-----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, NjlZq2zW/Fjl+Koc0558swuz8uLiiS7kuD6+ssyPthNQwTIptbeNhCrQXDFol8lR OQJlMrvsU4uwFhxcW148CQ== 0000950144-98-012912.txt : 19981118 0000950144-98-012912.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950144-98-012912 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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-Q SEC ACT: SEC FILE NUMBER: 001-10177 FILM NUMBER: 98751425 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-Q 1 WINDMERE DURABLE HOLDINGS INC 10-Q 9/30/98 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, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to Commission File Number 1-10177 WINDMERE-DURABLE HOLDINGS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) FLORIDA 59-1028301 - ------------------------------- --------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 5980 MIAMI LAKES DRIVE, MIAMI LAKES, FLORIDA 33014 -------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (305) 362-2611 --------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirement for the past 90 days. Yes X No ---- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Number of Shares Outstanding CLASS On November 4, 1998 - ---------------------------- ---------------------------- Common Stock, $.10 Par Value 22,090,966 2 WINDMERE-DURABLE HOLDINGS, INC. INDEX PART I. FINANCIAL INFORMATION ITEM 1. Consolidated Statements of Earnings for the Three and Nine Months Ended September 30, 1998 and 1997 3-4 Consolidated Balance Sheets as of September 30, 1998, December 31, 1997 and September 30, 1997 5-6 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 7-8 Notes to Consolidated Financial Statements 9-19 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20-29 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 30 ITEM 5. Other Information 30 ITEM 6. Exhibits and Reports on Form 8-K 30-31 SIGNATURES 32 2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WINDMERE-DURABLE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE INFORMATION)
Three Months Ended September 30, -------------------------------------- 1998 1997 ---------------- ----------------- Sales and Other Revenues $160,453 100.0% $ 79,976 100.0% Cost of Goods Sold 105,439 65.7 62,017 77.5 -------- ----- -------- ----- Gross Profit 55,014 34.3 17,959 22.5 Selling, General and Administrative Expenses 39,026 24.3 12,288 15.4 -------- ----- ------- ---- Operating Profit 15,988 10.0 5,671 7.1 Other (Income) Expense Interest Expense 8,104 5.1 861 1.1 Interest and Other Income (464) (.3) (601) (.8) Gain on sale of equity interest (42,651) (26.6) -- -- -------- ----- ------- ----- (35,011) (21.8) 260 .3 -------- ----- ------- ----- Earnings Before Equity in Net Earnings of Joint Ventures and Income Taxes 50,999 31.8 5,411 6.8 Equity in Net Earnings of Joint Ventures 362 .2 3,664 4.6 -------- ----- ------- ----- Earnings Before Income Taxes 51,361 32.0 9,075 11.4 Provision for Income Taxes 16,401 10.2 558 .7 -------- ----- ------- ----- Net Earnings $ 34,960 21.8% $ 8,517 10.7% ======== ===== ======= ===== Earnings Per Share - basic $ 1.65 $. 48 ======== ======= Earnings Per Share - diluted $ 1.58 $. 43 ======== =======
The accompanying notes are an integral part of these statements. 3 4 WINDMERE-DURABLE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE INFORMATION)
Nine Months Ended September 30, ------------------------------------- 1998 1997 ---------------- -------------- Sales and Other Revenues $278,415 100.0% $191,451 100.0% Cost of Goods Sold 202,168 72.6 149,667 78.2 -------- ----- -------- ----- Gross Profit 76,247 27.4 41,784 21.8 Selling, General and Administrative Expenses 63,558 22.8 33,635 17.5 Repositioning Charge 9,914 3.6 -- -- -------- ----- -------- ----- Operating Profit 2,775 1.0 8,149 4.3 Other (Income) Expense Interest Expense 10,575 3.8 2,194 1.2 Interest and Other Income (2,662) (.9) (1,565) ( .8) Gain on sale of equity interest (42,651) (15.3) -- -- -------- ----- -------- ----- (34,738) (12.4) 629 .4 -------- ----- -------- ----- Earnings Before Equity in Net Earnings of Joint Ventures and Income Taxes 37,513 13.4 7,520 3.9 Equity in Net Earnings of Joint Ventures 1,558 .6 3,784 2.0 -------- ----- -------- ----- Earnings Before Income Taxes 39,071 14.0 11,304 5.9 Provision for Income Taxes 10,838 3.9 527 .3 -------- ----- -------- ----- Net Earnings $ 28,233 10.1% $ 10,777 5.6% ======== ===== ======== ===== Earnings Per Share - basic $ 1.45 $ .61 ======== ======= Earnings Per Share - diluted $ 1.34 $ .55 ======== ======= Dividends Per Common Share $. 00 $ .10 ======== =======
The accompanying notes are an integral part of these statements. 4 5 WINDMERE-DURABLE HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS)
9/30/98 12/31/97 9/30/97 -------- -------- --------- ASSETS CURRENT ASSETS Cash & Cash Equivalents $ 12,826 $ 8,224 $ 6,352 Accounts and Other Receivables, less allowances of $4,908, $1,111 and $1,122, respectively 143,947 43,338 50,281 Receivables from Affiliates (Note 2) 7,513 15,291 16,749 Inventories Raw Materials 13,110 13,327 19,317 Work-in-process 20,656 21,062 21,622 Finished Goods 149,424 67,783 57,870 -------- -------- -------- Total Inventories 183,190 102,172 98,809 Prepaid Expenses 20,981 4,618 5,633 Refundable Income Taxes 3,867 5,043 -- Future Income Tax Benefits 13,837 1,274 2,791 -------- -------- -------- Total Current Assets 386,161 179,960 180,615 INVESTMENTS IN JOINT VENTURES (NOTE 2) 15,788 43,091 39,621 PROPERTY, PLANT & EQUIPMENT - AT COST, less accumulated depreciation of $54,388, $50,329 and $48,218, respectively 90,960 37,199 36,676 Notes Receivable from Affiliate 23,005 7,799 -- OTHER ASSETS 259,781 13,798 12,973 -------- -------- -------- TOTAL ASSETS $775,695 $281,847 $269,885 ======== ======== ========
5 6 WINDMERE-DURABLE HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS) CONTINUED
9/30/98 12/31/97 9/30/97 --------- -------- -------- LIABILITIES CURRENT LIABILITIES Notes and Acceptances Payable $ 998 $ 42,982 $ 45,453 Current Maturities of Long-Term Debt 8,630 3,815 3,815 Acounts Payable and Accrued Expenses 140,561 26,838 25,263 Income taxes payable 16,049 -- -- Deferred Income, current portion -- 247 330 -------- -------- -------- Total Current Liabilities 166,238 73,882 74,861 LONG-TERM DEBT 262,370 16,070 16,274 DEFERRED INCOME TAXES 13,022 -- -- DEFERRED INCOME, less current portion 16,043 1,074 15 SHAREHOLDERS' EQUITY (Note 3) Special Preferred Stock - authorized 40,000,000 shares of $.01 par value; none issued Common Stock - authorized 40,000,000 shares of $.10 par value; shares outstanding: 22,090, 18,119 and 17,800, respectively 2,209 1,812 1,780 Paid-in Capital 139,723 41,024 37,747 Retained Earnings 177,320 149,087 140,029 Unrealized Foreign Currency Translation Adjustment (1,230) (1,102) (821) -------- -------- -------- Total Shareholders' Equity 318,022 190,821 178,735 -------- -------- -------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $775,695 $281,847 $269,885 ======== ======== ========
The accompanying notes are an integral part of these statements. 6 7 WINDMERE-DURABLE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Nine Months Ended September 30, ------------------------------- 1998 1997 --------- --------- Cash flows from operating activities: Net earnings $ 28,233 $ 10,777 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation of property, plant and equipment 7,712 4,956 Amortization of intangible assets 3,626 824 Amortization of deferred income (248) (321) Repositioning charge 17,600 0 Loss on disposal of fixed assets 617 0 Net change in allowance for losses on accounts receivable 3,797 0 Equity in net earnings of joint ventures (1,588) (4,332) Gain on sale of equity interest (42,651) -- Changes in assets and liabilities Increase in accounts and other receivables (63,877) (12,687) Increase in inventories (10,632) (9,295) Increase in prepaid expenses (12,171) (1,882) (Increase) decrease in other assets (29,956) 615 Increase (decrease) in accounts payable and accrued expenses 39,424 (1,072) Increase in current and deferred income taxes 11,634 441 Increase in deferred income 14,970 -- Increase (decrease) in other accounts 128 (34) --------- -------- Net cash used in operating activities (33,382) (12,010) Cash flows from investing activities: Additions to property, plant and equipment - net (13,887) (8,872) Purchase of net assets - Household Products Group (319,626) -- Proceeds from sale of equity interest in Salton - net 72,279 -- Investments in joint ventures -- (198) Increase in receivable accounts and notes from affiliates (8,165) (4,610) --------- -------- Net cash used in investing activities (269,399) (13,680)
7 8 WINDMERE-DURABLE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) CONTINUED
