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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 3, 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 incorporation (IRS Employer Identification
or organization) Number)
2850 W. GOLF ROAD, SUITE 405, ROLLING MEADOWS, ILLINOIS 60008
- ------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 847-758-3880
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
COMMON STOCK,
PAR VALUE $0.01 PER SHARE
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)
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 13, 1998 was approximately $44,655,000. The number of
shares outstanding of the Registrant's class of common stock, as of March 13,
1998, was 10,908,440 shares.
Documents Incorporated by Reference
-----------------------------------
Part III of Form 10-K incorporates by reference the Company's definitive
proxy statement to be filed pursuant to Regulation 14A in connection with the
1998 annual meeting of stockholders.
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
JANUARY 3, 1998
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
PAGE
Item 1. Business............................................... 1
Item 2. Properties............................................. 10
Item 3. Legal Proceedings...................................... 11
Item 4. Submission of Matters to a Vote of Security Holders.... 11
Item 4A. Executive Officers of the Registrant................... 11
PART II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters....................... 12
Item 6. Selected Financial Data................................ 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 14
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk............................................... 19
Item 8. Financial Statements and Supplementary Data............ 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............... 42
PART III
Item 10. Directors and Executive Officers of the Registrant..... 42
Item 11. Executive Compensation................................. 42
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................... 42
Item 13. Certain Relationships and Related Transactions......... 42
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K...................................... 42
PART I
ITEM 1. BUSINESS
GENERAL
The Middleby Corporation ("Middleby" or the "Company"), through its
operating subsidiary Middleby Marshall Inc. ("Middleby Marshall") and its
subsidiaries, is a leader in the design, manufacture, marketing and service
of a broad line of cooking and warming equipment used in all types of
foodservice operations, including quick-service restaurants, full-service
restaurants, retail outlets, and hotels and other institutions. The Company's
products include Middleby Marshall-Registered Trademark- conveyor oven
equipment, Toastmaster-Registered Trademark- toasters and counterline cooking
and warming equipment, Southbend-Registered Trademark- ranges, convection
ovens, heavy- duty cooking equipment and steam cooking equipment,
CTX-Registered Trademark- infra-red conveyor cooking equipment and
Titan-Registered Trademark- mixers. The Company is also a provider of
integrated distribution and service capabilities in international markets.
Founded in 1888 as a manufacturer of baking ovens, Middleby Marshall
Oven Company was acquired in 1983 by TMC Industries Ltd., a publicly traded
company that changed its name in 1985 to The Middleby Corporation. Throughout
its history, the Company had been a leading innovator in the baking equipment
industry and in the early 1980s positioned itself as a leading foodservice
equipment manufacturer by introducing the conveyor oven that revolutionized
the pizza market. In 1989, the Company became a broad line equipment
manufacturer through the acquisition of the Foodservice Equipment Group of
Hussmann Corporation, which included CTX, Southbend, SteamMaster and
Toastmaster. The Company initiated its international distribution and service
strategy in 1990 by acquiring a controlling interest in Asbury Associates,
Inc. ("Asbury"). In 1991, the Company established Middleby Philippines
Corporation ("Middleby Philippines") to provide custom kitchen fabrication
and specialty cooking equipment to restaurant and hotel chains in the Asian,
Pacific Rim and Middle Eastern markets.
The Company has identified, as a major area of growth, the rapidly
growing international markets targeted by restaurant and hotel chains. To
capture this market, Middleby established its own export management company,
set up master distribution in international markets and began to distribute
complementary products of other American and European equipment
manufacturers. As the first company in its industry to take these
initiatives, Middleby has positioned itself as a preferred foodservice
equipment supplier to major chains expanding globally. Middleby's
international network enables it to offer a total store package ("TSP") of
kitchen equipment to be delivered virtually anywhere in the world, installed
and serviced by Middleby. The Company believes that its TSP program provides
it with a competitive marketing advantage and will enable it to develop
significant new international business. The Company has delivered and
installed equipment in over 100 countries throughout the world.
- 1 -
BUSINESS DIVISIONS AND PRODUCTS
The Company operates through the following domestic business
divisions: conveyor oven equipment (Middleby Marshall and CTX), counterline
cooking equipment and specialty products (Toastmaster and various
distribution products) and core cooking equipment (Southbend and
SteamMaster). Additionally, the Company provides its products and services to
the international marketplace through two operating subsidiaries: Asbury, a
leading exporter and distributor of foodservice equipment in the global
marketplace, and Middleby Philippines, one of the principal suppliers of
commercial kitchen fabrication and specialty cooking equipment in the Asian,
Pacific Rim and Middle Eastern markets.
CONVEYOR OVEN EQUIPMENT
Principal product lines include conveyor ovens sold under the
Middleby Marshall and CTX brand names. The Middleby Marshall product line is
the world's conveyor cooking equipment leader. A brand of baking and cooking
equipment since 1888, the Middleby Marshall name is renowned for quality and
durability. Middleby Marshall ovens are used by a majority of the leading
high-volume pizza chains and seafood chains, as well as by other restaurants
and institutions. Middleby Marshall conveyor ovens utilize a patented
process, Jet-Sweep air impingement, that forces heated air at high velocities
through a system of nozzles above and below the food product which is placed
on a moving conveyor belt. This process achieves faster baking times and
greater consistency of bake than conventional ovens. The CTX line of conveyor
ovens utilizes patented infra-red cooking and precision control technology
for more specialized, lower volume applications than Middleby Marshall ovens.
CTX conveyor ovens are sold to restaurants and pizza outlets and offer such
additional features as a programmable time and temperature control as well as
a self-cleaning function. Conveyor oven products range in price from
approximately $5,000 to $30,000 per unit (or as much as $90,000 for a
multiple unit system) and are predominately assembled to order and purchased
directly by end-users (who order units customized for their operations)
rather than through dealers.
COUNTERLINE COOKING EQUIPMENT AND SPECIALTY PRODUCTS
Principal counterline cooking equipment product lines (predominately
light-duty electric equipment) consist of Toastmaster counterline cooking and
warming equipment, including toasters, hot food servers, foodwarmers,
griddles, fryers, convection ovens, ranges and mixers. Toastmaster products
feature energy saving and food safety technologies, such as those offered in
the Accumiser griddle. Long in use by major restaurant chains, Toastmaster
products have continuously evolved to fit each chain's particular needs.
Counterline cooking equipment products range in price from $300 to $10,000
per unit and are predominately purchased from stock by dealers.
- 2 -
The Company does not produce consumer products under the Toastmaster
name, as an unaffiliated company, Toastmaster, Inc. owns the rights to the
Toastmaster brand name for consumer markets.
Additionally, the Company has a distribution agreement with a
European manufacturer of rotisserie cooking and merchandising display
equipment. In 1996, the Company entered into another arrangement with the
same manufacturer to distribute the RoFry oil-less fryer on an exclusive
basis in North and South America and on a non-exclusive basis in certain
other parts of the world. RoFry's unique multi-stage cooking process allows
the complete cooking of normally deep fried foods without any frying oil,
resulting in significant cost savings to the operator and a healthier food
product. Management believes RoFry could significantly impact the fryer
equipment market and represents a substantial growth opportunity.
Distribution products range in price from $1,000 to $15,000 per unit and are
predominately purchased by dealers from stock.
CORE COOKING EQUIPMENT
Principal product lines (mainly heavy-duty, gas-fired equipment)
include the Southbend product line of ranges, steamers, convection ovens,
broilers, fryers, griddles and steam cooking equipment. Many of the products
in this division are made to specification for use by the professional chef
or are offered as standardized equipment for general use in restaurants and
institutions. Southbend is known for its innovative product features and
premier cooking line. Its 40,000 BTU Pyromax-Registered Trademark- range
doubled the industry standard for BTU's when it was introduced in 1996.
Southbend's Marathoner Gold-Registered Trademark- convection oven has been
judged by a leading industry publication to be the best baking convection
oven on the market today. Core cooking equipment products range in price from
$1,000 to $10,000 (or as much as $60,000 for a complete line-up of modular
equipment) and are predominantly purchased by dealers on an order-by-order
basis.
INTERNATIONAL SPECIALTY EQUIPMENT
Middleby Philippines designs, engineers, manufactures and installs
custom kitchen fabrication and specialty cooking equipment used primarily in
conjunction with standard equipment manufactured in the U.S. to provide a
complete kitchen installation. Principal products include serving stations,
work tables, undercounter refrigeration systems, ventilation systems,
cabinets and shelving. In 1992, Middleby Philippines was qualified as a
supplier of kitchen fabrication to McDonald's. Customers are primarily Asian,
Pacific Rim and Middle Eastern operations of major U.S. and international
foodservice chains and hotels. Sales are primarily made on an order-by-order
project basis. Middleby Philippines' operations were moved in April 1996 into
a newly constructed 54,000 square foot facility outside of Manila. At January
3, 1998, the Company owned 94% of Middleby Philippines.
- 3 -
INTERNATIONAL DISTRIBUTION
The Company, through its Asbury subsidiary, provides integrated
export management and distribution services. Asbury sells the Company's
product lines and certain non-competing complementary product lines of other
American and European manufacturers throughout the world (except for Canada,
where the Company has a distribution operation, Escan). Asbury offers
customers a complete package of kitchen equipment, delivered and installed in
over 100 countries. For a local country distributor or dealer, Asbury
provides centralized sourcing of a broad line of equipment with complete
export management services, including export documentation, freight
forwarding, equipment warehousing and consolidation, installation, warranty
service and parts support. Asbury is headquartered in Miramar, Florida with
Asian sales and administrative operations based in the Philippines. The
Company has sales offices or distribution centers in Mexico, Spain, France,
Saudi Arabia, the Philippines, Taiwan, China, Japan and Korea. At January 3,
1998, the Company owned 91% of Asbury.
THE CUSTOMERS AND MARKET
The Company's products are sold primarily through independent
dealers and distributors to end-user customers, including quick-service
restaurants, full-service restaurants, retail outlets such as supermarkets
and convenience stores, and private and public institutions, such as hotels,
resorts, schools, hospitals, long-term care facilities, correctional
facilities, stadiums, airports, corporate cafeterias, military facilities and
government agencies. Many of the dealers in the U.S. belong to buying groups
that negotiate sales terms with the Company. Certain large restaurant and
hotel chain customers have purchasing organizations that manage product
procurement for their systems. The Company's ten largest customers accounted
for approximately 30% of net sales in 1997, with no single customer
accounting for more than 7% of 1997 net sales.
During the past several decades, growth in the U.S. foodservice
industry has been driven primarily by population growth, economic growth and
demographic changes, including the emergence of families with multiple
wage-earners and growth in the number of higher-income households. These
factors have led to a demand for convenience and speed in food preparation
and consumption. Eating-out and carry-out continue to be on an upward trend
in the U.S., although at a slower rate than during the 1970s and 1980s.
