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 January 2, 1999
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File No. 1-9973
THE MIDDLEBY CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 36-3352497
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
2850 W. Golf Road, Suite 405, Rolling Meadows, Illinois 60008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 847-758-3880
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common stock,
par value $0.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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|
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 26, 1999 was approximately $40,631,000. The number of
shares outstanding of the Registrant's class of common stock, as of March 26,
1999, was 10,157,721 shares.
Documents Incorporated by Reference
Part III of Form 10-K incorporates by reference the Company's definitive proxy
statement to be filed pursuant to Regulation 14A in connection with the 1999
annual meeting of stockholders.
<PAGE>
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
JANUARY 2, 1999
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business ................................................... 1
Item 2. Properties ................................................. 10
Item 3. Legal Proceedings .......................................... 11
Item 4. Submission of Matters to a Vote of Security Holders ........ 11
Item 4A. Executive Officers of the Registrant ....................... 11
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters .............................. 12
Item 6. Selected Financial Data .................................... 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 14
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk ..................................................... 21
Item 8. Financial Statements and Supplementary Data ................ 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ...................... 46
PART III
Item 10. Directors and Executive Officers of the Registrant ......... 46
Item 11. Executive Compensation ..................................... 46
Item 12. Security Ownership of Certain Beneficial Owners
and Management ........................................... 46
Item 13. Certain Relationships and Related Transactions ............. 46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K .............................................. 46
<PAGE>
PART I
Item 1. Business
General
The Middleby Corporation ("Middleby" or the "Company"), through its
operating subsidiary Middleby Marshall Inc. ("Middleby Marshall") and its
subsidiaries, is a leader in the design, manufacture, marketing, distribution,
and service of a broad line of cooking and warming equipment used in all types
of foodservice operations, including quick-service restaurants, full-service
restaurants, retail outlets, and hotels and other institutions. The Company's
products include Middleby Marshall(R) and CTX(R) conveyor oven equipment,
Southbend(R) ranges, convection ovens, heavy-duty cooking equipment and steam
cooking equipment and Toastmaster(R) toasters and counterline cooking and
warming equipment.
Founded in 1888 as a manufacturer of baking ovens, Middleby Marshall Oven
Company was acquired in 1983 by TMC Industries Ltd., a publicly traded company
that changed its name in 1985 to The Middleby Corporation. Throughout its
history, the Company had been a leading innovator in the baking equipment
industry and in the early 1980s positioned itself as a leading foodservice
equipment manufacturer by introducing the conveyor oven that revolutionized the
pizza market. In 1989, the Company became a broad line equipment manufacturer
through the acquisition of the Foodservice Equipment Group of Hussmann
Corporation, which included Southbend, Toastmaster and CTX. The Company
initiated its international distribution and service strategy in 1990 by
acquiring a controlling interest in Asbury Associates, Inc. ("Asbury"). In 1991,
the Company established Middleby Philippines Corporation ("MPC") to provide
modular foodservice equipment and custom kitchen fabrications to restaurant and
hotel chains in the Pacific Rim and Middle Eastern markets.
The Company has identified, as a major area of growth, the rapidly
growing international markets targeted by restaurant and hotel chains. To
capture this market, Middleby established its own export management company, set
up master distribution in international markets and began to distribute
complementary products of other American and European equipment manufacturers.
As the first company in its industry to take these initiatives, Middleby has
positioned itself as a preferred foodservice equipment supplier to major chains
expanding globally. Middleby's international network enables it to offer a total
store package ("TSP") of kitchen equipment to be delivered virtually anywhere in
the world, installed and serviced by Middleby. The Company believes that its TSP
program provides it with a competitive marketing advantage and will enable it to
develop significant new international business. The Company has delivered and
installed equipment in over 100 countries throughout the world.
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<PAGE>
Business Divisions and Products
The Company conducts its business through three principal business
divisions: Cooking Systems Group, International Distribution and International
Specialty Equipment. The Cooking Systems Group includes the following major
product groups: conveyor oven equipment marketed under the Middleby Marshall and
CTX brands; core cooking equipment marketed under the Southbend brand; and
counterline cooking equipment marketed under the Toastmaster brand.
Internationally, the Company markets and supports its products through its
International Distribution Division, which comprises the Middleby International
division, a sales and marketing support operation for U.S.-based chains; Asbury
Worldwide, an integrated distributor and exporter of foodservice equipment in
the global marketplace; and Escan, a Canadian distribution company. The
International Specialty Equipment Division consists of the Middleby Philippines
Corporation, a supplier of modular foodservice equipment and custom kitchen
fabrications in the Pacific Rim and Middle Eastern Markets. See Note 10 to the
Consolidated Financial Statements for further information on the Company's
business divisions.
Cooking Systems Group
The Company's domestic sales, distribution and manufacturing efforts have
been merged to form the Middleby Cooking Systems Group. The division's primary
operations are located in Elgin, Illinois and Fuquay-Varina, North Carolina. The
division's principal product groups include:
Conveyor Oven Equipment Product Group - Middleby Marshall and CTX
The Middleby Marshall oven line is the world's conveyor cooking equipment
leader. A brand of baking and cooking equipment since 1888, the Middleby
Marshall name is renowned for quality and durability. Middleby Marshall ovens
are used by a majority of the leading high-volume pizza chains, as well as by
other restaurants and institutions. Middleby Marshall conveyor ovens utilize a
patented process, Jet-Sweep air impingement, that forces heated air at high
velocities through a system of nozzles above and below the food product which is
placed on a moving conveyor belt. This process achieves faster baking times and
greater consistency of bake than conventional ovens. The Company's CTX line of
conveyor ovens utilizes patented infra-red cooking and precision control
technology for more specialized, lower volume applications. CTX conveyor ovens
are sold to restaurants and pizza outlets and offer such additional features as
a programmable time and temperature control as well as a self-cleaning function.
Conveyor oven products range in price from approximately $5,000 to $30,000 per
unit (or as much as $90,000 for a multiple unit system) and are predominately
assembled to order and purchased directly by end-users (who order units
customized for their operations) rather than through dealers.
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<PAGE>
Core Cooking Equipment Product Group - Southbend
In the market for 100 years, Southbend products, mainly heavy-duty,
gas-fired equipment, include ranges, convection ovens, broilers, fryers,
griddles, steamers and steam cooking equipment (marketed under the Steam Master
brand). Southbend products are offered as standardized equipment for general use
in restaurants and institutions, and also are made to specification for use by
the professional chef. Southbend is known for its innovative product features
and premier cooking line. Its 40,000 BTU Pyromax(R) range doubled the industry
standard for BTU's when it was introduced in 1996. Southbend's Marathoner
Gold(R) convection oven has been judged by a leading industry publication to be
the best baking convection oven on the market today. The newly-introduced
Southbend Simple Steam steamer is the industry's lowest maintenance and lowest
water usage pressureless steamer, and was awarded the 1998 Product Design of the
Year by the Electric Foodservice Council. Core cooking equipment products range
in price from $1,000 to $10,000 (or as much as $60,000 for a complete line-up of
modular equipment) and are predominantly purchased by dealers on an
order-by-order basis.
Counterline Cooking Equipment Product Group - Toastmaster
Toastmaster counterline cooking equipment products are predominantly light
and medium-duty electric equipment, including pop-up and conveyor toasters, hot
food servers, foodwarmers, griddles, fryers, convection ovens and ranges. A
leading equipment brand since 1917, Toastmaster has been voted the number one
toaster product for seventeen consecutive years in the Annual Industry Leaders
survey by ID magazine. As a major supplier to global restaurant chains,
Toastmaster is able to customize products to fit a chain's particular needs.
Toastmaster products are designed with energy saving features and food safety
technologies. Counterline cooking equipment products range in price from $300 to
$10,000 per unit and are predominately purchased from stock by dealers.
The Company does not produce consumer products under the Toastmaster name,
as an unaffiliated company, Toastmaster, Inc., owns the rights to the brand name
for consumer markets.
International Specialty Equipment Division - Middleby Philippines Corporation
Founded in 1991, Middleby Philippines Corporation engineers, manufactures
and installs modular foodservice equipment and custom kitchen fabrications used
primarily in conjunction with standard equipment manufactured in the U.S. to
provide a complete kitchen installation. Principal products include serving
stations, work tables, undercounter refrigeration systems, ventilation systems,
cabinets and shelving. Customers are primarily Pacific Rim and Middle Eastern
operations of major U.S. and international foodservice chains and hotels. MPC
has been a supplier of kitchen fabrication for McDonald's in certain markets
since 1992. Sales are primarily made on an order-by-order project basis. MPC's
manufacturing and assembly operations are located in a modern 54,000 square foot
facility outside of Manila.
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<PAGE>
International Distribution Division - Middleby International, Asbury Worldwide
and Escan
The International Distribution division provides integrated export
management and distribution services. The division sells the Company's product
lines and certain non-competing complementary product lines of other American
and European manufacturers throughout the world. The Company offers customers a
complete package of kitchen equipment, delivered and installed in over 100
countries. For a local country distributor or dealer, the division provides
centralized sourcing of a broad line of equipment with complete export
management services, including export documentation, freight forwarding,
equipment warehousing and consolidation, installation, warranty service and
parts support. In an effort to reduce the cost structure and streamline the
order fulfillment process, the operations of Asbury were decentralized during
the third quarter 1998 from a processing center based in Florida to
international-based regional centers for Asia, Europe and Latin America. The
regional centers are supported by sales and distribution offices located in
China, France, Japan, Korea, Mexico, the Philippines, Spain and Taiwan.
The Customers and Market
The Company's products are sold primarily through independent dealers and
distributors to end-user customers, including quick-service restaurants,
full-service restaurants, retail outlets such as supermarkets and convenience
stores, and private and public institutions, such as hotels, resorts, schools,
hospitals, long-term care facilities, correctional facilities, stadiums,
airports, corporate cafeterias, military facilities and government agencies.
Many of the dealers in the U.S. belong to buying groups that negotiate sales
terms with the Company. Certain large restaurant and hotel chain customers have
purchasing organizations that manage product procurement for their systems. The
Company's ten largest customers accounted for approximately 30% of net sales in
1998, with no single customer accounting for more than 10% of 1998 net sales.
During the past several decades, growth in the U.S. foodservice industry
has been driven primarily by population growth, economic growth and demographic
changes, including the emergence of families with multiple wage-earners and
growth in the number of higher-income households. These factors have led to a
demand for convenience and speed in food preparation and consumption. Eating-out
and carry-out continue to be on an upward trend in the U.S., although at a
slower rate than during the 1970s and 1980s. A strong U.S. economy and low
interest rates have led to increased industry growth rates during the last few
years. In 1998, the U.S. foodservice industry grew at a rate of 2.8% in real
dollars, the fastest rate since 1988.
The quick-service restaurant segment is the largest category within the
foodservice industry and has been the fastest growing segment since the mid
'80's. However, the quick-service restaurants today face a mature U.S. market
place, and, consequently, the segment's real growth rates are expected to slow
slightly from 2.5% in 1998. The full- service restaurant segment grew an
estimated 3.5% in real dollar terms in 1998 and 2.5%
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<PAGE>
in units. This segment has seen increasing chain penetration in recent years,
particularly in upscale segments, driven by the aging of the Baby Boom
generation.
The foodservice equipment industry has grown in response to the primary
growth factors of the foodservice industry. After high growth in the early- and
mid-1980s, growth in the foodservice equipment industry entered a slow period
from 1988 through 1991, due to a general decline in the worldwide economy and
the maturation of the domestic foodservice industry. Since 1992, the industry
has enjoyed steady growth in the United States due to the development of new
quick- service and casual-theme restaurant chain concepts, the expansion into
nontraditional locations by quick-service restaurants and store equipment
modernization. In the international markets, foodservice equipment manufacturers
had been experiencing stronger growth than the U.S. market due to rapidly
expanding international economies and increased opportunity for expansion by
U.S. chains into developing regions. In 1997, the Top 100 restaurant chains
built more new units outside the U.S. than inside, for the first time, according
to Technomic Inc., a leading foodservice research firm. However, the financial
crisis in Asia, where as much as 50% of some chain's development was
concentrated, and the effect on other emerging economies, severely curtailed
growth internationally in 1998.
In 1998, the foodservice equipment industry in the U.S. had total sales of
approximately $6.9 billion. The Company's manufactured products compete
primarily in the cooking and warming equipment category, which had sales in the
U.S. of approximately $1.2 billion in 1998 and is expected to grow 4.8% in real
dollar terms in 1999, according to Foodservice Equipment Reports, a leading
industry publication. Management believes that the broader international
equipment market the Company serves had 1998 sales of approximately $10 billion.
The near term outlook for international markets remains uncertain pending the
recovery of Asian economies.
The Company believes that continuing growth in demand for foodservice
equipment will result from the development of new restaurant units due to a
strong U.S. economy and low costs of financing, the expansion of U.S. chains
into international markets and the replacement and upgrade of existing
equipment.
The backlog of orders was $12,195,000 at January 2, 1999, all of which is
expected to be filled during 1999. The Company's backlog was $11,625,000 at
January 3, 1998. The backlog is not necessarily indicative of the level of
business expected for the year, as there is generally a short time between order
receipt and shipment for the majority of the Company's products.
Marketing and Distribution
Middleby's products and services are marketed in the U.S. and in over 100
countries through a combination of the Company's sales personnel and
international marketing divisions and subsidiaries, together with an extensive
network of independent dealers, distributors, consultants, sales representatives
and agents. The Company's relationships
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<PAGE>
with major restaurant chains are primarily handled through an integrated effort
of top-level executive and sales management at the corporate and business
division levels to best serve each customer's needs.
Each of the Company's business divisions is responsible for the marketing
of its products and services, under the direction of the division's President,
Sales Manager and supporting personnel. Each business division manages its own
sales, promotion and marketing programs with coordination and support provided
by corporate sales and marketing functions.
In the United States, each business or sales division distributes its
products to independent end-users through a network of approximately 400 to
1,000 non-exclusive dealers nationwide, who are supported by over 200
manufacturers' marketing representatives. Sales are made direct to certain large
restaurant chains who have established their own procurement and distribution
organization for their franchise system.
International sales are primarily made through the International
Distribution Division network to independent local country stocking and
servicing distributors and dealers and, at times, directly to major chains,
hotels and other large end-users by the Company-owned distribution companies.
Services and Product Warranty
The Company is an industry leader in equipment installation programs and
after-sales support and service. The emphasis on global service increases the
likelihood of repeat business and enhances Middleby's image as a partner and
provider of quality products and services. It is critical to major foodservice
chains that equipment providers be capable of supporting equipment on a
worldwide basis.
The Company's domestic service network consists of over 80 authorized
service parts distributors and 2,500 independent certified technicians that have
been formally trained and certified by the Company through its factory training
school and on-site installation training programs. The service network is
separate from the sales network to ensure that technicians remain focused on
service issues rather than new business. Technicians work through service parts
distributors, which are required to provide around-the-clock service via a toll-
free paging number. The Company provides substantial technical support at each
factory to the technicians in the field through factory-based technical service
engineers. The Company has stringent parts stocking requirements for these
agencies, leading to an exceptionally high first-call completion rate for
service and warranty repairs.
Middleby's international service network consists of distributors in over
100 countries with approximately 3,000 independent service technicians trained
in the installation and service of the Company's products and supported by
twelve internationally-based service managers along with the factory-based
technical service engineers. As with its domestic service network, the Company
maintains stringent parts stocking requirements for its international
distributors.
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<PAGE>
Competition
The cooking and warming segment of the foodservice equipment industry is
highly competitive and fragmented. Within a given product line, the industry
remains fairly concentrated, with typically a small number of competitors
accounting for the bulk of the line's industry-wide sales. Industry competition
includes companies that manufacture a broad line of products and those that
specialize in a particular product line. Competition in the industry is based
upon many factors, including brand recognition, product features and design,
quality, price, delivery lead times, serviceability and after-sale service. The
Company believes that its ability to compete depends on strong brand equity,
exceptional product performance, short lead-times and timely delivery,
competitive pricing, superior customer service support and its unique TSP
capability. Management believes that the demand for its labor saving,
multi-functional and energy efficient equipment will increase, driven by
quick-service and full-service chains that face labor supply issues, space
limitations and increasing operating costs.
In the international markets, the Company competes with U.S. manufacturers
and numerous global and local competitors. Management believes that the
Company's integrated international export management and distribution
capabilities uniquely position it to provide value-added services to U.S. and
internationally-based chains, as well as to local country distributors offering
a complete line of kitchen equipment.
The Company believes that it is among the largest multiple-line
manufacturers of cooking and warming equipment in the U.S. and worldwide,
although some of its competitors are units of operations that are larger than
the Company and possess greater financial and personnel resources. Among the
Company's major U.S. competitors are certain subsidiaries and divisions of
Welbilt Corporation, a subsidiary of Berisford plc; G.S. Blodgett Corp., a
subsidiary of Maytag Corporation; Hobart Corporation and Vulcan-Hart
Corporation, both subsidiaries of Premark International, Inc.; and Wells
Manufacturing Company, a subsidiary of Specialty Equipment Companies, Inc. Major
international-based competitors include Zanussi, a subsidiary of Electrolux AB,
and Ali Group.
Manufacturing and Quality Control
The Company operates two domestic and one international manufacturing
facilities. The Company's conveyor oven and counterline cooking equipment
products are manufactured in Elgin, Illinois and its core cooking equipment
products are manufactured in Fuquay-Varina, North Carolina. Middleby's
international specialty cooking equipment operation is located in Laguna, the
Philippines. Metal fabrication, finishing, sub-assembly and assembly operations
are conducted at each manufacturing facility. Equipment installed at individual
manufacturing facilities includes numerically controlled turret presses and
machine centers, shears, press brakes, welding equipment, polishing equipment,
CAD/CAM systems and product testing and quality assurance measurement devices.
The Company's state-of-the-art CAD/CAM systems enable virtual electronic
prototypes to be created, reviewed and refined before the first physical
prototype is built.
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<PAGE>
Detailed manufacturing drawings are quickly and accurately derived from the
model and passed electronically to manufacturing for programming and optimal
parts nesting on various numerically controlled punching cells. The Company
believes that this integrated product development and manufacturing process is
critical to assuring product performance, customer service and competitive
pricing.
