-----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, UIylXUhZyxVoulEW5XyDEsW2d9oIc3F2/lVsmCCiO5Gq0PLaMxneWeMjKnnfWFJg 5+gky00GWMBMmtmpeWBDCQ== 0000950137-99-000501.txt : 19990325 0000950137-99-000501.hdr.sgml : 19990325 ACCESSION NUMBER: 0000950137-99-000501 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990103 FILED AS OF DATE: 19990324 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-K SEC ACT: SEC FILE NUMBER: 001-10182 FILM NUMBER: 99571646 BUSINESS ADDRESS: STREET 1: 820 FOREST EDGE DR CITY: VERNON HILLS STATE: IL ZIP: 60061 BUSINESS PHONE: 8472154600 10-K 1 FORM 10-K/ANNUAL REPORT 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 3, 1999. or [ ] 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
Securities registered pursuant to Section 12(b) of the Act NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED Common stock, $0.10 par value New York Stock Exchange Common stock purchase rights, no par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] At March 5, 1999, there were 10,602,748 shares of registrant's common stock outstanding, and the aggregate market value of the voting stock held by nonaffiliates of the registrant as of such date was approximately $202.9 million. DOCUMENTS INCORPORATED BY REFERENCE Registrant's definitive Proxy Statement for its 1999 Annual Meeting of Shareholders to be held on May 13, 1999 (the "1999 Proxy Statement"): Part III. 2 PART I ITEM 1. BUSINESS Scotsman Industries, Inc. (together with its subsidiaries, "Scotsman" or the "Company") is a leading international manufacturer and marketer of a diversified line of commercial refrigeration products. The Company markets and sells its products to customers in the foodservice and food retail industries. Customers in the foodservice industry include restaurants, hotels, motels, soft-drink bottlers and brewers, and customers in the food retail industry include supermarkets and convenience stores. Scotsman was incorporated as a Delaware corporation in 1989 in connection with Household International, Inc.'s ("Household") spin-off of its commercial foodservice equipment operations. Effective April 14, 1989, Scotsman became publicly traded on the New York Stock Exchange and its operations ceased to be owned by Household. The Company conducts its business through the Scotsman Ice Systems division of its wholly-owned subsidiary, Scotsman Group Inc. ("SGI"), and through wholly-owned subsidiaries of SGI. SGI's wholly-owned domestic subsidiaries include Kysor Industrial Corporation ("Kysor"), The Delfield Company ("Delfield"), and Booth, Inc. Kysor was acquired by the Company in March 1997 (see "1997 Acquisitions"), and Delfield was acquired in April 1994. SGI's wholly-owned foreign subsidiaries include Frimont S.p.A. ("Frimont") and Castel MAC S.p.A. ("Castel MAC"), both located in Italy; Whitlenge Drink Equipment Limited ("Whitlenge") and Homark Holdings Ltd. ("Homark"), both located in the United Kingdom; Hartek Beverage Handling GmbH, located in Germany ("Hartek"); Hartek Awagem Vertriebsges m.b.H., a Hartek distributor located in Austria (together with Hartek, the "Hartek entities"); and Scotsman Ice Systems Shenyang Company Limited ("Scotsman Ice Systems China"), located in China. The Company acquired Homark in December 1997 (see "1997 Acquisitions"), Hartek in December 1995 and Whitlenge in April 1994. Scotsman Ice Systems China was formed in June 1995 as a joint-venture company between SGI and a Chinese company, Shenyang Xinle Precision Machinery Company. The Company increased its ownership interest in the joint-venture company from 60 percent to 100 percent in 1997. The Company also acquired a controlling interest in Austral Refrigeration Pty. Ltd., an Australian company ("Austral"), in 1998 (see "1998 Acquisitions"). FOODSERVICE EQUIPMENT BUSINESS The Company manufactures and sells a diversified line of commercial refrigeration products used in the foodservice industry. In the United States, those products include (1) ice machines manufactured and sold by both Scotsman Ice Systems and Booth (under its Crystal Tips brand), (2) food preparation and storage equipment, including food preparation workstations, refrigerators and freezers, and air ventilating equipment, manufactured and sold by Delfield, (3) beverage systems manufactured and sold by Booth, and (4) walk-in coolers and freezers manufactured and sold by the Kysor Panel Systems division of Kysor. Outside the United States those products include (1) ice machines manufactured and sold by Frimont, Castel MAC and the Company's Chinese subsidiary, (2) beverage systems manufactured and sold by Whitlenge, Hartek and Homark, and (3) a limited line of refrigerated cabinets, dough retarders and blast freezers manufactured and sold by Castel MAC. FOOD RETAIL EQUIPMENT BUSINESS The Company also manufactures and sells a diversified line of commercial refrigeration products used in the food retail industry. In the United States, those products consist primarily of refrigerated display cases manufactured and sold by the Kysor//Warren division of Kysor and walk-in coolers and freezers manufactured and sold by the Kysor Panel Systems division of Kysor. The Company also sells commercial ice machines to domestic food retail customers (primarily supermarkets) through Scotsman Ice Systems and Booth (under its Crystal Tips brand). Outside the United States, the Company manufactures and sells refrigerated display cases and installs and services food retail equipment in the Australian and New Zealand markets through Austral. The Company also sells commercial ice machines to food retail customers (primarily in Europe) through Frimont. 1998 ACQUISITIONS In March 1997, the Company acquired, as a result of its acquisition of Kysor, indirect ownership of 24 percent of the outstanding shares of Austral, the parent company of Kysor//Warren Australia, Pty. Ltd., a licensee and manufacturer of Kysor refrigerated display cases primarily in Australia ("Kysor//Warren Australia"). Kysor//Warren Australia is a leading supplier of refrigerated display page 1 3 cases to food retail customers in the Australian market. As the result of Austral's 1998 repurchase of some of its shares, the Company's ownership interest in Austral increased to 30 percent. In November 1998, the Company acquired, through Kysor, an additional 23 percent of the outstanding stock of Austral, thereby increasing its ownership interest in Austral to a 53 percent controlling interest. Austral reported sales of $91 million in its fiscal year ended June 30, 1998. In connection with its acquisition of a controlling interest in Austral, the Company, through Kysor, also entered into a put option agreement with the minority shareholders of Austral under which the minority shareholders have the right to require Kysor to acquire some or all of the remaining Austral shares at a purchase price per share equal to a multiple of Austral's net after-tax income for the preceding one or two fiscal year period, depending on the date of exercise, divided by the number of Austral shares outstanding on the date of exercise. The put is exercisable between October 1 and October 31 of each year, beginning October 1999. Kysor's obligation to purchase Austral shares in 1999 and 2000 is capped at an aggregate amount equal to Austral's net after-tax income in its fiscal year immediately preceding the date on which the put option is exercised and is at all times subject to Kysor's ability to complete the purchase in compliance with all covenants governing any then outstanding SGI debt or financing arrangements. In December 1998, Scotsman Drink Ltd., an intermediate holding company of the Company's United Kingdom subsidiaries, purchased a one-third stake in Total Cellar Systems, an installer and servicer of beer dispensing equipment in the United Kingdom for an amount less than $1.0 million. 1997 ACQUISITIONS In March 1997, Scotsman acquired Kysor (the "Kysor Acquisition"), which at the time was comprised of the Commercial Products Group, through which Kysor's refrigerated display case and walk-in cooler and freezer businesses were conducted, and the Transportation Products Group, through which Kysor sold a line of products to the transportation industry. The Company paid approximately $311 million in cash and assumed $35.0 million in debt, net of cash, for both the Commercial Products Group and the Transportation Products Group. Concurrent with the Kysor Acquisition, Scotsman sold substantially all of the assets of the Transportation Products Group for $86 million (approximately $71 million net of taxes) to a subsidiary of Kuhlman Corporation. Including estimated transaction and severance costs of $22.5 million, the net purchase price for the Commercial Products Group was approximately $298 million. The subsidiary of Kuhlman Corporation assumed substantially all liabilities related to the Transportation Products Group, including environmental and product liabilities. In December 1997, the Company acquired 100 percent of the outstanding shares of Homark Holdings Limited, a U.K.-based beverage equipment company ("Homark"). Homark is a leading manufacturer of counter dispense fonts, counter-mount dispensers, and line and shelf coolers sold primarily to the U.K. beer industry. Homark's annual revenues are approximately $10 million. The Company purchased Homark for approximately $5.6 million. PRODUCTS The principal commercial products of Scotsman are refrigerated display cases and mechanical refrigeration systems, ice machines, food preparation and storage equipment, walk-in coolers and freezers, and beverage systems. Scotsman also manufactures self-leveling tray and plate dispensers, and ventilation systems. In addition to commercial refrigeration products, Scotsman manufactures compact consumer ice machines and refrigerators for the luxury segment of the consumer appliance market. Refrigerated Display Cases Through its Kysor//Warren operating unit, Scotsman designs and manufactures display cases and mechanical refrigeration systems sold primarily to supermarkets. Refrigerated display cases are used by supermarkets and convenience stores to display perishable food items such as frozen foods, vegetables, deli items, dairy products and prepared meals. Remote mechanical refrigeration systems are located away from a store's customer area and provide power, air filtration and circulation and temperature controls to the refrigerated display cases located within the store. These products are sold under the Kysor//Warren trademark. Kysor//Warren Australia, a subsidiary of Austral, is a leading supplier of refrigerated display cases in the Australian and New Zealand markets. Sales of refrigerated display cases accounted for approximately 30 percent and 27 percent of the Company's sales in fiscal years 1998 and 1997, respectively. page 2 4 Ice Machines The Company manufactures and markets commercial ice-making machines under the Scotsman and Crystal Tips trademarks worldwide, under the Icematic and Simag trademarks in Europe, the Middle East, Africa and Asia, and under various brands through other dealer networks. The Company sells a diversified line of commercial ice machines that produce four forms of ice: cubes (consisting of contour, lenticular, gourmet and dice), flake, nugget and scale. Each type of ice is designed and marketed for specific applications and capacity ranges from 50 to 5,000 pounds of ice per day. The Company's ice machines are either self-contained units, which make, store, and in some cases, dispense ice, or modular units, which make, but do not store ice. Scotsman also manufactures and sells ice storage bins to accompany modular units. The Company manufactures and markets commercial ice machines and related components through its Italian subsidiaries, Castel MAC and Frimont, under the Icematic, Scotsman and Simag trademarks, for sale in Italy and for export primarily to Eastern and Western Europe, the Middle East, Africa and Asia. Scotsman manufactures ice machines for the Chinese market through Scotsman Ice Systems China. In China, the Company markets its ice machines under the Scotsman name. The Company also markets the Crystal Tips line internationally through three export marketing firms based in the United States and Canada. A significant percentage of the sales of the Company's commercial ice machines are to the full-service and fast-food restaurant industry. Other major end-user customers include hotels and motels, health care facilities, convenience stores, schools, supermarkets, and government and military facilities. In addition to commercial ice machines, Scotsman also manufactures compact consumer ice machines and refrigerators for the luxury segment of the consumer appliance markets. Scotsman's commercial ice machine business accounted for 27 percent, 29 percent, and 49 percent of the Company's sales in fiscal years 1998, 1997 and 1996, respectively. Food Preparation and Storage Equipment Scotsman manufactures and markets a wide range of commercial food preparation and storage equipment through its wholly-owned subsidiary Delfield. Delfield's principal products are customized and standard food preparation workstations, commercial up-right and under-the-counter refrigerators and freezers, mobile cafeteria systems and self-leveling tray and plate dispensers, all of which are constructed primarily from stainless steel, as well as wood and other decorative materials. Delfield's customized products are designed to address customer requests regarding size, space, features and performance. Delfield's standard refrigeration products frequently are incorporated into customers' systems or can be sold separately. Products are sold under the Delfield, Shelleyglas and Shelleymatic trademarks. Within the Company's food preparation and storage equipment unit, the Company also manufactures and markets several related products. In Europe, Castel MAC manufactures and markets a line of refrigerated cabinets under the Icematic brand name and a line of dough retarders and blast freezers under the Tecnomac brand name, and Frimont markets a line of refrigerators manufactured by Castel MAC under the Scotsman brand name. The Company also manufactures and markets niche products primarily through Delfield, including air ventilating equipment under the Air Tech trademark. In addition, the Company manufactures and markets a limited line of water coolers through its Italian subsidiaries, Frimont and Castel MAC, and small industrial applications through Whitlenge. Sales of food preparation and storage equipment accounted for approximately 16 percent, 21 percent and 32 percent of Scotsman's sales in fiscal years 1998, 1997 and 1996, respectively. Walk-in Coolers and Freezers Scotsman designs, manufactures, markets and sells walk-in coolers and freezers and environmental control systems through its Kysor Panel Systems operating unit. Kysor Panel Systems' refrigeration panels used in the construction of walk-in coolers and freezers are made from all three primary panel types: wood rail, urethane rail and soft nose. The Company can manufacture any of the three panel types to meet customer preferences. The Company's environmental control systems are used in industrial applications to test products under a range of temperatures. Sales of walk-in coolers and freezers accounted for approximately 14 percent and 11 percent of the Company's sales in fiscal years 1998 and 1997, respectively. Beverage Systems In the United States, Scotsman manufactures soft-drink dispensing equipment through its wholly-owned subsidiary, Booth. Booth manufactures and markets a complete line of non-coin operated soft-drink dispensing products and accessories. Booth offers both pre-mix and post-mix dispensers, page 3 5 which can either be ice-cooled or electrically-cooled, as well as ice and drink dispensers, hand-operated valves and other related accessory products used in the fountain market. Booth manufactures and markets the three major product categories of beverage systems (mechanically refrigerated, ice cooled and ice/drink) to major soft-drink companies. In Europe, Scotsman manufactures and markets soft-drink and draught beer dispensing equipment, and related products, under the Whitlenge, Homark and Hartek brand names through its Scotsman Drink Ltd. and Hartek Beverage Handling GmbH subsidiaries. Both Whitlenge and Hartek manufacture and market a wide range of beer and soft-drink coolers and related equipment. Homark manufactures counter dispense fonts, counter-mount dispensers, and line and shelf coolers, which are marketed through Whitlenge. The Company is a 50 percent partner in SAW Technologies, a joint venture formed in August 1996 to develop technologically advanced electronic beverage dispensing valves. The joint venture's product presently being sold to a major soft-drink bottler in the United Kingdom, uses technology which will be incorporated in products for other customers and markets. The product differentiates between and monitors different types of soft-drink syrups, continuously regulates the flow and mix of syrups and carbonated water, and can dispense other beverages such as fruit juices, where pulp presents difficulties for most of the current generation of mechanical valves. Sales of beverage systems accounted for approximately 13 percent, 12 percent and 19 percent of Scotsman's sales in fiscal years 1998, 1997 and 1996, respectively. MARKETING AND DISTRIBUTION Scotsman's sales and distribution network, which extends through over 100 countries, uses a combination of direct sales to national accounts, exclusive and non-exclusive distributors and independent dealers, wholesalers and sales representatives. Scotsman has approximately 330 sales and marketing employees, relationships with over 300 exclusive distributors in over 50 countries, and approximately 3,300 independent dealers, distributors, wholesalers and sales representatives in over 100 countries. While each business unit has its own marketing organization which is responsible for the marketing and distribution of its products, certain salespeople and distributors may handle more than one of the Company's product lines. Refrigerated Display Cases Kysor//Warren primarily sells refrigerated display cases directly to large supermarket and convenience store chains through its direct sales force. A smaller portion of Kysor//Warren sales are made through independent commercial refrigeration distributors that market to independent and small chain supermarkets and convenience stores. Ice Machines In the United States, both of the Company's Scotsman and Crystal Tips brands maintain their own independent distribution networks. Scotsman Ice Systems has approximately 85 distributors and Crystal Tips has approximately 68 distributors in the United States. Scotsman also owns and operates one of its largest distributors in Southern California, which it purchased upon the retirement of the former owners. Outside the United States, Crystal Tips has over 29 distributors. Outside the United States, Castel MAC and Frimont combined have approximately 1,200 dealers and 150 distributors in Eastern and Western Europe, Africa, the Middle East and Asia. In the majority of countries served, Castel MAC and Frimont each sell through separate distribution channels. Frimont's Simag brand is sold through a separate distribution network of 25 distributors and 200 dealers in Eastern and Western Europe, Africa, the Middle East and Asia. The Company's Chinese subsidiary sells commercial ice machines in China through its own distribution network. Distributors generally do not carry competing brands of ice machines. Distributors and dealers of each brand maintain inventories of replacement parts and are trained to install and service the equipment. Independent service dealers also install and service the equipment. The servicing functions performed by distributors and dealers are particularly important because ice machines typically require more service, due to variable water conditions, than other major appliances such as refrigerators. The Company also maintains inventories of replacement parts to support its ice machine product line. Scotsman sells commercial ice machines directly to national customers such as large restaurant chains, hotels, motels, soft-drink bottlers, and to state and federal governments. The Company sells consumer ice machines and refrigerators primarily through luxury consumer appliance distributors who sell to dealers. page 4 6 Food Preparation and Storage Equipment Delfield sells its products directly to national accounts such as large restaurant chains. Delfield also sells equipment through a network of approximately 1,400 non-exclusive dealers and approximately 28 independent sales representative firms. Such non-exclusive dealers generally carry competing lines of equipment. In Europe, Castel MAC sells to the European commercial bakery industry through dealers and agents specializing in that industry. Walk-in Coolers and Freezers Kysor Panel Systems sells its walk-in coolers and freezers directly to large supermarket chains primarily through its marketing and direct sales force. Kysor Panel Systems also sells to smaller independent supermarkets and convenience stores through a network of approximately 600 distributors, dealers and wholesalers. Beverage Systems Booth sells its beverage systems directly to soft-drink bottlers franchised or owned by large soft-drink companies. The systems are often labeled with the customer's name or trademark and the names of the beverages that will be dispensed. Whitlenge sells directly to soft-drink bottlers and brewers in the United Kingdom, while Hartek sells directly to soft-drink bottlers in Germany. Whitlenge and Hartek jointly export directly to bottlers and brewers through a direct sales force and distributors and local agents in various markets throughout Greater Europe and Africa. Products carrying the Homark brand name are primarily sold to the U.K. brewery market through the Whitlenge distribution network. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS For financial information pertaining to the Company's foreign and domestic operations refer to Note 15, "Business Segment Information," in Financial Statements and Supplementary Data in Item 8 of this report. ENVIRONMENTAL AND OTHER REGULATORY MATTERS The operations and properties of the Company are subject to various federal, state, local and foreign environmental regulations and standards. Because the requirements imposed by those authorities frequently are revised and supplemented, expenditures for compliance responsibilities are difficult to estimate and may exceed anticipated costs. The Company believes that compliance with existing and publicly proposed environmental regulations will not have a material adverse effect on the business, financial condition or results of operations of the Company. The Company or its subsidiaries have been identified as a potentially responsible party ("PRP") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or similar state statutes in connection with a number of hazardous waste sites, including a number of sites associated with the former Transportation Products Group of Kysor (see "1997 Acquisitions"). Under existing environmental laws, PRPs are jointly and severally responsible for the cost of clean-up and other remedial action at these sites, and each PRP is therefore potentially responsible for the full cost of remediation. As a practical matter, however, costs are generally shared with other PRPs, based on each PRP's relative contribution to the problem. Moreover, the purchaser of the Transportation Products Group has assumed all environmental liabilities associated with that business. Notwithstanding the assumption of liabilities by the purchaser, under applicable environmental laws the Company could incur liabilities related to these and other unknown environmental matters. Based on the foregoing factors, the relative size of the Company's contribution to the sites for which it has been named as a PRP (including those sites associated with Kysor's former Transportation Products Group), currently available information about the cost of remediation at such sites and the probability that other PRPs, many of which are large, solvent public companies, will pay the costs apportioned to them, the Company does not believe that any liability imposed in connection with such environmental proceedings, either individually or in the aggregate, will have a material adverse effect upon the Company's financial condition or its results of operations. COMPETITION The primary markets for Scotsman's products are highly competitive. The most significant competitive factors are product reliability and performance, service and price, with the relative importance of such factors varying among product lines. The Company has a number of competitors in each product line that it offers. Many of the Company's competitors are small, privately-owned companies. Some of the Company's competitors, however, are divisions of larger companies, and some have greater financial resources than the Company. Some of the Company's largest competitors include IMI Cornelius, plc, with whom the Company competes in beverage systems in the U.S. and Europe; Hussmann International Inc., with whom the Company competes in refrigerated display cases page 5 7 and related equipment in the U.S. and Australia; the Tyler division of United Technologies Corporation, with whom the Company competes in refrigerated display cases and related equipment in the U.S.; the Hill Phoenix division of Dover Corporation, with whom the Company competes in refrigerated display cases and related equipment in the U.S.; and The Manitowoc Company, Inc., with whom the Company competes in ice machines, food storage equipment, beverage systems and walk-in coolers and freezers in the U.S. Furthermore, the Company believes that the foodservice equipment industry and the food retail industry recently have begun to undergo significant consolidation as foodservice chains and supermarkets reduce their supplier base. Such consolidation could have an effect on the Company's future competitive position. RESEARCH AND DEVELOPMENT Scotsman conducts extensive research and development programs in each of its product lines. These programs seek to develop product improvements and achieve cost reductions, as well as develop new products. Approximately 76 employees of the Company are engaged in research and development. Scotsman's total research and development expenditures for fiscal years 1998, 1997 and 1996 were approximately $7.0 million, $6.2 million and $5.6 million, respectively. RAW MATERIALS The principal materials used in the manufacture of Scotsman's products are refrigeration components, including compressors, condensers, motors and controls, and raw materials, including stainless steel, galvanized steel, aluminum, copper, plastics, glass, foam insulation, brass and wood. These materials are readily available from several sources, and Scotsman has not experienced difficulties with respect to their availability. GENERAL Customers Although no single customer accounted for 10 percent or more of Scotsman's 1998 net sales on a historical basis, some of the Company's operating units are dependent upon a limited number of major customers, most of which do not have long-term purchase contracts with the Company. The Company's five largest customers represented approximately 20 percent of the Company's net sales in 1998. Sales of certain products, including, in particular, refrigerated display cases and food preparation and storage equipment, are largely dependent upon the expansion and renovation programs of the Company's large chain customers. Backlog of Orders The backlog of unshipped orders at the end of fiscal years 1998 and 1997 was $126.2 million and $119.9 million, respectively. The backlog is concentrated in the Company's Kysor//Warren and Kysor Panel Systems food retail businesses. The Company expects that all of the orders in the backlog at the end of fiscal year 1998 will be shipped during 1999. Seasonality The volume of sales of Scotsman's ice machines, food preparation and storage equipment and beverage systems is somewhat higher in the second and third fiscal quarters, than in the first and fourth fiscal quarters. Sales of Scotsman's refrigerated display cases and walk-in coolers and freezers are also subject to seasonal fluctuations. The Company expects that the second and third fiscal quarters generally will account for a greater portion of the annual net sales than the first and fourth fiscal quarters. Patents and Trademarks Scotsman holds or is licensed under many United States and foreign patents covering various design features used in its products, and also holds a number of other patents and patent applications, licenses, trademarks and trade names including the trademarks and trade names mentioned herein. Scotsman does not believe that any of the foregoing, considered individually, is material to its business, with the exception of the Scotsman, Delfield and Kysor trademarks. Scotsman believes it possesses adequate protection with respect to these trademarks. Associates As of January 3, 1999, Scotsman employed approximately 4,500 associates, including the associates of Austral, in which the Company has a 53 percent controlling interest. Approximately 1,700 of the Company's associates were covered by collective bargaining agreements at that time. The Company believes its relationships with associates are generally good. A new four-year collective bargaining agreement at the Company's Delfield unit in Mt. Pleasant, Michigan, became effective in April 1998. page 6 8 ITEM 2. PROPERTIES The following chart lists the domestic and international active manufacturing, distribution and office facilities owned or leased by Scotsman and the primary facilities of joint ventures in which Scotsman has an interest:
DOMESTIC FACILITIES LOCATION DESCRIPTION PRINCIPAL PRODUCT OWNED/LEASED - ------------------------- ---------------------------- ----------------------------- ------------ Goodyear, Arizona Plant and Office; Walk-in Coolers and Freezers Leased 50,000 sq. ft. LaVerne, California Distribution Facility; Ice Machines Leased 3,000 sq. ft. Columbus, Georgia Plant and Office; Refrigerated Display Cases Owned 297,000 sq. ft. Columbus, Georgia Plant and Office; Refrigeration Systems Owned 154,000 sq. ft. Columbus, Georgia Warehouse; Refrigerated Display Cases Leased 23,000 sq. ft. Conyers, Georgia Plant and Office; Refrigerated Display Cases Owned 480,000 sq. ft. Conyers, Georgia Warehouse; Refrigerated Display Cases Leased 81,000 sq. ft. Vernon Hills, Illinois Office; Ice Machines Leased 36,000 sq. ft. Vernon Hills, Illinois Office; Corporate Headquarters Leased 9,000 sq. ft. South Bend, Indiana Plant and Office; Refrigerated Display Cases Owned 102,000 sq. ft. Des Moines, Iowa Plant, Warehouse and Office; Refrigerated Display Cases Leased 57,000 sq. ft. Mt. Pleasant, Michigan Plant and Office; Food Preparation and Owned 347,000 sq. ft. Storage Equipment Portland, Oregon Plant and Office; Walk-in Coolers and Freezers Owned 88,000 sq. ft. Fairfax, South Carolina Plant and Warehouse; Ice Machines Owned 327,000 sq. ft. Covington, Tennessee Plant and Office; Food Preparation and Leased 188,000 sq. ft. Storage Equipment Johnson City, Tennessee Plant and Office; Walk-in Coolers and Freezers Leased 110,000 sq. ft. Dallas, Texas Plant and Office; Ice Machines and Leased 170,000 sq. ft. Beverage Systems Fort Worth, Texas Plant and Office; Walk-in Coolers and Freezers Owned 118,000 sq. ft. Fort Worth, Texas Office; Walk-in Coolers and Freezers Leased 17,000 sq. ft.
