<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER: 333-16453
SHOP VAC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 13-5609081
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2323 REACH ROAD, WILLIAMSPORT, PA 17701
(717) 326-0502
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [x]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
As of March 15, 1997, there were 6,500 Class A voting shares and 650,000 Class B
non-voting shares of the registrant's Common Stock outstanding, none of which
was held by non-affiliates. (Officers and directors of the registrant and their
immediate families are assumed to be affiliates for purposes of this
calculation.)
Exhibit Index is located on pages 47 and 48
<PAGE> 2
SHOP VAC CORPORATION
FORM 10-K
YEAR ENDED DECEMBER 31, 1996
INDEX
PART 1
<TABLE>
<CAPTION>
ITEM
NUMBER PAGE
- ------ ----
<S> <C>
1. Business 1
2. Properties 8
3. Legal Proceedings 9
4. Submission of Matters to a Vote of Security Holders 9
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 10
6. Selected Financial Data 10
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11
8. Financial Statements and Supplementary Data 15
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 43
PART III
10. Directors and Executive Officers of the Registrant 43
11. Executive Compensation 43
12. Security Ownership of Certain Beneficial Owners and Management 45
13. Certain Relationships and Related Transactions 46
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 47
</TABLE>
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PART I
ITEM 1. BUSINESS
Shop Vac believes that it is a leading worldwide manufacturer and marketer
of consumer and industrial wet/dry vacuum cleaners and accessories. The Company
estimates that its products account for over half of the domestic consumer
wet/dry vacuum market, with almost twice the market share of its closest
competitor. The Company also markets its wet/dry vacuums internationally in over
70 countries under the Aqua-Vac(R) and Goblin(R) brand names. The Aqua-Vac(R)
line of wet/dry vacuums is a leading brand in Western Europe.
In 1956, Martin Miller, the founder of the Company, pioneered the original
concept of a shop vacuum. The Company has maintained its leadership position in
North America since the Company introduced the wet/dry vacuum to the consumer
market under the Shop-Vac(R) brand name in the late 1960s. Shop Vac Corporation
is a New Jersey Corporation which was originally incorporated on February 13,
1969.
The Company produces a comprehensive line of wet/dry vacuums in various
combinations of tank size, motor horsepower and accessories, which are designed
for consumer, industrial/commercial and professional needs. Features include
motors ranging from 1.0 to 5.0 peak horsepower, tank sizes ranging from one to
55 gallons, detachable hand-held blowers and a variety of accessories such as
extension wands, brushes and nozzles. In Europe, the Company also manufactures
and markets a full line of floor care products in addition to its wet/dry
vacuums, including conventional vacuums, carpet cleaners and steam cleaners to
selected markets.
All of the Company's outstanding common stock is beneficially owned by
Jonathan and Matthew Miller.
The Company is headquartered in Williamsport, Pennsylvania, and as of
December 31, 1996 employed approximately 1,700 people worldwide.
Unless the context otherwise requires, the terms "Company" and "Shop Vac"
refer to the Company and its consolidated subsidiaries. The Company's principal
executive offices are located at 2323 Reach Road, Williamsport, Pennsylvania
17701, and its telephone number is 717-326-0502.
Shop Vac's product design, operations, sales and marketing are managed in
two groups: (i) North America, which is comprised of the United States, Canada,
Latin America and Australia, and (ii) Europe, which is comprised of Europe and
the remaining countries in which the Company does business. The Company sells
its products in North America through its own direct sales force primarily
through national and regional mass merchandisers, home centers, hardware chains,
warehouse clubs and industrial distributors. The Company's major North American
customers include Ace Hardware, Canadian Tire, W.W. Grainger, Home Depot, Kmart
and Wal-Mart. The Company sells its products in the more fragmented European
market primarily through home centers and electrical appliance chains, as well
as through catalogs. Shop Vac's customers in Europe include home centers, such
as Homebase Limited ("Homebase") in the United Kingdom, Castorama in France and
Baus Handelsges A.G. ("Bauhaus") in Germany; electrical appliance chains, such
as Curry's in the United Kingdom and ETS Darty et Fils ("Darty") in France;
catalog showrooms, such as Argos in the United Kingdom; mail order catalogs,
such as GUS Home Shopping Limited ("GUS") in the United Kingdom, S.A. La Redoute
France ("La Redoute") in France and Otto in Germany; and hypermarkets, such as
Carrefour in France and MGE Einkauf G.m.b.H. (the "Metro Group") in Germany.
RELIANCE ON CERTAIN CUSTOMERS
During 1996 the Company's aggregate net sales to its ten largest customers
were 53% of its total net sales. Sales to the Company's single largest customer
represented approximately 13% of the Company's net sales in 1996.
For financial information about foreign and domestic operations and export
sales, see Note 12 to the Consolidated Financial Statements of the Company and
its subsidiaries included elsewhere herein.
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COMPETITIVE STRENGTHS
Management believes that the Company enjoys the following competitive
advantages:
Strong Brand Name Recognition. The Shop-Vac(R) brand name has been
synonymous in North America with the wet/dry vacuum since the Company introduced
the wet/dry vacuum cleaner to the consumer market in the late 1960s. Independent
market research indicates that awareness of the Shop-Vac(R) brand name among
potential wet/dry vacuum purchasers in the United States has averaged
approximately 90% since 1987. The Company's international brands, Aqua-Vac(R)
and Goblin(R) also have strong brand name recognition in their respective
markets. The Company has built and maintained its well-recognized brand name by
manufacturing and selling high quality, powerful products at competitive prices.
Market Leadership. The Shop-Vac(R) brand image has helped the Company
achieve and maintain the leading position in its major markets. The Company
estimates that its products currently account for more than half of the $275
million domestic consumer wet/dry vacuum industry, with almost twice the market
share of its largest domestic competitor. In addition, the Aqua-Vac(R) brand of
wet/dry vacuums is a leading brand in Western Europe.
Established Customer Relationships and Extensive Distribution Network. The
Company has been the primary supplier of wet/dry vacuums to its top ten
customers in the United States and Canada for an average of over 17 years. In
addition, the Company believes that its products currently account for virtually
all of the wet/dry vacuum business of seven of its top ten customers in the
United States and Canada, and many retailers carry the Company's products at all
of their locations. Although the European market is more fragmented than in the
United States and Canada, the Company benefits from its well-established
relationships with major retailers in various Western European countries. The
Company estimates that its products are distributed through over 25,000 retail
outlets in North America and over 5,000 retail outlets in Europe.
Distinct Product Position. In North America, the Company's wet/dry products
are positioned by retailers as utility vacuums and, therefore, are sold through
hardware, rather than floor care, departments. As a result, in North America
Shop-Vac(R)'s wet/dry products do not compete with conventional vacuums for
retailer shelf space. In addition, the Company enjoys diversified distribution
through hardware chains and home centers, as well as through mass merchants. As
a hardware product, Shop Vac has benefited from the trend towards
"do-it-yourself" work by homeowners and the growth of national home center
chains. A similar trend is developing in Europe which the Company believes will
enhance its sales in Europe in light of the Company's relationships with
European home center chains.
Brand Loyalty. Management estimates that approximately half of the Company's
domestic sales in 1995 were to customers who, at that time, owned or had
previously owned a Shop-Vac(R). The Company estimates that it has an installed
base of approximately 18.0 million wet/dry vacuum units in North America and
approximately 3.5 million units in Europe, with these Shop-Vac(R) and
Aqua-Vac(R) owners being likely to purchase new or replacement Shop-Vac(R) and
Aqua-Vac(R) vacuums in the future. In addition, the Company's installed base
results in Shop-Vac(R) and Aqua-Vac(R) owners purchasing replacement parts,
filters and other related products, which accounted for approximately 10% of net
sales in 1996.
Low Cost Producer. The Company has over 25 years of experience in
developing, manufacturing and continually enhancing its line of wet/dry vacuum
cleaners and related products. To maximize profitability, the Company is
vertically integrated in North America. By controlling all major aspects of the
manufacturing process through its integrated facilities in North America, the
Company is able to control product quality and reduce lead times and delivery
costs. In addition, as a vertically integrated manufacturer, the Company is able
to design new products and enhance existing products in order to facilitate a
simplified manufacturing process, thereby reducing costs. Since the European
market is more fragmented, the Company outsources the majority of its
components, which allows for the added flexibility that is necessary to offer
smaller and more diverse product offerings for sale in various countries.
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BUSINESS STRATEGY
The Company's business strategy consists of the following key elements:
Emphasize Improved Profitability and Cash Flow. Following the decision to
sell the Company's discontinued operations, the Company focused on its core
operations and initiated a series of operational improvements targeted at
reducing expenses and increasing cash flow. These improvements include
consolidation of certain manufacturing operations, administrative personnel
reductions, improved inventory control and implementation of manufacturing
innovations and automation. For example, in 1995, the Company began using an
automated liquid coloring system instead of a manual mixing process and
converted certain plastic parts from thermal plastic to a lower cost thermoset
material. In 1996, the Company consolidated its plastic molding facility
formerly in Norwich, New York into its Canton, Pennsylvania operations and has
initiated consolidation of a small manufacturing facility in France into its
European manufacturing operations in Ireland. The benefits of these programs and
the impact of certain other factors are evident in the Company's recent
operating results, including gross margin improvement from 22.4% to 25.8% for
the years ended December 31, 1995 and 1996, respectively.
Maintain Leading Market Position. The Company intends to continue to
capitalize on the strengths of its brands and maintain a worldwide market
leadership position. In this capacity, the Company will continue to maintain
close relationships with its customers and manufacture quality products which
lead to high levels of customer satisfaction.
Expand International Sales. The Company intends to continue to leverage the
Shop-Vac(R) and Aqua-Vac(R) brand names to achieve global distribution of
products and product line extensions. The Company intends to increase its
advertising and promotional activity to broaden international awareness of its
products. As part of this strategy, the Company is seeking to develop
independent distribution channels in countries where it currently does not have
a major presence. In addition, from time to time, the Company coordinates with
its major customers' expansion into new markets. For example, while Shop-Vac's
products have been sold in Mexico in the past, the Company intends to expand its
presence in Mexico and the rest of Latin America alongside Wal-Mart, its
longtime customer.
Emphasize Product Innovation. The Company seeks to expand the wet/dry vacuum
cleaner product category by introducing new products under the Shop-Vac(R) and
Aqua-Vac(R) brand names and continually upgrading existing products in response
to consumer preferences, changing market dynamics and technological
advancements. For example, in 1994, the Company successfully introduced into the
North American market the Shop-Vac 1x1(R), a smaller light-weight hand-held
wet/dry vacuum intended for use in the home. In addition, in 1995, the Company
began to offer the QSP(R) (Quiet Super Power) line of wet/dry vacuums which
offer easier handling and quieter operations without sacrificing motor power.
The QSP(R) is the only "quiet" wet/dry vacuum in the market, and consumer
response has been very favorable. In 1995, the new "quiet" operating wet/dry
vacuum and carpet shampooer, the Multipro(R), was introduced in Europe.
INDUSTRY OVERVIEW
The consumer wet/dry vacuum was introduced by the Company commercially in
the late 1960s. A wet/dry vacuum differs from a conventional household vacuum
primarily because (i) the wet/dry vacuum is specially designed to allow debris
entering the vacuum to bypass the motor, enabling the wet/dry vacuum to intake
water and heavy debris such as glass and nails; (ii) the wet/dry vacuum utilizes
a strong, concentrated suction to clean, as opposed to an upright vacuum, which
relies on a "beater bar" to agitate debris; and (iii) the wet/dry vacuum does
not require many of the expensive parts (such as a beater bar, sophisticated
wheels and canister cord rewinds) of a conventional vacuum, thus significantly
lowering manufacturing costs and enabling the wet/dry product to retail at a
substantially lower price.
North America
In North America, the consumer wet/dry vacuum is positioned as a utility
vacuum and is sold through hardware, rather than floor care departments. As a
result, the wet/dry product does not compete for retailer shelf space with
conventional vacuum cleaners. Generally viewed as a secondary household vacuum,
the wet/dry product is able to perform heavier cleaning functions in areas such
as the basement, garage and workshop that the standard vacuum
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cannot attempt. Primary users of the consumer wet/dry vacuum are homeowners,
many of whom undertake "do-it-yourself" projects in their garages or workshops.
Consumer wet/dry vacuums are typically distributed and sold through mass
merchandise retailers, such as Kmart, Target Stores ("Target") and Wal-Mart;
home centers, such as Builder's Square, Hechinger Stores Company ("Hechinger")
and Home Depot; warehouse clubs such as Price Costco and Sam's Club; hardware
stores, such as Ace Hardware, Cotter & Company ("True Value Hardware") and
ServiStar Corporation ("ServiStar"). Over the last decade, the expansion of mass
merchandisers and home centers has contributed to the consolidation of the
retail industry. The proliferation of mass merchants and home centers throughout
the United States and, to a lesser extent, internationally has led to a
substantial increase in certain consumer purchases, such as the wet/dry vacuum,
at such locations and a decrease in such purchases at less well-recognized and
less accessible catalog showrooms and warehouse clubs.
International
In Europe and the Middle East, the Company has positioned its products in
response to the fragmentation of that market and differing consumer expectations
and demands. Generally, consumers in Europe own only one vacuum due to space
limitations and a lack of garages and basements. Consequently, in European
markets, the Company emphasizes the practical utility of its products by
offering additional features and accessories. As the European Community
continues to exert its influence over cross-border trading in Europe, the
fragmentation of that market should decrease. Historically, sales in Europe have
been conducted through local distributorships that adapted to local requirements
and consumer expectations. As fragmentation decreases and the need for local
distributors diminishes accordingly, manufacturers of consumer products are more
likely to sell directly to retailers to bypass costly middlemen and enhance
their competitive positions throughout Europe.
PRODUCTS
North America
In North America, the Company offers the industry's broadest line of
consumer and industrial wet/dry vacuums, manufacturing 46 consumer models and
approximately 49 industrial models, in addition to a full line of accessories.
The table below sets forth an overview of the Company's wet/dry vacuum products
offered in North America, as well as the primary distribution channels, target
markets and product categories:
<TABLE>
<CAPTION>
PRIMARY
SIZE/POWER MODEL(S) DISTRIBUTION CHANNEL TARGET MARKET
- ------------------- --------- ----------------------- -------------
<S> <C> <C> <C>
1 Gallon Hand-held Mass Merchants Consumer
1.0 Horsepower Home Centers
Hardware Chains
Industrial Distributors
5-25 Gallon Original Mass Merchants Consumer
1.25-5.0 Horsepower QSP(R) Home Centers
Hardware Chains
Industrial Distributors
Warehouse Clubs
10-16 Gallon Original Home Centers Contractor
3.0-5.0 Horsepower Industrial Distributors
5-55 Gallon Original Industrial Distributors Industrial
1.7-3.5 Horsepower
</TABLE>
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Consumer Line. The Company's consumer line of wet/dry products accounts for
the majority of its sales, totalling approximately 83% of 1996 net sales in the
United States (including wet/dry accessories). The consumer line consists of 46
models, differing primarily in size, motor power and included accessories, which
are marketed at suggested manufacturers' retail prices of between $29.99 and
$129.99. The storage capacity of the Company's consumer vacuums ranges from one
gallon to 25 gallons, motor power varies from 1.0 to 5.0 peak horsepower, and
various accessories include filters, brushes and hoses. Certain of Shop Vac's
products include detachable motors that can be used as leaf blowers in
conjunction with a nozzle accessory. The hand-held blower allows easy clean-up
of leaves, grass and other light debris from sidewalks, pool areas, decks and
patios.
Industrial/Commercial Line. The industrial line, comprised of 49 models and
marketed primarily to heavier users such as factories, warehouses and hospitals,
features more powerful, longer-lasting motors and larger capacity tanks (ranging
from five to 55 gallons) made of plastic, metal or stainless steel. The units
are equipped with heavy-duty carts for easy mobility and additional accessories
and filtration devices. The Company's industrial wet/dry vacuums are
manufactured for daily use and have a longer average useful life than the
Company's consumer products. The industrial line, which includes products
manufactured for W.W. Grainger under the Dayton brand name, accounted for
approximately 13% of the Company's net sales in the United States in 1996.
Contractor Line. The contractor line of wet/dry vacuums, marketed primarily
to small industrial businesses, independent contractors and experienced
woodworkers, offers larger capacity metal or stainless steel tanks, more
powerful motors and better filtration than the consumer line, and comes equipped
with heavy-duty carts to facilitate mobility. This line of products is primarily
sold in home centers such as Home Depot and warehouse clubs such as Sam's Club
and Price Costco. The contractor line accounted for approximately 3% of the
Company's net sales in the United States in 1996.
Private Label. The Company produces wet/dry products for other manufacturers
or retailers under such entity's brand label. Customers include Makita U.S.A.,
Inc., Milwaukee Electric Tool Corporation and Sioux Tool, Inc. The Company also
sells vacuum components to other manufacturers such as Parts Company of America
and Tennant Co. Private label sales accounted for approximately 1% of the
Company's net sales in the United States in 1996.
Accessories. The Company offers the industry's widest range of wet/dry
vacuum accessories, manufacturing 125 stock keeping units ("SKUs") aimed at
increasing the versatility of its products. Accessories include replacement
parts such as filters and hoses and additional tools such as brushes, wands,
nozzles and crevice tools which can be used in conjunction with the basic unit.
Customers may purchase accessories from retail locations or order them directly
from the Company. Accessory sales represented approximately 9% of the Company's
net sales in the United States in 1996.
Industrial Sweepers. The Company produces a line of three motorized
"walk-behind" sweepers for W.W. Grainger, and manufactures a manual push sweeper
for sale under the Shop-Vac(R) brand name and for certain private labels.
These sweepers are primarily used to clean aisles in factories and warehouses.
