<PAGE> 1
UNITED STATES
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, 1996
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 0-19431
--------
ROYAL APPLIANCE MFG. CO.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-1350353
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
650 ALPHA DRIVE, CLEVELAND, OHIO 44143
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(216) 449-6150
- --------------------------------------------------------------------------------
(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 shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common shares, as of the latest practicable date.
Common Shares, without par value 24,019,400
-------------------------------- --------------------------------
(Class) (Outstanding at November 11, 1996)
The Exhibit index appears on sequential page 15.
1
<PAGE> 2
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations -
three months and nine months ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows -
nine months ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6-7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8-12
Part II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 13
Signatures 14
Exhibit Index 15
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash $ -- $ --
Trade accounts receivable, net 48,048 43,558
Inventories 34,735 28,408
Deferred income taxes 6,743 7,230
Refundable income taxes, net -- 4,392
Prepaid expenses and other 663 1,144
--------- ---------
Total current assets 90,189 84,732
--------- ---------
Property, plant and equipment, at cost:
Land 2,356 3,405
Buildings 13,117 14,463
Molds, tooling, and equipment 45,806 37,596
Furniture and office equipment 5,631 5,352
Assets under capital leases 4,810 9,058
Leasehold improvements and other 2,677 2,565
--------- ---------
74,397 72,439
Less accumulated depreciation and amortization 36,030 30,760
--------- ---------
38,367 41,679
--------- ---------
Tooling deposits 532 4,047
Other 1,029 803
--------- ---------
Total assets $ 130,117 $ 131,261
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 18,570 $ 16,073
Accrued liabilities:
Advertising and promotion 8,242 7,253
Salaries, benefits, payroll taxes 5,295 3,056
Warranty and customer returns 7,500 7,600
Income taxes 2,640 --
Interest and other 3,935 3,963
Current portions of capital lease obligations and notes payable 650 742
--------- ---------
Total current liabilities 46,832 38,687
--------- ---------
Revolving credit agreement 18,734 28,839
Capitalized lease obligations, less current portion 3,377 7,174
Notes payable, less current portion 9,642 9,986
--------- ---------
Total long-term debt 31,753 45,999
--------- ---------
Total liabilities 78,585 84,686
--------- ---------
Commitments and contingencies (Note 3) -- --
Shareholders' equity:
Common shares, at stated value 210 210
Additional paid-in capital 41,434 41,583
Retained earnings 22,986 18,175
Cumulative translation adjustment (118) (413)
--------- ---------
64,512 59,555
Less treasury shares, at cost (1,201,000 shares at
September 30, 1996, and December 31, 1995, respectively) (12,980) (12,980)
--------- ---------
Total shareholders' equity 51,532 46,575
--------- ---------
Total liabilities and shareholders' equity $ 130,117 $ 131,261
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
-----------------------------
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ -------------------------
1996 1995 1996 1995
---------- ---------- --------- ----------
(Note 2)
<S> <C> <C> <C> <C>
Net sales $ 73,688 $ 66,990 $ 188,919 $ 174,261
Cost of sales 52,465 50,737 137,429 132,754
--------- --------- --------- ---------
Gross margin 21,223 16,253 51,490 41,507
Advertising and promotion 9,072 10,110 24,422 26,173
Other selling 2,285 2,897 6,645 8,587
General and administrative 3,179 3,390 8,794 9,850
Engineering and product development 911 620 2,535 2,451
Special charges (Note 5) -- 16,076 -- 16,076
--------- --------- --------- ---------
Income (loss) from operations 5,776 (16,840) 9,094 (21,630)
Interest expense, net 584 1,032 2,102 2,847
Other expense (income), net 25 (26) (897) 140
--------- --------- --------- ---------
Income (loss) before income taxes 5,167 (17,846) 7,889 (24,617)
Income tax expense (benefit) 2,016 (5,567) 3,078 (8,072)
--------- --------- --------- ---------
Net income (loss) $ 3,151 $ (12,279) $ 4,811 $ (16,545)
========= ========= ========= =========
Net income (loss) per common share $ .13 $ (.51) $ .20 $ (.69)
Weighted average number of common
shares and equivalents outstanding (in 24,271 23,999 24,185 23,999
thousands)
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
-----------------------------
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months
Ended September 30,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,811 $ (16,545)
--------- ---------
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation and amortization 6,383 8,820
Compensatory effect of stock options (213) 43
(Gain) loss on disposal of tooling, property, plant and equipment (648) 9,170
(Increase) decrease in assets:
Trade accounts receivable, net (4,490) (2,103)
Inventories (6,327) (7,169)
Refundable, deferred, and accrued income taxes 7,519 (8,826)
Prepaid expenses and other 473 1,162
Other (245) 191
Increase (decrease) in liabilities:
Trade accounts payable 2,503 17,389
Accrued advertising and promotion 989 (4,790)
Accrued salaries, benefits, and payroll taxes 2,239 756
Accrued warranty and customer returns (100) 1,080
Accrued interest and other 209 1,346
--------- ---------
Total adjustments 8,292 17,069
--------- ---------
Net cash from operating activities 13,103 524
--------- ---------
Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment, net (8,272) (6,986)
Decrease (increase) in tooling deposits 3,515 (265)
Proceeds from sale of plants and equipment 2,237 --
--------- ---------
Net cash from investing activities (2,520) (7,251)
--------- ---------
Cash flows from financing activities:
Proceeds from bank debt 182,182 70,386
Payments on bank debt (192,287) (67,923)
(Payments) proceeds from note payable (314) 4,450
Payments on capital lease obligations (230) (241)
Stock options proceeds 64 --
--------- ---------
Net cash from financing activities (10,585) 6,672
--------- ---------
Effect of exchange rate changes on cash 2 55
--------- ---------
Net increase in cash -- --
--------- ---------
Cash at beginning of period -- --
--------- ---------
Cash at end of period $ -- $ --
========= =========
Supplemental disclosure of cash flow information:
Cash payments (refunds) for:
Interest $ 1,856 $ 3,095
========= =========
Income taxes, net $ (4,441) $ 754
========= =========
Supplemental schedule of noncash investing and financing activities:
Exchange of certain tooling for the forgiveness of related note payable $ -- $ 586
========= =========
Assignment of capital lease obligation to buyer $ 3,690 $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1: BASIS OF PRESENTATION
The financial information for Royal Appliance Mfg. Co. and Subsidiaries
(the Company) included herein is unaudited; however, such information reflects
all adjustments (consisting solely of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the
consolidated statements of financial position as of September 30, 1996 and 1995.
It is suggested that these condensed financial statements be read in conjunction
with the consolidated financial statements and the notes thereto included in the
Company's latest shareholders' annual report (Form 10-K).
The results of operations for the three and nine month periods ended
September 30, 1996, are not necessarily indicative of the results to be expected
for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual results
could differ from those estimates.
The Company's revenue recognition policy is to recognize revenues when
products are shipped.
Net income (loss) per share is computed based on the weighted average
number of common and common equivalent shares outstanding and when applicable is
adjusted for the assumed conversion of shares issuable upon exercise of options,
after the assumed repurchase of common shares with the related proceeds.
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost or market. In September 1995,
the Company changed its method of accounting for domestic inventories from the
last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. As
required by generally accepted accounting principles, the Company has
retroactively adjusted prior years' financial statements for this change.
Management believes the FIFO method will provide a better matching of current
costs and current revenues due to past and future decreases in costs and changes
in the mix of products as the Company introduces new products into the
marketplace over time.
The effect of the change in accounting method decreased the loss for the
nine months ended September 30, 1995, by $378 and decreased the net loss per
common share by $.02.
