<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 October 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 36-333759
--------------------------------------------------------------------
(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 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 December 10, 1999
- ----------------------------- --------------------------------
Common Stock, $0.01 par value 19,186,254 shares
The exhibit index is on page 17.
<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 Nine months ended
October 31, October 31,
1998 1999 1998 1999
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenue $ 120,512 $ 117,054 $ 388,323 $ 385,752
Cost of sales 83,251 81,063 266,441 265,207
--------- --------- --------- ---------
Gross margin 37,261 35,991 121,882 120,545
Selling, general and administrative expenses 20,238 20,966 63,461 65,031
--------- --------- --------- ---------
Earnings from operations 17,023 15,025 58,421 55,514
Interest expense, net 3,567 1,911 11,687 5,778
--------- --------- --------- ---------
Earnings from operations before income
taxes and minority interest 13,456 13,114 46,734 49,736
Income taxes 4,815 5,033 16,880 19,068
Minority interest 24 11 57 64
--------- --------- --------- ---------
Net earnings before extraordinary item 8,617 8,070 29,797 30,604
Extraordinary item (1,374) - (1,374) -
--------- --------- --------- ---------
Net earnings $ 7,243 $ 8,070 $ 28,423 $ 30,604
========= ========= ========= =========
Basic earnings per share:
Net earnings per share before extraordinary item $ 0.47 $ 0.42 $ 1.64 $ 1.64
Extraordinary item (0.07) - (0.07) -
--------- --------- --------- ---------
Basic earnings per share $ 0.40 $ 0.42 $ 1.57 $ 1.64
========= ========= ========= =========
Diluted earnings per share:
Net earnings per share before extraordinary item $ 0.43 $ 0.41 $ 1.48 $ 1.52
Extraordinary item (0.07) - (0.07) -
--------- --------- --------- ---------
Diluted earnings per share $ 0.36 $ 0.41 $ 1.41 $ 1.52
========= ========= ========= =========
Weighted average shares outstanding - basic 18,255 19,237 18,132 18,627
Weighted average shares outstanding - diluted 20,027 19,797 20,094 20,180
</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, October 31,
1999 1999
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,814 $ 8,239
Accounts receivable, net 76,283 76,502
Inventories 65,535 63,728
Deferred tax assets, net 20,410 20,410
Other current assets 4,704 4,883
--------- ---------
Total current assets 173,746 173,762
Property, plant and equipment, net 40,954 49,300
Restricted cash equivalents - 1,499
Goodwill 15,281 29,599
Other intangibles, net 6,398 12,304
Other assets 366 291
--------- ---------
Total assets $ 236,745 $ 266,755
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ - $ 176
Accounts payable 31,723 27,750
Accrued liabilities 70,220 80,190
Accrued income taxes 4,621 15,436
--------- ---------
Total current liabilities 106,564 123,552
Long-term debt, excluding current installments 128,515 137,525
Other non-current liabilities 1,590 1,738
Stockholders' equity:
Common stock 184 192
Additional paid-in capital 62,968 62,008
Accumulated deficit (50,440) (51,770)
Accumulated other comprehensive income (2,637) (3,296)
Treasury stock, at cost (9,999) (3,194)
--------- ---------
Total stockholders' equity 76 3,940
--------- ---------
Total liabilities and stockholders' equity $ 236,745 $ 266,755
========= =========
</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>
Nine months ended
October 31,
1998 1999
---- ----
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 28,423 $ 30,604
Items not affecting cash:
Depreciation 3,829 4,324
Amortization 1,300 665
Utilization of net operating loss carryforwards 819 819
Changes in current assets and liabilities (excluding
effects of business acquired):
Accounts receivable (8,226) 3,220
Inventories (806) 6,708
Other current assets 188 (228)
Accounts payable and other current liabilities,
excluding current installments of long-term debt 19,774 12,357
-------- --------
Net cash provided by operating activities 45,301 58,469
Cash flows from investing activities:
Additions to property, plant and equipment, net of disposals (4,997) (7,940)
Cash equivalents restricted for capital additions 629 (1,499)
Businesses acquired - (29,195)
-------- --------
Net cash used in investing activities (4,368) (38,634)
Cash flows from financing activities:
Proceeds from long-term debt - 9,200
Repayments of long-term debt (31,275) (14)
Financing costs - (130)
Proceeds from exercise of stock options 904 3,976
Options withheld for taxes (1,935) (5,749)
Acquisition of treasury stock (3,385) (25,129)
-------- --------
Net cash used in financing activities (35,691) (17,846)
-------- --------
Other, net (144) (564)
-------- --------
Net increase in cash and cash equivalents 5,098 1,425
Cash and cash equivalents:
Beginning of period 39,947 6,814
-------- --------
End of period $ 45,045 $ 8,239
======== ========
Cash paid for interest and income taxes:
Interest, net $ 12,379 $ 5,868
======== ========
Income taxes $ 13,904 $ 7,452
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
statements.