Nine Months Ended September 30, ------------------------------- 1998 1997 ---- ---- Cash flows from financing activities: Notes and acceptances $ (41,984) $ 23,570 Proceeds from issuance of long term debt 507,000 0 Payments of long-term debt (255,885) (611) Exercise of stock options and warrants 2,962 2,017 Proceeds from sale of common stock - net 97,636 -- Cash dividends paid -- (1,713) Payment of withholding tax on stock option exercises (2,346) -- --------- -------- Net cash provided by financing activities 307,383 23,263 --------- -------- Increase (decrease) in cash and cash equivalents 4,602 (2,427) Cash and cash equivalents at beginning of year 8,224 8,779 --------- -------- Cash and cash equivalents at end of quarter $ 12,826 $ 6,352 ========= ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for: Interest $ 5,060 $ 963 Income taxes $ 0 $ 11
Non-cash investing and financing activities: In August 1998, holders of the $2.0 million of convertible notes issued in connection with Newtech acquisition converted the notes into 133,333 shares of Common Stock. The accompanying notes are an integral part of these statements. 8 9 WINDMERE-DURABLE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF ACCOUNTING POLICIES INTERIM REPORTING In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all normal recurring adjustments necessary to present fairly the Company's financial position as of September 30, 1998 and 1997, and the results of its operations and changes in financial position for the interim periods. Results for interim periods should not be considered indicative of results for a full year. Reference should be made to the financial statements contained in the registrant's Annual Report on Form 10-K for the year ended December 31, 1997. RECLASSIFICATIONS Certain prior period amounts have been reclassified for comparability. RECEIVABLES FROM AFFILIATES Receivables from Affiliates include accounts receivable which arise in the ordinary course of business and are settled as trade obligations, as well as the current portion of notes receivable due from certain of the Company's joint venture partners and other affiliates ("Affiliates"). Notes receivable from these Affiliates bear interest at prevailing market interest rates. REPOSITIONING CHARGE The Company in connection with its acquisition of the Black & Decker Household Products Group incurred a one-time repositioning charge totaling $17.6 million, $11.4 million after tax, of which $7.7 million is included in cost of goods sold. The charge is primarily non-cash and consists of writeoffs of inventory, goodwill and tooling associated with the Company's decision to exit certain personal care and other non-core, low-margin products. Also included are costs associated with the integration of the acquisition. INTEREST RATE AND DEBT RISK MANAGEMENT The Company uses interest rate swaps of one to four years in duration to reduce the impact of changes in interest rates on its floating rate debt. The notational amounts of the swap agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The differential paid or received on the agreements is recognized as an adjustment of interest expense. As of September 30, 1998, the Company had purchased swaps on $70 million notational principal amount with a market value of approximately ($1.7 million). The market value represents the 9 10 amount the Company would have to pay to exit the contracts at September 30, 1998. The Company does not intend to exit such contracts at this time. 2. INVESTMENTS IN JOINT VENTURES Investments in Joint Ventures consist of the Company's interests in joint ventures, accounted for under the equity method. Included are the Company's 50-percent interests in Newtech Electronics Industries, Inc. ("Newtech"), Breakroom of Tennessee, Inc. and Anasazi Partners, L.P. ("Anasazi"). On July 28, 1998, the Company consummated the sale of its 6,535,072 shares of Salton/Maxim stock ("Salton"). The shares were sold for $12 per share in cash plus a six and one-half year, $15 million subordinated promissory note bearing interest at 4% per annum. The note is to be offset by 5% of the total purchase price paid by Salton for product purchases from the Company and its affiliates during the term of the note. In addition, Salton repurchased for approximately $3.3 million an option owned by the Company to purchase 458,000 shares of Salton stock. The Company's after-tax proceeds from the transaction were approximately $50 million following the repayment of a $10.8 million note due Salton, resulting in an after-tax gain of approximately $28.0 million. Furthermore, the arrangements between the Company and Salton/Maxim pertaining to the Kmart contract will continue with certain modifications. Summarized financial information of the unconsolidated companies is as follows: (In Thousands) Nine Nine Months Ended Year Ended Months Ended 9/30/98 12/31/97 9/30/97 ------------ ---------- ------------ EARNINGS -------- Sales $299,009 $467,549 $276,125 Gross Profit $ 70,264 $108,100 $ 61,901 Net Earnings $ 11,055 $ 15,885 $ 8,651 BALANCE SHEET ------------- Current Assets $ 96,066 $169,300 $175,572 Noncurrent Assets $ 12,245 $ 38,781 $ 37,772 Current Liabilities $ 86,240 $132,550 $145,046 Shareholders' Equity $ 21,208 $ 61,581 $ 66,661 Notes receivable from affiliates totaled $26.6 million at September 30, 1998 which includes $8.5 million from the 1997 sale of one of the Company's manufacturing subsidiaries and $15.0 million from the sale of the Company's equity interest in Salton. Holders of the $2.0 million of 8% convertible notes issued in connection with the 1996 Newtech acquisition exercised their options to convert the notes into 133,333 shares of the Company's common stock at a price of $15 per share. 10 11 All sales made by joint ventures in the three month periods ended June 30, 1998 and 1997 were to entities other than members of the consolidated group. Note: Profits earned by the Company's manufacturing subsidiary on sales to joint ventures are included in the consolidated earnings results and are not part of the above table. 3. ACQUISITION On June 26, 1998 the Company consummated its acquisition of the Black & Decker Household Products Group ("HPG") for $319.6 million in cash, and assumed certain related liabilities ("HPG Acquisition"). The acquisition includes the cooking, garment care, food preparation and beverage categories. The acquisition has been accounted for as a purchase and accordingly, the acquired assets and liabilities have been recorded at their estimated fair values at the date of acquisition. The excess of the consideration paid over the estimated fair value of net assets acquired in the amount of $232.3 million has been allocated between goodwill and other intangible assets and is being amortized on a straightline basis over periods of 6.5 to 40 years. As part of the HPG Acquisition, the Company licensed the BLACK & DECKER(R) brand for use in marketing HPG products in North America, Central America, South America (excluding Brazil), and the Caribbean under a licensing arrangement with a minimum term of six and one-half years. For the first five years, the license will be on a royalty-free basis. Renewals, if mutually agreed upon, will be at specified minimum royalty payments. In addition, the Company purchased subbrands from The Black & Decker Corporation, including TOAST 'R OVEN(TM), PROFINISH(R), QUICK 'N EASY(R), SPACEMAKER(R), and KT KITCHENTOOLS(TM). To facilitate the acquisition, the Company entered into credit agreements providing it with an aggregate amount of $345 million in Senior Secured Credit Facilities and $185.0 million in Senior Subordinated Loans (Note 5). The Company subsequently repaid the Senior Subordinated Loans in conjunction with the completion of its public offerings described in Note 4. In connection with the acquisition, the Company will incur costs to exit certain activities and costs to terminate or relocate certain employees. Accrued acquisition liabilities for exit costs and employee termination and relocation costs are recognized in accordance with EITF 95-3, "Recognition of Liabilities in Connection With a Purchase Business Combination." The Company has not finalized its plans to exit activities and to terminate or relocate employees. Accordingly, unresolved issues could result in additional liabilities with respect to the acquisition. These adjustments will be reported primarily as an increase or decrease in goodwill. The following unaudited proforma summary presents the consolidated results of operations of the Company as if the acquisition had occurred at the beginning of the 1998 period. Data for the 1997 period is not readily available. 