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SCHEDULE 14A
(RULE 14a)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
ROYAL APPLIANCE MFG. CO.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NOT APPLICABLE
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: .......
(2) Aggregate number of securities to which transaction applies: ..........
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): ............
(4) Proposed maximum aggregate value of transaction: ......................
(5) Total fee paid: .......................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ...............................................
(2) Form, Schedule or Registration Statement No.: .........................
(3) Filing Party: .........................................................
(4) Date Filed: ...........................................................
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[Royal Appliance Logo] [Dirt Devil Trademark]
ROYAL APPLIANCE MFG. CO.
CLEVELAND, OHIO
To Our Shareholders:
You are cordially invited to attend the 1997 annual meeting of shareholders
of Royal Appliance Mfg. Co. to be held at Wellington's Center, 777 Alpha Drive,
Cleveland, Ohio 44143, on Tuesday, April 29, 1997, at 10:00 a.m. local time. We
are pleased to enclose the notice of our annual shareholders meeting, together
with a Proxy Statement, a Proxy and an envelope for returning the Proxy.
The matters expected to be acted upon at the meeting are described in
detail in the attached Notice of Meeting and Proxy Statement.
Our audited financial statements, management's discussion and analysis and
other information are included in the Appendix to the Proxy Statement which
accompanies the Proxy Statement.
Please carefully review the Proxy Statement and the Appendix to the Proxy
Statement. It is important that your shares be represented at the meeting.
Whether or not you plan to attend personally, please complete and mail the
enclosed proxy card in the enclosed return envelope. If you attend the meeting
and decide to vote in person, you may withdraw your Proxy at the meeting.
If you have any questions or need assistance in how to vote your shares,
please call our proxy solicitor, Morrow & Co., Inc. at (212) 754-8000. Your time
and attention to this letter and the accompanying Proxy Statement and Proxy is
appreciated.
Sincerely,
Michael J. Merriman
Chief Executive Officer
March 28, 1997
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[Royal Applicance Logo] [Dirt Devil Trademark]
ROYAL APPLIANCE MFG. CO.
CLEVELAND, OHIO
NOTICE OF ANNUAL SHAREHOLDERS MEETING
TO BE HELD APRIL 29, 1997
The annual meeting of shareholders of Royal Appliance Mfg. Co., an Ohio
corporation ("Company"), will be held on Tuesday, April 29, 1997 at 10:00 a.m.
local time, at Wellington's Center, 777 Alpha Drive, Cleveland, Ohio 44143, for
the following purposes:
1. To elect three Class II Directors for a term expiring in 1999.
2. To ratify the appointment of Coopers & Lybrand L.L.P. as auditors of the
Company for 1997.
3. To transact such other business that is properly brought before the
meeting.
Only holders of the Common Shares of record on the books of the Company at
the close of business on March 14, 1997 will be entitled to vote at the meeting.
YOUR VOTE IS IMPORTANT. ALL SHAREHOLDERS ARE INVITED TO ATTEND THE MEETING
IN PERSON. HOWEVER, TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE MARK,
DATE AND SIGN YOUR PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. Any
shareholder attending the meeting may vote in person even if the shareholder
returned a Proxy.
By Order of the Board of Directors
Richard G. Vasek
Secretary
Cleveland, Ohio
March 28, 1997
THE ENCLOSED PROXY, WHICH IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF THE COMPANY, CAN BE RETURNED IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES.
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PROXY STATEMENT
Proxies in the accompanying form are being solicited by the Board of
Directors of the Company for use at the annual meeting of shareholders on
Tuesday, April 29, 1997, or at any adjournment thereof. The meeting will be held
at Wellington's Center, 777 Alpha Drive, Cleveland, Ohio 44143 at 10:00 a.m.
local time. The Proxy Statement and the form of Proxy are being mailed to
shareholders commencing on or about March 28, 1997.
The Company's audited financial statements, management's discussion and
analysis and other information regarding the Company are included in the
Appendix to this Proxy Statement.
INFORMATION CONCERNING SOLICITATION AND VOTING
REVOCABILITY OF PROXIES
Any shareholder who executes and returns a Proxy may revoke the same at any
time before it is exercised by filing with the Secretary of the Company written
notice of such revocation or a duly executed proxy bearing a later date, or by
attending the meeting and voting in person. Attendance at the meeting will not
in and of itself constitute revocation of a Proxy.
RECORD DATE AND VOTING
Shareholders of record at the close of business on March 14, 1997 (the
"Record Date") are entitled to notice of and to vote at the meeting. Holders of
the Common Shares of record as of the close of business on the Record Date, or
their proxies, are entitled to one vote per Common Share. At the Record Date,
23,942,740 Common Shares of the Company were issued and outstanding.
Proxies properly signed and returned to the Company, in blank or without
voting instructions, will be voted "FOR" the three Director nominees named
herein, and ratification of the appointment of Coopers & Lybrand L.L.P. as
auditors of the Company for 1997.
The three candidates for election as directors at the Annual Meeting who
receive the highest number of affirmative votes will be elected. Broker
non-votes and shares as to which proxy authority has been withheld with respect
to any matter are not deemed to be present or represented for purposes of
determining whether shareholder approval of that matter has been obtained, and,
consequently, will have no effect on the outcome of the vote.
SOLICITATION
The cost of soliciting proxies will be borne by the Company. The Company
has retained the services of Morrow & Co., Inc. to aid in the solicitation of
Proxies. The Company estimates that it will pay Morrow & Co., Inc. a fee of
approximately $5,000 for its services, plus out-of-pocket expenses. In addition,
the Company may reimburse brokerage firms and other persons representing
beneficial owners of shares for their expenses in forwarding solicitation
material to such beneficial owners. Proxies may also be solicited by certain of
the Company's directors, officers and regular employees, without additional
compensation, personally or by telephone or telegram.
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Proposals of shareholders which are intended to be presented by such
shareholders at the Company's next annual meeting of shareholders to be held in
1998 must be received by the Company no later than November 29, 1997, in order
that they may be included in the proxy statement and form of proxy relating to
that meeting.
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PROPOSAL ONE
ELECTION OF DIRECTORS
The Board of Directors is divided into two classes, each of whose members
serve for a staggered two-year term. The Board is comprised of three Class I
Directors and three Class II Directors. The current term of the Class II
Directors ends upon the election of Class II Directors at this annual meeting.
The term of the Class I Directors will end upon the election of Class I
Directors at the 1998 annual meeting of shareholders.
The Board of Directors has nominated Messrs. Nalley, Richey and
Schneeberger to stand for reelection as the Class II Directors for a two-year
term. The two-year term will end upon the election of Class II Directors at the
1999 annual meeting of shareholders.
At the annual meeting, the Common Shares represented by valid Proxies,
unless otherwise specified, will be voted to reelect the Class II Directors.
Each individual nominated for election as a Director of the Company has agreed
to serve if elected. However, if any nominee becomes unable or unwilling to
serve if elected, the Proxies will be voted for the election of such other
person as may be recommended by the Board of Directors. The Board of Directors
has no reason to believe that the persons listed as nominees will be unable or
unwilling to serve.
The Board of Directors recommends that each shareholder vote "FOR" the
Board of Directors' nominees.
NOMINEES FOR TERMS EXPIRING IN 1999
DIRECTOR
NAME OF DIRECTOR AGE PRINCIPAL OCCUPATION SINCE
- --------------------------------------- --- --------------------------------------- --------
E. Patrick Nalley...................... 77 Director of Invacare Corporation 1981
Joseph B. Richey II.................... 59 President of Invacare Technologies 1994
R. Louis Schneeberger.................. 42 Chief Financial Officer and Director of 1991
Olympic Steel, Inc.
E. PATRICK NALLEY has served as a Director of the Company since the
Company's formation in 1981. In 1992, Mr. Nalley retired from his positions as
Executive Vice President of Sales and Assistant to the President of Invacare
Corporation, a home medical equipment manufacturer, which he held since 1987.
Mr. Nalley also serves as a Director of Invacare Corporation.
JOSEPH B. RICHEY II has served as a Director of the Company since July
1994. Since 1992, Mr. Richey has been President -- Invacare Technologies and
Senior Vice President -- Total Quality Management for Invacare Corp., having
previously served as General Manager -- North American Operations of Invacare
Corp. Mr. Richey is also a Director of Invacare Corporation and Steris
Corporation.
R. LOUIS SCHNEEBERGER has served as Chairman of the Board since July 1995
and as a Director of the Company since August 1991. He has served as Chief
Financial Officer and as a Director of Olympic Steel, Inc., a leading national
steel service chain since 1987, a trustee of the Achievement Center for
Children, a non-profit corporation focusing on children with disabilities and
serves on the Business Advisory Council for Kent State University.
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DIRECTORS WHOSE TERMS EXPIRE IN 1998
DIRECTOR
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION SINCE
- --------------------------------------- --- --------------------------------------- --------
Jack Kahl Jr........................... 56 Chief Executive Officer of Manco Inc. 1995
Michael J. Merriman.................... 40 Chief Executive Officer and President 1993
of the Company
John P. Rochon......................... 45 Chairman of the Richmont Corporation 1995
and Chief Executive Officer of Mary Kay
Holding Corporation
JACK KAHL JR. has served as a Director of the Company since September 1995.
Mr. Kahl has been Chief Executive Officer of Manco Inc., since 1971. Manco Inc.,
markets and manufactures pressure sensitive tapes, home weatherization products,
and mailing and shipping supplies. Mr. Kahl is also a Director of Applied
Industrial Technologies, Inc.
MICHAEL J. MERRIMAN has served as a Director of the Company since October
1993. Mr. Merriman was appointed Chief Executive Officer in July 1995 and
President and Chief Operating Officer in January 1995. From May 1992 until his
appointment as President, he had been Vice President -- Finance, Treasurer and
Secretary of the Company. Prior thereto, he was employed for 14 years as a
certified public accountant with the international accounting firm, Arthur
Andersen & Co. He was a partner in the firm from 1990 to 1992.
