-----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, HqT7pCX8OV557UrWJrUJeD+U5vKRgE2fYLYzYYe+buX+RvnP5sOcBcKM5DlcvJhI bqFbhag9yOwDKKQqGPEzKA== 0000950144-99-006301.txt : 19990518 0000950144-99-006301.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950144-99-006301 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99626830 BUSINESS ADDRESS: STREET 1: 5980 MIAMI LAKES DR CITY: MIAMI LAKES STATE: FL ZIP: 33014 BUSINESS PHONE: 3053622611 MAIL ADDRESS: STREET 1: 5980 MIAMI LAKES DRIVE CITY: MIAMI LAKES STATE: FL ZIP: 33014 FORMER COMPANY: FORMER CONFORMED NAME: WINDMERE CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SAVE WAY INDUSTRIES INC DATE OF NAME CHANGE: 19830815 FORMER COMPANY: FORMER CONFORMED NAME: SAVE WAY BARBER & BEAUTY SUPPLIES INC DATE OF NAME CHANGE: 19770626 10-Q 1 WINDMERE-DURABLE HOLDINGS INC 10-Q 3/31/99 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 March 31, 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 Identification Number) incorporation or organization) 5980 MIAMI LAKES DRIVE, MIAMI LAKES, FLORIDA 33014 - -------------------------------------------- ---------------------- (Address of principal executive offices) (Zip Code) (305) 362-2611 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirement for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: NUMBER OF SHARES OUTSTANDING CLASS ON MAY 12, 1999 ----- ----------------------------- Common Stock, $.10 Par Value 22,114,066 2 WINDMERE-DURABLE HOLDINGS, INC. INDEX PART I. FINANCIAL INFORMATION ITEM 1. Consolidated Statements of Earnings for the Three Months Ended March 31, 1999 and 1998 3 Consolidated Balance Sheets as of March 31, 1999, and December 31, 1998 4-5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 6-7 Notes to Consolidated Financial Statements 8-17 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18-27 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 27 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 28 ITEM 6. Exhibits and Reports on Form 8-K 28 SIGNATURES 29
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 March 31, -------------------------------------------------------- 1999 1998 ------------------------- ------------------------- Sales and Other Revenues $ 118,853 100.0% $ 55,394 100.0% Cost of Goods Sold 85,153 71.6 42,511 76.7 --------- --------- --------- --------- Gross Profit 33,700 28.4 12,883 23.3 Selling, General and Administrative Expenses 35,870 30.2 11,706 21.1 --------- --------- --------- --------- Operating Profit (Loss) (2,170) (1.8) 1,177 2.2 Other (Income) Expense Interest Expense 6,205 5.2 1,045 1.9 Interest and Other Income (289) (.2) (680) (1.2) --------- --------- --------- --------- 5,916 5.0 365 .7 Earnings (Loss) before Equity in Net Earnings (Loss) of Joint Ventures and Income Taxes (8,086) (6.8) 812 1.5 Equity in Net Earnings (Loss) of Joint Ventures (519) (.4) 445 .8 --------- --------- --------- --------- Earnings (Loss) Before Income Taxes (8,605) (7.2) 1,257 2.3 Provision (Benefit) for Income Taxes (2,076) (1.7) 121 .2 --------- --------- --------- --------- Net Earnings (Loss) $ (6,529) (5.5)% $ 1,136 2.1% ========= ========= ========= ========= Earnings Per Share - basic $ (.30) $ .06 ========= ========= Earnings Per Share - diluted $ (.30) $ .06 ========= =========
3 The accompanying notes are an integral part of these statements. 4 WINDMERE-DURABLE HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS)
3/31/99 12/31/98 -------- -------- ASSETS CURRENT ASSETS Cash & Cash Equivalents $ 13,794 $ 20,415 Accounts and Other Receivables, less allowances of $8,474, $7,367 and $1,068, respectively 127,104 165,837 Receivables from Affiliates (Note 2) 4,270 5,589 Inventories Raw Materials 10,002 12,648 Work-in-process 22,732 28,727 Finished Goods 122,539 124,090 -------- -------- Total Inventories 155,273 165,465 Prepaid Expenses 17,615 16,709 Refundable Income Taxes 6,555 6,555 Future Income Tax Benefits 24,170 18,277 -------- -------- Total Current Assets 348,781 398,847 INVESTMENTS IN JOINT VENTURES (NOTE 2) 15,182 15,708 PROPERTY, PLANT & EQUIPMENT - AT COST, less accumulated depreciation of $62,554, $59,524 and $52,014, respectively 76,422 76,077 Notes Receivable from Affiliate 7,789 7,891 OTHER ASSETS 241,831 244,214 -------- -------- TOTAL ASSETS $690,005 $742,737 ======== ========
4 5 WINDMERE-DURABLE HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS) CONTINUED
3/31/99 12/31/98 --------- --------- LIABILITIES CURRENT LIABILITIES Current Maturities of Long-Term Debt $ 7,842 $ 8,630 Accounts Payable and Accrued Expenses 94,191 119,611 Income taxes payable -- 2,693 Deferred Income, current portion 637 479 --------- --------- Total Current Liabilities 102,670 131,413 LONG-TERM DEBT 256,280 272,370 DEFERRED INCOME TAXES 12,131 12,132 DEFERRED INCOME, less current portion 1,464 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: 22,091, 22,091 and 18,722, respectively 2,209 2,209 Paid-in Capital 145,184 145,161 Retained Earnings 171,310 177,839 Unrealized Foreign Currency Translation Adjustment (1,243) (1,191) --------- --------- Total Shareholders' Equity 317,460 324,018 --------- --------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 690,005 $ 742,737 ========= =========
