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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended June 29, 2002
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 1-9973
THE MIDDLEBY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-3352497
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1400 Toastmaster Drive, Elgin, Illinois 60120
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone No., including Area Code (847) 741-3300
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
As of August 9, 2002, there were 8,973,547 shares of the registrant's common
stock outstanding.
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
QUARTER ENDED JUNE 29, 2002
INDEX
DESCRIPTION PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
BALANCE SHEETS 1
June 29, 2002 and
December 29, 2001(as restated)
STATEMENTS OF EARNINGS 2
June 29, 2002 and June 30, 2001
STATEMENTS OF CASH FLOWS 3
June 29, 2002 and June 30, 2001
NOTES TO FINANCIAL STATEMENTS 4
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 22
PART II. OTHER INFORMATION 25
PART I. FINANCIAL INFORMATION
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
(Unaudited)
(as restated(1))
Jun. 29, 2002 Dec. 29, 2001
------------- ---------------
ASSETS
Cash and cash equivalents ..................... $ 813 $ 3,795
Accounts receivable, net of reserve
for doubtful accounts of
$3,447 and $2,913 ........................... 29,219 25,158
Inventories, net .............................. 27,283 29,115
Prepaid expenses and other .................... 1,176 1,178
Current deferred taxes ........................ 11,723 11,291
--------- ---------
Total current assets ..................... 70,214 70,537
Property, plant and equipment, net of
accumulated depreciation of
$24,580 and $22,185 ......................... 28,941 30,598
Goodwill ...................................... 63,327 63,327
Other intangibles ............................. 26,300 26,466
Deferred taxes ................................ 1,980 1,980
Other assets .................................. 6,808 7,589
--------- ---------
Total assets .......................... $ 197,570 $ 200,497
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt .......... $ 13,500 $ 10,047
Accounts payable .............................. 13,969 9,289
Accrued expenses .............................. 38,946 38,438
--------- ---------
Total current liabilities ................ 66,415 57,774
Long-term debt ................................ 70,043 86,152
Other non-current liabilities ................. 17,705 17,162
Shareholders' equity:
Preferred stock, $.01 par value;
nonvoting; 2,000,000 shares
authorized; none issued ................... -- --
Common stock, $.01 par value;
20,000,000 shares authorized;
11,026,021 and 11,024,396 issued in 2002 and
2001, respectively ........................ 110 110
Paid-in capital ............................. 53,723 53,594
Treasury stock at cost; 2,052,474
shares in 2002 and
2001, respectively ........................ (11,997) (11,997)
Retained earnings (accumulated
deficit) .................................. 2,825 (1,029)
Accumulated other comprehensive
loss ...................................... (1,254) (1,269)
--------- ---------
Total shareholders' equity ............... 43,407 39,409
--------- ---------
Total liabilities and
shareholders' equity ................ $ 197,570 $ 200,497
========= =========
(1) See note 2
See accompanying notes
- 1 -
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
Jun. 29, 2002 Jun. 30, 2001 Jun. 29, 2002 Jun. 30, 2001
------------- ------------- ------------- -------------
(as restated)
Net sales ............................... $ 62,478 $25,293 $ 116,969 $50,040
Cost of sales ........................... 40,957 17,059 77,555 33,634
-------- ------- --------- -------
Gross profit .................... 21,521 8,234 39,414 16,406
Selling and distribution expenses ....... 7,312 3,561 14,533 7,178
General and administrative expenses ..... 6,013 2,425 11,964 5,143
-------- ------- --------- -------
Income from operations .......... 8,196 2,248 12,917 4,085
Interest expense and deferred
financing amortization ................ 3,024 178 6,122 333
Loss (gain) on acquisition financing
derivatives ........................... 579 -- (14) --
Other (income) expense, net ............. (311) 398 (89) 596
-------- ------- --------- -------
Earnings before income taxes .... 4,904 1,672 6,898 3,156
Provision for income taxes .............. 2,090 996 3,044 1,931
-------- ------- --------- -------
Net earnings .................... $ 2,814 $ 676 $ 3,854 $ 1,225
======== ======= ========= =======
Net earnings per share:
Basic ........................ $ 0.31 $ 0.08 $ 0.43 $ 0.14
Diluted ...................... $ 0.31 $ 0.08 $ 0.43 $ 0.14
Weighted average number of shares:
Basic ........................ 8,974 8,981 8,973 8,987
Dilutive stock options ..... 108 17 58 19
-------- ------- --------- -------
Diluted ...................... 9,082 8,998 9,031 9,006
See accompanying notes
- 2 -
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended
----------------
Jun. 29, 2002 Jun. 30, 2001
------------- -------------
Cash flows from operating activities-
Net earnings ...................................... $ 3,854 $ 1,225
Adjustments to reconcile net earnings
to cash provided by operating
activities:
Depreciation and amortization ................... 3,711 1,855
Utilization of NOL's ............................ (432) 1,205
Unrecognized (gain) loss on
Derivative financial instruments .............. (14) --
Changes in assets and liabilities-
Accounts receivable, net ........................ (4,061) 3,147
Inventories, net ................................ 1,832 (1,254)
Prepaid expenses and other assets ............... (36) (1,135)
Accounts payable ................................ 4,680 (1,412)
Accrued expenses and other
liabilities ................................... 1,188 (4,331)
-------- -------
Net cash provided by (used in) operating
activities ...................................... 10,722 (700)
-------- -------
Cash flows from investing activities-
Net additions to property and equipment ............. (824) (271)
-------- -------
Net cash (used in) investing activities ........... (824) (271)
-------- -------
Cash flows from financing activities-
Proceeds (repayments) under revolving
credit facilities, net ........................... (12,885) 3,717
Repayments of senior secured bank notes ........... (1,500) --
Increase in subordinated senior note(1) ........... 254 --
Increase in seller notes due Maytag(1) ............ 1,277 --
Repurchase of treasury stock ...................... -- (173)
Other financing activities, net ................... (42) 9
-------- -------
Net cash (used in) provided by
financing activities .......................... (12,896) 3,553
-------- -------
Effect of exchange rates on cash
And cash equivalents .............................. 16 (96)
-------- -------
Changes in cash and cash equivalents-
Net increase (decrease) in cash and
cash equivalents ................................ (2,982) 2,486
Cash and cash equivalents at
beginning of year ............................... 3,795 2,094
-------- -------
Cash and cash equivalents at end
of quarter ...................................... $ 813 $ 4,580
======== =======
Supplemental disclosure of cash flow information:
Interest paid ....................................... $ 2,992 $ 232
======== =======
Income taxes paid ................................... $ 2,878 $ 325
======== =======
(1) Represents an increase in principal balance of debt associated with
interest paid in kind.
