<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, 1997
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 OF (I.R.S. EMPLOYER
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 [x] No [ ]
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 46 and 47
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SHOP VAC CORPORATION
FORM 10-K
YEAR ENDED DECEMBER 31, 1996
INDEX
PART I
ITEM
NUMBER
- -------
PAGE
----
1. Business 1
2. Properties 9
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
7A. Quantitative and Qualitative Disclosures About Market Risk 15
8. Financial Statements and Supplementary Data 16
9. Changes in and Disagreements with Accountants on Accounting
And Financial Disclosure 42
PART III
10. Directors and Executive Officers of the Registrant 42
11. Executive Compensation 42
12. Security Ownership of Certain Beneficial Owners and Management 44
13. Certain Relationships and Related Transactions 45
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 46
<PAGE> 3
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. 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 6.0 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, 1997 employed approximately 1,750 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 1997 the Company's aggregate net sales to its ten largest customers
were 55% of its total net sales. Sales to the Company's single largest customer
represented approximately 16% of the Company's net sales in 1997.
For financial information about foreign and domestic operations and export
sales, see Note 11 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. 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 supplied wet/dry vacuums to its top ten customers in the United
States and Canada for an average of over 18 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. 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 1997 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.
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. The Company is continually
examining and modifying its manufacturing and business processes to reduce
expenses and increase cash flow. In recent years, these improvements have
included consolidation of certain manufacturing operations, administrative
personnel reductions, improved inventory control and implementation of
manufacturing innovations and automation. For example, in 1996, the Company
consolidated its plastic molding facility formerly in Norwich, New York into its
Canton, Pennsylvania operation and consolidated a manufacturing facility in
France into its European manufacturing operations in Ireland. In 1997, the
Company re-engineered its vacuum assembly operation to reduce material handling
costs and increased automation in its plastic molding activity. 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
25.8% to 27.7% for the years ended December 31, 1996 and 1997, 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) brand name 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.
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) was the first "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. In the third quarter of 1997 the Company introduced the QPV(R) (Quiet
Pump Vac), the only wet/dry vacuum with a pumping mechanism that will pump
liquid out of the vacuum tank, eliminating the inconvenience of having to carry
and empty a heavy liquid-filled tank. In the third quarter of 1997 the Company
also introduced the All-Around(R), an upscale version of the Shop Vac 1x1(R),
designed for use inside the home and the QSP Pro Series(R), a line of fuller
featured wet/dry vacuums designed for hardware and home center retailers. In
late 1997 a fully featured canister vacuum, the Aztec(R), was introduced in
Europe.
Sale of Europe. Although the Company's European operations have
historically been profitable, operating results have been poor in comparison to
the North American segment. The Company is involved in discussions with
interested parties with respect to the possible sale of its European operations.
The sale of the European operations would provide cash available for the
reduction of debt.
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.
3
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North America
In North America, the consumer wet/dry vacuum is positioned as a utility
vacuum and 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 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 and Wal-Mart; home centers,
such as Hechinger Stores Company and Home Depot; warehouse clubs such as Price
Costco and Sam's Club; hardware stores, such as Ace Hardware, Hardware
Wholesalers, Inc., and Tru Serv. Over the last decade, the expansion of mass
merchandisers and home centers has contributed to the consolidation of the
retail industry.
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 53 consumer models and
approximately 47 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
1.25-6.0 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>
4
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Consumer Line. The Company's consumer line of wet/dry products accounts for
the majority of its sales, totalling approximately 77% of 1997 net sales in the
United States (including wet/dry accessories). The consumer line consists of 53
models, differing primarily in size, motor power and included accessories, which
are marketed at suggested manufacturer's retail prices of between $24.96 and
$139.00. The capacity of the Company's consumer vacuums ranges from one gallon
to 25 gallons, motor power varies from 1.0 to 6.0 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 47 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 accounted for approximately 11%
of the Company's net sales in the United States in 1997.
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 and hardware chains. The contractor line accounted for
approximately 1% of the Company's net sales in the United States in 1997.
Components for Other Manufacturers. The Company has recently begun to
manufacture motors and plastic parts for other consumer product manufacturers.
This allows the Company to make profitable use of manufacturing capacity which
is not required for its primary business. This business accounted for
approximately 1% of the Company's net sales in 1997.
Private Label. The Company produces wet/dry products for other
manufacturers under such entities' 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.
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 through order forms included with the vacuum when sold or
through the Company's internet site (http://www.shop-vac.com). Accessory sales
represented approximately 9% of the Company's net sales in the United States in
1997.
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 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 Aztec(R) 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 Aqua-Vac(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
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cleaners: a "3-in-1" integrated cleaner with pure dry and wet/dry capacity as
well as an 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 three days 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, and
cartridge filters. The Company manufactures additional plastic components,
wheels and ball floats at its facility in Canton, Pennsylvania. The Company
manufactures all 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. 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, in early 1997 the Company
transferred the production of its steam cleaners from its plant in 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 Emerson Electric Co. and Genie. 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 Germany and Austria.
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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 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 1,750 persons world-wide as of December
31, 1997. Approximately 1,400 persons are employed in the United States and
approximately 350 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.
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ITEM 2. PROPERTIES
The Company owns or leases the following manufacturing, warehouse,
distribution and assembly facilities around the world:
<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.............................. 60,000 Warehouse 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:
Auckland, New Zealand................................... 3,200 Distribution Lease
* Bochum, Germany......................................... 22,935 Distribution Lease
Burlington, Ontario..................................... 79,000 Distribution Own
Evry, France............................................ 18,623 Distribution Lease
Graz, Austria........................................... 1,000 Office Lease
Hertogenbosch, Netherlands.............................. 1,400 Office Lease
Melbourne, Australia.................................... 17,500 Distribution Lease
Normanton, United Kingdom............................... 60,000 Offices/Distribution Lease
Tralee, County Kerry, Ireland........................... 85,000 Manufacturing Own
* Vienna, Austria......................................... 6,700 Distribution Lease
</TABLE>
- ------------------
* Closed facility remaining subject to a lease agreement.