The Company has established comprehensive programs to ensure the quality of
products, to analyze potential product failures and to certify vendors for
continuous improvement. Every product manufactured or licensed by the Company is
individually tested prior to shipment to ensure compliance with Company
standards.
The Company has implemented programs to reduce costs and improve operating
efficiencies. In some cases, new capital equipment has been acquired to increase
automation and productivity. Recently, Middleby has implemented, or is in the
process of implementing, new or upgraded management information systems at each
of its major operating units. These systems are Year 2000 compliant.
Sources of Supply
The Company purchases its raw materials and component parts from a number
of suppliers. The majority of the Company's material purchases are standard
commodity-type materials, such as stainless steel, electrical components,
hardware and various components. These materials and parts generally are
available in adequate quantities from numerous suppliers. Some component parts
are obtained from sole sources of supply. In such instances, management believes
it can substitute other suppliers as required. The majority of fabrication is
done internally through the use of automated equipment. Certain equipment and
accessories are manufactured by other suppliers for sale by the Company. The
Company believes it enjoys good relationships with its suppliers and considers
the present sources of supply to be adequate for its present and anticipated
future requirements.
Licenses, Patents, and Trademarks
Middleby Marshall has an exclusive license from Enersyst Development Center
L.L.C. ("Enersyst") to manufacture, use and sell Jetsweep air impingement ovens
in the U.S. for commercial food applications in which the interior length or
width of a rectangular cooking area, or in which the diameter of a circular
cooking area, equals or exceeds 36 inches. The Enersyst license covers numerous
existing patents and provides further exclusive and non-exclusive license rights
to existing and future developed technology. Middleby Marshall also holds an
exclusive sublicense from Lincoln Foodservice Products, Inc. ("Lincoln"), a
subsidiary of Welbilt Corporation, to manufacture, use and sell throughout the
world, other than in the U.S. and Japan, air impingement ovens of the
above-described dimensions for commercial food applications. This sublicense
covers the foreign analogues of the patents covered by the Enersyst license and
grants Middleby Marshall rights of first refusal for a similar
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<PAGE>
sublicense in Japan. The Enersyst license expires the later of the expiration of
the last of the licensed patents or September 30, 2008. The Lincoln sublicense
expire upon the expiration of the last patented improvement covered by the
license. While the loss of the Enersyst license or the Lincoln sublicense could
have an adverse effect on the Company, management believes it is capable of
designing, manufacturing and selling similar equipment, although not as
technologically advanced. Lincoln and Fuji Chubo Setsubi Company, Ltd. are the
only other foodservice equipment manufacturers licensed under the Enersyst
patents.
The Company holds numerous patents covering technology and applications
related to various products, equipment and systems. Management believes the
expiration of any one of these patents would not have a material adverse effect
on the overall operations or profitability of the Company.
The Company owns numerous trademarks and trade names; among them, CTX(R),
Middleby Marshall(R), Southbend(R) and Toastmaster(R) are registered with the
U.S. Patent and Trademark Office and in various foreign countries.
Employees
As of January 2, 1999, the Company employed 994 persons. Of this amount,
378 were management, administrative, sales, engineering and supervisory
personnel; 366 were hourly production non-union workers; and 250 were hourly
production union members. Included in these totals were 356 individuals employed
outside of the United States, of which 172 were management, sales,
administrative and engineering personnel, and 184 were hourly production
workers, who participate in an employee cooperative. At its Elgin, Illinois
facility, the Company has a union contract with the International Brotherhood of
Teamsters that expires on May 1, 2002. Management believes that the
relationships between employees, union and management are good.
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<PAGE>
Item 2. Properties
The Company's principal executive offices are located in Rolling Meadows,
Illinois. The Company operates two manufacturing facilities in the U.S. and one
manufacturing facility in the Philippines.
The principal properties of the Company are listed below:
<TABLE>
<CAPTION>
Principal Square Owned/
Location Business Divisions Function Footage Leased
- -------- ------------------ -------- ------- ------
<S> <C> <C> <C> <C>
Elgin, IL Cooking Systems Group Manufacturing, 207,000 Owned
Warehousing and
Offices
Warehousing 42,000 Leased(1)
Fuquay-Varina, NC Cooking Systems Group Manufacturing, 131,000 Owned
Warehousing and
Offices
Miramar, FL International Distribution Warehousing and 18,000 Leased(2)
Offices
Laguna, the Philippines International Specialty Equipment Manufacturing, 54,000 Owned
Warehousing and
Offices
Rolling Meadows, IL The Middleby Corporation Corporate Headquarters 4,000 Leased(3)
</TABLE>
- -----------
(1) Lease expires in August 1999, with payments of approximately $17,000 per
month.
(2) Lease expires in October 2002, with payments of approximately $12,000 per
month.
(3) Lease expires in July 2002, with payments of approximately $9,000 per
month.
At various other locations the Company leases small amounts of office space
for administrative and sales functions, and in certain instances limited
short-term inventory storage. These locations are in Canada, France, Japan,
Korea, Mexico, Philippines, Spain, and Taiwan.
Management believes that these facilities are adequate for the operation of
the Company's business as presently conducted.
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<PAGE>
Item 3. Legal Proceedings
The Company is routinely involved in litigation incidental to its business,
including product liability actions which are generally covered by insurance.
Such routine claims are vigorously contested and management does not believe
that the outcome of any such pending litigation will have a material adverse
effect upon the financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders in the fourth
quarter of the year ended January 2, 1999.
Item 4A. Executive Officers of the Registrant
Principal Occupation and
Principal Position and
Name Age Office with the Company
---- --- -----------------------
William F. Whitman, Jr. 59 Chairman of the Board of
the Company and Middleby Marshall
David P. Riley 52 President and Chief Executive
Officer of the Company and
Middleby Marshall
John J. Hastings 43 Executive Vice President, Chief
Financial Officer, Secretary and
Treasurer of the Company and
Middleby Marshall
The officers of the Company are elected annually by the Board of Directors,
hold office until their successors are chosen and qualify, and may be removed by
the Board of Directors at any time, at a duly convened meeting of the Board of
Directors or by written consent. The Company has employment agreements with
Messrs. Whitman and Riley. Laura B. Whitman, a director of the Company, is the
daughter of Mr. Whitman.
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<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock trades on the Nasdaq National Market System
under the symbol "MIDD". The following table sets forth, for the periods
indicated, the high and low closing sale prices per share of Common Stock, as
reported by the Nasdaq National Market System.
Closing Share Price
High Low
Fiscal 1998
First quarter............................................. 8.063 6.625
Second quarter............................................ 8.375 6.000
Third quarter............................................. 6.438 3.875
Fourth quarter............................................ 4.188 3.125
Fiscal 1997
First quarter............................................. 8.625 6.125
Second quarter............................................ 10.125 7.125
Third quarter............................................. 10.000 8.625
Fourth quarter............................................ 11.875 7.813
In December 1997, the Company completed a public stock offering. The
offering totaled 3,001,500 shares of which the Company sold 2,391,500 shares and
610,000 shares were sold by selling stockholders. Net proceeds to the Company
totaled approximately $22.1 million and were used to repay certain indebtedness.
As of January 2, 1999, the Company estimates there were approximately 2,200
beneficial owners of the Company's common stock.
In July 1998, the Company's Board of Directors adopted a stock repurchase
program and subsequently authorized the purchase of up to 1,800,000 common
shares in open market purchases. As of January 2, 1999, 838,000 shares had been
repurchased for $3.3 million.
The Company has not declared or paid cash dividends on its Common Stock
since 1991. The Company's current financing agreements limit the paying of
dividends.
During the fiscal year ended January 2, 1999, the Company issued an
aggregate of 29,300 shares of the Company's common stock to current and former
employees and directors, pursuant to the exercise of stock options, for an
aggregate consideration of approximately $88,500. Such options were granted
under the Company's Amended and Restated 1989 Stock Incentive Plan and had
exercise prices ranging between a maximum of $7.38 and a minimum of $1.38. The
issuance of such shares was exempt from registration under the Securities Act of
1933, as amended, pursuant to Section 4(2) thereof, as transactions by an issuer
not involving a public offering.
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<PAGE>
PART II
Item 6. Selected Financial Data
(dollars in thousands, except per share data)
Fiscal Year Ended (1)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales ................................. $ 132,320 $ 148,253 $ 124,765 $ 106,348 $ 94,158
Cost of sales ............................. 96,082 102,523 87,330 73,841 65,594
------------ ----------- ----------- ----------- -----------
Gross profit .............................. 36,238 45,730 37,435 32,507 28,564
Selling and distribution expenses ......... 20,817 22,150 18,319 15,385 13,398
General and administrative expenses ....... 12,304 10,689 10,439 9,326 8,573
Non-recurring expenses .................... 3,457 -- -- 900 --
------------ ----------- ----------- ----------- -----------
Income (loss) from operations .......... (340) 12,891 8,677 6,896 6,593
Interest expense and deferred
financing amortization, net ............ 2,916 4,136 4,351 4,327 3,262
Other expense (income), net ............... 939 413 (146) (36) 482
------------ ----------- ----------- ----------- -----------
Earnings (loss) before income taxes ....... (4,195) 8,342 4,472 2,605 2,849
Provision (benefit) for income
taxes .................................. (211) 2,538 1,389 (140) 614
------------ ----------- ----------- ----------- -----------
Net earnings (loss) from
continuing operations ............. (3,984) 5,804 3,083 2,745 2,235
Discontinued operations, net of
income tax ............................. -- (564) (2,610) 419 505
------------ ----------- ----------- ----------- -----------
Net earnings (loss) ................. $ (3,984) $ 5,240 $ 473 $ 3,164 $ 2,740
============ =========== =========== =========== ===========
Basic earnings (loss) per share:
Continuing operations ............... $ (0.37) $ 0.65 $ 0.37 $ 0.32 $ 0.27
Discontinued operations ............. 0.00 (0.06) (0.31) 0.05 0.06
------------ ----------- ----------- ----------- -----------
Net earnings per
share ............................. $ (0.37) $ 0.59 $ 0.06 $ 0.37 $ 0.33
============ =========== =========== =========== ===========
Weighted average number of
shares outstanding ................... 10,761,000 8,863,000 8,415,000 8,584,000 8,378,000
Diluted earnings (loss) per share:
Continuing operations ............... $ (0.37) $ 0.64 $ 0.35 $ 0.31 $ 0.26
Discontinued operations ............. 0.00 (0.06) (0.30) 0.05 0.06
------------ ----------- ----------- ----------- -----------
Net earnings per share
$ (0.37) $ 0.58 $ 0.05 $ 0.36 $ 0.32
============ =========== =========== =========== ===========
Weighted average number of
shares outstanding ................... 10,872,000 9,104,000 8,666,000 8,678,000 8,434,000
Balance Sheet Data:
Working capital ........................... $ 30,609 $ 38,790 $ 25,046 $ 28,746 $ 23,254
Total assets .............................. 96,591 103,636 85,685 85,211 76,700
Total debt ................................ 27,825 27,913 41,268 43,028 44,472
Stockholders' equity ...................... 44,734 52,333 22,167 21,778 14,657
</TABLE>
(1) The Company's fiscal year ends on the Saturday nearest to December 31.
- 13 -
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Informational Note
This report contains forward-looking statements subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. The Company
cautions readers that these projections are based upon future results or events
and are highly dependent upon a variety of important factors which could cause
such results or events to differ materially from any forward-looking statements
which may be deemed to have been made in this report, or which are otherwise
made by or on behalf of the Company. Such factors include, but are not limited
to, changing market conditions; the availability and cost of raw materials; the
impact of competitive products and pricing; the timely development and market
acceptance of the Company's products; foreign exchange and political risks
affecting international sales, in particular any continued weakness in Asian
economies; and other risks detailed herein and from time-to-time in the
Company's Securities and Exchange Commission filings, including those discussed
under "Risk Factors" in the Company's Registration Statement on Form S-2 (Reg
No. 333-35397).
NET SALES SUMMARY
(dollars in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended(1)
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Sales Percent Sales Percent Sales Percent
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Business Divisions:
Conveyor oven
equipment .......................... $ 45,605 34.5 $ 53,948 36.4 $ 41,216 33.0
Counterline cooking
equipment .......................... 16,270 12.3 16,527 11.1 19,635 15.8
Core cooking equipment................. 39,348 29.7 34,282 23.1 29,617 23.7
--------- ----- --------- ----- --------- -----
Cooking Systems
Group ............................ 101,223 76.5 104,757 70.6 90,468 72.5
International Specialty
Equipment Division ................. 5,239 4.0 7,627 5.1 6,552 5.3
International Distribution
Division(2) ........................ 39,096 29.5 47,668 32.2 39,722 31.8
--------- ----- --------- ----- --------- -----
Total international divisions...... 44,335 33.5 55,295 37.3 46,274 37.1
Intercompany sales(3) ................. (14,678) (11.1) (16,216) (10.9) (13,394) (10.7)
Other ................................. 1,440 1.1 4,417 3.0 1,417 1.1
--------- ----- --------- ----- --------- -----
Total .............................. $ 132,320 100.0% $ 148,253 100.0% $ 124,765 100.0%
========= ===== ========= ===== ========= =====
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company's fiscal year ends on the Saturday nearest to December 31.
(2) Consists of sales of products manufactured by Middleby and products
manufactured by third parties.
(3) Consists of sales to the Company's International Distribution Division from
the Company's other business divisions.
- 14 -
<PAGE>
Results of Operations
The following table sets forth certain consolidated statement of income
items as a percentage of net sales for the periods presented:
Fiscal Year Ended(1)
1998 1997 1996
----- ----- -----
Net sales ......................................... 100.0% 100.0% 100.0%
Cost of sales ..................................... 72.6 69.2 70.0
----- ----- -----
Gross profit ................................... 27.4 30.8 30.0
----- ----- -----
Selling, general and administrative expenses ...... 24.9 22.1 23.0
Non-recurring expense ............................. 2.6 -- --
----- ----- -----
(Loss) income from operations .................. (0.1) 8.7 7.0
Interest expense and deferred financing
amortization, net ............................. 2.2 2.8 3.5
Other expense (income), net ....................... 0.7 0.3 (0.1)
----- ----- -----
(Loss) earnings before income taxes ............ (3.0) 5.6 3.6
Provision (benefit) for income taxes .............. 0.0 1.7 1.1
----- ----- -----
(Loss) earnings from continuing operations ..... (3.0) 3.9 2.5
===== ===== =====
(1) The Company's fiscal year ends on the Saturday nearest to December 31.
Fiscal Year Ended January 2, 1999 as Compared to January 3, 1998
Net Sales. Net sales in fiscal 1998 decreased 10.7%, from $148.3 million in
fiscal 1997 to $132.3 million in fiscal 1998. Sales were impacted by economic
conditions in international markets and lower orders from certain major
restaurant chain customers.
Sales of the Cooking Systems Group decreased by 3.4%, from $104.8 million
in fiscal 1997 to $101.2 million in fiscal 1998. The decrease was attributable
to reduced sales of conveyor oven equipment which declined by 15.5%, resulting
from decreased demand from a certain major restaurant chain, decreased sales
into international markets affected by economic conditions, and the impact of a
$5.2 million non-recurring service and parts order in 1997. This decrease was
partially offset by a 14.8% increase in sales of core cooking equipment,
attributable to continued market penetration and new product offerings.
Counterline cooking equipment sales remained constant with the prior year.
Sales of the international divisions declined by 19.8%, from $55.3 million
in fiscal 1997 to $44.3 million in fiscal 1998. Sales of the International
Specialty Equipment Division declined 31.3%. This decline resulted from delayed
expansion plans by U.S. quick-service restaurant concepts into the Asia markets
in addition to decreased hotel
- 15 -
<PAGE>
and resort development. Net sales of the International Distribution Division
declined by 18.0%, as significantly lower sales in the troubled Asian and Middle
East markets were partly offset by increased sales in Mexico. A 33.0% increase
in sales in Latin America was more than offset by 41.9% and 18.1% decreases in
sales in the Asia and Europe/Middle East regions, respectively.
Gross profit. Gross profit decreased 20.8%, from $45.7 million in fiscal
1997 to $36.2 million in fiscal 1998. As a percentage of sales, gross margins
decreased from 30.8% in fiscal 1997 to 27.4% in fiscal 1998. The reduction in
margin percentage reflects the adverse impacts of reduced production
efficiencies at the Cooking Systems Group and International Specialty Equipment
Division resulting from lower volume and erratic customer demands throughout the
year. Product warranty costs increased from the prior year for one-time issues
associated with new product introductions and modifications. Gross margins at
the international divisions were affected by fluctuating foreign currencies
which had an unfavorable impact on pricing in international markets. In
addition, gross profit was impacted by the liquidation and write-down of
slow-moving inventories, including those in international markets affected by
the economic conditions.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased .9%, from $32.8 million in fiscal 1997 to
$33.1 million in fiscal 1998. Operating expenses at the Cooking Systems Group
were constant with lower selling expenses for the conveyor oven product group
offset by increased selling expenses for the core cooking equipment product
group. Operating expenses at the International Distribution Division increased
slightly as compared to the prior year due to the full year effect of expenses
associated with sales and distribution offices established during the second
quarter of 1997. Additionally, the International Distribution Division incurred
expense associated with efforts to reduce costs and decentralize operations from
the U.S. to international-based regional centers. The increase in expense was
offset in part by the cost savings of these actions realized during the fourth
quarter of 1998.
Non-recurring expenses. Non-recurring expenses of $3.4 million were
recorded during the third and fourth quarter of 1998. This amount is comprised
of $1.3 million associated with the abandonment of an enterprise-wide resource
planning system, $.2 million for restructuring actions related to the
International Distribution Division, and $1.9 million associated with costs
resulting from the discontinuation of distribution activities for all
non-manufactured products by the Cooking Systems Group and the exit of a
manufactured product line not consistent with the Company's cooking and warming
equipment strategy.
Income from operations. Income from operations decreased from $12.9 million
in fiscal 1997 to a loss of $.3 million in 1998, primarily due to lower sales
volumes, reduced margins and the effect of non-recurring expenses and other
one-time items.
