<PAGE> 1
Page 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended July 31, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
------------------- -----------------------
Commission File Number: 0-22798
-----------------------------------------------------
SPECIALTY EQUIPMENT COMPANIES, INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3337593
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1245 Corporate Blvd., Suite 401, Aurora, IL 60504
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(630) 585-5111
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all and 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 requirement for the past 90 days. Yes X No .
- --
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No .
- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 8, 1996
- ----------------------------- --------------------------------
Common Stock, $0.01 par value 17,484,333 shares
The exhibit index is on page 15.
<PAGE> 2
<TABLE>
<CAPTION>
Page 2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
SPECIALTY EQUIPMENT COMPANIES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
Three Months Ended Six Months Ended
July 31, July 31,
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue ................................................................. $104,831 $105,030 $210,947 $210,335
Cost of sales ........................................................... 71,880 72,424 144,451 145,085
-------- -------- --------- --------
Gross margin ........................................................ 32,951 32,606 66,496 65,250
Selling, general and administrative expenses ............................ 16,347 16,334 32,991 31,970
Amortization ............................................................ 3,799 439 16,441 880
Other expense ( income), net ............................................ 24 (321) 13 (331)
Earnings from operations before interest and -------- -------- --------- --------
income taxes .......................................................... 12,781 16,154 17,051 32,731
Interest expense, net ................................................... 5,435 4,900 11,014 9,892
--------- ------- ------- -------
Earnings from operations before income taxes ............................ 7,346 11,254 6,037 22,839
Income taxes ............................................................. 4,209 4,375 8,457 8,883
--------- ------- ------- -------
Net earnings (loss) before extraordinary item.......................... 3,137 6,879 (2,420) 13,956
Extraordinary item (net of taxes) ........................................ (218) - (218) -
-------- ------- ------- ------
Net earnings (loss) .................................................... $2,919 $6,879 $(2,638) $13,956
======== ======= ======= =======
Net earnings (loss) per common and dilutive common
equivalent share before extraordinary item.............................. $ 0.15 $ 0.32 $ (0.15) $ 0.65
Extraordinary item (net of taxes) ............................... (0.01) - (0.01) -
-------- ------- ------- -------
Net earnings (loss) per common and dilutive common equivalent share ..... $ 0.14 $ 0.32 (0.16) $ 0.65
====== ====== ======= ========
Average number of common and dilutive common
equivalent shares outstanding ........................................... 21,335.1 21,416.9 16,637.8 21,404.3
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
<PAGE> 3
<TABLE>
<CAPTION>
Page 3
SPECIALTY EQUIPMENT COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
January 31, July 31,
1996 1996
----------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................ $ 28,447 $ 41,345
Accounts receivable, net ......................................... 44,969 56,541
Inventories ...................................................... 51,514 51,125
Other current assets ............................................. 10,777 7,016
---------- --------
Total current assets .......................................... 135,707 156,027
Net property, plant and equipment .................................. 29,451 31,231
Restricted cash equivalents ........................................ 5,873 4,908
Intangible assets, net ............................................. 7,667 6,804
Other assets ....................................................... 1,537 1,507
---------- --------
Total assets .................................................. $ 180,235 $ 200,477
========= =========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Current installments of long-term debt ............................. $ 174 $ 174
Accounts payable ................................................... 21,340 24,748
Accrued expenses ................................................... 67,167 68,817
Accrued income taxes ............................................... 4,199 5,820
----------- ------------
Total current liabilities ....................................... 92,880 99,559
Long-term debt, excluding current installments ...................... 193,041 192,953
Other non-current liabilities ....................................... 1,935 1,882
Stockholders' equity (deficit):
Common stock ....................................................... 173 175
Additional paid-in capital ......................................... 50,895 50,645
Accumulated deficit ................................................ (157,921) (143,965)
Other .............................................................. (768) (772)
---------------- --------------
Total stockholders' deficit .................................... (107,621) (93,917)
Commitments and contingent liabilities (note 7) .....................