11 12 (In thousands - except per share data) Nine Months Ended September 30, ------------------------------- 1998 ---- Net Sales $402,015 Net Earnings $ 20,181(1) Earnings Per Share $ .96(1) ------------------ (1) Includes a one-time, primarily non-cash repositioning charge of $11.4 million, after tax and an after-tax gain on the sale of the Company's equity interest in Salton of $27.7 million. 4. PUBLIC OFFERINGS On July 27, 1998, the Company completed a public offering of 3,041,000 shares of its Common Stock. Net proceeds from the sale of the stock aggregated approximately $98,000,000. In conjunction with the Common Stock offering the Company granted the underwriters a 30 day option to purchase up to 456,150 additional shares of Common Stock to cover any over allotments, which was not exercised. The Company simultaneously completed a public offering of $130.0 million in aggregate principal of its 10% Senior Subordinated Notes due 2008. Net proceeds from the offering totaled approximately $125,000,000, including related costs of approximately $5.0 million, which are being amortized over the 10 year term of the notes. Proceeds from both offerings were used to pay, in total, outstanding principal and accrued interest under the $185.0 million Senior Subordinated Loans borrowed in connection with the June 26, 1998 acquisition of The Black & Decker Household Products Group as well as the $20.0 million Tranche C Term Loan and $12.0 million in revolving loans under the Senior Secured Credit Facilities. 5. LONG-TERM DEBT SENIOR SECURED CREDIT FACILITIES The Senior Credit Facilities, consist of a $160.0 million Senior Secured Revolving Credit Facility, a $90.0 million Tranche A Term Loan, a $75.0 million Tranche B Term Loan and a $20.0 million Tranche C Term Loan. The Company paid the purchase price of the HPG Acquisition, in part, with borrowings of $185.0 million under the Term Loans and $7.0 million under the Senior Secured Revolving Credit Facility. The Senior Secured Revolving Credit Facility includes (a) a $20 million sublimit for the issuance of letters of credit and (b) a $10 million sublimit for swing line loans (the "Swing Line Loans"). All amounts outstanding under the Senior Secured Revolving Credit Facility are payable on June 26, 2003. The Tranche A Term Loan is payable in quarterly installments, ranging from $2.0 million for the quarter ended March 31, 1999 to $6.5 million for the quarter ended March 31, 2003, and all remaining amounts owing due the following quarter. The Tranche B Term Loan is payable in annual installments of $630,000, with all remaining amounts owing thereunder due June 26, 2004. 12 13 The Tranche C Term Loan was paid on July 27, 1998 with the proceeds from the Company's offerings (Note 4). In accordance with the provisions of the Company's Senior Secured Credit Facilities $26.0 million of the net proceeds from the Salton transaction were used to repay $14.0 million and $12.0 million of the Tranche A Term Loan and the Tranche B Term Loan, respectively. Interest accrues on the loans made under the Senior Secured Revolving Credit Facility and the Tranche A Term Loan (other than Swing Line Loans) at either LIBOR (adjusted for any reserves) or the Base Rate, which is the higher of NationsBank, N.A.'s prime rate and the federal funds rate plus 0.50% (the "Base Rate"), at the Company's option, plus a specified margin which will be determined by the leverage ratio of the Company and its subsidiaries that initially has been set at 2.25%, or the Base Rate, plus a specified margin of 1.50%, at the Company's option. Interest accrues on the Tranche B Term Loan at either LIBOR (adjusted for any reserves) plus a specified margin which will be determined by the leverage ratio of the Company and its subsidiaries that initially is at 3.00%, or the Base Rate plus a specified margin of 2.00%, at the Company's option. Swing Line Loans will bear interest at the Base Rate. The aggregate amount outstanding under the Senior Credit Facilities will be prepaid by amounts equal to the net proceeds, or a specified portion thereof, from certain indebtedness and equity issuances and specified asset sales by the Company and its subsidiaries, and by a specified percentage of cash flow in excess of certain expenditures, costs and payments. The Company may at its option reduce the amount available under the Senior Credit Facilities to the extent such amounts are unused or prepaid in certain minimum amounts. The Senior Credit Facilities are secured by a security interest in substantially all of the real and personal property, tangible and intangible, of the Company and its domestic subsidiaries, as well as a pledge of all of the stock of such domestic subsidiaries, a pledge of not less than 65% of the voting stock of each direct foreign subsidiary of the Company and each direct foreign subsidiary of each domestic subsidiary of the Company, and a pledge of all of the capital stock of any subsidiary of a subsidiary of the Company that is a borrower under the Senior Credit Facilities. The Senior Credit Facilities are guaranteed by all of the current and will be guaranteed by all of the future domestic subsidiaries of the Company. The Senior Credit Facilities contain a number of significant covenants that, among other things, will restrict the ability of the Company to dispose of assets, incur additional indebtedness, prepay other indebtedness, pay dividends, repurchase or redeem capital stock, enter into certain investments or create new subsidiaries, enter into sale and lease-back transactions, make certain acquisitions, engage in mergers or consolidations, create liens, or engage in certain transactions with affiliates, and that will otherwise restrict corporate and business activities. 13 14 In addition, under the Senior Credit Facilities, the Company is required to comply with specified financial ratios and tests, including a minimum net worth test, a fixed charge coverage ratio, an interest coverage ratio, a leverage ratio and a minimum EBITDA requirement. 10% SENIOR SUBORDINATED NOTES DUE 2008 The $130.0 million in Senior Subordinated Notes were issued in July 1998, bear interest at a rate of 10%, payable semiannually and mature on July 31, 2008. The Notes are general unsecured obligations of the Company and rank subordinate in right of payment to all senior debt of the Company and rank pari passu in right of payment to all future subordinated indebtedness of the Company. The Notes may be redeemed at the option of the Company, in whole or in part, on or after July 31, 2003 at various redemption prices and up to 35% of the original aggregate principal amount of the notes may be redeemed with the net proceeds of an offering of common stock of the Company on or before July 31, 2001. The indenture pursuant to which the Notes are issued contains certain covenants that, among other things, limit the ability of the Company to incur additional indebtedness and issue preferred stock, pay dividends or make other certain restricted payments, apply net proceeds from certain asset sales, and sell stock of subsidiaries. 6. SHAREHOLDERS' EQUITY EARNINGS PER SHARE In 1997, the Company adopted Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." Basic shares for the three month periods ended September 30, 1998 and 1997 were 21,132,969 and 17,664,295, respectively. Basic shares for the nine month periods ended September 30, 1998 and 1997 were 19,437,363 and 17,548,353, respectively. Included in diluted shares are common stock equivalents relating to options, warrants and convertible debt of 997,061 and 2,391,927 for the three month periods ended September 30, 1998 and 1997, respectively, and 1,561,771 and 2,063,054 for the nine month periods, respectively. STOCK OPTIONS On April 30, 1998, the Company's Compensation Committee of its Board of Directors approved the 1998 Stock Option Plan, subject to ratification by the shareholders of the Company. The 1998 plan provides for the granting of incentive stock options to employees and nonqualified stock options to employees, consultants and directors. A total of 3.0 million shares have been reserved under the plan of which approximately 2.5 million have been granted to date. 14 15 7. RECENT ACCOUNTING PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (SFAS 130), effective January 1, 1998. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. Differences between net earnings and comprehensive earnings for the three month periods ended September 30, 1998 and 1997 were insignificant and, therefore, have not been separately disclosed. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 "Disclosures About Segments of an Enterprise and Related Information" (SFAS 131). The Company has not assessed the effect this new standard will have on its consolidated financial statements and/or disclosures. 