<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 MARCH 31, 2000.
[ ] 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
incorporation or organization) Number)
650 ALPHA DRIVE, CLEVELAND, OHIO 44143
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(Address of Principal Executive Offices) Zip Code
(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 15,693,752
- ------------------------------------------- ----------------------------
(Class) (Outstanding at May 4, 2000)
The Exhibit index appears on sequential page 17.
1
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number
<S> <C>
Part I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets -
March 31, 2000 and December 31, 1999 3
Consolidated Statements of Operations -
three months ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows -
three months ended March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6 - 9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10 - 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
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash $ 837 $ 1,427
Trade accounts receivable, net 41,080 48,526
Inventories 40,474 50,461
Deferred income taxes 4,702 5,074
Prepaid expenses and other 2,120 1,681
--------- ---------
Total current assets 89,213 107,169
--------- ---------
Property, plant and equipment, at cost:
Land 1,541 1,541
Building 7,777 7,777
Molds, tooling, and equipment 52,855 49,515
Furniture and office equipment 8,178 7,787
Assets under capital leases 4,696 4,694
Leasehold improvements and other 5,341 5,137
--------- ---------
80,388 76,451
Less accumulated depreciation and amortization (40,770) (37,556)
--------- ---------
39,618 38,895
--------- ---------
Tooling deposits 4,980 5,177
Other 1,223 651
--------- ---------
Total assets $ 135,034 $ 151,892
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 22,142 $ 22,280
Accrued liabilities:
Advertising and promotion 7,886 15,932
Salaries, benefits, and payroll taxes 2,657 8,005
Warranty and customer returns 9,950 10,050
Income taxes 2,284 3,366
Other 4,351 3,301
Current portions of capital lease obligations and notes payable 5,224 5,285
--------- ---------
Total current liabilities 54,494 68,219
--------- ---------
Revolving credit facility 34,700 32,200
Capitalized lease obligations, less current portion 2,417 2,504
--------- ---------
Total long-term debt 37,117 34,704
Deferred income taxes 3,841 4,300
--------- ---------
Total liabilities 95,452 107,223
--------- ---------
Commitments and contingencies (Note 3) - -
Shareholders' equity:
Common shares, at stated value 212 212
Additional paid-in capital 42,635 42,528
Retained earnings 56,306 55,226
--------- ---------
99,153 97,966
Less treasury shares, at cost (9,588,600 and 8,491,000 shares
at March 31, 2000 and December 31 1999, respectively) (59,571) (53,297)
--------- ---------
Total shareholders' equity 39,582 44,669
--------- ---------
Total liabilities and shareholders' equity $ 135,034 $ 151,892
========= =========
</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,
------------------------
2000 1999
-------- --------
<S> <C> <C>
Net sales $103,470 $ 89,210
Cost of sales 80,015 67,194
-------- --------
Gross margin 23,455 22,016
Advertising and promotion 11,990 10,978
Other selling 1,978 1,952
General and administrative 4,886 4,218
Engineering and product development 1,750 1,488
-------- --------
Income from operations 2,851 3,380
Interest expense, net 674 285
Receivable securitization and other expense, net 470 269
-------- --------
Income before income taxes 1,707 2,826
Income tax expense 627 1,074
-------- --------
Net income $ 1,080 $ 1,752
======== ========
BASIC
Weighted average number of common
shares outstanding (in thousands) 16,471 19,241
Earnings per share $ .07 $ .09
DILUTED
Weighted average number of common
shares and equivalents outstanding (in thousands) 16,717 19,283
Earnings per share $ .06 $ .09
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE> 5
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------------
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,080 $ 1,752
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Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 3,331 2,421
Compensatory effect of stock awards 107 -
Deferred income taxes (87) (480)
(Increase) decrease in assets:
Trade accounts receivable, net 7,446 (1,661)
Inventories 9,987 3,133
Refundable and accrued income taxes (1,082) 351
Prepaid expenses and other (439) (26)
Other (640) (87)
Increase (decrease) in liabilities:
Trade accounts payable (5,383) 2,903
Accrued advertising and promotion (8,046) 432
Accrued salaries, benefits, and payroll taxes (5,348) 37
Accrued warranty and customer returns (100) 400
Accrued other 1,050 (607)
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Total adjustments 796 6,816
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Net cash from operating activities 1,876 8,568
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Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment, net (3,986) (920)
Decrease (increase) in tooling deposits 197 (2,730)
------- -------
Net cash from investing activities (3,789) (3,650)
------- -------
Cash flows from financing activities:
Proceeds (payments) on bank debt, net 7,745 (2,800)
Payments on note payable (73) (90)
Payments on capital lease obligations (75) (85)
Proceeds from exercise of stock options - 150
Repurchase of common stock (6,274) (2,093)
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Net cash from financing activities 1,323 (4,918)
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Net decrease in cash (590) -
------- -------
Cash at beginning of period 1,427 -
------- -------
Cash at end of period $ 837 $ -
======= =======
Supplemental disclosure of cash flow information:
Cash payments for:
Interest $ 783 $ 399
======= =======
Income taxes, net of refunds $ 1,795 $ 1,188
======= =======
</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, 2000 and December
31, 1999, and the related statements of operations and cash flows as of, and for
the interim periods ended, March 31, 2000 and 1999. 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,
2000, 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.
