-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BQPTObnCvLNNyG1Dng8acWQyAJWG3+RdaAqClMNLPLNcL8acLUcbWG023Aq2yAva Mv0A6PJnSxVIkqAQGopI3A== 0000950169-98-000378.txt : 19980401 0000950169-98-000378.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950169-98-000378 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCOTSMAN HOLDINGS INC CENTRAL INDEX KEY: 0000923144 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 521862719 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-78954 FILM NUMBER: 98582277 BUSINESS ADDRESS: STREET 1: 8211 TOWN CENTER DR CITY: BALTIMORE STATE: MD ZIP: 21236 BUSINESS PHONE: 4109316000 MAIL ADDRESS: STREET 1: 8211 TOWN CENTER DR CITY: BALTIMORE STATE: MD ZIP: 21236 10-K 1 SCOTSMAN HOLDINGS, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE [X] SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 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: 033-68444 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 27, 1998, 4,920,135 shares of common stock ("Common Stock") of the Registrant were outstanding. PART I ITEM 1. BUSINESS GENERAL Scotsman Holdings, Inc. ("Holdings" or the "Company") was incorporated under the laws of Delaware in November 1993 for the purpose of acquiring Williams Scotsman, Inc. ("Scotsman"). The Company conducts business solely as a holding company, the only significant asset of which is the capital stock of Scotsman. Therefore, any cash dividends to be paid on the Company's common stock, or other cash expenses to be paid, are dependent upon the cash flows of Scotsman. Founded in 1946, Scotsman is the second largest lessor of mobile office and storage units in the United States with over 47,000 units leased through 72 branch offices in 38 states. Scotsman's fleet provides high quality, cost-effective relocatable space solutions to approximately 16,000 customers in 460 industries including construction, education, healthcare and retail. In addition to its core leasing operations, Scotsman sells new and previously leased mobile office units and provides delivery, installation and other ancillary products and services. Scotsman's mobile office fleet is generally comprised of standardized, versatile products that can be configured to meet a wide variety of customer needs. The units are fitted with axles and hitches and are towed to various locations. Most units are wood frame construction, 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 Scotsman's fleet of mobile office units is approximately 7 years while the average age of the total fleet is approximately 9 years. Based on its experience, management believes that the mobile office industry (excluding manufacturing operations) exceeds $2.0 billion and has grown significantly in recent years. This growth has been primarily driven by population shifts, demographic trends, economic expansion, and the increased demand for outsourcing space needs (for example, school expansion programs, construction starts, recreation and entertainment activities). By outsourcing their space needs, Scotsman's customers are able to achieve flexibility, preserve capital for core operations, and convert fixed costs into variable costs. Scotsman purchases its new mobile office units through third-party suppliers and purchases storage units in the aftermarket directly from shipping companies or through brokers. Scotsman believes there are numerous manufacturers and suppliers of mobile office and storage units which supply these products at competitive prices throughout the United States. Scotsman anticipates being able to procure an adequate supply of product on acceptable terms for its projected operational requirements. Scotsman does not believe that the loss of any one of its suppliers would have a material adverse effect on its operations. FORWARD LOOKING STATEMENTS Certain statements in this Form 10-K for the year ended December 31, 1997 constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results to differ from future results expressed or implied by such forward-looking statements. Such factors include, among others, the following: substantial leverage and 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 of the Company to implement its business and growth strategy and maintain and enhance its competitive strengths; the ability to finance fleet and branch expansion, locate and finance acquisitions, and integrate recently acquired businesses into the Company; the ability of the Company to obtain financing for general corporate purposes; 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 Scotsman nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. RECAPITALIZATION Pursuant to a recapitalization agreement, on May 22, 1997, the Company (i) repurchased 3,210,679 shares of its outstanding common stock for an aggregate of approximately $293.8 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 (or a price of $91.50 per share) in cash. In related transactions on the same date, (i) the Company purchased all of its outstanding 11% Series B senior notes due 2004 ($29.2 million aggregate principal amount) for approximately $32.2 million, including accrued interest and fees, (ii) Scotsman purchased $164.7 million aggregate principal amount of its 9.5% senior secured notes due 2000 for approximately $179.8 million, including accrued interest and fees and (iii) Scotsman repaid all of its outstanding indebtedness ($119.0 million) under its prior credit facility. Additionally, in a series of subsequent transactions, Scotsman purchased the remaining $300,000 principal amount of its 9.5% senior secured notes due 2000 for approximately $351,000, including accrued interest and fees. In conjunction with the debt extinguishment, the Company recognized an extraordinary loss of $18.3 million. The transactions described above are collectively referred to herein as the "Recapitalization". In connection with the Recapitalization, (i) Scotsman accelerated the payment of deferred compensation under its long term incentive plan, (ii) all outstanding stock options under Holdings' employee stock option plan vested and became immediately exercisable and (iii) Scotsman canceled a portion of the outstanding stock options. Accordingly, Scotsman 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, Scotsman 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 Holdings to pay recapitalization expenses, to repurchase common stock and to purchase 2 the 11% Series B senior notes. OPERATING STRATEGY Due to the local and regional nature of its business, Scotsman's goals are to become the leader in each of the local markets in which it competes and to expand its coverage to additional local markets. To achieve market leadership, Scotsman has 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. Scotsman believes that it is generally the first or second largest provider of relocatable space in each of its regional markets as measured by lease fleet size and revenues. Scotsman's branch offices are distributed throughout the United States and are located in a majority of the major metropolitan areas. Management's business and growth strategy includes the following: FLEET AND BRANCH EXPANSION. Scotsman plans to continue to capitalize on the industry's favorable growth trends by increasing customer penetration and fleet size in existing markets. In addition, Scotsman plans to open branches in new markets where positive business fundamentals exist. From January 1, 1995 to December 31, 1997, Scotsman increased its number of branches from 36 to 72 and the number of units from approximately 33,000 to 47,100. Scotsman plans to continue expanding its network. SELECTIVE FLEET ACQUISITIONS. To complement its fleet and branch expansion, Scotsman plans to capitalize on the industry's fragmentation and expand its geographic coverage by making selective acquisitions of mobile offices and storage product lease fleets. From January 1, 1995 to December 31, 1997, Scotsman made 13 acquisitions of approximately 5,400 units for a total purchase price of $35.5 million. These units have accounted for approximately 20% of the value of Scotsman's total fleet purchases during this period. ANCILLARY PRODUCTS AND SERVICES. Scotsman continues to identify new applications for its existing products, diversify into new product offerings and deliver ancillary products and services to leverage Scotsman's existing branch network. For example, in 1996, Scotsman began focusing on the market for storage product units, which are used for secured storage space. Since January 1, 1996, Scotsman has completed six acquisitions totaling approximately 2,400 storage units. Ancillary products and services include the rental of steps, ramps and furniture. 3 COMPETITION Although Scotsman's competition varies significantly by market, the mobile office industry, in general, is highly competitive. Scotsman competes primarily in terms of product availability, customer service and price. Scotsman believes that its reputation for customer service and its ability to offer a wide selection of units suitable for many varied uses at competitive prices allow it to compete effectively. However, certain of Scotsman's competitors are less leveraged, have greater market share or product availability in a given market and have greater financial resources than Scotsman. EMPLOYEES At December 31, 1997, Scotsman employed 659 persons. None of Scotsman's employees are covered by a collective bargaining agreement. Scotsman considers its relationship with its employees to be good. The Company has no employees other than its officers, all of whom are also officers of Scotsman. REGULATORY MATTERS The Company must comply with various federal, state and local environmental, health and safety laws and regulations in connection with its operations. The Company believes that it is in substantial compliance with applicable environmental, health and safety laws and regulations. In addition to compliance costs, the Company may incur costs related to alleged environmental damage associated with past or current properties owned or leased by the Company. The Company believes that its liability, if any, for any environmental remediation will have no material adverse effect on its financial condition. A portion of the Company's units is subject to regulation in certain states under motor vehicle and similar registration and certificate of title statutes. The Company believes that it has 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, the Company could be subject to additional costs, fees and taxes that it does not believe would be material to its financial condition. 4 ITEM 2. PROPERTIES Scotsman's headquarters is a three-story modular office structure located on 3.1 acres in suburban Baltimore, Maryland. Additionally, Scotsman leases approximately 68% of its 72 branch locations and owns the balance. Management believes that none of the Company's owned or leased facilities, individually, is material to the operations of the Company. ITEM 3. LEGAL PROCEEDINGS Scotsman is involved in certain legal actions arising in the ordinary course of business. Scotsman believes that none of these actions, either individually or in the aggregate, will have a material adverse effect on Scotsman's business, results of operations or financial condition. The Company is not a party to any legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 5 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS There is no established public trading market for the Company's Common Stock. During 1997, Scotsman paid dividends to Holdings in the aggregate amount of $178,749,252 in connection with the Recapitalization. In January 1998, Scotsman paid a dividend to Holdings in the amount of $22,700,558 to effect the repayment of a promissory note of Holdings. Scotsman does not intend to pay any further dividends in the foreseeable future, other than for the normal operating expenses of Holdings, but reserves the right to do so. In December 1997, Holdings declared a three-for-one stock split that was effected in the form of a 200% stock dividend (the "Stock Dividend"). Pursuant to the Scotsman Holdings, Inc. 1994 Employee Stock Option Plan (the "1994 Plan"), options for 322,590 shares of Holdings were granted during 1997. Additionally, options for 353,850 shares of Holdings were granted pursuant to the Scotsman Holdings, Inc. 1997 Employee Stock Option Plan (the "1997 Plan"). No shares of Holdings' common stock were issued during 1997 upon the exercise of the options previously granted under the Plan. This transaction was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereunder. 6 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 for the fiscal years ended December 31, 1993, 1994, 1995, 1996 and 1997 and as of the end of each of such periods have been derived from the audited Financial Statements.
