as defendants in the above-listed matters will have a material adverse effect on the financial condition, results of operations or liquidity of the Company. However, the actual effects of such indemnification on the Company cannot be finally determined until the amount of such indemnification, if any, is fixed. In connection with the Household Products Group acquisition, the Company also received two derivative demands alleging the breach of fiduciary duties by certain of the officers and directors of the Company. An independent committee of the Board of Directors is currently conducting an investigation as to whether such derivative actions are in the best interest of the Company. The Company is subject to other legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability, if any, in excess of applicable insurance coverage, is not likely to have a material effect on the financial position of the Company. However, as the outcome of litigation or other claims is difficult to predict, significant changes in the estimated exposures could occur. 4. BUSINESS SEGMENT INFORMATION Effective January 1, 2000, the Company reorganized into three new business units: Consumer Products North America, Consumer Products International and Manufacturing. The information for 1999 has been restated in order to conform to the new presentation. The Consumer Products North America segment distributes kitchen electric, personal care and home environment products under licensed brand names such as Black & Decker, as well as the Windmere and private label brand names. The sales are handled primarily through in house sales representatives to mass merchandisers, specialty retailers and appliance distributors in the United States and Canada. The Consumer Products International segment distributes kitchen electric, personal care and home environment products under the Black & Decker and Windmere brand names. Products are marketed throughout all countries in Latin America except for Brazil. 9 10 The Manufacturing segment includes the Company's operations located in Bao An County, Guangdong Province of the People's Republic of China and in Queretaro, Mexico. The majority of the Company's products are manufactured in these two facilities. Summarized financial information concerning the Company's reportable segments is shown in the following table. Corporate related items, results of insignificant operations and, as it relates to segment profit (loss), income and expense not allocated to reportable segments are included in the reconciliations to consolidated results. Segment information for the three month periods ended September 30, are as follows: (In Thousands)
Consumer Products Consumer North Products America International Manufacturing Total ----------------- ------------- ------------- --------- 2000: Net Sales....................... $ 146,104 $ 24,852 $111,686 $ 282,642 Intersegment net sales.......... - - 95,870 95,870 Operating earnings ............. 3,100 286 15,304 18,690 1999: Net Sales....................... 156,206 21,801 90,087 268,094 Intersegment net sales.......... - - 85,528 85,528 Operating earnings ............. 10,230 175 16,103 26,508
Reconciliation to consolidated amounts:
2000 1999 --------- --------- REVENUES: Total revenues for reportable segments $ 282,642 $ 268,094 Other revenues....................... 12,625 21,663 Eliminations of intersegment revenues (95,870) (85,528) --------- --------- Total consolidated revenues..... $ 199,397 $ 204,229 ========= ========= Operating earnings: Total earnings for reportable $ 18,690 $ 26,508 segments............................. Other earnings (loss)........... 695 (689) Interest expense................ (8,160) (7,212) Equity in net loss of joint ventures (128) - --------- -------- Consolidated earnings before income taxes................................ $ 11,097 $ 18,607 ========= =========
Segment information for the nine month periods ended September 30, are as follows: (In Thousands)
Consumer Products Consumer North Products America International Manufacturing Total ----------------- ------------- ------------- --------- 2000 Net Sales............. $ 380,454 $ 70,552 $307,975 $ 758,981 Intersegment net sales 5,894 - 260,984 266,878 Operating earnings (loss)................ (9,693) (405) 36,881 26,783 1999 Net Sales............. 358,317 55,132 199,388 612,837 Intersegment net sales - - 171,100 171,100 Operating earnings (loss)................ 3,993 (2,415) 26,353 27,931
Reconciliation to consolidated amounts:
2000 1999 ---------- --------- REVENUES: Total revenues for reportable segments $ 758,981 $ 612,837 Other revenues........................ 25,396 30,513 Eliminations of intersegment revenues. (266,878) (171,100) ---------- --------- Total consolidated revenues....... $ 517,499 $ 472,250 ========== ========= Operating earnings (loss) Total earnings (loss) for reportable $ 26,783 $ 27,931 segments.......................... Other earnings (loss)................. 2,297 (578) Interest expense...................... (22,225) (19,947) Equity in net earnings (loss) of joint ventures.............................. (128) (12,894) ----------- --------- Consolidated loss before income taxes. $ (6,727) (5,488) ========== =========