The accompanying notes are an integral part of these statements. 5 6 WINDMERE-DURABLE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Three Months Ended March 31, ----------------------------- 1999 1998 ----------- ----------- Cash flows from operating activities: Net earnings (Loss) $ (6,529) $ 1,136 Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation of property, plant and equipment 4,400 1,861 Amortization of intangible assets 4,330 213 Amortization of deferred income -- (125) Net change in allowance for losses on accounts receivable 1,107 (44) Equity in net earnings (loss) of joint ventures 526 (608) Changes in assets and liabilities Decrease in accounts and other receivables 37,626 4,875 Decrease in inventories 10,192 2,403 Increase in prepaid expenses (906) (2,414) Increase in other assets (1,845) (180) Decrease in accounts payable and accrued expenses (25,420) (10,729) Increase in current and deferred income taxes (8,587) 1,093 Decrease in deferred income (1,181) -- Increase (decrease) in other accounts (52) 22 -------- -------- Net cash provided by (used in) operating activities 13,661 (2,497) Cash flows from investing activities: Additions to property, plant and equipment - net (4,745) (2,671) (Decrease) increase in receivable accounts and notes from affiliates 1,318 (2,085) -------- -------- Net cash used in investing activities (3,427) (4,756)
6 7 WINDMERE-DURABLE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) CONTINUED
Three Months Ended March 31, ---------------------------- 1999 1998 ------- -------- Cash flows from financing activities: Net borrowings under lines of credit $ -- $ 2,470 Payments of long-term debt - net (16,878) (654) ------- ------- Exercise of stock options and warrants 23 2,050 Payment of withholding tax on stock option exercises -- (2,346) ------- ------- Net cash provided by (used in) financing activities (16,855) 1,520 ------- ------- Decrease in cash and cash equivalents (6,621) (5,733) Cash and cash equivalents at beginning of year 20,415 8,224 ------- ------- Cash and cash equivalents at end of quarter $ 13,794 $ 2,491 ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for: Interest $ 9,615 $1,643 Income taxes $2,505 $ 29
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 March 31, 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 March 31, 1999 and 1998 are $20,000,000 and $23,000,000, respectively, in contracts to purchase Hong Kong dollars, forward. Also outstanding are option contracts to sell $9,000,000 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 to reduce the impact of changes in interest rates on its floating rate debt. The notational amounts of the swap agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The differential paid or received on the agreements is recognized as an adjustment of interest expense. As of March 31, 1999, the Company had purchased swaps on $70 million notional principal amount with a market value of approximately ($600,000). The market value represents the amount the Company would have to pay to exit the contracts at March 31, 8 9 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"). On July 28, 1998, the Company consummated the sale of its equity interest in Salton Products, Inc. ("Salton"). Financial information for Salton has, therefore, been excluded from the 1999 period results. Arrangements between the Company and Salton pertaining to the Kmart contract, pursuant to which Salton provides Kmart with products under the White-Westinghouse brand name, are continuing with certain modifications. Summarized financial information of the unconsolidated companies is as follows: (In Thousands)
Three Three Months Ended Year Ended Months Ended 3/31/99 12/31/98 3/31/98 ------------ ---------- ------------ EARNINGS Sales $ 29,945 $346,280 $107,064 Gross Profit $ 2,422 $ 50,986 $ 29,746 Net Earnings (Loss) $ (792) $ 5,919 $ 1,541 BALANCE SHEET Current Assets $ 34,188 $ 58,248 $172,539 Noncurrent Assets $ 10,172 $ 12,079 $ 41,679 Current Liabilities $ 24,425 $ 49,220 $140,171
