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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 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 36-3337593
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1245 Corporate Boulevard, Suite 401
Aurora, Illinois 60504
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (630) 585-5111
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange on which
Title of each class registered:
- ------------------- -----------------------------
Common Stock (par value $.01 per share) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
Aggregate market value at March 18, 1999 of the voting stock held by
non-affiliates of the Registrant -- $250,464,610 (based on a closing price of
$26.75 per share on that date as reported on the New York Stock Exchange). (The
Registrant has assumed that all directors, executive officers and holders of 40%
or more of the shares of Common Stock are affiliates for the purposes of this
calculation.)
As of March 18, 1999, 18,463,337 shares of the Common Stock, $.01 par value, of
the Registrant were outstanding.
Documents Incorporated By Reference:
A portion of the Company's Proxy Statement relating to its 1999 Annual Meeting
of Stockholders is incorporated by reference in Part III hereof.
* The exhibit index is located on page 46.
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PART I
ITEM 1. BUSINESS
GENERAL
Specialty Equipment Companies, Inc. ("Specialty") is a manufacturer of a
diversified line of highly engineered commercial and institutional foodservice
equipment. Our products are used by customers in the foodservice equipment
market segment and include a variety of quick service restaurant chains, other
commercial restaurants, convenience store chains, specialty chains, soft drink
bottlers, brewers and institutional foodservice operators. We emphasize the
engineering and development of specially designed, state-of-the-art foodservice
equipment, and sell a wide array of standardized foodservice equipment and
related products. We service our customers through a broad-based global
distribution and service network.
Specialty's domestic operations, and some of its foreign operations are
conducted by Specialty Equipment Manufacturing Corporation ("Specialty Mfg."), a
wholly owned subsidiary. Specialty Equipment International (through its wholly
owned subsidiary, Gamko Holding, B.V.) conducts a substantial portion of
Specialty's foreign operations.
We generally market our products through one of six global brands. These
global brands are:
o Taylor;
o Beverage-Air;
o Bloomfield;
o Wells;
o World Dryer; and
o Gamko
Each of these brands has been a prominent brand in its specific market niche for
many years. For example, Wells produced its first waffle baker in 1920. Taylor
provided its first ice cream freezer to a restaurant in 1926 and has been
providing shake machines to McDonald's since the 1970's. Beverage-Air started
making refrigerated cabinets in 1944, and Bloomfield introduced its first coffee
service products in the 1950's. World Dryer started selling warm air hand dryers
in 1951 and Gamko produced its first cooler in 1965.
GLOBAL BRANDS
Beverage-Air
The Beverage-Air brand is one of the two leading brands (in sales) of
commercial refrigeration equipment for the soft drink bottling market. We are
also one of several leading manufacturers (in sales) of such equipment for the
foodservice market. Beverage Air brand products include vertical and horizontal
reach-in merchandising coolers, freezers, refrigerators, pizza and food
preparation units, school milk coolers, self-contained beer dispensing units,
delicatessen and floral display cases. Beverage-Air brand products include
models marketed under the Beverage-Air(R), Marketeer(R) and Maxi-Marketeer(R)
names.
Specialty acquired Beverage-Air in November 1986 to broaden Specialty's
product offerings to the national quick service restaurant and convenience store
chains. Specialty's management believed that Beverage-Air's product lines and
engineering capabilities were well suited to support development of customized
refrigeration products for the major chains. Since we acquired Beverage-Air, we
have been successful in growing the sales of Beverage-Air products in this
market niche.
In the foodservice niche, Beverage-Air generates revenue principally
through sales to large restaurants, hotel kitchens, supermarkets and convenience
stores through independent dealers and distributors. Beverage-Air's major
product lines in this market niche include stainless steel refrigerators and
freezers, delicatessen display cases, pizza and food preparation tables,
refrigerated and frozen food display cases and beer dispensing equipment.
Beverage-Air's foodservice products are serviced primarily through independent
service organizations.
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In the soft drink bottling market, we market our Beverage-Air products to
bottlers around the world, which purchase the coolers for placement in
supermarkets, convenience stores and special venues. Most of our bottler
customers are affiliated with major soft drink companies, such as Coca-Cola and
Pepsi Cola. We have worked with the bottlers to customize these coolers to meet
their marketing needs. For example, we have designed several unique
point-of-purchase soft drink merchandisers, including cabinets or refrigerators
designed for use in the express check-out lanes of supermarkets, a line of
curved-front vertical merchandisers (Maxi-Marketeers) and the Contour Cooler(TM)
for the international bottler market. In 1998, we began to market, under the
Beverage-Air global brand name, The Breeze(TM), the industry's first open
air-curtain merchandiser with product pulldown capability.
We have an active product development team that focuses exclusively on the
Beverage-Air brand. In addition to research and development activities focused
on domestic and international sales, resources have been dedicated to product
development activities related to design, performance and agency approvals
specifically for international markets, since these are markets targeted by its
major customers. Beverage-Air has advanced its product testing capabilities and
has successfully completed the Underwriter Laboratories ("UL") client test data
criterion. Because of these capabilities we can respond more quickly to the
equipment development needs of our key Beverage-Air brand accounts.
The benefits of our integrated marketing and quick response product
development capabilities can be seen through a recent example. In 1997, the Food
and Drug Administration made changes to its unified food codes. As a result of
these changes, many of our customers were required to change their equipment
specifications in calendar year 1998. This required us to quickly redesign the
existing core Beverage-Air product line to meet these new specifications. Not
only do we believe that this quick redesign effort will help us increase sales
in the short term (because our customers need to replace older equipment with
equipment meeting the new specifications) but also will strengthen our
relationship with our domestic customers. We also believe that this capability
has been an asset that has helped us grow our existing customers in key emerging
markets.
We manufacture Beverage-Air products at three facilities. At our
Spartanburg, South Carolina facility we primarily manufacture merchandising
equipment for the foodservice and soft drink bottler industry. At our Honea
Path, South Carolina and Brookville, Pennsylvania facilities, we manufacture
refrigeration products primarily for the foodservice industry. We believe that
this manufacturing arrangement, with each facility being equipped to meet
specified needs, has improved lead times and increased our ability to obtain
large domestic and international orders for Beverage Air brand products.
Taylor
Founded in 1926, Taylor is the world's largest designer and manufacturer
(in sales) of soft serve ice cream, frozen yogurt and shake equipment. We also
design and manufacture, under the Taylor brand name, batch ice cream and frozen
beverage dispensing equipment. Because of our engineering and manufacturing
capabilities at our Taylor operations, we were afforded an opportunity to extend
the Taylor brand equipment offerings from only "cold" equipment into "hot," or
cooking, equipment. As a result, in 1985 we began manufacturing and shipping,
under the Taylor brand name, automated two-sided grills worldwide, that both
increase speed of cooking, with assurance of consistent product temperature
profiles and quick recovery. In addition, we also manufacture flat grills and
customized hot and cold food preparation/holding cabinets under the Taylor name.
An exclusive global distributor network that is committed to sales and service
to the food service industry supports this expanded line of both hot and cold
equipment.
The principal customer base for Taylor products is quick service
restaurants (like McDonald's and Burger King) and specialty chains (like Dairy
Queen and TCBY). We primarily sell Taylor products for domestic and
international new store growth and the addition of equipment to existing stores'
equipment packages, remodeling and retrofitting of existing store kitchens
(primarily driven by the addition and substitution of menu items) and
replacement of older equipment.
Because of our flexible manufacturing capabilities and application
engineering focus for both hot and cold equipment, we believe that our active
product development program for Taylor products will serve as a focus of our
growth prospects. Special engineering groups concentrate on individual product
lines to develop new technologies that address food service operators' concerns
of labor, reliability, maintenance and service costs. Our commitment to research
and development of innovative Taylor products is demonstrated by our ability to
develop, test and implement proprietary hardware and software in-house.
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This research and development capability has yielded many innovative
features and products. For example, Taylor products feature technologies such as
Softech(R), a patented, integrated memory system designed to control all
necessary modes of refrigeration and to control automatically the hardness or
viscosity of the frozen product. Another Taylor technology is Labor Saver(TM),
which is heat treatment equipment for soft serve and shake freezers that reduces
cleaning and maintenance costs. In 1998, we began marketing Razzle(R), a frozen
dessert program made with soft serve ice cream or frozen yogurt and blended with
a choice of mix-ins, including hard candies and cookies. We supply the customer
using the Razzle(R) program with equipment, including a mixer, cups, lids and
promotional support. We have also developed additional refrigeration and cooking
equipment to expand its product lines, including the development of two
specialized ovens for baking and holding applications, and frozen carbonated and
non-carbonated beverage equipment. We also are in the process of becoming an
approved supplier to the key soft drink manufacturers, providing equipment and
programs to support foodservice, retail and other markets with frozen carbonated
beverages. In 1997, we embarked on a development program entitled Freezer and
Grill of the Future. As a result of this program, the Company anticipates
shipping new grill designs in early 1999 with a roll-out of a new generation of
soft serve and shake equipment beginning in the fourth quarter of calendar 1999.
We believe that one of the major reasons for the Taylor brand's leading
worldwide market position, has been the Company's global distributor network for
Taylor products. This network allows us to offer U.S. and international
customers reliable and consistent service worldwide. This network consists of a
worldwide group of more than 140 independent stocking and servicing
distributors. These distributors employ more than 600 full-time salespeople and
operate fleets of specialized service vehicles to provide reliable and
consistent sales and service coverage throughout their respective territories.
We think that most of these distributors and their personnel derive most of
their revenue from the sale and servicing of Taylor products and thus are likely
to have a continuing commitment to selling and servicing Taylor products and
protecting Taylor's reputation.
In 1995, we began a long-range service plan, titled Service 2000. The
objective of Service 2000 is to insure that we provide our customer's with the
highest quality service. To initiate this strategy, an advanced communication
network was developed to track service performance and to provide a benchmark
for measuring continuous improvement. We have also demonstrated our continued
commitment to service when we created the Taylor Development Center. The Center,
which is located in a 25,000 square foot addition to our Rockton, Illinois
manufacturing facility in February is dedicated to maintaining the level of
professional service necessary to sell and service new equipment as well as to
expanding their current service network training. In addition, the facility
provides a technical resource center that is expected to help Taylor develop its
next generation of foodservice and restaurant equipment.
During fiscal 1997 our Taylor facilities applied for and received ISO 9001
certification. The International Standards Organization ("ISO") designation is
issued only after a qualified registrar determines that the applicable quality
control systems are in compliance with ISO standards. We think that ISO 9001
designation is not only a demonstration of the level of our manufacturing and
product quality, but also provides us with a competitive advantage because of
the prestige related to ISO certification.
Wells
Wells was founded in 1920 and has been producing electric cooking products
for more than 75 years. Under the Wells brand name, we design, manufacture and
market a broad line of warming and cooking equipment. The Wells product line
consists primarily of electric counter top and built-in appliances (including
fryers, griddles, food warmers, toasters, hot plates, waffle bakers, convection
ovens and broilers).
We market our Wells products principally through independent foodservice
equipment dealers and distributors. Besides restaurant chains, supermarkets and
convenience store outlets, ultimate users of Wells equipment include independent
restaurants, recreation outlets, hotels, schools and hospitals. Recently we
introduced a refrigerated built-in buffet unit under the Wells name, which will
complement the Wells modular warmer line, to provide a full line of products to
support foodservice consultants and specifiers. Also, we have developed larger,
specialized Wells products for major restaurant chains.
Wells products are manufactured at our Verdi, Nevada facility. In order to
attain additional economies of scale, we also use the Verdi, Nevada facility to
manufacture our Bloomfield brand products.
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Bloomfield
Under the Bloomfield global brand name, we design, manufacture and market a
coffee and tea beverage equipment product line that includes brewers, glass
coffee decanters, insulated beverage dispensers and related accessories. In 1997
we introduced Bloomfield's Electronic Brew Control ("EBC(TM)") coffee equipment.
EBC(TM) has the capability of providing a consistent quality of brewing results,
with less operator attention and training. In addition, we have designed and
developed Satellite Brewing Systems, Multi-Brewers and Docking Stations, which
we believe will enhance the competitive position of Bloomfield products with the
quick service restaurant chains. We also market, as part of the Bloomfield
brand, a powder cappuccino dispenser and espresso machine under the name Cafe
Elite(TM).
We sell the Bloomfield product line directly to office coffee service
customers and independent coffee roasters and through independent foodservice
equipment dealers and distributors. Ultimate users of the Bloomfield equipment
include major restaurants, hotels, convenience stores and offices.
Consistent with our customized product development and marketing strategy,
we are committed to designing specialized coffee and tea brewing equipment to
meet the needs of the major national and global chains. As a result of this
commitment, a number of our Bloomfield products are purchased on a regular basis
by the major chains and their franchisees.
Gamko
Gamko is a leading manufacturer of commercial refrigeration equipment in
The Netherlands. Gamko products are sold under the Euro-Line(TM), Eco-Line(TM),
Party-Cooler(TM) and Maxi Glass(TM) line names. Gamko global brand offerings
include modular and traditionally designed beverage and bottle display coolers,
dispensing and keg coolers, and food display and waste disposal coolers.
We acquired Gamko in August 1997 to broaden Specialty's manufacturing and
marketing efforts in Europe. We felt that this global expansion would help us
meet the demands resulting from the rapid expansion of the global quick service
restaurant chains and soft drink beverage companies. In addition, the
acquisition affords Specialty entry into the global brewery refrigeration and
beer dispensing equipment market, which is Gamko's core business. We believe
that Gamko's product lines and engineering capabilities are well suited to
support development of customized refrigeration products for major customers.
Gamko has also been successful with application engineering concepts that we
think will drive product development in the future.
In the brewery market, we principally sell our Gamko products to brewers
around the world, although mostly to brewers affiliated with the major
international breweries. Generally our Gamko customers purchase the equipment
for placement in supermarkets, restaurants, bars, taverns and special venues. We
have worked with the brewers to customize these coolers to meet their marketing
needs. In the soft drink bottler market, Gamko has products suited for the
marketing programs of the major soft drink companies. We believe that we can use
the strength of the Beverage-Air global brand to expand Gamko's merchandiser
equipment line. In the foodservice market, Gamko generates revenue principally
through sales to distributors. Gamko's major product lines in this sector
include food display, food preparation coolers and catering equipment for the
restaurant and catering industry. It has also designed a unique waste disposal
cooler for use in hotels, restaurants and butcher shops. The waste disposal
cooler inhibits the development of bacteria and odors in these applications.
Gamko's foodservice products are serviced primarily through independent service
organizations.
Because of the perceived importance of product innovation and
responsiveness to the brewing and foodservice markets, we maintain a product
development staff focused specifically on developing additions to the Gamko
line. In addition to research and development activities focused on both West
and East European sales, we have dedicated resources to product development
activities related to design, performance and agency approvals specifically for
international markets. It is through this strategy of integrated marketing that
we intend to grow the Gamko brand customer base in emerging markets. For the
Gamko product line, we have also considered and pursued joint venture
manufacturing and marketing efforts in East Europe and Southeast Asia.
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World Dryer
Founded in 1950, World Dryer designs, manufactures and markets commercial,
wall-mounted cast iron and stainless steel warm-air hand and hair dryers under
the World(R) Dryer, Airspeed(TM), No-Touch(TM), and Airstyle(TM) product names.
