SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
April 5, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10182
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Scotsman Industries, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 36-3635892
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(State of Incorporation) (I.R.S. Employer Identification No.)
820 Forest Edge Drive, Vernon Hills, Illinois 60061
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (847) 215-4500
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes x No
___ ___
At MAY 15, 1998 there were 10,595,415 shares of registrant's common stock
outstanding.<PAGE>
SCOTSMAN INDUSTRIES, INC.
FORM 10-Q
APRIL 5, 1998
INDEX
PART I--FINANCIAL INFORMATION:
Item 1. FINANCIAL STATEMENTS-
HISTORICAL-
Condensed Statement of Income
Condensed Balance Sheet
Condensed Statement of Cash Flows
Notes to Condensed Financial Statements
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
PART II--OTHER INFORMATION:
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURE
2<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCOTSMAN INDUSTRIES, INC.
CONDENSED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
For the Three
Months Ended
________________________
Apr. 5, Mar. 30,
1998(i) 1997(i)
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Net sales $152,215 $ 98,077
Cost of sales 115,094 72,446
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Gross profit $ 37,121 $ 25,631
Selling and administrative expenses 24,233 16,124
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Income from operations $ 12,888 $ 9,507
Interest expense, net 7,206 2,207
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Income before income taxes $ 5,682 $ 7,300
Income taxes 3,342 3,435
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Income before extraordinary loss $ 2,340 $ 3,865
Extraordinary loss (net of
income taxes of $422) - (633)
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Net income $ 2,340 $ 3,232
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Basic EPS (ii):
Income before extraordinary loss $ 0.22 $ 0.37
Extraordinary loss - (0.06)
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Net income per common share $ 0.22 $ 0.31
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Diluted EPS (iii):
Income before extraordinary loss $ 0.22 $ 0.36
Extraordinary loss - (0.06)
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Net income per common share $ 0.22 $ 0.30
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3<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONDENSED STATEMENT OF INCOME - continued
(i) The Company reports on a 52-53 week fiscal year ending on
the Sunday nearest to December 31. Fiscal year 1998 will
have 53 weeks and the quarter ended April 5, 1998 is a 14
week period. Fiscal year 1997 had 52 weeks and the quarter
ended March 30, 1997 was a 13 week period.
(ii) BASIC: 'Basic' earnings per common share are computed by
dividing net income available to common shareholders by the
weighted average number of common shares outstanding:
10,575,923 and 10,544,095 for the three months ended April
5, 1998, and March 30, 1997, respectively. This replaces
'primary' earnings per share, which included common stock
equivalents in the calculation. The prior year per share
amounts are restated to reflect the current presentation.
(iii) DILUTED: 'Diluted' net income per share includes options,
warrants and convertible securities in the calculation. The
total number of shares used in the fully-diluted calculation
for the three months ended April 5, 1998, and March 30,
1997, were 10,831,973 and 10,795,445, respectively.
See notes to unaudited condensed financial statements.
4<PAGE>
<TABLE>
SCOTSMAN INDUSTRIES, INC.
CONDENSED BALANCE SHEET
(IN THOUSANDS)
Apr. 5, Dec. 28,
A S S E T S 1998 1997
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(unaudited)
<C> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments $ 13,105 $ 24,085
Trade accounts receivable, net of
reserves of $5,316 and $5,371 108,150 102,880
Inventories 82,393 75,350
Deferred income taxes 12,516 12,515
Other current assets 10,838 12,266
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Total current assets $227,002 $227,096
PROPERTIES AND EQUIPMENT, net of
accumulated depreciation of $54,264
and $50,866 86,988 86,762
GOODWILL, net 289,361 281,855
DEFERRED INCOME TAXES 11,991 11,653
OTHER NONCURRENT ASSETS 47,315 52,758
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$662,657 $660,124
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities
of long-term debt and capitalized
lease obligations $ 34,033 $ 29,519
Trade accounts payable 50,656 44,889
Accrued income taxes 12,535 4,002
Accrued expenses 63,345 69,537
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Total current liabilities $160,569 $147,947
LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS 311,967 321,132
DEFERRED INCOME TAXES 2,242 2,305
OTHER NONCURRENT LIABILITIES 45,175 46,086
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Total liabilities $519,953 $517,470
======= =======
5<PAGE>
SHAREHOLDERS' EQUITY:
Common stock, $.10 par value $ 1,078 $ 1,076
Additional paid in capital 74,016 73,639
Retained earnings 81,341 79,266
Accumulated other comprehensive income (12,019) (9,615)
Less: Common stock held in treasury (1,712) (1,712)
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Total Shareholders' Equity $142,704 $142,654
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$662,657 $660,124
======= =======
See notes to unaudited condensed financial statements.
