Item 1. Business
General
Scotsman Holdings, Inc. (Holdings) was incorporated under the laws of Delaware in November 1993 for the purpose of acquiring Williams Scotsman, Inc. ("Scotsman," individually; "the Company" or "we" collectively with Holdings). Holdings conducts business solely as a holding company. Its only significant asset is the capital stock of Scotsman. Therefore, Holdings is dependent upon the cash flows of Scotsman for all of its cash needs.
Scotsman was formed by the 1990 merger of Williams Mobile Offices, Inc., referred to as "Williams," and Scotsman Manufacturing, Inc. Both companies were founded in the mid-1940s. At the time of the combination, Williams had 17 offices located in 13 Eastern states and 15,000 rental units. Scotsman Manufacturing had 11 offices located in four Western states and 7,500 rental units. Both Williams and Scotsman Manufacturing had mobile office leasing as well as manufacturing and modular building operations. Subsequent to the merger, we made the strategic decision to close our manufacturing facilities and focus on core leasing activities.
We are currently the second largest lessor of mobile office units in North America with units leased through a network of branch offices located throughout the United States and Canada. Our mobile office units provide high quality, cost-effective relocatable space solutions to an estimated 24,000 customers in 450 industries, including construction, education, commercial and industrial and government. Our leasing operations have generated recurring revenues, high levels of repeat business and an average existing lease duration of approximately 23 months. In addition to our core leasing operations, we sell new and previously leased mobile office units and provide delivery, installation and other ancillary products and services.
Our mobile office fleet is generally comprised of standardized, versatile products that can be configured to meet a wide variety of customer needs. The units are fitted with axles and hitches and are towed to various locations. Most units are wood frame mounted on a steel chassis, contain materials used in conventional buildings and are equipped with air conditioning and heating, electrical outlets and, where necessary, plumbing facilities. Mobile office units are durable and have an estimated useful life of generally 20 years. Storage products are windowless and are typically used for secure storage space. There are generally two types: ground-level entry storage containers and storage trailers with axles and wheels. The basic storage unit features a roll-up or swing door at one end. Units are made of heavy exterior metals for security and water tightness. The average age of our mobile office units is approximately 9 years while the average age of the storage units is approximately 11 years. The average age of the total fleet is approximately 9 years.
From 1997 to 2003, we increased revenues at a compound annual growth rate, or "CAGR," of 10.8% to $437.8 million. Over the same period, cash flow from operating activities increased at a CAGR of 14.8% to $74.3 million and Adjusted EBITDA, as defined in Item 7 - Liquidity and Capital Resources, grew at a CAGR of 8.6% to $151.5 million. The number of lease fleet units increased 93% to 91,000 units. We have achieved this growth by expanding our lease fleet through factory purchases and acquisitions, expanding our branch network, increasing ancillary high margin services and product lines and improving fleet management.
Based on its experience, management believes that the North American mobile office industry (excluding manufacturing operations) exceeds $3.0 billion. This is primarily driven by positive demographic trends, economic expansion, an
increase in the number of applications for modular space and a greater recognition of the product's positive attributes. By outsourcing their space needs, our customers are able to achieve flexibility, preserve capital for core operations, and convert fixed costs into variable costs.
Recapitalization
In December 1993, Odyssey Partners, L.P., together with management, acquired all of the common stock of Holdings, Inc., which owns 100% of the outstanding voting securities of Scotsman.
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 $293.8 million in cash and approximately $21.8 million in promissory notes which were repaid in January 1998 and (ii) issued 1,475,410 shares of common stock for an aggregate of approximately $135.0 million in cash. Such amounts have not been restated for the three-for-one stock split granted by Holdings in December 1997. Pursuant to the May 1997 recapitalization, an investor group, which included affiliates of The Cypress Group L.L.C. and Keystone, Inc., acquired a significant equity stake in Holdings. In related transactions, we purchased or repaid all of the outstanding indebtedness. In conjunction with the debt extinguishment, we recognized an extraordinary loss of $13.7 million. The transactions described above are collectively referred to herein as the "Recapitalization".
Expansion and Acquisitions
Since the 1997 recapitalization, Scotsman has added several 100% owned subsidiaries, including Willscot Equipment LLC or "Willscot", Space Master International, Inc., or "SMI," Williams Scotsman of Canada, Inc., or "WSC," Evergreen Mobile Company, or "Evergreen," and Truck and Trailer Sales, Inc., or "TNT." Willscot was created in 1997 as part of the recapitalization of our company and WSC was formed in April 1998 to begin our expansion into the Canadian marketplace. We acquired SMI, a privately held Georgia corporation, on September 1, 1998 for total consideration of $272.7 million adding approximately 12,800 units to our lease fleet. On February 1, 1999, we acquired Evergreen, a privately held Washington corporation with a 2,000 unit mobile office fleet, for $36.2 million. TNT was acquired in August of 2000 for $8.6 million and added 1,000 units to our lease fleet. SMI, Evergreen and TNT currently have no assets or operations.
In addition, we have completed several asset acquisitions over the past five years as a complement to our internal fleet growth and branch expansion, the most significant of which was Mckinney Mobile Modular, or "Mckinney," with a fleet of 1,600 units. We purchased the sales and leasing business of Mckinney, a privately held California corporation, on February 1, 2001 for total consideration of $26.1 million. On July 31, 2002 we acquired the mobile office and storage product fleet of Northgate Industries Ltd., an Edmonton, Alberta-based Canadian company that was involved in the leasing of mobile offices to industrial markets. The transaction added over 500 units for a net purchase price of $7.0 million. On May 29, 2003 we purchased the mobile office leasing fleet business of AFA Locations Inc, a Montreal-based Canadian company. The purchase price was $3.2 million and the transaction added approximately 300 units.
Competitive Strengths
Market Leadership. We are one of two national operators competing in the highly fragmented mobile office industry and believe our lease fleet is more than three times larger than that of our next largest competitor. We are the first or second largest provider of leased fleet units in most of our regional markets.
National Presence and Customer Diversity. Our national presence provides us with the benefits of (1) customer and geographic diversification, (2) less sensitivity to regional economic downturns, (3) the ability to redeploy units within our branch network to optimize utilization levels in response to regional economic downturns, which reduces the need for new unit purchases and (4) economies of scale. We have an estimated 24,000 customers, the largest of which accounted for only 1.8% of 2003 revenues.
Effective Fleet Management. Our lease fleet is actively managed to maximize customer satisfaction, optimize fleet utilization and improve fleet quality and flexibility. Our proprietary management information system provides comprehensive fleet statistics and lease information that allow us to effectively monitor and allocate our units through our branch network.
We maintain a number of fleet management initiatives designed to improve operations and increase profitability, including (1) standardization of products, (2) maintaining fleet quality, (3) portability of fleet and (4) fleet pruning. These initiatives are outlined in more detail below:
o Emphasis on Standardization of Products. We focus on maintaining a standardized lease fleet through a combination of new fleet purchasing guidelines and the conversion of any non-standard units into more standard configurations. Product standardization allows us to easily modify our structures to meet specific customer needs and thus increase utilization. Conversions of existing units from non-standard to standardized units can be completed, on average, at less than the cost of purchasing new units. Overall, we believe that the majority of our fleet is comprised of standardized, highly versatile products.
o Fleet Quality. Because we believe that rental rates are based upon physical condition rather than age, we monitor our fleet on a regular basis, refurbishing units and conducting targeted sales programs, as necessary.
o Portability of Fleet and Fleet Redeployment. We capitalize on our nationwide franchise and inventory management systems by actively redeploying excess fleet to areas of higher customer demand. The portability and standardized nature of the units allow them to be relocated to surrounding areas at relatively low cost, thus allowing us to minimize capital expenditures for new fleet purchases. As part of our fleet purchasing and conversion activities, we generally have our units built or converted to meet industrialized building codes for use in several surrounding states, thus allowing them to be redeployed as necessary.
o Fleet Pruning. From time to time, we will sell excess or idle units from our fleet. Pruning activities allow us to manage fleet quality and composition.
Dedicated Marketing and Customer Service. Through extensive marketing and customer service programs, we focus on maintaining and expanding long-term customer relationships. We also maintain a full-service national support staff to prepare units for lease and maintain units while on lease. As a result of this extensive customer service, our leasing operations have generated recurring revenues due to high levels of repeat business.
Experienced Management. Since 1997, the current management team has doubled the size of our fleet and increased the size of our branch network, both organically and through selective strategic acquisitions. Management holds personal equity investments equivalent to approximately a 12% share of Holdings on a fully diluted basis. We believe that this represents a significant economic commitment to and confidence in our company.
Operating Strategy
Due to the local and regional nature of our business, our goals are to become the leader in each of the local markets in which we compete and to expand our coverage to additional local markets. To achieve market leadership, we have implemented a strategy which emphasizes (1) superior service, (2) a well-maintained, readily-available and versatile lease fleet, (3) effective fleet management using proprietary information systems, and (4) targeted marketing through an experienced and motivated sales force. We believe that we are generally the first or second largest provider of relocatable space in each of our regional markets as measured by lease fleet size and revenues. Our branch offices are distributed throughout the United States and Canada and are located in a majority of the major metropolitan areas.
