<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECITON 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. For the quarterly period ended SEPTEMBER 30, 1999
[ ] 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 17,270,052
-------------------------------- ---------------------------------
(Class) (Outstanding at November 5, 1999)
The Exhibit index appears on sequential page 16.
1
<PAGE> 2
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number
------
Part I FINANCIAL INFORMATION
<S> <C>
Item 1 Financial Statements
------ --------------------
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations -
three months and nine months ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows -
nine months ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6 - 8
Item 2 Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations 9 - 13
-----------------------------------
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 14
------ --------------------------------
Signatures 15
Exhibit Index 16
</TABLE>
EXHIBIT 27* - FINANCIAL DATA SCHEDULE
*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>
September 30, December 31,
1999 1998
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash $ 334 $ -
Trade accounts receivable, net 42,965 37,536
Inventories 47,309 31,088
Deferred income taxes 4,855 4,148
Prepaid expenses and other 2,586 4,572
--------- ---------
Total current assets 98,049 77,344
--------- ---------
Property, plant and equipment, at cost:
Land 1,541 1,541
Building 7,777 7,777
Molds, tooling, and equipment 72,917 64,865
Furniture and office equipment 7,183 7,022
Assets under capital leases 4,695 4,714
Leasehold improvements and other 4,606 3,718
--------- ---------
98,719 89,637
Less accumulated depreciation and amortization (58,304) (52,837)
--------- ---------
40,415 36,800
--------- ---------
Tooling deposits 4,332 2,770
Other 616 566
--------- ---------
Total assets $ 143,412 $ 117,480
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 31,239 $ 18,647
Accrued liabilities:
Advertising and promotion 9,893 8,768
Salaries, benefits, and payroll taxes 7,097 2,299
Warranty and customer returns 8,950 8,100
Income taxes 2,177 1,930
Other 3,706 6,809
Current portions of capital lease obligations and notes payable 599 551
--------- ---------
Total current liabilities 63,661 47,104
--------- ---------
Revolving credit agreement 20,700 10,600
Capitalized lease obligations, less current portion 2,589 2,833
Notes payable, less current portions 4,746 4,993
--------- ---------
Total long-term debt 28,035 18,426
--------- ---------
Deferred income taxes 5,626 5,227
--------- ---------
Total liabilities 97,322 70,757
--------- ---------
Commitments and contingencies (Note 3) - -
Shareholders' equity:
Common shares, at stated value 212 211
Additional paid-in capital 42,495 42,115
Retained earnings 51,566 42,544
Accumulated other comprehensive income - -
--------- ---------
94,273 84,870
Less treasury shares, at cost (7,612,800 and 5,726,400 shares
at September 30, 1999 and December 31 1998, respectively) (48,183) (38,147)
--------- ---------
Total shareholders' equity 46,090 46,723
--------- ---------
Total liabilities and shareholders' equity $ 143,412 $ 117,480
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
Part I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
------ --------------------
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 106,520 $ 73,607 $ 276,218 $ 176,714
Cost of sales 81,364 54,349 208,222 133,805
--------- --------- --------- ---------
Gross margin 25,156 19,258 67,996 42,909
Advertising and promotion 8,827 10,266 27,877 27,622
Other selling 2,587 1,999 6,711 5,892
General and administrative 4,444 2,804 12,554 9,725
Engineering and product development 1,646 1,087 4,673 3,143
--------- --------- --------- ---------
Income (loss) from operations 7,652 3,102 16,181 (3,473)
Interest expense, net 418 522 886 1,221
Receivable securitization and other expense
(income), net 322 (975) 948 (446)
--------- --------- --------- ---------
Income (loss) before income taxes 6,912 3,555 14,347 (4,248)
Income tax expense (benefit) 2,505 1,386 5,325 (1,640)
--------- --------- --------- ---------
Net income (loss) $ 4,407 $ 2,169 $ 9,022 $ (2,608)
========= ========= ========= =========
BASIC
Weighted average number of common
shares outstanding (in thousands) 18,067 21,270 18,794 21,874
Earnings (loss) per share $ .24 $ .10 $ .48 $ (.12)
DILUTED
Weighted average number of common
shares and equivalents outstanding
(in thousands) 18,425 21,431 18,992 21,874
Earnings (loss) per share $ .24 $ .10 $ .48 $ (.12)
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE> 5
Part I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
------ --------------------