JOHN P. ROCHON has served as a Director of the Company since September
1995. Mr. Rochon has been Chairman of the Richmont Corporation since 1990, and
Chief Executive Officer of Mary Kay Holding Corporation since 1991. Mr. Rochon
is also a Director of Nu-Kote Holding Inc.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
The Board of Directors of the Company held five meetings during the fiscal
year ended December 31, 1996. The Board of Directors has an Audit Committee, a
Compensation Committee, and a Corporate Governance Committee. The Audit
Committee, the Compensation Committee, and the Corporate Governance Committee
each held two meetings during 1996. The Committees receive their authority and
assignments from the Board of Directors and report to the Board of Directors.
All of the current Directors attended at least 75% of the Board and
applicable committee meetings held during 1996. In addition to holding regular
committee meetings, the Board members also reviewed and considered matters and
documents and communicated with each other wholly apart from the meetings.
Several actions were taken by unanimous written consent.
Jack Kahl Jr., E. Patrick Nalley, and R. Louis Schneeberger are members of
the Audit Committee. The Audit Committee recommends the engagement of the
Company's independent auditors and is primarily responsible for approving the
services performed by the Company's independent auditors. The Committee also
reviews and evaluates the Company's accounting principles and its system of
internal accounting controls.
E. Patrick Nalley, Joseph B. Richey II, and John P. Rochon are members of
the Compensation Committee. The Compensation Committee reviews and approves the
Company's executive compensation policy, makes recommendations concerning the
Company's employee benefit policies, and has authority to administer the
Company's stock option plans.
Jack Kahl Jr., E. Patrick Nalley, Joseph B. Richey II, John P. Rochon, and
R. Louis Schneeberger are members of the Corporate Governance Committee. The
functions of the Committee are to review and evaluate the performance of the
Chief Executive Officer, changes or potential changes in corporate control, and
all public policy issues affecting the Company. In addition, the Committee
identifies and recommends to the Board of Directors candidates for membership on
the Board of Directors and reviews and evaluates all shareholder proposals.
Shareholders wishing to suggest nominees for election to the Board at the 1998
annual meeting may do so by providing written notice to the Company in care of
Richard G. Vasek, Secretary, no later than November 29, 1997.
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COMPENSATION OF DIRECTORS
Each Director who is not an employee of the Company receives a director's
fee in the amount of $10,000 per annum for up to four meetings, and
reimbursement for out-of-pocket expenses incurred in connection with attending
such meetings. An additional $2,500 is paid for attending board meetings, if
any, in excess of four meetings in any one year and $1,250 is paid for
attendance at any committee meeting held on a day other than a day of a
Directors' meeting. Each non-employee Director also received options to purchase
20,000 Common Shares upon joining the Board of Directors. In February 1995, the
then current non-employee Directors were granted options for an additional
30,000 Common Shares at an option price equal to the fair market value of the
shares on the date of grant. Options granted to Directors are exercisable for a
period of ten years and become exercisable in 20% increments on each anniversary
of the date of grant commencing with the first anniversary.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth each person or entity who has beneficial
ownership of 5% or more of the outstanding Common Shares of the Company on March
14, 1997, based upon information furnished to the Company:
NAME AND ADDRESS SHARES AND NATURE OF PERCENTAGE OF TOTAL
OF BENEFICIAL OWNERS BENEFICIAL OWNERSHIP SHARES OUTSTANDING
-------------------------------------------------- -------------------- -------------------
Richmont Capital Partners I L.P. ................. 2,969,900(1) 12.4%
4300 West Grove Dallas, Texas 75248
John P. Rochon.................................... 2,975,400(2) 12.4%
4300 West Grove Dallas, Texas 75248
- ---------------
(1) Based on a Form 4 dated March 7, 1996, filed with the Securities and
Exchange Commission.
(2) Mr. Rochon is a general partner of Richmont Capital Partners I L.P. Amount
includes 2,969,900 shares owned by Richmont Capital Partners I L.P., 1,500
shares individually owned by Mr. Rochon, and 4,000 shares which can be
acquired by the exercise of stock options.
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SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the amount of the Company's Common Shares
beneficially owned by the Company's Directors, each of the named officers, and
all the Directors and Executive Officers as a group as of March 14, 1997.
PERCENT OF
NAME SHARES TOTAL
-------------------------------------------------- --------- ----------
Jack Kahl Jr...................................... 124,000(1) *
Michael J. Merriman............................... 44,000 *
E. Patrick Nalley................................. 1,132,000(1)(3) 4.7%
Joseph B. Richey II............................... 220,000(1) *
John P. Rochon.................................... 2,975,400(1)(4) 12.4%
R. Louis Schneeberger............................. 62,000(1) *
Gary J. Dieterich................................. 138,237(1) *
James A. Holcomb.................................. 1,000 *
Jeremiah J. Lynch................................. 500 *
T. Keith Moone.................................... 2,960 *
Directors and Executive
Officers as a group (10 persons)................ 4,700,097(2) 19.6%
- ---------------
* Less than 1%
(1) Includes shares which can be acquired by the exercise of stock options on or
prior to sixty days following March 14, 1997 as follows: Mr. Kahl -- 4,000;
Mr. Nalley -- 32,000; Mr. Richey -- 20,000; Mr. Rochon -- 4,000; Mr.
Schneeberger -- 32,000; Mr. Dieterich -- 64,140.
(2) Includes 156,140 options exercisable within sixty days following March 14,
1997.
(3) Also includes 228,765 shares held of record by Mr. Nalley as Trustee.
(4) Includes 2,969,900 shares beneficially owned by Richmont Capital Partners I
L.P. of which Mr. Rochon is a General Partner.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Act of 1934, as amended, requires the
Company's officers and directors, and persons who own greater than 10% of the
Company's Common Stock, to file reports of ownership and changes in ownership to
the Securities and Exchange Commission. Officers, directors and more than 10%
shareholders are required by the SEC to furnish to the company copies of all
Section 16(a) reports they file. Based solely upon a review of Forms 3 and 4 and
amendments thereto furnished to the Company during 1996 and Form 5 and
amendments thereto furnished to the Company with respect to 1996, or a written
representation from the reporting person that no Form 5 is required, all filings
required to be made by the Company's officers, directors and greater than 10%
shareholders were timely made.
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EXECUTIVE OFFICERS' COMPENSATION
Shown below is information concerning the annual and long-term compensation
for services to the Company and its subsidiaries for the years ended December
31, 1996, 1995, and 1994, of those persons (the "Named Executive Officers") who
served during 1996 as the Company's Chief Executive Officer and the other four
most highly compensated (during 1996) executive officers of the Company:
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- --------------
OTHER ANNUAL SECURITIES ALL OTHER
SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
NAME & PRINCIPAL POSITION YEAR ($) ($) ($)(2) OPTIONS/SAR(#) ($)(3)
- --------------------------------- ---- ------- ------- ------------ -------------- ------------
Michael J. Merriman 1996 325,000 325,325 0 600,000 13,008
Chief Executive Officer, 1995 250,000 0 0 0 6,500
President and Director 1994 180,000 3,566 0 40,000(4) 5,000
Gary J. Dieterich 1996 180,000 155,340 0 0 7,859
Senior Vice President -- 1995 175,000 0 0 0 6,375
Administration 1994 137,500 2,942 0 30,600 4,625
James A. Holcomb(1) 1996 165,000 142,395 0 200,000 4,558
Vice President -- Marketing & 1995 150,000 0 0 0 4,250
Strategic Planning
Donald W. Keagle* 1996 144,983 122,546 0 0 7,318
Senior Vice President -- 1995 132,983 0 0 0 5,709
Operations 1994 126,683 2,724 0 18,000 4,232
T. Keith Moone(1) 1996 150,000 87,225 0 120,000 6,953
Vice President -- Sales 1995 120,000 14,100(5) 49,811(6) 0 6,500
- ---------------
(1) Messrs. Holcomb and Moone became Named Executive Officers in 1995. Pursuant
to SEC rules, no information regarding their compensation for years prior to
their appointment as Named Executive Officers is required.
(2) Perquisites provided to each of the Named Executive Officers, if any, do not
exceed the disclosure thresholds established under the Securities and
Exchange Commission rules and are not included in this total.
(3) The amounts shown in this column represent payments made to the Company's
Defined Contribution Plans("DCP").
(4) Mr. Merriman forfeited these options in connection with the options granted
in 1996.
(5) Amount represents sales incentive bonus paid to Mr. Moone for his duties as
National Sales Manager, prior to his appointment as Vice President -- Sales
in December 1995.
(6) Amount represents tax gross-up payments to Mr. Moone related to
reimbursement of expenses relating to his relocation to Ohio in 1994.
* Mr. Keagle retired from the Company effective January 1, 1997.
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OPTION GRANTS IN 1996
Shown below is information on grants of stock options pursuant to the
Company's 1996 Key Executive Long-Term Incentive Plan (the "Stock Option Plan")
made in the year ended December 31, 1996, to the Named Executive Officers which
are listed in the Summary Compensation Table.
INDIVIDUAL GRANTS POTENTIAL
------------------------------------------------------------------- REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL
SECURITIES % OF TOTAL RATES OF STOCK
UNDERLYING OPTIONS MARKET PRICE APPRECIATION
OPTIONS GRANTED TO EXERCISE PRICE FOR OPTION TERM(2)
GRANTED EMPLOYEES IN PRICE DATE OF EXPIRATION -------------------------
NAME (#)(1) FISCAL YEAR ($/SH) GRANTS DATE 5%($) 10%($)
- ---------------------- ---------- ------------ -------- ------- ---------- ---------- ----------
Michael J. Merriman... 167,000 10.2% $ 3.25 $3.125 2/28/02 $ 156,612 $ 381,783
66,000 4.0% 5.25 3.125 2/28/02 0 18,884
167,000 10.2% 7.25 3.125 2/28/02 0 0
200,000 12.2% 10.25 3.125 2/28/02 0 0
Gary J. Dieterich..... 0 0.0% 0 0
James A. Holcomb...... 56,000 3.4% 3.25 3.125 2/28/02 52,517 128,023
22,000 1.3% 5.25 3.125 2/28/02 0 6,295
56,000 3.4% 7.25 3.125 2/28/02 0 0
66,000 4.0% 10.25 3.125 2/28/02 0 0
Donald W. Keagle...... 0 0.0% 0 0
T. Keith Moone........ 33,600 2.0% 3.25 3.125 2/28/02 31,510 76,814
12,800 .8% 5.25 3.125 2/28/02 0 3,662
33,600 2.0% 7.25 3.125 2/28/02 0 0
40,000 2.4% 10.25 3.125 2/28/02 0 0
- ---------------
(1) All stock options are exercisable on January 1, 2001, ("5 year cliff
vesting") assuming the executive officer remains employed by the Company. As
partial consideration for the new grants, the executive officers agreed to
forfeit all previously granted options, whether vested or not, to the
Company. The forfeited options, with exercise prices ranging from $3.75 to
$10.00, total 185,000 shares, including options for 155,000 shares from Mr.