The quick-service restaurant segment is the fastest growing and
largest category within the foodservice industry. In 1996, U.S. sales within
the quick-service restaurant segment increased 3.6% to $105 billion,
accounting for 33.2% of overall industry sales, while the full-service
restaurant segment increased 2.9% to $96 billion, accounting for 30.6% of
industry sales. These figures compare to 1987, when the quick-service
restaurant segment sales were $57.6 billion, or 28.7% of overall industry
sales, and full-service restaurant segment sales were $68 billion, or 33.9%
of the overall industry.
- 4 -
The foodservice equipment industry has grown in response to the
primary growth factors of the foodservice industry. After high growth in the
early- and mid-1980s, growth in the foodservice equipment industry entered a
slow period from 1988 through 1991, due to a general decline in the worldwide
economy and the maturation of the domestic foodservice industry. In 1992, the
industry began to recover due to the development of new quick-service and
casual-theme restaurant chain concepts, the expansion into nontraditional
locations by quick-service restaurants and store equipment modernization. The
international foodservice equipment industry is experiencing stronger growth
than the U.S. market due to rapidly expanding international economies and
increased opportunity for expansion by U.S. chains into developing regions.
In 1997, the foodservice equipment industry in the U.S. had total
sales of approximately $4.7 billion. The Company's manufactured products
compete primarily in the cooking and warming equipment category, which had
sales in the U.S. of approximately $1.1 billion in 1997 and is expected to
grow 5.0% in 1998. Management believes that the broader international
equipment market the Company serves had 1997 sales of approximately $10
billion, with expected annual growth of nearly twice the growth rate of the
U.S. market.
The Company believes that continuing growth in demand for
foodservice equipment will result from the development of new restaurant
units, the expansion of U.S. chains into international markets and the
replacement and upgrade of existing equipment.
The backlog of orders was $11,625,000 at January 3, 1998, all of
which is expected to be filled during 1998. The Company's backlog was
$15,017,000 at December 28, 1996. The backlog is not necessarily indicative
of the level of business expected for the year, as there is generally a short
time between order receipt and shipment for the majority of the Company's
products.
MARKETING AND DISTRIBUTION
Middleby's products and services are marketed in the U.S. and in
over 100 countries through a combination of the Company's sales personnel and
international marketing subsidiaries, together with an extensive network of
independent dealers, distributors, consultants, sales representatives and
agents. The Company's relationships with major restaurant chains are
primarily handled through an integrated effort of top-level executive and
sales management at the corporate and business division levels to best serve
each customer's needs.
Each of the Company's business divisions is responsible for the
marketing of its products and services, under the direction of the division's
President or General Manager, Sales Manager and supporting personnel. Each
business division manages its own sales, promotion and marketing programs
with coordination and support provided by corporate sales and marketing
functions.
- 5 -
Each business division distributes its products to independent
end-users through a network of approximately 400 to 1,000 non-exclusive
dealers nationwide, who are supported by over 200 manufacturers' marketing
representatives. Between 1990 and 1995, the Company reduced its authorized
dealers by approximately 50% to increase the importance of each dealer
relationship.
International sales are primarily made through Asbury's distribution
network to independent local country stocking and servicing distributors and
dealers and directly to major chains, hotels and other large end-users.
SERVICES AND PRODUCT WARRANTY
The Company is an industry leader in equipment installation programs
and after-sales support and service. The emphasis on global service increases
the likelihood of repeat business and enhances Middleby's image as a partner
and provider of quality products and services. It is critical to major
foodservice chains that equipment providers be capable of supporting
equipment on a worldwide basis.
The Company's domestic service network consists of over 80
authorized service parts distributors and 2,500 independent certified
technicians that have been formally trained and certified by the Company
through its factory training school and on-site installation training
programs. The service network is separate from the sales network to ensure
that technicians remain focused on service issues rather than new business.
Technicians work through service parts distributors, which are required to
provide around-the-clock service via a toll-free paging number. The Company
provides substantial technical support at each factory to the technicians in
the field through thirteen factory-based technical service engineers. The
Company has among the most stringent parts stocking requirements in the
industry for these agencies, leading to an exceptionally high first-call
completion rate for service and warranty repairs.
Middleby's international service network consists of distributors in
over 100 countries with approximately 3,000 independent service technicians
trained in the installation and service of the Company's products and
supported by fifteen internationally-based service managers along with the
factory-based technical service engineers. As with its domestic service
network, the Company maintains stringent parts stocking requirements for its
international distributors.
COMPETITION
The cooking and warming segment of the foodservice equipment industry is
highly competitive and fragmented. Within a given product line, the industry
remains fairly concentrated, with typically a small number of competitors
accounting for the bulk of the line's industry-wide sales. Industry
competition includes companies that manufacture a broad line of
- 6 -
products and those that specialize in a particular product line. Competition
in the industry is based upon many factors, including brand recognition,
product features and design, quality, price, delivery lead times,
serviceability and after-sale service. The Company believes that its ability
to compete depends on strong brand equity, exceptional product performance,
short lead-time and timely delivery, competitive pricing, superior customer
service support and its unique TSP capability. Management believes that the
demand for its labor saving, multi-functional and energy efficient equipment
will increase, driven by quick-service chains that face labor supply issues,
space limitations and increasing operating costs. The Company also focuses on
the user interface and serviceability factors of its equipment across global
markets.
In the international markets, the Company competes with U.S.
manufacturers and numerous global and local competitors. Management believes
that the Company's integrated international export management and
distribution capabilities uniquely position it to provide value-added
services to U.S. and internationally-based chains, as well as to local
country distributors offering a complete line of kitchen equipment.
The Company believes that it is among the largest multiple-line
manufacturers of cooking and warming equipment in the U.S. and worldwide,
although some of its competitors are units of operations that are larger than
the Company and possess greater financial and personnel resources. Among the
Company's major U.S. competitors are certain subsidiaries and divisions of
Welbilt Corporation, a subsidiary of Berisford plc; G.S. Blodgett Corp., a
subsidiary of Maytag Corporation; Hobart Corporation and Vulcan-Hart
Corporation, both subsidiaries of Premark International, Inc.; and Wells
Manufacturing Company, a subsidiary of Specialty Equipment Companies, Inc.
International-based competitors include Zanussi, a subsidiary of Electrolux
AB, and Ali Group.
MANUFACTURING AND QUALITY CONTROL
The Company operates two domestic and one international
manufacturing facilities. The Company's conveyor oven and counterline cooking
equipment products are manufactured in Elgin, Illinois and its core cooking
equipment products are manufactured in Fuquay-Varina, North Carolina.
Middleby's international fabrication and specialty cooking equipment
operation is located in Laguna, the Philippines. Metal fabrication,
finishing, sub-assembly and assembly operations are conducted at each
manufacturing facility. Equipment installed at individual locations includes
numerically controlled turret presses and machine centers, shears, press
brakes, welding equipment, polishing equipment, CAD/CAM systems and product
testing and quality assurance measurement devices. The Company's
state-of-the-art CAD/CAM systems enable virtual electronic prototypes to be
created, reviewed and refined before the first physical prototype is built.
Detailed manufacturing drawings are quickly and accurately derived from the
model and passed electronically to manufacturing for programming and optimal
parts nesting on various numerically controlled punching cells. The Company
believes that this integrated product development and manufacturing process
is critical to assuring product performance, customer service and competitive
pricing.
- 7 -
Middleby uses sophisticated equipment and procedures to ensure the
quality of its products. The Company also utilizes extensive internal
programs for analyzing potential product failures and certifying vendors for
continuous improvement. Every product manufactured or licensed by the Company
is individually tested prior to shipment to ensure compliance with Company
quality standards.
The Company has implemented programs to reduce costs and improve
operating efficiencies. In some cases, new capital equipment has been
acquired to increase automation and productivity. Recently, Middleby began
implementing new, company-wide management information systems that management
believes should further improve operating results.
SOURCES OF SUPPLY
The Company purchases its raw materials and component parts from a
number of suppliers. The majority of the Company's material purchases are
standard commodity-type materials, such as stainless steel, electrical
components, hardware and various components. These materials and parts
generally are available in adequate quantities from numerous suppliers. Some
component parts are obtained from sole sources of supply. In such instances,
management believes it can substitute other suppliers as required. The
majority of fabrication is done internally through the use of automated
equipment. Certain equipment and accessories are manufactured by other
suppliers for sale by the Company. The Company believes it enjoys good
relationships with its suppliers and considers the present sources of supply
to be adequate for its present and anticipated future requirements.
LICENSES, PATENTS, AND TRADEMARKS
Middleby Marshall has an exclusive license from Patentsmith II, Inc.
("Patentsmith") to manufacture, use and sell Jetsweep air impingement ovens
in the U.S. for commercial food applications in which the interior length or
width of a rectangular cooking area, or in which the diameter of a circular
cooking area, equals or exceeds 36 inches. The Patentsmith license covers
numerous patents, some of which extend beyond the year 2000. Middleby
Marshall also holds an exclusive sublicense from Lincoln Foodservice
Products, Inc. ("Lincoln"), a subsidiary of Welbilt Corporation, to
manufacture, use and sell throughout the world, other than in the U.S. and
Japan, air impingement ovens of the above-described dimensions for commercial
food applications. This sublicense covers the foreign analogues of the
patents covered by the Patentsmith license and grants Middleby Marshall
rights of first refusal for a similar sublicense in Japan. The Patentsmith
license and the Lincoln sublicense expire upon the expiration of the last
patented improvement covered by the license. While the loss of the
Patentsmith license or the Lincoln sublicense could have an adverse effect on
the Company, management believes it is capable of designing, manufacturing
and selling similar equipment, although not as technologically advanced.
Lincoln and Fuji Chubo Setsubi Company, Ltd. are the only other foodservice
equipment manufacturers licensed under the Patentsmith patents.
- 8 -
The Company holds numerous patents covering technology and
applications related to various products, equipment and systems. Management
believes the expiration of any one of these patents would not have a material
adverse effect on the overall operations or profitability of the Company.
The Company owns numerous trademarks and trade names; among them,
CTX-Registered Trademark-, Middleby Marshall-Registered Trademark-,
Southbend-Registered Trademark-, Toastmaster-Registered Trademark- and
Titan-Registered Trademark- are registered with the U.S. Patent and Trademark
Office and in various foreign countries.
EMPLOYEES
As of January 3, 1998, the Company employed 1,064 persons. Of this
amount, 416 were management, administrative, sales, engineering and
supervisory personnel; 366 were hourly production non-union workers; and 282
were hourly production union members. Included in these totals were 348
individuals employed outside of the United States, of which 172 were
management, sales, administrative and engineering personnel, and 176 were
hourly production workers, who participate in an employee cooperative. At its
Elgin, Illinois facility, the Company has a union contract with the
International Brotherhood of Teamsters that expires on May 1, 2002.
Management believes that the relationships between employees, union and
management are good.
- 9 -
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Rolling
Meadows, Illinois. The Company operates two manufacturing facilities in the
U.S. and one manufacturing facility in the Philippines. The Company also
operates a warehousing and office facility located in Florida.
