<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 SEPTEMBER 30,
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
-------
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)
7005 COCHRAN ROAD, GLENWILLOW, OHIO 44139
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) Zip Code
(440)996-2000
--------------------------------------------------------------------------------
(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 14,181,552
-------------------------------------------- ---------------------------------
(Class) (Outstanding at November 8, 2000)
The Exhibit index appears on sequential page 16.
1
<PAGE> 2
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
INDEX
Page
Number
------
Part I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations - three
months and nine months ended September 30, 2000
and 1999 4
Consolidated Statements of Cash Flows - nine
months ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-13
Part II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 14
Signatures 15
Exhibit Index
Exhibit 27* - financial data schedule 16
*Numbered in accordance with Item 601 of Regulation S-K
2
<PAGE> 3
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash $ - $ 1,427
Trade accounts receivable, net 38,445 48,526
Inventories 54,565 50,461
Deferred income taxes 5,122 5,074
Prepaid expenses and other 3,282 1,681
--------- ---------
Total current assets 101,414 107,169
--------- ---------
Property, plant and equipment, at cost:
Land 1,541 1,541
Building 7,777 7,777
Molds, tooling, and equipment 54,694 49,515
Furniture and office equipment 10,572 7,787
Assets under capital leases 4,582 4,694
Leasehold improvements and other 5,577 5,137
--------- ---------
84,743 76,451
Less accumulated depreciation and amortization (44,080) (37,556)
--------- ---------
40,663 38,895
--------- ---------
Tooling deposits 2,261 5,177
Other 1,407 651
--------- ---------
Total assets $ 145,745 $ 151,892
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 26,983 $ 22,280
Accrued liabilities:
Advertising and promotion 8,423 15,932
Salaries, benefits, and payroll taxes 3,331 8,005
Warranty and customer returns 9,500 10,050
Income taxes - 3,366
Other 4,741 3,301
Current portions of capital lease obligations and notes payable 5,100 5,285
--------- ---------
Total current liabilities 58,078 68,219
--------- ---------
Revolving credit agreement 51,700 32,200
Capitalized lease obligations, less current portion 2,219 2,504
--------- ---------
Total long-term debt 53,919 34,704
--------- ---------
Deferred income taxes 3,476 4,300
--------- ---------
Total liabilities 115,473 107,223
--------- ---------
Commitments and contingencies (Note 3) - -
Shareholders' equity:
Common shares, at stated value 212 212
Additional paid-in capital 42,914 42,528
Retained earnings 58,146 55,226
--------- ---------
101,272 97,966
Less treasury shares, at cost (11,327,400 and 8,491,000 shares
at September 30, 2000 and December 31, 1999, respectively) (71,000) (53,297)
--------- ---------
Total shareholders' equity 30,272 44,669
--------- ---------
Total liabilities and shareholders' equity $ 145,745 $ 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 amount)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net sales $ 96,129 $106,520 $281,674 $276,218
Cost of sales 74,351 81,364 220,990 208,222
-------- -------- -------- --------
Gross margin 21,778 25,156 60,684 67,996
Advertising and promotion 8,130 8,827 29,627 27,877
Other selling 2,164 2,587 6,485 6,711
General and administrative 4,658 4,444 13,096 12,554
Engineering and product development 1,624 1,646 4,696 4,673
-------- -------- -------- --------
Income from operations 5,202 7,652 6,780 16,181
Interest expense, net 986 418 2,408 886
Receivable securitization and other expense
(income), net 436 322 1,267 948
-------- -------- -------- --------
Income before income taxes 3,780 6,912 3,105 14,347
Income tax expense 435 2,505 185 5,325
-------- -------- -------- --------
Net income $ 3,345 $ 4,407 $ 2,920 $ 9,022
======== ======== ======== ========
BASIC
Weighted average number of common
shares outstanding (in thousands) 14,592 18,067 15,454 18,794
Earnings per share $ .23 $ .24 $ .19 $ .48
DILUTED
Weighted average number of common
shares and equivalents outstanding
(in thousands) 15,247 18,425 15,943 18,992
Earnings per share $ .22 $ .24 $ .18 $ .48
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE> 5
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,920 $ 9,022
-------- --------
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 11,474 8,650
Compensatory effect of stock options 247 -
