<PAGE> 1
Filed Pursuant to Rule 424B3
Registration Statement No. 333-38499
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME A FINAL PROSPECTUS IS
DELIVERED. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH JURISDICTION.
PROSPECTUS (Subject to Completion)
Issued December 2, 1997
$100,000,000
Scotsman Group Inc.
% SENIOR SUBORDINATED NOTES DUE 2007
Fully and unconditionally guaranteed by
SCOTSMAN GROUP INC. LOGO
------------------------
Interest payable and
------------------------
The Notes are redeemable at the option of Scotsman Group Inc. ("Scotsman Group"
or the "Issuer"), in whole or in part, at any time on or after ,
2002, at % of their principal amount, plus accrued interest, declining
ratably to 100% of their principal amount, plus accrued interest, on or after
, 2004. In addition, at any time prior to , 2000,
Scotsman Group may redeem in aggregate up to 35% of the original principal
amount of the Notes with the proceeds of one or more Equity Offerings (as
defined herein), at % of their principal amount, plus accrued interest. Upon
a Change of Control (as defined herein), each holder of Notes will have the
right to require Scotsman Group to purchase all or a portion of such holder's
Notes at a purchase price equal to 101% of the principal amount thereof, plus
accrued interest, if any, to the date of purchase. See "Description of the
Notes."
Scotsman Industries, Inc. ("Scotsman" or the "Company"), as primary obligor and
not merely as a surety, will fully and unconditionally guarantee on a senior
subordinated basis the payment of the Notes when due and the due performance by
the Issuer of its other obligations under the Indenture (as defined herein).
The Notes and the Guaranty will be unsecured general obligations of Scotsman
Group and the Company, respectively, subordinated in right of payment to all
existing and future Senior Indebtedness (as defined herein) of Scotsman Group
and the Company. As of September 28, 1997, after giving effect to this Offering
and the application of the net proceeds herefrom, Scotsman Group and the Company
would have had approximately $262 million of Senior Indebtedness outstanding and
approximately $146 million available under the Credit Facility and the Comerica
Agreement (each as defined herein), which, if borrowed, would constitute Senior
Indebtedness.
Application will be made to list the Notes on the Luxembourg Stock Exchange.
The Issuer will issue the Notes offered hereby in registered global form. One or
more Global Notes (as defined herein) will be registered in the name of, or a
nominee of, The Depository Trust Company, which will act as depositary.
Beneficial interests in a registered Global Note will be evidenced only by, and
transfers thereof will be effected only through, records maintained by the
Depositary (as defined herein) (with respect to participants' interests) and its
participants. Except as described below under "Description of Notes --
Book-Entry System," owners of beneficial interests in a registered Global Note
will not be considered Holders (as defined herein) and will not be entitled to
receive physical delivery of Notes in definitive form, and no Global Note will
be exchangeable except for another Global Note of like denomination and term to
be registered in the name of the Depositary or its nominee.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE % AND ACCRUED INTEREST, IF ANY
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
--------- -------------- -------------
<S> <C> <C> <C>
Per Note.................................................... % % %
Total....................................................... $ $ $
</TABLE>
- ------------
(1) Plus accrued interest, if any, from , 1997.
(2) The Company and Scotsman Group have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities
Act of 1933, as amended.
(3) Before deducting expenses payable by the Company estimated at $850,000.
------------------------
The Notes are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Mayer, Brown & Platt, counsel for the Underwriters. It is expected that
delivery of the Notes will be made against payment therefor in immediately
available funds on or about , 1997 in book-entry form through the
facilities of The Depository Trust Company, Cedel Bank, S.A., and Morgan
Guaranty Trust Company of New York, Brussels office, as operator of the
Euroclear System.
------------------------
MORGAN STANLEY DEAN WITTER FIRST CHICAGO CAPITAL MARKETS, INC.
, 1997
<PAGE> 2
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THE PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION OF SUCH PERSONS. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 11
The Company............................. 16
Scotsman Group.......................... 17
Kysor Acquisition....................... 17
Secondary Equity Offering............... 18
Use of Proceeds......................... 18
Capitalization.......................... 19
Selected Consolidated Financial and
Other Information..................... 20
Pro Forma Consolidated Financial
Information........................... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 28
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business................................ 35
Management.............................. 45
Description of the Notes................ 47
Certain United States Federal Tax
Considerations........................ 77
Description of Credit Facility.......... 82
Underwriters............................ 84
Legal Matters........................... 85
Experts................................. 85
Additional Information.................. 85
Incorporation of Certain Documents by
Reference............................. 86
Listing and General Information......... 86
Index to Financial Statements........... F-1
</TABLE>
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE MARKET PRICE OF THE NOTES.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THIS OFFERING,
AND MAY BID FOR, AND PURCHASE, THE NOTES IN THE OPEN MARKET. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITERS."
2
<PAGE> 3
[Graphic illustration of the percentage of the Company's 1996 pro forma net
sales represented by each of the Company's five product lines, together with
photographs of a representative sampling of products from each line.]
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing or
incorporated by reference in this Prospectus. As used in this Prospectus, the
term the "Company" or "Scotsman" refers to Scotsman Industries, Inc. and, unless
otherwise stated or indicated by the context, its subsidiaries, and the terms
"Scotsman Group" or the "Issuer" refers to Scotsman Group Inc. As used in this
Prospectus, the term "Kysor" refers to Kysor Industrial Corporation and, unless
otherwise stated or indicated by the context, its subsidiaries, after taking
into account the sale of substantially all of the assets and related liabilities
of Kysor's Transportation Products Group described elsewhere in this Prospectus.
Unless otherwise stated, reference to the Company's 1996 "pro forma" net sales
includes Kysor's 1996 sales. Scotsman reports financial information on a 52-53
week fiscal year ending on the Sunday nearest to December 31, which fell on
December 29, 1996, December 31, 1995, January 1, 1995, January 2, 1994 and
January 3, 1993, respectively, for each of Scotsman's last five fiscal years.
Scotsman's first fiscal nine months in 1997 and 1996 ended on September 28, 1997
and September 29, 1996, respectively.
THE COMPANY
GENERAL
Scotsman is a leading international manufacturer of a diversified line of
commercial refrigeration products, food preparation equipment and beverage
systems that is sold primarily to customers in the restaurant, supermarket,
lodging, healthcare and convenience store industries. The Company has a leading
market position in each of its five product lines, which consist of ice
machines, refrigerated display cases, food preparation and storage equipment,
walk-in coolers and freezers and beverage systems. Scotsman's customers include
many of the largest chains in the quick service restaurant, supermarket, lodging
and convenience store industries, including McDonald's, Boston Market, WalwMart,
Winn-Dixie, Marriott and Mobil, as well as bottlers affiliated with Coca-Cola
and Pepsi.
The Company's revenues are diversified among its five product lines, with
ice machines and refrigerated display cases, its two largest product lines,
representing approximately 29% and 30%, respectively, of the Company's 1996 pro
forma net sales. Within each of its product lines, the Company offers a broad
range of products designed to meet the diverse equipment needs of its customers.
The Company sells its products in over 100 countries through multiple
distribution channels and has manufacturing capabilities in the United States,
the United Kingdom, Germany and Italy and joint venture interests in Australia,
China, the United Kingdom and Indonesia. International sales of approximately
$144 million accounted for approximately 24% of the Company's 1996 pro forma net
sales. The Company believes that its leading market positions, broad product
offering, diverse customer base, extensive distribution network and strong
international presence provide it with significant competitive advantages and
position it for continued growth.
Since its spin-off from Household International, Inc. in 1989, Scotsman has
expanded through internal growth and through a disciplined acquisition program.
The Company's internal growth has been driven primarily by increased sales of
ice machines in the United States and Europe and beverage systems in Europe. In
addition, from 1992 through 1996, the Company successfully completed and
integrated five acquisitions. As a result of these acquisitions and internal
growth, the Company's net sales increased to $356.4 million in 1996 from $168.7
million in 1992, representing a compound annual growth rate of 20.6%. In March
1997, the Company acquired Kysor for a net purchase price of approximately $299
million (the "Kysor Acquisition"). Kysor is a leading supplier of refrigerated
display cases and walk-in coolers and freezers to the supermarket and
convenience store industries. For 1996, Kysor's sales of commercial
refrigeration products were $245.1 million, an increase of 18.3% from 1995. Pro
forma for the Kysor Acquisition, the Company's 1996 net sales were $601.4
million, a 68.7% increase over the Company's reported 1996 net sales. Through
the addition of Kysor's leading market positions and complementary product
lines, the Company expects to benefit from cross-selling opportunities, as well
as synergies related to reduced overhead, increased purchasing power and shared
research and development efforts.
3
<PAGE> 5
STRATEGY
Scotsman's operating strategy is to continue to capitalize on its
competitive advantages and enhance its customer relationships. The key
components of this strategy include:
CAPITALIZING ON MARKET LEADERSHIP. Scotsman seeks to build and
maintain leading market positions in each of its product lines. Scotsman
believes that its leading market positions, broad product offerings, strong
brand recognition and extensive distribution capabilities position it to
compete successfully as its customers consolidate their supplier base and
expand internationally.
OPTIMIZING MANUFACTURING EFFECTIVENESS AND FLEXIBILITY. To enhance
manufacturing effectiveness, Scotsman has adopted "lean manufacturing"
initiatives that have enhanced product quality, lowered product defects and
inventory costs and reduced lead times for customized products. The
Company's manufacturing processes are designed to produce a range of
different standard or customized models within each manufacturing unit,
thereby increasing efficiency while improving the Company's ability to meet
customers' delivery schedules.
EMPHASIZING PRODUCT QUALITY AND NEW PRODUCT DEVELOPMENT. By applying
its product design, manufacturing and refrigerant technology expertise,
Scotsman seeks to design and manufacture technically superior, durable and
energy efficient products. Scotsman also dedicates substantial resources to
new product development and customizing existing products to meet the
unique performance, size and appearance specifications of individual
customers.
LEVERAGING EXTENSIVE DISTRIBUTION CAPABILITIES TO DELIVER SUPERIOR
CUSTOMER SERVICE. Scotsman has an extensive sales, distribution and service
network that reaches customers in over 100 countries and is comprised of
approximately 200 employees and approximately 3,300 distributors and
dealers. Scotsman believes that this network, which is designed to meet the
needs of customers from product design and purchase through aftermarket
sales and support, provides it with a competitive advantage.
Scotsman also pursues a growth strategy intended to strengthen its
leadership positions within its product lines. The key elements of this strategy
include:
FOCUSING ON MAJOR NATIONAL CHAINS. Scotsman targets major national
chains within the five principal industries it serves. The Company believes
that these national chains are increasingly gaining market share at the
expense of independents and that, as a large diversified manufacturer,
Scotsman is well positioned to benefit from the trend among national chains
to consolidate their supplier base.
PURSUING CROSS-SELLING OPPORTUNITIES. Scotsman actively pursues
opportunities to cross-sell its broad range of products to existing
customers. The broader product range and increased customer base resulting
from the Kysor Acquisition present significant new cross-selling
opportunities for Scotsman.
CAPITALIZING ON INTERNATIONAL OPPORTUNITIES. Over the past several
years, international sales of commercial foodservice and retail food
equipment have grown at rates substantially higher than those for the
United States. The Company expects to use its international marketing,
distribution and manufacturing capabilities as a platform to increase
penetration of growing international markets.
EXPANDING THROUGH STRATEGIC ACQUISITIONS. Scotsman will continue to
explore strategic acquisitions and joint ventures that broaden the
Company's product lines, offer significant operational synergies or
increase the Company's penetration of international markets.
4
<PAGE> 6
THE OFFERING
Issuer........................ Scotsman Group, a Delaware corporation and a
direct wholly owned subsidiary of Scotsman.
Scotsman conducts its domestic ice machine
business through divisions of Scotsman Group
and all of its other businesses through
subsidiaries of Scotsman Group.
Notes Offered................. $100 million principal amount of % Senior
Subordinated Notes due 2007.
Maturity Date................. , 2007.
Interest Payment Dates........ and of each year, commencing
, 1998.
Optional Redemption........... The Notes are redeemable at the option of the
Issuer, in whole or in part, on or after
, 2002, at the redemption prices set
forth herein, together with accrued and unpaid
interest to the date of redemption.
In addition, up to 35% of the original
principal amount of the Notes are redeemable at
the option of the Issuer prior to
, 2000 with the proceeds of
one or more Equity Offerings at the redemption
price set forth herein, together with accrued
and unpaid interest to the date of redemption.
Guaranty...................... Scotsman will issue a Guaranty of the Notes
under which Scotsman, as primary obligor and
not merely as a surety, will fully and
unconditionally guarantee on a senior
subordinated basis the payment of the Notes
when due and the due performance by the Issuer
of its other obligations under the Indenture.
Sinking Fund.................. None.
Change of Control............. Upon the occurrence of a Change of Control,
each holder of the Notes shall have the option
to require the Issuer to repurchase such
holder's Notes at a redemption price equal to
101% of the principal amount thereof, plus
accrued interest to the date of redemption,
pursuant to an Offer to Purchase required to be
made by the Issuer.
Ranking....................... The Notes and the Guaranty are unsecured senior
subordinated obligations of the Issuer and the
Company, respectively, and are subordinated to
all existing and future Senior Indebtedness of
the Issuer and the Company, including
indebtedness under the Bank Credit Agreement.
As of September 28, 1997, after giving pro
forma effect to this Offering and the
application of net proceeds herefrom, the
aggregate outstanding principal amount of
Senior Indebtedness of the Issuer and Scotsman
would have been approximately $262 million. In
addition, the Notes are effectively
subordinated to the obligation of the Issuer's
subsidiaries. As of September 28, 1997, after
giving pro forma effect to this Offering and
the application of net proceeds herefrom, the
Issuer's subsidiaries would have had
approximately $38 million of indebtedness
outstanding. Subject to certain limitations,
Scotsman, the Issuer and their Restricted
Subsidiaries may incur additional indebtedness
in the future. See
5
<PAGE> 7
"Risk Factors -- Leverage" and "Description of
the Notes -- Ranking."
Subordination................. Senior Indebtedness of the Issuer or Scotsman,
as the case may be, shall be paid in full in
cash or cash equivalents from any payment or
distribution (except similarly subordinated
securities) in connection with any dissolution,
winding up, liquidation or reorganization (in
bankruptcy or otherwise) before the Notes shall
be entitled to receive such payments or
distributions.
In addition, no payment of any kind or
character may be made on the Notes if any
Obligations with respect to any Designated
Senior Indebtedness are not paid when due or if
any other default occurs with respect to any
Designated Senior Indebtedness and the maturity
thereof has been accelerated. During the
continuance of any default with respect to any
Designated Senior Indebtedness which permits
the maturity thereof to be accelerated, the
Issuer may not make any payment of any kind or
character in respect of the Notes, and the
Company may not make any payment in respect
thereof under the Guaranty, for a period of up
to 179 days after receipt of notice thereof by
the Issuer.
Certain Covenants............. The Indenture contains certain covenants,
including, without limitation, covenants with
respect to the following matters: (i)
limitations on indebtedness, (ii) limitation on
other senior subordinated indebtedness; (iii)
limitation on restricted payments; (iv)
limitation on sale or issuance of restricted
subsidiary stock and indebtedness; (v)
limitation on transactions with affiliates;
(vi) limitation on liens; (vii) limitation on
asset sales; (viii) limitation on dividends and
other payment restrictions affecting restricted
subsidiaries; and (ix) restrictions on mergers
and certain transfers of assets. See
"Description of the Notes -- Certain
Covenants."
Use of Proceeds............... The net proceeds of this Offering are intended
to be used to repay a portion of the borrowings
outstanding under the Credit Facility. See "Use
of Proceeds."
For further information regarding the Notes, see "Description of the Notes"
and for definitions of certain capitalized terms used but not defined in this
Summary, see "Description of the Notes -- Certain Definitions."
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements concerning
Scotsman's operations, performance and financial condition, including, in
particular, the likelihood of the Company's success in integrating acquisitions.
Actual results could differ materially from those currently anticipated due to a
number of factors, including those identified under "Risk Factors" and the
Cautionary Statements included as Exhibit 99 to the Company's Form 10-K for the
fiscal year ended December 29, 1996 and elsewhere in this Prospectus. The
forward-looking statements should be considered in light of these factors.
Unless otherwise indicated by the context, when used in this Prospectus or in
the documents incorporated by reference herein, the words "anticipate,"
"believe," "estimate," "intend" and "expect" and similar expressions are
intended to identify forward-looking statements.
6
<PAGE> 8
SECONDARY EQUITY OFFERING
This Prospectus is part of a Registration Statement that also covers the
offer and sale from time to time (the "Equity Offering") of up to 1,611,699
shares of common stock, par value $0.10 per share, of the Company (the "Common
Stock") by Onex Corporation ("Onex") and certain of its affiliates
(collectively, the "Selling Stockholders"), who have the right, pursuant to an
agreement with the Company and certain other persons (the "Registration Rights
Agreement"), to request that the Company include certain shares of Common Stock
in registrations by the Company of its securities under the Securities Act (as
herein defined). The Selling Stockholders have advised the Company, and the
Prospectus relating to the Equity Offering discloses, that they may sell their
shares of Common Stock through an underwritten public offering, in one or more
transactions (including block trades) on the New York Stock Exchange or on the
over-the-counter market or pursuant to privately negotiated transactions. The
Company is obligated under the Registration Rights Agreement to keep the
Registration Statement related to the Equity Offering effective for no more than
90 days. The Company will not receive any proceeds from the sale of Common Stock
in the Equity Offering. This Offering and the Equity Offering (collectively, the
"Offerings") are separate and independent transactions not contingent upon one
another. The Company is obligated to indemnify the Selling Stockholders and any
underwriters of the Equity Offering against certain liabilities, including
certain liabilities arising under the Securities Act.
7
<PAGE> 9
SUMMARY SCOTSMAN CONSOLIDATED FINANCIAL AND OTHER INFORMATION
Scotsman reports financial information on a 52-53 week fiscal year ending
on the Sunday nearest to December 31, which fell on December 29, 1996, December
31, 1995, January 1, 1995, January 2, 1994 and January 3, 1993, respectively,
for each of Scotsman's last five fiscal years. Scotsman's first fiscal nine
months in 1997 and 1996 ended on September 28, 1997 and September 29, 1996,
respectively, and such results are unaudited.
<TABLE>
<CAPTION>
FIRST FISCAL NINE MONTHS FISCAL YEAR
--------------------------------- ------------------------------------------------------------------
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
1997(1) 1997(2) 1996 1996(1) 1996 1995 1994 1993 1992
----------- ------- ---- ----------- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
INFORMATION:
Net sales................. $470,363 $431,529 $282,720 $601,435 $356,373 $324,291 $266,632 $163,952 $168,674
Cost of sales............. 351,990 320,284 202,250 443,787 257,942 236,402 190,518 114,472 122,226
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit.............. 118,373 111,245 80,470 157,648 98,431 87,889 76,114 49,480 46,448
Selling and administrative
expenses................ 68,626 63,449 45,072 89,861 58,135 53,435 47,900 31,874 31,588
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income from operations.... 49,747 47,796 35,398 67,787 40,296 34,454 28,214 17,606 14,860
Interest expense, net..... 21,479 15,207 4,159 31,416 5,279 6,326 5,416 4,235 4,675
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes................... 28,268 32,589 31,239 36,371 35,017 28,128 22,798 13,371 10,185
Income taxes.............. 14,289 15,605 14,772 18,358 16,449 12,720 10,013 5,989 3,793
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income before
extraordinary loss and
cumulative effect of
accounting changes...... 13,979 16,984 16,467 18,013 18,568 15,408 12,785 7,382 6,392
Extraordinary loss (net of
income taxes of
$422)(3)................ (633) (633) -- -- -- -- -- -- --
Cumulative effect of
accounting changes(4)... -- -- -- -- -- -- -- 29 --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income................ $ 13,346 $ 16,351 $ 16,467 $ 18,013 $ 18,568 $ 15,408 $ 12,785 $ 7,411 $ 6,392
Preferred stock
dividends............... -- -- 813 813 813 1,240 885 -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income available to
common shareholders..... $ 13,346 $ 16,351 $ 15,654 $ 17,200 $ 17,755 $ 14,168 $ 11,900 $ 7,411 $ 6,392
======== ======== ======== ======== ======== ======== ======== ======== ========
Income per share before
extraordinary loss and
cumulative effect of
accounting changes,
fully diluted(5)........ $ 1.29 $ 1.57 $ 1.54 $ 1.68 $ 1.73 $ 1.45 $ 1.35 $ 1.06 $ .90
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income per share,
fully diluted(5)........ $ 1.23 $ 1.51 $ 1.54 $ 1.68 $ 1.73 $ 1.45 $ 1.35 $ 1.06 $ .90
-------- -------- -------- -------- -------- -------- -------- -------- --------
OTHER INFORMATION:
EBITDA(6)................. $ 63,763 $ 59,844 $ 41,871 $ 86,689 $ 49,166 $ 42,048 $ 34,233 $ 21,280 $ 18,422
Capital expenditures...... 12,523 9,427 4,840 13,129 6,195 6,513 5,434 3,264 2,012
SELECTED RATIOS:
Ratio of earnings to fixed
charges(7).............. 2.2x 3.0x 7.7x 2.1x 6.8x 5.0x 4.8x 3.9x 3.0x
Ratio of EBITDA to
interest expense........ 3.0x 3.9x 10.1x 2.8x 9.3x 6.6x 6.3x 5.0x 3.9x
Ratio of total debt to
EBITDA.................. -- -- -- 4.2x 1.6x 2.1x 2.6x 1.5x 1.7x
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 28, 1997
----------------------------
AS ADJUSTED(8) ACTUAL
-------------- ------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET INFORMATION:
Cash and marketable securities.............................. $ 23,191 $ 23,191
Total assets................................................ 682,038 677,788
Total debt and capitalized lease obligations (including
current maturities)....................................... 360,168 355,918
Working capital............................................. 90,554 90,554
Shareholders' equity........................................ 142,314 142,314
</TABLE>
- -------------------------
(Footnotes on following page)
8
<PAGE> 10
- -------------------------
(1) Pro forma for the Kysor Acquisition and as adjusted for the consummation of
this Offering. For a detailed description of the assumptions used in the
preparation of this pro forma as adjusted financial information, see "Pro
Forma Consolidated Financial Information."
(2) Includes results of Kysor for the period from March 10, 1997 through
September 28, 1997.
(3) The extraordinary loss resulted from one-time expenses incurred by the
Company relating to the early retirement of certain debt as part of a
refinancing effected by the Company concurrently with the Kysor Acquisition.
(4) Effective January 4, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Post-Retirement
Benefits Other than Pensions"; Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes"; and Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Post-employment
Benefits."
(5) 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 the convertible preferred stock from the date of issue. The
total number of shares used in the fully diluted calculation were:
10,811,621; 10,811,621 and 10,726,127 for the pro forma as adjusted first
fiscal nine months of 1997 and the first fiscal nine months of 1997 and
1996, respectively; and 10,728,188; 10,728,188; 10,649,763; 9,488,965;
7,000,651 and 7,096,976 for the 1996 pro forma as adjusted fiscal year and
the fiscal years 1996, 1995, 1994, 1993 and 1992, respectively.
(6) Represents earnings before interest, taxes, accounting charges, depreciation
and amortization. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to service and incur debt. EBITDA
should not be considered by a prospective purchaser of Common Stock as an
alternative to net income or as an indicator of the Company's operating
performance or cash flows.
(7) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as income before extraordinary loss, cumulative effect of
accounting changes and income taxes, plus fixed charges. Fixed charges
consist of interest expense, amortization of debt expense and implicit
interest expense associated with operating leases.
(8) As adjusted for the consummation of this Offering. See "Use of Proceeds" and
"Capitalization."
9
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SUMMARY KYSOR CONSOLIDATED FINANCIAL AND OTHER INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME STATEMENT INFORMATION:
Net sales................................................... $245,062 $207,215 $164,606
Cost of sales............................................... 185,253 159,460 128,631
-------- -------- --------
Gross profit................................................ 59,809 47,755 35,975
Selling and administrative expenses......................... 35,075 37,589 32,815
Loss on disposition of foreign operation(1)................. -- 9,335 --
-------- -------- --------
Income from operations...................................... 24,734 831 3,160
Interest expense, net....................................... 956 (26) 489
-------- -------- --------
Income before income taxes.................................. 23,778 857 2,671
Income taxes (benefit)...................................... 8,650 (4,695) 870
-------- -------- --------
Net income.................................................. $ 15,128 $ 5,552 $ 1,801
Preferred stock dividends................................... 966 987 980
-------- -------- --------
Net income available to common shareholders................. $ 14,162 $ 4,565 $ 821
======== ======== ========
OTHER INFORMATION:
EBITDA(2)................................................... $ 29,505 $ 14,061 $ 7,519
Capital expenditures........................................ 6,934 6,420 3,107
</TABLE>
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(1) Represents the loss on disposition of Kysor's German subsidiary. The
transaction resulted in a tax benefit of $8.8 million.
(2) Represents earnings before interest, taxes, accounting charges, depreciation
and amortization and loss on disposition of foreign operations. EBITDA is
presented because it is a widely accepted financial indicator of a company's
ability to service and incur debt. EBITDA should not be considered by a
prospective purchaser of Common Stock as an alternative to net income or as
an indicator of Kysor's operating performance or cash flows.
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RISK FACTORS
Prospective investors should carefully consider and evaluate all of the
information set forth in this Prospectus, including the risks set forth below:
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
The Company's business strategy includes making acquisitions that will
expand its international presence or offer complementary products and services.
See "Business -- Growth Strategy." In pursuing a strategy of acquiring other
businesses, the Company will face risks commonly encountered with growth through
acquisitions.
In March 1997, Scotsman acquired Kysor for a net purchase price of
approximately $299 million. Including the Kysor Acquisition, Scotsman has made
six acquisitions and entered into one alliance and three joint ventures since
its spin-off from Household International, Inc. in April 1989. As a result of
these acquisitions and internal growth, the Company's net sales increased from
$168.7 million for fiscal 1992 to pro forma net sales of $601.4 million for
fiscal 1996. The Kysor Acquisition is the largest acquisition undertaken by the
Company to date and will require significant integration efforts. There can be
no assurance that the Company will be able to integrate Kysor effectively or in
a timely manner or that the beneficial effects expected will be obtained even if
Kysor is integrated as contemplated. See "Kysor Acquisition."
Acquiring businesses has been and is expected to continue to be an
important element of the Company's strategy for achieving growth. Acquisitions
vary in size and may include acquisitions that are large relative to the
Company. There can be no assurance that suitable acquisition candidates will be
identified, that financing for such acquisitions will be available on
satisfactory terms, that the Company will be able to accomplish its strategic
objectives as a result of any such acquisition, that any business or assets
acquired by the Company will be integrated successfully or that integration of
acquired businesses will not divert management resources or otherwise have a
material adverse effect on the Company's business, financial condition or
results of operations. The Company is continually evaluating possible
acquisitions and engages in discussions with acquisition candidates from time to
time.
ABILITY TO MANAGE GROWTH
Scotsman's growth will place a strain on its managerial and other
resources. From December 1993 through September 1997, the number of Company
employees increased from 915 to approximately 3,800. The Company's continued
rapid growth can be expected to place a significant strain on its management,
operations, employees and resources. There can be no assurance that the Company
will be able to manage effectively its expanding operations or achieve planned
growth on a timely or profitable basis. If the Company is unable to manage
growth effectively, its business, results of operations or financial condition
could be materially adversely affected. See "Business -- Growth Strategy."
LEVERAGE
The Kysor Acquisition significantly increased the Company's debt service
obligations. As of September 28, 1997, on a pro forma basis for this Offering,
the Company's indebtedness, including capitalized leases and current maturities,
would have been approximately $360 million, or approximately 72% of its book
capitalization. Although the Indenture will, and the Credit Facility does,
contain covenants that limit the incurrence by the Company, Scotsman Group and
certain of their subsidiaries of additional indebtedness, such limitations are
subject to a number of important qualifications and exceptions and the Company's
indebtedness could increase if, among other reasons, future acquisitions are
financed through additional borrowings. The Company's ability to make scheduled
payments of principal and interest or to refinance its indebtedness will depend
on the Company's operating performance and cash flows, which are affected by
prevailing economic conditions and financial, competitive and other factors
beyond the Company's control. The level of the Company's leverage from time to
time could have important consequences to holders of the Notes, including
limiting the Company's ability to (i) obtain additional financing for working
capital, capital expenditures, acquisitions or general corporate purposes; (ii)
adjust to changing market conditions, including
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business downturns; or (iii) compete effectively with competitors who are less
leveraged than the Company. In addition, certain of the Company's borrowings
under the Credit Facility are and may continue to be at variable rates of
interest, which causes the Company to be vulnerable to increases in interest
rates. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources", "Description of the
Notes" and "Description of Credit Facility."
If the Company is unable to generate sufficient cash flows to service its
debt obligations, it will have to adopt one or more alternatives, such as
reducing or delaying planned acquisitions, expansion and capital expenditures,
selling assets, restructuring debt or obtaining additional equity capital. There
can be no assurance that any of these alternatives could be effected on
satisfactory terms.
RESTRICTIONS IMPOSED BY THE CREDIT FACILITY AND THE INDENTURE
The Credit Facility contains, and the Indenture will contain, certain
restrictive covenants, including, among others, covenants with respect to the
following matters: (i) limitations on indebtedness; (ii) limitations on other
senior subordinated indebtedness; (iii) limitations on restricted payments; (iv)
limitations on sale or issuance of restricted subsidiary stock and indebtedness;
(v) limitations on transactions with affiliates; (vi) limitations on liens;
(vii) limitations on asset sales; (viii) limitations on dividends and other
payment restrictions affecting restricted subsidiaries; and (ix) restrictions on
mergers and certain transfers of assets. Although these covenants are subject to
various exceptions that are designed to allow the Company to operate without
undue restraint, there can be no assurance that such covenants will not
adversely affect its ability to finance future operations or capital needs or
engage in other business activities that may be in the interest of the Company.
In addition, the Credit Facility requires the maintenance of specified financial
ratios. The ability of the Company to comply with such provisions may be
affected by events beyond the Company's control. A breach of any of these
covenants or the inability of the Company to comply with the financial ratios
contained in the Credit Facility could result in a default under the Credit
Facility or the Indenture, which could entitle the lenders or the noteholders to
accelerate the maturity of the Credit Facility or the Notes, and could result in
cross-defaults permitting the acceleration of other indebtedness of the Company
and its subsidiaries. Such an event would have a material adverse effect on the
Company and adversely affect the ability of the Issuer or the Company (pursuant
to the Guaranty) to make payments on the Notes. See "Description of the Notes"
and "Description of Credit Facility."
DEPENDENCE ON CERTAIN CUSTOMERS; CUSTOMER PURCHASING PATTERNS
Although no single customer accounted for 10% or more of Scotsman's 1996
net sales on a historical or pro forma basis, some of the Company's operating
units are dependent upon a limited number of major customers, most of which do
not have long-term purchase contracts with the Company. The Company's five
largest customers represented approximately 9% of the Company's net sales in
1996 and approximately 20% of its 1996 pro forma net sales. Sales of certain
products, including, in particular, refrigerated display cases and food
preparation and storage equipment, are largely dependent upon the expansion and
renovation programs of the Company's large chain customers. Any of these
programs can result in significant revenue for the Company over a limited period
of time, followed by a decline in revenues if the customer's expansion or
upgrade program is modified or terminated. For example, the Company believes the
recently announced slowing of expansion plans by Boston Market, a major customer
of the Company, may negatively impact food preparation and storage equipment
sales in the near term. These purchasing patterns are largely beyond the control
of the Company and can result in substantial fluctuations in the Company's
operating results. Although the Company believes that its relationships with its
customers are good, changes in customer purchasing patterns could have a
material adverse effect on the sales of certain operating units and affect the
volume of the Company's sales.
ECONOMIC CONDITIONS
The Company's performance is affected by fluctuations in economic
conditions in the markets in which the Company sells its products, primarily the
United States and Western Europe. The strength or weakness of these economies
may affect the rate of expansion within the restaurant, supermarket, lodging,
healthcare and convenience store industries. In the event of an economic
downturn in any of the economies in which the
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Company conducts business, the Company's business, financial condition or
operating results could be materially and adversely affected.
COMPETITION
The primary markets for the Company's products are highly competitive. The
most significant competitive factors are product reliability and performance,
service and price, with the relative importance of such factors varying among
product lines. The Company has a number of competitors in each product line that
it offers. Many of the Company's competitors are small, privately owned
companies. Some of the Company's competitors, however, are divisions of larger
companies, and some have greater financial resources than the Company. The
Company's largest competitors include IMI Cornelius, plc, with whom the Company
competes in beverage systems in Europe; Hussmann Corporation, a subsidiary of
Whitman Corporation, with whom the Company competes in refrigerated display
cases and related equipment in the United States; and The Manitowoc Company,
Inc., with whom the Company competes in walk-in coolers and freezers and ice
machines. Furthermore, the Company believes that the commercial foodservice
equipment industry recently has begun to undergo significant consolidation as
foodservice chains and supermarkets reduce their supplier base. If the Company's
competitors are more successful than the Company in exploiting this
consolidation trend, the Company's profitability or market positions could be
adversely affected.
DEPENDENCE ON KEY PERSONNEL
Scotsman's success to date has depended in large part on the skills and
efforts of Richard C. Osborne, Chairman of the Board, President and Chief
Executive Officer, Donald D. Holmes, Vice President-Finance and Secretary, and
the heads of each of the operating units of the Company. While the Company has
employment agreements with certain of its executive officers, including Messrs.
Osborne and Holmes, there can be no assurance that the Company will be able to
retain the services of its officers and key employees. The loss of Messrs.
Osborne, Holmes or any of the heads of the Company's operating units could have
a material adverse effect on the Company's business, results of operations or
financial condition. See "Management."
FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY
The volume of sales of Scotsman's ice machines, food preparation and
storage equipment and beverage systems is somewhat higher in the second and
third fiscal quarters than in the first and fourth fiscal quarters. Sales of
Scotsman's refrigerated display cases and walk-in coolers and freezers are also
subject to seasonal fluctuations, with sales being typically somewhat stronger
in the second half of the fiscal year. The Company expects that, including
Kysor, the second and third fiscal quarters generally will account for a greater
portion of the annual net sales than the first and fourth fiscal quarters. As a
result of the seasonal nature of its sales, the operating results of the Company
will fluctuate from quarter to quarter and the Company may experience greater
cash needs in the second and third fiscal quarters, which could increase the
borrowing needs of the Company during these periods.
LITIGATION
The Company's results of operations can be negatively impacted by product
liability or other lawsuits and/or by warranty claims or other returns of goods.
Although the Company does not believe that outstanding claims will have a
material adverse effect on the Company, such claims, as well as any future
claims, are subject to the uncertainties attendant to litigation, and the
ultimate outcome of any such proceedings or claims cannot be predicted.
FOREIGN OPERATIONS AND CURRENCY FLUCTUATIONS
Scotsman sells products in over 100 countries and has manufacturing
operations in the United States, the United Kingdom, Germany and Italy and joint
venture interests in Australia, China, the United Kingdom and Indonesia. Sales
of the Company's products outside of the United States represented approximately
24% of the Company's 1996 pro forma net sales, and the Company anticipates that
international sales will continue to grow. International operations generally
are subject to various political and other risks that are not present in U.S.
operations, including, among other things, the risk of war or civil unrest,
expropriation and nationalization. In addition, certain international
jurisdictions restrict repatriation of the Company's non-U.S.
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earnings. Various international jurisdictions also have laws limiting the right
and ability of non-U.S. entities to pay dividends and remit earnings to
affiliated companies unless specified conditions are met. In addition, sales in
international jurisdictions typically are made in local currencies, which
subjects the Company to risks associated with currency fluctuations. Currency
devaluations and unfavorable changes in international monetary and tax policies
and other changes in the international regulatory climate could materially
affect the Company's profitability or growth plans.
ENVIRONMENTAL REGULATION
The operations and properties of the Company are subject to various
federal, state, local and foreign environmental regulations and standards
governing, among other things, emissions to air, discharge to waters and the
generation, storage, handling, transportation, treatment and disposal of a
variety of hazardous and non-hazardous substances and wastes. Because the
requirements imposed by those authorities frequently are revised and
supplemented, with a trend towards greater stringency, expenditures for
compliance responsibilities are difficult to estimate and may exceed anticipated
costs.
The Company or its subsidiaries have been identified as a potentially
responsible party ("PRP") under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") and similar state statutes in
connection with a number of hazardous waste sites, including a number of sites
associated with the former Transportation Products Group of Kysor. See "Kysor
Acquisition." Under existing environmental laws, PRPs are jointly and severally
responsible for the cost of clean-up and other remedial action at these sites,
and each PRP is therefore potentially responsible for the full cost of
remediation. As a practical matter, however, costs generally are shared with
other PRPs, based on each PRP's relative contribution to the problem. Moreover,
the purchaser of the Transportation Products Group has assumed all environmental
liabilities associated with that business. Notwithstanding the assumption of
liabilities by the purchaser, under applicable environmental laws the Company
could incur liabilities related to these and other unknown environmental
matters. Based on the foregoing factors, the relative size of the Company's
contribution to the sites for which it has been named a PRP (including those
sites associated with Kysor's former Transportation Products Group), currently
available information about the cost of remediation at such sites and the
probability that other PRPs, many of which are large, solvent public companies,
will pay the costs apportioned to them, the Company does not believe that any
liability imposed in connection with such environmental proceedings, either
individually or in the aggregate, will have a material adverse effect upon the
Company's financial condition or its results of operations. Furthermore, the
Company believes that compliance with existing and publicly proposed
environmental regulations will not have a material adverse effect on the
business, financial condition or results of operations of the Company. However,
there can be no assurance that the cost of compliance with current or future
regulations or the cost of other environmental obligations will not exceed
current estimates.
GOVERNMENTAL AND OTHER REGULATION
Scotsman's products and manufacturing processes are subject to various
health and safety regulations and standards that are subject to change and from
time to time may require significant changes in products or manufacturing
methods. For example, a new standard issued by the National Sanitation
Foundation that requires the temperature for holding many cold foods to be
lowered from 45 DEGREESF to 41 DEGREESF would, if adopted by state and local
health agencies, require the Company to make various engineering changes to its
refrigerated display cases. Although no assurances can be given, the Company
believes that health and safety matters, including the new temperature
requirement for refrigerated cases, will not have a material adverse effect on
its business, results of operations or financial condition. However, legal and
regulatory requirements in this area are increasing, and there can be no
assurance that significant costs and liabilities will not be incurred as a
result of currently unidentified future problems or new regulatory developments.
SUBORDINATION OF NOTES AND GUARANTY
The payment of principal of, premium, if any, and interest on, and any
other amounts owing in respect of, the Notes and the Guaranty will be
subordinated to the prior payment in full of all existing and future Senior
Indebtedness, which includes all obligations under the Credit Facility.
Furthermore, the Credit Facility is
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secured by a pledge of Scotsman's interest in the capital stock of the Issuer
and by a pledge of the Issuer's interest in the capital stock of certain of its
subsidiaries. Therefore, in the event of the bankruptcy, liquidation,
dissolution, reorganization or other winding up of the Issuer or Scotsman, the
assets of the Issuer and Scotsman will be available to pay obligations on the
Notes and the Guaranty only after all Senior Indebtedness has been paid in full,
and there may not be sufficient assets remaining to pay amounts due on any or
all of the Notes or the Guaranty. In addition, no payment of any kind or
character may be made on the Notes if any Obligations with respect to any
Designated Senior Indebtedness are not paid when due or if any other default
occurs with respect to any Designated Senior Indebtedness and the maturity
thereof has been accelerated. During the continuance of any default with respect
to any Designated Senior Indebtedness which permits the maturity thereof to be
accelerated, the Issuer may not make any payment of any kind or character in
respect of the Notes, and the Company may not make any payment in respect
thereof under the Guaranty, for a period of up to 179 days after receipt of
notice thereof by the Issuer. As of September 28, 1997, after giving effect to
the application of the estimated net proceeds herefrom, the aggregate amount of
outstanding Senior Indebtedness of the Company and the Issuer would have been
approximately $262 million. In addition, the Issuer would have had up to
approximately $146 million of available credit under the Credit Facility and the
Comerica Agreement. All borrowings under the Credit Facility and the Comerica
Agreement would constitute Senior Indebtedness and are guaranteed on a senior
basis by Scotsman. See "Use of Proceeds," "Capitalization," "Description of
Notes -- Subordination" and "Description of Credit Facility."
The Notes will also be effectively subordinated to all existing and future
liabilities of the Issuer's subsidiaries. As of September 28, 1997, after giving
pro forma effect to this Offering and the application of net proceeds herefrom,
the Issuer's subsidiaries would have had approximately $38 million of
indebtedness outstanding.
PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of the Notes may
require the Company to repurchase all or a portion of such holder's Notes at
101% of the principal amount of the Notes, together with accrued and unpaid
interest to the date of repurchase. The Indenture will require that, prior to
such a repurchase, the Company must either repay all outstanding Senior
Indebtedness or obtain any required consents to such repurchase. If a Change of
Control were to occur, the Company may not have the financial resources to repay
all of the Senior Indebtedness, the Notes and any other indebtedness that would
become payable upon the occurrence of such Change of Control. See "Description
of the Notes -- Certain Covenants -- Change of Control."
LACK OF TRADING MARKET FOR THE NOTES
The Notes are a new issue of securities for which there is currently no
trading market. The Company intends to apply for a listing of the Notes on the
Luxembourg Stock Exchange after the consummation of this Offering. The
Underwriters have advised the Company that they currently intend to make a
market in the Notes, although the Underwriters are not obligated to do so, and
any market making with respect to the Notes may be discontinued at any time
without notice. See "Underwriters." There can be no assurance as to the
liquidity of any market that may develop for the Notes, the ability of the
holders of the Notes to sell their Notes or the price at which such holders
would be able to sell their Notes. If a market were to exist, the Notes could
trade at prices that may be lower than the initial offering price thereof
depending on many factors, including prevailing interest rates and the markets
for similar securities, general economic conditions and the financial condition
and performance of, and prospects for, the Company.
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THE COMPANY
Scotsman was formed in 1989 through a spin-off (the "Spin-off") effected by
Household International, Inc. ("Household") of its commercial food service
equipment operations. As a result of the Spin-off, the Company became publicly
traded on the NYSE in April 1989. At the time of the Spin-off, the Company's
businesses consisted of the ice machine businesses of Scotsman Group, the
beverage systems business of Booth, Inc. ("Booth") and various other businesses,
which since have been sold. Since the Spin-off, the Company has grown both
through internal growth and a series of acquisitions. From 1992 through 1996,
the Company successfully completed and integrated the following five strategic
acquisitions:
Crystal Tips. In April 1992, the Company acquired the assets of Crystal
Tips, Inc., a domestic ice machine manufacturer ("Crystal Tips"). The purchase
enabled Scotsman to: (i) broaden its product offerings and increase its brand
recognition; (ii) improve its penetration in secondary market distribution
channels and under-represented segments such as healthcare; and (iii) combine
and re-engineer the manufacturing operations of Booth and Crystal Tips. Crystal
Tips had sales of approximately $15 million for its fiscal year ended prior to
the acquisition.
Simag. In January 1993, Scotsman acquired Simag, an ice machine
manufacturer in Italy. The Simag acquisition reinforced Scotsman's existing
manufacturing and distribution presence in Europe and provided a third Scotsman
brand in the region. Simag had sales of approximately $7 million for its fiscal
year ended prior to the acquisition.
Delfield. In April 1994, the Company acquired The Delfield Company, a maker
of food preparation and storage equipment ("Delfield"). The acquisition
provided: (i) a leading market position in a new, complementary product line;
(ii) opportunities to cross-sell ice machines and other Scotsman products into
Delfield accounts; (iii) benefits of shared knowledge across similar
technologies used by Scotsman's operating units; and (iv) improved purchasing
economies. Delfield had sales of approximately $94 million for its fiscal year
ended prior to the acquisition.
Whitlenge. Simultaneous with the April 1994 Delfield acquisition, Scotsman
acquired Whitlenge Drink Equipment Limited, a U.K.-based beverage systems
manufacturer ("Whitlenge"). Whitlenge gave the Company a leading market position
in beverage systems in the United Kingdom and enhanced the overall strength of
Scotsman's beverage systems product line. In addition, Whitlenge contributed
significantly to the Company's prominence, reputation, distribution strength and
customer relationships in European markets. Whitlenge had sales of approximately
$24 million for its fiscal year ended prior to the acquisition.
Hartek. In December 1995, Scotsman acquired Hartek Beverage Handling GmbH,
a beverage systems manufacturer based in Germany ("Hartek"). Hartek, with
Whitlenge, established the Company as the second largest manufacturer of
beverage systems in Europe, a region Scotsman believes presents substantial
growth prospects. By coordinating technology, purchasing, production and
distribution with Whitlenge, and developing progressive manufacturing
techniques, the Company improved the profitability of Hartek and expanded sales
of beverage systems in Europe. Hartek had sales of approximately $24 million for
its fiscal year ended prior to the acquisition.
In addition to these acquisitions, the Company has entered into two joint
ventures and one strategic alliance as described below:
China. Scotsman owns a 60% interest in a joint venture with Shenyang Xinle
Precision Machinery Company in Shenyang, China, which manufactures and markets
ice machines for the Chinese market. The joint venture sells its ice machines
primarily to commercial foodservice equipment distributors throughout the
People's Republic of China.
United Kingdom. Scotsman is a 50% partner in SAW Technologies Limited, a
joint venture recently formed to develop technologically advanced beverage
dispensing valves ("SAW Technologies"). The joint venture's Aztec valve, already
being sold to a major soft drink bottler in the United Kingdom, is also targeted
for other customers and markets.
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Howe Strategic Alliance. Scotsman's strategic alliance with Howe
Corporation ("Howe") includes distribution and trademark licensing agreements,
which give the Company exclusive worldwide rights to distribute Howe industrial
ice flakers. The agreements were executed in November 1992 for an initial
five-year term. The agreements were renewed in January 1996, and renew
automatically for successive three-year terms unless terminated by either party
by giving a notice at least two years before the expiration of the then-current
term.
