<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997.
[ ] 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
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(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
34-1350353
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(I.R.S. EMPLOYER IDENTIFICATION NO.)
650 ALPHA DRIVE, CLEVELAND, OHIO
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
44143
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(ZIP CODE)
(440) 449-6150
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities Registered Pursuant to Section 12(b) of the Act:
Common Shares, Without Par Value
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(Title of Each Class)
New York Stock Exchange
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(Name of Each Exchange on which Registered)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting shares held by non-affiliates of
the Registrant, as reported on the New York Stock Exchange, based upon the
closing sale price of Registrant's Common Shares on March 18, 1998 was
$110,797,473. Common Shares held by each officer and director have been excluded
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
The number of outstanding shares of the Registrant's common shares as of
March 18, 1998 was 22,027,824.
DOCUMENTS INCORPORATED BY REFERENCE
Applicable portions of the Proxy Statement for the Annual Meeting of
Shareholders to be held on Tuesday, April 28, 1998 are incorporated by reference
in Part III of this form.
The Exhibit index appears on sequential page 34.
<PAGE> 2
PART I
ITEM 1. BUSINESS
General
Royal Appliance Mfg. Co. ("Royal" or the "Company"), an Ohio corporation
with its corporate offices in the Cleveland, Ohio metropolitan area, develops,
assembles and markets a full line of cleaning products for home and commercial
use under the Dirt Devil(R) and Royal(R) brand names. In 1984, the Company
introduced the first in a line of Dirt Devil(R) hand-held vacuum cleaners, which
the Company believes has become the largest selling line of hand-held vacuum
cleaners in the United States. The Company has used the Dirt Devil(R) brand name
recognition to gain acceptance for other Dirt Devil(R) products. The Company
continues to market certain metal vacuum cleaners for home and commercial use
under the Royal(R) brand name.
The Company's business strategy is primarily focused on leveraging the well
known Dirt Devil(R) brand to new and innovative products both inside and outside
the floor care industry. The Company's goal is to expand the number, visibility
and volume of its products sold by retailers, as well as to increase the number
of major retailers carrying its products. The Company also seeks to increase the
sale of its products through independent dealers by offering dealer-exclusive
product lines and cooperative promotional programs.
The Company's marketing strategy is essential to its success. The Company
uses television, print and cooperative advertising to build and maintain brand
awareness and consumer demand, as well as to gain shelf space for its product
lines from major retailers. In order to provide the retailers with distinct
product alternatives, the Company offers different Dirt Devil(R) products in a
variety of styles and colors and with various features. Major retailers
currently carrying some portion of the Dirt Devil(R) product line include
Walmart, Kmart, Target, Service Merchandise, Sears, and Canadian Tire. The
Company also sells its Dirt Devil(R) products through independent dealers, who
primarily sell the metal line of Royal(R) vacuum cleaners.
Products
The Company sells a full line of plastic and metal vacuum cleaners. The
Company's Dirt Devil(R) vacuum cleaners are intended for home use. The Company's
metal vacuum cleaners are intended for home and commercial use.
DIRT DEVIL(R) AND PLASTIC RELATED PRODUCT LINES. The Company's primary
retail product lines are sold under the Dirt Devil(R) name. The first Dirt
Devil(R) product, the Hand Vac, a corded, hand-held vacuum cleaner, was
introduced in 1984. The Dirt Devil(R) line has since been expanded by the
introduction of upright and canister vacuum cleaners, electric brooms and mops,
and non-electric sweepers. The Dirt Devil(R) line was expanded in 1997 by the
introduction of the Dirt Devil(R) Mop Vac(R), a cordless rechargeable mop, and
the Dirt Devil(R) Swivel Glide(TM), a full size upright vacuum cleaner with
enhanced maneuverability.
During 1997, 1996, and 1995 plastic products accounted for approximately
90%, 88%, and 84%, respectively, of the Company's net sales.
METAL PRODUCT LINES. The Company has produced durable metal vacuum
cleaners since the early 1900's. Currently, the Company markets a full line of
metal upright and canister vacuum cleaners for home and commercial use. The
Company sells its metal vacuum cleaners exclusively through its network of
independent dealers. During 1997, 1996, and 1995, metal products accounted for
approximately 4%, 5%, and 6%, respectively, of the Company's net sales.
OTHER PRODUCTS. The Company sells accessories, attachments, refurbished
cleaners and replacement parts for each of its product lines. These products are
sold through retailers and dealers, and are also available directly from the
Company. During 1997, 1996, and 1995, these products accounted for approximately
6%, 7%, and 10%, respectively, of the Company's net sales.
NEW PRODUCTS. The Company introduces new products and enhances its
existing products on a regular basis for both the retail and dealer markets.
During the third quarter of 1998, the Company will introduce a full size upright
vacuum cleaner with bagless technology. This upright will be introduced via
direct response
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television until the fall of 1998 when it will be shipped to the Company's
retail customers. In order to support its product development efforts, the
Company engages in research and development activities, particularly with
respect to new product engineering. The Company's engineering and product
development expenditures were approximately $4.7 million, $3.9 million and $3.3
million in 1997, 1996 and 1995, respectively.
In addition to internally developing products, the Company may purchase
product tooling, license product designs and patents, and outsource certain
product assembly for products to be marketed under the Dirt Devil(R) brand name.
The Company may also license its trademarks and patents.
Marketing and Customers
The Company markets its Dirt Devil(R) products primarily through major
retailers, including mass market retailers (e.g., Walmart, Kmart, and Target),
catalog showrooms (e.g., Service Merchandise), warehouse clubs (e.g. Sam's
Club), regional chains and department stores. During 1997, Walmart (including
Sam's Club), Target and Kmart accounted for approximately 35.9%, 10.7% and 9.5%,
respectively, of the Company's net sales, compared to approximately 33.0%, 9.7%
and 11.3%, respectively, of the Company's net sales in 1996. These were the only
customers who accounted for approximately 10% or more of the Company's net sales
during such periods. During 1997 and 1996, the Company's net sales in the
aggregate to its five largest customers were 62.3% and 59.3%, respectively, of
its total net sales. The loss of any of these customers could have a significant
impact on the Company's operations. The Company anticipates that the significant
percentage of the Company's net sales attributable to a limited number of major
retail customers will continue. The Company believes that its relations with its
customers are good. The Company sells most of its products to retailers that are
serviced directly by the Company's internal sales staff.
Since Dirt Devil(R) products are targeted to sell to the mass market, the
Company believes that brand name recognition is critical to the success of these
products. The Company provides advertising and promotional support for its Dirt
Devil(R) products through television and cooperative advertising with retailers
and believes that these promotional activities, as well as those of its major
customers, affect brand name awareness and sales. The Company's cooperative
advertising program is established based upon planning with its mass market
retail customers. Some of the Company's advertising and promotional activities
are tied to holidays and also to specific promotional activities of retailers,
and historically have been higher during the Christmas shopping season. The
Company's advertising and promotional expenditures are not proportional to
anticipated sales. In addition, the Company has generated a small portion of its
sales from consumer direct orders using the Company's toll-free number and from
direct response television infomercials, in which consumers may order directly
from the Company.
The Company devotes considerable attention to the design and appearance of
its products and packaging in order to enhance their appeal to consumers and to
stand out among other brands on retailers' shelves. For example, Dirt Devil(R)
products sold by mass merchants are generally bright red in color. In order to
increase the presence of its Dirt Devil(R) products in major retail outlets, the
Company provides retailers with distinct product alternatives by offering its
Dirt Devil(R) product lines in a variety of styles and colors and with various
features.
The Company also strives to meet the packaging and product merchandising
needs of retailers. The Company endeavors to have sufficient quantities of
products in stock in order to process and fill orders in a timely manner. Since
orders are typically shipped within 10 days of the receipt of a purchase order,
the Company does not have a significant order backlog. The Company permits
cancellation of orders up to 72 hours prior to shipment.
The Company's line of metal vacuum cleaners is sold exclusively through a
network of over 2,500 independent vacuum cleaner dealers. As part of its effort
to support its independent dealer network, the Company has attempted to meet
independent dealers' needs for distinctive product offerings not available to
mass merchants. The Company's metal product lines are targeted at consumers and
commercial customers who are interested in purchasing more durable and higher
quality vacuum cleaners. The Company focuses its promotional activities with its
independent dealers on cooperative advertising.
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Many of the Company's independent dealers also provide warranty service for
Royal(R) and Dirt Devil(R) products. This allows the consumer to have prompt
access to local service outlets and is an important component of the Company's
efforts to be responsive to consumers. The Company's products are generally sold
with a two to six-year limited warranty.
The Company has generally accepted over-the-counter product returns from
its retail customers for any reason, reflecting the retailers' return policies.
Each of the Company's products has a toll-free number printed on it that
consumers may use to contact the Company's customer service representatives.
Through its customer service computer system, the Company can provide a prompt
response to consumer inquiries concerning the availability of its products and
service in the consumer's vicinity.
Competition
The Company's most significant competitors are Hoover and Eureka and, in
the hand-held market, Black & Decker. These competitors and several others are
subsidiaries or divisions of companies that are more diversified and have
greater financial resources than the Company. 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 has experienced heightened competition
in the upright market segment as a result of increased advertising expenditures
and new product introductions by its competitors.
Trademarks and Patents
The Company holds numerous trademarks and holds or licenses the use of
patents registered in the United States and foreign countries for various
products and processes. The Company has registered trademarks in the United
States and a number of foreign countries for the Dirt Devil(R), Royal(R) and
other names and logos, which are used in connection with the sale of its vacuum
cleaners and accessory parts. The Company considers the Dirt Devil(R) trademark
to be of considerable value and critical to its business. No challenges to its
rights to this trademark have arisen and the Company has no reason to believe
that any such challenges will arise in the future.
The Company holds or licenses the use of numerous domestic and
international patents, including design patents. The Company may also license
its trademarks and patents. The Company believes that its product lines are
generally not dependent upon any single patent or group of patents.
Seasonality
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 and the Dirt Devil(R) Broom Vac(R), 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 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.
Production
The Company currently assembles most of its products in its facilities
located in the Cleveland, Ohio metropolitan area. Unlike many of its
competitors, the Company currently does not manufacture components for its
products. Substantially all component parts for the Company's products are
manufactured by suppliers, frequently using molds and tooling owned by the
Company and built to its specifications. Since the Company's production
operations are currently limited to assembly, it believes that its fixed costs
are lower than many of its competitors. The Company also believes that this lack
of vertical integration permits it increased flexibility in the
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introduction and modification of products. The Company also outsources some or
all manufacturing of certain products.
The Company's engineering department is primarily responsible for the
design and testing of its products. The Company has computer-aided design
systems to assist its engineers in developing new products and modifying
existing products. The Company also retains outside design firms to assist its
engineers in designing new products. In addition to internally developing
products, the Company may purchase tooling, license intellectual property, or
otherwise sell products produced by others to the Company's specifications which
may be marketed under the Dirt Devil(R) brand name.
A majority of the raw materials purchased by the Company are component
parts, such as motors, bags, cords, and plastic parts, which are available from
multiple suppliers. The amount of time required by suppliers to fill orders
released by the Company varies from three to four months in the case of motors
and cords and one to four days for plastic parts. The Company does not believe
that it is dependent on any single source for any significant portion of its raw
material or component purchases. The Company believes that it has good
relationships with its suppliers and outsource manufacturers and has not
experienced any significant raw material or component shortages.
Employees
As of December 31, 1997, the Company employed approximately 670 full-time
employees, an increase of 55 employees from the prior year-end. In addition, the
Company generally utilizes temporary personnel during the period when the
Company is responding to its peak selling season. During 1997, the peak
temporary personnel level reached approximately 590. The Company's employees are
not represented by any labor union. The Company considers its relations with its
employees to be good.
Governmental Regulation
The Company's facilities are subject to numerous federal, state and local
laws and regulations designed to protect the environment from waste, emissions,
and from hazardous substances. The Company is also subject to the Federal
Occupational Safety and Health Act and other laws and regulations affecting the
safety and health of employees in the production areas of its facilities. The
Company is not a party to any investigation or litigation by the Environmental
Protection Agency or any state environment agency. The Company believes that it
is in compliance, in all material respects, with applicable environmental and
occupational safety regulations.
Business Segment Information
For description, see Note 13 of Notes to Consolidated Financial Statements.
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ITEM 2. PROPERTIES
On December 31, 1997, the Company and its subsidiaries owned or leased the
properties listed on the following table.
