ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Windmere-Durable Holdings, Inc. (the "Company") is engaged principally in manufacturing and distributing a wide variety of personal care, kitchen electric and seasonal products. The Company designs and manufactures its products for sale to retail stores, distributors and professional beauty supply customers located primarily in the United States, Canada and Europe, with additional distribution in Latin America and the Far East. The Company's products are sold largely under its Windmere trade name, as well as under other trade names, trademarks and private labels. The Company also manufactures products on a contract basis for others.
The Company's products are primarily manufactured by Durable Electrical Metal Factory, Ltd. ("Durable"), its wholly-owned Hong Kong subsidiary, in Bao An County, Guandong Province of the People's Republic of China ("People's Republic"), which is approximately 60 miles northwest of central Hong Kong, and other unrelated factories in the People's Republic. Approximately 85% to 90% of the Company's products are manufactured by Durable.
NEW DEVELOPMENTS
During the year ended December 31, 1996, the Company made several acquisitions:
In March 1996, the Company acquired certain assets and marketing rights, including patents and the trademark, to the LitterMaid computerized, infrared, automatic self-cleaning cat litter box.
In April 1996, the Company purchased a 50-percent interest in New M-Tech Corporation,( "New M-Tech") a manufacturer and distributor of consumer electronic products. New M-Tech distributes consumer electronic products under the Admiral, NewTech and White Westinghouse brand names.
In July 1996, the Company acquired a 50-percent interest in Salton/Maxim Housewares, Inc. ("Salton"). Salton designs and markets a broad range of small kitchen appliances and personal care appliances under the Salton, Maxim, Breadman, Juiceman, Salton Creations, Block China,
Farberware, Salton Time and White Westinghouse brand names. Salton sells its products primarily to department store chains, gourmet and lifestyle merchants, specialty stores and direct mail catalogs.
In December 1996, the Company acquired the remaining 50-percent of its seasonal products joint venture.
The Company was incorporated under the laws of the State of Florida in 1963. As used herein, the term "Company" refers to Windmere-Durable Holdings, Inc. (Prior to June 21, 1996, Windmere Corporation) and its subsidiaries, unless the context indicates otherwise. The Company's executive offices are located at 5980 Miami Lakes Drive, Miami Lakes, Florida 33014, (see Item 2.
ITEM 2. PROPERTIES
The executive offices of the Company, from which a significant amount of its business activities are conducted, are currently located at 5980 Miami Lakes Drive, Miami Lakes, Florida. All of the space in this approximately 140,000 sq. ft., two-story office and warehouse facility is owned and occupied by the Company. The Company also utilizes the services of public warehouses located in Reno, Nevada and Memphis, Tennessee pursuant to short-term contracts.
Durable owns approximately 40,000 sq. ft. of office space in Hong Kong, of which 24,000 sq. ft. is used for its and the Company's trading companies' headquarters. Durable also utilizes facilities of 2,000,000 sq. ft. in the People's Republic which it operates under contracts with the local government. The contracts require such periodic adjustments that terms of between one and five years exist at all times. Certain facilities have contract terms extending beyond five years.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In April 1994, Kabushiki Kaisha Izumi Seiki Seisakusho, a Japanese corporation ("Izumi"), filed an action against the Company, David M. Friedson, the President and Chief Executive Officer of the Company, U.S.
Philips Corporation, North American Philips Corporation and N.V. Philips Gloellampenfabrieken (together, "Philips"). This action concerns the 1992 settlement (the "Philips Settlement") of certain claims, primarily a Federal antitrust claim, made by the Company against Philips, which resulted in an $89,644,257 judgment in favor of the Company. Pursuant to the Philips Settlement, Philips paid the Company $57,000,000 in May 1992. As part of the Philips Settlement, the Company and Philips agreed that the Company's money judgment against Philips in connection with such antitrust litigation would be vacated. Izumi is claiming, among other things, that the Philips Settlement, including the agreement with Philips to cooperate to vacate the related judgment in favor of the Company, constitutes a breach by the Company of a customary indemnification agreement between Izumi (as seller of goods) and the Company (as buyer of goods) dated February 20, 1984. This indemnification agreement covered certain claims against the Company and was entered into more than eight months prior to the commencement of the Philips litigation in connection with the routine purchase by the Company of goods from Izumi. Izumi advanced certain legal fees and costs to the Company in connection with the Philips litigation. Izumi is further claiming that it is entitled to recover from the Company an unspecified portion of the Philips Settlement, punitive damages and reimbursement of litigation and other related costs and expenses. A pre-answer motion by the Company resulted in the dismissal of some of Izumi's claims, and the Company answered the remaining claims. A mediation was held on February 27, 1997 to consider settlement of the case. In March 1997, after evaluating the potential costs of continuing litigation, the Company paid $4,500,000 to settle the dispute.
The Company, its 50-percent owned joint venture partners Salton/Maxim Housewares, Inc. and New M-Tech Corporation, White Consolidated Industries, Inc. ("White Consolidated"), and certain other parties have been named as defendants in litigation filed by Westinghouse Electric Corporation ("Westinghouse") in the United States District Court for the Western District in Pennsylvania on December 18, 1996. The action arises from a dispute between Westinghouse and White Consolidated over rights to use the "Westinghouse" trademark for consumer products based on transactions between Westinghouse and White Consolidated in the 1970's and the parties' subsequent conduct. Prior to the filing of Westinghouse's Complaint against the Company, White Consolidated, on November 14, 1996, filed a Complaint in the United States District Court for the Northern District of Ohio against Westinghouse and another corporation for trademark infringement, dilution, false designation or origin and false advertisement, seeking both injunctive relief and damages. Procedural motions concerning the jurisdiction in which the dispute should be heard have
been filed by the parties. The action by Westinghouse seeks, among other things, a preliminary injunction enjoining the defendants from using the trademark, un-specified damages and attorneys' fees. Pursuant to the Indemnification Agreement dated January 23, 1997 by and among White Consolidated, Kmart Corporation, and the Company, White Consolidated is defending and indemnifying the Company for all costs and expenses for claims, damages, and losses, including the costs of litigation. Pursuant to the license agreements with White Consolidated, White Consolidated is defending and indemnifying Salton/Maxim and New M-Tech for all costs and expenses for claims, damages, and losses, including the costs of litigation. On January 29, 1997, on joint motion of the parties, the court issued an order staying future proceedings for sixty (60) days in order to give the parties an opportunity to pursue settlement discussions.
The Company is also subject to other legal proceedings, product liability and other claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability, if any, in excess of applicable insurance coverage, is not likely to have a material effect on the financial position of the Company. However, as the outcome of litigation or other legal claims is difficult to predict, significant changes in the estimated exposures could occur.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Incorporated by reference to the Company's 1996 Annual Report to Shareholders under the caption "Quarterly Stock Quotations and Dividends per Share." (Exhibit 13)
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
*Includes extraordinary charge for the settlement of Izumi litigation of $3,500,000 or $.20 per share.
**Includes a non-recurring loss on the sale of an other asset of $5,280,000, or $.31 per share.
***Includes a non-recurring gain on the sale of Hong Kong office space of $7,810,500, or $.45 per share.
****Includes cumulative effect of accounting change benefit of $1,731,100, or $.11 per share.
*****Includes extraordinary credit from litigation settlement of $29,648,800, or $1.82 per share.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Year Ended December 31, 1996 compared with Year Ended December 31, 1995
Net Sales
Net sales were $197.0 million and $187.8 million for the years ended December 31, 1996 and 1995, respectively. Manufacturing sales increased by $10.4 million due primarily to increased shipments of kitchen electric appliances. A kitchen electric appliance distributor and a national retail beauty supply chain accounted for 10.9% and 10.3%, respectively, of the Company's 1996 sales.
Set forth below is a table indicating the revenues that the Company derived from its distribution and manufacturing operations for the periods indicated:
Gross Profit Margin
The Company's gross margin percentage decreased in 1996 to 20.2% of sales from the 21.8% level in the prior year. The decrease is primarily attributed to the continued effect of remaining higher cost raw material inventories and a greater concentration of manufacturing sales. Lower margin kitchen electric products which comprised 82% of manufacturing sales in both 1996 and 1995, accounted for 31% and 25% of the Company's total sales in those years, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales were 20.0% in both 1996 and 1995. Commencement of operations at the Company's newly acquired LitterMaid, Inc. and Bay Books & Tapes, Inc. businesses resulted in a $1.6 million increase in expenses. Travel,
legal and selling expenses increased by $1.2 million and advertising costs decreased by $1.0 million.
Unusual or Non-Recurring Items
In 1995, the Company incurred a non-recurring pre-tax loss of $8.0 million on the sale of an other asset. This transaction reduced 1995 net earnings by $5.3 million, or $.31 per share, on an after-tax basis.