Given recent economic trends, we implemented a strategic initiative to dispose of selected rental units in our lease fleet which we have determined no longer merit further investment. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144 - Accounting for the Impairment or Disposal of Long Lived Assets, we plan to sell to one or more buyers approximately 2,900 units within a year of December 31, 2003, the effective date of the disposal initiative.
Management's business and growth strategy includes the following:
Fleet and Branch Expansion. We plan to continue to capitalize on the industry's favorable long-term growth trends by increasing customer penetration and fleet size in existing markets. In addition, we plan to open branches in new markets where positive business fundamentals exist. From January 1, 2000 to December 31, 2003, we increased the number of units from approximately 79,600 to 91,000 as a result of general fleet expansion and to a much lesser extent, through acquisitions.
Selective Fleet Acquisitions. To complement our internal fleet and branch expansion, we plan to continue to capitalize on the industry's fragmentation and expand our geographic coverage by making selective acquisitions of mobile offices and storage product lease fleets. Typically, there is a low cost of integrating acquired fleets and acquired units have existing leases that generate immediate revenues. From January 1, 2000 to December 31, 2003, we made five acquisitions of approximately 3,800 units for a total fleet purchase price of $39.6 million. Units added through acquisitions have accounted for approximately 14% of the value of our total fleet purchases during this period.
Storage and Ancillary Products. We continue to diversify our product offerings and deliver ancillary products and services to leverage our existing branch network. Since January 1, 2000, we have grown our storage product fleet, which provides secured storage space, from 15,200 units to 20,200 at December 31, 2003. Ancillary products and services include the rental of steps, furniture, ramps and security systems; sales of parts and supplies; and charges for granting insurance waivers and for damage billings.
Education Market Trends. The education market accounted for approximately 23% of our 2003 revenues. We believe that the education market offers growth opportunities as a result of the following: (1) state and local governmental pressures to find cost-effective ways to expand classroom capacity, (2) increased interstate and intrastate migrations necessitating rapid expansion of education space and (3) the predicted growth of the school age population.
Recession Resistance
Although a portion of our business is with customers in industries that are cyclical in nature and subject to change in general economic conditions, management believes that certain characteristics of the mobile office leasing industry and our operating strategies should help to mitigate the effects of economic downturns. These characteristics include (1) our typical lease terms, which include contractual provisions requiring customers to retain units on lease for, on average, 13 months, and have an average existing lease duration of 23 months, (2) the flexibility and low cost offered to our customers by leasing which may be an attractive alternative to capital purchases, (3) our ability to redeploy units during regional recessions, (4) the diversity of our industry exposure and (5) the geographic balance of our operations.
Products
Our products can be used to meet a variety of customer needs. Sample applications include classrooms, construction site offices, sales offices and special events headquarters. Our mobile office fleet ranges from single-unit facilities to section modular structures, which combine two or more units into one structure for applications that require more space. Units typically range in size from 8 to 14 feet in width and 16 to 70 feet in length and are generally wood frame mounted on a steel chassis, constructed using a steel frame and undercarriage with an exterior of wood or aluminum. The units are fitted with axles and hitches and are towed to various locations. Most units 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 extremely durable and have an estimated economic useful life of generally 20 years. During 2003, the average purchase price for new mobile office units (excluding storage products) was $14,200 and the average mobile office unit was leased for approximately $300 per month, although rates vary depending upon size, product type, features and geographic region. Products have varying lease terms, with average contractual terms of 13 months. However, most customers retain the product for a longer period as evidenced by an average existing lease duration of 23 months at December 31, 2003.
Our specific product offerings are described below:
Single-Wide Mobile Offices. Single-wide mobile offices are the most functional and versatile units in our lease fleet. Units typically have "open interiors" which can be modified using movable partitions. Single-wide mobile offices include tile floors, air conditioning/heating units, partitions and, if requested, toilet facilities.
Section Modulars. Section modulars are two or more units combined into one structure. Interiors are customized to match the customer needs. Examples of section modular units include hospital diagnostic annexes, special events headquarters, golf pro shops and larger general commercial offices.
Classrooms. Classroom units are generally standard single- or double-wide units adapted specifically for use by school systems or universities. Classroom units usually feature chalkboards and teaching aids, air conditioning/heating units, windows along side-walls and, if requested, toilet facilities.
Sales Offices. Sales offices are marketed to businesses that require site located space for sales presentations. Exteriors are typically wood-sided with some models offering recessed front entries.
Our "Executive Line" sales offices are larger, more expensive versions of the standard sales office with more amenities.
Storage Products. 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.
Branch Network
As a key element to our market leadership strategy, we maintain a network of over 80 branch offices throughout the United States and Canada. This network enables us to increase our product availability and customer service within our regional and local markets. Customers benefit because they are provided with (1) improved service availability, (2) reduced time to occupancy, (3) better access to sales representatives, (4) the ability to inspect units prior to rental and (5) lower freight costs which are typically paid by the customer. We benefit because we are able to spread regional overhead and marketing costs over a larger lease base, redeploy units within our branch network to optimize utilization, discourage potential competitors by providing ample local supply and offer profitable short-term leases which would not be profitable without a local market presence.
Management believes geographic diversification of our branch network mitigates economic and operating risk. In 2003, the Northeast, Mid Atlantic, Southeast, South Central, West, North Central and Canadian regions accounted for 20%, 14%, 20%, 10%, 20%, 11%, and 5% of our revenues, respectively.
Our branches are generally headed by a dedicated branch manager. The branch system is supervised by six U.S. regional vice presidents and an executive vice president who average 19 years of industry experience and 12 years with our company. Management believes it is important to encourage employees to achieve revenue and profit levels and to provide a high level of service to our customers. Approximately 30% of the regional managers' compensation is based upon the financial performance of their branches and approximately 45% of branch managers' compensation is tied to budgeted Adjusted EBITDA levels. Sales representatives' compensation is commission driven and based on the gross profits of new business.
Operations
Leasing. Leasing revenue is a function of average monthly rental rate, fleet size and utilization. We monitor fleet utilization at each branch. For 2003, average fleet utilization was 76.6%. While we adjust our pricing to respond to local competition in our markets, we believe that we generally achieve a rental rate equal to or above that of our competitors because of the quality of our products and our high level of customer service.
As part of our leasing operations, we sell used mobile office units from our lease fleet either at fair market value or, to a much lesser extent, pursuant to pre-established lease purchase options included in the terms of its lease agreements. Due in part to an active fleet maintenance program, our units maintain a significant percentage of their original value which includes the cost of the units as well as costs of significant improvements made to the units.
New Unit Sales. New unit sales include sales of newly-manufactured mobile office units. We do not generally purchase new units for resale until we have obtained firm purchase orders (which are generally non-cancelable) for such
units. New mobile units are generally purchased more heavily in the late spring and summer months due to seasonal classroom and construction market requirements.
Delivery and Installation. We provide delivery, site-work, installation and other services to our customers as part of our leasing and sales operations. Revenues from delivery, site-work and installation result from the transportation of units to a customer's location, site-work required prior to installation and installation of the mobile units which have been leased or sold. Typically units are placed on temporary foundations constructed by our service technicians, and service personnel will also generally install our ancillary products. We also derive revenues from tearing down and removing units once a lease expires.
Other. We also derive revenue from the sale of other products and services, including rental of steps, furniture and ramps; sales of parts, supplies and security systems; and charges for granting insurance waivers (i.e., charging a fee to customers who do not provide their own insurance certificate) and for damage billings.
Capital Expenditures and Acquisitions
We closely monitor fleet capital expenditures, which include fleet purchases and capitalizable costs of improvements to existing units. Generally, fleet purchases are controlled by field and corporate executives, and must pass our fleet purchasing policy guidelines (which include ensuring that utilization rates and unrentable units levels are acceptable, that redeployment, refurbishment and conversion options have been evaluated, and that specific return on investment criteria have been met). We purchase our units through approximately 50 third-party suppliers (most suppliers have only one factory, which generally serves a market within 300 to 400 miles), with no significant dependence on any supplier. The top three suppliers of units for 2003 represented approximately 39% of all fleet purchases, and the top ten suppliers represented approximately 73% of all fleet purchases. We believe that we have an excellent working relationship with our suppliers.
We believe that our fleet purchases are flexible and can be adjusted to match business needs and prevailing economic conditions. We are not "locked in" to long-term purchase contracts with manufacturers and can modify our capital spending activities to meet customer demand. For example, our fleet capital expenditures decreased from approximately $105.5 million in 2001 to approximately $40.8 million in 2002 and then increased to approximately $53.3 million in 2003.
We supplement our fleet spending with acquisitions. Although the timing and amount of acquisitions are difficult to predict, management considers its acquisition strategy to be opportunistic and will adjust its fleet spending patterns as acquisition opportunities become available.