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE FOOTAGE
----------------- LEASE EXPIRATIONS
LOCATION AND ADDRESS OWNED LEASED (EXCLUDING RENEWALS) FUNCTION
- -------------------- ------- ------ -------------------- --------
<S> <C> <C> <C> <C>
650 Alpha Drive................. -- 57,000 01/01 Corporate Headquarters
Highland Heights, Ohio and Assembly
1340 East 289th Street.......... 106,000 -- 11/11 Assembly
Wickliffe, Ohio(1)
8120 Tyler Blvd................. 300,000 -- N/A Shipping
Mentor, Ohio
6100 Heisley Road............... 188,000 -- N/A Assembly
Mentor, Ohio(2)
855 E. Greg Street.............. -- 46,000 01/99 Shipping
Sparks, Nevada
</TABLE>
- ---------------
(1) This leased property is reflected as owned because it contains a bargain
purchase option of $1. For further description, see Note 4 of Notes to
Consolidated Financial Statements.
(2) Based upon a plan adopted in 1998, the Company is planning to sell this
facility in 1998 and will transfer employees and assembly operations into
its other Mentor, Ohio facility on Tyler Blvd.
In addition, the Company utilizes public warehouses where appropriate. The
Company believes that these arrangements are more cost effective than leasing
its own warehouses.
The Company considers its present facilities suitable and adequate for the
anticipated needs of the Company.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to all executive
officers of the Company.
<TABLE>
<CAPTION>
POSITION AND OFFICES
NAME AGE WITH THE COMPANY
- ---- --- --------------------
<S> <C> <C>
Michael J. Merriman..................... 41 Chief Executive Officer and President
Gary J. Dieterich....................... 52 Senior Vice President -- Administration
James A. Holcomb........................ 47 Vice President -- Marketing & Strategic Planning
Jeremiah J. Lynch....................... 37 Vice President -- Operations
T. Keith Moone.......................... 42 Vice President -- Sales
</TABLE>
The following is a brief account of the business experience during the past
five years of each such executive officer:
Michael J. Merriman was appointed Chief Executive Officer in July 1995,
President and Chief Operating Officer in January 1995, and Director in October
1993. From May 1992 until his appointment as President he served as Vice
President -- Finance, Treasurer and Secretary of the Company.
Gary J. Dieterich has been Senior Vice President -- Administration since
December 1994. Prior to that time, he served as the Company's Vice
President -- Information Systems from 1991 to 1994 and Director of Information
Systems from 1988 to 1991.
James A. Holcomb has been Vice President -- Marketing and Strategic
Planning since August 1994. Prior to that time, he served 2 years as Vice
President of Marketing and Strategic Planning with the Regina Company.
Jeremiah J. Lynch has been Vice President -- Operations since September
1996. Mr. Lynch joined the Company in April, 1996 as Manager -- Quality. Prior
to joining the Company, he was employed for 5 years at Little Tikes, a division
of Rubbermaid, where he held several positions including Director of Quality.
T. Keith Moone has been Vice President -- Sales since December 1995. Prior
to that he served as the Company's National Sales Manager from May
1994 -- December 1995. Prior to joining the Company, he was employed for 7 years
with Western Publishing as Director -- National Accounts.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common shares are quoted on the New York Stock Exchange
(NYSE) under the symbol RAM. The following table sets forth, for the periods
indicated, the high and low sales price for the Company's Common Shares as
reported by the New York Stock Exchange.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996
--------------- -------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
Quarters:
First.................................... 8 1/8 5 5/8 4 1/4 2 5/8
Second................................... 8 11/16 5 1/2 7 1/4 4 1/8
Third.................................... 9 1/4 8 6 7/8 4 5/8
Fourth................................... 9 5 5/8 9 6 1/8
</TABLE>
The Company has not declared or paid any cash dividends and currently
intends not to pay any cash dividends in 1998. The Board of Directors intends to
retain earnings, if any, to support the operations and growth of the business.
In addition, the Company's credit agreement permits the payment of cash
dividends up to 50% of its net income from the preceding year and stock
repurchases up to an additional $6 million as of December 31, 1997.
On March 13, 1998, there were approximately 1,300 shareholders of record of
the Company's Common Shares, as reported by National City Corporation, the
Company's Registrar and Transfer Agent, which maintains its corporate offices at
National City Center, Cleveland, Ohio 44101-0756.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company. The selected Consolidated Statements of Operations and Consolidated
Balance Sheet data for each of the five years during the period ended December
31, 1997, are derived from the audited Consolidated Financial Statements of the
Company. Prior period amounts have been restated to reflect reclassifications to
conform to a 1995 change in the valuation method of accounting for inventory
from the LIFO method to the FIFO method. The data presented below should be read
in conjunction with the Consolidated Financial Statements and notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS:
Net sales.............................. $325,417 $286,123 $270,564 $278,322 $313,899
Cost of sales.......................... 229,469 204,000 201,555 200,568 229,581
-------- -------- -------- -------- --------
Gross margin......................... 95,948 82,123 69,009 77,754 84,318
Advertising and promotion.............. 47,626 40,443 40,496 42,298 61,280
Other selling.......................... 8,448 8,977 11,898 12,914 12,530
General and administrative............. 12,549 11,515 12,971 12,309 12,893
Engineering and product development.... 4,696 3,905 3,281 2,176 2,589
Special charges........................ -- -- 16,294 -- --
-------- -------- -------- -------- --------
Income (loss) from operations........ 22,629 17,283 (15,931) 8,057 (4,974)
Interest expense....................... 1,412 2,559 4,001 4,483 5,475
Receivable securitization and other
(income) expense, net................ 1,033 (622) 311 460 1,674
-------- -------- -------- -------- --------
Income (loss) before taxes........... 20,184 15,346 (20,243) 3,114 (12,123)
Income tax expense (benefit)........... 7,777 5,910 (6,487) 1,152 (4,346)
-------- -------- -------- -------- --------
Net income (loss).................... $ 12,407 $ 9,436 $(13,756) $ 1,962 $ (7,777)
======== ======== ======== ======== ========
BASIC EARNINGS PER SHARE
Weighted average number of common
shares outstanding (in thousands).... 23,549 24,010 23,999 23,999 24,000
Earnings (loss) per share.............. $ .53 $ .39 $ (.57) $ .08 $ (.32)
DILUTED EARNINGS PER SHARE
Weighted average number of common
shares and equivalents outstanding
(in thousands)....................... 23,939 24,183 23,999 24,011 24,000
Earnings (loss) per share.............. $ .52 $ .39 $ (.57) $ .08 $ (.32)
CONSOLIDATED BALANCE SHEET DATA
(AT END OF PERIOD)
Working capital........................ $ 31,136 $ 29,638 $ 46,045 $ 51,151 $ 56,692
Total assets......................... 134,947 126,141 131,261 141,208 153,351
Long-term debt....................... 13,672 15,743 45,999 46,927 59,609
Shareholders' equity................. 60,219 56,234 46,575 60,155 58,004
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth, for the years indicated, the percentages of
net sales of certain items in the Consolidated Statements of Operations and the
percentage change in such items as compared to the indicated prior year.
<TABLE>
<CAPTION>
YEAR TO YEAR
YEAR ENDED DECEMBER 31, INCREASES (DECREASES)
------------------------- -----------------------------
1997 1996 1995 1997 VS. 1996 1996 VS. 1995
----- ----- ----- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales.............................. 100.0% 100.0% 100.0% 13.7% 5.8%
Cost of sales.......................... 70.5 71.3 74.5 12.5 1.2
----- ----- ----- ----- -----
Gross margin......................... 29.5 28.7 25.5 16.8 19.0
Advertising and promotion.............. 14.6 14.1 15.0 17.8 (.1)
Other selling.......................... 2.6 3.1 4.4 (5.9) (24.6)
General and administrative............. 3.9 4.0 4.8 9.0 (11.2)
Engineering and product development.... 1.4 1.4 1.2 20.2 19.0
Special charges........................ -- -- 6.0 -- --
----- ----- ----- ----- -----
Income (loss) from operations........ 7.0 6.1 (5.9) 30.9 N/A
Interest expense....................... .5 .9 1.5 (44.8) (36.0)
Receivable securitization and
other (income) expense, net............ .3 (.2) .1 N/A N/A
----- ----- ----- ----- -----
Income (loss) before income taxes.... 6.2% 5.4% (7.5)% 31.5% N/A%
===== ===== ===== ===== =====
</TABLE>
1997 VS. 1996
Net sales for 1997 were $325,417, an increase of 13.7% from 1996. The
overall increase in net sales was due primarily to sales of the new Dirt
Devil(R) Mop Vac(R) and the new Dirt Devil(R) Swivel Glide(TM). The increase in
net sales was partially offset by decreases in 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 for 1997 (all of which are major retailers)
accounted for approximately 62.3% of net sales as compared with approximately
59.3% in 1996. The Company believes that its dependence on sales to its largest
customers will continue. Recently, several 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 28.7% for 1996 to
29.5% in 1997. The gross margin percentage was positively affected in 1997
primarily by the introduction of new products and lower cost of certain
component parts and was partially offset by higher product returns and freight
costs as a percent of sales.
Advertising and promotion expenses for 1997 were $47,626, an increase of
17.8% from 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 launch of the Dirt Devil(R) Mop Vac(R). The Company
utilizes direct response informercials for the introduction of certain new
products. 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 for 1997 were $8,448, a decrease of 5.9% from 1996.
The largest component of other selling expenses are internal sales and marketing
personnel compensation and commissions to manufacturers' representatives. The
Company continued to reduce its dependency on outside manufacturers'
representatives in 1997, resulting in the decrease in other selling expenses.
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1997 VS. 1996 (CONTINUED)
General and administrative expenses for 1997 were $12,549, an increase of
9.0% from 1996. General and administrative expenses decreased as a percentage of
net sales from 4.0% to 3.9%. The principal components are compensation
(including benefits), insurance, travel, provision for doubtful accounts, and
professional services. The increase is principally attributable to increases in
personnel, compensation related expenses, travel and supplies. Additionally, the
1996 expenses were reduced by bad debt insurance recoveries. The increase was
partially offset by decreases in professional services.
Engineering and product development expenses for 1997 were $4,696, an
increase of 20.2% from 1996, 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 1997 was primarily due to costs associated with the three new
product introductions in 1997 and two new products scheduled for introduction in
1998.
Interest expense for 1997 was $1,412, a decrease of 44.8% from 1996. The
decrease in interest expense resulted, primarily, from lower levels of variable
rate borrowings due to increases in funds received from the revolving trade
accounts receivable securitization program and from a lower effective borrowing
rate.
Receivable securitization and other (income) expense principally reflects
the cost of the Company's trade accounts receivable securitization program and
the effect of foreign currency transaction gains or losses related primarily 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.
Due to the factors discussed above, the Company had income before income
taxes for 1997 of $20,184, as compared to income before income taxes for 1996 of
$15,346. The components of the Company's effective income tax expense rate of
38.5% are described in Note 6 of the Company's Consolidated Financial
Statements.
1996 VS. 1995
Net sales for 1996 were $286,123, an increase of 5.8% from 1995. The
overall increase in net sales was due primarily to sales of the Dirt Devil(R)
Broom Vac(R), the Dirt Devil(R) Ultra MVP(TM) and the Dirt Devil(R) Ultra Hand
Vac, which were introduced in 1996. The increase in net sales was partially
offset by decreases in unit sales of the Company's other product lines. Overall
sales to the top 5 customers for 1996 (all of which are major retailers)
accounted for approximately 59.3% of net sales as compared with approximately
56.8% in 1995.
Gross margin, as a percent of net sales, increased from 25.5% for 1995 to
28.7% in 1996. The gross margin percentage was positively affected in 1996
primarily by the introduction of new products, lower product returns, lower cost
of certain parts and the elimination of the Company's European operations.
Advertising and promotion expenses for 1996 were $40,443, comparable with
1995. Increases in domestic advertising and promotion expenditures, including
media and co-op spending, were offset by savings from the divesture of European
operations.
Other selling expenses for 1996 were $8,977, a decrease of 24.6% from 1995.
The largest component of other selling expenses are internal sales and marketing
personnel compensation and commissions to manufacturers' representatives. The
Company has reduced its dependency on outside manufacturers' representatives,
resulting in the decrease in other selling expenses. The decrease in
manufacturers' representatives commissions was partially offset by increases in
internal sales and marketing personnel.
General and administrative expenses for 1996 were $11,515, a decrease of
11.2% from 1995. General and administrative expenses decreased as a percentage
of net sales from 4.8% to 4.0%. The principal components are compensation
(including benefits), insurance, travel, provision for doubtful accounts, and
professional services. The decrease is principally attributable to the
elimination of the Company's European operations and a decrease in the provision
for doubtful accounts in 1996 as compared to 1995. In 1995, the Company
increased the provision for doubtful accounts due to concerns with respect to
the economic health of certain retail customers.
11
<PAGE> 12
1996 VS. 1995 (CONTINUED)
Engineering and product development expenses for 1996 were $3,905, an
increase of 19.0% from 1995, 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 1996 was primarily due to costs associated with the three new
product introductions in 1996 and three new products introduced in 1997.