Equity in Net Earnings (Loss) of Joint Ventures
The Company's equity in net earnings (loss) of joint ventures was $2.3 million and $(.4) million in 1996 and 1995, respectively. The increase in 1996 primarily reflects the results of operations of the Company's newly acquired interests in Salton/Maxim Housewares, Inc. ("Salton") and New M-Tech Corporation ("New M-Tech"). The Company's equity in the net earnings of Salton and New M-Tech totaled $3.2 million for 1996 which was partially offset by losses of $.9 million at certain of the Company's other joint ventures.
Interest Expense
Interest expense increased by $.8 million to $1.4 million in 1996. The increase is the result of the amounts paid on notes payable issued in conjunction with the Salton and New M-Tech acquisitions as well as the increased level of borrowing under the Company's line of credit facility.
Taxes
The Company's tax expense is based on the earnings of each of its foreign and domestic operations and it includes such additional U.S. taxes as are applicable to the repatriation of foreign earnings. Foreign earnings, other than in Canada, are generally taxed at rates lower than in the United States. The Company made a provision in its 1995 second quarter of $.4 million, or $.02 per share, as a result of its settlement of a Hong Kong tax audit.
Extraordinary Item
On March 27, 1997, the Company paid $4,500,000 to settle the lawsuit filed in April 1994 by Izumi. An accrual of $5,300,000, including $800,000 in estimated legal expenses has been recorded as of December
31, 1996. The transaction resulted in an after tax charge of $3,500,000 or $.20 per share and has been recorded as an extraordinary item.
Earnings Per Share
The average number of common shares and common equivalent shares used in computing per share results was 17,620,000, in 1996 as compared to 17,227,000 in 1995. The decrease was primarily due to the non-inclusion of the dilutive effect of stock options and warrants in those 1996 quarters in which the Company sustained losses, offset by the additional shares issued upon the acquisition of Salton/Maxim and upon the exercise of stock options and warrants.
Supplier Contract
In January 1997, the Company through its 50-percent interests in Salton and New M-Tech entered into supply contracts with the Kmart Corporation for Kmart to purchase, distribute, market and sell certain products under the White-Westinghouse brand name licensed to Salton and New M-Tech. Under the terms of the contract, Salton and New M-Tech will supply Kmart, either through the Company or other manufacturers, with a broad range of small electrical appliances, consumer electronics and telephone products under the White-Westinghouse brand name. Kmart will be the exclusive discount department store to market these White-Westinghouse products.
Year Ended December 31, 1995 compared with Year Ended December 31, 1994
Net Sales
Net sales were $187.8 million and $181.1 million for the years ended December 31, 1995 and 1994, respectively. Manufacturing sales increased by $14.4 million due to increased shipments of kitchen electric appliances. Distribution sales declined by $7.7 million primarily due to the weak U.S. retailing environment in 1995. Wal-Mart Stores, Inc. and a kitchen electric appliance distributor accounted for 13.1% and 11.4%, respectively, of the Company's 1995 sales.
Set forth below is a table indicating the revenues that the Company derived from its distribution and manufacturing operations for the periods indicated:
Year Ended December 31, 1995 1994
Distribution $147,576,000 79% $155,320,600 86% Manufacturing 40,200,900 21 25,791,600 14 ----------- --- ----------- --- Total Sales $187,776,900 100% $181,112,200 100% =========== === =========== ===
Gross Profit Margin
The Company's gross margin percentage decreased in 1995 to 21.8% of sales from the 27.0% level in the prior year due to higher raw materials costs which could not be passed on to customers and the greater concentration of lower-margin manufacturing sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales were 20.0% and 19.6% in 1995 and 1994, respectively. The Company's higher aggregate operating expenses were primarily a result of increased bad debt expense and inventory storage costs.
Unusual or Non-Recurring Items
In 1995, the Company incurred a non-recurring pre-tax loss of $8.0 million on the sale of an other asset. This transaction reduced 1995 net earnings by $5.3 million, or $.31 per share, on an after-tax basis.
Equity in Net Earnings (Loss) of Joint Venture
The Company's equity in net earnings (loss) of joint ventures was $(.4) million and $.1 million in 1995 and 1994, respectively. Lower gross margins in 1995, due to higher raw materials costs, produced the decline in the joint venture's earnings.
Taxes
The Company's tax expense is based on the earnings of each of its foreign and domestic operations and it includes such additional U.S. taxes as are applicable to the repatriation of foreign earnings. Offshore earnings generally are taxed at rates lower than in the United States. The Company made a provision in its 1995 second quarter of $.4 million, or $.02 per share, as a result of its settlement of a Hong Kong tax audit.
Earnings Per Share
The average number of common shares and common equivalent shares used in computing per share results was 2.1% lower in 1995 primarily as a result of a lower dilutive effect from unexercised stock options and warrants, due both to a decline in the quoted market price of the Company's common stock during the year and the Company's fourth quarter loss.
Liquidity and Capital Resources
At December 31, 1996, the Company's working capital was $105.6 million, a decrease of $22.0 million since the end of 1995. At the end of 1996 and 1995, the Company's current ratio was 3.1 to 1 and 7.5 to 1, respectively, and its quick ratio was 1.3 to 1 and 3.5 to 1, respectively.
Cash and cash equivalents decreased by $9.0 million during 1996. Cash of $9.6 million was provided by operating activities. The Company utilized $35.1 million in investing activities, of which $18.7 million was for the acquisition of equity interests in joint ventures and new businesses and for loans to its joint venture partners. The Company invested $8.6 million in capital expenditures primarily at its factory in the People's Republic of China and anticipates incurring an additional $9.0 million in 1997.
The Company entered into the following significant investing transactions in 1996:
PX DISTRIBUTORS, INC.("PX")
In December 1995, the Company purchased, for a nominal amount, a 50-percent interest in PX Distributors, Inc., a distributor of home automation/security devices. The Company and the other owners have agreed to lend PX certain amounts from time to time to meet working
capital requirements. Loans made by the Company bear interest at the prime rate, are payable upon PX achieving sufficient cash flow, and are secured by the assets of PX.
SALTON/MAXIM HOUSEWARES, INC.
In February 1996, the Company entered into a stock purchase agreement with Salton providing for the issuance and sale by Salton to the Company of 6,508,572 shares of its common stock, representing 50-percent of Salton's outstanding common stock after issuance.
On July 11, 1996, Windmere completed its acquisition of 50-percent of Salton. The Company received 6,508,572 shares of Salton common stock (market value at date of acquisition of approximately $36.2 million) in exchange for a cash payment of $3.3 million, a $10.8 million promissory note and 748,112 shares of Windmere stock (market value at date of agreement of approximately $6.1 million). The total cost in excess of net assets acquired is not deemed to be material.
In addition, the Company received an option to purchase 453,000 shares of Salton common stock at an exercise price of $4.53 per share. The option becomes exercisable only if and to the extent that options to purchase shares of Salton common stock outstanding at the date of the stock purchase agreement are exercised.
The $10.8 million promissory note bears interest at a rate of 8-percent per annum payable quarterly and matures in July 2001. The note is subordinated to the Company's current and future indebtedness to its senior lender and is collateralized by certain of the Company's domestic assets.
LITTERMAID(TM)
In 1996, the Company purchased certain assets and marketing rights, including patents, for the LitterMaid(TM) computerized, infrared, automatic self-cleaning cat litter box. The purchase price of the assets includes $2,200,000 in cash and options to purchase 150,000 shares of the Company's common stock. The total fair value of the options as determined under SFAS 123, is $549,000 and has been included in the cost of the assets acquired.
New M-Tech Corporation
In April 1996, the Company acquired a 50-percent interest in New M-Tech Corporation, a consumer electronics company for $10 million. Payment consisted of $3.0 million in cash and $7.0 million in unsecured promissory notes. The promissory notes bear interest at 8% per annum and consist of a $3,000,000 promissory note maturing in 1998, and two $2,000,000 promissory notes maturing in 2001, one of which is convertible into shares of the Company's common stock at a price of $15 per share. Conversion may occur at any time during the term of the convertible promissory note, and may be required under certain circumstances. The notes are subordinated to the Company's current and future indebtedness to its senior lender. The total cost in excess of net assets acquired of $5.3 million has resulted in goodwill and is being amortized over 20 years on a straight-line basis.
BREAKROOM OF TENNESSEE, INC.
In May 1996, the Company agreed to contribute and/or purchase inventory valued at $250,000 in exchange for a 50-percent interest in Breakroom of Tennessee, Inc., a joint venture formed to market and distribute office products. The Company's investment as of December 31, 1996 consists of $240,390 in inventory purchased on behalf of the joint venture.
BAY BOOKS & TAPES, INC.
In June 1996, the Company acquired the assets of the books and video publishing division of KQED, Inc., consisting mostly of inventory, for $1,180,000 in cash. Bay Books & Tapes, Inc. publishes public television companion books and videos.
