<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, 1999
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from ________________to
_______________
Commission file number 0-19431
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ROYAL APPLIANCE MFG. CO.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
OHIO 34-1350353
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
650 ALPHA DRIVE, CLEVELAND, OHIO 44143
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(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(440) 449-6150
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(Registrant's telephone number, including area code)
Indicate, by check mark, whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common shares, as of the latest practicable date.
Common Shares, without par value 19,095,024
---------------------------------- ------------------------------
(Class) (Outstanding at May 10, 1999)
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, 1999 and December 31, 1998 3
Consolidated Statements of Operations -
three months ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows -
three months ended March 31, 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 9-14
-----------------------------------
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 15
------ --------------------------------
Signatures 16
Exhibit Index 17
Exhibit 27* - Financial data schedule
-----------
*Numbered in accordance with Item 601 of Regulation S-K.
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
------ --------------------
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash $ -- $ --
Trade accounts receivable, net 39,197 37,536
Inventories 27,955 31,088
Deferred income taxes 4,368 4,148
Prepaid expenses and other 4,598 4,572
---------- ----------
Total current assets 76,118 77,344
---------- ----------
Property, plant and equipment, at cost:
Land 1,541 1,541
Building 7,777 7,777
Molds, tooling, and equipment 65,270 64,865
Furniture and office equipment 7,193 7,022
Assets under capital leases 4,718 4,714
Leasehold improvements and other 4,058 3,718
---------- ----------
90,557 89,637
Less accumulated depreciation and amortization (55,189) (52,837)
---------- ----------
35,368 36,800
---------- ----------
Tooling deposits 5,500 2,770
Other 584 566
---------- ----------
Total assets $ 117,570 $ 117,480
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 21,550 $ 18,647
Accrued liabilities:
Advertising and promotion 9,200 8,768
Salaries, benefits and payroll taxes 2,336 2,299
Warranty and customer returns 8,500 8,100
Income taxes 2,281 1,930
Other 6,202 6,809
Current portions of capital lease obligations and notes payable 566 551
---------- ----------
Total current liabilities 50,635 47,104
---------- ----------
Revolving credit agreement 7,800 10,600
Capitalized lease obligations, less current portion 2,739 2,833
Notes payable, less current portion 4,897 4,993
---------- ----------
Total long-term debt 15,436 18,426
---------- ----------
Deferred income taxes 4,967 5,227
---------- ----------
Total liabilities 71,038 70,757
---------- ----------
Commitments and contingencies (Note 3) -- --
Shareholders' equity:
Common shares, at stated value 212 211
Additional paid-in capital 42,264 42,115
Retained earnings 44,296 42,544
Accumulated other comprehensive income -- --
---------- ----------
86,772 84,870
Less treasury shares, at cost (6,302,900 and 5,726,400 shares at
March 31, 1999, and December 31, 1998, respectively) (40,240) (38,147)
---------- ----------
Total shareholders' equity 46,532 46,723
---------- ----------
Total liabilities and shareholders' equity $ 117,570 $ 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
March 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Net sales $ 89,210 $ 51,848
Cost of sales 67,194 40,350
---------- ----------
Gross margin 22,016 11,498
Advertising and promotion 10,978 8,111
Other selling 1,952 1,953
General and administrative 4,218 3,893
Engineering and product development 1,488 1,185
---------- ----------
Income (loss) from operations 3,380 (3,644)
Interest expense, net 285 288
Receivable securitization and other expense, net 269 237
---------- ----------
Income (loss) before income taxes 2,826 (4,169)
Income tax expense (benefit) 1,074 (1,626)
---------- ----------
Net Income (loss) $ 1,752 $ (2,543)
========== ==========
BASIC
Weighted average number of common shares
outstanding (in thousands) 19,241 22,322
Earnings (loss) per share $ .09 $ (.11)
DILUTED
Weighted average number of common shares
and equivalents outstanding (in thousands) 19,283 22,322
Earnings (loss) per share $ .09 $ (.11)
</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>
Three months
Ended March 31,
----------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,752 $ (2,543)
-------- --------
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation and amortization 2,421 1,974
Compensatory effect of stock options -- 21
Deferred income taxes (480) --
(Increase) decrease in assets:
Trade accounts receivable, net (1,661) 22,809
Inventories 3,133 (3,225)
Refundable and accrued income taxes 351 (1,741)
Prepaid expenses and other (26) (2,569)
Other (87) 1,268
Increase (decrease) in liabilities:
Trade accounts payable 2,903 (14,528)
Accrued advertising and promotion 432 (3,107)