See accompanying notes
- 3 -
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 29, 2002
(Unaudited)
1) Summary of Significant Accounting Policies
The consolidated financial statements have been prepared by The Middleby
Corporation (the "company"), pursuant to the rules and regulations of the
Securities and Exchange Commission, the financial statements are unaudited
and certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations, although the company
believes that the disclosures are adequate to make the information not
misleading. These financial statements should be read in conjunction with
the financial statements and related notes contained in the company's 2001
Form 10-K and 2002 First Quarter Form 10-Q. See Note 2 for a discussion of
the effects on the company's previously issued consolidated financial
statements of certain matters identified in the quarter ended June 29,
2002.
In the opinion of management, the financial statements contain all
adjustments necessary to present fairly the financial position of the
company as of June 29, 2002 and December 29, 2001, and the results of
operations for the six months ended June 29, 2002 and June 30, 2001 and
cash flows for the six months ended June 29, 2002 and June 30, 2001.
Certain prior year amounts have been reclassified to be consistent with
the current year presentation.
2) Restatement
Subsequent to the issuance of the company's financial statements for the
year ended December 29, 2001 and the quarter ended March 30, 2002, it was
determined that the stock warrant rights issued in conjunction with the
subordinated senior notes should have been accounted for as a derivative
financial instrument in accordance with the Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133), instead of as stockholders' equity, as the
warrant rights contain a provision which provides the noteholder with the
option to require the company to repurchase the warrant rights from the
noteholder at their fair market value ("Put Option")for cash or debt.
Additionally, it was determined that the initial value assigned to the
warrant rights was based upon assumptions utilizing the maturity of the
notes as the expiry, rather than the 10 year life of the stock warrant
rights. Management has determined that the initial value assigned to the
stock warrant rights should be revalued based upon the 10-year life and
reclassified from Shareholders' Equity to Other Non-Current Liabilities on
the balance sheet
- 4 -
due to the terms of the Put Option. The impact of the restatement to the
fiscal 2001 balance sheet is a $0.8 million reduction in Long-Term Debt, a
$3.3 million increase in Other Non-Current Liabilities and a $2.5 million
reduction in Shareholders' Equity. The impact of this revision on net
earnings in 2001 is de minimis and does not change reported earnings per
share for the year ended December 29, 2001.
In accordance with SFAS 133, this derivative financial instrument should
be recorded at its fair market value. As a result the company determined
that the stock right warrants should be adjusted to $3.0 million as of
March 30, 2002 and restated in the balance sheet as of that date. The
change in fair market value of $0.3 million was recorded as a gain in the
restated income statement for the first quarter of 2002.
Additionally, on January 11, 2002 the company entered into an interest
rate swap agreement with a $20.0 million notional amount, as required by
the senior bank agreement. Subsequent to the issuance of the company's
financial statements for the first quarter ended March 30, 2002, it was
determined that this derivative financial instrument did not qualify for
hedge accounting treatment under SFAS 133. As a result, the company
recorded the interest rate swap in other non-current liabilities at its
fair value of $0.2 million at March 30, 2002. The increase in the fair
value of the interest rate swap from zero at inception to $0.2 million at
March 30, 2002 was recorded as a gain in the restated financial statements
for the first quarter of 2002.
The effect of the restatement is as follows (in thousands):
March 30, 2002 December 29, 2001
-------------- -----------------
As Previously As Previously
Reported As Restated Reported As Restated
-------- ----------- -------- -----------
At period end:
Accrued expenses $ 36,507 $ 36,734 n/a n/a
Long-term debt 81,190 80,466 $86,916 $86,152
Other non-current
liabilities 14,067 16,774 13,862 17,162
Paid-in capital 56,277 53,741 56,130 53,594
Retained earnings
(accumulated deficit) (315) 11 n/a n/a
For the period ended:
Interest expense &
deferred financing
amortization $ 3,058 $ 3,098 n/a n/a
(Gain) loss on
acquisition financing
derivatives -- (593) n/a n/a
Provision for income
taxes 727 954 n/a n/a
Net earnings 714 1,040 n/a n/a
Diluted earnings per share $ 0.08 $ 0.12 n/a n/a
As discussed above, the company has determined that it must restate its
previously issued consolidated balance sheet as of December 29, 2001 and
its condensed consolidated financial statements as of and for the three
month period ended March 30, 2002. The company intends to engage its
independent auditor to audit its restated financial statements for the
year ended December 29, 2001. The company also expects to amend its Annual
Report on Form 10-K for the year ended December 29, 2002 and its Quarterly
Report on Form 10-Q for the quarter ended March 30, 2002.
- 5 -
3) New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations". This statement addresses financial accounting and reporting
for business combinations initiated after June 30, 2001, superceding
Accounting Principles Board ("APB") Opinion No. 16 "Business Combinations"
and SFAS No. 38 "Accounting for Preacquisition Contingencies of Purchased
Enterprises". All business combinations in the scope of this statement are
to be accounted for using the purchase method of accounting. The company
has accounted for its acquisition of Blodgett Holdings, Inc. ("Blodgett")
in accordance with SFAS No. 141.
In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets", superceding APB Opinion No. 17, "Intangible Assets". This
statement addresses how intangible assets that are acquired individually
or with a group of other assets (excluding assets acquired in a business
combination) should be accounted for in financial statements upon their
acquisition. This statement also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. In accordance with this statement,
goodwill and certain other intangible assets with indefinite lives will no
longer be amortized, but evaluated for impairment based upon financial
tests related to the current value for the related assets. As a result
there may be more volatility in reported income than under the previous
standards because impairment losses are likely to occur irregularly and in
varying amounts. The company adopted this statement in the first quarter
of fiscal 2002. Upon initial adoption of this statement, the company
determined that no impairment of goodwill or other intangible assets had
occurred. Goodwill of $63.3 million and other intangible assets
(trademarks) of $26.3 million have been accounted for consistently with
the nonamortization provisions of this statement. As of June 29, 2002, the
company does not have any intangible assets subject to amortization. The
company recorded goodwill amortization, which reduced net income by
$135,000 from $811,000 or $0.09 per share in the second quarter of 2001
and $270,000 from $1,495,000 or $0.17 per share in the first six months of
2001.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations". This statement addresses financial accounting and
reporting obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs, and requires
that such costs be recognized as a liability in the period in which
incurred. This statement is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The company does not expect
the adoption of this statement to have a material impact to the financial
statements.