8. COMMITMENTS AND CONTINGENCIES The Company, its 50-percent owned joint venture partners Salton and Newtech, White Consolidated Industries, Inc. ("White Consolidated"), and certain other parties have been named as defendants in litigation filed by Westinghouse Electric Corporation ("Westinghouse") in the United States District Court for the Western District in Pennsylvania on December 18, 1996. The action arises from a dispute between Westinghouse and White Consolidated over rights to use the "Westinghouse" trademark for consumer products, based on transactions between Westinghouse and White Consolidated in the 1970's and the parties' subsequent conduct. Prior to the filing of Westinghouse's complaint against the Company, White Consolidated, on November 14, 1996, filed a complaint in the United States District Court for the Northern District of Ohio against Westinghouse and another corporation for trademark infringement, dilution, false designation or origin and false advertisement, seeking both injunctive relief and damages. It was subsequently determined that the entire dispute will be heard in the United States District Court for the Western District of Pennsylvania. The action by Westinghouse seeks, among other things, a preliminary injunction enjoining the defendants from using the trademark, unspecified damages and attorneys' fees. Pursuant to the Indemnification Agreement dated January 23, 1997 by and among White Consolidated, Kmart Corporation, and the Company, White Consolidated is defending and indemnifying the Company for all costs and expenses for claims, damages, and losses, including the costs of litigation. Pursuant to the license agreements with White Consolidated, White Consolidated is defending and indemnifying Salton and Newtech for all costs and expenses for claims, damages, and losses, including the costs of litigation. On April 9, 1997, on joint motion of the parties, the court issued an order staying future proceedings until the earlier of July 1, 1997 or five days after hearing before the court in order to give the parties an opportunity to pursue settlement discussions. Subsequently, after a status hearing before the Court on July 15, 1997, and in accordance with the Court's memorandum order of July 17, 1997, counsel for the parties in the litigation pending in the United States District Court for the Western District of Pennsylvania reported to the Court in a letter that the parties had agreed to pursue an expedited mini-trial/mediation proceeding in an effort to resolve their disputes. A mediation proceeding occurred and the parties were unable to reach a mediated settlement. Discovery is proceeding and the matter is likely to be tried in early 1999. 15 16 The Company is also a party to legal proceedings which are class action complaints, on behalf of those security holders of the Company who purchased such securities during a certain period in the second and third quarter of 1998, alleging violations of the federal securities laws (including Rule 10b-5 promulgated pursuant to the Securities Exchange Act of 1934, as amended) in connection with the acquisition by the Company of certain product categories of the Household Products Group of The Black & Decker Corporation. Among other things, the plaintiffs allege that the Company and certain of its directors and officers, along with NationsBanc Montgomery Securities LLC, provided false information in connection with a public offering of debt and equity securities. The plaintiffs seek, among other relief, to be declared a class, to be awarded compensatory damages, rescission rights, unspecified damages and attorneys' fees and costs. The Company has obtained an extension to move against, answer or otherwise respond in each of the proceedings. Because these matters are in their preliminary stages, management is unable at this time to determine what effect these lawsuits will have on the financial condition, results of operations or liquidity of the Company. The Company is currently advancing the legal expenses of the directors and officers who were named as defendants. Such defendants have agreed to repay the Company for all or any portion of such advances to which they are ultimately found not to be entitled pursuant to applicable law. Based on the information currently available to the Company, management does not believe that the indemnification of the officers and directors named as defendants in the above-listed matters will have a material adverse effect on the financial condition, results of operations or liquidity of the Company. However, the actual effects of such indemnification on the Company cannot be finally determined until the amount of such indemnification, if any, is fixed. The Company and the other 50 percent owner in Newtech have entered into an agreement whereby the Company will transfer 5.0% of its interest in Newtech to a third party if and when a liquidity event for the Company occurs. Pursuant to the agreement, a liquidity event will occur if Newtech sells equity interests in a public offering, Newtech is sold to a third party, or if there is an other disposition of the Company's interest or other similar event. On May 14, 1998, Newtech filed a Form S-1 Registration Statement to publicly offer shares of its common stock with the Securities and Exchange Commission. There can be no assurance that such offering will be consummated. 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. 16 17 9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION The following condensed consolidating financial information presents the results of operations, financial position and cash flows of the Company (on a stand alone basis), the guarantor subsidiaries (on a combined basis), the non-guarantor subsidiaries (on a combined basis) and the eliminations necessary to arrive at the consolidated results of the Company. The results of operations and cash flows presented below assume as if the guarantor subsidiaries were in place for all periods presented. The Company and subsidiary guarantors have accounted for investments in their respective subsidiaries on an unconsolidated basis using the equity method of accounting. The Subsidiary Guarantors are wholly-owned subsidiaries of the Company and have fully and unconditionally guaranteed the Notes on a joint and several basis. The guarantors include the following: Windmere Corporation, Windmere Holdings Corporation, Windmere Holdings Corporation II, Jerdon Products, Inc., Fortune Products, Inc., Bay Books & Tapes, Inc., Windmere Innovative Pet Products, Inc., EDI Masters, Inc., Windmere Fan Products, Inc., Household Products, Inc., HP Delaware, Inc., HP Americas, Inc., HPG LLC, HP Intellectual Corp., WD Delaware, Inc. and WD Delaware II, Inc. The Notes contain certain covenants which, among other things, will restrict the ability of the Subsidiary Guarantors to make distributions to Windmere-Durable Holdings, Inc. The Company has not presented separate financial statements and other disclosures concerning the guarantors and non-guarantor subsidiaries because it has determined they would not be material to investors.
Nine Months Ended September 30, 1998 ---------------------------------------------------------------------- None Windmere Durable ------------------------ Holdings, Inc. Guarantors Guarantors Eliminations Consolidated ---------------- ---------- ---------- ------------ ------------ Statement of Operations Net Sales 0 236,790,682 103,131,771 (61,507,790) 278,414,663 Cost of goods sold 0 180,914,314 83,465,524 (62,211,552) 202,168,286 Gross Profit 0 55,876,368 19,666,247 703,762 76,246,377 Operating Expenses (448,497) 61,316,288 2,459,626 270,243 63,557,660 Repositioning Charge 0 9,913,988 0 0 9,913,988 Operating Income 448,497 27,297,092 17,206,621 433,519 45,425,729 Other (income) expense, net (276,986) (35,083,528) 1,698,917 (1,076,403) (34,738,000) Earnings before income taxes and minority interest in subsidiaries 211,511 19,038,568 18,905,539 (642,884) 37,512,733 Provision for income taxes 0 15,353,537 1,250,634 (5,766,384) 10,838,000 Equity in earnings of affiliated companies, net of tax 150,951 1,406,783 0 0 1,557,734 Minority interest 0 0 0 0 0 Net earnings 362,462 5,091,815 17,654,905 5,123,500 28,232,467 ======= ========= ========== ========= ========== Balance Sheet Cash 0 5,254,032 7,572,180 0 12,826,212 Accounts receivables 0 123,103,204 21,465,688 (622,372) 143,946,520 Intercompany Receivables 24,761,456 (20,296,114) 3,584,831 (537,599) 7,512,574 Inventories 0 137,772,923 45,134,227 282,655 183,189,805 Other current assets 0 37,316,538 2,549,812 (1,181,847) 38,684,503 Total current assets 24,761,456 283,150,583 80,306,738 (2,059,163) 386,159,614
17 18
