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, 2001
-------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from
to .
-------------- --------------
Commission file number 0-19431
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ROYAL APPLIANCE MFG. CO.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-1350353
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
7005 COCHRAN ROAD, GLENWILLOW, OHIO 44139
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(Address of Principal Executive Offices) Zip Code
(440) 996-2000
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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 13,862,052
-------------------------------- -------------------------------
(Class) (Outstanding at August 10, 2001)
The Exhibit index appears on sequential page 17.
1
2
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
INDEX
Page
Number
------
Part I FINANCIAL INFORMATION
Item 1 Financial Statements
------ --------------------
Consolidated Balance Sheets -
June 30, 2001 and December 31, 2000 3
Consolidated Statements of Operations -
three months and six months ended June 30, 2001 and 2000 4
Consolidated Statements of Cash Flows -
six months ended June 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6 - 9
Item 2 Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations 10 - 14
-----------------------------------
Part II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 15
------ ---------------------------------------------------
Item 6 Exhibits and Reports on Form 8-K 15
------ --------------------------------
Signatures 16
Exhibit Index
Exhibit 10(p) - Phantom Stock Plan effective April 23, 2001 17
2
3
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
------ ---------------------
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
2001 2000
--------- ------------
(Unaudited)
ASSETS
Current assets:
Cash $ 1,165 $ 704
Trade accounts receivable, net 25,038 42,097
Inventories 51,699 45,470
Deferred and refundable income taxes 5,370 4,735
Prepaid expenses and other 1,656 1,573
--------- ---------
Total current assets 84,928 94,579
--------- ---------
Property, plant and equipment, at cost:
Land 1,541 1,541
Building 7,777 7,777
Molds, tooling, and equipment 50,190 48,650
Furniture, office and computer equipment and software 14,336 12,721
Assets under capital leases 3,171 3,171
Leasehold improvements and other 7,234 5,067
--------- ---------
84,249 78,927
Less accumulated depreciation and amortization (43,864) (37,119)
--------- ---------
40,385 41,808
--------- ---------
Tooling deposits 1,267 807
Fixed asset deposits and other 4,721 1,358
--------- ---------
Total assets $ 131,301 $ 138,552
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 18,918 $ 22,209
Accrued liabilities:
Advertising and promotion 9,287 13,103
Salaries, benefits, and payroll taxes 4,438 3,355
Warranty and customer returns 9,600 9,800
Other 5,623 6,091
Current portions of capital lease obligations 141 136
--------- ---------
Total current liabilities 48,007 54,694
--------- ---------
Revolving credit agreement 45,300 46,400
Capitalized lease obligations, less current portion 2,066 2,137
--------- ---------
Total long-term debt 47,366 48,537
--------- ---------
Deferred income taxes 3,678 4,268
--------- ---------
Total liabilities 99,051 107,499
--------- ---------
Commitments and contingencies (Note 4) -- --
Shareholders' equity:
Common shares, at stated value 213 212
Additional paid-in capital 43,321 43,038
Retained earnings 62,631 61,165
--------- ---------
106,165 104,415
Less treasury shares, at cost (11,895,200 and 11,780,500 shares
at June 30, 2001 and December 31, 2000, respectively) (73,915) (73,362)
--------- ---------
Total shareholders' equity 32,250 31,053
--------- ---------
Total liabilities and shareholders' equity $ 131,301 $ 138,552
========= =========
The accompanying notes are an integral part of these financial statements.
