SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
[x] THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number: 033-78954
SCOTSMAN HOLDINGS, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 52-1862719
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8211 Town Center Drive
Baltimore, Maryland 21236
(Address of principal executive offices) (Zip Code)
(410) 931-6000
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year - if changed since
last report)
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
--- ---
As of September 30, 1998, 6,196,374 shares of common stock ("Common
Stock") of the Registrant were outstanding.
<PAGE>
SCOTSMAN HOLDINGS, INC.
INDEX
FORM 10-Q
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1998 1
and December 31, 1997
Consolidated Statements of Operations for the three 2
and nine months ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows for the nine 3
months ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, 1998 December 31,
(Unaudited) 1997
------------------ ------------
(dollars in thousands)
<S> <C> <C>
Assets
------
Cash $ 727 $ 309
Trade accounts receivable, less allowance for
doubtful accounts 44,191 25,537
Prepaid expenses and other current assets 14,708 14,008
Rental equipment, net of accumulated depreciation of
$96,196 in 1998 and $93,623 in 1997 629,382 403,528
Property and equipment, net 42,879 37,105
Deferred financing costs, net 25,834 22,379
Goodwill and other intangible assets, net 164,516 1,204
Other assets 14,049 10,105
--------- ---------
$ 936,286 $ 514,175
========= =========
Liabilities and Stockholder's Equity
- ------------------------------------
Accounts payable $ 14,349 $ 7,518
Accrued expenses 42,289 17,097
Rents billed in advance 20,468 12,464
Promissory note -- 21,834
Long-term debt 822,686 533,304
Deferred income taxes 95,803 50,807
--------- ---------
Total liabilities 995,595 643,024
--------- ---------
Stockholder's equity:
Common stock, $.01 par value. Authorized 10,000,000
shares; issued and outstanding 9,507,407 shares in 1998
and 8,228,468 shares in 1997 95 82
Additional paid-in capital 231,144 164,494
Retained deficit 5,299 2,358
--------- ---------
236,538 166,934
Less treasury stock, at cost - 3,311,033 shares in 1998
and 3,308,333 in 1997 (295,847) (295,783)
--------- ---------
Net stockholders' deficit (59,309) (128,849)
--------- ---------
$ 936,286 $ 514,175
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-1-
<PAGE>
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ ---------------------
1998 1997 1998 1997
---- ---- ---- ----
(in thousands except share and per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Leasing $39,650 $31,052 $104,884 $ 88,167
Sales:
New units 15,694 15,188 34,435 33,025
Rental equipment 3,754 3,768 11,023 9,969
Delivery and installation 14,476 12,107 33,314 29,659
Other 6,874 6,649 18,517 16,661
-------- ------- -------- --------
Total revenues 80,439 68,764 202,173 177,471
-------- ------- -------- --------
Costs of sales and services:
Leasing:
Depreciation and amortization 6,894 8,478 18,940 24,540
Other direct leasing costs 5,943 5,048 15,629 13,913
Sales:
New units 13,298 12,732 28,548 27,787
Rental equipment 2,817 2,833 8,170 7,594
Delivery and installation 10,335 8,768 23,749 21,629
Other 1,511 2,233 3,865 4,948
-------- ------- -------- --------
Total costs 40,798 40,092 98,901 100,411
-------- ------- -------- --------
Gross profit 39,641 28,672 103,272 77,060
-------- ------- -------- --------
Selling, general and administrative expenses 15,223 11,292 41,755 35,072
Recapitalization expenses --- --- --- 5,105
Other depreciation and amortization 2,446 746 5,879 1,999
Interest, including amortization of deferred
financing costs 16,656 13,731 45,076 31,555
-------- ------- -------- --------
Total operating expenses 34,325 25,769 92,710 73,731
-------- ------- -------- --------
Earnings before income taxes
and extraordinary item 5,316 2,903 10,562 3,329
Income tax expense 5,582 1,074 7,621 1,232
-------- ------- -------- --------
Earnings (loss) before extraordinary item (266) 1,829 2,941 2,097
Extraordinary loss on extinguishment of debt, net --- 186 --- 11,490
-------- ------- -------- --------
Net earnings (loss) $ (266) $ 1,643 $ 2,941 $ (9,393)
======== ======= ======== ========
Earnings per common share:
Earnings (loss) before extraordinary item $ (0.05) $ 0.37 $ 0.58 $ 0.28
Extraordinary loss --- (0.04) --- (1.51)
-------- ------- -------- --------
Net earnings (loss) $ (0.05) $ 0.33 $ 0.58 $ (1.23)
======== ======= ======== ========
