1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the quarterly period ended MARCH 31, 2001.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from _________ to
___________.
Commission file number 0-19431
-------
ROYAL APPLIANCE MFG. CO.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-1350353
--------------------------------------------------------------------------------
(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
--------------------------------------------------------------------------------
(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 13,834,452
-------------------------------- ---------------------------
(Class) (Outstanding at May 4, 2001)
The Exhibit index appears on sequential page 16.
1
2
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
INDEX
Page
Number
------
Part I FINANCIAL INFORMATION
Item 1 Financial Statements
------ --------------------
Consolidated Balance Sheets -
March 31, 2001 and December 31, 2000 3
Consolidated Statements of Operations -
three months ended March 31, 2001 and 2000 4
Consolidated Statements of Cash Flows -
three months ended March 31, 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 - 13
-----------------------------------
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 14
------ --------------------------------
Signatures 15
Exhibit Index 16
*Numbered in accordance with Item 601 of Regulation S-K
2
3
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
-----------------------------
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
2001 2000
----------- -------------
ASSETS (Unaudited)
Current assets:
Cash $ 1,104 $ 704
Trade accounts receivable, net 42,581 42,097
Inventories 36,403 45,470
Deferred income taxes 4,125 4,735
Prepaid expenses and other 1,718 1,573
--------- ---------
Total current assets 85,931 94,579
--------- ---------
Property, plant and equipment, at cost:
Land 1,541 1,541
Building 7,777 7,777
Molds, tooling, and equipment 48,755 48,650
Furniture, office and computer equipment and software 13,416 12,721
Assets under capital leases 3,171 3,171
Leasehold improvements and other 5,249 5,067
--------- ---------
79,909 78,927
Less accumulated depreciation and amortization (40,611) (37,119)
--------- ---------
39,298 41,808
--------- ---------
Tooling deposits 1,811 807
Other 3,267 1,358
--------- ---------
Total assets $ 130,307 $ 138,552
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 26,154 $ 22,209
Accrued liabilities:
Advertising and promotion 8,685 13,103
Salaries, benefits, and payroll taxes 4,321 3,355
Warranty and customer returns 9,900 9,800
Income taxes 1,572 -
Other 6,727 6,091
Current portions of capital lease obligations and notes payable 138 136
--------- ---------
Total current liabilities 57,497 54,694
--------- ---------
Revolving credit facility 33,550 46,400
Capitalized lease obligations, less current portion 2,103 2,137
--------- ---------
Total long-term debt 35,653 48,537
Deferred income taxes 3,793 4,268
--------- ---------
Total liabilities 96,943 107,499
--------- ---------
Commitments and contingencies (Note 4) - -
Shareholders' equity:
Common shares, at stated value 212 212
Additional paid-in capital 43,175 43,038
Retained earnings 63,339 61,165
--------- ---------
106,726 104,415
Less treasury shares, at cost (11,780,500 shares
at March 31, 2001 and December 31, 2000) (73,362) (73,362)
--------- ---------
Total shareholders' equity 33,364 31,053
--------- ---------
Total liabilities and shareholders' equity $ 130,307 $ 138,552
========= =========
The accompanying notes are an integral part of these financial statements.
3
4
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
------ - --------------------
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
March 31,
----------------------
2001 2000
-------- --------
Net sales $104,522 $103,470
Cost of sales 81,888 80,015
-------- --------
Gross margin 22,634 23,455
Advertising and promotion 8,639 11,990
Other selling 2,480 1,978
General and administrative 4,976 4,886
Engineering and product development 1,914 1,750
-------- --------
Income from operations 4,625 2,851
Interest expense, net 739 674
Receivable securitization and other expense, net 515 470
-------- --------
Income before income taxes 3,371 1,707
Income tax expense 1,197 627
-------- --------
Net income $ 2,174 $ 1,080
======== ========
BASIC
Weighted average number of common
shares outstanding (in thousands) 13,729 16,471
Earnings per share $ .16 $ .07
DILUTED
Weighted average number of common
shares and equivalents outstanding (in thousands) 14,231 16,717
Earnings per share $ .15 $ .06
The accompanying notes are an integral part of these financial statements
4
5
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
------ --------------------
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months
Ended March 31,
-----------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net income $ 2,174 $ 1,080
-------- --------
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 3,613 3,331
Compensatory effect of stock awards 137 107
Deferred income taxes (177) (87)
(Increase) decrease in assets:
Trade accounts receivable, net (484) 7,446
Inventories 9,067 9,987
Refundable and accrued income taxes 1,884 (1,082)
Prepaid expenses and other (145) (439)
Other (313) (640)
Increase (decrease) in liabilities:
Trade accounts payable 3,945 (5,383)
Accrued advertising and promotion (4,418) (8,046)
Accrued salaries, benefits, and payroll taxes 966 (5,348)
Accrued warranty and customer returns 100 (100)
Accrued other 636 1,050
-------- --------
Total adjustments 14,811 796
-------- --------
Net cash from operating activities 16,985 1,876
-------- --------
Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment, net (1,013) (3,986)
(Increase) decrease in tooling deposits and other (2,690) 197
-------- --------
Net cash from investing activities (3,703) (3,789)
-------- --------
Cash flows from financing activities:
(Payments) proceeds on bank debt, net (12,850) 7,745
Payments on note payable - (73)
Payments on capital lease obligations (32) (75)
Repurchase of common stock - (6,274)
-------- --------
Net cash from financing activities (12,882) 1,323
-------- --------
Net increase (decrease) in cash 400 (590)
-------- --------
Cash at beginning of period 704 1,427
-------- --------
Cash at end of period $ 1,104 $ 837
======== ========
Supplemental disclosure of cash flow information:
Cash payments for:
Interest $ 875 $ 783
-------- --------
Income taxes, net of refunds $ (509) $ 1,795
-------- --------
The accompanying notes are an integral part of these financial statements.
5
6
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: BASIS OF PRESENTATION
The financial information for Royal Appliance Mfg. Co. and Subsidiaries
(the Company) included herein is unaudited; however, such information reflects
all adjustments (consisting solely of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the
consolidated statements of financial position as of March 31, 2001 and December
31, 2000, and the related statements of operations and cash flows as of, and for
the interim periods ended, March 31, 2001 and 2000. These condensed financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's latest shareholders'
annual report (Form 10-K).
The results of operations for the three month period ended March 31,
2001, are not necessarily indicative of the results to be expected for the full
year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual results
could differ from those estimates.
Net income per share is computed based on the weighted average number of
common shares outstanding for basic earnings per share and on the weighted
average number of common shares and common share equivalents outstanding for
diluted earnings per share.
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.
Outstanding as of March 31, 2001 and December 31, 2000 were $0 and $2,670,
respectively, in contracts to purchase foreign currency forward. There is no
significant unrealized gain or loss on these contracts. All contracts have terms
of four months or less.
6
7
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 March 31, 2001, and December
31, 2000, consisted of the following:
March 31, December 31,
2001 2000
---- ----
Finished goods $26,234 $37,832
Work in process and purchased parts 10,169 7,638
------- -------
$36,403 $45,470
======= =======
NOTE 3: ASSETS TO BE DISPOSED OF:
Based upon a plan established in January 2001, the Company will
discontinue 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 March 31, 2001.
As of March 31, 2001, the building and related land and improvements are
classified as "Assets to be Disposed Of" in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of." As such, there is no need to continue to
depreciate these assets. For financial statement purposes, the asset value,
including related accumulated depreciation, is included in Property, Plant and
Equipment, at cost on the face of the Consolidated Balance Sheets.
NOTE 4: COMMITMENTS AND CONTINGENCIES
At March 31, 2001, the Company estimates having contractual commitments
for future advertising and promotional expense of approximately $9,000 including
commitments for television advertising through December 31, 2001. Other
contractual commitments for items in the normal course of business total
approximately $1,800.
The Hoover Company (Hoover) filed a lawsuit in federal court, in the
Northern District of Ohio (case #1:00cv 0347), against the Company on February
4, 2000, under the patent, trademark, and unfair competition laws of the United
States. The claim asserts the Company's Dirt Devil(R) Easy Steamer infringes
certain patents held by Hoover. Hoover seeks damages, injunction of future
production, and legal fees. The Company is vigorously defending the suit and
believes that it is without merit. If Hoover were to prevail on all of its
claims, it could have a material adverse effect on the consolidated financial
position, results of operations, or cash flows of the Company.
The Company is involved in various other claims and litigation arising in
the normal course of business. In the opinion of management, the ultimate
resolution of these actions will not materially affect the consolidated
financial position, results of operations, or cash flows of the Company.
7
8
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5: DEBT
At March 31, 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 March 31, 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
$20,065 was utilized through March 31, 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 March 31, 2001, was $30,000.
At March 31, 2001, the Company had received approximately $24,800 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
$322 and $378 for the three months ended March 31, 2001 and 2000, respectively,
and have been classified as "Receivable securitization and other expense, net"
in the accompanying Consolidated Statements of Operations. The Company, as agent
for the purchaser of the receivables, retains collection and administrative
responsibilities for the purchased receivables. Additionally, the revolving
trade accounts receivable securitization program limits stock repurchases to
$5,000 for 2001.
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 May 4, 2001, the Company has repurchased approximately 61 shares
for an aggregate purchase price of $286 under the new program that is scheduled
to expire in December 2002. One of the Company's credit facilities limits 2001
stock repurchases to $5,000.
8
9
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
March 31,
----------------------
2001 2000
-------- --------
Net income $ 2,174 $ 1,080
======== ========
BASIC:
Common shares outstanding, net of treasury
shares, beginning of period 13,729 16,973
Weighted average common shares issued
during period - 1
Weighted average treasury shares repurchased
during period - (503)
-------- --------
Weighted average common shares outstanding,
net of treasury shares, end of period 13,729 16,471
======== ========
Net income per common share $ 0.16 $ 0.07
======== ========
DILUTED:
Common shares outstanding, net of treasury
shares, beginning of period 13,729 16,973
Weighted average common shares issued
during period - 1
Weighted average common share equivalents 502 246
Weighted average treasury shares repurchased
during period - (503)
-------- --------
Weighted average common shares outstanding,
net of treasury shares, end of period 14,231 16,717
======== ========
Net income per common share $ 0.15 $ 0.06
======== ========
9
10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------------------
RESULTS OF OPERATIONS
---------------------
Net sales increased 1.0% for the first quarter ended March 31, 2001,
compared with the same period in the prior year. The increase in the first
quarter net sales was due primarily to higher shipments of certain upright
vacuum cleaners. Overall sales to the top 5 customers (all of which are major
retailers) increased in the first three months of 2001, and increased as a
percentage of total net sales, accounting for approximately 74.5% as compared
with approximately 70.1% in the first three months of 2000. The Company believes
that its dependence on sales to its largest customers will continue. Recently,
some major retailers have experienced significant financial difficulties and
some have filed for protection from creditors under applicable bankruptcy laws.
The Company sells its products to certain customers that are in bankruptcy
proceedings.
Gross margin, as a percent of net sales, decreased from 22.7% for the
first quarter 2000 to 21.7% in the first quarter 2001. The gross margin
percentage was negatively affected in 2001 by lower average wholesale selling
prices on the Company's line of uprights due to continued heightened competition
despite higher unit sales. Gross margins were also negatively impacted due to
higher variable incentive compensation which was partially offset by lower
product returns.
Advertising and promotion expenses decreased 27.9% for the first quarter
2001 compared with the first quarter 2000, and decreased as a percentage of net
sales from 11.6% for the quarter ended March 31, 2000 to 8.3% for the quarter
ended March 31, 2001. The decrease in advertising and promotion expenses was due
primarily to decreases in media spending and cooperative advertising. However,
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 for the first quarter 2001 increased by $502 over
the first quarter 2000 and increased as a percentage of sales for the first
quarter 2001 to 2.4% from 1.9% for the first quarter of 2000. The increase is
primarily due to internal sales and marketing personnel compensation, which are
the largest components of other selling expenses.
General and administrative expenses increased 1.8% for the first quarter
2001, compared with the first quarter in 2000, but was comparable as a
percentage of net sales. The principal components are compensation (including
benefits), insurance, and professional services. The dollar increase in the
first quarter 2001 was primarily due to increases in employee related benefit
expenses.
Engineering and product development expenses increased 9.4% for the first
quarter 2001 compared with the first quarter in 2000. The principal components
are engineering salaries, outside professional engineering and design services
and other related product development expenditures. The amount of outside
professional engineering and design services and other related product
development expenditures are dependent upon the number and complexity of new
product introductions in any given period. The increase in the first quarter
2001 was primarily due to costs associated with new product introductions in
2001 and the timing of those introductions.
Interest expense increased 9.6% for the first quarter 2001, compared with
the first quarter in 2000. The increase in interest expense is the result of
higher 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.
10
11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
-------------
RESULTS OF OPERATIONS (CONTINUED)
---------------------------------
Due to the factors discussed above, the Company had income before income
taxes for the first quarter 2001 of $3,371 compared to income before income
taxes for the first quarter 2000 of $1,707.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company has used cash generated from operations during the quarter
ended March 31, 2001 to fund its capital expenditures and make payments on its
revolving line of credit facility. Working capital was $28,434 at March 31,
2001, a decrease of 28.7% over December 31, 2000. Current assets decreased by
$8,648 reflecting in part a decrease in inventory of $9,067, and a decrease in
deferred and refundable income taxes of $610 partially offset by an increase in
trade accounts receivable of $484, and increased prepaid expenses and other of
$145. Current liabilities increased by $2,803 reflecting in part a $3,945
increase in accounts payable, $1,572 increase in accrued taxes, a $966 increase
in accrued salaries, benefits, and payroll taxes and a $636 increase in accrued
other, partially offset by a decrease of $4,418 in accrued advertising and
promotion.
In the first three months of 2001, the Company utilized $3,703 of cash
for capital purchases, including approximately $1,740 of tooling related to the
new Platinum Force Extractor, Upright and Hand Vac.
At March 31, 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 March 31, 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
$20,065 was utilized through March 31, 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 March 31, 2001, was $30,000.
At March 31, 2001, the Company had received approximately $24,800 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
$322 and $378 for the three months ended March 31, 2001 and 2000, respectively,
and have been classified as "Receivable securitization and other expense, net"
in the accompanying Consolidated Statements of Operations. The Company, as agent
for the purchaser of the receivables, retains collection and administrative
responsibilities for the purchased receivables. Additionally, the revolving
trade accounts receivable securitization program limits stock repurchases to
$5,000 for 2001.
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 May 4, 2001, the Company has repurchased approximately 61 shares
for an aggregate purchase price of $286 under the new program that is scheduled
to expire in December 2002. One of the Company's credit facilities limits 2001
stock repurchases to $5,000.
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.
11
12
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.
Three Months Ended
-------------------------------------------------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31,
2001 2000 2000 2000 2000
---- ---- ---- ---- ----
Net sales $104,522 $126,549 $ 96,129 $ 82,075 $103,470
Gross margin 22,634 31,690 21,778 15,451 23,455
Net income (loss) 2,174 3,018 3,345 (1,504) 1,080
Net income (loss)
per share - diluted (a) $ 0.15 $ 0.21 $ 0.22 $ (0.10) $ 0.06
(a) The sum of 2000 quarterly net income (loss) per common
share does not equal annual net income per common share
due to the change in the weighted average number of
common shares outstanding due to share repurchases.
The Company believes that a significant percentage of certain of its
products are given as gifts and therefore, sell in larger volumes during the
Christmas and other shopping seasons. Because of the Company's continued
dependency on its major customers, the timing of purchases by these major
customers and the timing of new product introductions cause quarterly
fluctuations in the Company's net sales. As a consequence, results in prior
quarters are not necessarily indicative of future results of operations.
OTHER
-----
The Company's most significant competitors are Hoover, Eureka and Bissell
in the upright vacuum and carpet shampooer markets and, in the hand-held market,
Black & Decker. Most of these competitors and several others are subsidiaries or
divisions of companies that are more diversified and have greater financial
resources than the Company. The Company believes that the domestic vacuum
cleaner industry is a mature industry with modest annual growth in many of its
products but with a decline in certain other products. Competition is dependent
upon price, quality, extension of product lines, and advertising and promotion
expenditures. Additionally, competition is influenced by innovation in the
design of replacement models and by marketing and approaches to distribution.
The Company has experienced heightened competition, including price pressure and
increased advertising by its competitors, in the upright and carpet shampooer
market segments as a result of the Company's recent new product successes.
12
13
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. Due to the recent economic conditions, the cost of plastic resin and
transportation has increased in 2001.
LITIGATION
----------
The Hoover Company (Hoover) filed a lawsuit in federal court, in the
Northern District of Ohio (case #1:00cv 0347), against the Company on February
4, 2000, under the patent, trademark, and unfair competition laws of the United
States. The claim asserts the Company's Dirt Devil(R) Easy Steamer infringes
certain patents held by Hoover. Hoover seeks damages, injunction of future
production, and legal fees. The Company is vigorously defending the suit and
believes that it is without merit. If Hoover were to prevail on all of its
claims, it could have a material adverse effect on the consolidated financial
position, results of operations, or cash flows of the Company.
The Company is involved in various other claims and litigation arising in
the normal course of business. In the opinion of management, the ultimate
resolution of these actions will not materially affect the consolidated
financial position, results of operations, or cash flows of the Company.
ACCOUNTING STANDARDS
--------------------
The Company implemented Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
in the first quarter of 2001. Implementation of SFAS No. 133 did not have a
material impact on its consolidated financial position, results of operations,
or cash flows.
FORWARD-LOOKING STATEMENTS
--------------------------
Forward-looking statements in this Form 10-Q are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. Potential risks and
uncertainties include, but are not limited to: general business and economic
conditions; the financial strength of the retail industry particularly the major
mass retail channel; the competitive pricing and aggressive product development
environment, particularly in the bagless upright vacuum category within the
floor care industry; the impact of private-label programs by mass retailers; the
cost and effectiveness of planned advertising, marketing and promotional
campaigns; the success at retail and the acceptance by consumers of the
Company's new products, including the Company's bagless uprights, carpet
shampooers and its first consumer electronics product, the Telezapper; the
dependence upon the Company's ability to continue to successfully develop and
introduce innovative products; and the uncertainty of the Company's global
suppliers to continuously supply sourced finished goods and component parts.
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PART II - OTHER INFORMATION
ITEM 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
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Royal Appliance Mfg. Co.
----------------------------------------------
(Registrant)
/s/ Michael J. Merriman
----------------------------------------------
Michael J. Merriman
Chief Executive Officer, President and Director
(Principal Executive Officer)
Date: May 4, 2001 /s/ Richard G. Vasek
----------- ----------------------------------------------
Richard G. Vasek
Chief Financial Officer, Vice President -
Finance and Secretary (Principal Financial
Officer)
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INDEX TO EXHIBITS
PAGE NUMBER
-----------
10 (N) Promissory Note dated April 2, 2001 between Michael J.
Merriman and the Registrant
10 (O) Stock Pledge Agreement dated April 2, 2001 between Michael J.
Merriman and the Registrant
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