Europe and International
The Company conducts most of its European operations under the trade names
of Aqua-Vac(R) and Goblin(R). Goblin(R) is an established British conventional
vacuum brand name that the Company purchased in 1984. The table below sets forth
an overview of the Company's product offerings in Europe, as well as the primary
distribution channels and target markets:
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<TABLE>
<CAPTION>
PRIMARY
PRODUCT SIZE/POWER MODELS DISTRIBUTION CHANNEL TARGET MARKET
- ------------------------ ----------------------- ------------------- --------------------------- ------------------
<S> <C> <C> <C> <C>
Wet/Dry 15-30 liter Original Home Centers Consumer
Vacuum Cleaners 900-1100 watts Electrical Appliance Do-It-Yourself
Chains
Catalog Showrooms
Mail Order Catalogs
Hypermarkets
18-30 liter Quiet Operations Home Centers Domestic
1200-1400 watts Electrical Appliance Vacuum Users
Chains Step-up
Do-It-Yourself
20-60 liter Industrial Home Centers Contractors
1200-1400 watts Synchro(R) Industrial Outlets
Catalog Showrooms
20-30 liter Carpet Electrical Appliance Consumer
1000-1100 watts Shampooer Chains Commercial
Steam Cleaners 0.5-4.0 Steamatic(R) Home Centers Consumer
bar pressure Mondial(R) Electrical Appliance Do-It-Yourself
Chains
Catalog Showrooms
Mail Order Catalogs
Hypermarkets
Domestic Vacuum 4 liter Uprights Electrical Appliance Consumer
Cleaners dust capacity Chains
(Sold in the United 450-475 watts Catalog Showrooms
Kingdom, Germany Mail Order Catalogs
and Austria) Hypermarkets
3-5 liter Cylinders Electrical Appliance Consumer
dust capacity (Canisters) Chains
1000-1400 watts Catalog Showrooms
Mail Order Catalogs
Hypermarkets
Rechargeable/ Handheld Electrical Appliance Consumer
corded Chains
150-250 watts Catalog Showrooms
Mail Order Catalogs
Hypermarkets
</TABLE>
Wet/Dry Vacuum. In Europe, the Company produces and distributes a variety of
wet/dry vacuums under the AquaVac(R) brand name to the consumer and
industrial/commercial markets. The Company's wet/dry vacuums sold
internationally generally contain noise dampening features similar to those in
the QSP(R).
Conventional Vacuum Lines. The Company also offers a variety of conventional
and canister vacuums under the Aqua-Vac(R) and Goblin(R) brand names, differing
primarily in size, power and enhancements such as filtration, cord rewinds and
internal tool storage.
Steam Cleaners and Carpet Cleaners. The Company also manufactures and
markets a full line of steam cleaners, which clean items and areas such as
carpets, upholstery, furniture and floor surfaces using powerful steam
generators rather than detergents, solvents or abrasive cleaners. Features
include varying steam power, precise control of steam output and a wide range of
accessories such as additional nozzles and irons. The Company also offers two
types of carpet cleaners: a "3-in-1" integrated cleaner with pure dry and
wet/dry capacity as well as an
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internal reservoir and separate pump motor to facilitate carpet shampooing; and
an attachment for a wet/dry vacuum that enables the product to perform light
carpet cleaning.
Other Product Lines. The Company sells hand-held vacuums, both corded and
rechargeable, which are purchased by the Company from independent sources.
MANUFACTURING
North America
The Company manufactures virtually all of the components of its wet/dry
vacuums sold throughout North America except for metal screws, switches and
packaging cartons. The Company's vertical integration enables it to manufacture
its products rapidly, with fewer concerns regarding supplier delays, and thus
better services its customers' needs by responding promptly to sales orders.
Generally, the Company is able to ship product within 24 hours of a customer's
order, although ordinarily the time between order and shipment ranges from five
to seven days.
The Company's corporate headquarters in Williamsport, Pennsylvania includes
a manufacturing facility at which the Company produces a substantial portion of
the plastic tanks for its consumer products, hoses, caster feet and all of the
components for its industrial metal tank line and reusable dry filters. The
Company manufactures additional plastic components, wheels and ball floats at
its facility in Canton, Pennsylvania. The Company manufactures most of the
motors used in its products at Felchar's Binghamton, New York facility.
In Williamsport the Company assembles most of the products it sells in the North
American market under both the Shop-Vac(R) brand name and for private labels,
except for the Shop-Vac 1x1(R), which is assembled at the Company's Canton,
Pennsylvania location. The Company distributes its products throughout the west
coast from its facility in Cerritos, California and in Canada through a
distribution center in Burlington, Ontario.
International
The Company manufactures and assembles most of the products that it
distributes throughout Europe at its Tralee, County Kerry, Ireland facility. At
this facility, the Company manufactures hoses and assembles its wet/dry vacuums,
conventional vacuums and carpet cleaners. In addition, the Company is
transferring the production of its steam cleaners from its plant in Salindres,
France to its facility in Ireland. The Company purchases most of the plastic
components and all of the motors used in the manufacture of its European
products. The Company also purchases a small number of canister vacuums and its
hand-held vacuums from outside sources.
COMPETITION
The worldwide market for wet/dry products is competitive, and is based on
brand name, price, quality, and consumer advertising. The Company has enjoyed
the largest share of the worldwide market for consumer and industrial wet/dry
vacuums and related accessories since the Company introduced the wet/dry vacuum
to the consumer market in the late 1960s. The Company believes that its strong
brand name recognition, competitive pricing, breadth of product line,
comprehensive marketing program, long-term relationships with major retail
chains and well-established distribution network provide it with a strong
competitive position.
In the North American market for wet/dry vacuums the Company historically
has competed primarily with Sears and Genie. Sears has the second largest share
of the consumer wet/dry vacuum market, with an estimated market share of less
than half that of the Company in each of the last five years. In recent years
Hoover, Eureka and Royal have also entered the market with limited lines of
consumer wet/dry vacuum products.
Competition in the conventional and wet/dry vacuum markets differs in each
European country, although the market for floor care products is generally more
competitive than that for wet/dry products throughout Europe. The Company's
significant competitors include Electrolux Holdings Limited and Hoover, which
offer both conventional and wet/dry vacuums in several European markets, as well
as Rowenta, Royal and Vax Limited in the United Kingdom; and Karcher, Tornado
S.A. and Polti France S.A. in France; and Karcher, Robert Thomas and Einhell,
Hans, A.G. in
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Germany and Austria. However, most of the Company's competitors sell their
products primarily through electrical appliance outlets and mail order catalogs,
and the Company enjoys a significant percentage of the retail shelf space for
conventional and wet/dry vacuums in the growing home center retail distribution
channel throughout Europe. Competition in Europe is based more significantly on
product enhancement than in the United States, as a result of the European
consumer's general willingness to purchase products perceived as having
additional features.
RAW MATERIALS AND SUPPLIERS
The primary raw materials purchased by the Company are resins for the
outside casing of the product, copper for motor production and corrugated
packaging material. Shop Vac has multiple suppliers for each of its primary raw
materials, with many of whom the Company has long-standing trading
relationships. No single supplier accounts for a material amount of the
Company's total raw material purchases. In addition, the Company's agreements
with its largest suppliers guarantee raw material availability and outline
discounts and rebates but do not establish pricing.
ENVIRONMENTAL
The Company's operations are subject to constantly changing federal, state,
local and foreign regulations that impose limitations on the discharge of
pollutants into the environment and establish standards for the handling,
generation, emission, release, discharge, treatment, storage and disposal of
certain materials, substances and wastes. The Company believes that its
operations are in compliance in all material respects with the terms of all
applicable environmental laws and regulations as currently interpreted.
PATENTS AND TRADEMARKS
The Company owns and controls patents, trademarks, trade secrets, trade
names, copyrights and technology know-how, that are of material importance to
its business. The Company's trademarks are registered in the United States and
in a number of foreign countries. The Company intends to renew and maintain in a
timely manner those trademarks and patents that are renewable and maintainable
and are deemed important to the business of the Company.
The Company believes that its trademark position is adequately protected.
The Company also believes that its marks are generally well recognized by
consumers of its products and are associated with a high level of quality and
value. Because the Company believes that it is a product innovator, it is the
Company's policy to apply for design and utility patents on those products which
management believes may be of significance to the Company. However, management
believes that the Company's success depends predominantly on its skills in
marketing, distribution and manufacturing rather than on the patented features
of its products.
EMPLOYEES
The Company employed approximately 1,700 persons world-wide as of December
31, 1996. Approximately 1,250 persons are employed in the United States and
approximately 450 persons are employed in foreign countries. Each of the
Company's facilities recruits hourly personnel from its respective labor market
and the Company believes that the labor market for each facility is favorable.
None of the Company's employees are represented by any labor union, except in
Ireland and Australia (in accordance with local custom), and management believes
that the Company's employee relations are good.
ITEM 2. PROPERTIES
The Company owns or leases the following manufacturing, warehouse,
distribution and assembly facilities around the world:
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<TABLE>
<CAPTION>
SQUARE OWN/
LOCATION FEET TYPE OF FACILITY LEASE
- --------------------------------------------------------- ------------ ------------------------------- ----------
<S> <C> <C> <C>
UNITED STATES:
Williamsport, Pennsylvania........................... 247,000 Headquarters, manufacturing Own
and assembly
Williamsport, Pennsylvania........................... 103,000 Warehouse Lease
Williamsport, Pennsylvania........................... 50,000 Distribution Lease
Williamsport, Pennsylvania........................... 19,000 Assembly Lease
Canton, Pennsylvania................................. 94,000 Manufacturing Own
Binghamton, New York................................. 102,500 Manufacturing Own
Binghamton, New York................................. 67,500 Manufacturing Own
Norwich, New York.................................... 33,000 Warehouse Own
Cerritos, California................................. 30,850 Distribution Lease
INTERNATIONAL:
Hertogenbosch, Netherlands ....................... 1,400 Office Lease
Auckland, New Zealand ............................ 3,200 Distribution Lease
* Bochum, Germany .................................. 22,935 Distribution Lease
* Budapest, Hungary ................................ 3,000 Distribution Lease
Burlington, Ontario .............................. 79,000 Distribution Own
Evry, France ..................................... 18,623 Distribution Lease
Melbourne, Australia ............................. 17,500 Distribution/Assembly Lease
** Salindres, France ................................ 27,000 Manufacturing Own
** Salindres, France ................................ 11,700 Warehouse Lease
Tralee, County Kerry, Ireland .................... 85,000 Manufacturing Own
* Vienna, Austria .................................. 6,700 Distribution Lease
Normanton, United Kingdom ........................ 60,000 Offices/Distribution Lease
</TABLE>
- ------------------
* To be closed.
** Closed as of December 31, 1996
The Company has entered into an option agreement with an independent real
estate developer which entitles the developer to purchase the Company's former
manufacturing facility in Norwich, New York for $675,000. The option agreement
expires on June 19, 1997 and is renewable through June 19, 1998. The facility is
currently used by the Company as a warehouse, and the Company believes that upon
a sale of the facility, the Company will be able to obtain alternative warehouse
space as necessary at reasonable cost.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various lawsuits arising in the normal course of
business. In management's opinion, the ultimate outcome of these lawsuits will
not have a material adverse effect on the Company's financial condition and
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the Company's security holders during the
fourth quarter of 1996.
9
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Company's common
stock. On December 31, 1996 there were five holders of the Company's Class A
voting common stock and three holders of the Company's Class B non-voting common
stock. The Company did not declare or pay any dividends with respect to its
common stock during the years ended December 31, 1995 and 1996.
ITEM 6. SELECTED FINANCIAL DATA
The historical selected consolidated financial data presented below for, and
as of the end of, the years ended December 31, 1993 through 1996 have been
derived from the consolidated financial statements of the Company and its
subsidiaries, which financial statements have been audited by KPMG Peat Marwick
LLP, independent certified public accountants. The historical financial data
presented below for, and as of the end of, the year ended December 31, 1992 have
been derived from the financial records of the Company and its subsidiaries for
that year. Data has been restated (where appropriate) to exclude results of
discontinued operations in a manner which, in the opinion of the Company, is in
accordance with Accounting Principles Board Opinion No. 30 and fairly presents
the results for such periods. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of the
Company, together with the related notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1992 1993 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED OPERATING DATA:
Net Sales ..................................................................... $217,471 $224,726 $250,843
Cost of sales ................................................................. 155,350 162,710 182,694
-------- -------- --------
Gross profit ............................................................ 62,121 62,016 68,149
Selling, general and administrative expense ................................... 34,985 38,421 41,867
Restructuring charges ......................................................... -- -- --
-------- -------- --------
Income from operations .................................................. 27,136 23,595 26,282
Interest expense .............................................................. 8,142 7,210 8,826
Non-operating expense (income), net ........................................... 532 (870) 9
-------- -------- --------
Income from continuing operations before income taxes, extraordinary item
and cumulative effect of changes in accounting principles ............ 18,462 17,255 17,447
Income taxes .................................................................. 5,553 5,130 4,964
-------- -------- --------
Income from continuing operations before extraordinary item
and cumulative effect of changes in accounting principles ............ 12,909 12,125 12,483
-------- -------- --------
Discontinued operations:
Loss from operations of discontinued business, net ...................... (4,421) (4,148) (4,525)
Loss on disposal of discontinued business, net .......................... -- -- --
-------- -------- --------
Loss on discontinued operations ............................................... (4,421) (4,148) (4,525)
-------- -------- --------
Income (loss) before extraordinary item and cumulative effect of
changes in accounting principles ........................................ 8,488 7,977 7,958
Extraordinary item-loss on early extinguishment of debt, net of
income tax benefit ...................................................... -- -- --
Cumulative effect on changes in accounting principles, net .................... -- (1,049) --
-------- -------- --------
Net income (loss) ............................................................. $ 8,488 $ 6,928 $ 7,958
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996
--------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED OPERATING DATA:
Net Sales ..................................................................... $ 231,323 $214,039
Cost of sales ................................................................. 179,416 158,787
--------- --------
Gross profit ............................................................ 51,907 55,252
Selling, general and administrative expense ................................... 35,637 35,513
Restructuring charges ......................................................... -- 4,714
--------- --------
Income from operations .................................................. 16,270 15,025
Interest expense .............................................................. 11,629 10,104
Non-operating expense (income), net ........................................... 459 889
--------- --------
Income from continuing operations before income taxes, extraordinary item
and cumulative effect of changes in accounting principles ............ 4,182 4,032
Income taxes .................................................................. 1,425 1,755
--------- --------
Income from continuing operations before extraordinary item
and cumulative effect of changes in accounting principles ............ 2,757 2,277
--------- --------
Discontinued operations:
Loss from operations of discontinued business, net ...................... (10,639) --
Loss on disposal of discontinued business, net .......................... (120,296) --
--------- --------
Loss on discontinued operations ............................................... (130,935) --
--------- --------
Income (loss) before extraordinary item and cumulative effect of
changes in accounting principles ........................................ (128,178) 2,277
Extraordinary item-loss on early extinguishment of debt, net of
income tax benefit ...................................................... -- (1,499)
Cumulative effect on changes in accounting principles, net .................... -- --
---------- --------
Net income (loss) ............................................................. $(128,178) $ 778
========= ========
</TABLE>
10
<PAGE> 13
<TABLE>
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges....................... 3.2x 3.3x 2.9x 1.4x 1.4x
Depreciation and amortization............................ $ 5,595 $ 4,278 $ 5,054 $ 6,132 $ 7,783(2)
Capital expenditures, net................................ 1,221 7,656 7,838 8,042 582
CONSOLIDATED BALANCE SHEET DATA:
Total assets (1)......................................... $187,809 $ 207,678 $252,582 $ 135,480 $ 131,636
Total debt............................................... 72,423 78,669 94,304 95,650 110,397
Stockholders' equity (deficit)........................... 69,122 72,539 82,906 (41,601) (38,997)
</TABLE>
(1) Includes $36.5 million, $53.1 million, $67.1 million, $19.0 million and
$5.6 million of net current assets associated with discontinued operations
as of December 31, 1992, 1993, 1994, 1995 and 1996, respectively, and $45.8
million, $47.6 million and $54.4 million of net non-current assets
associated with discontinued operations as of December 31, 1992, 1993 and
1994, respectively. Net non-current assets associated with discontinued
operations as of December 31, 1995 and 1996 were nil. See Note 16 to the
consolidated financial statements of the Company and its subsidiaries
included elsewhere herein.
(2) Includes approximately $1.0 million of charges included in the 1996
restructuring charge.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" as well as the consolidated financial
statements of the Company and the notes thereto contained elsewhere herein.
The Company derives its revenues primarily from its core business, the
manufacture and sale of wet/dry vacuums. Shop Vac's product design, operations,
sales and marketing are managed in two groups: (i) North America, which is
comprised of the United States, Canada, Latin America and Australia and (ii)
Europe, which is comprised of Europe and the remaining countries in which the
Company does business. The Company has been the North American wet/dry vacuum
market leader since it introduced the wet/dry vacuum to the consumer market in
the late 1960s. The Company's European operations also manufacture and sell
wet/dry vacuums, as well as a full line of conventional vacuums, carpet cleaners
and steam cleaners, in Europe and internationally.
Historically, there have been relatively few participants in the domestic
consumer wet/dry vacuum industry, and prior to 1993, Sears Roebuck and Company
("Sears") and The Genie Company ("Genie") were the Company's only significant
competitors. Since 1993, Hoover, Eureka and Royal have introduced limited lines
of consumer wet/dry vacuum products. The Company has not lost a single major
customer as a result of these new entrants, which, singly and in the aggregate,
have not had a material impact on the Company's market share.
1996 AS COMPARED TO 1995
Net sales in the year ended December 31, 1996 totaled $214.0 million, a
decrease of approximately $17.3 million or 7.5%, compared to net sales of $231.3
million in the year ended December 31, 1995. This decrease is attributable
primarily to (i) three major domestic retailers' general reduction of their
respective wet/dry vacuum inventory balances in conjunction with overall
programs to reduce inventory levels and reduced QSP sales in 1996 compared to
1995 due to the introduction of the QSP which resulted in increased 1995 sales
to fill base inventory requirements, (ii) reduced 1x1 sales in 1996 due to two
major retailers' decisions not to repeat 1995 promotions of this product, and
(iii) lower sales volume in Europe, which reflects a reduction in the volume of
steam cleaner sales due to negative publicity about steam cleaning generally and
the strengthening U.S. dollar in 1996.
Gross profit in the year ended December 31, 1996 totaled $55.3 million, an
increase of approximately $3.3 million or 6.4% when compared to gross profit of
$51.9 million in the year ended December 31, 1995. Gross profit as a percentage
of net sales increased from 22.4% in the year ended December 31, 1995 to 25.8%
in the year ended December 31, 1996. This increase in gross profit as a
percentage of net sales resulted from (i) a reduction in the cost of raw
materials and the manufacturing cost savings implemented in late 1995 and 1996,
(ii) liquidation of domestic LIFO reserves due to a decline in inventory levels
and reductions in manufacturing costs of LIFO inventories, (iii) a lesser impact
in 1996 of the inventory reduction at its major domestic customers compared to
1995, and (iv) the charges incurred in 1995 relating to the replacement of
wet/dry vacuums in Australia as a result of defective motor components purchased
from an independent vendor (from whom the Company no longer purchases any
components) and incorporated in the Company's products sold in Australia. These
improvements were offset by a decline in gross profit as a result of the
decrease in net sales when compared to the prior year as well as a write down of
inventories recognized in connection with the shut down of certain European
operations.
