<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 April 30, 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)
(708) 585-5111
- - --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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 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 June 12, 1996
- - ----------------------------- ----------------------------
Common Stock, $0.01 par value 17,389,872 shares
The exhibit index is on page 15.
<PAGE> 2
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)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
1995 1996
-------- --------
<S> <C> <C>
Revenue .......................................................................... $ 106,116 $ 105,305
Cost of sales .................................................................... 72,571 72,661
--------- ---------
Gross margin ............................................................ 33,545 32,644
Selling, general and administrative expenses ..................................... 16,644 15,636
Amortization ..................................................................... 12,642 441
Other income, net ................................................................ (11) (10)
--------- ---------
Earnings from operations before interest and
income taxes .................................................................... 4,270 16,577
Interest expense, net ............................................................ 5,579 4,992
--------- ---------
Earnings (loss) from operations before
income taxes .................................................................... (1,309) 11,585
Income taxes ..................................................................... 4,248 4,508
--------- ---------
Net earnings (loss) ..................................................... $ (5,557) $ 7,077
========= =========
Net earnings (loss) per common and dilutive
common equivalent share ......................................................... $ (0.34) $ 0.33
========= =========
Average number of common and dilutive common
equivalent shares outstanding ................................................... 16,459.2 21,496.7
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
<PAGE> 3
Page 3
SPECIALTY EQUIPMENT COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS
January 31, April 30,
1996 1996
----------- ----------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................... $ 28,447 $ 32,987
Accounts receivable, net ................................................ 44,969 59,605
Inventories ............................................................. 51,514 49,462
Other current assets .................................................... 10,777 10,544
--------- ---------
Total current assets ................................................. 135,707 152,598
Net property, plant and equipment ........................................ 29,451 30,128
Restricted cash equivalents .............................................. 5,873 5,148
Intangible assets, net ................................................... 7,667 7,526
Other assets ............................................................. 1,537 1,526
--------- ---------
Total assets.......................................................... $ 180,235 $ 196,926
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt .................................. $ 174 $ 174
Accounts payable ........................................................ 21,340 23,023
Accrued expenses ........................................................ 67,167 70,888
Accrued income taxes .................................................... 4,199 8,401
--------- ---------
Total current liabilities ............................................ 92,880 102,486
Long-term debt, excluding current installments ........................... 193,041 192,997
Other non-current liabilities ............................................ 1,935 1,904
Stockholders' equity (deficit):
Common stock ............................................................ 173 174
Additional paid-in capital .............................................. 50,895 50,961
Accumulated deficit ..................................................... (157,921) (150,844)
Other ................................................................... (768) (752)
--------- ---------
Total stockholders' deficit ......................................... (107,621) (100,461)
Commitments and contingent liabilities (note 7) ..........................
Total liabilities and stockholders' equity (deficit)...................... $ 180,235 $ 196,926
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 4
Page 4
SPECIALTY EQUIPMENT COMPANIES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
1995 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) .................................................. $ (5,557) $ 7,077
Items not affecting cash:
Depreciation and amortization ....................................... 1,070 1,085
Amortization ........................................................ 12,642 441
Utilization of NOL carry forward .................................... 273 273
Gain from asset sales................................................ (11) (10)
-------- --------
Total............................................................... 8,417 8,866
Changes in current assets and liabilities:
Accounts receivable, net.............................................. (16,537) (14,117)
Inventories .......................................................... 1,710 2,492
Other current assets ................................................. (59) 240
Accounts payable and other current
liabilities, excluding current installments of long-term debt........ 13,648 9,177
-------- --------
Total............................................................... (1,238) (2,208)
-------- --------
Net cash flows from operations ........................................ 7,179 6,658
Cash flows from investing activities:
Additions to property, plant and equipment ........................... (1,821) (1,550)
Disposals of property, plant and equipment ........................... 10 10
Cash equivalents restricted for capital additions .................... (4,259) 725
Acquisition of net assets of business................................. -- (1,322)
-------- --------
Net cash used in investing activities................................ (6,070) (2,137)
-------- --------