The Company's principal executive offices are located at 820 Forest Edge
Drive, Vernon Hills, Illinois 60061 and its telephone number is (847) 215-4500.
SCOTSMAN GROUP
Scotsman Group is a Delaware corporation and a direct wholly owned
subsidiary of Scotsman. Scotsman conducts its domestic ice machine business
through divisions of Scotsman Group and all of its other businesses through
subsidiaries of Scotsman Group.
The principal office of Scotsman Group is located at 820 Forest Edge Drive,
Vernon Hills, Illinois 60061 and its telephone number is (847) 215-4500.
KYSOR ACQUISITION
REVIEW OF TRANSACTION
In March 1997, Scotsman acquired Kysor, which at the time was comprised of
the Commercial Products Group, through which Kysor's refrigerated display cases
and walk-in coolers and freezers businesses were conducted, and the
Transportation Products Group, through which Kysor sold a line of products to
the transportation industry. The Company paid approximately $309 million in cash
and assumed $35.0 million in debt, net of cash, for both the Commercial Products
Group and the Transportation Products Group. Concurrently with the Kysor
Acquisition, Scotsman sold substantially all of the assets of the Transportation
Products Group for $86.0 million (approximately $68 million net of taxes) to a
subsidiary of Kuhlman Corporation. Including estimated transaction and severance
costs of $22.5 million, the net purchase price for the Commercial Products Group
was approximately $299 million. The subsidiary of Kuhlman Corporation assumed
substantially all liabilities related to the Transportation Products Group,
including environmental and product liabilities. The Company financed the Kysor
Acquisition through a new unsecured bank facility. See "Description of Certain
Indebtedness."
Kysor's Commercial Products Group operates through its Kysor//Warren and
Kysor Panel Systems divisions. Kysor//Warren is the second largest U.S.
manufacturer of refrigerated display cases, and Kysor Panel Systems is the
leading manufacturer of walk-in coolers and freezers in the United States. In
1996, approximately 80% of Kysor's sales were to supermarket chains, with the
remaining 20% primarily to restaurants and convenience stores. In 1996, Kysor's
Commercial Products Group had sales of $245.1 million, an increase of 18.3% over
1995. This increase was driven primarily by strong demand from supermarket
chains and the inclusion of sales of NAX of North America, which was acquired by
Kysor in March 1996.
In addition, as a result of the Kysor Acquisition, the Company now owns
23.8% of the outstanding shares of Austral Refrigeration Pty. Ltd., the parent
company of Kysor//Warren Australia, Pty. Ltd., a licensee and manufacturer of
Kysor refrigerated display cases primarily in Australia ("Kysor//Warren
Australia"). Kysor//Warren Australia is a leading supplier of refrigerated
display cases in the Australian market. Kysor//Warren Australia owns a 50%
interest in an Indonesian joint venture, which the Company believes is the only
manufacturer of refrigerated display cases in Asia.
STRATEGIC RATIONALE
Scotsman believes the addition of Kysor presents significant opportunities
to increase the Company's sales and profitability. While both Scotsman and Kysor
historically have served a similar customer base, Scotsman generally has had
stronger relationships in the restaurant, lodging and healthcare industries and
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Kysor has had stronger relationships with supermarket and convenience store
chains. The Company believes that significant cross-selling opportunities exist
to broaden penetration and distribution of Scotsman's products to Kysor's
customers and vice versa. The Company believes that similarities in the
marketing, distribution and product technology employed by the two companies
will facilitate integration. Additional benefits from the transaction include
combined purchasing economies, research and development efficiencies, the
sharing of best practices, particularly in manufacturing, and reductions in
overhead expense.
POST-ACQUISITION INTEGRATION
Scotsman has consolidated Kysor's operations from four divisions to two.
Kysor's Bangor unit, a manufacturer of a specialty line of refrigerated display
cases, was integrated with Kysor//Warren, and Kysor's Kalt and Needham
businesses, which manufacture walk-in coolers and freezers, were combined to
form Kysor Panel Systems. This reorganization and the development of coordinated
national sales efforts are expected to result in cost savings and marketing and
distribution efficiencies. In addition, Scotsman eliminated approximately 20
redundant positions, primarily located at Kysor's former headquarters in
Cadillac, Michigan, which resulted in a cost savings of $5.3 million in 1996 on
a pro forma basis.
SECONDARY EQUITY OFFERING
This Prospectus is part of a Registration Statement that also covers the
offer and sale from time to time of up to 1,611,699 shares of Common Stock by
Onex and certain of its affiliates, who have the right, pursuant to the
Registration Rights Agreement, to request that the Company include certain
shares of Common Stock in registrations by the Company of its securities under
the Securities Act. The Selling Stockholders have advised the Company, and the
Prospectus relating to the Equity Offering discloses, that they may sell their
shares of Common Stock through an underwritten public offering, in one or more
transactions (including block trades) on the New York Stock Exchange or on the
over-the-counter market or pursuant to privately negotiated transactions. The
Company is obligated under the Registration Rights Agreement to keep the
Registration Statement related to the Equity Offering effective for no more than
90 days. The Company will not receive any proceeds from the sale of Common Stock
in the Equity Offering. The Offerings are separate and independent transactions
not contingent upon one another. The Company is obligated to indemnify the
Selling Stockholders and any underwriters of the Equity Offering against certain
liabilities, including certain liabilities arising under the Securities Act.
USE OF PROCEEDS
The net proceeds to Scotsman Group from this Offering are estimated to be
approximately $95,750,000. Scotsman Group intends to apply such net proceeds to
repay $30,000,000 of term loan borrowings outstanding under the Credit Facility
and approximately $65,750,000 of revolving loan borrowings outstanding under the
Credit Facility. See "Capitalization" and "Description of Credit Facility." As
of September 28, 1997, interest on the term loan portion of the Credit Facility
and the revolving loan portion of the Credit Facility accrued at rates ranging
from 7.0% to 8.625% per annum. At September 28, 1997, there was approximately
$150 million of term loan borrowings outstanding under the Credit Facility and
approximately $185 million of revolving loan borrowings outstanding under the
Credit Facility.
18
<PAGE> 20
CAPITALIZATION
The following table sets forth (i) the consolidated actual capitalization
of the Company as of September 28, 1997 (including short-term debt and current
maturities of capitalized lease obligations and long-term debt of the Company)
and (ii) the consolidated pro forma capitalization of the Company (including
short-term debt and current maturities of capitalized lease obligations and
long-term debt of the Company) as adjusted for the consummation of this Offering
and the application of the net proceeds to be received by the Company therefrom
as described in "Use of Proceeds," as if such event had occurred on September
28, 1997. This table should be read in conjunction with the consolidated
historical and pro forma financial information included or incorporated by
reference elsewhere in this Prospectus, including the notes thereto.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 28, 1997
------------------------
ACTUAL AS ADJUSTED
------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt and current maturities of capitalized lease
obligations and long-term debt............................ $ 22,548 $ 22,548
Long-term debt and capitalized lease obligations:
Credit Facility........................................ 317,540 221,790
% Senior Subordinated Notes Due 2007.............. -- 100,000
Industrial revenue bonds............................... 12,750 12,750
Foreign and other borrowings........................... 2,821 2,821
Capitalized lease obligations.......................... 259 259
-------- --------
Total long-term debt and capitalized lease
obligations......................................... 333,370 337,620
Shareholders' Equity:
Common stock, $0.10 par value, 50,000,000 shares
authorized; 10,752,066 actual and as adjusted shares
issued................................................ 1,075 1,075
Additional paid in capital............................. 73,549 73,549
Retained earnings...................................... 77,596 77,596
Deferred compensation and unrecognized pension cost.... (147) (147)
Foreign currency translation adjustments............... (8,155) (8,155)
Less: Common stock held in treasury:................... (1,604) (1,604)
-------- --------
Total shareholders' equity........................... 142,314 142,314
-------- --------
Total capitalization (including short-term debt and
current maturities of capitalized lease obligations
and long-term debt)................................. $498,232 $502,482
======== ========
</TABLE>
19
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL AND OTHER INFORMATION
The consolidated balance sheet information of the Company presented below
as of the end of each of the 1996 and 1995 fiscal years and the income statement
and other information of the Company presented below for each of the 1996, 1995
and 1994 fiscal years have been derived from, and should be read in conjunction
with, the Company's consolidated financial statements and notes thereto, which
have been audited by Arthur Andersen LLP, independent public accountants, and
which are included and incorporated by reference elsewhere in this Prospectus.
The consolidated balance sheet information of the Company presented below as of
the end of each of the 1994, 1993 and 1992 fiscal years and the income statement
and other information of the Company presented below for each of the 1993 and
1992 fiscal years have been derived from audited consolidated financial
statements of the Company not included or incorporated by reference in this
Prospectus. The balance sheet information of the Company presented below as of
September 28, 1997 and the income statement and other information of the Company
presented below for the first fiscal nine months ended September 28, 1997 and
September 29, 1996, respectively, have been derived from, and should be read in
conjunction with, the Company's unaudited consolidated financial statements
which are included and incorporated by reference elsewhere in this Prospectus.
The unaudited financial information includes all adjustments, consisting of
normal recurring accruals, that the Company considers necessary for a fair
presentation of the consolidated financial position and consolidated results of
operations for the periods reflected therein. All of the consolidated financial
information presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the other consolidated historical and pro forma financial information included
or incorporated by reference elsewhere in this Prospectus, including the notes
thereto.
20
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL AND OTHER INFORMATION
<TABLE>
<CAPTION>
FIRST FISCAL NINE
MONTHS FISCAL YEAR ENDED
------------------- ----------------------------------------------------
1997(1) 1996 1996 1995 1994 1993 1992
------- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT INFORMATION:
Net sales..................... $431,529 $282,720 $356,373 $324,291 $266,632 $163,952 $168,674
Cost of sales................. 320,284 202,250 257,942 236,402 190,518 114,472 122,226
-------- -------- -------- -------- -------- -------- --------
Gross profit.................. 111,245 80,470 98,431 87,889 76,114 49,480 46,448
Selling and administrative
expenses.................... 63,449 45,072 58,135 53,435 47,900 31,874 31,588
-------- -------- -------- -------- -------- -------- --------
Income from operations........ 47,796 35,398 40,296 34,454 28,214 17,606 14,860
Interest expense, net......... 15,207 4,159 5,279 6,326 5,416 4,235 4,675
-------- -------- -------- -------- -------- -------- --------
Income before income taxes.... 32,589 31,239 35,017 28,128 22,798 13,371 10,185
Income taxes.................. 15,605 14,772 16,449 12,720 10,013 5,989 3,793
-------- -------- -------- -------- -------- -------- --------
Income before extraordinary
loss and effect of
accounting changes.......... 16,984 16,467 18,568 15,408 12,785 7,382 6,392
Extraordinary loss (net of
income taxes of $422)(2).... (633) -- -- -- -- -- --
Cumulative effect of
accounting changes(3)....... -- -- -- -- -- 29 --
-------- -------- -------- -------- -------- -------- --------
Net income.................... $ 16,351 16,467 $ 18,568 $ 15,408 $ 12,785 $ 7,411 $ 6,392
Preferred stock dividends..... -- 813 813 1,240 885 -- --
-------- -------- -------- -------- -------- -------- --------
Net income available to common
shareholders................ 16,351 $ 15,654 $ 17,755 $ 14,168 $ 11,900 $ 7,411 $ 6,392
======== ======== ======== ======== ======== ======== ========
Income per share before
extraordinary loss and
cumulative effect of
accounting changes:
Primary(4).................. $ 1.57 $ 1.68 $ 1.85 $ 1.58 $ 1.49 $ 1.06 $ .90
-------- -------- -------- -------- -------- -------- --------
Fully diluted(5)............ $ 1.57 $ 1.54 $ 1.73 $ 1.45 $ 1.35 $ 1.06 $ .90
-------- -------- -------- -------- -------- -------- --------
Net income per share:
Primary(4).................. $ 1.51 $ 1.68 $ 1.85 $ 1.58 $ 1.49 $ 1.06 $ .90
-------- -------- -------- -------- -------- -------- --------
Fully diluted(5)............ $ 1.51 $ 1.54 $ 1.73 $ 1.45 $ 1.35 $ 1.06 $ .90
-------- -------- -------- -------- -------- -------- --------
OTHER INFORMATION:
EBITDA(6)..................... $ 59,844 $ 41,871 $ 49,166 $ 42,048 $ 34,233 $ 21,280 $ 18,422
Capital expenditures.......... 9,427 4,840 6,195 6,513 5,434 3,264 2,012
SELECTED RATIOS:
Ratio of earnings to fixed
charges(7).................. 3.0x 7.7x 6.8x 5.0x 4.8x 3.9x 3.0x
Ratio of EBITDA to interest
expense..................... 3.9x 10.1x 9.3x 6.6x 6.3x 5.0x 3.9x
Ratio of total debt to
EBITDA...................... -- -- 1.6x 2.1x 2.6x 1.5x 1.7x
BALANCE SHEET INFORMATION:
(AT END OF PERIODS):
Cash and marketable
securities.................. $ 23,191 $ 16,035 $ 16,501 $ 15,808 $ 9,770 $ 8,462 $ 5,202
Total assets.................. 677,788 294,029 283,264 275,943 244,791 103,173 96,103
Total debt and capitalized
lease obligations (including
current maturities)......... 355,918 77,925 76,606 87,756 88,191 32,176 31,454
Working capital............... 90,554 72,843 59,321 54,828 54,565 36,318 32,355
Shareholders' equity.......... 142,314 128,515 131,712 112,319 86,463 33,994 30,146
</TABLE>
- -------------------------
(Footnotes on following page)
21
<PAGE> 23
- -------------------------
(1) Includes results of Kysor for the period from March 10, 1997 through
September 28, 1997.
(2) The extraordinary loss resulted from one-time expenses incurred relating to
the early retirement of certain debt of the Company prior to the Kysor
Acquisition.
(3) Effective January 4, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Post-Retirement
Benefits Other than Pensions"; Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes"; and Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Post-employment
Benefits."
(4) Primary earnings per common share are computed by dividing net income
available to common shareholders by the weighted average number of shares of
common stock and common stock equivalents outstanding during each period.
The weighted average number of shares of common stock and common stock
equivalents were: 10,803,978 and 9,310,155 for the first fiscal nine months
of 1997 and 1996, respectively; and 9,601,422; 8,983,709; 7,980,996;
7,000,651 and 7,096,976 for the 1996, 1995, 1994, 1993 and 1992 fiscal
years, respectively.
(5) 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 the convertible preferred stock from the date of issue. The
total number of shares used in the fully diluted calculation were:
10,811,621 and 10,726,127 for the first fiscal nine months of 1997 and 1996,
respectively; and 10,728,188; 10,649,763; 9,488,965; 7,000,651 and 7,096,976
for the 1996, 1995, 1994, 1993 and 1992 fiscal years, respectively.
(6) Represents earnings before interest, taxes, accounting charges, depreciation
and amortization. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to service and incur debt. EBITDA
should not be considered by a prospective purchaser of Common Stock as an
alternative to net income or as an indicator of the Company's operating
performance or cash flows.
(7) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as income before extraordinary loss, cumulative effect of
accounting changes and income taxes, plus fixed charges. Fixed charges
consist of interest expense, amortization of debt expense and implicit
interest expense associated with operating leases.
22
<PAGE> 24
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following pro forma consolidated financial statements for the fiscal
nine months ended September 28, 1997 and the fiscal year ended December 29, 1996
are presented to illustrate the estimated effects of the completion of the Kysor
Acquisition and the financing thereof and the consummation of this Offering as
if such transactions had occurred at the beginning of the periods shown. See
"Use of Proceeds."
The Kysor Acquisition was accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed were recorded
at their estimated fair values which are subject to further refinement,
including final appraisals and other analyses, with appropriate recognition
given to the effect of current interest rates and income taxes.
The pro forma consolidated financial statements do not purport to represent
the financial position or results of operations that would have resulted if the
transactions had been consummated on the dates assumed or the results of
operations to be expected in the future. In addition to certain cost savings
reflected in the pro forma consolidated income statements, management believes
that certain additional cost savings and revenue enhancements may be realized
following the Kysor Acquisition. No assurances can be made as to the amount of
cost savings or revenue enhancements, if any, that actually will be realized.
See "Kysor Acquisition -- Strategic Rationale" and "Kysor Acquisition --
Post-Acquisition Integration."
The pro forma consolidated financial information is based on certain
assumptions and adjustments described in the notes thereto. Such financial
information should be read in conjunction with such notes, the discussion under
"Kysor Acquisition" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview" and the consolidated financial
statements and related notes of Scotsman and Kysor included and incorporated by
reference in this Prospectus.
23
<PAGE> 25
PRO FORMA CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
FISCAL NINE MONTHS ENDED SEPTEMBER 28, 1997
-------------------------------------------------------------------------------------------
SCOTSMAN KYSOR ACQUISITION OFFERING PRO FORMA
ACTUAL(1) ACTUAL(2) ADJUSTMENTS(3) PRO FORMA ADJUSTMENTS AS ADJUSTED
--------- --------- -------------- --------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales......................... $431,529 $38,834 $ -- $470,363 $ -- $470,363
Cost of sales..................... 320,284 31,583 123(4) 351,990 -- 351,990
-------- ------- ------- -------- ------- --------
Gross profit...................... 111,245 7,251 (123) 118,373 -- 118,373
Selling and administrative
expenses........................ 63,449 9,076 (3,899)(5) 68,626 -- 68,626
-------- ------- ------- -------- ------- --------
Income from operations............ 47,796 (1,825) 3,776 49,747 -- 49,747
Interest expense, net............. 15,207 68 4,573(6) 19,848 1,631(7) 21,479
-------- ------- ------- -------- ------- --------
Income before income taxes........ 32,589 (1,893) (797) 29,899 (1,631) 28,268
Income taxes...................... 15,605 (795) 131(8) 14,941 (652)(8) 14,289
-------- ------- ------- -------- ------- --------
Income before extraordinary
loss............................ 16,984 (1,098) (928) 14,958 (979) 13,979
Extraordinary loss (net of income
taxes of $422).................. (633)(9) -- -- (633) -- (633)
-------- ------- ------- -------- ------- --------
Net income........................ $ 16,351 $(1,098) $ (928) $ 14,325 $ (979) $ 13,346
Preferred stock dividends......... -- 176 (176)(10) -- -- --
-------- ------- ------- -------- ------- --------
Net income available to common
shareholders.................... $ 16,351 $(1,274) $ (752) $ 14,325 $ (979) $ 13,346
======== ======= ======= ======== ======= ========
Income per share before
extraordinary loss:
Primary(11)................... $ 1.57 $ 1.29
-------- --------
Fully diluted(12)............. $ 1.57 $ 1.29
-------- --------
Net income per share:
Primary(11)................... $ 1.51 $ 1.24
-------- --------
Fully diluted(12)............. $ 1.51 $ 1.23
-------- --------
</TABLE>
- -------------------------
(1) Includes results of Kysor for the period from March 10, 1997 through
September 28, 1997.
(2) Results included for Kysor are those from continuing operations through
March 9, 1997. The results of the discontinued Transportation Products
Group are excluded.
(3) The allocation of the purchase price to assets acquired and liabilities
assumed has been calculated on a preliminary basis. The final allocation
will be completed within twelve months of the acquisition date once final
appraisals and other analyses are completed.
(4) Represents the incremental increase in depreciation expense caused by the
recording of property, plant and equipment of Kysor at fair value.
(5) Represents the following adjustments:
<TABLE>
<S> <C> <C> <C>
(i) Net decrease in administrative expenses due to the
elimination of Kysor's world headquarters and the
consolidation of four Kysor business units into two business
units;...................................................... $(1,489)
(ii) Elimination of the amortization and deferral components of
pension expense for Kysor's defined benefit and
post-retirement plans (due to the complexities associated
with pension accounting, this benefit may not necessarily be
a representative element of pension expense in the
future);.................................................... (412)
(iii) Net increase in the amortization of goodwill recorded as a
result of the Kysor Acquisition;............................ 874
(iv) One-time costs incurred in anticipation of the completion of
the Kysor Acquisition; and.................................. (2,917)
(v) Incremental depreciation expense resulting from the
recording of property, plant and equipment of Kysor at fair
value....................................................... 45
-------
$(3,899)
=======
</TABLE>
(6) Represents an increase in interest expense due to increased levels of
borrowings under the Credit Facility to finance the Kysor Acquisition and
refinance certain debt of Scotsman and Kysor (the "Kysor Debt") and the
amortization of fees incurred in conjunction with the execution of the
Credit Facility.
(7) Represents the incremental amount of increased interest expense resulting
from the sale of the Notes and the application of the net proceeds thereof
to repay a portion of the Kysor Debt and the amortization of fees incurred
in connection with the sale of the Notes. See "Use of Proceeds."
(8) Represents the tax effect of the adjustments made as a result of the Kysor
Acquisition and this Offering, net of non-deductible goodwill.
(9) The extraordinary loss resulted from one-time expenses incurred relating to
the early retirement of certain debt of the Company prior to the Kysor
Acquisition.
(10) Represents the elimination of preferred stock dividends for Kysor due to
the purchase of the outstanding preferred stock of Kysor in conjunction
with the Kysor Acquisition.
(11) 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 of 10,803,978 for the
actual and pro forma as adjusted periods.
(12) 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 the convertible preferred stock from the date of issue. The
total number of shares used in the fully diluted calculation for the actual
and pro forma as adjusted periods was 10,811,621.
24
<PAGE> 26
PRO FORMA CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 29, 1996
----------------------------------------------------------------------------------------
SCOTSMAN KYSOR ACQUISITION OFFERING PRO FORMA
ACTUAL ACTUAL(1) ADJUSTMENTS(2) PRO FORMA ADJUSTMENTS AS ADJUSTED
-------- --------- -------------- --------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales............................. $356,373 $245,062 $ -- $601,435 $ -- $601,435
Cost of sales......................... 257,942 185,253 592(3) 443,787 -- 443,787
-------- -------- -------- -------- ------- --------
Gross profit.......................... 98,431 59,809 (592) 157,648 -- 157,648
Selling and administrative expenses... 58,135 35,075 (3,349)(4) 89,861 -- 89,861
-------- -------- -------- -------- ------- --------
Income from operations................ 40,296 24,734 2,757 67,787 -- 67,787
Interest expense, net................. 5,279 956 23,006(5) 29,241 2,175(6) 31,416
-------- -------- -------- -------- ------- --------
Income before income taxes............ 35,017 23,778 (20,249) 38,546 (2,175) 36,371
Income taxes.......................... 16,449 8,650 (5,871)(7) 19,228 (870)(7) 18,358
-------- -------- -------- -------- ------- --------
Net income............................ $ 18,568 $ 15,128 $(14,378) $ 19,318 $(1,305) $ 18,013
Preferred stock dividends............. 813 966 (966)(8) 813 -- 813
-------- -------- -------- -------- ------- --------
Net income available to common
shareholders........................ $ 17,755 $ 14,162 $(13,412) $ 18,505 $(1,305) $ 17,200
======== ======== ======== ======== ======= ========
Net income per share:
Primary(9).......................... $ 1.85 $ 1.79
-------- --------
Fully diluted(10)................... $ 1.73 $ 1.68
-------- --------
</TABLE>
- -------------------------
(1) Results included for Kysor are those from continuing operations. The
results of the discontinued Transportation Products Group are excluded.
(2) The allocation of the purchase price to assets acquired and liabilities
assumed has been calculated on a preliminary basis. The final allocation
will be completed within twelve months of the acquisition date once final
appraisals and other analyses are completed.
(3) Represents the incremental increase in depreciation expense caused by the
recording of property, plant and equipment of Kysor at fair value.
(4) Represents the following adjustments:
<TABLE>
<S> <C> <C>
(i) Net decrease in administrative expenses due to the
elimination of Kysor's world headquarters and the
consolidation of four Kysor business units into two business
units;...................................................... $(5,957)
(ii) Elimination of the amortization and deferral components of
pension expense for Kysor's defined benefit and
post-retirement plans (due to the complexities associated
with pension accounting, this benefit may not necessarily be
a representative element of pension expense in the
future);.................................................... (1,979)
(iii) Net increase in the amortization of goodwill recorded from
the purchase of Kysor by Scotsman; and...................... 4,374
(iv) Incremental depreciation expense resulting from the
recording of property, plant and equipment of Kysor at fair
value....................................................... 213
-------
$(3,349)
=======
</TABLE>
(5) Represents an increase in interest expense due to increased levels of
borrowings under the Credit Facility to finance the acquisition of Kysor
and refinance certain debt of Scotsman and Kysor and the amortization of
fees incurred in conjunction with the execution of the Credit Facility.
(6) Represents the incremental amount of increased interest expense resulting
from the sale of the Notes and the application of the net proceeds thereof
to repay a portion of the Kysor Debt and the amortization of fees incurred
in connection with the sale of the Notes. See "Use of Proceeds."
(7) Represents the tax effect of the adjustments made as a result of the Kysor
Acquisition and this Offering, net of non-deductible goodwill.
(8) Represents the elimination of preferred stock dividends for Kysor due to
the purchase of the outstanding preferred stock of Kysor in conjunction
with the Kysor Acquisition.
(9) 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 of 9,601,422 for the actual
and pro forma as adjusted periods.
(10) 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 the convertible preferred stock from the date of issue. The
total number of shares used in the fully diluted calculation for the actual
and pro forma as adjusted periods was 10,728,188.
25
<PAGE> 27
PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 29, 1996
------------------------------------------------------------------------------------
SCOTSMAN KYSOR ACQUISITION OFFERING PRO FORMA
ACTUAL ACTUAL ADJUSTMENTS(1) PRO FORMA ADJUSTMENTS AS ADJUSTED
-------- ------ -------------- --------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and temporary cash
investments................. $ 16,501 $ 8,354 $ -- $ 24,855 $ -- $ 24,855
Trade accounts and notes
receivable, net of
allowances.................. 58,734 34,654 -- 93,388 -- 93,388
Inventories................... 52,530 26,900 -- 79,430 -- 79,430
Deferred income taxes......... 4,708 4,927 14,520(2) 24,155 -- 24,155
Other current assets.......... 5,101 928 1,560(3) 7,589 -- 7,589
-------- -------- -------- -------- -------- --------
Total current assets..... 137,574 75,763 16,080 229,417 -- 229,417
Properties and equipment, net..... 46,659 29,732 6,670(4) 83,061 -- 83,061
Goodwill, net..................... 94,975 6,474 184,553(5) 286,002 -- 286,002
Deferred income taxes............. -- 4,667 14,598(6) 19,265 -- 19,265
Other noncurrent assets........... 4,056 33,770 2,842(7) 40,668 4,250(8) 44,918
Net assets of discontinued
operations...................... -- 38,656 (38,656)(9) -- -- --
-------- -------- -------- -------- -------- --------
Total assets............. $283,264 $189,062 $186,087 $658,413 $ 4,250 $662,663
======== ======== ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities:
Short-term debt and current
maturities of capitalized
lease obligations and
long-term
debt........................ $ 16,317 $ 5,799 $ (5,799)(10) $ 16,317 $ -- $ 16,317
Trade accounts payable........ 22,344 14,046 -- 36,390 -- 36,390
Accrued income taxes.......... 6,302 1,812 18,000(11) 26,114 -- 26,114
Accrued expenses.............. 33,290 16,928 18,922(12) 69,140 -- 69,140
-------- -------- -------- -------- -------- --------
Total current
liabilities............ 78,253 38,585 31,123 147,961 -- 147,961
% Senior Subordinated Notes Due
2007............................ -- -- -- -- 100,000(13) 100,000
Long-term debt and capitalized
lease obligations............... 60,289 32,822 248,318(14) 341,429 (95,750)(13) 245,679
Deferred income taxes............. 3,710 -- 3,695(6) 7,405 -- 7,405
Other noncurrent liabilities...... 9,300 14,247 6,359(15) 29,906 -- 29,906
-------- -------- -------- -------- -------- --------
Total liabilities........ 151,552 85,654 289,495 526,701 4,250 530,951
Shareholders' Equity:
Preferred stock............... -- 6,244 (6,244)(16) -- -- --
Common stock.................. 1,073 5,935 (5,935)(16) 1,073 -- 1,073
Additional paid in capital.... 73,053 8,742 (8,742)(16) 73,053 -- 73,053
Retained earnings............. 62,036 82,343 (82,343)(16) 62,036 -- 62,036
Deferred compensation and
unrecognized pension cost... (117) -- -- (117) -- (117)
Note receivable -- common
stock....................... -- (1,047) 1,047(16) -- -- --
Foreign currency translation
adjustments................. (2,877) 1,191 (1,191)(16) (2,877) -- (2,877)
Less: common stock held in
treasury.................... (1,456) -- -- (1,456) -- (1,456)
-------- -------- -------- -------- -------- --------
Total shareholders'
equity................. 131,712 103,408 (103,408) 131,712 0 131,712
-------- -------- -------- -------- -------- --------
Total liabilities and
shareholders' equity... $283,264 $189,062 $186,087 $658,413 $ 4,250 $662,663
======== ======== ======== ======== ======== ========
</TABLE>
- -------------------------
(Footnotes on following page)
26
<PAGE> 28
- -------------------------
(1) The allocation of the purchase price to assets acquired and liabilities
assumed has been calculated on a preliminary basis. The final allocation
will be completed within twelve months of the acquisition date once final
appraisals and other analyses are completed.
(2) Represents the tax benefit derived from the exercise of stock options by
former option holders of Kysor prior to the closing of the Kysor
Acquisition.
(3) Represents the estimated settlement of final accounts between Kuhlman
Corporation, the purchaser of Kysor's Transportation Products Group, and
Scotsman.
(4) Represents the adjustment to record the net book value of Kysor's
properties and equipment at their estimated fair values.
(5) Represents the adjustment to record goodwill and other intangible assets
acquired.
(6) Represents the deferred tax effect of purchase accounting and financing
transactions.
(7) Represents the following adjustments:
<TABLE>
<C> <S> <C>
(i) Elimination of previously existing unrecognized net gain,
unrecognized prior service cost, and unrecognized net asset
for Kysor's defined benefit plans;.......................... $ 3,629
(ii) Estimated costs of the Credit Facility; and................. 5,000
(iii) Monetization of cash surrender value of certain life
insurance policies held by Kysor............................ (5,787)
-------
$ 2,842
=======
</TABLE>
(8) Reflects the capitalization of the estimated amount of (i) underwriting
discounts and commissions to be paid by the Company in this Offering, (ii)
fees and expenses to be paid by the Company in connection with the Credit
Facility Amendment, as described under "Description of Credit Facility,"
and (iii) other fees and expenses to be paid by the Company in connection
with the Offerings.
(9) Represents the net assets of the Transportation Products Group of Kysor.
(10) Scotsman retired the short-term debt of Kysor assumed by Scotsman and
refinanced a portion of its short-term debt outstanding at December 29,
1996 through utilization of the Credit Facility.
(11) Represents the estimated tax payment on the gain associated with the sale
of the Transportation Products Group of Kysor.
(12) Represents the following adjustments:
<TABLE>
<S> <S> <C>
(i) The estimated costs of closing Kysor facilities;............ $ 2,359
(ii) Severance and other employee benefits payable to employees
of Kysor; and............................................... 13,267
(iii) Acquisition costs........................................... 3,296
-------
$18,922
=======
</TABLE>
(13) Represents the issuance of the Notes and the use of the net proceeds
therefrom as described under "Use of Proceeds."
(14) Represents the net increase in Credit Facility resulting from (i) the
financing of the Kysor Acquisition, including the application of cash
received from the sale of the Transportation Products Group to reduce
borrowings under the Credit Facility; (ii) the refinancing of approximately
$45 million of Scotsman's long-term debt outstanding as of December 29,
1996, through utilization of the Credit Facility; and (iii) the refinancing
of approximately $33 million of long-term debt of Kysor through utilization
of the Credit Facility.
(15) Represents the following adjustments:
<TABLE>
<S> <S> <C>
(i) Severance and other employee benefits payable;.............. $4,297
(ii) Elimination of previously unrecognized loss, unrecognized
prior service cost and unrecognized net obligation for
Kysor's defined benefit and post-retirement plans; and...... 1,367
(iii) Other....................................................... 695
------
$6,359
======
</TABLE>
(16) Represents the elimination of Kysor equity resulting from the Kysor
Acquisition.
27
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of results of operations and capital
resources and liquidity should be read in conjunction with the Company's and
Kysor's audited consolidated financial statements and notes thereto included and
incorporated by reference elsewhere in this Prospectus. In addition to
historical information, the following discussion and analysis of financial
condition and results of operations contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
significantly from those anticipated as a result of unforeseen factors. For a
discussion of certain factors that could cause actual results to differ from
those anticipated, see "Risk Factors" and the Cautionary Statements included in
Exhibit 99 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 29, 1996, which is incorporated herein by reference. Unless otherwise
indicated by the context, when used in the following discussion or in the
documents incorporated by reference herein, the words "anticipate," "believe,"
"estimate," "intend" and "expect," and similar expressions are intended to
identify forward-looking statements.
OVERVIEW
Scotsman is a leading international manufacturer of a diversified line of
commercial refrigeration products, food preparation equipment and beverage
systems that is sold primarily to customers in the restaurant, supermarket,
lodging, healthcare and convenience store industries. The Company has a leading
market position in each of its five product lines, which consist of ice
machines, refrigerated display cases, food preparation and storage equipment,
walk-in coolers and freezers and beverage systems. Scotsman's customers include
many of the largest chains in the quick service restaurant, supermarket, lodging
and convenience store industries. The Company sells its products in over 100
countries through multiple distribution channels and has manufacturing
capabilities in the United States, the United Kingdom, Germany and Italy and
interests in joint ventures in Australia, China, the United Kingdom and
Indonesia.
Kysor Acquisition. In March 1997, the Company acquired Kysor for a net
purchase price of approximately $299 million. Due to the significance of the
Kysor Acquisition, the Company's future operating results and capital structure
will be materially different from, and will not be comparable to, prior periods.
For fiscal year 1996, Kysor's sales of commercial refrigeration products were
$245.1 million, an increase of 18.3% from 1995. Combining Kysor's 1996 sales
with those of the Company for the comparable period results in pro forma net
sales for the Company of $601.4 million, a 68.7% increase over the Company's
reported 1996 sales. The Company's operating income in 1997 is expected to
increase significantly as a result of the Kysor Acquisition and associated
benefits, while amortization of goodwill and interest expense also are expected
to increase significantly. Kysor's results are expected to be accretive to
Scotsman's fully diluted earnings per share in the second half of 1997 and for
the full year. The Company expects that, including Kysor, the second and third
fiscal quarters generally will account for a greater portion of the annual net
sales of the Company than the first and fourth fiscal quarters.
Net Sales. The Company's revenues are diversified among its five product
lines, with ice machines and refrigerated display cases, its two largest product
lines, representing approximately 29% and 30%, respectively, of the Company's
1996 pro forma net sales, and food preparation and storage equipment, walk-in
coolers and freezers and beverage systems representing approximately 19%, 11%
and 11% of the Company's 1996 pro forma net sales, respectively. In 1996,
international sales of Scotsman's and Kysor's products were approximately $144
million, which accounted for approximately 24% of the Company's 1996 pro forma
net sales, and the Company anticipates that international sales will continue to
grow.
Cost of Sales. The principal elements of cost of sales are raw materials
(such as stainless steel, galvanized steel, aluminum and copper), labor and
manufacturing overhead. The Company's costs are affected by fluctuating raw
material costs. Because of the large quantities of raw materials purchased by
the Company, it is able to buy raw materials at prices that are competitive. The
Company has a number of manufacturing facilities for its five product lines,
and, accordingly, the Company's overall gross margin is impacted by its product
mix, raw material costs and plant utilization rates.
28
<PAGE> 30
Selling and Administrative Expenses. Selling and administrative expenses
include salaries, wages and related expenses associated with developing,
marketing and selling the Company's products. In addition, selling and
administrative expenses include general corporate overhead and costs associated
with various administrative functions. While certain of these expenses vary with
the level of net sales, many are relatively fixed over wide ranges of unit
volume.
Goodwill. The goodwill associated with the businesses acquired by Scotsman
through 1996 is being amortized over 40 years using the straight-line method.
The Company also is amortizing the goodwill associated with the Kysor
Acquisition over 40 years using the straight-line method.
KYSOR ACQUISITION PRO FORMA FINANCIAL INFORMATION
The pro forma consolidated financial information included elsewhere herein
gives effect to, among other things, the Kysor Acquisition. See "Pro Forma
Consolidated Financial Information."
On a pro forma basis, the Company's net sales for fiscal 1996 would have
been $601.4 million, compared to actual net sales of $356.4 million for that
period. Pro forma net sales of the Company include sales by Kysor's Commercial
Products Group, but not sales by Kysor's former Transportation Products Group,
which was sold simultaneously with the closing of the Kysor Acquisition.
Pro forma income from operations for the Company for fiscal 1996 would have
been $67.7 million, compared to actual operating income of $40.3 million for the
same period. The increase in operating income of the Company on a pro forma
basis is the result of the addition of $27.4 million of pro forma Kysor
operating income, reflecting the following: a reduction in administrative
expenses due to the elimination of Kysor's world headquarters and the
consolidation of four Kysor business units into two; certain favorable defined
benefit plan adjustments; the effect of the incremental increase in the
amortization of goodwill recorded from the purchase of Kysor by Scotsman; and
the incremental depreciation expense caused by the recording of property, plant
and equipment at fair value. Although the Company's pro forma and actual income
from operations were 11.3% of net sales for fiscal 1996, the Company believes
that potential synergies created by the Kysor Acquisition will improve future
operating margins for the Company.
Pro forma net income for fiscal 1996 would have been $18.5 million,
reflecting the inclusion of Kysor's operating income, incremental interest
expense resulting from additional borrowings related to financing the Kysor
Acquisition and associated income tax expense.
The Kysor Acquisition is being treated for accounting purposes as a
purchase under Accounting Principles Board Opinion No. 16. The excess purchase
price over the fair value of the identifiable assets and liabilities acquired
was approximately $192 million, which was allocated to goodwill and other
intangibles and is being amortized on a straight-line basis over 40 years.
29
<PAGE> 31
RESULTS OF OPERATIONS
The following table sets forth certain items from Scotsman's historical
statements of income expressed as a percentage of net sales for the periods
indicated:
<TABLE>
<CAPTION>
FIRST FISCAL
NINE MONTHS FISCAL YEAR
---------------- ---------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales....................................... 74.2 71.5 72.4 72.9 71.5
----- ----- ----- ----- -----
Gross profit........................................ 25.8 28.5 27.6 27.1 28.5
Selling and administrative expenses................. 14.7 16.0 16.3 16.5 17.9
----- ----- ----- ----- -----
Income from operations.............................. 11.1 12.5 11.3 10.6 10.6
Interest expense, net............................... 3.6 1.5 1.5 1.9 2.0
----- ----- ----- ----- -----
Income before income taxes.......................... 7.5 11.0 9.8 8.7 8.6
Income taxes........................................ 3.6 5.2 4.6 3.9 3.8
----- ----- ----- ----- -----
Income before extraordinary loss.................... 3.9 5.8 5.2 4.8 4.8
Preferred stock dividends........................... -- .3 .2 .4 .3
Extraordinary loss(1)............................... .1 -- -- -- --
----- ----- ----- ----- -----
Net income.......................................... 3.8% 5.5% 5.0% 4.4% 4.5%
===== ===== ===== ===== =====
</TABLE>
- -------------------------
(1) Net of income taxes.
NINE MONTHS ENDED SEPTEMBER 28, 1997, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 29, 1996
The Company's net sales increased by $148.8 million, or approximately 53%,
to $431.5 million for the nine months ended September 28, 1997 from $282.7
million for the first nine months of 1996. Results for the first nine months of
1997 included sales from March 10 through September 28 of $152.7 million from
the Commercial Products Group of Kysor, which was acquired by the Company in
March 1997.
Sales of refrigerated display cases and walk-in coolers and freezers by
Kysor for the period from March 10, 1997 through September 28, 1997 were $152.7
million, which represented approximately 35% of Scotsman's net sales in the
first nine months of 1997. On a pro forma basis, sales of refrigerated display
cases and walk-in coolers and freezers by Kysor for the first nine months of
1997 were $191.5 million, which represented approximately 41% of the Company's
pro forma net sales in the first nine months of 1997. Kysor's net sales for the
first nine months of 1997 increased by $7.7 million, or approximately 4%, from
$183.8 million in the comparable period of 1996. Kysor's backlog of orders from
supermarkets remains at record levels, although delivery schedules have been
deferred to future periods to a greater degree than anticipated.
Ice machine sales, which represented approximately 30% of net sales in the
first nine months of 1997, decreased by $7.3 million, or approximately 5%, to
$130.9 million in the first nine months of 1997 from $138.3 million in the same
period of 1996, using constant foreign exchange rates. The decline in ice
machine sales resulted from lower sales in Europe and the United States due to
soft market conditions in both regions, some slowdown in restaurant chain
activity in the United States and high distributor inventories in Europe at the
beginning of the period. Sales in the United States stabilized during the third
quarter, and the Company believes that the European market for ice machines is
also stabilizing.
Food preparation and storage equipment sales, which represented
approximately 22% of the Company's net sales in the first nine months of 1997,
increased by $8.1 million, or approximately 14%, in the first nine months of
1997 from the same period of 1996. Sales at Delfield benefitted from an
expanding customer base in the third quarter of 1997.
Beverage dispensing equipment sales, which represented approximately 13% of
the Company's net sales in the first nine months of 1997, decreased by $0.6
million, or approximately 1%, in the first nine months of 1997 from $54.4
million in the same period of 1996, ignoring the effect of exchange rates.
Increased European
30
<PAGE> 32
market penetration and continued sales gains by the Company's U.K.-based
beverage dispensing business more than offset soft market conditions for the
Company's dispensing business in Germany and in the United States.
The Company's gross profit increased by $30.8 million, or approximately
38%, to $111.2 million in the first nine months of 1997 from $80.4 million in
the first nine months of 1996, due to the inclusion of Kysor's results of
operations subsequent to its acquisition by the Company in March 1997. However,
the Company's gross profit margin decreased as a percentage of net sales to
25.8% in the first nine months of 1997 from 28.5% in the first nine months of
1996. The reduction in gross profit margins is partially attributable to the
inclusion of the results of Kysor, which historically has reported lower gross
profit margins. However, also contributing to the decline in gross profit
margins were higher production costs of food preparation and storage equipment.
These factors, along with the approximately 8% year-to-date decline in worldwide
ice machine sales, also affected the Company's gross profit margins for the
nine-month period.
Selling and administrative expenses increased by $18.4 million, or
approximately 41%, to $63.4 million in the first nine months of 1997 from $45.0
million in the first nine months of 1996. The increase in selling and
administrative expenses is attributable to the inclusion of Kysor's results
subsequent to its acquisition by the Company in March 1997, including
amortization of intangibles related to the purchase of Kysor of $2.6 million in
the first nine months of 1997. As a percentage of net sales, selling and
administrative expenses decreased to 14.7% in the first nine months of 1997 from
15.9% for the first nine months of 1996. The percentage decrease is primarily
attributable to Kysor's business units which, although they have historically
reported lower gross profit margins, also have lower selling and administrative
expenses as a percentage of net sales as compared to the balance of the
Company's businesses.
Income from operations increased by $12.4 million, or approximately 35%, to
$47.8 million in the first nine months of 1997 from $35.4 million in the first
nine months of 1996, which primarily reflects Kysor's contribution to the
Company's profits. As a percentage of net sales, income from operations
decreased to 11.1% in the first nine months of 1997 from 12.5% in the same
period of 1996. The decline is a result of the lower gross profit margins and an
additional $2.6 million of amortization of intangibles resulting from the Kysor
Acquisition.
Net interest expense increased by $11.0 million to $15.2 million in the
first nine months of 1997 from $4.2 million in the first nine months of the
prior year as a result of the increased domestic borrowings incurred by the
Company to fund the Kysor Acquisition.
The Company's overall income tax rate increased to 47.9% in the first nine
months of 1997 from 47.3% in the first nine months of 1996. The higher income
tax rate is primarily attributable to the impact of $2.6 million of additional
amortization of intangibles resulting from the Kysor Acquisition.
Net income, before a one-time after-tax charge of $633,000 incurred for the
early retirement of $20 million of 11.43% private placement debt, increased by
$0.5 million, or approximately 3%, to $17.0 million in the first nine months of
1997 from $16.5 million in the first nine months of 1996. On a fully diluted
basis, earnings per share, before the one-time charge, increased by $0.03, or
approximately 2%, to $1.57 in the first nine months of 1997 from $1.54 in the
first nine months of 1996. Net income, including the one-time charge, declined
by $0.1 million, or 1%, to $16.4 million in the first nine months of 1997 from
$16.5 million in the first nine months of 1996. On a fully diluted basis,
earnings per share, including the one-time charge, declined by $0.03, or
approximately 2%, to $1.51 in the first nine months of 1997 from $1.54 in the
first nine months of 1996.
The Kysor Acquisition was accretive to the Company's earnings per share for
the third quarter of 1997 and the nine-month period ended September 28, 1997,
and is expected to be accretive for fiscal 1997. Management believes that
earnings per share for fiscal 1997 may be slightly below the $1.73 per share for
fiscal 1996, before the one-time charge described above in the first fiscal
quarter of 1997.
31
<PAGE> 33
YEAR ENDED DECEMBER 29, 1996 ("1996"), COMPARED WITH YEAR ENDED DECEMBER
31, 1995 ("1995")
The Company experienced strong operating results in 1996 compared with
1995. Sales increased in many of the Company's businesses and operating income
as a percentage of sales increased as well. These positive operating results
were largely attributable to the inclusion of a full year's operations of
Hartek, which was purchased by the Company on December 31, 1995, strong growth
at Whitlenge, solid sales gains from the Company's European ice machine
businesses and a continued emphasis on cost containment.
The Company's net sales increased by $32.1 million, or 10%, to a record
$356.4 million in 1996 from $324.3 million in 1995.
Ice machine sales, which represented 49% of total sales of the Company in
1996, increased by $6.5 million, or 4%, to $176.0 million in 1996 from $169.5
million in 1995 primarily due to 15% growth in sales from European operations
while domestic sales of ice machines remained relatively constant.