3
4
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
------ ---------------------
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net sales $ 80,447 $ 82,075 $ 184,969 $ 185,545
Cost of sales 64,243 66,624 146,131 146,639
--------- --------- --------- ---------
Gross margin 16,204 15,451 38,838 38,906
Advertising and promotion 8,002 9,507 16,641 21,497
Other selling 2,204 2,343 4,684 4,321
General and administrative 4,652 3,552 9,628 8,438
Engineering and product development 1,739 1,322 3,653 3,072
--------- --------- --------- ---------
(Loss) income from operations (393) (1,273) 4,232 1,578
Interest expense, net 484 747 1,223 1,422
Receivable securitization and other
expense, net 200 361 715 831
--------- --------- --------- ---------
(Loss) income before income taxes (1,077) (2,381) 2,294 (675)
Income tax (benefit) expense (369) (877) 828 (250)
--------- --------- --------- ---------
Net (loss) income $ (708) $ (1,504) $ 1,466 $ (425)
========= ========= ========= =========
BASIC
Weighted average number of common
shares outstanding (in thousands) 13,812 15,467 13,769 15,948
(Loss) earnings per share $ (0.05) $ (0.10) $ .11 $ (0.03)
DILUTED
Weighted average number of common
shares and equivalents outstanding
(in thousands) 13,812 15,467 14,306 15,948
(Loss) earnings per share $ (0.05) $ (0.10) $ .10 $ (0.03)
The accompanying notes are an integral part of these financial statements
4
5
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
------ ---------------------
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months
Ended June 30,
--------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net income (loss) $ 1,466 $ (425)
-------- --------
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation and amortization 7,316 7,687
Compensatory effect of stock options 275 143
Gain on disposal of tooling and equipment -- (32)
Deferred income taxes (562) (433)
(Increase) decrease in assets:
Trade accounts receivable, net 17,059 18,464
Inventories (6,229) 147
Refundable and accrued income taxes (663) (4,161)
Prepaid expenses and other (83) (684)
Other (1,769) (982)
Increase (decrease) in liabilities:
Trade accounts payable (3,291) 2,830
Accrued advertising and promotion (3,816) (7,497)
Accrued salaries, benefits, and payroll taxes 1,083 (5,209)
Accrued warranty and customer returns (200) (650)
Accrued other (468) 1,065
-------- --------
Total adjustments 8,652 10,688
-------- --------
Net cash from operating activities 10,118 10,263
-------- --------
Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment, net (5,653) (10,625)
(Increase) decrease in tooling deposits and fixed asset deposits (2,292) 3,365
Proceeds from sale of equipment -- 32
-------- --------
Net cash from investing activities (7,945) (7,228)
-------- --------
Cash flows from financing activities:
(Payments) proceeds from bank debt, net (1,100) 7,700
Payments on note payable -- (148)
Payments on capital lease obligations (66) (153)
Proceeds from exercise of stock options 7 80
Repurchase of common stock (553) (11,549)
-------- --------
Net cash from financing activities (1,712) (4,070)
-------- --------
Net increase (decrease) in cash 461 (1,035)
-------- --------
Cash at beginning of period 704 1,427
-------- --------
Cash at end of period $ 1,165 $ 392
======== ========
Supplemental disclosure of cash flow information:
Cash payments for:
Interest $ 1,389 $ 1,552
======== ========
Income taxes, net of refunds $ 2,054 $ 4,352
======== ========
The accompanying notes are an integral part of these financial statements.
5
6
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: BASIS OF PRESENTATION
The financial information for Royal Appliance Mfg. Co. and Subsidiaries
(the Company) included herein is unaudited; however, such information reflects
all adjustments (consisting solely of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the
consolidated statements of financial position as of June 30, 2001 and December
31, 2000, and the related statements of operations and cash flows as of, and for
the interim periods ended, June 30, 2001 and 2000. These condensed financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's latest shareholders'
annual report (Form 10-K).
The results of operations for the three and six month periods ended June
30, 2001, are not necessarily indicative of the results to be expected for the
full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect reported amounts and
related disclosures. Actual results could differ from those estimates.
Net (loss) income per share is computed based on the weighted average
number of common shares outstanding for basic (loss) earnings per share and on
the weighted average number of common shares and common share equivalents
outstanding for diluted (loss) earnings per share.
