SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended SEPTEMBER 30, 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
incorporation or organization) Identification Number)
5980 MIAMI LAKES DRIVE, MIAMI LAKES, FLORIDA 33014
(Address of principal executive offices) (Zip code)
(305) 362-2611
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such report(s), and (2) has been subject to such filing requirement
for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Number of Shares Outstanding
Class on October 31, 1994
Common Stock, $.10 Par Value 16,843,501
WINDMERE CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Statements of Earnings for
Third Quarters Ended September 30, 1994 and
1993
Consolidated Statements of Earnings for
Nine Months Ended September 30, 1994 and 1993
Consolidated Balance Sheets as of
September 30, 1994, December 31, 1993
and September 30, 1993
Consolidated Statements of Cash Flows
for Nine Months Ended September 30, 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)
Third Quarter Ended
September 30, 1994 September 30, 1993
Sales $55,885,000 100.0% $53,403,400 100.0%
Cost of Goods Sold 38,364,800 68.6 36,187,400 67.8
Gross Profit 17,520,200 31.4 17,216,000 32.2
Selling, General and
Administrative Expenses 10,127,000 18.2 10,879,900 20.3
Operating Profit 7,393,200 13.2 6,336,100 11.9
Other (Income) Expense
Interest Expense 71,900 .1 312,100 .6
Interest and Other Income (530,100) (.9) (692,600) (1.3)
(458,200) (.8) (380,500) (.7)
Earnings Before Equity in Net
Earnings (Loss) of Joint Ventures,
Income Taxes and Minority
Interest 7,851,400 14.0 6,716,600 12.6
Equity in Net Earnings (Loss)
of Joint Ventures (267,800) (.5) (250,100) (.5)
Earnings Before Income Taxes
and Minority Interest 7,583,600 13.5 6,466,500 12.1
Income Taxes
Current 2,137,100 3.8 1,826,000 3.4
Deferred (391,400) (.7) (67,800) (.1)
1,745,700 3.1 1,758,200 3.3
Earnings Before Minority
Interest 5,837,900 10.4 4,708,300 8.8
Minority Interest 0 .0 (506,800) (.9)
Net Earnings $ 5,837,900 10.4% $ 4,201,500 7.9%
Earnings Per Common Share
and Common Equivalent Share $.33 $.26
Average Number of Common
Shares and Common Equivalent
Shares Outstanding 18,063,000 16,241,000
Dividends Per Common Share $.05 $ -
The accompanying notes are an integral part of these statements.
WINDMERE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Nine Months Ended
September 30, 1994 September 30, 1993
Sales $129,038,600 100.0% $128,691,800 100.0%
Cost of Goods Sold 90,197,200 69.9 91,051,600 70.8
Gross Profit 38,841,400 30.1 37,640,200 29.2
Selling, General and
Administrative Expense 29,230,500 22.6 29,304,300 22.7
Unusual or Non-Recurring
Items (Note 7) (7,810,500) (6.0) 0 .0
Operating Profit 17,421,400 13.5 8,335,900 6.5
Other (Income) Expense
Interest Expense 392,900 .3 862,100 .7
Interest and Other Income (1,610,200) (1.2) (1,798,100) (1.4)
(1,217,300) (.9) (936,000) (.7)
Earnings Before Equity in Net
Earnings (Loss) of Joint Ventures,
Income Taxes, Minority Interest and
Cumulative Effect of Accounting
Change 18,638,700 14.4 9,271,900 7.2
Equity in Net Earnings (Loss)
of Joint Ventures 180,800 .2 (389,200) (.3)
Earnings Before Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change 18,819,500 14.6 8,882,700 6.9
Income Taxes
Current 2,861,700 2.2 2,508,300 2.0
Deferred (267,100) (.2) (73,800) (.1)
2,594,600 2.0 2,434,500 1.9
Earnings Before Minority
Interest and Cumulative
Effect of Accounting Change 16,224,900 12.6 6,448,200 5.0
Minority Interest 1,200 .0 (636,500) (.5)
Cumulative Effect of
Accounting Change (Note 6) 0 .0 1,731,100 1.4
Net Earnings $16,226,100 12.6% $ 7,542,800 5.9%
Earnings Per Common Share
and Common Equivalent Share
Net Earnings Before Cumulative
Effect of Accounting Change $.93 $.36
Cumulative Effect of Accounting
Change - .11
$.93 $.47
Average Number of Common
Shares and Common Equivalent
Shares Outstanding 17,518,000 16,144,000
Dividends Per Common Share $.10 $ -
The accompanying notes are an integral part of these statements.