The principal properties of the Company are listed below:
PRINCIPAL SQUARE OWNED/
LOCATION BUSINESS DIVISIONS FUNCTION FOOTAGE LEASED
- -------- ------------------ -------- ------- ------
Elgin, IL Conveyor Oven Equipment Manufacturing, 207,000 Owned
Counterline Cooking Equipment Warehousing and
and Specialty Products Offices
Warehousing 42,000 Leased(1)
Fuquay-Varina, NC Core Cooking Equipment Manufacturing, 131,000 Owned
Warehousing and
Offices
Miramar, FL International Distribution Warehousing and 18,000 Leased(2)
Offices
Laguna, the Philippines International Specialty Equipment Manufacturing, 54,000 Owned
Warehousing and
Offices
Rolling Meadows, IL The Middleby Corporation Corporate Headquarters 4,000 Leased(3)
- -----------
(1) Lease expires in August 1999, with payments of approximately $17,000
per month.
(2) Lease expires in October 2002, with payments of approximately $12,000
per month.
(3) Lease expires in July 2002, with payments of approximately $6,000
per month.
At various other locations the Company leases small amounts of
office space for administrative and sales functions, and in certain instances
limited short-term inventory storage. These locations are in Canada; China;
France; Japan; Korea; Mexico; Philippines; Spain; and Taiwan.
Management believes that all of these facilities are adequate for
the operation of the Company's business as presently conducted.
- 10 -
ITEM 3. LEGAL PROCEEDINGS
The Company is routinely involved in litigation incidental to its
business, including product liability actions which are generally covered by
insurance. Such routine claims are vigorously contested and management does
not believe that the outcome of any such pending litigation will have a
material adverse effect upon the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders in the
fourth quarter of the year ended January 3, 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Principal Occupation and
Principal Position and
Name Age Office with the Company
---- --- -----------------------
William F. Whitman, Jr. 58 Chairman of the Board of
the Company and Middleby Marshall
David P. Riley 51 President and Chief Executive
Officer of the Company and
Middleby Marshall
John J. Hastings 42 Executive Vice President, Chief
Financial Officer, Secretary and
Treasurer
The officers of the Company are elected annually by the Board of
Directors, hold office until their successors are chosen and qualify, and may
be removed by the Board of Directors at any time, at a duly convened meeting
of the Board of Directors or by written consent. The Company has employment
agreements with Messrs. Whitman and Riley. Laura B. Whitman, a director of
the Company, is the daughter of Mr. Whitman.
- 11 -
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
On November 28, 1995, the Company's Common Stock was admitted for
trading on the Nasdaq National Market System under the symbol "MIDD". The
following table sets forth, for the periods indicated, the high and low
closing sale prices per share of Common Stock, as reported by the Nasdaq
National Market System.
CLOSING SHARE PRICE
-------------------
HIGH LOW
---- ---
FISCAL 1996
First quarter.......................................................... 8.625 7.000
Second quarter......................................................... 13.938 7.375
Third quarter.......................................................... 8.000 5.750
Fourth quarter......................................................... 6.750 4.750
FISCAL 1997
First quarter.......................................................... 8.625 6.125
Second quarter......................................................... 10.125 7.125
Third quarter.......................................................... 10.000 8.625
Fourth quarter......................................................... 11.875 7.813
In December 1997, the Company completed a public stock offering. The
offering totaled 3,001,500 shares of which the Company sold 2,391,500 shares
and 610,000 shares were sold by selling stockholders. Net proceeds to the
Company totaled approximately $22.1 million and were used to repay certain
indebtedness. As of January 3, 1998, the Company estimates there were
approximately 2,200 beneficial owners of the Company's common stock.
The Company has not declared or paid cash dividends on its capital
stock since 1991. The Company's current financing agreements limit the paying
of dividends. See Note 4 to the Consolidated Financial Statements.
During the fiscal year ended January 3, 1998, the Company issued an
aggregate of 10,562 shares of the Company's common stock to current and
former employees and directors, pursuant to the exercise of stock options,
for an aggregate consideration of approximately $36,000. Such options were
granted under the Company's Amended and Restated 1989 Stock Incentive Plan,
or outside of any plan, and had exercise prices ranging between a maximum of
$5.63 and a minimum of $1.88. The issuance of such shares was exempt from
registration under the Securities Act of 1933, as amended, pursuant to
Section 4(2) thereof, as transactions by an issuer not involving a public
offering.
- 12 -
PART II
ITEM 6. SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED (1)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
INCOME STATEMENT DATA:
Net sales......................... $148,253 $124,765 $106,348 $94,158 $85,789
Cost of sales..................... 102,523 87,330 73,841 65,594 62,501
-------- -------- -------- ------- -------
Gross profit...................... 45,730 37,435 32,507 28,564 23,288
Selling and distribution
expenses........................ 22,150 18,319 15,385 13,398 13,004
General and administrative
expenses........................ 10,689 10,439 9,326 8,573 10,530
Provision for product line
discontinuance.................. -- -- 900 -- --
-------- -------- -------- ------- -------
Income (loss) from operations... 12,891 8,677 6,896 6,593 (246)
Interest expense and deferred
financing amortization, net..... 4,136 4,351 4,327 3,262 3,947
Other expense (income), net....... 413 (146) (36) 482 (473)
Unusual (income) item(2).......... -- -- -- -- (18,402)
-------- -------- -------- ------- -------
Earnings before income taxes.... 8,342 4,472 2,605 2,849 14,682
Provision (benefit) for income
taxes........................... 2,538 1,389 (140) 614 271
-------- -------- -------- ------- -------
Net earnings from continuing
operations................ 5,804 3,083 2,745 2,235 14,411
Discontinued operations, net of
income tax..................... (564) (2,610) 419 505 (147)
-------- -------- -------- ------- -------
Net earnings ............... $ 5,240 $ 473 $ 3,164 $ 2,740 $14,264
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
Basic earnings (loss) per common
share:
Continuing operations....... $ 0.65 $ 0.37 $ 0.32 $ 0.27 $ 1.72
Discontinued operations..... (0.06) (0.31) 0.05 0.06 (0.02)
-------- -------- -------- ------- -------
Net earnings per common
share..................... $ 0.59 $ 0.06 $ 0.37 $ 0.33 $ 1.70
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
Weighted average number of
shares outstanding........... 8,863,000 8,415,000 8,584,000 8,378,000 8,369,000
Diluted earnings (loss) per common share:
Continuing operations....... $ 0.64 $ 0.35 $ 0.31 $ 0.26 $ 1.72
Discontinued operations..... (0.06) (0.30) 0.05 0.06 (0.02)
-------- -------- -------- ------- -------
Net earnings per common
share.................... $ 0.58 $ 0.05 $ 0.36 $ 0.32 $ 1.70
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
Weighted average number of
shares outstanding........... 9,104,000 8,666,000 8,678,000 8,434,000 8,369,000
BALANCE SHEET DATA:
Working capital................... $ 38,442 $25,046 $28,746 $23,254 $22,307
Total assets...................... 103,478 85,968 85,231 76,700 73,394
Total debt........................ 27,913 41,268 43,028 44,472 47,401
Stockholders' equity.............. 52,601 22,450 21,758 14,657 10,100
- -----------
(1) The Company's fiscal year ends on the Saturday nearest to December 31.
(2) In 1993, the Company settled a dispute with Hussmann Corporation
related to the 1989 acquisition of the Foodservice Equipment Group
which resulted in a gain of $18.4 million.
- 13 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 projections are based upon future results
or events and are highly dependent upon a variety of important factors which
could cause such results or events to differ materially from any
forward-looking statements which may be deemed to have been made in this
report, or which are otherwise made by or on behalf of the Company. 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,
in particular any continued weakness in Asian economies; and other risks
detailed herein and from time-to-time in the Company's Securities and
Exchange Commission filings, including those discussed under "Risk Factors"
in the Company's Registration Statement on Form S-2 (Reg No. 333-35397).
NET SALES SUMMARY
(DOLLARS IN THOUSANDS)
FISCAL YEAR ENDED(1)
--------------------
1997 1996 1995
---- ---- ----
SALES PERCENT SALES PERCENT SALES PERCENT
----- ------- ----- ------- ----- -------
BUSINESS DIVISIONS
Conveyor oven equipment... $53,948 36.4 % $41,216 33.0 % $39,443 37.1 %
Counterline cooking
equipment and specialty
products............... 20,777 14.0 19,635 15.8 17,186 16.1
Core cooking equipment.... 34,282 23.1 29,617 23.7 24,023 22.6
-------- ----- -------- ----- -------- -----
TOTAL COOKING AND
WARMING EQUIPMENT
DIVISIONS........... 109,007 73.5 90,468 72.5 80,652 75.8
International specialty
equipment.............. 7,627 5.1 6,552 5.3 4,487 4.2
International
distribution(2)........ 47,668 32.2 39,722 31.8 33,592 31.6
-------- ----- -------- ----- -------- -----
TOTAL INTERNATIONAL
DIVISIONS........... 55,295 37.3 46,274 37.1 38,079 35.8
Intercompany sales(3)..... (16,216) (10.9) (13,394) (10.7) (13,095) (12.3)
Other..................... 167 0.1 1,417 1.1 712 0.7
-------- ----- -------- ----- -------- -----
TOTAL.................. $148,253 100.0 % $124,765 100.0 % $106,348 100.0 %
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
- ---------------
(1) The Company's fiscal year ends on the Saturday nearest to December 31.
(2) Consists of sales of products manufactured by Middleby and products
manufactured by third parties.
(3) Consists of sales to the Company's international distribution division
from the Company's other business divisions.
- 14 -
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of
income items as a percentage of net sales for the periods presented:
FISCAL
YEAR
ENDED(1)
--------
1997 1996 1995
---- ---- ----
Net sales....................................................... 100.0% 100.0% 100.0%
Cost of sales................................................... 69.2 70.0 69.4
------- ------- -------
Gross profit................................................. 30.8 30.0 30.6
Selling, general and administrative expenses.................... 22.1 23.0 23.2
Provision for product line discontinuance....................... -- -- 0.9
------- ------- -------
Income from operations....................................... 8.7 7.0 6.5
Interest expense and deferred financing amortization,......... 2.8 3.5 4.1
Other expense (income), net..................................... 0.3 (0.1) (0.1)
------- ------- -------
Earnings before income taxes................................. 5.6 3.6 2.5
Provision (benefit) for income taxes............................ 1.7 1.1 (0.1)
------- ------- -------
Earnings from continuing operations.......................... 3.9 2.5 2.6
------- ------- -------
------- ------- -------
- -----------
(1) The Company's fiscal year ends on the Saturday nearest to December 31.
- 15 -
FISCAL YEAR ENDED JANUARY 3, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 28,
1996
NET SALES. Net sales in fiscal 1997 increased $23.5 million or 19%
to $148.3 million as compared to $124.8 million in fiscal 1996, reflecting
unit volume increases.
