<PAGE> 1
FORM 10-Q/A
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, 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 36-3337593
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(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
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(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 [ ].
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 11, 1999
- ---------------------------------- ----------------------------------
Common Stock, $0.01 par value 18,602,537 shares
The exhibit index is on page 16.
<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
April 30,
1998 1999
-------- --------
<S> <C> <C>
(unaudited)
Net revenue $127,665 $139,540
Cost of sales 88,179 95,837
-------- --------
Gross margin 39,486 43,703
Selling, general and administrative expenses 20,446 22,656
-------- --------
Earnings from operations 19,040 21,047
Interest expense, net 4,085 1,863
-------- --------
Earnings from operations before income taxes 14,955 19,184
Income taxes 5,477 7,320
Minority interest -- 30
-------- --------
Net earnings $ 9,478 $ 11,834
======== ========
Basic earnings per share $ 0.52 $ 0.64
======== ========
Diluted earnings per share $ 0.47 $ 0.59
======== ========
Weighted average shares outstanding - basic 18,161 18,392
Weighted average shares outstanding - diluted 20,053 20,185
</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, April 30,
1999 1999
--------- --------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 6,814 $ 1,446
Accounts receivable, net 76,283 92,640
Inventories 65,535 69,321
Deferred tax assets, net 20,410 20,410
Other current assets 4,704 5,265
--------- ---------
Total current assets 173,746 189,082
Property, plant and equipment, net 40,954 42,332
Goodwill 15,281 15,180
Other intangibles, net 6,398 6,285
Other assets 366 342
--------- ---------
Total assets $ 236,745 $ 253,221
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt $ -- $ 454
Accounts payable 31,723 34,161
Accrued liabilities 70,220 73,177
Accrued income taxes 4,621 12,072
--------- ---------
Total current liabilities 106,564 119,864
Long-term debt, excluding current installments 128,515 139,001
Other non-current liabilities 1,590 1,787
Stockholders' equity (deficit):
Common stock 184 186
Additional paid-in capital 62,968 53,975
Accumulated deficit (50,440) (38,606)
Accumulated other comprehensive income (2,637) (3,246)
Treasury stock, at cost (9,999) (19,740)
--------- ---------
Total stockholders' equity (deficit) 76 (7,431)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 236,745 $ 253,221
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
<PAGE> 4
Page 4
SPECIALTY EQUIPMENT COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Three months ended
April 30,
1998 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities: (unaudited)
Net earnings $ 9,478 $ 11,834
Items not affecting cash:
Depreciation 1,142 1,426
Amortization 282 215
Utilization of net operating loss carryforward 273 273
Changes in current assets and liabilities:
Accounts receivable (18,666) (16,357)
Inventories 146 (3,786)
Other current assets (206) (561)
Accounts payable and other current liabilities,
excluding current installments of long-term debt 15,851 12,846
-------- --------
Net cash flows provided by operating activities 8,300 5,890
Cash flows from investing activities:
Additions to property, plant and equipment (1,782) (2,803)
Cash equivalents restricted for capital additions 463 --
Businesses acquired -- --
-------- --------
Net cash used in investing activities (1,319) (2,803)
Cash flows from financing activities:
Increase in revolving credit facility -- 11,500
Repayments of long-term debt (4) (560)
Proceeds from exercise of stock options 347 1,626
Options withheld for taxes (1,713) (1,336)
Acquisition of treasury stock (1,233) (19,295)
-------- --------
Net cash used in financing activities (2,603) (8,065)
-------- --------
Other, net 128 (390)
-------- --------
Net increase (decrease) in cash 4,506 (5,368)
Cash and cash equivalents:
Beginning of period 39,947 6,814
-------- --------
End of period $ 44,453 $ 1,446
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial 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 Company's 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 month periods ended April 30, 1998 and 1999, (b) the
financial position at April 30, 1999 and (c) the cash flows for the three month
periods ended April 30, 1998 and 1999, have been made. The financial results for
the three months ended April 30, 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 quarters ended April 30,
1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
Three months ended
April 30,
1998 1999
-------- --------
<S> <C> <C>
Net earnings $ 9,478 $ 11,834
Other comprehensive earnings:
Foreign currency translation adjustment 133 (609)
-------- --------
Comprehensive earnings $ 9,611 $ 11,225
======== ========
2. Accounts Receivable
Accounts receivable at the following dates consisted of the following:
January 31, April 30,
1999 1999
-------- --------
Accounts receivable $ 80,188 $ 96,457
Less: allowance for doubtful accounts 3,905 3,817
-------- --------
$ 76,283 $ 92,640
======== ========
</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, April 30,
1999 1999
----------- ---------
<S> <C> <C>
Raw materials $ 31,361 $ 31,817
Work-in-process 8,764 8,573
Finished goods 25,410 28,931
----------- ---------
65,535 69,321
Less: excess of FIFO cost over LIFO -- --
----------- ---------
Total $ 65,535 $ 69,321
=========== =========
</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 month
periods ended April 30, 1998 and 1999.
