-----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, VO3jaC8J9TDVjW7GUj4aoe4zAXseBOawxL2EgTSOCgEeEJuWn+aPRNen0zZKnlUI 9gp0/LV2QrAzf40KkHCkzg== 0000950144-99-012891.txt : 19991115 0000950144-99-012891.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950144-99-012891 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99748788 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. FORM 10-Q 09/30/99 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER 1-10177 WINDMERE-DURABLE HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) FLORIDA 59-1028301 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER 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) 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 OCTOBER 28, 1999 ----- ------------------- Common Stock, $.10 Par Value 22,592,016 2 WINDMERE-DURABLE HOLDINGS, INC. INDEX
PART I. FINANCIAL INFORMATION ITEM 1. Consolidated Statements of Operations for the Three Months Ended September 30, 1999 and 1998............................ 3 Consolidated Statements of Operations for the Nine Months Ended September 30, 1999 and 1998............................. 4 Consolidated Balance Sheets as of September 30, 1999, and December 31, 1998................................. 5-6 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998..................... 7 Notes to Consolidated Financial Statements......................................... 8-14 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 15-22 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......................... 23 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings ................................................................. 24 ITEM 6. Exhibits and Reports on Form 8-K................................................... 24 SIGNATURES........................................................................................... 25
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WINDMERE-DURABLE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE INFORMATION)
THREE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------------------- 1999 1998 ------------------------------ -------------------------------- Sales and Other Revenues ............. $ 204,229 100.0% $ 160,453 100.0% Cost of Goods Sold ................... 139,137 68.1 105,439 65.7 --------- ----- --------- ----- Gross Profit .................... 65,092 31.9 55,014 34.3 Selling, General and Administrative Expenses ......... 39,853 19.6 39,026 24.3 --------- ----- --------- ----- Operating Profit ................ 25,239 12.3 15,988 10.0 Other (Income) Expense Interest Expense ................ 7,212 3.5 8,104 5.1 Interest and Other Income ....... (580) (.3) (464) (.3) Gain on sale of equity interest -- -- (42,651) (26.6) --------- ----- --------- ----- 6,632 3.2 (35,011) (21.8) --------- ----- --------- ----- Earnings before Equity in Net Earnings of Joint Ventures and Income Taxes ....... 18,607 9.1 50,999 31.8 Equity in Net Earnings of Joint Ventures ............... -- -- 362 .2 --------- ----- --------- ----- Earnings Before Income Taxes .................... 18,607 9.1 51,361 32.0 Provision for Income Taxes .................... 4,634 2.3 16,401 10.2 ========= ===== ========= ===== Net Earnings ......................... $ 13,973 6.8% $ 34,960 21.8% ========= ===== ========= ===== Earnings Per Share - basic ........... $ .62 $ 1.65 ========= ========= Earnings Per Share - diluted ......... $ .59 $ 1.58 ========= ==========
The accompanying notes are an integral part of these statements. 3 4 WINDMERE-DURABLE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE INFORMATION)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------------------------------- 1999 1998 ----------------------------- ------------------------------- Sales and Other Revenues ............. $ 472,250 100.0% $ 278,415 100.0% Cost of Goods Sold ................... 330,493 70.0 202,168 72.6 ------- ---- ------- ---- Gross Profit .................... 141,757 30.0 76,247 27.4 Selling, General and Administrative Expenses ......... 116,008 24.6 63,558 22.8 Repositioning charge ............ -- -- 9,914 3.6 ------- ---- ------- ---- Operating Profit ................ 25,749 5.4 2,775 1.0 Other (Income) Expense Interest Expense ................ 19,947 4.2 10,575 3.8 Interest and Other Income ....... (1,604) (.3) (2,662) (.9) Gain on sale of equity interest -- -- (42,651) (15.3) ------- ---- ------- ---- 18,343 3.9 (34,738) (12.4) ------- ---- ------- ---- Earnings before Equity in Net Earnings (Loss) of Joint Ventures and Income Taxes ....... 7,406 1.5 37,513 13.4 Equity in Net Earnings (Loss) of Joint Ventures ............... (12,894) (2.7) 1,558 .6 ------- ---- ------- ---- Earnings (Loss) Before Income Taxes .................... (5,488) (1.2) 39,071 14.0 Provision (Benefit) for Income Taxes .................... (2,366) (.5) 10,838 3.9 ------- ---- ------- ---- Net Earnings (Loss) .................. $ (3,122) (.7)% $ 28,233 10.1% ======= ==== ======= ==== Earnings (Loss) Per Share - basic ........................... $ (.14) $ 1.45 ======= ======= Earnings (Loss) Per Share - diluted ......................... $ (.14) $ 1.34 ======= =======
The accompanying notes are an integral part of these statements. 4 5 WINDMERE-DURABLE HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS)
9/30/99 12/31/98 ------- -------- ASSETS CURRENT ASSETS Cash & Cash Equivalents ............................................... $ 5,529 $ 20,415 Accounts and Other Receivables, less allowances of $7,970 and $7,367, respectively ............................................. 204,016 165,837 Receivables from Affiliates (Note 2) .................................. 3,244 5,589 Inventories Raw Materials .................................................... 10,107 12,648 Work-in-process .................................................. 22,422 28,727 Finished Goods ................................................... 152,951 124,090 -------- -------- Total Inventories ............................................ 185,480 165,465 Prepaid Expenses ...................................................... 9,895 16,709 Refundable Income Taxes ............................................... 7,927 6,555 Future Income Tax Benefits ............................................ 23,503 18,277 -------- -------- Total Current Assets ............................................. 439,594 398,847 INVESTMENTS IN JOINT VENTURES (NOTE 2) ......................................................... 2,763 15,708 PROPERTY, PLANT & EQUIPMENT - AT COST, less accumulated depreciation of $68,697 and $59,524, respectively ............................................ 77,866 76,077 Notes Receivable from Affiliate (Note 7)............................... -- 7,891 OTHER ASSETS .......................................................... 251,191 244,214 -------- -------- TOTAL ASSETS ........................................................ $771,414 $742,737 ======== ========
5 6 WINDMERE-DURABLE HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS)
9/30/99 12/31/98 ------- -------- LIABILITIES CURRENT LIABILITIES Current Maturities of Long-Term Debt ................................ $ 10,342 $ 8,630 Accounts Payable and Accrued Expenses ............................... 135,628 119,611 Income taxes payable ................................................ 1,096 2,693 Deferred Income, current portion .................................... 689 479 --------- --------- Total Current Liabilities ............................. 147,755 131,413 LONG-TERM DEBT ...................................................... 289,645 272,370 DEFERRED INCOME TAXES ............................................... 10,865 12,132 DEFERRED INCOME, less current Portion ............................... 1,052 2,804 SHAREHOLDERS' EQUITY (Note 3) Special Preferred Stock - Authorized 40,000,000 shares of $.01 par value; none issued Common Stock - authorized 40,000,000 shares of $.10 par value; shares outstanding: 22,512 and 22,091, respectively ................................ 2,251 2,209 Paid-in Capital ..................................................... 148,160 145,161 Retained Earnings ................................................... 174,717 177,839 Accumulated Other Comprehensive Income .............................. (1,480) (1,191) Note receivable from affiliate ...................................... (1,551) -- --------- --------- Total Shareholders' Equity .......................................... 322,097 324,018 --------- --------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY ................... $ 771,414 $ 742,737 ========= =========
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, ------------------------------- 1999 1998 ---- ---- Cash flows from operating activities: Net earnings (Loss) .......................................................... $ (3,122) $ 28,233 Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation of property, plant and equipment ................................ 13,108 7,712 Amortization of intangible assets ............................................ 12,627 3,626 Amortization of deferred income .............................................. -- (248) Repositioning charge ......................................................... -- 17,600 Loss on disposal of fixed assets ............................................. 2,204 617 Writedown of investment in joint venture ..................................... 12,574 -- Net change in allowance for losses on accounts receivable .................... 603 3,797 Equity in net earnings (loss) of joint ventures .............................. 371 (1,588) Gain on sale of equity interest ......................................... 0 (42,651) Changes in assets and liabilities Increase in accounts and other receivables ............................... (32,700) (63,877) Increase in inventories .................................................. (10,409) (10,632) Decrease (increase) in prepaid expenses .................................. 6,814 (12,171) Decrease (increase) in other assets ...................................... 5,894 (29,956) (Decrease) increase in accounts payable and accrued expenses ............. (2,219) 39,424 Current and deferred income taxes ........................................ (9,462) 11,634 (Decrease) increase in deferred income ................................... (1,541) 14,970 (Decrease) increase in other accounts .................................... (289) 128 -------- --------- Net cash used in operating activities .............................................. (5,547) (33,382) Cash flows from investing activities: Additions to property, plant and equipment - net ............................. (17,101) (13,887) Purchase of net assets - Household Products Group ............................ -- (319,626) Purchase of net assets from Newtech .......................................... (15,059) -- Proceeds from sale of equity interest in Salton - net ................... -- 72,279 Decrease (increase) in receivable accounts and notes from affiliates ................................................ 2,344 (8,165) -------- --------- Net cash used in investing activities ............................... (29,816) (269,399) Cash flows from financing activities: Net borrowings under lines of credit ......................................... $ 28,949 $ -- Notes and acceptances ........................................................ 0 (41,984) Long-term debt - net ......................................................... 0 507,000 Payments of long-term debt ................................................... (9,962) (255,885) Exercise of stock options and warrants ....................................... 1,490 2,962 Proceeds from sale of common stock - net ..................................... 0 97,636 Payment of withholding tax on Stock option exercises ................................................... -- (2,346) -------- --------- Net cash provided by financing activities ........................... 20,477 307,383 -------- --------- (Decrease) increase in cash and cash equivalents .............................................. (14,886) 4,602 Cash and cash equivalents at beginning of year .................................... 20,415 8,224 -------- --------- Cash and cash equivalents at end of quarter ....................................... $ 5,529 $ 12,826 ======== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for: Interest ..................................................................... $ 24,470 $ 5,060 Income taxes ................................................................. $ 5,621 $ 0 Non-cash investing and financing activities: In April 1999, the Company sold 210,000 shares of common stock to its Chief Executive Officer in exchange for a promissory note totaling $1,496,250