The World Dryer brand is the leading domestic and international brand (in sales)
of commercial warm-air hand and hair dryers. We design, manufacture and market
the World Dryer brand product lines for application in public washrooms, and
believe that the brand is uniquely positioned in its global market niche. The
core World Dryer product, the World Model A cast iron hand dryer, is distributed
in more than 80 countries worldwide.
World Dryer products have long been approved and purchased by several major
national restaurant chains and can be found in public restrooms throughout the
world. We have expanded the World Dryer brand with new models targeted for
specific market niches, including a line of hand dryers under the Electric
Aire(TM) name for the value-conscious customer. We acquired Electric Aire(TM) in
1994 and maintained the brand name for these specific market niches.
In addition, we have designed a line of World Dryer brand hand sanitation
systems to address the critical issues of food safety in the hospitality and
healthcare industries. The automatic hand Washstation is a multi-functional unit
that dispenses soap, water and warm air or paper. The washstation features
monitoring and warning functions to provide monitorable compliance with state
and federal health codes for kitchen employee hand sanitation. At least one
major quick service restaurant chain has recommended the Washstation to its
operators as one solution for its hand sanitation practices. We have also
developed and marketed a line of No-Touch(TM) dryers, soap dispensers and
automatic faucets under the World Dryer brand name, for the foodservice
industry. In 1998, to expand our product offerings for the public sanitation and
restroom market, we began marketing World Dryer baby changing stations under the
name DryBaby(TM).
During fiscal 1997 our World Dryer facility, located in Berkeley, Illinois
applied for and received ISO 9002 certification. As with the ISO certification
for the Taylor facility, we think that the ISO designation is not only a
demonstration of World Dryer's manufacturing and product quality, but also a
competitive advantage.
In our marketing efforts for World Dryer products, we emphasize key
sanitation issues, environmental benefits, such as waste paper reduction, and
lower end user cost. We believe that these marketing efforts have been a major
factor in the continued success of the World Dryer global brand.
ORGANIZATIONAL AND FINANCIAL HISTORY
Specialty was incorporated under the laws of the state of Delaware in 1984.
We acquired each of its currently active operations (other than the Beverage-Air
and Gamko operations) in January 1985 from Beatrice Companies, Inc. We completed
an initial public offering in 1987 and were acquired by SPE Acquisition, Inc.
("SPE") in a management-leveraged buy-out in 1988. Specialty was reorganized
pursuant to a Chapter 11 plan of reorganization, in which SPE was merged into
it, on March 31, 1992. On December 1, 1993, our Common Stock began trading on
the Nasdaq National Market. On December 29, 1998, our Common Stock became listed
on the New York Stock Exchange.
Specialty acquired Beverage-Air from Gerlach Industries, Inc. in November
1986. In August 1997, the Company acquired Gamko Holding, B.V. based in The
Netherlands. On January 31, 1998, pursuant to a Plan of Internal Restructuring,
approved by the Company's stockholders at the Annual Meeting of Stockholders
held on April 30, 1997, the Company organized Specialty Mfg., a wholly owned
subsidiary of the Company. As part of the formation of Specialty Mfg., the
Company contributed substantially all of its operating assets, other than its
intellectual property, stock in its other subsidiaries and certain other rights,
to Specialty Mfg., which assumed substantially all of the Company's liabilities.
In 1998, the Company organized Specialty Equipment International ("SEI"), a
wholly owned subsidiary of Specialty Equipment Companies, Inc. and Gamko became
a wholly owned subsidiary of SEI.
On December 1, 1998, the Company entered into a credit agreement with
several banks and Bank of America, Illinois, as agent for the banks (as amended
and restated, the "BA Bank Facility"). The BA Bank Facility provides a 5-year,
$200 million unsecured revolving credit facility. The proceeds from the BA Bank
Facility were used to call and refinance the remaining $118 million of
Specialty's 11-3/8% Senior Subordinated Notes due 2003 which were outstanding on
December 1, 1998 and to fund other long-term debt.
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COMMERCIAL FOODSERVICE INDUSTRY OVERVIEW
We generally treat the commercial foodservice equipment industry as being
divided into four customer categories: full service restaurants, quick service
restaurants, retail outlets, such as supermarkets and convenience stores, and
public and private institutions (schools, hospitals, hotels, corrections
facilities and other governmental facilities). The Company primarily serves
customers in the quick service restaurant and retail outlet categories.
The foodservice market, and particularly the quick service restaurant and
retail outlet categories, has grown at a fairly stable rate since 1992. This
growth has come in response to both population growth and other demographic
changes, principally the emergence of families with multiple wage earners,
causing greater demand for convenience in food and beverage preparation and
consumption. In response to these population and demographic changes, quick
service restaurant chains have accelerated their domestic and international unit
expansion. These changes have also intensified competition in these categories.
Simultaneously with the growth of the quick service restaurants, the major soft
drink beverage companies have accelerated domestic and international placement
of their products. The net result, according to published industry sources, is
that domestic sales of foodservice equipment increased 5.1% to $6.86 billion in
1998 and are projected to grow by an additional 3.1% in 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Growth in the foodservice equipment market results primarily from new store
openings, replacement of equipment, store unit remodeling upgrade programs and
purchases of equipment to support new food and beverage menu items. We think
that the domestic growth in new stores for many of these chains has slowed, but
that the previously opened stores have entered remodeling and equipment
replacement phases. We also believe that the competition resulting from slower
growth in the domestic foodservice industry has caused quick service restaurant
chains to make more frequent menu and format modifications, increasing their
demand for more flexible equipment. In addition, we have also seen an increased
demand for labor saving and energy efficient equipment, and this is a trend that
we believe will continue. At the same time, convenience stores and supermarkets
have increased their sales of prepared and fast foods, and this increase has
resulted in an increased demand for the types of products offered by us.
Similarly, the expansion of quick service restaurants into non-traditional
sites, such as retail stores, recreational facilities, supermarkets and
airports, presents us with an opportunity.
Although the domestic market is growing at a steady rate, we think that the
international market may present even greater opportunities. Throughout the
world, the concentration of quick service restaurants is substantially lower
than in the United States. The more limited penetration of quick service
restaurants outside the United States provides domestic quick service restaurant
chains with opportunities for international expansion. Several leading domestic
chains have embarked upon significant international expansion to attempt to take
advantage of this opportunity. Internationally, the unit growth of the four
largest quick service restaurant chains was 14% in 1997. We believe we are well
positioned to take advantage of this international growth because of our service
and sales organization as well as our historical relationships with some of the
key industry players. For example, the Company's largest customer, McDonald's,
accounts for more than 50% of all international sales realized by the four
largest U.S. restaurant chains. In fiscal 1999, approximately 28.5% of the
Company's sales were of products intended for use outside the United States
compared with 32.1% in fiscal 1998. Despite the opportunities, the international
markets present significant competitive risks, particularly the high cost of
maintaining service capabilities which in the United States has been important
in establishing and maintaining the Company's market position.
BUSINESS STRATEGY
The principal goal of our business strategy is to maintain and improve our
position as a leader in the foodservice equipment industry. The key elements of
this strategy include the following:
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Focusing on Major National Chains and Beverage Companies
The major global quick service restaurant chains, beverage companies,
convenience store chains and specialty chains lead the foodservice industry.
These companies maintain their leadership by focusing on menu innovation,
productivity, facilitating product availability to the consumer, sanitation,
energy efficiency and environmental issues. To serve these customers, we design
specialized foodservice equipment to meet the specific performance requirements
and appearance characteristics of the chains and beverage companies. Our focus
is to be able to respond quickly and effectively to changes in the competitive
environment that our customers face. To meet this goal, we dedicate
manufacturing capacity to the delivery of new or modified equipment to support
customer's changing marketing programs, and operate manufacturing facilities
designed for flexible assembly procedures and short production runs.
On the product development side, Specialty has an active product
development program with an emphasis on engineered products to meet special
applications. We organize product design and sales teams to work closely with
the national chains in developing applications to meet their specific
requirements. Our goal is to understand our customer's specific needs, and then
to design new or modified products that address those specific needs. Because we
can identify and address customer needs effectively, in many cases, our products
are among only two or three products that satisfy the equipment specifications
of major national chains for a particular item.
In 1998 we continued to take steps to maintain and expand our ability to
meet our customers' needs. Notably, we opened the Specialty Equipment Business
Development Center. The center provides a resource for research and development
departments for each of our global brands in our efforts to provide new products
and product variations for our customers. We think that this center will provide
us with growth opportunities by providing a dedicated facility for the
exploration of new product technologies. We also attempt to use our
relationships with our key customers to anticipate and predict their changing
needs, and to help expand their own markets and sales. On this front, we conduct
internal research and development to design equipment to advance the state of
the art in the foodservice market. Many of our newer products have been a result
of these efforts. For example, we developed Razzle(R) equipment as part of our
Taylor line of products. Razzle is an extension of our soft serve freezers that
is designed to enhance the frozen dessert menus of a variety of quick service
restaurants and specialty and convenience stores. For our Beverage-Air brand, we
worked with our bottler customers to develop point of purchase displays, such as
The Breeze(TM) and Contour Cooler(TM). We sell these products to soft drink
bottlers to market their products in retail checkout areas and other special
points of distribution. The Bloomfield line was expanded to include EBC(TM),
which we market to quick service restaurant chains. EBC provides consistent
quality brewing results with less operator attention. World Dryer's hand
sanitation station meets regulatory requirements for proper hand washing.
The Company's research and development results from a combination of
company and customer sponsored research activities. Total research and
development expenditures were $4.8 million, $6.9 million and $7.3 million, for
fiscal years 1997, 1998 and 1999.
Capitalizing on the Opportunities Presented by the Significant
International Expansion of the Major Quick Service Restaurant Chains and
Beverage Companies
We think that the international expansion of the major national quick
service restaurant chains and beverage companies, including our two largest
customers, is resulting in significant growth in the foodservice and beverage
equipment industries. We also think that this expansion of the major chains and
beverage companies internationally is presenting an opportunity for growth for
Specialty as well. To capitalize upon this opportunity, we have, among other
things, increased our international distribution and service support networks
and in 1997 acquired Gamko, our first manufacturing facility outside of North
America. In addition during 1997, we established an international advisory
board, composed of some of our key domestic and international officers, to chart
the future direction for our international marketing plan. We have also
continued to evaluate additional acquisitions in international markets of
companies that we think will have synergies with our existing business.
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Leveraging its Long-Term Relationships With Existing Major Customers
Specialty's strategy reflects its historic relationships with the major
national quick service restaurant chains as a result of the high penetration
rate of Taylor soft serve ice cream freezers throughout that market. We believe
that these relationships have developed in large part because of our extensive
distribution and service network and our customized manufacturing capabilities,
initially implemented for the Taylor global brand. Because of these abilities,
we can produce equipment to meet the high quality and volume needs of each of
our customers. In addition, Specialty intends to use the strength of the
Beverage-Air brand to expand Gamko's merchandiser equipment line. Based upon
these relationships, we have been able to employ an integrated marketing
approach, which has expanded the customer base for each of our global brands.
For example, Bloomfield coffee makers, Beverage-Air refrigeration equipment,
Wells warmers and World Dryer hand dryers are now approved for use in
McDonald's, Burger King, Wendy's and Hardee's, and other restaurants.
Developing New Products and Line Extensions by Extending Engineering Expertise
to Standardized Foodservice Equipment
Another element of our strategy is to adapt certain product features
developed for our larger customers to enhance our overall product line. We
believe that a large portion of the equipment and related products used in the
foodservice industry is standardized and consequently subject to price
competition, including import competition and purchasing considerations based on
volume and freight costs. We can gain a competitive advantage in the production
of standardized equipment, by modifying standardized equipment with
modifications we develop in meeting our larger customers' specialized needs. In
this way, we can "move" the standard market to a modified product, with
additional features, and compete on bases other than merely price. In some
cases, innovations developed by the Company for national chains have created new
products for its general product lines and have enabled the Company to achieve
manufacturing cost efficiencies by facilitating longer production runs.
Growth by Acquisition
Management believes that the foodservice equipment market is largely
fragmented, with many small manufacturers and only a few larger entities. Our
objective is to use our cash flow to grow our business by acquiring smaller
companies that fit well and provide synergies with our existing group of product
brands and customers. For example, our recent acquisition of Gamko provides us
with a number of synergies. The Gamko brand will benefit from the market
penetration achieved by our Beverage-Air brand, and Beverage-Air, as well as
possibly other brands, will benefit from increased access to, and presence in,
international markets.
OPERATIONS OUTSIDE THE UNITED STATES
Specialty's Gamko subsidiary manufactures refrigeration equipment in The
Netherlands and has sales offices in the United Kingdom, France, The Netherlands
and Germany. Our Canadian subsidiary, Bloomfield Industries Canada Limited,
manufactures a portion of the Bloomfield line at its Mississauga, Ontario plant
and markets the entire Bloomfield product line and selected Wells products
throughout Canada. Taylor has a foreign sales subsidiary in Rome, Italy, Taylor
Freezer International, S.r.l., which administers certain of Taylor's export
sales. We also have a number of other international sales offices. Specialty
also has relationships with independent dealers and distributors in more than
120 countries worldwide. Each of these dealers and distributors provides service
for one (or more) of our global brands.
WORLDWIDE MARKETING AND DISTRIBUTION
Management believes that a key to Specialty's long-term relationships with
its principal customers is its worldwide marketing, distribution and service
network. These customers require a high degree of responsiveness in product
development, production, delivery and service on a worldwide basis. Management
believes that our extensive distribution and service network, particularly for
the Taylor brand, gives us a competitive advantage in the markets in which we
compete. Also, we think that we enjoy a favorable strategic position because of
the close, long-standing relationships we have developed with our customers.
Without these strong relationships, our "cross-marketing" efforts would be far
more difficult.
9
<PAGE> 10
Specialty's global brands are marketed through a combination of field sales
personnel, consisting of direct salespeople, commissioned agents and distributor
salespeople. Each global brand has its own marketing, sales and service
programs. The following table summarizes the primary distribution mechanisms
employed by Specialty for each of its global brands:
<TABLE>
<CAPTION>
GLOBAL BRANDS PRINCIPAL DISTRIBUTION METHODS
<S> <C>
Taylor o Independent distributor network consisting of 47 North American and
119 international distributors
o Direct sales support to national chains
Beverage-Air o Network of 38 independent representative firms and more than 1,500
foodservice equipment dealers and bottlers
o Direct sales to soft drink bottlers
Wells and Bloomfield o Network of 144 representative firms, more than 1,500 foodservice
equipment dealers and suppliers and 250 authorized service centers
o Direct sales to office coffee services
World Dryer o Electrical, plumbing and janitorial supply distributors
o Building contractors
o Foodservice equipment dealers
o Catalog supply houses
Gamko o Direct sales offices in France, The Netherlands, Germany and the United Kingdom
o Direct sales to major breweries
o Foodservice equipment dealers and suppliers
</TABLE>
Typically, we design and produce equipment that satisfies the
specifications of major national chains, bottlers and brewers. We market our
equipment through extensive networks of independent dealers, distributors and
sales representatives directly to the chains, bottlers and brewers and
restaurant operators. We believe that we enjoy a competitive advantage because
our marking and distribution networks provide our customers with constant,
high-quality service. Many dealers and distributors in this network have had
relationships with Specialty or its brands for more than 20 years. We believe
that these long standing relationships make it more likely that the distributors
and dealers will have, and maintain, a strong commitment to Specialty and its
brands. We also sell certain products directly to the chains.