Total liabilities and stockholders' equity (deficit)................. $180,235 $200,477
================ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 4
<TABLE>
<CAPTION>
Page 4
SPECIALTY EQUIPMENT COMPANIES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
July 31,
1995 1996
Cash flows from operating activities: --------- --------
<S> <C> <C>
Net earnings (loss) ........................................................................ $ (2,638) $ 13,956
Items not affecting cash:
Depreciation and amortization ............................................................ 2,169 2,225
Amortization ............................................................................. 16,570 880
Utilization of NOL carry forward ......................................................... 546 546
(Gain) loss from asset sales.............................................................. 13 (11)
-------- --------
Total .................................................................................. 16,660 17,596
-------- --------
Changes in current assets and liabilities:
Accounts receivable, net ................................................................... (12,046) (11,082)
Inventories ................................................................................ 4,376 845
Other current assets ....................................................................... (22) 3,767
Accounts payable and other current
liabilities, excluding current installments of long-term debt............................. 8,659 6,268
--------- -------
Total................................................................................... 967 (202)
-------- ------
Net cash flows from operations .............................................................. 17,627 17,394
Cash flows from investing activities:
Additions to property, plant and equipment ................................................. (3,185) (3,798)
Disposals of property, plant and equipment ................................................. 28 11
Cash equivalents restricted for capital additions .......................................... (3,450) 965
Net assets of business acquired ........................................................ - (1,321)
--------- -------
Net cash used in investing activities .................................................. (6,607) (4,143)
-------- -------
Cash flows from financing activities:
Net decrease in revolving credit facility ................................................... (6,967) -
Repayments of long-term debt ............................................................... (5,143) (88)
Proceeds from long-term debt ............................................................... 6,400 -
Proceeds from stock options exercised ...................................................... 504 203
Cancellation of stock options .............................................................. - (452)
Refinancing costs .......................................................................... (111) -
-------- -------
Net cash used in financing activities .................................................. 5,317) (337)
-------- -------
Other ....................................................................................... (161) (16)
-------- -------
Net increase in cash and cash equivalents.................................................... 5,542 12,898
Cash and cash equivalents:
Beginning of period .................................................................... 3,244 28,447
-------- --------
End of period .......................................................................... $ 8,786 $ 41,345
======== =========
The accompanying notes are an integral part of these unaudited consolidated financial statements.
</TABLE>
<PAGE> 5
Page 5
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. General
These financial statements should be read with the financial statements and the
notes thereto for the fiscal year ended January 31, 1996 included in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission ("Commission") on March 26, 1996.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments necessary for a fair statement of (a) the results of
operations for the three and six month periods ended July 31, 1995 and 1996,
(b) the financial position at January 31, 1996 and July 31, 1996 and (c) the
statements of cash flows for the six month periods ended July 31, 1995 and
1996, have been made. The financial results for the three and six months ended
July 31, 1996 are not necessarily indicative of the financial results for the
entire 1997 fiscal year. Certain reclassifications have been made to the prior
period financial statements to conform with the current period presentation.
Net earnings (loss) per common and dilutive common equivalent share is computed
based on the weighted average number of common and dilutive common equivalent
shares outstanding during the period. The outstanding warrants and options to
purchase common stock are not included in common shares outstanding for the six
month period ended July 31, 1995 because the Company reported a net loss for
that period; such options and warrants are included for the periods ended July
31, 1996 for which the Company reported net earnings.
2. Accounts Receivable
Accounts receivable at the following dates consisted of the following:
<TABLE>
<CAPTION>
January 31, July 31,
Description 1996 1996
----------- ---------
(in thousands)
<S> <C> <C>
Accounts receivable ............................................. $ 50,498 $ 61,899
Less: allowance for doubtful accounts ........................... 5,529 5,358
---------- ---------
Total ...................................................... $ 44,969 $ 56,541
========== =========
</TABLE>
<TABLE>
<CAPTION>
3. Inventories
Inventories at the following dates consisted of the following:
January 31, July 31,
1996 1996
----------- --------
<S> <C> <C>
(in thousands)
Raw materials........................................................... $ 26,052 $26,650
Work in progress ....................................................... 6,976 7,478
Finished goods ......................................................... 18,486 16,997
--------- -------
51,514 51,125
Less: excess of FIFO cost over LIFO cost - -
-------- -------
Total ...................................................... $ 51,514 $51,125
=========== =======
</TABLE>
The Company uses the LIFO method of valuing inventories. LIFO had a de
minimis effect on the cost of sales for the three and six month periods ended
July 31, 1995 and 1996.