Marketing
In addition to opening new branches, we use a number of marketing tools to generate new business and customers. By maintaining a detailed and updated customer and prospect tracking system, marketing and sales personnel generally can identify when a particular customer or prospect typically utilizes our products and may contact such customer or prospect regarding their future needs.
Through our marketing and sales efforts we have successfully expanded the uses for our products. For example, since 1993, the number of industries (as measured by SIC code) that lease or purchase our products has increased from 360
to 450. Additionally, we expect to continue to increase our penetration of other industries that would benefit from the usage of our products. See "--Customer Base."
Developing new customers is an integral part of the sales process and is monitored through the use of quarterly goals for each employee with sales responsibility. In addition to our prospect tracking databases, we conduct direct mail campaigns and are a heavy user of print advertising, including the yellow pages and customer trade publications. We have developed a toll-free telephone number network so that our customers can call and speak to a sales representative in the branch location nearest the site where the call was placed. In addition, we participate in numerous regional and national trade shows, and our sales personnel participate in local trade groups and associations.
We also design marketing campaigns targeted at specific market niches.
During 1996, we began developing national accounts. To date, we have established approximately 270 national accounts and continue to pursue other national account relationships. The relationships are coordinated by a national account manager and serviced by the branch network. Due to our broad geographic capabilities, this program allows us to further differentiate ourselves from many of our "mom-and-pop" competitors by providing consistent service on a national basis.
Customer Base
We continually seek to expand our customer base and the applications for our products. Our customer base is comprised of an estimated 24,000 companies, which operate in approximately 450 industries, a significant increase over 1993 levels of 7,700 customers in 360 industries. We believe that the construction and education industries accounted for approximately 32% and 23%, respectively, of total revenues in 2003, and that no other industry accounted for more than 6% of total revenues in 2003. During 2003, no single customer accounted for more than 2% of our total revenues and our top ten customers accounted for approximately 7% of total revenues.
Our key customer industries as categorized by SIC Code are as follows:
Commercial/Industrial and Other. This category includes a variety of industries and product uses which help diversify our revenue stream. Common examples include: entertainment, recreation, transportation terminals, recycling, retail and fast food establishments, metal processing and refining and disaster relief. Although there are a number of different industries in this category, we believe that no single industry included in this category was material to us in 2003.
Construction. We provide office and storage space to a broad array of contractors associated with both residential and nonresidential buildings, commercial offices and warehouses; highway, street, bridge and tunnel contractors; water, sewer, communication and power line contractors; and special construction trades, including glass, glazing and demolition. We believe our construction customer base is characterized by a wide variety of contractors, who are associated with original construction as well as capital improvements in the commercial, institutional, residential and municipal arenas.
Education. Rapid and unpredictable shifts in populations within states often necessitate quick expansion of education facilities particularly in elementary and secondary schools. State and local governmental budgetary pressures have made mobile offices, especially multi-sectional offices, a convenient and cost-effective way to expand classroom, laboratory and library capacity. Our quality products are well suited for educational institutions, which demand a high level of maintenance and service support.
Professional Services. Customers in this category include professionals from a broad array of industry sectors including engineering, architectural, accounting, legal, insurance and sales.
Health Care. Health care customers are frequent users of multi-sectional facilities as administrative offices, waiting rooms, MRI and other diagnostic annexes adjacent to existing hospitals.
Utilities. Mobile offices have traditionally been leased to utilities involved in electrical service, natural gas distribution and production, and other energy-related services. Units are used as meeting rooms, reception and visitor centers, security offices and, during periods of utility plant reconstruction, as facilities to house the operations staff.
Government. Governmental users consist of federal, state and local public sector organizations such as the United States Environmental Protection Agency and state highway administrations. We have enjoyed particular success in focused niches such as prisons and jails, courthouses, national security buildings and NASA facilities. Our strategy of concentrated regional focus has been particularly successful in gaining business from local governmental customers.
Chemical and Pharmaceutical. Chemical and pharmaceutical companies have been long-time users of temporary office space. Mobile offices are particularly well suited for laboratory usage where space is needed for the duration of a specific project or for an off-site or isolated laboratory.
Fleet Management Information Systems
Our fleet information system is instrumental to our lease fleet management and targeted marketing efforts and allows management to monitor operations at our branches on a daily, weekly, and monthly basis. Lease fleet information is updated daily at the branch level and verified through a monthly physical inventory by branch personnel. This provides management with on-line access to utilization, lease fleet unit levels and rental revenues by branch or geographic region. In addition, an electronic file for each unit showing its lease history and current location/status is maintained in the information system. Branch salespeople utilize the system to obtain information regarding unit availability. The database tracks individual units by serial number and provides comprehensive information including cost, condition and other financial and unit specific information.
Regulatory Matters
We must comply with various federal, state and local environmental, health and safety laws and regulations in connection with our operations. We believe that we are in substantial compliance with these laws and regulations. In addition to compliance costs, we may incur costs related to alleged environmental damage associated with past or current properties owned or leased by us. We believe that our liability, if any, for any environmental remediation will not have a material adverse effect on our financial condition. However, we can not be certain that the discovery of currently unknown matters or conditions, new laws and regulations, or stricter interpretations of existing environmental laws will not have a material adverse effect on our business or operations in the future.
A portion of our units are subject to regulation in certain states under motor vehicle and similar registrations and certificate of title statutes. We believe that we have complied in all material respects with all motor vehicle
registration and similar certificate of title statutes in states where such statutes clearly apply to mobile office units. We have not taken actions under such statutes in states where it has been determined that such statutes do not apply to mobile office units. However, in certain states, the applicability of such statutes to our mobile office units is not clear beyond doubt. Due to the difficulty, expense and burden of complying with all possible motor vehicle and certificate of title requirements in such states, we do not take action to comply with every possible motor vehicle and similar registration and certificate of title requirement in such jurisdictions. If additional registration and related requirements are deemed to be necessary in such states or if the laws in such states or other states were to change to require us to comply with such requirements, we could be subject to additional costs, fees and taxes as well as administrative burdens in order to comply with such statutes and requirements. We do not believe the effect of such compliance will be material to our business and financial condition.
Competition
Although our competition varies significantly by market, the mobile office industry, in general, is highly competitive. We compete primarily in terms of product availability, customer service and price. We believe that our reputation for customer service and our ability to offer a wide selection of units suitable for various uses at competitive prices allows us to compete effectively. However, our primary competitor, GE Capital Modular Space, is less leveraged, has greater market share or product availability in some markets and has greater financial resources and pricing flexibility than us.
Employees
As of December 31, 2003 we had approximately 1,150 employees. None of our employees are covered by a collective bargaining agreement. Management believes its relationship with our employees is good. We have never experienced any material labor disruption and are unaware of any efforts or plans to organize our employees.
Risk Factors
Risks Relating to Our Indebtedness
Our substantial debt could adversely affect our financial health. - ------------------------------------------------------------------ We have a substantial amount of debt. As of December 31, 2003, we had $962.2 million of indebtedness.
Our substantial debt could have important consequences including:
o making our company more vulnerable to general adverse economic and industry conditions;
o limiting our ability to obtain additional financing for future working capital, capital expenditures, strategic acquisitions and other general corporate requirements;
o exposing us to interest rate fluctuations because the interest on the debt under our credit facility is at variable rates;
o requiring us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow for operations and other purposes;
o limiting our flexibility in planning for, or reacting to, changes in our business; and
o placing us at a competitive disadvantage compared to any competitors that have less debt.
We may incur additional debt. - ---------------------------- We may be able to incur substantial additional indebtedness in the future. The terms of the indentures governing our 9.875% senior notes due 2007 and our 10.0% senior secured notes due 2008 (collectively referred to as the "Senior Notes") permit us to incur a substantial amount of additional debt and our credit facility will permit additional borrowings under certain circumstances. As of December 31, 2003, we had $231.4 million of additional borrowing base (collateral) availability under our credit agreement. However, Consolidated Leverage ratio covenant restrictions limit our borrowing availability under the credit agreement at December 31, 2003 to $57.9 million. Accordingly, this additional indebtedness, if issued, could further exacerbate all the risks described above.
The indentures governing the Senior Notes and our credit facility contain various covenants which limit the discretion of our management in operating our business and could prevent us from engaging in some beneficial activities. - -------------------------------------------------------------------------------
The indentures governing the Senior Notes and our credit facility contain various restrictive covenants that limit our management's discretion in operating our business. In particular, these agreements will limit our ability to, among other things:
o incur additional debt or guarantee obligations;
o grant liens on assets;
o make restricted payments (including paying dividends on, redeeming, repurchasing or retiring our capital stock);
o make investments or acquisitions;
o sell assets;
o engage in transactions with affiliates; and
o merge, consolidate or transfer substantially all of our assets.