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 1997.
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, 1997 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, 1996 and 1997.
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 1997 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. 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 of 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,
----------------------------------------
1993 1994 1995
--------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED OPERATING DATA:
Net Sales ...................................................................... $ 224,726 $ 250,843 $ 231,323
Cost of sales................................................................... 162,710 182,694 179,416
--------- --------- ---------
Gross Profit ............................................................... 62,016 68,149 51,907
Selling, general and administrative expense .................................... 38,421 41,867 35,637
Restructuring charges .......................................................... -- -- --
--------- --------- ---------
Income from operations ..................................................... 23,595 26,282 16,270
Interest expense ............................................................... 7,210 8,826 11,629
Non-operating expense (income), net ............................................ (870) 9 459
--------- --------- ---------
Income from continuing operations before income taxes, extraordinary item
and cumulative effect of changes in accounting principles ............... 17,255 17,447 4,182
Income taxes ................................................................... 5,130 4,964 1,425
--------- --------- ---------
Income from continuing operations before extraordinary item
and cumulative effect of changes in accounting principles ................ 12,125 12,483 2,757
--------- --------- ---------
Discontinued operations:
Loss from operations of discontinued business, net ......................... (4,148) (4,525) (10,639)
Loss on disposal of discontinued business, net ............................. -- -- (120,296)
--------- --------- ---------
Loss on discontinued operations ................................................ (4,148) (4,525) (130,935)
--------- --------- ---------
Income (loss) before extraordinary item and cumulative effect of
changes in accounting principles ........................................... 7,977 7,958 (128,178)
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) .............................................................. $ 6,928 $ 7,958 $(128,178)
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED OPERATING DATA:
Net Sales ...................................................................... $ 214,039 $ 216,796
Cost of sales .................................................................. 158,787 156,817
--------- ---------
Gross Profit ............................................................... 55,252 59,979
Selling, general and administrative expense .................................... 35,513 36,890
Restructuring charges .......................................................... 4,714 --
--------- ---------
Income from operations ..................................................... 15,025 23,089
Interest expense ............................................................... 10,104 11,339
Non-operating expense (income), net ............................................ 889 1
--------- ---------
Income from continuing operations before income taxes, extraordinary item
and cumulative effect of changes in accounting principles ............... 4,032 11,749
Income taxes ................................................................... 1,755 (18,588)
--------- ---------
Income from continuing operations before extraordinary item
and cumulative effect of changes in accounting principles ................ 2,277 30,337
--------- ---------
Discontinued operations:
Loss from operations of discontinued business, net ......................... -- --
Loss on disposal of discontinued business, net ............................. -- --
--------- ---------
Loss on discontinued operations ................................................ -- --
--------- ---------
Income (loss) before extraordinary item and cumulative effect of
changes in accounting principles ........................................... 2,277 30,337
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) .............................................................. $ 778 $ 30,337
========= =========
</TABLE>
10
<PAGE> 13
<TABLE>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges .................... 3.3x 2.9x 1.4x 1.4x 2.0x
Depreciation and amortization ......................... $ 4,278 $ 5,054 $ 6,132 $ 7,783 $ 6,245
Capital expenditures, net ............................. 7,656 7,838 8,042 582 4,413
CONSOLIDATED BALANCE SHEET DATA:
Total assets (1) ...................................... $ 207,678 $ 252,582 $ 135,480 $ 131,636 $ 145,398
Total debt ............................................ 78,669 94,304 95,650 110,397 105,667
Stockholders' equity (deficit) ........................ 72,539 82,906 (41,601) (38,997) (11,072)
</TABLE>
(1) Includes $53.1 million, $67.1 million, $19.0 million, $5.6 million and $0
of net current assets associated with discontinued operations as of
December 31, 1993, 1994, 1995, 1996 and 1997, respectively, and $47.6
million, and $54.4 million of net non-current assets associated with
discontinued operations as of December 31, 1993 and 1994, respectively. Net
non-current assets associated with discontinued operations as of December
31, 1995, 1996, and 1997 were nil.
(2) 1996 amount includes approximately $1.0 million of restructuring charges.
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, Emerson Electric Co. and
Genie were the Company's only significant competitors. Since 1993, Hoover,
Eureka and Royal have introduced limited lines of consumer wet/dry vacuum
products.
1997 AS COMPARED TO 1996
Net sales in the year ended December 31, 1997 totaled $216.8 million or
1.3%, compared to net sales of $214.0 million in the year ended December 31,
1996. This increase is the net of (i) a $9.9 million increase in sales by the
North American Group, attributable to the introduction of new products (QPV(R),
All-Around(R) and Pro Series(R)) and new business, including manufacturing of
motors and plastic parts for other consumer product manufacturers and (ii) a
$7.1 million decrease in sales by the European Group, resulting from changes in
currency exchange rates and lower sales primarily in the UK and Ireland's export
business.
Gross profit in the year ended December 31, 1997 totaled $60.0 million, an
increase of approximately $4.7 million or 8.6% when compared to gross profit of
$55.3 million in the year ended December 31, 1996. Gross profit as a percentage
of net sales increased from 25.8% in the year ended December 31, 1996 to 27.7%
in the year ended December 31, 1997. This increase in gross profit as a
percentage of net sales resulted from (i) manufacturing cost reductions
including the consolidation of plastic molding facilities during 1996 and the
re-engineering of the Company's vacuum assembly operation to reduce material
handling costs and increased automation of the Company's plastic molding
activity in 1997 and (ii) increased sales in North America along with higher
gross margins and reduced sales in Europe where gross margins are lower.
SG&A expense decreased to $36.9 million in the year ended December 31, 1997
from $35.5 million in the year ended December 31, 1996, an increase of
approximately $1.4 million. SG&A expense as a percentage of net sales increased
from 16.6% in the year ended December 31, 1996 to 17.0% in the year ended
December 31, 1997. Increases in SG&A expense primarily consisted of an increase
in expenses related to the Company's upgrade of its business systems, executive
compensation expenses, and increased advertising and sales promotional expense.