Accrued salaries, benefits, and payroll taxes 37 (3,018)
Accrued warranty and customer returns 400 (400)
Accrued other (607) (133)
-------- --------
Total adjustments 6,816 (2,649)
-------- --------
Net cash from operating activities 8,568 (5,192)
-------- --------
Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment, net (920) (1,364)
Increase in tooling deposits (2,730) (238)
-------- --------
Net cash from investing activities (3,650) (1,602)
-------- --------
Cash flows from financing activities:
(Payments) proceeds on bank debt (2,800) 11,060
Payments on note payable (90) (109)
Payments on capital lease obligations (85) (55)
Proceeds from exercise of stock options 150 --
Repurchase of common stock (2,093) (5,457)
-------- --------
Net cash from financing activities (4,918) 5,439
-------- --------
Net decrease in cash -- (1,355)
-------- --------
Cash at beginning of period -- 1,355
-------- --------
Cash at end of period $ -- $ --
======== ========
Supplemental disclosure of cash flow information:
Cash payments for:
Interest $ 399 $ 289
======== ========
Income taxes, net of refunds $ 1,188 $ 115
======== ========
</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, 1999, and December
31, 1998, and the related statements of operations and cash flows as of, and for
the interim periods ended, March 31, 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 month period ended March 31,
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 March 31, 1999, and December 31, 1998,
consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Finished goods $ 14,117 $ 16,648
Work in process and purchased parts 13,838 14,440
------------ ------------
$ 27,955 $ 31,088
============ ============
</TABLE>
NOTE 3: COMMITMENTS AND CONTINGENCIES
At March 31, 1999, the Company estimates having contractual commitments for
future advertising and promotional expense of approximately $16,100, including
commitments for television advertising through December 31, 1999. Other
contractual commitments for items in the normal course of business total
approximately $4,800.
6
<PAGE> 7
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4: DEBT
In April, 1998, the Company entered into a three-year collateralized
revolving credit facility with availability of $45,000. 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 March 31, 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 March 31, 1999, was $25,000.
The maximum amount of receivables that can be sold is seasonally adjusted. At
March 31, 1999, the Company received approximately $16,100 from the sale of
trade accounts receivable. The proceeds from the sales were used to reduce
borrowings under the Company's revolving credit facility. Costs of the program,
which primarily consist of the purchaser's financing cost of issuing commercial
paper backed by the receivables, totaled $275 and $209 for the three months
ended March 31, 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.
The Company has a 7.9% fixed rate mortgage note payable in the amount of
$5,180. 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 March 31, 1999, the Company has repurchased approximately 1,602
shares for an aggregate purchase price of $6,475 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 (CONT.)
(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 March 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net income (loss) $ 1,752 $ (2,543)
============ ============
BASIC:
Common shares outstanding, net of treasury shares,
beginning of quarter 19,622 22,911
Weighted average common shares issued during
quarter 3 --
Weighted average treasury shares repurchased
during quarter (384) (589)
------------ ------------
Weighted average common shares outstanding, net of
treasury shares, end of quarter 19,241 22,322
============ ============
Net income (loss) per common share $ .09 $ (.11)
============ ============
DILUTED:
Common shares outstanding, net of treasury shares,
beginning of quarter 19,622 22,911
Weighted average common shares issued during
quarter 3 --
Weighted average common share equivalents 42 --
Weighted average treasury shares repurchased
during quarter (384) (589)
------------ ------------
Weighted average treasury shares outstanding, net of
treasury shares, end of quarter 19,283 22,322
============ ============
Net income (loss) per common share $ .09 $ (.11)
============ ============
</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 72.1% for the first quarter ended March 31, 1999,
compared with the same period in the prior year. The increase in the first
quarter net sales was due primarily to higher shipments of the Company's line of
upright vacuum cleaners, including the new Dirt Devil(R) Vision(TM) with bagless
technology, which was introduced in the third quarter of 1998. Overall sales to
the top 5 customers in the first three months of 1999 (all of which are major
retailers) accounted for approximately 74.7% of net sales as compared with
approximately 62.7% in the first three 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, increased from 22.2% for the first
quarter 1998 to 24.7% in the first quarter 1999. The gross margin percentage was
positively affected in 1999 primarily by lower returns as a percent of sales and
manufacturing variances as a percent of sales.
