10-K 1 sh10k2001.txt SH 10K 2001 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission File Number: 033-78954 SCOTSMAN HOLDINGS, INC. (Exact name of Registrant as specified in its Charter) Delaware 52-1862719 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8211 Town Center Drive 21236 Baltimore, Maryland (Zip Code) (Address of principal executive offices) Registrants' telephone number, including area code: (410) 931-6000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- None None -------------------------- ------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: None ------------------------------------------------------------------------------- (Title of class) 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. [X] As of March 29, 2002, 6,194,799 shares of common stock ("Common Stock") of the Registrant were outstanding. PART I Item 1. Business General Scotsman Holdings, Inc. was incorporated under the laws of Delaware in November 1993 for the purpose of acquiring Williams Scotsman, Inc. ("Scotsman"). We conduct business solely as a holding company, our only significant asset is the capital stock of Scotsman. Therefore, we are dependent upon the cash flows of Scotsman for all of our cash needs. Founded in 1946, Williams Scotsman, Inc. is the second largest lessor of mobile office and storage units in North America with approximately 93,900 units leased through a network of branch offices located throughout the United States and Canada. Our fleet provides high quality, cost-effective relocatable space solutions to approximately 25,000 customers in approximately 470 industries including construction, education, healthcare and retail. In addition to our core leasing operations, we sell new and previously leased mobile office units and provide delivery, installation and other ancillary products and services. Our mobile office fleet is generally comprised of standardized, versatile products that can be configured to meet a wide variety of customer needs. Most units are fitted with axles and hitches and are towed to various locations. Most units are wood frame mounted on a steel chassis, contain materials used in conventional buildings, and are equipped with air conditioning and heating, electrical outlets and, where necessary, plumbing facilities. Mobile office units are durable and have an estimated useful life of 20 years. Storage products are windowless and are typically used for secure storage space. There are generally two types: ground-level entry storage containers and storage trailers with axles and wheels. The basic storage unit features a roll-up or swing door at one end. Units are made of heavy exterior metals for security and water tightness. The average age of our mobile office units is approximately 8 years while the average age of the storage units is approximately 11 years. The average age of the total fleet is approximately 8 years. Based on its experience, management estimates that the North American mobile office industry (excluding manufacturing operations) exceeds $3.0 billion and has been growing in recent years. This growth has been primarily driven by positive demographic trends, economic expansion, an increase in the number of applications for modular space and a greater recognition of the product's positive attributes. By outsourcing their space needs, our customers are able to achieve flexibility, preserve capital for core operations, and convert fixed costs into variable costs. We purchase our new mobile office units through third-party suppliers and purchase storage units in the aftermarket directly from shipping companies or through brokers. We believe that there are numerous manufacturers and suppliers of mobile office and storage units that supply these products at competitive prices throughout the United States and Canada. We anticipate being able to procure an adequate supply of product on acceptable terms to meet projected customer requirements. We do not believe that the loss of any one of our suppliers would have a material adverse effect on our operations. Forward Looking Statements Certain statements in this Form 10-K for the year ended December 31, 2001 constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such forward-looking statements involve known and unknown risks, 1 uncertainties and other factors that may cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Such factors include, among others, the following: substantial leverage and the ability to service debt; changing market trends in the mobile office industry; general economic and business conditions including a prolonged or substantial recession; the ability to finance fleet and branch expansion, locate and finance acquisitions, and integrate recently acquired businesses; our ability to implement our business and growth strategy and maintain and enhance our competitive strengths; our ability to obtain financing for general corporate purposes; intense industry competition; availability of key personnel; industry over-capacity; and changes in, or the failure to comply with, government regulations. No assurance can be given as to future results and neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. Consequently, you should not place undue reliance on such forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the result of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Acquisition of Mckinney Mobile Modular On February 1, 2001, we acquired the sales and leasing business of Mckinney Mobile Modular, a privately held California corporation (Mckinney) in a transaction accounted for under the purchase method of accounting. Total consideration for the acquisition of Mckinney was approximately $26.1 million, including the repayment of existing indebtedness of Mckinney. The purchase price paid was allocated to the identifiable assets acquired of $21.6 million with the excess of $5.5 million representing goodwill and other intangible assets. The purchase price allocation was based upon estimates of the fair value of the assets acquired. The acquisition, which added over 1,600 units at a value of approximately $21.4 million, was financed with borrowings under our amended credit facility. Acquisition of Evergreen Mobile Company On February 1, 1999, we acquired all of the outstanding stock of Evergreen Mobile Company, a privately held Washington corporation ("Evergreen"), at a net purchase price of $36.2 million, in a transaction accounted for under the purchase method of accounting. At the time of the acquisition, Evergreen was the largest mobile office dealer in the state of Washington with a fleet of approximately 2,000 units. The acquisition was financed with borrowings under our amended credit facility. Recapitalization Pursuant to a recapitalization agreement, on May 22, 1997, we (i) repurchased 3,210,679 shares of our outstanding common stock for an aggregate of approximately $293.8 million in cash and approximately $21.8 million in promissory notes which were repaid in January 1998 and (ii) issued 1,475,410 shares of common stock for an aggregate of approximately $135.0 million in cash. Such amounts have not been restated for the three-for-one stock split granted in December 1997. In related transactions, we purchased or repaid all of the outstanding indebtedness. In conjunction with the debt extinguishment, we recognized an extraordinary loss of $13.7 million. The transactions described above are collectively referred to herein as the "Recapitalization". In connection with the Recapitalization, (i) we accelerated the payment of deferred 2 compensation under its long term incentive plan, (ii) all outstanding stock options under our employee stock option plan vested and became immediately exercisable and (iii) we canceled a portion of the outstanding stock options. Accordingly, we recognized $5.1 million of Recapitalization expenses including $2.5 million in connection with the acceleration of deferred compensation and $2.6 million in connection with the cancellation of the stock options. In order to finance the Recapitalization, we issued $400 million in 9.875% senior notes due 2007 and entered into a $300 million revolving bank facility. Scotsman paid a dividend of $178.7 million to us to pay Recapitalization expenses, to repurchase common stock and to purchase certain notes. Operating Strategy Due to the local and regional nature of our business, our goals are to become the leader in each of the local markets in which we compete and to expand our coverage to additional local markets. To achieve market leadership, we have implemented a strategy which emphasizes (i) superior service, (ii) a well-maintained, readily-available and versatile lease fleet, (iii) effective fleet management using proprietary information systems, and (iv) targeted marketing through an experienced and motivated sales force. We believe that we are generally the first or second largest provider of relocatable space in each of our regional markets as measured by lease fleet size and revenues. Our branch offices are distributed throughout the United States and Canada and are located in a majority of the major metropolitan areas. Management's business and growth strategy includes the following: Fleet and Branch Expansion. We plan to continue to capitalize on the industry's favorable long-term growth trends by increasing customer penetration and fleet size in existing markets. In addition, we plan to open branches in new markets where positive business fundamentals exist. From January 1, 1999 to December 31, 2001, we increased our number of branches from 80 to 88 and the number of units from approximately 70,200 to 93,900 as a result of general fleet expansion and to a much lesser extent, through acquisitions. Selective Fleet Acquisitions. To complement our internal fleet and branch expansion, we plan to continue to capitalize on the industry's fragmentation and expand our geographic coverage by making selective acquisitions of mobile offices and storage product lease fleets. Typically, there is a low cost of integrating acquired fleets and acquired units have existing leases that generate immediate revenues and EBITDA. From January 1, 1999 to December 31, 2001, we made four acquisitions of approximately 5,100 units for a total purchase price of $66.9 million. Units added through acquisitions have accounted for approximately 20% of the value of our total fleet purchases during this period. Ancillary Products and Services. We continue to identify new applications for our existing products, diversify into new product offerings and deliver ancillary products and services to leverage our existing branch network. For example, in 1996, we began focusing on the expanding market for storage product units, which are used for secured storage space. Since January 1, 1996, we have grown our storage product fleet by over 16,400 units, through direct purchases as well as nine acquisitions that totaled approximately 6,000 storage units. Ancillary products and services also include the rental of steps, furniture, ramps and security systems; sales of parts and supplies; and charges for granting insurance waivers and for damage billings. 3 Education Market Trends. The education market accounted for approximately 21% of our 2001 revenues and offers growth opportunities as a result of the following: (1) an increase in state and local initiatives governing maximum class sizes, (2) state and local governmental pressures to find cost-effective ways to expand classroom capacity, (3) increased interstate and intrastate migrations necessitating rapid expansion of education space and (4) the predicted growth of the school age population. Competition Although our competition varies significantly by market, the mobile office industry, in general, is highly competitive. We compete primarily in terms of product availability, customer service and price. We believe that our reputation for customer service and our ability to offer a wide selection of units suitable for many uses at competitive prices allow us to compete effectively. However, certain of our competitors, such as GE Capital Modular Space, are less leveraged, have greater market share or product availability in a given market and have greater financial resources than we do. Employees At December 31, 2001, we employed approximately 1,300 persons. None of our employees are covered by a collective bargaining agreement. Management considers its relationship with its employees to be good. We have never experienced any material labor disruption and are unaware of any efforts or plans to organize our employees. Regulatory Matters We must comply with various federal, state and local environmental, transportation, health and safety laws and regulations in connection with our operations. We believe that we are in substantial compliance with these laws and regulations. In addition to compliance costs, we may incur costs related to alleged environmental damage associated with past or current properties owned or leased by us. We believe that our liability, if any, for any environmental remediation will not have a material adverse effect on our financial condition. A portion of our units is subject to regulation in certain states under motor vehicle and similar registration and certificate of title statutes. We believe that we have complied in all material respects with all motor vehicle registration and similar certificate of title statutes in states where such statutes clearly apply to mobile office units. If laws in other states are changed to require registration, we could be subject to additional costs, fees and taxes. We do not believe that these costs would be material to our business or financial condition. Item 2. Properties Our headquarters is a three-story modular office structure located on 3.1 acres in suburban Baltimore, Maryland. Additionally, we lease approximately 73% of our 88 branch locations and we own the balance. Management believes that none of our leased facilities, individually, is material to our operations. Item 3. Legal Proceedings We are involved in certain legal actions arising in the ordinary course of business. 4 We believe that none of these actions, either individually or in the aggregate, will have a material adverse effect on our business, results of operations or financial condition. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Market for Registrant's Common Equity and Related Shareholder Matters There is no established public trading market for our Common Stock. Scotsman does not intend to pay any dividends except for our normal operating expenses, but reserves the right to do so. Scotsman's ability to pay dividends to us is limited to amounts for corporate and administrative expenses. (See Note 4 of Notes to the Company's Consolidated Financial Statements.) Pursuant to the our Amended and Restated 1997 Employee Stock Option Plan (the "1997 Plan"), options for the purchase of 23,300 shares of our common stock were granted during 2001. No options were exercised during 2001 and no shares of the our common stock were issued during 2001 upon the exercise of previously granted options. 5 Item 6. Selected Historical Financial Data The following tables summarize certain selected historical financial data which should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements appearing elsewhere herein. The selected historical financial data set forth below has been derived from the audited Financial Statements
Year Ended December 31, ------------------------------------------------------------- 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- (Dollars in thousands, except per share amounts) Statement of Operations Data: Revenues: Leasing $120,266 $152,221 $201,820 $220,547 $238,151 Sales: New units 41,926 46,448 73,001 73,291 91,114 Rental equipment 13,120 15,530 22,369 21,571 22,212 Delivery and installation 38,626 47,002 71,245 79,097 97,342 Other 22,252 25,893 37,370 37,640 43,437 -------- -------- -------- -------- -------- Total $236,190 $287,094 $405,805 $432,146 $492,256 ------------------------------------------------------------------------------------------------------------------- Gross profit: Leasing $ 71,237 $101,036 $136,543 $148,454 $153,281 Sales: New units 6,685 8,099 12,678 13,023 15,945 Rental equipment 3,521 3,730 5,133 5,266 5,326 Delivery and installation 10,914 12,083 18,886 19,427 19,003 Other 15,480 20,393 29,949 31,057 35,063 -------- ------- ------- ------- ------ Total $107,837 $145,341 $203,189 $217,227 $228,618 ------------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses $ 46,312 $ 58,152 $ 71,480 $ 76,872 $ 82,573 Casualty loss --- --- --- --- 1,500 Recapitalization expenses (1) 5,105 --- --- --- --- Earnings from continuing operations before extraordinary item 4,530 3,724 17,271 16,083 22,629 Earnings from continuing operations before extraordinary item per common share $ .65 $ .70 $ 2.79 $ 2.60 $ 3.65 ===== ===== ===== ==== ==== Earnings from continuing operations before extraordinary item per common share, assuming dilution $ .63 $ .66 $ 2.64 $ 2.46 $ 3.46 ===== ===== ==== ==== ==== Ratio of earnings to fixed charges (2) 1.2x 1.2x 1.4x 1.3x 1.5x EBITDA (3) $ 92,351 $117,519 $168,161 $177,554 $187,528 -------------------------------------------------------------------------------------------------------------------
6
Year Ended December 31, -------------------------------------------------------------- 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- (Dollars in thousands, except per share amounts) Balance Sheet Data: Rental equipment, net $ 403,528 $ 640,634 $ 726,924 $ 799,994 $ 866,867 Total assets 514,175 941,291 1,066,467 1,145,901 1,244,986 Long-term debt 533,304 845,447 915,823 959,110 1,022,972 Stockholder's equity (deficit) (128,849) (57,853) (38,683) (22,578) (1,279)
(1) Recapitalization expenses recognized in the amount of $5.1 million represent costs incurred in connection with the recapitalization of the Company in May 1997. These expenses include $2.5 million in connection with the acceleration of deferred compensation and $2.6 million in connection with the cancellation of the stock options. (2) The ratio of earnings to fixed charges is computed by dividing fixed charges into earnings from continuing operations before income taxes and extraordinary items plus fixed charges. Fixed charges include interest, expensed or capitalized, including amortization of deferred financing costs and debt discount and the estimated interest component of rent expense. (3) We define EBITDA as earnings before deducting interest, income taxes, depreciation and amortization, non-cash charges, recapitalization expenses and extraordinary items. EBITDA, which is not a measure of financial performance under generally accepted accounting principles, is presented because this data is used by some investors to determine our ability to meet historical debt service requirements.
