-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FI7w8G+oPqjdmoDr8PuNd11OqC16gvPIvWqwuQYvXuLXjcfP/XJjcAzDUFptVKVj FUbLUX/GZoog64YqEq7ayg== 0001047469-98-031907.txt : 19980818 0001047469-98-031907.hdr.sgml : 19980818 ACCESSION NUMBER: 0001047469-98-031907 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980704 FILED AS OF DATE: 19980817 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDDLEBY CORP CENTRAL INDEX KEY: 0000769520 STANDARD INDUSTRIAL CLASSIFICATION: REFRIGERATION & SERVICE INDUSTRY MACHINERY [3580] IRS NUMBER: 363352497 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09973 FILM NUMBER: 98692861 BUSINESS ADDRESS: STREET 1: 2850 W GOLF RD STREET 2: STE 405 CITY: ROLLING MEADOWS STATE: IL ZIP: 60008 BUSINESS PHONE: 7087413300 MAIL ADDRESS: STREET 1: 1400 TOASTMASTER DRIVE CITY: ELGIN STATE: IL ZIP: 60120 10-Q 1 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE PERIOD ENDED JULY 4, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 1-9973 THE MIDDLEBY CORPORATION ---------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) DELAWARE 36-3352497 ------------------------------ ---------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 2850 W. GOLF ROAD, SUITE 405, ROLLING MEADOWS, ILLINOIS 60008 - ------------------------------------------------------- -------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone No., including Area Code (847) 758-3880 ---------------- 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 twelve (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 --- --- As of July 6, 1998, there were 10,982,021 shares of the Registrant's common stock outstanding. THE MIDDLEBY CORPORATION AND SUBSIDIARIES QUARTER ENDED JULY 4, 1998 INDEX
DESCRIPTION PAGE PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements BALANCE SHEETS 1 July 4, 1998 and January 3, 1998 STATEMENTS OF EARNINGS 2 July 4, 1998 and June 28, 1997 STATEMENTS OF CASH FLOWS 3 July 4, 1998 and June 28, 1997 NOTES TO FINANCIAL STATEMENTS 4 Item 2. Management's Discussion and Analysis 8 of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 PART II. OTHER INFORMATION 14
PART I. FINANCIAL INFORMATION THE MIDDLEBY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED) JULY 4, 1998 JAN. 3, 1998 ------------ ------------ ASSETS - -------------------------------------- Cash and cash equivalents............. $ 1,533 $ 12,321 Accounts receivable, net.............. 26,182 22,251 Inventories, net...................... 26,636 24,072 Prepaid expenses and other............ 1,779 1,248 Current deferred taxes................ 2,462 3,000 -------- -------- Total current assets............. 58,592 62,892 Property, plant and equipment, net of accumulated depreciation of $14,659 and $13,534................. 22,876 21,790 Excess purchase price over net assets acquired, net of accumulated amortization of $4,907 and $4,673.............................. 13,782 12,882 Deferred taxes........................ 3,835 3,779 Other assets.......................... 2,322 2,135 -------- -------- Total assets..................... $101,407 $103,478 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY - -------------------------------------- Current maturities of long-term debt.. $ 2,757 $ 3,595 Accounts payable...................... 8,888 11,600 Accrued expenses...................... 9,287 9,255 -------- -------- Total current liabilities........ 20,932 24,450 Long-term debt........................ 24,287 24,318 Other non-current liabilities......... 1,934 2,109 Shareholders' equity: Preferred stock, $.01 par value; nonvoting; 2,000,000 shares authorized; none issued........... - - Common stock, $.01 par value; 20,000,000 shares authorized; 10,982,000 and 10,895,000 issued and outstanding in 1998 and 1997, respectively................ 110 109 Paid-in capital..................... 54,583 53,984 Cumulative translation adjustment... (1,431) (1,173) Accumulated earnings (deficit)...... 992 (319) -------- -------- Total shareholders' equity....... 54,254 52,601 -------- -------- Total liabilities and shareholders' equity.... $101,407 $103,478 -------- -------- -------- --------