- 16 -
<PAGE>
Non-operating expenses. Non-operating expenses decreased by 15.3%, from
$4.5 million in fiscal 1997 to $3.9 million in fiscal 1998. Net interest expense
declined by $1.2 million as a result of the lower outstanding debt balances
during the year. The Company utilized proceeds from the 1997 stock offering to
repay amounts due under revolving credit facilities.
Income taxes. The Company recorded a net tax benefit of $.2 million at an
effective rate of 5.0%. The net tax benefit reflects an adjustment to the
valuation allowance of $.9 million associated with tax credits which are more
likely than not to expire unutilized, in addition to the impact of losses at
certain foreign operations with no recorded benefit.
Fiscal Year Ended January 3, 1998 as Compared to December 28, 1996
Net sales. Net sales in fiscal 1997 increased $23.5 million, or 19.0%, to
$148.3 million as compared to $124.8 million in fiscal 1996, reflecting unit
volume increases.
Sales of the Cooking Systems Group increased 15.8% from $90.5 million in
fiscal 1996 to $104.8 million in fiscal 1997. Sales growth was led by a 31.0%
sales increase of conveyor oven equipment due to increased new restaurant
expansion and replacement of equipment by several major chains. Additionally,
during the first half of 1997 the division benefited from an oven upgrade
program for a major chain, which resulted in parts and service sales of $5.2
million. Sales of core cooking equipment increased 15.8% over the prior year due
to market share penetration and the introduction of new products. Sales of
counterline cooking equipment decreased 16.0% primarily due to increased
competition and competitive pricing pressures.
Sales of the international divisions increased by 19.5% from $46.3 million
in fiscal 1996 to $55.3 million in fiscal 1997. Sales of the Company's
International Specialty Equipment Division increased 16.4% over the prior year
due to the increased capacity provided by its 54,000 square foot facility in the
Philippines, which opened in mid-1996. Sales of the Company's International
Distribution Division increased 20.0% over the prior year, reflecting increased
sales activity at the Company's new sales and distribution offices and improving
economies in Europe and Latin America. Sales in the Asian markets in 1997
amounted to 17.4% of total sales. Company sales in this region slowed during the
fourth quarter due to the currency volatility and economic instability in the
region.
Gross profit. Gross profit increased $8.3 million, or 22.2%, to $45.7
million in fiscal 1997 as compared to $37.4 million in fiscal 1996. As a
percentage of net sales, gross profit margin increased to 30.8% in 1997 as
compared to 30.0% in 1996. The increase in gross profit margin was attributable
to increased sales of manufactured products, improved production efficiencies at
the new Philippines manufacturing facility and the elimination of expenses
associated with the trial field service program that was terminated during 1996.
- 17 -
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $4.1 million, or 14.2%, to $32.8 million in
fiscal 1997 from $28.8 million in fiscal 1996, largely due to the increased
sales and additional support for the Company's expanding international
operations. As a percentage of net sales, expenses decreased to 22.1% from 23.0%
in fiscal 1996.
Income from operations. Income from operations increased $4.2, million or
48.6%, to $12.9 million in fiscal 1997 from $8.7 million in fiscal 1996,
primarily due to the higher sales volumes, improved margins and the lower
selling, general and administrative expenses as a percentage of net sales.
Non-operating expenses. Interest expense and deferred financing
amortization decreased 4.9% to $4.1 million in fiscal 1997 from $4.4 million in
fiscal 1996. The lower interest expense is attributed to lower average
outstanding debt balances due in part to the Company's stock offering during the
fourth quarter.
Income taxes. The Company recorded a net tax provision of $2.5 million in
fiscal 1997 as compared to $1.4 million in fiscal 1996. The tax provision
included a benefit of $1.1 million related to net operating loss ("NOL")
utilization and valuation allowance reductions as compared to a benefit of $0.9
million recorded in fiscal 1996.
Financial Condition and Liquidity
Total cash and cash equivalents decreased by $5.6 million to $6.8 million
at January 2, 1999 from $12.3 million at January 3, 1998. Net borrowings
declined slightly from $27.9 million at January 3, 1998 to $27.8 million at
January 2, 1999. The overall use of liquidity was primarily to fund investing
activities of $5.1 million and for treasury stock purchases of $3.3 million.
Operating activities. Net cash provided by operating activities before
changes in assets and liabilities was $1.3 million in fiscal 1998 as compared to
$11.1 million in fiscal 1997. This decline is due to the lower net earnings. Net
cash provided by continuing operating activities after changes in assets and
liabilities was $2.3 million as compared to net cash provided of $4.8 million in
the prior year. Accounts receivables decreased $1.0 million due to lower sales
volumes as compared to the previous year. Inventories decreased by $1.8 million,
as a result of lower demand requirements in addition to focused efforts to
reduce inventory levels. Accounts payable decreased $.7 million as a result of
lower inventory purchases and timing of disbursements at the 1997 fiscal
year-end. Changes in other assets and liabilities resulted in net cash
utilization of $1.2 million due to the funding of payroll and retirement benefit
liabilities, and the timing of other expenses.
Investing activities. During 1998 the Company had capital expenditures of
$3.8 million primarily to enhance manufacturing capabilities and to install new
computer systems and equipment. Additionally, the Company acquired the remaining
interest in Asbury Associates, Inc. and Middleby Philippines Corporation, for
$1.2 million during the first quarter of 1998. This transaction increased the
Company's ownership interest in these subsidiaries to 100%.
- 18 -
<PAGE>
Financing activities. Net cash used in financing activities amounted to
$2.8 million in fiscal 1998 as compared to net cash provided of $7.7 million in
fiscal 1997. Net borrowings under financing arrangements decreased from $27.9
million to $27.8 million. The net change in borrowings reflects the repayment of
$1.8 million of foreign bank debt and $1.6 million of scheduled payments under
lease arrangements, offset by $3.5 million of foreign borrowings under the
Company's multi-currency revolving credit facility. The Company entered into the
unsecured multi-currency revolving credit line with a major international bank
in March 1998. This credit facility enhances the Company's ability to manage its
financing activities related to its international operations.
In July 1998, the Company's Board of Directors adopted a stock repurchase
program and during 1998 authorized the purchase of up to 1,800,000 common shares
from time to time in open market purchases. As of January 2, 1999, 838,000
shares had been purchased under the program for $3.3 million.
At January 2, 1999, the Company was not in compliance with certain
covenants pursuant to the multi-currency revolving credit facility and its $15.0
million senior note as a result of the Company's $3.3 million of stock
repurchases and the net loss incurred by the Company in the second half of the
year, which included the $3.5 million of non-recurring expenses. The Company has
obtained waivers for these covenant violations. In March 1999, the financing
agreements were amended to adjust the minimum requirements for the related
covenants and reduce the credit limit under the revolving credit facility from
$20.0 million to $10.0 million. Management believes that the Company will have
sufficient financial resources available to meet its anticipated requirements
for working capital, growth strategies, capital expenditures and debt
amortization for the foreseeable future.
Year 2000 Compliance
The Company has assessed and continues to assess the impact of the Year
2000 issue on its reporting systems and operations. The Year 2000 issue exists
because many computer systems and applications currently use two-digit date
fields to designate a year. As the century date occurs, date sensitive systems
may recognize the year 2000 as 1900 or not at all. This inability to recognize
or properly treat the year 2000 may cause the Company's systems to process
critical financial and operational information incorrectly.
The Company has undertaken a review of its information technology ("IT")
systems. The Company is in the process of executing a strategy to implement new
IT systems at its International Distribution Division to enhance its current
transaction processing and information reporting capabilities. These systems are
year 2000 compliant. In addition, the Company has completed, or is in process of
completing, upgrades to existing IT systems at all other business units to make
these systems year 2000 compliant. These systems projects are currently on
schedule for completion prior to July 30, 1999. If these systems projects are
not successful, the Company will develop contingency plans. Nevertheless,
- 19 -
<PAGE>
failure to complete these systems projects in a timely manner could result in a
significant disruption of the Company's ability to transact business with its
major customers and suppliers.
The Company has also undertaken a review of its critical non-IT systems,
such as production machinery and phone systems. The Company is in the process of
contacting equipment vendors and service providers to assess the potential risk
associated with these systems. Non-compliant systems will be replaced or
modified. Based upon internal evaluations and assurances provided by equipment
and service vendors, the Company does not believe significant modification to or
replacement of existing non-IT systems will be required. However, the Company
cannot verify the assurances it has been provided from third parties.
Additionally, a review of key suppliers and customers is in process to
ensure that the flow of products and services will not be disrupted as a result
of failure of the supplier or customer to become year 2000 compliant. While the
Company is receiving assurances that no such interruption will occur, the
Company cannot ensure that third parties will become compliant. Any significant
or prolonged interruption in the supply of essential services or products would
adversely affect the Company's operations and ability to conduct business. In
the event that the Company identifies problems with a service provider or other
vendor, it will attempt to obtain services and products from other available
sources. Similarly, problems with a significant portion of the Company's
customers in processing and paying invoices could materially impact the
Company's cash flows or liquidity. The Company is unable to anticipate whether a
significant portion of its customers will have difficulty in processing and
paying invoices.
Expenses associated with the Year 2000 issue relate primarily to the
modification of existing IT systems. The Company anticipates that remaining
costs to fully address these matters will amount to approximately $0.3 million.
The Company does not anticipate that future costs to address the Year 2000 issue
will have a material effect on its financial condition.
Foregoing is a Year 2000 readiness disclosure entitled to protection as
provided in the Year 2000 Information and Readiness Disclosure Act.
- 20 -
<PAGE>
International Exposure
The Company has manufacturing operations located in Asia and distribution
operations in Asia, Canada, Europe, and Latin America. The Company anticipates
that international sales will continue to account for a significant portion of
consolidated net sales in the foreseeable future. Countries within Asia and
certain other regions continue to be impacted by adverse economic conditions
which have resulted in reduced hotel and resort development, and delayed
expansion plans of quick-service restaurant chains within the region. As a
result, the Company's sales into international markets declined by 20% in fiscal
1998, including a 42% decline of sales into the Asian region. Some sales by the
foreign operations are in local currency and an increase in the relative value
of the U.S. dollar against such currencies would lead to the reduction in
consolidated sales and earnings. Additionally, foreign currency exposures are
currently not specifically hedged and there can be no assurances that the
Company's future results of operations will not be adversely affected by
currency fluctuations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk related to changes in interest rates.
The following table summarizes the maturity of the Company's debt obligations:
Fixed Rate Debt Variable Rate Debt
--------------- ------------------
(dollars in thousands)
1999 $ 1,893 $ --
2000 9,985 --
2001 4,973 3,474
2002 5,000 --
2003 2,500 --
------- -------
$24,351 $ 3,474
======= =======
Fixed rate debt is comprised of a $15.0 million senior note and $9.4 million due
under lease arrangements. The senior note bears interest at a rate of 10.99% and
the lease arrangements bear interest at an average implicit interest rate of
10.2%. Variable rate debt is comprised of borrowings under the Company's $10.0
million revolving credit line, which includes a $2.5 million yen denominated
loan and a $1.0 million Spanish-peseta denominated loan. Interest under the
revolving credit facility is assessed based upon the bank's reference rate in
each respective country. The interest rate assessed to the yen and peseta
denominated loans at January 2, 1999 were 1.2% and 6.4%, respectively.
- 21 -
<PAGE>
Item 8. Financial Statements and Supplementary Data
Page
----
Report of Independent Public Accountants .................................. 23
Consolidated Balance Sheets................................................ 24
Consolidated Statements of Earnings........................................ 25
Consolidated Statements of Changes in Stockholders' Equity ................ 26
Consolidated Statements of Cash Flows...................................... 27
Notes to Consolidated Financial Statements ................................ 28
The following consolidated financial statement schedule is included
in response to Item 14(d).
Schedule II - Valuation and Qualifying Accounts and Reserves............... 45
All other schedules for which provision is made to applicable regulation of the
Securities and Exchange Commission are not required under the related
instruction or are inapplicable and, therefore, have been omitted.
- 22 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of The Middleby Corporation:
We have audited the accompanying consolidated balance sheets of THE MIDDLEBY
CORPORATION (a Delaware corporation) and Subsidiaries as of January 2, 1999, and
January 3, 1998, and the related consolidated statements of earnings, changes in
stockholders' equity and cash flows for each of the three years in the period
ended January 2, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements 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 consolidated financial position of The
Middleby Corporation and Subsidiaries as of January 2, 1999, and January 3,
1998, and the results of their operations and their cash flows for each of the
three years in the period ended January 2, 1999, in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to the
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and are not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
February 15, 1999
(except for the matter discussed in Note 3 to the Consolidated Financial
Statements, as to which the date is March 31, 1999)
- 23 -
<PAGE>
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 2, 1999 AND JANUARY 3, 1998
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................................................... $ 6,768 $ 12,321
Accounts receivable, net ........................................................................ 21,242 22,251
Inventories, net ................................................................................ 20,456 24,072
Prepaid expenses and other ...................................................................... 941 1,248
Current deferred taxes .......................................................................... 2,895 3,000
--------- ---------
Total current assets ......................................................................... 52,302 62,892
Property, plant and equipment, net ................................................................. 22,596 21,790
Excess purchase price over net assets acquired, net ................................................ 13,617 12,882
Deferred taxes ..................................................................................... 5,347 3,779
Other assets ....................................................................................... 2,729 2,293
--------- ---------
Total assets ................................................................................. $ 96,591 $ 103,636
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ............................................................ $ 1,893 $ 3,595
Accounts payable ................................................................................ 10,945 11,600
Accrued expenses ................................................................................ 8,855 8,907
--------- ---------
Total current liabilities .................................................................... 21,693 24,102
Long-term debt ..................................................................................... 25,932 24,318
Retirement benefits and other non-current liabilities .............................................. 4,232 2,883
Stockholders' equity:
Preferred stock, $.01 par value; none issued .................................................... -- --
Common stock, $.01 par value, 10,996,000 and 10,895,000 shares issued in 1998 and 1997,
respectively ................................................................................. 110 109
Paid-in capital ................................................................................. 54,602 53,984
Treasury stock at cost; 838,000 shares in 1998 ................................................. (3,309) --
Accumulated deficit ............................................................................. (4,303) (319)
Accumulated other comprehensive income .......................................................... (2,366) (1,441)
--------- ---------
Total stockholders' equity ................................................................... 44,734 52,333
--------- ---------
Total liabilities and stockholders' equity ................................................... $ 96,591 $ 103,636
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
- 24 -
<PAGE>
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE FISCAL YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998
AND DECEMBER 28, 1996
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales ................................................................. $ 132,320 $ 148,253 $ 124,765
Cost of sales ............................................................. 96,082 102,523 87,330
--------- --------- ---------
Gross profit ........................................................ 36,238 45,730 37,435
Selling and distribution expenses ......................................... 20,817 22,150 18,319
General and administrative expenses ....................................... 12,304 10,689 10,439
Non-recurring expenses .................................................... 3,457 -- --
--------- --------- ---------
Income (loss) from operations ....................................... (340) 12,891 8,677
Interest expense and deferred financing amortization, net ................. 2,916 4,136 4,351
Other expense (income), net ............................................... 939 413 (146)
--------- --------- ---------
Earnings (loss) before income taxes ................................. (4,195) 8,342 4,472
Provision (benefit) for income taxes ...................................... (211) 2,538 1,389
--------- --------- ---------
Earnings (loss) from continuing operations .......................... (3,984) 5,804 3,083
Discontinued operations, net of income tax:
Loss from discontinued operations ................................... -- -- (744)
Loss on disposal including operating losses
during the phase-out period .................................. -- (564) (1,866)
--------- --------- ---------
Net earnings (loss) ................................................. $ (3,984) $ 5,240 $ 473
========= ========= =========
Basic earnings (loss) per share:
Continuing operations ............................................... $ (0.37) $ 0.65 $ 0.37
Discontinued operations ............................................. 0.00 (0.06) (0.31)
--------- --------- ---------
Net earnings (loss) per share ....................................... $ (0.37) $ 0.59 $ 0.06
========= ========= =========
Weighted average number of shares ......................................... 10,761 8,863 8,415
Diluted earnings (loss) per share:
Continuing operations ............................................... $ (0.37) $ 0.64 $ 0.35
Discontinued operations ............................................. 0.00 (0.06) (0.30)
--------- --------- ---------
Net earnings (loss) per share ....................................... $ (0.37) $ 0.58 $ 0.05
========= ========= =========
Weighted average number of shares ......................................... 10,872 9,104 8,666
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
- 25 -
<PAGE>
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998
AND DECEMBER 28, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Common Paid-in Treasury Accumulated Comprehensive
Stock Capital Stock Deficit Income Total
----- ------- ----- ------- ------ -----
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 30, 1995 $ 84 $ 27,934 $ -- $ (6,032) $ (208) $ 21,778
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net earnings -- -- 473 -- 473
Currency translation adjustments -- -- -- 44 44
Increase in minimum pension liability -- -- -- -- (303) (303)
- ------------------------------------------------------------------------------------------------------------------------------------
Net comprehensive income -- -- -- 473 (259) 214
Exercise of stock options 1 174 -- -- -- 175
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 28, 1996 $ 85 $ 28,108 $ -- $ (5,559) $ (467) $ 22,167
===================================================================================================================================
Comprehensive income:
Net earnings -- -- -- 5,240 -- 5,240
Currency translation adjustments -- -- -- -- (989) (989)
Decrease in minimum pension liability -- -- -- -- 15 15
- ------------------------------------------------------------------------------------------------------------------------------------
Net comprehensive income -- -- -- 5,240 (974) 4,266
Adjustments to valuation allowance -- 3,558 -- -- -- 3,558
Proceeds from stock offering 24 22,069 -- -- -- 22,093
Issuance of stock -- 213 -- -- -- 213
Exercise of stock options -- 36 -- -- -- 36
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 3, 1998 $ 109 $ 53,984 $ -- $ (319) $ (1,441) $ 52,333
===================================================================================================================================
Comprehensive income:
Net loss -- -- -- (3,984) -- (3,984)
Currency translation adjustments -- -- -- -- 177 177
Increase in minimum pension liability -- -- -- -- (1,102) (1,102)
- ------------------------------------------------------------------------------------------------------------------------------------
Net comprehensive income -- -- -- (3,984) (925) (4,909)
Exercise of stock options -- 81 -- -- -- 81
Issuance of stock 1 537 -- -- -- 538
Purchase of treasury stock -- -- (3,309) -- -- (3,309)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 2, 1999 $ 110 $ 54,602 $ (3,309) $ (4,303) $ (2,366) $ 44,734
===================================================================================================================================
</TABLE>
The accompanying notes to Consolidated Financial Statements
are an integral part of these statements.
