SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
July 3, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-10182
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Scotsman Industries, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 36-3635892
------------------------ -----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
775 Corporate Woods Parkway, Vernon Hills, Illinois 60061
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (708) 215-4500
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes x No
----- -----
At August 10, 1994 there were 8,265,038 shares of registrant's
--------------- ---------
common stock outstanding.<PAGE>
SCOTSMAN INDUSTRIES, INC.
FORM 10-Q
July 3, 1994
INDEX
PART I--FINANCIAL INFORMATION:
Item 1. FINANCIAL STATEMENTS-
HISTORICAL-
Condensed Statement of Income
Condensed Balance Sheet
Condensed Statement of Cash Flows
Notes to Condensed Financial Statements
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
PART II--OTHER INFORMATION:
Item 1. LEGAL PROCEEDINGS
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURE
2<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements
SCOTSMAN INDUSTRIES, INC.
CONDENSED STATEMENT OF INCOME
(Unaudited)
(In thousands, except per share amount)
<TABLE>
For the Three
Months Ended
---------------------
July 3, July 4,
1994 1993
---------------------
<C> <S> <S>
Net sales $75,799 $48,686
Cost of sales 52,916 33,707
-------- --------
Gross profit $22,883 $14,979
Selling and administrative expenses 12,700 8,118
-------- --------
Income from operations $10,183 $ 6,861
Interest expense, net 1,399 1,156
-------- --------
Income before income taxes $ 8,784 $ 5,705
Income taxes 3,912 2,563
-------- --------
Net income $ 4,872 $ 3,142
Preferred stock dividends 214 -
-------- --------
Net income available to
common shareholders $ 4,658 $ 3,142
======== ========
Net income per share <F1>:
Primary $ 0.58 $ 0.45
======== ========
Fully Diluted $ 0.51 $ 0.45
======== ========
<FN>
<F1> Primary earnings per common share are computed by dividing net income available to common shareholders by the
weighted average number of common shares and common stock equivalents outstanding during each period:
8,010,699 and 6,999,224 for the three months ended July 3, 1994 and July 4, 1993, respectively. The
computation for the three months ended July 3, 1994 includes the dilutive impact of common stock options
outstanding. Prior year calculations do not include the dilutive impact of stock options as the impact was
immaterial.
The calculation of fully diluted net income per share is based on net income before preferred stock
dividends. The number of shares assumes the conversion of convertible preferred stock from the date of issue
and also includes the dilutive impact, as if issuance had occurred on the acquisition date, of contingent
shares that will be distributed to the sellers of The Delfield Company and Whitlenge Drink Equipment Limited,
if those businesses achieve a combined specified level of earnings during fiscal year 1994. The total number
of shares used in the fully diluted earnings per share calculation for the three months ended July 3, 1994
was 9,601,544. Excluding the impact of the contingent shares (which have not as yet been earned) from the
3<PAGE>
calculation of fully diluted net income per share would have resulted in net income per share of $0.53 for
the three months ended July 3, 1994.
</TABLE>
See notes to unaudited condensed financial statements.
4<PAGE>
SCOTSMAN INDUSTRIES, INC.
CONDENSED STATEMENT OF INCOME
(Unaudited)
(In thousands, except per share amount)
<TABLE>
For the Six
Months Ended
---------------------
July 3, July 4,
1994 1993
-------- --------
<C> <S> <S>
Net sales $113,785 $86,582
Cost of sales 79,716 59,965
-------- --------
Gross profit $34,069 $26,617
Selling and administrative expenses 20,176 16,020
-------- --------
Income from operations $13,893 $10,597
Interest expense, net 2,306 2,259
-------- --------
Income before income taxes $11,587 $ 8,338
Income taxes 5,171 3,748
-------- --------
Net income before cumulative
effect of accounting changes $ 6,416 $ 4,590
Cumulative effect of
accounting changes <F1>
(See Note 4) - 29
-------- --------
Net income $ 6,416 $ 4,619
Preferred stock dividends 214 -
-------- --------
Net income available to
common shareholders $ 6,202 $ 4,619
======== ========
Net income per share before
cumulative effect of
accounting changes:
Primary $ 0.82 $ 0.66
======== ========
Fully diluted $ 0.77 $ 0.66
======== ========
Net income per share <F2>:
Primary $ 0.82 $ 0.66
======== ========
Fully diluted $ 0.77 $ 0.66
======== ========
<FN>
<F1> Changes in accounting principles related to post-retirement health care, post-employment expenses and income
taxes were implemented in the first quarter of 1993. The cumulative effect of these accounting changes was
as follows:
Unfavorable cumulative effect of accounting change due to post-retirement health care benefits (in
thousands) of $(1,660) pre-tax and $(1,029) after-tax.
5<PAGE>
Unfavorable cumulative effect of accounting change due to other post-employment benefits (in
thousands) of $(508) pre-tax and $(243) after-tax.
Favorable cumulative effect of accounting change relating to income taxes (in thousands) of $1,301.
<F2> Primary earnings per common share are computed by dividing net income available to common shareholders by the
weighted average number of common shares and common stock equivalents outstanding during each period:
7,573,392 and 6,995,331 for the six months ended July 3, 1994 and July 4, 1993, respectively. The
computation for the six months ended July 3, 1994 includes the dilutive impact of common stock options
outstanding. Prior year calculations do not include the dilutive impact of stock options as the impact was
immaterial.
