SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended MARCH 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 1-10177
WINDMERE CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 59-1028301
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
5980 MIAMI LAKES DRIVE, MIAMI LAKES, FLORIDA 33014
(Address of principal executive offices) (Zip Code)
(305) 362-2611
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such report(s), and (2) has been subject to such filing requirement
for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Number of Shares Outstanding
Class on May 5, 1994
Common Stock, $.10 Par Value 15,824,464
WINDMERE CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Statements of Earnings for
First Quarters Ended March 31, 1994 and
1993
Consolidated Balance Sheets as of
March 31, 1994, December 31, 1993
and March 31, 1993
Consolidated Statements of Cash Flows
for Three Months Ended March 31, 1994
and 1993
Notes to Consolidated Financial State-
ments
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WINDMERE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
First Quarter Ended
March 31, 1994 March 31, 1993
Sales $31,191,600 100.0% $35,226,800 100.0%
Cost of Goods Sold 22,110,400 70.9 26,210,100 74.4
Gross Profit 9,081,200 29.1 9,016,700 25.6
Selling, General and
Administrative Expenses 9,072,400 29.1 8,867,100 25.2
Operating Profit 8,800 .0 149,600 .4
Other (Income) Expense
Interest Expense 136,000 .4 216,500 .6
Interest and Other Income (516,200) (1.6) (541,100 ) (1.5)
(380,200) (1.2) (324,600 ) (.9)
Earnings Before Equity in Net
Earnings (Loss) of Joint Ventures,
Income Taxes, Minority Interest and
Cumulative Effect of Accounting
Change 389,000 1.2 474,200 1.3
Equity in Net Earnings (Loss)
of Joint Ventures 93,300 .3 (20,800 ) (.0)
Earnings Before Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change 482,300 1.5 453,400 1.3
Income Taxes
Current 29,000 .1 108,200 .3
Deferred 7,100 .0 86,000 .3
36,100 .1 194,200 .6
Earnings Before Minority
Interest and Cumulative
Effect of Accounting Change 446,200 1.4 259,200 .7
Minority Interest 1,200 .0 104,600 .3
Cumulative Effect of
Accounting Change (Note 6) 0 .0 1,731,100 4.9
Net Earnings $447,400 1.4% $2,094,900 5.9%
Earnings Per Common Share
and Common Equivalent Share
Net Earnings Before Cumulative
Effect of Accounting Change $.03 $.02
Cumulative Effect of Accounting
Change - .11
$.03 $.13
Average Number of Common
Shares and Common Equivalent
Shares Outstanding 16,554,100 16,051,200
The accompanying notes are an integral part of these statements.
WINDMERE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS 3/31/94 12/31/93 3/31/93
CURRENT ASSETS
Cash & Cash Equivalents $25,978,000 $24,794,700 $15,299,700
Accounts and Notes Receivable,
less allowances of $1,307,100 at
3/31/94; $1,424,600 at 12/31/93;
and $1,854,500 at 3/31/93 27,338,600 31,268,600 31,758,900
Receivables from Affiliates 9,119,100 9,166,600 10,596,700
Inventories
Raw Materials 16,088,900 14,981,700 14,477,300
Work-in-process 14,398,100 14,153,000 16,350,100
Finished Goods 35,046,900 38,022,800 35,052,400
Total Inventories 65,533,900 67,157,500 65,879,800
Prepaid Expenses (Note 5) 7,801,200 6,990,900 4,451,100
Future Income Tax Benefits 3,060,500 2,982,800 3,617,800
Total Current Assets 138,831,300 142,361,100 131,604,000
CASH - RESTRICTED 0 0 2,000,000
INVESTMENTS (Note 2) 0 0 288,500
PROPERTY, PLANT & EQUIPMENT -
AT COST, less accumulated
depreciation of $32,690,000
at 3/31/94; $31,406,300 at
12/31/93; and $29,134,300 at
3/31/93 25,211,800 25,022,200 25,272,700
OTHER ASSETS 12,512,800 13,096,000 14,040,700
___________ ___________ ___________
TOTAL ASSETS $176,555,900 $180,479,300 $173,205,900
WINDMERE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
LIABILITIES 3/31/94 12/31/93 3/31/93
CURRENT LIABILITIES
Notes and Acceptances Payable $3,049,700 $2,995,800 $5,930,000
Current Maturities of Long-Term
Debt 814,800 814,800 0
Accounts Payable 5,544,400 9,287,300 10,876,500
Accrued Expenses 9,151,400 9,660,000 7,330,000
Income Taxes 1,149,000 1,044,600 1,032,200
Deferred Income, current portion 598,100 598,100 598,100
Total Current Liabilities 20,307,400 24,400,600 25,766,800
LONG-TERM DEBT 4,299,300 4,503,200 7,522,400
DEFERRED INCOME TAXES 0 0 675,700
DEFERRED INCOME, less current
