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,
2002.
[ ] 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 12,816,452
-------------------------------- ---------------------------------
(Class) (Outstanding at November 13, 2002)
The Exhibit index appears on sequential page 27.
1
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
INDEX
Page
Number
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Part I FINANCIAL INFORMATION
Item 1 Financial Statements
------ --------------------
Consolidated Balance Sheets -
September 30, 2002 and December 31, 2001 3
Consolidated Statements of Operations -
Three and nine months ended September 30, 2002 and 2001 4
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6 - 12
Item 2 Management's Discussion and Analysis of Financial 13 - 18
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Condition and Results of Operations
-----------------------------------
Part II OTHER INFORMATION
Item 3 Quantitative and Qualitative Disclosures About Market Risk 19
------ ----------------------------------------------------------
Item 4 Controls and Procedures 19
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Item 6 Exhibits and Reports on Form 8-K 19
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Signatures 20
Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350 21
Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350 22
Certification of Principal Executive Officer Pursuant to 15 U.S.C. 78m (a) or 70o(d) 23 - 24
Certification of Principal Financial Officer Pursuant to 15 U.S.C. 78m (a) or 70o(d) 25 - 26
Exhibit Index 27
*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,
2002 2001
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash $ 2,278 $ 3,421
Trade accounts receivable, net 38,000 35,986
Inventories 63,114 50,807
Deferred income taxes 4,096 4,549
Prepaid expenses and other 3,069 1,636
--------- ---------
Total current assets 110,557 96,399
--------- ---------
Property, plant and equipment, at cost:
Land 1,541 1,541
Building 7,777 7,777
Molds, tooling, and equipment 52,403 52,031
Furniture, office and computer equipment and software 15,344 12,154
Assets under capital leases 3,171 3,171
Leasehold improvements and other 7,230 7,456
--------- ---------
87,466 84,130
Less accumulated depreciation and amortization (52,746) (46,556)
--------- ---------
34,720 37,574
--------- ---------
Computer software and tooling deposits 884 4,405
Other 2,412 2,066
--------- ---------
Total assets $ 148,573 $ 140,444
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 33,739 $ 27,433
Accrued liabilities:
Advertising and promotion 7,797 11,196
Salaries, benefits, and payroll taxes 4,849 7,258
Warranty and customer returns 9,200 9,950
Income taxes 881 1,370
Other 5,688 6,479
Current portions of capital lease obligations 158 147
--------- ---------
Total current liabilities 62,312 63,833
--------- ---------
Revolving credit facility 43,000 32,000
Capitalized lease obligations, less current portion 1,870 1,978
--------- ---------
Total long-term debt 44,870 33,978
Deferred income taxes 3,675 4,011
--------- ---------
Total liabilities 110,857 101,822
--------- ---------
Commitments and contingencies (Note 3) -- --
Shareholders' equity:
Common shares, at stated value 215 214
Additional paid-in capital 45,363 44,167
Retained earnings 72,379 70,489
--------- ---------
117,957 114,870
Less treasury shares, at cost (13,102,800 and 12,365,700 shares
at September 30, 2002 and December 31, 2001, respectively) (80,241) (76,248)
--------- ---------
Total shareholders' equity 37,716 38,622
--------- ---------
Total liabilities and shareholders' equity $ 148,573 $ 140,444
========= =========
The accompanying notes are an integral part of these financial statements.