The calculation of fully diluted net income per share is based on net income before preferred stock
dividends. The number of shares assumes the conversion of convertible preferred stock from the date of issue
and also includes the dilutive impact, as if issuance had occurred on the acquisition date, of contingent
shares that will be distributed to the sellers of The Delfield Company and Whitlenge Drink Equipment Limited,
if those businesses achieve a combined specified level of earnings during fiscal year 1994. The total number
of shares used in the fully diluted earnings per share calculation for the six months ended July 3, 1994 was
8,368,814. Excluding the impact of the contingent shares (which have not as yet been earned) from the
calculation of fully diluted net income per share would have resulted in net income per share of $0.79 for
the six months ended July 3, 1994.
</TABLE>
See notes to unaudited condensed financial statements.
6<PAGE>
SCOTSMAN INDUSTRIES, INC.
CONDENSED BALANCE SHEET
(In thousands)
<TABLE>
July 3, January 2,
A S S E T S 1994 1994
-------- --------
(unaudited)
<C>
CURRENT ASSETS: <S> <S>
Cash and temporary cash investments $ 9,662 $ 8,462
Trade accounts receivable, net of
reserves of $2,322 and $1,548 62,241 28,578
Inventories 43,998 25,693
Deferred income taxes 3,697 3,748
Other current assets 1,814 1,701
-------- --------
Total current assets $121,412 $ 68,182
PROPERTIES AND EQUIPMENT, net of
accumulated depreciation of $30,397
and $23,592 39,256 19,867
COST OF INVESTMENTS IN ACQUIRED BUSINESSES
IN EXCESS OF THE FAIR VALUE OF NET
TANGIBLE ASSETS AT ACQUISITION, net 84,902 11,320
OTHER NONCURRENT ASSETS 4,077 3,804
-------- --------
$249,647 $103,173
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities
of long-term debt and capitalized
lease obligations $ 3,010 $ 2,707
Trade accounts payable 27,646 11,743
Accrued income taxes 6,051 2,087
Accrued expenses 26,581 15,327
-------- --------
Total current liabilities $ 63,288 $ 31,864
======== ========
LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS 94,275 29,469
DEFERRED INCOME TAXES 2,150 435
OTHER NONCURRENT LIABILITIES 8,875 7,411
-------- --------
Total liabilities $168,588 $ 69,179
======== ========
SHAREHOLDERS' EQUITY:
Common stock, $.10 par value $ 846 $ 721
Preferred stock, $1.00 par value 2,000 -
Additional paid in capital 57,991 20,557
Retained earnings 26,675 20,855
Deferred compensation and
unrecognized pension cost (133) (54)
Foreign currency translation adjustments (4,977) (6,741)
7<PAGE>
Less: Common stock held in treasury (1,343) (1,344)
-------- --------
Total Shareholders' Equity $ 81,059 $ 33,994
-------- --------
$249,647 $103,173
======== ========
</TABLE>
See notes to unaudited condensed financial statements.
8<PAGE>
SCOTSMAN INDUSTRIES, INC.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
For the Six
Months Ended
-------------------
July 3, July 4,
1994 1993
-------- --------
<C>
CASH FLOW FROM OPERATING ACTIVITIES: <S> <S>
Net income $ 6,416 $ 4,619
Adjustments to reconcile net income to
net cash provided by operating
activities-
Depreciation and amortization 2,345 1,825
Change in assets and liabilities-
Trade accounts receivable (19,388) (13,928)
Inventories 950 (1,703)
Trade accounts payable and other
liabilities 9,998 7,839
Other, net (279) (353)
-------- --------
Net cash provided by (used in)
operating activities $ 42 (1,701)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in properties and equipment $ (1,567) $(1,361)
Proceeds from disposal of property,
plant and equipment 7 -
Acquisition of Delfield and Whitlenge (65,445) -
Acquisition of Simag - (5,546)
-------- --------
Net cash used in investing activities $(67,005) $ (6,907)
-------- --------
CASH FLOWS FROM FINANCING AND CAPITAL ACTIVITIES:
Principal payments under long-term debt
and capitalized lease obligations $(33,408) $ (60)
Dividends paid to shareholders (350) (350)
Issuance of long-term debt 63,0000 -
Issuance of common and preferred stock 39,000 -
Short-term debt, net (326) 5,952
-------- --------
Net cash provided by financing
activities $ 67,916 $ 5,542
-------- --------
Effect of exchange rate changes on cash
and temporary cash investments 247 (78)
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY CASH INVESTMENTS $ 1,200 $ (3,144)
CASH AND TEMPORARY CASH INVESTMENTS,
beginning of period 8,462 5,202
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS,
end of period $ 9,662 $ 2,058
======== ========
9<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,050 $ 2,238
======== ========
Income taxes $ 2,085 $ 1,714
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Investment in properties and equipment
through issuance of capitalized
lease obligations $ - $ -
======== ========
</TABLE>
See notes to unaudited condensed financial statements.
10<PAGE>
SCOTSMAN INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
The condensed consolidated financial statements include the accounts
of Scotsman Industries, Inc. and its consolidated subsidiaries (the
"Company").
As of January 4, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, 109, and 112. See Note 4 of Notes to
Unaudited Condensed Financial Statements. Except for the adoption of
the Accounting Standards implemented in the first quarter of 1993, all
accounting policies used in the preparation of the quarterly condensed
financial statements are consistent with the accounting policies
described in the notes to financial statements for the year ended
January 2, 1994, appearing in the Company's 1993 Annual Report to
Shareholders ("Annual Report"). In the opinion of management, the
interim financial statements reflect all adjustments which are
necessary for a fair presentation of the Company's financial position,
results of operations and cash flows for the interim periods
presented. The results for such interim periods are not necessarily
indicative of results for the full year. These financial statements
should be read in conjunction with the consolidated financial
statements and the accompanying notes to consolidated financial
statements included in the aforementioned Annual Report.
