<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, 1997
------------------
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
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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)
(440) 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 23,137,000
------------------------------------ -----------------------------------
(Class) (Outstanding at November 11, 1997)
The Exhibit index appears on sequential page 14.
1
<PAGE> 2
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I FINANCIAL INFORMATION
Item 1 Financial Statements
------ --------------------
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations -
three months and nine months ended
September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows -
nine months ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-7
Item 2 Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations 8-11
-----------------------------------
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 12
------ --------------------------------
Signatures 13
Exhibit Index 14
</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,
1997 1996
------------ -----------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash $ 1,003 $ 1,001
Trade accounts receivable, net 55,083 39,761
Inventories 39,614 34,052
Refundable and deferred income taxes 6,806 6,552
Prepaid expenses and other 2,842 2,436
--------- ---------
Total current assets 105,348 83,802
--------- ---------
Property, plant and equipment, at cost:
Land 2,356 2,356
Building 13,117 13,117
Molds, tooling, and equipment 55,583 44,716
Furniture and office equipment 5,887 5,221
Assets under capital leases 4,613 4,810
Leasehold improvements and other 2,834 2,717
--------- ---------
84,390 72,937
Less accumulated depreciation and amortization 41,738 35,654
--------- ---------
42,652 37,283
--------- ---------
Tooling deposits 1,497 3,962
Other 1,989 1,094
--------- ---------
Total assets $ 151,486 $ 126,141
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 23,013 $ 20,679
Accrued liabilities:
Advertising and promotion 8,059 11,682
Salaries, benefits, payroll taxes 4,550 5,980
Warranty and customer returns 8,100 7,975
Income taxes -- 3,503
Interest and other 5,440 3,680
Current portions of capital lease obligations and notes payable 674 665
--------- ---------
Total current liabilities 49,836 54,164
--------- ---------
Revolving credit agreement 27,091 2,886
Capitalized lease obligations, less current portion 3,162 3,307
Notes payable, less current portion 9,215 9,550
--------- ---------
Total long-term debt 39,468 15,743
--------- ---------
Deferred income taxes 4,230 --
--------- ---------
Total liabilities 93,534 69,907
--------- ---------
Commitments and contingencies (Note 3) -- --
Shareholders' equity:
Common shares, at stated value 210 210
Additional paid-in capital 41,733 41,500
Retained earnings 33,225 27,611
Cumulative translation adjustment -- (107)
--------- ---------
75,168 69,214
Less treasury shares, at cost (1,780,850 and 1,201,000 shares at
September 30, 1997, and December 31, 1996, respectively) (17,216) (12,980)
--------- ---------
Total shareholders' equity 57,952 56,234
--------- ---------
Total liabilities and shareholders' equity $ 151,486 $ 126,141
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
ART 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,
--------------- --------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 87,375 $ 73,688 $ 207,063 $ 188,919
Cost of sales 62,091 52,465 147,806 137,429
--------- --------- --------- ---------
Gross margin 25,284 21,223 59,257 51,490
Advertising and promotion 11,593 9,072 30,342 24,422
Other selling 2,039 2,285 5,793 6,645
General and administrative 3,157 3,179 8,942 8,794
Engineering and product development 1,107 911 3,509 2,535
--------- --------- --------- ---------
Income from operations 7,388 5,776 10,671 9,094
Interest expense, net 576 584 1,130 2,102
Other expense (income), net 108 25 337 (897)
--------- --------- --------- ---------
Income before income taxes 6,704 5,167 9,204 7,889
Income tax expense 2,615 2,016 3,590 3,078
--------- --------- --------- ---------
Net income $ 4,089 $ 3,151 $ 5,614 $ 4,811
========= ========= ========= =========
Net income per common share $ .17 $ .13 $ .23 $ .20
Weighted average number of common shares
and equivalents outstanding (in thousands) 24,073 24,271 24,201 24,185
</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,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,614 $ 4,811
-------- --------
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 6,435 6,383
Compensatory effect of stock options 61 (213)
Gain on disposal of tooling, property, plant and equipment -- (648)
(Increase) decrease in assets:
Trade accounts receivable, net (15,322) (4,490)
Inventories (5,562) (6,327)
Refundable, deferred, and accrued income taxes 473 7,519
Prepaid expenses and other (406) 473
Other (1,139) (245)
Increase (decrease) in liabilities:
Trade accounts payable 2,334 2,503
Accrued advertising and promotion (3,623) 989
Accrued salaries, benefits, and payroll taxes (1,430) 2,239
Accrued warranty and customer returns 125 (100)
Accrued interest and other 1,760 209
-------- --------
Total adjustments (16,294) 8,292
-------- --------
Net cash from operating activities (10,680) 13,103
-------- --------
Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment, net (11,453) (8,272)
Decrease in tooling deposits 2,465 3,515
Proceeds from sale of plants and equipment -- 2,237
-------- --------
Net cash from investing activities (8,988) (2,520)
-------- --------
Cash flows from financing activities:
Proceeds (payments) on bank debt 24,205 (10,105)
Payments on note payable (310) (314)
Payments on capital lease obligations (161) (230)
Proceeds from exercise of stock options 172 64
Repurchase of common stock (4,236) --
-------- --------
Net cash from financing activities 19,670 (10,585)
-------- --------
Effect of exchange rate changes on cash -- 2
-------- --------
Net increase in cash 2 --
-------- --------
Cash at beginning of period 1,001 --
-------- --------
Cash at end of period $ 1,003 $ --
======== ========
Supplemental disclosure of cash flow information: Cash payments (refunds) for:
Interest $ 1,109 $ 2,444
======== ========
Income taxes, net $ 3,117 $ (4,441)
======== ========
Supplemental schedule of noncash investing and financing activities:
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)
(In thousands, except per share amounts)
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, 1997 and
December 31, 1996, and the related statements of operations and cash flows as
of, and for the interim periods ended, September 30, 1997 and 1996. 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, 1997, 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 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 on a first-in
first-out (FIFO) basis. Inventories at September 30, 1997, and December 31,
1996, consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------- -------
<S> <C> <C>
Finished goods $20,527 $23,177
Work in process and purchased parts 19,087 10,875
------- -------
Inventories at FIFO cost $39,614 $34,052
======= =======
</TABLE>
NOTE 3: COMMITMENTS AND CONTINGENCIES
At September 30, 1997, the Company estimates having contractual commitments
for future advertising and promotional expense of approximately $19,600,
including commitments for television advertising through December 31, 1998.
