<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, 1999
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, 1999
- --------------------------------- -------------------------------------
Common Stock, $0.01 par value 19,269,171 shares
The exhibit index is on page 17.
<PAGE> 2
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. 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,
1998 1999 1998 1999
--------- --------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenue $ 140,146 $ 129,158 $ 267,811 $ 268,698
Cost of sales 95,011 88,307 183,190 184,144
--------- --------- --------- ---------
Gross margin 45,135 40,851 84,621 84,554
Selling, general, administrative & other expenses 22,777 21,409 43,223 44,065
--------- --------- --------- ---------
Earnings from operations 22,358 19,442 41,398 40,489
Interest expense, net 4,035 2,004 8,120 3,867
--------- --------- --------- ---------
Earnings from operations before income taxes 18,323 17,438 33,278 36,622
Income taxes 6,588 6,715 12,065 14,035
--------- --------- --------- ---------
Net earnings before minority interest 11,735 10,723 21,213 22,587
Minority interest (33) (23) (33) (53)
--------- --------- --------- ---------
Net earnings $ 11,702 $ 10,700 $ 21,180 $ 22,534
========= ========= ========= =========
Basic earnings per share $ 0.64 $ 0.59 $ 1.16 $ 1.23
========= ========= ========= =========
Diluted earnings per share $ 0.58 $ 0.54 $ 1.06 $ 1.12
========= ========= ========= =========
Weighted average shares outstanding - basic 18,299 18,225 18,231 18,307
Weighted average shares outstanding - diluted 20,038 20,000 20,046 20,109
</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>
January 31, July 31,
1999 1999
--------- ---------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 6,814 $ 11,725
Accounts receivable, net 76,283 79,297
Inventories 65,535 63,040
Deferred tax assets, net 20,410 20,410
Other current assets 4,704 5,064
--------- ---------
Total current assets 173,746 179,536
Property, plant and equipment, net 40,954 43,591
Restricted cash equivalents -- 2,282
Goodwill 15,281 15,081
Other intangibles, net 6,398 6,322
Other assets 366 361
--------- ---------
Total assets $ 236,745 $ 247,173
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ -- $ 324
Accounts payable 31,723 27,663
Accrued liabilities 70,220 75,562
Accrued income taxes 4,621 17,984
--------- ---------
Total current liabilities 106,564 121,533
Long-term debt, excluding current installments 128,515 123,364
Other non-current liabilities 1,590 1,772
Stockholders' equity:
Common stock 184 193
Additional paid-in capital 62,968 63,213
Accumulated deficit (50,440) (57,786)
Accumulated other comprehensive income (2,637) (3,311)
Treasury stock, at cost (9,999) (1,805)
--------- ---------
Total stockholders' equity 76 504
--------- ---------
Total liabilities and stockholders' equity $ 236,745 $ 247,173
========= =========
</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)
<TABLE>
<CAPTION>
Six months ended
July 31,
1998 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities: (unaudited)
Net earnings $ 21,180 $ 22,534
Items not affecting cash:
Depreciation 2,457 2,843
Amortization 605 425
Utilization of net operating loss carryforward 546 546
Changes in current assets and liabilities:
Accounts receivable (23,937) (3,014)
Inventories 209 2,495
Other current assets 295 (360)
Accounts payable and other current liabilities,
excluding current installments of long-term debt 18,672 14,645
-------- --------
Net cash flows provided by operating activities 20,027 40,114
Cash flows from investing activities:
Additions to property, plant and equipment (3,897) (5,480)
Cash equivalents restricted for capital additions 444 (2,282)
-------- --------
Net cash used in investing activities (3,453) (7,762)
Cash flows from financing activities:
Proceeds from long-term debt 301 5,200
Repayments of long-term debt -- (10,027)
Financing expenditures -- (130)
Proceeds from exercise of stock options & warrants 577 3,950
Options withheld for taxes (1,878) (4,242)
Acquisition of treasury stock (2,754) (21,687)
-------- --------
Net cash used in financing activities (3,754) (26,936)
-------- --------
Other, net (178) (505)
-------- --------
Net increase in cash 12,642 4,911
Cash:
Beginning of period 39,947 6,814
-------- --------
End of period $ 52,589 $ 11,725
======== ========
Cash paid for interest and income taxes:
Interest, net $ 8,810 $ 4,105
======== ========
Income taxes $ 6,680 $ 1,084
======== ========
</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, 1999 included in the Specialty Equipment Companies, Inc. (the
"Company" or "Specialty") Annual Report on Form 10-K filed with the Securities
and Exchange Commission ("Commission") on April 13, 1999.