ANASAZI PARTNERS, L.P.
In June 1996, the Company entered into an agreement to acquire a 50-percent interest in an investment partnership for $1.2 million. Payments as of December 31, 1996 include a $1.2 million capital contribution to the partnership and loans totaling $1.2 million to the partnership's other equity partner. Such loans bear interest at a rate of 8-percent per annum, are unsecured and are payable upon demand.
The partnership's investments include privately traded securities whose values have been estimated by the General Partner in the absence of readily ascertainable market values. Fair value for these securities is considered to be cost which may differ significantly from the values
that would have been used had a ready market for the securities existed.
Cash flows from financing activities generated $16.5 million in cash. The borrowings under the Company's line of credit facilities of $21.8 million and the $2.6 million generated from the exercise of stock options and warrants offset the $3.3 million used to pay cash dividends on the Company's common stock and the $3.8 million used to purchase and retire 463,000 shares of the Company's common stock. The purchase of the 463,000 shares completed the Company's purchase of 1,000,000 shares of its common stock under the 1994 stock purchase program for a total cost of $8.7 million. In 1996, the Company's Board of Directors authorized a new stock purchase program, whereby, the Company may purchase up to 10-percent of its outstanding shares (approximately 1.6 million shares). No shares have been purchased under the new program.
The Company's foreign subsidiaries (the "subsidiaries") have $6.4 million in trade finance lines of credit, payable on demand, which are secured by the subsidiaries' tangible and intangible property located in Hong Kong and in the People's Republic of China, as well as a Company guarantee. At December 31, 1996, the subsidiaries were utilizing, including letters of credit, approximately $2.5 million of these credit lines, leaving a remaining funding capacity of $3.9 million. These subsidiaries also have available an additional $5.0 million line of credit which is supported by a domestic standby letter of credit of which $3.2 million was outstanding at December 31, 1996.
The Company has a $30.0 million demand line of credit from a domestic bank, which is secured by domestic accounts receivable and inventory. At December 31, 1996, outstanding borrowings under this credit line totaled $18.0 million.
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.
The Company believes that its cash on hand and internally generated funds, together with its credit lines, will provide sufficient funding
to meet the Company's capital requirements and its operating needs for the foreseeable future.
Legal Proceedings
In April 1994, Kabushiki Kaisha Izumi Seiki Seisakusho, a Japanese corporation ("Izumi"), filed an action against the Company, David M. Friedson, the President and Chief Executive Officer of the Company, U.S. Philips Corporation, North American Philips Corporation and N.V. Philips Gloellampenfabrieken (together, "Philips"). This action concerns the 1992 settlement (the "Philips Settlement") of certain claims, primarily a Federal antitrust claim, made by the Company against Philips, which resulted in an $89,644,257 judgment in favor of the Company. Pursuant to the Philips Settlement, Philips paid the Company $57,000,000 in May 1992. As part of the Philips Settlement, the Company and Philips agreed that the Company's money judgment against Philips in connection with such antitrust litigation would be vacated. Izumi is claiming, among other things, that the Philips Settlement, including the agreement with Philips to cooperate to vacate the related judgment in favor of the Company, constitutes a breach by the Company of a customary indemnification agreement between Izumi (as seller of goods) and the Company (as buyer of goods) dated February 20, 1984. This indemnification agreement covered certain claims against the Company and was entered into more than eight months prior to the commencement of the Philips litigation in connection with the routine purchase by the Company of goods from Izumi. Izumi advanced certain legal fees and costs to the Company in connection with the Philips litigation. Izumi is further claiming that it is entitled to recover from the Company an unspecified portion of the Philips Settlement, punitive damages and reimbursement of litigation and other related costs and expenses. A pre-answer motion by the Company resulted in the dismissal of some of Izumi's claims, and the Company answered the remaining claims. A mediation was held on February 27, 1997 to consider settlement of the case. In March 1997, after evaluating the potential costs of continuing litigation, the Company paid $4,500,000 to settle the dispute.
The Company, its 50-percent owned joint venture partners Salton/Maxim Housewares, Inc. and New M-Tech Corporation, White Consolidated Industries, Inc. ("White Consolidated"), and certain other parties have
been named as defendants in litigation filed by Westinghouse Electric Corporation ("Westinghouse") in the United States District Court for the Western District in Pennsylvania on December 18, 1996. The action arises from a dispute between Westinghouse and White Consolidated over rights to use the "Westinghouse" trademark for consumer products based on transactions between Westinghouse and White Consolidated in the 1970's and the parties' subsequent conduct. Prior to the filing of Westinghouse's Complaint against the Company, White Consolidated, on November 14, 1996, filed a Complaint in the United States District Court for the Northern District of Ohio against Westinghouse and another corporation for trademark infringement, dilution, false designation or origin and false advertisement, seeking both injunctive relief and damages. Procedural motions concerning the jurisdiction in which the dispute should be heard have been filed by the parties. The action by Westinghouse seeks, among other things, a preliminary injunction enjoining the defendants from using the trademark, un-specified damages and attorneys' fees. Pursuant to the Indemnification Agreement dated January 23, 1997 by and among White Consolidated, Kmart Corporation, and the Company, White Consolidated is defending and indemnifying the Company for all costs and expenses for claims, damages, and losses, including the costs of litigation. Pursuant to the license agreements with White Consolidated, White Consolidated is defending and indemnifying Salton/Maxim and New M-Tech for all costs and expenses for claims, damages, and losses, including the costs of litigation. On January 29, 1997, on joint motion of the parties, the court issued an order staying future proceedings for sixty (60) days in order to give the parties an opportunity to pursue settlement discussions.
The Company is also subject to other legal proceedings, product liability and other claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability, if any, in excess of applicable insurance coverage, is not likely to have a material effect on the financial position of the Company. However, as the outcome of litigation or other legal claims is difficult to predict, significant changes in the estimated exposures could occur.
Manufacturing Operations
The Company's products are primarily manufactured by Durable, its wholly-owned Hong Kong subsidiary, in Bao An County, Guandong Province of the People's Republic of China, which is approximately 60 miles northwest of central Hong Kong. The Company has a significant amount of its assets in the People's Republic, primarily consisting of inventory, equipment and molds. Substantially all of the Company's products are manufactured by Durable and unrelated factories in the People's Republic. Approximately 85-percent to 90-percent of the Company's revenues are currently derived from products manufactured by
Durable. The supply and cost of these products, as well as finished products, can be adversely affected, among other reasons, by changes in foreign currency exchange rates, increased import duties, imposition of tariffs, imposition of import quotas, interruptions in sea or air transportation and political or economic changes. From time to time, the Company explores opportunities to diversify its sourcing and/or production of certain products to other low-cost locations or with other third parties or joint venture partners in order to reduce its dependence on production in the People's Republic and/or reduce Durable's dependence on the Company's existing distribution base. However, at the present time, the Company intends to continue its production in the People's Republic.
In June 1989, the People's Republic experienced civil disturbances. Although such disturbances have dissipated since that time, there continues to be pressure for political reform. No assurance can be given, however, that civil disturbances will not recur. If it becomes necessary to relocate the Company's manufacturing facilities from the People's Republic as a result of civil disturbances in that country or otherwise, the Company believes the production currently conducted in the People's Republic could be relocated to other Far East locations, including Hong Kong, or other low-cost manufacturing locations, with only temporary disruption and delay in such production and possible short-term operating and capital losses, provided that the Company is able to move substantially all of its manufacturing equipment and other assets currently in the People's Republic to another location. If the Company is unable to remove such assets, due to confiscation, expropriation, nationalization, embargoes or governmental restrictions, it would incur substantial operating and capital losses, including losses resulting from business disruption and delays in production. In addition, as a result of a relocation of its manufacturing equipment and certain other assets, the Company would likely incur relatively higher manufacturing costs. A relocation could also adversely affect the Company's revenues if the demand for the Company's products currently manufactured in the People's Republic decreases due to a dis ruption in the production and delivery of such products or due to higher prices which might result from increased manufacturing costs. Furthermore, earnings could be adversely affected due to reduced sales and/or the Company's inability to maintain its current margins on the products currently manufactured in the People's Republic.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference to the Company's 1996 Annual Report to Shareholders (Exhibit 13). See also PART IV, ITEM 14(a)1 of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders under the captions "Election of Directors" and "Executive Officers".
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders under the captions "Executive Compensation" and "Certain Transactions".
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders under the caption "Security Ownership".
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by Reference to the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders under the captions "Executive Compensation" and "Certain Transactions".
