<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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
----------------- -----------------------
Commission file number 0-19431
-------
ROYAL APPLIANCE MFG. CO.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-1350353
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
650 ALPHA DRIVE, CLEVELAND, OHIO 44143
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(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 19,988,524
-------------------------------- ----------------------------------
(Class) (Outstanding at November 12, 1998)
The Exhibit index appears on sequential page 16.
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, 1998 and December 31, 1997 3
Consolidated Statements of Operations -
three months and nine months ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows -
nine months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6 - 8
Item 2 Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations 9 - 13
-----------------------------------
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 14
------ --------------------------------
Signatures 15
Exhibit Index 16
</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,
1998 1997
--------- ---------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash $ -- $ 1,355
Trade accounts receivable, net 37,183 47,045
Inventories 34,813 36,195
Deferred and refundable income taxes 4,016 2,550
Prepaid expenses and other 2,277 1,861
--------- ---------
Total current assets 78,289 89,006
--------- ---------
Property, plant and equipment, at cost:
Land 1,541 2,356
Buildings 7,777 13,117
Molds, tooling, and equipment 63,461 58,236
Furniture and office equipment 6,918 6,068
Assets under capital leases 4,613 4,613
Leasehold improvements and other 3,042 3,049
--------- ---------
87,352 87,439
Less accumulated depreciation and amortization 50,158 44,547
--------- ---------
37,194 42,892
--------- ---------
Tooling deposits 1,720 1,146
Other 2,506 1,903
--------- ---------
Total assets $ 119,709 $ 134,947
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 21,664 $ 26,648
Accrued liabilities:
Advertising and promotion 6,863 9,576
Salaries, benefits and payroll taxes 3,344 5,750
Warranty and customer returns 8,000 8,700
Income taxes -- 975
Other 5,030 5,530
Current portions of capital lease obligations and notes payable 517 691
--------- ---------
Total current liabilities 45,418 57,870
--------- ---------
Revolving credit agreement 15,500 1,473
Capitalized lease obligations, less current portion 2,904 3,101
Notes payable, less current portion 5,084 9,098
--------- ---------
Total long-term debt 23,488 13,672
--------- ---------
Deferred income taxes 3,825 3,186
--------- ---------
Total liabilities 72,731 74,728
--------- ---------
Commitments and contingencies (Note 3) -- --
Shareholders' equity:
Common shares, at stated value 211 211
Additional paid-in capital 42,108 41,897
Retained earnings 37,410 40,018
Cumulative translation adjustment (1) --
--------- ---------
79,728 82,126
Less treasury shares, at cost (4,414,400 and 2,401,000 shares at
September 30, 1998, and December 31, 1997, respectively) (32,750) (21,907)
--------- ---------
Total shareholders' equity 46,978 60,219
--------- ---------
Total liabilities and shareholders' equity $ 119,709 $ 134,947
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
------ --------------------
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 73,607 $ 87,375 $ 176,714 $ 207,063
Cost of sales 54,349 62,091 133,805 147,806
--------- --------- --------- ---------
Gross margin 19,258 25,284 42,909 59,257
Advertising and promotion 10,266 11,593 27,622 30,342
Other selling 1,999 2,039 5,892 5,793
General and administrative 2,804 3,157 9,725 8,942
Engineering and product development 1,087 1,107 3,143 3,509
--------- --------- --------- ---------
Income (loss) from operations 3,102 7,388 (3,473) 10,671
Interest expense, net 522 576 1,221 1,130
Receivable securitization and other (income)
expense, net (975) 108 (446) 337
--------- --------- --------- ---------
Income (loss) before income taxes 3,555 6,704 (4,248) 9,204
Income tax expense (benefit) 1,386 2,615 (1,640) 3,590
--------- --------- --------- ---------
Net income (loss) $ 2,169 $ 4,089 $ (2,608) $ 5,614
========= ========= ========= =========
BASIC
Weighted average number of common
shares outstanding (in thousands) 21,277 23,497 21,876 23,741
Earnings (loss) per share $ .10 $ .17 $ (.12) $ .24
DILUTED
Weighted average number of common
shares and equivalents outstanding
(in thousands) 21,438 23,993 21,876 24,140
