<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, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from to
--------------------------------------------------
Commission File Number: 0-22798
-----------------------
SPECIALTY EQUIPMENT COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-333337593
- --------------------------------------------------------------------------------
(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____.
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 11, 1998
- ----------------------------- ---------------------------------
Common Stock, $0.01 par value 18,240,177 shares
The exhibit index is on page 15.
<PAGE> 2
Page 2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
SPECIALTY EQUIPMENT COMPANIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended Six months ended
July 31, July 31,
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue $ 113,146 $ 140,146 $ 222,388 $ 267,811
Cost of sales 78,466 95,011 154,775 183,190
--------- --------- --------- ---------
Gross margin 34,680 45,135 67,613 84,621
Selling, general and administrative expenses 18,246 22,777 34,261 43,223
--------- --------- --------- ---------
Earnings from operations 16,434 22,358 33,352 41,398
Interest expense, net 3,880 4,035 8,009 8,120
--------- --------- --------- ---------
Earnings from operations before income taxes 12,554 18,323 25,343 33,278
Income taxes 4,481 6,588 9,057 12,065
--------- --------- --------- ---------
Net earnings before minority interest 8,073 11,735 16,286 21,213
Minority interest - (33) - (33)
--------- --------- --------- ---------
Net earnings $ 8,073 $ 11,702 $ 16,286 $ 21,180
========= ========= ========= =========
Basic earnings per share $ 0.44 $ 0.64 $ 0.90 $ 1.16
========= ========= ========= =========
Diluted earnings per share $ 0.40 $ 0.58 $ 0.81 $ 1.06
========= ========= ========= =========
Weighted average shares outstanding - basic 18,178 18,299 18,099 18,231
Weighted average shares outstanding - diluted 20,188 20,037 20,147 20,046
</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, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
January 31, July 31,
1998 1998
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 39,947 $ 52,589
Accounts receivable, net 63,043 86,980
Inventories 54,030 53,821
Deferred tax assets, net 15,310 15,310
Other current assets 3,143 2,848
--------- ---------
Total current assets 175,473 211,548
Property, plant and equipment, net 38,743 40,183
Restricted cash equivalents 2,662 2,218
Goodwill 15,645 15,447
Other intangibles, net 7,973 7,571
Other assets 954 375
--------- ---------
Total assets $ 241,450 $ 277,342
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt $ 18,395 $ 18,290
Accounts payable 26,425 33,679
Accrued liabilities 68,748 74,918
Accrued income taxes 5,340 10,088
--------- ---------
Total current liabilities 118,908 136,975
Long-term debt, excluding current installments 159,591 159,892
Other non-current liabilities 1,762 1,737
Stockholders' equity (deficit):
Common stock 181 182
Additional paid-in capital 58,298 57,540
Accumulated deficit (88,041) (66,861)
Foreign currency translation adjustment (308) (428)
Other (2,327) (2,327)
Treasury stock, at cost (6,614) (9,368)
--------- ---------
Total stockholders' deficit (38,811) (21,262)
--------- ---------
Total liabilities and stockholders' deficit $ 241,450 $ 277,342
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
statements.
<PAGE> 4
Page 4
SPECIALTY EQUIPMENT COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Six months ended
July 31,
1997 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 16,286 $ 21,180
Items not affecting cash:
Depreciation 2,319 2,457
Amortization 377 605
Utilization of net operating loss carryforward 546 546
Changes in current assets and liabilities (excluding
effects of business
acquired):
Accounts receivable (8,258) (23,937)
Inventories 5,093 209
Other current assets 3,082 295
Accounts payable and other current liabilities,
excluding current installments of long-term debt 12,301 18,672
-------- --------
Net cash flows provided by operating activities 31,746 20,027
Cash flows from investing activities:
Additions to property, plant and equipment (1,615) (3,897)
Cash equivalents restricted for capital additions 99 444
Businesses acquired (883) -
-------- --------
Net cash used in investing activities (2,399) (3,453)
Cash flows from financing activities:
Proceeds from long-term debt - 301
Proceeds from exercise of stock options 443 577
Options withheld for taxes (1,611) (1,878)
Acquisition of treasury stock - (2,754)
-------- --------
Net cash used in financing activities (1,168) (3,754)
-------- --------
Other, net 592 (178)
-------- --------
Net increase in cash 28,771 12,642
Cash:
Beginning of period 7,787 39,947
-------- --------
End of period $ 36,558 $ 52,589
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
statements.
<PAGE> 5
Page 5
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. General
These consolidated financial statements should be read with the
consolidated financial statements and the notes thereto for the fiscal year
ended January 31, 1998 included in the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission ("Commission") on April 13,
1998.