Earnings per common share, assuming dilution:
Earnings (loss) before extraordinary item $ (0.05) $ 0.36 $ 0.55 $ 0.27
Extraordinary loss --- (0.04) --- (1.47)
-------- ------- -------- --------
Net earnings (loss) $ (0.05) $ 0.32 $ 0.55 $ (1.20)
======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
(dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 2,941 $ (9,393)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Extraordinary loss on extinguishment of debt --- 18,244
Depreciation and amortization 27,461 485
Non-cash stock charges for interest --- 1,527
Provision for bad debts 1,769 1,724
Deferred income tax expense (benefit) 7,508 (5,636)
Provision for deferred compensation --- 367
Non-cash stock option compensation expense 2,044 ---
Gain on sale of rental equipment (2,853) (2,365)
Increase in net trade accounts receivable (15,305) (12,458)
Decrease (increase) in other assets (339) (5,864)
Increase in accrued expenses 12,102 20,592
Other 4,946 (4,921)
--------- --------
Net cash provided by operating activities 40,274 30,302
--------- --------
Cash flows from investing activities:
Redemption of certificates of deposit 13 ---
Rental equipment additions (95,741) (68,858)
Proceeds from sales of rental equipment 11,023 9,959
Purchases of property, plant and equipment, net (8,283) (7,914)
Net assets of Space Master International, Inc.,
including rental equipment of $157,223 (272,862) ---
--------- --------
Net cash used in investing activities (365,850) (66,813)
--------- --------
</TABLE>
(continued)
-3-
<PAGE>
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Nine months ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
(dollars in thousands)
<S> <C> <C>
Cash flows from financing activities:
Net (decrease) increase in promissory note payable $ (21,834) $ 21,834
Proceeds from long-term debt 490,492 708,848
Repayment of long-term debt (201,110) (461,922)
Increase in deferred financing costs (6,097) (23,994)
Payments to acquire treasury stock (64) (293,794)
Net proceeds from issuance of common stock 64,620 125,803
Extraordinary loss on extinguishment of debt --- (12,704)
--------- --------
Net cash provided by financing activities 326,007 36,420
--------- --------
Net increase (decrease) in cash 431 (91)
Cash at beginning of period 296 413
--------- --------
Cash at end of period $ 727 $ 322
========= =========
Supplemental cash flow information:
Cash paid for income taxes $ 151 $ 128
========= =========
Cash paid for interest $ 31,334 $13,404
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in thousands, except share amounts)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Scotsman Holdings, Inc. (Holdings or the Company) was organized in November,
1993 for the purpose of acquiring Williams Scotsman, Inc. (Scotsman). The
Company conducts business solely as a holding company, the only significant
asset of which is the capital stock of Scotsman. Therefore, any cash
dividends to be paid on the Company's common stock, or cash interest to be
paid on notes of the Company, are dependent upon the cash flow of Scotsman.
(2) FINANCIAL STATEMENTS
The financial information for the nine months ended September 30, 1998 and
1997 has not been audited. In the opinion of management, the unaudited
financial statements contain all adjustments (consisting only of normal,
recurring adjustments) necessary to present fairly the Company's financial
position as of September 30,1998 and its operating results and cash flows for
the nine months ended September 30, 1998 and 1997. The results of operations
for the three and nine months periods ended September 30, 1998 and 1997 are
not necessarily indicative of the operating results for the full year.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and notes thereto
included in the Company's latest Form 10-K.
(3) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current year
presentation.
(4) ACQUISITION OF SPACE MASTER INTERNATIONAL, INC.
On September 1, 1998, Scotsman acquired all of the outstanding stock of Space
Master International, Inc., a privately held Georgia corporation ("SMI"), in
a transaction accounted for under the purchase method of accounting. Total
consideration for the acquisition of SMI was $272,862, including the
repayment of existing indebtedness of SMI. The purchase price paid was
allocated to the net assets acquired of $109,156 with the excess of $163,700
recorded as goodwill and other intangible assets. The purchase price
allocation was based upon estimates of the fair value of net assets acquired.
