UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number: 1-11007 TOASTMASTER INC. (Exact name of registrant as specified in its charter) MISSOURI 43-1204566 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1801 NORTH STADIUM BOULEVARD, COLUMBIA, MISSOURI 65202 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (573)445-8666 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] AT JULY 31, 1998, THERE WERE 7,551,950 SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING. TOASTMASTER INC. INDEX PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Statements of Operations - Quarters Ended June 30, 1998 and 1997 and 3 Six Months Ended June 30, 1998 and 1997 Consolidated Balance Sheets - June 30, 1998 and 1997 and December 31, 1997 4 Consolidated Statements of Cash Flows - Six Months Ended June 31, 1998 and 1997 5 Notes to Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-9 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 9 PART II. OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders 10 ITEM 6. Exhibits and Reports on Form 8-K 10 SIGNATURE 11 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TOASTMASTER INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER ENDED JUNE 30 SIX MONTHS ENDED JUNE 30 1998 1997 1998 1997 Net Sales $29,441 $27,757 $55,067 $54,072 Cost of Sales 25,171 22,790 46,488 44,970 Gross Profit 4,270 4,967 8,579 9,102 Selling, General and Admin. Expenses 4,885 5,573 9,863 10,628 Operating (Loss) (615) (606) (1,284) (1,526) Other Income - Interest 0 343 0 343 Other Expense - Interest 908 868 1,763 1,730 (Loss) Before Income Taxes (1,523) (1,131) (3,047) (2,913) Income Tax (Benefit) (511) (419) (1,153) (1,060) Net (Loss) $(1,012) $ (712) $(1,894) $(1,853) Basic and Diluted (Loss) per Common Share $ (0.13) $ (0.09) $ (0.25) $ (0.25) Weighted Average Shares Used in Computation: Basic Earnings per Common Share 7,551 7,538 7,545 7,538 Diluted Earnings per Common Share 7,594 7,538 7,587 7,538 TOASTMASTER INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) 6/30/98 12/31/97 6/30/97 ASSETS Cash $ 127 $ 178 $ 79 Accounts Receivable,less allowances 23,603 42,396 23,202 Inventories Finished Goods 38,534 26,029 34,842 Raw Matl.,WIP 8,305 7,157 9,012 LIFO/Inventory Valuation Reserve (855) (1,360) (3,777) Total Inventory 45,984 31,826 40,077 Deferred Income Tax 0 0 2,280 Prepaid Expenses 2,346 2,145 2,423 Income Taxes Receivable 4,893 4,070 1,829 Total Current Assets 76,953 80,615 69,890 Property, Plant and Equipment Land 928 928 928 Buildings 10,101 9,885 9,769 Less:Accumulated Depreciation (5,649) (5,393) (5,141) Machinery & Equipment 46,165 45,661 43,614 Less:Accumulated Depreciation (33,138) (31,818) (30,543) Net Property, Plant & Equipment 18,407 19,263 18,627 Goodwill, net of accumulated amortization 3,209 3,265 3,322 Other Assets 3,138 3,148 1,875 $101,707 $106,291 $93,714 LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities Current Installments of Long-Term Debt $ 2,077 $ 2,104 $ 2,124 Accounts Payable 7,156 4,383 8,410 Accrued Expenses 11,913 12,936 11,510 Deferred Income Taxes 1,456 1,456 0 Total Current Liabilities 22,602 20,879 22,044 Long Term Debt, Excl. Current Installments 38,447 42,597 32,782 Deferred Income Taxes 801 801 579 Other Liabilities 747 695 300 Total Liabilities 62,597 64,972 55,705 Stockholders' Equity: Common Stock, $.10 par value 760 760 760 Additional Paid-in Capital 25,340 25,344 25,340 Retained Earnings 13,680 15,878 12,437 Accumulated Other Comprehensive Income (429) (375) (240) 39,351 41,607 38,297 Treasury Stock (241) (288) (288) Total Stockholders' Equity 39,110 41,319 38,009 $101,707 $106,291 $93,714 TOASTMASTER INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) SIX MONTHS ENDED JUNE 30 1998 1997 Cash flows from operating activities: Net loss $ (1,894) $ (1,853) Adjustments to reconcile net loss to net cash from operating activities: Depreciation and amortization 1,947 1,868 Gain on sale of prop., plant and equip. (16) 0 Restructuring charge 0 123 Accounts receivable 18,793 19,502 Inventories (14,158) (5,600) Prepaid expenses & other current assets (201) (1,629) Other assets 8 (134) Accounts payable 2,773 4,655 Accrued liabilities (971) (1,790) Income taxes (823) (1,061) 7,352 15,934 Net cash flows provided by operating activities 5,458 14,081 Cash flows used in investing activities: Additions to property, plant and equipment (1,103) (1,946) Proceeds from sale of prop., plant and equip. 