-----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, IFzpkhj3BHA7u/WAUa6wAPRfGgtOEGpDkjC2ThtNd0MEnBhQa+apksFaZXeckrG4 DwK4cFUYpeV6q47OeKz18A== 0000950152-02-006191.txt : 20020813 0000950152-02-006191.hdr.sgml : 20020813 20020813110127 ACCESSION NUMBER: 0000950152-02-006191 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11194 FILM NUMBER: 02728278 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-Q 1 l95351ae10vq.txt ROYAL APPLIANCE MGF. CO. 10-Q/QTR END 6-30-02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended JUNE 30, 2002. ------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to . --------------- ------------- Commission file number 0-19431 ------- ROYAL APPLIANCE MFG. CO. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) OHIO 34-1350353 - ------------------------------------------------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 7005 COCHRAN ROAD, GLENWILLOW, OHIO 44139 - ------------------------------------------------------------------------------- (Address of Principal Executive Offices) Zip Code (440) 996-2000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate, by check mark, whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] . Indicate the number of shares outstanding of each of the issuer's classes of common shares, as of the latest practicable date. Common Shares, without par value 12,816,452 - -------------------------------------- --------------------------------- (Class) (Outstanding at August 12, 2002) The Exhibit index appears on sequential page 21. 1 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES INDEX
Page Number ------ Part I FINANCIAL INFORMATION Item 1 Financial Statements ------ -------------------- Consolidated Balance Sheets - 3 June 30, 2002 and December 31, 2001 Consolidated Statements of Operations - 4 Three and six months ended June 30, 2002 and 2001 Consolidated Statements of Cash Flows - 5 Six months ended June 30, 2002 and 2001 Notes to Consolidated Financial Statements 6 - 12 Item 2 Management's Discussion and Analysis of Financial 13 - 18 ------ ------------------------------------------------- Condition and Results of Operations ----------------------------------- Part II OTHER INFORMATION Item 4 Submission of Materials to a Vote of Security Holders 19 ------ ----------------------------------------------------- Item 6 Exhibits and Reports on Form 8-K 19 ------ -------------------------------- Signatures 20 Exhibit Index 21
*Numbered in accordance with Item 601 of Regulation S-K 2 Part I - FINANCIAL INFORMATION Item 1 - FINANCIAL STATEMENTS ------ --------------------- ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
June 30, December 31, 2002 2001 --------- --------- ASSETS (Unaudited) Current assets: Cash $ 1,966 $ 3,421 Trade accounts receivable, net 29,935 35,986 Inventories 55,796 50,807 Deferred income taxes 5,027 4,549 Prepaid expenses and other 2,625 1,636 --------- --------- Total current assets 95,349 96,399 --------- --------- Property, plant and equipment, at cost: Land 1,541 1,541 Building 7,777 7,777 Molds, tooling, and equipment 50,048 52,031 Furniture, office and computer equipment and software 15,200 12,154 Assets under capital leases 3,171 3,171 Leasehold improvements and other 7,058 7,456 --------- --------- 84,795 84,130 Less accumulated depreciation and amortization (49,358) (46,556) --------- --------- 35,437 37,574 --------- --------- Computer software and tooling deposits 1,801 4,405 Other 2,727 2,066 --------- --------- Total assets $ 135,314 $ 140,444 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 33,443 $ 27,433 Accrued liabilities: Advertising and promotion 7,132 11,196 Salaries, benefits, and payroll taxes 3,311 7,258 Warranty and customer returns 9,300 9,950 Income taxes - 1,370 Other 6,853 6,479 Current portions of capital lease obligations 156 147 --------- --------- Total current liabilities 60,195 63,833 --------- --------- Revolving credit facility 33,300 32,000 Capitalized lease obligations, less current portion 1,910 1,978 --------- --------- Total long-term debt 35,210 33,978 Deferred income taxes 4,011 4,011 --------- --------- Total liabilities 99,416 101,822 --------- --------- Commitments and contingencies (Note 3) - - Shareholders' equity: Common shares, at stated value 215 214 Additional paid-in capital 45,078 44,167 Retained earnings 69,245 70,489 --------- --------- 114,538 114,870 Less treasury shares, at cost (12,837,600 and 12,365,700 shares at June 30, 2002 and December 31, 2001, respectively) (78,640) (76,248) --------- --------- Total shareholders' equity 35,898 38,622 --------- --------- Total liabilities and shareholders' equity $ 135,314 $ 140,444 ========= =========
The accompanying notes are an integral part of these financial statements. 3 Part I - FINANCIAL INFORMATION Item 1 - FINANCIAL STATEMENTS ------ --------------------- ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 2002 2001 2002 2001 --------- --------- --------- --------- Net sales $ 89,390 $ 79,512 $ 180,554 $ 182,572 Cost of sales 73,046 64,243 145,862 146,131 --------- --------- --------- --------- Gross margin 16,344 15,269 34,692 36,441 Selling, general and administrative expenses 18,095 15,662 35,844 32,209 --------- --------- --------- --------- (Loss) income from operations (1,751) (393) (1,152) 4,232 Interest expense, net 291 484 619 1,223 Receivable securitization and other expense, net 12 200 153 715 --------- --------- --------- --------- (Loss) income before income taxes (2,054) (1,077) (1,924) 2,294 Income tax (benefit) expense (725) (369) (680) 828 --------- --------- --------- --------- Net (loss) income $ (1,329) $ (708) $ (1,244) $ 1,466 ========= ========= ========= ========= BASIC Weighted average number of common shares outstanding (in thousands) 13,049 13,812 13,146 13,769 (Loss) earnings per share $ (0.10) $ (0.05) $ (0.09) $ .11 DILUTED Weighted average number of common shares and equivalents outstanding (in thousands) 13,049 13,812 13,146 14,306 (Loss) earnings per share $ (0.10) $ (0.05) $ (0.09) $ .10
The accompanying notes are an integral part of these financial statements 4 Part I - FINANCIAL INFORMATION Item 1 - FINANCIAL STATEMENTS ------ -------------------- ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
Six Months Ended June 30, ---------------------- 2002 2001 -------- -------- Cash flows from operating activities: Net (loss) income $ (1,244) $ 1,466 -------- -------- Adjustments to reconcile net (loss) income to net cash from operating activities: Depreciation and amortization 8,829 7,316 Compensatory effect of stock awards 555 275 Deferred income taxes (478) (562) (Increase) decrease in assets: Trade accounts receivable, net 6,051 17,059 Inventories (4,989) (6,229) Prepaid expenses and other (989) (83) Other (1,153) (1,769) Increase (decrease) in liabilities: Trade accounts payable 6,010 (3,291) Accrued advertising and promotion (4,064) (3,816) Accrued salaries, benefits, and payroll taxes (3,947) 1,083 Accrued warranty and customer returns (650) (200) Accrued income taxes (1,370) (663) Accrued other 374 (468) -------- -------- Total adjustments 4,179 8,652 -------- -------- Net cash from operating activities 2,935 10,118 -------- -------- Cash flows from investing activities: Purchases of tooling, property, plant, and equipment, net (6,199) (5,653) Decrease (increase) in tooling deposits and other 2,604 (2,292) -------- -------- Net cash from investing activities (3,595) (7,945) -------- -------- Cash flows from financing activities: Proceeds (payments) on bank debt, net 1,300 (1,100) Proceeds from exercise of stock options 356 7 Payments on capital lease obligations (59) (66) Repurchase of common stock (2,392) (553) -------- -------- Net cash from financing activities (795) (1,712) -------- -------- Net (decrease) increase in cash (1,455) 461 -------- -------- Cash at beginning of period 3,421 704 -------- -------- Cash at end of period $ 1,966 $ 1,165 ======== ======== Supplemental disclosure of cash flow information: Cash payments for: Interest $ 691 $ 1,389 ======== ======== Income taxes, net of refunds $ 1,169 $ 2,054 ======== ========
The accompanying notes are an integral part of these financial statements. 5 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1: BASIS OF PRESENTATION The financial information for Royal Appliance Mfg. Co. and Subsidiaries (the Company) included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the consolidated statements of financial position as of June 30, 2002 and December 31, 2001, and the related statements of operations and cash flows as of, and for the interim periods ended, June 30, 2002 and 2001. These condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest annual report (Form 10-K). The results of operations for the three and six month periods ended June 30, 2002, are not necessarily indicative of the results to be expected for the full year. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Significant estimates include the allowance for doubtful accounts, the reserve for returns and allowances, reserve for inventory obsolescense and depreciation and amortization, among others. Certain prior year amounts have been reclassified to conform to the 2002 presentation. Net (loss) 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." In fiscal 2001, the Emerging Issues Task Force ("EITF") issued EITF No. 00-14, "Accounting for Certain Sales Incentives," and EITF No. 00-25, "Vendor Income Statement Characterization of Consideration to a Purchaser of the Vendor's Products or Services." These pronouncements address the recognition, measurement and statement of operations classification for certain sales incentives and are effective January 1, 2002. The Company adopted these pronouncements in the first quarter of fiscal 2002 and as a result certain items previously included in selling, general and administrative expenses were reclassified as a reduction of net sales. Additionally, prior period amounts were reclassified to conform to the new requirements. The impact of these two issues resulted in a reduction of net sales of $891 and $935 for the quarters ended June 30, 2002 and 2001, respectively and $1,589 and $2,397 for the six-month periods ended June 30, 2002 and 2001, respectively. These amounts, consisting principally of promotional allowances to the Company's retail customers, were previously recorded as selling, general and administrative expenses; therefore, there was no impact to net income or loss for either period. International operations, primarily Canadian, are conducted in their local currency. Assets and liabilities denominated in foreign currencies are translated at current exchange rates, and income and expenses are translated using weighted average exchange rates. The net effect of currency gains and losses realized on these business transactions is included in the determination of net income. 6 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1: BASIS OF PRESENTATION (CONTINUED) The Company has used forward exchange contracts to reduce fluctuations in foreign currency cash flows related to receivables denominated in foreign currencies. The terms of the currency instruments are consistent with the timing of the transactions being hedged. The purpose of the Company's foreign currency management activity is to protect the Company from the risk that the eventual cash flows from the foreign currency denominated transactions may be adversely affected by changes in exchange rates. Gains and losses on forward exchange contracts are deferred and recognized in income when the related transactions being hedged are recognized. Such gains and losses are generally reported on the same financial line as the hedged transaction. The Company does not use derivative financial instruments for trading or speculative purposes. Outstanding as of June 30, 2002 and December 31, 2001 were $990 and $0, respectively, in contracts to purchase foreign currency forward. There is no significant unrealized gain or loss on these contracts. All contracts have terms of three months or less. Costs incurred for producing and communicating advertising are expensed during the period aired, including costs incurred under the Company's cooperative advertising program. NOTE 2: INVENTORIES Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method. Inventories at June 30, 2002, and December 31, 2001, consisted of the following: June 30 December 31 ------- ----------- Finished goods $48,907 $43,277 Work in process and purchased parts 6,889 7,530 ------- ------- $55,796 $50,807 ======= ======= NOTE 3: COMMITMENTS AND CONTINGENCIES At June 30, 2002, the Company estimates having contractual commitments for future advertising and promotional expense of approximately $9,000 including commitments for television advertising through December 31, 2002. Other contractual commitments for items in the normal course of business total approximately $2,900. The Company is self-insured with respect to workers' compensation benefits in Ohio and carries excess workers' compensation insurance covering aggregate claims exceeding $350 per occurrence. 7 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 3: COMMITMENTS AND CONTINGENCIES (CONTINUED) The Hoover Company (Hoover) filed a lawsuit in federal court, in the Northern District of Ohio (case #1:00cv 0347), against the Company on February 4, 2000, under the patent, trademark, and unfair competition laws of the United States. The Complaint asserts that the Company's Dirt Devil Easy Steamer infringes three utility patents and two design patents held by Hoover, and also that the Easy Steamer design infringes the trade dress of Hoover's carpet extractor products. Recently, the Court has dismissed charges of infringement against Royal regarding one of the three utility patents, and has found that the Dirt Devil Easy Steamer infringes one claim of a second utility patent. The Court refused to grant summary judgment of infringement regarding the third utility patent, and also reserved judgment as to the validity of both of the remaining utility patents. Royal has motions currently pending to dismiss the charges of infringement of the design patents and the trademark claims. The trial date of November 4, 2002, has been established. Hoover seeks damages, injunction on future production, and legal fees. The Company is vigorously defending the suit and believes it is without merit. In accordance with Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies", a loss is reasonably possible, however, no range of potential loss can be estimated at this time. If Hoover were to prevail on all its remaining 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) on February 22, 2002, under the patent, trademark, and unfair competition laws of the United States. The Complaint asserts that Bissell infringes certain patents relating to bagless technology held by the Company. The Company seeks damages, injunction on future production, and legal fees. Bissell Homecare, Inc. (Bissell) filed a lawsuit in federal court, in the Eastern District of Michigan (case #02cv71079), against the Company on March 20, 2002, under the patent, trademark, and unfair competition laws of the United States. On April 25, 2002, the Company filed a motion to transfer the case from the Eastern District of Michigan to the Northern District of Ohio. On June 19, 2002, the Court transferred the case (now #1:02cv 1358) to the Northern District of Ohio. The Complaint asserts that the Company's Dirt Devil Easy Steamer and Platinum Force Extractor products infringe certain design and utility patents held by Bissell. Bissell seeks damages, injunction on future production, and legal fees. The Company is vigorously defending the suit and believes it is without merit. If Bissell were to prevail on all its claims, it could have a material adverse effect on the consolidated financial position, results of operations, or cash flows of the Company. Black & Decker Inc. and Black & Decker (U.S.) Inc. (B&D) filed a lawsuit in federal court, Northern District of Illinois (case #02C 1765) against the Company on March 8, 2002, under the patent, trademark, and unfair competition laws of the United States. The Complaint asserts that the Company's Roommate and Touch-Up vacuum cleaners infringe upon certain patents held by B&D. The Company settled this suit with a payment of $300,000 during the quarter ended June 30, 2002 with a remaining $300,000 due in January 2003. Under the settlement the Company has the right to continue to sell the products through the third quarter of 2003. 