WINDMERE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS 9/30/94 12/31/93 9/30/93
CURRENT ASSETS
Cash & Cash Equivalents $19,446,500 $24,794,700 $21,542,700
Short-Term Investments 2,500,000 0 0
Accounts and Notes Receivable,
less allowances of $1,301,100 at
9/30/94; $1,424,600 at 12/31/93;
and $1,633,300 at 9/30/93 46,997,200 31,268,600 42,216,800
Receivables from Affiliates 5,670,200 9,166,600 5,480,500
Inventories
Raw Materials 19,461,800 14,981,700 14,361,400
Work-in-process 15,528,000 14,153,000 15,993,500
Finished Goods 41,890,200 38,022,800 34,963,500
Total Inventories 76,880,000 67,157,500 65,318,400
Prepaid Expenses (Note 5) 8,226,900 6,990,900 6,312,300
Future Income Tax Benefits 2,457,300 2,982,800 3,252,300
Total Current Assets 162,178,100 142,361,100 144,123,000
INVESTMENTS (Note 2) 0 0 0
PROPERTY, PLANT & EQUIPMENT -
AT COST, less accumulated
depreciation of $33,985,500
at 9/30/94; $31,406,300 at
12/31/93; and $30,579,000 at
9/30/93 25,119,800 25,022,200 25,137,400
OTHER ASSETS 17,760,700 13,096,000 14,146,300
___________ ___________ ___________
TOTAL ASSETS $205,058,600 $180,479,300 $183,406,700
WINDMERE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
LIABILITIES 9/30/94 12/31/93 9/30/93
CURRENT LIABILITIES
Notes and Acceptances Payable $ 640,000 $2,995,800 $2,901,600
Current Maturities of Long-Term
Debt 814,800 814,800 814,800
Accounts Payable 14,987,600 9,287,300 13,491,700
Accrued Expenses 10,770,800 9,660,000 11,456,400
Income Taxes 3,866,900 1,044,600 3,330,500
Deferred Income, current portion 598,100 598,100 598,100
Total Current Liabilities 31,678,200 24,400,600 32,593,100
LONG-TERM DEBT 3,891,900 4,503,200 4,707,100
DEFERRED INCOME TAXES 0 0 150,300
DEFERRED INCOME, less current
portion 1,414,500 1,863,100 2,012,700
MINORITY INTEREST 0 3,125,200 2,559,100
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: 16,827,402 at 9/30/94;
15,780,447 at 12/31/93; and
15,594,420 at 9/30/93 1,682,700 1,578,100 1,559,400
Paid-in Capital 31,517,500 24,633,300 23,405,300
Retained Earnings 135,623,700 121,086,500 117,160,100
Unrealized Foreign Currency
Translation Adjustment (749,900) (710,700) (740,400)
Total Stockholders' Equity 168,074,000 146,587,200 141,384,400
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $205,058,600 $180,479,300 $183,406,700
The accompanying notes are an integral part of these statements.