- 6 -
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS
No. 121 and requires that one accounting model be used for long-lived
assets to be disposed of by sale, whether previously held and used or
newly acquired and by broadening the presentation of discontinued
operations to include more disposal transactions. This statement is
effective for financial statements issued for fiscal years beginning after
December 15, 2001. The adoption of SFAS No. 144 did not have a material
impact on the company's financial position, results of operations or cash
flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements SFAS 4, 44 and 64, Amendment of FASB Statement No. 13 and
Technical Corrections." SFAS No. 145 eliminates the current requirement
that gains and losses on debt extinguishment must be classified as
extraordinary items in the income statement. Instead, such gains and
losses will be classified as extraordinary items only if they are deemed
to be unusual and infrequent. The changes related to debt extinguishment
will be effective for fiscal years beginning after May 15, 2002, and the
changes related to lease accounting will be effective for transactions
occurring after May 15, 2002. The company will apply this guidance
prospectively.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires
recording costs associated with exit or disposal activities at their fair
values when a liability has been incurred. Under previous guidance,
certain exit costs were accrued upon management's commitment to an exit
plan, which is generally before an actual liability has been incurred.
This statement is effective for financial statements issued for fiscal
years beginning after December 31, 2002. The company will apply this
guidance prospectively.
4) Comprehensive Income
The company reports changes in equity during a period, except those
resulting from investment by owners and distribution to owners, in
accordance with SFAS No. 130, "Reporting Comprehensive Income."
Components of comprehensive income were as follows (in thousands):
Three Months Ended Six Months Ended
------------------ ----------------
Jun. 29, 2002 Jun. 30, 2001 Jun. 29, 2002 Jun. 30, 2001
------------- ------------- ------------- -------------
Net earnings ............ $ 2,814 $676 $3,854 $1,225
Cumulative translation
adjustment ............ (55) 312 15 380
------- ---- ------ ------
Comprehensive income .... $ 2,759 $988 $3,869 $1,605
======= ==== ====== ======
- 7 -
Accumulated other comprehensive income (loss) is comprised of minimum
pension liability of $1.1 million as of June 29, 2002 and December 29,
2001, respectively, as well as foreign currency translation adjustments of
$0.2 million as of June 29, 2002 and December 29, 2001, respectively.
5) Inventories
Inventories are comprised of material, labor and overhead and are stated
at the lower of cost or market. Costs for Blodgett inventory have been
determined using the last-in, first-out ("LIFO") method. Had the
inventories been valued using the first-in, first-out ("FIFO") method, the
amount would not have differed materially from the amounts as determined
using the LIFO method. Costs for Middleby inventory have been determined
using the first-in, first-out ("FIFO") method. The company estimates
reserves for inventory obsolescence and shrinkage based on its judgment of
future realization. Inventories at June 29, 2002 and December 29, 2001 are
as follows:
Jun. 29, 2002 Dec. 29, 2001
------------- -------------
(In thousands)
Raw materials and
parts .............. $ 6,036 $ 7,201
Work-in-process ...... 4,887 5,355
Finished goods ....... 16,360 16,559
------- -------
$27,283 $29,115
======= =======
6) Accrued Expenses
Accrued expenses consist of the following:
Jun. 29, 2002 Dec. 29, 2001
------------- -------------
(In thousands)
Accrued payroll and
related expenses ............. $11,061 $ 6,586
Accrued customer rebates ....... 3,361 3,933
Accrued commissions ............ 1,620 1,321
Accrued warranty ............... 10,069 9,179
Accrued acquisition costs ...... 529 3,200
Accrued severance and
plant closures ............... 2,303 6,497
Other accrued expenses ......... 10,003 7,722
------- -------
$38,946 $38,438
======= =======
- 8 -
7) Non-recurring Costs
On December 21, 2001 the company established reserves through purchase
accounting associated with $4.0 million in severance related obligations
and $6.9 million in facility costs related to the acquired Blodgett
business operations.
Severance obligations of $4.0 million were established in conjunction with
reorganization initiatives established during 2001 and completed during
the first half of 2002. During the first quarter of 2002, the company
reduced headcount at the acquired Blodgett operations by 123 employees.
This headcount reduction included most functional areas of the company and
included a reorganization of the executive management structure. During
the second quarter of 2002, the company further reduced headcount at the
Blodgett operations by 30 employees in conjunction with the consolidation
and exit of two manufacturing facilities. Production for the Blodgett
combi-oven, conveyor oven, and deck oven lines were moved from two
facilities located in Williston and Shelburne, Vermont into existing
manufacturing facilities in Burlington, Vermont and Elgin, Illinois. The
second quarter headcount reductions predominately related to the
manufacturing function.
Reserves of $6.9 million for facility closure costs predominately relate
to lease obligations for three manufacturing facilities that were exited
in 2001 and 2002. During the second quarter of 2001, prior to the
acquisition, reserves were established for lease obligations associated
with a manufacturing facility in Quakerstown, Pennsylvania that was exited
when production at this facility was relocated to an existing facility in
Bow, New Hampshire. The lease associated with the exited facility extends
through December 11, 2014. The facility is currently subleased for a
portion of the lease term through July 2006. During the second quarter of
2002, the company exited leased facilities in Williston and Shelburne,
Vermont in conjunction with the company's manufacturing consolidation
initiatives. The Williston lease extends through June 30,2005 and the
Shelburne lease extends through December 11, 2014. Neither of these
facilities has been subleased although the company is performing an active
search for subtenants. Total lease obligations under the three facilities
amount to approximately $10.6 million. The reserves are reflected net of
anticipated sublease income associated with the three facilities.
A summary of the non-recurring reserve balance activity is as follows (in
thousands):
Balance Asset Cash Balance
Dec 29, 2001 Write-offs Payments June 29, 2002
------------ ---------- -------- -------------
Severance obligations $ 3,947 $ -- $2,538 $1,409
Facility closure and lease
Obligations 6,928 -- 288 6,640
------- ------ ------ ------
Total $10,875 $ -- $2,826 $8,049
======= ====== ====== ======
- 9 -
As of the end of the second quarter, all actions pertaining to the
company's restructuring initiatives have been completed. At this time,
management believes the remaining reserve balance is adequate to cover the
remaining costs identified at June 29, 2002.
8) Financial Instruments
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended,
establishes accounting and reporting standards for derivative instruments.
The statement requires an entity to recognize all derivatives as either
assets or liabilities and measure those instruments at fair value.
Derivatives that do not qualify as a hedge must be adjusted to fair value
in earnings. If the derivative does qualify as a hedge under SFAS 133,
changes in the fair value will either be offset against the change in fair
value of the hedged assets, liabilities or firm commitments or recognized
in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a hedge's change in fair value will
be immediately recognized in earnings.
Foreign Exchange: The company has entered into derivative instruments,
principally forward contracts to reduce exposures pertaining to
fluctuations in foreign exchange rates. As of June 29, 2002 the company
had forward contracts to purchase $3.4 million U.S. Dollars with various
foreign currencies, all of which mature in the next fiscal quarter. The
fair value of these forward contracts amounts to $(0.2) million at the end
of the quarter.