Cash flows from financing activities:
Net decrease in revolving credit facility ............................ (6,598) --
Repayments of long-term debt ......................................... (71) (44)
Proceeds from long-term debt ......................................... 6,400 --
Proceeds from stock options exercised ................................ 60 67
Refinancing costs..................................................... (110) --
-------- --------
Net cash used in financing activities................................ (319) 23
-------- --------
Other.................................................................. (329) (4)
-------- --------
Net increase (decrease) in cash and cash equivalents................... 461 4,540
Cash and cash equivalents:
Beginning of period................................................... 3,244 28,447
-------- --------
End of period......................................................... $ 3,705 $ 32,987
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
<PAGE> 5
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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 month period ended April 30, 1995 and 1996, (b) the
financial position at January 31, 1996 and April 30, 1996 and (c) the
statements of cash flows for the three month periods ended April 30, 1995 and
1996, have been made. The financial results for the three months ended April
30, 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
period ended April 30, 1995 because the Company reported a net loss for that
period; such options and warrants are included for the period ended April 30,
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, April 30,
Description 1996 1996
---------- ---------
(in thousands)
<S> <C> <C>
Accounts receivable .............................................. $50,498 $65,030
Less: allowance for doubtful accounts ............................ 5,529 5,425
------- -------
Total ....................................................... $44,969 $59,605
======= =======
</TABLE>
3. Inventories
Inventories at the following dates consisted of the following:
<TABLE>
<CAPTION>
January 31, April 30,
1996 1996
---------- ---------
(in thousands)
<S> <C> <C>
Raw materials.................................................... $26,052 $25,307
Work in progress ................................................ 6,976 7,086
Finished goods .................................................. 18,486 17,069
------- -------
51,514 49,462
Less: excess of FIFO cost over LIFO cost -- --
------- -------
Total ................................................... $51,514 $49,462
======= =======
</TABLE>
The Company uses the LIFO method of valuing inventories. LIFO had a de minimis
affect on the cost of sales for the three month periods ended April 30, 1995 and
1996.
<PAGE> 6
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SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. Intangibles:
<TABLE>
<CAPTION>
January 31, April 30,
1996 1996
-------- --------
(in thousands)
<S> <C> <C>
Intangibles consisted of the following:
Patents .............................................. $ 1,568 $ 1,568
Other intangibles .................................... 48,206 48,506
Deferred pension costs ............................... 1,904 1,904
Less: accumulated amortization ....................... 44,011 44,452
------- -------
Net intangibles ...................................... $ 7,667 $ 7,526
======= =======
</TABLE>
Other intangibles primarily include deferred financing fees, engineering
drawings, distribution networks and skilled workforce.
5. Income Taxes
The Company adopted the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes"("Statement 109") effective March 1, 1993. The adoption of Statement 109
resulted in a net deferred tax asset of $35.7 million for the fiscal year ended
January 31, 1996 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, 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, April 30,
Description 1996 1996
-------- -------
(in thousands)
<S> <C> <C>
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 ............................................... 315 271
-------- --------
193,215 193,171
Less: current installments ...................................... 174 174
-------- --------
Total long-term debt, less current installments........... $193,041 $192,997
======== ========
</TABLE>
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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
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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 occurred 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 $307,000
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
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SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Letters of Credit
As of April 30, 1996, the Company had letters of credit outstanding totaling
$18.6 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
========= ======
</TABLE>
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
April 30,
1995 1996
------ ------
<S> <C> <C>
Net revenue:
Beverage-Air............................................................ 44.0% 36.5%
Taylor Company.......................................................... 40.5 47.5
Wells Manufacturing/Bloomfield ......................................... 13.3 13.5
World Dryer............................................................. 2.2 2.5
----- -----
Net revenue ............................................................ 100.0 100.0
Gross margin ........................................................... 31.6 31.0
Selling, general and administrative expenses............................ 15.7 14.9
Amortization ........................................................... 11.9 0.4
----- -----
Earnings from operations before
interest expense and income taxes ..................................... 4.0 15.7
Interest expense ....................................................... 5.2 4.7
----- -----
Earnings (loss) from operations
before income taxes ................................................... (1.2) 11.0
Income taxes ........................................................... 4.0 4.3
----- -----
Net earnings (loss)..................................................... (5.2)% 6.7%
===== =====
</TABLE>
Three Month Period Ended April 30, 1996 (Fiscal 1997) Compared to Three Month
Period Ended April 30, 1995 (Fiscal 1996).