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, 1998 and 1999,
(b) the financial position at July 31, 1999 and (c) the statements of cash flows
for the six month periods ended July 31, 1998 and 1999, have been made. The
financial results for the three and six months ended July 31, 1999 are not
necessarily indicative of the financial results for the entire 2000 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, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
Three months ended Three months ended
July 31, July 31,
1998 1999 1998 1999
--------- --------- --------- -------
<S> <C> <C> <C> <C>
Net earnings $ 11,702 $ 10,700 $ 21,180 $ 22,534
Other comprehensive earnings (loss):
Foreign currency translation adjustment (253) (64) (120) (673)
--------- --------- --------- ---------
Comprehensive earnings $ 11,449 $ 10,636 $ 21,060 $ 21,861
========= ========= ========= =========
</TABLE>
2. Accounts Receivable
Accounts receivable at the following dates consisted of the following:
<TABLE>
<CAPTION>
January 31, July 31,
1999 1999
---------- -------
<S> <C> <C>
Accounts receivable $80,188 $83,181
Less: allowance for doubtful accounts 3,905 3,884
------- -------
Total $76,283 $79,297
======= =======
</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,
1999 1999
----------- -------
<S> <C> <C>
Raw materials $31,361 $30,562
Work-in-process 8,764 7,984
Finished goods 25,410 24,494
------- -------
65,535 63,040
Less: excess of FIFO cost over LIFO -- --
------- -------
Total $65,535 $63,040
======= =======
</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, 1998 and 1999.
4. Intangibles and Goodwill:
<TABLE>
<CAPTION>
January 31, July 31,
1999 1999
-------- -------
<S> <C> <C>
Goodwill $15,843 $15,843
Less: accumulated amortization 562 762
------- -------
Net goodwill 15,281 15,081
======= =======
Intangibles consist of the following:
Patents $ 991 $ 991
Other intangibles 53,166 53,316
Deferred pension costs 1,915 1,915
------- -------
56,072 56,222
Less: accumulated amortization 49,674 49,900
------- -------
Net intangibles $ 6,398 $ 6,322
======= =======
</TABLE>
Other intangibles primarily include deferred financing fees,
engineering drawings, distribution networks and skilled workforce.
5. Income Taxes
At January 31, 1999, the Company had a net deferred tax asset of $29.0
million less a valuation allowance of $8.6 million. The Company has
approximately $10.5 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,
1999 1999
-------- --------
<S> <C> <C>
Revolving line of credit $120,000 $110,000
Industrial project revenue bonds due 2009 and 2014 4,365 9,565
Other long-term debt 4,150 4,123
-------- --------
128,515 123,688
Less: current installments -- 324
-------- --------
Total long-term debt $128,515 $123,364
======== ========
</TABLE>
Under the revolving credit facility, the Company had $82.5 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.
Litigation
Specialty 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 (the "Thermodyne
Action"). Plaintiffs alleged that Specialty and other defendants misappropriated
trade secrets in connection with the Company's development of an oven for
McDonald's and OSI Industries, Inc. ("OSI"). As a result of a ruling on a motion
to dismiss, all the claims against Specialty 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 Specialty 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 that did make a
settlement payment will seek a contribution from Specialty. On or about November
13, 1998, defendants in an action entitled "McDonald's Corporation v. American
Motorists Insurance Co." No. 97L0014, pending in the Circuit Court of DuPage
County Illinois, sought leave to file a third party complaint asserting
contingent subrogation rights against the Company, and other defendants from the
AFTEC litigation referred to above. The court denied that motion. On or about
March 5, 1999, St. Paul Surplus Lines Ins. Co., American Motorists Insurance
Co., Century Indemnity Co., Indemnity Insurance Co. of North America and Federal
Insurance Co. (collectively "Carriers") filed an action in the Circuit Court of
DuPage County, Illinois, No. 99 MR 0071 against the Company, and the other
defendants in the Thermodyne Action (except for McDonald's). Carriers allege
that they are subrogated to contribution claims McDonald's may have against the
Company arising from the Thermodyne Action. Count I purports to state a claim
for contribution under 740 ILCS 100/0.01 et. seq. for the Company's alleged
misappropriation of trade secrets, and prays for judgment "in an amount equal to
the relative degree of fault
<PAGE> 8
Page 8
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
found attributable to the defendants in the Thermodyne Action." Count II
purports to allege contribution claims arising from OSI's alleged tortious
interference with the contract and seeks the same relief sought in Count I.
