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 JUNE 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
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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
- --------------------------------------------------------------------------------
(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 15,057,352
-------------------------------- ------------------------------
(Class) (Outstanding at July 27, 2000)
The Exhibit index appears on sequential page 16.
1
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
INDEX
Page
Number
------
Part I FINANCIAL INFORMATION
Item 1 Financial Statements
------ --------------------
Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations -
three months and six months ended June 30, 2000
and 1999 4
Consolidated Statements of Cash Flows -
six months ended June 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 - 12
-----------------------------------
Part II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 13
------ ---------------------------------------------------
Item 5 Other Information 13
------ -----------------
Item 6 Exhibits and Reports on Form 8-K 13-14
------ --------------------------------
Signatures 15
Exhibit Index Exhibit 10(k) - Phantom Stock Plan effective 16
March 31, 2000
Exhibit 10(l) - Lease dated October 15, 1996, as amended,
with respect to Glenwillow, Ohio property
between Health-O-Meter Products, Inc. n.k.a
Sunbeam Products, Inc. and Duke Realty
Limited Partnership, as lessor, together
with the lease assignment effective July 1,
2000, between Sunbeam Products, Inc., Royal
Appliance Mfg. Co. and Dugan Realty L.L.C.
f.k.a. Duke Realty Limited Partnership.
Exhibit 27* - financial data schedule
*Numbered in accordance with Item 601 of Regulation S-K
2
3
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
------ --------------------
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
2000 1999
--------- ---------
(Unaudited)
ASSETS
Current assets:
Cash $ 392 $ 1,427
Trade accounts receivable, net 30,062 48,526
Inventories 50,314 50,461
Deferred income taxes 5,869 5,074
Prepaid expenses and other 2,365 1,681
--------- ---------
Total current assets 89,002 107,169
--------- ---------
Property, plant and equipment, at cost:
Land 1,541 1,541
Building 7,777 7,777
Molds, tooling, and equipment 55,839 49,515
Furniture and office equipment 9,047 7,787
Assets under capital leases 4,582 4,694
Leasehold improvements and other 5,452 5,137
--------- ---------
84,238 76,451
Less accumulated depreciation and amortization (42,236) (37,556)
--------- ---------
42,002 38,895
--------- ---------
Tooling deposits 1,812 5,177
Other 1,464 651
--------- ---------
Total assets $ 134,280 $ 151,892
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 25,110 $ 22,280
Accrued liabilities:
Advertising and promotion 8,435 15,932
Salaries, benefits, and payroll taxes 2,796 8,005
Warranty and customer returns 9,400 10,050
Income taxes -- 3,366
Other 4,366 3,301
Current portions of capital lease obligations and notes payable 5,166 5,285
--------- ---------
Total current liabilities 55,273 68,219
--------- ---------
Revolving credit agreement 39,900 32,200
Capitalized lease obligations, less current portion 2,322 2,504
--------- ---------
Total long-term debt 42,222 34,704
--------- ---------
Deferred income taxes 3,867 4,300
--------- ---------
Total liabilities 101,362 107,223
--------- ---------
Commitments and contingencies (Note 3) -- --
Shareholders' equity:
Common shares, at stated value 212 212
Additional paid-in capital 42,751 42,528
Retained earnings 54,801 55,226
Accumulated other comprehensive income -- --
--------- ---------
97,764 97,966
Less treasury shares, at cost (10,431,700 and 8,491,000 shares
at June 30, 2000 and December 31 1999, respectively) (64,846) (53,297)
--------- ---------
Total shareholders' equity 32,918 44,669
--------- ---------
Total liabilities and shareholders' equity $ 134,280 $ 151,892
========= =========
The accompanying notes are an integral part of these financial statements.