These estimates may vary from actual amounts ultimately recorded. The
acquisition was financed in part with additional borrowings under Scotsman's
amended credit facility and in part with the issuance of 1,278,939 shares of
Holding's common stock at a price of $50.67 per share.
The pro forma unaudited results of operations for the nine months ended
September 30, 1998 and 1997, assuming consummation of the acquisition as of
January 1, 1997, are as follows:
-5-
<PAGE>
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(4) ACQUISITION OF SPACE MASTER INTERNATIONAL, INC. (continued)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
---- ----
<S> <C> <C>
Total revenue $260,688 $244,108
Loss before extraordinary item (567) (2,640)
Net loss (567) (14,130)
Net loss per basic share $ (0.10) $ (1.67)
==== ====
Net loss per share, assuming dilution $ (0.09) $ (1.63)
==== ====
</TABLE>
(5) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets relate to purchase transactions and are
amortized on a straight-line basis over periods of up to 40 years. As of
September 30, 1998 and 1997, accumulated amortization was $605 and $210,
respectively. The Company periodically assesses the recovery of goodwill by
determining whether amortization of the goodwill over its remaining life can
be recovered through undiscounted cash flows of the acquired operations.
Goodwill impairment, if any, is measured by determining the amount by which
the carrying value of the goodwill exceeds its fair value based upon
discounting of future cash flows.
(6) LONG-TERM DEBT
In connection with the acquisition of SMI discussed in Note 4 above, Scotsman
entered into an amended credit facility providing for increased revolver
borrowings up to $540,000 and a new $60,000 term loan. Terms of the revolver
are unchanged from the original credit agreement dated May 1997. The term
loan, which matures May 21, 2005, bears interest at a rate of either prime
plus 2.0% or the Eurodollar rate plus 3.25%. Principal payments due on the
term loan are equal to 1% per year for the first four years, with equal
quarterly installments thereafter.
(7) EARNINGS PER SHARE
Earnings per common share is computed by dividing net earnings by the
weighted average number of common shares outstanding during the periods.
The following table sets forth the components of the weighted-average shares
outstanding for the basic and diluted earnings per share computations:
-6-
<PAGE>
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(7) EARNINGS PER SHARE (continued)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted-average shares -
basic earnings per share 5,335,133 4,920,135 5,059,671 7,613,165
Effect of employee stock options --- 228,183 246,216 191,361
--------- --------- --------- ---------
Weighted-average shares -
diluted earnings per share 5,335,133 5,148,318 5,305,887 7,804,526
========= ========= ========= =========
</TABLE>
Earnings per share amounts for 1997 have been restated to reflect the
three-for-one stock split that was effected in the form of a 200 percent
dividend which was declared by the Company in December, 1997.
Employee stock options were not included in the computation of diluted
earnings per share for the three months ended September 30, 1998 because the
Company recorded a loss before extraordinary item for that period, and,
therefore, the effect would have been antidilutive.
(8) INCOME TAXES
The difference between the Company's reported tax provision for the first
nine months of 1998 and the tax provision computed based on U.S. statutory
rates is primarily attributed to a change in estimate associated with the
Company's deferred tax asset valuation allowance. During the quarter ended
September 30, 1998, the Company recorded a charge to income tax expense of
$3,400 to increase the deferred tax asset valuation allowance as a result of
management's decision to abandon tax planning strategies associated with the
recoverability of certain net operating loss carryforwards.
(9) RECAPITALIZATION
Pursuant to a recapitalization agreement, on May 22, 1997, the Company (i)
repurchased 3,210,679 shares of its outstanding common stock for an aggregate
of approximately $293,777 in cash and approximately $21,834 in promissory
notes due January 1998 and (ii) issued 1,475,410 shares of common stock for
an aggregate of approximately $135,000 (or a price of $91.50 per share) in
cash. In related transactions on the same date, (i) the Company purchased all
of its outstanding Series B 11% Senior Notes due 2004 ($29,292 aggregate
principal amount) for approximately $32,251, including accrued interest and
fees, (ii) Scotsman purchased $164,660 aggregate principal amount of its 9
1/2% Senior Secured Notes due 2000 for approximately $179,852, including
accrued interest and fees and (iii) Scotsman repaid all of its outstanding
indebtedness ($119,017) under its prior credit facility. Additionally, in a
series of subsequent transactions, Scotsman purchased the remaining $300
principal amount of its 9.5% senior secured notes due 2000 for approximately
$351, including accrued interest and fees. In conjunction with the debt
extinguishment, the Company recognized an extraordinary loss of $18,333.