Year Ended December 31, -------------------------------------------------------------- 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- (Dollars in thousands) STATEMENT OF OPERATIONS DATA: Revenues: Leasing $ 63,668 $ 71,297 $ 86,765 $ 104,438 $120,266 Sales: New units 18,501 22,290 23,126 28,042 41,926 Rental equipment 9,716 8,045 9,733 12,331 13,120 Delivery and installation 24,237 26,511 28,162 32,767 38,626 Other 3,011 5,832 10,734 17,568 22,252 --------- -------- ------- ------- ------- Total $119,133 $133,975 $158,520 $195,146 $236,190 - --------------------------------------------------------------------------------------------------------- Gross profit: Leasing $ 38,005 $ 38,340 $ 47,898 $ 56,916 $ 71,237 Sales: New units 2,534 2,854 3,853 4,999 6,685 Rental equipment 1,335 1,620 2,080 2,618 3,521 Delivery and installation 3,363 4,942 6,114 7,520 10,914 Other 1,639 4,285 8,108 13,594 15,480 --------- ------ ------ ------- ------ Total $ 46,876 $ 52,041 $ 68,053 $ 85,647 $107,837 - --------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses $24,264 $29,376 $ 36,366 $ 42,320 $46,312 Restructuring costs (1) 6,082 912 --- --- --- Recapitalization expenses (2) --- --- --- --- 5,105 Earnings (loss) from continuing operations before extraordinary item (3,841) (432) 2,679 7,086 4,530 Earnings (loss) from continuing operations before extraordinary item per common share(3) (.38) (.04) .26 .69 .65 ===== ===== ======= ===== ===== Ratio of earnings to fixed charges (4) 0.7x 1.0x 1.2x 1.4x 1.2x - --------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA: Rental equipment, net $246,550 $283,181 $324,207 $356,183 $403,528 Total assets 296,062 336,786 384,616 429,546 514,175 Long-term debt 197,044 226,879 265,812 294,827 533,304 Stockholder's equity (deficit) 36,421 38,667 41,346 46,443 (128,849) - ---------------------------------------------------------------------------------------------------------
7 (1) Restructuring costs consist primarily of costs incurred in connection with the acquisition of Scotsman by Holdings in December 1993. (2) Recapitalization expenses represent costs incurred in connection with the recapitalization of Holdings 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. See Note 1 of Notes to Consolidated Financial Statements. (3) All earnings per share amounts have been restated to reflect the Stock Dividend. (4) 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. 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion regarding the financial condition and results of operations of the Company for the three years ended December 31, 1997 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". GENERAL During 1997, the Company and Scotsman completed a series of transactions pursuant to a Recapitalization Agreement. See Recapitalization. The Company is a holding company formed in November 1993, and conducts its business solely through Scotsman, its wholly-owned subsidiary. Scotsman derives its 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 account for a majority of Scotsman's revenues and gross profits. Used mobile office units are sold by Scotsman from its lease fleet in the ordinary course of its business at either fair market value or, to a lesser extent, pursuant to pre-established lease purchase options. Scotsman's cash flow is favorably affected by the sale of used units from its lease fleet as such units generally were purchased in previous years. Accordingly, 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 Scotsman. 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 and ramps; sales of parts, supplies and security systems; and charges for granting insurance waivers and for damage billings. Although a portion of Scotsman's 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 Scotsman's operating strategies should help to mitigate the effects of economic downturns. These characteristics include (i) Scotsman's 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 Scotsman's customers by leasing which may be an attractive alternative to capital purchases, (iii) Scotsman's ability to redeploy units during regional recessions and (iv) the diversity of Scotsman's industry segments and the geographic balance of Scotsman's operations (historically during economic slowdowns, the construction industry, which represented 26% of its 1997 revenues, experiences declines in utilization rates, while other customer segments including education are more stable). 9 RESULTS OF OPERATIONS 1997 COMPARED WITH 1996. Revenues in 1997 were $236.2 million, a $41.0 million or 21.0% increase from revenues of $195.1 million in 1996. The increase resulted from a $15.8 million or 15.2% increase in leasing revenue, a $13.9 million or 49.5% increase in new sales revenue, a $5.9 million or 17.9% increase in delivery and installation revenue and a $4.7 million or 26.7% increase in other revenue. The increase in leasing revenue is attributable to a 14.2% increase in the average lease fleet to approximately 44,000 units, and an increase in the average fleet utilization of approximately two percentage points to 87%, partially offset by a $2 decrease in the average monthly rental rate. The decrease in the average monthly rental rate is a result of modest rate increases offset by changes in fleet mix. The increase in new sales revenue is primarily attributable to a large volume of classroom sales in California during 1997. The increase in delivery and installation revenue is due to the increases in leasing and new sales activity described above. Other revenue increased as a result of increases in the rental of steps, ramps and furniture as well as miscellaneous revenue related to services provided for customer-owned units. Gross profit in 1997 was $107.8 million, a $22.2 million or 25.9% increase from 1996 gross profit of $85.6 million. This increase is primarily a result of an increase in leasing gross profit of $14.3 million or 25.2% and gross profit from delivery and installation of $3.4 million or 45.1%. The increase in gross profit from leasing is a result of the increase in leasing revenue described above combined with an increase in leasing margins from 54.5% in 1996 to 59.2% in 1997, primarily due to the change in the estimated residual value of rental equipment effective October 1, 1997. See note 2 of Notes to Consolidated Financial Statements. Excluding depreciation and amortization, leasing margins increased from 83.8% in 1996 to 84.6% in 1997. The increase in gross profit from delivery and installation revenue is due to the increase in related revenue described above and an improvement in the gross profit margin from 22.9% in 1996 to 28.3% in 1997 due to increased use of in-house resources vs. subcontractors. Selling, general and administrative (S,G&A) expenses increased by $4.0 million or 9.4% from 1996. This increase is the result of the growth experienced by the Company, both in terms of fleet size and number of branches as compared to 1996. Scotsman's branch network has expanded from 55 branches at December 31, 1996 to 72 branches at December 31, 1997 while the fleet has grown by approximately 6,400 units from December 31, 1996. The overall increases in SG&A expenses are due to increases in field related expenses, primarily payroll and occupancy, incurred in connection with this branch expansion. Recapitalization expenses of $5.1 million relate to accelerated incentive compensation and stock option expenses incurred in connection with the Recapitalization. Interest expense increased by 58.1% to $45.7 million in 1997 from $28.9 million in 1996. This increase is a result of increased borrowings to finance the Recapitalization as noted above and as a result of financing the fleet and branch growth described above. An extraordinary loss of $11.5 million (net of income taxes) arose from the extinguishment 10 of the Company's debt as a result of the Recapitalization. 1996 COMPARED WITH 1995. Revenues in 1996 were $195.1 million, a $36.6 million or 23.1% increase from revenues of $158.5 million in 1995. The increase resulted from a $17.7 million or 20.4% increase in leasing revenue, a $2.6 million or 26.7% increase in used sales revenue, a $4.9 million or 21.3% increase in new sales revenue, a $4.6 million or 16.4% increase in delivery and installation revenue and a $6.8 million or 63.6% increase in other revenue. The increase in leasing revenue is attributable to a 10% increase in the average lease fleet to approximately 38,600 units, an increase in the average fleet utilization of approximately four percentage points to 85% and an increase of $10 in the average monthly rental rate. The increase in new and used sales revenue is primarily due to the overall branch expansion that the Company has experienced during 1995 and 1996. The increase in delivery and installation revenue is attributable to the increases in the leasing and new unit sales revenue described above. Other revenue increased as a result of increases in the rental of steps, ramps and furniture as well as miscellaneous revenue related to services provided for customer-owned units. Gross profit in 1996 was $85.6 million, a $17.6 million or 25.8% increase from 1995 gross profit of $68.1 million. This increase is primarily a result of an increase in leasing gross profit of $9.0 million or 18.8% and gross profit from other revenue of $5.5 million or 67.6%. The increase in gross profit from leasing is a result of the increase in leasing revenue described above while the leasing profit margins dropped slightly. This decline in leasing profit margins is a result of the increases in depreciation and amortization expense during 1996. Excluding depreciation and amortization, leasing margins increased from 82.2% for 1995 to 83.8% for 1996. The increase in gross profit from other revenue is primarily due to the increase of revenue in this category as described above. Selling, general and administrative (S,G&A) expenses increased by $6.0 million or 16.4% from 1995, primarily due to an increase in field related expenses. This increase is a result of the branch expansion activity experienced by the Company during 1995 and 1996 and is comprised of a $3.5 million increase in personnel expenses and a $0.7 million increase in occupancy expenses. Interest expense increased by 14.3% to $28.9 million in 1996 from $25.3 million in 1995 primarily as a result of the increase in the average balances outstanding under the revolving line of credit. The increase is due to financing the fleet expansion and growth experienced by the Company during 1996. LIQUIDITY AND CAPITAL RESOURCES During 1995, 1996, and 1997, the Company's principal sources of funds consisted of cash flow from operating and financing sources. Cash flow from operating activities of $33.8 million in 11 1995, $46.0 million in 1996 and $31.7 million in 1997 was largely generated by the rental of units from the Company's lease fleet. The Company has increased its EBITDA and believes that EBITDA provides the best indication of its financial performance and provides the best measure of its ability to meet historical debt service requirements. The Company defines EBITDA as net income before depreciation, amortization, provision for deferred compensation, recapitalization expenses, interest, taxes and extraordinary loss. EBITDA as defined by the Company does not represent cash flow from operations as defined by generally accepted accounting principles and should not be considered as an alternative to cash flow as a measure of liquidity, nor should it be considered as an alternative to net income as an indicator of the Company's operating performance. The Company's EBITDA increased by $17.0 million or 22.6% to $92.4 million in 1997 compared to $75.3 million in 1996. This increase in EBITDA is a result of increased leasing activity resulting from the overall increase in the number of units in the fleet and utilization, partially offset by a slight decline in average monthly rental rates and increased SG&A expenses to support the increased activities during 1997. Cash flow used in investing activities was $68.0 million in 1995, $70.0 million in 1996 and $85.2 million in 1997. Scotsman's primary capital expenditures are for the discretionary purchase of new units for the lease fleet and units purchased through acquisition. Scotsman seeks to maintain its lease fleet in good condition at all times and generally increases the size of its lease fleet only in those local or regional markets experiencing economic growth and established unit demand. During 1995, 1996 and 1997, Scotsman significantly increased its net capital expenditures through purchases of new units for the rental fleet, capital improvements and betterments for existing units and the acquisition of existing rental fleets. The expenditures increased the size of the rental fleet by approximately 4,400 units during 1995, 3,300 units during 1996 and 6,400 units during 1997. This increased activity was in response to increased customer demand and the implementation of Scotsman's fleet acquisition strategy. The following table sets forth Scotsman's investment in its lease fleet for the periods indicated.
Year Ended December 31, -------------------------------- 1995 1996 1997 ---- ---- ---- (Dollars in millions) Gross capital expenditures for rental equipment: New units and betterments................. $47.1 $69.2 $80.0
12
Year Ended December 31, -------------------------------- 1995 1996 1997 ---- ---- ---- (Dollars in millions) Acquisitions................................ 25.0 3.1 7.4 ---- --- --- 72.1 72.3 87.4 Proceeds from sale of used rental equipment (9.7) (12.3) (13.1) ----- ------ ------ Net capital expenditures for rental equipment(1)..................................... $62.4 $60.0 $74.3 ===== ===== ===== Lease fleet maintenance expenses included in the statement of operations............. $15.3 $16.7 $18.3 ===== ===== =====
(1) This calculation now includes the proceeds received from the sale of used rental equipment rather than the book value of such sold equipment presented in prior periods. Prior year amounts have been restated. Scotsman believes it can manage the capital requirements of its lease fleet, and thus its cash flow, through the careful monitoring of its lease fleet additions. During 1995, 1996 and 1997, Scotsman was 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 Notes to Financial Statements. Historically, Scotsman has recognized net gains on the sale of used units. Scotsman's 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 Scotsman's 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. Scotsman estimates that the current annual capital expenditures (net of costs to replace used units that are sold) necessary to maintain its lease fleet and facilities at their current size and condition is approximately $20 million. Other capital expenditures of $6.9 million, $10.3 million and $10.9 million in 1995, 1996 and 1997, respectively, consist of those capital expenditures for items not directly related to the lease fleet, such as branch or headquarters equipment, leasehold improvements and management information systems. Cash provided by financing activities of $53.3 million in 1997 was primarily the result of a series of transactions related to the Recapitalization in May 1997, and net borrowings from long term debt. Cash provided by financing activities of $33.8 million in 1995 and $23.9 million in 1996 was primarily from borrowings under the line of credit. Scotsman's new credit facility matures May 21, 2002 and provides for a total line of credit 13 of up to $300 million subject to the satisfaction of certain requirements (including a borrowing base test). Availability under the line was $253.5 million at December 31, 1997. Borrowings under the line may be used for working capital, acquisitions and general corporate purposes. At Scotsman's option, the revolving credit loans may be maintained as (a) Base Rate Loans which bear interest at the prime rate plus 1% or (b) Eurodollar Loans which bear interest at the Eurodollar Rate plus 2.25%. Beginning in 1998, the applicable margin used to calculate such interest rates may be reduced if Scotsman satisfies certain leverage ratios. The credit facility is guaranteed by Holdings and certain of Scotsman's subsidiaries and is secured by a first priority security interest in substantially all the assets of Scotsman, Holdings and such subsidiaries. The credit facility contains certain covenants including restrictions against mergers, acquisitions, and disposition of assets, voluntary prepayments of debt, financial covenants and certain other covenants. Scotsman believes it will have, for the next 12 months, sufficient liquidity under its revolving line of credit and from cash generated from operations to meet its expected obligations as they arise. SEASONALITY Although demand from certain of Scotsman's customers is somewhat seasonal, Scotsman's operations as a whole are not seasonal to any significant extent. INFLATION Scotsman believes that inflation has not had a material effect on its results of operations. However, an inflationary environment could materially increase interest rates on Scotsman's floating rate debt and the replacement cost of units in Scotsman's lease fleet. The price of used units sold by Scotsman could also increase in such an environment. Scotsman's standard 12 month lease term 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, Scotsman may seek to limit its exposure to interest rate fluctuations by utilizing certain hedging mechanisms, although it is under no obligation to do so. IMPACT OF YEAR 2000 Scotsman has developed a comprehensive Year 2000 Compliance Plan designed to ensure that its computer systems will function properly with respect to dates in the year 2000 and beyond. As part of this plan, Scotsman has initiated discussions with its significant suppliers, large customers and financial institutions to ensure that those parties have appropriate plans to remediate Year 2000 issues where their systems interface with Scotsman's systems or otherwise impact its operations. Scotsman is well underway with these efforts, which are expected to be substantially complete by December 31, 1998. During the past three years, Scotsman has upgraded and/or replaced certain computer hardware and software systems that are significant to its business operations. Such systems have been determined to be Year 2000-compliant. While Scotsman believes its planning efforts are adequate 14 to address its Year 2000 concerns, there can be no guarantee that the systems of other companies on which Scotsman's systems and operations rely will be converted on a timely basis and will not have a material effect on Scotsman. The cost of the Year 2000 initiatives is not expected to be material to Scotsman's results of operations or financial position. 15 ITEM 8. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Financial Statements:
Page ---- Scotsman Holdings, Inc. and Subsidiaries: Independent Auditors' Reports...........................................................................17 Consolidated Balance Sheets as of December 31, 1997 and 1996............................................18 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995...............................................................19 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995.........................................................20 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995...............................................................21 Notes to Consolidated Financial Statements..............................................................23 Williams Scotsman, Inc. and Subsidiaries: Independent Auditors' Reports...........................................................................35 Consolidated Balance Sheets as of December 31, 1997 and 1996............................................36 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995...............................................................37 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995.........................................................38 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995...............................................................39 Notes to Consolidated Financial Statements..............................................................41 Financial Statement Schedules: Scotsman Holdings, Inc. and Subsidiaries: Schedule I - Condensed Financial Information of Registrant..............................................74 Scotsman Holdings, Inc. and Subsidiaries: Schedule II - Valuation and Qualifying Accounts.........................................................76
All schedules not listed have been omitted because of the absence of the conditions under which they are required or the required information is included elsewhere in the financial statements or notes thereto. 16 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, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Scotsman Holdings, Inc. and subsidiaries at December 31, 1997 and 1996 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. 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. Baltimore, Maryland January 23, 1998 17 Scotsman Holdings, Inc. and Subsidiaries Consolidated Balance Sheets
December 31 1997 1996 -------------------------------------- (In thousands) Assets Cash, and temporary investments of $13 in 1997 and 1996 $ 309 $ 426 Trade accounts receivable, net of allowance for doubtful accounts of $253 in 1997 and $258 in 1996 25,537 23,145 Prepaid expenses and other current assets 14,008 9,295 Rental equipment, net of accumulated depreciation of $93,623 in 1997 and $67,520 in 1996 403,528 356,183 Property and equipment, net (Note 3) 37,105 29,032 Deferred financing costs, net 22,379 6,268 Other assets 11,309 5,197 -------------------------------------- $ 514,175 $429,546 ====================================== Liabilities and stockholders' equity Accounts payable $ 7,518 $ 9,826 Accrued expenses 14,398 9,957 Rents billed in advance 12,464 10,621 Promissory note 21,834 - Long-term debt (Note 4) 533,304 294,827 Deferred compensation (Note 7) 2,699 3,300 Deferred income taxes (Note 5) 50,807 54,572 -------------------------------------- Total liabilities $ 643,024 $383,103 -------------------------------------- Stockholders' equity: Common stock, $.01 par value. Authorized: 10,000,000 shares; issued: 8,228,468 shares in 1997 and 3,472,968 shares in 1996 $ 82 $ 35 Additional paid-in capital 164,494 39,064 Retained earnings 2,358 9,333 -------------------------------------- 166,934 48,432 Less treasury stock - 3,308,333 common shares in 1997 and 97,354 common shares in 1996, at cost (295,783) (1,989) -------------------------------------- Net stockholders' (deficit) equity (128,849) 46,443 -------------------------------------- $ 514,175 $429,546 ======================================
See accompanying notes to consolidated financial statements. 18 Scotsman Holdings, Inc. and Subsidiaries Consolidated Statements of Operations
Year ended December 31 1997 1996 1995 ------------------------------------------------------ (In thousands except per share amounts) Revenues Leasing $120,266 $104,438 $ 86,765 Sales: New units 41,926 28,042 23,126 Rental equipment 13,120 12,331 9,733 Delivery and installation 38,626 32,767 28,162 Other 22,252 17,568 10,734 ------------------------------------------------------ Total revenues 236,190 195,146 158,520 ------------------------------------------------------ Cost of sales and services Leasing: Depreciation and amortization 30,459 30,588 23,417 Other direct leasing costs 18,570 16,934 15,450 Sales: New units 35,241 23,043 19,273 Rental equipment 9,599 9,713 7,653 Delivery and installation 27,712 25,247 22,048 Other 6,772 3,974 2,626 ------------------------------------------------------ Total costs of sales and services 128,353 109,499 90,467 ------------------------------------------------------ Gross profit 107,837 85,647 68,053 ------------------------------------------------------ Selling, general and administrative expenses 46,312 42,320 36,366 Recapitalization expenses 5,105 - - Other depreciation and amortization 2,900 2,411 1,851 Interest, including amortization of deferred financing costs of $2,724, $2,557 and $1,708 45,744 28,936 25,306 ------------------------------------------------------ Total operating expenses 100,061 73,667 63,523 ------------------------------------------------------ Income before income taxes and extraordinary item 7,776 11,980 4,530 Income tax expense 3,246 4,894 1,851 ------------------------------------------------------ Income before extraordinary item 4,530 7,086 2,679 Extraordinary loss on early extinguishment of debt, net of income taxes of $6,861 11,472 - - ------------------------------------------------------ Net (loss) income $ (6,942) $ 7,086 $ 2,679 ====================================================== Earnings per common share: Income before extraordinary item $ 0.65 $ 0.69 $ 0.26 Extraordinary loss (1.65) - - ------------------------------------------------------ Net (loss) income $(1.00) $ 0.69 $ 0.26 ====================================================== Earnings per common share, assuming dilution: Income before extraordinary item $ 0.62 $ 0.69 $ 0.26 Extraordinary loss (1.57) - - ------------------------------------------------------ Net (loss) income $(0.95) $ 0.69 $ 0.26 ======================================================
See accompanying notes to consolidated financial statements. 19 Scotsman Holdings, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity
Common Stock Additional ------------------------- Paid-in Retained Treasury Shares Amount Capital Earnings Stock Total ------------------------------------------------------------------------------ (In thousands) Balance at December 31, 1994 3,473 $35 $ 39,064 $ (432) $ - $ 38,667 Net income - - - 2,679 - 2,679 ------------------------------------------------------------------------------ Balance at December 31, 1995 3,473 35 39,064 2,247 - 41,346 Purchase of 97,354 shares of treasury stock (97) - - - (1,989) (1,989) Net income - - - 7,086 - 7,086 ------------------------------------------------------------------------------ Balance at December 31, 1996 3,376 $35 $ 39,064 $ 9,333 $ (1,989) $ 46,443 Purchase of 3,210,979 shares of treasury stock (3,211) - - - (293,794) (293,794) Issuance of 1,475,410 shares of common stock in connection with recapitalization 1,475 14 125,430 - - 125,444 Effect of three-for-one stock split effected in the form of a 200 percent stock dividend 3,280 33 - (33) - - Net loss - - - (6,942) - (6,942) ------------------------------------------------------------------------------ Balance at December 31, 1997 4,920 $82 $164,494 $ 2,358 $(295,783) $(128,849) ==============================================================================
See accompanying notes to consolidated financial statements. 20 Scotsman Holdings, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Year ended December 31 1997 1996 1995 -------------------------------------------------------- (In Thousands) Cash flows from operating activities Net (loss) income $ (6,942) $ 7,086 $ 2,679 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary loss on extinguishment of debt 18,333 - - Depreciation and amortization 36,133 35,694 27,027 Non-cash charges for interest 1,527 2,819 2,533 Provision for bad debts 2,370 2,209 1,509 Deferred income tax expense (benefit) (3,765) 4,568 1,751 Provision for deferred compensation 367 1,400 1,375 Gain on sale of rental equipment (3,521) (2,618) (2,080) Increase in net trade accounts receivable (4,762) (7,982) (4) (Increase) decrease in other assets (6,112) 258 (648) Increase in accrued expenses 4,441 879 821 Other (6,345) 1,653 (1,168) -------------------------------------------------------- Net cash provided by operating activities 31,724 45,966 33,795 -------------------------------------------------------- Cash flows from investing activities Redemption of certificates of deposit - 250 1,255 Rental equipment additions (87,403) (72,277) (72,096) Proceeds from sales of rental equipment 13,120 12,331 9,733 Purchase of property, plant and equipment, net (10,902) (10,284) (6,871) -------------------------------------------------------- Net cash used in investing activities (85,185) (69,980) (67,979) --------------------------------------------------------
21 Scotsman Holdings, Inc. and Subsidiaries Consolidated Statements of Cash Flows (continued)
Year ended December 31 1997 1996 1995 ------------------------------------------------------ (In Thousands) Cash flows from financing activities Proceeds from promissory note payable $ 21,834 $ - $ - Proceeds from long-term debt 797,084 219,420 204,389 Repayment of long-term debt (560,184) (193,362) (168,040) Increase in deferred financing costs (24,247) (113) (2,555) Net proceeds from issuance of common stock 125,444 - - Payments to acquire treasury stock (293,794) (1,989) - Loss on extinguishment of debt (12,793) - - ------------------------------------------------------ Net cash provided by financing activities 53,344 23,956 33,794 ------------------------------------------------------ Net decrease in cash (117) (58) (390) Cash at beginning of period 413 471 861 ------------------------------------------------------ Cash at end of period $ 296 $ 413 $ 471 ====================================================== Supplemental cash flow information: Cash paid for (received from) income taxes $ 313 $ 110 $ (5) ====================================================== Cash paid for interest $ 36,903 $ 23,888 $ 21,068 ======================================================
See accompanying notes to consolidated financial statements. Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) 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 owned subsidiaries, Mobile Field Office Company (MFO) and Willscot Equipment, LLC (Willscot). Willscot, a special purpose subsidiary, was formed in May 1997. The operations of Willscot are limited to the leasing of its mobile office units to Scotsman under a master lease and issuing the guarantee. Effective April 30, 1997, MFO transferred substantially all of its assets to Scotsman and ceased operations. Effective December 31, 1997, MFO was merged into Scotsman. RECAPITALIZATION Pursuant to a recapitalization agreement, on May 22, 1997, the Company (i) repurchased 3,210,679 shares of its outstanding common stock for an aggregate of approximately $293,777 in cash and approximately $21,834 in promissory notes due January 1998 and (ii) issued 1,475,410 shares of common stock for an aggregate of approximately $135,000 (or a price of $91.50 per share) in cash. In related transactions on the same date, (i) the Company purchased all of its outstanding 11% Series B senior notes due 2004 ($29,292 aggregate principal amount) for approximately $32,251, including accrued interest and fees, (ii) Scotsman purchased $164,660 aggregate principal amount of its 9.5% senior secured notes due 2000 for approximately $179,852, including accrued interest and fees and (iii) Scotsman repaid all of its outstanding indebtedness ($119,017) under its prior credit facility. Additionally, in a series of subsequent transactions, Scotsman purchased the remaining $300 principal amount of its 9.5% senior secured notes due 2000 for approximately $351, including accrued interest and fees. In conjunction with the debt extinguishment, the Company recognized an extraordinary loss of $18,333. In connection with the recapitalization, (i) Scotsman accelerated the payment of deferred compensation under its long term incentive plan, (ii) all outstanding stock options under the Company's employee stock option plan vested and became immediately exercisable and (iii) Scotsman canceled a portion of the outstanding stock options. Accordingly, the Company recognized $5,105 of recapitalization expenses including $2,489 in connection with the acceleration of deferred compensation and $2,616 in connection with the cancellation of the stock options. 23 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) RECAPITALIZATION (CONTINUED) In order to refinance the recapitalization transaction, Scotsman issued $400,000 in 9.875% senior notes due 2007 and entered into a $300,000 revolving bank facility. Scotsman paid a dividend of $178,749 to the Company to pay recapitalization expenses, to repurchase the common stock and to purchase the 11% Series B senior notes. 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. (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 36 months, and contractually averaged approximately 12 months at December 31, 1997. 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%. Effective October 1, 1997, the Company changed its estimated residual value from 20% to 50% to better reflect the estimated residual value of the equipment. The effect of this change in estimate is a decrease in depreciation expense of approximately $2,800, and an increase in net income of approximately $1,841, or $0.27 per share, (net of the related tax expense) for the year ended December 31, 1997. 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. 24 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (c) DEFERRED FINANCING COSTS Costs of obtaining long-term 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 20 to 40 years for buildings and improvements and 3 to 12 years for furniture and equipment. Maintenance and repairs are charged to expense as incurred. (e) 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. (f) RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to current year presentation. 25 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (g) 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 1997 1996 1995 ------------------------------------------------------------- Weighted-average shares-basic earnings per share 6,934,374 10,207,290 10,418,904 Effect of employee stock options 372,676 51,328 8,092 ------------------------------------------------------------- Weighted-average shares- diluted earnings per share 7,307,050 10,258,618 10,426,996 =============================================================