Selected Quarterly Financial Data (Unaudited): (In thousands except per share data) Year ended December 31, 2001 -------------------------------------------------------------------------------------------------------------- Quarter First Second Third Fourth Year -------------------------------------------------------------------------------------------------------------- Revenues $105,366 $119,897 $140,891 $126,102 $492,256 Gross Profit 53,791 58,088 59,558 57,181 228,618 Income before income taxes 4,591 9,077 13,666 12,880 40,214 Net income 2,524 4,949 7,515 7,641 22,629 Net income per common share .41 .80 1.21 1.23 3.65 Net income per common share, assuming dilution .39 .76 1.15 1.16 3.46 ---------------------------------------------------------------------------------------------------------------
7
(In thousands except per share data) Year ended December 31, 2000 -------------------------------------------------------------------------------------------------------------- Quarter First Second Third Fourth Year -------------------------------------------------------------------------------------------------------------- Revenues $ 95,733 $103,132 $124,766 $108,515 $432,146 Gross Profit 51,565 53,090 57,234 55,338 217,227 Income before income taxes 4,495 7,464 10,759 8,303 31,021 Net income 2,218 4,004 5,980 3,881 16,083 Net income per common share .36 .65 .97 .62 2.60 Net income per common share, assuming dilution .34 .61 .91 .60 2.46 ---------------------------------------------------------------------------------------------------------------
8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion regarding our financial condition and results of operations for the three years ended December 31, 2001 should be read in conjunction with the more detailed information and Financial Statements included elsewhere herein. Certain statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements. See "Forward-Looking Statements". Critical Accounting Policies and Estimates General. This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. (See note 1 of the Notes to Consolidated Financial Statements.) On an on-going basis, we evaluate estimates, including those related to bad debts, contingencies and litigation, intangible assets, and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. In December, 2001, the Securities and Exchange Commission (SEC) issued a statement regarding the selection and disclosure by public companies of critical accounting policies and practices. The SEC indicated that a critical accounting policy is one which is both important to the portrayal of a company's financial condition and results, and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the consolidated financial statements. Allowance for doubtful accounts. We are required to estimate the collectibility of our trade receivables. Accordingly, allowances for doubtful accounts are maintained for estimated losses resulting from the inability of our customers to make required payments. We evaluate a variety of factors in assessing the ultimate realization of these receivables including the current credit-worthiness of customers. The allowance for doubtful accounts is determined based on historical collection results in addition to an ongoing review of specific customers. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required, resulting in decreased net income. Contingencies. We are subject to proceedings, lawsuits, and other claims related to environmental, product and other matters, and are required to assess the likelihood of any adverse 9 judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after analysis of each individual matter. The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters. Goodwill and Intangible Impairment. We have significant intangible assets related to goodwill and other acquired intangibles as well as capitalized software costs. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgments. Changes in strategy and/or market conditions could significantly impact these judgments and require adjustments to recorded asset balances. Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. The process involves estimating actual current tax expense along with assessing temporary differences resulting from differing treatment of items for book and tax purposes. These timing differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance. General On February 1, 2001, we acquired the sales and leasing business of Mckinney Mobile Modular. See "Acquisition of Mckinney Mobile Modular." On February 1, 1999, we acquired all of the outstanding stock of Evergreen Mobile Company. See "Acquisition of Evergreen Mobile Company." We are a holding company formed in November 1993, and conduct our business solely through Scotsman, our wholly-owned subsidiary. We derive our revenues and earnings from the leasing and sale of mobile office and storage units, delivery and installation of those units and the provision of other ancillary products and services. Leasing operations, which primarily comprise the leasing of mobile office units and the sale of units from our lease fleet, account for a majority of our revenues and gross profits. Used mobile office units are sold from our lease fleet in the ordinary course of business at either fair market value or, to a lesser extent, pursuant to pre-established lease purchase options. The sale of used units results in the availability of the total cash proceeds and generally results in the reporting of gross profit on such sales. New unit sales revenues are derived from the sale of new mobile offices, similar to those units leased by us. Revenues from delivery and installation result from activities related to the transportation and installation of and site preparation for both leased and sold products. Other revenues are derived from other products and services including: rental of steps, furniture, ramps and 10 security systems; sales of parts and supplies; and charges for granting insurance waivers and for damage billings. Although a portion of our business is with customers in industries that are cyclical in nature and subject to changes in general economic conditions, management believes that certain characteristics of the mobile office leasing industry and their operating strategies should help to mitigate the effects of economic downturns. These characteristics include (i) our typical lease terms which include contractual provisions requiring customers to retain units on lease for, on average, 12 months, (ii) the flexibility and low cost offered to our customers by leasing which may be an attractive alternative to capital purchases, (iii) our ability to redeploy units during regional recessions and (iv) the diversity of our industry segments and the geographic balance of our operations (historically during economic slowdowns, the construction industry which represented approximately 33% of 2001 revenues, experiences declines in utilization rates, while other customer segments, including education which represented approximately 21% of revenues in 2001, are more stable). Results of Operations 2001 Compared With 2000. Revenues in 2001 were $492.3 million, a $60.1 million or 13.9% increase from revenues of $432.1 million in 2000. The increase resulted from a $17.6 million or 8.0% increase in leasing revenue, a $17.8 million or 24.3% increase in sales of new units, an $18.2 million or 23.1% increase in delivery and installation revenue, and a $5.8 million or 15.4% increase in other revenue. The increase in leasing revenue is attributable to a 10.7% increase in the average lease fleet to approximately 92,300 units for 2001, combined with an increase of $3 in the average monthly rental rate, offset by a decrease in the average fleet utilization of two percent to 82%. The increase in the average monthly rental rate is a result of overall rate improvement in some of our products combined with changes in fleet mix. The decrease in average fleet utilization is attributable to the softening economic and related business conditions. The increase in sales of new units is due to contracts assumed in connection with the Mckinney acquisition completed in the first quarter, as well as overall system growth. The increase in delivery and installation revenue is attributable to the increase in sales of new units and leasing revenue. Other revenue increased as a result of increases in high margin ancillary products and services, primarily steps, ramps, relocations of customer owned units, and charges for granting insurance waivers. Gross profit in 2001 was $228.6 million, an $11.4 million or 5.2% increase from 2000 gross profit of $217.2 million. The increase primarily resulted from a $4.8 million or 3.3% increase in leasing gross profit, a $2.9 million or 22.4% increase in new unit sales gross profit, and a $4.0 million or 12.9% increase in gross profit from other revenue. The increase in leasing gross profit is a result of the increase in leasing revenue described above offset by a decline in leasing margins from 67.3% in 2000 to 64.4% in 2001. Excluding depreciation and amortization, leasing margins decreased from 84.0% in 2000 to 81.9% in 2001. This margin suppression was attributable to a decline in average fleet utilization coupled with incremental costs associated with increased turnover of existing fleet in certain markets. The increase in new unit sales and other gross profit is the result 11 of the increase in the revenue described above. Selling, general and administrative (SG&A) expenses were $82.6 million, a $5.7 million or 7.4% increase from 2000. The overall increase in SG&A expenses is due to an increase in field related expenses, primarily payroll and occupancy, incurred in connection with the fleet growth described above in addition to the underlying cost of doing business. During June 2001, we suffered a flood in one of our branch locations. The estimated write off of destroyed fleet units is $1.5 million. Interest expense decreased by 6.9% to $85.5 million in 2001 from $91.9 million in 2000. This decrease is the result of a decrease of approximately 220 basis points in effective interest rates on our variable bank debt for 2001 from 2000, partially offset by increased borrowings to finance fleet growth. The difference between our reported tax provision for the year ended December 31, 2001 and the tax provision computed based on statutory rates is primarily attributable to non-deductible goodwill amortization expense of $5.1 million. 2000 Compared With 1999. Revenues in 2000 were $432.1 million, a $26.3 million or 6.5% increase from revenues of $405.8 million in 1999. The increase resulted from a $18.7 million or 9.3% increase in leasing revenue and a $7.9 million or 11.0% increase in delivery and installation revenue. The increase in leasing revenue is attributable to a 10.4% increase in the average lease fleet to approximately 83,300 units for 2000, combined with a slight increase of $1 in the average monthly rental rate, offset by a slight decrease in the average fleet utilization of one percent to 84%. The increase in delivery and installation revenue is attributable to the increase in leasing revenue as described above Gross profit in 2000 was $217.2 million, a $14.0 million or 6.9% increase from 1999 gross profit of $203.2 million. The increase primarily resulted from a $11.9 million or 8.7% increase in leasing gross profit and to a minor extent from a $1.1 million or 3.7% increase in gross profit from other revenue. The increase in leasing gross profit is a result of the increase in leasing revenue described above combined with stable leasing margins. Excluding depreciation and amortization, leasing margins decreased slightly from 84.8% in 1999 to 84.0% in 2000. Although other revenue was essentially flat, the increase in related gross profit was attributed to a favorable mix of higher margin ancillary products, as 1999 results included revenue associated with a large (lower margin) project to relocate customer-owned units. SG&A expenses in 2000 were $76.9 million, a $5.4 million or 7.5% increase from 1999. The increase is the result of the growth experienced by the Company, both in terms of number of branches and fleet size as compared to 1999. The Company's branch network has expanded from 83 branches at December 31, 1999 to 88 branches at December 31, 2000, while the fleet has grown by approximately 8,700 units from December 31, 1999. The increase in SG&A expenses is due to an 12 increase in field related expenses, primarily payroll and occupancy, incurred in connection with this branch expansion and fleet growth. Interest expense in 2000 was $91.9 million, an $8.0 million or 9.5% increase from 1999. This increase is a result of increased average borrowings of approximately $38.9 million to finance fleet and branch growth in addition to increases in interest rates on our variable bank debt. The effect of market rate increases in 2000 was partially offset by a 25 basis point reduction in February 2000 on bank credit facility borrowings as we achieved a specified leverage ratio threshold. The difference between our reported tax provision for the year ended December 31, 2000 and the tax provision computed based on statutory rates is primarily attributable to non-deductible goodwill amortization expense of $4.9 million. Liquidity and Capital Resources During 1999, 2000 and 2001, our principal sources of funds consisted of cash flow from operating and financing sources. Cash flow from operating activities of $72.3 million in 1999, $86.9 million in 2000 and $61.2 million in 2001 was largely generated by the rental of units from our lease fleet and sales of new mobile office units. We have increased our EBITDA and believe that EBITDA provides the best indication of our financial performance and provides the best measure of our ability to meet historical debt service requirements. We define EBITDA as earnings before interest, income taxes, depreciation and amortization, and non-cash charges. EBITDA as we define it, does not represent cash flow from operations as defined by generally accepted accounting principles and should not be considered as an alternative to cash flow as a measure of liquidity, nor should it be considered as an alternative to net income as an indicator of our operating performance. Our EBITDA increased by $10.0 million or 5.6% to $187.5 million in 2001 compared to $177.6 million in 2000. This increase in EBITDA is primarily the result of increased leasing and new unit sales activity described above, partially offset by increased SG&A expenses. In 2000, our EBITDA increased by $9.4 million or 5.6% to $177.6 million compared to $168.2 million in 1999. This increase in EBITDA is a result of increased leasing activity described above, partially offset by increased SG&A expenses. Cash flow used in investing activities was $142.7 million in 1999, $128.3 million in 2000 and $126.4 million in 2001. Our primary capital expenditures are for the discretionary purchase of new units for the lease fleet and units purchased through acquisitions. We seek to maintain our lease fleet in good condition at all times and we generally increase the size of our lease fleet only in those local or regional markets experiencing economic growth and established unit demand. These expenditures increased the size of the rental fleet by approximately 9,400 units during 1999, 8,700 units during 2000 and 5,700 units during 2001. This activity was in response to increased customer demand and, for the first half of 2001, was a continuation of our fleet acquisition strategy and branch expansion. The following table sets forth our investment in our lease fleet for the periods indicated. 13
Year Ended December 31, ----------------------------------- 1999 2000 2001 ---- ---- ---- (Dollars in millions) Gross capital expenditures for rental equipment: New units and betterments $115.0 $118.6 $106.2 Fleet acquisitions, excluding acquired businesses -- 4.0 21.4 ------ ------ ------ 115.0 122.6 127.6 Purchase price allocated to fleet of acquired businesses 24.2 5.3 -- Proceeds from sale of used rental equipment (22.4) (21.6) (22.2) ------ ------ ------ Net capital expenditures for rental equipment $116.8 $106.3 $105.4 ====== ====== ====== Lease fleet maintenance expenses included in the statement of operations $30.5 $35.1 $43.0 ===== ===== =====
We believe we can manage the capital requirements of our lease fleet, and thus our cash flow, through the careful monitoring of our lease fleet additions. During 1999, 2000 and 2001, we were able to sell used units in the ordinary course of business (excluding units sold pursuant to purchase options) at an average of more than 95% of their total capitalized cost and at a premium to net book value. Such capitalized costs include the cost of the unit as well as costs of significant improvements made to the unit. See further explanation below and Note 2 of the Notes to Consolidated Financial Statements. Historically, we have recognized net gains on the sale of used units. Our maintenance and refurbishment program is designed to maintain the value of lease fleet units and realize rental rates and operating cash flows from older units comparable to those from newer units. The sale of used units helps preserve the overall quality of our lease fleet and enhances cash flow. Generally, costs of improvements and betterments aggregating less than $1,000 per unit are expensed as incurred. Expenditures greater than $1,000 that significantly extend the economic useful life of a unit or that materially alter a unit's configuration are capitalized. We estimate that the current annual capital expenditures (net of proceeds from sales of used units) necessary to maintain our lease fleet and facilities at their current size and condition are approximately $25 million. Other capital expenditures of $13.9 million, $18.6 million and $16.3 million in 1999, 2000 and 2001, respectively, consist of items not directly related to the lease fleet, such as branch buildings, land, equipment, leasehold improvements and management information systems. Cash provided by financing activities of $70.3 million, $43.3 million, and $63.3 million in 1999, 2000 and 2001, respectively, is comprised primarily of long-term borrowings, net of repayments, under our revolving credit facility, which was further amended in January 2001 to provide for revolver borrowings up to $600 million. Scotsman paid dividends to the Company in the amount of $60, $55 and $55 to fund normal operating expenses in 2001, 2000 and 1999, respectively. 14 At December 31, 2001 we had $400 million of 9.875% Senior Notes due 2007. In February 2002, we issued $150 million of additional senior notes due 2007 under the existing indenture. Net proceeds from the issuance were used to permanently repay our $58.1 million term loan and to repay borrowings under the existing revolving credit facility. On March 26, 2002, we entered into a new credit facility providing for revolver borrowings up to $460 million and a $210 million term loan. The facility also provides for up to an additional $30 million in term or revolver commitments. Principal payments due on the term loan are equal to 1% per year payable quarterly beginning June 30, 2002, with the remaining balance due December 31, 2006. Borrowings under the new credit facility are based upon a borrowing base calculation. The new loan agreement requires compliance with certain financial covenants including capital expenditures, interest coverage, and leverage and fleet utilization levels. Net proceeds from the new credit facility, which matures December 31, 2006, were used to refinance the existing credit facility. We believe we will have sufficient liquidity under our new revolving line of credit and from cash generated from operations to fund our operations for the next 12 months. A summary of our significant contractual obligations and other commercial commitments is as follows: o Debt - Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Notes 4 and 9 o Operating Leases Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 6 o Standby Letters of Credit Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 4 Seasonality Although demand from certain of our customers is somewhat seasonal, our operations as a whole are not seasonal to any significant extent. Inflation We believe that inflation has not had a material effect on our results of operations. However, an inflationary environment could materially increase interest rates on our floating rate debt. The price of used units sold by us and the replacement cost of such units could also increase in such an environment. Our standard lease generally provides for annual rental rate escalation at the inflation rate as determined by the Consumer Price Index after the end of the initial lease term. In addition, we may seek to limit our exposure to interest rate fluctuations by utilizing certain hedging mechanisms, although we are under no obligation to do so. 15 Recent Accounting Pronouncements Goodwill and Other Intangible Assets. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 ("FAS No. 142"), Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with the Statement. Other intangible assets will continue to be amortized over their useful lives. We will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of $4.6 million, , ($0.74 per basic share and $0.70 per diluted share) per year. During 2002, we will perform the first of the required impairment tests of goodwill as of January 1, 2002. The results of these tests are not expected to have a material effect on our earnings and financial position. Impairment or Disposal of Long-Lived Assets. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 ("FAS No. 144"), Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. FAS No. 144 is effective for fiscal years beginning after December 15, 2001. We expect to adopt FAS No. 144 as of January 1, 2002 and do not anticipate it to have a material effect on our earnings and financial position. 16 Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Financial Statements: Page ---- Scotsman Holdings, Inc. and Subsidiaries: Report of Independent Auditors..........................................................................18 Consolidated Balance Sheets as of December 31, 2001 and 2000............................................19 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999..............................................................20 Consolidated Statements of Changes in Stockholders' Deficit for the years ended December 31, 2001, 2000 and 1999.........................................................21 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999...............................................................22 Notes to Consolidated Financial Statements...........................................................23-35 Williams Scotsman, Inc. and Subsidiaries: Report of Independent Auditors..........................................................................36 Consolidated Balance Sheets as of December 31, 2001 and 2000............................................37 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999...............................................................38 Consolidated Statements of Changes in Stockholder's Deficit for the years ended December 31, 2001, 2000 and 1999.........................................................39 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999...............................................................40 Notes to Consolidated Financial Statements...........................................................41-56 Financial Statement Schedules: Scotsman Holdings, Inc. and Subsidiaries: Schedule I - Condensed Financial Information of Registrant...........................................76-77 Scotsman Holdings, Inc. and Subsidiaries: Schedule II - Valuation and Qualifying Accounts.........................................................78
All schedules not listed have been omitted either because they are not required or, if required, the required information is included elsewhere in the financial statements or notes thereto. 17 Report of Independent Auditors Board of Directors Scotsman Holdings, Inc. We have audited the accompanying consolidated balance sheets of Scotsman Holdings, Inc. and subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These consolidated financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 consolidated financial position of Scotsman Holdings, Inc. and subsidiaries at December 31, 2001 and 2000 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Baltimore, Maryland February 20, 2002, except for Note 9 for which the date is March 26, 2002 18
Scotsman Holdings, Inc. and Subsidiaries Consolidated Balance Sheets December 31 2001 2000 --------------------------------------- (In thousands) Assets Cash $ 586 $ 2,549 Trade accounts receivable, net of allowance for doubtful accounts of $1,298 in 2001 and $983 in 2000 74,336 53,916 Prepaid expenses and other current assets 25,628 18,142 Rental equipment, net of accumulated depreciation of $178,046 in 2001 and $155,434 in 2000 866,867 799,994 Property and equipment, net 73,782 64,766 Deferred financing costs, net 10,696 15,408 Goodwill and other intangible assets, net 172,057 172,218 Other assets 21,034 18,908 --------------------------------------- $1,244,986 $1,145,901 ======================================= Liabilities and stockholders' deficit Accounts payable and accrued expenses $ 50,297 $ 54,747 Rents billed in advance 25,796 24,757 Revolving credit facility 564,922 500,460 Long-term debt 458,050 458,650 Deferred income taxes 147,200 129,865 --------------------------------------- Total liabilities 1,246,265 1,168,479 --------------------------------------- Stockholders' deficit: Common stock, $.01 par value. Authorized: 10,000,000 shares; issued: 9,507,407 shares in 2001 and 2000 95 95 Additional paid-in capital 233,926 234,204 Cumulative foreign currency translation adjustment (1,505) (457) Retained earnings 62,065 39,436 --------------------------------------- 294,581 273,278 Less treasury stock - 3,310,808 common shares in 2001 and 3,310,733 common shares in 2000, at cost (295,860) (295,856) --------------------------------------- Net stockholders' deficit (1,279) (22,578) --------------------------------------- $1,244,986 $1,145,901 ======================================= See accompanying notes.