WINDMERE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
9/30/94 9/30/93
Cash flows from operating activities
Net earnings $16,226,100 $7,542,800
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation of property, plant and
equipment 3,898,800 3,811,400
Amortization of intangible assets 316,800 483,300
Amortization of deferred income (448,600) (448,600)
Net change in allowance for losses
on accounts receivable (123,500) (2,300)
Gain on sale of fixed asset (Note 7) (7,810,500) 0
Equity in (earnings) losses of affiliates (180,800) 389,200
Increase (decrease) in minority interest (1,200) 927,500
Increase in accounts and notes receivable (15,605,100) (6,322,100)
Decrease (increase) in inventories (9,722,500) 3,222,700
Increase in prepaid expenses (1,236,000) (3,649,600)
Increase in accounts payable and
accrued expenses 6,811,100 4,660,300
Decrease in notes and acceptances
payable (2,355,800) (2,910,200)
Increase in current and deferred
income taxes 3,347,800 171,000
Increase in other assets (105,500) (411,000)
Decrease (increase) in other accounts (39,200) 36,600
Net cash provided by (used in)
operating activities (7,028,100) 7,501,000
Cash flows from investing activities
Proceeds from fixed asset sales 9,464,300 46,200
Decrease in restricted cash 0 6,212,000
Increase in short-term investments (2,500,000) 0
Additions to property, plant and
equipment (5,650,200) (4,449,100)
Other changes in investments
in affiliates 0 (322,400)
Sale of investments 0 242,500
Decrease in receivables from
affiliates 3,677,200 6,136,000
Net cash provided by
investing activities $ 4,991,300 $7,865,200
WINDMERE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Nine Months Ended
9/30/94 9/30/93
Cash flows from financing activities
Payments of long-term debt $ (611,300) $(2,000,600)
Exercises of stock options
and warrants 1,225,000 882,600
Cash dividends paid (1,688,900) 0
Purchases of common stock (2,236,200) 0
Net cash used in
financing activities (3,311,400) ( 1,118,000)
Increase (decrease) in cash and
cash equivalents (5,348,200) 14,248,200
Cash and cash equivalents at
beginning of year 24,794,700 7,294,500
Cash and cash equivalents at end
of quarter $19,446,500 $21,542,700
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the nine months for:
Interest $ 389,200 $ 474,400
Income taxes $ 177,300 $ 1,143,500
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Common stock issued for additional
investment in Durable Electrical
Metal Factory, Ltd. $ 8,000,000 $ 0
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 September 30, 1994
and 1993, and the results of operations and changes in financial
position for the interim periods. Results for interim periods
should not be considered indicative of results for a full year.
Reference should be made to the financial statements contained
in the Company's Annual Report on Form 10-K for the year ended
December 31, 1993.
Note 2. Investments include:
9/30/94 12/31/93 9/30/93
Joint Ventures - at
cost plus equity in
undistributed earnings $ 0 $ 0 $ 0
The Company's joint venture investment at each of the above
dates had a negative value of approximately $.3 million, which
deficits have 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:
Nine Nine
Months Ended Year Ended Months Ended
9/30/94 12/31/93 9/30/93
Sales $ 25,027,300 $ 24,507,400 $ 20,949,300
Gross Profit $ 3,105,600 $ 2,431,300 $ 1,753,300
Net Earnings (Loss) $ 361,600 $ (246,800) $ (313,700)
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: In May 1994, President Clinton extended the People's Republic's
most-favored-nation (MFN) trading status for an additional year,
beginning July 3, 1994. In making the decision to renew the
People's Republic's MFN status, the President announced that the
United States would, in the future, permanently de-link MFN
renewal from human rights issues, other than freedom of
emigration provisions. 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 were 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 June 1994, in accordance with the Trade Act of 1974, as
amended, the Office of the United States Trade Representative
(USTR) listed the People's Republic as a "priority foreign
country" based on its alleged failure to provide adequate and
effective protection of intellectual property rights and
initiated an investigation of its acts, policies and practices
in this area. While the USTR noted that the People's Republic
has implemented most of its commitments under the 1992
Memorandum of Understanding Between the Government of the United
States of America and the Government of the People's Republic on
the Protection of Intellectual Property, certain issues remain
unresolved.
The initiation of this investigation commences a year-long
process of discussions between the two countries that could
result, if negotiations are not successful, in the imposition of
substantial additional import duties or other restrictions on
the entry into the United States of selected goods originating
in the People's Republic. In the event that this investigation
results in the imposition of additional tariffs on the import of
products manufactured in the People's Republic, it is not yet
clear whether the types of products manufactured by the Company
in the People's Republic would be those subject to higher
tariffs. If the Company's products were subject to higher
tariffs or other restrictions on entry into the United States,
this could have an adverse impact on the Company's revenues and
earnings.
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. Unusual or Non-Recurring Items: In April 1994, the Company's
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 on this
sale of $7,810,500 was reflected in the Company's second quarter
results. No taxes were provided as the gain is not taxable.
Durable's manufacturing facilities in the People's Republic of
China were not affected by the sale.
Note 8. Effective April 1, 1994, the Company acquired the 20% interest
in Durable that it did not already own. The purchase price
consisted of the delivery of one million shares of the Company's
common stock, valued at $8,000,000, and a cash payment of
$10,000. This acquisition was accounted for as a purchase.