(Gain) loss on sale of property, plant and equipment, net (32) 85
Deferred income taxes (872) -
(Increase) decrease in assets:
Trade accounts receivable, net 10,081 (5,429)
Inventories (4,104) (16,221)
Refundable and accrued income taxes (3,366) (61)
Prepaid expenses and other (1,601) 1,986
Other (1,026) (222)
Increase (decrease) in liabilities:
Trade accounts payable 4,703 12,592
Accrued advertising and promotion (7,509) 1,125
Accrued salaries, benefits, and payroll taxes (4,674) 4,798
Accrued warranty and customer returns (550) 850
Accrued other 908 (3,103)
-------- --------
Total adjustments 3,679 5,050
-------- --------
Net cash from operating activities 6,599 14,072
-------- --------
Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment, net (12,440) (12,178)
Decrease (increase) in tooling deposits 2,916 (1,562)
Proceeds from sale of plant and equipment, net 32 -
-------- --------
Net cash from investing activities (9,492) (13,740)
-------- --------
Cash flows from financing activities:
Proceeds on bank debt, net 19,500 10,100
Payments on note payable (224) (230)
Payments on capital lease obligations (246) (213)
Proceeds from exercise of stock options 139 381
Repurchase of common stock (17,703) (10,036)
-------- --------
Net cash from financing activities 1,466 2
-------- --------
Net (decrease) increase in cash (1,427) 334
-------- --------
Cash at beginning of period 1,427 -
-------- --------
Cash at end of period $ - $ 334
======== ========
Supplemental disclosure of cash flow information:
Cash payments for:
Interest $ 2,616 $ 1,007
======== ========
Income taxes, net of refunds $ 4,413 $ 5,379
======== ========
</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 balance sheets as of September 30, 2000 and December 31, 1999, and
the related statements of operations and cash flows as of, and for the interim
periods ended, September 30, 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 annual report
(Form 10-K).
The results of operations for the three and nine month periods ended
September 30, 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 will be required to ensure that it is in
compliance with Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition
in Financial Statements, in the fourth quarter of 2000. Based upon the Company's
current analysis, management does not believe that the application of SAB 101
will result in any material adjustments to previously reported financial
information although certain disclosures may be enhanced in accordance with the
SAB guidance.
Earnings 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 September 30, 2000, and
December 31, 1999, consisted of the following:
September 30, December 31,
2000 1999
---- ----
Finished goods $39,920 $37,280
Work in process and purchased parts 14,645 13,181
------- -------
$54,565 $50,461
======= =======
NOTE 3: COMMITMENTS AND CONTINGENCIES
At September 30, 2000, the Company estimates having contractual
commitments for future advertising and promotional expense of approximately
$12,475, including commitments for television advertising through December 31,
2000. Other contractual commitments for items in the normal course of business
total approximately $3,100.
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 provides up to
$80,000 of borrowings and 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 September 30, 2000. The revolving credit facility permits share repurchases
up to $40,000 as long as the Company remains in compliance with all covenants
and prohibits the payment of cash dividends. As of November 8, 2000, the Company
had approximately $22,300 available for additional share repurchases under its
current revolving credit facility. 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 September 30, 2000, was
$30,000. The maximum amount of receivables that can be sold is seasonally
adjusted. At September 30, 2000, the Company received approximately $16,600 from
the sale of trade accounts receivable. The proceeds from the sales were used to
reduce borrowings under the Company's revolving credit facility. Costs of the
program, which primarily consist of the purchaser's financing cost of issuing
commercial paper backed by the receivables, totaled $1,061 and $859 for the nine
months ended September 30, 2000 and 1999, respectively, and have been classified
as Receivable securitization and other expense (income), net in the accompanying
Consolidated Statements of Operations. The Company, as agent for the purchaser
of the receivables, retains collection and administrative responsibilities for
the purchased receivables.