<PAGE> 6
Page 6
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. Intangibles:
<TABLE>
<CAPTION>
January 31, July 31,
1996 1996
----------- --------
(in thousands)
Intangibles consisted of the following:
<S> <C> <C>
Patents ............................................................. $ 1,568 $ 1,568
Other intangibles ................................................... 48,206 48,224
Deferred pension costs .............................................. 1,904 1,904
Less: accumulated amortization ...................................... 44,011 44,892
------- -------
Net intangibles ...................................................... $ 7,667 $ 6,804
======== =======
</TABLE>
Other intangibles primarily include deferred financing fees, engineering
drawings, distribution networks and skilled workforce.
5. Income Taxes
The Company follows the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement 109"). At January 31, 1996, the Company had a net deferred
tax asset of $35.7 million less a valuation allowance of $30.6 million. The
Company has approximately $18.9 million in NOL carry forwards. However, a
number of issues regarding the treatment of certain changes in ownership of the
Company pursuant to certain provisions of the Internal Revenue Code of 1986, as
amended ("IRC"), may arise which, if determined adversely, could limit the
amount and/or use of the NOL carry forwards. The NOL carry forwards are
available through fiscal 2008.
6. Long-Term Debt
Long-term debt at the following dates consisted of the following:
<TABLE>
<CAPTION>
January 31, July 31,
Description 1996 1996
------------ -----------
<S> <C> <C>
(in thousands)
Revolving line of credit ................................................. $ - $ -
11-3/8% senior subordinated notes due 2003 ............................... 180,000 180,000
Industrial project revenue bonds due 2008 and 2009 ....................... 12,900 12,900
Capitalized leases ....................................................... 315 227
-------- ----------
193,215 193,127
Less: current installments .............................................. 174 174
------- --------
Total long-term debt, less current installments. $193,041 $192,953
======== ========
</TABLE>
In August 1996 the Company redeemed its $6.5 million Village of Rockton,
Illinois Industrial Project Revenue Bonds and acquired in the open market $31.0
million of its 11-3/8% Senior Subordinated Notes Due 2003. Both purchases
were funded with available cash and cash equivalents.
<PAGE> 7
Page 7
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. Commitments and Contingent Liabilities
The Company is involved in litigation and claims incidental to its business.
The ultimate outcome of these matters cannot presently be determined because of
the uncertainties inherent in litigation. However, such claims are being
vigorously contested and management does not believe that it is probable that
the ultimate outcome of the loss contingencies relating to such litigation and
claims will have, individually or in the aggregate, a material adverse impact
upon the financial condition or results of operations of the Company.
The following is a summary of the more significant litigation and claims.
Litigation
The Company was a defendant, along with a number of its current and
former officers and directors, its former lender, General Electric Capital
Corporation ("GECC"), and the underwriters with respect to the Company's 1988
offering of debentures, in a securities class action filed by Melvin C. Nielsen
(the "Nielsen Case") alleging that the Company's prospectus and registration
statement with respect to such debentures contained material misrepresentations
and omissions, and seeking rescission of the sale of all $150 million of
debentures, and other compensatory and exemplary damages, and costs and
expenses. Although the claim was discharged against the Company pursuant to the
Company's plan of reorganization ("POR") and the Company was subsequently
dismissed from this case, the Company has continuing indemnification obligations
with respect to any liabilities incurred with regard to this claim by all of the
current and certain of the former officers and directors who are defendants in
the case, and has also agreed to indemnify GECC and one underwriter, Kidder,
Peabody & Co. ( a GECC affiliate at such time) for all costs incurred by them in
a successful defense. On October 27, 1994 the Company paid GECC $80,000 with
respect to GECC's costs incurred in connection with the Nielsen case. Further,
Piper Jaffray & Hopwood, another underwriter, made a claim under the terms of
its underwriting agreement for indemnification for its costs and expenses in
litigating this claim, which claim was denied by the Bankruptcy Court. The
Company's ultimate indemnification liability with respect to this case, if any,
should be limited to the extent that in connection with the POR, persons holding
approximately $115 million in principal amount of debentures at February 5, 1992
granted releases to, among others, each defendant in this case. However,
because of the possibility that the debentures were traded among members of the
plaintiff class, there can be no assurance that the Company's indemnification
obligation with respect to the Nielsen Case is limited to $35 million;
additionally, the Company has not established a reserve in its financial
statements relating to its possible indemnification obligation in the Nielsen
case.
