<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. For the quarterly period ended MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from ____________
to ____________
Commission file number 0-19431
-------
ROYAL APPLIANCE MFG. CO.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-1350353
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
650 ALPHA DRIVE, CLEVELAND, OHIO 44143
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(440) 449-6150
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate, by check mark, whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common shares, as of the latest practicable date.
Common Shares, without par value 22,027,824
- ------------------------------------ --------------------------------
(Class) (Outstanding at May 14, 1998)
The Exhibit index appears on sequential page 14.
1
<PAGE> 2
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I FINANCIAL INFORMATION
Item 1 Financial Statements
------ --------------------
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations -
three months ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flow -
three months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-8
Item 2 Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations 9-12
-----------------------------------
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 13
------ --------------------------------
Signatures 14
Exhibit Index 15
Exhibit 27* - Financial data schedule
-----------
</TABLE>
*Numbered in accordance with Item 601 of Regulation S-K.
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
-----------------------------
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ---------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash $ -- $ 1,355
Trade accounts receivable, net 24,236 47,045
Inventories 39,420 36,195
Deferred income taxes 3,453 2,550
Prepaid expenses and other 2,362 1,861
--------- ---------
Total current assets 69,471 89,006
--------- ---------
Property, plant and equipment, at cost:
Land 2,356 2,356
Buildings 13,117 13,117
Molds, tooling, and equipment 59,074 58,236
Furniture and office equipment 6,570 6,068
Assets under capital leases 4,613 4,613
Leasehold improvements and other 3,073 3,049
--------- ---------
88,803 87,439
Less accumulated depreciation and amortization 46,417 44,547
--------- ---------
42,386 42,892
--------- ---------
Tooling deposits 1,384 1,146
Other 2,599 1,903
--------- ---------
Total assets $ 115,840 $ 134,947
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 12,120 $ 26,648
Accrued liabilities:
Advertising and promotion 6,469 9,576
Salaries, benefits and payroll taxes 2,732 5,750
Warranty and customer returns 8,300 8,700
Income taxes -- 975
Other 5,397 5,530
Current portions of capital lease obligations and notes payable 708 691
--------- ---------
Total current liabilities 35,726 57,870
--------- ---------
Revolving credit agreement 12,533 1,473
Capitalized lease obligations, less current portion 3,038 3,101
Notes payable, less current portion 8,980 9,098
--------- ---------
Total long-term debt 24,551 13,672
--------- ---------
Deferred income taxes 3,323 3,186
--------- ---------
Total liabilities 63,600 74,728
--------- ---------
Commitments and contingencies (Note 3) -- --
Shareholders' equity:
Common shares, at stated value 211 211
Additional paid-in capital 41,918 41,897
Retained earnings 37,475 40,018
--------- ---------
79,604 82,126
Less treasury shares, at cost (3,284,300 and 2,401,000 shares at
March 31, 1998, and December 31, 1997, respectively) (27,364) (21,907)
--------- ---------
Total shareholders' equity 52,240 60,219
--------- ---------
Total liabilities and shareholders' equity $ 115,840 $ 134,947
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
-----------------------------
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Net sales $ 51,848 $ 58,618
Cost of sales 40,350 42,384
-------- --------
Gross margin 11,498 16,234
Advertising and promotion 8,111 9,023
Other selling 1,953 1,837
General and administrative 3,893 3,005
Engineering and product development 1,185 1,022
-------- --------
(Loss) income from operations (3,644) 1,347
Interest expense, net 288 253
Receivable securitization and other expense, net 237 84
-------- --------
(Loss) income before income taxes (4,169) 1,010
Income tax (benefit) expense (1,626) 404
-------- --------
Net (loss) income $ (2,543) $ 606
======== ========
BASIC
Weighted average number of common shares
outstanding (in thousands) 22,322 23,971
(Loss) earnings per share $ (.11) $ .03
DILUTED
Weighted average number of common shares
and equivalents outstanding (in thousands) 22,322 24,351
(Loss) earnings per share
$ (.11) $ .02
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
-----------------------------
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three months
Ended March 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (2,543) $ 606
-------- --------
Adjustments to reconcile net (loss) income to
net cash from operating activities:
Depreciation and amortization 1,974 1,660
Compensatory effect of stock options 21 20
(Increase) decrease in assets:
Trade accounts receivable, net 22,809 10,837
Inventories (3,225) 8,380
Refundable and accrued income taxes (1,741) (2,598)