85 0 Net cash flows used in investing activities (1,018) (1,946) Cash flows from financing activities: Proceeds from revolving credit agreement 71,454 60,414 Repayments of revolving credit agreement (74,565) (71,184) Dividends paid (302) (301) Repayment of long-term debt (1,065) (1,081) Stock options exercised 41 0 Net cash flows used in financing activities (4,437) (12,152) Foreign currency translation adjustment (54) (1) Net increase (decrease) in cash (51) (18) Cash at beginning of period 178 97 Cash at end of period $ 127 $ 79 Cash paid during the period for: Interest $ 1,806 $ 1,871 Income taxes $ 0 $ 0 TOASTMASTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The accompanying financial statements as of June 30, 1998 and June 30, 1997 and for the quarter and the six months then ended are unaudited. The balance sheet as of December 31, 1997 has been derived from the audited balance sheet as of that date. The consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. These financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 1997 and notes thereto contained in the Company's Annual Report to Shareholders incorporated by reference in the Annual Report on Form 10-K for the year ended December 31, 1997. The results of operations for the interim periods shown are not necessarily indicative of the results for the entire fiscal year ending December 31, 1998. 2. The loan and security agreement between the Company and Fleet Capital Corporation, as described in note 3 in the Notes to Consolidated Financial Statements contained in the Company's Annual Report to Shareholders, was amended as of March 11, 1998. The amendment reduced by .5% the interest rate under the London Interbank Offering Rate(LIBOR) option for borrowings under the revolving credit and term loan provisions of the agreement. 3. Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The adjustments that were previously made through stockholders' equity for the minimum pension liability and foreign currency adjustments will now be disclosed as other comprehensive income. For the quarter ended June 30, 1998, other comprehensive loss was $31 thousand and the total comprehensive loss was $1.043 million. For the quarter ended June 30, 1997, other comprehensive loss was $1 thousand and the total comprehensive loss was $713 thousand. For the six months ended June 30, 1998, other comprehensive loss was $54 thousand and the total comprehensive loss was $1.9 million. For the six months ended June 30, 1997, other comprehensive loss was $1 thousand and the total comprehensive loss was $1.9 million. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS MADE IN THIS REPORT ON FORM 10-Q ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE WORDS "SHOULD," "WILL BE," "INTENDED," "CONTINUE," "BELIEVE," "MAY," "EXPECT," "HOPE," "ANTICIPATE," "GOAL," "FORECAST" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS, FINANCIAL CONDITION OR BUSINESS COULD DIFFER MATERIALLY FROM ITS HISTORICAL RESULTS, FINANCIAL CONDITION OR BUSINESS, OR THE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER THE CAPTION "FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS" IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. The following discussion should be read in conjunction with the attached financial statements and notes thereto, and with the Company's audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 1997. The Company believes that sales of many of its products are seasonal, with significant quantities of its products given as gifts, and therefore sell in larger volumes during the Christmas shopping season. Net sales reflect a reduction from revenues of amounts related to sales discount programs, including absorption of out-bound freight and certain allowances for advertising, the latter of which are accounted for by certain competitors as "advertising" expense. The Company views these amounts as price reductions, thereby reducing net sales and lowering gross profits, as well as selling, general and administrative expense. As used in this Quarterly Report on Form 10-Q, the term "revenues" are recorded net of product returns and are before deduction of items referred to above that are used in computing net sales. During the periods discussed below, net sales averaged approximately 95% of revenues. RESULTS OF OPERATIONS Net sales increased 5.8% to $29.4 million for the quarter ended June 30, 1998 from $27.8 million for the quarter ended June 30, 1997. For the six months ended June 30, 1998, net sales increased 1.8% to $55.1 million from $54.1 million for the comparable period in 1997. Kitchen appliance revenues were $23.1 million for the second quarter of 1998, an increase of 3.6% from $22.3 million for the same period in 1997. Revenues from kitchen appliances for the six months ended June 30, 1998 increased 1.9% to $43.2 million from $42.4 million for the six months ended June 30, 1997. Decreases in breadmaker and toaster sales in both the second quarter and the six months were offset by strong sales of griddles, irons and other appliances. Time products revenues were $7.6 million for the quarter ended June 30, 1998, an increase of 22.6% from $6.2 million for the quarter ended June 30, 1997. For the six months ended June 30, 1998, revenues from time products were $14.5 million, an increase of 8.2% from $13.4 million for the same period in 1997. The increase in both periods was primarily from increased sales of clocks with the Timex and Indiglo brand names. Environmental products revenues were minimal, compared to $500 thousand and $900 thousand for the quarter and six months ended June 30, 1997, respectively. Revenues