Sales of the cooking and warming equipment divisions increased 20%,
led by a 31% sales increase of the conveyor oven equipment division due to
increased new restaurant expansion and replacement of equipment by several
major chains. Additionally, during the first half of 1997 the division
benefited from an oven upgrade program for a major chain, which resulted in
parts and service sales of $5.0 million. Sales of the core cooking equipment
division increased 16% over the prior year due to market share penetration
and the introduction of new products. Sales of the counterline cooking
equipment and specialty products division increased 6% primarily due to
increased market share penetration and market acceptance of certain specialty
products.
Sales of the international divisions represented 37% of total sales
in 1997 and increased 19% over the prior year. Sales of the Company's
international specialty equipment division increased 16% over the prior year
due to the increased capacity provided by its new 54,000 square foot facility
in the Philippines, which opened in mid-1996. Sales of the Company's
international distribution division increased 20% over the prior year,
reflecting increased sales activity at the Company's new sales and
distribution offices and improving economies in Europe and Latin America.
Sales in the Asian markets in 1997 amounted to 17% of total sales. Company
sales in this region slowed, primarily during the fourth quarter, due to the
current currency and economic instability in this region. There can be no
assurance that this slow down will not continue.
GROSS PROFIT. Gross profit increased $8.3 million or 22% to $45.7
million in fiscal 1997 as compared to $37.4 million in fiscal 1996. As a
percentage of net sales, gross profit margin increased to 30.8% in 1997 as
compared to 30.0% in 1996. The increase in gross profit margin was
attributable to increased sales of manufactured products, improved production
efficiencies at the new Philippines manufacturing facility and the
elimination of expenses associated with the trial field service program that
was terminated during 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $4.1 million or 14% to $32.8 million in
fiscal 1997 from $28.8 million in fiscal 1996, largely due to the increased
sales and additional support for the Company's expanding international
operations. As a percentage of net sales, expenses decreased to 22.1% from
23.0% in fiscal 1996.
INCOME FROM OPERATIONS. Income from operations increased $4.2
million or 49% to $12.9 million in fiscal 1997 from $8.7 million in fiscal
1996, primarily due to the higher sales volumes, improved margins and the
lower selling, general and administrative expenses as a percentage of net
sales.
- 16 -
INTEREST EXPENSE AND DEFERRED FINANCING AMORTIZATION. Interest
expense and deferred financing amortization decreased 5% to $4.1 million in
fiscal 1997 from $4.4 million in fiscal 1996. The lower interest expense is
attributed to lower average outstanding debt balances due in part to the
Company's stock offering during the fourth quarter.
INCOME TAXES. The Company recorded a net tax provision of $2.5
million in fiscal 1997 as compared to $1.4 million in fiscal 1996. The tax
provision included a benefit of $1.1 million related to net operating loss
("NOL") utilization and valuation allowance reductions as compared to a
benefit of $ 0.9 million recorded in fiscal 1996.
NET EARNINGS. Net earnings from continuing operations increased $2.7
million or 88% to $5.8 million in fiscal 1997 from $3.1 million in fiscal
1996. During fiscal 1997, the Company recorded losses from discontinued
operations of $0.6 million, net of tax, compared to losses of $2.6 million,
net of tax in 1996. Net earnings were $5.2 million in fiscal 1997 as compared
to $0.5 million in fiscal 1996.
FISCAL YEAR ENDED DECEMBER 28, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 30,
1995
NET SALES. Net sales in fiscal 1996 increased $18.5 million or 17%
to $124.8 million as compared to $106.3 million in fiscal 1995, reflecting
unit volume increases.
Sales of the cooking and warming equipment divisions increased 12%,
led by a 23% sales increase of the core cooking equipment division due to
market share penetration and the introduction of new products. Sales of the
conveyor oven equipment division increased 4% over the prior year. During the
first half of 1996, certain international pizza chains slowed new store
development, primarily in Europe. Sales of the counterline cooking equipment
and specialty products division increased 14% primarily due to a large
international chain equipment roll-out and increased sales of conveyor
toasters to McDonald's.
Sales of the international divisions represented 37% of total sales
in 1996 and increased 22% over the prior year. Sales of the Company's
international specialty equipment division increased 46% over the prior year.
During 1996, the division completed construction of a new 54,000 square foot
facility in the Philippines. The sales gain reflects increased production
capacity as the year progressed. Sales of the Company's international
distribution division increased 18% over the prior year, reflecting increased
sales activity at the Company's new sales and distribution offices.
GROSS PROFIT. Gross profit increased $4.9 million or 15% to $37.4
million in fiscal 1996 as compared to $32.5 million in fiscal 1995. As a
percentage of net sales, gross profit declined to 30.0% in 1996 as compared
to 30.6% in 1995. The decline in gross profit margin was attributable to
expenses of a trial direct service program that was initiated in late 1995
and terminated during the fourth quarter of 1996 and start-up costs
associated with the Company's new Philippines manufacturing facility.
- 17 -
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $4.1 million or 16% to $28.8 million in
fiscal 1996 from $24.7 million in fiscal 1995, largely due to the increased
sales, additional support for the Company's expanding international
operations and costs associated with dealer promotional programs. As a
percentage of net sales, expenses decreased to 23.0% from 23.2% in fiscal
1995.
INCOME FROM OPERATIONS. Income from operations increased $1.8
million or 26% to $8.7 million in fiscal 1996 from $6.9 million in fiscal
1995, primarily due to higher sales volumes.
INTEREST EXPENSE AND DEFERRED FINANCING AMORTIZATION. Interest
expense and deferred financing amortization increased 0.6% to $4.4 million in
fiscal 1996 from $4.3 million in fiscal 1995. Stable interest rates and
average outstanding debt balances contributed to the consistent expense
amount.
INCOME TAXES. The Company recorded a net tax provision of $1.4
million in fiscal 1996 as compared to a net tax benefit of $0.1 million in
fiscal 1995. The tax provision included a benefit of $0.9 million related to
NOL utilization and valuation allowance reductions as compared to a benefit
of $1.7 million recorded in fiscal 1995.
NET EARNINGS. Net earnings from continuing operations increased to
$3.1 million in fiscal 1996 from $2.7 million in fiscal 1995. During fiscal
1996, the Company recorded losses from discontinued operations of $0.7
million and an estimated loss on disposal of these operations of $1.9
million, net of tax. Net earnings were $0.5 million in fiscal 1996 as
compared to $3.2 million in fiscal 1995.
FINANCIAL CONDITION AND LIQUIDITY
For the year ended January 3, 1998, net cash provided by continuing
operating activities before changes in assets and liabilities was $11.1
million, as compared to $5.9 million for the year ended December 28, 1996.
Net cash provided by operating activities after changes in assets and
liabilities was $1.9 million as compared to $0.4 million in the prior year.
Accounts receivable increased $2.4 million and inventories increased $3.1
million. The increases in accounts receivable and inventories were largely
due to the higher sales levels and expansion of the Company's international
distribution operations.
During 1997, the Company decreased overall outstanding debt by $13.4
million under various facilities and increased its total cash and cash
equivalents by $10.9 million. In December 1997, the Company completed a
public stock offering that brought in net proceeds of approximately $22.1
million. With these proceeds, the Company paid off its borrowings under the
senior secured credit facility and decreased borrowings under the Middleby
Philippines subsidiary's credit facility. Also, in December 1997, the Company
entered into a sale and leaseback of certain intellectual property for $10.2
million. The cash generated from the Company's financing activities is
invested in short-term, interest-bearing, investment grade securities.
- 18 -
In March 1998, the Company's subsidiaries entered into a $20,000,000
unsecured multi-currency revolving line of credit with a major international
bank to replace the senior secured credit facility. 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 multi-currency revolving line of credit, the $15,000,000 senior
secured note became unsecured. The note's maturity and interest rate remain
unchanged. 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.
INTERNATIONAL EXPOSURE
The Company has manufacturing operations located in Asia and
distribution operations in Asia, Europe, Latin America, and Canada. The
Company anticipates that international sales will continue to account for a
significant portion of consolidated net sales in the foreseeable future. Some
sales by the foreign operations are in local currency and an increase in the
relative value of the U.S. dollar against such currencies would lead to the
reduction in consolidated sales and earnings. Foreign exchange losses have
not historically been material. However, foreign currency exposures are
currently not specifically hedged and there can be no assurances that the
Company's future results of operations will not be adversely affected by
currency fluctuations.
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 have not been, and are not expected, to be
material.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
- 19 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Report of Independent Public Accountants.................................. 21
Consolidated Balance Sheets............................................... 22
Consolidated Statements of Earnings....................................... 23
Consolidated Statements of Changes in Stockholders' Equity ............... 24
Consolidated Statements of Cash Flows..................................... 25
Notes to Consolidated Financial Statements................................ 26
The following consolidated financial statement schedule is included in
response to Item 14(d).
Schedule II - Valuation and Qualifying Accounts and Reserves.............. 41
All other schedules for which provision is made to applicable regulation of
the Securities and Exchange Commission are not required under the related
instruction or are inapplicable and, therefore, have been omitted.