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS
The following consolidated financial statements of Windmere- Durable Holdings, Inc. and subsidiaries are incorporated by reference in PART II, ITEM 8:
AUDITOR'S REPORT Exhibit 13
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995 Exhibit 13
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Exhibit 13
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - THREE YEARS ENDED DECEMBER 31, 1996 Exhibit 13
CONSOLIDATED STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Exhibit 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Exhibit 13
2. FINANCIAL STATEMENT SCHEDULES
AUDITOR'S REPORT Filed herewith
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES - YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Filed herewith
Individual financial statements of the Company have been omitted since consolidated financial statements have been presented, and all subsidiaries included in the consolidated financial statements are wholly-owned. All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements or the notes thereto.
3. EXHIBITS
(3) Articles of Incorporation and By-Laws.
3.1 Amended and Restated Articles of Incorporation of the Company filed with the Florida Secretary of State on May 17, 1984. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1984.
3.2 Articles of Amendment to the Articles of Incorporation of the Company filed with the Florida Secretary of State on May 16, 1986. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1986.
3.3 Articles of Amendment to the Articles of Incorporation of the Company filed with the Florida Secretary of State on June 23, 1986. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1987.
3.4 By-Laws as amended through October 11, 1991. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991.
3.5 Amendment to October 11, 1991 By-Laws. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.
3.6 Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company filed with the Florida Secretary of State on June 21, 1996. Filed herewith.
(10) Material Contracts
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.1 Employment Agreement dated as of January 27, 1983, between Belvin Friedson and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1982.
10.2 Employment Agreement, First Amendment, dated as of February 27, 1987, between Belvin Friedson and the Company. Incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1986.
10.3 Employment Agreement, Second Amendment, dated as of December 16, 1992, between Belvin Friedson and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.
10.4 Employment Agreements dated as of July 18, 1983, between David M. Friedson, Barbara Friedson Garrett and Arnold Thaler, respectively, and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1983.
10.5 Employment Agreement, First Amendment, dated as of January 17, 1985, between David M. Friedson and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1984.
10.6 Employment Agreement, Second Amendment and Nonqualified Stock Option, dated as of September 30, 1985, between David M. Friedson and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1985.
10.7 Employment Agreement (Third Amendment) and Nonqualified Stock Option (First Amendment) dated as of October 28, 1987, between David M. Friedson and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1987.
10.8 Employment Agreement (Fourth Amendment) and Nonqualified Stock Option (Second Amendment) dated as of October 26, 1987, between David M. Friedson and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1987.
10.9 Employment Agreement (Fifth Amendment) dated as of December 16, 1992, between David M. Friedson and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.
10.10 Nonqualified Stock Option dated as of January 5, 1987, granted by the Company to Barbara Friedson Garrett. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1986.
10.11 Employment Agreement (First Amendment) and Nonqualified Stock Option (First Amendment) dated as of October 26, 1987, between Barbara Friedson Garrett and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1987.
10.12 Employment Agreement (Second Amendment) and Nonqualified Stock Option (Second Amendment) dated as of October 26, 1987 between Barbara Friedson Garrett and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1987.
10.13 Employment Agreement (Third Amendment) dated as of December 16, 1992, between Barbara Friedson Garrett and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.
10.14 Nonqualified Stock Option dated as of January 5, 1987, granted by the Company to Arnold Thaler. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1986.
10.15 Employment Agreement (First Amendment) and Nonqualified Stock Option (First Amendment) dated as of October 26, 1987 between Arnold Thaler and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1987.
10.16 Employment Agreement (Second Amendment) and Nonqualified Stock Option (Second Amendment) dated as of October 26, 1987 between Arnold Thaler and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1987.
10.17 Employment Agreement (Third Amendment) dated as of December 16, 1992, between Arnold Thaler and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.
10.18 Employment Agreement dated May 31, 1987, between Robert Gorman and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1987.
10.19 Employment Agreement (First Amendment) dated as of December 16, 1992, between Robert Gorman and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.
10.20 1982 Employees Incentive Stock Option Plan. Incorporated by reference to Exhibit 4 to Post-Effective Amendment No. 1 to the Company's Form S-8 Registration Statement No. 2-92540.
10.21 Amendment to 1982 Employees Incentive Stock Option Plan. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1987.
10.22 1992 Employees Incentive Stock Option Plan. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.
10.23 Employment Agreement dated as of October 26, 1987 between Burton A. Honig and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1987.
10.24 Employment Agreement (First Amendment) dated as of December 16, 1992, between Burton A. Honig and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.
10.25 Consulting Agreement dated January 1, 1989 between Mr. Lai Kin, Chairman of Durable, and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1988.
10.26 Employment Agreement dated January 3, 1989, between Harry Schulman and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1988.
10.27 Employment Agreement (First Amendment) dated as of June 4, 1990, between Harry Schulman and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.
10.28 Employment Agreement (Second Amendment) dated as of December 16, 1992, between Harry Schulman and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.
10.29 1988 Director Stock Option Plan. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1988.
10.30 1989 Employees 401(k) Profit Sharing Plan and Trust. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1989.
10.31 Consulting Agreement, dated March 30, 1987, between Paragon Industries, Paragon Sales, Inc., William Weber, Jacqueline K. Weber and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990.
10.32 Amendment to Consulting Agreement, dated May 29, 1990, between Paragon Industries, Paragon Sales, Inc., William Weber, Jacqueline K. Weber and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990.
10.33 Second Amended and Restated Employment Agreement dated January 1, 1991, between David O'Neill and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991.
10.34 Second Amended and Restated Employment Agreement (First Amendment) dated December 16, 1992, between David O'Neill and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.
OTHER MATERIAL CONTRACTS
10.35 Installment Purchase Contract dated as of May 1, 1985, between the Dade County Industrial Development Authority and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1985.
10.36 Asset Purchase Agreement dated September 30, 1988 between Sally Beauty Company, Alberto-Culver Company, the Company and certain of the Company's affiliates. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1988.
10.37 Joint Venture Agreement, dated March 30, 1987, between Paragon Sales, Inc., William Weber, Jacqueline K. Weber and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990.
10.38 Amendment to Joint Venture Agreement, dated May 29, 1990, between Paragon Sales, Inc., William Weber, Jacqueline K. Weber and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990.
10.39 Exclusive Sales Agreement dated May 29, 1992 among the Company, American International Industries and Zvi and Betty Ryzman. Incorporated by reference to the Company's Form S-2 Registration Statement No. 33-51776.
10.40 Settlement Agreement dated May 6, 1992 between North American Philips Corporation and the Company. Incorporated by reference to the Company's Form S-2 Registration Statement No. 33-51776.
10.41 Letter of Credit Agreement dated July 31, 1992 between NationsBank and the Company. Incorporated by reference to the Company's Form S-2 Registration Statement No. 33-51776.
10.42 Agreement dated May 28, 1991, between Xingiao Economic Development Corporation and Durable. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991.
10.43 Agreement dated May 28, 1991, between Bogang Economic Development Company and Durable. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991.
10.44 Agreement dated May 28, 1991, between Wanfeng Economic Development Corporation and Durable. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991.
10.45 Warrant Agreement dated October 1, 1992, between American Stock Transfer and Trust Company and the Company. Incorporated by reference to the Company's Form S-2 Registration Statement No. 33-51776.
10.46 Stock Purchase Agreement dated May 29, 1992 between Glamour Industries, Inc. and the Company. Incorporated by reference to the Company's Form S-2 Registration Statement No. 33-51776.
10.47 Trademark Licensing Agreement dated January 11, 1994, between Helene Curtis, Inc. and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993.
10.48 Stock Acquisition Agreement dated April 1, 1994, between Durable, PPC Industries 1980 Limited, Ourimbah Investment, Limited and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994.
10.49 1995 Common Stock Purchase Rights Agreement dated March 6, 1995 between American Stock Transfer and Trust Company and the Company. Incorporated by reference to the Company's Form 8-A Registration Statement filed March 7, 1995.
10.50 Facility Letter dated June 3, 1995, from the Bank of East Asia, Limited to Durable, Durable Electric Limited and PPC Industries 1980 Limited. Incorporated by reference to the Company's Form 10-Q dated June 30, 1995.
10.51 Amended and Restated Letter Agreement dated July 28, 1995, between NationsBank and the Company. Incorporated by reference to the Company's Form 10-Q dated June 30, 1995.
10.52 Credit Agreement dated October 11, 1996, between Windmere Corporation, NationsBank National Association (South) and National Bank of Canada. Filed herewith.
10.53 Amendment No. 1 to Amended and Restated Letter Agreement, dated March 1, 1996, between NationsBank and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995.
10.54 Amendment Agreement No. 1 to the Credit Agreement (October 11, 1996) dated January 31, 1997. Filed herewith.
(13) Annual Report to Security Holders for the year ended December 31, 1996. Exhibit 13.
(21) Subsidiaries of the Registrant. Filed herewith.
(23) Consents of experts and counsel. Filed herewith.
