Management's discussion and analysis of financial condition and results of operations are based upon the company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. On an ongoing basis, the company evaluates its estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
In June 2002, the FASB issued SFAS 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 adoption of SFAS No. 146 did not have a material impact on the company’s financial position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123." This statement amends SFAS No. 123 to provide alternative methods of transition for voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the disclosure requirements to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The company has applied this guidance in the 2003 financial statements.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement requires that contracts with comparable characteristics be accounted for similarly. This statement is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the company’s financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for classifying and measuring certain financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the company’s financial position, results of operations or cash flows.
In December 2003, the Financial Accounting Standards Board ("FASB") issued a revision to Statement of Financial Accounting Standards ("SFAS") No. 132 "Employers' Disclosure about Pensions and Other Postretirement Benefits." This statement retains the disclosures previously required by SFAS No. 132 but adds additional disclosure requirements about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. It also calls for the required information to be provided separately for pension plans and for other postretirement benefit plans. The company has incorporated the new disclosures into the footnotes of the financial statements.
In December 2004, the FASB issued a revision to SFAS No. 123 "Accounting for Stock Based Compensation". This statement established standard for the accounting for transactions in which an entity exchanges its equity instruments for goods or services and addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. This statement is effective for interim periods beginning after June 15, 2005. The company will apply this guidance prospectively. The company is in the process of determining what impact the application of this guidance will have on the company's financial position, results of operations or cash flows
The level of indebtedness could adversely affect the company in a number of ways, including the following:
These restrictive covenants, among others, could negatively affect the company's ability to finance future capital needs, engage in other business activities or withstand a future downturn in business or the economy.
Under the company's credit agreement, the company is required to maintain certain specified financial ratios and meet financial tests, including certain ratios of leverage and fixed charge coverage. The company's ability to comply with these requirements may be affected by matters beyond its control, and as a result, the company cannot assure that it will be able to meet these ratios and tests. A breach of any of these covenants would prevent the company from being able to draw under its revolver and will result in a default under the credit agreement. In the event of a default under the credit agreement, the lenders could terminate their commitments and declare all amounts borrowed, together with accrued interest and other fees, to be due and payable. The company may be unable to pay these debts in these circumstances.
Further, the market for the company's products is characterized by changing technology and evolving industry standards. The company's ability to compete in the past has depended in part on the company's ability to develop innovative new products and bring them to market more quickly than its competitors. The company's ability to compete successfully will depend, in large part, on its ability to enhance and improve existing products, to continue to bring innovative products to market in a timely fashion, to adapt products to the needs and standards of customers and potential customers. Moreover, competitors may develop technologies or products that render the company's products obsolete or less marketable. If the company's products, markets and services are not competitive, the company's business, financial condition and operating results will be materially harmed.
The company may not be able to integrate successfully any operations, personnel, services or products that the company has acquired or may acquire in the future.
The company also may seek to expand or enhance some of its operations by forming joint ventures or alliances with various strategic partners throughout the world. Entering into joint ventures and alliances also entails risks, including difficulties in developing and expanding the business of newly formed joint ventures, exercising influence over the activities of joint ventures in which the company does not have a controlling interest, and potential conflicts with joint venture or alliance partners.
The company cannot assure that a product liability claim or series of claims brought against it would not have an adverse effect on the company's business, financial condition or results of operations. If any claim is brought against the company, regardless of the success or failure of the claim, the company cannot assure that it will be able to obtain or maintain product liability insurance in the future on acceptable terms or with adequate coverage against potential liabilities or the cost of a recall.
The occurrence of any of these factors could materially and adversely affect the company's business, financial condition and results of operations.
During the fourth quarter of 2004 the company entered into a new $160.0 million senior secured credit facility in order to increase the company's borrowing availability. Terms of the new agreement provide for $70.0 million of term loans and $90.0 million of availability under a revolving credit line. As of January 1, 2005, the company had $121.3 million outstanding under this facility, including $51.3 million of borrowings under the revolving credit line.
Borrowings under the senior secured credit facility are assessed at an interest rate at 1.5% above LIBOR for long-term borrowings or at the higher of the Prime rate and the Federal Funds Rate plus 0.5% for short-term borrowings. At January 1, 2005 the average interest rate on the senior debt amounted to 5.14%. The interest rates on borrowings under the senior bank facility may be adjusted quarterly based on the company’s defined indebtedness ratio on a rolling four-quarter basis. Additionally, a commitment fee, based upon the indebtedness ratio is charged on the unused portion of the revolving credit line. This variable commitment fee amounted to 0.30% as of January 1, 2005.
In November 2004, the company entered into a $2.5 million promissory note in conjunction with the release and early termination of obligations under a lease agreement relative to a manufacturing facility in Shelburne, Vermont. The note is assessed interest at 4.0% above LIBOR with an interest rate cap of 9.0%. At year-end the interest rate on the note was approximately 6.4%. The note amortizes monthly and matures in December 2009.
The company has historically entered into interest rate swap agreements to effectively fix the interest rate on its outstanding debt. In January 2002, the company had entered into an interest rate swap agreement for a notional amount of $20.0 million. This agreement swapped one-month LIBOR for a fixed rate of 4.03% and was in effect through December 2004. In February 2003, the company entered into an interest rate swap agreement for a notional amount of $10.0 million. This agreement swaps one-month LIBOR for a fixed rate of 2.36% and remains in effect through December 2005. In January 2005, subsequent to the fiscal 2004 year end, the company entered into an interest rate swap agreement for a notional amount of $70.0 million. This agreement swaps one-month LIBOR for a fixed rate of 3.78%. The $70.0 million notional amount amortizes consistent with the repayment schedule of the company's $70.0 million term loan maturing November 2009.
The terms of the senior secured credit facility limit the paying of dividends, capital expenditures and leases, and require, among other things, certain ratios of indebtedness and fixed charge coverage. The credit agreement also provides that if a material adverse change in the company’s business operations or conditions occurs, the lender could declare an event of default. Under terms of the agreement a material adverse effect is defined as (a) a material adverse change in, or a material adverse effect upon, the operations, business properties, condition (financial and otherwise) or prospects of the company and its subsidiaries taken as a whole; (b) a material impairment of the ability of the company to perform under the loan agreements and to avoid any event of default; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the company of any loan document. A material adverse effect is determined on a subjective basis by the company's creditors. At January 1, 2005, the company was in compliance with all covenants pursuant to its borrowing agreements.
The company accounts for its derivative financial instruments in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which was adopted in the first quarter of 2001. In accordance with SFAS No.133, as amended, these instruments are recognized on the balance sheet as either an asset or a liability measured at fair value. Changes in the market value and the related foreign exchange gains and losses are recorded in the statement of earnings.
Item 8. Financial Statements and Supplementary Data
| | | Page |
| | | |
| Report of Independent Public Accountants | | 38 |
| | | |
| Consolidated Balance Sheets | | 39 |
| Consolidated Statements of Earnings | | 40 |
| Consolidated Statements of Changes in Stockholders’ Equity | | 41 |
| Consolidated Statements of Cash Flows | | 42 |
| Notes to Consolidated Financial Statements | | 43 |
The following consolidated financial statement schedule is included in response to Item 15
| Schedule II - Valuation and Qualifying Accounts and Reserves | | 72 |
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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of The Middleby Corporation:
We have audited the accompanying consolidated balance sheets of The Middleby Corporation and Subsidiaries (the “Company”) as of January 1, 2005 and January 3, 2004, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the three years in the period ended January 1, 2005. Our audits also included the financial statement schedule listed in the Index at Item 8. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 1, 2005 and January 3, 2004, and the results of their operations and their cash flows for each of the three years in the period ended January 1, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of January 1, 2005, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 14, 2005
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 1, 2005 AND JANUARY 3, 2004
(amounts in thousands, except share data)
ASSETS | | 2004 | | 2003 | |
| Current assets: | | | | | |
Cash and cash equivalents | | $ | 3,803 | | $ | 3,652 | |
Accounts receivable, net | | | 26,612 | | | 23,318 | |
Inventories, net | | | 32,772 | | | 25,382 | |
Prepaid expenses and other | | | 2,008 | | | 1,776 | |
Prepaid taxes | | | 9,952 | | | -- | |
Current deferred taxes | | | 8,865 | | | 12,839 | |
| Total current assets | | | 84,012 | | | 66,967 | |
Property, plant and equipment, net | | | 22,980 | | | 24,921 | |
Goodwill | | | 74,761 | | | 74,761 | |
Other intangibles | | | 26,300 | | | 26,300 | |
Other assets | | | 1,622 | | | 1,671 | |
| Total assets | | $ | 209,675 | | $ | 194,620 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | |
| Current liabilities: | | | | | | | |
Current maturities of long-term debt | | $ | 10,480 | | $ | 14,500 | |
Accounts payable | | | 11,298 | | | 11,901 | |
Accrued expenses | | | 51,311 | | | 37,076 | |
| Total current liabilities | | | 73,089 | | | 63,477 | |
Long-term debt | | | 113,243 | | | 42,000 | |
Long-term deferred tax liability | | | 11,434 | | | 8,264 | |
Other non-current liabilities | | | 4,694 | | | 18,789 | |
| Stockholders' equity: | | | | | | | |
Preferred stock, $.01 par value; none issued | | | -- | | | -- | |
Common stock, $.01 par value, 11,402,044 and 11,257,021shares issued in 2004 and 2003, respectively | | | 114 | | | 113 | |
Restricted stock | | | (4,700 | ) | | -- | |
Paid-in capital | | | 60,446 | | | 55,279 | |
Treasury stock at cost; 3,856,344 and 2,047,271shares in 2004 and 2003, respectively | | | (89,650 | ) | | (12,463 | ) |
| Retained earnings | | | 41,362 | | | 21,470 | |
| Accumulated other comprehensive loss | | | (357 | ) | | (2,309 | ) |
| Total stockholders' equity | | | | | | 62,090 | |
| Total liabilities and stockholders' equity | | $ | 209,675 | | $ | 194,620 | |
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated financial statements.
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE FISCAL YEARS ENDED JANUARY 1, 2005, JANUARY 3, 2004 AND
DECEMBER 28, 2002
(amounts in thousands, except per share data)
| | | 2004 | | 2003 | | 2002 | |
| | | | | | | | |
| Net sales | | $ | 271,115 | | $ | 242,200 | | $ | 235,147 | |
| Cost of sales | | | 168,487 | | | 156,347 | | | 156,647 | |
| Gross profit | | | 102,628 | | | 85,853 | | | 78,500 | |
| Selling and distribution expenses | | | 30,496 | | | 29,609 | | | 28,213 | |
| General and administrative expenses | | | 23,113 | | | 21,228 | | | 20,556 | |
| Stock repurchase transaction expenses | | | 12,647 | | | -- | | | -- | |
| Acquisition integration reserve adjustments | | | (1,887 | ) | | -- | | | -- | |
| Income from operations | | | 38,259 | | | 35,016 | | | 29,731 | |
| Interest expense and deferred financing amortization, net | | | 3,004 | | | 5,891 | | | 11,180 | |
| Debt extinguishment expenses | | | 1,154 | | | -- | | | 9,122 | |
| Gain on acquisition financing derivatives | | | (265 | ) | | (62 | ) | | (286 | ) |
| Other expense, net | | | 522 | | | 366 | | | 901 | |
| Earnings before income taxes | | | 33,844 | | | 28,821 | | | 8,814 | |
| Provision for income taxes | | | 10,256 | | | 10,123 | | | 2,712 | |
| Net earnings | | $ | 23,588 | | $ | 18,698 | | $ | 6,102 | |
| | | | | | | | | | | |
| Net earnings per share: | | | | | | | | | | |
Basic | | $ | 2.56 | | $ | 2.06 | | $ | 0.68 | |
Diluted | | $ | 2.38 | | $ | 1.99 | | $ | 0.67 | |
| | | | | | | | | | | |
| Weighted average number of shares | | | | | | | | | | |
| Basic | | | 9,200 | | | 9,065 | | | 8,990 | |
| Dilutive stock options | | | 731 | | | 327 | | | 142 | |
| Diluted | | | 9,931 | | | 9,392 | | | 9,132 | |
| | | | | | | | | | | |
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated financial statements.