portion 1,713,600 1,863,100 2,311,700
MINORITY INTEREST 3,123,900 3,125,200 1,818,000
STOCKHOLDERS' EQUITY
Special Preferred Stock -
authorized 40,000,000 shares of
$.01 par value; none issued 0 0 0
Common Stock - authorized
40,000,000 shares of $.10 par
value; shares issued and out-
standing: 15,805,332 at 3/31/94;
15,780,447 at 12/31/93; and
15,372,491 at 3/31/93 1,580,500 1,578,100 1,537,200
Paid-in Capital 24,736,100 24,633,300 22,625,600
Retained Earnings 121,533,900 121,086,500 111,712,200
Unrealized Foreign Currency
Translation Adjustment (738,800 ) (710,700) (763,700)
Total Stockholders' Equity 147,111,700 146,587,200 135,111,300
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $176,555,900 $180,479,300 $173,205,900
The accompanying notes are an integral part of these statements.
WINDMERE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended
3/31/94 3/31/93
Cash flows from operating activities
Net earnings $ 447,400 $2,094,900
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation of property, plant and
equipment 1,283,700 1,235,700
Amortization of intangible assets 70,400 138,400
Amortization of deferred income (149,500) (149,600)
Net change in allowance for losses
on accounts receivable (117,500) 218,900
Equity in (earnings) losses of affiliates (93,300) 20,800
Increase (decrease) in minority interest (1,300) 186,400
Decrease in accounts and notes receivable 4,047,500 3,914,600
Decrease in inventories 1,623,600 2,661,300
Increase in prepaid expenses (810,300) (1,788,400)
Decrease in accounts payable
and accrued expenses (4,251,500) (2,081,300)
Increase in notes and acceptances
payable 53,900 118,200
Increase (decrease) in current and
deferred income taxes 26,700 (1,967,400)
Decrease in other assets 512,800 39,500
Decrease (increase) in other accounts (28,100) 13,300
Net cash provided by
operating activities 2,614,500 4,655,300
Cash flows from investing activities
Proceeds from fixed asset sales 1,400 0
Decrease in restricted cash 0 4,212,000
Additions to property, plant and
equipment (1,474,700) (1,962,500)
Decrease in receivables from
affiliates 140,800 1,019,800
Net cash provided by (used in)
investing activities $(1,332,500) $3,269,300
WINDMERE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Three Months Ended
3/31/94 3/31/93
Cash flows from financing activities
Payments of long-term debt $ (203,900) $ (100)
Exercise of stock options
and warrants 105,200 80,700
Net cash provided by (used in)
financing activities (98,700) 80,600
Increase in cash and
cash equivalents 1,183,300 8,005,200
Cash and cash equivalents at
beginning of year 24,794,700 7,294,500
Cash and cash equivalents at end
of quarter $25,978,000 $15,299,700
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the quarter for:
Interest $ 92,600 $ 199,800
Income taxes $ 171,100 $ 893,500
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
None.
The accompanying notes are an integral part of these statements.
WINDMERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. In the opinion of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to
present fairly the financial position as of March 31, 1994 and
1993, and the results of operations and changes in financial
position for the interim period. Results for interim periods
should not be considered indicative of results for a full year.
Reference should be made to the financial statements contained
in the registrant's Annual Report on Form 10-K for the year
ended December 31, 1993.
Note 2. Investments include:
3/31/94 12/31/93 3/31/93
Joint Ventures - at
cost plus equity in
undistributed earnings $ 0 $ 0 $288,500
The Company's joint venture investment at March 31, 1994 has a
negative value of $.3 million, which deficit has been classified
as a reduction in Receivables from Affiliates.
The following table provides financial data for the Company's
joint venture investment accounted for on the equity method:
Three Three
Months Ended Year Ended Months Ended
3/31/94 12/31/93 3/31/93
Sales $ 10,640,600 $ 24,507,400 $ 12,758,200
Gross profit $ 971,200 $ 2,431,300 $ 1,339,400
Net Earnings (Loss) $ 188,300 $ (246,800) $ 175,200
Note: Profits earned by the Company's manufacturing subsidiary
on sales to the joint venture are included in the consolidated
earnings results and are not part of the above table.