In addition, our credit facility also requires us to maintain certain financial ratios and limits our ability to make capital expenditures. If we fail to comply with the restrictions of the indentures governing the Senior Notes, our credit facility or any other subsequent financing agreements, a default may allow the creditors, if the agreements so provide, to accelerate the related debt as well as any other debt to which a cross-acceleration or cross-default provision applies. In addition, the lenders may be able to terminate any commitments they had made to supply us with further funds.
Our ability to service our debt requires a significant amount of cash. - --------------------------------------------------------------------- To service our debt, we require a significant amount of cash. Our ability to generate cash, make scheduled payments or to refinance our obligations depends on our successful financial and operating performance. We cannot assure you that our operating performance, cash flow and capital resources will be sufficient for payment of our debt in the future. Our financial and operating performance, cash flow and capital resources depend upon prevailing economic conditions, and certain financial, business and other factors, many of which are beyond our control. These factors include, among others:
o economic and competitive conditions affecting the mobile office industry;
o operating difficulties, increased operating costs or pricing pressures we may experience; and
o a decline in the resale value of our units.
Our estimated debt service obligations for 2004 are $85.4 million, based on (1) the projected average outstanding balance of the Senior Notes for 2004, (2) an interest rate of approximately 5% on our projected average outstanding variable rate debt for 2004 and (3) scheduled term loan repayments in 2004. Our annual debt service obligations will increase by $2.6 million per year for each 1% increase in interest rates, based on the balance of variable rate debt outstanding at December 31, 2003. If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital investments, sell material assets or operations, obtain additional capital or restructure our debt. In the event that we are required to dispose of material assets or operations or restructure our debt to meet our debt service and other obligations, we cannot assure you as to the terms of any such transaction or how soon any such transaction could be completed. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
Risks Relating to Our Business
Elements of our business are sensitive to general economic conditions. - --------------------------------------------------------------------- A portion of our revenues are derived from customers who are in industries and businesses that are cyclical in nature and subject to changes in general economic conditions, such as the construction industry. In addition, because we conduct our operations in a variety of markets, we are subject to economic conditions in each of these markets. Although we believe that certain of our operating strategies and industry characteristics may help to mitigate the effects of economic downturns, general economic downturns or localized downturns in markets where we have operations, including any downturns in the construction industry, could have a material adverse effect on us and our business, results of operations and financial condition. In particular, as a result of the recent recession and its impact on the construction industry, our financial results have been adversely impacted. In addition, at the present time we are unable to predict what long-term effect, if any, recent political events, including those relating to, or arising out of the growing threat of terrorism, and their attendant consequences will have on our business. Any of the foregoing economic or political events could have a material adverse effect on our results of operations and financial condition.
We face significant competition in the mobile office industry. - --------------------------------------------------------------------- Although our competition varies significantly by market, the mobile office industry, in general, is highly competitive. We compete primarily in terms of product availability, customer service and price. We believe that our reputation for customer service and our ability to offer a wide selection of units suitable for various uses at competitive prices allows us to compete effectively. However, our primary competitor, GE Capital Modular Space, is less leveraged, has greater market share or product availability in some markets, and has greater financial resources and pricing flexibility than we do.
An investor group controls a majority of our board of directors. - ---------------------------------------------------------------
An investor group, which includes affiliates of The Cypress Group L.L.C., and Keystone, Inc., beneficially owns in the aggregate approximately 82% of Holdings outstanding common stock. Holdings in turn owns 100% of Scotsman's outstanding voting securities. As a result, the investor group has the ability to control our management, policies and financing decisions, to elect a majority of the members of our board of directors and to control the vote on all matters coming before our stockholders.
We may not be able to remarket units returning from leases. - ---------------------------------------------------------- Our typical lease terms, which include contractual provisions requiring customers to retain units on lease for, on average, 13 months, actually have an average existing lease duration of 23 months. Because our customers generally rent our units for periods longer than the contractual lease terms, 60% of our leases are on a month-to-month basis. In addition, 22% of our leases have contractual lease terms expiring within six months. Should a significant number of our leased units be returned during any short period of time, a large supply of units would need to be remarketed. Our failure to effectively remarket a large influx of units returning from leases could have a material adverse effect on our financial performance and our ability to continue expanding our fleet.
We are dependent on key personnel. - ---------------------------------
Our continued success will depend largely on the efforts and abilities of our executive officers and certain other key employees, none of whom have employment agreements with us. We do not maintain insurance policies relating to these employees. If, for any reason, these officers or key employees do not remain with us, our operations could be adversely affected until suitable replacements with appropriate experience can be found.
A write-off of all or a part of our goodwill would adversely affect our operating results and net worth. - ----------------------------------------------------------------------
We have significant intangible assets related to goodwill, which represents the excess of the total purchase price of our acquisitions over the fair value of the net assets acquired. As of December 31, 2003, we had $169.9 million of unamortized goodwill on our balance sheet, which represented 14.1% of our total assets. Through December 31, 2001, we amortized goodwill on a straight-line basis over the estimated period of future benefit of 20 to 40 years. In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142 - Goodwill and Other Intangible Assets. SFAS No. 142 requires that, effective January 1, 2002, goodwill not be amortized but rather that it be reviewed annually for impairment. In the event impairment is identified, a charge to earnings would be recorded. We determined that goodwill was not impaired for the fiscal year ended December 31, 2003. Although it does not affect our cash flow, a write-off in future periods of all or a part of our goodwill would adversely affect our operating results and net worth.
Item 2.
Item 2. Properties
Our headquarters, which we own, is a three-story modular office structure located on 3.1 acres in suburban Baltimore, Maryland. Our company is comprised of 85 branches located throughout the United States and Canada. We lease approximately 71% of our branch properties and we own the balance. Management believes that none of our branch properties, individually, is material to our operations.
Item 3.
Item 3. Legal Proceedings
We are involved in certain legal actions arising in the ordinary course of business. We believe that none of these actions, either individually or in the aggregate, will have a material adverse effect on our business, results of operations or financial condition.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
There is no established public trading market for Holdings' Common Stock.
During 2003 and 2002, Scotsman paid dividends to Holdings of approximately $55,000 and $133,000, respectively, for normal operating expenses. Scotsman does not intend to pay any other dividends except for the normal operating expenses of Holdings, but reserves the right to do so. Scotsman's ability to pay dividends to Holdings is limited to amounts for corporate and administrative expenses. The indentures governing the Senior Notes and our credit agreement contain certain restrictive covenants that, among other things, limit the payment of dividends or the making of distributions on our equity interests. (See Note 5 of Notes to the Consolidated Financial Statements.)
(1) As of December 31, 2003 and 2002, the net balance of rental equipment excludes certain rental units, which no longer merit further investment pursuant to a strategic disposal initiative adopted in December 2003. The balance of these excluded held for sale units as of December 31, 2003 and 2002 was $.4 million and $21.2 million, respectively. The 2002 rental equipment balance presented in the balance sheet and herein was adjusted in accordance with SFAS No. 144 - Accounting for the Impairment or Disposal of Long-Lived Assets. See Note 10 to Consolidated Financial Statements-Assets Held for Sale.
(2) The first, second and third quarters of 2003 were adjusted to reflect the adoption of SFAS No. 148 - Accounting for Stock-based Compensation-Transition and Disclosure, effectively adopted January 1, 2003.
For the three months ended -------------------------- March 31, June 30, September 30, 2003 2003 2003 -------- --------- ------------ Quarterly compensation expense-previously reported $ 11 $1,694 $ --
Quarterly compensation expense-restated for adoption of SFAS 148 293 137 211
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion regarding our financial condition and results of operations for the three years ended December 31, 2003 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 "Safe Harbor Statement Cautionary Notice Regarding Forward-Looking Statements".
Critical Accounting Policies and Estimates
General. This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. (See Note 1 of the Notes to Consolidated Financial Statements.) On an on-going basis, we evaluate estimates, including those related to depreciation of rental equipment, bad debts, contingencies and litigation, intangible assets, stock-based compensation, foreign currency translation, and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the consolidated financial statements.
Depreciation of rental equipment. We depreciate rental equipment over its estimated useful life, after giving effect to an estimated salvage value. The useful life of our rental equipment is determined based on our estimate of the period over which the asset will generate revenue (generally 20 years), and the residual value (typically 50% of original cost) is determined based on our estimate of the expected value we could realize from the asset after this period. The lives and residual values are subject to periodic evaluation and may be affected by, among other factors, changes in building codes, legislation, regulations, local permitting and internal factors which may include, but are not limited to, changes in equipment specifications or maintenance policies. If these estimates change in the future, we may be required to recognize increased or decreased depreciation expense for these assets.
Allowance for doubtful accounts. We are required to estimate the collectibility of our trade receivables. Accordingly, allowances for doubtful accounts are maintained for estimated losses resulting from the inability of our customers to make required payments. We evaluate a variety of factors in assessing the ultimate realization of these receivables including the current credit-worthiness of customers. The allowance for doubtful accounts is determined based on historical collection results, days sales outstanding trends, and an ongoing review of specific customers. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required, resulting in decreased net income.