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INTERNATIONAL FACILITIES LOCATION DESCRIPTION PRINCIPAL PRODUCT OWNED/LEASED - ------------------------------- ------------------------- --------------------------- ------------- Glendenning, New South Wales, Plant and Office; Refrigerated Display Cases * Australia 154,000 sq. ft. Lonsdale, South Australia Plant and Office; Refrigerated Display Cases * 25,000 sq. ft. Padstow, New South Wales, Plant and Office; Refrigerated Display Cases * Australia 12,000 sq. ft. Vienna, Austria Office and Warehouse; Beverage Systems Leased 11,000 sq. ft. Shanghai, China Office; Ice Machines Leased 5,000 sq. ft. Radevormwald, Germany Plant and Office; Beverage Systems Owned 35,000 sq. ft. Castelfranco, Italy Plant and Office; Ice Machines Owned 242,000 sq. ft. Milan, Italy Plant and Office; Ice Machines Leased 152,000 sq. ft. Halesowen, United Kingdom Plant and Office; Beverage Systems Leased 84,000 sq. ft. Irthlingborough, Plant and Office; Beverage Systems * United Kingdom 3,900 sq. ft. Poole, United Kingdom Plant and Office; Beverage Systems Owned 18,000 sq. ft. Poole, United Kingdom Plant and Office; Beverage Systems Leased 12,500 sq. ft. Wareham, United Kingdom Plant and Office; Beverage Systems Leased 6,900 sq. ft.
* Facility owned or leased by Austral, which is 53 percent owned by the Company, or a separate joint venture in which Scotsman has an interest Scotsman considers the condition of its plants and other properties to be generally good and believes the capacity of its plants is adequate for the current needs of its business. Except for a registered first mortgage on the assets of Austral, and liens on a section of its Mt. Pleasant, Michigan, and Covington, Tennessee, facilities, both securing industrial revenue bonds, none of the principal properties owned by Scotsman are subject to encumbrances material to the operations of Scotsman. ITEM 3. LEGAL PROCEEDINGS LITIGATION RELATING TO INDIANAPOLIS ATHLETIC CLUB FIRE Delfield, which was acquired by the Company on April 29, 1994, was originally named as a defendant in Indianapolis Athletic Club, Inc. v. The Delfield Company, et al, a case filed in Marion County Superior Court, Indianapolis, Indiana. The case arose out of a fire at the Indianapolis Athletic Club (the "IAC") on February 5, 1992. The IAC alleges, in its action, that the fire was caused by a refrigerator manufactured by Delfield, and it seeks to recover property damages of between $10 to $12 million. Delfield was dismissed as a defendant in the case, following an investigation of its claim that the refrigerator in the IAC was manufactured, not by Delfield, but by the Delfield Division of Alco Standard Corporation ("Alco") prior to the acquisition of the Delfield Division by DFC Holding Corporation ("DFC") which was, in turn, acquired by Scotsman. Such dismissal was, however, without prejudice to the IAC's right to reinstate its claim against Delfield. The IAC continued to pursue its claim against the Delfield Division of Alco, and the Company has continued to monitor the action. page 8 10 Alco and the Delfield Division have denied that the refrigerator caused the fire. The case was tried in early 1997, and on February 17, 1997, a jury verdict was returned, and judgment was entered, in favor of Alco and the Delfield Division. On March 17, 1997, the IAC filed an appeal of the decision with the Indiana Court of Appeals. Although the plaintiffs and defendants have filed briefs with the court, no date has been set for oral argument and no decision has been rendered by the Indiana Court of Appeals. Pursuant to the agreement by which DFC acquired the Delfield Division, Alco is obligated to indemnify Delfield for all losses to Delfield resulting from product liability claims relating to products manufactured by the Delfield Division prior to its acquisition by DFC. Alco has agreed that its indemnity applies to the IAC's action, and Delfield believes that its insurance should cover any claims that are not covered by Alco's indemnity. Moreover, under the terms of the agreements pursuant to which the Company acquired Delfield and Whitlenge, the former shareholders of DFC and Whitlenge Acquisition Limited ("WAL"), an affiliate of DFC, are also required to indemnify the Company for up to $30 million in losses and expenses arising out of, among other things, suits, claims or proceedings arising out of the IAC fire. While no assurances can be given, the Company does not believe that the IAC action is likely to have a material adverse effect upon the financial condition of the Company or its results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the last fiscal quarter of 1998. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the names, ages and positions of all executive officers of Scotsman, the period that each has held his position with the Company and a brief account of each such officer's business experience during the past five years. Executive officers are appointed annually at a meeting of the Board of Directors of the Company held as soon as practicable after each annual meeting of the Company's shareholders. Officers of the Company are appointed to serve until the next annual election of officers and until their respective successors are chosen.
NAME AND AGE OFFICE AND EXPERIENCE - ---------------------- ------------------------------------------------------------------------------- Richard C. Osborne, 55 Mr. Osborne is Chairman of the Board and has held that position since May 1991. He is also President, Chief Executive Officer and a Director of Scotsman and President and Director of Scotsman Group and has held those positions since April 1989. Robert C. Eimers, 51 Mr. Eimers is Vice President-Human Resources of the Company and Assistant Secretary of Scotsman Group, and has held those positions since November 1998. From November 1997 to November 1998, he was a partner at the human resource consulting firm of Medina & Thompson. From February 1995 to September 1997, Mr. Eimers served as Senior Vice President-Human Resources at Service Merchandise. He served as Vice President-Human Resources at Sonoco Products Company from June 1988 to February 1995. David M. Frase, 51 Mr. Frase is a Vice President of the Company and has held that position since May 1997. He is also President and General Manager of Kysor Panel Systems, and has held those positions since 1987. Donald D. Holmes, 61 Mr. Holmes is Vice President-Finance and Secretary of Scotsman and Vice President-Finance, Secretary and Director of Scotsman Group and has held those positions since April 1989. Christopher D. Hughes, 52 Mr. Hughes is a Vice President of the Company and has held that position since June 1994. He is also President of Booth and has held that position since May 1994. From 1993 to May 1994, he was Vice President/General Manager of the Central and Western Transit Operations of Morrison Knudsen Corporation, a division engaged in the business of assembling new and overhauling used passenger rail cars.
page 9 11 Emanuele Lanzani, 64 Mr. Lanzani is an Executive Vice President of the Company and has held that position since April 1989. He is also Managing Director, Frimont and Castel MAC. Mr. Lanzani has been Managing Director of Castel MAC since its acquisition by Household in October 1985 and he has been Managing Director of Frimont since 1968. Randall C. Rossi, 48 Mr. Rossi is a Vice President of the Company and has held that position since January 1995. He is also President of Scotsman Ice Systems and has held that position since January 1995. From January 1994 to January 1995, he was Executive Vice President of Scotsman Ice Systems. From 1989 to January 1994, he was Vice President-Sales and Marketing of Scotsman Ice Systems. Michael de St. Paer, 53 Mr. de St. Paer is a Vice President of the Company and has held that position since April 1994. He is also Managing Director of Scotsman Beverage Systems and has held that position since September 1998. From June 1997 to September 1998 he was Managing Director of Scotsman Beverage Group - Europe. From April 1993 to June 1997, Mr. de St. Paer was Managing Director of Whitlenge. Graham E. Tillotson, 47 Mr. Tillotson is a Vice President of the Company and President of Delfield. He has held those positions since June 1997. From January 1997 to June 1997, he served as Interim President of Delfield. From 1984 to December 1996, he was Vice President, Sales & Marketing of Delfield. Logan F. Wernz, 55 Mr. Wernz is a Vice President of the Company and has held that position since May 1997. He is also President and General Manager of Kysor//Warren and has held those positions since 1988.
PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Scotsman Industries, Inc. common stock is listed on the New York Stock Exchange. The common stock ticker symbol is SCT. The high, low and last sales price per share for Scotsman's Common Stock, and dividends declared, by calendar quarter for 1997 and 1998 were as follows:
DIVIDENDS 1997 HIGH LOW LAST DECLARED - ---- ------- ------- ------- ---------- 1st Quarter $29.375 $23.000 $27.750 $ 0.025 2nd Quarter 28.250 24.500 27.750 $ 0.025 3rd Quarter 28.688 25.250 28.000 $ 0.025 4th Quarter 27.563 23.500 24.438 $ 0.025 ---------- Total dividends declared in 1997 $ 0.100 ---------- Shares outstanding at December 28, 1997 10,568,597 ---------- Shareholders of record at December 28, 1997 4,234 1998 - ---- 1st Quarter $30.750 $23.250 $28.000 $ 0.025 2nd Quarter 30.250 25.750 28.250 $ 0.025 3rd Quarter 29.063 20.563 22.000 $ 0.025 4th Quarter 21.938 14.750 20.563 $ 0.025 ---------- Total dividends declared in 1998 $ 0.100 ---------- Shares outstanding at January 3, 1999 10,596,880 ---------- Shareholders of record at January 3, 1999 3,809 ----------
The information contained in Note 7 of the "Notes to Consolidated Financial Statements" included under Item 8 is incorporated herein by reference. page 10 12 ITEM 6. SELECTED FINANCIAL DATA The following historical financial data has been derived from the Company's consolidated financial statements and should be read in conjunction with the audited Consolidated Financial Statements and the Notes thereto contained in Item 8 of this report and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Item 7 of this report. Scotsman Industries, Inc. Five-Year Summary (Amounts in thousands, except per-share data)
JAN. 3, DEC. 28, DEC. 29, DEC. 31, JAN. 1, FOR THE FISCAL YEARS ENDED 1999(a) 1997(b) 1996(c) 1995(d) 1995(e) - -------------------------- -------- -------- -------- -------- -------- Net sales $633,044 $571,588 $356,373 $324,291 $266,632 Income before income taxes 37,600 37,561 35,017 28,128 22,798 Income before extraordinary loss 18,928 18,919 18,568 15,408 12,785 Net income 18,928 18,286 18,568 15,408 12,785 Income per share before extraordinary loss, diluted (f) 1.76 1.75 1.73 1.45 1.35 Net income per share, diluted (f) 1.76 1.69 1.73 1.45 1.35 Total assets 707,650 660,124 283,264 275,943 244,791 Long-term debt and capitalized lease obligations, excluding current portion 330,531 321,132 60,289 74,719 85,161 Cash dividends declared per common share $ 0.10 $ 0.10 $ 0.10 $ 0.10 $ 0.10 -------- -------- -------- -------- --------
(a) The information for the fiscal year ended January 3, 1999, includes the balance sheet information of Austral. (b) The information for the fiscal year ended December 28, 1997, includes the results of Kysor subsequent to its acquisition in March 1997. (c) The information for the fiscal year ended December 29, 1996, includes the results of Hartek which was acquired on December 31, 1995. (d) The information for the fiscal year ended December 31, 1995, includes balance sheet information for Hartek which was acquired on December 31, 1995. (e) The information for the fiscal year ended January 1, 1995, includes the results of Delfield and Whitlenge as of the date of their acquisitions on April 29, 1994. (f) The calculation of diluted net income per share for the fiscal years 1998, 1997, 1996, 1995 and 1994 was based on 10,763,089, 10,803,261, 10,708,879, 10,644,697 and 9,474,715 weighted average shares of common stock, respectively. The calculation of diluted net income per share for the fiscal years ended December 31, 1995, December 29, 1996, and December 28,1997, is based on net income before preferred stock dividends. The number of shares assumes conversion of convertible preferred stock from the date of issue and also includes the dilutive impact, as if issuance had occurred on the acquisition date, of contingent shares which were subsequently distributed to the sellers of Delfield and Whitlenge based on those businesses having achieved a specified combined level of earnings during fiscal year 1994, and also includes the dilutive impact of common stock options outstanding. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Year ended January 3, 1999 ("1998"), compared with year ended December 28, 1997 ("1997") The Company's net sales increased by $61.5 million, or approximately 11 percent, to a record $633.0 million in 1998 from $571.6 million in 1997. Results for 1998 include sales of $274.5 million from the Commercial Products Group of Kysor, which was acquired by the Company in March 1997. Results for 1997 included sales from March 10 through December 28 of $215.5 million from Kysor. Sales to the foodservice industry, consisting primarily of sales to restaurants, hotels, motels, soft-drink bottlers, brewers and the Company's distribution network, increased $4.0 million, or 1 percent, to $352.1 million in 1998 from $348.1 million in 1997. Foodservice sales represented 56 percent of the Company's sales in 1998. Products sold to the foodservice industry include ice machines, food preparation and storage equipment, beverage systems, and walk-in coolers and freezers. Sales of all product lines to foodservice customers increased in 1998 with the exception of food preparation and storage equipment, which decreased 13 percent to $101.8 million in 1998 from $117.5 million in 1997. The decrease was primarily the result of substantially lower sales to Boston Market in 1998 than in 1997 at the Company's Delfield business unit. Worldwide ice machine sales to the foodservice industry were $157.0 million in 1998, an increase of 3 percent over 1997 sales of $152.2 million. Ice machine sales benefited from growth in the U.S. and Western European ice machine markets during 1998, partially offset by market weakness and lower sales in the Far East and Eastern Europe. page 11 13 Sales of beverage systems to the foodservice industry increased 19 percent to $83.7 million in 1998 from $70.2 million in 1997. Sales gains at the Company's domestic beverage dispensing business and 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 increase in sales. Sales to the food retail industry, consisting primarily of sales to supermarkets and convenience stores, increased $57.5 million to $281.0 million in 1998 from $223.5 million in 1997. Food retail sales represented 44 percent of the Company's sales in 1997. Products sold to the food retail industry include refrigerated display cases and mechanical refrigeration systems, walk-in coolers and freezers, and commercial ice machines. Sales of refrigerated display cases and refrigeration systems increased 24 percent to $188.4 million in 1998 from 1997 sales of $152.2 million. Sales of walk-in coolers and freezers increased 39 percent to $76.6 million in 1998 from 1997 sales of $55.2 million. The increase in sales of both display cases and walk-in coolers and freezers is largely attributable to the inclusion of Kysor's results for the full 12-month period in 1998. Sales of display cases and refrigeration systems were also impacted by delivery constraints in 1998 associated with the new refrigeration systems plant at Kysor//Warren. The backlog of orders from supermarkets at year-end was above year-end 1997 levels. The Company's gross profit increased by $16.4 million, or approximately 12 percent, to $158.4 million in 1998 from $142.0 million in 1997. The increase in gross profit is partially attributable to the Kysor Acquisition. Kysor's results of operations where included for the full year in 1998, whereas the Company's 1997 results included Kysor beginning in mid-March. Gross profit margins increased to 25.0 percent in 1998 from 24.8 percent in 1997. The Company's gross profit margins on foodservice sales increased as a result of higher sales of beverage systems and ice machines, and cost reductions, particularly in food preparation and storage equipment. The increase in foodservice gross profit margins more than offset reductions in food retail margins. Reductions in food retail margins were attributable to the inclusion, for the full 12-month period, of the results of Kysor, which has historically reported lower gross profit margins. Costs and inefficiencies associated with the new refrigeration systems plant at Kysor//Warren also contributed to the decrease in margins in 1998. Selling and administrative expenses increased by $10.9 million, or approximately 13 percent, to $93.9 million in 1998 from $83.1 million in 1997. The increase in selling and administrative expenses is largely attributable to the inclusion of Kysor's results for the full 12-month period in 1998, including amortization of intangibles of $4.9 million during that period related to the acquisition of Kysor. As a percentage of net sales, selling and administrative expenses increased to 14.8 percent in 1998 from 14.5 percent in 1997. One-time costs and increased sales and marketing expenses in several divisions in 1998 were the drivers of the increase in the percentage of net sales. Income from operations increased by $5.5 million, or approximately 9 percent, to $64.4 million in 1998 from $58.9 million in 1997. Operating income from sales to foodservice customers increased to $37.9 million in 1998 from $35.5 million in 1997, due to increased sales of beverage systems and ice machines. Operating income from sales to food retail customers increased to $35.5 million in 1998 from $31.8 million in 1997, which is largely attributable to the inclusion of Kysor results for the full 12-month period in 1998. Amortization of intangibles related to the Kysor acquisition increased $1.0 million, which is also attributable to the inclusion of Kysor for the full year in 1998. As a percentage of net sales, 1998 income from operations decreased to 10.2 percent from 10.3 percent in 1997. Net interest expense increased by $5.5 million to $26.8 million in 1998 from $21.4 million in the prior year as a result of a full year of increased domestic borrowings incurred by the Company to fund the Kysor Acquisition. Income tax expense of $18.7 million in 1998 was little changed from $18.6 million in 1997, as the amount of taxable income of the Company remained the same in 1998 as in 1997. The Company's overall income tax rate was 49.7 percent in 1998 compared to 49.6 percent in 1997. The income tax rate includes the impact of non-deductible amortization of intangibles resulting from the Kysor Acquisition. Net income increased $0.6 million, or 3.5 percent, to $18.9 million in 1998 from $18.3 million in 1997. 1998 net income included amortization and interest expense related to the 1997 acquisition of Kysor which was incurred for the full 12-month period in 1998, as compared with the period from mid-March through December in 1997. On a diluted basis, earnings per share increased by $0.07, or approximately 4 percent, to $1.76 in 1998 from $1.69 in 1997. Net income for 1997 included an extraordinary charge of $0.6 million, or $0.06 per share, incurred for the early retirement of debt. 1998 diluted earnings per share increased by $0.01, or approximately 1 percent, when compared to 1997 diluted earnings per share of $1.75, before the one-time charge. page 12 14 YEAR 2000 COMPLIANCE The Company uses software and other related technologies throughout its business that will be affected by the date change in Year 2000. The three areas where Year 2000 issues may affect the Company include (1) information technology (IT) systems, including computer hardware and software, (2) non-IT systems such as manufacturing or office equipment and other infrastructure which rely on imbedded computer chips to operate, and (3) the state of the Year 2000 readiness of third parties with significant relationships with the Company, such as suppliers, customers and service providers. The Company has substantially completed an assessment of its computer (IT) systems and is in the process of executing plans to resolve issues identified in these systems. The resolution of issues involves converting or modifying systems, replacing systems, and testing systems used in various applications throughout the Company to ensure that information can be accurately processed in the Year 2000. The Company is approximately 60 percent complete in modifying or replacing IT systems and expects completion by mid-1999. The Company is still in the process of assessing non-IT systems and equipment, consisting primarily of factory production equipment. Based on information currently available, testing and remediation of issues identified in non-IT systems is estimated to be completed by mid-1999. It is currently estimated that the aggregate cost of the Company's Year 2000 efforts will be approximately $3.5 million, of which approximately $2.3 million has been incurred to-date. All of the costs are being funded through operating cash flow. The Company is also taking steps to assess the Year 2000 readiness of significant third parties. These steps include contacting suppliers, customers and service providers that are believed to be critical to the Company's business operations after January 1, 2000, to determine their stage of Year 2000 compliance through questionnaires, interviews, on-site visits and testing. These activities are currently in process. While the Company's Year 2000 readiness plans are underway, the consequences of non-compliance by the Company, or its significant suppliers, customers or service providers could have a material adverse impact on the Company's operations. Although the Company does not anticipate any major non-compliance issues, it currently believes that the greatest risk of disruption in its business exists in the event of non-compliance by third parties that are significant to it. Some of the possible consequences of non-compliance by the Company or significant third parties include, among other things, temporary plant closings, delays in the receipt and delivery of raw materials and products, invoice and collection errors, and obsolescence of inventory. Given this risk, the Company intends to develop contingency plans to mitigate possible disruption in business operations that may result from Year 2000 related interruptions. Contingency plans may include increasing safety stocks of raw materials, securing alternative suppliers or other appropriate measures. The Company's Year 2000 activities are an ongoing process and the estimates of costs and completion dates for various activities described above are subject to change. EURO CURRENCY CONVERSION The Company has prepared for the conversion to the Euro currency and has begun handling transactions in the Euro as of the beginning of 1999. The Company's business systems are multi-currency functional and the Company's European operations transact business today in various European currencies, including the Euro. The Company does not believe the costs related to handling Euro-based transactions will have a material effect on the Company's financial condition or results of operations. RESULTS OF OPERATIONS Year ended December 28, 1997 ("1997 "), compared with year ended December 29, 1996 ("1996") The Company's net sales increased by $215.2 million, or approximately 60 percent, to a record $571.6 million in 1997 from $356.4 million in 1996. Results for 1997 included sales from March 10 through December 28 of $215.5 million from the Commercial Products Group of Kysor, which was acquired by the Company in March 1997. On a pro forma basis, Kysor's sales of refrigerated display cases and walk-in coolers and freezers increased $9.2 million, or 4 percent, to $254.3 million in 1997 from $245.1 million in 1996. page 13 15 Sales to the food retail industry, consisting primarily of sales to supermarkets and convenience stores, represented 39 percent of the Company's sales in 1997. Food retail sales increased $207.1 million to $223.5 million in 1997 from $16.4 million in 1996, which was attributable to the acquisition of Kysor. Kysor's sales of refrigerated display cases to food retail customers were $152.2 million in 1997. Sales of walk-in coolers and freezers to food retail customers were $55.2 million in 1997. At December 28, 1997, the Company's backlog of orders from supermarkets was at a record level, although the delivery schedules of certain customers were deferred from the fourth quarter of 1997 to future periods. Sales to the foodservice industry, consisting primarily of sales to restaurants, hotels, motels, bottlers and brewers, represented 61 percent of the Company's sales in 1997. Foodservice sales increased $8.2 million, or 2 percent, to $348.1 million in 1997 from $339.9 million in 1996. Sales of all product lines to foodservice customers increased in 1997, with the largest increase occurring in food preparation and storage equipment. Food preparation and storage equipment sales to foodservice customers increased by $6.6 million, or approximately 6 percent, to $117.5 million in 1997 from $110.9 million in 1996. Increased sales were driven by sales to Boston Market, a customer of the Company's Delfield business unit. Boston Market had significantly reduced its expansion plans in the second half of 1997. Worldwide ice machine sales to foodservice customers declined $9.3 million, or 6 percent, to $152.2 million in 1997 from $161.5 million in 1996. Approximately half the decline was due to changes in foreign exchange rates. However, the decline in ice machine sales also resulted from lower sales in Europe and the United States due to soft market conditions in both regions, some slowdown in restaurant chain activity in the United States and higher distributor inventories in Europe at the beginning of the year. Conditions in the United States improved in the fourth quarter of 1997 as did demand in Europe, as distributor inventories in that region returned to normal levels. Sales of beverage systems to foodservice customers increased by $2.7 million, or approximately 4 percent, to $70.2 million in 1997 from $67.6 million in 1996. Increased export sales and market penetration throughout Europe by the Company's U.K.