11
<PAGE> 14
Operating income, excluding the 1996 restructuring charge described below,
increased to $23.1 million in the year ended December 31, 1997 from $19.7
million in the year ended December 31, 1996, an increase of approximately $3.4
million or 17.0%. Operating income as a percentage of net sales increased to
10.7% in the year ended December 31, 1997 from 9.2% (before restructuring) in
the year ended December 31, 1996. An operating charge for restructuring European
operations was incurred in the third quarter of 1996 for $4.7 million.
Interest expense was $11.3 million in the year ended December 31, 1997, an
increase of $1.2 million or approximately 12.2%, compared to $10.1 million in
the year ended December 31, 1996. Interest expense as a percentage of net sales
increased from 4.7% in the year ended December 31, 1996 to 5.2% in the year
ended December 31, 1997. This increase was due to an increase in average
borrowings and rates in 1997 as a result of the issuance of the Senior Secured
Notes in the fourth quarter of 1996.
The Company recognized an income tax benefit in the third quarter of 1997
resulting from the reduction of a previously recorded valuation allowance which
had reduced the value of the Company's net deferred tax assets to zero. Due to
the operating results experienced since the disposition of the Company's
discontinued operations as well as other factors, management believes that the
Company will, more likely than not, realize the benefit of these assets in the
future. Also in the third quarter of 1997 a deferred tax liability was
recognized with respect to the undistributed earnings of the Company's European
subsidiaries. The net deferred tax assets arising from these adjustments
resulted in a recorded tax benefit of $23.9 million. Without these deferred tax
adjustments the Company's effective tax rate in 1997 was approximately 45%.
1996 AS COMPARED TO 1995
Net sales in the year ended December 31, 1996 totalled $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 was 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(R) sales in 1996 compared to
1995 due to the introduction of the QSP(R) which resulted in increased 1995
sales to fill base inventory requirements, (ii) reduced 1x1(R) 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 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.
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.
12
<PAGE> 15
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 were consolidated with the floor care manufacturing facilities in
Tralee, Ireland in 1997 and helped the Company improve efficiencies. Further, a
$3.2 million charge was recognized for severance, lease payments, and related
restructuring 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of cash are cash flow from operations and
borrowings under its foreign overdraft facilities. The Company's principal uses
of cash are to provide working capital, finance capital expenditures and meet
debt service requirements.
Net cash provided by operating activities was $4.0 million and $20.4
million in 1996 and 1997, respectively, which includes net cash provided (used)
in connection with discontinued operations of ($13.4) million and $700,000 in
1996 and 1997, respectively.
The Company's capital expenditures in 1996 and 1997 were $600,000 and $4.4
million, respectively. The Company's capital expenditures incurred in 1997 were
primarily for manufacture of new products and equipment required to implement
manufacturing cost reductions.
Anticipated cash costs of approximately $7.0 million remain to be paid
relating to the Company's indemnification obligations to the purchaser of the
Company's discontinued operations and lease terminations, among other items.
Approximately $1.5 million is expected to be paid in 1998. Through December 31,
1997 approximately $8.6 million of cash had been paid with respect to those
items.
In 1996 the Company terminated 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 this consolidation, the Company incurred a charge in 1996 of approximately
$1.5 million to cover severance, lease payments, shut-down and related expenses.
The Company also restructured its distribution operations in Austria, Germany,
Hungary, the Netherlands and Spain. In connection with this restructuring, the
Company incurred a charge in 1996 of approximately $3.2 million to cover
severance, lease payments, shut-down and related expenses. Through December 31,
1997, approximately $2.7 million of cash had been paid with respect to these
European restructuring charges. At December 31, 1997 approximately $500,000
remains in accrued expenses and other liabilities related to these restructuring
charges. The Company expects to pay approximately $200,000 in cash during 1998
with respect to these charges.
13
<PAGE> 16
The Company has a revolving credit facility which permits borrowings of up
to $25 million. During 1997, 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, 1997 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 foreign overdraft and
receivable discounting facilities.
RELIANCE ON CERTAIN CUSTOMERS
During 1997 the Company's aggregate net sales to its ten largest customers
were 55% of its total net sales. Sales to the Company's single largest customer
represented approximately 16% of the Company's net sales in 1997.
YEAR 2000 ISSUES
For many years the Company utilized a computer system with programs
developed internally to address the Company's business system needs. Like most
businesses, these systems generally used two digits to identify a year in date
fields. With the approach of the year 2000 these two digit date fields were
likely to cause erroneous recording of business transactions, difficulties in
transacting business with many customers and vendors and difficulties in the
Company's business planning processes.
The Company recently began replacing its business information systems with
updated systems. As part of this process the Company is installing software
packages which address year 2000 issues.
The Company anticipates future cash expenditures of $800,000 specifically
related to year 2000 compliance. It is expected that the installation of year
2000 compliant systems will be completed in the second quarter of 1999.
FOREIGN OPERATIONS
The Company has significant operations outside the United States, located
principally in Western Europe. During the year ended December 31, 1997, the
Company generated revenues from sales outside of the United States of $87.3
million, representing approximately 40% of the Company's total revenues during
the period. See Note 11 to the consolidated financial statements of the Company
and its subsidiaries included elsewhere herein.
Sales of Europe. Although the Company's European operations have
historically been profitable, operating results have been poor in comparison to
the North American segment. The Company is involved in discussions with
interested parties with respect to the possible sale of its European operations.
The sale of the European operations would provide cash available for the
reduction of debt.
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.
The Company primarily hedges the Irish punt against other European currencies
and the U.S. dollar against the Canadian dollar. At December 31, 1997, the
Company had approximately $24.7 million in foreign exchange forward contracts
outstanding. See Note 3 to the consolidated financial statements of the Company
and its subsidiaries included elsewhere herein.
14
<PAGE> 17
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.
To protect the Company from increases in the price of copper the Company
entered into a contract to hedge planned 1998 purchases of copper. At December
31, 1997, the Company had purchases of $1,475,000 under contract.