10 11 5. SUBSEQUENT EVENT In November 2000, the Company entered into a relationship with a consumer packaged goods company to develop, manufacture and distribute new products in the mass market. The Company has entered into a joint development agreement for one product and is in the process of reviewing other opportunities. In conjunction with the development arrangement, the Company plans to expand its existing manufacturing capacity, exit various non-strategic product lines, including certain retail personal care items, and reallocate Company resources resulting in non-recurring non-cash charges totaling $30 to $40 million in the fourth quarter of 2000. The Company has amended its Senior Secured Credit Facility to incorporate the capital requirements of the alliance, which includes an increase in allowable capital expenditures by $25.0 million over the next two years and the modification of various covenants. 6. CONDENSED CONSOLIDATING FINANCIAL INFORMATION The following condensed consolidating financial information presents the results of operations, financial position and cash flows of the Company (on a stand alone basis), the guarantor subsidiaries of the Company's Senior Subordinated Notes ("Notes") (on a combined basis), the non-guarantor subsidiaries (on a combined basis) and the eliminations necessary to arrive at the consolidated results of the Company. The results of operations and cash flows presented below assume the guarantor subsidiaries were in place for all periods presented. The Company and subsidiary guarantors have accounted for investments in their respective subsidiaries on an unconsolidated basis using the equity method of accounting. The Subsidiary Guarantors are wholly-owned subsidiaries of the Company and have fully and unconditionally guaranteed the Notes on a joint and several basis. The guarantors include the following: Applica Consumer Products, Inc., Windmere Holdings Corporation, Windmere Holdings Corporation II, Fortune Products, Inc., Bay Books & Tapes, Inc., HP Delaware, Inc., HP Americas, Inc., HPG LLC, HP Intellectual Corp. and WD Delaware, Inc. The Notes contain certain covenants which, among other things, will restrict the ability of the Subsidiary Guarantors to make distributions to the Company. The Company has not presented separate financial statements and other disclosures concerning the guarantors and non-guarantor subsidiaries because it has determined they would not be material to investors. 11 12 NINE MONTHS ENDED SEPTEMBER 30, 2000
APPLICA NON INCORPORATED GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ---------- ------------ ------------ STATEMENT OF OPERATIONS Net Sales........................... - 388,646 395,693 (266,840) 517,499 Cost of goods sold.................. - 283,296 337,700 (266,840) 354,156 ------- -------- ------- -------- ------- Gross Profit........................ - 105,350 57,993 - 163,343 Operating Expenses.................. (557) 111,543 24,680 270 135,936 ------- -------- ------- -------- ------- Operating Profit (Loss)............. 557 (6,193) 33,313 (270) 27,407 Other (income) expense, net......... 20,026 615 (89) - 20,552 ------- -------- ------- -------- ------- Earnings (loss) before income taxes and Equity in earnings (loss) of joint Ventures.............. (19,469) (6,808) 33,402 (270) 6,855 Provision (Benefit) for income taxes - 159 7,036 (5,494) 1,701 Equity in net loss of joint ventures....................... 128 - - - 128 ------- -------- ------- ---------- ------- Net earnings (loss)................. (19,597) (6,967) 26,366 5,224 5,026 ======= ======== ======= ========== ======= BALANCE SHEET Cash................................ 10 (2,107) 11,881 - 9,784 Accounts and other receivables...... - 134,648 59,776 - 194,424 Receivables from affiliates......... 21,286 (83,046) 64,597 - 2,837 Inventories......................... - 146,803 78,010 - 224,813 Other current assets................ - 893 11,719 11,536 24,148 ------- -------- ------- ---------- ------- Total current assets........... 21,296 197,191 225,983 11,536 456,006 Investments in joint venture........ 425,900 113,122 70,503 (607,351) 2,174 Property, plant and equipment, net.. - 17,800 63,390 - 81,190 Other assets........................ - 662,333 11,137 (440,316) 233,154 ------- -------- ------- ---------- ------- Total assets................... 447,196 990,446 371,013 (1,036,131) 772,524 ======= ======== ======= ========== ======= LIABILITIES: Accounts payable and accrued expenses 3 31,005 63,052 - 94,060 Current maturities of long term debt 18,342 - - - 18,342 Deferred income, current portion.... - 292 - - 292 Income taxes payable................ - (1,796) 5,511 (2,987) 728 ------ -------- ------- ---------- ------- Total current liabilities...... 18,345 29,501 68,563 (2,987) 113,422 Long term debt...................... 299,154 424,025 19,060 (433,203) 309,036 Deferred income, less current portion - - - - - Deferred income taxes............... - 5,514 2,843 (8,357) - ------- -------- ------- ---------- ------- Total liabilities.............. 317,499 459,040 90,466 (444,547) 422,458 Shareholders' equity................ 129,697 531,406 280,547 (591,584) 350,066 ------- -------- ------- ---------- ------- Total liabilities and shareholders' Equity....................... 447,196 990,446 371,013 (1,036,131) 772,524 ======= ======== ======= ========== ======= Cash Flow Information Net cash provided by (used in) operating Activities............... (19,595) (1,226,564) 26,514 1,163,007 (56,638) Net cash provided by (used in) investing Activities................ (42,710) 1,022,712 (41,016) (957,297) (18,311) Net cash provided by (used in) financing Activities................ 62,311 197,806 17,079 (205,710) 71,486 Effect of exchange rate............. - - (521) - (521) Cash at beginning................... 4 3,939 9,825 - 13,768 Cash at end......................... 10 (2,107) 11,881 - 9,784
12 13 NINE MONTHS ENDED SEPTEMBER 30, 1999