Advertising and promotion expenses for the first quarter 1999 were $10,978,
an increase of 35.3% from the first quarter 1998. The increase in advertising
and promotion expenses was due primarily to increases in cooperative advertising
and media spending for the Dirt Devil(R) Vision(TM). The Company intends to
continue emphasizing cooperative advertising and television as its primary
methods of advertising and promotion. In general, the Company's advertising
expenditures are not specifically proportional to anticipated sales. For
example, the amount of advertising and promotional expenditures may be
concentrated during critical retail shopping periods during the year,
particularly the fourth quarter and during new product and promotional campaign
introductions.
Other selling expenses for the first quarter 1999 were $1,952, comparable
with the first quarter 1998. The principal components are internal sales and
marketing personnel costs.
General and administrative expenses for the first quarter 1999 were $4,218,
an increase of 8.3% from the first quarter 1998. General and administrative
expenses decreased as a percentage of net sales from 7.5% to 4.7%. The principal
components are compensation (including benefits), insurance, provision for
doubtful accounts, travel and professional services. The dollar increase in the
first quarter 1999 was primarily due to an increase in provision for doubtful
accounts related to one customer which filed for bankruptcy protection under
Chapter 11 during the quarter.
Engineering and product development expenses for the first quarter 1999
were $1,488, an increase of 25.6% from the first quarter 1998, 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 period. The increase in the first quarter
1999 was primarily due to costs associated with more new product introductions
in 1999 and the timing of those introductions.
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 1999 was $285, comparable with the
first quarter 1998.
Receivable securitization and other expense, 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.
Due to the factors discussed above, the Company had income of $2,826 before
income taxes for the first quarter 1999 compared to a loss of $4,169 before
income taxes for the comparable period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has used cash generated from operations to fund its working
capital needs, capital expenditures and share repurchases. Working capital was
$25,483 at March 31, 1999, a decrease of 15.7% over the December 31, 1998 level.
Current assets decreased by $1,226 reflecting a reduction in inventories of
$3,133 which was partially offset by a $1,661 increase in trade accounts
receivable. Current liabilities increased by $3,531 principally reflecting a
$2,903 increase in trade payables, a $432 increase in accrued advertising and
promotion, and a $400 increase in accrued warranty and customer returns.
In the first three months of 1999, the Company utilized $3,650 of cash for
capital purchases, including approximately $2,000 of tooling related to the new
Dirt Devil(R) Easy Steamer(TM), the Dirt Devil(R) Vision(TM) with sensor and
Dirt Devil(R) Vision(TM).
In April, 1998, the Company entered into a three-year collateralized
revolving credit facility with availability of $45,000. 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 March 31, 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 March 31, 1999, was $25,000.
The maximum amount of receivables that can be sold is seasonally adjusted. At
March 31, 1999, the Company received approximately $16,100 from the sale of
trade accounts receivable. The proceeds from the sales were used to reduce
borrowings under the Company's revolving credit facility. Costs of the program,
which primarily consist of the purchaser's financing cost of issuing commercial
paper backed by the receivables, totaled $275 and $209 for the three months
ended March 31, 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.
10
<PAGE> 11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (DOLLARS IN THOUSANDS)
-------------
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- -------------------------------
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 March 31, 1999, the Company has repurchased approximately 1,602
shares for an aggregate purchase price of $6,475 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.
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,
1999 1998 1998 1998 1998
---------- ---------- ---------- ---------- -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net Sales $ 89,210 $ 106,006 $ 73,607 $ 51,259 $ 51,848
Gross margin 22,016 30,950 19,258 12,153 11,498
Net income (loss) 1,752 5,134 2,169 (2,234) (2,543)
Net income (loss) per
common share (a)(b) $ .09 $ .26 $ .10 $ (.10) $ (.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 due to 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 highly seasonal. The Company believes that a
significant percentage of certain of its products, particularly the Dirt
Devil(R) Hand Vac, Dirt Devil(R) Broom Vac(TM) and Dirt Devil(R) Mop 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 and the timing of
new product introductions causes quarterly fluctuations in the Company's net
sales. As a consequence, results in prior quarters are not necessarily
indicative of future results of operations.