Food preparation and storage equipment sales, which represented 29% of
total sales of the Company in 1996, remained constant compared to 1995,
reflecting a decline in European bakery equipment sales and a modest increase in
sales of food preparation equipment by Delfield, which were limited by a slowing
of the domestic market for such products. Sales in this product category are
expected to increase in 1997 due to Delfield's designation by Boston Market as
sole supplier of serving line equipment and certain related products.
Beverage systems sales, which represented 19% of total sales of the Company
in 1996, increased by $27.6 million, or 69%, to $67.6 million in 1996 from $40.0
million in 1995, driven primarily by the inclusion of the operating results of
Hartek and growth of 24% at Whitlenge due to increasing their export sales and a
strong domestic beer market in the United Kingdom.
Niche products sales, which represented 3% of total company sales in 1996,
decreased by $2.3 million, or 21%, to $9.2 million in 1996 from $11.5 million in
1995, driven primarily by a lower volume of certain contract products and
ventilation equipment.
The Company's gross profit increased by $10.5 million, or 12%, to $98.4
million in 1996 from $87.9 million in 1995. The Company's gross profit margin
increased to 27.6% of total sales in 1996 from 27.1% of total sales in 1995 due
to selling price increases in certain products, moderating material costs and
the impact of higher sales in relation to a base of certain fixed production
costs. These gains were partially offset by higher production costs at Delfield
due to inefficiencies incurred while implementing process improvements and
organizational changes in anticipation of future growth requirements.
Selling and administrative expenses increased by $4.7 million, or 9%, to
$58.1 million in 1996 from $53.4 million in 1995. Although selling and
administrative expenses increased due to the inclusion of Hartek, selling and
administrative expenses as a percentage of total sales of the Company declined
to 16.3% in 1996 from 16.5% in 1995, primarily due to higher overall sales and
lower advertising costs.
Income from operations increased by $5.8 million, or 17%, to $40.3 million
in 1996 from $34.5 million in 1995 primarily due to increased sales with higher
associated gross margins and the continued benefit of cost containment plans
initiated during 1996 and in prior years.
Net interest expense decreased by $1.0 million, or 17%, to $5.3 million in
1996 from $6.3 million in 1995 primarily due to the Company's lower average debt
levels and a favorable interest rate environment.
Income taxes increased by $3.7 million to $16.4 million in 1996 from $12.7
million in 1995 due to higher income from operations and a higher effective tax
rate. The Company's tax rate increased to 47.0% in 1996 from 45.2% in 1995
primarily due to the higher percentages of sales generated from foreign
operations with higher relative tax rates.
Overall, net income increased by $3.2 million, or 21%, to $18.6 million in
1996 from $15.4 million in 1995. On a fully diluted basis, earnings per share
increased by $0.28, or 19%, to $1.73 in 1996 from $1.45 in 1995. Of note, the
effects of fluctuations in currency exchange rates on the Company's results of
operations were immaterial.
32
<PAGE> 34
YEAR ENDED DECEMBER 31, 1995 ("1995"), COMPARED WITH YEAR ENDED JANUARY 1,
1995 ("1994")
The Company's net sales increased 22% in 1995, to $324.3 million, compared
with $266.6 million in 1994. Strong gains in worldwide ice machine sales and the
inclusion of Delfield and Whitlenge results for the full year were primary
contributors to this growth.
Ice machine sales increased 13% from the prior year and represented 52% of
total sales in 1995. Domestic ice machine sales were up 7%, a significantly
greater gain than the market as a whole. New products and expansion of the
distribution system contributed to the share gain. Sales of ice machines outside
the U.S. increased more than 20% due to improvement in Western European markets
and substantial sales increases to the Asia-Pacific region. In December 1995 the
Company's joint venture in Shenyang, China began production of ice machines to
be sold in the domestic China market.
Sales of food preparation and storage equipment increased 39% from 1994 to
1995 due to the inclusion of results for Delfield for a full year in 1995 versus
a partial year (from April 29, 1994) for 1994. Pro forma full-year sales of
these products, as if Delfield had been acquired at the beginning of 1994, were
up 1%. Reduced sales from Delfield to a few large national accounts were largely
offset by sales to other customers. Food preparation and storage equipment
represented approximately one-third of total Company sales in 1995.
The Company's 1995 worldwide beverage systems sales increased 23% versus
the prior year due to the inclusion of Whitlenge's sales for only eight months
of 1994. On a full-year basis, beverage systems realized increased sales of 5%,
compared with the prior year, primarily due to Whitlenge's increased penetration
of continental European markets. Sales of this equipment accounted for 12% of
1995 Company sales. Niche products, including ventilation equipment and certain
contract products, comprised the balance of the Company's sales.
Gross profit increased significantly in dollars but declined as a
percentage of sales, to 27.1% in 1995 from 28.5% in 1994, as a result of the
full-year inclusion of Delfield and Whitlenge results, which historically have
had lower gross profit margins. The impact of the increases of cost of materials
and a shift in sales mix at Delfield toward customers served by higher-cost
distribution channels also impacted gross profit in 1995.
Selling and administrative expenses for the year were up substantially in
dollars, again due in large measure to acquisitions. As a percentage of sales,
however, selling and administrative costs declined to 16.5% from 18.0% in the
prior year due to lower litigation-related costs, favorable health claims costs
and the full-year inclusion of Delfield and Whitlenge and their historically
lower ratios.
Income from operations increased $6.2 million, or 22%, from the prior year
as a result of the above mentioned factors.
Interest expense, net, increased $0.9 million due to the higher average
debt levels associated with the Delfield and Whitlenge acquisitions. A higher
effective income tax rate of 45.2% in 1995, compared with 43.9% in 1994,
reflects a greater proportion of income from the Company's higher-taxed Italian
subsidiaries.
1995 net income of $15.4 million and fully diluted net income per share of
$1.45 were record highs for Scotsman Industries. Hartek, acquired on December
31, 1995, had no impact on the income statement for the year. The effect of
changes in currency exchange rates was immaterial on the Company's results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's liquidity requirements have arisen primarily
from the need to fund its working capital, capital expenditures, acquisitions
and interest expense, including fixed obligations associated with debt or lease
obligations. The Company has met these liquidity requirements through use of
funds generated from operations, along with financing from various sources.
The Company expects to continue to generate significant cash flow from
operations, which will be used to run the Company's businesses and fund further
growth. Increased levels of working capital, capital expenditures and interest
expense associated with the Kysor Acquisition are not expected to adversely
impact the Company's liquidity and access to capital.
33
<PAGE> 35
The Company provided cash flow from operations of $8.8 million for the
first nine months of 1997 compared to cash flow provided by operating activities
of $19.3 million for the first nine months of 1996.
The following comparison of certain items in the balance sheets as of
September 28, 1997 and December 29, 1996 excludes the opening balances from the
Kysor Acquisition in March of 1997 and the impact of changes in foreign exchange
rates on those categories:
Inventory decreased by $6.3 million, which reflects the reduction in
Kysor inventories since the date of acquisition by the Company along with
decreases at some of the Company's other domestic businesses.
Accounts receivable were $27.8 million higher, primarily as a result
of the sales increase in the third quarter of 1997 compared to the fourth
quarter of 1996.
Trade accounts payable were $8.6 million higher which reflects the
impact of seasonal volume.
Capital expenditures, including those funded through capital leases,
increased $5.0 million, or approximately 102%, to $9.9 million for the first
nine months of 1997 from $4.9 million for the first nine months of 1996. Capital
expenditures in 1997 were made primarily to fund construction of a new Kysor
facility in Columbus, Georgia, along with equipment to realize productivity
improvements, new product tooling and maintenance and replacement items.
All asset and liability accounts as of September 28, 1997, were
significantly impacted by the Kysor Acquisition in March of 1997. Goodwill
increased from December 29, 1996, due to the Kysor Acquisition, which added
approximately $198 million.
Cash and temporary cash investments of $23.2 million as of September 28,
1997, increased by $6.7 million from December 29, 1996, reflecting the increase
in cash balances at the Company's foreign subsidiaries and in part due to the
Kysor Acquisition.
Shareholders' equity increased $10.6 million from December 29, 1996, which
reflects net income of $16.4 million for the first nine months of 1997, which
was partially offset by a reduction in shareholders' equity caused by changes in
accumulated foreign currency translation adjustments of $5.3 million and the
impact of dividends.
Note 3 to the Company's financial statements included and incorporated by
reference herein contains a summary of the changes in the Company's debt
structure as a result of the Kysor Acquisition. Long-term debt increased by
approximately $281 million as of September 28, 1997 primarily due to funding of
the Kysor Acquisition, along with funding of working capital needs. Short-term
debt reduced $1.9 million from December 29, 1996 primarily due to short-term
domestic borrowings being replaced with longer-term borrowings. Total debt,
including capital leases, was $355.9 million as of September 28, 1997 compared
to $76.6 million as December 29, 1996. The debt to capital ratio was
approximately 71% at September 28, 1997, compared with approximately 37% at
December 29, 1996.
On February 13, 1997, May 15, 1997 and August 14, 1997, the Company's Board
of Directors declared a dividend of 2 1/2 cents per share payable to common
shareholders of record on March 28, 1997, June 30, 1997 and September 30, 1997,
respectively.
Since its first quarter as a publicly-held company, the Company has paid a
quarterly dividend of 2 1/2 cents per share. The continuation, amount and timing
of this dividend will be determined by the Board of Directors and may change as
conditions warrant.
See "Description of Credit Facility" for a description of the amendment to
the Company's Credit Facility, which is intended to permit the consummation of
this Offering and provide the Company additional flexibility.
34
<PAGE> 36
BUSINESS
GENERAL
Scotsman is a leading international manufacturer of a diversified line of
commercial refrigeration products, food preparation equipment and beverage
systems that is sold primarily to customers in the restaurant, supermarket,
lodging, healthcare and convenience store industries. The Company has a leading
market position in each of its five product lines, which consist of ice
machines, refrigerated display cases, food preparation and storage equipment,
walk-in coolers and freezers and beverage systems. Scotsman's customers include
many of the largest chains in the quick service restaurant, supermarket, lodging
and convenience store industries, including McDonald's Corporation
("McDonald's"), Boston Chicken, Inc. ("Boston Market"), Wal-Mart Stores, Inc.
("WalwMart"), Winn-Dixie Stores, Inc. ("Winn-Dixie"), Marriott International,
Inc. ("Marriott") and Mobil Corporation ("Mobil"), as well as bottlers
affiliated with The Coca-Cola Company ("Coca-Cola") and PepsiCo, Inc. ("Pepsi").
The Company's revenues are diversified among its five product lines, with
ice machines and refrigerated display cases, its two largest product lines,
representing approximately 29% and 30%, respectively, of the Company's 1996 pro
forma net sales. Within each of its product lines, the Company offers a broad
range of products designed to meet the diverse equipment needs of its customers.
The Company sells its products in over 100 countries through multiple
distribution channels and has manufacturing capabilities in the United States,
the United Kingdom, Germany and Italy and joint venture interests in Australia,
China, the United Kingdom and Indonesia. International sales by Scotsman and
Kysor of approximately $144 million accounted for approximately 24% of the
Company's 1996 pro forma net sales. The Company believes that its leading market
positions, broad product offering, diverse customer base, extensive distribution
network and strong international presence provide it with significant
competitive advantages and position it for continued growth.
Since its Spin-off from Household in 1989, Scotsman has expanded through
internal growth and through a disciplined acquisition program. The Company's
internal growth has been driven primarily by increased sales of ice machines in
the United States and Europe and beverage systems in Europe. In addition, from
1992 through 1996, the Company successfully completed and integrated five
acquisitions. As a result of these acquisitions and internal growth, the
Company's net sales increased to $356.4 million in 1996 from $168.7 million in
1992, representing a compound annual growth rate of 20.6%. In March 1997, the
Company acquired Kysor for a net purchase price of approximately $299 million.
Kysor is a leading supplier of refrigerated display cases and walk-in coolers
and freezers to the supermarket and convenience store industries. For 1996,
Kysor's sales of commercial refrigeration products were $245.1 million, an
increase of 18.3% from 1995. Pro forma for the Kysor Acquisition, the Company's
1996 net sales were $601.4 million, a 68.7% increase over the Company's reported
1996 net sales. Through the addition of Kysor's leading market positions and
complementary product lines, the Company expects to benefit from cross-selling
opportunities, as well as synergies related to reduced overhead, increased
purchasing power and shared research and development efforts.
Scotsman is a market leader in each of its five product lines with well
recognized, premium brand names. The Company believes it is the largest
worldwide manufacturer of commercial ice machines, the largest manufacturer of
food preparation and storage equipment for the foodservice industry in the
United States and the second largest manufacturer of beverage systems in Europe
and refrigerated display cases and walk-in coolers and freezers in the United
States. Scotsman believes these strong market positions will enable it to take
advantage of favorable trends driving global demand for its products.
INDUSTRY OVERVIEW
Sales of the Company's five product lines are driven primarily by demand
from participants in the food and beverage industry. According to a recent
industry report, sales by the food and beverage industry are expected to grow
from $700 billion in 1995 to approximately $800 billion in the year 2005. Much
of this growth is expected to be captured by the foodservice industry (including
supermarket delis), which continues to gain market share from traditional
groceries. According to published industry sources, total U.S. foodservice sales
climbed from approximately $255 billion in 1990 to an estimated $336 billion in
1997.
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<PAGE> 37
According to published industry sources, the commercial foodservice segment of
the foodservice industry, the largest segment of this industry, is expected to
experience real growth of approximately 3.4% per year through 2005. Growth in
the U.S. foodservice market is driven primarily by population growth, economic
growth and demographic changes, including the number of families with two or
more wage-earners and shifting consumer preferences for convenience in food
preparation and consumption.
According to published industry sources, sales by the U.S. commercial
foodservice equipment industry grew 6.4% to approximately $4.5 billion in 1996
and are expected to grow by 6.8% in 1997. While normal replacement of aging
equipment and that for new construction generally drive sales of new commercial
refrigeration products, the Company expects further demand to result from
remodeling due to product upgrades and expanded perishable sections in
supermarkets and convenience stores, the expansion of national restaurant chains
and the replacement of products containing chlorofluorocarbons ("CFCs"). The
Company expects that a significant portion of the installed commercial
refrigeration systems in the United States that are CFC-based will be replaced
or retrofitted over the next decade, as CFCs become increasingly difficult to
obtain.
The commercial foodservice and retail food equipment industries are being
affected by several key industry trends, including expansion by national
restaurant and lodging chains, increased perishable and prepared food offerings
at supermarkets and convenience stores, supplier consolidation and increased
international foodservice demand.
National Chain Expansion. Large chains have a significant impact on the
commercial foodservice and retail food equipment markets as a result of new
store openings, remodeling and upgrading programs and equipment purchases to
support new menu items. The expansion of national chains is being driven by
increased consumer expenditures for dining out and carry-out meals. According to
an independent industry study, expenditures for food prepared outside of the
home have increased from approximately 38% of the average American's food budget
in 1975 to approximately 52% in 1995. Consistent with this trend, restaurant,
convenience store and supermarket chains continue to add new sites through
construction and acquisition. In 1996, for example, according to an independent
industry study, the top 100 restaurant chains grew at a rate of 5.6% compared
with 4.5% for the industry as a whole. Quick service restaurants continue to
expand into non-traditional sites to offer increased consumer convenience and
capture a greater portion of food expenditures. Locations for such
non-traditional outlets include retail stores, supermarkets, department stores
and gas stations. Quick service chains such as McDonald's and Sbarro, Inc., for
example, are moving into airports, hospitals and schools, which increases demand
for commercial foodservice equipment that is suitable for small, kiosk-type
locations. According to an independent industry study, the top 75 supermarket
chains accounted for approximately 78% of total supermarket industry sales in
1996, with the top 10 chains accounting for approximately 30% of total
supermarket industry sales. The Company believes that continued consolidation
will increase significantly that concentration over the next several years.
Expansion of Supermarket and Convenience Store Food Retail and
Foodservice. In 1996, sales of refrigerated display cases and systems to
supermarkets was approximately $700 million, while sales to convenience stores
totaled approximately $300 million, based on an independent industry study. In
an effort to capitalize on home meal replacement trends, convenience stores and
supermarkets continue to increase the portion of their floor space dedicated to
the sale of prepared and perishable foods. At the same time, expansion of
superstores has led to increased remodeling expenditures by existing stores in
order to remain competitive. The Company believes that national chains, in
particular, are placing added emphasis on store modernization to improve and
differentiate product merchandising.
Supplier Consolidation. National chains are demonstrating an increasing
tendency to purchase from fewer suppliers and to form collaborative
relationships with suppliers in order to minimize purchasing efforts and
optimize product design, responsiveness and pricing plans. Criteria for supplier
selection include not only product reliability and performance, service and
price, but also national presence and full-service design, engineering and
product customization capabilities. The Company believes that because these
criteria favor larger, more integrated suppliers, smaller industry participants
are at a competitive disadvantage in competing for contracts.
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<PAGE> 38
Growth in International Foodservice Demand. International foodservice
demand is driven by economic and disposable income growth, increased penetration
of retail foodservice establishments, increased popularity of chilled beverages
and fundamental changes in consumer attitudes toward dining outside the home.
The Company expects these factors to drive significant growth in foodservice
demand in regions such as Asia, Latin America and Eastern Europe over the next
10 years. Furthermore, the Company expects the developing economies in Eastern
Europe, China and other regions of the world to drive expansion of hotels,
restaurant chains and other foodservice establishments to meet increased
business, consumer and tourist demands. Throughout the world, the concentration
of quick service restaurant and lodging chains is substantially lower than in
the United States and provides opportunities for national chains to expand
internationally. As a result, many of the leading national chains have embarked
upon significant international expansion. For example, the top 100 U.S.
restaurant chains increased their number of international operating units and
sales by approximately 16% and 11%, respectively, in 1996 compared with U.S.
domestic unit and sales growth rates of 5.7% and 5.6%, respectively, according
to an independent industry study. As a result, international chains increasingly
are requiring their suppliers to have the capability to manufacture and service
products in multiple geographic markets.
OPERATING STRATEGY
Scotsman's operating strategy is to continue to capitalize on its
competitive advantages and enhance its customer relationships. The key
components of this strategy include:
CAPITALIZING ON MARKET LEADERSHIP
Scotsman seeks to build and maintain leading market positions in each of
its product lines. The Company believes it is the world's largest manufacturer
of commercial ice machines, the largest manufacturer of food preparation and
storage equipment for the foodservice industry in the United States and the
second largest manufacturer of beverage systems in Europe and refrigerated
display cases and walk-in coolers and freezers in the United States. The Company
believes that these leading market positions help to create a heightened
awareness of its product offerings and brands. Scotsman believes that its
leading market positions, broad product offerings, strong brand recognition and
extensive distribution capabilities position it to compete successfully as its
customers consolidate their supplier base and expand internationally.
OPTIMIZING MANUFACTURING EFFECTIVENESS AND FLEXIBILITY
To enhance manufacturing effectiveness, Scotsman has adopted "lean
manufacturing" initiatives, which include minimizing manufacturing complexity,
standardizing key product subcomponents, adopting cell manufacturing practices
and emphasizing continuous improvement. These efforts throughout the Company
have resulted in enhanced product quality, fewer product defects and lower
inventory costs. Manufacturing flexibility enables each of the Company's
manufacturing facilities to produce a range of standard or customized models
within each manufacturing unit, which increases efficiency while improving the
Company's ability to meet customers' delivery schedules. Scotsman believes that
additional manufacturing efficiencies will result from sharing best practices
among Kysor and Scotsman's other operating units.
EMPHASIZING PRODUCT QUALITY AND NEW PRODUCT DEVELOPMENT
By applying its product design, manufacturing and refrigerant technology
expertise, Scotsman seeks to provide customers with technically superior,
durable and energy efficient products. Scotsman also dedicates substantial
resources to new product development and customizing existing products to meet
the unique performance, size and appearance specifications of individual
customers. This commitment has resulted in the introduction of numerous
innovative new products and product enhancements, including: (i) the CM(3) ice
machine, which offers greater ice making capacity while using less energy and
having approximately 23% fewer parts than prior models; (ii) an ice dispenser
designed to fit within the limited space requirements of many European hotels;
(iii) customized serving counters for Boston Market, which Scotsman designed to
reduce the waiting time of Boston Market customers at peak periods; and (iv) the
Genesis drink dispensing
37
<PAGE> 39
tower, which allows the proprietor to change the dispenser's exterior for
different promotions. In addition, Scotsman was the first manufacturer to
convert its entire line of ice machines to CFC-free refrigerants.
LEVERAGING EXTENSIVE DISTRIBUTION CAPABILITIES TO DELIVER SUPERIOR CUSTOMER
SERVICE
Scotsman has an extensive sales, distribution and service network in over
100 countries that is designed to meet the needs of customers from product
design and purchase through aftermarket sales and support. The Company's
salesforce, sales engineers and distributors work closely with customers to
determine the appropriate product for a given application and, if necessary,
assist in the development of customized products. Following a sale, the Company
or its distributors, depending on the product and geographic market, provide
aftermarket support that includes training, maintenance, service and repair. See
"-- Marketing and Distribution."
GROWTH STRATEGY
The Company also pursues a growth strategy intended to strengthen its
leading market positions within its product lines. The key elements of this
strategy include:
FOCUSING ON MAJOR NATIONAL CHAINS
Scotsman targets major national chains within the five principal industries
it serves. The Company believes that these national chains increasingly are
gaining market share at the expense of independents, and the Company expects
this trend to accelerate in both domestic and international markets. Chain
expansion generates demand for new and replacement equipment through new
construction, non-traditional site development and facility redevelopment or
modernization. Scotsman's customers include many of the largest chains in the
quick service restaurant, supermarket, lodging and convenience store industries,
including McDonald's, Boston Market, WalwMart, Winn-Dixie, Marriott and Mobil.
Through strong brands in each product line, the Company seeks to become the
single supplier to its customers in each of its product lines. The Company will
continue to organize product design and sales teams to work closely with
national chains in developing applications to meet their specific requirements.
Furthermore, given the strength of its current relationships and its
capabilities abroad, the Company believes it is well positioned to benefit as
national chains expand into international markets. For example, Scotsman
provides refrigerated display cases and walk-in coolers and freezers to several
WalwMart locations in South America.
PURSUING CROSS-SELLING OPPORTUNITIES
Scotsman has similar customers in each of its five product lines. While the
Company maintains strong relationships with customers in each of its market
segments, penetration of individual accounts varies by product line. As a
result, the Company believes it has significant opportunities to pursue internal
growth through cross-selling initiatives across product lines. The recently
completed Kysor Acquisition, which expanded the Company's product range to
include refrigerated display cases and walk-in coolers and freezers, has
expanded these opportunities by broadening the Company's range of products and
expanding its existing customer base. Specific cross-selling objectives include
(i) increasing sales of Kysor's refrigerated display cases and walk-in coolers
and freezers to restaurants, where Scotsman historically has had significant
market share and (ii) increasing sales of Scotsman's ice machines and food
preparation and storage equipment to supermarkets, Kysor's strong customer base
historically. The Company also believes that the breadth of its product lines
resulting from the Kysor Acquisition enhances its ability to penetrate the
convenience store market, a market in which the Company and Kysor currently have
relationships with only a limited number of chains.
CAPITALIZING ON INTERNATIONAL OPPORTUNITIES
International foodservice equipment markets offer significant opportunities
for growth by the Company. The Company believes, for example, that Western
European foodservice locations have, on a percentage basis, significantly fewer
ice machines than foodservice locations in the United States and that market
penetration of
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<PAGE> 40
ice machines is significantly lower in other international markets. An integral
part of Scotsman's strategy has been to develop production, manufacturing,
marketing and distribution capabilities to serve international markets. The
Company intends to continue to capitalize on the rapid growth of the commercial
foodservice equipment industry in international markets by: (i) taking advantage
of its existing manufacturing presence, including through its joint venture
interests, in Australia, China, Germany, Indonesia, Italy and the United Kingdom
and its extensive distribution network, which extends through over 100
countries; (ii) expanding its presence into new markets through acquisitions,
joint ventures, alliances or startup investments; and (iii) leveraging its
relationships with national chains to participate in their international
expansion. Scotsman believes its brands and those of its subsidiaries are well
recognized internationally, in part from a European presence which dates back to
1963. The scale of the Company's international operations is a competitive
advantage, as most national competitors lack a significant presence in
international markets. In addition, the Company believes that most of its
competitors lack the breadth of international operating, service and
distribution capabilities necessary to meet the needs of large customers in
multiple international markets. The Company believes that it received several
recent contract awards from U.S. chains, in part, because of its ability to meet
such customers' needs across international markets.
EXPANDING THROUGH STRATEGIC ACQUISITIONS AND JOINT VENTURES
Strategic acquisitions are expected to remain an important element of
Scotsman's growth domestically and internationally. The Company has acquired six
businesses (including Kysor) since 1992 and formed three joint ventures and one
strategic alliance. The Company believes there are significant consolidation
opportunities in most of its product lines, particularly walk-in coolers and
freezers, display cases and food preparation and storage equipment, which are
relatively fragmented in the United States and highly fragmented in
international markets. The Company expects that complementary acquisitions will
provide the opportunity to achieve economies of scale through manufacturing,
purchasing and overhead efficiencies and economies of scope through
cross-selling opportunities and the sharing of product design innovation among
its operating units. Scotsman currently targets acquisitions that: (i) relate
closely to the Company's current technology, markets, customer types or product
categories; (ii) position the Company to take advantage of fundamental market
and industry trends; and (iii) will be non-dilutive to earnings. The Company's
management team has substantial experience and expertise in identifying,
completing and successfully integrating strategic acquisitions. See "The
Company" and "Kysor Acquisition" for a description of the Company's acquisitions
from 1992 to the present.
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<PAGE> 41
PRODUCTS
Scotsman manufactures a diversified line of commercial refrigeration
products, food preparation equipment and beverage systems, including ice
machines, refrigerated display cases, food preparation and storage equipment,
walk-in coolers and freezers and beverage dispensing systems. The Company sells
its key products through the following principal product lines:
<TABLE>
<CAPTION>
PERCENTAGE OF
PRO FORMA
1996 NET
PRODUCT LINE BUSINESS UNIT(S) SALES KEY PRODUCTS KEY BRANDS
------------ ---------------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
Ice Machines................... Scotsman Ice Systems 29% Commercial ice machines Scotsman
Frimont that make cube, flake, Icematic
Castel MAC nugget and scale ice. Crystal Tips
Booth/Crystal Tips Modular, self- contained Rapid Freeze
Scotsman China ice dispensing systems and Simag
storage bins.
Refrigerated Display Cases..... Kysor//Warren 30% Refrigerated self-serve Kysor//Warren
display cases. Bangor
Service deli cases.
Custom merchandisers.
Mechanical refrigeration
systems.
Refrigeration houses.
Electrical distribution
houses.
Food Preparation and Storage
Equipment.................... Delfield 19% Food preparation Delfield
Castel MAC workstations. Icematic
Refrigerators and freezers. Tecnomac
Dough retarders and blast Shelleyglas
freezers. Shelleymatic
Mobile cafeteria systems.
Tray and plate dispensers.
Walk-in Coolers and Freezers... Kysor Panel Systems 11% Modular insulated panels Kysor Needham
and insulated doors for Kysor Kalt
refrigerated enclosures.
Environmental rooms.
Walk-in cold rooms and
freezers.
Beverage Systems............... Booth/Crystal Tips 11% Soft beverage systems. Booth
Whitlenge Combination ice and Whitlenge
Hartek beverage dispensing Hartek
SAW Technologies systems. Aztec
Custom beer cooling
systems.
</TABLE>
Ice Machines. Scotsman believes it is the world leader in the sale of
commercial ice machines. The Company's commercial ice machines are sold in the
United States under the Scotsman and Crystal Tip brand names. The Company sells
a diversified line of commercial ice machines that make ice in all forms,
including cube, nugget, flake and scale. Each type of ice machine is designed
and marketed for specific applications and capacity ranges from 300 to 2,000
pounds of ice per day. The Company's ice machines are either self-contained
units, which make, store and, in some cases, dispense ice, or modular units,
which make, but do not store, ice. Recent new product introductions have further
augmented the Company's full line of commercial ice machine products. For
example, Scotsman's CM(3) line of cuber ice machines, introduced in 1996, offers
greater ice making capacity while using less energy and having approximately 23%
fewer parts than prior models.
Scotsman's expertise in manufacturing, design and refrigerant technology
enables the Company's ice machines generally to meet or exceed customer's
expectations for reliability and durability. Scotsman's ice machines have an
average life of approximately seven to 10 years and replacement sales typically
represent 70% to 80% of the Company's U.S. sales of ice machines.
The Company believes it is the only U.S. commercial ice machine company
with manufacturing facilities in Europe. The Company manufactures and markets
commercial ice machines and related components
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<PAGE> 42
through its Italian subsidiaries, Castel MAC and Frimont, principally under the
Icematic, Scotsman and Simag trademarks, for sale in Italy and for export
primarily to Eastern and Western Europe, the Middle East, Africa and the Far
East. In China, the Company markets its ice machines under the Scotsman name
through its Chinese joint venture. The Company also markets the Crystal Tips
line internationally through three export marketing firms based in the United
States and Canada.
The Company also distributes Howe industrial ice flakers under distribution
and trademark licensing agreements with Howe Corporation. See "The Company."
Refrigerated Display Cases. Through its Kysor//Warren operating unit,
Scotsman designs and manufactures refrigerated display cases and mechanical
refrigeration systems sold primarily to supermarkets. Refrigerated display cases
are used by supermarkets and convenience stores to display perishable food items
such as vegetables, deli items and prepared meals. Mechanical refrigeration
systems are located away from a store's customer area and provide power, air
filtration and circulation and temperature controls to the refrigerated display
cases located within the store.
Food Preparation and Storage Equipment. Scotsman manufactures and markets a
wide range of commercial food preparation and storage equipment through its
wholly owned subsidiary Delfield. Delfield's principal products are customized
and standard food preparation workstations, commercial up-right and
under-the-counter refrigerators and freezers, mobile cafeteria systems and
self-leveling tray and plate dispensers, all of which are constructed primarily
from stainless steel, as well as wood and other decorative materials. Delfield's
products are customized to address customer requests regarding size, space,
features and performance. Delfield's standard refrigeration products frequently
are incorporated into customers systems or can be sold separately.
Within the Company's food preparation and storage equipment unit, the
Company also manufactures and markets several related products. In Europe,
Castel MAC manufactures and markets a line of refrigerated cabinets under the
Icematic brand name and a line of dough retarders and blast freezers under the
Tecnomac brand name, and Frimont markets a line of refrigerators manufactured by
Castel MAC under the Scotsman brand name.
The Company also manufactures and markets niche products primarily through
Delfield, including air ventilating equipment under the Air Tech trademark, ice
cream dispensing equipment and iced drink mixing and dispensing machines. In
addition, the Company manufactures and markets a limited line of water coolers
through its Italian subsidiaries, Frimont and Castel MAC, and small industrial
applications through Whitlenge.
Walk-in Coolers and Freezers. Scotsman designs, manufactures, markets and
sells walk-in coolers and freezers and environmental control systems through its
Kysor Panel Systems operating unit. Kysor Panel Systems' refrigeration panels
used in the construction of walk-in coolers and freezers are made from all three
primary panel types: wood rail, urethane rail and soft nose. The Company
believes it is the only U.S. panel system supplier that can manufacture any of
the three panel types to meet customer preferences and that Kysor Panel Systems
is the largest supplier in the United States of walk-in coolers and freezers to
the supermarket industry and a leading supplier of walk-in coolers and freezers
to the convenience store industry. Scotsman's environmental control systems are
used in industrial applications to test products under a range of temperatures.
Beverage Systems. In the United States, Scotsman manufactures soft drink
dispensing equipment through its wholly owned subsidiary, Booth. Booth
manufactures and markets a complete line of non-coin operated soft drink
dispensers and accessories. Booth offers both pre-mix and post-mix dispensers,
which can either be ice-cooled or electrically-cooled, as well as ice and drink
dispensers, hand-operated valves and other related accessory products used in
the fountain drink market. Booth is one of only three companies in the United
States that manufacture and market the three major product categories of
beverage systems (mechanically refrigerated, ice cooled and ice/drink) to both
Coca-Cola and Pepsi.
In Europe, Scotsman manufactures and markets soft drink dispensing
equipment, draught beer cooling equipment and related equipment through its
Whitlenge and Hartek subsidiaries. Whitlenge specializes in
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<PAGE> 43
remote beverage cooling installations, including large installations for
restaurants, and also makes a range of refrigerated over and under-the-counter
soft drink units. Hartek manufactures and markets soft drink dispensing
equipment, draught beer cooling equipment and related ancillary equipment.
The Company is a 50% partner in SAW Technologies, a joint venture recently
formed to develop technologically advanced beverage dispensing valves. The joint
venture's Aztec valve, already being sold to a major soft drink bottler in the
United Kingdom, is targeted for other customers and markets. The Aztec valve
differentiates between and monitors different types of soft drink syrups,
continuously regulates the flow and mix of syrups and carbonated water and can
dispense other beverages such as fruit juices, where pulp presents difficulties
for most of the current generation of mechanical valves.
MARKETING AND DISTRIBUTION
Scotsman's sales and distribution network, which extends through over 100
countries, uses a combination of direct sales to national accounts, exclusive
and non-exclusive distributors and independent dealers, wholesalers and sales
representatives. Scotsman has approximately 200 sales and marketing employees
and relationships with over 300 exclusive distributors in over 50 countries and
approximately 3,300 independent dealers, distributors, wholesalers and sales
representatives in over 100 countries. Scotsman believes that these multiple
sales and distribution channels allow it to best serve its diverse customer base
across its five product lines.
While each business unit has its own marketing organization which is
responsible for the marketing and distribution of its products certain
salespeople and distributors may handle more than one of the Company's product
lines. The Company expects that in connection with its cross-selling objectives
more salespeople and distributors will handle more than one of the Company's
product lines.
Ice Machines. In the United States, both of the Company's Scotsman and
Crystal Tips brands maintain their own independent distribution networks.
Scotsman Ice Systems has approximately 85 distributors in the United States and
also sells directly to national customers such as large hotel chains, quick
service restaurants and convenience stores. Crystal Tips sells through
approximately 68 distributors in the United States. Outside the United States,
Crystal Tips has over 20 distributors. Outside the United States, Castel MAC and
Frimont combined have approximately 1,200 dealers and distributors in Europe and
Asia. In the majority of countries served, Castel MAC and Frimont each sell
through separate distribution channels. Distributors generally do not carry
competing brands of ice machines.
Refrigerated Display Cases. Kysor//Warren primarily sells refrigerated
display cases directly to large supermarket and convenience store chains through
its 29 person sales force. A smaller portion of Kysor//Warren's sales are made
through independent commercial refrigeration distributors that market to
independent and small chain supermarkets and convenience stores.
Food Preparation and Storage Equipment. Delfield sells its products
directly to national accounts such as large restaurant chains. Delfield also
sells through a network of approximately 1,400 non-exclusive dealers and
approximately 28 independent sales representative firms. In Europe, Castel MAC
sells through dealers and agents.
Walk-in Coolers and Freezers. Kysor Panel Systems sells its walk-in coolers
and freezers directly to large supermarket chains primarily through its 30
person marketing and sales force. Kysor Panel Systems also sells to smaller
independent supermarkets and convenience stores through a network of
approximately 600 distributors, dealers and wholesalers.
Beverage Systems. Booth sells its beverage systems directly to soft drink
bottlers franchised by large customers such as Coca-Cola and Pepsi. Whitlenge
sells directly to soft-drink bottlers and brewers in the United Kingdom, while
Hartek sells directly to soft-drink bottlers and brewers in Germany. Whitlenge
and Hartek jointly export directly to bottlers and brewers through a 10 person
sales force and over 7 distributors and local agents in various markets
throughout Western and Central Europe and the Middle East.
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<PAGE> 44
RESEARCH AND DEVELOPMENT
Scotsman conducts extensive research and development programs in each of
its product lines. These programs seek to develop product improvements and
achieve cost reductions, as well as develop new products. Approximately 65
employees of the Company are engaged in research and development. Scotsman's
total research and development expenditures for fiscal years 1996, 1995 and 1994
were $5.6 million, $4.8 million and $5.1 million, respectively, and Kysor's
total research and development expenditures for 1996, 1995 and 1994 were $.8
million, $.4 million and $.3 million, respectively.
RAW MATERIALS
The principal materials used in the manufacture of Scotsman's products are
refrigeration components, including compressors, condensers, motors and
controls, and raw materials such as stainless steel, galvanized steel, aluminum,
copper, plastic, glass, foam insulation, brass and wood. These materials are
readily available from several sources, and Scotsman has not experienced
difficulties with respect to their availability.
FACILITIES
The following chart lists the domestic and international active
manufacturing, distribution and office facilities owned or leased by Scotsman or
the joint ventures in which Scotsman has an interest:
DOMESTIC FACILITIES
<TABLE>
<CAPTION>
OWNED/
LOCATION DESCRIPTION PRINCIPAL PRODUCT LEASED
-------- ----------- ----------------- ------
<S> <C> <C> <C>
Goodyear, Arizona................... Plant and Office; Walk-in Coolers and Freezers Leased
50,000 square feet
Los Angeles, California............. Distribution Ice Machines Leased
Facility;
13,000 square feet
Columbus, Georgia................... Plant and Office; Refrigerated Display Cases Owned
295,826 square feet
Columbus, Georgia................... Plant and Office; Refrigeration Systems Owned
155,000 square feet
Conyers, Georgia.................... Plant and Office; Refrigerated Display Cases Owned
480,000 square feet
Vernon Hills, Illinois.............. Office; Ice Machines Leased
36,000 square feet
Vernon Hills, Illinois.............. Office; Corporate headquarters Leased
8,800 square feet
South Bend, Indiana................. Plant and Office; Refrigerated Display Cases Owned
90,000 square feet
Des Moines, Iowa.................... Plant, Warehouse Refrigerated Display Cases Leased
and Office;
93,000 square feet
Mt. Pleasant, Michigan.............. Plant and Office; Food Preparation and Storage Owned
327,000 square feet Equipment
Portland, Oregon.................... Plant and Office; Walk-in Coolers and Freezers Owned
84,000 square feet
Fairfax, South Carolina............. Plant and Ice Machines Owned
Warehouse;
327,000 square feet
</TABLE>
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<PAGE> 45
<TABLE>
<CAPTION>
OWNED/
LOCATION DESCRIPTION PRINCIPAL PRODUCT LEASED
-------- ----------- ----------------- ------
<S> <C> <C> <C>
Covington, Tennessee................ Plant and Office; Food Preparation and Storage Leased
188,000 square feet Equipment
Johnson City, Tennessee............. Plant and Office; Walk-in Coolers and Freezers Leased
60,000 square feet
Dallas, Texas....................... Plant and Office; Ice Machines Leased
170,000 square feet
Fort Worth, Texas................... Plant and Office; Walk-in Coolers and Freezers Owned
118,162 square feet
</TABLE>
INTERNATIONAL FACILITIES
<TABLE>
<CAPTION>
OWNED/
LOCATION DESCRIPTION PRINCIPAL PRODUCT LEASED
-------- ----------- ----------------- ------
<S> <C> <C> <C>
Adelaide, Australia.................. Plant and Office; Refrigerated Display Cases *
12,000 square feet
Sydney, Australia.................... Plant and Office; Refrigerated Display Cases *
163,000 square feet
Vienna, Austria...................... Office and Beverage systems Leased
Warehouse;
11,000 square feet
Shenyang, China...................... Plant and Office; Ice Machines *
17,000 square feet
Radevormwald, Germany................ Plant and Office; Beverage systems Owned
35,000 square feet
Jakarta, Indonesia................... Plant and Office; Refrigerated Display Cases *
5,000 square feet
Castelfranco, Italy.................. Plant and Office; Ice Machines Owned
230,000 square feet
Milan, Italy......................... Plant and Office; Ice Machines Leased
152,000 square feet
Halesowen, United Kingdom............ Plant and Office; Beverage systems Leased
76,000 square feet
Irthlingsborough, United Kingdom..... Plant and Office; Beverage systems *
3,900 square feet
</TABLE>
- -------------------------
* Facility owned or leased by a joint venture in which Scotsman has an interest.
Scotsman considers the condition of its plants and other properties to be
generally good and believes the capacity of its plants, as increased by the
plant under construction in Georgia, to be adequate for the current needs of its
business. Except for a lien on a section of its Mt. Pleasant, Michigan facility
and on its Covington, Tennessee facility, both securing industrial revenue
bonds, none of the principal properties owned by Scotsman are subject to
encumbrances material to the operations of Scotsman.
EMPLOYEES
As of September 28, 1997, Scotsman employed approximately 3,800 employees,
approximately 1,400 of whom are covered by collective bargaining agreements. The
Company believes its relationships with employees are generally good.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages (as of October 1, 1997) and
positions of all executive officers and directors of Scotsman or its
subsidiaries.
<TABLE>
<CAPTION>
NAME AND AGE POSITION WITH COMPANY
------------ ---------------------
<S> <C>
Richard C. Osborne, 53............... Chairman, President, Chief Executive Officer and Director
Paolo Faenza, 58..................... General Manager, Castel MAC
David M. Frase, 50................... Vice President of the Company and President of Kysor Panel
Systems
Richard M. Holden, 47................ Vice President -- Human Resources
Donald D. Holmes, 59................. Vice President -- Finance and Secretary
Christopher D. Hughes, 51............ Vice President of the Company and President of Booth
Ludwig H. Klein, 55.................. Vice President of the Company and Managing Director of
Hartek
Emanuele Lanzani, 63................. Executive Vice President of the Company and Managing
Director, Frimont and Castel MAC
Gerardo Palmieri, 57................. Director -- Sales and Marketing, Frimont
Randall C. Rossi, 45................. Vice President of the Company and President of Scotsman Ice
Systems
William J. Rotenberry, 42............ Vice President -- Business Development
Michael de St. Paer, 52.............. Vice President of the Company and Managing Director of
Whitlenge
Graham E. Tillotson, 46.............. Vice President of the Company and President of Delfield
Logan F. Wernz, 53................... Vice President of the Company and President of Kysor//Warren
Donald C. Clark, 66.................. Director
Timothy C. Collins, 40............... Director
Frank W. Considine, 76............... Director
George D. Kennedy, 71................ Director
Robert G. Rettig, 68................. Director
Richard L. Thomas, 66................ Director
</TABLE>
Mr. Osborne is Chairman of the Board and has held that position since May
1991. He is also President, Chief Executive Officer and a director of the
Company and has held those positions since April 1989.
Mr. Faenza is General Manager, Castel MAC, and has held that position since
1986.
Mr. Frase is a Vice President of the Company and has held that position
since May 1997. He is also President and General Manager of Kysor Panel Systems,
and has held those positions since 1987. From 1982 to 1987, he served as a Vice
President of Kysor's walk-in coolers and freezers business.
Mr. Holden is Vice President -- Human Resources of the Company and has held
that position since January 1990.
Mr. Holmes is Vice President -- Finance and Secretary of the Company and
has held those positions since April 1989.
Mr. Hughes is a Vice President of the Company and has held that position
since June 1994. He is also President of Booth and has held that position since
May 1994. From 1993 to May 1994, he was Vice President/General Manager of the
Central and Western Transit Operations of Morrison Knudsen Corporation, a
division engaged in the business of assembling new and overhauling used
passenger rail cars.
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<PAGE> 47
From 1991 to 1993, Mr. Hughes was Vice President of Operations of Scotsman Ice
Systems and Scotsman's former Glenco-Star division.
Mr. Klein is a Vice President of the Company and has held that position
since February 1996. He is also Managing Director of Hartek and has held that
position since February 1995. From June 1994 until February 1995, he worked as
an independent consultant and provided, during that period, consulting services
to Hartek and in the capital goods industry. From July of 1986 until June of
1994, Mr. Klein held the position of General Manager of Haacon Hebetechnik GmbH,
a manufacturer of industrial lifting equipment.
Mr. Lanzani is an Executive Vice President of the Company and has held that
position since April 1989. He is also the Managing Director, Frimont and Castel
MAC. Mr. Lanzani has been Managing Director of Castel MAC since its acquisition
by a wholly owned subsidiary of Household in October 1985 and has been Managing
Director of Frimont since 1968.
Mr. Palmieri is Director -- Sales and Marketing, Frimont, and has held that
position since 1980.
Mr. Rossi is a Vice President of the Company and has held that position
since January 1995. He is also President of Scotsman Ice Systems and has held
that position since January 1995. From January 1994 to January 1995, he was an
Executive Vice President of Scotsman Ice Systems. From 1989 to January 1994, he
was Vice President -- Sales and Marketing of Scotsman Ice Systems.
Mr. Rotenberry is Vice President -- Business Development. He has been
employed by the Company since January 1996 and became a Vice President of the
Company in February 1996. From 1990 until January 1996, he was Director of
Corporate Development for Joslyn Corporation, a diversified manufacturer.
Mr. de St. Paer is a Vice President of the Company and has held that
position since April 1994. He is also Managing Director of Whitlenge and has
held that position since April 1993. From June 1992 to April 1993 he was
Assistant Managing Director of Whitlenge. From 1991 until June 1992, he was the
Managing Director and a Group Technical Director of Hartek.
Mr. Tillotson is a Vice President of the Company and President of Delfield.
He has held those positions since June 1997. From January 1997 to June 1997, he
served as Interim President of Delfield. From 1984 to December 1996, he was Vice
President, Sales & Marketing of Delfield.
Mr. Wernz is a Vice President of the Company and has held that position
since May 1997. He is also President and General Manager of Kysor//Warren, and
has held those positions since 1988. From October 1984 to March 1988, he served
as President and General Manager of Kysor//Westran. From January 1967 to June
1984, he served in various managerial and executive positions at Parker Hannifin
and Ardco where he last served as President.