Counts III and IV are not brought against the Company. The complaint was
dismissed with prejudice on June 17, 1999. Plaintiffs have moved for
reconsideration but their motion has not yet been ruled upon. Specialty has not
established a reserve in its financial statements relating to this matter.
Specialty 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 from
exercising any such options, imposing a constructive trust for the benefit of
Specialty 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 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. Specialty and the individual defendants
believe that the allegations made in the complaint as amended are without merit
and are factually incorrect and Specialty intends to contest these allegations
vigorously. The individual defendants have each made demand upon Specialty for
indemnification with respect to this action. Management believes that if
Specialty were liable to the individual defendants for indemnification, the
uninsured portion of such liability would not be material to it.
Environmental and Related Matters
On May 5, 1994, Specialty (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.
Specialty 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 Specialty 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 Specialty's results of operations or financial
condition.
Specialty 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. We
<PAGE> 9
Page 9
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
have 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 Beverage-Air used the site before Specialty acquired
Beverage-Air. With respect to the NDEP matter discussed in (iii) above,
Specialty has spent approximately $331,000 to conduct tests and to implement a
remediation program, but given the pendency of the Specialty'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.
Routine Matters
In addition, Specialty is routinely involved in other litigation,
including environmental matters, incidental to its business. Such routine claims
are being vigorously contested and management does not believe that the outcome
of such litigation will have a material adverse effect upon the financial
condition of the Company.
Letters of Credit
As of July 31, 1999, the Company had letters of credit outstanding
totaling $12.9 million, which guarantee various business activities, including
$9.8 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
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. On May 27,
1999, at the Company's annual stockholders' meeting, stockholders approved an
amendment to the Director Plan which, among other things, allows certain
transfers of options pursuant to the plan that were not previously permitted.
The Executive Long-Term Incentive Plan, as amended, ("Employee Plan")
allows for the issue of a total of 5,004,814 shares of the Company's common
stock. A total of 1,008,750 options may still be granted under the Employee Plan
(after considering the amendment to the Employee Plan discussed below). 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. On May 27, 1999, at the Company's annual
stockholders' meeting, stockholders approved an amended and restated Employee
Plan which, among other things, authorized the issuance of up to an additional
one million option awards.
The following sets forth information with respect to options issued and
outstanding:
<PAGE> 10
Page 10
<TABLE>
<CAPTION>
Average option Range of
Shares price per share Option Prices
--------- --------------- -------------
<S> <C> <C> <C>
Options outstanding at January 31, 1999 1,960,932 $ 4.47 $1.00-23.25
Options exercised (422,160) 3.46 1.00-10.25
Options withheld for taxes (132,240) 1.24 1.00-10.25
--------- ------ -----------
Options outstanding at April 30, 1999 (1,276,532 exercisable) 1,406,532 $ 5.08 $1.00-23.25
Options exercised (20,600) 1.00 1.00
Options withheld for taxes (9,400) 1.00 1.00
---------- ------ -----------
Options outstanding at July 31, 1999 (1,246,532 exercisable) 1,376,532 $ 5.08 $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 exercised stock warrants on July 30, 1999 to
purchase 1,143,996 shares of Common Stock for a total exercise price of $2.3
million.
9. Earnings Per Share
The Company presents basic and diluted earnings per share. Basic
earnings excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the equity. Basic and diluted earnings per share
do not include securities in instances where they would be antidilutive.
The following table provides a reconciliation of the weighted average
shares outstanding used in calculating basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three months ended Six months ended
July 31, July 31,
1998 1999 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average shares outstanding-basic 18,299 18,225 18,231 18,307
Assumed execise of stock options
and stock warrant 1,739 1,775 1,815 1,802
------ ------ ------ ------
Weighted average shares outstanding-diluted 20,038 20,000 20,046 20,109
====== ====== ====== ======
</TABLE>
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, 1999 (Fiscal 2000) Compared to Three
and Six Month Periods Ended July 31, 1998 (Fiscal 1999).
Revenue. Revenue for the three months ended July 31, 1999 decreased 7.8% to
$129.2 million compared with $140.1 million for the comparable period in fiscal
1999. Revenue for the six months ended July 31, 1999 increased 0.3% to $268.7
million compared with $267.8 million for the comparable period in fiscal
1999.The revenue decrease for the three months ended July 31, 1999 was primarily
attributable to lower sales of refrigerated equipment to the beverage market of
about $15.5 million compared with the same period in the prior fiscal year. For
the first six months of fiscal 2000, revenue from sales of products for use
outside the United States was 27.5% of revenue as compared with 29.6% for the
same period in fiscal 1999. The decrease is attributable to lower sales of
refrigerated equipment to the beverage market.