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, 1997 and 1998,
(b) the financial position at July 31, 1998 and (c) the statements of cash flows
for the six month periods ended July 31, 1997 and 1998, have been made. The
financial results for the three and six months ended July 31, 1998 are not
necessarily indicative of the financial results for the entire 1999 fiscal year.
Certain reclassifications have been made to the prior period financial
statements to conform with the current period presentation.
Net earnings per share is computed based on the weighted average number
of basic and diluted common shares outstanding during the period.
During the quarter ended April 30, 1998, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements, and requires a total for
comprehensive income to be provided in condensed financial statements of interim
periods. Comprehensive income includes all changes in stockholders' equity
during the period except those resulting from investments by owners and
distributions to owners. Comprehensive earnings for the three and six month
periods ended July 31, 1997 and 1998 consisted of the following:
<TABLE>
<CAPTION>
Three months ended Six months ended
July 31, July 31,
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings $ 8,073 $ 11,702 $ 16,286 $ 21,180
Other comprehensive earnings (losses):
Foreign currency translation adjustment,
net of taxes (36) (154) (36) (73)
-------- -------- -------- --------
Comprehensive earnings $ 8,037 $ 11,548 $ 16,250 $ 21,107
======== ======== ======== ========
</TABLE>
2. Accounts Receivable
Accounts receivable at the following dates consisted of the following:
<TABLE>
<CAPTION>
January 31, July 31,
1998 1998
----------- -----------
<S> <C> <C>
Accounts receivable $ 66,998 $ 90,737
Less: allowance for doubtful accounts 3,955 3,757
----------- -----------
Total $ 63,043 $ 86,980
=========== ===========
</TABLE>
<PAGE> 6
Page 6
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. Inventories
Inventories at the following dates consisted of the following:
<TABLE>
<CAPTION>
January 31, July 31,
1998 1998
----------- ------------
<S> <C> <C>
Raw materials $ 28,602 $ 32,060
Work-in-process 8,885 7,322
Finished goods 16,624 14,520
----------- ------------
Sub-total 54,111 53,902
Less: excess of FIFO cost over LIFO 81 81
----------- ------------
Total $ 54,030 $ 53,821
=========== ============
</TABLE>
The Company uses the LIFO method of valuing inventories. LIFO, compared to
FIFO, had a de minimis effect on the cost of sales for the three and six month
periods ended July 31, 1997 and 1998.
4. Intangibles and Goodwill:
<TABLE>
<CAPTION>
January 31, July 31,
1998 1998
----------- ------------
<S> <C> <C>
Goodwill $ 15,843 $ 15,843
Less: accumulated amortization 198 396
----------- ------------
Net goodwill 15,645 15,447
=========== ============
Intangibles consist of the following:
Patents $ 991 $ 991
Other intangibles 52,076 52,076
Deferred pension costs 1,961 1,961
----------- ------------
55,028 55,028
Less: accumulated amortization 47,055 47,457
----------- ------------
Net intangibles $ 7,973 $ 7,571
=========== ============
</TABLE>
Other intangibles primarily include deferred financing fees, engineering
drawings, distribution networks and skilled workforce.
5. Income Taxes
At January 31, 1998, the Company had a net deferred tax asset of $32.3
million less a valuation allowance of $22.1 million. The Company has
approximately $13.3 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.
<PAGE> 7
Page 7
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. Long-Term Debt
Long-term debt at the following dates consisted of the following:
<TABLE>
<CAPTION>
January 31, July 31,
1998 1998
----------- ------------
<S> <C> <C>
Revolving line of credit $ - $ -
11-3/8% senior subordinated notes due 2003 149,040 149,040
Industrial project revenue bonds due 2009 6,400 6,400
Other long-term debt 18,711 22,742
Capitalized leases 3,835 -
----------- ------------
177,986 178,182
Less: current installments 18,395 18,290
----------- ------------
Total long-term debt $ 159,591 $ 159,892
=========== ============
</TABLE>
Under the revolving credit facility, the Company had $45.0 million
available for additional borrowings.
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.
The Company was 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 alleged that
the Company and other defendants misappropriated trade secrets in connection
with the Company's development of an oven for McDonald's and OSI. As a result of
a ruling on a motion to dismiss, all the claims against the Company other than
the trade secret claim were dismissed. The case was settled by the terms of a
confidential settlement agreement dated May 28, 1997 pursuant to which one of
the defendants agreed to make a settlement payment in a confidential amount.