- 26 -
<PAGE>
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998
AND DECEMBER 28, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities--
Net earnings (loss) ................................................................ $ (3,984) $ 5,240 $ 473
Adjustments to reconcile net earnings to net cash provided by continuing
operating activities--
Depreciation and amortization ................................................ 3,160 2,953 2,752
Deferred income taxes ........................................................ (843) 2,370 98
Discontinued operations ...................................................... -- 564 2,610
Non-cash portion of non-recurring expense .................................... 3,001 -- --
Cash effects of changes in--
Accounts receivable ......................................................... 1,009 (2,392) (5,801)
Inventories ................................................................. 1,774 (3,116) (2,636)
Prepaid expenses and other asset ............................................ (670) (1,271) (99)
Accounts payable ............................................................ (655) 1,231 (218)
Accrued expenses and other liabilities ...................................... (487) (746) 1,925
--------------------------------------
Net cash provided by (used in) continuing operating activities ..................... 2,305 4,833 (896)
Net cash (used in) provided by discontinued operating activities ................... -- (2,963) 1,311
--------------------------------------
Net cash provided by operating activities .......................................... 2,305 1,870 415
--------------------------------------
Cash flows from investing activities--
Additions to property and equipment ................................................ (3,830) (4,959) (2,966)
Purchase of subsidiary minority interest ........................................... (1,249) -- --
Proceeds from sale of discontinued operations ...................................... -- 6,281 4,800
--------------------------------------
Net cash provided by (used in) investing activities ................................ (5,079) 1,322 1,834
--------------------------------------
Cash flows from financing activities--
Proceeds (repayments) under intellectual property lease ............................ (1,551) 10,200 --
Proceeds (repayments) under revolving credit facilities ............................ 3,474 (14,575) (425)
Reduction in term loans ............................................................ -- (8,362) (3,597)
(Reduction in) proceeds from foreign bank debt ..................................... (1,793) (1,595) 2,233
Proceeds from public stock offering ................................................ -- 22,093 --
Repurchase of treasury stock ....................................................... (3,309) -- --
Proceeds from other stock issuances ................................................ 618 249 174
Other financing activities, net .................................................... (218) (291) (196)
--------------------------------------
Net cash provided by (used in) financing activities ................................ (2,779) 7,719 (1,811)
--------------------------------------
Changes in cash and cash equivalents--
Net (decrease) increase in cash and cash equivalents ............................ (5,553) 10,911 438
Cash and cash equivalents at beginning of year .................................. 12,321 1,410 972
--------------------------------------
Cash and cash equivalents at end of year ........................................ $ 6,768 $ 12,321 $ 1,410
======================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
- 27 -
<PAGE>
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
The Middleby Corporation (the "Company") is engaged in the design,
manufacture and sale of commercial and institutional foodservice equipment. Its
major lines of products consist of conveyor ovens, toasters, counter-top cooking
and warming equipment, ranges, convection ovens, broilers, steamers and
semi-custom fabrication. The Company manufactures and assembles most of this
equipment at two factories in the United States and one operation in the
Philippines. The Company conducts its business principally through one domestic
and two international divisions.
The Company's products are sold primarily to independent dealers and
distributors and are marketed primarily through the Company's sales personnel
and network of independent manufacturers' representatives. The Company's
end-user customers include: (i) fast food or quick-service restaurants,
including those restaurants that primarily offer pizza, (ii) full-service
restaurants, including casual-theme restaurants, (iii) retail outlets, such as
convenience stores, supermarkets and department stores and (iv) public and
private institutions, such as hotels, resorts, schools, hospitals, long-term
care facilities, correctional facilities, stadiums, airports, corporate
cafeterias, military facilities and government agencies. Included in these
customers are several large multi-national restaurant chains which account for a
significant portion of the Company's business, although no single customer
accounts for more than 10% of net sales.
The Company purchases raw materials and component parts, the majority of
which are standard commodity type materials, from a number of suppliers.
Although certain component parts are procured from a sole source, the Company
can purchase such parts from alternate vendors.
The Company has numerous licenses and patents to manufacture, use and sell
its products and equipment. Certain of these licenses begin to expire in the
year 2000. Management believes the loss of any one of these licenses or patents
would not have a material adverse effect on the financial and operating results
of the Company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation. Certain prior year
amounts have been reclassified to be consistent with the current year
presentation.
- 28 -
<PAGE>
The Company's fiscal year ends on the Saturday nearest December 31. Fiscal
years 1998, 1997 and 1996 ended on January 2, 1999, January 3, 1998 and December
28, 1996, respectively, and included 52, 53 and 52 weeks, respectively.
(b) Cash and Cash Equivalents
The Company considers all short-term investments with original maturities
of three months or less when acquired to be cash equivalents. The Company's
policy is to invest its excess cash in U.S. Government securities,
interest-bearing deposits with major banks, municipal notes and bonds and
commercial paper of companies with strong credit ratings that are subject to
minimal credit and market risk.
(c) Accounts Receivable
Accounts receivable, as shown in the consolidated balance sheets, are net
of allowances for doubtful accounts of $805,000 and $577,000 at January 2, 1999
and January 3, 1998, respectively.
(d) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
utilizing the first-in, first-out (FIFO) inventory method. Inventories at
January 2, 1999 and January 3, 1998 are as follows:
1998 1997
---- ----
(dollars in thousands)
Raw materials and parts $ 5,281 $ 6,073
Work in process ....... 3,743 6,804
Finished goods ........ 11,432 11,195
------- -------
$20,456 $24,072
======= =======
- 29 -
<PAGE>
(e) Property, Plant and Equipment
Property, plant and equipment are carried at cost as follows:
1998 1997
-------- --------
(dollars in thousands)
Land and improvements ...................... $ 3,322 $ 3,322
Building and improvements .................. 12,054 11,621
Furniture and fixtures ..................... 7,191 6,022
Machinery and equipment .................... 15,939 14,359
-------- --------
38,506 35,324
Less accumulated depreciation .............. (15,910) (13,534)
-------- --------
$ 22,596 $ 21,790
======== ========
Depreciation is provided for financial statement purposes using the
straight-line method and amounted to $2,510,000, $2,094,000 and $1,549,000 in
fiscal 1998, 1997 and 1996, respectively. Following is a summary of the
estimated useful lives:
Description Life
- ----------- ----
Land improvements............................................ 7 years
Building and improvements.................................... 20 to 40 years
Furniture and fixtures....................................... 5 to 7 years
Machinery and equipment...................................... 3 to 10 years
Expenditures which significantly extend useful lives are capitalized.
Maintenance and repairs are charged to expense as incurred. Asset impairments
are recorded whenever events or changes in circumstances indicate that the
recorded value of an asset is less than the sum of its expected future
undiscounted cash flows.
(f) Excess Purchase Price Over Net Assets Acquired
The excess purchase price over net assets acquired is being amortized using
a straight-line method over periods of 15 to 40 years. Amounts presented are net
of accumulated amortization of $5,186,000 and $4,673,000 at January 2, 1999 and
January 3, 1998, respectively. The Company periodically evaluates the useful
life and realizability of the excess purchase price over net assets acquired
based on current events and circumstances. Impairments are measured utilizing an
undiscounted forecasted income method pertaining to business units and are
recorded at the time management deems an impairment has occurred.
- 30 -
<PAGE>
(g) Intangible Assets
Trademarks, patents, license agreements and other intangibles, included in
other assets in the consolidated balance sheets, are being amortized on a
straight-line basis over estimated useful lives ranging from 5 to 15 years. Net
recorded intangible assets of $755,000 and $684,000 are presented net of
accumulated amortization of $2,182,000 and $2,091,000 at January 2, 1999 and
January 3, 1998, respectively.
(h) Accrued Expenses
Accrued expenses consist of the following at January 2, 1999 and January 3,
1998, respectively:
1998 1997
---- ----
(dollars in thousands)
Accrued payroll and related expenses ............ $2,629 $3,253
Accrued commissions ............................. 1,497 1,510
Accrued warranty ................................ 1,372 1,172
Other accrued expenses .......................... 3,357 2,972
------ ------
$8,855 $8,907
====== ======
(i) Fair Value of Financial Instruments
The carrying value of all financial instruments approximates the fair value
of those assets and liabilities.
(j) Foreign Currency
Foreign currency transactions are accounted for in accordance with SFAS No.
52: "Foreign Currency Translation." Assets and liabilities of the Company's
foreign operations are translated at exchange rates at the balance sheet date.
These translation adjustments are not included in determining net income for the
period but are disclosed and accumulated in a separate component of
stockholders' equity until sale or liquidation of the net investment in the
foreign entity takes place. Exchange gains and losses on foreign currency
transactions are included in determining net income for the period in which they
occur. Intercompany transactions of a long-term investment nature are considered
part of the Company's net investment and hence do not give rise to gains or
losses.
- 31 -
<PAGE>
(k) Use of Estimates
The preparation of 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(l) Revenue Recognition
Revenue is recognized from sales when a product is shipped. The Company
recognizes warranty and equipment installation expenses at the time a product is
shipped, if applicable. The expense is estimated considering current warranty
policies and historical experience.
(m) Research and Development Costs
Research and development costs, included in cost of sales in the
consolidated statements of earnings, are charged to expense when incurred. These
costs were $1,796,000, $1,695,000 and $1,515,000 in fiscal 1998, 1997 and 1996,
respectively.
(n) Earnings Per Share
During the fourth quarter of 1997, the Company adopted SFAS No. 128:
"Earnings Per Share." Under SFAS 128, "basic earnings per share" is calculated
based upon the weighted average number of common shares actually outstanding,
and "diluted earnings per share" is calculated based upon the weighted average
number of common shares outstanding, warrants and other potential common shares,
if they are dilutive. The Company's common share equivalents consist of shares
issuable on exercise of outstanding options computed using the treasury method
and amounted to 111,000, 241,000 and 251,000 for fiscal 1998, 1997 and 1996,
respectively.
(o) Consolidated Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the Company
considers all highly-liquid instruments with a maturity of three months or less
to be cash equivalents. Cash paid for interest was $2,877,000, $3,925,000 and
$4,397,000 in fiscal 1998, 1997 and 1996, respectively. Cash payments totaling
$565,000, $304,000 and $256,000 made for income taxes during fiscal 1998, 1997
and 1996, respectively.
- 32 -
<PAGE>
(3) FINANCING ARRANGEMENTS
The following is a summary of long-term debt at January 2, 1999 and January
3, 1998:
1998 1997
---- ----
(dollars in thousands)
Unsecured senior note ....................... $15,000 $15,000
Unsecured revolving credit line ............. 3,474 --
Intellectual property lease ................. 8,649 10,200
Foreign bank debt ........................... -- 1,793
Other financing ............................. 702 920
------- -------
27,825 27,913
Less current maturities of
long-term debt ......................... 1,893 3,595
------- -------
$25,932 $24,318
======= =======
The unsecured senior note bears interest at 10.99% and has an eight-year
term maturing January 10, 2003 with semi-annual payments of $2,500,000 beginning
in July 2000. A warrant for the purchase of 250,000 shares of common stock of
the Company at an exercise price of $3 per share was issued in conjunction with
the note.
As of January 2, 1999, the Company had borrowings of $2,474,000 in a
yen-denominated loan and $1,000,000 in a Spanish peseta-denominated loan under
the Company's unsecured multi-currency revolving credit line. There were no
borrowings in U.S. Dollars at year-end. The credit agreement was amended in
March 1999, reducing the credit line from $20,000,000 to $10,000,000. Interest
on U.S. borrowings is assessed at floating interest rates of between 0.3% to
2.0% above LIBOR rate or at the bank's reference rate to 0.5% below that
reference rate. The interest rate is adjusted quarterly based on the Company's
defined indebtedness ratio on a rolling four-quarter basis. Interest on foreign
borrowings is determined based upon the bank's reference rate within that
country. As of January 2, 1999, the interest rates on the yen and peseta
denominated borrowings were 1.2% and 6.4%, respectively. A variable commitment
fee, based upon the indebtedness ratio, of between 0.075% to 0.35% is charged on
the unused portion of the line of credit. The multi-currency revolving line of
credit expires on February 28, 2001, or earlier, at the Company's option.
In December 1997, the Company entered into a four-year sale and leaseback
of certain intellectual property for $10,200,000. The sale and leaseback
facility bears an
- 33 -
<PAGE>
implicit interest rate of 10.3% and has a four-year term maturing on December
30, 2001. At its option, the Company may repurchase the intellectual property
after three years at a specified price. After the final maturity of the lease,
the Company may repurchase the intellectual property at its then fair market
value. Principal and interest are paid on a quarterly basis.
Other financing arrangements are comprised primarily of capital lease
arrangements for production equipment, with repayment periods extending through
fiscal 2000. Ownership of the related equipment transfers to the Company at the
end of the lease period.
The terms of the credit and note agreements limit the paying of dividends,
limit capital expenditures and leases, and require, among other terms, a minimum
amount, as defined, of stockholders' equity, and certain ratios of indebtedness
and fixed charge coverage. The credit and note agreements also provide that if a
material adverse change in the Company's business operations or conditions
occurs, the lender and noteholder could declare an event of default. At January
2, 1999, the Company was not in compliance with covenants pursuant to its
revolving credit facility and note agreement. The Company subsequently obtained
waivers for these covenant violations. In March 1999, the credit and note
agreements were amended to adjust the minimum requirements of stockholders'
equity and ratios of indebtedness and fixed charge coverage.
The aggregate amount of long-term debt payable during each of the next five
years and thereafter is as follows:
(dollars in thousands)
1999 ............................... $ 1,893
2000 ............................... 9,985
2001 ............................... 8,447
2002 ............................... 5,000
2003 ............................... 2,500
-------
$27,825
=======
(4) COMMON AND PREFERRED STOCK
(a) Shares Authorized and Issued
At January 2, 1999 and January 3, 1998, the Company had 20,000,000
shares of common stock and 2,000,000 shares of Non-voting Preferred Stock
authorized. At January 2, 1999, there were 10,996,000 shares issued.
- 34 -
<PAGE>
(b) Public Stock Offering
In December 1997, the Company completed a public stock offering. The
offering totaled 3,001,500 shares of which the Company sold 2,391,500
shares and 610,000 shares were sold by selling stockholders. Net proceeds
to the Company totaled approximately $22.1 million and were used to repay
certain indebtedness.
(c) Treasury Stock
In July 1998, the Company's Board of Directors adopted a stock
repurchase program and during 1998 authorized the purchase of up to
1,800,000 common shares in open market purchases. As of January 2, 1999,
838,000 shares had been purchased for $3.3 million.
(d) Warrant
In conjunction with the issuance of the senior notes in January 1995
(see Note 3), the Company issued a transferable warrant to the noteholder
for the purchase of 250,000 shares of common stock at an exercise price of
$3 per share. The warrant provides for adjustment of the exercise price if
the Company issues additional shares at a purchase price below the then
current market price, as defined, and for adjustment of the number of
shares if the Company declares a stock dividend. The warrant became
exercisable on February 10, 1995 and expires July 10, 2003.
(e) Stock Options
The Company maintains a 1998 Stock Incentive Plan (the "Plan"), as
adopted effective as of February 19, 1998, which provides rights to key
employees to purchase shares of common stock at specified exercise prices.
The Plan supercedes the 1989 Stock Incentive Plan, as amended, and no
further options will be granted under the 1989 Plan. A maximum amount of
550,000 shares can be issued under the Plan. Options may be exercised upon
certain vesting requirements being met, but expire to the extent
unexercised within a maximum of ten years from the date of grant. The
weighted average exercise price of options outstanding under the Plan was
$6.41 at January 2, 1999 and $4.48 at January 3, 1998.
In addition to the above Plan, certain directors of the Company have
options outstanding at January 2, 1999 for 1,000 shares exercisable at
$1.875 per share and 75,000 shares exercisable at $7.50 per share.
- 35 -
<PAGE>
A summary of stock option activity is presented below:
Option
Stock Option Activity Employees Directors Price Per Share
- --------------------- --------- --------- ---------------
Outstanding at
December 28, 1996 ...... 136,600 82,000 $1.25 to $7.50
======= =======
Granted ................ 5,000 -- $9.63
Exercised .............. (4,562) (6,000) $1.875 to $5.63
Forfeited .............. (12,500) -- $5.25 to $5.63
------- -------
Outstanding at
January 3, 1998 ........ 124,538 76,000
======= =======
Granted ................ 200,000 -- $7.09
Exercised .............. (29,300) -- $1.25 to $7.38
Forfeited .............. (3,250) -- $5.25 to $5.63
------- --------
Outstanding at
January 2, 1999 ........ 291,988 76,000
======= =======
As permitted under SFAS No. 123: "Accounting for Stock-Based
Compensation", the Company has elected to follow APB Opinion No. 25:
"Accounting for Stock Issued to Employees" in accounting for stock-based
awards to employees and directors. Under APB 25, because the exercise price
of the Company's stock options is equal to or greater than the market price
of the underlying stock on the date of grant, no compensation expense is
recognized in the Company's financial statements for all periods presented.