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 9,022 $ (2,608)
-------- --------
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation and amortization 8,650 6,629
Compensatory effect of stock options - 61
Loss (gain) on sale of property, plant and equipment, net 85 (1,316)
(Increase) decrease in assets:
Trade accounts receivable, net (5,429) 9,862
Inventories (16,221) 1,382
Refundable and accrued income taxes (61) (1,802)
Prepaid expenses and other 1,986 (416)
Other (222) (847)
Increase (decrease) in liabilities:
Trade accounts payable 12,592 (4,984)
Accrued advertising and promotion 1,125 (2,713)
Accrued salaries, benefits, and payroll taxes 4,798 (2,406)
Accrued warranty and customer returns 850 (700)
Accrued other (3,103) (500)
-------- --------
Total adjustments 5,050 2,250
-------- --------
Net cash from operating activities 14,072 (358)
-------- --------
Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment, net (12,178) (6,357)
Increase in tooling deposits (1,562) (574)
Proceeds from sale of plant and equipment, net - 6,986
-------- --------
Net cash from investing activities (13,740) 55
-------- --------
Cash flows from financing activities:
Proceeds on bank debt, net 10,100 14,027
Payments on note payable (230) (4,214)
Payments on capital lease obligations (213) (171)
Proceeds from exercise of stock options 381 150
Repurchase of common stock (10,036) (10,843)
-------- --------
Net cash from financing activities 2 (1,051)
-------- --------
Effect of exchange rate changes on cash - (1)
-------- --------
Net increase (decrease) in cash 334 (1,355)
-------- --------
Cash at beginning of period - 1,355
-------- --------
Cash at end of period $ 334 $ -
======== ========
Supplemental disclosure of cash flow information:
Cash payments for:
Interest $ 1,007 $ 1,293
======== ========
Income taxes, net of refunds $ 5,379 $ 162
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: BASIS OF PRESENTATION
The financial information for Royal Appliance Mfg. Co. and Subsidiaries
(the Company) included herein is unaudited; however, such information reflects
all adjustments (consisting solely of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the
consolidated statements of financial position as of September 30, 1999 and
December 31, 1998, and the related statements of operations and cash flows as
of, and for the interim periods ended, September 30, 1999 and 1998. It is
suggested that these condensed financial statements be read in conjunction with
the consolidated financial statements and the notes thereto included in the
Company's latest shareholders' annual report (Form 10-K).
The results of operations for the three and nine month periods ended
September 30, 1999, are not necessarily indicative of the results to be expected
for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures.
Actual results could differ from those estimates.
The Company's revenue recognition policy is to recognize revenues when
products are shipped.
Net income (loss) per share is computed based on the weighted average
number of common shares outstanding for basic earnings per share and on the
weighted average number of common shares and common share equivalents
outstanding for diluted earnings per share.
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost or market using first-in,
first-out (FIFO) method. Inventories at September 30, 1999, and December 31,
1998, consisted of the following
September 30, December 31,
1999 1998
---- ----
Finished goods $27,361 $16,648
Work in process and purchased parts 19,948 14,440
------- -------
$47,309 $31,088
======= =======
NOTE 3: COMMITMENTS AND CONTINGENCIES
At September 30, 1999, the Company estimates having contractual
commitments for future advertising and promotional expense of approximately
$20,690, including commitments for television advertising through December 31,
2000. Other contractual commitments for items in the normal course of business
total approximately $2,700.
6
<PAGE> 7
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4: DEBT
The Company's collateralized revolving credit facility with availability
of $45,000 has a maturity date of April 1, 2002. Under the agreement, pricing
options of the bank's base lending rate and LIBOR rate are based on a formula,
as defined. In addition, the Company pays a commitment fee based on a formula,
as defined, on the unused portion of the facility. The revolving credit facility
contains covenants which require, among other things, the achievement of minimum
net worth levels and the maintenance of certain financial ratios. The Company
was in compliance with all applicable covenants as of September 30, 1999. The
revolving credit facility is collateralized by the Company's inventories and
certain trade accounts receivable.