-7-
<PAGE>
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(9) RECAPITALIZATION (continued)
In connection with the recapitalization, (i) Scotsman accelerated the payment
of deferred compensation under its long term incentive plan, (ii) all
outstanding stock options under the Company's employee stock option plan
vested and became immediately exercisable and (iii) Scotsman canceled a
portion of the outstanding stock options. Accordingly, in the second quarter
of 1997, the Company recognized $5,105 of recapitalization expenses including
$2,489 in connection with the acceleration of deferred compensation and
$2,616 in connection with the cancellation of the stock options.
In order to finance the recapitalization transaction Scotsman issued $400,000
in 9 7/8% Senior Notes due 2007 and entered into a $300,000 revolving bank
facility. Scotsman paid a dividend of $178,749 to the Company to pay
recapitalization expenses, to repurchase the common stock and to purchase the
Series B 11% Senior Notes. In January 1998, Scotsman paid a dividend of
$22,700 to the Company to repay the promissory note.
-8-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Three Months Ended September 30, 1998 Compared with Three Months Ended
September 30, 1997. Revenues in the quarter ended September 30, 1998 were $80.4
million, a $11.7 million or 17.0% increase from revenues of $68.8 million in the
same period of 1997. This increase resulted primarily from an $8.6 million or
27.7% increase in leasing revenue, a $0.5 million or 3.3% increase in new sales
revenue and a $2.4 million or 19.6% increase in delivery and installation
revenue. The increase in leasing revenue is attributable to an increase in the
average number of units in the fleet of 34.9% to approximately 60,900 for the
third quarter of 1998, offset by a decrease in fleet utilization of
approximately one percentage point and a slight overall decrease in average
monthly rental rate. The increase in the average number of units in the rental
fleet for the third quarter is primarily due to the acquisition of approximately
12,800 units in conjunction with the purchase of Space Master International,
Inc. on September 1, 1998. The overall decrease in the average monthly rental
rate is a result of modest rate increases in the Company's major products offset
by changes in fleet mix. Delivery and installation revenue increased as a result
of the increases in leasing and sales activity described above.
Gross profit for the quarter was $39.6 million, an $11.0 million or 38.3%
increase from the third quarter of 1997. This increase is primarily due to an
increase in leasing gross profit of $9.3 million or 53.0%, an increase in gross
profit from delivery and installation of $0.8 million or 24.0% and an increase
in gross profit from other revenue of $0.9 million or 21.4%. The increase in
leasing gross profit is due to an increase in the leasing activity described
above combined with an increase in leasing margins from 56.4% for the third
quarter of 1997 to 67.6% for the third quarter of 1998, primarily due to the
decrease in depreciation expense resulting from the change in estimated residual
value of rental equipment made in October 1997. Excluding depreciation and
amortization, leasing margins increased from 83.7% to 85.0%. The increase in
gross profit from delivery and installation revenue is due to the increased
activity described above, coupled with a one percentage point increase in the
margin percentage. The increase in gross profit from other revenue is due to an
improvement in margins.
Selling, general and administrative (SG&A) expenses increased by $3.9 million
or 34.8% from the third quarter of 1997. Of this increase, $2.0 million relates
to a non-cash stock option expense accrual recorded in the third quarter of 1998
in accordance with variable plan accounting. The remaining increase is the
result of the growth experienced by the Company, both in terms of fleet size and
the number of branches. The Company's branch network has expanded from 68
branches at September 30, 1997 to 78 branches at September 30, 1998 while the
fleet has grown by approximately 22,300 units. Of this increase in fleet,
approximately 12,800 are attributable to units acquired from Space Master
International on September 1, 1998. The overall increases in SG&A expenses are
due to increases in field related expenses, primarily payroll and occupancy
expenses incurred in connection with this branch expansion.
Interest expense increased by $2.9 million or 21.3% in the third quarter of
1998 from the same period of 1997. This increase is a result of increased
borrowings to finance the recapitalization in
-9-
<PAGE>
May 1997, the purchase of Space Master International, Inc. in September 1998 and
as a result of financing the other fleet and branch growth described above.
