<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 JUNE 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
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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 18,130,752
--------------------------------- --------------------------------------
(Class) (Outstanding at August 6, 1999)
The Exhibit index appears on sequential page 16.
1
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C> <C>
Part I FINANCIAL INFORMATION
Item 1 Financial Statements
------ --------------------
Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations -
three months and six months ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows -
six months ended June 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 4 Submission of Matters to a Vote of Security Holders 14
------ ---------------------------------------------------
Item 6 Exhibits and Reports on Form 8-K 14
------ --------------------------------
Signatures 15
Exhibit Index 16
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>
June 30, December 31,
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 744 $ --
Trade accounts receivable, net 29,836 37,536
Inventories 37,752 31,088
Deferred income taxes 4,393 4,148
Prepaid expenses and other 5,253 4,572
--------- ---------
Total current assets 77,978 77,344
--------- ---------
Property, plant and equipment, at cost:
Land 1,541 1,541
Building 7,777 7,777
Molds, tooling, and equipment 69,651 64,865
Furniture and office equipment 6,737 7,022
Assets under capital leases 4,688 4,714
Leasehold improvements and other 4,420 3,718
--------- ---------
94,814 89,637
Less accumulated depreciation and amortization (54,947) (52,837)
--------- ---------
39,867 36,800
--------- ---------
Tooling deposits 4,398 2,770
Other 579 566
--------- ---------
Total assets $ 122,822 $ 117,480
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 19,011 $ 18,647
Accrued liabilities:
Advertising and promotion 7,060 8,768
Salaries, benefits, and payroll taxes 4,198 2,299
Warranty and customer returns 8,600 8,100
Income taxes 1,558 1,930
Other 6,032 6,809
Current portions of capital lease obligations and notes payable 582 551
--------- ---------
Total current liabilities 47,041 47,104
--------- ---------
Revolving credit agreement 13,400 10,600
Capitalized lease obligations, less current portion 2,671 2,833
Notes payable, less current portions 4,822 4,993
--------- ---------
Total long-term debt 20,893 18,426
--------- ---------
Deferred income taxes 5,320 5,227
--------- ---------
Total liabilities 73,254 70,757
--------- ---------
Commitments and contingencies (Note 3) -- --
Shareholders' equity:
Common shares, at stated value 212 211
Additional paid-in capital 42,437 42,115
Retained earnings 47,159 42,544
Accumulated other comprehensive income -- --
--------- ---------
89,808 84,870
Less treasury shares, at cost (6,302,900 and 5,726,400 shares
at June 30, 1999 and December 31 1998, respectively) (40,240) (38,147)
--------- ---------
Total shareholders' equity 49,568 46,723
--------- ---------
Total liabilities and shareholders' equity $ 122,822 $ 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 Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 80,488 $ 51,259 $ 169,698 $ 103,107
Cost of sales 59,664 39,106 126,858 79,456
--------- --------- --------- ---------
Gross margin 20,824 12,153 42,840 23,651
Advertising and promotion 8,072 9,245 19,050 17,356
Other selling 2,172 1,940 4,124 3,893
General and administrative 3,892 3,028 8,110 6,921
Engineering and product development 1,539 871 3,027 2,056
--------- --------- --------- ---------
Income (loss) from operations 5,149 (2,931) 8,529 (6,575)
Interest expense, net 183 411 468 699
Receivable securitization and other
expense, net 357 292 626 529
--------- --------- --------- ---------
Income (loss) before income taxes 4,609 (3,634) 7,435 (7,803)
Income tax expense (benefit) 1,746 (1,400) 2,820 (3,026)
--------- --------- --------- ---------
Net income (loss) $ 2,863 $ (2,234) $ 4,615 $ (4,777)
========= ========= ========= =========
BASIC
Weighted average number of common
shares outstanding (in thousands) 19,098 22,028 19,170 22,175
Earnings (loss) per share $ .15 $ (.10) $ .24 $ (.22)
DILUTED
Weighted average number of common
shares and equivalents outstanding
(in thousands) 19,353 22,028 19,300 22,175
Earnings (loss) per share $ .15 $ (.10) $ .24 $ (.22)
</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>
Six Months
Ended June 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,615 $ (4,777)
-------- --------
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation and amortization 5,116 4,077
Compensatory effect of stock options -- 42
Loss on disposal of tooling and equipment 71 32
Deferred income taxes (152) --
(Increase) decrease in assets:
Trade accounts receivable, net 7,700 23,744
Inventories (6,664) (6,231)
Refundable and accrued income taxes (372) (3,187)
Prepaid expenses and other (681) (656)
Other (136) (963)
Increase (decrease) in liabilities:
Trade accounts payable 364 (15,630)
