<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 JUNE 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
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
650 ALPHA DRIVE, CLEVELAND, OHIO 44143
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(Address of Principal Executive Offices) (Zip Code)
(216) 449-6150
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(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 23,500,000
------------------------------------ -------------------------------
(Class) (Outstanding at August 8, 1997)
The Exhibit index appears on sequential page 14.
1
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<TABLE>
<CAPTION>
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
INDEX
Page No.
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<S> <C>
Part I FINANCIAL INFORMATION
Item 1 Financial Statements
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Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations -
three months and six months ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows -
six months ended June 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 4 Submission of Matters to a Vote of Security Holders 12
------ ---------------------------------------------------
Item 6 Exhibits and Reports on Form 8-K 12
------ --------------------------------
Signatures 13
Exhibit Index 14
Exhibit 11* - Computation of earnings per common share. 15
----------
Exhibit 27* - Financial data schedule (EDGAR filing only)
----------
*Numbered in accordance with Item 601 of Regulation S-K.
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
------ --------------------
<TABLE>
<CAPTION>
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
June 30, December 31,
1997 1996
-------- ------------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash $ -- $ 1,001
Trade accounts receivable, net 29,212 39,761
Inventories 38,548 34,052
Refundable and deferred income taxes 10,764 6,552
Prepaid expenses and other 2,160 2,436
--------- ---------
Total current assets 80,684 83,802
--------- ---------
Property, plant and equipment, at cost:
Land 2,356 2,356
Building 13,117 13,117
Molds, tooling, and equipment 53,231 44,716
Furniture and office equipment 5,674 5,221
Assets under capital leases 4,810 4,810
Leasehold improvements and other 2,791 2,717
--------- ---------
81,979 72,937
Less accumulated depreciation and amortization 39,252 35,654
--------- ---------
42,727 37,283
--------- ---------
Tooling deposits 1,841 3,962
Other 1,855 1,094
--------- ---------
Total assets $ 127,107 $ 126,141
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 23,665 $ 20,679
Accrued liabilities:
Advertising and promotion 6,614 11,682
Salaries, benefits, payroll taxes 2,825 5,980
Warranty and customer returns 7,850 7,975
Income taxes -- 3,503
Interest and other 4,606 3,680
Current portions of capital lease obligations and notes payable 658 665
--------- ---------
Total current liabilities 46,218 54,164
--------- ---------
Revolving credit agreement 6,916 2,886
Capitalized lease obligations, less current portion 3,221 3,307
Notes payable, less current portion 9,329 9,550
--------- ---------
Total long-term debt 19,466 15,743
--------- ---------
Deferred income taxes 5,573 --
--------- ---------
Total liabilities 71,257 69,907
--------- ---------
Commitments and contingencies (Note 3) -- --
Shareholders' equity:
Common shares, at stated value 210 210
Additional paid-in capital 41,663 41,500
Retained earnings 29,136 27,611
Cumulative translation adjustment -- (107)
--------- ---------
71,009 69,214
Less treasury shares, at cost (1,532,650 and 1,201,000 shares at
June 30, 1997, and December 31, 1996, respectively) (15,159) (12,980)
--------- ---------
Total shareholders' equity 55,850 56,234
--------- ---------
Total liabilities and shareholders' equity $ 127,107 $ 126,141
========= =========
</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 Six months ended
June 30, June 30,
-------------------------------- --------------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 61,070 $ 62,969 $ 119,688 $ 115,231
Cost of sales 43,331 46,465 85,715 84,964
------------- ------------- ------------- -------------
Gross margin 17,739 16,504 33,973 30,267
Advertising and promotion 9,726 8,947 18,749 15,350
Other selling 1,917 2,286 3,754 4,360
General and administrative 2,780 2,571 5,785 5,615
Engineering and product development 1,380 853 2,402 1,624
------------- ------------- ------------- -------------
Income from operations 1,936 1,847 3,283 3,318
Interest expense, net 301 663 554 1,518
Other expense (income), net 145 (993) 229 (922)
------------- ------------- ------------- -------------