Contingencies. We are subject to proceedings, lawsuits, and other claims related to environmental, product and other matters, and are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves
required, if any, for these contingencies is made after analysis of each individual matter. The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters.
Goodwill and Other Intangible Impairment. We have significant intangible assets related to goodwill and other acquired intangibles. The determination of whether or not these assets are impaired involves significant judgments. We periodically evaluate our goodwill, long lived assets, and intangible assets for potential impairment indicators. Our judgment regarding the existence of impairment indicators are based on estimated future cash flows, market conditions, operational performance, and/or legal factors. Based on our valuations of goodwill completed during 2003, we determined that goodwill was not impaired. Future changes in strategy and/or market conditions could significantly impact these judgments and require adjustments to recorded asset balances. Had the determination been made that the goodwill asset was impaired, the value of this asset would have been reduced by an amount up to $169.9 million, the amount of unamortized goodwill on our balance sheet as of December 31, 2003, resulting in a charge to operations.
Income Taxes. We are required to estimate income taxes in each of the jurisdictions in which we operate. The process involves estimating actual current tax expense along with assessing temporary differences resulting from differing treatment of items for book and tax purposes. These timing differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance.
Foreign Currency Translation. We use the exchange rate effective at the close of business on the balance sheet date to translate our foreign subsidiary's balance sheet and an average rate for the reporting period to translate the results of operations. The cumulative effect of changes in exchange rates is recognized in a separate line in the equity section of the balance sheet.
Stock-based Compensation. Prior to 2003, we accounted for our issuance of stock options and any modifications thereof using variable plan accounting and the intrinsic value method under Accounting Principles Board Opinion No. 25 - Accounting for Stock Issued to Employees (APB No. 25) and related interpretations. Effective January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123 - Accounting for Stock-Based Compensation. We selected the modified prospective method of adoption described in SFAS No. 148 - Accounting for Stock-Based Compensation - Transition and Disclosure. Compensation cost recognized in 2003 is the same as that which would have been recognized had the fair value method of SFAS No. 123 been applied from its original effective date.
Stock-based Compensation (continued). In accordance with the modified prospective method of adoption, results for prior years have not been restated. The following input variables were used to compute stock option fair values and the related stock compensation expense using the Cox Ross Rubinstein binomial model in accordance with SFAS No. 148 adoption standards:
2003 2002 2001 ---- ---- ---- Risk-free interest rate 2.97% 3.80% 4.50% Expected life in years 5.00 5.00 5.00 Expected Volatility 45.2% 46.2% 51.6% Expected Dividends 0.0% 0.0% 0.0%
General
Holdings is a holding company formed in November 1993, and conducts its business solely through Scotsman, its 100% owned subsidiary. We derive our revenues and earnings from the leasing and sale of mobile office and storage units, delivery and installation of those units and the provision of other ancillary products and services. Leasing operations, which primarily comprise the leasing of mobile office units and the sale of units from our lease fleet, account for a majority of our revenues and gross profits. Used mobile office units are sold from our lease fleet in the ordinary course of business at either fair market value or, to a lesser extent, pursuant to pre-established lease purchase options. The sale of rental equipment results in the availability of the total cash proceeds and generally results in the reporting of gross profit on such sales.
New unit sales revenues are derived from the sale of new mobile offices, similar to those units leased by us. Revenues from delivery and installation result from activities related to the transportation and installation of and site preparation for both leased and sold products. Other revenues are derived from other products and services including: rental of steps, furniture, ramps and security systems; sales of parts and supplies; and charges for granting insurance waivers and for damage billings.
During 2002 and 2003, our business was adversely impacted by overall soft economic conditions, which affected our construction customers primarily, and state budget issues in certain parts of the country that have affected our education customers. Although a portion of our business is with customers in industries such as these that are cyclical in nature and/or subject to changes in general economic conditions, management believes that certain characteristics of the mobile office leasing industry and their operating strategies should help to mitigate the effects of economic downturns. These characteristics include (i) our typical lease terms which include contractual provisions requiring customers to retain units on lease for, on average, 13 months, (ii) the flexibility and low cost offered to our customers by leasing which may be an attractive alternative to capital purchases, (iii) our ability to redeploy units during regional recessions and (iv) the diversity of our industry segments and the geographic balance of our operations.
In the ordinary course of business, we acquire leasing and related businesses. On May 29, 2003, we acquired the leasing business of AFA Locations Inc. On July 31, 2002, we acquired the leasing business of Northgate Industries Ltd. On February 1, 2001, we acquired the sales and leasing business of Mckinney Mobile Modular. See Note 1 of the Notes to Consolidated Financial Statements.
Results of Operations
2003 Compared With 2002. Revenues in 2003 were $437.8 million, a $57.4 million or 11.6% decrease from revenues of $495.2 million in 2002. The decrease resulted from a $27.3 million or 27.6% decrease in sales of new units, a $13.1 million or 5.8% decrease in leasing revenue, a $9.7 million or 9.6% decrease in delivery and installation revenues, a $4.0 million or 9.2% decrease in other revenues and a $3.2 million or 13.4% decrease in sales of rental equipment. Sales of new units and delivery and installation revenues decreases are largely due to market sluggishness associated with the current economy and competitive pricing pressures. In addition, state budget issues in certain parts of the country have affected operating results for the year ended December 31, 2003 by producing delays in several significant modular classroom projects. The decreases in leasing revenues are due to continued soft economic conditions, which resulted in competitive pricing pressures. The average monthly rental rate decreased approximately 4.2% to $250 for the year ended December 31, 2003 versus $261 for the year ended December 31, 2002. Average fleet utilization was 77% for the year ended December 31, 2003, which was relatively flat as compared to the same period in the prior year. The decrease in sales of rental equipment for the year ended December 31, 2003 is the result of the non-recurrence in 2003 of several large classroom sales which occurred in the prior year. The decreases in other revenue are the result of declines in sales and leasing revenue mentioned above.
Gross profit in 2003 was $177.9 million, a $29.8 million or 14.4% decrease from 2002 gross profit of $207.8 million. The decrease resulted from a $17.8 million or 13.2% decrease in leasing gross profit, a $4.0 million or 24.4% decrease in delivery and installation gross profit, a $4.1 million or 25.2% decrease in sales of new units, and a $1.4 million or 24.4% decrease in sales of rental equipment. The decrease in leasing gross profit is a result of the decrease in leasing revenue described above and a decline in leasing margins from 59.4% in 2002 to 54.6% in 2003. The decrease in margin percentage was attributable to the decrease in leasing revenue coupled with increased refurbishment and maintenance expenses as compared to 2002. The decrease in gross profit related to sales of new units, delivery and installation, and sales of rental equipment in 2003 resulted from the decrease in revenues described above.
Selling, general and administrative expenses (SG&A) were $76.3 million and $85.8 million for the years ended December 31, 2003 and 2002, respectively. The overall decrease in SG&A of $9.5 million or 11.1% was achieved by continuing our cost control initiatives, primarily reductions in personnel related costs as well as a $4.5 million decrease in non-cash stock compensation expense. In 2003, we adopted the provisions of SFAS No. 148 - Accounting for Stock-based Compensation-Transition and Disclosure. In accordance with the provisions of SFAS No. 148, we adopted the modified prospective provisions of the standard, effective January 1, 2003. Prior to adoption of SFAS No. 148, we accounted for stock compensation expense in accordance with APB No. 25 - Accounting for Stock Issued to Employees. For the year ended December 31, 2003, and 2002, we recorded stock compensation expense of $.8 million and $5.3 million, respectively.
Interest expense increased by 2.3% to $87.2 million in 2003 from $85.2 million in 2002. This increase is the result of the accelerated amortization by $2.5 million of deferred financing costs related to the partial extinguishment of commitments under our credit agreement and the incremental interest expense incurred on the additional $150.0 million of 10.0% senior secured notes, the net proceeds of which were used to pay off portions of the term loan and revolving credit facility debt. These increases were partially offset by (a) a decrease of approximately 10 basis points in effective interest rates on our variable rate debt for the year and (b) a $119.9 million or 25.0% decrease in the average credit facility debt over 2002, primarily due to the financing described above.
Given recent economic trends, in the fourth quarter of 2003 we implemented a strategic initiative to dispose of selected rental units in our lease fleet which we determined no longer merit further investment. A $19.4 million impairment charge was recorded to reflect the write-down of these assets to their estimated fair value (less costs to sell) in accordance with the provisions of SFAS No. 144 . See Note 10 to Notes to Consolidated Financial Statements.
The income tax expense (benefit) decreased from an expense of $8.1 million in 2002 to a benefit of $7.1 million in 2003, primarily due to the impairment charge associated with the strategic initiative to dispose of certain rental units of $19.4 million, which reduced income before taxes during the current year. The effective tax rate for 2003 was 37.9%, up from 34.9% in 2002. The higher rate is primarily attributable to increases in the local tax rates in 2003 in the Canadian provinces in which the company operates as well as the reversal of certain valuation allowances in 2002.
