<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, 1998
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
(570) 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, 1999, 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 41 through 43
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SHOP VAC CORPORATION
FORM 10-K
YEAR ENDED DECEMBER 31, 1998
INDEX
PART I
ITEM
NUMBER PAGE
- ------ ----
1. Business 1
2. Properties 6
3. Legal Proceedings 7
4. Submission of Matters to a Vote of Security Holders 7
PART II
5. Market for Registrant's Common Equity
and Related Stockholder Matters 8
6. Selected Financial Data 8
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
7A. Quantitative and Qualitative Disclosures About Market Risk 13
8. Financial Statements and Supplementary Data 15
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 37
PART III
10. Directors and Executive Officers of the Registrant 37
11. Executive Compensation 38
12. Security Ownership of Certain Beneficial Owners and Management 40
13. Certain Relationships and Related Transactions 40
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 41
<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. 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, pumps to empty vacuum containers and a
variety of accessories such as extension wands, brushes and nozzles.
On May 28, 1998, Shop Vac completed the sale of its European operations to
Glen Dimplex and certain of its affiliates. Shop Vac sold its capital stock
ownership in most of its European subsidiaries and transferred the businesses of
the French branch operation and its German subsidiary.
All of the Company's outstanding common stock is beneficially owned by
Jonathan and Matthew Miller and their families.
The Company is headquartered in Williamsport, Pennsylvania, and as of
December 31, 1998 employed approximately 1,400 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 570-326-0502. The Company's web site address
is http://www.shop-vac.com.
Shop Vac sells its products 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,
Lowe's, TruServ and Wal-Mart.
RELIANCE ON CERTAIN CUSTOMERS
During 1998, the Company's aggregate net sales to its ten largest customers
were 62% of its total net sales. Sales to the Company's single largest customer
represented approximately 19% of the Company's net sales in 1998.
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.
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 has built and maintained its
well-recognized brand name by manufacturing and selling high quality, powerful
products at competitive prices.
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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.
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. The Company estimates that its products are distributed through over
25,000 retail outlets in North America.
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 benefitted from the trend towards "do-it-yourself" work by
homeowners and the growth of national home center chains.
Brand Loyalty. Management estimates that approximately half of the Company's
domestic sales in 1998 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 20 million wet/dry vacuum units in North America, with
these Shop-Vac(R) owners being likely to purchase new or replacement vacuums in
the future. In addition, the Company's installed base results in Shop-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.
BUSINESS STRATEGY
The Company's business strategy consists of the following key elements:
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 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, selling the European
operations, administrative personnel reductions, improved inventory control and
implementation of manufacturing innovations and automation. The benefits of
these improvements are evident in the Company's recent operating results.
Emphasize Product Innovation. The Company seeks to expand the wet/dry vacuum
cleaner product category by introducing new products under the Shop-Vac(R) brand
name and continually upgrading existing products in response to consumer
preferences, changing market dynamics and technological advancements. For
example,
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in 1994, the Company successfully introduced into the North American market the
Shop-Vac 1x1(R), a smaller lightweight 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
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 1997, the Company also introduced the AllAround(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.
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.
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 Company, Home Depot, and Lowe's Companies, Inc.; warehouse
clubs such as Price Costco and Sam's Club; hardware stores, such as Ace
Hardware, Do It Best Corp., and Tru Serv. Over the last decade, the expansion of
mass merchandisers and home centers has contributed to the consolidation of the
retail industry.
PRODUCTS
The Company offers the industry's broadest line of consumer and industrial
wet/dry vacuums, manufacturing 58 consumer models and 40 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, as well as the primary
distribution channels, target markets and product categories:
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<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
3.0-6.0 Horsepower QSP(R) Industrial Distributors
5-55 Gallon Original Industrial Distributors Industrial
2.0-3.5 Horsepower
</TABLE>
Consumer Line. The Company's consumer line of wet/dry products accounts for
the majority of its sales, totaling approximately 76% of 1998 net sales in the
United States (including wet/dry accessories). The consumer line consists of 58
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 40 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 1998.
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 2% of the Company's net sales in the United States in 1998.
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 2% of the Company's net sales in 1998.
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, John Deere, and Sioux Tool, Inc. The
Company also sells vacuum components to other manufacturers such as Parts
Company of America and Tennant Co.
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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
1998.
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.
MANUFACTURING
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, 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 in Canada through a distribution
center in Burlington, Ontario.
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 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., Genie, Hoover, Eureka and
Royal.
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,
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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 1,400 persons world-wide as of December
31, 1998. Approximately 1,370 persons are employed in the United States and
approximately 30 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 a labor union, and management
believes that the Company's relations with its employees are good.
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....................... 26,000 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................................ 4,500 Warehouse Lease
INTERNATIONAL:
Auckland, New Zealand............................ 3,200 Distribution Lease
Burlington, Ontario.............................. 79,000 Distribution Own
Melbourne, Australia............................. 14,000 Distribution Lease
</TABLE>
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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 1998.
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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, 1998 there were eight holders of the Company's Class A
voting common stock and ten holders of the Company's Class B non-voting common
stock. All stockholders are members of the Miller family or entities controlled
by the Miller family. The Company did not declare or pay any dividends with
respect to its common stock during the years ended December 31, 1997 and 1998.
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, 1994 through 1998 have been
derived from the consolidated financial statements of the Company and its
subsidiaries, which financial statements have been audited by KPMG 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 for such periods. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of the Company, together with the related notes thereto,
included elsewhere herein.