The accompanying notes are an integral part of these statements. 7 8 WINDMERE-DURABLE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF ACCOUNTING POLICIES INTERIM REPORTING In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all normal recurring adjustments necessary to present fairly the Company's financial position as of September 30, 1999 and the results of its operations and changes in financial position for the interim periods. Results for interim periods should not be considered indicative of results for a full year. Reference should be made to the financial statements contained in the registrant's Annual Report on Form 10-K for the year ended December 31, 1998. RECLASSIFICATIONS Certain prior period amounts have been reclassified for comparability. RECEIVABLES FROM AFFILIATES Receivables from Affiliates include accounts receivable which arise in the ordinary course of business and are settled as trade obligations, as well as the current portion of notes receivable due from certain of the Company's joint venture partners and other affiliates ("Affiliates"). Notes receivable from these Affiliates bear interest at prevailing market interest rates. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses forward exchange contracts to reduce fluctuations in foreign currency cash flows related to third party raw material and other operating purchases. The terms of the currency instruments used are generally consistent with the timing of the committed or anticipated transactions being hedged. Outstanding at September 30, 1999 is $29,000,000, in contracts to purchase Hong Kong dollars, forward. Also outstanding are option contracts to sell and buy $18,800,000 in Canadian dollars, forward. There is no significant unrealized gain or loss on these contracts. All contracts have terms of six months or less. The Company uses interest rate swaps of one to four years in duration primarily to reduce the impact of changes in interest rates on its floating rate debt. The notional 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, 1999, the Company had purchased swaps on $120,000,000 notional principal amount with a market value of approximately ($98,000). The market value represents the amount the Company would have to pay to exit the contracts at September 30, 1999. The Company does not intend to exit such contracts at this time. 2. INVESTMENTS IN JOINT VENTURES Investments in Joint Ventures consist of the Company's interests in joint ventures, accounted for under the equity method. Included are the Company's 50-percent interests in Newtech Electronics Industries, Inc. ("Newtech"), Breakroom of Tennessee, Inc. and Anasazi Partners, L.P. ("Anasazi"). 8 9 In June 1999, the Company entered into a definitive asset purchase agreement to purchase substantially all of Newtech's assets, including inventory, accounts receivable, certain trademarks and other intangibles, as well as the assumption of certain liabilities relating to the business. Net assets acquired totaled approximately $15,000,000. In connection with the acquisition, the Company wrote down its remaining investment in Newtech resulting in a one-time non-cash charge of $12,574,400 ($8,300,000 after tax). The charge has been recorded as equity in net loss of joint ventures in the Company's Statement of Operations. Under the terms of the agreement, the Company acquired the exclusive right and license to use the White-Westinghouse Trademark in North America for the design, manufacture, and sale of certain consumer electronic products and has been assigned Newtech's rights under the long-term supply contracts with the Kmart Corporation in the United States and Zellers in Canada. According to the terms of the contracts, the Company will supply Kmart and Zellers consumer electronics under the White-Westinghouse brand. The remaining term under the Kmart contract can be extended up to 2011 upon mutual consent. The Zellers contract expires in 2004. Notes receivable from Affiliates at September 30, 1999 includes $13.9 million from the sale of the Company's equity interest in Salton. The $13.9 million note has been recorded net of related deferred income for anticipated future purchases by Salton from the Company. Note: Profits earned by the Company's manufacturing subsidiary on sales to joint ventures are included in the consolidated earnings results. 3. SHAREHOLDERS' EQUITY EARNINGS PER SHARE Basic shares for the three month periods ended September 30, 1999 and 1998 were 22,478,303 and 21,132,969, respectively. Basic shares for the nine month periods ended September 30, 1999 and 1998 were 22,290,429 and 19,437,363, respectively. Included in diluted shares are common stock equivalents relating to options, warrants and convertible debt of 1,327,338 and 997,061 for the three month periods ended September 30, 1999 and 1998, respectively and 1,561,771 for the nine month period ended September 30, 1998. All common stock equivalents have been excluded from the per share calculation in the nine month period ended September 30, 1999, as the Company incurred a loss in the period and their inclusion would have been anti-dilutive. 4. 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. On June 30, 1999, a consolidated amended class action complaint was filed. The consolidated amended class action complaint was purportedly filed on behalf of those security holders of the Company who purchased such securities during a certain period in the second and third quarters 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 defendants have moved to dismiss the consolidated class action complaint. The motion is pending consideration by the Court. 9 10 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. By Order dated June 3, 1999, the Court, among other things, appointed lead counsel and directed the filing of a joint scheduling order. On June 23, 1999, the parties submitted a Joint Scheduling Report and a proposed scheduling order, which is still under consideration by the Court. The Company is currently advancing the legal expenses of the directors and officers who were named as defendants. Such defendants have agreed to repay the Company for all or any portion of such advances to which they are ultimately found not to be entitled pursuant to applicable law. Based on the information currently available to the Company, management does not believe that the indemnification of the officers and directors named as defendants in the above-listed matters will have a material adverse effect on the financial condition, results of operations or liquidity of the Company. However, the actual effects of such indemnification on the Company cannot be finally determined until the amount of such indemnification, if any, is fixed. The Company is subject to other legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability, if any, in excess of applicable insurance coverage, is not likely to have a material effect on the financial position of the Company. However, as the outcome of litigation or other claims is difficult to predict, significant changes in the estimated exposures could occur. 5. BUSINESS SEGMENT INFORMATION Summarized financial information concerning the Company's reportable segments is shown in the following table. Corporate related items, results of insignificant operations and, as it relates to segment profit (loss), income and expense not allocated to reportable segments are included in the reconciliations to consolidated results. Segment information for the three month periods ended September 30, are as follows: (In Thousands)
HOUSEHOLD WINDMERE PRODUCTS DURABLE GROUP GROUP MANUFACTURING TOTAL ----- ---------- ------------- ----- 1999 Net Sales .................................... $ 53,573 $ 126,472 $54,061 $234,106 Intersegment net sales ....................... -- -- 46,413 46,413 Operating earnings ........................... 940 17,374 9,502 27,816 1998 Net Sales .................................... 47,546 100,262 39,384 187,192 Intersegment net sales ....................... -- -- 27,064 27,064 Operating earnings ........................... 2,154 7,595 8,875 18,624 Reconciliation to consolidated amounts: 1999 1998 ------- -------- Revenues Total revenues for reportable segments ......................................... $ 234,106 $ 187,192 Other revenues ................................................................. 16,536 325 Eliminations of intersegment revenues .......................................... (46,413) (27,064) ------- -------- Total consolidated revenues ............................................... $ 204,229 $ 160,453 ======= ========
10 11
Operating earnings Total earnings for reportable segments .. $ 27,816 $ 18,624 Other earnings (loss) ................... 1,221 52 Corporate headquarters expense .......... (3,218) (2,224) Interest expense ........................ (7,212) (8,104) Equity in net earnings of joint ventures -- 362 Gain on sale of equity interest ......... -- 42,651 -------- -------- Consolidated earnings before income taxes $ 18,607 $ 51,361 ======== ========
Segment information for the nine month periods ended September 30, are as follows: (In Thousands)
HOUSEHOLD WINDMERE PRODUCTS DURABLE GROUP GROUP MANUFACTURING TOTAL ----------- ----------- -------------- ------ 1999 Net Sales ......................... $ 148,498 $269,664 $117,017 $535,179 Intersegment net sales ............ -- -- 87,193 87,193 Operating earnings (loss) ......... (3,955) 13,508 19,821 29,374 1998 Net Sales ......................... 139,369 100,797 99,111 339,277 Intersegment net sales ............ -- -- 61,508 61,508 Operating earnings (loss) ......... (268) 7,649 17,069 24,450
11 12 Reconciliation to consolidated amounts:
1999 1998 ---- ---- Revenues Total revenues for reportable segments....................... $ 535,179 $ 339,277 Other revenues............................................... 24,264 646 Eliminations of intersegment revenues........................ (87,193) (61,508) ------------- -------------- Total consolidated revenues.............................. $ 472,250 $ 278,415 ============= ============== Operating earnings (loss) Total earnings (loss) for reportable segments................ $ 29,374 $ 24,450 Other earnings............................................... 5,640 (4,413) Corporate headquarters expense............................... (7,661) (4,686) Interest expense............................................. (19,947) (10,575) Equity in net earnings (loss) of joint ventures.............. (12,894) 1,558 Gain on sale of equity interest.............................. -- 42,651 Repositioning charge......................................... -- (9,914) ------------- -------------- Consolidated earnings (loss) before income taxes............. $ (5,488) 39,071 ============= ==============
6. CONDENSED CONSOLIDATING FINANCIAL INFORMATION The following condensed consolidating financial information presents the results of operations, financial position and cash flows of the Company (on a stand alone basis), the guarantor subsidiaries of the Company's Senior Subordinated Notes ("Notes") (on a combined basis), the non-guarantor subsidiaries (on a combined basis) and the eliminations necessary to arrive at the consolidated results of the Company. The results of operations and cash flows presented below assume as if the guarantor subsidiaries were in place for all periods presented. The Company and subsidiary guarantors have accounted for investments in their respective subsidiaries on an unconsolidated basis using the equity method of accounting. The Subsidiary Guarantors are wholly-owned subsidiaries of the Company and have fully and unconditionally guaranteed the Notes on a joint and several basis. The guarantors include the following: Windmere Corporation, Windmere Holdings Corporation, Windmere Holdings Corporation II, Jerdon Products, Inc., Fortune Products, Inc., Bay Books & Tapes, Inc., Consumer Products Americas, 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. 12 13