</TABLE>
6<PAGE>
<TABLE>
SCOTSMAN INDUSTRIES, INC.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
For the Three
Months Ended
-----------------------
Apr. 5, Mar. 30,
1998 1997
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<C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 2,340 $ 3,232
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 4,901 2,922
Change in assets and liabilities-
Trade accounts receivable (4,829) (10,579)
Inventories (6,414) (3,290)
Trade accounts payable and other
liabilities 213 (1,940)
Other, net 901 734
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Net cash provided by operating
activities $ (2,888) $ (8,921)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in properties and equipment $ (2,200) $ (1,836)
Proceeds from disposal of property,
plant and equipment 42 5
Acquisition of Kysor Industrial Corp. - (262,189)
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Net cash used in investing activities $( 2,158) $(264,020)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term debt
and capitalized lease obligations $(24,217) $ (56,816)
Issuance of long-term debt 15,228 326,491
Dividends paid to shareholders (265) (264)
Short-term debt, net 4,290 6,236
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Net cash provided by (used in)
financing activities $ (4,964) $ 275,647
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Effect of exchange rate changes on cash
and temporary cash investments (970) (1,133)
NET INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS $(10,980) $ 1,573
CASH AND TEMPORARY CASH INVESTMENTS, beginning
of period 24,085 16,501
CASH AND TEMPORARY CASH INVESTMENTS, ------- --------
end of period $ 13,105 $ 18,074
======= ========
7<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 7,410 $ 2,779
======= ========
Income taxes $ 1,703 $ 329
======= ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Investment in properties and equipment through
issuance of capitalized lease obligations $ (163) $ (418)
======= ========
See notes to unaudited condensed financial statements.
</TABLE>
8<PAGE>
SCOTSMAN INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
The condensed consolidated financial statements include the accounts
of Scotsman Industries, Inc. and its consolidated subsidiaries (the
"Company").
All accounting policies used in the preparation of the quarterly
condensed financial statements are consistent with the accounting
policies described in the notes to financial statements for the year
ended December 28, 1997, appearing in the Company's 1997 Annual Report
to Shareholders ("Annual Report"). In the opinion of management, the
interim financial statements reflect all adjustments which are
necessary for a fair presentation of the Company's financial position,
results of operations and cash flows for the interim periods
presented. The results for such interim periods are not necessarily
indicative of results for the full year. These financial statements
should be read in conjunction with the consolidated financial
statements and the accompanying notes to consolidated financial
statements included in the Annual Report.
(2) INVENTORIES:
Inventories consisted of the following (in thousands):
Apr. 5, Dec. 28,
1998 1997
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Finished goods $33,233 $28,564
Work-in-process 15,235 13,891
Raw materials 33,925 32,895
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Total inventories $82,393 $75,350
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9<PAGE>
(3) ACQUISITION OF KYSOR:
In March of 1997, the Company acquired Kysor Industrial Corporation
("Kysor"), a major manufacturer and marketer of refrigerated display
cases, commercial refrigeration systems and insulated panels primarily
serving the supermarket industry. The Company purchased Kysor's
common and preferred stock for an aggregate purchase price of $311
million. Concurrent with the purchase, the Company sold Kysor's
Transportation Products Group to a third party for an aggregate
purchase price of $86 million plus assumption of certain liabilities.
The Company retained possession of Kysor's Commercial Products Group.
Goodwill relating to the acquisition of Kysor was $196.8 million,
which is being amortized for book purposes over 40 years using the
straight-line method. In addition, there was a goodwill amount of
$12.6 million related to an investment which was recorded in other
noncurrent assets in the balance sheet.
The purchase price was allocated principally to goodwill of $196.8
million, working capital of $44.8 million, property, plant and
equipment of $36.4 million, severance and other Kysor employee related
liabilities of $43.7 million, and deferred tax impacts of $17.5
million.
Kysor reported total sales in 1996 of $381 million, of which $245
million related to commercial refrigeration products.
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
acquisition of Kysor had occurred as of the first day of the period
presented. The pro forma information includes assumptions and
estimates and is not necessarily indicative of the results of
operations of the Company as they may be in the future or as they
might have been had the transaction occurred as discussed above. The
pro forma results of operations for the year-to-date period ended
March 30, 1997, include certain adjustments made by Kysor prior to
acquisition anticipating the completion of the transaction. These
adjustments related to changes in the accounting estimates for the
carrying values of certain assets and liabilities and the combining of
four of Kysor's business units into two business units. Management
does not expect these adjustments to occur in the future.
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.
10<PAGE>
<TABLE>
<CAPTION>
(Amounts in thousands, except per-share data)
PRO FORMA (Unaudited)
Three Months Ended Apr. 5, Mar. 30,
1998 1997
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<C> <C> <C>
Net sales $152,215 $136,911
Net income before
extraordinary item $ 2,340 $ 1,839
Net income per common share before
extraordinary item $ 0.22 $ 0.17
Average number of common shares
outstanding - diluted 10,832 10,795
(4) SUMMARY FINANCIAL INFORMATION:
The following is summarized financial information of Scotsman Group
Inc., the Company's direct wholly-owned subsidiary, which issued $100
million aggregate principal amount of Senior Subordinated Notes due
2007 (the "Senior Subordinated Notes"). The Company has fully and
unconditionally guaranteed the Senior Subordinated Notes.
Summarized Financial Information (in thousands):
Apr.5, Dec. 28,
1998 1997
-------- ---------
Current Assets $227,002 $227,096
Noncurrent Assets 435,655 433,028
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Total Assets $662,657 $660,124
Current Liabilities $162,722 $149,690
Noncurrent Liabilities 359,384 369,523
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Total Liabilities $522,106 $519,213
For the Three Months Ended Apr. 5, Mar. 30,
1998 1997
-------- ---------
Net Sales $152,215 $ 98,077
Gross Profit 37,121 25,631
Income Before Extraordinary Loss 2,367 3,894
Net Income $ 2,367 $ 3,261
The Company has not presented separate financial statements and other
disclosure concerning Scotsman Group Inc. because the Company'
management has determined that such information is not material to the
holders of the Senior Subordinated Notes.