-based beverage dispensing unit more than offset soft market conditions for the Company's dispensing businesses in Germany and in the United States. The Company's gross profit increased by $43.6 million, or approximately 44 percent, to $142.0 million in 1997 from $98.4 million in 1996, due to the inclusion of Kysor's results of operations subsequent to its acquisition by the Company in March 1997. However, the Company's gross profit margin decreased as a percentage of sales to 24.8 percent in 1997 from 27.6 percent in 1996. The reduction in gross profit margins was partially attributable to the inclusion of the results of Kysor, which historically has reported lower gross profit margins. Also contributing to the decline in gross profit margins were higher production costs of food preparation and storage equipment, and a 6 percent decline in worldwide ice machine sales in 1997. Selling and administrative expenses increased by $24.9 million, or approximately 43 percent, to $83.1 million in 1997 from $58.1 million in 1996. The increase in selling and administrative expenses was attributable to the inclusion of Kysor's results subsequent to its acquisition by the Company in March 1997, including amortization of intangibles of $3.8 million related to the purchase of Kysor during the year. As a percentage of sales, selling and administrative expenses decreased to 14.5 percent in 1997 from 16.3 percent in 1996. The percentage decrease was primarily attributable to Kysor's business units which, although they have historically reported lower gross profit margins, also have lower selling and administrative expenses as a percentage of sales as compared with the balance of the Company's businesses. Income from operations increased by $18.6 million, or approximately 46 percent, to $58.9 million in 1997 from $40.3 million in 1996, which primarily reflects Kysor's contribution to the Company's profits. As a percentage of sales, income from operations decreased to 10.3 percent in 1997 from 11.3 percent in 1996. The decline was the result of the lower gross profit margins and an additional $3.8 million of amortization of intangibles resulting from the Kysor Acquisition. Net interest expense increased by $16.1 million to $21.4 million in 1997 from $5.3 million in the prior year as a result of the increased domestic borrowings incurred by the Company to fund the Kysor Acquisition. Income taxes increased by $2.2 million to $18.6 million in 1997 from $16.4 million in 1996 due to higher taxable income and an increase in the Company's overall income tax rate to 49.6 percent in 1997 from 47.0 percent in 1996. The higher income tax rate was primarily attributable to the impact of non-deductible amortization of intangibles resulting from the Kysor Acquisition. page 14 16 Net income, before a one-time after-tax charge of $633,000 incurred for the early retirement of $20 million of 11.43 percent private placement debt, increased by $0.3 million, or approximately 2 percent, to $18.9 million in 1997 from $18.6 million in 1996. On a diluted basis, earnings per share, before the onetime charge, increased by $0.02, or approximately 1 percent, to $1.75 in 1997 from $1.73 in 1996. Excluding the effects of foreign currency translation, 1997 net income before the one-time charge would have increased 4 percent. Net income, including the one-time charge, declined by $0.3 million, or approximately 2 percent, to $18.3 million in 1997 from $18.6 million in 1996. On a diluted basis, earnings per share, including the one-time charge, declined by $0.04, or approximately 2 percent, to $1.69 in 1997 from $1.73 in 1996. 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 the 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 in combination with available borrowing capacity will be used to run the Company's businesses and fund further growth. Refer to Note 7 of the Notes To Consolidated Financial Statements in Item 8 for a discussion of the Company's loan facilities. The Company generated cash flow from operations of $35.6 million in 1998 compared with cash flow from operations of $31.9 million in 1997. Net income plus depreciation and amortization increased by $3.5 million, or 10 percent, to $38.3 million in 1997 from $34.8 million in 1996. The changes in the balance sheet categories discussed below from December 28, 1997, to January 3, 1999, exclude the impact of the acquisition of a controlling interest in Austral, and of changes in foreign exchange rates on those categories. Beginning in December 1998, the balance sheet of Austral is consolidated with that of the Company and the appropriate minority interest is reflected on the Company's Consolidated Balance Sheet. Absent the Austral acquisition, working capital increased $8.1 million primarily due to a decrease in liabilities related to severance and retirement benefits paid to former executives of Kysor. Capital expenditures, including those funded through capital leases, decreased $1.8 million, or 15 percent, to $10.0 million in 1998 from $11.8 million in 1997. Capital expenditures in 1998 were made primarily for equipment to realize productivity improvements, new product tooling, and replacement and maintenance items. Capital expenditures in 1997 included funds to complete construction of a new refrigeration systems facility in Columbus, Georgia. In November 1998, the Company, through its Kysor Industrial Corporation subsidiary, acquired 24 percent of the outstanding stock of Austral, thereby increasing its ownership of Austral to a 53 percent controlling interest, for a cost of approximately $13.7 million. In December 1998, the Company's subsidiary Scotsman Drink Ltd. acquired a one-third stake in Total Cellar Systems, an installer and servicer of beer dispensing equipment in the United Kingdom, at a cost of less than $1 million (see "1998 Acquisitions" in Item 1 of this report). Cash and cash equivalents of $22.4 million as of January 3, 1999, decreased by $1.7 million from December 28, 1997, reflecting the decrease in cash balances at the Company's foreign subsidiaries. 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 borrowings under its credit facility with the First National Bank of Chicago. Note 7 to the Company's financial statements included in Item 8 and herein incorporated by reference, contains a summary of the changes in the Company's debt structure during 1998. Short-term debt increased $3.0 million from December 28, 1997, and principally related to amounts owed under lines of credit. Total debt, including capital leases, was $355.3 million as of January 3, 1999, compared with $350.7 million as of December 28, 1997. Total debt at January 3, 1999, includes $13.8 million of debt of Austral, which is now included in the Company's Consolidated Balance Sheet. The debt-to-capital ratio was 69 percent at January 3, 1999, compared with 71 percent at December 28, 1997. As of January 3, 1999, the Company was subject to various covenants under the agreements governing its outstanding indebtedness, including a covenant which had the effect of restricting the amount of the Company's dividends to its shareholders. Refer to Note 7 to the Company's financial statements for a further description of this particular covenant. The Company was in compliance with its covenants as of January 3, 1999. On February 10, 1998, May 14, 1998, August 13, 1998, and December 17, 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, June 30, 1998, September 30, 1998, and December 31, 1998. page 15 17 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. MARKET RISK The Company is exposed to market risks from changes in interest rates, foreign currency exchange rates and commodity prices. To reduce such risks, the Company selectively uses financial instruments. The Company does not use financial instruments for trading purposes. Discussions of the Company's accounting policies and further disclosure relating to financial instruments is included in Notes 1 and 10 of the Notes to Consolidated Financial Statements in Item 8. Interest Rate Risk The Company uses interest rate swap agreements and interest rate cap agreements to reduce the impact of changes in interest rates on its floating-rate long-term debt. Under these agreements, the Company has contracted with major financial institutions as follows: (i) for interest rate swap agreements, the Company has contracted to exchange the difference between a fixed rate and a floating rate applied to the notional amount and (ii) for interest rate cap agreements, the Company is entitled to receive from counterparties the amount, if any, by which the selected market interest rates exceed the strike rates stated in the contract, applied to the notional amount. At January 3, 1999, after adjusting for the effect of the interest rate swap agreements, the Company had fixed-rate debt and capital leases of $268.9 million and floating-rate debt of $86.4 million. The fair value of the Company's long-term debt at January 3, 1999, and December 28, 1997, amounted to $347.1 million and $347.5 million, respectively. The fair value of the Company's interest-rate swap agreements at January 3, 1999, and December 28, 1997, amounted to liabilities of $5.8 million and $2.1 million, respectively. The fair value of other financial instruments was immaterial as of January 3, 1999, and December 28, 1997. A hypothetical 100-basis point change in the interest rates would not have a material effect on cash flows, income or market values. For a description of the interest rate swap and interest rate cap agreements outstanding as of January 3, 1999, see Note 10 in Item 8. Currency Risk The Company enters into forward exchange contracts principally to hedge the currency fluctuations in transactions denominated in foreign currencies, thereby limiting the Company's risk that otherwise would result from changes in exchange rates. During 1998, the principal transactions hedged were short-term intercompany loans and intercompany purchases. The periods of the forward contracts correspond to the periods of the hedged transactions. Commodity Prices The Company is exposed to the fluctuation in market prices for various commodities including, but not limited to, steel, copper and aluminum. The Company is subject to commodity price risk as the prices for raw material change with movements in underlying commodity prices. The Company enters into contracts with its vendors to lock in commodity prices at various times and for various periods in order to limit near-term exposure to fluctuations in raw material prices. FORWARD-LOOKING STATEMENTS The foregoing 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, or changes in the strategic plans of 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 this report for a more detailed discussion of the foregoing and other factors. page 16 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED STATEMENT OF INCOME (Amounts in thousands, except per-share data)
FOR THE FISCAL YEARS ENDED JAN. 3, 1999 DEC. 28, 1997 DEC. 29, 1996 - -------------------------- ------------ ------------- ------------- Net sales $633,044 $571,588 $356,373 Cost of sales 474,679 429,598 257,942 -------- -------- -------- Gross profit 158,365 141,990 98,431 Selling and administrative expenses 93,945 83,071 58,135 -------- -------- -------- Income from operations 64,420 58,919 40,296 Interest expense, net 26,820 21,358 5,279 -------- -------- -------- Income before income taxes 37,600 37,561 35,017 Income taxes 18,672 18,642 16,449 -------- -------- -------- Income before extraordinary loss 18,928 18,919 18,568 Extraordinary loss (net of income taxes of $422) -- (633) -- -------- -------- -------- Net income $ 18,928 $ 18,286 $ 18,568 Preferred stock dividends -- -- 813 -------- -------- -------- Net income available to common shareholders $ 18,928 $ 18,286 $ 17,755 -------- -------- -------- Basic earnings per share: Income before extraordinary loss $ 1.79 $ 1.79 $ 1.89 Extraordinary loss -- (0.06) -- -------- -------- -------- Earnings per common share $ 1.79 $ 1.73 $ 1.89 -------- -------- -------- Diluted earnings per share: Income before extraordinary loss $ 1.76 $ 1.75 $ 1.73 Extraordinary loss -- (0.06) -- -------- -------- -------- Earnings per common share $ 1.76 $ 1.69 $ 1.73 -------- -------- --------
The accompanying notes to consolidated financial statements are an integral part of this statement. Page 17 19 CONSOLIDATED BALANCE SHEET
(Amounts in thousands, except number of shares) JAN. 3, 1999 DEC. 28, 1997 ------------ ------------- Assets - -------------------------------------------------------------------------------------------------- Current Assets: Cash and temporary cash investments $ 22,429 $ 24,085 Trade accounts and notes receivable, net of allowances of $5,214 in 1998 and $5,371 in 1997 119,210 102,880 Inventories 90,908 75,350 Deferred income taxes 14,981 12,515 Other current assets 10,799 12,266 -------- -------- Total current assets 258,327 227,096 Properties and equipment, net 99,463 86,762 Goodwill, net 309,743 281,855 Other noncurrent assets 40,117 64,411 -------- -------- TOTAL ASSETS $707,650 $660,124 -------- -------- Liabilities and Shareholders' Equity Current Liabilities: Short-term debt and current maturities of capitalized lease obligations and long-term debt $ 24,801 $ 29,519 Trade accounts payable 54,985 44,889 Accrued income taxes 17,052 4,002 Accrued expenses 68,184 69,537 -------- -------- Total current liabilities 165,022 147,947 -------- -------- Long-term debt and capitalized lease obligations 330,531 321,132 Deferred income taxes 2,368 2,305 Other noncurrent liabilities 41,858 46,086 -------- -------- TOTAL LIABILITIES 539,779 517,470 -------- -------- Minority Interest 7,338 -- -------- -------- Shareholders' Equity: Common stock, $.10 par value, authorized 50,000,000 shares; issued 10,783,090 shares and 10,760,490 shares, respectively 1,078 1,076 Preferred stock, $1.00 par value, authorized 10,000,000 shares; issued 0 shares -- -- Additional paid in capital 74,200 73,639 Retained earnings 97,134 79,266 Accumulated other comprehensive income (10,167) (9,615) Less: Common stock held in treasury; 186,210 and 191,893 shares, respectively (1,712) (1,712) -------- -------- TOTAL SHAREHOLDERS' EQUITY 160,533 142,654 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $707,650 $660,124 -------- --------
The accompanying notes to consolidated financial statements are an integral part of this statement. page 18 20 CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands) FOR THE FISCAL YEARS ENDED JAN. 3, 1999 DEC. 28, 1997 DEC. 29, 1996 - -------------------------- ------------ ------------- ------------- Cash flows from operating activities: Net income $ 18,928 $ 18,286 $ 18,568 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 19,412 16,549 8,870 (Gain) loss on property dispositions (102) 169 (82) Change in assets and liabilities: Trade accounts receivable 1,431 (11,537) (3,310) Inventories (1,018) 7,121 237 Trade accounts payable and other liabilities (8,549) (4,892) (1,877) Other, net 5,481 6,231 1,101 -------- -------- ------- Net cash provided by operating activities 35,583 31,927 23,507 Cash flows from investing activities: Investment in properties and equipment (9,964) (11,788) (6,195) Proceeds from dispositions of properties and equipment 292 154 230 Acquisition of Kysor -- (264,788) -- Acquisition of Austral (13,721) -- -- Other investments in subsidiaries and joint ventures (1,694) (7,626) (3,414) -------- -------- ------- Net cash used in investing activities (25,087) (284,048) (9,379) Cash flows from financing and capital activities: Short-term debt, net 2,941 (3,060) (6,524) Issuance of long-term debt 46,556 464,790 16,074 Principal payments under long-term debt and capitalized leases (59,459) (189,243) (21,128) Financing costs of Kysor and subordinated debt and debt discount -- (8,517) -- Dividends paid to shareholders (1,059) (1,055) (2,035) -------- -------- ------- Net cash (used in) provided by financing and capital activities (11,021) 262,915 (13,613) Effect of exchange rate changes on cash and temporary cash investments (1,131) (3,210) 178 -------- -------- ------- Net (decrease) increase in cash and temporary cash investments (1,656) 7,584 693 Cash and temporary cash investments at beginning of year 24,085 16,501 15,808 -------- -------- ------- Cash and temporary cash investments at end of year $ 22,429 $ 24,085 $ 16,501 -------- -------- ------- Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 28,879 $ 19,159 $ 6,812 -------- -------- ------- Income taxes $ 13,191 $ 23,092 $ 14,957 -------- -------- ------- Supplemental schedule of noncash investing and financing activities: Investment in properties and equipment through issuance of capitalized lease obligations $ (503) $ (440) $ (42) -------- -------- -------
The accompanying notes to consolidated financial statements are an integral part of this statement. page 19 21 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Accumulated Common Preferred Additional Other (Amounts in thousands, Stock Stock Paid in Retained Comprehensive Treasury Comprehensive except number of shares) Par Value Par Value Capital Earnings Income Stock Income Total --------- --------- ---------- -------- ------------- -------- ------------- --------- BALANCE AT DECEMBER 31, 1995 $ 915 $ 2,000 $70,514 $45,232 $ (4,999) $(1,343) $112,319 Comprehensive income: Net income -- -- -- 18,568 -- -- $18,568 18,568 Foreign currency translation adjustments -- -- -- -- 2,034 -- 2,034 2,034 Issuance of deferred compensation -- -- 119 -- (119) -- (119) -- Amortization of deferred compensation -- -- -- -- 120 -- 120 120 Unrecognized pension cost -- -- -- -- (30) -- (30) (30) Total comprehensive income -- -- -- -- -- -- $20,573 -- Dividends declared to common shareholders -- -- -- (951) -- -- (951) Dividends declared to preferred shareholders -- -- -- (813) -- -- (813) Conversion of preferred stock into common stock 153 (2,000) 1,847 -- -- -- -- Stock options exercised 5 -- 573 -- -- (113) 465 ------ ------- ------- ------- -------- ------- -------- -------- BALANCE AT DECEMBER 29, 1996 $1,073 $ -- $73,053 $62,036 $ (2,994) $(1,456) $131,712 Comprehensive income: Net income -- -- -- 18,286 -- -- $18,286 18,286 Foreign currency translation adjustments -- -- -- -- (6,573) -- (6,573) (6,573) Issuance of deferred compensation -- -- 119 -- (120) 1 (120) -- Amortization of deferred compensation -- -- -- -- 120 -- 120 120 Unrecognized pension cost -- -- -- -- (48) -- (48) (48) Total comprehensive income -- -- -- -- -- -- $11,665 -- Dividends declared to common shareholders -- -- -- (1,056) -- -- (1,056) Stock options exercised 3 -- 467 -- -- (257) 213 ------ ------- ------- ------- -------- ------- -------- -------- BALANCE AT DECEMBER 28, 1997 $1,076 $ -- $73,639 $79,266 $ (9,615) $(1,712) $142,654 Comprehensive income: Net income -- -- -- 18,928 -- -- $18,928 18,928 Foreign currency translation adjustments -- -- -- -- (478) -- (478) (478) Issuance of deferred compensation -- -- 151 -- (132) -- (132) 19 Amortization of deferred compensation -- -- -- -- 128 -- 128 128 Unrecognized pension cost -- -- -- -- (70) -- (70) (70) Total comprehensive income -- -- -- -- -- -- $18,376 -- Dividends declared to common shareholders -- -- -- (1,060) -- -- (1,060) Stock options exercised 2 -- 410 -- -- -- 412 ------ ------- ------- ------- -------- ------- -------- -------- BALANCE AT JANUARY 3, 1999 $1,078 $ -- $74,200 $97,134 $(10,167) $(1,712) $160,533
The accompanying notes to consolidated financial statements are an integral part of this statement. page 20 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation The consolidated financial statements include the accounts of Scotsman Industries, Inc. ("Scotsman" or "the Company") and its consolidated subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Certain amounts in the consolidated financial statements for previous years have been reclassified to conform to the presentation used for fiscal year 1998. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fiscal Year The Company reports on a 52-53 week fiscal year ending on the Sunday nearest to December 31. Fiscal year 1998 had 53 weeks. Fiscal years 1997 and 1996 had 52 weeks. Cash Management The Company considers all highly liquid investments with original maturities of three months or less to be temporary cash investments. Temporary cash investments, primarily Eurodollar deposits or repurchase agreements with maturities of 90 days or less, are carried at cost, which approximates market value. Interest income (in thousands) included in interest expense, net was $854, $1,411, and $791 for fiscal years 1998, 1997 and 1996, respectively. Trade Accounts and Notes Receivable Trade accounts and notes receivable at January 3, 1999, and December 28, 1997, included notes of $6.0 million and $6.4 million, respectively. Inventories Inventories are stated at the lower of cost or market and include the appropriate elements of material, labor and manufacturing overhead expenses. Cost is determined using the last-in, first-out ("LIFO") method for 13 percent of domestic inventories and the first-in, first-out ("FIFO") method for the balance of domestic and all foreign inventories. Properties and Equipment Properties and equipment, including capitalized leases, are recorded at cost to the Company at date of acquisition and depreciated over either their estimated useful lives, ranging from 3 to 40 years, or lease terms, whichever is shorter, using principally the straight-line method for financial reporting purposes and accelerated methods for tax reporting purposes. Goodwill Cost of investments in excess of net assets of businesses acquired is being amortized using the straight-line method over 40 years. The related amortization expense was $7.6 million, $6.3 million, and $2.5 million for the fiscal years 1998, 1997 and 1996, respectively. At January 3, 1999, and December 28, 1997, accumulated amortization was $21.9 million and $14.5 million, respectively. After an acquisition, the Company reviews whether subsequent events and circumstances have occurred that indicate that the remaining estimated useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. The Company uses projections to assess whether future operating income of the business on a non-discounted basis is likely to exceed the goodwill amortization over the remaining life of the goodwill, to determine whether a writedown of goodwill to recoverable value (as determined by the same projections) is appropriate. Financial Instruments The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. The Company's participation in derivatives is limited primarily to interest rate hedging agreements and forward exchange contracts. The Company enters into interest rate hedging agreements (swaps and caps) to reduce the impact of changes in interest rates on its floating-rate long-term debt. With interest rate swap agreements, the difference between the fixed and floating rates, which is to be paid or received, is accrued as interest rates change and is recognized over the life of the hedging agreements. Interest rate cap agreements entitle the Company to receive from the counterparties the amounts, if any, by which the selected market interest rates exceed the strike rates stated in the agreement. The cost of the interest rate cap Page 21 23 agreement is amortized over the shorter of the original term of the agreement or the life of the financial instrument to which it is matched. The cash impacts of these instruments are included with the cash flows of the items to which they relate in the Consolidated Statement of Cash Flows. The Company uses foreign currency forward contracts to hedge some of its currency exposure on non-permanent intercompany loans. Using hedge accounting, these contracts are valued at the current spot rate on a monthly basis, and the change in value is recognized currently and included, along with any amortization of forward points over the life of the contract, in selling and administrative expenses. Any foreign exchange gain or loss on the underlying intercompany loan is also included in selling and administrative expenses. The Company also uses foreign currency forward contracts to reduce some of its exposure to exchange risks associated with transactions in the regular course of the Company's international operations. The Company utilizes forward contracts which are short-term in duration and receives or pays the difference between the contracted forward rate and the exchange rate at the settlement date. The carrying amount and fair value of these contracts are not significant. If, subsequent to entering into a hedge transaction with forward contracts, the underlying transaction is no longer likely to occur, the hedge position is removed and any gain or loss is included in selling and administrative expenses. Revenue Recognition Revenue is recognized when goods are shipped to a customer. Research and Development Costs Research and development costs related to both present and future products are expensed currently. Research and development expenditures for fiscal years 1998, 1997, and 1996 were $7.0 million, $6.2 million, and $5.6 million, respectively. Environmental Liabilities The Company's operations and products are subject to federal, state, local and foreign regulatory requirements relating to environmental protection. It is the Company's policy to comply fully with all such applicable requirements. The Company may be subject to potential liabilities for the costs of environmental remediation at currently or previously owned or operated sites or sites to which it, or predecessor owners, transported materials. It is the Company's policy to accrue for the estimated cost of environmental matters, on a non-discounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Such provisions and accruals exclude claims for recoveries from insurance carriers or other third parties. Such claims are recognized as receivables only if realization is probable. Foreign Currency Translation The Company has foreign subsidiaries located in Italy, Germany, Austria, China, the United Kingdom, Australia and New Zealand. Foreign subsidiary income and expenses are translated into United States dollars at the average rates of exchange prevailing during the year. The assets and liabilities are translated into U.S. dollars at the rates of exchange on the balance sheet date and the related translation adjustments are accumulated as a separate component of shareholders' equity. As the Company intends to maintain its investments in these subsidiaries indefinitely, ultimate realization of these translation adjustments is highly uncertain. Foreign currency transaction gains and losses are recorded in income as they occur. Taxes Federal and state income taxes are not provided on undistributed earnings of foreign subsidiaries that have been or are intended to be reinvested indefinitely. Earnings Per Share Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Comprehensive Income In July 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS 130"), which established standards for reporting comprehensive income in financial statements. SFAS 130 requires reporting certain transactions that result in a change page 22 24 in equity, such as currency translation, unrealized gains and losses, deferred compensation and minimum pension liability adjustments, as components of comprehensive income. As of January 1, 1998, the Company adopted SFAS 130. The adoption of this Statement had no impact on the Company's net income or shareholders' equity. New Accounting Standards 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 the 1999 fiscal year. The Company is currently evaluating the extent to which its financial statements will be affected by these statements. The Company is unsure at this time what the impact will be on its financial statements. In June 1998, FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement requires that all derivative instruments, including certain derivative instruments embedded in other contracts, be recorded on the balance sheet as either an asset or liability measured at its fair value. This Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company is not required to adopt this Statement until the 2000 fiscal year. The Company is currently evaluating the extent to which its financial statements will be affected by this Statement. The Company is unsure at this time what the impact will be on its financial statements. 2. INVENTORIES Inventories consisted of the following (in thousands):