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JANUARY 1, 2005, JANUARY 3, 2004 AND
DECEMBER 28, 2002
(amounts in thousands)
| | | Common Stock | | Shareholder Receivable | | Restricted Stock | | Paid-in Capital | | Treasury Stock | | (Accumulated Deficit) Retained Earnings | | Accumulated Other Comprehensive Income | | Total Stockholders' Equity | |
Balance, December 29, 2001 | | $ | 110 | | $ | (290 | ) | $ | - | | $ | 53,814 | | $ | (11,927 | ) | $ | (1,029 | ) | $ | (1,269 | ) | $ | 39,409 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings | | | - | | | - | | | - | | | - | | | - | | | 6,102 | | | - | | | 6,102 | |
Currency translation adjustments | | | - | | | - | | | - | | | - | | | - | | | - | | | (378 | ) | | (378 | ) |
Increase in minimum pension liability,
net of tax of $138 | | | - | | | - | | | - | | | - | | | - | | | - | | | (346 | ) | | (346 | ) |
| Unrealized loss on interest rate swap | | | - | | | - | | | - | | | - | | | - | | | - | | | (560 | ) | | (560 | ) |
| Net comprehensive income | | | - | | | - | | | - | | | - | | | - | | | 6,102 | | | (1,284 | ) | | 4,818 | |
| Exercise of stock options | | | - | | | - | | | - | | | 15 | | | - | | | - | | | - | | | 15 | |
| Shareholder loan | | | - | | | (300 | ) | | - | | | - | | | - | | | - | | | - | | | (300 | ) |
| Loan forgiveness | | | - | | | 390 | | | - | | | - | | | - | | | - | | | - | | | 390 | |
| Issuance of treasury stock | | | - | | | - | | | - | | | 8 | | | 292 | | | - | | | - | | | 300 | |
Balance, December 28, 2002 | | $ | 110 | | $ | (200 | ) | $ | - | | $ | 53,837 | | $ | (11,635 | ) | $ | 5,073 | | $ | (2,553 | ) | $ | 44,632 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net earnings | | | - | | | - | | | - | | | - | | | - | | | 18,698 | | | - | | | 18,698 | |
Currency translation adjustments | | | - | | | - | | | - | | | - | | | - | | | - | | | 468 | | | 468 | |
Increase in minimum pension liability,
net of tax of $380 | | | - | | | - | | | - | | | - | | | - | | | - | | | (621 | ) | | (621 | ) |
Unrealized gain on interest rate swap,
net of tax of $118 | | | - | | | - | | | - | | | - | | | - | | | - | | | 397 | | | 397 | |
| Net comprehensive income | | | - | | | - | | | - | | | - | | | - | | | 18,698 | | | 244 | | | 18,942 | |
| Exercise of stock options | | | 3 | | | - | | | - | | | 1,442 | | | (828 | ) | | - | | | - | | | 617 | |
| Loan forgiveness | | | - | | | 200 | | | - | | | - | | | - | | | - | | | - | | | 200 | |
| Dividend payment | | | - | | | - | | | - | | | - | | | - | | | (2,301 | ) | | - | | | (2,301 | ) |
Balance, January 3, 2004 | | $ | 113 | | $ | - | | $ | - | | $ | 55,279 | | $ | (12,463 | ) | $ | 21,470 | | $ | (2,309 | ) | $ | 62,090 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net earnings | | | - | | | - | | | - | | | - | | | - | | | 23,588 | | | - | | | 23,588 | |
| Currency translation adjustments | | | - | | | - | | | - | | | - | | | - | | | - | | | 674 | | | 674 | |
Decrease in minimum pension liability,
net of tax of $290 | | | - | | | - | | | - | | | - | | | - | | | - | | | 1,077 | | | 1,077 | |
Unrealized gain on interest rate swap,
net of tax of $143 | | | - | | | - | | | - | | | - | | | - | | | - | | | 201 | | | 201 | |
| Net comprehensive income | | | - | | | - | | | - | | | - | | | - | | | 23,588 | | | 1,952 | | | 25,540 | |
| Exercise of stock options | | | - | | | - | | | - | | | 349 | | | - | | | - | | | - | | | 349 | |
| Purchase of treasury stock | | | - | | | - | | | - | | | - | | | (77,187 | ) | | - | | | - | | | (77,187 | ) |
| Restricted stock issuance | | | 1 | | | - | | | (4,819 | ) | | 4,818 | | | - | | | - | | | - | | | - | |
| Stock compensation | | | - | | | - | | | 119 | | | - | | | - | | | - | | | - | | | 119 | |
| Dividend payment | | | - | | | - | | | - | | | - | | | - | | | (3,696 | ) | | - | | | (3,696 | ) |
Balance, January 1, 2005 | | $ | 114 | | $ | - | | $ | (4,700 | ) | $ | 60,446 | | $ | (89,650 | ) | $ | 41,362 | | $ | (357 | ) | $ | 7,215 | |
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated financial statements.
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JANUARY 1, 2005, JANUARY 3, 2004 AND
DECEMBER 28, 2002
(amounts in thousands)
| | | 2004 | | 2003 | | 2002 | |
Cash flows from operating activities-- | | | | | | | |
Net earnings | | $ | 23,588 | | $ | 18,698 | | $ | 6,102 | |
| Adjustments to reconcile net earnings to net cash provided by operating activities- | | | | | | | | | | |
| Depreciation and amortization | | | 3,612 | | | 3,990 | | | 6,280 | |
| Debt extinguishment | | | 1,154 | | | -- | | | 8,087 | |
| Deferred taxes | | | 7,574 | | | 1,386 | | | (1,904 | ) |
| Non-cash adjustments to acquisition integration reserves | | | (1,887 | ) | | -- | | | -- | |
| Unrealized (gain) loss on derivative financial instruments | | | (265 | ) | | (62 | ) | | 326 | |
Non-cash equity compensation | | | 119 | | | -- | | | -- | |
Unpaid interest on seller notes | | | -- | | | 567 | | | 2,340 | |
| Changes in assets and liabilities, net of acquisitions | | | | | | | | | | |
| Accounts receivable, net | | | (2,980 | ) | | 4,792 | | | (2,700 | ) |
| Inventories, net | | | (7,004 | ) | | 2,136 | | | 1,719 | |
| Prepaid expenses and other assets | | | (10,193 | ) | | (1,176 | ) | | 516 | |
| Accounts payable | | | (682 | ) | | (1,587 | ) | | 1,998 | |
| Accrued expenses and other liabilities | | | 5,486 | | | 1,046 | | | (3,232 | ) |
Net cash provided by operating activities | | | 18,522 | | | 29,790 | | | 19,532 | |
Cash flows from investing activities-- | | | | | | | | | | |
Additions to property and equipment | | | (1,199 | ) | | (1,003 | ) | | (1,087 | ) |
Acquisition of Blodgett | | | (2,000 | ) | | (19,129 | ) | | -- | |
Net cash (used in) investing activities | | | (3,199 | ) | | (20,132 | ) | | (1,087 | ) |
Cash flows from financing activities-- | | | | | | | | | | |
Net (repayments) proceeds under previous revolving credit facilities | | | (1,500 | ) | | 1,500 | | | (13,885 | ) |
Net (repayments) proceeds under previous senior secured bank notes | | | (53,000 | ) | | (12,000 | ) | | 24,500 | |
Proceeds under new revolving credit facilities | | | 51,265 | | | -- | | | -- | |
Proceeds under new senior secured bank notes | | | 70,000 | | | -- | | | -- | |
Repayments under subordinated senior note | | | -- | | | -- | | | (25,013 | ) |
Proceeds (repayments) under foreign bank loan | | | -- | | | (2,400 | ) | | 2,400 | |
Debt issuance costs | | | (1,509 | ) | | -- | | | (1,346 | ) |
Retirement of warrant associated with note obligation | | | -- | | | -- | | | (2,688 | ) |
Repurchase of treasury stock | | | (77,187 | ) | | -- | | | -- | |
Issuance of treasury stock | | | -- | | | -- | | | 300 | |
Payment of special dividend | | | (3,696 | ) | | (2,301 | ) | | -- | |
Net proceeds from stock issuances | | | 349 | | | 617 | | | 15 | |
Shareholder loan | | | -- | | | 200 | | | (300 | ) |
Other financing activities, net | | | -- | | | -- | | | (47 | ) |
Net cash (used in) financing activities | | | (15,278 | ) | | (14,384 | ) | | (16,064 | ) |
| | | | | | | | | | | |
Effect of exchange rates on cash and cash equivalents | | | 106 | | | -- | | | -- | |
| | | | | | | | | | | |
Changes in cash and cash equivalents-- | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 151 | | | (4,726 | ) | | 2,381 | |
Cash and cash equivalents at beginning of year | | | 3,652 | | | 8,378 | | | 5,997 | |
| | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 3,803 | | $ | 3,652 | | $ | 8,378 | |
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated financial statements.
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, convection ovens, fryers, ranges, toasters, combi ovens, steamers, broilers, deck ovens, and counter-top cooking and warming equipment. The company manufactures and assembles this equipment at four factories in the United States and one factory in the Philippines.
The company's end-user customers include: (i) fast food or quick-service restaurants, (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's domestic sales are primarily through independent dealers and distributors and are marketed by the company's sales personnel and network of independent manufacturers' representatives. The company’s international sales are through a combined network of independent and company-owned distributors. The company maintains regional sales offices in Asia, Europe and Latin America complemented by sales and distribution offices in Canada, China, India, South Korea, Mexico, the Philippines, Spain, Taiwan and the United Kingdom.
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. 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) PURCHASE ACCOUNTING
On December 21, 2001, the company completed its acquisition of Blodgett Holdings, Inc. ("Blodgett") from Maytag Corporation (“Maytag”).
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 difference between the purchase price and the fair value of the assets acquired and liabilities assumed was recorded as goodwill. Under Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," goodwill and certain other intangible assets in conjunction with the Blodgett acquisition are subject to the nonamortization provisions of this statement from the date of acquisition.
The allocation of net cash paid for the Blodgett acquisition as of December 29, 2001 and December 28, 2002 is summarized as follows (in thousands):
| | | Dec. 29, 2001 | | Adjustments | | Dec. 28, 2002 | |
| Current assets | | $ | 36,957 | | $ | (197 | ) | $ | 36,760 | |
| Property, plant and equipment | | | 13,863 | | | (218 | ) | | 13,645 | |
| Goodwill | | | 62,008 | | | 756 | | | 62,764 | |
| Other intangibles | | | 26,300 | | | - | | | 26,300 | |
| Liabilities | | | (44,076 | ) | | (2,174 | ) | | (46,250 | ) |
| Total purchase price | | | 95,052 | | | (1,833 | ) | | 93,219 | |
| | | | | | | | | | | |
| Less: Notes issued at closing | | | (20,054 | ) | | 1,833 | | | (18,221 | ) |
| | | | | | | | | | | |
| Net cash paid for Blodgett at closing | | $ | 74,998 | | $ | -- | | $ | 74,998 | |
The goodwill and other intangible assets, which are comprised of trademarks, are subject to the non-amortization provisions of SFAS No. 142 and are allocable to the Cooking Systems Group for purposes of segment reporting (see Note 11 for further discussion). Neither of these assets is anticipated to be deductible for income taxes.
In August 2002, the company reached final settlement with Maytag on post-closing adjustments pertaining to the acquisition of Blodgett. As a result, the final purchase price and the principal amount of notes due to Maytag were reduced by $1.8 million.