The Company shortened the useful lives of tooling for certain product
families due to declining sales volume and the launch of replacement products.
Net income per share is computed based on the weighted average number of
common shares outstanding for basic earnings per share and on the weighted
average number of common shares and common share equivalents outstanding for
diluted earnings per share.
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) method. Inventories at March 31, 2000, and December
31, 1999, consisted of the following
March 31, December 31,
2000 1999
---- ----
Finished goods $30,623 $37,280
Work in process and purchased parts 9,851 13,181
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$40,474 $50,461
======= =======
NOTE 3: COMMITMENTS AND CONTINGENCIES
At March 31, 2000, the Company estimates having contractual commitments
for future advertising and promotional expense of approximately $12,300
including commitments for television advertising through December 31, 2000.
Other contractual commitments for items in the normal course of business total
approximately $2,500.
6
<PAGE> 7
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3: COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Hoover Company (Hoover) filed a lawsuit in federal court, in the
Northern District of Ohio (case #1:00cv 0347), against the Company on February
4, 2000, under the patent, trademark, and unfair competition laws of the United
States. The claim asserts the Company's Dirt Devil(R) Easy Steamer infringes
certain patents held by Hoover. Hoover seeks damages, injunction of future
production, and legal fees. The Company is vigorously defending the suit and
believes that it is without merit. If Hoover were to prevail on all of its
claims, it could have a material adverse effect on the consolidated financial
position, results of operations, or cash flows of the Company.
The Company is involved in various other 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.
NOTE 4: DEBT
The Company's collateralized revolving credit facility with availability
of $80,000 has a maturity date of April 1, 2003. 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, 2000. The
revolving credit facility permits additional share repurchases up to $40,000 as
long as the Company remains in compliance with all covenants but prohibits the
payment of cash dividends. The revolving credit facility is collateralized by
the assets of the Company.
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, 2000, was $30,000.
The maximum amount of receivables that can be sold is seasonally adjusted. At
March 31, 2000, the Company received approximately $22,300 from the sale of
trade accounts receivable. The proceeds from the sales were used to reduce
borrowings under the Company's revolving credit facility. Costs of the program,
which primarily consist of the purchaser's financing cost of issuing commercial
paper backed by the receivables, totaled $378 and $275 for the three months
ended March 31, 2000 and 1999, 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
$4,895. 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 February 2000, 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 4,250 of its outstanding
common shares. As of May 3, 2000, the Company has repurchased approximately
1,289 for an aggregate purchase price of $7,256 under this program. The program
is scheduled to expire in February 2001.
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 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 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.
Three months ended
March 31,
----------------------
2000 1999
-------- --------
Net income $ 1,080 $ 1,752
======== ========
BASIC:
Common shares outstanding, net of treasury
shares, beginning of period 16,973 19,622
Weighted average common shares issued
during period 1 3
Weighted average treasury shares repurchased
during period (503) (384)
-------- --------
Weighted average common shares outstanding,
net of treasury shares, end of period 16,471 19,241
======== ========
Net income per common share $ 0.07 $ 0.09
======== ========
DILUTED:
Common shares outstanding, net of treasury
shares, beginning of period 16,973 19,622
Weighted average common shares issued
during period 1 3
Weighted average common share equivalents 246 42
Weighted average treasury shares repurchased
during period (503) (384)
-------- --------
Weighted average common shares outstanding,
net of treasury shares, end of period 16,717 19,283
======== ========
Net income per common share $ 0.06 $ 0.09
======== ========
NOTE 7: SUBSEQUENT EVENT
In April 2000, the Company entered into a 15 year operating lease
agreement for a 458,000 square foot facility. This facility will serve as the
Company's new corporate headquarters and distribution center. The lease
commences on July 1, 2000, at which time the distribution operations will begin
to be moved to the new facility. The corporate headquarter relocation is
expected to be largely completed by year-end.