The Company also utilizes a revolving trade accounts receivable
securitization program to sell without recourse, through a wholly-owned
subsidiary, certain trade accounts receivable. Under the program, the maximum
amount allowed to be sold at any given time through September 30, 1999, was
$30,000. The maximum amount of receivables that can be sold is seasonally
adjusted. At September 30, 1999, the Company received approximately $23,600 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 $859 and $611 for the nine
months ended September 30, 1999 and 1998, respectively, and have been classified
as Receivable securitization and other expense (income), net 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 7.9% fixed rate mortgage note payable in the amount of
$5,040. The note is collateralized by the Company's assembly and 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 October 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 4,100 of its outstanding
common shares. As of November 5, 1999, the Company has repurchased approximately
3,488 shares for an aggregate purchase price of $17,850 under this program. The
program is scheduled to expire on December 31, 1999.
7
<PAGE> 8
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6: EARNINGS (LOSS) PER SHARE
The Company follows Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings per Share, for the calculation of earnings per share.
Basic earnings (loss) per share excludes dilution and is computed by dividing
income by the weighted average number of common shares outstanding for the
period. Diluted earnings per share includes the dilution of common stock
equivalents.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 4,407 $ 2,169 $ 9,022 $ (2,608)
======== ======== ======== ========
BASIC:
Common shares outstanding, net of treasury
shares, beginning of period 19,136 22,028 19,622 22,911
Weighted average common shares issued
during period 37 26 53 9
Weighted average treasury shares repurchased
during period (1,106) (784) (881) (1,046)
-------- -------- -------- --------
Weighted average common shares outstanding,
net of treasury shares, end of period 18,067 21,270 18,794 21,874
======== ======== ======== ========
Net income (loss) per common share $ 0.24 $ 0.10 $ 0.48 $ (0.12)
======== ======== ======== ========
DILUTED:
Common shares outstanding, net of treasury
shares, beginning of period 19,136 22,028 19,622 22,911
Weighted average common shares issued
during period 37 26 53 9
Weighted average common share equivalents 358 161 198 -
Weighted average treasury shares repurchased
during period (1,106) (784) (881) (1,046)
-------- -------- -------- --------
Weighted average common shares outstanding,
net of treasury shares, end of period 18,425 21,431 18,992 21,874
======== ======== ======== ========
Net income (loss) per common share $ 0.24 $ 0.10 $ 0.48 $ (0.12)
======== ======== ======== ========
</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 increased 44.7% for the third quarter and increased 56.3% for
the nine-month period ended September 30, 1999, compared with the same periods
in the prior year. The increase in the third quarter net sales and net sales for
the nine months ended September 30, 1999, was due primarily to higher shipments
of the Company's line of upright vacuum cleaners, including the Dirt Devil(R)
Vision(TM) with bagless technology, which was introduced in August 1998, and
initial shipments of the new Dirt Devil(R) Easy Steamer(TM), which was
introduced in July 1999. Overall sales to the top 5 customers (all of which are
major retailers) increased in the first nine months of 1999. Sales to the top 5
customers accounted for approximately 68.7% of net sales in the first nine
months of 1999 as compared with approximately 63.3% in the first nine months of
1998. 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 26.2% for the
third quarter 1998 to 23.6% in the third quarter 1999 and increased slightly
from 24.3% in the first nine months of 1998 to 24.6% in the first nine months of
1999. The gross margin percentage was negatively affected for the third quarter
1999 by a higher provision for slow moving and obsolete inventory compared with
the third quarter 1998 and positively affected in the first nine months of 1999
primarily by lower returns as a percent of sales.
Advertising and promotion expenses decreased 14.0% for the third quarter
1999 and were comparable for the nine months ended September 30, 1999. The
decrease in advertising and promotion expenses for the quarter was due primarily
to decreases in media spending and costs associated with producing the media.
The Company intends to continue emphasizing cooperative advertising and
television as its primary methods of advertising and promotion. In general, the
Company's advertising expenditures are not specifically proportional to
anticipated sales. For example, the amount of advertising and promotional
expenditures may be concentrated during critical retail shopping periods during
the year, particularly the fourth quarter, and during new product and
promotional campaign introductions. Advertising and promotion expenses will
increase for the fourth quarter 1999 partially due to the inclusion of new
television commercials supporting the Dirt Devil(R) Easy Steamer(TM) and the new
Dirt Devil(R) Vision(TM) with Sensor.