(2) INVENTORIES:
Inventories consisted of the following (in thousands):
<TABLE> July 3, January 2,
1994 1994
-------- --------
<C> <S> <S>
Finished goods $16,713 $14,755
Work-in-process 10,065 2,232
Raw materials 17,220 8,706
-------- --------
Total inventories $43,998 $25,693
======== ========
</TABLE>
The increase in total inventories from January 2, 1994 to July 3, 1994
was primarily attributable to the acquisition of The Delfield Company
("Delfield") and Whitlenge Drink Equipment Limited ("Whitlenge") on
April 29, 1994. Delfield and Whitlenge combined had $18.3 million of
inventories on April 29, 1994.
(3) CONTINGENCIES:
Pursuant to the Lead Contamination Control Act of 1988 (the "Act"),
the United States Environmental Protection Agency (the "EPA") has
published lists of water cooler models which may have water tanks with
interior surface linings containing more than 0.2 percent lead or
which are not "lead free" because a tin/lead solder was used to
11<PAGE>
connect internal parts of the cooler. These lists included certain
models of water coolers manufactured in the past by Halsey Taylor, a
former division of a Company subsidiary. The Act provides for the
issuance of a remedial action order by the United States Consumer
Product Safety Commission (the "CPSC") against the manufacturer of any
cooler listed by the EPA as containing a tank having an interior
surface lining with more than 0.2 percent lead.
On May 25, 1990, the CPSC accepted a Consent Order Agreement (the
"Consent Agreement") between the CPSC staff and the Company's
subsidiary under which the subsidiary agreed to conduct a
replacement/refund program for any Halsey Taylor tank-style water
coolers manufactured before April 1, 1979, which are water tested by
the cooler owner and shown to contribute more than twenty parts per
billion of lead to the water. The Consent Agreement resolves all
claims that the CPSC might have under the Act for issuance of an order
requiring the repair, replacement, or recall and refund of the
purchase price of water coolers manufactured by the Halsey Taylor
division before the date of the Consent Agreement.
The Company has made provisions to cover expenditures that it expects
to result from the Act. The actual cost to the Company will depend
upon, among other things, the number of cooler owners participating in
the replacement/refund program. Although no assurance can be given,
the Company believes, based upon its present expectations, that
expenditures resulting from the Act will not have a material adverse
effect on the Company's financial condition or its results of
operations. While the Company sold the assets of its Halsey Taylor
business in July, 1991, the purchaser of the Halsey Taylor business
did not assume any liability for this contingency.
On March 26, 1993, Remcor Products Company filed a lawsuit against the
Company's subsidiary, Scotsman Group, Inc. and Scotsman Group's
subsidiary, Booth, Inc., in the United States District Court for the
Northern District of Illinois. In its Complaint, Remcor alleged that
certain ice/drink dispensers made and sold by Scotsman Group and Booth
infringe a patent owned by Remcor relating to a cold plate system.
The Complaint seeks an unspecified amount of compensatory damages,
treble damages for willful infringement, prejudgment interest and
attorneys' fees, and also a permanent injunction from further alleged
acts of infringement.
12<PAGE>
(3) CONTINGENCIES: continued
During the course of discovery, Remcor has asserted that it has
suffered damages attributable to the Company's alleged infringement of
approximately $8.24 million during the period from 1989 through
year-end 1993, exclusive of treble damages, prejudgment interest and
attorneys' fees. This damages claim consists of claims for lost
profits and a royalty on certain sales.
The Company has denied that any of its products infringe Remcor's
patent and has asserted that the Remcor patent is invalid and
unenforceable. The Company also has strongly disputed Remcor's
contention that it is appropriate to apply a lost profits measure of
damages in this case and has contended that, even assuming
infringement, validity and enforceability of the patent, the amount of
compensatory damages for sales occurring through year-end 1993 would
be a royalty of approximately $500,000.
The Company is vigorously defending this lawsuit. Sales of ice/drink
dispensers accounted for less than 5 percent of the Company's
consolidated net sales in 1993. Although no assurances can be given,
after consultation with legal counsel, the Company does not believe
that this lawsuit will have a material adverse effect upon the
financial condition of the Company or its results of operations.
13<PAGE>
(4) CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES:
Effective January 4, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for
Post-retirement Benefits Other Than Pensions" ("SFAS 106") on the
immediate recognition basis. The new standard requires that the
expected cost of post-retirement benefits be charged to expense during
the years that the employees render service. Previously, the Company
recognized these costs on a pay-as-you-go basis.
The cumulative effect of this accounting change was to decrease income
for the three months ended April 4, 1993 by $1,660,000 ($1,029,000, or
$0.15 per share, after-tax), representing the amount of unfunded
obligation measured as of January 4, 1993. This accounting change is
not expected to materially impact future operating results and is not
expected to affect the Company's cash flows because the Company plans
to continue paying the cost of post-retirement benefits when incurred.
Other than the cumulative catch-up, the impact of this accounting
change on the first quarter of 1993 was not material.
Effective January 4, 1993, the Company changed its method of
accounting for income taxes as a result of the required adoption of
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). SFAS 109 requires a change in accounting
for income taxes to an asset and liability approach. The cumulative
effect of this change in 1993 was a favorable impact of $1,301,000, or
$.19 per share. The cumulative effect resulted primarily from the
recognition of the remainder of Italian tax benefits which resulted
from a prior year reorganization and adjustments for rate differences.