Although the Company is not required under the terms of this settlement
agreement to pay any damages or make any settlement payments, it is possible
that the codefendant who did make a settlement payment will seek a contribution
from the Company. The Company has not established a reserve in its financial
statements relating to this matter.
<PAGE> 8
Page 8
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 own shares
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. Plaintiff's complaint, which has
twice been amended, asserts that (i) the defendants breached their fiduciary
duties to the Company by soliciting stockholder approval of the Company's
Executive Long-Term Incentive Plan and Non-Employee Directors Long-Term
Incentive Plan by means of a misleading proxy statement and (ii) the Board
breached its fiduciary duty in approving such option plans. The complaint seeks
an order declaring the stockholder approval of those option plans void,
canceling the options granted thereunder, enjoining the directors exercising any
such 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, requiring an accounting in connection therewith, and awarding
unspecified damages plus plaintiff's attorneys' fees and expenses also in an
unspecified amount. The most recent amended complaint was filed after the court
granted in part the defendants' joint motion to dismiss the complaint, striking
certain non-disclosure claims; the court's order, however, denied the remainder
of defendants' motion to dismiss. The Company and the individual defendants
believe that the allegations made in the complaint as amended are without merit
and are factually incorrect and the Company intends to contest these allegations
vigorously. The individual defendants have each made demand upon the Company for
indemnification with respect to this action. 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.
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 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 and ground water 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 $322,000 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, though they are not expected to materially affect the financial
position or results of operations of the Company.
Letters of Credit
As of July 31, 1998, the Company had letters of credit outstanding
totaling $10.0 million, which guarantee various business activities, including
$6.5 million of letters of credit which guarantee the Industrial Project Revenue
Bonds (see note 6 above).
<PAGE> 9
Page 9
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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
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 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. A total of 38,750 options may still be granted under the Employee Plan.
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 following sets forth information with respect to options issued and
outstanding:
<TABLE>
<CAPTION>
Average option Range of
Shares price per share Option Prices
---------- --------------- -------------
<S> <C> <C> <C>
Options outstanding at January 31, 1998 2,466,637 $ 2.87 $ 1.00-13.44
Options exercised (279,041) (1.00) 1.00
Options withheld for taxes (83,075) (1.00) 1.00
---------- --------------- -------------
Options outstanding at April 30, 1998 (1,954,521 exercisable) 2,104,521 $ 3.18 $ 1.00-13.44
Options issued 100,000 $ 23.13 23.00-23.25
Options exercised (37,600) (5.39) 1.00-7.75
Options withheld for taxes (7,400) (1.63) 1.00-5.25
---------- --------------- -------------
Options outstanding at July 31, 1998 (1,909,521 exercisable) 2,159,521 $ 4.07 $ 1.00-23.25
========== =============== =============
</TABLE>
Options withheld for taxes are options which are withheld by the
Company, upon exercise by the grantee, to satisfy the grantee's withholding tax
liability. The options withheld cannot be reissued.
A non-employee director has stock warrants currently exercisable to
purchase 1,143,680 shares of Common Stock at approximately $2.01 per share.
<PAGE> 10
Page 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF THE OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
Three and Six Month Periods Ended July 31, 1998 (Fiscal 1999) Compared to Three
and Six Month Periods Ended July 31, 1997 (Fiscal 1998).
Revenue. Revenue for the three months ended July 31, 1998 increased 23.9% to
$140.1 million compared with $113.1 million for the comparable period in fiscal
1998. Revenue for the six months ended July 31, 1998 increased 20.4% to $267.8
million compared with $222.4 million for the comparable period in fiscal
1998.The revenue increase for both periods was primarily attributable to sales
of equipment to the beverage market and to sales of equipment packages for a
major customer's premium dessert program. In addition, sales were higher as the
result of the inclusion of $9.3 and $16.3 million in revenue, for the three and
six months ended July 31, 1998, respectively, from Specialty Equipment
International ("Gamko"), which was acquired in August 1997. For the second
quarter, sales of products for use outside the U.S. increased 20.4%, due to
increased sales to Western Europe and the inclusion of Gamko, partially offset
by lower sales to Latin America and Asia. Fiscal 1998 Latin American sales
included a large non-recurring beverage equipment order. For the first six
months of fiscal 1999, revenue from sales of products for use outside the United
States was 30.4% of revenue as compared with 32.5% for the same period in fiscal
1998.
