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 SEPTEMBER 30,
2001.
[ ] 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)
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 13,783,252
----------------------------------- ---------------------------------
(Class) (Outstanding at November 7, 2001)
The Exhibit index appears on sequential page 17.
1
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
INDEX
Page
Number
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Part I FINANCIAL INFORMATION
Item 1 Financial Statements
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Consolidated Balance Sheets -
September 30, 2001 and December 31, 2000 3
Consolidated Statements of Operations -
three months and nine months ended September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows -
nine months ended September 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 6 Exhibits and Reports on Form 8-K 15
------ --------------------------------
Signatures 16
Exhibit Index 17
*Numbered in accordance with Item 601 of Regulation S-K
2
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
September 30, December 31,
2001 2000
--------- ---------
ASSETS (Unaudited)
Current assets:
Cash $ 1,095 $ 704
Trade accounts receivable, net 48,762 42,097
Inventories 60,538 45,470
Refundable and deferred income taxes 4,806 4,735
Prepaid expenses and other 1,748 1,573
--------- ---------
Total current assets 116,949 94,579
--------- ---------
Property, plant and equipment, at cost:
Land 1,541 1,541
Building 7,777 7,777
Molds, tooling, and equipment 53,004 48,650
Furniture, office and computer equipment and software 15,123 12,721
Assets under capital leases 3,171 3,171
Leasehold improvements and other 7,400 5,067
--------- ---------
88,016 78,927
Less accumulated depreciation and amortization (47,048) (37,119)
--------- ---------
40,968 41,808
--------- ---------
Tooling deposits 3,250 807
Other 2,553 1,358
--------- ---------
Total assets $ 163,720 $ 138,552
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 33,726 $ 22,209
Accrued liabilities:
Advertising and promotion 10,954 13,103
Salaries, benefits, and payroll taxes 5,707 3,355
Warranty and customer returns 9,750 9,800
Income taxes 1,192 --
Other 5,741 6,091
Current portions of capital lease obligations and notes payable 143 136
--------- ---------
Total current liabilities 67,213 54,694
--------- ---------
Revolving credit agreement 54,100 46,400
Capitalized lease obligations, less current portion 2,028 2,137
--------- ---------
Total long-term debt 56,128 48,537
--------- ---------
Deferred income taxes 3,811 4,268
--------- ---------
Total liabilities 127,152 107,499
--------- ---------
Commitments and contingencies (Note 4) -- --
Shareholders' equity:
Common shares, at stated value 213 212
Additional paid-in capital 43,759 43,038
Retained earnings 66,716 61,165
--------- ---------
110,688 104,415
Less treasury shares, at cost (11,945,700 and 11,780,500 shares
at September 30, 2001 and December 31, 2000, respectively) (74,120) (73,362)
--------- ---------
Total shareholders' equity 36,568 31,053
--------- ---------
Total liabilities and shareholders' equity $ 163,720 $ 138,552
========= =========
The accompanying notes are an integral part of these financial statements.
3
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 Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net sales $112,726 $ 96,129 $297,695 $281,674
Cost of sales 85,042 74,351 231,173 220,990
-------- -------- -------- --------
Gross margin 27,684 21,778 66,522 60,684
Advertising and promotion 10,495 8,130 27,136 29,627
Other selling 2,767 2,164 7,451 6,485
General and administrative 5,106 4,658 14,734 13,096
Engineering and product development 2,065 1,624 5,718 4,696
-------- -------- -------- --------
Income from operations 7,251 5,202 11,483 6,780
Interest expense, net 674 986 1,897 2,408
Receivable securitization and other expense
(income), net 350 436 1,065 1,267
-------- -------- -------- --------
Income before income taxes 6,227 3,780 8,521 3,105
Income tax expense 2,142 435 2,970 185
-------- -------- -------- --------
Net income $ 4,085 $ 3,345 $ 5,551 $ 2,920
======== ======== ======== ========
BASIC
Weighted average number of common
shares outstanding (in thousands) 13,649 14,592 13,786 15,454
Earnings per share $ .30 $ .23 $ .40 $ .19
DILUTED
Weighted average number of common
shares and equivalents outstanding
(in thousands) 14,269 15,247 14,350 15,943
Earnings per share $ .29 $ .22 $ .39 $ .18
The accompanying notes are an integral part of these financial statements
4
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months
Ended September 30,
----------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net income $ 5,551 $ 2,920
-------- --------
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 11,061 11,474
Compensatory effect of stock options 412 247
Gain on sale of property, plant and equipment, net -- (32)
Deferred income taxes (839) (872)
(Increase) decrease in assets:
Trade accounts receivable, net (6,665) 10,081
Inventories (15,068) (4,104)
Refundable and accrued income taxes 1,503 (3,366)
Prepaid expenses and other (175) (1,601)
Other (1,706) (1,026)
Increase (decrease) in liabilities:
Trade accounts payable 11,517 4,703
Accrued advertising and promotion (2,149) (7,509)
Accrued salaries, benefits, and payroll taxes 2,352 (4,674)
Accrued warranty and customer returns (50) (550)
Accrued other (350) 908
-------- --------
Total adjustments (157) 3,679
-------- --------
Net cash from operating activities 5,394 6,599
-------- --------
Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment, net (9,710) (12,440)
(Increase) decrease in tooling deposits (2,443) 2,916
Proceeds from sale of plant and equipment, net -- 32
-------- --------
Net cash from investing activities (12,153) (9,492)
-------- --------