3
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 Nine Months Ended
September 30, September 30,
------------------------- --------------------------
(Dollars in thousands, except per share amounts)
2002 2001 2002 2001
-------- -------- -------- --------
Net sales $ 91,705 $111,503 $272,259 $294,075
Cost of sales 70,619 85,042 216,481 231,173
-------- -------- -------- --------
Gross margin 21,086 26,461 55,778 62,902
Selling, general and administrative expenses 15,417 19,210 51,261 51,419
-------- -------- -------- --------
Income from operations 5,669 7,251 4,517 11,483
Interest expense, net 423 674 1,042 1,897
Receivable securitization and other expense, net 436 350 589 1,065
-------- -------- -------- --------
Income before income taxes 4,810 6,227 2,886 8,521
Income tax expense 1,676 2,142 996 2,970
-------- -------- -------- --------
Net income $ 3,134 $ 4,085 $ 1,890 $ 5,551
======== ======== ======== ========
BASIC
Weighted average number of common
shares outstanding (in thousands) 12,816 13,649 13,036 13,786
Earnings per share $ .24 $ .30 $ .14 $ .40
DILUTED
Weighted average number of common
shares and equivalents outstanding (in thousands) 13,688 14,269 13,941 14,350
Earnings per share $ .23 $ .29 $ .14 $ .39
The accompanying notes are an integral part of these financial statements
4
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months
Ended September 30,
--------------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income $ 1,890 $ 5,551
-------- --------
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 12,515 11,061
Compensatory effect of stock awards 825 412
Deferred income taxes 117 (839)
(Increase) decrease in assets:
Trade accounts receivable, net (2,014) (6,665)
Inventories (12,307) (15,068)
Prepaid expenses and other (1,433) (175)
Other (1,134) (1,706)
Increase (decrease) in liabilities:
Trade accounts payable 6,306 11,517
Accrued advertising and promotion (3,399) (2,149)
Accrued salaries, benefits, and payroll taxes (2,409) 2,352
Accrued warranty and customer returns (750) (50)
Accrued income taxes (489) 1,503
Accrued other (791) (350)
-------- --------
Total adjustments (4,963) (157)
-------- --------
Net cash from operating activities (3,073) 5,394
-------- --------
Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment, net (8,873) (9,710)
Decrease (increase) in tooling deposits and other 3,521 (2,443)
-------- --------
Net cash from investing activities (5,352) (12,153)
-------- --------
Cash flows from financing activities:
Proceeds on bank debt, net 11,000 7,700
Proceeds from exercise of stock options 372 310
Payments on capital lease obligations (97) (102)
Repurchase of common stock (3,993) (758)
-------- --------
Net cash from financing activities 7,282 7,150
-------- --------
Net (decrease) increase in cash (1,143) 391
-------- --------
Cash at beginning of period 3,421 704
-------- --------
Cash at end of period $ 2,278 $ 1,095
======== ========
Supplemental disclosure of cash flow information:
Cash payments for:
Interest $ 1,150 $ 1,993
======== ========
Income taxes, net of refunds $ 1,368 $ 2,306
======== ========
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 (including all normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the consolidated
balance sheets as of September 30, 2002 and December 31, 2001, and the related
statements of operations and cash flows as of, and for the interim periods
ended, September 30, 2002 and 2001. These condensed financial statements should
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, 2002, 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.
Significant estimates include the allowance for doubtful accounts, the reserve
for returns and allowances, reserve for inventory obsolescence and depreciation
and amortization, among others.
Certain prior year amounts have been reclassified to conform to the 2002
presentation.
Net income per common 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 and sales agreements with certain customers. The Company records
estimated reductions to net sales for customer programs and incentive offerings
including pricing arrangements, promotions and other volume based incentives. If
market conditions were to soften, the Company may take actions to increase
customer incentives, possibly resulting in a reduction of net sales and gross
margins at the time the incentive is offered. The Company's revenue recognition
policy is in accordance with Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements." The Company includes royalty income from
various license agreements in net sales. During the nine-month periods ended
September 30, 2002 and 2001, royalty income totaled $433 and $205, respectively.
In fiscal 2001, the Emerging Issues Task Force ("EITF") issued EITF No.
00-14, "Accounting for Certain Sales Incentives," and EITF No. 00-25, "Vendor
Income Statement Characterization of Consideration to a Purchaser of the
Vendor's Products or Services" (both of which were clarified by EITF 01-09
"Accounting for Consideration Given by a Vendor to a Customer"). These
pronouncements address the recognition, measurement and statement of operations
classification for certain sales incentives and are effective January 1, 2002.
The Company adopted these pronouncements in the first quarter of fiscal 2002 and
as a result certain items previously included in selling, general and
administrative expenses were reclassified as a reduction of net sales.
Additionally, prior period amounts were reclassified to conform to the new
requirements. The impact of these two issues resulted in a reduction of net
sales of $1,378 and $1,223 for the quarters ended September 30, 2002 and 2001,
respectively and $2,967 and $3,620 for the nine-month periods ended September
30, 2002 and 2001, respectively. These amounts, consisting principally of
promotional allowances to the Company's retail customers, were previously
recorded as selling, general and administrative expenses; therefore, there was
no impact to net income for either period.
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.
6
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: BASIS OF PRESENTATION (CONTINUED)
The Company has used 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 September
30, 2002 or December 31, 2001.
Costs incurred for producing and communicating advertising are expensed
during the period aired, including costs incurred under the Company's
cooperative advertising program.
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, 2002, and
December 31, 2001, consisted of the following:
September 30 December 31
------------ -----------
Finished goods $56,596 $43,277
Work in process and purchased parts 6,518 7,530
------- -------
$63,114 $50,807
======= =======
NOTE 3: COMMITMENTS AND CONTINGENCIES
At September 30, 2002, the Company estimates having contractual
commitments for future advertising and promotional expense of approximately
$6,700 including commitments for television advertising through December 31,
2002. Other contractual commitments for items in the normal course of business
total approximately $3,000.