19
Scotsman Holdings, Inc. and Subsidiaries Consolidated Statements of Operations Year ended December 31 2001 2000 1999 ------------------------------------------------------ (In thousands except per share amounts) Revenues Leasing $238,151 $220,547 $201,820 Sales: New units 91,114 73,291 73,001 Rental equipment 22,212 21,571 22,369 Delivery and installation 97,342 79,097 71,245 Other 43,437 37,640 37,370 ------------------------------------------------------ Total revenues 492,256 432,146 405,805 ------------------------------------------------------ Cost of sales and services Leasing: Depreciation and amortization 41,761 36,720 34,553 Other direct leasing costs 43,109 35,373 30,724 Sales: New units 75,169 60,268 60,323 Rental equipment 16,886 16,305 17,236 Delivery and installation 78,339 59,670 52,359 Other 8,374 6,583 7,421 ------------------------------------------------------ Total costs of sales and services 263,638 214,919 202,616 ------------------------------------------------------ Gross profit 228,618 217,227 203,189 ------------------------------------------------------ Selling, general and administrative expenses 82,573 76,872 71,480 Other depreciation and amortization 18,845 17,474 15,866 Interest, including amortization of deferred financing costs of $5,269, $4,931, and $4,913 85,486 91,860 83,878 Non-cash charge for casualty loss 1,500 - - ------------------------------------------------------ Total operating expenses 188,404 186,206 171,224 ------------------------------------------------------ Income before income taxes 40,214 31,021 31,965 Income tax expense 17,585 14,938 14,694 ------------------------------------------------------ Net income $ 22,629 $ 16,083 $ 17,271 ====================================================== Earnings per common share: $ 3.65 $ 2.60 $ 2.79 ====================================================== Earnings per common share, assuming dilution: $ 3.46 $ 2.46 $ 2.64 ====================================================== See accompanying notes.
20
Scotsman Holdings, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Deficit Cumulative Common Stock Additional Foreign Currency ----------------------- Paid-in Retained Translation Treasury Shares Amount Capital Earnings Adjustment Stock Total --------------------------------------------------------------------------------------------- (In thousands) Balance at December 31, 1998 6,197 $95 $231,826 $ 6,082 $ - $(295,856) $(57,853) Appreciation in value of stock options - - 1,899 - - - 1,899 Net income - - - 17,271 - - 17,271 -------------------------------------------------------------------------------------------- Balance at December 31, 1999 6,197 95 233,725 23,353 - (295,856) (38,683) Appreciation in value of stock options - - 479 - - - 479 Foreign currency translation - - - - (457) - (457) adjustment Net income - - - 16,083 - - 16,083 -------------------------------------------------------------------------------------------- Balance at December 31, 2000 6,197 95 234,204 39,436 (457) (295,856) (22,578) Purchase of 75 shares of treasury stock - - - - - (4) (4) Decrease in value of stock options - - (278) - - - (278) Foreign currency translation adjustment - - - - (1,048) - (1,048) Net income - - - 22,629 - - 22,629 -------------------------------------------------------------------------------------------- Balance at December 31, 2001 6,197 $95 $233,926 $ 62,065 $ (1,505) $(295,860) $(1,279) ============================================================================================= See accompanying notes.
21
Scotsman Holdings, Inc. and Subsidiaries Consolidated Statements of Cash Flows Year ended December 31 2001 2000 1999 ---------------------------------------------------- (In thousands) Cash flows from operating activities Net income $ 22,629 $ 16,083 $ 17,271 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 65,875 59,125 55,332 Provision for bad debts 4,204 3,697 3,756 Deferred income tax expense 17,333 14,683 13,818 Non-cash option compensation expense (278) 479 1,899 Gain on sale of rental equipment (5,326) (5,266) (5,133) Increase in net trade accounts receivable (24,624) (337) (18,058) (Decrease)/increase in accounts payable and accrued expenses, (5,451) 1,579 9,248 including reserve for casualty loss Other (13,200) (3,121) (5,851) ----------------------------------------------------- Net cash provided by operating activities 61,162 86,922 72,282 ----------------------------------------------------- Cash flows from investing activities Rental equipment additions (106,177) (122,617) (115,024) Proceeds from sales of rental equipment 22,212 21,571 22,369 Acquisition of businesses, net of cash acquired (26,114) (8,687) (36,208) Purchase of property and equipment, net (16,347) (18,571) (13,860) ----------------------------------------------------- Net cash used in investing activities (126,426) (128,304) (142,723) ----------------------------------------------------- Cash flows from financing activities Proceeds from debt 547,129 493,748 483,525 Repayment of debt (483,267) (450,461) (413,149) Increase in deferred financing costs (557) - (91) Payments to acquire treasury stock (4) - - ---------------------------------------------------- Net cash provided by financing activities 63,301 43,287 70,285 ---------------------------------------------------- Net increase (decrease) in cash (1,963) 1,905 (156) Cash at beginning of period 2,549 644 800 ---------------------------------------------------- Cash at end of period $ 586 $ 2,549 $ 644 ==================================================== Supplemental cash flow information: Cash paid (refunds recovered) for income taxes $ 306 $ 196 $ (10) ======================================================= Cash paid for interest $ 89,351 $ 81,653 $ 76,920 ======================================================= See accompanying notes.
22 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) December 31, 2001 and 2000 1. Organization and Basis of Presentation Scotsman Holdings, Inc. was organized in November 1993 for the purpose of acquiring Williams Scotsman (Scotsman). The operations of Scotsman Holdings, Inc. and subsidiaries (the Company) consist of the leasing and sale of mobile offices, storage products, and their delivery and installation. Included in the operations of Scotsman are two wholly own subsidiaries, Willscot Equipment, LLC (Willscot) and Williams Scotsman of Canada, Inc., whose operations have not been significant to date. Willscot, a special purpose subsidiary, was formed in May 1997. Willscot is a guarantor of Scotsman's credit facility and acts as a full and unconditional, and joint and several subordinated guarantor of the 9.875% senior notes. The operations of Willscot are limited to the leasing of its mobile office units to Scotsman under a master lease. Acquisition of Mckinney Mobile Modular On February 1, 2001, the Company acquired the sales and leasing business of Mckinney Mobile Modular, a privately held California corporation (Mckinney) in a transaction accounted for under the purchase method of accounting. Total consideration for the acquisition of Mckinney was approximately $26.1 million, including the repayment of existing indebtedness of Mckinney. The purchase price paid was allocated to the identifiable assets acquired of $21.6 million with the excess of $5.5 million representing goodwill and other intangible assets. The purchase price allocation was based upon the estimates of the fair value of the assets acquired. The acquisition, which added over 1,600 units at a value of approximately $21.4 million, was financed with borrowings under the Company's amended credit facility. Acquisition of Evergreen Mobile Company On February 1, 1999, the Company acquired all of the outstanding stock of Evergreen Mobile Company, a privately held Washington corporation (Evergreen), in a transaction accounted for under the purchase method of accounting. Total consideration for the acquisition of Evergreen was $36.2 million, including the repayment of existing indebtedness of Evergreen. The purchase price paid was allocated to the net identifiable assets acquired of $19.7 million with the excess of $16.5 million representing goodwill and other intangible assets. The purchase price allocation was based upon the 23 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Organization and Basis of Presentation (continued) estimates of the fair value of the net assets acquired. The acquisition was financed with borrowings under the Company's amended credit facility. New Accounting Pronouncements Goodwill and Other Intangible Assets. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 ("FAS No. 142"), Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with the Statement. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of $4.6 million, , ($0.74 per basic share and $0.70 per diluted share) per year. During 2002, the Company will perform the first of the required impairment tests of goodwill as of January 1, 2002. The results of these tests are not expected to have a material effect on the earnings and financial position of the Company. Impairment or Disposal of Long-Lived Assets. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 ("FAS No. 144"), Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. FAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company expects to adopt FAS No. 144 as of January 1, 2002 and does not anticipate it to have a material impact on the Company's financial position and results of operations. 2. Summary of Significant Accounting Policies The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. 24 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Summary of Significant Accounting Policies (continued) (a) Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. (b) Leasing Operations Equipment is leased generally under operating leases and, occasionally, under sales-type lease arrangements. Operating lease terms generally range from 3 months to 60 months, and contractually averaged approximately 12 months at December 31, 2001. Rents billed in advance are initially deferred and recognized as revenue over the term of the operating leases. Rental equipment is depreciated by the straight-line method using an estimated economic useful life of 10 to 20 years and an estimated residual value of 50%. Costs of improvements and betterments are capitalized, whereas costs of replacement items, repairs and maintenance are expensed as incurred. Costs incurred for equipment to meet particular lease specifications are capitalized and depreciated over the lease term. However, costs aggregating less than $1 per unit are generally expensed as incurred. (c) Deferred Financing Costs Costs of obtaining debt are amortized using the straight-line method over the term of the debt. (d) Property and Equipment Depreciation is computed by the straight-line method over estimated useful lives ranging from 15 to 40 years for buildings and improvements and 3 to 10 years for furniture and equipment. Maintenance and repairs are charged to expense as incurred. (e) Goodwill and Other Intangible Assets The excess of cost over fair values of net assets acquired in purchase transactions has been recorded as goodwill and is being amortized on a straight-line basis over 20 to 40 years. 25 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Summary of Significant Accounting Policies (continued) Other identifiable intangibles acquired of $6,452 include assembled workforce, covenant not to compete and customer base which are being amortized on a straight line basis over periods of21 to 228 months. As of December 31, 2001 and 2000, accumulated amortization of goodwill and other intangible assets was $17,532 and $11,932, respectively. As discussed in Note 1, upon the adoption of FAS No. 142, the Company will cease amortization of goodwill. On a periodic basis, the Company evaluates the carrying value of its intangible assets to determine if the facts and circumstances suggest that intangible assets may be impaired. If this review indicates that intangible assets may not be recoverable, as determined by the undiscounted cash flow of the entity acquired over the remaining amortization period, the Company's carrying value of intangible assets would be reduced by the estimated shortfall of cash flows, on a discounted basis. Upon the adoption of FAS No. 142, as discussed above, the Company will modify their approach for reviewing for impairment. (f) Income Taxes Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (g) Revenue Recognition The Company's revenue recognition policy is to recognize rental income ratably over the month on a daily basis. Billings for periods extending beyond the month end are recorded as deferred income. Sales revenue is recognized at the time the units are delivered and installed, with the exception of long-term construction-type sales contracts for which revenue is recognized under the percentage of completion method. Under this method, income is recognized based on the incurred costs to date compared to estimated total costs. All other revenue is recognized when related services have been performed. (h) Reclassifications Certain prior year amounts have been reclassified to conform to current year presentation. 26 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Summary of Significant Accounting Policies (continued) (i) Earnings Per Share The following table sets forth the components of the weighted-average shares outstanding for the basic and diluted earnings per share computations:
December 31 2001 2000 1999 ----------------------------------------------------------- Weighted-average shares- basic earnings per share 6,196,623 6,196,674 6,196,674 Effect of employee stock options 338,068 340,787 349,591 ----------------------------------------------------------- Weighted-average shares- diluted earnings per share 6,534,691 6,537,461 6,546,265 ============================================================
(j) Accounts Receivable The Company's accounts receivable consist of amounts due from customers throughout the United States and Canada. Collateral is generally not required. The Company provides an allowance for doubtful accounts receivable by a charge to operations in amounts equal to the estimated losses expected to be incurred in collection of the accounts. The estimated losses are based on historical collection experience and a review of the current status of the existing receivables. Customer accounts are written off against the allowance for doubtful accounts when an account is determined to be uncollectible. 3. Property and Equipment Property and equipment consist of the following: December 31 2001 2000 --------------------------------- Land $ 17,223 $ 13,089 Buildings and improvements 28,162 28,464 Furniture and equipment 59,755 47,106 --------------------------------- 105,140 88,659 Less accumulated depreciation 31,358 23,893 --------------------------------- Net property and equipment $ 73,782 $ 64,766 ================================= 27 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Revolving Credit Facility and Long-Term Debt Debt consists of the following: December 31 2001 2000 --------------------------------- Borrowings under revolving credit facility $ 564,922 $ 500,460 Term loan 58,050 58,650 9.875% senior notes 400,000 400,000 ---------------------------------- $1,022,972 $ 959,110 ================================== The loan agreement for the credit facility provides for a $600,000 (increased from $540,000 effective January 26, 2001) revolving credit facility maturing May 21, 2002 and a $60,000 term loan maturing May 21, 2005. Availability under the revolver, which is based upon a borrowing base calculation, was $32,258 at December 31, 2001. Interest was payable at a rate of either prime plus 0.75% or the Eurodollar rate plus 2.0%. The weighted average interest rates of the revolver under the credit agreement were 4.22% and 8.85% at December 31, 2001 and 2000, respectively. Principal payments due on the term loan are equal to 1% per year payable quarterly through March 31, 2002, with equal quarterly installments commencing June 30, 2002. Interest on the term loan is payable at a rate of either prime plus 2.0% or the Eurodollar rate plus 3.25%. The weighted average interest rates of the term loan under the credit agreement were 5.25% and 10.06% at December 31, 2001 and 2000, respectively. Borrowings under the revolving credit facility are secured by a first priority lien on and security interest in the Company's rental equipment, accounts receivable and property and equipment. In addition to the restrictions and limitations described under the note agreement, including restrictions on the amount of dividends that Holdings can pay the Company, the revolving credit facility loan agreement requires compliance with certain financial covenants including capital expenditures, interest coverage and fleet utilization levels. The Company was in compliance with such covenants during 2001. The 9.875% senior notes are due June 1, 2007 with interest payable semi-annually on June 1 and December 1 of each year. On or after June 1, 2002, the notes are redeemable at the option of the Company, at redemption prices of 104.938% and 102.469% during the 12-month periods beginning June 1, 2002 and 2003, respectively, and 100% thereafter. Upon the occurrence of a change of control, the notes may be redeemed as a whole at the option of the Company at a redemption price of 100% plus the applicable premium as defined in the agreement. 28 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Revolving Credit Facility and Long-Term Debt (continued) The notes are general unsecured obligations of the Company and are subordinated in right of payment to all secured indebtedness. Additionally, the notes are guaranteed by Willscot, the Company's wholly owned subsidiary. Such guaranty is full and unconditional, and joint and several. The note agreement limits or restricts the Company's ability to incur additional indebtedness; make distributions of capital in an amount not to exceed 50% of accumulated earnings, dispose of property; incur liens on property; pay dividends to Holdings; and merge with or acquire other companies. At December 31, 2001 and 2000, the fair value of debt was approximately $1,016,972 and $883,110, respectively, based on the quoted market price of the senior notes and the book value of the credit facility, which are adjustable rate notes. Letter of credit obligations at December 31, 2001 were $2,820. See Note 9 of Notes to the Consolidated Financial Statements, Subsequent Events, regarding financing activities after December 31, 2001. 29 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. Income Taxes Deferred income taxes related to temporary differences between the tax bases of assets and liabilities and the respective amounts reported in the financial statements are summarized as follows:
December 31 2001 2000 ----------------------------- Deferred tax liabilities: Cost basis in excess of tax basis of assets and accelerated tax depreciation: Rental equipment $243,222 $220,502 Property and equipment 818 1,074 Other 2,626 2,631 ----------------------------- Total deferred tax liabilities 246,666 224,207 ----------------------------- Deferred tax assets: Allowance for doubtful accounts 467 390 Rents billed in advance 10,321 10,127 Net operating loss carryovers 85,849 80,196 Alternative minimum tax credit carryovers 1,759 1,759 Other 4,470 5,270 ----------------------------- 102,866 97,742 Less: valuation allowance (3,400) (3,400) ----------------------------- Total deferred tax assets 99,466 94,342 ----------------------------- Net deferred tax liabilities $147,200 $129,865 =============================
At December 31, 2001, the Company had net operating loss carryovers available for federal income tax purposes of $215,197 (net of related valuation allowance), of which $80,186 (net of related valuation allowance) relates to pre-recapitalization loss carryovers that are subject to certain limitations under the Internal Revenue Code. The Company is in the process of implementing a strategy to effectively release these limitations. However, ultimately the results may not be known for some time. These net operating loss carryovers expire at various dates from 2003 to 2021. Also, alternative minimum tax credit carryovers of approximately $1,759 are available without expiration limitations. An investment credit carryover of approximately $860 expired on December 31, 2000, and the Company recorded a charge to income tax expense accordingly. 30 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. Income Taxes (continued) Income tax expense consists of the following:
Years ended December 31 2001 2000 1999 ----------------------------------------------------- Current $ 252 $ 255 $ 876 Deferred 17,333 14,683 13,818 ----------------------------------------------------- $17,585 $14,938 $14,694 ===================================================== Federal $13,683 $12,626 $12,596 State 2,489 2,312 2,098 Foreign 1,413 - - ----------------------------------------------------- $17,585 $14,938 $14,694 ===================================================== The provision for income taxes is reconciled to the amount computed by applying the Federal corporate tax rate of 35% to income before income taxes as follows: Years ended December 31 2001 2000 1999 ----------------------------------------------------- Income tax at statutory rate $14,076 $10,857 $11,188 State income taxes, net of federal tax benefit 1,618 1,503 1,144 Amortization of goodwill and other Intangible assets 1,776 1,702 1,838 Increase in valuation allowance - - - Other 115 876 524 ----------------------------------------------------- $17,585 $14,938 $14,694 =====================================================
31 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Commitments The Company is obligated under noncancelable operating leases of certain equipment, vehicles and parcels of land. At December 31, 2001 approximate future minimum rental payments are as follows: 2002 $ 8,407 2003 6,692 2004 5,442 2005 4,439 2006 3,244 Thereafter 3,541 ------------------ Total minimum future lease payments $ 31,765 ================== Rent expense was $11,490 in 2001, $9,839 in 2000, and $8,817 in 1999. 7. Employee Benefit Plans The Company has adopted a defined contribution plan (the 401(k) Plan) which is intended to satisfy the tax qualification requirements of Sections 401(a), 401(k), and 401(m) of the Internal Revenue Code of 1986 (the Code). The 401(k) Plan covers substantially all employees and permits participants to contribute the lessor of (i) 15% of their annual compensation from the Company or (ii) the dollar limit described in Section 402(g) of the Code ($10,500 in 2001). All amounts deferred under this salary reduction feature are fully vested. The 401(k) Plan has a "matching" contribution feature under which the Company may contribute a percentage of the amount deferred by each participant. Such percentage, if any, is determined by the Board of Directors at their discretion. The Plan also has a "profit sharing" feature, under which the Company may contribute, at its discretion, an additional amount allocable to the accounts of active participants meeting the aforementioned eligibility requirements. Contributions made by the Company on behalf of a 401(k) Plan participant vest ratably during the first five years of employment and 100% thereafter. Matching contributions by the Company to the 401(k) Plan were approximately $587 in 2001, $477 in 2000 and $395 in 1999. No contributions have been made by the Company under the profit-sharing feature. The Company has adopted a Deferred Compensation Plan for Executives which is meant to be an unfunded deferred compensation plan maintained for a select group of management within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974. This plan allows key employees to defer a specified amount of their compensation until termination or upon the occurrence of other specified events. Such amounts are placed in the investment vehicles of the employee's choice. As of December 31, 2001, the total amount deferred under this plan, including earnings, was $1,370. 32 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Employee Benefit Plans (continued) The Company adopted a stock option plan for certain key employees of Scotsman. The plan was subsequently amended and restated in 1998 (the "Amended and Restated 1997 Employee Stock Option Plan"). Under the plan, up to 479,500 options to purchase Holdings' outstanding common stock may be granted. The options are granted with an exercise price equal to the fair value of the shares as of the date of grant. Fifty percent of the options granted vest ratably over five years, and fifty percent vest based on the Company meeting certain financial goals over the same five periods. All options expire 10 years from the date of grant. The Company is accounting for the options using the variable plan accounting. Under this plan, 23,300 and 46,100 options were granted in 2001 and 2000, respectively. For those options in which both the grant date and the measurement date were known, the Company recognized compensation (income)/expense in the amount of ($278), $479, and $1,899 in 2001, 2000, and 1999, respectively. Prior to the 1997 recapitalization, the Company had adopted a stock option plan for certain key employees ("1994 Employee Stock Option Plan"). The options were granted with an exercise price equal to the fair value of the shares as of the date of grant. All options outstanding under this plan became fully vested in conjunction with the recapitalization. Pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," and has been determined as if the Company had accounted for its employee stock options under the minimum value method of that Statement. The minimum value for these options was estimated at the date of grant by calculating the excess of the fair value of the stock at the date of grant over the present value of both the exercise price and the expected dividend payments, each discounted at the risk free rate, over the expected exercise life of the option. The following weighted average assumptions were used for 2001, 2000, and 1999: risk-free interest rate of 4.5%, 6.3%, and 5.6%, respectively; weighted average expected life of the options of 5 years; and no dividends. For purposes of pro forma disclosures, the estimated minimum value of the options is amortized to expense over the options' vesting period. Note that the effects of applying SFAS 123 for pro forma disclosure in the current year are not necessarily representative of the effects on pro forma net income for future years. The Company's pro forma information follows: 2001 2000 1999 ------------------------------------------- Pro forma net income $22,882 $15,446 $16,910 Pro forma earnings per share $ 3.69 $ 2.49 $ 2.73 33 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Employee Benefit Plans (continued) A summary of stock option activity and related information for the years ended December 31 follows. Amounts have been restated for the three-for-one stock split granted by Holdings in December 1997:
2001 2000 1999 ------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------------------------------------------------------------------------------- Beginning balance 1,120,540 $23.56 1,107,840 $22.68 1,099,640 $22.12 Granted 23,300 50.67 46,100 50.67 29,800 50.67 Canceled - - - - - - Forfeited (18,700) (38.45) (33,400) (31.77) (21,600) (32.07) ------------------------------------------------------------------------------- Ending balance 1,125,140 23.87 1,120,540 23.56 1,107,840 $22.68 Exercisable at end of year 975,506 20.26 871,030 18.54 950,165 $19.94 Weighted average minimum value of options granted during year $9.34 $19.45 $12.08
Exercise prices for options outstanding as of December 31, 2001 are detailed in the following table. The weighted-average remaining contractual life of those options is 5.38 years. ------------------------------------------------------------------------------- Weighted Shares Outstanding at Shares Exercisable at Average Exercise Price December 31, 2001 December 31, 2001 Remaining Contractual Life ------------------------------------------------------------------------------- $ 4.59 73,200 73,200 3.3 years $ 9.60 278,100 278,100 4.3 years $18.39 275,190 275,190 5.3 years $30.50 344,000 296,761 6.0 years $50.67 154,650 52,255 7.9 years ------------------------------------------------------------------------------- 34 8. Contingencies The Company is involved in various lawsuits and claims arising out of the normal course of its business. In addition, the Company has insurance policies to cover general liability and workers compensation related claims. In the opinion of management, the ultimate amount of liability not covered by insurance, if any, under pending litigation and claims will not have a materially adverse effect on the financial position or operating results of the Company. 9. Subsequent Events In February 2002, the Company issued $150,000 of additional 9.875% senior unsecured notes under its existing indenture. The additional notes, which are subject to all of the same terms and conditions as the $400,000 of previously issued notes, were issued at a price of 98.751%. Net proceeds from the issuance were used to permanently repay the outstanding balance of the term loan ($58,050 plus accrued interest) and to reduce outstanding borrowings under the revolver. In March 2002, the Company entered into a new credit facility, the net proceeds from which were used to refinance its existing credit facility. The new loan agreement provides for a $460 million revolving credit facility and a $210 million term loan both maturing on December 31, 2006. The facility also provides for up to an additional $30 million in term or revolver commitments. Interest on borrowings under both the term and revolver is payable at a rate of either prime plus 1.75% or the Eurodollar rate plus 3.00%. Such rates may decrease based upon the Company achieving specified leverage ratio thresholds. Principal payments due on the term loan are equal to 1% per year payable quarterly beginning June 30, 2002, with the remaining balance due December 31, 2006. Borrowings under the new credit facility, which are based upon a borrowing base calculation, are secured by a first priority lien on and security interest in the Company's rental equipment, accounts receivable and property and equipment. In addition to the restrictions and limitations described under the note agreement, including restrictions on the amount of dividends that the Company can pay to Holdings, the new loan agreement requires compliance with certain financial covenants including capital expenditures, interest coverage, leverage and fleet utilization levels. 35 Report of Independent Auditors Board of Directors Williams Scotsman, Inc. We have audited the accompanying consolidated balance sheets of Williams Scotsman, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholder's deficit and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 consolidated financial position of Williams Scotsman, Inc. and subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Baltimore, Maryland February 20, 2002, except for Note 11 for which the date is March 26, 2002 36 Williams Scotsman, Inc. and Subsidiaries Consolidated Balance Sheets
December 31 2001 2000 ----------------------------------- (In thousands) Assets Cash $ 584 $ 2,546 Trade accounts receivable, net of allowance for doubtful accounts of $1,298 in 2001 and $983 in 2000 74,336 53,916 Prepaid expenses and other current assets 25,628 20,685 Rental equipment, net of accumulated depreciation of $178,046 in 2001 and $155,434 in 2000 866,867 799,994 Property and equipment, net 73,782 64,766 Deferred financing costs, net 10,696 15,408 Goodwill and other intangible assets, net 172,057 172,218 Other assets 21,034 16,365 ----------------------------------- $1,244,984 $1,145,898 =================================== Liabilities and stockholder's deficit Accounts payable and accrued expenses $ 50,287 $ 54,735 Rents billed in advance 25,796 24,757 Revolving credit facility 564,922 500,460 Long-term debt 458,050 458,650 Deferred income taxes 152,670 135,317 ----------------------------------- Total liabilities 1,251,725 1,173,919 ----------------------------------- Stockholder's deficit: Common stock, $.01 par value. Authorized 10,000,000 shares; issued and outstanding 3,320,000 shares 33 33 Additional paid-in capital 126,289 126,567 Cumulative foreign currency translation adjustment (1,505) (457) Retained deficit (131,558) (154,164) ----------------------------------- Total stockholder's deficit (6,741) (28,021) ----------------------------------- $1,244,984 $1,145,898 =================================== See accompanying notes.
37 Williams Scotsman, Inc. and Subsidiaries Consolidated Statements of Operations
Year ended December 31 2001 2000 1999 -------------------------------------------------- (In thousands except per share amounts) Revenues Leasing $238,151 $220,547 $201,820 Sales: New units 91,114 73,291 73,001 Rental equipment 22,212 21,571 22,369 Delivery and installation 97,342 79,097 71,245 Other 43,437 37,640 37,370 -------------------------------------------------- Total revenues 492,256 432,146 405,805 -------------------------------------------------- Cost of sales and services Leasing: Depreciation and amortization 41,761 36,720 34,553 Other direct leasing costs 43,109 35,373 30,724 Sales: New units 75,169 60,268 60,323 Rental equipment 16,886 16,305 17,236 Delivery and installation 78,339 59,670 52,359 Other 8,374 6,583 7,421 -------------------------------------------------- Total costs of sales and services 263,638 214,919 202,616 -------------------------------------------------- Gross profit 228,618 217,227 203,189 -------------------------------------------------- Selling, general and administrative expenses 82,516 76,817 71,425 Other depreciation and amortization 18,845 17,474 15,866 Interest, including amortization of deferred financing costs of $5,269, $4,931 and $4,913 85,486 91,860 83,878 Non-cash charge for casualty loss 1,500 -- -- -------------------------------------------------- Total operating expenses 188,347 186,151 171,169 -------------------------------------------------- Income before income taxes 40,271 31,076 32,020 Income tax expense 17,605 14,957 14,713 -------------------------------------------------- Net income $ 22,666 $ 16,119 $ 17,307 ================================================== Earnings per common share $ 6.83 $ 4.86 $ 5.21 ================================================== See accompanying notes.
38 Williams Scotsman, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholder's Deficit
Cumulative Foreign Additional Currency Common Stock Paid-in Retained Translation Shares Amount Capital Deficit Adjustment Total ------------------------------------------------------------------------------------------- (In thousands) Balance at December 31, 1998 3,320 $33 $124,189 $(187,480) $ - $(63,258) Appreciation in value of stock options - - 1,899 - - 1,899 Dividends to parent--$.02 per share - - - (55) - (55) Net income - - - 17,307 - 17,307 ------------------------------------------------------------------------------------------- Balance at December 31, 1999 3,320 33 126,088 (170,228) - (44,107) Appreciation in value of stock options - - 479 - - 479 Dividends to parent--$.02 per share - - - (55) - (55) Foreign currency translation adjustment - - - - (457) (457) Net income - - - 16,119 - 16,119 ------------------------------------------------------------------------------------------- Balance at December 31, 2000 3,320 33 126,567 (154,164) (457) (28,021) Decrease in value of stock options - - (278) - - (278) Dividends to parent--$.02 per share - - - (60) - (60) Foreign currency translation adjustment - - - - (1,048) (1,048) Net income - - - 22,666 - 22,666 ------------------------------------------------------------------------------------------- Balance at December 31, 2001 3,320 $33 $126,289 $(131,558) $(1,505) $ (6,741) =========================================================================================== See accompanying notes.