Inventories at September 30, 1996, and December 31, 1995, consisted of
the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ -----------
<S> <C> <C>
Finished goods $19,532 $15,400
Work in process and purchased parts 15,203 13,008
-------- --------
Inventories at FIFO cost $34,735 $28,408
======= =======
</TABLE>
6
<PAGE> 7
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 3: COMMITMENTS AND CONTINGENCIES
At September 30, 1996, the Company estimates having contractual
commitments for future advertising and promotional expense of approximately
$14,100, including commitments for television advertising through March 31,
1997. Other contractual commitments for items in the normal course of business
total approximately $1,500.
NOTE 4: DEBT
The Company's revolving credit facility has a maturity date of April 1,
1999, and is classified as long-term at September 30, 1996. Prior to the
October, 1996 Amendment, the facility provided for revolving credit up to
$60,000, subject to a borrowing base formula as defined in the agreement. The
maximum amount allowable to the Company under the borrowing base formula was
approximately $49,000 as of September 30, 1996 resulting in availability of
approximately $30,000. The agreement requires monthly payments of interest only
through maturity. The facility provides for pricing options at the bank's base
lending rate and LIBOR plus a rate spread as defined in the agreement. At
September 30, 1996, the bank's base lending rate was 8.25%. In addition, the
Company pays a commitment fee at the annual rate of 0.375% on the unused
portion of the facility.
The revolving credit facility contains covenants which require, among
other things, the achievement of minimum net worth levels and the maintenance of
certain financial ratios. The Company was in compliance with all applicable
covenants as of September 30, 1996. The revolving credit facility is
collateralized by the Company's inventories, trade accounts receivable,
equipment and general intangibles.
The carrying amount of the Company's revolving credit facility and
mortgage notes payable approximate fair market value.
In October 1996, the Company entered into a revolving trade accounts
receivable securitization program to sell, through a wholly-owned subsidiary,
certain trade accounts receivables. The maximum amount of receivables that can
be sold is seasonally adjusted. The maximum amount allowed at any given time
through December 31, 1996, is $16,000. At November 1, 1996, the Company sold
approximately $14,000 in trade accounts receivables. The proceeds from the sales
were used to reduce borrowings under the Company's revolving credit facility.
The Company, as agent for the purchaser of the receivables, retains collection
and administrative responsibilities for the purchased receivables.
Correspondingly, in October 1996, the Company amended its revolving credit
facility to reduce the maximum amount of revolving credit from $60,000 to
$50,000.
NOTE 5: SPECIAL CHARGES
In the third quarter of 1995, pursuant to a board approved plan, the
Company recorded special charges of $16,076,000, primarily related to losses
from the disposal of certain inventory, molds and tooling and other intangibles
resulting from the decisions made to refocus the Company's primary operating and
marketing efforts on the North American market. The special charges included a
$12,444,000 write-down to the net realizable value of certain molds, tooling and
inventory being disposed of or held for sale, a $1,589,000 restructuring charge
related to the Company's intent on disposing or selling its European operations,
and a $2,043,000 special charge related to losses from the disposal of certain
inventory and intangibles resulting from discontinuing the Dirt Devil(R)
Cyclone(TM) product line and executive severance.
7
<PAGE> 8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
---------------------
RESULTS OF OPERATIONS
- ---------------------
Net sales increased 10.0% for the third quarter and increased 8.4% for
the nine month period ended September 30, 1996, compared with the same periods
in the prior year. The increase in the third quarter was due to sales of the new
Dirt Devil(R) Broom Vac(TM), which was introduced in the first quarter of 1996,
and the new Dirt Devil(R) Ultra Hand Vac(TM) and the new Dirt Devil(R) Ultra
MVP(TM) upright, which were both introduced at the end of the second quarter of
1996. The increase in net sales for the nine months ended September 30, 1996,
was due to sales of these new products. The increase in net sales for the third
quarter and nine months period ended September 30, 1996, was partially offset by
a decrease in sales of the Company's other product lines and the elimination of
the Company's European operations, which were sold in the fourth quarter of
1995. Overall sales to the top 5 customers (all of which are major retailers)
increased in the first nine months of 1996. Sales to the top 5 customers
accounted for approximately 56.6% of net sales as compared with approximately
53.3% in the first nine months of 1995. The Company believes that its dependence
on sales to its largest customers will continue.
Gross margin, as a percent of net sales, increased from 24.3% for the
third quarter 1995 to 28.8% in the third quarter 1996 and from 23.8% in the
first nine months of 1995 to 27.3% in the first nine months of 1996. The gross
margin percentage was positively affected in 1996 primarily by the introduction
of new products, lower product returns, lower cost of certain component parts
and the elimination of the Company's European operations.
Advertising and promotion expenses decreased 10.3% for the third quarter
1996 and decreased 6.7% for the nine month period ended September 30, 1996
compared with the same periods in 1995. The decrease in advertising and
promotion expenses was due primarily to the elimination of European advertising.
The Company intends to continue emphasizing cooperative advertising and
television as its primary methods of advertising and promotion. The Company's
advertising expenditures are not specifically related to anticipated sales. For
example, the amount of advertising and promotional expenditures may be
concentrated during new product introductions and during critical retail
shopping periods, particularly the fourth quarter.
Other selling expenses decreased 21.1% for the third quarter 1996 and
decreased 22.6% for the nine month period ended September 30, 1996 compared with
the same periods in 1995. The largest component of other selling expenses are
internal sales and marketing personnel compensation and commissions to outside
manufacturers' representatives, however, no such commissions are incurred on
sales made directly to certain large retail customers. The Company has reduced
its dependency on outside manufacturers' representatives resulting in lower
commissions for the third quarter and the nine month period ended September 30,
1996, compared with the same periods in 1995.
General and administrative expenses decreased 6.2% for the third quarter
1996 and decreased 10.7% for the nine month period ended September 30, 1996
compared with the same periods in 1995, due primarily to the company's divesture
of its European operations. General and administrative expenses decreased as a
percentage of net sales from 5.7% to 4.7% for the nine month period ended
September 30, 1996, and from 5.1% to 4.3% for the third quarter. The principal
components are compensation (including benefits), insurance and professional
services.
8
<PAGE> 9
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) (CONTINUED)
- --------------------------------------------
In the third quarter of 1995, pursuant to a board approved plan, the
Company recorded special charges of $16,076,000, primarily related to losses
from the disposal of certain inventory, molds and tooling and other intangibles
resulting from the decisions made to refocus the Company's primary operating and
marketing efforts on the North American market. The special charges included a
$12,444,000 write-down to the net realizable value of certain molds, tooling and
inventory being disposed of or held for sale, a $1,589,000 restructuring charge
related to the Company's intent on disposing or selling its European operations,
and a $2,043,000 special charge related to losses from the disposal of certain
inventory and intangibles resulting from discontinuing the Dirt Devil(R)
Cyclone(TM) product line and executive severance.
Interest expense decreased 43.4% for the third quarter 1996 and decreased
26.2% for the nine month period ended September 30, 1996 compared with the same
periods in 1995. The decrease in interest expense resulted primarily from lower
levels of variable rate borrowings to finance working capital and capital
expenditures and a lower effective borrowing rate.
Other expense (income) principally reflects the effect of foreign
currency transaction gains or losses related to the Company's international
assets. The amount also includes the gain from the sale of a facility of $638,
and the proceeds from insurance reimbursement of legal expenses of $319 in June
1996.
Due to the factors discussed above, the Company had income before income
taxes for the third quarter and nine months ended September 30, 1996 of $5,167
and $7,889, respectively, as compared to a loss before income taxes for the
third quarter and nine month period ended September 30, 1995 of $17,846 and
$24,617, respectively.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has used working capital generated from operations and the
proceeds from the sale of two facilities to fund its operations, capital
expenditures and its reduction in long-term debt. Working capital was $43,357 at
September 30, 1996, a decrease of 5.8% over December 31, 1995 level, which
contributed to the Company's reduction in long-term debt. Current liabilities
increased by $8,145 reflecting in part a $2,497 increase in trade accounts
payable, an increase of $2,239 in accrued salaries, benefits and payroll taxes
and an increase of $2,640 in accrued income taxes. Current assets increased by
$5,457 reflecting in part a $6,327 increase in inventory and a $4,490 increase
in trade accounts receivable, partially offset by a $4,879 reduction of
refundable and deferred income taxes.