11<PAGE>
(5) LONG-TERM DEBT COVENANTS AND RESTRICTIONS ON DIVIDENDS
In March of 1997, the Company financed the acquisition of Kysor, after
giving effect to the divestiture of Kysor's Transportation Products
Group and other acquisition related transactions, through a $415
million loan facility established between the Company, Scotsman Group
Inc. and certain other subsidiaries and The First National Bank of
Chicago as agent for the lenders (the "FNBC Facility"). The agreement
governing the FNBC Facility and other debt agreements include various
financial covenants. The Company was in compliance with these
covenants as of April 5, 1998. One of the covenants in the FNBC
Facility has the effect of restricting the amount of the Company's
dividends to its shareholders by requiring the Company to maintain
consolidated stockholder's equity of at least $120 million (without
giving effect to 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 April 5, 1998, consolidated
stockholder's equity of the Company was $142.7 million. Under this
covenant the amount of retained earnings that was restricted as of
April 5, 1998 was $61.0 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. Also, under a covenant in
the indenture under which the Senior Subordinated Notes were issued,
$70.1 million of retained earnings of the Company and its wholly-owned
subsidiary Scotsman Group Inc. were restricted as of April 5, 1998.
(6) COMPREHENSIVE INCOME (LOSS)
As of January 1, 1998, the Company adopted Financial Accounting
Standards Board (the FASB) Statement No. 130, "Reporting Comprehensive
Income." Statement No. 130 requires reporting certain transactions
that result in a change in equity, such as currency translation,
unrealized gains and losses and minimum pension liability adjustments,
as components of comprehensive income. The adoption of this Statement
had no impact on the Company's net income or shareholder's equity.
During the first quarter of 1998 and 1997, total comprehensive income
(loss) amounted to $(0.1) million and $(0.7) million, respectively.
Total comprehensive income (loss) for the Company includes net income,
foreign currency translation adjustments and deferred compensation
adjustments.
12<PAGE>
(7) CURRENT AND PENDING ACCOUNTING CHANGES
In July, 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This Statement
expands certain reporting and disclosure requirements for segments
from current standards. In February, 1998, the FASB issued Statement
No. 132, "Employers Disclosures about Pensions and Other
Postretirement Benefits." This Statement revised employer's
disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. The
Company is not required to adopt these Statements until December, 1998
and does not expect the adoption of these standards to result in
material changes to previously reported amounts.
In January, 1998, Statement of Position (SOP) No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use," was issued. This SOP provides guidance on the accounting for
computer software costs. In April, 1998, SOP No. 98-5, "Reporting on
the Costs of Start-Up Activities," was issued. This SOP provides
guidance on accounting for the cost of start-up activities. The
Company is not required to adopt these Statements until January, 1999
and does not expect the adoption of these standards to result in
material changes to previously reported amounts or disclosures.
13<PAGE>
SCOTSMAN INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
The following discussion and analysis of the Company's financial
condition and results of operations contains forward looking
statements that involve risks and uncertainties. Such statements
include references to the Company's expectations, beliefs, goals, or
anticipated results. The Company's results could differ significantly
from those anticipated as a result of unforeseen factors. Factors
that could cause actual results to differ from those anticipated
include (i) the strength or weakness of the various economies in which
the Company markets its products, (ii) weather conditions, (iii) the
utilization rates of the Company's facilities, (iv) labor
difficulties, (v) increased prices of raw materials and purchased
components, (vi) scheduling and transportation dislocations, (vii)
delays in development of new products or construction of new
facilities, (viii) product liability or other lawsuits, warranty
claims or return of goods, (ix) foreign currency fluctuations, (x)
changes in buying patterns of certain large customers as a result of
internal cost-control measures adopted by those customers, (xi)
changes in environmental, health, safety or refrigerant regulations or
standards, (xii) the level of the Company's leverage, (xiii) the
Company's ability or inability to manage growth, (xiv) the Company's
loss of key personnel and (xv) the failure of the Company or its
suppliers to achieve Year 2000 compliance in a timely manner. See the
Cautionary Statements included as Exhibit 99 to the Company's most
recent Form 10-K filed with the Securities and Exchange Commission for
a more detailed discussion of the foregoing and other factors.
RESULTS OF OPERATIONS
Net sales for the first quarter of 1998 were $152.2 million, up $54.1
million or 55 percent from sales for the first quarter of 1997. First
quarter 1998 results included sales of $66.6 million from the
Commercial Products Group of Kysor, which was acquired by the Company
in March, 1997. First quarter 1997 results included sales from March
10 through March 30 of $14.5 million from Kysor.
Sales to the food retailing industry consist primarily of refrigerated
display case and walk-in cooler and freezer sales by Kysor. Kysor's
sales, representing approximately 44 percent of the Company's sales
for the first quarter of 1998, were $66.6 million, an increase of
$13.2 million, or 25 percent, over pro forma first quarter 1997 sales
of $53.3 million. Demand for Kysor's products strengthened during the
quarter, and the backlog of orders from supermarkets remains at record
levels.
14<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - CONTINUED
Sales to the commercial foodservice industry consist primarily of the
Company's commercial ice machine, food preparation and storage
equipment and beverage systems products. Sales of these foodservice
products, representing 56 percent of the Company's sales for the first
quarter of 1998, were $85.6 million, an increase of 4 percent over the
prior year period, using constant foreign exchange rates. Sales
stated at actual exchange rates increased 2 percent in the first
quarter of 1998. Worldwide ice machine sales in the first quarter of
1998 were $40.6 million, an increase of 8 percent over the same period
of 1997, using constant foreign exchange rates. Sales stated at
actual exchange rates increased 5 percent in 1998. The increase in
ice machine sales was primarily driven by growth in the overall
domestic ice machine market during the first quarter of 1998, combined
with an improvement in sales overseas as market conditions in Europe
improved over first quarter 1997.