Other contractual commitments for items in the normal course of business total
approximately $1,000.
6
<PAGE> 7
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
(Unaudited)
(In thousands, except per share amounts)
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, 1997. In September, 1997,
the Company amended its revolving credit facility to reduce the maximum amount
of revolving credit from $50,000 to $40,000, subject to a borrowing base formula
as defined in the agreement. The maximum amount allowable to the Company under
the borrowing base formula was $40,000 as of September 30, 1997, resulting in
availability of approximately $8,900. 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 rate plus a rate spread, as defined in the
agreement. At September 30, 1997, the base lending rate was 8.50%. In addition,
the Company pays a commitment fee at the annual rate of 0.375% on the unused
portion of the facility. The carrying amount of the facility approximates fair
value.
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, 1997. The revolving credit facility is
collateralized by the Company's inventories, trade accounts receivable,
equipment and general intangibles.
In October 1996, the Company entered into a revolving trade accounts
receivable securitization program to sell without recourse, through a
wholly-owned subsidiary, certain trade accounts receivable. The maximum amount
of receivables that can be sold is seasonally adjusted. As of September 29,
1997, the Company entered into a revolving trade accounts receivable
securitization program replacing the previous program. Under the new program,
the maximum amount allowed at any given time through December 31, 1997, is
$40,000. At September 30, 1997, the Company received approximately $8,000 from
the sale of trade accounts receivable. The proceeds from the sales were used to
reduce borrowings under the Company's revolving credit facility. Costs of the
program, which primarily consist of the purchaser's financing cost of issuing
commercial paper backed by the receivables, totaled $386 for the nine months
ended September 30, 1997, and have been classified as Other expense in the
accompanying Consolidated Statements of Operations. The Company, as agent for
the purchaser of the receivables, retains collection and administrative
responsibilities for the purchased receivables.
The Company has a variable rate mortgage note payable in the amount of
$4,071. The note is collateralized by one of the Company's assembly facilities.
Monthly payments of principal and interest are payable through July 1, 2000, at
which time the balance of approximately $3,485 is due. Interest is at a 2.35%
spread above the 30 day commercial paper rate. At September 30, 1997, the 30 day
commercial paper rate was 5.55%. The carrying amount of the mortgage note
payable approximates fair value.
The Company has a 7.9% fixed rate mortgage note payable in the amount of
$5,587. The note is collateralized by the Company's distribution facility.
Monthly payments of principal and interest are payable through November 1, 2000,
at which time the balance of approximately $4,775 is due. The carrying amount of
the mortgage note payable approximates fair value.
NOTE 5: SHARE REPURCHASE PROGRAM
In February 1997, the Company's Board of Directors authorized a common
share repurchase program that provides for the Company to purchase, in the open
market and through negotiated transactions, up to 1,200 of its outstanding
common shares. As of September 30, 1997, the Company has repurchased
approximately 580 shares for an aggregate purchase price of $4,236. The program
is scheduled to expire on March 1, 1998.
7
<PAGE> 8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (In thousands, except per share amounts)
-------------
RESULTS OF OPERATIONS
- ---------------------
Net sales increased 18.6% for the third quarter and 9.6% for the nine month
period ended September 30, 1997, compared with the same periods in the prior
year. The increase in the third quarter and nine month period ended September
30, 1997, was due primarily to sales of the new Dirt Devil(R) Mop Vac(TM), which
the Company began shipping to its retail customers in the third quarter of 1997,
increases in the Company's line of upright vacuum cleaners and shipments of the
new Dirt Devil(R) RoomMate(TM). The increase in net sales for the third quarter
and nine month period ended September 30, 1997, was partially offset by
decreases in the sales of the Dirt Devil(R) Broom Vac(R) and certain other
products in the Dirt Devil(R) vacuum line. Overall sales to the top 5 customers
(all of which are major retailers) increased in the first nine months of 1997 to
approximately 61.5% of net sales as compared with approximately 56.1% in the
first nine months of 1996. The Company believes that its dependence on sales to
its largest customers will continue. Recently, many major retailers have
experienced significant financial difficulties and some have filed for
protection from creditors under applicable bankruptcy laws. The Company sells
its products to certain customers that are in bankruptcy proceedings.