Interest expense for 1996 was $2,559, a decrease of 36.0% from 1995. The
decrease in interest expense resulted primarily from lower levels of variable
rate borrowings to finance working capital and capital expenditures and a lower
effective borrowing rate.
Receivable securitization and other (income) expense principally reflects
the effect of foreign currency transaction gains or losses related primarily to
the Company's international assets and the cost of the Company's trade accounts
receivable securitization program. 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.
Due to the factors discussed above, the Company had income before income
taxes for 1996 of $15,346, as compared to a loss before income taxes for 1995 of
$20,243, which included special charges of $16,294.
LIQUIDITY AND CAPITAL RESOURCES
The Company has used working capital generated from operations to fund its
operations, capital expenditures and share repurchases. Working capital was
$31,136 at December 31, 1997, an increase of 5.1% over December 31, 1996 level.
Current assets increased by $5,204 reflecting in part a $7,284 increase of trade
accounts receivable and a $2,143 increase of inventories, which were partially
offset by a decrease in deferred income taxes of $4,002. Current liabilities
increased by $3,706 reflecting in part a $5,969 increase of trade accounts
payable, a $725 increase of accrued warranty and customer returns, and a $1,850
increase of accrued other, which were partially offset by decreases in accrued
advertising and promotion of $2,106 and in accrued income taxes of $2,528.
In 1997, the Company utilized $11,732 of cash for capital expenditures,
including approximately $7,713 for tooling related to the Dirt Devil(R) Swivel
Glide(TM), the Dirt Devil(R) Mop Vac(R), the Dirt Devil(R) RoomMate(TM) and a
full size upright vacuum cleaner with bagless technology.
The Company's revolving credit facility has a maturity date of April 1,
1999, and is classified as long-term at December 31, 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 approximately $40,000 as of December 31, 1997,
resulting in availability of approximately $35,100. The agreement requires
monthly payments of interest only through maturity. The facility provides for
pricing options at the bank's base lending rate and LIBOR plus a rate spread as
defined in the Agreement. At December 31, 1997, the bank's base lending rate was
8.25%. The Company's effective interest rate was 8.63% and 8.86% for 1997 and
1996, respectively. In addition, the Company pays a commitment fee at the annual
rate of .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 December 31, 1997. The revolving credit facility is
collateralized by the Company's inventories, trade accounts receivable,
equipment and general intangibles.
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 December 31, 1997, was
$40,000. The maximum amount of receivables that can be sold is seasonally
adjusted. At December, 31, 1997, the Company received
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
approximately $22,000 from the sale of trade accounts receivable. The proceeds
from the sales were used to reduce borrowings under the Company's revolving
credit facility. At December 31, 1996, the Company received approximately
$14,300 from the sale of trade accounts receivables. Costs of the program, which
primarily consist of the purchaser's financing cost of issuing commercial paper
backed by the receivables, totaled $892 and $161 in 1997 and 1996, respectively,
and have been classified as Receivable securitization and other expense in the
accompanying Consolidated Statements of Operations. The Company's effective
borrowing rate under this program was 6.64% and 6.20% for the years 1997 and
1996, respectively. 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 of up to 1,200 of its outstanding common shares. As of
December 31, 1997, the Company completed the program by repurchasing 1,200
shares for an aggregate purchase price of $8,927. In February 1998, the
Company's Board of Directors authorized another common share repurchase of up to
an additional 2,300 of its outstanding common shares. As of February 28, 1998,
the Company repurchased 883 shares for an aggregate purchase price of $5,457.
The program is scheduled to expire on March 1, 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 (UNAUDITED)
The following table presents certain unaudited consolidated quarterly
operating information for the Company and includes all adjustments that the
Company considers necessary for a fair presentation of such information for the
interim periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1997 1997 1997 1997 1996 1996 1996 1996
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales..................... $118,354 $87,375 $61,070 $58,618 $97,204 $73,688 $62,969 $52,262
Gross margin.................. 36,691 25,284 17,739 16,234 30,633 21,223 16,504 13,763
Net income.................... 6,793 4,089 919 606 4,625 3,151 1,328 332
Diluted earnings per share
(a)(b)...................... $ .29 $ .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.
(b) Earnings per share is calculated based on the diluted method explained in
Note 12 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 and Dirt Devil(R) Broom Vac(R), 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 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. The Company previously
announced it expects net sales for the first quarter 1998 to be less than the
first quarter 1997. The Company expects the decline in first quarter 1998 net
sales to result in a net loss estimated at between $2 million to $3 million,
however, the Company expects to remain profitable for the full year 1998.
13
<PAGE> 14
THE YEAR 2000 ISSUE
The Company has established processes to evaluate and manage the risks and
costs associated with ensuring its software and application systems will
properly recognize and process the year 2000 and beyond. Based upon initial
assessments, the Company expects its systems will be Year 2000 compliant by 1999
at a cost that will not be material to its financial statements. The Company is
also communicating with its suppliers, customers, financial institutions, and
others with which it does business to coordinate the Year 2000 conversion
process. While these efforts will involve additional costs, the Company
believes, based on available information, that it will be able to manage its
total Year 2000 transition without any material adverse effect on its business
operations, products or financial prospects.
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 and several others are subsidiaries or divisions 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.
ACCOUNTING STANDARDS
The Company will be required to implement Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income, in the fourth
quarter of 1998. The Company expects the implementation of SFAS No. 130 will not
have a material impact on its consolidated financial position and results of
operations.
The Company will also 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 adopted SFAS No. 128, Earnings Per Share, in the fourth quarter
of 1997. The impact of implementing SFAS No. 128 is discussed in Note 12 to the
Consolidated Financial Statements.
FORWARD LOOKING STATEMENTS
Forward-looking statements in this Form 10-K 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, and the dependence upon the Company's
ability to continue to successfully develop and introduce innovative products.
14
<PAGE> 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Royal Appliance Mfg. Co.
We have audited the consolidated financial statements and the financial
statement schedule of Royal Appliance Mfg. Co. and Subsidiaries listed in the
index on page 31 of this Form 10-K. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Royal Appliance
Mfg. Co. and Subsidiaries as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
Coopers & Lybrand L.L.P.
Cleveland, Ohio
February 13, 1998
15
<PAGE> 16
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 1,355 $ 1,001
Trade accounts receivable, less allowance for doubtful
accounts of $1,400 and $1,350 at December 31, 1997 and
1996, respectively...................................... 47,045 39,761
Inventories............................................... 36,195 34,052
Deferred income taxes..................................... 2,550 6,552
Prepaid expenses and other................................ 1,861 2,436
-------- --------
Total current assets.................................... 89,006 83,802
-------- --------
Property, plant and equipment, at cost:
Land...................................................... 2,356 2,356
Buildings................................................. 13,117 13,117
Molds, tooling, and equipment............................. 58,236 44,716
Furniture and office equipment............................ 6,068 5,221
Assets under capital leases............................... 4,613 4,810
Leasehold improvements and other.......................... 3,049 2,717
-------- --------
87,439 72,937
Less accumulated depreciation and amortization.......... 44,547 35,654
-------- --------
42,892 37,283
-------- --------
Tooling deposits............................................ 1,146 3,962
Other....................................................... 1,903 1,094
-------- --------
Total assets............................................ $134,947 $126,141
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 26,648 $ 20,679
Accrued liabilities:
Advertising and promotion............................... 9,576 11,682
Salaries, benefits and payroll taxes.................... 5,750 5,980
Warranty and customer returns........................... 8,700 7,975
Income taxes............................................ 975 3,503
Other................................................... 5,530 3,680
Current portions of capital lease obligations and notes
payable................................................... 691 665
-------- --------
Total current liabilities............................... 57,870 54,164
-------- --------
Revolving credit agreement.................................. 1,473 2,886
Capitalized lease obligations, less current portion......... 3,101 3,307
Notes payable, less current portion......................... 9,098 9,550
-------- --------
Total long-term debt.................................... 13,672 15,743
-------- --------
Deferred income taxes....................................... 3,186 --
Total liabilities....................................... 74,728 69,907
-------- --------
Commitments and contingencies (Notes 4 and 5)............... -- --
Shareholders' equity:
Serial preferred shares; authorized -- 1,000,000 shares;
none issued and outstanding............................. -- --
Common shares, at stated value; authorized -- 101,000,000
shares; issued and outstanding -- 25,311,724 and
25,231,000 at December 31, 1997 and 1996,
respectively............................................ 211 210
Additional paid-in capital................................ 41,897 41,500
Retained earnings......................................... 40,018 27,611
Cumulative translation adjustment......................... -- (107)
-------- --------
82,126 69,214
Less treasury shares, at cost (2,401,000 and 1,201,000
shares at December 31, 1997 and 1996, respectively)..... (21,907) (12,980)
-------- --------
Total shareholders' equity.............................. 60,219 56,234
-------- --------
Total liabilities and shareholders' equity.............. $134,947 $126,141
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE> 17
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales............................................ $ 325,417 $ 286,123 $ 270,564
Cost of sales........................................ 229,469 204,000 201,555
---------- ---------- ----------
Gross margin....................................... 95,948 82,123 69,009
Advertising and promotion............................ 47,626 40,443 40,496
Other selling........................................ 8,448 8,977 11,898
General and administrative........................... 12,549 11,515 12,971
Engineering and product development.................. 4,696 3,905 3,281
Special charges...................................... -- -- 16,294
---------- ---------- ----------
Income (loss) from operations...................... 22,629 17,283 (15,931)
Interest expense, net................................ 1,412 2,559 4,001
Receivable securitization and other (income) expense,
net................................................ 1,033 (622) 311
---------- ---------- ----------
Income (loss) before income taxes.................. 20,184 15,346 (20,243)
Income tax expense (benefit)......................... 7,777 5,910 (6,487)
---------- ---------- ----------
Net income (loss).................................. $ 12,407 $ 9,436 $ (13,756)
========== ========== ==========
BASIC
Weighted average number of common shares
outstanding (in thousands)...................... 23,549 24,010 23,999
Earnings (loss) per share.......................... $ .53 $ .39 $ (.57)
DILUTED
Weighted average number of common shares and
equivalents outstanding (in thousands).......... 23,939 24,183 23,999
Earnings (loss) per share.......................... $ .52 $ .39 $ (.57)
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 18
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
COMMON SHARES ADDITIONAL CUMULATIVE TREASURY SHARES TOTAL
------------------- PAID-IN RETAINED TRANSLATION -------------------- SHAREHOLDERS'
NUMBER AMOUNT CAPITAL EARNINGS ADJUSTMENT NUMBER AMOUNT EQUITY
---------- ------ ---------- -------- ----------- --------- -------- -------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994... 25,200,000 $210 $41,525 $31,931 $(531) 1,201,000 $(12,980) $ 60,155
Translation adjustment....... 118 118
Compensatory effect of stock
options.................... 58 58
Net loss..................... (13,756) (13,756)
---------- ---- ------- ------- ----- --------- -------- --------
Balance at December 31, 1995... 25,200,000 210 41,583 18,175 (413) 1,201,000 (12,980) 46,575
Translation adjustment....... 306 306
Compensatory effect of stock
options.................... (199) (199)
Shares issued from stock
option plan................ 31,100 116 116
Net income................... 9,436 9,436
---------- ---- ------- ------- ----- --------- -------- --------
Balance at December 31, 1996... 25,231,100 210 41,500 27,611 (107) 1,201,000 (12,980) 56,234
Translation adjustment....... 107 107
Compensatory effect of stock
options.................... 81 81
Shares issued from stock
option plan................ 80,624 1 316 317
Purchase of treasury
shares..................... 1,200,000 (8,927) (8,927)
Net income................... 12,407 12,407
---------- ---- ------- ------- ----- --------- -------- --------
Balance at December 31, 1997... 25,311,724 $211 $41,897 $40,018 $ -- 2,401,000 $(21,907) $ 60,219
========== ==== ======= ======= ===== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 19
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 12,407 $ 9,436 $(13,756)
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization........................... 9,407 8,719 11,586
Compensatory effect of stock options.................... 81 (199) 58
(Gain) loss on disposal of tooling, property and
equipment............................................. -- (467) 9,170
Deferred income taxes................................... 3,186 -- --
(Increase) decrease in assets:
Trade accounts receivable, net............................ (7,284) 3,797 1,787
Inventories............................................... (2,143) (5,644) 268
Refundable and accrued income taxes....................... 1,474 8,573 (7,248)
Prepaid expenses and other................................ 575 (1,288) 1,030
Other..................................................... (1,170) (305) (67)
Increase (decrease) in liabilities:
Trade accounts payable.................................... 5,969 4,587 5,988
Accrued advertising and promotion......................... (2,106) 4,429 (1,731)
Accrued salaries, benefits, and payroll taxes............. (230) 2,924 46
Accrued warranty and customer returns..................... 725 375 100
Accrued other............................................. 1,850 (47) 1,783
-------- -------- --------
Total adjustments....................................... 10,334 25,454 22,770
-------- -------- --------
Net cash from operating activities...................... 22,741 34,890 9,014
-------- -------- --------
Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment,
net..................................................... (14,548) (9,677) (8,872)
Proceeds from sale of plants and equipment................ -- 2,237 --
Decrease (increase) in tooling deposits................... 2,816 85 (2,634)
Cash proceeds from sale of European operations............ -- -- 3,548
-------- -------- --------
Net cash from investing activities...................... (11,732) (7,355) (7,958)
-------- -------- --------
Cash flows from financing activities:
Payments on bank debt, net................................ (1,413) (25,953) (11,179)
Proceeds from notes payable............................... -- -- 10,450
Payments on notes payable................................. (418) (398) (45)
Proceeds from exercise of stock options................... 317 116 --
Payments on capital lease obligations..................... (214) (293) (325)
Purchase of treasury shares............................... (8,927) -- --
-------- -------- --------
Net cash from financing activities...................... (10,655) (26,528) (1,099)
-------- -------- --------
Effect of exchange rate changes on cash..................... -- (6) 43
-------- -------- --------
Net increase in cash........................................ 354 1,001 --
Cash at beginning of year................................... 1,001 -- --
-------- -------- --------
Cash at end of year......................................... $ 1,355 $ 1,001 $ --
======== ======== ========
Supplemental disclosure of cash flow information:
Cash payments for:
Interest.................................................. $ 1,689 $ 3,018 $ 4,378
======== ======== ========
Income taxes, net of refunds.............................. $ 3,117 $ (2,663) $ 761
======== ======== ========
Supplemental schedule of noncash investing and financing
activities:
Exchange of certain tooling for the forgiveness of related
note payable............................................ $ -- $ -- $ 586
======== ======== ========
Assignment of capital lease obligation to buyer........... $ -- $ 3,690 $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE> 20
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS -- Royal Appliance Mfg. Co. ("Royal" or the
"Company"), an Ohio corporation with its corporate offices in the Cleveland,
Ohio metropolitan area, develops, assembles and markets a full line of cleaning
products for home and commercial use under the Dirt Devil(R) and Royal(R) brand
names. In 1984, the Company introduced the first in a line of Dirt Devil(R)
hand-held vacuum cleaners, which the Company believes has become the largest
selling line of hand-held vacuum cleaners in the United States. The Company has
used the Dirt Devil(R) brand name recognition to gain acceptance for other Dirt
Devil(R) products.