See accompanying notes - 1 - THE MIDDLEBY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Months Ended Six Months Ended -------------------- --------------------- July 4, June 28, July 4, June 28, 1998 1997 1998 1997 ---- ---- ---- ---- Net sales. . . . . . . . . . . . . . . . $ 33,641 $ 42,082 $ 64,742 $ 74,780 Cost of sales. . . . . . . . . . . . . . 22,969 29,268 44,632 51,492 -------- -------- -------- -------- Gross profit . . . . . . . . . . . . 10,672 12,814 20,110 23,288 Selling and distribution expenses. . . . 5,417 6,035 10,518 10,716 General and administrative expenses. . . 3,193 3,044 5,909 5,719 -------- -------- -------- -------- Income from operations . . . . . . . 2,062 3,735 3,683 6,853 Interest expense and deferred financing amortization . . . . . . . . 759 1,257 1,496 2,338 Other expense(income), net . . . . . . . 141 18 253 (20) -------- -------- -------- -------- Earnings before income taxes . . . . 1,162 2,460 1,934 4,535 Provision for income taxes.... . . . . . 371 873 623 1,562 -------- -------- -------- -------- Earnings from continuing operations . . . . . . . . . . . . 791 1,587 1,311 2,973 -------- -------- -------- -------- Loss from discontinued operations, net of tax . . . . . . . . . . . . . - (564) - (564) -------- -------- -------- -------- Net earnings . . . . . . . . . . . . $ 791 $ 1,023 $ 1,311 $ 2,409 -------- -------- -------- -------- -------- -------- -------- -------- Basic earnings (loss) per share: Continuing operations. . . . . . . . $ 0.07 $ 0.18 $ 0.12 $ 0.34 Discontinued operations. . . . . . . 0.00 (0.06) 0.00 (0.06) -------- -------- -------- -------- Net earnings per share . . . . . . . $ 0.07 $ 0.12 $ 0.12 $ 0.28 -------- -------- -------- -------- -------- -------- -------- -------- Weighted average number of shares. . 11,007 8,481 10,972 8,476 Diluted earnings (loss) per share: Continuing operations. . . . . . . . $ 0.07 $ 0.18 $ 0.12 $ 0.34 Discontinued operations. . . . . . . 0.00 (0.06) 0.00 (0.06) -------- -------- -------- -------- Net earnings per share . . . . . . . $ 0.07 $ 0.12 $ 0.12 $ 0.28 -------- -------- -------- -------- -------- -------- -------- -------- Weighted average number of shares. . . . 11,202 8,757 11,170 8,739
See accompanying notes - 2 - THE MIDDLEBY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED -------------------------- JULY 4, 1998 JUNE 28, 1997 ------------ ------------- Cash flows from operating activities- Net earnings............................ $ 1,311 $ 2,409 Adjustments to reconcile net earnings to cash provided by continuing operating activities- Depreciation and amortization......... 1,395 1,500 Utilization of NOL's.................. 604 1,416 Discontinued operations............... - 564 Changes in assets and liabilities- Accounts receivable................. (3,931) (6,525) Inventories......................... (2,564) (3,725) Prepaid expenses and other assets... (750) (914) Accounts payable and other liabilities....................... (2,681) 3,407 --------- --------- Net cash used in continuing operating activities.................. (6,616) (1,868) Net cash used in discontinued operations............... - (2,963) --------- --------- Net cash used in operating activities... (6,616) (4,831) --------- --------- Cash flows from investing activities- Purchase of subsidiary minority interest.............................. (1,134) - Proceeds from sale of discontinued operations............................ - 5,081 Additions to property and equipment..... (2,211) (1,702) --------- --------- Net cash (used in) provided by investing activities.................. (3,345) 3,379 --------- --------- Cash flows from financing activities- Increase in revolving credit line, net.. - 2,687 Reduction in term loans................. - (2,595) Reduction in capital expenditure loan... - (50) Reduction in intellectual property lease (451) - Reduction in proceeds from foreign bank debt..................... (419) 1,142 Other financing activities, net......... 43 188 --------- --------- Net cash (used in) provided by financing activities.................. (827) 1,372 --------- --------- Changes in cash and cash equivalents- Net decrease in cash and cash equivalents.................. (10,788) (80) Cash and cash equivalents at beginning of year..................... 12,321 1,410 --------- --------- Cash and cash equivalents at end of quarter............................ $ 1,533 $ 1,330 --------- --------- --------- --------- Interest paid............................. $ 1,152 $ 2,011 --------- --------- --------- --------- Income taxes paid......................... $ 558 $ 120 --------- --------- --------- ---------