Gross margin, as a percent of net sales, for the third quarter 1997 was
comparable to the third quarter 1996 and increased from 27.3% in the first nine
months of 1996 to 28.6% in the first nine months of 1997. The gross margin
percentage was positively affected in 1997 primarily by the introduction of new
products and lower costs of certain component parts and was partially offset by
higher product returns and freight costs as a percent of sales.
Advertising and promotion expenses increased 27.8% for the third quarter
1997 and increased 24.2% for the nine month period ended September 30, 1997
compared with the same periods in 1996. The increase in advertising and
promotion expenses was due primarily to the launch of the Fred Astaire
advertising campaign and the direct response television campaign for the Dirt
Devil(R) Mop Vac(R). The Company began utilizing direct response infomercials
for the introduction of certain new products in 1996. The Company intends to
continue emphasizing cooperative advertising and television as its primary
methods of advertising and promotion. In general, the Company's advertising
expenditures are not specifically proportional to anticipated sales. For
example, the amount of advertising and promotional expenditures may be
concentrated during critical retail shopping periods during the year,
particularly the fourth quarter, and during product and promotional campaign
introductions.
Other selling expenses decreased 10.8% for the third quarter 1997 and
decreased 12.8% for the nine month period ended September 30, 1997 compared with
the same periods in 1996. The largest component of other selling expenses are
internal sales and marketing personnel compensation. The Company has reduced its
dependency on outside manufacturers' representatives resulting in lower
commissions for the nine month period ended September 30, 1997, compared with
the same period in 1996.
General and administrative expenses for the third quarter 1997 and the nine
month period ended September 30, 1997 were comparable as a percentage of net
sales for the third quarter and for the nine month period ended September 30,
1997. The principal components are compensation (including benefits), insurance,
travel and professional services.
8
<PAGE> 9
RESULTS OF OPERATIONS (Continued)
- ---------------------
Engineering and product development expenses increased 21.5% for the third
quarter 1997 and increased 38.4% for the nine month period ended September 30,
1997, as the Company intensified its new product innovation efforts. The
principal components are engineering salaries, outside professional engineering
and design services and other related product development expenditures. The
amount of outside professional engineering and design services and other related
product development expenditures are dependent upon the number and complexity of
new product introductions in any given year. The increase in the first nine
months of 1997 was primarily due to costs associated with the new product
introductions in 1997 and the new product introductions planned for 1998.
Interest expense was comparable for the third quarter 1997 and decreased
46.2% for the nine month period ended September 30, 1997, compared with the same
periods in 1996. The decrease in interest expense resulted primarily from lower
levels of variable rate borrowings to finance working capital, capital
expenditures, and share repurchases, and a lower effective borrowing rate.
Other expense (income) principally reflects the effect of the cost of the
Company's trade accounts receivable securitization program and foreign currency
transaction gains or losses related to the Company's international assets. The
1996 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 September,
1996.
Due to the factors discussed above, the Company had income before income
taxes for the third quarter and nine months ended September 30, 1997 of $6,704
and $9,204, respectively, as compared to income before income taxes for the
third quarter and nine month period ended September 30, 1996 of $5,167 and
$7,889, respectively.
Liquidity and Capital Resources
- -------------------------------
The Company has used working capital generated from operations to fund its
operations and capital expenditures. Working capital was $55,512 at September
30, 1997, an increase of 87.3% over December 31, 1996. Current assets increased
by $21,546 reflecting in part a $15,322 increase of trade accounts receivable
and a $5,562 increase of inventories. Current liabilities decreased by $4,328
reflecting in part a $3,623 reduction of accrued advertising and promotion, a
$1,430 reduction of accrued salaries, benefits and payroll taxes, and a $3,503
reduction of accrued income taxes, which were partially offset by an increase in
trade accounts payables of $2,334 and an increase in accrued interest and other
of $1,760.
In the first nine months of 1997, the Company utilized $8,988 of cash for
capital purchases, including approximately $6,460 of tooling related to the new
Dirt Devil(R) Swivel Glide(TM), the Dirt Devil(R) RoomMate(TM), and Dirt
Devil(R) Mop Vac(TM).
The Company's revolving credit facility has a maturity date of April 1,
1999, and is classified as long-term at September 30, 1997. In September, 1997,
the Company amended its revolving credit facility to reduce the maximum amount
of revolving credit from $50,000 to $40,000, subject to a borrowing base formula
as defined in the agreement. The maximum amount allowable to the Company under
the borrowing base formula was $40,000 as of September 30, 1997, resulting in
availability of approximately $8,900. 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 rate plus a rate spread, as defined in the
agreement. At September 30, 1997, the base lending rate was 8.50%. In addition,
the Company pays a commitment fee at the annual rate of 0.375% on the unused
portion of the facility. The carrying amount of the facility approximates fair
value.