NINE MONTHS ENDED SEPTEMBER 30, 1999 --------------------------------------------------------------------------- (In thousands) WINDMERE DURABLE NON HOLDINGS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ----------------- ---------- ---------- ------------ ------------ STATEMENT OF OPERATIONS Net Sales ................................ 0 293,786 271,186 (92,722) 472,250 Cost of goods sold............................ 0 194,909 226,347 (90,763) 330,493 ---------- ----------- ---------- ----------- ---------- Gross Profit ................................ 0 98,877 44,839 (1,959) 141,757 Operating Expenses............................ (521) 98,968 17,290 271 116,008 ---------- ----------- ---------- ----------- ---------- 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.......... 0 (3,562) 3,766 (2,570) (2,366) Equity in net earnings (loss) of joint ventures........................ 593 (13,487) 0 0 (12,894) ---------- ----------- ---------- ----------- ---------- Net earnings (loss)........................... (17,556) (8,325) 23,512 (753) (3,122) ========== =========== ========== ============ =========== BALANCE SHEET Cash ................................ 6 (3,954) 9,477 0 5,529 Accounts and other receivables................ 0 158,404 51,141 (5,529) 204,016 Receivables from affiliates................... 21,390 (39,600) 30,301 (8,847) 3,244 Inventories ................................ 0 105,281 69,278 10,921 185,480 Other current assets.......................... 0 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............ 0 12,856 65,010 0 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 0 0 10,342 Deferred income, current portion.............. 0 689 0 0 689 Income taxes payable.......................... 0 (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......... 0 269 0 783 1,052 Deferred income taxes......................... 0 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' equity................................ 447,809 799,770 314,185 (790,350) 771,414 ========== ========== ========== =========== ========= 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....................... 0 0 (289) 0 (289) Cash at beginning............................. 0 3,083 17,332 0 20,415 Cash at end ................................ 6 (3,954) 9,477 0 5,529
13 14
NINE MONTHS ENDED SEPTEMBER 30, 1998 ---------------------------------------------------------------------------- (In thousands) WINDMERE DURABLE NON HOLDINGS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ----------------- ---------- ---------- ------------ ------------ STATEMENT OF OPERATIONS Net Sales..................................... 0 236,791 103,132 (61,508) 278,415 Cost of goods sold............................ 0 180,914 83,466 (62,212) 202,168 ---------- ----------- ---------- ------------ ---------- Gross profit............................. 0 55,877 19,666 704 76,247 Operating expenses............................ (448) 61,276 2,460 270 63,558 Repositioning charge.......................... 0 9,914 0 0 9,914 ---------- ----------- ---------- ----------- ---------- Operating Income.............................. 448 (15,314) 17,207 434 2,775 Other (income) expense, net................... (277) (35,084) 1,699 (1,076) (34,738) ----------- ------------ ---------- ------------ ----------- Earnings before income taxes and minority interest in subsidiaries............................. 212 19,039 18,906 (643) 37,513 Provision for income taxes.................... 0 15,354 1,251 (5,766) 10,838 Equity in earnings of affiliated companies, net of tax.................... 151 1,407 0 0 1,558 ---------- ----------- ---------- ----------- ---------- Net earnings.................................. 362 5,092 17,655 5,124 28,233 ========== =========== ========== =========== ========== BALANCE SHEET Cash.......................................... 0 5,254 7,572 0 12,826 Accounts receivables.......................... 0 123,103 21,466 (622) 143,947 Intercompany receivables...................... 24,761 (20,296) 3,585 (538) 7,513 Inventories................................... 0 137,773 45,134 283 183,190 Other current assets.......................... 0 37,317 2,550 (1,182) 38,685 ---------- ------ ----- ----- ------ Total current assets..................... 24,761 283,151 80,307 (2,059) 386,160 Investment in affiliated companies............ 414,427 23,021 70,477 (492,135) 15,788 Property and equipment, net................... 0 59,475 31,485 0 90,960 Other assets.................................. 0 617,284 19,940 (354,438) 282,786 ---------- ----------- ---------- ------------ ---------- Total assets............................. 439,188 982,930 202,209 (848,633) 775,694 ========== =========== ========== ============ ========== Notes payable................................. 0 11,350 998 (11,350) 998 Accounts payable and accrued expenses......... 1 132,079 9,103 (622) 140,561 Current maturities of L.T..................... 8,630 0 0 0 8,630 Deferred income taxes......................... 0 15,839 866 (656) 16,049 ---------- ----------- ---------- ------------ ---------- Total current liabilities................ 8,631 159,268 10,967 (12,628) 166,238 Long term debt................................ 260,370 356,869 0 (354,869) 262,370 Deferred income, less current portion......... 0 15,218 0 824 16,042 Deferred income taxes......................... 0 12,836 2,146 (1,960) 13,022 ---------- ----------- ---------- ------------ ---------- Total liabilities........................ 269,001 544,192 13,113 (368,634) 457,672 Shareholders' equity.......................... 170,187 438,738 189,097 (479,999) 318,022 ---------- ----------- ---------- ------------ ---------- Total liabilities and shareholders equity................................. 439,188 982,930 202,209 (848,633) 775,694 ========== ========== ========== ============ ========= Cash Flow Information Net cash provided (used) in operating activities 40,685 (613,451) (5,983) 545,368 (33,382) Net cash provided (used) in investing activities (398,521) 30,606 (1,885) 100,401 (269,399) Net cash provided (used) in financing activities 357,836 588,099 7,217 (645,769) 307,383 Cash at beginning............................. 0 0 8,224 0 8,224 Cash at end................................... 0 5,254 7,572 0 12,826
7. RELATED PARTY TRANSACTIONS On April 14, 1999, the Company sold 210,000 shares of authorized Common Stock at the fair market value of $7.125 per share to its Chief Executive Officer in exchange for a promissory note. The note is on a full recourse basis, with a maturity of three years from the date of purchase and bears interest at LIBOR plus 2.75%. 14 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This document contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such statements are indicated by words or phrases such as "anticipate," "projects," "management believes," "the Company believes," "intends," "expects," and similar words or phrases. Such forward-looking statements are subject to certain risks, uncertainties or assumptions and may be affected by certain other factors. Should one or more of these risks, uncertainties or other factors materialize, or should underlying assumptions prove incorrect, actual results, performance, or achievements of the Company may vary materially from any future results, performance or achievements expressed or implied by such forward-looking statements. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. The Company disclaims any obligation to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. The Company, through its subsidiaries, is a leading diversified manufacturer and distributor of a broad range of branded and private label small household appliances, including electric housewares (kitchen and garment care), personal care, and other products. The Company manufactures and markets products under the Windmere(R) and other Company-owned brand names, under private-label brand names, under licensed brand names, such as Black & Decker(R) and, pursuant to licenses such as, the White-Westinghouse(R) brand name. The Company's customers for such products include mass merchandisers, specialty retailers and appliance distributors primarily in North America, Latin America and the Caribbean. In addition, the Company manufactures products on an OEM basis for other major consumer products companies. The Company also manufactures and markets the LitterMaid(R) self-cleaning cat litter box. RESULTS OF OPERATIONS The operating results of the Company expressed as a percentage of sales and other revenues are set forth below: NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1999 1998 ---- ---- Net Sales...................................... 100.0% 100.0% Cost of goods sold ............................ 70.0 72.6 ----- ----- Gross Profit .................................. 30.0 27.4 Selling, general and administrative expenses .. 24.6 22.8 Other (income) expense - net .................. 3.9 (12.4) Equity in net earnings (loss) of joint ventures (2.7) .6 ----- ----- Earnings (loss) before income taxes ........... (1.2) 14.0 Provision (benefit) for income taxes .......... (.5) 3.9 ----- ----- Net earnings (loss) ........................... (.7)% 10.1% ===== ===== THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 Sales and other revenues Sales and other revenues ("Revenues") for the Company increased by $43.8 million to $204.2 million, an increase of 27.3% over Revenues for the third quarter of 1998. Sales to Walmart accounted for 20% and 14% of total sales for the 1999 and 1998 periods, respectively. 15 16 The increase is primarily the result of a $26.2 million or 26.1% increase in sales by the Household Products Group. The remaining increase in revenues may be attributed to a $6.0 million increase in Windmere Group sales, including $2.5 million in LitterMaid sales and sales of Newtech electronics of approximately $14.5 million, offset by a $4.7 million decrease in Durable OEM sales. Gross Profit Margin The Company's gross profit margin decreased to 31.9% of Revenues in 1999 from 34.3% in the 1998 period. The decrease in gross profit margin is primarily the result of approximately $14.5 million in sales, at significantly lower margins, of inventory purchased as part of the second quarter Newtech acquisition. The minimal amount of inventory remaining from the June 1999 Newtech transaction should result in less dilution to fourth quarter margins. Excluding sales of Newtech inventory, the gross profit margin was 33.7% for the 1999 period as compared to the 34.3% in 1998. Productivity gains at the Company's manufacturing facilities, offset by product mix and by aggressive pricing strategies used to gain additional market share in the Black & Decker business were the primary contributors to the minimal change in gross profit rate. Selling, General and Administrative Expenses Selling, general and administrative expenses for the Company increased by $.8 million in the third quarter of 1999 yet decreased as a percentage of sales, to 19.6% from 24.3% in the 1998 period. Equity in Net Earnings of Joint Ventures In June 1999, the Company wrote down its remaining investment in Newtech and, therefore, discontinued recording its interest in the joint ventures' operations. Interest Expense Interest expense decreased to $7.2 million in 1999 from $8.1 million in 1998. The higher interest costs in 1998 were due to bridge debt outstanding during July of 1998 which was at significantly higher interest rates than the Company's existing facilities. 