Interest rate swap: On January 11, 2002, in accordance with the senior
bank agreement, the company entered into an interest rate swap agreement
with a notional amount of $20.0 million to fix the interest rate
applicable to certain of its variable-rate debt. The agreement swaps
one-month LIBOR for a fixed rate of 4.03% and is in effect through
December 31, 2004. As of June 29, 2002, the fair value of this derivative
financial instrument was $(0.3) million. This net loss was recorded in
earnings for the six-month period.
Stock warrant rights: In conjunction with subordinated senior notes issued
in connection with the financing for the Blodgett acquisition, the company
issued 362,226 stock warrant rights and 445,100 conditional stock warrant
rights to the subordinated senior noteholder. The warrant rights allow the
noteholder to purchase Middleby common stock at $4.67 per share through
their expiration on December 21, 2011. The conditional stock warrant
rights are exercisable in the circumstance that the noteholder fails to
achieve certain prescribed rates of return as defined per the note
agreement. After March 15, 2007 or upon a Change in Control as defined per
the note agreement, the subordinated senior noteholder has the ability to
require the company to repurchase these warrant
- 10 -
rights at the fair market value. The obligation pertaining to the
repurchase of the warrant rights is recorded in Other Non-Current
Liabilities at fair market value utilizing a Black- Schole's valuation
model. As of June 29, 2002, the fair value of the warrant rights was
assessed at $3.0 million. The change in the fair value of the stock
warrant rights during the first six months amounted to $0.3 million and
was recorded as a gain in the income statement for the six month period
ended June 29, 2002. The company may experience volatility in earnings
caused by fluctuations in the market value of the stock warrant rights
resulting from changes in Middleby's stock price, interest rates, or other
factors that are incorporated into the valuation of these financial
instruments.
9) Segment Information
The company operates in two reportable operating segments defined by
management reporting structure and operating activities.
The worldwide manufacturing divisions operate through the Cooking Systems
Group. This business segment has manufacturing facilities in Illinois, New
Hampshire, North Carolina, Vermont and the Philippines. This business
segment supports four major product groups, including conveyor oven
equipment, core cooking equipment, counterline cooking equipment, and
international specialty equipment. Principal product lines of the conveyor
oven product group include Middleby Marshall ovens, Blodgett ovens and CTX
ovens. Principal product lines of the core cooking equipment product group
include the Southbend product line of ranges, steamers, convection ovens,
broilers and steam cooking equipment, the Blodgett product line of
convection and combi ovens, MagiKitch'n charbroilers and catering
equipment and the Pitco Frialator product line of fryers. The counterline
cooking and warming equipment product group includes toasters, hot food
servers, foodwarmers and griddles distributed under the Toastmaster brand
name. The international specialty equipment product group is primarily
comprised of food preparation tables, undercounter refrigeration systems,
ventilation systems and component parts for the U.S. manufacturing
operations.
The International Distribution Division provides integrated design, export
management, distribution and installation services through its operations
in China, India, Korea, Mexico, Spain, Taiwan and the United Kingdom. The
division sells the company's product lines and certain non-competing
complementary product lines throughout the world. For a local country
distributor or dealer, the company is able to provide a centralized source
of foodservice equipment with complete export management and product
support services.
- 11 -
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The company evaluates
individual segment performance based on operating income. Management
belives that intersegment sales are made at established arms-length
transfer prices.
The following table summarizes the results of operations for the company's
business segments(1):
Cooking Corporate
Systems International and
Group Distribution Other(2) Eliminations(3) Total
----- ------------ -------- --------------- -----
Three months ended June 29, 2002
Net sales $ 59,946 $ 9,446 $ (9) $ (6,905) $ 62,478
Operating income (loss) 10,435 485 (2,458) (266) 8,196
Depreciation expense 1,171 42 69 -- 1,282
Capital expenditures 518 66 7 -- 591
Six months ended June 29, 2002
Net sales $112,266 $ 16,292 $ 70 $ (11,659) $116,969
Operating income (loss) 17,418 488 (4,573) (416) 12,917
Depreciation expense 2,332 82 67 -- 2,481
Capital expenditures 740 75 9 -- 824
Total assets 86,968 17,529 104,055 (10,982) 197,570
Long-lived assets(4) 29,512 420 97,424 -- 127,356
Three months ended June 30, 2001
Net sales $ 23,787 $ 4,820 $ -- $ (3,314) $ 25,293
Operating income (loss) 2,999 (337) (414) -- 2,248
Depreciation expense 615 43 50 -- 708
Capital expenditures 48 (24) -- -- 24
Six months ended June 30, 2001
Net sales $ 47,446 $ 10,184 $ -- $ (7,590) $ 50,040
Operating income (loss) 5,563 (532) (1,046) 100 4,085
Depreciation expense 1,223 82 98 -- 1,403
Capital expenditures 122 6 143 -- 271
Total assets 55,941 16,977 15,013 (10,982) 76,949
Long-lived assets(4) 18,407 1,048 12,233 -- 31,688
(1) Non-operating expenses are not allocated to the operating segments.
(2) Includes corporate and other general company assets and operations.
(3) Includes elimination of intercompany sales, profit in inventory and
intercompany receivables. Intercompany sale transactions are
predominantly from the Cooking Systems Group to the International
Distribution Division.
(4) Long-lived assets of the Cooking Systems Group includes assets
located in the Philippines which amounted to $2,853 and $3,081 in
2002 and 2001, respectively.
Net sales by major geographic region, including those sales from the
Cooking Systems Group direct to international customers, were as follows
(in thousands):
Three Months Ended Six Months Ended
------------------ ----------------
Jun. 29, 2002 Jun. 30, 2001 Jun. 29, 2002 Jun. 30, 2001
------------- ------------- ------------- -------------
United States and Canada $51,098 $18,829 $ 95,121 $36,536
Asia 4,501 3,254 8,384 6,452
Europe and Middle East 5,222 1,935 10,281 4,542
Latin America 1,657 1,275 3,183 2,510
------- ------- -------- -------
Net Sales $62,478 $25,293 $116,969 $50,040
======= ======= ======== =======
- 12 -
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Unaudited).
Restatement
Subsequent to the issuance of the company's financial statements for the
year ended December 29, 2001, it was determined that the stock warrant
rights issued in conjunction with the subordinated senior notes should
have been accounted for as a derivative financial instrument in accordance
with the Statement of Financial Accounting Standard No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133), instead of
as stockholders' equity, as the warrant rights contain a provision which
provides the noteholder with the option to require the company to
repurchase the warrant rights from the noteholder at their fair market
value ("Put Option")for cash or debt. Additionally, it was determined that
the initial value assigned to the warrant rights was based upon
assumptions utilizing the maturity of the notes as the expiry, rather than
the 10 year life of the stock warrant rights. Management has determined
that the initial value assigned to the stock warrant rights should be
revalued based upon the 10 year life and reclassified from Shareholders'
Equity to Other Non-Current Liabilities on the balance sheet due to the
terms of the Put Option. The impact of the restatement to the fiscal 2001
balance sheet is a $0.8 million reduction in Long-Term Debt, a $3.3
million increase in Other Non-Current Liabilities and a $2.5 million
reduction in Shareholders' Equity. The impact of this revision on net
earnings in 2001 is de minimis and does not change reported earnings per
share for the year ended December 29, 2001.