Gross Margin. Gross margin for the three months ended July 31, 1999 decreased
9.5% to $40.9 million, compared with $45.1 million for the comparable period in
fiscal 1999. As a percent of revenue, gross margin decreased from 32.2% of
revenue for the three month period ended July 31, 1998 to 31.6% of revenue in
the three month period ended July 31, 1999. Gross margin for the six months
ended July 31, 1999 decreased 0.1% to $84.6 million, compared with the
comparable period in fiscal 1999. As a percent of revenue, gross margin
decreased from 31.6% of revenue for the six month period ended July 31, 1998 to
31.5% of revenue in the six month period ended July 31, 1999. The decrease in
gross margin percentage for the three month period ended July 31, 1999 was
principally a result of fixed expenses being spread over a smaller sales base.
<PAGE> 11
Page 11
Selling, General, Administrative & Other Expenses. Selling, general,
administrative & other ("SG&A") expense for the three months ended July 31, 1999
decreased 6.0% to $21.4 million. As a percent of revenue, SG&A was 16.5% for the
three months ended July 31, 1999 compared to 16.2% for the same period in fiscal
1999. SG&A expense for the six months ended July 31, 1999 increased 1.9% to
$44.1 million. As a percent of revenue, SG&A was 16.4% for the six months ended
July 31, 1999 compared to 16.1% for the comparable period in fiscal 1999. The
increase in SG&A expense as a percentage of sales reflects, in part, higher
research and development expense.
Interest Expense. Interest expense for the three months ended July 31, 1999
decreased 50.3% to $2.0 million compared with the same period in fiscal 1999.
Interest expense for the six months ended July 31, 1999 decreased 52.4% to $3.9
million compared with the same period in fiscal 1999. The reduction in interest
expense resulted from a lower cost of borrowing due to the December 1, 1998
refinancing of the business.
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,
1998 (%) 1999 (%) 1998 (%) 1999 (%)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Beverage-Air 46.1 41.7 46.3 45.2
Taylor 34.5 36.8 34.3 34.5
Wells/Bloomfield 9.9 11.2 10.6 10.7
Specialty Equipment International 6.7 7.0 6.1 6.9
World Dryer 2.8 3.3 2.7 2.7
----- ----- ----- -----
Net revenue 100.0 100.0 100.0 100.0
Gross margin 32.2 31.6 31.6 31.5
Selling, general, administrative & other expenses 16.2 16.5 16.1 16.4
----- ----- ----- -----
Earnings from operations 16.0 15.1 15.5 15.1
Interest expense, net (2.9) (1.6) (3.0) (1.4)
Income taxes (4.8) (5.2) (4.6) (5.3)
Minority interest -- -- -- --
----- ----- ----- -----
Net earnings 8.3 8.3 7.9 8.4
===== ===== ===== =====
</TABLE>
Liquidity and Capital Resources
Net cash flows provided by operations were $40.1 million for the six
months ended July 31, 1999 compared with $20.0 million for the six months ended
July 31, 1998. The increase is primarily the result of an decrease in working
capital, primarily related to inventories, accounts payable and accrued
liabilities, and higher net earnings. See -- "Results of Operations -- Revenue."
Net cash used in investing activities amounted to $7.8 million for the
six months ended July 31, 1999 compared with $3.5 million for the six months
ended July 31, 1998. Through the first six months of fiscal 2000, total capital
expenditures have been $5.5 million. The Company anticipates that capital
expenditures for fiscal 2000 will be approximately $12.0 million. The Company's
capital spending for the balance of fiscal 2000 is expected to be primarily
related to the acquisition, installation, improvement and equipping of its
Beverage-Air production facilities.
On April 8, 1999 the Company announced a plan to purchase $30 million
of its common stock (up to 1,000,000 shares) in the open market. For the six
months ended July 31, 1999 the Company purchased 755,400 shares of its common
stock at an average price of $28.66 per share.
<PAGE> 12
Page 12
As of July 31, 1999, the Company had net working capital of $58.0
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 increased from 21% during fiscal year 1999 to 23% for the
six months ended July 31, 1999. The Company's earnings from operations were
sufficient to cover fixed charges for the three months ended July 31, 1999.