Pro forma information regarding net earnings and earnings per share is
required by SFAS 123. This information is required to be determined as if
the Company had accounted for its employee and director stock options
granted subsequent to December 31, 1994 under the fair value method of that
statement. The weighted average estimated fair value of stock options
granted in fiscal 1998, 1997 and 1996 was $3.62, $5.32 and $3.37 per share,
respectively. The fair value of options has been estimated at the date of
grant using a Black-Scholes option pricing model with the following general
assumptions: risk-free interest rate of 5.5 percent, no expected dividend
yield, expected lives of 3.5 to 9.0 years and expected volatility of 40 to
60 percent.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the
- 36 -
<PAGE>
Company's options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in the opinion of
management, the existing models do not necessarily provide a reliable
single measure of the fair value of its options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma net income and per share data from continuing
operations is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(dollars in thousands, except per share data)
<S> <C> <C> <C>
Earnings from continuing operations ....... $ (4,047) $ 5,675 $ 2,946
Per share:
Basic ................................. $ (0.38) $ 0.64 $ 0.35
Diluted ............................... $ (0.38) $ 0.62 $ 0.34
</TABLE>
(5) INCOME TAXES
The provision (benefit) for income taxes for continuing operations is
summarized as follows:
1998 1997 1996
---- ---- ----
(dollars in thousands)
Federal ...................... $ (250) $ 2,346 $ 1,153
State and local .............. (42) 178 188
Foreign ...................... 81 14 48
------- ------- -------
Total ............... $ (211) $ 2,538 $ 1,389
======= ======= =======
Current ...................... $ 141 $ 3,124 $ 1,213
Deferred ..................... (352) (586) 176
------- ------- -------
Total ............... $ (211) $ 2,538 $ 1,389
======= ======= =======
- 37 -
<PAGE>
Reconciliation of the differences between income taxes computed at the
Federal statutory rate to the effective rate are as follows:
1998 1997 1996
---- ---- ----
U.S. Federal statutory tax rate ............ (34.0%) 34.0% 34.0%
NOL utilization and adjustments
to valuation allowance ................ 18.8 (13.1) (19.3)
Permanent book vs. tax
differences ........................... 4.0 1.8 1.2
Foreign tax losses with no benefit
and rate differentials ................ 8.2 5.6 11.0
State taxes, net of federal
benefit ............................... (2.0) 2.1 4.2
---- ---- ----
Consolidated effective tax rate for
continuing operations ................. (5.0%) 30.4% 31.1%
==== ==== ====
At January 2, 1999 and January 3, 1998, the Company had recorded the
following deferred tax assets and liabilities which were comprised of the
following:
1998 1997
---- ----
(dollars in thousands)
Deferred tax assets:
Federal net operating loss carry-forwards ..... $ 4,873 $ 5,224
Tax credit carry-forwards ..................... 1,725 1,676
Foreign net operating loss carry-forwards ..... 1,506 --
Accrued pension benefits ...................... 1,184 862
Reserve for product line discontinuance ....... 699 --
Accrued warranty .............................. 508 398
Other ......................................... 1,369 367
Valuation allowance ........................... (1,912) --
------- -------
Deferred tax assets ..................... 9,952 8,527
Deferred tax liabilities:
Depreciation .................................. (1,710) (1,748)
------- -------
Net deferred tax assets .......................... $ 8,242 $ 6,779
======= =======
As of January 2, 1999, the consolidated tax loss carry-forwards for Federal
income tax purposes were approximately $4,873,000 on a tax effected basis. These
carry-forwards expire as follows: $424,000 in 2004; $1,619,000 in 2005;
$1,913,000 in 2006; and $917,000 in 2007. Tax credit carry-forwards are
comprised of business tax credits of approximately $958,000, which expire from
1999 through 2001 and Federal alternative minimum tax credits of approximately
$767,000 that do not expire. Foreign net operating loss carry-forwards relate
primarily to the Company's operations in France, Japan, Korea, the Philippines
and Taiwan.
- 38 -
<PAGE>
The increase in the gross tax asset and the related valuation allowance is
due to the generation of net operating loss carry-forwards at certain foreign
operations for which valuation allowance has been established. Additionally, a
valuation allowance has been established related to business tax credits which
will more likely than not expire unutilized.
(6) COMMITMENTS AND CONTINGENCIES
The Company leases office and plant facilities and equipment under
operating leases which expire in fiscal 1999 through 2003. Rental expense was
$1,280,000, $1,569,000 and $802,000 in fiscal 1998, 1997 and 1996, respectively.
Future minimum rental payments under these leases are as follows:
(dollars in thousands)
1999................................. $ 760
2000................................. 647
2001................................. 593
2002................................. 452
2003 and thereafter.................. 274
------
$2,726
(7) DISCONTINUED OPERATION
On January 23, 1997, the Company completed the sale of substantially all of
the assets of Victory Refrigeration Company ("Victory"). The results of Victory
have been reported separately as a discontinued operation in the consolidated
financial statements for fiscal 1996. The results of the discontinued operations
are not necessarily indicative of the results which may have been obtained had
the continuing and discontinued operations been operating independently.
Summarized results of Victory are as follows:
1996
(dollars in thousands)
Net sales ................................. $ 27,261
Loss from operations ...................... (458)
Loss before income taxes .................. (1,111)
Benefit for income taxes .................. (367)
Loss from discontinued operations ......... $ (744)
- 39 -
<PAGE>
Additionally, the company recorded losses from operations during the
phase-out period and on disposal of the business of $564,000 and $1,866,000 in
1997 and 1996, respectively.
(8) NON-RECURRING EXPENSES
During the third quarter of 1998, the Company decided to discontinue the
implementation and fully abandon an enterprise-wide resource planning system.
This decision resulted from the failure of the system to meet certain
performance specifications. The total expense resulting from this decision
amounted to $1,335,000 and was recorded in accordance with SFAS 121 "Accounting
for the Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed
of." This charge reflects the complete write-off of costs associated with the
system, including capitalized software, program development and implementation
costs.
Additionally, during the third quarter of 1998, the Company recorded
charges of $190,000 for restructuring actions related to its International
Distribution Division and initiatives to reduce operating costs. These actions
included the disposal of assets resulting from the relocation from certain
leased facilities and severance benefits associated with terminated employees.
These actions were substantially complete at year-end.
During the fourth quarter of 1998, the Company decided to discontinue the
distribution of all non-manufactured products by the Cooking Systems Group and
exit a manufacturing product line not consistent with the Company's cooking and
warming equipment strategy. Accordingly, the Titan mixer line was sold and the
Company is ending distribution activities for the Ro-Fry oil-less fryer,
rotisserie ovens, display cases and combi-ovens. In conjunction with these
actions, the Company has recorded charges of $1,932,000 for the disposition of
inventories and related exit costs. The Company anticipates completion of the
exit strategy by the second quarter of 1999.
(9) ACQUISITION OF MINORITY INTEREST
During the first quarter of 1998, the Company acquired the remaining
interest in Asbury Associates, Inc. and Middleby Philippines Corporation from
the founder and president of Asbury Associates, Inc. The remaining interest was
acquired for $512,000 in cash, 50,000 shares of common stock with a market value
of $387,000 at the date of issuance and forgiveness of certain minority interest
liabilities owed by the minority shareholder. This transaction increased the
Company's ownership interest in these subsidiaries to 100%. The excess purchase
price over the value of assets acquired of $1,249,000 was allocated to goodwill
and is to be amortized over a period of 15 years.
- 40 -
<PAGE>
(10) SEGMENT INFORMATION
The Company operates in three reportable segments defined by factors
including physical location, management reporting structure, and operating
activities.
The domestic manufacturing operations operate through the Cooking Systems
Group. This division supports three major product groups, including conveyor
oven equipment, core cooking equipment and counterline cooking equipment.
Principal product lines of the conveyor oven product group include Middleby
Marshall ovens and CTX ovens. Principal product lines of the core cooking
equipment product group include the Southbend product line of ranges, steamers,
convection ovens, broilers, fryers, griddles and steam cooking equipment. The
counterline cooking and warming equipment product group includes toasters, hot
food servers, foodwarmers, griddles, fryers and ranges distributed under the
Toastmaster brand name. This business division has manufacturing facilities in
Elgin, Illinois and Fuquay-Varina, North Carolina.
The International Specialty Equipment Division operations are located in Manila,
the Philippines. The division engineers, manufactures and installs custom
kitchen fabrications and specialty cooking equipment used primarily in
conjunction with standard equipment manufactured in the U.S. to provide a
complete kitchen installation. Principal products include serving stations, work
tables, undercounter refrigeration systems, ventilation systems, cabinets and
shelving. Customers are primarily Asian, Pacific Rim, and Middle Eastern
operations of major U.S. and international foodservice chains and hotels.
The International Distribution Division provides integrated export management,
distribution and installation services through its distribution operations in
Canada, China, Florida, France, Japan, Korea, Mexico, the Philippines, Spain,
and Taiwan. The division sells the Company's product lines and certain
non-competing complementary product lines throughout the world. For a local
country distributor or dealer, the Company is able to provide a centralized
source of foodservice equipment with complete export management and product
support services.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates individual
segment performance based on operating income. Intersegment sales are made at
established arms length transfer prices.
- 41 -
<PAGE>
The following table summarizes the results of operations for the Company's
business segments:
<TABLE>
<CAPTION>
Cooking International
Systems Specialty International Corporate
Group Equipment Distribution and Other(1) Eliminations(2) Total
----------------------------------------------------------------------------------------------
FISCAL 1998
<S> <C> <C> <C> <C> <C> <C>
Net Sales .................... $ 101,223 $ 5,239 $ 39,096 $ 1,440 $ (14,678) $ 132,320
Operating Income ............. 7,772 (53) (2,629) (4,979) (451) (340)
Non-recurring expense ........ 1,932 -- -- 1,525 -- 3,457
Depreciation expense ......... 1,741 470 201 98 -- 2,510
Capital expenditures ......... 3,171 292 39 328 -- 3,830
Total Assets ................. 48,348 10,187 22,786 22,055 (6,785) 96,591
Long-lived Assets ............ 25,169 3,660 1,351 14,109 -- 44,289
FISCAL 1997
Net Sales .................... $ 104,757 $ 7,627 $ 47,668 $ 4,417 $ (16,216) $ 148,253
Operating Income ............. 15,548 904 (543) (2,869) (149) 12,891
Depreciation Expense ......... 1,408 350 245 91 -- 2,094
Capital Expenditures ......... 3,643 300 414 602 -- 4,959
Total Assets ................. 53,153 8,603 22,021 27,813 (7,954) 103,636
Long-lived Assets ............ 23,747 4,057 1,293 11,647 -- 40,744
FISCAL 1996
Net Sales .................... $ 90,468 $ 6,552 $ 39,722 $ 1,417 $ (13,394) $ 124,765
Operating Income ............. 12,656 (869) 1,206 (4,187) (129) 8,677
Depreciation Expense ......... 1,186 118 166 79 -- 1,549
Capital Expenditures ......... 1,089 1,439 285 153 -- 2,966
Total Assets ................. 48,375 8,579 15,052 18,849 (5,170) 85,685
Long-lived Assets ............ 21,520 4,123 875 10,118 -- 36,636
</TABLE>
(1) Includes sales of discontinued product lines in addition to corporate and
other general company assets and operations.
(2) Includes elimination of intercompany sales, profit in inventory, and
intercompany receivables. Intercompany sale transactions are predominantly
from the Cooking Systems Group to the International Distribution Division.
Net sales by each major geographic region are as follows:
1998 1997 1996
-------- -------- --------
(dollars in thousands)
United States .................. $ 89,005 $ 92,958 $ 78,491
-------- -------- --------
Asia ........................... 15,034 25,857 25,606
Europe and Middle East ......... 13,451 16,416 11,351
Latin America .................. 10,061 7,563 5,281
Canada ......................... 4,769 5,459 4,036
-------- -------- --------
Total international ........ 43,315 55,295 46,274
-------- -------- --------
$132,320 $148,253 $124,765
======== ======== ========
- 42 -
<PAGE>
(11) EMPLOYEE BENEFIT PLANS
The Company maintains non-contributory defined benefit plans for its union
employees at the Elgin, Illinois facility. Benefits are determined based upon
retirement age and years of service with the Company. The plan is funded in
accordance with provisions of the Employee Retirement Income Security Act of
1974.
The Company also maintains retirement benefit agreements with its Chairman
and President, and a non-qualified defined benefit retirement plan for certain
officers. The retirement benefits are based upon a percentage of the officer's
final base salary and number of years of employment. Additionally, the Company
maintains a retirement plan for non-employee directors. The plan provides for an
annual benefit upon retirement from the Board of Directors at age 70, equal to
100% of the director's last annual retainer, payable for a number of years equal
to the director's years of service up to a maximum of 10 years. Retirement
benefits for the officers and directors were unfunded as of January 2, 1999.
A summary of the plans' benefit obligations, funded status, and net balance
sheet position is as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
1998 1998 1997 1997
Funded Unfunded Funded Unfunded
Plans Plans Plans Plans
------- ------- ------- -------
<S> <C> <C> <C> <C>
Change in Benefit Obligation:
Benefit obligation - beginning of year .. $ 2,204 $ 1,901 $ 1,911 $ 1,566
Service cost ............................ 111 178 112 211
Interest on benefit obligations ......... 162 143 137 124
Actual return on assets ................. (71) -- (100) --
Net amortization and deferral ........... (51) 92 -- --
------- ------- ------- -------
Net pension expense ..................... 151 413 149 335
Net benefit payments .................... (100) -- (79) --
Actuarial (gain) loss ................... 460 687 223 --
------- ------- ------- -------
Benefit obligation - end of year ........ 2,715 3,001 2,204 1,901
------- ------- ------- -------
Change in Plan Assets:
Plan assets at fair value -
beginning of year .................... 1,858 -- 1,549 --
Company contributions ................... 301 -- 321 --
Investment gain ......................... 148 -- 127 --
Benefit payments and plan expenses ...... (173) -- (139) --
------- ------- ------- -------
Plan assets at fair value - end of year . 2,134 -- 1,858 --
------- ------- ------- -------
Unfunded benefit obligation ................ (581) (3,001) (346) (1,901)
Unrecognized net loss ...................... 699 686 287
Unrecognized prior year service cost ....... 245 -- 282 --
Unrecognized net transition asset .......... (15) -- (19) --
======= ======= ======= =======
Net amount recognized in the balance
sheet at year-end ..................... $ 348 $(2,315) $ 204 $(1,901)
======= ======= ======= =======
Assumed discount rate ...................... 6.5% 6.2% 7.5% 7.5%
Expected return on assets .................. 8.5% -- 8.5% --
</TABLE>
- 43 -
<PAGE>
The Company also maintains a discretionary profit sharing plan and 401k
savings plan for salaried and non-union hourly employees in the United States.
Contribution expenses associated with the profit sharing plan amounted to
$300,000, $310,000 and $308,000 in fiscal 1998, 1997 and 1996 respectively.
(12) QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1st 2nd 3rd 4th Total Year
--- --- --- --- ----------
(dollars in thousands, except per share data)
1998
<S> <C> <C> <C> <C> <C>
Net sales .......................................... $ 31,101 $ 33,641 $ 33,891 $ 33,687 $ 132,320
Gross profit ....................................... 9,438 10,672 9,420 6,708 36,238
Non-recurring expense .............................. -- -- 1,525 1,932 3,457
Income (loss) from operations ...................... 1,621 2,062 (113) (3,910) (340)
Earnings (loss) from continuing operations ......... 520 791 (888) (4,407) (3,984)
Earnings (loss) from discontinued operations ....... -- -- -- -- --
Net earnings (loss) ................................ $ 520 $ 791 $ (888) $ (4,407) $ (3,984)
=========== =========== =========== =========== ===========
Basic earnings (loss) per share (1):
Continuing operations ......................... $ 0.05 $ 0.07 $ (0.08) $ (0.42) $ (0.37)
Discontinued operations ....................... 0.00 0.00 0.00 (0.00) 0.00
----------- ----------- ----------- ----------- -----------
Net earnings (loss) per share ...................... $ 0.05 $ 0.07 (0.08) $ (0.42) $ (0.37)
=========== =========== =========== =========== ===========
Diluted earnings (loss) per share (1):
Continuing operations ......................... $ 0.05 $ 0.07 $ (0.08) $ (0.42) $ (0.37)
Discontinued operations ....................... 0.00 0.00 0.00 0.00 0.00
----------- ----------- ----------- ----------- -----------
Net earnings (loss) per share ...................... $ 0.05 $ 0.07 $ (0.08) $ (0.42) $ (0.37)
=========== =========== =========== =========== ===========
1997
Net sales .......................................... $ 32,698 $ 42,082 $ 35,850 $ 37,623 $ 148,253
Gross profit ....................................... 10,474 12,814 11,002 11,440 45,730
Income from operations ............................. 3,118 3,735 2,887 3,151 12,891
Earnings from continuing operations ................ 1,386 1,587 1,231 1,600 5,804
Loss from discontinued operations .................. -- (564) -- -- (564)
Net earnings ....................................... $ 1,386 $ 1,023 $ 1,231 $ 31,600 $ 5,240
=========== =========== =========== =========== ===========
Basic earnings (loss) per share (1):
Continuing operations ......................... $ 0.16 $ 0.18 $ 0.14 $ 0.17 $ 0.65
Discontinued operations ....................... 0.00 (0.06) 0.00 0.00 (0.06)
----------- ----------- ----------- ----------- -----------
Net earnings per share ............................. $ 0.16 $ 0.12 $ 0.14 $ 0.17 $ 0.59
=========== =========== =========== =========== ===========
Diluted earnings (loss) per share (1):
Continuing operations ......................... $ 0.16 $ 0.18 $ 0.14 $ 0.16 $ 0.64
Discontinued operations ....................... 0.00 (0.06) 0.00 0.00 (0.06)
----------- ----------- ----------- ----------- -----------
Net earnings per share ............................. $ 0.16 $ 0.12 $ 0.14 $ 0.16 $ 0.58
=========== =========== =========== =========== ===========
</TABLE>
(1) Sum of quarters may not equal the total for the year due to changes in the
number of shares outstanding during the year.
- 44 -
<PAGE>
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FISCAL YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998
AND DECEMBER 28, 1996
<TABLE>
<CAPTION>
Balance Additions Write-Offs Balance
Beginning Charged During the At End
Of Period Expense the Period Of Period
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Allowance for
doubtful accounts; deducted from
accounts receivable on the
balance sheets-
1996 $413,000 $117,000 $ (35,000) $495,000
1997 $495,000 $453,000 $(371,000) $577,000
1998 $577,000 $591,000 $(363,000) $805,000
Reserve for product line
discontinuance
1998 $ -- $1,932,000 $ (90,000) $1,842,000
</TABLE>
- 45 -
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
The information required by Part III (Items 10, 11, 12 and 13) is
incorporated by reference, to the extent necessary, in accordance with General
Instruction G(3), from the Company's definitive proxy statement filed pursuant
to Regulation 14A in connection with the 1999 annual meeting of stockholders.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial statements.