Merriman. The Options expire on February 28, 2002, subject to earlier
termination in certain events related to termination of employment. The
Stock Option Plan provides that in the event of a "change in control" of the
Company, the Compensation Committee can cause all outstanding stock options
to be immediately exercisable and may accelerate the termination date of all
such options. A "change in control" generally means the occurrence of (i)
the acquisition by a person of 20% or more of the Company's Common Shares,
(ii) the first purchase of shares pursuant to an exchange or tender offer,
or (iii) shareholder approval of a merger in which the Company is not the
surviving corporation or pursuant to which the Company's shares are
converted into cash. See also "Change-in-Control Arrangements" herein.
(2) The dollar amounts set forth in these columns are the result of calculations
at the 5% and 10% rates set by the Securities and Exchange Commission, and
therefore are not intended to forecast possible future appreciation, if any,
of the Company's Common Stock price. Using these rates, the total of
potential realizable values for the named officers represents 1% of the gain
that would be realized by all shareholders of the Company. Based on the
number of shares outstanding and the market price on the grant date, the
aggregate gain realized by the Company's shareholders assuming a 5% annual
rate of stock appreciation for the option term would be in excess of $25
million; a 10% annual rate of stock appreciation would result in a gain in
excess of $57 million.
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AGGREGATED OPTION EXERCISES
IN 1996 AND YEAR-END OPTION VALUES
Shown below is information with respect to the unexercised options to
purchase the Company's Common Shares under the Stock Option Plan held by the
Named Executive Officers at December 31, 1996. None of the Named Executive
Officers exercised any stock options during 1996.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END(#) AT FY-END($)(2)
SHARES ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------- --------------- -------------- ----------- ------------- ----------- -------------
Michael J. Merriman... 0 0 0 600,000 $ 0 $ 712,625
Gary J. Dieterich..... 0 0 64,140 52,380 74,025 81,225
James A. Holcomb...... 0 0 0 200,000 0 238,750
Donald W. Keagle...... 0 0 31,900 31,100 55,575 44,200
T. Keith Moone........ 0 0 0 120,000 0 142,600
- ---------------
(1) Calculated on the basis of the fair market value of the underlying
securities at the exercise date or year-end, as the case may be, minus the
exercise price.
CHANGE-IN-CONTROL AND OTHER EMPLOYMENT ARRANGEMENTS
The Company has entered into Severance Agreements with Messrs: Merriman,
Dieterich, Holcomb, Lynch and Moone that are designed to retain the executives
and provide for continuity of management in the event of any actual or
threatened change in the control of the Company. Each agreement only becomes
operative upon a "Change in Control" as defined in the Agreements. After a
Change in Control, if, during the three-year period commencing with the Change
in Control, the executive's employment is terminated for reasons other than
"cause" (as defined in the Agreement), death or disability, or the executive
terminates his employment for "good reason" (as defined in the Agreement), under
their respective agreements, the executive shall be entitled to receive a
severance amount equal to two to three times (as defined in the Agreement) of
his then base salary. All options held by the executives with respect to the
Company's common stock will become immediately exercisable upon the date of
termination of employment and remain exercisable for a period of 60 days
thereafter. Certain other officers were provided similar agreements providing
severance payments of one to two years of base salary.
The Company has entered into an Employment Contract with Mr. Merriman which
provides for payment of one year's base salary if his employment is terminated
by the Company.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The report of the Compensation Committee shall not be deemed incorporated
by reference by any general statement incorporating by reference this proxy
statement into any filing under the Securities Act of 1933 or under the
Securities Exchange Act of 1934, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
The Compensation Committee of the Board of Directors has furnished the
following report on executive compensation:
It is the responsibility of the Compensation Committee to set policy for
administering the Company's executive compensation plans and to make
recommendations to the Board as appropriate. These plans for Executive Officers
include base salaries, incentive compensation, stock options, and any other
forms of remuneration.
The Committee annually reviews in detail all aspects of compensation for
the Chief Executive Officer and other executive officers. If the Committee
believes that a particular situation warrants outside professional input, the
Committee may retain the services of a qualified compensation consulting firm to
assist it in the performance of its duties. The Committee has retained, since
1992, the services of Nash and Co., a compensation consulting firm, to provide
advice to the Committee with respect to the reasonableness of total compensation
to officers of the Company, taking into account how the executive compensation
of the
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Company compares to that of executives for its industry peer group (companies
included in the Dow Jones Home Furnishings and Appliance Index), as well as to
that of other public companies of similar size. The Committee also reviews
executive compensation surveys and other data in determining compensation
policies.
Cash compensation is provided to officers through a combination of base
salaries and incentive awards under the Company's Management Incentive Plan
(MIP). Based upon analysis provided by Nash and Co., base salaries are fixed at
levels below the competitive amounts paid to other executives in similar sized
public companies and in the companies included in the Dow Jones Home Furnishings
and Appliance Index. The MIP is highly leveraged such that the higher pre-tax
earnings are above the minimum thresholds, the higher the MIP award is as a
percentage of base salary. At the beginning of each year, the Compensation
Committee sets the MIP award percentages and the current year's minimum pre-tax
earnings thresholds that serve as the baseline for determining any payout under
the MIP. For 1996, the Company exceeded the minimum pre-tax threshold, therefore
MIP bonuses were paid to executive officers.
The Company has designed its compensation program for officers to provide a
strong and direct link between Company performance and executive pay. Each
component of executive compensation is evaluated so that, in combination, highly
talented executives can be attracted, retained and motivated to consistently
improve the financial performance of the Company.
Mr. Merriman, Chief Executive Officer, participates in the same
compensation programs provided to the other executive officers. The Committee
based the 1996 compensation of Mr. Merriman on the policies and procedures
described above, including utilizing the services of Nash & Co. to perform
comparisons with salaries of Chief Executive Officers of similar sized Ohio
public companies and those included in the Dow Jones Home Furnishings and
Appliance Index.
Annually, the Committee considers the desirability of granting longer-term
incentive awards to the Company's officers under the Company's Stock Option
Plans. In 1996, the Committee granted stock options to certain executive
officers under the Key Executive Long-Term Incentive Plan which was approved by
the Shareholders in 1996. In order to retain and focus the Company's key
executives on the Company's long-term profitability and increasing shareholder
value over an extended period, the Committee granted options under the 1996 Key
Executive Long-Term Incentive Plan which will vest at the end of five years ("5
year Cliff Vesting"). Further, the escalating exercise prices above the then
current market price of the Company's stock provide increasing incentive to
these officers only if substantial stock appreciation is actually realized for
shareholders, thus providing a direct link between the Company's stock
performance and executive compensation. In connection with such grants, Mr.
Merriman and certain executive officers forfeited all of their present vested
and unvested stock options outstanding under the 1991 Employees and Consultants'
Stock Option Plan.
COMPENSATION COMMITTEE
Joseph B. Richey II, Chairman
E. Patrick Nalley
John P. Rochon
10
13
SHAREHOLDER RETURN PERFORMANCE PRESENTATION. Set forth below is a line
graph comparing the yearly cumulative total shareholder return on the Company's
Common Shares against the cumulative total return of the Dow Jones Equity Market
Index and the Dow Jones Home Furnishings and Appliance Index from the date of
the Company's initial public offering in August 1991 through December 1996.
The stock price performance graph below shall not be deemed incorporated by
reference by any general statement incorporating by reference this proxy
statement into any filing under the Securities Act of 1933 or under the
Securities Exchange Act of 1934, except to the extent that the Company
specifically incorporates this information by reference and shall not otherwise
be deemed filed under such Acts.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURNS
Among Royal Appliance Mfg. Co., Dow Jones Equity
Market Index & Dow Jones Home Furnishings and Appliances Index
Fiscal Years Ending December 31
D. J. Home Fur-
Measurement Period Royal Appliance Dow Jones Equity nishing s and Ap-
(Fiscal Year Covered) Mfg. Co. Market Index pliances Index
8/6/91 100 100 100
1991 302 109 106
1992 182 118 134
1993 73 130 190
1994 45 131 152
1995 32 181 174
1996 89 224 184
Royal Appliance
- -- -- Mfg. Co. 100 302 182 73 45 32 89
- ---------------------------------------------------------------------------------------------------------
Dow Jones Equity
- -- Market Index 100 109 118 130 131 181 224
- ---------------------------------------------------------------------------------------------------------
D.J. Home
- - - - - Furnishings and
Appliances Index 100 106 134 190 152 174 184
- ---------------------------------------------------------------------------------------------------------
11
14
PROPOSAL TWO
INDEPENDENT AUDITORS
The Board of Directors recommends that you vote "FOR" the ratification of
the Board's appointment of Coopers & Lybrand L.L.P. as the Company's independent
accountants to serve for the fiscal year 1997 or until their successors are
selected. The Board's appointment is made upon the recommendation of the Audit
Committee. Proxies will be so voted unless the shareholders specify otherwise in
their proxies. Proposal two will be adopted if approved by the affirmative vote
of a majority of the shares present in person or by proxy at the meeting and
entitled to vote. In the event such selection is not ratified, the Board of
Directors will reconsider its selection.