During 2003, the company paid $19.1 million of principal and interest paid in kind to Maytag. During 2004, the company paid the remaining $2.0 million of notes. At January 1, 2005, there was no balance outstanding due to Maytag.
(3) STOCK REPURCHASE TRANSACTION
On December 23, 2004 the company repurchased 1,808,774 shares of its common stock and 271,000 options from William F. Whitman, Jr., the former chairman of the company’s board of directors, members of his family and trusts controlled by his family (collectively, the “Whitmans”) in a private transaction for a total aggregate purchase price of $83,974,578 in cash. The repurchased shares represented 19.6% of the company's outstanding shares and were repurchased for $75,968,508 at $42.00 per share which represented a 12.8% discount to the closing market price of $48.19 of the company’s common stock on December 23, 2004 and a 21.7% discount from the $53.64 average closing price over the thirty trading days prior to the repurchase. The company incurred $1.2 million of transaction costs associated with the repurchase of these shares. The 271,000 stock options were purchased for $8,006,070, which represented the difference between $42.00 and the exercise price of the option. In conjunction with the stock repurchase, the Whitmans resigned as directors of the company.
The company financed the share repurchase with borrowings under a $160.0 million senior bank facility that was established in connection with this transaction. The newly established senior bank facility provides for $70.0 million in term loan borrowings and $90.0 million of borrowing availability under a revolving credit facility.
In conjunction with the transaction the company recorded $13.8 million of expenses, which are comprised of the following items (dollars in thousands):
| Compensation related expense | | $ | 8,225 | |
| Pension settlement | | | 1,947 | |
| Financial advisor fees | | | 1,899 | |
| Other professional fees | | | 576 | |
| | | | | |
| Subtotal | | | 12,647 | |
| | | | | |
| Debt extinguishment costs | | | 1,154 | |
| | | | | |
| Total | | $ | 13,801 | |
The $8.2 million in compensation expense includes the value of the 271,000 repurchased stock options along with the employer portion of related payroll taxes.
In February 2005, the company settled all pension obligations associated with William F. Whitman, Jr., the former chairman of the company's board of directors for $7.5 million in cash. In conjunction with this transaction, the company recorded $1.9 million in settlement costs representing the difference between the settlement amount and the accrued pension liability at the time of the transaction.
Debt extinguishment costs of $1.2 million represent the write-off of deferred financing costs pertaining to the company's prior financing agreements which were paid prior to the maturity of the agreement utilizing funds under the company's new senior debt agreement completed in order to finance the stock repurchase transaction.
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements include the accounts of the company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.The company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. On an ongoing basis, the company evaluates its estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
The company's fiscal year ends on the Saturday nearest December 31. Fiscal years 2004, 2003 and 2002 ended on January 1, 2005, January 3, 2004 and December 28, 2002, 2001, respectively, and each included 52, 53 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) Accounts Receivable
Accounts receivable, as shown in the consolidated balance sheets, are net of allowances for doubtful accounts of $3,382,000 and $3,146,000 at January 1, 2005 and January 3, 2004, respectively.
(d) Inventories
Inventories are composed of material, labor and overhead and are stated at the lower of cost or market. Costs for inventories at two of the company's manufacturing facilities have been determined using the last-in, first-out ("LIFO") method. These inventories under the LIFO method amounted to $14.4 million in 2004 and $10.9 million in 2003 and represented approximately 44% and 43% of the total inventory in each respective year. Costs for all other 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 January 1, 2005 and January 3, 2004 are as follows:
| | | | 2004 | | | 2003 | |
| | | | (dollars in thousands) | |
| | | | | | | | |
| Raw materials and parts | | $ | 7,091 | | $ | 3,798 | |
| Work in process | | | 5,492 | | | 5,288 | |
| Finished goods | | | 19,971 | | | 15,667 | |
| | | | 32,554 | | | 24,753 | |
| LIFO reserve | | | 218 | | | 629 | |
| Total | | $ | 32,772 | | $ | 25,382 | |
(e) Property, Plant and Equipment
Property, plant and equipment are carried at cost as follows:
| | | | 2004 | | | 2003 | |
| | | | (dollars in thousands) | |
| | | | | | | | |
Land | | $ | 4,925 | | $ | 4,925 | |
Building and improvements | | | 18,277 | | | 18,409 | |
Furniture and fixtures | | | 8,765 | | | 8,604 | |
Machinery and equipment | | | 22,204 | | | 22,129 | |
| | | | 54,171 | | | 54,067 | |
Less accumulated depreciation | | | (31,191 | ) | | (29,146 | ) |
| | | $ | 22,980 | | $ | 24,921 | |
Property and equipment are depreciated or amortized on a straight-line basis over their useful lives based on management's estimates of the period over which the assets will be utilized to benefit the operations of the company. The useful lives are estimated based on historical experience with similar assets, taking into account anticipated technological or other changes. The company periodically reviews these lives relative to physical factors, economic factors and industry trends. If there are changes in the planned use of property and equipment or if technological changes were to occur more rapidly than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation and amortization expense in future periods.
Following is a summary of the estimated useful lives:
Description | Life |
Building and improvements | 20 to 40 years |
Furniture and fixtures | 5 to 7 years |
Machinery and equipment | 3 to 10 years |
Depreciation expense is provided for using the straight-line method and amounted to $3,150,000, $3,583,000 and $3,967,000 in fiscal 2004, 2003 and 2002, respectively.
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 undiscounted cash flows.
(f) Goodwill and Other Intangibles
Goodwill and other intangibles are reviewed for impairment annually or whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. For long-lived assets held for use, an impairment loss is recognized when the estimated undiscounted cash flows produced by an asset are less than the asset's carrying value.Estimates of future cash flows are judgments based on the company's experience and knowledge of operations. These estimates can be significantly impacted by many factors including changes in global and local business and economic conditions, operating costs, inflation, competition, and consumer and demographic trends. If the company's estimates or the underlying assumptions change in the future, the company may be required to record impairment charges.
(g) Accrued Expenses
Accrued expenses consist of the following at January 1, 2005 and January 3, 2004, respectively:
| | | 2004 | | 2003 | |
| | | (dollars in thousands) | |
| | | | | | |
| Accrued payroll and related expenses | | $ | 12,493 | | $ | 7,094 | |
| Accrued warranty | | | 10,563 | | | 11,563 | |
| Accrued customer rebates | | | 9,350 | | | 6,935 | |
| Accrued pension settlement | | | 3,637 | | | -- | |
| Accrued product liability and workers comp | | | 1,828 | | | 3,398 | |
| Other accrued expenses | | | 13,440 | | | 8,086 | |
| | | | | | | | |
| | | $ | 51,311 | | $ | 37,076 | |
(h) Litigation Matters
From time to time, the company is subject to proceedings, lawsuits and other claims related to products, suppliers, employees, customers and competitors. The company maintains insurance to cover product liability, workers compensation, property and casualty, and general liability matters. The company is required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of accrual required, if any, for these contingencies is made after assessment of each matter and the related insurance coverage. The required accrual may change in the future due to new developments or changes in approach such as a change in settlement strategy in dealing with these matters. The company does not believe that any such matter will have a material adverse effect on its financial condition, results of operations or cash flows of the company.
(i) Other Comprehensive Income
The following table summarizes the components of accumulated other comprehensive loss as reported in the consolidated balance sheets:
| | | 2004 | | 2003 | |
| | | (dollars in thousands) | |
| | | | | | |
| Minimum pension liability | | $ | (1,004 | ) | $ | (2,081 | ) |
| Unrealized gain (loss) on interest rate swap | | | 38 | | | (163 | ) |
| Currency translation adjustments | | | 609 | | | (65 | ) |
| | | | | | | | |
| | | $ | (357 | ) | $ | (2,309 | ) |
(j) Fair Value of Financial Instruments
Due to their short-term nature, the carrying value of the company's cash and cash equivalents and receivables approximate fair value. The value of long-term debt, which is disclosed in Note 5, approximates fair value. The company's derivative instruments are based on market prices when available or are derived from financial valuation methodologies.
(k) 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. Exchange gains and losses on foreign currency transactions are included in determining net income for the period in which they occur. These exchanges losses amounted to $0.6 million in fiscal 2004 and 2003.
(l) Revenue Recognition
The company recognizes revenue on the sale of its products when risk of loss has passed to the customer, which occurs at the time of shipment, and collectibility is reasonably assured. The sale prices of the products sold are fixed and determinable at the time of shipment. Sales are reported net of sales returns, sales incentives and cash discounts based on prior experience and other quantitative and qualitative factors.
(m) Warranty Costs
In the normal course of business the company issues product warranties for specific product lines and provides for the estimated future warranty cost in the period in which the sale is recorded. The estimate of warranty cost is based on contract terms and historical warranty loss experience that is periodically adjusted for recent actual experience. Because warranty estimates are forecasts that are based on the best available information, claims costs may differ from amounts provided. Adjustments to initial obligations for warranties are made as changes in the obligations become reasonably estimable.
A rollforward of the warranty reserve is as follows:
| | | 2004 | | 2003 | |
| | | (dollars in thousands) | |
| | | | | | |
| Beginning balance | | $ | 11,563 | | $ | 10,447 | |
| Warranty expense | | | 8,417 | | | 9,743 | |
| Warranty claims | | | (9,417 | ) | | (8,627 | ) |
| Ending balance | | $ | 10,563 | | $ | 11,563 | |
(n) 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 $2,537,000, $2,390,000 and $2,624,000 in fiscal 2004, 2003 and 2002, respectively.
(o) Stock Based Compensation
The company maintains various stock based employee compensation plans, which are more fully described in Note 6. The company has issued restricted stock grants and stock options under these plans to certain key employees and members of its Board of Directors. 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" in accounting for stock-based awards to employees and directors.
In accordance with APB No. 25, the company establishes the value of restricted stock grants based upon the market value of the stock at the time of issuance. The value of the restricted stock grant is reflected as a separate component reducing shareholders' equity with an offsetting increase to Paid-in Capital. The value of the stock grant is amortized and recorded as compensation expense over the applicable vesting period. In December 2004, the company issued restricted stock grants amounting to $4.8 million, of which $0.1 million had been recorded as compensation expense. The company had no issuances of restricted stock grants in prior years.
In accordance with APB No. 25, the company has not recorded compensation expense related to issued stock options in the financial statements for all periods presented because the exercise price of the stock options is equal to or greater than the market price of the underlying stock on the date of grant. Pro forma information regarding net earnings and earnings per share is required by SFAS No. 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 weighted average estimated fair value of stock options granted in fiscal 2003 was $8.35 per share and in fiscal 2002 was $4.30 per share. There were no options issued in 2004. The fair value of options 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 2.7% to 2.9% in 2003 and 4.8% in 2002; no expected dividend yield; expected lives of 4 to 8 years in 2003 and 7 years in 2002; and expected volatility of 55% to 65% in 2003 and 75% in 2002.
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 stock-based employee compensation expense, net of taxes, for fiscal year 2003 previously disclosed as $583,000 has been corrected to reflect the portion of a 2003 grant that vested immediately in 2003. The company’s pro forma net earnings and per share data utilizing a fair value based method is as follows:
| | | 2004 | | 2003 | | 2002 | |
| | | | | | | | |
| Net income - as reported | | $ | 23,588 | | $ | 18,698 | | $ | 6,102 | |
| | | | | | | | | | | |
Less: Stock-based employee compensation expense, net of taxes | | | 442 | | | 3,574 | | | 264 | |
| | | | | | | | | | | |
| Net income - pro forma | | $ | 23,146 | | $ | 15,124 | | $ | 5,838 | |
| | | | | | | | | | | |
| Earnings per share - as reported: | | | | | | | | | | |
| Basic | | $ | 2.56 | | $ | 2.06 | | $ | 0.68 | |
| Diluted | | | 2.38 | | | 1.99 | | | 0.67 | |
| | | | | | | | | | | |
| Earnings per share - pro forma: | | | | | | | | | | |
| Basic | | $ | 2.52 | | $ | 1.67 | | $ | 0.65 | |
| Diluted | | | 2.33 | | | 1.61 | | | 0.64 | |
(p) Earnings Per Share
In accordance with SFAS No. 128 “Earnings Per Share”, “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 dilutive securities.