In the first nine months of 1996, the Company utilized $4,757 of cash for
capital purchases, including approximately $3,296 of tooling related to the new
Dirt Devil(R) Ultra Hand Vac(TM) and Dirt Devil(R) Ultra MVP(TM) upright.
9
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- -------------------------------
The Company's revolving credit facility has a maturity date of April 1,
1999, and is classified as long-term at September 30, 1996. The facility
provided for revolving credit up to $60,000, subject to a borrowing base formula
as defined in the agreement. The maximum amount allowable to the Company under
the borrowing base formula was approximately $49,000 as of September 30, 1996
resulting in availability of approximately $30,000. The agreement requires
monthly payments of interest only through maturity. The facility provides for
pricing options at the bank's base lending rate and LIBOR plus a rate spread as
defined in the Agreement. At September 30, 1996, the bank's base lending rate
was 8.25%. In addition, the Company pays a commitment fee at the annual rate of
.375% on the unused portion of the facility.
The revolving credit facility contains covenants which require, among
other things, the achievement of minimum net worth levels and the maintenance of
certain financial ratios. The Company was in compliance with all applicable
covenants as of September 30, 1996. The revolving credit facility is
collateralized by the Company's inventories, trade accounts receivable, certain
real estate, equipment and general intangibles.
In October 1996, the Company entered into a revolving trade accounts
receivable securitization program to sell, through a wholly-owned subsidiary,
certain trade accounts receivables. The maximum amount of receivables that can
be sold is seasonally adjusted. The maximum amount allowed at any given time
through December 31, 1996, is $16,000. At November 1, 1996, the Company sold
approximately $14,000 in trade accounts receivables. The proceeds from the sales
were used to reduce borrowings under the Company's revolving credit facility.
The Company, as agent for the purchaser of the receivables, retains collection
and administrative responsibilities for the purchased receivables.
Correspondingly, in October 1996, the Company amended its revolving credit
facility to reduce the maximum amount of revolving credit from $60,000 to
$50,000.
During the second quarter of 1996, the Company sold two facilities which
were previously closed in 1995. The aggregate net proceeds are $2,237 in cash
and the assumption of $3,690 of capital lease liability by the buyer.
The Company believes that its revolving credit facilities along with cash
generated by operations will be sufficient to provide for the Company's
anticipated working capital and capital expenditure requirements for the next
twelve months.
10
<PAGE> 11
QUARTERLY OPERATING RESULTS
- ---------------------------
The following table presents certain unaudited consolidated quarterly
operating information for the Company and includes all adjustments (consisting
only of normal recurring adjustments and a change in the valuation method of
accounting for inventory, from the LIFO method to the FIFO method) that the
Company considers necessary for a fair presentation of such information for the
interim periods.
<TABLE>
<CAPTION>
Three Months Ended*
--------------------------------------------------------------------------------------------
Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30,
1996 1996 1996 1995 1995 1995
---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Net sales $73,688 $62,969 $52,262 $96,303 $66,990 $58,255
Gross margin 21,223 16,504 13,763 27,502 16,253 14,018
Net income (loss) 3,151 1,328 332 2,789 (12,279) (1,888)
Net income (loss) per
common share .13 .05 .01 .12 (.51) (.08)
<FN>
* See Note 2 of Notes to Consolidated Financial Statements
</TABLE>
The Company's business is highly seasonal. The Company believes that a
significant percentage of certain of its products, particularly hand vacs and
cordless rechargeable brooms, are given as gifts and therefore may sell in
larger volumes during the Christmas shopping season. Because of the Company's
continued dependency on its major customers, the timing of purchases by these
major customers could cause quarterly fluctuations in the Company's net sales.
As a consequence, results in prior quarters are not necessarily indicative of
future results of operations.
OTHER
- -----
The Company's past and future success is dependent upon continued
innovation in the design of replacement upright and hand-held models as well as
in new innovative niche products utilizing the Dirt Devil(R) brand name.
Competition is dependent upon price, quality, extension of product lines,
and advertising and promotion expenditures. Additionally, competition is
influenced by innovation in the design of replacement models and by marketing
and approaches to distribution. The Company has experienced heightened
competition in the upright market segment, and believes that its net sales and
market share in the domestic upright market segment have been negatively
affected by competitive pricing and by the increased advertising expenditures
of its competitors. The Company's most significant competitors in the domestic
vacuum cleaner market are Hoover and Eureka, and Black & Decker in the
hand-held market. Most of the competitors are subsidiaries of companies that
are more diversified and have greater financial resources than the Company.
INFLATION
- ---------
The Company does not believe that inflation by itself has had a material
effect on the Company's results of operations. However, as the Company
experiences price increases from its suppliers, which may include increases due
to inflation, retail pressures may prevent the Company from increasing its
selling prices.
11
<PAGE> 12
LITIGATION
- ----------
The Company is involved in various claims and litigation arising in the
normal course of business. In the opinion of management, the ultimate resolution
of these actions will not materially affect the consolidated financial position,
results of operations, or cash flows of the Company.
ACCOUNTING STANDARDS
- --------------------
The Company has selected the disclosure-only option of Statement of
Financial Accounting Standards "SFAS" No. 123, Accounting for Stock-Based
Compensation. The Company expects the implementation of SFAS No. 123 will not
have a material impact on its consolidated financial position and results of
operations.
FORWARD-LOOKING STATEMENTS
- --------------------------
Forward-looking statements in this Form 10-Q are made pursuant to the
safe harbor provisions of the Private Securities Litigation and Reform Act of
1995. Such forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof. Potential
risks and uncertainties include, but are not limited to the dependence upon the
Company's ability to continue to successfully develop and introduce innovative
products; general business and economic conditions; the financial strength of
the retail industry particularly the major mass retail channel; the competitive
pricing environment within the vacuum cleaner segment of the floor care
industry and the cost and effectiveness of planned advertising, marketing and
promotional campaigns.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
-------- --------------------------------
Forms 8-K - None
The following documents are furnished as an exhibit and
numbered pursuant to Item 601 of Regulation S-K:
Exhibit 4(a) - Amendment No. 1 to Restated Credit
and Security Agreement dated as of
October 1, 1996, by and among the
Registrant and various banks
including National City Commercial
Finance, Inc. as Agent.
Exhibit 4(b) - Receivable Purchase and Servicing
Agreement dated as of October 1,
1996, by the Registrant, Royal
Appliance Receivables, Inc., as
Seller, and Capital USA Funding L.P,
as Purchaser.
Exhibit 11 - Computation of earnings (loss) per
common share.
Exhibit 27 - Financial data schedule (EDGAR filing
only)
13
<PAGE> 14
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.
Royal Appliance Mfg. Co.