Goodwill of $4,936,000 was recognized on the transaction, which
is being amortized on a straight-line basis over twenty years.
As of the acquisition date, the Company will no longer allocate
any of Durable's earnings or losses to minority interest.
The acquisition of the additional 20% interest in Durable added
$.02 and $.11 per share to the Company's 1994 third quarter and
nine month's earnings results, respectively, of which $.08
represented a non-recurring gain on the sale of property.
Note 9. The Board of Directors of the Company has declared a regular
quarterly cash dividend of $.05 per share on its common stock.
This dividend was paid June 15, 1994 and September 15, 1994.
The payment of dividends is 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 has filed a pre-answer
motion to dismiss Izumi's complaint, and 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 September 30, 1994 Compared to
Three Months Ended September 30, 1993
Net sales were $55.9 million during the third quarter, a 4.7% increase from
the $53.4 million recorded for the same period last year. Manufacturing
sales were $2.1 million higher primarily due to increased shipments of
kitchen electric appliances. Wal-Mart Stores, Inc. and Sally Beauty
Company accounted for 15.7% and 12.1% of the Company's total sales during
this year's third quarter, respectively.
COMPARATIVE SALES RESULTS
Three Months Ended
September 30, 1994 September 30, 1993
DISTRIBUTION $ 50,182,900 89.8% $ 49,792,500 93.2%
MANUFACTURING 5,702,100 10.2 3,610,900 6.8
Total Sales $ 55,885,000 100.0% $ 53,403,400 100.0%
The Company's gross margin percentage declined in the current year's third
quarter to 31.4% of sales from the 32.2% level achieved during the same
period last year primarily due to higher raw materials costs and a greater
concentration of manufacturing sales, which carry lower margins.
Selling, general and administrative expenses as a percentage of sales were
18.2% and 20.3% in the third quarters of 1994 and 1993, respectively.
Reduced advertising costs and the greater concentration of manufacturing
sales, which incur lower selling, general and administrative expenses than
distribution sales, accounted for the lower level of these expenses.
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.
Effective April 1, 1994, the Company acquired the 20% interest in Durable
that it did not already own. This acquisition added $.02 per share to the
Company's 1994 third quarter earnings results. See Note 8 on page 11.
The average number of common shares and common equivalent shares used in
computing per share results was 11.2% higher in 1994 primarily as a result
of the shares issued to acquire the additional 20% interest in Durable and
from the exercise of stock options and warrants, as well as a higher
dilutive effect from unexercised stock options and warrants due to
increases in the quoted market price of the Company's common stock.
Nine Months Ended September 30, 1994 Compared to
Nine Months Ended September 30, 1993
Net sales were $129.0 million for the nine months ended September 30, 1994,
a .2% increase from the $128.7 million recorded for the same period last
year. The Company's distribution businesses had a sales increase of $3.5
million on higher unit shipments of its core product lines and from the
introduction of hair care appliances under the Helene Curtis Salon
Selectives brand name. Durable's manufacturing sales were $3.2 million
lower primarily due to a $6.4 million decline in sales of electric
fragrance units, which was partially offset by increased shipments of
kitchen electric appliances. Wal-Mart Stores, Inc. and Sally Beauty
Company have accounted for 16.3% and 11.5% of the Company's total sales in
1994, respectively.
COMPARATIVE SALES RESULTS
Nine Months Ended
September 30, 1994 September 30, 1993
DISTRIBUTION $114,321,500 88.6% $110,797,800 86.1%
MANUFACTURING 14,717,100 11.4 17,894,000 13.9
Total Sales $129,038,600 100.0% $128,691,800 100.0%
The Company's gross margin percentage increased for the nine months ended
September 30, 1994 to 30.1% of sales from the 29.2% level in the prior year
primarily due to the greater concentration of higher-margin distribution
sales.
Selling, general and administrative expenses as a percentage of sales and
in absolute dollars were at similar levels for the nine months ended
September 30, 1994 and 1993.
In 1994's second quarter, the Company recorded an unusual and non-recurring
gain of $7.8 million on the sale of 60,000 square feet of office space in
Hong Kong. See Note 7 on page 11.
The Company's equity in net earnings (loss) of joint ventures, excluding
the results of a joint venture sold in August 1993, was $.2 million and
$(.2) million in the first nine months of 1994 and 1993, respectively.