The company’s potentially dilutive securities consist of shares issuable on exercise of outstanding options computed using the treasury method and amounted to 731,000, 327,000 and 142,000 for fiscal 2004, 2003 and 2002, respectively. Stock options amounting to 5,000 at a price of $9.63 for fiscal 2002 were excluded from the common share equivalents, as they were anti-dilutive.
(q) Consolidated Statements of Cash Flows
Cash paid for interest was $2,627,000, $4,532,000 and $6,248,000 in fiscal 2004, 2003 and 2002, respectively. Cash payments totaling $16,890,000, $8,349,000 and $4,761,000 were made for income taxes during fiscal 2004, 2003 and 2002, respectively.
In 2004, net income included in the cash flows from operations has a non-cash expense of $1,154,000 pretax related to the early extinguishment of debt (see Note 3), $118,000 pretax related to a restricted stock grant (see Note 6) and $1,887,000 related to acquisition integration reserve adjustments (see Note 10). In 2003, net income included in the cash flows from operations had a non-cash expense $567,000 pretax related to an increase in the principal balance of debt associated with interest paid in kind. In 2002, net income included in the cash flows from operations had a non-cash expense of $8,807,000 pretax related to the early extinguishment of debt (see Note 4(r)) and $2,340,000 pretax related to an increase in the principal balance of debt associated with interest paid in kind. These non-cash items have been added back as adjustments to reconcile net earnings to net cash provided by operating activities.
(r) New Accounting Pronouncements
In April 2002, theFinancial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements SFAS No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections". SFAS No. 145 eliminates the previous requirement that gains and losses on debt extinguishment must be classified as extraordinary items in the income statement. Instead, such gains and losses are to be classified as extraordinary items only if they are deemed to be unusual and infrequent. The changes related to debt extinguishment are effective for fiscal years beginning after May 15, 2002, and the changes related to lease accounting are effective for transactions occurring after May 15, 2002. The company adopted this statement in fiscal 2003. As a result, in the 2003 financial statements, the company made a reclassification in the presentation of a loss incurred pertaining to the extinguishment of debt and its related tax benefit in the 2002 statement of earnings. In the 2002 financial statements, the company reported a $5.5 million extraordinary loss, comprised of a $9.1 million debt extinguishment loss net of a $3.6 million tax benefit. In the 2003 financial statements, the $9.1 million loss has been reclassified to debt extinguishment expense as a component of earnings before income taxes and the related $3.6 million tax benefit to the provision for income taxes.
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 adoption of SFAS No. 146 did not have a material impact on the company’s financial position, results of operations or cash flows.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123." This statement amends SFAS No. 123 to provide alternative methods of transition for voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the disclosure requirements to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The company has applied this guidance in the 2003 financial statements.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement requires that contracts with comparable characteristics be accounted for similarly. This statement is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the company’s financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for classifying and measuring certain financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the company’s financial position, results of operations or cash flows.
In December 2003, the FASB issued a revision to SFAS No. 132 "Employers' Disclosure about Pensions and Other Postretirement Benefits." This statement retains the disclosures previously required by SFAS No. 132 but adds additional disclosure requirements about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. It also calls for the required information to be provided separately for pension plans and for other postretirement benefit plans. The company has incorporated the new disclosures into the footnotes of the financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4". This statement amends the guidance in ARB No. 43, Chapter 4 to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This statement requires that these items be recognized as current period costs and also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The company will apply this guidance prospectively. The company is in the process of determining what impact the application of this guidance will have on the company's financial position, results of operations or cash flows
In December 2004, the FASB issued a revision to SFAS No. 123 "Accounting for Stock Based Compensation". This statement established standard for the accounting for transactions in which an entity exchanges its equity instruments for goods or services and addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. This statement is effective for interim periods beginning after June 15, 2005. The company will apply this guidance prospectively. The company is in the process of determining what impact the application of this guidance will have on the company's financial position, results of operations or cash flows
(5) FINANCING ARRANGEMENTS
The following is a summary of long-term debt at January 1, 2005 and January 3, 2004:
| | | 2004 | | 2003 | |
| | | (dollars in thousands) | |
| | | | | | |
| Senior secured revolving credit line | | $ | 51,265 | | $ | 1,500 | |
| Senior secured bank term loans | | | 70,000 | | | 53,000 | |
| Notes to Maytag | | | -- | | | 2,000 | |
| Other note | | | 2,458 | | | -- | |
| | | | | | | | |
| Total debt | | $ | 123,723 | | $ | 56,500 | |
| | | | | | | | |
| Less current maturities of | | | | | | | |
| long-term debt | | | 10,480 | | | 14,500 | |
| | | | | | | | |
| Long-term debt | | $ | 113,243 | | $ | 42,000 | |
During the fourth quarter of 2004 the company entered into a new $160.0 million senior secured credit facility in order to increase the company's borrowing availability. Terms of the new agreement provide for $70.0 million of term loans and $90.0 million of availability under a revolving credit line. As of January 1, 2005, the company had $121.3 million outstanding under this facility, including $51.3 million of borrowings under the revolving credit line. The company also had $3.9 million in outstanding letters of credit, which reduced the borrowing availability under the revolving credit line.
Borrowings under the senior secured credit facility are assessed at an interest rate of 1.5% above LIBOR for long-term borrowings or at the higher of the Prime rate and the Federal Funds Rate plus 0.5% for short term borrowings. At January 1, 2005 the average interest rate on the senior debt amounted to 5.14 %. The interest rates on borrowings under the senior bank facility may be adjusted quarterly based on the company’s defined indebtedness ratio on a rolling four-quarter basis. Additionally, a commitment fee, based upon the indebtedness ratio is charged on the unused portion of the revolving credit line. This variable commitment fee amounted to 0.30% as of January 1, 2005.
In November 2004, the company entered into a $2.5 million promissory note in conjunction with the release and early termination of obligations under a lease agreement relative to a manufacturing facility in Shelburne, Vermont. The note is assessed interest at 4.0% above LIBOR with an interest rate cap of 9.0%. At year-end the interest rate on the note was approximately 6.4%. The note amortizes monthly and matures in December 2009.
The company has historically entered into interest rate swap agreements to effectively fix the interest rate on its outstanding debt. In January 2002, the company had entered into an interest rate swap agreement for a notional amount of $20.0 million. This agreement swapped one-month LIBOR for a fixed rate of 4.03% and was in effect through December 2004. In February 2003, the company entered into an interest rate swap agreement for a notional amount of $10.0 million. This agreement swaps one-month LIBOR for a fixed rate of 2.36% and remains in effect through December 2005. In January 2005, subsequent to the fiscal 2004 year end, the company entered into an interest rate swap agreement for a notional amount of $70.0 million. This agreement swaps one-month LIBOR for a fixed rate of 3.78%. The $70.0 million notional amount amortizes consistent with the repayment schedule of the company's $70.0 million term loan maturing November 2009.
The terms of the senior secured credit facility limit the paying of dividends, capital expenditures and leases, and require, among other things, certain ratios of indebtedness and fixed charge coverage. The credit agreement also provides that if a material adverse change in the company’s business operations or conditions occurs, the lender could declare an event of default. Under terms of the agreement a material adverse effect is defined as (a) a material adverse change in, or a material adverse effect upon, the operations, business properties, condition (financial and otherwise) or prospects of the company and its subsidiaries taken as a whole; (b) a material impairment of the ability of the company to perform under the loan agreements and to avoid any event of default; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the company of any loan document. A material adverse effect is determined on a subjective basis by the company's creditors. At January 1, 2005, the company was in compliance with all covenants pursuant to its borrowing agreements.
The aggregate amount of debt payable during each of the next five years is as follows:
| | | (dollars in thousands) | |
| | | | |
| 2005 | | $ | 10,480 | |
| 2006 | | | 12,980 | |
| 2007 | | | 15,480 | |
| 2008 | | | 15,480 | |
| 2009 | | | 69,303 | |
| | | | | |
| | | $ | 123,723 | |
As of January 3, 2004, the company had aggregate borrowings under its senior bank agreement of $54.5 million. Year-end borrowings included a $48.5 million term loan assessed interest at floating rates of 2.75% above LIBOR, a $4.50 million term loan assessed interest at a rate of 3.75% above LIBOR and $1.5 million under a revolving credit line. At January 3, 2004, the interest rate on the $48.5 million and $4.5 million term loans were 3.99% and 4.93%, respectively. At January 3, 2004, the interest rate on the revolving credit line was 5.0%.
As of January 3, 2004 the company had $2.0 million in notes due to Maytag. The notes due to Maytag were to mature in December 2006 were assessed interest at a rate of 12.0% payable in cash.
(6) COMMON AND PREFERRED STOCK
(a) Shares Authorized and Issued
At January 1, 2005 and January 3, 2004, the company had 20,000,000 shares of common stock and 2,000,000 shares of Non-voting Preferred Stock authorized. At January 1, 2005, there were 7,545,700 common stock shares outstanding.
In July 1998, the company's Board of Directors adopted a stock repurchase program and during 1998 authorized the purchase of up to 1,800,000 common shares in open market purchases. As of January 1, 2005, 952,999 shares had been purchased under the 1998 stock repurchase program.
In October 2000, the company's Board of Directors approved a self tender offer that authorized the purchase of up to 1,500,000 common shares from existing stockholders at a per share price of $7.00. On November 22, 2000 the company announced that 1,135,359 shares were accepted for payment pursuant to the tender offer for $7.9 million.
On December 23, 2004, the company repurchased 1,808,774 shares at a $42.00 per share of its common stock from the chairman of the company's board of directors, members of his family and trusts controlled by his family upon his retirement from the company. The aggregate cost of the stock repurchase including transaction related costs was $77.2 million.
At January 1, 2005, the company had a total of 3,856,344 shares in treasury amounting to $89.7 million.
(c) Warrants
In December 2002, the company repurchased and retired 358,346 of outstanding stock warrant rights held by American Capital Strategies ("ACS"), which had been issued in connection with a senior subordinated note agreement entered into in December 2001. The stock warrant rights allowed ACS to purchase Middleby common stock at $4.67 per share at any time through their expiration on December 21, 2011. The stock warrant rights were purchased for $2.7 million in cash. Conditional stock warrant rights of 445,100 exercisable under circumstances defined per the note agreement expired with the retirement of the notes in December 2002. See Note 8 for further discussion.
(d) Stock Options and Grants
The company maintains a 1998 Stock Incentive Plan (the "Plan"), as amended on December 15, 2003, under which the Company's Board of Directors issues stock options and stock grants to key employees. A maximum amount of 1,500,000 shares can be issued under the Plan. Stock options issued under the plan provide key employees with rights to purchase shares of common stock at specified exercise prices. 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. Stock grants are issued to employees are transferable upon certain vesting requirements being met. As of January 1, 2005, a total of 1,144,160 stock options have been issued under the plan of which 445,960 have been exercised and 698,200 remain outstanding. As of January 1, 2005, a total of 100,000 restricted stock grants have been issued of which all are unvested. In addition to shares under the 1998 Stock Incentive Plan, certain directors of the company have outstanding stock options. As of January 1, 2005, there were 56,000 shares outstanding, all of which are vested.