Income before income taxes 1,490 2,177 2,500 2,722
Income tax expense 571 849 975 1,062
------------- ------------- ------------- -------------
Net income $ 919 $ 1,328 $ 1,525 $ 1,660
============= ============= ============= =============
Net income per common share $ .04 $ .05 $ .06 $ .07
Weighted average number of common shares
and equivalents outstanding (in thousands) 24,193 24,296 24,289 24,142
</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>
Six months
Ended June 30,
--------------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,525 $ 1,660
---------- ----------
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 3,833 3,834
Compensatory effect of stock options 41 (213)
Gain on disposal of tooling, property, plant and equipment -- (648)
(Increase) decrease in assets:
Trade accounts receivable, net 10,549 11,609
Inventories (4,496) (1,641)
Refundable, deferred, and accrued income taxes (2,142) 6,038
Prepaid expenses and other 276 365
Other (889) (186)
Increase (decrease) in liabilities:
Trade accounts payable 2,986 (1,620)
Accrued advertising and promotion (5,068) (3,295)
Accrued salaries, benefits, and payroll taxes (3,155) 632
Accrued warranty and customer returns (125) (100)
Accrued interest and other 926 84
---------- ----------
Total adjustments 2,736 14,859
---------- ----------
Net cash from operating activities 4,261 16,519
---------- ----------
Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment, net (9,042) (5,846)
Decrease in tooling deposits 2,121 2,530
Proceeds from sale of plants and equipment -- 2,237
---------- ----------
Net cash from investing activities (6,921) (1,079)
---------- ----------
Cash flows from financing activities:
Proceeds (payments) on bank debt 4,030 (15,105)
Payments on note payable (204) (198)
Payments on capital lease obligations (110) (169)
Proceeds from exercise of stock options 122 30
Repurchase of common stock (2,179) --
---------- ----------
Net cash from financing activities 1,659 (15,442)
---------- ----------
Effect of exchange rate changes on cash -- 2
---------- ----------
Net decrease in cash (1,001) --
---------- ----------
Cash at beginning of period 1,001 --
---------- ----------
Cash at end of period $ -- $ --
========== ==========
Supplemental disclosure of cash flow information:
Cash payments (refunds) for:
Interest $ 664 $ 1,838
========== ==========
Income taxes, net $ 3,117 $ (4,976)
========== ==========
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
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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 June 30, 1997 and December
31, 1996, and the related statements of operations and cash flows as of, and for
the interim periods ended, June 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 six month periods ended June
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 June 30, 1997, and December 31, 1996,
consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- --------
<S> <C> <C>
Finished goods $24,636 $23,177
Work in process and purchased parts 13,912 10,875
-------- --------
Inventories at FIFO cost $38,548 $34,052
======== ========
</TABLE>
NOTE 3: COMMITMENTS AND CONTINGENCIES
At June 30, 1997, the Company estimates having contractual commitments for
future advertising and promotional expense of approximately $12,000, including
commitments for television advertising through December 31, 1997. Other
contractual commitments for items in the normal course of business total
approximately $3,500.
6
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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 June 30, 1997. The facility provides for
revolving credit up to $50,000, subject to a borrowing base formula as defined
in the agreement. The maximum amount allowable to the Company under the
borrowing base formula was $34,300 as of June 30, 1997, resulting in
availability of approximately $22,700. 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 June 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 June 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. The maximum amount
allowed at June 30, 1997, is $9,000. At June 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 $275 for the six months ended June 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
$4,116. 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 June 30, 1997, the 30 day
commercial paper rate was 5.61%. 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
$5,647. 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 June 30, 1997, the Company has repurchased approximately
332 shares for an aggregate purchase price of $2,179. The program is scheduled
to expire on March 1, 1998.