Effective January 4, 1993, the Company also adopted the Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Post-employment Benefits" ("SFAS 112"). The statement requires
accrual accounting for benefits provided to former or inactive
employees after employment but before retirement. The Company
previously accounted for a certain portion of these post-employment
benefits on a pay-as-you-go basis. The impact of the change to SFAS
112, was an unfavorable pre-tax amount of $508,000 ($243,000, net of
tax or $.03 per share). Other than the effect of the cumulative
catch-up, the impact on pre-tax income of this accounting change for
the first quarter of 1993 was not material.
14<PAGE>
(5) ACQUISITION OF SIMAG:
The Company's Frimont, S.p.A. subsidiary acquired on January 8, 1993,
the assets of Simag, an ice machine manufacturer located in Milan,
Italy. The method of accounting used for the combination was the
purchase method. The results of Simag are included in the income
statements for the Company beginning after January 8, 1993. Simag was
acquired for $5.5 million and no shares of stock were or will be
issued as a result of this acquisition. Goodwill of $4.4 million
resulting from the Simag acquisition will be amortized over 40 years
using the straight-line method. No contingent payments, options, or
commitments were specified in the acquisition agreement of Simag. Pro
forma information has not been presented due to lack of materiality.
(6) ACQUISITION OF DELFIELD AND WHITLENGE:
On April 29, 1994, the Company completed the acquisition of Delfield
and Whitlenge for approximately $69.3 million in a combination of
cash, preferred stock and common stock. The cash outlay was offset by
cash on the books of the acquired businesses at closing of $3.9
million. Scotsman shareholders approved the issuance of common and
preferred stock related to the acquisition at a special shareholders
meeting held on April 28, 1994.
The method of accounting used for the combination was the purchase
method. Allocation of the purchase price has not been finalized;
however, it is expected to be completed within twelve months of the
acquisition. The preliminary amount of goodwill allocated to Delfield
and Whitlenge was $73.6 million and will be amortized over 40 years
using the straight-line method. The acquisition price included: (i)
$30.4 million in cash, (ii) 1.2 million shares of common stock, (with
a market value of approximately $16.5 million) and (iii) 2.0 million
shares of Series A $0.62 cumulative convertible preferred stock, with
an aggregate liquidation preference of $22.5 million and which are
initially convertible into 1,525,400 shares of common stock. Also,
the acquisition price will include up to 667,000 shares of additional
common stock if the businesses of Delfield and Whitlenge meet a
specified level of earnings before interest, income taxes,
depreciation and amortization in fiscal year 1994. In addition,
Scotsman also assumed Delfield and Whitlenge debt of approximately $35
million. The results of Delfield and Whitlenge are included in the
income statements for the Company beginning after April 29, 1994.
Delfield, headquartered in Mt. Pleasant, Michigan, manufactures and
sells refrigerated foodservice equipment, primarily in the United
States. Whitlenge, located near Birmingham, England, manufactures and
sells drink dispensing equipment in Western Europe.
15<PAGE>
(6) ACQUISITION OF DELFIELD AND WHITLENGE - continued
The accompanying unaudited Condensed Pro Forma Income Statement
information is presented to illustrate the effect of certain events on
the historical Income Statement Information of Scotsman Industries,
Inc. (the "Company") as if the acquisitions of The Delfield Company
and Whitlenge Drink Equipment Limited had occurred as of the first day
of each period presented.
The pro forma information includes assumptions and estimates and is
not necessarily indicative of the results of operations of the Company
as they may be in the future or as they might have been had the
transaction occurred as discussed above.
The Condensed Pro Forma Income Statement Information should be read in
conjunction with the historical condensed financial statements and
notes thereto of the Company appearing elsewhere herein.
<TABLE>
PRO FORMA
Amounts in Thousands, except per share data
-------------------------------------------
Three Months Ended Six Months Ended
------------------ ------------------
July 3, July 4, July 3, July 4,
1994 1993 1994 1993
-------- -------- -------- --------
<C> <S> <S> <S> <S>
Net sales $84,405 $79,267 $151,297 $140,511
Net income before extraordinary item and
cumulative effect of accounting changes 4,905 4,687 7,337 6,193
Net income per share before extraordinary
item and cumulative effect of accounting
changes (A) $ 0.47 $ 0.45 $ 0.70 $ 0.60
Average number of common shares outstanding (B) 10,532 10,391 10,532 10,387
</TABLE>
16<PAGE>
(6) ACQUISITION OF DELFIELD AND WHITLENGE - continued
(A) Pro forma net income per share (EPS) includes the dilutive effect
of 667,000 additional shares of common stock which are
contingently issuable as additional purchase price if the
acquired entities achieve certain combined earnings levels in
fiscal year 1994. These earnings levels are based on earnings
before interest, taxes, depreciation and amortization ("EBITDA").
The minimum level of EBITDA required in fiscal year 1994 that
would require issuance of any of the 667,000 contingent shares is
higher than the combined results of Delfield and Whitlenge as
reported in 1993. If all contingent shares are issued,
approximately $10 million of additional purchase price and
approximately $250,000 of additional annual amortization expense
will result. Pro forma net income includes this estimated
additional goodwill amortization.
(B) Pro forma weighted average number of common shares outstanding
consists of the following: For all periods presented Scotsman
common stock and common stock equivalents before the impact of
the issuance of the additional 1.2 million shares in April of
1994, the additional 1.2 million shares of common stock which
were issued in April 1994, 1,525,400 common stock equivalents for
the convertible preferred shares outstanding, and 667,000
additional shares of common stock which are contingently issuable
as additional purchase price if the acquired entities achieve
certain combined earnings levels in fiscal year 1994. The
computation for the three months and six months ended July 3,
1994 includes the dilutive effect of stock options outstanding.