A summary of stock option activity is presented below:
| | | | | | | Option | |
Stock Option Activity | | Employees | | Directors | | Price Per Share | |
| | | | | | | | |
Outstanding atDecember 29, 2001: | | | 281,625 | | | 82,000 | | | |
| Granted | | | 380,000 | | | -- | | $5.90 | |
| Exercised | | | (3,000 | ) | | (1,000 | ) | $1.875 to $4.50 | |
| Forfeited | | | (100,500 | ) | | -- | | $4.50 to $7.094 | |
| | | | | | | | | | |
Outstanding atDecember 28, 2002: | | | 558,125 | | | 81,000 | | | |
| Granted | | | 665,100 | | | 31,500 | | $10.51 to $18.47 | |
| Exercised | | | (213,625 | ) | | (15,000 | ) | $4.50 to $10.51 | |
| Forfeited | | | (14,100 | ) | | -- | | $5.90 to $10.51 | |
| | | | | | | | | | |
Outstanding atJanuary 3, 2004: | | | 995,500 | | | 97,500 | | | |
| Granted | | | -- | | | -- | | | |
| Exercised | | | (32,023 | ) | | (13,000 | ) | $4.50 to $18.47 | |
| Forfeited | | | (15,277 | ) | | (7,500 | ) | $4.50 to $18.47 | |
| Repurchased | | | (250,000 | ) | | (21,000 | ) | $5.90 to $10.51 | |
| | | | | | | | | | |
Outstanding atJanuary 1, 2005: | | | 698,200 | | | 56,000 | | |
| Weighted average price | | $ | 13.56 | | $ | 8.15 | | | |
| | | | | | | | | | |
Exercisable atJanuary 1, 2005: | | | 510,400 | | | 56,000 | | | |
| Weighted average price | | $ | 15.79 | | $ | 8.15 | | | |
In fiscal 2004, the weighted average price of shares exercised, forfeited and repurchased under the employee stock plan was $8.00, $10.94 and $12.86, respectively. In fiscal 2004, the weighted average price of shares exercised, forfeited and repurchased under the director stock plan was $7.15, $11.72 and $7.72, respectively.
The following summarizes the options outstanding and exercisable for the employee stock plan by exercise price, at January 1, 2005:
Exercise Price | | Options Outstanding | | Weighted Average Remaining Life | | Options Exercisable | | Weighted Average Remaining Life | |
| | | | | | | | | | |
Employee plan | | | | | | | | | |
| | | | | | | | | | |
| $5.25 | | | 2,750 | | | 1.83 | | | 2,750 | | | 1.83 | |
| $5.90 | | | 204,000 | | | 7.16 | | | 81,600 | | | 7.16 | |
| $7.063 | | | 15,500 | | | 0.13 | | | 15,500 | | | 0.13 | |
| $10.51 | | | 81,700 | | | 8.18 | | | 16,340 | | | 8.18 | |
| $18.47 | | | 394,250 | | | 8.81 | | | 394,250 | | | 8.81 | |
| | | | | | | | | | | | | | |
| | | | 698,200 | | | 8.03 | | | 510,440 | | | 8.23 | |
| | | | | | | | | | | | | | |
Director plan | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| $6.00 | | | 6,000 | | | 0.36 | | | 6,000 | | | 0.36 | |
| $7.50 | | | 35,000 | | | 1.12 | | | 35,000 | | | 1.12 | |
| $10.51 | | | 15,000 | | | 5.17 | | | 15,000 | | | 5.17 | |
| | | | | | | | | | | | | | |
| | | | 56,000 | | | 2.12 | | | 56,000 | | | 2.12 | |
(7) INCOME TAXES
Earnings before taxes is summarized as follows:
| | | 2004 | | 2003 | | 2002 | |
| | | (dollars in thousands) | |
| | | | | | | | |
| Domestic | | $ | 31,712 | | $ | 26,928 | | $ | 5,998 | |
| Foreign | | | 2,132 | | | 1,893 | | | 2,816 | |
| Total | | $ | 33,844 | | $ | 28,821 | | $ | 8,814 | |
| | | | | | | | | | | |
| The provision (benefit) for income taxes is summarized as follows: |
| | | | | | | | | | | |
| | | | 2004 | | | 2003 | | | 2002 | |
| | | (dollars in thousands) |
| | | | | | | | | | | |
| Federal | | $ | 7,126 | | $ | 7,661 | | $ | 1,495 | |
| State and local | | | 2,467 | | | 2,282 | | | 790 | |
| Foreign | | | 663 | | | 180 | | | 427 | |
| Total | | $ | 10,256 | | $ | 10,123 | | $ | 2,712 | |
| | | | | | | | | | | |
| Current | | $ | 2,682 | | $ | 11,011 | | $ | 1,922 | |
| Deferred | | | 7,574 | | | (888 | ) | | 790 | |
| Total | | $ | 10,256 | | $ | 10,123 | | $ | 2,712 | |
Reconciliation of the differences between income taxes computed at the federal statutory rate to the effective rate are as follows:
| | | 2004 | | 2003 | | 2002 | |
| U.S. federal statutory tax rate | | | 35.0 | % | | 35.0 | % | | 34.0 | % |
Permanent book vs. taxdifferences | | | (0.9 | ) | | -- | | | (0.3 | ) |
| Foreign tax rate differentials | | | (0.2 | ) | | (1.7 | ) | | 5.0 | |
State taxes, net of federalbenefit | | | 5.9 | | | 4.9 | | | 7.4 | |
| Write-off of foreign investment | | | -- | | | -- | | | (18.9 | ) |
| Reserve adjustments and other | | | (9.5 | ) | | (3.1 | ) | | 3.6 | |
| Consolidated effective tax | | | 30.3 | % | | 35.1 | % | | 30.8 | % |
At January 1, 2005 and January 3, 2004, the company had recorded the following deferred tax assets and liabilities, which were comprised of the following:
| | | | 2004 | | | 2003 | |
| | | | (dollars in thousands) | |
| | | | | | | | |
| Deferred tax assets: | | | | | | | |
| | | | | | | | |
Warranty reserves | | $ | 3,959 | | $ | 4,514 | |
Inventory reserves | | | 2,110 | | | 2,146 | |
Receivable related reserves | | | 1,189 | | | 1,156 | |
Accrued severance and plant closure | | | 1,128 | | | 3,578 | |
Accrued retirement benefits | | | 1,110 | | | 2,594 | |
Product liability reserves | | | 490 | | | 1,173 | |
Unicap | | | 259 | | | 406 | |
Payroll related | | | -- | | | 1,433 | |
Foreign net operating loss carry-forwards | | | -- | | | 211 | |
Other | | | 816 | | | 1,406 | |
Gross deferred tax assets | | | 11,061 | | | 18,617 | |
Valuation allowance | | | -- | | | -- | |
Deferred tax assets | | $ | 11,061 | | $ | 18,617 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | |
Intangible assets | | $ | (10,651 | ) | $ | (10,651 | ) |
Depreciation | | | (2,973 | ) | | (2,922 | ) |
LIFO reserves | | | (6 | ) | | (469 | ) |
| | | | | | | | |
Deferred tax liabilities | | $ | (13,630 | ) | $ | (14,042 | ) |
The company's financial statements include amounts recorded for contingent tax liabilities with respect to loss contingencies that are deemed probable of occurrence. As those contingencies are resolved, whether by audit or the closing of a tax year, the company adjusts tax expense to reflect the expected resolution. The 2004 tax provision includes a benefit of $3.2 million related to the release of tax reserves for a closed tax year.
Pursuant to The American Jobs Creation Act of 2004 (The Act) enacted on October 22, 2004, the company is in the process of evaluating those provisions relating the repatriation of certain foreign earnings and their impact on the company. The Act provides for a special one-time tax deduction of 85 percent of certain foreign earnings that are repatriated, as defined in the Act. The company may elect to apply this provision in 2005. On December 21, 2004, FASB Staff Position FAS 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004", was issued. In accordance with FAS 109-2, the company has not recorded any provisions for taxes on unremitted foreign earnings in its 2004 financial statements and will not do so until management has decided on whether, and to what extent the company might repatriate foreign earnings under the Act. Based on the company's assessment it is possible that under the repatriation provision of the Act we may repatriate some amount of earnings between $0 to $15 million with the respective tax liability ranging from $0 to $3 million.
(8) FINANCIAL INSTRUMENTS
In June 1998, the FASB issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 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 No. 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 accumulated 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.
(a) Foreign exchange
The company has entered into derivative instruments, principally forward contracts to reduce exposures pertaining to fluctuations in foreign exchange rates. As of January 1, 2005, the company had no forward and option purchase contracts outstanding.
(b) Interest rate swap
In January 2002, 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 swapped one-month LIBOR for a fixed rate of 4.03% and was in effect through December 2004. The portion of the hedge considered to be effective was recorded as a component of other comprehensive income. The change in the fair value of the interest rate swap in 2004 resulted in an increase to other comprehensive income of $0.2 million. The ineffective portion of the interest rate swap recorded as a gain in current year earnings amounted to $0.3 million.
In February 2003, the company entered into an interest rate swap agreement with a notational amount of $10.0 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 2.36% and is in effect through December 2005. The interest rate swap has been designated as a hedge, and in accordance with SFAS No. 133 the changes in the fair value are recorded as a component of accumulated comprehensive income. The change in the fair value of the swap during 2004 was a loss of $0.1 million.
In January 2005, subsequent to the fiscal year end, the company entered into an interest rate swap agreement with a notional amount of $70.0 million. The agreement swaps one month LIBOR for a fixed rate of 3.78%. The notional amount of the swap amortizes consistent with the repayment schedule of the company's senior term loan maturing in November 2009.
In conjunction with the subordinated senior notes issued in connection with the financing for the Blodgett acquisition, the company issued 358,346 stock warrant rights and 445,100 conditional stock warrant rights to the subordinated senior noteholder. The warrant rights allowed the noteholder to purchase Middleby common stock at $4.67 per share through their expiration on December 21, 2011. The conditional stock warrant rights were 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 had the ability to require the company to repurchase these warrant rights at the fair market value. The obligation pertaining to the repurchase of the warrant rights was recorded in Other Non-Current Liabilities at fair market value utilizing a Black-Scholes valuation model, which was assessed at value of $3.3 million as of December 29, 2001. The 358,346 of stock warrant rights were repurchased for $2.7 million in cash in 2002. Conditional stock warrant rights of 445,100 expired unexercised with the retirement of the notes. In 2002, the company recorded a gain of $0.6 million in conjunction with the repurchase and expiration of the warrant rights.
(9) LEASE COMMITMENTS
The company leases warehouse space, office facilities and equipment under operating leases, which expire in fiscal 2004 and thereafter. The company also has a lease obligation for a manufacturing facility that was exited in conjunction with manufacturing consolidation efforts related to the acquisition of Blodgett. Future payment obligations under these leases are as follows:
| | | Operating Leases | | Idle Facility Leases | | Total Lease Commitments | |
| | | (dollars in thousands) | |
| 2005 | | $ | 811 | | $ | 354 | | $ | 1,165 | |
| 2006 | | | 685 | | | 366 | | | 1,051 | |
| 2007 | | | 314 | | | 371 | | | 685 | |
| 2008 | | | 277 | | | 376 | | | 653 | |
| 2009 and thereafter | | | 515 | | | 2,589 | | | 3,104 | |
| | | | | | | | | | | |
| | | $ | 2,602 | | $ | 4,056 | | $ | 6,658 | |
Rental expense pertaining to the operating leases was $0.7 million, $0.6 million, and $1.1 million in fiscal 2004, 2003, and 2002, respectively. Reserves of $2.8 million have been established for the idle facility leases, net of anticipated sublease income (see Note 10 for further discussion).
(10) ACQUISITION INTEGRATION COSTS
In fiscal 2001, the company established reserves through purchase accounting associated with $3.9 million in severance related obligations and $6.9 million in facility exit costs related to the business operations that were acquired from Maytag Corporation on December 21, 2001 of Blodgett.