<TABLE>
<CAPTION>
------------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATING DATA:
Net Sales................................................. $ 250,843 $ 231,323 $ 214,039 $ 216,796 $ 183,249
Cost of sales............................................. 182,694 179,416 158,787 156,817 123,714
----------- ----------- ----------- ----------- ----------
Gross profit.......................................... 68,149 51,907 55,252 59,979 59,535
Selling, general and administrative expense............... 41,867 35,637 35,513 36,890 36,361
Restructuring charges..................................... -- -- 4,714 -- --
Loss on sale of European operations....................... -- -- -- -- 1,540
----------- ----------- ----------- ----------- ----------
Income from operations................................ 26,282 16,270 15,025 23,089 21,634
Interest expense, net..................................... 8,826 11,629 10,104 11,339 10,022
Non-operating expense (income), net....................... 9 459 889 1 (118)
----------- ----------- ----------- ----------- ----------
Income from continuing operations before income taxes
and extraordinary item.............................. 17,447 4,182 4,032 11,749 11,730
Income taxes (benefit).................................... 4,964 1,425 1,755 (18,588) 4,783
----------- ----------- ------------ ------------ ----------
Income from continuing operations before extraordinary
item................................................ 12,483 2,757 2,277 30,337 6,947
----------- ----------- ------------ ------------ ----------
Discontinued operations:
Loss from operations of discontinued business, net (4,525) (10,639) -- -- --
Loss on disposal of discontinued business, net -- (120,296) -- -- --
----------- ----------- ------------ ------------ ----------
Loss on discontinued operations........................... (4,525) (130,935) -- -- --
----------- ----------- ------------ ------------ ----------
Income (loss) before extraordinary item................... 7,958 (128,178) 2,277 30,337 6,947
Extraordinary item-loss on early extinguishment of debt,
net of income tax benefit............................. -- -- (1,499) -- --
----------- ----------- ------------ ------------ -----------
Net income (loss)......................................... $ 7,958 $ (128,178) $ 778 $ 30,337 $ 6,947
=========== =========== ============ ============ ===========
</TABLE>
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<TABLE>
1994 1995 1996 1997 1998
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges........................ 2.9x 1.4x 1.4x 2.0x 2.1x
Depreciation and amortization (2)......................... $ 5,054 $ 6,132 $ 7,783 $ 6,245 $ 5,744
Capital expenditures, net................................. 7,838 8,042 582 4,413 3,625
Consolidated Balance Sheet Data:
Total assets (1).......................................... 252,582 135,480 131,636 145,398 126,050
Total debt................................................ 94,304 95,650 110,397 105,667 100,039
Stockholders' equity (deficit)............................ 82,906 (41,601) (38,997) (11,072) (7,250)
</TABLE>
(1) Includes $67.1 million, $19.0 million and $5.6 million, of net current
assets associated with discontinued operations as of December 31, 1994,
1995, and 1996 respectively, and $54.4 million of net non-current assets
associated with discontinued operations as of December 31, 1994.
(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 was previously managed in two groups: (i) North America,
which is comprised of the United States, Canada, Latin America and Australia and
(ii) Europe, which was sold on May 28, 1998. 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 (which
were sold during 1998) also manufactured and sold wet/dry vacuums, as well as a
full line of conventional vacuums, carpet cleaners and steam cleaners, in Europe
and internationally.
RESULTS OF OPERATIONS
1998 AS COMPARED TO 1997
Net sales for the year ended December 31, 1998 were $183.2 million, a
decrease of $33.6 million or 15.5% compared to net sales of $216.8 million in
the year 1997. Net sales were down $45.8 million due to the sale of the European
business in May of 1998. Net sales were up $12.2 million in the North American
Group. New products introduced in the fall of 1997, increased advertising, and
generally favorable business conditions including increased housing starts, all
had a positive impact on North American revenues.
Gross profit in the year ended December 31, 1998 totaled $59.5 million, a
decrease of $400,000 when compared to the prior year. Gross profit as a
percentage of net sales increased from 27.7% in 1997 to 32.5% in 1998. This
increase in gross profit as a percentage of net sales resulted from
manufacturing cost reductions including the production of components that were
previously purchased as well as increased sales in North America and reduced
sales in Europe where gross margins were lower.
SG&A expense declined to $36.4 million in the year ended December 31, 1998
from $36.9 million in the year ended December 31, 1997, a decrease of $500,000.
SG&A expense as a percentage of net sales increased from 17.0% in 1997 to 19.8%
in 1998. Changes in SG&A expense were due to the sale of the European Group,
offset by increased expenditures in North America for advertising and sales
promotions.
During 1998, the Company incurred a loss of $1,540,000 on the sale of its
European operations and other assets computed as follows:
<TABLE>
<CAPTION>
======================================================================
(Amount in thousands)
- ----------------------------------------------------------------------
<S> <C>
Cash proceeds (net of expenses)............................. $7,575
Less net assets sold........................................ 9,115
Loss on Sale of Assets...................................... $1,540
======================================================================
</TABLE>
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Operating income was $21.6 million in the year ended December 31, 1998, a
decrease of $1.5 million from the year ended December 31, 1997 of $23.1 million.
Operating income as a percentage of net sales increased to 11.8% in the year
ended December 31, 1998 from 10.7% in the year ended December 31, 1997.
Operating income in 1998, excluding the loss on the sale of Europe of $1.5
million, improved $100,000 over 1997 operating income.
Interest expense was $10.0 million in the year ended December 31, 1998, a
decrease of $1.3 million or 11.6%, compared to $11.3 million in the year ended
December 31, 1997. Due to the reduction in sales resulting from the sale of the
European Group, interest expense as a percentage of net sales increased from
5.2% in the year ended December 31, 1997 to 5.5% in the year ended December 31,
1998. The lower net interest expense was due to reduced borrowings and increased
interest income on higher cash investments.
Income tax expense increased $23.4 million for the year ended December 31, 1998
to $4.8 million when compared to the $18.6 million tax benefit for the year
ended December 31, 1997. In 1997 the tax expense was significantly reduced
because the Company recognized an income tax benefit of $23.9 million resulting
from a reduction of a previously recorded valuation allowance which had reduced
the Company's net deferred tax assets to zero. In 1998, tax expense returned to
a more normal relationship to pretax income.
1997 AS COMPARED TO 1996
Net sales in the year ended December 31, 1997 totaled $216.8 million, an
increase of $2.8 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) AllAround(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 increased 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 expenses.
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
10
<PAGE> 13
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 believed that the Company would, 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%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of cash are cash flow from operations. The
Company's principal uses of cash are to provide working capital, finance capital
expenditures and meet debt service requirements.
The consolidated balance sheet as of December 31, 1998 reflects the
reductions in assets and liabilities that were transferred with the sale of the
European operations. The accompanying consolidated statement of cash flows
excluded 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.
Net cash provided by operating activities was $20.4 million and $11.8
million in 1997 and 1998, respectively. Cash expenditures for accounts payable
and accrued expenses in 1998 of $7.0 million include reductions of payables in
Europe prior to the May sale and payment of North American accrued expenses.
Debt reduction primarily resulted from the payment of capital leases with
cash received from the sale of the European operations.
The Company's capital expenditures in 1997 and 1998 were $4.4 and $3.6
million, respectively. The Company's capital expenditures were primarily for the
manufacture of new products and equipment required to implement manufacturing
cost reductions. Capital expenditures for 1999 are expected to approximate the
1997 amount.
The Company has a revolving credit facility which permits borrowings of up
to $25 million. During 1998, 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. 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.