from the five largest customers for the second quarter of 1998 represented approximately 45.1% of revenues. The five largest customers accounted for 48.9% of revenues for the second quarter of 1997. For the six months ended June 30, 1998, revenues from the five largest customers were 46.2%. The five largest customers accounted for 46.4% of revenues for the six months ended June 30, 1997. Gross profit was $4.3 million, 14.6% of net sales, for the quarter ended June 30, 1998, a decrease from $5 million, or 18% of net sales, for the comparable period in 1997. Gross profit also decreased for the six months ended June 30, 1998 to $8.6 million, or 15.6% of net sales, from $9.1 million, or 16.8% of net sales, for the same period in 1997. The decrease as a percentage of net sales was primarily due to the product mix sold and increased health care and workers' compensation costs. Selling, general and administrative expenses for the quarter ended June 30, 1998 decreased to $4.9 million compared to $5.6 million for the second quarter of 1997. For the six months ended June 30, 1998, selling, general and administrative expenses were $9.9 million, a decrease from $10.6 million for the same period in 1997. Cost controls initiated earlier in the year contributed to the reduction in expense. Interest income of $343 thousand in the second quarter of 1997 was from an expected income tax refund from prior years. Interest expense was up slightly at $908 thousand for the quarter ended June 30, 1998 from $868 thousand for the same period in 1997. Interest expense for the six months ended June 30, 1998 was unchanged at $1.7 million as compared to the same period in 1997. LIQUIDITY AND CAPITAL RESOURCES The Company's operations require substantial working capital. The Company has used available cash flow from operations and borrowings under its revolving credit agreement to finance additional working capital, to retire long-term debt and to fund capital expenditures. Net cash flows provided by operating activities for the six months ended June 30, 1998 were $5.5 million. Since December 31, 1997, there was a reduction in accounts receivable of $18.8 million, an increase in inventory of $14.2 million and an increase in accounts payable of $2.8 million as a result of normal seasonal patterns. Cash flows used for additions to property, plant and equipment of $1.1 million include the cost of new equipment and tooling for new and existing products. Net cash flows used in financing activities were $4.4 million for the six months ended June 30, 1998, and were primarily from repayments under the revolving credit agreement. At June 30, 1998, amounts outstanding under the revolving credit agreement were $32.2 million. The Company could borrow an additional $7.8 million under the terms of the revolving credit agreement at June 30, 1998. Other long-term debt was $8.3 million, including the current portion of $2.1 million. The terms of and collateral for the revolving credit agreement and long-term debt are described in Note 3 of the Notes to the Consolidated Financial Statements contained in the Company's 1997 Annual Report to shareholders, which note is incorporated herein by reference. Principal payments on the long-term debt are expected to be funded from internally generated cash flows and future borrowings. The revolving credit agreement expires in November 2001. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has transactions denominated in foreign currencies as discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1997 Annual Report. At June 30, 1998, accounts receivable included $834 thousand denominated in Canadian dollars and $1.1 million denominated in Mexican pesos. The Company does not purchase or sell foreign currency futures or forwards. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of the Stockholders of Toastmaster Inc. was held on May 12, 1998. The following items were submitted to a vote: Item 1. Edward J. Williams and James L. Hesburgh were elected as Class I directors. Class III directors (Robert H. Deming and Daniel J. Stubler) and Class II directors (John E. Thompson and S B. Rymer) continue to serve on the Board until the annual meeting of stockholders in 2000 and 1999, respectively. The vote with respect to the election of directors was as follows: Mr. Williams Mr.Hesburgh AFFIRMATIVE VOTES 6,941,553 6,942,863 WITHHELD AUTHORITY 23,923 22,613 Item 2. The selection of KPMG Peat Marwick LLP as the Company's independent auditors for the year ending December 31, 1998 was approved. The vote was as follows: AFFIRMATIVE VOTES 6,952,194 NEGATIVE VOTES 4,223 ABSTENTIONS 9,059 A total of 6,965,476 shares were voted. No broker non-votes were received. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter ended June 30, 1998. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: TOASTMASTER INC. August 7, 1998 BY: /s/ John E. Thompson John E. Thompson Executive Vice President Chief Financial Officer Signing on behalf of the registrant And as principal financial officer