Earnings (loss) per share $ .10 $ .17 $ (.12) $ .23
</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 FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months
ended September 30,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (2,608) $ 5,614
-------- --------
Adjustments to reconcile net (loss) income to
net cash from operating activities:
Depreciation and amortization 6,629 6,435
Compensatory effect of stock options 61 61
Gain on sale of property, plant and equipment, net (1,316) --
(Increase) decrease in assets:
Trade accounts receivable, net 9,862 (15,322)
Inventories 1,382 (5,562)
Refundable and accrued income taxes (1,802) 473
Prepaid expenses and other (416) (406)
Other (847) (1,139)
Increase (decrease) in liabilities:
Trade accounts payable (4,984) 2,334
Accrued advertising and promotion (2,713) (3,623)
Accrued salaries, benefits, and payroll taxes (2,406) (1,430)
Accrued warranty and customer returns (700) 125
Accrued other (500) 1,760
-------- --------
Total adjustments 2,250 (16,294)
-------- --------
Net cash from operating activities (358) (10,680)
-------- --------
Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment, net (6,357) (11,453)
Decrease (increase) in tooling deposits (574) 2,465
Proceeds from sale of plant and equipment, net 6,986 --
-------- --------
Net cash from investing activities 55 (8,988)
-------- --------
Cash flows from financing activities:
Proceeds on bank debt 14,027 24,205
Payments on note payable (4,214) (310)
Payments on capital lease obligations (171) (161)
Proceeds from exercise of stock options 150 172
Repurchase of common stock (10,843) (4,236)
-------- --------
Net cash from financing activities (1,051) 19,670
-------- --------
Effect of exchange rate changes on cash (1) --
-------- --------
Net (decrease) increase in cash (1,355) 2
-------- --------
Cash at beginning of period 1,355 1,001
-------- --------
Cash at end of period $ -- $ 1,003
======== ========
Supplemental disclosure of cash flow information:
Cash payments for:
Interest $ 1,293 $ 1,109
======== ========
Income taxes, net of refunds $ 162 $ 3,117
======== ========
</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, 1998 and
December 31, 1997, and the related statements of operations and cash flows as
of, and for the interim periods ended, September 30, 1998 and 1997. 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 annual report (Form 10-K).
The results of operations for the three and nine month periods ended
September 30, 1998, are not necessarily indicative of the results to be expected
for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures.
Actual results could differ from those estimates.
The Company's revenue recognition policy is to recognize revenues when
products are shipped.
Net income (loss) per share is computed based on the weighted average
number of common shares outstanding for basic earnings per share and on the
weighted average number of common shares and common share equivalents
outstanding for diluted earnings per share.
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost or market. Inventories at
September 30, 1998, and December 31, 1997, consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------- -------
<S> <C> <C>
Finished goods $16,901 $23,319
Work in process and purchased parts 17,912 12,876
------- -------
Inventories at FIFO cost $34,813 $36,195
======= =======
</TABLE>
NOTE 3: COMMITMENTS AND CONTINGENCIES
At September 30, 1998, the Company estimates having contractual
commitments for future advertising and promotional expense of approximately
$14,977, including commitments for television advertising through March 31,
1999. Other contractual commitments for items in the normal course of business
total approximately $1,500.
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
In April, 1998, the Company entered into a new three-year collateralized
revolving credit facility with availability of $45,000. Under the new agreement,
pricing options of the bank's base lending rate and LIBOR rate are based on a
formula, as defined. In addition, the Company pays a commitment fee based on a
formula, as defined, on the unused portion of the facility. The revolving credit
facility contains covenants which require, among other things, the achievement
of minimum net worth levels and the maintenance of certain financial ratios. The
Company was in compliance with all applicable covenants as of September 30,
1998. The revolving credit facility is collateralized by the Company's
inventories and certain trade accounts receivable.