RELIANCE ON CERTAIN CUSTOMERS
During 1998, the Company's aggregate net sales to its ten largest customers
were 62% of its total net sales. Sales to the Company's single largest customer
represented approximately 19% of the Company's net sales in 1998.
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.
11
<PAGE> 14
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, tested, and found to be century compliant.
The conversion to the new system is expected to be completed in mid-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 fourth 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. The Company's failure to correct or
develop an adequate contingency plan to mitigate a material Y2K problem,
including problems experienced by suppliers, could result in an interruption in
normal business activities or operations. However, the Company is confident in
the success of its efforts to address Year 2000 issues that will allow the
Company to complete a successful transition for the Year 2000. This statement
constitutes a Year 2000 readiness disclosure by Shop Vac Corporation, under the
Year 2000 Information and Readiness Disclosure Act.
FOREIGN OPERATIONS
The Company had significant operations outside the United States, located
principally in Western Europe, Canada, and Australia. During the year ended
December 31, 1998, the Company generated revenues from sales outside of the
United States of $39.5 million, representing approximately 22% 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.
Sale of European Operations. Although the Company's European operations were
historically profitable, operating results were poor in comparison to the North
American segment. On May 28, 1998, Shop Vac completed the sale of its European
operations to Glen Dimplex and certain of its affiliates. Shop Vac sold its
capital stock ownership in most of the European subsidiaries and transferred the
businesses of the French branch operation and its German subsidiary.
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 1999 purchases of copper. At December 31, 1998,
the Company had hedged future purchases of $1,287,000 under the contract.
SEASONALITY
The Company's business has not historically been subject to seasonal
fluctuations having a material effect upon the Company's financial condition or
results of operations.
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" (the Standard). The Standard establishes
12
<PAGE> 15
comprehensive accounting and reporting standards for derivative instruments and
hedging activities that require a Company to record the derivative instrument at
fair value in the balance sheet. Furthermore, the derivative instrument must
meet specific criteria or the change in its fair value is to be recognized in
earnings in the period of change. To achieve hedge accounting treatment the
derivative instrument needs to be part of a well documented hedging strategy
that describes the exposure to be hedged, the objective of the hedge and a
measurable definition of its effectiveness in hedging the exposure. The Standard
is effective as of the beginning of the first quarter of the fiscal year
beginning after June 15, 1999. The Company does not plan on early adoption of
the Standard at this time. Adoption of this statement is not expected to have a
material effect on the Company's financial statements.
In 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statements of Position (SOP) 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" and SOP 98-5 "Reporting on the
Cost of Start-Up Activities." These SOP's require that costs of start-up
activities, including organization costs, be expensed as incurred and that
certain costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. These
statements are effective for fiscal years beginning after December 15, 1998. The
Company has determined that adoption of SOP 98-1 and SOP 98-5 will not have a
material effect of 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. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposures are foreign currency risk and
risks associated with changes in commodity prices. These exposures are discussed
in detail below:
Disclosure of primary market risks and how they are managed
Foreign currency risk
Since the Company's sale of its European operations in May of 1998, the
Company's primary foreign currency exposure is with respect to the Canadian
dollar, resulting from the Company's sales of product to its Canadian
subsidiary. The Company normally enters into foreign currency forward exchange
contracts to hedge the forecasted cash flows from its Canadian subsidiary in
order to guarantee the exchange rate at which it will convert the Canadian
dollar receipts to the U.S. dollar. However, due to the low value of the
Canadian dollar relative to the U.S. dollar during the last half of 1998, the
Company has not hedged its exposure with respect to forecasted receipts and
accordingly the Company was not a party to any foreign currency forward exchange
contracts at December 31, 1998.
Commodity price risks
Certain raw materials used in the Company's products are subject to price
volatility, principally copper and plastic resins. The Company has used swap and
range forward contracts to control its exposure to changes in the prices of
copper but has not hedged its planned purchases of plastic resins. At December
31, 1998, the Company was committed under a range forward ("collar") contract
covering its forecasted purchases of copper for 1999.
13
<PAGE> 16
Based upon the spot rate at December 31, 1998, the amount outstanding under
contract was $1,287,000 and the fair market value of the contract was a
liability of $92,700.
This represents only the contract that exists as of December 31, 1998, it
does not consider those exposures which could arise after that date. As a
result, the Company's ultimate realized gain or loss with respect to commodity
price and foreign exchange fluctuations will depend on the exposures that arise
during future periods, the Company's hedging strategies at the time, and
commodity prices and foreign currency rates.
14
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
Independent Auditors' Report 16
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1998 17
Consolidated Statements of Income and Comprehensive Income
for the years ended December 31, 1996, 1997 and 1998 18
Consolidated Statements of Stockholders' Equity (Deficit) for
the years ended December 31, 1996, 1997 and 1998 19
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1997 and 1998 20
Notes to Consolidated Financial Statements 21
Financial Statement Schedule -
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1996, 1997 and 1998 36
All other schedules are omitted as they are not applicable.