Note 3. Investigations: In October 1990, Lasko Metal Products, Inc.
("Lasko") of West Chester, Pennsylvania, filed a petition with
the U.S. Department of Commerce ("Commerce") and the U.S.
International Trade Commission alleging that oscillating fans
and ceiling fans from the People's Republic of China, ("PRC")
are being sold at less than fair value and are causing material
injury to an industry in the United States. The Company
manufactures oscillating fans in the PRC which are distributed
in the United States. The Company also has a 50% interest in a
joint venture which imports such fans into the United States.
In October 1991, Commerce announced its final less-than-fair
value sales determination, finding a de minimis dumping margin
on oscillating fans manufactured and imported by the Company.
Based on this result, Commerce published an antidumping duty
order in December 1991, excluding all oscillating fans
manufactured by the Company from the duties imposed.
In January 1992, the final determination and antidumping duty
order was appealed to the U.S. Court of International Trade
("Court") by Lasko. The complaint alleges that Commerce erred
in computing a de minimis dumping margin for the Company which
resulted in the Company's exclusion from the affirmative final
antidumping duty determination. In December 1992, the Court
affirmed Commerce's determination with respect to all of the
challenges raised by Lasko. Lasko has appealed the Court's
decision to the Court of Appeals for the Federal Circuit (CAFC).
The antidumping duty order was later revoked as a result of a
successful appeal by another respondent. If Lasko were to
prevail before the CAFC, it is likely that the antidumping duty
order would be reinstated and would be expanded to include
electric oscillating fans manufactured by both Durable and other
Chinese-based factories from whom the Company purchases. The
Company believes that the claims asserted by Lasko in this
litigation are without merit and it intends to defend the action
fully and vigorously.
Note 4: On May 28, 1993, President Clinton issued an Executive Order
waiving the Trade Act of 1974's freedom of emigration
requirement (the so-called Jackson-Vanik amendment) with respect
to the People's Republic, thereby extending the People's
Republic's most-favored-nation (MFN) trading status for an
additional year, beginning July 3, 1993. Under U.S. law, MFN
status means that products are subject to the relatively low
duty rates set forth in Column 1 of the Harmonized Tariff
Schedules of the United States (HTSUS), that have resulted from
several rounds of reciprocal tariff negotiations conducted under
the auspices of the General Agreement on Tariffs and Trade
(GATT) since 1945. Products from countries not eligible for MFN
treatment are subject to much higher rates of duty, averaging 30
per cent ad valorem, as set forth in Column 2 of the HTSUS. If
MFN status for goods produced in the People's Republic is
removed, there would be a substantial increase in tariffs
imposed on goods of Chinese origin entering the United States,
including those manufactured by the Company, which could have a
material adverse impact on the Company's revenues and earnings.
In renewing the People's Republic's MFN status until July 2,
1994, the President announced that the next renewal of China's
MFN status for the 12-month period beginning July 3, 1994 will
be subject to certain conditions. The Executive Order directs
the Secretary of State to certify that the People's Republic is
complying with a 1992 agreement that prison labor will not be
used to produce goods for export to the United States, is not
erecting barriers to free emigration of its citizens and that it
is meeting other human rights goals. A decision concerning the
extension of MFN status for the 12-month period beginning July
3, 1994 must be made by the President before June 3, 1994.
Note 5. Prepaid Expenses: The Hong Kong Inland Revenue Department is
auditing the tax returns of most of the Company's consolidated
Hong Kong subsidiaries through 1991, and has proposed increases
in income taxes aggregating approximately $4,300,000, which
proposed amount, or any of it which is ultimately determined to
be due, may be significantly reduced by U.S. foreign tax
credits. Inland Revenue has required that cash deposits of
approximately $3,300,000 be made pending the resolution of the
issues, which amounts are included in prepaid expenses. The
Company has been advised it has defensible positions in
connection with the issues under discussion and intends to
vigorously contest the proposed tax increases. Management
believes that adequate provision for taxes has been made for the
years under examination and those not yet examined.
Note 6. The Company adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes", on January 1, 1993,
which changed the Company's method of accounting for income
taxes to an asset and liability approach. The cumulative effect
of this change in the method of accounting for income taxes,
after minority interest in the portion relating to Durable, was
a benefit of $1,731,100 or $.11 per share.