8 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 3: COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company filed a lawsuit in federal court, in the Northern District of Ohio (case #1:02cv 1127), against White Consolidated, Ltd. (Eureka) on June 14, 2002, under the patent, trademark and unfair competition laws of the United Sates. The Complaint asserts that Eureka infringes certain patents relating to bagless technology held by the Company. The Company seeks damages, injunction on future production, and legal fees. The Company is involved in various other claims and litigation arising in the normal course of business. The Company has product liability and general liability insurance policies in amounts management believes to be reasonable. There can be no assurance, however, that such insurance will be adequate to cover all potential product or other liability claims against the Company. In the opinion of management, the ultimate resolution of these actions will not materially affect the consolidated financial position, results of operations, or cash flows of the Company. NOTE 4: DEBT At June 30, 2002, the Company has a collateralized revolving credit facility with availability of up to $70,000 and a maturity date of April 1, 2005. Under the agreement, pricing options of the bank's base lending rate and LIBOR rate are based on a defined formula. In addition, the Company pays a commitment fee based on a defined formula on the unused portion of the facility. The revolving credit facility contains covenants, which require, among other things, the achievement of minimum net worth levels and the maintenance of certain financial ratios. The Company was in compliance with all applicable covenants as of June 30, 2002. The revolving credit facility is collateralized by the assets of the Company. As long as the Company remains in compliance with all covenants, the revolving credit facility permits share repurchases and dividends based on a defined formula up to $19,970 as of June 30, 2002. The Company also utilizes a revolving trade accounts receivable securitization program to sell without recourse, through a wholly-owned subsidiary, certain trade accounts receivable. Under the program, the maximum amount allowed to be sold at any given time is $30,000, seasonally adjusted to $35,000 from September to December. At June 30, 2002, the Company had received approximately $17,300 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 $277 and $645 for the six months ended June 30, 2002 and 2001, respectively, and have been classified as "Receivable securitization and other expense, net" in the accompanying Consolidated Statements of Operations. The Company, as agent for the purchaser of the receivables, retains collection and administrative responsibilities for the purchased receivables. The Company is required to maintain certain financial ratios associated with the receivables included within the program. The Company received a waiver from the bank with respect to non-compliance with delinquency ratios related to receivables included within the program for June and July 2002. NOTE 5: SHARE REPURCHASE PROGRAM In April 2001, the Company's Board of Directors authorized a common share repurchase program that provides for the Company to purchase, in the open market and through negotiated transactions, up to 3,400 of its outstanding common shares. As of August 9, 2002, the Company has repurchased approximately 1,322 shares for an aggregate purchase price of approximately $6,900 under the program that is scheduled to expire in December 2002. 9 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 6: EARNINGS PER SHARE The Company follows Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share, for the calculation of earnings per share. Basic earnings per share excludes dilution and is computed by dividing income by the weighted average number of common shares outstanding for the period. Diluted earnings per share includes the dilution of common stock equivalents.
Three months ended Six months ended June 30, June 30, ---------------------- ---------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Net (loss) income $ (1,329) $ (708) $ (1,244) $ 1,466 ======== ======== ======== ======== BASIC: Common shares outstanding, net of treasury shares, beginning of period 13,017 13,729 13,464 13,729 Weighted average common shares issued during period 37 166 35 83 Weighted average treasury shares repurchased during period (5) (83) (353) (43) -------- -------- -------- -------- Weighted average common shares outstanding, net of treasury shares, end of period 13,049 13,812 13,146 13,769 ======== ======== ======== ======== Net (loss) income per common share $ (0.10) $ (0.05) $ (0.09) $ 0.11 ======== ======== ======== ======== DILUTED: Common shares outstanding, net of treasury shares, beginning of period 13,017 13,729 13,464 13,729 Weighted average common shares issued during period 37 166 35 83 Weighted average common share equivalents - - - 537 Weighted average treasury shares repurchased during period (5) (83) (353) (43) -------- -------- -------- -------- Weighted average common shares outstanding, net of treasury shares, end of period 13,049 13,812 13,146 14,306 ======== ======== ======== ======== Net (loss) income per common share $ (0.10) $ (0.05) $ (0.09) $ 0.10 ======== ======== ======== ========
10 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 7: RELATED PARTY NOTE RECEIVABLE: On April 2, 2001, the Company and its Chief Executive Officer (Officer) entered into a Promissory Note Agreement in the principal amount of approximately $543. The non-interest bearing note was used by the Officer to fund the exercise of stock options to purchase 167 common shares of the Company. The promissory note is due and payable in full on April 2, 2008 or, if earlier, within twelve months after the Officer's voluntary termination of employment with the Company. The Officer simultaneously entered into a Stock Pledge Agreement with the Company pledging the 167 common shares as security for the promissory note. NOTE 8: BUSINESS SEGMENT INFORMATION The Company has two reportable segments: Consumer Products - Floorcare and Consumer Products - Other. The operations of the Consumer Products - Floorcare segment includes the design, assembly or sourcing, marketing and distribution of a full line of plastic and metal vacuum cleaners. The primary brand names associated with this segment include Dirt Devil and Royal. These products are sold primarily to major mass merchant retailers and independent dealers in North America. The operations of the Consumer Products - Other segment represents business conducted by Privacy Technologies, Inc. and Product Launch Partners, Inc., both of which are wholly owned subsidiaries of the Company. Currently, the primary product line within this segment is the TeleZapper, a telephone attachment that helps reduce unwanted computer-dialed telemarketing calls. These products are sold primarily to major mass merchant retailers and national electronic chains in North America. In August of 2002, the Company licensed the TeleZapper intellectual property to a phone manufacturer for the inclusion in telephones and answering machines. The Company's reportable segments are distinguished by the nature of products sold. The Company evaluates performance and allocates resources to reportable segments primarily based on net sales and operating income. The accounting policies of the reportable segments are the same as those described in Note 1, the accounting policies footnote. The Company records its federal and state tax assets and liabilities at corporate. There are no intersegment sales. 11 ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 8: BUSINESS SEGMENT INFORMATION (CONTINUED) Financial information for the Company's Reportable Segments consisted of the following:
Three months ended June 30, Six months ended June 30, 2002 2001 2002 2001 --------- --------- --------- --------- Net Sales Consumer Products - Floorcare $ 82,788 $ 79,512 $ 166,016 $ 182,572 Consumer Products - Other 6,602 - 14,538 - --------- --------- --------- --------- Consolidated Total $ 89,390 $ 79,512 $ 180,554 $ 182,572 ========= ========= ========= ========= (Loss) income from Operations Consumer Products - Floorcare $ 312 $ (393) $ (744) $ 4,232 Consumer Products - Other (2,063) - (408) - --------- --------- --------- --------- Consolidated Total $ (1,751) $ (393) $ (1,152) $ 4,232 ========= ========= ========= ========= Capital Expenditures Consumer Products - Floorcare $ 1,197 $ 2,360 $ 3,068 $ 4,420 Consumer Products - Other 50 50 50 62 --------- --------- --------- --------- Total for Reportable Segments 1,247 2,410 3,118 4,482 Corporate 191 1,832 477 3,463 --------- --------- --------- --------- Consolidated Total $ 1,438 $ 4,242 $ 3,595 $ 7,945 ========= ========= ========= ========= Depreciation and Amortization Consumer Products - Floorcare $ 3,380 $ 2,934 $ 6,479 $ 5,951 Consumer Products - Other 153 67 258 67 --------- --------- --------- --------- Total for Reportable Segments 3,533 3,001 6,737 6,018 Corporate 1,029 702 2,092 1,298 --------- --------- --------- --------- Consolidated Total $ 4,562 $ 3,703 $ 8,829 $ 7,316 ========= ========= ========= ========= Total Assets Consumer Products - Floorcare $ 107,366 $ 111,909 $ 107,366 $ 111,909 Consumer Products - Other 5,299 1,200 5,299 1,200 --------- --------- --------- --------- Total for Reportable Segments 112,665 113,109 112,665 113,109 Corporate 22,649 18,192 22,649 18,192 --------- --------- --------- --------- Consolidated Total $ 135,314 $ 131,301 $ 135,314 $ 131,301 ========= ========= ========= =========
12 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------------- CRITICAL ACCOUNTING POLICIES AND ESTIMATES - ------------------------------------------ Management's discussion and analysis of its financial position and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Financial Reporting Release No. 60, which was recently issued by the Securities and Exchange Commission ("SEC"), requires all registrants, including the Company, to include a discussion of "Critical" accounting policies or methods used in the preparation of financial statements. Management believes that the critical accounting policies and areas that require the most significant judgments and estimates to be used in the preparation of the consolidated financial statements are revenue recognition including customer based programs and incentives, allowance for doubtful accounts, useful lives of tooling and other long lived assets and accrued warranty and customer returns. Revenue Recognition - The Company's revenue recognition policy is to recognize revenues when products are shipped. 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 sell-through data at retail, forecast demand and the timeframe of new product introductions. Accrued Warranty and Customer Returns - The Company's return policy is to replace, repair or issue credit for 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. 13 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED) ------------- RESULTS OF OPERATIONS - --------------------- Net sales increased 12.4% for the second quarter and decreased 1.1% for the six-month period ended June 30, 2002, compared with the same periods in the prior year. The increase in the second quarter net sales was primarily due to shipments of the TeleZapper, which was introduced in the third quarter of 2001. The decrease in net sales for the six months ended June 30, 2002 was primarily due to lower shipments of carpet extractors and lower average wholesale prices on floorcare products, partially offset by shipments of the TeleZapper. Overall sales to the top 5 customers (all of which are major retailers) decreased in the first six months of 2002, both in terms of dollars and as a percentage of total net sales, accounting for approximately 69.6% as compared with approximately 74.5% in the first six months of 2001. The Company believes that its dependence on sales to its largest customers will continue. Recently, several major retailers have experienced significant financial difficulties and some, including Kmart, have filed for protection from creditors under applicable bankruptcy laws. As of June 30, 2002, the net exposure related to Kmart as well as other customer balances for which management believes that collection is doubtful was included in the calculation of allowance for doubtful accounts. The Company sells its products to certain customers that are in bankruptcy proceedings. Gross margin, as a percent of net sales, decreased from 19.2% for the second quarter 2001 to 18.3% in the second quarter 2002, and decreased from 20.0% for the six months ended June 30, 2001 to 19.2% for the six months ended June 30, 2002. The gross margin percentage was negatively affected in 2002 by lower average wholesale selling prices on the Company's floorcare products due to continued heightened competition. This negative impact on gross margins was partially offset by favorable TeleZapper margins, lower floorcare product returns and lower costs on certain products. Selling, general and administrative expenses increased 15.5% for the second quarter of 2002 and increased 11.3% for the six-month period ended June 30, 2002, compared with the same periods in 2001. The increase in selling, general and administrative expenses for 2002 was primarily due to increases in advertising and promotional expenditures related to TeleZapper, employee related benefit expenses, professional services associated with litigation and depreciation expense associated with recent upgrades to the Company's information technology. Interest expense decreased 39.9% for the second quarter 2002, and decreased 49.4% for the six-month period ended June 30, 2002 compared to the same periods in 2001. The decrease in interest expense is the result of lower effective borrowing rates and lower levels of variable rate borrowings to finance working capital, capital expenditures and share repurchases. Receivable securitization and other expense, net, principally reflects the effect of the cost of the Company's trade accounts receivable securitization program and foreign currency transaction gains or losses related to the Company's North American assets. Due to the factors discussed above, the Company had a loss before income taxes for the second quarter and six-month period ended June 30, 2002 of $(2,054) and $(1,924), respectively, compared to a loss before income taxes for the second quarter 2001 and income before income taxes for the six-month period ended June 30, 2001 of $(1,077) and $2,294, respectively. 14 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED) ------------- LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company used cash generated from operations during the quarter ended June 30, 2002 to fund its capital expenditures and share repurchases. Working capital was $35,154 at June 30, 2002, an increase of 7.9% over December 31, 2001. Current assets decreased by $1,050 reflecting in part a decrease in trade accounts receivable of $6,051, and a $1,455 decrease in cash, substantially offset by an increase in inventory of $4,989, and a $989 increase in prepaid expenses and other. Current liabilities decreased by $3,638, reflecting in part a $4,064 decrease in accrued advertising and promotion, a $3,947 decrease in accrued salaries, benefits, and payroll taxes and a $1,370 decrease in accrued income taxes, partially offset by an increase of $6,010 in accounts payable. In the first six months of 2002, the Company utilized $3,595 of cash for capital expenditures, including approximately $1,100 of tooling related to a new bagged upright and approximately $1,600 of tooling for various other floorcare products. At June 30, 2002, the Company had a collateralized revolving credit facility with availability of up to $70,000 and a maturity date of April 1, 2005. Under the agreement, pricing options of the bank's base lending rate and LIBOR rate are based on a defined formula. In addition, the Company pays a commitment fee based on a defined formula on the unused portion of the facility. The revolving credit facility contains covenants, which require, among other things, the achievement of minimum net worth levels and the maintenance of certain financial ratios. The Company was in compliance with all applicable covenants as of June 30, 2002. The revolving credit facility is collateralized by the assets of the Company. As long as the Company remains in compliance with all covenants, the revolving credit facility permits share repurchases and dividends based on a defined formula up to $19,970 as of June 30, 2002. The Company also utilizes a revolving trade accounts receivable securitization program to sell without recourse, through a wholly-owned subsidiary, certain trade accounts receivable. Under the program, the maximum amount allowed to be sold at any given time is $30,000, seasonally adjusted to $35,000 from September to December. At June 30, 2002, the Company had received approximately $17,300 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 $277 and $645 for the six months ended June 30, 2002 and 2001, respectively, and have been classified as "Receivable securitization and other expense, net" in the accompanying Consolidated Statements of Operations. The Company, as agent for the purchaser of the receivables, retains collection and administrative responsibilities for the purchased receivables. The Company is required to maintain certain financial ratios associated with the receivables included within the program. The Company received a waiver from the bank with respect to non-compliance with delinquency ratios related to receivables included within the program for June and July 2002. In April 2001, the Company's Board of Directors authorized a common share repurchase program that provides for the Company to purchase, in the open market and through negotiated transactions, up to 3,400 of its outstanding common shares. As of August 9, 2002, the Company has repurchased approximately 1,322 shares for an aggregate purchase price of approximately $6,900 under the program that is scheduled to expire in December 2002. The Company believes that its revolving credit facilities along with cash generated by operations will be sufficient to provide for the Company's anticipated working capital and capital expenditure requirements for the next twelve months, as well as any additional stock repurchases under the current repurchase program. 15 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED) ------------- QUARTERLY OPERATING RESULTS - --------------------------- The following table presents certain unaudited consolidated quarterly operating information for the Company and includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of such information for the interim periods. Certain prior period amounts have been reclassified to conform to current period presentation (See Note 1 to Notes to Consolidated Financial Statements).
Three Months Ended --------------------------------------------------------------------------------- June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, 2002 2002 2001 2001 2001 2001 -------- -------- -------- -------- -------- -------- Net sales $ 89,390 $ 91,164 $127,236 $111,503 $ 79,512 $103,060 Gross margin 16,344 18,348 32,663 26,461 15,269 21,172 Net (loss) income (1,329) 85 3,773 4,085 (708) 2,174 Net (loss) income per share - diluted(a) $ (0.10) $ 0.01 $ 0.27 $ 0.29 $ (0.05) $ 0.15
(a) The sum of 2001 quarterly net income (loss) per common share does not equal annual net income per common share due to the change in the weighted average number of common shares outstanding due to share repurchases. The Company believes that a significant percentage of certain of its products are given as gifts and therefore, sell in larger volumes during the Christmas and other holiday shopping seasons. The Company's continued dependency on its major customers, the timing of purchases by these major customers and the timing of new product introductions cause quarterly fluctuations in the Company's net sales. As a consequence, results in prior quarters are not necessarily indicative of future results of operations. OTHER - ----- The Company's Consumer Products - Floorcare business segment's most significant competitors are Hoover, Eureka and Bissell in the upright vacuum and carpet shampooer markets and, Black & Decker and Euro Pro in the hand-held market. Many of these competitors and several others are subsidiaries or divisions of companies that are more diversified and have greater financial resources than the Company. The Company believes that the domestic vacuum cleaner industry is a mature industry with modest annual growth in many of its products but with a decline in certain other products. Competition is dependent upon price, quality, extension of product lines, and advertising and promotion expenditures. Additionally, competition is influenced by innovation in the design of replacement models and by marketing and approaches to distribution. The Company experiences extensive competition, including price pressure and increased advertising by its competitors, in all product lines within the Consumer Products - Floorcare segment. These trends are expected to continue throughout 2002. The Company's Consumer Products - Other business segment competes with a variety of other consumer products and services. In addition to various state "do not call" lists, the Federal Trade Commission is proposing a national "do not call" list that may have an impact on the sales of the TeleZapper. In August of 2002, the Company licensed the TeleZapper intellectual property to a phone manufacturer for the inclusion in telephones and answering machines. During the first quarter of 2002, the Company announced a licensing arrangement with The Proctor and Gamble Company for the rights to a new carpet cleaning system. The initial marketing plan for the product has been scaled back, resulting in the Company seeking very limited retail distribution in 2002. 16 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED) ------------- INFLATION - --------- The Company does not believe that inflation by itself has had a material effect on the Company's results of operations. However, as the Company experiences price increases from its suppliers, which may include increases due to inflation, retail pressures may prevent the Company from increasing its prices. LITIGATION - ---------- The Hoover Company (Hoover) filed a lawsuit in federal court, in the Northern District of Ohio (case #1:00cv 0347), against the Company on February 4, 2000, under the patent, trademark, and unfair competition laws of the United States. The Complaint asserts that the Company's Dirt Devil Easy Steamer infringes three utility patents and two design patents held by Hoover, and also that the Easy Steamer design infringes the trade dress of Hoover's carpet extractor products. Recently, the Court has dismissed charges of infringement against Royal regarding one of the three utility patents, and has found that the Dirt Devil Easy Steamer infringes one claim of a second utility patent. The Court refused to grant summary judgment of infringement regarding the third utility patent, and also reserved judgment as to the validity of both of the remaining utility patents. Royal has motions currently pending to dismiss the charges of infringement of the design patents and the trademark claims. The trial date of November 4, 2002, has been established. Hoover seeks damages, injunction on future production, and legal fees. The Company is vigorously defending the suit and believes it is without merit. In accordance with Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies", a loss is reasonably possible, however, no range of potential loss can be estimated at this time. If Hoover were to prevail on all its remaining 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) on February 22, 2002, under the patent, trademark, and unfair competition laws of the United States. The Complaint asserts that Bissell infringes certain patents relating to bagless technology held by the Company. The Company seeks damages, injunction on future production, and legal fees. Bissell Homecare, Inc. (Bissell) filed a lawsuit in federal court, in the Eastern District of Michigan (case #02cv71079), against the Company on March 20, 2002, under the patent, trademark, and unfair competition laws of the United States. On April 25, 2002, the Company filed a motion to transfer the case from the Eastern District of Michigan to the Northern District of Ohio. On June 19, 2002, the Court transferred the case (now #1:02cv 1358) to the Northern District of Ohio. The Complaint asserts that the Company's Dirt Devil Easy Steamer and Platinum Force Extractor products infringe certain design and utility patents held by Bissell. Bissell seeks damages, injunction on future production, and legal fees. The Company is vigorously defending the suit and believes it is without merit. If Bissell were to prevail on all its claims, it could have a material adverse effect on the consolidated financial position, results of operations, or cash flows of the Company. Black & Decker Inc. and Black & Decker (U.S.) Inc. (B&D) filed a lawsuit in federal court, Northern District of Illinois (case #02C 1765) against the Company on March 8, 2002, under the patent, trademark, and unfair competition laws of the United States. The Complaint asserts that the Company's Roommate and Touch-Up vacuum cleaners infringe upon certain patents held by B&D. The Company settled this suit with a payment of $300,000 during the quarter ended June 30, 2002 with a remaining $300,000 due in January 2003. Under the settlement the Company has the right to continue to sell the products through the third quarter of 2003. 17 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED) ------------- LITIGATION (CONTINUED) - ---------- The Company filed a lawsuit in federal court, in the Northern District of Ohio (case #1:02cv 1127), against White Consolidated, Ltd. (Eureka) on June 14, 2002, under the patent, trademark and unfair competition laws of the United Sates. The Complaint asserts that Eureka infringes certain patents relating to bagless technology held by the Company. The Company seeks damages, injunction on future production, and legal fees. The Company is involved in various other claims and litigation arising in the normal course of business. The Company has product liability and general liability insurance policies in amounts management believes to be reasonable. There can be no assurance, however, that such insurance will be adequate to cover all potential product or other liability claims against the Company. In the opinion of management, the ultimate resolution of these actions will not materially affect the consolidated financial position, results of operations, or cash flows of the Company. ACCOUNTING STANDARDS - -------------------- In fiscal 2001, the Emerging Issues Task Force ("EITF") issued EITF No. 00-14, "Accounting for Certain Sales Incentives," and EITF No. 00-25, "Vendor Income Statement Characterization of Consideration to a Purchaser of the Vendor's Products or Services." These pronouncements address the recognition, measurement and statement of operations classification for certain sales incentives and are effective January 1, 2002. The Company adopted these pronouncements in the first quarter of fiscal 2002 and as a result certain items previously included in selling, general and administrative expenses were reclassified as a reduction of net sales. Additionally, prior period amounts were reclassified to conform to the new requirements. The impact of these two issues resulted in a reduction of net sales of $891 and $935 for the quarters ended June 30, 2002 and 2001, respectively and $1,589 and $2,397 for the six-month periods ended June 30, 2002 and 2001, respectively. These amounts, consisting principally of promotional allowances to the Company's retail customers, were previously recorded as selling, general and administrative expenses; therefore, there was no impact to net income or loss for either period. 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 Form 10Q 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 impact of an adverse outcome in any of the patent infringement cases; 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, Carpet CPR(TM) 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. 18 PART II - OTHER INFORMATION ITEM 4 - Submission of Matters to a Vote of Security Holders ------ --------------------------------------------------- (a) The Company's annual meeting of shareholders was held April 25, 2002, (b) At the annual meeting, the Company's shareholders elected Messrs. Jack Kahl Jr., Michael J. Merriman, and John P. Rochon, as Class I Directors for a two-year term which expires at the annual shareholders meeting in 2004. The term of office of Messrs. R. Louis Schneeberger, E. Patrick Nalley and Joseph B. Richey II, the Class II Directors, continued after the 2002 meeting; such term expires at the annual shareholders meeting in 2003. (c) At the annual meeting, the Company's shareholders ratified the appointment of PricewaterhouseCoopers L.L.P. as auditors of the Company for 2002. The holders of 11,664,172 common shares voted to ratify the appointment, the holders of 169,579 common shares voted against the ratification, and the holders of 9,938 common shares abstained. The following tabulation represents voting for the Class I Directors WITHHELD Name FOR AUTHORITY ---- --- --------- Jack Kahl 11,751,759 91,930 Michael J. Merriman 11,750,259 93,430 John P. Rochon 11,734,891 108,798 (d) Not applicable ITEM 6 - Exhibits and Reports on Form 8-K ------ -------------------------------- The Exhibits filed herewith are set forth on the Index to Exhibits filed as part of this report. Forms 8-K - None The following documents are furnished as an exhibit and numbered pursuant to Item 601 of Regulation S-K: None 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Royal Appliance Mfg. Co. ---------------------------------------------------- (Registrant) /s/ Michael J. Merriman ---------------------------------------------------- Michael J. Merriman Chief Executive Officer, President and Director (Principal Executive Officer) Date: August 12, 2002 /s/ Richard G. Vasek --------------- ---------------------------------------------------- Richard G. Vasek Chief Financial Officer, Vice President - Finance and Secretary (Principal Financial Officer) 20 INDEX TO EXHIBITS ----------------- PAGE NUMBER ----------- 10(q) Royal Appliance Phantom Stock Plan dated February 11, 2002 10(r) Royal Appliance Phantom Stock Plan for Directors dated April 25, 2002 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 21 EX-10.Q 3 l95351aexv10wq.txt EXHIBIT 10(Q) Exhibit 10(q) 2002 ROYAL APPLIANCE PHANTOM STOCK PLAN Effective Date: February 11, 2002 TABLE OF CONTENTS ARTICLE NUMBER - ------- ------ PURPOSE I DEFINITIONS II ELIGIBILITY AND PARTICIPATION III AWARD OF PHANTOM SHARES IV VESTING OF PHANTOM SHARES V EVENTS OF FORFEITURE VI TERMINATION OF EMPLOYMENT VII DISABILITY OF A PARTICIPANT VIII DEATH OF A PARTICIPANT IX PAYMENT OF PHANTOM SHARES X NONTRANSFERABILITY OF PHANTOM SHARES XI ADMINISTRATION XII AMENDMENT AND TERMINATION XIII PARTICIPATING EMPLOYERS XIV PHANTOM STOCK AGREEMENTS XV MISCELLANEOUS XVI ARTICLE I PURPOSE 1.1 This 2002 Royal Appliance Phantom Stock Plan is intended to serve as an incentive to key employees of the Company and Participating Employers, and to attract and retain in their employ persons of outstanding abilities upon whom the future success of the Company largely depends. This Plan shall become effective February 11, 2002. ARTICLE II DEFINITIONS 2.1 ACTUAL SHARES. The words "Actual Shares" shall mean the common shares, without par value, of the Company. 2.2 ADMINISTRATOR. The word "Administrator" shall mean the Compensation Committee or the person, persons, committee, corporation, partnership or other entity designated as Administrator under Article XII. 2.3 APPEALS COMMITTEE. The words "Appeals Committee" shall mean the Appeals Committee established pursuant to Article XII. 2.4 BENEFICIARY The word "beneficiary" shall mean any person who receives or is designated to receive payment of any amounts under the terms of this Plan because of the participation of another person in this Plan. 2.5 BOARD. The word "Board" shall mean the Board of Directors of the Company, as the same may change from time to time. 2.6 CAUSE. The word "Cause" shall mean for purposes of this Plan any of the following occurring while a Participant or former Participant is an employee of the Company or any Participating Employer: (a) his engaging in any act of fraud or gross dishonesty or criminal activity with respect to the Company or any Participating Employer; or (b) his conviction of any felony; or (c) his engaging in any act of willful misconduct or gross negligence which adversely affects the Companies or any Participating Employer; or (d) his refusal to submit to a medical examination if directed to do so by the Company or Participating Employer to determine whether the Participant is disabled under this Plan. 1 2.7 CHANGE IN CONTROL. The words "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. 2.8 COMMITTEE. The word "Committee" shall mean the Compensation Committee of the Board of Directors of Royal Appliance Mfg. Co., which shall consist of three (3) or more members designated by the Board of Directors. 2.9 COMPANY. The word "Company" shall mean Royal Appliance Mfg. Co., and any successor corporation or business organization which shall assume the duties and obligations of Royal Appliance Mfg. Co. under this Plan. 2.10 DISABILITY. The word "Disability" shall mean a physical or mental condition of a Participant resulting from bodily injury, disease, or mental disorder which renders him incapable of continuing his usual and customary employment with the Company. A licensed physician chosen by the Administrator shall determine whether a Participant has a disability. The criteria for determining Disability status shall be applied uniformly to all Participants. 2.11 EFFECTIVE DATE. The words "Effective Date" shall mean February 11, 2002. 2.12 HE, HIM, HIS. The words "he," "him," and "his" shall mean, in addition to their common meaning, "she," "her," "hers," "it" or "its," as the context may require, and generally, whenever any pronoun is used herein, it shall be construed to include the masculine pronoun, the feminine pronoun or the neuter pronoun, as shall be appropriate. 2.13 PARTICIPANT. The word "Participant" shall mean any individual who is designated by the Board and who takes the necessary actions to participate in the Plan pursuant to Article III hereof. 2 2.14 PARTICIPATING EMPLOYER. The words "Participating Employer" shall mean the Company and such subsidiaries and affiliated companies of the Company which participate in the Plan with the consent of the Board of Directors. 2.15 PHANTOM SHARE. The words "Phantom Share" shall mean a phantom unit of ownership awarded to a Participant pursuant to this Plan that represents one (1) Actual Share. 2.16 PHANTOM SHARE VALUE. The words "Phantom Share Value" shall mean the fair market value of an Actual Share. The fair market value of an Actual Share shall be the closing price of an Actual Share on the New York Stock Exchange or other applicable national stock exchange with which the Company is registered for the trading date for which the fair market value of an Actual Share is reported which is coincident with or immediately prior to the date the Phantom Share Value is determined under this Plan 2.17 PHANTOM STOCK AGREEMENT. The words "Phantom Stock Agreement" shall mean an agreement entered into by the Company or other Participating Employer and a Participant for the purpose of awarding Phantom Shares to the Participant in accordance with Section 4.2 of this Plan. 2.18 PLAN. The word "Plan" shall mean the 2002 Royal Appliance Phantom Stock Plan as originally effective February 11, 2002, and as amended from time to time. 2.19 PLAN YEAR. The words "Plan Year" shall mean the calendar year. 2.20 TERMINATION OF EMPLOYMENT. The words "Termination of Employment" shall mean the Participant's cessation of his service with a Participating Employer for any reason whatsoever, whether voluntarily or involuntarily, including by reason of retirement, death, or Disability. 2.21 VESTED PERCENTAGE. The words "Vested Percentage" shall mean, with respect to any Phantom Shares in the account of a Participant, the applicable percentage determined pursuant to Article V hereof. 2.22 VESTED PHANTOM SHARES. The words "Vested Phantom Shares" shall mean the number of Phantom Shares in a Participant's account multiplied by the applicable Vested Percentage determined pursuant to Article V hereof. 2.23 VESTING SERVICE. The words "Vesting Service" shall mean a Participant's period of continuous employment with the Company and a Participating Employer commencing on the date the Phantom Shares are awarded to him under the Plan and ending on his Termination of Employment. 2.24 YEARS OF SERVICE. The words "Years of Service" shall mean a Participant's period of continuous employment with the Company and a Participating Employer commencing on his most recent date of hire and ending on his Termination of Employment. 3 ARTICLE III ELIGIBILITY AND PARTICIPATION 3.1 ELIGIBILITY. The employees who shall be eligible to participate under this Plan shall be such employees as are designated by the Committee and qualify as members of a "select group of management or highly compensated employees" as provided in Sections 201(2), 301(a)(3), 401(a)(1) and 4021(b)(6) of the Employee Retirement Income Security Act of 1974, as amended. 3.2 PARTICIPATION. The Committee shall notify an employee upon his or her selection for participation under the Plan of such selection. If a selected employee desires to become a Participant, the employee shall, within such time as the Committee specifies: (a) furnish to the Committee all information requested by it; (b) execute such documents and such instruments as the Committee may require to facilitate the administration of this Plan; (c) agree in such form and manner as the Committee may require to be bound by the terms of this Plan and any amendments hereto; and (d) truthfully and fully answer any questions and supply any information which the Committee deems necessary or desirable for the proper administration of this Plan, without any reservations whatsoever. An employee who is selected by the Committee to participate in the Plan and who performs timely all acts required to become a Participant, shall become a Participant on or as of such date as is specified by the Committee. 3.3 TERMINATION OF PARTICIPATION. The Committee may terminate the participation of any Participant at any time. Except as otherwise provided in Article VI, such termination of participation shall not affect the rights of the terminated Participant to the payment of the Vested Phantom Shares previously awarded to such Participant pursuant to Article X. A Participant shall automatically cease to be a Participant on the date of his or her Termination of Employment. ARTICLE IV AWARD OF PHANTOM SHARES 4.1 AUTHORIZATION OF PHANTOM SHARES. The Company has authorized three hundred thousand (300,000) Phantom Shares which may be awarded under the Plan. In the event there shall be a change in the number of Actual Shares by reason of a stock split, stock dividend, reorganization, recapitalization, cash dividend, or other similar event, a similar change shall be made in the number of Phantom Shares. The determination of the Committee with 4 respect to any such adjustment shall be conclusive and binding upon the Participants and their beneficiaries. 4.2 AWARD OF PHANTOM SHARES. The Committee may, from time to time and in its sole discretion, award Phantom Shares to a Participant pursuant to a Phantom Stock Agreement. Subject to all the terms and conditions of this Plan, each awarded Phantom Share which becomes a Vested Phantom Share (or is deemed to be a Vested Phantom Share hereunder) shall entitle the Participant to receive Actual Shares of the Company equal to the number of the Vested Phantom Shares awarded to a Participant hereunder, on the dates and under the method of payment as set forth in this Plan. Each Participant shall be notified by the Committee of the number of Phantom Shares which have been awarded to him. 4.3 RIGHTS UNDER PHANTOM SHARES. Phantom Shares awarded under this Plan shall have no voting rights and shall not be entitled to receive cash or other dividends declared and paid, and the Participant shall have no other rights as a shareholder of the Company under the Ohio General Corporation Law or common law. 4.4 BOOKKEEPING ENTRIES. All grants of Phantom Shares awarded under this Plan shall be simple bookkeeping entries for the convenience of the Company. The Company shall not be require to segregate any funds with respect to the Phantom Shares granted under this Plan. All rights of Participants, former Participants and beneficiaries under this Plan shall constitute only contractual claims against the Company and no such claim against the Company shall be secured or deemed to be secured in any manner. ARTICLE V VESTING OF PHANTOM SHARES 5.1 VESTING SCHEDULE. Subject to the provisions of Section 6.2, the Vested Percentage applicable to a Participant shall be determined on the basis of his Vesting Service in accordance with the following table: Vesting Vested Service Percentage ------- ---------- Fewer than 3 years 0% At least 3 but fewer than 4 years 60% At least 4 but fewer than 5 years 80% 5 or more years 100% 5.2 DEATH OR DISABILITY. Notwithstanding anything in this Article to the contrary but subject to the provisions of this Section, upon the death of a Participant or the Termination of Employment of a Participant due to Disability, the Vested Percentage applicable to a Participant shall be determined by multiplying his months of Vesting Service with the Company (measured from the date the Phantom Shares were awarded to him until his date of 5 death or Termination of Employment due to Disability) by one-sixtieth (1/60). A fractional month of Vesting Service shall be counted as one (1) month. The Vested Percentage determined under this Section shall not exceed one hundred percent (100%). 5.3 CHANGE IN CONTROL. Notwithstanding anything in this Article to the contrary, but subject to the provisions of this Section, the Vested Percentage applicable to a Participant shall become one hundred percent (100%) with respect to all Phantom Shares previously granted to him pursuant to this Plan (other than Phantom Shares previously forfeited pursuant to Article VI) upon the occurrence of a Change in Control. ARTICLE VI EVENTS OF FORFEITURE 6.1 FORFEITURE. Except as provided in Section 6.2, in the event that a Participant has a Termination of Employment before he is one hundred percent (100%) vested under the provisions of Article V, he shall forfeit all rights whatsoever he shall have to receive any payments on account of the Phantom Shares that are not vested on the date of his Termination of Employment. 6.2 TERMINATION FOR CAUSE. Notwithstanding any other provision of this Plan, in the event that a Participant's Termination of Employment shall be for Cause, the Participant shall forfeit all Phantom Shares granted to him and shall forfeit all rights whatsoever he shall have to receive any payments of Actual Shares or other amounts under this Plan. If a Participant's employment could be terminated for Cause hereunder, it shall be considered so terminated regardless of whether actually so terminated or terminated voluntarily by the Participant through retirement or otherwise. 6.3 EFFECT OF FORFEITURE. Upon the occurrence of an event described in this Article which results in forfeiture of a Participant's Phantom Shares, such Phantom Shares shall be canceled and neither the Participant nor his beneficiary shall have any further rights with respect thereto. If a Participant forfeits all rights to receive payment hereunder as a result of a Termination of Employment for Cause pursuant to Section 6.2, he shall forfeit all rights to any further payments hereunder but he shall not be required to repay amounts previously received by him hereunder. Forfeited Phantom Shares shall not be reinstated by subsequent rehire of the Participant by the Company or a Participating Employer. Forfeited Phantom Shares shall be available for reissuance under the Plan. ARTICLE VII TERMINATION OF EMPLOYMENT 7.1 TERMINATION OF EMPLOYMENT OTHER THAN FOR CAUSE. In the event of a Participant's Termination of Employment for a reason other than death or Disability, and if there 6 is no Cause for the Company or any Participating Employer to terminate his employment, such Participant shall be entitled to receive a distribution of his Phantom Shares multiplied by his Vested Percentage. 7.2 PAYMENT OF VESTED PHANTOM SHARES. A Participant's Vested Phantom Shares shall be paid to such Participant as provided in Article X. ARTICLE VIII DISABILITY OF A PARTICIPANT 8.1 BENEFITS PAYABLE DUE TO DISABILITY. In the event of a Participant's Termination of Employment due to his Disability, all Phantom Shares awarded to such disabled Participant which have not vested previously pursuant to this Plan shall become vested in accordance with the pro-rata vesting formula set out in Section 5.2 as of the date the Participant's Termination of Employment due to his Disability. 8.2 PAYMENT OF VESTED PHANTOM SHARES. A Participant's Vested Phantom Shares shall be paid to such disabled Participant as provided in Article X. ARTICLE IX DEATH OF A PARTICIPANT 9.1 BENEFITS PAYABLE DUE TO DEATH. In the event of the Termination of Employment of a Participant by reason of his death, his beneficiary shall be entitled to receive a distribution of his Vested Phantom Shares. All Phantom Shares awarded to such Participant which have not vested previously pursuant to this Plan shall become vested in accordance with the pro-rata vesting formula set out in Section 5.2 as of the Participant's date of Termination of Employment by reason of his death. 9.2 PAYMENT OF VESTED PHANTOM SHARES. A Participant's Vested Phantom Shares shall be paid as provided in Article X to the beneficiary of the Participant. 9.3 DEFAULT BENEFICIARY. Unless a Participant or former Participant has designated a beneficiary in accordance with the provisions of Section 9.4, his beneficiary shall be deemed to be the person or persons in the first of the following classes in which there are any survivors of such Participant or former Participant: (a) his spouse at the time of his death; (b) his issue, per stirpes; (c) his parents; or 7 (d) the executor or administrator of his estate. 9.4 DESIGNATED BENEFICIARY. In lieu of having the Vested Phantom Shares distributable pursuant to this Article distributed to a beneficiary determined in accordance with the provisions of Section 9.3, a Participant may sign a document designating a beneficiary or beneficiaries to receive such Vested Phantom Shares. 9.5 PARTIAL DISPOSITION. In the event that a Participant or former Participant, dies at a time when he has a designation on file with the Administrator which does not fully dispose of his Vested Phantom Shares under this Plan upon his death, then the Vested Phantom Shares distributable on behalf of said Participant or former Participant, the disposition of which was not determined by the deceased Participant's or former Participant's designation, shall be distributed to a beneficiary determined under the provisions of Section 9.3. 9.6 AMBIGUITY AS TO BENEFICIARY. Any ambiguity in a Participant's beneficiary designation shall be resolved by the Administrator. Subject to Section 9.4, the Administrator may direct a Participant to clarify his beneficiary designation and if necessary execute a new beneficiary designation containing such clarification. ARTICLE X PAYMENT OF PHANTOM SHARES 10.1 PAYMENTS BEFORE TERMINATION OF EMPLOYMENT. Subject to Sections 10.2 and 10.4, a Participant who has not had a Termination of Employment may request a distribution of all or a portion of his Vested Phantom Shares. Such request shall be made in writing in a form and manner specified by the Company and must specify the number of Vested Phantom Shares to be distributed and the date upon which such Vested Phantom Shares shall be paid which must be as soon as administratively possible following a date that is at least one (1) year after the date on which the request is made. A Participant may request a distribution before the date on which his Phantom Shares actually become vested subject to the other requirements set forth in this Section. Any distribution request shall be irrevocable unless, prior to payment, the Participant dies, has a Termination of Employment due to Disability or has a Termination of Employment at which time the request shall become null and void and the Participant's Vested Phantom Shares shall be paid as provided in Section 10.2. 10.2 PAYMENTS ON OR AFTER A TERMINATION OF EMPLOYMENT. Upon a Participant's Termination of Employment for any reason, including death or Disability, the Participant or the beneficiary of the deceased Participant shall be entitled to a distribution equal to his Vested Phantom Shares. Such distribution shall be in a single lump sum payment on the date determined under Section 10.5 and shall be in lieu of all other benefits under this Plan. 10.3 CHANGE IN CONTROL. Any Phantom Shares held by a Participant under this Plan or any Phantom Shares remaining to be paid to a Participant or beneficiary under a prior 8 distribution election shall be paid immediately to such Participant or beneficiary in a single lump sum payment upon the occurrence of a Change in Control. 10.4 FORM AND AMOUNT OF PAYMENT. (a) Subject to such rules, procedures, limits and restrictions as the Administrator may establish from time to time, a Participant, may elect that distributions payable under Section 10.1 be made in a single sum or in the form of annual installments over a period of no fewer than two (2) calendar years and no more than ten (10) calendar years. (b) Any installment form of payment shall be equal to the number of Vested Phantom Shares to be distributed to a Participant divided by the number of remaining installments to be paid. (c) The Administrator, with the consent of the Company, may establish procedures to permit some or all Participants to request to change their prior elections regarding the form of their benefit payments under Section 10.1, provided that any such procedures shall either require such request be made a reasonable period of time before the Phantom Shares affected by such request shall be distributable, as determined by the Company in its sole discretion, or require forfeiture of a significant portion of such Phantom Shares. The Administrator may, but is not required to, grant any such requests. (d) All payments under the Plan shall be made in Actual Shares of the Company. Actual Shares shall be distributed first from treasury shares and then, to the extent treasury shares are not available, from any authorized and unissued Company shares. 10.5 COMMENCEMENT OF PAYMENTS. (a) Payments under Section 10.1 shall be made as soon as administratively possible following the date elected by the Participant which is at least one (1) year after the date such election is made by the Participant. (b) The Administrator, with the consent of the Company, may establish procedures to permit some or all Participants who have made a distribution election pursuant to Section 10.1 to request to change their prior elections regarding the time of commencement of benefits hereunder, provided that any such procedures shall either require that the request be made a reasonable period of time before the amounts affected by such request shall be distributable, as determined by the Company in its sole discretion, or require forfeiture of a significant portion of such amounts. The Administrator may, but is not required to, grant any such requests. 9 (c) Single lump sum payments made under Section 10.2 shall be made as soon as administratively possible following a Participant's Termination of Employment and, in any event, no later than ninety (90) days after a Participant's Termination of Employment. (d) Single lump sum payments made under Section 10.3 shall be made immediately upon a Change in Control. 10.6 PROTECTIVE DISTRIBUTIONS. In the event that the Administrator determines, in its sole discretion, that a Participant is not, or may not be, a member of a "select group of management or highly compensated employees" within the meaning of Sections 201(2), 301(a)(3), 401(a)(1) or 4021(b)(6) of the Employee Retirement Income Security Act of 1974, as amended, then the Administrator may, in its sole discretion, terminate such Participant's participation in this Plan, and distribute such Participant's Vested Phantom Shares in a single lump sum payment. Any such distribution shall be made at such time as the Administrator determines in its sole discretion. 10.7 TAX WITHHOLDING. A Participating Employer may withhold from any payment made by it under the Plan the number of Vested Phantom Shares equal in value to such amount or amounts as may be required for purposes of complying with the tax withholding or other provisions of the Internal Revenue Code or the Social Security Act or any state or local income or employment tax act or for purposes of paying any estate, inheritance or other tax attributable to any amounts payable hereunder. 10.8 CANCELLATION OF PHANTOM SHARES. As of the date of payment with respect to a Phantom Share of a Participant, such Phantom Share shall be deemed canceled. ARTICLE XI NONTRANSFERABILITY OF PHANTOM SHARES 11.1 NONTRANSFERABILITY. Except as provided in Article IX with respect to the designation of beneficiaries, Phantom Shares awarded pursuant to this Plan and the right to receive payments of Vested Phantom Shares, if any, attributable thereto, are nontransferable directly, indirectly, as security for a loan or otherwise by any means, either voluntarily or by operation of law. ARTICLE XII ADMINISTRATION 12.1 ADMINISTRATION. The Compensation Committee shall be the Administrator unless and until the Board shall appoint some other person, persons, committee, corporation, partnership or other entity as Administrator. 10 12.2 POWERS OF THE ADMINISTRATOR. The Administrator shall administer and interpret this Plan. In so doing, it shall have full power and discretion: (a) to interpret this Plan and any related documents, to resolve ambiguities, inconsistencies and omissions, to determine any questions of fact, to determine the right to benefits of, and the amount of benefits, if any, payable to any person in accordance with the provisions of this Plan; (b) to enact such rules, regulations, and procedures and to prescribe the use of such administrative forms as it shall deem advisable; and (c) to appoint or employ such agents, attorneys, appraisers, accountants and assistants at the expense of the Company, as it may deem necessary to keep its records or to assist it in taking any other action authorized or required hereunder. 12.3 DENIAL OF BENEFITS. If any Participant or beneficiary shall file an application for benefits hereunder and such application is denied in whole or in part by the Administrator, the applicant shall be notified in writing of the specific reason or reasons for such denial. The notice shall also set forth the specific Plan provisions upon which the denial is based, an explanation of the provisions of Section 12.4, and any other information deemed necessary or advisable by the Administrator. 12.4 APPEALS PROCEDURE. Any Participant, any beneficiary, or any authorized representative of a Participant or beneficiary whose application for benefits hereunder has been denied, in whole or in part, by the Administrator may upon written notice to the Appeals Committee request a review by the Appeals Committee of such denial of his application. Such review may be made by written briefs submitted by the applicant and the Administrator or at a hearing, or by both, as shall be deemed necessary by the Appeals Committee. Any such hearing shall be held in the main office of the Company on such date and at such time as the Appeals Committee shall designate upon not less than seven (7) days' notice to the applicant and the Administrator unless both of them accept shorter notice. The Appeals Committee shall make every effort to schedule the hearing on a day and at a time which is convenient to both the applicant and the Administrator. After the review has been completed, the Appeals Committee shall render a decision in writing, a copy of which shall be sent to both the applicant and the Administrator. Such decision shall be made no later than sixty (60) days following the applicant's request for review; provided, however, that in the event that a hearing is held with respect to the review of the claim, such decision shall be rendered no later than one hundred twenty (120) days following the applicant's request for review. In rendering its decision, the Appeals Committee shall have full power and discretion to interpret this Plan and related documents, to resolve ambiguities, inconsistencies and omissions, to determine any question of fact, to determine the right to benefits of, and the amount of benefits, if any, payable to, the applicant in accordance with the provisions of this Plan. Such decision shall set forth the specific reason or reasons for the decision and the specific Plan provisions upon which the decision is based. Such decision shall be final and binding on the applicant and the Administrator. 11 12.5 ESTABLISHMENT OF APPEALS COMMITTEE. The Company shall appoint the members of an Appeals Committee which shall consist of three (3) or more members. The Company may appoint one Appeals Committee to hear all appeals of denied benefits that may arise under the Plan or a number of Appeals Committees with different members to hear the appeals of denied benefits that arise from Participants employed by a Participating Employer or group of Participating Employers. The members of the Appeals Committee shall remain in office at the will of the Company and the Company may, from time to time, remove any of said members with or without cause. A member of the Appeals Committee may resign upon written notice to the remaining member or members of the Appeals Committee and to the Company, respectively. The fact that a person is a Participant or a former Participant or a prospective Participant shall not disqualify him from acting as a member of the Appeals Committee, nor shall any member of the Appeals Committee be disqualified from acting on any question because of his interest therein, except that no member of the Appeals Committee may act on any claim which such member has brought as a Participant, former Participant, or Beneficiary under this Plan. In case of the death, resignation or removal of any member of the Appeals Committee, the remaining members shall act until a successor-member shall be appointed by the Company. At the Administrator's request, the Secretary of the Company shall notify the Administrator in writing of the names of the original members of the Appeals Committee, of any and all changes in the membership of the Appeals Committee, of the member designated as Chairman, and the member designated as Secretary, and of any changes in either office. Until notified of a change, the Administrator shall be protected in assuming that there has been no change in the membership of the Appeals Committee or the designation of Chairman or of Secretary since the last notification was filed with it. The Administrator shall be under no obligation at any time to inquire into the membership of the Appeals Committee or its officers. All communications to the Appeals Committee shall be addressed to its Secretary at the address of the Company. 12.6 OPERATIONS OF APPEALS COMMITTEE. On all matters and questions, the decision of a majority of the members of the Appeals Committee shall govern and control; but a meeting need not be called or held to make any decision. The Appeals Committee shall appoint one of its members to act as its Chairman and another member to act as Secretary. The terms of office of these members shall be determined by the Appeals Committee, and the Secretary and/or Chairman may be removed by the other members of the Appeals Committee for any reason which such other members may deem just and proper. The Secretary shall do all things directed by the Appeals Committee. Although the Appeals Committee shall act by decision of a majority of its members as above provided, nevertheless in the absence of written notice to the contrary, every person may deal with the Secretary and consider his acts as having been authorized by the Appeals Committee. Any notice served or demand made on the Secretary shall be deemed to have been served or made upon the Appeals Committee. 12.7 DELEGATION OF POWERS. The Administrator may by appropriate resolution delegate to one or more of its members the authority to exercise any of its powers in administering and interpreting this Plan. 12.8 LIMITATION OF LIABILITY. The Administrator and the Appeals Committee shall not be liable for any action or determination made with respect to this Plan and awards under it and the Company shall indemnify all such persons, individually and collectively, against 12 any and all losses, costs or expenses which may be incurred by them, individually or collectively, in connection with their administration of this Plan. ARTICLE XIII AMENDMENT AND TERMINATION 13.1 POWER TO AMEND AND TERMINATE PLAN. This Plan may be amended by the Company at any time, or from time to time, and may be terminated by the Company with respect to any or all Participants at any time, but no such amendment or termination will deprive any Participant of the right to receive any payment in accordance with the terms of the Plan as of the date of such amendment or termination. ARTICLE XIV PARTICIPATING EMPLOYERS 14.1 LIST OF PARTICIPATING EMPLOYERS. The initial Participating Employers as of the Effective Date are as follows: PARTICIPATING EMPLOYERS Royal Appliance Mfg. Co. The Company may designate additional Participating Employers or remove Participating Employers by action of an appropriate officer of Company authorized or ratified by the Board. Such addition or deletion shall not require a formal Plan amendment. ARTICLE XV PHANTOM STOCK AGREEMENTS 15.1 EXECUTION OF PHANTOM STOCK AGREEMENTS. The Committee may, from time to time and in its sole discretion, award Phantom Shares to a Participant under this Plan by executing a Phantom Stock Agreement. Any Phantom Stock Agreement entered into pursuant to this Plan shall be in such form, and contain such terms and conditions, as the Committee may require. 15.2 MODIFICATION OF PLAN PROVISIONS. Notwithstanding anything contained in this Plan, the Committee may, with the approval of the Board of Directors, execute a Phantom Stock Agreement with senior executives of the Company pursuant to this Plan containing terms and conditions different from, or in addition to, the terms and conditions set forth in this Plan. 13 The terms and conditions that may be modified or added include, but are not limited to, those relating to: (a) vesting; (b) forfeitures; (c) the definition and effect of termination of employment; (d) distributions; (e) the definition and effect of death or disability; (f) offsets; and (g) any other provisions that the Board of Directors approves. ARTICLE XVI MISCELLANEOUS 16.1 NO IMPLIED RIGHTS. Neither the establishment of the Plan nor any amendment thereof shall be construed as giving any Participant, beneficiary or any other person any legal or equitable right unless such right shall be specifically provided for in the Plan or conferred by specific action of the Company in accordance with the terms and provisions of the Plan. Except as expressly provided in this Plan, neither the Company nor any other Participating Employer shall be required or be liable to make any payment under the Plan. 16.2 NO RIGHT TO PARTICIPATING EMPLOYER ASSETS. Neither the Participant nor any other person shall acquire, by reason of the Plan, any right in or title to any assets, funds or property of a Participating Employer whatsoever including, without limiting the generality of the foregoing, any specific funds, assets or other property which a Participating Employer, in its sole discretion, may set aside in anticipation of a liability hereunder. The Participant shall have only a contractual right to the amounts, if any, payable hereunder unsecured by any asset of a Participating Employer. Nothing contained in the Plan constitutes a guarantee by a Participating Employer that the assets of a Participating Employer shall be sufficient to pay any benefit to any person. 16.3 NO EMPLOYMENT RIGHTS CREATED. This Plan shall not be deemed to constitute a contract of employment between any of the Participating Employers and any Participant, nor confer upon any Participant or employee the right to be retained in the service of any Participating Employer for any period of time, nor shall any provision hereof restrict the right of any Participating Employer to discharge or otherwise deal with any Participant or other employees, with or without cause. Nothing herein shall be construed as fixing or regulating the compensation, salary, bonus or other remuneration payable to any Participant or other employee of a Participating Employer. 14 16.4 OFFSET. If, at the time payments or installments of payments are to be made hereunder, the Participant or the beneficiary or both are indebted or obligated to a Participating Employer, then the payments remaining to be made to the Participant or the beneficiary or both may, at the discretion of the Company, be reduced by the amount of such indebtedness or obligation, provided, however, that an election by the Company not to reduce any such payment or payments shall not constitute a waiver of its claim for such indebtedness or obligation. 16.5 NON-ASSIGNABILITY. Neither the Participant nor any other person shall have any voluntary or involuntary right to commute, sell, assign, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, and any attempt to do so shall be void. All amounts payable under this Plan are expressly declared to be unassignable and non-transferable. No part of the amounts payable under this Plan shall be, prior to actual payment, subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by the Participant or any other person, or be transferable by operation of law in the event of the Participant's or any other person's bankruptcy or insolvency. 16.6 NOTICE. Any notice required or permitted to be given under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, and if given to the Company, delivered to the principal office of the Company, directed to the attention of the Secretary of the Company. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or the receipt for registration or certification. 16.7 GOVERNING LAWS. The Plan shall be construed and administered according to the laws of the State of Ohio to the extent not preempted by the laws of the United States of America. 16.8 INCAPACITY. If the Administrator determines that any Participant or beneficiary entitled to payments under the Plan is incompetent by reason of physical or mental disability and is consequently unable to give a valid receipt for payments made hereunder, or is a minor, the Administrator may order the payments becoming due to such Participant or beneficiary to be made to another person for the benefit of such Participant or beneficiary, without responsibility on the part of the Administrator to follow the application of amounts so paid. Payments made pursuant to this Section shall completely discharge the Plan, the Administrator, the Participating Employers and the Appeals Committee with respect to such payments. 16.9 ADMINISTRATIVE FORMS. All applications, elections and designations in connection with the Plan made by a Participant or beneficiary shall become effective only when duly executed on forms provided by the Administrator and filed with the Administrator. 16.10 INDEPENDENCE OF PLAN. Except as otherwise expressly provided herein, this Plan shall be independent of, and in addition to, any other employee benefit agreement or plan or any rights that may exist from time to time thereunder. 15 16.11 RESPONSIBILITY FOR LEGAL EFFECT. Neither the Company, any other Participating Employer, the Administrator, the Appeals Committee, nor any officer, member, delegate or agent of any of them, makes any representations or warranties, express or implied, or assumes any responsibility concerning the legal, tax, or other implications or effects of this Plan. 16.12 SUCCESSORS. The terms and conditions of this Plan shall inure to the benefit of and bind the Company, the Participating Employers, the Administrator, the Appeals Committee and its members, the Participants, their beneficiaries, and the successors, assigns, and personal representatives of any of them. 16.13 HEADINGS AND TITLES. The Section headings and titles of Articles used in this Plan are for convenience of reference only and shall not be considered in construing this Plan. 16.14 GENERAL RULES OF CONSTRUCTION. The masculine gender shall include the feminine and neuter, and vice versa, as the context shall require. The singular number shall include the plural, and vice versa, as the context shall require. The present tense of a verb shall include the past and future tenses, and vice versa, as the context may require. 16.15 SEVERABILITY. In the event that any provision or term of this Plan, or any agreement or instrument required by the Administrator hereunder, is determined by a judicial, quasi-judicial or administrative body to be void or not enforceable for any reason, all other provisions or terms of this Plan or such agreement or instrument shall remain in full force and effect and shall be enforceable as if such void or nonenforceable provision or term had never been a part of this Plan, or such agreement or instrument. 16.16 ACTIONS BY THE COMPANY. Except as otherwise provided herein, all actions of the Company under this Plan shall be taken by the Board, by any officer of the Company, or by any other person designated by any of the foregoing. IN WITNESS WHEREOF, Royal Appliance Mfg. Co., by its duly authorized officers, has caused this 2002 Royal Appliance Phantom Stock Plan to be executed as of this 11th day of February 2002. ROYAL APPLIANCE MFG. CO. By ------------------------------------ And ---------------------------------- 16 EX-10.R 4 l95351aexv10wr.txt EXHIBIT 10(R) Exhibit 10(r) 2002 ROYAL APPLIANCE MFG. CO. PHANTOM STOCK PLAN FOR DIRECTORS Effective Date: April 1, 2002 ARTICLE NUMBER - ------- ------ PURPOSE I DEFINITIONS II ELIGIBILITY AND PARTICIPATION III AWARD OF PHANTOM SHARES IV VESTING OF PHANTOM SHARES V EVENTS OF FORFEITURE VI TERMINATION OF DIRECTORSHIP VII DISABILITY OF A PARTICIPANT VIII DEATH OF A PARTICIPANT IX PAYMENT OF PHANTOM SHARES X NONTRANSFERABILITY OF PHANTOM SHARES XI ADMINISTRATION XII AMENDMENT AND TERMINATION XIII PHANTOM STOCK AGREEMENTS XIV MISCELLANEOUS XV ARTICLE I PURPOSE 1.1 This 2002 Royal Appliance Mfg. Co. Phantom Stock Plan for Directors is intended to serve as an incentive to the non-employee members of the Board of Directors of the Company and to enable the Company to attract and retain persons of outstanding abilities upon whom the future success of the Company largely depends. This Plan shall become effective April 1, 2002. ARTICLE II DEFINITIONS 2.1 ACTUAL SHARES. The words "Actual Shares" shall mean common shares, without par value, of the Company. 2.2 ADMINISTRATOR. The word "Administrator" shall mean the Compensation Committee or the person, persons, committee, corporation, partnership or other entity designated as Administrator under Article XII. 2.3 APPEALS COMMITTEE. The words "Appeals Committee" shall mean the Appeals Committee established pursuant to Article XII. 2.4 BENEFICIARY The word "beneficiary" shall mean any person who receives or is designated to receive payment of any amounts under the terms of this Plan because of the participation of another person in this Plan. 2.5 BOARD or BOARD OF DIRECTORS. The word "Board" or "Board of Directors" shall mean the Board of Directors of the Company, as the same may change from time to time. 2.6 CAUSE. The word "Cause" shall mean for purposes of this Plan any of the following occurring while a Participant or former Participant is an Outside Director of the Company: (a) his engaging in any act of fraud or gross dishonesty or criminal activity with respect to the Company; or (b) his conviction of any felony; or (c) his engaging in any act of willful misconduct or gross negligence which adversely affects the Companies; or (d) his refusal to submit to a medical examination if directed to do so by the Company to determine whether he is disabled under this Plan. 1 2.7 CHANGE IN CONTROL. The words "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. 2.8 COMMITTEE. The word "Committee" shall mean the Compensation Committee of the Board of Directors of Royal Appliance Mfg. Co., which shall consist of three (3) or more members designated by the Board of Directors. 2.9 COMPANY. The word "Company" shall mean Royal Appliance Mfg. Co., and any successor corporation or business organization which shall assume the duties and obligations of Royal Appliance Mfg. Co. under this Plan. 2.10 DISABILITY. The word "Disability" shall mean a physical or mental condition of a Participant resulting from bodily injury, disease, or mental disorder which renders him incapable of continuing his usual and customary duties with the Company. A licensed physician chosen by the Administrator shall determine whether a Participant has a disability. The criteria for determining Disability status shall be applied uniformly to all Participants. 2.11 EFFECTIVE DATE. The words "Effective Date" shall mean April 1, 2002. 2.12 HE, HIM, HIS. The words "he," "him," and "his" shall mean, in addition to their common meaning, "she," "her," "hers," "it" or "its," as the context may require, and generally, whenever any pronoun is used herein, it shall be construed to include the masculine pronoun, the feminine pronoun or the neuter pronoun, as shall be appropriate. 2.13 OUTSIDE DIRECTOR. The words "Outside Director" shall mean a member of the Board of Directors of the Company who is not: (a) a current employee of the Company; 2 (b) a former employee of the Company receiving compensation for prior services (other than retirement benefits); or (c) a former officer of the Company. 2.14 PARTICIPANT. The word "Participant" shall mean any individual who is designated by the Board and who takes the necessary actions to participate in the Plan pursuant to Article III. 2.15 PHANTOM SHARE. The words "Phantom Share" shall mean a phantom unit of ownership awarded to a Participant pursuant to this Plan that represents one (1) Actual Share. 2.16 PHANTOM SHARE VALUE. The words "Phantom Share Value" shall mean the fair market value of an Actual Share. The fair market value of an Actual Share shall be the closing price of an Actual Share on the New York Stock Exchange or other applicable national stock exchange with which the Company is registered for the trading date for which the fair market value of an Actual Share is reported which is coincident with or immediately prior to the date the Phantom Share Value is determined under this Plan 2.17 PHANTOM STOCK AGREEMENT. The words "Phantom Stock Agreement" shall mean an agreement entered into by the Company and a Participant for the purpose of awarding Phantom Shares to the Participant in accordance with Section 4.2 of this Plan. 2.18 PLAN. The word "Plan" shall mean the 2002 Royal Appliance Mfg. Co. Phantom Stock Plan for Directors as originally effective April 1, 2002, and as amended from time to time. 2.19 PLAN YEAR. The words "Plan Year" shall mean the calendar year. 2.20 TERMINATION OF DIRECTORSHIP. The words "Termination of Directorship" shall mean the Participant's cessation of his services as an Outside Director of the Company for any reason whatsoever, whether voluntarily or involuntarily, including by reason of retirement, death, or Disability. 2.21 VESTED PERCENTAGE. The words "Vested Percentage" shall mean, with respect to any Phantom Shares in the account of a Participant, the applicable percentage determined pursuant to Article V. 2.22 VESTED PHANTOM SHARES. The words "Vested Phantom Shares" shall mean the number of Phantom Shares in a Participant's account multiplied by the applicable Vested Percentage determined pursuant to Article V. 2.23 VESTING SERVICE. The words "Vesting Service" shall mean a Participant's period of continuous service with the Company commencing on the date the Phantom Shares are awarded to him under the Plan and ending on his Termination of Directorship. 3 2.24 YEARS OF SERVICE. The words "Years of Service" shall mean a Participant's period of continuous service with the Company commencing on his most recent date of hire or appointment and ending on his Termination of Directorship. ARTICLE III ELIGIBILITY AND PARTICIPATION 3.1 ELIGIBILITY. The individuals who shall be eligible to participate under this Plan shall be such Outside Directors as are designated by the Committee. 3.2 PARTICIPATION. The Committee shall notify an individual upon his or her selection for participation under the Plan of such selection. If a selected individual desires to become a Participant, the individual shall, within such time as the Committee specifies: (a) furnish to the Committee all information requested by it; (b) execute such documents and such instruments as the Committee may require to facilitate the administration of this Plan; (c) agree in such form and manner as the Committee may require to be bound by the terms of this Plan and any amendments hereto; and (d) truthfully and fully answer any questions and supply any information which the Committee deems necessary or desirable for the proper administration of this Plan, without any reservations whatsoever. An individual who is selected by the Committee to participate in the Plan and who performs timely all acts required to become a Participant, shall become a Participant on or as of such date as is specified by the Committee. 3.3 TERMINATION OF PARTICIPATION. The Committee may terminate the participation of any Participant at any time. Except as otherwise provided in Article VI, such termination of participation shall not affect the rights of the terminated Participant to the payment of the Vested Phantom Shares previously awarded to such Participant pursuant to Article X. A Participant shall automatically cease to be a Participant on the date of his or her Termination of Directorship. ARTICLE IV AWARD OF PHANTOM SHARES 4.1 AUTHORIZATION OF PHANTOM SHARES. The Company has authorized twenty-five thousand (25,000) Phantom Shares which may be awarded under the Plan. In the event 4 there shall be a change in the number of Actual Shares by reason of a stock split, stock dividend, reorganization, recapitalization, cash dividend, or other similar event, a corresponding change shall be made in the number of Phantom Shares. The determination of the Committee with respect to any such adjustment shall be conclusive and binding upon the Participants and their beneficiaries. 4.2 AWARD OF PHANTOM SHARES. The Committee may, from time to time and in its sole discretion, award Phantom Shares to a Participant pursuant to a Phantom Stock Agreement. Subject to all the terms and conditions of this Plan, each awarded Phantom Share which becomes a Vested Phantom Share (or is deemed to be a Vested Phantom Share hereunder) shall entitle the Participant to receive Actual Shares of the Company equal to the number of the Vested Phantom Shares awarded to a Participant hereunder, on the dates and under the method of payment as set forth in this Plan. Each Participant shall be notified by the Committee of the number of Phantom Shares which have been awarded to him. 4.3 RIGHTS UNDER PHANTOM SHARES. Phantom Shares awarded under this Plan shall have no voting rights and shall not be entitled to receive cash or other dividends declared and paid, and the Participant shall have no other rights as a shareholder of the Company under federal law, the Ohio General Corporation Law or common law. 4.4 BOOKKEEPING ENTRIES. All grants of Phantom Shares awarded under this Plan shall be simple bookkeeping entries for the convenience of the Company. The Company shall not be require to segregate any funds with respect to the Phantom Shares granted under this Plan. All rights of Participants, former Participants and beneficiaries under this Plan shall constitute only contractual claims against the Company and no such claim against the Company shall be secured or deemed to be secured in any manner. ARTICLE V VESTING OF PHANTOM SHARES 5.1 VESTING SCHEDULE. Subject to the provisions of Section 6.2, the Vested Percentage applicable to a Participant shall be determined on the basis of his Vesting Service in accordance with the following table: Vesting Vested Service Percentage ------- ---------- Fewer than 3 years 0% At least 3 but fewer than 4 years 60% At least 4 but fewer than 5 years 80% 5 or more years 100% 5.2 DEATH OR DISABILITY. Notwithstanding anything in this Article to the contrary but subject to the provisions of this Section, upon the death of a Participant or the Termination of Directorship of a Participant due to Disability, the Vested Percentage applicable 5 to a Participant shall be determined by multiplying his months of Vesting Service with the Company (measured from the date the Phantom Shares were awarded to him until his date of death or Termination of Directorship due to Disability) by one-sixtieth (1/60). A fractional month of Vesting Service shall be counted as one (1) month. The Vested Percentage determined under this Section shall not exceed one hundred percent (100%). 5.3 CHANGE IN CONTROL. Notwithstanding anything in this Article to the contrary, but subject to the provisions of this Section, the Vested Percentage applicable to a Participant shall become one hundred percent (100%) with respect to all Phantom Shares previously granted to him pursuant to this Plan (other than Phantom Shares previously forfeited pursuant to Article VI) upon the occurrence of a Change in Control. ARTICLE VI EVENTS OF FORFEITURE 6.1 FORFEITURE. Except as provided in Section 6.2, in the event that a Participant has a Termination of Directorship before he is one hundred percent (100%) vested under the provisions of Article V, he shall forfeit all rights whatsoever he shall have to receive any payments on account of the Phantom Shares that are not vested on the date of his Termination of Directorship. 6.2 TERMINATION FOR CAUSE. Notwithstanding any other provision of this Plan, in the event that a Participant's Termination of Directorship shall be for Cause, the Participant shall forfeit all Phantom Shares granted to him and shall forfeit all rights whatsoever he shall have to receive any payments of Actual Shares or other amounts under this Plan. If a Participant's directorship could be terminated for Cause hereunder, it shall be considered so terminated regardless of whether actually so terminated or terminated voluntarily by the Participant through retirement or otherwise. 6.3 EFFECT OF FORFEITURE. Upon the occurrence of an event described in this Article which results in forfeiture of a Participant's Phantom Shares, such Phantom Shares shall be canceled and neither the Participant nor his beneficiary shall have any further rights with respect thereto. If a Participant forfeits all rights to receive payment hereunder as a result of a Termination of Directorship for Cause pursuant to Section 6.2, he shall forfeit all rights to any further payments hereunder but he shall not be required to repay amounts previously received by him hereunder. Forfeited Phantom Shares shall not be reinstated by subsequent reinstatement of the Participant as an Outside Director. Forfeited Phantom Shares shall be available for reissuance under the Plan. 6 ARTICLE VII TERMINATION OF DIRECTORSHIP 7.1 TERMINATION OF DIRECTORSHIP OTHER THAN FOR CAUSE. In the event of a Participant's Termination of Directorship for a reason other than death or Disability, and if there is no Cause for the Company to terminate his directorship, such Participant shall be entitled to receive a distribution of his Phantom Shares multiplied by his Vested Percentage. 7.2 PAYMENT OF VESTED PHANTOM SHARES. A Participant's Vested Phantom Shares shall be paid to such Participant as provided in Article X. ARTICLE VIII DISABILITY OF A PARTICIPANT 8.1 BENEFITS PAYABLE DUE TO DISABILITY. In the event of a Participant's Termination of Directorship due to his Disability, all Phantom Shares awarded to such disabled Participant which have not vested previously pursuant to this Plan shall become vested in accordance with the pro-rata vesting formula set out in Section 5.2 as of the date the Participant's Termination of Directorship due to his Disability. 8.2 PAYMENT OF VESTED PHANTOM SHARES. A Participant's Vested Phantom Shares shall be paid to such disabled Participant as provided in Article X. ARTICLE IX DEATH OF A PARTICIPANT 9.1 BENEFITS PAYABLE DUE TO DEATH. In the event of the Termination of Directorship of a Participant by reason of his death, his beneficiary shall be entitled to receive a distribution of his Vested Phantom Shares. All Phantom Shares awarded to such Participant which have not vested previously pursuant to this Plan shall become vested in accordance with the pro-rata vesting formula set out in Section 5.2 as of the Participant's date of Termination of Directorship by reason of his death. 9.2 PAYMENT OF VESTED PHANTOM SHARES. A Participant's Vested Phantom Shares shall be paid as provided in Article X to the beneficiary of the Participant. 9.3 DEFAULT BENEFICIARY. Unless a Participant or former Participant has designated a beneficiary in accordance with the provisions of Section 9.4, his beneficiary shall be deemed to be the person or persons in the first of the following classes in which there are any survivors of such Participant or former Participant: 7 (a) his spouse at the time of his death; (b) his issue, per stirpes; (c) his parents; or (d) the executor or administrator of his estate. 9.4 DESIGNATED BENEFICIARY. In lieu of having the Vested Phantom Shares distributable pursuant to this Article distributed to a beneficiary determined in accordance with the provisions of Section 9.3, a Participant may sign a document designating a beneficiary or beneficiaries to receive such Vested Phantom Shares. 9.5 PARTIAL DISPOSITION. In the event that a Participant or former Participant, dies at a time when he has a designation on file with the Administrator which does not fully dispose of his Vested Phantom Shares under this Plan upon his death, then the Vested Phantom Shares distributable on behalf of said Participant or former Participant, the disposition of which was not determined by the deceased Participant's or former Participant's designation, shall be distributed to a beneficiary determined under the provisions of Section 9.3. 9.6 AMBIGUITY AS TO BENEFICIARY. Any ambiguity in a Participant's beneficiary designation shall be resolved by the Administrator. Subject to Section 9.4, the Administrator may direct a Participant to clarify his beneficiary designation and if necessary execute a new beneficiary designation containing such clarification. ARTICLE X PAYMENT OF PHANTOM SHARES 10.1 PAYMENTS BEFORE TERMINATION OF DIRECTORSHIP. Subject to Sections 10.2 and 10.4, a Participant who has not had a Termination of Directorship may request a distribution of all or a portion of his Vested Phantom Shares. Such request shall be made in writing in a form and manner specified by the Company and must specify the number of Vested Phantom Shares to be distributed and the date upon which such Vested Phantom Shares shall be paid which must be as soon as administratively possible following a date that is at least one (1) year after the date on which the request is made. A Participant may request a distribution before the date on which his Phantom Shares actually become vested subject to the other requirements set forth in this Section. Any distribution request shall be irrevocable unless, prior to payment, the Participant dies, has a Termination of Directorship due to Disability or has a Termination of Directorship, at which time the request shall become null and void and the Participant's Vested Phantom Shares shall be paid as provided in Section 10.2. 10.2 PAYMENTS ON OR AFTER A TERMINATION OF DIRECTORSHIP. Upon a Participant's Termination of Directorship for any reason, including death or Disability, the Participant or the beneficiary of the deceased Participant shall be entitled to a distribution equal to his Vested 8 Phantom Shares. Such distribution shall be in a single lump sum payment on the date determined under Section 10.5 and shall be in lieu of all other benefits under this Plan. 10.3 CHANGE IN CONTROL. Any Phantom Shares held by a Participant under this Plan or any Phantom Shares remaining to be paid to a Participant or beneficiary under a prior distribution election shall be paid immediately to such Participant or beneficiary in a single lump sum payment upon the occurrence of a Change in Control. 10.4 FORM AND AMOUNT OF PAYMENT. (a) Subject to such rules, procedures, limits and restrictions as the Administrator may establish from time to time, a Participant, may elect that distributions payable under Section 10.1 be made in a single sum or in the form of annual installments over a period of no fewer than two (2) calendar years and no more than ten (10) calendar years. (b) Any installment form of payment shall be equal to the number of Vested Phantom Shares to be distributed to a Participant divided by the number of remaining installments to be paid. (c) The Administrator, with the consent of the Company, may establish procedures to permit some or all Participants to request to change their prior elections regarding the form of their benefit payments under Section 10.1, provided that any such procedures shall either require such request be made a reasonable period of time before the Phantom Shares affected by such request shall be distributable, as determined by the Company in its sole discretion, or require forfeiture of a significant portion of such Phantom Shares. The Administrator may, but is not required to, grant any such requests. (d) All payments under the Plan shall be made in Actual Shares of the Company. Actual Shares shall be distributed first from treasury shares and then, to the extent treasury shares are not available, from any authorized and unissued Company shares. 10.5 COMMENCEMENT OF PAYMENTS. (a) Payments under Section 10.1 shall be made as soon as administratively possible following the date elected by the Participant which is at least one (1) year after the date such election is made by the Participant. (b) The Administrator, with the consent of the Company, may establish procedures to permit some or all Participants who have made a distribution election pursuant to Section 10.1 to request to change their prior elections regarding the time of commencement of benefits hereunder, provided that any such procedures shall 9 either require that the request be made a reasonable period of time before the amounts affected by such request shall be distributable, as determined by the Company in its sole discretion, or require forfeiture of a significant portion of such amounts. The Administrator may, but is not required to, grant any such requests. (c) Single lump sum payments made under Section 10.2 shall be made as soon as administratively possible following a Participant's Termination of Directorship and, in any event, no later than ninety (90) days after a Participant's Termination of Directorship. (d) Single lump sum payments made under Section 10.3 shall be made immediately upon a Change in Control. 10.6 TAX WITHHOLDING. The Company may withhold from any payment made by it under the Plan the number of Vested Phantom Shares equal in value to such amount or amounts as may be required for purposes of complying with the tax withholding or other provisions of the Internal Revenue Code or the Social Security Act or any state or local income or employment tax act or for purposes of paying any estate, inheritance or other tax attributable to any amounts payable hereunder. 10.7 CANCELLATION OF PHANTOM SHARES. As of the date of payment with respect to a Phantom Share of a Participant, such Phantom Share shall be deemed canceled. ARTICLE XI NONTRANSFERABILITY OF PHANTOM SHARES 11.1 NONTRANSFERABILITY. Except as provided in Article IX with respect to the designation of beneficiaries, Phantom Shares awarded pursuant to this Plan and the right to receive payments of Vested Phantom Shares, if any, attributable thereto, are nontransferable directly, indirectly, as security for a loan or otherwise by any means, either voluntarily or by operation of law. ARTICLE XII ADMINISTRATION 12.1 ADMINISTRATION. The Compensation Committee shall be the Administrator unless and until the Board shall appoint some other person, persons, committee, corporation, partnership or other entity as Administrator. 12.2 POWERS OF THE ADMINISTRATOR. The Administrator shall administer and interpret this Plan. In so doing, it shall have full power and discretion: 10 (a) to interpret this Plan and any related documents, to resolve ambiguities, inconsistencies and omissions, to determine any questions of fact, to determine the right to benefits of, and the amount of benefits, if any, payable to any person in accordance with the provisions of this Plan; (b) to enact such rules, regulations, and procedures and to prescribe the use of such administrative forms as it shall deem advisable; and (c) to appoint or employ such agents, attorneys, appraisers, accountants and assistants at the expense of the Company, as it may deem necessary to keep its records or to assist it in taking any other action authorized or required hereunder. 12.3 DENIAL OF BENEFITS. If any Participant or beneficiary shall file an application for benefits hereunder and such application is denied in whole or in part by the Administrator, the applicant shall be notified in writing of the specific reason or reasons for such denial. The notice shall also set forth the specific Plan provisions upon which the denial is based, an explanation of the provisions of Section 12.4, and any other information deemed necessary or advisable by the Administrator. 12.4 APPEALS PROCEDURE. Any Participant, any beneficiary, or any authorized representative of a Participant or beneficiary whose application for benefits hereunder has been denied, in whole or in part, by the Administrator may upon written notice to the Appeals Committee request a review by the Appeals Committee of such denial of his application. Such review may be made by written briefs submitted by the applicant and the Administrator or at a hearing, or by both, as shall be deemed necessary by the Appeals Committee. Any such hearing shall be held in the main office of the Company on such date and at such time as the Appeals Committee shall designate upon not less than seven (7) days' notice to the applicant and the Administrator unless both of them accept shorter notice. The Appeals Committee shall make every effort to schedule the hearing on a day and at a time which is convenient to both the applicant and the Administrator. After the review has been completed, the Appeals Committee shall render a decision in writing, a copy of which shall be sent to both the applicant and the Administrator. Such decision shall be made no later than sixty (60) days following the applicant's request for review; provided, however, that in the event that a hearing is held with respect to the review of the claim, such decision shall be rendered no later than one hundred twenty (120) days following the applicant's request for review. In rendering its decision, the Appeals Committee shall have full power and discretion to interpret this Plan and related documents, to resolve ambiguities, inconsistencies and omissions, to determine any question of fact, to determine the right to benefits of, and the amount of benefits, if any, payable to, the applicant in accordance with the provisions of this Plan. Such decision shall set forth the specific reason or reasons for the decision and the specific Plan provisions upon which the decision is based. Such decision shall be final and binding on the applicant and the Administrator. 12.5 ESTABLISHMENT OF APPEALS COMMITTEE. The Company shall appoint the members of an Appeals Committee which shall consist of three (3) or more members. The Company may appoint one Appeals Committee to hear all appeals of denied benefits that may 11 arise under the Plan or a number of Appeals Committees with different members to hear the appeals of denied benefits that arise from Participants. The members of the Appeals Committee shall remain in office at the will of the Company and the Company may, from time to time, remove any of said members with or without cause. A member of the Appeals Committee may resign upon written notice to the remaining member or members of the Appeals Committee and to the Company, respectively. The fact that a person is a Participant or a former Participant or a prospective Participant shall not disqualify him from acting as a member of the Appeals Committee, nor shall any member of the Appeals Committee be disqualified from acting on any question because of his interest therein, except that no member of the Appeals Committee may act on any claim which such member has brought as a Participant, former Participant, or Beneficiary under this Plan. In case of the death, resignation or removal of any member of the Appeals Committee, the remaining members shall act until a successor-member shall be appointed by the Company. At the Administrator's request, the Secretary of the Company shall notify the Administrator in writing of the names of the original members of the Appeals Committee, of any and all changes in the membership of the Appeals Committee, of the member designated as Chairman, and the member designated as Secretary, and of any changes in either office. Until notified of a change, the Administrator shall be protected in assuming that there has been no change in the membership of the Appeals Committee or the designation of Chairman or of Secretary since the last notification was filed with it. The Administrator shall be under no obligation at any time to inquire into the membership of the Appeals Committee or its officers. All communications to the Appeals Committee shall be addressed to its Secretary at the address of the Company. 12.6 OPERATIONS OF APPEALS COMMITTEE. On all matters and questions, the decision of a majority of the members of the Appeals Committee shall govern and control; but a meeting need not be called or held to make any decision. The Appeals Committee shall appoint one of its members to act as its Chairman and another member to act as Secretary. The terms of office of these members shall be determined by the Appeals Committee, and the Secretary and/or Chairman may be removed by the other members of the Appeals Committee for any reason which such other members may deem just and proper. The Secretary shall do all things directed by the Appeals Committee. Although the Appeals Committee shall act by decision of a majority of its members as above provided, nevertheless in the absence of written notice to the contrary, every person may deal with the Secretary and consider his acts as having been authorized by the Appeals Committee. Any notice served or demand made on the Secretary shall be deemed to have been served or made upon the Appeals Committee. 12.7 DELEGATION OF POWERS. The Administrator may by appropriate resolution delegate to one or more of its members the authority to exercise any of its powers in administering and interpreting this Plan. 12.8 LIMITATION OF LIABILITY. The Administrator and the Appeals Committee shall not be liable for any action or determination made with respect to this Plan and awards under it and the Company shall indemnify all such persons, individually and collectively, against any and all losses, costs or expenses which may be incurred by them, individually or collectively, in connection with their administration of this Plan. 12 ARTICLE XIII AMENDMENT AND TERMINATION 13.1 POWER TO AMEND AND TERMINATE PLAN. This Plan may be amended by the Company at any time, or from time to time, and may be terminated by the Company with respect to any or all Participants at any time, but no such amendment or termination will deprive any Participant of the right to receive any payment in accordance with the terms of the Plan as of the date of such amendment or termination. ARTICLE XIV PHANTOM STOCK AGREEMENTS 14.1 EXECUTION OF PHANTOM STOCK AGREEMENTS. The Committee may, from time to time and in its sole discretion, award Phantom Shares to a Participant under this Plan by executing a Phantom Stock Agreement. Any Phantom Stock Agreement entered into pursuant to this Plan shall be in such form, and contain such terms and conditions, as the Committee may require. ARTICLE XV MISCELLANEOUS 15.1 NO IMPLIED RIGHTS. Neither the establishment of the Plan nor any amendment thereof shall be construed as giving any Participant, beneficiary or any other person any legal or equitable right unless such right shall be specifically provided for in the Plan or conferred by specific action of the Company in accordance with the terms and provisions of the Plan. Except as expressly provided in this Plan, the Company shall not be required or be liable to make any payment under the Plan. 15.2 NO RIGHT TO COMPANY ASSETS. Neither the Participant nor any other person shall acquire, by reason of the Plan, any right in or title to any assets, funds or property of the Company whatsoever including, without limiting the generality of the foregoing, any specific funds, assets or other property which the Company, in its sole discretion, may set aside in anticipation of a liability hereunder. The Participant shall have only a contractual right to the amounts, if any, payable hereunder unsecured by any asset of the Company. Nothing contained in the Plan constitutes a guarantee by the Company that the assets of the Company shall be sufficient to pay any benefit to any person. 15.3 NO RIGHTS TO DIRECTORSHIP CREATED. This Plan shall not be deemed to constitute a promise of continued directorship between the Company and any Participant, nor confer upon any Participant the right to be retained as a director of the Company for any period of time, nor shall any provision hereof restrict the right of the Company to discharge or 13 otherwise deal with any Participant, with or without cause. Nothing herein shall be construed as fixing or regulating the fees or other remuneration payable to any Participant. 15.4 OFFSET. If, at the time payments or installments of payments are to be made hereunder, the Participant or the beneficiary or both are indebted or obligated to the Company, then the payments remaining to be made to the Participant or the beneficiary or both may, at the discretion of the Company, be reduced by the amount of such indebtedness or obligation, provided, however, that an election by the Company not to reduce any such payment or payments shall not constitute a waiver of its claim for such indebtedness or obligation. 15.5 NON-ASSIGNABILITY. Neither the Participant nor any other person shall have any voluntary or involuntary right to commute, sell, assign, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, and any attempt to do so shall be void. All amounts payable under this Plan are expressly declared to be unassignable and non-transferable. No part of the amounts payable under this Plan shall be, prior to actual payment, subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by the Participant or any other person, or be transferable by operation of law in the event of the Participant's or any other person's bankruptcy or insolvency. 15.6 NOTICE. Any notice required or permitted to be given under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, and if given to the Company, delivered to the principal office of the Company, directed to the attention of the Secretary of the Company. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or the receipt for registration or certification. 15.7 GOVERNING LAWS. The Plan shall be construed and administered according to the laws of the State of Ohio to the extent not preempted by the laws of the United States of America. 15.8 INCAPACITY. If the Administrator determines that any Participant or beneficiary entitled to payments under the Plan is incompetent by reason of physical or mental disability and is consequently unable to give a valid receipt for payments made hereunder, or is a minor, the Administrator may order the payments becoming due to such Participant or beneficiary to be made to another person for the benefit of such Participant or beneficiary, without responsibility on the part of the Administrator to follow the application of amounts so paid. Payments made pursuant to this Section shall completely discharge the Plan, the Administrator, the Company and the Appeals Committee with respect to such payments. 15.9 ADMINISTRATIVE FORMS. All applications, elections and designations in connection with the Plan made by a Participant or beneficiary shall become effective only when duly executed on forms provided by the Administrator and filed with the Administrator. 15.10 INDEPENDENCE OF PLAN. Except as otherwise expressly provided herein, this Plan shall be independent of, and in addition to, any other agreement or director compensation plan or any rights that may exist from time to time thereunder. 14 15.11 RESPONSIBILITY FOR LEGAL EFFECT. Neither the Company, the Administrator, the Appeals Committee, nor any officer, member, delegate or agent of any of them, makes any representations or warranties, express or implied, or assumes any responsibility concerning the legal, tax, or other implications or effects of this Plan. 15.12 SUCCESSORS. The terms and conditions of this Plan shall inure to the benefit of and bind the Company, the Administrator, the Appeals Committee and its members, the Participants, their beneficiaries, and the successors, assigns, and personal representatives of any of them. 15.13 HEADINGS AND TITLES. The Section headings and titles of Articles used in this Plan are for convenience of reference only and shall not be considered in construing this Plan. 15.14 GENERAL RULES OF CONSTRUCTION. The masculine gender shall include the feminine and neuter, and vice versa, as the context shall require. The singular number shall include the plural, and vice versa, as the context shall require. The present tense of a verb shall include the past and future tenses, and vice versa, as the context may require. 15.15 SEVERABILITY. In the event that any provision or term of this Plan, or any agreement or instrument required by the Administrator hereunder, is determined by a judicial, quasi-judicial or administrative body to be void or not enforceable for any reason, all other provisions or terms of this Plan or such agreement or instrument shall remain in full force and effect and shall be enforceable as if such void or nonenforceable provision or term had never been a part of this Plan, or such agreement or instrument. 15.16 ACTIONS BY THE COMPANY. Except as otherwise provided herein, all actions of the Company under this Plan shall be taken by the Board, by any officer of the Company, or by any other person designated by any of the foregoing. IN WITNESS WHEREOF, Royal Appliance Mfg. Co., by its duly authorized officers, has caused this 2002 Royal Appliance Mfg. Co. Phantom Stock Plan for Directors to be executed as of this _____ day of ________ 2002. ROYAL APPLIANCE MFG. CO. By ---------------------------- And --------------------------- 15 EX-99.1 5 l95351aexv99w1.txt EXHIBIT 99.1 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Royal Appliance Mfg. Co. (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I Michael J. Merriman, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Michael J. Merriman - ----------------------- Michael J. Merriman Chief Executive Officer August 9, 2002 22 EX-99.2 6 l95351aexv99w2.txt EXHIBIT 99.2 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Royal Appliance Mfg. Co. (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I Richard G. Vasek, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (3) The Report fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (4) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Richard G. Vasek - ------------------------ Richard G. Vasek Chief Financial Officer August 9, 2002 23 -----END PRIVACY-ENHANCED MESSAGE-----