The following is a summary of significant policies followed in the
preparation of the accompanying Consolidated Financial Statements.
BASIS OF PRESENTATION -- The Consolidated Financial Statements include the
accounts of the Company and its wholly owned subsidiaries after elimination of
all intercompany accounts and transactions. The companies are hereinafter
referred to as "Royal" or the "Company".
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.
Net income (loss) per common 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.
The Company's revenue recognition policy is to recognize revenues when
products are shipped.
The Company's return policy is to replace, repair or issue credit for
product under warranty. Returns received during the current period are expensed
as received and a provision is provided for future returns based on current
shipments. All sales are final upon shipment of goods to the customers.
Foreign operations are conducted in their local currency. Assets and
liabilities of Royal's international operations are translated at current
exchange rates, and income and expenses are translated using weighted average
exchange rates. The effects of these translation adjustments are reported as a
separate component of shareholders' equity. The net effect of currency gains and
losses realized on business transactions is included in the determination of net
income (loss).
ADVERTISING AND PROMOTION -- Cost incurred for producing and communicating
advertising are expensed during the period incurred, including cost incurred
under the Company's cooperative advertising program.
INVENTORIES -- Inventory is stated at the lower of cost or market. In
September 1995, the Company changed its method of accounting for domestic
inventories from the last-in, first-out (LIFO) method to the first-in, first-out
(FIFO) method. Management believes the FIFO method will provide a better
matching of current costs and current revenues due to past and future decreases
in costs and changes in the mix of products as the Company's ability to
introduce new products into the marketplace increases.
Inventories at December 31 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Finished goods............................................. $23,319 $23,177
Work in process and component parts........................ 12,876 10,875
------- -------
$36,195 $34,052
======= =======
</TABLE>
20
<PAGE> 21
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. ACCOUNTING POLICIES: (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT -- the Company capitalizes as additions to
property, plant and equipment expenditures at cost for molds, tooling, land,
buildings, equipment, furniture, and leasehold improvements. Expenditures for
maintenance and repairs are charged to operating expense as incurred. The asset
and related accumulated depreciation or amortization accounts are adjusted to
reflect retirements and disposals and the resulting gain or loss is included in
the determination of net income (loss).
Plant and equipment are depreciated over the estimated useful lives of the
respective classes of assets. Leasehold improvements and assets held under
capital leases are amortized over their respective lease terms. Accumulated
amortization on assets under capital leases totaled $2,120 and $1,902 at
December 31, 1997 and 1996, respectively.
Depreciation for financial reporting purposes is computed on the
straight-line method using the following depreciable lives:
<TABLE>
<S> <C>
Buildings................................................... 40 years
Buildings under capital lease............................... 20 years
Molds, tooling, and equipment............................... 3-10 years
Furniture and office equipment.............................. 3-10 years
Vehicles.................................................... 3 years
</TABLE>
Accelerated methods as permitted by the applicable tax law are used for tax
reporting purpose.
The Company reviews for impairment whenever events or changes in
circumstances indicates that the carrying amount of property, plant and
equipment may not be recoverable under the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long Lived Assets to be Disposed Of.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- Financial instruments consist of a
revolving credit agreement and notes payable and are carried at amounts which
approximate fair value.
NEW ACCOUNTING PRONOUNCEMENTS -- The Company will be required to implement
SFAS No. 130, Reporting Comprehensive Income, in the fourth quarter of 1998. The
Company expects the implementation of SFAS No. 130 will not have a material
impact on its consolidated financial position and results of operations.
The Company will also 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 adopted SFAS No. 128, Earnings Per Share, in the fourth quarter
of 1997. The impact of implementing SFAS No. 128 is discussed in Note 12 to the
Consolidated Financial Statements.
2. SPECIAL CHARGES:
In 1995, pursuant to a board approved plan, the Company recorded special
charges of $16,294, primarily related to losses from the disposal of certain
inventory, molds and tooling and other intangibles primarily resulting from a
decision to refocus the Company's primary operating and marketing efforts on the
North American market. The special charges included a $11,567 write-down to the
net realizable value of certain molds, tooling, inventory and other assets
disposed of or held for sale, $2,598 restructuring charge related to the
Company's sale of its European operations, and $2,129 of special charges related
to losses from the disposal of certain inventory and intangibles resulting from
discontinuing a product line and executive severance. The Company completed the
sale of its European operations in 1995 and liquidated its European real estate
in 1996.
21
<PAGE> 22
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SPECIAL CHARGES: (CONTINUED)
Of the initial special charges, $27 remained as a reserve as of December
31, 1997. The balance of the reserve is primarily comprised of warranty
obligations and other related charges. A summary of the special charges reserve
account is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
----- ------ --------
<S> <C> <C> <C>
Reserve balance at beginning of year.................... $ 369 $1,548 $ --
Expenses charged to operations........................ -- -- 16,294
Realized loss on disposal of property, equipment and
inventories........................................ -- (666) (12,372)
Severance and other cash outflows..................... (342) (513) (2,374)
----- ------ --------
Reserve balance at end of year.......................... $ 27 $ 369 $ 1,548
===== ====== ========
</TABLE>
3. DEBT:
The Company's revolving credit facility has a maturity date of April 1,
1999, and is classified as long-term at December 31, 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 approximately $40,000 as of December 31, 1997,
resulting in availability of approximately $35,100. The agreement requires
monthly payments of interest only through maturity. The facility provides for
pricing options at the bank's base lending rate and LIBOR plus a rate spread as
defined in the Agreement. At December 31, 1997, the bank's base lending rate was
8.25%. The Company's effective interest rate was 8.63% and 8.86% for 1997 and
1996, respectively. In addition, the Company pays a commitment fee at the annual
rate of .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 December 31, 1997. The revolving credit facility is
collateralized by the Company's inventories, trade accounts receivable,
equipment and general intangibles.
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 December 31, 1997, was
$40,000. The maximum amount of receivables that can be sold is seasonally
adjusted. At December, 31, 1997, the Company received approximately $22,000 from
the sale of trade accounts receivable. The proceeds from the sales were used to
reduce borrowings under the Company's revolving credit facility. At December 31,
1996, the Company received approximately $14,300 from the sale of trade accounts
receivables. Costs of the program, which primarily consist of the purchaser's
financing cost of issuing commercial paper backed by the receivables, totaled
$892 and $161 in 1997 and 1996, respectively, and have been classified as Other
expense in the accompanying Consolidated Statements of Operations. The Company's
effective borrowing rate under this program was 6.64% and 6.20% for the years
1997 and 1996, respectively. 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
$4,024. 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 $3,467 is due. Interest is at a 2.35%
spread above the 30 day commercial paper rate. At December 31, 1997, the 30 day
commercial paper rate was 5.53%. The carrying amount of the mortgage note
payable approximates fair value.
22
<PAGE> 23
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. DEBT: (CONTINUED)
The Company has a 7.9% fixed rate mortgage note payable in the amount of
$5,526. 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.
Aggregate maturities of the notes payable and revolving credit facility at
December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998...................................... $ 452
1999...................................... 1,962
2000...................................... 8,609
-------
$11,023
=======
</TABLE>
4. LEASES:
Royal leases various facilities, equipment and vehicles under capital and
operating lease agreements. Operating lease payments totaled $579, $677 and
$1,255 for the years ended December 31, 1997, 1996, and 1995, respectively.
Minimum commitments under all capital and operating leases at December 31,
1997 are as follows:
<TABLE>
<CAPTION>
YEAR CAPITAL OPERATING
- ---- ------- ---------
<S> <C> <C>
1998............................................. $ 567 $383
1999............................................. 565 283
2000............................................. 565 167
2001............................................. 325 59
2002............................................. 304 15
Thereafter....................................... 2,733 15
------ ----
Total minimum lease payments..................... 5,059 $922
====
Less amount representing interest................ 1,719
------
Total present value of capital obligation........ 3,340
Less current portion............................. 239
------
Long-term obligation under capital leases........ $3,101
======
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
At December 31, 1997, the Company estimates having contractual commitments
for future advertising and promotional expense of approximately $10,100
including commitments for television advertising through December 31, 1998.
Other contractual commitments for items in the normal course of business total
approximately $2,000.
The Company is self-insured with respect to workers' compensation benefits
in Ohio and carries excess workers' compensation insurance covering aggregate
claims exceeding $350 per occurrence.
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.
23
<PAGE> 24
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES:
The income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -------
<S> <C> <C> <C>
Current (Refundable)
Federal................................................ $ 399 $4,643 $(4,601)
State and local........................................ 190 589 10
Deferred (benefit)....................................... 7,188 678 (1,896)
------ ------ -------
Total.................................................... $7,777 $5,910 $(6,487)
====== ====== =======
</TABLE>
Deferred income taxes reflect the impact for financial statement reporting
purposes of temporary differences between the financial statement carrying
amounts and tax basis of assets and liabilities. At December 31, 1997 and 1996,
the components of the net deferred tax (liability) asset were as follows:
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Deferred tax assets:
Warranty and customer returns............................. $ 4,444 $3,694
Bad debt reserve.......................................... 616 527
Inventory basis difference................................ 634 590
Accrued vacation, salaries and wages...................... 379 398
State and local taxes..................................... 729 756
Basis difference in fixed and intangible assets........... -- 1,037
Accrued advertising....................................... 22 --
Self insurance reserves................................... 315 137
Deferred compensation plan................................ 616 --
Other..................................................... 247 191
Deferred tax liabilities:
Accounts receivable mark to market........................ (3,631) --
Basis difference in fixed and intangible assets........... (4,286) --
State and local taxes..................................... (707) (521)
Other..................................................... (14) (257)
------- ------
Net deferred tax (liability) asset.......................... $ (636) $6,552
======= ======
</TABLE>
As of December 31, 1997, the Company has state and local tax net operating
loss carryforward tax benefits of approximately $505 which will substantially
expire between 2008 and 2010.