The Company has a 7.9% fixed rate mortgage note payable in the amount of
$4,744. 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 remaining balance of approximately $4,661
was paid. The carrying amount of the mortgage note payable approximates fair
value.
7
<PAGE> 8
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except per share amounts)
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 November 8, 2000, the Company has repurchased approximately
2,836 shares for an aggregate purchase price of $17,703 under the current
program, and an aggregate of 10,126 shares since the repurchases began in 1997.
The current program is scheduled to expire in February 2001.
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.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------------
2000 1999 2000 1999
------ ------ ------- ------
<S> <C> <C> <C> <C>
Net income $ 3,345 $ 4,407 $ 2,920 $ 9,022
======== ======== ======== ========
BASIC:
Common shares outstanding, net of treasury
shares, beginning of period 15,033 19,136 16,973 19,622
Weighted average common shares issued
during period 7 37 15 53
Weighted average treasury shares repurchased
during period (448) (1,106) (1,534) (881)
-------- -------- -------- --------
Weighted average common shares outstanding,
net of treasury shares, end of period 14,592 18,067 15,454 18,794
======== ======== ======== ========
Net income per common share $ 0.23 $ 0.24 $ 0.19 $ 0.48
======== ======== ======== ========
DILUTED:
Common shares outstanding, net of treasury
shares, beginning of period 15,033 19,136 16,973 19,622
Weighted average common shares issued
during period 7 37 15 53
Weighted average common share equivalents 655 358 489 198
Weighted average treasury shares repurchased
during period (448) (1,106) (1,534) (881)
-------- -------- -------- --------
Weighted average common shares outstanding,
net of treasury shares, end of period 15,247 18,425 15,943 18,992
======== ======== ======== ========
Net income per common share $ 0.22 $ 0.24 $ 0.18 $ 0.48
======== ======== ======== ========
</TABLE>
8
<PAGE> 9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (DOLLARS IN THOUSANDS)
-------------
RESULTS OF OPERATIONS
---------------------
Net sales decreased 9.8% for the third quarter and increased 2.0% for the
nine-month period ended September 30, 2000, compared with the same periods in
the prior year. The increase in net sales for the nine months ended September
30, 2000 was primarily attributable to higher shipments of the Company's Dirt
Devil Easy Steamer(TM), an upright carpet shampooer which was introduced in the
third quarter of 1999. The decrease in net sales for the third quarter of 2000
was primarily attributable to lower shipments of the Company's line of upright
vacuum cleaners. Overall sales to the top 5 customers in the first nine months
of 2000 (all of which are major retailers) were comparable to the first nine
months of 1999. Sales to the top 5 customers accounted for approximately 67.3%
of net sales in the first nine months of 2000 as compared with approximately
68.7% in the first nine months of 1999. The Company believes that its dependence
on sales to its largest customers will continue. Recently, many major retailers
have experienced significant financial difficulties and some have filed for
protection from creditors under applicable bankruptcy laws. The Company sells
its products to certain customers that are in bankruptcy proceedings.
Gross margin, as a percent of net sales, decreased from 23.6% for the
third quarter 1999 to 22.7% in the third quarter 2000 and decreased from 24.6%
in the first nine months of 1999 to 21.5% in the first nine months of 2000. The
gross margin percentage was negatively affected primarily by heightened
competition resulting in lower margins on various products, higher depreciation
expense on tooling for certain product lines due to shortened expected useful
lives and inventory obsolescence charges related primarily to the discontinued
corded Mop Vac product.
Advertising and promotion expenses decreased 7.9% for the third quarter
2000 and increased 6.3% for the nine months ended September 30, 2000. The
decrease in advertising and promotion expenses for the quarter was due primarily
to decreases in media spending and costs associated with producing the media.