Gross Margin. Gross margin for the three months ended July 31, 1998 increased
30.1% to $45.1 million, compared with $34.7 million for the comparable period in
fiscal 1998. As a percent of revenue, gross margin increased from 30.7% of
revenue for the three month period ended July 31, 1997 to 32.2% of revenue in
the three month period ended July 31, 1998. Gross margin for the six months
ended July 31, 1998 increased 25.2% to $84.6 million, compared with $67.6
million for the comparable period in fiscal 1998. As a percent of revenue, gross
margin increased from 30.4% of revenue for the six month period ended July 31,
1997 to 31.6% of revenue in the six month period ended July 31, 1998. The
increase in gross margin percentage for the three and six month periods ended
July 31, 1998 was principally a result of fixed expenses being spread over a
larger sales base, improved manufacturing performance, and the impact of Gamko.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expense for the three months ended July 31, 1998
increased 24.8% to $22.8 million. As a percent of revenue, SG&A was 16.2% for
the three months ended July 31, 1998 and 1997. Selling, general and
administrative ("SG&A") expense for the six months ended July 31, 1998 increased
26.2% to $43.2 million. As a percent of revenue, SG&A was 16.1% for the six
months ended July 31, 1998 compared to 15.4% for the comparable period in fiscal
1998. The higher expenses reflect the inclusion of Gamko as well as higher
selling and research and development expenses for the six months ended July 31,
1998.
Interest Expense. Interest expense for the three months ended July 31, 1998
increased 4.0% to $4.0 million compared with the same period in fiscal 1998.
Interest expense for the six months ended July 31, 1998 increased 1.4% to $8.1
million compared with the same period in fiscal 1998.
<PAGE> 11
Page 11
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,
1997 (%) 1998 (%) 1997 (%) 1998 (%)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Beverage-Air 44.8 46.1 44.9 46.3
Taylor 39.7 34.5 39.6 34.3
Wells/Bloomfield 12.2 9.9 12.7 10.6
Specialty Equipment International (Gamko) - 6.7 - 6.1
World Dryer 3.3 2.8 2.8 2.7
-------- -------- -------- --------
Net revenue 100.0 100.0 100.0 100.0
Gross margin 30.7 32.2 30.4 31.6
Selling, general and administrative expenses 16.2 16.2 15.4 16.1
-------- -------- -------- --------
Earnings from operations 14.5 16.0 15.0 15.5
Interest expense, net (3.4) (2.9) (3.6) (3.0)
Income taxes (4.0) (4.7) (4.1) (4.5)
-------- -------- -------- --------
Net earnings before minority interest 7.1 8.4 7.3 8.0
Minority interest - - - -
-------- -------- -------- --------
Net earnings 7.1 8.4 7.3 8.0
======== ======== ======== ========
</TABLE>
Liquidity and Capital Resources
Net cash flows provided by operations were $20.0 million for the six
months ended July 31, 1998 compared with $31.7 million for the three months
ended July 31, 1997. The decrease is primarily the result of an increase in
accounts receivable compared to the prior year. See -- "Results of Operations --
Revenue."
Net cash used in investing activities amounted to $3.5 million for the
six months ended July 31, 1998 compared with $2.4 million for the six months
ended July 31, 1997. The prior year includes $0.9 million for acquisition of
businesses. Through the first six months of fiscal 1999, total capital
expenditures have been $3.9 million. The Company anticipates that capital
expenditures for fiscal 1999 will be approximately $9.0 million. The Company's
capital spending for the balance of fiscal 1999 is expected to be primarily
related to the acquisition, installation, improvement and equipping of its
Beverage-Air and Taylor production facilities.
On September 16, 1997 the Company announced a plan to purchase $10
million of its common stock (up to 600,000 shares) in the open market and in
private transactions. For the six months ended July 31, 1998 the Company
purchased 135,613 shares of its common stock at an average price of $20.31 per
share. On August 6, 1998 the Company completed the stock purchase plan. In
total, the Company purchased 567,364 shares at an average price of $17.62 per
share.
As of July 31, 1998, the Company had net working capital of $74.6
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 21% during fiscal year 1998 to 20% for the six
months ended July 31, 1998. The Company's earnings from operations were
sufficient to cover fixed charges for the three and six months ended July 31,
1998.
<PAGE> 12
Page 12
As of July 31, 1998, 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 $10.0 million, including $6.5 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 $45.0 million available for
additional borrowings. In addition, the Company had cash and cash equivalents of
$52.6 million as of July 31, 1998.
The Company had four financial covenants to meet at July 31, 1998 under
the Bank Credit Agreement -- a liquidity ratio covenant at July 31, 1998 of at
least 1.25:1.00; a senior funded debt to cash flow covenant for the twelve
months ended July 31, 1998 of not greater than 2.00:1.00; a total funded debt to
cash flow covenant ratio for the twelve months ended July 31, 1998 not greater
than 3.50:1.00 and an interest coverage covenant ratio of at least 2.00:1.00.
