<PAGE> 1
Page 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended July 31, 2000
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission File Number: 0-22798
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SPECIALTY EQUIPMENT COMPANIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 36-3337593
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1245 Corporate Blvd., Suite 401, Aurora, IL 60504
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(Address of principal executive offices) (Zip Code)
(630) 585-5111
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. Yes X No .
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 12, 2000
----------------------------- ---------------------------------
Common Stock, $0.01 par value 19,515,887 shares
The exhibit index is on page 16.
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
SPECIALTY EQUIPMENT COMPANIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended Six months ended
July 31, July 31,
1999 2000 1999 2000
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenue $129,158 $134,666 $268,698 $266,063
Cost of sales 88,307 91,122 184,144 180,684
-------- -------- -------- --------
Gross margin 40,851 43,544 84,554 85,379
Selling, general and administrative expenses 21,409 22,644 44,065 46,446
-------- -------- -------- --------
Earnings from operations 19,442 20,900 40,489 38,933
Interest expense, net 2,004 2,394 3,867 4,643
-------- -------- -------- --------
Earnings from operations before income taxes 17,438 18,506 36,622 34,290
Income taxes 6,715 6,969 14,035 13,003
Minority interest 23 25 53 43
-------- -------- -------- --------
Net earnings $ 10,700 $ 11,512 $ 22,534 $ 21,244
======== ======== ======== ========
Basic earnings per share $ 0.59 $ 0.59 $ 1.23 $ 1.10
======== ======== ======== ========
Diluted earnings per share $ 0.54 $ 0.59 $ 1.12 $ 1.08
======== ======== ======== ========
Weighted average shares outstanding - basic 18,225 19,474 18,307 19,386
Weighted average shares outstanding - diluted 20,000 19,669 20,109 19,741
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
<PAGE> 3
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SPECIALTY EQUIPMENT COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
January 31, July 31,
2000 2000
-------- --------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 459 $ 11,632
Accounts receivable, net 71,501 76,725
Inventories 64,133 61,763
Deferred tax assets, net 27,938 27,938
Other current assets 3,411 3,500
-------- --------
Total current assets 167,442 181,558
Property, plant and equipment, net 51,406 51,330
Restricted cash equivalents 1,102 994
Goodwill 29,665 35,021
Other intangibles, net 15,357 15,269
Other assets 344 333
-------- --------
Total assets $265,316 $284,505
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt $ 961 $ 218
Accounts payable 31,932 32,030
Accrued liabilities 69,921 74,297
Accrued income taxes 6,883 16,179
-------- --------
Total current liabilities 109,697 122,724
Long-term debt, excluding current installments 126,374 118,723
Other non-current liabilities 1,868 1,694
Stockholders' equity:
Common stock 193 195
Additional paid-in capital 68,999 67,263
Accumulated deficit (35,525) (22,957)
Accumulated other comprehensive income (1,682) (2,354)
Treasury stock, at cost (4,608) (783)
-------- --------
Total stockholders' equity 27,377 41,364
-------- --------
Total liabilities and
stockholders' equity $265,316 $284,505
======== ========
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
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SPECIALTY EQUIPMENT COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Six months ended
July 31,
1999 2000
-------- -------
Cash flows from operating activities: (unaudited)
Net earnings $ 22,534 $ 21,244
Items not affecting cash:
Depreciation 2,843 3,313
Amortization 425 782
Utilization of net operating loss carryforward 546 -
Changes in current assets and liabilities
(net of acquisitions):
Accounts receivable (3,014) (5,244)
Inventories 2,495 3,782
Other current assets (360) (37)
Accounts payable and other current liabilities,
excluding current installments of long-term debt 14,645 13,721
-------- --------
Net cash provided by
operating activities 40,114 37,561
Cash flows from investing activities:
Additions to property, plant and equipment, net (5,480) (3,020)
Cash equivalents restricted for capital additions (2,282) 108
Businesses acquired - (7,681)
-------- --------
Net cash used in investing activities (7,762) (10,593)
Cash flows from financing activities:
Decrease in revolving credit facility (10,000) (7,000)
Proceeds from long-term debt 5,200 -
Repayments of long-term debt (27) (1,394)
Financing costs (130) -
Proceeds from exercise of stock options 3,950 521
Options withheld for taxes (4,242) (2,255)
Acquisition of treasury stock (21,687) (4,850)
-------- --------
Net cash used in financing activities (26,936) (14,978)
-------- --------
Other, net (505) (817)
-------- --------
Net increase in cash 4,911 11,173
Cash and cash equivalents:
Beginning of period 6,814 459
-------- --------
End of period $ 11,725 $ 11,632
======== ========
Cash paid for:
Interest, net $ 4,105 $ 4,658
======== ========
Income taxes $ 1,084 $ 3,707
======== ========
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
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SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. General
These consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto for the fiscal
year ended January 31, 2000 included in the Specialty Equipment Companies, Inc.