The Company also utilizes a revolving trade accounts receivable
securitization program to sell without recourse, through a wholly-owned
subsidiary, certain trade accounts receivable. Under the program, the maximum
amount allowed to be sold at any given time through September 30, 1998, was
$25,000. The maximum amount of receivables that can be sold is seasonally
adjusted. At September 30, 1998, the Company received approximately $13,300 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 $611 and $386 for the nine
months ended September 30, 1998 and 1997, respectively, and have been classified
as Receivable securitization and other (income) 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.
During the third quarter of 1998, the Company sold one of its assembly
facilities. The facility was sold for $7,100. Proceeds were used to pay off a
variable rate mortgage and pay down the Company's revolving credit debt. The net
gain from this transaction was approximately $1,300.
The Company has a 7.9% fixed rate mortgage note payable in the amount of
$5,336. The note is collateralized by the Company's distribution and assembly
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 1998, 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 2,300 of its outstanding
common shares. The Company completed the program repurchasing 2,300 shares for
an aggregate purchase price of $11,817 in October 1998. In October 1998, the
Company's Board of Directors authorized another common share repurchase program
that provides for the Company to purchase, in the open market and through
negotiated transactions, up to an additional 4,100 of its outstanding common
shares. As of October 31, 1998, the Company has repurchased approximately 504
shares for an aggregate purchase price of $2,018 under the new program. The
program is scheduled to expire on December 31, 1999.
7
<PAGE> 8
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6: EARNINGS (LOSS) PER SHARE
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings per Share, which modifies the
calculation of earnings per share. The Standard replaces the previous
presentation of primary and fully diluted earnings per share to basic and
diluted.
Basic earnings (loss) per share excludes dilution and is computed by
dividing income by the weighted average number of common shares outstanding for
the period. Diluted earnings per share includes the dilution of common stock
equivalents, and is computed similarly to fully diluted earnings per share
pursuant to APB Opinion No. 15. All prior periods presented have been restated
to reflect this adoption.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 2,169 $ 4,089 $ (2,608) $ 5,614
======== ======== ======== ========
BASIC:
Common shares outstanding, net of treasury
shares, beginning of period 22,028 23,728 22,911 24,030
Weighted average common shares issued
during period 33 9 11 31
Weighted average treasury shares repurchased
during period (784) (240) (1,046) (320)
-------- -------- -------- --------
Weighted average common shares outstanding,
net of treasury shares, end of period 21,277 23,497 21,876 23,741
======== ======== ======== ========
Net income (loss) per common share $ .10 $ .17 $ (.12) $ .24
======== ======== ======== ========
DILUTED:
Common shares outstanding, net of treasury
shares, beginning of period 22,028 23,728 22,911 24,030
Weighted average common shares issued
during period 33 9 11 31
Weighted average common share equivalents 161 496 -- 399
Weighted average treasury shares repurchased
during period (784) (240) (1,046) (320)
-------- -------- -------- --------
Weighted average common shares outstanding,
net of treasury shares, end of period 21,438 23,993 21,876 24,140
======== ======== ======== ========
Net income (loss) per common share $ .10 $ .17 $ (.12) $ .23
======== ======== ======== ========
</TABLE>
NOTE 7: COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, Reporting Comprehensive Income, in the first quarter of 1998. The
implementation of SFAS No. 130 did not have a material impact on the Company's
consolidated financial position or results of operations since the Company had
no significant other comprehensive income.