Mr. Clark was Chairman of the Board and a director of Household until his
retirement in 1996. Mr. Clark was Chairman of the Board of Household from 1984
to 1996 and Chief Executive Officer of Household from 1982 to September 1994. He
is also director of Armstrong World Industries, Inc., PMI Group, Inc.,
Ripplewood Holdings L.L.C., Ameritech Corporation and Warner-Lambert Co. and
serves as trustee of Clarkson University and Northwestern University. He has
been a director of the Company since April 1989 and served as Chairman of the
Board of the Company from April 1989 to May 1991.
Mr. Collins is Chief Executive Officer and Senior Managing Director of
Ripplewood Holdings L.L.C., an industrial and investment management holding
company, and has held that position since 1995. Mr. Collins was Senior Managing
Director of Onex Investment Corp. (New York), a management company for the U.S.
investments of Onex Corporation, an Ontario corporation, from 1990 to 1995. He
also serves on the board of directors of Dayton Superior Corporation and
Danielson Holding Corporation. He has been a director of the Company since April
1994.
Mr. Considine is Honorary Chairman of the Board, Chairman of the Executive
Committee and a director of American National Can Company, a packaging
manufacturer, and has held those positions since 1990. He was Chairman of the
Board of American National Can Company from 1983 to 1990, President from 1969 to
1988, and Chief Executive Officer from 1973 to 1988. Mr. Considine is Chairman
of the Board of Trustees of
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<PAGE> 48
Loyola University, Chicago, and serves on the Board of Trustees of the Field
Museum of Natural History, Chicago. Mr. Considine has been a director of the
Company since April 1989.
Mr. Kennedy was Chairman and a director of the Mallinckrodt Group Inc., a
producer of medical products and chemicals, from 1991 until his retirement in
October 1994. He was Chairman and Chief Executive Officer of Mallinckrodt Group
Inc. from 1986 to 1991. Mr. Kennedy is also a director of Brunswick Corporation,
Illinois Tool Works, Inc., American National Can Company, Kemper National
Insurance Company and Stone Container Corporation. He has been a director of the
Company since April 1989.
Mr. Rettig is a consultant to Illinois Tool Works, Inc., a manufacturer of
industrial products and components, and a consultant to, and a director of, The
Tech Group, a custom molding company, and has held those positions since 1990.
He was an Executive Vice President of Illinois Tool Works, Inc. from 1983 to
December 1989. Mr. Rettig is also a director of Lawson Products, Inc. and serves
as a trustee of the Illinois Institute of Technology. He has been a director of
the Company since April 1989.
Mr. Thomas was Chairman of First Chicago NBD Corporation and The First
National Bank of Chicago from 1995 until his retirement in May 1996. He was
Chairman, President and Chief Executive Officer of The First National Bank of
Chicago from 1992 to 1995. Mr. Thomas is currently a director of First Chicago
NBD Corporation, The First National Bank of Chicago, CNA Financial Corporation,
IMC Global Inc., The PMI Group, Inc., The Sabre Group Holdings, Inc. and Sara
Lee Corporation. Mr. Thomas is Chairman of the Board and a trustee of Kenyon
College, a trustee of the Chicago Symphony Orchestra, Northwestern University
and Rush Presbyterian-St. Luke's Medical Center, and is Chairman of the Civic
Committee of The Commercial Club of Chicago. He has been a director of the
Company since August 1997.
EXECUTIVE COMPENSATION
The Company's executive compensation program is structured to provide
meaningful incentives to the executive officers to increase shareholder value.
The program is comprised of a base salary, an annual cash incentive compensation
program and a long-term incentive compensation plan in the form of stock
options, stock appreciation rights, restricted stock and restricted stock
rights.
As of February 15, 1997, the directors and certain officers of the Company,
as a group, beneficially owned, or had the right to acquire within 60 days
pursuant to the exercise of stock options, 1,432,665 shares of Common Stock
representing 13.1% of the shares of Common Stock then issued and outstanding.
DESCRIPTION OF THE NOTES
GENERAL
The Notes are to be issued under an Indenture, to be dated as of
, 1997 (the "Indenture"), among the Company, the Issuer and Harris
Trust and Savings Bank, as Trustee (the "Trustee"). A copy of the form of
Indenture is filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The following summary of certain provisions of the
Indenture does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the Indenture and the Notes including the
definitions of certain terms therein and those terms made a part of the
Indenture by the Trust Indenture Act of 1939, as amended. Whenever particular
defined terms of the Indenture not otherwise defined herein are referred to,
such defined terms are incorporated herein by reference. For definitions of
certain capitalized terms used in the following summary, see "-- Certain
Definitions."
TERMS OF THE NOTES
The Notes will be unsecured senior subordinated obligations of the Issuer,
initially limited to $100 million aggregate principal amount, and will mature on
, 2007. The Notes will bear interest at the rate per annum shown on
the cover page hereof from , 1997, or from the most recent date to
which interest has been paid or provided for, payable semiannually to Holders of
record at the close of business on the or immediately
preceding the interest payment date on and of each
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<PAGE> 49
year, commencing , 1998. Interest on the Notes will be computed on the
basis of a 360-day year of twelve 30-day months.
Principal of and interest on the Notes will be payable, and the Notes may
be exchanged or transferred, at the office or agency of the Issuer in the
Borough of Manhattan, The City of New York (which initially shall be the
corporate trust office of the Trustee's affiliate, at 88 Pine Street, New York,
New York 10005), except that, at the option of the Issuer, payment of interest
may be made by check mailed to the address of the Holders as such address
appears in the Note Register or, if the Notes are listed on the Luxembourg Stock
Exchange, at the main office of the Paying Agent in Luxembourg. Payments with
respect to principal of the Notes will be made only against surrender of such
Notes (together with any necessary endorsements).
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
shall be made for any registration of transfer or exchange of Notes, but the
Issuer may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
OPTIONAL REDEMPTION
From and after , 2002, the Notes will be redeemable, at the
Issuer's option, in whole or in part, at any time or from time to time, upon not
less than 30 nor more than 60 days' prior notice mailed by first-class mail to
each Holder's registered address, at the following redemption prices (expressed
in percentages of principal amount), plus accrued and unpaid interest to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the 12-month period commencing on of the years set
forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2002..................................................... %
2003..................................................... %
2004 and thereafter...................................... 100%
</TABLE>
In addition, at any time and from time to time prior to , 2000,
the Issuer may redeem in the aggregate up to 35% of the original principal
amount of the Notes with the proceeds of one or more Equity Offerings, at a
redemption price (expressed as a percentage of principal amount) of % plus
accrued and unpaid interest to the redemption date (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date); provided, however, that either (i) at least $
million in aggregate principal amount of the Notes must remain outstanding after
each such redemption or (ii) such redemption must retire the Notes in their
entirety and, in any case, that such redemption occurs within 60 days following
the closing of such Equity Offering.
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note.
On and after the redemption date, interest will cease to accrue on the
Notes or the portion thereof called for redemption.
SINKING FUND
There will be no sinking fund payments for the Notes.
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<PAGE> 50
COMPANY GUARANTY
The Company will fully and unconditionally Guarantee on a senior
subordinated basis the performance and the punctual payment when due, whether at
Stated Maturity, by acceleration or otherwise, of all the Obligations of the
Issuer under the Indenture and the Notes (the "Guaranty"). The Guaranty will be
limited in amount to an amount not to exceed the maximum amount that can, after
giving effect to all other contingent and fixed liabilities of the Company, be
guaranteed by the Company without rendering the Guaranty void or voidable under
applicable law relating to fraudulent transfer or fraudulent conveyance or
similar laws affecting the rights of creditors generally. In addition, the
Company will agree to pay any and all expenses (including reasonable counsel
fees and expenses) incurred by the Trustee and the Holders in enforcing any
rights under the Guaranty with respect to the Company.
RANKING
The indebtedness evidenced by the Notes and the Guaranty will be unsecured,
general obligations of the Issuer or the Company, as the case may be,
subordinated in right of payment, as set forth in the Indenture, to the prior
payment of all Senior Indebtedness of the Issuer or the Company, as the case may
be, whether outstanding on the Issue Date or thereafter incurred, including the
Issuer's and the Company's respective Obligations under the Bank Credit
Agreement. After giving effect to this Offering and the application of the net
proceeds herefrom, as of September 28, 1997, the Company, the Issuer and the
Restricted Subsidiaries would have had approximately $262 million of Senior
Indebtedness outstanding and would have had up to approximately $146 million
available under the Credit Facility and the Comerica Agreement which, if
borrowed, would be Senior Indebtedness. In addition, the Company has pledged all
outstanding Capital Stock of the Issuer owned by the Company to secure its
obligations under its Guarantee of the Credit Facility.
Only Indebtedness of the Issuer or the Company that is Senior Indebtedness
will rank senior to the Notes or the Guaranty, as the case may be, in accordance
with the provisions of the Indenture. The Notes will in all respects rank pari
passu with all other Senior Subordinated Indebtedness of the Issuer. The Issuer
and the Company have agreed in the Indenture that they will not Incur, directly
or indirectly, any Indebtedness that is subordinate or junior in ranking in
right of payment to its Senior Indebtedness unless such Indebtedness is Senior
Subordinated Indebtedness or is expressly subordinated in right of payment to
Senior Subordinated Indebtedness. Unsecured Indebtedness is not deemed to be
subordinated or junior to Secured Indebtedness merely because it is unsecured.
A significant portion of the operations of the Issuer and all of the
operations of the Company are currently conducted through their respective
Subsidiaries. Claims of creditors of any Subsidiary of the Issuer, including
trade creditors, secured creditors and creditors holding guarantees issued by
such Subsidiaries, and claims of preferred stockholders (if any) of such
Subsidiaries generally will have priority with respect to the assets and
earnings of such Subsidiaries over the claims of creditors of the Issuer or the
Company, including holders of the Notes, even though such obligations would not
constitute Senior Indebtedness of the Issuer or the Company. The Notes and the
Guaranty, therefore, will be effectively subordinated to creditors (including
trade creditors) and preferred stockholders (if any) of Subsidiaries of the
Issuer. After giving effect to this Offering and the application of the net
proceeds herefrom, as of September 28, 1997, the Issuer's Subsidiaries would
have had approximately $38 million of Indebtedness outstanding and owed to
Persons other than to the Company, the Issuer and its Subsidiaries. Although the
Indenture limits the incurrence of Indebtedness and the issuance of capital
stock of certain of the Issuer's Subsidiaries, such limitations are subject to a
number of significant qualifications; moreover, the Indenture does not impose
any limitation on the incurrence by such Subsidiaries of liabilities that are
not considered Indebtedness under the Indenture. See "-- Certain
Covenants -- Limitation on Indebtedness."
SUBORDINATION
Upon any payment or distribution of assets or securities of the Issuer or
the Company, as the case may be, of any kind or character, whether in cash,
property or securities, in connection with any dissolution or winding up or
total or partial liquidation or reorganization of the Issuer or the Company, as
the case may be, whether voluntary or involuntary, or in bankruptcy, insolvency,
receivership or other proceedings or upon any
49
<PAGE> 51
general assignment for the benefit of creditors or any other marshaling of
assets for the benefit of creditors generally, all amounts due or to become due
upon all Senior Indebtedness (including, without limitation, any interest
accruing subsequent to an event of bankruptcy whether or not such interest is an
allowed claim enforceable against the debtor under the United States Bankruptcy
Code and all contingent claims or obligations in connection with such Senior
Indebtedness) shall first be paid in full, in cash or cash equivalents, before
the Holders or the Trustee on their behalf shall be entitled to receive any
payment by the Issuer or the Company on account of any principal of, premium if
any, or interest on the Notes (including any repurchase of the Notes or on
account of the redemption provisions of the Notes) or any payment to acquire any
of the Notes for cash, property or securities, or any distribution with respect
to the Notes of any cash, property or securities. Before any payment may be made
by, or on behalf of, the Issuer on any principal of, premium if any, or interest
on the Notes (including any repurchase of the Notes or on account of the
redemption provisions of the Notes), or the Company on the Guaranty, as the case
may be, in connection with any such dissolution, winding up, liquidation or
reorganization, any payment or distribution of assets or securities of the
Issuer or the Company, as the case may be, of any kind or character, whether in
cash, property or securities, to which the Holders or the Trustee on their
behalf would be entitled, but for the subordination provisions of the Indenture,
shall be made by the Issuer or the Company, as the case may be, or by a
receiver, trustee in bankruptcy, liquidating trustee, agent or other similar
Person making such payment or distribution or by the Holders or the Trustee if
received by them or it, directly to the holders of the Senior Indebtedness (pro
rata to such holders on the basis of the respective amounts of Senior
Indebtedness held by such holders) or their representatives or to any trustee or
trustees under any indenture pursuant to which any such Senior Indebtedness may
have been issued, as their respective interests appear, to the extent necessary
to pay all Obligations with respect to such Senior Indebtedness in full, in cash
or cash equivalents, after giving effect to any concurrent payment, distribution
or provision therefor to or for the holders of such Senior Indebtedness.
In addition, the Issuer or the Company, as the case may be, may not make
any payment of any kind or character from any source on the Notes or make any
deposit pursuant to the provisions described under "Defeasance" below or may not
repurchase, redeem or otherwise retire any Notes whether pursuant to the terms
of the Notes or upon acceleration or otherwise (collectively, "pay the Notes")
if (i) any Obligations with respect to any Designated Senior Indebtedness of the
Issuer or the Company, as the case may be, are not paid when due unless such
nonpayment has been cured or waived or ceases to exist or such Designated Senior
Indebtedness has been paid in full or (ii) any other default on Designated
Senior Indebtedness of the Issuer or the Company, as the case may be, occurs and
the maturity of such Designated Senior Indebtedness is accelerated in accordance
with its terms (which acceleration occurs automatically under certain
circumstances) unless the default has been cured or waived, ceases to exist or
any such acceleration has been rescinded or such Designated Senior Indebtedness
has been paid in full. However, the Issuer or the Company, as the case may be,
may pay the Notes without regard to the foregoing if the Issuer or the Company,
as the case may be, and the Trustee receive written notice approving such
payment from the Representative or Representatives of all Designated Senior
Indebtedness with respect to which either of the events set forth in clause (i)
or (ii) of the immediately preceding sentence has occurred and is continuing.
During the continuance of any default (other than a default described in clause
(i) or (ii) of the second preceding sentence) with respect to any Designated
Senior Indebtedness of the Issuer or the Company, as the case may be, pursuant
to which the maturity thereof may be accelerated immediately without further
notice (except such notice as may be required to effect such acceleration) or
the expiration of any applicable grace periods, the Issuer or the Company, as
the case may be, shall not pay any principal of, premium if any, or interest on
the Notes (including any repurchase of the Notes or on account of the redemption
provisions of the Notes) for a period (a "Payment Blockage Period") commencing
upon the receipt by the Trustee (with a copy to the Issuer or the Company, as
the case may be) of written notice (a "Blockage Notice") of such default from a
Representative of the holders of such Designated Senior Indebtedness specifying
an election to effect a Payment Blockage Period and ending 179 days thereafter
(or earlier if such Payment Blockage Period is terminated (i) by written notice
to the Trustee and the Issuer or the Company, as the case may be, from the
Person or Persons who gave such Blockage Notice, (ii) because the default giving
rise to such Blockage Notice is no longer continuing or (iii) because such
Designated Senior Indebtedness has been repaid in full). Notwithstanding the
provisions described in the immediately preceding sentence (but subject to the
provisions
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<PAGE> 52
described in the immediately preceding paragraph), unless the holders of such
Designated Senior Indebtedness or the Representative of such holders shall have
accelerated the maturity of such Designated Senior Indebtedness, the Issuer or
the Company, as the case may be, must resume payments when due on the Notes
after the end of such Payment Blockage Period. Each of the Notes and the
Guaranty shall not be subject to more than one Payment Blockage Period in any
consecutive 360-day period, irrespective of the number of defaults with respect
to Designated Senior Indebtedness of the Issuer or the Company, as the case may
be, during such period.
Notwithstanding the foregoing, so long as any Obligations remain
outstanding under the Credit Agreement dated as of March 12, 1997 described in
the definition of "Bank Credit Agreement," as in effect on the date hereof (and
any related notes, guarantees, collateral documents, instruments and agreements
executed in connection therewith) as the same may be amended, restated, modified
or supplemented from time to time (but not after (x) the date (even if such
Obligations remain outstanding) any agreement relating to any refunding,
replacement or refinancing of less than the entirety of the borrowings and
commitments then outstanding or permitted to be outstanding under such Credit
Agreement is effected or (y) the date such Credit Agreement is terminated and
all such Obligations due and payable at the time of such termination shall have
been paid in full), then only a Representative of the holders of Senior
Indebtedness under such Credit Agreement shall be entitled to give a Blockage
Notice unless the Company or the Issuer, as the case may be, and such
Representative or holders agree otherwise in a writing delivered to the Trustee.
If payment of the Notes is accelerated because of an Event of Default, the
Issuer or the Trustee shall promptly notify the holders of all Designated Senior
Indebtedness or the Representatives of such holders of the acceleration. If any
Designated Senior Indebtedness is outstanding, neither of the Issuer or the
Company may pay the Notes until five Business Days after the Representatives of
all the issues of Designated Senior Indebtedness receive notice of such
acceleration and, thereafter, may pay the Notes only if the Indenture otherwise
permits payments at that time.
By reason of the subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Issuer or the Company, as the case may
be, who are holders of Senior Indebtedness of the Issuer or the Company, as the
case may be, may recover more from the Issuer or the Company, as the case may
be, ratably, than the Noteholders, and creditors of the Issuer or the Company,
as the case may be, who are not holders of Senior Indebtedness of the Issuer or
the Company, as the case may be, may recover less from the Issuer or the
Company, as the case may be, ratably, than holders of Senior Indebtedness and
may recover more, ratably, than Holders of the Notes.
To the extent any payment of Senior Indebtedness (whether by or on behalf
of the Issuer or the Company, as the case may be, as proceeds of security or
enforcement of any right of setoff or otherwise) is declared to be fraudulent or
preferential, set aside or required to be paid to any receiver, trustee in
bankruptcy, liquidating trustee, agent or other similar Person under any
bankruptcy, insolvency, receivership, fraudulent conveyance or similar law, then
if such payment is recovered by, or paid over to, such receiver, trustee in
bankruptcy, liquidating trustee, agent or other similar Person, the Senior
Indebtedness or part thereof originally intended to be satisfied shall be deemed
to be reinstated and outstanding as if such payment had not occurred.
Notwithstanding the foregoing, payment from the money or the proceeds of
U.S. Government Obligations held in any defeasance trust described under "--
Defeasance" below will not be contractually subordinated in right of payment to
any Senior Indebtedness or subject to the restrictions described herein.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other capitalized
term used herein for which no definition is otherwise provided.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided that
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<PAGE> 53
the following items shall be excluded in computing Adjusted Consolidated Net
Income (without duplication): (i) the net income (or loss) of any Person (other
than net income (or loss) attributable to a Restricted Subsidiary) in which any
Person (other than the Company or any of its Restricted Subsidiaries) has an
ownership interest and the net income (or loss) of any Unrestricted Subsidiary,
except, in each case, to the extent of the amount of dividends or other
distributions actually paid to the Company or any of its Restricted Subsidiaries
by such other Person or such Unrestricted Subsidiary during such period; (ii)
solely for the purposes of calculating the amount of Restricted Payments that
may be made pursuant to clause 3(A) of paragraph (a) of the "Limitation on
Restricted Payments" covenant described below (and in such case, except to the
extent includable pursuant to clause (i) above), the net income (or loss) of any
Person accrued prior to the date it becomes a Restricted Subsidiary or is merged
into or consolidated with the Company or any of its Restricted Subsidiaries or
all or substantially all of the property and assets of such Person are acquired
by the Company or any of its Restricted Subsidiaries; (iii) the net income of
any Restricted Subsidiary to the extent that the declaration or payment of
dividends or similar distributions by such Restricted Subsidiary of such net
income is not at the time permitted by the operation of the terms of its charter
or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to such Restricted Subsidiary; (iv) any gains
or losses (on an after-tax basis) attributable to Asset Sales; (v) except for
purposes of calculating the amount of Restricted Payments that may be made
pursuant to paragraph (a) of the "Limitation on Restricted Payments" covenant
described below, any amount paid or accrued as dividends on Preferred Stock of
the Company or any Restricted Subsidiary that is owned by the Persons other than
the Company and any of its Restricted Subsidiaries; and (vi) all extraordinary
gains and extraordinary losses.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the provisions described under "-- Certain Covenants -- Limitation
on Restricted Payments," "-- Certain Covenants -- Limitation on Affiliate
Transactions" and "-- Certain Covenants -- Limitations on Asset Sales" only,
"Affiliate" shall also mean any beneficial owner of Capital Stock representing
10% or more of the total voting power of the Voting Stock (on a fully diluted
basis) of the Company or of rights or warrants to purchase such Capital Stock
(whether or not currently exercisable) and any Person who would be an Affiliate
of any such beneficial owner pursuant to the first sentence hereof.
"Asset Acquisition" means (i) an Investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries; provided, however, that such
Person's primary business is related, ancillary or complementary to the
businesses of the Company and its Restricted Subsidiaries on the date of such
Investment or (ii) an acquisition by the Company or any of its Restricted
Subsidiaries of the property and assets of any Person other than the Company or
any of its Restricted Subsidiaries that constitute substantially all of a
division or line of business of such Person; provided, however, that the
property and assets acquired are related, ancillary or complementary to the
businesses of the Company and its Restricted Subsidiaries on the date of such
acquisition.
"Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of the Company or any of its
Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or Sale-Leaseback Transaction) in one transaction
or a series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, except any such disposition of director's qualifying shares or of
shares of Capital Stock of foreign Restricted Subsidiaries to foreign nationals
to the extent required by law, (ii) all or substantially all of the property and
assets of an operating unit or business of the Company or any of its Restricted
Subsidiaries, or (iii) any other property and assets of the Company or
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any of its Restricted Subsidiaries outside the ordinary course of business of
the Company or such Restricted Subsidiary and, in each case, that is not
governed by the provisions of the Indenture applicable to mergers,
consolidations and sales of assets and Sale/Leaseback Transactions of the
Company or such Restricted Subsidiary; provided, however, that "Asset Sale"
shall not include (v) sales or other dispositions of inventory, receivables and
other current assets, (w) sales or other dispositions of damaged, worn-out or
other obsolete property in the ordinary course of business so long as such
property is not necessary for the proper conduct of the business of the Company
and its Restricted Subsidiaries, (x) exchanges of property of the Company or any
of its Restricted Subsidiaries for property of any other Person which is
related, ancillary or complimentary to the business of the Company and its
Restricted Subsidiaries at the time of such exchange and where the Board of
Directors of the Company or such Restricted Subsidiary has determined in good
faith that such exchange is fair and reasonable, (y) creation or assumption of
Liens permitted under the "Limitation on Liens" covenant described below or any
foreclosure thereof, or (z) sales or other dispositions of property or assets
with an aggregate Fair Market Value not in excess of $5 million in any fiscal
year.
"Attributable Debt" means, in respect of a Sale/Leaseback Transaction as at
the time of determination, the present value (discounted at the interest rate
implicit in the Sale/Leaseback Transaction, compounded annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bank Credit Agreement" means (A) that certain Credit Agreement, dated as
of March 12, 1997, by and among the Company, the Issuer and The First National
Bank of Chicago (or any successor thereto or replacement thereof), as agent and
as a lender, and certain other institutions, as lenders, and certain other
parties thereto, providing for up to $450 million of Indebtedness, including any
related notes, guarantees, collateral documents, instruments and agreements
executed in connection therewith, in each case as amended, restated, modified,
renewed, refunded, replaced or refinanced, in whole or in part from time to time
by one or more other agreements, instruments and documents entered into with
such Persons and/or other Persons, and (B) with respect to the Company, the
Issuer and any Restricted Subsidiary, any other debt facilities or commercial
paper facilities with banks or other institutional lenders providing for
revolving credit loans, term loans, receivables financing (including through the
sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables) or letters or credit,
including in each case any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case as
amended, restated, modified, renewed, refunded, replaced or refinanced, in whole
or in part, from time to time by one or more other agreements, instruments and
documents entered into with such Persons and/or other Persons.
"Board of Directors" means the Board of Directors of the Company or the
Issuer, as the case may be, or any committee thereof duly authorized to act on
behalf of such Board.
"Business Day" means each day which is not a Legal Holiday (as defined in
the Indenture).
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participation or other equivalents of or
interests in equity (however designated) of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
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"Change of Control" means the occurrence of any of the following events:
(i) any "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act) is or becomes the "beneficial owner" (within
the meaning of Rules 13d-3 and 13d-5 under the Exchange Act, except that
for purposes of this clause (i) such person or group shall be deemed to
have "beneficial ownership" of all shares that such person or group has the
right to acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of more than 35% of the
total voting power of the Voting Stock of the Company; provided, however,
that a person shall not be deemed to be the beneficial owner of, or to own
beneficially, (i) any securities tendered pursuant to a tender or exchange
offer made by or on behalf of such Person or any of such Person's
Affiliates until such tendered securities are accepted for purchase or
exchange thereunder, or (ii) any securities if such beneficial ownership
(A) arises solely as a result of a revocable proxy delivered in response to
a proxy or consent solicitation made pursuant to applicable law, and (B) is
not also then reportable on Schedule 13D (or any successor schedule) under
the Exchange Act;
(ii) during any period of two consecutive years from and after the
Issue Date, individuals who at the beginning of such period constituted the
Board of Directors of the Company (together with any new directors whose
election by such Board of Directors or whose nomination for election by the
shareholders of the Company was approved by a vote of a majority of the
directors of the Company then still in office who were either directors at
the beginning of such period or whose election or nomination for election
was previously so approved) cease for any reason to constitute a majority
of the Board of Directors then in office;
(iii) the merger or consolidation of the Company with or into another
Person (other than the Issuer or another Wholly Owned Subsidiary), or the
sale of all or substantially all the assets of the Company to another
Person, and, in the case of any such merger or consolidation, the
securities of the Company that are outstanding immediately prior to such
transaction and which represent 100% of the aggregate voting power of the
Voting Stock of the Company are changed into or exchanged for cash,
securities or property, unless pursuant to such transaction such securities
are changed into or exchanged for, in addition to any other consideration,
securities of the surviving corporation that represent, immediately after
such transaction, at least a majority of the aggregate voting power of the
Voting Stock of the surviving corporation; or
(iv) the Company ceases for any reason to be the beneficial owner,
directly or indirectly, of all Voting Stock of the Issuer, except as a
result of the merger of the Company with and into the Issuer or of the
merger of the Issuer with and into the Company; provided that the pledge of
such Voting Stock (without the transfer of voting rights attributable
thereto) shall not be deemed to transfer the beneficial ownership thereof.
"Code" means the Internal Revenue Code of 1986, as amended.
"Comerica Agreement" means that certain promissory note, dated as of March
12, 1997, by Scotsman Group to Comerica Bank, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, restated, modified, renewed,
refunded, replaced or refinanced, in whole or in part from time to time by one
or more other agreements, instruments and documents entered into with such
Person and/or other Persons.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's common stock, whether now outstanding or
issued after the Issue Date, including, without limitation, all series and
classes of such common stock.
"Consolidated Coverage Ratio" means, on any date of determination, the
ratio of (i) the aggregate amount of Consolidated EBITDA for the then most
recent four fiscal quarters prior to such date for which reports have been filed
with the SEC pursuant to the "SEC Reports and Reports to Holders" covenant (the
"Four Quarter Period") to (ii) Consolidated Interest Expense for such Four
Quarter Period. In making the foregoing computation, (A) pro forma effect shall
be given to any Indebtedness Incurred or repaid during the
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period (the "Reference Period") commencing on the first day of the Four Quarter
Period and ending on such date (other than Indebtedness Incurred or repaid under
a revolving credit or similar arrangement to the extent of the commitment
thereunder (or under any predecessor revolving credit or similar arrangement) in
effect on the last day of such Four Quarter Period adjusted, however, to give
pro forma effect to repayments resulting from the reduction in such commitment
or Indebtedness Incurred in excess of such commitment, in each case after the
end of such Four Quarter Period and on or before such date), in each case as if
such Indebtedness had been Incurred or repaid the first day of such Reference
Period; (B) Consolidated Interest Expense attributable to interest on any
Indebtedness (whether existing or being Incurred) computed on a pro forma basis
and bearing a floating interest rate shall be computed as if the rate in effect
on such date (taking into account any Interest Rate Agreement applicable to such
Indebtedness if such Interest Rate Agreement has a remaining term in excess of
12 months or, if shorter, at least equal to the remaining term of such
Indebtedness) had been the applicable rate for the entire Reference Period; (C)
pro forma effect shall be given to Asset Dispositions and Asset Acquisitions
(including giving pro forma effect to the application of proceeds of any Asset
Disposition) that occur during such Reference Period as if they had occurred and
such proceeds had been applied on the first day of such Reference Period; and
(D) pro forma effect shall be given to asset dispositions and asset acquisitions
(including giving pro forma effect to the application of proceeds of any asset
disposition) that have been made by any Person that has become a Restricted
Subsidiary or has been merged with or into the Company or any Restricted
Subsidiary during such Reference Period and that would have constituted Asset
Dispositions or Asset Acquisitions had such transactions occurred when such
Person was a Restricted Subsidiary as if such asset dispositions or asset
acquisitions were Asset Dispositions or Asset Acquisitions that occurred on the
first day of such Reference Period; provided that to the extent that clause (C)
or (D) of this sentence requires that pro forma effect be given to an asset
acquisition or asset disposition, such pro forma computation shall be based upon
the four full fiscal quarters immediately preceding such date of the Person, or
division or line of business of the Person, that is acquired or disposed for
which financial information is available; and provided further that to the
extent that clause (C) or (D) of this sentence requires that pro forma effect be
given to an asset acquisition, such pro forma computation shall exclude any
expense (net of any expense increase) which, in the good faith estimate of
management, will (in accordance with GAAP and the rules, regulations and
guidelines of the SEC) be eliminated as a result of such acquisition.
"Consolidated EBITDA" means, for any period, the sum of the amounts for
such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest
Expense, to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, (iii) income taxes, to the extent such amount was
deducted in calculating Adjusted Consolidated Net Income (other than income
taxes (either positive or negative) attributable to extraordinary and
non-recurring gains or losses or sales of assets), (iv) depreciation expense, to
the extent such amount was deducted in calculating Adjusted Consolidated Net
Income, (v) amortization expense, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income, and (vi) all other non-cash items
reducing Adjusted Consolidated Net Income (other than items that will require
cash payments and for which an accrual or reserve is, or is required by GAAP to
be, made), less all non-cash items increasing Adjusted Consolidated Net Income
(other than items that will require cash payments and for which an accrual or
reserve is, or is required by GAAP to be, made), all as determined on a
consolidated basis for the Company and its Restricted Subsidiaries in conformity
with GAAP; provided that, if any Restricted Subsidiary is not a Wholly Owned
Restricted Subsidiary, Consolidated EBITDA shall be reduced (to the extent not
otherwise reduced in accordance with GAAP) by an amount equal to (A) the amount
of the Adjusted Consolidated Net Income attributable to such Restricted
Subsidiary multiplied by (B) the quotient of (1) the number of shares of
outstanding Common Stock of such Restricted Subsidiary not owned on the last day
of such period by the Company or any of its Restricted Subsidiaries divided by
(2) the total number of shares of outstanding Common Stock of such Restricted
Subsidiary on the last day of such period.
"Consolidated Interest Expense" means, for any period, the aggregate amount
(without duplication) of (x) interest in respect of Indebtedness of the Company
and its Restricted Subsidiaries (including amortization of original issue
discount on any Indebtedness and the interest portion of any deferred payment
obligation, calculated in accordance with the effective interest method of
accounting; all commissions, discounts and other fees and charges owed with
respect to letters of credit, bankers' acceptance financings and
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other financings to the extent attributable to such period; the net costs
associated with Interest Rate Agreements); and (y) the interest component of
Capital Lease Obligations paid, accrued or scheduled to be paid or to be accrued
by the Company and its Restricted Subsidiaries during such period, all as
determined on a consolidated basis in conformity with GAAP; excluding, however,
(i) any amount of such interest of any Restricted Subsidiary if all or a portion
of the net income of such Restricted Subsidiary is excluded in the calculation
of Adjusted Consolidated Net Income pursuant to the proviso to the definition
thereof (but only in the same proportion as the net income of such Restricted
Subsidiary is excluded from the calculation of Adjusted Consolidated Net Income
pursuant to the proviso to the definition thereof), and (ii) any amount of such
interest expense of any Restricted Subsidiary that is not a Wholly Owned
Restricted Subsidiary if all or a portion of the Adjusted Consolidated Net
Income of such Restricted Subsidiary is excluded in the calculation of
Consolidated EBITDA pursuant to the proviso to the definition thereof.
"Consolidated Net Worth" means, as of any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of the Company and its Restricted Subsidiaries
(which shall be as of a date not more than 135 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness and the cost of treasury
stock, each item to be determined in conformity with GAAP (excluding the effects
of foreign currency exchange adjustments under Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 52).
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" in respect of the Company or the Issuer,
as the case may be, means (i) Indebtedness and all other Obligations of the
Company or the Issuer, as the case may be, under the Credit Agreement, dated as
of March 12, 1997, described in the definition of "Bank Credit Agreement"
(including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith), in each case as amended, restated,
modified, renewed, refunded, replaced or refinanced, in whole or in part, and
(ii) any other Senior Indebtedness of the Issuer or the Company, as the case may
be, which, at the date of determination, has an aggregate principal amount
outstanding of, or under which, at the date of determination, the holders
thereof are committed to lend up to, at least $10 million and is specifically
designated by the Issuer or the Company, as the case may be, in the instrument
evidencing or governing such Senior Indebtedness as "Designated Senior
Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
to the extent that by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable) or upon the happening of any
event, it (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable, in whole or in part, at the option of
the holder thereof, in each case described in the immediately preceding clauses
(i) , (ii) or (iii), on or prior to the Stated Maturity of the Notes; provided,
however, that (x) any class of Capital Stock of such Person that, by its terms,
authorizes such Person to satisfy in full its obligations with respect to the
payment of dividends or upon maturity, redemption (pursuant to a sinking fund or
otherwise) or repurchase thereof or otherwise by the delivery of Capital Stock
that is not Disqualified Stock, and that is not convertible, puttable or
exchangeable for Disqualified Stock or Indebtedness, shall not be deemed to be
Disqualified Stock so long as such Person satisfies its obligations with respect
thereto solely by the delivery of Capital Stock that is not Disqualified Stock
and (y) any Capital Stock of a Subsidiary of such Person that would otherwise
constitute Disqualified Stock shall not be deemed to be Disqualified Stock so
long as such Capital Stock is held by such Person; and provided further,
however, that any Capital Stock that would not constitute Disqualified Stock but
for provisions thereof giving holders thereof the right to require such Person
to repurchase or redeem such Capital Stock upon the occurrence of an "asset
sale" or "change of control" (however designated) occurring prior to the first
anniversary of the Stated Maturity of the Notes shall not
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constitute Disqualified Stock if (x) the "asset sale" or "change of control"
provisions applicable to such Capital Stock are not more favorable to the
holders of such Capital Stock than the provisions described under "-- Certain
Covenants -- Limitation on Asset Sales" and "-- Repurchase of Notes upon a
Change of Control" and (y) any such requirement only becomes operative after
compliance with such corresponding terms applicable to the Notes, including the
purchase of any Notes tendered pursuant thereto.
"Equity Offering" means a primary offering, whether public or private, of
shares of common stock of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by (i) senior management of the Company if the aggregate amount of
the transaction with respect to which Fair Market Value is being determined does
not exceed $10 million in value or (ii) the Board of Directors of the Company,
whose determination shall be conclusive and evidenced by a Board Resolution, if
the aggregate amount of the transaction with respect to which Fair Market Value
is being determined exceeds $10 million in value.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect on the Issue Date, including those set forth in (i) the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants, (ii) statements and pronouncements of
the Financial Accounting Standards Board, (iii) such other statements by such
other entity as approved by a significant segment of the accounting profession,
and (iv) the rules and regulations of the SEC governing the inclusion of
financial statements (including pro forma financial statements) in periodic
reports required to be filed pursuant to Section 13 of the Exchange Act,
including opinions and pronouncements in staff accounting bulletins and similar
written statements from the accounting staff of the SEC. All ratios and other
computations contained or referred to in the Indenture shall be computed in
conformity with GAAP applied on a consistent basis, except that computations
made for purposes of determining compliance with the terms of the covenants and
with other provisions of the Indenture shall be made without giving effect to
(i) the amortization of any expenses incurred in connection with the offering of
the Notes and (ii) except as otherwise provided, the amortization of any amounts
required or permitted by Accounting Principles Board Opinion Nos. 16 and 17.
"Guarantee" means, without duplication, any obligation, contingent or
otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of
any Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness of such Person or (ii) entered into for the
purpose of assuring in any other manner the obligee of such Indebtedness of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided, however, that the term "Guarantee" shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security and the accrual of interest
shall not be deemed the Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
with respect to (A) indebtedness of such Person for money
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borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other
similar instruments for the payment of which such Person is responsible or
liable; (ii) the amount of all Capital Lease Obligations of such Person and all
Attributable Debt in respect of Sale/Leaseback Transactions entered into by such
Person; (iii) all obligations of such Person issued or assumed as the deferred
purchase price of property (which purchase price is due more than six months
after the date of taking delivery of title to such property), including all
obligations of such Person for the deferred purchase price of property under any
title retention agreement (but excluding trade accounts payable arising in the
ordinary course of business); (iv) all obligations of such Person for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in clauses (i)
through (iii) above) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if and to the
extent drawn upon, such drawing is reimbursed no later than the tenth Business
Day following receipt by such Person of a demand for reimbursement following
payment on the letter of credit); (v) the amount of all obligations of such
Person with respect to the redemption, repayment or other repurchase of any
Disqualified Stock or, with respect to any Subsidiary of such Person the
liquidation preference with respect to, any Preferred Stock (but excluding, in
each case, any accrued and unpaid dividends); (vi) all obligations of the type
referred to in clauses (i) through (v) of other Persons and all dividends of
other Persons for the payment of which, in either case, such Person is
responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise, including by means of any Guarantee; (vii) all obligations of the
type referred to in clauses (i) through (vi) of other Persons secured by any
Lien on any property or asset of such first-mentioned Person (whether or not
such obligation is assumed by such first-mentioned Person), the amount of such
obligation being deemed to be the lesser of the value of such property or assets
or the amount of the obligation so secured; and (viii) to the extent not
otherwise included in this definition, the amount of Hedging Obligations of such
Person. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, assuming the contingency giving rise to the
obligation were to have occurred on such date, of any Guarantees outstanding at
such date. Notwithstanding the foregoing, none of the following shall constitute
Indebtedness: (i) indebtedness arising from agreements providing for
indemnification or adjustment of purchase price or from guarantees securing any
obligations of the Company or any of its Subsidiaries pursuant to such
agreements, incurred or assumed in connection with the disposition of any
business, assets or Subsidiary of the Company, other than guarantees or similar
credit support by the Company or any of its Subsidiaries of Indebtedness
incurred by any Person acquiring all or any portion of such business, assets or
Subsidiary for the purpose of financing such acquisition; (ii) any trade
accounts payable and other accrued current liabilities incurred in the ordinary
course of business as the deferred purchase price of property; (iii) obligations
arising from guarantees to suppliers, lessors, licensees, contractors,
franchisees or customers incurred in the ordinary course of business; (iv)
obligations (other than Guarantees of indebtedness for borrowed money) in
respect of Indebtedness of other Persons arising in connection with (A) the sale
or discount of accounts receivable, (B) trade acceptances and (C) endorsements
of instruments for deposit in the ordinary course of business; (v) obligations
in respect of performance bonds provided by the Company or its Subsidiaries in
the ordinary course of business and refinancing thereof; (vi) obligations
arising from the honoring by a bank or other financial institution of a check,
draft or similar instrument drawn against insufficient funds in the ordinary
course of business, provided, however, that such obligation is extinguished
within two Business Days of its incurrence; and (vii) obligations in respect of
any obligations under workers' compensation laws and similar legislation;
provided that Indebtedness of the Company or its Restricted Subsidiaries that is
Guaranteed by the Company or any of the Restricted Subsidiaries shall only be
counted once in the calculation of the amount of Indebtedness of the Company and
its Restricted Subsidiaries.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed to
protect the Company or any Restricted Subsidiary against fluctuations in
interest rates.
"Investment" in any Person means (without duplication) any direct or
indirect advance, loan or other extension of credit (including, without
limitation, by way of Guarantee or similar arrangement (but excluding (x)
advances to customers in the ordinary course of business that are, in conformity
with GAAP, recorded as
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accounts receivable on the balance sheet of the Company or its Restricted
Subsidiaries and (y) Guarantees of Indebtedness of the Company or any Restricted
Subsidiaries and similar arrangements permitted under the "Limitation on
Indebtedness" covenant below)) or capital contribution to (by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others), or any purchase or acquisition of
Capital Stock, bonds, notes, debentures or other similar instruments issued by,
such Person and shall include (i) the designation of a Restricted Subsidiary as
an Unrestricted Subsidiary and (ii) the Fair Market Value of the Capital Stock
(or any other Investment) held by the Company or any of its Restricted
Subsidiaries, of (or in) any Person that has ceased to be a Restricted
Subsidiary. For purposes of the definition of "Unrestricted Subsidiary" and the
"Limitation on Restricted Payments" covenant described below, (i) "Investment"
shall include the Fair Market Value of the assets (net of liabilities (other
than liabilities to the Issuer or any of its Restricted Subsidiaries)) of any
Restricted Subsidiary at the time that such Restricted Subsidiary is designated
an Unrestricted Subsidiary, (ii) the Fair Market Value of the assets (net of
liabilities (other than liabilities to the Company or any of its Restricted
Subsidiaries)) of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary shall be considered a reduction
in outstanding Investments, and (iii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its Fair Market Value at the time of
such transfer.
"Issue Date" means the date on which the Notes are originally issued.
"Lenders" has the meaning specified in the Bank Credit Agreement.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien,
or, in the case of a Subsidiary not organized under the laws of a state of the
United States or the District of Columbia, fixed charge or floating charge of
any kind (including any conditional sale or other title retention agreement or
lease in the nature thereof).
"Moody's" means Moody's Investor's Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale, (iii) payments
made to repay Indebtedness or any other obligation outstanding at the time of
such Asset Sale that either (x) is secured by a Lien on the property or assets
sold or (y) is required to be paid as a result of such sale, and (iv)
appropriate amounts to be provided by the Company or any Restricted Subsidiary
as a reserve against any liabilities associated with such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as determined
in conformity with GAAP and (b) with respect to any issuance or sale of Capital
Stock, the proceeds of such issuance or sale in the form of cash or cash
equivalents, including payments in respect of deferred payment obligations (to
the extent corresponding to the principal, but not interest, component thereof)
when received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any Restricted
Subsidiary) and proceeds from the conversion of other property received when
converted to cash or cash equivalents, net of attorneys' fees, accountants'
fees, underwriters' or placement agents' fees, discounts or commission and
brokerage, consultant and other fees incurred in connection with such issuance
or sale and net of taxes paid or payable as a result thereof.
"Obligations" means all payment obligations of every nature whether for
principal, reimbursements, interest, fees, expenses, indemnities or otherwise
under the documentation governing any Indebtedness.
"Offer to Purchase" means an offer to purchase Notes by the Issuer from the
Holders commenced by mailing a notice to the Trustee and each Holder stating:
(i) the covenant pursuant to which the offer is being
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made and that all Notes validly tendered will be accepted for payment on a pro
rata basis; (ii) the purchase price and the date of purchase (which shall be a
Business Day no earlier than 30 days nor later than 60 days from the date such
notice is mailed) (the "Payment Date"); (iii) that any Note not tendered will
continue to accrue interest pursuant to its terms; (iv) that, unless the Issuer
defaults in the payment of the purchase price, any Note accepted for payment
pursuant to the Offer to Purchase shall cease to accrue interest on and after
the Payment Date; (v) that Holders electing to have a Note purchased pursuant to
the Offer to Purchase will be required to surrender the Note, together with the
form entitled "Option of the Holder to Elect Purchase" on the reverse side of
the Note duly completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the Business Day immediately preceding
the Payment Date; (vi) that Holders will be entitled to withdraw their election
if the Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such Notes purchased; and (vii) that Holders
whose Notes are being purchased only in part will be issued new Notes equal in
principal amount to the unpurchased portion of the Notes surrendered; provided
that each Note purchased and each new Note issued shall be in a principal amount
of $1,000 or integral multiples thereof. On the Payment Date, the Issuer shall
(i) accept for payment on a pro rata basis Notes or portions thereof tendered
pursuant to an Offer to Purchase; (ii) deposit with the Paying Agent money
sufficient to pay the purchase price of all Notes or portions thereof so
accepted; and (iii) deliver, or cause to be delivered, to the Trustee all Notes
or portions thereof so accepted together with an Officers' Certificate
specifying the Notes or portions thereof accepted for payment by the Issuer. The
Paying Agent shall promptly mail to the Holders of Notes so accepted for payment
an amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail to such Holders a new Note equal in principal amount to
any unpurchased portion of the Note surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
integral multiples thereof. The Issuer will publicly announce the results of an
Offer to Purchase as soon as practicable after the Payment Date. The Trustee
shall act as the Paying Agent for an Offer to Purchase. The Issuer will comply
with Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable,
in the event that the Issuer is required to repurchase Notes pursuant to an
Offer to Purchase and the Issuer may modify any of the foregoing provisions to
the extent it is advised by independent counsel that such modification is
necessary or appropriate to ensure such compliance.