The Company is self-insured with respect to workers' compensation
benefits in Ohio and carries excess workers' compensation insurance covering
aggregate claims exceeding $350 per occurrence.
7
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3: COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 Complaint asserted that the Company's Dirt Devil Easy Steamer
infringed three utility patents and two design patents held by Hoover, and also
that the Easy Steamer design infringed the trade dress of Hoover's carpet
extractor products. The Court had dismissed charges of infringement against
Royal regarding one of the three utility patents, and found that the Dirt Devil
Easy Steamer infringed one claim of a second utility patent. The Company filed a
lawsuit in federal court, in the Northern District of Ohio (case #1:01cv 2775),
against The Hoover Company (Hoover) on December 10, 2001, under the patent,
trademark, and unfair competition laws of the United States. The Complaint
asserted that Hoover infringed certain patents relating to bagless technology
held by the Company. On October 17, 2002, the Company and Hoover reached a
settlement of all patent-related litigation described above. Hoover has
granted rights to the Company with regard to its existing carpet extractor
patents. The Company has granted rights to Hoover with regard to its existing
bagless upright vacuum cleaner patents. The settlement includes cash payments
to the Company.
The Company filed a lawsuit in federal court, in the Northern District of
Ohio (case #1:02cv 0338), against Bissell Homecare, Inc. (Bissell) on February
22, 2002, under the patent, trademark, and unfair competition laws of the United
States. The Complaint asserts that Bissell infringes certain patents relating to
bagless technology held by the Company. The Company seeks damages, injunction on
future production, and legal fees.
Bissell Homecare, Inc. (Bissell) filed a lawsuit in federal court, in the
Eastern District of Michigan (case #02cv71079), against the Company on March 20,
2002, under the patent, trademark, and unfair competition laws of the United
States. On April 25, 2002, the Company filed a motion to transfer the case from
the Eastern District of Michigan to the Northern District of Ohio. On June 19,
2002, the Court transferred the case (now #1:02cv 1358) to the Northern District
of Ohio. The Complaint asserts that the Company's Dirt Devil Easy Steamer and
Platinum Force Extractor products infringe certain design and utility patents
held by Bissell. Bissell seeks damages, injunction on future production, and
legal fees. The Company is vigorously defending the suit and believes it is
without merit. If Bissell were to prevail on all its claims, it could have a
material adverse effect on the consolidated financial position, results of
operations, or cash flows of the Company.
8
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3: COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company filed a lawsuit in federal court, in the Northern District
of Ohio (case #1:02cv 1127), against White Consolidated, Ltd. (Eureka) on June
14, 2002, under the patent, trademark and unfair competition laws of the United
Sates. The Complaint asserts that Eureka infringes certain patents relating to
bagless technology held by the Company. The Company seeks damages, injunction on
future production, and legal fees.
The Company is involved in various other claims and litigation arising in
the normal course of business. The Company has product liability and general
liability insurance policies in amounts management believes to be reasonable.
There can be no assurance, however, that such insurance will be adequate to
cover all potential product or other liability claims against the Company. 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.
NOTE 4: DEBT
At September 30, 2002, the Company has a collateralized revolving credit
facility with availability of up to $70,000 and a maturity date of April 1,
2005. 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, 2002. The revolving credit facility is
collateralized by the assets of the Company. As long as the Company remains in
compliance with all covenants, the revolving credit facility permits share
repurchases and dividends based on a defined formula up to $18,369 as of
September 30, 2002.
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 is $30,000, seasonally adjusted to
$35,000 from September to December. At September 30, 2002, the Company had
received approximately $18,100 from the sale of trade accounts receivable that
have 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 $584 and $877 for the nine months ended
September 30, 2002 and 2001, 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. The Company is required to maintain certain financial
ratios associated with the receivables included within the program. The current
program with the existing provider will be terminated in January 2003 and be
replaced by another provider. The terms and conditions of the new agreement are
substantially the same as the current program.
NOTE 5: 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 13, 2002, the Company has repurchased approximately 1,322
shares for an aggregate purchase price of approximately $6,900 under the program
that is scheduled to expire in December 2002.