Notes receivable from affiliates at March 31, 1999 include approximately $8.1 million from the 1997 sale of one of the Company's manufacturing subsidiaries and $15.0 million from the sale of the Company's equity interest in Salton. The $15.0 million note has been recorded net of related deferred income for anticipated future purchases by Salton from the Company. All sales made by joint ventures in the three month periods ended March 31, 1999 and 1998 were to entities other than members of the consolidated group. Sales made by the Company to Salton in the three month periods ended March 31, 1999 and 1998 totaled $7.9 million and $6.4 million, respectively. Note: Profits earned by the Company's manufacturing subsidiary on sales to joint ventures are included in the consolidated earnings results and are not part of the above table. 9 10 3. SHAREHOLDERS' EQUITY EARNINGS PER SHARE In 1997, the Company adopted Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." Basic shares for the three month periods ended March 31, 1999 and 1998 were 22,090,966 and 18,413,731, respectively. Included in diluted shares are common stock equivalents relating to options, warrants and convertible debt of 1,779,910 for the three month period ended March 31, 1998. All common stock equivalents have been excluded from the per share calculation for the 1999 period, as the Company incurred a net loss and their inclusion would have been anti-dilutive. 4. COMMITMENTS AND CONTINGENCIES The Company, Salton, Newtech, White Consolidated Industries, Inc. ("White Consolidated"), and certain other parties have been named as defendants in litigation filed by Westinghouse Electric Corporation ("Westinghouse") in the United Stated District Court for the Western District in Pennsylvania on December 18, 1996. The action arises from a dispute between Westinghouse and White Consolidated over rights to use the "Westinghouse" trademark for consumer products, based on transactions between Westinghouse and White Consolidated in the 1970's and the parties subsequent conduct. Prior to the filing of Westinghouse's complaint against the Company, White Consolidated, on November 14, 1996, filed a complaint in the United States District Court for the Northern District of Ohio against Westinghouse and another corporation for trademark infringement, dilution, false designation or origin and false advertisement, seeking both injunctive relief and damages. It was subsequently determined that the entire dispute will be heard in the United States District Court for the Western District of Pennsylvania. The action by Westinghouse seeks, among other things, an injunction enjoining the defendants from using the trademark, unspecified damages and attorney's fees. Pursuant to the Indemnification Agreement dated January 23, 1997 by and among White Consolidated, Kmart Corporation, and the Company, White Consolidated is defending and indemnifying the Company for all costs and expenses for claims, damages, and losses, including the costs of litigation. Pursuant to the license agreements with White Consolidated, White Consolidated is defending and indemnifying Salton and Newtech for all costs and expenses for claims, damages, and losses, including the costs of litigation. White Consolidated and Westinghouse reached a partial settlement in late April 1999 under which, among other things, White Consolidated will withdraw its claims against Westinghouse. The partial settlement does not resolve the dispute insofar as it relates to the products licensed by White Consolidated to Salton or Newtech, or manufactured by the Company, and the litigation is proceeding as to those matters. The parties have filed cross-motions for summary judgement. Trial is currently scheduled for June 1999. 10 11 The Company is also a party to 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 a consolidation of eight separate class action complaints with substantially similar allegations. The complaints were purportedly filed on behalf of those security holders of the Company who purchased such securities during a certain period in the second and third quarter of 1998, alleging violations of the federal securities laws (including Rule 10b-5 promulgated pursuant to the Securities Exchange Act of 1934, as amended) in connection with the acquisition by the Company of certain product categories of the Household Products Group of The Black & Decker Corporation. Among other things, the plaintiffs allege that the Company and certain of its directors and officers, along with NationsBanc Montgomery Securities LLC, provided false information in connection with a public offering of debt and equity securities. The plaintiffs seek, among other relief, to be declared a class, to be awarded compensatory damages, rescission rights, unspecified damages and attorneys' fees and costs. The court is presently considering the appointment of lead counsel. The Company has filed a motion to dismiss, which has been stayed pending further order of the court. Because these matters are in their preliminary stages, management is unable at this time to determine what effect these lawsuits will have on the financial condition, results of operations or liquidity of the Company. By Order dated March 9, 1999, in addition to consolidating the above-referenced cases, the Court provisionally certified a class of plaintiffs who purchased Windmere stock between May 12, 1998 and September 22, 1998, provisionally certified Sherleigh Associates LLC and Sherleigh Associates, Inc. Profit Sharing Plan as lead plaintiff in this matter and is currently reviewing bids for lead counsel which bids are 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. 