<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________________ TO _____________________
COMMISSION FILE NUMBER 333-16453
SHOP VAC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 13-5609081
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2323 REACH ROAD, WILLIAMSPORT, PA 17701
(717) 326-0502
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [x] No [ ]
Common Shares, No Par Value, Outstanding at September 30, 1998 -- 6,500 Class A
voting and 650,000 Class B non-voting.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SHOP VAC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
========================================================================================================
Assets December 31, 1997 September 30, 1998
(Unaudited)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................... $ 34,450 $ 34,011
Receivables, less allowance for doubtful
accounts of $1,946 in 1997 and $1,335
in 1998 .............................................. 25,265 21,724
Inventories (note 2) ................................... 22,508 18,108
Prepaid expenses and other current assets .............. 2,636 1,096
Deferred income taxes .................................. 3,502 4,412
- --------------------------------------------------------------------------------------------------------
Total current assets ....................................... 88,361 79,351
Property, plant, and equipment, net .................... 35,603 28,462
Deferred income taxes .................................. 15,846 12,950
Other assets ........................................... 5,588 4,794
- --------------------------------------------------------------------------------------------------------
Total assets ............................................... $145,398 $125,557
- --------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
1
<PAGE> 3
SHOP VAC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
=======================================================================================================
Liabilities and Stockholders' Equity (Deficit) December 31, 1997 September 30, 1998
(Unaudited)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt ....................... $ 3,175 $ 31
Accounts payable ....................................... 19,450 13,067
Accrued expenses ....................................... 17,701 10,300
- -------------------------------------------------------------------------------------------------------
Total current liabilities .................................. 40,326 23,398
Long-term debt ............................................. 102,492 100,016
Other liabilities .......................................... 13,652 13,332
Stockholders' equity (deficit):
Common stock, Class A voting, no par,
20,000 shares authorized, 6,500 shares
issued. Class B non-voting, no par,
1,000,000 shares authorized, 650,000
shares issued ....................................... 85 85
Paid in capital ........................................ 110 110
Accumulated deficit .................................... (13,649) (10,586)
Other comprehensive income - foreign currency
translation adjustment .............................. 2,382 (798)
- -------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) ....................... $ (11,072) $ (11,189)
- -------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) ....... $ 145,398 $ 125,557
=======================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(Continued)
2
<PAGE> 4
SHOP VAC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
============================================================================================================================
Three months ended Nine months ended
September 30, September 30,
- ----------------------------------------------------------------------------------------------------------------------------
1997 1998 1997 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales......................................... $ 52,217 $ 40,916 $151,882 $137,477
Cost of sales..................................... 38,274 27,599 110,466 95,010
- ----------------------------------------------------------------------------------------------------------------------------
Gross profit...................................... 13,943 13,317 41,416 42,467
Selling, general and administrative expense....... 9,835 8,200 27,506 28,210
Loss on sale of European operations............... ----- ----- ----- 1,540
- ----------------------------------------------------------------------------------------------------------------------------
Income from operations............................ 4,108 5,117 13,910 12,717
Interest expense, net............................. 2,782 2,419 8,600 7,632
Other expense (income), net....................... 35 (122) (30) (99)
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes........................ 1,291 2,820 5,340 5,184
Income tax expense (benefit)...................... (22,120) 1,131 (21,968) 2,121
- ----------------------------------------------------------------------------------------------------------------------------
Net income ....................................... $ 23,411 $ 1,689 $ 27,308 $ 3,063
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(Continued)
3
<PAGE> 5
SHOP VAC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
===================================================================================================
Nine months ended
September 30,
- ---------------------------------------------------------------------------------------------------
1997 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................. $ 27,308 $ 3,063
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ........................... 4,230 3,914
Amortization included in interest expense ............... 437 437
Retirement of fixed assets .............................. -- 265
Loss on sale of assets .................................. -- 1,540
Changes in assets and liabilities:
Receivables .......................................... (986) (3,599)
Inventories .......................................... (5,733) (3,489)
Prepaid expenses and other current assets ............ (273) (165)
Other assets ......................................... (98) 53
Deferred income taxes ................................ (22,369) 1,257
Accounts payable and accrued expenses ................ 3,176 (3,144)
Accrued restructuring charges ........................ (1,021) (46)
Other liabilities .................................... 1,625 620
- ---------------------------------------------------------------------------------------------------
Net cash provided by continuing operations ...................... 6,296 706
Net cash provided (used) by discontinued operations ............. 1,310 (944)
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities ....................... 7,606 (238)
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Cash flows from investing activities:
Net proceeds from sale of assets ........................ -- 6,718
Capital expenditures .................................... (3,156) (3,120)
- ---------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities ................ (3,156) 3,598
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term debt and capital lease payments ................... (2,192) (3,805)
- ---------------------------------------------------------------------------------------------------
Net cash used by financing activities ........................... (2,192) (3,805)
- ---------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash ......................... (474) 6
- ---------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents ....................... 1,784 (439)
Cash and cash equivalents, beginning of year .................... 21,141 34,450
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of quarter ....................... 22,925 34,011
- ---------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Cash paid for interest ...................................... 10,106 10,220
Cash paid for income taxes .................................. 694 664
===================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 6
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollars in thousands)
(1) The accompanying interim unaudited condensed consolidated financial
statements include the accounts of Shop Vac Corporation and its wholly
owned subsidiaries (the "Company"). All intercompany accounts and
transactions are eliminated in consolidation.