JAN. 3, 1999 DEC. 28, 1997 ------------ ------------- Finished goods $36,154 $28,564 Work-in-process 20,375 13,891 Raw materials 34,379 32,895 ------- ------- TOTAL INVENTORIES $90,908 $75,350 ------- -------
Approximately $7.6 million and $7.0 million of total Company inventories were valued on the LIFO method in fiscal 1998 and 1997, respectively. If inventories valued on the LIFO method had been valued using the FIFO method, they would have been $4.0 million and $4.1 million higher at January 3, 1999, and December 28, 1997, respectively. 3. PROPERTIES AND EQUIPMENT Properties and equipment consisted of assets owned and leased under capital lease arrangements as follows (in thousands):
JAN. 3, 1999 DEC. 28, 1997 ------------ ------------- Owned: Land $ 10,260 $ 4,439 Buildings and leasehold improvements 54,633 50,132 Machinery, fixtures and equipment 90,384 76,556 Accumulated depreciation and amortization (60,700) (49,044) -------- -------- Owned, net 94,577 82,083 -------- -------- Leased: Buildings and leasehold improvements 5,351 5,270 Machinery, fixtures and equipment 1,766 1,231 Accumulated depreciation and amortization (2,231) (1,822) -------- -------- Leased, net 4,886 4,679 -------- -------- PROPERTIES AND EQUIPMENT, NET $ 99,463 $ 86,762 -------- --------
4. SHORT-TERM DEBT Short-term debt (in thousands) at January 3, 1999, and December 28, 1997, was $6,263 and $3,305, respectively, and principally related to amounts owed under lines of credit. The weighted average interest rate based on short-term debt outstanding as of January 3, 1999, and December 28, 1997, was 7.0 percent and 7.2 percent, respectively. Average borrowings (in thousands) and the related weighted average interest rates were as follows:
1998 1997 ------ ------ Bank and other borrowings $3,970 $4,524 ------ ------ Weighted-average interest rate 6.4% 6.7% ------ ------
The maximum aggregate short-term debt outstanding (in thousands) at the end of any month during fiscal years 1998 and 1997 was $8,791 and $12,333, respectively. page 23 25 5. LINES OF CREDIT The Company maintains various credit agreements which are used primarily to fund the Company's working capital needs. At January 3, 1999, these agreements (in thousands) included foreign and domestic lines of credit of $17,916 and $7,500, respectively. Lines of credit are reviewed annually, with amounts borrowed under lines of credit included in short-term debt. At January 3, 1999, foreign and domestic lines of credit not in use were (in thousands) $17,243 and $1,910, respectively. Borrowings under these agreements are available at the prime rate or other prevailing market rates. All domestic and the majority of foreign lines of credit have no fees or compensating balance arrangements. Fees incurred for one small portion of the foreign line of credit were not significant and were expensed when incurred. 6. ACCRUED EXPENSES Accrued expenses consisted of the following (in thousands):
JAN. 3, 1999 DEC. 28, 1997 ------------ ------------- Payroll and employee benefits $16,884 $19,494 Current portion of product warranties 10,417 9,583 Reserve for customer allowances 4,766 4,740 Other current liabilities 36,117 35,720 ------------ ------------- TOTAL ACCRUED EXPENSES $68,184 $69,537 ------------ -------------
7. LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS Long-term debt and capitalized lease obligations consisted of the following (in thousands):
JAN. 3, 1999 DEC. 28, 1997 ------------ ------------- FNBC Facility with floating interest rates; due 1998 - 2004 $216,787 $230,591 8.625% Senior Subordinated debt; due 2007, net of discount 99,759 99,733 Foreign borrowings with various interest rates; due 1998 - 2011 17,425 2,435 Various industrial revenue bonds with floating interest rates; due 1998 - 2006 12,750 12,800 Capitalized lease obligations with various interest rates; due 1998 - 2003 1,669 367 Other domestic borrowings with various interest rates; due 1998 - 2012 679 1,420 ------------ ------------- Total $349,069 $347,346 Current portion 18,538 26,214 ------------ ------------- LONG-TERM PORTION $330,531 $321,132 ------------ -------------
In March 1997, the Company financed the acquisition of Kysor Industrial Corporation, after giving effect to the divestiture of the 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 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. As of January 3, 1999, $55 million of the term loan portion of the FNBC Facility had been repaid by the Company. The revolving portion of the FNBC Facility reduces (or has reduced) on December 31 in the respective years as follows: $10 million in 1998, $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. For information on the interest-rate swaps outstanding which were established in 1997 to comply with the requirement imposed by the FNBC Facility, see Note 10. 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 (as described below), including debt outstanding under a former $90 million reducing revolving credit agreement and a $20 million private placement agreement. This early repayment resulted in an after-tax loss of $633,000 which is presented in the accompanying income statement for the fiscal year ended December 28, 1997, as an extraordinary loss. page 24 26 As of January 3, 1999, interest rates under the FNBC Facility ranged from approximately 6.69 percent to 8.13 percent for Eurocurrency loans. Commitment fees on the FNBC Facility vary from 0.175 percent to 0.35 percent per annum on the unused portion. In December 1997, the Company's wholly-owned subsidiary, Scotsman Group Inc., issued $100 million of 8 5/8% Senior Subordinated Notes which will mature on December 15, 2007. Net proceeds of the subordinated notes were used to repay $30 million of the term loan under the FNBC Facility as discussed above and also to repay amounts owed under the revolving credit portion of the FNBC Facility. The Company has issued a guaranty of the Notes under which the Company, as primary obligor and not merely as a surety, has fully and unconditionally guaranteed on a senior subordinated basis the payment of the Notes when due and the due performance by Scotsman Group Inc. of its other obligations under the Indenture. See Note 16 regarding summary financial information of Scotsman Group Inc. The Company's foreign subsidiaries have various loans outstanding, which are primarily loan agreements with banks. Of the $17.4 million of foreign long-term debt outstanding as of January 3, 1999, $12.8 million related to long-term debt of Austral Refrigeration Pty. Limited ("Austral"). A controlling interest in Austral was acquired by the Company in November 1998 (see Note 14). The debt of Austral is secured by an interlocking Guarantee and Indemnity from Austral and its wholly-owned subsidiaries, along with a registered first mortgage over the whole of assets of Austral and its wholly-owned subsidiaries and a registered first mortgage on its Glendenning properties. The Company has various industrial revenue bonds outstanding. One of the industrial revenue bonds is secured by a bank letter of credit for $9.6 million. The current cost of the commitment fee on the letter of credit ranges from 0.50 percent to 1.50 percent on outstanding principal and interest depending on the Company's leverage ratio as defined in the FNBC Facility as described above. The two other industrial revenue bonds are secured by properties. One is secured by a building with a net book value of $4.2 million as of January 3, 1999, and the other is secured by a building section with a net book value of $0.6 million as of January 3, 1999. Interest rates on the Company's industrial revenue bonds are variable. The Company also has various capital lease obligations which are collateralized by properties and equipment with a net book value of approximately $0.7 million. The weighted average effective interest rate was 7.6 percent and 7.7 percent at January 3, 1999, and December 28, 1997, respectively. Future required maturities of long-term debt and capital leases, assuming letters of credit are outstanding at the same level as January 3, 1999, were as follows (in thousands): - ---------------------------------------------------------------------- 1999 $ 18,538 2000 28,602 2001 24,137 2002 27,831 2003 23,696 Thereafter 226,265 -------- TOTAL $349,069 --------
The agreement governing the FNBC Facility includes various financial covenants. The Company was in compliance with those covenants as of January 3, 1999. 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 stockholders' 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 January 3, 1999, consolidated stockholders' equity of the Company was $160.5 million. Under this covenant, the amount of retained earnings that were restricted as of January 3, 1999, was $70.7 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 included in the senior subordinated debt indenture, $79.2 million of retained earnings of the Company and its wholly-owned subsidiary, Scotsman Group Inc., were restricted as of January 3, 1999. 8. OPERATING LEASES The Company leases certain of its offices, buildings, and machinery and equipment for periods up to 15 years with various renewal options. Rental expense under operating leases was $5.1 million in 1998, $4.1 million in 1997, and $2.5 million in 1996. page 25 27 Future minimum lease commitments under non-cancelable operating leases with initial lease terms greater than one year at January 3, 1999, were as follows (in thousands): - -------------------------------------------------------------------- 1999 $ 3,562 2000 3,106 2001 2,537 2002 2,043 2003 1,502 Thereafter 5,824 ------- TOTAL MINIMUM LEASE COMMITMENTS $18,574 -------
9. EMPLOYEE BENEFIT PLANS The Company sponsors defined benefit pension plans for certain salaried and hourly employees. Plans covering salaried employees provide benefits that are based on years of service and compensation. Plans covering hourly employees provide benefits of stated amounts for each year of service. The pension assets are invested in institutional mutual funds which contain both equities and fixed investments. The Company complies with funding requirements under the Employee Retirement Income Security Act. The Company maintains plans that provide certain health care benefits to certain employees retiring from the Company on or after attaining a certain age and who have rendered at least 10 years of service to the Company. These plans are unfunded. The Company reserves the right to change or terminate the benefits at any time. Information for the Company's major defined benefit plans and post-retirement medical plans is as follows (in thousands):
Post-retirement Pension Benefits Medical Plans --------------------------- ------------------- 1998 1997 1998 1997 --------- --------- -------- -------- Change in benefit obligation: Benefit obligation at beginning of year $52,984 $ 52,897 $ 6,478 $ 5,399 Service cost 2,986 2,331 383 350 Interest cost 3,606 2,790 392 375 Plan participants' contributions -- -- 45 40 Amendments 320 -- -- -- Net actuarial loss (gain) 1,932 5,500 (470) 513 Settlement gain -- (134) -- -- Benefits paid (1,987) (10,292) (369) (199) Expenses paid (240) (108) -- -- --------- --------- -------- -------- BENEFIT OBLIGATION AT END OF YEAR $59,601 $ 52,984 $ 6,459 $ 6,478 --------- --------- -------- -------- Change in plan assets: Fair value of plan assets at beginning of year $50,399 $ 43,314 -- -- Actual return on plan assets 8,206 6,788 -- -- Employer contributions 1,338 1,323 323 159 Plan participants' contributions 78 70 46 40 Benefits paid (1,624) (1,109) (369) (199) Expenses paid (334) 13 -- -- --------- --------- -------- -------- FAIR VALUE OF PLAN ASSETS AT END OF YEAR $58,063 $ 50,399 $ -- $ -- --------- --------- -------- -------- Funded status $(1,538) $ (2,585) $(6,459) $(6,478) Unrecognized prior-service cost 1,354 1,183 -- -- Unrecognized transition asset (4) (6) -- -- Unrecognized net actuarial (gain) loss (2,778) (758) 23 470 --------- --------- -------- -------- ACCRUED BENEFIT COST $(2,966) $ (2,166) $(6,436) $(6,008) --------- --------- -------- -------- Amounts recognized in the statement of financial position consist of: Prepaid (accrued) benefit cost $ 4,567 $ (17) $ -- $ -- Accrued benefit liability (8,354) (2,542) (6,436) (6,008) Intangible asset 625 267 -- -- Accumulated other comprehensive income 196 126 -- -- --------- --------- -------- -------- NET AMOUNT RECOGNIZED $(2,966) $ (2,166) $(6,436) $(6,008) --------- --------- -------- -------- Weighted-average assumptions as of December 31: Discount rate 6.75%-7.0% 7.0% 6.75% 7.0% Expected return on assets 8.0%-8.5% 8.0%-8.5% -- -- Rate of compensation increase 4.0%-6.0% 4.0%-6.0% -- -- --------- --------- -------- --------
page 26 28
Pension Benefits Post-retirement Medical Plans ---------------------------------- ------------------------------ 1998 1997 1996 1998 1997 1996 ------- ------- ------ ----- ----- ----- Components of net periodic benefit cost: Service cost $ 2,908 $ 2,313 $1,141 $ 383 $ 350 $ 146 Interest cost 3,606 2,536 790 392 375 148 Expected return on plan assets (4,216) (2,739) (643) -- -- -- Amortization of prior service cost 149 117 122 -- -- -- Amortization of transition asset (2) (2) (2) -- -- -- Recognized net actuarial loss (gain) 59 17 (8) (24) -- -- ------- ------- ------ ----- ----- ----- NET PERIODIC BENEFIT COST $ 2,504 $ 2,242 $1,400 $ 751 $ 725 $ 294 ------- ------- ------ ----- ----- -----
For measurement purposes, a 7.50 percent gross health care trend rate was used for post-retirement medical plan benefits for 1999. Trend rates were assumed to decrease gradually to 5.0 percent in 2005 and remain at this level beyond. Assumed health care cost trend rates have a significant effect on the amounts reported for the post-retirement medical plans. A one percentage point change in assumed health care cost trend rates would have the following effects on 1998 expense and year-end liabilities (in thousands):
ONE-PERCENT ONE-PERCENT INCREASE DECREASE ----------- ----------- Effect on total of service and interest cost components $117 $ (95) Effect on post-retirement benefit obligation $862 $(704) ----------- -----------
The Company has pension plans covering employees in its Italian subsidiaries. These plans combine aspects of both government mandated and non-contributory plans. Total pension expense under these plans included in the Consolidated Statement of Income (in thousands) was $693, $793, and $895 in fiscal years 1998, 1997 and 1996, respectively. The unfunded liability for these plans included in the Consolidated Balance Sheet at January 3, 1999, and December 28, 1997, (in thousands) was $4,388 and $4,208, respectively. The Company also sponsors defined contribution pension plans. Participation in one of these plans is available to substantially all domestic employees. Company contributions to these plans are based on either a percentage of employee contributions or a specified amount depending on the provisions of the plan. Total costs incurred under the plans were (in thousands) $1,582, $661, and $742 for fiscal years 1998, 1997 and 1996, respectively. 10. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair market value of each class of financial instrument for which it is practicable to estimate that value: Cash and Temporary Cash Investments Temporary cash investments consist principally of investments in short-term, interest-bearing instruments. The carrying amount approximates fair market value. Trade Accounts and Notes Receivable and Payable The carrying amount of the Company's trade accounts and notes receivable and payable approximates market value. Long-Term Debt The carrying amount of most of the Company's long-term debt and the Company's short-term debt approximates market value since rates on those debt agreements are variable and are set periodically based on current rates during the year. The fair market value of the Company's long-term debt with fixed interest rates is estimated based on quoted market prices for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. Letters of Credit As collateral for the Company's industrial revenue bonds and for certain of its insurance programs, the Company had a total of $11.1 million of letters of credit outstanding as of January 3, 1999. The Company pays letter of credit fees to its bank group that range from 0.50 to 1.50 percent based upon the leverage ratio as defined in the FNBC Facility. It is the Company's opinion that the replacement costs for such letters of credit would not significantly vary from the present fee structure. page 27 29 Interest Rate Hedging and Forward Contracts Effective March 1997, the Company entered into two interest rate swap agreements to reduce the impact of changes in interest rates on its domestic floating-rate long-term debt. The interest rate swap agreements had notional principal amounts of $50 million and $100 million, respectively. Interest payable was at a fixed rate of 6.245 percent and 6.17 percent, for the $50 million and $100 million agreements, respectively. In return for both of these agreements, the Company will receive floating rate interest payments based on three-month London Interbank Offered Rate. The $50 million interest rate swap agreement has a maturity date of March 2000, but is extendable for an additional two years at the option of the bank. The $100 million interest rate swap agreement will mature in March 2003. These two swap agreements are accounted for as hedges. Also, the Company had a forward exchange contract outstanding as of January 3, 1999, to hedge exposure relating to an intercompany receivable. The difference between the forward exchange rate in the contract and the market exchange rate was immaterial as of January 3, 1999. The Company also has an interest-rate cap agreement outstanding relating to a portion of indebtedness at its Australian subsidiary. The interest-rate cap agreement entitles the Company to receive from the counterparty the amount, if any, by which the bank bill rate in Australia exceeds 7.0 percent on a notional principal amount of 5.0 million Australian dollars. The fair value of the interest-rate cap agreement was not significant as of January 3,1999. No material loss is anticipated due to nonperformance by counterparties to these agreements. The fair value of interest-rate swaps and caps is the estimated amount that the Company would receive or pay to terminate the agreements as of the balance sheet date. The estimated fair value of the Company's financial instruments which differ from their carrying amount at January 3, 1999, (in thousands) was as follows:
CARRYING AMOUNT FAIR VALUE --------------- ---------- Liabilities: Long-term debt $347,400 $347,129 Interest-rate swap agreements -- 5,793 -------- --------
The estimated fair value of the Company's financial instruments which differ from their carrying amount at December 28, 1997, (in thousands) was as follows:
CARRYING AMOUNT FAIR VALUE --------------- ---------- Liabilities: Long-term debt $346,979 $347,496 Interest-rate swap agreements -- 2,111 -------- --------
11. INCOME TAXES The components of the consolidated net deferred tax assets and liabilities as of January 3, 1999, and December 28, 1997, were as follows (in thousands):
JAN. 3, 1999 DEC. 28, 1997 ------------ ------------- GROSS DEFERRED TAX ASSETS: Warranty accruals $ 4,613 $ 4,046 Severance accruals 3,249 4,685 Pensions 4,740 4,937 Excise tax 1,493 2,239 Receivable allowances 1,128 1,529 Inventory reserves 1,270 1,924 Reserve for post-retirement medical costs 1,369 2,308 Amortization of certain intangibles 2,134 1,009 German net operating loss carry forwards 1,171 2,210 Other 15,007 15,252 -------- -------- Total gross deferred tax assets 36,174 40,139 Valuation allowance (1,171) (2,210) -------- -------- Total deferred tax assets $ 35,003 $ 37,929 -------- -------- GROSS DEFERRED TAX LIABILITIES: Properties and equipment $ (7,486) $ (7,935) Goodwill amortization (1,395) (1,751) Pension accrual (2,006) (3,179) Adjustments for accounting method changes (1,353) (12) Other (2,247) (3,189) -------- -------- Total gross deferred tax liabilities $(14,487) $(16,066) -------- --------
page 28 30 The above deferred tax components are reflected in the accompanying balance sheet as follows (in thousands):
JAN. 3, 1999 DEC. 28, 1997 ------------ ------------- Current portion of deferred tax asset $14,981 $12,515 Non-current portion of deferred tax asset (included in other non-current assets) 7,903 11,653 Non-current portion of deferred tax liability (2,368) (2,305) ------------ -------------
The valuation allowance as of January 3, 1999, includes $1.2 million to entirely offset the tax asset established for Hartek pre-acquisition net operating loss carry forwards. The Company is awaiting written notice from the German Tax Office confirming that the losses, for corporate as well as Trade Tax purposes, assessed on the basis of the tax field audit for the years through 1996 are unchanged compared to the original assessments. The German net operating loss carry forwards, if realized, will result in a reduction of goodwill and the benefit of utilizing the net operating loss carry forwards will not flow through the income statement. The provision (benefit) for income taxes consisted of the following (in thousands):
FOR THE FISCAL YEARS ENDED JAN. 3, 1999 DEC. 28, 1997 DEC. 29, 1996 - -------------------------- ------------ ------------- ------------- State - Current $ 1,836 $ 2,365 $ 801 Federal - Current 7,868 3,541 6,717 Foreign - Current 6,506 6,096 7,407 ------- ------- ------- Total 16,210 12,002 14,925 ------- ------- ------- State - Deferred 225 (971) 89 Federal - Deferred 1,418 6,324 748 Foreign - Deferred 819 1,287 687 ------- ------- ------- Total 2,462 6,640 1,524 ------- ------- ------- PROVISION FOR INCOME TAXES $18,672 $18,642 $16,449 ------- ------- -------
Income before income taxes from foreign operations was $15.5 million in 1998, $14.7 million in 1997 and $15.7 million in 1996. The differences between the Company's effective tax rate and the statutory federal income tax rate were as follows:
FOR THE FISCAL YEARS ENDED JAN. 3, 1999 DEC. 28, 1997 DEC. 29, 1996 - -------------------------- ------------ ------------- ------------- Statutory federal income tax rate 35.0% 35.0% 35.0% Increase (decrease) in rate resulting from: State and local income taxes, net of federal tax benefit 3.5 2.5 1.7 Foreign tax effect 5.0 5.9 7.6 Non-tax deductible goodwill 6.3 5.3 2.0 Other (0.1) 0.9 0.7 ---- ---- ---- 49.7% 49.6% 47.0% ---- ---- ----
In accordance with the Company's accounting policy, provision for U.S. income taxes has not been made on $37.7 million of undistributed earnings of foreign subsidiaries at January 3, 1999. 12. STOCK-BASED COMPENSATION PLANS The Company has a long-term executive incentive program which provides for granting key employees options to purchase the Company's common stock. Under the program, options are exercisable at a rate set by the Compensation Committee of the Board of Directors of the Company. To date, options have been exercisable in cumulative annual increments of 25 percent commencing one year after the date of grant. The option price per share is not less than the fair market value of one share on the date of the grant. An option may not be exercisable after more than 10 years and one day from the date of the grant. The Company also maintains the Non-Employee Directors Stock Option Plan. The options under this plan vest 100 percent on the date preceding the first annual meeting of shareholders following the date of the grant of the options. The option price per share may not be less than the fair market value of one share on the date of the grant. An option may not be exercisable after more than 10 years and one day from the date of the grant. page 29 31 The Company accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with FASB Statement No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
1998 1997 1996 ------- ------- ------- Net income (in thousands): As reported $18,928 $18,286 $18,568 Pro forma $17,973 $17,845 $18,306 Basic net income per share: As reported $ 1.79 $ 1.73 $ 1.89 Pro forma $ 1.70 $ 1.69 $ 1.86 Diluted net income per share: As reported $ 1.76 $ 1.69 $ 1.73 Pro forma $ 1.67 $ 1.65 $ 1.71 ------- ------- -------
A summary of the status of the Company's two stock option plans at January 3, 1999, December 28, 1997, and December 29, 1996, and changes during the years then ended is presented in the following table:
1998 1997 1996 --------------------- ------------------- -------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Shares Exercise Shares Exercise (000) Price (000) Price (000) Price ------ -------- ------ -------- ------ -------- Outstanding at beginning of year 614 $15 560 $13 525 $12 Granted 161 26 98 27 92 18 Exercised (23) 16 (31) 11 (51) 10 Forfeited (29) 23 (13) 19 (6) 17 ------ -------- ------ -------- ------ -------- Outstanding at end of year 723 17 614 15 560 13 ------ -------- ------ -------- ------ -------- Exercisable at end of year 467 $13 418 $11 377 $10 Weighted average fair value of options granted during the year $15.04 $15.30 $9.74 ------ -------- ------ -------- ------ --------
The following table summarizes information about stock options outstanding at January 3, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------ ------------------------- Weighted Number Average Weighted Number Weighted Outstanding Remaining Average Exercisable Average Range of at 1/3/99 Contractual Exercise at 1/3/99 Exercise Exercise Prices (000) Life (years) Price (000) Price - --------------- ----------- ------------ -------- ----------- -------- $ 7 to $10 201 1.7 $ 8 201 $ 8 $11 to $15 114 1.8 12 112 12 $16 to $20 171 6.1 17 127 17 $21 to $28 237 8.7 27 27 26 ----------- ------------ -------- ----------- -------- $7 to $28 723 3.1 $17 467 $13 ----------- ------------ -------- ----------- --------
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1998 and 1997, respectively:
EXECUTIVE PLAN 1998 1997 - -------------- ------ ------ Risk-free interest rate 6.43% 6.49% Expected volatility 34.74% 35.85% Expected dividend yield 0.38% 0.40% Expected life, in years 10.01 10.01 ----- -----
NON-EMPLOYEE DIRECTORS PLAN 1998 1997 - --------------------------- ------ ------ Risk-free interest rate 5.68% 6.47% Expected volatility 34.44% 35.59% Expected dividend yield 0.36% 0.40% Expected life, in years 10.01 10.01 ------ ------
The Company issued from treasury 5,683, 4,874, and 5,965 shares of common stock in fiscal years 1998, 1997 and 1996, respectively, as annual Board of Directors fees. Costs relating to these fees (in thousands) of $147, $120 and $120, were recorded in fiscal years 1998, 1997 and 1996, respectively. page 30 32 13. ACQUISITION OF KYSOR In March 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 (hereinafter referred to as the "Acquisition") 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 and is being amortized for book purposes over 40 years using the straight-line method. 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 December 28, 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 value 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.