Accrued advertising and promotion (1,708) (3,417)
Accrued salaries, benefits, and payroll taxes 1,899 (2,873)
Accrued warranty and customer returns 500 (600)
Accrued other (777) 54
-------- --------
Total adjustments 5,160 (5,608)
-------- --------
Net cash from operating activities 9,775 (10,385)
-------- --------
Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment, net (8,131) (1,807)
Increase in tooling deposits (1,628) (2,101)
-------- --------
Net cash from investing activities (9,759) (3,908)
-------- --------
Cash flows from financing activities:
Proceeds on bank debt, net 2,800 18,727
Payments on note payable (159) (221)
Payments on capital lease obligations (143) (111)
Proceeds from exercise of stock options 323 --
Repurchase of common stock (2,093) (5,457)
-------- --------
Net cash from financing activities 728 12,938
-------- --------
Net increase (decrease) in cash 744 (1,355)
-------- --------
Cash at beginning of period -- 1,355
-------- --------
Cash at end of period $ 744 $ --
======== ========
Supplemental disclosure of cash flow information:
Cash payments for:
Interest $ 606 $ 768
======== ========
Income taxes, net of refunds $ 3,330 $ 161
======== ========
</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 June 30, 1999 and December
31, 1998, and the related statements of operations and cash flows as of, and for
the interim periods ended, June 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 six month periods ended June
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 June 30, 1999, and December 31, 1998,
consisted of the following
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Finished goods $21,311 $16,648
Work in process and purchased parts 16,441 14,440
------- -------
Inventories at FIFO cost $37,752 $31,088
======= =======
</TABLE>
NOTE 3: COMMITMENTS AND CONTINGENCIES
At June 30, 1999, the Company estimates having contractual commitments
for future advertising and promotional expense of approximately $13,700,
including commitments for television advertising through December 31, 1999.
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 June 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 June 30, 1999, was $30,000.
The maximum amount of receivables that can be sold is seasonally adjusted. At
June 30, 1999, the Company received approximately $13,200 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 $565 and $415 for the six months ended June
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.
The Company has a 7.9% fixed rate mortgage note payable in the amount of
$5,111. 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 August 6, 1999, the Company has repurchased approximately
2,612 shares for an aggregate purchase price of $12,667 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 Six months ended
June 30 June 30
------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 2,863 $ (2,234) $ 4,615 $ (4,777)
======== ======== ======== ========
BASIC:
Common shares outstanding, net of treasury
shares, beginning of period 19,095 22,028 19,622 22,911
Weighted average common shares issued
during period 3 -- 28 --
Weighted average treasury shares repurchased
during period -- -- (480) (736)
-------- -------- -------- --------
Weighted average common shares outstanding,
net of treasury shares, end of period 19,098 22,028 19,170 22,175
======== ======== ======== ========
Net income (loss) per common share $ 0.15 $ (0.10) $ 0.24 $ (0.22)
======== ======== ======== ========
DILUTED:
Common shares outstanding, net of treasury
shares, beginning of period 19,095 22,028 19,622 22,911
Weighted average common shares issued
during period 3 -- 28 --
Weighted average common share equivalents 255 -- 130 --
Weighted average treasury shares repurchased
during period -- -- (480) (736)
-------- -------- -------- --------
Weighted average common shares outstanding,
net of treasury shares, end of period 19,353 22,028 19,300 22,175
======== ======== ======== ========
Net income (loss) per common share $ 0.15 $ (0.10) $ 0.24 $ (0.22)
======== ======== ======== ========
</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 57.0% for the second quarter and increased 64.6% for
the six-month period ended June 30, 1999, compared with the same periods in the
prior year. The increase in the second quarter net sales and net sales for the
six months ended June 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. Overall sales to the top 5 customers (all of
which are major retailers) increased in the first six months of 1999. Sales to
the top 5 customers accounted for approximately 71.4% of net sales in the first
six months of 1999 as compared with approximately 61.6% in the first six 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 23.7% for the
second quarter 1998 to 25.9% in the second quarter 1999 and from 22.9% in the
first six months of 1998 to 25.2% in the first six months of 1999. The gross
margin percentage was positively affected in 1999 primarily by lower returns as
a percent of sales and lower manufacturing variances as a percent of sales.