24
<PAGE> 25
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES: (CONTINUED)
The differences between income taxes at the statutory federal income tax
rate of 34% and those reported in the Consolidated Statements of Operations are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
% OF PRE-TAX % OF PRE-TAX % OF PRE-TAX
1997 INCOME 1996 INCOME 1995 LOSS
------ ------------ ------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Tax expense (benefit) at statutory
rate............................. $6,862 34.0% $5,218 34.0% $(6,883) (34.0)%
Capital (gain) losses on
disposition of foreign
subsidiaries and other non
deductible expenses.............. (93) (.5) 87 .6 461 2.3
State and local income taxes, net
of federal benefit............... 1,008 5.0 257 1.7 (400) (1.9)
Federal surtax on income over $10
million.......................... -- -- 70 .5 -- --
Other, net......................... -- -- 278 1.7 335 1.6
------ ---- ------ ---- ------- -----
$7,777 38.5% $5,910 38.5% $(6,487) (32.0)%
====== ==== ====== ==== ======= =====
</TABLE>
7. MAJOR CUSTOMERS:
Royal's two largest customers represented approximately 35.9% and 10.7% of
total net sales in 1997. The Company's two largest customers represented
approximately 33.0% and 11.3% in 1996 and 28.6% and 15.5% of total net sales in
1995. Additionally, a significant concentration of Royal's business activity is
with major domestic mass market retailers whose ability to meet their financial
obligations with Royal is dependent on economic conditions germane to the retail
industry. During recent years, several 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.
The Company provides credit, in the normal course of business, to the
retail industry which includes mass market retailers, warehouse clubs, and
independent dealers. The Company performs ongoing credit evaluations of its
customers and establishes appropriate allowances for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends and other information.
8. STOCK OPTIONS:
Under the terms of the Company's stock option plans for employees, outside
directors and consultants, all outstanding options have been granted at prices
at least equal to the then current market value on the date of grant, except for
50,000 options granted to a consultant below market value in November, 1996. The
compensation element of these 50,000 options is being recognized as compensation
expense over the two year vesting period. Certain stock options granted become
exercisable in cumulative 20% installments, commencing one year from date of
grant with full vesting occurring on the fifth anniversary date, and expire in
ten years, subject to earlier termination in certain events related to
termination of employment. Other stock options granted vest at the end of five
years ("5 year cliff vesting") and expire in six years, subject to earlier
termination in certain events related to termination of employment. Vesting may
be accelerated in certain events relating to change of the Company's ownership.
25
<PAGE> 26
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTIONS: (CONTINUED)
The following summarizes the changes in the number of Common Shares under
option:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Options outstanding at beginning
of the year.............................. 2,486 1,141 1,051
Options granted during the year............ 173 1,639 446
Options exercised during the year.......... (81) (31) --
Options canceled during the year........... (276) (263) (356)
--------------- --------------- ---------------
Options outstanding at end of year......... 2,302 2,486 1,141
=============== =============== ===============
Options exercisable at end of the year..... 528 439 326
Option price range per share............... $3.00 to $10.25 $3.00 to $10.25 $3.25 to $10.00
</TABLE>
The 528 exercisable options at December 31, 1997, are exercisable at an
average exercise price of $5.22. The Company's current option plans, which
provide for a total of 3,060 options, have 646 options remaining for future
grants at December 31, 1997.
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation"
in fiscal 1996. As permitted by SFAS No. 123, the Company continues to measure
compensation cost in accordance with Accounting Principles Board ("APB") Opinion
No. 25 and related interpretations in accounting for its plans. Had compensation
cost for the Company's stock-based compensation plans been determined based on
the fair value at the grant dates for awards under these plans consistent with
the method of SFAS No. 123, the Company's net income (loss) and earnings (loss)
per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C> <C>
Net income (loss) (in thousands) As reported.................... $12,407 $ 9,436 $(13,756)
Pro forma...................... $12,195 $ 9,100 $(13,817)
Basic earnings (loss) per share As reported.................... $ .53 $ .39 $ (.57)
Pro forma...................... $ .52 $ .38 $ (.58)
Diluted earnings (loss) per share As reported.................... $ .52 $ .39 $ (.57)
Pro forma...................... $ .51 $ .38 $ (.58)
</TABLE>
The effect on net income and earnings per share is not expected to be
indicative of the effects on net income and earnings per share in future years.
Since the SFAS No. 123 method of accounting has not been applied to options
granted prior to 1995, the resulting pro forma compensation costs may not be
representative of those to be expected in future years. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Expected volatility............................. 34.7% 37.8% 38.1%
Risk-free interest rate......................... 5.83% 6.36% 5.87%
Expected life of options in years............... 7 years 7 years 7 years
Expected dividend yield......................... 0% 0% 0%
</TABLE>
During fiscal years 1997, 1996 and 1995 the weighted average grant-date
fair value of options granted was $3.16, $1.16, and $1.67 per share,
respectively.
26
<PAGE> 27
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SHAREHOLDER RIGHTS PLAN:
The Company has a Shareholder Rights Plan which provides that under certain
circumstances each Right will entitle the shareholder to purchase one
one-hundredth of a share of Series A Participating Preferred Stock at an
exercise price of $40. Upon the occurrence of certain other events, including if
a "Person" becomes the beneficial owner of more than 20% of the outstanding
Common Shares or an "Adverse Person" becomes the beneficial owner of 10% of the
outstanding Common Shares, the holder of a Right will have the right to receive,
upon exercise, Common Shares of the Company, or Common Stock of the acquirer,
having a value equal to two times the exercise price of the Right. The
Shareholder Rights Plan is designed to deter abusive market manipulation or
unfair takeover tactics and to prevent an acquirer from gaining control of the
Company without offering a fair price to all shareholders. The Rights expire on
November 2, 2003, unless redeemed prior to that date. The Rights can be redeemed
at a price of $.01 per Right.
10. BENEFIT PLANS:
The Company sponsors a 401(k) defined contribution plan which covers
substantially all of its employees who have satisfied the plan's eligibility
requirements. Participants may contribute to the plan by voluntarily reducing
their salary up to a maximum of 15% of qualified compensation subject to annual
I.R.S. limits. All contributions vest immediately. For 1997, the matching
contribution was 100%, up to the first 2% of qualified compensation, and 50% of
the next 4% of such compensation. The Company has also made discretionary
contributions to the plan. The Company's provisions for matching and
discretionary contributions totaled approximately $942, $797 and $754 for the
years ended December 31, 1997, 1996 and 1995, respectively.
Voluntary after-tax contributions and certain rollover contributions are
also permitted.
During 1996, the Company established a voluntary, non-qualified deferred
compensation plan for key executives. The Company has recorded a deferred
compensation liability of $1,350 as of December 31, 1997.
The Company does not offer any other post-retirement benefits, accordingly,
it is not subject to the provisions of Statement of Financial Accounting
Standards "SFAS" No. 106, "Employers' Accounting for Post Retirement Benefits
Other Than Pensions."
11. 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 December 31, 1997, the Company completed the program
repurchasing 1,200 shares for an aggregate purchase price of $8,927. In February
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 2,300 of its
outstanding common shares. The program is scheduled to expire on March 1, 1999.
27
<PAGE> 28
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. EARNINGS PER SHARE:
In the fourth quarter of 1997, the Company adopted 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 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>
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
Net Income (loss)........................................... $ 12,407 $ 9,436 $(13,756)
BASIC:
Common shares outstanding, net of treasury shares,
beginning of year...................................... 24,030 23,999 23,999
Weighted average common shares issued during year......... 36 11 --
Weighted average treasury shares repurchased during
year................................................... (517) -- --
-------- ------- --------
Weighted average common shares outstanding, net of treasury
shares, end of year....................................... 23,549 24,010 23,999
======== ======= ========
Net income (loss) per common share.......................... $ .53 $ .39 $ (.57)
======== ======= ========
DILUTED:
Common shares outstanding, net of treasury shares,
beginning of year...................................... 24,030 23,999 23,999
Weighted average common shares issued during year......... 36 11 --
Weighted average common share equivalents................. 390 173 --
Weighted average treasury shares repurchased during
year................................................... (517) -- --
-------- ------- --------
Weighted average treasury shares outstanding, net of
treasury shares, end of year.............................. 23,939 24,183 23,999
======== ======= ========
Net income (loss) per common share.......................... $ .52 $ .39 $ (.57)
======== ======= ========
</TABLE>
28
<PAGE> 29
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. BUSINESS SEGMENT INFORMATION:
Prior to the sale of the Company's European operations in the fourth
quarter of 1995 (Note 2), sales and marketing operations of the Company were
principally located in both the United States and Europe. All Company operated
assembly facilities have been and are located in the United States. Included in
the amounts disclosed for the United States are amounts attributable to all
North American countries. Included in the Europe loss from operations is
approximately $1,800 of advertising, promotion and certain selling expenditures
for 1995, which represents the parent Company's funding of market penetration,
including television advertising for the European market.
BUSINESS SEGMENT INFORMATION
BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- ---------
<S> <C> <C> <C>
Net sales
United States....................................... $ 325,417(A) $286,123(A) $ 259,727
Europe.............................................. -- -- 10,837
--------- -------- ---------
$ 325,417 $286,123 $ 270,564
========= ======== =========
Income (loss) from operations
United States....................................... $ 22,629 $ 17,283 $ (14,664)(B)
Europe.............................................. -- -- (1,267)
--------- -------- ---------
$ 22,629 $ 17,283 $ (15,931)
========= ======== =========
Identifiable assets
United States....................................... $ 134,947 $126,141 $ 128,287
Europe.............................................. -- -- 2,974
--------- -------- ---------
$ 134,947 $126,141 $ 131,261
========= ======== =========
Capital expenditures (includes cash and noncash
acquisitions)
United States.................................... $ 11,732 $ 9,592 $ 10,691
Europe........................................... -- -- 815
--------- -------- ---------
$ 11,732 $ 9,592 $ 11,506
========= ======== =========
Depreciation and amortization expense
United States.................................... $ 9,407 $ 8,719 $ 11,398
Europe........................................... -- -- 188
--------- -------- ---------
$ 9,407 $ 8,719 $ 11,586
========= ======== =========
</TABLE>
- ---------------
(A) Includes export sales originating from the United States in 1997 and 1996.
(B) Amount includes special charges of $16,294.
29
<PAGE> 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item with respect to Executive Officers of the
Company is set forth in Part I of this Annual Report on Form 10-K. Information
required by this Item with respect to members of the Board of Directors of the
Company contained under the headings "Nominees for Terms Expiring in 2000" and
"Directors whose Terms Expire in 1999" in the Company's Proxy Statement, dated
March 27, 1998, is incorporated herein by reference.
Information required by this Item with respect to compliance with Section
16 of the Exchange Act contained under the heading "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement, dated March
27, 1998, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item relating to executive compensation
contained under the headings "Compensation of Directors", "Executive Officers'
Compensation", "Options Grants in 1997", "Aggregated Option Exercises in 1997
and Year-End Option Values", and "Change-in-Control and Other Employment
Arrangements" in the Company's Proxy Statement, dated March 27, 1998, is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item contained under the headings
"Security Ownership of Certain Beneficial Owners" and "Security Ownership of
Management", in the Company's Proxy Statement, dated March 27, 1998, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
30
<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
----
<C> <C> <S> <C>
(a) (1) FINANCIAL STATEMENTS
Report of Independent Accountants........................... 15
Consolidated Balance Sheets at December 31, 1997 and 1996... 16
Consolidated Statements of Operations -- Years Ended
December 31, 1997, 1996 and 1995............................ 17
Consolidated Statement of Shareholders' Equity -- Years
Ended December 31, 1997, 1996 and 1995...................... 18
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1997, 1996 and 1995............................ 19
Notes to Consolidated Financial Statements.................. 20-29
(2) FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule of
Royal Appliance Mfg. Co. and Subsidiaries is included in
Item 14(d):
Schedule II -- Valuation and Qualifying Accounts............ 33
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions, are inapplicable, or the information has been
included in the Notes to Consolidated Financial Statements
(3) EXHIBITS
The exhibits filed herewith are set forth on the Index to
Exhibits filed as part of this report....................... 34-35
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1997........................................... --
</TABLE>
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on this 18th day of
March, 1998.
ROYAL APPLIANCE MFG. CO.
Registrant
By /s/ Michael J. Merriman
--------------------------------------
Michael J. Merriman
Chief Executive Officer and President
Date March 18, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated, as of the 18th day of March 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Michael J. Merriman Chief Executive Officer, President and
- ----------------------------------------------------- Director (Principal Executive and Financial
Michael J. Merriman Officer)
/s/ Richard G. Vasek Controller, Secretary and Chief Accounting
- ----------------------------------------------------- Officer (Principal Accounting Officer)
Richard G. Vasek
R. Louis Schneeberger* Chairman of the Board
- -----------------------------------------------------
R. Louis Schneeberger
Jack Kahl Jr.* Director
- -----------------------------------------------------
Jack Kahl Jr.