(Amounts in thousands, except per-share data) Pro Forma (Unaudited) TWELVE MONTHS ENDED DEC. 28, 1997 - --------------------------------------------- --------------------- Net sales $610,422 Net income before extraordinary loss 16,893 Net income 16,260 Net income per share, diluted $ 1.51 --------
14. ACQUISITION OF AUSTRAL AND OTHER INVESTMENTS The Company's subsidiary, Kysor Industrial Corporation, acquired 24 percent of the outstanding stock of Austral Refrigeration Pty. Limited ("Austral") on November 16, 1998, and thereby increased its ownership of Austral to a 53 percent controlling interest. The Company had first acquired a 24 percent interest in Austral as part of its 1997 acquisition of Kysor Industrial Corporation. The Company's ownership percentage in Austral prior to the November 1998 purchase had grown to 30 percent due to the repurchase by Austral of certain outstanding shares during 1998. Austral, a privately-held company based in Australia, is a licensee of the Company's Kysor//Warren product line and the largest manufacturer and installer of supermarket display cases and refrigeration systems in Australia and New Zealand. Austral reported sales for its fiscal year ended June 30, 1998, of approximately U.S. $91 million. With the November 1998 purchase, the Company recorded a preliminary amount of goodwill of $14.7 million, bringing the total amount of goodwill related to Austral to $26.6 million. Prior to the acquisition of a controlling interest in Austral, goodwill related to the investment in Austral was recorded in other non-current assets in the balance sheet. The goodwill amount related to Austral is preliminary and will be finalized within 12 months of the November 1998 acquisition date. The amount of goodwill from this acquisition will be amortized for book purposes over 40 years using the straight-line method. page 31 33 In connection with its acquisition of a controlling interest in Austral, the Company, through Kysor, also entered into a put option agreement with the minority shareholders of Austral under which the minority shareholders have the right to require Kysor to acquire some or all of the remaining Austral shares at a purchase price per share equal to a multiple of Austral's net after tax income for the preceding one or two fiscal year period, depending on the date of exercise, divided by the number of Austral shares outstanding on the date of exercise. The put is exercisable between October 1 and October 31 of each year, beginning October 1999. Kysor's obligation to purchase Austral shares in 1999 and 2000 is capped at an aggregate amount equal to Austral's net after-tax income in its fiscal year immediately preceding the date on which the put option is exercised and is at all times subject to Kysor's ability to complete the purchase in compliance with all covenants governing any then outstanding SGI debt or financing arrangements. 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 Austral 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 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.
(Amounts in thousands, except per-share data) Pro Forma (Unaudited) TWELVE MONTHS ENDED JAN. 3, 1999 - --------------------------------------------- --------------------- Net sales $727,751 Net income 19,658 Net income per share, diluted $ 1.83 --------
In December 1998, the Company's subsidiary, Scotsman Drink Limited, purchased one-third of the issued capital of Total Cellar Systems Limited, an installer and servicer of beer dispensing equipment in the United Kingdom, for a purchase price of less than $1.0 million. In December 1997, the Company's subsidiary, Scotsman Group Inc., acquired the remaining 40 percent interest in the former joint venture in China for a cash outlay of approximately $1.4 million. In December 1997, the Company's subsidiary, Scotsman Drink Limited, acquired Homark Holdings Limited ("Homark"), a beverage dispensing business located in the United Kingdom, for a purchase price of approximately 3.3 million pounds sterling or approximately $5.6 million. Homark had 1997 full-year sales of approximately $10 million. Pro forma information related to these acquisitions was not material. 15. BUSINESS SEGMENT INFORMATION Effective January 3, 1999, the Company adopted Statement of Financial Accounting Standards No.131, "Disclosures about Segments of an Enterprise and Related Information." The Company's principal business is the design, manufacture and sale of a diversified line of commercial refrigeration products. The Company sells the products it manufactures to customers in the foodservice industry and the food retail industry. The foodservice industry is defined as worldwide restaurants (including fast-food chains), hotels, motels, soft-drink bottlers, brewers and the Company's distribution network to reach these customers. Products sold to foodservice customers include commercial ice machines, food preparation workstations and commercial up-right and under-the-counter refrigerators and freezers, beverage systems, and walk-in coolers and freezers. The food retail industry is defined as worldwide supermarkets and convenience stores, and products manufactured and sold to these customers include refrigerated display cases, mechanical refrigeration systems, walk-in coolers and freezers, and ice machines. page 32 34 The Company's primary measure of segment profit or loss is operating earnings, which is defined by the Company as earnings before interest and taxes. The segment disclosures are generally on a basis consistent with the accounting policies described in Note 1, Summary of Significant Accounting Policies, with several exceptions. Intersegment transfers of inventory are recorded at variable cost, plus a markup. The costs of corporate office activities are not allocated to the segments. Amortization of goodwill is included in the operating earnings of the foodservice segment, however it is not included in the operating earnings of the food retail segment. Information on the two segments is as follows (in thousands):
Net Sales Operating Earnings Depreciation and Amortization ------------------------------------------- ---------------------------- ----------------------------------- 1998 1997 1996 1998 1997 1996 1998 1997 1996 ---------- -------- -------- ------- ------- ------- ------ ------- ------ Foodservice $352,094 $348,058 $339,949 $37,875 $35,540 $39,048 $8,939 $8,399 $8,468 Food Retail 280,950 223,530 16,424 35,545 31,839 2,976 5,232 3,966 307 -------- -------- -------- ------- ------- ------- ------- ------- ------ Total $633,044 $571,588 $356,373 $73,420 $67,379 $42,024 $14,171 $12,365 $8,775 -------- -------- -------- ------- ------- ------- ------- ------- ------
Investment in Total Assets Capital Expenditures Equity Method Investees ------------------------------------- ----------------------------------- -------------------------------------- 1998 1997 1996 1998 1997 1996 1998 1997 1996 Foodservice $263,137 $268,559 $266,249 $6,748 $5,164 $6,076 $1,842 $6,806 $1,101 Food Retail (a) 167,385 123,235 9,386 3,565 6,525 180 157 17,365 958 -------- -------- -------- ------- ------- ------ ------ ------- ------ Total $430,522 $391,794 $275,635 $10,313 $11,689 $6,256 $1,999 $24,171 $2,059 -------- -------- -------- ------- ------- ------ ------ ------- ------
(a) Beginning December 1998, the balance sheet of Austral was consolidated as the Company acquired a controlling interest. Prior to that date, Austral was accounted for under the equity method.
1998 1997 1996 -------- -------- -------- Total segment operating earnings $73,420 $67,379 $42,024 Costs not allocated to segments: Goodwill and intangible amortization from Kysor acquisition (5,335) (4,309) -- Corporate functions (3,665) (4,151) (1,728) Interest expense (27,674) (22,769) (6,070) Interest income 854 1,411 791 -------- -------- -------- Consolidated income before income taxes $37,600 $37,561 $35,017 -------- -------- --------
Earnings (Loss) of Nonconsolidated Affiliates 1998 1997 1996 -------- -------- -------- Foodservice $(186) $(150) $(297) Food Retail (a) 1,880 1,376 -- -------- -------- -------- Total $1,694 $1,226 $(297) -------- -------- --------
(a)Beginning December 1998, the balance sheet of Austral was consolidated as the Company acquired a controlling interest. Prior to that date, Austral was accounted for under the equity method.
1998 1997 1996 -------- -------- -------- Total segment assets $430,522 $391,794 $275,635 Corporate and unallocated assets: Cash and temporary cash investments 10,568 8,148 1,310 Goodwill related to Kysor acquisition, net of amortization 187,918 187,774 -- Goodwill from Austral investment, net of amortization 25,723 12,324 -- Prepaid income taxes 21,151 23,957 4,479 All other, net 31,768 36,127 1,840 -------- -------- -------- Total assets $707,650 $660,124 $283,264 -------- -------- --------
Revenues From External Customers 1998 1997 1996 - -------------------------------- -------- -------- -------- Refrigerated display cases $188,384 $152,156 $ -- Ice machines 171,865 166,190 175,998 Food preparation and storage equipment 103,004 119,681 112,800 Walk-in coolers and freezers 86,115 63,325 -- Beverage systems 83,676 70,236 67,575 -------- -------- -------- Total $633,044 $571,588 $356,373 -------- -------- --------
page 33 35
Net Sales to External Customers Long-Lived Assets ------------------------------------- ------------------------------------ Geographic Information 1998 1997 1996 1998 1997 1996 - ---------------------- ----------- ----------- ----------- -------- ------------- -------- United States $479,031 $429,803 $226,486 $ 97,799 $107,080 $38,472 Great Britain 42,673 31,886 27,578 5,053 8,467 2,589 All other countries 111,340 109,899 102,309 25,598 24,287 9,654 -------- -------- -------- -------- -------- ------- Total $633,044 $571,588 $356,373 $128,450 $139,834 $50,715 -------- -------- -------- -------- -------- -------
Revenues are attributed to a country according to the location of the customer. The Company has no single external customer which accounts for 10 percent or more of its revenue. Long-lived assets exclude goodwill and other intangibles. 16. 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. Summarized Financial Information (in thousands):
FOR THE FISCAL YEARS ENDED JAN. 3, 1999 DEC. 28, 1997 DEC. 29, 1996 - -------------------------- ------------ ------------- ------------- Current assets $258,327 $227,096 $137,574 Non-current assets 449,323 433,028 145,690 -------- -------- -------- Total assets $707,650 $660,124 $283,264 -------- -------- -------- Current liabilities $167,325 $149,690 $ 79,664 Non-current liabilities 374,757 369,523 73,298 -------- -------- -------- Total liabilities $542,082 $519,213 $152,962 -------- -------- --------
FOR THE FISCAL YEARS ENDED JAN. 3, 1999 DEC. 28, 1997 DEC. 29, 1996 - -------------------------- ------------ ------------- ------------- Net sales $633,044 $571,588 $356,373 Gross profit 158,365 141,990 98,431 Income before extraordinary loss 19,033 19,041 18,679 Net income $ 19,033 $ 18,408 $ 18,679 -------- -------- --------
The Company has fully and unconditionally guaranteed the Senior Subordinated Notes. The Company has not presented separate financial statements and other disclosure concerning Scotsman Group Inc. because the Company's management has determined that such information is not material to the holders of the Senior Subordinated Notes. 17. EARNINGS PER SHARE DISCLOSURE Following is a reconciliation of the numerators and the denominators of the basic and diluted EPS computation.
FOR THE FISCAL YEARS ENDED JAN. 3, 1999 DEC. 28, 1997 DEC. 29, 1996 -------------------------------------- ------------------------------------- -------------------------------------- Income Income Income in thousands Shares Per-share in thousands Shares Per-share in thousands Shares Per-share (Numerator) (Denominator) amount (Numerator) (Denominator) amount (Numerator) (Denominator) amount ------------ ------------- --------- ------------- ------------ --------- ------------ ------------- --------- Net income $18,928 $18,286 $18,568 Less: preferred stock dividends -- -- (813) Basic EPS Income available to common stockholders $18,928 10,590,081 $1.79 $18,286 10,554,984 $1.73 $17,755 9,398,016 $1.89 ------- ---------- ------- ------- ---------- ------- ------- --------- --------- Effect of Dilutive Securities: Common stock options -- 173,008 -- 248,277 -- 203,406 Convertible preferred stock -- -- -- -- 813 1,107,457 ------- ---------- ------- ------- ---------- ------- ------- --------- --------- Diluted EPS Income available to common stockholders and assumed conversions $18,928 10,763,089 $1.76 $18,286 10,803,261 $1.69 $18,568 10,708,879 $1.73 ------- ---------- ------- ------- ---------- ------- ------- ---------- ---------
page 34 36 18. STOCK ACTIVITY Common, preferred and treasury stock activities were as follows:
COMMON STOCK NUMBER OF SHARES (NET OF TREASURY SHARES) PREFERRED STOCK TREASURY STOCK - ---------------- ------------------------ --------------- -------------- Balance at December 31, 1995 8,964,974 1,999,992 188,040 --------- ---------- ------- Issuance of deferred compensation 5,965 -- (5,965) Conversion of preferred stock into common stock 1,525,386 (1,999,992) -- Stock options exercised 46,139 -- 4,974 --------- ---------- ------- Balance at December 29, 1996 10,542,464 -- 187,049 Issuance of deferred compensation 4,874 -- (4,874) Stock options exercised 21,259 -- 9,718 --------- ---------- ------- Balance at December 28, 1997 10,568,597 -- 191,893 Issuance of deferred compensation 5,683 -- (5,683) Stock options exercised 22,600 -- -- --------- ---------- ------- Balance at January 3, 1999 10,596,880 -- 186,210 --------- ---------- -------
page 35 37 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Scotsman Industries, Inc.: We have audited the accompanying consolidated balance sheet of Scotsman Industries, Inc. (a Delaware Corporation) and subsidiaries as of January 3, 1999, and December 28, 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended January 3, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Scotsman Industries, Inc. and subsidiaries as of January 3, 1999, and December 28, 1997, and the results of their operations and their cash flows for each of the three years in the period ended January 3, 1999, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen - ----------------------------- Arthur Andersen LLP Chicago, Illinois February 2, 1999 page 36 38 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The consolidated financial statements and related information have been prepared by management, which is responsible for the integrity and objectivity of that information. They have been prepared in conformity with generally accepted accounting principles and include amounts that are based on management's best estimates and judgments where appropriate. The financial information contained elsewhere in this annual report is consistent with that in the consolidated financial statements. The Company maintains internal accounting control systems that are adequate to provide reasonable assurance that the assets are safeguarded from loss or unauthorized use. These systems produce records adequate for preparation of financial information. Our independent public accountants, Arthur Andersen LLP, have audited the financial statements and have rendered an opinion as to the statements' fairness in all material respects in accordance with generally accepted accounting principles. During the audit they obtain an understanding of the Company's internal control systems, and perform tests and other procedures to the extent required by generally accepted auditing standards. The Audit Committee of the Board of Directors, composed of directors who are not officers or employees of the Company, meets periodically with management and the independent public accountants on financial reporting matters. The independent public accountants have free access to meet with the Audit Committee, without the presence of management, to discuss their audit results and opinions on the quality of financial reporting. /s/ Richard C. Osborne /s/ Donald D. Holmes - ------------------------------------- ------------------------------------ Richard C. Osborne Donald D. Holmes Chairman of the Board, Vice President-Finance and Secretary President and Chief Executive Officer page 37 39 SELECTED QUARTERLY FINANCIAL DATA (Unaudited) (Amounts in thousands, except per-share data)
FOR THE THREE MONTHS ENDED FISCAL YEAR 1998 JAN. 3, 1999 OCT. 4, 1998 JULY 5, 1998 APR. 5, 1998 - ------------------------------------------- ------------ ------------ ------------ ------------ Net sales $ 139,853 $ 164,421 $ 176,555 $ 152,215 Cost of sales 105,612 122,857 131,116 115,094 ------------ ------------ ------------ ------------ Gross profit 34,241 41,564 45,439 37,121 Selling and administrative expenses 19,851 21,673 22,442 22,392 Amortization expense 1,953 1,907 1,886 1,841 ------------ ------------ ------------ ------------ Income from operations 12,437 17,984 21,111 12,888 Interest expense, net 6,385 6,516 6,713 7,206 ------------ ------------ ------------ ------------ Income before income taxes 6,052 11,468 14,398 5,682 Income taxes 3,405 5,436 6,489 3,342 ------------ ------------ ------------ ------------ Income before extraordinary loss $ 2,647 $ 6,032 $ 7,909 $ 2,340 Extraordinary loss -- -- -- -- ------------ ------------ ------------ ------------ Net income $ 2,647 $ 6,032 $ 7,909 $ 2,340 ------------ ------------ ------------ ------------ Basic earnings per share (a): Income before extraordinary loss $ 0.25 $ 0.57 $ 0.75 $ 0.22 Extraordinary loss -- -- -- -- ------------ ------------ ------------ ------------ Earnings per common share $ 0.25 $ 0.57 $ 0.75 $ 0.22 Diluted earnings per share (b): Income before extraordinary loss $ 0.25 $ 0.56 $ 0.73 $ 0.22 Extraordinary loss -- -- -- -- ------------ ------------ ------------ ------------ Earnings per common share $ 0.25 $ 0.56 $ 0.73 $ 0.22 Weighted-average common shares outstanding: Basic 10,596,106 10,595,915 10,593,470 10,575,923 Diluted 10,712,289 10,771,692 10,849,779 10,831,973 ------------ ------------ ------------ ------------
(a) Basic earnings per common share are computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding. (b) Diluted earnings per common share includes options, warrants and convertible securities in the calculation. page 38 40 SELECTED QUARTERLY FINANCIAL DATA (CONTINUED) (Unaudited) (Amounts in thousands, except per-share data)
FOR THE THREE MONTHS ENDED FISCAL YEAR 1997 DEC. 28, 1997 SEPT. 28, 1997 JUNE 29, 1997 MAR. 30, 1997 - ------------------------------------------- ------------- -------------- ------------- ------------- Net sales $ 140,059 $ 159,675 $ 173,777 $ 98,077 Cost of sales 109,314 119,527 128,311 72,446 ------------- -------------- ------------- ------------ Gross profit 30,745 40,148 45,466 25,631 Selling and administrative expenses 17,735 20,572 23,159 15,126 Amortization expense 1,887 1,774 1,820 998 ------------- -------------- ------------- ------------ Income from operations 11,123 17,802 20,487 9,507 Interest expense, net 6,151 6,426 6,574 2,207 ------------- -------------- ------------- ------------ Income before income taxes 4,972 11,376 13,913 7,300 Income taxes 3,037 5,343 6,827 3,435 ------------- -------------- ------------- ------------ Income before extraordinary loss $ 1,935 $ 6,033 $ 7,086 $ 3,865 Extraordinary loss -- -- -- (633) ------------- -------------- ------------- ------------ Net income $ 1,935 $ 6,033 $ 7,086 $ 3,232 Basic earnings per share(a): Income before extraordinary loss $ 0.18 $ 0.57 $ 0.67 $ 0.37 Extraordinary loss -- -- -- (0.06) ------------- -------------- ------------- ------------ Earnings per common share $ 0.18 $ 0.57 $ 0.67 $ 0.31 Diluted earnings per share(b): Income before extraordinary loss $ 0.18 $ 0.56 $ 0.66 $ 0.36 Extraordinary loss -- -- -- (0.06) ------------- -------------- ------------- ------------ Earnings per common share $ 0.18 $ 0.56 $ 0.66 $ 0.30 Weighted-average common shares outstanding: Basic 10,566,637 10,558,231 10,550,977 10,544,095 Diluted 10,801,118 10,813,359 10,830,127 10,795,445 ------------- -------------- ------------- ------------
(a) Basic earnings per common share are computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding. (b) Diluted earnings per common share includes options, warrants and convertible securities in the calculation. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in accountants or disagreements with accountants on accounting and financial disclosures during 1998. page 39 41 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained in "Information Regarding Nominees and Directors" and "Compliance with Section 16 (a) of the Exchange Act" in the 1999 Proxy Statement is incorporated herein by reference. See also "Executive Officers of the Registrant," Part I, above. ITEM 11. EXECUTIVE COMPENSATION The information contained in the sections entitled "Executive Compensation," "Options and Stock Appreciation Rights," "Pension Plan," "Executive Compensation and Severance Agreements, Including Change of Control Provisions," and "Directors' Fees and Compensation" in the 1999 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained in the sections entitled "Security Ownership of Management" and "Security Ownership of Certain Beneficial Owners" in the 1999 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in the sections entitled "Executive Compensation," "Executive Compensation and Severance Agreements, Including Change of Control Provisions" and "Other Agreements" in the 1999 Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a)(1) LIST OF FINANCIAL STATEMENTS The following Consolidated Financial Statements of Scotsman Industries, Inc. and Subsidiaries are included in Item 8 of this report. Report of Independent Public Accountants Consolidated Statement of Income for each of the three years ended January 3, 1999, December 28, 1997, and December 29, 1996 Consolidated Balance Sheet as of January 3, 1999, and December 28, 1997 Consolidated Statement of Cash Flows for each of the three years ended January 3, 1999, December 28, 1997, and December 29, 1996 Consolidated Statement of Shareholders' Equity for each of the three years ended January 3, 1999, December 28, 1997, and December 29, 1996 Notes to Consolidated Financial Statements Selected Quarterly Financial Data (Unaudited) (a)(2) LIST OF FINANCIAL STATEMENT SCHEDULE Scotsman Industries, Inc. Schedule II - Valuation and Qualifying Accounts (In thousands)
ADDITIONS ----------------------- Balance at Charged to Charged to Balance Beginning Costs/ Other at End of of Period Expenses Accounts(a) Deductions Period ---------- ---------- ----------- ---------- --------- 1996 - Accounts Receivable Reserves $2,960 $ 435 $ (128) $(489) $2,778 1997 - Accounts Receivable Reserves $2,778 $1,126 $1,972 $(505) $5,371 1998 - Accounts Receivable Reserves $5,371 $ 511 $ 292 $(960) $5,214
(a) Includes the foreign currency translation impact and also includes increases due to inclusion of the accounts receivable reserves of the acquired businesses as of the date of their acquisition by the Company. page 40 42 (a) (3) LIST OF EXHIBITS The following exhibits are filed as part of this report. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report has been marked with an asterisk(*). Unless otherwise indicated, all documents incorporated by reference to prior filings have been filed under Commission File No. 1-10182. Exhibit 2.1 Agreement and Plan of Merger, dated as of February 2, 1997, among the Company, K Acquisition Corp., and Kysor Industrial Corporation (incorporated herein by reference from Exhibit (c) (1) to the Company's Tender Offer Statement on Schedule 14D-1, filed with the Commission on February 7, 1997), as amended by the First Amendment to Agreement and Plan of Merger, dated as of March 7, 1997 (incorporated herein by reference to the Company's 8-K, dated March 8, 1997). Exhibit 2.2 Asset Purchase Agreement, dated as of February 2, 1997, among Kuhlman Corporation, Transpro Group, Inc., Kysor Industrial Corporation, and certain subsidiaries of Kysor Industrial Corporation (incorporated herein by reference to Exhibit (c) (2) of the Company's Schedule 14D-1 filed with the Commission on February 7, 1997). Exhibit 2.3 Agreement for the Sale, Purchase and Assignment of the Entire Share Capital of Hartek Beverage Handling GmbH and Hartek Awagem Vertriebsges, m.b.H., dated December 31, 1995, among Hartek Beverage Handling B.V., Hartwall Bolagen AB, Scotsman Group Inc. and Scotsman Industries, Inc. (incorporated herein by reference to the Company's 10-K for the fiscal year ended December 31, 1995). Exhibit 2.4 Agreement and Plan of Merger, dated as of January 11, 1994, among Scotsman Industries, Inc., Scotsman Acquisition Corporation, DFC Holding Corporation, The Delfield Company, Onex Corporation, Onex DHC LLC, Pacific Mutual Life Insurance Co., PM Group Life Insurance Co., EJJM, Matthew O. Diggs, Jr., Timothy C. Collins, W. Joseph Manifold, Charles R. McCollom, Anita J. Moffatt Trust, Anita J. Moffatt, Remo Panella, Teddy F. Reed, Robert L. Schafer, Graham E. Tillotson, John A. Tilmann Trust, John A. Tilmann, Kevin E. McCrone, Michael P. McCrone, Ronald A. Anderson and Continental Bank N.A. (incorporated herein by reference to the Company's 8-K, dated January 13, 1994), as amended by the First Amendment thereto, dated as of March 17, 1994 (incorporated herein by reference to the Company's 10-K for the fiscal year ended January 2, 1994). Exhibit 2.5 Share Acquisition Agreement, dated as of January 11, 1994, among Scotsman Industries, Inc., Whitlenge Acquisition Limited, Whitlenge Drink Equipment Limited, Timothy C. Collins, Graham F. Cook, Christopher R.L. Wheeler, Michael de St. Paer and John Rushton (incorporated herein by reference to the Company's 8-K, dated January 13, 1994), as amended by the First Amendment thereto, dated as of March 17, 1994 (incorporated herein by reference to the Company's 10-K for the fiscal year ended January 2, 1994). Exhibit 3.1 Restated Certificate of Incorporation of the Company (incorporated herein by reference to the Company's 10-K for the fiscal year ended December 31, 1989). Exhibit 3.2 By-Laws of the Company, as amended (incorporated herein by reference to the Company's 8-K, dated June 21, 1991). Exhibit 4 Rights Agreement, dated as of April 14, 1989, between Scotsman Industries, Inc. and Harris Trust & Savings Bank (incorporated herein by reference to the Company's 8-K, dated April 25, 1989), as amended by Amendment No. 1 thereto, dated as of January 11, 1994 (incorporated herein by reference to Scotsman Industries, Inc. Amendment No. 4 to General Form for Registration of Securities on Form 10/A, as filed with the Commission on January 27, 1994), Amendment 2 thereto, dated as of February 10, 1998 (incorporated herein by reference to the Company's 8-K, dated February 10, 1998), and Amendment 3 thereto, dated as of February 11, 1998 (incorporated herein by reference to the Company's 8-K, dated February 19, 1998). Exhibit 10.1 Reorganization and Distribution Agreement, dated as of March 15, 1989, by and among Household International, Inc., Eljer Industries, Inc., Schwitzer, Inc. and Scotsman Industries, Inc. (incorporated herein by reference to the Company's 8-K, dated April 25, 1989).