In accordance with SFAS 133, this derivative financial instrument should
be recorded at its fair market value. As a result the company determined
that the stock right warrants should be adjusted to $3.0 million as of
March 30, 2002 and restated in the balance sheet as of that date. The
change in fair market value of $0.3 million was recorded as a gain in the
restated income statement for the first quarter of 2002.
Additionally, on January 11, 2002 the company entered into a interest rate
swap agreement with a $20.0 million notional amount, as required by the
senior bank agreement. Subsequent to the issuance of the company's
financial statements for the first quarter ended March 30, 2002, it was
determined that this derivative financial instrument did not qualify for
hedge accounting treatment under SFAS 133. As a result, the company
recorded the interest rate swap in other non-current liabilities at its
fair value of $0.2 million at March 30, 2002. The increase in the fair
value of the interest rate swap from zero at inception to $0.2 million at
March 30, 2002 was recorded as a gain in the restated financial statements
for the first quarter of 2002.
See Note 2 to the financial statements for summary of principle effects of
restatement.
- 13 -
Acquisition
On December 21, 2001, the company completed its acquisition of Blodgett
Holdings, Inc. ("Blodgett") from Maytag Corporation.
The company has accounted for this business combination using the purchase
method to record a new cost basis for the assets acquired and liabilities
assumed. The allocation of the purchase price and acquisition costs to the
assets acquired and liabilities assumed is subject to change pending
additional information that may come to the attention of the company
pertaining to the fair values of acquired assets and liabilities and the
settlement of post-close adjustments to the purchase price with the
seller. The difference between the purchase price and the fair value of
the assets acquired and liabilities assumed was recorded as goodwill.
Under SFAS 142, goodwill and certain other intangible assets with
indefinite lives acquired in conjunction with the Blodgett acquisition
will be subject to the nonamortization provisions of this statement from
the date of acquisition.
The consolidated financial statements include the operating results and
the financial position of Blodgett for the period subsequent to its
acquisition on December 21, 2001. The results of operations prior to and
including December 21, 2001 are not reflected in the consolidated
statements of earnings as they have been reported in the financial
statements of the seller, Maytag Corporation.
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, volatility in earnings
resulting from changes in the value of stock warrant rights issued in
conjunction with the acquisition financing caused by fluctuations in
Middleby's stock price and other valuation factors; variability in
financing costs; quarterly variations in operating results; dependence on
key customers; international exposure; foreign exchange and political
risks affecting international sales; changing market conditions; the
impact of competitive products and pricing; the timely development and
market acceptance of the company's products; the availability and cost of
raw materials; the ability to successfully integrate the acquired
operations of Blodgett; and other risks detailed herein and from
time-to-time in the company's SEC filings, including the 2001 report on
Form 10-K.
- 14 -
Net Sales Summary
(dollars in thousands)
Three Months Ended Six Months Ended
------------------ ----------------
Jun. 29, 2002 Jun. 30, 2001 Jun. 29, 2002 Jun. 30, 2001
------------- ------------- ------------- -------------
Sales Percent Sales Percent Sales Percent Sales Percent
----- ------- ----- ------- ----- ------- ----- -------
Business Divisions
Cooking Systems Group:
Core cooking
equipment .............. $ 43,605 69.8 $ 9,640 38.1 $ 80,237 68.6 $ 19,807 39.6
Conveyor oven
equipment .............. 12,114 19.4 9,882 39.1 24,200 20.7 19,060 38.1
Counterline cooking
equipment .............. 2,711 4.3 2,931 11.6 5,222 4.5 5,746 11.4
International specialty
equipment .............. 1,516 2.5 1,334 5.2 2,607 2.2 2,833 5.7
-------- ----- -------- ----- --------- ----- -------- -----
Total Cooking Systems
Group .................. 59,946 96.0 23,787 94.0 112,266 96.0 47,446 94.8
International
Distribution (1) ....... 9,446 15.1 4,820 19.1 16,292 13.9 10,184 20.4
Intercompany
sales (2) .............. (6,914) (11.1) (3,314) (13.1) (11,589) (9.9) (7,590) (15.2)
Other .................... -- -- -- -- -- -- -- --
-------- ----- -------- ----- --------- ----- -------- -----
Total .................. $ 62,478 100.0 $ 25,293 100.0 $ 116,969 100.0 $ 50,040 100.0
======== ===== ======== ===== ========= ===== ======== =====
(1) Consists of sales of products manufactured by Middleby and products
manufactured by third parties.
(2) Consists primarily of the elimination of sales to the company's
International Distribution Division from Cooking Systems Group.
Results of Operations
The following table sets forth certain consolidated statements of earnings
items as a percentage of net sales for the periods.
Three months ended Six months ended
------------------ ----------------
Jun. 29, 2002 Jun. 30, 2001 Jun. 29, 2002 Jun. 30, 2001
------------- ------------- ------------- -------------
Net sales .......................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ...................................... 65.6 67.4 66.3 67.2
----- ----- ----- -----
Gross profit ................................... 34.4 32.6 33.7 32.8
Selling, general and administrative
expenses ...................................... 21.3 23.7 22.7 24.6
----- ----- ----- -----
Income from operations ......................... 13.1 8.9 11.0 8.2
Interest expense and deferred
financing amortization, net ................... 4.8 0.7 5.2 0.7
Loss (gain) on acquisition financings derivatives .. 0.9 -- -- --
Other expense, net ................................. (0.4) 1.6 (0.1) 1.2
----- ----- ----- -----
Earnings before income taxes ................... 7.8 6.6 5.9 6.3
Provision for income taxes ......................... 3.3 3.9 2.6 3.9
----- ----- ----- -----
Net Earnings ................................... 4.5% 2.7% 3.3% 2.4%
===== ===== ===== =====
- 15 -
Three Months Ended June 29, 2002 Compared to Three Months Ended June 30,
2001
NET SALES. Net sales for the second quarter of fiscal 2002 were $62.5
million as compared to $25.3 million in the second quarter of 2001. The
increase in net sales resulted from the incremental business associated
with the acquired Blodgett operations. On a proforma basis in the second
quarter of 2001 net sales for combined Middleby and Blodgett amounted to
$58.3 million. Net sales in the second quarter of 2002 increased over the
combined net sales of the prior year quarter, primarily at the acquired
Blodgett operations.