8
<PAGE> 9
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 15.8% for the third quarter and decreased 14.7% for
the nine month period ended September 30, 1998, compared with the same periods
in the prior year. The decrease in the third quarter net sales was due to lower
shipments of specialty products, particularly, the Dirt Devil(R) Mop Vac(R) and
was partially offset by increased shipments of upright vacuum cleaners,
including the new Dirt Devil(R) Vision which the Company began shipping to its
retail customers in the third quarter of 1998. The decrease in net sales for the
nine months ended September 30, 1998, was due primarily to lower shipments of
speciality products, particularly, the Dirt Devil(R) Mop Vac(R) and the Dirt
Devil(R) Broom Vac(R). Overall sales to the top 5 customers (all of which are
major retailers) decreased, in the first nine months of 1998 but increased as a
percentage of net sales. Sales to the top 5 customers accounted for
approximately 63.3% of net sales in the first nine months of 1998 as compared
with approximately 61.5% in the first nine months of 1997. The Company believes
that despite recent inventory reductions at certain of the Company's major
retailers, sell-through of Dirt Devil(R) uprights to consumers at retail have
increased. 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, decreased from 28.9% for the
third quarter 1997 to 26.2% in the third quarter 1998 and from 28.6% in the
first nine months of 1997 to 24.3% in the first nine months of 1998. The gross
margin percentage was negatively affected for the third quarter primarily by
manufacturing variances as a percent of sales and by lower sales of higher
margin products. The gross margin percentage was negatively affected for the
nine months ended September 30, 1998 primarily by higher consumer returns and
manufacturing variances and costs incurred in connection with the consolidation
of two of the Company's facilities.
Advertising and promotion expenses decreased 11.4% for the third quarter
1998 and decreased 9.0% for the nine month period ended September 30, 1998
compared with the same periods in 1997. The decrease in advertising and
promotion expenses was due primarily to not incurring in 1998 expenses related
to the 1997 launch of the Fred Astaire Super Bowl advertising campaign and the
direct response television campaign for the Dirt Devil(R) Mop Vac(R). 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 new product and promotional campaign
introductions.
Other selling expenses for the third quarter 1998 and for the nine month
period ended September 30, 1998 were comparable with the same periods in 1997.
The principal components are internal sales and marketing personnel costs.
General and administrative expenses decreased 11.2% for the third quarter
1998 and increased 8.8% for the nine month period ended September 30, 1998,
compared with the same periods in 1997. The decrease in the third quarter was
primarily due to lower compensation related expenses. The increase in the nine
month period ended September 30, 1998, was primarily due to increases in
employee related benefit expenses, professional fees and supplies. General and
administrative expenses increased as a percentage of net sales for the third
quarter 1998 from 3.6% to 3.8% and for the nine month period ended September 30,
1998, from 4.3% to 5.5%, compared with the same periods in 1997. The principal
components are compensation (including benefits), insurance, travel and
professional services.
9
<PAGE> 10
RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
- -------------------------------------------------------------
Engineering and product development expenses were comparable for the
third quarter 1998 and decreased 10.4% for the nine month period ended September
30, 1998. 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 period.
The decrease in the first nine months of 1998 was primarily due to fewer new
product introductions in 1998.
Interest expense decreased 9.4% for the third quarter 1998 and increased
8.1% for the nine month period ended September 30, 1998, compared with the same
periods in 1997. The decrease in interest expense for the third quarter resulted
primarily from lower levels of variable rate borrowings due to the receipt of
proceeds from the August, 1998 sale of one of the Company's assembly facilities.
The increase in interest expense for the nine month period ended September 30,
1998, resulted primarily from higher levels of variable rate borrowings to
finance working capital, capital expenditures and share repurchases, partially
offset by a lower effective borrowing rate and the receipt of proceeds from the
sale of one of the Company's assembly facilities.
Receivable securitization and other (income) expense principally reflects
the cost of the Company's trade accounts receivable securitization program and
foreign currency transaction gains or losses related to the Company's North
American assets. The amount also includes the gain from the sale of a facility
of approximately $1,300.
Due to the factors discussed above, the Company had income before income
taxes for the third quarter and a loss before income taxes for the nine months
ended September 30, 1998 of $3,555 and $4,248, respectively, as compared to
income before income taxes for the third quarter and nine months ended September
30, 1997 of $6,704 and $9,204, respectively.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has used cash generated from operations to fund its working
capital needs, capital expenditures, and share repurchases. Working capital was
$32,871 at September 30, 1998, an increase of 5.6% over December 31, 1997.