The increase in advertising and promotion expenses during the first nine months
of 2000 are due to advertising on the Easy Steamer(TM) during the first half of
2000. 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 decreased 16.3% for the third quarter 2000 and
3.4% for the nine month period ended September 30, 2000 compared with the same
periods in 1999. The decrease is primarily due to lower internal sales and
marketing personnel compensation, which are the largest components of other
selling expenses. Other selling expenses decreased as a percentage of sales
for the third quarter and nine month period ended September 30, 2000, from 2.4%
to 2.3%, compared with the same periods in 1999.
General and administrative expenses increased 4.8% for the third quarter
2000 and increased 4.3% for the nine-month period ended September 30, 2000,
compared with the same periods in 1999. General and administrative expenses
increased as a percentage of net sales for the third quarter 2000 from 4.2% to
4.8% and increased for the nine month period ended September 30, 2000, from 4.5%
to 4.6%, compared with the same periods in 1999. The principal components are
compensation (including benefits), insurance, provision for doubtful accounts,
travel and professional services. The dollar increases in the third quarter and
nine-month period ended September 30, 2000, were primarily due to increases in
employee related benefit expenses and professional services.
9
<PAGE> 10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (DOLLARS IN THOUSANDS) (CONTINUED)
-------------
RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
--------------------------------------------------------------
Engineering and product development expenses were comparable for the
third quarter 2000 and for the nine-month period ended September 30, 2000. 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.
Interest expense increased 135.9% for the third quarter 2000 and
increased 171.8% for the nine-month period ended September 30, 2000, compared
with the same periods 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 and higher effective borrowing rates.
Receivable securitization and other expense (income), net principally
reflects the effect of the cost of the Company's trade accounts receivable
securitization program and foreign currency transaction gains or losses related
to the Company's North American assets.
Due to the factors discussed above, the Company had income before income
taxes for the third quarter and nine months ended September 30, 2000, of $3,780
and $3,105, respectively, as compared to income before income taxes for the
third quarter and for the nine months ended September 30, 1999, of $6,912 and
$14,347, respectively.
The third quarter results for 2000 include a $930 research and
development tax credit related to prior years which increased earnings per share
by $.06. The effective tax rate was reduced to 11.5% and 6.0% for the third
quarter and nine months ended September 30, 2000, respectively, as a result of
the tax credit.
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 $43,336 at September 30, 2000, an increase of
11.3% over December 31, 1999. Current assets decreased by $5,755 reflecting in
part a $10,081 decrease of trade accounts receivable, partially offset by an
increase in inventory of $4,104 and an increase in prepaid expenses and other of
$1,601. Current liabilities decreased by $10,141 reflecting in part a $7,509
decrease in accrued advertising and promotion, a $4,674 decrease in accrued
salaries, benefits, and payroll taxes and a $550 decrease in accrued warranty
and customer returns partially offset by a $4,703 increase in trade accounts
payable.
In the first nine months of 2000, the Company utilized $9,524 of cash for
capital purchases, including approximately $3,950 of tooling related to the new
Dirt Devil(R) Vision Lite(TM) and the Dirt Devil(R) Vision(TM) with Sensor and
approximately $2,025 for computer equipment and software.
The Company's collateralized revolving credit facility provides up to
$80,000 of borrowings and 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 September 30, 2000. The revolving credit facility permits share repurchases
up to $40,000 as long as the Company remains in compliance with all covenants
but prohibits the payment of cash dividends. As of November 8, 2000, the Company
had approximately $22,300 available for additional share repurchases under its
current revolving credit facility. The revolving credit facility is
collateralized by the assets of the Company.
10
<PAGE> 11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (DOLLARS IN THOUSANDS) (CONTINUED)
-------------
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
-------------------------------
The Company also utilizes a revolving trade accounts receivable
securitization program to sell without recourse, through a wholly-owned
subsidiary, certain trade accounts receivable. Under the program, the maximum
amount allowed to be sold at any given time through September 30, 2000, was
$30,000. The maximum amount of receivables that can be sold is seasonally
adjusted. At September 30, 2000, the Company received approximately $16,600 from
the sale of trade accounts receivable. The proceeds from the sales were used to
reduce borrowings under the Company's revolving credit facility. Costs of the
program, which primarily consist of the purchaser's financing cost of issuing
commercial paper backed by the receivables, totaled $1,061 and $859 for the nine
months ended September 30, 2000 and 1999, respectively, and have been classified
as Receivable securitization and other expense (income), net in the accompanying
Consolidated Statements of Operations. The Company, as agent for the purchaser
of the receivables, retains collection and administrative responsibilities for
the purchased receivables.