COMPETITION
In general, the foodservice industry is highly competitive with competition
primarily based on price, product features, quality, reliability,
serviceability, field service and name recognition with no one method of
competition being generally more important than any of the others. Management
believes that Specialty is competitive on these bases.
Our competitors include companies that manufacture a variety of foodservice
equipment products and those that specialize in a particular product. The
industry is generally fragmented and consists of companies that are smaller than
Specialty. However, Specialty does have some competitors that are units of
larger companies that have greater financial and personnel resources than
Specialty. Also, during periods of poor economic conditions, Specialty may face
competition from used equipment, particularly equipment originally manufactured
by Specialty. Used equipment often presents a lower cost, acceptable quality
alternative to newly manufactured equipment. Management believes that price will
continue to be a major competitive factor. Outside the United States, we face
many local competitors throughout our product lines.
10
<PAGE> 11
COMPONENTS AND SUPPLIES
Most of Specialty's component purchases are for standard commodity-type
materials such as stainless steel, coatings and electrical components.
Generally, we buy these components from a number of suppliers, and have not
experienced any significant shortages. We also purchase custom components
produced to our specifications. Management believes that we enjoy good
relationships with our suppliers. No long-term supply contracts are used,
although occasionally we purchase some materials in advance as a hedge against
price increases.
BACKLOG
Specialty's backlog of unshipped orders was approximately $66.4 million at
February 28, 1999, compared with $62.0 million at February 28, 1998. Management
expects that Specialty will deliver its existing backlog during the current
fiscal year.
EMPLOYEES
As of February 28, 1999, Specialty employed 2,916 persons, of whom 23 at
Bloomfield's manufacturing facility in Forestview, Illinois were covered by
collective bargaining agreements. Management generally considers its
relationships with employees to be satisfactory. Specialty has not experienced a
work stoppage due to a labor dispute in more than 10 years.
PATENTS AND TRADEMARKS
Specialty holds numerous patents and trademarks registered in the United
States and foreign countries for various products. Management believes that an
integral part of Specialty's strength is its ability to capitalize on its
tradenames, several of which are widely recognized, and it takes such actions as
it determines necessary to protect these names. Our rights in our trademarks
will continue for so long as we uses the marks and takes the necessary actions
to protect our rights. Our trademark registrations in the United States and most
foreign countries must be renewed periodically, and we intend to do so based
upon our continued use of such marks. Frequently, our products, and certain of
their features, are patented, but management believes that no individual patent
is material to the business as a whole.
DEPENDENCE ON MAJOR CUSTOMERS
During fiscal 1997, 1998 and 1999, sales to McDonald's restaurants (both
McDonald's owned and independently franchised) accounted for approximately 20%,
15% and 14%, respectively, of Specialty's revenue. Sales to McDonald's increased
4.8% in fiscal 1999, as a result of sales of equipment for a new frozen dessert
program, offset by lower sales of cooking grills. The decline in the sales
percentage for fiscal 1998 was a result of the increased overall revenue of
Specialty combined with a decrease in sales to McDonald's. The decrease in sales
is primarily attributable to a non-recurring McDonald's freezer trade-in program
in fiscal 1997 and a reduction in the purchase of two-sided cooking grills by
McDonald's in the current fiscal year. Because of the importance of McDonald's
as a customer, if sales to McDonald's were to substantially decrease without a
corresponding increase to other customers, such decrease would have a material
adverse effect on Specialty's financial position. While management believes its
relationship with McDonald's is favorable, the Company has no contracts with
McDonald's assuring it of any sales beyond those reflected in its backlog.
During fiscal 1999, sales to Coca-Cola Enterprises ("CCE") accounted for
approximately 11% of Specialty's revenue. Prior to fiscal 1999, sales to CCE did
not exceed 10% of Specialty's revenue. The increase in sales was the result of
the expansion of CCE's marketing and placement of its beverage products both
domestically and internationally.
Specialty's financial performance is tied closely to its major customers'
demand for large quantities of mass produced customized products, or rollouts.
For example, in fiscal 1994 through the first six months of fiscal 1996,
Specialty's improved performance can be partially attributed to a significant
rise in the number of orders for refrigerated point-of-purchase displays by soft
drink bottlers. In the past, large rollouts of products, such as the Taylor
two-sided grill, have been similarly significant to our performance. However,
the ability to predict which customers and which products will experience
roll-outs is limited, and there can be no assurances that in any year we will
receive orders for any such roll-outs.
11
<PAGE> 12
REGULATION AND ENVIRONMENTAL COMPLIANCE
Specialty is subject to the Federal Occupational Safety and Health Act and
other laws regulating safety and noise exposure levels in the production areas
of its facilities. Specialty's facilities are subject to numerous federal, state
and local laws and regulations designed to protect the environment.
Environmental laws and regulations that are material to Specialty's operations
include the Clean Air Act, which regulates air emissions and the phase-out of
chlorofluorocarbons ("CFCs"), the Clean Water Act, which regulates discharges to
waters of the United States, the Resource Conservation and Recovery Act, which
regulates the handling and disposal of hazardous substances, the Comprehensive
Environmental Response Compensation and Liability Act, which applies to cleanup
of hazardous waste and the Emergency Planning and Community Right to Know Act,
which applies to disclosure of information on the use of hazardous substances.
Environmental laws and regulations that are material to Specialty's operations
also include state counterparts to these federal laws. In addition, our European
subsidiary, Gamko Holding B.V., is subject to the laws and regulations with
regard to safety and the environment in The Netherlands. Management believes
that Specialty is in compliance with all applicable laws and regulations and
believes that continued compliance with these laws and regulations will not
require significant capital expenditures or affect the Company's future
operations. See "--Legal Proceedings."
Specialty has made substantial investments in investigating and testing
potential refrigerants. We have upgraded our entire domestic product line to use
component parts that comply with the 1990 Amendments to the Clean Air Act, which
institute a phase-out of the production and consumption of certain CFCs. In our
Beverage-Air medium temperature application products, we have eliminated
components using CFCs, and we have converted our Taylor low temperature
compressor equipment away from components using CFCs. In both cases, we have
replaced the CFC based components with components using hydrofluorocarbons,
which are believed to be environmentally safer. In fiscal 1996, the EPA award us
their "Stratospheric Protection Award" for our efforts with the Beverage Air
brand equipment in meeting required conversion of refrigerants and eliminating
CFC based components. We continue to work to reduce the number of our products
using CFC based components.
New legislation and regulations, as well as revisions to existing laws and
regulations at the local, state and federal levels, may be proposed in the
future concerning environmental matters and the foodservice equipment industry.
Such proposals could affect Specialty's operations by:
o requiring us to make material capital expenditures to design new
products or product modifications;
o affecting the desirability of our existing products, as compared
to other products;
o limiting or creating opportunities for us with respect to
modification to existing products, and with respect to new
products.
Although we are not aware of any proposed local, state or federal environmental
statutes or regulations which will materially affect our operations or the
market for our products or result in material capital expenditures, we cannot
predict the effect from any possible future legislation or regulations. During
fiscal 1999, other than normal equipment considerations, there were no material
capital expenditures for environmental control facilities and no future material
expenditures are anticipated.
SEASONALITY
Specialty experiences seasonal fluctuations in working capital requirements
of approximately $10 million to $15 million. Specialty's working capital
requirements generally peak in February and March because it offers distributors
extended payment terms winter shipments of soft serve ice cream, frozen drink
and yogurt machines.
ITEM 2. PROPERTIES
FACILITIES AND MANUFACTURING
Our manufacturing facilities are generally equipped to process products
from raw materials to finished products. Management believes that our equipment
and facilities are well maintained and generally are, and will continue to be,
adequate for our present and immediate future needs.
12
<PAGE> 13
Since 1992, we have developed a Total Quality Management program at each of
our principal manufacturing facilities. As part of this program, during fiscal
1997, the Taylor facility in Rockton, Illinois and the World Dryer facility in
Berkeley, Illinois were certified under the International Standards Organization
as ISO 9000 companies.
We conduct metal fabrication, finishing, sub-assembly and assembly
operations at each of our facilities. Among major categories of equipment that
we have installed at individual locations are:
o numerically controlled turret presses;
o robotic and conventional welding equipment;
o electrostatic powder coating facilities;
o polishing equipment;
o numerically controlled machining centers;
o computer assisted design systems; and
o product testing and quality assurance measurement devices.
The following table sets forth certain information relating to the
Company's principal facilities, organized by the global brand that is
manufactured or stored at those facilities:
<TABLE>
<CAPTION>
Approx. Square Owned/Date of
Global Brand Locations Use Footage Lease Expiration
------------ --------- --- -------------- -----------------
<S> <C>
Taylor Rockton, IL Manufacturing and office 336,000 Owned
facilities 25,000 Owned
Technical development center 7,600 Month-to-Month
Warehouse facility 28,800 December 2001
Warehouse facility 5,600 Month-to-Month
Rosemont, IL Warehouse facility 10,500 April 2001
Warehouse and office facility
Beverage-Air Spartanburg, SC Manufacturing, office and 323,000 Owned
warehouse facilities
Warehouse facility 144,500 October 2000
Honea Path, SC Manufacturing facility 60,000 Owned
Brookville, PA Manufacturing facility 145,000 December 2000
Wells/Bloomfield Verdi, NV Manufacturing and office 90,000 June 2002
facilities 18,000 Owned
Manufacturing and office 24,300 Owned
Sparks, NV facilities 28,000 March 2000
Mississauga, Manufacturing facility
Ontario, Canada Warehouse facility 37,200 October 2000
Forestview, IL Manufacturing and 43,000 July 1999
office facilities
Decanter manufacturing facility
World Dryer Berkeley, IL Manufacturing and office 50,000 February 2003
facilities
Gamko Etten-Leur, The Manufacturing and office 111,000 Owned
Netherlands facilities 17,000 Owned
Service and sales facility
Executive Office Aurora, IL Office facility 5,100 November 2000
</TABLE>
13
<PAGE> 14
ITEM 3. LEGAL PROCEEDINGS
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 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. 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
14
<PAGE> 15
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
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 January 31, 1999, Specialty had letters of credit outstanding
totaling $7.6 million, which guarantee various business activities, including
$4.4 million of letters of credit which guarantee the Industrial Project Revenue
Bonds.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth quarter of
the year ended January 31, 1999.
EXECUTIVE OFFICERS OF SPECIALTY EQUIPMENT COMPANIES, INC.
<TABLE>
<CAPTION>
Year First Joined
Specialty or a
Predecessor
Business
Name Age Position and Offices Held
---- --- -------- -------------------------
<S> <C> <C> <C>
Daniel B. Greenwood 79 1955 Director and Chairman of the Board
Jeffrey P. Rhodenbaugh 44 1986 Chief Executive Officer, President, Chief
Operating Officer, Chief Executive Officer of
Taylor and Director
Donald K. McKay 67 1977 Executive Vice President, Chief Financial
Officer, Treasurer and Secretary
William W. Robertson 68 1970 Chairman, Chief Executive Officer and President
of Beverage-Air
</TABLE>
Mr. Greenwood has served as Chairman of the Board since January 1985. He
also served as Chief Executive Officer from that date until September 1988 and
from November 18, 1993 to January 31, 1995. Mr. Greenwood has served as a
director since January 1985. Prior to January 1985, he was employed by Taylor
for 30 years, most recently as President.
15
<PAGE> 16
Mr. Rhodenbaugh has been President and Chief Operating Officer of the
Company and Chief Executive Officer of Taylor since September 1996. He became
Chief Executive Officer of the Company on May 1, 1997. He was elected to the
Board of Directors on April 30, 1997. He was President of Beverage-Air from
March 1996 to September 1996. From April 1993 to March 1996, he served as
Executive Vice President of Beverage-Air. He also served as Vice President of
Marketing from January 1991 to September 1996. He served as President of Wells
from January 1990 to January 1991, and as Wells' Vice President of Sales and
Marketing from 1986 to January 1990. Mr. Rhodenbaugh serves on the board of
directors and executive committee and, in 1997, he served as president of the
North American Association of Food Equipment Manufacturers (NAFEM).
Mr. McKay has served as Executive Vice-President, Chief Financial Officer,
Treasurer and Secretary since April 1989. From January 1985 until April 1989,
Mr. McKay served as Vice President of Finance, Treasurer and Secretary. From
September 1988 to March 1992, Mr. McKay served as a director of the Company.
From 1977 to January 1985, Mr. McKay was employed by Beatrice, most recently as
Vice-President of its Commercial Equipment Division.
Mr. Robertson has been employed by Beverage-Air since 1970 and has been
Chief Executive Officer of Beverage-Air since 1974. Since May 1998, Mr.
Roberstson has also served as Chairman of the Board of Beverage-Air (a position
he previously held from March 1996 to September 1996). From 1974 until March 1,
1996, and from September 1996, to May 1998, Mr. Robertson has served as
President of Beverage-Air. From April 1987 to March 1992, Mr. Robertson served
as one of Specialty's directors.
PART II
ITEM 5. MARKETS FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Specialty's Common Stock is listed on the New York Stock Exchange. The
Common Stock began trading on the New York Stock Exchange on December 29, 1998.
From December 1, 1993 until that time, the Common Stock traded on the Nasdaq
Stock Market. As of the close of business on March 18, 1999, there were
approximately 60 holders of record of the shares of the Common Stock. We
estimate that there are approximately 1,300 beneficial holders of the Common
Stock as of the close of business on March 18, 1999. The closing price of the
Common Stock on March 18, 1999 as reported by the New York Stock Exchange was
$26.75. The following table sets forth the market price per share for the Common
Stock.
<TABLE>
<CAPTION>
Market Price
High Low
---- ---
<S> <C> <C>
Period from February 1, 1997 to April 30, 1997 14-1/8 12-1/8
Period from May 1, 1997 to July 31, 1997 16-1/4 12-1/4
Period from August 1, 1997 to October 31, 1997 17-1/2 14-3/4
Period from November 1, 1997 to January 31, 1998 17-3/8 15-1/2
Period from February 1, 1998 to April 30, 1998 23-3/4 16-5/8
Period from May 1, 1998 to July 31, 1998 24-3/8 20
Period from August 1, 1998 to October 31, 1998 23 18
Period from November 1, 1998 to January 31, 1999 28-15/16 21-7/8
</TABLE>
Since 1992, Specialty has not paid any dividends on its Common Stock.
Specialty does not have any present intention to pay dividends in the
foreseeable future. Specialty's ability to pay dividends is restricted by
covenants contained in the BA Bank Facility.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth selected consolidated financial and
operating data for Specialty for the periods and at the dates indicated. The
selected consolidated operating and financial data, at or for each of the full
fiscal years, presented below was derived from the Consolidated Financial
Statements of Specialty, which were audited by KPMG LLP, independent auditors.
The table should be read in conjunction with the Consolidated Financial
Statements, related notes, and other financial information.