Revenue. Revenue for the three months ended April 30, 1996 decreased 0.8% to
$105.3 million compared with $106.1 million for the comparable period in fiscal
1996. The revenue decrease for the three months was primarily attributable to
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) offset almost entirely by 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 17.2%
of revenue in the prior year period to 21.2% of revenue in the current year
period). Revenue attributable to sales of products for use outside the United
States decreased by 3.0% in the first three 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. However, the Company's sales of products for use outside the
United States to its traditional dealer and fast food chain customers increased
16% during the three months ended April 30, 1996 as compared with the
comparable period in fiscal 1996. For the first three months of fiscal 1997,
revenue from sales of products for use outside the United States was 27.2% of
revenue as compared with 27.8% for the same period in fiscal 1996.
The Company's largest customer has experienced significant growth over the last
several years. Although the Company is no longer the sole supplier of
two-sided cooking grills to this customer, it has received a dominant share of
that business. There is no assurance that the Company will maintain such
dominant share in the future.
<PAGE> 11
Page 11
Gross Margin. Gross margin for the three months ended April 30, 1996 decreased
2.7% to $32.6 million, compared with $33.5 million for the comparable period in
fiscal 1996. As a percent of revenue, gross margin decreased from 31.6% of
revenue for the three months ended April 30, 1995 to 31.0% of revenue in the
three months ended April 30, 1996. The decline in gross margin as a percent of
revenue is primarily a result of higher direct material costs, principally for
stainless steel, and increased price competition in the soft drink bottler
market.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expense for the three months ended April 30, 1996
decreased 6.1% to $15.6 million compared with $16.6 million for the comparable
period in fiscal 1996. As a percent of revenue, SG&A declined from 15.7% to
14.9%, in the three months ended April 30, 1996 compared to the comparable
period in fiscal 1996. Included in the three month period ended April 30,
1995 was a $1.1 million expense provision associated with the implementation of
Demand Flow Technology, an inventory program designed to reduce the inventory
component of working capital. The three month period ended April 30, 1996
included sales promotion expense of $0.6 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 $0.5
million.
Amortization. Amortization for the three months ended April 30, 1996 decreased
to $441,000 compared with $12.6 million for the comparable period in fiscal
1996. The decrease is attributable to the fact that the reorganization value
in excess of amounts allocable to identifiable assets (which was incurred
because of the Company's 1992 reorganization) was fully amortized as of March
31, 1995.
Interest Expense. Interest expense for the three months ended April 30, 1996
decreased 10.5% to $5.0 million compared with $5.6 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") and an increase in interest
income earned from short-term cash investments.
Liquidity and Capital Resources
Net cash flows from operations were $6.7 million for the three months ended
April 30, 1996 compared with $7.2 million for the three months ended April 30,
1995. See -- "Results of Operations -- Revenue."
Net cash used in investing activities amounted to $2.1 million for the three
months ended April 30, 1996 compared with $6.1 million for the three months
ended April 30, 1995. Through the first three months of fiscal 1997, total
capital expenditures have been $1.6 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 related to the acquisition, installation,
improvement and equipping of its Beverage-Air and Taylor production facilities
and a 60,000 square foot manufacturing plant for Beverage-Air in Abbeville,
South Carolina which is expected to cost approximately $2.0 million. The
Company is currently completing plans, subject to board of director approval,
for 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 April 30, 1996, the Company had net working capital of $50.1 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 three months
ended April 30, 1996. The Company's earnings from operations were sufficient
to cover fixed charges for the three months ended April 30, 1996.