11 12 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. The Company and the other 50 percent owner in Newtech have entered into an agreement whereby the Company will transfer 5.0% of its interest in Newtech to a third party if and when a liquidity event for the Company occurs. Pursuant to the agreement, a liquidity event would occur if Newtech sells equity interests in a public offering, Newtech is sold to a third party, or if there is an other disposition of the Company's interest or other similar event. On March 25, 1999, the Company, pursuant to the terms of the applicable Shareholders' Agreement, offered to purchase the shares of Newtech not owned by it for a total of $1.0 million. The other shareholders of Newtech have until May 25, 1999 to accept the Company's offer or purchase the shares of Newtech owned by the Company for $1.0 million. On May 7, 1999, Newtech advised the Company that it is in default with its senior lenders. The Company and Newtech are currently in negotiations with the senior lenders to determine the appropriate course of action. The outcome of these negotiations and its impact on the Company's financial statements has not yet been determined. The Company has an investment in and receivables from Newtech aggregating approximately $22.0 million. 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. 12 13 Segment information for the three month periods ended March 31, are as follows: (In Thousands)
HOUSEHOLD WINDMERE PRODUCTS DURABLE GROUP GROUP MANUFACTURING TOTAL --------- --------- ------------- --------- 1999 Net Sales $ 47,390 $ 65,150 $ 28,142 $ 140,682 Intersegment net sales -- -- 23,518 23,518 Operating earnings (loss) (2,774) (1,267) 2,728 (1,311) 1998 Net Sales 45,890 -- 24,724 70,614 Intersegment net sales -- -- 14,676 14,676 Operating earnings (loss) (2,045) -- 1,799 (246)
Reconciliation to consolidated amounts:
1999 1998 --------- --------- Revenues Total revenues for reportable segments $ 140,682 $ 70,614 Other revenues (loss) 1,689 (544) Eliminations of intersegment revenues (23,518) (14,676) --------- --------- Total consolidated revenues $ 118,853 $ 55,394 ========= ========= Operating earnings (loss) Total earnings (loss) for reportable segments $ (1,311) $ (246) Other earnings 1,353 2,283 Corporate headquarters expense (2,212) (737) Interest expense - net (5,916) (488) Equity in net earnings (loss) of joint ventures (519) 445 --------- --------- Consolidated earnings (loss) before income taxes $ (8,605) $ 1,257 ========= =========
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 13 14 Corporation, Windmere Holdings Corporation II, Jerdon Products, Inc., Fortune Products, Inc., Bay Books & Tapes, Inc., Windmere Innovative Pet Products, Inc., EDI Masters, Inc., Windmere Fan Products, Inc., Household Products, Inc., HP Delaware, Inc., HP Americas, Inc., HPG LLC, HP Intellectual Corp., WD Delaware, Inc. and WD Delaware II, Inc. The Notes contain certain covenants which, among other things, will restrict the ability of the Subsidiary Guarantors to make distributions to Windmere-Durable Holdings, Inc. The Company has not presented separate financial statements and other disclosures concerning the guarantors and non-guarantor subsidiaries because it has determined they would not be material to investors. Three Months Ended March 31, 1999
Windmere Durable Non Holdings, Inc. Guarantors Guarantors Eliminations Consolidated ---------------- ---------- ---------- ------------ ------------ Statement of Operations Net Sales 0 91,517 50,854 (23,518) 118,853 Cost of goods sold 0 68,821 40,163 (23,831) 85,153 -------- -------- -------- -------- -------- Gross Profit 0 22,696 10,691 313 33,700 Operating Expenses (176) 29,856 6,100 90 35,870 -------- -------- -------- -------- -------- Operating Profit (Loss) 176 (7,160) 4,591 223 (2,170) Other (income) expense, net 5,986 248 (318) 0 5,916 -------- -------- -------- -------- -------- Earnings (loss) before income taxes and equity in earnings (loss) of joint ventures (5,810) (7,408) 4,909 223 (8,086) Provision (Benefit) for income taxes 0 1,692 60 (3,828) (2,076) Equity in net earnings (loss) of joint ventures 393 (912) 0 0 (519) -------- -------- -------- -------- -------- Net earnings (loss) (5,417) (10,012) 4,849 4,051 (6,529) ======== ======== ======== ======== ======== Balance Sheet Cash 10 (1,100) 14,884 0 13,794 Accounts and other receivables 0 75,919 47,005 4,180 127,104 Receivables from affiliates 1,744 4,207 1,357 (3,038) 4,270 Inventories 0 89,570 63,754 1,949 155,273 Other current assets 0 25,914 4,596 17,830 48,340 -------- -------- -------- -------- -------- Total current assets 1,754 194,510 131,596 20,921 348,781 Investments in joint ventures 426,306 22,252 70,500 (503,876) 15,182 Property, plant and equipment, net 0 12,587 63,835 0 76,422 Other assets 0 601,226 20,280 (371,886) 249,620 -------- -------- -------- -------- -------- Total assets 428,060 830,575 286,211 (854,841) 690,005 ======== ======== ======== ======== ========