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; provided that such person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) a Temporary Cash
Investment; (iii) commission, payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses in accordance with GAAP; (iv) loans, transactions and arrangements
or advances to directors, officers, employees and agents made in the ordinary
course of business in accordance with past practice of the Company or its
Restricted Subsidiaries and that do not in the aggregate, in the case of loans
or advances, exceed $3 million at any time outstanding, provided that with
respect to any transaction or arrangement which is reasonably expected to
involve more than $1 million, such transaction or arrangement shall be approved
by a majority of the members of the Board of Directors of the Issuer or Company,
as the case may be having no personal stake in such transaction or arrangement;
(v) Investments existing on the Issue Date and any extension, renewal or other
modification thereof (but not an increase in the amount thereof, other than as a
result of the accrual or accretion of interest or original issue discount
pursuant to the original terms of such Investment); (vi) Investments in any
Person received in any dissolution, winding up, liquidation or reorganization of
such Person in satisfaction of claims against such Person; (vii) Investments
received as consideration from Asset Sales or Asset Dispositions permitted under
the "Limitation on Asset Sales" covenant described below; (viii) stock,
obligations or securities received in satisfaction of judgments or in
settlements; (ix) Investments in Austral Refrigeration Pty. Ltd. ("Austral
Investments"); (x) exchanges of property permitted pursuant to clause (x) of the
definition of "Asset Sales"; and (xi) other Investments in any Persons made with
an intention to control at a subsequent time such
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Persons (as evidenced by a resolution of the Board of Directors of the Company
or the Issuer, as the case may be, to such effect) in an aggregate amount
outstanding at any time not to exceed $10 million plus the net reduction in such
other Investments and in Austral Investments after the Issue Date; provided,
that the Investment in Austral Refrigeration Pty. Ltd. and any such Person shall
be deemed reduced to zero for purposes of this definition only, among other
things, at such time as Austral Refrigeration Pty. Ltd. or such other Person
becomes a Restricted Subsidiary.
"Permitted Liens" means, with respect to any Person, (a) liens incurred or
deposits by such Person under worker's compensation laws, unemployment insurance
laws or similar laws, rules, regulations or other governmental requirements, or
good faith liens incurred or deposits made in connection with bids, tenders,
contracts (other than for the payment of Indebtedness) or leases to which such
Person is a party, or deposits to secure public or statutory obligations of such
Person or deposits of cash or United States government bonds to secure surety or
appeal bonds to which such Person is a party, or deposits as security for
contested taxes or import duties or for the payment of rent, in each case
Incurred in the ordinary course of business; (b) Liens imposed by law, such as
landlord's, carriers', warehousemen's and mechanics' Liens, in each case for
sums not yet due or being contested in good faith by appropriate proceedings or
other Liens arising out of judgments or awards against such Person with respect
to which such Person shall then be proceeding with an appeal or other
proceedings for review; (c) Liens for property taxes not yet subject to
penalties for nonpayment or which are being contested in good faith and by
appropriate proceedings; (d) Liens in favor of issuers of surety bonds or
letters of credit issued pursuant to the request of and for the account of such
Person in the ordinary course of its business; provided, however, that such
letters of credit do not constitute Indebtedness; (e) minor survey exceptions,
minor encumbrances, easements or reservations of, or rights of others for,
licenses, rights of way, sewers, electric lines, telegraph and telephone lines
and other similar purposes, or zoning or other restrictions as to the use of
real property or leases, subleases or other Liens incidental to the conduct of
the business of such Person or to the ownership of its properties which were not
Incurred in connection with Indebtedness and which do not in the aggregate
materially impair their use in the operation of the business of such Person; (f)
Liens securing Indebtedness Incurred to finance the construction, purchase or
lease of, or repairs, improvements or additions to, property of such Person
(including Liens securing Indebtedness of the pollution control or revenue bond
type); provided, however, that the Lien may not extend to any other property
owned by such Person or any of its Subsidiaries at the time the Lien is
Incurred, and the Indebtedness secured by the Lien may not be Incurred more than
180 days after the later of the acquisition, completion of construction, repair,
improvement, addition or commencement of full operation of the property subject
to the Lien; (g) Liens to secure Indebtedness permitted under the provisions
described in clauses (a), (b)(1), (b)(4), (b)(7), (b)(8) and (b)(10) under "--
Certain Covenants -- Limitation on Indebtedness"; (h) Liens existing on the
Issue Date; (i) Liens on property or shares of Capital Stock of another Person
at the time such other Person becomes a Subsidiary of such Person; provided,
however, that such Liens are not created, incurred or assumed in connection
with, or in contemplation of, such other Person becoming such a Subsidiary;
provided further, however, that such Lien may not extend to any other property
owned by such Person or any of its Subsidiaries; (j) Liens on property at the
time such Person or any of its Subsidiaries acquires the property, including any
acquisition by means of a merger or consolidation with or into such Person or a
Subsidiary of such Person; provided, however, that such Liens are not created,
incurred or assumed in connection with, or in contemplation of, such
acquisition; provided further, however, that the Liens may not extend to any
other property owned by such Person or any of its Subsidiaries; (k) Liens
securing Indebtedness or other obligations of a Subsidiary of such Person owing
to such Person or a wholly owned Subsidiary of such Person (or, in the case of
the Issuer, to a Wholly Owned Subsidiary); (l) Liens securing Hedging
Obligations so long as such Hedging Obligations relate to Indebtedness that is,
and is permitted to be under the Indenture, secured by a Lien on the same
property securing such Hedging Obligations; (m) Liens arising in the ordinary
course of business in favor of the United States, any state thereof, any foreign
country or any department, agency, instrumentality or political subdivision of
any such jurisdiction, to secure partial, progress, advance or other payments
pursuant to any contract or statute or regulation; (n) Liens to secure any
Refinancing (or successive Refinancing) as a whole, or in part, of any
Indebtedness secured by any Lien referred to in the foregoing clause (f), (h),
(i) and (j), provided, however, that (x) such new Lien shall be limited to all
or part of the same property that secured the original Lien (plus improvements
to or on such
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property) and (y) the Indebtedness secured by such Lien at such time is not
increased to any amount greater than the sum of (A) the outstanding principal
amount or, if greater, committed amount of the Indebtedness described under
clause (f), (h), (i) or (j) at the time the original Lien became a Permitted
Lien or the Issue Date, whichever is greater, and (B) an amount necessary to pay
any fees and expenses, including premiums, related to such refinancing,
refunding, extension, renewal or replacement; (o) judgment and attachment Liens
not giving rise to an Event of Default or Liens created by or existing from any
litigation or legal proceeding that are currently being contested in good faith
by appropriate proceedings and for which adequate reserves have been made; (p)
Liens in favor of collecting or payor banks having a right of setoff,
revocation, refund or chargeback with respect to money or instruments of the
Issuer or any Subsidiary on deposit with or in possession of such bank; and (q)
Liens to secure Sale/Leaseback Transactions that are permitted pursuant to the
"Limitation on Sale/Leaseback Transactions" covenant.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock issuer, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Preferred Stock" means, as applied to the Capital Stock of any
corporation, means Capital Stock of any class or classes (however designated)
which is preferred as to the payment of dividends, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
The term "principal" of a Note means the principal of the Note plus the
premium, if any, payable on the Note which is due or overdue or is to become due
at the relevant time.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, decease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced or the Notes (whichever is
earlier), (ii) the portion of such Refinancing Indebtedness that has a Stated
Maturity that is earlier than the Stated Maturity of the Notes has an Average
Life at the time such Refinancing Indebtedness is Incurred that is equal to or
greater than the Average Life of the Indebtedness being Refinanced and (iii)
such Refinancing Indebtedness has an aggregate principal amount (or if Incurred
with original issue discount, an aggregate issue price) that is equal to or less
than the aggregate principal amount (or if Incurred with original issue
discount, the aggregate accreted value) then outstanding or committed (plus fees
and expenses, including any premium and defeasance costs) under the Indebtedness
being Refinanced; provided further, however, that Refinancing Indebtedness shall
not include Indebtedness of the Company or a Restricted Subsidiary that
Refinances Indebtedness of an Unrestricted Subsidiary.
"Registration Rights Agreement" means that certain Registration Rights
Agreement dated as of April 24, 1994 among the Company and certain former
shareholders of certain Restricted Subsidiaries.
"Representative" means any trustee, agent or representative (if any) for an
issue of Senior Indebtedness of the Issuer or the Company, as the case may be.
"Restricted Payment" with respect to any Person means (i) the declaration
or payment of any dividends or any other distributions of any sort in respect of
its Capital Stock (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the direct or
indirect holders of its Capital Stock (other than (x) dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock), (y)
dividends or distributions payable solely to the Company or a Restricted
Subsidiary, and (z) pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Subsidiary that is an entity
other than a corporation) ), (ii) the purchase, redemption or other acquisition
or retirement for value of any Capital Stock of the Company held by any Person
or of any Capital Stock of a Restricted Subsidiary held by any
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Affiliate of the Company (other than a Restricted Subsidiary), including the
exercise of any option to exchange any Capital Stock (other than into Capital
Stock of the Company that is not Disqualified Stock), (iii) the purchase,
repurchase, redemption, defeasance or other acquisition or retirement for value,
prior to scheduled maturity, scheduled repayment or scheduled sinking fund
payment of any Subordinated Obligations (other than the purchase, repurchase or
other acquisition of Subordinated Obligations purchased in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of acquisition) or (iv) the making
of any Investment in any Person (other than a Permitted Investment).
"Restricted Subsidiary" means the Issuer and any other Subsidiary of the
Company that is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Issuer, Inc.,
and its successors.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person; provided that the Fair Market Value of such property
(as reasonably determined by the Board of Directors acting in good faith) is $10
million or more.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Issuer or the Company,
as the case may be, secured by a Lien.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Indebtedness" means, with respect to any Person, any Indebtedness
of such Person and all other Obligations with respect to such Indebtedness
(including interest, whether or not allowed, on such Indebtedness accruing on or
after the filing of any petition in bankruptcy or for reorganization relating to
such Person), including, without limitation, all Obligations of such Person
under the Bank Credit Agreement, the Comerica Agreement and Hedging Obligations
in each case, whether outstanding on the Issue Date or thereafter Incurred,
unless such Indebtedness, by its terms or the terms of any instrument creating
or evidencing such Indebtedness, is pari passu with, or subordinated in right of
payment to, the Notes; provided, however, that Senior Indebtedness shall not
include (1) any obligation of such Person to any Subsidiary, director, officer
or employee of such Person, (2) any liability for federal, state, local or other
taxes owed or owing by such Person, (3) any accounts payable or other liability
to trade creditors arising in the ordinary course of business (including
guarantees thereof or instruments evidencing such liabilities), (4) any
Indebtedness of such Person (and any accrued and unpaid interest in respect
thereof) which is expressly subordinated in right of payment in any respect to
any other Indebtedness or other obligation of such Person, (5) that portion of
any Indebtedness (other than under the Bank Credit Agreement) which at the time
of Incurrence is Incurred in violation of the Indenture, and (6) any
Indebtedness of such Person that, when Incurred and without regard to any
election under Section 1111(b) of the United States Bankruptcy Code, was without
recourse to such Person.
"Senior Subordinated Indebtedness" means, with respect to the Issuer or the
Company, as the case may be, the Notes, with respect to the Issuer, and the
Guaranty, with respect to the Company, and any other Indebtedness of the Issuer
or the Company, as the case may be, that specifically provides that such
Indebtedness is to rank pari passu with the Notes or such Guaranty, as the case
may be, in right of payment and is not subordinated by its terms in right of
payment to any Indebtedness or other obligation of the Issuer or the Company, as
the case may be, which is not Senior Indebtedness of the Issuer or the Company,
as the case may be.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at
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the option of the holder thereof upon the happening of any contingency unless
such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company or the
Issuer (whether outstanding on the Issue Date or thereafter Incurred), as the
case may be, which is subordinate or junior in right of payment to the Notes or
the Guaranty, as the case may be, pursuant to a written agreement to that
effect.
"Subsidiary" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such Person, (ii) such
Person and one or more Subsidiaries of such Person or (iii) one or more
Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof, or
in the case of a Subsidiary not organized under the laws of a state of the
United States or the District of Columbia, any foreign government or any agency
thereof, or obligations guaranteed or insured by the United States of America or
any agency thereof, or in the case of a Subsidiary not organized under the laws
of a state of the United States or the District of Columbia, any foreign
government or any agency thereof, (ii) investments in time deposit accounts,
certificates of deposit and money-market deposits maturing within 365 days of
the date of acquisition thereof issued by a bank or trust company which is
organized under the laws of the United States of America, any state thereof or
any foreign country recognized by the United States, and which bank or trust
company has capital, surplus and undivided profits aggregating in excess of $100
million (or the foreign currency equivalent thereof) and has outstanding debt
which is rated "A" (or such similar equivalent rating) or higher by Moody's, S&P
or at least one nationally recognized statistical rating organization (as
defined in Rule 436 under the Securities Act) or any money market fund sponsored
by a registered broker dealer or mutual fund distributor, provided that a
foreign Subsidiary of the Company may also make deposits with any central bank
of the jurisdiction in which such Subsidiary is organized, (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above or (v) below entered into with a bank
meeting the qualifications described in clause (ii) above, (iv) investments in
commercial paper, maturing not more than 270 days after the date of acquisition,
issued by a Person (other than an Affiliate of the Issuer) organized and in
existence under the laws of the United States of America or any foreign country
recognized by the United States of America with a rating at the time as of which
any investment therein is made of "P-2" (or higher) according to Moody's or
"A-2" (or higher) according to S&P, (v) investments in securities with
maturities of twelve months or less from the date of acquisition issued or fully
guaranteed by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority thereof, and rated
at least "A" by S&P or Moody's and (vi) interests in any investment company
which invests solely in instruments of the type described in clauses (i) through
(v).
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company other
than the Issuer that at the time of determination shall be designated an
Unrestricted Subsidiary by the Board of Directors of the Company in the manner
provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board
of Directors of the Company may designate any Subsidiary of the Company
(including any newly acquired or newly formed Subsidiary) to be an Unrestricted
Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital
Stock or Indebtedness of, or holds any Lien on any property of, the Company or
any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary
to be so designated; provided, however, that either (A) the Subsidiary to be so
designated has total assets of $1,000 or less or (B) if such Subsidiary has
assets greater than $1,000, such designation would be permitted under the
covenant described under "-- Certain Covenants -- Limitation on Restricted
Payments." The Board of Directors of the Company may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (x) the Company could Incur $1.00 of
additional Indebtedness under paragraph (a) of the covenant described under
"-- Certain Covenants -- Limitation on Indebtedness" and (y) no Default shall
have occurred and be continuing. Any such designation by the Board of Directors
of the Company shall be evidenced by the Company to the Trustee by promptly
filing with the Trustee a copy of the
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board resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares held by other
Persons to the extent such shares are required by applicable law to be held by a
Person other than the Company or a Restricted Subsidiary) is owned by the
Company or one or more Wholly Owned Subsidiaries.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Company shall not, and shall not permit
any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness
(other than the Notes and Indebtedness existing on the Issue Date); provided,
however, that the Company or a Restricted Subsidiary (in the case of such
Restricted Subsidiary other than the Issuer to the extent permitted under the
"Limitation on the Sale or Issuance of Capital Stock or Indebtedness of
Restricted Subsidiaries" covenant below) may Incur such Indebtedness if, on the
date of such Incurrence and after giving effect thereto, the Consolidated
Coverage Ratio equals or exceeds (x) for the period from the Issue Date and
ending on the third anniversary thereof, 2.0:1.0, and (y) thereafter, 2.25:1.00.
(b) Notwithstanding the foregoing paragraph (a), the Company and any
Restricted Subsidiary (in the case of such Restricted Subsidiary other than the
Issuer to the extent permitted under the "Limitation on the Sale or Issuance of
Capital Stock or Indebtedness of Restricted Subsidiaries" covenant below) may
Incur the following Indebtedness:
(1) (x) Indebtedness Incurred pursuant to the Bank Credit Agreement,
so long as the aggregate principal amount of all Indebtedness outstanding
under the Bank Credit Agreement does not, at any time, exceed the aggregate
amount of borrowing availability from time to time allowed under the Bank
Credit Agreement that determine availability on the basis of a borrowing
base or other asset-based calculation, if available and (y) other
Indebtedness up to $150 million in aggregate principal amount outstanding
at any time; provided, however, that in no event shall the aggregate
principal amount of such indebtedness exceed $450 million as of the date of
such Incurrence minus the aggregate amount of Indebtedness permanently
repaid as provided under the "Limitation on Asset Sales" covenant described
below;
(2) Indebtedness owed to and held by the Company or a Wholly Owned
Restricted Subsidiary; provided, however, that any subsequent issuance or
transfer of any Capital Stock which results in any such Wholly Owned
Restricted Subsidiary ceasing to be a Wholly Owned Restricted Subsidiary or
any subsequent transfer of such Indebtedness (other than to the Company or
another Wholly Owned Restricted Subsidiary) shall be deemed, in each case,
to constitute the Incurrence of such Indebtedness by the issuer thereof;
(3) the Notes;
(4) Indebtedness Incurred pursuant to the Comerica Agreement, so long
as the aggregate principal amount of all Indebtedness outstanding
thereunder does not exceed $15 million at any time;
(5) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2), (3) or (4) of this covenant);
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(6) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (3) or (5) above or clause
(9) below, or this clause (6);
(7) Indebtedness consisting of Interest Rate Agreements directly
related to Indebtedness permitted to be Incurred by the Company and its
Restricted Subsidiaries pursuant to the Indenture;
(8) Indebtedness under Currency Agreements entered into in the
ordinary course of business for the purpose of limiting risks that arise in
the ordinary course of business of the Company and its Restricted
Subsidiaries;
(9) Indebtedness Incurred to finance capital expenditures in an
aggregate principal amount not to exceed $20 million in any fiscal year;
and
(10) Indebtedness in an aggregate principal amount which, together
with the principal amount of all other Indebtedness of the Company and its
Restricted Subsidiaries outstanding on the date of such Incurrence (other
than Indebtedness permitted by clauses (1) through (9) above or paragraph
(a)), does not exceed $40 million.
(c) Notwithstanding the foregoing, the Company and the Issuer shall not
Incur any Indebtedness pursuant to the foregoing paragraph (b) if the proceeds
thereof are used, directly or indirectly, to Refinance any Subordinated
Obligations unless such Indebtedness shall be subordinated to the Notes or the
Guaranty, as the case may be, at least to the same extent as such Subordinated
Obligations.
(d) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company, in its sole discretion,
will classify such item of Indebtedness and only be required to include the
amount and type of such Indebtedness in one of the above clauses and (ii) an
item of Indebtedness may be divided and classified in more than one of the types
of Indebtedness described above.
Limitation on Senior Subordinated Indebtedness. The Issuer or the Company,
as the case may be, will not Incur any Indebtedness that is expressly made
subordinate in right of payment to any Senior Indebtedness of the Issuer or the
Company, as the case may be, unless such Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such Indebtedness is
outstanding, is expressly made pari passu with, or subordinate in right of
payment to, the Notes, with respect to the Issuer, or the Guaranty with respect
to the Company; provided that the foregoing limitation shall not apply to
distinctions between categories of Senior Indebtedness of the Issuer or the
Company that exist by reason of any Liens or Guarantees arising or created in
respect of some but not all of such Senior Indebtedness.
Limitation on Restricted Payments. (a) The Company shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to make a Restricted
Payment if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company is not able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under "--
Limitation on Indebtedness;" or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the Issue Date would exceed the sum of:
(A) 50% of the Adjusted Consolidated Net Income accrued during the
period (treated as one accounting period) from the beginning of the
fiscal quarter immediately following the fiscal quarter during which the
Notes are originally issued to the end of the most recent fiscal quarter
ending at least 45 days prior to the date of such Restricted Payment
(or, in case such Adjusted Consolidated Net Income shall be a deficit,
minus 100% of such deficit);
(B) the aggregate Net Cash Proceeds received by the Company or the
Issuer from the issuance or sale of its Capital Stock (other than
Disqualified Stock) subsequent to the Issue Date (other than an issuance
or sale to a Subsidiary of the Company and other than an issuance or
sale to
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an employee stock ownership plan or to a trust established by the
Company or any of its Subsidiaries for the benefit of their employees);
(C) the aggregate Net Cash Proceeds received by the Company or the
Issuer from the issue or sale subsequent to the Issue Date of its
Capital Stock (other than Disqualified Stock) to an employee stock
ownership plan; provided, however, that if such employee stock ownership
plan incurs any Indebtedness with respect thereto, such aggregate amount
shall be limited to an amount equal to any increase in the Consolidated
Net Worth of the Company resulting from principal repayments made by
such employee stock ownership plan with respect to such Indebtedness;
(D) the amount by which Indebtedness of the Company or any
Restricted Subsidiary is reduced on the Company's balance sheet upon the
conversion or exchange (other than by a Subsidiary of the Company)
subsequent to the Issue Date, of any Indebtedness of the Company or any
Restricted Subsidiary convertible or exchangeable for Capital Stock
(other than Disqualified Stock) of the Company (less the amount of any
cash, or the fair value of any other property, distributed by the
Company or any Restricted Subsidiary upon such conversion or exchange);
and
(E) an amount equal to the sum of (i) the net reduction in
Investments in Unrestricted Subsidiaries resulting from dividends,
repayments of loans or advances or other transfers of assets, in each
case to the Company or any Restricted Subsidiary from or with respect to
Unrestricted Subsidiaries, and (ii) the portion (proportionate to the
Company's equity interest in such Subsidiary) of the Fair Market Value
of the net assets of an Unrestricted Subsidiary at the time such
Unrestricted Subsidiary is designated a Restricted Subsidiary; provided,
however, that the foregoing sum shall not exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously made (and
treated as a Restricted Payment) by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary.
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(i) any purchase or redemption of Capital Stock or Subordinated
Obligations of the Company or a Restricted Subsidiary made by exchange for,
or out of the proceeds of the substantially concurrent sale of, Capital
Stock of the Company (other than Disqualified Stock and other than Capital
Stock issued or sold to a Subsidiary of the Company); provided, however,
that (A) such purchase or redemption shall be excluded in the calculation
of the amount of Restricted Payments and (B) the Net Cash Proceeds from
such sale shall be excluded from the calculation of amounts under clause
(3)(B) of paragraph (a) above (but only to the extent that such Net Cash
Proceeds were used to purchase or redeem such Capital Stock as provided in
this clause (i));
(ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by
exchange for, or out of the proceeds of the substantially concurrent sale
of, Refinancing Indebtedness which is permitted to be Incurred pursuant to
clause (b)(6) of the covenant described under "-- Limitation on
Indebtedness;" provided, however, that such purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value shall
be excluded in the calculation of the amount of Restricted Payments;
(iii) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have complied
with this covenant; provided, however, that at the time of payment of such
dividend, no other Default shall have occurred and be continuing (or result
therefrom); and provided further, however, that such dividends shall be
included in the calculation of the amount of Restricted Payments;
(iv) dividends paid from the Net Cash Proceeds received by the Company
from the issue or sale of its Capital Stock (other than Disqualified Stock)
subsequent to the Issue Date (other than an issue or sale to a Subsidiary
of the Company and other than an issue or sale to an employee stock
ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees) in an aggregate amount not
to exceed 6% of such Net Cash Proceeds in any calendar year; provided,
however, that such dividends shall be included in the calculation of the
amount of Restricted Payments;
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(v) the repurchase of shares of, or options to purchase shares of,
common stock or stock equivalents of the Company or any of its Subsidiaries
from employees, former employees, directors or former directors of the
Company or any of its Subsidiaries (or permitted transferees of such
employees, former employees, directors or former directors), pursuant to
the terms of the agreements (including employment agreements) or plans (or
amendments thereto) approved by the Board of Directors of the Company or
the Issuer under which such individuals purchase or sell or are granted the
option to purchase or sell, shares of such common stock or stock
equivalents; provided, however, that the aggregate amount of such
repurchases shall not exceed $1 million in any calendar year and $5 million
in the aggregate; provided further, however, that such repurchases shall be
excluded in the calculation of the amount of Restricted Payments; or
(vi) other Restricted Payments in an aggregate amount not to exceed
$10 million; provided, however, that such Restricted Payments shall be
excluded in the calculation of the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted Subsidiaries
other than the Issuer. The Company shall not, and shall not permit any
Restricted Subsidiary other than the Issuer to, create or otherwise cause or
permit to exist or become effective any consensual encumbrance or restriction on
the ability of any Restricted Subsidiary other than the Issuer (a) to pay
dividends or make any other distributions on its Capital Stock or pay any
Indebtedness owed to the Issuer or another Restricted Subsidiary, (b) to make
any loans or advances to the Issuer or another Restricted Subsidiary or (c) to
transfer any of its property or assets to the Issuer or another Restricted
Subsidiary, except: (i) any encumbrance or restriction pursuant to an agreement
in effect at or entered into on the Issue Date; (ii) any encumbrance or
restriction with respect to a Restricted Subsidiary other than the Issuer
pursuant to an agreement relating to any Indebtedness Incurred by such
Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by the Issuer (other than Indebtedness Incurred as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Issuer) and outstanding on such date; (iii)
any encumbrance or restriction pursuant to an agreement effecting a Refinancing
of Indebtedness Incurred pursuant to an agreement referred to in clause (i) or
(ii) of this covenant or this clause (iii) or contained in any amendment to an
agreement referred to in clause (i) or (ii) of this covenant or this clause
(iii); provided, however, that the encumbrances and restrictions with respect to
such Restricted Subsidiary contained in any such refinancing agreement or
amendment are no less favorable to the Noteholders than encumbrances and
restrictions with respect to such Restricted Subsidiary contained in such
agreements; (iv) any such encumbrance or restriction consisting of customary
nonassignment provisions related to intellectual property and in leases
governing leasehold interests to the extent such provisions restrict the
transfer of the lease or the property leased thereunder; (v) in the case of
clause (c) above, restrictions contained in security agreements or mortgages
securing Indebtedness of a Restricted Subsidiary to the extent such restrictions
restrict the transfer of the property subject to such security agreements or
mortgages; (vi) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all or
substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition; and (vii) any encumbrance or
restriction pursuant to an agreement relating to Indebtedness permitted by
clause (iii) of paragraph (b) under the "Limitation on this Sale or Issuance of
Capital Stock and Indebtedness of Restricted Subsidiaries" covenant below.
Limitation on the Sale or Issuance of Capital Stock and Indebtedness of
Restricted Subsidiaries. (a) The Company will not sell, and will not permit any
Restricted Subsidiary other than the Issuer, directly or indirectly, to issue or
sell, any shares of Capital Stock of such Restricted Subsidiary (including
options, warrants or other rights to purchase shares of such Capital Stock),
except (i) to the Company, the Issuer or a Wholly Owned Restricted Subsidiary
other than the Issuer; (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; and (iii) as Asset Sales
and Asset Dispositions permitted under the "Limitation on Asset Sales" covenant
described below.
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(b) The Company will not permit any Restricted Subsidiary other than the
Issuer, directly or indirectly, to Incur any Indebtedness except (i)
Indebtedness of such Restricted Subsidiary existing on the Issue Date or the
time such Restricted Subsidiary was acquired by the Company (other than
Indebtedness Incurred in connection with or anticipation of such acquisition);
(ii) Indebtedness permitted pursuant to clause (1), (2), (4), (5), (6) (to the
extent that such Refinancing Indebtedness Refinances any Indebtedness of such
Restricted Subsidiary), (7), (8) or (9) of paragraph (b) of the "Limitation on
Indebtedness" covenant; and (iii) other Indebtedness in an aggregate principal
amount which, together with all other Indebtedness of all Restricted
Subsidiaries other than the Issuer outstanding on the date of such Incurrence
(other than Indebtedness permitted by clause (i) or (ii) of this paragraph (b)),
does not exceed the greater of (A) $50 million or (B) an amount equal to 1.5
times the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters prior to the date of such Incurrence for which reports have been
filed with the SEC pursuant to the "SEC Reports and Reports to Holders"
covenant.
(c) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company, in its sole discretion,
will classify such item of Indebtedness and only be required to include the
amount and type of such Indebtedness in one of the above clauses and (ii) an
item of Indebtedness may be divided and classified in more than one of the types
of Indebtedness described above.
Limitation on Asset Sales. The Company will not, and will not permit any
Restricted Subsidiary to, consummate any Asset Sale, unless (i) the
consideration received by the Company or such Restricted Subsidiary is at least
equal to the Fair Market Value of the assets sold or disposed of, and (ii) at
least 75% of the consideration received consists of cash or Temporary Cash
Investments; provided, that the amount of any liabilities of the Company or any
Subsidiary that are assumed by the transferee in such Asset Sale shall be deemed
to be cash or cash equivalents, as the case may be, for purposes of this clause
(ii), provided further that this clause (ii) shall not apply to any sale or
other disposition of assets as a result of a foreclosure (or a secured party
taking ownership of such assets in lieu thereof) or any involuntary proceeding
in which the Company and its Restricted Subsidiaries cannot, directly or
indirectly, determine the type of proceeds received from such sale or other
disposition. In the event and to the extent that the Net Cash Proceeds received
by the Company or any of its Restricted Subsidiaries from one or more Asset
Sales occurring on or after the Issue Date in any period of 12 consecutive
months exceed $20 million, then the Company shall or shall cause the relevant
Restricted Subsidiary to (i)(A) within twelve months after the date Net Cash
Proceeds so received exceed $20 million, apply an amount equal to such excess
Net Cash Proceeds to permanently repay Senior Indebtedness of the Company or
Indebtedness of any Restricted Subsidiary (and to the extent that such Senior
Indebtedness or Indebtedness, as the case may be, was Incurred under a revolving
credit or similar arrangement, the permanent reduction or cancellation of the
commitment thereunder), in each case owing to a Person other than the Company or
any of its Restricted Subsidiaries or (B)(x) within twelve months after the date
Net Cash Proceeds so received exceed $20 million, invest an equal amount, or the
amount not so applied pursuant to clause (A) or (y) within eighteen months after
the date Net Cash Proceeds so received exceed $20 million, enter into a
definitive agreement committing to invest an equal amount, or the amount not
applied pursuant to clause (A) or (B)(x) not later than 24 months after the date
Net Cash Proceeds so received exceed $20 million in each case, in property or
assets (other than current assets) of a nature or type or that are used in a
business (or in a company having property and assets of a nature or type, or
engaged in a business) similar or related to the nature or type of the property
and assets of, or the business of, the Company and its Restricted Subsidiaries
existing on the date of such investment and (ii) apply (no later than the end of
the 12-month period referred to in clause (i)(A) or the 24-month period referred
to in clause (i)(B)(y)), as applicable, such excess Net Cash Proceeds (to the
extent not applied or committed to be applied pursuant to clause (i)) as
provided in the following paragraph of this "Limitation on Asset Sales"
covenant. The amount of such excess Net Cash Proceeds required to be applied (or
to be committed to be applied) during such 12-month period or 24-month period,
as the case may be, of the preceding sentence and not applied (or committed to
be applied) as so required by the end of such period shall constitute "Excess
Proceeds."
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If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $20 million, the Issuer
must commence, not later than the fifteenth Business Day of such month, and
consummate a similar offer to purchase from the Holders and the holders of any
Senior Indebtedness or any other Indebtedness ranking pari passu with, the Notes
which by its terms requires the Issuer to make a similar offer to purchase, on a
pro rata basis, an aggregate principal amount of Notes, Senior Indebtedness or
such other Indebtedness (if any) equal to the Excess Proceeds on such date, at a
purchase price equal to 100% of the principal amount of the Notes, Senior
Indebtedness or such other Indebtedness (if any), plus, in each case, accrued
interest (if any) to the date of purchase.
There can be no assurance that the Issuer will have sufficient funds
available at the time of debt payment (including repurchases of Notes) required
by the foregoing covenant (as well as any contained in the Bank Credit Agreement
or other securities of the Issuer which might be outstanding at the time). The
above covenant requiring the Issuer to repurchase the Notes will, unless
appropriate consents are obtained, require the Issuer to repay all indebtedness
then outstanding which by its terms would prohibit such Note repurchase, either
prior to or concurrently with such Note repurchase.
Limitation on Affiliate Transactions. (a) The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property,
employee compensation arrangements or the rendering of any service) with any
Affiliate of the Company (an "Affiliate Transaction") unless the terms thereof
(1) are no less favorable to the Company or such Restricted Subsidiary than
those that could reasonably be expected to be obtained at the time of such
transaction in arm's-length dealings with a Person who is not such an Affiliate,
(2) if such Affiliate Transaction involves an amount in excess of $10 million,
is set forth in writing and has been approved by a majority of the members of
the Board of Directors of the Company or the Issuer, as the case may be, having
no personal stake in such Affiliate Transaction or (3) if such Affiliate
Transaction involves an amount in excess of $20 million, has been determined by
a nationally recognized investment banking firm or other qualified independent
appraiser to be fair, from a financial standpoint, to the Company and its
Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i)
transactions between or among the Company and/or its Restricted Subsidiaries;
(ii) Restricted Payments, Permitted Investments and other transactions and
payments that are permitted by the provisions of the Indenture described above
under the caption "-- Limitation on Restricted Payments"; (iii) loans,
transactions and arrangements or advances to officers, directors, employees and
agents in the ordinary course of business in an aggregate principal amount not
to exceed, in the case of loans or advances, $3 million outstanding at any one
time, provided that with respect to any transaction or arrangement which is
reasonably be expected to involve more than $1 million, such transaction or
arrangement shall be approved by a majority of the members of the Board of
Directors of the Company having no personal stake in such transaction or
arrangement; (iv) compensation, indemnification and other benefits paid or made
available (x) pursuant to employment and consultant agreements, (y) for and in
connection with services actually rendered and generally comparable to those
paid or made by entities engaged in the same or similar business (including,
reimbursement for advancement of out-of-pocket expenses and directors' and
officers' liability insurance), or (z) indemnification under the Company's and
any Subsidiary's charter, by-laws or other organizational documents; (v)
transactions, expenses and payments pursuant to the Registration Rights
Agreement; (vi) transactions between and among the Company and its Subsidiaries
or between or among Subsidiaries of the Company, provided that any ownership
interest in any such Subsidiary which is not beneficially owned directly or
indirectly by the Company or any of its Subsidiaries is not beneficially owned
by an Affiliate of the Company other than by virtue of the direct or indirect
ownership interest in such Subsidiary held (in the aggregate) by the Company
and/or one or more of its Subsidiaries; (vii) transactions between or among the
Company and its Affiliates not involving in excess of $1 million during any
fiscal year; and (viii) any acquisition by the Company of Capital Stock (other
than Disqualified Stock) of the Company or any Subsidiary thereof and any
capital contribution by the Company to any Restricted Subsidiary.
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Limitation on Liens. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Lien (other than Permitted Liens) of any nature whatsoever on any of its
properties (including Capital Stock of a Restricted Subsidiary), whether owned
at the Issue Date or thereafter acquired, to secure any Indebtedness of the
Company or the Issuer, without effectively providing that the Notes or, in the
case of a Lien on the assets or property of the Company, the Guaranty, as the
case may be, shall be secured equally and ratably with (or prior to) the
obligations so secured for so long as such obligations are so secured.
Limitation on Sale/Leaseback Transactions. The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless (i) the Company or such
Restricted Subsidiary would be entitled to (A) Incur Indebtedness in an amount
equal to the Attributable Debt with respect to such Sale/Leaseback Transaction
pursuant to the covenant described under "-- Limitation on Indebtedness" and (B)
create a Lien on such property securing such Attributable Debt without equally
and ratably securing the Notes pursuant to the covenant described under "--
Limitation on Liens," (ii) the net proceeds received by the Company or any
Restricted Subsidiary in connection with such Sale/Leaseback Transaction are at
least equal to the Fair Market Value of such property and (iii) the Company or
the Issuer, as the case may be, applies the proceeds of such transaction in
compliance with the covenant described under "-- Limitation on Asset Sales."
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Issuer must commence, within 30 days of the occurrence of a Change of
Control, and within 60 days thereof consummate, an Offer to Purchase for all
Notes then outstanding, at a purchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest (if any) to the date of
purchase.
There can be no assurance that the Issuer will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
any contained in the Bank Credit Agreement or other securities of the Issuer
which might be outstanding at the time). The above covenant requiring the Issuer
to repurchase the Notes will, unless appropriate consents are obtained, require
the Issuer to repay all indebtedness then outstanding which by its terms would
prohibit such Note repurchase, either prior to or concurrently with such Note
repurchase.
SEC REPORTS AND REPORTS TO HOLDERS
Whether or not the Company is required to file reports with the SEC, for so
long as any Notes are outstanding, the Company shall file with the SEC all such
reports and other information as it would be required to file with the SEC by
Sections 13(a) or 15(d) under the Exchange Act, if it were subject thereto. See
"Additional Information." The Company shall supply the Trustee with copies of
such reports and other information and shall supply to the Trustee for
forwarding to each Holder, without cost to such Holder, copies of such annual
and quarterly reports containing financial statements.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Notes when due, continued for 30 days, (ii) a default
in the payment of principal of any Note when due at its Stated Maturity, upon
optional redemption, upon required repurchase, upon declaration or otherwise,
(iii) the failure by the Company or the Issuer to comply with their respective
obligations under "Consolidation, Merger and Sale of Assets" below, (iv) the
failure by the Company or the Issuer to comply for 30 days after notice with any
of their respective obligations in the covenants described above under "--
Certain Covenants," "-- Limitation on Indebtedness," "-- Limitation on
Restricted Payments," "-- Limitation on Restrictions on Distributions from
Restricted Subsidiaries," "-- Limitation on Asset Sales" (other than a failure
to purchase Notes), "-- Limitation on Affiliate Transactions," "-- Limitation on
the Sale or Issuance of Capital Stock and Indebtedness of Restricted
Subsidiaries," "-- Change of Control" (other than a failure to purchase Notes),
"-- Limitation on Liens," "-- Limitation on Sale/Leaseback Transactions" or "--
SEC Reports," (v) the failure by the Company or the Issuer to comply for 60 days
after notice with their respective other
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agreements contained in the Indenture, (vi) Indebtedness of the Company or the
Issuer is not paid within any applicable grace period after final maturity or
the maturity of such Indebtedness is accelerated by the holders thereof because
of a default (and such acceleration is not rescinded or annulled) and the total
amount of such Indebtedness unpaid or accelerated exceeds $10 million (the
"cross acceleration provision"), (vii) certain events of bankruptcy, insolvency
or reorganization of the Company, the Issuer or a Significant Subsidiary (the
"bankruptcy provisions"), (viii) any judgment or decree for the payment of money
in excess of $10 million is rendered against the Company, the Issuer or a
Significant Subsidiary, remains outstanding for a period of 60 days following
such judgment and is not discharged, waived or stayed within 10 days after
notice to the Issuer and the Company (the "judgment default provision") or (ix)
the Guaranty of the Company ceases to be in full force and effect (other than in
accordance with the terms of such Guaranty) or the Company denies or disaffirms
its obligations under its Guaranty if such default continues for a period of ten
days after notice thereof to the Issuer and the Company. However, a default
under clauses (iii), (iv), (v), (vi), (viii) and (ix) will not constitute an
Event of Default until the Trustee or the holders of 25% in principal amount of
the outstanding Notes notify the Issuer of the default and the Issuer does not
cure such default within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Notes may declare the
principal of and accrued but unpaid interest on all the Notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable immediately; provided the Issuer or the Trustee shall promptly notify
the holders of the Designated Senior Indebtedness (or their representatives) of
the acceleration and under no circumstances shall the Issuer pay the Notes until
five Business Days after the Representatives of all Designated Senior
Indebtedness receive notice of such acceleration, and thereafter, the Issuer
shall pay the Notes only if the payments are otherwise permitted pursuant to the
subordination provisions contained in the Indenture. If an Event of Default
relating to certain events of bankruptcy, insolvency or reorganization of the
Issuer occurs and is continuing, the principal of and interest on all the Notes
will ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any holders of the Notes.
Under certain circumstances, the holders of a majority in principal amount of
the outstanding Notes may rescind any such acceleration with respect to the
Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a Note
may pursue any remedy with respect to the Indenture or the Notes unless (i) such
holder has previously given the Trustee notice that an Event of Default is
continuing, (ii) holders of at least 25% in principal amount of the outstanding
Notes have requested the Trustee to pursue the remedy, (iii) such holders have
offered the Trustee reasonable security or indemnity against any loss, liability
or expense, (iv) the Trustee has not complied with such request within 60 days
after the receipt thereof and the offer of security or indemnity and (v) the
holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction inconsistent with such request within such 60-day
period. Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding Notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. The Trustee,
however, may refuse to follow any direction that conflicts with law or the
Indenture or that the Trustee determines is unduly prejudicial to the rights of
any other holder of a Note or that would involve the Trustee in personal
liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder of the Notes notice
of the Default within 90 days after it occurs. Except in the case of a Default
in the payment of principal of or interest on any Note, the Trustee may withhold
notice if and so long as a committee of its trust officers determines that
withholding notice is not opposed to the interest of the holders of the Notes.
In addition, the Issuer and the Company are required to deliver to the Trustee,
within 120 days after the end of each fiscal year, a certificate indicating
whether the signers thereof know of
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any Default that occurred during the previous year. The Issuer and the Company
also are required to deliver to the Trustee, promptly after the Issuer or the
Company, as the case may be, becomes aware of any Default or Event of Default,
written notice of such Default or Event of Default.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Issuer and the Company will not consolidate with, merge with or into,
or sell, convey, transfer, lease or otherwise dispose of all or substantially
all of their respective property and assets (computed on a consolidated basis)
in one transaction or a series of related transactions to, any Person or permit
any Person to merge with or into the Issuer or the Company, as the case may be,
unless: (i) the Company or the Issuer, as the case may be, shall be the
continuing Person, or the Person (if other than the Issuer or the Company)
formed by such consolidation or into which the Company or the Issuer is merged
or that acquired or leased such property and assets of the Company or the Issuer
shall be a corporation organized and validly existing under the laws of the
United States of America or any jurisdiction thereof and shall expressly assume,
by a supplemental indenture, executed and delivered to the Trustee, all of the
obligations of the Issuer on all of the Notes or all of the obligations of the
Company on the Guaranty, as the case may be, and under the Indenture; (ii)
immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing; (iii) immediately after giving
effect to such transaction on a pro forma basis the Company or the Issuer, as
the case may be, or any Person becoming the successor obligor of the Notes or
the Guaranty shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company or the Issuer, as the case may be,
immediately prior to such transaction; (iv) immediately after giving effect to
such transaction on a pro forma basis the Company, the Issuer, or any Person
becoming the successor obligor of the Notes, as the case may be, could Incur at
least $1.00 of Indebtedness under the first paragraph of the "Limitation on
Indebtedness" covenant; and (v) the Company or the Issuer, as the case may be,
delivers to the Trustee an Officers' Certificate (attaching the arithmetic
computations to demonstrate compliance with the clauses (iii) and (iv)) and
Opinion of Counsel, in each case stating that such consolidation, merger or
transfer and such supplemental indenture complies with this provision and that
all conditions precedent provided for herein relating to such transaction have
been complied with; provided, however, that (x) clauses (iii) and (iv) above do
not apply if, in the good faith determination of the Board of Directors of the
Company or the Issuer, whose determination shall be evidenced by a Board
Resolution, the principal purpose of such transaction is to change the state of
incorporation of the Company or the Issuer; and provided further, however, that
any such transaction shall not have as one of its purposes the evasion of the
foregoing limitations; and (y) clauses (iii) and (iv) above do not apply to any
transaction between the Company or the Issuer and any Wholly Owned Restricted
Subsidiary or between the Company and the Issuer.
The Company shall be released from all its obligations under the Guaranty
and the Indenture following any consolidation, merger or sale of all or
substantially all of the property and assets of the Issuer (other than a
consolidation or merger upon the completion of which the Issuer shall remain a
subsidiary of the Company) in compliance with the above provisions.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the holders of a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the Notes) and any past default or compliance with any provisions
may also be waived with the consent of the holders of a majority in principal
amount of the Notes then outstanding. However, without the consent of each
holder of an outstanding Note affected thereby, no amendment may, among other
things, (i) reduce the amount of Notes whose holders must consent to an
amendment, (ii) reduce the rate of or extend the time for payment of interest on
any Note, (iii) reduce the principal of or extend the Stated Maturity of any
Note, (iv) \reduce the premium payable upon the redemption of any Note or change
the time at which any Note may be redeemed as described under "-- Optional
Redemption," (v) make any Note payable in money other than that stated in the
Note, (vi) impair the right of any holder of the Notes to receive payment of
principal of and interest on such holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such holder's Notes,
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(vii) make any change in the amendment provisions which require each holder's
consent or in the waiver provisions or (viii) make any change to the
subordination provisions of the Indenture that would adversely affect the
Noteholders.
Without the consent of any holder of the Notes, the Company, the Issuer and
the Trustee may amend the Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporation of the
obligations of the Company or the Issuer under the Indenture, to provide for
uncertificated Notes in addition to or in place of certificated Notes (provided
that the uncertificated Notes are issued in registered form for purposes of
Section 163(f) of the Code, or in a manner such that the uncertificated Notes
are described in Section 163(f)(2)(B) of the Code), to add guarantees with
respect to the Notes, to secure the Notes, to add to the covenants of the
Company or the Issuer for the benefit of the holders of the Notes or to
surrender any right or power conferred upon the Company or the Issuer, to make
any change that does not adversely affect the rights of any holder of the Notes
or to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act.
The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Issuer is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the Notes,
or any defect therein, will not impair or affect the validity of the amendment.
DEFEASANCE
The Issuer at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Issuer at any time may terminate its obligations under the covenants
described under "-- Certain Covenants," the operation of the cross acceleration
provision, the bankruptcy provisions with respect to Significant Subsidiaries
and the judgment default provision described under "-- Defaults" above and the
limitations contained in clauses (iii) and (iv) under Consolidation above
("covenant defeasance").
If the Issuer exercises its legal defeasance option or its covenant
defeasance option, the Company will be released from all of its obligations
under the Guaranty unless and only to the extent the Issuer's obligations under
the Notes and the Indenture are reinstated pursuant to the Indenture.
The Issuer may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Issuer exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Issuer exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) (with respect only to
Significant Subsidiaries) or (viii) under "-- Defaults" above or because of the
failure of the Issuer to comply with clause (iii) or (iv) under "Consolidation,
Merger and Sale of Assets" above.
In order to exercise either defeasance option, the Issuer must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Notes to
redemption or maturity, as the case may be, and must comply with certain other
conditions, including delivery to the Trustee of an Opinion of Counsel to the
effect that holders of the Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
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NOTICES
Notices to Holders will be mailed to them at their respective addresses as
they appear in the Security Register by first class mail and shall be published
in a leading newspaper having general circulation in Luxembourg if and so long
as the Notes are listed on the Luxembourg Stock Exchange and such publication is
required by such Exchange.