<PAGE> 5
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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 and nine month periods ended October 31, 1998 and
1999, (b) the financial position at October 31, 1999 and (c) the statements of
cash flows for the nine month periods ended October 31, 1998 and 1999, have been
made. The financial results for the three and nine months ended October 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
consolidated 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.
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 nine month
periods ended October 31, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
Three months ended Nine months ended
October 31, October 31,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $ 7,243 $ 8,070 $ 28,423 $ 30,604
Other comprehensive earnings (losses):
Foreign currency translation adjustment 103 (420) (15) (1,094)
-------- -------- -------- --------
Comprehensive earnings $ 7,346 $ 7,650 $ 28,408 $ 29,510
======== ======== ======== ========
</TABLE>
2. Accounts Receivable
Accounts receivable consisted of the following:
January 31, October 31,
1999 1999
---- ----
Accounts receivable $ 80,188 $ 80,359
Less: allowance for doubtful accounts 3,905 3,857
-------- --------
Total $ 76,283 $ 76,502
======== ========
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SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. Inventories
Inventories consisted of the following:
January 31, October 31,
1999 1999
---- ----
Raw materials $ 31,361 $ 31,322
Work-in-process 8,764 8,744
Finished goods 25,410 23,662
-------- --------
Total $ 65,535 $ 63,728
======== ========
The Company values domestic inventories at the lower of last-in,
first-out ("LIFO") cost or market. LIFO, compared to FIFO, had a de minimis
effect on the cost of sales for the three and nine month periods ended October
31, 1998 and 1999.
4. Intangibles and Goodwill:
January 31, October 31,
1999 1999
---- ----
Goodwill $ 15,843 $ 30,491
Less: accumulated amortization 562 892
-------- --------
Net goodwill $ 15,281 $ 29,599
======== ========
Intangibles consist of the following:
Patents $ 991 $ 1,516
Other intangibles 53,166 58,879
Deferred pension costs 1,915 1,915
-------- --------
56,072 62,310
Less: accumulated amortization 49,674 50,006
-------- --------
Net intangibles $ 6,398 $ 12,304
======== ========
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. Based on the Company's
performance in fiscal 2000, we expect to reduce this valuation allowance at
January 31, 2000. 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 consisted of the following:
January 31, October 31,
1999 1999
---- ----
Revolving line of credit $120,000 $124,000
Industrial project revenue bonds due 2009 and 2014 4,365 9,565
Other long-term debt 4,150 4,136
-------- --------
128,515 137,701
Less: current installments - 176
-------- --------
Total long-term debt $128,515 $137,525
======== ========
Under the revolving credit facility, the Company had $68.8 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 believes that there is only a remote
chance of a loss occurring and that the ultimate outcome of the loss
contingencies relating to such litigation and claims will not have, individually
or in the aggregate, a material adverse impact upon the financial condition or
results of operations of the Company.
The following is a summary of the more significant litigation and claims.
Litigation
The Company was a defendant along with 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." which was transferred to 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 Thermodyne Action 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
<PAGE> 8
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SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Company's alleged 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 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 time to appeal has not yet begun to run. Management believes
that there is only a remote chance of a loss occurring and, accordingly,
believes that the Company will not suffer a material loss related to this
action. Specialty has not established a reserve in its consolidated 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.
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.