(b) REPORTS ON FORM 8-K
None.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders Windmere-Durable Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Windmere-Durable Holdings, Inc. and Subsidiaries (the "Company") as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Windmere-Durable Holdings, Inc. and Subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
We have also audited Schedule II of Windmere-Durable Holdings, Inc. and Subsidiaries for each of the three years in the period ended December 31, 1996. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Miami, Florida February 7, 1997 (except for Notes K and R as to which the date is March 27, 1997)
WINDMERE CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CHANGES IN ALLOWANCE FOR POSSIBLE LOSSES ON ACCOUNTS RECEIVABLE:
Years Ended December 31, 1996 1995 1994 ---- ---- ---- Balance at beginning of period $ 1,158,000 $ 1,338,100 $ 1,424,600
Addition - Charged to costs and expenses 930,000 894,700 231,400
Addition - Charged to other accounts (a) 4,000 31,600 31,300
Deductions (b) (963,000) (1,106,400) (349,200) ----------- ----------- -----------
Balance at end of period $ 1,129,000 $ 1,158,000 $ 1,338,100 =========== =========== ===========
(a) Recoveries of amounts previously written off against the reserve.
(b) Write-off of accounts receivable against the reserve.
PART IV. ITEM 3. (21).
SUBSIDIARIES OF THE REGISTRANT
NAME INCORPORATED IN - ---- --------------- Consumer Products Americas, Inc. Florida
EDI Masters, Inc. Florida
Fortune Products, Inc. Florida
Jerdon Products, Inc. Florida
Windmere Fan Products, Inc. Florida
Bay Books & Tapes, Inc. Florida
LitterMaid, Inc. Florida
Windmere Corporation Florida
Windmere Holdings Corporation Delaware
Windmere Holdings Corporation II Delaware
Goal Making Company Limited British Virgin Islands
Remdale Investments Limited British Virgin Islands
PPC Industries, Ltd. British Virgin Islands
Windmere Consumer Products, Inc. Canada
Durable Electric, Ltd. Hong Kong
Durable Electrical Metal Factory, Ltd. Hong Kong
PPC Industries (1980) Ltd. Hong Kong
Sandgate Services, Ltd. Hong Kong
Parawind, Ltd. Hong Kong
PPC Product Services, Ltd. Hong Kong
Each of the above subsidiaries is wholly-owned and is included in the consolidated financial statements as of December 31, 1996.
AUDITOR'S CONSENT
We have issued our report dated February 7, 1997, accompanying the consolidated financial statements and schedules incorporated by reference in the Annual Report of Windmere-Durable Holdings, Inc. on Form 10-K for the year ended December 31, 1996. We hereby consent to the incorporation by reference of the aforementioned report in the Registration Statements of Windmere-Durable Holdings, Inc. on Form S-8 (File No. 33-7681, effective September 30, 1986), Form S-8 (File No. 33-36424, effective August 17, 1990), Form S-2 (File No. 33-51776, effective January 19, 1993), and on Form S-8 (File No. 33-58574, effective February 22, 1993).
GRANT THORNTON LLP
Miami, Florida March 27, 1997
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WINDMERE-DURABLE HOLDINGS, INC. (Registrant)
BY: /s/ David M. Friedson DATE: 3-27-97 ---------------------------- ------------------------ David M. Friedson, Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
BY: /s/ David M. Friedson DATE: 3-27-97 --------------------------- ------------------------ David M. Friedson, Chairman, President and Chief Executive Officer
BY: /s/ Harry D. Schulman DATE: 3-27-97 ---------------------------- ------------------------ Harry D. Schulman, Senior Vice President - Finance and Administration and Chief Financial Officer
BY: /s/ Burton A. Honig DATE: 3-27-97 ---------------------------- ------------------------ Burton A. Honig, Vice President - Finance (Principal Accounting Officer)
BY: /s/ Bertley Sager DATE: 3-28-97 ---------------------------- ------------------------ Bertley Sager, Director
BY: /s/ Jerald I. Rosen DATE: 3-27-97 ---------------------------- ------------------------ Jerald I. Rosen, Director
BY: /s/ Harold Strauss DATE: 3-28-97 ---------------------------- ------------------------ Harold Strauss, Director
BY: /s/ Lai Kin DATE: 3-28-97 ---------------------------- ------------------------ Lai Kin, Director
BY: /s/ Raymond So DATE: 3-28-97 ---------------------------- ------------------------ Raymond So, Director
BY: /s/ Leonard Glazer DATE: 3-28-97 ---------------------------- ------------------------ Leonard Glazer, Director
BY: /s/ Barbara Friedson Garrett DATE: 3-27-97 ---------------------------- ------------------------ Barbara Friedson Garrett, Director
BY: /s/ Felix S. Sabates DATE: 3-27-97 ---------------------------- ------------------------ Felix S. Sabates, Director
BY: /s/ Arnold Thaler DATE: 3-27-97 ---------------------------- ------------------------ Arnold Thaler, Director
BY: /s/ Thomas J. Kane DATE: 3-28-97 ---------------------------- ------------------------- Thomas J. Kane, Director
BY: /s/ Susan J. Ganz DATE: 3-27-97 ---------------------------- ------------------------- Susan J. Ganz, Director
BY: /s/ Desmond Lai DATE: 3-28-97 ---------------------------- ------------------------- Desmond Lai, Director
FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders Windmere - Durable Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Windmere - Durable Holdings, Inc. and Subsidiaries (the "Company") as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Windmere - Durable Holdings, Inc. and Subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
Miami, Florida February 7, 1997 (except for Notes K and R, as to which the date is March 27, 1997)
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
ASSETS
The accompanying notes are an integral part of these statements.
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
The accompanying notes are an integral part of these statements.
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1996
The accompanying notes are an integral part of this statement.
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(continued)
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31,
The accompanying notes are an integral part of these statements.
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Windmere - Durable Holdings, Inc. and Subsidiaries (the "Company") is principally engaged in the manufacture and sale of personal care, kitchen electric and seasonal products. In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. A summary of the Company's significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions are eliminated in consolidation. The Company reflects its investments in its 50%-owned joint ventures at cost plus its equity in undistributed net earnings.
FOREIGN CURRENCY TRANSLATION
Balance sheet accounts of the Company's foreign operations are translated at the exchange rate in effect at each year end and income statement accounts are translated at the average exchange rates prevailing during the year. Adjustments resulting from this translation process are accumulated in a separate component of stockholders' equity and are not included in the determination of net earnings. The Company's foreign manufacturing subsidiary utilizes the local currency as its functional currency, and the other foreign subsidiaries primarily utilize the U.S. dollar as their functional currency.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Cash balances at December 31, 1996 include $5,251,000 held in foreign banks by the Company's Hong Kong and Canadian subsidiaries.
(continued)
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
INVENTORIES
Inventories are stated at the lower of cost or market; cost is determined by the first-in, first-out method. Inventories are comprised of the following:
1996 1995 -------------- -------------- Raw materials $ 13,824,300 $ 16,327,900 Work in process 20,551,900 21,085,300 Finished goods 55,137,800 41,600,400 -------------- --------------
$ 89,514,000 $ 79,013,600 ============== ==============
RECEIVABLES FROM AFFILIATES
Receivables from affiliates include accounts receivable which arise in the ordinary course of business and are settled as trade obligations, as well as notes receivable due from certain of the Company's joint venture partners ("affiliates"). Notes receivable to these affiliates totaled $8,045,800 at December 31, 1996, are short-term and bear interest at prevailing market interest rates.
PROPERTY, PLANT AND EQUIPMENT
Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to their estimated operating service lives using accelerated and straight-line methods.
INTANGIBLE ASSETS
Intangible assets, consisting primarily of goodwill, are being amortized on a straight-line basis over periods ranging from 7-20 years. Intangible assets were $13,704,600 and $10,113,700 at December 31, 1996 and 1995, respectively, and the related accumulated amortization was $2,700,700 and $2,126,800, respectively.
In December 1996, the Company acquired the remaining 50-percent of its seasonal products joint venture for a nominal amount. The total cost in excess of net assets acquired has resulted in goodwill of $1,277,400 and is being amortized over 7 years.
(continued)
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
INTANGIBLE ASSETS - CONTINUED
On an ongoing basis, management reviews the valuation and amortization of goodwill. As part of this review, the Company estimates the value and future benefits of the net income generated by the related subsidiaries to determine that no impairment has occurred.
In March 1995, the Financial Accounting Standards Board issued Statement 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement had no impact on the Company's results of operations or financial position upon adoption in January 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist primarily of cash and cash equivalents, accounts receivable, notes receivable, accounts payable, notes payable and bank debt. At December 31, 1996, the fair value of these instruments approximates the carrying amount of these items.
INCOME TAXES
No provision has been made for U.S. taxes on undistributed earnings of foreign subsidiaries and joint ventures of approximately $108,000,000 at December 31, 1996, as it is anticipated that such earnings will be reinvested in their respective operations or in other foreign operations.