2002 Compared With 2001. Revenues in 2002 were $495.2 million, a $2.9 million or .6% increase from revenues of $492.3 million in 2001. The increase resulted from a $7.8 million or 8.6% increase in sales of new units, a $3.7 million or 3.8% increase in delivery and installation revenues, and a $1.7 million or 7.8% increase in sales of rental equipment. These increases were substantially offset by an $11.0 million or 4.6% decrease in leasing revenue. The decrease in leasing revenue is attributable to a decrease of $2 in the average monthly rental rate, and a decrease in the average fleet utilization of four percent to 78%. The decrease in the average monthly rental rate is a result of the softening economic and related business conditions combined with competitive pricing and changes in fleet mix. The increases in sales of new units and rental equipment, and delivery and installation revenue are due to several large school projects.
Gross profit in 2002 was $207.8 million, a $20.9 million or 9.1% decrease from 2001 gross profit of $228.6 million. The decrease primarily resulted from a $18.4 million or 12.0% decrease in leasing gross profit, and a $2.5 million or 13.2% decrease in delivery and installation gross profit. The decrease in leasing gross profit is a result of the decrease in leasing revenue described above and a decline in leasing margins from 64.4% in 2001 to 59.4% in 2002. This margin suppression was attributable to a decline in average fleet utilization coupled with fleet quality improvement initiatives. The decrease in delivery and installation gross profit is attributable to continued competitive pressures, and to a lesser extent, a higher mix of lower margin sales related projects.
SG&A expenses were $85.8 million, a $3.2 million or 3.9% increase from 2001 expenses of $82.6 million. The overall increase in SG&A expense is due primarily to increased noncash stock option compensation expense, and increased insurance and property costs, partially offset by our continued cost control initiatives that commenced in the second half of 2001.
Interest expense decreased by .3% to $85.2 million in 2002 from $85.5 million in 2001. This decrease is the result of a decrease of approximately 155 basis points in effective interest rates on our variable rate debt for the year, and a $128.7 million or 21.2% decrease in the average credit facility debt over 2001 (primarily due to the 2002 financing transactions described herein), partially offset by (a) interest expense on the additional $150.0 million of Senior Notes and $182.0 million in additional term loans and (b) the additional amortization of deferred financing fees, resulting from the additional $150.0 million of Senior Notes and the refinancing of our credit facility.
The income tax expense decreased from $17.6 million in 2001 to $8.1 million in 2002. The effective tax rate for 2002 was 34.9%, down from 43.7% in 2001. The lower rate was primarily attributable to the elimination of non-deductible goodwill amortization as well as the reversal of certain valuation allowances in 2002.
Liquidity and Capital Resources
During 2001, 2002 and 2003, our principal sources of funds consisted of cash flow from operating and financing sources. Cash flow from operating activities of $59.5 million in 2001, $95.3 million in 2002 and $74.2 million in 2003 was largely generated by the rental of units from our lease fleet and sales of new mobile office units.
Our Adjusted EBITDA decreased by $21.6 million or 12.5% to $151.5 million in 2003 compared to $173.1 million in 2002. This decrease in Adjusted EBITDA is primarily the result of the revenue declines described above. Adjusted EBITDA is defined as earnings before deducting interest, income taxes, depreciation, amortization and non-cash charges. In 2003, noncash charges consisted of a $19.4 million impairment charge of selected fleet assets and a $.8 million non-cash stock option compensation expense. In 2002, noncash charges consisted of noncash stock option compensation expense of $5.3 million. We utilize Adjusted EBITDA when interpreting operating trends and results of operations of our core business operations. Accordingly, we believe that Adjusted EBITDA provides additional information with respect to our overall operating performance and our ability to incur and service debt, make capital expenditures and meet working capital requirements. However, Adjusted EBITDA should not be considered in isolation or as a substitute to cash flow from operations, net income, or other measures of performance, profitability, or liquidity prepared in accordance with generally accepted accounting principles. Because Adjusted EBITDA excludes some, but not all, items that affect net income and may vary among companies, the Adjusted EBITDA mentioned above may not be comparable to similarly titled measures of other companies.
The table below reconciles Adjusted EBITDA to cash flow from operating activities, the most directly comparable GAAP measure (in thousands), and presents our cash flow used in investing activities and cash flow used in financing activities for the years ended December 31, 2003 and 2002:
2003 2002 ---- ----
Adjusted EBITDA $151,479 $173,128 Decrease in net accounts receivable 9,167 10,387 Increase in accounts payable and accrued expenses 2,742 1,308 Interest paid (74,608) (76,744) (Increase) decrease in other assets (7,805) 433 Decrease in other liabilities (1,576) (7,496) Gain on sale of rental equipment (4,373) (5,787) (Gain) loss on sale of fixed assets (810) 50 ---- ----- Cash flow from operating activities $ 74,216 $ 95,279 ====== ======
Other Data: Cash flow used in investing activities $(43,639) $(36,119) ====== ====== Cash flow used in financing activities $(30,566) $(59,295) ====== ======
Cash flow used in investing activities was $124.8 million in 2001, $36.1 million in 2002 and $43.6 million in 2003. Our primary capital expenditures are for the discretionary purchase of new units for the lease fleet and units purchased through acquisitions. We seek to maintain our lease fleet in good condition at all times and we generally increase the size of our lease fleet only in those local or regional markets experiencing economic growth and established unit demand. Our fleet acquisition strategy includes increasing our fleet size in accordance with customer demand and the related business conditions of the time.
The following table sets forth our investment in our lease fleet for the periods indicated.
Year Ended December 31, 2001 2002 2003 ---- ---- ---- (Dollars in millions) Gross capital expenditures for rental equipment: New units and betterments............... $105.5 $40.8 $53.3 Purchase price allocated to fleet of acquired businesses.......... 21.4 6.3 2.6 ----- ---- ---- 126.9 47.1 55.9 Proceeds from sale of used rental equipment.. (22.2) (24.0) (20.7) ------ ------ ------
Net capital expenditures for rental equipment............................... $104.7 $23.1 $ 35.2 ===== ==== ====
Lease fleet maintenance expenses included in the statement of operations..........$43.0 $46.3 $47.7 ==== ==== ====
We believe we can manage the capital requirements of our lease fleet, and thus our cash flow, through the careful monitoring of our lease fleet additions.
Our maintenance and refurbishment program is designed to maintain the value of lease fleet units and realize rental rates and operating cash flows from older units comparable to those from newer units. The sale of rental equipment helps preserve the overall quality of our lease fleet and enhances cash flow. Generally, costs of improvements and betterments aggregating less than $1,000 per unit are expensed as incurred. Expenditures greater than $1,000 that significantly extend the economic useful life of a unit or that materially alter a unit's configuration are capitalized.
Other capital expenditures of $15.4 million, $11.9 million and $7.6 million in 2001, 2002 and 2003, respectively, consist of items not directly related to the lease fleet, such as branch buildings, land, equipment, leasehold improvements and management information systems.
Cash provided by financing activities of $63.3 million in 2001 was primarily from borrowings, net of repayments, under our revolving credit facility. Cash used in financing activities of $59.3 million in 2002 and $30.6 million in 2003 was primarily associated with net repayments of borrowings under our credit agreement. For 2002, cash used in financing activities included $20.3 million for deferred financing fees relating to the issuance of additional 9.875% senior notes and the new credit facility established in the first quarter of that year. For 2003, $8.0 million in deferred financing fees was incurred related to the issuance of 10.0% senior secured notes and the amendment of our credit agreement in August 2003.
At December 31, 2003 we had $548.8 million of 9.875% senior notes due 2007, $263.4 million in term loan and revolving facility debt and $150.0 million of 10.0% senior secured notes due August 2008.
The $150.0 million of 10.0% senior secured notes were issued in August 2003. We used the net proceeds of $145.4 million received from that offering to repay $27.5 million of the term loan under our credit agreement and repay $117.9 million of borrowings and terminate commitments under our revolving credit facility. The 10.0% senior secured notes are fully and unconditionally guaranteed on a senior secured second lien basis by Scotsman's 100% owned subsidiaries: Space Master International, Inc., Evergreen Mobile Company, Truck & Trailer Sales, Inc. and Williams Scotsman of Canada, Inc. Willscot, also a 100% owned subsidiary of Scotsman, has fully and unconditionally guaranteed the senior secured notes on a subordinated secured second lien basis. These 100% owned subsidiaries of Scotsman act as joint and several guarantors of the senior and senior secured notes. See Note 1 for a description of the operations of Willscot.
In accordance with SFAS No. 145 - Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, effective for fiscal years beginning after May 15, 2002, $2.5 million of financing costs relating to the partial extinguishment of debt under our credit agreement is included in interest expense for the year ended December 31, 2003.