The difference between the Company's reported tax provision for the three
months ended September 30, 1998 and the tax provision computed based on U.S.
statutory rates is primarily attributed to a change in estimate associated with
the Company's deferred tax asset valuation allowance. During the quarter ended
September 30, 1998, the Company recorded a charge to income tax expense of
$3,400 relating to an increase in the deferred tax asset valuation allowance as
a result of management's decision to abandon tax planning strategies associated
with the recoverability of certain net operating loss carryforwards.
Nine Months Ended September 30, 1998 Compared with Nine Months Ended September
30, 1997. Revenue in the nine months ended September 30, 1998 were $202.2
million, a $24.7 million or 13.9% increase from revenues of $177.5 million in
the nine months ended September 30, 1997. The increase resulted primarily from a
$16.7 million or 19.0% increase in leasing revenue, a $3.7 million or 12.3%
increase in delivery and installation revenue and a $1.9 million or 11.1%
increase in other revenue. The increase in leasing revenue is attributable to an
increase in the average number of units in the lease fleet of 24.1% to
approximately 53,600 units for the first nine months of 1998 combined with
stable utilization of 86%, offset by a slight overall decrease in the average
monthly rental rate. This overall decrease in average monthly rental rate is a
result of modest rate increases in the Company's major products offset by
changes in fleet mix. Delivery and installation revenue increased as a result of
the increases in leasing and sales activity described above. Other revenue
increased as a result of increases in the rental of steps as well as
miscellaneous revenue related to services provided for customer-owned units.
Gross profit for the nine months ended September 30, 1998 was $103.3, a $26.2
million or 34.0% increase from gross profit of $77.0 million during the same
period of 1997. This increase is primarily due to an increase in leasing gross
profit of $20.6 million or 41.4%, an increase in delivery and installation gross
profit of $1.5 million or 19.1% and an increase in gross profit from other
revenue of $2.9 million or 25.1%. The increase in leasing gross profit is due to
the increase in leasing revenue described above combined with an increase in the
leasing margins from 56.4%in 1997 to 67.0% in 1998, primarily due to a decrease
in depreciation expense resulting from the change in estimated residual value of
rental equipment made in October 1997. Excluding depreciation and amortization,
leasing margins increased from 84.2% in 1997 to 85.1% in 1998. The increase in
gross profit from delivery and installation is due to the increase in leasing
activity described above. In addition, delivery and installation margins
improved 1.6 percentage points related to the usage of in-house personnel as
opposed to more expensive outside subcontractors. The increase in gross profit
from other revenue is primarily due to the increase of revenue in this category
as described above.
Selling, general and administrative (SG&A) expenses increased by $6.7 million
or 19.1% from 1997. Of this increase, $2.0 million relates to a non-cash stock
option expense accrual recorded in the third quarter of 1998 in accordance with
variable plan accounting. The remaining increase is the result of the growth
experienced by the Company, both in terms of fleet size and number of branches
as compared to 1997. As noted above, the Company's branch network has expanded
from 68 branches at September 30, 1997 to 78 branches at September 30, 1998
while the fleet has grown by approximately 22,300 units from September 30, 1998.
Of this increase in fleet, approximately 12,800 are attributable to units
acquired from Space Master International on September 1, 1998. The overall
increases in SG&A expenses are due to increases in field related expenses,
primarily payroll and occupancy, incurred in connection with this branch
expansion.
-10-
<PAGE>
Interest expense increased by 42.8% to $45.1 million in 1998 from $31.6
million in 1997. This increase is a result of increased borrowings to finance
the recapitalization in May 1997, the purchase of Space Master International,
Inc. in September 1998 and as a result of financing the other fleet and branch
growth described above.
The difference between the Company's reported tax provision for the first nine
months of 1998 and the tax provision computed based on U.S. statutory rates is
primarily attributed to a change in estimate associated with the Company's
deferred tax asset valuation allowance. During the quarter ended September 30,
1998, the Company recorded a charge to income tax expense of $3,400 relating to
an increase in the deferred tax asset valuation allowance as a result of
management's decision to abandon tax planning strategies associated with the
recoverability of certain net operating loss carryforwards.
Liquidity and Capital Resources
During the nine months ended September 30, 1998 and 1997, the Company's
principal sources of funds consisted of cash flow from operating and financing
sources. Cash flow from operating activities of $40.3 million and $30.3 million
for the nine months ended September 30, 1998 and 1997, respectively, was largely
generated by the rental and sale of units from the Company's lease fleet.