Advertising and promotion expenses decreased 12.7% for the second quarter
1999 and increased 9.8% for the six month period ended June 30, 1999 compared
with the same periods in 1998. The decrease in advertising and promotion
expenses for the quarter was due primarily to decreases in media spending. The
increase for the six-month period 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 increased 12.0% for the second quarter 1999 and
increased 5.9% for the six month period ended June 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 second quarter 1999 from 3.8% to 2.7% and for the six month period ended
June 30, 1999, from 3.8% to 2.4%, compared with the same periods in 1998.
General and administrative expenses increased 28.5% for the second
quarter 1999 and increased 17.2% for the six-month period ended June 30, 1999,
compared with the same periods in 1998. General and administrative expenses
decreased as a percentage of net sales for the second quarter 1999 from 5.9% to
4.8% and for the six month period ended June 30, 1999, from 6.7% to 4.8%,
compared with the same periods in 1998. The principal components are
compensation (including benefits), insurance, provision for doubtful accounts,
travel and professional services. The dollar increases in the second quarter and
six-month period ended June 30, 1999, were primarily due to increases in
employee related benefit expenses and professional services. Also impacting the
six-month period ended June 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.
Engineering and product development expenses increased 76.7% for the
second quarter 1999 and increased 47.2% for the six-month period ended June 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 six months of 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) (CONTINUED)
-------------
RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
- --------------------------------------------------------------
Interest expense decreased 55.5% for the second quarter 1999 and
decreased 33.0% for the six-month period ended June 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.
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 before income
taxes for the second quarter and six months ended June 30, 1999, of $4,609 and
$7,435, respectively, as compared to a loss before income taxes for the second
quarter and six months ended June 30, 1998, of $3,634 and $7,803, respectively.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has used cash generated from operations to fund its working
capital needs, capital expenditures, and share repurchases. Working capital was
$30,937 at June 30, 1999, an increase of 2.3% over December 31, 1998. Current
assets increased by $634 reflecting a $7,700 reduction of trade accounts
receivable partially offset by an increase in cash of $744, an increase in
inventory of $6,664, an increase in deferred and refundable income taxes of $245
and an increase in prepaid expenses and other of $681. Current liabilities were
comparable at June 30, 1999, compared to December 31, 1998.
In the first six months of 1999, the Company utilized $9,759 of cash for
capital purchases, including approximately $6,200 of tooling related to the new
Dirt Devil(R) Easy Steamer(TM), the Dirt Devil(R) Vision(TM) with Sensor, the
Dirt Devil(R) Power Lite(TM), the Dirt Devil(R) Vision(TM) and the Dirt Devil(R)
Swivel Glide(TM).
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 June 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 June 30, 1999, was $30,000.
The maximum amount of receivables that can be sold is seasonally adjusted. At
June 30, 1999, the Company received approximately $13,200 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 $565 and $415 for the six months ended June
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.