Other selling expenses increased 29.4% for the third quarter 1999 and
increased 13.9% for the nine month period ended September 30, 1999 compared with
the same periods in 1998. The increase is primarily due to internal sales and
marketing personnel compensation, which are the largest components of other
selling expenses. Other selling expenses decreased as a percentage of sales for
the third quarter 1999 from 2.7% to 2.4% and for the nine month period ended
September 30, 1999, from 3.3% to 2.4%, compared with the same periods in 1998.
General and administrative expenses increased 58.5% for the third quarter
1999 and increased 29.1% for the nine-month period ended September 30, 1999,
compared with the same periods in 1998. General and administrative expenses
increased as a percentage of net sales for the third quarter 1999 from 3.8% to
4.2% and decreased for the nine month period ended September 30, 1999, from 5.5%
to 4.5%, compared with the same periods in 1998. The principal components are
compensation (including benefits), insurance, provision for doubtful accounts
and professional services. The dollar increases in the third quarter and
nine-month period ended September 30, 1999, were primarily due to increases in
employee related benefit expenses and professional services. Also impacting the
nine-month period ended September 30, 1999 was an increase in provision for
doubtful accounts related to one customer which filed for bankruptcy protection
under Chapter 11 during the first quarter.
9
<PAGE> 10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS) (CONTINUED)
RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
- --------------------------------------------------------------------------
Engineering and product development expenses increased 51.4% for the
third quarter 1999 and increased 48.7% for the nine-month period ended September
30, 1999. The principal components are engineering salaries, outside
professional engineering and design services and other related product
development expenditures. The amount of outside professional engineering and
design services and other related product development expenditures are dependent
upon the number and complexity of new product introductions in any given period.
The increase in the first nine months of 1999 was primarily due to costs
associated with more new product introductions in 1999 and the timing of those
introductions.
Interest expense decreased 19.9% for the third quarter 1999 and decreased
27.4% for the nine-month period ended September 30, 1999, compared with the same
periods in 1998. The decrease in interest expense is the result of lower levels
of variable rate borrowings to finance working capital, capital expenditures and
share repurchases and the payoff of a variable rate mortgage in the third
quarter 1998.
Receivable securitization and other expense (income), net 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 North American assets. The 1998 amount includes the gain from
the sale of a facility of approximately $1,300.
Due to the factors discussed above, the Company had income before income
taxes for the third quarter and nine months ended September 30, 1999, of $6,912
and $14,347, respectively, as compared to income before income taxes for the
third quarter and a loss before income taxes for the nine months ended September
30, 1998, of $3,555 and $4,248, respectively.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has used cash generated from operations and revolving credit
proceeds to fund its working capital needs, capital expenditures, and share
repurchases. Working capital was $34,388 at September 30, 1999, an increase of
13.7% over December 31, 1998. Current assets increased by $20,705 reflecting in
part a $5,429 increase of trade accounts receivable, an increase in inventory of
$16,221, and an increase in deferred and refundable income taxes of $707
partially offset by a decrease in prepaid expenses and other of $1,986. Current
liabilities increased by $16,557 reflecting in part a $12,592 increase in trade
accounts payable, a $1,125 increase in accrued advertising and promotion, a
$4,798 increase in accrued salaries, benefits, and payroll taxes and a $850
increase in accrued warranty and customer returns partially offset by a decrease
of $3,103 in accrued other.
In the first nine months of 1999, the Company utilized $13,740 of cash
for capital purchases, including approximately $8,549 of tooling related to the
new Dirt Devil(R) Easy Steamer(TM), the Dirt Devil(R) Vision(TM) with Sensor,
the Dirt Devil(R) Vision(TM), the Dirt Devil(R) Swivel Glide(TM), the Dirt
Devil(R) Power Lite(TM) and the new Dirt Devil(R) Stick Vac.
The Company's collateralized revolving credit facility with availability
of $45,000 has a maturity date of April 1, 2002. Under the agreement, pricing
options of the bank's base lending rate and LIBOR rate are based on a formula,
as defined. In addition, the Company pays a commitment fee based on a formula,
as defined, on the unused portion of the facility. The revolving credit facility
contains covenants which require, among other things, the achievement of minimum
net worth levels and the maintenance of certain financial ratios. The Company
was in compliance with all applicable covenants as of September 30, 1999. The
revolving credit facility is collateralized by the Company's inventories and
certain trade accounts receivable.