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 STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," and No. 131, "Disclosures about Segments of an Enterprise and Related
Information." In January 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits". These statements establish standards for reporting and
display of comprehensive income and its components and for reporting information
about business segments and products in financial statements and establish new
disclosure requirements relating to pension and other postretirement benefits.
These pronouncements are effective for years beginning after December 15, 1997.
Adoption of these statements is not expected to have a material affect on the
Company's financial statements.
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 significant 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. The Company's
ability to successfully address Year 2000 issues could also adversely impact
future profits. Overall anticipated performance of the Company could be affected
by any serious economic downturns in the United States or Europe.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
15
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
Independent Auditors' Report 18
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1997 19
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997 20
Consolidated Statements of Stockholders' Equity (Deficit) for
the years ended December 31, 1995, 1996 and 1997 21
Consolidated Statements of Cash flows for the years
ended December 31, 1995, 1996 and 1997 22
Notes to Consolidated Financial Statements 23
Financial Statement Schedule -
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1995, 1996 and 1997 42
All other schedules are omitted as they are not applicable.
16
<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 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, 1996 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 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
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG Peat Marwick LLP
Harrisburg, Pennsylvania
March 6, 1998
17
<PAGE> 20
SHOP-VAC CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
===========================================================================================================
December 31,
-----------------------
Assets 1996 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................... $ 21,141 34,450
Accounts and notes receivable, less allowance for doubtful
Receivables of $1,853 in 1996 and $1,946 in 1997 ................. 29,154 25,265
Inventories ......................................................... 25,314 22,508
Prepaid expenses and other current assets ........................... 3,222 2,636
Deferred income taxes................................................ -- 3,502
Net current assets of discontinued operations ....................... 5,556 --
- -----------------------------------------------------------------------------------------------------------
Total current assets ...................................................... 84,387 88,361
Property, plant, and equipment, net ....................................... 30,922 29,428
Property, plant, and equipment under capital leases, net .................. 9,875 6,175
Deferred income taxes...................................................... -- 15,846
Other assets .............................................................. 6,452 5,588
- -----------------------------------------------------------------------------------------------------------
$131,636 145,398
===========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- -----------------------------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt ................................... $ 4,297 3,175
Accounts payable .................................................... 20,688 19,450
Accrued expenses .................................................... 26,278 17,701
- -----------------------------------------------------------------------------------------------------------
Total current liabilities ................................................. 51,263 40,326
Long-term debt ............................................................ 106,100 102,492
Other liabilities ......................................................... 13,270 13,652
- -----------------------------------------------------------------------------------------------------------
Total liabilities ......................................................... 170,633 156,470
- -----------------------------------------------------------------------------------------------------------
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 ................................................. (43,986) (13,649)
Equity adjustment from foreign currency translation ................. 4,794 2,382
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) ...................................... (38,997) (11,072)
- -----------------------------------------------------------------------------------------------------------
$131,636 145,398
===========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 21
SHOP-VAC CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(dollars in thousands)
<TABLE>
<CAPTION>
==============================================================================================================================
Years ended December 31,
---------------------------------------
1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales..................................................................... $ 231,323 214,039 216,796
Cost of sales................................................................. 179,416 158,787 156,817
- ------------------------------------------------------------------------------------------------------------------------------
Gross profit.................................................................. 51,907 55,252 59,979
Selling, general, and administrative expense.................................. 35,637 35,513 36,890
Restructuring charges......................................................... -- 4,714 --
- ------------------------------------------------------------------------------------------------------------------------------
Income from operations........................................................ 16,270 15,025 23,089
Interest expense.............................................................. 11,629 10,104 11,339
Non-operating expense, net.................................................... 459 889 1
- ------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes and extraordinary item................................ 4,182 4,032 11,749
Income taxes (benefit)........................................................ 1,425 1,755 (18,588)
- ------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before extraordinary item................................................. 2,757 2,277 30,337
- ------------------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Loss from operation of discontinued
business, net of income tax benefit..................................... (10,639) -- --
Loss on disposal of discontinued business,
net of income tax benefit............................................... (120,296) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Loss on discontinued operations............................................... (130,935) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item....................................... (128,178) 2,277 30,337
Extraordinary item - loss on early extinguishment of debt,
net of income tax benefit................................................. -- (1,499) --
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss)............................................................. $(128,178) 788 30,337
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 22
SHOP-VAC CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholder's 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, 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
Net income ..................................................... -- -- -- --
Equity adjustment from foreign currency translation ............ -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 ..................................... 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, 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)
Net income ................................................. 30,337 -- 30,337
Equity adjustment from foreign currency translation ........ -- (2,412) (2,412)
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 ................................. (13,649) 2,382 (11,072)
=========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 23
SHOP-VAC CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(dollars in thousands)
<TABLE>
<CAPTION>
=====================================================================================================================
Years ended December 31,
------------------------------------
1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)................................................ $(128,178) 778 30,337
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization............................. 6,132 6,736 5,662
Amortization included in interest expense................. -- -- 583
Retirement of fixed assets................................ -- -- 588
Loss on disposal of discontinued operations............... 120,296 -- --
Restructuring charges..................................... -- 3,035 (954)
Changes in assets and liabilities:
Accounts and notes receivable.......................... 609 3,411 2,504
Inventories............................................ 11,086 3,630 913
Prepaid expenses and other current assets.............. 3,015 625 (196)
Other assets........................................... 1,763 (4,804) (83)
Accounts payable and accrued expenses.................. (27,994) 2,379 (1,725)
Deferred income taxes.................................. (412) -- (19,670)
Other liabilities...................................... 4,070 1,584 1,785
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by continuing operations.................... (9,613) 17,374 19,744
Net cash provided (used) by discontinued operations.................. (9,317) (13,413) 699
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities..................... (18,930) 3,961 20,443
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures............................................. (8,042) (582) (4,413)
Proceeds from sale of property and equipment..................... 222 -- --
Proceeds from sale of discontinued operations.................... 30,000 -- --
Investing activities of discontinued operations.................. (2,887) -- --
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities..................... 19,293 (582) (4,413)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from (payment of) revolving line-of-credit, net......... 18,063 48,681 --
Payment of term loan............................................. (8,000) -- --
Payment of private placement notes............................... (9,238) (30,762) --
Payment of industrial development revenue bonds.................. (500) (2,300) --
Proceeds from issuance of other long-term debt................... 3,139 100,000 --
Other long-term debt and capital lease payments.................. (3,234) (3,510) (2,268)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities..................... 230 14,747 (2,268)
- ---------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash.............................. (78) 333 (453)
- ---------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents............................ 515 18,459 13,309
Cash and cash equivalents, beginning of year......................... 2,167 2,682 21,141
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year............................... $ 2,682 21,141 34,450
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 24
SHOP-VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1996, and 1997
================================================================================
(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 to six months. For purposes
of the statements of cash flows, the Company considers all highly liquid
debt instruments with original maturities of six months or less to be cash
equivalents. Included in cash equivalents are corporate commercial paper
and repurchase agreements of $26,026,000 and $2,045,000, respectively, at
December 31, 1997. At December 31, 1996, commercial paper and repurchase
agreements were $14,493,000 and $1,235,000, respectively.