Sales of food preparation and storage equipment, decreased 14 percent
in the first quarter of 1998 compared to the first quarter of the
prior year. Sales were lower as a direct result of lower activity
with Boston Market in the first quarter of 1998 than in the same
period of 1997, partially offset by other sales activity at the
Company' Delfield business.
Sales of beverage systems, increased 25 percent in U. S. dollars in
the first quarter of 1998 compared to the first quarter of 1997.
Ignoring the effect of changes in foreign exchange rates, sales of
beverage systems increased 28 percent in the first quarter of 1998
over the prior year period. Increased European market penetration and
continued sales gains by the Company's U.K.-based beverage dispensing
business, combined with the addition of Homark, a manufacturer of
equipment serving the U.K. beer industry which was acquired by the
Company in December, 1997, led to the sales gains.
15<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - CONTINUED
The Company's gross profit increased by $11.5 million, or 45 percent,
to $37.1 million in the first quarter of 1998 from $25.6 million in
the first quarter of 1997, primarily due to the impact of the Kysor
Acquisition. However, the Company's gross profit margin decreased as
a percentage of net sales to 24.4 percent in the first quarter of 1998
from 26.1 percent in the first quarter of 1997. The reduction in
margins in the first quarter of 1998 is attributable to the inclusion
of a full quarter of results of Kysor, which historically has reported
lower gross profit margins. Kysor was acquired by the Company in
March, 1997, and first quarter 1997 included Kysor results from March
10 through March 30. The Company's gross profit margins in
foodservice products increased in the first quarter of 1998 from the
same period in 1997 principally due to increased sales of beverage
systems and ice machines in 1998.
Selling and administrative expenses of $22.4 million increased by $7.3
million or 48 percent in the first quarter of 1998 as compared to the
first quarter of 1997. The increase in selling and administrative
expenses is largely attributable to the inclusion of a full quarter of
Kysor results in the first quarter of 1998, including amortization of
intangibles related to the purchase of Kysor of $1.2 million during
the quarter. Kysor results were included for the period March 10
through March 30 in 1997. As a percentage of net sales, selling and
administrative expenses decreased in the first quarter of 1998 to 14.7
percent from 15.4 percent reported in the first quarter of 1997. The
Kysor business units have historically reported lower gross profit
margins, but also lower selling and administrative expenses as a
percent of sales as compared to the balance of the Company's
businesses.
Income from operations of $12.9 million for the first quarter of 1998
increased by $3.4 million or 36 percent from the first quarter of 1997
which reflects the contribution to profits of the Kysor business. As
a percentage of net sales, 1998 first quarter income from operations
decreased to 8.5 percent from 9.7 percent in 1997. The decline is the
result of lower gross profit margins discussed above, and additional
amortization of intangibles resulting from the Kysor acquisition of
$1.2 million in the first quarter of 1998 as compared to $0.3 million
in the first quarter of 1997.
16<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - CONTINUED
Net interest expense of $7.2 million for the first quarter of 1998
increased by $5.0 million when compared to the first quarter of the
prior year. The Company incurred increased domestic borrowings to fund
the acquisition of Kysor beginning on March 10, 1997, whereas such
borrowings were in place for the full first quarter of 1998.
The Company's overall income tax rate for the first quarter of 1998
was 58.8 percent compared to 47.1 percent for the first quarter of
1997. The higher income tax rate in 1998 is primarily attributable to
the impact of $1.2 million per quarter of additional amortization of
intangibles resulting from the Kysor Acquisition, which is not tax
deductible.
Net income for the first quarter of 1998 was $2.3 million, or $0.22
per share compared to first quarter 1997 net income of $3.2 million,
or $0.30 per share. First quarter 1997 net income included a one-time
after-tax charge of $633,000 incurred for the early retirement of $20
million of 11.43 percent private placement debt. The $0.9 million, or
$0.08 per share decline in first quarter 1998 net income principally
reflects a full quarter's amortization and interest expense related to
last year's mid-March acquisition of Kysor. Nonetheless, management
expects that Kysor will be accretive to earnings for total fiscal year
1998.
The Company has been evaluating its computer software programs and
operating systems for the Year 2000 compliance. Based on this
assessment, the Company determined that it is required to modify
portions of its software during 1998 and 1999 so that its computer
systems will properly utilize dates beyond December 31, 1999. Based
on present information the Company believes that it will be able to
achieve Year 2000 compliance, and that the cost associated with
achieving such compliance will not have a material effect on its
financial condition or results of operations. However, if such
upgrades, modifications and conversions are not made, or are not made
in a timely manner, the Year 2000 issue could have a material impact
on the Company's operations.
The Company is currently communicating with its suppliers and
customers regarding Year 2000 compliance within their organizations.
In the event that any of the Company's significant suppliers or
customers does not successfully and timely achieve Year 2000
compliance, the Company's business or operations could be adversely
affected.
17<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND 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.