Note 7. Subsequent Event: In April 1994, the Company's 80%-owned
manufacturing subsidiary, Durable Electrical Metal Factory, Ltd.
("Durable"), completed the sale of 60,000 square feet of office
space in Hong Kong, for $9,500,000. Following this sale,
Durable continues to own approximately 50,000 square feet of
space in Hong Kong, of which 30,000 square feet will be used for
its administrative headquarters. A non-recurring profit after
minority interest of $6,200,000 will be reflected in the
Company's second quarter results. Durable's manufacturing
facilities in the People's Republic of China are unaffected by
the sale.
Note 8. Subsequent Event: The Company has reached an agreement-in-
principle with the minority shareholder of Durable to acquire
the 20% interest in Durable that it does not already own. The
purchase price, determined on April 1, 1994, will consist of the
delivery of one million shares of the Company's common stock and
a cash payment of $10,000. The transaction is expected to close
in the Company's second quarter. Based on 1993 pro-forma
financial statements, the transaction is not dilutive.
Note 9. Subsequent Event: The Board of Directors of the Company has
declared a regular quarterly cash dividend of $.05 per share on
its common stock. The dividend is first payable June 15, 1994,
to shareholders of record at the close of business on June 1,
1994.
The payment of dividends will be at the discretion of the Board
of Directors of the Company and will depend upon, among other
things, future earnings, capital requirements, the Company's
financial condition and such other factors as the Board of
Directors may consider.
Note 10. On April 26, 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. The Company disagrees with Izumi's position and
believes that it has meritorious defenses and counterclaims to
these claims by Izumi. The Company intends to defend this
action fully and vigorously.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended March 31, 1994 Compared to
Three Months Ended March 31, 1993
Net sales were $31.2 million during the first quarter, an 11.4% decrease
from the $35.2 million recorded for the same period last year.
Manufacturing sales were $3.8 million lower due to reduced shipments of
electric fragrance units and fan products. Wal-Mart Stores, Inc. accounted
for 17.8% of the Company's total sales during this year's first quarter.
COMPARATIVE SALES RESULTS
Three Months Ended
March 31, 1994 March 31, 1993
DISTRIBUTION $ 27,657,300 88.7% $ 27,885,600 79.2%
MANUFACTURING 3,534,300 11.3 7,341,200 20.8
Total Sales $ 31,191,600 100.0% $ 35,226,800 100.0%
The Company's gross margin percentage rose in the current year's first
quarter to 29.1% of sales from the 25.6% level achieved last year primarily
due to a greater concentration of distribution sales which carry higher
margins.
Selling, general and administrative expenses increased in the quarter ended
March 31, 1994 versus the prior year's first quarter by 3.9% as a
percentage of sales primarily from the spreading of these costs over a
lower level of sales in the current quarter.
The Company's equity in net earnings of joint ventures, excluding the
results of a joint venture sold in August 1993, was $.1 million in each of
the 1994 and 1993 first quarters.
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, although
rates in Canada and Europe are higher.
The average number of common shares and common equivalent shares used in
computing per share results was higher in 1994 primarily as a result of a
greater amount of common shares outstanding due to the exercise of stock
options and warrants.
Liquidity & Capital Resources
At March 31, 1994, the Company's current ratio and quick ratio were 6.8 to
1 and 3.6 to 1 and at March 31, 1993, they were 5.1 to 1 and 2.6 to 1,
respectively. Working capital at March 31, 1994 and 1993 was $118.5
million and $105.8 million, respectively.
Cash and cash equivalents at March 31, 1994 are approximately $1.2 million
higher than the December 31, 1993 level. Cash was generated from reduced
inventory levels, lower accounts receivable balances, operating earnings
and various non-cash charges. The Company utilized approximately $5.7
million of cash during the quarter for purchases of new fixed assets and
to decrease accounts payable.
A foreign bank provides a $4.5 million line of credit, payable on demand,
to certain of the Company's foreign subsidiaries (the "subsidiaries"). The
credit facility is secured primarily by the subsidiaries' right, title and
interest in all of their present and future property, accounts receivable,
inventory, equipment and general intangibles located in Hong Kong and in
the People's Republic of China. In addition, the Company entered into a
guarantee agreement whereby it agreed to be liable should the subsidiaries
default in their obligations. At March 31, 1994, the subsidiaries were
utilizing, including letters of credit, approximately $3.6 million of this
credit line, leaving an additional funding capacity of $.9 million.
The Company has a $10.0 million demand line of credit from a domestic bank,
which is secured by domestic accounts receivable. The Company has had no
borrowings under this facility.