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, 1999 and 1998 were 22,478,303 and 21,132,969, respectively. Included in diluted shares are common stock equivalents relating to options, warrants and convertible debt of 1,327,338 and 997,061 for the three month periods ended September 30, 1999 and 1998, respectively. Windmere Group Windmere Group sales increased by $6.0 million to $53.6 million in the third quarter of 1999. The increase in Windmere Group sales is attributable to increased sales of electric housewares and growth in LitterMaid product sales partially offset by weakness in personal care sales. LitterMaid distribution sales increased by $2.5 million or 46.8% over 1998 sales. Gross profit margin for the Windmere Group decreased to 20.7% in the 1999 period as compared to 27.2% in 1998. The decrease is the result of increased sales of lower margin items comprising the period's product mix. 16 17 Selling, general and administrative expenses decreased by $.6 million in the 1999 third quarter to approximately $10.2 million and as a percentage of sales to 19.0% from 22.7% in 1998. Household Products Group Sales for the Household Products Group increased by $26.2 million to $126.5 million or 26.1% from the 1998 period. Approximately 66% of the increase in sales may be attributed to existing and new product introductions to domestic retailers. The remaining growth is the result of existing and new product introductions in Latin America and Canada. The gross profit margin for the Household Products Group decreased from 32.8% in 1999 of sales to 32.0% of sales in 1999. The decrease is the result of increased volume and productivity gains partially offset by product mix and more competitive pricing strategies used to gain additional market share. Selling, general and administrative expenses for the Household Products Group decreased by approximately $2.2 million in the 1999 third quarter to $23.1 million. The decrease is primarily the result of the exiting 19 of the 20 service contracts with Black & Decker in the second quarter. Selling, general and administrative expenses represented 18.3% and 25.2% of segment sales in the 1999 and 1998 periods, respectively. Durable Manufacturing Sales at the Company's China based manufacturing subsidiary increased by $14.7 million in the 1999 period as compared to 1998. Included in 1999 total sales are OEM sales to third parties totaling $7.6 million. Operating earnings for Durable Manufacturing increased by $.6 million to $9.5 million in the 1999 third quarter. Increased productivity and capacity utilization contributed to the improved results. NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 Sales and other revenues Sales and other revenues ("Revenues") for the Company increased by $193.8 million to $472.3 million, an increase of 70% over Revenues for the nine months ended September 30, 1998. The increase is primarily the result of an increase in Household Products Group sales of $168.9 million to $269.7 million in distribution sales and which is inclusive of HPG results for the entire 1999 period. Sales to Walmart accounted for 18% of total sales for the 1999 period. The remaining increase in revenues may be attributed to a $9.1 million increase in Windmere Group sales and $17.0 in sales of Newtech electronics offset by a decrease in Durable OEM sales of $7.8 million. Gross Profit Margin The Company's gross profit margin was 30.0% in 1999 and in 1998, excluding the $7.7 million portion of the repositioning charge recorded as cost of goods sold in the 1998 period. Productivity gains at the Company's manufacturing facilities offset by product mix and by aggressive pricing strategies used to gain additional market share in the Black & Decker business were the primary contributors to the unchanged gross profit rate. Selling, General and Administrative Expenses Selling, general and administrative expenses for the Company increased by $52.5 million to $116.0 million in the nine months ended September 30, 1999. As a percentage of sales, costs increased to 24.6% from 22.8% in the 1998 period. The increase is primarily due to the June 26, 1998 acquisition of the Household Products Group ("HPG"). 17 18 Equity in Net Earnings of Joint Ventures The Company's equity in net earnings of joint ventures decreased to a loss of $12.9 million in the 1999 period compared to income of $1.6 million in the 1998 period. The decrease is primarily the result of a one-time non cash charge of $12.6 million ($8.3 million after tax) to write down the Company's remaining investment in Newtech in conjunction with the June 1999 purchase of Newtech's assets. Interest Expense Interest expense increased to $19.9 million in 1999 from $10.6 million in 1998. The change is the result of amounts borrowed in conjunction with the acquisition of HPG, beginning in July 1998. 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, 1999 and 1998 were 22,290,429 and 19,437,363, respectively. Included in diluted shares are common stock equivalents relating to options, warrants and convertible debt of 1,561,771 for the nine month period ended September 30, 1998. All common stock equivalents have been excluded from the per share calculation in the 1999 period, as the Company incurred a loss in the period and their inclusion would have been anti-dilutive. Windmere Group Windmere Group sales increased by $9.1 million to $148.5 million in the first nine months ended September 30, 1999. The increase in Windmere Group sales is attributable to increases in LitterMaid, kitchen and seasonal product sales partially offset by weakness in personal care sales. LitterMaid distribution sales increased by $8.0 million or 66.9% over 1998 sales. Gross profit margin for the Windmere Group decreased to 19.4% in the 1999 period as compared to 21.7% in 1998. The decrease is the result of increased sales of lower margin items comprising the period's product mix. Selling, general and administrative expenses for the Windmere Group increased by approximately $2.2 million to $32.7 million or 22.0% of segment sales from $30.5 million or 21.9% of segment sales in the 1998 period. Contributing significantly to the increase were costs directly associated with the increase in LitterMaid sales volume such as royalties, a reserve for a customer who filed for bankruptcy in the period and approximately $500,000 related to the write-off of product design costs in conjunction with a change in accounting regulations. Household Products Group Sales for the Household Products Group increased by $168.9 million to $269.7 million in 1999. The Company acquired the Household Products Group on June 26, 1998, therefore group results were excluded from the first six months of 1998. The remaining increase is due to a $26.2 million increase in 1999 third quarter sales as compared to the 1998 period. Third quarter growth resulted from existing and new product introductions primarily in North America as well as Latin America and Canada. 18 19 Selling, general and administrative expenses for the Household Products Group totaled $70.2 million or 26.0% of segment sales compared to $25.4 million or 25.2% in the 1998 period. Included in selling, general and administrative expenses in the 1999 period was approximately $3.2 million in costs under contracts where Black & Decker was providing services to the Company during a transition period while the Company was putting in place its own personnel and systems and $2.4 million in costs to run back office operations at the Company's Shelton, CT location. All significant service contracts with Black & Decker have been exited as of May 31, 1999 and all back office operations have been relocated to the Company's Miami headquarters, as of June 30, 1999. Also included is approximately $9.4 million in amortization of intangibles recorded in conjunction with the acquisition. Durable Manufacturing Sales at the Company's China based manufacturing subsidiary increased by $17.9 million or 18.1% to $117.0 million in the 1999 period. Included in total sales are OEM sales to third parties totaling $29.8 million, a decrease of $7.8 million from 1998. Operating earnings for Durable Manufacturing increased by $2.8 million to $19.8 million in the 1999 period. Increased productivity and capacity utilization contributed to the improved results. Liquidity and Capital Resources At September 30, 1999, the Company's working capital was $291.8 million, as compared to $219.9 million at September 30, 1998. At September 30, 1999 and 1998, the Company's current ratio was 3.0 to 1 and 2.3 to 1, respectively, and its quick ratio was 1.6 to 1 and 1.2 to 1, respectively. The improvement in ratios is primarily the result of the acquisition. Cash balances decreased by approximately $14.9 million for the nine months ended September 30, 1999. The net cash used in operating activities is primarily the result of the increased growth in sales resulting from the June 26, 1998 acquisition of HPG resulting in higher accounts receivable and inventory balances. Cash used in investing activities totaled approximately $29.8 million for the period and is primarily the result of $17.1 million in capital expenditures at the Company's manufacturing facilities and approximately $15.0 million for the purchase of the assets of Newtech. Funds provided by financing activities totaled approximately $20.5 million in the period reflecting increased net borrowings of $19.0 million. Borrowings are used to meet additional working capital requirements associated with the increased level of operations. 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 $36.0 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 the Senior Secured Credit Facilities. The Company is currently borrowing $129.0 million under the term loan portion of its Senior Secured Credit Facilities. The Senior Secured Revolving Credit Facility as amended, provides for borrowings by the Company of up to $110.0 million through December 31, 1999 and $160.0 million thereafter and through the remainder of the term of the loan. As of November 9, 1999, the Company is borrowing $50.5 million under the Senior Secured Revolving Credit Facility and has approximately $63.8 million available for future borrowings, under all its credit facilities. Advances under the Senior Secured Revolving Credit Facility are based upon percentages of outstanding eligible accounts receivable and inventories. The Company's aggregate capital expenditures for the nine months ended September 30, 1999 were $17.1 million. The Company anticipates that the total capital expenditures for 1999 will be approximately $21.0 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. 19 20 At September 30, 1999, debt as a percent of total capitalization was 48 percent. The Company's ability to make scheduled payments of principal of, or to pay the interest on, or to refinance, its indebtedness, or to fund planned capital expenditures, product research and development expenses and marketing expenses will depend on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory, and international and United States domestic political factors and other factors that are beyond the Company's control. Based upon the current level of operations and anticipated cost savings and revenue growth, management believes that cash flow from operations and available cash, together with available borrowings under the Senior Credit and other facilities, will be adequate to meet the Company's future liquidity needs for at least the next several years. The Company may, however, need to refinance all or a portion of the principal of the indebtedness on or prior to maturity. There can be no assurance that the Company's business will generate sufficient cash flow from operations, that anticipated revenue growth and operating improvements will be realized or that future borrowings will be available under the Senior Secured Credit Facilities in an amount sufficient to enable the Company to service its indebtedness, including the Senior Subordinated Notes, or to fund its other liquidity needs. In addition, there can be no assurance that the Company will be able to effect any such refinancing on commercially reasonable terms or at all. It is the Company's intention to pay down outstanding borrowings under its Revolving Credit Facility in the first quarter of 2000. CURRENCY MATTERS While the Company transacts business predominantly in U.S. dollars and most of its revenues are collected in U.S. dollars, a portion of the Company's costs, such as payroll, rent and indirect operations costs, are denominated in other currencies, such as Chinese renminbi, Hong Kong dollars and Mexican pesos. Changes in the relation of these and other currencies to the U.S. dollar will affect the Company's cost of goods sold and operating margins and could