In March of 1997, the Company financed the acquisition of Kysor, after
giving effect to the divestiture of Kysor's Transportation Products
Group and other acquisition related transactions, through a $415
million loan facility established between the Company, Scotsman Group
and certain other subsidiaries and The First National Bank of Chicago
as agent for the lenders (the "FNBC Facility"). The FNBC Facility
originally consisted of a $150 million seven-year term loan and a $265
million seven-year reducing 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 leverage ratio as
defined in the FNBC Facility and vary between 0.5 percent to 1.50
percent above Eurocurrency rates. The revolving portion of the FNBC
Facility reduces on December 31 in the respective years as follows:
$10 million in 1998, and $15 million in each of 1999, 2000, 2001,
2002, and 2003, with the remaining amount outstanding payable on the
loan termination date in March 2004. The FNBC Facility is guaranteed
by Scotsman and certain of its subsidiaries and secured by a pledge of
stock of certain subsidiaries of Scotsman, including, but not limited
to, Scotsman Group Inc., The Delfield Company and Kysor Industrial
Corporation.
The FNBC Facility required that a notional amount of $150 million be
hedged to reduce interest rate exposure for three years. Interest-
rate swaps were established in 1997 to comply with the requirement
imposed by the FNBC Facility.
18<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
In addition to financing the Kysor acquisition, proceeds of the FNBC
facility were used to pay expenses associated with this acquisition
and were used to repay existing long-term debt, including debt
outstanding under a former $90.0 million reducing revolving credit
agreement and the $20.0 million private placement agreement. This
early repayment resulted in an after-tax loss of $633,000 in the first
quarter of 1997, which is presented in the accompanying income
statement in PART I, ITEM 1 as an extraordinary loss.
In 1997, the Company's wholly-owned subsidiary Scotsman Group Inc.
issued $100 million of 8-5/8% Senior Subordinated Notes (the "Notes")
and used the net proceeds of the Notes to repay $30 million of the
term loan under the FNBC Facility and also to repay amounts
outstanding under the revolving credit portion of the FNBC Facility.
During the first fiscal quarter of 1998, the Company repaid $10
million of the term loan, as required under the FNBC Facility.
The agreement governing the FNBC Facility and other debt agreements to
which the Company and its subsidiaries are parties include various
financial covenants, including covenants which have the effect of
restricting the amount of the Company's dividends to its shareholders.
The Company was in compliance with these covenants as of April 5,
1998. Under such covenants, $61.0 million of retained earnings of the
Company and $70.1 million of retained earnings of the Company and its
wholly-owned subsidiary, Scotsman Group Inc., were restricted as of
April 5, 1998. See Note 5 to the financial statements included in
this report for a more detailed description of the covenants
restricting payments of dividends.
The Company utilized cash flow from operations of $2.9 million for the
first three months of 1998 compared to cash flow utilized by operating
activities of $8.9 million for the first three months of 1997.
The following changes in the balance sheet categories from December
28, 1997, until April 5, 1998, excluding the impact of changes in
foreign exchange rates on those categories:
Inventory increased by $6.4 million, which reflects increased
seasonal activity both domestically and in the Company's foreign
subsidiaries.
19<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
Accounts receivable were $4.8 million higher, primarily as a
result of the sales increase in the first quarter of 1998
compared to the first quarter of 1997.
Trade accounts payable were $5.1 million higher which reflects
the impact of seasonal volume.
Capital expenditures, including those funded through capital leases,
increased $0.1 million, or 5 percent, to $2.4 million for the first
quarter of 1998 from $2.3 million for the first three months of 1997.
Capital expenditures in 1998 were made primarily to fund equipment to
realize productivity improvements, new product tooling, and
maintenance and replacement items.
Cash and temporary cash investments of $13.1 million as of April 5,
1998, decreased by $11.0 million from December 28, 1997, reflecting
the decrease in cash balances at the Company's foreign operations. In
January, 1998, Scotsman Group Inc. received net dividends of $13.7
million from foreign operations which were then used by Scotsman Group
Inc. to reduce borrowing under the FNBC facility.
Shareholders' equity increased $0.1 million from December 28, 1997,
which is primarily attributable to net income of $2.3 million for the
first three months of 1998, offset by a reduction in shareholders'
equity caused by changes in accumulated foreign currency translation
adjustments of $2.4 million and the impact of dividends.
Short-term debt increased $4.5 million from December 28, 1997 due to
temporary short-term domestic borrowings. Total debt, including
capital leases, was $346.0 million as of April 5, 1998 compared to
$350.7 million as of December 28, 1997. The debt to capital ratio was
71 percent at April 5, 1998, which is the same percentage as at
December 28, 1997.
On February 10, 1998, the Company's Board of Directors declared a
dividend of 2 1/2 cents per share payable to common shareholders of
record on March 31, 1998.
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.
20<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS
ON FORM 8-K
(a) Exhibits
Exhibit 10.1 Promissory Note in the principal amount of $7,500,000, made as of
April 28, 1998, by Scotsman Group Inc. to Comerica Bank.
Exhibit 10.2 Amendment, dated as of December 15, 1997, to the ISDA Master
Agreement, dated March 3, 1994, between The First National Bank of
Chicago and Scotsman Group Inc.
Exhibit 10.3 Amended Confirmation, dated February 5, 1998, relating to Interest
Rate Swap Transaction, dated March 17, 1997, under the ISDA Master
Agreement, dated March 3, 1994, as amended, between The First
National Bank of Chicago and Scotsman Group Inc.
Exhibit 27 Article 5 Financial Data Schedule for the Period Ended April 5,
1998.
(b) The Registrant filed a Current Report on Form 8-K dated February 10, 1998,
reporting under Item 5, Other Events.
21<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SCOTSMAN INDUSTRIES, INC.
Date MAY 20, 1998 By: /s/ Donald D. Holmes
-------------------------
Donald D. Holmes
Vice President-Finance
and Secretary
22<PAGE>
EXHIBIT INDEX
Exhibit Page Number
Number Description of Exhibit
------- ----------- ------------
10.1 Promissory Note in the principal
amount of $7,500,000, made as of
April 28, 1998, by Scotsman Group
Inc. to Comerica Bank.