9
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6: 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,
-------------------------- --------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income $ 3,134 $ 4,085 $ 1,890 $ 5,551
======== ======== ======== ========
BASIC:
Common shares outstanding, net of treasury
shares, beginning of period 13,078 13,614 13,464 13,729
Weighted average common shares issued
during period 3 52 53 130
Weighted average treasury shares repurchased
during period (265) (17) (481) (73)
-------- -------- -------- --------
Weighted average common shares outstanding,
net of treasury shares, end of period 12,816 13,649 13,036 13,786
======== ======== ======== ========
Net income per common share $ 0.24 $ 0.30 $ 0.14 $ 0.40
======== ======== ======== ========
DILUTED:
Common shares outstanding, net of treasury
shares, beginning of period 13,078 13,614 13,464 13,729
Weighted average common shares issued
during period 3 52 53 130
Weighted average common share equivalents 872 620 905 564
Weighted average treasury shares repurchased
during period (265) (17) (481) (73)
-------- -------- -------- --------
Weighted average common shares outstanding,
net of treasury shares, end of period 13,688 14,269 13,941 14,350
======== ======== ======== ========
Net income per common share $ 0.23 $ 0.29 $ 0.14 $ 0.39
======== ======== ======== ========
10
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 7: RELATED PARTY NOTE RECEIVABLE:
On April 2, 2001, the Company and its Chief Executive Officer (Officer)
entered into a Promissory Note Agreement in the principal amount of
approximately $543. The non-interest bearing note was used by the Officer to
fund the exercise of stock options to purchase 167 common shares of the Company.
The promissory note is due and payable in full on April 2, 2008 or, if earlier,
within twelve months after the Officer's voluntary termination of employment
with the Company. The Officer simultaneously entered into a Stock Pledge
Agreement with the Company pledging the 167 common shares as security for the
promissory note.
NOTE 8: BUSINESS SEGMENT INFORMATION
The Company has two reportable segments: Consumer Products - Floorcare
and Consumer Products - Other. The operations of the Consumer Products -
Floorcare segment includes the design, assembly or sourcing, marketing and
distribution of a full line of plastic and metal vacuum cleaners. The primary
brand names associated with this segment include Dirt Devil and Royal. These
products are sold primarily to major mass merchant retailers and independent
dealers in North America. The operations of the Consumer Products - Other
segment represents business conducted by Privacy Technologies, Inc. and Product
Launch Partners, Inc., both of which are wholly owned subsidiaries of the
Company. Currently, the primary product line within this segment is the
TeleZapper, a telephone attachment that helps reduce unwanted computer-dialed
telemarketing calls. These products are sold primarily to major mass merchant
retailers and national electronic chains in North America. In August of 2002,
the Company licensed the TeleZapper intellectual property to a phone
manufacturer for the inclusion in telephones and answering machines.
The Company's reportable segments are distinguished by the nature of
products sold. The Company evaluates performance and allocates resources to
reportable segments primarily based on net sales and operating income. The
accounting policies of the reportable segments are the same as those described
in Note 1, the accounting policies footnote. The Company records its federal and
state tax assets and liabilities at corporate. There are no intersegment sales.
11
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 8: BUSINESS SEGMENT INFORMATION (CONTINUED)
Financial information for the Company's Reportable Segments consisted
of the following:
Three months ended September 30, Nine months ended September 30,
2002 2001 2002 2001
-------- -------- -------- --------
Net Sales
Consumer Products - Floorcare $ 82,937 $105,857 $248,953 $288,429
Consumer Products - Other 8,768 5,646 23,306 5,646
-------- -------- -------- --------
Consolidated Total $ 91,705 $111,503 $272,259 $294,075
======== ======== ======== ========
Income from Operations
Consumer Products - Floorcare $ 901 $ 5,846 $ 157 $ 10,078
Consumer Products - Other 4,768 1,405 4,360 1,405
-------- -------- -------- --------
Consolidated Total $ 5,669 $ 7,251 $ 4,517 $ 11,483
======== ======== ======== ========
Capital Expenditures
Consumer Products - Floorcare $ 1,586 $ 3,193 $ 4,654 $ 7,613
Consumer Products - Other 28 63 78 125
-------- -------- -------- --------
Total for Reportable Segments 1,614 3,256 4,732 7,738
Corporate 143 952 620 4,415
-------- -------- -------- --------
Consolidated Total $ 1,757 $ 4,208 $ 5,352 $ 12,153
======== ======== ======== ========
Depreciation and Amortization
Consumer Products - Floorcare $ 2,523 $ 2,870 $ 9,002 $ 8,821
Consumer Products - Other 132 100 390 167
-------- -------- -------- --------
Total for Reportable Segments 2,655 2,970 9,392 8,988
Corporate 1,031 775 3,123 2,073
-------- -------- -------- --------
Consolidated Total $ 3,686 $ 3,745 $ 12,515 $ 11,061
======== ======== ======== ========
Total Assets
Consumer Products - Floorcare $118,849 $140,552 $118,849 $140,552
Consumer Products - Other 8,211 4,046 8,211 4,046
-------- -------- -------- --------
Total for Reportable Segments 127,060 144,598 127,060 144,598
Corporate 21,513 19,122 21,513 19,122
-------- -------- -------- --------
Consolidated Total $148,573 $163,720 $148,573 $163,720
======== ======== ======== ========
12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of its financial position and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities. Actual results could
differ from those estimates. Financial Reporting Release No. 60, which was
recently issued by the Securities and Exchange Commission ("SEC"), requires all
registrants, including the Company, to include a discussion of "Critical"
accounting policies or methods used in the preparation of financial statements.