16
<PAGE> 17
Selected Financial Data
(in thousands, except ratio and per share data)
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net revenue $ 371,730 $ 392,512 $401,230 $ 433,121 $ 495,647
Gross margin 119,273 123,747 122,110 133,899 156,758
Earnings (loss) from operations before
interest expense and income taxes (18,311) 39,379 60,723 63,043 74,124
Earnings (loss) before extraordinary item (53,996) 8,911 34,122 37,542 44,025
Net earnings (loss) (53,996) 8,693 32,338 37,542 37,601
Net earnings (loss) per diluted common share (3.29) 0.44 1.61 1.86 1.86
Interest expense 22,997 21,010 18,714 15,944 14,068
Ratio of earnings to fixed charges (1) - 1.81x 3.07x 3.85x 5.10x
FINANCIAL RATIOS AND OTHER DATA:
EBITDA (2) $ 60,629 $ 65,973 $ 66,992 $ 68,882 $ 80,625
Depreciation 3,954 4,309 4,616 4,871 5,352
Amortization (3) 74,986 22,285 1,653 968 1,149
Capital expenditures 6,693 5,666 9,185 4,715 7,527
Ratio of EBITDA to interest expense 2.64x 3.14x 3.58x 4.32x 5.73x
Ratio of EBITDA less capital expenditures to
interest expense 2.35x 2.87x 3.09x 4.02x 5.20x
JANUARY 31,
BALANCE SHEET DATA (at period end): 1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Total assets $ 168,576 $ 180,235 $176,916 $ 241,450 $ 236,745
Cash and cash equivalents, including
restricted cash equivalents 6,907 34,320 10,846 42,609 6,814
Long-term debt, including current installments 199,179 193,215 155,581 177,986 128,515
Total other liabilities 90,192 94,641 92,566 102,275 108,154
Total stockholders' equity (deficit) (120,795) (107,621) (71,231) (38,811) 76
</TABLE>
1. For purposes of determining this ratio, earnings consist of earnings
(loss) from operations before income tax expense (benefit) plus
interest expense and amortization of deferred financing costs. Fixed
charges consist of interest expense, plus amortization of deferred
financing costs. Earnings were insufficient to cover fixed charges by
$41.3 million for fiscal 1995.
2. EBITDA is defined as earnings from operations before interest expense,
income tax expense (benefit), depreciation and amortization. EBITDA
does not represent earnings from operating activities as defined by
generally accepted accounting principles and should not be considered
as an alternative to net income as an indicator of the Company's
operating performance or to cash flows as a measure of liquidity, but
rather provides additional information related to debt service
capability.
3. Amortization expense includes the amortization of deferred financing
costs, reorganization value in excess of amounts allocable to
identifiable assets, goodwill, other intangible assets and unearned
compensation.
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We derive a substantial portion of our revenue from the sale of new
foodservice equipment. Sales are generally to national quick service restaurant
chains, beverage companies, convenience store chains and specialty chains.
Typically sales result from new store openings, store modifications or
replacement of existing equipment. Since 1991, the foodservice equipment market
has grown, primarily as a result of the domestic and international growth of the
major U.S. restaurant chains. In 1997 (the most recent available data), the
domestic operating unit growth rate of U. S. major restaurant chains was 2.8%.
In addition, the major quick service restaurant chains have commenced
significant international expansion. In 1997, the operating unit growth rate of
the four largest U.S. restaurant chains in international markets was nearly 14%.
Our largest customer, McDonald's, increased its international units by more than
20% in 1997. McDonald's alone accounts for more than 50% of all international
sales realized by the four largest U.S. restaurant chains. Also, our quick
service restaurant industry customers have increased their demand for newer
equipment, due in part to international expansion, menu expansion efforts,
remodeling of existing stores and an increased emphasis on improved sanitation
and labor and energy efficiency. In a similar manner, the soft drink beverage
companies have embarked on domestic and international expansion with regard to
the marketing and placement of their products. From 1992 to 1996, (the most
recent data available) soft drink consumption in North America grew by an
average rate of just 2.5%. Internationally soft drink consumption grew at an
average rate of 8.5%. During fiscal 1999, sales to CCE, our second largest
customer, grew to 11% of our total sales. Management believes that, given our
historic relationships with the major quick service restaurant chains, bottlers
and brewers, we are well positioned to capitalize upon these growth
opportunities.
Our financial performance is tied closely to our major customers' demands
for large quantities of mass produced customized products, or roll-outs. For
example, from fiscal 1994 through the first six months of fiscal 1996, our
improved performance can be partially attributed to a continuing significant
rise in the number of orders for refrigerated point-of-purchase displays by soft
drink bottlers, primarily those associated with Coca-Cola and PepsiCo products.
During the last six months of fiscal 1996, the sales order backlog and demand
for refrigerators from the soft drink bottlers returned to its historic pattern
of being lower in the months of August through January as a result of lower
demand from the bottler industry for point-of-purchase units. However, from
fiscal 1997 through 1999, sales of refrigeration equipment to the soft drink
bottler industry increased, particularly internationally. In the past, large
roll-outs of products such as Taylor's "two-sided" grill have been similarly
significant to our performance. However, the ability to predict which customers
and which products will experience roll-outs is limited, and there can be no
assurances that in any year we will receive orders for any roll-outs.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JANUARY 31, 1999 COMPARED TO FISCAL YEAR ENDED JANUARY 31,
1998.
Revenue. Revenue for fiscal 1999 increased 14.4% to $495.6 million compared
with $433.1 million for the prior fiscal year. The revenue increase was
primarily attributable to increased sales of refrigeration equipment to the soft
drink beverage companies and the inclusion of a full year of sales by Gamko; the
prior year's financial results included Gamko only from August 1997, which is
when we acquired Gamko. Revenue attributable to sales of products for use
outside the United States increased by 1.5% in fiscal 1999, as compared with
fiscal 1998. Fiscal 1999 revenue from sales of products for use outside the
United Sates constituted 28.5% of revenue compared with 32.1% in fiscal 1998.
Gross Margin. Gross margin for fiscal 1999 increased 17.1% to $156.8
million, compared with $133.9 million in fiscal 1998. As a percent of revenue,
gross margin increased from 30.9% in fiscal 1998 to 31.6% in fiscal 1999. The
increase in gross margin percentage was largely a result of a favorable sales
mix, attributable in part to the integration of Gamko.
Selling, General and Administrative Expenses (SG&A). SG&A expenses for
fiscal 1999 increased 16.6% to $82.6 million compared with $70.9 million in
fiscal 1998. As a percent of revenue, SG&A increased from 16.4% to 16.7% of
revenue, respectively, in fiscal 1999 as compared to fiscal 1998. The increase
in fiscal 1999 SG&A expenses was primarily due to higher sales during fiscal
1999. Contributing factors to the increased expenses, were product development
and including Gamko for a full year in fiscal 1999 versus six months in fiscal
1998.
18
<PAGE> 19
Interest Expense. Interest expense for fiscal 1999 decreased 11.9% to $14.1
million from $15.9 million in fiscal 1998. The decrease is principally due to a
decrease in total borrowings, and a decrease in our cost of funds resulting from
our early retirement of the Notes.
Income Taxes. Income tax expense for fiscal 1999 increased 67.5% to $16.0
million from $9.6 million in fiscal 1998. The increase in tax expense is largely
attributable to increased earnings before taxes of approximately $12.9 million,
which increased income tax expense by approximately $4.9 million. Tax expense
for fiscal 1999 included recognition of tax benefits primarily related to the
$6.5 million reduction in the valuation allowance. The remaining valuation
allowance of $8.6 million at January 31, 1999 is expected to be eliminated in
fiscal 2000 with $4.5 million to be recorded as a deferred tax benefit and the
balance to be credited to equity. Tax expense for fiscal 1998 included
recognition of tax benefits primarily related to the $7.0 million reduction in
the valuation allowance.
FISCAL YEAR ENDED JANUARY 31, 1998 COMPARED TO FISCAL YEAR ENDED JANUARY 31,
1997.
Revenue. Revenue for fiscal 1998 increased 7.9% to $433.1 million compared
with $401.2 million for the prior fiscal year. The revenue increase was
primarily attributable to increased sales of refrigeration equipment to the soft
drink bottlers and $12.8 million of sales by Gamko, which was acquired in August
1997. Sales were offset, in part, by a decline in domestic sales of equipment to
the Company's largest customer. The decline in the sales to this customer is
primarily attributable to a successful freezer trade-in program in fiscal 1997
and a reduction in the purchase of two-sided cooking grills by this customer.
Although the Company is no longer the sole supplier of two-sided cooking grills
to this customer, it has continued to receive a dominant share of that business.
There is no assurance that the Company will maintain such dominant share. See
"Item 1 - Dependence on Major Customer." Revenue attributable to sales of
products for use outside the United States increased by 11.0% in fiscal 1998, as
compared with fiscal 1997. The increase is attributable to sales of
refrigeration equipment by Gamko. Fiscal 1998 revenue from sales of products for
use outside the United States constituted 32.1% of revenue compared with 31.2%
in fiscal 1997.
Gross Margin. Gross margin for fiscal 1998 increased 9.7% to $133.9
million, compared with $122.1 million in fiscal 1997. As a percent of revenue,
gross margin increased from 30.4% in fiscal 1997 to 30.9% in fiscal 1998. The
increase is primarily attributable to a favorable sales mix, due in part to the
integration of Gamko.
Selling, General and Administrative Expenses (SG&A). SG&A expenses for
fiscal 1998 increased 15.5% to $70.9 million compared with $61.4 million in
fiscal 1997. As a percent of revenue, SG&A increased from 15.3% to 16.3% of
revenue, respectively, in fiscal 1998 as compared to fiscal 1997. The increase
in fiscal 1998 SG&A expenses was due to favorable casualty insurance experience
in the prior year, higher selling, sales promotion and increased research and
development expenses in fiscal 1998 and the integration of Gamko.
Interest Expense. Interest expense for fiscal 1998 decreased 14.8% to $15.9
million from $18.7 million in fiscal 1997. The decrease is principally due to
repurchasing $31.0 million of the outstanding Notes in fiscal 1997 and reducing
net outstanding debt by $9.4 million in fiscal 1998.
Income Taxes. Income tax expense for fiscal 1998 increased 21.2% to $9.6
million from $7.9 million in fiscal 1997 due to increased earnings. Tax expense
for fiscal 1998 included recognition of tax benefits related to deferred tax
assets of $7.1 million, of which $5.1 million was due to a reduction in the
valuation allowance. Tax expense for fiscal 1997 included the recognition of
$7.2 million of tax benefits related to deferred tax assets, of which $5.1
million was due to a reduction in the valuation allowance.
19
<PAGE> 20
The following table sets forth selected operating data as a percentage of net
revenue:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1997 (%) 1998 (%) 1999 (%)
-------- -------- --------
<S> <C> <C> <C>
Beverage-Air 40.2 43.4 46.3
Taylor 42.4 36.9 32.5
Specialty Equipment International (Gamko) -- 3.0 6.3
Wells/Bloomfield 14.1 13.4 11.6
World Dryer 3.3 3.3 3.3
----- ----- -----
Net revenue 100.0 100.0 100.0
Gross margin 30.4 30.9 31.6
Selling, general and administrative expenses 15.3 16.3 16.6
----- ----- -----
Earnings from operations 15.1 14.6 15.0
Interest expense, net (4.7) (3.7) (2.9)
Income taxes (1.9) (2.2) (3.2)
----- ----- -----
Earnings before extraordinary item 8.5 8.7 8.9
===== ===== =====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Total cash flows provided by operations were $24.0 million, $47.0 million
and $22.0 million in fiscal 1997, 1998 and 1999, respectively. These amounts
primarily represent net earnings plus depreciation and amortization and the
impact of cash flows from working capital requirements. The reduction in total
cash flows from operations for fiscal 1999 resulted from a decrease in cash
flows from working capital.
Net cash used in investing activities amounted to $7.7 million, $25.9
million, and $4.8 million in fiscal 1997, 1998 and 1999, respectively. Fiscal
1998 included $21.6 million used for acquisition of businesses, primarily Gamko.
Capital expenditures were $7.5 million in fiscal 1999 compared to $4.7 million
in fiscal 1998. Management expects capital spending to be approximately $10.0
million in the next fiscal year.
Net cash provided by (used in) financing activities amounted to $(34.5)
million, $13.8 million and $(50.0) million in fiscal 1997, 1998 and 1999,
respectively. During fiscal 1999, Specialty acquired $31.4 million of the Notes
on the open market and called the remaining $117.6 million of Notes on December
1, 1998 in accordance with the terms of the indenture under which we issued the
Notes. We financed the call of the Notes and replaced the $18 million bank note
for financing the Gamko acquisition with a new revolving credit facility
(discussed below). In fiscal 1998, in connection with the Gamko acquisition, we
obtained bank financing of $18.0 million. In fiscal 1997, we acquired $31.0
million of the Notes on the open market. In fiscal 1997, we recorded an
extraordinary loss of $1.8 million (net of taxes) for the premium paid on the
early extinguishment of the Notes.
Our old credit agreement expired on November 30, 1998. The first call date
on the Notes was December 1, 1998. On December 1, 1998, we entered into a $200
million, five year, unsecured revolving credit facility (the "BA Bank Facility")
to refinance the Notes and the BA Credit Agreement.
As of January 31, 1999, we had $120 million of borrowings under the BA Bank
Facility for working capital purposes and $7.6 million of letters of credit. As
of that date, we had approximately $72.4 million available for additional
borrowings under this facility. Interest rates under the BA Bank Facility equal
LIBOR, (4.875% at January 31, 1999) plus 0.875% for the revolving line of
credit.
Specialty reported working capital of $67.2 million as of January 31, 1999.
Specialty's average operating working capital (defined as average monthly gross
accounts receivable and net inventory less accounts payable) as a percentage of
sales declined from 23% during fiscal 1995 to 21% during fiscal 1999.
In September 1997, Specialty announced its intention to acquire up to $10
million of its common stock in open market and private transactions. In August
1998, the Company had completed the buyback, acquiring a total of 567,364 shares
at a total cost of $10 million.
20
<PAGE> 21
Specialty's earnings from operations were sufficient to cover fixed charges
by $42.0 million, $47.1 million and $60.0 for fiscal 1997, fiscal 1998 and
fiscal 1999, respectively. Specialty's earnings before interest, taxes,
depreciation and amortization (EBITDA) exceeded its fixed charges by $48.3
million, $52.4 million and $66.0 million for fiscal 1997, 1998 and 1999,
respectively.
The BA Bank Facility includes two financial covenants which Specialty was
required to meet on January 31, 1999. The first financial covenant is a total
funded debt to cash flow ratio for the twelve months ended January 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 January 31, 1999 of 1.57:1.00; and an interest coverage ratio for the
twelve months ended January 31, 1999 of 5.33:1.00.
Management believes that the sources of capital described above, together
with internally generated funds, will be adequate to meet our anticipated
capital and cash requirements for the foreseeable future, including debt service
and corporate income taxes. Specialty experiences certain seasonal fluctuations
in its working capital requirements. See "Item 1 - Seasonality."
IMPACT OF INFLATION
Management does not believe that inflation has had a material impact on
Specialty's operations during fiscal 1999. Management believes that Specialty
may face increasing costs in the upcoming fiscal year as a result of inflation
which Specialty may not fully be able to offset with increased productivity or
pass on to its customers due to competitive factors within the industry.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. Specialty
is required to comply with SFAS No. 133 in fiscal year 2001. Specialty has not
evaluated the impact of SFAS No. 133 on the consolidated financial statements.
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 expects Specialty to be substantially Year 2000 compliant
on or before April 1, 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 have begun the process of converting our information systems. As of March
15, 1999, the Year 2000 conversion project of our information systems is more
than 90% 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.