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)
- -------------------------------
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 August 6, 1999, the Company has repurchased approximately
2,612 shares for an aggregate purchase price of $12,667 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
--------------------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1999 1999 1998 1998 1998 1998
--------- ---------- ---------- ----------- --------- ----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Net sales $80,488 $89,210 $106,006 $73,607 $51,259 $51,848
Gross margin 20,824 22,016 30,950 19,258 12,153 11,498
Net income (loss) 2,863 1,752 5,134 2,169 (2,234) (2,543)
Net income (loss) per $.15 $.09 $.26 $.10 $(.10) $(.11)
common share (a) (b)
</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(R), and Dirt Devil(R) Mop Vac(TM) are
given as gifts and therefore, sell in larger volumes during the Christmas
shopping season. Because of the Company's continued dependency on its major
customers, the timing of purchases by these major customers and the timing of
new product introductions 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.
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 (DOLLARS IN THOUSANDS) (CONTINUED)
-------------
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 is developing and implementing plans to either convert or
replace the software or equipment that is not Year 2000 compliant. The Company
expects to complete these projects during 1999.
Year 2000 problems could affect many of 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.
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)
- --------------------
External and internal costs directly associated with modifying internal
use software for Year 2000 compliance are expensed as incurred. As of June 30,
1999, the costs incurred for this project were primarily attributable to
internal personnel costs and consulting fees which were estimated at $160. The
remaining costs to fix the Year 2000 problems are estimated at approximately
$200, 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 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 is in the process of developing 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. These contingency plans will be completed by September 30,
1999.
FORWARD-LOOKING STATEMENTS
- --------------------------
Forward-looking statements in this Form 10-Q are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. Potential risks and
uncertainties include, but are not limited to: general business and economic
conditions; the financial strength of the retail industry particularly the major
mass retail channel; the competitive pricing environment within the vacuum
cleaner segment of the floor care industry; the continued use of private label
programs by the Company's major mass retail customers; 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 4 - Submission of Matters to a Vote of Security Holders
------ ---------------------------------------------------
(a) The Company's annual meeting of shareholders was held
April 27, 1999.
(b) At the annual meeting, the Company's shareholders elected
Messrs. E. Patrick Nalley, Joseph B. Richey II, and R.
Louis Schneeberger, as Class II Directors for a two-year
term which expires at the annual shareholders meeting in
2001.
The term of office of Messrs. Jack Kahl Jr., Michael J.
Merriman, and John P. Rochon, the Class I Directors,
continued after the 1999 meeting; such term expires at the
annual shareholders meeting in 2000.
(c) At the annual meeting, the Company's shareholders ratified
the appointment of PricewaterhouseCoopers L.L.P. as
auditors of the Company for 1999. The holders of
16,497,791 common shares voted to ratify the appointment,
the holders of 53,444 common shares voted against the
ratification, and the holders of 30,521 common shares
abstained.
The following tabulation represents voting for the Class
II Directors
<TABLE>
<CAPTION>
NAME FOR WITHHELD AUTHORITY
---- --- ------------------
<S> <C> <C>
Mr. Nalley 16,422,690 159,066
Mr. Richey 16,441,708 140,048
Mr. Schneeberger 16,442,488 139,268
</TABLE>
(d) Not applicable
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 4 (d) - Amendment No. 1 to Credit Agreement
dated as of May 1, 1998, by and among the
Registrant and various banks including
National City Bank as administrative agent
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: August 6, 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
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Exhibit 4(d) - Amendment No. 1 to Credit Agreement dated as of May 1, 1998, by and 17 - 22
among the Registrant and various banks including National City Bank as
administrative agent
Exhibit 27 - Financial data schedule (EDGAR filing only)
</TABLE>
16
<PAGE> 1
Exhibit 4(d)
ROYAL APPLIANCE MFG. CO.