See accompanying notes - 3 - THE MIDDLEBY CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JULY 4, 1998 (UNAUDITED) 1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. BASIS OF PRESENTATION The financial statements have been prepared by The Middleby Corporation (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information not misleading. These financial statements should be read in conjunction with the financial statements and related notes contained in the Company's 1997 Annual Report. Other than as indicated herein, there have been no significant changes from the data presented in said Report. In the opinion of management, the financial statements contain all adjustments necessary to present fairly the financial position of the Company as of July 4, 1998 and January 3, 1998, and the results of operations for the three and six months ended July 4, 1998 and June 28, 1997 and cash flows for the six months ended July 4, 1998 and June 28, 1997. B. COMPREHENSIVE INCOME During the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which requires companies to report all changes in equity during a period, except those resulting from investment by owners and distribution to owners, in a financial statement for the period in which they are recognized. Components of comprehensive income were as follows:
Six Months Ended July 4, 1998 June 28, 1997 ------------ ------------- (In thousands) Net earnings.................. $ 1,311 $ 2,409 Cumulative translation adjustment................. (258) 8 ------- ------- Comprehensive Income $ 1,053 $ 2,417 ------- ------- ------- -------
- 4 - C. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assesses the effectiveness of transactions that receive hedge accounting. Statement 133 is effective for fiscal years beginning after June 15, 1999 and may be adopted earlier at the Company's election. Statement 133 cannot be applied retroactively. Statement 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the company's election, before January 1, 1998). The Company does not utilize derivative instruments or hedge any transactions and therefore adoption of Statement 133 would not materially affect the financial statements as reported. However, the Company may elect to enter into such transactions in the future. Accordingly, adoption of Statement 133 could increase volatility in future earnings and other comprehensive income. 2) INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". The Company has recorded an income tax provision of $623,000 for the fiscal six months ended July 4, 1998. The Company has significant tax loss carry-forwards, and although a tax provision is recorded, the Company makes no payment of federal tax other than AMT amounts. - 5 - 3) EARNINGS PER SHARE During the fourth quarter of 1997, the Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share" which specifies modifications to the calculation of earnings per share from that historically used by the Company. Under SFAS 128, "basic earnings per share" is calculated based upon the weighted average number of common shares actually outstanding, and "diluted earnings per share" is calculated based upon the weighted average number of common shares outstanding, warrants and other potential common shares, if they are dilutive. The Company's common share equivalents consist of shares issuable on exercise of outstanding options computed using the treasury method and amounted to 195,000 and 276,000 for the three-month period and 198,000 and 263,000 for the six-month period ended July 4, 1998 and June 28, 1997, respectively. All prior periods have been restated to present all earnings per share data on a consistent basis. 4) INVENTORIES Inventories are valued using the first-in, first-out method. Inventories consist of the following:
July 4, 1998 Jan. 3, 1998 ------------ ------------ (In thousands) Raw materials and parts.......... $ 7,052 $ 6,073 Work-in-process.................. 7,456 6,804 Finished goods................... 12,128 11,195 -------- -------- $ 26,636 $ 24,072 -------- -------- -------- --------
5) ACCRUED EXPENSES Accrued expenses consist of the following:
July 4, 1998 Jan. 3, 1998 ------------ ------------ (In thousands) Accrued payroll and related expenses............... $ 2,871 $ 3,601 Accrued commissions.............. 1,683 1,510 Accrued warranty................. 1,341 1,172 Other accrued expenses........... 3,392 2,972 -------- -------- $ 9,287 $ 9,255 -------- -------- -------- --------
- 6 - 6) ACQUISITION OF SUBSIDIARY MINORITY INTEREST During the first quarter of 1998, the Company acquired the remaining minority interest in Asbury Associates, Inc. and the Middleby Philippines Corporation, from the founder and president of Asbury Associates, Inc. The remaining interest was acquired for $500,000 in cash, 50,000 shares of common stock with a market value of $387,000 at the date of issuance, and forgiveness of certain minority interest liabilities owed by the minority shareholder. This transaction increased the Company's ownership interest in these subsidiaries to 100%. The excess purchase price over the value of assets acquired of $1.1 million was allocated to goodwill, and is to be amortized over a period of 15 years. - 7 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED). INFORMATIONAL NOTE This report contains forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The Company cautions readers that these statements are highly dependent upon a variety of important factors which could cause such results or events to differ materially from such statements. Such factors include, but are not limited to, changing market conditions; the availability and cost of raw materials; the impact of competitive products and pricing; the timely development and market acceptance of the Company's products; foreign exchange and political risks affecting international sales, including the current economic crisis in certain Asian countries; and other risks detailed herein and from time-to-time in the Company's Securities and Exchange Commission filings, including those discussed under the heading "Risk Factors" in the Company's Registration Statement on Form S-2 (No. 333-35397) filed with the Securities and Exchange Commission.
NET SALES SUMMARY (DOLLARS IN THOUSANDS) THREE MONTHS ENDED SIX MONTHS ENDED JULY 4, 1998 JUNE 28, 1997 JULY 4, 1998 JUNE 28, 1997 Sales Percent Sales Percent Sales Percent Sales Percent BUSINESS DIVISIONS Conveyor oven equipment............. $12,601 37.5% $17,008 40.4% $22,142 34.2% $29,438 39.4% Counterline cooking equipment and specialty products... 4,391 13.1% 4,580 10.9% 8,395 13.0% 8,812 11.8% Core cooking equipment............. 10,129 30.1% 8,574 20.4% 19,649 30.3% 16,005 21.4% ------- ----- ------- ----- ------- ----- ------- ----- TOTAL COOKING AND WARMING EQUIPMENT DIVISIONS......... 27,121 80.6% 30,162 71.7% 50,186 77.5% 54,255 72.6% International specialty equipment............. 1,248 3.7% 1,763 4.2% 2,613 4.0% 3,739 5.0% International distribution (1)...... 9,710 28.9% 14,203 33.8% 18,991 29.3% 23,673 31.7% ------- ----- ------- ----- ------- ----- ------- ----- TOTAL INTERNATIONAL DIVISIONS......... 10,958 32.6% 15,966 37.9% 21,604 33.4% 27,412 36.7% Intercompany sales (2)............. (4,687) (13.9%) (4,920) (11.7%) (7,777) (12.0%) (8,502) (11.4%) Other................... 249 0.7% 874 2.1% 729 1.1% 1,615 2.2% ------- ----- ------- ----- ------- ----- ------- ----- TOTAL................ $33,641 100.0% $42,082 100.0% $64,742 100.0% $74,780 100.0% ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
(1) Consists of sales of products manufactured by Middleby and products manufactured by third parties. (2) Consists of sales to the Company's international distribution division from the Company's other business divisions. - 8 - RESULTS OF OPERATIONS The following table sets forth certain consolidated statements of earnings items as a percentage of net sales for the periods presented.