Current assets decreased by $10,717 reflecting a $9,862 reduction of trade
accounts receivable and a decrease in inventory of $1,382 partially offset by an
increase in deferred and refundable income taxes of $1,466. Current liabilities
decreased by $12,452 reflecting in part a $4,984 reduction of trade accounts
payable, a $2,713 reduction of accrued advertising and promotion, a $2,406
reduction of accrued salaries, benefits and payroll taxes, a $700 reduction of
accrued warranty and customer returns and a $975 reduction of accrued income
taxes.
In the first nine months of 1998, the Company utilized $6,931 of cash for
capital purchases, including approximately $3,110 of tooling related to the new
Dirt Devil(R) Vision(TM), Dirt Devil(R) Swivel Glide(TM), and Dirt Devil(R) Mop
Vac(TM).
In April, 1998, the Company entered into a new three-year collateralized
revolving credit facility with availability of $45,000. Under the new agreement,
pricing options of the bank's base lending rate and LIBOR rate are based on a
formula, as defined. In addition, the Company pays a commitment fee based on a
formula, as defined, on the unused portion of the facility. The revolving credit
facility contains covenants which require, among other things, the achievement
of minimum net worth levels and the maintenance of certain financial ratios. The
Company was in compliance with all applicable covenants as of September 30,
1998. The revolving credit facility is collateralized by the Company's
inventories and certain trade accounts receivable.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- -------------------------------
The Company also utilizes a revolving trade accounts receivable
securitization program to sell without recourse, through a wholly-owned
subsidiary, certain trade accounts receivable. Under the program, the maximum
amount allowed to be sold at any given time through September 30, 1998, was
$25,000. The maximum amount of receivables that can be sold is seasonally
adjusted. At September 30, 1998, the Company received approximately $13,300 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 $611 and $386 for the nine
months ended September 30, 1998 and 1997, respectively, and have been classified
as Receivable securitization and other (income) 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.
During the third quarter of 1998, the Company sold one of its assembly
facilities. The facility was sold for $7,100. Proceeds were used to pay off a
variable rate mortgage and pay down the Company's revolving credit debt. The net
gain from this transaction was approximately $1,300.
In February 1998, 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 2,300 of its outstanding
common shares. The Company completed the program repurchasing 2,300 shares for
an aggregate purchase price of $11,817 in October 1998. In October 1998, the
Company's Board of Directors authorized another common share repurchase program
that provides for the Company to purchase, in the open market and through
negotiated transactions, up to an additional 4,100 of its outstanding common
shares. As of October 31, 1998, the Company has repurchased approximately 504
shares for an aggregate purchase price of $2,018 under the new program. The
program is scheduled to expire on December 31, 1999.
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,
1998 1998 1998 1997 1997 1997 1997
--------- -------- --------- -------- --------- -------- ---------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $73,607 $51,259 $51,848 $118,354 $87,375 $61,070 $58,618
Gross margin 19,258 12,153 11,498 36,691 25,284 17,739 16,234
Net income (loss) 2,169 (2,234) (2,543) 6,793 4,089 919 606
Net income (loss) per
common share (a) $.10 $(.10) $(.11) $.29 $.17 $.04 $.02
</TABLE>
(a) Earnings (loss) per share is calculated based on the diluted method
explained in Note 6 to the Consolidated Financial Statements.
The Company's business is highly seasonal. The Company believes that a
significant percentage of certain of its products, particularly the Dirt
Devil(R) Hand Vac, Dirt Devil(R) Broom Vac(R), and Dirt Devil(R) Mop Vac(TM) are
given as gifts and therefore, 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 and the timing of
new product introductions 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.