AS THE BORROWER
AND
THE FINANCIAL INSTITUTIONS NAMED HEREIN
AS LENDERS
AND
NATIONAL CITY BANK
AS ADMINISTRATIVE AGENT
---------------------
AMENDMENT NO. 1
DATED AS OF
MAY 28, 1999
TO
CREDIT AGREEMENT
DATED AS OF
MAY 1, 1998
---------------------
<PAGE> 2
AMENDMENT NO. 1 TO CREDIT AGREEMENT
THIS AMENDMENT NO. 1 TO CREDIT AGREEMENT, dated as of May 28, 1999
("THIS AMENDMENT"), among:
(i) ROYAL APPLIANCE MFG. CO., an Ohio corporation (herein,
together with its successors and assigns, the "BORROWER");
(ii) the financial institutions listed on the signature pages
hereof (the "LENDERS"); and
(iii) NATIONAL CITY BANK, a national banking association, as
Administrative Agent (the "ADMINISTRATIVE AGENT") for the Lenders under
the Credit Agreement:
PRELIMINARY STATEMENTS:
(1) The Borrower, the Lenders named therein, and the Administrative
Agent entered into the Credit Agreement, dated as of May 1, 1998 (herein
referred to as the "CREDIT AGREEMENT"; with the terms defined therein, or the
definitions of which are incorporated therein, being used herein as so defined).
(2) The parties hereto desire to amend certain of the provisions of the
Credit Agreement, all as more fully set forth below.
NOW, THEREFORE, the parties hereby agree as follows:
SECTION 1. AMENDMENTS.
1.1. EXTENSION OF MATURITY DATE. Effective on the Effective Date
provided for in section 3 hereof, the definition of the term "Maturity Date"
contained in section 1.1 of the Credit Agreement is amended to read in its
entirety as follows:
"MATURITY DATE" shall mean April 1, 2002, unless earlier
terminated, or extended in accordance with section 4.4.
1.2. INDEBTEDNESS COVENANT. Effective on the Effective Date provided
for in section 3 hereof, section 9.4(b) of the Credit Agreement is amended by
changing the dollar amount specified therein from $12,000,000 to $15,000,000.
1.3. DIVIDENDS COVENANT. Effective on the Effective Date provided for
in section 3 hereof, section 9.6 of the Credit Agreement is amended by changing
the date which appears therein from December 31, 1997 to December 31, 1998, with
the result that, as so amended, section 9.6 of the Credit Agreement reads in its
entirety as follows:
9.6. DIVIDENDS, ETC. The Borrower will not (a) directly or
indirectly declare, order, pay or make any dividend (other than
dividends payable solely in capital stock of the Borrower) or other
distribution on or in respect of any capital stock of any class of the
Borrower, whether by reduction of capital or otherwise, or (b) directly
or indirectly make, or permit any of its Subsidiaries to directly or
indirectly make, any purchase, redemption, retirement or other
acquisition of any capital stock of any class of the Borrower (other
than for a consideration consisting solely of capital stock of the same
class of the Borrower) or of any warrants, rights or options to acquire
or any securities convertible into or exchangeable for any capital
stock of
18
<PAGE> 3
the Borrower, EXCEPT that if no Event of Default shall have occurred
and be continuing or would result therefrom, the Borrower shall be
permitted to repurchase shares of its capital stock in open market or
privately negotiated transactions if the aggregate amount expended for
such purposes after December 31, 1998 does not exceed $20,000,000.
1.4. MINIMUM CONSOLIDATED NET WORTH COVENANT. Effective on the
Effective Date provided for in section 3 hereof, section 9.10 of the Credit
Agreement is amended by changing the amount and the calendar dates which appear
therein and by adding a new clause (iv) at the end thereof, with the result that
section 9.10 of the Credit Agreement, as so amended, reads in its entirety as
follows:
9.10. MINIMUM CONSOLIDATED NET WORTH. The Borrower will not
permit its Consolidated Net Worth at any time to be less than
$46,723,000, EXCEPT that (i) effective as of the end of the Borrower's
fiscal year ended December 31, 1999, and as of the end of each fiscal
year thereafter, the foregoing amount (as it may from time to time be
increased as herein provided), shall be increased by 50% of the
consolidated net income of the Borrower and its Subsidiaries for the
fiscal year ended on such date, if any, as determined in conformity
with GAAP (there being no reduction in the case of any such
consolidated net income which reflects a deficit), (ii) the foregoing
amount (as it may from time to time be increased as herein provided),
shall be increased by an amount equal to 100% of the cash proceeds (net
of underwriting discounts and commissions and other customary fees and
costs associated therewith) from any sale or issuance of equity by the
Borrower after the Closing Date (other than any sale or issuance to
management or employees pursuant to employee benefit plans of general
application), (iii) the foregoing amount (as it may from time to time
be increased as herein provided), shall be increased by an amount equal
to 50% of the increase in Consolidated Net Worth attributable to the
issuance of common stock or other equity interests subsequent to
December 31, 1998 as consideration in any Acquisitions permitted under
section 9.2, and (iv) in determining compliance with the foregoing
covenant, the effect of stock repurchases made subsequent to December
31, 1998 pursuant to section 9.6 shall not be taken into account.