<PAGE> 12
Page 12
As of April 30, 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 $18.6 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 $31.4 million available
for additional borrowings. In addition, the Company had cash and cash
equivalents of $33.0 million as of April 30, 1996.
The Company had four financial covenants to meet at April 30, 1996
under the Bank Credit Agreement -- a current ratio covenant at April 30, 1996
of at least 1.15:1.00; a leverage ratio covenant for the twelve months ended
April 30, 1996 of not greater than 5.75:1.00; an interest coverage covenant
ratio for the twelve months ended April 30, 1996 of at least 1.50:1.00 and a
cash flow to fixed charges covenant ratio of at least 1.175:1.00. The Company
met each of these covenants as it had a current ratio of 1.49:1.00 at April 30,
1996; a leverage ratio of 2.92:1.00 for the twelve months ended April 30, 1996;
an interest coverage ratio for the twelve months ended April 30, 1996 of
3.02:1.00 and a cash flow to fixed charges ratio for the twelve months ended
April 30, 1996 of 2.33:1.00.
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.
Impact of Inflation
Management does not believe that inflation has had a material impact on
the Company's operations during the first three months of fiscal 1997;
however, the Company has experienced increased material costs, especially with
respect to stainless steel as compared to the first three months of fiscal
1996. 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
Election of Directors. At the Company's Annual Meeting of Stockholders, held
on April 25, 1996, the following members were elected to the Company's Board of
Directors, each by the respective vote indicated to the right of such nominee's
name:
<TABLE>
<CAPTION>
Authority
Nominee For Withheld
--------------------- ---------- ---------
<S> <C> <C>
Avram A. Glazer 15,408,829 275,150
Charles E. Hutchinson 15,623,379 60,600
Richard A. Kent 15,623,379 60,600
</TABLE>
The terms of office of the remaining directors continued following the meeting.
There were no other matters submitted to a vote of stockholders for the
quarter ended April 30, 1996.
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits
10.1 Specialty Equipment Companies, Inc. Supplemental Retirement Plan,
amended and restated, effective February 1, 1991.
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: June 13, 1996 /s/ William E. Dotterweich
-------------------------- ----------------------------------
William E. Dotterweich,
Chief Executive Officer
(Principal Executive Officer)
Date: June 13, 1996 /s/ Donald K. McKay
-------------------------- ----------------------------------
Donald K. McKay,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE> 15
Page 15
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
No. Description Page
- - ------- ----------- ----
<S> <C> <C>
10.1 Specialty Equipment Companies, Inc. Supplemental 16
Retirement Plan amended and restated, effective
February 1, 1991.
27.1 Financial data schedule. 27
</TABLE>
<PAGE> 1
EXHIBIT 10.1
SPECIALTY EQUIPMENT COMPANIES, INC.
SUPPLEMENTAL RETIREMENT PLAN
AS AMENDED AND RESTATED
EFFECTIVE FEBRUARY 1, 1991
Page 1
<PAGE> 2
PREAMBLE
WHEREAS, effective February 1, 1991 SPECIALTY EQUIPMENT COMPANIES, INC.
(The "Company"), a Delaware corporation, established a pension plan for the
benefit of certain eligible employees and known as the Specialty Equipment
Companies, Inc. Supplemental Retirement Plan (the "Supplemental Plan"); and
WHEREAS, the Supplemental Plan has subsequently been amended from time to
time.
NOW, THEREFORE, February 1, 1991, except as otherwise herein provided, the
Company, in accordance with the provisions of the Supplemental Plan pertaining
to amendments thereof, hereby amend and restate the Supplemental Plan in its
entirety as follows:
Page 2
<PAGE> 3
SPECIALTY EQUIPMENT COMPANIES, INC.
SUPPLEMENTAL RETIREMENT PLAN
ARTICLE 1
GENERAL
1.1 Purpose. It is the intention of Specialty Equipment Companies, Inc.
(the "Company") to maintain appropriate levels of retirement benefits for
specified individuals who are entitled to benefits under the Specialty
Equipment Retirement Income Plan (the "Pension Plan"). Accordingly, the Board
of Directors of Specialty Equipment Companies, Inc. authorized the appropriate
officers of the Company to establish the Specialty Equipment Companies, Inc.