Prepaid expenses and other (501) (600)
Other (800) (670)
Increase (decrease) in liabilities:
Trade accounts payable (14,528) (4,997)
Accrued advertising and promotion (3,107) (6,025)
Accrued salaries, benefits, and payroll taxes (3,018) (3,417)
Accrued warranty and customer returns (400) (75)
Accrued other (133) 421
-------- --------
Total adjustments (2,649) 2,936
-------- --------
Net cash from operating activities (5,192) 3,542
-------- --------
Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment, net (1,364) (449)
Increase in tooling deposits (238) (2,635)
-------- --------
Net cash from investing activities (1,602) (3,084)
-------- --------
Cash flows from financing activities:
Proceeds (payments) on bank debt 11,060 (669)
Payments on note payable (109) (102)
Payments on capital lease obligations (55) (60)
Proceeds from exercise of stock options -- 117
Repurchase of common stock (5,457) (745)
-------- --------
Net cash from financing activities 5,439 (1,459)
-------- --------
Net decrease in cash (1,355) (1,001)
-------- --------
Cash at beginning of period 1,355 1,001
-------- --------
Cash at end of period $ -- $ --
======== ========
Supplemental disclosure of cash flow information: Cash payments for:
Interest $ 289 $ 340
======== ========
Income taxes, net of refunds $ 115 $ 3,002
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: BASIS OF PRESENTATION
The financial information for Royal Appliance Mfg. Co. and Subsidiaries
(the Company) included herein is unaudited; however, such information reflects
all adjustments (consisting solely of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the
consolidated statements of financial position as of March 31, 1998, and December
31, 1997, and the related statements of operations and cash flows as of, and for
the interim periods ended, March 31, 1998 and 1997. It is suggested that these
condensed financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's latest
shareholders' annual report (Form 10-K).
The results of operations for the three month period ended March 31,
1998, are not necessarily indicative of the results to be expected for the full
year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual results
could differ from those estimates.
The Company's revenue recognition policy is to recognize revenues when
products are shipped.
Net (loss) income per share is computed based on the weighted average
number of common shares outstanding for basic earnings per share and on the
weighted average number of common shares and common share equivalents
outstanding for diluted earnings per share.
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost or market. Inventories at
March 31, 1998, and December 31, 1997, consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------- -------
<S> <C> <C>
Finished goods $21,990 $23,319
Work in process and purchased parts 17,430 12,876
------- -------
Inventories at FIFO cost $39,420 $36,195
======= =======
</TABLE>
NOTE 3: COMMITMENTS AND CONTINGENCIES
At March 31, 1998, the Company estimates having contractual commitments
for future advertising and promotional expense of approximately $12,800,
including commitments for television advertising through December 31, 1998.
Other contractual commitments for items in the normal course of business total
approximately $2,250.
6
<PAGE> 7
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4: DEBT
The Company's revolving credit facility has a maturity date of April 1,
1999, and is classified as long-term at March 31, 1998. 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 $30,700 as of March 31, 1998, resulting
in availability of approximately $16,000. The agreement requires monthly
payments of interest only through maturity. The facility provides for pricing
options at the bank's base lending rate and LIBOR plus a rate spread as defined
in the Agreement. At March 31, 1998, the bank's base lending rate was 8.5%. In
addition, the Company pays a commitment fee at the annual rate of .375% on the
unused portion of the facility. In April, 1998 the Company received a commitment
for a new $45 million three-year secured revolving line of credit. The Company
expects to finalize this agreement in the second quarter of 1998. The new
facility will replace the Company's current $40 million revolver. 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 March 31, 1998. 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 March 31, 1998, was $25,000.
The maximum amount of receivables that can be sold is seasonally adjusted. At
March 31, 1998, the Company received approximately $13,300 from the sale of
trade accounts receivable. The proceeds from the sales were used to reduce
borrowings under the Company's revolving credit facility. Costs of the program,
which primarily consist of the purchaser's financing cost of issuing commercial
paper backed by the receivables, totaled $209 and $132 for the first quarter
ended March 31, 1998 and 1997, respectively, and have been classified as Other
expense in the accompanying Consolidated Statements of Operations. The Company,
as agent for the purchaser of the receivables, retains collection and
administrative responsibilities for the purchased receivables.