4. Intangibles and Goodwill:
<TABLE>
<CAPTION>
January 31, April 30,
1999 1999
------- -------
<S> <C> <C>
Goodwill $15,843 $15,843
Less: accumulated amortization 562 663
------- -------
$15,281 $15,180
======= =======
Intangibles consist of the following:
Patents $ 991 $ 991
Other intangibles 53,166 53,166
Deferred pension costs 1,915 1,915
------- -------
56,072 56,072
Less: accumulated amortization 49,674 49,787
------- -------
Net intangibles $ 6,398 $ 6,285
======= =======
</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 net operating loss (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, April 30,
1999 1999
-------- --------
<S> <C> <C>
Revolving line of credit $120,000 $131,500
Industrial project revenue bonds due 2009 4,365 4,365
Other long-term debt 4,150 3,590
-------- --------
128,515 139,455
Less: current installments -- 454
-------- --------
Total long-term debt $128,515 $139,001
======== ========
</TABLE>
Under the revolving credit facility, the Company had $68.5 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. 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. 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 ("Thermodyne Subrogation Matter") 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 purported misappropriation of trade secrets, and prays for judgment
"in an amount equal to the relative degree of fault found attributable to the
defendants in the
<PAGE> 8
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SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Thermodyne Action." Count II purports to allege contribution claims arising from
OSI Industries, Inc.'s alleged tortious interference on the contracts and seeks
the same relief sought in Count I. Counts III and IV are not brought against the
Company. Defendants have moved to dismiss the complaint with prejudice; the
Carriers have moved to voluntarily dismiss without prejudice. Those, and other
motions, are scheduled for hearing in June 1999. 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 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 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. 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
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 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
<PAGE> 9
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SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
have been commenced and no notifications have been received regarding this
matter since December 1992. We 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 $329,000 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 April 30, 1999, the Company had letters of credit outstanding
totaling $7.3 million, which guarantee various business activities, including
$4.4 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.
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 8,750 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. On May 27, 1999, at the Company's annual
stockholders' meeting, stockholders approved an amendment to the 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:
<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
========= =============== =============
</TABLE>
<PAGE> 10
Page 10
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 1,145,769 shares of Common
Stock at approximately $2.01 per share.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
Three Month Period Ended April 30, 1999 (Fiscal 2000) Compared to Three Month
Period Ended April 30, 1998 (Fiscal 1999).
Revenue. Revenue for the three months ended April 30, 1999 increased 9.3% to
$139.5 million compared with $127.7 million for the comparable period in fiscal
1999. The revenue increase for the three months was primarily attributable to
sales of beverage equipment to the U.S. soft drink and international brewery
market and an increase in sales of Taylor brand equipment. Sales of products for
use outside the U.S. decreased 4.5% due to the prior year sales including a
large non-recurring international shipment for beverage equipment. Shipments in
the current fiscal quarter were principally to domestic soft drink bottlers. The
strong shipments to the soft drink industry in the first quarter may be due in
part to the bottlers changing the timing of their capital equipment purchases to
meet seasonal equipment requirements. For the first three months of fiscal 2000,
revenue from sales of products for use outside the United States was 28.0% of
revenue as compared with 32.1% for the same period in fiscal 1999.
Gross Margin. Gross margin for the three months ended April 30, 1999 increased
10.7% to $43.7 million, compared with $39.5 million for the comparable period in
fiscal 1999. As a percent of revenue, gross margin increased from 30.9% of
revenue for the three month period ended April 30, 1998 to 31.3% of revenue in
the three month period ended April 30, 1999, reflecting the spreading of the
fixed portion of cost of sales over a higher volume of sales.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expense for the three months ended April 30, 1999
increased 10.8% to $22.7 million. As a percent of revenue, SG&A increased from
16.0% to 16.2% in the three months ended April 30, 1999, compared to the
comparable period in fiscal 1999. The marginal increase was due in part to
expenses related to research and development and higher casualty insurance
expenses.
Interest Expense. Interest expense for the three months ended April 30, 1999
decreased 54.4% to $1.9 million compared with the same period in fiscal 1999.
The reduction in interest expense resulted from a lower cost of borrowing
resulting from the December 1998 refinancing of the business.