Supplement Retirement Plan (the "Supplemental Plan") effective as of February
1, 1991. This Supplemental Plan is intended to provide benefits to certain
employees of the Company who have been deprived of promised benefits because of
limits imposed under the Pension Plan by the Internal Revenue Code. The
Supplemental Plan shall maintain such retirement benefits levels by means of
supplemental unfunded payments made by the Company to the individuals eligible
for such payments as more fully described in Articles 3 and 4.
1.2 Effective Date. This Supplemental Plan is effective as of February
1, 1991.
ARTICLE 2
ADMINISTRATION
2.1 Company. The Supplemental Plan shall be administered by the Company
in accordance with, to the extent applicable, the provisions of Section 11 of
the Pension Plan.
Page 3
<PAGE> 4
ARTICLE 3
ELIGIBILITY
3.1 Persons Eligible to Receive Benefits. Division Presidents and
Corporate Officers of Specialty Equipment Companies, Inc. designated by the
Board of Directors, whose benefits under the Pension Plan are reduced by reason
of the application of the limitations on benefits under Section 415 of the
Internal Revenue Code or the limitation on compensation under Section
401(a)(17) of the Internal Revenue Code, as such limitations are in effect on
the date of commencement of benefits under the Pension Plan (or as in effect at
any time thereafter), shall be eligible to receive a benefit under this
Supplemental Plan. The surviving spouse of a Participant who dies prior to the
commencement of payment of his benefit under the Pension Plan shall be eligible
to receive a Supplemental Surviving Spouse Benefit under Section 4.4
3.2 Participant. Every individual described in Section 3.1 above who is
eligible to receive benefits under this Supplemental Plan by reason of his
service with the Company shall be known as a "Participant".
3.3 Beneficiary. Every individual described in Section 3.1 above who is
eligible to receive benefits under this Supplemental Plan by reason of the
death of a Participant shall be known as a "Beneficiary". The term
"Beneficiary" shall include spouses, heirs-at-law, legal representatives, and
every other person to whom benefits may be distributed, as determined under the
Pension Plan.
ARTICLE 4
SUPPLEMENTAL RETIREMENT BENEFIT
4.1 Intent. The intent of the Supplemental Plan is to provide
Participants with a supplemental benefit equal to the difference, if any,
between (a) the benefit they would have been entitled to under the Pension Plan
without regard to the limitations under Section 415 and 401 (a)(17) of the
Internal Revenue Code and (b) the benefit they are entitled to receive under
the Pension Plan.
Page 4
<PAGE> 5
4.2 Benefit. The Supplemental benefit payable to a Participant
in the form of a single life annuity, commencing at his Normal Retirement Date,
shall be a monthly amount equal to the difference between (a) and (b) below,
where:
(a) equals the monthly amount of the benefit to which the
Participant would have been entitled under the Pension Plan if such benefit
were computed without giving effect to the limitation on benefits imposed by
Sections 415 and 401(a)(17) of the Internal Revenue Code; and
(b) equals the monthly amount of the benefit that is actually
payable to the Participant under the Pension Plan.
4.3 Form of Benefit. The Supplemental Benefit shall be:
(a) Payable at the election of the Participant as an early,
normal or late retirement as provided in the Pension Plan. In the event a
Participant elects to retire early and commence receipt of his Supplemental
Benefit, it shall be reduced for such early commencement using the early
retirement reduction factors set forth in the Pension Plan.
(b) Payable at the election of the Participant in the same
optional forms of benefit as provided under the Pension Plan and such
optional forms shall be determined and valued using the actuarial assumptions
set forth in the Pension Plan.
4.4 Supplemental Surviving Spouse Benefit. In the event of the
Participant's death prior to the commencement of benefits under the Pension
Plan, the surviving spouse of the Participant shall be entitled to a death
benefit based on the benefit entitlement of the Participant as set forth in the
Pension Plan for pre-retirement deaths. Upon the death of the Participant,
after commencement of benefits, the remaining entitlement of the Participant,
if any, shall be paid in the form selected by the Participant upon the
commencement of his benefit as provided in the Pension Plan.