10.2 Amendment, dated as of December 15,
1997, to the ISDA Master Agreement,
dated March 3, 1994, between The
First National Bank of Chicago and
Scotsman Group Inc.
10.3 Amended Confirmation, dated February 5,
1998, relating to Interest Rate Swap
Transaction, dated March 17, 1997,
under the ISDA Master Agreement, dated
March 3, 1994, as amended, between The
First National Bank of Chicago and
Scotsman Group Inc.
27 Article 5 Financial Data Schedule for
the Period Ended April 5, 1998.
23<PAGE>
</TABLE>
EXHIBIT 10.1
TAX I.D. NO.36-3635935
PROMISSORY NOTE
$7,500,000.00 Detroit, Michigan
April 28, 1998
On or before May 1, 1999, FOR VALUE RECEIVED, the undersigned,
SCOTSMAN GROUP INC., a Delaware corporation (herein called "Maker"),
promises to pay to the order of COMERICA BANK, a Michigan banking
corporation (herein called "Bank"), at the principal office of Bank at
Detroit, Michigan, in lawful currency of the United States of America,
SEVEN MILLION FIVE HUNDRED THOUSAND DOLLARS ($7,500,000.00), or so
much of said sum as has been advanced and is then outstanding
hereunder, together with interest thereon as hereinafter set forth.
This Note is a note under which advances, repayments and new
advances may be made from time to time, provided that Bank shall not
be obligated to make any advance hereunder. Advances hereunder may be
requested in Maker's discretion by telephonic notice to Bank or by
submission of a request for advance in form annexed hereto as Exhibit
"A". Any advance requested by telephonic notice (i) shall be made
only to Account No.1076111614 with Bank in the name of Maker or to
such other account as Maker shall subsequently designate by written
notice to Bank, and (ii) shall be confirmed by Maker that same day by
submission to Bank by first class mail of the written request for
advance aforementioned. Maker acknowledges that if Bank makes an
advance based on a telephonic request, it shall be for Maker's
convenience and all risks involved in the use of such procedure shall
be borne by Maker, and Maker expressly agrees to indemnify and hold
Bank harmless therefor. Bank shall have no duty to confirm the
authority of anyone requesting an advance by telephone.
Each advance outstanding under this Note from time to time shall
bear interest at a per annum rate equal to Bank's prime rate
established by Bank from time to time or such other rate accepted by
Bank with respect thereto, and shall be payable upon the repayment
date therefor. The amount, rate and repayment date of each advance
shall be noted on Bank's records, which records will be prima facie
evidence thereof, absent manifest error. Failure to pay any advance on
its repayment date, without Bank's consent, shall constitute a default
and such advance shall thereafter bear interest at three percent (3%)
above said prime rate as it may vary from time to time until paid.
Interest shall be computed on a daily basis using a year of 360 days
and assessed for the actual number of days elapsed. Interest on each
advance shall be payable monthly on the last day of each month in the
case of a prime based advance, and in all other cases on the
respective repayment date therefore which date shall not be later than
the maturity date of this Note.<PAGE>
This Note replaces that certain Promissory Note dated March 10,
1998, by Maker payable to Bank in the principal amount of Seven
Million Five Hundred Thousand Dollars ($7,500,000.00).
Whenever Bank deems itself insecure, or on default in payment of
any liability hereunder, or upon the occurrence of any Default as
defined under that Scotsman Group Inc. Revolving Credit Agreement
dated as of March 12, 1997, among Maker, certain affiliates of Maker,
The First National Bank of Chicago, as Agent, Bank, as lender, and the
various banks listed on the signature pages thereof (as amended from
time to time in writing by and between the parties thereto), the
representations, warranties, covenants and default provisions of which
are hereby incorporated by reference into this Note, notwithstanding
the earlier termination and expiration of said Revolving Credit
Agreement, as said representations, warranties, covenants and default
provisions may be amended from time to time in writing by and between
the parties thereto, or upon any default in payment of any other
liability of Maker to Bank and continuance thereof beyond any period
of grace, if any, provided with respect thereto, the Bank may declare
this Note due forthwith. Nothing herein shall limit any right granted
Bank by other instrument or by law.
SCOTSMAN GROUP INC.
By:/s/ D. D. Holmes
--------------------------------
Its:V.P.
-------------------------------
2<PAGE>
EXHIBIT "A"
REQUEST FOR ADVANCE
TO: COMERICA BANK (the "Bank")
The undersigned hereby requests an advance, or confirms such a request
made by telephone, under the Seven Million Five Hundred Thousand
Dollar ($7,500,000.00) Promissory Note dated _____________, 1998, made
by undersigned to the Bank, pursuant to the following terms:
Advance Amount: $_______ Interest Rate: _____% per annum
Advance Date: ______________, 19__ Repayment Date: ____________,
19__
The proceeds of this advance shall be or have been deposited to the
Account No. _____________ of the undersigned with the Bank or as
follows: _____________________.
Undersigned warrant(s) that no condition exists or event has occurred
which constitute or, with the giving of notice or the running of time,
or both, would constitute a default under said Promissory Note or any
related agreement with the Bank, and the undersigned further warrants
that no Event of Default, or condition or event which, with the giving
of notice or the running of time, or both, would have otherwise
constituted a "Default" under that certain Scotsman Group Inc.