11
<PAGE> 14
SG&A expense decreased to $35.5 million in the year ended December 31, 1996
from $35.6 million in the year ended December 31, 1995, a decrease of
approximately $100,000. SG&A expense as a percentage of net sales increased from
15.4% in the year ended December 31, 1995 to 16.6% in the year ended December
31, 1996. Reductions in SG&A expense primarily consisted of reductions in
European sales and administrative personnel and related expenses and reductions
in executive compensation. These improvements were offset by allowances for
doubtful accounts receivable and other expenses recognized in connection with
the shut down of certain European operations and increased domestic promotional
expense. The increase in SG&A expense as a percentage of net sales was due to
the decline in net sales.
Operating income, excluding the restructuring charge described below,
increased to $19.7 million in the year ended December 31, 1996 from $16.3
million in the year ended December 31, 1995, an increase of approximately $3.5
million or 21.3%. Operating income before restructuring as a percentage of net
sales increased to 9.2% in the year ended December 31, 1996 from 7.0% in the
year ended December 31, 1995.
An operating charge for restructuring European operations was incurred in
the third quarter of 1996 for $4.7 million. A $1.5 million charge resulted from
the anticipated cost of severance, lease payments, and related shutdown expenses
of the Salindres, France facility that manufactured steam cleaners. These
operations are being consolidated with the current floor care manufacturing
facilities in Tralee, Ireland in 1997 and will help the Company improve
efficiencies. Further, a $3.2 million charge was recognized for severance, lease
payments, and related shutdown expenses of the distribution operations in
Austria, Germany, Hungary, the Netherlands, and Spain.
Income from operations after restructuring decreased to $15.0 million in the
year ended December 31, 1996 from $16.3 million in the year ended December 31,
1995, a decrease of approximately $1.2 million or 7.7%. Operating income as a
percentage of net sales was 7.0% in the year ended December 31, 1996, unchanged
from the year ended December 31, 1995.
Interest expense was $10.1 million in the year ended December 31, 1996, a
decrease of $1.5 million or approximately 13.1%, compared to $11.6 million in
the year ended December 31, 1995. Interest expense as a percentage of net sales
decreased from 5.0% in the year ended December 31, 1995 to 4.7% in the year
ended December 31, 1996. This decrease was related to a decrease in average
borrowings in 1996 due to the disposition of discontinued operations which
reduced working capital needs and the application of the disposition proceeds to
pay down debt.
1995 AS COMPARED TO 1994
Net sales in 1995 totaled $231.3 million, a decrease of approximately $19.5
million or 7.8%, compared to net sales of $250.8 million in 1994. This decrease
was primarily related to (i) a decrease in sales of the Company's steam cleaners
in France and Germany following negative press reports in 1994 about the safety
of steam cleaning products, which was partially offset by a general increase in
sales of European floor care products, and (ii) a decrease in North American
sales of wet/dry vacuums due, in part, to (a) a decrease in net sales to
warehouse clubs which typically rotate product offerings in order to appeal to a
captive customer base, (b) reductions in net sales to retailers which
experienced financial difficulties in 1995, (c) a decrease in inventory levels
maintained by two major customers in conjunction with an overall program to
reduce inventory levels, and (d) mild winter weather as well as other general
factors.
Gross profit in 1995 totaled $51.9 million, a decrease of approximately
$16.2 million or 23.8%, compared to gross profit of $68.1 million in 1994. Gross
profit as a percentage of net sales decreased from 27.2% in 1994 to 22.4% in
1995. This decrease in gross profit as a percentage of net sales was primarily
related to (i) the decline in European sales of steam cleaners described above
and the absence of a corresponding reduction in fixed manufacturing overhead,
(ii) an increase in raw materials cost that was only partially offset by a
corresponding price increase instituted by the Company, (iii) the decline in
North American sales described above and (iv) fixed overhead costs incurred
during a temporary domestic manufacturing slowdown implemented by management in
response to lower sales volume in the first six months of 1995. In addition, the
Company recorded a charge due to the return of products sold in Australia as a
result of defective motor components described above. These decreases were
partially offset by increased gross profit on European sales of wet/dry vacuums.
12
<PAGE> 15
SG&A expense decreased to $35.6 million in 1995 from $41.9 million in 1994,
a decrease of approximately $6.2 million or 14.9%. SG&A expense as a percentage
of net sales decreased from 16.7% for 1994 to 15.4% for 1995. This decrease was
primarily attributable to (i) reductions in executive compensation, reductions
in domestic administrative personnel and reductions in European sales and
administrative personnel implemented in the second quarter of 1995, (ii)
reductions of various domestic corporate overhead costs, (iii) lower domestic
media advertising in 1995 than in 1994, which had been increased in 1994 in
anticipation of the launch of the Company's new QSP(R) product line, (iv) other
reductions in domestic selling expenses and (v) reductions in European
advertising and selling expenses.
Income from operations decreased to $16.3 million in 1995 from $26.3 million
in 1994, a decrease of approximately $10.0 million or 38.1%. Operating income as
a percentage of net sales decreased to 7.0% in 1995 from 10.5% in 1994. This
decrease was a result of the factors discussed above.
Interest expense was $11.6 million in 1995, an increase of approximately
$2.8 million or 31.8%, compared to $8.8 million in 1994. Interest expense as a
percentage of net sales increased from 3.5% in 1994 to 5.0% in 1995. This
increase was primarily related to additional borrowings under the Company's
revolving credit facility, as well as increased interest rates in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of cash are cash flow from operations and
borrowings under its revolving credit facilities. The Company's principal uses
of cash are to provide working capital, finance capital expenditures and meet
debt service requirements.
Net cash provided (used) by operating activities was ($18.9 million) and
$4.0 million in 1995 and 1996, respectively, which includes net cash used in
connection with discontinued operations of $9.3 million and $13.4 million in
1995 and 1996, respectively. Net cash used for operating activities in 1995 of
$18.9 million represents a use of cash borrowed under the revolving credit
facility and foreign lines of credit to reduce accounts payable and accrued
expenses.
The Company's capital expenditures in 1995 and 1996, excluding capital
expenditures incurred with respect to discontinued operations, were
approximately $8.0 million and $600,000, respectively. The decline in the
Company's capital expenditures for 1996 reflects a decline in capital
requirements as a consequence of major capital improvements made by the Company
in previous years. The Company's capital expenditures incurred with respect to
the discontinued operations in 1995 and 1996 were approximately $2.9 million and
nil, respectively.
Anticipated cash costs of approximately $10.0 million remain to be paid over
the next five years, approximately one half of which are anticipated to be paid
by December 31, 1997, relating to the Company's indemnification obligations to
the purchaser of the Company's discontinued operations, the closure of
discontinued operations in Europe and the United States, severance obligations,
warehouse closings and lease terminations, among other items. Through December
31, 1996 approximately $5.6 million of cash had been paid with respect to those
items.
The Company has terminated the manufacture of steam cleaners at its facility
in Salindres, France in order to consolidate all of its European manufacturing
activities into its facility in Tralee, County Kerry, Ireland. In connection
with the foregoing consolidation, the Company incurred a charge in the third
quarter of 1996 of approximately $1.5 million to cover severance, lease
payments, shut-down and related expenses. The Company is terminating its
distribution operations in Austria, Germany, Hungary, the Netherlands and Spain.
In connection with such termination, the Company incurred a charge in the third
quarter of 1996 of approximately $3.2 million to cover severance, lease
payments, shut-down and related expenses. At December 31, 1996, approximately
$1.7 million of cash had been paid with respect to these European restructuring
charges. The Company expects to pay approximately $1.4 million in cash during
1997 with respect to these charges.
On October 1, 1996, the Company issued $100 million of senior secured notes.
The net proceeds from the issuance of the notes were approximately $95.6 million
after payment of underwriters' discounts and expenses of the offering. The net
proceeds were used to repay $57.5 million outstanding under the Company's
revolving line of credit and $30 million of outstanding 10.83% private placement
notes.
13
<PAGE> 16
<PAGE> 17
The Company has a revolving credit facility which permits borrowings of up
to $25 million. As of December 31, 1996, there were no amounts borrowed under
this facility.
The agreements with the lenders of the senior secured notes and the
revolving credit facility contain certain financial and operating covenants
requiring the Company to maintain certain financial ratios, limiting capital
expenditures and limiting the Company's ability to create or permit certain
liens. At December 31, 1996 the Company is in compliance with the agreements
with the lenders of the senior secured notes and the revolving credit facility.
The Company believes that it will be able to satisfy its debt service
requirements and its working capital and capital expenditure requirements from
operating cash flows together with availability under the revolving credit
facility.
The Company has an estimated tax loss carryforward for income tax purposes
of $50.9 million at December 31, 1996, which is available to reduce federal
income taxes, if any, through 2011. Additionally, the Company has tax loss
carryforwards available to reduce future income taxes, if any, in certain states
and foreign jurisdictions. Based on the Company's historical and current pretax
earnings management believes that the recorded deferred tax assets, net of
valuation allowance, will be realized.
FOREIGN OPERATIONS
The Company has significant operations outside the United States, located
principally in Western Europe. During the year ended December 31, 1996, the
Company generated revenues from sales outside of the United States of $81.1
million, representing approximately 38% of the Company's total revenues during
the period. See Note 12 to the consolidated financial statements of the Company
and its subsidiaries included elsewhere herein.
When appropriate, the Company enters into foreign exchange contracts to
hedge its foreign exchange exposure. The objective of the hedging program is to
manage the risk of adverse cash flow due to fluctuations in foreign currencies.
At December 31, 1996, the Company had approximately $13.5 million in foreign
exchange forward contracts outstanding. See Note 3 to the consolidated financial
statements of the Company and its subsidiaries included elsewhere herein.
RAW MATERIALS
The Company's operating profit margins are sensitive to the price of raw
materials, particularly, copper, plastic resin and corrugated boxes. The Company
does not believe that future raw material price increases in excess of price
increases that may be obtained from customers will have a materially adverse
effect on its operations taken as a whole.
SEASONALITY
The Company's business has not historically been subject to any seasonal
fluctuations having a material effect upon the Company's financial condition or
results of operations.
NEW ACCOUNTING STANDARD
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996 and is to be applied prospectively. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Management of the Company does not expect that the adoption of SFAS
No. 125 will have a material impact on the Company's financial position, results
of operations, or liquidity. The AICPA has issued Statement of Position 96-1,
"Environmental Remediation Liabilities" which is required to be adopted for the
fiscal year ended December 31, 1997 and is not expected to have a material
impact on the Company's financial position, results of operations or liquidity.
FORWARD-LOOKING INFORMATION -- RISK FACTORS
To the extent the Registrant has made "forward-looking statements", certain
risk factors could cause results to differ materially from those anticipated in
such forward-looking statements. Competition from new entrants in the wet/dry
vacuum market or the loss of signficant customers could adversely effect the
Company's share of the wet/dry vacuum market. Increases in raw material costs
could adversely impact the future profitability of the Company. Overall
anticipated performance of the Company could be affected by any serious economic
downturns in the United States or Europe.
14
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
Independent Auditors' Report 16
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and 1996 17
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 18
Consolidated Statements of Stockholders' Equity (Deficit) for
the years ended December 31, 1994, 1995 and 1996 19
Consolidated Statements of Cash Flows for the years
ended December 31, 1994, 1995 and 1996 20
Notes to Consolidated Financial Statements 21
Financial Statement Schedule -
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1994, 1995 and 1996 42
All other schedules are omitted as they are not applicable.
15
<PAGE> 19
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Shop-Vac Corporation:
We have audited the consolidated financial statements of Shop-Vac Corporation
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Shop-Vac Corporation
and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
/s/ KPMG Peat Marwick LLP
Harrisburg, Pennsylvania
March 7, 1997
16
<PAGE> 20
SHOP-VAC CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
===================================================================================================================
December 31,
ASSETS -------------------------
1995 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................. $ 2,682 21,141
Accounts and notes receivable, less allowance for doubtful
receivables of $1,725 in 1995 and $1,853 in 1996 ..................... 31,262 29,154
Inventories ................................................................ 28,020 25,314
Prepaid expenses and other current assets .................................. 4,618 3,222
Net current assets of discontinued operations .............................. 19,029 5,556
- -------------------------------------------------------------------------------------------------------------------
Total current assets .............................................................. 85,611 84,387
Property, plant, and equipment, net ............................................... 36,503 30,922
Property, plant, and equipment under capital leases, net .......................... 10,080 9,875
Other assets ...................................................................... 3,286 6,452
- -------------------------------------------------------------------------------------------------------------------
$135,480 131,636
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- -------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt .......................................... $ 6,258 4,297
Accounts payable ........................................................... 36,372 20,688
Accrued expenses ........................................................... 19,005 26,278
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities ......................................................... 61,635 51,263
Long-term debt .................................................................... 89,392 106,100
Other liabilities ................................................................. 26,054 13,270
- -------------------------------------------------------------------------------------------------------------------
Total liabilities ................................................................. 177,081 170,633
- -------------------------------------------------------------------------------------------------------------------
Stockholders' equity (deficit):
Common stock, Class A voting, no par, 20,000 shares authorized, 6,500
shares issued. Class B nonvoting, no par, 1,000,000 shares
authorized,
650,000 shares issued ................................................ 85 85
Paid-in capital ............................................................ 110 110
Accumulated deficit ........................................................ (44,764) (43,986)
Equity adjustment from foreign currency translation ........................ 2,968 4,794
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) .............................................. (41,601) (38,997)
- -------------------------------------------------------------------------------------------------------------------
$135,480 131,636
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 21
SHOP-VAC CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(dollars in thousands)
<TABLE>
<CAPTION>
=======================================================================================================================
Years ended December 31,
------------------------------------------
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $250,843 231,323 214,039
Cost of sales 182,694 179,416 158,787
- -----------------------------------------------------------------------------------------------------------------------
Gross profit 68,149 51,907 55,252
Selling, general, and administrative expense 41,867 35,637 35,513
Restructuring charges -- -- 4,714
- -----------------------------------------------------------------------------------------------------------------------
Income from operations 26,282 16,270 15,025
Interest expense 8,826 11,629 10,104
Non-operating expense, net 9 459 889
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes and extraordinary item 17,447 4,182 4,032
Income taxes 4,964 1,425 1,755
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before extraordinary item 12,483 2,757 2,277
- -----------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Loss from operation of discontinued
business, net of income tax benefit (4,525) (10,639) --
Loss on disposal of discontinued business,
net of income tax benefit -- (120,296) --
- -----------------------------------------------------------------------------------------------------------------------
Loss on discontinued operations (4,525) (130,935) --
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 7,958 (128,178) 2,277
Extraordinary item - loss on early extinguishment of debt,
net of income tax benefit -- -- (1,499)
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 7,958 (128,178) 778
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 22
SHOP-VAC CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
(dollars in thousands)
<TABLE>
<CAPTION>
Common stock
-----------------------------------
Shares issued
-----------------------
Class A Class B
voting non-voting Amount Paid-in capital
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1994 6,500 650,000 $85 110
Net income -- -- -- --
Equity adjustment from foreign currency translation -- -- -- --
Redemption of minority interest in subsidiary -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 6,500 650,000 85 110
Net Loss -- -- -- --
Equity adjustment from foreign currency translation -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 6,500 650,000 85 110
Net income -- -- -- --
Equity adjustment from foreign currency translation -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 6,500 650,000 $85 110
==================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Equity
adjustment
Retained from foreign Total
earnings currency stockholders'
(deficit) translation equity (deficit)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1994 75,462 (3,118) 72,539
Net income 7,958 -- 7,958
Equity adjustment from foreign currency translation -- 2,415 2,415
Redemption of minority interest in subsidiary (6) -- (6)
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 83,414 (703) 82,906
Net Loss (128,178) -- (128,178)
Equity adjustment from foreign currency translation -- 3,671 3,671
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 (44,764) 2,968 (41,601)
Net income 778 -- 778
Equity adjustment from foreign currency translation -- 1,826 1,826
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 (43,986) 4,794 (38,997)
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 23
SHOP-VAC CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(dollars in thousands)
<TABLE>
<CAPTION>
===========================================================================================================================
Years ended December 31,
----------------------------------------
1994 1995 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 7,958 (128,178) 778
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 5,054 6,132 6,736
Loss on disposal of discontinued operations -- 120,296 --
Restructuring charges:
Goodwill write-off -- -- 1,047
Other non-cash charges -- -- 523
Other accrued expenses -- -- 1,465
Changes in assets and liabilities:
Accounts and notes receivable (6,807) 609 3,411
Inventories (8,557) 11,086 3,630
Prepaid expenses and other current assets (4,215) 3,015 625
Other assets (773) 1,763 (4,804)
Accounts payable and accrued expenses 14,274 (27,994) 2,379
Deferred income taxes 1,480 (412) --
Other liabilities 2,395 4,070 1,584
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by continuing operations 10,809 (9,613) 17,374
Net cash (used) by discontinued operations (7,102) (9,317) (13,413)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 3,707 (18,930) 3,961
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (7,838) (8,042) (582)
Proceeds from sale of property and equipment 66 222 --
Proceeds from sale of discontinued operations -- 30,000 --
Investing activities of discontinued operations (12,618) (2,887) --
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (20,390) 19,293 (582)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from (payment of) revolving line-of-credit, net 14,933 18,063 (48,681)
Payment of term loan (4,000) (8,000) --
Payment of private placement notes -- (9,238) (30,762)
Payment of industrial development revenue bonds (500) (500) (2,300)
Proceeds from issuance of priority revolving line-of-credit -- 16,044 2,084
Payment of priority revolving line-of-credit -- (16,044) (2,084)
Proceeds from issuance of other long-term debt 6,700 3,139 100,000
Other long-term debt and capital lease payments (1,498) (3,234) (3,510)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 15,635 230 14,747
- ---------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 116 (78) 333
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (932) 515 18,459
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of year 3,099 2,167 2,682
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 2,167 2,682 21,141
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 24
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1994, 1995, and 1996
================================================================================
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Shop-Vac Corporation is a multi-national, manufacturing and distribution
concern. The Company's principal line of business is the manufacture and
distribution of wet/dry vacuum cleaners for consumer and industrial
applications. The primary markets for the Company's products are the
United States, Canada, Mexico, Australia, and Europe. The Company's
primary customers include major discount retailers and major hardware and
home center retailers. Sales and related cost of goods sold are
recognized when products are shipped. The Company's raw materials are
readily available, and the Company is not dependent on a single supplier
or only a few suppliers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Shop-Vac
Corporation and its subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
TRANSLATION OF FOREIGN CURRENCY
The functional currency for the Company's foreign operations is the
applicable local currency. The translation of the applicable foreign
functional currencies into U.S. dollars is performed for balance sheet
accounts using current exchange rates in effect at the balance sheet date
and for revenue and expense accounts using a weighted average exchange
rate experienced during the period. The gains or losses resulting from
such translations are included in stockholders' equity (deficit). Gains
or losses resulting from foreign currency transactions are included in
results of operations.