15
<PAGE> 18
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, 1997 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
Harrisburg, Pennsylvania
March 5, 1999
16
<PAGE> 19
SHOP VAC CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
=============================================================================================================
December 31,
----------------------------
Assets 1997 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................................. $ 34,450 45,531
Accounts and notes receivable, less allowance for doubtful
receivables of $1,946 in 1997 and $1,377 in 1998 ................ 25,265 17,434
Inventories ............................................................ 22,508 14,375
Prepaid expenses and other current assets .............................. 2,636 1,129
Deferred income taxes .................................................. 3,502 5,539
- -------------------------------------------------------------------------------------------------------------
Total current assets ......................................................... 88,361 84,008
Property, plant, and equipment, net .......................................... 29,428 26,977
Property, plant, and equipment under capital leases, net ..................... 6,175 --
Deferred income taxes ........................................................ 15,846 10,479
Other assets ................................................................. 5,588 4,586
- -------------------------------------------------------------------------------------------------------------
$ 145,398 $126,050
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- -------------------------------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt ...................................... $ 3,175 31
Accounts payable ....................................................... 19,450 8,479
Accrued expenses ....................................................... 17,701 11,752
- -------------------------------------------------------------------------------------------------------------
Total current liabilities .................................................... 40,326 20,262
Long-term debt ............................................................... 102,492 100,008
Other liabilities ............................................................ 13,652 13,030
- -------------------------------------------------------------------------------------------------------------
Total liabilities ............................................................ 156,470 133,300
- -------------------------------------------------------------------------------------------------------------
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 .................................................... (13,649) (6,702)
Accumulated other comprehensive income ................................. 2,382 (743)
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) ......................................... (11,072) (7,250)
- -------------------------------------------------------------------------------------------------------------
$ 145,398 126,050
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 20
SHOP VAC CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
(dollars in thousands)
<TABLE>
<CAPTION>
===========================================================================================================
Years ended December 31,
-----------------------------------
1996 1997 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales .......................................................... $ 214,039 216,796 183,249
Cost of sales....................................................... 158,787 156,817 123,714
- -----------------------------------------------------------------------------------------------------------
Gross profit ....................................................... 55,252 59,979 59,535
Selling, general, and administrative expense ....................... 35,513 36,890 36,361
Restructuring charges .............................................. 4,714 -- --
Loss on sale of European operations ................................ -- -- 1,540
- -----------------------------------------------------------------------------------------------------------
Income from operations ............................................. 15,025 23,089 21,634
Interest expense, net .............................................. 10,104 11,339 10,022
Non-operating expense (income), net ................................ 889 1 (118)
- -----------------------------------------------------------------------------------------------------------
Income before taxes ................................................ 4,032 11,749 11,730
Income taxes (benefit) ............................................. 1,755 (18,588) 4,783
- -----------------------------------------------------------------------------------------------------------
Income before extraordinary item ................................... 2,277 30,337 6,947
Extraordinary item - loss on early extinguishment of debt,
net of income tax benefit .................................... (1,499) -- --
- -----------------------------------------------------------------------------------------------------------
Net income ......................................................... $ 778 30,337 6,947
===========================================================================================================
===========================================================================================================
Comprehensive Income
===========================================================================================================
Net income ......................................................... $ 778 30,337 6,947
Other comprehensive income (loss):
Foreign currency translation adjustment ...................... 1,826 (2,412) (495)
Less: reclassification adjustment for gain included in net income
resulting from the sale of the European operations ........... -- -- (2,630)
- -----------------------------------------------------------------------------------------------------------
Comprehensive income ............................................... $ 2,604 27,925 3,822
===========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 21
SHOP VAC CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
(dollars in thousands)
<TABLE>
<CAPTION>
Common stock
----------------------------
Shares issued
------------------------
Class A Class B
voting non-voting Amount Paid-in capital
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, 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
Net income ............................................... -- -- -- --
Equity adjustment from foreign currency translation ...... -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 ............................... 6,500 650,000 $ 85 110
==================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Retained other Total
earnings comprehensive stockholders'
(deficit) income equity (deficit)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
Net income ............................................... 6,947 -- 6,947
Equity adjustment from foreign currency translation ...... -- (3,125) (3,125)
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 ............................... (6,702) (743) (7,250)
==================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 22
SHOP VAC CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(dollars in thousands)
<TABLE>
<CAPTION>
=====================================================================================================================
Years ended December 31,
------------------------------------
1996 1997 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................... $ 778 30,337 6,947
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................... 6,589 5,662 5,161
Amortization included in interest expense ....................... 147 583 583
Retirement of fixed assets ...................................... -- 588 1,185
Loss on sale of European operations ............................. -- -- 1,540
Changes in assets and liabilities:
Accounts and notes receivable ................................ 3,411 2,504 717
Inventories .................................................. 3,630 913 236
Prepaid expenses and other current assets .................... 625 (196) (301)
Other assets ................................................. (4,804) (83) 44
Accounts payable and accrued expenses ........................ 2,379 (1,725) (7,029)
Deferred income taxes ........................................ -- (19,670) 3,552
Accrued restructuring charges ................................ 3,035 (954) (46)
Other liabilities ............................................ 1,584 1,785 418
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations ................................... 17,374 19,744 13,007
Net cash provided (used) by discontinued operations .......................... (13,413) 699 (1,229)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities .................................... 3,961 20,443 11,778
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures ..................................................... (582) (4,413) (3,625)
Proceeds from sale of assets ............................................. -- -- 6,718
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities ............................. (582) (4,413) 3,093
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payment of revolving line-of-credit, net ................................. (48,681) -- --
Payment of private placement notes ....................................... (30,762) -- --
Payment of industrial development revenue bonds .......................... (2,300) -- --
Proceeds from issuance of other long-term debt ........................... 100,000 -- --
Other long-term debt and capital lease payments .......................... (3,510) (2,268) (3,813)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities ............................. 14,747 (2,268) (3,813)
- ---------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash ...................................... 333 (453) 23
- ---------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents .................................... 18,459 13,309 11,081
Cash and cash equivalents, beginning of year ................................. 2,682 21,141 34,450
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year ....................................... $ 21,141 34,450 45,531
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 23
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1997, and 1998
================================================================================
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Shop Vac Corporation is a multinational 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 and Australia. 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.
In May of 1998, the Company sold its European operations. Accordingly,
the Consolidated Statements of Operations include the results of the
European Group through the date of sale.
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 other comprehensive
income. 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 $43,376,000 and
$1,250,000, respectively, at December 31, 1998. At December 31, 1997,
commercial paper and repurchase agreements were $26,026,000 and
$2,045,000, 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)
21
<PAGE> 24
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,
including payroll costs allocable to research and development, were
approximately $1,366,000, $1,449,000 and $2,107,000 in 1996, 1997, and
1998, 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)
22
<PAGE> 25
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(1) CONTINUED
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,
- ------------------------------------------------------------------
1997 1998
- ------------------------------------------------------------------
<S> <C> <C>
Raw materials............................ $ 8,518 5,551
Work-in-process.......................... 4,821 5,674
Finished goods........................... 9,169 3,150
- ------------------------------------------------------------------
$ 22,508 14,375
==================================================================
</TABLE>
At December 31, 1997 and 1998, approximately 52% and 90%, respectively,
of total inventories are stated on the LIFO method. If the FIFO cost
method had been used with respect to such inventories, total inventories
would have been approximately $1,204,000 and $859,000 higher at December
31, 1997 and 1998, respectively.
23
<PAGE> 26
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(3) FINANCIAL INSTRUMENTS
The Company enters into foreign exchange forward contracts and commodity
forward contracts to hedge certain foreign currency transactions and
forecasted purchases of raw materials, respectively. No gain or loss is
recognized on the contracts prior to settlement because the contracts
constitute hedges of actual or forecasted transactions. To the extent
that the contracts do not effectively hedge actual or forecasted
transactions, gain or loss and the related asset or liability is
recognized in the financial statements.