The computation for the three months and six months ended July 4,
1993 do not include the dilutive effect of stock options
outstanding as the dilutive effect is immaterial.
In order to provide the financing for the cash consideration paid in
connection with the acquisition, the refinancing of the majority of
approximately $35 million in existing indebtedness of Delfield and
Whitlenge, replacement letters of credit for approximately $9 million
of the Company's outstanding industrial revenue bonds, working capital
for the Company and its subsidiaries following the acquisition, and
transaction costs associated with the acquisition, the Company entered
into a Credit Agreement, dated as of April 29, 1994 (the "New Credit
Agreement"), with a group of lenders for which The First National Bank
of Chicago ("First Chicago") acted as agent. The New Credit Agreement
establishes a revolving credit facility in the amount of $90 million.
Under the terms of the New Credit Agreement, the revolving credit
facility will reduce by $7 million at the end of years one and two,
$12 million at the end of year three, and $5 million at the end of
each of years four and five, with the remaining balance due at the end
of year six.
17<PAGE>
(6) ACQUISITION OF DELFIELD AND WHITLENGE - continued
Borrowings under the New Credit Agreement will bear interest at a
floating rate based upon, at the Company's option, (i) the higher of
First Chicago's corporate base rate or the Federal funds rate plus 1/2
percent per annum, or (ii) the rate offered by First Chicago for
deposits in the relevant Eurocurrency, plus an applicable margin. The
applicable margin will vary between 0.75 percent and 1.125 percent per
annum, depending upon the Company's ratio of earnings before interest,
taxes and amortization to total interest.
The New Credit Agreement contains various financial covenants that,
among other things, require the Company to maintain, on a consolidated
basis, specified leverage, interest expense coverage and cash flow
coverage ratios, and a minimum adjusted consolidated tangible net
worth. The minimum adjusted consolidated tangible net worth covenant
has the effect of restricting the amount of the Company's dividends to
its shareholders to an amount equal to $2,000,000 plus 40 percent of
the sum of cumulative net income from May 2, 1994 forward and the net
cash proceeds from the issuance of equity securities after April 29,
1994. Under such covenant, $23.6 million of retained earnings was
restricted at July 3, 1994. The Company is precluded from paying
dividends to its shareholders if a default or an event which, but for
the lapse of time or the giving of notice, or both, would constitute a
default, under the New Credit Agreement has occurred and is continuing
or would occur after giving effect to the payment of such dividend.
Concurrently with the execution of the New Credit Agreement, the
Company entered into amended and restated note purchase agreements,
under which $20 million of its 11.43 percent Senior Notes due May 1,
1998 are outstanding, in order to, among other things, conform the
financial covenants in those agreements to the covenants contained in
the New Credit Agreement. The Company also terminated the $25 million
Revolving Credit Agreement which had been in place prior to the
acquisition. No amounts were outstanding under that agreement.
18<PAGE>
SCOTSMAN INDUSTRIES, INC.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Net sales for the second quarter of 1994 were $75.8 million, up $27.1
million or 55.7 percent from sales of $48.7 million for the second
quarter of 1993. Using constant foreign currency exchange rates, net
sales for the second quarter of 1994 were up $28.0 million or 58.7
percent compared to the second quarter of 1993.
Net income for the second quarter of 1994 was up $1.7 million or 55.1
percent compared to the second quarter of 1993.
The sales and net income increases during the second quarter were
primarily attributable to the acquisition of The Delfield Company and
Whitlenge Drink Equipment Limited on April 29, 1994. The Company's
sales were boosted by the combined sales contributions of The Delfield
Company ("Delfield") and Whitlenge Drink Equipment Limited
("Whitlenge") of $24.4 million which represented approximately 90
percent of the $27.1 million increase in net sales. Sales of Delfield
represented 28 percent of the Company's sales for the three months
ended July 3, 1994. On a pro forma basis, sales for Delfield would
have been $28.4 million and $24.7 million for the three months ended
July 3, 1994 and July 4, 1993, respectively. Sales of Whitlenge
represented 4 percent of the Company's sales for the three months
ended July 3, 1994. On a pro forma basis, sales of Whitlenge would
have been $4.7 million and $5.9 million for the three months ended
July 3, 1994 and July 4, 1993, respectively. Excluding the sales of
the newly acquired companies, Scotsman Industries, Inc.'s sales would
have increased $2.7 million or 5.5 percent over the prior year's
second quarter, and using constant exchange rates would have increased
$3.6 million or 7.5 percent over the second quarter of the prior year.
Scotsman's worldwide ice machine sales representing approximately 59
percent of the Company's sales for the second quarter of 1994 were up
5.0 percent in U.S. dollars, or 7.1 percent, using constant foreign
currency exchange rates. U.S. ice machine sales for the second
quarter of 1994 were up 9.3 percent over the second quarter of 1993,
reflecting an improving domestic market. Ice machine sales from the
Company's European businesses were down 3.9 percent in U.S. dollars
but were up 2.4 percent in local currency. European ice machine sales
were stronger as a result of slightly improved markets in Western
Europe.
19<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations - continued
Sales of other product lines of the Company's European businesses
(bakery equipment, commercial refrigerators, etc.) representing 2
percent of the Company's sales for the second quarter of 1994
increased 8 percent in dollars and 16 percent in lire reflecting
improvement in Western European markets for those products.