7
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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 decreased 3.0% for the second quarter and increased 3.9% for the
six month period ended June 30, 1997, compared with the same periods in the
prior year. The decrease in the second quarter was due primarily to lower sales
of the Dirt Devil(R) Broom Vac(TM) and lower hand held vacuum sales. The
decrease in second quarter net sales was partially offset by increases in the
Company's line of upright vacuum cleaners, in particular the Dirt Devil(R) Ultra
MVP(TM) which was introduced in the second quarter of 1996 and the new Dirt
Devil(R) Swivel Glide(TM) which was introduced late in the second quarter of
1997. The increase in net sales for the six months ended June 30, 1997, was due
primarily to the sale of the Dirt Devil(R) Ultra MVP(TM) and the Dirt Devil(R)
Swivel Glide(TM). The increase in net sales for the six month period ended June
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 six months of 1997. Sales to the top 5 customers
accounted for approximately 65.3% of net sales in the first six months of 1997
as compared with approximately 53.3% in the first six 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, increased from 26.2% for the
second quarter 1996 to 29.1% in the second quarter 1997 and from 26.3% in the
first six months of 1996 to 28.4% in the first six 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.
Advertising and promotion expenses increased 8.7% for the second quarter
1997 and increased 22.1% for the six month period ended June 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 new Dirt Devil(R)
Mop Vac(R), a cordless rechargeable mop which will be shipped to retail in the
third quarter of 1997. 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 16.1% for the second quarter 1997 and
decreased 13.9% for the six month period ended June 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 second quarter and the six month period ended June 30, 1997,
compared with the same periods in 1996.
General and administrative expenses increased 8.1% for the second quarter
1997 and increased 3.0% for the six month period ended June 30, 1997, compared
with the same periods in 1996. General and administrative expenses were
comparable as a percentage of net sales for the six month period ended June 30,
1997, and for the second quarter. The principal components are compensation
(including benefits), insurance, travel and professional services.
8
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RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
- --------------------------------------------------------------
Engineering and product development expenses increased 61.8% for the second
quarter 1997 and increased 47.9% for the six month period ended June 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 six months of
1997 was primarily due to costs associated with the new product introductions in
1997.
Interest expense decreased 54.6% for the second quarter 1997 and decreased
63.5% for the six month period ended June 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 and capital
expenditures 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 June, 1996.
Due to the factors discussed above, the Company had income before income
taxes for the second quarter and six months ended June 30, 1997 of $1,490 and
$2,500, respectively, as compared to income before income taxes for the second
quarter and six months period ended June 30, 1996 of $2,177 and $2,722,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has used working capital generated from operations to fund its
operations and capital expenditures. Working capital was $34,466 at June 30,
1997, an increase of 16.3% over December 31, 1996. Current liabilities
decreased by $7,946 reflecting in part a $3,155 reduction of accrued salaries,
benefits and payroll taxes, a $3,503 reduction of accrued income taxes, and
$5,068 reduction of accrued advertising and promotion, which were partially
offset by an increase in trade accounts payables of $2,986 and an increase in
accrued interest and other of $926. Current assets decreased by $3,118
reflecting in part a $10,549 reduction of trade accounts receivable and a
$1,001 reduction of cash which were partially offset by increases in inventory
of $4,496 and refundable and deferred income taxes of $4,212.
In the first six months of 1997, the Company utilized $6,921 of cash for
capital purchases, including approximately $4,900 of tooling related to the new
Dirt Devil(R) Swivel Glide(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 June 30, 1997. The facility provides for
revolving credit up to $50,000, subject to a borrowing base formula as defined
in the agreement. The maximum amount allowable to the Company under the
borrowing base formula was $34,300 as of June 30, 1997 resulting in the
availability of approximately $22,700. 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 June 30, 1997, the bank's base lending rate was 8.50%. In
addition, the Company pays a commitment fee at the annual rate of .375% on the
unused portion of the facility.
9
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LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- -------------------------------
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 June 30, 1997. The revolving credit facility is collateralized
by the Company's domestic inventory, 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 without recourse, through a
wholly-owned subsidiary, certain trade accounts receivable. The maximum amount
of receivables that can be sold is seasonally adjusted. The maximum amount
allowed at June 30, 1997, is $9,000. At June 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 $275 for the six months ended June 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 June 30, 1997, the Company has repurchased approximately
332 shares for an aggregate purchase price of $2,179. 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
--------------------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1997 1997 1996 1996 1996 1996
-------- --------- -------- --------- -------- ---------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 61,070 $ 58,618 $ 97,204 $ 73,688 $ 62,969 $ 52,262
Gross margin 17,739 16,234 30,633 21,223 16,504 13,763
Net income 919 606 4,625 3,151 1,328 332
Net income per
common share (a) .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 implemented Statement of Financial Accounting Standards "SFAS"
No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, in the first quarter of 1997. The impact of
implementing SFAS No. 125 did not have a material impact on its consolidated
financial position and results of operations.