CASH EQUIVALENTS
Cash in excess of daily requirements is invested in short-term marketable
securities with an original maturity of three months or less. For
purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months
or less to be cash equivalents. Included in cash equivalents are
corporate commercial paper and repurchase agreements of $14,493,000 and
$1,235,000, respectively, at December 31, 1996. There were no such items
at December 31, 1995.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost for most
foreign inventories has been determined on the first-in, first-out (FIFO)
basis. Cost for most domestic inventories has been determined on the
last-in, first-out (LIFO) basis.
(Continued)
21
<PAGE> 25
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(1) CONTINUED
PROPERTY, PLANT, AND EQUIPMENT AND DEPRECIATION
Property, plant, and equipment are valued at cost less accumulated
depreciation. Depreciation of property, plant, and equipment is computed
for financial statement purposes on straight-line and declining balance
methods over the estimated useful lives of the property. Leasehold
improvements are amortized over the shorter of the life of the asset or
the terms of the related leases.
Expenditures for maintenance, repairs and renewals are generally charged
to earnings as incurred. Renewals of significant amounts are capitalized.
LONG-LIVED ASSETS
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, in 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair
value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell. Adoption of this
Statement did not have a material impact on the Company's financial
position, results of operations, or liquidity.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Such expenses
were approximately $547,000, $344,000 and $253,000 in 1994, 1995, and
1996, respectively.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Earnings of foreign operations are reinvested in the business and no
provision for domestic income tax or foreign withholding tax is made on
such earnings until distributed (see note 8).
(Continued)
22
<PAGE> 26
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(1) CONTINUED
RETIREMENT BENEFIT PLANS
Substantially all domestic employees participate in noncontributory
pension plans and substantially all non-U.S. employees participate in
contributory or noncontributory pension plans. Pension accounting
information is disclosed in note 9 to the consolidated financial
statements.
FOREIGN GOVERNMENT GRANTS
The Company recognizes foreign government grants relating to the training
and continued employment of certain personnel as a reduction in relevant
expenses in the period in which related costs are incurred. Foreign
government grants received by the Company toward the purchase of
equipment and by lessors of equipment leased by the company under capital
leases are recorded as a reduction in the cost of the acquired or leased
asset (see note 14). The Company received government grants relating to
equipment amounting to $159,000 in 1994. The Company did not receive
government grants in 1995 and 1996.
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(2) INVENTORIES
Inventories are classified as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1995 1996
- -------------------------------------------
<S> <C> <C>
Raw materials $17,613 15,745
Work-in-process 481 119
Finished goods 9,926 9,450
- -------------------------------------------
$28,020 25,314
===========================================
</TABLE>
At December 31, 1995 and 1996, approximately 68% and 52%, respectively,
of total inventories are stated on the LIFO method. If the FIFO cost
method had been used with respect to such inventories, total inventories
would have been approximately $2,925,000 and $502,000 higher at December
31, 1995 and 1996, respectively.
(Continued)
23
<PAGE> 27
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(3) FOREIGN CURRENCY INSTRUMENTS
The Company enters into foreign exchange forward contracts to hedge
certain foreign currency transactions. These transactions include
purchases of motors denominated in Italian lire and collections of
accounts receivable denominated in German marks and other European
currencies by the Company's Irish manufacturing subsidiary as well as
collection of intercompany amounts due from the Company's Irish
manufacturing subsidiary as well as collection of intercompany amounts
due from the Company's Canadian subsidiary resulting from its purchase of
product manufactured by the Company. These contracts are purchased to
reduce the impact of foreign currency fluctuations on operating results.
The Company enters into these financial instruments utilizing
over-the-counter as opposed to exchange traded instruments. Assuming
performance by the contracting parties, these contracts do not subject
the Company to risk due to exchange rate movements as gains and losses on
the contracts offset gains and losses on the transactions being hedged.
The contracts are settled in cash upon expiration, resulting in a gain or
loss measured by the difference between the spot rate and the contract
rate at expiration. The Company does not hedge firm commitments beyond
two years. The Company reduces the risk of losses due to nonperformance
by counterparties by only entering into agreements with major
international financial institutions. At December 31, 1995 and 1996, the
Company had foreign exchange forward contracts outstanding as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1995 1996
- -------------------------------------------------------------------
<S> <C> <C>
Irish punt against Italian lira $22,036 3,751
Irish punt against German mark 6,159 --
Irish punt against British pound 1,249 4,168
Irish punt against French franc 1,184 --
Irish punt against U.S. dollar 296 --
Irish punt against Dutch guilder 269 --
Canadian dollar against U.S. dollar 3,620 5,610
Other currencies 1,347 --
- -------------------------------------------------------------------
$36,160 13,529
===================================================================
</TABLE>
(Continued)
24
<PAGE> 28
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts and notes
receivable, accounts payable, and current portion of long-term debt
approximate fair values due to the short-term maturities of these
instruments.
The fair values of the long-term portion of the Company's debt
instruments are based on the amount of future cash flows associated with
each instrument discounted using the Company's current borrowing rate for
similar debt instruments of comparable maturity. The amount reported in
the consolidated balance sheet for long-term debt approximates fair
value.
The fair value of accounts receivable sold with recourse approximates the
outstanding balances of those accounts receivable at each balance sheet
date.
The fair value of the Company's foreign exchange forward contracts are
estimated based on the difference between the contracted exchange rate
and the spot rate at each balance sheet date. The fair value of such
contracts was an obligation of $1,020,000 and an asset of $147,000 at
December 31, 1995 and 1996, respectively. The financial statements
include no carrying amounts with respect to these contracts.
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment consisted of the following (dollars in
thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1995 1996
- -------------------------------------------------------------------
<S> <C> <C>
Land $ 1,599 1,687
Buildings and improvements 18,912 18,085
Machinery and equipment 68,614 69,423
Construction in progress 1,961 581
- -------------------------------------------------------------------
91,086 89,776
Less accumulated depreciation 54,583 58,854
- -------------------------------------------------------------------
Net property, plant, and equipment $36,503 30,922
===================================================================
</TABLE>
(Continued)
25
<PAGE> 29
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(5) CONTINUED
Property, plant, and equipment under capital leases consisted of the
following (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Buildings $ 4,274 3,966
Machinery and equipment 9,501 9,734
- ---------------------------------------------------------------------
13,775 13,700
Less accumulated amortization 3,695 3,825
- ---------------------------------------------------------------------
Net property, plant, and equipment
under capital leases $10,080 9,875
=====================================================================
</TABLE>
(6) OPERATING LEASES
The Company rents certain real property and machinery and equipment under
operating leases expiring at various dates through 2000. Rental expense
under operating leases, including short-term machinery and equipment
rental, aggregated approximately $617,000 in 1994, $873,000 in 1995, and
$790,000 in 1996.
Future minimum lease payments required under all noncancelable operating
leases of continuing operations at December 31, 1996 are approximately as
follows (dollars in thousands):
<TABLE>
<S> <C>
1997 $ 788
1998 669
1999 490
2000 62
----------------------------------------
Total minimum lease payments $2,009
========================================
</TABLE>
(Continued)
26
<PAGE> 30
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(7) LONG-TERM DEBT
Details of the Company's long-term debt are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1996
- -------------------------------------------------------------------------
<S> <C> <C>
Revolving line of credit $ 48,681 --
10-5/8% senior secured notes due 2003 -- 100,000
Private placement notes 30,762 --
Industrial development revenue bonds 2,300 --
Capital lease agreements, interest at rates
ranging from 9% to 10.9% 10,038 7,802
Other, substantially foreign, interest
at average rate of 6.2% 3,869 2,595
- -------------------------------------------------------------------------
95,650 110,397
Less current installments 6,258 4,297
- -------------------------------------------------------------------------
$ 89,392 106,100
=========================================================================
</TABLE>
On October 1, 1996, the Company issued $100 million of senior secured
notes. The notes bear interest, payable semi-annually, at 10-5/8% and
mature on September 1, 2003. The net proceeds from the issuance of the
notes were approximately $95.6 million after payment of $3.5 million in
underwriters discounts and approximately $900,000 in expenses related to
the offering. The net proceeds were used to repay $57.5 million
outstanding under the Company's existing revolving line of credit and
priority facility, $30.0 million of outstanding 10.83% private placement
notes due 2001 and $2.5 million of related prepayment fees and expenses.
The $2.5 million of prepayment fees and expenses are recorded as an
extraordinary item, net of income tax benefit of $1 million. The
remaining proceeds were used for general corporate purposes. Also on
October 1, 1996, the Company established a new revolving credit facility
for up to $25 million, subject to a borrowing bases limitation based on
the aggregate of certain percentages of the eligible accounts receivable
and eligible inventory of the Company and its domestic subsidiaries. The
new revolving credit facility expires in 1999 and bears interest, at the
Company's option, at either: 0.75% plus the higher of the federal funds
rate plus 0.5% per annum or the lender's prime commercial lending rate
(9.0% at December 31, 1996); or LIBOR plus 2% (7.375% at December 31,
1996). The agreements with the lenders of the senior secured notes and
the new revolving credit facility contain financial and operating
covenants requiring the Company to maintain certain financial ratios,
limiting capital expenditures and restricting its ability to incur
certain indebtedness, make certain investments, and create or permit
certain liens. At December 31, 1996 the Company is in compliance with the
agreements with the lenders of the senior secured notes and the new
revolving credit facility.
(Continued)
27
<PAGE> 31
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(7) CONTINUED
The Company's prior revolving line of credit bore interest at the
lender's adjusted base rate which was 9.25% at December 31, 1995. The
total availability at December 31, 1995 was $55 million of which
$48,681,000 was outstanding. At December 31, 1995, the private placement
notes' interest rate was 10.83%. At January 1, 1996, the Company was not
in compliance with certain covenants of the revolving line of credit
agreement and private placement note agreement. In addition, the Company
did not make the required annual principal payment of $6.7 million due on
the private placement notes on April 30, 1996. (The private placement
notes required annual principal payments of $6,700,000 through 1999 with
final maturity of $3,962,000 in April 2000.) On August 28, 1996, the
Company entered into Amendment Agreements with the holders of the private
placement notes and the lender under the revolving line of credit which
suspended the relevant financial covenants and payment dates with respect
to payments due or past due under either the private placement notes or
the revolving line of credit to provide that no principal payments became
due until October 31, 1996. Furthermore, the revolving line of credit
lender provided an additional $7.5 million of availability (maximum $62.5
million) from August 28, 1996 through October 31, 1996 (the "Priority
Facility"), the proceeds of which were used to make a $770,389 principal
payment with respect to the private placement notes, to pay $307,621 in
amendment fees to the holders of the private placement notes, to make a
$112,500 facility fee payment upon closing the Priority Facility, and for
working capital and general corporate purposes.
The Industrial Development Revenue Bonds bore interest at a variable rate
determined periodically (6.23% at December 31, 1995). The bonds were
secured at December 31, 995 by an irrevocable letter of credit from a
financial institution in the amount of $2,370,000. The bonds were
redeemed in June 1996.
The Company currently leases a sales/administration/distribution facility
in England from an entity controlled by the stockholders of the Company.
This lease has been recorded as a capital lease with annual payments of
approximately $340,000 (interest at 9%) which management believes is
comparable to terms for similar facilities in arms-length transactions.
At December 31, 1996, land, building, and equipment under capital lease
of $2,316,000 and capital lease obligations of $2,068,000 have been
recognized with respect to this lease. The Company also guaranteed up to
UK(pound) 500,000 (approximately $800,000) of indebtedness incurred by
the entity in connection with the entity's acquisition of the facility.
(Continued)
28
<PAGE> 32
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(7) CONTINUED
The Company's future principal payments on long-term debt are
approximately as follows (in thousands):
<TABLE>
<S> <C>
1997 $ 4,297
1998 1,864
1999 1,883
2000 530
2001 437
Thereafter 101,386
===============================
</TABLE>
(8) INCOME TAXES
Total income tax expense (benefit) is allocated as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1994 1995 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from operations $ 4,964 1,425 1,755
Extraordinary item - loss on early extinguishment of debt -- -- (998)
Results of discontinued operations (1,195) (76) --
Loss on disposal of discontinued business -- (454) --
- ------------------------------------------------------------------------------------------------
$ 3,769 895 757
================================================================================================
</TABLE>
The domestic and foreign components of income (loss) from continuing
operations before income taxes and extraordinary item are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1994 1995 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Domestic $10,595 3,150 7,647
Foreign 6,852 1,032 (3,615)
- ----------------------------------------------------------------
$17,447 4,182 4,032
================================================================
</TABLE>
(Continued)
29
<PAGE> 33
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(8) CONTINUED
Components of income tax expense (benefit) from continuing operations are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 Current Deferred Total
- ----------------------------------------------------------
<S> <C> <C> <C>
Federal $1,861 1,287 3,148
Foreign 1,514 (220) 1,294
State 178 344 522
- ----------------------------------------------------------
$3,553 1,411 4,964
==========================================================
1995
- ----------------------------------------------------------
Federal $1,309 (414) 895
Foreign 493 (62) 431
State 145 (46) 99
- ----------------------------------------------------------
$1,947 (522) 1,425
==========================================================
1996
- ----------------------------------------------------------
Federal $ 176 898 1,074
Foreign 566 3 569
State 15 97 112
- ----------------------------------------------------------
$ 757 998 1,755
==========================================================
</TABLE>
The difference between the expected income tax expense from continuing
operations at the statutory federal income tax rate of 35% and the actual
income tax expense from continuing operations as reflected in the
accompanying consolidated financial statements is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1994 1995 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expense at statutory rate $ 6,106 1,464 1,411
State income tax, net 339 64 73
Foreign taxes (1,104) 70 1,834
Change in beginning of year valuation allowance for deferred
tax assets allocated to income tax expense -- -- (1,667)
Foreign tax credits (310) -- --
Other (67) (173) 104
- ----------------------------------------------------------------------------------------------------
Total provision for income taxes
from continuing operations $ 4,964 1,425 1,755
====================================================================================================
</TABLE>
(Continued)
30
<PAGE> 34
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(8) CONTINUED
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below (dollars in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------
1995 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts $ 504 538
Inventories, including uniform capitalization 475 568
Compensated absences and postretirement
benefits principally due to accrual for
financial reporting purposes 1,871 1,851
Liabilities due to accrual for financial
reporting purposes 6,945 7,330
Credit carryovers 5,697 4,088
Net operating loss carryforwards 21,149 21,289
Other 331 96
- --------------------------------------------------------------------------------------
Total gross deferred tax assets 36,972 35,760
Less valuation allowance 33,704 32,037
- --------------------------------------------------------------------------------------
3,268 3,723
- --------------------------------------------------------------------------------------
Deferred tax liabilities:
Plant and equipment, due to differences in
depreciation and capitalized interest 3,119 3,607
Costs deferred for financial reporting currently
deductible for tax 149 116
- --------------------------------------------------------------------------------------
Total gross deferred tax liabilities 3,268 3,723
- --------------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ -- --
======================================================================================
</TABLE>
The valuation allowance for deferred tax assets at January 1, 1994 was
$6,739,000. The net change in the valuation allowance for the years ended
December 31, 1995 and 1996 was an increase of $26,965,000 and a decrease
of $1,667,000, respectively.
(Continued)
31
<PAGE> 35
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(8) CONTINUED
The Company has not recognized a deferred tax liability for the basis
differences related to the stock in certain foreign subsidiaries since
such differences are primarily related to undistributed earnings and the
earnings are not expected to be remitted and become taxable to the
Company in the foreseeable future. The accumulated amount of such
undistributed earnings was approximately $4,267,000 at December 31, 1996.
At December 31, 1996, the Company has federal alternative minimum tax
credit carryovers of approximately $1,358,000 which are available to
reduce future regular income taxes, if any, over an indefinite period.
At December 31, 1996, the Company also has general business credit
carryforwards of approximately $456,000 and foreign tax credit
carryforwards of approximately $2,274,000 which are available to offset
future federal income taxes. If not used to reduce federal income taxes
these credits will expire as follows (dollars in thousands):
<TABLE>
<CAPTION>
General Foreign
business tax
credit credit
- ---------------------------------------------------------
<S> <C> <C>
December 31, 1997 $ -- 259
December 31, 1998 -- 1,441
December 31, 1999 -- 574
December 31, 2008 203 --
December 31, 2009 251 --
December 31, 2010 2 --
=========================================================
</TABLE>
The Company has an estimated tax loss carryforward for federal income tax
purposes of approximately $50.9 million at December 31, 1996 which is
available to reduce federal income taxes, if any, through 2011.
The Company also has tax loss carryforwards in certain states and
foreign jurisdictions which are available to reduce future income taxes
if any, in those jurisdictions. Based on the Company's historical and
current pretax, operating results, future reversals of existing taxable
temporary differences, estimates of future taxable income, and available
tax planning strategies, management believes that it is more likely
than not that the recorded deferred tax assets, net of the valuation
allowance, will be realized.
(9) EMPLOYEE BENEFIT PLANS
The Company provides non-contributory, defined benefit pension plans
covering substantially all domestic personnel. The benefits are based on
average compensation and the number of years of service. The Company's
funding policy is to contribute the recommended amount based on the
calculations of the plans' consulting actuary.