The Company has a variable rate mortgage note payable in the amount of
$3,977. 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 March 31, 1998, the 30 day
commercial paper rate was 5.48%. The carrying amount of the mortgage note
payable approximates fair value.
The Company has a 7.9% fixed rate mortgage note payable in the amount of
$5,464. The note is collateralized by the Company's distribution facility.
Monthly payments of principal and interest are payable through November 1, 2000,
at which time the balance of approximately $4,775 is due. The carrying amount of
the mortgage note payable approximates fair value.
NOTE 5: SHARE REPURCHASE PROGRAM
In February 1998, the Company's Board of Directors authorized a common
share repurchase program that provides for the Company to purchase, in the open
market and through negotiated transactions, up to 2,300 of its outstanding
common shares. As of March 31, 1998, the Company has repurchased 883 shares for
an aggregate purchase price of $5,457. The program is scheduled to expire on
March 1, 1999.
7
<PAGE> 8
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6: EARNINGS (LOSS) PER SHARE
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings per Share, which modifies the
calculation of earnings per share. The Standard replaces the previous
presentation of primary and fully diluted earnings per share to basic and
diluted.
Basic (loss) 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>
Three months ended March 31,
----------------------------
1998 1997
-------- --------
<S> <C> <C>
Net (loss) income $ (2,543) $ 606
======== ========
BASIC:
Common shares outstanding, net of treasury shares,
beginning of quarter 22,911 24,030
Weighted average common shares issued during
quarter -- 18
Weighted average treasury shares repurchased
during quarter (589) (77)
-------- --------
Weighted average common shares outstanding, net of
treasury shares, end of quarter 22,322 23,971
======== ========
Net (loss) income per common share $ (.11) $ .03
======== ========
DILUTED:
Common shares outstanding, net of treasury shares,
beginning of quarter 22,911 24,030
Weighted average common shares issued during
quarter -- 18
Weighted average common share equivalents -- 380
Weighted average treasury shares repurchased
during quarter (589) (77)
-------- --------
Weighted average treasury shares outstanding, net of
treasury shares, end of quarter 22,322 24,351
======== ========
Net (loss) income per common share $ (.11) $ .02
======== ========
</TABLE>
NOTE 7: COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, Reporting Comprehensive Income, in the first quarter of 1998.
The implementation of SFAS No. 130 did not have a material impact on the
Company's consolidated financial position or results of operations since the
Company had no significant other comprehensive income.
8
<PAGE> 9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
--------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Net sales decreased 11.5% for the first quarter ended March 31, 1998,
compared with the same period in the prior year. The decrease in the first
quarter net sales was due primarily to lower shipments of the Dirt Devil(R)
Ultra MVP(TM) and the Dirt Devil(R) Broom Vac(R). Overall sales to the top 5
customers in the first three months of 1998 (all of which are major retailers)
accounted for approximately 62.7% of net sales as compared with approximately
68.3% in the first three months of 1997. The Company believes that its
dependence on sales to its largest customers will continue. Recently, many major
retailers have experienced significant financial difficulties and some have
filed for protection from creditors under applicable bankruptcy laws. The
Company sells its products to certain customers that are in bankruptcy
proceedings.
Gross margin, as a percent of net sales, decreased from 27.7% for the
first quarter 1997 to 22.2% in the first quarter 1998. The gross margin
percentage was negatively affected in 1998 primarily by higher consumer returns
and charges incurred in connection with the plan to consolidate two of the
Company's facilities and was partially offset by improved sales mix of higher
margin products.
Advertising and promotion expenses for the first quarter 1998 were
$8,111, a decrease of 10.1% from the first quarter 1997. The decrease in
advertising and promotion expenses was due primarily to not incurring in 1998
expenses related to the launch of the 1997 Fred Astaire Superbowl advertising
campaign. 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 the first quarter 1998 were $1,953, an
increase of 6.3% from the first quarter 1997. The increase is primarily due to
internal sales and marketing personnel compensation, which are the largest
components of other selling expenses.
General and administrative expenses for the first quarter 1998 were
$3,893, an increase of 29.6% from the first quarter 1997. General and
administrative expenses increased as a percentage of net sales from 5.1% to
7.5%. The principal components are compensation (including benefits), insurance,
travel and professional services. The increase in the first quarter 1998 was
primarily due to increases in employee related benefit expenses, professional
fees, training and supplies.