SECTION 2. REPRESENTATIONS AND WARRANTIES.
The Borrower represents and warrants as follows:
2.1. AUTHORIZATION, VALIDITY AND BINDING EFFECT. This Amendment has
been duly authorized by all necessary corporate action on the part of the
Borrower, has been duly executed and delivered by a duly authorized officer or
officers of the Borrower, and constitutes the valid and binding agreement of the
Borrower, enforceable against the Borrower in accordance with its terms.
2.2. REPRESENTATIONS AND WARRANTIES TRUE AND CORRECT. The
representations and warranties of the Borrower contained in the Credit
Agreement, as amended hereby, are true and correct on and as of the date hereof
as though made on and as of the date hereof, except to the extent that such
representations and warranties expressly relate to a specified date, in which
case such representations and warranties are hereby reaffirmed as true and
correct when made.
2.3. NO EVENT OF DEFAULT, ETC. No condition or event has occurred or
exists which constitutes or which, after notice or lapse of time or both, would
constitute an Event of Default.
19
<PAGE> 4
2.4. COMPLIANCE. The Borrower is in full compliance with all covenants
and agreements contained in the Credit Agreement, as amended hereby.
2.5. RECENT FINANCIAL STATEMENTS. The Borrower has furnished to the
Lenders and the Administrative Agent complete and correct copies of the audited
consolidated balance sheet of the Borrower and its consolidated subsidiaries as
of December 31, 1998, and the related audited consolidated statements of income,
changes in shareholders' equity, and cash flows for the fiscal year then ended,
accompanied by the unqualified report thereon of the Borrower's independent
accountants, as contained in the Report on Form 10-K filed by the Borrower with
the SEC for its fiscal year ended December 31, 1998. All such financial
statements have been prepared in accordance with GAAP, consistently applied
(except as stated therein), and fairly present the financial position of the
Borrower and its consolidated subsidiaries as of December 31, 1998 and the
consolidated results of their operations and cash flows for the fiscal year then
ended.
SECTION 3. EFFECTIVENESS.
This Amendment shall become effective on and as of the date (the
"EFFECTIVE DATE"), on or before July 31, 1999 if the following conditions are
satisfied:
(a) this Amendment shall have been executed by the Borrower
and the Administrative Agent, and counterparts hereof as so executed
shall have been delivered to the Administrative Agent;
(b) the Administrative Agent shall have been notified by all
of the Lenders that such Lenders have executed this Amendment (which
notification may be by facsimile or other written confirmation of such
execution); and
(c) the Borrower shall have paid to the Administrative Agent,
for the pro rata account of the Lenders, a nonrefundable amendment fee
in the amount previously agreed between the Borrower and the
Administrative Agent.
The Administrative Agent shall notify the Borrower and each Lender in writing of
the Effective Date of this Amendment.
SECTION 4. RATIFICATIONS.
The terms and provisions set forth in this Amendment shall modify and
supersede all inconsistent terms and provisions set forth in the Credit
Agreement, and except as expressly modified and superseded by this Amendment,
the terms and provisions of the Credit Agreement are ratified and confirmed and
shall continue in full force and effect.
SECTION 5. MISCELLANEOUS.
5.1. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and
inure to the benefit of the Borrower, each Lender and the Administrative Agent
and their respective permitted successors and assigns.
20
<PAGE> 5
5.2. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties made in this Amendment shall survive the execution and delivery
of this Amendment, and no investigation by the Administrative Agent or any
Lender or any subsequent Loan or issuance of a Letter of Credit shall affect the
representations and warranties or the right of the Administrative Agent or any
Lender to rely upon them.