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, 1997. The revolving credit facility is
collateralized by the Company's inventories, trade accounts receivable,
equipment and general intangibles.
9
<PAGE> 10
Liquidity and Capital Resources (Continued)
- -------------------------------
In October 1996, the Company entered into a revolving trade accounts
receivable securitization program to sell without recourse, through a
wholly-owned subsidiary, certain trade accounts receivable. The maximum amount
of receivables that can be sold is seasonally adjusted. As of September 29,
1997, the Company entered into a revolving trade accounts receivable
securitization program replacing the previous program. Under the new program,
the maximum amount allowed at any given time through December 31, 1997, is
$40,000. At September 30, 1997, the Company received approximately $8,000 from
the sale of trade accounts receivable. The proceeds from the sales were used to
reduce borrowings under the Company's revolving credit facility. Costs of the
program, which primarily consist of the purchaser's financing cost of issuing
commercial paper backed by the receivables, totaled $386 for the nine months
ended September 30, 1997, and have been classified as Other expense in the
accompanying Consolidated Statements of Operations. The Company, as agent for
the purchaser of the receivables, retains collection and administrative
responsibilities for the purchased receivables.
In February 1997, the Company's Board of Directors authorized a common
share repurchase program that provides for the Company to purchase, in the open
market and through negotiated transactions, up to 1,200 of its outstanding
common shares. As of September 30, 1997, the Company has repurchased
approximately 580 shares for an aggregate purchase price of $4,236. The program
is scheduled to expire on March 1, 1998.
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, as well as any additional stock repurchases.
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) 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, March 31,
1997 1997 1997 1996 1996 1996 1996
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $87,375 $61,070 $58,618 $97,204 $73,688 $62,969 $52,262
Gross margin 25,284 17,739 16,234 30,633 21,223 16,504 13,763
Net income 4,089 919 606 4,625 3,151 1,328 332
Net income per
common share (a) .17 .04 .02 .19 .13 .05 .01
</TABLE>
(a) The sum of 1996 quarterly net income per common share does not equal annual
net income per common share due to the effect of rounding.
The Company's business is highly seasonal. The Company believes that a
significant percentage of certain of its products, particularly hand vacs and
broom vacs, 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.
10
<PAGE> 11
Other
- -----
The Company believes that the domestic vacuum cleaner industry is a mature
industry with modest annual growth in many of its products but with a decline in
certain other products. 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's most significant
competitors are Hoover and Eureka, and Black & Decker, in the hand-held market.
These 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
prices.
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 will be required to implement SFAS No. 128, Earnings Per Share,
in the fourth quarter of 1997. The Company expects the implementation of SFAS
No. 128 will not have a material impact on its calculation of earnings per
share.
Forward-looking Statements
- --------------------------
Forward-looking statements in this Form 10-Q are made pursuant to the safe
harbor provisions of the Private Securities Litigation 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, 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; the cost and effectiveness of planned advertising,
marketing and promotional campaigns, the success at retail and acceptance by
consumers of the Company's new products, including the Dirt Devil(R) Mop Vac(R),
and the dependence upon the Company's ability to continue to successfully
develop and introduce innovative consumer products.
11
<PAGE> 12
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. 3 to Restated Credit and Security
Agreement dated as of September 29, 1997, 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
September 29, 1997, by the Registrant,
Royal Appliance Receivables, Inc., as
Seller, and Llama Retail Funding L.P,
as Purchaser.
Exhibit 11 - Computation of earnings per common share.
Exhibit 27 - Financial data schedule (EDGAR filing only)
12
<PAGE> 13
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)
/s/ Michael J. Merriman
-------------------------
Michael J. Merriman
Chief Executive Officer, President and Director
(Principal Executive and Financial Officer)
Date: November 12, 1997 /s/ Richard G. Vasek
------------------- -----------------------
Richard G. Vasek
Controller, Secretary and Chief Accounting Officer
(Principal Accounting Officer)
13
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Exhibit 4(a) - Amendment No. 3 to Restated Credit and Security
Agreement dated as of September 29, 1997, by and among the
Registrant and various banks including National City
Commercial Finance, Inc.