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 early
21
<PAGE> 22
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
This 10-K includes a number of statements which relate to anticipated
future events (forward looking statements) rather than actual present conditions
or historical events. You can identify forward-looking statements because
generally they include words such as "believes", "expects", "intends",
"anticipates", "estimates", and similar expressions. Forward-looking statements,
by their nature, are subject to a variety of risks and uncertainties that could
cause actual results to differ materially from the results expected in the
forward looking statement. Many of these risks and uncertainties cannot be
controlled by Specialty. Some examples of these risks and uncertainties are:
o general domestic and global economic conditions and their impact
on the growth of the quick service restaurant and soft drink
bottler industries;
o Specialty's dependence on its major customers and key management
personnel;
o the effect of changing environmental, product safety and other
regulations upon our business;
o the effects of competition;
o the significance of the our outstanding indebtedness; and
O the economic, currency, social, political and other issues which
are raised by increasing expansion into foreign markets.
Other factors detailed elsewhere from time to time in our filings with the
Securities and Exchange Commission also may have an impact on the ultimate
reliability of our forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Specialty is subject to certain market risks, including foreign currency
and interest rates. Specialty is exposed to potential gains or losses from
foreign currency fluctuations affecting net investments and earnings denominated
in foreign currencies. The Company's primary exposure is to changes in exchange
rates for the U.S. Dollar versus The Dutch Guilder.
22
<PAGE> 23
In fiscal year 1999, the net change in the cumulative foreign currency
translation adjustments account, which is a component of stockholders' equity,
was an unrealized loss of $85,000. Unrealized foreign currency translation gains
(losses) of $41,000 and ($117,000) were recognized in fiscal 1997 and fiscal
1998, respectively.
Specialty is a purchaser of steel. Specialty generally buys steel based
upon market prices that are established with the vendor as part of the purchase
process. Specialty does not use commodity financial instruments to hedge steel
prices due to a high correlation between commodity cost and the ultimate selling
price of its products.
Specialty's exposure to interest rate risk relates primarily to its debt
obligations and temporary cash investments. Interest rate risk is managed
through variable rate borrowings with varying maturities. At January 31, 1999,
all debt was issued at variable rates. Specialty does not use, and has not used
in the past fiscal years, any derivative financial instruments relating to the
risk associated with changes in interest rates.
The table below presents principal amounts and related weighted average
interest rates by year of maturity for the Company's investments and debt
obligations: (in thousands)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
00 01 02 03 04 Thereafter Total
------ ---- ----- ----- ----- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash equivalents $1,763 $ - $ - $ - $ - $ - $ 1,763
Variable interest rate 5.08% - - - - - 5.08%
Liabilities:
Long-term debt variable rate $ - $ - $ - $ - $ - $ 128,515 $128,515
Average variable
interest rate - - - - - 6.17% 6.17%
</TABLE>
Specialty is exposed to credit risk on certain assets, primarily accounts
receivable. Specialty provides credit to customers in the ordinary course of
business and performs ongoing credit evaluations and Specialty currently
believes its allowance for doubtful accounts is sufficient to cover customer
credit risks.
Settlement of foreign sales and purchases are generally denominated in U.S.
currency, except for sales by SEI, resulting in limited foreign currency
transaction exposure. Sales by SEI are denominated in a variety of foreign
currencies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following pages contain the Financial Statements and Supplementary Data
as required by Item 8 of Part II of Form 10-K.
23
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Specialty Equipment Companies, Inc.:
We have audited the accompanying consolidated balance sheets of Specialty
Equipment Companies, Inc. (the "Company") and subsidiaries as of January 31,
1998 and 1999, and the related consolidated statements of earnings,
stockholders' equity (deficit) and comprehensive income and cash flows for each
of the years in the three-year period ended January 31, 1999. In connection with
our audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in Item 14(a)(2). These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Specialty
Equipment Companies, Inc. and subsidiaries as of January 31, 1998 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended January 31, 1999, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects,
the information set forth therein.
KPMG LLP
Chicago, Illinois
March 17, 1999
24
<PAGE> 25
SPECIALTY EQUIPMENT COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
January 31,
1998 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 39,947 $ 6,814
Accounts receivable, net 63,043 76,283
Inventories 54,030 65,535
Deferred tax assets, net 15,310 20,410
Other current assets 3,143 4,704
--------- ---------
Total current assets 175,473 173,746
Property, plant and equipment, net 38,743 40,954
Restricted cash equivalents 2,662 --
Goodwill 15,645 15,281
Other intangibles, net 7,973 6,398
Other assets 954 366
--------- ---------
Total assets $ 241,450 $ 236,745
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt $ 18,395 $ --
Accounts payable 26,425 31,723
Accrued liabilities 68,748 70,220
Accrued income taxes 5,340 4,621
--------- ---------
Total current liabilities 118,908 106,564
Long-term debt, excluding current installments 159,591 128,515
Other non-current liabilities 1,762 1,590
Stockholders' equity (deficit):
Common stock, $.01 par value, 25,000,000 shares
authorized, 18,082,804 and 18,442,777 shares outstanding at
January 31, 1998 and 1999, respectively 181 184
Additional paid-in capital 58,298 62,968
Accumulated deficit (88,041) (50,440)
Accumulated other comprehensive income (2,635) (2,637)
Treasury stock, at cost, 403,896 and 567,364 shares
at January 31, 1998 and 1999 (6,614) (9,999)
--------- ---------
Total stockholders' equity (deficit) (38,811) 76
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 241,450 $ 236,745
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
25
<PAGE> 26
SPECIALTY EQUIPMENT COMPANIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended January 31,
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Net revenue $ 401,230 $ 433,121 $ 495,647
Cost of sales 279,120 299,222 338,889
--------- --------- ---------
Gross margin 122,110 133,899 156,758
Selling, general and administrative expenses 61,387 70,856 82,634
--------- --------- ---------
Earnings from operations 60,723 63,043 74,124
Interest expense, net 18,714 15,944 14,068
--------- --------- ---------
Earnings from operations before income taxes 42,009 47,099 60,056
Income taxes 7,887 9,557 16,008
Minority interest -- -- 23
--------- --------- ---------
Earnings before extraordinary item 34,122 37,542 44,025
Extraordinary item (1,784) -- (6,424)
--------- --------- ---------
Net earnings $ 32,338 $ 37,542 $ 37,601
========= ========= =========
Basic earnings per share before extraordinary item $ 1.95 $ 2.07 $ 2.41
Extraordinary item (0.10) -- (0.35)
--------- --------- ---------
Basic earnings per share $ 1.85 $ 2.07 $ 2.06
========= ========= =========
Diluted earnings per share before extraordinary item $ 1.70 $ 1.86 $ 2.18
Extraordinary item (0.09) -- (0.32)
--------- --------- ---------
Diluted earnings per share $ 1.61 $ 1.86 $ 1.86
========= ========= =========
Weighted average shares outstanding - basic 17,514 18,143 18,280
Weighted average shares outstanding - diluted 20,058 20,205 20,202
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
26
<PAGE> 27
SPECIALTY EQUIPMENT COMPANIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Accumulated Comprehensive Treasury Comprehensive
Stock Capital Deficit Income Stock Income
------ ---------- ----------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1996 $ 173 $ 50,895 $(157,921) $ (768) $ --
Net earnings -- -- 32,338 -- -- $ 32,338
Exercise of stock options 7 789 -- -- --
Tax benefit of stock options -- 3,354 -- -- --
Options withheld for taxes -- (1,052) -- -- --
Utilization of NOL carryforward -- 515 -- -- --
Minimum pension liability -- -- -- 398 -- 398
Foreign currency translation -- -- -- 41 -- 41
--------- --------- --------- --------- --------- ---------
Balance at January 31, 1997 180 54,501 (125,583) (329) -- $ 32,777
=========
Net earnings -- -- 37,542 -- -- $ 37,542
Exercise of stock options 1 1,525 -- -- --
Tax benefit of stock options -- 3,065 -- -- --
Options withheld for taxes -- (1,885) -- -- --
Treasury stock -- -- -- -- (6,614)
Utilization of NOL carryforward -- 1,092 -- -- --
Minimum pension liability -- -- -- (2,189) -- (2,189)
Foreign currency translation -- -- -- (117) -- (117)
--------- --------- --------- --------- --------- ---------
Balance at January 31, 1998 181 58,298 (88,041) (2,635) (6,614) $ 35,236
=========
Net earnings -- -- 37,601 -- -- $ 37,601
Exercise of stock options 3 1,262 -- -- --
Tax benefit of stock options -- 4,756 -- -- --
Options withheld for taxes -- (2,440) -- -- --
Treasury stock -- -- -- -- (3,385)
Utilization of NOL carryforward -- 1,092 -- -- --
Minimum pension liability -- -- -- 83 -- 83
Foreign currency translation -- -- -- (85) -- (85)
--------- --------- --------- --------- --------- ---------
Balance at January 31, 1999 $ 184 $ 62,968 $ (50,440) $ (2,637) $ (9,999) $ 37,599
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
27
<PAGE> 28
SPECIALTY EQUIPMENT COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended January 31,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 32,338 $ 37,542 $ 37,601
Items not affecting cash:
Depreciation 4,584 4,856 5,381
Amortization 2,303 968 3,043
Deferred taxes (5,105) (5,100) (5,100)
Utilization of net operating loss carryforward 1,092 1,092 1,092
Changes in current assets and liabilities (excluding
effects of business acquired):
Accounts receivable (8,027) (4,787) (13,240)
Inventories (3,341) 4,335 (11,505)
Other current assets 41 3,141 (1,561)
Accounts payable and other current liabilities, excluding
current installments of long-term debt 89 4,944 6,261
--------- --------- ---------
Net cash provided by operating activities 23,974 46,991 21,972
Cash flows from investing activities:
Additions to property, plant and equipment (9,185) (4,715) (7,527)
Disposal of property, plant and equipment 38 49 42
Cash equivalents restricted for capital additions 2,814 397 2,662
Businesses acquired (1,321) (21,584) --
--------- --------- ---------
Net cash used in investing activities (7,654) (25,853) (4,823)
--------- --------- ---------
Cash flows from financing activities:
Net increase in revolving credit facilities -- -- 120,000
Proceeds from long-term debt -- 18,000 --
Repayments of long-term debt (37,601) (264) (169,075)
Financing costs -- -- (1,090)
Proceeds from exercise of stock options 796 1,526 1,262
Tax benefit from exercise of stock options 3,354 3,065 4,756
Options withheld for taxes (1,052) (1,885) (2,440)
Acquisition of treasury stock -- (6,614) (3,385)
--------- --------- ---------
Net cash provided by (used in) financing activities (34,503) 13,828 (49,972)
--------- --------- ---------
Other, net (2,477) (2,806) (310)
--------- --------- ---------
Net increase (decrease) in cash (20,660) 32,160 (33,133)
Cash:
Beginning of period 28,447 7,787 39,947
--------- --------- ---------
End of period $ 7,787 $ 39,947 $ 6,814
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
28
<PAGE> 29
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997, 1998 AND 1999
1 . ORGANIZATION OF BUSINESS
Specialty Equipment Companies, Inc. (the "Company") is a manufacturer of a
diversified line of highly engineered commercial and institutional foodservice
equipment that is used by a variety of commercial foodservice operators
including, quick service restaurant chains, other commercial restaurants,
convenience store chains, specialty chains, soft drink bottlers and
institutional foodservice operators.
The Company was incorporated on November 28, 1984 in the State of Delaware.
All of the significant U. S. operations are conducted through Specialty
Equipment Manufacturing Corporation, a wholly-owned subsidiary of the Company,
which was organized on January 31, 1998. Quaboes B.V., acquired in order to
facilitate the acquisition of Gamko Holding B.V. ("Gamko"), and Gamko are
wholly-owned subsidiaries of the Company, based in The Netherlands. World Dryer
Co., Limited is a division of Bloomfield Industries Canada Limited, which is a
wholly-owned subsidiary of the Company. Taylor Freezer International, S.r.l.,
Taylor Freezer (Cyprus) Ltd., Taylor-Chicago Corp. and Coolpart B.V. are
wholly-owned subsidiaries of the Company. FM Manufacturing, Inc. (formerly known
as Market Forge Co.) is a wholly-owned subsidiary, but has not had any
operations since October 1993. Included in revenue export sales principally to
Europe, Asia and Latin America. Sales to one major customer approximated 20%,
15% and 14%, respectively, of revenue in fiscal years 1997, 1998 and 1999. Sales
to another major customer approximated 11% in fiscal 1999.
Effective August 1, 1997, a wholly owned subsidiary of the Company acquired
Gamko for $21 million in cash. Gamko is based in The Netherlands and is engaged
in the manufacture and sale of refrigeration equipment to the foodservice
industry. The acquisition has been accounted for by the purchase method and,
accordingly, the results of operations of Gamko have been included in the
Company's consolidated financial statements from August 1, 1997. The excess of
the purchase price over the fair value of the net identifiable assets acquired
has been recorded as goodwill and is being amortized on a straight-line basis
over 40 years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation and Report Preparation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions are eliminated in consolidation. Certain reclassifications have
been made to the prior years' financial statements to conform with the current
year presentation. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported results of operations, financial position
and various disclosures. Actual results could differ from those estimates.
b. Cash and Cash Equivalents
The Company considers all short-term deposits with a maturity of three
months or less to be cash equivalents.
c. Inventories
The Company values domestic inventories at the lower of > last-in,
first-out (LIFO) cost or market.
d. Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated over
the estimated useful lives of the respective assets using the straight-line
method for financial statement purposes and using the modified accelerated cost
recovery system for income tax purposes. Depreciable lives are principally 40
years for buildings and building improvements and 10 to 14 years for machinery
and equipment. Repair and maintenance costs are expensed as incurred.
29
<PAGE> 30
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997, 1998 AND 1999
e. Restricted Cash Equivalents
Restricted cash equivalents represent amounts designated for capital
additions which were received from the placement of Industrial Project Revenue
Bonds in excess of amounts expended on the projects through January 31, 1998.
The amounts are invested in tax exempt, cash equivalent instruments.
f. Goodwill and Intangible Assets
Intangible assets relate to the businesses acquired, proprietary trademarks
and patents, and covenants not to compete. The intangible assets are being
amortized over an average useful life of three to 15 years using the
straight-line method. Goodwill is being amortized over 40 years.
g. Warranty Reserves
Warranty reserves are accrued at the time of sale based on historical
experience and current product mix. Product warranties generally provide one
year coverage on parts and 90 days on labor, with certain exceptions.
h. Income Taxes
The asset and liability method is used in accounting for income taxes.
Under this method deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
i. Foreign Currency Translation
The accounts of Bloomfield Industries Canada Limited and Gamko are
translated into U.S. dollars. Assets and liabilities are translated at the
year-end exchange rate. The adjustment resulting from translation is reflected
as an adjustment to equity in the accompanying consolidated financial
statements. Gains and losses from foreign currency transactions are included in
results of operations currently. Revenue and expenses are translated using a
weighted average rate for the year.
j. Statements of Cash Flows
Cash paid for interest and income taxes is as follows: (in thousands)
<TABLE>
<CAPTION>
Years Ended January 31,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Interest, net $19,329 $15,972 $15,703
Income taxes 6,580 7,112 13,967
</TABLE>
k. Pensions and Postretirement Benefits
The Company offers pension plans which cover substantially all employees
and a postretirement medical benefit plan to retirees at one of its divisions.