Revolving Credit Agreement dated as of March 12, 1997, among the
undersigned, The First National Bank of Chicago, as Agent, and the
banks and other parties listed on the signature pages thereof (as
amended from time to time in writing by and between the parties
thereto), notwithstanding the earlier termination and expiration of
said Credit Agreement, has occurred and is continuing as of the date
hereof.
Dated this ____ day of _________, 19__.
SCOTSMAN GROUP INC.
By:_____________________________________
Its:____________________________________
3<PAGE>
EXHIBIT 10.2
AMENDMENT
Amendment (the "Amendment") dated as of December 15, 1997 to the
ISDA Master Agreement dated as of March 3, 1994 (the "Agreement"),
between Scotsman Group Inc. ("Scotsman") and The First National Bank
of Chicago ("First Chicago").
WHEREAS, the parties desire to amend the Agreement as described
herein:
NOW, THEREFORE, In consideration of the mutual agreements herein
and in the Agreement contained, the parties hereto agree as follows:
1. Amendments to Agreement
a. Part IV(f) of the Schedule shall be amended by deleting item
numbers (i) through (v) entirely and replacing them with the
following:
"The Note Pledge Agreement, the Stock Pledge Agreement
and the Guaranties, as defined in the Credit Agreement."
b. Part IV(g) of the Schedule shall be amended by replacing the
description of Party B's "Credit Support Provider" with the following:
"Any party to a Credit Support Document other than Party B,
the secured parties or any beneficiaries thereunder."
c. Part VI(a) of the Schedule shall be amended by replacing the
definition of "Credit Agreement" with the following:
"Credit Agreement" means that certain Credit Agreement dated
as of March 12, 1997, among Party B, The Delfield Company,
Scotsman Drink Limited, Whitlenge Drink Equipment Limited,
Frimont S.p.A. Castel MAC S.p.A. and Kysor Industrial
Corporation, as the Borrowers, Scotsman Industries, Inc.,
Party A, as Agent, and the Lenders named therein, as amended
by First Amendment dated as of March 24, 1997, a Second
Amendment dated as of June 30, 1997, and a Third Amendment
dated as of December 15, 1997, as the same may be amended
from time to time in accordance with its terms, but without
regard to any termination or cancellation thereof, whether
by reason of payment of all indebtedness incurred thereunder
or otherwise, unless such agreement is terminated and
replaced by a Successor Credit Agreement.
2. Representations
Each party represents to the other party that: -
a. Powers. It has the power to execute and deliver this
Amendment and to perform its obligations under this Amendment and has
taken all necessary action to authorize such execution, delivery and
performance;
b. No Violation or Conflict. Such execution, delivery and
performance do not violate or conflict with any law applicable to it,
any provision of its constitutional documents, any order or judgment
of any court or other agency of government applicable to it or any of<PAGE>
its assets or any contractual restriction binding on or affecting it
or any of its assets;
c. Consents. All governmental and other consents that are
required to have been obtained by it with respect to this Amendment
have been obtained and are in full force and effect and all conditions
of any such consents have been complied with; and
d. Obligations Binding. Its obligations under this Amendment
constitute its legal, valid and binding obligations, enforceable in
accordance with its respective terms (subject to applicable
bankruptcy, reorganization, insolvency, moratorium or similar laws
affecting creditors' rights generally and subject, as to
enforceability, to equitable principles of general application
(regardless of whether enforcement is sought in a proceeding in equity
or at law)).
3. Miscellaneous
a. This Amendment constitutes the entire Agreement and
understanding of the parties with respect to its subject matter and
supersedes all oral communications and prior writings with respect
thereto.
b. No amendment, modification or waiver in respect of this
Amendment will be effective unless in writing (including a writing
evidenced by a facsimile transmission) and executed by each of the
parties.
c. This Amendment may be executed in counterparts each of which
shall be deemed to be an original.
d. This Amendment will be governed by and construed in
accordance with the laws of the State of New York (without reference
to choice of law doctrine).
IN WITNESS WHEREOF, the parties have executed this Amendment by
their duly authorized officers as of the date hereof.
SCOTSMAN GROUP INC.
By: /s/ D. D. Holmes
------------------------------------
Name: D.D. Holmes
Title: V.P.
THE FIRST NATIONAL BANK OF CHICAGO
By:/s/ Janet D. Newell
------------------------------------
Name: Janet D. Newell
Title: AVP
<PAGE>
EXHIBIT 10.3
TO: SCOTSMAN GROUP, INC.
ATTN: JUDY PELTEKIAN
PHONE: (847) 215-4547
FAX NO. (847) 913-9844
FROM: THE FIRST NATIONAL BANK OF CHICAGO, CHICAGO
DATE: 05FEB98
RE: OUR REF: 8969.A TRN ID: 1055720
---------------------------------------------------------------
AMENDED CONFIRMATION *
WE ARE PLEASED TO CONFIRM THE TERMS OF THE TRANSACTION DESCRIBED
BELOW BETWEEN THE FIRST NATIONAL BANK OF CHICAGO, CHICAGO ("FIRST
CHICAGO") (THE FLOATING RATE PAYER), AND SCOTSMAN GROUP, INC.
("SCOTGRPINC") (THE FIXED RATE PAYER).
TYPE OF TRANSACTION: INTEREST RATE SWAP
NOTIONAL AMOUNT: USD 100,000,000.00
TERM:
TRADE DATE: 17MAR97
EFFECTIVE DATE: 26MAR97
* TERMINATION DATE: 27MAR03, SUBJECT TO ADJUSTMENT IN
ACCORDANCE WITH THE MODIFIED
FOLLOWING BUSINESS DAY CONVENTION
FIXED AMOUNTS:
FIXED RATE PAYER: SCOTGRPINC
* PAYMENT DATES: EACH MARCH 26, JUNE 26, SEPTEMBER
26, AND DECEMBER 26, COMMENCING
JUNE 26, 1997 AND ENDING MARCH 27,
2003.