The Company's revenue recognition policy is to recognize revenues when
products are shipped. The Company's return policy is to replace, repair or issue
credit for product under warranty. Returns received during the current period
are expensed as received and a provision is provided for estimated future
returns based on current shipments. All sales are final upon shipment of goods
to the customers. The Company's revenue recognition policy is in accordance with
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements."
International operations, primarily Canadian, are conducted in their
local currency. Assets and liabilities denominated in foreign currencies are
translated at current exchange rates, and income and expenses are translated
using weighted average exchange rates. The net effect of currency gains and
losses realized on these business transactions is included in the determination
of net income.
The Company uses forward exchange contracts to reduce fluctuations in
foreign currency cash flows related to receivables denominated in foreign
currencies. The terms of the currency instruments are consistent with the timing
of the transactions being hedged. The purpose of the Company's foreign currency
management activity is to protect the Company from the risk that the eventual
cash flows from the foreign currency denominated transactions may be adversely
affected by changes in exchange rates. Gains and losses on forward exchange
contracts are deferred and recognized in income when the related transactions
being hedged are recognized. Such gains and losses are generally reported on the
same financial line as the hedged transaction. The Company does not use
derivative financial instruments for trading or speculative purposes. There were
no contracts to purchase foreign currency forward outstanding as of June 30,
2001. There is no significant unrealized gain or loss on these contracts. All
contracts have terms of four months or less.
6
7
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) method. Inventories at June 30, 2001, and December
31, 2000, consisted of the following
June 30, December 31,
2001 2000
------- ------------
Finished goods $42,517 $37,832
Work in process and purchased parts 9,182 7,638
------- -------
Inventories at FIFO cost $51,699 $45,470
======= =======
NOTE 3: ASSETS TO BE DISPOSED OF
Based upon a plan established in January 2001, the Company discontinued
operations at its former distribution and assembly center during the second
quarter of 2001. The property has been listed with a real estate broker and the
Company believes that the property will be sold for a price that exceeds the net
book value as of June 30, 2001.
As of June 30, 2001, the building and related land and improvements are
classified as "Assets to be Disposed Of" in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of." As such, there is no need to continue to
depreciate these assets. For financial statement purposes, the asset value,
including related accumulated depreciation, is included in Property, Plant and
Equipment, at cost on the face of the Consolidated Balance Sheets. As of June
30, 2001, the net book value of this facility was $7,731.
NOTE 4: COMMITMENTS AND CONTINGENCIES
At June 30, 2001, the Company estimates having contractual commitments
for future advertising and promotional expense of approximately $9,058 including
commitments for television advertising through December 31, 2001. Other
contractual commitments for items in the normal course of business total
approximately $5,545.
The Hoover Company (Hoover) filed a lawsuit in federal court, in the
Northern District of Ohio (case #1:00cv 0347), against the Company on February
4, 2000, under the patent, trademark, and unfair competition laws of the United
States. The claim asserts the Company's Dirt Devil(R) Easy Steamer infringes
certain patents held by Hoover. Hoover seeks damages, injunction of future
production, and legal fees. The Company is vigorously defending the suit and
believes that it is without merit. If Hoover were to prevail on all of its
claims, it could have a material adverse effect on the consolidated financial
position, results of operations, or cash flows of the Company.
The Company is involved in various other claims and litigation arising in
the normal course of business. In the opinion of management, the ultimate
resolution of these actions will not materially affect the consolidated
financial position, results of operations, or cash flows of the Company.
7
8
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5: DEBT
At June 30, 2001, the Company had a reducing collateralized revolving
credit facility with availability of up to $72,000 and a maturity date of March
7, 2003. Under the agreement, pricing options of the bank's base lending rate
and LIBOR rate are based on a defined formula. In addition, the Company pays a
commitment fee based on a defined formula 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, 2001. The revolving credit facility is collateralized
by the assets of the Company and prohibits the payment of cash dividends. As
long as the Company remains in compliance with all covenants, the revolving
credit facility permits additional share repurchases up to $40,000, of which
$20,618 was utilized through June 30, 2001.