The Company and certain of its current and former directors are named as
defendants in an action filed by Virginia A. Noerr, who claims to be a
stockholder of the Company's common stock. The action "Noerr v. Greenwood et
al.," C.A. No. 14320, is pending in the Court of Chancery for the State of
Delaware in and for New Castle County, Delaware. Plaintiff purports to bring
this action both as a class action on behalf of all stockholders of record on
April 2, 1993 and derivatively for the benefit of the Company. The amended
complaint alleges that the named individual defendants breached fiduciary
duties of care and loyalty owed to the Company with regard to stock options
granted to the named individual defendants and with regard to the accuracy of
the disclosures in the proxy statement which sought stockholder approval.
Plaintiff also alleges, among other things, that implementation of the
Company's stock option plan constituted self-dealing transactions not entirely
fair to the Company in that the exercise price of the options was so
unreasonably low that the issuance of Common Stock pursuant to the options
constitute waste. The amended complaint seeks, among other things, entry of
judgment against defendants permanently enjoining them from exercising the
stock options; imposing a constructive trust for the benefit of the Company
upon any profits the individual named defendants may have made through exercise
of their options, and monetary damages, costs and expenses. In May 1996
plaintiff filed an amended complaint. The amended complaint, among other
things, corrects certain errors in the original filing and expands the
complaint to include the Company's Executive Long-
<PAGE> 8
Page 8
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Term Incentive Plan. The individual defendants have made demand upon the
Company for indemnification. The Company believes that if the Company were
liable to the individual defendants for indemnification, the uninsured portion
of such liability would not be material to the Company. The Company and the
individual defendants believe that the plaintiff's allegations are without
merit and are factually incorrect and the Company intends to contest these
allegations vigorously.
The Company is a defendant along with other defendants in an action filed on
July 20, 1995 entitled "Thermodyne Food Service Products, Inc. and AFTEC, Inc.
v. McDonald's Corporation, et al." in the United States District Court,
Northern District of Illinois, Eastern Division. Plaintiffs allege that the
Company and other defendants misappropriated trade secrets in connection with
the Company's development of an oven for McDonald's. Plaintiffs have also
asserted unfair competition and violations of the Illinois Consumer Fraud and
Deceptive Practices Act. As a result of a ruling on a motion to dismiss, the
only claim remaining against the Company is the trade secret claim. The
complaint does not specify a dollar amount for claimed damages. The Company
believes it has strong defenses to this claim and intends to contest it
vigorously.
Environmental and Related Matters
On May 5, 1994, the Company (doing business as Taylor Freezer Company) was among
more than 80 parties notified as potential third-party defendants in an action
involving the clean up of the MIG/Dewane Landfill near Belvidere, Illinois. A
third-party complaint has been filed by the principal owners and operators of
the landfill. Those owners and operators were sued by the principal users of
the landfill who in turn had been sued by the Environmental Protection Agency
("EPA") in April, 1992. The complaint seeks contribution for the proposed clean
up of the site. The Company has not received settlement offers from the EPA,
but it settled its alleged liability with the private plaintiffs for $54,000 for
the costs associated with the remedial investigation of the site. The Company
has not settled its alleged liability for clean up costs at the site. Beatrice
Company (ConAgra) has assumed defense of the matter and has agreed to defend and
indemnify the Company for claims related to the MIG/Dewane site to the extent
they are related to Taylor and the events giving rise to the claims occurring
during the Beatrice Company (ConAgra) period of ownership. Based upon presently
available information, management does not believe this matter will have a
material effect on the Company's results of operation or financial
condition.