Engineering and product development expenses for the first quarter 1998
were $1,185, an increase of 15.9% from the first quarter 1997, as the Company
continues its new product innovation efforts. The principal components are
engineering salaries, outside professional engineering and design services and
other related product development expenditures. The amount of outside
professional engineering and design services and other related product
development expenditures are dependent upon the number and complexity of new
product introductions in any given year. The increase in the first quarter 1998
was primarily due to costs associated with the new product introductions in
1998.
9
<PAGE> 10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
--------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
- ---------------------------------
Interest expense for the first quarter 1998 was $288, an increase of
13.8% from the first quarter 1997. The increase in interest expense resulted
primarily from higher levels of variable rate borrowings to finance working
capital, capital expenditures and share repurchases, partially offset by a lower
effective borrowing rate.
Receivable securitization and other expense principally reflects the
effect of the cost of the Company's trade accounts receivable securitization
program and foreign currency transaction gains or losses related to the
Company's international assets.
Due to the factors discussed above, the Company had a loss of $4,169
before income taxes for the first quarter 1998 compared to income of $1,010
before income taxes for the comparable period in 1997.
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
$33,745 at March 31, 1998, an increase of 8.4% over the December 31, 1997 level.
Current assets decreased by $19,535 reflecting a reduction in trade accounts
receivable of $22,809 which was partially offset by a $3,225 increase in
inventories. Current liabilities also decreased by $22,144 principally
reflecting a $14,528 decrease in trade payables, a $3,107 decrease in accrued
advertising and promotion, a $3,018 decrease in accrued salaries, benefits and
payroll taxes, and a $975 decrease in accrued income taxes.
In the first three months of 1998, the Company utilized $1,602 of cash
for capital purchases, including approximately $950 of tooling related to the
new Dirt Devil(R) Vision(TM), Dirt Devil(R) Swivel Glide(TM) and Dirt Devil(R)
Mop Vac(TM).
The Company's revolving credit facility has a maturity date of April 1,
1999, and is classified as long-term at March 31, 1998. 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 $30,700 as of March 31, 1998, resulting
in availability of approximately $16,000. The agreement requires monthly
payments of interest only through maturity. The facility provides for pricing
options at the bank's base lending rate and LIBOR plus a rate spread as defined
in the Agreement. At March 31, 1998, the bank's base lending rate was 8.5%. In
addition, the Company pays a commitment fee at the annual rate of .375% on the
unused portion of the facility. In April, 1998 the Company received a commitment
for a new $45 million three-year secured revolving line of credit. The Company
expects to finalize this agreement in the second quarter of 1998. The new
facility will replace the Company's current $40 million revolver. 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 March 31, 1998. The revolving credit facility is collateralized
by the Company's inventories, trade accounts receivable, equipment and general
intangibles.
10
<PAGE> 11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED) (DOLLARS IN THOUSANDS)
--------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- -------------------------------------------
The Company also utilizes a revolving trade accounts receivable
securitization program to sell without recourse, through a wholly-owned
subsidiary, certain trade accounts receivable. Under the program, the maximum
amount allowed to be sold at any given time through March 31, 1998, was $25,000.
The maximum amount of receivables that can be sold is seasonally adjusted. At
March 31, 1998, the Company received approximately $13,300 from the sale of
trade accounts receivable. The proceeds from the sales were used to reduce
borrowings under the Company's revolving credit facility. Costs of the program,
which primarily consist of the purchaser's financing cost of issuing commercial
paper backed by the receivables, totaled $209 and $132 for the first quarter
ended March 31, 1998 and 1997, respectively, and have been classified as Other
expense in the accompanying Consolidated Statements of Operations. The Company,
as agent for the purchaser of the receivables, retains collection and
administrative responsibilities for the purchased receivables.
In February 1998, the Company's Board of Directors authorized a common
share repurchase program that provides for the Company to purchase, in the open
market and through negotiated transactions, up to 2,300 of its outstanding
common shares. As of March 31, 1998, the Company has repurchased 883 shares for
an aggregate purchase price of $5,457. The program is scheduled to expire on
March 1, 1999.
The Company has reached an agreement to sell one of its Mentor, Ohio
facilities. The Company anticipates completing the transaction in the third
quarter of 1998. The net cash proceeds are approximately $7,000, which exceeds
the net book value of the facility. The cash proceeds will be used to pay off
the Company's variable rate mortgage note payable.