No provisions 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 $4.5 - $6.0 million annual capital requirements and its operating
needs for the foreseeable future.
Legal Proceedings
In October 1990, Lasko Metal Products, Inc. ("Lasko") of West Chester,
Pennsylvania, filed a petition with the U.S. Department of Commerce
("Commerce") and the U.S. International Trade Commission alleging that
oscillating fans and ceiling fans from the People's Republic of China,
("PRC") are being sold at less than fair value and are causing material
injury to an industry in the United States. The Company manufactures
oscillating fans in the PRC which are distributed in the United States.
The Company also has a 50% interest in a joint venture which imports such
fans into the United States.
In October 1991, Commerce announced its final less-than-fair value sales
determination, finding a de minimis dumping margin on oscillating fans
manufactured and imported by the Company. Based on this result, Commerce
published an antidumping duty order in December 1991, excluding all
oscillating fans manufactured by the Company from the duties imposed.
In January 1992, the final determination and antidumping duty order was
appealed to the U.S. Court of International Trade ("Court") by Lasko. The
complaint alleges that Commerce erred in computing a de minimis dumping
margin for the Company which resulted in the Company's exclusion from the
affirmative final antidumping duty determination. In December 1992, the
Court affirmed Commerce's determination with respect to all of the
challenges raised by Lasko. Lasko has appealed the Court's decision to the
Court of Appeals for the Federal Circuit (CAFC). The antidumping duty
order was later revoked as a result of a successful appeal by another
respondent. If Lasko were to prevail before the CAFC, it is likely that
the antidumping duty order would be reinstated and would be expanded to
include electric oscillating fans manufactured by both Durable and other
Chinese-based factories from whom the Company purchases. The Company
believes that the claims asserted by Lasko in this litigation are without
merit and it intends to defend the action fully and vigorously.
On April 26, 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. The
Company disagrees with Izumi's position and believes that it has
meritorious defenses and counterclaims to these claims by Izumi. The
Company intends to defend this action fully and vigorously.
The Company is subject to other legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability, if any, with respect to these actions will
not materially affect the financial position of the Company.
Manufacturing Operations
The personal, household and fabric care appliances of the Company are
primarily manufactured by Durable, its 80%-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% to 90% of the Company's products
are manufactured by Durable. The supply and cost of these 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 and,
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
disruption 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.
On May 28, 1993, President Clinton issued an Executive Order waiving the
Trade Act of 1974's freedom of emigration requirement (the so-called
Jackson-Vanik amendment) with respect to the People's Republic, thereby
extending the People's Republic's most-favored-nation (MFN) trading status
for an additional year, beginning July 3, 1993. Under U.S. law, MFN status
means that products are subject to the relatively low duty rates set forth
in Column 1 of the Harmonized Tariff Schedules of the United States
(HTSUS), that have resulted from several rounds of reciprocal tariff
negotiations conducted under the auspices of the General Agreement on
Tariffs and Trade (GATT) since 1945. Products from countries not eligible
for MFN treatment are subject to much higher rates of duty, averaging 30
per cent ad valorem, as set forth in Column 2 of the HTSUS. If MFN status
for goods produced in the People's Republic is removed, there would be a
substantial increase in tariffs imposed on goods of Chinese origin entering
the United States, including those manufactured by the Company, which could
have a material adverse impact on the Company's revenues and earnings.
In renewing the People's Republic's MFN status until July 2, 1994, the
President announced that the next renewal of China's MFN status for the 12-
month period beginning July 3, 1994 will be subject to certain conditions.
The Executive Order directs the Secretary of State to certify that the
People's Republic is complying with a 1992 agreement that prison labor will
not be used to produce goods for export to the United States, is not
erecting barriers to free emigration of its citizens and that it is meeting
other human rights goals. A decision concerning the extension of MFN
status for the 12-month period beginning July 3, 1994 must be made by the
President before June 3, 1994.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See "Legal Proceedings" in Part I, Item 2 of this report.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) There were no reports on Form 8-K filed for the three months
ended March 31, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WINDMERE CORPORATION
(Registrant)
May 13, 1994 By: /s/
Harry D. Schulman
Executive Vice President - Finance
and Administration and Chief
Financial Officer
(Duly authorized to sign on
behalf of the Registrant)
May 13, 1994 By: /s/
Burton A. Honig
Vice President - Finance
(Duly authorized to sign on
behalf of the Registrant)