The Company has also received notice of potential environmental actions from (i)
the South Carolina Department of Health and Environmental Control ("SCDHEC") and
the EPA with respect to drums of hazardous waste materials disposed of in South
Carolina, (ii) the SCDHEC with respect to the clean up of the Unisphere
Hazardous Waste Site in Spartanburg County, South Carolina, and (iii) the Nevada
Department of Conservation and Natural Resources, Division of Environmental
Protection ("NDEP"), which issued a finding of alleged violation and order
relating to alleged soil contamination. With respect to the SCDHEC matter
discussed in (i) above, management is unable to determine the existence or
amount of its potential liabilities because no formal proceedings have been
commenced and no notifications have been received regarding this matter since
December, 1992. The Company has reason to believe that this site will be the
subject of no further action by the EPA. With respect to the SCDHEC matter
discussed in (ii) above, management is unable to determine the existence or
amount of its potential liability, if any, because the use of the site by
Beverage-Air occurred prior to the purchase of the Beverage-Air assets by the
Company from Gerlach Industries in November, 1986. With respect to the NDEP
matter discussed in (iii) above, the Company has spent approximately $308,000 to
conduct tests and to implement a remediation program, but given the pendency of
the Company's appeal and its uncertain outcome, management cannot estimate what,
if any, additional expenditures might be required.
<PAGE> 9
Page 9
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Letters of Credit
As of July 31, 1996, the Company had letters of credit outstanding totaling
$18.0 million, which guarantee various business activities, including $13.1
million of letters of credit which guarantee the Industrial Project Revenue
Bonds (see note 6 above).
8. Stock Option Plan and Stock Warrants
On May 6, 1993 the stockholders approved long-term incentive plans for both
non-employee directors and employees. Pursuant to the Non-Employee Directors
Long-Term Incentive Plan ("Director Plan") each non-employee director was
granted an option to purchase 175,241 shares of the Company's common stock at a
price of $1.00 per share (which was not less than management's determination of
the fair market value of the underlying shares on the date of grant). The
aggregate grants under the Director Plan totaled 876,205 shares.
The Executive Long-Term Incentive Plan, as amended, ("Employee Plan") allows
for the issue of a total of 4,004,814 shares of the Company's common stock. All
of the options granted are at an exercise price which was not less than
management's determination of the fair market value of the underlying shares at
the respective dates of grant.
The options under the Director Plan all vested and became exercisable on May 6,
1995, as on such date all of the conditions to vesting were satisfied. All
options awarded pursuant to the Director Plan expire on May 6, 2000.
The following sets forth information with respect to options issued and
outstanding:
<TABLE>
<CAPTION>
Average option
Shares price per share
----------- ----------------
<S> <C> <C>
Options outstanding at January 31, 1996 3,703,732 $2.02
Options exercised (64,829) (1.00)
Options canceled (2,171) (1.00)
--------- ------
Options outstanding at April 30, 1996
(3,356,732 exercisable) 3,636,732 2.03
Options exercised (104,944) (1.00)
Options canceled (30,556) (1.00)
--------- ------
Options outstanding at July 31, 1996 3,501,232 $2.07
========= ======
</TABLE>
Options canceled represent options which are withheld by the Company, upon
exercise by the grantee, to satisfy the grantee's withholding tax liability.
The options canceled cannot be reissued.
A non-employee director has stock warrants currently exercisable to purchase
1,126,426 shares of Common Stock at approximately $2.00 per share.