(Continued)
32
<PAGE> 36
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(9) CONTINUED
The following table sets forth the plans' funded status and amounts
recognized in the Company's balance sheet (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Accumulated benefit obligation, including vested
benefits of $7,531 in 1995 and $7,644 in 1996 $ (8,246) (8,393)
- ----------------------------------------------------------------------------------------------------
Projected benefit obligation for service rendered to date $(10,515) (10,371)
Plan assets at fair value, primarily short-term marketable securities
and mutual funds 8,744 10,135
- ----------------------------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets (1,771) (236)
Unrecognized prior service cost 57 45
Unrecognized net loss 1,294 1,451
Unrecognized net transition obligation (88) (77)
- ----------------------------------------------------------------------------------------------------
Prepaid (accrued) pension costs $ (508) 1,183
====================================================================================================
</TABLE>
Net periodic pension cost includes the following components (dollars in
thousands):
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1994 1995 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $1,298 1,478 1,449
Interest cost on projected benefit obligations 643 720 807
Return on plan assets (524) (714) (813)
Net amortization and deferral 154 222 68
- ----------------------------------------------------------------------------------------
Net period pension cost $1,571 1,706 1,511
========================================================================================
</TABLE>
A weighted-average discount rate of 7.5% in 1995 and 1996 and a rate of
increase in future compensation levels of 4% in 1995 and 1996 were used
in determining the actuarial present value of the projected benefit
obligation. The expected long-term rate of return on assets was 8.9% in
1995 and 1996.
(Continued)
33
<PAGE> 37
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(9) CONTINUED
Certain U.S. employees of the Company are eligible to participate in the
Shop-Vac Employees' Savings Plan. This plan allows employees to
contribute up to 15% of their earnings as pretax contributions. The
Company also makes matching contributions to each participant's account
equal to 25% of the amount contributed by the employee, up to a maximum
employee contribution of 6%. The Company's contributions to this plan
totaled approximately $170,000, $173,000, and $160,000 during the years
ended December 31, 1994, 1995, and 1996, respectively.
Until March 31, 1995, certain executive officers of the Company were
eligible to participate in the Shop-Vac Executive Benefit Trust, a
nonqualified deferred compensation plan. This plan allowed participants
to contribute up to 30%, 40% and 40% of their earnings as pretax
contributions for the years ended December 31, 1993, 1994, and 1995,
respectively. The Company also made matching contributions to each
participant's account equal to 75% of the amount contributed by the
employee, up to a maximum employee contribution of 6%. The Company's
contributions to this plan totaled approximately $260,000 and $64,000
during the years ended December 31, 1994 and 1995, respectively. This
plan was terminated in 1995.
Certain employees are also covered by a retirement benefit plan providing
prescription drug benefits. The plan is not funded. The Company accounts
for these costs by accruing for them over the employee service period.
the accumulated benefit obligation at December 31, 1995 and 1996 was
$1,279,000 and $1,691,000, respectively, and is reflected in other
liabilities in the accompanying consolidated balance sheet. The benefit
obligation was calculated using a discount rate of 7.5% at December 31,
1995 and 1996, and a 5% annual rate of increase in the cost of covered
benefits. The effect of one percentage point increase in the annual rate
would increase the accumulated benefit obligation by approximately 16%.
(Continued)
34
<PAGE> 38
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(10) STATEMENT OF CASH FLOWS
Supplemental disclosure of cash flow information (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------
1994 1995 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid for interest $8,679 11,879 7,852
Cash paid for income taxes 3,861 1,176 1,084
Capital lease obligations of new
property, plant, and equipment 5,895 1,654 589
=========================================================================
</TABLE>
(11) COMMITMENTS AND CONTINGENCIES
It is the opinion of the Company's management and legal counsel that
various claims and litigation in which the Company is currently involved
have been adequately provided for and any resulting claims or judgments
will not materially affect the Company's business, financial condition,
cash flows, or operations.
Certain of the Company's European operations regularly discount portions
of their trade accounts receivable with local banks. These accounts
receivable are sold to the banks with recourse to the Company to the
extent that the accounts receivable are not collectible by the bank. The
sale of these receivables has been reflected as a reduction of accounts
receivable. The discount on the receivables sold has been included in
interest expense. Accounts receivable approximating $28,504,000 and
$26,099,000 were sold under these arrangements during the years ended
December 31, 1995 and 1996, respectively. As of December 31, 1995 and
1996 accounts receivable with outstanding balances of approximately
$5,391,000 and $6,100,000, respectively, were held by the banks.
STOCKHOLDERS' AGREEMENT
The Company and its stockholders have entered into an agreement which
provides, in part, (i) for the accrual and payment of an annual dividend
equal to 10% of the net income of the Company (after taxes) which accrues
and is payable commencing upon the death, disability, or incapacity of
Jonathan Miller or Matthew Miller, (ii) effective joint control of the
Company by Jonathan Miller and Matthew Miller, and (iii) restrictions on
the transfer of any of the Company's stock. The dividend provision set
forth in the stockholders' agreement suspends the payment of such
dividends to the extent such payment would result in the breach or
violation of the terms, conditions, or covenants of the Company's
financing arrangements.
(Continued)
35
<PAGE> 39
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(12) GEOGRAPHIC INFORMATION
The Company and its subsidiaries are primarily engaged in the manufacture
and sale of various types of industrial and consumer wet/dry vacuum
cleaners. The Company and subsidiaries operate in various geographic
areas as indicated by the following (dollars in thousands):
<TABLE>
<CAPTION>
Europe,
principally
France,
Germany,
Ireland, and
United the United Elimin- Consoli-
States Kingdom Other ations dated
================================================================================================================
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Total sales $157,412 85,157 24,674 (16,400) 250,843
Operating profit (loss) 19,418 6,879 (15) -- 26,282
Identifiable assets,
December 31, 1994 80,860 42,679 7,528 -- 131,067
Year ended December 31, 1995:
Total sales 144,459 77,820 22,982 (13,938) 231,323
Operating profit 14,458 1,627 185 -- 16,270
Identifiable assets,
December 31, 1995 71,203 38,042 7,206 -- 116,451
Year ended December 31, 1996:
Total sales 132,929 73,803 22,222 (14,915) 214,039
Operating profit (loss) 17,144 (2,547) 428 -- 15,025
Identifiable assets,
December 31, 1996 81,555 36,579 7,946 -- 126,080
================================================================================================================
</TABLE>
Sales between geographic areas are made at the cost of producing the
items plus a profit margin. Operating profit is total operating revenue
less operating expenses. Interest, other nonoperating income and expenses
and income taxes are not considered in computing operating profit.
Identifiable assets are those assets identified with the operations in
each geographic area. Identifiable assets exclude the net assets of
discontinued operations.
(Continued)
36
<PAGE> 40
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(13) BUSINESS AND CREDIT CONCENTRATIONS
Most of the Company's customers are in the consumer products retail
industry. Approximately 15%, 14% and 13% of net sales for the years ended
December 31, 1994, 1995, and 1996, respectively, were with one customer.
The Company's ten largest customers accounted for approximately 46%, 49%
and 56% of the Company's net sales for 1994, 1995, and 1996,
respectively, and approximately 44% and 61% of the Company's accounts
receivable balances at December 31, 1995 and 1996, respectively.
(14) FOREIGN GOVERNMENT GRANTS
Under various agreements between one of the Company's foreign
subsidiaries and the industrial development authority of a foreign
government, the foreign subsidiary has received, upon satisfaction of
certain conditions, grants from the foreign government amounting to
approximately 45% of the cost of acquiring certain capital assets. In
accordance with the grant agreements, the foreign subsidiary is required
to maintain retained earnings in the amount of $3.8 million that may not
be distributed as dividends for a period of 10 years from the date of
the grant agreements. The foreign government may revoke the grants and
require repayment of grants received by the foreign subsidiary if the
foreign subsidiary violates any of the various grant agreements'
provisions. Violation of the agreements would occur if, among other
things, the foreign subsidiary changes the nature of its operations,
ceases to operate, stops paying its liabilities, or becomes bankrupt. The
foreign subsidiary believes it is in compliance with the provisions of
the agreements. The foreign subsidiary's contingent liability for the
repayment of grants received terminates 10 years from receipt of the
grant amounts and amounted to $3.6 million at December 31, 1996. This
contingent liability expires in varying amounts (ranging from $163,000 to
$868,000 annually) beginning in 1997 and ending in 2004.
(Continued)
37
<PAGE> 41
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(15) RESTRUCTURING CHARGES
During 1996 the Company terminated the manufacture of steam cleaners at
its facility in France and has consolidated all of its European
manufacturing activities, including the production of steam cleaners,
into its facility in Ireland. In connection with the foregoing
consolidation, the Company incurred a pre-tax charge in the third quarter
of 1996 of approximately $1.5 million to cover severance, lease
termination payments, shut-down, and related expenses. The Company is
also terminating its distribution operations in Austria, Germany,
Hungary, the Netherlands, and Spain. In connection with such termination,
the Company incurred a pre-tax charge in the third quarter of 1996 of
approximately $3.2 million to cover severance, lease termination
payments, shut-down and related expenses. Although the Company expects
that the termination of these distribution operations will negatively
impact sales in the near-term, the Company expects to continue sales to
its major customers in these markets. In addition, the Company recorded
charges of approximately $700,000 related to accounts receivable and
general and administrative expenses and $600,000 related to inventories
at these locations. These amounts are recorded in selling, general and
administrative expenses, and cost of sales, respectively.
The restructuring charges include approximately $1.8 million for
severance and termination benefits for substantially all employees of the
Company's steam cleaner manufacturing operations and the Company's
distribution operations in Austria, Germany, Hungary, the Netherlands,
and Spain. Approximately 70 employees will be terminated as a result of
this restructuring.
The restructuring charges also include charges of approximately $500,000
to recognize the reduction in value of leasehold improvements at leased
locations which are being abandoned as a result of the shut-down of the
steam cleaner and distribution operations. Additionally, a loss of $1.0
million is included in the restructuring charges which recognizes the
decline in value to zero of goodwill associated with the Company's
Netherlands distribution operation, which will shut down as part of the
restructuring.
The remainder of the restructuring charges represents the accrual for
lease terminations and other obligations at September 30, 1996. At
December 31, 1996, approximately $1.7 million of cash had been paid with
respect to the restructuring charges.
The Company anticipates the liquidation of these operations to be
completed by March 31, 1997.
(Continued)
38
<PAGE> 42
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(15) CONTINUED
Summarized information relating to the Company's distribution operations
to be terminated are presented below for the years ended December 31,
1994, 1995, and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $23,759 21,335 13,602
Costs and expenses 24,645 22,857 15,644
Restructuring charges -- -- 3,212
- --------------------------------------------------------------------
Loss from operations $ (886) (1,522) (5,254)
====================================================================
</TABLE>
Sales by the Company's French steam cleaner facility are principally
intercompany.
(16) DISCONTINUED OPERATIONS
During the early part of 1995, the Company was in the process of
negotiating the restructuring and refinancing of the existing debt. Based
upon negotiations with the lenders and a comprehensive product strategy
and planning strategy review, it was decided to dispose of a major
subsidiary and related product lines. As a result, the Company adopted a
formal plan of disposal and engaged an investment banking firm to sell
its McCulloch Corporation subsidiary and other related assets worldwide.
Subsequently, the Company entered into an agreement in October 1995 with
a buyer to sell all of the McCulloch operations which sale was completed
on November 1, 1995. Furthermore, the agreement to sell McCulloch
required the Company to distribute McCulloch products in certain European
locations through December 31, 1996. The Company was obligated to use the
net proceeds from the sale of the operations to reduce debt.
(Continued)
39
<PAGE> 43
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(16) CONTINUED
The assets and liabilities of the discontinued operations have been
reclassified in the accompanying consolidated financial statements to
separately identify them as net current assets related to discontinued
operations. These net assets consist of net working capital, net
property, plant and equipment, other assets, and intangible assets, less
related liabilities, as follows as of December 31, 1995 and 1996 (dollars
in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1995 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Current assets:
Accounts receivable $ 8,734 5,472
Inventory 9,223 84
Prepaid expenses 1,072 --
- ---------------------------------------------------------------------
Net current assets of discontinued operations $19,029 5,556
=====================================================================
</TABLE>
The disposal of the McCulloch operations has been accounted for as a
discontinued operation and, accordingly, its operating results are
segregated and reported as discontinued operations in the accompanying
consolidated statement of operations. Sales and related costs of the
European distribution arrangement are included in discontinued operations
and inventory and receivables related to the distribution agreement are
included with net current assets of discontinued operations. Summarized
information relating to the McCulloch operations for the year ended
December 31, 1994 and the ten months ended October 31, 1995 are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1994 1995
- -------------------------------------------------------
<S> <C> <C>
Net sales $247,160 267,123
Costs and expenses 252,880 277,838
- -------------------------------------------------------
Loss before income taxes (5,720) (10,715)
Income tax (benefit) (1,195) (76)
- -------------------------------------------------------
Net loss $ (4,525) (10,639)
=======================================================
</TABLE>
(Continued)
40
<PAGE> 44
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(16) CONTINUED
In 1995 the Company recorded a loss on disposition of the net assets of
discontinued operations of $120.3 million, net of a tax benefit of $0.5
million, which was recorded in the fourth quarter of 1995. The loss on
disposal represents the net book value of the operations being disposed
of less the proceeds received of $30 million in November 1995. Further,
the loss includes charges, amounting to $19.6 million for reduction in
the number of employees as a result of the sale, consolidation of certain
offices and leased facilities, disposition of certain assets, estimated
losses on existing contractual arrangements, estimated losses on European
distribution of McCulloch products through December 31, 1996 and certain
other charges resulting from the McCulloch disposition, such as certain
indemnity obligations arising in connection with the McCullloch
disposition, including, but not limited to, indemnification of the
purchaser of McCulloch with respect to certain potential environmental,
lease, product and workers' compensation liabilities. Through December
31, 1996 approximately $5.6 million of cash had been paid with respect to
those items. The Company anticipates that cash payments of approximately
$10 million remain to be paid over the next five years, approximately
one-half of which are anticipated to be paid by December 31, 1997.
================================================================================
41
<PAGE> 45
SCHEDULE II
SHOP VAC CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
BALANCE AT ADDITIONS BALANCE AT
BEGINNING COSTS AND CLOSE OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
1994
ALLOWANCE FOR DOUBTFUL ACCOUNTS.. 1,859 336 362 1,833
1995
ALLOWANCE FOR DOUBTFUL ACCOUNTS.. 1,833 129 237 1,725
1996
ALLOWANCE FOR DOUBTFUL ACCOUNTS.. 1,725 742 614 1,853
</TABLE>
42
<PAGE> 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company, their respective ages
as of December 31, 1996 and their respective current positions with the Company
are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jonathan Miller........... 48 Chairman of the Board, Chief Executive Officer and
President, North American Group
Matthew Miller............ 43 Vice Chairman of the Board and President, European
Group
W. Earl Stogner........... 56 Executive Vice President & Chief Financial Officer
and Director
</TABLE>
The terms of office for all of the above officers and directors are until
their successors are chosen and qualified.
Jonathan Miller joined Craftool Company in 1970 as Vice President. Upon
Craftool's merger with the Company, Mr. Miller served as Vice President of
Manufacturing and Engineering until 1981, at which time he was appointed
President of the Shop Vac North American Group. In 1992, Mr. Miller was elected
Chairman of the Board of Directors of the Company. Mr. Miller is the son of
Martin Miller, the founder of the Company and is the brother of Matthew Miller.
Mr. Miller holds a degree in economics from Rutgers University.
Matthew Miller joined the Company in 1975 as director of sales and
marketing. In 1981, he was appointed to his current position of President of the
Shop Vac European Group. Mr. Miller is the son of Martin Miller, the founder of
the Company and the brother of Jonathan Miller. Mr. Miller holds an
undergraduate degree from Dickinson College and a masters degree from Oxford
University.
W. Earl Stogner joined the Company in 1989 as Vice President and Chief
Financial Officer and was promoted to Executive Vice President and was appointed
to the Board of Directors in 1990. Prior to joining the Company, Mr. Stogner
served as Vice President -- Administration and Control for Chicago Pacific Corp.
from 1986 to 1989 and as Vice President -- Finance of Pennsylvania House (a
division of General Mills, Inc.) from 1972 to 1986. Mr. Stogner holds a degree
in business administration and accounting from King's College.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid for the fiscal
years ended December 31, 1994, 1995, and 1996 to each of the persons who are the
most highly compensated executive officers of the Company.
43
<PAGE> 47
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION(1)(2) COMPENSATION
- --------------------------- ---- -------- ------------------ ------------
<S> <C> <C> <C> <C>
Jonathan Miller........................... 1996 $164,717 $11,952 $ 1,392(3)
Chairman of the Board, Chief 1995 343,637 11,951 11,517
Executive Officer and President, 1994 900,000 35,527 41,892
North American Group
Matthew Miller............................ 1996 $187,888 -- $ 1,392(3)
Vice Chairman of the Board 1995 355,911 -- 7,396
and President, European Group 1994 878,019 -- 25,406
W. Earl Stogner........................... 1996 $675,000 $ 9,538 $ 2,367(3)
Executive Vice President 1995 675,000 9,313 8,986
and Chief Financial Officer 1994 675,000 9,573 31,767
</TABLE>
(1) The above listed executives are participants in the Shop Vac Corporation
Pension Plan, a defined benefit pension plan. This plan provides an annual
benefit based upon the employee's average compensation for his or her
highest five consecutive years of compensation and the number of years'
service to the Company. The table below sets forth the estimated annual
benefit payable based on the indicated final average compensation and
years of service, assuming retirement at age 65:
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------------------------
REMUNERATION 5 10 15 20 25 30 35
- ------------ ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$100,000.......................... $15,625 $31,250 $46,875 $46,875 $46,875 $46,875 $46,875
125,000........................... 20,000 40,000 60,000 60,000 60,000 60,000 60,000
150,000 and above................. 24,375 48,750 73,125 73,125 73,125 73,125 73,125
</TABLE>
The compensation covered by the pension plan consists of base salary and
bonus, if any, paid during each plan year. The covered compensation and
credited years of service, as of December 31, 1995 for each of the
officers named in the Executive Compensation table above were as follows:
Jonathan Miller - $150,000, 26 years; Matthew Miller - $150,000, 21 years;
W. Earl Stogner - $150,000, 8 years. Retirement benefits under the plan
are calculated on the basis of a life annuity, 10 year certain.
(2) Comprised of amounts reimbursed to Jonathan Miller and W. Earl Stogner in
connection with taxes paid by them with respect to the value of the
personal use portion of Company-provided vehicles.
(3) Comprised of (i) in the case of Jonathan and Matthew Miller, a $1,392 term
life insurance premium and (ii) in the case of W. Earl Stogner, employer
matching contributions totalling $975 in 1996 to the Shop Vac Employee
Savings Plan and a $1,392 term life insurance premium.
Jonathan Miller, Matthew Miller and W. Earl Stogner constitute the
Company's compensation committee and participated in all deliberations of
the Company's board of directors during the year ended December 31, 1996
concerning executive officer compensation.