The company established reserves of $6.9 million associated with the facility closure and lease obligations for manufacturing facilities in Pennsylvania and Vermont that were exited in 2001 and 2002. These reserves were subsequently increased in 2002 by $3.4 million through purchase accounting due to changes in the assumptions related to the timing and amount of sublease income expected to be realized, resulting in an increase in goodwill. The facility in Quakertown, Pennsylvania was exited in 2001 prior to the acquisition of Blodgett. The lease extends on this facility through December 2014. The company is recovering a portion of the lease cost on a sublease that ends in April 2006. Two other facilities in Williston, Vermont and Shelburne, Vermont were exited during the second quarter of 2002 in conjunction with the company's consolidation initiatives following the Blodgett acquisition. Lease obligations on these properties extended through June 2005 and December 2014, respectively. The company completed an early buyout for the Williston, Vermont property during the first quarter of 2004. During the fourth quarter of 2004, the company entered into an agreement with Pizzagalli Properties, LLC, to terminate the company’s lease obligations related to the facility in Shelburne, Vermont. This transaction occurred simultaneously with a sale of the property in Shelburne, Vermont from Pizzagalli Properties, LLC to an unrelated third party. Under terms of the lease termination agreement the company paid to the lessor $600,000 in cash and entered into an interest bearing note in the amount of $2,513,884. See Note 5 for further discussion of the note arrangement.
During 2004 the company recorded adjustments to reduce the reserves for acquisition related costs by $1.9 million. The reserve adjustments reflect a reduction in obligations associated with the Shelburne facility resulting from the sale of that property which allowed the company to negotiate an early exit from the lease. The remaining reserve of $2.8 million represents estimated costs associated with the Quakertown, Pennsylvania lease net of anticipated sublease income. Management believes the remaining reserve balance is adequate to cover costs associated with the lease obligation. However, the forecast of sublease income could differ from actual amounts, which are subject to the occupancy by a subtenant and a negotiated sublease rental rate. If the company's estimates or underlying assumptions change in the future, the company would be required to adjust the reserve amount accordingly.
A summary of the reserve balance activity is as follows (in thousands):
| | | Severance Obligations | | Facility Closure and Lease Obligations | | Total | |
| | | | | | | | |
| Balance December 29, 2001 | | $ | 3,947 | | $ | 6,928 | | $ | 10,875 | |
| Reserve adjustments | | | (92 | ) | | 3,377 | | | 3,285 | |
| Payments | | | (3,584 | ) | | (812 | ) | | (4,396 | ) |
| Balance December 28, 2002 | | | 271 | | | 9,493 | | | 9,764 | |
| Reserve adjustments | | | (134 | ) | | 176 | | | 42 | |
| Payments | | | (122 | ) | | (1,020 | ) | | (1,142 | ) |
| Balance January 3, 2004 | | | 15 | | | 8,649 | | | 8,664 | |
| Reserve adjustments | | | (11 | ) | | (1,875 | ) | | (1,886 | ) |
| Payments | | | (4 | ) | | (3,986 | ) | | (3,990 | ) |
| Balance January 1, 2005 | | $ | -- | | $ | 2,788 | | $ | 2,788 | |
(11) 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 division has manufacturing facilities in Illinois, New Hampshire, North Carolina, Vermont and the Philippines. This division 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 ranges, convection ovens 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 Canada, China, India, South Korea, Mexico, the Philippines, 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.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The chief decision maker evaluates individual segment performance based on operating income. Management believes that intersegment sales are made at established arms length transfer prices.
The following table summarizes the results of operations for the company’s business segments1 (dollars in thousands):
| | | Cooking
Systems
Group | | International
Distribution | | Corporate
and Other(2) | | Eliminations(3) | | Total | |
2004 | | | | | | | | | | | |
| Net sales | | $ | 257,510 | | $ | 46,146 | | | -- | | $ | (32,541 | ) | $ | 271,115 | |
| Operating income | | | 54,990 | | | 1,908 | | | (19,751 | ) | | (775 | ) | | 36,372 | |
| Depreciation expense | | | 3,267 | | | 156 | | | (273 | ) | | -- | | | 3,150 | |
| Net capital expenditures | | | 888 | | | 197 | | | 114 | | | -- | | | 1,199 | |
| Total assets | | | 177,271 | | | 24,439 | | | 14,485 | | | (6,520 | ) | | 209,675 | |
Long-lived assets(4) | | | 121,529 | | | 412 | | | 3,722 | | | -- | | | 125,663 | |
| | | | | | | | | | | | | | | | | |
2003 | | | | | | | | | | | | | | | | |
| Net sales | | $ | 229,402 | | $ | 42,698 | | | -- | | $ | (29,900 | ) | $ | 242,200 | |
| Operating income | | | 40,968 | | | 2,182 | | | (6,491 | ) | | (1,643 | ) | | 35,016 | |
| Depreciation expense | | | 3,698 | | | 148 | | | (263 | ) | | -- | | | 3,583 | |
| Net capital expenditures | | | 869 | | | 36 | | | 98 | | | -- | | | 1,003 | |
| Total assets | | | 170,233 | | | 20,690 | | | 6,854 | | | (3,157 | ) | | 194,620 | |
Long-lived assets(4) | | | 123,910 | | | 509 | | | 3,234 | | | -- | | | 127,653 | |
| | | | | | | | | | | | | | | | | |
2002 | | | | | | | | | | | | | | | | |
| Net sales | | $ | 223,675 | | $ | 36,162 | | | -- | | $ | (24,690 | ) | $ | 235,147 | |
| Operating income | | | 31,635 | | | 1,323 | | | (1,925 | ) | | (1,302 | ) | | 29,731 | |
| Depreciation expense | | | 4,077 | | | 163 | | | (273 | ) | | -- | | | 3,967 | |
| Net capital expenditures | | | 647 | | | 265 | | | 175 | | | -- | | | 1,087 | |
| Total assets | | | 178,775 | | | 22,709 | | | 11,009 | | | (4,531 | ) | | 207,962 | |
Long-lived assets(4) | | | 126,729 | | | 459 | | | 2,983 | | | -- | | | 130,171 | |
| | | | | | | | | | | | | | | | | |
| (1) | Non-operating expenses are not allocated to the operating segments. Non-operating expenses consist of interest expense and deferred financing amortization, gains and losses on acquisition financing derivatives, and other income and expenses items outside of income from operations. |
| (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 $2,184, $2,379 and $2,611 in 2004, 2003 and 2002, respectively. |
Net sales by each major geographic region are as follows:
| | | | 2004 | | | 2003 | | | 2002 | |
| | | | (dollars in thousands) | |
| | | | | |
| United States and Canada | | $ | 219,377 | | $ | 193,610 | | $ | 191,400 | |
| | | | | | | | | | | |
| Asia | | | 20,846 | | | 20,319 | | | 15,830 | |
| Europe and Middle East | | | 22,808 | | | 21,842 | | | 20,310 | |
| Latin America | | | 8,084 | | | 6,429 | | | 7,607 | |
| Total international | | | 51,738 | | | 48,590 | | | 43,747 | |
| | | | | | | | | |
| | | $ | 271,115 | | $ | 242,200 | | $ | 235,147 | |
(12) RELATED PARTY TRANSACTIONS
On November 8, 1999 the company made a loan to its Chief Executive Officer, in the amount of $434,250. The loan was repayable with interest of 6.08% on February 28, 2003 and was established in conjunction with 100,000 shares of common stock purchased at the market price by the company on behalf of the officer. In accordance with a special incentive agreement with the officer, the loan and the related interest was to be forgiven by the company if certain targets of Earnings Before Taxes for fiscal years 2000, 2001 and 2002 were achieved. As of December 28, 2002, the entire loan had been forgiven as the financial targets established by the special incentive agreement had been achieved. One-third of the principal loan amount had been forgiven in fiscal 2000 and the remaining two-thirds was forgiven in fiscal 2002.
A second loan to the company’s Chief Executive Officer was made on March 1, 2001 in the amount of $300,000 and was repayable with interest of 6.0% on February 24, 2004. This loan was established in conjunction with the company's commitment to transfer 50,000 shares of common stock from treasury to the officer at $6.00 per share. The market price at the close of business on March 1, 2001 was $5.94 per share. In accordance with a special incentive agreement with the officer, the loan and the related interest were to be forgiven by the company if certain targets of Earnings Before Taxes for fiscal years 2001, 2002, and 2003 were achieved. As of January 3, 2004, the entire loan had been forgiven as the financial targets established by the special incentive agreement had been achieved. One-third of the principal loan amount had been forgiven in fiscal 2002 and the remaining two-thirds was forgiven in fiscal 2003. Amounts forgiven were recorded in general and administrative expense.
(13) EMPLOYEE RETIREMENT PLANS
(a) Pension Plans
The company maintains a non-contributory defined benefit plan for its union employees at the Elgin, Illinois facility. Benefits are determined based upon retirement age and years of service with the company. This defined benefit plan was frozen on April 30, 2002 and no further benefits accrue to the participants beyond this date. Plan participants will receive or continue to receive payments for benefits earned on or prior to April 30, 2002 upon reaching retirement age. The employees participating in the defined benefit plan were enrolled in a newly established 401K savings plan on July 1, 2002, further described below.
The company also maintains a retirement benefit agreement with its Chairman. The retirement benefits are based upon a percentage of the Chairman’s final base salary. Additionally, the company maintains a retirement plan for non-employee directors. The plan provides for an annual benefit upon a change in control of the company or 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.
A summary of the plans’ benefit obligations, funded status, and net balance sheet position is as follows:
| | | (dollars in thousands) | |
| | | | | | | | | 2003
Director
Plans | |
| Change in Benefit Obligation: | | | | | | | | | |
| Benefit obligation - beginning of year | | $ | 4,034 | | $ | 5,809 | | $ | 3,502 | | $ | 4,129 | |
| | | | | | | | | | | | | | |
| Service cost | | | -- | | | 341 | | | -- | | | 397 | |
| Interest on benefit obligations | | | 243 | | | 375 | | | 249 | | | 312 | |
| Return on assets | | | (215 | ) | | -- | | | (264 | ) | | -- | |
| Net amortization and deferral | | | 132 | | | 648 | | | 106 | | | 406 | |
| Pension settlement | | | -- | | | 1,947 | | | -- | | | -- | |
| Net pension expense | | | 160 | | | 3,311 | | | 91 | | | 1,115 | |
| Net benefit payments | | | (190 | ) | | (7 | ) | | (203 | ) | | (7 | ) |
| Actuarial (gain) loss | | | 157 | | | (832 | ) | | 644 | | | 572 | |
| Benefit obligation - end of year | | $ | 4,161 | | $ | 8,281 | | $ | 4,034 | | $ | 5,809 | |
| Change in Plan Assets: | | | | | | | | | | | | | |
| Plan assets at fair value - beginning ofyear | | | 3,346 | | | 2,420 | | | 3,078 | | | 1,214 | |
| Company contributions | | | 216 | | | 1,580 | | | 280 | | | 1,007 | |
| Investment gain | | | 111 | | | 71 | | | 191 | | | 310 | |
| Benefit payments and plan expenses | | | (190 | ) | | (106 | ) | | (203 | ) | | (111 | ) |
| Plan assets at fair value - end of year | | $ | 3,483 | | $ | 3,965 | | $ | 3,346 | | $ | 2,420 | |
| Funded Status: | | | | | | | | | | | | | |
| Unfunded benefit obligation | | $ | (678 | ) | $ | (4,316 | ) | $ | (688 | ) | $ | (3,389 | ) |
| Unrecognized net loss | | | 1,674 | | | -- | | | 1,628 | | | 832 | |
| Net amount recognized in the balancesheet at year-end | | | 996 | | | (4,316 | ) | | 940 | | | (2,557 | ) |
| | | | | | | | | | | | | | |
| Amount recognized in balance sheet: | | | | | | | | | | | | | |
| Current liabilities | | $ | -- | | $ | (3,637 | ) | $ | -- | | $ | -- | |
| Non-current liabilities | | | (678 | ) | | (679 | ) | | (688 | ) | | (3,389 | ) |
| Accumulated othercomprehensive income | | | 1,674 | | | -- | | | 1,628 | | | 832 | |
| Net amount recognized | | $ | 996 | | $ | (4,316 | ) | $ | 940 | | $ | (2,557 | ) |
| | | | | | | | | | | | | | |
| Salary growth rate | | | n/a | | | 3.50 | % | | n/a | | | 3.50 | % |
| Assumed discount rate | | | 6.00 | % | | 6.25 | % | | 6.25 | % | | 6.25 | % |
| Expected return on assets | | | 6.50 | % | | n/a | | | 8.50 | % | | n/a | |
The company has engaged a non-affiliated third party professional investment advisor to assist the company develop investment policy and establish asset allocations. The company's overall investment objective is to provide a return, that along with company contributions, is expected to meet future benefit payments. Investment policy is established in consideration of anticipated future timing of benefit payments under the plans. The anticipated duration of the investment and the potential for investment losses during that period are carefully weighed against the potential for appreciation when making investment decisions. The company routinely monitors the performance of investments made under the plans and reviews investment policy in consideration of changes made to the plans or expected changes in the timing of future benefit payments.