The financial statements listed on Page 20 are filed as part of this
Form 10-K.
3. Exhibits.
3.1 Unofficial Restated Certificate of Incorporation of The
Middleby Corporation (as amended to August 23, 1996),
incorporated by reference to the Company's Form 10-Q/A,
Amendment No. 1, Exhibit 3(i), for the fiscal quarter ended
June 29, 1996, filed on August 23, 1996;
3.2 Unofficial Amended and Restated Bylaws of The
MiddlebyCorporation (as amended to August 23, 1996),
incorporated by reference to the Company's Form 10-Q/A,
Amendment No. 1, Exhibit 3(ii), for the fiscal quarter ended
June 29, 1996, filed on August 23, 1996;
4.1 Certificate of Designations dated October 30, 1987, and
specimen stock certificate relating to the CompanyPreferred
Stock, incorporated by reference from the Company's Form 10-K,
Exhibit (4), for the fiscal year ended December 31, 1988,
filed on March 15, 1989;
- 46 -
<PAGE>
4.2 Note Agreement dated as of January 1, 1995, among Middleby
Marshall Inc. and Asbury Associates, Inc. as Obligors,
incorporated by reference to the Company's Form 10-K, Exhibit
(4) (c), for the fiscal year ended December 31, 1994, filed on
March 31, 1995;
4.3 Amendment No. 1 to Note Agreement, incorporated by reference
to the Company's Form 10-Q, Exhibit (4)(c)(i), for the fiscal
quarter ended June 29, 1996, filed August 13, 1996;
4.4 Amendment No. 2 to Note Agreement, incorporated by reference
to the Company's Form 10-Q, Exhibit (4)(c)(ii), for the fiscal
quarter ended June 29, 1996, filed on August 13, 1996;
4.5 Amendment No. 3 to Note Agreement, dated as of August 15,
1996, incorporated by reference to the Company's Form 10-K for
the fiscal year ended December 28, 1996, filed on March 28,
1997;
4.6 "Second Amendment" (Amendment No. 4) to Note Agreement, dated
as of January 15, 1997, incorporated by reference to the
Company's Form 10-K for the fiscal year ended December 28,
1996, filed on March 28, 1997;
4.7 Amendment No. 5 to Note Agreement, dated as of March 18, 1998,
incorporated by reference to the Company's Form 8-K, Exhibit
4(a), filed on August 21, 1998.
4.8 Amendment No. 6 to Note Agreement, dated as of March 31, 1999;
4.9 Warrant to purchase common stock of The Middleby Corporation
dated January 10, 1995, incorporated by reference to the
Company's Form 10-K, Exhibit (4) (d), for the fiscal year
ended December 31, 1994, filed on March 31, 1995;
- 47 -
<PAGE>
4.10 Intercreditor Agreement dated as of January 10, 1995, by and
among Sanwa Business Credit Corporation, as Agent, the
Northwestern Mutual Life Insurance Company, as the Senior
Noteholder, and First Security Bank of Utah, National
Association, as Security Trustee and collateral Agent,
incorporated by reference to the Company's Form 10-K, Exhibit
(4) (e), for the fiscal year ended December 31, 1994, filed on
March 31, 1995;
4.11 Amendment No. 1 to Intercreditor Agreement, incorporated by
reference to the Company's Form 10-Q, Exhibit (4)(e)(i), for
the fiscal quarter ended June 29, 1996, filed on August 13,
1996;
4.12 Amendment No. 2 to Intercreditor Agreement, incorporated by
reference to the Company's Form 10-Q, Exhibit (4)(e)(ii), for
the fiscal quarter ended June 29, 1996, filed on August 13,
1996;
4.13 Multicurrency Credit Agreement dated as of March 19, 1998
among Middleby Marshall Inc., the Subsidiaries of Middleby
Marshall Inc., and Bank of America National Trust and Savings
Association, Incorporated by reference to the Company's Form
8-K, Exhibit 4(b), filed on August 21, 1998.
4.14 Second Amendment and Waiver dated as of March 31, 1999 to
Multicurrency Credit Agreement dated as of March 19, 1998;
10.1* Amended and Restated Employment Agreement of William F.
Whitman, Jr., dated January 1, 1995, incorporated by reference
to the Company's Form 10-Q, Exhibit (10) (iii) (a), for the
fiscal quarter ended April 1, 1995;
10.2* Amendment No. 1 to Amended and Restated Employment Agreement
of William F. Whitman, Jr., incorporated by reference to the
Company's Form 8-K, Exhibit 10(a), filed on August 21, 1998.
10.3* Amended and Restated Employment Agreement of David P. Riley,
dated January 1, 1995, incorporated by reference to the
Company's 10-Q, Exhibit (10) (iii) (b) for the fiscal quarter
ended April 1, 1995;
- 48 -
<PAGE>
10.4* Amendment No. 1 to Amended and Restated Employment Agreement
of David P. Riley incorporated by reference to the Company's
Form 8-K, Exhibit 10(b), filed on August 21, 1998.
10.5* Amended and Restated Employment Agreement of independent
directors adopted as of January 1, 1995, incorporated by
reference to the Company's Form 10-Q, Exhibit (10) (iii) (c),
for the fiscal quarter ended April 1, 1995;
10.6* The Middleby Corporation Amended and Restated 1989 Stock
Incentive Plan, as amended, incorporated by reference to the
Company's Form 10-Q, Exhibit (10)(iii)(d), for the fiscal
quarter ended June 29, 1996, filed on August l3, 1996;
10.7* The Middleby Corporation 1998 Stock Incentive Plan;
10.8* 1996 Management Incentive Plan (Corporate Vice Presidents),
incorporated by reference to Company's Form 10-Q, Exhibit 10
(iii) (f), for the fiscal quarter ended June 29, 1996, filed
on August 13, 1996;
10.9* Description of Supplemental Retirement Program, incorporated
by reference to Amendment No. 1 to the Company's Form 10-Q,
Exhibit 10 (c), for the fiscal quarter ended July 3, 1993,
filed on August 25, 1993;
10.10* The Middleby Corporation Stock Ownership Plan, incorporated by
reference to the Company's Form 10-K, Exhibit (10) (iii) (m),
for the fiscal year ended January 1, 1994, filed on March 31,
1994;
10.11* Amendment to The Middleby Corporation Stock Ownership Plan
dated as of January 1, 1994, incorporated by reference to the
Company's Form 10-K, Exhibit (10) (iii) (n), for the fiscal
year ended December 31,1994, filed on March 31, 1995;
10.12 Underwriting agreement dated October 28, 1997 between the
Company and Shroder and Co. Inc. and Brean Murray, Co Inc.,
incorporated by reference to exhibit 2 to schedule 13D for
William F Whitman, Jr., filed on November 5, 1997;
- 49 -
<PAGE>
10.13 The lease agreement dated as of December 30, 1997 between
Middleby Marshall Inc. and Bank of America Leasing and Capital
Corporation, incorporated by reference to the Company's 8-K
filed on January 13, 1998;
10.14 Amendment to the lease agreement dated December 30, 1997
between Middleby Marshall Inc. and Bank of America Leasing and
Capital Corporation, incorporated by reference to the
Company's 8-K filed on January 13, 1998;
(22) List of subsidiaries;
(27.1) Financial Data Schedules (EDGAR only);
* Designates management contract or compensation plan.
(b) There were no reports on Form 8-K in the fiscal fourth quarter of 1998.
(c) See the financial statement schedule included under Item 8.
- 50 -
<PAGE>
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, on the 27th of March,
1999.
THE MIDDLEBY CORPORATION
BY: /s/ David P. Riley
--------------------------------
David P. Riley
President, Chief Executive
Officer
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 March 27th, 1999.
Signatures Title
---------- -----
PRINCIPAL EXECUTIVE OFFICER
/s/ David P. Riley President, Chief Executive Officer
- ----------------------------- and Director
David P. Riley
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER
/s/ John J. Hastings Executive Vice President, Chief
- ----------------------------- Financial Officer, Secretary and
John J. Hastings Treasurer
DIRECTORS
/s/ William F. Whitman, Jr. Chairman of the Board and Director
- -----------------------------
William F. Whitman, Jr.
/s/ Robert R. Henry Director
- -----------------------------
Robert R. Henry
/s/ A. Don Lummus Director
- -----------------------------
A. Don Lummus
/s/ John R. Miller, III Director
- -----------------------------
John R. Miller, III
- 51 -
<PAGE>
/s/ Philip G. Putnam Director
- -----------------------------
Philip G. Putnam
/s/ Sabin C. Streeter Director
- -----------------------------
Sabin C. Streeter
/s/ Joseph G. Tompkins Director
- -----------------------------
Joseph G. Tompkins
/s/ Laura B. Whitman Director
- -----------------------------
Laura B. Whitman
/s/ Robert L. Yohe Director
- -----------------------------
Robert L. Yohe
- 52 -
EXECUTION COPY
MIDDLEBY MARSHALL INC.
AND
ASBURY ASSOCIATES, INC.
SIXTH AMENDMENT TO NOTE AGREEMENT AND WAIVER
Note Agreement Dated as of January 1, 1995
$15,000,000 10.99% Senior Secured Notes
Due January 10, 2003
and
Warrant to Purchase Common Stock
THIS SIXTH AMENDMENT TO NOTE AGREEMENT AND WAIVER, dated as of March 31,
1999 (the or this "Sixth Amendment"), relates to the Note Agreement dated as of
January 1, 1995 (as heretofore amended, the "Original Note Agreement"), between
and among Middleby Marshall Inc., a Delaware corporation ("MMI") and Asbury
Associates, Inc., a Florida corporation ("Asbury"), (Asbury and MMI each
hereinafter sometimes individually referred to as an "Obligor" and collectively
as the "Obligors"), and The Northwestern Mutual Life Insurance Company (the
"Noteholder").
RECITALS:
A. The Obligors and the Noteholder have heretofore entered into the
Original Note Agreement, pursuant to which were issued the $15,000,000 10.99%
Senior Notes Due January 10, 2003 (the "Notes ") dated January 10, 1995. The
Noteholder is the holder of 100% of the outstanding principal amount of the
Notes.
B. The Obligors have requested that the Noteholder agree to (i) waive
certain covenant defaults under Sections 5.7(b), 5.8, 5.9(a) and 5.9(b) of the
Original Note Agreement and (ii) amend certain terms of the Original Note
Agreement.
C. Capitalized terms used herein shall have the respective meanings
ascribed thereto in the Original Note Agreement unless herein defined or the
context shall otherwise require.
NOW, THEREFORE, upon the full and complete satisfaction of the conditions
precedent to the effectiveness of this Sixth Amendment set forth in Section 3.1
hereof, and in consideration of good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, the Obligors and the Noteholder do
hereby agree as follows:
SECTION 1. AMENDMENTS.
<PAGE>
1.1. Section 5.7(b) of the Original Note Agreement shall be and is hereby
amended in its entirety to read as follows:
(b) the ratio of (1) Consolidated Indebtedness to (2) EBITDA, measured at
the end of each fiscal quarter for the four (4) immediately preceding
fiscal quarters then ended, to exceed the following levels on each
date:
Maximum Level Period Ended
------------- ------------
5.75 April 3, 1999
5.75 July 3, 1999
5.00 October 2, 1999
4.00 January 1, 2000 and thereafter
provided, however, that for purposes of calculating EBITDA for the
preceding four quarters, non-recurring charges taken by MMI in the
third and fourth quarters of 1998 will be excluded from EBITDA; and
provided further, that, for purposes of testing compliance with this
covenant, the term (i) "Consolidated Indebtedness" shall include the
present value of all capital lease obligations of MMI and its
Subsidiaries, determined as of any date the ratio is to be determined,
and (ii) in the event that MMI or any of its Subsidiaries shall have
made an Acquisition involving any Person during any such fiscal
quarter, the term "EBITDA" shall include the allocable earnings before
interest, taxes, depreciation and amortization for the four (4) most
recently completed fiscal quarters of such Person determined in
accordance with GAAP, and, if GAAP is not applicable, determined in a
manner agreed to in writing by the holders of the Notes and MMI.
1.2. Section 5.8 of the Original Note Agreement shall be and is hereby
amended in its entirety to read as follows:
Section 5.8. Consolidated Tangible Net Worth. The Obligors will at all
times keep and maintain Consolidated Tangible Net Worth equal to or greater
than the sum of $24,000,000 plus an amount equal to 50% of Consolidated Net
Income earned during each of its fiscal quarters beginning with its fiscal
quarter commencing on January 3, 1999; provided that notwithstanding that
Consolidated Net income for any such elapsed fiscal quarter may be a
deficit figure, no reduction of the result thereof shall be made in the sum
to be maintained pursuant hereto.
1.3. Section 5.9 of the Original Note Agreement shall be and is hereby
amended in its entirety to read as follows:
2
<PAGE>
Section 5.9. Fixed Charges Coverage Ratio. (a) The Obligors will at all
times keep and maintain the ratio of Consolidated Net Income Available for
Fixed Charges (CNIAFC) for the immediately preceding four fiscal quarter
period to Consolidated Fixed Charges for the same four quarter period at
not less than:
Minimum Level Period Ended
------------- ------------
.75 April 3, 1999
.75 July 3, 1999
1.00 October 2, 1999
1.50 January 1, 2000
1.75 April 1, 2000 and thereafter
provided, however, that non-recurring charges taken by MMI in the third and
fourth quarters of fiscal 1998 will be excluded when calculating CNIAFC.
(b) The Obligors shall maintain a Consolidated Fixed Charge Coverage Ratio
measured at the end of each fiscal quarter for the four (4)
immediately preceding fiscal quarters then ended at not less than:
Minimum Level Period Ended
------------- ------------
1.00 April 3, 1999
1.00 July 3, 1999
1.00 October 2, 1999
1.00 January 1, 2000
1.25 April 1, 2000 and thereafter
In the event that MMI or any of its Subsidiaries shall have made an
Acquisition involving any Person during such immediate preceding fiscal
quarter, then for purposes of calculating the Consolidated Fixed Charge
Coverage Ratio, Consolidated Net Income shall include the allocable net
income (adjusted as provided in the definition of the term "Consolidated
Fixed Charge Coverage Ratio") of such Person for the four (4) most recently
completed fiscal quarters of such Person determined in accordance with
GAAP, and, if GAAP is not applicable, determined in a manner agreed to in
writing by the holders of the Notes and MMI.
SECTION 2. REPRESENTATIONS AND WARRANTIES.
3
<PAGE>
2.1. To induce the Noteholder to execute and deliver this Sixth Amendment,
each Obligor represents and warrants to the Noteholder (which representations
shall survive the execution and delivery of this Sixth Amendment) that:
(a) this Sixth Amendment has been duly authorized, executed and delivered
by it and this Sixth Amendment constitutes the legal, valid and
binding obligation, contract and agreement of such Obligor enforceable
against it in accordance with its terms, except as enforcement may be
limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws or equitable principles relating to or limiting
creditors' rights generally;
(b) the Original Note Agreement, as amended by this Sixth Amendment,
constitutes the legal, valid and binding obligation, contract and
agreement of such Obligor enforceable against it in accordance with
its terms, except as enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws or equitable
principles relating to or limiting creditors' rights generally;
(c) the execution, delivery and performance by such Obligor of this Sixth
Amendment (i) have been duly authorized by all requisite corporate
action and, if required, shareholder action, (ii) do not require the
consent or approval of any governmental or regulatory body or agency,
and (iii) will not (A) violate (1) any provision of law, statute, rule
or regulation or its certificate of incorporation or bylaws, (2) any
order of any court or any rule, regulation or order of any other
agency or government binding upon it, (B) violate or require any
consent under or with respect to any provision of the Revolving Credit
Agreement or the Revolving Credit Documents or any other material
indenture, agreement or other instrument to which it is a party or by
which its properties or assets are or may be bound, or (C) result in a
breach or constitute (alone or with due notice or lapse of time or
both) a default under any indenture, agreement or other instrument
referred to in clause (iii)(B) of this Section 2.1(c);
(d) as of the date hereof and after giving effect to this Sixth Amendment,
no Default or Event of Default has occurred which is continuing; and
(e) since October 3, 1998 there has been no material adverse change in the
business or financial conditions or prospects of any Obligor.
SECTION 3. CONDITIONS PRECEDENT; MISCELLANEOUS.
4
<PAGE>
3.1. This Sixth Amendment shall not become effective until each and every
one of the following conditions shall have been satisfied:
(a) executed counterparts of this Sixth Amendment, duly executed by the
Obligors shall have been delivered to the Noteholder;
(b) the Noteholder shall have received an amendment to the Revolving
Credit Agreement providing a waiver comparable to that provided in
Section 3.2 hereof, consenting to this Sixth Amendment and containing
covenant adjustments and other provisions as shall be in form and
substance satisfactory to the Noteholder;
(c) receipt by the Noteholder of an amount equal to 3/8 of 1% of the
outstanding principal balance of the Notes as consideration for the
Noteholder's execution and delivery of this Sixth Amendment; and
(d) the representations and warranties of the Obligors set forth in
Section 2 hereof are true and correct on and with respect to the date
hereof.
Upon satisfaction of the conditions herein, this Sixth Amendment shall be
effective as of the date first written above.
3.2. Upon and by virtue of this Amendment becoming effective as herein
contemplated, the failure of the Obligors to comply with the provisions of
Sections 5.8 (Consolidated Tangible Net Worth) and 5.9(a)(Fixed Charges Coverage
Ratio) of the Original Note Agreement for the period ended October 3, 1998, and
with the provisions of Sections 5.7(b) (Indebtedness Ratio), 5.8 (Consolidated
Tangible Net Worth), 5.9(a) and 5.9(b)(Fixed Charges Coverage Ratio) of the
Original Note Agreement for the period ending January 2, 1999, which failures
constitute a Default or Event of Default under the Original Note Agreement,
shall be deemed to have been waived by the Noteholder.