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SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Specialty received notice of potential environmental actions from 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. Specialty has
spent approximately $331,000 to conduct tests and to implement a remediation
program, but given the pendency of 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 October 31, 1999, the Company had letters of credit outstanding
totaling $12.6 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 559,750 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. On October 23, 1999 additional amendments were made
to the employee plan which generally increases the vesting period for future
option grants.
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 (1,730,932 exercisable) 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
Options issued 449,000 21.38 21.38
Options exercised (84,571) 1.00 1.00
Options withheld for taxes (67,429) 1.00 1.00
--------- --------- -----------
Options outstanding at
October 31, 1999 (1,054,532 exercisable) 1,673,532 $ 11.86 $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 per share 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 per share 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 Nine Months Ended
October 31, October 31,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding-basic 18,255 19,237 18,132 18,627
Assumed exercise of stock options
and stock warrant 1,772 560 1,962 1,553
------ ------ ------ ------
Weighted average shares outstanding-diluted 20,027 19,797 20,094 20,180
====== ====== ====== ======
</TABLE>
<PAGE> 11
Page 11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF THE OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
Three and Nine Month Periods Ended October 31, 1999 (Fiscal 2000) Compared to
Three and Nine Month Periods Ended October 31, 1998 (Fiscal 1999).
Revenue. Revenue for the three months ended October 31, 1999 decreased 2.9% to
$117.1 million compared with $120.5 million for the comparable period in fiscal
1999. Revenue for the nine months ended October 31, 1999 decreased 0.7% to
$385.8 million compared with $388.3 million for the comparable period in fiscal
1999. The revenue decrease for both periods was attributable to lower sales of
Beverage-Air refrigeration equipment to the soft drink beverage market which
resulted in part from non-recurring international sales in the prior year and
the levelling off of soft drink bottler market demand from historic highs last
year. Sales to the soft drink bottler market declined $13.0 million and $21.7
million, for the three and nine month periods, respectively. Excluding sales to
the soft drink beverage market and $2.2 million of sales for both periods by
Carter-Hoffmann, which was acquired as of September 30, 1999, sales would have
increased by approximately 9% for the quarter and 6% for the nine month period
ended October 31, 1999 compared to the comparable periods in fiscal 1999. All of
the Company's other global brands reported sales increases. For the third
quarter, sales of products for use outside the U.S. decreased 9.4% from the
prior year period, due to decreased sales of equipment to the beverage market.
For the first nine months of fiscal 2000, revenue from sales of products for use
outside the United States was 27.2% of revenue as compared with 29.3% for the
same period in fiscal 1999.
Gross Margin. Gross margin for the three months ended October 31, 1999 decreased
3.4% to $36.0 million, compared with $37.3 million for the comparable period in
fiscal 1999. As a percent of revenue, gross margin decreased from 30.9% of
revenue for the three month period ended October 31, 1998 to 30.7% of revenue in
the three month period ended October 31, 1999. Gross margin for the nine months
ended October 31, 1999 decreased 1.1% to $120.5 million, compared with $121.9
million for the comparable period in fiscal 1999. As a percent of revenue, gross
margin decreased from 31.4% of revenue for the nine month period ended October
31, 1998 to 31.2% of revenue in the nine month period ended October 31, 1999.
The decrease in gross margin as a percent of sales of 0.2% for the three and
nine month periods ended October 31, 1999 was principally the result of fixed
expenses being spread over a smaller sales base and manufacturing variances
resulting from producing at lower volumes in order to reduce inventories of the
Company's Beverage-Air brand.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expense for the three months ended October 31, 1999
increased 3.6% to $21.0 million. As a percent of revenue, SG&A was 17.9% for the
three months ended October 31, 1999 compared to 16.8% for the same period in
fiscal 1999. SG&A expenses for the nine months ended October 31, 1999 increased
2.5% to $65.0 million. As a percent of revenue, SG&A was 16.8% for the nine
months ended October 31, 1999 compared to 16.4% for the comparable period in
fiscal 1999. The higher expenses reflect the addition of Carter-Hoffmann, higher
medical insurance experience and increased research and development expenses.
The addition of Carter-Hoffmann resulted in an increase of $0.5 million for both
the quarter and year-to-date periods and the higher insurance expenses accounted
for $0.2 million in both periods. Research and development expenses were
approximately $0.7 million higher for the quarter and $1.3 million higher for
the nine month period ended October 31, 1999 than the prior year periods.