APPLICA NON INCORPORATED GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ---------- ------------ ------------ STATEMENT OF OPERATIONS Net Sales........................... - 293,786 271,186 (92,722) 472,250 Cost of goods sold.................. - 185,420 226,347 (90,763) 321,004 ------ ------- ------- -------- ------- Gross Profit........................ - 108,366 44,839 (1,959) 151,246 Operating Expenses.................. (521) 108,457 17,290 271 125,497 ------ ------- ------- -------- ------- Operating Profit (Loss)............. 521 (91) 27,549 (2,230) 25,749 Other (income) expense, net......... 18,670 (1,691) 271 1,093 18,343 ------ ------- ------- -------- ------- Earnings (loss) before income taxes and Equity in earnings (loss) of joint Ventures.............. (18,149) 1,600 27,278 (3,323) 7,406 Provision (Benefit) for income taxes - (3,562) 3,766 (2,570) (2,366) Equity in net earnings (loss) of joint ventures.............. 593 (13,487) - - (12,894) ------- ------- ------- -------- ------- Net earnings (loss)................. (17,556) (8,325) 23,512 (753) (3,122) ======= ======= ======= ======== ======= BALANCE SHEET Cash................................ 6 (3,954) 9,477 - 5,529 Accounts and other receivables...... - 158,404 51,141 (5,529) 204,016 Receivables from affiliates......... 21,390 (39,600) 30,301 (8,847) 3,244 Inventories......................... - 105,281 69,278 10,921 185,480 Other current assets................ - 23,281 6,508 11,536 41,325 ------- ------- ------- -------- ------- Total current assets........... 21,396 243,412 166,705 8,081 439,594 Investments in joint ventures....... 426,413 9,248 70,585 (503,483) 2,763 Property, plant and equipment, net.. - 12,856 65,010 - 77,866 Other assets........................ 0 534,254 11,885 (294,948) 251,191 ------- ------- ------- -------- ------- Total assets................... 447,809 799,770 314,185 (790,350) 771,414 ======= ======= ======= ======== ======= LIABILITIES: Notes payable....................... 0 11,350 0 (11,350) 0 Accounts payable and accrued expenses 1 70,575 65,052 0 135,628 Current maturities of long term debt 10,342 - 0 - 10,342 Deferred income, current portion.... - 689 - - 689 Income taxes payable................ - (1,164) 1,045 1,215 1,096 ------- ------- ------- -------- ------- Total current liabilities...... 10,343 81,450 66,097 (10,135) 147,755 Long term debt...................... 284,195 286,404 5,450 (286,404) 289,645 Deferred income, less current portion - 269 - 783 1,052 Deferred income taxes............... - 16,254 2,969 (8,358) 10,865 ------- ------- ------- -------- ------- Total liabilities.............. 294,538 384,377 74,516 (304,114) 449,317 Shareholders' equity................ 153,271 415,393 239,669 (486,236) 322,097 ------- ------- ------- -------- ------- Total liabilities and shareholders' 447,809 799,770 314,185 (790,350) 771,414 ======= ======= ======= ======== ======= Equity...................... Cash Flow Information Net cash provided by (used in) operating Activities................ (17,555) 66,983 10,870 (65,556) (5,258) Net cash provided by (used in) investing Activities................ (9,474) 35,241 (35,407) (20,176) (29,816) Net cash provided by (used in) financing Activities............... 27,035 (109,261) 16,971 85,732 20,477 Effect of exchange rate............. - - (289) - (289) Cash at beginning................... - 3,083 17,332 - 20,415 Cash at end......................... 6 (3,954) 9,477 - 5,529
13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This document contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such statements are indicated by words or phrases such as "anticipate," "projects," "management believes," "the Company believes," "intends," "expects," and similar words or phrases. Such forward-looking statements are subject to certain risks, uncertainties or assumptions and may be affected by certain other factors. These factors include, but are not limited to: o economic conditions and the retail environment; o the Company's dependence on the timely development and introduction of products; o the acceptance of products by customers and consumers; o competitive products and pricing; o reliance on key customers; o dependence on foreign suppliers and supply and manufacturing constraints; o changes in raw material costs; o cancellation or reduction of orders for products; o the effects of the class action litigation filed by certain shareholders; and o other risks and uncertainties detailed from time to time. Should one or more of these risks, uncertainties or other factors materialize, or should underlying assumptions prove incorrect, actual results, performance, or achievements of the Company may vary materially from any future results, performance or achievements expressed or implied by such forward-looking statements. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. The Company disclaims any obligation to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. The Company, through its subsidiaries, is a leading diversified manufacturer and distributor of a broad range of branded and private label small household appliances, including electric housewares (kitchen and garment care), personal care, and other products. The Company manufactures and markets products under licensed brand names, such as Black & Decker(R), under the Windmere(R) and other Company-owned brand names and under private-label brand names. The Company's customers for such products include mass merchandisers, specialty retailers and appliance distributors primarily in North America, Latin America and the Caribbean. In addition, the Company manufactures products on an OEM basis for other major consumer products companies. The Company also manufactures and markets the LitterMaid(R) self-cleaning cat litter box. In June 2000, the Kmart Corporation exercised its option to terminate its long-term supply contract with the Company for the sale of consumer electronic products under the White-Westinghouse trademark in the United States. The termination will be effective on June 30, 2002. Under the terms of the agreement, Kmart's minimum purchase requirements for the period July 1, 2001 through June 30, 2002 will be reduced to 25% of the original requirements for that period. Management does not believe that the termination of the agreement will have a material effect on the financial condition, results of operations or liquidity of the Company. RESULTS OF OPERATIONS The operating results of the Company expressed as a percentage of sales and other revenues are set forth below:
NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 ---- ---- Net Sales............................. 100.0% 100.0% Cost of goods sold.................... 68.4 68.0 ----- ----- Gross Profit.......................... 31.6 32.0 Selling, general and administrative 26.3 26.6 expenses.............................. Other (income) expense - net.......... 4.0 3.9 Equity in net loss of joint ventures.. -- (2.7) ---- ----- Earnings (loss) before income taxes... 1.3 (1.2) Provision (benefit) for income taxes.. .3 (.5) ---- ---- Net earnings (loss)................... 1.0% (.7)% ===== ====