as Agent. 15 - 26
Exhibit 4(b) - Receivable Purchase and Servicing Agreement dated as of
September 29, 1997, by the Registrant, Royal Appliance Receivables,
Inc., as Seller, and Llama Retail Funding L.P, as Purchaser. 27 - 33
Exhibit 11 - Computation of earnings per common share 34
Exhibit 27 - Financial data schedule (EDGAR filing only)
</TABLE>
14
<PAGE> 1
EXECUTION COPY
EXHIBIT 4(a)
AMENDMENT NO. 3
---------------
TO
--
RESTATED CREDIT AND SECURITY AGREEMENT
--------------------------------------
This Amendment No. 3 to Restated Credit And Security Agreement (this
"Amendment No. 3"), made as of the 29th day of September, 1997, 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, as amended by that certain Amendment No. 1 to Restated Credit
and Security Agreement, dated October 1, 1996 and that certain Amendment No. 2
to Restated Credit and Security Agreement, dated April 1, 1997 (collectively,
the "Credit Agreement"), pursuant to which the Lenders have made Loans and other
financial accommodations available to the Borrower;
WHEREAS, the Borrower wishes to amend the Credit Agreement to increase the
amount of capital expenditures permitted to be incurred and the amount of
capital stock of the Borrower permitted to be repurchased; and
WHEREAS, the Borrower has advised the Agent that: (i) pursuant to Section
5.7 of the Credit Agreement, the Borrower desires to sell that portion of its
"Receivables" indebtedness owing from Wal-Mart Stores, Inc., Sears, Roebuck &
Company and Target Stores, a division of Dayton-Hudson Corporation 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 September 29, 1997 (the
"Sale Agreement"), and (iii) Royal Appliance Receivables, Inc. shall transfer
such "Receivables" to Llama Retail Funding, L.P., a Delaware limited partnership
(the "Purchaser") pursuant to that certain Receivables Purchase and Servicing
Agreement, dated as of September 29, 1997 (the "Receivables Purchase
Agreement");
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 increase capital
expenditures and increased repurchases and (ii) such sale of Sears, Roebuck &
Company Receivables, Wal-Mart Stores, Inc. Receivables and Target Stores
Receivables as contemplated by the Sale Agreement and the Receivables Purchase
Agreement;
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:
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<PAGE> 2
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.
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 - ELIGIBLE ACCOUNTS. The
definition of "Eligible Accounts" set forth in Section 1.1 of the Credit
Agreement is hereby amended by deleting clause (w) thereof and substituting the
following in lieu thereof:
(w) are Wal-Mart Accounts, Sears Accounts and Target Accounts.
2.2 AMENDMENT TO SECTION 1.1 - ROYAL APPLIANCE RECEIVABLES,
INC. The definition of "Royal Appliance Receivables, Inc." set forth in Section
1.1 of the Credit Agreement is hereby amended by deleting such definition in its
entirety and substituting the following in lieu thereof:
"ROYAL APPLIANCE RECEIVABLES, INC." means Royal Appliance
Receivables, Inc, an Ohio corporation and wholly-owned subsidiary of
the Borrower whose purpose is to purchase the Wal-Mart Accounts, Sears
Accounts and Target Accounts from the Borrower.
2.3 AMENDMENT TO SECTION 1.1 - DELETIONS. Section 1.1 of the
Credit Agreement is amended by deleting the definitions of "Capital USA
Funding", "Commerzbank", "Receivables Sale and Contribution Agreement",
"Receivables Purchase Agreement" and "Standby Receivables Purchase Agreement".
2.4 AMENDMENT TO SECTION 1.1 - ADDITIONS. Section 1.1 of the
Credit Agreement is hereby amended by adding thereto the following definitions:
"CAPITAL USA, L.L.C." means Capital USA, L.L.C., a Delaware
limited liability corporation.
"LLAMA FUNDING" means Llama Retail Funding, L.P., a Delaware
limited partnership.
"RECEIVABLES PURCHASE AND SERVICING AGREEMENT" means that
certain Receivables Purchase and Servicing Agreement, dated as of
September 29, 1997, among Royal Appliance Receivables, Inc., Llama
Funding, the Borrower and Capital USA, L.L.C. as Agent.
"REVOLVING CREDIT COMMITMENT" means the commitment of each
Lender to advance Loans up to the amount as set forth in Second Amended
Annex I.
"SALE AGREEMENT" means that certain Receivables Sale and
Contribution Agreement, dated as of September 29, 1997, between the
Borrower and Royal Appliance Receivables, Inc..
"SEARS" means Sears, Roebuck & Company.
-16-
<PAGE> 3
"SEARS ACCOUNT" means: (i) indebtedness owing from Sears
arising from the provision of merchandise and goods by the Borrower to
Sears, including the right to payment of any interest or finance
charges and other obligations of Sears with respect thereto, (ii) all
security interests or liens and property subject thereto from time to
time purporting to secure payment by Sears, (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
Sears, (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, Sears is obligated to
pay for merchandise or goods sold to Sears by the Borrower 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 or Royal Appliance Receivables,
Inc., with respect to Sears Accounts and Sears and (v) all proceeds of
any of the foregoing.
"TARGET" means Target Stores, a division of Dayton-Hudson
Corporation.
"TARGET ACCOUNT" means: (i) indebtedness owing from Target
arising from the provision of merchandise and goods by the Borrower to
Target, including the right to payment of any interest or finance
charges and other obligations of Target with respect thereto, (ii) all
security interests or liens and property subject thereto from time to
time purporting to secure payment by Target, (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
Target, (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, Target is obligated to
pay for merchandise or goods sold to Target by the Borrower 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 or Royal Appliance Receivables,
Inc., with respect to Target Accounts and Target and (v) all proceeds
of any of the foregoing.
2.5 AMENDMENT TO ANNEX I. Annex I of the Credit Agreement is
hereby deleted in its entirety and Second Amended Annex I attached hereto is
substituted in lieu thereof.