At December 31, 1997 and 1998, the Company had foreign exchange forward
contracts outstanding as follows (amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Irish punt against Italian lira (7,200,000 ITL)............. $ 4,041 --
Irish punt against British pound (2,970 GBP)................ 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)............. 12,872 --
British pound against Italian lira (450,000 ITL)............ 270 --
- -----------------------------------------------------------------------------------
$ 24,676 --
===================================================================================
</TABLE>
These contracts were 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
delivery of the subject currency, resulting in a gain or loss measured
by the difference between the spot rate and the contract rate at
settlement. The Company reduces the risk of losses due to nonperformance
by counterparties by only entering into agreements with major
international financial institutions.
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 $311,000 at December 31, 1997. 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. This contract assures the Company that its 1999 copper costs
will remain within a specific range ("Collar Contract"). Based upon the
spot rate at December 31, 1998, the amount outstanding under the
contract was $1,287,000 and the fair market value of the contract was a
liability of $92,700. The financial statements include no carrying
amounts with respect to the Collar Contract.
(Continued)
24
<PAGE> 27
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>
--------------------------------------------------------------------
1997 1998
--------------------------------------------------------------------
<S> <C> <C>
Land..................................... $ 1,585 1,137
Buildings and improvements............... 18,240 14,331
Machinery and equipment.................. 75,711 65,163
Construction in progress................. 2,166 1,460
--------------------------------------------------------------------
97,702 82,091
Less accumulated depreciation............ 62,099 55,114
Net property, plant, and equipment....... $ 35,603 26,977
====================================================================
</TABLE>
Substantially all capital lease obligations were satisfied during 1998.
Accordingly, capital leased assets were reclassified to plant, property,
and equipment.
(5) OPERATING LEASES
The Company rents certain real property and machinery and equipment
under operating leases expiring at various dates through 2004. Rental
expense under operating leases, including short-term machinery and
equipment rental, aggregated approximately $790,000 in 1996, $1,573,000
in 1997, and $1,023,000 in 1998.
(Continued)
25
<PAGE> 28
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(5) CONTINUED
Future minimum lease payments required under all noncancellable
operating leases at December 31, 1998 are approximately as follows
(dollars in thousands):
<TABLE>
<S> <C>
1999............................. $ 595
2000............................. 222
2001............................. 117
2002 and thereafter.............. 125
----------------------------------------------
Total minimum lease payments..... $ 1,059
----------------------------------------------
</TABLE>
Until the date of sale of the European Group, the Company's U.K.
subsidiary leased a sales/administration/distribution facility in
England from an entity controlled by the stockholders of the Company. In
connection with the sale of the European Group the Company has
guaranteed payments due under the lease during the period from June 3,
1999 until the facility is sold or leased or until the end of the
original lease term (February 2004).
(6) LONG-TERM DEBT
Details of the Company's long-term debt are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
December 31,
- ----------------------------------------------------------------------------------------------
1997 1998
- ----------------------------------------------------------------------------------------------
<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 4.5% to 10% 4,108 39
Other, substantially foreign, interest generally
at rates of 6.25% to 9.25%...................................... 1,559 --
- ----------------------------------------------------------------------------------------------
105,667 100,039
Less current installments........................................... 3,175 31
- ----------------------------------------------------------------------------------------------
102,492 100,008
==============================================================================================
</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 Company also has a 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 revolving credit facility expires in September 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 (8.50% at December 31, 1998); or LIBOR
plus 2% (6.94% at December 31, 1998).
(Continued)
26
<PAGE> 29
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(6) CONTINUED
The agreements with the lenders of the senior secured notes and the
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. The Company is in compliance with the agreements with the lenders
of the senior secured notes and the new revolving credit facility.
Accrued interest payable amounted to approximately $3,577,000 and
$3,542,000 at December 31, 1997 and 1998, respectively. Interest expense
is net of interest income of $299,000, $1,283,000 and $1,786,000 for the
years ended December 31, 1996, 1997 and 1998, respectively.
The Company's future principal payments on long-term debt are
approximately as follows (dollars in thousands):
<TABLE>
<S> <C>
1999...................... $ 31
2000...................... 8
2001...................... --
2002...................... --
2003...................... 100,000
------------------------------------
Total $ 100,039
====================================
</TABLE>
(7) INCOME TAXES
Total income tax expense (benefit) is allocated as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1996 1997 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from operations.................................. $ 1,755 (18,588) 4,783
Extraordinary item - loss on early extinguishment of debt...... (998) -- --
- --------------------------------------------------------------------------------------------------
$ 757 (18,588) 4,783
==================================================================================================
</TABLE>
The domestic and foreign components of income (loss) from operations
before income taxes and extraordinary item are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1996 1997 1998
-----------------------------------------------------------------------
<S> <C> <C> <C>
Domestic........................ $ 7,647 10,772 11,346
Foreign......................... (3,615) 977 384
-----------------------------------------------------------------------
$ 4,032 11,749 11,730
=======================================================================
</TABLE>
(Continued)
27
<PAGE> 30
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(7) CONTINUED
Components of income tax expense (benefit) from operations are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 Current Deferred Total
------------------------------------------------------------------------
<S> <C> <C> <C>
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)
========================================================================
1998
------------------------------------------------------------------------
Federal......................... $ 214 3,696 3,910
Foreign......................... 614 65 679
State........................... 270 (76) 194
------------------------------------------------------------------------
$ 1,098 3,685 4,783
========================================================================
</TABLE>
The difference between the expected income tax expense from continuing
operations at the statutory federal income tax rate of 35% and the
actual income tax expense from continuing operations as reflected in the
accompanying consolidated financial statements is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1996 1997 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expense at statutory rate ............................................. $ 1,411 4,112 4,106
State income tax, net ................................................. 73 527 199
Foreign taxes ......................................................... 1,834 435 594
Change in beginning of year valuation allowance for deferred
tax assets allocated to income tax expense ........................ (1,667) (25,589) (1,109)
Adjustment of deferred tax-undistributed earnings of
foreign subsidiaries not previously recognized .................... -- 1,670 --
Adjustment of deferred tax-expiration of foreign tax and
general business credits .......................................... -- -- 927
Other ................................................................. 104 257 66
- -----------------------------------------------------------------------------------------------------------
Total provision for income taxes
from continuing operations......................................... $ 1,755 (18,588) 4,783
===========================================================================================================
</TABLE>
(Continued)
28
<PAGE> 31
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,
------------------------
1997 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts ........................................ $ 544 494
Inventories, including uniform capitalization .................... 453 716
Compensated absences and postretirement
benefits principally due to accrual for
financial reporting purposes ................................. 1,705 1,693
Liabilities due to accrual for financial
reporting purposes ........................................... 4,139 3,640
Credit carryovers ................................................ 3,999 2,756
Net operating loss carryforwards ................................. 19,668 15,121
Other ............................................................ 628 812
Total gross deferred tax assets ...................................... 31,136 25,232
Less valuation allowance ............................................. 6,448 5,339
- -------------------------------------------------------------------------------------------------
24,688 19,893
- -------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Plant and equipment, due to differences in
depreciation and capitalized interest ........................ 3,534 3,741
Undistributed earnings of foreign subsidiaries ................... 1,670 --
Costs deferred for financial reporting currently
deductible for tax ........................................... 136 134
- -------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities ................................. 5,340 3,875
- -------------------------------------------------------------------------------------------------
Net deferred tax assets .............................................. $19,348 16,018
=================================================================================================
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1997
and 1998 was $32,037,000 and $6,448,000, respectively. The net change in
the valuation allowance for the years ended December 31, 1997 and 1998
was a decrease of $25,589,000 and $1,109,000, respectively. In assessing
the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion of all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making
that assessment. In order to fully realize the deferred tax assets, the
Company will need to generate future taxable income of approximately $50
million
(Continued)
29
<PAGE> 32
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(7) CONTINUED
prior to the expiration of the net operating loss and credit
carryforwards as discussed below. Taxable income for the years ended
December 31, 1997 and 1998 was $6,900,000 and $11,340,000, respectively.