<PAGE> 10
Page 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF THE
OPERATIONS AND FINANCIAL CONDITION
Results of Operations
The following table sets forth selected operating data as a percentage of
Company net revenue:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
1995 1996 1995 1996
------------------ ----------------
<S> <C> <C> <C> <C>
Net revenue:
Beverage-Air.................................... 39.4% 38.2% 41.7% 37.3%
Taylor Company.................................. 43.5 45.4 42.0 46.5
Wells Manufacturing/Bloomfield ................. 13.5 13.2 13.4 13.4
World Dryer..................................... 3.6 3.2 2.9 2.8
----- ----- ----- -----
Net revenue..................................... 100.0 100.0 100.0 100.0
Gross margin ................................... 31.4 31.0 31.5 31.0
Selling, general and administrative expenses.... 15.6 15.5 15.6 15.2
Amortization ................................... 3.6 0.4 7.8 0.4
Other expense (income), net .................... - (0.3) - (0.2)
Earnings from operations before ----- ----- ---- -----
interest expense and income taxes ............. 12.2 15.4 8.1 15.6
Interest expense ............................... 5.2 4.7 5.2 4.7
----- ----- ----- -----
Earnings (loss) from operations
before income taxes ........................... 7.0 10.7 2.9 10.9
Income taxes.................................... 4.0 4.2 4.0 4.3
----- ----- ----- -----
Net earnings (loss) before extraordinary item... 3.0% 6.5% (1.1)% 6.6%
===== ===== ===== =====
</TABLE>
Three and Six Month Periods Ended July 31, 1996 (Fiscal 1997) Compared to Three
and Six Month Periods Ended July 31, 1995 (Fiscal 1996).
Revenue. Revenue for the three months ended July 31, 1996 increased 0.2% to
$105.0 million compared with $104.8 million for the comparable period in fiscal
1996. Revenue for the six months ended July 31, 1996 decreased 0.3% to $210.3
million compared with $210.9 million for the comparable period in fiscal 1996.
The revenue increase for the three months was primarily attributable to
increased sales of ice cream freezer equipment, including increased sales of
such products to the Company's largest customer (total revenue to the Company's
largest customer increased from 21.1% of revenue in the prior year period to
21.5% of revenue in the current year period), offset almost entirely by lower
sales of refrigeration equipment to the soft drink bottler industry (compared
with the particularly strong sales to that industry in the prior year period).
In the six month period the decline in sales of refrigeration equipment to the
soft drink bottler industry more than offset the increase in sales of ice cream
freezer equipment. Revenue attributable to sales of products for use outside
the United States decreased by 3.9% in the first six months of fiscal 1997, as
compared with the comparable period in fiscal 1996. The decrease is primarily
attributable to lower sales of refrigeration equipment to the bottler market as
a result of declining industry demand for such equipment and increased
competition. For the first six months of fiscal 1997, revenue from sales of
products for use outside the United States was 25.6% of revenue as compared
with 26.5% for the same period in fiscal 1996.
<PAGE> 11
Page 11
Gross Margin. Gross margin for the three months ended July 31, 1996 decreased
1.0% to $32.6 million, compared with $33.0 million for the comparable period in
fiscal 1996. Gross margin for the six months ended July 31, 1996 decreased 1.9%
to $65.3 million, compared with $66.5 million for the comparable period in
fiscal 1996. As a percent of revenue, gross margin decreased from 31.5% and
31.4% of revenue for the three and six month periods ended July 31, 1995,
respectively, to 31.0% of revenue in the three and six month periods ended
July 31, 1996. The decline in gross margin as a percent of revenue is
primarily a result of increased price competition in the soft drink bottler
market and expenses associated with Beverage-Air's new plant in Abbeville, South
Carolina.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expense for the three months ended July 31, 1996
decreased 0.1% to $16.3 million. SG&A expense for the six months ended July 31,
1996 decreased 3.1% to $32.0 million compared with $33.0 million for the
comparable period in fiscal 1996. As a percent of revenue, SG&A declined from
15.6% to 15.5% in the three months ended July 31, 1996 and from 15.6% to 15.2%,
in the six months ended July 31, 1996, compared to the comparable periods in
fiscal 1996. Included in the six month period ended July 31 1995 was a $1.9
million expense provision associated with the implementation of Demand Flow
Technology, an inventory program designed to reduce the inventory component of
working capital. The six month period ended July 31, 1996 included sales
promotion expense of $1.1 million reflecting credits given under a freezer
trade-in program and $0.2 million to promote the sale of a counter top
refrigerator model. The freezers sold under the trade-in program were reported
as sales at their normal selling price. These expenses were partially offset
by favorable medical and casualty insurance experience of $0.7 million.