page 41 43 Exhibit 10.2 Tax Sharing Agreement, dated as of March 15, 1989, among Household International, Inc., Eljer Industries, Inc., Schwitzer, Inc. and Scotsman Industries, Inc. (incorporated herein by reference to the Company's 8-K, dated April 25, 1989). Exhibit 10.3 Benefits and Labor Agreement, dated as of March 15, 1989, among Household International, Inc., Eljer Industries, Inc., Schwitzer, Inc. and Scotsman Industries, Inc. (incorporated herein by reference to the Company's 10-K for the fiscal year ended December 31, 1989). Exhibit 10.4 Credit Agreement, dated March 12, 1997, (the "Credit Agreement"), among Scotsman Group Inc. and the other parties named therein, as Borrowers, the Lenders named therein, and The First National Bank of Chicago, as Agent (incorporated herein by reference to the Company's 10-K for the fiscal year ended December 29, 1996), as amended by the First Amendment thereto, dated March 24, 1997 (incorporated by reference to the Company's 10-K for the fiscal year ended December 28, 1997), the Second Amendment thereto dated June 30, 1997 (incorporated by reference to the Company's 10-K for the fiscal year ended December 28, 1997), and the Third Amendment thereto dated December 15, 1997, (incorporated by reference to the Company's 10-K for the fiscal year ended December 28, 1997) and the Fourth Amendment thereto dated September 30, 1998. Exhibit 10.5 Domestic Guaranty, dated as of March 12, 1997, entered into by Scotsman Industries, Inc., in favor of The First National Bank of Chicago, as agent, and the lenders named in the Credit Agreement (incorporated herein by reference to the Company's 10-Q for the quarter ended March 30, 1997). Exhibit 10.6 Domestic Guaranty, dated as of March 12, 1997, in the form separately entered into by each of Scotsman Group Inc., Booth, Inc., DFC Holding Corporation, The Delfield Company and Kysor Industrial Corporation, in favor of The First National Bank of Chicago, as agent, and the lenders named in the Credit Agreement (incorporated herein by reference to the Company's 10-Q for the quarter ended March 30, 1997). Exhibit 10.7 Foreign Guaranty, dated as of March 12, 1997, in the form separately entered into by each of Whitlenge Drink Equipment Limited, Scotsman Drink Limited, Frimont S.p.A., and Castel MAC S.p.A., in favor of The First National Bank of Chicago, as agent, and the lenders named in the Credit Agreement (incorporated herein by reference to the Company's 10-Q for the quarter ended March 30, 1997). Exhibit 10.8 Indenture, dated as of December 17, 1997, among Scotsman Industries, Inc., Scotsman Group Inc., and Harris Trust and Savings Bank, together with the form of 8 5/8% Senior Subordinated Notes Due 2007 issued by Scotsman Group Inc. under the Indenture and the related Guaranty of Scotsman Industries, Inc. (incorporated by reference to the Company's 10-K for the fiscal year ended December 28, 1997). Exhibit 10.9 Promissory Note in the principal amount of $7,500,000, made as of April 28,1998, by Scotsman Group Inc. to Comerica Bank (incorporated by reference to the Company's 10-Q for the quarter ended April 5,1998), together with the related Reaffirmation of Guaranty and Consent, dated March 12, 1996, by Scotsman Industries, Inc. in favor of Comerica Bank, Guaranty Agreement, dated June 30, 1996, by Scotsman Industries, Inc. in favor of Comerica Bank (incorporated herein to the Company's 10-Q, dated June 30, 1996) and Guaranty by Booth, Inc., DFC Holding Corporation, The Delfield Company and Kysor Industrial Corporation, dated March 12, 1997, in favor of Comerica Bank (incorporated herein by reference to the Company's 10-K for the fiscal year ended December 29, 1996). Exhibit 10.10 Reimbursement Agreement, dated March 1, 1988, among Household Manufacturing, Inc., King-Seeley Thermos Co. and the National Westminster Bank PLC, as amended by the Amendments dated as of April 14, 1989, December 12, 1989, June 26, 1992, November 20, 1992, March 17, 1993, among Scotsman Group Inc., Scotsman Industries, Inc. and The Bank of Nova Scotia (incorporated herein by reference to the Company's 10-K for the fiscal year ended January 3, 1993), the Amendment dated April 29, 1994 (incorporated herein by reference to the Company's 10-Q for the quarter ended April 3, 1994), Amendment No. 7 thereto, dated March 12, 1997 (incorporated by reference to the Company's 10-K for the fiscal year ended December 29,1996), among Scotsman Group Inc., Scotsman Industries, Inc., The Bank of Nova Scotia and The First National Bank of Chicago. page 42 44 Exhibit 10.11 ISDA Master Agreement, dated as of March 3, 1994, including the Schedule and Amended Confirmation (2) thereto, between The First National Bank of Chicago and Scotsman Group Inc. (incorporated herein by reference to the Company's 10-K for the fiscal year ended January 1, 1995), as amended by an Amendment thereto dated December 15,1997 (incorporated by reference to the Company's 10-Q for the quarter ended April 5, 1998), together with the related Confirmation of Interest Rate Swap Transactions, dated March 17, 1997, in the notional amounts of $100 million and $50 million, respectively (incorporated herein by reference to the Company's 10-Q for the quarter ended March 30, 1997), as amended by an Amended Confirmation, dated February 5, 1998 (incorporated by reference to the Company's 10-Q for the quarter ended April 5, 1998). Exhibit 10.12* Long-Term Executive Incentive Compensation Plan of Scotsman Industries, Inc., as amended May 14, 1998 (incorporated by reference to the Company's Form 10-Q for the quarter ended July 5, 1998). Exhibit 10.13* Scotsman Industries, Inc., Executive Incentive Compensation Program, Plans AA, A-1 and A-2 (incorporated herein by reference to the Company's 10-K for the fiscal quarter ended December 29, 1996). Exhibit 10.14* Scotsman Group Inc. Supplemental Tax Reduction Investment Plan, dated as of April 14, 1989 (incorporated herein by reference to the Company's 10-K for the fiscal year ended December 30, 1990). Exhibit 10.15* Non-Employee Directors Stock Option Plan, effective as of August 11, 1994 (incorporated herein by reference to the Company's Registration Statement on Form S-8, No. 33-59397). Exhibit 10.16* Employment Agreement, dated September 16, 1991, between Scotsman Group Inc. and Richard C. Osborne (incorporated herein by reference to the Company's 10-Q for the quarter ended September 29, 1991). Exhibit 10.17* Employment Agreement, dated September 16, 1991, between Scotsman Group Inc. and Emanuele Lanzani (incorporated herein by reference to the Company's 10-K for the fiscal year ended December 29, 1991). Exhibit 10.18* Employment Agreement, dated September 16, 1991, between Scotsman Group Inc. and Donald D. Holmes (incorporated herein by reference to the Company's 10-Q for the quarter ended September 29, 1991). Exhibit 10.19* Employment Agreement, dated December 18, 1997, between Scotsman Group Inc. and David M. Frase. Exhibit 10.20* Employment Agreement, dated October 17, 1996, between Scotsman Group Inc. and Christopher D. Hughes. Exhibit 10.21* Executive Severance Agreement, dated as of September 16, 1991, between Richard C. Osborne and Scotsman Group Inc. (incorporated herein by reference to the Company's 10-Q for the quarter ended September 29, 1991), as amended by Amendment No. 1 thereto, dated as of January 11, 1994 (incorporated herein by reference to the Company's 10-K for the fiscal year ended January 2, 1994). Exhibit 10.22* Executive Severance Agreement, dated as of September 16, 1991, between Emanuele Lanzani and Frimont S.p.A. (incorporated herein by reference to the Company's 10-K for the fiscal year ended December 29, 1991), as amended by Amendment No. 1 thereto, dated as of January 11, 1994 (incorporated herein by reference to the Company's 10-K for the fiscal year ended January 2, 1994). Exhibit 10.23* Executive Severance Agreement, dated as of September 16, 1991, between Donald D. Holmes and Scotsman Group Inc. (incorporated herein by reference to the Company's 10-Q for the quarter ended September 29, 1991), as amended by Amendment No. 1 thereto, dated as of January 11, 1994, between Donald D. Holmes and Scotsman Group Inc. (incorporated herein by reference to the Company's 10-K for the fiscal year ended January 2, 1994).
page 43 45 Exhibit 10.24* Retirement Program for Emanuele Lanzani of Frimont, S.p.A., Subsidiary of King- Seeley Thermos Co., dated July 25, 1984 (incorporated herein by reference to the Company's 10-K for the fiscal year ended December 31, 1989). Exhibit 10.25 Agreement dated March 27, 1981, by and between Emanuele Lanzani and King-Seeley Thermos Co. and Frimont, S.p.A. (incorporated herein by reference to the Company's 10-K for the fiscal year ended December 31, 1989), as amended by the Amendment dated March 20, 1990 (incorporated herein by reference to the Company's 10-Q for the quarter ended September 30, 1990). Exhibit 21 List of Subsidiaries. Exhibit 23 Consent of Arthur Andersen LLP. Exhibit 27 Article 5 Financial Data Schedule for the Fiscal Year Ended January 3, 1999. Exhibit 99 Cautionary Statements.
Copies of the exhibits referred to above will be furnished to shareholders upon written request at a cost of 15 cents per page. Requests should be made to Scotsman Industries, Inc., 820 Forest Edge Drive, Vernon Hills, Illinois 60061, Attention: Donald D. Holmes, Secretary. (b) Reports on Form 8-K None. (c) Exhibits The exhibits required under this Item 14 (c) are filed as a separate section of this report. (d)FINANCIAL STATEMENT SCHEDULES See item 14(a)(2), above. Page 44 46 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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. DATED: MARCH 19, 1999 SCOTSMAN INDUSTRIES, INC. BY: /s/ R.C. Osborne ------------------------------------------------------ R.C. Osborne, Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Scotsman and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------------------------------------------------------------------------- /s/ R.C. Osborne , Chairman of the Board, President, March 19, 1999 - ---------------------- (R.C. Osborne) Chief Executive Officer and Director(Principal Executive Officer) /s/ D.C. Clark , Director March 19, 1999 - ---------------------- (D.C. Clark) /s/ F.W. Considine , Director March 19, 1999 - ---------------------- (F. W. Considine) /s/ P.B. Hamilton , Director March 19, 1999 - ---------------------- (P.B. Hamilton) /s/ G.D. Kennedy , Director March 19, 1999 - ---------------------- (G.D. Kennedy) /s/ J.J. O'Connor , Director March 19, 1999 - ---------------------- (J.J. O'Connor) /s/ R.G. Rettig , Director March 19, 1999 - ---------------------- (R.G. Rettig) /s/ R.L. Thomas , Director March 19, 1999 - ---------------------- (R.L. Thomas) /s/ D.D. Holmes , Vice President - Finance and March 19, 1999 - ---------------------- (D.D. Holmes) Secretary (Principal Financial and Accounting Officer)
page 45 47 EXHIBIT INDEX Exhibit Page Number Number Description(1) of Exhibit -------- --------------- ----------- 2.1 Agreement and Plan of Merger, dated as of February 2, 1997, among the Company, K Acquisition Corp., and Kysor Industrial Corporation (incorporated herein by reference from Exhibit (c)(1) to the Company's Tender Offer Statement on Schedule 14D-1, filed with the Commission on February 7, 1997), as amended by the First Amendment to Agreement and Plan of Merger, dated as of March 7, 1997 (incorporated herein by reference to the Company's 8-K, dated March 8, 1997). 2.2 Asset Purchase Agreement, dated as of February 2, 1997, among Kuhlman Corporation, Transpro Group, Inc., Kysor Industrial Corporation, and certain subsidiaries of Kysor Industrial Corporation (incorporated herein by reference to Exhibit (c)(2) of the Company's Schedule 14D-1 filed with the Commission on February 7, 1997). 2.3 Agreement for the Sale, Purchase and Assignment of the Entire Share Capital of Hartek Beverage Handling GmbH and Hartek Awagem Vertriebsges, m.b.H., dated December 31, 1995, among Hartek Beverage Handling B.V., Hartwall Bolagen AB, Scotsman Group Inc. and Scotsman Industries, Inc. (incorporated herein by reference to the Company's 10-K for the fiscal year ended December 31, 1995). 2.4 Agreement and Plan of Merger, dated as of January 11, 1994, among Scotsman Industries, Inc., Scotsman Acquisition Corporation, DFC Holding Corporation, The Delfield Company, Onex Corporation, Onex DHC LLC, Pacific Mutual Life Insurance Co., PM Group Life Insurance Co., EJJM, Matthew O. Diggs, Jr., Timothy C. Collins, W. Joseph Manifold, Charles R. McCollom, Anita J. Moffatt Trust, Anita J. Moffatt, Remo Panella, Teddy F. Reed, Robert L. Schafer, Graham E. Tillotson, John A. Tilmann Trust, John A. Tilmann, Kevin E. McCrone, Michael P. McCrone, Ronald A. Anderson and Continental Bank N.A. (incorporated herein by reference to the Company's 8-K, dated January 13, 1994), as amended by the First Amendment thereto, dated as of March 17, 1994 (incorporated herein by reference to the Company's 10-K for the fiscal year ended January 2, 1994). 2.5 Share Acquisition Agreement, dated as of January 11, 1994, among Scotsman Industries, Inc., Whitlenge Acquisition Limited, Whitlenge Drink Equipment Limited, Timothy C. Collins, Graham F. Cook, Christopher R.L. Wheeler, Michael de St. Paer and John Rushton (incorporated herein by reference to the Company's 8-K, dated January 13, 1994), as amended by the First Amendment thereto, dated as of March 17, 1994 (incorporated herein by reference to the Company's 10-K for the fiscal year ended January 2, 1994). 48 Exhibit Page Number Number Description(1) of Exhibit ------- -------------- ----------- 3.1 Restated Certificate of Incorporation of the Company (incorporated herein by reference to the Company's 10-K for the fiscal year ended December 31, 1989). 3.2 By-Laws of the Company, as amended (incorporated herein by reference to the Company's 8-K, dated June 21, 1991). 4 Rights Agreement, dated as of April 14, 1989, between Scotsman Industries, Inc. and Harris Trust & Savings Bank (incorporated herein by reference to the Company's 8-K, dated April 25, 1989), as amended by Amendment No. 1 thereto, dated as of January 11, 1994 (incorporated herein by reference to Scotsman Industries, Inc. Amendment No. 4 to General Form for Registration of Securities on Form 10/A, as filed with the Commission on January 27, 1994), Amendment 2 thereto, dated as of February 10, 1998 (incorporated herein by reference to the Company's 8-K, dated February 10, 1998), and Amendment 3 thereto, dated as of February 11, 1998 (incorporated herein by reference to the Company's 8-K, dated February 10, 1998). 10.1 Reorganization and Distribution Agreement, dated as of March 15, 1989, by and among Household International, Inc., Eljer Industries, Inc., Schwitzer, Inc. and Scotsman Industries, Inc. (incorporated herein by reference to the Company's 8-K, dated April 25, 1989). 10.2 Tax Sharing Agreement, dated as of March 15, 1989, among Household International, Inc., Eljer Industries, Inc., Schwitzer, Inc. and Scotsman Industries, Inc. (incorporated herein by reference to the Company's 8-K, dated April 25, 1989). 10.3 Benefits and Labor Agreement, dated as of March 15, 1989, among Household International, Inc., Eljer Industries, Inc., Schwitzer, Inc. and Scotsman Industries, Inc. (incorporated herein by reference to the Company's 10-K for the fiscal year ended December 31, 1989). 10.4 Credit Agreement, dated March 12, 1997 (the "Credit Agreement"), among Scotsman Group Inc. and the other parties named therein, as Borrowers, the Lenders named therein, and The First National Bank of Chicago, as Agent (incorporated herein by reference to the Company's 10-K for the fiscal year ended December 29, 1996), as amended by the First Amendment thereto, dated March 24, 1997 (incorporated by reference to the Company's 10-K for the fiscal year ended December 28, 1997), the Second Amendment thereto dated June 30, 1997 (incorporated by reference to the Company's 10-K for the fiscal year ended December 28, 1997), and the Third Amendment thereto dated December 15, 1997 (incorporated by reference to the Company's 10-K for the fiscal year ended December 28, 1997) and the Fourth Amendment thereto dated September 30, 1998. 49 Exhibit Page Number Number Description(1) of Exhibit ------- -------------- ----------- 10.5 Domestic Guaranty, dated as of March 12, 1997, entered into by Scotsman Industries, Inc., in favor of The First National Bank of Chicago, as agent, and the lenders named in the Credit Agreement (incorporated herein by reference to the Company's 10-Q for the quarter ended March 30, 1997). 10.6 Domestic Guaranty, dated as of March 12, 1997, in the form separately entered into by each of Scotsman Group Inc., Booth, Inc., DFC Holding Corporation, The Delfield Company and Kysor Industrial Corporation, in favor of The First National Bank of Chicago, as agent, and the lenders named in the Credit Agreement (incorporated herein by reference to the Company's 10-Q for the quarter ended March 30, 1997). 10.7 Foreign Guaranty, dated as of March 12, 1997, in the form separately entered into by each of Whitlenge Drink Equipment Limited, Scotsman Drink Limited, Frimont S.p.A. and Castel MAC S.p.A., in favor of The First National Bank of Chicago, as agent, and the lenders named in the Credit Agreement (incorporated herein by reference to the Company's 10-Q for the quarter ended March 30, 1997). 10.8 Indenture, dated as of December 17, 1997, among Scotsman Industries, Inc., Scotsman Group, Inc., and Harris Trust and Savings Bank, together with the form of 8 5/8% Senior Subordinated Notes Due 2007 issued by Scotsman Group Inc. under the Indenture and the related Guaranty of Scotsman Industries, Inc. (incorporated by reference to the Company's 10-K for the fiscal year ended December 28, 1997). 10.9 Promissory Note in the principal amount of $7,500,000, made as of April 28, 1998, by Scotsman Group Inc. to Comerica Bank (incorporated by reference to the Company's 10-Q for the quarter ended April 5, 1998), together with the related Reaffirmation of Guaranty and Consent, dated March 12, 1996, by Scotsman Industries, Inc. in favor of Comerica Bank, Guaranty Agreement, dated June 30, 1996, by Scotsman Industries, Inc. in favor of Comerica Bank (incorporated herein to the Company's 10-Q, dated June 30, 1996) and Guaranty by Booth, Inc., DFC Holding Corporation, The Delfield Company and Kysor Industrial Corporation, dated March 12, 1997, in favor of Comerica Bank (incorporated herein by reference to the Company's 10-K for the fiscal year ended December 29, 1996). 50 Exhibit Page Number Number Description(1) of Exhibit -------- --------------- ---------- 10.10 Reimbursement Agreement, dated March 1, 1988, among Household Manufacturing, Inc., King-Seeley Thermos Co. and the National Westminster Bank PLC, as amended by the Amendments dated as of April 14, 1989, December 12, 1989, June 26, 1992, November 20, 1992, March 17, 1993, among Scotsman Group Inc., Scotsman Industries, Inc. and The Bank of Nova Scotia (incorporated herein by reference to the Company's 10-K for the fiscal year ended January 3, 1993), the Amendment dated April 29, 1994 (incorporated herein by reference to the Company's 10-Q for the quarter ended April 3, 1994), Amendment No. 7 thereto, dated March 12, 1997 (incorporated by reference to the Company's 10-K for the fiscal year ended December 29, 1996), among Scotsman Group Inc., Scotsman Industries, Inc., The Bank of Nova Scotia and The First National Bank of Chicago. 10.11 ISDA Master Agreement, dated as of March 3, 1994, including the Schedule and Amended Confirmation (2) thereto, between The First National Bank of Chicago and Scotsman Group Inc. (incorporated herein by reference to the Company's 10-K for the fiscal year ended January 1, 1995), as amended by an Amendment thereto dated December 15, 1997 (incorporated by reference to the Company's 10-Q for the quarter ended April 5, 1998), together with the related Confirmation of Interest Rate Swap Transactions, dated March 17, 1997, in the notional amounts of $100 million and $50 million, respectively (incorporated herein by reference to the Company's 10-Q for the quarter ended March 30, 1997), as amended by an Amended Confirmation, dated February 5, 1998 (incorporated by reference to the Company's 10-Q for the quarter ended April 5, 1998). 10.12* Long-Term Executive Incentive Compensation Plan of Scotsman Industries, Inc., as amended May 14, 1998 (incorporated by reference to the Company's Form 10-Q for the quarter ended July 5, 1998). 10.13* Scotsman Industries, Inc., Executive Incentive Compensation Program, Plans AA, A-1 and A-2 (incorporated herein by reference to the Company's 10-K for the fiscal quarter ended December 29, 1996). 10.14* Scotsman Group Inc. Supplemental Tax Reduction Investment Plan, dated as of April 14, 1989 (incorporated herein by reference to the Company's 10-K for the fiscal year ended December 30, 1990). 10.15* Non-Employee Directors Stock Option Plan, effective as of August 11, 1994 (incorporated herein by reference to the Company's Registration Statement on Form S-8, No. 33-59397). 10.16* Employment Agreement, dated September 16, 1991, between Scotsman Group Inc. and Richard C. Osborne (incorporated herein by reference to the Company's 10-Q for the quarter ended September 29, 1991). 51 Exhibit Page Number Number Description(1) of Exhibit ------- -------------- ----------- 10.17* Employment Agreement, dated September 16, 1991, between Scotsman Group Inc. and Emanuele Lanzani (incorporated herein by reference to the Company's 10-K for the fiscal year ended December 29, 1991). 10.18* Employment Agreement, dated September 16, 1991, between Scotsman Group Inc. and Donald D. Holmes (incorporated herein by reference to the Company's 10-Q for the quarter ended September 29, 1991). 10.19* Employment Agreement, dated December 18, 1997, between Scotsman Group Inc. and David M. Frase. 10.20* Employment Agreement, dated October 17, 1996, between Scotsman Group Inc. and Christopher D. Hughes. 10.21* Executive Severance Agreement, dated as of September 16, 1991, between Richard C. Osborne and Scotsman Group Inc. (incorporated herein by reference to the Company's 10-Q for the quarter ended September 29, 1991), as amended by Amendment No. 1 thereto, dated as of January 11, 1994 (incorporated herein by reference to the Company's 10-K for the fiscal year ended January 2, 1994). 10.22* Executive Severance Agreement, dated as of September 16, 1991, between Emanuele Lanzani and Frimont S.p.A. (incorporated herein by reference to the Company's 10-K for the fiscal year ended December 29, 1991), as amended by Amendment No. 1 thereto, dated as of January 11, 1994 (incorporated herein by reference to the Company's 10-K for the fiscal year ended January 2, 1994). 10.23* Executive Severance Agreement, dated as of September 16, 1991, between Donald D. Holmes and Scotsman Group Inc. (incorporated herein by reference to the Company's 10-Q for the quarter ended September 29, 1991), as amended by Amendment No. 1 thereto, dated as of January 11, 1994, between Donald D. Holmes and Scotsman Group Inc (incorporated herein by reference to the Company's 10-K for the fiscal year ended January 2, 1994). 10.24* Retirement Program for Emanuele Lanzani of Frimont, S.p.A., Subsidiary of King-Seeley Thermos Co. dated July 25, 1984 (incorporated herein by reference to the Company's 10-K for the fiscal year ended December 31, 1989). 10.25 Agreement dated March 27, 1981, by and between Emanuele Lanzani and King-Seeley Thermos Co. and Frimont, S.p.A. (incorporated herein by reference to the Company's 10-K for the fiscal year ended December 31, 1989), as amended by the Amendment dated March 20, 1990 (incorporated herein by reference to the Company's 10-Q for the quarter ended September 30, 1990). 52 Exhibit Page Number Number Description(1) of Exhibit ------- --------------- ----------- 21 List of Subsidiaries. 23 Consent of Arthur Andersen LLP. 27 Article 5 Financial Data Schedule for the Fiscal Year Ended January 3, 1999. 