E. Patrick Nalley* Director
- -----------------------------------------------------
E. Patrick Nalley
J.B. Richey* Director
- -----------------------------------------------------
J.B. Richey
John P. Rochon* Director
- -----------------------------------------------------
John P. Rochon
</TABLE>
* The undersigned, by signing his name hereto, does hereby sign this Form 10-K
on behalf of Royal Appliance Mfg. Co., and the above named directors and
officers of Royal Appliance Mfg. Co., pursuant to a Power of Attorney executed
on behalf of Royal Appliance Mfg. Co. and each of such directors and officers
and which has been filed with the Securities and Exchange Commission.
/s/ Michael J. Merriman
--------------------------------------
Michael J. Merriman, Chief Executive
Officer,
President and Director, and
Attorney-in-Fact
32
<PAGE> 33
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS CHARGED TO BALANCE AT
DESCRIPTION BEGINNING OF YEAR EXPENSES AND COSTS DEDUCTIONS END OF YEAR
----------- ----------------- -------------------- ---------- -----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year Ended
December 31, 1995...................... $ 928 $1,062 $ (10)(A) $2,000
Year Ended
December 31, 1996...................... $2,000 $ 144 $ 794(A) $1,350
Year Ended
December 31, 1997...................... $1,350 $ 225 $ 175(A) $1,400
INVENTORY RESERVE:
Year Ended
December 31, 1995...................... $2,157 $2,434(B) $2,902(C) $1,689
Year Ended
December 31, 1996...................... $1,689 $ 760(B) $1,048(C) $1,401
Year Ended
December 31, 1997...................... $1,401 $ 305(B) $ 712(C) $ 994
</TABLE>
- ---------------
Note: (A) Uncollectible accounts charged off, less recoveries.
(B) Reserve for product model changes.
(C) Disposal of obsolete inventory.
33
<PAGE> 34
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
INDEX TO EXHIBITS
FOR FORM 10-K
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- -------- -----------
<C> <S>
3(a) Articles of Incorporation, amended and restated May 4, 1992,
filed as Exhibit 3.1 of Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1992, filed with
the Commission on August 13, 1992, and incorporated herein
by reference.
3(b) Code of Regulations, amended and restated May 4, 1992, filed
as Exhibit 3.2 of Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1992, filed with the
Commission on August 13, 1992, incorporated herein by
reference.
3(c) Amendment to Amended and Restated Articles of Incorporation
October 21, 1993, filed as an Exhibit to Registrant's Form
8-K filed with the Commission on November 1, 1993, and
incorporated herein by reference.
4(a) Restated Credit and Security Agreement dated as of March 27,
1996, by and among the Registrant and various banks
including National City Commercial Finance, Inc. as agent.
Filed as Exhibit 4(a) to the Annual Report on Form 10-K for
the year-ended December 31, 1995, incorporated by reference.
4(b) 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. Filed as Exhibit 4(a) of
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997, filed with the Commission on
November 12, 1997, and incorporated herein by reference.
4(c) 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. Filed as Exhibit 4(b) of Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, filed with the Commission on November
12, 1997, and incorporated herein by reference.
The Registrant agrees to furnish copies of certain of its
other long-term debt to the Commission upon request.
4(d) Shareholder Rights Agreement dated as of October 21, 1993,
filed as an Exhibit to Registrant's form 8-K filed with the
Commission on November 1, 1993, and incorporated herein by
reference.
10(a) Royal Appliance Mfg. Co. 1991 Stock Option Plan for Outside
Directors, filed as Exhibit 10.12 to the Registrant's
Registration Statement on Forms S-1, filed with the
Commission on August 6, 1991, file number 33-41211 (the
"Initial Registration Statement"), incorporated herein by
reference.
10(b) Royal Appliance Mfg. Co. Employees and Consultants Stock
Option Plan, filed as Exhibit 10.13 to the Initial
Registration Statement, incorporated herein by reference.
10(c) Form of Indemnity Agreement for Directors and Officers of
the Registrant, filed as Exhibit 10.38 to the Initial
Registration Statement, incorporated herein by reference.
10(d) Lease dated December 11, 1981 by and between Syndicated
Properties and the Registrant, as amended, filed as Exhibit
10.7 to the Initial Registration Statement, incorporated
herein by reference.
10(e) Annual Management Incentive Plan Description. Filed as
Exhibit 10(f) to the Annual Report on Form 10-K for the year
ended December 31, 1993, incorporated herein by reference.
10(f) Royal Appliance Mfg. Co. Key Executive Long-Term Incentive
Plan filed as Exhibit 10(f) to the Annual Report on Form
10-K for the year ended December 31, 1995, incorporated
herein by reference.
</TABLE>
34
<PAGE> 35
INDEX TO EXHIBITS -- CONTINUED
FOR FORM 10-K
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- -------- -----------
<C> <S>
10(g) Form of Severance and Employment Agreement between the
registrant and Mssrs. Merriman, Dieterich, Holcomb, Lynch
and Moone, respectively, filed as Exhibit 10(g) to the
Annual Report on Form 10-K for the year ended December 31,
1994, incorporated herein by reference.
10(h) Employment Agreement dated September 15, 1995, between the
Registrant and Mr. Merriman filed as Exhibit 10(I) to the
Annual Report on Form 10-K for the year ended December 31,
1995, incorporated herein by reference.
10(i) Royal Appliance 401(k) Plus Plan, effective July 1, 1996.
21 Subsidiaries of Registrant
23 Consent of Coopers & Lybrand L.L.P regarding S-8
Registration.
24 Powers of Attorney of the Registrant, Directors and
Principal Financial Officer of the Registrant.
27.1 Financial Data Schedule for Current Period
27.2 Restated Financial Data Schedule for 3 Month Period
27.3 Restated Financial Data Schedule for 9 Month Period
99.1 Form 11-K Annual Report for Royal Appliance 401(k)
Retirement Savings Plan.
99.2 Consent of independent accountants
</TABLE>
35
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION
---- ---------------
<S> <C>
Dirt Devil, Inc.(1)......................................... Ohio
Royal Appliance Receivable, Inc.(1)......................... Ohio
Royal Appliance FSC, Inc.(1)................................ U.S.V.I.
Royal Appliance International Co.(1)........................ Delaware
</TABLE>
- ---------------
(1) Company is a wholly-owned subsidiary of the Registrant.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Royal Appliance Mfg. Co. on Form S-8 (File No. 33-44802) of our report dated
February 13, 1998, on our audits of the consolidated financial statements and
financial statement schedule of Royal Appliance Mfg. Co. and Subsidiaries as of
December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996 and
1995, which reports is included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Cleveland, Ohio
March 16, 1998
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
-----------------
ROYAL APPLIANCE MFG. CO.
------------------------
KNOW ALL MEN BY THESE PRESENTS; that Royal Appliance Mfg. Co. and each
person whose name is signed below hereby constitute and appoint Michael J.
Merriman and Richard G. Vasek, or both of them, their attorney-in-fact and
agent, with full power of substitution and resubstitution, for and on behalf of
Royal Appliance Mfg. Co. and the undersigned Directors and officers of Royal
Appliance Mfg. Co., to sign Royal Appliance Mfg. Co.'s Annual Report on Form
10-K, any or all amendments thereto, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting such attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite and necessary in
connection with such matters and hereby ratifying and confirming all that such
attorney-in-fact and agent or his substitute or substitutes may do or cause to
be done by virtue hereof.
This Power of Attorney of Royal Appliance Mfg. Co. and the Directors and
officers of Royal Appliance Mfg. Co. may be executed in multiple counterparts,
each of which shall be deemed an original with respect to the person executing
it.
IN WITNESS WHEREOF, this Power of Attorney has been signed at Cleveland,
Ohio this 13th day of March, 1998.
ROYAL APPLIANCE MFG. CO.
By: /s/ Richard G. Vasek
----------------------------------------
Richard G. Vasek, Controller, Secretary
and Chief Accounting Officer
DIRECTORS
/s/ Jack Kahl Jr. /s/ Michael J. Merriman
- --------------------------- -------------------------------------
Jack Kahl Jr. Michael J. Merriman
/s/ E. Patrick Nalley /s/ Joseph B. Richey, II
- --------------------------- -------------------------------------
E. Patrick Nalley Joseph B. Richey, II
/s/ John P. Rochon /s/ R. Louis Schneeberger
- --------------------------- -------------------------------------
John P. Rochon R. Louis Schneeberger
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE
REGISTRANT'S FORM 10K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000085462
<NAME> ROYAL APPLIANCE MFG. CO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,355
<SECURITIES> 0
<RECEIVABLES> 47,045
<ALLOWANCES> 0
<INVENTORY> 36,195
<CURRENT-ASSETS> 89,006
<PP&E> 87,439
<DEPRECIATION> 44,547
<TOTAL-ASSETS> 134,947
<CURRENT-LIABILITIES> 57,870
<BONDS> 13,672
0
0
<COMMON> 211
<OTHER-SE> 60,008
<TOTAL-LIABILITY-AND-EQUITY> 134,947
<SALES> 325,417
<TOTAL-REVENUES> 325,417
<CGS> 229,469
<TOTAL-COSTS> 229,469
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,412
<INCOME-PRETAX> 20,184
<INCOME-TAX> 7,777
<INCOME-CONTINUING> 12,407
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,407
<EPS-PRIMARY> .53<F1>
<EPS-DILUTED> .52<F1>
<FN>
<F1>We have calculated earnings per share amounts in accordance with SFAS No. 128
"Earnings Per Share." We have entered Basic and Diluted Amounts in place of
Primary and Fully Diluted, respectively.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE REGISTRANT'S
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 28,924
<ALLOWANCES> 0
<INVENTORY> 25,672
<CURRENT-ASSETS> 64,106
<PP&E> 73,386
<DEPRECIATION> 37,196
<TOTAL-ASSETS> 108,539
<CURRENT-LIABILITIES> 37,399
<BONDS> 14,908
0
0
<COMMON> 210
<OTHER-SE> 69,747
<TOTAL-LIABILITY-AND-EQUITY> 108,539
<SALES> 58,618
<TOTAL-REVENUES> 58,618
<CGS> 42,384
<TOTAL-COSTS> 42,384
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 253
<INCOME-PRETAX> 1,010
<INCOME-TAX> 404
<INCOME-CONTINUING> 606
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 606
<EPS-PRIMARY> .03<F1>
<EPS-DILUTED> .02<F1>
<FN>
<F1>We have calculated earnings per share amounts in accordance with SFAS No. 128
"Earnings Per Share." We have entered Basic and Diluted Amounts in place of
Primary and Fully Diluted, respectively.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<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> 105,340
<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> .24<F1>
<EPS-DILUTED> .23<F1>
<FN>
<F1>We have calculated earnings per share amounts in accordance with SFAS No. 128
"Earnings Per Share." We have entered Basic and Diluted Amounts in place of
Primary and Fully Diluted, respectively.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99.1 TO
FORM 10-K
FORM 11-K
ANNUAL REPORT
Pursuant to Section 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Years Ended December 31, 1997 and 1996
ROYAL APPLIANCE 401(k) RETIREMENT SAVINGS PLAN
----------------------------------------------
(Full title of the plan)
ROYAL APPLIANCE MFG. CO.
------------------------
(Name of issuer of the securities held pursuant to the plan)
650 ALPHA DRIVE, CLEVELAND, OHIO 44143
--------------------------------------
(Address of principal executive office)
<PAGE> 2
INDEX OF FINANCIAL STATEMENTS
PAGES
-----
Report of Independent Accountants 2
Financial Statements:
Statement of Net Assets Available for Plan
Benefits at December 31, 1997 3
Statement of Net Assets Available for Plan
Benefits at December 31, 1996 4
Statement of Changes in Net Assets Available for
Plan Benefits for the year ended December 31, 1997 5
Statement of Changes in Net Assets Available for
Plan Benefits for the year ended December 31, 1996 6
Notes to Financial Statements 7-9
Supplemental Schedules:
Schedule of Assets Held for Investment Purposes
for the years ended December 31, 1997 and 1996 10
Schedule of Reportable Transactions for the years
ended December 31, 1997 and 1996 11
1
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------
To the Trustees of the
Royal Appliance 401(k) Retirement Savings Plan
We have audited the accompanying statements of net assets available for plan
benefits of the Royal Appliance 401(k) Retirement Savings Plan (the "Plan") as
of December 31, 1997 and 1996 and the related statements of changes in net
assets available for plan benefits for the years then ended. These financial
statements are the responsibility of the Plan's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of the Plan as of
December 31, 1997 and 1996 and the changes in net assets available for Plan
benefits for the years then ended in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of assets held
for investment purposes and reportable transactions for the years ended December
31, 1997 and 1996 are presented for the purpose of additional analysis and are
not a required part of the basic financial statements but are supplementary
information required by the Department of Labor's Rules and Regulations for
Reporting and Disclosure under the Employee Retirement Income Security Act of
1974. The Fund Information in the statement of net assets available for plan
benefits and the statement of changes in net assets available for plan benefits
is presented for purposes of additional analysis rather than to present the net
assets available for plan benefits and changes in net assets available for plan
benefits of each fund. The supplemental schedules and Fund Information have been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, are fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
Coopers & Lybrand L.L.P.