("Specialty" or the "Company") Annual Report on Form 10-K filed with the
Securities and Exchange Commission ("Commission") on April 24, 2000.
In the opinion of management, all adjustments, consisting only of
normal recurring adjustments necessary for a fair statement of (a) the results
of operations for the three and six month periods ended July 31, 1999 and 2000,
(b) the financial position at July 31, 2000 and (c) the cash flows for the six
month periods ended July 31, 1999 and 2000, have been made. The financial
results for the three and six months ended July 31, 2000 are not necessarily
indicative of the financial results for the entire 2001 fiscal year. Certain
reclassifications have been made to the prior period financial statements to
conform to the current period presentation.
Net earnings per share is computed based on the weighted average number
of basic and diluted common shares outstanding during the period.
Comprehensive income includes all changes in stockholders' equity
during the relevant period except those resulting from investments by owners and
distributions to owners. Comprehensive earnings for the three and six months
ended July 31, 1999 and 2000 consisted of the following:
Three months ended Six months ended
July 31, July 31,
1999 2000 1999 2000
-------- ------- ------- -------
Net earnings $ 10,700 $11,512 $22,534 $21,244
Other comprehensive earnings:
Foreign currency translation
adjustment (64) 17 (673) (672)
-------- ------- ------- -------
Comprehensive earnings $ 10,636 $11,529 $21,861 $20,572
======== ======= ======= =======
2. Accounts Receivable
Accounts receivable at the following dates consisted of the following:
January 31, July 31,
2000 2000
------- -------
Accounts receivable $75,943 $81,273
Less: allowance for doubtful accounts 4,442 4,548
------- -------
$71,501 $76,725
======= =======
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SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. Inventories
Inventories at the following dates consisted of the following:
January 31, July 31,
2000 2000
------- -------
Raw materials $32,393 $34,464
Work-in-process 8,261 5,418
Finished goods 23,666 22,068
------- -------
64,320 61,950
Less: excess of FIFO cost over LIFO 187 187
------- -------
Total $64,133 $61,763
======= =======
The Company uses the LIFO method of valuing inventories. LIFO,
compared to FIFO, had a de minimis effect on the cost of sales for the three and
six month periods ended July 31, 1999 and 2000.
4. Intangibles and Goodwill:
January 31, July 31,
2000 2000
------- -------
Goodwill $30,746 $36,541
Less: accumulated amortization 1,081 1,520
------- -------
$29,665 $35,021
======= =======
Intangibles consist of the following:
Patents $ 1,516 $ 1,516
Other intangibles 52,482 52,756
Deferred pension costs 2,801 2,801
------- -------
56,799 57,073
Less: accumulated amortization 41,442 41,804
------- -------
Net intangibles $15,357 $15,269
======= =======
Other intangibles primarily include deferred financing fees,
engineering drawings, distribution networks and skilled workforce.
5. Income Taxes
At January 31, 2000, the Company had a net deferred tax asset of $27.9
million. The Company has approximately $7.8 million in net operating loss (NOL)
carry forwards. However, a number of issues regarding the treatment of certain
changes in ownership of the Company pursuant to certain provisions of the
Internal Revenue Code of 1986, as amended ("IRC"), may arise which, if
determined adversely, could limit the amount and/or use of the NOL carry
forwards. The NOL carry forwards are available through fiscal 2008.