Coopers & Lybrand L.L.P. has audited the Company's financial statements for
each fiscal year since the fiscal year ended December 31, 1985. Representatives
of Coopers & Lybrand L.L.P. are expected to be present at the meeting with the
opportunity to make a statement if they desire to do so, and are expected to be
available to respond to appropriate questions.
OTHER MATTERS
The Board of Directors of the Company is not aware that any matter other
than those listed in the Notice of Meeting is to be presented for action at the
meeting. If any of the Board's nominees is unavailable for election as a
Director or any other matter should properly come before the meeting, it is
intended that votes will be cast pursuant to the Proxy in respect thereto in
accordance with the best judgment of the person or persons acting as proxies.
FINANCIAL INFORMATION
UPON WRITTEN REQUEST BY ANY SHAREHOLDER TO THE SECRETARY, ROYAL APPLIANCE
MFG. CO., 650 ALPHA DRIVE, CLEVELAND, OHIO 44143, A COPY OF THE COMPANY'S 1996
ANNUAL REPORT OR FORM 10-K WILL BE PROVIDED WITHOUT CHARGE.
MARCH 28, 1997
12
15
ROYAL APPLIANCE MFG. CO.
INDEX TO APPENDIX TO THE PROXY STATEMENT
DECEMBER 31, 1996
PAGE
----
Market for the Company's Common Equity and Related Shareholder Matters............... A-2
Selected Consolidated Financial Data................................................. A-3
Management's Discussion and Analysis of Results of Operations and Financial
Condition.......................................................................... A-4
Report of Independent Accountants.................................................... A-9
Consolidated Financial Statements --
Consolidated Balance Sheets..................................................... A-10
Consolidated Statements of Operations........................................... A-11
Consolidated Statements of Shareholders' Equity................................. A-12
Consolidated Statements of Cash Flows........................................... A-13
Notes to Consolidated Financial Statements...................................... A-14
A-1
16
MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
The Company's common shares are quoted on the New York Stock Exchange
(NYSE) under the symbol RAM. The following table sets forth, for the periods
indicated, the high and low sales price for the Company's Common Shares as
reported by the New York Stock Exchange.
Year Ended December 31,
-----------------------------------------
1996 1995
---------------- ----------------
High Low High Low
---- --- ---- ---
Quarters:
First............................. 4 1/4 2 5/8 4 2 5/8
Second............................ 7 1/4 4 1/8 3 3/4 2 5/8
Third............................. 6 7/8 4 5/8 4 5/8 2 7/8
Fourth............................ 9 6 1/8 3 3/4 2 1/2
The Company has not declared or paid any cash dividends and currently
intends not to pay any cash dividends in 1997. The Board of Directors intends to
retain earnings, if any, to support the operations and growth of the business.
In addition, the Company's credit agreement permits the payment of cash
dividends up to 50% of its net income from the preceding year and stock
repurchases up to $7.5 million.
On March 14, 1997, there were approximately 1,500 shareholders of record of
the Company's Common Shares, as reported by National City Corporation, the
Company's Registrar and Transfer Agent, which maintains its corporate offices at
National City Center, Cleveland, Ohio 44101-0756.
A-2
17
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company. The selected Consolidated Statements of Operations and Consolidated
Balance Sheet data for each of the five years during the period ended December
31, 1996, are derived from the audited Consolidated Financial Statements of the
Company. Prior period amounts have been restated to reflect reclassifications to
conform to a 1995 change in the valuation method of accounting for inventory
from the LIFO method to the FIFO method. The data presented below should be read
in conjunction with the Consolidated Financial Statements and notes thereto
included elsewhere herein.
Year Ended December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(Dollars in thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS:
Net sales..................................... $286,123 $270,564 $278,322 $313,899 $394,980
Cost of sales................................. 204,000 201,555 200,568 229,581 250,832
-------- -------- -------- -------- --------
Gross margin................................ 82,123 69,009 77,754 84,318 144,148
Advertising and promotion..................... 40,443 40,496 42,298 61,280 79,397
Other selling................................. 8,977 11,898 12,914 12,530 14,875
General and administrative.................... 11,515 12,971 12,309 12,893 13,301
Engineering and product development........... 3,905 3,281 2,176 2,589 2,544
Special charges............................... -- 16,294 -- -- --
-------- -------- -------- -------- --------
Income (loss) from operations............... 17,283 (15,931) 8,057 (4,974) 34,031
Interest expense.............................. 2,559 4,001 4,483 5,475 3,155
Other (income) expense, net................... (622) 311 460 1,674 (23)
-------- -------- -------- -------- --------
Income (loss) before taxes.................. 15,346 (20,243) 3,114 (12,123) 30,899
Income tax expense (benefit).................. 5,910 (6,487) 1,152 (4,346) 12,046
-------- -------- -------- -------- --------
Net income (loss)........................... $ 9,436 $(13,756) $ 1,962 $ (7,777) $ 18,853
======== ======== ======== ======== ========
Net income (loss) per common share............ $ .39 $ (.57) $ .08 $ (.32) $ .76
======== ======== ======== ======== ========
Weighted average number of common shares and
equivalents outstanding (in thousands)...... 24,213 23,999 24,011 24,000 24,946
CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD)
Working capital............................. $ 29,638 $ 46,045 $ 51,151 $ 56,692 $ 79,727
Total assets................................ 126,141 131,261 141,208 153,351 187,097
Long-term debt.............................. 15,743 45,999 46,927 59,609 68,106
Shareholders' equity........................ 56,234 46,575 60,155 58,004 65,692
A-3
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In thousands, except per share amounts)
The following table sets forth, for the years indicated, the percentages of
net sales of certain items in the Consolidated Statements of Operations and the
percentage change in such items as compared to the indicated prior year. Prior
period percentages have been restated to reflect reclassifications to conform to
a 1995 change in the valuation method of accounting for inventory from the LIFO
method to the FIFO method.
Year to Year
Year Ended December 31, Increases (Decreases)
----------------------------- ----------------------------
1996 1995 1994 1996 vs. 1995 1995 vs. 1994
------- ------- ------- ------------- -------------
Net sales........................... 100.0% 100.0% 100.0% 5.8% (2.8)%
Cost of sales....................... 71.3 74.5 72.1 1.2 .5
----- ----- ----- ----- -----
Gross margin...................... 28.7 25.5 27.9 19.0 (11.2)
Advertising and promotion........... 14.1 15.0 15.2 (.1) (4.3)
Other selling....................... 3.1 4.4 4.6 (24.6) (7.9)
General and administrative.......... 4.0 4.8 4.4 (11.2) 5.4
Engineering and product
development....................... 1.4 1.2 .8 19.0 50.8
Special charges..................... -- 6.0 -- -- --
----- ----- ----- ----- -----
Income (loss) from operations..... 6.1 (5.9) 2.9 N/A N/A
Interest expense.................... .9 1.5 1.6 (36.0) (10.8)
Other (income) expense, net......... (.2) .1 .2 N/A (32.4)
----- ----- ----- ----- -----
Income (loss) before income
taxes.......................... 5.4% (7.5)% 1.1% N/A% N/A%
===== ===== ===== ===== =====
1996 VS. 1995
Net sales for 1996 were $286,123, an increase of 5.8% from 1995. The
overall increase in net sales was due primarily to sales of the new Dirt
Devil(R) Broom Vac(R), the Dirt Devil(R) Ultra MVP(TM) and Dirt Devil(R) Ultra
Hand Vac. The increase in net sales was partially offset by decreases in unit
sales of the Company's other product lines. Overall sales to the top 5 customers
for 1996 (all of which are major retailers) accounted for approximately 59.3% of
net sales as compared with approximately 56.8% in 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 25.5% for 1995 to
28.7% in 1996. The gross margin percentage was positively affected in 1996
primarily by the introduction of new products, lower product returns, lower cost
of certain parts and the elimination of the Company's European operations.
Advertising and promotion expenses for 1996 were $40,443, comparable with
1995. Increases in domestic advertising and promotion expenditures, including
media and co-op spending, were offset by savings from the divesture of European
operations. 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 product and promotional campaign introductions. The Company has recently
utilized direct response infomercials for the introduction of its new products.
The Company began a major new advertising campaign in the first quarter of 1997.
Other selling expenses for 1996 were $8,977, a decrease of 24.6% from 1995.
The largest component of other selling expenses are internal sales and marketing
personnel compensation and commissions to manufacturers' representatives. The
Company has reduced its dependency on outside manufacturers' representatives,
resulting in the decrease in other selling expenses. The decrease in
manufacturers' representatives commissions was partially offset by increases in
internal sales and marketing personnel.
General and administrative expenses for 1996 were $11,515, a decrease of
11.2% from 1995. General and administrative expenses decreased as a percentage
of net sales from 4.8% to 4.0%. The principal components are compensation
(including benefits), insurance, travel, provision for doubtful accounts, and
professional
A-4
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
1996 VS. 1995 -- (CONTINUED)
services. The decrease is principally attributable to the elimination of the
Company's European operations and a decrease in the provision for doubtful
accounts in 1996 as compared to 1995. In 1995, the Company increased the
provision for doubtful accounts due to concerns with respect to the economic
health of certain retail customers.
Engineering and product development expenses for 1996 were $3,905, an
increase of 19.0% from 1995, as the Company intensified its new product
innovation efforts. 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 year.
The increase in 1996 was primarily due to costs associated with the three new
product introductions in 1996 and three new products scheduled for introduction
in 1997.
Interest expense for 1996 was $2,559, a decrease of 36.0% from 1995. The
decrease in interest expense resulted primarily from lower levels of variable
rate borrowings to finance working capital and capital expenditures, and a lower
effective borrowing rate.
Other expense (income) principally reflects the effect of foreign currency
transaction gains or losses related primarily to the Company's international
assets and the cost of the Company's trade accounts receivable securitization
program. The amount also includes the gain from the sale of a facility of $638,
and the proceeds from insurance reimbursement of legal expenses of $319 in 1996.