Management believes that the critical accounting policies and areas that require
the most significant judgments and estimates to be used in the preparation of
the consolidated financial statements are revenue recognition, including
customer based programs and incentives, allowance for doubtful accounts,
useful lives of tooling and other long lived assets and accrued warranty and
customer returns.
Revenue Recognition - 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 and sales agreements with certain customers. The
Company records estimated reductions to net sales for customer programs and
incentive offerings including pricing arrangements, promotions and other
volume based incentives. If market conditions were to soften, the Company may
take actions to increase customer incentives, possibly resulting in a
reduction of net sales and gross margins at the time the incentive is offered.
The Company's revenue recognition policy is in accordance with Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements". The Company
includes royalty income from various license agreements in net sales.
Allowance for Doubtful Accounts - The Company maintains an allowance
for trade accounts receivable for which collection on specific customer accounts
is doubtful. In determining collectibility, management reviews available
customer financial statement information, credit rating reports as well as other
external documents and public filings. When it is deemed probable that a
specific customer account is uncollectible, that balance is included in the
reserve calculation. Actual results could differ from these estimates under
different assumptions.
Useful Lives of Tooling - The Company capitalizes the cost of tooling
used in the production of its products by third party suppliers and global
contract manufacturers. The tooling is depreciated on a straight-line basis over
2-3 years, based on the nature of the product and the estimated product life
cycle. The useful lives are reviewed on a quarterly basis by management and
useful lives may be shortened if needed. In determining whether or not
shortening of useful lives is required, management reviews product
sell-through data at retail, forecasted demand and the timeframe of new
product introductions.
Accrued Warranty and Customer Returns - The Company's return policy is
to replace, repair or issue credit for products under warranty. Returns received
during the current period are expensed as received and a reserve is maintained
for future returns from current shipments. Management calculates the reserve
utilizing historical return rates for each product family. These rates are
reviewed and adjusted periodically. Management utilizes judgment for
estimating return rates of new products and adjusts those estimates as actual
results become available.
13
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
RESULTS OF OPERATIONS
Net sales decreased 17.8% for the third quarter and decreased 7.4% for
the nine-month period ended September 30, 2002, compared with the same periods
in the prior year. The decrease in the third quarter net sales was primarily
due to lower shipments of the Platinum Force line of products which were
launched during the third quarter of 2001, and lower average wholesale prices
on floorcare products, partially offset by an increase in shipments of the
Telezapper, which was also introduced during the third quarter of 2001. The
decrease in net sales for the nine months ended September 30, 2002 was
primarily due to lower shipments of carpet extractors and lower average
wholesale prices on floorcare products, partially offset by an increase in
shipments of the TeleZapper. Overall sales to the top 5 customers (all of
which are major retailers) decreased in the first nine months of 2002, both in
terms of dollars and as a percentage of total net sales, accounting for
approximately 68.0% as compared with approximately 70.3% in the first nine
months of 2001. The Company believes that its dependence on sales to its largest
customers will continue. Recently, several major retailers have experienced
significant financial difficulties and some, including Kmart and Ames, have
filed for protection from creditors under applicable bankruptcy laws. As of
September 30, 2002, the net exposure related to Kmart and Ames, as well as other
customer balances for which management believes that collection is doubtful, was
included in the calculation of allowance for doubtful accounts. The Company
sells its products to certain customers that are in bankruptcy proceedings,
including Kmart.
Gross margin, as a percent of net sales, decreased from 23.7% for the
third quarter 2001 to 23.0% in the third quarter 2002, and decreased from 21.4%
for the nine months ended September 30, 2001 to 20.5% for the nine months ended
September 30, 2002. The gross margin percentage was negatively affected in 2002
by lower average wholesale selling prices on the Company's floorcare products
due to continued heightened competition. This negative impact on gross margins
was partially offset by favorable TeleZapper margins, lower floorcare product
returns, lower costs on certain products and an adjustment to net sales of
$1,400, for certain sales programs.