Investments in affiliated companies 414,426,670 23,020,600 70,476,650 (492,135,475) 15,788,445 Property and equipment, net 0 59,474,928 31,485,227 0 90,960,155 Other assets 0 617,283,750 19,940,434 (354,438,280) 282,785,904 ----------- ----------- ----------- ------------ ----------- Total assets 439,188,126 982,929,861 202,209,049 (848,632,917) 775,694,118 =========== =========== =========== ============ =========== LIABILITIES: Notes payable 0 11,350,207 998,444 (11,350,207) 998,444 Accounts payable and accrued expenses 1,066 132,078,934 9,102,782 (622,071) 140,560,710 Current maturities of L.T. 8,630,000 0 0 0 8,630,000 Deferred income S.T. 0 0 0 0 0 Deferred income taxes 0 15,838,868 865,616 (655,644) 16,048,840 ----------- ----------- ----------- ------------ ----------- Total current liabilities 8,631,066 159,268,009 10,966,842 (12,628,223) 166,237,694 Long term debt 260,370,000 356,869,293 0 (354,869,293) 262,370,000 Deferred income, less current portion 0 15,218,367 0 824,010 16,042,377 Deferred income taxes 0 12,836,352 2,145,685 (1,960,037) 13,022,000 Total liabilities 269,001,066 544,192,022 13,112,528 (368,633,543) 457,672,071 Shareholders' equity 170,187,060 438,737,840 189,096,521 (479,999,374) 318,022,047 Total liabilities and shareholder equity 439,188,126 982,929,861 202,209,049 (848,632,917) 775,694,118 =========== =========== =========== ============ =========== Cash Flow Information Net cash provided (used) in operating activities 40,684,662 (613,451,297) (5,983,456) 545,368,164 (33,381,927) Net cash provided (used) in investing activities (398,520,952) 30,606,355 (1,885,068) 100,400,562 (269,399,103) Net cash provided (used) in financing activities 357,836,290 588,098,974 7,216,822 (645,768,726) 307,383,360 Cash at beginning 0 0 8,223,882 0 8,223,882 Cash at end 0 5,254,032 7,572,180 0 12,826,211
Nine Months Ended September 30, 1997 ---------------------------------------------------------------------- None Windmere Durable ------------------------ Holdings, Inc. Guarantors Guarantors Eliminations Consolidated ---------------- ---------- ---------- ------------ ------------ Statement of Operations Net Sales 0 136,975,478 116,066,766 (61,590,964) 191,451,279 Cost of goods sold 0 106,675,357 105,153,283 (62,160,964) 149,667,676 Gross profit 0 30,300,120 10,913,483 570,000 41,783,603 Operating expenses 0 29,521,931 3,843,279 270,243 33,635,453 Operating income 0 777,690 7,070,204 299,757 8,147,650 Other (income) expense, net 324,537 1,447,111 (1,143,020) 0 628,627
18 19
Earnings before equity in net earnings (loss) of joint ventures and income tax (324,537) (669,421) 8,213,224 299,757 7,519,023 Provision for income taxes 0 9,099 183,882 333,805 526,786 Equity in net earnings loss of joint ventures 87,349 3,696,998 0 0 3,784,347 ---------- ----------- ----------- ----------- ----------- Net earnings (237,189) 3,018,979 8,029,342 (34,048) 10,777,084 ========== =========== =========== =========== =========== Balance Sheet Cash & cash equivalents 0 155,478 6,196,485 0 6,351,963 Accounts receivables 0 38,556,265 11,365,913 358,822 50,281,000 Receivables from affiliates 30,941,789 (32,525,764) 18,008,379 324,843 16,749,248 Inventories 0 48,709,774 50,643,594 (544,368) 98,809,000 Other current assets 0 5,827,499 3,172,182 (575,672) 8,424,009 Total current assets 30,941,789 60,723,253 89,386,553 (436,375) 180,615,220 Investment in joint ventures 46,265,002 47,379,290 46,199,154 (100,222,849) 39,620,596 Property and plant and equipment net 0 7,201,146 29,474,963 0 36,676,109 Other assets 0 5,035,628 12,525,799 (4,588,358) 12,973,069 Total assets 77,206,791 120,339,317 177,586,469 (105,247,582) 269,884,994 ========== =========== =========== =========== =========== Notes and acceptance payable 0 49,850,207 6,952,701 (11,350,207) 45,452,701 Current maturities of long term debt 0 3,814,815 0 0 3,814,815 Accounts payable 0 3,212,530 16,115,201 0 19,327,731 Accrued expenses 2,068 1,107,906 4,826,781 0 5,936,754 Current maturities of L.T. 0 3,814,815 0 0 3,814,815 Deferred income current portion 0 330,002 0 0 330,002 Deferred income taxes 0 1,772,059 (341,377) (1,430,523) 158 Total current liabilities 2,068 60,087,518 27,553,305 (12,780,730) 74,862,161 Long term debt 10,847,620 5,425,926 0 0 16,273,546 Deferred income, less current portion 0 14,679 0 0 14,679 Deferred income taxes 0 (185,648) 68,401 117,247 0 Total liabilities 10,849,688 65,342,476 27,621,707 (12,663,483) 91,150,387 Shareholders' equity 66,357,104 54,996,841 149,964,762 (92,584,099) 178,734,607 Total liabilities and shareholders Equity 77,206,791 120,339,317 177,586,469 (105,247,582) 269,884,994 ========== =========== =========== =========== =========== Net cash provided (used) in operating activities (235,122) (17,426,085) 11,336,937 (5,686,031) (12,010,301) Net cash provided (used) in investing activities (68,721) (6,624,086) (14,873,425) 7,885,930 (13,680,302) Net cash provided (used) in financing activities 303,843 22,088,889 3,070,225 (2,199,899) 23,263,058 Cash at beginning 0 2,116,760 6,662,748 0 8,779,508 Cash at end 0 155,478 6,196,485 0 6,351,963
19 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 Sales and Other Revenues ("Sales") for the third quarter of 1998 increased by $80.5 million, more than double Sales for the same period in 1997. The increase in sales is the result of the June 26, 1998 acquisition of the Black & Decker Household Products Group, now the Company's Household Products, Inc. subsidiary. All Household Products, Inc. sales are distribution sales. Although contributing significantly to total sales for the period, Household Products, Inc. experienced softness in the domestic market for its higher-end product lines and weaker than expected sales in Latin America and Canada. Sales to Walmart accounted for 14% of total Company sales in the 1998 third quarter.
COMPARATIVE REVENUE RESULTS ------------------------------------------------------ (In Thousands) THREE MONTHS ENDED ------------------------------------------------------ SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 --------------------- ------------------- DISTRIBUTION $ 147,488 91.9% $ 59,799 74.8% MANUFACTURING 12,965 8.1 20,177 25.2 ------- ----- ------- ---- Total Sales $ 160,453 100.0% $ 79,976 100.0% ======= ===== ======= =====
The Company's gross profit margin increased to 34.3% of sales from 22.5% in the 1997 period. While the increase is attributable primarily to the June 26, 1998 acquisition, increased productivity, a more profitable product mix and lower raw material costs, which include the effect of volume purchase discounts, at the Company's manufacturing operations also contributed significantly to the margin improvement. Selling, general and administrative expenses increased by $26.7 million and as a percentage of sales to 24.3% from 15.4% for the year ago quarter. The increase is due to the June 26, 1998 acquisition of the Black & Decker Household Products Group. Expenses incurred to integrate and delink Household Products, Inc. from Black & Decker were higher than anticipated. Interest expense increased by $7.2 million to $8.1 million in the 1998 period. The change is the result of amounts borrowed in conjunction with the June 26, 1998 acquisition of the Black & Decker Household Products Group. On July 28, 1998, the Company consummated the sale of its 6,535,072 shares of Salton/Maxim stock. The sale of the stock resulted in an after-tax capital gain of $27.7 million. The Company's equity in net earnings of joint ventures decreased $3.3 million to $362,000 in the 1998 period. The decrease is primarily the result of the July 1998 sale of the Company's equity interest in Salton as well as weaker profits at Newtech. 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. 20 21 The Company's effective tax rate for the third quarter has increased to 32% compared to 10% in the prior year because of the gain on the sale of the Salton/Maxim stock. The gain increases the proportion of the Company's income taxable in the U.S. which is generally taxed at rates higher than its foreign income. In 1997, the Company adopted Financial Accounting Standards No. 128 (FAS 128), "Earnings Per Share". Basic shares for the three month periods ended September 30, 1998 and 1997 were 21,132,969 and 17,664,295, respectively. The increase in number of shares was primarily due to the July 1998 public offering of 3,041,000 shares of the Company's common stock. Included in diluted shares are common stock equivalents relating to options, warrants and convertible debt of 997,061, and 2,391,927 for the three month period ended September 30, 1998 and 1997, respectively. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 Sales and Other Revenues for the 1998 nine month period increased by $87.0 million or 45.4% over sales for the same period in 1997. The increase is primarily the result of the June 26, 1998 acquisition of Household Products, Inc. (See discussion of three month period results). Sales to Walmart accounted for 11% of total sales for the nine month period ended September 30, 1998.