Due to the factors discussed above, the Company had income before income
taxes for 1996 of $15,346, as compared to a loss before income taxes for 1995 of
$20,243, which included special charges of $16,294. The components of the
Company's effective income tax expense rate of 38.5% are described in Note 6 of
the Company's Consolidated Financial Statements.
1995 VS. 1994
Net sales for 1995 were $270,564, a decrease of 2.8% from 1994. The overall
decrease in net sales was due primarily to lower European net sales from the
Company's European subsidiaries which the Company sold in the fourth quarter of
1995. Domestic net sales experienced continued decreases in unit sales of the
Dirt Devil(R) Hand Vac, the original Dirt Devil(R) Broom Vac(R) and the Dirt
Devil(R) Stick Vac, partially offset by sales of the new Dust Devil(R) Cordless
Hand Vac and increased unit sales of upright vacuum cleaners, in particular the
new Dirt Devil(R) Impulse(TM). Overall sales to the top 5 customers for 1995
(all of which are major retailers) accounted for approximately 56.8% of net
sales as compared with approximately 52.5% in 1994.
Gross margin, as a percent of net sales, decreased from 27.9% for 1994 to
25.5% in 1995. The gross margin percentage was negatively affected in 1995
primarily by cost increases for plastic component parts and other materials and
continued competitive pricing and promotional pressures.
Advertising and promotion expenses for 1995 were $40,496, a decrease of
4.3% from 1994. The decrease in advertising and promotional expenditures
resulted from significant reductions in European advertising and promotional
expenditures and the elimination of racecar sponsorships, partially offset by an
increase in domestic television expenditures.
Other selling expenses for 1995 were $11,898, a decrease of 7.9% from 1994.
The largest component of other selling expenses are commissions to
manufacturers' representatives, however, no such commissions are incurred on
sales made directly to certain large retail customers. Although manufacturers'
representatives commissions declined in 1995 compared with 1994, the decline was
partially offset by increases in internal sales and marketing personnel.
General and administrative expenses for 1995 were $12,971, an increase of
5.4% from 1994. General and administrative expenses increased as a percentage of
net sales from 4.4% to 4.8%. The principal components are compensation
(including benefits), insurance, travel, provision for doubtful accounts, and
professional services. The increase is principally attributable to an increase
in the provision for doubtful accounts.
A-5
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
1995 VS. 1994 -- (CONTINUED)
Engineering and product development expenses for 1995 were $3,281, an
increase of 50.8% from 1994, as the Company intensified its new product
innovation efforts. The increase in engineering and product development expenses
in 1995 were primarily due to increases in internal engineering personnel and
increase in outside professional engineering and design services and other
related product development expenditures due to two new product introductions in
1995 and three new products scheduled for introduction in 1996.
In 1995, the Company recorded special charges of $16,294, primarily related
to losses resulting from the disposal of certain inventory, molds and tooling
and other intangibles primarily resulting from the decisions made to refocus the
Company's primary operating and marketing efforts on the North American market.
The special charges include a $11,567, write-down to the net realizable value of
certain molds, tooling, inventory, and other assets being disposed of or held
for sale, a $2,598, restructuring charge related to the Company's sale of its
European operations, and $2,129, of special charges related to losses from the
discontinuation of the Dirt Devil(R) Cyclone(TM) product line and executive
severance. The Company's European operations, which have been less than 10% of
the Company's total net sales, have generated approximately $30,000 in pre-tax
losses before special charges since 1991. The Company sold substantially all of
its European assets during the fourth quarter of 1995. In connection with the
sale of its European operations, the Company has licensed certain foreign
trademarks and patents.
Interest expense for 1995 was $4,001, a decrease of 10.8% from 1994. The
decrease in interest expense resulted primarily, from lower levels of variable
rate borrowings to finance working capital and capital expenditures, but was
partially offset by a higher effective borrowing rate.
Other expense (income) principally reflects the effect of foreign currency
transaction gains or losses related primarily to the Company's European
operations.
Due to the factors discussed above, the Company incurred a loss before
income taxes for 1995 of $20,243, as compared to income before income taxes for
1994 of $3,114.
LIQUIDITY AND CAPITAL RESOURCES
The Company has used working capital generated from operations and the
proceeds from the sale of two facilities and certain trade receivables to fund
its operations, capital expenditures and its reduction in long-term debt.
Working capital was $29,638 at December 31, 1996, a decrease of 35.6% over
December 31, 1995 level. Current liabilities increased by $15,477 reflecting in
part an increase in trade accounts payable, accrued advertising and promotions,
accrued salaries, benefits and payroll taxes and accrued income taxes. Current
assets in 1996 were comparable to 1995. A trade accounts receivable reduction of
$3,797 (net of a $14,300 sale of trade receivables, as described below) and a
reduction in refundable and deferred income taxes of $5,070 were partially
offset by an increase in inventory of $5,644 and an increase in prepaid expenses
and other of $1,292.
In 1996, the Company utilized $9,592 of cash for capital expenditures,
including approximately $6,877 for tooling related to the Dirt Devil(R) Ultra
MVP(TM), the Dirt Devil(R) Ultra Hand Vac, the Dirt Devil(R) Swivel Glide(TM)
and the Dirt Devil(R) Mop Vac(TM).
The Company's revolving credit facility has a maturity date of April 1,
1999, and is classified as long-term at December 31, 1996. The facility provides
for revolving credit up to $50,000, subject to a borrowing base formula as
defined in the agreement. The maximum amount allowable to the Company under the
borrowing base formula was approximately $42,000 as of December 31, 1996,
resulting in availability of approximately $39,000. 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 plus a rate spread as
defined in the Agreement. At December 31, 1996, the bank's base lending rate was
8.25%. The Company's effective interest rate was 8.86% and 9.60% for the years
1996 and 1995. 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
A-6
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES -- (CONTINUED)
with all applicable covenants as of December 31, 1996. The revolving credit
facility is collateralized by the Company's inventories, trade accounts
receivable, equipment and general intangibles.
In October 1996, the Company entered into a revolving trade accounts
receivable securitization program to sell, through a wholly-owned subsidiary,
certain trade accounts receivables. The maximum amount of receivables that can
be sold is seasonally adjusted. The maximum amount allowed at any given time
through February 28, 1997, is $16,000, $9,000, thereafter. At December 31, 1996,
the Company received approximately $14,300 from the sale of trade accounts
receivables. 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 $161 in 1996, and have been classified as Other expense
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.
During the second quarter of 1996, the Company sold two facilities which
were closed in 1995. The aggregate net proceeds included $2,237 in cash and the
assumption of $3,690 of capital lease liability by one of the buyers.
In February 1997, 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 1,200 of its outstanding
common shares. Through March 26, 1997, the Company has repurchased 115 shares
for an aggregate purchase price of $754. The program is scheduled to expire on
March 1, 1998.
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, and stock repurchases, if any.
QUARTERLY OPERATING RESULTS (UNAUDITED)
The following table presents certain unaudited consolidated quarterly
operating information for the Company and includes all adjustments (consisting
only of normal recurring adjustments and reclassification to conform with a 1995
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 (a)
-----------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1996 1996 1996 1996 1995 1995 1995 1995
-------- --------- -------- --------- -------- --------- -------- ---------
Net sales.............................. $97,204 $73,688 $62,969 $52,262 $96,303 $66,990 $58,255 $49,016
Gross margin........................... 30,633 21,223 16,504 13,763 27,502 16,253 14,018 11,236
Net income (loss)...................... 4,625 3,151 1,328 332 2,789 (12,279) (1,888) (2,378)
Net income (loss) per common share (b) .19 .13 .05 .01 .12 (.51) (.08) (.10)
(a) See Note 1 of Notes to Consolidated Financial Statements.
(b) The sum of 1996 quarterly net income per common share does not equal annual
net income per common share due to the effect of rounding.
The Company's business is highly seasonal. The Company believes that a
significant percentage of certain of its products, particularly the Dirt
Devil(R) Hand Vac and Dirt Devil(R) Broom Vac(R), 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.
A-7
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (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 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
remain under pressure as a result of increased advertising expenditures and new
product introductions by its competitors. The Company's most significant
competitors are Hoover and Eureka, and Black & Decker in the hand-held market.
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.
ACCOUNTING STANDARDS
The Company will be required to implement Statement of Financial Accounting
Standards "SFAS" No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, in the first quarter of 1997. The
Company expects the implementation of SFAS No. 125 will not have a material
impact on its consolidated financial position and results of operations.
The Company will also be required to implement SFAS No. 128, Earnings Per
Share, in the fourth quarter of 1997. The Company expects the implementation of
SFAS No. 128 will not have a material impact on its calculation of earnings per
share.
The Company adopted the disclosure-only option of SFAS No. 123, Accounting
for Stock-Based Compensation, as of December 31, 1996. The impact of
implementing SFAS No. 123 is discussed in Note 8 to the consolidated financial
statements.
FORWARD LOOKING STATEMENTS
Forward-looking statements in this Form 10-K are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. Readers
are cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date hereof. Potential risks and uncertainties
include, but are not limited to, general business and economic conditions; the
financial strength of the retail industry particularly the major mass retail
channel; the competitive pricing environment within the vacuum cleaner segment
of the floor care industry; the cost and effectiveness of planned advertising,
marketing and promotional campaigns, the success at retail of the Company's new
products, and the dependence upon the Company's ability to continue to
successfully develop and introduce innovative products.
A-8
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Royal Appliance Mfg. Co.