CONCERNING THE TRUSTEE
Harris Trust and Savings Bank is to be the Trustee under the Indenture and
has been appointed by the Issuer as Registrar and Paying Agent with regard to
the Notes.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that if an Event of Default occurs (and is
not cured), the Trustee will be required, in the exercise of its power, to use
the degree of care of a prudent man in the conduct of his own affairs. Subject
to such provisions, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request of any Holder of Notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it (including the Guaranty) and the Notes will
be governed by, and construed in accordance with, the laws of the State of New
York without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
BOOK-ENTRY SYSTEM
The Notes shall be issued under a book-entry system in the form of one or
more registered global Notes (each a "Global Note"). Each Global Note will be
deposited with, or on behalf of, The Depository Trust Company, New York, New
York ("DTC"). Global Notes will be registered in the name of Cede & Co.
("Cede"), as nominee for DTC, and will bear a legend regarding the restrictions
on exchanges and registration of transfers thereof referred to below and any
other matters as may be provided for pursuant to the Indenture. Holders in the
Global Note may hold their interests therein directly through DTC, if they are
participants in such system, or indirectly through organizations (including
Morgan Guaranty Trust Company of New York, Brussels office, as operator of the
Euroclear System ("Euroclear") and Cedel Bank, S.A. ("Cedel")) that are
participants in such system. All interests in a Global Note, including those
held through Euroclear or Cedel, may be subject to the procedures and
requirements of DTC. Those interests held through Euroclear or Cedel may also be
subject to the procedures and requirements of such systems.
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the
means of the New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities of its participants
and to facilitate the clearance and settlement of securities transactions among
its participants through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. DTC's participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations, some of
whom (and/or their representatives) own DTC. Access to DTC's book-entry system
is also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
either directly or indirectly.
Upon the issuance of a Global Note in registered form, DTC will credit, on
its book-entry registration and transfer system, the respective principal
amounts of the Notes represented by such Global Note to the
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accounts of participants. The accounts to be credited will be designated by the
underwriters or dealers. Ownership of beneficial interests in the Global Note
will be limited to participants or persons that may hold interests through
participants. Ownership of beneficial interests by participants in the Global
Note will be shown on, and the transfer of that ownership interest will be
effected only through, records maintained by such participants. The laws of some
jurisdictions may require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such laws may impair the ability
to transfer beneficial interest in a Global Note.
So long as DTC or its nominee is the registered owner of a Global Note, it
will be considered the sole owner or holder of the Notes represented by such
Global Note for all purposes under the Indenture. Except as set forth below,
owners of beneficial interests in such Global Notes will not be entitled to have
the Notes represented thereby registered in their names, will not receive or be
entitled to receive physical delivery or certificates representing the Notes and
will not be considered the owners or holders thereof under the Indenture.
Accordingly, each person owning a beneficial interest in such Global Note must
rely on the procedures of DTC and, if such person is not a participant, on the
procedures of the participant through which such person owns its interest, to
exercise any rights of a holder under the Indenture. The Company understands
that under existing practice, in the event that the Company and the Issuer
request the holders to take, or a beneficial owner desires to take, any action,
DTC would act upon the instructions of, or authorize, the participant to take
such action.
Payment of principal of, and any premium and interest on, the Notes
represented by a Global Note will be made to DTC or its nominee, as the case may
be, as the registered owner and holder of the Global Note representing such
Notes. None of the Company, the Issuer, the Trustee, any paying agent or
registrar for such Notes will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
The Company has been advised by DTC that DTC will credit participants'
accounts with payments of principal and any premium or interest on the payment
date thereof in amounts proportionate to their respective beneficial interests
in the principal amount of the Global Note as shown on the records of DTC. The
Company expects that payments by participants to owners of beneficial interests
in the Global Note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in "street name," and will be the
responsibility of such participants.
Transfers between participants in DTC will be effected in accordance with
DTC's procedures. Transfers between accountholders in Euroclear and Cedel will
be effected in the ordinary way in accordance with their respective rules and
operating procedures.
Cross-market transfers between accountholders in DTC, one the one hand, and
directly or indirectly through Euroclear or Cedel accountholders, on the other
hand, will be effected through DTC in accordance with DTC's rules on behalf of
Euroclear or Cedel, as the case may be, by its respective depositary; however,
such cross-market transactions will require delivery of instructions to
Euroclear or Cedel, as the case may be, by the counterparty in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or Cedel, as the case may be, will, if
the transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant Global Note in DTC, and making
or receiving payment in accordance with normal procedures for same-day fund
settlement applicable to DTC. Euroclear accountholders and Cedel accountholders
may not deliver instructions directly to the depositaries for Euroclear or
Cedel.
Because of time-zone differences, the securities account of a Euroclear or
Cedel accountholder purchasing an interest in a Global Note from an
accountholder in DTC will be credited, and any such crediting will be reported
to the relevant Euroclear or Cedel participant, during the securities settlement
processing day (which must be a business day for Euroclear or Cedel) immediately
following the settlement date of DTC. Cash received in Euroclear or Cedel as a
result of sales of interests in a Global Note by or
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through a Euroclear or Cedel accountholder to a participant in DTC will be
received with value on the settlement date of DTC but will be available in the
relevant Euroclear or Cedel cash account only as of the business day for
Euroclear or Cedel following DTC's settlement date.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures
to facilitate transfers of interest in the Global Note among accountholders in
DTC and accountholders of Euroclear and Cedel, they are under no obligation to
perform or to continue to perform such procedures, and such procedures may be
discontinued at any time. None of the Company, the Issuer, the Trustee or any
agent of the Company, the Issuer or the Trustee will have any responsibility for
the performance of DTC, Euroclear or Cedel or their respective participants or
indirect participants of their respective obligations under the rules and
procedures governing their operation.
A Global Note may not be exchanged or transferred except as a whole by the
Depositary to a nominee or a successor of DTC or by a nominee of DTC to another
nominee of DTC. A Global Note representing all but not part of the Notes being
offered hereby is exchangeable or transferable for Notes in definitive form of
like tenor and terms if DTC notifies the Company that it is unwilling or unable
to continue as depositary for such Global Note or if at any time DTC is no
longer eligible to be or in good standing as a clearing agency registered under
the Exchange Act, and in either case, a successor depositary is not appointed by
the Company within 90 days of receipt by the Company of such notice or of the
Company becoming aware of such ineligibility. A Global Note exchangeable
pursuant to the preceding sentence shall be exchangeable for certificated Notes
registered in such names and in such authorized denominations as the depositary
for such Global Notes shall direct.
CERTIFICATED NOTES
The Holder of certificated Notes may transfer or exchange such Notes by
surrendering them at the office or agency maintained by the Issuer for such
purposes in the Borough of Manhattan, The City of New York which initially will
be the corporate trust office of the Trustee's affiliate, or at the office of
any transfer agent, at which office or agency new certificated Notes shall be
available. In case any Note shall become mutilated, lost, destroyed or
wrongfully taken, it may be replaced, subject to applicable laws, at the office
or agency maintained by the Issuer for such purpose in the Borough of Manhattan,
The City of New York which initially will be the corporate trust office of the
Trustee's affiliate, or at the office of any transfer agent, at which office or
agency new certificated Notes shall be available. If required by the Trustee,
the Company or the Issuer, an indemnity bond must be furnished that is
sufficient in the judgment of both the Trustee, the Company and the Issuer to
protect the Company, the Issuer, the Trustee or any agent from any loss that any
of them may suffer if a Note is replaced. The Issuer may charge a Holder for its
expenses and the expenses of the Trustee in replacing a Note. In case any such
mutilated, lost, destroyed or wrongfully taken Note has become or is about to
become due and payable, the Issuer in its discretion may pay such Note instead
of issuing a new Note in replacement thereof.
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following discussion is a summary of certain United States federal
income and estate tax considerations relevant to the purchase, ownership and
disposition of the Notes by the beneficial owners thereof ("Holders"). The
discussion is limited to initial purchasers of the Notes and does not address
the tax consequences to subsequent purchasers of Notes. This summary does not
purport to be a complete analysis of all the potential federal income tax
effects relating to the purchase, ownership and disposition of the Notes. There
can be no assurance that the Internal Revenue Service (the "Service") will take
a similar view of such consequences. Further, the discussion does not address
all aspects of taxation that might be relevant to particular purchasers in light
of their individual circumstances (including the effect of any state, local,
non-United States or other tax laws) or to certain types of purchasers
(including dealers in securities, insurance companies, financial institutions
and tax-exempt entities) subject to special treatment under United States
federal income tax laws. The discussion below assumes that the Notes are held as
capital assets.
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The discussion of the United States federal income tax consequences set
forth below is based upon provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), judicial decisions, and administrative interpretations,
all in effect as of the date hereof, all of which are subject to change at
anytime, and any such change may be applied retroactively. Because individual
circumstances may differ, each prospective purchaser of the Notes is strongly
urged to consult its own tax advisor with respect to its particular tax
situation and the particular tax effects of any state, local, non-United States,
or other tax laws and possible changes in the tax laws.
As used herein, the term "United States Holder" means a Holder of a Note
who or which is for United States federal income tax purposes either (i) a
citizen or resident of the United States, (ii) a corporation, partnership or
other entity created or organized in the United States or organized under the
laws of the United States or of any State thereof, (iii) an estate the income of
which is subject to United States federal income taxation regardless of its
source, or (iv) a trust described in Section 7701(a)(30) of the Code (taking
into account changes thereto and associated with effective dates, elections and
transition rules). The term "United States Holder" also includes certain former
citizens and residents of the United States whose income and gain on the Notes
will be subject to United States taxation. As used herein, the term "Foreign
Holder" means a Holder of a Note who or which is not a United States Holder.
TAX CONSEQUENCES TO UNITED STATES HOLDERS
Payments of Interest
Interest paid on a Note will generally be taxable to a United States Holder
as ordinary interest income at the time it accrues or is received in accordance
with the United States Holder's method of accounting for United States federal
income tax purposes.
Sale, Exchange or Retirement of Notes
Upon the sale, exchange, redemption or retirement of a Note, a United
States Holder will recognize taxable gain or loss equal to the difference
between the amount realized on the sale, exchange, redemption or retirement (not
including any amount attributable to accrued but unpaid interest) and such
Holder's adjusted tax basis in the Note. To the extent attributable to accrued
but unpaid interest, the amount realized by the United States Holder will be
treated as a payment of interest. See "Payments of Interest" above. A United
States Holder's adjusted tax basis in a Note will equal the cost of the Note to
such Holder, reduced by any principal payments received by such Holder.
Gain or loss realized on the sale, exchange, redemption or retirement of a
Note by a United States Holder generally will be capital gain or loss. The
recently enacted Taxpayer Relief Act of 1997 made certain changes to the Code
with respect to the taxation of capital gains of taxpayers other than
corporations. Under the Taxpayer Relief Act of 1997, capital gain realized by a
non-corporate taxpayer on the disposition of a capital asset held for more than
one year but not more than 18 months is taxed at a maximum rate of 28% and
capital gain realized on the disposition of a capital asset held for more than
18 months generally is taxed at a maximum rate of 20%. Capital gain on the
disposition of assets by non-corporate taxpayers held for not more than one year
continues to be taxed at the rates applicable to ordinary income (i.e., up to
39.6%). The distinction between capital gain or loss and ordinary income or loss
is also relevant for purposes of, among other things, limitations on the
deductibility of capital losses.
TAX CONSEQUENCES TO FOREIGN HOLDERS
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) payments of principal and interest on the Notes by the Issuer or
any paying agent to a Foreign Holder, as defined above, will not be subject
to withholding of United States federal income tax, provided that, in the
case of interest, (i) such Foreign Holder does not own, actually or
constructively, 10 percent or more of the total combined voting power of
all classes of stock of the Issuer entitled to vote, (ii) such Foreign
Holder is not, for United States federal income tax purposes, a controlled
foreign corporation
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related, directly or indirectly, to the Issuer through stock ownership,
(iii) such Foreign Holder is not a bank receiving interest described in
Section 881(c)(3)(A) of the Code and (iv) the certification requirements
under Section 871(h) or Section 881(c) of the Code and Treasury regulations
thereunder (summarized below) are met;
(b) a Foreign Holder will not be subject to United States federal
income tax on gain realized on the sale, exchange or other disposition of a
Note, unless (i) such holder is an individual who is present in the United
States for 183 days or more in the taxable year of sale, exchange or other
disposition, and certain conditions are met or (ii) such gain is
effectively connected with the conduct by such Holder of a trade or
business in the United States; and
(c) a Note held by an individual who is not a citizen or resident of
the United States (as defined for United States federal estate tax
purposes) at the time of his death will not be subject to United States
federal estate tax as a result of such individual's death, provided that,
at the time of such individual's death, the individual does not own,
actually or constructively, 10 percent or more of the total combined voting
power of all classes of stock of the Issuer entitled to vote and payments
with respect to such Note, if received at the time of the individual's
death, would not have been effectively connected to the conduct by such
individual of a trade or business in the United States.
Certification Requirements
Sections 871(h) and 881(c) of the Code and Treasury Regulations relating
thereto require that, in order to obtain the exemption from withholding tax
described in paragraph (a) above, either (i) the beneficial owner of a Note must
certify, under penalties of perjury, to the Issuer or paying agent, as the case
may be, that such owner is a Foreign Holder and must provide such owner's name
and address, and United States taxpayer identification number, if any, or (ii) a
securities clearing organization, bank or other financial institution that holds
customers securities in the ordinary course of its trade or business (a
"Financial Institution") and holds the Note on behalf of the beneficial owner
thereof must certify, under penalties of perjury, to the Issuer or paying agent,
as the case may be, that such certificate has been received from the beneficial
owner by it or by a Financial Institution between it and the beneficial owner
and must furnish the payor with a copy thereof. A certificate described in this
paragraph is effective only with respect to payments of interest made to the
certifying Foreign Holder after delivery of the certificate in the calendar year
of its delivery and the two immediately succeeding calendar years. Such
requirement will be fulfilled if the beneficial owner of a Note certifies on
Internal Revenue Service Form W-8, under penalties of perjury, that it is a
Foreign Holder and provides its name and address, and any Financial Institution
holding the Note on behalf of the beneficial owner files a statement with the
withholding agent to the effect that it has received such a statement from the
beneficial owner (and furnishes the withholding agent with a copy thereof).
The United States Treasury Department recently adopted new Treasury
Regulations (the "New Regulations") with respect to withholding and backup
withholding generally effective, subject to certain transition rules described
below, for payments after December 31, 1998, regardless of the issue date of the
instrument with respect to which such payments are made.
The New Regulations provide documentation procedures designed to simplify
compliance by withholding agents. The New Regulations generally do not affect
the documentation rules described above, but add other certification options.
Under one such option, a withholding agent will be allowed to rely on an
intermediary withholding certificate furnished by a "qualified intermediary" (as
defined below) on behalf of one or more beneficial owners (or other
intermediaries) without the withholding agent having to obtain the beneficial
owner certificate described above. "Qualified intermediaries" include: (i)
foreign financial institutions or foreign clearing organizations (other than a
United States branch or United States office of such institution or
organization) or (ii) foreign branches or offices of United States financial
institutions or foreign branches of offices of United States clearing
organizations, which, as to both (i) and (ii), have entered into withholding
agreements with the Service. In addition to certain other requirements,
qualified intermediaries must obtain withholding certificates, such as revised
Internal Revenue Service Form W-8 (see below), from each beneficial owner. Under
another option, an authorized foreign agent of a United States withholding agent
will be permitted to act on behalf of the United States withholding agent,
provided certain conditions are met.
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For purposes of the certification requirements, the New Regulations
generally treat as the beneficial owners of payments on a Note those persons
that, under United States tax principles, are the taxpayers with respect to such
payments, rather than persons such as nominees or agents legally entitled to
such payments. In the case of payments to an entity classified as a foreign
partnership under United States tax principles, the partners, rather than the
partnership, generally will be required to provide the required certifications
to qualify for the withholding exemption described above. A payment to a United
States partnership, however, is treated for these purposes as payment to a
United States payee, even if the partnership has one or more foreign partners.
The New Regulations provide certain presumptions with respect to withholding for
beneficial owners not furnishing the required certifications to qualify for the
withholding exemption described above. In addition, the New Regulations will
replace a number of current tax certification forms (including Internal Revenue
Service Form W-8, Form 1001 (treaty exemptions) and possibly Form 4224 (United
States effectively connected income)) with a single, revised Internal Revenue
Service Form W-8 (which, in certain circumstances, will require information in
addition to that previously required). Under the New Regulations, this Internal
Revenue Service Form W-8 will remain valid until the last day of the third
calendar year following the year in which the certificate is signed.
Under the New Regulations, withholding of United States federal income tax
may apply to payments on a taxable sale or other disposition of a Note by a
Foreign Holder who does not provide appropriate certification to the withholding
agent with respect to such transaction.
The New Regulations provide transition rules concerning existing
certificates, such as Internal Revenue Service Form W-8. Valid withholding
certificates that are held on December 31, 1998 will generally remain valid
until the earlier of December 31, 1999 or the date of expiration of the
certificate under the law in effect prior to January 1, 1999. Further,
certificates dated prior to January 1, 1998 will generally remain valid until
the end of 1998, irrespective of the fact that their validity expires during
1998.
United States Trade or Business
If a Foreign Holder is engaged in a trade or business in the United States,
and if interest on the Note, or gain realized on the sale, exchange or other
disposition of the Note, is effectively connected with the conduct of such trade
or business, the Foreign Holder, although exempt from United States withholding
tax, will generally be subject to United States income tax on such interest or
gain in the same manner as if it were a United States Holder. See "Tax
Consequences to United States Holders" above. In lieu of the certificates
described above, such a Foreign Holder will be required to provide the Issuer a
properly executed Internal Revenue Service Form 4224 (Statement Claiming
Exemption of Tax on Income Effectively Connected with the Conduct of Business in
the United States) in order to claim an exemption from withholding tax. The New
Regulations, though, might require a revised Form W-8 in place of the Form 4224.
If such Foreign Holder is a foreign corporation, it may be subject to a branch
profits tax equal to 30% (or such lower rate provided by an applicable treaty)
of its effectively connected earnings and profits for the taxable year, subject
to certain adjustments. For purposes of the branch profits tax, interest on and
any gain recognized on the sale, exchange or other disposition of a Note will be
included in the earnings and profits of such Foreign Holder if such interest or
gain is effectively connected with the conduct by the Foreign Holder of a trade
or business in the United States.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Under current United States federal income tax law, a 31% backup
withholding tax requirement applies to certain payments of interest on, and the
proceeds of a sale, exchange or redemption of, the Notes. In addition, certain
persons making such payments are required to submit information returns (i.e.,
Internal Revenue Service Forms 1099) to the Service with regard to those
payments.
Backup withholding and information reporting will generally not apply with
respect to payments made to certain "exempt recipients" such as corporations or
certain tax-exempt entities. In the case of a non-corporate United States
Holder, backup withholding generally will apply only if such Holder (i) fails to
furnish to the payor in the manner required its Taxpayer Identification Number
("TIN") which, for an individual, would be his Social Security number, (ii)
furnishes an incorrect TIN and the payor is so notified by the Service, (iii) is
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<PAGE> 82
notified by the Service that it has failed to properly report payments of
interest and dividends and the payor is so notified by the Service or (iv) under
certain circumstances, fails to certify, under penalties of perjury, that it has
furnished a correct TIN and has not been notified by the Service that it is
subject to backup withholding for failure to report interest and dividend
payments.
In the case of a Foreign Holder, under current United States federal income
tax law, information reporting on Internal Revenue Service Form 1099 (including
Internal Revenue Service Form 1099B) and backup withholding will not apply to
payments of principal or interest made by the Issuer or any paying agent thereof
on a Note if such holder has provided the required certification on Internal
Revenue Service Form W-8 (as described above under "Tax Consequences to Foreign
Holders") under penalties of perjury that it is not a United States Holder or
has otherwise established an exemption, provided in each case that the Issuer or
such paying agent, as the case may be, does not have actual knowledge that the
payee is a United States Holder. However, interest on a Note beneficially owned
by a Foreign Holder will be required to be reported annually on Internal Revenue
Service Form 1042S.
Under current United States federal income tax laws, if payments of
principal or interest on a Note are made to or through a foreign office of a
custodian, nominee, broker or other agent acting on behalf of a beneficial owner
of a Note, such custodian, nominee, broker or other agent will not be required
to apply backup withholding to such payments made to such beneficial owner.
However, if such custodian, nominee, broker or other agent is a United States
person for United States federal income tax purposes, a controlled foreign
corporation for United States federal income tax purposes, or a foreign person
50% or more of whose gross income is effectively connected with the conduct of a
United States trade or business for a specified three-year period, such
custodian, nominee, broker or other agent may be subject to certain information
reporting requirements with respect to such payments unless it has in its
records documentary evidence that the beneficial owner is a Foreign Holder and
certain conditions are met or the beneficial owner otherwise establishes an
exemption.
Under current United States federal income tax law, payments on the sale,
exchange, retirement or other disposition of a Note made to or through a foreign
office of a broker generally will not be subject to backup withholding. Such
payments, however, will be subject to information reporting if the broker is a
United States person for United States federal income tax purposes, a controlled
foreign corporation for United States federal income tax purposes, or a foreign
person 50% or more of whose gross income is effectively connected with the
conduct of a United States trade or business for a specified three year period,
unless the broker has in its records documentary evidence that the beneficial
owner is not a United States person and certain other conditions are met, or the
beneficial owner otherwise establishes an exemption.
Under the New Regulations, in the case of a Foreign Holder, backup
withholding and information reporting will not apply to payments of principal
and interest with respect to a Note if such Holder provides the required
certification to establish an exemption from the withholding of United States
federal income tax or otherwise establishes an exemption.
Under the New Regulations, payments of principal and interest with respect
to a Note made to a custodian, nominee or broker will not be subject to backup
withholding or information reporting, irrespective of the place of payment or
the location of the office of the custodian, nominee or broker, although
payments of interest with respect to a Note paid to a foreign intermediary
(whether or not a qualified intermediary) will be subject to withholding of
United States federal income tax at the rate of 30% unless the beneficial owner
(whether or not a United States person) establishes an exemption by furnishing a
withholding certificate or other appropriate documentation. Unless the
beneficial owner establishes an exemption, a payment by a custodian, nominee or
broker may be subject to information reporting and to backup withholding as
well, although no backup withholding will apply if (i) the payment has been
subject to withholding of United States federal income tax at the rate of 30% or
(ii) the payment is made outside the United States to an offshore account in a
financial institution that maintains certain procedures related to account
documentation.
Under the New Regulations, payment on the sale, exchange, redemption or
retirement of a Note to or through a broker may be subject to information
reporting and backup withholding unless (i) the transaction is effected outside
the United States and the broker is not a United States person, a controlled
foreign
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<PAGE> 83
corporation for United States federal income tax purposes, a United States
branch of a foreign bank or foreign insurance company, a foreign partnership
controlled by United States persons or engaged in a United States trade or
business or a foreign person 50% or more of whose gross income is effectively
connected with the conduct of a United States trade or business for a specified
three-year period or (ii) the beneficial owner otherwise establishes an
exemption. If the broker in the transaction described in clause (i) above is not
described therein, the payments on the sale, exchange, redemption or retirement
of the Note will be subject to information reporting if the broker does not
receive an appropriate certification or documentary evidence establishing an
exception, but will not be subject to backup withholding in the absence of such
certification or documentary evidence unless the broker has actual knowledge
that the owner is a United States person.
Backup withholding tax is not an additional tax. Rather, any amounts
withheld from a payment to a person under the backup withholding rules are
allowed as a refund or a credit against such person's United States federal
income tax, provided that the required information is furnished to the Service.
Holders should consult their tax advisors regarding the application of
backup withholding in their particular situations, the availability of an
exemption therefrom, and the procedure for obtaining such an exemption, if
available.
NO GROSS UP
Unless required by law, all payments of principal and interest by the
Issuer on the Notes will be made without withholding or deduction for, or on
account of, any present or future United States federal income taxes. If any
such withholding or deduction is required, neither the Issuer nor the Company
will be obligated to pay the Holder any additional amounts in respect of such
withholding or deduction.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION AND IS NOT TAX ADVICE.
ACCORDINGLY, EACH PROSPECTIVE HOLDER SHOULD CONSULT ITS OWN TAX ADVISOR AS TO
THE PARTICULAR TAX CONSEQUENCES TO THE PROSPECTIVE HOLDER, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, OR NON-UNITED STATES INCOME TAX
LAWS AND ANY RECENT OR PROSPECTIVE CHANGES IN APPLICABLE TAX LAWS.
DESCRIPTION OF CREDIT FACILITY
The following summary description of the Credit Facility does not purport
to be complete and is subject in all respects to the provisions thereof, a copy
of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part and is incorporated herein by reference.
In connection with the closing of the Kysor Acquisition in March 1997, the
Company, Scotsman Group, certain other subsidiaries of the Company, certain
financial institutions ("Lenders") and The First National Bank of Chicago, as
agent for the Lenders ("First Chicago"), entered into a loan agreement providing
for a credit facility in the aggregate principal amount of $415 million and, in
contemplation of this Offering, the Company has entered into negotiations to
amend such loan agreement, which would, among other things, permit the
consummation of this Offering and change certain covenants (the "Credit Facility
Amendment" and, together with such loan agreement, as amended to date, the
"Credit Facility"). The following description of the Credit Facility assumes the
effectiveness of the Credit Facility Amendment and the application of the net
proceeds of this Offering to repay $30 million of term loan borrowings
outstanding under the Credit Facility. The Credit Facility consists of a $120
million term loan facility (the "Term Facility") and a $265 million revolving
loan facility (the "Revolving Facility").
The Revolving Facility will mature on March 12, 2004 (unless otherwise
earlier terminated or extended in accordance with the terms of the Credit
Facility). The aggregate principal amount which may be borrowed thereunder will
be reduced on December 31, 1998 by $10 million and by $15 million on each
December 31 thereafter until maturity, at which time the remaining commitment
amount under the Revolving Facility will be reduced to zero. The Term Facility
will mature on December 31, 2002 and be amortized with semi-annual
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<PAGE> 84
principal payments (in varying amounts) starting on December 31, 1997 and
continuing thereafter until maturity.
Borrowings under the Credit Facility bear interest at a floating rate based
upon, at the borrower's option, (i) the higher of First Chicago's corporate base
rate or the Federal funds rate plus 1/2% per annum, or (ii) the rate offered by
First Chicago for deposits in the relevant Eurocurrency, plus, in each case, an
applicable margin. As of September 28, 1997, borrowings under the Term Facility
and the Revolving Facility accrued interest at rates ranging from 7.0% to 8.625%
per annum (equal to 1.375% above Eurocurrency rates, but the applicable margin
will vary depending upon the "Debt/Earnings Ratio" (as defined below)).
The Credit Facility is guaranteed by Scotsman and certain of its
subsidiaries and secured by a pledge of stock of certain subsidiaries of
Scotsman.
The Credit Facility contains conditions precedent, representations and
warranties, covenants, events of default and other provisions customary for such
financings. Financial covenants in the Credit Facility require Scotsman to
maintain: (a) net worth on a consolidated basis of not less than the sum of $120
million plus 60% of Scotsman's consolidated net income for all quarters ending
after December 31, 1996 plus 60% of the proceeds of any equity issuances by
Scotsman less certain other adjustment amounts identified therein; (b) a ratio
(the "Debt/Earnings Ratio") of total indebtedness to EBITDA (net income, plus
income tax expense, minus equity in net income of affiliates (net of cash
dividends received), plus interest expense, plus depreciation expense, plus
amortization expense, plus other non-cash charges, minus interest income) of not
more than certain specified amounts measured on a rolling four-quarter basis for
each quarter end (such ratio for the period ending December 28, 1997 not to
exceed 5.0 to 1.00); (c) a ratio of EBITDAR (EBITDA plus rents) minus capital
expenditures to "Fixed Charges" (interest expense, plus scheduled principal
repayments (including mandatory Revolving Facility reductions), plus income tax
expense, plus rents, plus dividends paid) of not less than 1.0 to 1 for all
fiscal quarters ending in 1997 and 1.05 to 1 thereafter; and (d) a ratio of
total senior indebtedness to EBITDA of not more than certain specified amounts
measured on a rolling four quarter basis for each quarter end (such ratio for
the period ending December 28, 1997 not to exceed 4.25 to 1.00). The covenant
described in (a) above could restrict the Company's ability to make future
distributions to its stockholders if such distributions would cause the Company
to violate the net worth maintenance requirement. At September 28, 1997,
consolidated stockholders' equity of the Company was $142.3 million. The Company
is also precluded from paying dividends to its stockholders (other than
dividends payable in its own capital stock) if a default or an unmatured default
under the agreement has occurred and is continuing or would occur after giving
effect to the payment of such dividends.
The Credit Facility requires that a notional amount of $150 million be
hedged to reduce interest rate exposure until March 12, 2000. Subsequent to the
Kysor Acquisition, the Company entered into interest rate swap agreements to
hedge its interest rate exposure on the $150 million until March 27, 2000. One
of the interest rate swap agreements is extendable for an additional two years
at First Chicago's option at the end of three years.
83
<PAGE> 85
UNDERWRITERS
Under the terms and subject to the conditions in an Underwriting Agreement
dated the date hereof (the "Underwriting Agreement"), the Underwriters named
below (the "Underwriters") have severally agreed to purchase, and the Company
has agreed to sell to them, severally, the respective principal amounts of Notes
set forth opposite their respective names below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITER NOTES
----------- ---------
<S> <C>
Morgan Stanley & Co. Incorporated........................... $
First Chicago Capital Markets, Inc. ........................
------------
Total............................................. $100,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the Notes is subject to the
approval of certain legal matters by their counsel and to certain other
conditions. The Underwriters are obligated to take and pay for all the Notes if
any are taken.
The Underwriters initially propose to offer the Notes directly to the
public at the public offering price set forth on the cover page hereof and to
certain dealers at a price that represents a concession not in excess of %
of the principal amount of the Notes. Each Underwriter may allow, and such
dealers may reallow, a concession to certain other dealers not in excess of
% of the principal amount of the Notes. After the initial offering of the
Notes, the offering price and other selling terms may from time to time be
varied by the Underwriters.
The Company intends to apply for listing of the Notes on the Luxembourg
Stock Exchange. There can be no assurance, however, that even if the Notes are
listed, a trading market will develop. The Company has been advised by the
Underwriters that they presently intend to make a market in the Notes, as
permitted by applicable laws and regulations. The Underwriters are not
obligated, however, to make a market in the Notes and any such market making may
be discontinued at any time at the sole discretion of the Underwriters.
Accordingly, no assurance can be given as to the liquidity of, or the existence
of trading markets for, the Notes.
In order to facilitate this Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Notes. Specifically, the Underwriters may overallot in connection with this
Offering, creating a short position in the Notes for their own account. In
addition, to cover overallotments or to stabilize the price of the Notes, the
Underwriters may bid for, and purchase, shares of Notes in the open market.
Finally, the underwriting syndicate may reclaim selling concessions allowed to
an underwriter or a dealer for distributing the Notes in this Offering, if the
syndicate repurchases previously distributed Notes in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the Notes above
independent market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.
The Company and Scotsman Group, on the one hand, and the Underwriters, on
the other hand, have agreed to indemnify each other against certain liabilities,
including certain liabilities under the Securities Act.
In the ordinary course of its business, Morgan Stanley & Co. Incorporated
("Morgan Stanley") has from time to time performed investment banking services
for the Company. In particular, Morgan Stanley served as financial advisor to
the Company in the Kysor Acquisition.
The rules of the National Association of Securities Dealers, Inc. (the
"NASD") provide that no NASD member shall participate in a public offering of an
issuer's securities where more than 10% of the net offering proceeds are
intended to be paid to members participating in the distribution of the offering
or associated or affiliated persons of such members, unless a "qualified
independent underwriter" shall have been engaged on the terms provided in such
rules. First Chicago Capital Markets, Inc. ("FCCM") may be deemed to be
participating in such a transaction since it is anticipated that greater than
10% of the net proceeds from the
84
<PAGE> 86
sale of the Notes will be used to repay outstanding indebtedness of the Company
to First Chicago, an affiliate of FCCM, under the Credit Facility.
In view of such anticipated use of proceeds, this Offering is being
conducted in accordance with the rules of the NASD and Morgan Stanley is acting
as "qualified independent underwriter" within the meaning of such rules. In
connection therewith, Morgan Stanley has participated in the preparation of the
Registration Statement of which this Prospectus forms a part. It has exercised
its usual standards of "due diligence" with respect thereto and has recommended
the maximum price at which the Notes may be offered hereby. Morgan Stanley will
receive no separate fee for its services as qualified independent underwriter,
although the Company has agreed to reimburse its expenses incurred as a result
of such engagement.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Sidley & Austin, Chicago, Illinois and for the Underwriters by Mayer,
Brown & Platt, Chicago, Illinois.
EXPERTS
The consolidated financial statements of the Company at December 29, 1996
and December 31, 1995 and for each of the three years ended December 29, 1996,
December 31, 1995 and January 1, 1995, respectively, included and incorporated
by reference elsewhere in this Prospectus have been audited by Arthur Andersen
LLP, independent public accountants, as set forth in their report thereon
included and incorporated by reference elsewhere herein. The financial
statements referred to above are included and incorporated by reference herein
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated balance sheet of Kysor Industrial Corporation and
Subsidiaries as of December 31, 1996 and 1995 and the consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1996, included in this Prospectus, have been included
herein in reliance on the report of Coopers & Lybrand, L.L.P., independent
public accountants, given on the authority of that firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy and information statements and
other information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission; Midwest Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511 and Northeast Regional Office, Seven World Trade
Center, New York, New York 10048. Copies of such material can be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy information statements and
other information regarding companies which file electronically with the
Commission. In addition, reports, proxy and information statements and other
information concerning the Company may also be inspected at the offices of the
NYSE, 20 Broad Street, New York, New York 10005.
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<PAGE> 87
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents which have been filed with the Commission are
hereby incorporated by reference in this Prospectus:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 29, 1996;
2. The Company's Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 30, 1997, June 29, 1997 and September 28, 1997,
respectively; and
3. The Company's Current Reports on Form 8-K dated March 8, 1997 (as
amended by Form 8-K/A filed with the Commission on May 22, 1997), September
29, 1997, October 22, 1997 and November 25, 1997, respectively.
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering hereunder shall be
deemed to be incorporated by reference herein and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein, or in any other subsequently filed documents which
also is or is deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus. The Company will provide without charge to each person to whom this
Prospectus is delivered upon written or oral request, a copy of any or all of
such documents that have been or may be incorporated by reference into this
Prospectus (other than exhibits to such documents which are not specifically
incorporated by reference into such documents). Requests for such documents
should be directed to Corporate Secretary, Scotsman Industries, Inc., 820 Forest
Edge Drive, Vernon Hills, Illinois 60061, telephone number (847) 215-4500.
LISTING AND GENERAL INFORMATION
Application will be made to list the Notes on the Luxembourg Stock
Exchange. Prior to the listing, a legal notice relating to the issue of the
Notes and the governing documents of each of the Company and the Issuer will be
deposited with the Chief Registrar of the District Court of Luxembourg (Greffier
en Chef du Tribunal d'Arrondissement de et a Luxembourg), where such documents
may be examined or copies obtained.
If and so long as the Notes are listed on the Luxembourg Stock Exchange and
the rules of such Stock Exchange shall so require, copies of the governing
documents of each of the Company and the Issuer and the Indenture will be
available for inspection at the office of the Company's special agent to be
chosen in Luxembourg. So long as the Notes are listed on the Luxembourg Stock
Exchange and the rules of such Stock Exchange shall so require, copies of any
and all required statutory accounts of the Company and the Issuer and any and
all required annual and quarterly reports of the Company will be available
during normal business hours on any weekday at the office of the Company's
special agent to be chosen in Luxembourg.
The creation and issuance of the Notes were authorized on behalf of the
Issuer by resolutions adopted by the Board of Directors of the Issuer on October
21, 1997. The creation and issuance of the Guaranty were authorized on behalf of
the Company by resolutions adopted by the Board of Directors of the Company on
September 30, 1997.
The Company will appoint a special agent in Luxembourg until such time as
the Company is required to appoint a transfer and paying agent located in
Luxembourg. The Company reserves the right to vary such appointment.
The Notes have been accepted for clearance through Cedel and Euroclear with
a Common Code of . The International Securities Identification Number
is for the Global Note. The
86
<PAGE> 88
CUSIP Number for the Global Note is . Application has also been made
for acceptance of the Notes to DTC's book-entry settlement system.
Booth(R), Delfield(R), Kysor(R), Kysor//Warren(R), Scotsman(R),
Shelleyglas(R) and Simag(R), are registered trademarks or trade names of the
Company or its subsidiaries. Boston Market(R) is a registered trademark of
Boston Chicken, Inc. Coca-Cola(R) is a registered trademark of The Coca-Cola
Company. Howe(R) and Rapid Freeze(R) are registered trademarks of Howe
Corporation. Marriott(R) is a registered trademark of Marriott International,
Inc. McDonald's(R) is a registered trademark of McDonald's Corporation. Mobil(R)
is a registered trademark of Mobil Corporation. Pepsi(R) is a trademark of
Pepsico, Inc. WalwMart(R) is a registered trademark of Wal-Mart Stores, Inc.
Winn-Dixie(R) is a registered trademark of Winn-Dixie Stores, Inc.
87
<PAGE> 89
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Income Financial Statements of Scotsman
Industries, Inc.:
Report of Independent Public Accountants.................. F-2
Unaudited Consolidated Statement of Income for the Fiscal
Nine Months Ended September 28, 1997 and September 29,
1996 and Audited Consolidated Statement of Income for
the Fiscal Years Ended December 29, 1996, December 31,
1995 and January 1, 1995............................... F-3
Unaudited Consolidated Balance Sheet as of September 28,
1997 and Audited Consolidated Balance Sheet as of
December 29, 1996 and December 31, 1995................ F-4
Unaudited Consolidated Statement of Cash Flows for the
Fiscal Nine Months Ended September 28, 1997 and
September 29, 1996 and Audited Consolidated Statement
of Cash Flows for the Fiscal Years Ended December 29,
1996, December 31, 1995 and January 1, 1995............ F-5
Unaudited Consolidated Statement of Shareholders' Equity
for the Fiscal Nine Months Ended September 28, 1997 and
Audited Consolidated Statement of Shareholders' Equity
for the Fiscal Years Ended December 29, 1996, December
31, 1995 and January 1, 1995........................... F-6
Notes to Consolidated Financial Statements................ F-7
Financial Statements of Completed Acquisition:
Kysor Industrial Corporation
Report of Independent Accountants...................... F-25
Consolidated Balance Sheet as of December 31, 1996 and
1995.................................................. F-26
Consolidated Statement of Income for the Years Ended
December 31, 1996, 1995 and 1994...................... F-27
Consolidated Statement of Shareholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994.......... F-28
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994................ F-30
Notes to Consolidated Financial Statements............. F-31
</TABLE>
F-1
<PAGE> 90
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Scotsman Industries, Inc.:
We have audited the accompanying consolidated balance sheet of Scotsman
Industries, Inc. (a Delaware Corporation) and subsidiaries as of December 29,
1996, and December 31, 1995, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 29, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Scotsman Industries, Inc.