- 20 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of The Middleby Corporation
We have audited the accompanying consolidated balance sheets of THE
MIDDLEBY CORPORATION (a Delaware corporation) and Subsidiaries as of January
3, 1998, and December 28, 1996, and the related consolidated statements of
earnings, changes in stockholders' equity and cash flows for each of the
three years in the period ended January 3, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements 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 consolidated financial
position of The Middleby Corporation and Subsidiaries as of January 3, 1998,
and December 28, 1996, and the results of their operations and their cash
flows for each of the three years in the period ended January 3, 1998, in
conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in the index
to the financial statements is presented for purposes of complying with The
Securities and Exchange Commission's rules and are not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
February 16, 1998
(Except with respect to the matter discussed
in note 4, as to which date is March 19, 1998)
- 21 -
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 3, 1998 AND DECEMBER 28, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 12,321 $ 1,410
Accounts receivable, net.................................................................. 22,251 19,859
Inventories, net.......................................................................... 24,072 20,956
Prepaid expenses and other................................................................ 1,248 939
Net assets of discontinued operations..................................................... -- 4,082
Current deferred taxes.................................................................... 3,000 2,086
---------- ----------
Total current assets................................................................... 62,892 49,332
Property, plant and equipment, net........................................................... 21,790 18,843
Excess purchase price over net assets acquired, net.......................................... 12,882 13,339
Deferred taxes............................................................................... 3,779 2,950
Other assets................................................................................. 2,135 1,504
---------- ----------
Total assets........................................................................... $ 103,478 $ 85,968
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................................................... $ 3,595 $ 3,916
Accounts payable.......................................................................... 11,600 10,369
Accrued expenses.......................................................................... 9,255 10,001
---------- ----------
Total current liabilities.............................................................. 24,450 24,286
Long-term debt............................................................................... 24,318 37,352
Minority interest and other non-current liabilities.......................................... 2,109 1,880
Stockholders' equity:
Preferred stock, $.01 par value; none issued.............................................. -- --
Common stock, $.01 par value;10,895,000 and 8,468,000 shares issued and outstanding in
1997 and 1996, respectively............................................................ 109 85
Paid-in capital........................................................................... 53,984 28,108
Cumulative translation adjustment......................................................... (1,173) (184)
Accumulated deficit....................................................................... (319) (5,559)
---------- ---------
Total stockholders' equity............................................................. 52,601 22,450
---------- ---------
Total liabilities and stockholders' equity............................................. $ 103,478 $ 85,968
---------- ----------
---------- ----------
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
- 22 -
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE FISCAL YEARS ENDED JANUARY 3, 1998, DECEMBER 28, 1996
AND DECEMBER 30, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995
---- ---- ----
Net sales................................................................... $148,253 $124,765 $106,348
Cost of sales............................................................... 102,523 87,330 73,841
-------- -------- --------
Gross profit.......................................................... 45,730 37,435 32,507
Selling and distribution expenses........................................... 22,150 18,319 15,385
General and administrative expenses......................................... 10,689 10,439 9,326
Provision for product line discontinuance................................... -- -- 900
-------- -------- --------
Income from operations................................................ 12,891 8,677 6,896
Interest expense and deferred financing amortization........................ 4,136 4,351 4,327
Other expense (income), net................................................. 413 (146) (36)
-------- -------- --------
Earnings before income taxes.......................................... 8,342 4,472 2,605
Provision (benefit) for income taxes........................................ 2,538 1,389 (140)
-------- -------- --------
Earnings from continuing operations.................................... 5,804 3,083 2,745
Discontinued operations, net of income tax:
(Loss) earnings from discontinued operations........................... -- (744) 419
Loss on disposal including operating losses
during the phase-out period.................................... (564) (1,866) --
-------- -------- --------
Net earnings.......................................................... $ 5,240 $ 473 $ 3,164
-------- -------- --------
-------- -------- --------
Basic earnings (loss) per share:
Continuing operations................................................. $0.65 $0.37 $0.32
Discontinued operations............................................... (0.06) (0.31) 0.05
-------- -------- --------
Net earnings per share................................................ $0.59 $0.06 $0.37
-------- -------- --------
-------- -------- --------
Weighted average number of shares........................................... 8,863 8,415 8,584
Diluted earnings (loss) per share:
Continuing operations................................................. $0.64 $0.35 $0.31
Discontinued operations............................................... (0.06) (0.30) 0.05
-------- -------- --------
Net earnings per share................................................ $0.58 $0.05 $0.36
-------- -------- --------
-------- -------- --------
Weighted average number of shares........................................... 9,104 8,666 8,678
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
- 23 -
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JANUARY 3, 1998, DECEMBER 28, 1996
AND DECEMBER 30, 1995
(DOLLARS IN THOUSANDS)
ACCUMULATED
COMMON STOCK PAID-IN CAPITAL DEFICIT CTA TOTAL
------------ --------------- ----------- --- -----
BALANCE,
December 31, 1994......................... $ 83 $ 24,154 $ (9,196) $ (384) $ 14,657
Net earnings ............................. -- -- 3,164 -- 3,164
NOL utilization and change in tax asset
valuation allowance.................... -- 3,409 -- -- 3,409
Exercise of stock options................. 1 121 -- -- 122
Issuance of deferred warrant.............. -- 250 -- -- 250
Change in cumulative translation
adjustment............................. -- -- -- 156 156
-----------------------------------------------------------------------------------
BALANCE,
December 30, 1995 ........................ $ 84 $ 27,934 $ (6,032) $ (228) $ 21,758
Net earnings.............................. -- -- 473 -- 473
Exercise of stock options................. 1 174 -- -- 175
Change in cumulative translation
adjustment............................. -- -- -- 44 44
-----------------------------------------------------------------------------------
BALANCE,
December 28, 1996......................... $ 85 $ 28,108 $ (5,559) $ (184) $ 22,450
Net earnings.............................. -- -- 5,240 -- 5,240
NOL utilization and change in tax asset
valuation allowance.................... -- 3,558 -- -- 3,558
Proceeds from stock offering.............. 24 22,069 -- -- 22,093
Issuance of stock......................... -- 213 -- -- 213
Exercise of stock options................. -- 36 -- -- 36
Change in cumulative translation
adjustment............................. -- -- -- (989) (989)
-----------------------------------------------------------------------------------
BALANCE,
January 3, 1998........................... $ 109 $ 53,984 $ (319) $ (1,173) $ 52,601
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
- 24 -
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JANUARY 3, 1998, DECEMBER 28, 1996
AND DECEMBER 30, 1995
(DOLLARS IN THOUSANDS)
1997 1996 1995
---- ---- ----
Cash flows from operating activities--
Net earnings.................................................................. $ 5,240 $ 473 $ 3,164
Adjustments to reconcile net earnings to net cash provided by continuing
operating activities--
Depreciation and amortization........................................... 2,953 2,752 3,024
Utilization of NOL...................................................... 2,370 98 (137)
Discontinued operations................................................. 564 2,610 (419)
Cash effects of changes in--
Accounts receivable................................................... (2,392) (5,801) 862
Inventories........................................................... (3,116) (2,636) (3,147)
Prepaid expenses and other assets..................................... (1,271) (99) 911
Accounts payable...................................................... 1,231 (218) 3,071
Accrued expenses and other liabilities................................ (746) 1,925 (198)
------- -------- ---------
Net cash provided by (used in) continuing operating activities................ 4,833 (896) 7,131
Net cash (used in) provided by discontinued operating activities.............. (2,963) 1,311 (2,268)
------- -------- ---------
Net cash provided by operating activities.................................... 1,870 415 4,863
------- -------- ---------
Cash flows from investing activities--
Additions to property and equipment........................................... (4,959) (2,966) (2,728)
Proceeds from sale of discontinued operations................................. 6,281 4,800 --
Net cash received from sale of investment..................................... -- -- 1,337
------- -------- ---------
Net cash provided by (used in) investing activities........................... 1,322 1,834 (1,391)
------- -------- ---------
Cash flows from financing activities--
Proceeds from stock offering.................................................. 22,093 -- --
Proceeds from sale and leaseback.............................................. 10,200 -- --
Reduction in revolving credit line, net....................................... (14,575) (425) (1,000)
Reduction in term loans....................................................... (8,362) (3,597) (2,932)
(Reduction in) proceeds from foreign bank debt................................ (1,595) 2,233 1,200
Proceeds from senior secured note............................................. -- -- 15,000
Proceeds from credit facility................................................. -- -- 31,000
Retirement of bank debt....................................................... -- -- (44,055)
Other financing activities, net............................................... (42) (22) (2,366)
------- -------- ---------
Net cash provided by (used in) financing activities........................... 7,719 (1,811) (3,153)
------- -------- ---------
Changes in cash and cash equivalents--
Net increase in cash and cash equivalents.................................. 10,911 438 319
Cash and cash equivalents at beginning of year............................. 1,410 972 653
------- -------- ---------
Cash and cash equivalents at end of year................................... $12,321 $ 1,410 $ 972
------- -------- ---------
------- -------- ---------
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
- 25 -
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
The Middleby Corporation (the "Company") is engaged in the design,
manufacture and sale of commercial and institutional foodservice equipment.
Its major lines of products consist of conveyor ovens, toasters, counter-top
cooking and warming equipment, heavy-duty gas ovens, convection ovens,
broilers, steamers and semi-custom fabrication. The Company manufactures and
assembles most of this equipment at two factories in the United States and
one operation in the Philippines. The Company conducts its business
principally through three domestic and two international divisions. Each
division operates primarily on a decentralized basis.
The Company's products are sold primarily to independent dealers and
distributors and are marketed primarily through the Company's sales personnel
and network of independent manufacturers' representatives. The Company's
end-user customers include: (i) fast food or quick-service restaurants,
including those restaurants that primarily offer pizza, (ii) full-service
restaurants, including casual-theme restaurants, (iii) retail outlets, such
as convenience stores, supermarkets and department stores and (iv) public and
private institutions, such as hotels, resorts, schools, hospitals, long-term
care facilities, correctional facilities, stadiums, airports, corporate
cafeterias, military facilities and government agencies. Included in these
customers are several large multi-national restaurant chains which account
for a significant portion of the Company's business, although no single
customer accounts for more than 10% of net sales.
The Company purchases raw materials and component parts, the
majority of which are standard commodity type materials, from a number of
suppliers. Although certain component parts are procured from a sole source,
the Company can purchase such parts from alternate vendors.
The Company has numerous licenses and patents to manufacture, use
and sell its products and equipment. Certain of these licenses begin to
expire in the year 2000. Management believes the loss of any one of these
licenses or patents would not have a material adverse effect on the financial
and operating results of the Company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned and majority-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
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The Company's fiscal year ends on the Saturday nearest December 31.
Fiscal years 1997, 1996 and 1995 ended on January 3, 1998, December 28, 1996
and December 30, 1995, respectively, and included 53, 52 and 52 weeks,
respectively.
(b) CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with original
maturities of three months or less when acquired to be cash equivalents. The
Company's policy is to invest its excess cash in U.S. Government securities,
interest-bearing deposits with major banks, municipal notes and bonds and
commercial paper of companies with strong credit ratings that are subject to
minimal credit and market risk.
(c) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(d) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined utilizing the first-in, first-out (FIFO) inventory method.
Inventories at January 3, 1998 and December 28, 1996 are as follows:
1997 1996
---- ----
(dollars in thousands)
Raw materials and parts..................................... $ 6,073 $ 6,492
Work in process............................................. 6,804 4,621
Finished goods.............................................. 11,195 9,843
--------- ----------
$ 24,072 $ 20,956
--------- ----------
--------- ----------
The amounts shown above are net of inventory reserves of $546,000
and $946,000 at January 3, 1998 and December 28, 1996, respectively.
(e) ACCOUNTS RECEIVABLE
Accounts receivable, as shown in the consolidated balance sheets,
are net of allowances for doubtful accounts of $577,000 and $495,000 at
January 3, 1998 and December 28, 1996, respectively.
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(f) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost as follows:
1997 1996
---- ----
(dollars in thousands)
Land and improvements......................................................... $ 3,322 $ 3,322
Building and improvements..................................................... 11,621 11,012
Machinery and equipment....................................................... 20,381 16,250
---------- ----------
35,324 30,584
Less accumulated depreciation................................................. (13,534) (11,741)
---------- ----------
$21,790 $18,843
---------- ----------
---------- ----------
Depreciation is provided for financial statement purposes using the
straight-line method and amounted to $2,094,000, $1,549,000 and $1,543,000 in
fiscal 1997, 1996 and 1995, respectively. Following is a summary of the
estimated useful lives:
DESCRIPTION LIFE
----------- ----
Land improvements.................................................................... 7 years
Building and improvements............................................................ 20 to 40 years
Machinery and equipment.............................................................. 3 to 10 years
Expenditures which significantly extend useful lives are
capitalized. Maintenance and repairs are charged to expense as incurred.
Asset impairments are recorded whenever events or changes in circumstances
indicate that the recorded value of an asset is less than the sum of its
expected future cash flows, in accordance with SFAS No. 121: "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of".