Interest Expense. Interest expense for the three months ended October 31, 1999
decreased 46.4% to $1.9 million compared with the same period in fiscal 1999.
Interest expense for the nine months ended October 31, 1999 decreased 50.6% to
$5.8 million compared with the same period in fiscal 1998. The Company acquired
$31.4 million of its outstanding senior subordinated notes in September 1998.
The Company redeemed the remainder of the outstanding notes on December 1, 1998.
The lower interest expense resulted principally from refinancing the Company's
11-3/8% senior subordinated notes at December 1, 1998.
<PAGE> 12
Page 12
The following table sets forth selected operating data as a percentage
of Company net revenue:
<TABLE>
<CAPTION>
Three months ended Nine months ended
October 31, October 31,
1998 (%) 1999 (%) 1998 (%) 1999 (%)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Beverage-Air 48.4 39.1 47.0 43.3
Taylor 29.8 35.4 32.9 34.8
Wells/Bloomfield 12.2 13.1 11.1 11.4
Specialty Equipment International (Gamko) 6.6 6.9 6.2 6.9
Carter-Hoffmann - 1.9 - 0.6
World Dryer 3.0 3.6 2.8 3.0
-------- -------- -------- --------
Net revenue 100.0 100.0 100.0 100.0
Gross margin 30.9 30.7 31.4 31.2
Selling, general and administrative expenses 16.8 17.9 16.4 16.8
-------- -------- -------- --------
Earnings from operations 14.1 12.8 15.0 14.4
Interest expense, net (3.0) (1.6) (3.0) (1.5)
Income taxes (3.9) (4.3) (4.3) (4.9)
Minority interest - - - (0.1)
-------- -------- -------- --------
Net earnings before extraordinary item 7.2 6.9 7.7 7.9
======== ======== ======== ========
</TABLE>
Liquidity and Capital Resources
Net cash flows provided by operations were $58.5 million for the nine
months ended October 31, 1999 compared with $45.3 million for the nine months
ended October 31, 1998. The increase is primarily the result of a decrease in
accounts receivable and inventory compared to the prior year. See -- "Results of
Operations -- Revenue."
Net cash used in investing activities amounted to $38.6 million for the
nine months ended October 31, 1999 compared with $4.4 million for the nine
months ended October 31, 1998. The current year includes $29.2 million
principally related to the acquisition of Carter-Hoffmann. Carter-Hoffmann's
product line of foodservice equipment includes holding cabinets, transport
equipment and rethermalizing equipment for a variety of hot and cold foods.
Management believes that Carter-Hoffmann's market and technology are a good
strategic fit with its six other brands and provides marketing synergies with
the Wells brand.
Through the first nine months of fiscal 1999, total capital
expenditures have been $8.0 million. The Company anticipates that capital
expenditures for fiscal 1999 will be approximately $11.0 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 and Taylor production facilities.
On April 8, 1999 the Company announced a plan to purchase 1 million
shares of its common stock (up to $30 million) in the open market. For the nine
months ended October 31, 1999 the Company purchased 897,800 shares of its common
stock at an average price of $27.99 per share.
As of October 31, 1999, the Company had net working capital of $50.2
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 23% for the
nine months ended October 31, 1999. The Company's earnings from operations were
sufficient to cover fixed charges for the three months ended October 31, 1999.
<PAGE> 13
Page 13
As of October 31, 1999, the Company had borrowings of $124.0 million
under the Revolving Credit Facility of its BA Bank Facility. In addition, it had
outstanding letters of credit in the amount of $12.6 million, including $9.8
million of letters of credit which guarantee the Industrial Project Revenue
Bonds (referenced in note 6 to the consolidated financial statements included as
item 1 hereto). Under the Revolving Credit Facility, the Company had $68.8
million available for additional borrowings. In addition, the Company had cash
and cash equivalents of $8.2 million as of October 31, 1999.
The BA Bank Facility includes two financial covenants which Specialty
was required to meet on October 31, 1999. The first financial covenant is a
total funded debt to cash flow ratio for the twelve months ended October 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 October 31, 1999 of 1.83:1.00; and an interest coverage ratio for
the twelve months ended October 31, 1999 of 8.67:1.00.