14 15
Windmere Durable Non Holdings, Inc. Guarantors Guarantors Eliminations Consolidated ---------------- ---------- ---------- ------------ ------------ LIABILITIES: Accounts payable and accrued expenses 3 74,393 36,872 (17,077) 94,191 Current maturities of long term debt 7,842 0 0 0 7,842 Deferred income, current Portion 0 637 0 0 637 Income taxes payable 0 394 900 (1,294) 0 -------- -------- -------- -------- -------- Total current liabilities 7,845 75,424 37,772 (18,371) 102,670 Long term debt 256,280 370,918 0 (370,918) 256,280 Deferred income, less current portion 0 17,943 0 (16,479) 1,464 Deferred income taxes 0 16,253 2,984 (7,106) 12,131 -------- -------- -------- -------- -------- Total liabilities 264,125 480,538 40,756 (412,874) 372,545 Shareholders' equity 163,935 350,037 245,455 (441,967) 317,460 -------- -------- -------- -------- -------- Total liabilities and shareholders' equity 428,060 830,575 286,211 (854,841) 690,005 ======== ======== ======== ======== ======== Cash Flow Information Net cash provided by (used in) operating activities (5,414) 116,007 (43,382) (53,498) 13,713 Net cash provided by (used in) investing activities 10,279 (20,548) 5,305 1,537 (3,427) Net cash provided by (used in) financing activities (4,855) (99,642) 35,681 51,961 (16,855) Effect of exchange rate 0 0 (52) 0 (52) Cash at beginning 0 3,083 17,332 0 20,415 Cash at end 10 (1,100) 14,884 0 13,794
Three Months Ended March 31, 1998
Windmere Durable Non Holdings, Inc. Guarantors Guarantors Eliminations Consolidated ---------------- ---------- ---------- ------------ ------------ Statement of Operations Net Sales 0 44,507 25,563 (14,676) 55,394 Cost of goods sold 0 35,037 22,450 (14,976) 42,511 ------- ------- ------- ------- ------- Gross profit 0 9,470 3,113 300 12,883 Operating expenses (154) 10,375 1,395 90 11,706 ------- ------- ------- ------- ------- Operating profit (Loss) 154 (905) 1,718 210 1,177
15 16
Windmere Durable Non Holdings, Inc. Guarantors Guarantors Eliminations Consolidated ---------------- ---------- ---------- ------------ ------------ 0ther (income) expense, net 107 358 (460) 360 365 -------- -------- -------- -------- -------- Earnings (loss) before income taxes and equity in earnings (loss) of joint ventures 47 (1,263) 2,178 (150) 812 Provision (Benefit) for income taxes 0 43 94 (16) 121 Equity in net earnings (loss) of joint ventures 122 323 0 0 445 -------- -------- -------- -------- -------- Net earnings (loss) 169 (983) 2,084 (134) 1,136 ======== ======== ======== ======== ======== Balance Sheet Cash 0 (1,593) 4,084 0 2,491 Accounts and other receivables 0 27,955 9,709 842 38,506 Receivables from affiliates 793 (7,305) 24,112 (297) 17,303 Inventories 0 54,458 45,672 (361) 99,769 Other current assets 0 15,589 1,324 (4,657) 12,256 -------- -------- -------- -------- -------- Total current assets 793 89,104 84,901 (4,473) 170,325 Investment in joint ventures 80,701 51,021 46,200 (134,223) 43,699 Property, plant and equipment, net 0 7,429 30,580 0 38,009 Other assets 0 4,632 20,137 (3,131) 21,638 -------- -------- -------- -------- -------- Total assets 81,494 152,186 181,818 (141,827) 273,671 ======== ======== ======== ======== ======== Notes and acceptances payable 0 50,350 6,452 (11,350) 45,452 Accounts payable and accrued expenses 45 4,635 12,051 (622) 16,109 Current maturities of long term debt 0 3,365 0 0 3,365 Income taxes payable and other current liabilities 0 948 (134) (649) 165 -------- -------- -------- -------- -------- Total current liabilities 45 59,298 18,369 (12,621) 65,091 Long term debt 10,848 5,018 0 0 15,866 Deferred income 0 125 0 906 1,031 Deferred income taxes 0 (186) 2,154 (1,968) 0 -------- -------- -------- -------- -------- Total liabilities 10,893 64,255 20,523 (13,683) 81,988 Shareholders' equity 70,601 87,931 161,295 (128,144) 191,683 -------- -------- -------- -------- -------- Total liabilities and shareholders equity 81,494 152,186 181,818 (141,827) 273,671 ======== ======== ======== ======== ======== Net cash used in operating activities 0 (522) (1,997) 0 (2,519) Net cash used in investing activities 0 (2,399) (2,357) 0 (4,756) Net cash provided by financing activities 0 1,329 191 0 1,520 Effect of exchange rate 0 0 22 0 22 Cash at beginning 0 0 8,224 0 8,224 Cash at end 0 (1,592) 4,083 0 2,491