Amortization. Amortization for the three months ended July 31, 1996 decreased
to $439,000 compared with $3.8 million for the comparable period in fiscal
1996. Amortization for the six months ended July 31, 1996 decreased to $880,000
compared with $16.4 million for the comparable period in fiscal 1996. The
decrease for the three month period is attributable to the fact that a majority
of the Company's other intangible assets were fully amortized as of January 31,
1996. The decrease for the six month period is primarily attributable to the
fact that the reorganization value in excess of amounts allocable to
identifiable assets (which was recorded as a result of the Company's 1992
reorganization) was fully amortized as of March 31, 1995.
Other Expense (Income). Other income for the three month and six month periods
ended July 31, 1996 increased by $0.3 million versus the comparable prior year
periods, reflecting a net recovery of $0.3 million of Canadian federal sales
taxes applicable to prior years.
Interest Expense. Interest expense for the three months ended July 31, 1996
decreased 9.8% to $4.9 million compared with $5.4 million for the comparable
period in fiscal 1996. Interest expense for the six months ended July 31, 1996
decreased 10.2% to $9.9 million compared with $11.0 million for the comparable
period in fiscal 1996. The decrease is principally due to a decrease in average
amounts borrowed pursuant to the Company's Bank Credit Agreement dated December
1, 1993, as amended (the "Bank Credit Agreement"), the acquisition by the
Company in July 1995 of $5.0 million of its 11-3/8% senior subordinated notes
and an increase in interest income earned from short-term cash investments.
Liquidity and Capital Resources
Net cash flows from operations were $17.4 million for the six months ended July
31, 1996 compared with $17.6 million for the six months ended July 31, 1995.
See--"Results of Operations--Revenue."
Net cash used in investing activities amounted to $4.1 million for the six
months ended July 31, 1996 compared with $6.6 million for the six months ended
July 31, 1995. Through the first six months of fiscal 1997, total capital
expenditures have been $3.8 million. In addition, the Company acquired the net
assets of Taylor Distributors, Inc. for approximately $1.3 million. The
Company anticipates that capital expenditures for fiscal 1997 will be
approximately $9.0 million. The Company's capital spending for the balance of
fiscal 1997 is expected to be
<PAGE> 12
Page 12
related to the acquisition, installation, improvement and equipping of its
Beverage-Air and Taylor production facilities and the construction of a service
and sales technical training center in Rockton, Illinois which is expected to
cost approximately $3.0 million and has been included in the projected capital
spending for the year.
As of July 31, 1996, the Company had net working capital of $56.5 million. The
Company's average operating working capital (defined as average monthly gross
accounts receivable and net inventory less accounts payable) as a percentage of
sales declined from 22% during fiscal year 1996 to 21% for the six months ended
July 31, 1996. The Company's earnings from operations were sufficient to cover
fixed charges for the six months ended July 31, 1996.
As of July 31, 1996, the Company had no borrowings under the Revolving Credit
Facility of its Bank Credit Agreement. However, it had outstanding letters of
credit in the amount of $18.0 million, including $13.1 million of letters of
credit which guarantee the Industrial Project Revenue Bonds (referenced in
note 6 to the financial statements included as item 1 hereto). Under the
Revolving Credit Facility, the Company had $32.0 million available for
additional borrowings. In addition, the Company had cash and cash equivalents
of $41.3 million as of July 31, 1996.