Net sales at the Cooking Systems Group amounted to $59.9 million in the
second quarter of 2002 as compared to $23.8 million in the prior year
quarter. Core cooking equipment sales amounted to $43.6 million as
compared to $9.6 million, primarily due to the addition of the acquired
product lines which amounted to $33.4 million in the second quarter.
Excluding the acquired product lines, core product sales increased by $0.6
million due to improved market conditions as compared to the prior year
quarter and the addition of sales personnel. Conveyor oven equipment sales
amounted to $12.1 million as compared to $9.9 million in the prior year
quarter. The increase in conveyor oven sales resulted from the addition of
$1.7 million in Blodgett conveyor ovens and $0.5 million of increased
sales of Middleby Marshall conveyor ovens resulting from sales of
remanufactured ovens. Counterline cooking equipment sales decreased to
$2.7 million from $2.9 million in the prior year. International specialty
equipment sales increased to $1.5 million from $1.3 million as a result of
increased fryer production for the U.S. market.
Net sales at the International Distribution Division increased by $4.6
million to $9.4 million, due in part to the addition of Frialator
International - a distribution operation in the United Kingdom, which was
acquired as part of the Blodgett purchase. Net sales of Frialator
International amounted to $2.0 million. Excluding the impact of Frialator
International, the sales of this division increased by $2.6 million,
primarily due to the revenues associated with the acquired product lines
which began to be distributed through this division late in the first
quarter of 2002.
GROSS PROFIT. Gross profit increased to $21.5 million from $8.2 million in
the prior year period as a result of the increased sales volumes resulting
from the acquisition. The gross margin rate was 34.4% in the quarter as
compared to 32.6% in the prior year quarter. The increase in the overall
gross margin rate is largely attributable to greater leverage and an
improved cost structure resulting from the increased volume associated
with the acquisition. As part of the cost structure improvements, the
company consolidated manufacturing for several Blodgett product lines into
existing manufacturing operations, enabling the exit of two production
facilities during the second quarter.
- 16 -
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general,
and administrative expenses increased from $6.0 million in the second
quarter of 2001 to $13.3 million in the second quarter of 2002. The
increased expense reflects the incremental cost associated with the
acquired Blodgett operations. As a percentage of net sales operating
expenses amounted to 21.3% in the second quarter of 2002 versus 23.7% in
the prior year reflecting improved leverage on the greater combined sales
base.
NON-OPERATING EXPENSES. Interest and deferred financing amortization costs
increased to $3.0 million from $0.2 million in the prior year as a result
of increased interest expense associated with the debt incurred to finance
the Blodgett acquisition. The loss on acquisition related financing
derivatives amounted $0.6 million and consisted primarily of a loss on the
company's interest rate swap agreement. Other income was $0.3 million in
the current year compared to other expense of $0.4 million in the prior
year quarter due primarily to foreign exchange gains, which resulted from
the weakening U.S. dollar.
INCOME TAXES. A tax provision of $2.1 million, at an effective rate of
43%, was recorded during the quarter. This compared to a provision $1.0
million at a 60% rate in the prior year quarter. The reduction in the
effective rate reflects improved earnings at foreign operations, for which
the prior year reflected tax losses with no recorded benefit.
Six Months Ended June 29, 2002 Compared to Six Months Ended June 30, 2001
NET SALES. Net sales in the six-month period ended June 29, 2002 were
$117.0 million as compared to $50.0 million in the six-month period ended
June 30, 2001. The increase in net sales resulted from the incremental
business associated with the acquired Blodgett operations. On a proforma
basis in the six-month period ended June 30, 2001 net sales for combined
Middleby and Blodgett amounted to $112.7 million.
Net sales at the Cooking Systems Group for the six-month period ended June
29, 2002 amounted to $112.3 million as compared to $47.4 million in the
prior year six-month period. Core cooking equipment sales amounted to
$80.2 million as compared to $19.8 million, primarily due to the addition
of Blodgett product lines which amounted to $61.3 million in the six-month
period. Conveyor oven equipment sales amounted to $24.2 million as
compared to $19.1 million in the prior year six-month period. The increase
in conveyor oven sales resulted from the addition of $3.3 million in
Blodgett conveyor ovens and $1.8 million of increased sales of Middleby
Marshall conveyor ovens resulting from sales of remanufactured ovens and
market share gains. Counterline cooking equipment sales decreased to $5.2
million from $5.7 million in the prior year. International specialty
- 17 -
equipment sales decreased slightly to $2.6 million from $2.8 million as a
result of lower sales into the Philippines which has been impacted by a
slowed economy and reduced foreign investment due in part to the political
environment in that country.
Net sales at the International Distribution Division increased by $6.1
million to $16.3 million, due in part to the addition of Frialator
International - a distribution operation in the United Kingdom, which was
acquired as part of the Blodgett purchase. Net sales of Frialator
International amounted to $3.9 million. Excluding the sales from Frialator
International, sales increased $2.2 million primarily due to revenues
associated in the acquired product lines, which began to be distributed by
this division late in the first quarter of 2002.
GROSS PROFIT. Gross profit increased to $39.4 million from $16.4 million
in the prior year period as a result of the increased sales volumes
resulting from the acquisition. The gross margin rate was 33.7% for the
six-month period as compared to 32.8% in the prior year period. The
increase in the overall gross margin rate is largely attributable to
greater leverage and an improved cost structure resulting from the
increased volume associated with the acquisition. As part of the cost
structure improvements, the company consolidated manufacturing for several
Blodgett product lines into existing manufacturing operations, enabling
the exit of two production facilities during the second quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general,
and administrative expenses increased from $12.3 million for the six-month
period ended June 30, 2001 to $26.5 million for the six-month period ended
June 29, 2002. The increased expense reflects the incremental cost
associated with the acquired Blodgett operations. As a percentage of net
sales operating expenses amounted to 22.7% in the six-month period ended
June 29, 2002 versus 24.6% in the prior year reflecting improved leverage
on the greater combined sales base.
NON-OPERATING EXPENSES. Interest and deferred financing amortization costs
increased to $6.1 million from $0.3 million in the prior year as a result
of increased interest expense associated with the debt incurred to finance
the Blodgett acquisition. Other income was $0.1 million in the current
year compared to other expense of $0.6 million in the prior year due to
the favorable impact of foreign exchange fluctuations.
INCOME TAXES. A tax provision of $3.0 million, at an effective rate of
44%, was recorded for the six-month period, as compared to a provision of
$1.9 million at 61% rate in the prior year period. The reduction in the
effective rate reflects improved earnings at foreign operations, for which
the prior year reflected tax losses with no recorded benefit.