2.6 AMENDMENT TO SECTION 4.1. Section 4.1 of the Credit
Agreement is hereby amended by deleting the proviso at the end thereof and
substituting the following proviso in lieu thereto:
;PROVIDED, HOWEVER, that, so long as the Borrower shall be
permitted to sell Wal-Mart Accounts, Sears Accounts and Target
Accounts to Royal Appliance Receivables, Inc., the Collateral
shall not include Wal-Mart Accounts, Sears
Accounts and Target Accounts.
2.7 AMENDMENT TO SECTION 4.4. Section 4.4 of the Credit
Agreement is hereby amended by deleting clause (g) thereof and substituting the
following in lieu thereof:
-17-
<PAGE> 4
and (g) all Wal-Mart Accounts, Sears Accounts and Target
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, Sears or Target, as applicable, or
Guaranteed by any Person.
2.8 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, Sears
Accounts and Target 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,
Sears Accounts and Target 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.
2.9 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 UCC]) of Wal-Mart Accounts, Sears Accounts and Target
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.
2.10 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 Wal-Mart Accounts, Sears
Accounts and Target 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,
Sears Accounts or Target Accounts 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;...
-18-
<PAGE> 5
2.11 AMENDMENT TO SECTION 4.10. Section 4.10 of the Credit
Agreement is hereby amended by the last sentence of such section and
substituting the following in lieu thereof:
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, Sears Accounts and Target 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.
2.12 AMENDMENT TO SECTION 5.8. Section 5.8 of the Credit
Agreement is hereby amended by deleting the proviso at the end of such section
and substituting the following proviso in lieu thereof:
;PROVIDED; HOWEVER, that:
(A) in respect of the sale of Wal-Mart
Accounts, Sears Accounts and Target Accounts, the
Borrower's ability to sell such Accounts is
conditioned upon continued satisfaction of the
following conditions: (i) the amount payable in
respect of a Purchase (as defined in the Sale
Agreement) for the sold Wal-Mart Accounts, Sears
Accounts and Target 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
amount payable in respect of a Purchase (as defined
in the Sale Agreement) payable to the Borrower by
Royal Appliance Receivables, Inc. shall not be less
than the portion of the Sale Price payable to Royal
Appliance Receivables, Inc. in cash pursuant to the
Receivables Purchase and Servicing Agreement (which
provisions shall not be modified without the Agent
and the Lenders' written consent) or treated as
equity or deferred purchase price and the cash
portion of such amount shall be immediately paid by
Royal Appliances Receivables, Inc., to the Borrower,
(iii) any deferred purchase price with respect to
Pool Receivables (as defined in the Sale Agreement)
shall be payable to the Borrower as soon as payable
to Royal Appliance Receivables, Inc. under the
Receivables Purchase and Servicing Agreement,
2.13 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,
Sears Accounts and Target Accounts permitted in connection
with Section 5.8 of this Agreement.
-19-
<PAGE> 6
2.14 AMENDMENT OF SECTION 8.3(d). Section 8.3(d) of the Credit
Agreement is hereby amended by deleting clause (J) thereof and substituting the
following in lieu thereof:
(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, Sears
Accounts and Target 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
Llama Funding or Capital USA, L.L.C., as Agent (together with
its successors and assigns), pursuant to the Receivables
Purchase and Servicing Agreement in respect of Wal-Mart
Accounts, Sears Accounts and Target Accounts purchased by
Royal Appliance Receivables, Inc. by the Borrower.
2.15 AMENDMENT OF SECTION 8.3(e)(i). Section 8.3(e)(i) of the
Credit Agreement is hereby deleted in its entirety and the following substituted
in lieu thereof:
(e) DIVIDENDS; RESTRICTED PAYMENTS.
(i) The Borrower will not declare or pay any
dividend or distribution in cash, property or obligations
(other than in shares of capital stock of the Borrower or any
Subsidiary of the Borrower or in options, warrants or other
rights to acquire any such capital stock or in other
securities convertible into any such capital stock) on any
shares of capital stock of the Borrower of any class and the
Borrower will not, and will not permit any Subsidiary to,
purchase, redeem or otherwise acquire for any consideration
any shares of capital stock of the Borrower of any class or
any option, warrant or other right to acquire any such capital
stock, except that: (A) the Borrower may pay cash dividends
during each Fiscal Year on a quarterly basis, provided that
(X) the aggregate amount of all such cash dividends in any
Fiscal Year shall not exceed fifty percent (50%) of the
Borrower's Consolidated Net Income for the Fiscal Year
immediately preceding the Fiscal Year in which such dividends
are paid, and (Y) after giving effect to any redemption
permitted below and any such dividend payment, no Potential
Default or Event of Default would occur or exist and (B) the
Borrower may redeem its capital stock, provided that (XX) the
aggregate amount of all such redemptions shall not exceed
fifteen million dollars ($15,000,000) and (YY) after giving
effect to any dividend payment permitted above and any such
redemption, no Potential Default or Event of Default would
occur or exist.
2.16 AMENDMENT OF SECTION 8.4(e). Section 8.4(e) of the Credit
Agreement is hereby deleted in its entirety and the following substituted in
lieu thereof:
(e) CONSOLIDATED CAPITAL EXPENDITURES. The
Borrower shall not permit its Consolidated Capital
Expenditures (including, for the purpose of calculating this
Consolidated Capital Expenditures covenant, any purchase money
Indebtedness permitted under Section of this Agreement) during
any Fiscal Year to exceed $13,000,000, or such greater amount
as the Agent, the Required Lenders and the Borrower shall
agree upon in writing from time to time.