Based upon the level of recent historical taxable income and projections
of future taxable income over the periods which the deferred tax assets
are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences and
carryforwards, net of the existing valuation allowances at December 31,
1998. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future
taxable income during the carryforward periods are reduced.
Tax benefits to be recognized in the future due to any reduction in the
valuation allowance for deferred tax assets will be reported as income
tax benefit allocable to income from operations. The Company recognized
such income tax benefits in 1997 and 1998 resulting from reductions of
previously recorded valuation allowance.
The Company has a net operating loss carryforward for federal income tax
purposes of approximately $39.6 million at December 31, 1998 which is
available to reduce federal income taxes, if any, through 2010 and state
income tax carryforwards which expire over various carryforward periods.
At December 31, 1998, the Company has federal alternative minimum tax
credit carryovers of approximately $1,633,000 which are available to
reduce future regular income taxes, if any, over an indefinite period.
At December 31, 1998, the Company also has general business credit
carryforwards of approximately $549,000 and foreign tax credit
carryforwards of approximately $574,000 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, 1999.......................... $ -- 574
December 31, 2007.......................... 93 --
December 31, 2008.......................... 203 --
December 31, 2009.......................... 251 --
December 31, 2010.......................... 2 --
=====================================================================
</TABLE>
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 were primarily related to undistributed earnings
and the earnings were 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 was 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 $3,497,000 at December 31, 1998.
(Continued)
30
<PAGE> 33
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 plan's benefit obligations, fair
value of plan assets, funded status, and amounts shown in the
accompanying balance sheets at December 31, 1997 and 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year ................ $ 10,371 $ 11,973
Service cost ........................................... 1,367 1,550
Interest cost .......................................... 766 861
Actuarial loss ......................................... 631 3,253
Benefits paid .......................................... (1,162) (1,525)
- ----------------------------------------------------------------------------------------
Benefit obligation at end of year .......................... $ 11,973 $ 16,112
- ----------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year ......... $ 10,135 $ 12,073
Actual return on plan assets ........................... 1,905 1,393
Employer contribution .................................. 1,379 1,544
Benefits paid .......................................... (1,162) (1,525)
Other .................................................. (184) (181)
- ----------------------------------------------------------------------------------------
Fair value of plan assets at end of year ................... $ 12,073 $ 13,304
- ----------------------------------------------------------------------------------------
Funded status .............................................. $ 100 $ (2,808)
Unrecognized net actuarial loss ............................ 1,224 4,298
Unrecognized prior service cost ............................ 33 20
Unrecognized net transition obligation ..................... (66) (55)
- ----------------------------------------------------------------------------------------
Prepaid benefit cost ....................................... $ 1,291 1,455
- ----------------------------------------------------------------------------------------
Weighted-average assumptions as of December 31:
Discount rate........................................... 7.25% 6.75%
Expected return on plan assets.......................... 8.90% 8.90%
Rate of compensation increase........................... 4.00% 4.00%
========================================================================================
</TABLE>
(Continued)
31
<PAGE> 34
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(8) CONTINUED
Net periodic pension cost includes the following components (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1997 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service cost ................................. $ 1,449 1,367 1,550
Interest cost ................................ 807 766 861
Expected return on plan assets ............... (813) (897) (1,071)
Net amortization and deferral ................ 68 36 39
- -----------------------------------------------------------------------------------------
Net period pension cost .......................... $ 1,511 1,272 1,379
=========================================================================================
</TABLE>
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 20% 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 $160,000, $182,000, and $222,000 during the years
ended December 31, 1996, 1997, and 1998, 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, 1997
and 1998 was $1,765,000 and $1,905,000, respectively, and is reflected
in other liabilities in the accompanying consolidated balance sheet. The
benefit obligation was calculated using a discount rate of 7.25% and
6.75% at December 31, 1997 and 1998, 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 23.3%.
(9) STATEMENT OF CASH FLOWS
Supplemental disclosure of cash flow information (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1997 1998
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid for interest ........................... $7,852 10,019 9,460
Cash paid for income taxes ....................... 1,084 1,221 797
Capital lease obligations for new
property, plant, and equipment ............... 589 -- --
====================================================================================
</TABLE>
32
<PAGE> 35
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 settlements or
judgments will not materially affect the Company's business, financial
condition, cash flows, or operations.
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.
(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, 1996:
Total sales ........................ $132,929 73,803 22,222 (14,915) 214,039
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
Identifiable assets,
December 31, 1997 .............. 111,398 27,518 6,482 -- 145,398
Year ended December 31, 1998*
Total sales ........................ 155,960 20,902 18,554 (12,167) 183,249
Identifiable assets
December 31, 1998 .............. 120,503 -- 5,547 -- 126,050
================================================================================================================
</TABLE>
*European total sales are through May 28, 1998
(Continued)
33
<PAGE> 36
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(11) CONTINUED
Sales between geographic areas are made at the cost of producing the
items plus a profit margin. Identifiable assets are those assets
identified with the operations in each geographic area. Identifiable
assets exclude the net assets of discontinued operations.