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SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. Long-Term Debt
Long-term debt at the following dates consisted of the following:
January 31, July 31,
2000 2000
-------- --------
Revolving line of credit $113,000 $106,000
Industrial project revenue bonds due 2009 and 2014 9,565 9,565
Other long-term debt 4,770 3,376
-------- --------
127,335 118,941
Less: current installments 961 218
-------- --------
Total long-term debt $126,374 $118,723
======== ========
Under the Company's $200 million revolving credit facility with
Bank of America as agent bank (the "BA Bank Facility"), the Company had $86.5
million available for additional borrowings at July 31, 2000.
7. Commitments and Contingent Liabilities
The Company is involved in litigation and claims incidental to its
business. The ultimate outcome of these matters cannot presently be determined
because of the uncertainties inherent in litigation. However, such claims are
being vigorously contested and management does not believe that it is probable
that the ultimate outcome of the loss contingencies relating to such litigation
and claims will have, individually or in the aggregate, a material adverse
impact upon the financial condition or results of operations of the Company.
The following is a summary of the more significant litigation and claims.
Litigation
The Company was a defendant along with other defendants in an action filed on
July 20, 1995 entitled "Thermodyne Food Service Products, Inc. and AFTEC, Inc.
v. McDonald's Corporation, et al." which was transferred to the United States
District Court, Northern District of Illinois, Eastern Division (the "Thermodyne
Action"). Plaintiffs alleged that Specialty and other defendants misappropriated
trade secrets in connection with the Company's development of an oven for
McDonald's and OSI Industries, Inc. ("OSI"). As a result of a ruling on a motion
to dismiss, all the claims against Specialty other than the trade secret claim
were dismissed. The case was settled by the terms of a confidential settlement
agreement dated May 28, 1997 pursuant to which one of the defendants agreed to
make a settlement payment in a confidential amount. Although Specialty is not
required under the terms of this settlement agreement to pay any damages or make
any settlement payments, it is possible that the codefendant that did make a
settlement payment will seek a contribution from Specialty. On or about November
13, 1998, defendants in an action entitled "McDonald's Corporation v. American
Motorists Insurance Co." No. 97L0014, pending in the Circuit Court of DuPage
County, Illinois, sought leave to file a third party complaint asserting
contingent subrogation rights against the Company, and other defendants from the
Thermodyne Action referred to above. The court denied that motion. On or about
March 5, 1999, St. Paul Surplus Lines Ins. Co., American Motorists Insurance
Co., Century Indemnity Co., Indemnity Insurance Co of North America and Federal
Insurance Co. (collectively "Carriers") filed an action in the Circuit Court of
DuPage County, Illinois, No. 99 MR 0071 against the Company, and the other
defendants in the Thermodyne Action (except for McDonald's). Carriers allege
that they are subrogated to contribution claims McDonald's may have against the
Company arising from the Thermodyne Action. Count I purports to state a claim
for contribution under 740 ILCS 100/0.01 et. seq. for the Company's alleged
misappropriation of trade secrets, and seeks judgment "in an amount equal to the
relative degree
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SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
of fault found attributable to the defendants in the Thermodyne Action." Count
II purports to state a claim for contribution arising from OSI's alleged
tortious interference with the contract and seeks the same relief sought in
Count I. Counts III and IV are not brought against the Company. The complaint
was dismissed with prejudice on June 17, 1999. Plaintiff's time to appeal has
not yet run. Management believes that the Company will not suffer a material
loss related to this action.
The Company and certain of its current and former directors are named as
defendants in an action filed by Virginia A. Noerr, who claims to own shares of
the Company's common stock. The action "Noerr v. Greenwood et al.," C.A. No.
14320, is pending in the Court of Chancery for the State of Delaware in and for
New Castle County, Delaware. Plaintiff purports to bring this action both as a
class action on behalf of all stockholders of record on April 2, 1993 and
derivatively for the benefit of the Company. Plaintiff's complaint, which has
twice been amended, asserts that (i) the defendants breached their fiduciary
duties to the Company by soliciting stockholder approval of the Company's
Executive Long-Term Incentive Plan and Non-Employee Directors Long-Term
Incentive Plan by means of a misleading proxy statement and (ii) the Board
breached its fiduciary duty in approving such option plans. The complaint seeks
an order declaring the stockholder approval of those option plans void,
canceling the options granted thereunder, enjoining the directors from
exercising any such options, imposing a constructive trust for the benefit of
Specialty upon any profits the individual named defendants may have made through
exercise of their options, requiring an accounting in connection therewith, and
awarding unspecified damages plus plaintiff's attorneys' fees and expenses in an
unspecified amount. The most recent amended complaint was filed after the court
granted in part the defendants' joint motion to dismiss the complaint, striking
certain non-disclosure claims; the court's order, however, denied the remainder
of defendants' motion to dismiss. Specialty and the individual defendants
believe that the allegations made in the complaint as amended are without merit
and are factually incorrect and Specialty intends to contest these allegations
vigorously. The individual defendants have each made demand upon Specialty for
indemnification with respect to this action. Management believes that if
Specialty were liable to the individual defendants for indemnification, the
uninsured portion of such liability would not be material.