(g) EXCESS PURCHASE PRICE OVER NET ASSETS ACQUIRED
The excess purchase price over net assets acquired is being
amortized using a straight-line method over 40 years. Amounts presented are
net of accumulated amortization of $4,673,000 and $4,216,000 at January 3,
1998 and December 28, 1996, respectively. The Company periodically evaluates
the useful life and realizability of the excess purchase price over net
assets acquired based on current events and circumstances. Impairments are
measured utilizing an undiscounted forecasted income method pertaining to
business units and are recorded at the time management deems an impairment
has occurred.
(h) INTANGIBLE ASSETS
Trademarks, patents, license agreements and other intangibles,
included in other assets in the consolidated balance sheets, are being
amortized on a straight-line basis over estimated useful lives ranging from 5
to 14 years. Net recorded intangible assets of $684,000 and $243,000 are
presented net of accumulated amortization of $2,383,000 and $2,314,000 at
January 3, 1998 and December 28, 1996, respectively.
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(i) ACCRUED EXPENSES
Accrued expenses consist of the following at January 3, 1998 and
December 28, 1996, respectively:
1997 1996
---- ----
(dollars in thousands)
Accrued payroll and related expenses.................................... $3,601 $3,567
Accrued commissions..................................................... 1,510 1,392
Accrued warranty........................................................ 1,172 1,252
Other accrued expenses.................................................. 2,972 3,790
-------- ----------
$9,255 $10,001
-------- ----------
-------- ----------
(j) FOREIGN CURRENCY
Foreign currency transactions are accounted for in accordance with
SFAS No. 52: "Foreign Currency Translation." Assets and liabilities of the
Company's foreign operations are translated at exchange rates at the balance
sheet date. These translation adjustments are not included in determining net
income for the period but are disclosed and accumulated in a separate
component of stockholders' equity until sale or liquidation of the net
investment in the foreign entity takes place. Exchange gains and losses on
foreign currency transactions are included in determining net income for the
period in which they occur. Intercompany transactions of a long-term
investment nature are considered part of the Company's net investment and
hence do not give rise to gains or losses.
(k) RESEARCH AND DEVELOPMENT COSTS
Research and development costs, included in cost of sales in the
consolidated statements of earnings, are charged to expense when incurred.
These costs were $1,695,000, $1,515,000 and $1,438,000 in fiscal 1997, 1996
and 1995, respectively.
(l) EARNINGS PER SHARE
During the fourth quarter of 1997, the Company adopted SFAS No. 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 241,000, 251,000 and 94,000 for fiscal 1997, 1996 and 1995,
respectively. All prior periods have been restated to present all earnings
per share data on a consistent basis.
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(m) CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of the consolidated statements of cash flows, the
Company considers all highly-liquid instruments with a maturity of three
months or less to be cash equivalents. Cash paid for interest was $3,925,000,
$4,397,000 and $4,076,000 in fiscal 1997, 1996 and 1995, respectively. Cash
payments totaling $304,000, $256,000 and $371,000 were made for income taxes
during fiscal 1997, 1996 and 1995, respectively.
(n) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of all financial instruments approximates the
fair value of those assets and liabilities.
(3) DISCONTINUED OPERATION
On January 23, 1997, the Company completed the sale of substantially
all of the assets of Victory Refrigeration Company ("Victory"). After
post-closing adjustments, gross proceeds were $6,700,000, less amounts for
retained liabilities and transaction costs aggregating $2,600,000. The sale
and leaseback of the Victory facility to an unrelated third party had
previously been completed on December 27, 1996 for proceeds of $4,800,000,
less certain transaction expenses.
The results of Victory have been reported separately as a
discontinued operation in the consolidated financial statements for all
periods presented. The results of the discontinued operations are not
necessarily indicative of the results which may have been obtained had the
continuing and discontinued operations been operating independently.
Summarized results of Victory are as follows:
1996 1995
---- ----
(dollars in thousands)
Net sales................................................ $27,261 $32,841
(Loss) income from operations............................ (458) 1,642
(Loss) earnings before income taxes...................... (1,111) 603
(Benefit) provision for income taxes..................... (367) 184
(Loss) earnings from discontinued
operations......................................... (744) 419
Additionally, the company recorded losses from operations during the
phase-out period and on disposal of the business of $564,000 and $1,866,000
in 1997 and 1996, respectively.
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Interest expense of $809,000 and $771,000 for 1996 and 1995,
respectively, has been allocated based upon the ratio of the net assets of
the discontinued operations to the consolidated capitalization of the
Company. Continuing operations and discontinued operations reflect the net
tax expense or tax benefit generated by the respective operations, limited,
however, by the income tax benefit recognized in the Company's historical
financial statements. No general corporate expenses have been allocated to
the discontinued operations.
The net assets of discontinued operations included in the
consolidated balance sheets at December 28, 1996 consisted primarily of
receivables, inventory and equipment related to the discontinued operations,
net of accounts payable, accrued liabilities and closing costs associated
with the sale.
(4) FINANCING ARRANGEMENTS
The following is a summary of long-term debt at January 3, 1998 and
December 28, 1996:
1997 1996
---- ----
(dollars in thousands)
Senior note................................. $ 15,000 $ 15,000
Senior secured credit facility:
Revolving credit line.................. -- 14,575
Term loans............................. -- 8,362
Intellectual property lease................. 10,200 --
Other....................................... 2,713 3,331
--------- ----------
27,913 41,268
Less current maturities of
long-term debt......................... 3,595 3,916
--------- ----------
$ 24,318 $ 37,352
--------- ----------
--------- ----------
The Company completed a public stock offering in December 1997 (see
Note 5). Net proceeds from the offering of approximately $22.1 million were
used to repay borrowings under the senior secured credit facility. In March
1998, the Company entered into a $20,000,000 unsecured multi-currency
revolving line of credit with a major international bank to replace the
senior secured credit facility. The multi-currency revolving line of credit
permits borrowings at floating interest rates of between 0.3% to 1.5% above
LIBOR rate or
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at the bank's reference rate to 0.5% below that reference rate. The interest
rate is adjusted quarterly based on the Company's defined indebtedness ratio
on a rolling four-quarter basis. At the initiation of the multi-currency
revolving line of credit, the floating interest rate for any borrowings under
LIBOR contracts was at 0.75% above the LIBOR rate and the rate for any
borrowings under reference rate contracts was at the bank's reference rate. A
variable commitment fee, based upon the indebtedness ratio, of between 0.075%
to 0.3% is charged on the unused portion of the multi-currency revolving line
of credit. This multi-currency revolving line of credit expires on February
28, 2001, or earlier at the Company's option.
In December 1997, the Company entered into a four-year sale and
leaseback of certain intellectual property for $10,200,000. The sale and
leaseback facility bears an implicit interest rate of 10.3% and has a
four-year term maturing on December 30, 2001. At its option, the Company may
repurchase the intellectual property after three years at a specified price.
After the final maturity of the lease, the Company may repurchase the
intellectual property at its then fair market value. Principal and interest
are paid on a quarterly basis.
The unsecured senior note bears interest at 10.99% and has an
eight-year term maturing January 10, 2003 with semi-annual payments of
$2,500,000 beginning in July 2000. A warrant for the purchase of 250,000
shares of common stock of the Company at an exercise price of $3 per share
was issued in conjunction with the note. The note agreement was previously
secured by a senior security interest in substantially all the intellectual
property collateral of the Company's subsidiaries. Concurrently with the
initiation of the unsecured multi-currency revolving line of credit, the
noteholder released its secured position.
The terms of the credit and note agreements limit the paying of
dividends, limit capital expenditures and leases, and require, among other
terms, a minimum amount, as defined, of stockholders' equity, and certain
ratios of indebtedness and fixed charge coverage. The credit and note
agreements also provide that if a material adverse change in the Company's
business operations or conditions occurs, the lender and noteholder could
declare an event of default. The Company was in compliance with all covenants
as amended for the period ending January 3, 1998.
A foreign subsidiary of the Company had borrowings of $1,838,000 at
January 3, 1998, under a revolving credit line. The Company's domestic
subsidiary guarantees this revolving credit line. Interest is at the
prevailing bank rate. The revolving credit line is payable in full on various
dates during 1998 with final payment due November 6, 1998.
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The aggregate amount of long-term debt payable during each of the
next five years and thereafter is as follows:
(dollars in thousands)
1998............................... $ 3,595
1999............................... $ 1,892
2000............................... $ 5,358
2001............................... $ 9,568
2002............................... $ 5,000
Thereafter......................... $ 2,500
-------
$27,913
-------
-------
(5) COMMON AND PREFERRED STOCK
(a) Shares Authorized
At January 3, 1998 and December 28, 1996, the Company had
20,000,000 shares of common stock and 2,000,000 shares of Non-voting
Preferred Stock authorized.
(b) Public Stock Offering
In December 1997, the Company completed a public stock offering.
The offering totaled 3,001,500 shares of which the Company sold
2,391,500 shares and 610,000 shares were sold by selling stockholders.
Net proceeds to the Company totaled approximately $22.1 million and
were used to repay certain indebtedness.
(c) Warrant
In conjunction with the issuance of the senior notes in January
1995 (see Note 4), the Company issued a transferable warrant to the
noteholder for the purchase of 250,000 shares of common stock at an
exercise price of $3 per share. The warrant provides for adjustment of
the exercise price if the Company issues additional shares at a
purchase price below the then current market price, as defined, and for
adjustment of the number of shares if the Company declares a stock
dividend. The warrant became exercisable on February 10, 1995 and
expires July 10, 2003.
(d) Stock Options
The Company maintains the Amended and Restated 1989 Stock
Incentive Plan (the "Plan"), effective as of February 16, 1989, which
provides rights to key employees to purchase shares of common stock at
the fair market value of the stock on the date of grant. A maximum
amount of 400,000 shares can be issued under
- 33 -
the Plan. Options may be exercised upon certain vesting requirements
being met, but expire to the extent unexercised within a maximum of ten
years from the date of grant. At January 3, 1998, 154,575 shares remain
available for future grants under the Plan. The weighted average
exercise price of options outstanding under the Plan was $4.48 at
January 3, 1998 and $4.43 at December 28, 1996.
In addition to the above Plan, certain directors of the Company
have options outstanding at January 3, 1998 for 1,000 shares
exercisable at $1.875 per share and 75,000 shares exercisable at $7.50
per share.