We have audited the consolidated financial statements of Royal Appliance
Mfg. Co. and Subsidiaries listed in the index on page A-1 of this Proxy
Statement. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Royal Appliance
Mfg. Co. and Subsidiaries as of December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Cleveland, Ohio
February 11, 1997
A-9
24
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1996 1995
------------ ------------
(Dollars in thousands)
ASSETS
Current assets:
Cash..................................................................... $ 1,001 $ --
Trade accounts receivable, less allowance for doubtful accounts of $1,350
and $2,000 at December 31, 1996 and 1995, respectively................. 39,761 43,558
Inventories.............................................................. 34,052 28,408
Deferred income taxes.................................................... 6,552 7,230
Refundable income taxes, net............................................. -- 4,392
Prepaid expenses and other............................................... 2,436 1,144
-------- --------
Total current assets.............................................. 83,802 84,732
-------- --------
Property, plant and equipment, at cost:
Land..................................................................... 2,356 3,405
Buildings................................................................ 13,117 14,463
Molds, tooling, and equipment............................................ 44,716 37,596
Furniture and office equipment........................................... 5,221 5,352
Assets under capital leases.............................................. 4,810 9,058
Leasehold improvements and other......................................... 2,717 2,565
-------- --------
72,937 72,439
Less accumulated depreciation and amortization.................... 35,654 30,760
-------- --------
37,283 41,679
-------- --------
Tooling deposits........................................................... 3,962 4,047
Other...................................................................... 1,094 803
-------- --------
Total assets...................................................... $126,141 $131,261
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable................................................... $ 20,679 $ 16,073
Accrued liabilities:
Advertising and promotion.............................................. 11,682 7,253
Salaries, benefits, payroll taxes...................................... 5,980 3,056
Warranty and customer returns.......................................... 7,975 7,600
Income taxes........................................................... 3,503 --
Interest and other..................................................... 3,680 3,963
Current portions of capital lease obligations and notes payable............ 665 742
-------- --------
Total current liabilities......................................... 54,164 38,687
-------- --------
Revolving credit agreement................................................. 2,886 28,839
Capitalized lease obligations, less current portion........................ 3,307 7,174
Notes payable, less current portion........................................ 9,550 9,986
-------- --------
Total long-term debt.............................................. 15,743 45,999
-------- --------
Total liabilities................................................. 69,907 84,686
-------- --------
Commitments and contingencies (Notes 4 and 5).............................. -- --
Shareholders' equity:
Serial preferred shares; authorized -- 1,000,000 shares; none issued and
outstanding............................................................ -- --
Common shares, at stated value; authorized -- 101,000,000 shares; issued
and outstanding -- 25,231,100 and 25,200,000 at December 31, 1996 and
1995, respectively..................................................... 210 210
Additional paid-in capital............................................... 41,500 41,583
Retained earnings........................................................ 27,611 18,175
Cumulative translation adjustment........................................ (107) (413)
-------- --------
69,214 59,555
Less treasury shares, at cost (1,201,000 shares at December 31, 1996 and
1995, respectively).................................................... (12,980) (12,980)
-------- --------
Total shareholders' equity........................................ 56,234 46,575
-------- --------
Total liabilities and shareholders' equity........................ $126,141 $131,261
======== ========
The accompanying notes are an integral part of these financial statements.
A-10
25
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
1996 1995 1994
-------- -------- --------
(Note 1)
(Dollars in thousands, except per
share amounts)
Net sales.................................................. $286,123 $270,564 $278,322
Cost of sales.............................................. 204,000 201,555 200,568
-------- -------- --------
Gross margin............................................. 82,123 69,009 77,754
Advertising and promotion.................................. 40,443 40,496 42,298
Other selling.............................................. 8,977 11,898 12,914
General and administrative................................. 11,515 12,971 12,309
Engineering and product development........................ 3,905 3,281 2,176
Special charges............................................ -- 16,294 --
-------- -------- --------
Income (loss) from operations............................ 17,283 (15,931) 8,057
Interest expense, net...................................... 2,559 4,001 4,483
Other (income) expense, net................................ (622) 311 460
-------- -------- --------
Income (loss) before income taxes........................ 15,346 (20,243) 3,114
Income tax expense (benefit)............................... 5,910 (6,487) 1,152
-------- -------- --------
Net income (loss)........................................ $ 9,436 $(13,756) $ 1,962
-------- -------- --------
Net income (loss) per common share......................... $ .39 $ (.57) $ .08
Weighted average number of common shares and equivalents
outstanding (in thousands)............................... 24,213 23,999 24,011
The accompanying notes are an integral part of these financial statements.
A-11
26
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Common Shares Additional Cumulative Treasury Shares Total
------------------- Paid-in Retained Translation -------------------- Shareholders'
Number Amount Capital Earnings Adjustment Number Amount Equity
---------- ------ ---------- -------- ----------- --------- -------- -------------
Balance at December 31, 1993... 25,200,000 $210 $ 41,467 $29,969 $(662) 1,201,000 $(12,980) $ 58,004
Translation adjustment....... 131 131
Compensatory effect of stock
options.................... 58 58
Net income................... 1,962 1,962
---------- ---- ------- -------- ----- --------- -------- --------
Balance at December 31, 1994... 25,200,000 210 41,525 31,931 (531) 1,201,000 (12,980) 60,155
Translation adjustment....... 118 118
Compensatory effect of stock
options.................... 58 58
Net loss..................... (13,756) (13,756)
---------- ---- ------- -------- ----- --------- -------- --------
Balance at December 31, 1995... 25,200,000 210 41,583 18,175 (413) 1,201,000 (12,980) 46,575
Translation adjustment....... 306 306
Compensatory effect of stock
options.................... (199) (199)
Shares issued from stock
option plan................ 31,100 116 116
Net income................... 9,436 9,436
---------- ---- ------- -------- ----- --------- -------- --------
Balance at December 31, 1996... 25,231,100 $210 $ 41,500 $27,611 $(107) 1,201,000 $(12,980) $ 56,234
========== ==== ======= ======== ===== ========= ======== ========
The accompanying notes are an integral part of these financial statements.
A-12
27
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
1996 1995 1994
-------- -------- --------
(Note 1)
Cash flows from operating activities:
Net income (loss).................................................. $ 9,436 $(13,756) $ 1,962
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization.................................... 8,719 11,586 12,089
Compensatory effect of stock options............................. (199) 58 58
(Gain) loss on disposal of tooling, property & equipment......... (467) 9,170 --
(Increase) decrease in assets:
Trade accounts receivable, net..................................... 3,797 1,787 (8,120)
Inventories........................................................ (5,644) 268 11,233
Refundable, deferred and accrued income taxes...................... 8,573 (7,248) 5,408
Prepaid expenses and other......................................... (1,288) 1,030 (181)
Other.............................................................. (305) (67) (677)
Increase (decrease) in liabilities:
Trade accounts payable............................................. 4,587 5,988 (2,119)
Accrued advertising and promotion.................................. 4,429 (1,731) (1,266)
Accrued salaries, benefits, and payroll taxes...................... 2,924 46 (160)
Accrued warranty and customer returns.............................. 375 100 --
Accrued interest and other......................................... (47) 1,783 109
-------- -------- --------
Total adjustments........................................... 25,454 22,770 16,374
-------- -------- --------
Net cash from operations........................................... 34,890 9,014 18,336
-------- -------- --------
Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment, net.......... (9,677) (8,872) (5,868)
Proceeds from sale of plants and equipment......................... 2,237 -- --
Decrease (increase) in tooling deposits............................ 85 (2,634) (417)
Cash proceeds from sale of European operations..................... -- 3,548 --
-------- -------- --------
Net cash from investing activities.......................... (7,355) (7,958) (6,285)
-------- -------- --------
Cash flows from financing activities:
Payments on bank debt, net......................................... (25,953) (11,179) (11,823)
Proceeds from notes payable........................................ -- 10,450 --
Payments on notes payable.......................................... (398) (45) --
Proceeds from exercise of stock options............................ 116 -- --
Payments on capital lease obligations.............................. (293) (325) (302)
-------- -------- --------
Net cash from financing activities.......................... (26,528) (1,099) (12,125)
-------- -------- --------
Effect of exchange rate changes on cash.............................. (6) 43 74
-------- -------- --------
Net decrease in cash................................................. 1,001 -- --
Cash at beginning of year............................................ -- -- --
-------- -------- --------
Cash at end of year.................................................. $ 1,001 $ -- $ --
======== ======== ========
Supplemental disclosure of cash flow information:
Cash payments for:
Interest, net of capitalized interest.............................. $ 3,018 $ 4,378 $ 4,687
======== ======== ========
Income taxes, net of refunds....................................... $ (2,663) $ 761 $ (4,251)
======== ======== ========
Supplemental schedule of noncash investing and financing activities:
Exchange of certain tooling for the forgiveness of related note
payable.......................................................... $ -- $ 586 $ --
======== ======== ========
Assignment of capital lease obligation to buyer.................... $ 3,690 $ -- $ --
======== ======== ========
The accompanying notes are an integral part of these financial statements.
A-13
28
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS -- Royal Appliance Mfg. Co. ("Royal" or the
"Company"), an Ohio corporation with its corporate offices in the Cleveland,
Ohio metropolitan area, develops, assembles and markets a full line of cleaning
products for home and commercial use under the Dirt Devil(R) and Royal(R) brand
names. In 1984, the Company introduced the first in a line of Dirt Devil(R)
hand-held vacuum cleaners, which the Company believes has become the largest
selling line of hand-held vacuum cleaners in the United States. The Company has
used the Dirt Devil(R) brand name recognition to gain acceptance for other Dirt
Devil(R) products.
The following is a summary of significant policies followed in the
preparation of the accompanying Consolidated Financial Statements.
BASIS OF PRESENTATION -- The Consolidated Financial Statements include the
accounts of the Company and its wholly owned subsidiaries after elimination of
all intercompany accounts and transactions. The companies are hereinafter
referred to as "Royal" or the "Company".
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.
Certain prior year amounts have been reclassified to conform to the 1996
presentation.
Net income (loss) per common share is computed based on the weighted
average number of common and common equivalent shares outstanding and is
adjusted for the assumed conversion of shares issuable upon exercise of options,
after the assumed repurchase of common shares with the related proceeds.
The Company's revenue recognition policy is to recognize revenues when
products are shipped.
Foreign operations are conducted in their local currency. Assets and
liabilities of Royal's international operations are translated at current
exchange rates, and income and expenses are translated using weighted average
exchange rates. The effects of these translation adjustments are reported as a
separate component of shareholders' equity. The net effect of currency gains and
losses realized on business transactions is included in the determination of net
income (loss).