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 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 4 - Submission of Matters to a Vote of Security Holders
------ ---------------------------------------------------
(a) The Company's annual meeting of shareholders was held
April 29, 1997.
(b) At the annual meeting, the Company's shareholders
elected Messrs. E. Patrick Nalley, Joseph B. Richey II,
and R. Louis Schneeberger, as Class II Directors for a
two year term which expires at the annual shareholders
meeting in 1999.
The term of office of Messrs. Jack Kahl Jr.,
Michael J. Merriman, and John P. Rochon, the Class
I Directors, continued after the 1997 meeting;
such term expires at the annual shareholders
meeting in 1998.
(c) At the annual meeting, the Company's shareholders
ratified the appointment of Coopers & Lybrand L.L.P. as
auditors of the Company for 1997. The holders of
21,326,576 common shares voted to ratify the
appointment, the holders of 122,262 common shares voted
against the ratification, and the holders of 46,610
common shares abstained.
The following tabulation represents voting for the
Class II Directors
<TABLE>
<CAPTION>
Name FOR WITHHELD AUTHORITY
---- --- ------------------
<S> <C> <C>
Mr. Nalley 20,270,112 1,225,336
Mr. Richey 20,271,859 1,223,589
Mr. Schneeberger 20,282,074 1,213,374
</TABLE>
(d) Not applicable
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 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: August 8, 1997 /s/ Richard G. Vasek
---------------- -----------------------------------------------
Richard G. Vasek
Controller, Secretary and Chief Accounting Officer
(Principal Accounting Officer)
13
<PAGE> 14
INDEX TO EXHIBITS
Page No.
- --------
Exhibit 11 - Computation of earnings per common share 15
Exhibit 27 - Financial data schedule (EDGAR filing only)
14
<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 Six Months
Ended June 30, Ended June 30
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income applicable to
common shares $ 919 $ 1,328 $ 1,525 $ 1,660
============ ============ ============ ============
Primary:
Weighted average common shares
outstanding for the period 23,819 24,003 23,914 24,001
Dilutive stock options -
based on the treasury stock
method using average market
price 374 293 375 141
------------ ------------ ------------ ------------
TOTALS 24,193 24,296 24,289 24,142
============ ============ ============ ============
Fully diluted:
Weighted average shares outstanding 23,819 24,003 23,914 24,001
Dilutive stock options -
based on the treasury stock
method using the period-ended
market price if higher than
the average market price 462 293 465 248
------------ ------------ ------------ ------------
TOTALS 24,281 24,296 24,379 24,249
============ ============ ============ ============
Income per common and
common equivalent share:
Primary $ .04 $ .05 $ .06 $ .07
Fully diluted (A) $ .04 $ .05 $ .06 $ .07
</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.
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
REGISTRANT'S FORM 10Q FOR THE QUARTER ENDED JUNE 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000085462
<NAME> ROYAL APPLIANCE MFG. CO.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 29,212
<ALLOWANCES> 0
<INVENTORY> 38,548
<CURRENT-ASSETS> 80,684
<PP&E> 81,979
<DEPRECIATION> 39,252
<TOTAL-ASSETS> 127,107
<CURRENT-LIABILITIES> 46,218
<BONDS> 19,466
<COMMON> 210
0
0
<OTHER-SE> 70,799
<TOTAL-LIABILITY-AND-EQUITY> 127,107
<SALES> 119,688
<TOTAL-REVENUES> 119,688
<CGS> 85,715
<TOTAL-COSTS> 85,715
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 554
<INCOME-PRETAX> 2,500
<INCOME-TAX> 975
<INCOME-CONTINUING> 1,525
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,525
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