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. The
total letters of credit supporting Beverage-Air's two industrial revenue bonds
is $9.8 million as noted above.
On July 31, 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 nine 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.
In 1996, we began our efforts to make Specialty Year 2000 compliant.
This program encompassed 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 October 31, 1999.
<PAGE> 14
Page 14
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.
The Company has seven principal locations where we have significant
business information technology systems. At those principal locations all of the
significant business information technology systems have been assessed,
remedied, tested and found to be Year 2000 compliant. We have not missed any
significant Year 2000 deadlines and we have not experienced any significant Year
2000 mishaps. 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, both domestically and internationally. In general, most of our
principal vendors, suppliers, distributors and customers assure us that they
will be Year 2000 compliant. We recognize that the results of this assessment
cannot be conclusive, and therefore, we can make no assurance that these third
parties will become Year 2000 compliant.
As part of its Year 2000 compliance program the Company has monitored,
through the press and other public information, the Year 2000 compliance efforts
relating to the provision of basic infrastructure services (such as power,
transportation and communication) and related matters. For the United States,
Canada, the Netherlands, Germany, the United Kingdom and France, which are the
sites of the Company's principal operations, based upon these third party
sources, the Company does not believe it will experience any material disruption
in its operations as a result of Year 2000 issues with the infrastructure of
these countries. However, there can be no assurance that no such interruptions
will occur.
Accordingly, we developed contingency plans in 1999. Our contingency
plans include the following: initial verification of operating functionality on
January 1, 2000, uninteruptable power supply and backup power supply, standby
heating sources for facilities, facility management inspection on January 1,
2000, increases in inventory stock on hand, where necessary, and staffing of
customer service departments on January 1, 2000. Management believes, 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 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 our
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 are 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. The Company is evaluating the implications of the Euro conversion
and is uncertain as to the potential impact on its operations.
<PAGE> 15
Page 15
Current and Pending Accounting Changes
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivatives and for hedging activities. As issued, SFAS
No. 133 was effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. In June 1999, SFAS No. 137 was issued, effectively
deferring the date of required adoption of SFAS No. 133 to fiscal quarters
beginning after June 15, 2000. The Company is required to comply with SFAS No.
133 in fiscal year 2001 and estimates its adoption will not have a material
effect on the consolidated financial statements.
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
There have been no material changes in the Company's market risk during
the first nine months ended October 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 for the year ended
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
There were no matters submitted to a vote of stockholders for the
quarter ended October 31, 1999.
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits
10.1 First Amendment to the Specialty Equipment Companies, Inc.
Amended and Restated Executive Long-Term Incentive Plan, dated
October 23, 1999
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: December 14, 1999 /s/ Jeffrey P. Rhodenbaugh
------------------- --------------------------
Jeffrey P. Rhodenbaugh, Chief Executive Officer
(Principal Executive Officer)
Date: December 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
------- -----------
10.1 First Amendment to the Specialty Equipment Companies, Inc.
Amended and Restated Executive Long-Term Incentive Plan,
dated October 23, 1999
27.1 Financial Data Schedule
<PAGE> 1
FIRST AMENDMENT TO
SPECIALTY EQUIPMENT COMPANIES, INC.
AMENDED AND RESTATED
EXECUTIVE LONG-TERM INCENTIVE PLAN
WHEREAS, the Specialty Equipment Companies, Inc. Executive Long-Term
Incentive Plan, as amended and restated effective May 27, 1999 (the "Plan"),
provides that the Board of Directors of Specialty Equipment Companies, Inc. (the
"Board") may from time to time in its discretion amend or modify the Plan,
subject to stockholder approval as may be required in instances governed by
Section 422 of the Internal Revenue Code, Section 16(b) of the 1934 Act, or to
comply with the listing requirements of any securities exchange or market system
on which the Company's equity securities are listed; and
WHEREAS, the Board has determined that the Plan should be amended to
modify the vesting and exercisability provisions of the Plan as provided herein,
and the Board has authorized Jeffrey Rhodenbaugh and Donald McKay, or either of
them, to execute this First Amendment to the Plan on behalf of Specialty
Equipment Companies, Inc. (the "Company").