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, 2001, was $30,000.
At June 30, 2001, the Company had received approximately $11,300 from the sale
of trade accounts receivable that has not yet been collected. 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
$645 and $709 for the six months ended June 30, 2001 and 2000, respectively, and
have been classified as "Receivable securitization and other expense, net" in
the accompanying Consolidated Statements of Operations. The Company, as agent
for the purchaser of the receivables, retains collection and administrative
responsibilities for the purchased receivables. Additionally, the revolving
trade accounts receivable securitization program limits stock repurchases to
$5,000 for 2001, of which $553 was utilized through June 30, 2001.
NOTE 6: SHARE REPURCHASE PROGRAM
In April 2001, 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 3,400 of its outstanding common
shares. As of August 10, 2001, the Company has repurchased approximately 115
shares for an aggregate purchase price of $553 under the new program that is
scheduled to expire in December 2002. One of the Company's credit facilities
limits 2001 stock repurchases to $5,000, of which $553 was utilized through June
30, 2001.
8
9
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In Thousands, except per share amounts)
NOTE 7: (LOSS) EARNINGS PER SHARE
The Company follows Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings per Share, for the calculation of earnings per share.
Basic earnings (loss) 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.
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net (loss) income $ (708) $ (1,504) $ 1,466 $ (425)
======== ======== ======== ========
BASIC:
Common shares outstanding, net of treasury
shares, beginning of period 13,729 15,875 13,729 16,973
Weighted average common shares issued
during period 166 13 83 7
Weighted average treasury shares repurchased
during period (83) (421) (43) (1,032)
-------- -------- -------- --------
Weighted average common shares outstanding,
net of treasury shares, end of period 13,812 15,467 13,769 15,948
======== ======== ======== ========
Net (loss) income per common share $ (0.05) $ (0.10) $ 0.11 $ (0.03)
======== ======== ======== ========
DILUTED:
Common shares outstanding, net of treasury
shares, beginning of period 13,729 15,875 13,729 16,973
Weighted average common shares issued
during period 166 13 83 7
Weighted average common share equivalents -- -- 537 --
Weighted average treasury shares repurchased
during period (83) (421) (43) (1,032)
-------- -------- -------- --------
Weighted average common shares outstanding,
net of treasury shares, end of period 13,812 15,467 14,306 15,948
======== ======== ======== ========
Net (loss) income per common share $ (0.05) $ (0.10) $ 0.10 $ (0.03)
======== ======== ======== ========
9
10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
---------------------
RESULTS OF OPERATIONS
---------------------
Net sales decreased 2.0% for the second quarter and decreased .3% for the
six-month period ended June 30, 2001, compared with the same periods in the
prior year. The decrease in net sales for the second quarter ended June 30,
2001, was due primarily to lower shipments of certain other specialty floorcare
products partially offset by shipments of the Dirt Devil Spot Scrubber, which
was introduced in mid 2000. The decrease in net sales for the six months ended
June 30, 2001 was primarily due to lower shipments of the Dirt Devil Easy
Steamer and certain other specialty floorcare products partially offset by
shipments of the Dirt Devil Spot Scrubber. Overall sales to the top 5 customers
(all of which are major retailers) increased in the first six months of 2001,
and as a percentage, sales to the top 5 customers were 74.5% of net sales as
compared with approximately 68.0% in the first six months of 2000. 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 18.8% for the
second quarter 2000 to 20.1% in the second quarter 2001 and remained consistent
at 21.0% in the first six months of 2000 and 2001. The gross margin percentage
was negatively affected in the second quarter of 2000 primarily by higher
depreciation expense on tooling for certain product lines due to shortened
expected useful lives and inventory obsolescence charges related to the corded
Mop Vac and Broom Vac.