Income Taxes. Income tax expense increased 33.7% to $7.3 million compared to
$5.5 million for the comparable period in fiscal 1999. The increase in tax
expense is largely attributed to increased earnings before taxes of
approximately $4.2 million. The increase in the effective tax rate was due in
part to a change in the federal tax law concerning the treatment of the reserve
for doubtful accounts and non-recurring temporary differences.
<PAGE> 11
Page 11
The following table sets forth selected operating data as a percentage
of Company net revenue:
<TABLE>
<CAPTION>
Three months ended
April 30,
1998 (%) 1999 (%)
--------- ---------
<S> <C> <C>
Beverage-Air 46.5 48.5
Taylor 34.1 32.4
Wells/Bloomfield 11.4 10.2
Gamko 5.5 6.7
World Dryer 2.5 2.2
--------- ---------
Net revenue 100.0 100.0
Gross margin 30.9 31.3
Selling, general and administrative expenses 16.0 16.2
--------- ---------
Earnings from operations 14.9 15.1
Interest expense, net (3.2) (1.3)
Income taxes (4.3) (5.3)
--------- ---------
Net earnings 7.4 8.5
========= =========
</TABLE>
Liquidity and Capital Resources
Net cash flows provided by operations were $6.3 million for the three
months ended April 30, 1999 compared with $8.3 million for the three months
ended April 30, 1998. The decrease is primarily the result of an increase in
working capital, primarily related to inventories and accounts payable, compared
to the prior year offset by higher net earnings from operations. See -- "Results
of Operations -- Revenue."
Net cash used in investing activities amounted to $2.8 million for the
three months ended April 30, 1999 compared with $1.3 million for the three
months ended April 30, 1998. Through the first three months of fiscal 2000,
total capital expenditures have been $2.8 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 three
months ended April 30, 1999 the Company purchased 664,000 shares of its common
stock at an average price of $29.06 per share.
As of April 30, 1999, the Company had net working capital of $69.2
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 22% for the
three months ended April 30, 1999. The Company's earnings from operations were
sufficient to cover fixed charges for the three months ended April 30, 1999.
As of April 30, 1999, the Company had borrowings of $131.5 million
under the Revolving Credit Facility of its BA Bank Facility. In addition, it had
outstanding letters of credit in the amount of $7.3 million, including $4.4
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 $68.5 million
available for additional borrowings. In addition, the Company had cash and cash
equivalents of $1.4 million as of April 30, 1999.
<PAGE> 12
Page 12
The BA Bank Facility includes two financial covenants which Specialty
was required to meet on April 30, 1999. The first financial covenant is a total
funded debt to cash flow ratio for the twelve months ended April 30, 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
April 30, 1999 of 1.66:1.00; and an interest coverage ratio for the twelve
months ended April 30, 1999 of 6.49:1.00.
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 June 9, 1999 the Company's largest stockholder provided notice to
the Company of his intent to exercise his warrants to purchase common stock of
the Company. The warrants otherwise would expire on July 31, 1999. The warrants
are exercisable for 1,145,769 shares of common stock at 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 three 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 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.
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 April 30, 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 April 30, 1999, the
Year 2000 conversion project of our information systems is more than 95%
complete, with all of 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.
<PAGE> 13
Page 13
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.
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 Securities and Exchange
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 quarter ended April 30, 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.
<PAGE> 14
Page 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See note 7 of "Notes to Unaudited Consolidated Financial Statements"
included in Part I. Item 1. of this Form 10-Q.
Item 4. Submissions of Matters to a Vote of Security Holders
There were no matters submitted to a vote of stockholders for the
quarter ended April 30, 1999.
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits
10.1 Amended and Restated Executive Long-Term Incentive Plan.
10.2 Amended and Restated Non-Employee Directors Long-Term
Incentive Plan.
27.1 Financial Data Schedule.
2. Reports on Form 8-K.
None.
<PAGE> 15
Page 15
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 24, 1999 /s/Jeffrey P. Rhodenbaugh
- ------------------------ --------------------------------------------------
Jeffrey P. Rhodenbaugh, Chief Executive Officer
(Principal Executive Officer)
Date: June 24, 1999 /s/Donald K. McKay
- ------------------------ --------------------------------------------------
Donald K. McKay, Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE> 16
Page 16
Exhibit Index
Exhibit
No. Description
--------- -----------
*10.1 Amended and Restated Executive Long-Term Incentive Plan.
*10.2 Amended and Restated Non-Employee Directors Long-Term Incentive Plan.
27.1 Financial data schedule.
*Incorporated herein by reference to the applicable exhibit to the Company's
Definitive Notice and Proxy Statement on Form 14A, as filed with the Securities
and Exchange Commission on April 16, 1999.
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