All earnings per share amounts have been restated to reflect the three-for-one stock split that was effected in the form of a 200 percent stock dividend. This dividend was declared by the Company in December, 1997 and resulted in the issuance of an additional 3,280 shares. 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following: December 31 1997 1996 --------------------------------- Land $ 8,043 $ 6,889 Buildings and improvements 18,096 12,820 Furniture and equipment 17,691 13,870 --------------------------------- 43,830 33,579 Less accumulated depreciation 6,725 4,547 --------------------------------- Net property and equipment $37,105 $29,032 ================================= 26 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. LONG-TERM DEBT Long-term debt consists of the following: December 31 1997 1996 ------------------------------ Borrowings under new revolving credit facility $133,304 $ - 9.875% senior notes 400,000 - Borrowings under prior revolving credit facility - 103,753 9.5% senior secured notes - 165,000 11% Series B notes - 26,074 ------------------------------ $533,304 $294,827 ============================== The loan agreement for the new revolving credit facility provides for a $300,000 revolving credit facility which matures May 21, 2002. Availability under the line is based upon a borrowing base calculation and was $253,525 at December 31, 1997. Interest is payable at a rate of either prime plus 1.0% or the Eurodollar rate plus 2.25%. Such rates will vary based upon specified leverage ratio thresholds. The weighted average interest rate was 8.1% at December 31, 1997. Borrowings under the 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, the credit facility loan agreement requires compliance with certain financial covenants including capital expenditures, interest coverage and fleet utilization. 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. Additionally, on or prior to June 1, 2000, the Company, at its option, may redeem up to $160,000 of notes, with the proceeds of a public equity offering at a redemption price of 109.875%. 27 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. LONG TERM DEBT (CONTINUED) The notes are general unsecured obligations of the Company and are effectively subordinated in right of payment to all secured indebtedness, including the new revolving credit facility. Additionally, the notes are guaranteed by Scotsman's wholly-owned subsidiaries, MFO and Willscot. Such guarantees are full, unconditional and joint and several. The note indenture 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, excluding the recapitalization related distribution; dispose of property; incur liens on property and merge with or acquire other companies. At December 31, 1997 and 1996, the fair value of long-term debt was approximately $551,000 and $297,000, respectively, based on the quoted market price of the senior notes, senior secured notes and the Series B notes and the book value of the revolving credit facilities, which are adjustable rate notes. The Company also has a $21,834 promissory note payable due January, 1998 that was incurred in connection with the recapitalization transaction described in Note 1. This note bears interest at a rate of 6%. See Note 9. Letter of credit obligations at December 31, 1997 were $24,016, of which $22,700 relates to the promissory note payable above. As discussed in Note 1, the prior revolving credit facility, the 9.5% senior secured notes and the 11% Series B notes were repaid in connection with the recapitalization. 28 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 1997 1996 ----------------------------- Deferred tax liabilities: Cost basis in excess of tax basis of assets and accelerated tax depreciation: Rental equipment $103,268 $94,050 Property, plant and equipment 1,074 983 ----------------------------- Total deferred tax liabilities 104,342 95,033 ----------------------------- Deferred tax assets: Allowance for doubtful accounts 98 100 Rents billed in advance 5,269 3,317 Pre-acquisition separate company net operating loss carryovers 32,282 25,816 Net operating loss carryovers 11,889 3,972 Alternative minimum tax credit carryovers 1,465 1,465 Investment tax credit carryovers 860 860 Holdings interest expense - 2,504 Other 1,672 2,427 ----------------------------- Total deferred tax assets 53,535 40,461 ----------------------------- Net deferred tax liabilities $ 50,807 $54,572 =============================
At December 31, 1997, the Company had net operating loss carryovers available for federal income tax purposes of approximately $115,930, including pre-acquisition separate company loss carryovers, as a result of both the purchase of Scotsman by the Company in December, 1993 and the May 22, 1997 recapitalization, available for federal income tax purposes of approximately $83,687, and investment tax credit carryovers of approximately $860. These carryovers expire at various dates from 2000 to 2012. The annual utilization of the preacquisition net operating loss carryovers is subject to certain limitations under the Internal Revenue Code. The Company is considering the implementation of tax planning strategies which would increase the annual limitation. Also, alternative minimum tax credit carryovers of approximately $1,465 are available without expiration limitations. 29 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. INCOME TAXES (CONTINUED) The income tax (benefit) expense consists of the following: Years ended December 31 1997 1996 1995 ---------------------------------------------------- Current $ 150 $ 326 $ 100 Deferred (3,765) 4,568 1,751 ---------------------------------------------------- $(3,615) $4,894 $1,851 ==================================================== Federal $(3,634) $4,235 $1,602 State 19 659 249 ---------------------------------------------------- $(3,615) $4,894 $1,851 ==================================================== The provision for income taxes (benefit) is reconciled to the amount computed by applying the Federal corporate tax rate of 35% to income (loss) before income taxes as follows:
Years ended December 31 1997 1996 1995 -------------------------------------- Income tax (benefit) at statutory rate $ (3,695) $ 4,193 $ 1,540 State income taxes, net of federal tax benefit 12 542 66 Other 68 159 245 -------------------------------------- $ (3,615) $ 4,894 $ 1,851 ======================================
6. COMMITMENTS The Company is obligated under noncancellable operating leases of certain equipment, vehicles and parcels of land. At December 31, 1997 approximate future minimum rental payments are as follows: 1998 $ 2,569 1999 2,475 2000 2,157 2001 1,792 2002 1,394 Thereafter 3,380 ------- $13,767 ======= Rent expense was $3,468 in 1997, and $2,875 in 1996 and $2,605 in 1995. 30 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 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 ($9,500 in 1997). All amounts 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. 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 by the Company to the 401(k) Plan were approximately $309 in 1997, $243 in 1996, and $129 in 1995. During 1997 the Company 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, 1997, the total amount deferred under this plan, including earnings, was $2,699. Prior to the recapitalization transaction (described in Note 1), the Company had an Incentive Compensation Plan (the Plan) that covered approximately 40 management members. In connection with the Plan, the Company recorded $2,925, $1,800, and $1,775 of management incentive compensation in 1997, 1996, and 1995 respectively, a portion of which was deferred. In 1997, as part of the recapitalization transaction, the Company accelerated the payment of deferred compensation in the amount of $6,225 and the Plan was dissolved. 31 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. EMPLOYEE BENEFIT PLANS (CONTINUED) In December 1997, the Company adopted a stock option plan for certain key employees. Under the plan, up to 390,000 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 ratably based on the Company meeting certain EBITDA goals over the next five years. All options expire 10 years from the date of grant. The Company is accounting for the options using the variable plan accounting. In 1997, 353,850 options were granted under this plan. For those options in which both the grant date and the measurement date were known in 1997, no compensation expense was recorded. The Company also adopted a stock option plan for certain key employees in March 1995. The options were granted with an exercise price equal to the fair value of the shares as of the date of grant. The Company accounted for stock option grants under this plan in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees", and, accordingly, recognizes no compensation expense for the stock option grants. All options outstanding under this plan became fully vested in conjunction with the recapitalization transaction. In addition, during 1997, employees with these options were given the opportunity to cancel their options at a price of $30.50 per option (as adjusted for the three-for-one stock split noted below). As a result, 128,400 of the outstanding options were canceled. The difference between the $30.50 and the option exercise price has been recorded as recapitalization expense in the consolidated statement of operations. 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 1997 and 1996: risk-free interest rate of 6%; weighted average expected life of the options of 5 years; and no dividends. 32 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. EMPLOYEE BENEFIT PLANS (CONTINUED) 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: 1997 1996 1995 ----------------------------- Pro forma net (loss) income $(8,477) $9,076 $4,543 Pro forma (loss) income per common share $ (1.22) $ 2.73 $ 1.37 Pro forma (loss) income per common share, assuming dilution $ (1.16) $ 2.73 $ 1.37 A summary of stock option activity and related information for the years ended December 31 follows. (All prior year amounts have been restated to reflect a three-for-one stock split effected in the form of a 200 percent stock dividend granted by the Company in December, 1997.):
1997 1996 1995 ------------------------- ------------------------- ------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------------- ----------- ------------ ------------ ---------- ------------ Beginning balance 453,150 $ 8.37 114,600 $4.59 - $ - Granted 676,440 24.73 345,150 9.60 114,600 4.59 Canceled (128,400) 10.65 - - - - Forfeited (1,500) 18.39 (6,600) 6.87 - - ------------- ----------- ------------ ------------ ---------- ------------ Ending balance 999,690 $19.14 453,150 $8.37 114,600 $4.59 Exercisable at end of year 716,610 $14.64 112,830 $7.63 22,920 $4.59 Weighted average minimum value of options granted during year $ 6.25 $2.43 $1.16
Exercise prices for options outstanding as of December 31, 1997 range from $4.59 to $30.50. The weighted-average remaining contractual life of those options is 8.9 years. 33 Scotsman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. RELATED PARTY TRANSACTIONS Prior to the recapitalization transaction, Scotsman had a management agreement with a subsidiary of the principal stockholder of the Company. The agreement provides that Scotsman would pay an annual fee of up to $250 in consideration for certain management, consulting and financial advisory services. The Company incurred expenses of $97, $250 and $250 for these services in 1997, 1996 and 1995, respectively. This agreement was terminated in conjunction with the recapitalization transaction. 9. SUBSEQUENT EVENT On January 15, 1998, through the payment of a dividend by Scotsman, the Company repaid its promissory note in the principal amount of $21,834 plus accrued interest. Scotsman obtained additional borrowings under their revolving credit facility to fund the dividend. As a result of the repayment of the promissory note, the underlying letter of credit in the amount of $22,700 was canceled. 34 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, 1997 and 1996, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Williams Scotsman, Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. 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. Baltimore, Maryland January 23, 1998 35 Williams Scotsman, Inc. and Subsidiaries Consolidated Balance Sheets
December 31, 1997 1996 -------------------------------------- (In thousands) ASSETS Cash, and temporary investments of $13 in 1997 and 1996 $ 307 $ 351 Trade accounts receivable, net of allowance for doubtful accounts of $253 in 1997 and $258 in 1996 25,537 23,145 Prepaid expenses and other current assets 14,008 9,295 Rental equipment, net of accumulated depreciation of $93,623 in 1997 and $67,520 in 1996 403,528 356,183 Property and equipment, net (Note 3) 37,105 29,032 Deferred financing costs, net 22,379 5,494 Other assets 11,309 5,197 -------------------------------------- $ 514,173 $428,697 ====================================== LIABILITIES AND STOCKHOLDER'S EQUITY Accounts payable $ 7,518 $ 9,826 Accrued expenses 13,568 8,924 Rents billed in advance 12,464 10,621 Long-term debt (Note 4) 533,304 268,753 Deferred compensation (Note 7) 2,699 3,300 Deferred income taxes (Note 5) 56,184 57,640 -------------------------------------- Total liabilities 625,737 359,064 -------------------------------------- Stockholder's equity: Common stock, $.01 par value. Authorized 10,000,000 shares; issued and outstanding 3,320,000 shares 33 33 Additional paid-in capital 56,844 56,844 Retained (deficit) earnings (168,441) 12,756 -------------------------------------- Total stockholder's (deficit) equity (111,564) 69,633 -------------------------------------- $ 514,173 $428,697 ======================================
See accompanying notes to consolidated financial statements. 36 Williams Scotsman, Inc. and Subsidiaries Consolidated Statements of Operations
Year ended December 31 1997 1996 1995 --------------------------------------------- (In thousands except per share amounts) REVENUES Leasing $120,266 $104,438 $ 86,765 Sales: New units 41,926 28,042 23,126 Rental equipment 13,120 12,331 9,733 Delivery and installation 38,626 32,767 28,162 Other 22,252 17,564 10,734 -------------------------------------------- Total revenues 236,190 195,142 158,520 -------------------------------------------- COST OF SALES AND SERVICES Leasing: Depreciation and amortization 30,459 30,588 23,417 Other direct leasing costs 18,570 16,934 15,450 Sales: New units 35,241 23,043 19,273 Rental equipment 9,599 9,713 7,653 Delivery and installation 27,712 25,247 22,048 Other 6,772 3,974 2,626 -------------------------------------------- Total costs of sales and services 128,353 109,499 90,467 -------------------------------------------- Gross profit 107,837 85,643 68,053 -------------------------------------------- Selling, general and administrative expenses 46,256 42,260 36,295 Recapitalization expenses 5,105 - - Other depreciation and amortization 2,900 2,411 1,851 Interest, including amortization of deferred financing costs of $2,688, $2,449 and $1,601 43,611 25,797 22,485 -------------------------------------------- Total operating expenses 97,872 70,468 60,631 -------------------------------------------- Income before income taxes and extraordinary item 9,965 15,175 7,422 Income tax expense 3,986 5,980 2,863 -------------------------------------------- Income before extraordinary item 5,979 9,195 4,559 Extraordinary loss on extinguishment of debt, net of income taxes of $5,292 8,427 - - -------------------------------------------- Net (loss) income (2,448) 9,195 4,559 ============================================ Earnings per common share: Income before extraordinary item $ 1.80 $ 2.77 $ 1.37 Extraordinary loss (2.54) - - -------------------------------------------- Net (loss) income $ (0.74) $ 2.77 $ 1.37 ============================================
See accompanying notes to consolidated financial statements. 37 Williams Scotsman, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholder's Equity
Common Additional Retained Stock Paid-in Earnings Shares Amount Capital (Deficit) Total ---------------------------------------------------------------------------- (In Thousands) Balance at December 31, 1994 3,320 $33 $56,844 $ 1,072 $ 57,949 Net income - - - 4,559 4,559 ---------------------------------------------------------------------------- Balance at December 31, 1995 3,320 33 $56,844 5,631 62,508 Dividends - $ .62 per share (2,070) (2,070) Net income - - - 9,195 9,195 ---------------------------------------------------------------------------- Balance at December 31, 1996 3,320 $33 $56,844 $ 12,756 $ 69,633 Dividends - $53.84 per share (Note 1) - - - (178,749) (178,749) Net loss - - - (2,448) (2,448) ---------------------------------------------------------------------------- Balance at December 31, 1997 3,320 $33 $56,844 $(168,441) $(111,564) ============================================================================