Advertising and promotion expenses decreased 15.8% for the second quarter
2001 and decreased 22.6% for the six month period ended June 30, 2001 compared
with the same periods in 2000. The decrease for the three and six-month periods
was due primarily to planned decreases in cooperative advertising and media
spending. However, the Company intends to increase cooperative advertising and
television advertising and promotion during the second half of 2001 in
conjunction with the launch of the new Platinum Force product family and the
Telezapper, the Company's first consumer electronics product. In general, the
Company's advertising expenditures are not specifically proportional to
anticipated sales. For example, the amount of advertising and promotional
expenditures may be concentrated during critical retail shopping periods during
the year, particularly the fourth quarter, and during new product and
promotional campaign introductions.
Other selling expenses decreased 5.9% for the second quarter 2001 and
increased 8.4% for the six month period ended June 30, 2001 compared with the
same periods in 2000. The increase for the six-month period ended June 30, 2001
was primarily due to internal sales and marketing personnel costs, which are the
largest components of other selling expenses. Other selling expenses decreased
as a percentage of sales for the second quarter 2001 from 2.9% to 2.7% and
increased for the six-month period ended June 30, 2001, from 2.3% to 2.5%,
compared with the same periods in 2000.
General and administrative expenses increased as a percentage of net
sales for the second quarter 2001 from 4.3% to 5.8% and for the six month period
ended June 30, 2001, from 4.5% to 5.2%, compared with the same periods in 2000.
The principal components are compensation (including benefits), insurance,
provision for doubtful accounts, travel and professional services. The increase
in the three and six-month periods ended June 30, 2001, was primarily due to
increases in employee related benefit expenses and provision for doubtful
accounts.
10
11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (DOLLARS IN THOUSANDS) (CONTINUED)
-------------
RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------
(CONTINUED)
Engineering and product development expenses increased 31.5% for the
second quarter 2001 and 18.9% for the six-month period ended June 30, 2001. 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 increase in 2001 was
primarily due to the timing of costs associated with new product introductions
in 2001 as compared to the new product introductions in 2000.
Interest expense decreased 35.2% for the second quarter 2001 and
decreased 14.0% for the six-month period ended June 30, 2001, compared with the
same periods in 2000. The decrease in interest expense is the result of lower
levels of variable rate borrowings to finance working capital, capital
expenditures, share repurchases and lower effective borrowing rates.
Receivable securitization and other expense, net principally reflects the
effect of the cost of the Company's trade accounts receivable securitization
program and foreign currency transaction gains or losses related to the
Company's North American assets.
Due to the factors discussed above, the Company had a loss before income
taxes for the second quarter and income for the six months ended June 30, 2001,
of $(1,077) and $2,294, respectively, as compared to loss before income taxes
for the second quarter and six months ended June 30, 2000, of $(2,381) and
$(675), respectively.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company has used cash generated from operations to fund its capital
expenditures, make payments on its revolving line of credit facility, and share
repurchases. Working capital was $36,921 at June 30, 2001, a decrease of 7.4%
over December 31, 2000. Current assets decreased by $9,651 reflecting a $17,059
reduction of trade accounts receivable partially offset by an increase in
inventories of $6,229 and an increase in deferred and refundable income taxes of
$635. Current liabilities decreased by $6,687, reflecting a decrease in trade
accounts payable of $3,291, a decrease in accrued advertising and promotion of
$3,816, partially offset by an increase in accrued salaries, benefits and
payroll taxes of $1,083.
In the first six months of 2001, the Company utilized $7,945 of cash for
capital purchases, including approximately $1,900 of tooling related to the new
Platinum Force Extractor, Upright and Hand Vac, introduced in the second half of
2001, approximately $2,700 for computer equipment and software and approximately
$2,100 for leasehold improvements.
At June 30, 2001, the Company had a reducing collateralized revolving
credit facility with availability of up to $72,000 and a maturity date of March
7, 2003. Under the agreement, pricing options of the bank's base lending rate
and LIBOR rate are based on a defined formula. In addition, the Company pays a
commitment fee based on a defined formula 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, 2001. The revolving credit facility is collateralized
by the assets of the Company and prohibits the payment of cash dividends. As
long as the Company remains in compliance with all covenants, the revolving
credit facility permits additional share repurchases up to $40,000, of which
$20,618 was utilized through June 30, 2001.