The Company has recognized the liabilities for these plans pursuant to an
actuarial valuation of the benefits and costs of these programs using costs,
asset return and inflation factors deemed appropriate and reasonable. The
discount rate used to determine the liabilities recognized was 7.75% in fiscal
1997 and 6.75% in fiscal 1998 and fiscal 1999. The benefits for the
postretirement medical benefit plan are paid on a current basis and are not
prefunded.
30
<PAGE> 31
l. Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate fair value because of the
short maturity of these financial instruments. The BA Bank Facility (see Note 9)
is at variable interest rates tied to market rates and accordingly, the Company
considers the fair value to be the same as its carrying value.
m. Earnings Per Common Share
Basic earnings per share are based upon the weighted-average number of
common shares outstanding. Diluted earnings per share assumes the exercise of
all options and warrants which are dilutive, whether exercisable or not. The
dilutive effect of the options and warrants were $0.24, $0.21 and $0.20 in
fiscal 1997, 1998 and 1999, respectively.
n. Stock Option Plans
Prior to February 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
On February 1, 1996 the Company adopted SFAS No. 123, Accounting for Stock
Based Compensation, which permits entities to recognize as expense over the
vesting period the fair value of stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25.
o. Research and Development Expenses
Research and development costs are charged to expense when incurred. Total
research and development costs charged to expense were $4.8 million, $6.9
million and $7.3 million in fiscal 1997, 1998 and 1999, respectively.
p. Revenue Recognition
The Company recognizes revenue from product sales upon shipment to the
customer.
q. Advertising Costs
Advertising costs are charged to expense when incurred. Total advertising
costs charged to expense were $7.6 million, $8.4 million and $7.9 million in
fiscal 1997, 1998 and 1999, respectively.
31
<PAGE> 32
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997, 1998 AND 1999
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following: (in thousands)
S
<TABLE>
<CAPTION>
January 31,
1998 1999
---- ----
<S> <C> <C>
Accounts receivable $66,998 $80,188
Less: allowance for doubtful accounts 3,955 3,905
------- --------
Total $63,043 $76,283
======= =======
</TABLE>
Substantially all of the Company's receivables represent sales made
directly, or indirectly through distributors, to the foodservice and beverage
industry.
5. INVENTORIES
Inventories consist of the following: (in thousands)
<TABLE>
<CAPTION>
January 31,
1998 1999
---- ----
<S> <C> <C>
Raw material $ 28,602 $ 31,361
Work in process 8,885 8,764
Finished goods 16,624 25,410
------------ ----------
Subtotal 54,111 65,535
Less: excess of FIFO cost over LIFO 81 --
------------ ----------
Total $ 54,030 $ 65,535
============ ==========
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following: (in thousands)
<TABLE>
<CAPTION>
January 31,
1998 1999
---- ----
<S> <C> <C>
Land $ 897 $ 897
Buildings and building improvements 22,306 25,296
Machinery and equipment 36,945 44,640
Construction in progress 4,039 3,141
Fixed assets under capital leases 3,185 --
------- --------
Total 67,372 73,974
Less: accumulated depreciation and amortization 28,629 33,020
------- --------
Net property, plant and equipment $38,743 $ 40,954
======= ========
</TABLE>
32
<PAGE> 33
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997, 1998 AND 1999
7. GOODWILL AND OTHER INTANGIBLES
<TABLE>
<CAPTION>
January 31,
1998 1999
---- ----
<S> <C> <C>
Goodwill consist of the following: (in thousands)
Goodwill $ 15,843 $ 15,843
Less: accumulated amortization 198 562
---------- ----------
$ 15,645 $ 15,281
========== ==========
Other intangible consist of the following: (in thousands)
Patents $ 991 $ 991
Other intangibles 52,076 53,166
Deferred pension costs 1,961 1,915
---------- ----------
Total 55,028 56,072
Less: accumulated amortization 47,055 49,674
---------- ----------
Other intangibles, net $ 7,973 $ 6,398
========== ==========
</TABLE>
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following: (in thousands)
<TABLE>
<CAPTION>
January 31,
1998 1999
---- ----
<S> <C> <C>
Accrued insurance premiums and self-
insurance reserves $13,689 $13,731
Accrued payroll and other compensation 16,958 17,861
Accrued warranty reserves 6,664 8,506
Accrued discontinued product lines 4,860 4,476
Accrued retiree medical expense 6,995 8,168
Accrued interest 2,883 1,248
Other 16,699 16,230
------- -------
Total $68,748 $70,220
======= =======
</TABLE>
9. LONG-TERM DEBT
Long-term debt consists of the following: (in thousands)
January 31,
1998 1999
---------- -----------
[S] [C] [C]
Revolving line of credit (a) $ -- $ 120,000
11-3/8% senior subordinated notes due 2003 (b) 149,040 --
Industrial project revenue bonds due 2009 (c) 6,400 4,365
Other long-term debt (d) 18,711 4,150
Capitalized leases (e) 3,835 --
---------- -----------
177,986 128,515
Less: current installments 18,395 --
---------- ----------
Total long-term debt $ 159,591 $ 128,515
========== ==========
33
<PAGE> 34
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997, 1998 AND 1999
(a) BA Bank Facility
The BA Bank Facility, as amended, provides for an unsecured $200.0 million
revolving line of credit. As of January 31, 1999, the Company had $120 million
of borrowings outstanding on its revolving line of credit and $7.6 million of
letters of credit. The BA Bank Facility expires on November 30, 2003.
Interest rates under the BA Bank Facility equal LIBOR, (4.875% at January
31, 1999) plus 0.875% for the revolving line of credit.
(b) Senior Subordinated Notes
During fiscal 1999 the Company acquired $31 million of its outstanding
senior subordinated notes in private market transactions. On December 1, 1998
the Company called the remaining $118 million of 11-3/8% Senior Subordinated
Notes at a price of 105.7. The Company recorded an extraordinary item of $6.4
million (net of taxes of $4.0 million) related to the early extinguishment of
this debt.
(c) Industrial Project Revenue Bonds
In February 1995 the Company issued $6.4 million of variable interest rate
Industrial Project Revenue Bonds ("2009 IRBs"). Interest is payable monthly and
the principal is due in 2009. The 2009 IRBs are secured by an irrevocable letter
of credit for $4.4 million.
(d) Other Long-term Debt
Other long-term debt consists principally of a $4.2 million secured loan
incurred in connection with the purchase of the Gamko facility. As of January
31, 1999 the interest rate was 5.60%.
(e) Leased property and leasehold interests
Leased property and leasehold interests under capital leases are included
in property, plant and equipment (none at January 31, 1999). Future minimum
payments under noncancelable operating leases as of January 31, 1999 are as
follows: (in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ending Operating
January 31, Leases
---------
<S> <C>
2000 $2,485
2001 2,012
2002 1,239
2003 789
2004 306
Thereafter 68
------
Total payments $6,899
======
</TABLE>
Rent expense under operating leases amounted to $2.3 million, $3.0 million
and $3.1 million for the fiscal years ended January 31, 1997, 1998 and 1999,
respectively.
34
<PAGE> 35
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997, 1998 AND 1999
10. INCOME TAXES
The components of income tax expense consist of the following: (in thousands)
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
Year ended January 31, 1997
Federal $11,270 $(4,319) $ 6,951
State 1,544 (786) 758
Foreign 178 - 178
------- ------- -------
Total $12,992 $(5,105) 7,887
======= ======= =======
Year ended January 31, 1998
Federal $12,374 $(4,315) $ 8,059
State 1,684 (785) 899
Foreign 599 - 599
------- ------- -------
Total $14,657 $(5,100) $ 9,557
======= ======= =======
Year ended January 31, 1999
Federal $17,579 $(4,435) $13,144
State 2,458 (665) 1,793
Foreign 1,071 - 1,071
------- ------- -------
Total $21,108 $(5,100) $16,008
======= ======= =======
</TABLE>
Income tax expense differed from the amounts computed by applying the U.S.
Federal income tax rate of 35 percent to pretax income as a result of the
following: (in thousands)
<TABLE>
<CAPTION>
Years Ended January 31,
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Tax expense computed at the
Federal statutory rate $ 14,703 $ 16,513 $ 20,991
Increase (reduction) in income taxes resulting from:
Change in valuation of temporary differences (7,945) (5,933) (5,388)
State income taxes, net of Federal income
tax benefit 1,149 1,471 1,409
Foreign sales corporation (1,393) (1,394) (1,202)
Other, net 1,373 (1,100) 198
-------- -------- --------
Provision for income taxes $ 7,887 $ 9,557 $ 16,008
======== ======== ========
</TABLE>
The benefits in fiscal 1997 of the utilization of $2.8 million (tax
effected $1.1 million) of net operating loss carryforwards ("NOLs") that existed
prior to the Plan of Reorganization ("POR") pursuant to the Company's 1992
Reorganization, reduced other intangibles existing at the date of reorganization
until exhausted and thereafter beginning in fiscal 1997 were recorded as a
direct addition to additional paid-in capital.
35
<PAGE> 36
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
January 31,
1998 1999
---- ----
<S> <C> <C>
Deferred taxes: (in thousands)
Allowance for doubtful accounts $ 740 $ 400
Intangibles, due to differences in amortization 13,250 13,135
Accrued liabilities, principally due to accruals for compensated absences,
self-insurance liability reserves, warranties, pension, discontinued
product lines and postretirement benefits other than pensions 15,400 15,825
Net operating loss carryforwards 5,175 4,080
-------- --------
Total gross deferred tax assets 34,565 33,440
Less valuation allowance (15,100) (8,620)
-------- --------
Net deferred tax assets 19,465 24,820
-------- --------
Deferred tax liabilities:
Inventories, principally due to additional costs inventoried for
tax purposes pursuant to the IRC and tax
basis difference resulting from the 1992 Reorganization (2,700) (2,600)
Property, plant and equipment, principally due to
differences in depreciation (1,455) (1,810)
-------- --------
Total deferred tax liabilities (4,155) (4,410)
-------- --------
Net deferred taxes $ 15,310 $ 20,410
======== ========
</TABLE>
The net change in the total valuation allowance for fiscal 1997, 1998 and
1999 was a decrease of $8.5 million, $7.0 million, and $6.5 million,
respectively. The Company believes that the valuation allowance is sufficient to
reduce the net deferred tax asset to an amount that will more likely than not be
realized. The Company will continue to review the need for this valuation
allowance and make adjustments as deemed appropriate. The Company has
approximately $10.5 million in NOLs. However, there are a number of issues that
may arise which, if determined adversely, could limit the amount and/or use of
available NOLs. These issues include the availability of certain deductions
previously claimed by the Company and the applicability of certain provisions of
the Internal Revenue Code of 1986, as amended, (the "IRC") generally limiting
the availability of NOLs following certain changes in ownership. The NOLs are
available through fiscal 2008. Earnings before income taxes include foreign
income of $0.5 million, $1.4 million and $2.5 million in the years ended January
31, 1997, 1998 and 1999, respectively.
11. PENSION AND BENEFIT PLANS
Pension and Profit Sharing Plans
The Company has non-contributory defined benefit plans in place covering
substantially all employees. Annual contributions to the plans are equal to the
minimum amount required to meet funding standards of the Internal Revenue Code.
These contributions are deductible for Federal income tax purposes. Benefits for
these plans are based primarily on years of service or qualifying compensation,
or both, of the participants. The plans' assets are invested in various pooled
arrangements consisting of equities, fixed income, real estate, venture capital
and short-term obligations.
The following sets forth the plans' funded status and amounts recognized
in the Company's consolidated financial statements as of January 31: (in
thousands)
36
<PAGE> 37
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
FY 1998 FY 1999 FY 1998 FY 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 35,204 $ 45,457 $ 11,614 $ 12,773
Service cost 1,879 2,183 463 556
Interest cost 2,751 2,936 880 850
Plan participants' contributions -- -- -- --
Amendments 61 193 -- --
Actuarial gain (loss) 6,944 (1,081) 455 5
Benefits paid (1,279) (1,387) (639) (442)
Expenses paid (103) (387) -- --
-------- -------- -------- --------
Benefit obligation at end of year $ 45,457 $ 47,914 $ 12,773 $ 13,742
======== ======== ======== ========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $ 29,969 $ 32,764 $ 425 $ 425
Actual return on plan assets 3,375 2,565 22 23
Employer contribution 802 1,192 617 419
Plan participants' contributions -- -- -- --
Benefits paid (1,279) (1,387) (639) (442)
Expenses paid (103) (387) -- --
-------- -------- -------- --------
Fair value of plan assets at end of year $ 32,764 $ 34,747 $ 425 $ 425
======== ======== ======== ========
NET AMOUNT RECOGNIZED:
Funded status $(12,693) $(13,167) $(12,348) $(13,317)
Unrecognized prior service cost 1,912 1,885 2,221 1,975
Unrecognized transition asset (538) (403) -- --
Unrecognized net actuarial loss (gain) 5,741 5,136 (608) (721)
-------- -------- -------- --------
Net amount recognized $ (5,578) $ (6,549) $(10,735) $(12,063)
======== ======== ======== ========
AMOUNTS RECOGNIZED IN THE STATEMENTS OF
FINANCIAL POSITION CONSIST OF:
Accrued benefit liability $ (9,866) $(10,709) $(10,735) $(12,063)
Intangible asset 1,961 1,915 -- --
Accumulated other comprehensive income 2,327 2,245 -- --
-------- -------- -------- --------
Net amount recognized $ (5,578) $ (6,549) $(10,735) $(12,063)
======== ======== ======== ========
ACTUARIAL ASSUMPTIONS:
Discount rate 6.75% 6.75% 6.75% 6.75%
Expected return on plan assets 10.00% 10.00% NA NA
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 1,879 $ 2,183 $ 463 $ 556
Interest cost 2,751 2,935 879 850
Expected return on plan assets (2,766) (3,161) -- --
Amortization of prior service cost 203 220 246 246
Amortization of transition asset (135) (134) -- --
Recognized net actuarial loss (gain) 72 120 (51) (68)
-------- -------- -------- --------
Net periodic benefit cost $ 2,004 $ 2,163 $ 1,537 $ 1,584
======== ======== ======== ========
</TABLE>
37
<PAGE> 38
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997, 1998 AND 1999
As of January 31, 1999, the projected benefit obligation, accumulated
benefit obligation ("ABO"), and fair value of plan assets for the pension plans
with ABO in excess of plan assets were $47.9 million, $42.1 million and $34.7
million. For plans in which benefits are based on qualifying compensation, the
assumed rate of increase is 3.5% for fiscal 1997, 1998 and 1999.
The Company has two nonpension postretirement benefit plans. The medical
plan is contributory with participants' contributions adjusted annually; the
life insurance plan is noncontributory. Assumed health care cost trend rates
have a significant effect on the amounts reported for the medical plan. For
measurement purposes, a 7.5% annual rate of increase in the per capita cost of
covered medical benefits was assumed for fiscal 2000. The rate was assumed to
decrease by 0.5% per year to an ultimate rate of 5.0%. A one-percentage point
change in assumed medical cost trend rates would increase (decrease) the total
of service and interest cost by $283,000 and ($225,000), and increase (decrease)
the postretirement benefit obligation by $2.3 million and ($1.9) million.
In addition to the Company plans, the Company contributed $21,000, $27,000
and $26,000 to a multi-employer union pension plan for fiscal years 1997, 1998
and 1999, respectively.
12. 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.