- 18 -
Financial Condition and Liquidity
During the six months ended June 29, 2002, cash and cash equivalents
decreased by $3.0 million to $0.8 million at June 29, 2002 from $3.8
million at December 29, 2001. Net borrowings decreased from $96.2 million
at December 29, 2001 to $83.5 million at June 29, 2002.
OPERATING ACTIVITIES. Net cash provided by operating activities before
changes in assets and liabilities was $7.1 million in the six months ended
June 29, 2002 as compared to $4.3 million in the prior year period. Net
cash provided by operating activities after changes in assets and
liabilities was $10.7 million as compared to net cash used of $0.7 million
in the prior year period.
During the six months ended June 29, 2002, accounts receivable increased
$4.1 million due to increased sales. Inventories decreased $1.8 million
due to inventory reduction measures. Accounts payable increased $4.7
million due to increased inventory purchases on higher volumes and
management of vendor payments to enhance cash flows. Accrued expenses and
other liabilities increased $1.2 million primarily due to the increase of
incentive compensation accruals, offset in part by the payment of accrued
severance obligations associated with headcount reductions completed
during the first half of the year.
INVESTING ACTIVITIES. During the six months ending June 29, 2002, the
company had capital expenditures of $0.8 million associated with
enhancements to existing manufacturing facilities required to consolidate
the production for several product lines that were moved from two
manufacturing facilities that were closed in the second quarter.
FINANCING ACTIVITIES. Net borrowings decreased by $12.9 million during the
six months ending June 29, 2002. This included $14.4 million of repayments
on senior bank debt, offset in part by $0.3 million of an increase to the
subordinated senior notes and a $1.3 million increase in the note due
Maytag. The increase in the subordinated notes and the notes due Maytag
represents the assessed interest which is paid in kind and added to the
principal balance of the note, in accordance with the terms of the
respective borrowing agreements.
At June 29, 2002, the company was in compliance with all covenants
pursuant to its borrowing agreements. Management believes that future cash
flows from operating activities and borrowing availability under the
revolving credit facility will provide the company with sufficient
financial resources to meet its anticipated requirements for working
capital, capital expenditures and debt amortization for the foreseeable
future.
- 19 -
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations". This statement addresses financial accounting and
reporting for business combinations initiated after June 30, 2001,
superceding APB Opinion No. 16 "Business Combinations" and SFAS No. 38
"Accounting for Preacquisition Contingencies of Purchased Enterprises".
All business combinations in the scope of this statement are to be
accounted for using the purchase method of accounting. The company has
accounted for its acquisition of Blodgett Holdings, Inc. ("Blodgett") in
accordance with SFAS No. 141.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142
"Goodwill and Other Intangible Assets", superceding APB Opinion No. 17,
"Intangible Assets". This statement addresses how intangible assets that
are acquired individually or with a group of other assets (excluding
assets acquired in a business combination) should be accounted for in
financial statements upon their acquisition. This statement also addresses
how goodwill and other intangible assets should be accounted for after
they have been initially recognized in the financial statements. In
accordance with this statement, goodwill and certain other intangible
assets with indefinite lives will no longer be amortized, but evaluated
for impairment based upon financial tests related to the current value for
the related assets. As a result there may be more volatility in reported
income than under the previous standards because impairment losses are
likely to occur irregularly and in varying amounts. The company has
adopted this statement in the first quarter of fiscal 2002. Upon initial
adoption of this statement, the company has determined no impairment of
goodwill or other intangible assets had occurred. Goodwill of $63.3
million and other intangible assets (trademarks) of $26.3 million have
been accounted for consistently with the nonamortization provisions of
this statement. As of June 29, 2002, the company does not have any
intangible assets subject to amortization. In the first six months of
2001, the company had recorded goodwill amortization, which reduced net
income by $270,000 from $1,495,000 or $0.17 per share.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143
"Accounting for Asset Retirement Obligations". This statement addresses
financial accounting and reporting obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs, and requires that such costs be recognized as a
liability when the recognition criteria in FASB Concepts Statement No. 5
"Recognition and Measurement in the Financial Statements of Business
Enterprises" are met. This statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The company does
not expect the adoption of this statement to have a material impact to the
financial statements.
- 20 -
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS No. 144 supercedes SFAS No. 121 and requires that one accounting
model be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired and by broadening the
presentation of discontinued operations to include more disposal
transactions. This statement is effective for financial statements issued
for fiscal years beginning after December 15, 2001. The adoption of SFAS
No. 144 did not have a material impact on the company's financial
position, results of operations or cash flows.
In April 2002, the Financial Accounting Standards Board issued SFAS 145,
"Rescission of FASB Statements SFAS 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections". SFAS No. 145 eliminates the
current requirement that gains and losses on debt extinguishment must be
classified as extraordinary items in the income statement. Instead, such
gains and losses will be classified as extraordinary items only if they
are deemed to be unusual and infrequent. The changes related to debt
extinguishment will be effective for fiscal years beginning after May 15,
2002, and the changes related to lease accounting will be effective for
transactions occurring after May 15, 2002. The company will apply this
guidance prospectively.
In June 2002, the Financial Accounting Standards Board issued Statement
No. 146, Accounting for Costs Associated with Exit or Disposal Activities.
This Statement requires recording costs associated with exit or disposal
activities at their fair values when a liability has been incurred. Under
previous guidance, certain exit costs were accrued upon management's
commitment to an exit plan, which is generally before an actual liability
has been incurred. This statement is effective for financial statements
issued for fiscal years beginning after December 31, 2002. The company
will apply this guidance prospectively.
- 21 -
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The company is exposed to market risk related to changes in interest
rates. The following table summarizes the maturity of the company's debt
obligations.
Fixed Variable
Twelve Month Rate Rate
Period Ending Debt Debt
------------- ---- ----
(In thousands)
June 30, 2003 $ -- $13,500
June 30, 2004 -- 9,750
June 30, 2005 -- 8,750
June 30, 2006 -- 8,000
June 30, 2007 43,543 --
------- -------
$43,543 $40,000
======= =======
Fixed rate obligations of $43.5 million due in the twelve month period
ending June 29, 2007 include $22.2 million of subordinated senior notes
which bear an interest rate of 15.5%, of which 2% is payable in kind, for
which the unpaid interest will be added to the principal balance of the
notes. The subordinated senior notes are reflected net of a debt discount
of $3.1 million, representing the unamortized balance of the prescribed
value of warrants issued in connection with the notes. Additional fixed
rate debt consists of approximately $21.3 million of notes due to Maytag
arising from the acquisition of Blodgett. The notes bear interest at an
average rate of approximately 12.4%. The amount of notes due to Maytag is
subject to change pending post closing purchase price adjustments as
provided for under provisions of the purchase agreement.