8
<PAGE> 9
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except per share amounts)
NOTE 7: SUBSEQUENT EVENT (CONTINUED)
In connection with the relocation of distribution operations and
corporate headquarters, certain leasehold improvements and furniture and
fixtures will be taken out of service. Depreciation expense of approximately
$1,000 will be accelerated over the remaining useful life for these assets
resulting in zero book value by year-end. Additionally, the Company will incur
expenses related to the facilities relocation. These expenses will be expensed
as incurred.
9
<PAGE> 10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
---------------------
RESULTS OF OPERATIONS
- ---------------------
Net sales increased 16.0% for the first quarter ended March 31, 2000,
compared with the same period in the prior year. The increase in the first
quarter net sales, was due primarily to shipments of the Dirt Devil(R) Easy
Steamer(TM), an upright carpet shampooer which was introduced in the third
quarter of 1999, and higher shipments of certain upright vacuum cleaners.
Overall sales to the top 5 customers (all of which are major retailers)
increased in the first three months of 2000, but decreased as a percentage of
net sales accounting for approximately 70.1% as compared with approximately
74.7% in the first three months of 1999. The Company believes that its
dependence on sales to its largest customers will continue. Recently, some 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 24.7% for the
first quarter 1999 to 22.7% in the first quarter 2000. The gross margin
percentage was negatively affected in 2000 by the sale of lower margin products
and higher depreciation expense on tooling for certain product lines due to
shortened expected useful lives.
Advertising and promotion expenses increased 9.2% for the first quarter
2000 compared with the first quarter 1999, but decreased slightly as a
percentage of net sales. The increase in advertising and promotion expenses was
due primarily to increases in media spending and cooperative advertising. 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 2000 were comparable with
the first quarter 1999. The principal components are internal sales and
marketing personnel compensation.
General and administrative expenses increased 15.8% for the first quarter
2000, compared with the first quarter in 1999, but remained the same as a
percentage of net sales. The principal components are compensation (including
benefits), insurance, and professional services. The dollar increase in the
first quarter 2000 was primarily due to increases in employee related benefit
expenses and professional services.
Engineering and product development expenses increased 17.6% for the
first quarter 2000 compared with the first quarter in 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 quarter
2000 was primarily due to costs associated with more new product introductions
in 2000 and the timing of those introductions.
Interest expense increased 136.5% for the first quarter 2000, compared
with the first quarter in 1999. The increase in interest expense is the result
of higher 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 first quarter 2000 of $1,707 compared to income before income
taxes for the first quarter 1999 of $2,826.
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
- -------------------------------
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 $34,719 at March 31, 2000, a decrease of 10.9%
over December 31, 1999. Current assets decreased by $17,956 reflecting in part a
$7,446 decrease of trade accounts receivable, a decrease in inventory of $9,987,
and a decrease in deferred and refundable income taxes of $372 partially offset
by an increase in prepaid expenses and other of $439. Current liabilities
decreased by $13,725 reflecting in part a $8,046 decrease in accrued advertising
and promotion, a $5,348 decrease in accrued salaries, benefits, and payroll
taxes and a $1,082 decrease in accrued income taxes partially offset by an
increase of $1,050 in accrued other.
In the first three months of 2000, the Company utilized $3,789 of cash
for capital purchases, including approximately $1,800 of tooling related to the
new Dirt Devil(R) Vision Lite(TM).
The Company's collateralized revolving credit facility with availability
up to $80,000 has a maturity date of April 1, 2003. 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, 2000. The
revolving credit facility permits additional share repurchases up to $40,000, as
long as the Company remains in compliance with all convenants, but prohibits the
payment of cash dividends. The revolving credit facility is collateralized by
the assets of the Company.
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, 2000, was $30,000.
The maximum amount of receivables that can be sold is seasonally adjusted. At
March 31, 2000 and December 31, 1999, the Company received approximately $22,300
and $23,100, respectively, 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 $378 and $275 for the three months ended March 31, 2000 and
1999, 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 February 2000, 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 4,250 of its outstanding
common shares. As of May 3, 2000, the Company has repurchased approximately
1,289 for an aggregate purchase price of $7,256 under this program. The program
is scheduled to expire in February 2001.
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 and anticipated expenditures associated with the Company's
planned move in the second half of 2000.
11
<PAGE> 12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) (CONTINUED)
---------------------
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,
2000 1999 1999 1999 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $103,470 $131,766 $106,520 $ 80,488 $ 89,210
Gross margin 23,455 35,536 25,156 20,824 22,016
Net income 1,080 3,660 4,407 2,863 1,752
Net income
per share - diluted (a) $ 0.06 $ 0.21 $ 0.24 $ 0.15 $ 0.09
(a) Earnings per share is calculated based on the diluted method explained in Note 6 to the Consolidated Financial
Statements.
</TABLE>
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.
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, Eureka and Bissell in the
upright vacuum and carpet shampooer market and, in the hand-held market, Black &
Decker. Several of these competitors 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. Due to the recent economic conditions, the cost of plastic resin and
transportation has increased in 2000.
12
<PAGE> 13
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) (CONTINUED)
---------------------
LITIGATION
- ----------
The Hoover Company (Hoover) filed a lawsuit in federal court, in the
Northern District of Ohio (case #1:00cv 0347), against the Company on February
4, 2000, under the patent, trademark, and unfair competition laws of the United
States. The claim asserts the Company's Dirt Devil(R) Easy Steamer infringes
certain patents held by Hoover. Hoover seeks damages, injunction of future
production, and legal fees. The Company is vigorously defending the suit and
believes that it is without merit. If Hoover were to prevail on all of its
claims, it could have a material adverse effect on the consolidated financial
position, results of operations, or cash flows of the Company.
The Company is involved in various other 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.
YEAR 2000 COMPLIANCE
- --------------------
The Company developed a detailed Year 2000 Action Plan and began the
process of assessing the magnitude of the Year 2000 on its primary computer
systems in 1998. Additionally, the Company began gathering data, identifying,
and developing remediation plans for affected non-IT systems and equipment. In
conjunction with the internal assessment, the Company also began evaluating and
monitoring key suppliers and customers in regard to their respective Year 2000
preparedness and compliance.
As of the date of this filing, the Company has not experienced any
internal problems related to Year 2000 compliance issues nor has the Company
experienced any disturbances or interruption in its ability to transact business
with its suppliers or customers. The Company, however, continues to monitor its
systems, suppliers, and customers for any unanticipated issues that have yet to
surface. The Company has appropriately expensed the costs related to Year 2000
preparedness as incurred.
13
<PAGE> 14
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) (CONTINUED)
---------------------
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, particularly in the bagless upright vacuum category, within the
floor care industry; the impact of private-label programs by mass retailers; 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; and the uncertainty of the Company's foreign
suppliers to continuously supply sourced finished goods and component parts.
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.
Royal Appliance Mfg. Co.
---------------------------------------
(Registrant)
/s/ Michael J. Merriman
---------------------------------------
Michael J. Merriman
Chief Executive Officer, President and
Director
(Principal Executive Officer)
Date: May 5, 2000 /s/ Richard G. Vasek
----------- ---------------------------------------
Richard G. Vasek
Chief Financial Officer, Vice President -
Finance and Secretary
(Principal Financial Officer)
16
<PAGE> 17
INDEX TO EXHIBITS
PAGE NUMBER
-----------
Exhibit 27 - Financial data schedule (EDGAR filing only)
17
<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 MARCH 31, 2000 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 837
<SECURITIES> 0
<RECEIVABLES> 41,080
<ALLOWANCES> 0
<INVENTORY> 40,474
<CURRENT-ASSETS> 89,213
<PP&E> 80,388
<DEPRECIATION> 40,770
<TOTAL-ASSETS> 135,034
<CURRENT-LIABILITIES> 54,494
<BONDS> 37,117
0
0
<COMMON> 212
<OTHER-SE> 42,635
<TOTAL-LIABILITY-AND-EQUITY> 135,034
<SALES> 103,470
<TOTAL-REVENUES> 103,470
<CGS> 80,015
<TOTAL-COSTS> 80,015
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 674
<INCOME-PRETAX> 1,707
<INCOME-TAX> 627
<INCOME-CONTINUING> 1,080
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,080
<EPS-BASIC> .07
<EPS-DILUTED> .06
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