99 Cautionary Statements. - ------------------- (1) Unless otherwise indicated, all documents incorporated herein by reference to prior filings have been incorporated by reference to filings made under Commission File No 1-10182. EX-10.4 2 AMENDMENT TO CREDIT AGREEMENT 1 Exhibit 10.4 FOURTH AMENDMENT TO CREDIT AGREEMENT This FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of September 30, 1998 among Scotsman Group Inc., The Delfield Company, Scotsman Drink Limited, Whitlenge Drink Equipment Limited, Frimont S.p.A., Castel MAC S.p.A., Kysor Industrial Corporation, Scotsman Industries, Inc., the Lenders (as defined below) and The First National Bank of Chicago, as Agent. RECITALS WHEREAS, Scotsman Group Inc., a Delaware corporation ("Group"), The Delfield Company, a Delaware corporation ("Delfield"), Scotsman Drink Limited, a private company limited by shares registered in England ("Drink"), Whitlenge Drink Equipment Limited, a private company limited by shares registered in England ("Whitlenge"), Frimont S.p.A., a societa per azioni incorporated with limited liability in the Republic of Italy ("Frimont"), Castel MAC S.p.A., a societa per azioni incorporated with limited liability in the Republic of Italy ("Castel"), Kysor Industrial Corporation, a Michigan corporation ("Kysor"; Group, Delfield, Drink, Whitlenge, Frimont, Castel and Kysor are collectively referred to herein as the "Borrowers" and each a "Borrower"), Scotsman Industries, Inc. ("Industries"), certain financial institutions parties thereto and The First National Bank of Chicago, as Agent, are parties to that certain Credit Agreement, dated as of March 12, 1997, as amended by that certain First Amendment to Credit Agreement, dated as of March 24, 1997, that certain Second Amendment to Credit Agreement, dated as of June 30, 1997 and that certain Third Amendment to Credit Agreement, dated as of December 15, 1997 (as further amended or modified hereby and as hereafter amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement") and WHEREAS, the Borrowers and Industries have requested that the Agent and the lenders thereto amend certain provisions of the Credit Agreement, all as more fully described herein; and WHEREAS, the Agent and such lenders have agreed to grant such amendments upon the terms and conditions set forth herein. 2 AGREEMENT NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. Definitions. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned thereto in the Credit Agreement. SECTION 2. Amendments to the Credit Agreement. Subject to the terms and conditions set forth herein, the Credit Agreement is hereby amended as follows: 2.1 Definitions. (a) Article I of the Credit Agreement is hereby amended by adding thereto the following new definitions, in proper alphabetical order: "Australian Dollars" and "A$" shall mean the lawful currency of Australia. "Eligible Currency" means any currency other than Dollars that is readily available, freely traded, in which deposits are customarily offered to banks in the London interbank market, convertible into Dollars in the international interbank market and as to which a Current Dollar Equivalent may be readily calculated. If, after the designation by the Agent and the Required Lenders of any currency as an Alternative Currency, currency control or other exchange regulations are imposed in the country in which such currency is issued with the result that different types of such currency are introduced, such country's currency is, in the determination of the Agent, no longer readily available or freely traded or as to which, in the determination of the Agent, a Current Dollar Equivalent is not readily calculable, then the Agent shall promptly notify the Lenders and Group, such country's currency shall no longer be an Alternative Currency until such time as all of the Lenders agree to reinstate such country's currency as an Alternative Currency and promptly, but in any event within five (5) Business Days of receipt of such notice from the Agent, the Borrowers with respect to such Alternative Currency shall repay all Loans in such affected currency or convert such Loans into Loans in Dollars or another Alternative Currency, as applicable, subject to the other terms contained in Article II of this Agreement. "Euro" means the euro referred to in the Council Regulation (EC) No. 1103/97 dated 17 June 1997 passed by the Council of the European Union, or, if different, the then lawful currency of the member states of the European Union that participate in the third stage of the Economic and Monetary Union. "Euro Implementation Date" means the first date (currently expected to be January 1, 1999) on which the Euro becomes the currency of some or all of the member states of the European Union. "National Currency Unit" means the unit of currency (other than a Euro unit) of each member state of the European Union that participates in the third stage of Economic and Monetary Union. 2 3 "Year 2000 Issues" means anticipated costs, problems and uncertainties associated with the inability of certain computer systems (and equipment containing embedded microchips) of Group and its Subsidiaries to effectively handle data, including dates, on and after January 1, 2000, as it affects Group's consolidated business, operations, and financial condition. (b) The definition of "Alternative Currency" contained in Article I of the Credit Agreement is hereby amended by deleting such definition and restating it in its entirety as follows: "Alternative Currency" shall mean (i) subject to availability pursuant to Section 3.8 and to the extent freely transferable and convertible into Dollars and only so long as such currencies remain Eligible Currencies, the lawful currencies of France, Germany, Italy, Japan, Switzerland, Canada and the United Kingdom, (ii) upon and after the Euro Implementation Date, the Euro only for so long as the Euro is and remains an Eligible Currency and (iii) subject to availability and to the terms and conditions of this Agreement, such other freely transferable and convertible foreign currencies as requested by Group and acceptable to Agent and the Required Lenders, in their reasonable discretion. (c) The definition of "Existing Letter of Credit" contained in Article I of the Credit Agreement is hereby amended by deleting such definition and restating it in its entirety as follows: "Existing Letter of Credit" means that certain letter of credit no. 00323043 issued by First Chicago for the account of Delfield in connection with workers' disability compensation in the State of Michigan. 2.2 Method of Selecting Types and Interest Periods for New Advances. Section 2.10 of the Credit Agreement is hereby amended by adding at the end of clause (e) thereof, immediately before the period, the following: "; provided, that, if any Advance made (or to be made) on or after the Euro Implementation Date would, but for this provision, be capable of being made either in the Euro or in an applicable National Currency Unit, such Advance shall be made in the Euro, unless otherwise consented to by the Agent" 2.3 Representations. Article V of the Credit Agreement is hereby amended by adding at the end of such Article V the following new Section 5.27: "5.27 Year 2000 Issues. Group has made a reasonable assessment of the Year 2000 Issues and based on this assessment Group does not reasonably anticipate any Material Adverse Effect as a result of Year 2000 Issues." 2.4 Indebtedness. Section 6.11 of the Credit Agreement is hereby amended by (i) deleting the word "and" at the end of clause (g) thereof and (ii) adding at the end of clause (h) thereof before the period the following: "; and (i) Indebtedness of Austral Refrigeration Pty., Limited and its Subsidiaries in an aggregate principal amount not to exceed A$25,000,000 at any one time." 3 4 2.5 Investments. Subsection 6.15(a) is hereby amended by amending and restating clause (iv) of such subsection in its entirety as follows: "(iv) other Investments after the date hereof directly in Austral Refrigeration Pty., Limited or indirectly in Austral Refrigeration Pty., Limited through the acquisition of all of the equity interests of Refrigeration Investment (MBO) Limited, a company organized under the laws of the British Virgin Islands (the sole assets of which consist of the stock of Austral Refrigeration Pty., Limited), and through the acquisition of other entities with the prior written consent of the Agent, in an aggregate outstanding principal amount not to exceed $25,000,000." 2.6 Liens. Section 6.16 of the Credit Agreement is hereby amended by (i) deleting the word "and" at the end of clause (i) thereof and (ii) adding at the end of clause (j) thereof before the period the following: "and (k) Liens on the assets of Austral Refrigeration Pty., Limited and its Subsidiaries securing Indebtedness permitted under Section 6.11(i)" 2.7 Change in Corporate Structure: Fiscal Year. Section 6.23 of the Credit Agreement is hereby amended by (i) deleting the word "and" as it appears before clause (y) thereof and (ii) adding at the end of clause (y) immediately before the period the following: "and (z) Austral Refrigeration Pty., Limited and its Subsidiaries may maintain the fiscal year they employ as of September 30,1998". 2.8 Fixed Charge Coverage Ratio. Section 6.25.2 of the Credit Agreement is hereby amended by adding at the end of such section before the period the following: "; and, provided, further that with respect to regularly scheduled principal payments made with respect to the Term Loans and Revolving Loans referred to in clause (b) of the definition of Fixed Charges (i) any calculation of Fixed Charges for any period of four Fiscal Quarters ending on the last day of the second Fiscal Quarter (the "Last Quarter Day") shall include the regularly scheduled principal payment of the Term Loans made on the June 30th occurring closest to such Last Quarter Day (even if such payment is made after such last day) and shall include the regularly scheduled principal payment of the Term Loans and the Revolving Loans made on the immediately preceding December 31st, (ii) any calculation of Fixed Charges for any period of four Fiscal Quarters ending on the last day of the fourth Fiscal Quarter (the "Last Annual Day") shall include the regularly scheduled principal payment of the Term Loans and the Revolving Loans made on the December 31st occurring closest to such Last Annual Day (even if such payment is made after such last day) and shall include the regularly scheduled principal payment of the Term Loans made on the immediately preceding June 30th and (iii) in no event shall the calculation of Fixed Charges for any such period of four Fiscal Quarters include more than two regularly scheduled principal payments of the Term Loans or more than one regularly scheduled principal payment of the Revolving Loans" 2.9 Guaranties. Section 6.28 of the Credit Agreement is hereby amended by (i) deleting in its entirety the parenthetical phrase that appears in clause (B) of such section immediately after the words "Non-Guarantor Subsidiaries" and replacing it with the following parenthetical phrase: 4 5 "(excluding (1) with respect to any such Subsidiary which is a Kysor Subsidiary, goodwill and other intangible assets allocated to any such Kysor Subsidiary in connection with the Acquisition and (2) the assets of Austral Refrigeration Pty., Limited and its Subsidiaries)" , (ii) deleting the word "and" as it appears immediately before the "(C)" in the first proviso thereof and (iii) adding, at the end of clause (C) thereof immediately after the word "hereof" and before the semicolon the following: "and (D) neither Austral Refrigeration Pty., Limited nor any of its Foreign Subsidiaries shall be required by this Section 6.28 to execute a Guaranty or an Intercompany Note so long as Austral Refrigeration Pty., Limited and each such Subsidiary, respectively, is not a Wholly-Owned Subsidiary of Industries; provided that immediately upon Austral Refrigeration Pty., Limited becoming a Wholly-Owned Subsidiary of Industries, Austral Refrigeration Pty., Limited shall execute a Guaranty or Intercompany Note to the extent otherwise required pursuant to this Section 6.28 and immediately upon each such Foreign Subsidiary of Austral Refrigeration Pty., Limited becoming a Wholly-Owned Subsidiary of Industries, each such Foreign Subsidiary shall execute a Guaranty or Intercompany Note to the extent otherwise required pursuant to this Section 6.28" 2.10 Covenants. Article VI of the Credit Agreement is hereby amended by adding at the end of such Article VI the following new Section 6.32: "6.32 Year 2000 Issues. Industries shall advise the Agent if any Year 2000 Issues with respect to Industries or its Subsidiaries will have or would reasonably be expected to have a Material Adverse Effect. 2.11 Amendments. Section 8.2 of the Credit Agreement is hereby amended by adding two new paragraphs at the end of such section as follows: "Notwithstanding anything herein to the contrary, after the Euro Implementation Date, or in immediate anticipation thereof, the Agent (acting reasonably and after consultation with other parties hereto) may by reasonable prior notice to the other parties hereto amend this Agreement unilaterally for the exclusive purpose of effectuating changes hereto which are necessary to the integration of the making of Revolving Loans hereunder in Euro and only in a manner which shall not result in a deterioration of the position of any party to this Agreement from its respective position prior to the Euro Implementation Date. The Agent shall as promptly as practicable notify the other parties to this Agreement of any amendment to this Agreement which the Agent reasonably determines (after consultation with the other parties hereto) to be necessary as a result of the commencement of the third stage of the European Economic and Monetary Union and the occurrence of the Euro Implementation Date. Any amendments so notified shall take effect in accordance with the terms of the relevant notification, and, to the extent possible, such amendments shall be implemented to put the parties in the same position as if the Euro Implementation Date had not occurred; provided, however, that if and to 5 6 the extent that the Agent determines it is not possible to put all parties into such position, the Agent may give priority to putting the Agent, the Arranger and the Lenders into that position; provided, further, that no amendment which is prejudicial to any party shall be effective without such party's prior written consent." 2.12 General Provisions. Article IX of the Credit Agreement is hereby amended by adding at the end of such Article IX the following new Section 9.16: "9.16 Rounding and Other Consequential Changes. Without prejudice to any method of conversion or rounding prescribed by any legislative measures of the Council of the European Union, each reference in this Agreement to a fixed amount or to fixed amounts in a National Currency Unit to be paid to or by the Agent shall be replaced by a reference to such comparable and convenient fixed amount or fixed amounts in the Euro as the Agent may reasonably specify in the event such National Currency Unit ceases to be an Eligible Currency." SECTION 3. Conditions to Effectiveness of this Amendment. The effectiveness of this Amendment is subject to the satisfaction of the following conditions precedent: 3.1 Amendment. This Amendment shall have been duly executed and delivered by each of the parties hereto. 3.2 Officer's Certificate. The Agent shall have received (i) a certificate of an Authorized Officer of Industries certifying as to the matters set forth in Sections 4.1 and 4.2 of this Amendment and (ii) a certificate of the Secretary or Assistant Secretary of each Loan Party certifying (as applicable): (a) copies of its charter and bylaws or equivalent constitutive documents, (b) resolutions of its board of directors (and shareholders if required) authorizing this Amendment and any other document executed in connection with this Amendment or the transactions contemplated hereby, (c) the incumbency and signatures of each officer authorized to execute and deliver this Amendment or other agreement executed in connection therewith and (d) its good standing certificates. 3.3 Guaranty or Intercompany Note. Refrigeration Investment (MBO) Limited shall execute and deliver to the Agent a Guaranty substantially in the form of Exhibit A-2 hereto or an Intercompany Note in favor of Group pursuant to Section 6.28 of the Credit Agreement. 3.4 Additional Matters. The Agent shall have received such other certificates, opinions, documents and instruments relating to the transactions contemplated hereby as may have been requested by the Agent or any Lender, in each case, in form and substance satisfactory to the Agent. SECTION 4. Representations and Warranties of the Borrower. Each of Industries and each of the Borrowers represents and warrants to the Agent and the Lenders, as of the date of execution and delivery of this Amendment by each of Industries and each of the Borrowers and as of the Effective Date (as hereinafter defined), that both before and after giving effect to this Amendment: 4.1 no Default or Unmatured Default (other than any Default or Unmatured Default waived pursuant to the terms hereof) has occurred and is continuing or would occur after giving effect to the transactions contemplated hereby; and 6 7 4.2 all of the representations and warranties contained in the Credit Agreement and in the other Loan Documents (other than those that expressly speak only as of a different date) are true and correct before and after giving effect to the effectiveness of this Amendment. SECTION 5. Miscellaneous. 5.1 Effect; Ratification; Effectiveness. The amendments set forth herein are effective solely for the purposes set forth herein and shall be limited precisely as written, and shall not be deemed to (i) be a consent to any amendment, consent or modification of any other term or condition of the Credit Agreement or of any other instrument or agreement referred to therein; or (ii) prejudice any right or remedy which the Agent or the Lenders may now have or may have in the future under or in connection with the Credit Agreement or any other instrument or agreement referred to therein. Each reference in the Credit Agreement to "this Agreement", "herein", "hereof" and words of like import and each reference in the other Loan Documents to the "Agreement" or the "Credit Agreement" shall mean the Credit Agreement as amended hereby. This Amendment shall be construed in connection with and as part of the Credit Agreement and all terms, conditions, representations, warranties, covenants and agreements set forth in the Credit Agreement and each other instrument or agreement referred to therein, except as herein amended or waived, are hereby ratified and confirmed and shall remain in full force and effect. This Amendment shall immediately become effective as of the date hereof upon both (i) the receipt by the Agent of duly executed counterparts of this Amendment from each party hereto and (ii) the satisfaction of each of the conditions precedent contained in Section 3 hereof (the "Effective Date"). 5.2 Loan Documents. This Amendment is a Loan Document executed pursuant to the Credit Agreement and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof. 5.3 Costs, Fees and Expenses. Industries agrees to pay all costs, fees and expenses (including the reasonable fees and expenses of counsel to the Agent) incurred in connection with the preparation, execution and delivery of this Amendment as required pursuant to the Credit Agreement. 5.4 Headings Descriptive. The headings of the several Sections and Subsections of this Amendment are inserted for convenience only and shall not in any way affect the meaning or construction of any provision or term of this Amendment. 5.5 Counterparts. This Amendment may be executed in any number of counterparts, each such counterpart constituting an original and all of which when taken together shall constitute one and the same instrument. 5.6 Severability. Any provision contained in this Amendment that is held to be inoperative, unenforceable or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable or invalid without affecting the remaining provisions of this Amendment in that jurisdiction or the operation, enforceability or validity of such provision in any other jurisdiction. 5.7 GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF ILLINOIS WITHOUT REGARD TO PRINCIPLES RELATING TO CONFLICTS OF LAW. 7 8 5.8 WAIVER OF TRIAL BY JURY. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH THIS AMENDMENT OR ANY OTHER LOAN DOCUMENT OR ANY MATTER ARISING HEREUNDER OR THEREUNDER. * * * * 8 9 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective duly authorized officers as of the date first written above. SCOTSMAN GROUP INC. By:/s/ Donald D. Holmes -------------------------------------- Name: Donald D. Holmes Its: Vice President THE DELFIELD COMPANY By:/s/ Donald D. Holmes -------------------------------------- Name: Donald D. Holmes Its: Vice President By:/s/ Donald D. Holmes -------------------------------------- Name: Donald D. Holmes Its: SCOTSMAN DRINK LIMITED By:/s/ Donald D. Holmes -------------------------------------- Name: Donald D. Holmes Its: Director 10 WHITLENGE DRINK EQUIPMENT LIMITED By:/s/ Donald D. Holmes -------------------------------------- Name: Donald D. Holmes Its: Director FRIMONT S.P.A. By:/s/ Richard C. Osborne -------------------------------------- Name: Richard C. Osborne Its: Director CASTEL MAC S.P.A. By:/s/ Richard C. Osborne -------------------------------------- Name: Richard C. Osborne Its: Director KYSOR INDUSTRIAL CORPORATION By:/s/ Donald D. Holmes -------------------------------------- Name: Donald D. Holmes Its: Vice President 11 SCOTSMAN INDUSTRIES, INC. By:/s/ Donald D. Holmes -------------------------------------- Name: Donald D. Holmes Its: Vice President THE FIRST NATIONAL BANK OF CHICAGO, individually and as Agent By:/s/ Scott D. Moreen -------------------------------------- Name: Scott D. Moreen Its: Vice President ABN AMRO BANK N.V. By:/s/ Mary L. Honda -------------------------------------- Name: Mary L. Honda Its: Vice President By:/s/ Bernard J. McGuigan -------------------------------------- Name: Bernard J. McGuigan Its: Group Vice President and Director BANK OF SCOTLAND By:/s/ Janet Taffe -------------------------------------- Name: Janet Taffe Its: Assistant Vice President BANK OF SCOTLAND By:/s/ Annie Chin Tat -------------------------------------- Name: Annie Chin Tat Its: Senior Vice President 12 THE SUMITOMO BANK, LTD., CHICAGO BRANCH By:/s/ Kenichiro Kobayashi -------------------------------------- Name: Kenichiro Kobayashi Its: Joint General Manager THE BANK OF TOKYO-MITSUBISHI, LTD. By:/s/ Hajime Watanabe -------------------------------------- Name: Hajime Watanabe Its: Deputy General Manager CREDIT AGRICOLE INDOSUEZ By:/s/ Katherine L. Abbott -------------------------------------- Name: Katherine L. Abbott Its: First Vice President By:/s/ Dean Balice -------------------------------------- Name: Dean Balice Its: Senior Vice President Branch Manager DAI-ICHI KANGYO BANK, LTD. By:/s/ Nobuyasu Fukatsu -------------------------------------- Name: Nobuyasu Fukatsu Its: Vice President 13 FIRST AMERICAN NATIONAL BANK By:/s/ Alexis Griffin -------------------------------------- Name: Alexis Griffin Its: Bank Officer THE LONG-TERM CREDIT BANK OF JAPAN, LTD. By:/s/ Mark A. Thompson -------------------------------------- Name: Mark A. Thompson Its: Senior Vice President & Team Leader LLOYDS BANK, PLC. By:/s/ Windsor R. Davies -------------------------------------- Name: Windsor R. Davies Its: Director, Corporate Banking, USA D061 By:/s/ David C. Rodway -------------------------------------- Name: David C. Rodway Its: Assistant Vice President R156 MELLON BANK, N.A. By:/s/ Ryan F. Busch -------------------------------------- Name: Ryan F. Busch Its: Assistant Vice President 14 FIRST HAWAIIAN BANK By:/s/ Charles L. Jenkins -------------------------------------- Name: Charles L. Jenkins Its: Vice President, Manager THE FUJI BANK, LIMITED By:/s/ Peter L. Chinnici -------------------------------------- Name: Peter L. Chinnici Its: Joint General Manager THE FUJI BANK, LIMITED LONDON BRANCH (Qualifying Lender to UK Borrower) By:/s/ Y. Hirashima -------------------------------------- Name: Y. Hirashima Its: Senior Assistant General Manager HARRIS TRUST AND SAVINGS BANK By:/s/ Patrick J. McDonnell -------------------------------------- Name: Patrick J. McDonnell Its: Vice President THE MITSUBISHI TRUST AND BANKING CORPORATION By:/s/ Hachiro Hosoda -------------------------------------- Name: Hachiro Hosoda Its: Deputy General Manager 15 COMERICA BANK By:/s/ Gregory N. Block -------------------------------------- Name: Gregory N. Block Its: Vice President SOCIETE GENERALE By:/s/ Joseph A. Philbin -------------------------------------- Name: Joseph A. Philbin Its: Director BANK OF NEW YORK By:/s/ John M . Lokay, Jr. -------------------------------------- Name: John M. Lokay, Jr. Its: Vice President CORESTATES BANK, N.A. By:/s/ C. Jeffrey Seaton -------------------------------------- Name: C. Jeffrey Seaton Its: Senior Vice President 16 THE NORTHERN TRUST COMPANY By:/s/ David Sullivan -------------------------------------- Name: David Sullivan Its: Second Vice President ROYAL BANK OF SCOTLAND, PLC. By:/s/ Scott Barton -------------------------------------- Name: Scott Barton Its: Vice President THE SANWA BANK, LIMITED By:/s/ Gordon B. Holtby -------------------------------------- Name: Gordon B. Holtby Its: Vice President and Manager SUNTRUST BANK, ATLANTA By:/s/ Margaret A. Jaketic -------------------------------------- Name: Margaret A. Jaketic Its: Vice President By:/s/ Linda L. Dash -------------------------------------- Name: Linda L. Dash Its: Vice President EX-10.19 3 EMPLOYMENT AGREEMENT--FRASE 1 Exhibit 10.19 December 18, 1997 Mr. David Frase President Kysor Panel Systems 4201 Janada Street Fort Worth, TX 76117 RE: EMPLOYMENT AGREEMENT Dear David: 1. This letter confirms your employment by Kysor Panel Systems, a wholly-owned subsidiary of SCOTSMAN GROUP, INC. ("the Company") as President, Kysor Panel Systems. In that capacity you are entitled to the following: a. An annual salary of $135,000; b. Benefits as described in, and in accordance with, the Company's benefit plans; and c. An annual par bonus equal to 35% of your annual salary. The amount of bonus that you actually receive, if any, will depend on the achievement of your divisional, corporate and individual goals. 