See accompanying notes to consolidated financial statements. 38 Williams Scotsman, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Year ended December 31 1997 1996 1995 ---------------------------------------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income $ (2,448) $ 9,195 $ 4,559 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss on extinguishment of debt 13,719 - - Depreciation and amortization 36,047 35,448 26,869 Provision for bad debts 2,370 2,209 1,509 Deferred income tax (benefit) expense (1,456) 5,654 2,763 Provision for deferred compensation 367 1,400 1,375 Gain on sale of rental equipment (3,521) (2,618) (2,080) Increase in net trade accounts receivable (4,762) (7,982) (4) (Increase) decrease in other assets (6,112) 258 (648) Increase in accrued expenses 4,644 810 729 Other (6,345) 1,653 (1,168) ------------------------------------------ Net cash provided by operating activities 32,503 46,027 33,904 ------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Redemption of certificates of deposit - 250 1,255 Rental equipment additions (87,403) (72,277) (72,096) Proceeds from sales of rental equipment 13,120 12,331 9,733 Purchase of property and equipment, net (10,902) (10,284) (6,871) ------------------------------------------ Net cash used in investing activities $(85,185) $(69,980) $(67,979) ==========================================
39 Williams Scotsman, Inc. and Subsidiaries Consolidated Statements of Cash Flows (continued)
Year ended December 31 1997 1996 1995 ----------------------------------------- (In Thousands) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt $ 797,084 $ 219,420 $ 204,389 Repayment of long-term debt (532,533) (193,362) (168,040) Increase in deferred financing costs (24,247) (113) (2,555) Cash dividends paid (178,749) (2,070) - Premium paid on extinguishment of debt (8,917) - - ------------------------------------------ Net cash provided by financing activities 52,638 23,875 33,794 ------------------------------------------ Net decrease in cash (44) (78) (281) Cash at beginning of period 338 416 697 ------------------------------------------ Cash at end of period $ 294 $ 338 $ 416 ========================================== Supplemental cash flow information: Cash paid for (received from) income taxes $ 313 $ 110 $ (5) ========================================== Cash paid for interest $ 36,178 $ 23,888 $ 21,068 ==========================================
See accompanying notes to consolidated financial statements. 40 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) 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 operations of the Company consist of the leasing and sale of mobile offices and storage products (equipment) and their delivery and installation. RECAPITALIZATION Pursuant to a recapitalization agreement, on May 22, 1997, Holdings (i) repurchased 3,210,679 shares of its outstanding common stock for an aggregate of approximately $293,777 in cash and approximately $21,834 in promissory notes due January 1998 and (ii) issued 1,475,410 shares of common stock for an aggregate of approximately $135,000 (or a price of $91.50 per share) in cash. In related transactions on the same date, (i) Holdings purchased all of its outstanding 11% Series B senior notes due 2004 ($29,292 aggregate principal amount) for approximately $32,251, including accrued interest and fees, (ii) the Company purchased $164,660 aggregate principal amount of its 9.5% senior secured notes due 2000 for approximately $179,852, including accrued interest and fees and (iii) the Company repaid all of its outstanding indebtedness ($119,017) under its prior credit facility. Additionally, in a series of subsequent transactions, the Company purchased the remaining $300 principal amount of its 9.5% senior secured notes due 2000 for approximately $351, including accrued interest and fees. In conjunction with the debt extinguishment, the Company recognized an extraordinary loss of $13,719. In connection with the recapitalization, (i) the Company accelerated the payment of deferred compensation under its long term incentive plan, (ii) all outstanding stock options under Holdings' employee stock option plan vested and became immediately exercisable and (iii) the Company canceled a portion of the outstanding stock options. Accordingly, the Company recognized $5,105 of recapitalization expenses including $2,489 in connection with the acceleration of deferred compensation and $2,616 in connection with the cancellation of the stock options. 41 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) RECAPITALIZATION (CONTINUED) In order to finance the recapitalization, the Company issued $400,000 in 9.875% senior notes due 2007 and entered into a $300,000 revolving bank facility. The Company paid a dividend of $178,749 to Holdings to pay recapitalization expenses, to repurchase common stock and to purchase the 11% Series B senior notes. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Mobile Field Office Company (MFO) and Willscot Equipment, LLC (Willscot). 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, unconditional and joint and severerable 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 and issuing the guarantee. Effective April 30, 1997, MFO transferred substantially all of its assets to the Company and ceased operations. Effective December 31, 1997, MFO merged into the Company. 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. (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 36 months, and contractually averaged approximately 12 months at December 31, 1997. 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%. Effective October 1, 1997, the Company changed its estimated residual value from 20% to 50% to better reflect the estimated residual value of the equipment. The effect of this change in estimate is a decrease in 42 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING (CONTINUED) (b) LEASING OPERATIONS (CONTINUED) depreciation expense of approximately $2,800, and an increase in net income of approximately $1,826, or $0.55 per share, (net of the related tax expense) for the year ended December 31, 1997. 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 long-term debt are amortized using a 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 20 to 40 years for buildings and improvements and 3 to 12 years for furniture and equipment. Maintenance and repairs are charged to expense as incurred. (e) RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to current year presentation. (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. The Company is included in the consolidated federal income tax return of Holdings. Income taxes are included in the accompanying financial statements on a separate return basis. 43 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (g) EARNINGS PER SHARE Earnings per share is computed based on weighted average number of common shares outstanding of 3,320,000 shares for 1997, 1996 and 1995. 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following: December 31 1997 1996 --------------------------- Land $ 8,043 $ 6,889 Buildings and improvements 18,096 12,820 Furniture and equipment 17,691 13,870 --------------------------- 43,830 33,579 Less accumulated depreciation 6,725 4,547 --------------------------- Net property and equipment $37,105 $29,032 =========================== 4. LONG-TERM DEBT Long-term debt consists of the following: December 31 1997 1996 -------------------------- Borrowings under new revolving credit facility $133,304 $ - 9.875% senior notes 400,000 - Borrowings under prior revolving credit facility - 103,753 9.5% senior secured notes - 165,000 -------------------------- $533,304 $268,753 ========================== The loan agreement for the new revolving credit facility provides for a $300,000 revolving credit facility which matures May 21, 2002. Availability under the line is based upon a borrowing base calculation and was $253,525 at December 31, 1997. Interest is payable at a rate of either prime plus 1.0% or the Eurodollar rate plus 2.25%. 44 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. LONG TERM DEBT (CONTINUED) Such rates will vary based upon specified leverage ratio thresholds. The weighted average interest rate was 8.1% at December 31, 1997. Borrowings under the 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, the credit facility loan agreement requires compliance with certain financial covenants including capital expenditures, interest coverage and fleet utilization. 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. Additionally, on or prior to June 1, 2000, the Company, at its option, may redeem up to $160,000 of notes, with the proceeds of a public equity offering at a redemption price of 109.875%. The notes are general unsecured obligations of the Company and are subordinated in right of payment to all secured indebtedness, including the new revolving credit facility. Additionally, the notes are guaranteed by the Company's wholly-owned subsidiaries, MFO and Willscot. Such guarantees are full, unconditional and joint and severable. 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, excluding the recapitalization-related distribution; dispose of property; incur liens on property and merge with or acquire other companies. At December 31, 1997 and 1996, the fair value of long-term debt was approximately $551,000 and $274,000, respectively, based on the quoted market price of the senior notes and senior secured notes and the book value of the revolving credit facilities, which are adjustable rate notes. Letter of credit obligations at December 31, 1997 were $24,016, of which $22,700 relates to a promissory note payable of Holdings which was repaid on January 15, 1998 (see Note 10). As discussed in Note 1, the prior revolving credit facility and the 9.5% senior secured notes were repaid in connection with the recapitalization. 45 Williams Scotsman, 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 1997 1996 ----------------------------- Deferred tax liabilities: Cost basis in excess of tax basis of assets and accelerated tax depreciation: Rental equipment $103,268 $94,050 Property and equipment 1,074 983 ----------------------------- Total deferred tax liabilities 104,342 95,033 ----------------------------- Deferred tax assets: Allowance for doubtful accounts 98 100 Rents billed in advance 5,269 3,317 Pre-acquisition separate company net operating loss carryovers 32,282 25,816 Net operating loss carryovers 6,511 3,547 Alternative minimum tax credit carryovers 1,465 1,465 Investment tax credit carryovers 860 860 Other 1,673 2,288 ----------------------------- Total deferred tax assets 48,158 37,393 ----------------------------- Net deferred tax liabilities $ 56,184 $57,640 =============================
At December 31, 1997, the Company had net operating loss carryovers available for federal income tax purposes of approximately $100,565, including pre-acquisition separate company loss carryovers, as a result of both the purchase of the Company by Holdings in December, 1993 and the May 22, 1997 recapitalization, available for federal income tax purposes of approximately $83,687 and investment tax credit carryovers of approximately $860. These carryovers expire at various dates from 2000 to 2012. The annual utilization of the preacquisition net operating loss carryovers is subject to certain limitations under the Internal Revenue Code. The Company is considering the implementation of tax planning strategies which would increase the annual limitation. Also, alternative minimum tax credit carryovers of approximately $1,465 are available without expiration limitations. 46 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. INCOME TAXES (CONTINUED) The income tax (benefit) expense consists of the following: Years ended December 31 1997 1996 1995 ------------------------------------------- Current $ 150 $ 326 $ 100 Deferred (1,456) 5,654 2,763 ------------------------------------------- $(1,306) $5,980 $2,863 =========================================== Federal $(1,325) $5,145 $2,453 State 19 835 408 ------------------------------------------- $(1,306) $5,980 $2,863 =========================================== The provision for income taxes is reconciled to the amount computed by applying the Federal corporate tax rate of 35% in 1997 and 1996 and 34% in 1995 to income before income taxes as follows: Years ended December 31 1997 1996 1995 ---------------------------- Income tax at statutory rate $(1,314) $5,311 $2,524 State income taxes, net of federal tax benefit 12 543 308 Other (4) 126 31 ---------------------------- $(1,306) $5,980 $2,863 ============================ 47 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. COMMITMENTS The Company is obligated under noncancellable operating leases of certain equipment, vehicles and parcels of land. At December 31, 1997 approximate future minimum rental payments are as follows: 1998 $ 2,569 1999 2,475 2000 2,157 2001 1,792 2002 1,394 Thereafter 3,380 ------- $13,767 ======= Rent expense was $3,468 in 1997, $2,875 in 1996 and $2,605 in 1995. 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 ($9,500 in 1997). All amounts 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. 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 by the Company to the 401(k) Plan were approximately $309 in 1997, $243 in 1996, and $129 in 1995. During 1997 the Company 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, 1997, the total amount deferred under this Plan, including earnings, was $2,699. 48 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. EMPLOYEE BENEFIT PLANS (CONTINUED) Prior to the recapitalization transaction (described in Note 1), the Company had an Incentive Compensation Plan (the Plan) that covered approximately 40 management members. In connection with the Plan, the Company recorded $2,925, $1,800, and $1,775 of management incentive compensation in 1997, 1996, and 1995 respectively, a portion of which was deferred. In 1997, as part of the recapitalization transaction, the Company accelerated the payment of deferred compensation in the amount of $6,225 and the Plan was dissolved. In December 1997, the Company adopted a stock option plan for certain key employees. Under the plan, up to 390,000 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 ratably based on the Company meeting certain financial goals over the next five years. All options expire 10 years from the date of grant. The Company is accounting for the options using the variable plan accounting. In 1997, 353,850 options were granted under this plan. For those options in which both the grant date and the measurement date were known in 1997, no compensation expense was recorded. The Company also adopted a stock option plan for certain key employees in March 1995. The options were granted with an exercise price equal to the fair value of the shares as of the date of grant. The Company accounted for stock option grants under this plan in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees", and, accordingly, recognizes no compensation expense for the stock option grants. All options outstanding under this plan became fully vested in conjunction with the recapitalization transaction. In addition, employees with these options were given the opportunity to cancel their options at a price of $30.50 (as adjusted for three-for-one stock split noted below) per option. As a result, 128,400 of the outstanding options were canceled in 1997. The difference between the $30.50 and the option exercise price has been recorded as recapitalization expense in the consolidated statement of operations. 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, 49 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. EMPLOYEE BENEFIT PLANS (CONTINUED) over the expected exercise life of the option. The following weighted average assumptions were used for 1997 and 1996: risk-free interest rate of 6%; 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: 1997 1996 1995 ----------- -------- -------- Pro forma net (loss) income $(3,983) $9,076 $4,543 Pro forma (loss) earnings per share $ (1.20) $ 2.73 $ 1.37 A summary of stock option activity and related information for the years ended December 31 follows. (All prior year amounts have been restated to reflect a three-for-one stock split effected in the form of a 200 percent stock dividend granted by Holdings in December, 1997.):
1997 1996 1995 -------------------------- ------------------------ ----------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------------- ------------ ----------- ------------ ---------- ------------ Beginning balance 453,150 $ 8.37 114,600 $ 4.59 - - Granted 676,440 24.73 345,150 9.60 114,600 4.59 Canceled (128,400) 10.65 - - - - Forfeited (1,500) 18.39 (6,600) 6.87 - - ------------- ------------ ----------- ------------ ---------- ------------ Ending balance 999,690 $19.14 453,150 $ 8.37 114,600 $4.59 Exercisable at end of year 716,610 $14.64 112,830 $ 7.63 22,920 $4.59 Weighted average minimum value of options granted during year $ 6.25 $ 2.43 $1.16