Environmental and Related Matters
On May 5, 1994, Specialty (doing business as Taylor Freezer Company) was among
more than 80 parties notified as potential third-party defendants in an action
involving the clean up of the MIG/Dewane Landfill near Belvidere, Illinois. The
principal owners and operators of the landfill have filed a third-party
complaint. The principal users of the landfill who in turn had been sued by the
Environmental Protection Agency ("EPA") in April 1992 sued those owners and
operators. 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 of the
costs associated with the remedial investigation of the site. In addition, the
Company has incurred a minimal expense associated with the administration of
this matter. Specialty has not settled its alleged liability for clean up costs
at the site. Beatrice Company (ConAgra) has assumed defense of the matter and
has agreed to defend and indemnify Specialty for claims related to the
MIG/Dewane site to the extent they are related to Taylor and the events giving
rise to the claims occurred during the Beatrice Company (ConAgra) period of
ownership. Based upon presently available information, management does not
believe this matter will have a material effect on Specialty's results of
operations or financial condition.
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 or
results of operations of the Company.
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SPECIALTY EQUIPMENT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Letters of Credit
As of July 31, 2000, the Company had letters of credit outstanding
totaling $12.9 million, which guarantee various business activities, including
$9.8 million of letters of credit which guarantee the Industrial Project Revenue
Bonds (see note 6 above).
8. Stock Option Plan and Stock Warrants
On May 6, 1993 the stockholders approved long-term incentive plans for
both non-employee directors and employees. Pursuant to the Non-Employee
Directors Long-Term Incentive Plan ("1993 Director Plan") each non-employee
director was granted an option to purchase 175,241 shares of the Company's
common stock at a price of $1.00 per share. The aggregate grants under the 1993
Director Plan totaled 876,205 shares. The options under the Director Plan all
vested and became exercisable on May 6, 1995; as on such date all of the
conditions to vesting were satisfied. All options awarded pursuant to the 1993
Director Plan expired on May 6, 2000. On May 25, 2000 the stockholders of the
Company approved a new long-term incentive plan for the non-employee directors
of the Company (the "2000 Director Plan"). On May 26, 2000 each non-employee
director was granted an option to purchase 2,800 shares of the Company's common
stock at a price of $20.625 per share. The aggregate grants made were 16,800
shares and have a vesting period of five years and term of 10 years.
The Executive Long-Term Incentive Plan, as amended, ("Employee Plan")
allows for the issue of a total of 5,004,814 shares of the Company's common
stock. A total of 534,750 options may still be granted under the Employee Plan.
All of the options granted are at an exercise price, which was not less than
management's determination of the fair market value of the underlying shares at
the respective dates of grant.
The following sets forth information with respect to options issued and
outstanding:
<TABLE>
<CAPTION>
Average option Range of
Shares price per share Option Prices
--------- --------------- -------------
<S> <C> <C> <C>
Options outstanding at January 31, 2000 1,603,532 $ 10.28 $1.00-23.25
Options issued 40,000 18.98 18.875-20.50
Options exercised (481,960) 1.00 1.00
Options withheld for taxes (99,272) 1.00 1.00
--------- ------- -------------
Options outstanding at
April 30, 2000 (443,300 exercisable) 1,062,300 $ 15.69 $1.00-23.25
Options issued 16,800 20.56 20.5625
Options forfeited (15,000) 22.50 22.50
Options exercised (127,550) 1.00 1.00
Options withheld for taxes (12,450) 1.00 1.00
--------- ------- -------------
Options outstanding at
July 31, 2000 (203,300 exercisable) 924,100 $ 17.90 $1.00-23.25
========= ======= ===========
</TABLE>
Options withheld for taxes are options, which are withheld by the
Company, upon exercise by the grantee, to satisfy the Company's tax withholding
obligation for the grantee's tax liability.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
Three and Six Month Periods Ended July 31, 2000 (Fiscal 2001) Compared to Three
and Six Month Periods Ended July 31, 1999 (Fiscal 2000).