14 15 THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999 SALES AND OTHER REVENUES Sales and other revenues ("Revenues") for the Company decreased by $4.8 million to $199.4 million, a decrease of 2.4% over Revenues for the third quarter of 1999. The change is primarily the result of a $14.5 million decrease in revenues related to electronics inventory liquidated in conjunction with the Newtech asset purchase and a $11.3 million increase in OEM sales.. Also contributing to the net change was a $1.3 million increase in Black & Decker branded kitchen product sales and a $3.7 million decrease in other product sales. A de-emphasis of the Corning brand and elimination of the Fiesta and Campbells brand in conjunction with the Company's restructuring of its sales organization contributed to losses in other branded kitchen sales on top of the already soft retail results. Sales to Walmart accounted for 16.5% and 20.0% of total sales for the 2000 and 1999 periods, respectively. GROSS PROFIT MARGIN Gross profit decreased by $2.1 million. Gross profit margin was 33.5% as a percentage of revenues in 2000 as compared to 33.7% in the 1999 period. The minimal change in the gross profit margin is the result of an increase in raw material costs, primarily oil-based plastic resins partially offset by realized manufacturing cost synergies, productivity gains and a more favorable product mix of distribution sales. There can be no assurance that manufacturing synergies and productivity gains will be able to offset increases in raw material costs in future periods. The Company has taken steps to bring its inventory levels back in line by the end of the year, including reducing production in China and Mexico. The slowdown in production will reduce gross profit margins in the fourth quarter of 2000 as overhead absorption is decreased. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the Company increased by $4.4 million in the third quarter of 2000 and increased as a percentage of sales, to 24.1% from 21.4% in the 1999 period. The dollar increase consists primarily of increases in distribution and freight costs of $5.0 million. Additional warehousing and distribution expenses were incurred due to increased finished goods inventory levels and sales volume. Freight expenses increased reflecting the additional sales volume, increase in finished goods inventory and rate increases from the carriers. The impact of the slowdown in production on selling, general and administrative expenses should begin taking effect in the first quarter of 2001. INTEREST EXPENSE Interest expense increased by $948,000 to $8.2 million in 2000. The increase is a result of additional borrowings under the Company's Senior Revolving Credit Facility to meet working capital requirements, primarily associated with the increase in finished goods inventory, as well as due to rising interest rates. TAXES The Company's tax expense is based on the earnings of each of its foreign and domestic operations and it includes such additional U.S. taxes as are applicable to any repatriation of foreign earnings. Foreign earnings, other than in Canada, Mexico and certain other countries in Latin America, are generally taxed at rates lower than in the United States. EARNINGS PER SHARE Basic shares for the three month periods ended September 30, 2000 and 1999 were 23,035,355 and 22,478,303, respectively. Included in diluted shares are common stock equivalents relating to options and warrants of 539,762 and 1,327,338 for the three month periods ended September 30, 2000 and 1999, respectively. 15 16 CONSUMER PRODUCTS NORTH AMERICA ("NORTH AMERICA") North America sales decreased by $10.1 million to $146.1 million in the third quarter of 2000. The change is primarily attributable to a $1.7 million decrease in Black & Decker branded products and a $7.6 million decrease in other branded kitchen electrics. A de-emphasis of the Corning brand and elimination of the Fiesta and Campbells brand in conjunction with the Company's restructuring of its sales organization contributed to losses in other branded kitchen sales on top of the already soft retail results. CONSUMER PRODUCTS INTERNATIONAL ("INTERNATIONAL") Sales for the International segment increased by $3.1 million to $24.9 million or 14% from the 1999 period. The increase is attributed to growth in sales of existing products, as well as the introduction of new products, under the Black & Decker brand name. MANUFACTURING Sales at the Company's manufacturing subsidiaries increased by $21.6 million in the 2000 period to $111.7 million due to a projected increase in Company-wide sales growth and increased OEM sales. Included in 2000 third quarter sales are OEM sales totaling $15.8 million, a $11.3 million increase over the 1999 period. NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999 SALES AND OTHER REVENUES Sales and other revenues ("Revenues") for the Company increased by $45.2 million to $517.5 million, an increase of 9.6% over Revenues for the first nine months of 1999. The change is primarily the result of a $34.7 million increase in Black & Decker and Windmere branded kitchen products. Also contributing to the net increase were increases in OEM sales and professional personal care product sales of $18.7 million and $5.5 million, respectively. The increases were partially offset by a $7.5 million decrease in home environment sales and a $4.9 million decrease in revenues related to electronic products. The decrease in electronic products revenues reflects $17.1 million of electronics inventory liquidated in conjunction with the Newtech asset purchase in 1999. Sales to Walmart accounted for 18.7% and 18.0% of total sales for the 2000 and 1999 periods, respectively. GROSS PROFIT MARGIN Gross profit increased by $12.1 million. Gross profit margin was 31.6% as a percentage of revenues compared to 32.0% in the 1999 period. The minimal change in the gross profit margin is primarily the result of an increase in raw material costs, primarily oil-based resins, partially offset by realized manufacturing cost synergies, productivity gains and a more favorable product mix of distribution sales. There can be no assurance that manufacturing synergies and productivity gains will be able to offset increases in raw material costs in future periods. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the Company increased by $10.4 million in the nine month period ended September 30, 2000 yet decreased as a percentage of sales, to 26.3% from 26.6% in the 1999 period. The dollar increase consists primarily of increases in distribution and freight costs of $11.0 million, amortization of $1.8 million of which $1.2 is related to the 1999 Newtech acquisition and $2.2 million in systems related consulting fees, partially offset by a $1.9 million decrease in sales and marketing related expenses including commissions, advertising, promotion and sales materials. Additional warehousing and distribution expenses were incurred due to increased inventory levels and sales volume. Freight expenses increased reflecting both the additional sales volume, increase in finished goods inventory and rate increases from the carriers. EQUITY IN NET LOSS OF JOINT VENTURES In June 1999, the Company wrote down its remaining investment in a joint venture and, therefore, discontinued recording its interest in the joint venture's operations. INTEREST EXPENSE 16 17 Interest expense increased by $2.3 million to $22.2 million in 2000. The increase is a result of additional borrowings under the Company's Senior Revolving Credit Facility to meet working capital requirements, primarily associated with the increase in finished goods inventory, as well as due to rising interest rates. TAXES The Company's tax expense is based on the earnings of each of its foreign and domestic operations and it includes such additional U.S. taxes as are applicable to any repatriation of foreign earnings. Foreign earnings, other than in Canada, Mexico and certain other countries in Latin America, are generally taxed at rates lower than in the United States. EARNINGS PER SHARE Basic shares for the nine month periods ended September 30, 2000 and 1999 were 22,917,044 and 22,290,429, respectively. Included in diluted shares are common stock equivalents relating to options of 971,795 for the nine month period ended September 30, 2000. All common stock equivalents have been excluded from the per share calculation in the nine month period ended September 30, 1999 as their inclusion would have been anti-dilutive. CONSUMER PRODUCTS NORTH AMERICA ("NORTH AMERICA") North America sales increased by $16.2 million or 4.5% to $374.6 million in the first nine months of 2000, excluding $5.9 million in sales to other Company segments. The change is primarily attributable to a $19.3 million increase in Black & Decker and Windmere branded kitchen electrics and $5.5 million in professional personal care product sales, offset by a $7.5 million decrease in home environment product sales. CONSUMER PRODUCTS INTERNATIONAL ("INTERNATIONAL") Sales for the International Segment increased by $15.4 million to $70.6 million or 28.0% from the 1999 period. The increase may be attributed to growth in sales of existing products as well as the introduction of new products, under both the Black & Decker and Windmere brand names. MANUFACTURING Sales at the Company's Manufacturing subsidiaries increased by $108.6 million to $308.0 million in the 2000 period as compared to 1999, primarily as a result of increased Company-wide sales. Included in total sales are OEM sales totaling $47.0 million, a $18.7 million, or 66.2%, increase over the 1999 period. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2000, the Company's working capital was $342.6 million, as compared to $291.8 million at September 30, 1999. At September 30, 2000 and 1999, the Company's current ratio was 4.0 to 1 and 3.0 to 1, respectively, and its quick ratio was 2.0 to 1 and 1.6 to 1, respectively. The change in ratios is primarily the result of the use of the Company's long-term credit facilities to meet short-term working capital requirements. A slowdown in 2000 third quarter sales has resulted in higher than expected inventory levels. Cash balances decreased by $4.0 million for the nine month period ended September 30, 2000. The net cash used in operating activities, which totaled $56.7 million, reflects increased working capital requirements, primarily to finance the increase in finished goods inventories. Higher inventory levels in the first half of the year primarily reflected early production by the Company of certain products due to capacity constraints typically experienced in the back half of the year and the delay by several key retailers of modular sets. In addition, slower than anticipated retail sales in the third quarter caused inventory levels to remain high. The Company is currently taking steps to manage the impact of the increase in inventory levels, including slowing down production in the fourth quarter, in order to reduce the levels by year end. Cash used in investing activities totaled approximately $18.7 million for the period and consists of capital expenditures at the Company's manufacturing facilities. 