Exercise prices for options outstanding as of December 31, 1997 range from $4.59 to $30.50. The weighted-average remaining contractual life of those options is 8.9 years. 50 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARIES The 9.875% senior notes issued by the Company are guaranteed by its wholly owned subsidiaries, MFO and Willscot. See Note 2 for a description of the operations of these subsidiaries. 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. Full separate financial statements of the guarantor subsidiaries have not been included because management has determined they are not material to investors. Summarized financial statements of those subsidiaries as of and for the year ended December 31, 1997 are as follows: Balance Sheet ------------- Assets: Rental equipment, at cost $340,066 Less accumulated depreciation 47,701 ------------ Net rental equipment 292,449 Other assets 2,084 ------------ Total assets $294,449 ============ Liabilities and stockholder's equity: Total liabilities 612 ------------ Stockholder's equity 293,837 ------------ Total liabilities and stockholder's equity $294,449 ============ Statement of Operations ----------------------- Revenue: Leasing $ 21,932 Other 509 ------------ 22,441 Expenses: Selling, general and administrative 11,999 Depreciation 9,895 Interest 547 ------------ 22,441 ------------ Net income $ - ============ 51 Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. RELATED PARTY TRANSACTIONS Prior to the recapitalization transaction, the Company had a management agreement with a subsidiary of the principal stockholder of Holdings. The agreement provided that the Company would pay an annual fee of up to $250 in consideration for certain management, consulting and financial advisory services. The Company incurred expenses of $97, $250 and $250 for these services in 1997, 1996 and 1995, respectively. This agreement was terminated in conjunction with the recapitalization transaction. 10. SUBSEQUENT EVENT On January 15, 1998, the Company paid a dividend to Holdings to facilitate Holdings repaying a promissory note in the principal amount of $21,834 plus accrued interest. The Company obtained additional borrowings under its revolving credit facility to fund the dividend. As a result of the repayment of the promissory note, the underlying letter of credit in the amount of $22,700 was canceled. 52 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 53 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS AND OFFICERS OF THE COMPANY The Company's directors and executive officers are as follows:
Name Age Position - ---- --- -------- Barry P. Gossett............................ 57 Director and Chairman of the Board Gerard E. Holthaus........................... 48 President and Chief Executive Officer; Director James N. Alexander........................... 38 Director Daniel L. Doctoroff.......................... 39 Director Michael F. Finley............................ 35 Director Robert B. Henske............................. 36 Director James L. Singleton........................... 42 Director David P. Spalding............................ 43 Director Gerard E. Keefe.............................. 41 Senior Vice President and Chief Financial Officer Katherine K. Giannelli....................... 37 Vice President and Controller John B. Ross................................. 49 Vice President and Corporate Counsel
DIRECTORS AND OFFICERS OF SCOTSMAN Scotsman's directors and executive officers are as follows:
Name Age Position - ---- --- -------- Barry P. Gossett............................ 57 Director and Chairman of the Board Gerard E. Holthaus........................... 48 President and Chief Executive Officer; Director James N. Alexander........................... 37 Director Daniel L. Doctoroff.......................... 38 Director Michael F. Finley............................ 35 Director Robert B. Henske............................. 35 Director James L. Singleton........................... 42 Director David P. Spalding............................ 43 Director J. Collier Beall............................. 50 Senior Vice President and Southern Division Manager Joseph F. Donegan............................ 47 Senior Vice President and Northern Division Manager Gerard E. Keefe.............................. 41 Senior Vice President and Chief Financial Officer Katherine K. Giannelli....................... 37 Vice President and Controller Robert W. Hansen............................. 41 Vice President and Western Regional Manager John H. Hennessey, Jr........................ 52 Vice President-Marketing and Product Development William C. LeBuhn............................ 35 Vice President-Human Resources John B. Ross................................. 49 Vice President and Corporate Counsel William J. Wyatt............................. 58 Vice President-Marketing and Sales Support - --------
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 54 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. - --------- Mr. Gossett has been Chairman of the Board since April 1997. He is currently a partner in Pascal Turner Partners, a real estate investment firm. He formerly served as Chairman 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 twenty-five 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. Holthaus 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 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 and Young (Baltimore), where he served as a partner from 1982 to 1988. Mr. Alexander was elected as a director of the Company in May 1997. Mr. Alexander has been a Vice President of Keystone and a Principal of Arbor Investors, L.L.C. since August 1995. 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. He also serves on the Board of Advisors of FEP Capital Holdings, L.P.and FW Strategic Partners, L.P. Mr. Doctoroff was elected as a director of the Company in May 1997. Mr. Doctoroff has been a Vice President of Keystone since October 1992, a Managing Director of Oak Hill Partners, Inc. and its predecessor, which provides investment advisory services to Acadia Partners, L.P. ("Acadia"), since August 1987, Vice President and Director of Acadia MGP, Inc., a corporate general partner of Acadia since March 1992 and a managing partner of Insurance Partners Advisors, L.P., which provides investment advisory services to Insurance Partners, L.P., since February 1994. Mr. Doctoroff is also a director of Bell & Howell Holdings Company, CapStar Hotel Company, American Capital Access Corporation and Payroll Transfers, Inc. Mr. Finley was elected as a director of the Company in May 1997. Mr. Finley has been a Principal 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. from 1989 to 1994. 55 Mr. Henske was elected as a director of the Company in May 1997. From January 1997 to the present, Mr. Henske has been a Vice President of Keystone and a Principal at Arbor Investors, L.L.C. From January 1996 to December 1996, he was Executive Vice President, Chief Financial Officer and a director of American Savings Bank, F.A., a federally-chartered thrift. Mr. Henske is also a director of Reliant Building Products, Inc. From 1986 to January 1996, he was a partner and held various other positions with Bain & Company, a management consulting firm. Mr. Singleton was elected as a director of the Company in May 1997. Mr. Singleton 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. Singleton is also a director of Able Body Corporation, L.P., Thebault Company, Cinemark USA, Inc., and Genesis Eldercare Corp. Mr. Spalding was elected as a director of the Company in May 1997. Mr. Spalding has been 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. from February 1991 to April 1994. Previously, he held the position of Senior Vice President of Lehman Brothers Inc. from September 1988 to February 1991. From April 1987 to September 1988, he was Senior Vice President of General Electric Capital Corporation Corporate Finance Group, Inc. Prior to 1987 he was a Vice President of The First National Bank of Chicago. Mr. Spalding is also a director of AMTROL Inc., Frank's Nursery & Crafts, and Lear Corporation. Mr. Beall has been Senior Vice President and Southern Division Manager of the Company since September 1996 and was the Southeast Region Manager prior thereto. 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. Mr. Donegan has been Senior Vice President and Northern Division Manager of the Company since September 1996 and served as the Northeast Region Manager prior thereto. Mr. Donegan's responsibilities include the implementation of corporate policies, attainment of branch profitability, fleet utilization management and development of personnel. 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. Mr. 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 headquartered in Columbia, Maryland, 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. 56 Ms. Giannelli has been Vice President and Controller of the Company with responsibilities for the Company's accounting department including regulatory reporting since 1990. Prior to joining the Company, Ms. Giannelli was a Senior Manager of KPMG Peat Marwick in Baltimore, Maryland where she had been employed from 1982 to 1990. Mr. Hansen has been Vice President and Western Regional Manager with responsibility for Sales and Operations in the 13 Western States since 1994. His duties include attainment of branch profitability, fleet management, development of personnel and implementation of corporate poilicy in his region. Prior to joining the Company in 1983, Mr. Hansen was General Manager of Duracite Mfg., a cabinetwork and construction firm in the San Francisco Bay Area. Mr. Hennessey has been Vice President of Marketing and Product Development since September 1997. Mr. Hennessey's responsibilities include strategic planning, development of new products for rental and sale to customers and Scotsman's National Accounts Program. Mr. Hennessey has over 28 years of experience in the financial services industry. Prior to joining the Company, Mr. Hennessey was Senior Vice President of NationsBank from 1993 to 1997. Mr. LeBuhn has been Vice President of Human Resources since January 1994. Mr. LeBuhn's responsibilities include the management of human resources related programs. Prior to joining the Company, Mr. LeBuhn was Human Resources Manager for Sherwin-Williams Eastern Division from 1992 to January 1994 and Director of Human Resources for Consolidated International Insurance Group, Inc. from 1985 to 1992. Mr. Ross has been Corporate 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, he was engaged in the private practice of law in both North Carolina and Maryland. Mr. Wyatt has been Vice President, Marketing and Sales Support since 1994. He was Director of Sales and Marketing for the Company from 1990 to 1994 and was National Sales Manager from 1988 to 1990. Before joining the Company, Mr. Wyatt operated W.J. Wyatt and Company, Inc., a consulting firm providing sales development, market planning, convention and meeting management and publishing services. 57 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth certain information concerning the compensation for the last three completed fiscal years of the seven highest paid officers of the Company who received total compensation in excess of $100,000 during 1997.
Long Term Compensation ---------------------- Awards Payouts ------ ------- Annual Compensation Securities LTIP ------------------------------ Underlying Payouts All Other Year Salary Bonus Options(2) $ (3) Compensation ---- ------ ----- ---------- ------- ------------ Gerard E. Holthaus President and Chief Executive Officer (1) 1997 $241,520 $50,500 165,090 $910,254 $15,858 1996 200,000 50,500 81,000 15,422 1995 180,769 50,000 23,400 12,968 Barry P. Gossett Chairman of the Board 1997 249,488 51,000 --- 920,392 14,916 1996 225,000 51,000 --- 20,374 1995 205,770 52,000 --- 18,066 J. Collier Beall Senior Vice President and Southern Division Manager 1997 212,610 20,000 65,000 377,750 11,050 1996 197,555 28,000 30,000 9,825 1995 171,390 20,000 6,900 7,200 Joseph F. Donegan Senior Vice President and Northern Division Manager 1997 189,734 20,000 65,000 360,854 10,800 1996 179,288 25,000 30,000 9,625 1995 148,635 15,000 5,850 8,138 Gerard E. Keefe Senior Vice President and Chief Financial Officer 1997 117,025 25,000 60,000 330,442 11,050 1996 89,769 21,000 27,000 9,725 1995 75,277 --- 900 7,150 Robert W. Hansen Vice President and Western Regional Manager 1997 157,130 18,000 25,000 256,788 9,325 1996 132,601 12,000 15,000 8,925 1995 133,500 12,000 5,850 8,138 James D. Funk (5) 1997 130,470 19,500 15,000 277,750 877,858 1996 147,357 20,000 21,000 9,144 1995 158,338 20,000 5,850 7,875
58 (1) Effective April 1997, Mr. Holthaus succeeded Mr. Gossett as Chief Executive Officer. (2) Represents options granted to purchase shares of Holdings pursuant to the 1994 Plan and, for 1997, options granted pursuant to both the 1994 Plan and the 1997 Plan. The numbers of options presented reflect the Stock Dividend. (3) Represents accelerated payments made under the Long Term Incentive Plan which was terminated in May 1997 as a result of the Recapitalization. (4) Represents disability insurance premium, key man life insurance premium, car allowance and employer match under the 401(k) Plan. For Mr. Funk, 1997 also represents severance and payments to cancel stock options. (5) Mr. Funk was Vice President and Midwestern Regional Manager prior to his resignation in October, 1997. The following tables contain information covering stock options granted during 1997 to the Chief Executive Officer and the other officers named in the Executive Compensation table above and the number and value of unexercised stock options held by those officers at the end of the fiscal year. 59 OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Individual Grants Value at Assumed ------------------------------------------------- Annual Rates % of Total Of Stock Price Options Appreciation for Granted to Exercise or Option Term Options Employees in Base Price Expiration -------------------- Name Granted (#)(1) Fiscal Year ($/Share)(2) Date 5%($) 10%($) - ------------------------ -------------- -------------- ------------ ------------ ----- ------ Gerard E. Holthaus........... 79,590 11.8% 18.39 3/30/07 (3) 920,856 2,332,783 85,500 12.6% 30.50 12/18/07 (4) 1,639,890 4,156,155 Barry P. Gossett............. - - - - - - J. Collier Beall............. 30,000 4.4% 18.39 3/30/07 (3) 347,100 879,300 35,000 5.2% 30.50 12/18/07 (4) 671,300 1,701,350 Joseph F. Donegan............ 30,000 4.4% 18.39 3/30/07 (3) 347,100 879,300 35,000 5.2% 30.50 12/18/07 (4) 671,300 1,701,350 Gerard E. Keefe.............. 30,000 4.4% 18.39 3/30/07 (3) 347,100 879,300 30,000 4.4% 30.50 12/18/07(4) 575,400 1,458,300 Robert W. Hansen............. 15,000 2.2% 18.39 3/30/07 (3) 173,550 439,650 10,000 1.5% 30.50 12/18/07 (4) 191,800 486,100 James D. Funk (5)............ 15,000 2.2% 18.39 3/30/07 (3) - -
___________ (1) Share amounts have been adjusted to reflect the Stock Dividend. (2) Represents fair market value of Common Stock at date of grant. (3) Options became fully vested in conjunction with the Recapitalization. (4) 50% of the options vest ratably over five years and 50% vest ratably based on the Company meeting certain financial targets over the next five years. (5) In connection with the Recapitalization, Mr. Funk cancelled all of his options at a price of $30.50 (as restated for the Stock Dividend) per share. 60 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES (1)
Number of Securities Underlying Unexercised Value of Unexercised Options at In-the-Money Options Fiscal Year end (#) At Fiscal Year End ($) Name Exercisable/Unexercisable(2)(3) Exercisable/Unexercisable(4) - ------------------ ------------------------------- ---------------------------- Gerard E. Holthaus.................. 201,090 / 68,400 3,263,029 / 0 Barry P. Gossett.................... - - J. Collier Beall ................... 73,900 / 28,000 1,169,079 / 0 Joseph F. Donegan................... 72,850 / 28,000 1,141,874 / 0 Gerard E. Keefe..................... 63,900 / 24,000 950,919 / 0 Robert W. Hansen.................... 37,850 / 8,000 646,724 / 0 James D. Funk(5).................... - -