11
12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (DOLLARS IN THOUSANDS) (CONTINUED)
-------------
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
-------------------------------
The Company also utilizes a revolving trade accounts receivable
securitization program to sell without recourse, through a wholly-owned
subsidiary, certain trade accounts receivable. Under the program, the maximum
amount allowed to be sold at any given time through June 30, 2001, was $30,000.
At June 30, 2001, the Company had received approximately $11,300 from the sale
of trade accounts receivable that has not yet been collected. 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
$645 and $709 for the six months ended June 30, 2001 and 2000, respectively, and
have been classified as "Receivable securitization and other expense, net" in
the accompanying Consolidated Statements of Operations. The Company, as agent
for the purchaser of the receivables, retains collection and administrative
responsibilities for the purchased receivables. Additionally, the revolving
trade accounts receivable securitization program limits stock repurchases to
$5,000 for 2001, of which $553 was utilized through June 30, 2001.
In April 2001, 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 3,400 of its outstanding common
shares. As of August 10, 2001, the Company has repurchased approximately 115
shares for an aggregate purchase price of $553 under the new program that is
scheduled to expire in December 2002. One of the Company's credit facilities
limits 2001 stock repurchases to $5,000, of which $553 was utilized through June
30, 2001.
The Company believes that its revolving credit facilities and cash
generated by operations will be sufficient to provide for the Company's
anticipated working capital and capital expenditure requirements for the next
twelve months, as well as any additional stock repurchases under the April 2001
repurchase program.
QUARTERLY OPERATING RESULTS
---------------------------
The following table presents certain unaudited consolidated quarterly
operating information for the Company and includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for a
fair presentation of such information for the interim periods.
Three Months Ended
June 30, March 31, Dec. 30, Sept. 30 June 30, March 31,
2001 2001 2000 2000 2000 2000
-------- -------- -------- -------- -------- --------
Net sales $ 80,447 $104,522 $126,549 $ 96,129 $ 82,075 $103,470
Gross margin 16,204 22,634 31,690 21,778 15,451 23,455
Net (loss) income (708) 2,174 3,018 3,345 (1,504) 1,080
Net (loss) income
per share - diluted (a) $ (0.05) $ 0.15 $ 0.21 $ 0.22 $ (0.10) $ 0.06
(a) The sum of 2000 quarterly net income (loss) per common share does not
equal annual net income per common share due to the change in the
weighted average number of common shares outstanding due to share
repurchases.
The Company believes that a significant percentage of certain of its
products are given as gifts and therefore, sell in larger volumes during the
Christmas and other holiday shopping seasons. Because of the Company's continued
dependency on its major customers, the timing of purchases by these major
customers and the timing of new product introductions cause quarterly
fluctuations in the Company's net sales. As a consequence, results in prior
quarters are not necessarily indicative of future results of operations.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (DOLLARS IN THOUSANDS) (CONTINUED)
-------------
OTHER
-----
The Company's most significant competitors are Hoover, Eureka and Bissell
in the upright vacuum and carpet shampooer markets and, in the hand-held market,
Black & Decker. Most of these competitors and several others are subsidiaries or
divisions of companies that are more diversified and have greater financial
resources than the Company. 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, including price pressure and
increased advertising by its competitors, in the upright and carpet shampooer
market segments as a result of the Company's recent new product successes.
INFLATION
---------
The Company does not believe that inflation by itself has had a material
effect on the Company's results of operations. However, as the Company
experiences price increases from its suppliers, which may include increases due
to inflation, retail pressures may prevent the Company from increasing its
prices. Due to recent economic conditions, the cost of plastic resin and
transportation has increased in 2001.