17 18 Cash provided by financing activities totaled approximately $71.5 million in the period reflecting increased borrowings used to meet working capital requirements, primarily the acquisition and storage of excess finished goods inventories. No provision for U.S. taxes has been made on undistributed earnings of the Company's foreign subsidiaries and joint ventures because management plans to reinvest such earnings in their respective operations or in other foreign operations. Repatriating those earnings or using them in some other manner which would give rise to a U.S. tax liability would reduce after tax earnings and available working capital. Certain of the Company's foreign subsidiaries have approximately $48.9 million in trade finance lines of credit, payable on demand, which are secured by the subsidiaries' tangible and intangible property, and in some cases, a Company guarantee. Outstanding borrowings by the Company's Hong Kong subsidiaries are primarily in U.S. dollars. The Company's primary sources of liquidity are its cash flow from operations and borrowings under its Senior Secured Credit Facilities. The Senior Secured Credit Facilities, as amended, consist of a Senior Secured Revolving Credit Facility, a Tranche A Term Loan and a Tranche B Term Loan. The Company is currently borrowing $118.7 million under the term loan portion of its Senior Secured Credit Facilities. The Senior Secured Revolving Credit Facility as amended, provides for borrowings by the Company of up to $160.0 million. As of November 1, 2000, the Company is borrowing $68.8 million under the Senior Secured Revolving Credit Facility and has approximately $89.2 million available for future cash borrowings, under all its credit facilities. Advances under the Senior Secured Revolving Credit Facility are based upon percentages of outstanding eligible accounts receivable and inventories. In November 2000, the Company entered into a relationship with a consumer packaged goods company to develop, manufacture and distribute new products in the mass market. To date, the Company has entered into a joint development agreement for one product and is in the process of reviewing other opportunities. In conjunction with the development arrangement, the Company will expand its existing manufacturing capacity, exit various non-strategic product lines including certain retail personal care items, and reallocate Company resources resulting in non-recurring non-cash charges totaling $30 to $40 million in the fourth quarter of 2000. The Company has amended its Senior Secured Credit Facility to incorporate the capital requirements of the alliance, which includes an increase in allowable capital expenditures of $25.0 million over the next two years and the modification of certain covenants. The Company's aggregate capital expenditures for the nine months ended September 30, 2000 were $19.4 million. The Company anticipates that the total capital expenditures for 2000 will be approximately $26.0 million, which includes the cost of new tooling. The Company plans to fund those capital expenditures from cash flow from operations and, if necessary, borrowings under the Senior Secured Revolving Credit Facility. At September 30, 2000, debt as a percent of total capitalization was 48.3 percent. The Company's ability to make scheduled payments of principal of, or to pay the interest on, or to refinance, its indebtedness, or to fund planned capital expenditures, product research and development expenses and marketing expenses will depend on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory, and international and United States domestic political factors and other factors that are beyond the Company's control. Based upon the current level of operations and anticipated cost savings and revenue growth, management believes that cash flow from operations and available cash, together with available borrowings under the Senior Secured Credit and other facilities, will be adequate to meet the Company's future liquidity needs for at least the next several years. The Company may, however, need to refinance all or a portion of the principal of the indebtedness on or prior to maturity. There can be no assurance that the Company's business will generate sufficient cash flow from operations, that anticipated revenue growth and operating improvements will be realized or that future borrowings will be available under the Senior Secured Credit Facilities in an amount sufficient to enable the Company to service its indebtedness, including the Senior Subordinated Notes, or to fund its other liquidity needs. In addition, there can be no assurance that the Company will be able to effect any such refinancing on commercially reasonable terms or at all. While the Company transacts business predominantly in U.S. dollars and most of its revenues are collected in U.S. dollars, a portion of the Company's costs, such as payroll, rent and indirect operations costs, are denominated in other currencies, such as Chinese renminbi, Hong Kong dollars, Canadian dollars and Mexican pesos. Changes in the relation of these and other currencies to the U.S. dollar will affect the Company's cost of goods sold and operating margins and could result in exchange losses. The impact of future exchange rate fluctuations on the Company's results of operations cannot be accurately predicted. Durable uses the Hong Kong dollar as its functional currency. The Hong Kong dollar has historically been "pegged" to a fixed exchange rate vis-a-vis the U.S. dollar. If the Hong Kong dollar were to be significantly devalued against the U.S. dollar and the exchange rate allowed to fluctuate, the Company could experience significant changes in its currency translation account which would 18 19 impact the Company's future comprehensive income. The Company acquired its Mexican manufacturing facilities and related assets from The Black & Decker Corporation. Because the operations of such facilities are primarily peso-denominated and the revenues derived from products manufactured at such facilities are primarily dollar-denominated, the Company is now subject to fluctuations in the value of the peso. The December 1994 devaluation of the peso had a number of effects on the Mexican economy that adversely affected the financial condition of businesses in Mexico. The devaluation caused the peso value of dollar denominated indebtedness associated with businesses in Mexico to increase significantly, and also greatly increased the rate of inflation, resulting in a sharp rise in nominal interest rates on peso-denominated financing. There can be no assurance