result in exchange losses. The impact of future exchange rate fluctuations on the Company's results of operations cannot be accurately predicted. The Company uses forward exchange contracts to reduce fluctuations in foreign currency cash flows related to third party raw material and other operating purchases as well as trade receivables. The purpose of the Company's foreign currency management activity is to reduce the risk that eventual cash flows from foreign currency denominated transactions may be adversely affected by changes in exchange rates. Durable uses the Hong Kong dollar as its functional currency. The Hong Kong dollar has historically been "pegged" to a fixed exchange rate vis-a-vis the U.S. dollar. If the Hong Kong dollar were to be significantly devalued against the U.S. dollar and the exchange rate allowed to fluctuate, the Company could experience significant changes in its currency translation account which would impact the Company's future comprehensive income. The Company has acquired the Queretaro property and related assets from The Black & Decker Corporation. Because the operations of such facilities are primarily peso-denominated and the revenues derived from products manufactured at such facilities are primarily dollar-denominated, the Company is now subject to fluctuations in the value of the peso. The December 1994 devaluation of the peso had a number of effects on the Mexican economy that adversely affected the financial condition of businesses in Mexico. The devaluation caused the peso value of dollar denominated indebtedness associated with businesses in Mexico to increase significantly, and also greatly increased the rate of inflation, resulting in a sharp rise in nominal interest rates on peso-denominated financing. There can be no assurance that the peso to dollar foreign exchange rate will not be volatile in the future and that financial markets will not have a material adverse effect on the Company's business, financial condition and results of operations. The Company uses interest rate swaps of one to four years in duration to reduce the impact of changes in interest rates on its floating rate debt. The notional amounts of the agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The differential paid or received on the agreements is recognized as an adjustment of interest expense. 20 21 As of September 30, 1999, the Company had purchased interest rate swaps on $120 million notional principal amount with a market value of approximately ($98,000). The market value represents the amount the Company would have to pay to exit the contracts at September 30, 1999. The Company does not intend to exit such contracts at this time. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement of Financial Accounting Standards (FAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." FAS No. 133 establishes standards for accounting and reporting for derivative instruments, and conforms the requirements for treatment of different types of hedging activities. This statement is effective for all fiscal years beginning after June 15, 2000. The Company has not completed its evaluations of FAS No. 133. SEASONALITY The Company's business is highly seasonal, with operating results varying from quarter to quarter. The Company has historically experienced higher revenues in the third and fourth quarters of each fiscal year primarily due to increased demand by customers for products in the late summer for "back-to-school" sales and in the fall for holiday sales. As a result of the HPG acquisition, the fourth quarter has now become the Company's largest quarter. The Company's major sales occur during August through November. Sales are generally made on 45 to 90 day terms. Heaviest collections on its open accounts receivable are received from November through March, at which time the Company is in its most liquid state. YEAR 2000 ISSUES The Company uses a significant number of computer software programs and operating systems across its entire organization, including applications used in financial business systems, manufacturing and administrative functions. A complete evaluation has been performed to identify whether any of the Company's software applications contain source code that is unable to interpret the upcoming year 2000 and beyond. The appropriate modifications have been made and the Company now believes that its critical systems are Year 2000 compliant. The Company has received communications from its major suppliers and trading partners, some of who have filed reports with the Securities and Exchange Commission, and believes that they are also Year 2000 Compliant. The cost of implementing required system changes is not material to the Company's consolidated financial statements. No assurance can be given, however, that all of the Company's systems, the systems of acquired businesses and those of significant customers and suppliers will not experience Year 2000 compliance difficulties. Difficulties that arise may result in unfavorable business consequences including disruption in product shipments, delays in receipt of materials, delay in customer receipts and payments to suppliers. LEGAL PROCEEDINGS The Company 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. On June 30, 1999, a consolidated amended class action complaint was filed. The consolidated amended class action complaint was purportedly filed on behalf of those security holders of the Company who purchased such securities during a certain period in the second and third quarters 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 defendants have moved to dismiss the consolidated class action complaint. The motion is pending consideration by the Court. 21 22 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. By Order dated June 3, 1999, the Court, among other things, appointed lead counsel and directed the filing of a joint scheduling order. On June 23, 1999, the parties submitted a Joint Scheduling Report and a proposed scheduling order, which is still under consideration by the Court. The Company is currently advancing the legal expenses of the directors and officers who were named as defendants. Such defendants have agreed to repay the Company for all or any portion of such advances to which they are ultimately found not to be entitled pursuant to applicable law. Based on the information currently available to the Company, management does not believe that the indemnification of the officers and directors named as defendants in the above-listed matters will have a material adverse effect on the financial condition, results of operations or liquidity of the Company. However, the actual effects of such indemnification on the Company cannot be finally determined until the amount of such indemnification, if any, is fixed. The Company is subject to other legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability, if any, in excess of applicable insurance coverage, is not likely to have a material effect on the financial position of the Company. However, as the outcome of litigation or other claims is difficult to predict, significant changes in the estimated exposures could occur. MANUFACTURING OPERATIONS The Company's products are manufactured primarily at the Company's facilities in the PRC and Mexico. The Company has ceased manufacturing at the Asheboro facility as of March 31, 1999 and completely exited the facility as of June 30, 1999. Prior to the HPG acquisition, the majority of the Company's products were manufactured by Durable, its wholly-owned Hong Kong subsidiary operating in Bao An County, Guangdong Province of the People's Republic of China, which is approximately 60 miles northwest of Central, Hong Kong. The Company has a significant amount of its assets in the People's Republic, primarily consisting of inventory, equipment and molds. The supply and cost of products, as well as finished products, can be adversely affected, among other reasons, by changes in foreign currency exchange rates, increased import duties, imposition of tariffs, imposition of import quotas, interruptions in sea or air transportation and political or economic changes. From time to time, the Company explores opportunities to diversify its sourcing and/or production of certain products to other low-cost locations or with other third parties or joint venture partners in order to reduce its dependence on production in the People's Republic and/or reduce Durable's dependence on the Company's existing distribution base. However, at the present time, the Company intends to continue its production in the People's Republic and Mexico. The Mexican government exercises significant influence over many aspects of the Mexican economy. Accordingly, the actions of the Mexican government concerning the economy could have a significant effect on private sector entities in general and the Company in particular. In addition, during the 1980s and 1990s, Mexico experienced periods of slow or negative growth, high inflation, significant devaluations of the peso and limited availability of foreign exchange. As a result of the Company's reliance upon manufacturing facilities in Mexico, economic conditions in Mexico could adversely affect the Company's business, financial condition and results of operations. 22 23 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. The Senior Credit Facilities accrue interest at variable rates; however, the company has purchased interest rate protection for such loans in the form of interest rate swaps. Based on the current amount of variable rate, as well as underlying swaps, the exposure to interest rate risk is not material. Fixed-rate debt obligations issued by the Company are not callable until July 31, 2003. The Company is subject to foreign currency exchange rate risk relating to receipts from customers and payments to suppliers in foreign currencies. As a general policy, the Company hedges foreign currency commitments of future payments and receipts by purchasing foreign currency-forward and option contracts. As of September 30, 1999, the notional value of such derivatives was approximately $67 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. 23 24 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 10.44 - Employment agreement dated August 2, 1999 between Windmere-Durable Holdings, Inc. and Harry Schulman. Filed herewith. 27.1 - Financial Data Schedule (for S.E.C. use only) (b) Reports on Form 8-K: None 24 25 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 12, 1999 By: /s/ HARRY D. SCHULMAN -------------------------- Harry D. Schulman Chief Operating Officer (Duly authorized to sign on behalf of the Registrant) November 12, 1999 By: /s/ TERRY L. POLISTINA --------------------------- Terry L. Polistina Senior Vice President - Finance (Duly authorized to sign on behalf of the Registrant) 25 EX-10.44 2 EMPLOYMENT AGREEMENT/ HARRY SCHULMAN 08/02/99 1 EXHIBIT 10.44 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is executed this 2nd day of August, 1999, by and between Windmere-Durable Holdings, Inc., a Florida corporation with its principal place of business at 5980 Miami Lakes Drive, Miami Lakes, Florida (the "Company"), and Harry D. Schulman, an individual residing in the State of Florida (the "Executive"). RECITALS: A. The Executive is currently employed as the Chief Operating Officer, Chief Financial Officer and Secretary of the Company. B. The Executive possesses intimate knowledge of the business and affairs of the Company and its subsidiaries, their policies, methods and personnel. C. The Board of Directors of the Company (the "Board") recognizes that the Executive has contributed to the growth and success of the Company and its subsidiaries, and desires to assure the Company and its subsidiaries of the Executive's continued employment and to compensate him therefor. D. The Board has determined that this Agreement will reinforce and encourage the Executive's continued attention an dedication to the Company and its subsidiaries. E. The Executive is willing to make his services available to the Company on the terms and conditions hereinafter set forth. AGREEMENT Therefore, in consideration of the premises, mutual covenants and agreements of the parties contained herein, and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the Company and the Executive hereby agree as follows: 1. Employment. Commencing on the Closing Date, the Company shall employ the Executive and the Executive shall accept employment by the Company, upon the terms and conditions set forth in this Agreement. 