Selling, general and administrative expenses decreased 19.7% for the
third quarter of 2002 and were consistent for the nine-month period ended
September 30, 2002, compared with the same periods in 2001. The decrease in
selling, general and administrative expenses for the third quarter of 2002 was
primarily due to decreases in advertising and promotional expenditures.
Interest expense decreased 37.2% for the third quarter 2002, and
decreased 45.1% for the nine-month period ended September 30, 2002 compared to
the same periods in 2001. The decrease in interest expense is the result of
lower effective borrowing rates and lower levels of variable rate borrowings to
finance working capital, capital expenditures and share repurchases.
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 income before income
taxes for the third quarter and nine-month period ended September 30, 2002 of
$4,810 and $2,886, respectively, compared to income before taxes for the third
quarter and nine month period ended September 30, 2001 of $6,227 and $8,521,
respectively.
14
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company used net cash generated from operations and bank borrowings
to fund its capital expenditures and share repurchases. Working capital was
$48,245 at September 30, 2002, an increase of 48.1% over December 31, 2001.
Current assets increased by $14,158 reflecting in part an increase in trade
accounts receivable of $2,014, an increase in inventory of $12,307, and a $1,433
increase in prepaid expenses and other, partially offset by a decrease in cash
of $1,143. Current liabilities decreased by $1,521, reflecting in part a $3,399
decrease in accrued advertising and promotion, a $2,409 decrease in accrued
salaries, benefits, and payroll taxes, a $750 decrease in accrued warranty and
customer returns, a $791 decrease in accrued other, partially offset by an
increase of $6,306 in accounts payable. Inventories have increased, as well as
accounts payable related to inventory purchases, in order to meet seasonal
demand.
In the first nine months of 2002, the Company utilized $5,352 of cash for
capital expenditures, including approximately $1,100 of tooling related to a new
bagged upright, approximately $650 of tooling for new metal uprights and
approximately $1,600 of tooling for various other floorcare products.
At September 30, 2002, the Company has a collateralized revolving credit
facility with availability of up to $70,000 and a maturity date of April 1,
2005. 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, 2002. The revolving credit facility is
collateralized by the assets of the Company. As long as the Company remains in
compliance with all covenants, the revolving credit facility permits share
repurchases and dividends based on a defined formula up to $18,369 as of
September 30, 2002.
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 is $30,000, seasonally adjusted to
$35,000 from September to December. At September 30, 2002, the Company had
received approximately $18,100 from the sale of trade accounts receivable that
have 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 $584 and $877 for the nine months ended
September 30, 2002 and 2001, 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. The Company is required to maintain certain financial
ratios associated with the receivables included within the program. The current
program with the existing provider will be terminated in January 2003 and be
replaced by another provider. The terms and conditions of the new agreement are
substantially the same as the current 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 13, 2002, the Company has repurchased approximately 1,322
shares for an aggregate purchase price of approximately $6,900 under the program
that is scheduled to expire in December 2002.
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 current
repurchase program.
15
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
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. Certain prior
period amounts have been reclassified to conform to current period presentation
(See Note 1 to Notes to Consolidated Financial Statements).
Three Months Ended
-----------------------------------------------------------------------------------------
Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
2002 2002 2002 2001 2001 2001 2001
-------- -------- -------- -------- -------- -------- --------
Net sales $ 91,705 $ 89,390 $ 91,164 $127,236 $111,503 $ 79,512 $103,060
Gross margin 21,086 16,344 18,348 32,663 26,461 15,269 21,172
Net income (loss) 3,134 (1,329) 85 3,773 4,085 (708) 2,174
Net income (loss)
per share - diluted (a) $ 0.23 $ (0.10) $ 0.01 $ 0.27 $ 0.29 $ (0.05) $ 0.15
(a) The sum of 2001 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. 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.
OTHER
The Company's Consumer Products - Floorcare business segment's most
significant competitors are Hoover, Eureka and Bissell in the upright vacuum and
carpet shampooer markets and, Black & Decker and Euro Pro in the hand-held
market. Many 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 experiences extensive competition, including price pressure and
new advertising and new product offerings from its competitors, in all
product lines within the Consumer Products - Floorcare segment. These trends
are expected to continue.