A summary of stock option activity is presented below:
Key Option
Stock Option Activity Employees Directors Price Per Share
--------------------- --------- --------- ---------------
Outstanding at
December 30, 1995..... 155,000 9,000 $1.25 to $5.63
Granted............... 60,000 75,000 $5.25 to $7.50
Exercised............. (72,500) (2,000) $1.25 to $4.38
Forfeited............. (5,900) -- $3.00 to $5.63
-------- ---------
Outstanding at
December 28, 1996...... 136,600 82,000 $1.25 to $7.50
-------- ---------
-------- ---------
Granted................ 5,000 -- $9.63
Exercised.............. (4,562) (6,000) $1.875 to $5.63
Forfeited.............. (12,500) -- $5.25 to $5.63
-------- ---------
Outstanding at
January 3, 1998......... 124,538 76,000 $1.25 to $9.63
-------- ---------
-------- ---------
The weighted average exercise price of options granted was $9.63
and $5.78 in 1997 and 1996, respectively. As permitted under SFAS
No. 123: "Accounting for Stock-Based Compensation" the Company has
elected to follow APB Opinion No. 25: "Accounting for Stock Issued to
Employees" and related interpretations, in accounting for stock-based
awards to employees and directors. Under APB 25, because the exercise
price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized in the Company's financial statements for all periods
presented.
Pro forma information regarding net earnings and earnings per
share is required by SFAS 123. This information is required to be
determined as if the Company had accounted for its employee and
director stock options granted subsequent to December 31, 1994 under
the fair value method of that statement. The fair value of options
granted in fiscal years 1997, 1996 and 1995 reported below
- 34 -
has been estimated at the date of grant using a Black-Scholes option
pricing model with the following general assumptions: risk-free
interest rate of 5.5 percent, no expected dividend yield, expected
lives of 3.5 to 6.0 years and expected volatility of 57.6%.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including
the expected stock price volatility. Because the Company's options have
characteristics significantly different from those of traded options
and because changes in the subjective input assumptions can materially
affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of
the fair value of its options.
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting
period. The Company's pro forma information follows:
1997 1996 1995
---- ---- ----
(dollars in thousands, except per share data)
Earnings from continuing operations............... $ 5,675 $ 2,946 $ 2,678
Per share:
Basic.................................... $ 0.64 $ 0.35 $ 0.31
Diluted.................................. $ 0.62 $ 0.34 $ 0.31
Net earnings....................................... $ 5,111 $ 336 $ 3,097
Per share:
Basic.................................... $ 0.58 $ 0.04 $ 0.36
Diluted.................................. $ 0.56 $ 0.04 $ 0.36
(6) PROVISION FOR PRODUCT LINE DISCONTINUANCE
In 1995, company management made the decision to discontinue the
production of a unique line of mixers. A provision of $900,000 was recorded
for this product line discontinuance. The charge related to the disposal of
assets associated with the product line and its operations. No changes in
operating personnel were made as a result of this decision.
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(7) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No.
109: "Accounting for Income Taxes."
The provision for income taxes for continuing operations is
summarized as follows:
1997 1996 1995
---- ---- ----
(dollars in thousands)
Federal $2,346 $1,153 $(385)
State and local........................... 178 188 183
Foreign................................... 14 48 62
-------- -------- ------
$2,538 $1,389 $(140)
-------- -------- ------
-------- -------- ------
Although the Company is not a Federal taxpayer due to its net
operating loss ("NOL") carry-forwards, a tax provision is still required to
be recorded. The majority of the NOL carry-forwards expiring prior to 1998
relate to a 1983 quasi-reorganization and were not recorded as a benefit to
the tax provision, but were directly credited to paid-in-capital. NOL's
expiring in 1998 and thereafter are recorded entirely as a benefit to the tax
provision as they are recognized. Reconciliation of the differences between
income taxes computed at the Federal statutory rate and effective rate are as
follows:
1997 1996 1995
---- ---- ----
U.S. Federal statutory tax rate................ 34.0% 34.0% 34.0%
Utilizations of NOL and reductions
in valuation allowance.................... (13.1) (19.3) (65.6)
Permanent book vs. tax
differences............................... 1.8 1.2 15.5
Foreign tax losses with no benefit
and rate differentials.................... 5.6 11.0 3.7
State taxes, net of federal
benefit................................... 2.1 4.2 7.0
------ ----- -----
Consolidated effective tax rate for
continuing operations........................ 30.4 31.1 (5.4)
------ ----- -----
------ ----- -----
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At January 3, 1998 and December 28, 1996, the Company had recorded
the following deferred tax assets and liabilities which were comprised of the
following:
1997 1996
---- ----
(dollars in thousands)
Deferred tax assets:
Net operating loss carry-forwards................... $5,224 $12,073
Tax credit carry-forwards........................... 1,676 1,503
Accrued pension benefits............................ 862 703
Accrued warranty.................................... 398 641
Other 367 1,141
Valuation allowance................................. -- (9,437)
------- ------
Deferred tax assets........................... 8,527 6,624
Deferred tax liabilities:
Depreciation........................................ (1,748) (1,588)
------- ------
Net deferred tax assets ............................... $6,779 $5,036
------- ------
------- ------
As of January 3, 1998, the consolidated tax loss carry-forwards for
Federal income tax purposes were approximately $5,224,000 on a tax effected
basis. These carry-forwards expire as follows: $3,000 in 1998; $264,000 in
2001; $508,000 in 2004; $1,619,000 in 2005; $1,913,000 in 2006; and $917,000
in 2007. Consolidated business tax credit carry-forwards available at January
3, 1998 to reduce future tax liabilities were approximately $898,000 and
expire from 1998 through 2000. The Company also has tax credits of
approximately $778,000 resulting from Federal alternative minimum tax
payments that do not expire.
The decrease in the gross tax asset and the related valuation
allowance was primarily due to the utilization and expiration of NOL
carry-forwards during 1997. At January 3, 1998, the Company has recorded no
valuation allowance, reflecting management's judgement as to the Company's
ability to generate taxable income which will, more likely than not, be
sufficient to recognize these tax assets.
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(8) COMMITMENTS AND CONTINGENCIES
The Company leases office and plant facilities and equipment under
operating leases which expire in fiscal 1998 through 2003. Rental expense was
$1,569,000, $802,000 and $816,000 in fiscal 1997, 1996 and 1995,
respectively. Future minimum rental payments under these leases are as
follows:
(dollars in thousands)
1998................................. $ 1,515
1999................................. 1,337
2000................................. 1,453
2001................................. 862
2002................................. 840
Thereafter........................... 345
--------
$ 6,352
--------
--------
In addition to the above, the Company entered into an agreement with
the owner of the Victory facility (prior to the sale of the Victory
subsidiary -see Note 3) to guarantee Victory's lease payments. The lease
guarantee expires no later than December 27, 1998. The contingent liability
related to this guarantee totals approximately $368,000 at January 3, 1998.
(9) GEOGRAPHIC INFORMATION
The Company's principal manufacturing operations are located in the
United States and the Philippines, with additional sales and distribution
operations located in Canada, China, France, Japan, Korea, Mexico, Spain and
Taiwan. The Company's products are marketed to customers in more than 100
countries through these operations, together with a network of independent
distributors. Total export sales represented 37%, 37% and 36% of total net
sales in fiscal 1997, 1996 and 1995, respectively. Net sales by each major
geographic region are as follows:
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1997 1996 1995
----------- ----------- -----------
(dollars in thousands)
United States................. $ 92,958 $ 78,491 $ 68,269
--------- --------- ---------
Asia/Pacific.................. 25,857 25,606 20,161
Europe/Other.................. 16,416 11,351 10,039
Latin America ................ 7,563 5,281 4,036
Canada........................ 5,459 4,036 3,843
--------- --------- ---------
Total international....... 55,295 46,274 38,079
--------- --------- ---------
$ 148,253 $ 124,765 $ 106,348
--------- --------- ---------
--------- --------- ---------
(10) EMPLOYEE BENEFIT PLANS
The Company has a discretionary profit sharing plan and a 401(k)
savings plan for United States salaried and non-union hourly employees. The
company had profit sharing expense of $310,000, $308,000 and $299,000 in fiscal
1997, 1996 and 1995, respectively.
The Company has a defined benefit pension plan for union hourly plant
employees at the Elgin, Illinois facility. The company's funding policy is to
contribute the minimum required by the Employee Retirement Income Security Act
of 1974. The plan had projected benefit obligations of $2,204,000 and $1,911,000
at January 3, 1998 and December 28, 1996, respectively. The market values of
plan assets were $1,806,000 and $1,549,000 at January 3, 1998 and December 28,
1996, respectively. The discount rates used to determine the projected benefit
obligations were 7.5% and 7.5% for 1997 and 1996, respectively. The net pension
expense for this plan was $149,000, $155,000 and $140,000 for fiscal 1997, 1996
and 1995, respectively.
The Company has retirement benefit agreements with its Chairman and
President, and a non-qualified defined benefit retirement plan for certain
officers. The retirement benefits are based on a percentage of the officer's
final base salary and the number of years of employment. Additionally, the
Company maintains a retirement plan for non-employee directors. The plan
provides for an annual benefit upon retirement from the Board of Directors at
age 70, equal to 100% of the director's last annual retainer, payable for a
number of years equal to the director's years of service up to a maximum of 10
years. The projected benefit obligations accrued under these agreements were
$2,115,000 and $2,067,000 at January 3, 1998 and December 28, 1996,
respectively, and are currently unfunded. The discount rates used to determine
the projected benefit obligations were 7.0% and 7.5% for 1997 and 1996,
respectively. Retirement benefit expense was $51,000, $255,000 and $255,000 in
fiscal 1997, 1996 and 1995, respectively.
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(11) QUARTERLY DATA (UNAUDITED)
1st 2nd 3rd 4th
--- --- --- ---
(dollars in thousands, except per share data)
1997
----
Net sales.................................. $ 32,698 $ 42,082 $ 35,850 $ 37,623
Gross profit............................... 10,474 12,814 11,002 11,440
Income from operations..................... 3,118 3,735 2,887 3,151
Earnings from continuing operations........ 1,386 1,587 1,231 1,600
Loss from discontinued operations.......... -- (564) -- --
Net earnings.............................. $ 1,386 $ 1,023 $ 1,231 $ 1,600
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings (loss) per share:
Continuing operations.................. $ 0.16 $ 0.18 $ 0.14 $ 0.17
Discontinued operations................ 0.00 (0.06) 0.00 0.00
---------- ---------- ---------- ----------
Net earnings per share..................... $ 0.16 $ 0.12 $ 0.14 $ 0.17
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings (loss) per share:
Continuing operations.................. $ 0.16 $ 0.18 $ 0.14 $ 0.16
Discontinued operations................ 0.00 (0.06) 0.00 0.00
---------- ---------- ---------- ----------
Net earnings per share..................... $ 0.16 $ 0.12 $ 0.14 $ 0.16
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
1996
----
Net sales.................................. $ 29,510 $ 28,661 $ 31,400 $ 35,194
Gross profit............................... 8,567 8,529 9,373 10,966
Income from operations..................... 2,288 1,671 2,062 2,656
Earnings from continuing operations........ 766 401 624 1,292
Loss from discontinued operations.......... (80) (432) (1,603) (495)
Net earnings.............................. $ 686 $ (31) $ (979) $ 797
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings (loss) per share:
Continuing operations.................. $ 0.09 $ 0.05 $ 0.08 $ 0.15
Discontinued operations................ (0.01) (0.05) (0.19) (0.06)
---------- ---------- ---------- ----------
Net earnings per share..................... $ 0.08 $ 0.00 $ (0.11) $ 0.09
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings (loss) per share:
Continuing operations.................. $ 0.09 $ 0.04 $ 0.07 $ 0.15
Discontinued operations................ (0.01) (0.04) (0.19) (0.06)
---------- ---------- ---------- ----------
Net earnings per share..................... $ 0.08 $ 0.00 $ (0.12) $ 0.09
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
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THE MIDDLEBY CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FISCAL YEARS ENDED JANUARY 3, 1998, DECEMBER 28, 1996
AND DECEMBER 30, 1995
Balance Additions Write-Offs Balance
Beginning Charged During the At End
Of Period Expense the Period Of Period
--------- ------- ---------- ---------
Allowance for
doubtful accounts; deducted from
accounts receivable on the
balance sheets-
1995 $342,000 $170,000 $ (99,000) $413,000
1996 $413,000 $117,000 $ (35,000) $495,000
1997 $495,000 $453,000 $(371,000) $577,000
- 41 -
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information required by Part III (Items 10, 11, 12 and 13) is
incorporated by reference, to the extent necessary, in accordance with
General Instruction G(3), from the Company's definitive proxy statement filed
pursuant to Regulation 14A in connection with the 1998 annual meeting of
stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial statements.