These condensed financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, such
interim statements reflect all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position
and the results of operations and cash flows for the interim periods
presented. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year.
These financial statements should be read in conjunction with the
audited consolidated financial statements and footnotes included in the
Company's Annual Report on Form 10-K dated March 30, 1998 for the year
ended December 31, 1997.
(2) Inventories are classified as follows:
<TABLE>
<CAPTION>
=========================================================================================
December 31, 1997 September 30, 1998
(Unaudited)
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials ............................... $ 8,518 $ 7,267
Work-in-process ............................. 4,821 6,134
Finished goods .............................. 9,169 4,707
- ----------------------------------------------------------------------------------------
$22,508 $18,108
========================================================================================
</TABLE>
(3) The Company will be required to adopt Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" for its 1998 annual
financial statements. Comprehensive income for the periods ended September
30, 1997 and 1998 are presented below:
<TABLE>
<CAPTION>
=============================================================================================================
Three months ended Nine months ended
September 30, September 30,
- -------------------------------------------------------------------------------------------------------------
1997 1998 1997 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income ....................................... $ 23,411 $ 1,689 $ 27,308 $ 3,063
Other comprehensive income (loss):
Foreign currency translation adjustment ....... (588) (280) (1,907) (550)
Less: reclassification adjustment for gain
included in net income resulting from the
sale of the European operations ............... -- -- -- (2,630)
- -------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) ...................... $ 22,823 $ 1,409 $ 25,401 $ (117)
=============================================================================================================
</TABLE>
5
<PAGE> 7
SHOP VAC CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net sales in the third quarter were $40.9 million, a decrease of $11.3 million
or 21.6% compared to the third quarter of 1997. Net sales were down $14.0
million in the third quarter due to the disposition of the Company's European
operations in the second quarter of 1998. Net sales of the North American Group
were $2.7 million higher in the third quarter compared to 1997. New products
introduced in the fall of 1997, increased advertising, and generally favorable
business conditions all had a positive impact on North American revenues.
Net sales in the first nine months were $137.5 million, a decrease of $14.4
million or 9.5% compared to the first nine months of 1997. Net sales of the
European Group were $30.5 million lower in the first nine months primarily due
to the disposition of the Company's European operations in the second quarter of
1998 and a large promotional order in the first half of last year. Net sales of
the North American Group were $16.1 million higher in the first nine months of
1998 compared to 1997.
Gross profit in the quarter totaled $13.3 million, a decrease of $600,000 or
4.5% compared to the third quarter of 1997. Gross profit declined $2.6 million
due to the reduced European Group sales, partially offset by improved North
American gross profits of $2.0 million. Gross profit in the first nine months
totaled $42.5 million, an increase of $1.1 million or 2.5% over the first nine
months of 1997. The improvement in the first nine months was due to a more
favorable product mix, continued cost improvements and the sales volume
increases in the North American Group, partially offset by reduced gross profit
from the European Group of $6.5 million.
Selling, general and administrative ("SG&A") expense in the quarter totaled $8.2
million, a decrease of $1.6 million or 16.6% compared to the third quarter of
1997. SG&A expenses in the first nine months totaled $28.2 million, an increase
of $700,000 or 2.6% over the first nine months of 1997. Increases in SG&A
expenses in the quarter and the first nine months were primarily due to
increased advertising and sales promotional expenditures, partially offset by
reduced European operating expenses.
Income from operations in the quarter was $5.1 million, an increase of $1.0
million or 24.6% compared to the third quarter of 1997. This increase is
primarily attributable to the improvements in the North American operations.
The Company incurred a loss this year of $1,540,000 on the sale of its European
operations and other assets computed as follows:
<TABLE>
<CAPTION>
=============================================================================
(Amounts in thousands)
- -----------------------------------------------------------------------------
<S> <C>
Cash proceeds (net of expenses).............................. $ 7,575
Less net assets sold and fees incurred....................... 9,115
- -----------------------------------------------------------------------------
Loss on sale $ 1,540
=============================================================================
</TABLE>
Income from operations in the first nine months totaled $12.7 million, a
decrease of $1.2 million or 8.6% compared to the first nine months of 1997. This
decrease is primarily attributable to the European operations where operating
income was $3.0 million lower in the first nine months than the same period for
the prior year as well as the loss on sale of the European operations. This
decline in European operating income was due to the significant decline in sales
compared to the prior year. These decreases were partially offset by improved
North American operating income.