3.3. The Company understands and agrees that (i) the waiver contained in
Section 3.2 hereof pertains only to the Default or Event of Default therein
described and to the extent so described and not to any other Default or Event
of Default which may exist under, or any other matters arising in connection
with, the Original Note Agreement or the Notes, or to any rights, powers or
remedies that the Noteholder may have by virtue of any such other actions or
matters, and (ii) this Sixth Amendment does not constitute an agreement to
forbear from exercising any rights, powers or remedies the Noteholder may have
with respect to such other Default or Event of Default or other matters.
3.4. This Sixth Amendment shall be construed in connection with and as part
of the Original Note Agreement, and except as modified and expressly amended by
this Sixth Amendment, all terms, conditions and covenants contained in the
Original Note Agreement and the Notes are hereby ratified and shall be and
remain in full force and effect.
5
<PAGE>
3.5. Any and all notices, requests, certificates and other instruments
executed and delivered after the execution and delivery of this Sixth Amendment
may refer to the Original Note Agreement without making specific reference to
this Sixth Amendment but nevertheless all such references shall include this
Amendment unless the context otherwise requires.
3.6. This Sixth Amendment shall be governed by and construed in accordance
with Illinois law.
3.7. This Sixth Amendment may be executed in any number of counterparts,
each executed counterpart constituting an original, but all together one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Sixth Amendment
to Note Agreement as of the day and year first above written.
MIDDLEBY MARSHALL INC.
By /s/ John J. Hastings
-------------------------------
Its Executive Vice President
ASBURY ASSOCIATES, INC.
By /s/ John J. Hastings
-------------------------------
Its Vice President
Accepted as of March 31, 1999.
THE NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY
By /s/ Richard A. Strait
-------------------------------
Its Authorized Representative
6
SECOND AMENDMENT AND WAIVER
DATED AS OF MARCH 31, 1999 TO
MULTICURRENCY CREDIT AGREEMENT
DATED AS OF MARCH 18, 1998
THIS SECOND AMENDMENT AND WAIVER, dated as of March 31, 1999 (this
"Amendment") is entered into among MIDDLEBY MARSHALL INC., a Delaware
corporation ("Middleby"), the existing Subsidiaries of Middleby (together with
Middleby, individually, a "Borrower" and collectively, the "Borrowers"), and
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking
association, having its principal office at 231 South LaSalle Street, Chicago,
Illinois 60697 (the "Bank").
RECITALS:
A. The Borrowers and the Bank have entered into a Multicurrency Credit
Agreement dated as of March 18, 1998, as amended by that certain First Amendment
dated as of July 4, 1998 (as amended, modified or supplemented, the "Agreement";
the terms defined in the Agreement and not otherwise defined herein shall be
used herein as defined in the Agreement).
B. The Borrowers have requested, and the Bank has agreed, that the Bank
shall waive any Default or Event of Default arising out of the Borrowers'
failure to satisfy the financial covenants set forth in Sections 7.13(a),
7.13(b) and 7.13(c) as measured as of the end of the fiscal quarter ending on
January 2, 1999.
C. The Borrowers and the Bank wish to amend the Agreement as hereinafter
set forth.
D. Therefore, the parties hereto agree as follows:
1. AMENDMENT TO THE AGREEMENT.
1.1 Section 1.1 of the Agreement. Section 1.1 of the Agreement is hereby
amended as of the date hereof by inserting at the end of the definition of
"Applicable Margin" the following:
"Notwithstanding the foregoing, commencing on March 31, 1999 and for
so long as the ratio of Indebtedness to EBITDA as determined pursuant to
Section 7.13(b) shall be 3.5:1.0 or greater, the following percentages
shall be in effect for all purposes under this Agreement and shall, during
such period, replace the applicable percentages shown in the pricing grid
above: (i) LIBOR or IBOR,
<PAGE>
2.00%, (ii) Reference Rate, 0.50%, (iii) Commitment Fee, 0.35% and
(iv) Letter of Credit Fee, 1.50%."
1.2 Section 2.1 of the Agreement. Section 2.1 of the Agreement is hereby
amended as of the date hereof by deleting it in its entirety and inserting the
following in lieu thereof:
"2.1 Amounts and Terms of Commitments. The Bank agrees, on the terms
and conditions set forth herein, to make loans to any Borrower (each such
loan, a "Revolving Loan") from time to time on any Business Day during the
period from the date hereof to the Revolving Termination Date, in an
aggregate principal Dollar Equivalent amount not to exceed (a) $10,000,000
at any time outstanding for all Borrowers (such amount as the same may be
reduced pursuant to Section 2.6 or as a result of one or more assignments
pursuant to Section 9.8, the Bank's "Commitment"), (b) the Aggregate
Commitment Sublimit at any time outstanding for the Foreign Borrowers, or
(c) with respect to any Foreign Borrower, the Individual Commitment
Sublimit applicable thereto; provided, however, that, after giving effect
to any Borrowing of Revolving Loans or issuance of a Letter of Credit, the
aggregate principal Dollar Equivalent amount of all outstanding Revolving
Loans plus the aggregate Dollar Equivalent amount of outstanding LC
Obligations shall not exceed (a) the Commitment, (b) with respect to the
Foreign Borrowers, the Aggregate Commitment Sublimit, (c) with respect to
any Foreign Borrower, the Individual Commitment Sublimit applicable
thereto. Within the limits of the Bank's Commitment, and subject to the
other terms and conditions hereof, each Borrower may borrow under this
Section 2.1, prepay pursuant to Section 2.6 and reborrow pursuant to this
Section 2.1."
1.3 Section 7.13(a) of the Agreement. Section 7.13(a) of the Agreement is
hereby amended as of the date hereof by deleting it in its entirety and
inserting the following in lieu thereof:
"(a) Minimum Tangible Net Worth. Middleby and its Subsidiaries on a
consolidated basis shall maintain at all times Tangible Net Worth equal to
or greater than the sum of (a) $24,000,000 plus (b) an amount equal to 50%
of Net Income earned during each of its fiscal quarters beginning with its
2
<PAGE>
fiscal quarter commencing April 4, 1999 (without reduction for net losses,
if any)."
1.4 Section 7.13(b) of the Agreement. Section 7.13(b) of the Agreement is
hereby amended as of the date hereof by deleting it in its entirety and
inserting the following in lieu thereof:
"(b) Ratio of Indebtedness to EBITDA. Middleby and its Subsidiaries on
a consolidated basis shall maintain a ratio of (a) Indebtedness to (b)
EBITDA, measured at the end of each fiscal quarter for the four (4)
immediately preceding fiscal quarters then ended, for such period ending on
a date set forth below of not more than the amount set forth opposite such
date:
Date Ratio
---- -----
4/3/99 5.75:1.00
7/3/99 5.75:1.00
10/2/99 5.00:1.00
1/1/00 4.00:1.00
4/1/00 and
each fiscal quarter
thereafter 3.5:1.00
For purposes of testing compliance with this covenant, the term (i)
"Indebtedness" shall include the present value of all capital lease
obligations of Middleby and the Subsidiaries, determined as of any date the
ratio is to be determined, and (ii) in the event that Middleby or any of
its Subsidiaries shall have made an Acquisition involving any Person during
any such fiscal quarter, the term "EBITDA" shall include the allocable
earnings before interest, taxes, depreciation and amortization for the four
(4) most recently completed fiscal quarters of such Person determined in
accordance with GAAP, and, if GAAP is not applicable, determined in a
manner agreed to in writing by the Bank and Middleby. For further purposes
of testing compliance with this covenant, when the results of the fiscal
quarter ending October 3, 1998 or the fiscal quarter ending January 2, 1999
are required for the calculation of Net
3
<PAGE>
Income in the calculation of EBITDA to determine such ratio, Middleby and
its Subsidiaries are entitled to exclude as expenses from such calculation
of Net Income the amounts of $1,525,000 and $1,932,000, respectively, which
amounts refer to non-recurring charges taken in such fiscal quarters."
1.5 Section 7.13(c) of the Agreement. Section 7.13(c) of the Agreement is
hereby amended as of the date hereof by deleting it in its entirety and
inserting the following in lieu thereof:
"(c) Fixed Charge Coverage Ratio. Middleby and its Subsidiaries on a
consolidated basis shall maintain a Fixed Charge Coverage Ratio, measured
at the end of each fiscal quarter for the four (4) immediately preceding
fiscal quarters then ended, for such period ending on a date set forth
below of not less than the amount set forth opposite such date:
Date Ratio
---- -----
4/3/99 1.00:1.00
7/3/99 1.00:1.00
10/2/99 1.00:1.00
1/1/00 1.00:1.00
4/1/00 and
each fiscal
quarter thereafter 1.25:1.00
In the event that Middleby or any of its Subsidiaries shall have made an
Acquisition involving any Person during such immediately preceding fiscal
quarter, then for purposes of calculating the Fixed Charge Coverage Ratio,
Net Income shall include the allocable net income (adjusted as provided in
the definition of the term "Fixed Charge Coverage Ratio") of such Person
for the four (4) most recently completed fiscal quarters of such Person
determined in accordance with GAAP, and, if GAAP is not applicable,
determined in a manner agreed to in writing by the Bank and Middleby. For
the purpose of testing compliance with this covenant, when the results of
the fiscal quarter ending October 3, 1998 or the fiscal quarter ending
January 2, 1999 are required for the calculation of Net Income in the
calculation of EBITDA to determine such ratio, Middleby and its
Subsidiaries are entitled to exclude as expenses from such calculation of
Net Income the amounts of $1,525,000 and $1,932,000, respectively, which
amounts refer to non-recurring charges taken in such fiscal quarters."
4
<PAGE>
1.6 Section 7.13(e) of the Agreement. The Agreement is hereby amended as of
the date hereof by adding a Section 7.13(e) at the end of Section 7.13 as
follows:
"(e) Minimum EBITDA. Middleby and its Subsidiaries on a consolidated
basis shall maintain EBITDA, measured on a cumulative basis as of the dates
and for the periods set forth below, of not less than (i) $1,600,000 for
the three-month period ending on April 3, 1999, (ii) $4,750,000 for the
six-month period ending on July 3, 1999 and (iii) $8,500,000 for the
nine-month period ending on October 2, 1999."
1.7 Section 7.13(f) of the Agreement. The Agreement is hereby amended as of
the date hereof by adding a Section 7.13(f) at the end of Section 7.13 as
follows:
"(f) Maximum Indebtedness. Middleby and its Subsidiaries shall not
permit Indebtedness of Middleby and its Subsidiaries (excluding any
Indebtedness arising from the BA Leasing Documents), at any time between
and including March 31, 1999 and April 1, 2000, to exceed the sum of (i)
eighty percent (80%) of their total accounts receivable derived from
operations in the United States, plus (ii) fifty percent (50%) of their
total inventory located in the United States, plus (iii) forty percent
(40%) of their net fixed assets located in the United States, provided,
that the Bank, in its sole discretion, may change any of the above
percentages by providing notice of such change to Middleby based on the
results of any field examination of the Borrowers' accounting records and
operations."
2. WAIVER. The Bank hereby waives any Default or Event of Default arising
out of the failure of the Borrowers to satisfy the financial covenants under
Section 7.13(a), 7.13(b) and 7.13(c) of the Credit Agreement as measured as of
the end of the fiscal quarter ending on January 2, 1999. This waiver by the Bank
as described above shall not operate as a waiver of (i) any other right, power
or remedy of the Bank under the Loan Documents or (ii) any other Default or
Event of Default under the Agreement.
3. WARRANTIES. To induce the Bank to enter into this Amendment, the
Borrowers warrant that:
5
<PAGE>
3.1 Authorization. The Borrowers are duly authorized to execute and deliver
this Amendment, and are and will continue to be duly authorized to borrow monies
under the Agreement, as amended hereby, and to perform their obligations under
the Agreement, as amended hereby.
3.2 No Conflicts. The execution and delivery of this Amendment, and the
performance by the Borrowers of their respective obligations under the
Agreement, as amended hereby, do not and will not conflict with any provision of
law or of the charter or by-laws of each Borrower or of any agreement binding
upon each Borrower.
3.3 Validity and Binding Effect. The Agreement, as amended hereby, is a
legal, valid and binding obligation of the Borrowers, enforceable against the
Borrowers in accordance with its respective terms, except as enforceability may
be limited by bankruptcy, insolvency or other similar laws of general
application affecting the enforcement of creditors' rights or by general
principles of equity limiting the availability of equitable remedies.
4. CONDITIONS PRECEDENT. This Amendment shall be effective as of the date
first written above upon the satisfaction of each of the following conditions
precedent:
4.1 Documentation. The Borrowers shall have delivered to the Bank this
Amendment together with each of the following, all duly executed and dated the
date hereof, in form and substance satisfactory to the Bank:
(a) Resolutions. For each Borrower, as the Bank deems necessary, a copy,
duly certified by the secretary or an assistant secretary of such Borrower, of
(i) resolutions of such Borrower's Board of Directors authorizing or ratifying
the execution and delivery of this Amendment and authorizing the borrowings
under the Agreement, as amended hereby, (ii) all documents evidencing other
necessary corporate action, and (iii) all approvals or consents, if any,
necessary with respect to this Amendment.
(b) Incumbency. For each Borrower, as the Bank deems necessary, a
certificate of the secretary or an assistant secretary of such Borrower
certifying the names of such Borrower's officers authorized to sign this
Amendment and all other documents or certificates to be delivered hereunder,
together with the true signatures of such officers.
(c) Certification. A certificate of the president or chief financial
officer of Middleby as to the matters set out in Sections 4.2, 4.3 and 4.4
hereof.
6
<PAGE>
(d) Other. Such other documents as the Bank may reasonably request.
4.2 No Default. As of the date hereof, after giving effect to this
Amendment, no Event of Default or Default shall have occurred and be continuing.
4.3 Warranties. As of the date hereof, after giving effect to this
Amendment, the representations and warranties in Article V of the Agreement and
in Section 3 of this Amendment shall be true and correct as though made on such
date, except for such changes as are specifically permitted under the Agreement.
4.4 Northwestern Notes. As of the date hereof, no default or event of
default shall have occurred and be continuing under that certain Note Agreement
dated January 1, 1995 between Middleby and Northwestern Mutual Life Insurance
Company ("Northwestern") pursuant to which Middleby issued those certain
$15,000,000 10.99% Senior Notes due on January 10, 2003 which are held by
Northwestern.
5. GENERAL.
5.1 Expenses. The Borrowers agree to pay the Bank upon demand for all
reasonable expenses, including reasonable attorneys' and legal assistants' fees
(which attorneys and legal assistants may be employees of the Bank), incurred by
the Bank in connection with the preparation, negotiation and execution of this
Amendment.
5.2 Law. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED
BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS (WITHOUT REGARD TO CONFLICTS OF
LAW PROVISIONS THEREOF); PROVIDED THAT THE BANK SHALL RETAIN ALL RIGHTS ARISING
UNDER FEDERAL LAW.
5.3 Successors. This Amendment shall be binding upon the Borrowers and the
Bank and their respective successors and assigns, and shall inure to the benefit
of the Borrowers and the Bank and the successors and assigns of the Bank.
5.4 Confirmation of the Agreement. Except as amended and waived hereby, the
Agreement shall remain in full force and effect and is hereby ratified and
confirmed in all respects.
5.5 References to the Agreement. Each reference in the Agreement to "this
Agreement," "hereunder," "hereof," or words of like import, and each reference
to the Agreement in any and all instruments or documents provided for in the
Agreement or delivered or to be delivered thereunder or in connection therewith,
shall, except where the context otherwise requires, be deemed a reference to the
Agreement as amended hereby.
7
<PAGE>
5.6 Counterparts. This Amendment may be executed in any number of separate
counterparts, each of which shall collectively and separately constitute one
agreement.
5.7 Reaffirmation of Guaranty. Middleby and Asbury Associates, Inc., as
guarantors (the "Guarantors") pursuant to that certain Continuing Guaranty
(Multicurrency) dated as of March 18, 1998 (the "Guaranty") executed by the
Guarantors in favor of the Bank hereby acknowledge and affirm to the Bank that
notwithstanding the execution and delivery of this Amendment, the Guarantors
hereby re-confirm the Guaranty and are and continue to be primarily liable for
the Liabilities, as defined in the Guaranty.
[signature page follows]
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed at Chicago, Illinois by their respective officers thereunto duly
authorized as of the date first written above.
MIDDLEBY MARSHALL INC., as Borrower
and Guarantor
By:_________________________________
Name: John J. Hastings
Title: Executive Vice President and
Chief Financial Officer
MIDDLEBY PHILIPPINES CORPORATION, as
Borrower
By:_________________________________
Name: John J. Hastings
Title: Vice President
MIDDLEBY JAPAN CORPORATION, as
Borrower
By:_________________________________
Name: John J. Hastings
Title: Vice President
ASBURY WORLDWIDE (TAIWAN) CO., LTD.,
as Borrower
By:_________________________________
Name: John J. Hastings
Title: Vice President
ASBURY ASSOCIATES, INC., as Borrower
and Guarantor
By:_________________________________
Name: John J. Hastings
Title: Vice President
ASBURY WORLDWIDE KOREA CO., LTD., as
Borrower
9
<PAGE>
By:_________________________________
Name: John J. Hastings
Title: Vice President
INTERNATIONAL CATERING EQUIPMENT
AND SUPPLIES, INC., as Borrower
By:_________________________________
Name: John J. Hastings
Title: Vice President
ASBURY MEXICO, S.A. DE C.V., as
Borrower
By:_________________________________
Name: John J. Hastings
Title: Vice President
ASBURY, S.L., as Borrower
By:_________________________________
Name: John J. Hastings
Title: Vice President
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Bank
By:_________________________________
Name:_______________________________
Title:______________________________
10
<PAGE>
Certificate of Middleby Marshall Inc.
I, the undersigned, Secretary of Middleby Marshall Inc. a Delaware
corporation (the "Company"), DO HEREBY CERTIFY that:
1. This Certificate is furnished pursuant to Section 4.1 of that certain
Second Amendment and Waiver dated as of March 31, 1999 (the "Amendment") to
that certain Multicurrency Credit Agreement (as so amended and as
previously amended, modified or supplemented, the "Credit Agreement"),
between the Company, certain of its affiliates and Bank of America National
Trust and Savings Association (the "Bank"). Unless otherwise defined
herein, capitalized terms used in this Certificate have the meanings
assigned to such terms in the Credit Agreement.