The Company met each of these covenants as it had a liquidity ratio of
30.56:1.00 at July 31, 1998; a senior funded debt to cash flow ratio of
0.08:1.00 for the twelve months ended July 31, 1998; total funded debt to cash
flow ratio for the twelve months ended July 31, 1998 of 2.26:1.00 and an
interest coverage ratio for the twelve months ended July 31, 1998 of 4.49:1.00.
The Company's Bank Credit Agreement expires on November 30, 1998. The
first call date on the Notes is December 1, 1998. The Company believes that
given the current interest rate environment and the Company's improved credit
position it may be able to refinance the Notes and the Credit Agreement under
more favorable terms, although there can be no assurance that such refinancing
will be possible.
Management believes that the Bank Credit Agreement and the other
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 six months of fiscal 1999. 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.
Year 2000
In 1996, the Company began converting its computer systems to be
Year 2000 compliant (i.e., to recognize the difference between `99 and `00 as
one year instead of negative 99 years). The Company expects to be Year 2000
compliant on or before December 31, 1998. As part of this project the Company is
also monitoring the Year 2000 compliance status of its major distributors and
suppliers. Total costs of the project through July 31, 1998 have been
approximately $652,000. The costs to complete the project are estimated to be
approximately $498,000. The Company estimates that as of July 31, 1998 the Year
2000 conversion project is more than 60% complete, with one of its principal
locations now operating under Year 2000 business compliant software. The
programming and hardware costs of the conversion are funded through operating
cash flows and are expensed as incurred. The Company believes that the primary
risk of the Year 2000 conversion is primarily associated with the degree to
which its major vendors and suppliers become Year 2000 compliant, because of the
limited leverage the Company has with respect to the internal operations of
these vendors and suppliers.
<PAGE> 13
Page 13
Safe Harbor for Forward-Looking Statements Under the Securities Litigation
Reform Act of 1995
Except for historical information contained herein, this Quarterly
Report to Stockholders contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated and discussed herein. These factors
include: general economic conditions and their impact on the growth of the quick
service restaurant and soft drink bottler industries, the Company's dependence
on a major customer and key management personnel, the effects of competition,
the demands relating to further overseas expansion, the significance of the
Company's outstanding indebtedness and other factors detailed elsewhere from
time to time in the Company's filings with the Securities and Exchange
Commission.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The disclosure requirements pursuant to Item 305 of Regulation S-K are
not yet effective for the Company. Such disclosures will be included in the
Company's filing commencing with its Annual Report on Form 10-K for the fiscal
year ending January 31, 1999.
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
At the Company 1998 Annual Meeting of Stockholders held on May 19,
1998, the following directors were elected to terms expiring in the Company's
fiscal year ended 2002: Messrs. Daniel B. Greenwood, Kevin E. Glazer and William
E. Dotterweich. There were no other matters submitted to a vote of stockholders
for the quarter ended July 31, 1998.
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 14, 1998 /s/ Jeffrey P. Rhodenbaugh
---------------------------- ---------------------------------------
Jeffrey P. Rhodenbaugh, Chief Executive
Officer
(Principal Executive Officer)
Date: September 14, 1998 /s/ Donald K. McKay
---------------------------- ---------------------------------------
Donald K. McKay, Chief Financial Officer
(Principal Financial and Accounting
Officer)
<PAGE> 15
Page 15
Exhibit Index
Exhibit
No. Description
------- -----------
27.1 Financial data schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 52,589
<SECURITIES> 0
<RECEIVABLES> 90,737
<ALLOWANCES> (3,757)
<INVENTORY> 53,821
<CURRENT-ASSETS> 211,548
<PP&E> 70,567
<DEPRECIATION> 30,384
<TOTAL-ASSETS> 277,342
<CURRENT-LIABILITIES> 136,975
<BONDS> 159,892
0
0
<COMMON> 182
<OTHER-SE> (21,444)
<TOTAL-LIABILITY-AND-EQUITY> 277,342
<SALES> 140,146
<TOTAL-REVENUES> 140,146
<CGS> 95,011
<TOTAL-COSTS> 95,011
<OTHER-EXPENSES> 22,777
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,035
<INCOME-PRETAX> 18,323
<INCOME-TAX> 6,588
<INCOME-CONTINUING> 11,702
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,702
<EPS-PRIMARY> 0.58
<EPS-DILUTED> 0
</TABLE>
