1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. For the quarterly period ended JUNE 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For
the transition period from to
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Commission file number 0-19431
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ROYAL APPLIANCE MFG. CO.
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(Exact name of registrant as specified in its charter)
OHIO 34-1350353
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
650 ALPHA DRIVE, CLEVELAND, OHIO 44143
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(Address of Principal Executive Offices) (Zip Code)
(440) 449-6150
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(Registrant's telephone number, including area code)
Indicate, by check mark, whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common shares, as of the latest practicable date.
Common Shares, without par value 21,447,924
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(Class) (Outstanding at August 6, 1998)
The Exhibit index appears on sequential page 15.
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
INDEX
Page No.
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Part I FINANCIAL INFORMATION
Item 1 Financial Statements
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Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations -
three months and six months ended June 30, 1998 and 1997 4
Consolidated Statement of Cash Flows -
six months ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6 - 8
Item 2 Management's Discussion and Analysis of Financial
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Condition and Results of Operations 9 - 12
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Part II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 13
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Item 6 Exhibits and Reports on Form 8-K 13
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Signatures 14
Exhibit Index 15
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
June 30, December 31,
1998 1997
--------- ---------
ASSETS (Unaudited)
Current assets:
Cash $ -- $ 1,355
Trade accounts receivable, net 23,301 47,045
Inventories 42,426 36,195
Deferred and refundable income taxes 5,131 2,550
Prepaid expenses and other 2,517 1,861
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Total current assets 73,375 89,006
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Property, plant and equipment, at cost:
Land 2,356 2,356
Buildings 13,117 13,117
Molds, tooling, and equipment 59,414 58,236
Furniture and office equipment 6,581 6,068
Assets under capital leases 4,613 4,613
Leasehold improvements and other 3,112 3,049
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89,193 87,439
Less accumulated depreciation and amortization 48,409 44,547
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40,784 42,892
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Tooling deposits 3,247 1,146
Other 2,672 1,903
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Total assets $ 120,078 $ 134,947
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 11,018 $ 26,648
Accrued liabilities:
Advertising and promotion 6,159 9,576
Salaries, benefits and payroll taxes 2,877 5,750
Warranty and customer returns 8,100 8,700
Income taxes -- 975
Other 5,584 5,530
Current portions of capital lease obligations and notes payable 726 691
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Total current liabilities 34,464 57,870
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Revolving credit agreement 20,200 1,473
Capitalized lease obligations, less current portion 2,973 3,101
Notes payable, less current portion 8,859 9,098
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Total long-term debt 32,032 13,672
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Deferred income taxes 3,555 3,186
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Total liabilities 70,051 74,728
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Commitments and contingencies (Note 3) -- --
Shareholders' equity:
Common shares, at stated value 211 211
Additional paid-in capital 41,939 41,897
Retained earnings 35,241 40,018
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77,391 82,126
Less treasury shares, at cost (3,284,300 and 2,401,000 shares at
June 30, 1998, and December 31, 1997, respectively) (27,364) (21,907)
--------- ---------
Total shareholders' equity 50,027 60,219
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Total liabilities and shareholders' equity $ 120,078 $ 134,947
========= =========
The accompanying notes are an integral part of these financial statements.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net sales $ 51,259 $ 61,070 $ 103,107 $ 119,688
Cost of sales 39,106 43,331 79,456 85,715
----------- ----------- ----------- -----------
Gross margin 12,153 17,739 23,651 33,973
Advertising and promotion 9,245 9,726 17,356 18,749
Other selling 1,940 1,917 3,893 3,754
General and administrative 3,028 2,780 6,921 5,785
Engineering and product development 871 1,380 2,056 2,402
----------- ----------- ----------- -----------
(Loss) income from operations (2,931) 1,936 (6,575) 3,283
Interest expense, net 411 301 699 554
Receivable securitization and other expense,
net 292 145 529 229
----------- ----------- ----------- -----------
(Loss) income before income taxes (3,634) 1,490 (7,803) 2,500
Income tax (benefit) expense (1,400) 571 (3,026) 975
----------- ----------- ----------- -----------
Net (loss) income $ (2,234) $ 919 $ (4,777) $ 1,525
=========== =========== =========== ===========
BASIC
Weighted average number of common
shares outstanding (in thousands)