The Company believes that its revolving credit facilities along with cash
generated by operations will be sufficient to provide for the Company's
anticipated working capital and capital expenditure requirements for the next
twelve months, as well as any additional stock repurchases.
QUARTERLY OPERATING RESULTS
- ---------------------------
The following table presents certain unaudited consolidated quarterly
operating information for the Company and includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for a
fair presentation of such information for the interim periods.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31,
1998 1997 1997 1997 1997
--------- -------- --------- -------- ---------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net Sales $51,848 $118,354 $87,375 $61,070 $58,618
Gross margin 11,498 36,691 25,284 17,739 16,234
Net (loss) income (2,543) 6,793 4,089 919 606
Net (loss) income per
common share (a) $ (.11) $ .29 $ .17 $ .04 $ .02
</TABLE>
(a) (Loss) earnings per share is calculated based on the diluted method
explained in Note 6 to the Consolidated Financial Statements.
The Company's business is highly seasonal. The Company believes that a
significant percentage of certain of its products, particularly the Dirt
Devil(R) Hand Vac and Dirt Devil(R) Broom Vac(TM), are given as gifts and
therefore, sell in larger volumes during the Christmas shopping season. Because
of the Company's continued dependency on its major customers, the timing of
purchases by these major customers could cause quarterly fluctuations in the
Company's net sales. As a consequence, results in prior quarters are not
necessarily indicative of future results of operations.
11
<PAGE> 12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED) (DOLLARS IN THOUSANDS)
--------------------------------------------------------
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 of companies that are more diversified and have greater financial
resources than the Company.
INFLATION
- ---------
The Company does not believe that inflation by itself has had a material
effect on the Company's results of operations. However, as the Company
experiences price increases from its suppliers, which may include increases due
to inflation, retail pressures may prevent the Company from increasing its
prices
LITIGATION
- ----------
The Company is involved in various claims and litigation arising in the
normal course of business. In the opinion of management, the ultimate resolution
of these actions will not materially affect the consolidated financial position,
results of operations, or cash flows of the Company.
ACCOUNTING STANDARDS
- --------------------
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, Reporting Comprehensive Income, in the first quarter of 1998. The
implementation of SFAS No. 130 did not have a material impact on the Company's
consolidated financial position or results of operations since the Company had
no significant other comprehensive income.
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.
FORWARD LOOKING STATEMENTS
- --------------------------
Forward-looking statements in this Form 10-Q are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. Potential risks and
uncertainties include, but are not limited to, general business and economic
conditions; the financial strength of the retail industry particularly the major
mass retail channel; the competitive pricing environment within the vacuum
cleaner segment of the floor care industry; the cost and effectiveness of
planned advertising, marketing and promotional campaigns, the success at retail
and the acceptance by consumers of the Company's new products, and the
dependence upon the Company's ability to continue to successfully develop and
introduce innovative products.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K
-------- --------------------------------
Forms 8-K - None
The following documents are furnished as an exhibit and
numbered pursuant to Item 601 of Regulation S-K:
Exhibit 27 - Financial data schedule
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Royal Appliance Mfg. Co.
--------------------------------------------------
(Registrant)
/s/ Michael J. Merriman
--------------------------------------------------
Michael J. Merriman
Chief Executive Officer, President and Director
(Principal Executive and Financial Officer)
Date: May 15, 1998 /s/ Richard G. Vasek
------------- --------------------------------------------------
Richard G. Vasek
Controller, Secretary and Chief Accounting Officer
(Principal Accounting Officer)
14
<PAGE> 15
INDEX TO EXHIBITS
Page No.
--------
Exhibit 27 - Financial data schedule 15
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10Q FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<CIK> 0000085462
<NAME> ROYAL APPLIANCE MFG. CO.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 24,236
<ALLOWANCES> 0
<INVENTORY> 39,420
<CURRENT-ASSETS> 69,471
<PP&E> 88,803
<DEPRECIATION> 46,417
<TOTAL-ASSETS> 115,840
<CURRENT-LIABILITIES> 35,726
<BONDS> 24,551
0
0
<COMMON> 211
<OTHER-SE> 79,393
<TOTAL-LIABILITY-AND-EQUITY> 115,840
<SALES> 51,848
<TOTAL-REVENUES> 51,848
<CGS> 40,350
<TOTAL-COSTS> 40,350
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 288
<INCOME-PRETAX> (4,169)
<INCOME-TAX> (1,626)
<INCOME-CONTINUING> (2,543)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,543)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