Plan assets were invested in the following classes of securities (none of which were securities of the company):
| | | 2004 Union Plan | | 2004 Director Plans | | 2003 Union Plan | | 2003 Director Plans | |
| | | | | | | | | | |
| Equity | | | 28 | % | | 7 | % | | 20 | % | | 38 | % |
| Fixed income | | | 59 | | | 93 | | | 56 | | | 62 | |
| Real estate | | | 13 | | | -- | | | 24 | | | -- | |
| | | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
The expected return on assets is developed in consideration of the anticipated duration of investment period for assets held by the plan, the allocation of assets in the plan, and the historical returns for plan assets.
Estimated future benefit payments under the plans are as follows (dollars in thousands):
| | | Union Plan | | Director Plans | |
| 2005 | | $ | 276 | | $ | 7,749 | |
| 2006 | | | 281 | | | -- | |
| 2007 | | | 278 | | | 20 | |
| 2008 | | | 273 | | | 20 | |
| 2009 | | | 257 | | | 20 | |
| 2010 thru 2014 | | | 1,349 | | | 300 | |
| | | | | | | | |
In conjunction with the retirement of the chairman of the board in December 2004, the company entered into an agreement to settle obligations relating to the chairman's pension. As part of this settlement, the company agreed to make payments aggregating to $7.6 million, which will be funded in part by existing plan assets, in the first quarter of 2005 to fully settle all pension obligations due to the former chairman. Contributions to the directors' plan beyond the funding of the chairman pension settlement are based upon actual retirement benefits for directors as they retire. These funding requirements are expected to amount to $0.2 million in 2005.
Contributions under the union plan are funded in accordance with provisions of The Employee Retirement Income Security Act of 1974. Expected contributions to be made in 2005 are $0.3 million.
(b) 401K Savings Plans
The company maintains a defined contribution plan for all employees in the United States other than union employees at the Elgin, Illinois facility, which participates in a separate plan. The discretionary profit sharing contributions approved relating to the plan years ending 2004, 2003, and 2002 for the profit sharing and 401K plan amounted to $800,000, $750,000 and $600,000, respectively.
In conjunction with the freeze on future benefits under the defined benefit plan for union employees at the Elgin, Illinois facility, the company established a 401K savings plan for this group of employees. The company makes contributions to this plan in accordance with its agreement with the union. These contributions amounted to $221,400 in 2004, $157,400 in 2003 and $82,500 in 2002.
(14) QUARTERLY DATA (UNAUDITED)
| | | 1st | | 2nd | | 3rd | | 4th | | Total Year | |
| | | (dollars in thousands, except per share data) | |
| | | | | | | | | | | | |
2004 | | | | | | | | | | | |
| Net sales | | $ | 62,463 | | $ | 72,913 | | $ | 70,620 | | $ | 65,119 | | $ | 271,115 | |
| Gross profit | | | 23,176 | | | 28,793 | | | 26,394 | | | 24,265 | | | 102,628 | |
| Income from operations | | | 10,104 | | | 14,653 | | | 12,582 | | | 920 | | | 38,259 | |
| Net earnings (loss) | | $ | 5,591 | | $ | 8,289 | | $ | 10,368 | | $ | (660 | ) | $ | 23,588 | |
| | | | | | | | | | | | | | | | | |
| Basic earnings (loss) per share (1) | | $ | 0.61 | | $ | 0.90 | | $ | 1.12 | | $ | (0.07 | ) | $ | 2.56 | |
| | | | | | | | | | | | | | | | | |
| Diluted earnings (loss) per share (1) | | $ | 0.56 | | $ | 0.82 | | $ | 1.03 | | $ | (0.07 | ) | $ | 2.38 | |
| | | | | | | | | | | | | | | | | |
2003 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net sales | | $ | 56,393 | | $ | 65,408 | | $ | 60,894 | | $ | 59,505 | | $ | 242,200 | |
| Gross profit (2) | | | 19,052 | | | 22,650 | | | 22,633 | | | 21,518 | | | 85,853 | |
| Income from operations (2) | | | 6,407 | | | 9,644 | | | 9,986 | | | 8,979 | | | 35,016 | |
| Net earnings (2) | | $ | 2,609 | | $ | 4,597 | | $ | 5,651 | | $ | 5,841 | | $ | 18,698 | |
| | | | | | | | | | | | | | | | | |
| Basic earnings per share (1) (2) | | $ | 0.29 | | $ | 0.51 | | $ | 0.63 | | $ | 0.64 | | $ | 2.06 | |
| | | | | | | | | | | | | | | | | |
| Diluted earnings per share (1) (2) | | $ | 0.28 | | $ | 0.49 | | $ | 0.59 | | $ | 0.60 | | $ | 1.99 | |
| (1) | Sum of quarters may not equal the total for the year due to changes in the number of shares outstanding during the year. |
| (2) | The 2003 fourth quarter included an adjustment to the LIFO provision for inventory, which increased pretaxearnings by $0.6 million and net earnings by $0.4 million, or $0.04 per share. |
(15) SUBSEQUENT EVENT
On January 7, 2005, subsequent to the end of fiscal year 2004, the company acquired the assets of Nu-Vu Foodservice Systems for $12.0 million in cash. Nu-Vu Foodservice Systems is a manufacturer of baking ovens and proofers with principal operations located in Menominee, Michigan. The acquisition had no effect on the 2004 financial statements.
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FISCAL YEARS ENDED JANUARY 3, 2004, DECEMBER 28, 2002
AND DECEMBER 29, 2001
| | | Balance Beginning Of Period | | Additions Charged Expense | | Write-Offs During the the Period | | Balance At End Of Period | |
| Allowance fordoubtful accounts; deducted fromaccounts receivable on thebalance sheets- | | | | | | | | | |
| | | | | | | | | | |
| 2002 | | $ | 2,913,000 | | $ | 1,012,000 | | $ | (431,000 | ) | $ | 3,494,000 | |
| | | | | | | | | | | | | | |
| 2003 | | $ | 3,494,000 | | $ | 615,000 | | $ | (963,000 | ) | $ | 3,146,000 | |
| | | | | | | | | | | | | | |
| 2004 | | $ | 3,146,000 | | $ | 514,000 | | $ | (278,000 | ) | $ | 3,382,000 | |
Item 9. Changes in and Disagreements with Accountants onAccounting and Financial Disclosure
None
Item 9A. Controls and Procedures
The company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the company's management, including its Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.
As of January 1, 2005, the company carried out an evaluation, under the supervision and with the participation of the company's management, including the company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the company's disclosure controls and procedures. Based on the foregoing, the company's Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of this period.
During the year ended January 1, 2005 there have been no significant changes in the company's internal controls over financial reporting or in other factors that could significantly affect the internal controls subsequent to the date the company completed its evaluation.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting a defined in Rules 13a-15(f) and 15d -15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
| (i) | pertain to the maintenance of records that in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets. |
| (ii) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of our management and directors; and |
| (iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the framework inInternal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of January 1, 2005. Our management's assessment of the effectiveness of our internal control over financial reporting as of January 1, 2005 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.
The Middleby Corporation
March 14, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of The Middleby Corporation:
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that The Middleby Corporation and Subsidiaries (the “Company”) maintained effective internal control over financial reporting as of January 1, 2005, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of January 1, 2005, is fairly stated, in all material respects, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 1, 2005, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended January 1, 2005 of the Company and our report dated March 14, 2005 expressed an unqualified opinion on those financial statements and financial statement schedule.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 14, 2005
Item 9B. Other Information
None.
PART III
Pursuant to General Instruction G (3), the information called for by Part III (Item 10 (Directors and Executive Officers of the Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management), Item 13 (Certain Relationships and Related Transactions) and Item 14 (Principal Accountingt Fees and Services)), is incorporated herein by reference from the registrant’s definitive proxy statement filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K.