Cash flows from financing activities:
Proceeds from bank debt, net 7,700 19,500
Payments on note payable -- (224)
Payments on capital lease obligations (102) (246)
Proceeds from exercise of stock options 310 139
Repurchase of common stock (758) (17,703)
-------- --------
Net cash from financing activities 7,150 1,466
-------- --------
Net increase (decrease) in cash 391 (1,427)
-------- --------
Cash at beginning of period 704 1,427
-------- --------
Cash at end of period $ 1,095 $ --
======== ========
Supplemental disclosure of cash flow information:
Cash payments for:
Interest $ 1,993 $ 2,616
-------- --------
Income taxes, net of refunds $ 2,306 $ 4,413
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The accompanying notes are an integral part of these financial statements.
5
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 balance sheets as of September 30, 2001 and December 31, 2000, and
the related statements of operations and cash flows as of, and for the interim
periods ended, September 30, 2001 and 2000. 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 nine month periods ended
September 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 requires management to make
estimates and assumptions that affect reported amounts and related disclosures.
Actual results could differ from those estimates.
Earnings 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.
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 foreign currency forward contracts outstanding as of September 30, 2001. All
contracts have terms of four months or less.
6
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 September 30, 2001, and
December 31, 2000, consisted of the following:
September 30, December 31,
2001 2000
---- ----
Finished goods $51,189 $37,832
Work in process and purchased parts 9,349 7,638
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$60,538 $45,470
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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 September 30, 2001.
As of September 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 in the Consolidated Balance Sheets. As of September 30, 2001,
the net book value of this facility was $7,731.
NOTE 4: COMMITMENTS AND CONTINGENCIES
At September 30, 2001, the Company estimates having contractual
commitments for future advertising and promotional expense of approximately
$8,000, including commitments for television advertising through December 31,
2001. Other contractual commitments for items in the normal course of business
total approximately $3,000.
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
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except per share amounts)
NOTE 5: DEBT
At September 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 September 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 $20,823 was utilized through September 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 September 30, 2001, was
$35,000. At September 30, 2001, the Company had received approximately $18,700
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 $877 and $1,061 for the nine months ended September 30,
2001 and 2000, respectively, and have been classified as "Receivable
securitization and other expense (income), 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 $6,000 for 2001, of which
$758 was utilized through September 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 November 7, 2001, the Company has repurchased approximately 229
shares for an aggregate purchase price of $1,068 under the new program that is
scheduled to expire in December 2002. One of the Company's credit facilities
limits 2001 stock repurchases to $6,000, of which $758 was utilized through
September 30, 2001.
8
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except per share amounts)
NOTE 7: 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 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 Nine months ended
September 30, September 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income $ 4,085 $ 3,345 $ 5,551 $ 2,920
======== ======== ======== ========
BASIC:
Common shares outstanding, net of treasury
shares, beginning of period 13,614 15,033 13,729 16,973
Weighted average common shares issued
during period 52 7 130 15
Weighted average treasury shares repurchased
during period (17) (448) (73) (1,534)
-------- -------- -------- --------
Weighted average common shares outstanding,
net of treasury shares, end of period 13,649 14,592 13,786 15,454
======== ======== ======== ========
Net income per common share $ 0.30 $ 0.23 $ 0.40 $ 0.19
======== ======== ======== ========
DILUTED:
Common shares outstanding, net of treasury
shares, beginning of period 13,614 15,033 13,729 16,973
Weighted average common shares issued
during period 52 7 130 15
Weighted average common share equivalents 620 655 564 489
Weighted average treasury shares repurchased
during period (17) (448) (73) (1,534)
-------- -------- -------- --------
Weighted average common shares outstanding,
net of treasury shares, end of period 14,269 15,247 14,350 15,943
======== ======== ======== ========
Net income per common share $ 0.29 $ 0.22 $ 0.39 $ 0.18
======== ======== ======== ========
9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS)
RESULTS OF OPERATIONS
Net sales increased 17.3% for the third quarter and increased 5.7% for
the nine-month period ended September 30, 2001, compared with the same periods
in the prior year. The increase in net sales was primarily attributable to the
introduction during the third quarter of 2001 of the Company's new Platinum
Force line of products, which includes a bagless hand vac, a bagless upright and
an upright carpet shampooer. The Company also began shipping its first ever
consumer electronics product, the Telezapper(TM), in the third quarter of 2001.