-20-
<PAGE> 7
2.17 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, L.L.C. or Llama
Funding, or a finding by any court, that the security interest
under the Sale 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) Llama Funding or Capital
USA, L.L.C. exercise any remedy against the Borrower or Royal
Receivables, Inc. other than the liquidation settlement
procedures by Llama Funding as set forth in the Receivables
Purchase and Servicing 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 Sale Agreement, the
Receivables Purchase and Servicing Agreement or any Related
Documents (as defined in the Receivables Purchase and
Servicing Agreement) without ten (10) Business Days' prior
written notice to the Agent and the written consent of the
Agent and the Lenders.
SECTION 3. CONDITIONS PRECEDENT TO EFFECTIVENESS OF THIS AMENDMENT NO.
3. In addition to all of the other conditions and agreements set forth herein,
the effectiveness of this Amendment No. 3 is subject to the conditions precedent
that the Agent shall have received the following deliveries or shall have
satisfied the following conditions:
3.1 SALE TERMS. All Related Documents and all financing
statements filed by Royal Appliance Receivables, Inc. shall be limited to
Wal-Mart Accounts, Sears Accounts and Target Accounts (and shall specifically
exclude Wal-Mart Canada Accounts) and shall be in form and substance
satisfactory to the Agent.
3.2 THIS AMENDMENT NO. 3. The Agent shall have received this
Amendment No. 3, executed and delivered by a duly authorized officer of the
Borrower.
3.3 SECURITIZATION DOCUMENTATION. A fully executed copy of
each of the Receivables Purchase and Servicing Agreement, Sale Agreement and
each and every instrument, assignment, financing statement, certificate, opinion
and other document delivered in connection with any of the foregoing.
3.4 REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT. Upon the
effectiveness of this Amendment No. 3, 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 4. REPRESENTATIONS AND WARRANTIES. Borrower hereby
represents and warrants to the Agent and the Lenders as follows:
4.1 THIS AMENDMENT NO. 3. This Amendment No. 3 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> 8
4.2 CREDIT AGREEMENT. The Credit Agreement, as amended by
this Amendment No. 3, 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. 3.
4.3 NON-WAIVER. The execution, delivery, performance and
effectiveness of this Amendment No. 3 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. 3 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. 3.
SECTION 5. MISCELLANEOUS.
5.1 GOVERNING LAW. This Amendment No. 3 shall be governed by
and construed in accordance with the laws of the State of Ohio.
5.2 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.
5.3 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> 9
IN WITNESS WHEREOF, Royal Appliance Mfg. Co. has caused this Amendment
No. 3 to Restated Credit and Security Agreement to be executed and delivered as
of the date above written.
ROYAL APPLIANCE MFG. CO.
------------------------------
By: Richard G. Vasek
Its: Controller, Secretary and
Chief Accounting Officer
ACCEPTED AND AGREED:
NATIONAL CITY COMMERCIAL FINANCE, INC.,
as Agent
- -----------------------------
By: Tina M. Lucas
Its: Vice President
-23-
<PAGE> 10
LENDERS
NATIONAL CITY COMMERCIAL FINANCE, INC.,
as a Lender
- -----------------------------
By: Tina M. Lucas
Its: Vice President
THE CIT GROUP BUSINESS CREDIT, INC.,
as a Lender
- -----------------------------
By: Uri Tooch
Its: Assistant 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> 11
LETTER OF CREDIT BANK
NATIONAL CITY BANK
- --------------------------
By: Thomas R. Poe
Its: Senior Vice President
-25-
<PAGE> 12
Second 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
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. $12,000,000 30%
- -----------------------------------------------------------------------------------------------------------------
The CIT Group Business Credit, Inc. $7,600,000 19%
- -----------------------------------------------------------------------------------------------------------------
CoreStates Bank $7,200,000 18%
- -----------------------------------------------------------------------------------------------------------------
National Bank of Canada, a Canadian Chartered Bank $6,800,000 17%
- -----------------------------------------------------------------------------------------------------------------
BTM Capital $6,400,000 16%
=================================================================================================================
Total Revolving Credit Commitment $40,000,000 100%
- ---------------------------------
=================================================================================================================
</TABLE>
-26-
<PAGE> 1
EXECUTION COPY
EXHIBIT 4(b)
RECEIVABLES PURCHASE AND
SERVICING AGREEMENT
RECEIVABLES PURCHASE AND SERVICING AGREEMENT, dated as of September
29, 1997 (this "Agreement"), by and among Royal Appliance Receivables, Inc., an
Ohio corporation as Seller (the "Seller"), LLAMA RETAIL 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, with respect to all Tier I Receivables,
0.60% and, with respect to all Tier II Receivables, 0.90% per annum.
BALANCE SHEET DATE: means June 30, 1997.
27
<PAGE> 2
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.
COLLECTION ACCOUNT: means the Eligible Bank Account titled "Llama
Retail 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 March 17, 1998, or such later date as
the Administrative Agent may agree, with the approval of the Purchaser
in a written notice to the Seller.