39 Williams Scotsman, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Year ended December 31 2001 2000 1999 ------------------------------------------------------------ (In thousands) Cash flows from operating activities Net income $ 22,666 $ 16,119 $ 17,307 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 65,875 59,125 55,332 Provision for bad debts 4,204 3,697 2,254 Deferred income tax expense 17,353 14,703 13,837 Non-cash option compensation (income)/expense (278) 479 1,899 Gain on sale of rental equipment (5,326) (5,266) (5,133) Increase in net trade accounts receivable (24,624) (337) (16,556) (Decrease)/increase in accounts payable and accrued expenses, including reserve for casualty loss (5,452) 1,578 9,249 Other (13,199) (3,121) (5,851) ------------------------------------------------------------ Net cash provided by operating activities 61,219 86,977 72,338 ------------------------------------------------------------ Cash flows from investing activities Rental equipment additions (106,177) (122,617) (115,024) Proceeds from sales of rental equipment 22,212 21,571 22,369 Acquisition of businesses, net of cash acquired (26,114) (8,687) (36,208) Purchase of property and equipment, net (16,347) (18,571) (13,860) ------------------------------------------------------------ Net cash used in investing activities (126,426) (128,304) (142,723) ------------------------------------------------------------ Cash flows from financing activities Proceeds from debt 547,129 493,748 483,525 Repayment of debt (483,267) (450,461) (413,149) Increase in deferred financing costs (557) - (91) Cash dividends paid (60) (55) (55) ------------------------------------------------------------ Net cash provided by financing activities 63,245 43,232 70,230 ----------------------------------------------------------- Net (decrease) increase in cash (1,962) 1,905 (155) Cash at beginning of period 2,546 641 796 ------------------------------------------------------------ Cash at end of period $ 584 $ 2,546 $ 641 ============================================================ Supplemental cash flow information: Cash paid (refunds received) for income taxes $ 306 $ 196 $ (10) ============================================================ Cash paid for interest $ 89,351 $ 81,653 $ 76,920 ============================================================ See accompanying notes.
40 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) December 31, 2001 and 2000 1. Organization and Basis of Presentation Williams Scotsman, Inc. (the Company) is a wholly owned subsidiary of Scotsman Holdings, Inc. (Holdings), a corporation which was organized in November 1993 for the purpose of acquiring the Company. The Company's operations include two wholly owned subsidiaries, Willscot Equipment, LLC (Willscot) and Williams Scotsman of Canada, Inc., whose operations have not been significant to date. Willscot, a special purpose subsidiary, was formed in May 1997 and is a guarantor of the Company's credit facility and acts as a full and unconditional, and joint and several subordinated guarantor of the 9.875% senior notes. The operations of Willscot are limited to the leasing of its mobile office units to the Company under a master lease. The operations of the Company consist primarily of the leasing and sale of mobile offices and storage products (equipment) and their delivery and installation. Acquisition of Mckinney Mobile Modular On February 1, 2001, the Company acquired the sales and leasing business of Mckinney Mobile Modular, a privately held California corporation (Mckinney) in a transaction accounted for under the purchase method of accounting. Total consideration for the acquisition of Mckinney was approximately $26.1 million, including the repayment of existing indebtedness of Mckinney. The purchase price paid was allocated to the identifiable assets acquired of $21.6 million with the excess of $5.5 million representing goodwill and other intangible assets. The purchase price allocation was based upon the estimates of the fair value of the assets acquired. The acquisition, which added over 1,600 units at a value of approximately $21.4 million, was financed with borrowings under the Company's amended credit facility. Acquisition of Evergreen Mobile Company On February 1, 1999, the Company acquired all of the outstanding stock of Evergreen Mobile Company, a privately held Washington corporation (Evergreen), in a transaction accounted for under the purchase method of accounting. Total consideration for the acquisition of Evergreen was $36.2 million, including the repayment of existing indebtedness of Evergreen. The purchase price paid was allocated to the net identifiable assets acquired of $19.7 million with the excess of $16.5 million representing goodwill and other intangible assets. The purchase price allocation was based upon the estimates of the fair value of the net assets acquired. The acquisition was financed with borrowings under the Company's amended credit facility. 41 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Organization and Basis of Presentation (continued) New Accounting Pronouncements Goodwill and Other Intangible Assets. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 ("FAS No. 142"), Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with the Statement. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of $4.6 million, ($1.39 per share) per year. During 2002, the Company will perform the first of the required impairment tests of goodwill as of January 1, 2002. The results of these tests are not expected to have a material effect on the earnings and financial position of the Company. Impairment or Disposal of Long-Lived Assets. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 ("FAS No. 144"), Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. FAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company expects to adopt FAS No. 144 as of January 1, 2002 and does not anticipate it to have a material impact on the Company's financial position and results or operations. 2. Summary of Significant Accounting Policies The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. (a) Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. 42 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements 2. Summary of Significant Accounting Policies (continued) (b) Leasing Operations Equipment is leased generally under operating leases and, occasionally, under sales-type lease arrangements. Operating lease terms generally range from 3 months to 60 months, and contractually averaged approximately 12 months at December 31, 2001. Rents billed in advance are initially deferred and recognized as revenue over the term of the operating leases. Rental equipment is depreciated by the straight-line method using an estimated economic useful life of 10 to 20 years and an estimated residual value of 50%. Costs of improvements and betterments are capitalized, whereas costs of replacement items, repairs and maintenance are expensed as incurred. Costs incurred for equipment to meet particular lease specifications are capitalized and depreciated over the lease term. However, costs aggregating less than $1 per unit are generally expensed as incurred. (c) Deferred Financing Costs Costs of obtaining debt are amortized using the straight-line method over the term of the debt. (d) Property and Equipment Depreciation is computed by the straight-line method over estimated useful lives ranging from 15 to 40 years for buildings and improvements and 3 to 10 years for furniture and equipment. Maintenance and repairs are charged to expense as incurred. (e) Goodwill and Other Intangible Assets The excess of cost over fair values of net assets acquired in purchase transactions has been recorded as goodwill and is being amortized on a straight-line basis over 20 to 40 years. Other identifiable intangibles acquired of $6,452 include assembled workforce, covenant not to compete and customer base which are being amortized on a straight line basis over periods of 21 to 228 months. As of December 31, 2001 and 2000, accumulated amortization of goodwill and other intangible assets was $17,532 and $11,932, respectively. As discussed in Note 1, upon the adoption of FAS No. 142, the Company will cease amortization of goodwill. On a periodic basis, the Company evaluates the carrying value of its intangible assets to determine if the facts and circumstances suggest that intangible assets may be impaired. If this review indicates that intangible assets may not be recoverable, as determined by the undiscounted cash flow of the entity acquired over the remaining amortization period, the Company's carrying value of intangible assets would be reduced by the estimated shortfall of cash flows, on a discounted basis. Upon the adoption of FAS No. 142, as discussed above, the Company will modify their approach for reviewing for impairment. 43 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements 2. Summary of Significant Accounting Policies (continued) (f) Income Taxes Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (g) Earnings Per Share Earnings per share is computed based on weighted average number of common shares outstanding of 3,320,000 shares for 2001, 2000 and 1999. (h) Revenue Recognition The Company's revenue recognition policy is to recognize rental income ratably over the month on a daily basis. Billings for periods extending beyond the month end are recorded as deferred income. Sales revenue is recognized at the time the units are delivered and installed, with the exception of long-term construction-type sales contracts for which revenue is recognized under the percentage of completion method. Under this method, income is recognized based on the incurred costs to date compared to estimated total costs. All other revenue is recognized when related services have been performed. (i) Accounts Receivable The Company's accounts receivable consist of amounts due from customers throughout the United States and Canada. Collateral is generally not required. The Company provides an allowance for doubtful accounts receivable by a charge to operations in amounts equal to the estimated losses expected to be incurred in collection of the accounts. The estimated losses are based on historical collection experience and a review of the current status of the existing receivables. Customer accounts are written off against the allowance for doubtful accounts when an account is determined to be uncollectible. (j) Reclassifications Certain prior year amounts have been reclassified to conform to current year presentation. 44 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements 3. Property and Equipment Property and equipment consist of the following: December 31 2001 2000 ----------------------------------- Land $17,223 $13,089 Buildings and improvements 28,162 28,464 Furniture and equipment 59,755 47,106 ----------------------------------- 105,140 88,659 Less accumulated depreciation 31,358 23,893 ----------------------------------- Net property and equipment $73,782 $64,766 =================================== 4. Revolving Credit Facility and Long-Term Debt Debt consists of the following: December 31 2001 2000 ---------------------------------- Borrowings under revolving credit facility $564,922 $500,460 Term loan 58,050 58,650 9.875% senior notes 400,000 400,000 ---------------------------------- $1,022,972 $959,110 ================================== The loan agreement for the credit facility provides for a $600,000 (increased from $540,000 effective January 26, 2001) revolving credit facility maturing May 21, 2002 and a $60,000 term loan maturing May 21, 2005. Availability under the revolver, which is based upon a borrowing base calculation, was $32,258 at December 31, 2001. Interest was payable at a rate of either prime plus 0.75% or the Eurodollar rate plus 2.0%. The weighted average interest rates of the revolver under the credit agreement were 4.22% and 8.85% at December 31, 2001 and 2000, respectively. Principal payments due on the term loan are equal to 1% per year payable quarterly through March 31, 2002, with equal quarterly installments commencing June 30, 2002. Interest on the term loan is payable at a rate of either prime plus 2.0% or the Eurodollar rate plus 3.25%. The weighted average interest rates of the term loan under the credit agreement were 5.25% and 10.06% at December 31, 2001 and 2000, respectively. 45 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements 4. Revolving Credit Facility and Long-Term Debt (continued) Borrowings under the revolving credit facility are secured by a first priority lien on and security interest in the Company's rental equipment, accounts receivable and property and equipment. In addition to the restrictions and limitations described under the note agreement, including restrictions on the amount of dividends that the Company can pay to Holdings, the revolving credit facility loan agreement requires compliance with certain financial covenants including capital expenditures, interest coverage and fleet utilization levels. The Company was in compliance with such covenants during 2001. The 9.875% senior notes are due June 1, 2007 with interest payable semi-annually on June 1 and December 1 of each year. On or after June 1, 2002, the notes are redeemable at the option of the Company, at redemption prices of 104.938% and 102.469% during the 12-month periods beginning June 1, 2002 and 2003, respectively, and 100% thereafter. Upon the occurrence of a change of control, the notes may be redeemed as a whole at the option of the Company at a redemption price of 100% plus the applicable premium as defined in the agreement. The notes are general unsecured obligations of the Company and are subordinated in right of payment to all secured indebtedness. Additionally, the notes are guaranteed by Willscot, the Company's wholly owned subsidiary. Such guaranty is full and unconditional, and joint and several. The note agreement limits or restricts the Company's ability to incur additional indebtedness; make distributions of capital in an amount not to exceed 50% of accumulated earnings, dispose of property; incur liens on property; pay dividends to Holdings; and merge with or acquire other companies. At December 31, 2001 and 2000, the fair value of debt was approximately $1,016,972 and $883,110, respectively, based on the quoted market price of the senior notes and the book value of the credit facility, which are adjustable rate notes. Letter of credit obligations at December 31, 2001 were $2,820. See Note 11 of Notes to the Consolidated Financial Statements, Subsequent Events, regarding financing activities after December 31, 2001. 46 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements 5. Income Taxes Deferred income taxes related to temporary differences between the tax bases of assets and liabilities and the respective amounts reported in the financial statements are summarized as follows:
December 31 2001 2000 -------------------------- Deferred tax liabilities: Cost basis in excess of tax basis of assets and accelerated tax depreciation: Rental equipment $243,222 $220,502 Property and equipment 818 1,074 Other 2,626 2,631 -------------------------- Total deferred tax liabilities 246,666 224,207 -------------------------- Deferred tax assets: Allowance for doubtful accounts 467 390 Rents billed in advance 10,321 10,127 Net operating loss carryovers 80,379 74,743 Alternative minimum tax credit carryovers 1,759 1,759 Other 4,470 5,271 -------------------------- 97,396 92,290 Less: valuation allowance (3,400) (3,400) -------------------------- Total deferred tax assets 93,996 88,890 -------------------------- Net deferred tax liabilities $152,670 $135,317 ==========================
At December 31, 2001, the Company had net operating loss carryovers available for federal income tax purposes of $199,562 (net of related valuation allowance), of which $80,186 (net of related valuation allowance) relates to pre-recapitalization loss carryovers that are subject to certain limitations under the Internal Revenue Code. The Company is in the process of implementing a strategy to effectively release these limitations. However, ultimately the results may not be known for some time. These net operating loss carryovers expire at various dates from 2003 to 2021. Also, alternative minimum tax credit carryovers of approximately $1,759 are available without expiration limitations. An investment credit carryover of approximately $860 expired on December 31, 2000, and the Company recorded a charge to income tax expense accordingly. 47 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements 5. Income Taxes (continued) Income tax expense consists of the following:
Years ended December 31 2001 2000 1999 ------------------------------------------- Current $ 252 $ 254 $ 876 Deferred 17,353 14,703 13,837 ------------------------------------------- $17,605 $14,957 $14,713 =========================================== Federal $13,703 $12,644 $12,615 State 2,489 2,313 2,098 Foreign 1,413 - - ------------------------------------------- $17,605 $14,957 $14,713 =========================================== The provision for income taxes is reconciled to the amount computed by applying the Federal corporate tax rate of 35% to income before income taxes as follows: Years ended December 31 2001 2000 1999 ------------------------------------------- Income tax at statutory rate $14,096 $10,876 $11,207 State income taxes, net of federal tax benefit 1,618 1,503 1,144 Amortization of goodwill and other intangible assets 1,776 1,702 1,838 Other 115 876 524 ------------------------------------------- $17,605 $14,957 $14,713 ===========================================
48 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements 6. Commitments The Company is obligated under noncancelable operating leases of certain equipment, vehicles and parcels of land. At December 31, 2001 approximate future minimum rental payments are as follows: 2002 $ 8,407 2003 6,692 2004 5,442 2005 4,439 2006 3,244 Thereafter 3,541 ----- Total minimum future lease payments $31,765 ======= Rent expense was $11,490 in 2001, $9,839 in 2000, and $8,817 in 1999. 7. Employee Benefit Plans The Company has adopted a defined contribution plan (the 401(k) Plan) which is intended to satisfy the tax qualification requirements of Sections 401(a), 401(k), and 401(m) of the Internal Revenue Code of 1986 (the Code). The 401(k) Plan covers substantially all employees and permits participants to contribute the lesser of (i) 15% of their annual compensation from the Company or (ii) the dollar limit described in Section 402(g) of the Code ($10,500 in 2001). All amounts deferred under this salary reduction feature are fully vested. The 401(k) Plan has a "matching" contribution feature under which the Company may contribute a percentage of the amount deferred by each participant. Such percentage, if any, is determined by the Board of Directors at their discretion. The Plan also has a "profit sharing" feature, under which the Company may contribute, at its discretion, an additional amount allocable to the accounts of active participants meeting the aforementioned eligibility requirements. Contributions made by the Company on behalf of a 401(k) Plan participant vest ratably during the first five years of employment and 100% thereafter. Matching contributions by the Company to the 401(k) Plan were approximately $587 in 2001, $477 in 2000, and $395 in 1999. No contributions have been made by the Company under the profit-sharing feature. The Company has adopted a Deferred Compensation Plan for Executives which is meant to be an unfunded deferred compensation plan maintained for a select group of management within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974. This plan allows key employees to defer a specified amount of their compensation until termination or upon the occurrence of other specified events. Such amounts are placed in the 49 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements 7. Employee Benefit Plans (continued) investment vehicles of the employee's choice. As of December 31, 2001, the total amount deferred under this plan, including earnings, was $1,370. Holdings adopted a stock option plan for certain key employees of the Company. The plan was subsequently amended and restated in 1998 (the "Amended and Restated 1997 Employee Stock Option Plan"). Under the plan, up to 479,500 options to purchase Holdings' outstanding common stock may be granted. The options are granted with an exercise price equal to the fair value of the shares as of the date of grant. Fifty percent of the options granted vest ratably over five years, and fifty percent vest based on the Company meeting certain financial goals over the same five periods. All options expire 10 years from the date of grant. The Company is accounting for the options using variable plan accounting. Under this plan, 23,300 and 46,100 options were granted in 2001 and 2000, respectively. For those options in which both the grant date and the measurement date were known, the Company recognized compensation (income)/expense in the amount of ($278), $479 and $1,899 in 2001, 2000, and 1999, respectively. Prior to the 1997 recapitalization, the Company had adopted a stock option plan for certain key employees ("1994 Employee Stock Option Plan"). The options were granted with an exercise price equal to the fair value of the shares as of the date of grant. All options outstanding under this plan became fully vested in conjunction with the recapitalization. Pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," and has been determined as if the Company had accounted for its employee stock options under the minimum value method of that Statement. The minimum value for these options was estimated at the date of grant by calculating the excess of the fair value of the stock at the date of grant over the present value of both the exercise price and the expected dividend payments, each discounted at the risk free rate, over the expected exercise life of the option. The following weighted average assumptions were used for 2001, 2000 and 1999: risk-free interest rate of 4.5%, 6.3%, and 5.6%, respectively; weighted average expected life of the options of 5 years; and no dividends. For purposes of pro forma disclosures, the estimated minimum value of the options is amortized to expense over the options' vesting period. Note that the effects of applying SFAS 123 for pro forma disclosure in the current year are not necessarily representative of the effects on pro forma net income for future years. The Company's pro forma information follows: 2001 2000 1999 -------------------------------------------------- Pro forma net income $22,919 $15,482 $16,946 Pro forma earnings per share $ 6.90 $ 4.66 $ 5.10 50 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements 7. Employee Benefit Plans (continued) A summary of stock option activity and related information for the years ended December 31 follows. Amounts have been restated for the three-for-one stock split granted by Holdings in December 1997:
2001 2000 1999 ------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------------------------------------------------------------------------------- Beginning balance 1,120,540 $23.56 1,107,840 $22.68 1,099,640 $22.12 Granted 23,300 50.67 46,100 50.67 29,800 50.67 Canceled - - - - - - Forfeited (18,700) (38.45) (33,400) (31.77) (21,600) (32.07) ------------------------------------------------------------------------------- Ending balance 1,125,140 23.87 1,120,540 23.56 1,107,840 $22.68 Exercisable at end of year 975,506 20.26 871,030 18.54 950,165 $19.94 Weighted average minimum value of options granted during year $ 9.34 $19.45 $12.08
Exercise prices for options outstanding as of December 31, 2001 are detailed in the following table. The weighted-average remaining contractual life of those options is 5.38 years. ------------------------------------------------------------------------------- Weighted Shares Outstanding at Shares Exercisable at Average Exercise Price December 31, 2001 December 31, 2001 Remaining Contractual Life ------------------------------------------------------------------------------- $ 4.59 73,200 73,200 3.3 years $ 9.60 278,100 278,100 4.3 years $18.39 275,190 275,190 5.3 years $30.50 344,000 296,761 6.0 years $50.67 154,650 52,255 7.9 years ------------------------------------------------------------------------------- 51 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements 8. Supplemental Condensed Consolidating Financial Information The 9.875% senior notes issued by the Company are guaranteed by its wholly owned subsidiary, Willscot, which acts as a full and unconditional, and joint and several subordinated guarantor of the notes. See Note 1 for a description of the operations of this subsidiary. Additionally, Willscot has entered into a management agreement with the Company whereby it pays a fee to the Company in an amount equal to the rental and other income (net of depreciation expense) it earns from the Company. Therefore, Willscot earns no net income. The following summarizes condensed consolidating financial information for the Company (Parent) and Willscot (Guarantor Subsidiary).