BUSINESS DAY
CONVENTION: MODIFIED FOLLOWING
* FIXED RATE:
FROM AND TO BUT
INCLUDING EXCLUDING FIXED RATE
--------- --------- ----------
26MAR97 29DEC97 6.4565 PCT
29DEC97 27MAR03 6.1700 PCT<PAGE>
FIXED RATE DAY COUNT
FRACTION: ACTUAL/360
FLOATING AMOUNTS:
FLOATING RATE PAYER: FIRST CHICAGO
* PAYMENT DATES: EACH MARCH 26, JUNE 26, SEPTEMBER
26, AND DECEMBER 26, COMMENCING
JUNE 26, 1997 AND ENDING MARCH 27,
2003.
BUSINESS DAY
CONVENTION: MODIFIED FOLLOWING
FLOATING RATE OPTION: USD-LIBOR-BBA
DESIGNATED MATURITY: 3MONTHS
FLOATING RATE DAY
COUNT FRACTION: ACTUAL/360
RESET DATES: THE FIRST DAY OF EACH CALCULATION
PERIOD
SPREAD PCT: NONE
* INITIAL FLOATING RATE:
(INCLUDING SPREAD) 5.73828
COMPOUNDING: INAPPLICABLE
AVERAGING: INAPPLICABLE
METHOD OF AVERAGING:
ROUNDING CONVENTION: 5 DECIMAL PLACES AS PER ISDA
BUSINESS DAYS: NEW YORK AND LONDON
DOCUMENTATION:
THIS CONFIRMATION SUPPLEMENTS, FORMS PART OF, AND IS SUBJECT TO,
THE ISDA MASTER AGREEMENT DATED AS OF 03MAR94 BETWEEN THE
PARTIES, AS AMENDED AND SUPPLEMENTED FROM TIME TO TIME (THE
"AGREEMENT"). TERMS USED AND NOT OTHERWISE DEFINED HEREIN SHALL
HAVE THEIR MEANINGS AS DEFINED IN THE 1991 ISDA DEFINITIONS.
DEALING WITH CONFIRMATIONS ON OUR BEHALF:
DIANNE SCHUYLER 312-732-2148
DEALING WITH SETTLEMENTS ON OUR BEHALF:
EDWARD LAZOWSKI 312-732-2623<PAGE>
FIRST CHICAGO PAYMENT INSTRUCTIONS:
THE FIRST NATIONAL BANK OF CHICAGO, CHICAGO
ABA 071000013
ACCT NUMBER 48115380
ATTN: INTEREST RATE SWAPS
SCOTSMAN GROUP, INC. PAYMENT INSTRUCTIONS:
PLEASE ADVISE
PLEASE CONFIRM THE FOREGOING CORRECTLY SETS FORTH THE TERMS OF
OUR AGREEMENT BY EXECUTING THIS LETTER AND RETURNING IT VIA
FACSIMILE TO:
DERIVATIVES PRODUCT SUPPORT - CONFIRMATIONS
THE FIRST NATIONAL BANK OF CHICAGO, CHICAGO
(312) 336-4403 (FAX)
IT HAS BEEN A PLEASURE WORKING WITH YOU ON THIS INTEREST RATE
SWAP TRANSACTION AND WE LOOK FORWARD TO COMPLETING SIMILAR
TRANSACTIONS WITH YOU IN THE NEAR FUTURE.
REGARDS,
THE FIRST NATIONAL BANK OF CHICAGO,
CHICAGO
BY: /s/ Howard Costley
-----------------------------
NAME: Howard Costley
TITLE: 1st V.P.
BY: /s/ Diane Schuyler
------------------------------
NAME: Diane Schuyler
TITLE: Operations Officer
ACCEPTED AND CONFIRMED AS OF THE DATE HERETO:
SCOTSMAN GROUP, INC.
BY: /s/ Donald D. Holmes
----------------------------------------------------------
NAME: Donald D. Holmes
TITLE: V.P.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial
information extracted from Scotsman
Industries, Inc. Condensed Balance Sheet
(Unaudited) as of April 5, 1998 and
Scotsman Industries, Inc. Condensed
Statement of Income (Unaudited) for the
Three Months Ended April 5, 1998 and is
qualified in its entirety by reference
to such financial statements.
<MULTIPLIER> 1000
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> APR-05-1998
<PERIOD-TYPE> 3-MOS
<CASH> 13,105
<SECURITIES> 0
<RECEIVABLES> 108,150
<ALLOWANCES> 5,316
<INVENTORY> 82,393
<CURRENT-ASSETS> 227,002
<PP&E> 86,988
<DEPRECIATION> 54,264
<TOTAL-ASSETS> 662,657
<CURRENT-LIABILITIES> 160,569
<BONDS> 311,967
<COMMON> 1,078
0
0
<OTHER-SE> 141,626
<TOTAL-LIABILITY-AND-EQUITY> 662,657
<SALES> 152,215
<TOTAL-REVENUES> 152,215
<CGS> 115,094
<TOTAL-COSTS> 115,094
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,206
<INCOME-PRETAX> 5,682
<INCOME-TAX> 3,342
<INCOME-CONTINUING> 2,340
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,340
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