MINIMUM INVESTMENT AMOUNT: means $100,000.
PARENT JUDGMENT AMOUNT: means $5 million.
PROGRAM FEE RATE: means 0.20%, 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 January 31,
1998, $40,000,000, and thereafter $25,000,000.
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.
28
<PAGE> 3
2. ADDITIONS AND MODIFICATIONS TO THIS AGREEMENT.
(a) 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 "Minimum Dilution Reserve
Amount" is deleted in full.
(iv) The definition of "Related Documents" is hereby
amended by adding the following after the words
"Receivables Purchase Agreement:"
, the Management Agreement, dated as of September
29, 1997, between the Parent and the Seller
(b) The following new definition is hereby added:
CP DISRUPTION EVENT: The inability of a Purchaser, at
any time, whether as a result of a prohibition, a
contractual restriction or any other event or
circumstances whatsoever, to raise funds through the
issuance of its commercial paper notes (whether or
not constituting commercial paper notes issued to
fund Purchases hereunder) in the United States
commercial paper market.
(c) Section 2.1(a) is hereby amended by adding the
following at the end
thereof:
In the event the Purchaser is not able to make a
Purchase that it otherwise has agreed to make solely
as a result of a CP Disruption Event, the Purchaser
will, to the extent it is permitted, request an
advance under the Liquidity Agreement and shall make
such Purchase in an amount equal to the amount of
such advance.
29
<PAGE> 4
(d) Section 6.3(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
(e) Section 6.3 (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
(f) 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
(g) 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 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 Parent or the Seller shall take any corporate
action to authorize any of the actions set forth in
this subsection; or
(h) Section 7.1(l) is hereby amended by deleting the
phrase "or for any other reason whatsoever."
(i) Section 10.4 is amended by inserting "lenders," in
the second parenthetical phrase thereof, before the word "directors."
30
<PAGE> 5
(j) Annex B(l) is hereby deleted and replaced in its
entirety as follows:
(l) (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;
(k) Annex D (b) is hereby amended by deleting the phrase
"in a manner acceptable to the Administrative Agent."
(l) Annex D (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
(m) Annex D (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) Exhibit A is hereby amended by deleting the text of
paragraph A and replacing it in its entirety as
follows:
THE DILUTION RESERVE.
DILUTION RESERVE: For any Receivables Interest, on
any day, an amount equal to the product of (a) 10%
and (b) the Net Receivables Pool Balance at the time
of such calculation.
31
<PAGE> 6
(n) Section 2.18 is hereby added as follows:
Section 2.18 PAYMENTS IN RESPECT OF DILUTIONS. On any
day on which one or more Dilutions arise as a result
of any action by any Designated Obligor 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.
32
<PAGE> 7
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:
ROYAL APPLIANCE MFG. CO., as Parent and
Servicer
By:_____________________________________
Name:
Title:
LLAMA RETAIL FUNDING, L.P.,
as Purchaser,
By Llama Retail Funding Corp.,
its general partner
By:_____________________________________
Name:
Title: President
CAPITAL USA, L.L.C.,
as Administrative Agent
By:_____________________________________
Name: James L. Sigman
Title: Vice President
33
<PAGE> 1
EXHIBIT 11
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
FORM 10-Q
COMPUTATION OF EARNINGS PER COMMON SHARE
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net income applicable to
common shares $ 4,089 $ 3,151 $ 5,614 $ 4,811
======= ======= ======= =======
Primary:
Weighted average common shares
outstanding for the period 23,577 24,002 23,802 24,004
Dilutive stock options -
based on the treasury stock
method using average market
price 496 269 399 181
------ ------ ------ ------
Totals 24,073 24,271 24,201 24,185
====== ====== ====== ======
Fully diluted:
Weighted average shares outstanding 23,577 24,002 23,802 24,004
Dilutive stock options -
based on the treasury stock
method using the period-ended
market price if higher than
the average market price 501 331 452 304
------ ------ ------ ------
Totals 24,078 24,333 24,254 24,308
====== ====== ====== ======
Income per common and common equivalent share:
Primary $ .17 $ .13 $ .23 $ .20
Fully diluted (A) $ .17 $ .13 $ .23 $ .20
</TABLE>
(A) 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.
34
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<CIK> 0000085462
<NAME> ROYAL APPLIANCE MFG. CO.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 1,003
<SECURITIES> 0
<RECEIVABLES> 55,083
<ALLOWANCES> 0
<INVENTORY> 39,614
<CURRENT-ASSETS> 105,348
<PP&E> 84,390
<DEPRECIATION> 41,738
<TOTAL-ASSETS> 151,486
<CURRENT-LIABILITIES> 49,836
<BONDS> 39,468
0
0
<COMMON> 210
<OTHER-SE> 74,958
<TOTAL-LIABILITY-AND-EQUITY> 151,486
<SALES> 207,063
<TOTAL-REVENUES> 207,063
<CGS> 147,806
<TOTAL-COSTS> 147,806
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 337
<INCOME-PRETAX> 9,204
<INCOME-TAX> 3,590
<INCOME-CONTINUING> 5,614
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,614
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