COMPARATIVE REVENUE RESULTS ------------------------------------------------------- NINE MONTHS ENDED ------------------------------------------------------- SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 ------------------------ -------------------- DISTRIBUTION $ 239,719 86.1% $ 138,988 72.6% MANUFACTURING 38,696 13.9 52,463 27.4 ------- ----- ------ ---- Total Sales $ 278,415 100.0% $ 191,451 100.0% ======= ===== ======= =====
The Company in connection with its acquisition of the Black & Decker Household Products Group incurred a one-time repositioning charge totaling $17.6 million, $11.4 million after tax, of which $7.7 million is included in cost of goods sold. The charge is primarily non-cash and consists of writeoffs of inventory, goodwill and tooling associated with the Company's decision to exit certain personal care and other non-core, low-margin products. Also included are costs associated with the integration of the acquisition. Excluding the portion of the repositioning charge recorded as cost of goods sold in the 1998 period, the Company's gross profit margin increased to 30.2% of sales from 21.8% in the 1997 period. While the increase is attributable primarily to the June 26, 1998 acquisition, increased productivity, a more profitable product mix and lower raw material costs, which include the effect of volume purchase discounts, at the Company's manufacturing operations also contributed significantly to the margin improvement. Selling, general and administrative costs increased by $29.9 million and as a percentage of sales to 22.8% from 17.5% in the nine months ended September 30, 1998 compared to the same period of 1997. The increase is due to the June 26, 1998 acquisition of the Black & Decker Household Products Group. Expenses incurred to integrate and delink Household Products, Inc. from Black & Decker were higher than anticipated. Interest expense increased by $8.4 million in the 1998 period. The change is the result of the increased level of borrowing throughout the year under the Company's credit facilities as well as amounts borrowed in conjunction with the acquisition of the Black & Decker Household Products Group. 21 22 The Company's equity in net earnings of joint ventures was $1.6 million for the nine months ended September 30, 1998 as compared to $3.8 million for the same period in 1997. The decrease is primarily the result of the July 1998 sale of the Company's equity interest in Salton. 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's effective tax rate for the 1998 nine month period has increased to 29% compared to 7% in the prior year because of the gain on the sale of the Salton/Maxim stock. The gain increases the proportion of the Company's income taxable in the U.S. which is generally taxed at rates higher than its foreign income. Basic shares for the nine month periods ended September 30, 1998 and 1997 were 19,437,363 and 17,548,353, respectively. The increase in number of shares was primarily due to the July 1998 public offering of 3,041,000 of the Company's common stock. Included in diluted shares are common stock equivalents relating to options, warrants and convertible debt of 1,561,771 and 2,063,054 for the nine month periods ended September 30, 1998 and 1997. LIQUIDITY & CAPITAL RESOURCES At September 30, 1998, the Company's current ratio and quick ratio were 2.3 to 1 and 1.2 to 1 as compared to 2.4 to 1 and 1.1 to 1 at September 30, 1997. The Company had working capital of $219.9 million and $105.8 million at September 30, 1998 and 1997, respectively. Cash balances increased by approximately $4.6 million for the nine month period ended September 30, 1998. The net use of cash in operating activities is a result of the increased growth in sales as a result of the June 26, 1998 acquisition of the Black & Decker Household Products Group, resulting in higher accounts receivable balances. Cash used in investing activities is primarily the result of the payment of $319.6 to purchase the net assets of the Household Products Group offset by the net proceeds from the sale of the Company's equity interest in Salton. Financing activities provided cash flows of $307.4 million primarily as a result of the borrowings and proceeds from the public offerings of Common Stock and 10% Senior Subordinated Notes made in conjunction with the acquisition of the Black & Decker Household Products Group. 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. 22 23 Certain of the Company's foreign subsidiaries (the "subsidiaries") have $21.4 million in trade finance lines of credit, payable on demand, which are secured by the subsidiaries' tangible and intangible property located in Hong Kong and in the People's Republic of China, as well as a Company guarantee. At September 30, 1998, the subsidiaries were utilizing, including letters of credit, approximately $1.0 million of these credit lines. Outstanding borrowings by the Company's Hong Kong subsidiaries are primarily in U.S. dollars. The Company's primary sources of liquidity are its cash flow from operations and borrowings under the Senior Secured Credit Facilities. The Company is currently borrowing $139.0 million under the term loan portion of its Senior Secured Credit Facilities. In addition, $145.0 million is available for future borrowings under the Senior Secured Revolving Credit Facility and other credit facilities. Advances under the Senior Secured Revolving Credit Facility are based upon percentages of outstanding eligible accounts receivable and inventories. Under the Senior Secured Revolving Credit Facility, the Company may elect to borrow at either LIBOR (adjusted for any reserves) or the Base Rate (as defined). Interest will accrue on the Senior Secured Revolving Credit Facility and the Tranche A Term Loan at either LIBOR (adjusted for any reserves) plus a specified margin which will be determined by the leverage ratio of the Company and its subsidiaries that initially has been set at 2.25%, or the Base Rate, plus a specified margin of 1.50%. Interest will accrue on the Tranche B Term Loan at either LIBOR (adjusted for any reserves) plus a specified margin which will be determined by the leverage ratio of the Company and its subsidiaries that initially has been set at 3.00%, or the Base Rate plus a specified margin of 2.00%. The Senior Secured Credit Facilities contain a number of significant covenants that, among other things, restrict the ability of the Company to dispose of assets, incur additional indebtedness, prepay other indebtedness, pay dividends, repurchase or redeem capital stock, enter into certain investments or create new subsidiaries, enter into sale and lease-back transactions, make certain acquisitions, engage in mergers or consolidations, create liens, or engage in certain transactions with affiliates, and that will otherwise restrict corporate and business activities. In addition, under the Senior Credit Facilities, the Company is required to comply with specified financial ratios and tests, including a minimum net worth test, a fixed charge coverage ratio, an interest coverage ratio, a leverage ratio and a minimum EBITDA requirement. The indenture pursuant to which the 10% Senior Subordinated Notes are issued contains certain covenants that, among other things, limit the ability of the Company to incur additional indebtedness and issue preferred stock, pay dividends or make other certain restricted payments, apply net proceeds from certain asset sales, and sell stock of subsidiaries. The Company's ability to make scheduled payments of principal of, or to pay the interest on, or to refinance, its indebtedness, or to fund planned capital expenditures, product research and development expenses and marketing expenses will depend on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory, and international and United States domestic political factors and other factors that are beyond the Company's control. Based upon the current level of operations and anticipated cost savings and revenue growth, management believes that cash flow from operations and available cash, together with available borrowings under the Senior Credit and other facilities, will be adequate to meet the Company's future liquidity needs for at least the next several years. The Company may, however, need to refinance all or a portion of the principal of the indebtedness on or prior to maturity. There can be no assurance that the Company's business will generate sufficient cash flow from operations, that anticipated revenue 23 24 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 Notes, or to fund its other liquidity needs. In addition, there can be no assurance that the Company will be able to effect any such refinancing on commercially reasonable terms or at all. The Company's aggregate capital expenditures for the nine months ended September 30, 1998 were $13.9 million. The Company anticipates that the total capital expenditures for the remainder of 1998 and for 1999 will be approximately $7.1 million and $25.0 million, respectively, 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, 1998, debt as a percent of total capitalization was 46 percent. PUBLIC OFFERINGS On July 27, 1998, the Company completed a public offering of 3,041,000 shares of its Common Stock. Net proceeds from the sale of the stock aggregated approximately $98,000,000. In conjunction with the Common Stock offering the Company granted the underwriters a 30 day option to purchase up to 456,150 additional shares of Common Stock to cover any over allotments, which was not exercised. The Company simultaneously completed a public offering of $130.0 million in aggregate principal of its 10% Senior Subordinated Notes due 2008 (the "Notes"). Net proceeds from the offering totaled approximately $125,000,000, including related costs of approximately $5.0 million, which are being amortized over the 10 year term of the notes. Proceeds from both offerings were used to pay, in total, outstanding principal and accrued interest under the $185.0 million Senior Subordinated Loans borrowed in connection with the June 26, 1998 acquisition of the Black & Decker Household Products Group as well as the $20.0 million Tranche C Term Loan and $12.0 million in revolving loans under the Senior Secured Credit Facilities. SALE OF SALTON SHARES On July 28, 1998, the Company consummated the sale of its 6,535,072 shares of Salton stock. The shares were sold for $12 per share in cash plus a six and one-half year, $15 million subordinated promissory note bearing interest at 4% per annum. The note is to be offset by 5% of the total purchase price paid by Salton for product purchases from the Company and its affiliates during the term of the note. In addition, Salton repurchased for approximately $3.3 million an option owned by the Company to purchase 458,000 shares of Salton stock. The Company's after-tax proceeds from the transaction were approximately $50 million following the repayment of a $10.8 million note due Salton resulting in an after-tax gain of approximately $28.0 million. 