22,028 23,747 22,175 23,864
(Loss) earnings per share
$ (.10) $ .04 $ (.22) $ .06
DILUTED
Weighted average number of common
shares and equivalents outstanding
(in thousands) 22,028 24,121 22,175 24,238
(Loss) earnings per share $ (.10) $ .04 $ (.22) $ .06
The accompanying notes are an integral part of these financial statements.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Six months
Ended June 30,
--------------------------
1998 1997
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Cash flows from operating activities:
Net (loss) income $ (4,777) $ 1,525
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Adjustments to reconcile net (loss) income to net cash from operating
activities:
Depreciation and amortization 4,077 3,833
Compensatory effect of stock options 42 41
Loss on disposal of tooling, property, plant and equipment 32 --
(Increase) decrease in assets:
Trade accounts receivable, net 23,744 10,549
Inventories (6,231) (4,496)
Refundable and accrued income taxes (3,187) (2,142)
Prepaid expenses and other (656) 276
Other (963) (889)
Increase (decrease) in liabilities:
Trade accounts payable (15,630) 2,986
Accrued advertising and promotion (3,417) (5,068)
Accrued salaries, benefits, and payroll taxes (2,873) (3,155)
Accrued warranty and customer returns (600) (125)
Accrued other 54 926
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Total adjustments (5,608) 2,736
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Net cash from operating activities (10,385) 4,261
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Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment, net (1,807) (9,042)
Decrease (increase) in tooling deposits (2,101) 2,121
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Net cash from investing activities (3,908) (6,921)
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Cash flows from financing activities:
Proceeds on bank debt 18,727 4,030
Payments on note payable (221) (204)
Payments on capital lease obligations (111) (110)
Proceeds from exercise of stock options -- 122
Repurchase of common stock (5,457) (2,179)
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Net cash from financing activities 12,938 1,659
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Net decrease in cash (1,355) (1,001)
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Cash at beginning of period 1,355 1,001
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Cash at end of period $-- $--
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Supplemental disclosure of cash flow information:
Cash payments for:
Interest $ 768 $ 664
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Income taxes, net of refunds $ 161 $ 3,117
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The accompanying notes are an integral part of these financial statements.
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: BASIS OF PRESENTATION
The financial information for Royal Appliance Mfg. Co. and Subsidiaries
(the Company) included herein is unaudited; however, such information reflects
all adjustments (consisting solely of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the
consolidated statements of financial position as of June 30, 1998 and December
31, 1997, and the related statements of operations and cash flows as of, and for
the interim periods ended, June 30, 1998 and 1997. It is suggested that these
condensed financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's latest
annual report (Form 10-K).
The results of operations for the three and six month periods ended June
30, 1998, are not necessarily indicative of the results to be expected for the
full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual results
could differ from those estimates.
The Company's revenue recognition policy is to recognize revenues when
products are shipped.
Net (loss) income per share is computed based on the weighted average
number of common shares outstanding for basic earnings per share and on the
weighted average number of common shares and common share equivalents
outstanding for diluted earnings per share.
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost or market. Inventories at
June 30, 1998, and December 31, 1997, consisted of the following:
June 30, December 31,
1998 1997
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Finished goods $24,324 $23,319
Work in process and purchased parts 18,102 12,876
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Inventories at FIFO cost $42,426 $36,195
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NOTE 3: COMMITMENTS AND CONTINGENCIES
At June 30, 1998, the Company estimates having contractual commitments
for future advertising and promotional expense of approximately $11,685,
including commitments for television advertising through December 31, 1998.
Other contractual commitments for items in the normal course of business total
approximately $2,100.
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4: DEBT
In April, 1998, the Company entered into a new three-year collateralized
revolving credit facility with availability of $45,000. Under the new agreement,
pricing options of the bank's base lending rate and LIBOR rate are based on a
formula, as defined. In addition, the Company pays a commitment fee based on a
formula, as defined, on the unused portion of the facility. The revolving credit
facility contains covenants which require, among other things, the achievement
of minimum net worth levels and the maintenance of certain financial ratios. The
Company was in compliance with all applicable covenants as of June 30, 1998. The
revolving credit facility is collateralized by the Company's inventories and
certain trade accounts receivable.