The Company's Consumer Products - Other business segment competes with a
variety of other consumer products and services. In addition to various state
"do not call" lists, the Federal Trade Commission is proposing a national "do
not call" list that may have an impact on the sales of the TeleZapper. In August
2002, the Company licensed the TeleZapper intellectual property to a phone
manufacturer for the inclusion in telephones and answering machines.
16
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
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 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 Complaint asserted that the Company's Dirt Devil Easy Steamer
infringed three utility patents and two design patents held by Hoover, and also
that the Easy Steamer design infringed the trade dress of Hoover's carpet
extractor products. The Court had dismissed charges of infringement against
Royal regarding one of the three utility patents, and found that the Dirt Devil
Easy Steamer infringed one claim of a second utility patent. The Company filed a
lawsuit in federal court, in the Northern District of Ohio (case #1:01cv 2775),
against The Hoover Company (Hoover) on December 10, 2001, under the patent,
trademark, and unfair competition laws of the United States. The Complaint
asserted that Hoover infringed certain patents relating to bagless technology
held by the Company. On October 17, 2002, the Company and Hoover reached a
settlement of all patent-related litigation described above. Hoover has granted
rights to the Company with regard to its existing carpet extractor patents. The
Company has granted rights to Hoover with regard to its existing bagless upright
vacuum cleaner patents. The settlement includes cash payments to the Company.
The Company filed a lawsuit in federal court, in the Northern District of
Ohio (case #1:02cv 0338), against Bissell Homecare, Inc. (Bissell) on February
22, 2002, under the patent, trademark, and unfair competition laws of the United
States. The Complaint asserts that Bissell infringes certain patents relating to
bagless technology held by the Company. The Company seeks damages, injunction on
future production, and legal fees.
Bissell Homecare, Inc. (Bissell) filed a lawsuit in federal court, in the
Eastern District of Michigan (case #02cv71079), against the Company on March 20,
2002, under the patent, trademark, and unfair competition laws of the United
States. On April 25, 2002, the Company filed a motion to transfer the case from
the Eastern District of Michigan to the Northern District of Ohio. On June 19,
2002, the Court transferred the case (now #1:02cv 1358) to the Northern District
of Ohio. The Complaint asserts that the Company's Dirt Devil Easy Steamer and
Platinum Force Extractor products infringe certain design and utility patents
held by Bissell. Bissell seeks damages, injunction on future production, and
legal fees. The Company is vigorously defending the suit and believes it is
without merit. If Bissell were to prevail on all its claims, it could have a
material adverse effect on the consolidated financial position, results of
operations, or cash flows of the Company.
17
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
LITIGATION (CONTINUED)
The Company filed a lawsuit in federal court, in the Northern District
of Ohio (case #1:02cv 1127), against White Consolidated, Ltd. (Eureka) on June
14, 2002, under the patent, trademark and unfair competition laws of the United
Sates. The Complaint asserts that Eureka infringes certain patents relating to
bagless technology held by the Company. The Company seeks damages, injunction on
future production, and legal fees.
The Company is involved in various other claims and litigation arising
in the normal course of business. The Company has product liability and general
liability insurance policies in amounts management believes to be reasonable.
There can be no assurance, however, that such insurance will be adequate to
cover all potential product or other liability claims against the Company. 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
In fiscal 2001, the Emerging Issues Task Force ("EITF") issued EITF No.
00-14, "Accounting for Certain Sales Incentives," and EITF No. 00-25, "Vendor
Income Statement Characterization of Consideration to a Purchaser of the
Vendor's Products or Services" (both of which were clarified by EITF 01-09
"Accounting for Consideration Given by a Vendor to a Customer"). These
pronouncements address the recognition, measurement and statement of operations
classification for certain sales incentives and are effective January 1, 2002.
The Company adopted these pronouncements in the first quarter of fiscal 2002 and
as a result certain items previously included in selling, general and
administrative expenses were reclassified as a reduction of net sales.
Additionally, prior period amounts were reclassified to conform to the new
requirements. The impact of these two issues resulted in a reduction of net
sales of $1,378 and $1,223 for the quarters ended September 30, 2002 and 2001,
respectively and $2,967 and $3,620 for the nine-month periods ended September
30, 2002 and 2001, respectively. These amounts, consisting principally of
promotional allowances to the Company's retail customers, were previously
recorded as selling, general and administrative expenses; therefore, there was
no impact to net income for either period.
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: the financial strength of the retail industry
particularly in the major mass retail channel; the impact of Kmart's recent
bankruptcy filing on Royal's future sales and earnings; the competitive pricing
and aggressive product development environment within the floorcare 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 continued acceptance by consumers of the Company's new
products, the dependence upon the Company's ability to continue to successfully
develop and introduce innovative products; the uncertainty of the Company's
global supply chain and suppliers to continuously supply sourced finished goods
and component parts; including interuptions from potential port work stopages,
and general business and economic conditions.