Deferred taxes have been provided on temporary differences in reporting certain transactions for financial accounting and tax purposes.
DEFERRED INCOME
In 1992, the Company granted an exclusive license for the distribution of a product. Deferred income of $1,340,600 resulted from this transaction, which is being reported as other income on a straight-line basis over the five year license term.
In 1988, the Company sold its Save-Way Beauty Supply stores for a gain of approximately $6,980,000, of which $3,300,000 was allocated to a ten-year covenant not to compete that is being amortized to other income on a straight-line basis.
(continued)
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of common shares and common equivalent shares outstanding during each year, using the modified treasury stock method. The total number of such weighted average shares was 17,620,000 in 1996, 17,227,000 in 1995, and 17,589,000 in 1994. Stock options and warrants are considered common stock equivalents unless their inclusion would be antidilutive.
RECLASSIFICATIONS
Certain prior year amounts within the accompanying financial statements have been reclassified for comparability.
NOTE B - UNUSUAL OR NON-RECURRING ITEMS
In 1995, the Company incurred a non-recurring pre-tax loss of $8,000,000 on the sale of an other asset. This transaction reduced 1995 net earnings by $5,280,000, or $.31 per share, on an after-tax basis.
In 1994, Durable sold 60,000 square feet of office space in Hong Kong, for $9,500,000. This transaction generated a non-recurring profit of $7,810,500, or approximately $.45 per share. No taxes were provided as the gain was not taxable.
NOTE C - INVESTMENTS IN JOINT VENTURES
Investments in joint ventures consist of the Company's interests in joint ventures, accounted for under the equity method. Included are the Company's 50-percent interests in Salton/Maxim Housewares, Inc. ("Salton"), New M-Tech Corporation ("New M-Tech"), PX Distributors, Inc. ("PX"), Breakroom of Tennessee, Inc. and Anasazi Partners, L.P. ("Anasazi").
In December 1996, the Company acquired the remaining 50-percent of its seasonal products joint venture for a nominal amount. The assets and liabilities of the joint venture are included in the consolidated financial statements of the Company and have been excluded from the summarized financial information below for 1996.
(continued)
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE C - INVESTMENTS IN JOINT VENTURES - Continued
Summarized financial information of the unconsolidated companies is as follows:
All sales made by joint ventures, other than sales of $935,000 by Salton to the Company in 1996, were to entities other than members of the consolidated group. Included in the Company's sales are sales made to joint ventures of approximately $17,855,400 in 1996, including $8,537,000 to Salton, and $7,485,300 in 1995.
Certain of the Company's joint venture investments at December 31, 1996 and 1995, had negative values of approximately $375,000 and $800,000, respectively, which deficits have been classified as a reduction in receivables from affiliates.
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE D - PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment:
NOTE E - NOTES AND ACCEPTANCES PAYABLE
The Company's foreign subsidiaries (the "subsidiaries") have $6,400,000 in trade finance lines of credit, payable on demand, which are secured by the subsidiaries' tangible and intangible property located in Hong Kong and in the People's Republic of China, as well as a Company guarantee. At December 31, 1996, the subsidiaries were utilizing, including letters of credit, approximately $2,496,300 of these credit lines. These subsidiaries also have available an additional $5,000,000 line of credit which is supported by a domestic standby letter of credit. As of December 31, 1996, $3,232,000 was being utilized under this facility.
The Company has a $30,000,000 line of credit from a domestic bank, which is secured by domestic accounts receivable and inventory. At December 31, 1996, there was $18,000,000 outstanding under this credit line.
NOTE F - ACCRUED EXPENSES
Accrued expenses are summarized as follows:
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE G - LONG-TERM DEBT
Long-term debt is summarized as follows:
In 1985, the Company received proceeds of $7,500,000 from the issuance of tax-exempt industrial development revenue bonds. The bonds are being paid off in equal quarterly principal payments of $203,700 through May 2000. At December 31, 1996, the interest rate on the bonds was 6.5-percent. The bonds include certain covenants which provide, among other things, restrictions relating to the maintenance of minimum levels of working capital, net worth and other financial ratios.
NOTE H - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan for its employees to which the Company makes discretionary contributions at rates dependent on the level of each employee's contributions. Contributions made by the Company are limited to the maximum allowable for federal income tax purposes. The amounts charged to earnings for this plan during the three years ended December 31, 1996 were not significant.
The Company does not provide any health or other benefits to retirees.
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE I - INCOME TAXES
Income tax expense (benefit) consists of the following:
The analysis of the deferred income tax provision (benefit) representing the tax effects of temporary differences between tax and financial reporting is as follows:
The United States and foreign components of earnings (loss) before income taxes are as follows:
(continued)
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE I - INCOME TAXES - Continued
The differences between the statutory rates and the tax rates computed on pre-tax profits are as follows:
In the third quarter of 1995, the Company reached an agreement with the Hong Kong Inland Revenue Department concerning the taxes assessed against the Company's consolidated Hong Kong subsidiaries through 1991. The assessment, including interest charges and net of U.S. foreign tax credits, approximated $1,400,000. The Company made a provision in its 1995 second quarter of $400,000 or $.02 per share, to increase its contingency reserve to the settlement amount. Security deposits of approximately $3,000,000 were refunded to the Company during the fourth quarter of 1995. Hong Kong tax returns for the fiscal years 1992 through 1995 have been audited and accepted as filed.
The Internal Revenue Service has completed its field work in its examination of the Company's 1992 tax return. To date, no adjustments have been proposed. Management believes that adequate provision for taxes has been made for the years under examination and those not yet examined.
The Company's future income tax benefits at December 31, 1996, arise from Durable's and the Company's Canadian subsidiary's net operating loss carryforwards. Valuation allowances have not been recorded limiting such benefits based on management's current estimate that future profits will be sufficient to realize these benefits.
(continued)
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE I - INCOME TAXES - Continued
The primary components of future income tax benefits at December 31, 1996 are as follows:
The tax benefits resulting from the exercise of stock options have been recorded as additions to paid-in capital in the amounts of $183,600 and $242,800 in 1996 and 1995, respectively.
NOTE J - ACQUISITIONS
PX DISTRIBUTORS, INC.
In December 1995, the Company purchased, for a nominal amount, a 50-percent interest in PX Distributors, Inc., a distributor of home automation/security devices. The Company and the other owners have agreed to lend PX certain amounts from time to time to meet working capital requirements. Loans made by the Company bear interest at the prime rate, are payable upon PX achieving sufficient cash flow and are secured by the assets of PX.
SALTON/MAXIM HOUSEWARES, INC.
In February 1996, the Company entered into a stock purchase agreement with Salton providing for the issuance and sale by Salton to the Company of 6,508,572 shares of its common stock, representing 50-percent of Salton's outstanding common stock after issuance.
On July 11, 1996, Windmere completed its acquisition of 50-percent of Salton. The Company received 6,508,572 shares of Salton common stock (market value at date of acquisition of approximately $36.2 million) in exchange for a cash payment of $3,254,300, a $10,847,700 promissory note and 748,112 shares of Windmere stock (market value at date of agreement of approximately $6,057,000). The total cost in excess of net assets acquired is not deemed to be material.
(continued)
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE J - ACQUISITIONS - Continued
In addition, the Company received an option to purchase 453,000 shares of Salton common stock at an exercise price of $4.53 per share. The option becomes exercisable only if and to the extent that options to purchase shares of Salton common stock outstanding at the date of the stock purchase agreement are exercised.
The $10,847,700 promissory note bears interest at a rate of 8-percent per annum, payable quarterly, and matures in July 2001. The note is subordinated to the Company's current and future indebtedness to its senior lender and is collateralized by certain of the Company's domestic assets.
LITTERMAID(TM)
In 1996, the Company purchased certain assets and marketing rights, including patents, for the LitterMaid(TM), computerized, infrared, automatic self-cleaning cat litter box. The purchase price of the assets included $2,200,000 in cash and options to purchase 150,000 shares of the Company's common stock. The total fair value of the options as determined under SFAS 123, is $549,000 and has been included in the cost of the assets acquired (Note L).
NEW M-TECH CORPORATION
In April 1996, the Company acquired a 50-percent interest in New M-Tech Corporation, a consumer electronics company for $10,000,000. Payment consisted of $3,000,000 in cash and $7,000,000 in unsecured promissory notes. The promissory notes bear interest at 8% per annum and consist of a $3,000,000 promissory note maturing in 1998, and two $2,000,000 promissory notes maturing in 2001, one of which is convertible into shares of the Company's common stock at a price of $15 per share. Conversion may occur at any time during the term of the convertible promissory note, and may be required under certain circumstances. The notes are subordinated to the Company's current and future indebtedness to its senior lender. The total cost in excess of net assets acquired of $5,300,000 has resulted in goodwill and is being amortized over 20 years on a straight-line basis.