Revenue. Revenue for the three months ended July 31, 2000 increased 4.3% to
$134.7 million compared with $129.2 million for the comparable period in fiscal
2000. For the first six months of fiscal 2001, revenue was down 1.0% to $266.1
million versus $268.7 million in the first half of fiscal 2000. The revenue
increase for the three months ended July 31, 2000 was primarily attributable
sales from the Carter-Hoffmann and Nova acquisitions and increased sales of
foodservice equipment offset by lower sales of beverage equipment to the U.S.
soft drink bottler market compared to the prior fiscal year period. Management
is uncertain as to the timing of future capital spending by its large soft drink
soft drink bottler customers for the Company's refrigeration equipment. In
addition, sales in the three months ended July 31, 2000 were adversely impacted
as a result of the prior year period including a large non-recurring order to a
quick service restaurant chain. Revenue was also negatively impacted by the
strength of the U.S. dollar as compared to the Dutch Guilder which had the
effect of decreasing the dollar amount of sales generated by Gamko. Sales in the
three and six month period ended July 31, 2000 include $5.3 million and $11.3
million of sales by Carter-Hoffmann, which was acquired on September 30, 1999
and $1.3 million and $1.7 million of sales by Nova, which was acquired on March
31, 2000. Sales of products for use outside the U.S. decreased $9.0 million for
the three and six month periods ended July 31, 2000 compared to the prior year
periods, principally as a result of lower sales to the U.S. based global
bottlers. For the first six months of fiscal 2001, revenue from sales of
products for use outside the United States was 27.8% of revenue as compared with
30.9% for the same period in fiscal 2000.
Gross Margin. Gross margin for the three months ended July 31, 2000 increased
6.6% to $43.5 million, compared with $40.9 million for the comparable period in
fiscal 2000. As a percent of revenue, gross margin increased from 31.6% of
revenue for the three-month period ended July 31, 1999 to 32.3% of revenue in
the three-month period ended July 31, 2000. Gross margin for the six months
ended July 31, 2000 increased 1.0% to $85.4 million, compared with $84.6 million
for the comparable period in fiscal 2000. As a percent of revenue, gross margin
increased from 31.5% of revenue for the six-month period ended July 31, 1999 to
32.1% of revenue in the six-month period ended July 31, 2000. The improvement in
margins is a result of a favorable sales mix and efforts to reduce expenses at
certain of our global brands.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses for the three months ended July 31, 2000
increased 5.8% to $22.6 million from $21.4 million for the same period in fiscal
2000. As a percent of revenue, SG&A increased from 16.5% to 16.8% in the three
months ended July 31, 2000, compared to the comparable period in fiscal 2000.
SG&A expenses for the six months ended July 31, 2000 increased 5.4% to $46.4
million from $44.1 million for the same period in fiscal 2000. As a percent of
revenue, SG&A increased from 16.4% to 17.5% in the six months ended July 31,
2000, compared to the comparable period in fiscal 2000. The increase was due in
part to increased research and development spending and the acquisitions of
Carter-Hoffmann and Nova.
Interest Expense. Interest expense for the three months ended July 31, 2000
increased 19.5% to $2.4 million compared with the same period in fiscal 2000.
Interest expense for the six months ended July 31, 2000 increased 20.1% to $4.6
million compared with the same period in fiscal 2000. The increase in interest
expense resulted from higher interest rates compared to the prior year period.
Included in the Company's borrowings for the first six months of fiscal 2001
were the acquisitions of Carter-Hoffmann on September 30, 1999 and Nova on March
31, 2000.
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Income Taxes. Income tax expense for the three months ended July 31, 2000
increased 3.8% to $7.0 million compared to $6.7 million for the comparable three
month period in fiscal 2000. The increase in tax expense is largely attributed
to increased earnings before taxes of approximately $1.1 million. For the six
months ended July 31, 2000 income tax expense decreased 7.4% to $13.0 million
compared to $14.0 million for the comparable period in fiscal 2000. The decrease
in tax expense is largely attributed to decreased earnings before taxes of
approximately $2.3 million.