2. There has been no change in the Certificate of Incorporation of the Company
since April 3, 1998, such Certificate of Incorporation is in full force and
effect as of the date hereof and no steps have been taken by the Board of
Directors or the stockholders of the Company to effect or authorize any
amendment or modification thereto.
3. There has been no change in the Bylaws of the Company since April 3, 1998,
such Bylaws are in full force and effect as of the date hereof and no steps
have been taken by the Board of Directors or the stockholders of the
Company to effect or authorize any amendment or modification thereto.
4. Attached hereto as Exhibit I is a true, correct and complete copy of
resolutions duly adopted by the Board of Directors of the Company, which
resolutions have not been revoked, modified, amended or rescinded and are
still in full force and effect.
5. The persons named in Exhibit II attached hereto have been duly elected,
have duly qualified as and, on the date hereof, are officers of the Company
holding the respective offices set forth therein opposite their names, and
the signatures set forth therein opposite their names are their genuine
signatures.
WITNESS my hand and seal of the Company this 31st day of March, 1999.
____________________________________
John J. Hastings
11
<PAGE>
I, the undersigned, David P. Riley, President of the Company, DO HEREBY
CERTIFY that John J. Hastings is the duly elected and qualified Secretary of the
Company and the signature above is his genuine signature.
WITNESS my hand on this 31st day of March, 1999.
____________________________________
David P. Riley
12
<PAGE>
CERTIFICATE OF CHIEF FINANCIAL OFFICER
OF MIDDLEBY MARSHALL INC.
Bank of America National Trust
and Savings Association
231 South LaSalle Street
Chicago, Illinois 60697
Ladies/Gentlemen:
Reference is made to that certain Second Amendment and Waiver dated as of March
31, 1999 (the "Amendment") between Middleby Marshall Inc., a Delaware
corporation ("Middleby"), the existing Subsidiaries of Middleby (together with
Middleby, individually, a "Borrower" and collectively, the "Borrowers"), and
Bank of America National Trust and Savings Association (the "Bank"). The
Amendment effects certain amendments and a waiver, as described therein, to that
certain Multicurrency Credit Agreement dated as of March 18, 1998 between the
Borrowers and the Bank (as amended thereby and as previously amended, modified
or supplemented, the "Agreement"). Unless otherwise defined herein, terms used
in this certificate which are defined in the Agreement shall have the same
meaning herein as therein.
In connection with the execution and delivery of the Amendment, the chief
financial officer of Middleby hereby certifies to the Bank as follows:
1. As of the date hereof, no Default or Event of Default has occurred and
is continuing.
2. The warranties in Article V of the Agreement and in Section 3 of the
Amendment are true and correct as of the date hereof as though made on
the date hereof, except for such changes as are specifically permitted
under the Agreement.
3. As of the date hereof, no default or event of default has occurred and
is continuing under that certain Note Agreement dated January 1, 1995
between Middleby and Northwestern Mutual Life Insurance Company
("Northwestern") pursuant to which Middleby issued those certain
$15,000,000 10.99% Senior Notes due on January 10, 2003 which are held
by Northwestern.
13
<PAGE>
Dated: March 31, 1999
Very truly yours,
MIDDLEBY MARSHALL INC.
By: ________________________________
Name: John J. Hastings
Title: Chief Financial Officer
<PAGE>
Certificate of Asbury Associates, Inc.
I, the undersigned, Secretary of Asbury Associates, Inc. a Florida
corporation (the "Company"), DO HEREBY CERTIFY that:
6. This Certificate is furnished pursuant to Section 4.1 of that certain
Second Amendment and Waiver dated as of March 31, 1999 (the "Amendment") to
that certain Multicurrency Credit Agreement (as so amended and as
previously amended, modified or supplemented, the "Credit Agreement"),
between the Company, certain of its affiliates and Bank of America National
Trust and Savings Association (the "Bank"). Unless otherwise defined
herein, capitalized terms used in this Certificate have the meanings
assigned to such terms in the Credit Agreement.
7. There has been no change in the Articles of Incorporation of the Company
since April 3, 1998, such Articles of Incorporation are in full force and
effect as of the date hereof and no steps have been taken by the Board of
Directors or the stockholders of the Company to effect or authorize any
amendment or modification thereto.
8. There has been no change in the Bylaws of the Company since April 3, 1998,
such Bylaws are in full force and effect as of the date hereof and no steps
have been taken by the Board of Directors or the stockholders of the
Company to effect or authorize any amendment or modification thereto.
9. Attached hereto as Exhibit I is a true, correct and complete copy of
resolutions duly adopted by the Board of Directors of the Company, which
resolutions have not been revoked, modified, amended or rescinded and are
still in full force and effect.
10. The persons named in Exhibit II attached hereto have been duly elected,
have duly qualified as and, on the date hereof, are officers of the Company
holding the respective offices set forth therein opposite their names, and
the signatures set forth therein opposite their names are their genuine
signatures.
WITNESS my hand and seal of the Company this 31st day of March, 1999.
____________________________________
John J. Hastings
<PAGE>
I, the undersigned, David P. Riley, Chief Executive Officer of the Company,
DO HEREBY CERTIFY that John J. Hastings is the duly elected and qualified
Secretary of the Company and the signature above is his genuine signature.
WITNESS my hand on this 31st day of March, 1999.
____________________________________
David P. Riley
THE MIDDLEBY CORPORATION
1998 STOCK INCENTIVE PLAN
INTRODUCTION
This document contains the provisions of The Middleby Corporation 1998 Stock
Incentive Plan, as adopted effective as of February 19, 1998 (the "Effective
Date"). The purpose of this Plan is to provide a means to attract and retain
employees of experience and ability and to furnish additional incentives to
them.
ARTICLE I
DEFINITIONS
1.1. "BOARD" means the Company's Board of Directors.
1.2. "CODE" means the Internal Revenue Code of 1986, as amended.
1.3. "COMPANY" means The Middleby Corporation, a Delaware corporation.
1.4. "ELIGIBLE EMPLOYEE" means any employee of an Employer.
1.5. "EMPLOYER" means the Company or any affiliate or subsidiary of the
Company.
1.6. "FAIR MARKET VALUE" means, as of any date, the closing price of Stock
on the national stock exchange or automated quotation system on which the Stock
is then listed or, if there was no trading in Stock on that date, the closing
price of Stock on such exchange or automated quotation system on the next
preceding date on which there was trading in Stock.
1.7. "GRANT" means any award of Options, Stock Appreciation Rights,
Restricted Stock or Performance Stock (or any combination thereof) made under
this Plan to an Eligible Employee.
1.8. "OPTION" means any stock option granted under this Plan.
1.9. "PERFORMANCE STOCK" means Stock issued pursuant to Article VII of this
Plan.
1.10. "PLAN" means The Middleby Corporation 1998 Stock Incentive Plan, as
set out in this document and as subsequently amended.
1.11. "RECIPIENT" means an Eligible Employee to whom a Grant has been made.
1.12. "RESTRICTED STOCK" means Stock transferred to a Recipient in a Grant
which is, at the date on which the Grant is made, both (i) not "transferable"
and (ii) "subject to a substantial risk of forfeiture," within the meaning of
Section 83 of the Code.
1.13. "STOCK" means the Company's authorized common stock, par value $.01
per share.
1.14. "STOCK APPRECIATION RIGHT" means a right transferred to a Recipient
under a Grant which entitles the Recipient, upon exercise, to receive a payment
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(in cash, Stock or a combination of cash and Stock) which is equal to the
increase (if any) in the Fair Market Value of a share of Stock between the date
as of which the Grant was made and the date as of which the right is exercised.
1.15. The masculine gender includes the feminine, and the singular number
includes the plural, unless a different meaning is clearly required by the
context.
ARTICLE II
STOCK AVAILABLE FOR GRANTS
2.1. 550,000 shares of Stock are available for Grants under the Plan. The
Stock available for Grants may include unissued or reacquired shares. If a Grant
expires or is canceled, any shares which were not issued or fully vested under
the Grant at the time of expiration or cancellation will again be available for
Grants.
2.2. If there is a merger, consolidation, stock dividend, split-up,
combination or exchange of shares, recapitalization or change in capitalization
with respect to Stock, the total number of shares provided for in Section 2. 1.
will be adjusted by the Board to accurately reflect that event.
ARTICLE III
MAKING GRANTS
3.1. (a) The Board may, at any time while the Plan is in effect and there
is Stock available for Grants, make Grants to Eligible Employees; provided, that
the selection of Eligible Employees for participation and decisions concerning
the timing, pricing and amount of a Grant shall be made solely by a committee
consisting of two or more directors. The number of shares of Stock granted in a
fiscal year to each executive officer whose compensation is subject to reporting
in the Company's annual proxy statement (an "Executive Officer") shall not
exceed 100,000 shares for any fiscal year during which he serves as an Executive
Officer.
(b) No Grant may be made after February 19, 2008.
(c) All grants and any exercises of Grants are conditioned upon stockholder
approval of the Plan as described in Section 9.2.
(d) If there is a merger, consolidation, stock dividend, split-up,
combination or exchange of shares, recapitalization or change in capitalization
with respect to Stock, or any other corporate action with respect to Stock
which, in the opinion of the Board, adversely affects the relative value of a
Grant, the number of shares and the exercise price (in the case of an Option) of
any Grant which is outstanding at the time of that event will be adjusted by the
Board to the extent necessary to remedy the adverse effect on the Grant's value.
3.2. (a) The terms of each Grant will be set out in a written agreement.
(b) Subject to the applicable provisions of Article IV, VI, VI or VII, a
Grant may contain any terms and conditions which the Board determines, as long
as they are consistent with the provisions of the Plan. Such terms may, without
limitation, include provisions that Grants shall terminate upon termination of
employment in specified circumstances.
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ARTICLE IV
OPTIONS
4.1. The terms of each Option must include the following:
(i) The name of the Recipient.
(ii) The number of shares which are subject to the Option.
(iii) The term over which the Option may be exercised.
(iv) A requirement that the Option is not transferable by the
Recipient except by will or the laws of descent and distribution and that,
during his lifetime, it is exercisable only by him. Provided that, subject
to the approval of the Board, an Option may be transferable as permitted
under 17 C.F.R. sec. 240.16b-3 and 5, as long as such transfers are made to
one or more of the following: family members, including children of the
Recipient, the spouse of the Recipient, or grandchildren of the Recipient,
trusts for such family members or charities ("Transferees"), and provided
that such transfer is a bona fide gift and accordingly, the Recipient
receives no consideration for the transfer, and that the Options
transferred continue to be subject to the same terms and conditions that
were applicable to the Options immediately prior to the transfer. In the
event of such a transfer, the Transferee may not subsequently transfer this
Option. The designation of a beneficiary shall not constitute a transfer.
(v) A statement of whether the Option is intended to be an "incentive
stock option" under Section 422 of the Code or a "nonqualified stock
option".
4.2. An Option which is intended to be an incentive stock option under
Section 422 of the Code must contain the following terms:
(i) The exercise price per share must be at least 100% of the Stock's
Fair Market Value on the date the Option is granted.
(ii) The aggregate Fair Market Value (as of the date the Option is
granted) of Stock with respect to which incentive stock options are
exercisable for the first time by the Recipient during any calendar year
(under all stock option plans of the Employers) may not exceed $100,000.
(iii) The term over which the Option may be exercised may never exceed
ten years from the date of Grant.
(iv) If the Recipient, at the time the option is granted, owns 10% or
more of the voting stock of an Employer (including Stock which he is deemed
to own under Section 424(d) of the Code), the exercise price must be at
least 110% of the Stock's Fair Market Value as of the Option's date of
grant, and the term of the Option may not be more than five years from the
date of grant.
4.3. (a) An Option may be exercised, in whole or part, at any time during
its term, subject to any specific conditions in the Option's terms and any rules
adopted by the Board for the exercise of Options.
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(b) A Recipient may pay the exercise price of an Option in cash or, in the
Board's discretion, in shares of Stock owned by him (valued at Fair Market
Value), with a note payable to the Company, or in a combination of cash, notes
and shares of Stock.
(c) The following rules apply to the exercise of Options:
(i) If a Recipient dies, any Option may, to the extent it was
exercisable at his death, be exercised by his estate, within one year after
his date of death or such shorter period as the Option may provide.
(ii) If a Recipient terminates employment because he has become
permanently and totally disabled, he may exercise any Option to the extent
it was exercisable at his termination of employment, but only within one
year after his termination of employment or such shorter period as the
Option may provide.
(iii) If a Recipient terminates employment for any reason other than
death or permanent and total disability, he may exercise any Option to the
extent it was exercisable at his termination of employment, but only within
three months after his termination of employment or such shorter or longer
period as the Option may provide.
(iv) Subparagraph (i), (ii) or (iii) can never operate to make an
Option exercisable beyond the term for which it was granted.
(d) To the extent an Option is not exercised before the expiration of its
term or before the expiration of any shorter exercise period under paragraph
(c), it will be canceled.
ARTICLE V
STOCK APPRECIATION RIGHTS
5.1. The terms of each Grant of Stock Appreciation Rights must include the
following:
(i) The name of the Recipient.
(ii) The number of Stock Appreciation Rights which are being granted.
(iii) The term over which the Stock Appreciation Rights may be
exercised. This term may never exceed ten years from the date of Grant.
(iv) A description of any events which will cause cancellation of the
Stock Appreciation Rights before the end of the term described in
subparagraph (iii).
(v) Whether or not the Stock Appreciation Rights are issued in tandem
with any Option, and, if so, the manner in which the Recipient's exercise
of one affects his right to exercise the other.
(vi) A requirement that the Stock Appreciation Rights are not
transferable by the Recipient except by will or the laws of descent and
distribution and that during his lifetime such Rights are exercisable only
by him.
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5.2. Stock Appreciation Rights which are issued in tandem with an Option
which is intended to be an incentive stock option under Section 422 of the Code
must contain the following terms:
(i) They will expire no later than at the expiration of the Option.
(ii) Payment under the Stock Appreciation Rights may not exceed 100%
of the difference between the exercise price of the Option and the Fair
Market Value of Stock on the date the Stock Appreciation Rights are
exercised.
(iii) They are transferable only when the Option is transferable, and
under the same conditions.
(iv) They are exercisable only when the Option is exercisable.
(v) They may only be exercised when the Fair Market Value of Stock
exceeds the exercise price of the Option.
5.3. (a) Stock Appreciation Rights may be exercised at any time during
their term, subject to Section 5.2., to any specific conditions in their terms
and to any rules adopted by the Board for the exercise of Stock Appreciation
Rights.
(b) Determination of the form of payment upon exercise of a Stock
Appreciation Right (cash, Stock or a combination of cash and Stock) is solely in
the discretion of the Board.
ARTICLE VI
RESTRICTED STOCK
6.1. The terms of each Grant of Restricted Stock must include the
following:
(i) The name of the Recipient.
(ii) The number of shares of Restricted Stock which are being granted.
(iii) Whether the Recipient must pay any amount in connection with the
Grant and if so, the amount and terms of that payment. Such amount shall
not exceed 10% of the Fair Market Value of the Restricted Stock at the time
the Grant is made, and may be such lesser amount as shall be determined by
the Board.
(iv) A description of the restrictions applicable to the Grant and the
conditions on which the restriction may be removed.
ARTICLE VII
PERFORMANCE STOCK
7.1. The terms of each grant of Performance Stock must include the
following:
(i) The name of the Recipient.
(ii) The number of shares of Performance Stock which are being
granted.
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(iii) The details of the applicable performance period, if any, and
performance criteria, if any.
(iv) Whether the Recipient must pay any amount in connection with the
Grant and if so, the amount and terms of that payment.
ARTICLE VIII
ADMINISTRATION
8.1. Subject to Section 3.l(a) hereof, the complete authority to control
and manage the operation and administration of the Plan is placed in the Board.
8.2. Subject to Section 3.l(a) hereof, the Board has all authority which is
necessary or appropriate for the operation and administration of the Plan,
including the following:
(a) To make Grants and determine their terms, subject to the provisions
of the Plan.
(b) To interpret the provisions of the Plan.
(c) To adopt any rules, procedures and forms necessary for the operation
and administration of the Plan which are consistent with its provisions.
(d) To determine all questions relating to the eligibility and other
rights of all persons under the Plan.
(e) To keep all records necessary for the operation and administration
of the Plan.
(f) To designate or employ agents and counsel (who may also be employed
by an Employer) to assist in the administration of the Plan.
(g) To cause any shares of Stock acquired by a Recipient through
exercise of a Grant to be recorded on the Company's records in the
Recipients' name, and to cause such shares to be issued to the Recipient or
to his brokerage account, as he elects.
(h) To cause any withholding of tax required in connection with a Grant
to be made.
ARTICLE IX
AMENDMENT AND TERMINATION
9.1. The Plan may be amended or terminated at any time by action of the
Board. However, no amendment may, without stockholder approval:
(i) increase the aggregate number of shares available for Grants
(except to reflect an event described in section 2.2); or
(ii) extend the term of the Plan; or
(iii) change the definition of Eligible Employee for purposes of the
Plan.
9.2. If the Plan is not, within twelve months of its Effective Date,
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approved by a majority of the shares voted at a regular or special meeting of
the Company's stockholders, the Plan will terminate and all Grants made under it
will be canceled.
9.3. No amendment or termination of the Plan (other than termination under
Section 9.2.) may adversely modify any person's rights under an Option unless he
consents to the modification in writing.
ARTICLE X
MISCELLANEOUS
10.1. Neither the provisions of this Plan, nor the fact that a Recipient
receives a Grant will constitute or be evidence of a contract of employment,
position or compensation level, or give such Recipient any right to continued
employment with the Employer. Neither the provisions of this Plan nor the fact
that a Recipient receives a Grant will be construed as the Company's guarantee
of the tax effects for the Recipient of the receipt of a Grant, transfer of the
same, exercise of the same, or the retention or sale of the underlying Stock.
10.2. If any provision of this Plan is held illegal or invalid for any
reason, such illegality or invalidity will not affect the remaining provisions.
Instead, each provision is fully severable and this Plan will be construed and
enforced as if any illegal or invalid provision had never been included.
10.3. Except as provided in federal law, the provisions of the Plan will be
construed in accordance with the laws of Delaware, without giving effect to
principles of conflicts of laws.
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