Sales of Booth dispensing equipment representing 7 percent of the
Company's sales for the second quarter of 1994 were up 7.9 percent
compared to sales in the same quarter of the prior year.
Net sales for the first six months of 1994 were $113.8 million, up
$27.2 million or 31.4 percent from sales of $86.6 million for the same
period of 1993. Using constant foreign currency exchange rates, net
sales for the first half of 1994 were up $28.9 million or 34.1 percent
compared to the first half of 1993.
Net income for the first half of 1994 was up $1.8 million or 38.9
percent compared to the first half of 1993 which included the
cumulative effect of changes in accounting principles as discussed
below.
The sales and net income increases during the first half of 1994 were
primarily attributable to the acquisition of Delfield and Whitlenge on
April 29, 1994. The Company's sales were boosted by the combined
sales contributions of Delfield and Whitlenge. Sales of Delfield
represented 18 percent of the Company's sales for the six months ended
July 3, 1994. On a pro forma basis, sales for Delfield for the
six-month period would have been $53.0 million and $43.7 million for
the six months ended July 3, 1994 and July 4, 1993, respectively.
Sales of Whitlenge represented 3 percent of the Company's sales for
the six months ended July 3, 1994. On a pro forma basis, sales for
Whitlenge for the six-month period would have been $9.0 million and
$10.3 million for the six months ended July 3, 1994 and July 4, 1993,
respectively. Delfield, the larger of the two acquired businesses,
realized very strong sales growth across all products in the first
half of 1994. Whitlenge sales declined due to lower demand in its
U.K. markets. Excluding the sales of the newly acquired companies,
Scotsman Industries, Inc.'s sales would have increased $2.8 million or
3.2 percent over the prior year's first half, and using constant
exchange rates would have increased $4.5 million or 5.3 percent over
the first half of the prior year.
20<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations - continued
Scotsman's worldwide ice machine sales representing approximately
two-thirds of the Company's sales for the first half of 1994 were up
3.9 percent in U.S. dollars, or 6.2 percent, using constant foreign
currency exchange rates. U.S. ice machine sales for the six months of
1994 were up 7.2 percent over the first half of 1993, reflecting an
improving domestic market. Ice machine sales from the Company's
European businesses were down 3.3 percent in U.S. dollars but were up
3.8 percent in local currency. European ice machine sales were
stronger as a result of slightly improved markets in Western Europe.
Sales of other product lines of the Company's European businesses
(bakery equipment, commercial refrigerators, etc.) representing 2
percent of the Company's sales for the first half of 1994 decreased 7
percent in dollars but were essentially flat in lire when compared to
the first half of 1993.
Sales of Booth dispensing equipment representing 8 percent of the
Company's sales for the first half of 1994 were flat compared to sales
in the same period of the prior year.
The Company's gross profit increased by $7.9 million for the three
months ended and increased by $7.5 million for the first half of 1994
when compared to the same periods of the prior year. These increases
were primarily attributable to the contributions of the acquired
businesses of $6.7 million for both periods in 1994. Volume driven
increases in gross profit at Scotsman Ice Systems were partially
offset by inefficiencies and lower production levels resulting from
the relocation and start up of the Crystal Tips operation of Booth,
Inc.
Selling and administrative expenses increased by $4.6 million for the
quarter and $4.2 million on a year-to-date basis due primarily to
expenses incurred by the newly acquired companies.
Interest expense, net was higher for both the quarter and the
year-to-date periods compared to the same periods of the prior year.
Additional interest expense, which was incurred as a result of the
acquisitions of Delfield and Whitlenge, was partially offset by lower
interest due to an interest rate swap agreement which matured in April
of 1994.
21<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations - continued
Income tax expense increased for both the three months and six months
ended July 3, 1994 when compared to the same periods of the prior year
due to the additional pre-tax income attributable to Delfield and
Whitlenge. The effective income tax rates for the three months and
six months ended July 3, 1994 compared to the same periods in the
prior year are slightly lower, which reflects the lower effective tax
rates relating to the new businesses compared to the mix of businesses
of Scotsman prior to the acquisition of Delfield and Whitlenge.
Effective January 4, 1993, the Company changed its method of
accounting for income taxes as a result of the required adoption of
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). SFAS 109 requires a change in accounting
for income taxes to an asset and liability approach. The cumulative
effect of the change in 1993 was a favorable impact of $1.3 million,
or $.19 per share.
Effective January 4, 1993, the Company also adopted the Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Post-Employment Benefits" ("SFAS 112"). The statement requires
accrual accounting for benefits provided to former or inactive
employees after employment but before retirement. The Company
previously accounted for a certain portion of these post-employment
benefits on a pay-as-you-go basis. The first quarter 1993 impact of
the change to SFAS 112 was an unfavorable pretax amount of $0.5
million ($0.2 million, after-tax or $.03 per share).
Effective January 4, 1993, the Company also changed its method of
accounting for retiree health care benefits as required by Statement
of Financial Accounting Standards No. 106, "Employers' Accounting for
Post-retirement Benefits Other Than Pensions" ("SFAS 106"). The
statement requires that the expected cost of benefits other than
pensions must be charged to expense during the years that employees
render service. The Company formerly recognized retiree health care
costs on a pay-as-you-go basis. The Company recognized in the first
quarter of 1993 immediately as a charge against earnings the entire
portion of future retiree benefit costs of $1.7 million ($1.0 million
after-tax) already earned by both active and retired employees up to
January 4, 1993. The after-tax impact of this accounting change in
the first quarter of 1993 was $0.15 per share.