In August 1996 the Company redeemed its $6.5 million Village of Rockton,
Illinois Industrial Project Revenue Bonds and acquired in the open market $31.0
million of its 11-3/8% Senior Subordinated Notes Due 2003. The purchases were
funded with available cash and cash equivalents. The redemption of the
Industrial Project Revenue Bonds was made due to the Company increasing its
planned capital expenditures to include a service and sales training center in
Rockton, Illinois. The redemption was made to comply with the IRC.
The Company had four financial covenants to meet at July 31, 1996 under the
Bank Credit Agreement--a current ratio covenant at July 31, 1996 of at least
1.15:1.00; a leverage ratio covenant for the twelve months ended July 31, 1996
of not greater than 5.75:1.00; an interest coverage covenant ratio for the
twelve months ended July 31, 1996 of at least 1.50:1.00 and a cash flow to
fixed charges covenant ratio of at least 1.2125:1.00. The Company met each of
these covenants as it had a current ratio of 1.57:1.00 at July 31, 1996; a
leverage ratio of 2.92:1.00 for the twelve months ended July 31, 1996; an
interest coverage ratio for the twelve months ended July 31, 1996 of 3.05:1.00
and a cash flow to fixed charges ratio for the twelve months ended July 31,
1996 of 2.38:1.00.
Management believes that the sources of capital described above, with
internally generated funds, will be adequate to meet the Company's anticipated
capital and cash requirements for at least the next twelve months, including
debt service and corporate income taxes. The Company's Bank Credit Agreement
expires on November 30, 1996. Management believes the Company is in a stronger
financial position than it was at the time the present agreement was negotiated
in 1993 and does not foresee a problem negotiating a favorable arrangement for
its future credit needs.
Impact of Inflation
Management does not believe that inflation has had a material impact on the
Company's operations during the first six months of fiscal 1997. Management
believes that the Company may face increasing costs during the balance of the
fiscal year as a result of inflation which the Company may not fully be able to
offset with increased productivity or pass on to its customers due to
competitive factors within the industry.
<PAGE> 13
Page 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
See note 7 of "Notes to Unaudited Consolidated Financial Statements" included
in Part I. Item 1. of this Form 10-Q.
Item 4. Submissions of Matters to a Vote of Security Holders
----------------------------------------------------
There were no matters submitted to a vote of stockholders for the quarter ended
July 31, 1996.
Item 5. Other Information
-----------------
On September 3, 1996 the Company announced the appointment of
Jeffrey P. Rhodenbaugh as President and Chief Operating Officer. Mr.
Rhodenbaugh assumes these duties from William E. Dotterweich who will
continue in his position as Chief Executive Officer.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
1. Exhibits
27.1 Financial Data Schedule
2. Reports on Form 8-K.
None.
<PAGE> 14
Page 14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Specialty Equipment Companies, Inc.
(Registrant)
Date: September 9, 1996 /s/ William E. Dotterweich
-------------------------- -------------------------------------------
William E. Dotterweich, Chief Executive Officer
(Principal Executive Officer)
Date: September 9, 1996 /s/ Donald K. McKay
-------------------------- -------------------------------------------
Donald K. McKay, Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE> 15
Page 15
Exhibit Index
Exhibit
No. Description Page
------- ----------- ----
16
27.1 Financial data schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> MAY-01-1996
<PERIOD-END> JUL-31-1996
<CASH> 41,345
<SECURITIES> 0
<RECEIVABLES> 61,899
<ALLOWANCES> 5,358
<INVENTORY> 51,125
<CURRENT-ASSETS> 156,027
<PP&E> 48,647
<DEPRECIATION> 17,416
<TOTAL-ASSETS> 200,477
<CURRENT-LIABILITIES> 99,559
<BONDS> 192,953
<COMMON> 175
0
0
<OTHER-SE> (94,082)
<TOTAL-LIABILITY-AND-EQUITY> 200,477
<SALES> 105,030
<TOTAL-REVENUES> 105,030
<CGS> 32,606
<TOTAL-COSTS> 32,606
<OTHER-EXPENSES> 16,452
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,900
<INCOME-PRETAX> 11,254
<INCOME-TAX> 4,375
<INCOME-CONTINUING> 6,879
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,879
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