On May 28, 1998, the Company sold its remaining European operations. In
this transaction the Company sold its capital stock ownership in Goblin
Limited (a UK corporation), Goblin Ireland Limited (an Irish
corporation), FAM Nederland B.V. (a Netherlands Corporation) and Shop
Vac Gesellschaft mbH (an Austrian corporation and transferred the
businesses of its French branch operation and of its German subsidiary,
Shop Vac Vertriebs GmbH for approximately $7,500,000 in cash less
transaction costs of approximately $600,000. The sale resulted in a loss
of $1,540,000.
(12) BUSINESS AND CREDIT CONCENTRATIONS
Most of the Company's customers are in the consumer products retail
industry. Approximately 13%, 16% and 19% of net sales for the years
ended December 31, 1996, 1997, and 1998, respectively, were with one
customer. The Company's ten largest customers accounted for
approximately 55%, 55% and 62% of the Company's net sales for 1996,
1997, and 1998, respectively, and approximately 47% and 69% of the
Company's accounts receivable balances at December 31, 1997 and 1998,
respectively.
(13) RESTRUCTURING CHARGES
During 1996 the Company terminated the manufacture of steam cleaners at
its facility in France and consolidated all of its European
manufacturing activities, including the production of steam cleaners,
into its facility in Ireland. The Company also restructured its
distribution operations in Austria, Germany, Hungary, the Netherlands,
and Spain. In connection with these restructurings, the Company incurred
pre-tax charges in 1996 of approximately $4.7 million to cover
severance, lease termination payments, shutdown and related expenses. In
addition, the Company recorded charges of approximately $1.3 million
related to accounts receivable and general and administrative expenses
and inventories. The restructuring charges included charges of
approximately $1.5 million to recognize the reduction in value of
leasehold improvements and goodwill. During 1996, 1997 and 1998
approximately $1.7 million, $1 million, and $50,000, respectively, of
cash expenditures were made with respect to these restructuring charges.
(14) DISCONTINUED OPERATIONS
During 1995, the Company sold its McCulloch Corporation subsidiary and
other related assets worldwide. The agreement to sell McCulloch required
the Company to distribute McCulloch products in certain European
locations through December 31, 1996. The disposal of the McCulloch
operations was accounted for as a discontinued operation.
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
(Continued)
34
<PAGE> 37
SHOP VAC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(14) CONTINUED
operations which were disposed of less the proceeds received. 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, 1997, and 1998 approximately $5.6 million, $3.0 million,
and $800,000 of cash, respectively, was paid with respect to those
items. Anticipated cash costs of $6.1 million remain to be paid for
these items.
================================================================================
35
<PAGE> 38
SCHEDULE II
SHOP VAC CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1996, 1997 and 1998
(dollars in thousands)
<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>
1996
ALLOWANCE FOR DOUBTFUL ACCOUNTS..................... $ 1,725 742 614 1,853
1997
ALLOWANCE FOR DOUBTFUL ACCOUNTS..................... 1,853 251 158 1,946
1998
ALLOWANCE FOR DOUBTFUL ACCOUNTS..................... 1,946 2 *571 1,377
</TABLE>
o Included is the write-off of the European Group allowance for $580 and a
recovery in the North American Group of $(9).
36
<PAGE> 39
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...................... 50 Chairman, Chief Executive Officer and President
Matthew Miller....................... 45 Vice Chairman
Kenneth Benbassat.................... 51 Director
C. Stewart Gentsch................... 62 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 the position of President of the Shop
Vac European Group. Mr. Miller is the son of Martin Miller, the founder of the
Company, and is 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.
C. 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.
37
<PAGE> 40
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid for the fiscal
years ended December 31, 1996, 1997, and 1998 to each of the persons who are the
most highly compensated executive officers of the Company.
<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.................... 1998 $ 350,000 $400,000 $ 9,629 $ 2,532 (3)
Chairman of the Board, Chief 1997 350,000 400,000 15,385 2,992
Executive Officer and President, 1996 164,717 -- 11,952 1,392
North American Group
Matthew Miller..................... 1998 $ 350,000 $400,000 $ 9,340 $ 2,532 (3)
Vice Chairman of the Board 1997 350,000 400,000 -- 3,392
and President, European Group 1996 187,888 -- -- 1,392
</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, 1998 for each of the
officers named in the Executive Compensation table above were as
follows: Jonathan Miller - $160,000, 28 years and Matthew Miller -
$160,000, 23 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 Matthew Miller 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 $1,152 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, 1998
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.
38
<PAGE> 41
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.
39
<PAGE> 42
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 28, 1999 with
respect to beneficial ownership of shares of the Common Stock by each person
known to own 5% or more of the Common Stock, by each Director, by each executive
officer named in the Summary Compensation Table and by all Directors and
executive officers as a group. The beneficial owners have sole voting and
investment power as to all such shares.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES BENEFICIALLY OWNED PERCENTAGE OF OUTSTANDING
- ------------------------------------ ----------------------------------- -------------------------
CLASS A VOTING CLASS B NON-VOTING
-------------- ------------------
<S> <C> <C> <C>
Jonathan Miller........................... 3,494 (1) 334,171 (1) 51.4%
Shop Vac Corporation
2323 Reach Road
Williamsport, PA 17701
Matthew Miller............................ 3,006 (2) 315,829 (2) 48.6%
Shop Vac Corporation
2323 Reach Road
Williamsport, PA 17701
</TABLE>
(1) Includes 1,419 shares of Class A and 334,006 shares of Class B owned by
the Jonathan Miller Family Limited Partnership and the wife and children
of Jonathan Miller.
(2) Includes 975 shares of Class A and 118,314 shares of Class B owned by
the Matthew Miller 1984 Children's Trust and the children of Matthew
Miller.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Up to the date of sale of the European Group, the Company's U.K. subsidiary
leased 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 1998 was $380,000 which was comparable to
annual rent paid for similar facilities in arms-length transactions in the local
market. In connection with the sale of the European Group, the Company has
guaranteed payments due under the lease during the period from June 3, 1999
until the facility is sold or leased or until the end of the lease term.
40
<PAGE> 43
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, 1997 and 1998
Consolidated Statements of Operations for the years ended December
31, 1996, 1997 and 1998
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the years ended December
31, 1996, 1997 and 1998
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, 1996,
1997 and 1998
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 quarter ended December
31, 1998.
(c) The exhibits filed in response to Item 601 of Regulation S-K are as follows:
Exhibit No. Description
2.1* Agreement between Shop Vac Corporation and Glen Dimplex dated
as of April 25, 1998.
2.2* Agreement between Shop Vac Corporation and Morphy Richards
Appliances Limited for the sale and purchase of the whole of
the issued share capital of Goblin Limited dated as of May 29,
1998.