10
<PAGE> 11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS) (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company also utilizes a revolving trade accounts receivable
securitization program to sell without recourse, through a wholly-owned
subsidiary, certain trade accounts receivable. Under the program, the maximum
amount allowed to be sold at any given time through September 30, 1999, was
$30,000. The maximum amount of receivables that can be sold is seasonally
adjusted. At September 30, 1999, the Company received approximately $23,600 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 $859 and $611 for the nine
months ended September 30, 1999 and 1998, respectively, and have been classified
as Receivable securitization and other expense, net 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 October 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 4,100 of its outstanding
common shares. As of November 5, 1999, the Company has repurchased approximately
3,488 shares for an aggregate purchase price of $17,850 under this program. The
program is scheduled to expire on December 31, 1999.
The Company believes that its revolving credit facilities along with cash
generated by operations will be sufficient to provide for the Company's
anticipated working capital and capital expenditure requirements for the next
twelve months, as well as any additional stock repurchases under the current
repurchase program.
QUARTERLY OPERATING RESULTS
The following table presents certain unaudited consolidated quarterly
operating information for the Company and includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for a
fair presentation of such information for the interim periods.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------------
Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1999 1999 1999 1998 1998 1998 1998
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $106,520 $ 80,488 $ 89,210 $106,006 $ 73,607 $ 51,259 $ 51,848
Gross margin 25,156 20,824 22,016 30,950 19,258 12,153 11,498
Net income (loss) 4,407 2,863 1,752 5,134 2,169 (2,234) (2,543)
Net income (loss) per
common share (a)(b) $ 0.24 $ 0.15 $ 0.09 $ 0.26 $ 0.10 $ (0.10) $ (0.11)
</TABLE>
(a) The sum of 1998 quarterly net income per common share does not equal
annual net income per common share due to the change in the weighted
average number of common shares outstanding caused by share repurchases.
(b) Earnings (loss) per share is calculated based on the diluted method
explained in Note 6 to the Consolidated Financial Statements.
The Company's business is seasonal. The Company believes that a significant
percentage of certain of its products are given as gifts and therefore, sell in
larger volumes during the Christmas shopping season. Because of the Company's
continued dependency on its major customers, the timing of purchases by these
major customers and the timing of new product introductions 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 (DOLLARS IN THOUSANDS) (CONTINUED)
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 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.
INFLATION
- ---------
The Company does not believe that inflation by itself has had a material
effect on the Company's results of operations. However, as the Company
experiences price increases from its suppliers, which may include increases due
to inflation, retail pressures may prevent the Company from increasing its
prices.
LITIGATION
- ----------
The Company is involved in various claims and litigation arising in the
normal course of business. In the opinion of management, the ultimate resolution
of these actions will not materially affect the consolidated financial position,
results of operations, or cash flows of the Company.
ACCOUNTING STANDARDS
- --------------------
The Company will be required to implement Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities, in the first quarter of 2001. The Company expects the
implementation of SFAS No. 133 will not have a material impact on its
consolidated financial position, results of operations, or cash flows.
The Company adopted Statement of Position ("SOP') 98-1, Accounting for
the Costs of Computer Software, in the first quarter of 1999. The impact of
implementing SOP 98-1 did not have a material impact on its consolidated
financial position, results of operations, or cash flows.
YEAR 2000 COMPLIANCE
- --------------------
Many currently installed computer systems are not capable of
distinguishing the year 2000 from the year 1900. As a result, computer systems
and/or software used by many companies in a wide variety of applications will
experience operating difficulties unless they are modified or upgraded to
adequately process information involving, related to or dependent upon the
century change. Significant uncertainty exists concerning the scope and
magnitude of problems associated with the century change.
The Company has developed a Year 2000 Action Plan to address this
concern. A project team has performed a detailed assessment of all internal
computer systems and has implemented plans to either convert or replace the
software or equipment that is not Year 2000 compliant. The Company expects to
complete these projects during 1999.