THREE MONTHS ENDED SIX MONTHS ENDED JULY 4, 1998 JUNE 28, 1997 JULY 4, 1998 JUNE 28, 1997 Net Sales .................................... 100.0% 100.0% 100.0% 100.0% Cost of Sales ................................ 68.3% 69.6% 68.9% 68.9% ----- ----- ----- ----- Gross Profit. .............................. 31.7% 30.4% 31.1% 31.1% Selling, general and administrative expenses.. 25.6% 21.5% 25.4% 21.9% ----- ----- ----- ----- Income from operations...................... 6.1% 8.9% 5.7% 9.2% Interest expense and deferred financing amortization, net............................ 2.2% 3.0% 2.3% 3.2% Other (income) expense, net................... 0.4% 0.1% 0.4% (0.0%) ----- ----- ----- ----- Earnings before income taxes................ 3.5% 5.8% 3.0% 6.0% Provision (benefit) for income taxes.......... 1.1% 2.1% 1.0% 2.1% ----- ----- ----- ----- Net earnings from continuing operations..... 2.4% 3.7% 2.0% 3.9% ----- ----- ----- ----- ----- ----- ----- -----
THREE MONTHS ENDED JULY 4, 1998 COMPARED TO THREE MONTHS ENDED JUNE 28, 1997 NET SALES. Net sales in the three-month period ended July 4, 1998 decreased $8.5 million or 20% to $33.6 million as compared to $42.1 million in the three-month period ended June 28, 1997. The prior year's second quarter included $3.3 million in non-recurring parts sales for equipment upgrades and field service revenue for a major chain customer. In addition, the company experienced lower unit volume in the Company's cooking and warming equipment divisions and international divisions. Sales of the Company's cooking and warming equipment divisions decreased 10% for the three-month period ended July 4,1998 compared to the prior three-month period. Sales of the core cooking equipment division increased 18% from continued market penetration and new products. However, these gains were more than offset by a 26% decrease in sales of the conveyor oven equipment division in the three-month period due primarily to the non-recurring parts and field service revenue discussed above. Sales of the counterline cooking equipment and specialty products division decreased 4% due to lower international sales. - 9 - Sales of the international divisions represented 33% of total sales in the three-month period compared to 38% in the prior year period, and decreased 31% as compared to the prior year. Sales of the Company's international specialty equipment division decreased 29% primarily due to deferred new store openings by a major chain customer directly related to the ongoing currency and economic crisis in Asia. Sales of the Company's international distribution division decreased 32% primarily due to lower sales in certain Asian and Middle Eastern markets. Sales to certain other international markets, such as Latin America, were higher as compared to the prior year. GROSS PROFIT. Gross profit decreased $2.1 million or 17% in the three-month period to $10.7 million as compared to $12.8 million in the prior year period. The decrease in gross profit was due to the lower sales volume. As a percentage of net sales, gross profit margin increased 1.3% to 31.7% from 30.4%. The increase in gross margin percent was primarily due to a more favorable product mix, principally a higher percentage of manufactured product versus distributed product. Additionally, the prior year period included revenue from a non-recurring parts sales and field service upgrade program that carried a lower margin. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased $0.5 million or 5% in the three-month period to $8.6 million as compared to $9.1 million in the prior year's second quarter. The decrease was primarily due to lower variable selling expenses associated with the lower sales volume. As a percentage of sales, selling, general and administrative expenses increased to 25.6% from 21.5% as a higher expense base to support the Company's expanded international infrastructure was spread over lower sales. INCOME FROM OPERATIONS. Income from operations decreased $1.6 million or 43% to $2.1 million for the three-month period ended July 4, 1998 from $3.7 million in the prior year's second quarter. The lower sales volume and gross profit resulted in the lower income from operations. INTEREST EXPENSE AND DEFERRED FINANCING AMORTIZATION. Interest expense and deferred financing amortization for the three months ended July 4, 1998 decreased 38% to $0.8 million as compared to $1.3 million in the prior year's second quarter. The decrease was due to a lower average outstanding debt balance as a result of the Company's stock offering completed during the fourth quarter of 1997. INCOME TAXES. The Company recorded a net tax provision of $0.3 million for the three-month period ended July 4, 1998 as compared to a net tax provision of $0.9 million in the prior year's second quarter. NET EARNINGS. As a result of the above factors, for the three-month period ended July 4, 1998, the Company recorded net earnings of $0.8 million as compared to $1.6 million in the prior year's second quarter. - 10 - SIX MONTHS ENDED JULY 4, 1998 COMPARED TO SIX MONTHS ENDED JUNE 28, 1997 NET SALES. Net sales in the six-month period ended July 4, 1998 decreased $10.4 million or 13% to $64.7 million as compared to $74.8 million in the six-month period ended June 28, 1997, reflecting lower unit volume in the Company's cooking and warming equipment divisions and international divisions. The Asia currency and economic crisis, slowed purchases by two major customers and a non-recurring equipment upgrade program during the prior year's period were the primary causes. Sales of the Company's cooking and warming equipment divisions decreased 8% for the six-month period ended July 4,1998. Sales of the core cooking equipment division increased 23% from continued market penetration and new products. These gains were more than offset by a 25% decrease in sales of the conveyor oven equipment division in the six-month period as one major chain customer slowed purchases during the first two months of the year to reduce inventory in its system and another major chain embarked on a store restructuring program. Additionally, the 1997 six-month period included conveyor oven service and equipment upgrade billings for a major chain customer that was not repeated in 1998. Sales of the counterline cooking equipment and specialty products division decreased 5% due to lower international sales. Sales of the international divisions represented 33% of total sales in the six-month period and decreased 21% as compared to the prior year period. Sales of the Company's international specialty equipment division decreased 30% due to deferred new store openings in Asia by a major chain customer. Sales of the Company's international distribution division decreased 20% primarily due to lower sales in certain Asian and Middle Eastern markets. Sales to certain other international markets, such as Latin America, were higher as compared to the prior year. GROSS PROFIT. Gross profit decreased $3.2 million or 14% in the six-month period to $20.1 million as compared to $23.3 million in the prior year period. As a percentage of net sales, gross profit margin stayed at 31.1%. Favorable product mix was offset by the decreased volume and increased warranty expenses. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses remained unchanged for the six-month period at $16.4 million. Lower variable selling expenses were offset by increases due to expansion of the Company's international sales and service capabilities, including the establishment of sales and distribution offices in Japan, Korea and Mexico during the second quarter of 1997. As a percentage of sales, selling, general and administrative expenses increased to 25.3% from 21.9% as the higher expense base to support the expanded international infrastructure was spread over lower sales. - 11 - INCOME FROM OPERATIONS. Income from operations decreased $3.2 million or 46% to $3.7 million for the six-month period ended July 4, 1998 from $6.9 million in the prior year period. The lower sales volume and increased expense base resulted in the lower income from operations. INTEREST EXPENSE AND DEFERRED FINANCING AMORTIZATION. Interest expense and deferred financing amortization for the six months ended July 4, 1998 decreased 35% to $0.8 million as compared to $1.5 million in the prior year period. The decrease was due to a lower average outstanding debt balance as a result of the Company's stock offering completed during the fourth quarter of 1997. INCOME TAXES. The Company recorded a net tax provision of $0.6 million for the six-month period ended July 4, 1998 as compared to a net tax provision of $1.6 million in the prior year period. NET EARNINGS. As a result of the above factors, for the six-month period ended July 4, 1998, the Company recorded net earnings of $1.3 million as compared to $3.0 million in the prior year period. FINANCIAL CONDITION AND LIQUIDITY For the six months ended July 4, 1998, net cash provided by operating activities before changes in assets and liabilities was $3.3 million as compared to $5.9 million for the six months ended June 28, 1997. The decline is largely due to the lower profits. Net cash used by continuing operating activities after changes in assets and liabilities was $6.6 million as compared to net cash used of $1.9 million in the prior year six-month period. Historically, the Company has been a net cash user during the first half of the year and a net cash generator during the second half of the year. Accounts receivables have increased $3.9 million due to the timing of shipments during the second quarter, the timing of collections at the end of the prior fiscal year and the application of dealer rebates. Inventories have increased $2.6 million, due to difficulties in forecasting demand in Asian markets and the timing of orders and shipments during the quarter. Accounts payables have decreased $2.6 million due to timing of payments at the prior fiscal year-end. During the first six months of 1998, the Company decreased its overall outstanding debt by $0.9 million under various facilities. The Company decreased its borrowings under the Middleby Philippines subsidiary's credit facility by $1.9 million and reduced the amount outstanding under its intellectual property lease by $0.5 million. The Company entered into a $1.5 million yen-denominated loan at its Japanese subsidiary, under the unsecured multi-currency