ITEM 1. BUSINESS
General
Royal Appliance Mfg. Co. ("Royal" or the "Company"), an Ohio corporation with its corporate offices in the Cleveland, Ohio metropolitan area, develops, assembles and markets a full line of cleaning products for home and some for commercial use, primarily in North America, under the Dirt Devil(R) and Royal(R) brand names. In 1984, the Company introduced the first in a line of Dirt Devil(R) floorcare products, which the Company believes has become one of the largest selling lines of vacuum cleaners in the United States. The Company has used the Dirt Devil(R) brand name recognition to gain acceptance for other Dirt Devil(R) floorcare products. The Company continues to market certain metal vacuum cleaners for home and commercial use under the Royal(R) brand name.
The Company's business strategy is primarily focused on leveraging the well-known Dirt Devil(R) brand to new and innovative products both inside and outside the floor care industry, primarily in North America. The Company's goal is to expand the number, visibility and volume of its products sold by retailers, as well as to increase the number of major retailers carrying its products. The Company also seeks to increase the sale of its products through independent dealers by offering dealer-exclusive product lines and cooperative promotional programs.
The Company's marketing strategy is essential to its success. The Company uses television, print, cooperative advertising and its Dirt Devil website to build and maintain brand awareness and consumer demand, as well as to gain shelf space for its product lines from major retailers. In order to provide the retailers with distinct product alternatives, the Company offers different Dirt Devil(R) products in a variety of styles and colors and with various features. Major retailers currently carrying some portion of the Dirt Devil(R)product line include Best Buy, Canadian Tire, Circuit City, Kmart, Sears, Service Merchandise, Target, and WalMart. The Company also sells its Dirt Devil(R) products through independent dealers, who primarily sell the metal line of Royal(R) vacuum cleaners.
Products
The Company sells a full line of plastic and metal vacuum cleaners. The Company's Dirt Devil(R) vacuum cleaners are intended for home use. The Company's metal vacuum cleaners are intended for home and commercial use.
DIRT DEVIL(R) AND PLASTIC RELATED PRODUCT LINES. The Company's primary retail product lines are sold under the Dirt Devil(R) name. The first Dirt Devil(R) product, the Hand Vac, a corded, hand-held vacuum cleaner, was introduced in 1984. The Dirt Devil(R) line has since been expanded by the introduction of upright and canister vacuum cleaners, electric brooms and mops, and was expanded in 1999 by the introduction of the Dirt Devil(R) Easy Steamer, a carpet extractor, and the Dirt Devil(R) Vision with Sensor, a bagless upright vacuum cleaner with a dirt sensor.
During 1999, 1998, and 1997 plastic products accounted for approximately 91%, 88%, and 90%, respectively, of the Company's net sales.
METAL PRODUCT LINES. The Company has produced durable metal vacuum cleaners since the early 1900's. Currently, the Company markets a full line of metal upright and canister vacuum cleaners for home and commercial use. The Company sells its metal vacuum cleaners exclusively through its network of independent dealers. During 1999, 1998, and 1997, metal products accounted for approximately 3%, 4%, and 4%, respectively, of the Company's net sales.
OTHER PRODUCTS. The Company sells accessories, attachments, refurbished cleaners and replacement parts for each of its product lines. These products are sold through retailers and dealers, and are also available directly from the Company. During 1999, 1998, and 1997, these products accounted for approximately 6%, 8%, and 6%, respectively, of the Company's net sales.
NEW PRODUCTS. The Company introduces new products and enhances its existing products on a regular basis for both the retail and dealer markets. During the second half of 2000, the Company will introduce the Dirt
Devil(R)Vision Lite(TM), a lightweight bagless upright and the Dirt Devil(R)Spot Scrubber(TM), a corded hand-held carpet shampooer. In order to support its product development efforts, the Company engages in research and development activities, particularly with respect to new product engineering. The Company's engineering and product development expenditures were approximately $6.3 million, $4.6 million and $4.7 million in 1999, 1998 and 1997, respectively.
In addition to internally developing products, the Company may purchase product tooling, license product designs and patents, and outsource certain product assembly for products to be marketed under the Dirt Devil(R) brand name. The Company may also license its trademarks and patents.
Marketing and Customers
The Company markets its Dirt Devil(R) products primarily through major retailers, including mass market retailers (e.g. WalMart, Target, Kmart and Ames), electronic chains (e.g. Best Buy, Circuit City, and Service Merchandise), warehouse clubs (e.g. Sam's Club), regional chains and department stores. During 1999, WalMart (including Sam's Club), Kmart and Target accounted for approximately 36.9%, 13.6% and 12.1%, respectively, of the Company's net sales, compared to approximately 31.6%, 13.4% and 14.1%, respectively, of the Company's net sales in 1998. These were the only customers who accounted for approximately 10% or more of the Company's net sales during such periods. During 1999 and 1998, the Company's net sales in the aggregate to its five largest customers were 68.7% and 64.2%, respectively, of its total net sales. The loss of any of these customers or loss of shelf space with these customers could have a significant impact on the Company's operations. The Company anticipates that the significant percentage of the Company's net sales attributable to a limited number of major retail customers will continue. The Company believes that its relations with its customers are good. The Company sells most of its products to retailers that are serviced directly by the Company's internal sales staff.
Since Dirt Devil(R) products are targeted to sell to the mass market, the Company believes that brand name recognition is critical to the success of these products. The Company provides advertising and promotional support for its Dirt Devil(R) products through television and cooperative advertising with retailers and believes that these promotional activities, as well as those of its major customers, affect brand name awareness and sales. The Company's cooperative advertising program is established based upon planning with its mass market retail customers. Some of the Company's advertising and promotional activities are tied to holidays and also to specific promotional activities of retailers, and historically have been higher during the Christmas shopping season. The Company's advertising and promotional expenditures are not proportional to anticipated sales. In addition, the Company has generated a small portion of its sales from consumer direct orders, primarily for accessories and new product launches, through the Company's toll-free number, website and from direct response television infomercials, in which consumers may order directly from the Company.
The Company devotes considerable attention to the design and appearance of its products and packaging in order to enhance their appeal to consumers and to stand out among other brands on retailers' shelves. For example, Dirt Devil(R)products sold by mass merchants are often bright red in color. In order to increase the presence of its Dirt Devil(R) products in major retail outlets, the Company provides retailers with distinct product alternatives by offering its Dirt Devil(R) product lines in a variety of styles and colors and with various features.
The Company also strives to meet the logistic and product merchandising needs of its retailers. The Company endeavors to have sufficient quantities of products in stock in order to process and fill orders in a timely manner. Since orders are typically shipped within 10 days of the receipt of a purchase order, the Company does not have a significant order backlog. The Company permits cancellation of orders up to 72 hours prior to shipment.
The Company's line of metal vacuum cleaners is sold exclusively through a network of independent vacuum cleaner dealers. As part of its effort to support its independent dealer network, the Company has attempted to meet independent dealers' needs for distinctive product offerings not available to mass merchants. The Company's metal product lines are targeted at consumers and commercial customers who are interested in purchasing more durable and higher quality vacuum cleaners. The Company focuses its promotional activities with its independent dealers on cooperative advertising.
Many of the Company's independent dealers also provide warranty service for Royal(R) and Dirt Devil(R) products. This allows the consumer to have prompt access to local service outlets and is an important component of the Company's efforts to be responsive to consumers. The Company's products are generally sold with a one to six-year limited warranty.
The Company has generally accepted over-the-counter product returns from its retail customers for any reason, reflecting the retailers' customer return policies.
Each of the Company's products has a toll-free number printed on it that consumers may use to contact a Company customer service representative. Through its customer service computer system, the Company can provide a prompt response to consumer inquiries concerning the availability of its products and service stations in the consumer's vicinity.
Competition
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. 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 new product success.
Trademarks and Patents
The Company holds numerous trademarks registered in the United States and foreign countries for various products. The Company has registered trademarks in the United States and a number of foreign countries for the Dirt Devil(R), Royal(R) and other names and logos, which are used in connection with the sale of its vacuum cleaners, other products and accessory parts. The Company considers the Dirt Devil(R) trademark to be of considerable value and critical to its business. No challenges to its rights to this trademark have arisen and the Company has no reason to believe that any such challenges will arise in the future.
The Company holds or licenses the use of numerous domestic and international patents, including design patents and processes. The Company may also license its trademarks and patents. The Company believes that its product lines are generally not dependent upon any single patent or group of patents.
Seasonality
The Company's business is seasonal. The Company believes that a significant percentage of certain of its products are given as gifts and therefore, sell in larger volumes during the Christmas shopping season. 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.
Production
The Company currently assembles most of its products in its facilities located in the Cleveland, Ohio metropolitan area and Reynosa, Mexico. Unlike many of its competitors, the Company does not manufacture component parts for its products. Component parts for the Company's products are manufactured by suppliers, frequently using molds and tooling owned by the Company and built to its specifications. Since the Company's production operations are currently limited to assembly, it believes that its fixed costs are lower than many of its competitors. The Company also believes that this lack of vertical integration permits it increased flexibility in the introduction and modification of products. The Company has outsourced some or all manufacturing of certain products. In the second half of 2000, the Company plans on outsourcing production of certain additional products in Asia. The Company believes that by outsourcing these additional products, it may realize increased
manufacturing flexibility, lower product cost, and lower tooling expenditures. This additional outsourcing will result in the discontinuing of the Reynosa, Mexico operation in the second quarter of 2000.
The Company's engineering department is primarily responsible for the design and testing of its products. The Company has computer-aided design systems to assist its engineers in developing new products and modifying existing products. The Company also retains outside design firms to assist its engineers in designing new products. In addition to internally developing products, the Company may purchase tooling, license intellectual property, or otherwise sell products produced by others to the Company's specifications which may be marketed under the Dirt Devil(R) brand name.
A majority of the raw materials purchased by the Company are component parts, such as motors, bags, cords, and plastic parts, which are available from multiple suppliers. The amount of time required by suppliers to fill orders released by the Company varies from two to four months in the case of motors and cords, from five to ten weeks for sourced products and one to four days for plastic parts. The Company does not believe that it is dependent on any single source for any significant portion of its raw material or component purchases. The Company believes that it has good relationships with its suppliers and outsource manufacturers and has not experienced any significant raw material or component shortages.
Employees
As of December 31, 1999, the Company employed approximately 990 full-time employees, an increase of 310 employees from the prior year-end. In addition, the Company generally utilizes temporary personnel during the period when the Company is responding to its peak selling season. During 1999, the peak temporary personnel level reached approximately 1,000. The Company's employees are not represented by any labor union, except for the approximate 74 employees in the Mexican assembly facility. The Company considers its relations with its employees to be good.
The Company also has in effect a severance compensation plan that provides for a severance payment to full-time employees, based on years of employment, if within thirty-six months after a change-in-control of the Company their employment is terminated for any reason other than death, permanent disability, voluntary retirement or for cause. Executives who receive payments pursuant to change-in-control and other employment arrangements will not receive duplicative severance payments under the severance compensation plan.
Governmental Regulation
The Company's facilities are subject to numerous federal, state and local laws and regulations designed to protect the environment from waste, emissions, and from hazardous substances. The Company is also subject to the Federal Occupational Safety and Health Act and other laws and regulations affecting the safety and health of employees in the production areas of its facilities. The Company is not a party to any investigation or litigation by the Environmental Protection Agency or any state environment agency. The Company believes that it is in compliance, in all material respects, with applicable environmental and occupational safety regulations.
Business Segment Information
For description, see Note 13 of Notes to Consolidated Financial Statements.
ITEM 2.
ITEM 2. PROPERTIES
On December 31, 1999, the Company and its subsidiaries owned or leased the properties listed on the following table.
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(1) This leased property is reflected as owned because it contains a bargain purchase option of $1. For further description, see Note 4 of Notes to Consolidated Financial Statements.
(2) Based upon a plan established in 2000, the Company will discontinue operations at this location on May 31, 2000. The property will either be returned to the landlord in exchange for early termination of the lease or will be subleased by the Company.
In addition, the Company utilizes public warehouses where appropriate. The Company believes that these arrangements are more cost effective than leasing its own warehouses.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to all executive officers of the Company.
The following is a brief account of the business experience during the past five years of each such executive officer:
Michael J. Merriman was appointed Chief Executive Officer in July 1995, President and Chief Operating Officer in January 1995, and Director in October 1993.
James A. Holcomb has been Vice President -- Marketing and Strategic Planning since August 1994.
Robert N. McKee has been Vice President -- Engineering since December 1997. Prior to that he served as Director -- Consumer Products Engineering for the Deere & Co.
T. Keith Moone has been Vice President -- Sales since December 1995. Prior to that he served as the Company's National Sales Manager from May 1994 -- December 1995.
Richard G. Vasek was appointed Chief Financial Officer and Vice President -- Finance in September 1998, and Secretary in January 1996. From February 1992 until his appointment as Chief Financial Officer and Vice President -- Finance he served as the Company's Corporate Controller.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common shares are quoted on the New York Stock Exchange (NYSE) under the symbol RAM. The following table sets forth, for the periods indicated, the high and low sales price for the Company's Common Shares as reported by the New York Stock Exchange.
The Company has not declared or paid any cash dividends and currently intends not to pay any cash dividends in 2000. The Board of Directors intends to retain earnings, if any, to support the operations, growth of the business and to fund the stock repurchase program. The Company's new credit agreement, which became effective in March, 2000, prohibits the payment of cash dividends. The Company's new credit agreement permits additional stock repurchases up to $40 million.
On March 10, 2000, there were approximately 1,100 of record of the Company's Common Shares, as reported by National City Corporation, the Company's Registrar and Transfer Agent, which maintains its corporate offices at National City Center, Cleveland, Ohio 44101-0756.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the Company. The selected Consolidated Statements of Operations and Consolidated Balance Sheet data for each of the five years during the period ended December 31, 1999, are derived from the audited Consolidated Financial Statements of the Company. Prior period amounts have been reclassified to conform to the 1999 presentation. The data presented below should be read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere herein.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following table sets forth, for the years indicated, the percentages of net sales of certain items in the Consolidated Statements of Operations and the percentage change in such items as compared to the indicated prior year.
1999 VS. 1998
Net sales for 1999 were $407,984, an increase of 44.3% from 1998. The overall increase in net sales was due primarily to higher shipments of the Company's line of upright vacuum cleaners, including the Dirt Devil(R) Vision(TM) a bagless vacuum introduced in August 1998, and the new Dirt Devil(R) Easy Steamer(TM), a carpet extractor. Overall sales to the top 5 customers for 1999 (all of which are major retailers) accounted for approximately 68.7% of net sales as compared with approximately 64.2% in 1998. 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 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 26.1% for 1998 to 25.4% in 1999. The gross margin percentage was negatively affected in 1999 primarily by higher sales of lower margin products, and higher provisions for slow moving and obsolete inventory and accelerated depreciation on tooling primarily associated with the cordless Mop Vac, which was discontinued during 1999. The decline in gross margins was partially offset by lower product returns as a percent of sales.
Advertising and promotion expenses for 1999 were $46,546, an increase of 6.9% from 1998. The increase in advertising and promotion expenses was due primarily to increases in media and cooperative advertising expenditures, including new television commercials supporting the Dirt Devil(R) Easy Steamer(TM) and the Dirt Devil(R) Vision(TM) with Sensor. 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 1999 were $9,087, an increase of 14.3% from 1998. The increase is primarily due to internal sales and marketing personnel compensation, which are the largest components of other selling expenses. Other selling expenses decreased as a percentage of sales from 2.8% in 1998 to 2.2% in 1999.
1999 VS. 1998 (continued) General and administrative expenses for 1999 were $15,960, an increase of 30.1% from 1998. General and administrative expenses decreased as a percentage of sales from 4.3% in 1998 to 3.9% in 1999. The principal components are compensation (including benefits), insurance, provision for doubtful accounts and professional services. The dollar increases were primarily due to increases in employee headcount related compensation expense, professional services, and provision for doubtful accounts.
Engineering and product development expenses for 1999 were $6,256, an increase of 37.0% from 1998. The principal components are engineering salaries, outside professional engineering and design services and other related product development expenditures. The amount of outside professional engineering and design services and other related product development expenditures are dependent upon the number and complexity of new product introductions in any given year. The increase in 1999 was primarily due to costs associated with the new product introductions in 1999 and new products to be introduced in 2000.
In 1999, the Company recorded a charge for tooling obsolescence of $2,621 primarily related to the write-off of tooling for the Dirt Devil(R) Mop Vac(R)and the Dirt Devil(R) Ultra MVP(TM). For further explanation see Note 2 of the Company's consolidated financial statements.
Interest expense for 1999 was $1,401, a decrease of 7.9% from 1998. The decrease in interest expense resulted, primarily, from the payoff of a variable rate mortgage in the third quarter 1998 and a lower effective borrowing rate partially offset by higher levels of variable rate borrowings to finance working capital, capital expenditures and share repurchases.
Receivable securitization and other expense (income), net principally reflects the 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. The 1998 amount also includes the gain from the sale of a facility of approximately $1,300.
Due to the factors discussed above, the Company had income before income taxes for 1999 of $20,292, as compared to income before income taxes for 1998 of $4,132. The components of the Company's effective income tax expense rate of 37.5% are described in Note 6 of the Company's Consolidated Financial Statements.
1998 VS. 1997
Net sales for 1998 were $282,720, a decrease of 13.1% from 1997. The overall decrease in net sales was due to lower sales of the Dirt Devil(R) Mop Vac(R) and the Dirt Devil(R) Broom Vac(R). The decrease in net sales was partially offset by increases in sales of the Company's line of upright vacuum cleaners including the new Dirt Devil(R) Vision. Despite lower shipments to retailers in 1998, the Company believes that retailers' sales to consumers of the Company's products increased over 1997. Overall sales to the top 5 customers for 1998 (all of which are major retailers) accounted for approximately 64.2% of net sales as compared with approximately 62.3% in 1997.
Gross margin, as a percent of net sales, decreased from 29.5% for 1997 to 26.1% in 1998. The gross margin percentage was negatively affected in 1998 primarily by lower sales of higher margin products and higher manufacturing variances as a percent of sales.
Advertising and promotion expenses for 1998 were $43,562, a decrease of 8.5% from 1997. The decrease in advertising and promotion expenses was due primarily to not incurring in 1998 expenses related to the 1997 launch of the Fred Astaire Super Bowl advertising campaign and the direct response television campaign launch of the Dirt Devil(R) Mop Vac(R).
Other selling expenses for 1998 were $7,947, a decrease of 5.9% from 1997. The decrease is primarily due to lower compensation expenses and lower commissions to manufacturer's representatives. The principal components of other selling expenses are internal sales and marketing personnel costs.
General and administrative expenses for 1998 were $12,270, a decrease of 2.2% from 1997. The decrease is primarily due to lower compensation related expenses partially offset by increases in professional services.
1999 VS. 1998 (continued) General and administrative expenses increased as a percentage of net sales from 3.9% to 4.3%. The principal components are compensation (including benefits), insurance, travel, and professional services.
Engineering and product development expenses for 1998 were $4,567, a decrease of 2.7% from 1997. 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 year. The decrease in 1998 was primarily due to fewer new product introductions in 1998.
Interest expense for 1998 was $1,521, an increase of 7.7% from 1997. The increase in interest expense resulted, primarily, from higher levels of variable rate borrowings to finance working capital, capital expenditures and share repurchases, partially offset by a lower effective borrowing rate and the receipt of proceeds from the sale of one of the Company's assembly facilities.
Receivable securitization and other expense (income), net principally reflects the cost of the Company's trade accounts receivable securitization program and the effect of foreign currency transaction gains or losses related to the Company's North American assets. The 1998 amount also includes the gain from the sale of a facility of $1,300.
Due to the factors discussed above, the Company had income before income taxes for 1998 of $4,132, as compared to income before income taxes for 1997 of $20,184.
LIQUIDITY AND CAPITAL RESOURCES
The Company has used cash generated from operations and revolving credit proceeds to fund its working capital needs, capital expenditures and share repurchases. Working capital was $38,950 at December 31, 1999, an increase of 28.8% over December 31, 1998 level. Current assets increased by $29,825 reflecting in part a $10,990 increase of trade accounts receivable, a $19,373 increase of inventories, and a $926 increase in deferred income taxes, which were partially offset by a decrease in prepaid expenses and other of $2,891. Current liabilities increased by $21,115 reflecting in part a $3,633 increase of trade accounts payable, a $5,706 increase of accrued salaries, benefits, and payroll taxes, a $7,164 increase of accrued advertising and promotion, a $1,950 increase of accrued warranty and customer returns, a $1,436 increase of accrued income taxes, and a $4,734 increase of current portions of capital lease obligations and notes payable, which were partially offset by a decrease in accrued other of $3,508.
In 1999, the Company utilized $18,881 of cash for capital expenditures, including approximately $10,900 for tooling related to the Dirt Devil(R) Easy Steamer(TM), the Dirt Devil(R) Vision(TM) with Sensor, the new Dirt Devil(R)Vision Lite(TM), the Dirt Devil(R) Vision(TM), the Dirt Devil(R) Swivel Glide(TM), the Dirt Devil(R) Power Lite(TM) and the Dirt Devil(R) Stick Vac(TM).
At December 31, 1999, the Company had a collateralized revolving credit facility with availability of up to $45,000 and a maturity date of April 1, 2002. Under the agreement, pricing options of the bank's base lending rate and LIBOR rate are based on a formula, as defined. In addition, the Company pays a commitment fee based on a formula, as defined, on the unused portion of the facility. The revolving credit facility contains covenants which require, among other things, the achievement of minimum net worth levels and the maintenance of certain financial ratios. The Company was in compliance with all applicable covenants as of December 31, 1999. The revolving credit facility is collateralized by the Company's inventories and certain trade accounts receivable. The Company's effective interest rate was 8.19% and 8.45% for 1999 and 1998, respectively.
On March 7, 2000 the Company entered into a new $80,000 three year collateralized revolving credit facility. Under the agreement, pricing options of the bank's base lending rate and LIBOR rate are based on a formula, as defined. In addition, the Company pays a commitment fee based on a formula, as defined, on the unused portion of the facility. The revolving credit facility contains covenants which require, among other things, the achievement of minimum net worth levels and the maintenance of certain financial ratios. The revolving credit
1999 VS. 1998 (continued) facility permits additional share repurchases up to $40,000 as long as the Company remains in compliance with all covenants but prohibits the payment of cash dividends. The new facility replaced the Company's $45,000 revolver.
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 December 31, 1999, was $40,000. The maximum amount of receivables that can be sold is seasonally adjusted. At December 31, 1999 and 1998, the Company had received approximately $23,100 and $22,000, respectively, from the sale of trade accounts receivable. The proceeds from the sales were used to reduce borrowings under the Company's revolving credit facility. Costs of the program, which primarily consist of the purchaser's financing cost of issuing commercial paper backed by the receivables, totaled $1,281, $916 and $892 in 1999, 1998 and 1997, respectively, and have been classified as Receivable securitization and other expense (income), net in the accompanying Consolidated Statements of Operations. The Company's effective borrowing rate under this program was 6.51%, 6.79% and 6.64% for the years 1999, 1998 and 1997, respectively. The Company, as agent for the purchaser of the receivables, retains collection and administrative responsibilities for the purchased receivables.
In October 1998, the Company's Board of Directors authorized a common share repurchase program that provided for the Company to purchase, in the open market and through negotiated transactions, up to 4,100 of its outstanding common shares. The Company completed the program repurchasing 3,790 shares for an aggregate purchase price of $19,667 in December 1999. In February 2000, the Company's Board of Directors authorized another common share repurchase program that enables for the Company to purchase, in the open market and through negotiated transactions, up to an additional 4,250 of its outstanding common shares. As of March 15, 2000, the Company has repurchased approximately 1,098 for an aggregate purchase price of $6,308 under the new program. The program is scheduled to expire in February 2001.
The Company believes that its revolving credit facilities along with cash generated by operations will be sufficient to provide for the Company's anticipated working capital and capital expenditure requirements for the next twelve months, as well as additional stock repurchases, if any.
QUARTERLY OPERATING RESULTS (UNAUDITED)
The following table presents certain unaudited consolidated quarterly operating information for the Company and includes all adjustments that the Company considers necessary for a fair presentation of such information for the interim periods.
- --------------- (a) The sum of 1998 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.
(b) Includes charge for tooling obsolescence as described in Note 2 to the Consolidated Financial Statements
The Company's business is seasonal. The Company believes that a significant percentage of certain of its products are given as gifts and therefore, sell in larger volumes during the Christmas shopping season. 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 causes 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 believes that the domestic vacuum cleaner industry is a mature industry with modest annual growth in many of its products but with a decline in certain other products. Competition is dependent upon price, quality, extension of product lines, and advertising and promotion expenditures. Additionally, competition is influenced by innovation in the design of replacement models and by marketing and approaches to distribution. The Company's most significant competitors are Hoover, Eureka, and Bissell in the upright vacuum and carpet shampooer market and in the hand-held market, Black & Decker. These competitors and several others are subsidiaries or divisions of companies that are more diversified and have greater financial resources than the Company.
INFLATION
The Company does not believe that inflation by itself has had a material effect on the Company's results of operations. However, as the Company experiences price increases from its suppliers, which may include increases due to inflation, retail pressures may prevent the Company from increasing its prices. Due to recent economic conditions, the Company expects the cost of plastic resin and transportation will increase in 2000.
ACCOUNTING STANDARDS
The Company will be required to implement Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, in the first quarter of 2001. The Company expects the implementation of SFAS No. 133 will not have a material impact on its consolidated financial position, results of operations, or cash flows.
The Company adopted Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, in the first quarter of 1999. The impact of implementing SOP 98-1 did not have a material impact on its consolidated financial position, results of operations, or cash flows.
YEAR 2000 COMPLIANCE
The Company developed a detailed Year 2000 Action Plan and began the process of assessing the magnitude of the Year 2000 on its primary computer systems in 1998. Additionally, the Company began gathering data, identifying, and developing remediation plans for affected non-IT systems and equipment. In conjunction with the internal assessment, the Company also began evaluating and monitoring key suppliers and customers in regard to their respective Year 2000 preparedness and compliance.
As of the date of this filing, the Company has not experienced any internal problems related to Year 2000 compliance issues nor has the Company experienced any disturbances or interruption in its ability to transact business with its suppliers or customers. The Company, however, continues to monitor its systems, suppliers, and customers for any unanticipated issues that have yet to surface. The Company has appropriately expensed the costs related to Year 2000 preparedness as incurred. As of December 31, 1999, the Company has spent approximately $150.
FORWARD LOOKING STATEMENTS
Forward-looking statements in this Form 10-K 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 within the vacuum cleaner segment of 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 line of Dirt Devil(R) Vision uprights with bagless technology and the Dirt Devil(R) Easy Steamer(TM); the dependence upon the Company's ability to continue to successfully develop and introduce innovative products; and the uncertainty of the Company's foreign suppliers to continuously to supply sourced finished goods and component parts.
ITEM 7a.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not have any derivative financial instruments as of December 31, 1999. The Company sells a small portion of its products in various global markets. As a result, the Company's cash flow and earnings are exposed to fluctuations in foreign currency exchange rates. There were no forward exchange or currency swap contracts outstanding as of December 31, 1999.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Royal Appliance Mfg. Co.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Royal Appliance Mfg. Co. and its Subsidiaries (the "Company") at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Cleveland, Ohio March 7, 2000
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR YEARS ENDED DECEMBER 31,
The accompanying notes are an integral part of these financial statements.
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS -- Royal Appliance Mfg. Co. ("Royal" or the "Company"), an Ohio corporation with its corporate offices in the Cleveland, Ohio metropolitan area, develops, assembles and markets a full line of cleaning products for home and commercial use under the Dirt Devil(R) and Royal(R) brand names. In 1984, the Company introduced the first in a line of Dirt Devil(R)floorcare products, which the Company believes has become one of the largest selling line of vacuum cleaners in the United States. The Company has used the Dirt Devil(R) brand name recognition to gain acceptance for other Dirt Devil(R)products.
The following is a summary of significant policies followed in the preparation of the accompanying Consolidated Financial Statements.
BASIS OF PRESENTATION -- The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries after elimination of all intercompany accounts and transactions. The companies are hereinafter referred to as "Royal" or the "Company".
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to the 1999 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 future returns based on current shipments. All sales are final upon shipment of goods to the customers.
Foreign operations are conducted in their local currency. Assets and liabilities of Royal's international operations are translated at current exchange rates, and income and expenses are translated using weighted average exchange rates. The effects of these translation adjustments are reported as a separate component of shareholders' equity as Accumulated Other Comprehensive Income. The net effect of currency gains and losses realized on business transactions is included in the determination of net income.
As of December 31, Accumulated Other Comprehensive Income consisted of the following:
ADVERTISING AND PROMOTION - Cost incurred for producing and communicating advertising are expensed during the period aired, including cost incurred under the Company's cooperative advertising program.
INVENTORIES -- Inventories are stated at the lower of cost or market using first-in, first-out (FIFO) method.
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. ACCOUNTING POLICIES: (CONTINUED) Inventories at December 31, consisted of the following:
PROPERTY, PLANT AND EQUIPMENT -- the Company capitalizes as additions to property, plant and equipment expenditures at cost for molds, tooling, land, buildings, equipment, furniture, and leasehold improvements. Expenditures for maintenance and repairs are charged to operating expense as incurred. The asset and related accumulated depreciation or amortization accounts are adjusted to reflect retirements and disposals and the resulting gain or loss is included in the determination of net income.
Internal and external costs incurred to develop internal use computer software during the application development stage are capitalized and amortized on the straight line method over the estimated useful life of software. Capitalized costs include payroll costs and related benefits, costs of related hardware and consulting fees. During 1999, $163 of such costs were capitalized.
Plant and equipment are depreciated over the estimated useful lives of the respective classes of assets. Leasehold improvements and assets held under capital leases are amortized over their respective lease terms. Accumulated amortization on assets under capital leases totaled $2,525 and $2,338 at December 31, 1999 and 1998, respectively.
Depreciation for financial reporting purposes is computed on the straight-line method using the following depreciable lives:
Accelerated methods as permitted by the applicable tax law are used for tax reporting purpose.
The Company reviews for impairment whenever events or changes in circumstances indicates that the carrying amount of property, plant and equipment may not be recoverable under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed Of. If it is determined that an impairment loss has occurred based on expected future cash flows, the loss is recognized on the Consolidated Statement of Operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- Financial instruments consist of a revolving credit agreement and notes payable and are carried at amounts which approximate fair value.
NEW ACCOUNTING PRONOUNCEMENTS -- The Company will be required to implement Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, in the first quarter of 2001. The Company expects the implementation of SFAS No. 133 will not have a material impact on its consolidated financial position, results of operations, or cash flows.
The Company adopted Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, in the first quarter of 1999. The impact of implementing
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. ACCOUNTING POLICIES: (CONTINUED) SOP 98-1 did not have a material impact on its consolidated financial position, results of operations, or cash flows.
2. CHARGES FOR TOOLING OBSOLESCENCE:
During the fourth quarter of 1999, the wholesale price for the cordless Dirt Devil(R) Mop Vac(R) (Mop Vac) decreased significantly. This reduction in wholesale price triggered an impairment review for cordless Mop Vac tooling. Previous to the fourth quarter reduction in wholesale prices, the cordless Mop Vac had net future cash flows in excess of the remaining net book value of the tooling. However, previously during the year the Company shortened the depreciable lives of such tooling due to the decision to discontinue the product line at the end of 1999. Subsequent to the price reduction, the product was no longer profitable and therefore discontinued. As a result of the impairment review, the Company determined that net future cash flows for the product were negative, therefore, an impairment charge of $992 was recorded during the fourth quarter.
During 1999, the Dirt Devil(R) Ultra MVP(R) (Ultra MVP) lost its shelf placement in retail stores, however, the unit was slotted for special promotions at several retailers. When the unit lost its shelf placement at retail, an impairment review was performed resulting in no impairment charge as the estimated net future cash flows exceeded the net book value of the tooling. During the 1999 Holiday season, the Ultra MVP had some limited special promotion distribution. However, retail subsequently lowered the retail price point below the wholesale price. With the reduction of price, the Company would no longer be able to produce the unit at a profit, thus triggering an impairment review. As a result of the review, an impairment charge of $1,629 was recorded at the end of the fourth quarter and accelerated depreciation of $436 was also taken during the fourth quarter.
Prior to the fourth quarter, due to sales commitments and component part usage requirements, the assets were considered as "held for use" in accordance SFAS No. 121. However, due to specific trigger events which occurred during the fourth quarter, the remaining value of the assets were determined to be impaired and the assets were written down to zero and removed from service.
Also, during 1999, the Company shortened the useful lives of tooling for certain product families due to declining sales volumes and the launch of replacement products. As a result of the reduced remaining useful lives for certain product families, including the Mop Vac and Ultra MVP, the Company recorded accelerated depreciation expense of $1,574 during 1999.
3. DEBT:
At December 31, 1999, the Company had a collateralized revolving credit facility with availability of up to $45,000 and a maturity date of April 1, 2002. Under the agreement, pricing options of the bank's base lending rate and LIBOR rate are based on a formula, as defined. In addition, the Company pays a commitment fee based on a formula, as defined, on the unused portion of the facility. The revolving credit facility contains covenants which require, among other things, the achievement of minimum net worth levels and the maintenance of certain financial ratios. The Company was in compliance with all applicable covenants as of December 31, 1999. The revolving credit facility is collateralized by the Company's inventories and certain trade accounts receivable. The Company's effective interest rate was 8.19% and 8.45% for 1999 and 1998, respectively.
On March 7, 2000 the Company entered into a new $80,000 three year collateralized revolving credit facility. Under the agreement, pricing options of the bank's base lending rate and LIBOR rate are based on a formula, as defined. In addition, the Company pays a commitment fee based on a formula, as defined, on the unused portion of the facility. The revolving credit facility contains covenants which require, among other things, the achievement of minimum net worth levels and the maintenance of certain financial ratios. The revolving credit facility permits additional share repurchases up to $40,000 million as long as the Company remains in
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. DEBT: (CONTINUED) compliance with all covenants but prohibits the payment of cash dividends. The new facility replaced the Company's $45,000 million revolver.
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 December 31, 1999, was $40,000. The maximum amount of receivables that can be sold is seasonally adjusted. At December 31, 1999 and 1998, the Company had received approximately $23,100 and $22,000, respectively, from the sale of trade accounts receivable. The proceeds from the sales were used to reduce borrowings under the Company's revolving credit facility. Costs of the program, which primarily consist of the purchaser's financing cost of issuing commercial paper backed by the receivables, totaled $1,281, $916 and $892 in 1999, 1998 and 1997, respectively, and have been classified as Receivable securitization and other (income) expense, net in the accompanying Consolidated Statements of Operations. The Company's effective borrowing rate under this program was 6.51%, 6.79% and 6.64% for the years 1999, 1998 and 1997, respectively. The Company, as agent for the purchaser of the receivables, retains collection and administrative responsibilities for the purchased receivables.
The Company has a 7.9% fixed rate mortgage note payable in the amount of $4,968. The note is collateralized by an assembly and distribution facility. Monthly payments of principal and interest are payable through November 1, 2000, at which time the balance of approximately $4,775 is due. The carrying amount of the mortgage note payable approximates fair value.
Aggregate maturities of the notes payable and revolving credit facility at December 31, 1999, prior to the March 2000 refinancing, are as follows:
4. LEASES:
Royal leases various facilities, equipment and vehicles under capital and operating lease agreements. Operating lease payments totaled $796, $602 and $579 for the years ended December 31, 1999, 1998, and 1997, respectively.
Minimum commitments under all capital and operating leases at December 31, 1999 are as follows:
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES:
At December 31, 1999, the Company estimates having contractual commitments for future advertising and promotional expense of approximately $11,400 including commitments for television advertising through December 31, 2000. Other contractual commitments for items in the normal course of business total approximately $2,750.
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.
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 claims and litigation arising in the normal course of business. In the opinion of management, the ultimate resolution of these actions, as well as the Hoover lawsuit mentioned above, will not materially affect the consolidated financial position, results of operations, or cash flows of the Company.
6. INCOME TAXES:
The income tax expense consisted of the following:
Deferred income taxes reflect the impact for financial statement reporting purposes of temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities. At December 31, 1999 and 1998, the components of the net deferred tax liability were as follows:
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES: (CONTINUED)
The differences between income taxes at the statutory federal income tax rate of 34% and those reported in the Consolidated Statements of Operations are as follows:
7. MAJOR CUSTOMERS:
Royal's three largest customers represented approximately 36.9%, 13.6%, and 12.1% of total net sales in 1999. The Company's three largest customers represented approximately 31.6%, 13.4% and 14.1% in 1998 and 35.9%, 9.5% and 10.7% of total net sales in 1997. Additionally, a significant concentration of Royal's business activity is with major domestic mass market retailers whose ability to meet their financial obligations with Royal is dependent on economic conditions germane to the retail industry. During recent years, several 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.
The Company provides credit, in the normal course of business, to the retail industry which includes mass market retailers, warehouse clubs, and independent dealers. The Company performs ongoing credit evaluations of its customers and establishes appropriate allowances for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
8. STOCK OPTIONS:
Under the terms of the Company's stock option plans for employees, outside directors and consultants, all outstanding options have been granted at prices at least equal to the then current market value on the date of grant. Certain stock options granted become exercisable in cumulative 20% installments, commencing one year from date of grant with full vesting occurring on the fifth anniversary date, and expire in ten years, subject to
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTIONS: (CONTINUED) earlier termination in certain events related to termination of employment. Other stock options granted vest at the end of five years ("5 year cliff vesting") and expire in ten years, subject to earlier termination in certain events related to termination of employment. Vesting may be accelerated in certain events relating to change of the Company's ownership.
The following summarizes the changes in the number of Common Shares under option:
The 669 exercisable options at December 31, 1999, are exercisable at an average exercise price of $4.96 . The Company's current option plans, which provide for a total of 3,060 options, have 31 options remaining for future grants at December 31, 1999.
The Company adopted the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" in fiscal 1996. As permitted by SFAS No. 123, the Company continues to measure compensation cost in accordance with Accounting Principles Board ("APB") Opinion No. 25 and related interpretations in accounting for its plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under these plans consistent with the method of SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
The effect on net income and earnings per share is not expected to be indicative of the effects on net income and earnings per share in future years. Since the SFAS No. 123 method of accounting has not been applied to options granted prior to 1995, the resulting pro forma compensation costs may not be representative of those to be
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTIONS: (CONTINUED) expected in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
During fiscal years 1999, 1998 and 1997 the weighted average grant-date fair value of options granted was $1.44, $2.22, and $3.16 per share, respectively.
9. SHAREHOLDER RIGHTS PLAN:
The Company has a Shareholder Rights Plan which provides that under certain circumstances each Right will entitle the shareholder to purchase one one-hundredth of a share of Series A Participating Preferred Stock at an exercise price of $40. Upon the occurrence of certain other events, including if a "Person" becomes the beneficial owner of more than 20% of the outstanding Common Shares or an "Adverse Person" becomes the beneficial owner of 10% of the outstanding Common Shares, the holder of a Right will have the right to receive, upon exercise, Common Shares of the Company, or Common Stock of the acquirer, having a value equal to two times the exercise price of the Right. The Shareholder Rights Plan is designed to deter abusive market manipulation or unfair takeover tactics and to prevent an acquirer from gaining control of the Company without offering a fair price to all shareholders. The Rights expire on November 2, 2003, unless redeemed prior to that date. The Rights can be redeemed at a price of $.01 per Right.
10. BENEFIT PLANS:
The Company sponsors a 401(k) defined contribution plan which covers substantially all of its employees who have satisfied the plan's eligibility requirements. Participants may contribute to the plan by voluntarily reducing their salary up to a maximum of 15% of qualified compensation subject to annual I.R.S. limits. All contributions vest immediately. For 1999, the matching contribution was 100%, up to the first 3% of qualified compensation, and 50% of the next 2% of such compensation. The Company has also made discretionary contributions to the plan. The Company's provisions for matching and discretionary contributions totaled approximately $906, $788 and $779 for the years ended December 31, 1999, 1998 and 1997, respectively. Voluntary after-tax contributions and certain rollover contributions are also permitted.
The Company also sponsors a non-qualified deferred compensation plan which permits key employees to annually elect (via individual contracts) to defer a portion of their compensation on a pre-tax basis until retirement. The retirement benefit to be provided is based on the amount of compensation deferred, Company match and investment earnings. All contributions vest immediately. Although the Plan is designed to be unfunded, the Company has funded the deferred compensation liability with investments in marketable securities, primarily stock mutual funds, which are classified as current assets. During the third quarter of 1999 the original non-qualified deferred compensation plan was terminated and all proceeds were paid out to the participants. Effective October 1, 1999, a new non-qualified deferred compensation plan was established. The new plan offers the same benefits as the old plan. The Company's provisions for matching and discretionary contributions totaled approximately $25, $154 and $163 for the years ended December 31, 1999, 1998 and 1997, respectively. The deferred compensation liability and related assets recorded by the Company were $111 and $2,332 as of December 31, 1999 and 1998, respectively. ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. BENEFIT PLANS: (CONTINUED) The Company does not offer any other post-retirement benefits, accordingly, it is not subject to the provisions of SFAS No. 106, "Employers' Accounting for Post Retirement Benefits Other Than Pensions."
11. SHARE REPURCHASE PROGRAM:
In October 1998, the Company's Board of Directors authorized a common share repurchase program that provided for the Company to purchase, in the open market and through negotiated transactions, up to 4,100 of its outstanding common shares. The Company completed the program repurchasing 3,790 shares for an aggregate purchase price of $19,667 in December 1999. In February 2000, the Company's Board of Directors authorized another common share repurchase program that provides for the Company to purchase, in the open market and through negotiated transactions, up to an additional 4,250 of its outstanding common shares. As of March 15, 2000, the Company has repurchased approximately 1,098 shares for an aggregate purchase price of $6,308 under the new program. The program is scheduled to expire in February 2001.
12. EARNINGS PER SHARE:
In the fourth quarter of 1997, the Company adopted SFAS No. 128, Earnings per Share, which modifies the calculation of earnings per share. The Standard replaces the previous presentation of primary and fully diluted earnings per share to basic and diluted.
Basic 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. All prior periods presented have been restated to reflect this adoption.
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. BUSINESS SEGMENT INFORMATION:
Management has determined that the Company consists of a single operating segment, therefore, the disclosure requirements of SFAS 131 consist only of revenues and long lived assets by geographic location. All prior period disclosures are also provided below:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item with respect to Executive Officers of the Company is set forth in Part I of this Annual Report on Form 10-K. Information required by this Item with respect to members of the Board of Directors of the Company contained under the headings "Nominees for Terms Expiring in 2002" and "Directors whose Terms Expire in 2001" in the Company's Proxy Statement, dated March 24, 2000, is incorporated herein by reference.
Information required by this Item with respect to compliance with Section 16 of the Exchange Act contained under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement, dated March 24, 2000, is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item relating to executive compensation contained under the headings "Compensation of Directors", "Executive Officers' Compensation", "Options Grants in 1999", "Aggregated Option Exercises in 1999 and Year-End Option Values", and "Change-in-Control and Other Employment Arrangements" in the Company's Proxy Statement, dated March 24, 2000, is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item contained under the headings "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management", in the Company's Proxy Statement, dated March 24, 2000, is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on this 16th day of March, 2000. ROYAL APPLIANCE MFG. CO. Registrant
By /s/ Michael J. Merriman -------------------------------------- Michael J. Merriman Chief Executive Officer and President
Date March 16, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, as of the 16th day of March 2000.
* The undersigned, by signing his name hereto, does hereby sign this Form 10-K on behalf of Royal Appliance Mfg. Co., and the above named directors and officers of Royal Appliance Mfg. Co., pursuant to a Power of Attorney executed on behalf of Royal Appliance Mfg. Co. and each of such directors and officers and which has been filed with the Securities and Exchange Commission.
/s/ MICHAEL J. MERRIMAN -------------------------------------- Michael J. Merriman, Chief Executive Officer, President and Director, and Attorney-in-Fact
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors of Royal Appliance Mfg. Co.
Our audits of the consolidated financial statements referred to in our report dated March 7, 2000, appearing on page 17 of the Form 10-K also included an audit of the financial statement schedule listed as Exhibit 27 of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Cleveland, Ohio March 7, 2000
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
Note: (A) Uncollectible accounts charged off, less recoveries. (B) Reserve for product model changes. (C) Disposal of obsolete inventory.
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
INDEX TO EXHIBITS FOR FORM 10-K