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.
11
<PAGE> 12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (CONTINUED) (DOLLARS IN THOUSANDS)
-------------
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 2000. 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.
The Company adopted SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information, in the fourth quarter of 1998. Interim
disclosures are not required as this Company consists of only one segment.
YEAR 2000 COMPLIANCE
- --------------------
Many currently installed computer systems are not capable of distinguishing
the year 2000 from the year 1900. As a result, computer systems and/or software
used by many companies in a wide variety of applications will experience
operating difficulties unless they are modified or upgraded to adequately
process information involving, related to or dependent upon the century change.
Significant uncertainty exists concerning the scope and magnitude of problems
associated with the century change.
The Company has developed a Year 2000 Action Plan to address this concern.
A project team has performed a detailed assessment of all internal computer
systems and is developing and implementing plans to either convert or replace
the software or equipment that is not Year 2000 compliant. The Company expects
to complete these projects during 1999.
12
<PAGE> 13
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (CONTINUED) (DOLLARS IN THOUSANDS)
-------------
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 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 is being taken based on individual
responses.
External and internal costs directly associated with modifying internal use
software for Year 2000 compliance are expensed as incurred. As of March 31,
1999, the costs incurred for this project were primarily attributable to
internal personnel costs and consulting fees which were estimated at $120. The
remaining costs to fix the Year 2000 problems are estimated at approximately
$250, which will be incurred in 1999. These costs do not include normal system
replacements and upgrades. The Company does not expect Year 2000 compliance
costs to have a material impact on the Company's consolidated financial
position, 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 unforseen 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 begun the process to develop formal
contingency plans that will address mission critical activities as determined by
management in the event the Year 2000 project is not completed in a timely
manner. These contingency plans will be completed in the first half of 1999.
13
<PAGE> 14
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (CONTINUED) (DOLLARS IN THOUSANDS)
-------------
FORWARD LOOKING STATEMENTS
- --------------------------
Forward-looking statements in this Form 10-Q are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. Readers
are cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date hereof. Potential risks and uncertainties
include, but are not limited to, general business and economic conditions; the
financial strength of the retail industry particularly the major mass retail
channel; the competitive pricing environment within the vacuum cleaner segment
of the floor care industry; the cost and effectiveness of planned advertising,
marketing and promotional campaigns, the success at retail and the acceptance by
consumers of the Company's new products, including the Company's line of Dirt
Devil(R) Vision uprights with bagless technology and the Dirt Devil Easy
Steamer which will be introduced in the second quarter 1999, the dependence
upon the Company's ability to continue to successfully develop and introduce
innovative products and unforeseen technological issues associated with the
Year 2000 compliance efforts.
14
<PAGE> 15
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)
15
<PAGE> 16
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.
<TABLE>
<S> <C>
Royal Appliance Mfg. Co.
----------------------------------------------------------------
(Registrant)
/s/ Michael J. Merriman
----------------------------------------------------------------
Michael J. Merriman
Chief Executive Officer, President and Director
(Principal Executive Officer)
Date: May 10, 1999 /s/ Richard G. Vasek
------------- ----------------------------------------------------------------
Richard G. Vasek
Chief Financial Officer, Vice President - Finance and Secretary
(Principal Financial Officer)
</TABLE>
16
<PAGE> 17
INDEX TO EXHIBITS
Page No.
--------
Exhibit 27 - Financial data schedule 15
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN
ITS ENTITETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000085462
<NAME> ROYAL APPLIANCE MFG. CO.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 39,197
<ALLOWANCES> 0
<INVENTORY> 27,955
<CURRENT-ASSETS> 76,118
<PP&E> 90,557
<DEPRECIATION> 55,189
<TOTAL-ASSETS> 117,570
<CURRENT-LIABILITIES> 50,635
<BONDS> 15,436
0
0
<COMMON> 212
<OTHER-SE> 46,320
<TOTAL-LIABILITY-AND-EQUITY> 117,570
<SALES> 89,210
<TOTAL-REVENUES> 89,210
<CGS> 67,194
<TOTAL-COSTS> 67,194
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 285
<INCOME-PRETAX> 2,826
<INCOME-TAX> 1,074
<INCOME-CONTINUING> 1,752
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,752
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