The Company also utilizes a revolving trade accounts receivable
securitization program to sell without recourse, through a wholly-owned
subsidiary, certain trade accounts receivable. Under the program, the maximum
amount allowed to be sold at any given time through June 30, 1998, was $25,000.
The maximum amount of receivables that can be sold is seasonally adjusted. At
June 30, 1998, the Company received approximately $9,200 from the sale of trade
accounts receivable. The proceeds from the sales were used to reduce borrowings
under the Company's revolving credit facility. Costs of the program, which
primarily consist of the purchaser's financing cost of issuing commercial paper
backed by the receivables, totaled $415 and $275 for the six months ended June
30, 1998 and 1997, respectively, and have been classified as Receivable
securitization and 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.
At June 30, 1998, the Company had a variable rate mortgage note payable
in the amount of $3,928. The note was collateralized by one of the Company's
assembly facilities. The facility was sold in August 1998 for $7,100. Proceeds
were used to pay off the variable rate mortgage and pay down the Company's
revolving credit debt. The net gain from this transaction was approximately
$1,000.
The Company has a 7.9% fixed rate mortgage note payable in the amount of
$5,401. The note is collateralized by the Company's distribution facility.
Monthly payments of principal and interest are payable through November 1, 2000,
at which time the balance of approximately $4,775 is due. The carrying amount of
the mortgage note payable approximates fair value.
NOTE 5: SHARE REPURCHASE PROGRAM
In February 1998, 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 2,300 of its outstanding
common shares. As of July 31, 1998, the Company has repurchased approximately
1,468 shares for an aggregate purchase price of $8,597. The program is scheduled
to expire on March 1, 1999.
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6: EARNINGS (LOSS) PER SHARE
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings per Share, which modifies the
calculation of earnings per share. The Standard replaces the previous
presentation of primary and fully diluted earnings per share to basic and
diluted.
Basic (loss) earnings per share excludes dilution and is computed by
dividing income by the weighted average number of common shares outstanding for
the period. Diluted earnings per share includes the dilution of common stock
equivalents, and is computed similarly to fully diluted earnings per share
pursuant to APB Opinion No. 15. All prior periods presented have been restated
to reflect this adoption.
Three months ended Six months ended
June 30, June 30,
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1998 1997 1998 1997
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Net (loss) income $ (2,234) $ 919 $ (4,777) $ 1,525
========== ========== ========== ==========
BASIC:
Common shares outstanding, net of treasury
shares, beginning of period 22,028 23,944 22,911 24,030
Weighted average common shares issued
during period -- -- -- 29
Weighted average treasury shares repurchased
during period -- (197) (736) (195)
---------- ---------- ---------- ----------
Weighted average common shares outstanding,
net of treasury shares, end of period 22,028 23,747 22,175 23,864
========== ========== ========== ==========
Net (loss) income per common share $ (.10) $ .04 $ (.22) $ .06
========== ========== ========== ==========
DILUTED:
Common shares outstanding, net of treasury
shares, beginning of period 22,028 23,944 22,911 24,030
Weighted average common shares issued
during period -- -- -- 29
Weighted average common share equivalents -- 374 -- 374
Weighted average treasury shares repurchased
during period -- (197) (736) (195)
---------- ---------- ---------- ----------
Weighted average treasury shares outstanding,
net of treasury shares, end of period 22,028 24,121 22,175 24,238
========== ========== ========== ==========
Net (loss) income per common share $ (.10) $ .04 $ (.22) $ .06
========== ========== ========== ==========
NOTE 7: COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, Reporting Comprehensive Income, in the first quarter of 1998. The
implementation of SFAS No. 130 did not have a material impact on the Company's
consolidated financial position or results of operations since the Company had
no significant other comprehensive income.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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RESULTS OF OPERATIONS
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Net sales decreased 16.1% for the second quarter and decreased 13.9% for
the six month period ended June 30, 1998, compared with the same periods in the
prior year. The decrease in the second quarter net sales and net sales for the
six months ended June 30, 1998, was due primarily to lower shipments of the Dirt
Devil(R) Ultra MVP(TM) and the Dirt Devil(R) Broom Vac(R). Overall sales to the
top 5 customers (all of which are major retailers) decreased, in the first six
months of 1998. Sales to the top 5 customers accounted for approximately 61.6%
of net sales in the first six months of 1998 as compared with approximately
65.3% in the first six months of 1997. The Company believes that its dependence
on sales to its largest customers will continue. Recently, many major retailers
have experienced significant financial difficulties and some have filed for
protection from creditors under applicable bankruptcy laws. The Company sells
its products to certain customers that are in bankruptcy proceedings.