As of July 31, 1999, the Company had borrowings of $110.0 million under
the Revolving Credit Facility of its BA Bank Facility. In addition, it had
outstanding letters of credit in the amount of $12.9 million, including $9.8
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 $82.5 million
available for additional borrowings. In addition, the Company had cash and cash
equivalents of $11.7 million as of July 31, 1999.
The BA Bank Facility includes two financial covenants which Specialty
was required to meet on July 31, 1999. The first financial covenant is a total
funded debt to cash flow ratio for the twelve months ended July 31, 1999, which
could not exceed 3.50:1.00. The second covenant is an interest coverage ratio
which had to be at least 3.50:1.00. Specialty met each of these covenants as it
reported a total funded debt to cash flow ratio for the twelve months ended July
31, 1999 of 1.53:1.00; and an interest coverage ratio for the twelve months
ended July 31, 1999 of 7.58:1.00.
On May 6, 1999 the Company incurred $5.4 million in letter of credit
obligations. The letter of credit supports an issue of $5.2 million of
Industrial Project Revenue Bonds to enable the Company to finance plant
expansion, acquisition, installation, improvement and equipping of production
facilities at its Beverage-Air location in Abbeville County, South Carolina.
On July 30, 1999 a non-employee director of the Company exercised
warrants to purchase 1,143,996 shares of the Company's common stock for a total
exercise price of $2.3 million.
Management believes that the BA Bank Facility 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 2000. 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
The information provided below constitutes "Year 2000
Readiness Disclosure" as defined in the Year 2000 Information and Readiness
Disclosure Act and is subject to the terms thereof. The following description of
the Company's remediation process is meant for informational purposes and not as
a form of covenant, representation or guarantee of any kind. In addition, many
of the Company's Year 2000-related efforts are dependent on third parties that
are effectively beyond the Company's control.
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year. These
programs treat years as occurring between 1900 and the end of 1999 and do not
self-convert to reflect the upcoming change of the century. If not corrected,
applications could fail or create erroneous results by or at the Year 2000.
<PAGE> 13
Page 13
In 1996, we began our efforts to make Specialty Year 2000 compliant.
This program encompasses information systems, manufacturing equipment,
facilities systems, our products and the readiness of our suppliers,
distributors and customers. Management believes Specialty to be substantially
Year 2000 compliant as of July 31, 1999.
We have tested and analyzed our products to determine exposure to
contingencies related to the Year 2000. This analysis revealed that our products
raise limited Year 2000 issues, and that such issues should be able to be
addressed without a material impact upon Specialty and its operating results.
We have substantially completed our analysis of our information systems
and the process of converting our information systems. As of July 31, 1999, the
Year 2000 conversion project of our information systems is more than 95%
complete, with all of our critical systems at our principal locations now
operating under Year 2000 compliant software. Similarly, we have reviewed the
Year 2000 status of our machinery and equipment and have implemented the
necessary system changes.
Management believes that Specialty's greatest exposure regarding the
Year 2000 issue is associated with the ability of its principal vendors,
suppliers, distributors and customers to become Year 2000 compliant. In response
to this concern, management continues to survey and monitor the Year 2000
compliance status of Specialty's major vendors, suppliers, distributors and
customers. However, we can make no assurance that these third parties will
become Year 2000 compliant, and accordingly, we expect to develop contingency
plans in 1999 to the extent that we determine that any of Specialty's major
vendors, suppliers, distributors and customers are expected to encounter
significant Year 2000 related problems. However, if a significant number of key
third party relationships do not promptly become Year 2000 compliant, their
non-compliance could have a material adverse effect on Specialty's financial
position or results of operations.
The exact magnitude of any of these effects is not currently estimable.
Through January 31, 1999 the Company had spent approximately $867,000
on its Year 2000 conversion project. It anticipates that the costs to complete
the project are approximately $187,000.
Euro Currency
Specialty derived approximately 15% of its revenue in fiscal 1999 from
its operations in Western Europe. Historically, transactions in Western Europe
have been denominated primarily in U.S. currency, however transactions by the
recently acquired Gamko subsidiary are denominated in a variety of European
currencies.
On January 1, 1999, eleven of the fifteen member countries of the
European Union adopted the Euro as their common legal currency. Following the
introduction of the Euro, the local currencies were scheduled to remain legal
tender in the participating countries until January 1, 2002. During this
transition period, goods and services may be paid for using either the Euro or
the participating country's local currency. Thereafter, the local currencies
will be canceled and the Euro currency will be used for all transactions between
the eleven participating members of the European Union.