The following table sets forth selected operating data as a percentage
of Company net revenue:
Three months ended Six months ended
July 31, July 31,
1999(%) 2000(%) 1999(%) 2000(%)
------- ------- ------- -------
Beverage-Air 41.7 38.8 45.2 39.6
Carter-Hoffmann - 3.9 - 4.3
Specialty Equipment International 7.0 6.8 6.9 6.7
Taylor 36.8 34.4 34.5 33.9
Wells/Bloomfield 11.2 11.8 10.7 11.9
World Dryer 3.3 4.3 2.7 3.6
------- ------- ------- -------
Net revenue 100.0 100.0 100.0 100.0
Gross margin 31.6 32.3 31.5 32.1
Selling, general and
administrative expenses 16.5 16.8 16.4 17.5
------- ------- ------- -------
Earnings from operations 15.1 15.5 15.1 14.6
Interest expense, net (1.6) (1.8) (1.4) (1.7)
Income taxes (5.2) (5.2) (5.2) (4.9)
Minority interest - - (0.1) -
------- ------- ------- -------
Net earnings 8.3 8.5 8.4 8.0
======= ======= ======= =======
Liquidity and Capital Resources
Net cash flows provided by operations were $37.6 million for the six
months ended July 31, 2000 compared with $40.1 million for the six months ended
July 31, 1999. The decrease is primarily the result of increased use of
working capital compared to the prior year and lower net earnings from
operations. See -- "Results of Operations -- Revenue."
Net cash used in investing activities amounted to $10.6 million for the
six months ended July 31, 2000 compared with $7.8 million for the six months
ended July 31, 1999. The increase is primarily attributable to the Nova
acquisition, offset by reduced capital spending. Through the first six months of
fiscal 2001, total capital expenditures have been $3.0 million. The Company
anticipates that capital expenditures for fiscal 2001 will be approximately $8.5
million.
In January 2000 the Company announced a plan to purchase $30 million of
its common stock (up to 1,000,000 shares) in the open market. For the six months
ended July 31, 2000, the Company purchased 250,250 shares of its common stock at
an average price of $19.38 per share.
As of July 31, 2000, the Company had net working capital of $58.8
million. The Company's average operating working capital (defined as average
monthly gross accounts receivable and net inventory less accounts payable) as a
percentage of sales decreased from 23% during fiscal year 2000 to 21% for the
six months ended July 31, 2000. The Company's earnings from operations were
sufficient to cover fixed charges for the six months ended July 31, 2000.
<PAGE> 12
Page 12
As of July 31, 2000, the Company had borrowings of $106.0 million under
the Revolving Credit Facility of its BA Bank Facility. In addition, it had
outstanding letters of credit in the amount of $12.9 million, including $9.8
million of letters of credit which guarantee the Industrial Project Revenue
Bonds (referenced in note 6 of notes to the unaudited consolidated financial
statements included as item 1 hereto). Under the Revolving Credit Facility, the
Company had $86.5 million available for additional borrowings. In addition, the
Company had cash and cash equivalents of $11.6 million as of July 31, 2000.
The BA Bank Facility includes two financial covenants, which Specialty
was required to meet on July 31, 2000. The first financial covenant is a total
funded debt to cash flow ratio for the twelve months ended July 31, 2000, of not
more than 3.50:1.00. The second covenant is an interest coverage ratio, which
had to be at least 3.50:1.00 for the twelve months ended July 31, 2000.
Specialty met each of these covenants as it reported a total funded debt to cash
flow ratio for the twelve months ended July 31, 2000 of 1.72:1.00; and an
interest coverage ratio for the twelve months ended July 31, 2000 of 8.66:1.00.
Management believes that the BA Bank Facility and the other sources of
capital described above, with internally generated funds, will be adequate to
meet the Company's anticipated capital and cash requirements for at least the
next twelve months, including debt service and corporate income taxes.
Impact of Inflation
Management does not believe that inflation has had a material impact on
the Company's operations during the first six months of fiscal 2001. Management
believes that the Company may face increasing costs during the balance of the
fiscal year as a result of inflation, which the Company may not fully be able to
offset with increased productivity or pass on to its customers due to
competitive factors within the industry.