2. Term. The term of employment (the "Term") of this Agreement shall begin on the date hereof and shall terminate as provided herein. Except as otherwise provided in Sections 7, 8, 9, 10, 11 and 12 below, the Term shall be for a continuous three-year period commencing on this date and running for a period such that on each "Anniversary Date" (as defined below) an additional year automatically shall be added. On any Anniversary Date, either party may provide written notice to the other party of that party's intention not to extend the Term of this Agreement beyond the number of years then remaining in 2 the Term, which shall always be three. Such written notice shall be deemed the notice to terminate this Agreement at the end of the three-year term then in effect. The "Anniversary Date," as used herein, shall be the first day of the second year of the Term and the first day of each subsequent year, including each year beyond the first three years of the Term. It is the intention of the parties that the Term as of each Anniversary Date automatically shall be three years, that three years' written notice shall be required to terminate this Agreement, except as otherwise provided in Sections 7, 8, 9, 10, 11 and 12 below, and that said written notice to terminate may only be given on an Anniversary Date. 3. Duties. The Executive will have such duties as are assigned or delegated to the Executive by the Board or Chief Executive Officer of the Company, and will initially serve as the Chief Operating Officer, Chief Financial Officer and Secretary of the Company. The Executive will devote his entire business time, attention, skill, and energy exclusively to the business of the Company and its subsidiaries, will use his best efforts to promote the success of the Company and its subsidiaries, and will cooperate fully with the Board in the advancement of the best interests of the Company and its subsidiaries. 4. Compensation. During the Term, the Company shall compensate Executive as follows: (a) Salary. The Company shall pay Executive an annual salary of $395,000 (the "Annual Base Salary"), to be distributed in equal periodic installments according to the Company's customary payroll practices. The Annual Base Salary will increase progressively for each of the ensuing twelve month periods ("Fiscal Year") during the Term by an amount at least equal to the percentage increase in the United States Consumer Price Index for all urban consumers (CPI-U), U.S. City Average - All Items, published by the Bureau of Labor Statistics, United States Department of Labor (the "Index") for the previous calendar year. If at any time required for the determination of the Annual Base Salary adjustment as above described, the Index is no longer published or issued, the parties shall use such other index as is then generally recognized or accepted for similar determinations of purchasing power. If the parties are unable to agree on the selection of an index which would most accurately carry out the intent hereof, or if there is a dispute with respect to any computations as called for herein, then the issue with respect thereto shall be determined by arbitration according to the then existing rules of the American Arbitration Association. Nothing contained herein shall be construed to prevent the Company from increasing Executive's Annual Base Salary more often than annually or by a higher amount than required by the Index. (b) Annual Bonus. The Executive shall be entitled to receive incentive compensation (the "Incentive Compensation") for each year during the Term as set forth below: (i) Performance Bonus. At the beginning of each calendar year during the Term, the Board (or the Compensation Committee thereof) shall establish target goals for (A) earnings before interest, taxes, depreciation and amortization ("EBITDA") of the Company on a consolidated basis and (B) the Executive's personal performance (collectively, the "Performance Goals"). The Executive shall be entitled to an annual bonus (the "Performance Bonus") based 50% on the 2 3 achievement of the Performance Goal set forth in (A) above and 50% on the achievement of the Performance Goal set forth in (B) above, it being understood that a pro rata Performance Bonus may be earned by the Executive as set forth below in any year in which either Performance Goal is met. Such Performance Bonus shall be equal to a percentage of his Annual Base Salary to be determined as follows: AGGREGATE PERCENTAGE OF BONUS AS PERCENTAGE PERFORMANCE GOALS ACHIEVED OF ANNUAL BASE SALARY ----------------------------------------- ---------------------- 75% - 79% (Threshold Performance) 35% 80% - 84% 38% 85% - 89% 41% 90% - 94% 44% 95% - 99% 47% 100% - 104% (Target Performance) 50% 105% - 109% 63% 110% - 114% 66% 115% - 119% 69% 120% - 124% 72% 125% and above (Maximum Performance) 75% (ii) Synergy Bonus. At the beginning of each of the calendar years 1999, 2000, 2001 and 2002, the Board (or the Compensation Committee thereof) shall establish target goals for the synergies to be attained as a result of the integration of the business Household Products, Inc., a subsidiary of the Company (the "HPG Group"), into the Company (the "Synergy Goals"). Not later than 90 days after the end of each such year in which the portion of the Synergy Goals achieved are at least equal to 75%, the Executive shall be paid a cash bonus (the "Synergy Bonus") equal to a percentage of his Annual Base Salary to be determined as follows: AGGREGATE PERCENTAGE OF BONUS AS PERCENTAGE SYNERGY GOALS ACHIEVED OF ANNUAL BASE SALARY ---------------------------------- ---------------------- 75% - 79% (Threshold Performance) 5% 80% - 84% 7% 85% - 89% 9% 90% - 94% 11% 95% - 99% 13% 100% - 104% (Target Performance) 15% 105% - 109% 17% 110% - 114% 19% 115% - 119% 21% 120% - 124% 23% 125% and above (Maximum Performance) 25% 3 4 (iii) Special Bonus. From time to time during the Term, as determined by the Compensation Committee, the Executive shall be entitled to additional bonuses to be paid in cash, stock or otherwise. 5. Expense Reimbursement and Other Benefits. (a) Reimbursement of Expenses. During the term of Executive's employment hereunder, the Company, upon the submission of proper substantiation, including copies of all relevant invoices, receipts or other evidence reasonably requested by the Company, by the Executive, shall reimburse the Executive for all reasonable expenses actually paid or incurred by the Executive in the course of and pursuant to the business of the Company, including first class or business class air travel. (b) Executive Benefits. Executive shall participate in the Company's Group Health and Hospitalization Plan, Group Life Insurance Plan, Group Disability Insurance Plan and all other insurances, or insurance plans (collectively, the "Welfare Benefits"), and Executive benefits and bonuses covering the Company senior executive officers as are now or may in the future be in effect, subject to applicable eligibility requirements. Additionally, the Company shall provide the Executive with life insurance in an amount equal to five times his Annual Base Salary. During the Term, the Company shall pay for (i) the Executive's annual dues in a country club and (ii) tax preparation and financial planning for the Executive on an annual basis up to a maximum of $5,000. Notwithstanding anything to the contrary contained in this Agreement, the Executive shall be entitled to all benefits, including bonuses, paid or given by the Company to executive officers of the Company during the Term, and nothing contained in this Agreement shall in any way be deemed to limit the Executive's receipt of or participation in such benefits, bonuses or benefit plans or to preclude the Company from making additional payments, in the form of bonuses or otherwise, or conferring additional benefits upon the Executive. Additionally, if in the future the Company adopts a supplemental executive retirement plan, a deferred compensation plan or similar arrangement, the Executive shall be entitled to participate in such plan or arrangement on the terms and conditions consistent with those applicable to senior executive officers as determined by the Compensation Committee or the Board of Directors. (c) Stock Options. During the Term of this Agreement, the Executive shall be eligible to be granted options to acquire shares of the Company Common Stock under (and therefore subject to all terms and conditions of ) the Company stock option plans as then in effect, and all rules and regulations of the Securities and Exchange Commission applicable to stock option plans. Such options will contain such restrictions as required by the Board or the applicable committee of the Board charged with administration of the stock option plan. The number of shares of Common Stock subject to the stock options shall be adjusted for any subsequent stock splits, stock dividends or similar recapitalizations of the Company's Common Stock which results in an increase or decrease of the number of shares of outstanding Common Stock of the Company. The number of options and terms and conditions of options shall be determined in the sole discretion of the Board, or applicable committee thereof, and shall be based on several factors, including the performance of the Company on a consolidated basis. 4 5 (d) Automobile. During the Term, the Company shall provide Executive with an automobile or a monthly automobile allowance, such automobile or allowance to be substantially equal in value to, or greater in value than, the automobile which is currently being provided to Executive. (e) Vacation. During the Term, the Executive will be entitled to four weeks' paid vacation for each year. The Executive will also be entitled to the paid holidays and other paid leave set forth in the Company's policies. Vacation days and holidays during any fiscal year that are not used by the Executive during such fiscal year may not be carried over and used in any subsequent fiscal year. 6. Restrictions. (a) Non-Competition. During the Term and for a one year period after the termination of the Term for any reason, the Executive shall not, directly or indirectly, engage in or have any interest in any sole proprietorship, partnership, corporation or business or any other person or entity (whether as an Executive, officer, director, partner, agent, security holder, creditor, consultant or otherwise) that directly or indirectly (or through any affiliated entity) engages in competition with the Company (for this purpose, any business that engages in the manufacture or distribution of products similar to those products manufactured or distributed by the Company at the time of termination of the Agreement shall be deemed to be in competition with the Company); provided that such provision shall not apply to the Executive's ownership of Common Stock of the Company or the acquisition by the Executive, solely as an investment, of securities of any issuer that is registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended, and that are listed or admitted for trading on any United States national securities exchange or that are quoted on the National Association of Securities Dealers Automated Quotations System, or any similar system or automated dissemination of quotations of securities prices in common use, so long as the Executive does not control, acquire a controlling interest in or become a member of a group which exercises direct or indirect control or, more than five percent of any class of capital stock of such corporation. (b) Nondisclosure. During the Term and for a one year period after the termination of the Term for any reason, the Executive shall not at any time divulge, communicate, use to the detriment of the Company or for the benefit of any other person or persons, or misuse in any way, any Confidential Information (as hereinafter defined) pertaining to the business of the Company. Any Confidential Information or data now or hereafter