18
PART II - OTHER INFORMATION
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in information about market
risk than that provided in the 2001 Annual Report on Form
10-K.
ITEM 4 - Controls and Procedures
The Company maintains a system of controls and procedures
designed to provide reasonable assurance as to the
reliability of the financial statements and other
disclosures included in this report, as well as to safeguard
assets from unauthorized use or disposition. The Company
evaluated the effectiveness of the design and operation of
its disclosure controls and procedures under supervision and
with the participation of management, including the Company's
Chief Executive Officer and Chief Financial Officer, within
90 days prior to the filing date of this report. Based upon
that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely
alerting them to material information required to be included
in the Company's periodic Securities and Exchange Commission
filings. No significant changes were made to the Company's
internal controls or other factors that could significantly
affect these controls subsequent to the date of evaluation.
ITEM 6 - Exhibits and Reports on Form 8-K
The Exhibits filed herewith are set forth on the Index to
Exhibits filed as part of this report.
Forms 8-K - None
The following documents are furnished as an exhibit and
numbered pursuant to Item 601 of Regulation S-K:
None
19
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 13, 2002 /s/ Richard G. Vasek
----------------- --------------------------------------------
Richard G. Vasek
Chief Financial Officer, Vice President - Finance
and Secretary
(Principal Financial Officer)
20
Certification of Principal Executive Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
I, Michael J. Merriman, the Chief Executive Officer and President of Royal
Appliance Mfg. Co. (the "Company"), certify that to the best of my knowledge,
based upon a review of the Quarterly Report on Form 10-Q for the period ended
September 30, 2002 of the Company (the "Report"):
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Michael J. Merriman
-----------------------
Michael J. Merriman,
Royal Appliance Mfg. Co.
Chief Executive Officer and President
November 13, 2002
21
Certification of Principal Financial Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
I, Richard G. Vasek, Chief Financial Officer of Royal Appliance Mfg. Co. (the
"Company") certify that to the best of my knowledge, based upon a review of the
Quarterly Report on Form 10-Q for the period ended September 30, 2002 of the
Company (the "Report"):
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Richard G. Vasek
--------------------
Richard G. Vasek
Royal Appliance Mfg. Co.
Chief Financial Officer
November 13, 2002
22
Certification of Principal Executive Officer
Pursuant to 15 U.S.C. 78m(a) or 78o(d)
(Section 302 of the Sarbanes-Oxley Act of 2002)
I, Michael J. Merriman, the Chief Executive Officer and President of Royal
Appliance Mfg. Co. (the "Company"), certify that:
(1) I have reviewed this quarterly report on Form 10-Q of the
Company;
(2) Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the Company
as of, and for, the periods presented in this quarterly
report;
(4) The Company's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the Company and we have:
(a) designed such disclosure controls and procedures
to ensure that material information relating to the
Company, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the Company's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our
conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of
the Evaluation Date;
(5) The Company's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
Company's auditors and the audit committee of Company's board
of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the Company's ability to record, process,
summarize and report financial data and have
identified for the Company's auditors any material
weaknesses in internal controls; and
23
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the Company's internal controls; and
(6) The Company's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Michael J. Merriman
-----------------------
Michael J. Merriman,
Royal Appliance Mfg. Co.
Chief Executive Officer and President
November 13, 2002
24
Certification of Principal Financial Officer
Pursuant to 15 U.S.C. 78m(a) or 78o(d)
(Section 302 of the Sarbanes-Oxley Act of 2002)
I, Richard G. Vasek, the Chief Financial Officer of Royal Appliance Mfg. Co.
(the "Company"), certify that:
(1) I have reviewed this quarterly report on Form 10-Q of the
Company;
(2) Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the Company
as of, and for, the periods presented in this quarterly
report;
(4) The Company's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the Company and we have:
(a) designed such disclosure controls and procedures
to ensure that material information relating to the
Company, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the Company's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our
conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of
the Evaluation Date;
(5) The Company's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
Company's auditors and the audit committee of Company's board
of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the Company's ability to record, process,
summarize and report financial data and have
identified for the Company's auditors any material
weaknesses in internal controls; and
25
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the Company's internal controls; and
(6) The Company's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Richard G. Vasek
--------------------
Richard G. Vasek,
Royal Appliance Mfg. Co.
Chief Financial Officer
November 13, 2002
26
INDEX TO EXHIBITS
PAGE NUMBER
None
27