and subsidiaries as of December 29, 1996, and December 31, 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 29, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Chicago, Illinois
February 4, 1997
F-2
<PAGE> 91
SCOTSMAN INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE FISCAL
NINE MONTHS ENDED FOR THE FISCAL YEARS ENDED
------------------------------ ------------------------------------------------
SEPTEMBER 28, SEPTEMBER 29, DECEMBER 29, DECEMBER 31, JANUARY 1,
1997 1996 1996 1995 1995
------------- ------------- ------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.................... $431,529 $282,720 $356,373 $324,291 $266,632
Cost of sales................ 320,284 202,250 257,942 236,402 190,518
-------- -------- -------- -------- --------
Gross profit................. 111,245 80,470 98,431 87,889 76,114
Selling and administrative
expenses................... 63,449 45,072 58,135 53,435 47,900
-------- -------- -------- -------- --------
Income from operations....... 47,796 35,398 40,296 34,454 28,214
Interest expense, net........ 15,207 4,159 5,279 6,326 5,416
-------- -------- -------- -------- --------
Income before income taxes... 32,589 31,239 35,017 28,128 22,798
Income taxes................. 15,605 14,772 16,449 12,720 10,013
-------- -------- -------- -------- --------
Income before extraordinary
loss....................... 16,984 16,467 18,568 15,408 12,785
Extraordinary loss (net of
income taxes of $422)...... (633) -- -- -- --
-------- -------- -------- -------- --------
Net income................... $ 16,351 $ 16,467 $ 18,568 $ 15,408 $ 12,785
Preferred stock dividends.... -- 813 813 1,240 885
-------- -------- -------- -------- --------
Net income available to
common shareholders........ $ 16,351 $ 15,654 $ 17,755 $ 14,168 $ 11,900
======== ======== ======== ======== ========
Income per share before
extraordinary loss:
Primary.................... $ 1.57 $ 1.68 $ 1.85 $ 1.58 $ 1.49
-------- -------- -------- -------- --------
Fully diluted.............. $ 1.57 $ 1.54 $ 1.73 $ 1.45 $ 1.35
-------- -------- -------- -------- --------
Net income per share:
Primary.................... $ 1.51 $ 1.68 $ 1.85 $ 1.58 $ 1.49
-------- -------- -------- -------- --------
Fully diluted.............. $ 1.51 $ 1.54 $ 1.73 $ 1.45 $ 1.35
-------- -------- -------- -------- --------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-3
<PAGE> 92
SCOTSMAN INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and temporary cash investments................... $ 23,191 $ 16,501 $ 15,808
Trade accounts and notes receivable, net of allowances
of $4,809 in 1997, $2,778 in 1996 and $2,960 in
1995............................................... 118,963 58,734 54,500
Inventories........................................... 75,128 52,530 52,251
Deferred income taxes................................. 14,485 4,708 5,690
Other current assets.................................. 7,288 5,101 3,093
-------- -------- --------
Total current assets............................. 239,055 137,574 131,342
Properties and equipment, net........................... 86,470 46,659 46,373
Goodwill, net........................................... 274,625 94,975 94,732
Deferred Income Taxes................................... 26,590 -- --
Other noncurrent assets................................. 51,048 4,056 3,496
-------- -------- --------
Total assets..................................... $677,788 $283,264 $275,943
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt and current maturities of capitalized
lease obligations and long-term debt............... $ 22,548 $ 16,317 $ 13,037
Trade accounts payable................................ 49,910 22,344 24,174
Accrued income taxes.................................. 14,702 6,302 4,491
Accrued expenses...................................... 61,341 33,290 34,812
-------- -------- --------
Total current liabilities........................ 148,501 78,253 76,514
Long-term debt and capitalized lease obligations........ 333,370 60,289 74,719
Deferred income taxes................................... 7,613 3,710 3,814
Other noncurrent liabilities............................ 45,990 9,300 8,577
-------- -------- --------
Total liabilities................................ 535,474 151,552 163,624
Shareholders' Equity:
Common stock, $.10 par value, authorized 50,000,000
shares; issued 10,752,066 shares, 10,729,513 shares
and 9,153,014 shares, respectively................. 1,075 1,073 915
Preferred stock, $1.00 par value, authorized
10,000,000 shares; issued 0 shares, 0 shares and
1,999,992 shares, respectively..................... -- -- 2,000
Additional paid in capital............................ 73,549 73,053 70,514
Retained earnings..................................... 77,596 62,036 45,232
Deferred compensation and unrecognized pension cost... (147) (117) (88)
Foreign currency translation adjustments.............. (8,155) (2,877) (4,911)
Less: Common stock held in treasury; 187,825 shares,
187,049 shares and 188,040 shares, respectively.... (1,604) (1,456) (1,343)
-------- -------- --------
Total shareholders' equity....................... 142,314 131,712 112,319
-------- -------- --------
Total liabilities and shareholders' equity....... $677,788 $283,264 $275,943
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-4
<PAGE> 93
SCOTSMAN INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL
NINE MONTHS ENDED FOR THE FISCAL YEARS ENDED
----------------------------- ----------------------------------------
SEPTEMBER 28, SEPTEMBER 29, DECEMBER 29, DECEMBER 31, JANUARY 1,
1997 1996 1996 1995 1995
------------- ------------- ------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 16,351 $ 16,467 $ 18,568 $ 15,408 $ 12,785
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 12,048 6,473 8,870 7,594 6,019
Loss (gain) on property dispositions....... -- -- (82) (39) 45
Change in assets and liabilities:
Trade accounts receivable.................. (27,756) (16,278) (3,310) (2,607) (7,779)
Inventories................................ 6,272 1,739 237 2,006 (3,815)
Trade accounts payable and other
liabilities.............................. 6,296 10,243 (1,877) (2,074) 10,290
Other, net................................. (4,433) 685 1,101 3,162 (1,369)
--------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities................................. 8,778 19,329 23,507 23,450 16,176
Cash flows from investing activities:
Investment in properties and equipment....... (9,427) (4,840) (6,195) (6,513) (5,434)
Proceeds from dispositions of properties and
equipment.................................. 113 180 230 215 34
Acquisition of Delfield and Whitlenge........ -- -- -- -- (28,689)
Investment in U.K. joint venture............. -- (2,024) (2,024) -- --
Investment in China joint venture, net....... -- (399) (399) (665) --
Acquisition of Hartek........................ (635) (991) (991) (1,491) --
Acquisition of Kysor Industrial Corp. ....... (268,540) -- -- -- --
--------- -------- -------- -------- --------
Net cash used in investing activities........ (278,489) (8,074) (9,379) (8,454) (34,089)
Cash flows from financing and capital
activities:
Short-term debt, net......................... (1,873) (12,489) (6,524) 3,616 (74)
Issuance of long-term debt................... 353,749 16,075 16,074 17,806 63,000
Principal payments under long-term debt and
capitalized leases......................... (73,278) (13,153) (21,128) (28,071) (42,831)
Dividends paid to shareholders............... (791) (1,551) (2,035) (2,118) (1,339)
--------- -------- -------- -------- --------
Net cash provided by (used in) financing and
capital activities......................... 277,807 (11,118) (13,613) (8,767) 18,756
Effect of exchange rate changes on cash and
temporary cash investments................... (1,406) 90 178 (191) 465
--------- -------- -------- -------- --------
Net increase in cash and temporary cash
investments.................................. 6,690 227 693 6,038 1,308
Cash and temporary cash investments at
beginning of period.......................... 16,501 15,808 15,808 9,77 8,462
--------- -------- -------- -------- --------
Cash and temporary cash investments at end of
period....................................... $ 23,191 $ 16,035 $ 16,501 $ 15,808 $ 9,770
========= ======== ======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest................................... $ 15,193 $ 4,739 $ 6,812 $ 7,431 $ 4,566
========= ======== ======== ======== ========
Income taxes............................... $ 18,034 $ 10,018 $ 14,957 $ 10,992 $ 10,685
========= ======== ======== ======== ========
Supplemental schedule of noncash investing and
financing activities:
Investment in properties and equipment
through issuance of capitalized lease
obligations.............................. $ (440) $ (42) $ (42) $ (96) $ (56)
========= ======== ======== ======== ========
Issuance of stock for acquisition of
Delfield and Whitlenge................... $ -- $(12,089) $(39,000)
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-5
<PAGE> 94
SCOTSMAN INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
FOREIGN
TREASURY COMMON PREFERRED ADDITIONAL CURRENCY
STOCK STOCK STOCK PAID IN RETAINED TRANSLATION
NUMBER PAR VALUE PAR VALUE CAPITAL EARNINGS OTHER(A) ADJUSTMENTS
-------- --------- --------- ---------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 2, 1994............ 202,295 $ 721 $ -- $20,557 $20,855 $ (54) $(6,741)
------- ------ ------- ------- ------- ----- -------
Net income.......................... -- -- -- -- 12,785 -- --
Foreign currency translation
adjustments....................... -- -- -- -- -- -- 1,710
Issuance of deferred compensation... (8,038) -- -- 118 -- (119) --
Amortization of deferred
compensation...................... -- -- -- -- -- 99 --
Dividends declared to common
shareholders...................... -- -- -- -- (796) -- --
Dividends declared to preferred
shareholders...................... -- -- -- -- (885) -- --
Issuance of common and preferred
stock relating to acquisition of
Delfield and Whitlenge............ -- 120 2,000 36,880 -- -- --
Stock options exercised............. -- 5 -- 530 -- -- --
Unrecognized pension cost........... -- -- -- -- -- 21 --
Other............................... 2 -- -- -- -- -- --
------- ------ ------- ------- ------- ----- -------
Balance at January 1, 1995............ 194,259 $ 846 $ 2,000 $58,085 $31,959 $ (53) $(5,031)
======= ====== ======= ======= ======= ===== =======
Net income.......................... -- -- -- -- 15,408 -- --
Foreign currency translation
adjustments....................... -- -- -- -- -- -- 120
Issuance of deferred compensation... (6,219) -- -- 120 -- (120) --
Amortization of deferred
compensation...................... -- -- -- -- -- 129 --
Dividends declared to common
shareholders...................... -- -- -- -- (895) -- --
Dividends declared to preferred
shareholders...................... -- -- -- -- (1,240) -- --
Issuance of common stock relating to
acquisition of Delfield and
Whitlenge......................... -- 67 -- 12,022 -- -- --
Stock options exercised............. -- 2 -- 287 -- -- --
Unrecognized pension cost........... -- -- -- -- -- (44) --
------- ------ ------- ------- ------- ----- -------
Balance at December 31, 1995.......... 188,040 $ 915 $ 2,000 $70,514 $45,232 $ (88) $(4,911)
Net income.......................... -- -- -- -- 18,568 -- --
Foreign currency translation
adjustments....................... -- -- -- -- -- -- 2,034
Issuance of deferred compensation... (5,965) -- -- 119 -- (119) --
Amortization of deferred
compensation...................... -- -- -- -- -- 120 --
Dividends declared to common
shareholders...................... -- -- -- -- (951) -- --
Dividends declared to preferred
shareholders...................... -- -- -- -- (813) -- --
Conversion of preferred stock into
common stock...................... -- 153 (2,000) 1,847 -- -- --
Stock options exercised............. 4,974 5 -- 573 -- -- --
Unrecognized pension cost........... -- -- -- -- -- (30) --
------- ------ ------- ------- ------- ----- -------
Balance at December 29, 1996.......... 187,049 $1,073 $ -- $73,053 $62,036 $(117) $(2,877)
Net income.......................... -- -- -- -- 16,351 -- --
Foreign currency translation
adjustments....................... -- -- -- -- -- -- (5,278)
Issuance of deferred compensation... (4,874) -- -- 120 -- (120) --
Amortization of deferred
compensation...................... -- -- -- -- -- 90 --
Dividends declared to common
shareholders...................... -- -- -- -- (791) -- --
Conversion of preferred stock into
common stock...................... -- -- -- -- -- -- --
Stock options exercised............. 5,650 2 -- 376 -- -- --
Unrecognized pension cost........... -- -- -- -- -- -- --
------- ------ ------- ------- ------- ----- -------
Balance at September 28, 1997
(unaudited)......................... 187,825 $1,075 $ -- $73,549 $77,596 $(147) $(8,155)
======= ====== ======= ======= ======= ===== =======
<CAPTION>
TREASURY
STOCK TOTAL
-------- -----
<S> <C> <C>
Balance at January 2, 1994............ $(1,344) $ 33,994
------- --------
Net income.......................... -- 12,785
Foreign currency translation
adjustments....................... -- 1,710
Issuance of deferred compensation... 1 --
Amortization of deferred
compensation...................... -- 99
Dividends declared to common
shareholders...................... -- (796)
Dividends declared to preferred
shareholders...................... -- (885)
Issuance of common and preferred
stock relating to acquisition of
Delfield and Whitlenge............ -- 39,000
Stock options exercised............. -- 535
Unrecognized pension cost........... -- 21
Other............................... -- --
------- --------
Balance at January 1, 1995............ $(1,343) $ 86,463
======= ========
Net income.......................... -- 15,408
Foreign currency translation
adjustments....................... -- 120
Issuance of deferred compensation... -- --
Amortization of deferred
compensation...................... -- 129
Dividends declared to common
shareholders...................... -- (895)
Dividends declared to preferred
shareholders...................... -- (1,240)
Issuance of common stock relating to
acquisition of Delfield and
Whitlenge......................... -- 12,089
Stock options exercised............. -- 289
Unrecognized pension cost........... -- (44)
------- --------
Balance at December 31, 1995.......... $(1,343) $112,319
Net income.......................... -- 18,568
Foreign currency translation
adjustments....................... -- 2,034
Issuance of deferred compensation... -- --
Amortization of deferred
compensation...................... -- 120
Dividends declared to common
shareholders...................... -- (951)
Dividends declared to preferred
shareholders...................... -- (813)
Conversion of preferred stock into
common stock...................... -- --
Stock options exercised............. (113) 465
Unrecognized pension cost........... -- (30)
------- --------
Balance at December 29, 1996.......... $(1,456) $131,712
Net income.......................... -- 16,351
Foreign currency translation
adjustments....................... -- (5,278)
Issuance of deferred compensation... 1 1
Amortization of deferred
compensation...................... -- 90
Dividends declared to common
shareholders...................... -- (791)
Conversion of preferred stock into
common stock...................... -- --
Stock options exercised............. (149) 229
Unrecognized pension cost........... -- --
------- --------
Balance at September 28, 1997
(unaudited)......................... $(1,604) $142,314
======= ========
</TABLE>
- -------------------------
(a) Other shareholders' equity includes deferred compensation and unrecognized
pension cost.
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-6
<PAGE> 95
SCOTSMAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Scotsman
Industries, Inc. ("Scotsman" or "the Company") and its consolidated
subsidiaries. All significant intercompany transactions have been eliminated in
consolidation.
Certain amounts in the consolidated financial statements for previous years
have been reclassified to conform to the presentation used for fiscal year 1996.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying consolidated financial statements as of September 28, 1997
and for the nine month periods ended September 28, 1997 and September 29, 1996,
are unaudited condensed statements and have been prepared on a basis consistent
with the accounting policies used in preparing the annual financial statements.
In the opinion of management, the interim financial statements reflect all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of such financial information. The results of such interim periods
are not necessarily indicative of the results to be expected for a full year.
See Note 17 for information regarding the acquisition of Kysor Industrial
Corporation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
FISCAL YEAR
The Company reports on a 52-53 week fiscal year ending on the Sunday
nearest to December 31. Fiscal years 1996, 1995 and 1994 had 52 weeks.
CASH MANAGEMENT
The Company considers all highly liquid investments with original
maturities of three months or less to be temporary cash investments.
Temporary cash investments, primarily Eurodollar deposits or repurchase
agreements with maturities of 90 days or less, are carried at cost, which
approximates market. Interest income (in thousands) included in interest
expense, net was $791, $633 and $277 for fiscal years 1996, 1995 and 1994,
respectively.
TRADE ACCOUNTS AND NOTES RECEIVABLE
Trade accounts and notes receivable at December 29, 1996, and December 31,
1995, included notes of $7.5 million and $7.3 million, respectively.
INVENTORIES
Inventories are stated at the lower of cost or market and include the
appropriate elements of material, labor and manufacturing overhead expenses.
Cost is determined using the last-in, first-out ("LIFO") method for a portion of
domestic inventories and the first-in, first-out ("FIFO") method for the balance
of domestic and all foreign inventories.
F-7
<PAGE> 96
SCOTSMAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTIES AND EQUIPMENT
Properties and equipment, including capitalized leases, are recorded at
cost to the Company at date of acquisition and depreciated over either their
estimated useful lives, ranging from 3 to 40 years, or lease terms, whichever is
shorter, using principally the straight-line method for financial reporting
purposes and accelerated methods for tax reporting purposes.
GOODWILL
Cost of investments in excess of net assets of businesses acquired after
October 1970 is being amortized using the straight-line method over 40 years.
The related amortization expense was $2.5 million, $2.4 million and $1.5 million
for the fiscal years 1996, 1995 and 1994, respectively. At December 29, 1996,
and December 31, 1995, accumulated amortization was $8.0 million and $5.4
million, respectively. After an acquisition, the Company continually reviews
whether subsequent events and circumstances have occurred that indicate that the
remaining estimated useful life of goodwill may warrant revision or that the
remaining balance of goodwill may not be recoverable. If events and
circumstances indicate that goodwill related to a particular business should be
reviewed for possible impairment, the Company uses projections to assess whether
future operating income of the business on a non-discounted basis is likely to
exceed the goodwill amortization over the remaining life of the goodwill, to
determine whether a writedown of goodwill to recoverable value (as determined by
the same projections) is appropriate.
FINANCIAL INSTRUMENTS
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. The Company's
participation in derivatives is limited primarily to interest rate swap
agreements and forward exchange contracts. The Company enters into interest rate
swap agreements to reduce the impact of changes in interest rates on its
floating-rate long-term debt. The difference between the fixed and floating
rates, which is to be paid or received, is accrued as interest rates change and
is recognized over the life of the swap agreements. The cash impacts of these
instruments are included with the cash flows of the items to which they relate
in the Consolidated Statement of Cash Flows.
INTEREST EXPENSE
Interest expense included in the Consolidated Statement of Income is
related to private placement debt, debt covered under a credit agreement,
industrial development revenue bonds, capitalized lease obligations, and
borrowings on domestic lines of credit and foreign lines of credit.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs related to both present and future products
are expensed currently. Research and development expenditures for fiscal years
1996, 1995 and 1994 were $5.6 million, $4.8 million and $5.1 million,
respectively.
FOREIGN CURRENCY TRANSLATION
The Company has foreign subsidiaries located in Italy, Germany, Austria,
China and the United Kingdom. Foreign subsidiary income and expenses are
translated into United States dollars at the average rates of exchange
prevailing during the year. The assets and liabilities are translated into U.S.
dollars at the rates of exchange on the balance sheet date, and the related
translation adjustments are accumulated as a separate component of shareholders'
equity. As the Company intends to maintain its investments in these subsidiaries
indefinitely, ultimate realization of these translation adjustments is highly
uncertain. Foreign currency transaction gains and losses are minimal and are
recorded in income as they occur.
F-8
<PAGE> 97
SCOTSMAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TAXES
Federal and state income taxes are not provided on undistributed earnings
of foreign subsidiaries that have been or are intended to be reinvested
indefinitely.
STOCK OPTIONS
In 1995 the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS
123"). Currently, when stock options are exercised proceeds from the sale of
common stock issued under those options are credited to common stock and
additional paid in capital. Therefore, under the method used by the Company, no
charges or credits are made to income for stock options. As permitted by SFAS
123, the Company will continue to account for stock options as described above.
The financial statement effect of this new standard is limited to additional
required footnote disclosure in 1996 which is provided in Note 12.
EARNINGS PER SHARE
Primary earnings per share are computed based on income after preferred
stock dividends. The number of shares includes common stock and common stock
equivalents.
The calculation of fully-diluted net income per share is based on net
income before preferred stock dividends. The number of shares includes common
stock and common stock equivalents, assumes conversion of the convertible
preferred stock from the date of issue and also includes the dilutive impact, as
if issuance had occurred on the acquisition date of Delfield and Whitlenge, of
contingent shares that were issued subsequent to January 1, 1995.
2. INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Finished goods........................................ $23,207 $21,604
Work-in-process....................................... 9,052 8,023
Raw materials......................................... 20,271 22,624
------- -------
Total inventories................................ $52,530 $52,251
======= =======
</TABLE>
Approximately $7.0 million and $7.5 million of total Company inventories
were valued on the LIFO method in fiscal 1996 and 1995, respectively. In 1996
there were reductions in levels of inventory valued on LIFO which reduced cost
of sales by $0.1 million. If inventories valued on the LIFO method had been
valued using the FIFO method, they would have been $3.9 million and $4.1 million
higher at December 29, 1996, and December 31, 1995, respectively.
F-9
<PAGE> 98
SCOTSMAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTIES AND EQUIPMENT
Properties and equipment consisted of assets owned and leased under capital
lease arrangements as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Owned:
Land...................................................... $ 1,966 $ 1,995
Buildings and leasehold improvements...................... 28,521 28,046
Machinery, fixtures and equipment......................... 54,564 49,294
Accumulated depreciation and amortization................. (43,000) (37,949)
-------- --------
Owned, net................................................ 42,051 41,386
-------- --------
Leased:
Buildings and leasehold improvements...................... 5,141 5,029
Machinery, fixtures and equipment......................... 1,121 1,540
Accumulated depreciation and amortization................. (1,654) (1,582)
-------- --------
Leased, net............................................... 4,608 4,987
-------- --------
Properties and equipment, net............................. $ 46,659 $ 46,373
======== ========
</TABLE>
4. SHORT-TERM DEBT
Short-term debt (in thousands) at December 29, 1996, and December 31, 1995,
was $6,115 and $12,767, respectively, and principally related to amounts owed
under lines of credit. The weighted average interest rate based on short-term
debt outstanding as of December 29, 1996, and December 31, 1995, was 6.1 percent
and 7.3 percent, respectively. Average borrowings (in thousands) and the related
weighted average interest rates were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Bank and other borrowings................................... $4,888 $2,463
Weighted average interest rate.............................. 6.4% 7.9%
====== ======
</TABLE>
The maximum aggregate short-term debt outstanding (in thousands) at the end
of any month during fiscal years 1996 and 1995 was $11,109 and $12,767,
respectively.
5. LINES OF CREDIT
The Company maintains various credit agreements which are used primarily to
fund the Company's working capital needs. At December 29, 1996, these agreements
(in thousands) included foreign and domestic lines of credit of $18,472 and
$11,000, respectively. Lines of credit are reviewed annually, with amounts
borrowed under lines of credit included in short-term debt.
At December 29, 1996, foreign and domestic lines of credit not in use were
(in thousands) $18,216 and $5,141, respectively. Borrowings under these
agreements are available at the prime rate or other prevailing market rates.
There are no fees or compensating balance requirements on the lines of credit.
F-10
<PAGE> 99
SCOTSMAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Payroll and employee benefits............................... $ 7,818 $ 6,394
Current portion of product warranties....................... 6,673 5,994
Reserve for customer allowances............................. 4,264 3,446
Other current liabilities................................... 14,535 18,978
------- -------
Total accrued expenses...................................... $33,290 $34,812
======= =======
</TABLE>
7. LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS
Long-term debt and capitalized lease obligations consisted of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Credit Agreement with floating interest rates; due 2000..... $35,473 $41,765
11.43% private placement agreement; due 1997-1998........... 20,000 20,000
Allendale County Industrial Revenue Bonds with floating
interest rate; due 2001................................... 9,250 9,250
Town of Covington Industrial Revenue Bonds with floating
interest rate; due 2002-2006.............................. 3,150 3,150
Isabella County Industrial Revenue Bonds with floating
interest rate; due 1996-2003.............................. 450 500
Foreign borrowings with various interest rates; due
1997-2011................................................. 2,047 --
Capital lease obligations with various interest rates; due
1996-1998................................................. 121 324
------- -------
Total.................................................. $70,491 $74,989
Current portion........................................ 10,202 270
------- -------
Long-term portion...................................... $60,289 $74,719
======= =======
</TABLE>
In April 1994 a $90 million reducing revolving credit agreement ("Credit
Agreement") was established to provide the financing for the cash consideration
paid in connection with the acquisitions of Delfield and Whitlenge, the
refinancing of the majority of approximately $35 million in existing
indebtedness of Delfield and Whitlenge, replacement of letters of credit of
approximately $10.1 million, working capital for the Company and its
subsidiaries following the acquisitions, and transaction costs associated with
the acquisitions. Under the terms of the Credit Agreement, the revolving credit
facility reduces 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 years four and five, with the
remaining balance due at the end of year six. As of December 29, 1996, of the
$76.0 million of credit available under this agreement, $30.4 million was
unused.
Borrowings under the Credit Agreement will bear interest at a floating rate
based upon, at the Company's option, (a) the higher of the agent bank's
corporate base rate or the federal funds rate plus 0.5 percent per annum, or (b)
the rate offered by the agent bank for deposits in the relevant Eurocurrency,
plus an applicable margin. The applicable margin varies between 0.50 percent and
1.0 percent per annum, depending upon the Company's ratio of earnings before
interest, taxes and amortization to total interest. As of December 29, 1996,
interest rates under the Credit Agreement ranged from approximately 6.1 percent
for Eurodollar loans to approximately 6.9 percent for borrowings denominated in
pounds sterling. Commitment fees on the Credit Agreement vary from 0.175 percent
to 0.25 percent per annum on the unused portion.
F-11
<PAGE> 100
SCOTSMAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1989 the Company issued $20.0 million of private placement debt held
primarily by insurance companies.
The Allendale County Industrial Revenue Bonds are secured by a bank letter
of credit for $9.6 million. The current cost of the commitment fee on the letter
of credit ranges from 0.50 percent to 1.0 percent on outstanding principal and
interest depending on the Company's interest coverage ratio as defined in the
Credit Agreement as described above. The interest rate applicable to the
Allendale County Industrial Revenue Bonds was 4.21 percent and 5.23 percent at
December 29, 1996, and December 31, 1995, respectively.
Delfield had two industrial revenue bonds outstanding which the Company
assumed as of the acquisition in April 1994. One series was issued by the town
of Covington, Tennessee and the other was issued by Isabella County, Michigan.
The Town of Covington Industrial Revenue Bonds are secured by a building with a
net book value of $4.4 million as of December 29, 1996. The Isabella County
Industrial Revenue Bonds are secured by a building section with a net book value
of $0.8 million as of December 29, 1996. The interest rates for these two
industrial revenue bonds as of December 29, 1996, were 5.16 percent and 5.94
percent, respectively. The interest rates for these two industrial revenue bonds
as of December 31, 1995, were 5.31 percent and 6.12 percent, respectively.
The Company also has various capital lease obligations which are
collateralized by properties and equipment with a net book value of
approximately $0.2 million.
The weighted average effective interest rate was 7.5 percent and 7.7
percent at December 29, 1996, and December 31, 1995, respectively. Future
required maturities of long-term debt and capital leases assuming letters of
credit are outstanding at the same level as December 29, 1996, were as follows
(in thousands):
<TABLE>
<S> <C>
1997........................................................ $10,202
1998........................................................ 10,710
1999........................................................ 415
2000........................................................ 35,888
2001........................................................ 9,320
Thereafter.................................................. 3,956
-------
Total....................................................... $70,491
=======
</TABLE>
The Credit Agreement and private placement agreement contain 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 Company was in compliance with these covenants as of December 29, 1996.
Among other restrictions, one of the Company's covenants has the effect of
restricting the amount of the Company's dividends to its shareholders to an
amount equal to $2.0 million 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 a covenant, $45.4 million of
retained earnings was restricted as of December 29, 1996. The Company is
precluded from paying dividends to its shareholders if a default or an event
which, but for the lapse of time or giving of notice, or both, would constitute
a default under the Credit Agreement has occurred and is continuing or would
occur after giving effect to the payment of such dividends.
8. OPERATING LEASES
The Company leases certain of its offices, buildings, and machinery and
equipment for periods up to 10 years with various renewal options. Rental
expense under operating leases was $2.5 million in 1996, $2.4 million in 1995
and $2.0 million in 1994.
F-12
<PAGE> 101
SCOTSMAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease commitments under noncancelable operating leases with
initial lease terms greater than one year at December 29, 1996, were as follows
(in thousands):
<TABLE>
<S> <C>
1997........................................................ $1,584
1998........................................................ 1,390
1999........................................................ 979
2000........................................................ 1,019
2001........................................................ 1,000
Thereafter.................................................. 1,955
------
Total minimum lease commitments............................. $7,927
======
</TABLE>
9. EMPLOYEE BENEFIT PLANS
The Company sponsors defined benefit pension plans for certain salaried and
hourly employees. Plans covering salaried employees provide benefits that are
based on years of service and compensation. Plans covering hourly employees
provide benefits of stated amounts for each year of service. The pension assets
are invested in institutional mutual funds which contain both equities and fixed
investments. The Company complies with funding requirements under the Employee
Retirement Income Security Act.
As a result of the spin-off of the Company from Household International,
Inc. ("Household") in 1989, Household became responsible for all domestic
salaried pension benefits accrued prior to March 31, 1989.
The Company adopted a supplemental executive retirement plan ("SERP") for
certain employees in 1994.
Net periodic pension cost included in the Consolidated Statement of Income
was as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
------------------------------------------
DECEMBER 29, DECEMBER 31, JANUARY 1,
1996 1995 1995
------------ ------------ ----------
<S> <C> <C> <C>
Service cost............................................... $ 1,141 $ 919 $ 815
Interest cost.............................................. 790 667 475
Actual return on plan assets............................... (1,050) (797) (213)
Net amortization and deferral.............................. 519 365 (60)
------- ------ ------
Net periodic pension cost.................................. $ 1,400 $1,154 $1,017
======= ====== ======
</TABLE>
F-13
<PAGE> 102
SCOTSMAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The funded status of the Company's pension plans (in thousands), excluding
the Italian and German pension plans, was as follows:
<TABLE>
<CAPTION>
DECEMBER 29, 1996 DECEMBER 31, 1995
------------------------------ ------------------------------
PLAN ASSETS PLAN ASSETS
EXCEED ACCUMULATED EXCEED ACCUMULATED
ACCUMULATED BENEFITS EXCEED ACCUMULATED BENEFITS EXCEED
BENEFITS PLAN ASSETS BENEFITS PLAN ASSETS
----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefits obligation........................... $(4,425) $(4,435) $(1,688) $(5,193)
Non-vested benefits obligation....................... (419) (586) -- (1,542)
------- ------- ------- -------
Accumulated benefit obligation....................... (4,844) (5,021) (1,688) (6,735)
Effects of anticipated future compensation levels.... (1,838) (612) (292) (1,607)
------- ------- ------- -------
Projected benefit obligation......................... (6,682) (5,633) (1,980) (8,342)
Plan assets at fair value............................ 5,115 3,771 1,772 5,393
------- ------- ------- -------
Projected benefit obligation in excess of plan
assets............................................. (1,567) (1,862) (208) (2,949)
Unrecognized net asset............................... -- (9) -- (12)
Unrecognized prior service cost...................... 464 835 -- 1,289
Unrecognized net (gain) or loss...................... (396) 74 (79) 1
Adjustment required to recognize minimum liability... -- (344) -- (482)
------- ------- ------- -------
Accrued pension cost................................. $(1,499) $(1,306) $ (287) $(2,153)
======= ======= ======= =======
</TABLE>
Assumptions used in the actuarial computations were:
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 31, JANUARY 1,
1996 1995 1995
------------ ------------ ----------
<S> <C> <C> <C>
Discount rate........................................... 7.5 - 9.0% 7.5 - 9.0% 8.0 - 9.0%
Rate of increase in compensation levels................. 4.0 - 7.0% 4.0 - 7.0% 4.0 - 7.0%
Expected long-term rate of return on assets............. 8.5 - 10.0% 8.5 - 10.0% 9.0 - 10.0%
</TABLE>
The Company has pension plans covering employees in its Italian
subsidiaries. These plans combine aspects of both government mandated and
non-contributory plans. Total pension expense under these plans included in the
Consolidated Statement of Income (in thousands) was $895, $888, and $785 in
fiscal years 1996, 1995 and 1994, respectively. The unfunded liability for these
plans included in the Consolidated Balance Sheet at December 29, 1996, and
December 31, 1995, (in thousands) was $4,578 and $4,286, respectively. The
Company also has a Hartek pension plan in Germany which covers only a former
employee and his spouse. Information for the Hartek pension plan has not been
included in the tables presented as the amounts were immaterial as of December
29, 1996.
The Company also sponsors defined contribution benefit plans. Participation
in one of these plans is available to substantially all domestic employees.
Company contributions to these plans are based on either a percentage of
employee contributions or a specified amount depending on the provisions of the
plan. Total costs incurred under the plans were (in thousands) $742, $568, and
$643 for fiscal years 1996, 1995 and 1994, respectively.
The Company maintains plans that provide certain health care benefits to
certain employees retiring from the Company on or after attaining age 55 who
have rendered at least 10 years of service to the Company. These plans are
unfunded. The Company reserves the right to change or terminate the benefits at
any time.
F-14
<PAGE> 103
SCOTSMAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic post-retirement benefit cost for the fiscal years ended
December 29, 1996, December 31, 1995, and January 1, 1995, included the
following components (in thousands):
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 31, JANUARY 1,
1996 1995 1995
------------ ------------ ----------
<S> <C> <C> <C>
Service cost on benefits earned............................ $146 $132 $161
Interest cost on accumulated post-retirement benefit
obligation............................................... 148 139 142
Amortization of net loss subsequent to transition.......... -- -- 4
---- ---- ----
Net periodic post-retirement benefit cost.................. $294 $271 $307
==== ==== ====
</TABLE>
The following table sets forth the status of the plan, reconciled to the
accrued post-retirement benefit cost recognized in the Company's balance sheet
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees.................................................. $ 755 $ 820
Fully-eligible active plan participants................... 171 141
Other active plan participants............................ 1,110 1,161
------ ------
Total....................................................... $2,036 $2,122
Unrecognized net (loss) gain................................ 64 (126)
------ ------
Accrued post-retirement benefit cost recognized in the
balance sheet............................................. $2,100 $1,996
====== ======
</TABLE>
Assumptions used in the actuarial computations were:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Discount rate............................................... 7.5% 7.5%
Projected health care cost trend rates:
Pre-65 benefits........................................... 8.5% 12.6%
Post-65 benefits.......................................... 8.5% 11.3%
Ultimate health care cost trend rates:
Pre-65 benefits........................................... 5.0% 5.5%
Post-65 benefits.......................................... 5.0% 5.5%
</TABLE>
Increasing the assumed health care cost trend rate by one percentage point
in each year would increase the accumulated post-retirement benefit obligation
by approximately (in thousands) $360 for 1996 and $378 for 1995, and the
aggregate of the service and interest cost components of net periodic
post-retirement benefit cost by approximately (in thousands) $64 for 1996, $57
for 1995 and $63 for 1994.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
During 1994 the Company adopted Statement of Financial Accounting Standards
No. 107, "Disclosures About Fair Value of Financial Instruments," ("SFAS 107")
and Statement of Financial Accounting Standards No. 119, "Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments"("SFAS
119"). These statements require certain disclosures about the fair value of
financial instruments, including derivative financial instruments, for which it
is practicable to estimate fair value.
F-15
<PAGE> 104
SCOTSMAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following methods and assumptions were used to estimate the fair market
value of each class of financial instrument for which it is practicable to
estimate that value:
Cash and Temporary Cash Investments
Temporary cash investments consist principally of investments in
short-term, interest-bearing instruments. The carrying amount approximates
fair market value.
Trade Accounts and Notes Receivable and Payable
The carrying amount of the Company's trade accounts and notes
receivable and payable approximates market value.
Long-Term Debt
The carrying amount of most of the Company's long-term debt and the
Company's short-term debt approximates market value since rates on those
debt agreements are variable and are set periodically based on current
rates during the year. An exception would be the private placement
agreement which has a fixed interest rate of 11.43 percent. The fair value
of the private placement agreement was estimated based on the current rates
quoted to the Company for debt with the same maturities.
Letters of Credit
As collateral for the Company's industrial revenue bonds and for
certain of its insurance programs, the Company had a total of $10.1 million
of letters of credit outstanding as of December 29, 1996. The Company pays
letter of credit fees to its bank group that range from 0.50 to 1.0 percent
based upon the Company's interest coverage ratio as defined in the Credit
Agreement. It is the Company's opinion that the replacement costs for such
letters of credit would not significantly vary from the present fee
structure. No material loss is anticipated due to nonperformance by
counterparties to these agreements.
Swap Agreements and Forward Contracts
Effective May 1994 the Company entered into two interest rate swap
agreements to reduce the impact of changes in interest rates on its
domestic floating-rate long-term debt. Both of the interest rate swap
agreements had a notional principal amount of $10 million and interest
payable was at a fixed rate of 5.64 percent and 6.33 percent, respectively.
In return for both of these agreements, the Company will receive floating
rate interest payments based on three-month London Interbank Offered Rate.
These agreements will expire in May 1997. These two swap agreements are
accounted for as hedges. The Company had a forward exchange contract
outstanding as of December 29, 1996, to hedge exposure relating to an
intercompany transaction. The Company had no forward exchange contracts
outstanding as of December 31, 1995.
The fair value of interest rate swaps and forward exchange contracts
is the estimated amount that the Company would receive or pay to terminate
the agreements as of the balance sheet date.
F-16
<PAGE> 105
SCOTSMAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated fair value of the Company's financial instruments at December
29, 1996, (in thousands) was as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- -----
<S> <C> <C>
Assets:
Cash and temporary cash investments....................... $16,501 $16,501
Trade accounts and notes receivable....................... 58,734 58,734
Forward exchange contract................................. -- 229
Liabilities:
Short-term debt........................................... 6,115 6,115
Trade accounts payable.................................... 22,344 22,344
Long-term debt............................................ 70,370 71,535
Interest rate swap agreements............................. -- 44
</TABLE>
The estimated fair value of the Company's financial instruments at December
31, 1995, (in thousands) was as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- -----
<S> <C> <C>
Assets:
Cash and temporary cash investments....................... $15,808 $15,808
Trade accounts and notes receivable....................... 54,500 54,500
Liabilities:
Short-term debt........................................... 12,767 12,767
Trade accounts payable.................................... 24,174 24,174
Long-term debt............................................ 74,665 76,675
Interest rate swap agreements............................. -- 176
</TABLE>
F-17
<PAGE> 106
SCOTSMAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
The components of the consolidated net deferred tax assets and liabilities
as of December 29, 1996, and December 31, 1995, were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Gross deferred tax assets:
Tax credits due to Italian reorganization................. $ 530 $ 556
Warranty accruals......................................... 3,110 2,907
Reserve for Delfield and Whitlenge........................ 291 1,055
Hartek reserve............................................ 461 1,091
Receivable allowances..................................... 812 797
Inventory reserves........................................ 720 754
Reserve for post-retirement medical costs................. 823 791
Tax benefit of German net operating loss carry forwards... 3,562 4,851
Other..................................................... 3,502 2,989
------- -------
Total gross deferred tax assets........................... 13,811 15,791
Valuation allowance....................................... (3,681) (4,991)
------- -------
Total deferred tax assets................................. $10,130 $10,800
======= =======
Gross deferred tax liabilities:
Properties and equipment.................................. $(6,102) $(5,702)
Inventory related items................................... (180) (909)
Simag goodwill amortization............................... (1,611) (1,186)
Other..................................................... (1,239) (1,157)
------- -------
Total gross deferred tax liabilities...................... $(9,132) $(8,954)
======= =======
</TABLE>
Deferred taxes reflected in the accompanying balance sheets as of December
29, 1996, and December 31, 1995, were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Current portion of deferred tax asset....................... $ 4,708 $ 5,690
Noncurrent portion of deferred tax asset (included in other
noncurrent assets)........................................ -- 22
Current portion of deferred tax liability (included in
accrued expenses)......................................... -- (52)
Noncurrent portion of deferred tax liability................ (3,710) (3,814)
</TABLE>
The valuation allowance as of December 29, 1996, includes $3.6 million to
entirely offset the tax asset established for Hartek pre-acquisition net
operating loss carry forwards which might not be realized due to the terms of
the purchase agreement of Hartek (see Note 14) which requires substantial
repayment to the seller if utilized and due to a pending decision of the Supreme
Tax Court in Germany which may result in such carry forwards being not
utilizable by the Company. The German net operating loss carry forwards, if
realized, will result in a reduction of goodwill and the benefit of utilizing
the net operating loss carry forwards will not flow through the income
statement.
The valuation allowance also includes $0.1 million to partially offset the
tax asset in Italy relating to a prior-year reorganization of one of the
Company's Italian subsidiaries. The Company established this reserve for the
Italian tax asset due to the limited carry forward life of net operating losses
in Italy.
F-18
<PAGE> 107
SCOTSMAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
------------------------------------------------
DECEMBER 29, DECEMBER 31, JANUARY 1,
1996 1995 1995
------------ ------------ ----------
<S> <C> <C> <C>
United States:
Current............................................. $ 7,518 $ 7,431 $ 7,300
Deferred............................................ 837 855 (746)
------- ------- -------
8,355 8,286 6,554
------- ------- -------
Foreign:
Current............................................. 7,407 3,605 2,412
Deferred............................................ 687 829 1,047
------- ------- -------
8,094 4,434 3,459
------- ------- -------
Provision for income taxes............................ $16,449 $12,720 $10,013
======= ======= =======
</TABLE>
The provision (benefit) for deferred income taxes included the following
(in thousands):
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
------------------------------------------------
DECEMBER 29, DECEMBER 31, JANUARY 1,
1996 1995 1995
------------ ------------ ----------
<S> <C> <C> <C>
Amortization of Italian reorganization benefits....... $ 58 $ 122 $ 535
Depreciation.......................................... 458 307 203
Reserve for Glenco-Star disposition................... -- 249 56
Reserve for swap loss................................. -- -- 38
Warranty reserve...................................... (311) (33) (304)
Inventory adjustments................................. (732) 913 (95)
Reserve for relocation of Crystal Tips................ -- -- 167
Valuation allowance changes........................... (27) (51) (117)
Reserve for Delfield and Whitlenge.................... 727 -- --
Utilization of German net operating loss carry
forwards............................................ 952 -- --
Other, net............................................ 399 177 (182)
------ ------ -----
Total................................................. $1,524 $1,684 $ 301
====== ====== =====
</TABLE>
Income before income taxes from foreign operations was $15.7 million in
1996, $8.9 million in 1995, and $6.9 million in 1994. The differences between
the Company's effective tax rate and the statutory federal income tax rate were
as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
------------------------------------------------
DECEMBER 29, DECEMBER 31, JANUARY 1,
1996 1995 1995
------------ ------------ ----------
<S> <C> <C> <C>
Statutory federal income tax rate..................... 35.0% 35.0% 35.0%
Increase in rate resulting from:
State and local income taxes, net of federal tax
benefit.......................................... 1.7 2.9 2.7
Foreign tax effect.................................. 7.6 4.9 4.9
Other............................................... 2.7 2.4 1.3
---- ---- ----
47.0% 45.2% 43.9%
==== ==== ====
</TABLE>
In accordance with the Company's accounting policy, provision for U.S.
income taxes has not been made on $38.6 million of undistributed earnings of
foreign subsidiaries at December 29, 1996.
F-19
<PAGE> 108
SCOTSMAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. STOCK-BASED COMPENSATION PLANS
The Company has a long-term executive incentive program which provides for
granting key employees options to purchase the Company's common stock. Under the
program, options are exercisable at a rate set by the Compensation Committee of
the Board of Directors of the Company. To date, options have been exercisable in
cumulative annual increments of 25 percent commencing one year after the date of
grant. The option price per share is not less than the fair market value of one
share on the date of the grant. An option may not be exercisable after more than
10 years and one day from the date of the grant.
In August 1994 the Board of Directors adopted, subject to shareholder
approval, the Non-Employee Directors Stock Option Plan. The plan was approved by
the shareholders at the 1995 Annual Meeting of Shareholders. The plan provides
for (a) an automatic award of options to purchase shares of the Company's common
stock to non-employee directors as of the effective date of the plan, (b)
automatic awards to non-employee directors who are elected or appointed to the
Board of Directors after the effective date and (c) automatic annual awards
thereafter. The options will vest 100 percent on the date preceding the first
annual meeting of shareholders following the date of the grant of the options.
The option price per share may not be less than the fair market value of one
share on the date of the grant. An option may not be exercisable after more than
10 years and one day from the date of the grant.
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with FASB Statement No. 123 ("SFAS 123"), the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net income:
As reported............................................... $18,568 $15,408
Pro forma................................................. 18,306 15,281
Primary net income per share:
As reported............................................... $ 1.85 $ 1.58
Pro forma................................................. $ 1.82 $ 1.56
Fully diluted net income per share:
As reported............................................... $ 1.73 $ 1.45
Pro forma................................................. $ 1.71 $ 1.43
</TABLE>
A summary of the status of the Company's two stock option plans at December
29, 1996, December 31, 1995, and January 1, 1995, and changes during the years
then ended is presented in the following table:
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year............ 525 $12 473 $10 472 $ 9
Granted..................................... 92 18 79 18 71 16
Exercised................................... (51) 10 (24) 9 (52) 9
Forfeited................................... (6) 17 (3) 16 (18) 11
--- --- ---
Outstanding at end of year.................. 560 13 525 12 473 10
--- --- ---
Exercisable at end of year.................. 377 10 357 10 294 9
Weighted average fair value of options
granted during the year................... $9.74 $10.73 --
</TABLE>
F-20
<PAGE> 109
SCOTSMAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 29, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------------
WEIGHTED AVERAGE OPTIONS EXERCISABLE
REMAINING --------------------------------------
NUMBER OUTSTANDING CONTRACTUAL WEIGHTED AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES AT 12/29/96 LIFE(YEARS) EXERCISE PRICE AT 12/29/96 EXERCISE PRICE
- ------------------------ ------------------ ---------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
$7 to $9................. 224,187 3.2 $ 8 224,187 $ 8
$11 to $15............... 121,300 3.8 $12 104,645 $12
$16 to $20............... 214,675 8.2 $18 48,525 $18
-------- --------
$7 to $20................ 560,162 4.3 $13 377,357 $10
======== ========
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996 and 1995, respectively: risk-free interest
rates of 5.93 percent and 7.56 percent for the executive options and 6.86
percent and 6.77 percent for the Non-Employee Directors Plan options; expected
dividend yields of 0.60 percent for the executive plan options for both years
and 0.50 percent for the Non-Employee Directors plan options for both years;
expected lives of 10.01 for both plans in both years; and expected volatility of
36.60 percent for both plans in both years.
The Company issued from treasury 5,965, 6,219, and 8,038 shares of common
stock in fiscal years 1996, 1995 and 1994, respectively, as annual Board of
Directors fees. Costs relating to these fees (in thousands) of $120, $129, and
$99 were recorded in fiscal years 1996, 1995 and 1994, respectively.
13. ACQUISITION OF DELFIELD AND WHITLENGE
On April 29, 1994, the Company completed the acquisition of The Delfield
Company, a maker of food preparation and storage equipment, and Whitlenge Drink
Equipment Limited, a U.K.-based beverage systems manufacturer, for an aggregate
price of 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 on April 28, 1994.
The method of accounting used for the combination was the purchase method.
The initial amount of goodwill allocated to Delfield and Whitlenge was $73.7
million and is being amortized over 40 years using the straight-line method. The
acquisition price included: (a) $30.4 million in cash, (b) 1.2 million shares of
common stock (with a market value of approximately $16.5 million on the
acquisition date) and (c) 2.0 million shares of Series A $0.62 cumulative
convertible preferred stock with an aggregate liquidation preference of $22.5
million which were convertible into 1,525,393 shares of common stock. (If such
conversion had taken place on January 1, 1996, primary earnings per share would
have been $1.73.) All the cumulative convertible preferred stock was converted
to common stock during 1996. Also, the acquisition price of $69.3 million was
increased by $12.1 million to include 667,000 shares of additional common stock
based upon the businesses of Delfield and Whitlenge meeting a specified level of
earnings before interest, income taxes, depreciation and amortization in fiscal
year 1994. These additional shares were issued subsequent to January 1, 1995. In
addition, Scotsman also assumed Delfield and Whitlenge debt of approximately $35
million which was substantially repaid on the acquisition date. (See Note 7.)
The results of Delfield and Whitlenge are included in the income statements for
the Company beginning after April 29, 1994.
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 the Company as if the acquisitions of Delfield and
Whitlenge had occurred as of the first day of the period presented.
F-21
<PAGE> 110
SCOTSMAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 unaudited 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>
<CAPTION>
PRO FORMA
(UNAUDITED)
----------------------
TWELVE MONTHS ENDED
JANUARY 1, 1995
-------------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C>
Net sales............................................. $304,144
Net income............................................ 13,547
Net income per share, fully diluted................... $ 1.28
</TABLE>
14. ACQUISITION OF HARTEK
The Company's Scotsman Group Inc. subsidiary acquired on December 31, 1995,
the stock of Hartek Beverage Handling GmbH and the stock of Hartek Awagem
Vertriebsges. m.b.H., a beverage dispensing manufacturer and a small distributor
of Hartek and other products located in Radevormwald, Germany and Vienna,
Austria, respectively (collectively, "Hartek"). Hartek had 1995 annual sales of
approximately $24 million. The method of accounting used for the combination was
the purchase method. The results of the Hartek businesses have been included in
the income statements for the Company beginning on the date of acquisition,
December 31, 1995. Hartek was acquired for an initial cost of $5.8 million,
including acquisition costs. No shares of stock were or will be issued as a
result of these acquisitions. The cash outlay was partially offset by cash on
the books of Hartek at closing of $3.3 million. Goodwill of $1.9 million has
been recorded as of December 29, 1996. The amount of goodwill from this
acquisition will be amortized for book purposes over 40 years using the
straight-line method.
Under the terms of the agreement governing the purchase of the Hartek
businesses, the Company is required to pay to the seller 75 percent of the
actual amount of any tax saving realized by Hartek in respect of each of its
financial years 1996 through 1998 through the use of the amount of any tax loss
carry forward available to Hartek as of December 31, 1995, in reduction of
taxable profits for those financial years 1996 through 1998. This additional
consideration is not to exceed an amount of 2.2 million deutsche marks or, as of
December 29, 1996, approximately $1.4 million. In addition, at the date of
acquisition, Scotsman also assumed Hartek debt of approximately $6.4 million.
Pro forma unaudited 1995 net sales of the Company, as if Hartek were
acquired on the first day of the fiscal year 1995 would have been $349 million.
Pro forma information relating to net income and earnings per share has not been
presented as the pro forma impact of those numbers on the Company's results was
not material. 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.
F-22
<PAGE> 111
SCOTSMAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. GEOGRAPHIC INFORMATION
The Company's geographic data, based on the locations of operations, are as
follows (in thousands):
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
------------------------------------------------
DECEMBER 29, DECEMBER 31, JANUARY 1,
1996 1995 1995
------------ ------------ ----------
<S> <C> <C> <C>
Sales to unaffiliated customers:
United States....................................... $235,302 $239,110 $201,746
Europe.............................................. 121,071 85,181 64,886
-------- -------- --------
Total.......................................... $356,373 $324,291 $266,632
======== ======== ========
Operating profit:
United States....................................... $ 24,248 $ 25,309 $ 20,773
Europe.............................................. 16,048 9,145 7,441
-------- -------- --------
Total.......................................... $ 40,296 $ 34,454 $ 28,214
======== ======== ========
Identifiable assets:
United States....................................... $181,259 $181,994 $172,608
Europe.............................................. 102,005 93,949 72,183
-------- -------- --------
Total.......................................... $283,264 $275,943 $244,791
======== ======== ========
</TABLE>
Export sales from the United States were less than 10 percent of
consolidated net sales for all years presented.
16. SUMMARY FINANCIAL INFORMATION
The following is summarized financial information of Scotsman Group Inc.,
the Company's direct wholly owned subsidiary, which proposes to issue $100
million aggregate principal amount of Senior Subordinated Notes due 2007:
Summarized Financial Information
(Amounts in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------- ------------ ------------
(UNAUDITED)
-------------
<S> <C> <C> <C>
Current assets..................................... $239,055 $137,574 $131,342
Noncurrent assets.................................. 438,733 145,690 144,601
-------- -------- --------
Total assets.................................. $677,788 $283,264 $275,943
======== ======== ========
Current liabilities................................ $150,230 $ 79,664 $ 77,340
Noncurrent liabilities............................. 386,973 73,298 87,110
-------- -------- --------
Total liabilities............................. $537,203 $152,962 $164,450
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL
NINE MONTHS ENDED FOR THE FISCAL YEARS ENDED
----------------------------- ------------------------------------------------
SEPTEMBER 28, SEPTEMBER 29, DECEMBER 29, DECEMBER 31, JANUARY 1,
1997 1996 1996 1995 1995
------------- ------------- ------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.................... $431,529 $282,720 $356,373 $324,291 $266,632
Gross profit................. 111,245 80,470 98,431 87,889 76,114
Income before extraordinary
loss....................... 17,070 16,546 18,679 15,525 12,875
Net income................... 16,437 16,546 18,679 15,525 12,875
</TABLE>
F-23
<PAGE> 112
SCOTSMAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SUBSEQUENT EVENT (UNAUDITED)
In March of 1997 the Company completed the acquisition of Kysor Industrial
Corporation ("Kysor"), a leading supplier of refrigerated display cases and
walk-in coolers and freezers to the supermarket and convenience store
industries. The Company purchased Kysor's common and preferred stock
(hereinafter referred to as the "Kysor Acquisition") for an aggregate purchase
price of $309 million. Concurrent with the purchase, the Company sold
substantially all of the assets of Kysor's Transportation Products Group to a
third party for $86 million (approximately $68 million net of taxes). The
Company retained possession of Kysor's Commercial Products Group. Goodwill
relating to the Kysor Acquisition will be finalized within 12 months of the
acquisition date and will be amortized for book purposes over 40 years using the
straight-line method.