2. During your employment with the Company, you will devote your full time and energies to the faithful and diligent performance of the duties inherent in, and implied by, your executive position. 3. In consideration of your having accepted employment with the Company, it is mutually agreed that: a. In the event your employment with the Company is terminated by the Company during the period covered by this agreement for any reason other than: i. willful and deliberate misconduct; or ii. inability, for reasons of disability, reasonably to perform your duties for 6 consecutive calendar months; or b. In the event you resign your position with the Company during the period covered by this agreement because: i. you are assigned to a position of lesser rank or status; or ii. your annual salary, annual par bonus or your benefits are reduced; or 2 Mr. David Frase December 18, 1997 - Page 2 iii. you are reassigned to a geographical area more than 50 miles from your present residence; or the Company shall be required, and hereby agrees, to continue paying your then annual salary, to pay your then annual bonus at par level and to provide all pension, profit sharing, deferred compensation, medical and life insurance benefits under the Company's benefit plans, or the economic equivalent thereof, for a period of twelve (12) months from the date of such termination or resignation provided, however, that any amount paid or benefit provided by the Company, pursuant to Section 3 of the Executive Severance Agreement shall be in lieu of any amount paid or benefit received under this paragraph C. If, pursuant to the terms of a benefit plan, a benefit would be earned or accrued during such 12 month period but would be payable on a deferred basis (were you to be employed during such 12 month period) the benefit similarly shall be deferred hereunder; provided, however, that the Company reserves the right to pay the present value of such benefit to you in cash at the end of such 12 month period. 4. You are not required to mitigate the amount of any payments to be made by the Company pursuant to this Agreement by seeking other employment, or otherwise, nor shall the amount of any payments provided for in this Agreement be reduced by any compensation earned by you as the result of self- employment or your employment by another employer after the date of termination of your employment with the Company. 5. If a dispute arises regarding the termination of your employment or the interpretation or enforcement of this Agreement and you obtain a final judgement in your favor from a court of competent jurisdiction from which no appeal may be taken, whether because the time to do so has expired or otherwise, or your claim is settled by the Company prior to the rendering of such a judgement, all reasonable legal and other professional fees and expenses incurred by you in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided for in this Agreement or in otherwise pursuing your claim will be promptly paid by the Company with interest thereon at the highest statutory rate of your state of domicile for interest on judgements against private parties from the date of payment thereof by you to the date of reimbursement to you by the Company. 6. This agreement shall commence on December 18, 1997 and will continue in effect for one full calendar year, the last day which shall be December 17, 1 998. However, at the end of such year and, if extended, at the end of each additional year thereafter, the term of this Agreement shall be extended automatically for one additional year, unless the Compensation Committee of the Board of Directors delivers written notice three months prior to the end of such term, or extended term, to you, that this Agreement will not be extended. In such case, this Agreement will terminate at the end of the term, or extended term, then in progress. 3 Mr. David Frase December 18, 1997 - Page 3 If the foregoing terms and provisions are acceptable to you, please sign where indicated on the enclosed copy of this Agreement and return it to me. We look forward to your many contributions to the success of SCOTSMAN GROUP, INC. Sincerely, SCOTSMAN GROUP, INC. By /s/ Richard C. Osborne --------------------------------------- ACCEPTED AND AGREED to the date first above set forth. /s/ David M. Frase - ------------------------------------------- Employee EX-10.20 4 EMPLOYMENT AGREEMENT--HUGHES 1 Exhibit 10.20 October 17, 1996 Mr. Christopher D. Hughes Booth/Crystal Tips, Inc. 2007 Royal Lane - Suite 100 Dallas, Texas 75229 RE: EMPLOYMENT AGREEMENT Dear Chris: 1. This letter confirms your employment by SCOTSMAN GROUP, INC. ("the Company") as President-Booth/Crystal Tips, Inc. In that capacity you are entitled to the following: a. An annual salary of $140,000; b. Benefits as described in, and in accordance with, the Company's benefit plans; and c. An annual par bonus equal to 30% of your annual salary. The amount of bonus that you actually receive, if any, will depend on the achievement of corporate and your individual goals. 2. During your employment with the Company, you will devote your full time and energies to the faithful and diligent performance of the duties inherent in, and implied by, your executive position. 3. In consideration of your having accepted employment with the Company, it is mutually agreed that: a. In the event your employment with the Company is terminated by the Company during the period covered by this agreement for any reason other than: i. willful and deliberate misconduct; or ii. inability, for reasons of disability, reasonably to perform your duties for 6 consecutive calendar months; or b. In the event you resign your position with the Company during the period covered by this agreement because: i. you are assigned to a position of lesser rank or status; or ii. your annual salary, annual par bonus or your benefits are reduced; or iii. you are reassigned to a geographical area more than 50 miles from your present residence; 2 Mr. Christopher D. Hughes October 17, 1996 - Page 2 the Company shall be required, and hereby agrees, to continue paying your then annual salary, to pay your then annual bonus at par level and to provide all pension, profit sharing, deferred compensation, medical and life insurance benefits under the Company's benefit plans, or the economic equivalent thereof, for a period of twelve (12) months from the date of such termination or resignation. If, pursuant to the terms of a benefit plan, a benefit would be earned or accrued during such 12 month period but would be payable on a deferred basis (were you to be employed during such 12 month period) the benefit similarly shall be deferred hereunder; provided, however, that the Company reserves the right to pay the present value of such benefit to you in cash at the end of such 12 month period. 4. You are not required to mitigate the amount of any payments to be made by the Company pursuant to this Agreement by seeking other employment, or otherwise, nor shall the amount of any payments provided for in this Agreement be reduced by any compensation earned by you as the result of self-employment or your employment by another employer after the date of termination of your employment with the Company. 5. If a dispute arises regarding the termination of your employment or the interpretation or enforcement of this Agreement and you obtain a final judgement in your favor from a court of competent jurisdiction from which no appeal may be taken, whether because the time to do so has expired or otherwise, or your claim is settled by the Company prior to the rendering of such a judgement, all reasonable legal and other professional fees and expenses incurred by you in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided for in this Agreement or in otherwise pursuing your claim will be promptly paid by the Company with interest thereon at the highest statutory rate of your state of domicile for interest on judgements against private parties from the date of payment thereof by you to the date of reimbursement to you by the Company. 6. This agreement shall commence on October 16, 1996 and will continue in effect for one full calendar year, the last day which shall be October 1 5, 1997. However, at the end of such year and, if extended, at the end of each additional year thereafter, the term of this Agreement shall be extended automatically for one additional year, unless the Compensation Committee of the Board of Directors delivers written notice three months prior to the end of such term, or extended term, to you, that this Agreement will not be extended. In such case, this Agreement will terminate at the end of the term, or extended term, then in progress. 3 Mr. Christopher D. Hughes October 17, 1996 - Page 3 If the foregoing terms and provisions are acceptable to you, please sign where indicated on the enclosed copy of this Agreement and return it to me. We look forward to your many contributions to the success of SCOTSMAN GROUP, INC. Sincerely, SCOTSMAN GROUP, INC. By/s/ Richard C. Osborne ------------------------------ ACCEPTED AND AGREED to the date first above set forth. /s/ Christopher Hughes - -------------------------------- Employee EX-21 5 LIST OF SUBSIDIARIES 1 EXHIBIT 21 LIST OF SUBSIDIARIES OF THE REGISTRANT (1)
JURISDICTION OF INCORPORATION OTHER NAMES UNDER WHICH NAME OF SUBSIDIARY OR ORGANIZATION SUBSIDIARY DOES BUSINESS - ------------------ --------------- ------------------------ Scotsman Group Inc. Delaware Scotsman Scotsman Commercial Ice Systems, Inc. Scotsman Ice Systems Scotsman of Los Angeles Austral International Pty. Ltd.(2) Australia None Austral PCR Mgmt. Services Pty. Australia None Ltd.(2) Austral Refrigeration Pty. Limited(3) Australia None Beleggingsmaatschappij Netherlands None Interrub B.V. Booth, Inc. Texas Crystal Tips Castel MAC, S.p.A. Italy None Charles Needham Industries, Inc. Texas None Charles Needham Industries LP Delaware Limited Kysor Panel Systems Partnership ComCool Refrigeration Pty. Ltd.(2) Australia None Cowley Refrigeration Ltd.(4) New Zealand None DFC Holding Corporation Delaware None The Delfield Company Delaware None Frimont, S.p.A. Italy None Hartek Awagem Vertriebsges m.b.H. Austria None Hartek Beverage Handling GmbH Germany None Homark Holdings Ltd England None Homark Group Ltd England None Kysor/Bangor, Inc. Michigan None Kysor Business Trust Delaware Business Trust None Kysor CNI, Inc. Michigan None Kysor Industrial Corporation Michigan Kysor/Warren
2
JURISDICTION OF INCORPORATION OTHER NAMES UNDER WHICH NAME OF SUBSIDIARY OR ORGANIZATION SUBSIDIARY DOES BUSINESS - ------------------ --------------- ------------------------ Kysor/Kalt, Inc. Michigan None Kysor Warren Australia Pty. Ltd.(2) Australia None Kysor/Warren de Mexico Mexico None S. De R.L. De C.V. Kysor Worldwide Corp. Barbados None Lawrence Refrigeration Pty.(2) Australia None Midland Techniques, Ltd. England None QAL National Refrigeration Pty. Ltd.(2) Australia None QAL Refrigeration (SA) Pty. Ltd.(2) Australia None QAL Refrigeration (WA) Pty. Ltd.(5) Australia None Queensland Refrigeration Pty. Ltd.(5) Australia None Refrigeration Investment (MBO) British Virgin Islands None Limited Scotsman Drink Limited England None Scotsman Group FSC, Inc. Barbados None Scotsman Ice Systems China None Shenyang Co. Ltd. Skilmetal Australia Pty. Ltd.(6) Australia None Techni Doors Pty. Ltd.(2) Australia None Whitlenge Acquisition Limited England None Whitlenge Drink Equipment Limited England None
- ------------------ (1) Unless otherwise indicated, Scotsman has a direct or indirect 100% ownership interest in the listed subsidiaries. (2) 100% owned by Austral Refrigeration Pty. Ltd. ("Austral"), in which Scotsman has an indirect 53.1% ownership interest. (3) Indirect 53.1% ownership interest. (4) 60% owned by Austral in which Scotsman has an indirect 53.1% ownership interest. (5) 51% owned by Austral in which Scotsman has an indirect 53.1% ownership interest. (6) 90% owned by Austral in which Scotsman has an indirect 53.1% ownership interest. EX-23 6 CONSENT OF ARTHUR ANDERSEN 1 Exhibit 23 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K into the Company's previously filed Registration Statements, File Nos. 33-35870, 33-35871, 33-53482, 33-57219, 33-56353, 33-59397, 33-60377, 333-38489, 333-57801, 333-61945, and 333-61955. Chicago, Illinois Arthur Andersen LLP March 19, 1999 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SCOTSMAN INDUSTRIES, INC. CONSOLIDATED BALANCE SHEET AS OF JANUARY 3, 1999 AND SCOTSMAN INDUSTRIES, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED JANUARY 3, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JAN-03-1999 DEC-29-1997 JAN-03-1999 22,429 0 119,210 5,214 90,908 258,327 99,463 62,932 707,650 165,022 330,531 0 0 1,078 159,455 707,650 633,044 633,044 474,679 474,679 0 0 26,820 37,600 18,672 18,928 0 0 0 18,926 1.79 1.76
EX-99 8 CAUTIONARY STATEMENTS 1 EXHIBIT 99 SCOTSMAN INDUSTRIES, INC. CAUTIONARY STATEMENTS Information provided by the Company from time to time, either orally or in writing, may contain certain "forward looking" information, as that term is defined in Section 21E of the Securities Exchange Act of 1934, as amended (the "Act"). Consistent with the Act, such forward-looking information may include information relating to such matters as sales, income, earnings per share, return on equity, capital expenditures, dividends, capital structure, cash flow, debt to capitalization ratios, internal growth rates, future economic performance, management's plans and objectives for future operations, or the assumptions relating to, or underlying, any such forward-looking information. The cautionary statements set forth below are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the "safe harbor" provisions of the Act. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance and that actual results may differ materially from those expressed in, or implied by, the forward-looking statements as a result of various factors, including but not limited to the following: 1. The Company's performance should be expected to be affected by the strength or weakness of the various economies in which the Company markets its products, primarily in the United States and Western Europe, but also in the Far East. The relative strength or weakness of these economies may affect the rate at which new hotels, restaurants, fast food outlets, supermarkets or other facilities with a need for the Company's products are built, and the rate at which other potential commercial customers replace or upgrade ice machines, beverage dispensing systems, food preparation and storage equipment, refrigerated display cases, walk-in coolers and freezers, and insulated panels already in use, thus affecting the demand for the Company's products. 2. Sales of a significant proportion of the Company's products can be negatively impacted by abnormal weather conditions during different seasons and quarters of the year. 3. Underutilization of the Company's facilities may occur as a result of failure to meet anticipated sales volumes. Such underutilization, which results in excess capacity costs, may significantly affect the Company's operating results. 4. The Company's ability to realize operating profits is dependent on its ability to timely manufacture, source and deliver products which may be sold for a profit. Labor difficulties, delays in delivery or increased prices of raw materials and purchased components, scheduling and transportation difficulties, management dislocations and delays in development and manufacture of new products can negatively affect operating profits. 5. The Company's results of operations can be negatively impacted by product liability or other lawsuits and/or by warranty claims or other returns of goods. 6. The Company sells products in over 100 countries and has manufacturing operations in the United States, the United Kingdom, Germany, Italy, Australia, and China and joint venture interests in the United Kingdom. International operations generally are subject to various political and other risks that are not present in the U.S. operations, including, among other things, the risk of war or civil unrest, expropriation and nationalization. In addition, certain international jurisdictions restrict repatriation of the Company's non-U.S. earnings. Various international jurisdictions also have laws limiting the right and ability of non-U.S. entities to pay dividends and remit earnings to affiliated 2 companies unless specified conditions are met. In addition, sales in international jurisdictions typically are made in local currencies, which subjects the Company to risks associated with currency fluctuations. Currency devaluations and unfavorable changes in international monetary and tax policies and other changes in the international regulatory climate could materially affect the Company's profitability or growth plans. 7. Although no single customer accounts for more than 10% of the Company's consolidated net sales, the volume of sales of the Company's refrigerated display cases, food preparation and storage equipment, walk-in coolers and freezers and beverage systems may be affected, from time to time, by changes in the buying patterns of certain large customers as a result of internal cost-control measures adopted by such customers, changes in the strategic plans of such customers, or other factors. 8. The Company's products and manufacturing processes are subject to various environmental, health and safety regulations and standards. Such regulations and standards, from time to time, may require significant changes in products or manufacturing methods. The Company also is, or may be, subject from time to time to claims and litigation arising under the Comprehensive Environmental Response, Compensation and Liability Act and similar state statutes. The Company believes that environmental, health and safety matters will not have a material effect on its business or financial condition. However, legal and regulatory requirements in this area are increasing, and there can be no assurance that significant costs and liabilities will not be incurred as a result of currently unidentified or future problems or new regulatory developments. 9. The acquisition of Kysor Industrial Corporation in March, 1997 (the "Kysor Acquisition") significantly increased the Company's debt service obligations. The Kysor Acquisition was financed through a loan facility established between the Company, the Company's wholly-owned subsidiary Scotsman Group Inc., and certain other subsidiaries and The First National Bank of Chicago as agent for the lenders (the "Credit Facility"). In December 1997, Scotsman Group Inc. issued $100 million of 8 5/8% Senior Subordinated Notes (the "Notes"). Although the Indenture for the Notes and the Credit Facility contain covenants that limit the incurrence by the Company, Scotsman Group and certain of the subsidiaries of additional indebtedness, such limitations are subject to a number of important qualifications and exceptions and the Company's indebtedness could increase if, among other reasons, future acquisitions are financed through additional borrowings. The Company's ability to make scheduled payments of principal and interest or to refinance its indebtedness will depend on the Company's operating performance and cash flows, which are affected by prevailing economic conditions and financial, competitive and other factors beyond the Company's control. If the Company is unable to generate sufficient cash flows to service its debt obligations, it will have to adopt one or more alternatives, such as reducing or delaying planned acquisitions, expansion and capital expenditures, selling assets, restructuring debt or obtaining additional equity capital. There can be no assurance that any of these alternatives could be effected on satisfactory terms. 10. The Company's continued rapid growth can be expected to place a significant strain on its management, operations, employees, and other resources. There can be no assurance that the Company will be able to manage effectively its expanding operations or achieve planned growth on a timely or profitable basis. If the Company is unable to manage growth effectively, its business, results of operations or financial condition could be materially adversely affected. 11. The Company's success to date has depended in large part on the skills and efforts of Richard C. Osborne, Chairman of the Board, President and Chief Executive Officer, Donald D. Holmes, Vice President-Finance and Secretary, and the heads of each of the operating units of the Company. 3 While the Company has employment agreements with certain of its executive officers, including Messrs. Osborne and Holmes, there can be no assurance that the Company will be able to retain the services of its officers and key employees. The loss of Messrs. Osborne, Holmes, or any of the heads of the Company's operating units could have a material adverse effect on the Company's business, results of operations or financial condition. 12. The Company's results of operations can be negatively impacted if upgrades, modifications and conversions of its computer software programs and operating systems to properly utilize dates beyond December 31, 1999 are not made, or are not made in a timely manner. In addition, the consequences of the Company's significant suppliers, customers or service providers not executing a plan to address the Year 2000 readiness of computer programs and systems within their organizations, or among third parties they rely on, could also have a material adverse impact on the Company's results of operations. Some of the possible consequences of non-compliance by the Company or significant third parties include, among other things, temporary plant closings, delays in the receipt and delivery of raw materials and products, invoice and collection errors, and obsolescence of inventory. -----END PRIVACY-ENHANCED MESSAGE-----