-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Dc4EWefaB8jjefUvTgpfxkS456FZ2cHXkhDKi+WLHXfwigPOuS39tG+mcLIhaKQp Ryfulxk/+b1QwYdzKefJsw== 0000895813-98-000141.txt : 19980521 0000895813-98-000141.hdr.sgml : 19980521 ACCESSION NUMBER: 0000895813-98-000141 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980405 FILED AS OF DATE: 19980520 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCOTSMAN INDUSTRIES INC CENTRAL INDEX KEY: 0000846660 STANDARD INDUSTRIAL CLASSIFICATION: AIR COND & WARM AIR HEATING EQUIP & COMM & INDL REFRIG EQUIP [3585] IRS NUMBER: 363635892 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10182 FILM NUMBER: 98628875 BUSINESS ADDRESS: STREET 1: 820 FOREST EDGE DR CITY: VERNON HILLS STATE: IL ZIP: 60061 BUSINESS PHONE: 8472154600 10-Q 1 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 ------- Scotsman Industries, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 36-3635892 ------------------------ ----------------------------------- (State of Incorporation) (I.R.S. Employer Identification No.) 820 Forest Edge Drive, Vernon Hills, Illinois 60061 ---------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (847) 215-4500 ------------- 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. 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 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) ------- ------- Net sales $152,215 $ 98,077 Cost of sales 115,094 72,446 ------- ------ Gross profit $ 37,121 $ 25,631 Selling and administrative expenses 24,233 16,124 ------- ------ Income from operations $ 12,888 $ 9,507 Interest expense, net 7,206 2,207 ------- ------ Income before income taxes $ 5,682 $ 7,300 Income taxes 3,342 3,435 ------- ------ Income before extraordinary loss $ 2,340 $ 3,865 Extraordinary loss (net of income taxes of $422) - (633) ------- ------ Net income $ 2,340 $ 3,232 ======= ====== Basic EPS (ii): Income before extraordinary loss $ 0.22 $ 0.37 Extraordinary loss - (0.06) ------- ------ Net income per common share $ 0.22 $ 0.31 ======= ====== Diluted EPS (iii): Income before extraordinary loss $ 0.22 $ 0.36 Extraordinary loss - (0.06) ------- ------ Net income per common share $ 0.22 $ 0.30 ======= ====== 3 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 SCOTSMAN INDUSTRIES, INC. CONDENSED BALANCE SHEET (IN THOUSANDS) Apr. 5, Dec. 28, A S S E T S 1998 1997 ------- -------- (unaudited) 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 ------- ------- 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 ------- ------- $662,657 $660,124 ======= ======= 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 ------- ------- 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 ------- ------- Total liabilities $519,953 $517,470 ======= ======= 5 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) ------- ------- Total Shareholders' Equity $142,704 $142,654 ------- ------- $662,657 $660,124 ======= ======= See notes to unaudited condensed financial statements.
6 SCOTSMAN INDUSTRIES, INC. CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) For the Three Months Ended ----------------------- Apr. 5, Mar. 30, 1998 1997 ------- ------- 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 ------- ------- Net cash provided by operating activities $ (2,888) $ (8,921) ------- ------- 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) ------- ------- Net cash used in investing activities $( 2,158) $(264,020) ------- ------- 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 ------- -------- Net cash provided by (used in) financing activities $ (4,964) $ 275,647 ------- ------- 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 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.
8 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 ------ -------- Finished goods $33,233 $28,564 Work-in-process 15,235 13,891 Raw materials 33,925 32,895 ------ ------ Total inventories $82,393 $75,350 ====== ====== 9 (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
(Amounts in thousands, except per-share data) PRO FORMA (Unaudited) Three Months Ended Apr. 5, Mar. 30, 1998 1997 -------- -------- 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 ------- ------- Total Assets $662,657 $660,124 Current Liabilities $162,722 $149,690 Noncurrent Liabilities 359,384 369,523 ------- ------- 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 (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 (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 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 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 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 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 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 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 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 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 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 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
EX-10.1 2 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. 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 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 EX-10.2 3 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 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 EX-10.3 4 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 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 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. EX-27 5 ART. 5 FDS FOR FIRST QUARTER 10-Q
5 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. 1000 JAN-03-1999 DEC-29-1997 APR-05-1998 3-MOS 13,105 0 108,150 5,316 82,393 227,002 86,988 54,264 662,657 160,569 311,967 1,078 0 0 141,626 662,657 152,215 152,215 115,094 115,094 0 0 7,206 5,682 3,342 2,340 0 0 0 2,340 0.22 0.22
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