As of December 31, 2001 ------------------------------------------------------------- Guarantor Parent Subsidiary Eliminations Consolidated ------------------------------------------------------------- Balance Sheet Assets: Rental equipment, at cost $ 305,549 $ 739,364 $ - $1,044,913 Less accumulated depreciation 61,980 116,066 178,046 ------------------------------------------------------------ Net rental equipment 243,569 623,298 - 866,867 Property and equipment, net 73,782 73,782 Investment in Willscot 629,747 (629,747) - Other assets 297,886 6,449 - 304,335 -------------------------------------------------------------- Total assets $1,244,984 $ 629,747 $(629,747) $1,244,984 ============================================================== Liabilities: Accounts payable and accrued expenses $ 50,287 $ - $ - $ 50,287 Long-term debt and revolving credit facility 1,022,972 1,022,972 Other liabilities 178,466 178,466 ------------------------------------------------------------- Total liabilities 1,251,725 - - 1,251,725 ------------------------------------------------------------- Equity (deficit): (6,741) 629,747 (629,747) (6,741) ------------------------------------------------------------- Total liabilities and stockholder's equity $1,244,984 $ 629,747 $(629,747) $1,244,984 (deficit) =============================================================
52 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements 8. Supplemental Condensed Consolidating Financial Information (continued)
As of December 31, 2000 ---------------------------------------------------------- Guarantor Parent Subsidiary Eliminations Consolidated ----------------------------------------------------------- Balance Sheet Assets: Rental equipment, at cost $ 263,768 $ 691,660 $ - $ 955,428 Less accumulated depreciation 57,390 98,044 155,434 ---------------------------------------------------------- Net rental equipment 206,378 593,616 - 799,994 Property and equipment, net 64,766 64,766 Investment in Willscot 597,673 (597,673) - Other assets 277,081 4,057 - 281,138 ------------------------------------------------------------ Total assets $1,145,898 $ 597,673 $(597,673) $1,145,898 ============================================================ Liabilities: Accounts payable and accrued expenses $ 54,735 $ - $ - $ 54,735 Long-term debt and revolving credit facility 959,110 959,110 Other liabilities 160,074 160,074 ----------------------------------------------------------- Total liabilities 1,173,919 - - 1,173,919 ----------------------------------------------------------- Equity (deficit): (28,021) 597,673 (597,673) (28,021) ---------------------------------------------------------- Total liabilities and stockholder's equity $1,145,898 $ 597,673 $(597,673) $1,145,898 (deficit): ========================================================== For the Year Ended December 31, 2001 --------------------------------------------------------- Guarantor Parent Subsidiary Eliminations Consolidated --------------------------------------------------------- Results of Operations Total revenues $ 431,703 $ 73,698 $ (13,145) $ 492,256 Gross profit 180,637 47,981 - 228,618 Other expenses 153,511 47,981 (13,145) 188,347 Net income $ 22,666 $ - $ - $ 22,666
53 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements 8. Supplemental Condensed Consolidating Financial Information (continued)
For the Year Ended December 31, 2000 ----------------------------------------------------------- Guarantor Parent Subsidiary Eliminations Consolidated ----------------------------------------------------------- Results of Operations Total revenues $381,430 $ 66,190 $ (15,474) $432,146 Gross profit 173,751 43,476 - 217,227 Other expenses 158,149 43,476 (15,474) 186,151 Net income $ 16,119 $ - $ - $ 16,119 For the Year Ended December 31, 1999 ----------------------------------------------------------- Guarantor Parent Subsidiary Eliminations Consolidated ----------------------------------------------------------- Results of Operations Total revenues $362,123 $ 60,476 $ (16,794) $405,805 Gross profit 162,788 40,401 - 203,189 Other expenses 147,562 40,401 (16,794) 171,169 Net income $ 17,307 $ - $ - $ 17,307 For the Year Ended December 31, 2001 ------------------------------------------------------------ Guarantor Parent Subsidiary Eliminations Consolidated ------------------------------------------------------------ Cash Flows Cash provided by operating activities $ 39,674 $ 21,545 $ - $ 61,219 Cash used in investing activities (71,027) (55,399) - (126,426) Cash (used in) provided by financing Activities 28,494 34,751 - 63,245 ------------------------------------------------------------ Net change in cash (2,859) 897 - (1,962) Cash at beginning of period 2,546 - - 2,546 ------------------------------------------------------------ (Overdraft)/cash at end of period $ (313) $ 897 $ - $ 584 ============================================================
54 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements 8. Supplemental Condensed Consolidating Financial Information (continued)
For the Year Ended December 31, 2000 --------------------------------------------------------- Guarantor Parent Subsidiary Eliminations Consolidated ----------------------------------------------------------- Cash Flows Cash provided by operating activities $ 65,403 $ 21,574 $ - $ 86,977 Cash used in investing activities (56,446) (71,858) - (128,304) Cash (used in) provided by financing Activities (7,052) 50,284 - 43,232 ----------------------------------------------------------- Net change in cash 1,905 - - 1,905 Cash at beginning of period 641 - - 641 ----------------------------------------------------------- Cash at end of period $ 2,546 $ - $ - $ 2,546 ============================================================ For the Year Ended December 31, 1999 ------------------------------------------------------------ Guarantor Parent Subsidiary Eliminations Consolidated ------------------------------------------------------------ Cash Flows Cash provided by operating activities $ 50,291 $ 22,047 $ - $ 72,338 Cash used in investing activities (61,417) (81,306) - (142,723) Cash provided by financing activities 10,971 59,259 - 70,230 ------------------------------------------------------------ Net change in cash (155) - - (155) Cash at beginning of period 796 - - 796 ------------------------------------------------------------ Cash at end of period $ 641 $ - $ - $ 641 =============================================================
55 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements 9. Related Party Transactions During 2001, 2000 and 1999, the Company paid dividends of $60, $55, and $55, respectively, to Holdings primarily to fund normal operating expenses. 10. Contingencies The Company is involved in various lawsuits and claims arising out of the normal course of its business. In addition, the Company has insurance policies to cover general liability and workers compensation related claims. In the opinion of management, the ultimate amount of liability not covered by insurance, if any, under pending litigation and claims will not have a materially adverse effect on the financial position or operating results of the Company. 11. Subsequent Events In February 2002, the Company issued $150,000 of additional 9.875% senior unsecured notes under its existing indenture. The additional notes, which are subject to all of the same terms and conditions as the $400,000 of previously issued notes, were issued at a price of 98.751%. Net proceeds from the issuance were used to permanently repay the outstanding balance of the term loan ($58,050 plus accrued interest) and to reduce outstanding borrowings under the revolver. In March 2002, the Company entered into a new credit facility, the net proceeds from which were used to refinance its existing credit facility. The new loan agreement provides for a $460 million revolving credit facility and a $210 million term loan both maturing on December 31, 2006. The facility also provides for up to an additional $30 million in term or revolver commitments. Interest on borrowings under both the term and revolver is payable at a rate of either prime plus 1.75% or the Eurodollar rate plus 3.00%. Such rates may decrease based upon the Company achieving specified leverage ratio thresholds. Principal payments due on the term loan are equal to 1% per year payable quarterly beginning June 30, 2002, with the remaining balance due December 31, 2006. Borrowings under the new credit facility, which are based upon a borrowing base calculation, are secured by a first priority lien on and security interest in the Company's rental equipment, accounts receivable and property and equipment. In addition to the restrictions and limitations described under the note agreement, including restrictions on the amount of dividends that the Company can pay to Holdings, the new loan agreement requires compliance with certain financial covenants including capital expenditures, interest coverage, leverage and fleet utilization levels. 56 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. 57 PART III Item 10. Directors and Executive Officers of the Registrant Directors and Officers Our directors and executive officers are as follows: Name Age Position ---- --- -------- Barry P. Gossett 61 Director and Chairman Emeritus of the Board Gerard E. Holthaus 52 President and Chief Executive Officer; Director and Chairman of the Board James N. Alexander 42 Director Michael F. Finley 40 Director Steven B. Gruber 44 Director Brian Kwait 40 Director David P. Spalding 47 Director Joseph F. Donegan 51 Executive Vice President - U.S. Field Operations J. Collier Beall 54 Senior Vice President and Southern Region Vice President Gerard E. Keefe 45 Senior Vice President and Chief Financial Officer William C. LeBuhn 39 Senior Vice President - Marketing and Human Resources Dean T. Fisher 55 Vice President - Operations William G. Gessner 43 Vice President - Information Services John B. Ross 53 Vice President and General Counsel --------------- The directors are elected annually and serve until their successors are duly elected and qualified. No director of the Company receives any fee for attendance at Board of Directors meetings or meetings of Committees of the Board of Directors. Outside directors are reimbursed for their expenses for any meeting attended. Executive officers of the Company are elected by the Board of Directors and serve at the discretion of the Board of Directors. Barry P. Gossett is Chairman Emeritus of the Board. He is currently a partner in Pascal Turner Partners, a real estate investment firm. He formerly served as Chairman of the Board from October 1995 to April 1999 and Chief Executive Officer of the Company from October 1995 to April 1997. Prior to this, he served as President and Chief Executive Officer of the Company from 1990 to October 1995. Mr. Gossett has been a director and employee of the Company or its predecessor for over thirty years. Before joining the Company, Mr. Gossett was a partner at Buchanan and Company, a Washington, D.C. accounting firm. Mr. Gossett was one of the founders of the Modular Building Institute, an industry trade group which represents member companies. Mr. Gossett also serves on the Board of Directors of Nanofab Inc., DeCorp Inc. and several charitable and educational institutions. Gerard E. Holthaus was elected Chairman of the Board in April 1999 and has been President and Chief Executive Officer of the Company since April 1997. He has been with the Company since June 1994, and served as President and Chief Operating Officer from October 1995 to April 1997 and was Executive Vice President and Chief Financial Officer prior thereto. He has served as a director 58 since June 1994. Before joining the Company, Mr. Holthaus served as Senior Vice President of MNC Financial, Inc. from April 1988 to June 1994. From 1971 to 1988, Mr. Holthaus was associated with the accounting firm of Ernst & Young (Baltimore), where he served as a partner from 1982 to 1988. He also serves on the Board of Directors of Grove Worldwide, LLC and The Baltimore Life Companies. James N. Alexander was elected as a director of the Company in May 1997. Mr. Alexander has been Chief Financial Officer of Keystone since January 2000 and a Vice President of Keystone since August 1995. He has been a Partner of Oak Hill Capital Management, Inc., which provides investment advisory services to Oak Hill Capital Partners, L.P., since February 1999. Prior to joining Keystone, he worked at Goldman, Sachs & Co. where he was a Vice President in the Fixed Income Division from August 1993 to July 1995. Mr. Alexander is also a director for FEP Capital Holdings, L.P., Oak Hill Strategic Partners, L.P., 230 Park Investors, L.L.C. and 237 Park Investors, L. L. C. Michael F. Finley was elected as a director of the Company in May 1997. Mr. Finley has been a Managing Director of Cypress since 1998 and has been a member of Cypress since its formation in April 1994. Prior to joining Cypress, he was a Vice President in the Merchant Banking Group at Lehman Brothers Inc. Steven B. Gruber was elected as a director of the Company in February 2002. From February 1999 to present, Mr. Gruber has been a Managing Partner of Oak Hill Capital Management, Inc., the manager of Oak Hill Capital Partners, L.P. From March 1992 to present he has been a Managing Director of Oak Hill Partners, Inc. From February 1994 to present, Mr. Gruber has also been an officer of Insurance Partners Advisors, L.P., an investment advisor to Insurance Partners, L.P. From October 1992 to present, he has been a Vice President of Keystone, Inc. Mr. Gruber is also a director of American Skiing Company, Travel Centers of America, Inc., SNTL Corporation and several private companies related to Keystone, Inc. and Oak Hill Capital Partners L.P. Brian Kwait was elected as a director of the Company in September 1998 and also served in that capacity from December 1993 through May 1997. Mr. Kwait is a Member and Managing Principal of Odyssey Investment Partners, LLC since April 1997 and was a Principal of Odyssey Partners, LP from August 1989 to March 1997. Mr. Kwait is also a director of Velocita Corp. and IWO Holdings, Inc. David P. Spalding was elected as a director of the Company in May 1997. Mr. Spalding has been a Vice Chairman of Cypress since its formation in April 1994. Prior to joining Cypress, he was a Managing Director in the Merchant Banking Group at Lehman Brothers Inc. Mr. Spalding is also a director of AMTROL Inc., Frank's Nursery & Crafts, and Lear Corporation. Joseph F. Donegan has been Executive Vice President of U.S. Field Operations of the Company since May 2001. He was Senior Vice President and Northern Division Manager of the Company since September 1996 and served as the Northeast Regional Manager prior thereto. Mr. Donegan's responsibilities include the implementation of corporate policies, attainment of branch profitability, fleet utilization management and development of personnel for the entire United States branch network. Mr. Donegan has over 20 years of experience within the industry. From 1991 through May 1994, Mr. Donegan held similar positions with Space Master Buildings, Kullman Industries and Bennett Mobile Offices. 59 J. Collier Beall has been Senior Vice President and Southern Division Manager since September 1996 and was the Southeast Regional Manager prior to that. Mr. Beall's responsibilities include the implementation of corporate policies, attainment of branch profitability, fleet utilization management and development of personnel. Prior to joining the Company in 1977, Mr. Beall was a Regional Manager for Modular Sales and Leasing Company based in Georgia. Gerard E. Keefe has been Senior Vice President and Chief Financial Officer of the Company since April 1997. He formerly served as Vice President, Fleet and Finance with responsibilities including overall fleet management and purchasing, treasury functions, planning and budgeting from February 1995 to April 1997. Prior to joining the Company, Mr. Keefe was with The Ryland Group, a national homebuilder, from 1993 to 1995. From 1991 to 1993, he was a management consultant serving the manufacturing, distribution and financial services industries, and from 1977 to 1991, he was with Ernst & Young, (Baltimore), most recently as a Senior Manager. William C. LeBuhn has been Senior Vice President - Marketing and Human Resources of the Company since March 2002. He formerly served as Vice President - Marketing and Human Resources from July 1999 to March 2002, and was Vice President of Human Resources from January 1994 to July 1999. While still involved in the Human Resource related programs, Mr. LeBuhn's primary responsibilities now include the overall strategic marketing plans. Prior to joining the Company, Mr. LeBuhn was HR Manager for Sherwin-Williams' Eastern Division from 1992 to January 1994, Director of HR for Consolidated International Insurance Group, Inc. from 1988 to 1992, and HR Officer for Meridian Bancorp from 1984 to 1988. Dean T. Fisher joined our company as Vice President of Operations in October 2001. His operational responsibilities include credit, invoicing, document compliance, cash posting, collections and recovery. Prior to joining our company, Mr. Fisher was Senior Vice President, Division Head of Global Customer Services for VISA International, a major credit card company, from 1997 to 2001. From 1986 to 1997, he was with some of the predecessors to Bank of America as a Senior Vice President. From 1977 to 1986, he was with a predecessor company of Key Corp., a financial institution. William G. Gessner has been Vice President of Information Services of the Company since November 1998 with responsibilities including the overall management of the Company's business information systems and technology initiatives. He formerly served as Director of Information Services from July 1996 to November 1998. Prior to joining the Company, Mr. Gessner was Director of Corporate Information Systems at ARINC, Incorporated, an engineering services and telecommunications company in Annapolis, Maryland, from 1988 to 1996. John B. Ross has been Vice President and General Counsel for the Company since February 1995. Prior to joining the Company, Mr. Ross was Corporate Counsel for MNC Leasing Corporation from 1983 to 1991 and Special Assets Counsel for MNC Financial, Inc. from 1991 to 1993. Prior to joining MNC Leasing Corporation and during the period from 1993 to 1995, he was engaged in the private practice of law in both North Carolina and Maryland. 60 Item 11. Executive Compensation Summary Compensation Table The following table sets forth certain information concerning the compensation paid or accrued for the last three completed fiscal years of our five highest paid officers (the "Named Executive Officers") who received total compensation in excess of $100,000 during 2001.