NOW, THEREFORE, the Plan is hereby amended, effective as of October 23,
1999, as set forth below.
1. Administration: Committee Authority. Article 4(c) (vii) and
(viii) are hereby amended and restated as follows:
(vii) to accelerate the exercisability of and to accelerate
or waive any or all of
<PAGE> 2
the restrictions and conditions applicable to, any Award,
except restrictions set forth in Article 8(a)(ii) and (iii).
(viii) to extend the exercisability of options (other than
incentive stock options) and to extend or waive any or all of
the restrictions and conditions applicable to any Award,
except the restrictions limiting the term of Awards to 10
years or 15 years (as the case may be pursuant to Article
6(a)(ii)).
2. Exercise. Vesting of Options and Stock Appreciation Rights.
Article 8(a) shall be amended, by adding the following new Article 8(a)(v) as
follows:
(v) Effective with respect to options and stock
appreciation rights granted after October 23, 1999, the
Committee may in its discretion grant options and stock
appreciation rights with a vesting and exercisability schedule
stated in the Grantee's Option Award Agreement, which may
provide for vesting and exercisability as rapidly as or less
rapidly than at the rate of 25% per year as provided in
Article 8(a)(iv).
3. Termination of Employment. Awards After October 23, 1999.
Article 13 shall be amended, by adding the following new Article 13(c) as
follows:
(c) Awards After October 23, 1999. With respect to options and
stock appreciation rights issued after October 23, 1999, such
options and stock appreciation rights shall be governed by the
Plan and by the following rules:
(i) Options or stock appreciation rights issued after
October 23, 1999, shall be considered vested and
exercisable as of the date of the Grantee's death as if
each such option or stock appreciation right had been
- - 2 -
<PAGE> 3
issued with vesting and exercisability over a five year
period in five annual installments at the rate of 20%
each year on the anniversary of the Grant Date of the
award (the "Alternate Vesting Schedule");
(ii) Options or stock appreciation rights issued after
October 23, 1999, shall be considered vested and
exercisable as of the date of the Grantee's Retirement
or Disability as if each such option or stock
appreciation right had been issued with the Alternate
Vesting Schedule; and
(iii) if a Grantee's employment terminates because the
Grantee resigns, except where the resignation is for
Disability or Retirement, the Committee shall have
discretion to determine within 90 days of the date of
such termination, that a resigning Grantee's options and
stock appreciation rights will instead be vested and
exercisable in accordance with the Alternate Vesting
Schedule. The Committee may consider whether or not the
facts and circumstances of a resignation warrant vesting
and exercisability in accordance with the Alternative
Vesting Schedule because the resignation appears similar
to a Retirement, or because it appears to be more
similar to an involuntary termination of employment than
a voluntary termination, but the Committee shall have
absolute and final discretion to determine whether or
not to allow all or part of a resigned Grantee's option
or stock appreciation right to vest and be exercisable
in accordance with the Alternate Vesting Schedule;
4. Except as provided in this First Amendment to the Plan, the
Plan is hereby ratified and confirmed.
Dated as of: October 23, 1999
/s/ Donald K. McKay
----------------------------
Donald K. McKay
- - 3 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 8,239
<SECURITIES> 0
<RECEIVABLES> 80,359
<ALLOWANCES> (3,857)
<INVENTORY> 63,728
<CURRENT-ASSETS> 173,762
<PP&E> 86,489
<DEPRECIATION> (37,189)
<TOTAL-ASSETS> 266,755
<CURRENT-LIABILITIES> 123,552
<BONDS> 137,525
0
0
<COMMON> 192
<OTHER-SE> 3,748
<TOTAL-LIABILITY-AND-EQUITY> 266,755
<SALES> 117,054
<TOTAL-REVENUES> 117,054
<CGS> 81,063
<TOTAL-COSTS> 81,063
<OTHER-EXPENSES> 20,966
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<INTEREST-EXPENSE> 1,911
<INCOME-PRETAX> 13,114
<INCOME-TAX> 5,033
<INCOME-CONTINUING> 8,070
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,070
<EPS-BASIC> 0.42
<EPS-DILUTED> 0.41
</TABLE>