BREAKROOM OF TENNESSEE, INC.
In May 1996, the Company agreed to contribute and/or purchase inventory valued at $250,000 in exchange for a 50-percent interest in Breakroom of Tennessee, Inc., a joint venture formed to market and distribute office products. The Company's investment as of December 31, 1996 consists of $240,390 in inventory purchased on behalf of the joint venture.
(continued)
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE J - ACQUISITIONS - Continued
BAY BOOKS & TAPES, INC.
In June 1996, the Company acquired the assets of the books and video publishing division of KQED, Inc., consisting mostly of inventory, for $1,180,000 in cash. Bay Books & Tapes, Inc. publishes public television companion books and videos.
ANASAZI PARTNERS, L.P.
In June 1996, the Company entered into an agreement to acquire a 50-percent interest in an investment partnership for $1,250,000. Payments as of December 31, 1996, include a $1,250,000 capital contribution to the partnership and loans totaling $1,250,000 to the partnership's other equity partner. Such loans bear interest at a rate of 8-percent per annum, are unsecured and are payable upon demand.
The partnership's investments include privately traded securities whose values have been estimated by the General Partner in the absence of readily ascertainable market values. Fair value for these securities is considered to be cost which may differ significantly from the values that would have been used had a ready market for the securities existed.
PRO-FORMA
The results of operations on a pro-forma basis as though Salton and New M-Tech had been acquired as of the beginning of the years ended December 31, 1996 and 1995 are as follows: (In Thousands except per share amounts)
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE K - COMMITMENTS AND CONTINGENCIES
LITIGATION
In April 1994, Kabushiki Kaisha Izumi Seiki Seisakusho, a Japanese corporation ("Izumi"), filed an action against the Company, David M. Friedson, the President and Chief Executive Officer of the Company, U.S. Philips Corporation, North American Philips Corporation and N.V. Philips Gloellampenfabrieken (together, "Philips"). This action concerns the 1992 settlement (the "Philips Settlement") of certain claims, primarily a Federal antitrust claim, made by the Company against Philips, which resulted in an $89,644,257 judgment in favor of the Company. Pursuant to the Philips Settlement, Philips paid the Company $57,000,000 in May 1992. As part of the Philips Settlement, the Company and Philips agreed that the Company's money judgment against Philips in connection with such antitrust litigation would be vacated. Izumi is claiming, among other things, that the Philips Settlement, including the agreement with Philips to cooperate to vacate the related judgment in favor of the Company, constitutes a breach by the Company of a customary indemnification agreement between Izumi (as seller of goods) and the Company (as buyer of goods) dated February 20, 1984. This indemnification agreement covered certain claims against the Company and was entered into more than eight months prior to the commencement of the Philips litigation in connection with the routine purchase by the Company of goods from Izumi. Izumi advanced certain legal fees and costs to the Company in connection with the Philips litigation. Izumi is further claiming that it is entitled to recover from the Company an unspecified portion of the Philips Settlement, punitive damages and reimbursement of litigation and other related costs and expenses. A pre-answer motion by the Company resulted in the dismissal of some of Izumi's claims, and the Company answered the remaining claims. A mediation was held on February 27, 1997 to consider settlement of the case. On March 27, 1997, after evaluating the potential costs of continuing litigation, the Company paid $4,500,000 to settle the dispute.
(continued)
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE K - COMMITMENTS AND CONTINGENCIES - Continued
LITIGATION - Continued
The Company, its 50-percent owned joint venture partners Salton/Maxim Housewares, Inc. and New M-Tech Corporation, White Consolidated Industries, Inc. ("White Consolidated"), and certain other parties have been named as defendants in litigation filed by Westinghouse Electric Corporation ("Westinghouse") in the United States District Court for the Western District in Pennsylvania on December 18, 1996. The action arises from a dispute between Westinghouse and White Consolidated over rights to use the "Westinghouse" trademark for consumer products, based on transactions between Westinghouse and White Consolidated in the 1970's and the parties' subsequent conduct. Prior to the filing of Westinghouse's Complaint against the Company, White Consolidated, on November 14, 1996, filed a Complaint in the United States District Court for the Northern District of Ohio against Westinghouse and another corporation for trademark infringement, dilution, false designation or origin and false advertisement, seeking both injunctive relief and damages. Procedural motions concerning the jurisdiction in which the dispute should be heard have been filed by the parties. The action by Westinghouse seeks, among other things, a preliminary injunction enjoining the defendants from using the trademark, unspecified damages and attorneys' fees. Pursuant to the Indemnification Agreement dated January 23, 1997 by and among White Consolidated, Kmart Corporation, and the Company, White Consolidated is defending and indemnifying the Company for all costs and expenses for claims, damages, and losses, including the costs of litigation. Pursuant to the license agreements with White Consolidated, While Consolidated is defending and indemnifying Salton/Maxim and NewTech for all costs and expenses for claims, damages, and losses, including the costs of litigation. On January 29, 1997, on joint motion of the parties, the court issued an order staying future proceedings for sixty (60) days in order to give the parties an opportunity to pursue settlement discussions.
The Company is also subject to other legal proceedings, product liability and other claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability, if any, in excess of applicable insurance coverage, is not likely to have a material effect on the financial position of the Company. However, as the outcome of litigation or other legal claims is difficult to predict, significant changes in the estimated exposures could occur.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with several of its executive officers for periods ranging from two to five years. The agreements provide the employees with an option to terminate their agreements and receive lump sum payments of up to five years compensation if there is a change in control of the Company.
(continued)
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE K - COMMITMENTS AND CONTINGENCIES - Continued
OTHER
In April 1994, the Company purchased from Ourimbah Investment, Limited ("Ourimbah") the remaining 20% of the issued and outstanding capital stock of Durable (the "Purchased Shares") which had not, prior to such purchase, been owned, directly or indirectly, by the Company. In connection with such purchase, the Company agreed to make an additional payment to Ourimbah for the Purchased Shares upon the occurrence of a change of control of the Company on or before July 1, 1999. Any such additional payment will be in an amount with respect to each Purchased Share equal to the greater of (i) the same multiple of earnings per share of Durable as the highest multiple of earnings per share paid for the shares of common stock of the Company received in connection with such change of control or (ii) the same multiple of net asset value per share of Durable as the highest multiple of price per net asset value per share paid for the shares of common stock of the Company received in connection with such change of control. For purposes of determining whether any such additional payment is required, a change of control will be deemed to have occurred upon (i) the acquisition by any person of 50% or more of the then outstanding shares of common stock of the Company, (ii) a change in the majority of the members of the Company's board of directors who are serving as of the date of the purchase agreement or (iii) the approval by the Company's shareholders of (A) a reorganization, merger or consolidation in which the shareholders of the Company prior to such transaction do not, immediately thereafter, own more than 50% of the combined voting power of the Company following such transaction, (B) a liquidation of dissolution of the Company or (C) a sale of all or substantially all of the Company's assets. No change of control will be deemed to have occurred in connection with any transaction approved by a majority of the members of the board of directors.
NOTE L - STOCKHOLDERS' EQUITY
STOCK OPTIONS
The Company's 1982 and 1992 Employees' Incentive Stock Option Plans provide for granting of options of not more than 1,200,000 shares and 500,000 shares, respectively, of common stock. Options granted under the plans are exercisable in equal annual installments during a five or six year period beginning one year after the date the option is granted.
(continued)
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE L - STOCKHOLDERS' EQUITY - Continued
The Company has also granted stock options which are classified as non-qualified, and which are not included in the 1982 or 1992 Employees' Incentive Stock Option Plans. Prior to December 31, 1995, the Company accounted for such options under APB Opinion 25 and related Interpretations. Commencing January 1, 1996, the Company accounts for non-qualified options issued to non-employees, under SFAS 123, Accounting for Stock Based Compensation.
The exercise price of all options granted by the Company equals the market price at the date of grant. No compensation expense has been recognized.
During 1996, the Company issued options to purchase 97,500 shares of common stock to non-employee sales representatives. These sales representatives included Top Sales and TJK (Note P) which received options to purchase 25,000 shares. The options were issued with an exercise price that was equal to the market price on the date of the grant. The total fair value of the options, as determined under SFAS 123, was $357,000 which is to be amortized over the vesting period of the options. For 1996, the Company expensed $68,000 associated with these options.
In connection with the purchase of certain assets of LitterMaid(TM), the Company issued options for the purchase of 150,000 shares of common stock. The total fair value of the options, as determined under SFAS 123, was $549,000 and has been included in the cost of purchasing the assets.