ADVERTISING AND PROMOTIONAL EXPENDITURES -- Cost incurred for producing and
communicating advertising are expensed during the period incurred, including
cost incurred under the Company's cooperative advertising program.
INVENTORIES -- Inventory is 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's ability to introduce new
products into the marketplace increases.
The effect of the change in accounting method was insignificant for the
year 1995, and increased income and earnings per common share for the year 1994
as follows:
Effect of Change
in Accounting Method
--------------------
1994
--------------------
Increase in net income........................................... $407
Increase in net income per common share.......................... $.02
A-14
29
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES: (CONTINUED)
Inventories at December 31 consisted of the following:
December 31, December 31,
1996 1995
------------ ------------
Finished goods........................................... $ 23,177 $ 15,400
Work in process and component parts...................... 10,875 13,008
------- -------
$ 34,052 $ 28,408
======= =======
PROPERTY, PLANT AND EQUIPMENT -- the Company capitalizes as additions to
property, plant and equipment expenditures at cost for molds, tooling, land,
buildings, equipment, furniture, and leasehold improvements. Expenditures for
maintenance and repairs are charged to operating expense as incurred. The asset
and related accumulated depreciation or amortization accounts are adjusted to
reflect retirements and disposals and the resulting gain or loss is included in
the determination of net income (loss).
Plant and equipment are depreciated over the estimated useful lives of the
respective classes of assets. Leasehold improvements and assets held under
capital leases are amortized over their respective lease terms. Accumulated
amortization on assets under capital leases totaled $1,902 and $2,302 at
December 31, 1996 and 1995, respectively.
Depreciation for financial reporting purposes is computed on the
straight-line method using the following depreciable lives:
Buildings.............................................................. 40 years
Buildings under capital lease.......................................... 20 years
Molds, tooling, and equipment.......................................... 3-10 years
Furniture and office equipment......................................... 3-10 years
Vehicles............................................................... 3 years
Accelerated methods as permitted by the applicable tax law are used for tax
reporting purpose.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- Financial instruments consist of a
revolving credit agreement and notes payable and are carried at amounts which
approximate fair value.
NEW ACCOUNTING PRONOUNCEMENTS -- The Company will be required to implement
Statement of Financial Accounting Standards "SFAS" No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
in the first quarter of 1997. The Company expects the implementation of SFAS No.
125 will not have a material impact on its consolidated financial position and
results of operations.
The Company will also be required to implement SFAS No. 128, Earnings Per
Share, in the fourth quarter of 1997. The Company expects the implementation of
SFAS No. 128 will not have a material impact on its calculation of earnings per
share.
The Company adopted the disclosure-only option of SFAS No. 123, Accounting
for Stock-Based Compensation, as of December 31, 1996. The impact of
implementing SFAS No. 123 is discussed in Note 8 to the consolidated financial
statements.
2. SPECIAL CHARGES:
In 1995, pursuant to a board approved plan, the Company recorded special
charges of $16,294, primarily related to losses from the disposal of certain
inventory, molds and tooling and other intangibles primarily resulting from a
decision to refocus the Company's primary operating and marketing efforts on the
North American market. The special charges include a $11,567 write-down to the
net realizable value of certain molds, tooling, inventory and other assets
disposed of or held for sale, $2,598 restructuring charge related to
A-15
30
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SPECIAL CHARGES: (CONTINUED)
the Company's sale of its European operations, and $2,129 of special charges
related to losses from the disposal of certain inventory and intangibles
resulting from discontinuing the Dirt Devil(R) Cyclone(TM) product line and
executive severance. The Company completed the sale of its European operations
in 1995 and liquidated its European real estate in 1996.
Of the initial special charges, $369 remained as a reserve as of December
31, 1996. The balance of the reserve is primarily comprised of warranty
obligations and other related charges. A summary of the special charges reserve
account is presented below:
1996 1995
------- -------
Reserve balance at beginning of year........................... $ 1,548 $ --
Expenses charged to operations............................... -- 16,294
Realized loss on disposal of property, equipment and
inventories............................................... (666) (12,372)
Severance and other cash outflows............................ (513) (2,374)
-------- ------
Reserve balance at end of year................................. $ 369 $ 1,548
======== ======
3. DEBT:
The Company's revolving credit facility has a maturity date of April 1,
1999, and is classified as long-term at December 31, 1996. The facility provides
for revolving credit up to $50,000, subject to a borrowing base formula as
defined in the agreement. The maximum amount allowable to the Company under the
borrowing base formula was approximately $42,000 as of December 31, 1996,
resulting in availability of approximately $39,000. 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 plus a rate spread as
defined in the Agreement. At December 31, 1996, the bank's base lending rate was
8.25%. The Company's effective interest rate was 8.86% and 9.60% for the years
1996 and 1995. In addition, the Company pays a commitment fee at the annual rate
of .375% on the unused portion of the facility. The carrying amount of the
facility approximates fair value.
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 December 31, 1996. The revolving credit facility is
collateralized by the Company's inventories, trade accounts receivable,
equipment and general intangibles.
In October 1996, the Company entered into a revolving trade accounts
receivable securitization program to sell, through a wholly-owned subsidiary,
certain trade accounts receivables. The maximum amount of receivables that can
be sold is seasonally adjusted. The maximum amount allowed at any given time
through February 28, 1997, is $16,000, $9,000, thereafter. At December 31, 1996,
the Company received approximately $14,300 from the sale of trade accounts
receivables. 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 $161 in 1996, and have been classified as Other expense
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 variable rate mortgage note payable in the amount of
$4,204. 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 $3,485 is due. Interest is at a 2.35%
spread above the 30 day commercial paper rate. At December 31, 1996, the 30 day
commercial paper rate was 5.38%. The carrying amount of the mortgage note
payable approximates fair value.
The Company has a 7.9% fixed rate mortgage note payable in the amount of
$5,764. The note is collateralized by the Company's distribution facility.
Monthly payments of principal and interest are payable
A-16
31
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DEBT: (CONTINUED)
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.
During the second quarter of 1996, the Company sold two facilities which
were closed in 1995. The aggregate net proceeds were $2,237 in cash and the
assumption of a $3,690 capital lease liability by the buyer.
Aggregate maturities of the notes payable and revolving credit facility at
December 31, 1996, are as follows:
1997.............................. $ 418
1998.............................. 452
1999.............................. 3,375
2000.............................. 8,609
-------
$12,854
=======
4. LEASES:
Royal leases various facilities, equipment and vehicles under capital and
operating lease agreements. Operating lease payments totaled $677, $1,255 and
$1,548 for the years ended December 31, 1996, 1995, and 1994, respectively.
Minimum commitments under all capital and operating leases at December 31,
1996 are as follows:
Year Capital Operating
------------------------------------------------------- ------------ ------------
1997................................................... $ 552 $ 445
1998................................................... 551 291
1999................................................... 553 159
2000................................................... 555 69
2001................................................... 244 50
Thereafter............................................. 3,471 15
------ ------
Total minimum lease payments........................... 5,926 $1,029
======
Less amount representing interest...................... 2,372
------
Total present value of capital obligation.............. 3,554
Less current portion................................... 247
------
Long-term obligation under capital leases.............. $3,307
======
5. COMMITMENTS AND CONTINGENCIES:
At December 31, 1996, the Company estimates having contractual commitments
for future advertising and promotional expense of approximately $9,600 including
commitments for television advertising through March 31, 1997. Other contractual
commitments for items in the normal course of business total approximately
$3,100.
The Company is self-insured with respect to workers' compensation benefits
in Ohio and carries excess workers' compensation insurance covering aggregate
claims exceeding $350 per occurrence.
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.
A-17
32
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES:
The income tax provision (benefit) consisted of the following (1994 amounts
have been restated to reflect the Company's election off the Last-In, First-Out
(LIFO) method of valuing inventory. See Note 1):
1996 1995 1994
------ ------- ------
Current (Refundable)
Federal....................................................... $4,643 $(4,601) $ 832
State and local............................................... 589 10 39
Deferred (benefit).............................................. 678 (1,896) 281
------ ------- ------
Total........................................................... $5,910 $(6,487) $1,152
====== ======= ======
Deferred income taxes reflect the impact for financial statement reporting
purposes of temporary differences between the financial statement carrying
amounts and tax basis of assets and liabilities. At December 31, 1996 and 1995,
the components of the net deferred tax asset were as follows:
1996 1995
------ ------
Deferred tax assets:
Warranty and customer returns.................................. $3,694 $3,188
Bad debt reserve............................................... 527 782
Inventory basis difference..................................... 590 617
Accrued vacation, salaries and wages........................... 398 258
AMT credit carry forward....................................... -- 762
State and local taxes.......................................... 756 356
Basis difference in fixed assets............................... 1,037 577
Accrued advertising............................................ -- 576
Self insurance reserves........................................ 137 150
Charitable contributions carryforward.......................... -- 197
Other.......................................................... 191 276
Deferred tax liabilities:
State and local taxes.......................................... (521) (425)
Other.......................................................... (257) (84)
------ ------
Net deferred tax asset........................................... $6,552 $7,230
====== ======
As of December 31, 1996, the Company has state and local tax net operating
loss carryforward tax benefits of approximately $571 which will substantially
expire between 2008 and 2010.
A-18
33
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES: (CONTINUED)
The differences between income taxes at the statutory federal income tax
rate of 34% and those reported in the Consolidated Statements of Operations are
as follows:
Year Ended December 31,
--------------------------------------------------------
% of % of % of
Pre-tax Pre-tax Pre-tax
1996 Income 1995 Loss 1994 Income
------ ------ ------- ------ ------ ------
Tax (benefit) provision at statutory
rate................................... $5,218 34.0% $(6,883) (34.0)% $1,059 34.0%
Capital losses on disposition of foreign
subsidiaries and other non deductible
expenses............................... 87 .6 461 2.3 -- --
State and local income taxes, net of
federal benefit........................ 257 1.7 (400) (1.9) 36 1.2
Federal surtax on income over $10
million................................ 70 .5 -- -- -- --
Other, net............................... 278 1.7 335 1.6 57 1.8
------- ---- ------- ----- ------ ----
$5,910 38.5% $(6,487) (32.0)% $1,152 37.0%
======= ==== ======= ===== ====== ====
7. MAJOR CUSTOMERS:
Royal's two largest customers represented approximately 33.0% and 11.3% of
total net sales in 1996, 28.6% and 15.5% in 1995 and 24.5% and 14.4% of total
net sales in 1994. Additionally, a significant concentration of Royal's business
activity is with major domestic mass market retailers whose ability to meet
their financial obligations with Royal is dependent on economic conditions
germane to the retail industry. During recent years, 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.