24 25 In accordance with the provisions of the Company's Senior Secured Credit Facilities $26.0 million of the net proceeds from the Salton transaction were used to repay $14.0 million and $12.0 million of the Tranche A Term Loan and the Tranche B Term Loan, respectively. CURRENCY MATTERS The Company uses forward exchange contracts to reduce fluctuations in foreign currency, cash flows related to third party raw material and other operating purchases. The terms of the currency instruments used are generally consistent with the timing of the committed or anticipated transactions being hedged. The purpose of the Company's foreign currency management activity is to protect the Company from the risk that eventual cash flows from foreign currency denominated transactions may be adversely affected by changes in exchange rates. There is no significant unrealized gain or loss on these contracts. All contracts have terms of six months or less. Recent months have seen an unusually rapid devaluation of certain Asian-Pacific currencies. While there has not been a material impact on the currencies in Hong Kong or the People's Republic, where the Company has operations, there can be no assurances that there will not be a material impact in the future. The December 1994 devaluation of the peso had a number of effects on the Mexican economy that adversely affected the financial condition of businesses in Mexico. There can be no assurance that the peso to dollar foreign exchange rate will not be volatile in the future and will not have a material adverse effect on the Company. The Company uses interest rate swaps of one to four years in duration to reduce the impact of changes in interest rates on its floating rate debt. The notational amounts of the agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The differential paid or received on the agreements is recognized as an adjustment of interest expense. As of September 30, 1998, the Company had purchased interest rate swaps on $70 million notational principal amount with a market value of approximately ($1.7 million). The market value represents the amount the Company would have to pay to exit the contracts at September 30, 1998. The Company does not intend to exit such contracts at this time. RECENT ACCOUNTING PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (SFAS 130), effective January 1, 1998. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. Differences between net earnings and comprehensive earnings for the three month periods ended September 30, 1998 and 1997 were insignificant and, therefore, have not been separately disclosed. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 "Disclosures About Segments of an Enterprise and Related Information" (SFAS 131). The Company has not assessed the effect this new standard will have on its consolidated financial statements and/or disclosures. 25 26 SEASONALITY The Company's business is highly seasonal, with operating results varying from quarter to quarter. The Company has historically experienced higher revenues in the third and fourth quarters of each fiscal year primarily due to increased demand by customers for products in the late summer for "back-to-school" sales and in the fall for holiday sales. The Company's major sales occur during August through November. Sales are generally made on 60 to 90 day terms. Heaviest collections on its open accounts receivable are received from November through March, at which time the Company is in its most liquid state. YEAR 2000 ISSUES The Company uses a significant number of computer software programs and operating systems across its entire organization, including applications used in financial business systems, manufacturing, and various administrative functions. To the extent that the Company's software applications contain source code that is unable to appropriately interpret the upcoming calendar year 2000 and beyond, modification or replacement of such applications will be necessary. The Company has initiated a review of its computer systems and programs to identity those that are not Year 2000 compliant. Key systems and programs, including those that interact with customers and suppliers, are being assessed and plans are being developed to address and implement required system and program modifications by December 31, 1999. The Company also has begun to address whether significant customers and suppliers may have Year 2000 compliance issues which will affect their interaction with the Company. The cost of implementing required system changes is not expected to be material to the Company's consolidated financial statements. No assurance can be given, however, that all of the Company's systems, the systems of acquired businesses, and those of significant customers and suppliers, will be Year 2000 compliant and that the failure to achieve Year 2000 compliance will not have a material adverse effect on the Company's operations. LEGAL PROCEEDINGS The Company, its 50-percent owned joint venture partners Salton and Newtech, White Consolidated Industries, Inc. ("White Consolidated"), and certain other parties have been named as defendants in litigation filed by Westinghouse Electric Corporation ("Westinghouse") in the United Stated District Court for the Western District in Pennsylvania on December 18, 1996. The action arises from a dispute between Westinghouse and White Consolidated over rights to use the "Westinghouse" trademark for consumer products, based on transactions between Westinghouse and White Consolidated in the 1970's and the parties' subsequent conduct. Prior to the filing of Westinghouse's complaint against the Company, White Consolidated, on November 14, 1996, filed a complaint in the United States District Court for the Northern District of Ohio against Westinghouse and another corporation for trademark infringement, dilution, false designation or origin and false advertisement, seeking both injunctive relief and damages. It was subsequently determined that the entire dispute will be heard in the United States District Court for the Western District of Pennsylvania. The action by Westinghouse seeks, among other things, a preliminary injunction enjoining the defendants from using the trademark, unspecified damages and attorneys' fees. Pursuant to the Indemnification Agreement dated January 23, 1997 by and among White Consolidated, Kmart Corporation, and the Company, White Consolidated is defending and indemnifying the Company for all costs and expenses for claims, damages, and losses, including the costs of litigation. Pursuant to the license 26 27 agreements with White Consolidated, White Consolidated is defending and indemnifying Salton and Newtech for all costs and expenses for claims, damages, and losses, including the costs of litigation. On April 9, 1997, on joint motion of the parties, the court issued an order staying future proceedings until the earlier of July 1, 1997 or five days after hearing before the court in order to give the parties an opportunity to pursue settlement discussions. Subsequently, after a status hearing before the Court on July 15, 1997, and in accordance with the Court's memorandum order of July 17, 1997, counsel for the parties in the litigation pending in the United States District Court for the Western District of Pennsylvania reported to the Court in a letter that the parties had agreed to pursue an expedited mini-trial/mediation proceeding in an effort to resolve their disputes. A mediation proceeding occurred and the parties were unable to reach a mediated settlement. Discovery is proceeding and the matter is likely to be tried in early 1999. The Company is also a party to the following legal proceedings: 1. CONCETTA BRUNO AND RICHARD EHRLICH, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED V. WINDMERE-DURABLE HOLDINGS, INC., DAVID FRIEDSON, HARRY D. SCHULMAN AND NATIONSBANC MONTGOMERY SECURITIES LLC, Case No. CV 98-5974 Date suit instituted: 9/25/98 Name of Court: United States District Court, Eastern District of New York 2. RALPH CASEY, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED V. WINDMERE-DURABLE HOLDINGS, INC., DAVID M. FRIEDSON, HARRY D. SCHULMAN AND NATIONSBANC MONTGOMERY SECURITIES LLC, Case No. 98-2273-CIV-GRAHAM Date Suit Instituted: November 9, 1998 Name of Court: United States District Court, Southern District of Florida 3. GILBERT KUNKEN, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED V. WINDMERE-DURABLE HOLDINGS, INC., DAVID M. FRIEDSON, HARRY D. SCHULMAN, AND LAI KIN Case No. 98-2316-CIV-MOORE Date Suit Instituted: October 5, 1998 Name of Court: United States District Court, Southern District of Florida 4. JONATHAN CHARIFF, INC. ON BEHALF OF ITSELF AND ALL OTHERS SIMILARLY SITUATED V. WINDMERE-DURABLE HOLDINGS, INC., DAVID M. FRIEDSON, HARRY D. SCHULMAN AND NATIONSBANC MONTGOMERY SECURITIES LLC, Case No. 98-2344-CIV-MORENO Date Suit Instituted: October 7, 1998 Name of Court: United States District Court, Southern District of Florida 5. 