11
<PAGE> 12
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. 131, Disclosure About
Segments of an Enterprise and Related Information, in the fourth quarter of
1998. The Company expects the implementation of SFAS No. 131 will not have a
material impact on the reporting of segment information.
The Company will be required to implement SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, in the first quarter of 2000. The
Company expects the implementation of SFAS No. 133 will not have a material
impact on the Company's consolidated financial position or results of
operations.
YEAR 2000 COMPLIANCE
- --------------------
Many currently installed computer systems are not capable of
distinguishing the year 2000 from the year 1900. As a result, computer systems
and/or software used by many companies in a wide variety of applications will
experience operating difficulties unless they are modified or upgraded to
adequately process information involving, related to or dependent upon the
century change. Significant uncertainty exists concerning the scope and
magnitude of problems associated with the century change.
The Company has developed a Year 2000 Action Plan to address this
concern. A project team has performed a detailed assessment of all internal
computer systems and is developing and implementing plans to either convert or
replace the software or equipment that is not year 2000 compliant. The Company
expects to complete these projects during 1999.
Year 2000 problems could affect many of our production, distribution,
financial, administrative and communication operations, as well as the
processing of customer orders. The Company's internal business system was
modified to be year 2000 compliant in the third quarter 1998. Testing and
verification of the system will be completed by December 31, 1998. In addition,
the Company has asked vendors, major customers, service suppliers,
communications providers and banks to verify their year 2000 readiness; their
system failures could have a significant impact on the Company's operations.
Action is being taken based on individual responses.
12
<PAGE> 13
YEAR 2000 COMPLIANCE (CONTINUED)
- --------------------
External and internal costs directly associated with modifying internal
use software for year 2000 compliance are expensed as incurred. As of September
30, 1998, the cost of this project is primarily attributable to internal
personnel costs which are estimated at $40. The remaining costs to fix the year
2000 problems are estimated at approximately $110 and will be incurred in the
fourth quarter 1998 and in 1999. These costs do not include normal system
replacements and upgrades. The Company does not expect year 2000 compliance
costs to have a material impact on the Company's consolidated financial position
or results of operation.
The Company is uncertain of the above expectations. For example, if the
Company is unsuccessful in identifying or fixing all year 2000 problems in the
Company's critical operations or if the Company is affected by the inability of
suppliers or major customers (such as one of our top 5 customers) to continue
operations due to such a problem, the Company's consolidated financial position
or results of operation could be materially impacted.
The total costs that the Company incurs in connection with the year 2000
problems will be influenced by the Company's ability to successfully identify
year 2000 systems' flaws, the nature and amount of programming required to fix
the affected programs, the related labor and/or consulting costs for such
remediation and the ability of third parties with whom we have business
relationships to successfully address their own year 2000 concerns. These and
other unforseen factors could have a material adverse effect on the Company's
consolidated financial position and results of operation.
Based on available information, the Company does not believe any material
exposure to significant business interruption exists as a result of Year 2000
compliance issues. Accordingly, the Company has not adopted any formal
contingency plan in the event its Year 2000 project is not completed in a timely
manner. If needed, contingency planning will be in the first half of 1999.
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 the acceptance by consumers of the Company's new products, including the
Company's line of Dirt Devil(R) Vision uprights with bagless technology, the
dependence upon the Company's ability to continue to successfully develop and
introduce innovative products and unforseen technological issues associated with
the year 2000 compliance efforts.
13
<PAGE> 14
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 27 - Financial data schedule (EDGAR filing only)
14
<PAGE> 15
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 Officer)
Date: November 12, 1998 /s/ Richard G. Vasek
------------------- -----------------------------------------------
Richard G. Vasek
Chief Financial Officer, Vice President -
Finance and Secretary (Principal Financial
Officer)
15
<PAGE> 16
INDEX TO EXHIBITS
Exhibit 27 - Financial data schedule (EDGAR filing only)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
REGISTRANTS FORM 10Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
</LEGEND>
<CIK> 0000085462
<NAME> ROYAL APPLIANCE MFG CO.
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