3
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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)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Net sales $ 82,075 $ 80,488 $ 185,545 $ 169,698
Cost of sales 66,624 59,664 146,639 126,858
--------- --------- --------- ---------
Gross margin 15,451 20,824 38,906 42,840
Advertising and promotion 9,507 8,072 21,497 19,050
Other selling 2,343 2,172 4,321 4,124
General and administrative 3,552 3,892 8,438 8,110
Engineering and product development 1,322 1,539 3,072 3,027
--------- --------- --------- ---------
(Loss) income from operations (1,273) 5,149 1,578 8,529
Interest expense, net 747 183 1,422 468
Receivable securitization and other
expense, net 361 357 831 626
--------- --------- --------- ---------
(Loss) income before income taxes (2,381) 4,609 (675) 7,435
Income tax (benefit) expense (877) 1,746 (250) 2,820
--------- --------- --------- ---------
Net (loss) income $ (1,504) $ 2,863 $ (425) $ 4,615
========= ========= ========= =========
BASIC
Weighted average number of common
shares outstanding (in thousands) 15,467 19,098 15,948 19,170
(Loss) earnings per share $ (0.10) $ .15 $ (0.03) $ .24
DILUTED
Weighted average number of common
shares and equivalents outstanding
(in thousands) 15,467 19,353 15,948 19,300
(Loss) earnings per share $ (0.10) $ .15 $ (0.03) $ .24
The accompanying notes are an integral part of these financial statements
4
5
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
------ --------------------
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months
Ended June 30,
-----------------------
2000 1999
-------- --------
Cash flows from operating activities:
Net (loss) income $ (425) $ 4,615
-------- --------
Adjustments to reconcile net (loss) income to
net cash from operating activities:
Depreciation and amortization 7,687 5,116
Compensatory effect of stock options 143 -
(Gain) loss on disposal of tooling and equipment (32) 71
Deferred income taxes (433) (152)
(Increase) decrease in assets:
Trade accounts receivable, net 18,464 7,700
Inventories 147 (6,664)
Refundable and accrued income taxes (4,161) (372)
Prepaid expenses and other (684) (681)
Other (982) (136)
Increase (decrease) in liabilities:
Trade accounts payable 2,830 364
Accrued advertising and promotion (7,497) (1,708)
Accrued salaries, benefits, and payroll taxes (5,209) 1,899
Accrued warranty and customer returns (650) 500
Accrued other 1,065 (777)
-------- --------
Total adjustments 10,688 5,160
-------- --------
Net cash from operating activities 10,263 9,775
-------- --------
Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment, net (10,625) (8,131)
Decrease (increase) in tooling deposits 3,365 (1,628)
Proceeds from sale of equipment 32 -
-------- --------
Net cash from investing activities (7,228) (9,759)
-------- --------
Cash flows from financing activities:
Proceeds from bank debt, net 7,700 2,800
Payments on note payable (148) (159)
Payments on capital lease obligations (153) (143)
Proceeds from exercise of stock options 80 323
Repurchase of common stock (11,549) (2,093)
-------- --------
Net cash from financing activities (4,070) 728
-------- --------
Net (decrease) increase in cash (1,035) 744
-------- --------
Cash at beginning of period 1,427 -
-------- --------
Cash at end of period $ 392 $ 744
======== ========
Supplemental disclosure of cash flow information:
Cash payments for:
Interest $ 1,552 $ 606
======== ========
Income taxes, net of refunds $ 4,352 $ 3,330
======== ========
The accompanying notes are an integral part of these financial statements.
5
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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, 2000 and December
31, 1999, and the related statements of operations and cash flows as of, and for
the interim periods ended, June 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
shareholders' annual report (Form 10-K).
The results of operations for the three and six month periods ended June
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.
Net (loss) 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 first-in,
first-out (FIFO) method. Inventories at June 30, 2000, and December 31, 1999,
consisted of the following
June 30, December 31,
2000 1999
------- -------
Finished goods $39,828 $37,280
Work in process and purchased parts 10,486 13,181
------- -------
Inventories at FIFO cost $50,314 $50,461
======= =======
NOTE 3: COMMITMENTS AND CONTINGENCIES
At June 30, 2000, the Company estimates having contractual commitments
for future advertising and promotional expense of approximately $13,400,
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
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 June 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 July 27, 2000, the Company had
approximately $28,500 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 June 30, 2000, was $30,000.
The maximum amount of receivables that can be sold is seasonally adjusted. At
June 30, 2000, the Company received approximately $16,500 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 $709 and $565 for the six months ended June
30, 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
$4,820. 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.
7
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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 July 27, 2000, the Company has repurchased approximately
1,941 shares for an aggregate purchase price of $11,549 under the current
program. The current program is scheduled to expire in February 2001.
NOTE 6: (LOSS) 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 (loss) 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. The press release dated July 18, 2000 incorrectly reported diluted
loss per share of $.09 due to the inclusion of antidilutive common share
equivalents.