The credit agreement contains restrictions on the amount of dividends that Scotsman can pay to Holdings and requires compliance with certain financial covenants including capital expenditures, an interest coverage ratio, a leverage ratio and fleet utilization levels. In August 2003, we amended these financial ratios by (1) increasing the permitted maximum leverage ratio, (2) decreasing the required utilization rate, and (3) decreasing the minimum interest coverage ratio. These steps are geared toward improving our underlying liquidity, profitability, and performance. The failure to maintain the required ratios would result in us not being able to borrow under the credit agreement and, if not cured within the grace periods, would result in an default under the credit agreement. We are currently in compliance with all financial covenants.
The Company's total credit facility (including the term loan and revolver commitment) was $550.0 million at December 31, 2003. Borrowing base (collateral) availability calculated in accordance with the credit agreement under this facility was $231.4 million at December 31, 2003. Consolidated Leverage Ratio covenant restrictions further limited our borrowing availability at December 31, 2003 to $57.9 million. In order to meet our future cash requirements, we intend to use internally generated funds and to borrow under our credit facility. We believe we will have sufficient liquidity under our revolving line of credit and from cash generated from operations to fund our operations for the next 12 months. Our credit facility expires December 2006 and the Senior Notes mature in 2007 and 2008. It is expected that we will refinance outstanding obligations under these agreements prior to their maturities. Until such time, we expect that funds from operations will be sufficient to satisfy debt service requirements related to these obligations
For the year ended December 31, 2003, our actual Consolidated Leverage Ratio was 6.37 as compared to the maximum covenant requirement of 6.75 and our actual Consolidated Interest Coverage Ratio was 1.92 as compared to the minimum covenant requirement of 1.70. The Consolidated Interest Coverage Ratio was calculated by dividing Consolidated EBITDA (as defined in our credit agreement) of $150,725 for the twelve month period ended December 31, 2003 by cash interest expense of $78,385 as defined in the credit agreement. The Consolidated Leverage Ratio was calculated by dividing the December 31, 2003 consolidated debt balance of $962,178 by Consolidated EBITDA for the twelve month period ended December 31, 2003. For Consolidated Leverage Ratio calculation purposes Consolidated
EBITDA for the twelve months ended December 31, 2003 was $151,129, which in accordance with the credit agreement, was adjusted to include $404 relating to entities we acquired during the calculation period.
Consolidated EBITDA as defined in our credit agreement represents consolidated net income plus consolidated interest, tax, depreciation and amortization expenses, and excludes gains and losses on sales of fixed assets and any other non-cash items. It is used in determining our compliance with the financial ratios required by our agreement. Consolidated EBITDA should not be considered in isolation or as a substitute to cash flow from operating activities, net income or other measures of performance prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity.
Although not required by our credit agreement, if cash flow from operating activities, the most directly comparable GAAP measure to Consolidated EBITDA, were used in these calculations instead of Consolidated EBITDA, our leverage ratio and interest coverage ratios would have been 12.96 and .95, respectively.
The table below reconciles Consolidated EBITDA, calculated pursuant to the credit agreement, for the twelve months ended December 31, 2003 to cash flow from operating activities, the most directly comparable GAAP measure (in thousands).
Twelve Months Ended December 31, 2003 ------------------- Consolidated EBITDA $ 151,129 (a) Decrease in receivables, net 9,167 Increase in accounts payable and accrued expenses 2,686 Interest paid (74,608) Decrease in other assets (7,805) Decrease in other liabilities (1,576) Gain on sale of rental equipment (4,373) Proforma EBITDA impact of acquisitions (404) --- Cash flow from operating activities $ 74,216 (a) ======
Other Data: Cash flow used in investing activities $ (43,639) ====== Cash flow used in financing activities $ (30,566) ======
(a) Note: In accordance with the provisions of the credit agreement, Holding's financial results are to be used in the calculation of the covenant compliance ratios.
Seasonality
Although demand from certain of our customers is somewhat seasonal, our operations as a whole are not seasonal to any significant extent.
Inflation
We believe that inflation has not had a material effect on our results of operations. However, an inflationary environment could materially increase interest rates on our floating rate debt. The price of rental equipment sold by us and the replacement cost of such units could also increase in such an environment. Our standard lease generally provides for annual rental rate escalation at the inflation rate as determined by the Consumer Price Index after the end of the initial lease term. In addition, we may seek to limit our exposure to interest rate fluctuations by utilizing certain hedging mechanisms, although we are under no obligation to do so.
Item 7a
Item 7a Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss to future earnings, to future values, or to future cash flows that may result from the changes in the price of financial instruments. The Company is exposed to financial market risks, including changes in foreign currency exchange rates and interest rates. Exposure to market risks related to operating activities is managed through the Company's regular operating and financing activities.
Foreign Currency Risk
We are exposed to foreign currency translation risks. We do not enter into contracts or financial instruments to manage this risk. The exposure related to fluctuations in the exchange rates on the local currency of Scotsman's 100% owned Canadian subsidiary, Williams Scotsman, Inc. of Canada, is not significant to overall operations. The effect of changes in the exchange rate has been separately identified in the cash flow statement.
Interest Rate Risk
The Company's revolving credit facility and term loan bears interest at variable rates, and the fair value of this instrument is not significantly impacted by changes in market interest rates.
The table below provides information about the Company's financial instruments that are sensitive to interest rate changes:
Year of Maturity at December 31, 2003 Fair 2004 2005 2006 2007 2008 Total Value $ ----- ----- ----- ----- ----- ------- ------- Debt Variable Rate $2,121 $2,121 $259,126 $ -- $ -- $263,368 $263,368 Average Interest Rate 4.24% 4.24% 4.29% -- --
Fixed Rate -- -- -- 548,810 150,000 698,810 719,750 Average Interest Rate -- -- -- 9.90% 10.000%
Item 8.
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements: Page
Scotsman Holdings, Inc. and Subsidiary: Report of Independent Auditors..........................................35 Consolidated Balance Sheets as of December 31, 2003 and 2002............36 Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001...................37 Consolidated Statements of Changes in Stockholder's Equity/(Deficit) for the years ended December 31, 2003, 2002 and 2001...................................38 Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001................39-40 Notes to Consolidated Financial Statements...........................41-61
Williams Scotsman, Inc. and Subsidiaries Report of Independent Auditors..........................................62 Consolidated Balance Sheets as of December 31, 2003 and 2002............63 Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001....................64 Consolidated Statements of Changes in Stockholder's Equity/(Deficit) for the years ended December 31, 2003, 2002 and 2001....................................65 Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001.................66-67 Notes to Consolidated Financial Statements...........................68-91
Financial Statement Schedules: Scotsman Holdings, Inc. and Subsidiary: Schedule I - Condensed Financial Information of Registrant..... 116-117 Schedule II - Valuation and Qualifying Account .......................118
All schedules not listed have been omitted either because they are not required or, if required, the required information is included elsewhere in the financial statements or notes thereto.
Report of Independent Auditors
Board of Directors Scotsman Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Scotsman Holdings, Inc. and Subsidiary as of December 31, 2003 and 2002, and the related consolidated statements of operations, changes in stockholder's equity (deficit) and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedules listed in the Index at Item 8. These consolidated financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Scotsman Holdings, Inc. and Subsidiary at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Notes 1 and 4 to the Consolidated Financial Statements, effective January 1, 2002 the Company changed its method of accounting for goodwill and other intangible assets.
As discussed in Note 2 to the Consolidated Financial Statements, effective January 1, 2003 the Company changed its method of accounting for stock-based compensation.
/s/ Ernst & Young LLP Baltimore, Maryland
February 6, 2004
Scotsman Holdings, Inc. and Subsidiary Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) December 31, 2003 and 2002
1. Organization and Basis of Presentation
Scotsman Holdings, Inc. (Holdings) was organized in November 1993 for the purpose of acquiring Williams Scotsman Inc. (Scotsman). The operations of Holdings and its subsidiary (collectively "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 its 100% owned subsidiaries, Willscot Equipment, LLC (Willscot), and Williams Scotsman of Canada, Inc. Willscot, a special purpose subsidiary, was formed in May 1997; its operations are limited to the leasing of its mobile office units to the Company under a master lease. 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. These 100% owned subsidiaries of Scotsman are guarantors of the Company's credit facility.
The operations of the Company consist primarily of the leasing and sale of mobile offices, modular buildings and storage products (equipment) and their delivery and installation throughout the United States and Canada.
Acquisition of AFA Locations Inc.
On May 29, 2003 the Company acquired AFA Locations Inc. (AFA), a privately-held, Montreal, Canadian-based company that was involved in the leasing of mobile offices built by the manufacturing operations of AFA's consolidated entity. The purchase of the leasing business resulted in the acquisition of approximately 300 units at a value of approximately $2.6 million and the related customer base. The transaction was accounted for under the purchase method of accounting with a net purchase price of $3.2 million and $.6 million of goodwill. The acquisition was financed with borrowings under the Company's credit facility.