OTHER ARRANGEMENTS
Pursuant to employment agreements between the Company and each of Jonathan
Miller and Matthew Miller, the Company has agreed to pay each of them (i) a base
salary at the rate of $350,000 per annum and (ii) commencing
44
<PAGE> 48
in calendar year 1997 and for each successive calendar year thereafter,
incentive compensation of $400,000 for any calendar year if with respect to each
year, the Company generates actual earnings before interest and taxes ("EBIT")
that equal or exceed 90% of the Company's budgeted EBIT for such year or amounts
of less than $400,000 for a given calendar year if the Company achieves certain
lower EBIT thresholds for such year. In addition to the foregoing, the Company
may increase such base salaries, based on merit review, taking into account
performance, the employee's responsibilities and increased cost of living,
and/or pay additional discretionary bonus compensation, at the discretion of the
Company's independent directors. In exchange for such compensation, (i) Jonathan
Miller has agreed to serve as Chairman of the Company's Board of Directors,
President of the Company's North American Group and Chief Executive Officer of
the Company for a three year evergreen term, and (ii) Matthew Miller has agreed
to serve as Vice Chairman of the Company's Board of Directors and President of
the Company's European Group for a three-year evergreen term. Under the terms of
the agreement, if either Jonathan or Matthew Miller is terminated without cause
or resigns with good reason, he is entitled to receive continued insurance
coverage for the following three years and (at his option) either (i) the
greater of (a) continued salary for the next three years, plus bonuses in each
such year equal to the bonus paid to him in the year immediately prior to the
year in which his employment was terminated or (b) $750,000 or (ii) a lump-sum
payment equal to the present value of the payments described in clause (i). Each
of Jonathan Miller and Matthew Miller is also entitled to receive such severance
if his employment is terminated as a consequence of a change of control of the
Company; however, if such termination occurs in connection with or as a
consequence of a change of control occurring upon or following the exercise by
the holders of the Company's senior secured notes of their rights to the
Millers' stock as a result of a default under the Indenture and the subsequent
foreclosure on the collateral, each of Jonathan Miller and Matthew Miller have
agreed that any and all payments due to them pursuant to their respective
employment agreements with respect to such termination will be subordinated to
the full payment of all sums due under the senior secured notes.
Pursuant to the terms of an employment agreement between the Company and W.
Earl Stogner, the Company has agreed to pay to Mr. Stogner a base salary at the
rate of $675,000 per annum, plus a discretionary bonus determined by the
Company's Board of Directors in its sole discretion. In exchange for such
compensation, Mr. Stogner has agreed to serve as a Director, Executive Vice
President and Chief Financial Officer of the Company for a three-year evergreen
term. Under the terms of the agreement, if Mr. Stogner is terminated without
cause or resigns with good reason, he is entitled to receive continued insurance
coverage for the following three years and (at his option) either (i) continued
salary for the next three years, plus bonuses in each such year equal to the
bonus paid to him in the year immediately prior to the year in which his
employment was terminated or (ii) a lump-sum payment equal to the present value
of the payments described in clause (i). Mr. Stogner is also entitled to receive
such severance upon a change of control of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 28, 1997 with
respect to beneficial ownership of shares of the Common Stock by each person
known to own 5% or more of the Common Stock, by each Director, by each executive
officer named in the Summary Compensation Table and by all Directors and
executive officers as a group. The beneficial owners have sole voting and
investment power as to all such shares.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES BENEFICIALLY OWNED PERCENTAGE OF OUTSTANDING
- ------------------------------------ ----------------------------------- -------------------------
CLASS A VOTING CLASS B NON-VOTING
-------------- ------------------
<S> <C> <C> <C>
Jonathan Miller...................... 3,250(1) 325,000(1) 50%
Shop Vac Corporation
2323 Reach Road
Williamsport, PA 17701
Matthew Miller ...................... 3,250(2) 325,000(2) 50%
Goblin Limited
Don Pedro Avenue
Normanton Industrial Estate
West Yorkshire WF6 1TT
</TABLE>
45
<PAGE> 49
(1) Includes 1,197 shares of Class A and 325,000 shares of Class B owned by the
Jonathan Miller Family Limited Partnership.
(2) Includes 1,197 shares of Class A and 325,000 shares of Class B owned by the
Matthew Miller Family Limited Partnership and the Matthew Miller 1984
Children's Trust.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company currently leases a sales/administration/distribution facility in
Normanton, England from New Yorkshire Limited, an entity controlled by Jonathan
and Matthew Miller. Annual rent under this lease for 1996 was $340,000 which was
comparable to annual rent paid for similar facilities in arms-length
transactions in the local market. The Company has also guaranteed up to
approximately $800,000 of indebtedness incurred by New Yorkshire Limited from
Midland Bank plc ("Midland") in connection with the acquisition of the Normanton
facility.
46
<PAGE> 50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1995 and 1996
Consolidated Statements of Operations for the years ended December
31, 1994, 1995 and 1996
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for the years ended December
31, 1994, 1995 and 1996
Notes to Consolidated Financial Statements
(2) The following financial statement schedule for Shop-Vac Corporation
and subsidiaries is included herein:
II Valuation and Qualifying Accounts - years ended December 31, 1994,
1995 and 1996
All other schedules are omitted as they are not applicable.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the period ended December
31, 1996
(c) The exhibits filed in response to Item 601 of Regulation S-K are as
follows:
Exhibit No. Description
3.1* Certificate of Incorporation, as amended, of Shop Vac
Corporation
3.2* By-Laws of Shop Vac Corporation.
4.1* Indenture, dated as of October 1, 1996, between Shop Vac
Corporation and Marine Midland Bank, as trustee, relating to
$100,000,000 aggregate principal amount of 10 5/8% Senior
Secured Notes due 2003.
4.2* Registration Rights Agreement, dated as of October 1, 1996,
between Shop Vac Corporation, Lehman Brothers and First
Union Capital Markets Corp.
4.3* Specimen Certificate of 10 5/8% Senior Secured Notes due
2003 (the "Private Notes") (included in Exhibit 4.1 hereto).
4.4* Specimen Certificate of 10 5/8% Senior Secured Notes due
2003 (the "Exchange Notes") (included in Exhibit 4.1
hereto).
47
<PAGE> 51
10.1* Credit Agreement, dated as of October 1, 1996, between Shop
Vac Corporation, Felchar Manufacturing Corporation and First
Union National Bank of North Carolina with respect to a
$25,000,000 revolving credit facility.
10.2* Pledge Agreement, dated as of October 1, 1996, by Jonathan
Miller, Matthew Miller, the Jonathan Miller Family Limited
Partnership, the Matthew Miller Family Limited Partnership
and the Matthew Miller 1984 Children's Trust in favor of
Marine Midland Bank.
10.3* Purchase Agreement, dated as of September 25, 1996, between
Shop Vac Corporation, Lehman Brothers and First Union
Capital Markets Corp.
10.4* Shareholders Agreement dated July 21, 1987 by and among Shop
Vac Corporation, Martin Miller, as trustee, Jonathan Miller,
individually and as a trustee, and Matthew Miller,
individually and as a trustee, as amended by Amendment to
Shareholders Agreement dated August 1, 1991.
10.5* Employment Agreement dated March 14, 1996 with respect to
Jonathan Miller, as amended by a First Amendment dated
September 25, 1996.
10.6* Employment Agreement dated March 14, 1996 with respect to
Matthew Miller, as amended by a First Amendment dated
September 25, 1996.
10.7* Employment Agreement dated March 14, 1996 with respect to W.
Earl Stogner
10.8 Settlement Agreement between District 65 Pension Plan and
Shop Vac Corporation dated September 23, 1996. (Page 50)
10.9* Stock Purchase Agreement dated October 22, 1995 by and among
Beaver Acquisition Corporation and Shop Vac Corporation, and
Amendment No. 1 to the Stock Purchase Agreement dated
November 1, 1995.
12.1 Statement of Computation of Ratio of Earnings to Fixed
Charges. (Page 85)
21.1* Subsidiaries of Shop Vac Corporation.
25.1* Statement of Eligibility and Qualification (Form T-1) under
the Trust Indenture Act of 1939 of Marine Midland Bank.
27.1 Financial Data Schedule. (Page 86)
99.1* Form of Letter of Transmittal and related documents to be
used in conjunction with the Exchange Offer
99.2* Forms of Notices of Guaranteed Delivery.
- -------------
* Previously filed with the Registrant's Form S-4 Registration Statement dated
January 28, 1997 and incorporated herein by reference.
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<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SHOP VAC CORPORATION
By /s/ Jonathan Miller
-----------------------------------
JONATHAN MILLER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 21, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 21st day of March 1997.
SIGNATURE TITLE
/s/ Jonathan Miller
- -------------------------- President and Chief Executive Officer and Director
JONATHAN MILLER (Principal Executive Officer)
/s/ W. Earl Stogner
- --------------------------- Executive Vice President and Chief Financial
W. EARL STOGNER Officer and Director (Principal Financial Officer
and Principal Accounting Officer)
/s/ Matthew Miller
- --------------------------- President of the European Group and Director
MATTHEW MILLER
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<PAGE> 53
SETTLEMENT AGREEMENT
This settlement agreement (the "Agreement") is made as of September 23,
1996 by and between the Board of Trustees of the District 65 Pension Plan (the
"Plan") and Shop-Vac Corporation (the "Company") and all of the trades or
businesses under common control with the company as the term "common control" is
used in Section 4001(b) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") and Section 414(b) and (c) of the Internal Revenue Code of
1986, as amended (the "Code'$") to the extent they are jointly and severally
liable to the Plan for the Company's minimum funding and/or withdrawal liability
under ERISA and/or the code and are under "common control" with the Company as
of the date of this Agreement (collectively, the "Employer")).
WHEREAS, the Plan alleges that Employer owes the Plan withdrawal
liability, mass withdrawal liability and a share of the Plan's minimum funding
deficiency for plan years ending on or before January 31, 1995;
WHEREAS, the Employer contests the Plan's allegations of such
liabilities in material respects; and
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<PAGE> 54
WHEREAS, the Plan and Employer wish to fully settle and satisfy all
claims they may have against each other in connection with the Company's
participation in and termination of participation from the Plan;
NOW, THEREFORE, in consideration of the covenants and conditions set
forth herein, the parties,-intending to be legally bound, agree as follows:
1. The Employer's obligation for withdrawal liability, mass withdrawal
liability and a share of the Plan's minimum funding deficiency ("Minimum Funding
Deficiency") shall be satisfied by payment of either a lump sum as set forth in
paragraph 2, installment payments as set forth in paragraph 3, a combination
thereof as set forth in paragraph 4 or a hardship settlement pursuant to
paragraph 8, but each of these alternatives is subject to Employer's right to
challenge and receive an adjustment in withdrawal liability and Minimum Funding
Deficiency obligations pursuant to paragraphs 6 and 7. The calculation of the
Employer's withdrawal liability and Minimum Funding Deficiency under this
Agreement shall be made in accordance with the provisions of this Agreement and,
to the extent not inconsistent herewith, the provisions of the Final Settlement
Term Sheet or, if applicable, the Special Settlement Term Sheet. \On or before
September 6, 1996, the
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<PAGE> 55
Plan will send Employer the Agreement executed by the Plan, Exhibits A and B,
Company's contribution history, an immunization schedule, and the Allocation of
Total Funding Deficiency to Delinquent and Insufficient Contributions. The terms
set forth in Exhibit B are as defined herein and in the Settlement Term Sheet.
The Employer shall complete and execute the Agreement, and return it to the Plan
together with a completed Exhibit A so that they are received by the Plan on or
before September 23, 1996. If an otherwise executed Agreement is returned to the
Plan without completion of Exhibit A, the Employer will be deemed to have chosen
the Twenty-Year Payment Option described in paragraph 3.
2. Lump Sum Option. The Employer may fully and completely satisfy its
withdrawal liability, mass withdrawal liability, and Minimum Funding Deficiency
obligations by making a single, lump sum payment to the Plan in the amount set
forth on the final line of section A on Exhibit B. Such lump sum payment shall
be received by the Plan on or before September 23, 1996. Exhibit B sets forth
the manner in which these sums were calculated, including the applicable
assumptions.
3. Twenty Year Payment Option. The Employer may fully and completely
satisfy its withdrawal liability, mass
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<PAGE> 56
withdrawal liability and Minimum Funding Deficiency obligations by making
quarterly installment payments over twenty years. The interest rate charged to
Employers that choose to pay their liability over twenty years shall be 8%
compounded annually. The quarterly payments shall be in the amount set forth on
line B8 of Exhibit B. Exhibit B sets forth the manner in which these sums were
calculated, including the applicable assumptions. The first quarterly payment
under the Twenty Year Payment option shall be received by the Plan on or before
September 23, 1996. Subsequent quarterly payments shall be received by the Plan
on or before each December 15, March 15, June 15 and September 15 until Employer
has satisfied its obligation hereunder.
4. Modified Installment/Partial Lump Sum Payment Option. The Employer
may fully and completely satisfy its withdrawal liability, mass withdrawal
liability, and Minimum Funding Deficiency obligations by making quarterly
payments for a period of less than twenty (20) years, or by paying its
withdrawal liability in a partial lump sum with the remainder of that liability
and the Minimum Funding Deficiency paid off in twenty (20) years or less,
calculated in accordance with Section C of Exhibit B. The interest rate charged
to Employers that choose to satisfy their obligations in installments for a
period of less than twenty
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<PAGE> 57
(20) years shall be 8% compounded annually. If the Employer intends to satisfy
its obligations as provided in this paragraph 4, the Employer shall state on
Exhibit A the amount it intends to pay in a partial lump sum, if any, and the
number of quarterly payments it intends to make to satisfy its obligations. The
Employer shall return the completed Exhibit A to the Plan by telecopy on or
before September 23, 1996. The Plan will then complete the applicable parts of
Section C of Exhibit B and return it to the Employer by telecopy, on or before
September 30, 1996. The Employer may then choose to amend or revise its Exhibit
A as set forth below; provided, however, that the Plan shall receive on or
before September 23, 1996, the Employer's completed and executed Agreement, and,
at a minimum, the first quarterly payment as calculated under the Twenty Year
Payment Option. on or before September 30, 1996, the Plan will provide the
Employer with information regarding alternative payment schedules as reasonably
requested by the Employer and permitted under this Agreement, which shall be
adjusted to reflect all payments previously made and indicate the amount of
interest (for the period from September 23 through October 10, 1996, at 8%
compounded annually) payable with respect to the differential between the
payment made as of or immediately prior to September 23, 1996 and the amount
that would have been payable on
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<PAGE> 58
September 23, 1993 had the Employer's Revised Exhibit A been in effect on that
date. No later than October 10, 1996, the Employer may amend its Exhibit A. If
the Employer does so, then no later than October 10, 1996, the Plan shall
receive the revised Exhibit A together with the difference, if any, between the
amount the Employer paid as of or immediately prior to September 23, 1996 and
the amount that would have been payable on September 23, 1996 had the Employer's
revised Exhibit A been in effect on that date, with interest at 8% compounded
annually on that difference between the period from September 23, 1996 to
October 10, 1996. Subsequent quarterly payments shall be received by the Plan on
or before each December 15, March 15, June 15, or September 15 until the
Employer has satisfied its obligations hereunder.
5. Releases.
(a) Employer and its successors and assigns (collectively
referred to hereinafter as the "EMPLOYER RELEASOR") (but none of the foregoing
in their capacities as a participant or beneficiary of the Plan), in
consideration of the Plan's obligations hereunder, unconditionally and forever
releases and discharges the Plan, its present and former trustees, employees,
agents, advisors, consultants, and service providers, and each of its (or their)
heirs, agents, executors, administrators, successors and assigns
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<PAGE> 59
(collectively referred to hereinafter as the "PLAN RELEASEE"), from any and all
disputes, controversies, suits, actions, causes of action, claims, assessments,
demands, debts, sums of money, damages, judgments, liabilities and obligations
of any kind whatsoever, upon any legal or equitable theory (whether contractual,
common law, statutory, federal, state, local or otherwise), whether known or
unknown which the EMPLOYER RELEASOR ever had, now has, or hereafter can, shall
or may have, from the beginning of time to the date of this release, against the
PLAN RELEASEE by reasons of any matter, cause or thing whatsoever relating in
any way to Company's participation in, contributions to, or withdrawal from the
Plan, including but not limited to the payment of withdrawal liability, mass
withdrawal liability, minimum funding deficiencies, or payment of excise taxes.
This release shall not prohibit Employer from asserting a challenge to the
Plan's calculation of Employer's withdrawal liability and Minimum Funding
Deficiency solely in the manner provided for and on the grounds set forth in
paragraphs 6 and 7 of this Agreement, and further, shall not prohibit Employer
from asserting a claim for a hardship settlement pursuant to, and in accordance
with, paragraph 8 of this Agreement. This paragraph 5 shall not prohibit
Employer from maintaining any action to enforce the terms of this Agreement or
contesting
56
<PAGE> 60
with the Internal Revenue Service any assessment on the Employer of excise
taxes.
(b) The Plan and each of its trustees, employees, agents,
successors and assigns (collectively referred to hereinafter as the "PLAN
RELEASOR"), in consideration of Employer's obligations hereunder,
unconditionally and forever releases and discharges Employer, its present and
former shareholders, partners, officers, directors, employees, agents, owners
(but none of the foregoing in their capacity as a participant or beneficiary of
the Plan), and each of its (or their) heirs, agents, executors, administrators,
successors and assigns (collectively referred to hereinafter as the "EMPLOYER
RELEASEE"), from any and all disputes, controversies, suits, actions, causes of
action, claims, assessments, demands, debts, sums of money, damages, judgments,
liabilities and obligations of any kind whatsoever, upon any legal or equitable
theory (whether contractual, common law, statutory, federal, state, local or
otherwise, whether known or unknown which the PLAN RELEASOR ever had, now has,
or hereafter can, shall or may have, from the beginning of times to the date of
this release, against the EMPLOYER RELEASEES by reasons of any matter, cause or
thing whatsoever, relating in any way to Company's participation in,
contributions to, or withdrawal from the Plan, including but
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<PAGE> 61
not limited to any claim for "redetermination liability" or "reallocation
liability" as those terms are defined in 29 C.F.R. Section 2640.7 and interests
on any amounts. This release shall not prohibit the Plan from maintaining any
action to enforce the terms of this Agreement. Notwithstanding the foregoing,
this release shall not apply to any person or entity included within the
definition of Employer under this Agreement if they assert that they are not
bound by this Agreement; provided, however this shall not vitiate the
applicability of this release to all other persons or entities within definition
of Employer under this Agreement.