The cumulative effect of the changes in accounting principles
implemented in the first quarter of 1993 was $29,000.
22<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition
Including the impact of foreign exchange translation, inventories were
up $18.3 million from January 2, 1994 to July 3, 1994 which reflects
primarily the additional inventory of Delfield and Whitlenge as of the
acquisition date. Including the impact of foreign exchange
translation, trade accounts receivable increased $33.7 million which
reflects the additional receivables of the acquired businesses of
$13.1 million on the acquisition date and the impact of the sales
increase of the other businesses of Scotsman Industries when comparing
the second quarter of 1994 to the fourth quarter of 1993. Including
the impact of foreign exchange translation, accounts payable increased
by $15.9 million from January 2, 1994 to July 3, 1994 which reflects
$9.0 million of trade payables of Delfield and Whitlenge on the
acquisition date and also reflects increased seasonal activity.
Goodwill increased $73.6 million from December of 1993 which reflects
the preliminary amount of goodwill allocated in the acquisitions of
Delfield and Whitlenge.
The non-current portion of long-term debt and capitalized leases
increased by $64.8 million from January 2, 1994 which reflects
primarily the issuance of $63.0 million of domestic long-term debt to
effect the acquisitions of Delfield and Whitlenge on April 29, 1994,
the assumption of approximately $35.0 million of debt on the books of
Delfield and Whitlenge on the acquisition date, offset by the
refinancing of $31.3 million of Delfield's and Whitlenge's debt,
repayment of $2.0 million of the new long-term domestic debt after the
acquisition date and repayment of capital lease obligations of $0.1
million.
Shareholders' equity increased by $47.1 million from December of 1993
primarily due to net income of $6.4 million for the first half of
1994, issuance of $39.0 million in cumulative convertible preferred
stock and common stock to effect the acquisition, along with changes
in accumulated translation of $1.8 million during the first half of
1994. These changes, which were accompanied by increases in long-term
domestic debt, caused the debt-to-equity ratio to climb from 0.9 to 1
as of January 2, 1994 to 1.2 to 1 as of July 3, 1994.
On June 10, 1994 and February 17, 1994 the Company's Board of
Directors declared a dividend of 2 1/2 cents per share payable to
shareholders of record of the Company's common stock on March 31, 1994
and June 30, 1994, respectively.
23<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Litigation Relating to Indianapolis Athletic Club Fire.
------------------------------------------------------
Delfield, a wholly-owned subsidiary of DFC Holding
Corporation ("DFC"), which was acquired by the Company
on April 29, 1994, is currently a defendant in seven
actions brought in the state courts of Indiana arising
out of a fire at the Indianapolis Athletic Club (the
"IAC") on February 5, 1992. The fire resulted in the
deaths of three persons, injuries to several other
persons and property damages to the IAC and several of
its guests. The IAC and several other claimants
allegedly incurred property damage in the fire totaling
between $10 to $12 million, most of which was allegedly
incurred by the IAC. In addition, there are also
claims for personal injury, wrongful death and loss of
services which have not yet been quantified. Although
the cause of the fire has not yet been determined, the
claimants have alleged, in their actions, that a
refrigerator manufactured by Delfield caused the fire
and have asserted negligence, strict liability and
breach of warranty claims against Delfield. Two of
these actions (which were brought on behalf of firemen
who died or were injured in the fire) have been
dismissed, but such dismissals have been appealed. In
addition to these seven actions, the IAC and another
plaintiff also brought suits against Delfield from
which Delfield was dismissed as a defendant, without
prejudice to such plaintiffs' rights to reinstate their
claims against Delfield.
Delfield is conducting its own investigation and is
unable to express any opinion at this time as to the
cause of the fire. However, Delfield believes that the
refrigerator in the IAC at the time of the fire was
manufactured, not by Delfield, but by the Delfield
Division of Alco Standard Corporation ("Alco") prior to
the acquisition of the Delfield Division by DFC.
Pursuant to the agreement by which DFC acquired the
Delfield Division, Alco is obligated to indemnify
Delfield for all losses to Delfield resulting from
product liability claims relating to products
manufactured by the Delfield Division prior to its
acquisition by DFC, unless any claim therefor or on
account therefor is first asserted after May 1, 1993,
in which case Delfield is required to indemnify Alco
against such losses. Alco has agreed that its
indemnity applies to some of the actions arising out of
the fire (including the action brought by the IAC) but
not all of the actions.
Delfield believes that all of the actions arising from
the IAC fire are covered by Alco's indemnity and that
Delfield's insurance should cover any claims that are
not covered by Alco's indemnity. Moreover, under the
24<PAGE>
terms of the Agreement and Plan of Merger, dated as of
January 11, 1994, as amended, pursuant to which the
Company acquired DFC and Delfield, and the Share
Acquisition Agreement, dated as January 11, 1994, as
amended, pursuant to which the Company acquired
Whitlenge Acquisition Limited ("WAL"), an affiliate of
DFC, and Whitlenge, the former shareholders of DFC and
WAL are also required to indemnify the Company for up
to $30 million in losses and expenses arising out of,
among other things, suits, claims or proceedings
arising out of the IAC fire.
The Company is unable to determine at this time the
amount of Delfield's potential liability, if any, with
respect to the IAC fire. Although no assurances can be
given, based upon the Company's review of Alco's
indemnity, Delfield's insurance policies, the
indemnification obligations of the former shareholders
of DFC and WAL, and the financial ability of certain
former shareholders of DFC and WAL to comply with those
indemnification obligations, the Company does not
believe that the imposition of liability upon Delfield
in one or more actions arising out of the IAC fire
would be likely to have a material adverse effect upon
the financial condition of the Company or its results
of operations.