Gross margin, as a percent of net sales, decreased from 29.1% for the
second quarter 1997 to 23.7% in the second quarter 1998 and from 28.4% in the
first six months of 1997 to 22.9% in the first six months of 1998. The gross
margin percentage was negatively affected in 1998 primarily by higher consumer
returns and manufacturing variances as a percent of sales and was partially
offset by improved sales mix of higher margin products.
Advertising and promotion expenses decreased 5.0% for the second quarter
1998 and decreased 7.4% for the six month period ended June 30, 1998 compared
with the same periods in 1997. The decrease in advertising and promotion
expenses was due primarily to not incurring in 1998 expenses related to the
launch of the Fred Astaire Super Bowl advertising campaign and the direct
response television campaign for the Dirt Devil(R) Mop Vac(R). The Company
intends to continue emphasizing cooperative advertising and television as its
primary methods of advertising and promotion. In general, the Company's
advertising expenditures are not specifically proportional to anticipated sales.
For example, the amount of advertising and promotional expenditures may be
concentrated during critical retail shopping periods during the year,
particularly the fourth quarter, and during new product and promotional campaign
introductions.
Other selling expenses were comparable for the second quarter 1998 and
increased 3.7% for the six month period ended June 30, 1998 compared with the
same periods in 1997. The increase is primarily due to internal sales and
marketing personnel compensation, which are the largest components of other
selling expenses.
General and administrative expenses increased 8.9% for the second quarter
1998 and increased 19.6% for the six month period ended June 30, 1998, compared
with the same periods in 1997. General and administrative expenses increased as
a percentage of net sales for the second quarter 1998 from 4.6% to 5.9% and for
the six month period ended June 30, 1998, from 4.8% to 6.7%, compared with the
same periods in 1997. The principal components are compensation (including
benefits), insurance, travel and professional services. The increases in the
second quarter and six month period ended June 30, 1998, were primarily due to
increases in employee related benefit expenses, professional fees and supplies.
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RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
Engineering and product development expenses decreased 36.9% for the
second quarter 1998 and decreased 14.4% for the six month period ended June 30,
1998. The principal components are engineering salaries, outside professional
engineering and design services and other related product development
expenditures. The amount of outside professional engineering and design services
and other related product development expenditures are dependent upon the number
and complexity of new product introductions in any given period. The decrease in
the first six months of 1998 was primarily due to lower costs associated with
the new product introductions in 1998.
Interest expense increased 36.5% for the second quarter 1998 and
increased 26.2% for the six month period ended June 30, 1998, compared with the
same periods in 1997. The increase in interest expense resulted primarily from
higher levels of variable rate borrowings to finance working capital, capital
expenditures and share repurchases, partially offset by a lower effective
borrowing rate.
Receivable securitization and other expense principally reflects the
effect of the cost of the Company's trade accounts receivable securitization
program and foreign currency transaction gains or losses related to the
Company's international assets.