5.3. REFERENCE TO CREDIT AGREEMENT. The Credit Agreement and any and
all other agreements, instruments or documentation now or hereafter executed and
delivered pursuant to the terms of the Credit Agreement as amended hereby, are
hereby amended so that any reference therein to the Credit Agreement shall mean
a reference to the Credit Agreement as amended hereby.
5.4. EXPENSES. As provided in the Credit Agreement, but without
limiting any terms or provisions thereof, the Borrower agrees to pay on demand
all costs and expenses incurred by the Administrative Agent in connection with
the preparation, negotiation, and execution of this Amendment, including without
limitation the costs and fees of the Administrative Agent's special legal
counsel, regardless of whether this Amendment becomes effective in accordance
with the terms hereof, and all costs and expenses incurred by the Administrative
Agent or any Lender in connection with the enforcement of the Credit Agreement,
as amended hereby.
5.5. SEVERABILITY. Any term or provision of this Amendment held by a
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Amendment and the effect thereof shall be
confined to the term or provision so held to be invalid or unenforceable.
5.6. APPLICABLE LAW. This Amendment shall be governed by and construed
in accordance with the laws of the State of Ohio.
5.7. HEADINGS. The headings, captions and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
5.8. ENTIRE AGREEMENT. This Amendment is specifically limited to the
matters expressly set forth herein. This Amendment and all other instruments,
agreements and documentation executed and delivered in connection with this
Amendment embody the final, entire agreement among the parties hereto with
respect to the subject matter hereof and supersede any and all prior
commitments, agreements, representations and understandings, whether written or
oral, relating to the matters covered by this Amendment, and may not be
contradicted or varied by evidence of prior, contemporaneous or subsequent oral
agreements or discussions of the parties hereto. There are no oral agreements
among the parties hereto relating to the subject matter hereof or any other
subject matter relating to the Credit Agreement.
5.9. COUNTERPARTS. This Amendment may be executed by the parties hereto
separately in one or more counterparts, each of which when so executed shall be
deemed to be an original, but all of which when taken together shall constitute
one and the same agreement.
21
<PAGE> 6
IN WITNESS WHEREOF, this Amendment has been duly executed and delivered
as of the date first above written.
<TABLE>
<S> <C>
- ----------------------------------------------------------- --------------------------------------------------------
ROYAL APPLIANCE MFG CO. NATIONAL CITY BANK,
INDIVIDUALLY AS A LENDER,
THE LETTER OF CREDIT ISSUER
BY:_____________________________ AND AS ADMINISTRATIVE AGENT
TITLE:
BY:_____________________________
TITLE:
- ----------------------------------------------------------- --------------------------------------------------------
COMERICA BANK NATIONAL BANK OF CANADA,
A CANADIAN CHARTERED BANK
CLEVELAND REPRESENTATIVE OFFICE
BY:_____________________________
TITLE:
BY:_____________________________
TITLE:
- ----------------------------------------------------------- --------------------------------------------------------
</TABLE>
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
REGISTRANT'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000085462
<NAME> ROYAL APPLIANCE MFG. CO.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 744
<SECURITIES> 0
<RECEIVABLES> 29,836
<ALLOWANCES> 0
<INVENTORY> 37,752
<CURRENT-ASSETS> 77,978
<PP&E> 94,814
<DEPRECIATION> 54,947
<TOTAL-ASSETS> 122,822
<CURRENT-LIABILITIES> 47,041
<BONDS> 20,893
0
0
<COMMON> 212
<OTHER-SE> 42,437
<TOTAL-LIABILITY-AND-EQUITY> 122,822
<SALES> 169,698
<TOTAL-REVENUES> 169,698
<CGS> 126,858
<TOTAL-COSTS> 126,858
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 468
<INCOME-PRETAX> 7,435
<INCOME-TAX> 2,820
<INCOME-CONTINUING> 4,615
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,615
<EPS-BASIC> .24
<EPS-DILUTED> .24
</TABLE>