Variable rate debt consists of $1.0 million of borrowings under a $27.5
million revolving credit facility, which becomes due in December 2005, and
$39.0 million in senior bank notes. As of June 29, 2002 the revolving
credit facility had borrowing availability of $22.8 million based upon the
company's collateral base as determined per the senior bank agreement. The
company had $0.8 million outstanding in letters of credit and $1.0 million
in cash borrowings against this facility at the end of the second quarter.
The secured senior bank notes are comprised of two separate tranches of
debt. The first tranche of debt for $36.0 million is repaid on a quarterly
basis over the four-year term ending December 2005. The second tranche of
debt for $3.0 million matures with a single payment in December 2005. The
secured revolving credit facility and $36.0 million senior bank note bear
interest at a rate of 3.25% above LIBOR, or 5.09% as of June 29, 2002. The
$3.0 million senior bank note accrues interest at a rate of 4.5% above
LIBOR, or 6.34% as of June 29, 2002.
- 22 -
Acquisition Financing Derivative Instruments
On January 11, 2002, in accordance with the senior bank agreement, the
company entered into an interest rate swap agreement, with a notional
amount of $20.0 million to fix the interest rate applicable to certain of
its variable-rate debt. The agreement swaps one-month LIBOR for a fixed
rate of 4.03% and is in effect through December 31, 2004. As of June 29,
2002, the fair value of this derivative financial instrument was $(0.3)
million. This net loss was recorded in earnings for the six-month period.
In conjunction with subordinated senior notes issued in connection with
the financing for the Blodgett acquisition, the company issued 362,226
stock warrant rights and 445,100 conditional stock warrant rights to the
subordinated senior noteholder. The warrant rights allow the noteholder to
purchase Middleby common stock at $4.67 per share through their expiration
on December 21, 2011. The conditional stock warrant rights are exercisable
in the circumstance that the noteholder fails to achieve certain
prescribed rates of return as defined per the note agreement. After March
15, 2007 or upon a Change in Control as defined per the note agreement,
the subordinated senior noteholder has the ability to require the company
to repurchase these warrant rights at the fair market value. The
obligation pertaining to the repurchase of these warrant rights is
recorded in Other Non-Current Liabilities at fair market value utilizing a
Black-Scholes valuation model. As of June 29, 2002, the fair value of the
warrant rights was assessed at $3.0 million. The change in the fair value
of the stock warrant rights during the first six months amounted to $0.3
million and was recorded as a gain in the income statement for the six
month period ended June 29, 2002. The company may experience volatility in
earnings caused by fluctuations in the market value of the stock warrant
rights resulting from changes in Middleby's stock price, interest rates,
or other factors that are incorporated into the valuation of these
financial instruments.
- 23 -
Foreign Exchange Derivative Financial Instruments
The company uses foreign currency forward purchase and sale contracts with
terms of less than one year, to hedge its exposure to changes in foreign
currency exchange rates. The company's primary hedging activities are to
mitigate its exposure to changes in exchange rates on intercompany and
third party trade receivables and payables. The company does not currently
enter into derivative financial instruments for speculative purposes. In
managing its foreign currency exposures, the company identifies and
aggregates naturally occurring offsetting positions and then hedges
residual balance sheet exposures. The following table summarizes the
forward and option purchase contracts outstanding at June 29, 2002, the
fair value of which was $(0.2) million at the end of the quarter:
Sell Purchase Maturity
---- -------- --------
1,000,000 Euro $913,300 U.S. Dollars August 26, 2002
689,655 British Pounds $1,000,000 U.S. Dollars July 19, 2002
1,000,000 British Pounds $1,481,000 U.S. Dollars August 30, 2002
- 24 -
PART II. OTHER INFORMATION
The company was not required to report the information pursuant to Items 1
through 6 of Part II of Form 10-Q for the three months ended June 29,
2002, except as follows:
Item 2. Changes in Securities
c) During the second quarter of fiscal 2002, the company issued 625
shares of the company's common stock to a division executive and
1,000 shares to a company director, pursuant to the exercise of
stock options, for $2,812.50 and $1,875.00, respectively. Such
options were granted at an exercise price of $4.50 and $1.875 per
share, respectively. As certificates for the shares were legended
and stop transfer instructions were given to the transfer agent, the
issuance of such shares was exempt under the Securities Act of 1933,
as amended, pursuant to Section 4(2) thereof, as transactions by an
issuer not involving a public offering.
Item 4. Submission of Matters to a Vote of Security Holders
On May 16, 2002, the company held its 2002 Annual Meeting of Stockholders.
The following persons were elected as directors to hold office until the
2003 Annual Meeting of Stockholders: Selim A. Bassoul, Robert R. Henry, A.
Don Lummus, John R. Miller III, Philip G. Putnam, David P. Riley, Sabin C.
Streeter, William F. Whitman, Jr., Laura B. Whitman and Robert L. Yohe.
The number of shares cast for, withheld and abstained with respect to each
of the nominees were as follows:
Nominee For Withheld Abstained
------- --- -------- ---------
Bassoul 6,383,009 2,958 0
Henry 6,384,209 1,758 0
Lummus 6,384,209 2,258 0
Miller 6,384,209 1,758 0
Putnam 6,384,209 1,758 0
Riley 6,384,209 1,758 0
Streeter 6,384,184 1,783 0
Whitman, W 6,383,509 2,458 0
Whitman, L 6,383,684 2,283 0
Yohe 6,383,709 2,258 0
The stockholders voted to amend The Middleby Corporation Management 1998
Stock Incentive Plan to increase by 300,000 the number of shares available
for grants and to permit a one-time grant to Selim A. Bassoul of options
for 200,000 shares. 6,364,857 shares were cast for ratification, 18,752
shares were cast against ratification and 2,358 shares abstained. There
were no broker non-votes with respect to either of these proposals.
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Item 6. Exhibits and Reports on Form 8-K
a) Exhibits - The following Exhibits are filed herewith:
Exhibit 10(A) - Amendment No. 3 to Amended and Restated Employment
Agreement of William F. Whitman, dated April 16, 2002.
Exhibit 10(B) - Severance Agreement of Selim A. Bassoul, dated April
16, 2002.
Exhibit 10(C) - Employment Agreement of Selim A. Bassoul, dated May
16, 2002.
Exhibit 10(D) - Severance Agreement of David B. Baker, dated June
21, 2002.
Exhibit 10(E) - Amended 1998 Stock Incentive Plan dated May 16,
2002.
Exhibit 99.1 - Certification of Principal Executive Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.2 - Certification of Principal Financial Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
b) Reports on Form 8-K
On July 25, 2002 the company filed a report on Form 8-K, in response
to Item 4, Changes in Registrant's Certifying Accountant.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MIDDLEBY CORPORATION
(Registrant)
Date August 19, 2002 By: /s/ David B. Baker
------------------------------------
David B. Baker
Vice President,
Chief Financial Officer
and Secretary
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