Euro Currency
Specialty derived approximately 13% of its revenue in fiscal 2000 from
its operations in Western Europe. Historically, transactions in Western Europe
have been denominated primarily in U.S. currency; however, transactions by our
Gamko subsidiary are denominated in a variety of European currencies.
On January 1, 1999, eleven of the fifteen member countries of the
European Union adopted the Euro as their common legal currency. Following the
introduction of the Euro, the local currencies are scheduled to remain legal
tender in the participating countries until January 1, 2002. During this
transition period, goods and services may be paid for using either the Euro or
the participating country's local currency. Thereafter, the local currencies
will be canceled and the Euro currency will be used for all transactions
occurring in 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. Management does not believe the Euro conversion has had a material
adverse affect upon the Company.
<PAGE> 13
Page 13
Safe Harbor for Forward-Looking Statements Under the Securities Litigation
Reform Act of 1995
Except for historical information contained herein, this Quarterly
Report to Stockholders contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated and discussed herein. These factors
include: general economic conditions and their impact on the growth of the quick
service restaurant and soft drink bottler industries, fluctuation in demand for
the Company's products due to trends in the foodservice and soft drink bottler
industries, the Company's dependence on its major customer and key management
personnel, the effects of competition, the demands relating to further overseas
expansion, the significance of the Company's outstanding indebtedness and other
factors detailed elsewhere from time to time in the Company's filings with the
Securities and Exchange Commission.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk during
the first six months ended July 31, 2000. For additional information on market
risk, refer to the "Quantitative and Qualitative Disclosures About Market Risk"
section of the Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 2000.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See note 7 of "Notes to Unaudited Consolidated Financial Statements"
included in Part I. Item 1. of this Form 10-Q.
Item 4. Submissions of Matters to a Vote of Security Holders
At the Company's Annual Stockholder Meeting on May 25, 2000,
stockholders elected the following directors and approved the adoption of the
Company's 2000 Non-Employee Director Long-Term Incentive Plan. Following is a
record of the votes cast:
Election of Directors: Votes For Votes Withheld
--------- --------------
Jeffrey P. Rhodenbaugh 15,966,308 160,105
Malcolm I. Glazer 15,965,831 160,582
Barry L. MacLean 15,966,308 160,105
Votes For Votes Against Abstentions
--------- ------------- -----------
Adoption of the Company's 2000
Non-Employee Director Long-Term
Incentive Plan: 15,790,927 323,010 12,476
There were no other matters submitted to a vote of stockholders for the
quarter ended July 31, 2000.
<PAGE> 14
Page 14
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits
10.1 Amended Employment Retention Agreement Between Specialty Equipment
Companies, Inc. and Jeffrey P. Rhodenbaugh
10.2 Amended Employment Retention Agreement Between Specialty Equipment
Companies, Inc. and Donald K. McKay
10.3 Amended Employment Retention Agreement Between Specialty Equipment
Companies, Inc. and Daniel B. Greenwood
10.4 Employment Retention Agreement Between Specialty Equipment
Companies, Inc. and Robert R. Friedl
27.1 Financial data schedule.
2. Reports on Form 8-K.
None.
<PAGE> 15
Page 15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Specialty Equipment Companies, Inc.
(Registrant)
Date: September 14, 2000 /s/ Jeffrey P. Rhodenbaugh
-------------------- -----------------------------------------------
Jeffrey P. Rhodenbaugh, Chief Executive Officer
(Principal Executive Officer)
Date: September 14, 2000 /s/ Robert R. Friedl
-------------------- -----------------------------------------------
Robert R. Friedl, Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE> 16
Page 16
Exhibit Index
Exhibit
No. Description
------------ ------------
10.1 Amended Employment Retention Agreement Between Specialty
Equipment Companies, Inc. and Jeffrey P. Rhodenbaugh
10.2 Amended Employment Retention Agreement Between Specialty
Equipment Companies, Inc. and Donald K. McKay
10.3 Amended Employment Retention Agreement Between Specialty
Equipment Companies, Inc. and Daniel B. Greenwood
10.4 Employment Retention Agreement Between Specialty Equipment
Companies, Inc. and Robert R. Friedl
Financial data schedule.
27.1