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)
22
<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
undiscounted 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 $344,000, $253,000 and $190,000 in 1995, 1996, and
1997, 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.
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 8 to the consolidated financial
statements.
(Continued)
23
<PAGE> 26
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(1) CONTINUED
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 13). The Company did not receive government grants in 1995, 1996, or
1997.
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,
----------------------
1996 1997
- --------------------------------------------------------
<S> <C> <C>
Raw materials ................ $11,778 8,518
Work-in-process .............. 5,620 4,821
Finished goods ............... 7,916 9,169
- --------------------------------------------------------
$25,314 22,508
========================================================
</TABLE>
At both December 31, 1996 and 1997, approximately 52% 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 $502,000 and $1,240,000 higher at December 31, 1996 and
1997, respectively.
(Continued)
24
<PAGE> 27
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(3) FINANCIAL 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 collection of
intercompany amounts due to 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, 1996 and 1997, the Company had foreign exchange forward contracts
outstanding as follows (amount in thousands):
<TABLE>
<CAPTION>
1996 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Irish punt against Italian lira (7,200,000 ITL)........ $ 3,751 4,041
Irish punt against British pound (2,970 GBP)........... 4,168 4,497
Irish punt against French franc (7,150 FF)............. -- 1,202
Irish punt against Dutch guilder (940 DGL)............. -- 1,794
Canadian dollar against U.S. dollar 17,500 CD)......... 5,610 12,872
British pound against Italian lira (450,000 ITL)....... -- 270
- ---------------------------------------------------------------------------------
$13,529 24,676
=================================================================================
</TABLE>
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 asset of $147,000 and an asset of $311,000 at December 31, 1996 and
1997, respectively. The financial statements include no carrying amounts
with respect to these contracts.
The company also entered into a contract to hedge planned purchases of
copper. At December 31, 1997, the amount outstanding under contract was
$1,475,000. Based upon the spot rate at December 31, 1997, the fair market
value of the contract was a liability of $332,000.
(Continued)
25
<PAGE> 28
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(3) CONTINUED
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.
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment consisted of the following (dollars in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Land .................................................. $ 1,687 1,585
Buildings and improvements ............................ 18,085 17,003
Machinery and equipment ............................... 69,423 67,201
Construction in progress .............................. 581 2,166
- ---------------------------------------------------------------------------------
89,776 87,955
Less accumulated depreciation ......................... 58,854 58,527
- ---------------------------------------------------------------------------------
Net property, plant, and equipment .................... $30,922 $29,428
=================================================================================
</TABLE>
Property, plant, and equipment under capital leases consisted of the
following (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Buildings ........................................ $ 3,966 1,237
Machinery and equipment .......................... 9,734 8,510
- ----------------------------------------------------------------------------
13,700 9,747
Less accumulated amortization .................... 3,825 3,572
- ----------------------------------------------------------------------------
Net property, plant, and equipment
under capital leases ......................... $ 9,875 6,175
============================================================================
</TABLE>
26
<PAGE> 29
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(5) OPERATING LEASES
The Company rents certain real property and machinery and equipment under
operating leases expiring at various dates through 2001. Rental expense
under operating leases, including short-term machinery and equipment
rental, aggregated approximately $873,000 in 1995, $790,000 in 1996, and
$1,573,000 in 1997.
Future minimum lease payments required under all noncancellable operating
leases of continuing operations at December 31, 1997 are approximately as
follows (dollars in thousands):
<TABLE>
<S> <C>
1998 ....................... $1,420
1999 ....................... 1,034
2000 ....................... 483
2001 ....................... 412
-------------------------------------
Total minimum lease payments $3,349
=====================================
</TABLE>
The Company currently leases a sales/administration/distribution facility
in England from an entity controlled by the stockholders of the Company.
The Company also guaranteed up to UK(pound) 500,000 (approximately
$825,000) of indebtedness incurred by the entity in connection with the
entity's acquisition of the facility.
27
<PAGE> 30
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(6) LONG-TERM DEBT
Details of the Company's long-term debt are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
10-5/8% senior secured notes due 2003 ............ $100,000 100,000
Revolving line of credit ......................... -- --
Capital lease agreements, interest at rates
ranging from 9% to 10.9% ..................... 7,802 4,108
Other, substantially foreign, interest generally
at average rate of 6.25% to 9.25% ............ 2,595 1,559
- ----------------------------------------------------------------------------
110,397 105,667
Less current installments ........................ 4,297 3,175
- ----------------------------------------------------------------------------
$106,100 102,492
============================================================================
</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 base 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 (9.25% at
December 31, 1997); or LIBOR plus 2% (7.72% at December 31, 1997). 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, 1997 the Company is in compliance with the
agreements with the lenders of the senior secured notes and the new
revolving credit facility.
