1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the quarterly period ended MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period
from to
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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
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
650 ALPHA DRIVE, CLEVELAND, OHIO 44143
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(Address of Principal Executive Offices) (Zip Code)
(216) 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 23,999,000
- - ------------------------------------ ----------------------------------
(Class) (Outstanding at May 13, 1996)
The Exhibit index appears on sequential page 14.
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
INDEX
Page No.
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Part I FINANCIAL INFORMATION
Item 1 Financial Statements
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Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995 3
Consolidated Statements of Operations -
three months ended March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows three months ended March
31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6-7
Item 2 Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations 8-11
-----------------------------------
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 12
------ --------------------------------
Signatures 13
Exhibit Index 14
Exhibit 11* - Computation of earnings (loss) per common share. 15
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Exhibit 27* - Financial data schedule.
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*Numbered in accordance with Item 601 of Regulation S-K.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
-----------------------------
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
March 31, December 31,
1996 1995
---------- ------------
ASSETS (Unaudited) (Note 2)
Current assets:
Cash $ -- $ --
Trade accounts receivable, net 31,395 43,558
Inventories 29,116 28,408
Deferred income taxes 6,576 7,230
Refundable income taxes, net -- 4,392
Prepaid expenses and other 1,850 1,144
--------- ---------
Total current assets 68,937 84,732
--------- ---------
Property, plant and equipment, at cost:
Land 3,387 3,405
Buildings 14,457 14,463
Molds, tooling, and equipment 37,790 37,596
Furniture and office equipment 5,436 5,352
Assets under capital leases 9,058 9,058
Leasehold improvements and other 2,586 2,565
--------- ---------
72,714 72,439
Less accumulated depreciation and amortization 32,442 30,760
--------- ---------
40,272 41,679
--------- ---------
Tooling deposits 4,868 4,047
Other 1,179 803
--------- ---------
Total assets $ 115,256 $ 131,261
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 12,855 $ 16,073
Accrued liabilities:
Advertising and promotion 4,267 7,253
Salaries, benefits, payroll taxes 2,775 3,056
Warranty and customer returns 7,400 7,600
Income taxes 294 --
Interest and other 4,032 3,963
Current portions of capital lease obligations and notes payable 765 742
--------- ---------
Total current liabilities 32,388 38,687
--------- ---------
Revolving credit agreement 19,015 28,839
Capitalized lease obligations, less current portion 7,075 7,174
Notes payable, less current portion 9,877 9,986
--------- ---------
Total long-term debt 35,967 45,999
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Total liabilities 68,355 84,686
--------- ---------
Commitments and contingencies (Note 3) -- --
Shareholders' equity:
Common shares, at stated value 210 210
Additional paid-in capital 41,598 41,583
Retained earnings 18,507 18,175
Cumulative translation adjustment (434) (413)
--------- ---------
59,881 59,555
Less treasury shares, at cost (1,201,000 shares at
March 31, 1996, and December 31, 1995, respectively) (12,980) (12,980)
--------- ---------
Total shareholders' equity 46,901 46,575
--------- ---------
Total liabilities and shareholders' equity $ 115,256 $ 131,261
========= =========
The accompanying notes are an integral part of these financial statements.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended
March 31,
---------
1996 1995
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(Note 2)
Net sales $52,262 $ 49,016
Cost of sales 38,499 37,780
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Gross margin 13,763 11,236
Advertising and promotion 6,403 6,840
Other selling 2,074 2,981
General and administrative 3,044 3,277
Engineering and product development 771 979
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Income (loss) from operations 1,471 (2,841)
Interest expense, net 855 881
Other expense (income), net 71 (6)
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Income (loss) before income taxes 545 (3,716)
Income tax expense (benefit) 213 (1,338)
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Net income (loss) $ 332 $ (2,378)
======= ========
Net income (loss) per common share $ .01 $ (.10)
Weighted average number of common shares
and equivalents outstanding (in thousands) 23,999 23,999
The accompanying notes are an integral part of these financial statements.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
-----------------------------
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Three months
Ended March 31,
---------------------
1996 1995
-------- --------
(Note 2)
Cash flows from operating activities:
Net income (loss) $ 332 $ (2,378)
-------- --------
Adjustments to reconcile net loss to
net cash from operating activities:
Depreciation and amortization 1,788 2,232
Compensatory effect of stock options 15 15