6
<PAGE> 8
Net interest expense was $2.4 million in the quarter, a decrease of $400,000 or
13.0% compared to the third quarter of 1997. Net interest expense in the first
nine months was $7.6 million, a decrease of $1.0 million or 11.3% compared to
the first nine months of 1997. The lower net interest expense was due to reduced
borrowings and increased interest income on higher cash investments.
Income tax expense for the quarter increased approximately $23.3 million
compared to the third quarter of 1997 and year to date income tax expense was
approximately $24.1 million higher than the comparable prior year period. In
1997 tax expense was significantly reduced because the Company recognized an
income tax benefit of $22.1 million 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. In 1998 tax expense has returned to a more normal
relationship to pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
The consolidated balance sheet as of September 1998 reflects the reductions in
assets and liabilities that were transferred with the European operations. The
accompanying condensed consolidated statement of cash flows excludes the changes
in assets and liabilities that were transferred. The following comments on
liquidity are based on operating performance and do not include changes in
balance sheet line items resulting from the sale of the European operations.
During the nine months ended September 30, 1998, cash equivalents declined from
$34.5 million to $34.0 million due to cash used for capital expenditures of $3.1
million, debt reduction of $3.8 million, European cash transferred to buyer as
part of the sale of $900,000 and cash used through operations of $200,000,
partially offset by cash received on the sale of the European operations and
other assets of $7.6 million. Debt reduction primarily resulted from the payment
of capital leases with cash received from the sale of the European operations.
At September 30, 1998 accounts receivable increased by $3.6 million over 1997
year end balances due to September sales which were substantially higher than
previous months, consistent with historical seasonal patterns of the North
American business. North American inventories at year end 1997 were unusually
low due to unexpectedly heavy demand in December. Inventories increased during
the first nine months of 1998, returning to more seasonal levels and consuming
cash of $3.5 million. Accounts payable and accrued expenses consumed $3.1
million during the first nine months of 1998 due to reductions in European
accounts payable prior to the sale and the payment of North American accrued
expenses. Other operating activities generated cash of $10.0 million.
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.
YEAR 2000 STATUS
The Company is in the process of changing computer hardware platforms and
application software for its business management systems. The new software has
been installed and tested to be century compliant. The conversion to the new
system is expected to be completed during the second quarter of 1999.
The Company is also in the process of reviewing its systems other than business
management systems to identify and assess operational issues that may result
from date sensitive equipment.
The Company is early in the process of contacting its significant suppliers and
larger customers to determine the extent to which the Company is vulnerable to
third party compliance with Year 2000 issues.
Through the third quarter of 1998 the Company has spent approximately $200,000
to address the Year 2000 issues. The Company believes that the total cost of its
Year 2000 identification, assessment, remediation and testing efforts will not
exceed $500,000 which will be funded from operating cash flows.
A contingency plan has not been developed for dealing with the most reasonably
likely worst case scenario.
7
<PAGE> 9
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.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This statement establishes accounting and reporting
standards for derivative instruments and hedging activities. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company is currently evaluating the impact of this statement.
8
<PAGE> 10
PART II - OTHER INFORMATION
Items 1 - 5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
27.1 Financial Data Schedule
B. Reports on Form 8-K
A report on Form 8-K was filed on October 7, 1998 reporting the sale by Matthew
Miller and his family of certain of the Registrant's common stock to Jonathan
Miller and his family.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHOP VAC CORPORATION
By /s/ David A. Grill
------------------------------
David A. Grill
Vice President and
Chief Financial Officer
Date: November 13, 1998
9
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 34,011
<SECURITIES> 0
<RECEIVABLES> 23,059
<ALLOWANCES> 1,335
<INVENTORY> 18,108
<CURRENT-ASSETS> 79,351
<PP&E> 82,921
<DEPRECIATION> 54,459
<TOTAL-ASSETS> 125,557
<CURRENT-LIABILITIES> 23,398
<BONDS> 100,016
0
0
<COMMON> 85
<OTHER-SE> (11,274)
<TOTAL-LIABILITY-AND-EQUITY> 125,557
<SALES> 137,477
<TOTAL-REVENUES> 137,477
<CGS> 95,010
<TOTAL-COSTS> 95,010
<OTHER-EXPENSES> 29,750
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,632
<INCOME-PRETAX> 5,184
<INCOME-TAX> 2,121
<INCOME-CONTINUING> 3,063
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,063
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