Kysor, headquartered in Cadillac, Michigan, reported total sales in 1996 of
$381 million, of which $245 million related to commercial refrigeration
products.
The Kysor Acquisition, after giving effect to the divestiture of the
Transportation Products Group and other acquisition related transactions, was
financed through a $415 million loan facility between the Company, Scotsman
Group Inc. and the other parties named therein and The First National Bank of
Chicago (the "FNBC Facility"). The Company has entered into negotiations to
amend the FNBC Facility, which would, among other things, permit the
consummation of an offering of $100 million senior subordinated notes of
Scotsman Group Inc. (the "Offering") and change certain covenants (the "FNBC
Facility Amendment"). The following description of the FNBC Facility assumes the
effectiveness of the FNBC Facility Amendment and the application of the net
proceeds of the Offering to repay $30 million of term loan borrowings
outstanding under the FNBC Facility. The FNBC Facility consists of a $120
million term loan and a $265 million revolving loan facility, both with an
initial interest rate of 1.375 percent above Eurocurrency rates. The interest
rates on both facilities adjust based on a certain ratio tied to the strength of
the Company's balance sheet.
The agreement governing the FNBC Facility includes various financial
covenants. One of those covenants has the effect of restricting the amount of
the Company's dividends to its shareholders by requiring the Company to maintain
consolidated stockholders' equity of at least $120 million (without giving
effect to the cumulative effect of future changes in accumulated translation
adjustments), plus 60 percent of (i) the cumulative net income of the Company
from December 30, 1996, forward and (ii) the net cash proceeds from any future
issuance of equity securities by the Company after the closing of the FNBC
Facility. At September 28, 1997, consolidated stockholders' equity of the
Company was $142.3 million. The Company is also precluded from paying dividends
to its shareholders (other than dividends payable in its own capital stock) if a
default or an unmatured default under the agreement has occurred and is
continuing or would occur after giving effect to the payment of such dividends.
Subsequent to the acquisition of Kysor, the Company entered into interest
rate swap agreements to hedge its interest rate exposure on $150 million of the
aggregate borrowing under the FNBC Facility for a three-year period. One of the
interest rate swap agreements, covering a notional amount of $50 million, is
extendable for an additional two years at the bank's option.
F-24
<PAGE> 113
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Scotsman Industries, Inc.:
We have audited the accompanying consolidated balance sheet of Kysor
Industrial Corporation and Subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Kysor
Industrial Corporation and Subsidiaries as of December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
As discussed in the subsequent event note (Note 12), Kysor Industrial
Corporation's common stock and preferred stock were acquired in March 1997 for
an aggregate purchase price of approximately $309 million.
COOPERS & LYBRAND L.L.P.
Detroit, Michigan
February 3, 1997
F-25
<PAGE> 114
KYSOR INDUSTRIAL CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents........................................ $ 8,353,855 $ 15,746,157
Accounts receivable less $1,212,000 and $1,431,000 allowance
for doubtful accounts..................................... 34,654,123 31,534,632
Inventory................................................... 26,899,996 19,421,832
Prepaid expenses............................................ 928,351 1,445,000
Deferred income taxes....................................... 4,927,000 6,182,000
------------ ------------
TOTAL CURRENT ASSETS........................................ 75,763,325 74,329,621
PROPERTY, PLANT AND EQUIPMENT
Land........................................................ 2,590,094 2,565,775
Buildings................................................... 22,136,202 21,248,181
Machinery and equipment..................................... 34,613,964 29,384,546
------------ ------------
59,340,260 53,198,502
Less accumulated depreciation............................... (29,608,379) (26,084,694)
------------ ------------
TOTAL PROPERTY, PLANT AND EQUIPMENT......................... 29,731,881 27,113,808
INVESTMENT IN AFFILIATE..................................... 18,844,774 --
OTHER ASSETS
Goodwill, patents and other intangibles, net of amortization
of $1,310,310 and $625,987................................ 6,474,085 3,001,722
Cash value of officers' life insurance...................... 11,929,773 11,003,100
Deferred income taxes....................................... 4,667,000 3,902,000
Miscellaneous receivables and other assets.................. 2,995,387 1,818,545
------------ ------------
TOTAL OTHER ASSETS.......................................... 26,066,245 19,725,367
------------ ------------
NET ASSETS OF DISCONTINUED TRANSPORTATION PRODUCTS
SEGMENT................................................... 38,655,539 34,798,818
------------ ------------
TOTAL ASSETS................................................ $189,061,764 $155,967,614
============ ============
LIABILITIES
CURRENT LIABILITIES
Current maturities of long-term debt........................ $ 5,798,924 $ 4,256,636
Accounts payable............................................ 14,045,982 14,041,687
Accrued income taxes payable................................ 1,811,602 --
Accrued expenses and contingent liabilities................. 16,928,179 19,429,190
------------ ------------
TOTAL CURRENT LIABILITIES................................... 38,584,687 37,727,513
Long-term debt, less current maturities..................... 32,821,534 25,388,991
Accumulated postretirement benefit obligation............... 2,891,879 2,731,806
Other long-term liabilities................................. 11,354,940 9,883,751
------------ ------------
TOTAL LIABILITIES........................................... 85,653,040 75,732,061
PREFERRED SHAREHOLDERS' EQUITY
Employee Stock Ownership Plan Preferred Stock, shares
authorized 5,000,000; outstanding 786,869 and 797,517
stated value of $24.375 per share......................... 19,179,931 19,439,472
Unearned deferred compensation under Employee Stock
Ownership Plan............................................ (12,935,432) (14,446,112)
------------ ------------
TOTAL PREFERRED SHAREHOLDERS' EQUITY........................ 6,244,499 4,993,360
COMMON SHAREHOLDERS' EQUITY
Common stock, $1 par value, shares authorized 30,000,000,
outstanding 5,934,724 and 5,639,028....................... 5,934,724 5,639,028
Additional paid-in capital.................................. 8,741,604 3,645,084
Retained earnings........................................... 82,343,144 66,530,997
Translation adjustment...................................... 1,191,456 483,343
Notes receivable-common stock 77,288 and 78,009 shares...... (1,046,703) (1,056,259)
------------ ------------
TOTAL COMMON SHAREHOLDERS' EQUITY........................... 97,164,225 75,242,193
------------ ------------
TOTAL EQUITY.............................................. 103,408,724 80,235,553
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $189,061,764 $155,967,614
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-26
<PAGE> 115
KYSOR INDUSTRIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
SALES AND REVENUES
Net sales........................................ $245,062,236 $207,215,463 $164,606,458
Interest and other revenues...................... 2,399,334 2,395,323 1,718,786
------------ ------------ ------------
TOTAL SALES AND REVENUES.................... 247,461,570 209,610,786 166,325,244
------------ ------------ ------------
COSTS AND EXPENSES
Cost of sales.................................... 185,253,069 159,460,217 128,630,810
Selling and administrative expenses.............. 39,035,732 37,329,235 32,253,125
Interest expense................................. 1,335,865 913,921 1,175,547
Loss on disposition of foreign operation......... -- 9,335,104 --
Other (income) expense........................... (1,941,616) 1,714,893 1,595,026
------------ ------------ ------------
TOTAL COSTS AND EXPENSES.................... 223,683,050 208,753,370 163,654,508
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES.......................................... 23,778,520 857,416 2,670,736
Income taxes..................................... 8,650,000 (4,695,000) 870,000
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS................ 15,128,520 5,552,416 1,800,736
Operations of Discontinued Transportation
Segment, net of income taxes of $2,650,000,
$6,810,000 and $7,180,000, respectively........ 5,416,360 11,876,247 11,473,845
------------ ------------ ------------
NET INCOME....................................... $ 20,544,880 $ 17,428,663 $ 13,274,581
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-27
<PAGE> 116
KYSOR INDUSTRIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNEARNED
DEFERRED ADDITIONAL
PREFERRED COMPENSATION COMMON PAID-IN RETAINED TRANSLATION
STOCK ESOP STOCK CAPITAL EARNINGS ADJUSTMENT
--------- ------------ ------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993........ $19,747,731 $(16,174,952) $5,467,840 $ 3,386,004 $43,997,461 $ 285,705
Employee Stock Ownership Plan,
deferred compensation earned.... -- 864,420 -- -- -- --
Purchase of common stock, returned
to an unissued status (24,292
shares)......................... -- -- (24,292) (468,710) -- --
Preferred stock distributions
(6,610 shares for 9,463 shares
of common)...................... (161,134) -- 9,463 156,735 -- --
Exercise of employee stock
options, 187,870 shares
issued.......................... -- -- 187,870 2,312,307 -- --
Collections of notes receivable... -- -- -- -- -- --
Translation adjustment on
investments in foreign
subsidiaries.................... -- -- -- -- -- 521,246
Net income........................ -- -- -- -- 13,274,581 --
Preferred stock dividends (net of
income tax benefit of
$598,000)....................... -- -- -- -- (979,580) --
Common dividends declared, $.51
per share....................... -- -- -- -- (2,849,427) --
----------- ------------ ---------- ----------- ----------- ----------
BALANCE, DECEMBER 31, 1994........ $19,586,597 $(15,310,532) $5,640,881 $ 5,386,336 $53,443,035 $ 806,951
Employee Stock Ownership Plan,
deferred compensation earned.... -- 864,420 -- -- -- --
Purchase of common stock, returned
to an unissued status (276,178
shares)......................... -- -- (276,178) (5,528,670) -- --
Preferred stock distributions
(6,036 shares for 7,148 shares
of common)...................... (147,125) -- 7,148 139,545 -- --
Exercise of employee stock
options, 267,177 shares
issued.......................... -- -- 267,177 3,647,873 -- --
Collections of notes receivable... -- -- -- -- -- --
Translation adjustment on
investments in foreign
subsidiaries.................... -- -- -- -- -- (323,608)
Net income........................ -- -- -- -- 17,428,663 --
Preferred stock dividends (net of
income tax benefit of
$580,000)....................... -- -- -- -- (987,047) --
Common dividends declared, $.60
per share....................... -- -- -- -- (3,353,654) --
----------- ------------ ---------- ----------- ----------- ----------
BALANCE, DECEMBER 31, 1995........ $19,439,472 $(14,446,112) $5,639,028 $ 3,645,084 $66,530,997 $ 483,343
Employee Stock Ownership Plan,
deferred compensation earned.... -- 1,510,680 -- -- -- --
Preferred stock distributions
(10,648 shares for 10,803 shares
of common)...................... (259,541) -- 10,803 259,394 -- --
Exercise of employee stock
options, 284,893 shares
issued.......................... -- -- 284,893 4,837,126 -- --
Collections of notes receivable... -- -- -- -- -- --
Translation adjustment on
investments in foreign
subsidiaries and affiliates..... -- -- -- -- -- 708,113
Net income........................ -- -- -- -- 20,544,880 --
Preferred stock dividends (net of
income tax benefit of
$590,000)....................... -- -- -- -- (966,179) --
Common dividends declared, $.645
per share....................... -- -- -- -- (3,766,554) --
----------- ------------ ---------- ----------- ----------- ----------
BALANCE, DECEMBER 31, 1996........ $19,179,931 $(12,935,432) $5,934,724 $ 8,741,604 $82,343,144 $1,191,456
=========== ============ ========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-28
<PAGE> 117
KYSOR INDUSTRIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
NOTES UNEARNED
RECEIVABLE - DEFERRED TOTAL
COMMON COMPENSATION SHAREHOLDERS'
STOCK ESOP EQUITY
------------ ------------ -------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1993.................................. $(1,319,260) $(697,453) $ 54,693,076
Employee Stock Ownership Plan, deferred compensation
earned.................................................... -- 348,727 1,213,147
Purchase of common stock, returned to an unissued status
(24,292 shares)........................................... -- -- (493,002)
Preferred stock distributions (6,610 shares for 9,463 shares
of common)................................................ -- -- 5,064
Exercise of employee stock options, 187,870 shares issued... -- -- 2,500,177
Collections of notes receivable............................. 32,852 -- 32,852
Translation adjustment on investments in foreign
subsidiaries.............................................. -- -- 521,246
Net income.................................................. -- -- 13,274,581
Preferred stock dividends (net of income tax benefit of
$598,000)................................................. -- -- (979,580)
Common dividends declared, $.51 per share................... -- -- (2,849,427)
----------- --------- ------------
BALANCE, DECEMBER 31, 1994.................................. $(1,286,408) $(348,726) $ 67,918,134
Employee Stock Ownership Plan, deferred compensation
earned.................................................... -- 348,726 1,213,146
Purchase of common stock, returned to an unissued status
(276,178 shares).......................................... -- -- (5,804,848)
Preferred stock distributions (6,036 shares for 7,148 shares
of common)................................................ -- -- (432)
Exercise of employee stock options, 267,177 shares issued... -- -- 3,915,050
Collections of notes receivable............................. 230,149 -- 230,149
Translation adjustment on investments in foreign
subsidiaries.............................................. -- -- (323,608)
Net income.................................................. -- -- 17,428,663
Preferred stock dividends (net of income tax benefit of
$580,000)................................................. -- -- (987,047)
Common dividends declared, $.60 per share................... -- -- (3,353,654)
----------- --------- ------------
BALANCE, DECEMBER 31, 1995.................................. $(1,056,259) -- $ 80,235,553
Employee Stock Ownership Plan, deferred compensation
earned.................................................... -- -- 1,510,680
Preferred stock distributions (10,648 shares for 10,803
shares of common)......................................... -- -- 10,656
Exercise of employee stock options, 284,893 shares issued... -- -- 5,122,019
Collections of notes receivable............................. 9,556 -- 9,556
Translation adjustment on investments in foreign
subsidiaries and affiliates............................... -- -- 708,113
Net income.................................................. -- -- 20,544,880
Preferred stock dividends (net of income tax benefit of
$590,000)................................................. -- -- (966,179)
Common dividends declared, $.645 per share.................. -- -- (3,766,554)
----------- --------- ------------
BALANCE, DECEMBER 31, 1996.................................. $(1,046,703) -- $103,408,724
=========== ========= ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-29
<PAGE> 118
KYSOR INDUSTRIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
Income from continuing operations......................... $ 15,128,520 $ 5,552,416 $ 1,800,736
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization........................... 4,852,585 3,944,499 4,388,663
Provision for losses on accounts receivable............. 368,474 276,983 688,281
(Gain) Loss on sales of fixed assets.................... 64,975 15,560 (129,961)
Undistributed earnings of affiliate..................... (1,747,766) -- --
Deferred compensation (ESOP)............................ 1,510,680 1,213,146 1,213,147
Deferred income taxes................................... 490,000 (2,647,000) (1,432,000)
Changes in assets and liabilities providing (consuming)
cash:
Accounts receivable................................... (1,544,323) (4,356) (4,019,570)
Inventories........................................... (5,028,023) 923,692 (3,050,632)
Prepaid expenses...................................... 543,944 108,037 (542,702)
Accounts payable...................................... (3,861,193) (422,984) 2,093,555
Accrued expenses and contingent liabilities........... (3,766,788) 2,614,862 658,159
Accrued income taxes payable.......................... 4,210,458 694,591 41,901
Other long-term liabilities........................... 2,621,653 2,359,203 1,178,144
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING
OPERATIONS................................................ 13,843,196 14,628,649 2,887,721
Cash provided (used) by operating activities of discontinued
operations................................................ 11,994,531 18,290,625 10,999,658
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES................................................ 25,837,727 32,919,274 13,887,379
------------ ------------ ------------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (6,934,360) (6,420,318) (3,107,202)
Proceeds from sales of property and equipment............. 735,235 3,821,016 897,954
Acquisitions, net of cash acquired........................ 9,316 (3,372,448) (4,127,916)
Investment in affiliate................................... (18,315,732) -- --
Dividends received from foreign affiliate................. 2,218,723 -- --
(Increase) in other long-term assets...................... (2,603,514) (376,119) (1,799,644)
Unrealized translation gain (loss)........................ -- (374,582) 403,761
Investing activities of discontinued operations........... (10,235,072) (7,963,078) (6,211,792)
------------ ------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............ (35,125,404) (14,685,529) (13,944,839)
------------ ------------ ------------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Current borrowings........................................ 13,000,000 4,482,120 625,510
Principal payments against long-term debt................. (9,381,656) (14,009,858) (3,348,726)
Proceeds from issuance of common stock.................... 3,466,231 2,802,766 1,767,093
Purchase of common stock.................................. -- (5,804,848) (493,002)
Common stock and preferred stock dividends paid........... (5,197,493) (4,813,484) (4,353,866)
Financing activities of discontinued operations........... 8,293 (1,682,102) 1,303,334
------------ ------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES............ 1,895,375 (19,025,406) (4,499,657)
------------ ------------ ------------
NET (DECREASE) IN CASH AND EQUIVALENTS...................... (7,392,302) (791,661) (4,557,117)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR................... 15,746,157 16,537,818 21,094,935
------------ ------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD....................... $ 8,353,855 $ 15,746,157 $ 16,537,818
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-30
<PAGE> 119
KYSOR INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS. Kysor Industrial Corporation is a leading supplier of
refrigerated display cases, walk-in coolers and freezers to the supermarket and
convenience store industries and a producer of components for the medium- and
heavy-duty commercial vehicle market. The principal markets for the Company's
products include the United States, Europe, South America and the Pacific Rim.
Sales to major customers aggregated approximately $104 million, $72 million and
$27 million for the years ended December 31, 1996, 1995 and 1994 respectively.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Kysor Industrial Corporation and all of its subsidiaries
("Kysor" or "Company").
BASIS OF PRESENTATION. In connection with the sale of the Company (see
footnote 12), the net assets of the transportation products group (which was
formerly accounted for as a segment) were simultaneously sold. The measurement
date occurred after the balance sheet date and before the issuance of the
Company's financial statements and, accordingly, this segment has been reflected
as a discontinued operation in the consolidated financial statements for all
years presented.
CASH AND EQUIVALENTS. Kysor considers all highly-liquid debt instruments
purchased with a maturity of three months or less to be cash equivalents.
INVENTORIES. Inventories are stated at the lower of FIFO (first in, first
out) cost or market.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION. Property, plant and
equipment are stated at cost. Depreciation is computed by the straight-line
method based on the estimated useful lives of the assets which range from 3 to
40 years.
GOODWILL. Goodwill, resulting from the excess of cost over the net assets
of purchased companies, is amortized on a straight-line basis over periods not
exceeding 20 years.
INCOME TAXES. Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the years in which the
differences are expected to reverse.
FOREIGN CURRENCY TRANSLATION. Translation adjustments have been accumulated
as a separate component of Shareholders' Equity.
FINANCIAL INSTRUMENTS. The Company has cash, cash equivalents, and
long-term debt which are considered financial instruments. The fair values of
these financial instruments, as determined through information obtained from
banking sources and management estimates, approximate their carrying values.
PENSION AND RETIREMENT PLANS. Annual provisions for pension and retirement
plan costs recognize amortization of prior service costs over the expected
service period of active employees. Accrued pension costs are funded annually to
the extent deductible for federal income tax purposes.
Postretirement health and life insurance benefits are accounted for in
accordance with Statement of Financial Accounting Standards No. 106, "Employers
Accounting for Postretirement Benefits Other Than Pensions".
ENVIRONMENTAL COSTS. Environmental expenditures that relate to an existing
condition caused by past operations, and do not contribute to current or future
revenues, are expensed. Liabilities are recorded when environmental assessments
and/or cleanups are probable and the costs can be reasonably estimated.
Generally, the timing of these accruals coincides with Kysor's commitment to a
formal plan of action.
ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-31
<PAGE> 120
KYSOR INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
RECENT PROFESSIONAL ACCOUNTING STANDARDS. The Company adopted the
provisions of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of",
and SFAS No. 123, "Accounting for Stock-Based Compensation", effective January
1, 1996. As permitted by SFAS 123, the Company has elected to continue to
measure stock-based compensation using the intrinsic value method in accordance
with APB Opinion No. 25 "Accounting for Stock Issued to Employees". The adoption
of SFAS 121 and SFAS 123 did not have a material impact on the financial
position or the results of operations of the Company.
NOTE 2. INVENTORY
Components of Inventory are as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Finished goods............................................. $ 6,381 $ 4,406
Work-in-process............................................ 7,631 5,512
Raw materials.............................................. 12,887 9,504
------- -------
$26,899 $19,422
======= =======
</TABLE>
NOTE 3. ACCRUED EXPENSES AND CONTINGENT LIABILITIES
Components of Accrued Expenses and Contingent Liabilities are as follows at
December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Workers' compensation and liability insurance.............. $ 4,491 $ 4,341
Compensation............................................... 5,348 4,664
Warranty................................................... 1,317 1,220
Litigation................................................. 1,010 1,682
Other...................................................... 4,762 7,622
------- -------
Total Accrued Expenses and Contingent Liabilities..... $16,928 $19,429
======= =======
</TABLE>
F-32
<PAGE> 121
KYSOR INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. FINANCING
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995
---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Long-term debt consists of the following:
Term note, $750 quarterly principal payments, plus fixed
interest rate at 9.9%..................................... $ 6,000 $ 9,000
Loan agreement for Kysor Industrial Corporation Employee
Stock Ownership Plan, $1,250 semiannual principal
payments, plus fixed interest rate at 8.36%............... 18,750 20,000
Revolving Credit Facility................................... 13,000 --
Other, principal payments due in 1997, plus interest at
rates ranging from 5.0% to 9.2%........................... 871 646
------- -------
38,621 29,646
Less current maturities..................................... 5,799 4,257
------- -------
Total Long-Term Debt................................... $32,822 $25,389
======= =======
</TABLE>
At December 31, 1996, the Company maintained revolving credit agreements
with two banks which provide for borrowings up to $30 million. Interest rates
are fixed at the date of borrowing based on current LIBOR rates plus a spread of
.375%. An annual commitment fee of .1875% is paid on the unused balance. The
Company has an interest rate swap under which the variable rate of interest on
the term note is converted to a fixed rate of 9.4% plus a spread of .50%. The
weighted average variable rate of interest received and paid is equal to the
three-month LIBOR (5.56% at December 31, 1996) and is reset quarterly. The term
of the swap matches the maturity of the corresponding term note.
During the years ended December 31, 1996 and 1995, there was no short-term
debt.
Aggregate maturities of obligations under long-term debt, during the next
five years ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Maturities of long-term debt........................ $5,799 $5,974 $2,996 $2,596 $2,500
</TABLE>
Interest paid was $1,953,000, $1,763,000, and $2,105,000 for the years
ended December 31, 1996, 1995, and 1994 respectively.
NOTE 5. STOCK OPTION PLANS
The Company adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation", effective with the 1996 financial statements. The Company,
however, has elected to measure compensation cost using the intrinsic value
method, in accordance with APB Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees."
As of December 31, 1996, Kysor administered its 1980 Nonqualified Stock
Option Plan; 1983 Incentive Stock Option Plan; 1984 Stock Option Plan; 1987
Stock Option and Restricted Stock Plan; and 1993 Long-Term Incentive Plan. All
outstanding options granted prior to January 1, 1990 are currently exercisable.
All options granted after January 1, 1990 vest at the rate of 20% at date of
grant and 20% each year thereafter, except for the final 20% which vests only
upon exercise and retention for one year of the entire vested 80%.
Under the 1987 Stock Option and Restricted Stock Plan, the Company granted
key employees and directors 13,500 and 6,000 shares of common stock during 1996
and 1995, respectively. Under the 1993 Long-term Incentive Plan, the Company has
made available for key employees and directors 225,250 and 226,000
F-33
<PAGE> 122
KYSOR INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. STOCK OPTION PLANS -- (CONTINUED)
shares of common stock during 1996 and 1995, respectively. Under the 1987 Stock
Option Plan, 9,316 and 1,516 remained available for grant as of December 31,
1996 and 1995, respectively. Under the 1993 Long-Term Incentive Plan, 459,100
and 639,000 remained available for grant as of December 31, 1996 and 1995,
respectively.
Information concerning stock options is as follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
1996 EXERCISE 1995 EXERCISE 1994 EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period........... 1,582,120 $15.65 1,731,000 $14.19 1,732,300 $13.40
New grants (based on fair value of Common
Stock at dates of grant)................... 238,750 22.89 232,000 22.61 221,000 16.63
Terminated and expired....................... (71,970) 17.66 (9,510) 11.97 (8,030) 8.60
Exercised*................................... (327,670) 14.02 (371,370) 13.29 (214,270) 10.54
Outstanding at end of period**............... 1,421,230 17.14 1,582,120 15.65 1,731,000 14.19
Outstanding but not exercisable.............. 530,850 19.07 552,590 18.05 571,070 14.78
Exercisable at end of period................. 890,380 15.83 1,029,530 14.36 1,159,930 13.90
</TABLE>
- -------------------------
* Exercised at option prices ranging from $7.25 to $22.5625 during 1996, $7.25
to $22.5625 during 1995, and $7.25 to $18.9375 during 1994.
** Outstanding shares have option prices ranging from $7.25 to $29.00 per share.
At December 31, 1996, the weighted-average remaining contractual life
relating to the outstanding shares was 5.80 years.
The fair value of each option grant was estimated as of date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
options granted in:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Estimated fair value per share of options granted during the
year...................................................... $ 6.70 $ 7.48
Assumptions:
Annualized dividend yield................................. 2.50% 2.50%
Common Stock price volatility............................. 27.17% 27.19%
Risk-free rate of return.................................. 5.71% 7.33%
Expected option term (in years)........................... 6.25 6.25
</TABLE>
The Company has elected to continue applying the provisions of APB 25 and,
accordingly, no stock option compensation cost is included in income for the
1980, 1983, 1984, 1987, and 1993 Plans. Had stock option compensation cost for
these Plans been determined based on the fair value at the 1996 and 1995 grant
dates for awards under those Plans consistent with the methodology of SFAS 123,
the Company's net income would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1996 1995
------------------- -------------------
AS PRO AS PRO
REPORTED FORMA REPORTED FORMA
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Net income (in thousands)................. $20,545 $20,102 $17,429 $16,775
</TABLE>
NOTE 6. ACQUISITIONS AND DIVESTITURES
On March 19, 1996, Kysor acquired certain assets and assumed certain
liabilities of Nax of North America (NAX), located in Des Moines, Iowa. NAX is a
manufacturer and assembler of European style deli cases and hot food cases sold
to the supermarket and fast food industries.
F-34
<PAGE> 123
KYSOR INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. ACQUISITIONS AND DIVESTITURES -- (CONTINUED)
On February 14, 1996, the Company purchased 24.255% of the outstanding
shares of Austral Refrigeration Pty. Ltd. (Austral), headquartered in Sydney,
Australia. Austral is the parent company of Kysor/Warren Australia Pty. Ltd.
which has been a licensee and manufacturer of Kysor refrigerated display cases
for over 25 years. Also included as a part of Austral is a group of businesses
that perform installation and maintenance of refrigeration products throughout
Australia and other Asian markets.
The following unaudited proforma consolidated information gives effect to
the acquisition of Austral as if the acquisition had occurred on January 1 of
the respective period. Unaudited consolidated proforma income from operations
before income taxes approximates $24 million and $5.2 million for the year ended
December 31, 1996 and 1995 and proforma consolidated net income approximates
$20.7 million and $20.0 million for the respective periods.
The Company's share of Austral's income is recorded using the "equity
method" of accounting and aggregated $1.7 million in 1996 and is included in
other (income)/expense in the accompanying consolidated statement of income.
Summarized financial information of the unconsolidated company as of and
for the year ended December 31, 1996: (amounts in thousands)
<TABLE>
<S> <C>
Current assets.............................................. $35,804
Non-current assets.......................................... 17,354
Current liabilities......................................... 22,298
Non-current liabilities..................................... 1,259
Revenues.................................................... 98,579
Income before taxes......................................... 15,187
Net income.................................................. 9,380
</TABLE>
The difference between the Company's recorded investment in affiliate and
its proportionate share of Austral's net assets relates primarily to goodwill
included in the investment.
On October 2, 1995, the Company acquired substantially all of the assets
and assumed certain liabilities of Cooler Technology, Inc. (Cool-Tech) located
in Puyallup, Washington. Cool-Tech manufactures insulated panels and doors for
the supermarket and food service industries. On October 4, 1995, Kysor acquired
certain assets and assumed certain liabilities of Bangor Refrigeration
Corporation (Bangor) located in South Bend, Indiana. Bangor is a manufacturer of
specialty refrigeration display cases and walk-in coolers for grocery stores,
convenience stores and the food service industry. The 1995 acquisitions did not
have a material impact on the operations of the Company.
On February 4, 1994, Kysor acquired certain assets and assumed certain
liabilities of Kalt Manufacturing Company, Inc. (Kalt), located in Portland,
Oregon. Kalt manufactures insulated panels and doors for the supermarket and
convenience store industries and also has a manufacturing facility in Goodyear,
Arizona. The acquisition did not have a material impact on the operations of the
Company.
The NAX, Kalt, Cool-Tech and Bangor acquisitions were all accounted for as
purchases and, accordingly, the results of operations of each entity have been
included in the Consolidated Statement of Income since their respective
acquisition dates. The excess of the purchase price over the estimated fair
value of the net assets acquired for each transaction is being amortized on a
straight-line basis over periods ranging from 10 to 15 years.
On December 14, 1995, Kysor sold the assets of its German subsidiary,
Kysor/Warren Refrigeration, GmbH, in exchange for the assumption of certain
liabilities. After several years of significant operating losses,
F-35
<PAGE> 124
KYSOR INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. ACQUISITIONS AND DIVESTITURES -- (CONTINUED)
the operation was sold to existing German management. The transaction resulted
in a loss on disposition of $9.3 million and a tax benefit of $8.8 million.
NOTE 7. PREFERRED STOCK
On February 24, 1989, Kysor sold 820,513 shares of newly issued 8%
cumulative Series A Convertible Voting preferred stock, $24.375 stated value per
share (the "convertible stock"), to the Kysor Industrial Corporation Employee
Stock Ownership Plan (the "ESOP"). The convertible stock may be voluntarily
converted at the option of the holder, unless previously redeemed, into shares
of Kysor Industrial Corporation common stock (the "common stock") on a
one-for-one basis, subject to certain antidilution adjustments, and will convert
automatically into common stock (in certain instances subject to a conversion
floor equal to liquidation value of $24.375 per share, plus accrued and unpaid
dividends) if transferred to a holder other than the ESOP or another Kysor
Industrial Corporation employee benefit plan. The convertible stock is subject
to redemption by the Company. Each share of convertible stock entitles its
holder to one vote on all matters submitted for a vote of shareholders, again
subject to possible antidilution adjustments. The convertible stock ranks senior
to the common stock and is at least on a parity with any other series of
preferred stock that may be subsequently issued.
Preferred Stock issued and outstanding was 786,869 and 797,517 shares at
December 31, 1996 and 1995, respectively. Preferred shares allocated to ESOP
participants were 61,977 and 35,463 for each of the years ended December 31,
1996 and 1995, respectively.
NOTE 8. PENSION AND RETIREMENT PLANS
Kysor has several noncontributory defined benefit pension plans and defined
contribution plans covering substantially all of its domestic employees. The
defined benefit plans provide benefits based on the participants' years of
service and compensation or stated amounts for each year's service. The
Company's funding policy is to make annual contributions as required by contract
or applicable regulations.
The pension cost components were:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Defined Benefit Plans:
Service cost benefits earned during period....... $ 1,558 $ 1,247 $ 1,327
Interest cost on projected benefit obligation.... 2,731 2,458 2,255
Actual investment return on plan assets.......... (3,420) (6,019) 731
Net amortization and deferral.................... 1,989 5,415 (3,069)
------- ------- -------
Net periodic pension cost................... $ 2,858 $ 3,101 $ 1,244
======= ======= =======
</TABLE>
Assumptions used in the accounting were:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rates............................................ 7.5% 7.5% 8.0%
Rates of increase in compensation levels.................. 4.8% 4.8% 4.9%
Expected long-term rate of return on assets............... 8.0% 8.0% 8.0%
</TABLE>
F-36
<PAGE> 125
KYSOR INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. PENSION AND RETIREMENT PLANS -- (CONTINUED)
The following table sets forth the funded status and amounts recognized in
the Company's statement of financial position for defined benefit plans:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995
------------------- -------------------
PLANS IN WHICH PLANS IN WHICH
------------------- -------------------
ASSETS ACCUM. ASSETS ACCUM.
EXCEED BENEFITS EXCEED BENEFITS
ACCUM. EXCEED ACCUM. EXCEED
BENEFITS ASSETS BENEFITS ASSETS
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation......................... $(21,048) $ (7,881) $(18,191) $ (6,617)
======== ======== ======== ========
Accumulated benefit obligation.................... $(22,624) $(10,637) $(19,414) $ (8,590)
======== ======== ======== ========
Projected benefit obligation...................... $(26,993) $(12,300) $(22,710) $(10,156)
Plan assets at fair market value.................. 33,487 -- 30,387 --
-------- -------- -------- --------
Projected benefit obligation (in excess of) or
less than plan assets.......................... 6,494 (12,300) 7,677 (10,156)
Unrecognized net (gain) or loss................... (4,051) 3,340 (5,061) 2,810
Prior service cost not yet recognized in net
periodic pension cost.......................... 973 284 653 334
Unrecognized net (asset) obligation at January
1,............................................. (551) 352 (661) 440
-------- -------- -------- --------
Pension asset (liability) recognized in the
statement of financial position................ $ 2,865 $ (8,324) $ 2,608 $ (6,572)
======== ======== ======== ========
</TABLE>
At both December 31, 1996 and 1995, 100 percent of plan assets was invested
in publicly traded stocks, bonds, and money market investments.
In 1985, Kysor adopted a nonqualified, unfunded supplemental executive
retirement plan for senior management. Kysor has purchased life insurance
policies on the lives of participants and is the sole owner and beneficiary of
such policies. The amount of coverage is designed to provide sufficient revenues
to cover all costs of the plan if the assumptions made as to mortality
experience, policy earnings, and other factors are realized. The Company is
charging earnings with the present value of the future cost of the plan over the
remaining working life of the participants. The above tables include information
related to this plan.
In September 1985, Kysor established an Employee Stock Ownership Plan
("ESOP") and trust for its domestic salaried employees. The ESOP authorized the
trust to borrow $3,487,000 from a bank in September 1985. The proceeds were used
to purchase 357,668 shares of common stock at $9.75 per share, that being the
mean market price on the New York Stock Exchange on August 22, 1985, the day
preceding the date the transaction was agreed upon. The loan obligation was paid
in full during 1996.
In February 1989, Kysor expanded the ESOP with the sale to the ESOP of $20
million of newly issued Series A Convertible Voting preferred stock from the
Company (see Note 7). The ESOP purchase of preferred stock was financed by a
loan from the Company which issued a $20 million, 15-year ESOP note to raise the
necessary funds. In 1996, 1995 and 1994, dividends on Preferred Stock of
$1,556,000, $1,567,000, and $1,578,000 plus interest expense of $116,000,
$111,000, and $101,000, respectively, were used to service the debt obligation
related to the ESOP. The Company amortized unearned deferred compensation
relating to the shares allocated for the year as a percentage of the total
shares to be allocated of $1,512,000 in 1996 and $864,000 in 1995 and 1994.
F-37
<PAGE> 126
KYSOR INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. PENSION AND RETIREMENT PLANS -- (CONTINUED)
POSTRETIREMENT HEALTH AND LIFE INSURANCE BENEFITS
Kysor provides certain defined health care and life insurance benefits for
retired employees. All salaried and certain hourly employees may become eligible
for these benefits if they reach retirement age while working for the Company.
Retiree benefit payments under these programs were $187,000, $307,000 and
$164,000 in 1996, 1995, and 1994, respectively.
The components of periodic expenses for the postretirement benefits were as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1996 1995
---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Service cost -- benefits earned during the year.......... $118 $ 91
Interest cost on accumulated postretirement benefit
obligation............................................. 252 253
Net amortization......................................... (10) (7)
---- ----
Net periodic benefit costs.......................... $360 $337
==== ====
</TABLE>
The actuarial and recorded liabilities for those postretirement benefits,
none of which have been funded, were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1996 1995
---- ----
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees.................................................. $1,503 $1,580
Fully eligible active plan participants................... 661 575
Other active participants................................. 1,403 966
------ ------
Total APBO................................................ 3,567 3,121
Fair market value of plan assets.......................... -- --
------ ------
Accumulated postretirement benefit obligation in excess of
plan assets............................................ 3,567 3,121
Unrecognized net (loss)................................... (856) (389)
------ ------
Accrued postretirement benefit liability at December 31,.... $2,892 $2,732
====== ======
</TABLE>
Assumptions used to determine the net periodic postretirement benefit cost
were:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------
1996 1995
---- ----
<S> <C> <C>
Discount rate............................................... 7.5% 7.5%
Present health care trend rate (decreasing uniformly to the
year 2005)
Under age 65.............................................. 8.45% 8.9%
Age 65 and older.......................................... 7.12% 7.4%
Ultimate trend rate in 2005................................. 5.0% 5.5%
===== ====
</TABLE>
A 1% increase each year in the health care cost trend rate used would have
resulted in a 10.6% increase in the aggregate service and interest components of
expense for the year ended December 31, 1996, and a 8.2% increase in the
accumulated postretirement benefit obligation at December 31, 1996.
F-38
<PAGE> 127
KYSOR INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. PENSION AND RETIREMENT PLANS -- (CONTINUED)
The Company has a continuing deferred compensation arrangement with Raymond
A. Weigel, former chairman, which provides for annual payments of $350,000.
NOTE 9. LEASE COMMITMENTS
Kysor leases certain real estate and equipment. In most cases, management
expects that in the normal course of business these leases will be renewed and
replaced by other leases. Kysor has future minimum rental payments required
through 2001 under operating leases that have initial or remaining noncancelable
lease terms in excess of one year in the following amounts, for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Future minimum rental payments............... $961 $850 $699 $616 $150
</TABLE>
In addition to fixed rentals, certain of these leases requires Kysor to pay
maintenance, property taxes, and insurance. Rental expense charged to operations
is as follows, for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Minimum rentals....................................... $1,749 $1,739 $1,758
</TABLE>
NOTE 10. INCOME TAXES
The provision (credit) for income tax consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Currently payable
Federal................................................... $7,056 $(2,896) $ 1,525
State and local........................................... 997 727 275
Foreign................................................... 107 121 102
------ ------- -------
Total currently payable................................ 8,160 (2,048) 1,902
------ ------- -------
Deferred
Federal................................................... 479 (2,381) (908)
State, local and foreign.................................. (11) (266) (124)
------ ------- -------
Total deferred......................................... 490 (2,647) (1,032)
------ ------- -------
Total Provision........................................ $8,650 $(4,695) $ 870
====== ======= =======
</TABLE>
F-39
<PAGE> 128
KYSOR INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. INCOME TAXES -- (CONTINUED)
The components of deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
GROSS DEFERRED TAX ASSETS:
Employee benefit plans...................................... $ 5,750 $ 4,798 $ 3,891
Postretirement health care.................................. 1,096 1,035 983
Workers' compensation/liability insurance................... 1,659 1,603 1,549
Warranty.................................................... 471 462 353
Service contract............................................ 777 829 876
Bad debts................................................... 360 530 453
Vacation pay................................................ 374 329 295
Slow-moving inventory....................................... 576 288 286
Alternative minimum tax..................................... -- 400 --
Litigation.................................................. 269 286 357
Other....................................................... 1,365 2,565 1,217
------- ------- -------
Total Deferred Tax Assets.............................. 13,297 13,125 10,260
------- ------- -------
GROSS DEFERRED TAX LIABILITIES:
Depreciation................................................ 2,125 2,169 1,984
Pension..................................................... 969 872 838
Other....................................................... 9 -- 1
------- ------- -------
Total Deferred Tax Liabilities......................... 3,103 3,041 2,823
------- ------- -------
Net Deferred Income Tax Asset............................... $ 9,594 $15,084 $ 7,437
======= ======= =======
</TABLE>
Major differences between the income taxes computed, using the United
States statutory tax rate and the actual income tax expense, were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Federal income taxes at statutory rate...................... $8,332 $ 292 $936
Net nondeductible losses (nontaxable income) related to
foreign subsidiaries and other foreign expenses........... -- 3,959 376
Tax benefit related to disposition of foreign operation..... -- (8,842) --
State and local income taxes (net of federal benefit)....... 645 301 98
Life insurance.............................................. (150) (147) (172)
Other....................................................... (177) (258) (368)
------ ------- ----
Provision for Income Taxes............................. $8,650 $ 4,695 $870
====== ======= ====
</TABLE>
Income taxes paid (net of refunds) were $6,861,548, $4,273,000, and
$10,195,000 for the years ended December 31, 1996, 1995, and 1994, respectively.
Domestic operations contributed a profit of $28,998,000, $24,911,000, and
$23,321,000 to income before income taxes for 1996, 1995 and 1994, respectively.
Foreign operations contributed a profit (loss) of $1,099,000, ($5,368,000), and
($1,996,000), for the same periods. Income tax benefits of $1,676,000,
$1,342,000, and $771,000 have been credited to shareholders' equity for the
years ended December 31, 1996, 1995, and 1994, respectively, for deemed
compensation deductions attributable to stock options. Income tax benefits of
$590,000, $580,000, and $598,000 for preferred stock
F-40
<PAGE> 129
KYSOR INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. INCOME TAXES -- (CONTINUED)
dividends related to the Company's ESOP have been credited to shareholders'
equity in 1996, 1995, and 1994, respectively.
NOTE 11. CONTINGENT LIABILITIES
As previously reported, the Company has been involved in ongoing
proceedings relating to environmental contamination at the Cadillac Industrial
Park in Cadillac, Michigan (the "Site"). A U.S. EPA administrative order was
issued in 1995 to the Company and other potentially responsible parties (PRPs)
requiring soil and groundwater remediation at the Site. It is intended that the
remediation will be conducted through a joint effort involving other PRPs and a
Local Development Finance Authority established by the City of Cadillac
("LDFA"), which has sold approximately $7 million of nonrecourse bonds to pay
the anticipated capital costs of constructing an area-wide environmental cleanup
facility. The Company believes that the bond proceeds received by the LDFA will
be adequate to cover the capital costs of the area-wide cleanup facility. If the
proceeds are insufficient to pay the required capital costs, Kysor and the other
PRPs would be responsible for the additional costs pursuant to the pending
administrative order. It is anticipated that operating and maintenance costs of
the cleanup facility will be shared primarily by the PRPs, including Kysor, as
well as other parties within the Cadillac Industrial Park pursuant to a special
assessment district proposed by the City of Cadillac. The extent of any
assessment to Kysor cannot be determined at the present time. The Company has
reserved its right to seek mixed funding for certain costs related to the
cleanup, and will continue to pursue insurance coverage for any costs it may
incur at the Site. There still has been no determination as to the availability
or extent of such funding or insurance coverage.
Other contingent liabilities include various legal actions, proceedings and
claims which are pending or which may be instituted or asserted in the future
against the Company. For example, in 1994 the Company settled a lawsuit filed by
the State of Michigan seeking to recover past response costs, penalties and
natural resource damages concerning the Site described above. That settlement
did not affect the State's right to pursue additional claims for natural
resource damages if certain additional contamination is discovered. To the
Company's knowledge, at this juncture such additional contamination has not been
detected. Litigation is subject to many uncertainties, the outcome of individual
matters is not predictable with assurance and it is reasonably possible that
some of these other legal actions, proceedings and claims could be decided
unfavorable to the Company. Although the liability with regard to these matters
at December 31, 1996 cannot be ascertained, it is the opinion of management,
after conferring with counsel, that any liability resulting from these other
matters should not materially affect the consolidated financial position,
results of operation, or liquidity of the Company and its subsidiaries at
December 31, 1996.
NOTE 12. SUBSEQUENT EVENT (UNAUDITED)
In March of 1997, the Company's common and preferred stock was acquired by
Scotsman Industries, Inc. ("Scotsman") for an aggregate purchase price of $309
million. Concurrent with the transaction, Scotsman sold the Transportation
Products Group (which was formerly reported as a segment) to a third party for
an aggregate purchase price of $86 million plus the assumption of certain
liabilities. The Transportation Products Group ("TPG") had revenues of
$136,229,237, $154,690,727, and $148,054,042 at December 31, 1996, 1995 and
1994, respectively. Interest expense of Kysor has been allocated to TPG based on
the ratio of net assets of TPG to the sum of consolidated net assets and debt of
Kysor.
F-41
<PAGE> 130
KYSOR INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. SUBSEQUENT EVENT (UNAUDITED) -- (CONTINUED)
The following is a summary of assets and liabilities of the TPG which have
been classified as a discontinued operation in the accompanying consolidated
financial statements:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1996 1995
---- ----
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Current assets............................................. $34,177 $34,507
Net fixed assets........................................... 27,986 21,447
Other noncurrent assets.................................... 8,713 10,250
------- -------
Subtotal assets.......................................... 70,876 66,204
------- -------
Current liabilities........................................ 19,035 19,069
Noncurrent liabilities..................................... 13,785 12,936
------- -------
Subtotal liabilities..................................... 32,820 32,005
------- -------
Net assets of discontinued Transportation segment.......... $38,056 $34,199
======= =======
</TABLE>
F-42