Cleveland, Ohio
March 13, 1998
2
<PAGE> 4
ROYAL APPLIANCE 401(K) RETIREMENT SAVINGS PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
AT DECEMBER 31, 1997
------------------
<TABLE>
<CAPTION>
National Institutional Strong Vanguard Dodge &
City Investors' Government Fidelity 500 Templeton Cox
Cash GIC Securities Puritan Portfolio Foreign Balanced
ASSETS Account Fund Fund Fund Fund Fund Fund
------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Investments:
Invested Assets $ -- $ 1,771,903 $ 526,944 $ 1,298,868 $ 1,779,167 $ 743,252 $ 240,764
Cash & Cash
Equivalents 77,093 26,930 (1,527) 1,662 1,341 38,127 244,479
Accrued Income -- 108 7,546 7 20,923 63 744
- ------------------------------------------------------------------------------------------------------------------------------
Subtotal 77,093 1,798,941 532,963 1,300,537 1,801,431 781,442 485,987
Contributions receivable -- 65,999 13,471 23,840 43,716 22,937 19,261
- ------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 77,093 $ 1,864,940 $ 546,434 $ 1,324,377 $ 1,845,147 $ 804,379 $ 505,248
=========== =========== =========== =========== =========== =========== ===========
NET ASSETS AVAILABLE
FOR PLAN BENEFITS $ 77,093 $ 1,864,940 $ 546,434 $ 1,324,377 $ 1,845,147 $ 804,379 $ 505,248
=========== =========== =========== =========== =========== =========== ===========
<CAPTION>
Davis
New York Parkstone Royal
Venture Small Stock Loan
ASSETS Fund Capitalization Fund Account Total
---- -------------- ---- ------- -----
<S> <C> <C> <C> <C> <C>
Investments:
Invested Assets $ 2,076,082 $ 1,918,942 $ 1,072,356 $ 671,104 $12,099,382
Cash & Cash
Equivalents 3,747 2,974 3,220 -- 398,046
Accrued Income 16 11 19 -- 29,437
- ----------------------------------------------------------------------------------------------
Subtotal 2,079,845 1,921,927 1,075,595 671,104 12,526,865
Contributions receivable 45,503 51,656 24,182 -- 310,565
- ----------------------------------------------------------------------------------------------
Total Assets $ 2,125,348 $ 1,973,583 $ 1,099,777 $ 671,104 $12,837,430
=========== =========== =========== =========== ===========
NET ASSETS AVAILABLE
FOR PLAN BENEFITS $ 2,125,348 $ 1,973,583 $ 1,099,777 $ 671,104 $12,837,430
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
ROYAL APPLIANCE 401(K) RETIREMENT SAVINGS PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
AT DECEMBER 31, 1996
-----------------
<TABLE>
<CAPTION>
National Institutional Strong Vanguard Dodge &
City Investors' Government Fidelity 500 Templeton Cox
Cash GIC Securities Puritan Portfolio Foreign Balanced
ASSETS Account Fund Fund Fund Fund Fund Fund
------- ---- ---- ---- ---- ---- ----
Investments:
<S> <C> <C> <C> <C> <C> <C> <C>
Invested Assets $ -- $ 1,705,780 $ 496,561 $ 1,006,439 $ 1,050,525 $ 615,736 $ 315,068
Cash & Cash
Equivalents 186,992 7,308 42 23 3 8,102 33
Accrued Income -- 29 2,544 6 12,616 6 4
- --------------------------------------------------------------------------------------------------------------------------
Subtotal 186,992 1,713,117 499,147 1,006,468 1,063,144 623,844 315,105
Contributions receivable -- 77,893 16,205 27,089 43,602 23,197 18,299
- --------------------------------------------------------------------------------------------------------------------------
Total Assets $ 186,992 $ 1,791,010 $ 515,352 $ 1,033,557 $ 1,106,746 $ 647,041 $ 333,404
=========== =========== =========== =========== =========== =========== ===========
NET ASSETS AVAILABLE
FOR PLAN BENEFITS $ 186,992 $ 1,791,010 $ 515,352 $ 1,033,557 $ 1,106,746 $ 647,041 $ 333,404
=========== =========== =========== =========== =========== =========== ===========
<CAPTION>
Davis
New York Parkstone Royal
Venture Small Stock Loan
ASSETS Fund Capitalization Fund Account Total
---- -------------- ---- ------- -----
Investments:
<S> <C> <C> <C> <C> <C>
Invested Assets $ 1,305,118 $ 1,973,315 $ 1,134,485 $ 551,019 $10,154,046
Cash & Cash
Equivalents 49 19 149 -- 202,720
Accrued Income 11 517 8 -- 15,741
- ---------------------------------------------------------------------------------------------
Subtotal 1,305,178 1,973,851 1,134,642 551,019 10,372,507
Contributions receivable 52,524 84,560 26,969 -- 370,338
- ---------------------------------------------------------------------------------------------
Total Assets $ 1,357,702 $ 2,058,411 $ 1,161,611 $ 551,019 $10,742,845
=========== =========== =========== =========== ===========
NET ASSETS AVAILABLE
FOR PLAN BENEFITS $ 1,357,702 $ 2,058,411 $ 1,161,611 $ 551,019 $10,752,845
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
ROYAL APPLIANCE 401(K) RETIREMENT SAVINGS PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
National Institutional Strong Vanguard
City Investors' Government Fidelity 500 Templeton
Cash GIC Securities Puritan Portfolio Foreign
Account Fund Fund Fund Fund Fund
------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Additions:
Contributions and Contributions Receivable:
Company contributions $ 77,902 $ 106,593 $ 27,640 $ 55,440 $ 106,392 $ 54,001
Employee pre-tax contributions 214,177 64,463 22,749 77,082 126,594 80,278
Participant's voluntary after-tax contributions 683 310 90 90 40 105
Investment Income:
Interest and dividends 281 5,672 30,617 102,205 17,906 32,917
Net appreciation/(depreciation) in fair
market value -- 96,122 13,820 123,319 388,513 23,861
Loans to participants, net -- (18,768) (3,007) (12,472) (39,634) 796
Transfers between funds, net (231,410) (64,868) (32,272) 22,240 224,401 28,071
---------------------------------------------------------------------------------
Total additions 61,633 189,524 59,637 367,904 824,212 220,029
Deductions:
Benefits paid to participants -- 115,041 28,547 77,073 85,776 62,676
Miscellaneous fees -- 553 8 11 35 15
Other 171,532 -- -- -- -- --
---------------------------------------------------------------------------------
Net additions (109,899) 73,930 31,082 290,820 738,401 157,338
Net Assets Available for Plan Benefits,
Beginning of Year 186,992 1,791,010 515,352 1,033,557 1,106,746 647,041
---------------------------------------------------------------------------------
Net Assets Available for Plan Benefits,
End of Year $ 77,093 $1,864,940 $ 546,434 $1,324,377 $1,845,147 $ 804,379
=================================================================================
<CAPTION>
Dodge & Davis
Cox New York Parkstone Royal
Balanced Venture Small Stock Loan
Fund Fund Capitalization Fund Account Total
---- ---- -------------- ---- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Additions:
Contributions and Contributions Receivable:
Company contributions $ 44,330 $ 113,464 $ 142,082 $ 57,377 $ -- $ 785,221
Employee pre-tax contributions 68,464 163,923 207,565 66,546 -- 1,091,841
Participant's voluntary after-tax contributions -- 538 536 526 -- 2,918
Investment Income:
Interest and dividends 23,569 81,715 141,300 4,213 37,356 477,751
Net appreciation/(depreciation) in fair
market value 48,537 413,397 (260,957) (51,504) -- 795,108
Loans to participants, net (878) (26,401) (7,642) 4,753 103,253 --
Transfers between funds, net 19,811 205,218 (113,373) (37,294) (20,524) --
--------------------------------------------------------------------------------
Total additions 203,833 951,854 109,511 44,617 120,085 3,152,839
Deductions:
Benefits paid to participants 31,982 184,179 194,217 106,424 -- 885,915
Miscellaneous fees 7 29 122 27 -- 807
Other -- -- -- -- -- 171,532
--------------------------------------------------------------------------------
Net additions 171,844 767,646 (84,828) (61,834) 120,085 2,094,585
Net Assets Available for Plan Benefits,
Beginning of Year 333,404 1,357,702 2,058,411 1,161,611 551,019 10,742,845
--------------------------------------------------------------------------------
Net Assets Available for Plan Benefits,
End of Year $ 505,248 $2,125,348 $ 1,973,583 $1,099,777 $ 671,104 $12,837,430
================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 7
ROYAL APPLIANCE 401(K) RETIREMENT SAVINGS PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Institutional Strong Vanguard Dodge &
National Investors' Government Fidelity 500 Templeton Cox
Cash GIC Securities Puritan Portfolio Foreign Balanced
Account Fund Fund Fund Fund Fund Fund
------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Additions:
Contributions and Contributions Receivable:
Company contributions $(18,958) $ 129,362 $ 35,808 $ 58,895 $ 93,833 $ 48,062 $ 41,883
Employee pre-tax contributions 64,760 105,129 40,137 82,286 130,927 75,064 54,304
Participant's voluntary after-tax 4,818 105 24 24 -- 22 --
contributions
Investment Income:
Interest and dividends 1,976 1,570 31,338 112,773 22,096 26,562 12,700
Net appreciation/(depreciation) in fair
market value -- 105,407 (18,251) 23,837 155,419 54,222 21,421
Loans to participants, net 12,253 (125,898) (33,846) (33,337) (31,349) (31,046) (11,054)
Transfers between funds, net 106,618 (193,758) (44,140) (104,150) 120,638 526,013 82,512
---------------------------------------------------------------------------------------
Total additions 171,467 21,917 11,070 140,328 491,564 698,899 201,766
Deductions:
Benefits paid to participants 29,225 192,082 41,164 105,535 43,760 74,666 6,166
Miscellaneous fees -- 160 4 6 11 20 6
---------------------------------------------------------------------------------------
Net additions 142,242 (170,325) (30,098) 34,787 447,793 624,213 195,594
Net Assets Available for Plan Benefits,
Beginning of Year 44,750 1,961,335 545,450 998,770 658,953 22,828 137,810
---------------------------------------------------------------------------------------
Net Assets Available for Plan Benefits,
End of Year $186,992 $1,791,010 $515,352 $1,033,557 $1,106,746 $ 647,041 $ 333,404
=======================================================================================
<CAPTION>
Davis Kaufmann
New York Parkstone Royal Aggressive Scudder
Venture Small Stock Growth Global Loan
Fund Capitalization Fund Fund Fund Account Total
---- -------------- ---- ---- ---- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Additions:
Contributions and Contributions Receivable:
Company contributions $ 65,767 $ 115,108 $ 54,659 $ 137,938 $ -- $ -- $ 762,357
Employee pre-tax contributions 172,996 51,551 118,654 204,978 -- -- 1,100,786
Participant's voluntary after-tax 2,296 -- 2,279 68 -- -- 9,636
contributions
Investment Income:
Interest and dividends 61,988 307,471 121 108 10,035 6,400 595,138
Net appreciation/(depreciation) in fair
market value 202,250 (361,448) 715,383 338,117 7,293 -- 1,243,650
Loans to participants, net (51,356) (33,537) (57,147) (53,638) -- 449,955 --
Transfers between funds, net 64,445 2,015,421 21,861 (2,039,285) (556,175) -- --
----------------------------------------------------------------------------------------
Total additions 518,386 2,094,566 855,810 (1,411,714) (538,847) 456,355 3,711,567
Deductions:
Benefits paid to participants 123,956 36,123 107,639 107,707 -- -- 868,023
Miscellaneous fees 12 32 12 12 9 -- 284
----------------------------------------------------------------------------------------
Net additions 394,418 2,058,411 748,159 (1,519,433) (538,856) 456,355 2,843,260
Net Assets Available for Plan Benefits,
Beginning of Year 963,284 -- 413,452 1,519,433 538,856 94,664 7,899,585
----------------------------------------------------------------------------------------
Net Assets Available for Plan Benefits,
End of Year $1,357,702 $2,058,411 $1,161,611 $ -- $ -- $551,019 $10,742,845
========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 8
ROYAL APPLIANCE 401(K) RETIREMENT SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
---------------
1. Plan Description and Benefits:
------------------------------
The following brief description of the Royal Appliance 401(k) Retirement
Savings Plan (the "Plan") is provided for general information purposes
only. Participants should refer to the Summary Plan Description for more
complete information.