2.3* Agreement between Shop Vac Corporation and Glen Dimplex for the
sale and purchase of the whole of the issued share capital of
Goblin Ireland Limited dated as of May 29, 1998.
2.4* Purchase Agreement between EIO Morphy Richards GmbH and Shop
Vac Vertriebs GmbH and Shop Vac Corporation for the sale and
purchase of the assets and assumption of the liabilities of
Shop Vac Vertriebs GmbH dated as of May 29, 1998.
2.5* Share Purchase Agreement between Shop Vac Corporation and
Carmen Nederland B.V. for the sale and purchase of the whole of
the issued share capital of FAM Nederland B.V. dated as of May
29, 1998.
41
<PAGE> 44
2.6* Transfer of Business Agreement between Shop Vac Corporation and
Goblin SARL for the sale and purchase of the assets and
assumption of the liabilities of the French branch operation of
Shop Vac Corporation dated as of May 29, 1998.
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 105/8% 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 105/8% Senior Secured Notes due 2003
(the "Private Notes") (included in Exhibit 4.1 hereto).
4.4** Specimen Certificate of 105/8% 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.
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** 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 46)
21.1 Subsidiaries of Shop Vac Corporation (Page 44)
27.1 Financial Data Schedule. (Page 47)
- ---------------
42
<PAGE> 45
* Previously filed with the Registrant's Form 8-K Current Report dated May 28,
1998 and incorporated herein by reference.
** Previously filed with the Registrant's Form S-4 Registration Statement
dated January 28, 1997 and incorporated herein by reference.
43
<PAGE> 46
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 16, 1999
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 16th day of March 1999.
SIGNATURE TITLE
/s/ Jonathan Miller
- ----------------------- President and Chief Executive Officer and Director
JONATHAN MILLER (Principal Executive Officer)
/s/ Matthew Miller
- ----------------------- Vice Chairman and Director
MATTHEW MILLER
/s/ Kenneth Benbassat
- ----------------------- Director
KENNETH BENBASSAT
/s/ C. Stewart Gentsch
- ----------------------- Director
C. STEWART GENTSCH
/s/ David A. Grill
- ----------------------- Vice President and Chief Financial Officer
DAVID A. GRILL (Principal Financial Officer and Principal
Accounting Officer)
45
<PAGE> 47
EXHIBIT INDEX
Exhibit No. Description
2.1* Agreement between Shop Vac Corporation and Glen Dimplex dated
as of April 25, 1998.
2.2* Agreement between Shop Vac Corporation and Morphy Richards
Appliances Limited for the sale and purchase of the whole of
the issued share capital of Goblin Limited dated as of May 29,
1998.
2.3* Agreement between Shop Vac Corporation and Glen Dimplex for the
sale and purchase of the whole of the issued share capital of
Goblin Ireland Limited dated as of May 29, 1998.
2.4* Purchase Agreement between EIO Morphy Richards GmbH and Shop
Vac Vertriebs GmbH and Shop Vac Corporation for the sale and
purchase of the assets and assumption of the liabilities of
Shop Vac Vertriebs GmbH dated as of May 29, 1998.
2.5* Share Purchase Agreement between Shop Vac Corporation and
Carmen Nederland B.V. for the sale and purchase of the whole of
the issued share capital of FAM Nederland B.V. dated as of May
29, 1998.
2.6* Transfer of Business Agreement between Shop Vac Corporation and
Goblin SARL for the sale and purchase of the assets and
assumption of the liabilities of the French branch operation of
Shop Vac Corporation dated as of May 29, 1998.
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 105/8% 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 105/8% Senior Secured Notes due 2003
(the "Private Notes") (included in Exhibit 4.1 hereto).
4.4** Specimen Certificate of 105/8% 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.
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** 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 46)
21.1 Subsidiaries of Shop Vac Corporation (Page 44)
27.1 Financial Data Schedule. (Page 47)
- ---------------
* Previously filed with the Registrant's Form 8-K Current Report dated May 28,
1998 and incorporated herein by reference.
** 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>
1994 1995 1996 1997 1998
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Income from continuing operations
before income taxes
and extraordinary item .................. $17,447 $ 4,182 $ 4,032 $11,749 $11,730
Interest Expense ............................ 8,826 11,629 10,104 11,339 10,022
Interest Component of Rental Expense ........ 154 218 198 394 256
------- ------- ------- ------- -------
$26,427 $16,029 $14,334 $23,482 $22,008
======= ======= ======= ======= =======
Interest Expense ............................ $ 8,826 $11,629 $10,104 $11,339 $10,022
Interest Component of Rental Expense ........ 154 218 198 394 256
------- ------- ------- ------- -------
$ 8,980 $11,847 $10,302 $11,733 $10,278
======= ======= ======= ======= =======
Fixed Charge Coverage Ratio.................. 2.9 1.4 1.4 2.0 2.1
======= ======= ======= ======= =======
</TABLE>
<PAGE> 1
SHOP VAC CORPORATION
EXHIBIT 21.1
SUBSIDIARIES OF SHOP VAC CORPORATION
<TABLE>
<CAPTION>
SUBSIDIARY NAME JURISDICTION INCORPORATED
- --------------- -------------------------
<S> <C>
FELCHAR MANUFACTURING CORPORATION NEW YORK
MOSTARE MANUFACTURING CORPORATION ARKANSAS
SHOP VAC AUSTRALIA PTY LTD. AUSTRALIA
SHOP VAC INTERNATIONAL, INC. DELAWARE
SHOP VAC MEXICO SA DE CV MEXICO
SHOP VAC OF CANADA LTD ONTARIO
SHOP VAC PROPERTIES INTERNATIONAL LTD DELAWARE
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 45,531
<SECURITIES> 0
<RECEIVABLES> 18,811
<ALLOWANCES> 1,377
<INVENTORY> 14,375
<CURRENT-ASSETS> 84,008
<PP&E> 82,091
<DEPRECIATION> 55,114
<TOTAL-ASSETS> 126,050
<CURRENT-LIABILITIES> 20,262
<BONDS> 100,039
0
0
<COMMON> 85
<OTHER-SE> (7,335)
<TOTAL-LIABILITY-AND-EQUITY> 126,050
<SALES> 183,249
<TOTAL-REVENUES> 183,249
<CGS> 123,714
<TOTAL-COSTS> 123,714
<OTHER-EXPENSES> 37,901
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,022
<INCOME-PRETAX> 11,730
<INCOME-TAX> 4,783
<INCOME-CONTINUING> 6,947
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,947
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