The financial statements listed on Page 20 are filed as part
of this Form 10-K.
3. Exhibits.
(3) (i) Unofficial Restated Certificate of Incorporation of The
Middleby Corporation (as amended to August 23, 1996),
incorporated by reference to the Company's Form 10-Q/A,
Amendment No. 1, Exhibit 3(i), for the fiscal quarter ended
June 29, 1996, filed on August 23, 1996;
(3) (ii) Unofficial Amended and Restated Bylaws of The Middleby
Corporation (as amended to August 23, 1996),
incorporated by reference to the Company's Form 10-Q/A,
Amendment No. 1, Exhibit 3(ii), for the fiscal quarter ended
June 29, 1996, filed on August 23, 1996;
(4) (a) Certificate of Designations dated October 30, 1987, and
specimen stock certificate relating to the Company
Preferred Stock, incorporated by reference from the
Company's Form 10-K, Exhibit (4), for the fiscal year
ended December 31, 1988, filed on March 15, 1989;
- 42 -
(4) (b) Loan and Security Agreement dated January 9, 1995, by
and among Middleby Marshall Inc. and Asbury Associates, Inc., as
Borrowers, certain lenders named therein, as Lenders, and Sanwa
Business Credit Corporation, as Agent and Lender, incorporated by
reference to the Company's Form 10-K, Exhibit (4) (b), for the
fiscal year ended December 31, 1994, filed on March 31, 1995;
(4) (b) (i) First Amendment to Loan and Security Agreement, incorporated by
reference to the Company's Form 10-Q, Exhibit (4)(b)(i), for the
fiscal quarter ended June 29, 1996, filed on August 13, 1996;
(4) (b) (ii) Second Amendment to Loan and Security Agreement,
dated as of December 26, 1996, incorporated by reference to the
Company's Form 10-K for the fiscal year ended December 28, 1996, filed
on March 28, 1997;
(4) (b) (iii) Third Amendment to Loan and Security Agreement, dated
as of January 22, 1997, incorporated by reference to the Company's
Form 10-K for the fiscal year ended December 28, 1996, filed on
March 28, 1997;
(4) (c) Note Agreement dated as of January 1, 1995, among
Middleby Marshall Inc. and Asbury Associates, Inc. as Obligors,
incorporated by reference to the Company's Form 10-K, Exhibit (4) (c), for
the fiscal year ended December 31, 1994, filed on March 31, 1995;
(4) (c) (i) Amendment No. 1 to Note Agreement, incorporated by
reference to the Company's Form 10-Q, Exhibit (4)(c)(i), for the
fiscal quarter ended June 29, 1996, filed August 13, 1996;
(4) (c) (ii) Amendment No. 2 to Note Agreement, incorporated by
reference to the Company's Form 10-Q, Exhibit (4)(c)(ii), for the
fiscal quarter ended June 29, 1996, filed on August 13, 1996;
(4) (c) (iii) Amendment No. 3 to Note Agreement, dated as of August
15, 1996, incorporated by reference to the Company's Form 10-K
for the fiscal year ended December 28, 1996, filed on March 28, 1997;
- 43 -
(4) (c) (iv) "Second Amendment" (Amendment No. 4) to Note Agreement,
dated as of January 15, 1997, incorporated by reference to the
Company's Form 10-K for the fiscal year ended December 28, 1996,
filed on March 28, 1997;
(4) (d) Warrant to purchase common stock of The Middleby
Corporation dated January 10, 1995, incorporated by reference
to the Company's Form 10-K, Exhibit (4) (d), for the fiscal year
ended December 31, 1994, filed on March 31, 1995;
(4) (e) Intercreditor Agreement dated as of January 10, 1995, by
and among Sanwa Business Credit Corporation, as Agent, the
Northwestern Mutual Life Insurance Company, as the Senior
Noteholder, and First Security Bank of Utah, National Association,
as Security Trustee and collateral Agent, incorporated by reference
to the Company's Form 10-K, Exhibit (4) (e), for the fiscal year
ended December 31, 1994, filed on March 31, 1995;
(4) (e) (i) Amendment No. 1 to Intercreditor Agreement, incorporated by reference
to the Company's Form 10-Q, Exhibit (4)(e)(i), for the fiscal quarter
ended June 29, 1996, filed on August 13, 1996;
(4) (e) (ii) Amendment No. 2 to Intercreditor Agreement, incorporated by reference
to the Company's Form 10-Q, Exhibit (4)(e)(ii), for the fiscal quarter
ended June 29, 1996, filed on August 13, 1996;
(10) (iii) (a) * Amended and Restated Employment Agreement of William F. Whitman, Jr.,
dated January 1, 1995, incorporated by reference to the Company's
Form 10-Q, Exhibit (10) (iii) (a), for the fiscal quarter ended
April 1, 1995;
(10) (iii) (b) * Amended and Restated Employment Agreement of David P. Riley,
dated January 1, 1995, incorporated by reference to the Company's
10-Q, Exhibit (10) (iii) (b) for the fiscal quarter ended April
1, 1995;
(10) (iii) (c) * Amended and Restated Employment Agreement of independent directors
adopted as of January 1, 1995, incorporated by reference to the
Company's Form 10-Q, Exhibit (10) (iii) (c), for the fiscal quarter
ended April 1, 1995;
- 44 -
(10) (iii) (d) * The Middleby Corporation Amended and Restated 1989 Stock Incentive
Plan, as amended, incorporated by reference to the Company's
Form 10-Q, Exhibit (10)(iii)(d), for the fiscal quarter ended
June 29, 1996, filed on August l3, 1996;
(10) (iii) (e) * 1996 Management Incentive Plan (Corporate Vice Presidents),
incorporated by reference to Company's Form 10-Q, Exhibit 10
(iii) (f), for the fiscal quarter ended June 29, 1996, filed
on August 13, 1996;
(10) (iii) (f) * Description of Supplemental Retirement Program, incorporated by
reference to Amendment No. 1 to the Company's Form 10-Q,
Exhibit 10 (c), for the fiscal quarter ended July 3, 1993, filed
on August 25, 1993;
(10) (iii) (g) * The Middleby Corporation Stock Ownership Plan, incorporated by
reference to the Company's Form 10-K, Exhibit (10) (iii) (m),
for the fiscal year ended January 1, 1994, filed on March 31,
1994;
(10) (iii) (h) * Amendment to The Middleby Corporation Stock Ownership Plan dated
as of January 1, 1994, incorporated by reference to the Company's
Form 10-K, Exhibit (10) (iii) (n), for the fiscal year ended
December 31 ,1994, filed on March 31, 1995;
(10) (iii) (i) Agreement of Purchase and Sale of the Company's Cherry Hill,
New Jersey facility, with attached lease, incorporated by reference
to the Company's Form 10-Q, Exhibit (10)(iii)(j), for the fiscal quarter
ended September 28, 1996, filed on November 12, 1996;
(10) (iii) (j) Asset Purchase Agreement among Middleby Marshall Inc., Victory
Refrigeration Company and Victory Acquisition Group dated December 27,
1996, incorporated by reference to the Company's Form 8-K, Exhibit
(10)(iii)(k), filed on February 7, 1997;
(10) (iii) (k) Underwriting agreement dated October 28, 1997 between the Company and
Shroder and Co. Inc. and Brean Murray, Co Inc., incorporated by reference
to exhibit 2 to schedule 13D for William F Whitman, Jr., filed on November
5, 1997;
- 45 -
(10) (iii) (l) The lease agreement dated as of December 30, 1997 between Middleby
Marshall Inc. and Bank of America Leasing and Capital Corporation,
incorporated by reference to the Company's 8-K filed on January 13, 1998;
(10) (iii) (m) Amendment to the lease agreement dated December 30, 1997 between Middleby
Marshall Inc. and Bank of America Leasing and Capital Corporation,
incorporated by reference to the Company's 8-K filed on January 13, 1998;
(22) List of subsidiaries;
(27.1) Financial Data Schedules (EDGAR only);
(27.2) Restated Financial Data Schedules (EDGAR only);
(27.3) Restated Financial Data Schedules (EDGAR only);
* Designates management contract or compensation plan.
(b) There were no reports on Form 8-K in the fiscal fourth quarter of 1997.
However, subsequent to the end of the fiscal year, on January 13, 1998,
the registrant filed a report of Form 8-K to disclose the sale of
certain license and sublicense agreements.
(c) See the financial statement schedule included under Item 8.
- 46 -
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 27th of March,
1998.
THE MIDDLEBY CORPORATION
BY: /s/ David P. Riley
----------------------------
David P. Riley
President, 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 March 27th, 1998.
Signatures Title
----------- -----
PRINCIPAL EXECUTIVE OFFICER
/s/ David P. Riley President, Chief Executive Officer
-------------------------------------- and Director
David P. Riley
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER
/s/ John J. Hastings Executive Vice President, Chief
-------------------------------------- Financial Officer, Secretary and
John J. Hastings Treasurer
DIRECTORS
/s/ William F. Whitman, Jr. Chairman of the Board and Director
--------------------------------------
William F. Whitman, Jr.
/s/ Robert R. Henry Director
--------------------------------------
Robert R. Henry
/s/ A. Don Lummus Director
--------------------------------------
A. Don Lummus
/s/ John R. Miller, III Director
--------------------------------------
John R. Miller, III
- 47 -
/s/ Philip G. Putnam Director
--------------------------------------
Philip G. Putnam
/s/ Sabin C. Streeter Director
--------------------------------------
Sabin C. Streeter
/s/ Joseph G. Tompkins Director
--------------------------------------
Joseph G. Tompkins
/s/ Laura B. Whitman Director
--------------------------------------
Laura B. Whitman
/s/ Robert L. Yohe Director
--------------------------------------
Robert L. Yohe
- 48 -