Overall sales to the top 5 customers increased in the first nine months of 2001
(all of which are major retailers) as compared to the first nine months of 2000.
Sales to the top 5 customers accounted for approximately 72.2% of net sales in
the first nine months of 2001 as compared with approximately 67.3% in the first
nine 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 22.7% for the
third quarter 2000 to 24.6% in the third quarter 2001 and increased from 21.5%
in the first nine months of 2000 to 22.3% in the first nine months of 2001. The
gross margin percentage was positively affected by initial shipments of higher
margin products, including the Platinum Force line of products and the
Telezapper, partially offset by continued retail emphasis on lower price point
products.
Advertising and promotion expenses increased 29.0% for the third quarter
2001 and decreased 8.4% for the nine months ended September 30, 2001. The
increase in advertising and promotion expenses for the quarter was due primarily
to increases in media spending and costs associated with the launch of the
Platinum Force line of products and the Telezapper. The decrease in advertising
and promotion expenses during the first nine months of 2001 was due to planned
decreases in media spending. The Company intends to continue emphasizing
cooperative advertising and television as its primary methods of advertising and
promotion. In general, the Company's advertising expenditures are not
specifically proportional to anticipated sales. For example, the amount of
advertising and promotional expenditures may be concentrated during critical
retail shopping periods during the year, particularly the fourth quarter, and
during new product and promotional campaign introductions.
Other selling expenses increased by $603 for the third quarter 2001 and
$966 for the nine month period ended September 30, 2001 compared with the same
periods in 2000. The increase is primarily due to higher internal sales and
marketing personnel compensation, which are the largest components of other
selling expenses. Other selling expenses increased as a percentage of sales for
the third quarter and nine month period ended September 30, 2001, from 2.3% to
2.5%, compared with the same periods in 2000.
General and administrative expenses increased 9.6% for the third quarter
2001 and increased 12.5% for the nine-month period ended September 30, 2001,
compared with the same periods in 2000. General and administrative expenses
decreased as a percentage of net sales for the third quarter 2001 from 4.8% to
4.5% and increased for the nine month period ended September 30, 2001, from 4.6%
to 4.9%, compared with the same periods in 2000. The principal components are
compensation (including benefits), insurance, provision for doubtful accounts,
travel, professional services and information technology related expenditures
and amortization. The dollar increases in the third quarter and nine-month
period ended September 30, 2001, were primarily due to increases in employee
related benefit expenses, professional services and information technology
related expenditures and amortization.
10
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 by 27.2% for the
third quarter 2001 and 21.8% for the nine-month period ended September 30, 2001.
The principal components are engineering compensation, 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 dollar
increases in the third quarter and nine-month period ended September 30, 2001,
were primarily due to increases in engineering compensation, outside
professional engineering and design services, and other related product
development expenditures.
Interest expense decreased 31.6% for the third quarter 2001 and decreased
21.2% for the nine-month period ended September 30, 2001, compared with the same
periods in 2000. The decrease in interest expense is the result of lower
effective borrowing rates partially offset by higher levels of variable rate
borrowings to finance working capital, capital expenditures and share
repurchases
Receivable securitization and other expense (income), 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 income before income
taxes for the third quarter and nine months ended September 30, 2001, of $6,227
and $8,521, respectively, as compared to income before income taxes for the
third quarter and for the nine months ended September 30, 2000, of $3,780 and
$3,105, respectively.
The third quarter results for 2000 included a $930 research and
development tax credit related to prior years which increased earnings per share
by $.06. The effective tax rate was reduced to 11.5% and 6.0% for the third
quarter and nine months ended September 30, 2000, respectively, as a result of
the tax credit.