Page 5
<PAGE> 6
The monthly amount of the Supplement Surviving Spouse Benefit payable to
the surviving spouse shall be equal to the difference between (a) and (b)
below, where:
(a) equals the monthly amount of the benefit to which the
surviving spouse would be entitled under Section 5.1 or 5.2 (whichever is
applicable) of the Pension Plan if such benefit were computed without giving
effect to the limitations under Section 415 and 401(a)(17) of the Internal
Revenue Code; and
(b) equals the monthly amount of the benefit actually payable
to the surviving spouse under Section 5.1 or 5.2 (whichever is applicable) of
the Pension Plan.
The Supplemental Surviving Spouse Benefit shall be payable in the
same form and shall commence at the same time as the benefits that are payable
to the surviving spouse pursuant to Section 5.1 or 5.2 (whichever is applicable)
of the Pension Plan.
4.5 Obligation of the Company.
(a) By the establishment of this Supplemental Plan, the Company
guarantees, subject to the qualifications and limitations set forth in Article
5 below, benefits equal to the amounts determined in accordance with Section
4.2 to each Participant.
(b) Except for Participants and Beneficiaries described in Section
4.2 and 4.4 above, future benefits under this Supplemental Plan shall be
subject to discontinuance or diminution pursuant to Section 5.2. It is the
intent that benefits shall, to the maximum extent permitted by law, be paid to
Participants and Beneficiaries under and pursuant to the terms of the Pension
Plan and that termination, curtailment, or reduction of benefit payments under
the Pension Plan shall not result in commencement of or increased retirement
benefits hereunder.
Page 6
<PAGE> 7
ARTICLE 5
AMENDMENT OR TERMINATION
5.1 Amendment to Conform with Law. The Company, acting through its Board
of Directors, may by amendment take such changes in, additions to, and
substitutions for the provisions of this Supplemental Plan, to take effect
retroactively or otherwise, as is deemed necessary or advisable for the purpose
of conforming this Supplemental Plan to any present or future federal law
relating to plans of this or of a similar nature, and to the administrative
regulations and rulings promulgated thereunder.
5.2 Other Amendments and Termination. The Company, acting through its
Board of Directors, may amend this Supplemental Plan at any time and from time
to time in any manner which it deems desirable. The Company, acting through
its Board of Directors, may terminate this Supplemental Plan at any time which
it deems desirable. Notwithstanding the foregoing, no amendment, curtailment,
discontinuance or termination of this Supplemental Plan shall have the effect
of reducing or canceling any benefits which have accrued and vested hereunder
as of the date of such action, whether or not such benefits are in pay status;
provided that nothing in this Section 5.2 shall obligate the Company to pay
retirement benefits to anyone who does not meet the eligibility requirements of
Section 3.1 nor to pay retirement benefits in excess of the amounts described
in Article 4.
In the event the Pension Plan is amended to increase the benefit
payable to Participants or Beneficiaries under the Pension Plan, benefits
payable under the Supplemental Plan shall be adjusted for Participants or
Beneficiaries.
Page 7
<PAGE> 8
5.3 Form of Amendment or Termination. Any such amendment, or termination
of this Supplemental Plan or discontinuance or reduction of payments hereunder
shall be made by an instrument in writing, duly certified, reflecting that said
amendment or termination or discontinuance or reduction of payments has been
authorized by the Board of Directors.
5.4 Notice of Amendment or Termination. The Company shall notify
Participants or Beneficiaries who are affected by any such amendment or
termination or discontinuance or reduction of payments within a reasonable time
thereof.
ARTICLE 6
MISCELLANEOUS
6.1 No Guarantee of Employment, etc. Neither the creation of this
Supplemental Plan nor anything contained herein shall be construed as giving
any Participant hereunder or other employees of the Company any right to remain
in the employ of the Company.