--------------------------------------------
(Registrant)
Michael J. Merriman
-------------------------------------------
Michael J. Merriman
Chief Executive Officer, President and Director
(Principal Executive and Financial Officer)
Date: November 11, 1996 Richard G. Vasek
----------------- -------------------------------------------
Richard G. Vasek
Controller, Secretary and Chief Accounting Officer
(Principal Accounting Officer)
14
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Exhibit 4(a) - Amendment No. 1 to Restated Credit and Security
Agreement dated as of October 1, 1996, by and among the
Registrant and various banks including National City
Commercial Finance, Inc. as Agent. 16 - 26
Exhibit 4(b) - Receivable Purchase and Servicing Agreement dated as of
October 1, 1996, by the Registrant, Royal Appliance
Receivables, Inc., as Seller, and Capital USA Funding L.P,
as Purchaser. 27 - 35
Exhibit 11 - Computation of earnings (loss) per common share 36
Exhibit 27 - Financial data schedule (EDGAR filing only)
</TABLE>
15
<PAGE> 1
EXECUTION COPY
AMENDMENT NO. 1
---------------
TO
--
RESTATED CREDIT AND SECURITY AGREEMENT
--------------------------------------
This Amendment No. 1 to Restated Credit And Security Agreement
(this "Amendment No. 1"), made as of the 1st day of October, 1996, between Royal
Appliance Mfg. Co. (the "Borrower"), National City Commercial Finance, Inc., as
agent for the Lenders (the "Agent"), National City Bank, as Letter of Credit
Bank (the "Letter of Credit Bank"), and the Lenders,
WITNESSETH:
WHEREAS, the Borrower, the Agent, the Letter of Credit Bank and the
Lenders have entered into that certain Restated Credit and Security Agreement,
dated as of March 27, 1996 (the "Credit Agreement"), pursuant to which the
Lenders have made Loans and other financial accommodations available to the
Borrower; and
WHEREAS, the Borrower has advised the Agent that: (i) pursuant to
Section 5.7 of the Credit Agreement, the Borrower desires to sell an outstanding
amount not to exceed $16,000,000 (and after December 31, 1996, not to exceed
$9,000,000) of its "Receivables" indebtedness owing from Wal-Mart Stores, Inc.
arising from the provision of merchandise and goods by the Borrower, (ii) such
sale shall be made to Royal Appliance Receivables, Inc., an Ohio corporation and
wholly-owned, special purpose corporation of the Borrower, pursuant to that
certain Receivables Sale and Contribution Agreement, dated as of October 1, 1996
(the "Sale Agreement"), and (iii) Royal Appliance Receivables, Inc. shall
transfer such "Receivables" to Capital U.S.A. Funding, L.P., a Delaware limited
partnership (the "Purchaser") pursuant to that certain Receivables Purchase and
Servicing Agreement, dated as of October 1, 1996 (the "Receivables Purchase
Agreement") or, in the event the Purchaser, in its discretion as permitted by
the Receivables Purchase Agreement, declines to purchase any of the
"Receivables" offered by the Borrower, to Commerzbank Aktiengesellschaft, New
York Branch, as agent for certain banks parties to that certain Standby
Receivables Purchase and Servicing Agreement, dated as of October 1, 1996 (the
"Standby Receivables Purchase Agreement"), may elect to purchase such
Receivables.
WHEREAS, upon the terms and subject to the conditions as set forth
hereinafter the Borrower, the Agent and the Lenders desire to amend the Credit
Agreement as set forth herein to accommodate: (i) such sale of Wal-Mart Stores,
Inc. Receivables as contemplated by the Sale Agreement, the Receivables Purchase
Agreement and the Standby Receivables Purchase Agreement and (ii) the
establishment of Royal Appliance Receivables, Inc.
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained herein, and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Borrower, the Agent and the
Lenders hereby agree as follows:
SECTION 1. DEFINED TERMS. Unless otherwise specified herein,
capitalized terms used herein without definition shall have the meanings
ascribed to such terms in the Credit Agreement.
16
<PAGE> 2
SECTION 2. AMENDMENT CREDIT AGREEMENT. The Credit Agreement shall be
amended, effective as of the date of this Amendment, as follows:
2.1 AMENDMENT TO SECTION 1.1. The definition of "Eligible
Accounts" set forth in Section 1.1 of the Credit Agreement is hereby
amended by adding new clause (w) thereto as follows:
(w) are Wal-Mart Accounts.
2.2 AMENDMENT TO SECTION 1.1. Section 1.1 of the Credit
Agreement is hereby amended by adding thereto the following
definitions:
"CAPITAL USA FUNDING" means Capital USA Funding, L.P., a
Delaware limited partnership.
"COMMERZBANK" means Commerzbank Aktiengesellschaft, New York
Branch.
"RECEIVABLES PURCHASE AGREEMENT" means that certain
Receivables Purchase and Servicing Agreement, dated as of October 1,
1996, between Royal Appliance Receivables, Inc. and Capital USA.
"RECEIVABLES SALE AND CONTRIBUTION AGREEMENT" means that
certain Receivables Sale and Contribution Agreement, dated as of
October 1, 1996, between the Borrower and Royal Appliance Receivables,
Inc.
"REVOLVING CREDIT COMMITMENT" means the commitment of each
Lender to advance Loans up to the amount as set forth in Amended Annex
I.
"ROYAL APPLIANCE RECEIVABLES, INC." means Royal Appliance
Receivables, Inc., an Ohio corporation and wholly-owned subsidiary of
the Borrower established to purchase the Wal-Mart Accounts from the
Borrower.
"STANDBY RECEIVABLES PURCHASE AGREEMENT" means that certain
Standby Receivables Purchase and Servicing Agreement, dated as of
October 1, 1996, between Royal Appliance Receivables, Inc. and
Commerzbank, as agent for the banks which are from time to time parties
thereto.
"WAL-MART" means Wal-Mart Stores, Inc., a Delaware
corporation.
"WAL-MART ACCOUNT" means: (i) indebtedness owing from Wal-Mart
arising from the provision of merchandise and goods by the Borrower to
Wal-Mart (excluding Wal-Mart Canada Accounts), including the right to
payment of any interest or finance charges and other obligations of
Wal-Mart with respect thereto, (ii) all security interests or liens and
property subject thereto from time to time purporting to secure payment
by Wal-Mart, (iii) all guarantees, indemnities and warranties and
proceeds thereof, proceeds of insurance policies, financing statements
and other agreements or arrangements of whatever character from time to
time supporting or securing payment by Wal-Mart, (iv) all collections
(I.E., all cash collections and other cash proceeds) and records (I.
E., all contracts {I. E., a written agreement or agreements pursuant to
which, or under which, Wal-Mart is obligated to pay for merchandise or
goods sold to Wal-Mart by the Borrower
17
<PAGE> 3
from time to time}) and other documents, books, records and other
information (including, without limitation, computer programs, tapes,
disks, punch cards, data processing software and related property and
rights) prepared and maintained by the Borrower, Royal Appliance
Receivables, Inc., with respect to Wal-Mart Accounts and Wal-Mart and
(v) all proceeds of any of the foregoing.
"WAL-MART CANADA ACCOUNT" means an indebtedness owing by
Wal-Mart or any affiliate thereof located in Canada which is originally
invoiced and collected in Canadian Dollars.
2.3 AMENDMENT TO ANNEX I. Annex I of the Credit Agreement is
hereby deleted in its entirety and Amended Annex I attached hereto is
substituted in lieu thereof.
2.4 AMENDMENT TO SECTION 4.1. Section 4.1 of the Credit
Agreement is hereby amended by adding at the end thereof the following
proviso thereto:
; PROVIDED, HOWEVER, that, so long as the Borrower shall be
permitted to sell Wal-Mart Accounts to Royal Appliance
Receivables, Inc., the Collateral shall not include Wal-Mart
Accounts.
2.5 AMENDMENT TO SECTION 4.4. Section 4.4 of the Credit
Agreement is hereby amended by adding thereto new clause (g) as
follows:
and (g) all Wal-Mart Accounts consist solely of open accounts,
are not evidenced by "chattel paper" within the meaning of the
UCC, and are not secured by Wal-Mart or Guaranteed by any
Person.
2.6 AMENDMENT TO SECTION 4.5. Section 4.5 of the Credit
Agreement is hereby deleted in its entirety and the following
substituted in lieu thereof:
4.5 TITLE TO COLLATERAL; LIENS; TRANSFERS. Borrower
has good, indefeasible and merchantable title to and ownership
of the Collateral, free and clear of all Liens, except for
Liens permitted under Section 8.3(d) and the security interest
(within the meaning of Section 1309.02(A)(2) of the Ohio
Revised Code [9-102(1)(b) of the UCC]) in favor of Royal
Appliance Receivables, Inc. in Wal-Mart Accounts permitted in
connection with Section 5.8 of this Agreement. Except as
permitted by Section 8.3(d) or 8.3(a) of this Agreement, as
contemplated by Section 5.8 of this Agreement (with respect to
such security interest (within the meaning of Section
1309.02(A)(2) of the Ohio Revised Code) [9-102(1)(a) of the
UCC] in Wal-Mart Accounts), or as otherwise provided herein or
in any other Loan Document, the Borrower shall not encumber,
pledge, mortgage, grant a security interest in, assign, sell,
lease or otherwise dispose of or transfer, whether by sale,
merger, consolidation, liquidation, dissolution or otherwise,
any of the Collateral.