Long-Term Compensation Awards Annual --------------- Compensation Securities All Other ------------ Underlying Compensation Year Salary Bonus Options(1) $ (2) ---- ------ ----- -------------- ----------------- Gerard E. Holthaus President and Chief Executive Officer ....................2001 $439,177 $139,500 -- $9,433 2000 413,600 103,500 -- 9,433 1999 371,292 112,500 -- 9,183 Joseph F. Donegan Executive Vice President - U.S. Field Operations..........2001 305,245 45,000 -- 5,375 2000 260,609 33,750 1,000 4,625 1999 247,387 36,000 -- 4,149 J. Collier Beall Senior Vice President and Southern Region V.P.............2001 275,074 40,500 -- 2,616 2000 258,837 33,750 -- 2,637 1999 244,432 36,000 -- 2,270 Gerard E. Keefe Senior Vice President and Chief Financial Officer.........2001 174,513 54,000 -- 4,500 2000 159,675 40,500 -- 4,125 1999 149,387 45,000 -- 3,825 William C. LeBuhn Senior Vice President-Marketing and Human Resources.......2001 144,073 43,200 -- 1,938 2000 133,708 33,000 1,000 -- 1999 124,746 36,000 -- --
(1) Represents options granted to purchase shares of Holdings pursuant to the 1997 Plan for options granted in 2000. (2) Represents employer match under the 401(k) plan. In addition, amounts for Mr. Holthaus include a disability insurance premium of $4,058 in each of 2001, 2000 and 1999. 61 Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values The following table contains information covering the number and value of unexercised stock options held by the Named Executive Officers at the end of the fiscal year. Number of Securities Underlying Unexercised Value of Unexercised Options at In-the-Money Options Fiscal Year End (1) At Fiscal Year End ($) Name Exercisable/Unexercisable (2) Exercisable/Unexercisable(3) ------------- ----------------------------- ---------------------------- Gerard E. Holthaus..... 273,013 / 21,478 $8,343,167 / $175,066 Joseph F. Donegan ..... 100,875 / 7,975 3,036,840 / 71,665 J. Collier Beall....... 101,725 / 7,175 3,084,521 / 71,665 Gerard E. Keefe........ 88,250 / 6,650 2,603,591 / 61,427 William C. LeBuhn...... 92,650 / 6,350 2,923,655 / 61,427 (1) No options were exercised by the Named Executive Officers during fiscal 2001. (2) For options granted under the 1997 Plan, 50% vest ratably over five years and 50% vest ratably based on us meeting certain financial targets over the same five periods. All other options became fully vested in conjunction with the Recapitalization. (3) Based on the estimated fair market value at December 31, 2001. 62 Scotsman Holdings, Inc. 1994 Employee Stock Option Plan In March 1995, a stock option plan was adopted for certain of our key employees. All options outstanding under this plan became fully vested in conjunction with the Recapitalization. The options are exercisable for a period of 10 years from date of grant. Scotsman Holdings, Inc. Amended and Restated 1997 Employee Stock Option Plan In December 1997, a stock option plan was adopted for certain of our key employees, which was amended and restated in December 1998. Under the plan, up to 479,500 options to purchase Holdings' common stock may be granted. In 2001, 23,300 options were granted under this plan at an offer price of $50.67 per share. Fifty percent of the options granted vest ratably over five years and fifty percent vest ratably based on the Company meeting certain financial targets over the same five periods. All options expire 10 years from the date of grant. 401(k)/Defined Contribution Plan On May 1, 1993, we adopted a defined contribution plan (the "401(k) Plan") which is intended to satisfy the tax qualification requirements of Sections 401(a), 401(k), and 401(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Each of our employees is eligible to participate in the salary reduction feature of the 401(k) Plan. The 401(k) Plan permits participants to contribute the lesser of (i) 15% of their annual compensation from the Company or (ii) the dollar limit described in Section 402(g) of the Code ($10,500 in 2001). All amounts deferred by a participant under the 401(k) Plan's salary reduction feature by a participant are fully vested. The 401(k) Plan has a "matching" contribution feature under which the we may contribute a percentage of the amount deferred by each participant who makes salary reduction deferrals to the 401(k) Plan, and is employed by us on the last day of the year. This percentage, if any, is determined by the Board of Directors at their discretion and is communicated to 401(k) Plan participants during the year for which the matching contribution will be made. Matching contributions made on behalf of a 401(k) Plan participant are subject to a deferred vesting schedule based on the number of years a participant has been employed by us. A participant becomes 20%, 40%, 60%, 80% and 100% vested in the matching contributions made to the 401(k) Plan on his or her behalf after completion of 1, 2, 3, 4 and 5 years of service with us, respectively. The 401(k) Plan also has a "profit sharing" feature, under which we may contribute, in our discretion, an additional amount which is allocated to the accounts of active participants who have been employed for 12 consecutive months by the Company, who have completed 1,000 hours of service during the Plan Year and who are employed on the last day of the year, based on such participants' compensation for the year. The vesting schedule for these contributions is identical to that for matching contributions. 63 A participant's 401(k) Plan benefits generally are payable upon the participant's death, disability, retirement, or other termination of employment. Payments under the 401(k) Plan are made in a lump sum. In 2001, we made matching contributions to the 401(k) Plan participants in an aggregate amount of $586,507. Deferred Compensation Plan for Executives During 1997, we adopted a deferred compensation plan for executives (the "Plan") which is meant to be an unfunded deferred compensation plan maintained for a select group of management within the meaning of Sections 201(2), 301(a)(3) and 401 (a)(1) of the Employee Retirement Income Security Act of 1974. The Plan allows key employees to defer a specified amount of their compensation until termination or upon the occurrence of other specified events. Such amounts are placed in the investment vehicles of the employee's choice. As of December 31, 2001, the total amount deferred under this Plan, including earnings, was $1,369,542. Compensation Committee Interlocks and Insider Participation During 2001, the Compensation Committee was comprised of two outside directors: David P. Spalding and Daniel L. Doctoroff. Mr. Doctoroff, who was a managing partner of Oak Hill Capital Management, Inc. and a Vice President of Keystone, and a director of our company since May 1997, resigned from our board in December, 2001. Steven B. Gruber has replaced Mr. Doctoroff as a member of our Compensation Committee in 2002. No member of the Committee has any interlocking or insider relationship with the Company which is required to be reported under the applicable rules and regulations of the Securities and Exchange Commission. 64 Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information regarding the beneficial ownership of our Common Stock by (i) all persons owning of record or beneficially to the knowledge of the Company 5% or more of the issued and outstanding Common Stock, (ii) each director individually, (iii) each executive officer named in the Summary Compensation Table, and (iv) all executive officers and directors as a group.
Shares of Name Common Stock Percentage ---- ------------ ---------- Cypress Merchant Banking Partners L.P.(1)(2)(3) c/o The Cypress Group L.L.C. 65 East 55th Street New York, NY 10022........................................ 2,431,523 39.24% Cypress Offshore Partners L.P.(1)(2)(3) Bank of Bermuda (Cayman) Limited P.O. Box 513 G.T. Third Floor British American Tower George Town, Grand Cayman Cayman Islands, B.W.I............................................. 125,939 2.03 Scotsman Partners, L.P.(2)(3)(4) 201 Main Street Fort Worth, TX 76102 ............................................2,557,462 41.27 Odyssey Investment Partners Fund, LP(3)(5) 280 Park Avenue New York, NY 10017 ............................................ 716,536 11.56 James N. Alexander(6) ............................................ --- --- Michael F. Finley(7) ............................................ --- --- Steven B. Gruber(6) ............................................ --- --- Brian Kwait(8)......................................................... --- --- David P. Spalding(7)................................................... --- --- Barry P. Gossett (3)(9)................................................ 124,407 2.01 Gerard E. Holthaus (10)(11)(12)........................................ 311,113 4.81 Joseph F. Donegan (10)(11)(12)......................................... 104,475 1.66 J. Collier Beall (10)(11)(12).......................................... 106,225 1.69 Gerard E. Keefe (10)(11)(12)........................................... 89,750 1.43 William C. LeBuhn (10)(11)(12)......................................... 95,650 1.52 All executive officers and directors as a group........................ 910,145 13.13
(1) Cypress Merchant Banking Partners L.P. and Cypress Offshore Partners L.P. are controlled by The Cypress Group L.L.C. or affiliates thereof. Certain executives of The Cypress Group L.L.C., including Messrs. Jeffrey Hughes, James Singleton, David Spalding and James Stern, 65 may be deemed to share beneficial ownership of the shares shown as beneficially owned by Cypress Merchant Banking Partners L.P. and Cypress Offshore Partners L.P. Each of such individuals disclaims beneficial ownership of such shares. (2) Does not include shares beneficially owned by members of management, as to which the Investor Group (as defined herein) has an irrevocable proxy. (3) Under the Investor Stockholders Agreement (as defined herein), the Cypress Stockholders (as defined herein), Scotsman Partners, L.P., and Odyssey Investment Group (as defined herein) have agreed to vote their shares for certain nominees for director and other matters and the Cypress Stockholders, Scotsman Partners, L.P., Odyssey Investment Group and Mr. Gossett have agreed to restrict the transfer of their shares subject to certain exceptions. See "Certain Relationships and Related Transactions--Investor Stockholders Agreement." (4) The shares of Holdings Common Stock beneficially owned by Scotsman Partners, L.P. may be deemed to be owned by J. Taylor Crandall, Group 31, Inc. ("Group 31") and Arbor Scotsman, L.P. ("AS"). Mr. Crandall is the sole stockholder of Group 31, which is the general partner of AS, which, in turn, is the general partner of Scotsman Partners, L.P. Group 31 and AS disclaim such beneficial ownership. The address of Mr. Crandall, Group 31 and AS is the same as Scotsman Partners. Mr. Crandall is a Managing Partner of Oak Hill Capital Management, Inc. (5) Includes 1,461 shares that are beneficially owned by Odyssey Coinvestors, LLC, an affiliate of Odyssey Investment Partners, LLC (together, "Odyssey Investor Group"). The General Partner of Odyssey Investment Partners Fund, LP is Odyssey Capital Partners, LLC a Delaware limited liability company (the "General Partner of Odyssey") and the Managing Member of Odyssey Coinvestors, LLC is Odyssey Investment Partners, LLC, a Delaware limited liability company. Paul D. Barnett, Stephen Berger, William Hopkins, Brian Kwait and Muzzi Mirza are Managing Members of Odyssey Capital Partners, LLC and Odyssey Investment Partners, LLC, and, therefore, may each be deemed to share voting and investment power with respect to 716,536 shares and votes deemed to be owned by the General Partner of Odyssey and Odyssey Investment Partners, LLC. Each Messrs. Barnett, Berger, Hopkins, Kwait and Mirza disclaims beneficial ownership of such shares. (6) Such person's address is c/o Scotsman Partners, L.P. (7) Such person's address is c/o Cypress Merchant Banking Partners L.P. (8) Such person's address is c/o Odyssey Investment Partners Fund, LP. (9) Such person's address is c/o Pascal-Turner Partners, 3300 Eastern Boulevard, Baltimore, Maryland 21220-2825. (10) Such person's address is the address of the Company's principal executive offices. 66 (11) Each member of management is a party to the Stockholders' Agreement whereby he or she has agreed to limit the transferability of his or her shares. See "Certain Relationships and Related Transactions--Stockholders' Agreement." (12) Includes 273,013, 100,875, 101,725, 88,250, 92,650, and 733,538 shares held as options by Messrs. Holthaus, Donegan, Beall, Keefe and LeBuhn and all executive officers as a group, respectively, which are exercisable within 60 days. 67 Item 13. Certain Relationships and Related Transactions The Recapitalization Holdings, the Odyssey Investor Group, certain other existing stockholders of Holdings, certain partnerships affiliated with The Cypress Group L.L.C. and Scotsman Partners, L.P. are parties to a Recapitalization Agreement dated April 11, 1997 pursuant to which the Recapitalization occurred. See "Recapitalization". Stockholders' Agreement Cypress Merchant Banking Partners, L.P., Cypress Offshore Partners, L.P., Scotsman Partners, L.P. (collectively the "Investor Group"), the Management Stockholders and Holdings are parties to a Management Stockholders' and Optionholders' Agreement dated as of September 14, 1998 (the "Stockholders' Agreement"), which contains certain rights and restrictions with respect to the transfer of each Management Stockholder's shares of Common Stock. The Stockholders' Agreement prohibits the transfer of any shares of Common Stock by Management Stockholders (other than sales required in connection with the disposition of all shares of Common Stock owned by the Investor Group and its affiliates) until the earlier of twelve months after an initial public offering of the equity of Holdings for designated officers (and sixty days after an initial public offering for non-designated officers) or the day after the Investor Group and its affiliates have disposed of more than 33-1/3% of the shares of Common Stock originally acquired by the Investor Group, and thereafter, the aggregate number of shares which may be transferred by each Management Stockholder in any calendar year (other than certain required sales) may not exceed 25% of the number of shares acquired pursuant to the Subscription Agreement between Holdings and such Management Stockholder plus the number of any shares acquired pursuant to the exercise of stock purchase options. In addition, the Stockholders' Agreement restricts the transfer of shares of Common Stock by each Management Stockholder for a period of five years from the date of purchase of such shares, except certain permitted transfers and transfers pursuant to an effective registration statement or in accordance with Rule 144 under the Securities Act. Upon the expiration of such five-year period, subject to the foregoing restrictions, each Management Stockholder may transfer his shares after giving to the Investor Group and Holdings, respectively, a right of first refusal to purchase such shares. Each Management Stockholder has the right (and in limited circumstances the obligation) to