LITIGATION
----------
The Hoover Company (Hoover) filed a lawsuit in federal court, in the
Northern District of Ohio (case #1:00cv 0347), against the Company on February
4, 2000, under the patent, trademark, and unfair competition laws of the United
States. The claim asserts the Company's Dirt Devil(R) Easy Steamer infringes
certain patents held by Hoover. Hoover seeks damages, injunction of future
production, and legal fees. The Company is vigorously defending the suit and
believes that it is without merit. If Hoover were to prevail on all of its
claims, it could have a material adverse effect on the consolidated financial
position, results of operations, or cash flows of the Company.
The Company is involved in various other claims and litigation arising in
the normal course of business. In the opinion of management, the ultimate
resolution of these actions will not materially affect the consolidated
financial position, results of operations, or cash flows of the Company.
ACCOUNTING STANDARDS
--------------------
The Company implemented Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
in the first quarter of 2001. The implementation of SFAS No. 133 did not have a
material impact on its consolidated financial position, results of operations,
or cash flows.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (DOLLARS IN THOUSANDS) (CONTINUED)
-------------
FORWARD-LOOKING STATEMENTS
--------------------------
Forward-looking statements in this Form 10-Q are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. Potential risks and
uncertainties include, but are not limited to: general business and economic
conditions; the financial strength of the retail industry particularly the major
mass retail channel; the competitive pricing and aggressive product development
environment, particularly in the bagless upright vacuum category within the
floor care industry; the impact of private-label programs by mass retailers; the
cost and effectiveness of planned advertising, marketing and promotional
campaigns; the success at retail and the acceptance by consumers of the
Company's new products, including the Company's bagless uprights, carpet
shampooers and its first consumer electronics product, the Telezapper; the
dependence upon the Company's ability to continue to successfully develop and
introduce innovative products; and the uncertainty of the Company's global
suppliers to continuously supply sourced finished goods and component parts.
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Part II - OTHER INFORMATION
ITEM 4 - Submission of Matters to a Vote of Security Holders
------ ---------------------------------------------------
(a) The Company's annual meeting of shareholders was held April 24,
2001.
(b) At the annual meeting, the Company's shareholders elected Messrs.
R. Louis Schneeberger, E. Patrick Nalley, and Joseph B. Richey
II, as Class II Directors for a two-year term which expires at
the annual shareholders meeting in 2003.
The term of office of Messrs. Jack Kahl Jr., Michael J. Merriman,
and John P. Rochon, the Class I Directors, continued after the
2001 meeting; such term expires at the annual shareholders
meeting in 2002.
(c) At the annual meeting, the Company's shareholders ratified the
appointment of PricewaterhouseCoopers L.L.P. as auditors of the
Company for 2002. The holders of 10,705,357 common shares voted
to ratify the appointment, the holders of 201,385 common shares
voted against the ratification, and the holders of 9,304 common
shares abstained.
The following tabulation represents voting for the Class II
Directors
NAME FOR WITHHELD AUTHORITY
---- --- ------------------
Mr. Schneeberger 10,837,847 78,199
Mr. Nalley 10,831,809 84,237
Mr. Richey 10,837,694 78,352
(d) Not applicable
ITEM 6 - Exhibits and Reports on Form 8-K
------ --------------------------------
Forms 8-K - None
The following documents are furnished as an exhibit and numbered
pursuant to Item 601 of Regulation S-K:
Exhibit 10(p) - Phantom Stock Plan effective April 23, 2001
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Royal Appliance Mfg. Co.
-------------------------------------------
(Registrant)
/s/ Michael J. Merriman
-------------------------------------------
Michael J. Merriman
Chief Executive Officer, President and Director
(Principal Executive Officer)
Date: August 13, 2001 /s/ Richard G. Vasek
-------------- -------------------------------------------
Richard G. Vasek
Chief Financial Officer, Vice President -
Finance and Secretary
(Principal Financial Officer)
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INDEX TO EXHIBITS
PAGE
NUMBER
Exhibit 10(p) - Phantom Stock Plan effective April 23, 2001
17