that the peso to dollar foreign exchange rate will not be volatile in the future and that financial markets will not have a material adverse effect on the Company's business, financial condition and results of operations. The Company uses interest rate derivatives of one to eight years in duration to reduce the impact of changes in interest rates on its floating rate debt. The notional amounts of the agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The differential paid or received on the agreements is recognized as an adjustment of interest expense. Outstanding at September 30, 2000, were interest rate swaps on $160.0 million notional principal amount with a market value of approximately ($1,473,000). The market value represents the amount the Company would have to pay to exit the contracts at September 30, 2000. The Company does not intend to exit the contracts at this time. MANUFACTURING OPERATIONS The Company's products are manufactured primarily at the Company's facilities in China and Mexico. The Company has a significant amount of its assets in China and Mexico, primarily consisting of inventory, equipment and molds. The supply and cost of products, as well as finished products, can be adversely affected, among other reasons, by changes in foreign currency exchange rates, increased import duties, imposition of tariffs, imposition of import quotas, interruptions in sea or air transportation and political or economic changes. The Mexican government exercises significant influence over many aspects of the Mexican economy. Accordingly, the actions of the Mexican government concerning the economy could have a significant effect on private sector entities in general and the Company in particular. In addition, during the 1980s and 1990s, Mexico experienced periods of slow or negative growth, high inflation, significant devaluations of the peso and limited availability of foreign exchange. As a result of the Company's reliance upon manufacturing facilities in Mexico, economic conditions in Mexico could adversely affect the Company's business, financial condition and results of operations. 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 China and Mexico and/or reduce its dependence on the Company's existing distribution base. However, at the present time, the Company intends to continue its production in China and Mexico. NEW ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards (SFAS) 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS 137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133, and SFAS 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, is effective for the Company as of January 1, 2001. The new standards require that an entity recognize all derivatives as either assets or liabilities measured at fair value. The accounting for changes in the fair value of a derivative depends on the use of the derivative. Adoption of these new accounting standards may result in cumulative after-tax reductions in net earnings and other comprehensive income beginning in the first quarter of 2001. The adoption will also impact assets and liabilities recorded on the balance sheet. The Company does not believe that the impact of derivatives currently outstanding will have a material impact on future operations. SEASONALITY The Company's business is highly seasonal, with operating results varying from quarter to quarter. The Company has historically experienced higher revenues in the third and fourth quarters of each fiscal year primarily due to increased demand by customers for products in the late summer for "back-to-school" sales and in the fall for holiday sales. The fourth quarter has now become the Company's largest sales volume quarter. The Company's major sales occur during August through November. Sales are generally 19 20 made on 45 to 90 day terms. Heaviest collections on its open accounts receivable are received from November through March, at which time the Company is in its most liquid state. LEGAL PROCEEDINGS The Company is a defendant in SHERLEIGH ASSOCIATES LLC AND SHERLEIGH ASSOCIATES INC. PROFIT SHARING PLAN, ON THEIR OWN BEHALF AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED V. WINDMERE-DURABLE HOLDINGS, INC., DAVID M. FRIEDSON, HARRY D. SCHULMAN AND NATIONSBANC MONTGOMERY SECURITIES LLC, 98-2273-CIV-LENARD which was filed in the United States District Court, Southern District of Florida on October 8, 1998. This matter is a class action complaint, which is the consolidation of eight separate class action complaints with substantially similar allegations. By Order dated March 9, 1999, in addition to consolidating the above-referenced cases, the Court provisionally certified the class of plaintiffs who purchased Windmere stock between May 12, 1998 and September 22, 1998, and provisionally certified Sherleigh Associates LLC and Sherleigh Associates, Inc. Profit Sharing Plan as lead plaintiff. On June 30, 1999, a consolidated amended class action complaint was filed. The consolidated amended class action complaint alleges violations of the federal securities laws (including Rule 10b-5 promulgated pursuant to the Securities Exchange Act of 1934, as amended) in connection with the acquisition by the Company of certain product categories of the Household Products Group of the Black & Decker Corporation. Among other things, the plaintiffs allege that the Company and certain of its directors and officers, along with NationsBanc Montgomery Securities LLC, provided false information in connection with a public offering of debt and equity securities. The plaintiffs seek, among other relief, to be awarded compensatory damages, rescission rights, unspecified damages and attorneys' fees and costs. The defendants moved to dismiss the consolidated class action complaint, but such motion was denied. Discovery procedures have been initiated. The Company is currently advancing the legal expenses of the directors and officers who were named as defendants. Such defendants have agreed to repay the Company for all or any