The Euro conversion raises strategic as well as operational issues. The
conversion is expected to result in a number of changes, including the
stimulation of cross-border competition by creating cross-border price
transparency. We are evaluating the implications of the Euro conversion,
particularly on Gamko, and are uncertain as to the potential impact on our
operations.
<PAGE> 14
Page 14
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 its 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 Commission.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk during
the first six months ended July 31, 1999. For additional information on market
risk, refer to the "Quantitative and Qualitative Disclosures About Market Risk"
section of the Company's Annual Report on Form 10-K dated 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
On May 27, 1999, at the Company's Annual Meeting of Stockholders,
stockholders voted to approve the following proposals:
1. The election of Mssrs. Avram A. Glazer, Charles E. Hutchinson and
Richard A. Kent to the board of directors for a three-year term
("Proposal No. 1").
2. The adoption of the Specialty Equipment Companies, Inc. Amended and
Restated Executive Long-Term Incentive Plan which resulted in the
following principal changes:
a. An increase in the aggregate number of shares of Common
Stock available for grants under the plan by one million
shares (from 4,004,814 to 5,004,814);
b. Awards made under the amended and restated plan (but not
outstanding awards) will vest in four equal annual
installments;
c. Awards granted under the amended and restated plan or the
previously existing plan are transferable to certain family
members and certain trusts and partnerships for the benefit of
family members; and
d. Awards made under the amended and restated plan (but not
outstanding awards or incentive stock options) may have terms
of up to fifteen years, and such awards (other than incentive
stock options) may have termination dates as late as ten years
after vesting ("Proposal No. 2").
3. The amendment to the Specialty Equipment Companies, Inc.
Non-Employee Director Long-Term Incentive Plan which among other
more technical revisions:
a. Made options granted pursuant to the plan transferable to
certain revocable trusts, family members and certain trusts
and partnerships for the benefit of family members;
b. Permits the exercise price of such options to be paid by
the tender of Common Stock held by the option holder for at
least six months; and
c. Grants the Company's Board of Directors broader authority
to administer the plan ("Proposal No. 3").
<PAGE> 15
Page 15
The following table sets forth, for each of the above proposals, the
number of votes cast for, against and withheld, as well as the number of
abstentions and broker non-votes with respect to such proposal. The total shares
eligible to vote were 18,463,337 and the total votes cast were 15,283,665.
<TABLE>
<CAPTION>
Votes Votes Broker
Votes For Against Withheld Abstentions Non-votes
----------- --------- ---------- ----------- ---------
Proposal No. 1
- --------------
<S> <C> <C> <C> <C> <C>
Avram A. Glazer 15,112,615 0 171,050 0 0
Charles E. Hutchinson 15,112,365 0 171,300 0 0
Richard A. Kent 15,112,715 0 170,950 0 0
Proposal No. 2 12,726,328 1,446,485 0 22,960 1,087,892
- --------------
Proposal No. 3 15,087,646 174,609 0 21,410 0
- --------------
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits
27.1 Financial Data Schedule.
2. Reports on Form 8-K.
None.
<PAGE> 16
Page 16
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, 1999 /s/ Jeffrey P. Rhodenbaugh
------------------ ----------------------------------
Jeffrey P. Rhodenbaugh, Chief
Executive Officer (Principal
Executive Officer)
Date: September 14, 1999 /s/ Donald K. McKay
------------------ ----------------------------------
Donald K. McKay, Chief Financial
Officer (Principal Financial
and Accounting Officer)
<PAGE> 17
Page 17
Exhibit Index
Exhibit
No. Description
------ -----------
27.1 Financial data schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> MAY-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 11,725
<SECURITIES> 0
<RECEIVABLES> 83,181
<ALLOWANCES> (3,884)
<INVENTORY> 63,040
<CURRENT-ASSETS> 179,536
<PP&E> 79,307
<DEPRECIATION> (35,716)
<TOTAL-ASSETS> 247,173
<CURRENT-LIABILITIES> 121,533
<BONDS> 123,364
0
0
<COMMON> 193
<OTHER-SE> 311
<TOTAL-LIABILITY-AND-EQUITY> 247,173
<SALES> 129,158
<TOTAL-REVENUES> 129,158
<CGS> 88,307
<TOTAL-COSTS> 88,307
<OTHER-EXPENSES> 21,409
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,004
<INCOME-PRETAX> 17,438
<INCOME-TAX> 6,715
<INCOME-CONTINUING> 10,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,700
<EPS-BASIC> 0.59
<EPS-DILUTED> 0.54
</TABLE>