Environmental and Related Matters
The Company received notice of potential environmental actions from (i)
the South Carolina Department of Health and Environmental Control ("SCDHEC") and
the EPA with respect to drums of hazardous waste materials disposed of in South
Carolina, (ii) the SCDHEC with respect to the clean up of the Unisphere
Hazardous Waste Site in Spartanburg County, South Carolina, and (iii) the Nevada
Department of Conservation and Natural Resources, Division of Environmental
Protection ("NDEP"), which issued a finding of alleged violation and order
relating to alleged soil and ground water contamination. With respect to the
SCDHEC matter discussed in (i) above, management is unable to determine the
existence or amount of its potential liabilities because no formal proceedings
have been commenced and no notifications have been received regarding this
matter since December, 1992. The Company has reason to believe that this site
will be the subject of no further action by the EPA. With respect to the SCDHEC
matter discussed in (ii) above, management is unable to determine the existence
or amount of its potential liability, if any, because the use of the site by
Beverage-Air occurred prior to the purchase of the Beverage-Air assets by the
Company from Gerlach Industries in November, 1986. With respect to the NDEP
matter discussed in (iii) above, the Company has spent approximately $329,000 to
conduct tests and to implement a remediation program, but given the pendency of
the Company's appeal and its uncertain outcome, management cannot estimate what,
if any, additional expenditures might be required, though they are not expected
to materially affect the financial position or results of operations of the
Company.
Letters of Credit
As of January 31, 1999, the Company had letters of credit outstanding
totaling $7.6 million, which guarantee various business activities, including
$4.4 million of letters of credit which guarantee the Industrial Project Revenue
Bonds.
38
<PAGE> 39
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997, 1998 AND 1999
13. TREASURY STOCK
In September 1997, the Company announced its intention to acquire up to
$10 million of its common stock in open market and private transactions. As of
January 31, 1999, the Company had acquired 567,364 shares at a total cost of $10
million.
14. STOCK OPTION PLAN AND STOCK WARRANT
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 (the "Director Plan") each non-employee
director was granted an option to purchase 175,241 shares of 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 dates of grant). The
aggregate shares under the Director Plan totaled 876,205 shares. The options
under the Director Plan all vested and became exercisable on May 6, 1995. All
options awarded pursuant to the Director Plan expire on May 6, 2000.
The Executive Long-Term Incentive Plan, as amended, (the "Employee Plan")
allows for the issue of a total of 4,004,814 shares of the Company's common
stock. All of the options granted are at an exercise price which is not less
than management's determination of the fair market value of the underlying
shares at the respective dates of grant.
The following sets forth information with respect to options issued and
outstanding:
<TABLE>
<CAPTION>
Avg. option Range of
Shares Price Option Prices
------ ----- -------------
<S> <C> <C> <C>
Options outstanding at January 31, 1996
(3,223,732 exercisable) 3,703,732 $ 2.02 $1.00-10.00
Options granted 50,000 12.00 12.00
Options exercised (671,358) (1.08) 1.00-5.25
Options withheld (86,837) (1.21) 1.00-5.25
--------- ------------ -----------
Options outstanding at January 31, 1997
(2,945,537 exercisable) 2,995,537 2.42 1.00-12.00
Options granted 100,000 12.97 12.50-13.44
Options exercised (503,282) (8.00) 1.00-10.25
Options withheld (125,618) (1.22) 1.00-10.25
--------- ------------ -----------
Options outstanding at January 31, 1998
(2,366,637 exercisable) 2,466,637 2.87 1.00-13.44
Options granted 130,000 22.98 22.50-23.25
Options exercised (523,441) (1.08) 1.00-5.25
Options withheld (112,264) (1.21) 1.00-5.25
--------- ------------ -----------
Options outstanding at January 31, 1999
(1,730,932 exercisable) 1,960,932 $ 4.47 $1.00-23.25
========= ============ ===========
</TABLE>
The options exercisable at January 31, 1999 have an average exercise price
of $2.59 per share and range of exercise prices of $1.00 to $12.00 per share.
The weighted average remaining contractual life of the options currently
outstanding is 1.5 years.
A non-employee director has an exercisable stock warrant to purchase
1,145,769 shares of Common Stock at approximately $2.01 per share expiring on
July 31, 1999. The warrant was issued in connection with the POR and was
subsequently acquired by a non-employee director, prior to his election as a
director.
39
<PAGE> 40
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997, 1998 AND 1999
At January 31, 1999, there were 8,750 additional shares available for
grant under the Employee Plan. The per share weighted-average fair value of
stock options granted during fiscal 1997, 1998 and 1999 was $3.53, $5.13 and
$8.84, respectively on the date of grant using the Black Scholes option-pricing
model. The following are weighted-average assumptions used in determining the
fair value of stock options: Expected dividend yield 0%, risk-free interest rate
of 6.38%, 5.42% and 5.11%, an expected life of 4.5, 4.5 and 5 years and a
volatility rate of 40%, 35% and 34%, in fiscal 1997, 1998 and 1999,
respectively. Had compensation cost for the Company's stock option plans been
determined consistent with the fair value method of SFAS No. 123, Accounting for
Stock Based Compensation, the Company's fiscal 1997, 1998 and 1999 results of
operations would not have been materially different from the amounts reported.
15. BUSINESS SEGMENT
The Company is a manufacturer of a diversified line of highly engineered,
commercial and institutional foodservice equipment used by customers in the
foodservice equipment market segment. In June 1997, the FASB issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which the Company has adopted in the current year. Management reviews results of
operations based on products in the foodservice equipment market segment.
Revenues and long-lived assets by geographic region for fiscal 1997, 1998
and 1999, based upon location of shipment, were as follows: (in thousands)
<TABLE>
<CAPTION>
January 31,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
United States $275,870 $294,008 $354,552
International 125,360 139,113 141,095
-------- -------- --------
Total $401,230 $433,121 $495,647
======== ======== ========
Long-Lived Asssets:
United States $ 44,449 $ 45,121 $ 43,041
International 36 20,856 19,958
-------- -------- --------
Total $ 44,485 $ 65,977 $ 62,999
======== ======== ========
</TABLE>
40
<PAGE> 41
SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997, 1998 AND 1999
16. QUARTERLY RESULTS (UNAUDITED)
The quarterly data has not been audited by the independent auditors. (in
thousands, except share amounts)
<TABLE>
<CAPTION>
Fiscal 1999
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue $127,665 $140,146 $120,512 $107,324
Gross margin 39,486 45,135 37,261 34,876
Net earnings 9,478 11,702 7,243 9,178
Basic earnings per share $ 0.52 $ 0.64 $ 0.40 $ 0.50
Diluted earnings per share $ 0.47 $ 0.58 $ 0.36 $ 0.46
Average shares outstanding-basic 18,161 18,299 18,255 18,402
Average shares outstanding-diluted 20,053 20,037 20,027 20,137
<CAPTION>
Fiscal 1998
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue $109,242 $113,146 $107,694 $103,039
Gross margin 32,933 34,680 33,162 33,124
Net earnings 8,213 8,073 7,175 14,081
Basic earnings per share $ 0.46 $ 0.44 $ 0.39 $ 0.78
Diluted earnings per share $ 0.41 $ 0.40 $ 0.35 $ 0.70
Average shares outstanding-basic 18,020 18,178 18,284 18,139
Average shares outstanding-diluted 20,106 20,188 20,233 20,006
</TABLE>
The Company's fiscal 1998 and 1999 fourth quarter earnings include a
reduction in income tax expense due to the reduction of the valuation allowance
related to deferred tax assets.
41
<PAGE> 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has no items to report under Item 9 of this report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 as to Specialty's Directors is
incorporated herein by reference to the information set forth under the caption
"Election of Directors" in the Company's definitive Proxy Statement for the 1999
Annual Meeting of Stockholders, since such Proxy Statement will be filed with
the Securities and Exchange Commission not later than 120 days after the end of
the Specialty's fiscal year pursuant to Regulation 14A. Information required by
this Item 10 as to the executive officers of the Company is included in Part I
of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference to
the information set forth under the caption "Executive Compensation" in the
Specialty's definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders, since such Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the end of the Specialty's
fiscal year pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item 12 is incorporated by reference to the
information set forth under the caption "Voting Securities and Principal
Stockholders" in the Specialty's definitive Proxy Statement for the 1999 Annual
Meeting of Stockholders, since such Proxy Statement will be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
Specialty's fiscal year pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item 13 is incorporated by reference to the
information set forth under the caption "Certain Transactions" in the
Specialty's definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders, since such Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the end of the Specialty's
fiscal year pursuant to Regulation 14A.
42
<PAGE> 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following Financial Statements of the Registrant and its subsidiaries are
included in Part II, Item 8:
Page No.
-------
Independent Auditors' Report 24
Consolidated Balance Sheets as of January 31, 1998 and 1999 25
Statements of Operations for the years ended January 31,
1997, 1998 and 1999 26
Statements of Stockholders' Equity (Deficit) and Comprehensive
Income for the years ended January 31, 1997, 1998 and 1999 27
Statements of Cash Flows for the years ended January 31,
1997, 1998 and 1999 28
Notes to Consolidated Financial Statements 29
(a)(2) Financial Statement Schedules
The following Financial Statement Schedules of the Registrant
are included in Item 14 thereof:
Independent Auditors' Report 24
Schedule II - Valuation and Qualifying Accounts 45
All other schedules for which provision is made in the applicable
accounting rules and regulations of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable, and therefore have been omitted.
(a)(3) Exhibits
Reference is made to the Exhibit Index set forth herein.
(b) No reports on Form 8-K were filed during the quarter ended
January 31, 1999.
43
<PAGE> 44
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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 on the 9th day of April,
1999.
SPECIALTY EQUIPMENT COMPANIES, INC.
By: /s/ JEFFREY P. RHODENBAUGH
---------------------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on April 9, 1999:
<TABLE>
<CAPTION>
Signature Title
<S> <C>
DANIEL B. GREENWOOD* Chairman of the Board and Director
- ------------------------------------
Daniel B. Greenwood
/s/ JEFFREY P. RHODENBAUGH President, Chief Executive and Chief Operating Officer
- ------------------------------------ and Director (Principal Executive Officer)
Jeffrey P. Rhodenbaugh
/s/ DONALD K. MC KAY Executive Vice President, Chief Financial Officer,
- ------------------------------------ Treasurer and Secretary (Principal Accounting and
Donald K. McKay Financial Officer)
WILLIAM E. DOTTERWEICH* Director
- ------------------------------------
William E. Dotterweich
AVRAM A. GLAZER* Director
- ------------------------------------
Avram A. Glazer
KEVIN E. GLAZER* Director
- ------------------------------------
Kevin E. Glazer
MALCOLM I. GLAZER* Director
- ------------------------------------
Malcolm I. Glazer
CHARLES E. HUTCHINSON* Director
- ------------------------------------
Charles E. Hutchinson
RICHARD A. KENT* Director
- ------------------------------------
Richard A. Kent
BARRY L. MacLEAN* Director
- ------------------------------------
Barry L. MacLean
*By /s/ DONALD K. MC KAY
- ------------------------------------
Donald K. McKay
Attorney-in-Fact
</TABLE>
44
<PAGE> 45
SCHEDULE II
SPECIALTY EQUIPMENT COMPANIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JANUARY 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to
Beginning Costs and Balance at
of Year Expenses Deductions End of Year
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Year ended January 31, 1997
Allowance for doubtful accounts $ 5,529 $ 3 $ 873 $ 4,659
Inventory reserves $ 3,201 $ 26 $ 641 $ 2,586
Valuation allowance for deferred tax assets $30,585 $ -- $ 8,460 $22,125
Year ended January 31, 1998
Allowance for doubtful accounts $ 4,659 $ 248 $ 952 $ 3,955
Inventory reserves $ 2,586 $ 130 $ 200 $ 2,516
Valuation allowance for deferred tax assets $22,125 $ -- $ 7,025 $15,100
Year ended January 31, 1999
Allowance for doubtful accounts $ 3,955 $ 289 $ 339 $ 3,905
Inventory reserves $ 2,516 $ 238 $ 341 $ 2,413
Valuation allowance for deferred tax assets $15,100 $ -- $ 6,480 $ 8,620
</TABLE>
45
<PAGE> 46
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1+ Plan of Reorganization, dated February 5, 1992.
2.2+ Order of the United States Bankruptcy Court for the Northern District
of Illinois, Western Division, entered March 17, 1992, confirming the
Company's Plan of Reorganization.
3.1@ Amended and Restated Certificate of Incorporation of the Company.
3.2@ Amended and Restated By-laws of the Company.
3.3< Second Amended and Restated Credit Agreement, dated as of November 24,
1998, among Specialty Equipment Companies, Inc. and Specialty Equipment
Manufacturing Corporation, as Borrowers, and Bank of America National
Trust and Savings Association, as agent.
10.1+ Specialty Equipment Companies, Inc. Executive Long-Term Incentive Plan.
First Amendment to Executive Long-Term Incentive Plan.
10.2* Second Amendment to Specialty Equipment Companies, Inc. Executive
Long-Term
10.3o Incentive Plan, effective June 6, 1994.
10.4+ Specialty Equipment Companies, Inc. Non-Employees Director Long-Term
Incentive Plan.
10.5+ Specialty Equipment Companies, Inc. Restricted Stock Plan.
10.6/ Specialty Equipment Companies Retirement Income Plan amended and
restated effective January 31, 1987.
10.7ss. Specialty Equipment Companies, Inc. Supplemental Retirement Plan,
executed November 25, 1991.
10.8+ Employment Retention Agreement, dated December 19, 1991, by and between
Specialty Equipment Companies, Inc. and Daniel B. Greenwood.
10.9++ First Amendment to Employee Retention Agreement, dated December 19,
1993, by and between Specialty Equipment Companies, Inc. and Daniel B.
Greenwood.
10.10* Second Amendment to Employee Retention Agreement, dated December 19,
1995, by and between Specialty Equipment Companies, Inc. and Daniel B.
Greenwood.
10.11+ Employment Retention Agreement, dated December 19, 1991, by and between
Specialty Equipment Companies, Inc. and Donald K. McKay.
10.12++ First Amendment to Employee Retention Agreement, dated December 19,
1993, by and between Specialty Equipment Companies, Inc. and Donald K.
McKay.
10.13* Second Amendment to Employee Retention Agreement, dated December 19,
1995, by and between Specialty Equipment Companies, Inc. and Donald K.
McKay.
10.14+ Employment Retention Agreement, dated December 19, 1991, by and between
Specialty Equipment Companies, Inc. and William W. Robertson.
10.15++ First Amendment to Employee Retention Agreement, dated December 19,
1993, by and between Specialty Equipment Companies, Inc. and William W.
Robertson.
10.16/ Second Amendment to Employee Retention Agreement, dated December 19,
1995, by and between Specialty Equipment Companies, Inc. and William W.
Robertson.
10.17++ Employment Retention Agreement, dated December 19, 1991, by and between
Specialty Equipment Companies, Inc. and Jeffrey P. Rhodenbaugh.
10.18++ First Amendment to Employment Retention Agreement, dated December 19,
1993, by and between Specialty Equipment Companies, Inc. and Jeffrey P.
Rhodenbaugh.
10.19* Second Amendment to Employment Retention Agreement, dated December 19,
1995, by and between Specialty Equipment Companies, Inc. and Jeffrey P.
Rhodenbaugh.