portion of such advances to which they are ultimately found not to be entitled pursuant to applicable law. Based on the information currently available to the Company, management does not believe that the indemnification of the officers and directors named as defendants in the above-listed matters will have a material adverse effect on the financial condition, results of operations or liquidity of the Company. However, the actual effects of such indemnification on the Company cannot be finally determined until the amount of such indemnification, if any, is fixed. In connection with the Household Products Group acquisition, the Company also received two derivative demands alleging the breach of the fiduciary duties by certain of the officers and directors of the Company. An independent committee of the Board of Directors is currently conducting an investigation as to whether such derivative actions are in the best interest of the Company. The Company is subject to other legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability, if any, in excess of applicable insurance coverage, is not likely to have a material effect on the financial position of the Company. However, as the outcome of litigation or other claims is difficult to predict, significant changes in the estimated exposures could occur. 20 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's major market risk exposure is to changing interest rates, debt obligations issued at a fixed rate and fluctuations in the currency exchange rates. The Company's policy is to manage interest rate risk through the use of a combination of fixed and floating rate instruments, with respect to both its liquid assets and its debt instruments. Although the Company feels it has mitigated some of its exposure to a rise in interest rates, large increases may have a negative impact on future earnings. The Senior Secured Credit Facilities accrue interest at variable rates; however, the company has purchased interest rate protection for such loans in the form of interest rate swaps and caps. The Company typically maintains a fixed to total debt ratio of approximately 40% - 50%. Fixed-rate debt obligations issued by the Company are not callable until July 31, 2003. The Company is subject to foreign currency exchange rate risk relating to receipts from customers and payments to suppliers in foreign currencies. As a general policy, the Company hedges foreign currency commitments of future payments and receipts by purchasing foreign currency-forward and option contracts. As of June 30, 2000, the notional value of such derivatives was approximately $18.3 million, with no significant unrealized gain or loss. The majority of the Company's receipts and expenditures are contracted in U.S. dollars and the Company does not consider the market risk exposure relating to currency exchange to be material at this time. Extreme volatility in certain currencies could, however, have a negative material impact on future operations. 21 22 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See "Legal Proceedings" in Part I, Item 2 of this report. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: 3.1 Second Amended and Restated Articles of Incorporation of the Company filed with the Florida Secretary of State on May 10, 2000. 10.1 Amendment No. 1 to Amended and Restated Credit Agreement by and among the Company, each of its subsidiaries party thereto, each of the lenders party thereto and Bank of America, N.A. (f/k/a Nationsbank, National Association), as agent for the lenders, dated April 29, 1999. 10.2 Amendment No. 2 to Amended and Restated Credit Agreement by and among the Company, each of its subsidiaries party thereto, each of the lenders party thereto and Bank of America, N.A. (f/k/a Nationsbank, National Association), as agent for the lenders, dated December 29, 1998. 10.3 Amendment No. 3 to Amended and Restated Credit Agreement by and among the Company, each of its subsidiaries party thereto, each of the lenders party thereto and Bank of America, N.A., as agent for the lenders, dated February 17, 2000. 10.4 Amendment No. 4 to Amended and Restated Credit Agreement by and among the Company, each of its subsidiaries party thereto, each of the lenders party thereto and Bank of America, N.A., as agent for the lenders, dated June 30, 2000. 10.5 Amendment No. 5 to Amended and Restated Credit Agreement by and among the Company, each of its subsidiaries party thereto, each of the lenders party thereto and Bank of America, N.A., as agent for the lenders, dated June 30, 2000. 10.6 Amendment No. 6 to Amended and Restated Credit Agreement by and among the Company, each of its subsidiaries party thereto, each of the lenders party thereto and Bank of America, N.A., as agent for the lenders, dated November 9, 2000. 10.7* Employment Agreement dated July 1, 2000 between Applica Consumer Products, Inc. and Michael J. Michienzi, President and General Manager, Sales and Marketing of Applica Consumer Products, Inc. 10.8* Employment Agreement dated July 1, 2000 between Applica Consumer Products, Inc. and Richard J. Gagliano, Senior Vice President, Manufacturing and Engineering of Applica Consumer Products, Inc. 10.9* Employment Agreement dated July 1, 2000 between the Company and Terry L. Polistina, Senior Vice President, Finance and Administration. 27.1 Financial Data Schedule (filed electronically) (b) Reports on Form 8-K: None ----------- * These exhibits are management contracts or compensatory plans or arrangements. 22 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. APPLICA INCORPORATED (Registrant) November 14, 2000 By: /s/ HARRY D. SCHULMAN ________________________________________ Harry D. Schulman CHIEF OPERATING OFFICER, CHIEF FINANCIAL OFFICER AND SECRETARY (Duly authorized to sign on behalf of the Registrant) November 14, 2000 By: /s/ TERRY L. POLISTINA ________________________________________ Terry L. Polistina SENIOR VICE PRESIDENT - FINANCE AND ADMINISTRATION (Duly authorized to sign on behalf of the Registrant) 23