LIQUIDITY AND CAPITAL RESOURCES
The Company has used cash generated from operations and revolving credit
proceeds to fund its working capital needs, capital expenditures, and share
repurchases. Working capital was $49,736 at September 30, 2001, an increase of
24.7% over December 31, 2000. Current assets increased by $22,370 reflecting in
part a $6,665 increase of trade accounts receivable and an increase in inventory
of $15,068. Current liabilities increased by $12,519 reflecting, in part, a
$11,517 increase in trade accounts payable and $2,352 increase in accrued
salaries and benefits, partially offset by a $2,149 decrease in accrued
advertising and promotion.
In the first nine months of 2001, the Company utilized $12,153 of cash
for capital purchases, including approximately $3,400 tooling related to the new
Dirt Devil(R) Platinum Force line of products and approximately $4,700 for
computer equipment and software.
At September 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 September 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 $20,823 was utilized through September 30, 2001.
11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS) (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company also utilizes a revolving trade accounts receivable
securitization program to sell without recourse, through a wholly-owned
subsidiary, certain trade accounts receivable. Under the program, the maximum
amount allowed to be sold at any given time through September 30, 2001, was
$35,000. At September 30, 2001, the Company had received approximately $18,700
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 $877 and $1,061 for the nine months ended September 30,
2001 and 2000, respectively, and have been classified as "Receivable
securitization and other expense (income), 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 $6,000 for 2001, of which
$758 was utilized through September 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 November 7, 2001, the Company has repurchased approximately 229
shares for an aggregate purchase price of $1,068 under the new program that is
scheduled to expire in December 2002. One of the Company's credit facilities
limits 2001 stock repurchases to $6,000, of which $758 was utilized through
September 30, 2001.
The Company believes that its revolving credit facilities along with cash
generated by operations will be sufficient to provide for the Company's
anticipated working capital and capital expenditure requirements for the next
twelve months, as well as any additional stock repurchases under the February
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
Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
2001 2001 2001 2000 2000 2000 2000
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Net sales $112,726 $ 80,447 $104,522 $126,549 $ 96,129 $ 82,075 $103,470
Gross margin 27,684 16,204 22,634 31,690 21,778 15,451 23,455
Net income (loss) 4,085 (708) 2,174 3,018 3,345 (1,504) 1,080
Net income (loss) per $ 0.29 $ (0.05) $ 0.15 $ 0.21 $ 0.22 $ (0.10) $ 0.06
common share (a) (b)
(a) The sum of 2000 quarterly net income (loss) per share does not equal
annual net income (loss) per share due to rounding.
(b) Income (loss) per share is calculated based on the diluted method
explained in Note 7 to the Consolidated Financial Statements.
12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS) (CONTINUED)
QUARTERLY OPERATING RESULTS (CONTINUED)
The Company's business is seasonal. The Company believes that a
significant percentage of certain of its products are given as gifts and,
therefore, sell in larger volumes during the Christmas shopping season. 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.
The Company remains cautious about the fourth quarter 2001 because of the
continued retail emphasis on lower price point products and retailers' concern
about the holiday season due to current economic uncertainties.
OTHER
The Company believes that the domestic vacuum cleaner industry is a
mature industry with modest annual growth in many of its products but with a
decline in certain other products. Competition is dependent upon price, quality,
extension of product lines, and advertising and promotion expenditures.
Additionally, competition is influenced by innovation in the design of
replacement models and by marketing and approaches to distribution. The
Company's most significant competitors are Hoover, Eureka and Bissell in the
upright and carpet shampooer market, and 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 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.
13
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS) (CONTINUED)
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.
In June 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations". This Statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset, except for certain
obligations of lessees. SFAS 143 is effective for financial statements issued
for fiscal years beginning after June 15, 2002. The Company is in the process of
determining the effects of this Statement on its business.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This
Statement addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This Statement supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", and the accounting and reporting provisions of APB Opinion NO.
30, "Reporting the Results of Operations". SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The Company is in the process of
determining the effects of this Statement on its business.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this release 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;
retail's reaction to a potential slowdown in consumer spending; 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(TM), 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.
14
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K
------ --------------------------------
Forms 8-K - None
The following documents are furnished as an exhibit and
numbered pursuant to Item 601 of Regulation S-K:
None
15
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: November 9,2001 /s/ Richard G. Vasek
------------------ ------------------------------------------------
Richard G. Vasek
Chief Financial Officer, Vice President -
Finance and Secretary
(Principal Financial Officer)
16
INDEX TO EXHIBITS
PAGE NUMBER
None
17