Litigation Relating to the Glenco-Star Lease.
--------------------------------------------
In September, 1992, the Company transferred the assets
of its Glenco-Star division to a wholly-owned
subsidiary of the Company, Glenco Star Corporation, and
sold the stock of Glenco Star Corporation to Glenco
Holdings, Inc. Glenco Star Corporation assumed the
Company's obligations under a triple net lease for a
275,000 square foot facility in Philadelphia which
expires in August, 1996. Although the Company was not
released from its obligation to the landlord under the
lease, Glenco Holdings furnished the Company with a
letter of credit (the "Letter of Credit") in the amount
of $1.5 million under which the issuer, Boatmen's First
National Bank of Kansas City (the "Bank"), is obligated
to reimburse the Company for the amount of any rent
payments made by the Company to the landlord under the
lease after August 1, 1994. During the period covered
by the Letter of Credit, the lease provides for minimum
monthly rent payments of approximately $1.5 million and
additional rent payments for real estate taxes,
property insurance premiums, maintenance, utilities and
other expenses associated with the property.
On February 1, 1994, Glenco Star Corporation defaulted
on its obligation to make its monthly rent payment to
the landlord under the lease and subsequently filed for
bankruptcy under Chapter 11 of the federal Bankruptcy
Code. See Part I, Item 1, of the Company's Annual
Report on Form 10-K for the Fiscal Year Ended
January 4, 1994, "Glenco-Star Lease Obligations."
25<PAGE>
Since that date, Glenco Star Corporation has failed to
make any further monthly rent payments under the lease.
Upon notice of each default in the payment of rent,
through and including the default on August 1, 1994,
the Company has made a monthly rent payment to the
landlord. The Company also has paid certain real
estate taxes and property insurance premiums, as
additional rent due under the lease, after Glenco Star
defaulted in its obligations to make such payments.
On August 4, 1994, Glenco Holdings and James Ferrell, a
principal stockholder of Glenco Holdings and the person
who obtained the Letter of Credit from the Bank, filed
a lawsuit against the Company and the Bank in the
Circuit Court of Jackson County, Missouri. In their
complaint, the plaintiffs allege that any attempt by
the Company to draw against the Letter of Credit would
breach a contract entered into between the Company,
Glenco Holdings and Glenco Star at the time of the
Company's sale of Glenco Star to Glenco Holdings. The
complaint seeks a declaratory judgment that the Company
has no right to draw on the Letter of Credit and a
permanent injunction prohibiting the Company from
attempting to draw upon, and the Bank from disbursing
funds under, the Letter of Credit.
The plaintiffs also filed a motion for a preliminary
injunction on August 4, 1994, seeking to enjoin the
Company from drawing upon, and the Bank from paying
pursuant to, the Letter of Credit. The Court has set a
hearing date of August 26, 1994 for this motion. The
Company intends to vigorously defend its right to draw
upon the Letter of Credit in this lawsuit and at the
hearing on plaintiffs' motion for a preliminary
injunction.
On August 8, 1994, the Company successfully drew
against the Letter of Credit in the amount of $57,501,
representing the August monthly rent payment made to
the landlord by the Company on August 4, 1994.
Item 4. Submission of Matters to
a Vote of Security Holders
A special meeting of Shareholders of Scotsman
Industries, Inc. was held on April 28, 1994 for the
purpose of voting upon a proposal to issue shares of
Scotsman Common Stock and Scotsman Preferred Stock to
the shareholders of DFC and WAL in connection with the
proposed acquisition, by Scotsman, of DFC and its
wholly-owned subsidiary Delfield, and WAL and its
wholly-owned subsidiary, Whitlenge. Proxies for the
meeting were solicited by management pursuant to
Regulation 14A under the Securities Exchange Act of
1934, and there was no solicitation in opposition to
management's solicitation.
26<PAGE>
The proposal to issue shares to the shareholders of DFC
and WAL in connection with the acquisition was
approved. The results of the vote of the special
meeting were as follows:
Shares Voted "For" 4,473,195
Shares Voted "Against" 14,909
Shares "Withheld" 71,132
Broker Non-Votes 0
The Annual Meeting of Shareholders was held on June 10,
1994 for the purpose of electing two directors each to
serve for a term of three years. Proxies for the
meeting were solicited by management pursuant to
Regulation 14A under the Securities Exchange Act of
1934, and there was no solicitation in opposition to
management's solicitation.
Both of management's nominees for directors listed in
the proxy statement were elected. The results of the
vote were as follows:
<TABLE>
Shares Voted "FOR" Shares Broker Non-
------------ "WITHHELD" Votes
-------------- --------------
<C> <S> <S> <S>
Frank Considine 6,076,701 20,687 -0-
George D. Kennedy 6,076,756 20,632 -0-
</TABLE>
The following persons continued their terms of office
as directors of the Company following the Annual
Meeting: Donald C. Clark, Timothy C. Collins, James J.
O'Connor, Richard C. Osborne, Robert G. Rettig, and
Matthew O. Diggs, Jr.
PART II. OTHER INFORMATION - continued
Item 6. Exhibits and Reports
on Form 8-K
(b) The Registrant filed one current report on Form
8-K, dated April 29, 1994, reporting under Item 2,
Acquisition or Disposition of Assets.
27<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
SCOTSMAN INDUSTRIES, INC.
Date: August 16, 1994 By: /s/ Donald D. Holmes
-------------------------
Donald D. Holmes
Vice President-Finance
and Secretary
28<PAGE>