Scotsman Holdings, Inc. and Subsidiary Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation (continued)
Acquisition of Northgate Industries Ltd
On July 31, 2002 the Company acquired the mobile office and storage product fleet of Northgate Industries Ltd., an Edmonton, Alberta-based Canadian company that was involved in the leasing of mobile offices to industrial markets. The transaction was accounted for under the purchase method of accounting with a net purchase price of $7.0 million being allocated to the identifiable net assets acquired of $6.6 million with the excess of $.4 million representing goodwill. The purchase price allocation was based upon estimates of the fair value of the net assets acquired. The acquisition, which added over 500 units at a value of approximately $6.3 million, was financed with borrowings under the Company's credit facility.
Acquisition of Mckinney Mobile Modular
On February 1, 2001, the Company acquired the mobile office sales and leasing business of Mckinney Mobile Modular, a privately held California corporation (Mckinney) in a transaction accounted for under the purchase method of accounting. Total consideration for the acquisition of Mckinney was approximately $26.1 million, including the repayment of existing indebtedness of Mckinney. The purchase price paid was allocated to the identifiable assets acquired of $21.6 million with the excess of $5.5 million representing goodwill and other intangible assets. The purchase price allocation was based upon the estimates of the fair value of the assets acquired. The acquisition, which added over 1,600 units at a value of approximately $21.4 million, was financed with borrowings under the Company's then existing credit facility.
Recent Accounting Pronouncements
Stock-based Compensation. In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148 - Accounting for Stock-Based Compensation - Transition and Disclosure, effective for fiscal years ending after December 15, 2002. Effective January 1, 2003, the Company adopted the provisions SFAS No. 148. See Note 2 Summary of Significant Accounting Policies - Stock-based Compensation for further discussion of SFAS No. 148.
Goodwill and other intangible assets. In June 2001, the FASB issued SFAS No. 141 - - Business Combinations, and SFAS No. 142 - Goodwill and Other Intangible Assets .. SFAS No. 141 applies to all business combinations with a closing date after June 30, 2001. SFAS No. 141 also eliminates the pooling-of-interests-method of accounting and further clarifies the criteria for recognition of intangible assets separately from goodwill. There was no material effect upon adoption of SFAS No. 141, which was adopted on December 1, 2001. See Note 2 Summary of Significant Accounting Policies-Goodwill and Other Intangible Assets for
Scotsman Holdings, Inc. and Subsidiary Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation (continued)
Recent Accounting Pronouncements (continued)
further discussion of SFAS No. 142, which was adopted on January 1, 2002. Also see Note 4, Goodwill and Other Intangible Assets.
2. Summary of Significant Accounting Policies
(a) Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States 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) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its 100% owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.
(c) Accounts Receivable and Allowance for Doubtful Accounts
The Company's accounts receivable consist of amounts due from customers throughout the United States and Canada. Collateral is generally not required. The Company provides an allowance for doubtful accounts receivable by a charge to operations in amounts equal to the estimated losses expected to be incurred in collection of the accounts. The estimated losses are based on historical collection experience, days sales outstanding trends, and an ongoing review of specific customers and a review of the current status of the existing receivables. Customer accounts are written off against the allowance for doubtful accounts when an account is determined to be uncollectible.
Scotsman Holdings, Inc. and Subsidiary Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
(d) Leasing Operations
Equipment is leased generally under operating leases and, occasionally, under sales-type lease arrangements. Operating lease terms generally range from 3 months to 60 months, and contractually averaged approximately 13 months at December 31, 2003. 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 generally of 10 to 20 years and an estimated residual value of typically 50%.
Costs of improvements and betterments are capitalized, whereas costs of replacement items, repairs and maintenance are expensed as incurred. Costs incurred for equipment to meet particular lease specifications are capitalized and depreciated over the lease term. However, costs aggregating less than $1 per unit are generally expensed as incurred.
(e) Property and Equipment
Property and equipment is stated at cost. Depreciation is computed by the straight-line method over estimated useful lives ranging from 15 to 40 years for buildings and improvements and 3 to 10 years for furniture and equipment. Maintenance and repairs are charged to expense as incurred.
(f) Deferred Financing Costs
Costs of obtaining debt are amortized using the straight-line method which approximates the effective interest rate method over the term of the debt.
(g) Goodwill and Other Intangible Assets
The excess of cost over fair values of net assets acquired in purchase transactions has been recorded as goodwill. In accordance with SFAS No. 142, goodwill (and intangible assets deemed to have indefinite lives) is no longer amortized but is subject to annual impairment tests in accordance with the Statement. Prior to the adoption of this standard, goodwill was amortized on a straight-line basis over 20 to 40 years. The Company performed the first of these required tests during 2002 and determined that the evaluation for impairment each year would be performed as of October 1. For 2003 and 2002, goodwill was determined not to be impaired. On a periodic basis, the Company evaluates the carrying value of its intangible assets to
Scotsman Holdings, Inc. and Subsidiary Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
(g) Goodwill and Other Intangible Assets (continued)
assets to determine if the facts and circumstances suggest that intangible assets may be impaired. If this review indicates that intangible assets may not be recoverable, as determined by the undiscounted cash flow of the Company over the remaining amortization period, the Company's carrying value of intangible assets would be reduced by the estimated shortfall of cash flows, on a discounted basis. Intangible assets with finite lives are amortized over their estimated useful lives ranging from 24 to 228 months, with a remaining weighted average useful life of 110 months.
(h) Stock-based Compensation
Prior to 2003, the Company accounted for its issuance of stock options and any modifications thereof using variable plan accounting and the intrinsic value method under Accounting Principles Board Opinion No. 25 - Accounting for Stock Issued to Employees (APB No.25) and related interpretations. Stock-based employee compensation expense (income) for stock options of $5,313 and $(278) was reflected in net income for the years ended December 31, 2002 and 2001, respectively. The 2002 compensation expense resulted from a modification made for the continuation of certain employees' options after their termination from the Company.
Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123 - Accounting for Stock-Based Compensation. The Company selected the modified prospective method of adoption described in SFAS No. 148. Compensation cost recognized in 2003 of $766 is the same as that which would have been recognized had the fair value method of SFAS No. 123 been applied from its original effective date. In accordance with the modified prospective method of adoption, results for prior years have not been restated.
Scotsman Holdings, Inc. and Subsidiary Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
(h) Stock-based Compensation (continued)
Pro forma information required by SFAS No. 123 has been determined as if the Company had accounted for its employee stock options under the fair value method during each year presented in the financial statements. The stock compensation expense for each period presented was determined using a straight-lined attribution method over the vesting period
Year Ended December 31, ---------------------- 2003 2002 2001 ---- ---- ---- Net (loss) income, reported $(11,682) $15,198 $22,629 Add: Stock compensation- net of tax reported 476 3,460 (156) Deduct: Stock compensation-net of tax fair value-based (476) (939) (637) --- --- --- Pro forma net (loss) income $(11,682) $17,719 $21,836 ====== ====== ====== (Loss) Earnings per share basic: Reported $ (1.89) $ 2.45 $ 3.65 ==== ==== ==== Pro forma $ (1.89) $ 2.86 $ 3.52 ==== ==== ====
(Loss) Earnings per share diluted: Reported $ (1.89) $ 2.32 $ 3.46 ==== ==== ==== Pro forma $ (1.89) $ 2.71 $ 3.34 ==== ==== ====
The weighted average fair value of options granted in 2003, 2002, and 2001 were $20.77, 21.76, and 25.19, respectively. The following assumptions were used to compute these fair values using the Cox Ross Rubinstein binomial model at grant date in accordance with SFAS No. 148 adoption standards:
2003 2002 2001 ---- ---- ---- Risk-free interest rate 2.97% 3.80% 4.50% Expected life in years 5.00 5.00 5.00 Volatility 45.2% 46.2% 51.6% Dividend Yield 0% 0% 0%
During 2003, a modification was made for the continuation of certain employees options after their termination from the Company. The weighted average of the fair value of their modified options, risk free interest rate at modification date, expected life and volatility was $35.10, 2.06%, 3.81 years, and 45.3%, respectively.
For purposes of the pro forma disclosures above, the estimated fair values of options granted are amortized to expense over the options' vesting period.
Scotsman Holdings, Inc. and Subsidiary Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
(i) 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.
(j) Advertising costs
Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2003, 2002, and 2001 was $3,935, $4,189, and $4,538, respectively and is included in selling, general, and administrative expenses in the consolidated statements of operations.
(k) 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 2003 2002 2001 ----------------------------------------- Weighted-average shares- basic 6,194,799 6,195,184 6,196,623
Effect of employee stock options -- 347,776 338,068 ----------------------------------------- Weighted-average shares- diluted 6,194,799 6,542,960 6,534,691 =========================================
Common stock equivalents of approximately 355,000 were excluded from the weighted average shares-diluted total for the year ended December 31, 2003 due to their anti-dilutive nature, which resulted from the Company's net loss for such period.
Scotsman Holdings, Inc. and Subsidiary Notes to Consolidated Financial Statements
(l) