SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
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ROYAL APPLIANCE MFG. CO.
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(Name of Registrant as Specified In Its Charter)
NOT APPLICABLE
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previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
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[Royal Appliance Logo] [Dirt Devil Trademark]
ROYAL APPLIANCE MFG. CO.
CLEVELAND, OHIO
To Our Shareholders:
You are cordially invited to attend the 2002 annual meeting of shareholders
of Royal Appliance Mfg. Co. to be held at The Forum Conference Center, One
Cleveland Center, 1375 East Ninth Street, Cleveland, Ohio, on Thursday, April
25, 2002, at 3:00 p.m. local time. We are pleased to enclose the notice of our
annual shareholders meeting, together with a Proxy Statement, a Proxy and an
envelope for returning the Proxy.
The matters expected to be acted upon at the meeting are described in
detail in the attached Notice of Meeting and Proxy Statement.
It is important that your shares be represented at the meeting. Whether or
not you plan to attend personally, please complete and mail the enclosed proxy
card in the enclosed return envelope. If you attend the meeting and decide to
vote in person, you may withdraw your Proxy at the meeting.
If you have any questions or need assistance in how to vote your shares,
please call our proxy solicitor, Morrow & Co., Inc. at (212) 754-8000. Your time
and attention to this letter and the accompanying Proxy Statement and Proxy is
appreciated.
Sincerely,
Michael J. Merriman
Chief Executive Officer
March 27, 2002
[Royal Appliance Logo] [Dirt Devil Trademark]
ROYAL APPLIANCE MFG. CO.
CLEVELAND, OHIO
NOTICE OF ANNUAL SHAREHOLDERS MEETING
TO BE HELD APRIL 25, 2002
The annual meeting of shareholders of Royal Appliance Mfg. Co., an Ohio
corporation ("Company"), will be held on Thursday, April 25, 2002 at 3:00 p.m.
local time, at The Forum Conference Center, One Cleveland Center, 1375 East
Ninth Street, Cleveland, Ohio, for the following purposes:
1. To elect three Class I Directors for a term expiring in 2004.
2. To ratify the appointment of PricewaterhouseCoopers LLP as auditors of
the Company for 2002.
3. To transact such other business that is properly brought before the
meeting.
Only holders of the Common Shares of record on the books of the Company at
the close of business on March 11, 2002 will be entitled to vote at the meeting.
YOUR VOTE IS IMPORTANT. ALL SHAREHOLDERS ARE INVITED TO ATTEND THE MEETING
IN PERSON. HOWEVER, TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE MARK,
DATE AND SIGN YOUR PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. Any
shareholder attending the meeting may vote in person even if the shareholder
returned a Proxy.
By Order of the Board of Directors
Richard G. Vasek
Secretary
Glenwillow, Ohio
March 27, 2002
THE ENCLOSED PROXY, WHICH IS BEING SOLICITED ON BEHALF OF THE BOARD
OF DIRECTORS OF THE COMPANY, CAN BE RETURNED IN THE ENCLOSED ENVELOPE,
WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
1
PROXY STATEMENT
Proxies in the accompanying form are being solicited by the Board of
Directors of the Company for use at the annual meeting of shareholders on
Thursday, April 25, 2002, or at any adjournment thereof. The meeting will be
held at The Forum Conference Center, One Cleveland Center, 1375 East Ninth
Street, Cleveland, Ohio, at 3:00 p.m. local time. The Proxy Statement and the
form of Proxy are being mailed to shareholders commencing on or about March 27,
2002.
INFORMATION CONCERNING SOLICITATION AND VOTING
REVOCABILITY OF PROXIES
Any shareholder who executes and returns a Proxy may revoke the same at any
time before it is exercised by filing with the Secretary of the Company written
notice of such revocation or a duly executed proxy bearing a later date, or by
attending the meeting and voting in person. Attendance at the meeting will not
in and of itself constitute revocation of a Proxy.
RECORD DATE AND VOTING
Shareholders of record at the close of business on March 11, 2002 (the
"Record Date") are entitled to notice of and to vote at the meeting. Holders of
the Common Shares of record as of the close of business on the Record Date, or
their proxies, are entitled to one vote per Common Share. At the Record Date,
13,017,352 Common Shares of the Company were issued and outstanding.
Proxies properly signed and returned to the Company, in blank or without
voting instructions, will be voted "FOR" the three Director nominees named
herein, and ratification of the appointment of PricewaterhouseCoopers LLP as
auditors of the Company for 2002.
The three candidates for election as directors at the Annual Meeting who
receive the highest number of affirmative votes will be elected. Broker
non-votes and shares as to which proxy authority has been withheld with respect
to any matter are not deemed to be present or represented for purposes of
determining whether shareholder approval of that matter has been obtained, and,
consequently, will have no effect on the outcome of the vote.
SOLICITATION
The cost of soliciting proxies will be borne by the Company. The Company
has retained the services of Morrow & Co., Inc. to aid in the solicitation of
Proxies. The Company estimates that it will pay Morrow & Co., Inc. a fee of
approximately $5,000 for its services, plus out-of-pocket expenses. In addition,
the Company may reimburse brokerage firms and other persons representing
beneficial owners of shares for their expenses in forwarding solicitation
material to such beneficial owners. Proxies may also be solicited by certain of
the Company's directors, officers and regular employees, without additional
compensation, personally or by telephone or telegram.
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS FOR 2003 ANNUAL MEETING
Proposals of shareholders which are intended to be presented by such
shareholders at the Company's next annual meeting of shareholders to be held in
2003 must be received by the Company no later than November 27, 2002, in order
that they may be included in the proxy statement and form of proxy relating to
that meeting.
2
PROPOSAL ONE
ELECTION OF DIRECTORS
The Board of Directors is divided into two classes, each of whose members
serve for a staggered two-year term. The Board is comprised of three Class I
Directors and three Class II Directors. The current term of the Class I
Directors ends upon the election of Class I Directors at this annual meeting.
The term of the Class II Directors will end upon the election of Class II
Directors at the 2003 annual meeting of shareholders.
The Board of Directors has nominated Messrs. Kahl, Merriman and Rochon to
stand for reelection as the Class I Directors for a two-year term. The two-year
term will end upon the election of Class I Directors at the 2004 annual meeting
of shareholders.
At the annual meeting, the Common Shares represented by valid Proxies,
unless otherwise specified, will be voted to reelect the Class I Directors. Each
individual nominated for election as a Director of the Company has agreed to
serve if elected. However, if any nominee becomes unable or unwilling to serve
if elected, the Proxies will be voted for the election of such other person as
may be recommended by the Board of Directors. The Board of Directors has no
reason to believe that the persons listed as nominees will be unable or
unwilling to serve.
The Board of Directors recommends that each shareholder vote "FOR" the
Board of Directors' nominees.
NOMINEES FOR TERMS EXPIRING IN 2004
DIRECTOR
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION SINCE
--------------- --- -------------------------------------- --------
Jack Kahl Jr.......................... 61 Chief Executive Officer of Jack Kahl & 1995
Associates, LLC
Michael J. Merriman................... 45 Chief Executive Officer and President 1993
of the Company
John P. Rochon........................ 50 Chairman of the Richmont Corporation 1995
JACK KAHL JR. has served as a Director of the Company since September 1995.
Mr. Kahl was Chief Executive Officer of Manco, Inc., a manufacturer of pressure
sensitive tapes, home weatherization products and shipping supplies, from 1971
to 2000. He currently serves as CEO of Jack Kahl & Associates, LLC. Mr. Kahl is
also a Director of American Greetings Company and Acorn Products, Inc.
MICHAEL J. MERRIMAN has served as a Director of the Company since October
1993 and as Chief Executive Officer and President since 1995.
JOHN P. ROCHON has served as a Director of the Company since September
1995. Mr. Rochon is Chairman of the Richmont Corporation, a merchant banking
investment holding and trading company, since 1990, and was Chief Executive
Officer of Mary Kay Holding Corporation from 1991 to 2001.
3
DIRECTORS WHOSE TERMS EXPIRE IN 2003
DIRECTOR
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION SINCE
--------------- --- -------------------- --------
E. Patrick Nalley.................... 82 Director of Invacare Corporation 1981
Joseph B. Richey II.................. 64 President of Invacare Technologies 1994
R. Louis Schneeberger................ 47 Chief Financial Officer of Cardinal 1991
Commerce Corporation
E. PATRICK NALLEY has served as a Director of the Company since the
Company's formation in 1981. In 1992, Mr. Nalley retired from his positions as
Executive Vice President of Sales and Assistant to the President of Invacare
Corporation, a provider of home health care medical equipment. Mr. Nalley also
serves as a Director of Invacare Corporation.
JOSEPH B. RICHEY II has served as a Director of the Company since July
1994. Since 1992, Mr. Richey has been President -- Invacare Technologies and
Senior Vice President -- Total Quality Management for Invacare Corp. Mr. Richey
is also a Director of Invacare Corporation, Steris Corporation and Unique
Mobility Inc.
R. LOUIS SCHNEEBERGER has served as Chairman of the Board since July 1995
and as a Director of the Company since August 1991. Mr. Schneeberger has been
the Executive Vice President and Chief Financial Officer for Cardinal Commerce
Corporation, an early-stage development company involved in the authentication
of internet-based transactions, since December 2000. From March 2000 until
December 2000, Mr. Schneeberger served as Chief Financial Officer of Complient
Corporation. Prior thereto he served 13 years as Chief Financial Officer and as
a Director of Olympic Steel, Inc., a steel service center. Mr. Schneeberger also
serves as a Trustee of the Achievement Centers for Children, serves on the
Business Advisory Council for Kent State University and Enterprise Development
Inc., an affiliate of Case Western Reserve University.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
The Board of Directors of the Company held six meetings during the fiscal
year ended December 31, 2001. The Board of Directors has an Audit Committee, a
Compensation Committee, and a Corporate Governance Committee. The Audit
Committee and the Corporate Governance each held two meetings during 2001 while
the Compensation Committee met once during 2001. The Committees receive their
authority and assignments from the Board of Directors and report to the Board of
Directors.
All of the current Directors attended at least 75% of the Board and
applicable committee meetings held during 2001. In addition to holding regular
committee meetings, the Board members also reviewed and considered matters and
documents and communicated with each other wholly apart from the meetings.
Several actions were taken by unanimous written consent.
Jack Kahl Jr., E. Patrick Nalley, and R. Louis Schneeberger are members of
the Audit Committee. The Audit Committee recommends the engagement of the
Company's independent auditors and is primarily responsible for approving the
services performed by the Company's independent auditors. The Committee also
reviews and evaluates the Company's accounting principles and its system of
internal accounting controls. The Board of Directors has adopted an Audit
Committee Charter that was included as an exhibit in the 2000 proxy statement.
The Board confirmed that all members of the Audit Committee are "independent"
within the meaning of the New York Stock Exchange's new rules.
E. Patrick Nalley, Joseph B. Richey II, and John P. Rochon are members of
the Compensation Committee. The Compensation Committee reviews and approves the
Company's executive compensation policy, makes recommendations concerning the
Company's employee benefit policies, and has authority to administer the
Company's stock option plans.
Jack Kahl Jr., E. Patrick Nalley, Joseph B. Richey II, John P. Rochon, and
R. Louis Schneeberger are members of the Corporate Governance Committee. The
functions of the Committee are to review and evaluate the performance of the
Chief Executive Officer, changes or potential changes in corporate control, and
all public policy issues affecting the Company. In addition, the Committee
identifies and recommends to the Board of Directors candidates for membership on
the Board of Directors and reviews and evaluates all shareholder proposals.
Shareholders wishing to suggest nominees for election to the Board at the 2003
annual meeting may do so by providing written notice to the Company in care of
Richard G. Vasek, Secretary, no later than November 27, 2002.
4
AUDIT COMMITTEE REPORT
The following report of the Audit Committee describes the Committee's
discussions with the Company's independent auditors and the Committee's review
of the Company's audited financial statements.
Management of the Company is responsible for the Company's internal
controls and the financial reporting process. The Company's independent auditors
are responsible for performing an independent audit of the Company's
consolidated financial statements in accordance with generally accepted auditing
standards and for issuing a report thereon. The Audit Committee's responsibility
is to monitor and oversee these processes.
In this context, the Audit Committee has met and held discussions with
management and the Company's independent auditors. Management has represented to
the Committee that the Company's consolidated financial statements were prepared
in accordance with generally accepted accounting principles, and the Committee
has reviewed and discussed the consolidated financial statements with management
and the independent auditors. The Committee also discussed with the independent
auditors matters required to be discussed by Statement on Auditing Standards No.
61 (Communication with Audit Committees).
The Company's independent auditors also provided to the Committee the
written disclosures and the letter required by Independence Standards Board
Standard No. 1 (Independence Discussions with Audit Committees), and the
Committee discussed with the independent auditors that firm's independence.
Based on the Committee's discussions with management and the independent
auditors and the Committee's review of the representations of management and the
report of independent auditors to the Committee, the Committee recommended to
the Board of Directors that the audited consolidated financial statements be
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2001 as filed with the Securities and Exchange Commission.
The report by the Audit Committee shall not be deemed to be incorporated by
reference by any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act or the Exchange Act, and
shall not otherwise be deemed filed under such Acts.
AUDIT COMMITTEE
R. Louis Schneeberger, Chairman
Jack Kahl Jr.
E. Patrick Nalley
5
COMPENSATION OF DIRECTORS
Each Director who is not an employee of the Company receives a director's
fee in the amount of $16,000 per annum for up to four meetings, and
reimbursement for out-of-pocket expenses incurred in connection with attending
such meetings. An additional $4,000 is paid for attending board meetings, if
any, in excess of four meetings in any one year and $2,000 is paid for
attendance at any committee meeting held on a day other than a day of a
Directors' meeting. Each non-employee Director received options to purchase
20,000 Common Shares upon joining the Board of Directors. In 1995, the
non-employee Directors were granted options for an additional 30,000 Common
Shares. In October 2001, two Directors were granted 20,000 options at the then
current market price to replace expiring options. These options expire in ten
years and vest 50% immediately with the remaining 50% vesting ratably over the
next twelve months.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth each person or entity who, pursuant to SEC
rules, had beneficial ownership of 5% or more of the Common Shares of the
Company on March 11, 2002, based upon information furnished to the Company:
NAME AND ADDRESS SHARES AND NATURE OF PERCENTAGE OF
OF BENEFICIAL OWNERS BENEFICIAL OWNERSHIP TOTAL SHARES
-------------------- -------------------- -------------------
Richmont Capital Partners I, L.P.................. 2,969,900(1) 22.8%
2400 Dallas Parkway, Suite 230
Plano, Texas 75093
John P. Rochon.................................... 2,991,400(2) 22.9%
2400 Dallas Parkway, Suite 230
Plano, Texas 75093
E. Patrick Nalley................................. 1,065,000(3) 8.2%
7005 Cochran Road
Glenwillow, Ohio 44139
Dimensional Fund Advisors......................... 987,900(4) 7.6%
1299 Ocean Avenue
Santa Monica, CA 90401
Kestrel Investment Management Corporation......... 797,800(5) 6.1%
411 Borel Avenue
San Mateo, CA 94402
---------------
(1) Based on a Form 4 dated March 7, 1996, filed with the Securities and
Exchange Commission.
(2) Mr. Rochon is a general partner of Richmont Capital Partners I, L.P. Amount
includes 2,969,900 shares owned by Richmont Capital Partners I L.P., 1,500
shares individually owned by Mr. Rochon, and 20,000 shares which can be
acquired by the exercise of stock options.
(3) Based on a Form 4 dated September 30, 1997, filed with the Securities and
Exchange Commission. Amount includes 45,000 which can be acquired by the
exercise of stock options.
(4) Based on Schedule 13(G) dated January 30, 2002, filed with the Securities
and Exchange Commission.
(5) Based on Schedule 13(G) dated February 14, 2001, filed with the Securities
and Exchange Commission.
6
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the amount of the Company's Common Shares
beneficially owned by the Company's Directors, each of the named officers, and
all the Directors and Executive Officers as a group as of March 11, 2002.
PERCENT OF
NAME SHARES TOTAL
---- --------- ----------
Jack Kahl Jr............................................... 140,000(1) 1.1%
Michael J. Merriman........................................ 451,312(1) 3.4%
E. Patrick Nalley.......................................... 1,065,000(1)(2) 8.2%
Joseph B. Richey II........................................ 250,000(1) 1.9%
John P. Rochon............................................. 2,991,400(1)(3) 22.9%
R. Louis Schneeberger...................................... 93,000(1) *
Richard C. Farone.......................................... 94,401(1) *
Richard G. Vasek........................................... 120,855(1) *
David M. Brickner.......................................... 58,526(1) *
T. Keith Moone............................................. 0 *
Directors and Executive Officers as a group (9 persons).... 5,264,494(4) 38.5(4)
---------------
* Less than 1%
(1) Includes shares which can be acquired by the exercise of stock options on or
prior to sixty days following March 11, 2001 as follows: Mr. Kahl -- 20,000;
Mr. Merriman -- 229,312; Mr. Nalley -- 45,000; Mr. Richey -- 50,000; Mr.
Rochon -- 20,000; Mr. Schneeberger -- 45,000; Mr. Farone -- 92,040; Mr.
Vasek -- 115,300; Mr. Brickner -- 53,000.
(2) Includes 1,000,000 shares held of record by Mr. Nalley as Trustee.
(3) Includes 2,969,900 shares beneficially owned by Richmont Capital Partners I,
L.P. of which Mr. Rochon is a General Partner.
(4) Includes 669,652 shares exercisable within sixty days following March 11,
2001.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Act of 1934, as amended, requires the
Company's officers and directors, and persons who own greater than 10% of the
Company's Common Stock, to file reports of ownership and changes in ownership to
the Securities and Exchange Commission. Officers, directors and more than 10%
shareholders are required by the SEC to furnish to the Company copies of all
Section 16(a) reports they file. Based solely upon a review of Forms 3 and 4 and
amendments thereto furnished to the Company during 2001 and Form 5 and
amendments thereto furnished to the Company with respect to 2001, or a written
representation from the reporting person that no Form 5 is required, all filings
required to be made by the Company's officers, directors and greater than 10%
shareholders were timely made.
7
EXECUTIVE OFFICERS' COMPENSATION
Shown below is information concerning the annual and long-term compensation
for services to the Company and its subsidiaries for the years ended December
31, 2001, 2000, and 1999, of those persons (the "Named Executive Officers") who
served during 2001 as the Company's Chief Executive Officer and the other four
most highly compensated executive officers of the Company:
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------- --------------------------------
OTHER ANNUAL SECURITIES LONG-TERM ALL OTHER
SALARY BONUS COMPENSATION UNDERLYING INCENTIVE PLAN COMPENSATION
NAME & PRINCIPAL POSITION YEAR ($) ($) ($)(3) OPTIONS/SAR(#) PAYOUTS($) ($)(4)
------------------------- ---- ------- ------- ------------ --------------- -------------- ------------
Michael J. Merriman 2001 400,000 435,339 0 0 0 16,917
Chief Executive Officer, 2000 400,000 0 0 120,000 0 33,230
President and Director 1999 360,000 410,040 0 200,000 0 17,623
Richard Farone(1) 2001 195,834 170,503 0 5,000 0 9,043
Executive Vice President -- 2000 145,000 0 0 50,000 0 10,873
Sales, Marketing &
Engineering
Richard G. Vasek 2001 185,000 147,177 0 0 0 7,764
Chief Financial Officer 2000 175,000 0 0 25,000 0 12,327
Vice President -- Finance 1999 143,333 120,686 0 70,000 0 7,741
David M. Brickner(1) 2001 135,000 143,751 0 10,000 0 5,551
Vice President -- 2000 128,500 0 0 15,000 0 5,240
Manufacturing
T. Keith Moone(2) 2001 185,000 157,177 0 0 0 8,850
Vice President -- Sales 2000 180,000 0 0 15,000 0 7,889
1999 165,000 173,930 0 50,000 0 7,109
---------------
(1) Mr. Farone and Brickner became Named Executive Officers in 2000. Pursuant to
SEC rules, no information regarding their compensation for years prior to
their appointment as Named Executive Officers is required.
(2) Mr. Moone ceased to be an Officer of the Company effective February 15,
2002.
(3) Perquisites provided to each of the Named Executive Officers, if any, do not
exceed the disclosure thresholds established under the Securities and
Exchange Commission rules and are not included in this total.
(4) The amounts show in this column represents payments made to the Company's
Defined Contribution Plans ("DCP") by the Company.
8
OPTION/SAR GRANTS IN 2001
Shown below is information on grants of options or stock rights pursuant to
the Company's compensation plans made in the year ended December 31, 2001, to
the Named Executive Officers which are listed in the Summary Compensation Table.
INDIVIDUAL GRANTS
---------------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS/SAR ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO PRICE APPRECIATION FOR
OPTIONS/SAR EMPLOYEES EXERCISE OPTION TERM (2)
GRANTED IN FISCAL PRICE EXPIRATION ----------------------
NAME (#) (1) YEAR ($/SH) DATE 5%($) 10%($)
---- ----------- -------------- -------- ---------- --------- ----------
Michael J. Merriman......... 0 0.0% -- -- --
Richard C. Farone........... 5,000 1.6% $5.05 6/12/11 15,880 40,242
Richard G. Vasek............ 0 0.0% -- -- --
David M. Brickner........... 10,000 3.2% -- 10/12/11 65,970 105,047
T. Keith Moone.............. 0 0.0% -- -- --
---------------
(1) The June options vest 33% on each anniversary of the grant date with full
vesting occurring on the third anniversary date, assuming the executive
officer remains employed by the Company. The October stock rights become 60%
vested on the third anniversary from the date of grant and 80% vested on the
fourth anniversary with full vesting occurring on the fifth anniversary
date, assuming the executive officer remains employed by the Company. The
Options and Rights expire in ten years from the date of grant, subject to
earlier termination in certain events related to termination of employment.
The Plans provide that in the event of a "change in control" of the Company,
the Compensation Committee can cause all outstanding stock rights to be
immediately exercisable and may accelerate the termination date of all such
options. A "change in control" generally means the occurrence of (I) the
acquisition by a person of 20% or more of the Company's Common Shares, (ii)
the first purchase of shares pursuant to an exchange or tender offer, or
(iii) shareholder approval of a merger in which the Company is not the
surviving corporation or pursuant to which the Company's shares are
converted into cash. See also "Change-in-Control Arrangements" herein.
(2) The dollar amounts set forth in these columns are the result of calculations
at the 5% and 10% rates set by the Securities and Exchange Commission, and
therefore are not intended to forecast possible future appreciation, if any,
of the Company's Common Stock price. Using these rates, the total of
potential realizable values for the named officers represents less than 1%
of the gain that would be realized by all shareholders of the Company. Based
on the number of shares outstanding and the market price on the June and
October grant dates, the aggregate gain realized by the Company's
shareholders assuming a 5% annual rate of stock appreciation for the option
term would be in excess of $44 million and $35 million, respectively; a 10%
annual rate of stock appreciation would result in a gain in excess of $112
million and $89 million, respectively.
AGGREGATED OPTION/SAR EXERCISES
IN 2001 AND YEAR-END OPTION/SAR VALUES
Shown below is information with respect to the unexercised stock options
and stock rights to receive the Company's Common Shares under the plans held by
the Named Executive Officers at December 31, 2001.
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS/SAR AT FY-END
OPTIONS/SAR AT FY-END(#) ($)(1)
SHARES ACQUIRED VALUE ----------------------------- ---------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ----------- ------------ -------------- ----------- -------------
Michael J. Merriman..... 167,000 -- 513,000 240,000 $39,200 $657,600
Richard C. Farone....... -- -- 78,040 124,000 59,075 270,080
Richard G. Vasek........ -- -- 101,300 94,000 76,705 145,330
David M. Brickner....... -- -- 42,000 48,000 37,200 122,120
T. Keith Moone.......... 33,600 58,800 106,400 45,000 9,800 89,550
---------------
(1) Calculated on the basis of the fair market value of the underlying
securities at December 31, 2001, minus the exercise price.
9
CHANGE-IN-CONTROL AND OTHER EMPLOYMENT ARRANGEMENTS
Michael J. Merriman, President and Chief Executive Officer, and the Company
entered into a new Employment Agreement effective as of March 14, 2002. Under
the Agreement, Mr. Merriman is entitled to a base salary of $400,000 per year,
and participates in the Company's annual management incentive plan ("MIP"). The
term of the agreement is for one year, with automatic renewals unless one party
gives notice of its intent not to renew the agreement. In the event of Mr.
Merriman's termination without cause, termination due to death or disability,
termination for "good reason" (as defined in the agreement), or if the Company
gives notice of its intention not to renew the agreement (collectively, a
"Triggering Termination"), Mr. Merriman is entitled to severance payments equal
to: (a) three times the sum of his then current annual base salary and the
average annual bonus based on the prior three years (paid in six semi-annual
installments); (b) a prorated portion of his MIP award for the year in which the
termination occurs, if applicable; (c) a lump sum severance payment determined
annually by the Board (initially $1.5 million), (d) forgiveness of all amounts
due from Mr. Merriman on his April 2001 $542,750 note payable to the Company,
and (e) continuation of his insurance and other employee benefits for 36 months.
If any of these payments or any other payments made by the Company would
precipitate an excise tax as a "parachute payment" under Internal Revenue Code,
Mr. Merriman shall be entitled to receive an amount equal to the amount of those
excise taxes plus a tax "gross-up" payment. If a Triggering Termination occurs
following a change-in-control (as defined in the Agreement), Mr. Merriman's
severance payments will be paid in a lump sum. The agreement also contains a
covenant by Mr. Merriman not to compete with the Company for up to 36 months
following the termination of his employment. In the event of a Triggering
Termination, any and all unvested stock options and phantom stock rights held by
Mr. Merriman will fully vest.
The Company has entered into Severance Agreements with the other three
Named Executive Officers that are designed to retain the executives and provide
for continuity of management in the event of any actual or threatened change in
the control of the Company. Each agreement only becomes operative upon a "Change
in Control" as defined in the Agreements. After a Change in Control, if, during
the three-year period commencing with the Change in Control, the executive's
employment is terminated for reasons other than "cause" (as defined in the
Agreement), death or disability, or the executive terminates his employment for
"good reason" (as defined in the Agreement), under their respective agreements,
the executive shall be entitled to receive a severance amount equal to three
times of his then base salary. The Company may make an additional payment to
reimburse such individuals for excise tax payments, if any, triggered by the
foregoing severance payments. All options and stock rights held by the
executives with respect to the Company's common stock will become immediately
exercisable upon the date of termination of employment and remain exercisable
for a period of up to three years.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The report of the Compensation Committee shall not be deemed incorporated
by reference by any general statement incorporating by reference this proxy
statement into any filing under the Securities Act of 1933 or under the
Securities Exchange Act of 1934, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
The Compensation Committee of the Board of Directors has furnished the
following report on executive compensation:
It is the responsibility of the Compensation Committee to set policy for
administering the Company's executive compensation plans and to make
recommendations to the Board as appropriate. These plans for Executive Officers
include base salaries, incentive compensation, stock options, and any other
forms of remuneration.
The Committee annually reviews in detail all aspects of compensation for
the Chief Executive Officer and other executive officers. If the Committee
believes that a particular situation warrants outside professional input, the
Committee may retain the services of a qualified compensation consulting firm to
assist it in the performance of its duties. The Committee has retained the
services of PricewaterhouseCoopers LLP to provide analysis to the Committee with
respect to the reasonableness of total compensation to officers of the Company,
taking into account how the executive compensation of the Company compares to
that of executives for its industry peer group (companies included in the Dow
Jones Home Construction and Furnishings Index), as well as to that of other
public companies of similar size. The Committee also reviews executive
compensation surveys and other data in determining compensation policies.
10
Cash compensation is provided to officers through a combination of base
salaries and incentive bonus awards under the Company's Management Incentive
Plan (MIP). Based upon the Committee's analysis, base salaries are fixed at
levels below or above the average competitive amounts paid to other executives
in similar sized public companies and below those of companies included in the
Dow Jones Home Construction and Furnishings Index. Individual salaries may vary
somewhat below or above the average, based upon the individual's performance and
contribution to Company success, tenure on the job, and specific industry skill.
The MIP is highly leveraged such that the higher actual earnings before taxes,
interest, depreciation and amortization are above the minimum thresholds, the
higher the MIP award is as a percentage of base salary. At the beginning of each
year, the Compensation Committee sets the MIP award percentages and the current
year's minimum earnings thresholds that serve as the baseline for determining
any payout under the MIP. For 2001, the Company exceeded the earnings threshold,
therefore MIP bonuses were paid to the Executive Officers. The Board also
determined to grant additional bonuses to certain Executive Officers for product
quality improvements.
The Company has designed its compensation program for officers to provide a
strong and direct link between Company performance and executive pay. Each
component of executive compensation is evaluated so that, in combination, highly
talented executives can be attracted, retained and motivated to consistently
improve the financial performance of the Company.
Mr. Merriman, Chief Executive Officer, participates in the same
compensation programs provided to the other executive officers. The Committee
based the 2001 compensation of Mr. Merriman on the policies and procedures
described above. Mr. Merriman's base salary was fixed below the average
competitive amounts paid to other Chief Executive Officers of similar sized
public companies and those of companies included in the Dow Jones Home
Construction and Furnishings Index.
Annually, the Committee considers the desirability of granting longer-term
incentive awards to the Company's officers under the Company's Stock Option and
Stock Rights Plans. The Committee granted stock options and rights to certain
Executive Officers during 2001. The option grants will vest 33 1/3% per
anniversary date, with full vesting occurring on the third anniversary date, and
the stock rights will vest 60% on the third anniversary and in cumulative 20%
installments, thereafter, with full vesting occurring on the fifth anniversary
date. The stock rights provide for settlement, once exercised, in the Company
Stock thus providing an incentive to these officers and creating a direct link
between the Company's stock performance and executive compensation.
COMPENSATION COMMITTEE
Joseph B. Richey II, Chairman
E. Patrick Nalley
John P. Rochon
11
SHAREHOLDER RETURN PERFORMANCE PRESENTATION. Set forth below is a line
graph comparing the yearly cumulative total shareholder return on the Company's
Common Shares against the cumulative total return of the Dow Jones US Total
Market Index and the Dow Jones Home Construction and Furnishings Index for the
five-year period ended December 31, 2001.
The stock price performance graph below shall not be deemed incorporated by
reference by any general statement incorporating by reference this proxy
statement into any filing under the Securities Act of 1933 or under the
Securities Exchange Act of 1934, except to the extent that the Company
specifically incorporates this information by reference and shall not otherwise
be deemed filed under such Acts.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURNS
Among Royal Appliance Mfg. Co., Dow Jones Equity
Market Index & Dow Jones Home Construction and Furnishings Index
Fiscal Years Ending December 31
GRAPH
1997 1998 1999 2000 2001
- - - - Royal Appliance Mfg. Co. 100 56 68 60 75
---------------------------------------------------------------------------------------------------------------
Dow Jones US Total Market
-- Index 100 125 153 139 122
---------------------------------------------------------------------------------------------------------------
D.J. Home Construction and
-- -- Furnishings Index 100 108 88 94 124
---------------------------------------------------------------------------------------------------------------
12
PROPOSAL TWO
INDEPENDENT AUDITORS
During the year 2001, PricewaterhouseCoopers LLP provided various audit,
and non-audit services to the Company as follows:
a) Audit Fees: Aggregate fees billed for professional services rendered for
the audit of the Company's year ended December 31, 2001 annual financial
statements and review of financial statements in the Company's Form 10Q
Reports. $110,590.
b) Financial Information Systems Design and Implementation Fees: $1,793,703
c) All Other Fees: Principally information technology consulting: $485,592
The Audit Committee of the Board has considered whether the services
described in sections (b) and (c) above are compatible with maintaining the
independent accountant's independence and has determined that such services have
not adversely affected PricewaterhouseCoopers LLP's independence.
Upon recommendation of the Audit Committee, and subject to ratification by
the shareholders at the April 25, 2002 Annual Meeting, the Board of Directors
has appointed PricewaterhouseCoopers LLP as independent auditors to examine the
consolidated financial statements of the Company for the year ending December
31, 2002.
If the Board's appointment is not ratified, or if PricewaterhouseCoopers
LLP declines to act or becomes incapable of action, or if their appointment is
discontinued, the Board will appoint other independent auditors whose continued
appointment after the next Annual Meeting of Shareholders shall be subject to
ratification by the shareholders.
PricewaterhouseCoopers LLP representatives are expected to be present at
the Annual Meeting. They will have an opportunity to make a statement if they so
desire, and it is expected that they will respond to appropriate questions
raised at the meeting.
The persons named in the accompanying form of proxy intend to vote such
proxies to ratify the appointment of PricewaterhouseCoopers LLP unless a
contrary choice is indicated.
The Board of Directors recommends a vote FOR ratification of the
appointment of independent auditors.
OTHER MATTERS
The Board of Directors of the Company is not aware that any matter other
than those listed in the Notice of Meeting is to be presented for action at the
meeting. If any of the Board's nominees are unavailable for election as a
Director or any other matter should properly come before the meeting, it is
intended that votes will be cast pursuant to the Proxy in respect thereto in
accordance with the best judgment of the person or persons acting as proxies.
FINANCIAL INFORMATION
UPON WRITTEN REQUEST BY ANY SHAREHOLDER TO THE SECRETARY, ROYAL APPLIANCE
MFG. CO., 7005 COCHRAN ROAD, GLENWILLOW, OHIO 44139, A COPY OF THE COMPANY'S
2001 ANNUAL REPORT OR FORM 10-K WILL BE PROVIDED WITHOUT CHARGE.
March 27, 2002
13
ROYAL APPLIANCE MFG. CO.
NOTICE: 2002 ANNUAL MEETING OF SHAREHOLDERS
The 2002 Annual Meeting of Shareholders of Royal Appliance Mfg. Co. will be held
on Thursday, April 25, 2002 at 3:00 p.m. at The Forum Conference Center,
One Cleveland Center, 1375 East Ninth Street, Cleveland, Ohio.
[DIRT DEVIL LOGO]
YOUR VOTE IS VERY IMPORTANT
Please sign, date and return your proxy/voting instruction card below. Detach
and return the card in the envelope provided.
DETACH CARD
--------------------------------------------------------------------------------
ROYAL APPLIANCE MFG. CO.
The undersigned hereby appoints Michael J. Merriman and R. Louis Schneeberger,
with full power of substitution, as proxy to vote the Common Shares of Royal
Appliance Mfg. Co. owned by the undersigned at the annual meeting of
shareholders to be held April 25, 2002, at The Forum Conference Center, One
Cleveland Center, 1375 East Ninth Street, Cleveland, Ohio, at 3:00 p.m. local
time, and at any adjournment thereof, upon all business that may properly come
before the meeting, including the business identified and in the manner
indicated on this Proxy and described in the Proxy Statement furnished herewith.
THE BOARD OF DIRECTORS RECOMMENDS VOTING FOR ALL ITEMS.
1. ELECTION OF DIRECTORS WITHHOLD AUTHORITY [ ]
FOR all nominees listed below [ ] to vote for all nominees listed below
(except as indicated to the contrary below)
Michael J. Merriman, Jack Kahl, Jr., John P. Rochon
INSTRUCTION: (TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE WRITE
THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW)
-----------------------------------------------------------------------------
2. RATIFICATION OF THE APPOINTMENT OF AUDITORS
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(CONTINUED, AND TO BE SIGNED ON OTHER SIDE)
DETACH CARD
--------------------------------------------------------------------------------
(Continued from the other side)
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS, WHICH RECOMMENDS
VOTING FOR ALL ITEMS. SHARES REPRESENTED BY PROPERLY EXECUTED PROXIES WILL BE
VOTED AS SPECIFIED. UNLESS OTHERWISE SPECIFIED, THE SHARES REPRESENTED BY THIS
PROXY WILL BE VOTED FOR ALL ITEMS.
Dated................, 2002
...........................
Signature
...........................
Signature
Please sign exactly as
name(s) appear on this
proxy. If joint account,
each joint owner should
sign. If signing for a
corporation or partnership
or as agent, attorney, or
fiduciary indicate the
capacity in which you are
signing.
PLEASE SIGN, DATE, AND RETURN YOUR PROXY PROMPTLY IN THE ENCLOSED ENVELOPE TO
NATIONAL CITY BANK, P.O. BOX 92301, CLEVELAND, OHIO 44197-1200.