GENERAL - The Plan is a defined contribution plan covering substantially
all employees of Royal Appliance Mfg. Co. (the "Company"). Employees who
attain age 18 and complete at least six months of service are eligible to
become participants in the Plan.
On December 27, 1991, the Company filed Form S-8 with the Securities and
Exchange Commission (SEC) allowing participants in the Plan to invest in
Common Shares of the Company. This investment option was available as of
February 1, 1992. As a result, the Plan is now required to comply with
the reporting provisions of the SEC Form 11-K.
CONTRIBUTIONS - Contributions consist of employer matching, employer
profit sharing, salary reduction, voluntary after-tax contributions, and
rollover contributions.
In 1997 and 1996, employer matching contributions were 100% of the salary
reduction contributions that do not exceed 2% of qualified employee
compensation and 50% of the salary reduction contributions greater than
2% but not in excess of 4% of qualified employee compensation. The
employer profit sharing contribution is discretionary based on amounts as
authorized by the Board of Directors. All employer contributions have
been made in the form of cash. Salary reduction contributions may range
from 1% to 15% of qualified compensation subject to annual I.R.S. limits.
Participants may also make voluntary after-tax contributions of up to 10%
of their annual compensation in addition to the contribution through
salary reduction. Rollover contributions are also permitted.
INVESTMENT OF FUNDS - All of the investment transactions are executed by
National City Trust ("National City"), an affiliate of National City
Corporation.
Each participant may elect among the following investment vehicles:
A. INSTITUTIONAL INVESTORS' GIC FUND - Seeks to provide income and
stability of principal by investing in guaranteed investment
contracts (GIC's) or similar instruments issued by insurance
companies and/or banks.
B. STRONG GOVERNMENT SECURITIES FUND - Seeks to provide a high
level of current income by investing in securities issued or
guaranteed by the U.S. government.
C. FIDELITY PURITAN FUND - Seeks to maximize income, with growth of
capital being a secondary objective. Invests in high-yielding
securities, including common stocks, preferred stocks and bonds.
D. VANGUARD 500 PORTFOLIO FUND - Seeks to return investment results
that correspond to the price and yield performance of the S&P
500 index.
E. TEMPLETON FOREIGN FUND - seeks long term growth of capital by
investing in companies generally located in foreign countries.
In 1997, this fund changed investments from the Templeton
Foreign Mutual Fund to the Templeton Institutional Foreign
Equity Mutual Fund.
F. DODGE & COX BALANCED FUND - seeks income, conservation of
principal, and long-term growth of principal and income by
investing in equity securities and bonds.
-7-
<PAGE> 9
ROYAL APPLIANCE 401(K) RETIREMENT SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
1. Plan Description and Benefits (cont.):
--------------------------------------
G. DAVIS NEW YORK VENTURE FUND - seeks long term capital growth by
investing in securities that have above average appreciation
potential.
H. PARKSTONE SMALL CAPITALIZATION FUND - seeks growth of capital by
investing in stocks of small to medium size companies primarily
in the United States.
I. ROYAL STOCK FUND - This fund is comprised exclusively of Common
Shares, without par value of the Company (Common Shares). Each
participant electing to purchase Common Shares through the Stock
Fund is permitted to vote such Common Shares in the same manner
as any other shareholder and is furnished proxy materials to
such effect. If a participant does not vote their proxy, the
Trustee votes the proxy for the participant's Common Shares.
Common Shares purchased under the Account are generally
purchased on the open market for cash. The price of Common
Shares purchased on the open market is priced for each
participant's account at an average purchase price of all shares
purchased, plus brokerage fees, taxes, commissions and expenses
incident to the purchase, unless it is determined that the
Company will bear these costs. No more than 50% of a
participant's contributions may be invested in the Stock Fund.
J. KAUFMANN AGGRESSIVE GROWTH FUND - Seeks growth of capital by
investing in stocks of small to medium size companies typically
outside of the S&P 500 "universe". This investment option was
discontinued in 1996.
K. SCUDDER GLOBAL FUND - Seeks long term growth of capital by
investing in companies incorporated in the U.S. and foreign
countries. This investment option was discontinued in 1996.
Participants can allocate their contribution between the Funds in various
percentages, which can be changed on a quarterly basis throughout the
year.
The number of participants in each investment program as of December 31,
1997 was as follows:
<TABLE>
<CAPTION>
No. of
Participants
------------
<S> <C>
Institutional Investors' GIC Fund 335
Strong Government Securities Fund 192
Fidelity Puritan Fund 271
Vanguard 500 Portfolio Fund 360
Dodge & Cox Balanced Fund 207
Davis New York Venture Fund 371
Templeton Foreign Fund 254
Parkstone Small Capitalization Fund 414
Royal Stock Fund 295
</TABLE>
VESTING - All contributions are 100% vested and non-forfeitable.
DISTRIBUTION AND WITHDRAWALS - Loans and hardship withdrawals are
permitted pursuant to the terms of the Plan. In addition, participants
may make hardship withdrawals from the voluntary after-tax contribution
account by filing a written request at least thirty (30) days in advance.
Participants and their beneficiaries are entitled to receive a
distribution of their account balances upon death, disability,
termination of employment prior to retirement, or retirement.
Distribution may be made in a lump sum or periodic payments, as may be
elected by the participants or their beneficiaries, subject to the terms
of the Plan.
-8-
<PAGE> 10
ROYAL APPLIANCE 401(K) RETIREMENT SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
---------------
1. Plan Description and Benefits (cont.):
--------------------------------------
APPRECIATION (DEPRECIATION) IN FAIR MARKET VALUE OF ASSETS - The Plan
presents, in the Statements of Changes in Net Assets Available for Plan
Benefits, the net appreciation (depreciation) in the fair market value of
its investments, which consist of realized gains or losses and unrealized
appreciation (depreciation).
EXPENSES - Administrative fees, brokerage fees and other Plan expenses
are the responsibility of the Plan. The Company, at its discretion has
elected to pay these costs directly.
2. Summary of Significant Accounting Policies:
-------------------------------------------
BASIS OF PRESENTATION - The accompanying financial statements have been
prepared on an accrual basis in accordance with generally accepted
accounting principles.
INVESTMENTS - Certain assets of the Plan are maintained in Guaranteed
Investment Contracts (the Institutional Investors' GIC Fund) and
Investment Funds (Strong Government Securities Fund, Fidelity Puritan
Fund, Vanguard 500 Portfolio Fund, Templeton Foreign Fund, Kaufmann
Aggressive Growth Fund, Scudder Global Fund, Dodge & Cox Balanced Fund,
Davis New York Venture Fund, and Parkstone Small Capitalization Fund) and
common shares of the Company. Contributions by the Company and employees
are first made to National City via the cash account facility.
Contributions and income from investments of each fund are reinvested in
the same fund.
Investments in Guaranteed Investment Contracts are recorded at the
guaranteed value (contribution and interest) of the Plan assets.
Other investments are valued at fair market value by National City using
readily available published market values.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of net assets
available for plan benefits and changes, therein. Actual results could
differ from those estimates.
3. Income Tax Status:
------------------
The Internal Revenue Service (IRS) has issued a favorable determination
letter dated June 20, 1995, with respect to the Plan's qualified status,
as amended, under Section 401(a) of the Internal Revenue Code (Code). As
such, the trust established thereunder is exempt from Federal income
taxes under Section 501(a) of the Code. All withdrawals, with the
exception of after tax employee contributions, are taxable to the
participants of the Plan.
4. Right to Terminate:
-------------------
Although it has not expressed any interest to do so, the Company has the
right to terminate the Plan at any time.
5. Reconciliation to Form 5500
---------------------------
Write-offs of loan balances which total $171,532 were recorded to the
statement of changes in net assets available for plan benefits in 1997
which were recorded to the Form 5500 in prior years.
-9-
<PAGE> 11
ROYAL APPLIANCE 401(K) RETIREMENT SAVINGS PLAN
ITEM 27 (A) - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Identity of issue, borrower, lessor, or Description of investment including maturity Cost Current
similar party date, rate of interest, collateral, par or Value
maturity value
-------------------------------------------------------------------------------------------------------------------------
1996
====
<S> <C> <C> <C>
Royal Appliance Stock Common Stock $988,120 $1,134,485
Armada Money Market Fund Mutual Fund 106,650 106,650
Dodge & Cox Balanced Fund Mutual Fund 287,586 315,068
Fidelity Puritan Fund Mutual Fund 943,228 1,006,439
Davis New York Venture Fund Mutual Fund 1,025,517 1,305,118
Vanguard Index 500 Fund Mutual Fund 787,685 1,050,525
Strong Government Securities Mutual Fund 487,730 496,561
Institutional Investors GIC Fund GIC Fund 1,455,182 1,705,780
Parkstone Small Cap Mutual Fund 2,332,149 1,973,315
Templeton Foreign Fund Mutual Fund 565,152 615,736
Participant Loans Various maturity dates; interest prime plus 1% 551,019 551,019
1997
====
Royal Appliance Stock Common Stock 1,129,807 1,072,356
Armada Money Market Fund Mutual Fund 398,046 398,046
Dodge & Cox Balanced Fund Mutual Fund 225,197 240,764
Fidelity Puritan Fund Mutual Fund 1,183,343 1,298,868
Davis New York Venture Fund Mutual Fund 1,710,098 2,076,082
Vanguard Index 500 Fund Mutual Fund 1,431,972 1,779,167
Strong Government Securities Mutual Fund 513,308 526,944
Institutional Investors GIC Fund GIC Fund 1,675,899 1,771,903
Parkstone Small Cap Mutual Fund 2,078,463 1,918,942
Templeton Institutional Foreign Equity Fund Mutual Fund 833,053 743,252
Participant Loans Various maturity dates; interest prime plus 1% 671,104 671,104
</TABLE>
-10-
<PAGE> 12
ROYAL APPLIANCE 401(K) RETIREMENT SAVINGS PLAN
ITEM 27 (D) - SCHEDULE OF TRANSACTIONS OR SERIES OF TRANSACTIONS
IN EXCESS OF 5% OF THE CURRENT VALUE OF PLAN ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
Purchase Selling Cost of Current
Identity of Party Involved Description of Asset Price Price Asset Value of Asset
----- ----- ----- --------------
<S> <C> <C> <C> <C> <C>
1996 - single transaction
National City Royal Appliance Mfg. Co. Common Stock
Purchases $ 208,123 $ -- $ 208,123 $ 286,921
Sales $ -- $ 175,447 $ 188,034 $ --
1997 - single transaction
National City Templeton Foreign Fund
Purchases $ 818,834 $ -- $ -- $ 818,834
Sales $ -- $ 818,834 $ 663,090 $ 818,834
1997 - series of transactions
National City Davis New York Venture Fund $ 660,281 $ 302,714 $ 214,420 $ 962,896
Dodge & Cox Balanced Fund $ 210,457 $ 333,296 $ 283,308 $ 543,753
Parkstone Small Capitalization Fund $ 812,926 $ 606,343 $ 816,483 $ 1,419,270
Templeton Foreign Fund $ 155,322 $ 887,442 $ 720,524 $ 1,042,765
Templeton Institutional Funds, Inc. $ 854,627 $ 18,902 $ 20,340 $ 873,530
Vanguard 500 Portfolio Fund $ 645,516 $ 305,386 $ 215,756 $ 950,903
Armada Money Market Fund $5,752,378 $5,763,626 $5,763,626 $11,516,004
<CAPTION>
Realized
Gain (Loss)
Identity of Party Involved Description of Asset on Sale
---------
<S> <C> <C>
1996 - single transaction
National City Royal Appliance Mfg. Co. Common Stock
Purchases $ --
Sales $ (12,587)
1997 - single transaction
National City Templeton Foreign Fund
Purchases $ --
Sales $ 155,744
1997 - series of transactions
National City Davis New York Venture Fund $ 88,294
Dodge & Cox Balanced Fund $ 49,988
Parkstone Small Capitalization Fund $ (210,140)
Templeton Foreign Fund $ 166,918
Templeton Institutional Funds, Inc. $ (1,438)
Vanguard 500 Portfolio Fund $ 89,630
Armada Money Market Fund $ --
</TABLE>
-11-
<PAGE> 1
EXHIBIT 99.2
- ------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Royal Appliance 401(k) Retirement Savings Plan on Form S-8 (File No. 33-44802)
of our report dated March 13, 1998, on our audits of the financial statements of
Royal Appliance 401(k) Retirement Savings Plan as of December 31, 1996 and 1997,
and for the years ended December 31, 1996 and 1997, which report is included in
this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Cleveland, Ohio
March 13, 1998