sell his shares in connection with certain dispositions of shares by the Investor Group and the right to cause his shares to be included in certain registrations of Common Stock on behalf of the Investor Group. In addition, upon termination of any Management Stockholder's employment, Holdings may elect to require such Management Stockholder to sell to Holdings all of his shares. Investor Stockholders Agreement On May 22, 1997, Holdings, certain partnerships affiliated with The Cypress Group, L.L.C. (the "Cypress Stockholders") and Scotsman Partners, L.P. (collectively, including their permitted transferees, the "Investor Stockholders") and the Odyssey Investor Group, Barry P. Gossett, BT Investment Partners, Inc. and certain other stockholders (together with their permitted transferees and 68 the Investor Stockholders, the "Stockholders") entered into an investor stockholders agreement, which was subsequently amended on September 1, 1998 (the "Investor Stockholders Agreement"). Under the terms of the Investor Stockholders Agreement, unless otherwise agreed to by the Investor Stockholders, the board of directors of Holdings (the "Board of Directors") will consist of nine directors: three persons nominated by the Cypress Stockholders, three persons nominated by Scotsman Partners, one person nominated by Odyssey Investment Group, the Chairman of the Board of Directors and the President of Holdings. Each of Cypress Stockholders, Scotsman Partners and Odyssey Investment Group is entitled to remove and replace any or all of their respective designees on the Board of Directors and each is entitled to remove the director or directors who are the Chairman of the Board and the President of Holdings in accordance with the provisions of the Investor Stockholders Agreement. If the Holdings Common Stock held by either the Cypress Stockholders or Scotsman Partners is reduced to an amount less than 20% of the outstanding Holdings Common Stock, but 5% or more of the outstanding Holdings Common Stock, the Cypress Stockholders or Scotsman Partners, as the case may be, will be entitled to designate one director. Each of the Cypress Stockholders or Scotsman Partners will lose the right to designate one director when the Cypress Stockholders or Scotsman Partners, as the case may be, no longer holds at least 5% of the outstanding Holdings Common Stock. From and after the date that Odyssey Investment Group owns less than 5% of the outstanding Holdings Common Stock, it will no longer be entitled to designate any director for election or removal. If any of Cypress Stockholders, Scotsman Partners and Odyssey Investment Group is entitled to designate a lesser number of directors pursuant to the Investor Stockholders Agreement, then they will vote their shares to cause the number of the entire Board of Directors to be reduced by the number of directors they are no longer entitled to designate. Under the Investor Stockholders Agreement, until such time as either the Cypress Stockholders or the Scotsman Partners is no longer entitled to designate three directors, without the approval of a majority of the directors designated by each of the Cypress Stockholders and Scotsman Partners, respectively, Holdings will not take certain actions (including mergers, consolidations, sales of all or substantially all assets, electing or removing the Chairman or President of Holdings, issuing securities, incurring certain indebtedness, making certain acquisitions, approving operating and capital budgets and other major transactions). Under the Investor Stockholders Agreement, prior to the consummation of an initial public offering of Holdings Common Stock (an "IPO"), each Stockholder will have the right to acquire shares of Holdings Common Stock in connection with certain new issuances of Holdings Common Stock, on the same terms and conditions, for the amount necessary to allow the participating Stockholder to maintain its percentage holding of the outstanding Holdings Common Stock. The Investor Stockholders Agreement contains provisions limiting the ability of Stockholders to transfer their shares in certain circumstances. Among other provisions, the Investor Stockholders Agreement includes (i) rights of first offer in favor of the Investor Stockholders with respect to proposed transfers of shares to a third party and (ii) tag-along rights in favor of each Stockholder pursuant to which a selling Stockholder would be required to permit the other Stockholders to participate on a proportional basis in a transfer of shares to a third party. Also, if one or more Stockholders holding at least 60% of the outstanding Holdings Common Stock determine to sell shares to a third party, in certain circumstances such Stockholders have the right to require the other 69 Stockholders to sell their shares to such third party. Under the Investor Stockholders Agreement, the Stockholders have the right to require the Company to register their shares of Holdings Common Stock under the Securities Act in certain circumstances, including upon a demand of certain of the Stockholders. The Investor Stockholders Agreement (other than the registration rights provisions) will terminate (unless earlier terminated as specified in the Investor Stockholders Agreement) upon the earlier of (i) May 22, 2007 and (ii) completion of an IPO. Employment Arrangement During 2001, Mr. Gossett was engaged by the Company to assist with mergers and acquisitions, real estate project management, strategic initiatives and other general business services. As compensation for these services, Mr. Gossett received $120,000 for the year ended December 31, 2001. Mr. Gossett currently serves as Chairman Emeritus of the Company's Board of Directors. 70 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) Financial Statements and Financial Statement Schedules (1) and (2). See Index to Financial Statements and Supplemental Schedules at Item 8 of this Annual Report on Form 10-K. (b) Reports on Form 8-K filed in the fourth quarter of 2001. None. (c) Exhibits Exhibit Number -------------- 2.1 -- Recapitalization Agreement, dated as of April 11, 1997. (Incorporated by reference to Exhibit 2 of Form 8-K dated May 22, 1997.) 2.2 -- Stock Purchase Agreement, dated as of July 23, 1998. (Incorporated by reference to Exhibit 2 of Form 8-K dated September 1, 1998.) 3.1 -- Certificate of Incorporation of Williams Scotsman, Inc., as amended. (Incorporated by reference to Exhibit 3(i) of Form 8-K dated November 27, 1996). 3.2 -- By-laws of Williams Scotsman, Inc. (Incorporated by reference to Exhibit 3.2 of Registration Statement on Form S-l, Commission File No. 33-68444). 4.1 -- Indenture dated as of May 15, 1997 among Williams Scotsman, Inc., Mobile Field Office Company, Willscot Equipment, LLC and The Bank of New York, as trustee. (Incorporated by reference to Exhibit 4.1 of Registration Statement on Form S-4, Commission File No. 333-30753). 10.1 -- Credit Agreement, dated as of May 22, 1997 and Amended and Restated as of September 1, 1998, by and among Williams Scotsman, Inc., Scotsman Holdings, Inc. each of the financial institutions named therein, Bankers Trust Company, as issuing bank and BT Commercial Corporation, as agent. (Incorporated by reference to Exhibit 10.1 to the annual report on Form 10-K of Williams Scotsman, Inc. (Commission Act File No.: 33-68444) for the year ended December 31, 1998 (the Company's 1998 Form 10-K)). 71 10.2 -- Investor Stockholders Agreement, dated as of May 22, 1997, among Scotsman Partners, L.P., Cypress Merchant Banking Partners, L.P., Cypress Offshore Partners, L.P., Odyssey Partners, L.P., Barry P. Gossett, BT Investment Partners, Inc. and certain other stockholders. (Incorporated by reference to Exhibit 10.3 of Registration Statement on Form S-4, Commission File No.333-30753). 10.3 -- Amendment No. 1 to Investor Stockholders Agreement, dated as of September 1, 1998, among Scotsman Partners, L.P. Cypress Merchant Banking Partners, L.P., Cypress Offshore Partners, L.P., Odyssey Partners, L.P., Barry P. Gossett, BT Investment Partners, Inc. and certain other stockholders. (Incorporated by reference to Exhibit 10.3 of the Company's 1998 Form 10-K.) 10.4 -- Management Stockholders' and Optionholders' Agreement, dated as of September 14, 1998, among Scotsman Partners, L.P., Cypress Merchant Banking Partners, L.P., Cypress Offshore Partners, L.P., and certain management stockholders of Holdings. (Incorporated by reference to Exhibit 10.4 of the Company's 1998 Form 10-K.) 10.5 -- Scotsman Holdings, Inc. Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 10.8 of Registration Statement on Form S-1 of Scotsman Holdings, Inc. Commission File No.:33-68444). 10.6 -- Scotsman Holdings, Inc. 1994 Employee Stock Option Plan. (Incorporated by reference to Exhibit 10.11 of the Company's Form 10-K for the year ended December 31, 1994). 10.7 -- Scotsman Holdings, Inc. Amended and Restated 1997 Employee Stock Option Plan. (Incorporated by reference to Exhibit 10.7 of the Company's 1998 Form 10-K.) 10.8 -- First Amendment to Credit Agreement dated as of July 7, 1999. (Incorporated by reference to Exhibit 10.8 to the quarterly report on Form 10-Q of Williams Scotsman, Inc. (Commission Act File No.: 33-68444) for the quarter ended September 30, 1999 (the Company's 1999 3Q 10-Q)). 72 10.9 -- Second Amendment to Credit Agreement dated as of September 15, 1999. (Incorporated by reference to Exhibit 10.9 to the Company's 1999 3Q 10-Q). 10.10 -- Third Amendment to Credit Agreement dated as of January 26, 2001. (Incorporated by Reference to Exhibit 99.1 of the Company's Form 8-K dated February 12, 2001). 12.1 -- Statement regarding computation of ratios. 21.1 -- Subsidiaries of Registrant: Willscot Equipment, LLC, and Space Master International, Inc. 73 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized. WILLIAMS SCOTSMAN, INC. By: /s/ Gerard E. Keefe ------------------------ Gerard E. Keefe Senior Vice President and Chief Financial Officer Dated: March 29, 2002 KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gerard E. Keefe, his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report, and to file the same with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Name Capacity Date ---- -------- ---- /s/ Gerard E. Holthaus Chairman, President, Chief March 29, 2002 ------------------------- Gerard E. Holthaus Executive Officer and Director /s/ Gerard E. Keefe Senior Vice President and March 29, 2002 ------------------------- Gerard E. Keefe Chief Financial Officer /s/ Glenn A. Schultz Controller March 29, 2002 ------------------------- Glenn A. Schultz /s/ Barry P. Gossett Chairman Emeritus of the March 29, 2002 ------------------------- Barry P. Gossett Board /s/ James N. Alexander Director March 29, 2002 ------------------------- James N. Alexander /s/ Michael F. Finley Director March 29, 2002 ------------------------- Michael F. Finley 74 Name Capacity Date ---- -------- ---- /s/ Steven B. Gruber Director March 29, 2002 ----------------------- Steven B. Gruber /s/ Brian Kwait Director March 29, 2002 ----------------------- Brian Kwait /s/ David P. Spalding Director March 29, 2002 ----------------------- David P. Spalding 75 SCOTSMAN HOLDINGS, INC. AND SUBSIDIARIES Schedule I - Condensed Financial Information of Registrant
Condensed Balance Sheets December 31, ----------------------------------- 2001 2000 ---- ---- (in thousands) Assets Cash $ 2 $ 3 Investment in subsidiary (7,991) (30,598) Deferred income taxes 5,472 5,452 ------- -------- $ (2,517) $ (25,143) ======= ======== Liabilities and Stockholders' Deficit Accrued expenses $ 13 $ 12 ------- -------- Stockholders' deficit: Common stock 95 95 Additional paid-in capital 229,101 229,101 Retained earnings 64,134 41,505 -------- -------- 293,330 270,701 Treasury stock (295,860) (295,856) ------- ------- (2,530) (25,155) ----- ------ $ (2,517) $ (25,143) ====== ======
Condensed Statements of Operations Year Ended December 31, ----------------------------------------- 2001 2000 1999 ---- ---- ---- (In thousands) Revenue $ -- $ -- $ -- Selling, general and administrative expenses 57 55 55 Interest -- -- -- ------ ------ ------ 57 55 55 ------ ------ ------ Loss before income taxes (57) (55) (55) Income tax benefit 20 19 19 ------ ------ ------ Loss before equity in earnings of subsidiaries and extraordinary item (37) (36) (36) Equity in earnings of subsidiaries 22,666 16,119 17,307 ------- ------- ------- Net income $22,629 $16,083 $17,271 ======= ======= =======
76 SCOTSMAN HOLDINGS, INC. AND SUBSIDIARIES Schedule I - Condensed Financial Information of Registrant, Continued
Statement of Cash Flows Year Ended December 31, ---------------------------------- 2001 2000 1999 ---- ---- ---- (in thousands) Cash flows from operating activities: Net income $22,629 $16,083 $17,271 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Deferred income tax benefit (20) (20) (19) Undistributed earnings of subsidiary (22,666) (16,119) (17,307) Other -- 1 (1) ------- ------- ------- Net cash used in operating activities (57) (55) (56) ------- ------- ------- Cash flows from financing activities: Dividends received from subsidiary 60 55 55 Payments to acquire treasury stock (4) -- -- ------- ------- ------- Net cash provided by financing activities 56 55 55 ------- ------- ------- Net (decrease) increase in cash (1) -- (1) Cash at beginning of period 3 3 4 ------- ------- ------- Cash at end of period $ 2 $ 3 $ 3 ======= ======= =======
77 SCOTSMAN HOLDINGS, INC. AND SUBSIDIARIES Schedule II - Valuation and Qualifying Accounts
Year ended December 31, ------------------------------------------ 2001 2000 1999 ---- ---- ---- (In thousands) Allowance for Doubtful Accounts: Balance at beginning of the period $ 983 $1,058 $ 839 Provision charged to expense 4,204 3,697 2,254 Acquired allowance - - 115 Accounts receivable written-off (3,889) (3,772) (2,150) ----- ----- ----- Balance at end of the period $1,298 $ 983 $1,058 ===== ===== =====
78 EXHIBITS TO FORM 10-K SCOTSMAN HOLDINGS, INC. EXHIBIT INDEX Sequentially Numbered Exhibit No. Description of Document Page ----------- ----------------------- -------------- 12.1 -- Statement regarding computation of ratios. 80 79 Exhibit 12.1 SCOTSMAN HOLDINGS, INC. AND SUBSIDIARIES Computation of Ratio of Earnings to Fixed Charges
Year Ended December 31 ------------------------------------------------------------- 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- (Dollars in thousands) Earnings: Earnings from continuing operations before income taxes and extraordinary item $ 9,965 $12,456 $ 31,965 $ 31,021 $ 40,214 Fixed charges from below 44,900 67,346 86,817 95,140 89,316 ------ ------ ------- ------- ------- Total earnings $54,865 $79,802 $118,782 $126,161 $129,530 ------ ------ ------- ------- ------- Fixed Charges: Interest $43,611 $65,110 $ 83,878 $ 91,860 $ 85,486 Interest component of rent expense: Total rent expense $ 3,866 $ 6,708 $ 8,817 $ 9,839 $ 11,490 Portion considered interest expense 33% 33% 33% 33% 33% ------- ------- ------- ------ ------- Interest component $ 1,289 $ 2,236 $ 2,939 $ 3,280 $ 3,830 ------- ------- ------- ------- ------- Total fixed charges $44,900 $67,346 $ 86,817 $ 95,140 $ 89,316 ------- ------- ------ ------ ------ Earnings to Fixed Charges 1.2x 1.2x 1.4x 1.3x 1.5x ==== ==== ==== ==== ====
80