16 17 7. Related Party Transactions On April 14, 1999, the Company sold 210,000 shares of authorized, but unissued 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%. The transaction requires a waiver of certain provisions under the Company's Senior Credit Agreement. In the event such waiver is not obtained, the sale of the shares will be rescinded. 17 18 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 held by affiliates 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: THREE MONTHS ENDED MARCH 31, ---------------------------- 1999 1998 ----------- ------------ Net Sales 100.0% 100.0% Cost of goods sold 71.6 76.7 ------- ------- Gross Profit 28.4 23.3 Selling, general and administrative expenses 30.2 21.1 Other (income) expense - net 5.0 .7 Earnings (loss) before income taxes and equity in earnings (loss) of joint ventures (.4) .8 ------- ------- Earnings (loss) before taxes (7.2) 2.3 Provision (benefit) for income taxes (1.7) .2 ------- ------- Net earnings (loss) (5.5)% 2.1% ======= ======= 18 19 Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998 Sales and other revenues Sales and other revenues ("Revenues") for the Company increased by $63.5 million to $118.9 million, an increase of 115% over Revenues for the first quarter of 1998. The increase is primarily the result of its June 26, 1998 acquisition of the Black & Decker Household Products Group (HPG) which contributed $65.2 million in distribution sales. Sales to Walmart accounted for 18% of total sales for the 1999 period. In the 1998 period, sales to a national retail beauty supply chain accounted for 10.2% of total sales. Fees earned by the Company under marketing arrangements with its joint ventures totaled $300,000 for the 1999 period as compared to $655,000 for 1998 and are classified as Revenues. Gross Profit Margin The Company's gross profit margin increased to 28.4% of Revenues from 23.3% in the 1998 period. The increase is attributable primarily to the June 26, 1998 acquisition. Partially offsetting the increase is approximately $760,000 in unabsorbed overhead from the Asheboro facility, which is scheduled to be closed in the second quarter of 1999. Selling, General and Administrative Expenses Selling, general and administrative expenses for the Company increased by $24.2 million in the first quarter of 1999. As a percentage of sales, costs increased to 30.2% from 20.1% in the 1998 period. The increase is primarily due to the June 26, 1998 acquisition of HPG. Equity in Net Earnings of Joint Ventures The Company's equity in net earnings of joint ventures decreased to a loss of $519,000 in the 1999 first quarter as compared to income of $445,000 in the 1998 period. The decrease is primarily the result of the July 1998 sale of the Company's equity interest in Salton as well as weaker performance by Newtech. Interest Expense Interest expense increased to $6.2 million in 1999 from $1.1 million in 1998. The change is the result of amounts borrowed in conjunction with the acquisition of the Black & Decker Household Products Group. 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. 19 20 EARNINGS PER SHARE In 1997, the Company adopted Financial Accounting Standards No. 128 (SFAS) 128), "Earnings Per Share." Basic shares for the three month periods ended March 31, 1999 and 1998 were 22,090,966 and 18,413,731, respectively. Included in diluted shares are common stock equivalents relating to options, warrants and convertible debt of 1,779,910 for the three month period ended March 31, 1998. All common stock equivalents have been excluded from the per share calculation for the 1999 period, as the Company incurred a net loss and their inclusion would have been anti-dilutive. The increase in the number of basic shares is primarily due to the July 1998 public offering of 3,041,000 shares of the Company's common stock. Windmere Group Windmere Group sales decreased by $1.5 million to $47.4 million in the first quarter of 1999. The decrease in Windmere Group sales is attributable to weakness in personal care and seasonal product sales partially offset by growth in LitterMaid sales. LitterMaid distribution sales increased by $3.5 million or 137% over 1998 sales. Selling, general and administrative expenses for the Windmere Group increased by approximately $700,000 to 22.4% of segment sales from 21.6% in the 1998 period. Group expenses for 1998 represented 8.9% of total Company sales as compared to 17.9% in the 1998 period. Contributing significantly to the increase were costs directly associated with the increase in sales volume such as commissions and approximately $500,000 related to the write-off of product design costs in conjunction with a change in accounting regulations. Household Products Group Selling, general and administrative expenses for the Household Products Group totaled $22.1 million or 34.0% of segment sales and 18.6% of total Company sales. Included in selling, general and administrative expenses was approximately $4.5 million in costs under contracts where Black & Decker is providing services to the Company. These services were to be provided during a transition period during which the Company would be putting in place its own personnel and systems. Now and until the contracts are completed, which is scheduled for the end of the 1999 second quarter, there will be some duplication of operating costs. Also included is approximately $3.5 million in amortization of intangibles recorded in conjunction with the acquisition. Durable Manufacturing Sales at the Company's China based manufacturing subsidiary increased by $3.4 million or 13.8% to $28.1 million in the 1999 period. Operating earnings for Durable Manufacturing increased by $900,000 to $2.7 million in the 1999 first quarter. Better absorption of fixed overhead as a result of increased sales volume in addition to increased productivity, 20 21 contributed to the improved results. Liquidity and Capital Resources At March 31, 1999, the Company's working capital was $246.1 million, as compared to $105.2 million at March 31, 1998. At March 31, 1999 and 1998, the Company's current ratio was 3.4 to 1 and 2.6 to 1, respectively, and its quick ratio was 1.7 to 1 and 1.1 to 1, respectively. The improvement in ratios is primarily the result of the acquisition. Cash balances increased by approximately $6.6 million for the first quarter ended March 31, 1999. The net cash provided by operating activities is primarily the result of the increased growth in sales resulting from the June 26, 1998 acquisition of HPG and the resultant cash collections in the period. Cash used in investing activities totaled approximately $3.4 million for the period and is primarily the result of $4.7 million in capital expenditures at the Company's manufacturing facilities. Funds used in financing activities totaled approximately $16.9 million in the period. Funds generated in operations were used to repay borrowings under the Company's credit facilities including a $4.0 million prepayment of the Company's Senior Secured Term debt. 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 $26.0 million in trade finance lines of credit, payable on demand, which are secured by the subsidiaries' tangible and intangible property, as well as 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 $133.2 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 May 10, 1999, the Company is not borrowing under the Senior Secured Revolving Credit Facility and has approximately $117.8 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 quarter ended March 31, 1999 were $4.7 million. The Company anticipates that the total capital expenditures for 1999 will be approximately $25.0 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. 21 22 At March 31, 1999, debt as a percent of total capitalization was 45 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. 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 22 23 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. As of March 31, 1999, the Company had purchased interest rate swaps on $70 million notional principal amount with a market value of approximately ($600,000). The market value represents the amount the Company would have to pay to exit the contracts at March 31, 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 fixed quarters of years beginning after June 1999. 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. 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 23 24 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, Salton, Newtech, White Consolidated Industries, Inc. ("White Consolidated"), and certain other parties have been named as defendants in litigation filed by Westinghouse Electric Corporation ("Westinghouse") in the United Stated District Court for the Western District in Pennsylvania on December 18, 1996. The action arises from a dispute between Westinghouse and White Consolidated over rights to use the "Westinghouse" trademark for consumer products, based on transactions between Westinghouse and White Consolidated in the 1970's and the parties subsequent conduct. Prior to the filing of Westinghouse's complaint against the Company, White Consolidated, on November 14, 1996, filed a complaint in the United States District Court for the Northern District of Ohio against Westinghouse and another corporation for trademark infringement, dilution, false designation or origin and false advertisement, seeking both injunctive relief and damages. It was subsequently determined that the entire dispute will be heard in the United States District Court for the Western District of Pennsylvania. The action by Westinghouse seeks, among other things, an injunction enjoining the defendants from using the trademark, unspecified damages and attorney's fees. Pursuant to the Indemnification Agreement dated January 23, 1997 by and among White Consolidated, Kmart Corporation, and the Company, White Consolidated is defending and indemnifying the Company for all costs and expenses for claims, damages, and losses, including the costs of litigation. Pursuant to the license agreements with White Consolidated, White Consolidated is defending and indemnifying Salton and Newtech for all costs and expenses for claims, damages, and losses, including the costs of litigation. White Consolidated and Westinghouse reached a partial settlement in late April 1999 under which, among other things, White Consolidated will withdraw its claims against Westinghouse. The partial settlement does not resolve the dispute insofar as it relates to the products licensed by White Consolidated to Salton or Newtech, or manufactured by the Company, and the litigation is proceeding as to those matters. The parties have filed cross-motions for summary judgement. Trial is currently scheduled for June 1999. The Company is also a party to 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 a consolidation of eight separate class action complaints with substantially similar allegations. The 24 25 complaints were purportedly filed on behalf of those security holders of the Company who purchased such securities during a certain period in the second and third quarter of 1998, alleging violations of the federal securities laws (including Rule 10b-5 promulgated pursuant to the Securities Exchange Act of 1934, as amended) in connection with the acquisition by the Company of certain product categories of the Household Products Group of The Black & Decker Corporation. Among other things, the plaintiffs allege that the Company and certain of its directors and officers, along with NationsBanc Montgomery Securities LLC, provided false information in connection with a public offering of debt and equity securities. The plaintiffs seek, among other relief, to be declared a class, to be awarded compensatory damages, rescission rights, unspecified damages and attorneys' fees and costs. The court is presently considering the appointment of lead counsel. The Company has filed a motion to dismiss the matter, which has been stayed pending further order of the court. Because these matters are in their preliminary stages, management is unable at this time to determine what effect these lawsuits will have on the financial condition, results of operations or liquidity of the Company. By Order dated March 9, 1999, in addition to consolidating the above-referenced cases, the Court provisionally certified a class of plaintiffs who purchased Windmere stock between May 12, 1998 and September 22, 1998, provisionally certified Sherleigh Associates LLC and Sherleigh Associates, Inc. Profit Sharing Plan as lead plaintiff in this matter and is currently reviewing bids for lead counsel which bids are 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. COMMITMENTS AND CONTINGENCIES The Company and the other 50 percent owner in Newtech have entered into an agreement whereby the Company will transfer 5.0% of its interest in Newtech to a third party if and when a liquidity event for the Company occurs. Pursuant to the agreement, a liquidity event would occur if Newtech sells equity interests in a public offering, Newtech is sold to a third party, or if there is an other disposition of the Company's interest or other similar event. 25 26 On March 25, 1999, the Company, pursuant to the terms of the applicable Shareholders' Agreement, offered to purchase the shares of Newtech not owned by it for a total of $1.0 million. The other shareholders of Newtech have until May 25, 1999 to accept the Company's offer or purchase the shares of Newtech owned by the Company for $1.0 million. On May 7, 1999, Newtech advised the Company that it is in default with its senior lenders. The Company and Newtech are currently in negotiations with the senior lenders to determine the appropriate course of action. The outcome of these negotiations and its impact on the Company's financial statements has not yet been determined. The Company has an investment in and receivables from Newtech aggregating approximately $22,000,000. MANUFACTURING OPERATIONS The Company's products are manufactured primarily at the Company's facilities in the PRC, Mexico and the United States. In October 1998, the Company announced its intention to close the Asheboro, North Carolina plant. The Company has ceased manufacturing at the Asheboro facility as of March 31, 1999 and is scheduled to completely exit the facility by 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. 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. 26 27 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 March 31, 1999, the notional value of such derivatives was approximately $26 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. 27 28 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 None. (b) Reports on Form 8-K: None. 28 29 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) May 14, 1999 By: /s/ Harry D. Schulman ---------------------------------- Harry D. Schulman Chief Financial Officer (Duly authorized to sign on behalf of the Registrant) May 14, 1999 By: /s/ Terry L. Polistina ---------------------------------- Terry L. Polistina Senior Vice President - Finance (Duly authorized to sign on behalf of the Registrant) 29 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 MAR-31-1999 13,794 0 135,578 8,474 155,273 348,781 138,976 62,554 690,005 102,670 130,000 0 0 2,209 315,251 690,005 118,853 118,853 85,153 85,153 0 1,107 6,205 (8,605) (2,076) (6,529) 0 0 0 (6,529) (.30) (.30)
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