6.2 Merger, Consolidation, etc. The Company may not merge or consolidate
with any other corporation, including any other affiliated company, and may not
liquidate, spin off, dissolve or otherwise reorganize without making suitable
arrangements for the payment of any benefits under this Supplemental Plan to
any individual who has vested accrued benefits hereunder.
6.3 Inalienability. Except so far as may be contrary to the laws of any
state having jurisdiction over the premises, a Participant or Beneficiary shall
have no right to assign, transfer, hypothecate, encumber, commute or anticipate
his interest in any payments under this Supplemental Plan and such payments
shall not in any way be subject to any legal process to levy upon or attach the
same for payment of any claim against any Participant or Beneficiary.
Page 8
<PAGE> 9
6.4 Incompetency. If any Participant or Beneficiary is, in the opinion of
the Company, legally incapable of giving a valid receipt and discharge for any
payment, the Company may, at its option, direct that such payment or any part
thereof be made to such person or persons who in the opinion of the Company are
caring for and supporting such Participant or Beneficiary, unless it has
received due notice of claim from a fully appointed guardian or conservator of
the estate of the Participant or Beneficiary. A payment so made will be a
complete discharge of the obligations under this Supplemental Plan to the
extent of and as to that payment, and the Company will have no obligation
regarding the application of the payment.
6.5 No Requirement to Fund. No provisions in this Supplemental Plan
shall be construed to require, either directly or indirectly, the Company to
reserve, or otherwise set aside, funds for the payment of benefits hereunder.
6.6 Controlling Law. To the extent not preempted by the laws of the
United States of America, the laws of the State of Illinois shall be the
controlling state law in all matters relating to this Supplemental Plan.
6.7 Severability. If any provisions of this Supplemental Plan shall be
held illegal or invalid for any reason, said illegality or invalidity shall not
affect the remaining parts of this Supplemental Plan, and this Supplemental
Plan shall be construed and enforced as if said illegal and invalid provisions
had never been included herein.
6.8 Limitations on Provisions. The provisions of this Supplemental Plan
and any retirement benefits shall be limited as described herein. Any benefit
payable under the Pension Plan shall be paid solely in accordance with the
terms and provisions of the Pension Plan and nothing in this Supplemental Plan
shall operate or be construed in any way to modify, amend, or affect the terms
and provisions of the Pension Plan.
6.9 Gender and Number. Whenever the context requires or permits, the
gender and number of words shall be interchangeable.
Page 9
<PAGE> 10
IN WITNESS WHEREOF, Specialty Equipment Companies, Inc. has caused the
Supplemental Retirement Plan to be executed by the Company on the 8th day
of May, 1996.
Specialty Equipment Companies, Inc.
By: /s/ Donald K.McKay
----------------------------------
ATTEST
By: /s/ Douglas C. Johnson
-----------------------
Assistant Secretary
H:be:RRR:Special:SRP.doc
Page 10
<PAGE> 11
Attachment A
SPECIALTY EQUIPMENT COMPANIES, INC.
SUPPLEMENTAL RETIREMENT PLAN
PARTICIPANTS
William Dotterweich
Gerta Knoll - Surviving Spouse of James Knoll
Donald McKay
William Robertson
Clark Wangaard
Page 11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> APR-30-1996
<CASH> 32,987
<SECURITIES> 0
<RECEIVABLES> 65,030
<ALLOWANCES> 5,425
<INVENTORY> 49,462
<CURRENT-ASSETS> 152,598
<PP&E> 46,942
<DEPRECIATION> 16,814
<TOTAL-ASSETS> 196,126
<CURRENT-LIABILITIES> 102,486
<BONDS> 192,997
<COMMON> 174
0
0
<OTHER-SE> (100,635)
<TOTAL-LIABILITY-AND-EQUITY> 196,926
<SALES> 105,305
<TOTAL-REVENUES> 105,305
<CGS> 72,661
<TOTAL-COSTS> 72,661
<OTHER-EXPENSES> 16,067
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,992
<INCOME-PRETAX> 11,585
<INCOME-TAX> 4,508
<INCOME-CONTINUING> 7,077
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,077
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
</TABLE>
