-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GHxjOS2G/D88RhsuIOUKP5mOR/GQ6uozMEeQwM6RQZqP0mQUK8ilgyNuzwqkCkIR T68hn4N5Msau91t5U+Wk1w== 0000950152-02-001830.txt : 20020415 0000950152-02-001830.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950152-02-001830 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROYAL APPLIANCE MANUFACTURING CO CENTRAL INDEX KEY: 0000085462 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD APPLIANCES [3630] IRS NUMBER: 341350353 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11194 FILM NUMBER: 02576113 BUSINESS ADDRESS: STREET 1: 7005 COCHRAN ROAD CITY: GLENWILLOW STATE: OH ZIP: 44139 BUSINESS PHONE: 4409962000 MAIL ADDRESS: STREET 1: N/A CITY: N/A STATE: OH ZIP: 44139 10-K 1 l93095ae10-k.txt ROYAL APPLIANCE MFG. CO. FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED DECEMBER 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 incorporation or organization) Identification) 7005 COCHRAN ROAD, GLENWILLOW, OHIO 44139 (Address of principal executive offices) Zip Code
(440) 996-2000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Common Shares, Without Par Value New York Stock Exchange (TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE 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 such 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, by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting shares held by non-affiliates of the Registrant, as reported on the New York Stock Exchange, based upon the closing sale price of Registrant's Common Shares on March 11, 2002, was $44,639,303. Common Shares held by each officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the Registrant's common shares as of March 11, 2002, was 13,017,352. DOCUMENTS INCORPORATED BY REFERENCE Applicable portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on Thursday, April 25, 2002, are incorporated by reference in Part III of this form. The Exhibit index appears on sequential page 37. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I 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 or sources 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 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 brand name recognition to gain acceptance for other Dirt Devil floorcare products. The Company continues to market certain metal vacuum cleaners for home and commercial use under the Royal brand name. During 2001, the Company's subsidiary, Privacy Technologies, Inc. ("Privacy Technologies(TM)") introduced the TeleZapper(TM) -- a telephone attachment that helps block unwanted telemarketing calls and removes consumers' phone numbers from the telemarketers' computerized dialing lists. The Company has also created Product Launch Partners, Inc. Product Launch Partners, Inc. was established as a vehicle for inventors and start-up consumer product companies to joint venture with the Company on new product launch opportunities. The Company's business strategy is primarily focused on leveraging its distribution channels and its well-known Dirt Devil brand, where applicable, to new and innovative products both inside and outside the floorcare industry, primarily in North America. The Company's product offering consists of name brand consumer products in two business segments: Consumer Products -- Floorcare and Consumer Products -- Other. 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 floorcare 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 and Privacy Technologies websites to build and maintain brand awareness and consumer demand, as well as to gain shelf space for its product lines from major retailers. BUSINESS SEGMENTS CONSUMER PRODUCTS -- FLOORCARE: The Company's Consumer Products -- Floorcare business segment designs, assembles or sources, markets and distributes a full line of plastic and metal vacuum cleaners. The Company's Dirt Devil vacuum cleaners are intended for home use. The Company's metal vacuum cleaners are intended for home and commercial use. This business segment's primary retail product lines are sold under the Dirt Devil name. The first Dirt Devil product, the Hand Vac, was introduced in 1984. The Dirt Devil line has since been expanded to include a full line of upright vacuum cleaners at various price points, both with bags and bagless, upright and hand held carpet and upholstery extractors, canister vacuum cleaners, and a full line of corded and cordless hand held vacuum cleaners. During 2001, the Dirt Devil line of products was further expanded with the introduction of Dirt Devil(R) Platinum Force(TM), a family of floorcare products that offer unique features at premium retail price points. 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 under the Royal brand name for home and commercial use exclusively through its network of independent dealers. The Company also sells accessories, carpet and upholstery cleaning solutions, attachments, refurbished cleaners and replacement parts for each of its product lines. 1 In order to provide the retailers with distinct product alternatives, the Company offers different Dirt Devil products in a variety of styles and colors and with various features. Major retailers currently carrying some portion of the Dirt Devil product line include Best Buy, Canadian Tire, Kmart, Sam's Club, Sears, Lowe's, Target, and WalMart. The Company also sells its Dirt Devil products through independent dealers, who primarily sell the metal line of Royal vacuum cleaners. CONSUMER PRODUCTS -- OTHER: The Company's Consumer Products -- Other segment primarily represents business conducted by Privacy Technologies, Inc. and Product Launch Partners, Inc. This business segment designs, sources and distributes consumer products outside of the Company's traditional floorcare business. Currently, this segment is substantially comprised of the TeleZapper, which was introduced in the second half 2001 by Privacy Technologies, Inc. The TeleZapper is a telephone attachment that helps block unwanted telemarketing calls and removes consumers' phone numbers from telemarketers' computerized dialing lists. Major retailers currently offering the TeleZapper include Best Buy, Canadian Tire, Kmart, RadioShack, Target and Walmart. In order to optimize the value of the TeleZapper product line, the Company is exploring the possibility of licensing the TeleZapper intellectual property or an outright sale of the entire TeleZapper business. NET SALES BY BUSINESS SEGMENT: The following table sets forth the amounts and percentages of the Company's net sales for the three years ended December 31, 2001 for the Company's two business segments.
2001 % 2000 % 1999 % -------- ----- -------- ----- -------- ----- Consumer Products -- Floorcare.................... $406,502 94.8% $408,223 100.0% $407,984 100.0% Consumer Products -- Other........................ 21,923 5.2% -- -- -- -- -------- ----- -------- ----- -------- ----- $428,425 100.0% $408,223 100.0% $407,984 100.0% ======== ===== ======== ===== ======== =====
For further information on business segments, see Note 13 of the Notes to the Consolidated Financial Statements. NEW PRODUCTS The Company introduces new products and enhances its existing products on a regular basis for both the retail and dealer markets. 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 $7.9 million, $6.8 million, and $6.3 million in 2001, 2000 and 1999, respectively. The Company has recently formed licensing and R&D partnerships, including one with The Procter & Gamble Company to launch, in the second half of 2002, a new product to clean carpets more effectively. Additionally, the Company has licensing agreements with third parties, that license the Dirt Devil brand name for certain other cleaning products in North America and for use of the Dirt Devil brand name in other countries. 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 and Royal brand names or through Privacy Technologies. MARKETING AND CUSTOMERS The Company markets its Dirt Devil and TeleZapper products primarily through major retailers, including mass market retailers (e.g. WalMart, Target and Kmart), electronic chains (e.g. Best Buy and RadioShack), warehouse clubs (e.g. Sam's Club), home improvement centers (e.g. Lowe's), regional chains and department stores (e.g. Ames). During 2001, WalMart (including Sam's Club), Kmart and Target 2 accounted for approximately 31.1%, 14.3%, and 14.1% respectively, of the Company's net sales, compared to approximately 32.6%, 13.5%, and 13.1%, respectively, of the Company's net sales in 2000. These were the only customers who accounted for 10% or more of the Company's net sales during such periods. During 2001 and 2000, the Company's net sales in the aggregate to its five largest customers were 68.1% and 66.1%, respectively, of its total net sales. The loss of any of these customers or loss of their shelf space 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 through its internal sales staff. Recently, several major retailers have experienced significant financial difficulties and some, including Kmart, have filed for protection from creditors under applicable bankruptcy laws. As of December 31, 2001, the net exposure related to Kmart as well as other customer balances for which management believes collection is doubtful was included in the calculation of allowance for doubtful accounts. The Company sells its products to certain customers that are in bankruptcy proceedings. Since Dirt Devil and TeleZapper 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 and TeleZapper 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, websites and from direct response television infomercials. The Company devotes considerable attention to the design and appearance of its products and their packaging in order to enhance their appeal to consumers and to stand out among other brands on retailers' shelves. In order to increase the presence of its Dirt Devil products in major retail outlets, the Company provides retailers with distinct product alternatives by offering its Dirt Devil 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 and Dirt Devil 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 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 3 provide a prompt response to consumer inquiries concerning the availability of its products and service dealers in the consumer's vicinity. COMPETITION The Company's Consumer Products -- Floorcare business segment's most significant competitors are Hoover, Eureka and Bissell in the upright vacuum and carpet shampooer markets and, Black & Decker and Euro Pro in the hand-held market. Many of these competitors and several others are subsidiaries or divisions of companies that are more diversified and have greater financial resources than the Company. The Company believes that the domestic vacuum cleaner industry is a mature industry with modest annual growth in many of its products but with a decline in certain other products. Competition is dependent upon price, quality, extension of product lines, and advertising and promotion expenditures. Additionally, competition is influenced by innovation in the design of replacement models and by marketing and approaches to distribution. The Company experiences extensive competition, including price pressure and increased advertising by its competitors, in all product lines within the Consumer Products -- Floorcare segment. These trends are expected to continue into 2002. 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, Royal, TeleZapper, and other names and logos, which are used in connection with the sale of its vacuum cleaners, consumer electronics and other products and accessory parts. The Company considers both the Dirt Devil and TeleZapper trademarks to be of considerable value and critical to its business. No challenges to its rights to these trademarks 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 in the Consumer Products -- Floorcare segment are generally not dependent upon any single patent or group of patents. Within the Consumer Products -- Other segment, the primary product line, the TeleZapper, is dependent upon a limited number of patents for that product. SEASONALITY The Company believes that a significant percentage of certain of its products are given as gifts and therefore, sell in larger volumes during the Christmas and other holiday shopping seasons. Because of the Company's continued dependency on its major customers, the timing of purchases by these major customers and the timing of new product introductions cause quarterly fluctuations in the Company's net sales. As a consequence, results in prior quarters are not necessarily indicative of future results of operations. PRODUCTION The Company currently assembles certain products in its facilities located in the Cleveland, Ohio metropolitan area. The products that are not assembled in Northeast Ohio have been outsourced to global third party contract manufacturers. 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 final assembly, it believes that its fixed costs are lower than many of its competitors. The Company also believes that this lack of vertical integration and the use of third party contract manufacturers has provided increased flexibility in the introduction and modification of products. 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 4 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 and Royal brand names or through Privacy Technologies. 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 1 to 3 months for sourced finished goods, and days to several weeks for component 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 contract manufacturers and has not experienced any significant raw material or component shortages. EMPLOYEES As of December 31, 2001, the Company employed approximately 670 full-time employees. In addition, the Company generally utilizes temporary personnel during the period when the Company is responding to its peak selling season. During 2001, the peak temporary personnel level reached approximately 260. The Company's employees are not represented by any labor union. 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 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. 5 ITEM 2. PROPERTIES On December 31, 2001, the Company and its subsidiaries owned or leased the material properties listed on the following table:
APPROXIMATE SQUARE FOOTAGE ----------------- LEASE EXPIRATIONS LOCATION AND ADDRESS OWNED LEASED (EXCLUDING RENEWALS) FUNCTION - -------------------- ------- ------- -------------------- -------- 7005 Cochran Road...... -- 458,000 07/15 Distribution Center & Glenwillow, Ohio Corporate Headquarters 1340 East 289th 106,000 -- 11/11 Assembly and Refurb Street............... Operations Wickliffe, Ohio(1) 8120 Tyler Blvd........ 300,000 -- N/A Assembly, Shipping and Mentor, Ohio Warehouse 1350 Rockefeller....... -- 147,000 05/02 Assembly Wickliffe, OH(2) 3951 East Earlstone.... -- 140,400 06/06 Distribution Center Ontario, CA
- --------------- (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) The Company intends to vacate this facility at the end of the lease term and transfer operations to the 8120 Tyler Blvd., Mentor, Ohio facility. 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 Complaint asserts that the Company's Dirt Devil 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 filed a lawsuit in federal court, in the Northern District of Ohio (case #1:01cv 2775), against The Hoover Company (Hoover) on December 10, 2001, under the patent, trademark, and unfair competition laws of the United States. The Complaint asserts that Hoover infringes certain patents relating to bagless technology held by the Company. The Company seeks damages, injunction on future production, and legal fees. The Company filed a lawsuit in federal court, in the Northern District of Ohio (case #1:02cv 0338), against Bissell Homecare, Inc. (Bissell) in 2002, under the patent, trademark, and unfair competition laws of the United States. The Complaint asserts that Bissell infringes certain patents relating to bagless technology held by the Company. The Company seeks damages, injunction on future production, and legal fees. Bissell Homecare, Inc. (Bissell) filed a lawsuit in federal court, in the Western District of Michigan (case 1:02cv 0142), against the Company in 2002, under the patent, trademark, and unfair competition laws of the United States. The Complaint asserts that the Company's Dirt Devil Easy Steamer and Platinum Force Extractor infringes certain patents held by Bissell. Bissell seeks damages, injunction of future production, and legal fees. The Company is vigorously defending the suit and believes that it is without merit. If Bissell 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. 6 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is certain information with respect to the named executive officers of the Company.
NAME AGE POSITION AND OFFICES WITH THE COMPANY - ---- --- ------------------------------------- Michael J. Merriman........................ 45 President and Chief Executive Officer Richard C. Farone.......................... 38 Executive Vice President -- Sales, Marketing & Engineering Richard G. Vasek........................... 37 Chief Financial Officer, Vice President -- Finance and Secretary David M. Brickner.......................... 35 Vice President -- Operations
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 and President in 1995 and Director in October 1993. Richard C. Farone has been Executive Vice President -- Sales, Marketing & Engineering since December 2000. Since 1987, he has served in several different roles in the Company's marketing and new products areas, most recently as Vice President -- Product Development. 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. David M. Brickner has been Vice President -- Operations since 2001. Prior to that, he was Vice President -- Manufacturing from December 1998 to 2001. Since 1988, he has served in several different roles in the Company's engineering, purchasing, and sourced products areas. PART II 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.
YEAR ENDED DECEMBER 31, ----------------------------- 2001 2000 ------------- ------------- HIGH LOW HIGH LOW ----- ----- ----- ----- QUARTERS: First................................................ $4.75 $3.85 $6.00 $4.37 Second............................................... $6.10 $3.15 $6.44 $4.62 Third................................................ $6.61 $3.57 $6.87 $4.94 Fourth............................................... $5.55 $4.00 $5.94 $3.44
The Company has not declared or paid any cash dividends and currently intends not to pay any cash dividends in 2002. The Board of Directors intends to retain earnings, if any, to support the operations, growth 7 of the business and to fund the stock repurchase program. The Company's current credit agreement prohibits the payment of cash dividends and permits additional stock repurchases up to $40 million, of which $23.0 million was utilized through December 31, 2001, in accordance with the stock repurchase programs (see Notes 3 and 11 of the Notes to the Company's Consolidated Financial Statements). On March 11, 2002, there were approximately 900 shareholders 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. 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, 2001, are derived from the audited Consolidated Financial Statements of the Company. Prior period amounts have been reclassified to conform to the 2001 presentation. The data presented below should be read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere herein.