10.20+ Sublease, dated July 28, 1972, by and between Beverage-Air Company and
Tannetics, Inc; Assignment of Sublease, dated March 30, 1973, by and
between Buffington Company, as successor to Beverage-Air Company, and
Herman L. Buffington; Amendment to Sublease, dated September 8, 1989,
by and between the Herman L. Buffington Irrevocable Trust and Specialty
Equipment Companies, Inc.
10.21(1) Lease, dated December 5, 1994, between Community Cash Stores of
Spartanburg, SC and Specialty Equipment Companies, Inc., Beverage-Air
division.
10.22+ Lease, dated May 1, 1992, by and between Wells Enterprises and Wells
Manufacturing Company.
10.23(1) Lease, dated March 31, 1995, by and between Dermody Industrial Group
and Wells Manufacturing Company.
10.24+ Lease, dated June 28, 1990, by and between Orlando Corporation and
Bloomfield Industries Canada Limited.
10.25+ Lease, dated July 1, 1993, by and between New York Life Insurance
Company and Specialty Equipment Companies, Inc.
46
<PAGE> 47
EXHIBIT NO. DESCRIPTION
- ---------- -----------
10.26/ First Amendment to Lease, dated August 15, 1995, by and between
New York Life Insurance Company and Specialty Equipment Companies,
Inc.
10.27+ Sublease, dated January 31, 1993, by and between Arrow Uniform
Rental, Inc. and Specialty Equipment Companies, Inc.
10.28(1) Lease, dated January 3, 1995 by and between Brouillette, Inc. and
Taylor Company.
10.29/ Lease, dated August 30, 1995, between Lakewood Realty and Mortgage
Corporation and Specialty Equipment Companies, Inc.
10.30(1) Irrevocable Letter of Credit, dated February 22, 1995, in the
amount of $6.5 million issued by Barclays Bank, PLC, in favor of
Amalgamated Bank of Chicago, and Trustee under the Trust
Indenture, dated as of February 22, 1995 between the State of
South Carolina and Amalgamated Bank of Chicago.
10.31(1) Pledge Agreement, dated as of February 1, 1995, among Specialty
Equipment Companies, Inc., Shawmut Capital Corporation as
guarantor, and Barclays Bank PLC, New York Branch, covering $6.4
million State of South Carolina Industrial Project Revenue Bonds,
Series 1995 (Specialty Equipment Companies, Inc. Project).
10.32+ First Amendment to Pledge Agreement, dated as of February 15,
1997, among Specialty Equipment Companies, Inc., Barclays Bank
PLC, on behalf of itself and as agent for Shawmut Capital Corp.,
Bank of America Illinois and Amalgamated Bank of Chicago.
10.33+ Warrant to purchase Common Stock of the Company, originally issued
March 31, 1992, reregistered December 27, 1996 to the Malcolm I.
Glazer Family Limited Partnership.
10.34+ Form of Indemnification Agreement for the directors and certain
officers of the Company.
10.35& Stock Purchase Agreement between Specialty Equipment Companies,
Inc. and Quaboes B.V. and Shareholders of Gamko Holding B.V. and
of Coolpart B.V., dated August 11, 1997.
10.36# Instrument of Transfer and Assumption Agreement dated January 31,
1998, between Specialty Equipment Companies, Inc. (the "Parent")
and Specialty Equipment Manufacturing Corporation (the "Operating
Subsidiary").
10.37# License Agreement dated January 31, 1998 by and between Specialty
Equipment Companies, Inc., ("Licensor") and Specialty Equipment
Manufacturing Corporation.
10.38# Management and Administrative Services Agreement dated January 31,
1998, between Specialty Equipment Companies, Inc.. and Specialty
Equipment Manufacturing Corporation.
12.1(phi) Statement Re: Computation of Ratios of Earnings to Fixed Charges
21.1(phi) Subsidiaries of Specialty Equipment Companies, Inc.
23.1(phi) Consent of KPMG Peat Marwick LLP.
24.1(phi) Powers of Attorney of Mr. Kent dated March 24, 1999, Messrs.
Greenwood, Hutchinson , Dotterweich and MacLean dated March 25,
1999, Mssrs. M. Glazer and A. Glazer dated March 30, 1999, and Mr.
K. Glazer dated March 31, 1999.
27.1(phi) Financial data schedule.
- --------------------------------------------------------------------------------
+ Incorporated herein by reference to the applicable exhibit to the
Company's Registration Statement on Form S-1, as amended, initially
filed with the Securities and Exchange Commission on September 3, 1993
(Registration No. 33-68404).
* Incorporated herein by reference to the applicable exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended October
31, 1993, as filed with the Securities and Exchange Commission on
December 15, 1993.
++ Incorporated herein by reference to the applicable exhibit to the
Company's Annual Report on Form 10-K for the year ended January 31,
1994, as filed with the Securities and Exchange Commission on March 25,
1994.
@ Incorporated herein by reference to the applicable exhibit to the
Company's Form 8-K, as filed with the Securities and Exchange Commission
on May 12, 1994.
o Incorporated herein by reference to the applicable exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended April 30,
1994, as filed with the Securities and Exchange Commission on June 14,
1994.
(1) Incorporated herein by reference to the applicable exhibit to the
Company's Annual Report on Form 10-K for the year ended January 31,
1995, as filed with the Securities and Exchange Commission on March 28,
1995.
/ Incorporated herein by reference to the applicable exhibit to the
Company's Annual Report on Form 10-K for the year ended January 31,
1996, as filed with the Securities and Exchange Commission on March 26,
1996.
ss. Incorporated herein by reference to the applicable exhibit to theZ
Company's Quarterly Report on Form 10-Q for the quarter ended April 30,
1996, as filed with the Securities and Exchange Commission on June 13,
1996.
= Incorporated herein by reference to the applicable exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended October
31, 1996, as filed with the Securities and Exchange Commission on
December 15, 1996.
+ Incorporated herein by reference to the applicable exhibit to the
Company's Annual Report on Form 10-K for the year ended January 31,
1997, as filed with the Securities and Exchange Commission on March 27,
1997.
& Incorporated herein by reference to the applicable exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended October
31, 1997, as filed with the Securities and Exchange Commission on
December 15, 1997.
# Incorporated herein by reference to the applicable exhibit to the
Company's Annual Report on Form 10-K for the year ended January 31,
1998, as filed with the Securities and Exchange Commission on April 13,
1998.
< Incorporated herein by reference to the applicable exhibit to the
Company's Quarter Report on Form 10-Q for the quarter ended October 31,
1998, as filed with the Securities and Exchange Commission on December
14, 1998.
(phi) Filed herewith.
47
<PAGE> 1
EXHIBIT 12.1
STATEMENT RE:
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended January 31,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings:
Earnings (loss) from operations
before income taxes $ (41,308) $ 18,369 $ 42,009 $ 47,099 $ 60,056
Interest expenses (1) 22,997 21,010 18,714 15,944 14,068
Amortization of deferred
financing costs 1,828 1,670 1,479 587 543
--------- --------- --------- --------- ---------
Total $ (16,483) $ 41,049 $ 62,202 $ 63,630 $ 74,667
========= ========= ========= ========= =========
Fixed charges:
Interest expense (1) $ 22,997 $ 21,010 $ 18,714 $ 15,944 $ 14,068
Amortization of deferred
financing costs 1,828 1,670 1,479 587 543
--------- --------- --------- --------- ---------
Total $ 24,825 $ 22,680 $ 20,193 $ 16,531 $ 14,611
========= ========= ========= ========= =========
Ratio of earnings to fixed charges (2) 1.81x 3.08x 3.85x 5.11x
</TABLE>
(1) Interest expense includes interest income, but excludes
amortization of deferred financing costs.
(2) Earnings were insufficient to cover fixed charges by $41.3 million
for the year ended January 31, 1995.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF SPECIALTY EQUIPMENT COMPANIES, INC.
Jurisdiction of Incorporation
Subsidiary or Organization
---------- -----------------------------
Bloomfield Industries Canada Limited Ontario, Canada
Coolpart B.V. The Netherlands
FM Manufacturing, Inc. Delaware
Gamko Holding B.V. The Netherlands
Specialty Equipment International B.V. The Netherlands
Specialty Equipment Foreign Sales Corporation Delaware
Specialty Equipment Manufacturing Corporation Delaware
Taylor-Chicago Corporation Illinois
Taylor Freezer (Cyprus) Limited Cyprus
Taylor Freezer International S.r.l. Rome, Italy
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
Specialty Equipment Companies, Inc.
We consent to incorporation by reference in the registration statement (No.
33-74604) on Form S-8 of Specialty Equipment Companies, Inc. of our report dated
March 17, 1999, relating to the consolidated balance sheets of Specialty
Equipment Companies, Inc. and subsidiaries as of January 31, 1998 and 1999, and
the related consolidated statements of operations, stockholders equity (deficit)
and comprehensive income and cash flows and related schedule for each of the
years in the three-year period ended January 31, 1999, which report appears in
the January 31, 1999 annual report on Form 10-K of Specialty Equipment
Companies, Inc.
KPMG PEAT MARWICK LLP
Chicago, Illinois
April 12, 1999
<PAGE> 1
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the individual whose signature appears
below hereby appoints Jeffrey P. Rhodenbaugh and Donald K. McKay, and each of
them, any one of whom may act without the joinder of the other, as his
attorney-in-fact with full power of substitution and resubstitution to sign on
his behalf in any and all capacities, and to sign and file all amendments and
post-effective amendments to, the Annual Report on Form 10-K ("Form 10-K") to be
filed under the Securities and Exchange Act of 1934 by Specialty Equipment
Companies, Inc., a Delaware corporation, on or about April 9, 1999, and any and
all other documents that may be required in connection with the filing of the
Form 10-K, which amendments may make such changes and additions to the Form 10-K
as such attorney-in-fact may deem necessary or appropriate.
/s/ Barry MacLean
-------------------------------------
Dated: March 29, 1999
<PAGE> 2
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the individual whose signature appears
below hereby appoints Jeffrey P. Rhodenbaugh and Donald K. McKay, and each of
them, any one of whom may act without the joinder of the other, as his
attorney-in-fact with full power of substitution and resubstitution to sign on
his behalf in any and all capacities, and to sign and file all amendments and
post-effective amendments to, the Annual Report on Form 10-K ("Form 10-K") to be
filed under the Securities and Exchange Act of 1934 by Specialty Equipment
Companies, Inc., a Delaware corporation, on or about April 9, 1999, and any and
all other documents that may be required in connection with the filing of the
Form 10-K, which amendments may make such changes and additions to the Form 10-K
as such attorney-in-fact may deem necessary or appropriate.
/s/ Malcolm Glazer
----------------------------------
Malcolm Glazer
Dated: March 25, 1999
<PAGE> 3
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the individual whose signature appears
below hereby appoints Jeffrey P. Rhodenbaugh and Donald K. McKay, and each of
them, any one of whom may act without the joinder of the other, as his
attorney-in-fact with full power of substitution and resubstitution to sign on
his behalf in any and all capacities, and to sign and file all amendments and
post-effective amendments to, the Annual Report on Form 10-K ("Form 10-K") to be
filed under the Securities and Exchange Act of 1934 by Specialty Equipment
Companies, Inc., a Delaware corporation, on or about April 9, 1999, and any and
all other documents that may be required in connection with the filing of the
Form 10-K, which amendments may make such changes and additions to the Form 10-K
as such attorney-in-fact may deem necessary or appropriate.
/s/ Avram Glazer
----------------------------------
Avram Glazer
Dated: March 26, 1999
<PAGE> 4
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the individual whose signature appears
below hereby appoints Jeffrey P. Rhodenbaugh and Donald K. McKay, and each of
them, any one of whom may act without the joinder of the other, as his
attorney-in-fact with full power of substitution and resubstitution to sign on
his behalf in any and all capacities, and to sign and file all amendments and
post-effective amendments to, the Annual Report on Form 10-K ("Form 10-K") to be
filed under the Securities and Exchange Act of 1934 by Specialty Equipment
Companies, Inc., a Delaware corporation, on or about April 9, 1999, and any and
all other documents that may be required in connection with the filing of the
Form 10-K, which amendments may make such changes and additions to the Form 10-K
as such attorney-in-fact may deem necessary or appropriate.
/s/ Kevin Glazer
----------------------------------
Dated: March 24, 1999
<PAGE> 5
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the individual whose signature appears
below hereby appoints Jeffrey P. Rhodenbaugh and Donald K. McKay, and each of
them, any one of whom may act without the joinder of the other, as his
attorney-in-fact with full power of substitution and resubstitution to sign on
his behalf in any and all capacities, and to sign and file all amendments and
post-effective amendments to, the Annual Report on Form 10-K ("Form 10-K") to be
filed under the Securities and Exchange Act of 1934 by Specialty Equipment
Companies, Inc., a Delaware corporation, on or about April 9, 1999, and any and
all other documents that may be required in connection with the filing of the
Form 10-K, which amendments may make such changes and additions to the Form 10-K
as such attorney-in-fact may deem necessary or appropriate.
/s/ Richard Kent
----------------------------------
Dated: March 24, 1999
<PAGE> 6
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the individual whose signature appears
below hereby appoints Jeffrey P. Rhodenbaugh and Donald K. McKay, and each of
them, any one of whom may act without the joinder of the other, as his
attorney-in-fact with full power of substitution and resubstitution to sign on
his behalf in any and all capacities, and to sign and file all amendments and
post-effective amendments to, the Annual Report on Form 10-K ("Form 10-K") to be
filed under the Securities and Exchange Act of 1934 by Specialty Equipment
Companies, Inc., a Delaware corporation, on or about April 9, 1999, and any and
all other documents that may be required in connection with the filing of the
Form 10-K, which amendments may make such changes and additions to the Form 10-K
as such attorney-in-fact may deem necessary or appropriate.
/s/ Daniel B. Greenwood
----------------------------------
Daniel B. Greenwood
Dated: March 29, 1999
<PAGE> 7
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the individual whose signature appears
below hereby appoints Jeffrey P. Rhodenbaugh and Donald K. McKay, and each of
them, any one of whom may act without the joinder of the other, as his
attorney-in-fact with full power of substitution and resubstitution to sign on
his behalf in any and all capacities, and to sign and file all amendments and
post-effective amendments to, the Annual Report on Form 10-K ("Form 10-K") to be
filed under the Securities and Exchange Act of 1934 by Specialty Equipment
Companies, Inc., a Delaware corporation, on or about April 9, 1999, and any and
all other documents that may be required in connection with the filing of the
Form 10-K, which amendments may make such changes and additions to the Form 10-K
as such attorney-in-fact may deem necessary or appropriate.
/s/ Charles Huthinson
----------------------------------
Charles Hutchinson
Dated: March 24, 1999
<PAGE> 8
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the individual whose signature appears
below hereby appoints Jeffrey P. Rhodenbaugh and Donald K. McKay, and each of
them, any one of whom may act without the joinder of the other, as his
attorney-in-fact with full power of substitution and resubstitution to sign on
his behalf in any and all capacities, and to sign and file all amendments and
post-effective amendments to, the Annual Report on Form 10-K ("Form 10-K") to be
filed under the Securities and Exchange Act of 1934 by Specialty Equipment
Companies, Inc., a Delaware corporation, on or about April 9, 1999, and any and
all other documents that may be required in connection with the filing of the
Form 10-K, which amendments may make such changes and additions to the Form 10-K
as such attorney-in-fact may deem necessary or appropriate.
/s/ William E. Dotterweich
----------------------------------
Dated: March 25, 1999
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