(c) To the extent that the Employer complies with its obligations
under this Agreement, the Plan shall not seek payment from any trades or
businesses that were under "common control" with the Company with respect to the
liabilities arising from the Company's participation in, contributions to, or
withdrawal from the Plan, as the term "common control" is defined in Section
4001(b) of ERISA and 414(b) and (c) of the Code, which are jointly and severally
liable for minimum funding and/or withdrawal liability (or related liabilities)
under ERISA or the Code, but which are not included in the definition of
Employer in this Agreement.
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<PAGE> 62
6. Employers's Right to Challenge the Plan's Withdrawal Liability and
Minimum Funding Deficiency Calculation
(a) If on or before July 3, 1996, Employer had advised the
Plan in writing of: (i) the Plan's record of the Company's contribution history,
for purposes of calculating withdrawal liability and minimum Funding Deficiency,
that Employer contends is erroneous, and (ii) Employer's position as to the
Company's correct contribution history, and if Employer also had submitted
credible evidence in support of (i) and (ii) including, but not limited to,
canceled checks, payroll records, remittance reports, agreements,
correspondence, memoranda and/or other documents or evidence, Employer may
challenge the Plan's calculations of Employer's withdrawal liability and Minimum
Funding Deficiency obligation in accordance with subparagraphs 6(b) and (d)
hereof. The July 3, 1996 submission deadline is extended to August 20, 1996 for
employers who did not receive notice of a submission deadline prior to their
receipt of the Final Settlement Term Sheet or the Special Settlement Term Sheet.
If Employer did not timely challenge its contribution history in the manner
provided for in this paragraph 6, Employer shall be deemed to have waived and
released any claims or defenses relating to Company's contribution history;
provided, however, that nothing in this paragraph shall be construed as
preventing
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<PAGE> 63
Employer, if it otherwise timely submitted a contribution history challenge in
accord with this paragraph 6(a), from submitting to the Plan additional evidence
which must have been received by the Plan on or before August 8, 1996; and
provided, further however, that Employer shall not be prohibited from
challenging the results of any payroll audit(s), which audit results were not
included in the contribution history the Plan provided to Employer before July
3, 1996 (or August 20, 1996 if applicable), and which are included on Exhibit B.
(b) If Employer has satisfied the requirements of paragraph
6(a), Employer may challenge the Plan's calculation of Employer's withdrawal
liability and Minimum Funding Deficiency only on the basis of Employer asserting
that the Plan used an incorrect contribution history for Company to calculate
these liabilities. Employer challenges to the Plan's record of the Company's
contribution history may include challenges relating to the amount the Company
was obligated to contribute, the number of employees for whom Company was
obligated to contribute to the Plan ("covered employees"), the rate of
contributions due on behalf of covered employees, the amount of earnings of
covered employees upon which contributions to the Plan were required, the
duration of the obligation to contribute to the Plan, the effective date of a
withdrawal, the
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<PAGE> 64
commencement of contributions for covered employees, the classifications
for which contributions were required and sale of assets issues arising under
Section 4204 Of ERISA. Exhibit B shall reflect the Plan's final determination of
Employer's challenge to the Plan's data of the Company's contribution history.
(c) If Employer has challenged in writing, as provided in
paragraph 6(a), the Plan's record of the Company's contribution history, the
Plan shall be required to respond to Employer as to the Plan's determination of
such challenge on or before September 6, 1996 unless the Employer and the Plan
have agreed to a later date.
(d) If Employer has challenged any calculation error in the
Company's contribution history in accordance with this paragraph and disputes
the Plan's decision in response to the Employer's contribution history
challenge, Employer may pursue its claim only by commencing binding arbitration
against the Plan on or before the later of (i) October 10, 1996 or (ii) within
twenty (20) calendar days after receiving the Plan's response to the Employer's
challenge as provided in paragraph 6(c). Employer may commence arbitration by
notifying the Plan in writing of its intent to arbitrate. Arbitration shall be
conducted in accordance with the rules set forth in paragraph 9(a) of this
Agreement. In such arbitration, Employer has the
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<PAGE> 65
burden of proving a calculation error by the Plan, and the presumption
established in Section 4221(a)(3) of ERISA shall not apply. Unless otherwise
agreed by the Plan and the Employer, during the period between the date the
first payment is due under this Agreement and the date of the arbitrator's final
award (the "Interim Period"), the Employer shall pay the Plan in accordance with
the calculations set forth in Exhibit B. If it is determined that the Plan
incorrectly calculated the Employer's liability under this Agreement, and the
Employer overpaid the Plan during the Interim Period, the amounts due to the
Plan hereunder shall be adjusted accordingly, and any amounts paid to the Plan
in excess of that which otherwise should have been due under the corrected
calculation shall be credited to Employer, with interest at an annual rate of
8.0 percent (the "Credit"). The Credit shall be applied against the next payment
due under this Agreement, until the Credit is exhausted. If Employer has
satisfied its obligations pursuant to paragraph 2 of this Agreement, the Plan
shall refund to Employer a payment in the amount of the Credit, based on the
arbitrator's final decision, such amount to be paid within fifteen (15) days of
the receipt of such decision by the Plan.
7. Mass Withdrawal. The Employer may assert that it is not part of the
mass withdrawal (as defined in 29)
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<PAGE> 66
C.F.R. Section 2640.7) only if it advised the Plan in writing of its assertion
and provided to the Plan credible evidence of its position on or before July 3,
1996. The July 3, 1996 submission deadline is extended to August 20, 1996 for
Employers who did not receive notice of a submission deadline prior to their
receipt of the Final Settlement Term Sheet or the Special Settlement Term Sheet.
If the Employer otherwise provides timely notice under this Paragraph, the
Employer shall be permitted to submit additional evidence in support of its
assertion that it was not part of the mass withdrawal. Such additional evidence
must have been received by the Plan by August 8, 1996. Exhibit B shall reflect
the Plan's final determination of Employer's claim that it is not part of the
mass withdrawal. If subsequent to the effective date of this Agreement the
Employer continues to dispute whether it is part of the mass withdrawal, and
Employer has satisfied the requirements of this paragraph, Employer may
challenge the Plan's position by commencing arbitration against the Plan by
notifying the Plan in writing of its intent to arbitrate on or before October
10, 1996 or within twenty (20) calendar days after receiving the Plan's response
to the Employer's challenge, whichever is later. Arbitration shall be conducted
in accordance with the rules set forth in paragraph 9(a) of this Agreement. If
it is determined by agreement between
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<PAGE> 67
the parties or a decision by the arbitrator that Employer is not part of the
mass withdrawal, Employer's withdrawal liability shall be reduced in accordance
with the provisions of Sections 4209(a) and 4219(c)(1)(B) of ERISA, the payments
due as described in Exhibit B shall be adjusted accordingly, and Employer shall
receive a credit for any amounts paid to the Plan in excess of that which
otherwise should have been due under the revised withdrawal liability
calculation with interest at the annual rate of 8% (the "Mass Withdrawal
Credit"). The Mass Withdrawal Credit shall be applied against the next payment
due under this Agreement, until the Mass Withdrawal Credit is exhausted. If
Employer has satisfied it obligation pursuant to paragraph 2 of this Agreement,
the Plan shall refund to Employer a payment in the amount of the Mass Withdrawal
Credit, based on the arbitrator's final decision, such amount to be paid within
fifteen (15) days of receipt of such decision by the Plan.
8. Hardship Settlements.
(a) Employer may obtain terms more favorable than those set
forth in paragraphs 2, 3, or 4 of this Agreement if Employer qualifies for a
hardship settlement and applies to the Plan for relief in the manner provided
for herein. To apply for a hardship settlement, Employer must submit to the Plan
(i) an executed Agreement together with a payment equal to the greater of
Employer's first
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<PAGE> 68
payment under its proposed hardship settlement proposal or 110% of the quarterly
Preliminary Payment Amount, on or before September 23, 1996 and (ii) a written
explanation of the basis of the hardship settlement proposal on or before
October 10, 1996. Upon written request by the Plan, Employer shall submit to the
Plan financial information the Plan reasonably deems relevant to the hardship
inquiry. Such information shall be kept confidential by the Plan pursuant to the
provisions of paragraph 16 hereof. Employer's request for a hardship settlement
shall be denied if it does not submit the foregoing information within thirty
(30) days of the Plan's request for information. If Employer is unable to
provide the requested information within thirty (30) days, the Employer may
submit to the Plan a written request for an extension of time (which request
must be received within the thirty (30) day period), which request shall not be
unreasonably denied by the Plan. The Employer may request in writing from the
Plan relevant data concerning the Plan's record of the Company's contribution
history which shall be provided by the Plan within sixty (60) days of the
Employer's request.
(b) The general test for determining the Employer's
entitlement to a hardship settlement is whether (a) the Employer will not be
able to continue to operate absent such a settlement, or (b) the Employer will
suffer a
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<PAGE> 69
material diminution in or material impediment to its ability to operate if it
is required to pay its withdrawal liability and minimum funding deficiency in
accordance with paragraphs 2, 3, and 4 of this Agreement ("the paragraph 2, 3,
and 4 payments"). Employers that as of the date of this Agreement are in
bankruptcy or declare bankruptcy, or are not operating or are liquidating or
winding down operations are not entitled to a hardship settlement. Various
factors shall be considered in determining whether the Employer is entitled to a
hardship settlement, including, but not limited to: (i) whether Employer is
operating at an economic loss, (ii) whether employment at Employer has been
reduced materially from prior levels, (iii) whether sales and profits of the
business are depressed or are declining as compared to prior periods, (iv)
whether the paragraph 2, 3, and 4 payments would violate Employer's bank loan
covenants,(v) whether making the paragraph 2, 3, and 4 payments will materially
diminish or impede employer's ability to compete including, without limitation,
raising capital, hiring employees, or competitively pricing its products, (vi)
the annual installment payments otherwise required under paragraph 3 hereof
("the paragraph 3 annual installment payments) as a percentage of the Employer's
taxable income, (vii) the paragraph 3 annual installment payments as a
percentage of the Employer's gross sales,
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(viii) the paragraph 3 annual installment as a percentage of the Employer's
payroll, or (ix) the total payment otherwise to be made pursuant to paragraph 3
hereof as a percentage of the net worth of the Employer. For not-for-profit
employers, additional factors may be considered, including, but not limited to:
(i) the nature of, and restrictions on, funding provided to the organization by
public and private sources or (ii) licensing, regulatory and accreditation
requirements to which the Employer is subject.
(c) As soon as practical after the submission of a hardship
request by Employer under paragraph 8(a), the parties shall meet in person or by
telephone to attempt to settle an Employer's hardship request. If the parties
cannot agree on whether Employer is entitled to a hardship settlement and the
Plan determines that the Employer is not entitled to a hardship settlement, such
dispute shall be resolved through binding final offer arbitration in which the
arbitrator shall choose either Employer's proposal or the Plan's proposal. In
the arbitration, the Plan's proposal shall be in an amount not greater than the
payment amounts required under paragraphs 3 or 4 of this Agreement for
installment payments and Employer's proposal shall be identical to the proposal
submitted to the Plan pursuant to paragraph 8(a) of this Agreement. If the Plan
determines that the Employer may be
67
<PAGE> 71
entitled to a hardship settlement but does not agree to Employer's proposal,
then the Plan shall make a counterproposal and the Employer may, but is not
required to, make a counterproposal; such counterproposal to be made within
thirty (30) days of the Plan's counterproposal. The Plan has the right to accept
the Employer's counterproposal, offer its own counterproposal, or give notice
that its prior proposal was its final proposal. If the parties do not agree
following the Plan's final proposal, either of the parties may submit the
dispute to binding final offer arbitration in which the arbitrator shall choose
either the Employer's final proposal or the Plan's final proposal. Final offer
arbitration shall be conducted in accordance with the rules set forth in
paragraph 9 of this Agreement. Either party may commence arbitration by
providing the other party notice of its intent to arbitrate. Each party loses
the right to arbitrate if neither party commences arbitration within thirty (30)
days after the Plan has provided notice to Employer that it has made its final
proposal. In the interim period between the date payments are due as provided
for in paragraphs 2, 3, and 4 and the arbitrator's final award, Employer shall
make payments to the Plan at the greater of Employer's final hardship settlement
proposal or 110% of the quarterly Preliminary Payment Amount.
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<PAGE> 72
(d) If the Plan proposes in arbitration the amount set forth
in paragraph 3 of this Agreement for installment payments and the arbitrator
rejects Employer's request for a hardship settlement, the 110% (or 115% for
Employers who were offered and accepted the Special settlement Term Sheet) rate
used to calculate the Employer's adjusted withdrawal liability on Exhibit B
shall be increased to 112% (or 117% for employers who were offered and accepted
the Special Settlement Term Sheet) and the Immunization Schedule shall be
revised accordingly.
(e) An interest rate of 8% per annum shall be charged to all
payments that pursuant to the arbitration award should have been made during the
pendency of the hardship settlement request and final arbitration decision.
(f) If the arbitrator determines that Employer did not have
reasonable basis for claiming hardship, the arbitrator shall order that Employer
pay the Plan interest at the rate of 1% per month (or part of a month) on all
deficiencies, plus the Plan's reasonable costs and attorneys' fees expended in
connection with the arbitration.
(g) If Employer's financial condition improves during the
period in which it is obligated to pay the Plan under a hardship settlement so
that it would not have a hardship (as that term is defined in paragraph 6(b)
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<PAGE> 73
of this Agreement) in paying to the Plan future payments due after the date of
Employer's improved financial condition (the "Improvement Date"), the Plan on
fifteen (15) days written notice to Employer may terminate the hardship
settlement (the "Termination Notice") and require Employer to pay all payments
due after the Improvement Date in accordance with the original installment
payment provision set forth in paragraph 3 of this Agreement. If the Employer
provides the Plan appropriate written notice in accordance with paragraph 10 of
this Agreement (the "Paragraph 10 Notice"), the Plan may provide Termination
Notice to the Employer with respect to the changes provided by Employer in the
Paragraph 10 Notice within one hundred twenty (120) days of the Plan's receipt
of the Paragraph 10 Notice from Employer. This period may be extended by mutual
agreement of the parties. If Employer disputes the Plan's termination of the
hardship settlement, the dispute shall be subject to arbitration pursuant to
paragraph 6(b) of this Agreement. If the Plan prevails in arbitration, the
Employer shall be obligated to pay to the Plan installment payments in
accordance with paragraph 3 of this Agreement for the period commencing on the
Improvement Date and ending on the date provided for in paragraph 3. Employer
shall pay interest at the rate of 8% per annum on all installments due from and
after the Improvement Date.
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9. Arbitration.
(a) Any arbitration commenced pursuant to paragraphs 6 and 7
of this Agreement shall be conducted before one of the following arbitrators:
Ralph Berger
Bonnie S. Weinstock
Ira Jaffe
Requests for arbitration shall be assigned to the above individuals on
a rotating basis. Arbitration commenced pursuant to paragraphs 6 and 7 of this
Agreement shall be conducted pursuant to the American Arbitration Association's
("AAA") Multiemployer Pension Plan Arbitration Rules, although the AAA shall not
be utilized as the administrator of the arbitration process.
(b) Any arbitration commenced pursuant to paragraphs 8 or 10
of this Agreement shall be conducted before one of the following arbitrators:
Margaret Shaw
Carol Wittenberg
Philip Ross
Requests for arbitration shall be assigned to the above-individuals on
a rotating basis. Arbitration commenced pursuant to paragraphs 8 or 10 of this
Agreement shall be conducted pursuant to the AAA's Commercial
71
<PAGE> 75
Arbitration Rules, although the AAA shall not be utilized as the administrator
of the arbitration process.
(c) Each time that a party seeks arbitration under this
Agreement, the arbitrator who shall hear and decide the dispute between the
parties shall be chosen on a rotating basis from the list of names set forth in
subparagraphs (a) and (b), which correspond to the issue sought to be
arbitrated. Such rotating assignments shall be made by the Plan in the order of
the dates of the notice of intention to arbitrate. When there is more than one
notice bearing the same date, the assignment shall be made in alphabetical order
of the names of the companies involved.
(d) Each party shall bear its own costs in any arbitration
commenced under this Agreement, unless otherwise determined by the arbitrator or
provided for by paragraph 8(f) of this Agreement. Arbitration decisions
hereunder shall be final and binding on the parties.
(e) Unless the Plan and Employer agree otherwise, the situs of
arbitration hereunder shall be in New York, New York.
(f) If the arbitrators listed in paragraphs 9(a) or (b) are
not available and the parties are unable to agree on an alternate arbitrator,
the parties shall arbitrate their dispute before the AAA in New York, New York.
72
<PAGE> 76
10. Continuing Duty to Notify Plan.
(a) If Employer elects to satisfy its obligations to the Plan
pursuant to paragraphs 3 or 4 of the Agreement or obtains a hardship settlement
under paragraph 8 of the Agreement, to the extent possible, it shall notify the
Plan, in writing, thirty (30) calendar days prior to material changes in its
corporate structure or the sale of business or assets, which are reasonably
likely to materially impact adversely its ability to comply with the Installment
Payment Terms defined in this Agreement and immediately upon the occurrence of
any other event which appears reasonably likely to result in a change in
Employer's financial condition, when such occurrences may either (i) materially
impact adversely Employer's ability to satisfy its obligations hereunder, or
(ii) if Employer has a hardship settlement (by agreement or arbitration award),
materially improve Employer's financial condition.
(b) If the Plan reasonably determines that Employer is unable
or will be unable to fully satisfy its obligations to comply fully with the
Installment Payment Terms hereunder, including but not limited to obligations
pursuant to a hardship settlement, if applicable, as a result of any factors set
forth in paragraph 10(a), or as a result of the occurrence of a transaction the
principle purpose of which is to evade or avoid liability under this
73
<PAGE> 77
Agreement, the Plan shall notify the Employer in writing of its finding and
may-accelerate payments required hereunder and require a lump sum payment to be
made as soon as possible in an amount equal to the present value of the
remaining payments due hereunder, using an 8% discount rate. If that lump sum
payment is timely made, the amount due and owing shall be adjusted downward in
accordance with the applicable Immunization Schedule. If the Plan has given an
acceleration notice to Employer as provided herein, Employer has the right to
demand arbitration before an arbitrator specified in paragraph 9(b) and selected
in the manner provided therein. Upon the Employer's demand for arbitration, the
Employer must post security in an amount reasonably acceptable to the Plan. If
Employer fails to post security, the Plan has the right to seek injunctive
relief in an appropriate court. The arbitrator's authority is limited to
determining whether the Plan had the right to accelerate payment in accordance
with the factors set forth in this Paragraph 10.