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED STATEMENTS OF OPERATIONS: Net sales............................... $428,425 $408,223 $407,984 $282,720 $325,417 Cost of sales........................... 325,746 315,849 304,452 208,861 229,469 -------- -------- -------- -------- -------- Gross margin.......................... 102,679 92,374 103,532 73,859 95,948 Selling, general and administrative expenses.............................. 84,701 79,694 77,849 68,346 73,319 Charge for tooling obsolescence......... -- -- 2,621 -- -- -------- -------- -------- -------- -------- Income from operations................ 17,978 12,680 23,062 5,513 22,629 Interest expense, net................... 2,415 3,503 1,401 1,521 1,412 Receivable securitization and other expense (income), net................. 1,181 1,713 1,369 (140) 1,033 -------- -------- -------- -------- -------- Income before taxes................... 14,382 7,464 20,292 4,132 20,184 Income tax expense...................... 5,058 1,525 7,610 1,606 7,777 -------- -------- -------- -------- -------- Net income............................ $ 9,324 $ 5,939 $ 12,682 $ 2,526 $ 12,407 ======== ======== ======== ======== ======== BASIC EARNINGS PER SHARE Weighted average number of common shares outstanding (in thousands)............ 13,731 15,083 18,155 21,368 23,553 Earnings per share...................... $ .68 $ .39 $ .70 $ .12 $ .53 DILUTED EARNINGS PER SHARE Weighted average number of common shares and equivalents outstanding (in thousands)............................ 14,297 15,574 18,371 21,562 23,944 Earnings per share...................... $ .65 $ .38 $ .69 $ .12 $ .52 CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD) Working capital......................... $ 32,566 $ 39,885 $ 38,950 $ 30,240 $ 32,486 Total assets............................ 140,444 138,552 151,892 117,480 134,947 Long-term debt.......................... 33,978 48,537 34,704 18,426 13,672 Shareholders' equity.................... 38,622 31,053 44,669 46,723 60,219
8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's discussion and analysis of its financial position and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Management believes that the critical accounting policies and areas that require the most significant judgments and estimates to be used in the preparation of the consolidated financial statements are revenue recognition including customer based programs and incentives, allowance for doubtful accounts, useful lives of tooling and other long lived assets and accrued warranty and customer returns. Revenue Recognition -- The Company's revenue recognition policy is to recognize revenues when products are shipped. All sales are final upon shipment of product to the customer. The Company records estimated reductions to net sales for customer programs and incentive offerings including pricing arrangements, promotions and other volume based incentives. If market conditions were to soften, the Company may take actions to increase customer incentives, possibly resulting in a reduction of net sales and gross margins at the time the incentive is offered. Allowance for Doubtful Accounts -- The Company maintains an allowance for trade accounts receivable for which collection on specific customer accounts is doubtful. In determining collectibility, management reviews available customer financial statement information, credit rating reports as well as other external documents and public filings. When it is deemed probable that a specific customer account is uncollectible, that balance is included in the reserve calculation. Actual results could differ from these estimates under different assumptions. Useful Lives of Tooling -- The Company capitalizes the cost of tooling used in the production of its products by third party suppliers and global contract manufacturers. The tooling is depreciated on a straight-line basis over 2 - 4 years, based on the nature of the product and the estimated product life cycle. The useful lives are reviewed on a quarterly basis by management and useful lives may be shortened if needed. In determining whether or not shortening of useful lives is required, management reviews retail sell-through data, forecast demands and the timeframe of new product introductions. Accrued Warranty and Customer Returns -- The Company's return policy is to replace, repair or issue credit for product under warranty. Returns received during the current period are expensed as received and a reserve is maintained for future returns from current shipments. Management calculates the reserve utilizing historical return rates by product family. These rates are reviewed and adjusted periodically. Management utilizes judgment for estimating return rates of new products and adjusts those estimates as actual results become available. 9 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.
YEAR TO YEAR YEAR ENDED DECEMBER 31, INCREASES (DECREASES) ------------------------ ----------------------------- 2001 2000 1999 2001 VS. 2000 2000 VS. 1999 ------ ------ ------ ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales..................................... 100.0% 100.0% 100.0% 4.9% 0.1% Cost of sales................................. 76.0 77.4 74.6 3.1 3.7 ----- ----- ----- ----- --- Gross margin................................ 24.0 22.6 25.4 11.2 (10.8) Selling, general and administrative expenses.................................... 19.8 19.5 19.0 6.3 2.4 Charge for tooling obsolescence............... -- -- 0.7 -- N/M ----- ----- ----- ----- --- Income from operations...................... 4.2 3.1 5.7 41.8 (45.0) Interest expense, net......................... 0.6 0.9 0.4 (31.1) 150.0 Receivable securitization and other expense (income), net............................... 0.2 0.4 0.3 (31.1) 25.1 ----- ----- ----- ----- --- Income before income taxes.................. 3.4% 1.8% 5.0% 92.3% (63.2)% ===== ===== ===== ===== ===
2001 VS. 2000 Net sales for 2001 were $428,425, an increase of 4.9% from 2000. The increase in sales for 2001 was attributable to the shipments of the TeleZapper, which was introduced during the third quarter of 2001. These sales increases were partially offset by lower sales of certain product lines within the Consumer Products -- Floorcare segment including Dirt Devil canisters and stick vacuums. Overall sales to the top 5 customers for 2001 (all of which are major retailers) accounted for approximately 68.1% of net sales as compared with approximately 66.1% in 2000. The Company believes that its dependence on sales to its largest customers will continue. Recently, several major retailers have experienced significant financial difficulties and some, including Kmart, have filed for protection from creditors under applicable bankruptcy laws. As of December 31, 2001, the net exposure related to Kmart as well as other customer balances for which management believes collection is doubtful was included in the calculation of allowance for doubtful accounts. The Company sells its products to certain customers that are in bankruptcy proceedings. Gross margin, as a percent of net sales, increased from 22.6% for 2000 to 24.0% in 2001. The gross margin percentage was positively affected in 2001 primarily by shipments of the TeleZapper. The increase was partially offset by competitive pressure resulting in lower selling prices and margins on various floorcare products. Selling, general and administrative expenses for 2001 were $84,701, an increase of 6.3% from 2000. Selling, general and administrative expenses increased as a percentage of net sales from 19.5% in 2000 to 19.8% in 2001. The dollar increase is primarily attributable to employee compensation and related benefits, higher professional fees associated with litigation (see Note 5 of the Company's Consolidated Financial Statements), bad debt expense primarily associated with the bankruptcy filing by Kmart, and expenses associated with upgrades to the Company's information technology systems. Interest expense for 2001 was $2,415, a decrease of 31.1% from 2000. The decrease in interest expense resulted from a lower effective borrowing rate combined with lower levels of variable rate borrowings to finance working capital, share repurchases, and capital expenditures. 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 decrease during 2001 was due to lower receivable securitization expense associated with a lower effective borrowing rate and reduced foreign currency transaction losses on Canadian sales activity. 10 Due to the factors discussed above, the Company had income before income taxes for 2001 of $14,382 as compared to income before income taxes for 2000 of $7,464. The components of the Company's effective income tax expense rate of 35.2% are described in Note 6 of the Company's Consolidated Financial Statements. 2000 VS. 1999 Net sales for 2000 were $408,223, an increase of 0.1% from 1999. Increased unit and dollar volume shipments of the Dirt Devil Easy Steamer(TM) (which was introduced in mid 1999) and the Dirt Devil Spot Scrubber(TM) (which was introduced in mid 2000) offset lower sales of certain other product lines including the Company's line of upright vacuums and the Dirt Devil Broom Vac(TM). Overall sales to the top 5 customers for 2000 (all of which are major retailers) accounted for approximately 66.1% of net sales as compared with approximately 67.1% in 1999. Gross margin, as a percent of net sales, decreased from 25.4% for 1999 to 22.6% in 2000. The gross margin percentage was negatively affected in 2000 primarily by heightened competition resulting in lower margins on various products, higher depreciation expense on tooling for certain product lines due to shortened expected useful lives and inventory obsolescence charges related primarily to the discontinued corded Mop Vac product. Selling, general and administrative expenses for 2000 were $79,694, an increase of 2.4% from 1999. Selling, general and administrative expenses increased as a percentage of net sales from 19.0% in 1999 to 19.5% in 2000. The dollar increase is primarily due to increases in employee related benefit expenses, professional services associated with litigation and increased engineering and product development expenses associated with new product introductions. Interest expense for 2000 was $3,503, an increase of 150.0% from 1999. The increase in interest expense resulted primarily from a higher effective borrowing rate combined with higher levels of variable rate borrowings to finance working capital, capital expenditures, the balloon payment made on fixed rate debt on one of the Company's facilities 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 increase during 2000 was due to higher receivable securitization expense associated with a higher effective borrowing rate and foreign currency transaction losses on Canadian sales activity. Due to the factors discussed above, the Company had income before income taxes for 2000 of $7,464, as compared to income before income taxes for 1999 of $20,292. The components of the Company's effective income tax expense rate of 20.4% are described in Note 6 of the Company's Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES The Company has used cash generated from operations to fund its working capital needs, capital expenditures and share repurchases. Working capital was $32,566 at December 31, 2001, a decrease of 18.3% over the December 31, 2000 level. Current assets increased by $1,820 reflecting in part a $5,337 increase of inventories partially offset by a $6,111 decrease of trade accounts receivable. Current liabilities increased by $9,139 reflecting a $5,224 increase in trade accounts payable, $3,903 increase of accrued salaries, benefits, and payroll taxes, a $1,370 increase of accrued income taxes, partially offset by a $1,907 decrease of accrued advertising and promotion. In 2001, the Company utilized $13,842 of cash for capital expenditures, including approximately $4,600 for tooling related to the new Dirt Devil Platinum Force line of products which includes a bagless upright, full size extractor, corded hand vac, bagged upright and bagless stick vac and approximately $4,800 for computer equipment and software and consulting services, primarily related to the Oracle ERP implementation and other information technology upgrades. 11 At December 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 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, 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 $22,952 was utilized through December 31, 2001. The Company's effective interest rate was 7.34% and 9.28% for 2001 and 2000, respectively. 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, 2001, was $35,000. At December 31, 2001 and 2000, the Company had received approximately $24,700 and $19,200, respectively, 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 $993, $1,559, and $1,281 in 2001, 2000 and 1999, 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 5.42%, 7.56% and 6.51% for 2001, 2000, and 1999, respectively. The Company, as agent for the purchaser of the receivables, retains collection and administrative responsibilities for the purchased receivables. Additionally, the program contains covenants which the Company was in compliance with as of December 31, 2001. In February 2000, the Company's Board of Directors authorized a common share repurchase program that enabled the Company to purchase, in the open market and through negotiated transactions, up to an additional 4,250 of its outstanding common shares. The Company completed the program repurchasing 3,289 shares for an aggregate purchase price of $20,065 in February 2001. In April 2001, the Company's Board of Directors authorized another common share repurchase program that enables the Company to purchase, in the open market and through negotiated transactions, up to an additional 3,400 of its outstanding common shares. As of March 11, 2002, the Company has repurchased approximately 1,052 for an aggregate purchase price of $5,250 under the program that expires in December 2002. The following tables present total contractual obligations and other commercial commitments of the Company as of December 31, 2001:
PAYMENTS DUE BY YEAR ------------------------------------------- CONTRACTUAL OBLIGATIONS TOTAL 2002 2003-2006 THEREAFTER - ----------------------- ------- ------ --------- ---------- Long-Term Debt -- Revolver........................... $32,000 $ -- $32,000(a) $ -- Capital Lease Obligations............................ 3,061 235 1,264 1,562 Operating Leases..................................... 26,640 3,419 9,783 13,438 ------- ------ ------- ------- Total Contractual Cash Obligations................... $61,701 $3,654 $43,047 $15,000 ======= ====== ======= =======
12
AMOUNT OF COMMITMENT EXPIRATION PER YEAR ----------------------------------------------- TOTAL AMOUNTS OTHER COMMERCIAL COMMITMENTS COMMITTED 2002 2003-2006 THEREAFTER - ---------------------------- ------------- ------ --------- ---------- Standby Letters of Credit.......................... $1,562 $1,250 $-- $312 Other Commercial Commitments....................... 7,300 7,300 -- -- ------ ------ -- ---- Total Commercial Commitments....................... $8,862 $8,550 $-- $312 ====== ====== == ====
- --------------- (a) The existing revolving credit facility has a maturity date of March 2003. The Company is in negotiations with its bank group to renew and extend the revolving line of credit for a three year period beginning April 1, 2002. The Company believes that cash generated by operations along with its revolving credit facilities 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.
THREE MONTHS ENDED ----------------------------------------------------------------------------------------- DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, 2001 2001 2001 2001 2000 2000 2000 2000 -------- --------- -------- --------- -------- --------- -------- --------- Net sales.................... $130,730 $112,726 $80,447 $104,522 $126,549 $96,129 $82,075 $103,470 Gross margin................. 36,157 27,684 16,204 22,634 31,690 21,778 15,451 23,455 Net income (loss)............ 3,773 4,085 (708) 2,174 3,018 3,345 (1,504) 1,080 Net income (loss) per share -- diluted(a)........ $ 0.27 $ 0.29 $ (0.05) $ 0.15 $ 0.21 $ 0.22 $ (0.10) $ 0.06
- --------------- (a) The sum of 2001 and 2000 quarterly net income (loss) per common share does not equal annual net income per common share due to the change in the weighted average number of common shares outstanding due to share repurchases. The Company believes that a significant percentage of certain of its products are given as gifts and therefore sell in larger volumes during the Christmas and other holiday shopping seasons. Because of the Company's continued dependency on its major customers, the timing of purchases by these major customers and the timing of new product introductions 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's Consumer Products -- Floorcare segment's most significant competitors are Hoover, Eureka and Bissell in the upright vacuum and carpet shampooer markets and, Black & Decker and Euro Pro in the hand-held market. 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 experiences extensive competition, including price pressure and increased advertising by its competitors, in all product lines within the Consumer Products-Floorcare segment. These trends are expected to continue into 2002. 13 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. ACCOUNTING STANDARDS The Company implemented Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, in the first quarter of 2001. The implementation of SFAS No. 133 did not have a material impact on its consolidated financial position, results of operations, or cash flows. The Company is required to implement the following new accounting pronouncements during the first quarter of 2002: SFAS No. 141, "Business Combinations" -- This statement requires that all business combinations be accounted for under a single method, the purchase method. Use of the pooling-of-interests method is no longer permitted. SFAS No. 142, "Goodwill and Other Intangible Assets" -- This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets, and in summary discontinues the amortization of goodwill and other intangibles with indefinite lives. SFAS No. 143, "Accounting for Asset Retirement Obligations" -- This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" -- This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company expects that the implementation of the above standards will not have a material impact on its consolidated financial position, results of operations or cash flows. FORWARD LOOKING STATEMENTS Forward-looking statements in this release are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. Potential risks and uncertainties include, but are not limited to: the financial strength of the retail industry particularly in the major mass retail channel; the impact of Kmart's recent bankruptcy filing on Royal's future sales and earnings; the competitive pricing and aggressive product development environment within the floorcare industry; the impact of private-label programs by mass retailers; the cost and effectiveness of planned advertising, marketing and promotional campaigns; the success at retail and the continued acceptance by consumers of the Company's new products, including the Company's bagless uprights, carpet shampooers, and its first consumer electronics product, the TeleZapper(TM), the dependence upon the Company's ability to continue to successfully develop and introduce innovative products; the uncertainty of the Company's global suppliers to continuously supply sourced finished goods and component parts; and general business and economic conditions ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 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 relating to receipts from customers and payments to service providers in foreign currencies. As a general policy, the Company has hedged certain foreign currency commitments of future payments and receipts by purchasing foreign currency-forward contracts. As of December 31, 2001, there were no such contracts outstanding. The majority of the Company's receipts and expenditures are contracted in U.S. dollars, and the Company does not consider the market risk exposure relating to currency exchange to be material at this time. 14 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion. PRICEWATERHOUSECOOPERS LLP Cleveland, Ohio February 11, 2002 15 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 2001 2000 ------------ ------------ (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash...................................................... $ 3,421 $ 704 Trade accounts receivable, less allowance for doubtful accounts of $3,000 and $1,300 at December 31, 2001 and 2000, respectively...................................... 35,986 42,097 Inventories............................................... 50,807 45,470 Refundable and deferred income taxes...................... 4,549 4,735 Prepaid expenses and other................................ 1,636 1,573 -------- -------- Total current assets............................... 96,399 94,579 -------- -------- Property, plant and equipment, at cost: Land...................................................... 1,541 1,541 Buildings................................................. 7,777 7,777 Molds, tooling, and equipment............................. 52,031 48,650 Furniture, office and computer equipment, and software.... 12,154 12,721 Assets under capital leases............................... 3,171 3,171 Leasehold improvements and other.......................... 7,456 5,067 -------- -------- 84,130 78,927 Less accumulated depreciation and amortization..... (46,556) (37,119) -------- -------- 37,574 41,808 -------- -------- Computer software and tooling deposits...................... 4,405 807 Other....................................................... 2,066 1,358 -------- -------- Total assets....................................... $140,444 $138,552 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable.................................... $ 27,433 $ 22,209 Accrued liabilities: Advertising and promotion............................... 11,196 13,103 Salaries, benefits, and payroll taxes................... 7,258 3,355 Warranty and customer returns........................... 9,950 9,800 Income taxes............................................ 1,370 -- Other................................................... 6,479 6,091 Current portions of capital lease obligations and notes payable................................................. 147 136 -------- -------- Total current liabilities.......................... 63,833 54,694 -------- -------- Revolving credit agreement................................ 32,000 46,400 Capitalized lease obligations, less current portion....... 1,978 2,137 -------- -------- Total long-term debt............................... 33,978 48,537 -------- -------- Deferred income taxes..................................... 4,011 4,268 -------- -------- Total liabilities.................................. 101,822 107,499 -------- -------- Commitments and contingencies (Note 4 and 5).............. -- -- Shareholders' equity: Serial preferred shares; authorized -- 1,000,000 shares; none issued and outstanding............................. -- -- Common shares, at stated value; authorized -- 101,000,000 shares; issued 25,829,452 and 25,509,152 at December 31, 2001 and 2000, respectively............................. 214 212 Additional paid-in capital................................ 44,167 43,038 Retained earnings......................................... 70,489 61,165 -------- -------- 114,870 104,415 Less treasury shares, at cost (12,365,700 and 11,780,500 shares at December 31, 2001 and 2000, respectively)..... (76,248) (73,362) -------- -------- Total shareholders' equity......................... 38,622 31,053 -------- -------- Total liabilities and shareholders' equity......... $140,444 $138,552 ======== ========
The accompanying notes are an integral part of these financial statements. 16 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
2001 2000 1999 -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales................................................... $428,425 $408,223 $407,984 Cost of sales............................................... 325,746 315,849 304,452 -------- -------- -------- Gross margin.............................................. 102,679 92,374 103,532 Selling, general and administrative expenses................ 84,701 79,694 77,849 Charge for tooling obsolescence............................. -- -- 2,621 -------- -------- -------- Income from operations.................................... 17,978 12,680 23,062 Interest expense, net....................................... 2,415 3,503 1,401 Receivable securitization and other expense (income), net... 1,181 1,713 1,369 -------- -------- -------- Income before income taxes.................................. 14,382 7,464 20,292 Income tax expense.......................................... 5,058 1,525 7,610 -------- -------- -------- Net income................................................ $ 9,324 $ 5,939 $ 12,682 ======== ======== ======== BASIC Weighted average number of common shares outstanding (in thousands)................................................ 13,731 15,083 18,155 Earnings per share.......................................... $ .68 $ .39 $ .70 DILUTED Weighted average number of common shares and equivalents outstanding (in thousands)................................ 14,297 15,574 18,371 Earnings per share.......................................... $ .65 $ .38 $ .69
The accompanying notes are an integral part of these financial statements. 17 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON SHARES ADDITIONAL TREASURY SHARES TOTAL ------------------- PAID-IN RETAINED --------------------- SHAREHOLDERS' NUMBER AMOUNT CAPITAL EARNINGS NUMBER AMOUNT EQUITY ---------- ------ ---------- -------- ---------- -------- ------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) BALANCE AT DECEMBER 31, 1998... 25,347,924 $211 $42,115 $42,544 5,726,400 $(38,147) $ 46,723 Shares issued from stock option plan................ 116,428 1 413 414 Purchase of treasury shares..................... 2,764,600 (15,150) (15,150) Net income................... 12,682 12,682 ---------- ---- ------- ------- ---------- -------- -------- BALANCE AT DECEMBER 31, 1999... 25,464,352 212 42,528 55,226 8,491,000 (53,297) 44,669 Compensatory effect of stock options.................... 361 361 Shares issued from stock option plan................ 44,800 149 149 Purchase of treasury shares..................... 3,289,500 (20,065) (20,065) Net income................... 5,939 5,939 ---------- ---- ------- ------- ---------- -------- -------- BALANCE AT DECEMBER 31, 2000... 25,509,152 212 43,038 61,165 11,780,500 (73,362) 31,053 Compensatory effect of stock options.................... 586 586 Shares issued from stock option plan................ 320,300 2 543 545 Purchase of treasury shares..................... 585,200 (2,886) (2,886) Net income................... 9,324 9,324 ---------- ---- ------- ------- ---------- -------- -------- BALANCE AT DECEMBER 31, 2001... 25,829,452 $214 $44,167 $70,489 12,365,700 $(76,248) $ 38,622 ========== ==== ======= ======= ========== ======== ========
The accompanying notes are an integral part of these financial statements. 18 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
2001 2000 1999 -------- -------- -------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 9,324 $ 5,939 $ 12,682 -------- -------- -------- Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization.......................... 15,279 15,836 11,896 Charge for tooling obsolescence........................ -- -- 2,621 Compensatory effect of stock options................... 586 361 -- (Gain) loss on sale of property, plant and equipment, net.................................................. -- (32) 85 Deferred income taxes.................................. (382) 618 (1,853) (Increase) decrease in assets: Trade accounts receivable, net......................... 6,111 6,429 (10,990) Inventories, net....................................... (5,337) 4,991 (19,373) Refundable and accrued income taxes.................... 1,681 (3,677) 1,436 Prepaid expenses and other............................. (63) 108 2,891 Other.................................................. (1,509) (1,147) (308) Increase (decrease) in liabilities: Trade accounts payable................................. 5,224 (1,700) 2,745 Accrued advertising and promotion...................... (1,907) (2,829) 7,164 Accrued salaries, benefits, and payroll taxes.......... 3,903 (4,650) 5,706 Accrued warranty and customer returns.................. 150 (250) 1,950 Accrued other.......................................... 388 2,257 (3,508) -------- -------- -------- Total adjustments................................. 24,124 16,315 462 -------- -------- -------- Net cash from operating activities................ 33,448 22,254 13,144 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of tooling, property, plant, and equipment, net.................................................... (10,244) (17,776) (16,474) Proceeds from sale of property, plant and equipment....... -- 32 -- (Increase) decrease in computer software and tooling deposits............................................... (3,598) 4,370 (2,407) -------- -------- -------- Net cash from investing activities................ (13,842) (13,374) (18,881) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: (Payments) proceeds on bank debt, net..................... (14,400) 15,829 22,488 Payments on notes payable................................. -- (5,186) (302) Proceeds from exercise of stock options................... 545 149 414 Payments on capital lease obligations..................... (148) (330) (286) Purchase of treasury shares............................... (2,886) (20,065) (15,150) -------- -------- -------- Net cash from financing activities................ (16,889) (9,603) 7,164 -------- -------- -------- Net increase (decrease) in cash............................. 2,717 (723) 1,427 -------- -------- -------- Cash at beginning of year................................... 704 1,427 -- -------- -------- -------- Cash at end of year......................................... $ 3,421 $ 704 $ 1,427 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash payments for: Interest.................................................. $ 2,611 $ 3,818 $ 1,594 ======== ======== ======== Income taxes, net of refunds.............................. $ 3,759 $ 4,574 $ 8,021 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 19 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 or sources and markets a full line of cleaning products for home and some for commercial use, primarily in North America under the Dirt Devil and Royal brand names. In 1984, the Company introduced the first in a line of Dirt Devil 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 brand name recognition to gain acceptance for other Dirt Devil floorcare products. The Company continues to market certain metal vacuum cleaners for home and commercial use under the Royal brand name. During 2001, the Company's subsidiary, Privacy Technologies, Inc. ("Privacy Technologies") introduced the TeleZapper -- a telephone attachment that helps block unwanted telemarketing calls and removes consumers' phone numbers from the telemarketers' computerized dialing lists. The Company also created Product Launch Partners, Inc. Product Launch Partners, Inc. was established as a vehicle for inventors and start-up consumer product companies to joint venture with the Company on new product launch opportunities. 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 of America requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Significant estimates include the allowance for doubtful accounts, the reserve for returns and allowances, and depreciation and amortization, among others. Certain prior year amounts have been reclassified to conform to the 2001 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. 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 has used forward exchange contracts to reduce fluctuations in foreign currency cash flows related to receivables denominated in foreign currencies. The terms of the currency instruments are consistent with the timing of the transactions being hedged. The purpose of the Company's foreign currency management activity is to protect the Company from the risk that the eventual cash flows from the foreign 20 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 December 31, 2001 and 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. Advertising and Promotion -- Cost incurred for producing and communicating advertising are expensed during the period aired, including costs incurred under the Company's cooperative advertising program. Advertising and promotion costs were $44,486, $47,154 and $46,546 for the years ended December 31, 2001, 2000 and 1999, respectively. Inventories -- Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method. Inventories at December 31, consisted of the following:
2001 2000 ------------ ------------ Finished goods.............................................. $43,277 $37,832 Work in process and component parts......................... 7,530 7,638 ------- ------- $50,807 $45,470 ======= =======
Property, Plant and Equipment -- The Company capitalizes, as additions to property, plant and equipment, expenditures at cost for molds, tooling, land, buildings, equipment, furniture, computer software, 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 2001 and 2000, $185 and $94, respectively of such internal 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 the shorter of useful lives or their respective lease terms. Accumulated amortization on assets under capital leases totaled $1,555 and $1,407 at December 31, 2001 and 2000, respectively. Depreciation for financial reporting purposes is computed on the straight-line method using the following depreciable lives: Buildings................................................... 40 years Building under capital lease................................ 20 years Molds, tooling, and equipment............................... 3 - 5 years Furniture, office and computer equipment, and software...... 2 - 5 years Vehicles.................................................... 3 years Internal use software....................................... 2 - 5 years
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 indicate that the carrying amount of property, plant and equipment may not be recoverable under the provisions of Statement 21 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 that is carried at an amount which approximates fair value. New Accounting Pronouncements -- The Company implemented Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, in the first quarter of 2001. The implementation of SFAS No. 133 did not have a material impact on its consolidated financial position, results of operations, or cash flows. The Company is required to implement the following new accounting pronouncements during the first quarter of 2002: SFAS No. 141, "Business Combinations" -- This statement requires that all business combinations be accounted for under a single method, the purchase method. Use of the pooling-of-interests method is no longer permitted. SFAS No. 142, "Goodwill and Other Intangible Assets" -- This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets, and in summary, discontinues the amortization of goodwill and other intangibles with indefinite lives. SFAS No. 143, "Accounting for Asset Retirement Obligations" -- This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" -- This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company expects that the implementation of the above standards will not have a material impact on its consolidated financial position, results of operations or cash flows. 2. CHANGES IN DEPRECIABLE LIVES AND CHARGES FOR TOOLING OBSOLESCENCE: During 2001 and 2000, the Company shortened the useful lives of tooling for certain product families due to declining sales volumes, reduced product life cycles and the launch of replacement products. As a result of the reduced useful lives for certain product families, including certain Royal metal products during 2001 and the Dirt Devil Corded Mop Vac, Dirt Devil Stick Vac and Dirt Devil Broom Vac during 2000, the Company recorded accelerated depreciation expense of $191 and $1,788 during 2001 and 2000, respectively. Also during 2000, the Company relocated its corporate headquarters. As a result of the move, the remaining net book value of leasehold improvements associated with the former corporate headquarters was amortized on an accelerated basis from the date the decision was made to move through the actual date of the move. Due to this event, accelerated depreciation expense of approximately $1,200 was recorded in 2000. During the fourth quarter of 1999, the wholesale price for the cordless Dirt Devil 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, earlier that 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 of 1999. 22 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During 1999, the Dirt Devil Ultra MVP(R) 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 Dirt Devil 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 of 1999. Prior to the fourth quarter of 1999, due to sales commitments and component part usage requirements, the assets were considered as "held for use" in accordance with 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 during the fourth quarter of 1999. 3. DEBT: At December 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 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, 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 $22,952 was utilized through December 31, 2001. The Company's effective interest rate was 7.34% and 9.28% for 2001 and 2000, respectively. 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, 2001, was $35,000. At December 31, 2001 and 2000, the Company had received approximately $24,700 and $19,200, respectively, 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 $993, $1,559, and $1,281 in 2001, 2000 and 1999, 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 5.42%, 7.56%, and 6.51% for 2001, 2000, and 1999, respectively. The Company, as agent for the purchaser of the receivables, retains collection and administrative responsibilities for the purchased receivables. Additionally, the program contains covenants which the Company was in compliance with as of December 31, 2001. 4. LEASES: Royal leases various facilities, equipment, computers, software and vehicles under capital and operating lease agreements. Operating lease payments totaled $2,905, $1,912, and $796 for the years ended December 31, 2001, 2000, and 1999, respectively. 23 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Minimum commitments under all capital and operating leases at December 31, 2001 are as follows:
YEAR CAPITAL OPERATING - ---- ------- --------- 2002........................................................ $ 235 $ 3,419 2003........................................................ 315 3,057 2004........................................................ 317 2,760 2005........................................................ 314 2,117 2006........................................................ 318 1,849 Thereafter.................................................. 1,562 13,438 ------ ------- Total minimum lease payments................................ 3,061 $26,640 ======= Less amount representing interest........................... 936 ------ Total present value of capital obligation................... 2,125 Less current portion........................................ 147 ------ Long-term obligation under capital leases................... $1,978 ======
5. COMMITMENTS AND CONTINGENCIES: At December 31, 2001, the Company estimates having contractual commitments for future advertising and promotional expense of approximately $3,000, including commitments for television advertising through December 31, 2002. Other contractual commitments for items in the normal course of business total approximately $4,300. 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 Complaint asserts that the Company's Dirt Devil 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 filed a lawsuit in federal court, in the Northern District of Ohio (case #1:01cv 2775), against The Hoover Company (Hoover) on December 10, 2001, under the patent, trademark, and unfair competition laws of the United States. The Complaint asserts that Hoover infringes certain patents relating to bagless technology held by the Company. The Company seeks damages, injunction on future production, and legal fees. The Company filed a lawsuit in federal court, in the Northern District of Ohio (case #1:02cv 0338), against Bissell Homecare, Inc. (Bissell) in 2002, under the patent, trademark, and unfair competition laws of the United States. The Complaint asserts that Bissell infringes certain patents relating to bagless technology held by the Company. The Company seeks damages, injunction on future production, and legal fees. Bissell Homecare, Inc. (Bissell) filed a lawsuit in federal court, in the Western District of Michigan (case 1:02cv 0142), against the Company in 2002, under the patent, trademark, and unfair competition laws of the United States. The complaint asserts that the Company's Dirt Devil Easy Steamer and Platinum Force Extractor infringes certain patents held by Bissell. Bissell seeks damages, injunction of future production, and 24 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) legal fees. The Company is vigorously defending the suit and believes that it is without merit. If Bissell 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 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:
2001 2000 1999 ------ ------ ------- Current: Federal................................................. $4,888 $ 782 $ 8,683 State and local......................................... 552 125 780 Deferred.................................................. (382) 618 (1,853) ------ ------ ------- Total..................................................... $5,058 $1,525 $ 7,610 ====== ====== =======
Deferred income taxes reflect the impact, for financial statement reporting purposes, of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. At December 31, 2001 and 2000, the components of the net deferred tax asset were as follows:
2001 2000 ------- ------- DEFERRED TAX ASSETS: Warranty and customer returns............................. $ 3,881 $ 4,017 Bad debt reserve.......................................... 1,170 507 Inventory basis difference................................ 636 833 Accrued vacation, compensation and benefits............... 866 422 State and local taxes..................................... 127 166 Accrued advertising....................................... 98 164 Self insurance reserves................................... 90 59 Deferred compensation plan................................ 164 154 State and local taxes..................................... -- 309 Other..................................................... -- 7 DEFERRED TAX LIABILITIES: Accounts receivable mark to market........................ -- (658) Basis difference in fixed and intangible assets........... (4,566) (4,409) State and local taxes..................................... (240) -- Other..................................................... (1,688) (1,415) ------- ------- Net deferred tax asset...................................... $ 538 $ 156 ======= =======
25 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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:
YEAR ENDED DECEMBER 31, ------------------------------------------------------- % OF % OF % OF PRE-TAX PRE-TAX PRE-TAX 2001 INCOME 2000 INCOME 1999 INCOME ------ ------- ------- ------- ------ ------- Tax expense at statutory rate..... $4,890 34.0% $ 2,538 34.0% $6,900 34.0% Research & experimentation credit.......................... (400) (2.8) (1,130) (15.1) -- -- State and local income taxes, net of federal benefit.............. 360 2.5 81 1.1 507 2.5 Federal surtax on income over $10 million......................... 42 0.3 -- -- 196 1.0 Other, net........................ 166 1.2 36 0.4 7 -- ------ ---- ------- ----- ------ ---- $5,058 35.2% $ 1,525 20.4% $7,610 37.5% ====== ==== ======= ===== ====== ====
During 2000, the Company performed a detailed study of Research and Experimentation ("R&E") expenses over the preceding three-year period. As a result of this study, it was determined that additional expenditures qualify under the current guidance. Based on revised calculations, the Company was entitled to R & E credits of $462, $166 and $302 for the years ended 1999, 1998 and 1997, respectively. These Federal Income Tax refunds were received in 2001. For the years ended December 31, 2001 and 2000, the R & E credit amounted to $400 and $200, respectively. 7. MAJOR CUSTOMERS: Royal's three largest customers represented approximately 31.1%, 14.3%, and 14.1% of total net sales in 2001. The Company's three largest customers represented approximately 32.6%, 13.5% and 13.1% in 2000 and 36.9%, 13.6% and 12.1% of total net sales in 1999. 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, including Kmart, have filed for protection from creditors under applicable bankruptcy laws. As of December 31, 2001, the net exposure related to Kmart as well as other customers balances for which management believes collection is doubtful was included in the calculation of allowance for doubtful accounts. The Company sells its products to certain customers that are in bankruptcy proceedings. 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 BASED PLANS: 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 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 six to 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. 26 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following summarizes the changes in the number of Common Shares under option:
2001 2000 1999 --------------- --------------- --------------- Options outstanding at beginning of the year........................... 2,673 2,764 2,244 Options granted during the year...... 204 90 673 Options exercised during the year.... (321) (45) (116) Options canceled during the year..... (185) (136) (37) --------------- --------------- --------------- Options outstanding at end of the year............................... 2,371 2,673 2,764 =============== =============== =============== Options exercisable at end of the year............................... 1,651 865 669 Option price range per share......... $2.50 to $10.25 $2.50 to $10.25 $2.50 to $10.25
The 1,651 exercisable options at December 31, 2001 are exercisable at an average exercise price of $6.14. The Company's current option plans, which provide for a total of 3,060 options, have 59 options remaining for future grants at December 31, 2001. 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:
YEAR ENDED DECEMBER 31, ------------------------- 2001 2000 1999 ------ ------ ------- Net income (in thousands) As reported............................................. $9,324 $5,939 $12,682 Pro forma............................................... $9,091 $5,623 $12,314 Basic earnings per share As reported............................................. $ .68 $ .39 $ .70 Pro forma............................................... $ .66 $ .37 $ .68 Diluted earnings per share As reported............................................. $ .65 $ .38 $ .69 Pro forma............................................... $ .64 $ .36 $ .67
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 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:
YEAR ENDED DECEMBER 31, --------------------------- 2001 2000 1999 ------- ------- ------- Expected volatility....................................... 35.7% 36.6% 39.0% Risk-free interest rate................................... 4.85% 5.12% 6.70% Expected life of options in years......................... 7 years 7 years 7 years Expected dividend yield................................... 0% 0% 0%
27 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During fiscal years 2001, 2000 and 1999 the weighted average grant-date fair value of options granted was $2.17, $2.39 and $1.44 per share, respectively. The Company has also established compensation plans under which stock rights have been granted to certain key employees to receive Company stock upon exercise. These rights become 60% vested on the third anniversary from date of grant and an additional 20% vested for each subsequent year, 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. During 2001 and 2000, the Company awarded 116 and 330 stock rights under the plans, respectively, with a weighted average fair value at the date of grant of $4.25 and $4.89 per share for the years ended December 31, 2001 and 2000, respectively. The Company amortizes unearned compensation to expense over the five-year vesting period. Compensation expense related to these awards was $586 and $361 for 2001 and 2000, respectively. At December 31, 2001, 4 total stock rights were reserved for future issuance. 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 each of the last three years, 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 $965, $1,017, and $906 for the years ended December 31, 2001, 2000 and 1999, 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. The Company's provisions for matching and discretionary contributions totaled approximately $72, $77, and $25 for the years ended December 31, 2001, 2000 and 1999, respectively. The deferred compensation liability which equals the related assets recorded by the Company was $419 and $395 as of December 31, 2001 and 2000, respectively. 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." 28 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. SHARE REPURCHASE PROGRAM: In February 2000, the Company's Board of Directors authorized a common share repurchase program that enabled the Company to purchase, in the open market and through negotiated transactions, up to an additional 4,250 of its outstanding common shares. The Company completed the program repurchasing 3,289 shares for an aggregate purchase price of $20,065 in February 2001. In April 2001, the Company's Board of Directors authorized another common share repurchase program that enables the Company to purchase, in the open market and through negotiated transactions, up to an additional 3,400 of its outstanding common shares. As of March 11, 2002, the Company has repurchased approximately 1,052 for an aggregate purchase price of $5,250 under the program that expires in December 2002. 12. 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.
2001 2000 1999 ------- ------- ------- Net income.................................................. $ 9,324 $ 5,939 $12,682 ======= ======= ======= BASIC: Common shares outstanding, net of treasury shares, beginning of year...................................... 13,729 16,973 19,622 Weighted average common shares issued during year......... 170 23 68 Weighted average treasury shares repurchased during year................................................... (168) (1,913) (1,535) ------- ------- ------- Weighted average common shares outstanding, net of treasury shares, end of year....................................... 13,731 15,083 18,155 ======= ======= ======= Net income per common share................................. $ .68 $ .39 $ .70 ======= ======= ======= DILUTED: Common shares outstanding, net of treasury shares, beginning of year...................................... 13,729 16,973 19,622 Weighted average common shares issued during year......... 170 23 68 Weighted average common share equivalents................. 566 491 216 Weighted average treasury shares repurchased during year................................................... (168) (1,913) (1,535) ------- ------- ------- Weighted average common shares outstanding, net of treasury shares, end of year....................................... 14,297 15,574 18,371 ======= ======= ======= Net income per common share................................. $ .65 $ .38 $ .69 ======= ======= =======
13. BUSINESS SEGMENT INFORMATION: The Company has two reportable segments: Consumer Products -- Floorcare and Consumer Products -- Other. The operations of the Consumer Products -- Floorcare segment includes the design, assembly or sourcing, marketing and distribution of a full line of plastic and metal vacuum cleaners. The primary brand names associated with this segment include Dirt Devil and Royal. These products are sold primarily to major mass merchant retailers and independent dealers in North America. The operations of the Consumer Products -- Other segment represents business conducted by Privacy Technologies, Inc. and Product Launch Partners, Inc., both of which are wholly owned subsidiaries of the Company. Currently, the primary product line within this segment is the TeleZapper, a telephone attachment that helps block unwanted telemarketing 29 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) calls and removes consumers' phone numbers from telemarketers' computerized dialing lists. These products are sold primarily to major mass merchant retailers and national electronic chains in North America. The Company's reportable segments are distinguished by the nature of products sold. The Company evaluates performance and allocates resources to reportable segments primarily based on net sales and operating income. The accounting policies of the reportable segments are the same as those described in Note 1. The Company records its federal and state tax assets and liabilities at corporate. There are no intersegment sales. Financial information for the Company's reportable segments consisted of the following:
YEAR ENDED DECEMBER 31, ------------------------------ 2001 2000 1999 -------- -------- -------- Net Sales Consumer Products -- Floorcare..................... $406,502 $408,223 $407,984 Consumer Products -- Other......................... 21,923 -- -- -------- -------- -------- Consolidated Total................................. $428,425 $408,223 $407,984 ======== ======== ======== Income from Operations Consumer Products -- Floorcare..................... $ 15,882 $ 12,680 $ 23,062 Consumer Products -- Other......................... 2,096 -- -- -------- -------- -------- Consolidated Total................................. $ 17,978 $ 12,680 $ 23,062 ======== ======== ======== Capital Expenditures Consumer Products -- Floorcare..................... $ 6,011 $ 7,298 $ 16,827 Consumer Products -- Other......................... 74 -- -- -------- -------- -------- Total for Reportable Segments...................... 6,085 7,298 16,827 Corporate.......................................... 7,757 6,076 2,054 -------- -------- -------- Consolidated Total................................. $ 13,842 $ 13,374 $ 18,881 ======== ======== ======== Depreciation and Amortization Consumer Products -- Floorcare..................... $ 12,079 $ 13,046 $ 11,012 Consumer Products -- Other......................... 208 -- -- -------- -------- -------- Total for Reportable Segments...................... 12,287 13,046 11,012 Corporate.......................................... 2,992 2,790 884 -------- -------- -------- Consolidated Total................................. $ 15,279 $ 15,836 $ 11,896 ======== ======== ======== Total Assets Consumer Products -- Floorcare..................... $114,376 $124,638 $139,763 Consumer Products -- Other......................... 6,773 -- -- -------- -------- -------- Total for Reportable Segments...................... 121,149 124,638 139,763 Corporate.......................................... 19,295 13,914 12,129 -------- -------- -------- Consolidated Total................................. $140,444 $138,552 $151,892 ======== ======== ========
30 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Financial information related to the Company's operations by geographic location consisted of the following:
2001 2000 1999 -------- -------- -------- REVENUES, NET: United States...................................... $408,289 $389,867 $390,121 All other Countries................................ 20,136 18,356 17,863 -------- -------- -------- $428,425 $408,223 $407,984 ======== ======== ======== LONG LIVED ASSETS, NET: United States...................................... $ 32,527 $ 38,109 $ 34,676 All other Countries................................ 5,047 3,699 4,219 -------- -------- -------- $ 37,574 $ 41,808 $ 38,895 ======== ======== ========
31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None PART III 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 2004" and "Directors whose Terms Expire in 2003" in the Company's Proxy Statement, dated March 27, 2002, 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 27, 2002, is incorporated herein by reference. 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/SAR Grants in 2001", "Aggregated Option/SAR Exercises in 2001 and Year-End Option/SAR Values", and "Change-in-Control and Other Employment Arrangements" in the Company's Proxy Statement, dated March 27, 2002, is incorporated herein by reference. 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 27, 2002, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None 32 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE ----- (a) (1) Financial Statements Report of Independent Accountants........................... 15 Consolidated Balance Sheets at December 31, 2001 and 2000... 16 Consolidated Statements of Operations -- Years Ended December 31, 2001, 2000 and 1999.......................... 17 Consolidated Statements of Shareholders' Equity -- Years Ended December 31, 2001, 2000 and 1999.................... 18 Consolidated Statements of Cash Flows -- Years Ended December 31, 2001, 2000 and 1999.......................... 19 Notes to Consolidated Financial Statements.................. 20-31 (2) Financial Statement Schedules The following consolidated financial statement schedule of Royal Appliance Mfg. Co. and Subsidiaries is included in Item 14(d): Report of Independent Accountants on Financial Statement Schedule.................................................. 35 Schedule II -- Valuation and Qualifying Accounts............ 36 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the information has been included in the Notes to Consolidated Financial Statements (3) Exhibits The exhibits filed herewith are set forth on the Index to Exhibits filed as part of this report..................... 37-38 (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 2001......................................... --
33 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 15th day of March, 2002. ROYAL APPLIANCE MFG. CO. Registrant By /s/ MICHAEL J. MERRIMAN -------------------------------------- Michael J. Merriman Chief Executive Officer and President Date March 15, 2002 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 15th day of March 2002.
SIGNATURE TITLE --------- ----- /s/ MICHAEL J. MERRIMAN Chief Executive Officer, President and - --------------------------------------------- Director Michael J. Merriman (Principal Executive Officer) /s/ RICHARD G. VASEK Chief Financial Officer and Secretary - --------------------------------------------- (Principal Financial and Accounting Officer) Richard G. Vasek /s/ R. LOUIS SCHNEEBERGER* Chairman of the Board - --------------------------------------------- R. Louis Schneeberger /s/ JACK KAHL JR.* Director - --------------------------------------------- Jack Kahl Jr. /s/ E. PATRICK NALLEY* Director - --------------------------------------------- E. Patrick Nalley /s/ J.B. RICHEY* Director - --------------------------------------------- J.B. Richey /s/ JOHN P. ROCHON* Director - --------------------------------------------- John P. Rochon
- --------------- * 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 34 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 February 11, 2002, appearing on page 15 of the Form 10-K also included an audit of the financial statement schedule listed as Schedule II 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 February 11, 2002 35 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001
BALANCE AT ADDITIONS CHARGED TO BALANCE AT BEGINNING OF YEAR EXPENSES AND COSTS DEDUCTIONS END OF YEAR ----------------- -------------------- ---------- ----------- (DOLLARS IN THOUSANDS) ALLOWANCE FOR DOUBTFUL ACCOUNTS: Year Ended December 31, 1999........ $1,500 $ 595 $1,195(A) $ 900 Year Ended December 31, 2000........ $ 900 $ 321 $ (79)(A) $1,300 Year Ended December 31, 2001........ $1,300 $2,118 $ 418(A) $3,000 INVENTORY RESERVE: Year Ended December 31, 1999........ $1,475 $2,444(B) $1,591(C) $2,328 Year Ended December 31, 2000........ $2,328 $2,707(B) $3,190(C) $1,845 Year Ended December 31, 2001........ $1,845 $ 650(B) $1,308(C) $1,187
- --------------- Note: (A) Uncollectible accounts charged off, less recoveries. (B) Reserve for product model changes. (C) Disposal of obsolete inventory. 36 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES INDEX TO EXHIBITS FOR FORM 10-K
EXHIBIT DESCRIPTION - ------- ----------- 3(a) Articles of Incorporation, amended and restated May 4, 1992, filed as Exhibit 3.1 of Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992, filed with the Commission on August 13, 1992, and incorporated herein by reference. 3(b) Code of Regulations, amended and restated May 4, 1992, filed as Exhibit 3.2 of Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992, filed with the Commission on August 13, 1992, incorporated herein by reference. 3(c) Amendment to Amended and Restated Articles of Incorporation October 21, 1993, filed as an Exhibit to Registrant's Form 8-K filed with the Commission on November 1, 1993, and incorporated herein by reference. 4(a) Credit Agreement dated as of March 7, 2000, by and among the Registrant and various banks including National City Bank as administrative agent, filed as Exhibit 4(a) to the Annual Report on Form 10-K for the year ended December 31, 1999, incorporated herein by reference. 4(b) Receivables Purchase Agreement dated as of January 23, 2001, among Royal Appliance Receivables, Inc., as Seller, the Registrant, Market Street Funding Corporation and PNC Bank, National Association, filed as Exhibit 4(b) to the Annual Report on Form 10-K for the year ended December 31, 2000, incorporated herein by reference. 4(c) Amendment No. 1 to Receivables Purchase Agreement dated August 24, 2001. The Registrant agrees to furnish copies of certain of its other long-term debt to the Commission upon request. 4(d) Shareholder Rights Agreement dated as of October 21, 1993, filed as an Exhibit to Registrant's Form 8-K filed with the Commission on November 1, 1993, and incorporated herein by reference. 10(a) Royal Appliance Mfg. Co. 1991 Stock Option Plan for Outside Directors, filed as Exhibit 10.12 to the Registrant's Registration Statement on Forms S-1, filed with the Commission on August 6, 1991, file number 33-41211 (the "Initial Registration Statement"), incorporated herein by reference. 10(b) Royal Appliance Mfg. Co. Employees and Consultants Stock Option Plan, filed as Exhibit 10.13 to the Initial Registration Statement, incorporated herein by reference. 10(c) Form of Indemnity Agreement for Directors and Officers of the Registrant, filed as Exhibit 10.38 to the Initial Registration Statement, incorporated herein by reference. 10(d) Form of Severance and Employment Arrangement between the Registrant and Mssrs. Farone, Vasek and Brickner, filed as Exhibit 10(g) to the Annual Report on Form 10-K for the year ended December 31, 1994, incorporated herein by reference. 10(e) Annual Management Incentive Plan Description. Filed as Exhibit 10(f) to the Annual Report on Form 10-K for the year ended December 31, 1993, incorporated herein by reference. 10(f) Royal Appliance Mfg. Co. Key Executive Long-Term Incentive Plan filed as Exhibit 10(f) to the Annual Report on Form 10-K for the year ended December 31, 1995, incorporated herein by reference. 10(g) Separation Agreement between the Registrant and Mr. Moone dated March 6, 2002. 10(h) Form of Amendment to Severance and Employment Agreement between the registrant and Mssrs. Farone, Vasek and Brickner filed as Exhibit 10(h) to the Annual Report on Form 10-K for the year ended December 31, 2000, incorporated herein by reference. 10(i) Employment Agreement dated March 14, 2002, between the Registrant and Mr. Merriman.
37 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES INDEX TO EXHIBITS FOR FORM 10-K -- (CONTINUED)
EXHIBIT DESCRIPTION - ------- ----------- 10(j) Royal Appliance 401(k) Plus Plan, effective October 1, 1999 filed as Exhibit 10(i) to the Annual Report on Form 10-K for the year ended December 31, 1999, incorporated herein by reference. 10(k) Royal Appliance Phantom Stock Plan, effective March 31, 2000, filed as Exhibit 10(k) of Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by reference. 10(l) Royal Appliance Phantom Stock Plan, effective December 15, 2000, filed as Exhibit 10(l) to the Annual Report on Form 10-K for the year ended December 31, 2000, incorporated herein by reference. 10(m) Royal Appliance Phantom Stock Plan, dated April 23, 2001, filed as Exhibit 10(p) to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, incorporated herein by reference. 10(n) Lease dated October 15, 1996, as amended, with respect to Glenwillow, Ohio property filed as Exhibit 10(l) of Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by reference. 10(o) Promissory Note dated April 2, 2001, between Michael J. Merriman and the Registrant, filed as Exhibit 10(n) to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, incorporated herein by reference. 10(p) Stock Pledge Agreement dated April 2, 2001, between Michael J. Merriman and the Registrant, filed as Exhibit 10(o) to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, incorporated herein by reference. 21 Subsidiaries of Registrant. 23 Consent of PricewaterhouseCoopers LLP regarding S-8 Registration. 24 Powers of Attorney of the Registrant, Directors and Principal Financial Officer of the Registrant. 99.1 Form 11-K Annual Report for Royal Appliance 401(k) Retirement Savings Plan. 99.2 Consent of independent accountants.
38 EX-4.C 3 l93095aex4-c.txt EXHIBIT 4(C) Exhibit 4(c) AMENDMENT NO. 1 TO RECEIVABLES PURCHASE AGREEMENT THIS AMENDMENT NO. 1 TO RECEIVABLES PURCHASE AGREEMENT (this "AMENDMENT") dated as of August 24, 2001, is entered into among ROYAL APPLIANCE RECEIVABLES, INC. (the "SELLER"). ROYAL APPLIANCE MFG. CO. (the "SERVICER"), MARKET STREET FUNDING CORPORATION (together with its successors and permitted assigns, the "ISSUER"), and PNC BANK, NATIONAL ASSOCIATION, as Administrator (the "ADMINISTRATOR"). RECITALS 1. The Seller, the Servicer, the Issuer and Administrator are parties to the Receivables Purchase Agreement dated as of January 23, 2001 (the "AGREEMENT"); and 2. The parties hereto desire to amend the Agreement as hereinafter set forth. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. CERTAIN DEFINED TERMS. Capitalized terms that are used herein without definition and that are defined in EXHIBIT I to the Agreement shall have the same meanings herein as therein defined. 2. AMENDMENTS TO AGREEMENT. 2.1 The definition of "Obligor" set forth in EXHIBIT I to the Agreement is hereby amended in its entirety as follows: "`Obligor' means, any of, Lowes Companies, Inc. and any Subsidiary thereof, Sams Club and any Subsidiary thereof other than McClanes, Sears, Roebuck and Co. and any Subsidiary thereof, Target Stores Division of Dayton-Hudson Corporation, Wal-Mart Stores, Inc. and any Subsidiary thereof other than McClanes, Radioshack Corporation and any Subsidiary thereof or The Home Depot, Inc. and any Subsidiary thereof." 2.2 The definition of "Purchase Limit" set forth in EXHIBIT I to the Agreement is hereby amended by deleting the amount "$30,000,000" and inserting in its place the amount "$35,000,000" 2.3 PARAGRAPH (o)(ii) of EXHIBIT V to the Agreement is hereby amended by deleting the amount "$5,000,000" and inserting in its place the amount "$6,000,000". 3. REPRESENTATIONS AND WARRANTIES. Each of the Seller and the Servicer hereby represents and warrants to the Administrator and the Issuer as follows: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties contained in Exhibit III of the Agreement are true and correct as of the date hereof (unless stated to relate solely to an earlier date, in which case such representations or warranties were true and correct as of such earlier date). (b) ENFORCEABILITY. The execution and delivery by each of the Seller and the Servicer of this Amendment, and the performance of each of its obligations under this Amendment and the Agreement, as amended hereby, are within each of its corporate powers and have been duly authorized by all necessary corporate action on each of its parts. This Amendment and the Agreement, as amended hereby, are each of the Seller's and the Servicer's valid and legally binding obligations, enforceable in accordance with its terms. (c) NO DEFAULT. Both before and immediately after giving effect to this Amendment and the transactions contemplated hereby, no Termination Event or Unmatured Termination Event exists or shall exist. 4. EFFECT OF AMENDMENT. All provisions of the Agreement, as expressly amended and modified by this Amendment, shall remain in full force and effect. After this Amendment becomes effective, all references in the Agreement (or in any other Transaction Document) to "this Agreement", "hereof", "herein" or words of similar effect referring to the Agreement shall be deemed to be references to the Agreement as amended by this Amendment. This Amendment shall not be deemed, either expressly or impliedly, to waive, amend or supplement any provision of the Agreement other than as set forth herein. 5. EFFECTIVENESS. This Amendment shall become effective as of the date hereof upon receipt by the Administrator of counterparts of this Amendment (whether by facsimile or otherwise) executed by each of the other parties hereto, in form and substance satisfactory to the Administrator in its sole discretion. 6. COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute but one and the same instrument. 7. GOVERNING LAW. This Amendment shall be governed by, and construed in accordance with, the internal laws of the State of New York (without regard to any otherwise applicable principles of conflicts of law). 8. SECTION HEADINGS. The various headings of this Amendment are included for convenience only and shall not affect the meaning or interpretation of this Amendment, the Agreement or any provision hereof or thereof. 2 IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first written above. ROYAL APPLIANCE RECEIVABLES, INC. By: /s/ Richard G. Vasek ----------------------------------------- Name: Richard G. Vasek ----------------------------------- Title: Secretary ---------------------------------- ROYAL APPLIANCE MFG. CO. By: /s/ Richard G. Vasek ----------------------------------------- Name: Richard G. Vasek ----------------------------------- Title: CFO ---------------------------------- MARKET STREET FUNDING CORPORATION By: ----------------------------------------- Name: ----------------------------------- Title: ---------------------------------- PNC BANK, NATIONAL ASSOCIATION, as Administrator By: ----------------------------------------- Name: ----------------------------------- Title: ---------------------------------- S-1 EX-10.G 4 l93095aex10-g.txt EXHIBIT 10(G) Exhibit 10(g) February 11, 2002 T. Keith Moone 9054 E. Washington Chagrin Falls, Ohio 4402 Revised February 21, 2002 Dear Keith: This letter will serve as a Separation Agreement between Royal Appliance Mfg. Co., its subsidiaries and affiliated companies collectively referred to as the Company and you, which is being offered to you, due to the elimination of your position. 1. SEPARATION PAY -------------- You will receive separation pay at a semi-monthly rate of $7708.34, plus $387.50 for car and phone allowance, starting February 15, 2002 through February 15, 2003. Payments will be made on a regular basis for the gross amount of your salary with appropriate deductions for federal, state and local taxes, social security contribution, health care contributions, and other deductions required by federal, state, or local law. If you obtain employment elsewhere during this period you will be eligible to receive the remaining amount of this separation pay in a lump sum less all applicable taxes and deductions within 30 days of notifying me and starting employment elsewhere. If you have not obtained employment elsewhere ( to include, but not limited to; direct employee, independent sales rep, consulting arrangements over 80 hours per month and business ventures) by February 15, 2003, your semi-monthly rate of $7708.34 will be continued, until the earlier of starting employment elsewhere or February 15, 2004. 2. OTHER PAY --------- You will receive a lump sum payment of $89,500, subject to applicable federal, state and local deductions, as consideration for 2001 and 2002 incentives and awards and forfeiture of all outstanding stock options and phantom stock rights, within 30 days of signing this agreement. The Company will reimburse you for legal fees incurred as a result of reviewing this agreement of up to $2,000. 3. GROUP MEDICAL BENEFITS ---------------------- You will continue to receive coverage under the provisions of the Royal Appliance Group Medical Coverage Plan through Royal paying the COBRA through August 15, 2003, or until benefits become effective at another employer, whichever comes first, on the same terms and conditions as presently provided by Royal Appliance. At that time, you will be entitled under COBRA to continue coverage for up to an additional 6 months provided that you pay the cost of the premium at the time that you elect to continue coverage. Further information regarding your COBRA rights will be sent to you at a later date. Page 2 of 4 4. SAVINGS PLANS -------------- You are fully vested in the Royal Appliance 401(k) Savings Plan and 401(k) Plus Plan. You will be entitled to keep your investments in the Plans or withdraw them according to the provisions of the Plans. Please understand that separation payments are not eligible for continued contributions to these Plans. 5. LIFE, STD, LTD INSURANCE ------------------------ Your life insurance coverage will continue through August 15, 2002, or when benefits become effective at another employer, whichever comes first. You may convert your life insurance to an individual policy within 30 days of the expiration of your life insurance coverage. Short Term Disability and Long Term Disability insurances will discontinue after February 15, 2002. 6. UNEMPLOYMENT COMPENSATION ------------------------- You may be eligible for Unemployment Compensation and application should be made with your local unemployment insurance office. 7. DATE OF TERMINATION ------------------- Your employment with Royal Appliance Mfg. Co. will be terminated effective February 15, 2002. 8. VACATION -------- You will be paid for 132 hours vacation pay based on 96 hours of unused vacation pay for the current vacation year and 36 hours of banked vacation. This payment will be made within 30 days of signing this agreement. 9. PROFESSIONAL OUTPLACEMENT ------------------------- You are eligible to receive professional outplacement assistance through a professional firm contracted by the Company. This will be guaranteed for 6 months and will be extended on a monthly basis if needed. 10. NON-COMPETE AND CONFIDENTIALITY ------------------------------- By accepting these payments and in consideration of all other benefits offered to you, you agree that you will not compete with Royal Appliance Mfg. Co., it's parent company, it's affiliated companies and it's subsidiaries without the express written consent of the Company. This includes but is not limited to employment with or consulting with any company, firm, person or entities which competes directly or indirectly with Royal Appliance Mfg. Co. or entering into business as an owner, sole proprietor or representative which competes directly or indirectly with Royal Appliance Mfg. Co. This agreement not to compete will be in effect until February 15, 2003. By signing this agreement and accepting these payments, you agree not to disclose the terms of the separation agreement, except to members of your immediate family, accountant, attorney, or as otherwise required by law. You also agree that you will not make or publish any negative comments or disparaging remarks concerning Royal Appliance Mfg. Co., its employees, officers, suppliers and customers. 11. TRADE SECRETS ------------- You acknowledge that as an employee of Royal you executed a Technical Information and Non-Competition Agreement and you hereby reaffirm the validity of and continue to abide by. Said Agreement is expressly incorporated herein by reference. You are obligated not to reveal, disclose, sell, provide, submit or otherwise make known the trade secrets of Royal Appliance Mfg. Co. Trade secrets include but are not limited to designs, discoveries, improvements, innovations and ideas, whether or not patented or patentable, relating to any part of the business or activities of the Company including, without limitation, present, novel or improved products, processes, machines, methods of manufacturing, promotional and advertising materials or schemes and other manufacturing and sales techniques. Page 3 of 4 TRADE SECRETS (CONTINUED) ------------------------- Trade secrets also include the confidential information of the Company which includes but is not limited to the Company's products, sales methods, customer terms, co-op agreements, customer lists, customer pricing, supplier pricing, customer usages, manufacturing procedures, manufacturing distribution processes, policies and practices of the Company, equipment, costs of production and overhead, compositions, technology, formulas, know-how, research and development programs, financial information, blueprints, drawings, drafts or other written and electronic material of the Company. 12. RELEASE OF ALL CLAIMS --------------------- By signing this Agreement, and by accepting the payments set forth above, you agree to release and discharge and forever forego any claims, demands, suits, causes of action or other legal rights which you have or may have against Royal Appliance Mfg. Co., its employees, agents, owners, directors, officers or other representatives which presently exist as a result of your employment with the Company or as the result of your termination from your employment with the Company. These claims include, but are not limited to, claims under the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act, the Older Workers Benefits Protection Act, the Americans with Disabilities Act, the Ohio Anti-Discrimination Statutes and any other claim for breach of contract, express or implied and any claim under any state or federal statute or regulation. By signing this agreement, you also acknowledge that you have received additional monetary consideration for waiver of any claims that you may have under the Older Workers Benefits Protection Act and the Age Discrimination in Employment Act. Under these acts you are advised of your right to consult with an attorney prior to the execution of this agreement and have at least twenty one (21) days from the date of this letter to consider the separation agreement. You further are advised that you have seven (7) days following the execution of the separation agreement to revoke the agreement and the separation agreement shall not become effective and enforceable until the revocation period has expired. Your acceptance of this letter will serve as your acknowledgment of the receipt of and the acceptance of the consideration described in paragraphs one through ten above in complete and final settlement as full compensation for any claims or damages of whatever nature suffered by you in connection with your employment with and termination by Royal Appliance Mfg. Co. You understand and agree that this release will be considered to be final and shall be a complete bar to any legal or equitable action which might be brought by you in connection with your employment with the Company and your termination from the Company. Any breach by you of any term or condition of this letter or any contract that you may have with the Company will release the Company from any further liability to make the payments referred above, or provide benefits described above except as required by law but will not otherwise release you from your obligations under this agreement. Furthermore, you agree that a breach of any of the conditions of this agreement will result in irreparable and continuing damage to Royal for which there will be no adequate remedy at law. If you breach any of the provisions of this agreement, Royal shall be entitled to injunctive relief in addition to all other remedies available at law or in equity. You are advised of your right to consult with an attorney prior to the execution of this agreement. This offer will remain open until 5:00 p.m., March 5, 2002. This letter is presented to you in duplicate. After a full review of the letter, if you are in full agreement with the terms of the letter, sign the letter and return one (1) copy of the letter to me to indicate that you have read and understood the agreement, that you are in full agreement with the terms of the separation agreement and that your signature is voluntary and given in return for the payments outlined above. Page 4 of 4 Please call me at (440) 996-2000 or Tim Araps at (440) 996-2000, if you have any questions. Thank you. Date: - -------------------------------- ---------------------- Michael J. Merriman I have received, read and understood the terms of the above agreement. I fully agree with the terms of the agreement and my signature is voluntary given. Date: - -------------------------------- ---------------------- T. Keith Moone EX-10.I 5 l93095aex10-i.txt EXHIBIT 10(I) Exhibit 10(i) EMPLOYMENT AGREEMENT THIS AGREEMENT ("Agreement"), dated as of March 14, 2002 is between MICHAEL J. MERRIMAN ("Merriman") and ROYAL APPLIANCE MFG. CO., an Ohio corporation ("Royal"). WHEREAS, Merriman has been President and Chief Executive Officer of Royal pursuant to an employment agreement dated September 15, 1995; WHEREAS, Royal desires to continue to employ Merriman pursuant to the terms of this Agreement; WHEREAS, Royal and Merriman desire to replace the Severance and Employment Agreement between them originally executed in 1995; and WHEREAS, Merriman desires to accept such continuing employment on the terms set forth in this Agreement. NOW THEREFORE, in consideration of the premises and mutual covenants set forth herein and for other good and valuable consideration the parties agree as follows: 1. DEFINITION OF CERTAIN TERMS. For the purposes of this Agreement, the terms listed below shall be defined as follows: "Affiliate" shall mean any corporation or other business entity that directly or indirectly is controlled by the Company and any joint venture, partnership or other legal entity in which the Company has a significant ownership interest. "Board" shall mean the Company's Board of Directors. "Cause" shall have the meaning set forth in Section 6.C. "Company" shall mean Royal and its successors and assigns. "Change in Control" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A or Item 1 of Form 8-K (or any similar item or successor schedule, form, or report) promulgated under the Securities Exchange Act of 1934 as amended ("Exchange Act"); provided that, without limitation, such a change in control shall be deemed to have occurred if and at such times as (i) any "person" (as such term is used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority (i.e., more than one- half) thereof unless the election, or the nomination for election by the Company's shareholders, of each new director during such two-year period was approved by an affirmative vote of at least two-thirds of the directors then still in office who were directors at the beginning of said two-year period. In addition, a change of control shall be deemed to have occurred if there is (a) the sale, lease or other transfer in one or more transactions not in the ordinary course of business of a total of seventy percent (70%) or more of the Company's assets, or (b) any merger or consolidation between the Company and another corporation or other legal entity immediately after which the Company's stockholders immediately prior to the transaction hold, directly or indirectly, less than fifty percent (50%) of the combined voting power of the Company or its successor. "Disability" shall mean Merriman's inability to perform all of his duties for an aggregate of 90 days in any 12 consecutive month period due to a physical or mental incapacity based upon evidence of a licensed physician who has been mutually agreed to by Merriman (or his primary care giver if Merriman is physically unable to agree) and Royal. "Effective Date" shall mean the date of this Agreement as set forth in the first line above. "Executive" shall mean Merriman. "Good Reason" shall have the meaning set forth in Section 6.C. "Noncompete Period" shall have the meaning set forth in Section 7. "Term" shall have the meaning set forth in Section 2. 2. TERM OF EMPLOYMENT. The initial term of this Agreement shall commence on the Effective Date of this Agreement and shall expire on the first anniversary thereof ("Term"); PROVIDED, HOWEVER, that the Term shall be automatically extended for successive one-year periods, unless not later than 60 days prior to the end of the initial term or any automatic extension thereof, the Company or Merriman shall have given the other party written notice to the contrary. If the Company gives notice of its intention not to renew this Agreement, Merriman will be entitled to the severance benefits set forth in Section 6.A hereof. 3. POSITION. A. During the Term, Merriman will be employed as President and Chief Executive Officer of the Company. Merriman will devote substantially all his business time to the performance of his duties hereunder, will engage in no other business activities without permission of the Board and will perform his duties hereunder to the best of his abilities; PROVIDED, HOWEVER, that Merriman may serve as an outside director for any three (3) companies that do not compete with the Company or any of its Affiliates; and PROVIDED, FURTHER, that such services do not adversely affect the performance of his duties hereunder. Merriman will report to the Board. In addition, Merriman will serve on the Board without additional compensation. 2 B. In his capacity as President and Chief Executive Officer of the Company, Merriman shall have the executive authority, responsibilities and duties typically held and executed by a chief executive officer of a nationally recognized manufacturing and sales corporation. Without limiting the foregoing, Merriman shall (i) attend all meetings of the Board; and (ii) assist the Board and its committees in the exercise of the Board's duties and responsibilities, in each case as requested by, and pursuant to the direction of, the Board. C. Additionally, Merriman may make and manage personal business investments of his choice and serve in any capacity with any civic, educational or charitable organization, or trade association, without seeking or obtaining written approval of the Board, if such investments, activities and services do not significantly interfere or conflict with the performance of his duties hereunder or the interests of the Company. Written approval is required from the Board with respect to Merriman serving in any capacity with any federal, state or local governmental entity. D. PRINCIPAL OFFICE. Merriman's principal office and normal place of work shall be at the Company's principal executive offices in Glenwillow, Ohio. 4. COMPENSATION. During the Term, Merriman shall be entitled to annual compensation from the Company consisting of (i) a Salary, (ii) a Cash Bonus (if earned), and (iii) Stock Options and Phantom Stock Rights granted by the Board in its discretion, subject to the terms and conditions set forth in A., B., and C. as follows: A. SALARY. The Company shall pay Merriman an annual base salary ("Base Salary") of Four Hundred Thousand Dollars ($400,000) payable in 24 equal semi-monthly installments. State, local and federal income tax withholdings and other normal employee deductions will be deducted from the gross salary prior to payment to Merriman. Merriman's Base Salary shall be reviewed annually by the Board and increases, if any, will be made at the discretion of the Board. Merriman's Base Salary may not be reduced without his consent. B. CASH BONUS PROGRAM. At the end of each fiscal year during the Term, Merriman may earn a cash bonus pursuant to the Company's annual management incentive plan ("MIP"). The annual MIP payment to Merriman will be calculated as a percentage of Merriman's annual Base Salary, the percentage based upon the Company's actual performance compared to the various targeted levels set forth by the Board at the beginning of each fiscal year. The annual MIP payment will be paid to Merriman by February 15th following each annual calendar period. C. STOCK OPTIONS AND PHANTOM STOCK RIGHTS. Merriman may receive, from time to time, during the Term, such stock options and phantom stock rights as are awarded by the Board or a Committee of the Board under plans authorized by the Board. 5. BENEFITS AND EXPENSES. A. During the Term, the Company will provide benefits to Merriman no less favorable than those benefits made available to other Company senior management members, 3 including participation in group term life insurance, group health, hospitalization, dental and vision coverage, disability coverage, the 401(k) retirement plan, and maintenance of the current vacation plan providing for six (6) weeks of paid vacation per year which will accrue year to year if unused. B. Reasonable travel, entertainment and other business expenses incurred by Merriman in the performance of his duties hereunder shall be reimbursed by the Company in accordance with Company policies in effect from time to time. C. During the Term, the Company shall provide Merriman with a monthly car allowance for the sole purpose of defraying lease expenses, such allowance not to exceed $700 per month. The Company shall also reimburse Merriman for monthly country club dues not to exceed $700 per month. The Company shall also continue to pay all professional dues currently paid for Merriman, including those to the Young Presidents Organization. D. Merriman shall be indemnified by the Company against claims arising in connection with his status as an employee, officer, director or agent of the Company in accordance with the Company's policies in effect from time to time, subject to applicable law. 6. BENEFITS UPON TERMINATION. A. In the event of Merriman's termination without Cause, termination due to death or Disability, if Merriman terminates his employment for Good Reason or if the Company gives notice of its intention not to renew this Agreement (collectively, "Triggering Termination"), Merriman, or his estate, shall be entitled to the following severance benefits: (i) Basic severance equal to three times the sum of Merriman's current annual Base Salary and Merriman's average annual MIP earned over the three (3) most recent completed fiscal years of the Company, with such basic severance payable in six (6) equal semi-annual installments beginning within thirty (30) days after the effective date of the Triggering Termination. Notwithstanding the foregoing, if there is a Change in Control after the Effective Date but before the Triggering Termination, the basic severance shall be accelerated and paid in full as a lump sum (without any discount) within thirty (30) days after the Triggering Termination. The balance of any unpaid basic severance shall be accelerated and paid in full (without any discount), in a lump sum, upon any Change in Control that occurs after a Triggering Termination; (ii) An additional lump sum severance, payable within 30 days of the Triggering Termination. This amount will be determined and set annually each February by the Board and the amount so set shall govern until the next determination by the Board. Such additional lump sum severance amount will not be adjusted up or down by more than 33% from the previous year's amount. The additional lump sum severance amount for 2002 through February 2003 will be $1,500,000; 4 (iii) The Company shall forgive any amount remaining due from Merriman on the note payable to the Company in the original principal amount of $542,750 that Merriman signed on April 2, 2001; and (iv) Payment of Executive's Base Salary through the date of termination. These severance benefits are in addition to any benefits to which Merriman shall be entitled to under the Company's benefit plans, including a pro rata MIP payment (based on the period of time served during the year in which the Triggering Termination occurs), if any, for the year in which the Triggering Termination occurs to be paid to Merriman by the next February 15 and any unpaid MIP payment for a prior year, group health, hospitalization, dental and vision coverage for him and his family on the same basis as active senior management of the Company for the 36 months subsequent to the Triggering Termination, and accrued vacation. As a result of any Triggering Termination or immediately after a Change in Control, the Company agrees to continue in effect any perquisite, benefit or compensation plan (including its annual bonus plan, long-term incentive plan, section 401(k) plan, dental plan, life insurance plan, health and accident plan, disability plan, 401(k) Plus Plan, or deferred compensation plan) in which the Executive is currently participating (collectively referred to as the "Benefit Plans"), or to maintain plans providing substantially similar benefits, unless the continuation of any such plan (or similar plan) would, in the good faith determination of the Board, have a material adverse economic effect on the Company taking into account all facts and circumstances. Other than as provided in the preceding sentence, the Company agrees after a Change in Control and/or for the period 36 months subsequent to the Triggering Termination not to take any action that would adversely affect the Executive's participation in, or materially reduce the benefits under, any of the Benefit Plans or deprive the Executive of any material fringe benefit currently enjoyed. B. If Merriman's employment (i) is terminated by the Company for Cause, or (ii) is voluntarily terminated by Merriman for other than Good Reason, Merriman's employment hereunder shall terminate. In addition to any benefits to which Merriman shall be entitled under the Company's benefit plans, including the MIP payment for the year in which the termination occurred (and any such unpaid amount for a prior year) and accrued vacation, the Company shall pay his unpaid Base Salary to the date of that termination to Merriman. C. The following terms shall have the meanings specified below: (i) "Cause" shall mean the following: (1) an act or acts of dishonesty by the Executive constituting a felony and resulting or intended to result directly or indirectly in substantial gain or personal enrichment at the expense of the Company; or (2) the willful and continued failure by the Executive substantially to perform his duties with the Company (other than any such failure resulting from incapacity due to mental or physical illness) after a demand in writing for substantial performance is delivered by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed his duties, and such failure results in demonstrable material injury to the Company. The Executive's employment shall in no event be considered to have been terminated by the Company for Cause if such 5 termination took place as the result of (1) bad judgment or negligence, or (2) any act or omission without intent of gaining therefrom directly or indirectly a profit to which the Executive was not legally entitled, or (3) any act or omission believed in good faith to have been in or not opposed to the interest of the Company, or (4) any act or omission in respect of which a determination be made that the Executive met the applicable standard of conduct prescribed for indemnification or reimbursement or payment of expenses under the Regulations of the Company or the laws of the State of Ohio, in each case as in effect at the time of such act or omission. The Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board (other than Executive) at a meeting of the Board called and held for that purpose (after reasonable notice to the Executive and an opportunity for him, together with his counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Executive was guilty of conduct set forth above in clauses (1) or (2) of the first sentence of this paragraph and specifying the particulars thereof in detail. (ii) "Good Reason" will exist if any one or more of the following occur: (1) failure by the Company or its Affiliates to honor any of its obligations under Sections 4.A., 4.B., 4.C., 5.A., 5.B., 5.C., 5.D. or 14., or (2) an adverse change in nature or scope of the authority, powers, functions, responsibilities or duties attached to the position of President and Chief Executive Officer with the Company (as such position existed on the Effective Date) (including but not limited to assignment by the Company to Merriman of duties inconsistent with his current position, duties, responsibilities, and status with the Company or a change of his reporting responsibilities or titles currently in effect) without the prior written consent of Merriman, which is not remedied within ten (10) calendar days after receipt by the Company of written notice from Merriman of such change; or (3) if a change in circumstances significantly affecting Merriman's position has occurred (including, without limitation, a change in the scope of the business or other activities for which he is responsible), and as a result thereof Merriman has been rendered substantially unable to carry out, has been substantially hindered in the performance of, or has suffered a substantial reduction in, any of the authorities, powers, functions, responsibilities or duties attached to the position of President and Chief Executive Officer (as such position existed on the Effective Date), which situation is not remedied within ten (10) calendar days after written notice to the Company from Merriman; or (4) the Company shall, without Merriman's prior written consent, relocate its principal executive offices, or require Merriman to have his principal location of work changed, to any location which is in excess of thirty 6 (30) miles from the current location thereof or cause Merriman to travel away from his office in the course of discharging his responsibilities or duties significantly more (in terms of consecutive days or aggregate days in any calendar year) than was required of him previously; or (5) failure to elect or reelect or maintain Merriman as President and Chief Executive Officer or the removal of Merriman as a director of the Company. (6) After a Change in Control, any purported termination by the Company of Executive's employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Section 6.D. and, for purposes of this Agreement, no such purported termination shall be effective, provided, if the failure to comply with Section 6.D. occurs despite the Company's good faith efforts to comply, no Good Reason shall exist and the provisions of Section 6.D. shall govern. D. Any purported termination of employment by the Company for Cause shall be communicated by written Notice of Termination to Merriman in accordance with Section 15 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. Any good faith failure to comply with the provisions of this Section D. or Section 15 shall require that the process set forth in this Section 6D. be repeated to comply with such provisions. 7. CONFIDENTIALITY; NONDISPARAGEMENT; NONSOLICIATION; NONCOMPETITION. A. Merriman acknowledges the time and expense incurred by the Company and its subsidiaries in connection with developing proprietary and confidential information in connection with its businesses and operations. Merriman agrees that he will not at any time during the Term, and for 36 months after termination of his employment ("Noncompete Period"), divulge, communicate, use to the detriment of the Company or any of its subsidiaries or Affiliates (collectively, the "Group") or for the benefit of an other person, firm or entity, or misappropriate in any way, any confidential information or trade secrets relating to the Group, including without limitation, business strategies, operating plans, acquisition strategies (including the identities of (and any other information concerning) possible acquisition candidates), pro forma financial information, marketing analyses, acquisition terms and conditions, personnel information, trade processes, manufacturing methods, know-how, customer lists and relationships, supplier lists, or other non-public proprietary and confidential information relating to the Group, except to the extent such information is lawfully obtainable from public sources or such use or disclosure is (i) necessary to the performance of Merriman's duties under this Agreement, (ii) required by applicable laws, regulations, or by the rules of a self regulatory organization, or (iii) authorized by the Company. Additionally, during the Noncompete Period, Merriman will not make disparaging remarks about the Company or any of its Subsidiaries, employees, directors, suppliers or customers. 7 B. During the Noncompete Period, Merriman shall not, directly or indirectly, for himself or on behalf of any other person, firm or entity, employ, engage or retain any person who at any time during the preceding 12-month period was an employee or consultant of any member of the Group or contact any supplier, customer, employee or consultant from the Group for the purpose of soliciting or diverting any such supplier, customer, employee or consultant from any member of the Group or otherwise interfering with the business relationship of any member of the Group with any of the foregoing, without prior written authorization from the Company. C. During the Noncompete Period, Merriman shall not, directly or indirectly, engage in, or serve as a principal, partner, joint venturer, member, manager, trustee, agent, stockholder, director, officer, or employee of, or consultant or advisor to, or in any other capacity, or in any manner, own, control, manage, operate, or otherwise participate, invest, or have any interest in, any person, firm or entity that engages in North America in the floor care business or in any business that is competitive with any product code or any other business that generated 10% of the revenues of the Group within the preceding 24-month period, without prior written authorization from the Company; provided, however, that the ownership of less than 5% of the outstanding equity securities of a publicly traded corporation or other publicly traded legal entity shall not in and of itself be a violation of this Section 7.C. D. Merriman acknowledges that his employment by the Company and agreements herein (including the agreements of this Section 7) are reasonable and necessary for the protection of the Company and are essential inducements to the Company entering into this Agreement. Accordingly, Merriman shall be bound by the provisions hereof (including the provisions of this Section 7) to the maximum extent permitted by law, it being the intent and spirit of the parties that the foregoing shall be fully enforceable. However, the parties further agree that, if any of the provisions of this Section 7 shall for any reason be held to be excessively broad as to duration, geographical scope, or subject matter, such provision shall be construed by limiting and reducing it so as to be enforceable to the extent compatible with the applicable law as it shall herein pertain. E. Merriman acknowledges that the services to be rendered under the provisions of this Agreement are of a unique nature and that it would be difficult or impossible to replace such services and that by reason thereof, Merriman agrees and consents that if he violates the provisions of this Section 7, the Company, in addition to any other rights and remedies available under this Agreement or otherwise, shall be entitled to an injunction to be issued or specific performance to be required restricting Merriman from committing or continuing any violation of the provisions of this Section 7. F. Notwithstanding any other provision of Section 7, if a Change in Control occurs subsequent to a Triggering Termination, the Noncompete Period shall end one year after any Change in Control unless it would otherwise terminate earlier. If there is a Change in Control after the Effective Date but on or before the date of a Triggering Termination, the Noncompete Period shall end one year after such termination. 8 8. GOVERNING LAW; JURISDICTION AND VENUE. This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio, without giving effect to the conflict of law provisions thereof. Any claim or action arising hereunder shall be litigated exclusively in the Court of Common Pleas, Cuyahoga County, Ohio or federal courts situated in the Northern District of Ohio, Eastern Division, and each party irrevocably consents and submits to the personal and subject matter jurisdiction of said courts. 9. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and understanding between the parties with respect to the subject matter hereof and supersedes and cancels any and all prior discussions, correspondence, agreements or understandings (whether oral or written) between the parties hereto with respect to such matters, excluding any agreements relating to stock option and phantom stock grants or indemnity as an employee, officer, director or agent. Any representation, premise or condition, whether written or oral, not specifically incorporated herein, shall be of no binding effect upon the parties. 10. SEVERABILITY; ASSIGNMENT. A. Except for Section 7 hereof, if any portion of this Agreement is held invalid or unenforceable by a court of competent jurisdiction, such portion shall be deemed deleted as though it had never been included herein, but the remainder of this Agreement shall remain in full force and effect. B. This Agreement shall not be assignable by Merriman except pursuant to the laws of decent and distribution and then only for purposes of enforcing Merriman's rights hereunder and shall be assignable by the Company only with the consent of Merriman, PROVIDED, HOWEVER, that the Company may assign its rights and obligations under this Agreement without consent of Merriman in the event that the Company shall effect a Sale of the Company that would constitute a Change in Control. 11. COOPERATION WITH REGARD TO LITIGATION. Merriman agrees to cooperate with the Company during the Noncompete Period by making himself reasonably available to testify on behalf of the Company or its Affiliates, in any action, suit or proceeding, whether civil, criminal, administrative, or investigative and to assist the Company or any of its Affiliates in any such action, suit, or proceeding by providing information and meeting and consulting with its counsel and representatives. Merriman shall be reimbursed promptly for all out of pocket expenses incurred in satisfying his obligations under this Section 11. 12. WAIVER; AMENDMENT. No provision hereof may be waived except by a written agreement signed by all parties hereto. The waiver of any term or of any condition of this Agreement shall not be deemed to constitute a waiver of any other term or condition. This Agreement may be amended only by a written agreement signed by all parties hereto. 9 13. SURVIVAL OF PAYMENT PROVISIONS. The payment provisions of Sections 5, 6, 11, 14, 18, 19 and 20 hereof shall survive the expiration, suspension or termination, for any reason, of this Agreement. 14. SUCCESSORS; BINDING AGREEMENT. This Agreement shall inure to the benefit of, and be binding upon, the Company, its successors and permitted assigns. The Company will require any successor or assignee (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as would apply if the Executive terminated his employment for Good Reason. This Agreement shall also inure to the benefit of and be binding upon Merriman, his personal or legal representatives, his executors, administrators, heirs, distributees, devisees and legatees. If Merriman should die while any amount would still be payable hereunder had Merriman continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee, or other designee or, if there be no such designee, to his estate. 15. NOTICE. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or delivered by recognized overnight courier or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the Secretary of the Company, 7005 Cochran Road, Glenwillow, Ohio 44139, and addressed to Merriman (currently, 16361 Misty Lake Glen, Chagrin Falls, Ohio 44023) at his last known address contained in the personnel records of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 16. WITHHOLDING TAXES. The Company may withhold from any amounts payable under this Agreement such federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. 17. COUNTERPARTS. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 18. SET-OFF; INTEREST ON OVERDUE PAYMENTS. There shall be no right of set-off or counterclaim against, or delay in, any payment by the Company to Merriman hereunder in respect of any claim against or debt or obligation of Merriman, whether arising hereunder or otherwise. Without limiting the rights of Merriman at law or in equity, if the Company fails to make any payments hereunder on a timely basis, the Company shall pay interest on the amount 10 thereof at an annualized rate equal to the rate in effect, at the time such payment should have been made, under the Company's 401(k) plan for loans to participants in such plan. 19. PARACHUTE PAYMENTS. A. If it shall be determined that any payment, distribution or benefit received or to be received by Merriman from the Company or any of its Affiliates, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, phantom stock, performance share, performance unit, restricted stock, stock appreciation right or similar right, or the lapse or termination of any restriction on, or the vesting or exercisability of, any of the foregoing (individually and collectively, "Payments") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or to any similar tax imposed by state or local law, or to any interest or penalties with respect to such taxes (such tax or taxes, together with any such interest and penalties, being hereafter collectively referred to as the "Excise Tax"), then Merriman shall be entitled to receive an additional payment from the Company (the "Excise Tax Gross-Up Payment") in an amount such that the net amount retained by Merriman, after the calculation and deduction of any Excise Tax on the Payments (together with any penalties and interest that have been or will be imposed on Merriman in connection therewith) and any federal, state and local income taxes, Excise Taxes and payroll taxes (including the tax imposed by Section 3101(b) of the Code) on the Excise Tax Gross-Up Payment provided for in this Section 19, shall be equal to the Payments. In computing the amount of this payment, it shall be assumed that Merriman is subject to tax by each taxing jurisdiction at the highest marginal tax rate in the respective taxing jurisdiction of Merriman, taking into account the city and state in which Merriman resides, but giving effect to the tax benefit, if any, which Merriman may enjoy to the extent that any such tax is deductible in determining the tax liability of any other taxing jurisdiction (provided that the highest marginal tax rate for federal income tax purposes shall be determined under Section 1 of the Code). B. All determinations required to be made under this Section 19, including whether and when an Excise Tax Gross-Up Payment is required and the amount of such Excise Tax Gross-Up Payment and the assumptions to be utilized in arriving at such determination, except as specified in Section 19.A., shall be made by the Company's independent auditors (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and Merriman within 15 business days after the Company makes any Payments to Merriman. The determination of tax liability and the assumptions made by the Accounting Firm shall be subject to review by Merriman's tax advisor, and, if Merriman's tax advisor does not agree with the determination reached by the Accounting Firm, then the Accounting Firm and Merriman's tax advisor shall jointly designate a nationally-recognized public accounting firm within five (5) business days after notice has been given to the Company of Merriman's disagreement with the Accounting Firm's calculation, which shall make the determination within 15 business days after its appointment. If the parties cannot agree on a nationally recognized public accounting firm, then both parties shall select a nationally recognized public accounting firm who shall then jointly select a third nationally recognized public accounting firm which shall make the determination within 15 business days after its appointment. All fees and expenses of the 11 accountants and tax advisors retained by either Merriman or the Company shall be borne by the Company. Any Excise Tax Gross-Up Payment, as determined pursuant to this Section 19, shall be paid by the Company to Merriman within five (5) days after the receipt of the determination, subject to applicable federal, state, local and Excise Tax withholding requirements. Any determination by a jointly designated public accounting firm shall be binding upon the Company and Merriman. If an accounting firm determines that no Excise Tax is payable by Merriman, it shall, at the same time as it makes such determination, furnish the Company and Merriman an opinion that Merriman has substantial authority not to report any Excise Tax on his federal, state or local income or other tax return. C. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination hereunder, it is possible that Excise Tax Gross-Up Payments will not have been made by the Company that should have been made consistent with the calculations required to be made hereunder ("Underpayment"). In the event that the Internal Revenue Service ("IRS"), on audit, asserts that Merriman has made an underpayment and Merriman is required (by reason of settlement or otherwise) to make a payment of any Excise Tax, or if Merriman is required to make one or more payments of Excise Tax to the IRS (and/or interest or penalties thereon) upon the filing of his original or amended tax returns which exceed the amounts taken into account in determining the initial Excise Tax Gross-Up Payment made pursuant to Sections 19A. and B., then in either of such events, any such Underpayment calculated in accordance with and in the same manner as the Excise Tax Gross-Up Payment in Section 19.A. shall be promptly paid by the Company to or for the benefit of Merriman. In addition, the Company will pay Merriman an amount equal to any penalties, interest or additions to be assessed against him as a result of the Underpayment, which amounts shall be grossed up for any federal, state, local or Excise Taxes payable with respect to such penalties, interest or additions to tax such that Merriman receives a net amount equal to the penalties, interest and additions to tax assessed against him (determined in the same manner as described in Section 19.A.). Merriman shall not be obligated to contest any proposed assessment of any Underpayment and may settle any such audit action or proceeding involving an Underpayment at his discretion; provided, however, that Merriman shall, upon notice of examination by the IRS, give notice thereof to the Company and the Company, at its sole cost and in its sole discretion, may, on behalf of Merriman, defend and contest against any proposed IRS deficiency. In the event that the Company assumes the defense of the proposed deficiency, the Company shall immediately, upon written request of Merriman, secure all of its possible obligations to Merriman as provided for in this Section 19.C. by either posting cash collateral in escrow or providing Merriman with a "clean irrevocable letter of credit" in the amount of all of the Company's possible obligations to Merriman pursuant to this Section 19.C. The terms of such escrow or clean irrevocable letter of credit shall be negotiated by Company and Merriman at such time. Merriman agrees to execute any documents, including Powers of Attorney, that may be necessary to facilitate Company's defense and/or contesting the IRS' assertions. In the event that the Excise Tax Gross-Up Payment exceeds the amount subsequently determined to be due, such excess shall constitute a loan from the Company to Merriman payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 12 20. LEGAL FEES AND EXPENSES. It is the intent of the Company that the Executive not be required to incur the legal expenses associated with (i) negotiation or interpretation of any provision in, or obtaining of any right or benefit under, this Agreement or (ii) the enforcement of his rights under this Agreement by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive hereunder. Accordingly, the Company irrevocably authorizes the Executive from time to time to retain counsel of his choice, at the expense of the Company as hereafter provided, to represent the Executive in connection with the negotiation and interpretation or enforcement of this Agreement, including the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to the Executive's entering into an attorney-client relationship with such counsel, and in that connection the Company and the Executive agree that a confidential relationship shall exist between the Executive and such counsel. The Company shall pay or cause to be paid and shall be solely responsible for any and all reasonable attorneys' and related fees and expenses incurred by the Executive under this Section 20. Executed in Glenwillow, Ohio this 14th day of March, 2002. ROYAL APPLIANCE MFG. CO. By: ------------------------------ --------------------------------- R. Louis Schneeberger Michael J. Merriman Chairman of the Board 13 EX-21 6 l93095aex21.txt EXHIBIT 21 Exhibit 21 SUBSIDIARIES Jurisdiction of Name Incorporation Dirt Devil, Inc. (1) Ohio Royal Appliance Receivables, Inc. (1) Ohio Royal Appliance FSC, Inc. (1) U.S.V.I. Royal Appliance International Co. (1) Delaware RADDCO, S.A. DE C.V. (1) Mexico Royal Vacuum Cleaner Co. (1) Ohio Royal Appliance Luxembourg S.A.H. (2) Luxembourg DD Interactive, Inc. (1) Ohio Privacy Technologies, Inc. (1) Ohio LaunchPad Partners, Inc. (1) (3) Ohio (1) Company is a wholly-owned subsidiary of the Registrant. (2) Company is a wholly-owned subsidiary of the Royal Appliance International Co. (3) Subsequent to December 31, 2001, name changed to Product Launch Partners, Inc. 42 EX-23 7 l93095aex23.txt EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Forms S-8 (File No. 33-44802 and 333-36046) of Royal Appliance Mfg. Co. of our report dated February 11, 2002, relating to the financial statements, which appear in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated February 11, 2002, relating to the financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP Cleveland, Ohio March 15, 2002 EX-24 8 l93095aex24.txt EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY ----------------- ROYAL APPLIANCE MFG. CO. ------------------------ KNOW ALL MEN BY THESE PRESENTS; that Royal Appliance Mfg. Co. and each person whose name is signed below hereby constitute and appoint Michael J. Merriman and Richard G. Vasek, or both of them, their attorney-in-fact and agent, with full power of substitution and resubstitution, for and on behalf of Royal Appliance Mfg. Co. and the undersigned Directors and officers of Royal Appliance Mfg. Co., to sign Royal Appliance Mfg. Co.'s Annual Report on Form 10-K, any or all amendments thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that such attorney-in-fact and agent or his substitute or substitutes may do or cause to be done by virtue hereof. This Power of Attorney of Royal Appliance Mfg. Co. and the Directors and officers of Royal Appliance Mfg. Co. may be executed in multiple counterparts, each of which shall be deemed an original with respect to the person executing it. IN WITNESS WHEREOF, this Power of Attorney has been signed at Cleveland, Ohio this 13th day of March, 2002. ROYAL APPLIANCE MFG. CO. By: /s/ Richard G. Vasek --------------------------------------- Richard G. Vasek, Chief Financial Officer and Secretary DIRECTORS /s/ Jack Kahl Jr. /s/ Michael J. Merriman -------------------------------- ----------------------------------- Jack Kahl Jr. Michael J. Merriman /s/ E. Patrick Nalley /s/ Joseph B. Richey, II -------------------------------- ----------------------------------- E. Patrick Nalley Joseph B. Richey, II /s/ John P. Rochon /s/ R. Louis Scneeberger -------------------------------- ----------------------------------- John P. Rochon R. Louis Schneeberger EX-99.1 9 l93095aex99-1.txt EXHIBIT 99.1 EXHIBIT 99.1 TO FORM 10-K FORM 11-K ANNUAL REPORT Pursuant to Section 15(d) of the Securities Exchange Act of 1934 For the Fiscal Years Ended December 31, 2001 and 2000 ROYAL APPLIANCE 401(k) RETIREMENT SAVINGS PLAN ---------------------------------------------- (Full title of the plan) ROYAL APPLIANCE MFG. CO. ------------------------- (Name of issuer of the securities held pursuant to the plan) 7005 COCHRAN ROAD, GLENWILLOW, OHIO 44139 (Address of principal executive office) INDEX OF FINANCIAL STATEMENTS PAGES ----- Report of Independent Accountants 2 Financial Statements: Statements of Net Assets Available for Plan Benefits as of December 31, 2001 and 2000 3 Statements of Changes in Net Assets Available for Plan Benefits for the years ended December 31, 2001 and 2000 4 Notes to Financial Statements 5-9 Supplemental Schedules: Schedule of Assets Held for Investment Purposes as of December 31, 2001 10 Schedule of Reportable Transactions for the year ended December 31, 2001 11 1 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of the Royal Appliance 401(k) Retirement Savings Plan In our opinion, the accompanying statements of net assets available for plan benefits and the related statements of changes in net assets available for plan benefits present fairly, in all material respects, the net assets available for plan benefits of the Royal Appliance 401(k) Retirement Savings Plan (the "Plan") at December 31, 2001 and 2000, and the changes in net assets available for plan benefits for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Plan'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 of America, 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 our opinion. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules of assets held for investment purposes as of December 31, 2001 and reportable transactions for the year ended December 31, 2001, are presented for the purpose of additional analysis and are not a required part of the basic financial statements but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. These supplemental schedules are the responsibility of the Plan's management. These supplemental schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. PricewaterhouseCoopers LLP Cleveland, Ohio February 20, 2002 2 ROYAL APPLIANCE 401(k) RETIREMENT SAVINGS PLAN STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
DECEMBER 31, --------------------------------------------- 2001 2000 --------------------- ------------------- ASSETS Investments, at fair value: Equity mutual funds $ 14,108,506 $ 15,677,403 Fixed income mutual funds 1,212,909 672,787 Royal Appliance Mfg. Co. common stock 866,403 688,427 Participant loans 857,655 882,555 ------------- ------------ Total investments 17,045,473 17,921,172 Cash and cash equivalents 2,766 1,032 Contributions receivable 301,500 376,515 ------------- ------------ Net Assets Available For Plan Benefits $ 17,349,739 $ 18,298,719 ============= ============
The accompanying notes are an integral part of these financial statements 3 ROYAL APPLIANCE 401(K) RETIREMENT SAVINGS PLAN STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
FOR YEARS ENDED DECEMBER 31, ----------------------------- 2001 2000 ------------ ------------ Additions: Contributions: Company Contributions $ 949,338 $ 1,063,022 Employee pre-tax contributions 1,159,536 1,413,019 Participants' after-tax contributions 1,485 3,315 Participant rollovers from other plans 45,920 71,522 ------------ ------------ Total contributions 2,156,279 2,550,878 Miscellaneous income - 9,465 Investment Income: Interest and Dividends 236,516 251,278 Net depreciation in fair market value (1,987,499) (1,540,347) ------------ ------------ Net investment loss (1,750,983) (1,289,069) ------------ ------------ Net additions 405,296 1,271,274 Deductions: Benefits paid to participants 1,351,536 2,185,812 Miscellaneous fees 2,740 9,335 ------------ ------------ Net change for the year (948,980) (923,873) Net assets available for plan benefits, beginning of year 18,298,719 19,222,592 ------------ ------------ Net assets available for plan benefits, end of year $ 17,349,739 $ 18,298,719 ============ ============
The accompanying notes are an integral part of these financial statements 4 ROYAL APPLIANCE 401(K) RETIREMENT SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS 1. PLAN DESCRIPTION AND BENEFITS: The following brief description of the Royal Appliance 401(k) Retirement Savings Plan (the "Plan") is provided for general information purposes only. Participants should refer to the Summary Plan Description for more complete information. GENERAL - The Plan is a defined contribution plan covering substantially all employees of Royal Appliance Mfg. Co. (the "Company"). Employees who attain age 18 and complete at least six months of service are eligible to become participants in the Plan. On December 27, 1991, the Company filed Form S-8 with the Securities and Exchange Commission (SEC) allowing participants in the Plan to invest in Common Shares of the Company. This investment option was available as of February 1, 1992. As a result, the Plan is now required to comply with the reporting provisions of the SEC Form 11-K. CONTRIBUTIONS - Contributions consist of employer matching, employer profit sharing, salary reduction, voluntary after-tax contributions, and rollover contributions. During 2001 and 2000, employer matching contributions were 100% of the first 3% of salary reduction contributions and 50% of the next 2% of salary reduction contributions. The employer profit sharing contribution is discretionary based on amounts as authorized by the Board of Directors. All employer contributions have been made in the form of cash. Salary reduction contributions may range from 1% to 15% of qualified compensation subject to annual I.R.S. limits. Participants may also make voluntary after-tax contributions of up to 10% of their annual compensation in addition to the contribution through salary reduction. Rollover contributions are also permitted. PARTICIPANT ACCOUNTS - Each participant account is credited with the participant's contribution and allocations of the Company's contribution and Plan earnings offset by Plan administrative expenses. Each day, the Trustee calculates earnings and allocates gains and losses to each participant's account. INVESTMENT OF FUNDS - Delaware Management Trust Company ("Delaware" or "Trustee"), an affiliate of Lincoln National Corporation, is the trustee and recordkeeper of the Plan. Each participant may elect among the following investment vehicles: A. STRONG GOVERNMENT SECURITIES FUND - seeks to provide a high level of current income by investing in securities issued or guaranteed by the U.S. government. B. FIDELITY PURITAN FUND - seeks to maximize income, with growth of capital being a secondary objective. Invests in high-yielding securities, including common stocks, preferred stocks and bonds. C. TEMPLETON INSTITUTIONAL FOREIGN EQUITY MUTUAL FUND - seeks long-term growth of capital by investing in companies generally located in foreign countries. 5 ROYAL APPLIANCE 401(k) RETIREMENT SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS 1. PLAN DESCRIPTION AND BENEFITS (CONTINUED): D. BLACKROCK SMALL CAPITALIZATION GROWTH FUND - seeks long-term capital growth by investing in stocks of small companies with earnings growth momentum and relative price strength. E. MAS SMALL CAPITALIZATION VALUE PORTFOLIO - seeks long-term capital growth by investing in stocks of small companies with stocks selling at discounted price/earnings valuations. F. MASSACHUSETTS INVESTORS GROWTH FUND - Seeks long term growth of capital and future income by choosing companies believed to have better-than-average long-term growth potential. G. DAVIS NEW YORK VENTURE FUND - seeks long-term capital growth by investing in securities that have above average appreciation potential. This investment option was discontinued effective September 1999. However, during January 2001, this investment option was reinstated. H. DELAWARE S&P 500 INDEX FUND - seeks to return investment results that correspond to the price and yield performance of the S&P 500 Index. I. DELAWARE PRESERVATION FUND - seeks to provide a high degree of safety, stable principal value and consistent and positive returns. J. DELAWARE SELECT GROWTH FUND - seeks securities with high, consistent and accelerating earnings. Targets companies with earnings growth rates of 20% or more with capitalization of at least $300 million. K. DELAWARE GROWTH AND INCOME FUND - seeks total return by providing capital appreciation potential plus dividend income. Invests in common stocks that have a better yield than the average dividend yield of the S&P 500 Index. L. DELAWARE DEVON FUND - seeks stocks in "transition" from value to growth and/or mid-cap to large-cap. Identifies stocks with the potential for above average dividend growth. During January 2001, this investment option was discontinued and the participant funds were transferred to the Davis New York Venture Fund. M. ROYAL STOCK FUND - This fund is comprised exclusively of Common Shares, without par value of the Company (Common Shares). Each participant electing to purchase Common Shares through the Stock Fund is permitted to vote such Common Shares in the same manner as any other shareholder and is furnished proxy materials to such effect. If a participant does not vote their proxy, the Trustee votes the proxy for the participant's Common Shares. Common Shares purchased under the Account are generally purchased on the open market for cash. The price of Common Shares purchased on the open market is priced for each participant's account at an average purchase price of all shares purchased, plus brokerage fees, taxes, commissions and expenses incident to the purchase, unless it is determined that the Company will bear these costs. No more than 50% of a participant's contributions may be invested in the Royal Stock Fund. Participants can allocate their contribution between the Funds in various percentages, which can be changed on a daily basis throughout the year. 6 ROYAL APPLIANCE 401(k) RETIREMENT SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS 1. PLAN DESCRIPTION AND BENEFITS (CONTINUED): VESTING - All contributions are 100% vested and non-forfeitable. LOANS, DISTRIBUTIONS AND WITHDRAWALS - Loans and hardship withdrawals are permitted pursuant to the terms of the Plan. In addition, participants may make hardship withdrawals from the voluntary after-tax contribution account by filing a written request at least thirty (30) days in advance. Loans are secured by the balance in the participant's vested account and carry an interest rate equal to the prime rate plus one percent on the date of the loan. Interest rates range from 5.75% to 10.50%. Principal and interest are paid ratably through payroll deductions. Participants and their beneficiaries are entitled to receive a distribution of their account balances upon death, disability, termination of employment prior to retirement, or retirement. Distributions may be made in a lump sum or periodic payments, as may be elected by the participants or their beneficiaries, subject to the terms of the Plan. EXPENSES - Administrative fees, brokerage fees and other Plan expenses are the responsibility of the Plan. The Company, at its discretion has elected to pay these costs directly. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION - The accompanying financial statements have been prepared on an accrual basis in accordance with accounting principles generally accepted in the United States of America. Certain reclassifications have been made to prior year's financial statements to conform to the current year presentation. USE OF ESTIMATES - The preparation of financial statements in accordance with accounting principles generally accepted in the United Sates of America requires the use of management's estimates. These estimates are subjective in nature and involve judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at fiscal year end and the reported amounts of additions and deductions during the fiscal year. Actual results could differ from those estimates. RISKS AND UNCERTAINTIES - Financial instruments which potentially subject the Plan to concentrations of credit risk consist primarily of securities in which the Plan invests. Investment securities are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the near-term could materially affect participants' account balances and the amounts reported in the statements of net assets available for plan benefits. CASH AND CASH EQUIVALENTS - The Plan considers all liquid investments with original maturities of three months or less to be classified as cash equivalents. Cash equivalents are stated at cost, which approximates market value. INVESTMENTS - The Plan's investments are maintained in a trust fund administered by the Trustee. Investments are recorded at acquisition cost on a trade-date basis, which includes brokerage commissions, and are revalued each business day based upon quoted market prices. In the statements of changes in net assets available for plan benefits, the Plan presents the realized appreciation or depreciation on investments and the unrealized appreciation or depreciation in the fair value of investments. Net appreciation or depreciation is determined based on the difference between average cost of the investments and the market value as of each valuation date of such investment. Average cost is determined based on the weighted average cost of all investments purchased less any dispositions during the Plan year. DISTRIBUTIONS - Plan distributions are recorded when paid. 7 ROYAL APPLIANCE 401(k) RETIREMENT SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS 3. INVESTMENTS The following presents the market value of investments that represent 5 percent or more of the Plan's net assets at either December 31, 2001 or 2000:
DECEMBER 31, -------------------------------------- 2001 2000 -------------------------------------- Strong Governent Securities Fund, 112,410 and 63,530 shares, respectively $ 1,212,909 $ 672,787 Fidelity Purtian Fund, 111,314 and 121,164 shares, respectively $ 1,966,911 $ 2,281,522 Templeton Institutional Foreign Equity Mutual Fund, 81,165 and 82,275 shares, respectively $ 1,174,454 $ 1,394,568 Blackrock Small Capitalization Growth Fund 137,134 and 153,044 shares, respectively $ 1,814,287 $ 3,083,847 Davis New York Venture Fund, 63,068 shares as of December 31, 2001 $ 1,603,819 $ - Delaware S&P 500 Index Fund, 393,041 and 422,653 shares, respectively $ 2,641,239 $ 3,271,334 Delaware Preservation Fund, 183,132 and 131,228 shares, respectively $ 2,949,154 $ 1,996,640 Delaware Select Growth Fund, 33,434 and 33,729 shares, respectively $ 764,980 $ 1,021,988 Delaware Devon Fund, 94,061 shares as of December 31, 2000 $ - $ 1,607,509
The net (depreciation) appreciation in the fair value of the Plan's investments for fiscal years 2001 and 2000 was as follows: 2001 2000 ----------- ----------- Equity mutual funds $(2,186,947) $(1,435,210) Fixed income mutual funds 25,104 32,777 Common stock 174,344 (137,914) ----------- ----------- Total $(1,987,499) $(1,540,347) =========== =========== 8 ROYAL APPLIANCE 401(k) RETIREMENT SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS 4. INCOME TAX STATUS: The Internal Revenue Service (IRS) has issued a favorable determination letter dated June 20, 1995, with respect to the Plan's qualified status, as amended, under Section 401(a) of the Internal Revenue Code (Code). As such, the trust established thereunder is exempt from Federal income taxes under Section 501(a) of the Code. All withdrawals, with the exception of after-tax employee contributions, are taxable to the participants of the Plan. 5. RIGHT TO TERMINATE: Although it has not expressed any interest to do so, the Company has the right to terminate the Plan at any time. 6. RELATED PARTY TRANSACTIONS: At December 31, 2001 and 2000, the Plan held units of participation in certain mutual funds in which Delaware Investment Company is the advisor to the fund and Trustee to the Plan. As of December 31, 2001 and 2000, the funds had total cost of $7,135,339 and $5,324,051 and a total market value of $6,722,204 and $4,876,550, respectively. 9 ROYAL APPLIANCE 401(K) RETIREMENT SAVINGS PLAN ITEM 27 (a) - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES AS OF DECEMBER 31, 2001
Description of investment including maturity date, rate of Identity of issue, interest, collateral, borrower, lessor, or similar party par or maturity value Cost Market Value - -------------------------------------------------------- ---------------------------------- ---------------- ---------------- Strong Government Securities Fund Mutual Fund $ 1,207,771 $ 1,212,909 Fidelity Puritan Fund Mutual Fund 2,082,024 1,966,911 Templeton Institutional Foreign Equity Mutual Fund Mutual Fund 1,349,462 1,174,454 Blackrock Small Capitalization Growth Fund Mutual Fund 2,661,609 1,814,287 MAS Small Capitalization Value Portfolio Mutual Fund 752,830 713,363 Massachusetts Investors Growth Fund Mutual Fund 137,845 113,468 Davis New York Venture Fund Mutual Fund 1,793,878 1,603,819 Delaware S&P 500 Index Fund Mutual Fund 2,996,179 2,641,239 Delaware Preservation Account Mutual Fund 2,819,374 2,949,154 Delaware Select Growth Fund Mutual Fund 934,450 764,980 Delaware Growth & Income Fund Mutual Fund 385,336 366,831 Royal Stock Fund Common Stock 964,618 866,403 Royal Cash Fund Cash 2,766 2,766 Participant Loans 5.75% to 10.50% 857,655 857,655 -------- -------- $ 18,945,797 $ 17,048,239
10 ROYAL APPLIANCE 401(k) RETIREMENT SAVINGS PLAN ITEM 27 (d) - SCHEDULE OF REPORTABE TRANSACTIONS FOR THE YEAR ENDED DECEMBER 31, 2001
Purchase Selling Cost of Realized Gain Identity of Party Involved Description of Asset Price Price Asset on Sale - ----------------------------------- ----------------------- --------------- --------------- --------------- ---------------- Delaware Devon Fund Mutual Fund $ - $ 1,647,344 $ 1,571,180 $ 76,164 Davis New York Venture Fund Mutual Fund $ 1,647,344 $ - $ 1,647,344 $ -
11 EX-99.2 10 l93095aex99-2.txt EXHIBIT 99.2 EXHIBIT 99.2 ------------ CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 33-44802) of Royal Appliance Mfg. Co. of our report dated February 20, 2002, relating to the financial statements of Royal Appliance 401(k) Retirement Savings Plan which appears in this Form 11-K. PricewaterhouseCoopers LLP Cleveland, Ohio March 15, 2002 12 -----END PRIVACY-ENHANCED MESSAGE-----