Due to the factors discussed above, the Company had a loss before
income taxes for the second quarter and six months ended June 30, 1998 of $3,634
and $7,803, respectively, as compared to income before income taxes for the
second quarter and six months ended June 30, 1997 of $1,490 and $2,500,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has used working capital generated from operations to fund
its operations, capital expenditures, and share repurchases. Working capital was
$38,911 at June 30, 1998, an increase of 25.0% over December 31, 1997. Current
assets decreased by $15,631 reflecting a $23,744 reduction of trade accounts
receivable partially offset by an increase in inventory of $6,231 and an
increase in deferred and refundable income taxes of $2,581. Current liabilities
decreased by $23,406 reflecting in part a $15,630 reduction of trade accounts
payable, a $3,417 reduction of accrued advertising and promotion, a $2,873
reduction of accrued salaries, benefits and payroll taxes, and a $975 reduction
of accrued income taxes.
In the first six months of 1998, the Company utilized $3,908 of cash
for capital purchases, including approximately $2,145 of tooling related to the
new Dirt Devil(R) Vision(TM), Dirt Devil(R) Swivel Glide(TM), and Dirt Devil(R)
Mop Vac(TM).
In April, 1998, the Company entered into a new three-year
collateralized revolving credit facility with availability of $45,000. Under the
new agreement, pricing options of the bank's base lending rate and LIBOR rate
are based on a formula, as defined. In addition, the Company pays a commitment
fee based on a formula, as defined, on the unused portion of the facility. The
revolving credit facility contains covenants which require, among other things,
the achievement of minimum net worth levels and the maintenance of certain
financial ratios. The Company was in compliance with all applicable covenants as
of June 30, 1998. The revolving credit facility is collateralized by the
Company's inventories and certain trade accounts receivable.
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LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- -------------------------------
The Company also utilizes a revolving trade accounts receivable
securitization program to sell without recourse, through a wholly-owned
subsidiary, certain trade accounts receivable. Under the program, the maximum
amount allowed to be sold at any given time through June 30, 1998, was $25,000.
The maximum amount of receivables that can be sold is seasonally adjusted. At
June 30, 1998, the Company received approximately $9,200 from the sale of trade
accounts receivable. The proceeds from the sales were used to reduce borrowings
under the Company's revolving credit facility. Costs of the program, which
primarily consist of the purchaser's financing cost of issuing commercial paper
backed by the receivables, totaled $415 and $275 for the six months ended June
30, 1998 and 1997, respectively, and have been classified as Receivabel
securitization and 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.
At June 30, 1998, the Company had a variable rate mortgage note payable
in the amount of $3,928. The note was collateralized by one of the Company's
assembly facilities. The facility was sold in August 1998 for $7,100. Proceeds
were used to pay off the variable rate mortgage and pay down the Company's
revolving credit debt. The net gain from this transaction was approximately
$1,000.
In February 1998, 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 2,300 of its outstanding
common shares. As of July 31, 1998, the Company has repurchased approximately
1,468 shares for an aggregate purchase price of $8,597. The program is scheduled
to expire on March 1, 1999.
The Company believes that its revolving credit facilities along with
cash generated by operations will be sufficient to provide for the Company's
anticipated working capital and capital expenditure requirements for the next
twelve months, as well as any additional stock repurchases.
QUARTERLY OPERATING RESULTS
- ---------------------------
The following table presents certain unaudited consolidated quarterly
operating information for the Company and includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for a
fair presentation of such information for the interim periods.
Three Months Ended
--------------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1998 1998 1997 1997 1997 1997
-------- --------- -------- --------- -------- ---------
(Dollars in thousands, except per share amounts)
Net sales $ 51,259 $ 51,848 $118,354 $ 87,375 $ 61,070 $ 58,618
Gross margin 12,153 11,498 36,691 25,284 17,739 16,234
Net (loss) income (2,234) (2,543) 6,793 4,089 919 606
Net (loss) income per
common share (a) $ (.10) $ (.11) $ .29 $ .17 $ .04 $ .02
<FN>
(a) (Loss) earnings per share is calculated based on the diluted method explained in Note 6 to the Consolidated
Financial Statements.
</FN>
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, Dirt Devil(R) Broom Vac(R), and Dirt Devil(R) Mop Vac(TM) are
given as gifts and therefore, sell in larger volumes during the Christmas
shopping season. Because of the Company's continued dependency on its major
customers, the timing of purchases by these major customers and the timing of
new product introductions 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.