(Increase) decrease in assets:
Trade accounts receivable, net 12,163 13,290
Inventories (708) (2,228)
Refundable, deferred, and accrued income taxes 5,340 (2,113)
Prepaid expenses and other (716) (50)
Other (468) (102)
Increase (decrease) in liabilities:
Trade accounts payable (3,199) 7,091
Accrued advertising and promotion (2,986) (5,186)
Accrued salaries, benefits, and payroll taxes (281) (131)
Accrued warranty and customer returns (200) --
Accrued interest and other 76 (306)
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Total adjustments 10,824 12,512
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Net cash from operating activities 11,156 10,134
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Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment, net (328) (1,015)
Increase in tooling deposits (821) (868)
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Net cash from investing activities (1,149) (1,883)
-------- --------
Cash flows from financing activities:
Proceeds from bank debt 56,500 18,203
Payments on bank debt (66,324) (26,619)
Payments on note payable (97) --
Payments on capital lease obligations (89) (79)
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Net cash from financing activities (10,010) (8,495)
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Effect of exchange rate changes on cash 3 244
-------- --------
Net increase in cash -- --
-------- --------
Cash at beginning of period -- --
-------- --------
Cash at end of period $ -- $ --
======== ========
Supplemental disclosure of cash flow information:
Cash payments (refunds) for:
Interest $ 956 $ 1,210
======== ========
Income taxes, net of refunds $ (5,128) $ 775
======== ========
The accompanying notes are an integral part of these financial statements.
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
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, 1996, and December
31, 1995, and the related statements of operations and cash flows as of, and for
the interim periods ended, March 31, 1996 and 1995. 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,
1996, 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 recognization policy is to recognize revenues when
products are shipped.
Net income (loss) per share is computed based on the weighted average
number of common and common equivalent shares outstanding and when applicable is
adjusted for the assumed conversion of shares issuable upon exercise of options,
after the assumed repurchase of common shares with the related proceeds.
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost or market. In September 1995,
the Company changed its method of accounting for domestic inventories from the
last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. As
required by generally accepted accounting principles, the Company has
retroactively adjusted prior years' financial statements for this change.
Management believes the FIFO method will provide a better matching of current
costs and current revenues due to past and future decreases in costs and changes
in the mix of products as the Company introduces new products into the
marketplace over time.
The effect of the change in accounting method decreased the loss by $76
and had no affect on the earnings per common share, for the three months ended
March 31, 1995.
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 2: INVENTORIES (CONTINUED)
Inventories at March 31, 1996, and December 31, 1995, consisted of the
following:
March 31, December 31,
1996 1995
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Finished goods $12,931 $15,400
Work in process and purchased parts 16,185 13,008
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Inventories at FIFO cost $29,116 $28,408
======= =======
NOTE 3: COMMITMENTS AND CONTINGENCIES
At March 31, 1996, the Company estimates having contractual commitments for
future advertising and promotional expense of approximately $8,600, including
commitments for television advertising through September 30, 1996, the end of
the television fiscal year. Other contractual commitments for items in the
normal course of business total approximately $1,700.
NOTE 4: DEBT
The Company's revolving credit facility has a maturity date of April 1, 1999,
and is classified as long-term at March 31, 1996. The facility provides for
revolving credit up to $60,000, subject to a borrowing base formula as defined
in the agreement. The maximum amount allowable to the Company under the
borrowing base formula was $32,000 as of March 31, 1996. The agreement requires
monthly payments of interest only through maturity. The facility provides for
pricing options at the bank's base lending rate and LIBOR. At March 31, 1996,
the base lending rate was 8.75%. In addition, the Company pays a commitment fee
at the annual rate of 0.375% 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, 1996. The revolving credit facility is collateralized
by the Company's domestic inventory, trade accounts receivable, equipment and
general intangibles.
In June 1995, the Company obtained a variable rate mortgage note payable in the
amount of $4,450, the proceeds of which were used to pay down the Company's
revolving credit debt. The note is collateralized by one of the Company's
assembly facilities. Monthly payments of principal and interest are payable
through July 1, 2000, at which time the balance of approximately $3,510 is due.
Interest is at 2.35% spread above the 30 day commercial paper rate. At March 31,
1996, the 30 day commercial paper rate was 5.3%.