acquired by the Executive with respect to the business of the Company (which shall include, but not be limited to, information concerning the Company's financial condition, prospects, technology, customers, suppliers, sources of leads and methods of doing business) shall be deemed a valuable, special and unique asset of the Company that is received by the Executive in confidence and as a fiduciary, and Executive shall remain a fiduciary to the Company with respect to all of such information. For purposes of this Agreement, "Confidential Information" means 5 6 information disclosed to the Executive or known by the Executive as a consequence of or through his employment by the Company (including information conceived, originated, discovered or developed by the Executive) prior to or after the date hereof, and not generally known, about the Company or its business. Notwithstanding the foregoing, nothing herein shall be deemed to restrict the Executive from disclosing Confidential Information to the extent required by law. None of the foregoing obligations and restrictions apply to any Confidential Information that the Executive demonstrates was or became generally available to the public other than as a result of disclosure by the Executive. (c) Nonsolicitation of Executives and Clients. During the Term and for a one year period after the termination of the Term for any reason, the Executive shall not, directly or indirectly, for himself or for any other person, firm, corporation, partnership, association or other entity, other than in connection with the performance of Executive's duties under this Agreement, (a) employ or attempt to employ or enter into any contractual arrangement with any Executive or former Executive of the Company, unless such Executive or former Executive has not been employed by the Company for a period in excess of six months, (b) call on or solicit any of the actual or targeted prospective clients of the Company on behalf of any person or entity in connection with any business competitive with the business of the Company, and/or (c) make known the names and addresses of such clients or any information relating in any manner to the Company's trade or business relationships with such customers (unless the Executive can demonstrate that such information was or became generally available to the public other than as a result of a disclosure by the Executive). (d) Ownership of Developments. All copyrights, patents, trade secrets, or other intellectual property rights associated with any ideas, concepts, techniques, inventions, processes, or works of authorship developed or created by Executive during the course of performing work for the Company or its customers (collectively, the "Work Product") shall belong exclusively to the Company and shall, to the extent possible, be considered a work made by the Executive for hire for the Company within the meaning of Title 17 of the United States Code. To the extent the Work Product may not be considered work made by the Executive for hire for the Company, the Executive agrees to assign, and automatically assign at the time of creation of the Work Product, without any requirement of further consideration, any right, title, or interest the Executive may have in such Work Product. Upon the request of the Company, the Executive shall take such further actions, including execution and delivery of instruments of conveyance, as may be appropriate to give full and proper effect to such assignment. (e) Books and Records. All books, records, and accounts relating in any manner to the customers of the Company, whether prepared by the Executive or otherwise coming into the Executive's possession, shall be the exclusive property of the Company and shall be returned immediately to the Company on termination of the Executive's employment hereunder or on the Company's request at any time. (f) Definition of Company. For purposes of this Section 6, the term "Company" also shall include, along with all current direct and indirect subsidiaries, any existing or future subsidiaries of the Company that are operating during the time periods described herein and any other entities that directly or indirectly, through one or more intermediaries, control, are controlled by or are under common control with the Company during the periods described herein. 6 7 (g) Acknowledgment by Executive. The Executive acknowledges and confirms that (a) the restrictive covenants contained in this Section 6 are reasonably necessary to protect the legitimate business interests of the Company, and (b) the restrictions contained in this Section 6 (including without limitation the length of the term of the provisions of this Section 6) are not overbroad, overlong, or unfair and are not the result of overreaching, duress or coercion of any kind. The Executive further acknowledges and confirms that his full, uninhibited and faithful observance of each of the covenants contained in this Section 6 will not cause him any undue hardship, financial or otherwise, and that enforcement of each of the covenants contained herein will not impair his ability to obtain employment commensurate with his abilities and on terms fully acceptable to him or otherwise to obtain income required for the comfortable support of him and his family and the satisfaction of the needs of his creditors. The Executive acknowledges and confirms that his special knowledge of the business of the Company is such as would cause the Company serious injury or loss if he were to use such ability and knowledge to the benefit of a competitor or were to compete with the Company in violation of the terms of this Section 6. The Executive further acknowledges that the restrictions contained in this Section 6 are intended to be, and shall be, for the benefit of and shall be enforceable by, the Company's successors and assigns. (h) Reformation by Court. In the event that a court of competent jurisdiction shall determine that any provision of this Section 6 is invalid or more restrictive than permitted under the governing law of such jurisdiction, then only as to enforcement of this Section 6 within the jurisdiction of such court, such provision shall be interpreted and enforced as if it provided for the maximum restriction permitted under such governing law. (i) Extension of Time. If the Executive shall be in violation of any provision of this Section 6, then each time limitation set forth in this Section 6 shall be extended for a period of time equal to the period of time during which such violation or violations occur. If the Company seeks injunctive relief from such violation in any court, then the covenants set forth in this Section 6 shall be extended for a period of time equal to the pendency of such proceeding including all appeals by the Executive. (j) Survival. The provisions of this Section 6 shall survive the termination of this Agreement, as applicable. 7. Death. The Term shall terminate upon the death of Executive and be of no further force or effect. Upon such termination, the Company will pay the Executive's estate a lump sum equal to the sum of (A) the Annual Base Salary at the date of termination multiplied by the number of years remaining in the Term, and (B) the product of the sum of the Performance Bonus for the prior year multiplied by the number of years remaining in the Term. 7 8 8. Disability. If during the Term Executive is unable to perform his services, by reason of illness or incapacity, for a period of 180 consecutive days or more, the Company may, at its option, upon written notice to Executive, terminate the Term and his employment hereunder. If the Term is terminated as a result of the Executive's disability, the Company will pay the Executive (A) his Annual Base Salary at the date of termination for the period remaining in the Term to be distributed in periodic installments according to the Company's customary payroll practices, and (B) a lump sum equal to the product of the sum of the Performance Bonus for the prior year multiplied by the number of years remaining in the Term, to be paid at the time of such termination. The Company shall also continue to pay the premiums for the same or substantially similar Welfare Benefits for the remainder of the Term. Such termination shall not affect any rights of Executive to insurance payments due to Executive as a result of the insurance coverage provided for in Section 5(b) above. Notwithstanding the foregoing, if the Executive shall find other employment during the period he is receiving payments pursuant to this Section 8, then the Executive shall promptly notify the Company in writing of the date and terms of such employment and the Company shall be entitled to reduce the amount payable to the Executive pursuant to this Section 8 during the period from the commencement of such other employment by the cash compensation received and to be received by the Executive for services rendered in connection with such other employment. 9. Termination for Cause. (a) The Company shall have the right to terminate the Term and the Executive's employment hereunder for Cause (as defined below). Upon any termination pursuant to this Section 9, the Company shall pay to the Executive any unpaid Annual Base Salary through the effective date of termination specified in such notice. The Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of termination, subject, however, to the provisions of Section 5(a)). (b) For purposes hereof, the term "Cause" shall mean: (A) the willful and continued failure by the Executive to substantially perform his duties with the Company, other than any such failure resulting from his incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance by the Executive of a notice of termination for Good Reason (as defined in section 11 hereof), after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (B) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of this section, no act or failure to act on the part of the Executive shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a copy of the resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with his counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth above in clauses (A) or (B) above. 8 9 10. Termination Without Cause. At any time the Company shall have the right to terminate the Term and the Executive's employment hereunder by written notice to the Executive. Upon any termination pursuant to this Section 10 (that is not a termination under any of Sections 7, 8, 11 or 12), the Company shall pay to the Executive a lump sum equal to the sum of (A) the Annual Base Salary at the date of termination multiplied by the number of years remaining in the Term, and (B) the product of the sum of the Performance Bonus for the prior year multiplied by the number of years remaining in the Term. The Company shall also continue to pay the premiums for the same or substantially similar Welfare Benefits and the Executive shall be entitled to the other benefits set forth in Section 5(b), (d) and (e) for the remainder of the Term. Further, any Company stock option granted to Executive shall be exercisable immediately and the Company stock acquired pursuant to such exercise may be sold by Executive subject to no restrictions by the Company whatsoever (other than those imposed by federal and state securities laws). The Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of termination, subject, however, to the provisions of Section 5(a)). The Executive shall be entitled to receive all severance payments and benefits hereunder regardless of any future employment undertaken by the Executive as long as he is in full compliance with the terms of this Agreement. 