(1) No options were exercised by executive officers during fiscal 1997. (2) Share amounts have been adjusted to reflect the Stock Dividend. (3) For options granted under the 1997 Plan, 50% vest ratably over five years and 50% vest ratably based on the Company meeting certain financial targets over the next five years. All other options became fully vested in conjunction with the Recapitalization. (4) Based on the estimated fair market value at December 31, 1997. (5) In conjunction with the Recapitalization, Mr. Funk elected to cancel all of his stock options at a price of $30.50 (as adjusted for the Stock Dividend) per share. Mr. Funk resigned in October 1997. 61 SCOTSMAN HOLDINGS, INC. 1994 EMPLOYEE STOCK OPTION PLAN In March 1995, a stock option plan was adopted for certain key employees of Scotsman. In February 1997, after giving effect to the Stock Dividend, options for 322,590 shares of Holdings were granted at an offer price of $18.39 per share. 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. 1997 EMPLOYEE STOCK OPTION PLAN In December 1997, a stock option plan was adopted for certain key employees. Under the plan, up to 390,000 options to purchase Holdings' outstanding common stock may be granted. In 1997, 353,850 options were granted under this plan at an offer price of $30.50 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 next five years. All options expire 10 years from the date of grant. LONG TERM INCENTIVE PLAN Scotsman adopted a long term incentive plan (the "Incentive Compensation Plan"). Under the terms of the Incentive Compensation Plan, which was terminated upon the consummation of the Recapitalization, certain management employees have been or would have been entitled to receive, for each of fiscal years 1994 through 1998, cash compensation if certain targets are or were met. In February 1997, $400,000 was paid to approximately 40 management employees based upon Scotsman's 1996 operating performance. Upon consummation of the Recapitalization, Scotsman accelerated the payment of $6,225,000 of previously deferred compensation to certain management employees under the Incentive Compensation Plan (including all executive officers of Scotsman) and such plan was terminated. 401(K)/DEFINED CONTRIBUTION PLAN On May 1, 1993, Scotsman 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 employee of Scotsman who completes one hour of service with Scotsman 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 Scotsman or (ii) the dollar limit described in Section 402(g) of the Code ($9,500 in 1997). All amounts deferred 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 Scotsman may contribute 62 a percentage of the amount deferred by each participant who makes salary reduction deferrals to the 401(k) Plan, has been employed for 12 consecutive months by Scotsman, completes 1,000 hours of service with Scotsman during the Plan year and is employed by Scotsman 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 Scotsman. 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 Scotsman, respectively. The 401(k) Plan also has a "profit sharing" feature, under which Scotsman may contribute, in its discretion, an additional amount which is allocated to the accounts of active participants who have been employed for 12 consecutive months by Scotsman, 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. 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 1997, Scotsman made matching contributions to the 401(k) Plan participants in an aggregate amount of $309,453. DEFERRED COMPENSATION PLAN FOR EXECUTIVES During 1997, Scotsman 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, 1997, the total amount deferred under this Plan, including earnings, was $2,699,224. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No director or executive officer of Scotsman was or is a director or executive officer of any corporation, other than Holdings, that has a director or executive officer who is also a director of Scotsman or a member of a committee of the Board of Directors. During 1997, no officers or employees of Scotsman other than Messrs. Gossett and Holthaus participated in deliberations of Scotsman's Board of Directors concerning executive officer compensation. 63 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of Holdings' 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 Holdings Common Stock, (ii) each director individually and (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 (1) Percentage - ---- ---------------- ---------- Cypress Merchant Banking Partners L.P.(2)(3)(4) c/o The Cypress Group L.L.C. 65 East 55th Street New York, NY 10022......................................... 2,026,203 41.18% Cypress Offshore Partners L.P.(2)(3)(4) 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...................................... 104,946 2.13 Scotsman Partners, L.P.(3)(4)(5) 201 Main Street Fort Worth, TX 76102....................................... 2,131,149 43.31 Odyssey Partners, L.P.(4)(6) 31 West 52nd Street New York, NY 10019......................................... 290,223 5.90 James N. Alexander(7)........................................... --- --- Daniel L. Doctoroff(7).......................................... --- --- Michael F. Finley(8)............................................ --- --- Robert B. Henske(7)............................................. --- --- James L. Singleton(8)........................................... --- --- David P. Spalding(8)............................................ --- --- Barry P. Gossett (4)(9)......................................... 124,407 2.53 Gerard E. Holthaus (9)(10)(11).................................. 239,190 4.67 J. Collier Beall(9)(10)(11)..................................... 78,400 1.57 Joseph F. Donegan(9)(10)(11).................................... 76,450 1.53 Gerard E. Keefe(9)(10)(11)...................................... 65,400 1.31 Robert W. Hansen(9)(10)(11)..................................... 44,000 0.89 All executive officers and directors as a group................. 803,522 14.52
(1) Shares have been adjusted to reflect the Stock Dividend. 64 (2) 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 P. Hughes, James L. Singleton, David P. Spalding and James A. Stern, 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. (3) Does not include shares beneficially owned by members of management, as to which the Investor Group (as defined herein) has an irrevocable proxy. (4) Under the Investor Stockholders Agreement, the Cypress Stockholders (as defined herein) and Scotsman Partners, L.P. have agreed to vote their shares for certain nominees for director and other matters and the Cypress Stockholders, Scotsman Partners, L.P., Odyssey 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." (5) 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 the Chief Financial Officer of Keystone, Inc. (6) The shares of common stock beneficially owned by Odyssey may be deemed to be beneficially owned by the general partners of Odyssey: Stephen Berger, Brian Wruble, Leon Levy, Jack Nash and Joshua Nash (collectively, the "General Partners"), who will share voting and investing control over such shares. The General Partners disclaim such beneficial ownership. The address of each of the General Partners is the address of Odyssey. (7) Such person's address is c/o Scotsman Partners, L.P. (8) Such person's address is c/o Cypress Merchant Banking Partners L.P. (9) Such person's address is the address of the Company's principal executive offices. (10) 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." 65 (11) Includes 201,090, 73,900, 72,850, 63,900, 37,850, and 612,590 shares held as options by Messrs. Holthaus, Beall, Donegan, Keefe and Hansen and all executive officers as a group, respectively, which are exercisable within 60 days. 66 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS THE RECAPITALIZATION Holdings, Odyssey, 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 the Company are parties to a Second Amended and Restated Management Stockholders' and Optionholders' Agreement dated as of May 22, 1997 (the "Stockholders' Agreement"), which amends and restates the Amended and Restated Management Stockholders' and Optionholders' Agreement dated as of June 6, 1994, and 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 each Management Stockholder (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 fifteen months after an initial public offering of the equity of Scotsman 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 Scotsman 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 Scotsman, 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. Each Management Stockholder has granted to the Investor Group an irrevocable proxy that permits the Investor Group to vote his shares. In addition, upon termination of any Management Stockholder's employment, Scotsman may elect to require such Management Stockholder to sell to Scotsman all of his shares. INVESTOR STOCKHOLDERS AGREEMENT 67 Upon consummation of the Recapitalization, Holdings, certain partnerships affiliated with The Cypress Group, LLC (the "Cypress Stockholders") and Scotsman Partners (collectively, including their permitted transferees, the "Investor Stockholders") and Odyssey, Barry Gossett, BT Investment Partners, Inc. and certain other stockholders (including their permitted transferees and the Investor Stockholders, the "Stockholders") entered into an investor stockholders agreement (the "Investor Stockholders Agreement"). Under the terms of the Investor Stockholders Agreement, unless otherwise agreed by the Investor Stockholders, the board of directors of Holdings will consist of eight directors: three persons nominated by the Cypress Stockholders, three persons nominated by Scotsman Partners, the Chairman of the Board and the President of Holdings. Each of the Investor Stockholders agree to vote (or cause their affiliates to vote) to remove and replace each other's nominees in accordance with appropriate instructions. 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. 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 will include (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 the Investor Stockholders determine to sell shares to a third party, in certain circumstances the Investor Stockholders will have the right to require the other Stockholders to sell their shares to such third party. 68 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 the 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) 10 years from the closing date and (ii) completion of an IPO. ODYSSEY INVESTORS MANAGEMENT AGREEMENT Prior to the Recapitalization, the Company had entered into a management agreement with Odyssey Investors, Inc., a wholly owned subsidiary of Odyssey Partners. The agreement provided that the Company would pay an annual fee of up to $250,000 in consideration for certain management, consulting and advisory services. The Company incurred expenses of $96,575 for these services in 1997. The agreement was terminated in conjunction with the Recapitalization. 69 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 1997. 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.) 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, 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 of Registration Statement on Form S-4, Commission File No. 333-30753).
70 10.3 -- Stockholder 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 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). 10.4 -- Second Amended and Restated Management Stockholders' and Optionholders' Agreement, dated as of May 22, 1997, 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 Registration Statement on Form S-4, Commission File No.333-30753). 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 Scotsman's Form 10-K for the year ended December 31, 1994). 10.7 -- Scotsman Holdings, Inc. 1997 Employee Stock Option Plan. 12.1 -- Statement regarding computation of ratios. 21.1 -- Subsidiaries of Registrant: Williams Scotsman, Inc. and its subsidiaries Mobile Field Office Company and Willscot Equipment, LLC 27 -- Financial Data Schedule
71 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. SCOTSMAN HOLDINGS, INC. By: /s/ Gerard E. Keefe ___________________________ Gerard E. Keefe Senior Vice President and Chief Financial Officer Dated: March 27, 1998 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 President, Chief Executive March 27, 1998 __________________________ Officer and Director Gerard E. Holthaus /s/ Gerard E. Keefe Senior Vice President and March 27, 1998 __________________________ Chief Financial Officer Gerard E. Keefe /s/ Katherine K. Giannelli Vice President and Controller March 27, 1998 __________________________ Katherine K. Giannelli /s/ Barry P. Gossett Chairman of the Board March 27, 1998 __________________________ Barry P. Gossett /s/ James N. Alexander Director March 27, 1998 __________________________ James N. Alexander /s/ Daniel L. Doctoroff Director March 27, 1998 __________________________ Daniel L. Doctoroff 72 NAME CAPACITY DATE ---- -------- ---- /s/ Michael F. Finley Director March 27, 1998 __________________________ Michael F. Finley /s/ Robert B, Henske Director March 27, 1998 __________________________ Robert B. Henske /s/ James L. Singleton Director March 27, 1998 __________________________ James L. Singleton /s/ David P. Spalding Director March 27, 1998 __________________________ David P. Spalding 73 SCOTSMAN HOLDINGS, INC. AND SUBSIDIARIES Schedule I - Condensed Financial Information of Registrant Condensed Balance Sheets December 31, -------------------------- (in thousands) 1997 1996 ---- ---- Assets Cash $ 2 $ 75 Investment in subsidiary (109,494) 71,703 Deferred financing costs, net -- 774 Deferred income taxes 5,377 3,068 --------- ------- $(104,115) $75,620 ========= ======= Liabilities and Stockholders' Equity Accrued expenses $ 830 $ 1,033 Long-term debt -0- 26,074 Promissory note payable 21,834 -- --------- ------- 22,664 27,107 --------- ------- Stockholders' equity: Common stock 82 35 Additional paid-in capital 164,494 39,064 Retained earnings 4,428 11,403 --------- ------- 169,004 50,502 Treasury stock (295,783) (1,989) --------- ------- (126,779) 48,513 --------- ------- $(104,115) $75,620 ========= =======
Condensed Statements of Operations Year Ended December 31, ------------------------------------- (in thousands) 1997 1996 1995 ---- ---- ---- Revenue $ -- $ 2,074 $ -- ------- ------- ------- Selling, general and administrative expenses 56 60 71 Interest 2,133 3,139 2,821 ------- ------- ------- 2,189 3,199 2,892 ------- ------- ------- Loss before income taxes (2,189) (1,125) (2,892) Income tax benefit 2,309 1,086 1,012 ------- ------- ------- Income (loss) before equity in earnings of subsidiaries and extraordinary item 120 (39) (1,880) Extraordinary loss on early extinguishment of debt, net of income taxes (4,614) -- -- Equity in earnings (loss) of subsidiaries (2,448) 9,195 4,559 Net income (loss) $(6,942) $ 9,156 $ 2,679 ======= ======= =======
74 SCOTSMAN HOLDINGS, INC. AND SUBSIDIARIES Schedule I - Condensed Financial Information of Registrant, Continued
Statement of Cash Flows Year Ended December 31, ------------------------------ (in thousands) 1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ (6,942) $ 9,156 $ 2,679 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Extraordinary loss on extinguishment of debt 4,614 --- --- Amortization 86 246 158 Non-cash charges for interest 1,527 2,819 2,533 Deferred income tax benefit (2,309) (1,086) (1,012) Undistributed (earnings) loss of subsidiary 2,448 (9,195) (4,559) Other (203) 69 92 --------- ------- ------- Net cash provided by (used in) operating activities (779) 2,009 (109) --------- ------- ------- Cash flows from financing activities: Dividends received from subsidiary 178,749 --- --- Issuance of promissory note 21,834 --- --- Premium paid on extinguishment of debt (3,876) --- --- Repayments of long-term debt (27,651) --- --- Net proceeds from issuance of common stock 125,444 --- --- Payments to acquire treasury stock (293,794) (1,989) --- --------- ------- ------- Net cash provided by (used in) financing activities 706 (1,989) --- --------- ------- ------- Net increase (decrease) in cash (73) 20 (109) Cash at beginning of period 75 55 164 --------- ------- ------- Cash at end of period $ 2 $ 75 $ 55 ========= ======= =======