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. The February 2000 repurchase program is one of a series of
programs that began in 1997. As of November 8, 2000, the Company has repurchased
approximately 2,836 shares for an aggregate purchase price of $17,703 under the
current program, and an aggregate of 10,126 shares since the repurchases began
in 1997. The current 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 February
2000 repurchase program.
QUARTERLY OPERATING RESULTS
---------------------------
The following table presents certain unaudited consolidated quarterly
operating information for the Company and includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for a
fair presentation of such information for the interim periods.
<TABLE>
<CAPTION>
Three Months Ended
Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
2000 2000 2000 1999 1999 1999 1999
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 96,129 $ 82,075 $103,470 $131,766 $106,520 $ 80,488 $ 89,210
Gross margin 21,778 15,451 23,455 35,536 25,156 20,824 22,016
Net income (loss) (a) 3,345 (1,504) 1,080 3,660 4,407 2,863 1,752
Net income (loss) per $ 0.22 $ (0.10) $ 0.06 $ 0.21 $ 0.24 $ 0.15 $ 0.09
common share (b)
</TABLE>
(a) The sum of 2000 quarterly net income (loss) does not equal annual net
income (loss) due to rounding.
(b) Earnings (loss) per share is calculated based on the diluted method
explained in Note 6 to the Consolidated Financial Statements.
The Company's business is seasonal. The Company believes that a
significant percentage of certain of its products are given as gifts and
therefore, sell in larger volumes during the Christmas shopping season. The
Company's continued dependency on its major customers, the timing of purchases
by these major customers and the timing of new product introductions cause
quarterly fluctuations in the Company's net sales. As a consequence, results in
prior quarters are not necessarily indicative of future results of operations.
11
<PAGE> 12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (DOLLARS IN THOUSANDS) (CONTINUED)
-------------
OTHER
-----
The Company believes that the domestic vacuum cleaner industry is a
mature industry with modest annual growth in many of its products but with a
decline in certain other products. Competition is dependent upon price, quality,
extension of product lines, and advertising and promotion expenditures.
Additionally, competition is influenced by innovation in the design of
replacement models and by marketing and approaches to distribution. The
Company's most significant competitors are Hoover, Eureka and Bissell in the
upright and carpet shampooer market, and in the hand-held market, Black &
Decker. These competitors and several others are subsidiaries or divisions of
companies that are more diversified and have greater financial resources than
the Company.
INFLATION
---------
The Company does not believe that inflation by itself has had a material
effect on the Company's results of operations. However, as the Company
experiences price increases from its suppliers, which may include increases due
to inflation, retail pressures may prevent the Company from increasing its
prices. Due to recent economic conditions, the cost of plastic resin and
transportation has increased in 2000.
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.
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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.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
------ --------------------------------
Forms 8-K - None
The following documents are furnished as an exhibit and
numbered pursuant to Item 601 of Regulation S-K:
Exhibit 27 - Financial data schedule (EDGAR filing only)
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Royal Appliance Mfg. Co.
-------------------------------------------
(Registrant)
/s/ Michael J. Merriman
-------------------------------------------
Michael J. Merriman
Chief Executive Officer, President and Director
(Principal Executive Officer)
Date: November 13, 2000 /s/ Richard G. Vasek
----------------- -----------------------------------------------
Richard G. Vasek
Chief Financial Officer, Vice President -
Finance and Secretary
(Principal Financial Officer)
15
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INDEX TO EXHIBITS
PAGE NUMBER
-----------
Exhibit 27 - Financial data schedule (EDGAR filing only)
16