Three months ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
Net (loss) income $ (1,504) $ 2,863 $ (425) $ 4,615
======== ======== ======== ========
BASIC:
Common shares outstanding, net of treasury
shares, beginning of period 15,875 19,095 16,973 19,622
Weighted average common shares issued
during period 13 3 7 28
Weighted average treasury shares repurchased
during period (421) - (1,032) (480)
-------- -------- -------- --------
Weighted average common shares outstanding,
net of treasury shares, end of period 15,467 19,098 15,948 19,170
======== ======== ======== ========
Net (loss) income per common share $ (0.10) $ 0.15 $ (0.03) $ 0.24
======== ======== ======== ========
DILUTED:
Common shares outstanding, net of treasury
shares, beginning of period 15,875 19,095 16,973 19,622
Weighted average common shares issued
during period 13 3 7 28
Weighted average common share equivalents - 255 - 130
Weighted average treasury shares repurchased
during period (421) - (1,032) (480)
-------- -------- -------- --------
Weighted average common shares outstanding,
net of treasury shares, end of period 15,467 19,353 15,948 19,300
======== ======== ======== ========
Net (loss) income per common share $ (0.10) $ 0.15 $ (0.03) $ 0.24
======== ======== ======== ========
8
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (DOLLARS IN THOUSANDS)
------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Net sales increased 2.0% for the second quarter and increased 9.3% for
the six-month period ended June 30, 2000, 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, 2000, was due primarily to shipments of the Dirt
Devil(R) Easy Steamer(TM), an upright carpet shampooer introduced in the third
quarter of 1999. Overall sales to the top 5 customers (all of which are major
retailers) increased in the first six months of 2000, although as a percentage,
sales to the top 5 customers were 68.1% of net sales as compared with
approximately 71.4% in the first six 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 25.9% for the
second quarter 1999 to 18.8% in the second quarter 2000 and from 25.2% in the
first six months of 1999 to 21.0% in the first six months of 2000. The gross
margin percentage was negatively affected in 2000 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 to the corded Mop Vac and Broom
Vac. We expect gross margins to improve in the second half of 2000 when several
new products will be introduced to the market.
Advertising and promotion expenses increased 17.8% for the second quarter
2000 and increased 12.8% for the six month period ended June 30, 2000 compared
with the same periods in 1999. The increase for the three and six-month periods
was due primarily to increases in cooperative advertising and media spending for
the Dirt Devil(R) Easy Steamer(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 7.9% for the second quarter 2000 and
increased 4.8% for the six month period ended June 30, 2000 compared with the
same periods in 1999. The increase is primarily due to internal sales and
marketing personnel costs, which are the largest components of other
selling expenses. Other selling expenses increased as a percentage of sales for
the second quarter 2000 from 2.7% to 2.9% and decreased for the six-month period
ended June 30, 2000, from 2.4% to 2.3%, compared with the same periods in 1999.
General and administrative expenses decreased 8.7% for the second quarter
2000 and increased 4.0% for the six-month period ended June 30, 2000, compared
with the same periods in 1999. General and administrative expenses decreased as
a percentage of net sales for the second quarter 2000 from 4.8% to 4.3% and for
the six month period ended June 30, 2000, from 4.8% to 4.5%, 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 increase in the six-month period ended June 30, 2000, was
primarily due to increases in employee related benefit expenses and professional
services.
9
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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 decreased 14.1% for the
second quarter 2000 and was comparable for the six-month period ended June 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. The decrease in
the second quarter of 2000 was primarily due to the timing of costs associated
with new product introductions in 2000 as compared to the new product
introductions in the second quarter of 1999.
Interest expense increased 308.2% for the second quarter 2000 and
increased 203.8% for the six-month period ended June 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, 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 a loss before income
taxes for the second quarter and six months ended June 30, 2000, of $2,381 and
$675, respectively, as compared to income before income taxes for the second
quarter and six months ended June 30, 1999, of $4,609 and $7,435, 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
$33,729 at June 30, 2000, a decrease of 13.4% over December 31, 1999. Current
assets decreased by $18,167 reflecting a $18,464 reduction of trade accounts
receivable partially offset by an increase in deferred and refundable income
taxes of $795 and an increase in prepaid expenses and other of $684. Current
liabilities decreased by $12,946, reflecting a decrease in accrued advertising
and promotion of $7,497, a decrease in accrued salaries, benefits and payroll
taxes of $5,209, a decrease of $650 in accrued warranty and customer returns and
a decrease of $3,366 in accrued income taxes partially offset by an increase in
trade accounts payable of $2,830 and an increase of $1,065 in accrued other.
In the first six months of 2000, the Company utilized $7,260 of cash for
capital purchases, including approximately $5,600 of tooling related to the new
Dirt Devil(R) Vision Lite(TM) and the Dirt Devil(R) Vision(TM) with Sensor.
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 June 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 July 27, 2000, the Company had
approximately $28,500 available for additional share repurchases under its
current revolving credit facility. The revolving credit facility is
collateralized by the assets of the Company.
10
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 June 30, 2000, was $30,000.