PART IV
Item 15. Exhibits, Financial Statement Schedules
| (a) | 1. | | Financial statements. |
| | | | |
| | | | The financial statements listed on Page 37 are filed as part of this Form 10-K. |
| | | | |
| | 3. | Exhibits. | |
| | | | |
| | | 2.1 | Stock Purchase Agreement, dated August 30, 2001, between The Middleby Corporation and Maytag Corporation, incorporated by reference to the company's Form 10-Q Exhibit 2.1, for the fiscal period ended September 29, 2001, filed on November 13, 2001. |
| | | | |
| | | 2.2 | Amendment No. 1 to Stock Purchase Agreement, dated December 21, 2001, between The Middleby Corporation and Maytag Corporation, incorporated by reference to the company's Form 8-K Exhibit 2.2 dated December 21, 2001, filed on January 7, 2002. |
| | | | |
| | | 2.3 | Amendment No. 2 to Stock Purchase Agreement, dated December 23, 2002 between The Middleby Corporation and Maytag Corporation, incorporated by reference to the company's Form 8-K Exhibit 2.1 dated December 23, 2002, filed on January 7, 2003. |
| | | | |
| | | 3.1 | 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. |
| | | | |
| | | 3.2 | 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. |
| | | | |
| | | 4.1 | 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. |
| | | | |
| | | 4.2 | Subordinated Promissory Note Agreement, dated December 21, 2001, between The Middleby Corporation and Maytag Corporation incorporated by reference to the company's Form 8-K, Exhibit 4.1 filed on January 7, 2002. |
| | | | |
| | | 4.3 | Subordinated Promissory Note Agreement, dated December 21, 2001, between The Middleby Corporation and Maytag Corporation incorporated by reference to the company's Form 8-K, Exhibit 4.2 filed on January 7, 2002. |
| | | | |
| | | 4.4 | Credit Agreement, dated December 21, 2001, between The Middleby Corporation, Middleby Marshall Inc., Fleet National Bank and Bank of America incorporated by reference to the company's Form 8-K, Exhibit 4.3 filed on January 7, 2002. |
| | | | |
| | | 4.5 | Deed of Charge and Memorandum of Deposit, dated December 21, 2001, between G.S. Blodgett Corporation and Bank of America incorporated by reference to the company's Form 8-K, Exhibit 4.4 filed on January 7, 2002. |
| | | | |
| | | 4.6 | Subsidiary Guaranty, dated December 21, 2001, between The Middleby Corporation, Middleby Marshall Inc. and Bank of America incorporated by reference to the company's Form 8-K, Exhibit 4.5 filed on January 7, 2002. |
| | | | |
| | | 4.7 | Security Agreement, dated December 21, 2001, between The Middleby Corporation, Middleby Marshall Inc. and its subsidiaries and Bank of America incorporated by reference to the company's Form 8-K, Exhibit 4.6 filed on January 7, 2002. |
| | | | |
| | | 4.8 | U.S. Pledge Agreement, dated December 21, 2001, between The Middleby Corporation, Middleby Marshall Inc. and its subsidiaries and Bank of America incorporated by reference to the company's Form 8-K, Exhibit 4.7 filed on January 7, 2002. |
| | | | |
| | | 4.9 | Note and Equity Purchase Agreement, dated December 21, 2001, between The Middleby Corporation, Middleby Marshall Inc. and American Capital Financial Services, Inc incorporated by reference to the company's Form 8-K/A Amendment No. 1, Exhibit 4.8 filed on January 31, 2002. |
| | | | |
| | | 4.10 | Warrant Agreement, dated December 21, 2001, between The Middleby Corporation, Middleby Marshall Inc. and American Capital Financial Services, Inc incorporated by reference to the company's Form 8-K/A Amendment No. 1, Exhibit 4.9 filed on January 31, 2002. |
| | | | |
| | | 4.11 | Conditional Warrant Agreement, dated December 21, 2001, between The Middleby Corporation, Middleby Marshall Inc. and American Capital Financial Services, Inc incorporated by reference to the company's Form 8-K/A Amendment No. 1, Exhibit 4.10 filed on January 7, 2002. |
| | | | |
| | | 4.12 | Amended and Restated Credit Agreement, dated December 23, 2002, between The Middleby Corporation, Middleby Marshall Inc., LaSalle Bank National Association, Wells Fargo Bank, Inc. and Bank of America N.A., incorporated by reference to the company's Form 8-K Exhibit 2.1 dated December 23, 2002, filed on January 7, 2003. |
| | | | |
| | | 4.13 | Note Prepayment and Warrant Purchase Agreement, dated December 23, 2002, between The Middleby Corporation, Middleby Marshall, Inc. and American Capital Financial Services, Inc., incorporated by reference to the company's Form 8-K Exhibit 2.1 dated December 23, 2002, filed on January 7, 2003. |
| | | | |
| | | 4.14 | Consent and Waiver to Subordinated Promissory Note, dated December 23, 2002, between The Middleby Corporation and Maytag Corporation, incorporated by reference to the company's Form 8-K Exhibit 2.1 dated December 23, 2002, filed on January 7, 2003. |
| | | | |
| | | 4.15 | First Amendment to the Amended and Restated Credit Agreement, dated October 31, 2003, between The Middleby Corporation, Middleby Marshall, Inc., LaSalle Bank National Association, Wells Fargo Bank, Inc. and Bank of America N.A., incorporated by reference to the company’s Form 10-Q, Exhibit 4.1, for the fiscal period ended September 27, 2003, filed on November 7, 2003. |
| | | | |
| | | 4.16 | Restated and Substituted Promissory Note, dated October 23, 2003, between The Middleby Corporation and Maytag Corporation, incorporated by reference to the company’s Form 10-Q, Exhibit 4.2, for the fiscal period ended September 27, 2003, filed on November 7, 2003. |
| | | | |
| | | 4.17 | Second Amended and Restated Credit Agreement, dated May 19, 2004, between The Middleby Corporation, Middleby Marshall, Inc., LaSalle Bank National Association, Wells Fargo Bank, Inc., Bank of America N.A. and Banc of America Securities, LLC, incorporated by reference to the company's Form 8-K Exhibit 4.1, dated May 19, 2004, filed on May 21, 2004. |
| | | | |
| | | 4.18 | Commercial Promissory Note between The Middleby Corporation and Pizzagalli Properties, LLC, dated November 10, 2004. |
| | | | |
| | | 4.19 | Third Amended and Restated Credit Agreement, dated December 23, 2004, between The Middleby Corporation, Middleby Marshall, Inc., LaSalle Bank National Association, Wells Fargo Bank, Inc. and Bank of America N.A., incorporated by reference to the company's Form 8-K Exhibit 10.2, dated December 23, 2004, filed on December 28, 2004. |
| | | | |
| | | 10.1 * | 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; |
| | | | |
| | | 10.2 * | Amendment No. 1 to Amended and Restated Employment Agreement of William F. Whitman, Jr., incorporated by reference to the company's Form 8-K, Exhibit 10(a), filed on August 21, 1998. |
| | | | |
| | | 10.3 * | 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; |
| | | | |
| | | 10.4 * | Amendment No. 1 to Amended and Restated Employment Agreement of David P. Riley incorporated by reference to the company's Form 8-K, Exhibit 10(b), filed on August 21, 1998. |
| | | | |
| | | 10.5 * | Retirement Plan for 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; |
| | | | |
| | | 10.6 * | 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; |
| | | | |
| | | 10.7 * | 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; |
| | | | |
| | | 10.8 * | 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; |
| | | | |
| | | 10.9 | Grantor trust agreement dated as of April 1, 1999 among the company and Wachovia Bank, N.A, incorporated by reference to the company's Form 10-K, Exhibit 10.15, for the fiscal year ended January 1, 2000 filed on March 31, 2000. |
| | | | |
| | | 10.10 * | Amendment No. 2 to Amended and Restated Employment Agreement of David P. Riley, dated December 1, 2000, incorporated by reference to the company's Form 10-K, Exhibit 10(C), for the fiscal year ended December 30, 2000 filed on March 30, 2001. |
| | | | |
| | | 10.11 * | Loan arrangement between the company and Selim A. Bassoul, dated November 19, 1999, incorporated by reference to the company's Form 10-K, Exhibit 4(E), for the fiscal year ended December 30, 2000 filed on March 30, 2001. |
| | | | |
| | | 10.12 * | Amendment No. 2 to Amended and Restated Employment Agreement of William F. Whitman, dated January 1, 2001, incorporated by reference to the company's Form 10-K, Exhibit 10(D), for the fiscal year ended December 30, 2000 filed on March 30, 2001. |
| | | | |
| | | 10.13 * | Amendment No. 3 to Amended and Restated Employment Agreement of David P. Riley, dated June 20, 2001, incorporated by reference to the company's Form 10-K, Exhibit 10-16, for the fiscal year ended December 29, 2001 filed on March 29, 2002. |
| | | | |
| | | 10.14 * | Amendment No. 3 to Amended and Restated Employment Agreement of William F. Whitman, dated April 16, 2002, incorporated by reference to the company's Form 10-Q, Exhibit 10(A), for the fiscal period ended June 29, 2002 filed on August 19, 2002. |
| | | | |
| | | 10.15 * | Employment Agreement of Selim A. Bassoul, dated May 16, 2002, incorporated by reference to the company's Form 10-Q, Exhibit 10(C), for the fiscal period ended June 29, 2002, filed on August 19, 2002. |
| | | | |
| | | 10.16 * | Amendment No. 4 to Amended and Restated Employment Agreement of William F. Whitman, Jr., dated January 2, 2003, incorporated by reference to the company's Form 10-Q, Exhibit 10(A), for the fiscal period ended June 28, 2003, filed on August 8, 2003. |
| | | | |
| | | 10.17 * | Amendment No. 1 to Employment Agreement of Selim A. Bassoul, dated July 3, 2003, incorporated by reference to the company’s form 10-Q, Exhibit 10(B) for the fiscal period ended June 28, 2003, filed on August 8, 2003. |
| | | | |
| | | 10.18 * | Amendment No. 5 to Amended and Restated Employment Agreement of William F. Whitman, Jr., dated December 15, 2003, incorporated by reference to the company’s Form 10-K, Exhibit 10.18, for the fiscal year ended January 3, 2004, filed on April 2, 2004. |
| | | | |
| | | 10.19 * | Amendment No. 2 to Employment Agreement of Selim A. Bassoul, dated December 15, 2003, incorporated by reference to the company’s Form 10-K, Exhibit 10.19, for the fiscal year ended January 3, 2004, filed on April 2, 2004. |
| | | | |
| | | 10.20 * | Severance agreement of David B. Baker, dated March 1, 2004, incorporated by reference to the company’s Form 10-K, Exhibit 10.20, for the fiscal year ended January 3, 2004, filed on April 2, 2004. |
| | | | |
| | | 10.21 * | Severance agreement of Timothy J. FitzGerald, dated March 1, 2004, incorporated by reference to the company’s Form 10-K, Exhibit 10.21, for the fiscal year ended January 3, 2004, filed on April 2, 2004. |
| | | | |
| | | 10.22 * | Amended 1998 Stock Incentive Plan, dated December 15, 2003, incorporated by reference to the company’s Form 10-K, Exhibit 10.21, for the fiscal year ended January 3, 2004, filed on April 2, 2004. |
| | | | |
| | | 10.23 * | Amendment No. 3 to Employment Agreement of Selim A. Bassoul, dated May 7, 2004, incorporated by reference to the company's Form 10-Q Exhibit 10(A), for the firscal period ended July 3, 2004, filed on August 17, 2004. |
| | | | |
| | | 10.24 * | Amendment No. 6 to Employment Agreement of William F. Whitman, dated September 13, 2004, incorporated by reference to the company's Form 8-K Exhibit 10, dated September 13, 2004, filed on September 17, 2004. |
| | | | |
| | | 10.25 * | Retention Agreement of Timothy J. FitzGerald, dated July 22, 2004, incorporated by reference to the company's Form 10-Q Exhibit 10.2, for the fiscal period ended October 2, 2004, filed on November 16, 2004. |
| | | | |
| | | 10.26 | Lease Termination Agreement between Cloverleaf Properties, Inc., Blodgett Holdings, Inc., The Middleby Corporation and Pizzagalli Properties, LLC, dated November 10, 2004. |
| | | | |
| | | 10.27 | Certificate of Lease Termination by Pizzagalli Properties, LLC and Cloverleaf Properties, Inc., dated November 10, 2004. |
| | | | |
| | | 10.28 | Stock Purchase Agreement between The Middleby Corporation, William F. Whitman Jr., Barbara K. Whitman, W. Fifield Whitman III, Laura B. Whitman and Barbara K. Whitman Irrevocable Trust, dated December 23, 2004, incorporated by reference to the company's Form 8-K Exhibit 10.1, dated December 23, 2004, filed on December 28, 2004. |
| | | | |
| | | 10.29 * | Employment Agreement of Selim A. Bassoul dated December 23, 2004, incorporated by reference to the company's Form 8-K Exhibit 10.1, dated December 23, 2004, filed on December 28, 2004. |
| | | | |
| | | 21 | List of subsidiaries; |
| | | | |
| | | 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. |
| | | | |
| | | 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. |
| | | | |
| | | 32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | | |
| | | 32.2 | Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| | | * | Designates management contract or compensation plan. |
| | | | |
| (c) | See the financial statement schedule included under Item 8. |
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 17th of March 2005.
| | | |
| | THE MIDDLEBY CORPORATION |
|
|
|
| By: | /s/ Timothy J. FitzGerald |
| |
Timothy J. FitzGerald |
| | Vice President,Chief Financial 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 17, 2005.
Signatures | | Title |
| | | |
| PRINCIPAL EXECUTIVE OFFICER | | |
| | | |
| | | |
| /s/ Selim A. Bassoul | | Chairman of the Board, President, |
| Selim A. Bassoul | | Chief Executive Officer and Director |
| | | |
| PRINCIPAL FINANCIAL AND | | |
| ACCOUNTING OFFICER | | |
| | | |
| | | |
| /s/ Timothy J. FitzGerald | | Vice President, Chief Financial |
| Timothy J. FitzGerald | | Officer |
| | | |
| DIRECTORS | | |
| | | |
| | | |
| /s/ A. Don Lummus | | Director |
| A. Don Lummus | | |
| | | |
| | | |
| /s/ John R. Miller, III | | Director |
| John R. Miller, III | | |
| | | |
| | | |
| /s/ Philip G. Putnam | | Director |
| Philip G. Putnam | | |
| | | |
| | | |
| /s/ David P. Riley | | Director |
| David P. Riley | | |
| | | |
| | | |
| /s/ Sabin C. Streeter | | Director |
| Sabin C. Streeter | | |
| | | |
| | | |
| /s/ Robert L. Yohe | | Director |
| Robert L. Yohe | | |