In October 1995, the Company obtained a 7.9% fixed rate mortgage note payable
in the amount of $6,000, the proceeds of which were used to pay down the
Company's revolving credit debt. The note is collateralized by the Company's
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 Company's revolving credit facility and mortgage
notes payable approximate fair market value.
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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 6.6% for the first quarter ended March 31, 1996, compared
with the same period in the prior year. The increase in the first quarter was
primarily a result of sales of the new cordless Dirt Devil(R) Broom Vac(TM),
which was introduced during the first quarter of 1996, sales of the Dust
Devil(R) Cordless Hand Vac, which was introduced in the second quarter of 1995
and increased unit sales of upright vacuum cleaners. The increase in net sales
was partially offset by a decrease in the aggregate sales of the other products
in the Dirt Devil(R) vacuum line and the elimination of the Company's European
operations which were sold in the fourth quarter of 1995. Overall sales to the
top 5 customers in the first three months of 1996 (all of which are major
retailers) accounted for approximately 54.0% of net sales as compared with
approximately 50.8% in the first three months of 1995. The Company believes that
its dependence on sales to its largest customers will continue.
Recently, many major retailers have experienced significant financial
difficulties and some have filed for protection from creditors under applicable
bankruptcy laws. The Company sells its products to certain customers that are in
bankruptcy proceedings.
Gross margin, as a percent of net sales, increased from 22.9% for the first
quarter 1995 to 26.3% in the first quarter 1996. The gross margin percentage was
positively affected in 1996 primarily by the introduction of the Dirt Devil(R)
Broom Vac(TM), lower product returns and the elimination of the Company's
European operations.
Advertising and promotion expenses for the first quarter 1996 were $6,403, a
decrease of 6.4% from the first quarter 1995. The decrease in advertising and
promotion expenses was due primarily to the elimination of European advertising,
partially offset by an increase in domestic advertising and promotion. The
Company intends to continue emphasizing cooperative advertising and television
as its primary methods of advertising and promotion. The Company's advertising
expenditures are not specifically related to anticipated sales. For example, the
amount of advertising and promotional expenditures may be concentrated during
new product introductions and critical retail shopping periods during the year,
particularly the fourth quarter.
Other selling expenses for the first quarter 1996 were $2,074, a decrease of
30.4% from the first quarter 1995. The largest components of other selling
expenses are internal sales and marketing personnel compensation and commissions
to outside manufacturers' representatives, however, no such commissions are
incurred on sales made directly to certain large retail customers. The decrease
in other selling expenses is primarily due to a reduction in the amount paid to
manufacturers' representatives, reflecting the Company's increased utilization
of its internal sales force.
General and administrative expenses for the first quarter 1996 were $3,044 a
decrease of 7.1% from the first quarter 1995 due primarily to the Company's
divesture of its European operations. General and administrative expenses
decreased as a percentage of net sales from 6.7% to 5.8% because of a reduction
in general and administrative expenses and higher net sales in the first quarter
1996 compared to the first quarter 1995. The principal components are
compensation (including benefits), insurance, travel and professional services.
Interest expense for the first quarter 1996 was $855, a decrease of 3.0% from
the first quarter 1995. The decrease in interest expense resulted primarily from
lower levels of variable rate borrowings to finance working capital and capital
expenditures.
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RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) (CONTINUED)
- - -------------------------------------------
Other expense (income) principally reflects the effect of foreign currency
transaction gains or losses related to the Company's international assets.
Due to the factors discussed above, the Company had income of $545 before
income taxes for the first quarter 1996 compared to a loss of $3,716 before
income taxes for the comparable period in 1995.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
The Company has used working capital, primarily through reductions in trade
accounts receivable, to fund its operations, capital expenditures and its
reduction in bank indebtedness. Working capital was $36,549 at March 31, 1996, a
decrease of 20.6% over the December 31, 1995 level. Current liabilities
decreased by $6,299 principally reflecting a decrease in trade payables of
$3,218 and accrued advertising of $2,986. Current assets also decreased by
$15,795 reflecting a reduction in trade accounts receivable by $12,163 and
refundable and deferred income taxes of $5,046 which was partially offset by an
increase in inventory and prepaid expenses.