The maximum amount of receivables that can be sold is seasonally adjusted. At
June 30, 2000, the Company received approximately $16,500 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 $709 and $565 for the six months ended June
30, 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. The February 2000 repurchase program is one of a series of
programs that began in 1997. As of July 27, 2000, the Company has repurchased
approximately 1,941 shares for an aggregate purchase price of $11,549 under the
current program, and an aggregate of 9,231 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.
Three Months Ended
----------------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
2000 2000 1999 1999 1999 1999
------- -------- -------- -------- ------- -------
(Dollars in thousands, except per share amounts)
Net sales $82,075 $103,470 $131,766 $106,520 $80,488 $89,210
Gross margin 15,451 23,455 35,536 25,156 20,824 22,016
Net (loss) income (1,504) 1,080 3,660 4,407 2,863 1,752
Net (loss) income per $ (.10) $ .06 $ .21 $ .24 $ .15 $ .09
common share (a)
(a) (Loss) earnings 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 are given as gifts and
therefore, sell in larger volumes during the Christmas shopping season. Because
of the Company's continued dependency on its major customers, the timing of
purchases by these major customers and the timing of new product introductions
cause quarterly fluctuations in the Company's net sales. As a consequence,
results in prior quarters are not necessarily indicative of future results of
operations.
11
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 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.
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.
12
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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 25,
2000.
(b) At the annual meeting, the Company's shareholders elected Messrs.
Jack Kahl Jr., Michael J. Merriman, and John P. Rochon, as Class I
Directors for a two-year term which expires at the annual
shareholders meeting in 2002.
The term of office of Messrs. E. Patrick Nalley, Joseph B. Richey
II, and R. Louis Schneeberger, the Class II Directors, continued
after the 2000 meeting; such term expires at the annual
shareholders meeting in 2001.
(c) At the annual meeting, the Company's shareholders ratified the
appointment of PricewaterhouseCoopers L.L.P. as auditors of the
Company for 2001. The holders of 13,972,782 common shares voted to
ratify the appointment, the holders of 41,847 common shares voted
against the ratification, and the holders of 23,547 common shares
abstained.
The following tabulation represents voting for the Class I
Directors
NAME FOR WITHHELD AUTHORITY
---- --- ------------------
Mr. Kahl 13,941,723 96,453
Mr. Merriman 13,936,568 101,608
Mr. Rochon 13,936,823 101,353
(d) Not applicable
ITEM 5 - Other Information
- ------ -----------------
In the second quarter of 1999, the Company hired McDonald Investments
Inc. to assist the Board of Directors in exploring strategic
alternatives to maximize its shareholders' value. Although the Company
received preliminary indications of interest from several potential
suitors, none of the indications of interest resulted in an agreement.
In July 1999, the Company announced that its engagement of McDonald
Investments was completed. Subsequent to July 1999, the Company,
McDonald Investments and Richmont Capital Partners I, L.P., which
beneficially owns almost 20% of the outstanding Common Stock of the
Company and whose Chairman is a director of the Company, have continued
to receive occasional inquiries, including recent inquiries, from
potential suitors. In a few cases, the Company and/or Richmont have
met with the interested parties. None of the inquiries or informal
talks resulted in any definitive offers, nor did the Company believe
that any interested party, at such time, had the financial commitments
to consummate an acquisition. In response to inquiries, Richmont has
indicated that, based on current market conditions and the position of
the Company, as a shareholder, it would not consider selling its shares
of Company Stock at a price less than "low double digits".
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:
13
14
PART II - OTHER INFORMATION (CONTINUED)
Exhibit 10(k) - Phantom Stock Plan effective March 31, 2000
Exhibit 10(l) - Lease dated October 15, 1996, as amended, with
respect to Glenwillow, Ohio property between
Health-O-Meter Products, Inc. n.k.a Sunbeam
Products, Inc. and Duke Realty Limited
Partnership, as lessor, together with the lease
assignment effective July 1, 2000, between Sunbeam
Products, Inc., Royal Appliance Mfg. Co. and Dugan
Realty L.L.C. f.k.a. Duke Realty Limited
Partnership.
Exhibit 27 - Financial data schedule (EDGAR filing only)
14
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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: July 28, 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 10(k) - Phantom Stock Plan effective March 31, 2000 17-34
Exhibit 10(l) - Lease dated October 15, 1996, as amended, with respect 35-99
to 35-99 Glenwillow, Ohio property between
Health-O-Meter Products, Inc. n.k.a Sunbeam Products,
Inc. and Duke Realty Limited Partnership, as lessor,
together with the lease assignment dated effective July
1, 2000, between Sunbeam Products, Inc., Royal
Appliance Mfg. Co. and Dugan Realty L.L.C. f.k.a. Duke
Realty Limited Partnership.
Exhibit 27 - Financial data schedule (EDGAR filing only) 100
16