The Company has increased its EBITDA and believes the EBITDA provides the
best indication of its financial performance and provides the best measure if
its ability to meet historical debt service requirements. The Company defines
EBITDA as net income before interest, taxes, depreciation, amortization,
deferred compensation, non-cash compensation expenses and recapitalization
expenses. EBITDA as defined by the Company does not represent cash flow from
operations as defined by generally accepted accounting principles and should not
be considered as an alternative to cash flows as a measure of liquidity, nor
should it be considered as an alternative to net income as an indicator of the
Company's operating performance. The Company's EBITDA increased by $15.6 million
or 23.3% to $82.5 million for the nine months ended September 30, 1998 compared
to $66.9 million for the same period of 1997. This increase in EBITDA is a
result of increased leasing activity resulting from the overall increases in the
number of units in the fleet and stable utilization, partially offset by a
slight decline in the average monthly rental rate due to changes in fleet mix
and increased SG&A expenses required to support the increased activities during
the nine months ended September 30, 1998.
Cash flow used in investing activities was $365.9 million and $66.8 million in
the nine months ended September 30, 1998 and 1997, respectively. The Company's
primary capital expenditures are for the discretionary purchase of new units for
the lease fleet and units purchased through acquisition. The Company seeks to
maintain its lease fleet in good condition at all times and generally increases
the size of its lease fleet only in those local or regional markets experiencing
economic growth and established unit demand. On September 1, 1998, the Company
purchased all of the outstanding common stock of Space Master International,
Inc. for an aggregate purchase price of $272.9 million, net of cash acquired.
Cash provided by financing activities of $326.0 million in the nine months ended
September 30, 1998 was primarily from borrowings under the line of credit and
the issuance of common stock to effect the purchase of Space Master
International. Cash provided by financing activities of $36.4 million in the
nine months ended September 30, 1997 was from a series of transactions related
to the recapitalization in May 1997.
-11-
<PAGE>
The Company believes it will have, for the next 12 months, sufficient
liquidity under its revolving line of credit and from cash generated from
operations to meet its expected obligations as they arise.
Impact of Year 2000
The Company has developed a comprehensive Year 2000 Compliance Plan designed
to ensure that its computer systems will function properly with respect to dates
in the year 2000 and beyond. To date, the Company has completed nearly all
phases of its plan, including the assessment, remediation, testing and
implementation of its key business computer applications affected by the Year
2000 issue. During the past three years, the Company has upgraded and/or
replaced certain computer hardware and software systems that are significant to
its business operations. Such systems have been determined to be Year 2000
compliant. Modification and testing of certain remaining software applications
is currently underway and is expected to be completed by December 31, 1998.
Additionally, the Company has surveyed its significant suppliers, large
customers and financial institutions to ensure that those parties have
appropriate plans to remediate Year 2000 issues where their systems interface
with the Company's systems or otherwise impact its operations. To date, the
Company is not aware of any such third party with a Year 2000 issue that would
materially impact the Company's results of operations, liquidity or capital
resources. While the Company believes its planning efforts are adequate to
address its Year 2000 concerns, there can be no guarantee that the systems of
other companies on which the Company's systems and operations rely will be
converted on a timely basis and will not have a material effect on the Company.
Total costs related to Year 2000 initiatives are not expected to be material to
the Company's results of operations or financial position. The Company is in the
process of finalizing a contingency plan for all critical computer applications
that could be impacted by the Year 2000 issue. The contingency plan is expected
to be complete by December 31, 1998.
-12-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 Financial Data Schedule for the quarter ended September 30, 1998.
(b) Reports on Form 8-K.
In a report on Form 8-K dated September 1, 1998, the Company announced
that it had purchased all of the outstanding stock of Space Master
International, Inc., a privately held Georgia corporation, for total
consideration of approximately $270 million including repayment of
existing debt.
-13-
<PAGE>
SIGNATURES
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 HOLDINGS, INC.
By: /s/ Gerard E. Keefe
__________________________
Gerard E. Keefe
Senior Vice President and
Chief Financial Officer
Dated: November 13, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Capacity Date
---- -------- ----
<S> <C> <C>
/s/ Gerard E. Keefe Senior Vice President and November 13, 1998
_______________________________ Chief Financial Officer
Gerard E. Keefe
/s/ Katherine K. Giannelli Vice President and Controller November 13, 1998
_______________________________
Katherine K. Giannelli
</TABLE>
-14-
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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0
0
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