In the first three months of 1996, the Company utilized $1,149 of cash for
capital purchases, including approximately $800 of tooling related to the new
Dirt Devil(R) Ultra Hand Vac(TM) and Dirt Devil(R) Ultra MVP(TM).
The Company's revolving credit facility has a maturity date of April 1, 1999,
and is classified as long-term at March 31, 1996. The facility provides for
revolving credit up to $60,000, subject to a borrowing base formula as defined
in the agreement. The maximum amount allowable to the Company under the
borrowing base formula was $32,000 as of March 31, 1996. The agreement requires
monthly payments of interest only through maturity. The facility provides for
pricing options at the bank's base lending rate and LIBOR. At March 31, 1996,
the base lending rate was 8.75% In addition, the Company pays a commitment fee
at the annual rate of .375% 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, 1996. The revolving credit facility is collateralized
by the Company's domestic inventory, trade accounts receivable, certain real
estate, equipment and general intangibles.
The Company has reached an agreement to sell two facilities which were
previously closed in 1995. The Company has completed one transaction in April
1996 and anticipates completing the other transaction late in the second quarter
of 1996. The aggregate net proceeds are approximately $2,200 in cash and the
assumption of $3,700 of capital lease liability by the buyer. The cash proceeds
will be used to pay down the Company's revolving credit debt. The net gain from
these transactions are anticipated to be approximately $700.
The Company believes that its revolving credit facility 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.
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QUARTERLY OPERATING RESULTS
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The following table presents certain unaudited consolidated quarterly
operating information for the Company and includes all adjustments (consisting
only of normal recurring adjustments and a change in the valuation method of
accounting for inventory, from the LIFO method to the FIFO method) that the
Company considers necessary for a fair presentation of such information for the
interim periods.
Three Months Ended*
-------------------------------------------------------------------------------------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31,
1996 1995 1995 1995 1995
--------- --------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
Net Sales $52,262 $96,303 $66,990 $58,255 $49,016
Gross margin 13,763 27,502 16,253 14,018 11,236
Net income (loss) 332 2,789 (12,279) (1,888) (2,378)
Net income (loss) per
common share .01 .12 (.51) (.08) (.10)
<FN>
* See Note 2 of Notes to Consolidated Financial Statements
The Company's business is highly seasonal. The Company believes that a
significant percentage of certain of its products, particularly hand vacs, 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 could 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, if any, annual growth in most of its products and
which may be experiencing a decline in certain other products, in particular
corded hand-held vacuums. 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
has experienced heightened competition in the upright market segment since 1992,
and believes that its net sales and market share in the domestic upright market
segment have been negatively affected by the increased advertising expenditures
of its competitors. The Company's most significant competitors in the domestic
vacuum cleaner market are Hoover and Eureka, and Black & Decker, in the
hand-held market. Most of the competitors, including Regina (which was purchased
out of bankruptcy in April 1995 by a subsidiary of Phillips Electronics N.V.),
are subsidiaries of companies that are more diversified and have greater
financial resources than the Company. The Company's past and future success is
dependent upon continued innovation in the design of replacement upright and
hand-held models as well as in new innovative niche products utilizing the Dirt
Devil(R) brandname.
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.
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LITIGATION
- - ----------
The Company is involved in various claims and litigation arising in the
normal course of business. In the opinion of management, the ultimate resolution
of these actions will not materially affect the consolidated financial position,
results of operations, or cash flows of the Company.
ACCOUNTING STANDARDS
- - --------------------
The Company has selected the disclosure-only option of Statement of
Financial Accounting Standards "SFAS" No. 123, Accounting for Stock-Based
Compensation. The Company expects the implementation of SFAS No. 123 will not
have a material impact on its consolidated financial position and results of
operations.
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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 11 - Computation of earnings (loss) per common
share.
Exhibit 27 - Financial data schedule
12
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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.
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(Registrant)
Michael J. Merriman
--------------------------------------------------
Michael J. Merriman
Chief Executive Officer, President and Director
(Principal Executive and Financial Officer)
Date: May 13, 1996 Richard G. Vasek
--------------------------------------------------
Richard G. Vasek
Controller, Secretary and Chief Accounting Officer
(Principal Accounting Officer)
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INDEX TO EXHIBITS
Page No.
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Exhibit 11 - Computation of earnings (loss) per common share 15
Exhibit 27 - Financial data schedule
14