Higher gross margins this year produced the improved earnings.
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. No taxes
were provided on the Hong Kong property sale as the gain from that
transaction is not taxable. 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.
Effective April 1, 1994, the Company acquired the 20% interest in Durable
that it did not already own. This acquisition added $.11 per share to the
Company's nine month's earnings results, of which $.08 represented a non-
recurring gain on the sale of property. See Note 8 on page 11.
The average number of common shares and common equivalent shares used in
computing per share results was 8.5% higher in 1994 primarily as a result
of the shares issued to acquire the additional 20% interest in Durable and
from the exercise of stock options and warrants, as well as a higher
dilutive effect from unexercised stock options and warrants due to
increases in the quoted market price of the Company's common stock.
Liquidity & Capital Resources
At September 30, 1994, the Company's current ratio and quick ratio were 5.1
to 1 and 2.7 to 1 and at September 30, 1993, they were 4.4 to 1 and 2.4 to
1, respectively. Working capital at September 30, 1994 and 1993 was $130.5
million and $111.5 million, respectively.
Cash and cash equivalents at September 30, 1994 were approximately $5.3
million lower than the December 31, 1993 level. Cash of $7.0 million was
used in operating activities, largely for a seasonal buildup of accounts
receivable and inventory levels. The Company received $9.5 million from
the sale of office space in Hong Kong in April and utilized approximately
$5.7 million of cash during the nine month period for purchases of new
fixed assets. The Company acquired 205,300 shares of its common stock for
retirement during this year's third quarter, at a cost of $2.2 million.
In addition, cash dividends of $1.7 million have been paid this year.
A foreign bank provides a $3.9 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 September 30, 1994, the subsidiaries were
utilizing, including letters of credit, approximately $2.4 million of this
credit line, leaving an additional funding capacity of $1.5 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 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 has filed a pre-answer motion to dismiss Izumi's complaint, and
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 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% 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.
In May 1994, President Clinton extended the People's Republic's most-
favored-nation (MFN) trading status for an additional year, beginning July
3, 1994. In making the decision to renew the People's Republic's MFN
status, the President announced that the United States would, in the
future, permanently de-link MFN renewal from human rights issues, other
than freedom of emigration provisions. 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 were 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 June 1994, in accordance with the Trade Act of 1974, as amended, the
Office of the United States Trade Representative (USTR) listed the People's
Republic as a "priority foreign country" based on its alleged failure to
provide adequate and effective protection of intellectual property rights
and initiated an investigation of its acts, policies and practices in this
area. While the USTR noted that the People's Republic has implemented most
of its commitments under the 1992 Memorandum of Understanding Between the
Government of the United States of America and the Government of the
People's Republic on the Protection of Intellectual Property, certain
issues remain unresolved.
The initiation of this investigation commences a year-long process of
discussions between the two countries that could result, if negotiations
are not successful, in the imposition of substantial additional import
duties or other restrictions on the entry into the United States of
selected goods originating in the People's Republic. In the event that
this investigation results in the imposition of additional tariffs on the
import of products manufactured in the People's Republic, it is not yet
clear whether the types of products manufactured by the Company in the
People's Republic would be those subject to higher tariffs. If the
Company's products were subject to higher tariffs or other restrictions on
entry into the United States, this could have an adverse impact on the
Company's revenues and earnings.
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 September 30, 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)
November 8, 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)
November 8, 1994 By: /s/
Burton A. Honig
Vice President - Finance
(Duly authorized to sign on
behalf of the Registrant)
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<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 19,446,500
<SECURITIES> 0
<RECEIVABLES> 46,997,200
<ALLOWANCES> 1,301,100
<INVENTORY> 76,880,000
<CURRENT-ASSETS> 162,178,100
<PP&E> 25,119,800
<DEPRECIATION> 33,985,500
<TOTAL-ASSETS> 205,058,600
<CURRENT-LIABILITIES> 31,678,200
<BONDS> 3,891,900
<COMMON> 1,682,700
0
0
<OTHER-SE> 166,391,300
<TOTAL-LIABILITY-AND-EQUITY> 205,058,600
<SALES> 129,038,600
<TOTAL-REVENUES> 129,038,600
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<TOTAL-COSTS> 90,197,200
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<F1>INCLUDES A $7,810,500 GAIN ON THE SALE OF PROPERTY.
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