(Continued)
28
<PAGE> 31
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(6) CONTINUED
The Company's future principal payments on long-term debt are
approximately as follows (in thousands):
<TABLE>
<S> <C>
1998 ..................... $ 3,175
1999 ..................... 1,609
2000 ..................... 228
2001 ..................... 105
2002 ..................... 117
Thereafter ............... 100,433
-------------------------------------
Total .................... $105,667
=====================================
</TABLE>
(7) INCOME TAXES
Total income tax expense (benefit) is allocated as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1995 1996 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from operations ................................... $ 1,425 1,755 (18,588)
Extraordinary item - loss on early extinguishment of debt ....... -- (998) --
Results of discontinued operations .............................. (76) -- --
Loss on disposal of discontinued business ....................... (454) -- --
- ----------------------------------------------------------------------------------------------------------
$ 895 757 (18,588)
==========================================================================================================
</TABLE>
(Continued)
29
<PAGE> 32
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(7) CONTINUED
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,
------------------------------------
1995 1996 1997
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic .......................... $ 3,150 7,647 10,772
Foreign ........................... 1,032 (3,615) 977
- ---------------------------------------------------------------------------
$ 4,182 4,032 11,749
===========================================================================
</TABLE>
Components of income tax expense (benefit) from continuing operations are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 Current Deferred Total
- ----------------------------------------------------------------
<S> <C> <C> <C>
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
================================================================
1997
- ----------------------------------------------------------------
Federal ................. $ 176 (17,312) (17,136)
Foreign ................. 740 40 780
State ................... 241 (2,473) (2,232)
- ----------------------------------------------------------------
$ 1,157 (19,745) (18,588)
================================================================
</TABLE>
(Continued)
30
<PAGE> 33
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
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,
---------------------------
1995 1996 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expense at statutory rate ............................................ $ 1,464 1,411 4,112
State income tax, net ................................................ 64 73 527
Foreign taxes ........................................................ 70 1,834 435
Change in beginning of year valuation allowance for deferred
tax assets allocated to income tax expense ....................... -- (1,667) (25,589)
Adjustment of deferred tax-undistributed earnings of
foreign subsidiaries not previously recognized ................... -- -- 1,670
Other ................................................................ (173) 104 257
- -----------------------------------------------------------------------------------------------------
Total provision for income taxes
from continuing operations ....................................... $ 1,425 1,755 (18,588)
=====================================================================================================
</TABLE>
(Continued)
31
<PAGE> 34
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(7) 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,
------------------------
1996 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts ..................................... $ 538 544
Inventories, including uniform capitalization ............... 568 453
Compensated absences and postretirement
benefits principally due to accrual for
financial reporting purposes ......................... 1,851 1,705
Liabilities due to accrual for financial
reporting purposes ................................... 7,330 4,139
Credit carryovers ........................................... 4,088 3,999
Net operating loss carryforwards ............................ 21,289 19,668
Other ....................................................... 96 628
- --------------------------------------------------------------------------------------------
Total gross deferred tax assets ................................. 35,760 31,136
Less valuation allowance ........................................ 32,037 6,448
- --------------------------------------------------------------------------------------------
3,723 24,688
- --------------------------------------------------------------------------------------------
Deferred tax liabilities:
Plant and equipment, due to differences in
depreciation and capitalized interest ..................... 3,607 3,534
Undistributed earnings of foreign subsidiaries .............. -- 1,670
Costs deferred for financial reporting currently
deductible for tax ........................................ 116 136
- --------------------------------------------------------------------------------------------
Total gross deferred tax liabilities ............................ 3,723 5,340
- --------------------------------------------------------------------------------------------
Net deferred tax assets ......................................... $ -- 19,348
============================================================================================
</TABLE>
The valuation allowance for deferred tax assets at January 1, 1996 was
$33,704,000. The net change in the valuation allowance for the years ended
December 31, 1996 and 1997 was a decrease of $1,667,000 and $25,589,000,
respectively.
(Continued)
32
<PAGE> 35
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(7) CONTINUED
Prior to 1997, the Company had not recognized a deferred tax liability for
the basis differences related to the stock in 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. However, during 1997 the Company decided to
consider alternatives to continued investment in the European entities,
including sale of these operations. Accordingly, a deferred tax liability
of $1,670,000 has been recognized. The accumulated amount of such
undistributed earnings related to other foreign subsidiaries in which the
investment is expected to be essentially permanent in duration and for
which a deferred tax liability has not been recognized was approximately
$2,356,000 at December 31, 1997.
At December 31, 1997, the Company has federal alternative minimum tax
credit carryovers of approximately $1,528,000 which are available to
reduce future regular income taxes, if any, over an indefinite period.
At December 31, 1997, the Company also has general business credit
carryforwards of approximately $456,000 and foreign tax credit
carryforwards of approximately $2,015,000 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, 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 $48.4 million at December 31, 1997 which is
available to reduce federal income taxes, if any, through 2011
(substantially all expires in 2010) and state income taxes over various
carryforward periods. The Company also has tax loss carryforwards in
certain foreign jurisdictions which are available to reduce future income
taxes 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.
The Company recognized an income tax benefit in 1997 resulting from a
reduction of a previously recorded valuation allowance which had reduced
the value of the Company's net deferred tax assets to zero. Due to
operating results experienced since the disposition of the Company's
discontinued operations, as well as other factors, management believes
that the Company will, more likely than not, realize the benefit of these
assets in the future.
33
<PAGE> 36
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(8) 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.