revolving credit line discussed in the following paragraph. During this same period the Company decreased its cash and cash equivalents to $1.5 million from $12.3 million at January 3, 1998. The cash was used primarily to fund the working capital needs discussed above, capital expenditures of $2.2 million, and other investing activities of $1.1 million. In July 1998, the Company's board of directors adopted a stock repurchase program and authorized the purchase of up to 300,000 common shares from time to time in open market purchases. As of August 14, 1998 no shares have been purchased under this program. - 12 - In March 1998, the Company entered into a $20.0 million unsecured multi-currency revolving credit line with a major international bank. This new credit facility enhances the Company's ability to manage its financing activities related to its international operations. Concurrently with the initiation of the unsecured revolving line of credit, the $15.0 million senior secured note became unsecured. The note's maturity and interest rate remain unchanged. The Company continues to remain in compliance with debt covenants. Management believes that the Company will have sufficient financial resources available to meet its anticipated requirements for working capital, growth strategies, capital expenditures and debt amortization for the foreseeable future. YEAR 2000 COMPLIANCE The Company has assessed and continues to assess the impact of the Year 2000 issue on its reporting systems and operations. The Year 2000 issue exists because many computer systems and applications currently use two-digit date fields to designate a year. As the century date occurs, date sensitive systems may recognize the year 2000 as 1900 or not at all. This inability to recognize or properly treat the year 2000 may cause our systems to process critical financial and operational information incorrectly. The Company is currently implementing new information systems to enhance its current transaction processing and information reporting capabilities. These systems are Year 2000 compliant. Costs to modify existing computer systems and applications are not material. The Company is also in the process of contacting its major third-party relationships. Thus far, these parties have stated they intend to be Year 2000 compliant by January 1, 2000. If the Company's systems implementation plan is not successful, there could be a significant disruption of the Company's ability to transact business with its major customers and suppliers. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable. - 13 - PART II. OTHER INFORMATION The Company was not required to report the information pursuant to Items 1 through 6 of Part II of Form 10-Q for the three months ended April 4, 1998, except as follows: ITEM 2. CHANGES IN SECURITIES c) During the second quarter of fiscal 1998, the Company issued 375 shares to a division executive pursuant to the exercise of stock options, for $1,969. Such options were granted at an exercise price of $5.25 per share. The issuance of such shares was exempt under the Securities Act of 1933, as amended, pursuant to section 4(2) thereof, as a transaction not involving a public offering. ITEM 5. OTHER INFORMATION The Securities and Exchange Commission has recently amended Rules 14a-4 and 14a-5 promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"), in respect of the Company's exercise of discretionary voting authority in connection with annual shareholder meetings, and in particular with respect to matters not submitted under the Shareholder Proposal rule set forth in Rule 14a-8 under the 1934 Act. Under the amended Rules, a company is permitted discretionary voting authority in those instances in which the company did not have notice of the matter by a date more than 45 days before the month and day in the current year corresponding to the date on which the company first mailed its proxy materials for the prior year's annual meeting of shareholders, or by a date established by an overriding advance notice provision in a company's articles of incorporation or bylaws. The Company has not implemented such an advance notice provision. Accordingly, in connection with the 1999 Annual Meeting of Stockholders of the Company, the date after which notice of a stockholder proposal submitted outside the processes of Rule 14a-8 under the 1934 Act is considered untimely is February 21, 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits - The following Exhibits are filed herewith: Exhibit (27) - Financial Data Schedule (EDGAR only) - 14 - SIGNATURES 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. THE MIDDLEBY CORPORATION (Registrant) Date: August 17, 1998 By: /s/ John J. Hastings ---------------------------- ----------------------------------- John J. Hastings, Executive Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) - 15 - EX-27 2 EX-27 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS JAN-02-1999 JAN-04-1998 JUL-04-1998 1,533 0 26,182 0 26,636 58,592 27,783 4,907 101,407 20,932 24,287 0 0 110 54,144 101,407 64,742 64,742 44,632 44,632 16,427 0 1,496 1,934 623 1,311 0 0 0 1,311 0.12 0.12
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