Had compensation cost for the Employees' Incentive Stock Option Plans and non-qualified options issued to employees been determined based on the fair value of the options at the grant dates consistent with the method of SFAS 123, the Company's net income (loss) and earnings (loss) per share would have been changed to the pro forma amounts indicated below. Disclosure of such amounts is not required for the fiscal year ended December 31, 1994 and accordingly is not presented below.
(continued)
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE L - STOCKHOLDERS' EQUITY - Continued
The above pro forma disclosures may not be representative of the effects on reported net income for future years as options vest over several years and the Company may continue to grant options to employees.
The fair value of each option grant is estimated on the date of grant using the binomial option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: dividend yield of 0.0 percent for all years; expected volatility of 43.97 percent and 42.20 percent; risk-free interest rates of 5.56 percent and 5.34 percent; and expected holding periods of 6.34 and 4.06 years.
A summary of the status of the Company's fixed stock options as of December 31, 1996 and 1995, and changes during the years ending on those dates is as follows:
(continued)
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE L - STOCKHOLDERS' EQUITY - Continued
The following information applies to options outstanding at December 31, 1996.
WARRANTS
As part of a lawsuit settlement, warrants to purchase 750,423 shares of the Company's common stock have been issued. The warrants have an exercise price of $7.50 per share and are exercisable through January 19, 1998. At December 31, 1996, 432,997 warrants have been exercised.
COMMON STOCK PURCHASE RIGHTS PLAN
In March 1995, the Company implemented a Common Stock Purchase Rights Plan and distributed one Right for each share of the Company's common stock outstanding. The Rights are not exercisable or transferable, apart from the Company's common stock, until after a person or group acquires, or has the right to acquire, beneficial ownership of 15 percent or more of the Company's common stock (which threshold may, under certain circumstances, be reduced to 10 percent) or announces a tender or exchange offer to acquire such percentage of the Company's common stock. Each Right entitles the holder to purchase one quarter of one share of common stock at an exercise price of $25.00 per full share and contains provisions that entitle the holder in the event of specific transactions, to purchase common stock of the Company or any acquiring or surviving entity at one-half of market price as determined under the terms of the Rights Agreement. The Rights will expire in March 2005, unless previously exercised or redeemed at the option of the Company for $.00001 per Right.
(continued)
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE L - STOCKHOLDERS' EQUITY - Continued
STOCK PURCHASE PROGRAM
The $3.8 million purchase in 1996 of 463,000 shares of the Company's common stock completed the Company's purchase of 1,000,000 shares of its common stock under the 1994 stock purchase program. In 1996, the Company's Board of Directors authorized a new stock purchase program, whereby, the Company can purchase up to 10-percent of its outstanding shares (approximately 1.6 million shares). No shares have been purchased under the new program.
NOTE M - SPECIAL PREFERRED STOCK
During 1986, the Company was authorized to issue 40,000,000 shares of $.01 par value special preferred stock purchase rights for each share of common stock, par value $.10 per share. These rights entitled the holder to purchase one share of special preferred stock at a price of $.01 under certain conditions in connection with preserving for the Company and its stockholders the benefits of any recovery in the Company's lawsuit with North American Philips Corporation, et al. In 1992, these conditions ceased to apply, therefore, the special preferred stock rights remain outstanding but have no continuing application.
NOTE N - GEOGRAPHIC AREA INFORMATION
(continued)
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE N - GEOGRAPHIC AREA INFORMATION - Continued
Transfers between geographic areas are billed at negotiated prices. In 1995, the United States operations' operating profit includes an $8,000,000 loss on the sale of an other asset. In 1994, the international operations' operating profit includes a $7,810,500 gain on the sale of Hong Kong office space. All United States revenues are derived from sales to unaffiliated customers. Included in domestic revenues and operating profit are certain sales derived from direct product shipments from Hong Kong to customers located in the United States.
International operations are conducted in Canada, Hong Kong, Europe and the People's Republic of China.
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE O - CONCENTRATION OF CREDIT AND OTHER RISKS
The Company sells on credit terms to a majority of its customers, most of which are U.S. and Canadian retailers and distributors located throughout those countries.
A kitchen electric appliance distributor and a national retail beauty supply chain accounted for 10.9% and 10.3%, respectively, of 1996 sales. In 1995, Wal-Mart Stores, Inc. and a kitchen electric appliance distributor accounted for 13.1% and 11.4%, respectively, of the Company's sales.
The Company's allowance for doubtful accounts is based on management's estimates of the creditworthiness of its customers, and, in the opinion of management is believed to be set in an amount sufficient to respond to normal business conditions. Should such conditions deteriorate or any major credit customer default on its obligations to the Company, this allowance may need to be increased which may have an adverse impact upon the Company's earnings.
The Company produces the vast majority of its products in its facilities in the People's Republic of China ("PRC"). The Company is subject to the risk that political or economic upheaval in the PRC could cause production disruptions and/or increases to its costs, although no such events have occurred in over five years. Presently, products imported into the U.S. from the PRC are subject to favorable duty rates based on the "Most Favored Nation" status of the PRC ("MFN Status"). MFN Status is renewed on an annual basis by the President and Congress. If political or economic instability in the PRC develops or if higher duties were applied to imports into the U.S., the Company could experience a material adverse impact on its revenues and earnings.
NOTE P - RELATED PARTY TRANSACTIONS
The Company has used the services of Top Sales Company, Inc. ("Top Sales"), an independent sales representative, since 1978. A member of the Company's Board of Directors is the sole shareholder and Chief Executive Officer of Top Sales. The Company made commission payments to Top Sales of $693,300, $556,400 and $719,600 in 1996, 1995 and 1994, respectively. In 1996, the President of TJK Sales Inc. ("TJK"), an independent sales representative, became a member of the Company's Board of Directors. Commission payments to TJK totaled $469,000 in 1996.
Included in other assets, are a series of personal loans made by the Company to the President and Chief Executive Officer. The loans, which total $959,000 at December 31, 1996, bear interest at prevailing market rates and mature in 2001.
(continued)
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE P - RELATED PARTY TRANSACTIONS - Continued
In 1986, the Company made a non-interest bearing loan of $78,000 to a director of the Company. The entire amount of such loan was outstanding at December 31, 1996.
The Company loaned $300,000 to Lion Redcliff Import and Export, Ltd., which is 50-percent owned by an entity whose President is also a Director of the Company. Pursuant to the note, periodic principal payments are made by the debtor. The remaining obligation of $253,100 at December 31, 1996, bears interest at the prime rate.
NOTE Q - FABERWARE LICENSE
In the fourth quarter of 1996, the Company entered into a license agreement, pursuant to which, it holds the exclusive world-wide rights to use the Faberware name on a broad range of small electric products. Under the Company's marketing cooperation agreement with Salton, Salton is to be the exclusive distributor of the Faberware products. The license agreement expires December 31, 2095 and calls for quarterly royalty payments of 10-percent of net sales as defined in the agreement.
NOTE R - EXTRAORDINARY ITEM
On March 27, 1997, the Company paid $4,500,000 to settle the lawsuit filed in April 1994 by Izumi relating to the Phillips settlement in 1992 (Note K). An accrual of $5,300,000, including $800,000 in estimated legal expenses has been recorded as of December 31, 1996. The transaction resulted in an after tax charge of $3,500,000 and has been recorded as an extraordinary item, to correspond with the extraordinary gain recorded from the settlement in 1992.
NOTE S - SUBSEQUENT EVENT
In January 1997, the Company through its 50-percent interests in Salton and New M-Tech entered into supply contracts with the Kmart Corporation for Kmart to purchase, distribute, market and sell certain products under the White-Westinghouse brand name licensed to Salton and New M-Tech. Under the terms of the contract, Salton and New M-Tech will supply Kmart, either through the Company or other manufacturers, with a broad range of small electrical appliances, consumer electronics and telephone products under the White-Westinghouse brand name. Kmart will be the exclusive discount department store to market these White-Westinghouse products.
WINDMERE - DURABLE HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL DATA
QUARTERLY FINANCIAL DATA (UNAUDITED)
The quarterly results for the years 1996 and 1995 are set forth in the following tabulation. (In Thousands)
* Differs by $.01 from earnings per share for the year-ended 1996, due to the effect of the change in common shares and common equivalent shares outstanding from quarter to quarter. Includes an after tax extraordinary charge for the settlement of the Izumi case of $3,500,000 or $.20 per share. ** Includes an after-tax non-recurring loss on the sale of an ozther asset of $5,280,000, or $.31 per share.
QUARTERLY STOCK QUOTATIONS AND DIVIDENDS PER SHARE
The Company's common stock is traded on the New York Stock Exchange under the symbol WND. High and low market prices and dividends paid per share in 1996 and 1995, by quarters, are as follows:
The approximate number of holders of common stock of the Company, as of December 31, 1996, was 1,400. This number does not include any adjustment for stockholders owning common stock in the Depository Trust name or otherwise in "Street" name, which the Company believes represents an additional 4,300 stockholders.