-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, r5cUmYwYSxtIwPQIiADplkJzkDG7SO9NXorXiJ0PCzz47tmYpGP6lkG+BlxjTcxL oHHtS28qm5vsLOR2Xcavpw== 0000217084-94-000010.txt : 19941129 0000217084-94-000010.hdr.sgml : 19941129 ACCESSION NUMBER: 0000217084-94-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941108 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WINDMERE CORP CENTRAL INDEX KEY: 0000217084 STANDARD INDUSTRIAL CLASSIFICATION: 3634 IRS NUMBER: 591028301 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10177 FILM NUMBER: 94558117 BUSINESS ADDRESS: STREET 1: 5980 MIAMI LAKES DR CITY: MIAMI LAKES STATE: FL ZIP: 33014 BUSINESS PHONE: 3053622611 MAIL ADDRESS: STREET 1: 5980 MIAMI LAKES DRIVE CITY: MIAMI LAKES STATE: FL ZIP: 33014 FORMER COMPANY: FORMER CONFORMED NAME: SAVE WAY INDUSTRIES INC DATE OF NAME CHANGE: 19830815 FORMER COMPANY: FORMER CONFORMED NAME: SAVE WAY BARBER & BEAUTY SUPPLIES INC DATE OF NAME CHANGE: 19770626 10-Q 1 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) EX-27 2
5 9-MOS DEC-31-1994 SEP-30-1994 19,446,500 0 46,997,200 1,301,100 76,880,000 162,178,100 25,119,800 33,985,500 205,058,600 31,678,200 3,891,900 1,682,700 0 0 166,391,300 205,058,600 129,038,600 129,038,600 90,197,200 90,197,200 0 (4,000) 392,900 18,638,700 2,594,600 16,226,100 0 0 0 16,226,100 .93 0 INCLUDES A $7,810,500 GAIN ON THE SALE OF PROPERTY. NOT REPORTED, AS IT IS NOT MATERIALLY DIFFERENT FROM EPS-PRIMARY.
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