75 SCOTSMAN HOLDINGS, INC. AND SUBSIDIARIES Schedule II - Valuation and Qualifying Accounts Year ended December 31, ------------------------------ 1997 1996 1995 ---- ---- ---- (In thousands) Allowance for Doubtful Accounts: Balance at beginning of the period $ 258 $ 447 $ 444 Provision charged to expense 2,370 2,209 1,509 Accounts receivable written-off (2,375) (2,398) (1,468) ------- ------- ------- Balance at end of the period $ 253 $ 258 $ 447 ======= ======= ======= 76 EXHIBITS TO FORM 10-K SCOTSMAN HOLDINGS, INC. EXHIBIT INDEX Sequentially Numbered Exhibit No. Description of Document Page - ----------- ----------------------- ------------- 10.7 -- Scotsman Holdings, Inc. 1997 Employee Stock Option Plan 12.1 -- Statement regarding computation of ratios. 27 -- Financial Data Schedule 77 EX-10 2 EXHIBIT 10.7 EXHIBIT 10.7 78 SCOTSMAN HOLDINGS, INC. 1997 EMPLOYEE STOCK OPTION PLAN INCENTIVE STOCK OPTION AGREEMENT -------------------------------- THIS INCENTIVE STOCK OPTION AGREEMENT (this "Agreement") is made this 18th day of December, 1997, by and between Scotsman Holdings, Inc., a Delaware corporation (the "Company"), and FIELD (name) (the "Optionee"). WHEREAS, the Company and its stockholders have approved the Scotsman Holdings, Inc. 1997 Employee Stock Option Plan (the "Plan"), pursuant to which the Company may, from time to time, enter into stock option agreements with certain of its employees eligible to participate in the Plan; WHEREAS, the Optionee is now in the employ of the Company or an Affiliate of the Company as a Key Employee, and the Company desires to have the Optionee remain in such employ and to afford the Optionee the opportunity to acquire, or enlarge, the Optionee's stock ownership in the Company so that the Optionee may have a direct proprietary interest in the Company's success; and WHEREAS, the Committee has, pursuant to its authority under the Plan, granted to the Optionee an Award in the form of an Incentive Stock Option to acquire up to the number of shares of the Company's Common Stock set forth in SECTION 1 below in accordance with the provisions of the Plan and subject to the terms and conditions of the Plan and this Agreement. NOW, THEREFORE, in consideration of the mutual undertakings and obligations of the parties herein and other good and valuable consideration, the parties hereby agree as follows: 1. Grant of Option. Subject to the terms, conditions and provisions of this Agreement and the Plan, the Company hereby grants to the Optionee an Option to purchase up to shares of the Company's Common Stock, par value $.01 per share (this "Option"), which Option is intended to be an Incentive Stock Option. The Optionee accepts this Option subject to all of the terms, conditions and provisions of this Agreement and the Plan, and agrees to be bound and to abide by all requests, decisions and determinations of the Committee made in accordance with the Plan. 2. The Plan. This Option is intended to conform in all respects with the terms of the Plan as presently written. Inconsistencies between this Option and the Plan will be resolved according to the terms of the Plan, a copy of which has been supplied to you. 79 3. Option Price. The exercise price for the Option shall be $30.50 per share (the "Option Price"). 4. Exercise of the Option. The Option granted hereunder shall be exercised, in whole or in part, subject to Sections 7 and 8 hereof and the vesting requirements set forth in EXHIBIT A, at any time during the term of the Option by delivering to the Secretary of the Company on any business day (the "Exercise Date"), written notice specifying the number of shares as to which the Option is being exercised (the "Exercised Shares") pursuant to the form on EXHIBIT B, accompanied by: (i) cash or check payable to the order of the Company for the aggregate Option Price of the Exercised Shares; or (ii) in the discretion of the Committee, shares of Common Stock of the Company (the "Stock Payment") with a Fair Market Value equal to or less than the aggregate Option Price of the Exercised Shares, plus cash or check payable to the order of the Company for an amount equal to that amount, if any, by which the aggregate Option Price for the Exercised Shares exceeds the Fair Market Value of the Stock Payment. If the Option granted hereunder is exercised in part, the Optionee must purchase no less than 100 shares at any one time. 5. Taxes. The Company shall be entitled to require as a condition of delivery of the certificate representing the Exercised Shares that the Optionee remit an amount sufficient to satisfy all federal, state and other government taxes or withholding requirements; PROVIDED, FURTHER, that the Company shall have the right to withhold such sums from any compensation otherwise due to the Optionee. 6. Issuance of Stock. Upon payment in full of the aggregate Option Price, the Company shall issue to the Optionee a certificate representing the Exercised Shares, in the form of fully paid and non-assessable Common Stock of the Company. 7. Termination of Employment. (a) Upon termination of employment of a Participant with the Company or an Affiliate, this Option shall, to the extent not previously exercised, terminate and become null and void, provided that: (1) if the Participant shall die while in the employ of the Company or an Affiliate or during either the three month or one year period, whichever is applicable, specified in clause (2) below and at a time when such Participant was entitled to exercise any portion of this Option as herein provided, the legal representative of such Participant, or such person who acquired this Option by bequest or inheritance or by reason of the death of the Participant, shall have the right to exercise this Option, to the extent not previously exercised, in respect of any or all of such number of Shares that such Participant is entitled to purchase pursuant to this Option at the time of such Participant's death, at any time up to and including one year after the date of death; and 80 (2) if the employment of any Participant shall terminate by reason of the Participant's Retirement, Disability or dismissal other than for Cause, and while such Participant is entitled to exercise this Option, as herein provided, such Participant shall have the right to exercise this Option, to the extent not theretofore exercised, in respect of any or all of such number of Shares that such Participant is entitled to purchase pursuant to this Option at the time of such termination, at any time up to and including (i) three months after the date of such termination of employment in the case of termination by reason of Retirement or dismissal other than for cause and (ii) one year after the date of termination of employment in the case of termination by reason of Disability. (b) If a Participant voluntarily terminates his employment, or is discharged for Cause, any Option granted hereunder shall terminate. (c) If this Option shall be exercised by the legal representative of a deceased or a disabled Participant, or by a person who acquired this Option by bequest or inheritance or by reason of death of any Participant, written notice of such exercise shall be accompanied by a certified copy of letters testamentary or equivalent proof of the right of such legal representative or other person to exercise this Option. 8. Vesting Upon a Change in Control. (a) CHANGE IN CONTROL shall be deemed to occur if: (i) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended), other than Cypress Merchant Banking Partners L.P., Cypress Offshore Partners L.P., BT Investment Partners, Inc., and Scotsman Partners, L.P., or any of their affiliates or any combination thereof (collectively, the "Investor Group"), is or becomes the "beneficial owner") (as defined in Rule 13d- 3 under the Exchange Act), directly or indirectly, of all of the outstanding capital stock of the Employer; or (ii) a sale of all or substantially all of the assets of the Employer other than to an entity owned or controlled by the Investor Group is consummated; or (iii) any merger, consolidation, issuance of securities or purchase or sale of assets, the result of which would be the occurrence of any event described in clause (i) or (ii) above, is consummated; or (iv) a registration statement under the Securities Act of 1933, as amended, registering common stock in connection with the Employer's initial public offering becomes effective. (b) Upon the occurrence of a change in control, this Option shall immediately vest and become exercisable and the Participant shall receive, with respect to each Share subject to this Option, an amount equal to the excess of the Fair Market Value of such Share immediately prior to the occurrence of such transaction over the exercise price for such Share under this Option; such amount to be payable in cash, in one or more kinds of property (including the property, if any, payable in such transaction), or in a combination thereof, as the Committee, in its sole discretion, shall determine. 81 9. Stockholders' Agreement. It is a condition to the effectiveness of this Option and the obligation of the Company to issue any Shares hereunder that the Participant shall have executed, on or prior to the date hereof, the Amended and Restated Management Stockholders' and Optionholders' Agreement, dated as of June 6, 1994, by and among the Company, the Stockholders and Permitted Transferees (each as defined therein) as such agreement may be amended or restated (the "Stockholders Agreement"). If the Participant has not executed the Stockholders Agreement on or before the date hereof, this Option shall automatically and without any further notice terminate and be null and void. 10. Term of Option. Subject to the terms, conditions and provisions of this Agreement and the Plan, this Option shall terminate ten years from the date of grant on December 18, 2007. 11. Non-Transferability of Option. This Option may be exercised only by the Participant and may not be assigned or transferred except as expressly provided in the Plan. Immediately upon any attempt to assign or transfer this Option, by operation of law or otherwise, in violation of this Agreement, this Option shall terminate and be null and void. 12. No Rights of Stockholder. The Participant shall not be deemed a stockholder of the Company for any purpose until the shares of the Company's Common Stock subject to this Option have been issued to the Participant upon the exercise of this Option. The Participant shall have no obligation to exercise this Option. 13. Common Stock Acquired for Investment. The Participant agrees that the Company may require the Participant to certify (in such form as the Company may specify) prior to each time or times the Exercised Shares are purchased that such Exercised Shares are being purchased by the Participant for investment and not with any intention of distributing the same. The stock certificates for any shares of Common Stock issued by the Company upon exercise of this Option shall be stamped, if appropriate, with a legend restricting transferability of the Shares in accordance with this Agreement and the Plan, the Securities Act of 1933, as amended, and any applicable state securities laws. 14. Notice of Disposition. In the event the Participant makes a disposition (as that term is defined in Section 424(c) of the Code) of the Exercised Shares within two years from the date hereof or within one year from the date of acquiring such Exercised Shares, the Participant shall notify the Company of such disposition within thirty (30) days thereof. 15. The Company's Rights. The existence of this Option shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure, or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or other stocks with preference ahead of or convertible into, or otherwise affecting the Common Stock or rights thereof, or dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. 82 16. Recapitalization. In the event of a change in the number of issued shares of Common Stock of the Company resulting from a subdivision or consolidation of shares or other capital adjustment, or the payment of a stock dividend or other increase or decrease in such shares, the committee may, in its sole and absolute discretion, make such adjustments to this Option as it deems appropriate. 17. Miscellaneous. (a) The Participant acknowledges that the exercise of this Option is subject to the Certificate of Incorporation and the Bylaws of the Company, as both may be amended from time to time, and any applicable federal or state laws, rules or regulations. (b) The Committee shall have the right, in its sole and absolute discretion, to alter or amend this Agreement, from time to time, in any manner for the purpose of promoting the objectives of the Plan but only if all agreements granting options to purchase shares of the Company's Common Stock pursuant to the Plan which are in effect and not wholly exercised at the time of such alteration or amendment shall also be similarly altered or amended with substantially the same effect. Any such alteration or amendment of this Agreement by the Committee shall, upon adoption thereof by the Committee, become and be binding and conclusive on all persons affected thereby without requirement for consent or other action with respect thereto by any such person. The Company shall give written notice to the Participant of any such alteration or amendment of this Agreement by the Committee as promptly as practical after the adoption thereof. The foregoing shall not restrict the ability of the Participant and the Company by mutual consent to alter or amend this Agreement in any manner which is consistent with the Plan and approved by the Committee. (c) This Agreement shall be governed by and construed in accordance with the laws of the State of Maryland, exclusive of its conflicts of law provisions. (d) The descriptive headings of the sections and paragraphs of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. (e) Any notice or communication required to be given pursuant to this Agreement shall be in writing and shall be sufficiently made or given if hand-delivered or mailed by certified mail, addressed to the Participant at the address contained in the records of the Company or to the Company at its principal office. (f) This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. 83 (g) To the extent that any capitalized term used in this Agreement is not defined herein, it shall be given the meaning ascribed to such term in the Plan. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. WITNESS: SCOTSMAN HOLDINGS, INC. _________________________ By:_____________________________________ Gerard E. Holthaus President and Chief Executive Officer OPTIONEE _________________________ ________________________________________ PRINT NAME: 84 EXHIBIT A SCOTSMAN HOLDINGS, INC. 1997 EMPLOYEE STOCK OPTION PLAN INCENTIVE STOCK OPTION AGREEMENT -------------------------------- VESTING OF INCENTIVE STOCK OPTIONS FOR FIELD(name) The award of Incentive Stock Options under this Agreement vest and become exercisable as follows: Performance-based Vesting ------------------------- for 50% shares subject to options as follows -- EBITDA targets * -------------- 1. Options for FIELD(div) Shares become 1997 - $91,142,000 exercisable on December 31, 1997 if the Company's 1997 EBITDA target is achieved 2. Options for FIELD(div) Shares become 1998 - $108,591,000 exercisable on December 31, 1998 if the Company's 1998 EBITDA target is achieved 3. Options for FIELD(div) Shares become 1999 - $128,249,000 exercisable on December 31, 1999 if the Company's 1999 EBITDA target is achieved 4. Options for FIELD(div) Shares become 2000 - $150,673,000 exercisable on December 31, 2000 if the Company's 2000 EBITDA target is achieved 5. Options for FIELD(div) Shares become 2001 - $174,639,000 exercisable on December 31, 2001 if the Company's 2001 EBITDA target is achieved Time Based Vesting ------------------ for 50% of Shares subject to options on the following dates -- FIELD(div) shares on December 31, 1997 FIELD(div) shares on December 31, 1998 FIELD(div) shares on December 31, 1999 FIELD(div) shares on December 31, 2000 FIELD(div) shares on December 31, 2001 * Subject to annual Cap-X adjustments. If EBITDA targets are missed in any one year, there is the opportunity for a cumulative performance-based vesting calculation to make up for any year(s) vesting percentage not achieved. The cumulative measurement date will be the earlier of December 31, 2001 or a change of control. 85 EX-12 3 EXHIBIT 12.1 EXHIBIT 12.1 86 Exhibit 12 SCOTSMAN HOLDINGS, INC. AND SUBSIDIARIES Computation of Ratio of Earnings to Fixed Charges
Year Ended December 31, ------------------------------------------------------------ 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- (Dollars in thousands) Earnings: Earnings (loss) from continuing operations before income taxes and extraordinary item $(6,377) $ (702) $ 4,530 $11,980 $ 7,776 Fixed charges from below 22,322 21,869 26,174 29,894 46,900 ------- ------- ------- ------- ------- Total earnings $15,945 $21,167 $30,704 $41,874 $54,676 ------- ------- ------- ------- ------- Fixed Charges: Interest $21,530 $21,106 $25,306 $28,936 $45,744 Interest component of rent expense: Total rent expense $ 2,375 $ 2,288 $ 2,605 $ 2,875 $ 3,468 Portion considered interest expense 33% 33% 33% 33% 33% ------- ------- ------- ------- ------- Interest component $ 792 $ 763 $ 868 $ 958 $ 1,156 ------- ------- ------- ------- ------- Total fixed charges $22,322 $21,869 $26,174 $29,894 $46,900 ------- ------- ------- ------- ------- Earnings to Fixed Charges 0.7x 1.0x 1.2x 1.4x 1.2x ======= ======= ======= ======= ======= Excess Fixed Charges $ 6,377 $ 702 --- --- --- ======= ======= ======= ======= =======
87 EX-27 4 FINANCIAL DATA SCHEDULE, SCOTSMAN HOLDINGS, INC.
5 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 309 0 25,790 253 0 0 540,981 100,348 514,175 0 533,304 0 0 82 (128,931) 514,175 236,190 236,190 128,353 128,353 54,317 0 45,744 7,776 3,246 4,530 0 11,472 0 (6,942) (1.00) (0.95)
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