The Company provides credit, in the normal course of business, to the
retail industry which includes mass market retailers, warehouse clubs, and
independent dealers. The Company performs ongoing credit evaluations of its
customers and establishes appropriate allowances for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends and other information.
8. STOCK OPTIONS:
Under the terms of the Company's stock option plans for employees, outside
directors and consultants, all outstanding options have been granted at prices
at least equal to the then current market value on the date of grant, except for
50,000 options granted to a consultant below market value in November, 1996. The
compensation element of these 50,000 options is being recognized as compensation
expense over the two year vesting period. Certain stock options granted become
exercisable in cumulative 20% installments, commencing one-year from date of
grant with full vesting occurring on the fifth anniversary date, and expire in
ten years, subject to earlier termination in certain events related to
termination of employment. Other stock options granted vest at the end of five
years ("5 year cliff vesting") and expire in six years, subject to earlier
termination in certain events related to termination of employment. Vesting may
be accelerated in certain events relating to change of the Company's ownership.
A-19
34
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTIONS: (CONTINUED)
The following summarizes the changes in the number of Common Shares under
option:
1996 1995 1994
---------------- --------------- ---------------
Options outstanding at beginning of the
year.................................... 1,141 1,051 762
Options granted during the year........... 1,639 446 330
Options exercised during the year......... (31) -- --
Options canceled during the year.......... (263) (356) (41)
----- ----- -----
Options outstanding at end of year........ 2,486 1,141 1,051
===== ===== =====
Options exercisable at end of the year.... 439 326 298
Option price range per share.............. $3.00 to $10.25 $3.25 to $10.00 $3.75 to $10.00
The 439 exercisable options at December 31, 1996, are exercisable at an
average exercise price of $5.33. The Company's current option plans, which
provide for a total of 3,060 options, have 543 options remaining for future
grants at December 31, 1996.
The Company accounts for employee stock options under Accounting Principles
Board "APB" Opinion No. 25, under which no compensation cost has been
recognized, except for options granted below market value. The Compay adopted
the disclosure-only option of SFAS No. 123, Accounting for Stock-Based
Compensation, as of December 31, 1996. Had compensation cost been determined
based upon the fair market value at the grant date for awards granted in 1996
and 1995 consistent with the methodology prescribed in SFAS No. 123, the effect
on 1996 and 1995 net income (loss) and earnings (loss) per share would have been
immaterial.
9. SHAREHOLDER RIGHTS PLAN:
The Company has a Shareholder Rights Plan which provides that under certain
circumstances each Right will entitle the shareholder to purchase one
one-hundredth of a share of Series A Participating Preferred Stock at an
exercise price of $40. Upon the occurrence of certain other events, including if
a "Person" becomes the beneficial owner of more than 20% of the outstanding
Common Shares or an "Adverse Person" becomes the beneficial owner of 10% of the
outstanding Common Shares, the holder of a Right will have the right to receive,
upon exercise, Common Shares of the Company, or Common Stock of the acquirer,
having a value equal to two times the exercise price of the Right. The
Shareholder Rights Plan is designed to deter abusive market manipulation or
unfair takeover tactics and to prevent an acquirer from gaining control of the
Company without offering a fair price to all shareholders. The Rights expire on
November 2, 2003, unless redeemed prior to that date. The Rights can be redeemed
at a price of $.01 per Right.
10. BENEFIT PLANS:
The Company sponsors a 401(k) defined contribution plan which covers
substantially all of its employees who have satisfied the plan's eligibility
requirements. Participants may contribute to the plan by voluntarily reducing
their salary up to a maximum of 15% of qualified compensation subject to annual
I.R.S. limits. All contributions vest immediately. For 1996, the matching
contribution was 100%, up to the first 2% of qualified compensation, and 50% of
the next 4% of such compensation. The Company has also made discretionary
contributions to the plan. The Company's provisions for matching and
discretionary contributions totaled approximately $797, $754 and $692 for the
years ended December 31, 1996, 1995 and 1994, respectively.
Voluntary after-tax contributions and certain rollover contributions are
also permitted.
During 1996, the Company established a voluntary, non-qualified deferred
compensation plan for key executives. The Company has recorded a deferred
compensation liability of $180 as of December 31, 1996.
A-20
35
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. BENEFIT PLANS: (CONTINUED)
The Company does not offer any other post-retirement benefits, accordingly,
it is not subject to the provisions of Statement of Financial Accounting
Standards "SFAS" No. 106, "Employers' Accounting for Post Retirement Benefits
Other Than Pensions."
11. BUSINESS SEGMENT INFORMATION:
Prior to the sale of the Company's European operations in the fourth
quarter of 1995 (Note 2), sales and marketing operations of the Company were
principally located in both the United States and Europe. All Company operated
assembly facilities have been and are located in the United States. Included in
the amounts disclosed for the United States are amounts attributable to all
North American countries. Included in the Europe loss from operations is
approximately $1,800 and $5,197 of advertising, promotion and certain selling
expenditures for 1995 and 1994, respectively, which represents the parent
Company's funding of market penetration, including television advertising for
the European market.
Business Segment Information
by Geographic Area
1996 1995 1994
-------- -------- --------
(Note 1)
Net sales
United States........................................ $286,123(A) $259,727 $259,522
Europe............................................... -- 10,837 18,800
-------- -------- --------
$286,123 $270,564 $278,322
======== ======== ========
Income (loss) from operations
United States........................................ $ 17,283 $(14,664)(B) $ 13,012
Europe............................................... -- (1,267) (4,955)
-------- -------- --------
$ 17,283 $(15,931) $ 8,057
======== ======== ========
Identifiable assets
United States........................................ $126,141 $128,287 $130,547
Europe............................................... -- 2,974 10,661
-------- -------- --------
$126,141 $131,261 $141,208
======== ======== ========
Capital expenditures (includes cash and noncash
acquisitions)
United States........................................ $ 9,592 $ 10,691 $ 5,860
Europe............................................... -- 815 425
-------- -------- --------
$ 9,592 $ 11,506 $ 6,285
======== ======== ========
Depreciation and amortization expense
United States........................................ $ 8,719 $ 11,398 $ 11,909
Europe............................................... -- 188 180
-------- -------- --------
$ 8,719 $ 11,586 $ 12,089
======== ======== ========
(A) Includes export sales originating from the United States in 1996.
(B) Amount includes special charges of $16,294
12. SUBSEQUENT EVENT:
In February 1997, 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 1,200 of its outstanding
common shares. Through March 26, 1996, the Company has repurchased 115 shares
for an aggregate purchase price of $754. The program is scheduled to expire on
March 1, 1998.
A-21
36
ROYAL APPLIANCE MFG. CO.
NOTICE: 1997 ANNUAL MEETING OF SHAREHOLDERS
The 1997 Annual Meeting of Shareholders of Royal Appliance Mfg. Co. will be held
on Tuesday, April 29, 1997 at 10:00 a.m. at Wellington's Center, 777 Alpha
Drive, Cleveland, Ohio.
[DIRT DEVIL(R) LOGO]
YOUR VOTE IS VERY IMPORTANT
Please sign, date and return your proxy/voting instruction card below. Detach
and return the card in the envelope provided.
DETACH CARD
- --------------------------------------------------------------------------------
ROYAL APPLIANCE MFG. CO.
The undersigned hereby appoints Michael J. Merriman and R. Louis Schneeberger
with power of substitution as proxy to vote the Common Shares of Royal Appliance
Mfg. Co. owned by the undersigned at the annual meeting of shareholders to be
held April 29, 1997, at Wellington's Center, 777 Alpha Drive, Cleveland, Ohio
44143, at 10:00 a.m. local time, and at any adjournment thereof, upon all
business that may properly come before the meeting, including the business
identified and in the manner indicated on this Proxy and described in the Proxy
Statement furnished herewith.
THE BOARD OF DIRECTORS RECOMMENDS VOTING FOR ALL ITEMS.
1. ELECTION OF DIRECTORS WITHHOLD AUTHORITY [ ]
FOR all nominees listed below [ ] to vote for all nominees listed below
(except as indicated to the contrary below)
E. Patrick Nalley, Joseph B. Richey II, R. Louis Schneeberger
INSTRUCTION: (TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE WRITE
THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW)
-----------------------------------------------------------------------------
2. RATIFICATION OF THE APPOINTMENT OF AUDITORS
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(CONTINUED, AND TO BE SIGNED ON OTHER SIDE)
37
DETACH CARD
- --------------------------------------------------------------------------------
PROXY NO. SHARES
(Continued from the other side)
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS, WHICH RECOMMENDS
VOTING FOR ALL ITEMS. SHARES REPRESENTED BY PROPERLY EXECUTED PROXIES WILL BE
VOTED AS SPECIFIED. UNLESS OTHERWISE SPECIFIED, THE SHARES REPRESENTED BY THIS
PROXY WILL BE VOTED FOR ALL ITEMS.
Dated................, 1997
...........................
Signature
...........................
Signature
Please sign exactly as
name(s) appear on this
proxy. If joint account,
each joint owner should
sign. If signing for a
corporation or partnership
or as agent, attorney, or
fiduciary indicate the
capacity in which you are
signing.
PLEASE SIGN, DATE, AND RETURN YOUR PROXY PROMPTLY IN THE ENCLOSED ENVELOPE TO
NATIONAL CITY BANK, P.O. BOX 92301, CLEVELAND, OHIO 44197-1200.