11. Similarly Situated Employers. The Plan agrees that no former
contributing employer shall receive settlement terms that are more favorable
than those offered under this Agreement. The foregoing sentence does not apply
to employers who are in bankruptcy, are not operating, or are liquidating or
winding down operations pursuant to a
74
<PAGE> 78
plan of liquidation or have requested and received hardship settlements. This
section also does not apply to a situation in which the Plan determines that an
employer is unable to meet its obligations under this Agreement. This section
shall not prohibit the Plan from requiring employers who did not execute the
Final Settlement Term Sheet from providing additional consideration.
12. Late Payments. If Employer fails to satisfy in a timely fashion any
payment obligation hereunder Employer shall be charged interest on the overdue
amount at the rate of 1% per month, or part of a month. If Employer fails to
cure such delinquency within sixty (60) calendar days of the Plan sending
written notice from the Plan of its delinquency, Employer's payment obligations
hereunder shall become immediately due and owing. If the Plan commences
litigation to collect such payment obligations and prevails, Employer shall
become liable to the Plan for the remedies set forth in Section 502(g)(2) of
ERISA.
13. If conditions or circumstances arise subsequent to the execution of
this Agreement which causes an Employer to be unable to satisfy its installment
payment obligations under paragraph 3 or paragraph 4, the Employer must notify
the Plan in writing of the basis for its inability to satisfy its obligations
and its proposed
75
<PAGE> 79
revised schedule of payments. The Plan agrees to meet with the Employer to
discuss its request for a revised payment schedule.
14. Plan's Right to Void Agreement. The Plan has the right to void this
Agreement if it does not receive this Agreement executed by the Employer with
Employer's initial payment on or before September 23, 1996, if the Plan notifies
Employer within fifteen (15) days of receiving Employer's initial payment.
15. Notices. All notices hereunder shall be sent by confirmed facsimile
or guaranteed overnight mail, with tracing capability, as follows:
If to the Plan:
District 65 Pension Plan
c/o Glenn D. Shaffer
President
I.E. Shaffer & Co.
830 Bear Tavern Road
CN 01028
West Trenton, New Jersey 08628-1019
with a copy to:
Ronald E. Richman, Esq.
Chadbourne & Parke LLP
30 Rockefeller Plaza
New York, New York 10112
76
<PAGE> 80
and
William T. Josem, Esq.
Cleary & Josem LLP
1420 Walnut Street, Suite 300
Philadelphia, Pennsylvania 19102-4097
If to Employer:
with a copy to:
Such notices shall be deemed given when received. Either party may
change the names and addresses of the persons/entities to whom notice shall be
given by written notice to the other.
16. Confidentiality. The Plan agrees that any non-public information
provided to it pursuant to paragraphs 8 and 10 of this Agreement shall be
treated as confidential information and, unless required by law, shall not be
provided to, or otherwise disclosed, to any labor organizations or other third
parties, except that the Plan may provide such information to its trustees,
third-party administrator, accountants, financial analysts, attorneys,
consultants and others for the purpose of representing itself in arbitration or
a lawsuit or as may be required by
77
<PAGE> 81
law. The Plan shall advise any trustees, third-party administrators,
accountants, financial analysts, attorneys, consultants and others to whom the
Plan shows any non-public information disclosed under this Agreement of this
confidentiality provision and shall require that such individuals or entities
(with the exception of arbitrators and court officials or employees) execute in
writing an acknowledgment of the confidentiality of such material. If such
information is subpoenaed, notice shall be provided to Employer, and the Plan
shall cooperate at the Employer's expense in any effort by the Employer to quash
any such request for the documents.
17. Choice of Law. This Agreement shall be construed in accordance with
the laws of the State of New York without giving effect to New York's rules
concerning conflicts of law, except where preempted by ERISA.
18. Preliminary Payment Agreement Superseded. This Agreement shall
supersede and be substituted for the Preliminary Payment Agreement previously
entered into between the Plan and the Company. The Employer's execution of and
compliance with this Agreement shall void all obligations of the Company under
the Preliminary Payment Agreement to make quarterly payments, beginning with the
quarterly payment due on September 15, 1996. The foregoing
78
<PAGE> 82
shall not void Company's obligation to the Plan to make quarterly payments under
the Preliminary Payment Agreement that were due prior to September 15, 1996 or
to pay interest on any late payments. The parties hereby waive the requirement
contained in paragraph 8 of the Preliminary Payment Agreement that they provide
thirty (30) days' notice of the Termination of the Preliminary Payment
Agreement.
19. Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes any
and all prior agreements or understandings between the parties arising out of or
relating to the Assessment. This Agreement may only be amended by a writing
executed by both parties.
20. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof. If any
provision of this Agreement, or the application thereof to any person or any
circumstance, is invalid or unenforceable, (i) a suitable and equitable
provision shall be substituted therefor by a court or arbitrator or the parties
to carry out, so far as may be valid and enforceable, the intent and purpose of
such invalid or unenforceable provision, and (ii) the remainder of this
79
<PAGE> 83
Agreement shall not be affected by such invalidity or unenforceability, nor
shall such invalidity or enforceability affect the validity or enforceability of
such provision, or the application thereof, in any other jurisdiction.
21. Acknowledgment of Authority. The individual executing this
Agreement on behalf of the Company represents and warrants that he or she has
authority to execute this Agreement on behalf of the Company. The Company
executing this Agreement represents and warrants that it has the authority to
execute the Agreement on behalf of all persons or entities defined as the
Employer herein. The individual executing this Agreement on behalf of the Plan
represents and warrants that he has authority to act on behalf of the Plan,
pursuant to unanimous resolution of the Board of Trustees of the Plan approving
the Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
20th day of December, 1996.
DISTRICT 65 PENSION PLAN [Employer] SHOP-VAC CORPORATION
By: /s/ By: /s/ David C. Grill
----------------------- -----------------------
Vice President
80
<PAGE> 84
SETTLEMENT AGREEMENT BETWEEN
DISTRICT 65 PENSION PLAN
AND Shop-Vac Corporation
(Fill in name of Company)
EXHIBIT A
The above-named entity chooses the following settlement payment option in
accordance with the Settlement Agreement by and between it and the District 65
Pension Plan (Check the applicable box):
Lump Sum Option
- ---
Twenty Year Payment Option
- ---
X Modified Installment/Partial Lump Sum Payment
- ---
(If you choose this option, you must fill out one or both of the
following boxes and transmit this Exhibit to the Plan by telecopy by
the date set forth in paragraph 3 of the Settlement Agreement - The
Plan's fax number is 609-530-1331)
99,043 Amount of Partial Lump Sum Payment, if any
72 Number of Quarterly Payments to be made
(with final payment of $19,005 per Ex.B.
81
<PAGE> 85
SETTLEMENT AGREEMENT BETWEEN
DISTRICT 65 PENSION PLAN AND SHOP-VAC CORPORATION
EXHIBIT B
Withdrawal Date: 03/31/93
Present Value of Vested Benefits at 01/31/93:
Interest Rate: Blended
Mortality Table: UP84
Retirement Assumption: Age 62/65
Collection of Funding Deficiencies: 50% collected
Collection of Withdrawal Liability: 5O% collected
Highest 3-year average compensation: $2,692,225
Highest contribution rate: 7.00%
No interest is charged for withdrawal liability or the
funding deficiency until September 15, 1996
The funding deficiency is reduced in accordance with
paragraph 1 of the Settlement Term Sheet
Calculations based on Employer not withdrawing as part of mass withdrawal
Allocated funding deficiency by year:
<TABLE>
<S> <C>
Deficiency for year ending 1/31/93 = $124,985
Deficiency for year ending 1/31/94 = 62,205
Deficiency for year ending 1/31/95 = 0fr
Total deficiency = $187,190
</TABLE>
<TABLE>
<S> <C>
A. LUMP SUM OPTION
1. Minimum Funding Deficiency Allocation 187,190
2. Withdrawal Liability Amount 1,998,309
3. Reduced Withdrawal Liability Amount 1,904,081
4. Additional credits, if any 0
5. Total (A.1. plus A.3. less A.4.) 2,091,271
B. TWENTY YEAR PAYMENT OPTION
1. Minimum Funding Deficiency Allocation 187,190
2. Withdrawal Liability Amount 1,998,309
3. Reduced Withdrawal Liability Amount 1,904,081
4. Excess payments made on or before September 15, 1996,
if any, as per paragraph 5(b) of the Term Sheet 0
5. Subtotal of Withdrawal Liability Amount
(B.3. less B.4.) 1,904,081
6. Adjusted Withdrawal Liability Amount (B.5. times 110%) 2,094,489
7. Total (B.1. + B.6.) 2,281,679
8. Amount of each quarterly payment to amortize Total
over 20 years 55,357
C. MODIFIED INSTALLMENT/PARTIAL LUMP SUM PAYMENT OPTION
1. Subtotal of Withdrawal Liability Amount (from B.5.) 1,904,081
2. Adjusted Withdrawal Liability Amount applying
Immunization Factor (C.1. times 110%) 2,094,489
3. Amount of partial lump sum payment, if any 99,043*
4. Additional interest for incorrect September payment 80
5. Subtotal (C.2. - C.3. + C.4.) 1,995,526
6. Total Withdrawal Liability and Minimum Funding
Deficiency Allocation to be amortized (B.1. plus C.5.) 2,182,716
7. Number of quarterly payments of $55,357 to
amortize C.6. 72
8. Final payment amount 19,005
</TABLE>
* Discounted with 1.5 months of interest.
82
<PAGE> 86
SHOP-VAC CORPORATION (# 3569)
CONTRIBUTIONS AND SALARIES BY PLAN YEAR
<TABLE>
<CAPTION>
Plan Year Contributions
-------------------- -----------------------------------
Start End Received Delinquent Total Salary
-------- -------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
02/01/75 01/31/76 37,024 0 37,024 925,604
02/01/76 01/31/77 56,831 0 56,831 1,405,211
02/01/77 01/31/78 70,414 0 70,414 1,556,737
02/01/78 01/31/79 96,348 0 96,348 2,028,385
02/01/79 01/31/80 156,563 0 156,563 3,296,063
02/01/80 01/31/81 110,273 0 110,273 2,321,529
02/01/81 01/31/82 91,711 0 91,711 1,930,768
02/01/82 01/31/83 84,548 0 84,548 1,751,718
02/01/83 01/31/84 92,170 0 92,170 1,843,391
02/01/84 01/31/85 108,060 0 108,060 2,161,193
02/01/85 01/31/86 117,712 0 117,712 2,354,244
02/01/86 01/31/87 117,528 0 117,528 2,350,565
02/01/87 01/31/88 110,463 0 110,463 2,209,261
02/01/88 01/31/89 115,484 0 115,484 2,309,677
02/01/89 01/31/90 191,601 0 191,601 2,859,772
02/01/90 01/31/91 203,506 0 203,506 2,907,227
02/01/91 01/31/92 136,347 0 136,347 1,947,819
02/01/92 01/31/93 147,275 0 147,275 2,103,932
02/01/93 01/31/94 35,149 0 35,149 502,133
02/01/94 01/31/95 0 0 0 0
</TABLE>
83
<PAGE> 87
SHOP-VAC CORPORATION (#3569)
ALLOCATION OF TOTAL FUNDING DEFICIENCY TO
DELINQUENT AND INSUFFICIENT CONTRIBUTIONS
<TABLE>
<CAPTION>
A. Plan Year Ended 01/31/93 01/31/94 01/31/95 Total
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
B. Funding Deficiency = FD 4,761,876 9,923,524 6,664,459 21,549,859
C. Funding Deficiency due to Delinquent Contributions:
1. Total delinquent contributions for period = C:TD 130,037 52,879 242,070 424,986
2. Total required contributions for period = C:TR 5,477,911 5,553,927 4,401,668 15,433,508
3. Funding deficiency due to delinquent contributions:
B. x (C.1./C.2.) = FD:DC 113,039 94,481 377,511 585,032
D. Funding Deficiency due to Insufficient Contributions:
B. - C.3 = FD:IC 4,648,836 9,829,042 6,486,947 20,964,826
</TABLE>
ALLOCATION OF TOTAL FUNDING DEFICIENCY TO EMPLOYER
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Contributions
----------------------------------------- FD:DC FD:IC Funding
Allocated to Allocated to Deficiency
Delinquent Contributing Allocated to
Plan Year Required Employers Employers Employer
Ended Delinquent Received (2)+(3) FD:DC*[(2)/C:TD] FD:IC*[(4)/C:TR] (5)+(6)
- ------------ ---------- -------- ----------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
01/31/93 0 147,275 147,275 0 124,985 124,985
01/31/94 0 35,149 35,149 0 62,205 62,205
01/31/95 0 0 0 0 0 0
</TABLE>
<PAGE> 88
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1995 and 1996
Consolidated Statements of Operations for the years ended December
31, 1994, 1995 and 1996
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for the years ended December
31, 1994, 1995 and 1996
Notes to Consolidated Financial Statements
(2) The following financial statement schedule for Shop-Vac Corporation
and subsidiaries is included herein:
II Valuation and Qualifying Accounts - years ended December 31, 1994,
1995 and 1996
All other schedules are omitted as they are not applicable.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the period ended December
31, 1996
(c) The exhibits filed in response to Item 601 of Regulation S-K are as
follows:
Exhibit No. Description
3.1* Certificate of Incorporation, as amended, of Shop Vac
Corporation
3.2* By-Laws of Shop Vac Corporation.
4.1* Indenture, dated as of October 1, 1996, between Shop Vac
Corporation and Marine Midland Bank, as trustee, relating to
$100,000,000 aggregate principal amount of 10 5/8% Senior
Secured Notes due 2003.
4.2* Registration Rights Agreement, dated as of October 1, 1996,
between Shop Vac Corporation, Lehman Brothers and First
Union Capital Markets Corp.
4.3* Specimen Certificate of 10 5/8% Senior Secured Notes due
2003 (the "Private Notes") (included in Exhibit 4.1 hereto).
4.4* Specimen Certificate of 10 5/8% Senior Secured Notes due
2003 (the "Exchange Notes") (included in Exhibit 4.1
hereto).
47
<PAGE> 89
10.1* Credit Agreement, dated as of October 1, 1996, between Shop
Vac Corporation, Felchar Manufacturing Corporation and First
Union National Bank of North Carolina with respect to a
$25,000,000 revolving credit facility.
10.2* Pledge Agreement, dated as of October 1, 1996, by Jonathan
Miller, Matthew Miller, the Jonathan Miller Family Limited
Partnership, the Matthew Miller Family Limited Partnership
and the Matthew Miller 1984 Children's Trust in favor of
Marine Midland Bank.
10.3* Purchase Agreement, dated as of September 25, 1996, between
Shop Vac Corporation, Lehman Brothers and First Union
Capital Markets Corp.
10.4* Shareholders Agreement dated July 21, 1987 by and among Shop
Vac Corporation, Martin Miller, as trustee, Jonathan Miller,
individually and as a trustee, and Matthew Miller,
individually and as a trustee, as amended by Amendment to
Shareholders Agreement dated August 1, 1991.
10.5* Employment Agreement dated March 14, 1996 with respect to
Jonathan Miller, as amended by a First Amendment dated
September 25, 1996.
10.6* Employment Agreement dated March 14, 1996 with respect to
Matthew Miller, as amended by a First Amendment dated
September 25, 1996.
10.7* Employment Agreement dated March 14, 1996 with respect to W.
Earl Stogner
10.8 Settlement Agreement between District 65 Pension Plan and
Shop Vac Corporation dated September 23, 1996. (Page 50)
10.9* Stock Purchase Agreement dated October 22, 1995 by and among
Beaver Acquisition Corporation and Shop Vac Corporation, and
Amendment No. 1 to the Stock Purchase Agreement dated
November 1, 1995.
12.1 Statement of Computation of Ratio of Earnings to Fixed
Charges. (Page 85)
21.1* Subsidiaries of Shop Vac Corporation.
25.1* Statement of Eligibility and Qualification (Form T-1) under
the Trust Indenture Act of 1939 of Marine Midland Bank.
27.1 Financial Data Schedule. (Page 86)
99.1* Form of Letter of Transmittal and related documents to be
used in conjunction with the Exchange Offer
99.2* Forms of Notices of Guaranteed Delivery.
- -------------
* Previously filed with the Registrant's Form S-4 Registration Statement dated
January 28, 1997 and incorporated herein by reference.
48
<PAGE> 1
SHOP VAC CORPORATION AND SUBSIDIARIES EXHIBIT 12.1
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(THOUSANDS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income from continuing operations
before income taxes
and cumulative effect of
changes in accounting principles $18,462 $17,255 $17,447 $ 4,182 $ 4,032
Interest Expense ...................... 8,142 7,210 8,826 11,629 10,104
Interest Component of Rental Expense .. 111 133 154 218 198
------- ------- ------- ------- -------
$26,715 $24,598 $26,427 $16,029 $14,334
======= ======= ======= ======= =======
Interest Expense ...................... $ 8,142 $ 7,210 $ 8,826 11,629 10,104
Interest Component of Rental Expense .. 111 133 154 218 198
------- ------- ------- ------- -------
$ 8,253 $ 7,343 $ 8,980 $11,847 $10,302
======= ======= ======= ======= =======
Fixed Charge Coverage Ratio ........... 3.2 3.3 2.9 1.4 1.4
======= ======= ======= ======= =======
</TABLE>
85
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 21,141
<SECURITIES> 0
<RECEIVABLES> 31,007
<ALLOWANCES> 1,853
<INVENTORY> 25,314
<CURRENT-ASSETS> 84,387
<PP&E> 89,776
<DEPRECIATION> 58,854
<TOTAL-ASSETS> 131,636
<CURRENT-LIABILITIES> 51,263
<BONDS> 106,100
0
0
<COMMON> 85
<OTHER-SE> (39,082)
<TOTAL-LIABILITY-AND-EQUITY> 131,636
<SALES> 214,039
<TOTAL-REVENUES> 214,039
<CGS> 158,787
<TOTAL-COSTS> 158,787
<OTHER-EXPENSES> 40,227
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,104
<INCOME-PRETAX> 4,032
<INCOME-TAX> 1,755
<INCOME-CONTINUING> 2,277
<DISCONTINUED> 0
<EXTRAORDINARY> (1,499)
<CHANGES> 0
<NET-INCOME> 778
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