12
<PAGE> 13
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Dollars in thousands) (Continued)
YEAR 2000 COMPLIANCE (CONTINUED)
- --------------------------------
Year 2000 problems could affect many of the Company's production,
distribution, financial, administrative and communication operations, as well as
the processing of customer orders. The Company's internal business system was
modified to be Year 2000 compliant in the third quarter of 1998. Testing and
verification of the mission critical components of the business system are
complete. Ongoing testing of the overall business system will be performed
throughout 1999. The Company has completed its inventory of embedded systems and
is currently in the assessment and remediation phases for this critical area. In
addition, the Company has asked vendors, service suppliers, communications
providers and banks to verify their Year 2000 readiness; their system failures
could have a significant impact on the Company's operations. Action has been has
been taken based on individual responses and visits to key suppliers.
External and internal costs directly associated with modifying internal
use software for Year 2000 compliance are expensed as incurred. As of September
30, 1999, the costs incurred for this project were primarily attributable to
internal personnel costs and consulting fees which were estimated at $170. The
remaining costs to fix the Year 2000 problems are estimated at approximately
$100, which will be incurred in the fourth quarter of 1999. These costs do not
include normal system replacements and upgrades. The Company does not expect
Year 2000 compliance costs to have a material impact on the Company's
consolidated financial position, results of operations, or cash flows.
The Company is uncertain of the above expectations. For example, if the
Company is unsuccessful in identifying or fixing all Year 2000 problems in the
Company's critical operations or if the Company is affected by the inability of
suppliers or major customers (such as one of our top 5 customers) to continue
operations due to such a problem, the Company's consolidated financial position,
results of operations, or cash flows, could be materially impacted.
The total costs that the Company incurs in connection with the Year
2000 problems will be influenced by the Company's ability to successfully
identify Year 2000 systems' flaws, the nature and amount of programming required
to fix the affected programs, the related labor and/or consulting costs for such
remediation and the ability of third parties with whom we have business
relationships to successfully address their own Year 2000 concerns. These and
other unforeseen factors could have a material adverse effect on the Company's
consolidated financial position, results of operations, or cash flows.
Based on available information, the Company does not believe any material
exposure to significant business interruption exists as a result of Year 2000
compliance issues. The Company has developed formal contingency plans that it
believes will address mission critical activities as determined by management in
the event the Year 2000 project is not completed in a timely manner.
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 and aggressive product development
environment within the vacuum cleaner segment of the floor care industry; the
impact of private-label programs by mass retail; the cost and effectiveness of
planned advertising, marketing and promotional campaigns; the success at retail
and the acceptance by consumers of the Company's new products, including the
Company's line of Dirt Devil(R) Vision uprights with bagless technology and the
Dirt Devil(R) Easy Steamer(TM); the dependence upon the Company's ability to
continue to successfully develop and introduce innovative products; the
uncertainty of the Company's foreign suppliers to continue to supply finished
goods and component parts; and unforeseen technological issues associated with
the Year 2000 compliance efforts.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
------ --------------------------------
Forms 8-K - None
The following documents are furnished as an exhibit and
numbered pursuant to Item 601 of Regulation S-K:
Exhibit 27 - Financial data schedule (EDGAR filing only)
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Royal Appliance Mfg. Co.
-------------------------------------------
(Registrant)
/s/ Michael J. Merriman
-------------------------------------------
Michael J. Merriman
Chief Executive Officer, President and Director
(Principal Executive Officer)
Date: November 8, 1999 /s/ Richard G. Vasek
---------------- -------------------------------------------
Richard G. Vasek
Chief Financial Officer, Vice President - Finance
and Secretary
(Principal Financial Officer)
15
<PAGE> 16
INDEX TO EXHIBITS
PAGE NUMBER
-----------
Exhibit 27 - Financial data schedule (EDGAR filing only)
16
<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, 1999 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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<SECURITIES> 0
<RECEIVABLES> 42,965
<ALLOWANCES> 0
<INVENTORY> 47,309
<CURRENT-ASSETS> 98,049
<PP&E> 98,719
<DEPRECIATION> 58,304
<TOTAL-ASSETS> 143,412
<CURRENT-LIABILITIES> 63,661
<BONDS> 28,035
0
0
<COMMON> 212
<OTHER-SE> 42,495
<TOTAL-LIABILITY-AND-EQUITY> 143,412
<SALES> 276,218
<TOTAL-REVENUES> 276,218
<CGS> 208,222
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<INTEREST-EXPENSE> 886
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<EPS-BASIC> .48
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