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 AND NATIONSBANC MONTGOMERY SECURITIES LLC, 98-2367-CIV-GRAHAM 27 28 Date Suit Instituted: October 8, 1998 Name of Court: United States District Court, Southern District of Florida 6. KAM CHU TAM, MON TAY YAN AND MING HEUNG YAN, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED V. WINDMERE-DURABLE HOLDINGS, INC., DAVID FRIEDSON, HARRY D. SCHULMAN AND NATIONSBANC MONTGOMERY SECURITIES LLC, Case No. CV 98-6360 Date Suit Instituted: October 20, 1998 Name of Court: United States District Court, Eastern District of New York Each of these matters is a class action complaint, purportedly on behalf of those security holders of the Company who purchased such securities during a certain period in the second and third quarter of 1998, alleging violations of the federal securities laws (including Rule 10b-5 promulgated pursuant to the Securities Exchange Act of 1934, as amended) in connection with the acquisition by the Company of certain product categories of the Household Products Group of The Black & Decker Corporation. Among other things, the plaintiffs allege that the Company and certain of its directors and officers, along with NationsBanc Montgomery Securities LLC, provided false information in connection with a public offering of debt and equity securities. The plaintiffs seek, among other relief, to be declared a class, to be awarded compensatory damages, rescission rights, unspecified damages and attorneys' fees and costs. The Company has obtained an extension to move against, answer or otherwise respond in each of the Litigation Matters. Because these matters are in their preliminary stages, management is unable at this time to determine what effect these lawsuits will have on the financial condition, results of operations or liquidity of the Company. The Company is currently advancing the legal expenses of the directors and officers who were named as defendants. Such defendants have agreed to repay the Company for all or any portion of such advances to which they are ultimately found not to be entitled pursuant to applicable law. Based on the information currently available to the Company, management does not believe that the indemnification of the officers and directors named as defendants in the above-listed matters will have a material adverse effect on the financial condition, results of operations or liquidity of the Company. However, the actual effects of such indemnification on the Company cannot be finally determined until the amount of such indemnification, if any, is fixed. The Company is subject to other legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability, if any, in excess of applicable insurance coverage, is not likely to have a material effect on the financial position of the Company. COMMITMENTS AND CONTINGENCIES The Company and the other 50 percent owner in Newtech have entered into an agreement whereby the Company will transfer 5.0% of its interest in Newtech to a third party if and when a liquidity event for the Company occurs. Pursuant to the agreement, a liquidity event would occur if Newtech sells equity interests in a public offering, Newtech is sold to a third party, or if there is an other disposition of the Company?s interest or other similar event. On May 14, 1998, Newtech filed a Form S-1 Registration Statement to publicly offer shares of its common stock with the Securities and Exchange Commission. There can be no assurance that such offering will be consummated. 28 29 MANUFACTURING OPERATIONS The Company's products are manufactured primarily at the Company's facilities in the PRC, Mexico and the United States. In October 1998, the Company announced its intention to close the Asheboro, North Carolina plant. Prior to the HPG acquisition, approximately 85-percent to 90-percent of the Company's products were manufactured by Durable, its wholly-owned Hong Kong subsidiary operating in Bao An County, Guangdong Province of the People's Republic of China, which is approximately 60 miles northwest of Central, Hong Kong. The Company has a significant amount of its assets in the People's Republic, primarily consisting of inventory, equipment and molds. The supply and cost of products, as well as finished products, can be adversely affected, among other reasons, by changes in foreign currency exchange rates, increased import duties, imposition of tariffs, imposition of import quotas, interruptions in sea or air transportation and political or economic changes. From time to time, the Company explores opportunities to diversify its sourcing and/or production of certain products to other low-cost locations or with other third parties or joint venture partners in order to reduce its dependence on production in the People's Republic and/or reduce Durable's dependence on the Company's existing distribution base. However, at the present time, the Company intends to continue its production in the People's Republic and Mexico. The Mexican government exercises significant influence over many aspects of the Mexican economy. Accordingly, the actions of the Mexican government concerning the economy could have a significant effect on private sector entities in general and the Company in particular. In addition, during the 1980s and 1990s, Mexico experienced periods of slow or negative growth, high inflation, significant devaluations of the peso and limited availability of foreign exchange. As a result of the Company's reliance upon manufacturing facilities in Mexico, economic conditions in Mexico could adversely affect the Company's business, financial condition and results of operations. FORWARD LOOKING STATEMENTS Certain matters discussed in this Form 10-Q are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. These factors include economic conditions and the retail environment; the Company's dependence on the timely development, introduction and customer acceptance of products; competitive products and pricing; reliance on key customers; dependence on foreign suppliers and supply and manufacturing constraints; cancellation or reduction of orders; the outcome of pending litigation; and other risks and uncertainties detailed from time to time in the Company's Securities and Exchange Commission filings. 29 30 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings See "Legal Proceedings" in Part I, Item 2 of this report. ITEM 5. Other Information The deadline for submission of proposals by shareholders pursuant to Rule 14a-8 issued under the Securities Exchange Act of 1934 (the "Act") for inclusion in the proxy statement for the Company's 1999 Annual Meeting of Shareholders is December 21, 1998. Any proposals submitted other than pursuant to Rule 14a-8 of the Act must be received by the Company no later than March 6, 1999 or such proposals will be considered untimely, and the Company may confer discretionary voting with respect to such matters in its proxy for the 1999 Annual Meeting of Shareholders. ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits 27.1....Financial Data Schedule (for S.E.C. USE ONLY). 27.2....Financial Data Schedule (for S.E.C. USE ONLY). (b) Reports on Form 8-K: 1. Form 8-K dated July 16, 1998, reporting under "Item 5. Other Information," the execution of the Credit Agreement and the agreement for Senior Subordinated Loans referred to in the 8-K filed June 26, 1998 regarding the acquisition of the Household Products Group from Black & Decker. 2. Form 8-K dated July 21, 1998 reporting under "Item 5. Other Information," that Salton/Maxim Housewares, Inc. had given the Company notice of its intent to close, on July 27, 1998, on the purchase of the shares of Salton owned by the Company and attaching a copy of the press release related thereto. 3. Form 8-K dated July 27, 1998, reporting under "Item 5. Other Information," that the Company has completed an offering of 3,041,000 shares of its Common Stock and $130 million of its 10% Senior Subordinated Notes due 2008 and attaching (i) the Underwriting Agreements, dated July 22, 1998 among the Company, NationsBank Montgomery Securities LLC and Raymond James & Associates, Inc. (relating to the sale of Common Stock) and among the Company, the Guarantors named therein and NationsBanc Montgomery Securities LLC relating to the sale of the Senior Subordinated Notes) and (ii) the Supplemental Indenture dated as of July 27, 1998 among the Company, the Guarantors named therein and State Street Bank & Trust Company, as Trustee, relating to the issuance of the Senior Subordinated Notes. 4. Form 8-K dated July 28, 1998, reporting under "Item 5. Other Information," that Salton/Maxim Housewares, Inc. had completed the acquisition of the Salton shares owned by the Company and attaching a copy of the press release related thereto. 30 31 5. Form 8-K/A dated August 14, 1998, reporting under "Item Acquisition or Disposition of Assets," the unaudited proforma financial information for the completed acquisition of the Salton shares owned by the Company. 6. Form 8-K dated August 24, 1998 reporting under "Item 5. Other Events," the signing of The Amended and Restated Credit Agreement by and Among Windmere-Durable Holdings, Inc. and NationsBank, National Association, and the other Lenders Party Thereto from Time to Time dated August 7, 1998. 7. Form 8-K dated October 2, 1998 reporting under "Item 5. Other Events," the issuance of a press release dated September 29, 1998 announcing that Windmere-Durable Holdings received notice that a class action lawsuit had been filed on September 25, 1998. 31 32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WINDMERE-DURABLE HOLDINGS, INC. (Registrant) November 13, 1998 By: /s/ Harry D. Schulman ------------------------------- Harry D. Schulman Chief Financial Officer (Duly authorized to sign on behalf of the Registrant) November 13, 1998 By: /s/ Terry L. Polistina ------------------------------- Terry L. Polistina Senior Vice President - Finance (Duly authorized to sign on behalf of the Registrant) 32 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 12,826 0 148,855 4,908 183,190 386,161 145,348 54,388 775,695 166,238 130,000 0 0 2,209 315,813 775,695 278,415 278,415 202,168 202,168 63,558 0 10,575 39,071 10,838 28,233 0 0 0 28,233 1.45 1.34
EX-27.2 3 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 6,352 0 65,908 1,122 98,809 180,615 84,894 48,218 269,885 74,861 0 0 0 1,780 37,747 269,885 191,451 191,451 149,667 149,667 33,635 0 2,194 11,304 527 10,777 0 0 0 10,777 .61 .55
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