2.7 AMENDMENT TO SECTION 4.6. Clause (e) of Section 4.6 of the
Credit Agreement is hereby deleted in its entirety and the following
substituted in lieu thereof:
(e) make any other change (other than sales of
Inventory in the ordinary course of business and other than
sales (I.E., the security interest within the meaning of
Section 1309.02(A)(2) of the Ohio Revised Code [9-102(1)(b) of
the
18
<PAGE> 4
UCC]) of Wal-Mart Accounts to the extent permitted by Section 5.8 of
this Agreement to Royal Appliance Receivables, Inc.) which might
affect the perfection or priority of the Agent's Lien in the
Collateral.
2.8 AMENDMENT TO SECTION 4.9. The first clause of the first
sentence of Section 4.9 of the Credit Agreement is hereby deleted in
its entirety and following substituted in lieu thereof:
...During regular business hours and after reasonable notice
to the Borrower, the Agent and each of the Lenders (by any of
its officers, employees, agents, representatives, or
designees, including any Lender) shall have the right to
inspect the Borrower's Collateral or the Wal-Mart Accounts and
to inspect and audit, all books, records, journals, orders,
receipts, or other correspondence related thereto (and to make
extracts or copies thereof as the Agent may desire) and to
inspect the premises upon which any of the Collateral or any
Wal-Mart Account is located for the purpose of verifying the
amount, quality, quantity, value, and condition of, or any
other matter relating to, the Collateral or Wal-Mart
Account;...
2.9 AMENDMENT TO SECTION 4.10. Section 4.10 of the Credit
Agreement is hereby amended by adding at the end thereof the following
sentence thereto:
On or before the fifteenth day (15th) day of each calendar
month, the Borrower shall deliver to the Agent, in form and
substance satisfactory to the Agent, a summary of the sales of
Wal-Mart Accounts to Royal Appliance Receivables, Inc. showing
the aggregate outstanding face amount of the Receivables sold,
the sale price of the Receivables sold, the cash portion of
the Sale Price (indicating payment thereof to the Borrower by
wire transfer to the Blocked Accounts) and such other
information relating to the sales as the Agent may request
from time to time.
2.10 AMENDMENT TO SECTION 5.8. Section 5.8 of the Credit
Agreement is hereby amended by adding at the end thereof the following
proviso thereto:
; PROVIDED; HOWEVER, that, in respect of the sale of the
Wal-Mart Accounts, the Borrower's ability to sell such
Wal-Mart Accounts is conditioned upon continued satisfaction
of the following conditions: (i) the Sale Price (as defined in
the Sale Agreement) for the sold Wal-Mart Accounts (other than
the portion thereof treated as capital contribution) shall be
paid by Royal Appliance Receivables, Inc. directly to the
Lockbox or Blocked Accounts established pursuant to Section
5.2 of this Credit Agreement, (ii) the Sale Price (as defined
in Receivables Sale and Contribution Agreement) payable to the
Borrower by Royal Appliance Receivables, Inc. shall not be
less than the Cash Purchase Price payable to Royal Appliance
Receivables, Inc. pursuant to the Receivables Purchase
Agreement and the Standby Receivables Purchase Agreement
(which provisions shall not be modified without the Agent and
the Lenders' written consent) treated as equity or deferred
purchase price and such Sale Price shall be immediately paid
by Royal Appliances Receivables, Inc., to the Borrower, (iii)
any deferred purchase price with respect to Purchased
Receivable or Bank Purchased Receivable shall be payable to
the Borrower as soon as payable to Royal Appliance
Receivables, Inc.
19
<PAGE> 5
under the Receivables Purchase Agreement and the Standby
Receivables Purchase Agreement, (iv) the sale of Wal-Mart
Accounts to Royal Appliance Receivables, Inc. shall be at the
sole discretion of the Borrower and (v) without the consent of
the Lenders, the Borrower shall not have outstanding in excess
of (x) $16,000,000 in sold Wal-Mart Accounts prior to December
31, 1996, and (y) $9,000,000 in sold Wal-Mart Accounts
thereafter.
2.11 AMENDMENT TO SECTION 7.6. The second sentence of Section
7.6 of the Credit Agreement is hereby deleted in its entirety and the
following substituted in lieu thereof:
. . . All such assets are free and clear of any
mortgage, security interest or other Lien of any kind, other
than any Liens in favor of the Lenders, Liens permitted by
Section 8.3(d) of this Agreement, and the security interest
(within the meaning of Section 1309.02(A)(2) of the Ohio
Revised Code [9-102(1)(b) of the UCC]) in favor of Royal
Appliance Receivables, Inc. in respect of Wal-Mart Accounts
permitted in connection with Section 5.8 of this Agreement.
2.12 AMENDMENT OF SECTION 8.3(d). Section 8.3(d) of the Credit
Agreement is hereby amended by adding clause (J) thereto as follows:
(J) any security interest (within the meaning of
Section 1309.02(A)(2) of the Ohio Revised Code [9-102(1)(b) of
the UCC]), to the extent permitted and satisfying the
condition set forth in Section 5.8 of this Agreement: (x) with
respect to the Borrower, in favor of Royal Appliance
Receivables, Inc. in respect of Wal-Mart Accounts of the
Borrower permitted to be transferred by Section 5.8 of this
Agreement and (y) with respect to the Royal Appliance
Receivables, Inc., in favor of Capital USA, pursuant to the
Receivables Purchase Agreement, or Commerzbank, pursuant to
the Standby Receivables Purchase Agreement, as agent for the
banks which are parties thereto in respect of Wal-Mart
Accounts purchased by Royal Appliance Receivables, Inc. by the
Borrower.
2.13 AMENDMENT OF SECTION 9. Section 9 of the Credit Agreement
is hereby amended by adding Subsection 9.14 thereto as follows:
9.14 either: (i) the assertion by the Borrower, Royal
Appliance Receivables, Inc., Capital USA or Commerzbank, or a
finding by any court, that the security interest under the
Receivables Sale and Contribution Agreement constitutes a
security interest within the meaning a Section 1309.02(A)(1)
of the Ohio Revised Code [9-102(1)(a) of the UCC], (ii)
Capital USA or Commerzbank exercise any remedy against the
Borrower or Royal Receivables, Inc. other than the liquidation
settlement procedures by Capital USA as set forth in Section
2.8 of the Receivables Purchase Agreement and by Commerzbank
as set forth in Section 2.8 of the Standby Receivables
Purchase Agreement, (iii) the Borrower fails at any time to
satisfy any of the conditions set forth in the proviso to
Section 5.8 of this Credit Agreement or (iv) the Borrower
agrees to any modification to the Receivables Sale and
Contribution Agreement, the Receivables Purchase
Agreement, the Standby Receivables Purchase Agreement or any
Related Documents (as defined in the Receivables Purchase
Agreement) without ten (10)
20
<PAGE> 6
Business Days' prior written notice to the Agent and the
written consent of the Agent and the Lenders.
SECTION 3. WAIVER OF NON-COMPLIANCE WITH CERTAIN PROVISIONS. Subject to
the conditions set forth in Section 4 below, the Lenders hereby waive the
Borrower's any noncompliance with the provisions of Sections 8.3(f), 8.3(g) or
8.3(h) by reason of (i) the creation or operation of Royal Appliance
Receivables, Inc. or (ii) the pledge to the Agent in favor of the Lenders of the
capital stock of Royal Appliance Receivables, Inc.
SECTION 4. CONDITIONS PRECEDENT TO EFFECTIVENESS OF THIS AMENDMENT NO.
1. In addition to all of the other conditions and agreements set forth herein,
the effectiveness of this Amendment No. 1 is subject to the conditions
precedent that the Agent shall have received the following deliveries or shall
have satisfied the following conditions:
4.1 SALE TERMS. All Related Documents and all financing
statements filed by Royal Appliance Receivables, Inc., the Purchaser
and Commerzbank shall be limited to the Wal-Mart Accounts (and shall
specifically exclude Wal-Mart Canada Accounts and shall reflect, in the
case of the Bank Purchased Receivables (as defined in the Standby
Receivables Purchase Agreement) purchased from Royal Appliance
Receivables, Inc., Commerzbank as the secured party for the benefit of
the Banks.
4.2 THIS AMENDMENT NO. 1. The Agent shall have received this
Amendment No. 1, executed and delivered by a duly authorized officer of
the Borrower.
4.3 PLEDGE AGREEMENT. A Pledge Agreement, substantially in the
form of EXHIBIT 1 hereto (the "Pledge Agreement"), executed and
delivered by an authorized officer of the Borrower in favor of the
Agent for the benefit of the Lenders and pledging the capital stock of
Royal Appliance Receivables, Inc. owned by the Borrower.
4.4 SECURITIZATION DOCUMENTATION. A fully executed copy of
each of the Receivables Purchase Agreement, Receivables Sale and
Contribution Agreement, Standby Receivables Purchase Agreement and each
and every instrument, assignment, financing statement, certificate,
opinion and other document delivered in connection with any of the
foregoing.
4.5 REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT. Upon the
effectiveness of this Amendment No. 1, each reference in the Credit
Agreement to "this Agreement", "hereunder", "hereof", "herein", or
words of like import shall mean and be a reference to the Credit
Agreement, as amended hereby and each reference to the Credit Agreement
in any other document, instrument or agreement executed and/or
delivered in connection with the Credit Agreement shall mean and be a
reference to the Credit Agreement, as amended hereby.
SECTION 5. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents
and warrants to the Agent and the Lenders as follows:
5.1 THIS AMENDMENT NO. 1. This Amendment No. 1 has been duly
and validly executed by an executive officer of the Borrower and
constitutes a legal, valid and binding obligation of the Borrower
enforceable against Borrower in accordance with its terms.
21
<PAGE> 7
5.2 THE PLEDGE AGREEMENT. The Pledge Agreement has been duly
and validly executed by an executive officer of the Borrower and
constitutes a legal, valid and binding obligation of the Borrower
enforceable against Borrower in accordance with its terms.
5.3 CREDIT AGREEMENT. The Credit Agreement, as amended by this
Amendment No. 1, remains in full force and effect and remains a valid
and binding obligation of the Borrower enforceable against the
Borrower in accordance with its terms. The Borrower hereby ratifies and
confirms the Credit Agreement, as amended by this Amendment No. 1.
5.4 NON-WAIVER. The execution, delivery, performance and
effectiveness of this Amendment No. 1 shall not operate nor be deemed
to be or construed as, a waiver (i) of any right, power or remedy of
the Agent or Lenders under the Credit Agreement, nor (ii) of any term,
provision, representation, warranty or covenants contained in the
Credit Agreement. Further, none of the provisions of this Amendment No.
1 shall constitute, be deemed to be or construed as a waiver of any
default or Event of Default under the Credit Agreement, as amended by
this Amendment No. 1.
SECTION 6. MISCELLANEOUS.
6.1 GOVERNING LAW. This Amendment No. 1 shall be governed by
and construed in accordance with the laws of the State of Ohio.
6.2 SEVERABILITY. In the event any provision of this Amendment
No. 1 should be invalid, the validity of the other provisions hereof
and of the Credit Agreement shall not be affected thereby.
6.3 COUNTERPARTS. This Amendment No. 1 may be executed in one
or more counterparts, each of which, when taken together, shall
constitute but one and the same agreement.
22
<PAGE> 8
IN WITNESS WHEREOF, Royal Appliance Mfg. Co. has caused this Amendment
No. 1 to Restated Credit and Security Agreement to be executed and delivered as
of the date above written.
ROYAL APPLIANCE MFG. CO.
---------------------------
By:
-----------------------
Its:
-----------------------
Accepted and Agreed:
NATIONAL CITY COMMERCIAL FINANCE, INC.,
as Agent
- -----------------------------
By: Lee K. Mosby
Its: Vice President
23
<PAGE> 9
LENDERS
NATIONAL CITY COMMERCIAL FINANCE, INC.,
as a Lender
- -----------------------------
By: Lee K. Mosby
Its: Vice President
THE CIT GROUP BUSINESS CREDIT, INC.,
as a Lender
- -----------------------------
By: Michael F. Lapresi
Its: Vice President
CORESTATES BANK, N.A. (as assignee of
Meridian Commercial Finance
Corporation), as a Lender
- ----------------------------
By: Christopher J. Calabrese
Its: Vice President
NATIONAL BANK OF CANADA, a Canadian
Chartered Bank, as a Lender
- -----------------------------
By: Douglas K. Winget
Its: Vice President
BTM CAPITAL CORPORATION (as successor by
merger to BOT Financial Corporation),
as a Lender
- -----------------------------
By: William R. York
Its: Managing Director
24
<PAGE> 10
LETTER OF CREDIT BANK
NATIONAL CITY BANK
- --------------------------
By: Thomas R. Poe
Its: Senior Vice President
25
<PAGE> 11
Amended Annex I
RESTATED CREDIT AND SECURITY AGREEMENT, DATED AS OF MARCH 27, 1996,
AMONG ROYAL APPLIANCE MFG. CO., THE AGENT, LETTER OF CREDIT BANK
AND THE LENDERS, AS AMENDED BY AMENDMENT NO. 1 THERETO
COMMITMENTS AND PERCENTAGES OF THE LENDERS
<TABLE>
<CAPTION>
Ratable
Revolving Credit Portion
Name Of Lender Commitment (Percentage)
============== ========== ===========
<S> <C> <C>
National City Commercial Finance, Inc. $15,000,000 30%
The CIT Group Business Credit, Inc. $9,500,000 19%
CoreStates Bank $9,000,000 18%
National Bank of Canada, a Canadian Chartered Bank $8,500,000 17%
BTM Capital $8,000,000 16%
TOTAL REVOLVING CREDIT COMMITMENT $50,000,000 100%
- ---------------------------------
</TABLE>
26
<PAGE> 1
RECEIVABLES PURCHASE AND
SERVICING AGREEMENT
RECEIVABLES PURCHASE AND SERVICING AGREEMENT, dated as of October 1,
1996 (this "Agreement"), by and among ROYAL APPLIANCE RECEIVABLES, INC. an Ohio
corporation as Seller (the "Seller"), CAPITAL USA FUNDING, L.P., a Delaware
limited partnership, as Purchaser (as such, together with its successors and
assigns, the ("Purchaser"), ROYAL APPLIANCE MFG. CO., an Ohio corporation as
originator of the Receivables (the "Parent") and as servicer (as such, together
with its successors and assigns, the "Servicer") and CAPITAL USA, L.L.C., a
Delaware limited liability company in its capacity as administrator hereunder
(as such, together with its successors and assigns, the "Administrative Agent").
W I T N E S S E T H:
--------------------
WHEREAS, the Seller is a wholly-owned, bankruptcy-remote subsidiary of
the Parent;
WHEREAS, the Seller has been formed for the sole purpose of purchasing
and selling certain trade receivables originated by the Parent in the ordinary
course of its business and sold or contributed to the Seller from time to time
pursuant to the Receivables Sale Agreement by and between the Parent and the
Seller;
WHEREAS, the Administrative Agent has been requested and is willing to
provide certain administrative services on behalf of the Purchaser in connection
with the making and financing of such purchases;
WHEREAS, the Purchaser desires that a Servicer be appointed to service
receivables purchased by the Purchaser under this Agreement and the Parent has
been requested and is willing to act as the Servicer;
NOW, THEREFORE, the parties agree as follows:
This Agreement hereby expressly incorporates by reference herein the
Standard Terms and Conditions attached hereto as Annex A.
1. (a) CERTAIN DEFINED TERMS. As used in this agreement, the
following additional terms shall have the following meanings:
APPLICABLE MARGIN: means 0.90% per annum.
BALANCE SHEET DATE: means June 30, 1996.
BUSINESS DAY: means any day of the year other than a Saturday,
Sunday or any day on which banks generally are required, or authorized,
to close in New York, New York, Fayetteville, Arkansas, or Cleveland,
Ohio.
27
<PAGE> 2
COLLECTION ACCOUNT: means the Eligible Bank Account titled
"Capital USA Funding, L.P. -- Collection Account Royal Appliance"
established pursuant to Section 2.03(b).
ESCROW PERIOD: means, with respect to any Escrowed Amount, the
period expiring on the 91st day (or such longer period as may be
required by Section 547 of the United States Bankruptcy Code to the
extent the Seller or the Parent was an "insider" within the meaning of
Section 547 of the United States Bankruptcy Code at the time of such
transfer) following the deposit or allocation of such Escrowed Amount
into the Escrowed Amount Subaccount.
FINAL PURCHASE DATE: means the date that is 90 days following
the Effective Date, which date shall be extended for additional 90-day
periods unless the Administrative Agent provides written notice to the
Seller that an extension will not be made; PROVIDED, however, that in
no event shall any such extension be made that would cause the Final
Purchase Date to occur more than 364 days following the Effective Date.
MINIMUM INVESTMENT AMOUNT: means $100,000.
MAXIMUM DILUTION RATIO: means 20%
PARENT JUDGMENT AMOUNT: means $5 million.
PROGRAM FEE RATE: means 0.10%, as adjusted from time to time
by written notice from the Administrative Agent to the Seller.
PURCHASE DATE: means the Effective Date and, thereafter, each
successive Business Day.
PURCHASE LIMIT: means from the Effective Date through December
31, 1996, $16,000,000, and thereafter $9,000,000.
SERVICING FEE RATE: means 1.00%.
(b) All capitalized terms used and not defined herein, shall
have the meaning specified in Annex A to this Agreement.
(c) The words "herein", "hereof" and "hereunder" and other
words of similar import refer to this Agreement as a whole. All references to
Articles and Sections shall be deemed to refer to Articles and Sections of this
Agreement as the context requires.
2. ADDITIONS AND MODIFICATIONS TO THIS AGREEMENT.
28
<PAGE> 3
(a) The following defined term is hereby added:
"MONTHLY DSO: means, for any calendar month, the
Days' Sales Outstanding for such month, calculated as
of the first day of the month next succeeding such
month."
(b) The following defined terms are hereby amended in
full to read as follows:
"AVERAGE HISTORICAL DSO: means, for any date of
determination, (a) the sum of the Monthly DSOs for
the immediately preceding twelve calendar months
DIVIDED BY (b) 12."
"DILUTION DISCOUNT: means, on any date, 10%."
"DILUTION FACTOR: means, with respect to any month
and any date of calculation, the greater of (a) a
fraction (i) the numerator of which is equal to the
aggregate Dilutions for the immediately preceding 12
calendar months and (ii) the denominator of which is
equal to the aggregate Cumulative Sales for the
immediately preceding 12 calendar months and (b) the
product of (i) a fraction (A) the numerator of which
is equal to the maximum Dilutions that occur in any
given calendar month during the immediately preceding
twelve calendar month period and (B) the denominator
of which is equal to the aggregate Outstanding
Balance of Purchased Receivables that are Eligible
Receivables as of such date (after giving effect to
any Purchase to be made on such date) and (ii) the
greater of (A) 1.00 and (B) a fraction (I) the
numerator of which is equal to the Cumulative Sales
for the Parent's most recently ended fiscal year and
(II) the denominator of which is equal to the
Cumulative Sales for the Parent's second most
recently ended fiscal year."
"PURCHASE TERMINATION DATE: means the earliest to
occur of: (a) the date so designated pursuant to
Section 7.1 of this Agreement as a result of the
occurrence of a Termination Event, (b) the date
designated in writing by the Seller to each of the
Purchaser, the Banks, the Administrative Agent and
the Agent, such date to occur no earlier than 10
Business Days following receipt by the last party to
receive such notice and (c) the Final Purchase Date."
"REVOLVING PERIOD: means the period commencing on the
Effective Date of this Agreement and ending on the
day prior to the Purchase Termination Date."
29
<PAGE> 4
"STANDARD DEVIATION OF DSO: means, for any date of
determination, the square root of the Average DSO
Deviation.
Where:
AVERAGE DSO DEVIATION equals (a) the
aggregate Square of DSO Differences
for all Target Monthly DSOs used to
calculate the Average Historical DSO
on such date DIVIDED BY (b) 12;
SQUARE OF DSO DIFFERENCE equals the
DSO Difference MULTIPLIED BY itself;
DSO DIFFERENCE means, for each
Target Monthly DSO, an amount equal
to the Average Historical DSO on
such date MINUS the Target Monthly
DSO; and
TARGET MONTHLY DSO is each Monthly
DSO used to calculate the Average
Historical DSO."
(c) The following defined terms are amended as follows:
(i) Clause (d) of the definition of "Eligible
Receivable" is hereby amended by adding the following after the word
"adjusted:"
(other than as contemplated in (c) above)
(ii) Clause (o) of the definition of "Eligible
Receivable" is hereby amended by deleting the words "30 days'" and
inserting the words "60 days'."
(iii) The definition of "Related Documents" is
hereby amended by adding the following after the words "Standby
Receivables Purchase Agreement:"
, the Management Agreement, dated as of
October 1, 1996, between the Parent and the
Seller
(d) Section 2.8(a)(iii) is hereby amended as follows: the
words "Escrowed Accounts" in the parenthetical phrase is deleted and replaced
by the words "Escrowed Amounts."
(e) Section 3.1(l) is hereby deleted and replaced in its
entirety as follows:
(l) Payment of the Purchaser's legal fees (in an
amount not to exceed $7,500) and expenses and other
document preparation costs;
30
<PAGE> 5
(f) Section 3.1(n) is hereby deleted and replaced in its
entirety as follows:
(n) (i) Consolidated balance sheets and
statements of income and changes in financial
position of the Parent, the Servicer and their
respective Subsidiaries for each of the years in the
three year period ended the Balance Sheet Date,
audited by an independent nationally recognized
accounting firm;
(ii) Unaudited balance sheets of the
Seller as of the Effective Date and consolidated
balance sheets and statements of income and changes
in financial position of the Parent, the Servicer and
their respective Subsidiaries for each fiscal quarter
following the Balance Sheet Date ended more than 45
days prior to the Effective Date;
(iii) The Seller's balance sheet, dated
as of the Effective Date and certified by the chief
executive or accounting officer of the Parent;
(g) Section 4.3(a)(i) is hereby amended as follows:
(A) by adding the following in the fourth line
of the first sentence after the words
"requires it to be so qualified:"
in which the failure to be so
qualified could have a material
adverse effect on the Parent
(B) by adding the following at the end of the
second sentence:
, which the failure to comply with
could have a material adverse effect
on the Parent
(h) Section 4.3(a)(xi) is hereby amended by adding at the
end thereof the following: "which failure to pay could have a material adverse
effect on the Parent."
(i) Section 4.5(b) is hereby amended by deleting the
fourth sentence thereof and replacing it with the following sentence:
Any such repurchase shall be made without recourse
to, or warranty, express or implied (other than a
warranty that such Receivable is free and clear of
any and all encumbrances, liens, security interests
and claims created by the Purchaser), of, the
Purchaser.