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,
------------------------
1996 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Accumulated benefit obligation, including vested
benefits of $7,644 in 1996 and $8,920 in 1997 ....................... $ (8,393) (9,579)
=======================================================================================================
Projected benefit obligation for service rendered to date ................. $(10,371) (11,973)
Plan assets at fair value, primarily marketable securities
and mutual funds ...................................................... 10,135 12,073
- -------------------------------------------------------------------------------------------------------
Excess (deficiency) of plan assets over projected benefit obligation ...... (236) 100
Unrecognized prior service cost ........................................... 45 33
Unrecognized net loss ..................................................... 1,451 1,224
Unrecognized net transition obligation .................................... (77) (66)
- ------------------------------------------------------------------------------------------------------
Prepaid pension costs ..................................................... $ 1,183 1,291
=======================================================================================================
</TABLE>
Net periodic pension cost includes the following components (dollars in
thousands):
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1995 1996 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period ...... $ 1,478 1,449 1,367
Interest cost on projected benefit obligations ........ 720 807 766
Return on plan assets ................................. (714) (813) (897)
Net amortization and deferral ......................... 222 68 36
- -------------------------------------------------------------------------------------------
Net period pension cost ............................... $ 1,706 1,511 1,272
===========================================================================================
</TABLE>
A weighted-average discount rate of 7.5% in 1996 and 7.25% in 1997 and a
rate of increase in future compensation levels of 4% in 1996 and 1997 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
1996 and 1997.
(Continued)
34
<PAGE> 37
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(8) 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 $173,000, $160,000, and $182,000 during the years ended
December 31, 1995, 1996, and 1997, respectively.
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, 1996 and 1997 was
$1,691,000 and $1,765,000, 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% and 7.25% at
December 31, 1996 and 1997, respectively, and a 5% annual rate of increase
in the cost of covered benefits. The effect of a one percentage point
increase in the annual rate would increase the accumulated benefit
obligation by approximately 16%.
(9) STATEMENT OF CASH FLOWS
Supplemental disclosure of cash flow information (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1996 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid for interest ........................... $11,879 7,852 12,626
Cash paid for income taxes ....................... 1,176 1,084 1,221
Capital lease obligations of new
property, plant, and equipment ............... 1,654 589 --
================================================================================
</TABLE>
35
<PAGE> 38
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(10) 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 $26,099,000 and
$10,263,000 were sold under these arrangements during the years ended
December 31, 1996 and 1997, respectively. As of December 31, 1996 and 1997
accounts receivable with outstanding balances of approximately $6,100,000
and $1,811,000, 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.
36
<PAGE> 39
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(11) 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, 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 ........ 17,144 (2,547) 428 -- 15,025
Identifiable assets,
December 31, 1996 ..... 81,555 36,579 7,946 -- 126,080
Year ended December 31, 1997:
Total sales ............. 143,252 66,654 20,650 (13,760) 216,796
Operating profit ........ 21,463 734 846 46 23,089
Identifiable assets,
December 31, 1997 ..... 111,398 27,518 6,482 -- 145,398
=======================================================================================================
</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.
37
<PAGE> 40
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(12) BUSINESS AND CREDIT CONCENTRATIONS
Most of the Company's customers are in the consumer products retail
industry. Approximately 14%, 13% and 16% of net sales for the years ended
December 31, 1995, 1996, and 1997, respectively, were with one customer.
The Company's ten largest customers accounted for approximately 49%, 56%
and 55% of the Company's net sales for 1995, 1996, and 1997, respectively,
and approximately 61% and 58% of the Company's accounts receivable
balances at December 31, 1996 and 1997, respectively.
(13) 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 $3.1 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 $2.9 million at
December 31, 1997. This contingent liability expires in varying amounts
(ranging from $139,000 to $740,000 annually) beginning in 1998 and ending
in 2004. A sale of the foreign subsidiary would not be expected to require
a repayment of the grant contingent liability.
38
<PAGE> 41
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(14) 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 this consolidation, the
Company incurred a pre-tax charge in 1996 of approximately $1.5 million to
cover severance, lease termination payments, shut- down, and related
expenses. The Company also restructured its distribution operations in
Austria, Germany, Hungary, the Netherlands, and Spain. In connection with
such restructuring, the Company incurred a pre-tax charge in 1996 of
approximately $3.2 million to cover severance, lease termination payments,
shut-down and related expenses. 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 were 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.
The restructuring charges also included charges of approximately $500,000
to recognize the reduction in value of leasehold improvements at leased
locations which were abandoned as a result of the restructuring of the
steam cleaner and distribution operations. Additionally, a loss of $1.0
million was included in the restructuring charges which recognized the
decline in value to zero of goodwill associated with the Company's
Netherlands distribution operation.
The remainder of the restructuring charges represents the cost of lease
terminations and other obligations. During 1996 and 1997 approximately
$1.7 million and $1 million, respectively, of cash expenditures were made
with respect to these restructuring charges. At December 31, 1997
approximately $500,000 remains in accrued expenses and other liabilities
related to these restructuring charges. The Company expects to pay
approximately $200,000 in cash during 1998 with respect to these charges.
(15) DISCONTINUED OPERATIONS
During 1995 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. 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> 42
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(15) 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. As of December 31, 1996 these net assets consist of net
working capital (primarily accounts receivable).
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.
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. The loss on disposal represents the net book value of the
operations which were disposed of less the proceeds received of $30
million. 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 McCulloch disposition, including, but not limited to,
indemnification of the purchaser of McCulloch with respect to certain
potential environmental, lease, product and workers' compensation
liabilities. During 1996 and 1997 approximately $5.6 million and $3.0
million of cash, respectively, was paid with respect to those items.
Anticipated cash costs of $7.0 million remains to be paid for these items.
Approximately $1.5 million is expected to be paid in 1998.
(16) SUBSEQUENT EVENTS
During March 1998 the Company has entered into negotiations with a third
party for the sale of the European Group.
================================================================================
40
<PAGE> 43
SCHEDULE II
SHOP VAC CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1995, 1996 and 1997
<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>
1995
ALLOWANCE FOR DOUBTFUL ACCOUNTS ........ $ 1,833 129 237 1,725
1996
ALLOWANCE FOR DOUBTFUL ACCOUNTS ........ 1,725 742 614 1,853
1997
ALLOWANCE FOR DOUBTFUL ACCOUNTS ........ 1,853 251 158 1,946
</TABLE>
41
<PAGE> 44
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, 1997 and their respective current positions with the Company
are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jonathan Miller ............. 49 Chairman of the Board, Chief Executive Officer and
President, North American Group
Matthew Miller .............. 44 Vice Chairman of the Board and President, European
Group
Kenneth Benbassat ........... 50 Director
R. Stewart Gentsch .......... 61 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.
Kenneth Benbassat became a Director of the Company in 1997. Mr. Benbassat
is an attorney and a Partner with the firm Loeb & Loeb LLP in its Los Angeles
office.