11. Termination by Executive. (a) The Executive shall at all times have the right, upon 60 days written notice to the Company, to terminate the Term and his employment hereunder. (b) Upon any termination pursuant to this Section 11 by the Executive without Good Reason (as defined below), the Company shall pay to the Executive any unpaid Annual Base Salary through the effective date of termination specified in such notice. The Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of termination, subject, however, to the provisions of Section 5(a)). The Executive shall be entitled to receive all severance payments and benefits hereunder regardless of any future employment undertaken by the Executive as long as he is in full compliance with the terms of this Agreement. (c) Upon any termination pursuant to this Section 11 by the Executive for Good Reason, the Company shall pay to the Executive the same amounts that would have been payable by the Company to the Executive under Section 10 of this Agreement if the Executive's employment had been terminated by the Company without Cause. The Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of termination, subject, however, to the provisions of Section 5(a)). 9 10 (d) For purposes of this Agreement, "Good Reason" shall mean (i) the assignment to the Executive of any duties inconsistent in any material respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3 of this Agreement, or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) the relocation of the Executive to another location more than 50 miles from his current location without his consent, or (iii) any failure by the Company to comply with any of the material provisions of Section 4 of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive. 12. Change in Control. (a) In the event that (i) a Change in Control (as defined in paragraph (b) of this Section 12) in the Company shall occur during the Term, and (ii) prior to the earlier of the expiration of the Term and one year after the date of the Change in Control, the Term and Executive's employment with the Company is terminated by the Company without Cause, as defined in Section 9(b) (and other than pursuant to Section 7 by reason of the Executive's death or Section 8 by reason of the Executive's disability) or the Executive terminates the Term and his employment for Good Reason, as defined in Section 11(d), the Company shall (1) pay to the Executive any unpaid Annual Base Salary through the effective date of termination, (2) pay to the Executive the Incentive Compensation, if any, not yet paid to the Executive for any year prior to such termination, at such time as the Incentive Compensation otherwise would have been payable to the Executive, (3) at the time of such termination, pay to the Executive a lump sum equal to the sum of (A) the Annual Base Salary at the date of termination multiplied by the number of years remaining in the Term, and (B) the product of the sum of the Performance Bonus for the prior year multiplied by the number of years remaining in the Term. The Company shall also continue to pay the premiums for the same or substantially similar Welfare Benefits for the number of years remaining in the Term. Further, any Company stock option granted to Executive shall be exercisable immediately and the Company stock acquired pursuant to such exercise may be sold by Executive subject to no restrictions by the Company whatsoever (other than those imposed by federal and state securities laws). The Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of termination, subject, however, to the provisions of Section 5(a)). (b) For purposes of this Agreement, the term "Change in Control" shall mean: (i) Approval by the shareholders of the Company of (x) a reorganization, merger, consolidation or other form of corporate transaction or series of transactions, in each case, with respect to which persons who were the shareholders of the Company immediately prior to such reorganization, merger or consolidation or other transaction do not, immediately thereafter, own more than 50% of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company's then outstanding voting securities, or (y) a liquidation or dissolution of the Company or (z) the sale of all or substantially all of the assets of the Company (unless such reorganization, merger, consolidation or other corporate transaction, liquidation, dissolution or sale is subsequently abandoned); or 10 11 (ii) Individuals who, as of the date hereof, constitute the Board (as of the date hereof the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or (iii) The acquisition (other than from the Company) by any person, entity or "group", within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act (excluding, for this purpose, the Company or its subsidiaries, or any Executive benefit plan of the Company or its subsidiaries) which acquires beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act), of 20% or more of either the then outstanding shares of the Company's Common Stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally in the election of directors. (c) The payments made pursuant to paragraph (a) above shall be in lieu of any and all compensation due to Executive for the years that would otherwise be remaining in the Term. Upon receipt of said lump sum payment, this Agreement and all rights and duties of the parties shall be terminated, except as follows. In consideration for such lump sum payment and for the right to terminate under the conditions set forth above, Executive agrees to consult with the Company (or its successors), and its officers if requested to do so for a period of at least two years from the date of such termination. However, Executive shall be required to devote only such part of his time to such services as Executive believes reasonable in Executive's sole discretion, and the time and date such services are offered shall be determined by Executive so long as that time and date is within a reasonable period of time after the request. It is expressly agreed that the Company's rights to avail itself of the advice and consultation services of Executive shall at all times be exercised in a reasonable manner, that adequate notice shall be given to Executive in such events, and that non-compliance with any such request by Executive for good reason, including, but not limited to, ill health or prior commitments, shall not constitute a breach or violation of this Agreement. Executive agrees that, except for reimbursement of all reasonable expenses incurred by him with respect to such consultation and advisory services, payable as such consultation and advisory services are rendered, he shall not be entitled to any further compensation. It is understood that in furnishing any advisory and consulting services provided herein, Executive shall not be an Executive of the Company but shall act in the capacity of independent contractor. 11 12 13. Waivers. It is understood that either party may waive the strict performance of any covenant or agreement made herein; however, any waiver made by a party hereto must be duly made in writing in order to be considered a waiver, and the waiver of one covenant or agreement shall not be considered a waiver of any other covenant or agreement unless specifically in writing as aforementioned. 14. Savings Provisions. The invalidity, in whole or in part, of any covenant or restriction, or any section, subsection, sentence, clause, phrase or word, or other provisions of this Agreement, as the same may be amended from time to time shall not affect the validity of the remaining portions thereof. 15. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Florida without giving effect to its choice of law provision. 16. Notices. If either party desires to give notice to the other in connection with any of the terms and provisions of this Agreement, said notice must be in writing and shall be deemed given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case addressed to the party for whom it is intended as follows (or such other addresses as either party may designated by notice to the other party): If to the Company: Windmere-Durable Holdings, Inc. 5980 Miami Lakes Drive Miami, Lakes, Florida 33014 Attn: Chief Executive Officer If to Executive: At the most recent home address of Executive on the official records of the Company 17. Default. In the event either party defaults in the performance of its obligations under this Agreement, the non-defaulting party may, after giving 30 days notice to the defaulting party to provide a reasonable opportunity to cure such default, proceed to protect its rights by suit in equity, action at law, or, where specifically provided for herein, by arbitration, to enforce performance under this Agreement or to recover damages for breach thereof, including all costs and attorneys' fees, whether settled out of court, arbitrated, or tried (at both trial and appellate levels). 18. Section 162(m) Limits. Notwithstanding any other provision of this Agreement, if and to the extent that any remuneration payable by the Company to the Executive for any year would exceed the maximum amount of such remuneration that the Company may deduct for that year by reason of Section 162(m) of the Code, payment of the portion of the remuneration for that year that would not be so deductible under Section 162(m) shall, in the sole discretion of the Board, be deferred so that it shall become payable at such time or times as the Board reasonably determines that it would be deductible by the Company under Section 162(m), with interest at the "short-term applicable federal rate" as such term is defined in Section 1274(d) of the Code. 12 13 19. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment, distribution or other action by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, determined with regard to any additional payments required under this Section 19) (a "Payment") would be subject to an excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by the Executive with respect to any such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall make a payment to the Executive (a "Gross-Up Payment") in an amount equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of paragraph (c) of this Section 19, all determinations required to be made under this Section 19, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Grant Thornton LLP, or such other independent public accounting firm regularly engaged by the Company from time to time (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Executive within 20 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Company shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 19, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal and state income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 19 and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. 13 14 (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 19(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. 14 15 (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 19(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 19(c)) promptly, after receipt by Executive of such refund, pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 19(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 20. No Third Party Beneficiary. Nothing expressed or implied in this Agreement is intended, or shall be construed, to confer upon or give any person other than the Company, the parties hereto and their respective heirs, personal representatives, legal representatives, successors and assigns, any rights or remedies under or by reason of this Agreement. 21. Waiver of Jury Trial. ALL PARTIES KNOWINGLY WAIVE THEIR RIGHTS TO REQUEST A TRIAL BY JURY IN ANY LITIGATION IN ANY COURT OF LAW, TRIBUNAL OR LEGAL PROCEEDING INVOLVING THE PARTIES HERETO OR ANY DISPUTES ARISING OUT OF OR RELATED TO THIS AGREEMENT. [Signatures on following page.] 15 16 IN WITNESS WHEREOF, the Company, by its appropriate officer, signed this Agreement and Executive have signed this Agreement, as of the day and year first above written. WINDMERE-DURABLE HOLDINGS, INC. By: /s/ David M. Friedson -------------------------------------- EXECUTIVE /s/ Harry D. Schulman ----------------------------------------- Harry D. Schulman 16 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1,000,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 5,529 0 204,016 7,970 185,480 439,594 146,563 68,697 771,414 147,755 130,000 0 0 2,251 319,846 771,414 472,250 472,250 330,493 116,008 0 1,755 19,947 (5,488) (2,366) (3,122) 0 0 0 (3,122) (.14) (.14) The [EPS-PRIMARY] amount represents BASIC earnings per share and the [EPS-DILUTED] amount represents DILUTED earnings per share in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share.
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