31
<PAGE> 6
(j) Section 5.3(b) is hereby amended by deleting the
phrase "in a manner acceptable to the Administrative Agent."
(k) Section 5.3(f) is hereby deleted and replaced in its
entirety as follows:
(f) promptly upon the request of the
Administrative Agent, copies of any ERISA reports
filed by the Seller or the Parent; and
(l) Section 5.3(g) is hereby deleted and replaced in its
entirety as follows:
(g) promptly, from time to time, such other
information, documents, records or reports respecting
the Purchased Receivables, the Contracts, the
condition or operations, financial or otherwise, of
the Seller or the transactions contemplated by this
Agreement and the Related Documents as the Purchaser
or the Administrative Agent may, from time to time,
reasonably request from the Seller, the Servicer or
the Parent.
(m) Section 6.2(b)(iv) is hereby deleted and replace in
its entirety as follows:
(iv) notifying the Purchaser and the
Administrative Agent of any action, suit, proceeding,
dispute, defense or counterclaim, or offset or
deduction not arising as a result of normal and
expected merchandise returns, that is or may be
asserted by Wal-Mart or any Adverse Claim against the
Purchased Receivables, threatened, pending or
asserted by any party with respect to any Purchased
Receivable; and
(n) Section 6.5(b) and (d) are each hereby amended by
adding at the end of each such section the following:
in any way that could materially affect the
Servicer's ability to perform is obligations under
this Agreement or any Related Document
(o) Section 6.6(d) is hereby amended by adding at the
end of such section the following:
with respect to the Receivables or the obligations of
the Servicer under this Agreement
(p) Section 6.11(c) is hereby deleted and replace in its
entirety as follows:
the Servicer shall generally not pay any of its Debts
as such Debts become due, or shall admit in writing
its inability to pay its Debts generally, or shall
make a general assignment for the benefit of
creditors, or any proceeding shall be instituted by
or against the Servicer
32
<PAGE> 7
(and, in the case of any such proceeding instituted
against it, but not instituted by it, any such
proceeding shall remain undismissed or unstayed for a
period of 60 days) seeking to adjudicate it a
bankrupt or insolvent, or seeking liquidation,
winding up, reorganization, arrangement, adjustment,
protection, relief or composition of it or any of its
Debts under any law relating to bankruptcy,
insolvency, reorganization or relief of debtors, or
seeking the entry of an order for relief or the
appointment of a receiver, trustee, custodian or
other similar official for it or for any substantial
part of its property, or any of the actions sought in
such proceeding (including, without limitation, the
entry of an order for relief against, or the
appointment of a receiver, trustee, custodian or
other similar official for, it or for any substantial
part of its property) shall occur, or the Servicer
shall take any corporate action to authorize any of
the actions set forth in this subsection; or
(q) Section 6.11(f) is hereby amended by inserting the
word "reasonably" before the word "determined."
(r) Section 7.1((b) is hereby amended by inserting the
following after the words "Debt of the Parent:"
in excess of $5 million, individually or in the
aggregate
(s) Section 7.1(c) is hereby deleted and replace in its
entirety as follows:
the Parent or the Seller shall generally not pay any
of its respective Debts as such Debts become due, or
shall admit in writing its inability to pay its Debts
generally, or shall make a general assignment for the
benefit of creditors, or any proceeding shall be
instituted by or against the Parent (and, in the case
of any such proceeding instituted against the Parent,
but not instituted by it, any such proceeding shall
remain undismissed or unstayed for a period of 60
days) or the Seller seeking to adjudicate it a
bankrupt or insolvent, or seeking liquidation,
winding up, reorganization, arrangement, adjustment,
protection, relief or composition of it or any of its
Debts under any law relating to bankrupt cy,
insolvency, reorganization or relief of debtors, or
seeking the entry of an order for relief or the
appointment of a receiver, trustee, custodian or
other similar official for it or for any substantial
part of its property, or any of the actions sought in
such proceeding (including, without limitation, the
entry of an order for relief against, or the
appointment of a receiver, trustee, custodian or
other similar official for, it or for any substantial
part of its property) shall occur, or the Parent or
the Seller shall take any corporate action to
authorize any of the actions set forth in this
subsection; or
33
<PAGE> 8
(t) Section 7.1(m) is hereby amended by deleting the
phrase "or for any other reason whatsoever."
(u) Section 10.4 is amended by inserting "lenders," in
the second parenthetical phrase thereof, before the word "directors."
(v) Section 2.15 is hereby added as follows:
Section 2.15 PAYMENTS IN RESPECT OF DILUTIONS. On any
day on which one or more Dilutions arise as a result
of any action by Wal-Mart or otherwise, the Seller
shall pay to the Administrative Agent within ten
days, for application hereunder in reduction of
Capital Investment, in immediately available funds,
by wire transfer or otherwise, an amount equal to the
aggregate dollar amount of such Dilutions.
3. COUNTERPARTS. This Agreement may be executed in counterparts
each of which shall be an original, but all of which together shall constitute
one and the same instrument.
34
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this Receivables
Purchase and Servicing Agreement to be executed by their respective officers
thereunto duly authorized as of the date first written above.
ROYAL APPLIANCE RECEIVABLES, INC.,
as Seller
By:
---------------------------------------
Name:
Title:
CAPITAL USA FUNDING, L.P.,
as Purchaser,
By Capital USA Funding Corp.,
its general partner
By:
---------------------------------------
Name: James L. Sigman
Title: President
ROYAL APPLIANCE MFG. CO., as Parent and
Servicer
By:
---------------------------------------
Name:
Title:
CAPITAL USA, L.L.C.,
as Administrative Agent
By:
---------------------------------------
Name: James L. Sigman
Title: Vice President
35
<PAGE> 1
EXHIBIT 11
- ----------
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
FORM 10-Q
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30
--------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) applicable to
common shares (A) $ 3,151 $(12,279) $ 4,811 $(16,545)
======== ======== ======== ========
Primary:
Weighted average common shares
outstanding for the period 24,002 23,999 24,004 23,999
Dilutive stock options -
based on the treasury stock
method using average market
price 269 -- 181 --
-------- -------- -------- --------
TOTALS 24,271 23,999 24,185 23,999
======== ======== ======== ========
Fully diluted:
Weighted average shares outstanding 24,002 23,999 24,004 23,999
Dilutive stock options -
based on the treasury stock
method using the period-ended
market price if higher than
the average market price 331 -- 304 --
-------- -------- -------- --------
TOTALS 24,333 23,999 24,308 23,999
======== ======== ======== ========
Income (loss) per common and common equivalent share:
Primary $ .13 $ (.51) $ .20 $ (.69)
Fully diluted (B) $ .13 $ (.51) $ .20 $ (.69)
<FN>
(A) Prior period amount has been restated to reflect a change in the
valuation method of accounting for inventory from the LIFO method to
the FIFO method.
(B) This calculation is submitted in accordance with Regulation S-K Item
601(b)(11) although not required for statement of operations
presentation because it results in dilution of less than 3 percent.
</TABLE>
36
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE REGISTRANT'S
FORM 10Q FOR THE NINE MONTHS ENDED SEPTEMEBER 30, 1996 AND IS QUALIFIED IN ITS
ENTIREY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 48,048
<ALLOWANCES> 0
<INVENTORY> 34,735
<CURRENT-ASSETS> 90,189
<PP&E> 74,397
<DEPRECIATION> 36,030
<TOTAL-ASSETS> 130,117
<CURRENT-LIABILITIES> 46,832
<BONDS> 31,753
<COMMON> 210
0
0
<OTHER-SE> 51,322
<TOTAL-LIABILITY-AND-EQUITY> 130,117
<SALES> 188,919
<TOTAL-REVENUES> 188,919
<CGS> 137,429
<TOTAL-COSTS> 137,429
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,102
<INCOME-PRETAX> 7,889
<INCOME-TAX> 3,078
<INCOME-CONTINUING> 4,811
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,811
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