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OTHER
- -----
The Company believes that the domestic vacuum cleaner industry is a
mature industry with modest annual growth in many of its products but with a
decline in certain other products. Competition is dependent upon price, quality,
extension of product lines, and advertising and promotion expenditures.
Additionally, competition is influenced by innovation in the design of
replacement models and by marketing and approaches to distribution. The
Company's most significant competitors are Hoover and Eureka, and Black &
Decker, in the hand-held market. These competitors are subsidiaries 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.
LITIGATION
- ----------
The Company is involved in various claims and litigation arising in the
normal course of business. In the opinion of management, the ultimate resolution
of these actions will not materially affect the consolidated financial position,
results of operations, or cash flows of the Company.
ACCOUNTING STANDARDS
- --------------------
The Company will be required to implement SFAS No. 131, Disclosure
About Segments of an Enterprise and Related Information, in the fourth quarter
of 1998. The Company expects the implementation of SFAS No. 131 will not have a
material impact on the reporting of segment information.
The Company will be required to implement SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, in the first quarter of 2000. The
Company expects the implementation of SFAS No. 133 will not have a material
impact on the Company's consolidated financial position or results of operation.
FORWARD-LOOKING STATEMENTS
- --------------------------
Forward-looking statements in this Form 10-Q are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. Potential risks and
uncertainties include, but are not limited to, general business and economic
conditions; the financial strength of the retail industry particularly the major
mass retail channel; the competitive pricing 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
and the acceptance by consumers of the Company's new products, and the
dependence upon the Company's ability to continue to successfully develop and
introduce innovative products.
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PART II - OTHER INFORMATION
ITEM 4 - Submission of Matters to a Vote of Security Holders
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(a) The Company's annual meeting of shareholders was
held April 28, 1998.
(b) At the annual meeting, the Company's shareholders
elected Messrs. Jack Kahl Jr., Michael J. Merriman,
and John P. Rochon, as Class I Directors for a two
year term which expires at the annual shareholders
meeting in 2000.
The term of office of Messrs. E. Patrick Nalley,
Joseph B. Richey II, and R. Louis Schneeberger, the
Class II Directors, continued after the 1998
meeting; such term expires at the annual
shareholders meeting in 1999.
(c) At the annual meeting, the Company's shareholders
ratified the appointment of PricewaterhouseCoopers
L.L.P. as auditors of the Company for 1998. The
holders of 19,391,748 common shares voted to ratify
the appointment, the holders of 93,513 common shares
voted against the ratification, and the holders of
45,629 common shares abstained.
The following tabulation represents voting for the
Class I Directors
Name FOR WITHHELD AUTHORITY
---- --- ------------------
Mr. Kahl 18,531,942 988,948
Mr. Merriman 18,525,642 1,005,248
Mr. Rochon 18,530,567 1,000,323
(d) Not applicable
ITEM 6 - Exhibits and Reports on Form 8-K
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Forms 8-K - None
The following documents are furnished as an exhibit and numbered
pursuant to Item 601 of Regulation S-K:
Exhibit 4(a)- Credit Agreement dated as of May 1, 1998, by
and among the Registrant and various banks including
National City Bank as Agent.
Exhibit 10(j) - Royal Appliance Deferred Compensation Plan
for Outside Directors
Exhibit 27 - Financial data schedule (EDGAR filing only)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Royal Appliance Mfg. Co.
----------------------------------------------------
(Registrant)
/s/ Michael J. Merriman
----------------------------------------------------
Michael J. Merriman
Executive Officer, President and Director
(Principal Executive and Financial Officer)
Date: August 6, 1998 /s/ Richard G. Vasek
----------------------------------------------------
Richard G. Vasek
Controller, Secretary and Chief Accounting Officer
(Principal Accounting Officer)
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INDEX TO EXHIBITS
Page No.
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Exhibit 4(a) - Credit Agreement dated as of May 1, 1998, by and among the Registrant 16 - 114
and various banks including National City Bank as Agent.
Exhibit 10(j) - Royal Appliance Deferred Compensation Plan for Outside Directors 115 - 140
Exhibit 27 - Financial data schedule (EDGAR filing only)
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