R. Stewart Gentsch became a Director of the Company in 1997. Prior to his
retirement in 1995 Mr. Gentsch was President and General Manager of Stanley
Tools Worldwide.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid for the fiscal
years ended December 31, 1995, 1996, and 1997 to each of the persons who are the
most highly compensated executive officers of the Company.
42
<PAGE> 45
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)(2) COMPENSATION
- --------------------------- ---- -------- -------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Jonathan Miller ........................ 1997 $350,000 $400,000 $15,385 $2,992 (3)
Chairman of the Board, Chief 1996 164,717 -- 11,952 1,392
Executive Officer and President, 1995 343,627 -- 11,951 11,517
North American Group
Matthew Miller ......................... 1997 $350,000 $400,000 -- $3,392 (3)
Vice Chairman of the Board 1996 187,888 -- -- 1,392
and President, European Group 1995 355,911 -- -- 7,396
W. Earl Stogner ........................ 1997 $675,000 -- $10,545 $3,767 (3)
Executive Vice President 1996 675,000 -- 9,538 2,367
and Chief Financial Officer 1995 675,000 -- 9,313 8,986
</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 ................ 24,375 48,750 73,125 73,125 73,125 73,125 73,125
160,000 and above ...... 26,125 52,250 78,375 78,375 78,375 78,375 78,375
</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, 1997 for each of the officers
named in the Executive Compensation table above were as follows: Jonathan
Miller - $160,000, 27 years; Matthew Miller - $160,000, 22 years; W. Earl
Stogner - $160,000, 9 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) a $1,392 term life insurance premium and (ii)
contributions to the Shop Vac Employee Savings Plan.
Kenneth Benbassat and R. Stewart Gentsch constitute the Company's
compensation committee and participated in all deliberations of the
Company's board of directors during the year ended December 31, 1997
concerning executive officer compensation.
The outside directors of the Company (currently Mr. Benbassat and Mr.
Gentsch) are paid directors fees of $1,000 per month plus $1,000 for each
board meeting attended and $300 for each telephonic board meeting in which
they participate.
43
<PAGE> 46
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 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 agreed to pay to Mr. Stogner a base salary at the rate
of $675,000 per annum. 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. Mr. Stogner's employment ended
effective December 8, 1997. All amounts due to Mr. Stogner under the employment
agreement have been accrued in the accompanying financial statements.
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.
44
<PAGE> 47
<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>
(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 1997 was $375,000
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 $825,000 of indebtedness incurred by New Yorkshire Limited from
Midland Bank plc ("Midland") in connection with the acquisition of the Normanton
facility.
45
<PAGE> 48
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, 1996 and 1997
Consolidated Statements of Operations for the years ended December
31, 1995, 1996 and 1997
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the years ended December
31, 1995, 1996 and 1997
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, 1995,
1996 and 1997
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, 1997
(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).
46
<PAGE> 49
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* 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 49)
21.1* Subsidiaries of Shop Vac Corporation.
27.1 Financial Data Schedule (Page 50)
- ------------
* Previously filed with the Registrant's Form S-4 Registration Statement dated
January 28, 1997 and incorporated herein by reference.
47
<PAGE> 50
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 30, 1998
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 1998.
SIGNATURE TITLE
/s/ Jonathan Miller
- ------------------------- President and Chief Executive Officer and Director
JONATHAN MILLER (Principal Executive Officer)
/s/ Matthew Miller
- ------------------------- President of the European Group and Director
MATTHEW MILLER
/s/ David A. Grill
- ------------------------- Vice President and Chief Financial Officer
DAVID A. GRILL (Principal Financial Officer and Principal
Accounting Officer)
48
<PAGE> 51
EXHIBIT INDEX
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).
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.
<PAGE> 52
EXHIBIT INDEX (CONTINUED)
Exhibit No. Description
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* 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 50)
21.1* Subsidiaries of Shop Vac Corporation.
27.1 Financial Data Schedule (Page 51)
- ------------
* Previously filed with the Registrant's Form S-4 Registration Statement dated
January 28, 1997 and incorporated herein by reference.
<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>
1993 1994 1995 1996 1997
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income from continuing operations
before income taxes
and cumulative effect of
changes in accounting principles ... $17,255 $17,447 $ 4,182 $ 4,032 $11,749
Interest Expense ....................... 7,210 8,826 11,629 10,104 11,339
Interest Component of Rental Expense ... 133 154 218 198 394
------- ------- ------- ------- -------
$24,598 $26,427 $16,029 $14,334 $23,482
======= ======= ======= ======= =======
Interest Expense ....................... $ 7,210 $ 8,826 $11,629 $10,104 $11,339
Interest Component of Rental Expense ... 133 154 218 198 394
------- ------- ------- ------- -------
$ 7,343 $ 8,980 $11,847 $10,302 $11,733
======= ======= ======= ======= =======
Fixed Charge Coverage Ratio ............ 3.3 2.9 1.4 1.4 2.0
======= ======= ======= ======= =======
</TABLE>
49
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 34,450
<SECURITIES> 0
<RECEIVABLES> 27,211
<ALLOWANCES> 1,946
<INVENTORY> 22,508
<CURRENT-ASSETS> 88,361
<PP&E> 87,955
<DEPRECIATION> 58,527
<TOTAL-ASSETS> 145,398
<CURRENT-LIABILITIES> 40,326
<BONDS> 105,667
0
0
<COMMON> 85
<OTHER-SE> (11,157)
<TOTAL-LIABILITY-AND-EQUITY> 145,398
<SALES> 216,796
<TOTAL-REVENUES> 216,796
<CGS> 156,817
<TOTAL-COSTS> 156,817
<OTHER-EXPENSES> 36,890
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,339
<INCOME-PRETAX> 11,749
<INCOME-TAX> (18,588)
<INCOME-CONTINUING> 30,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,337
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
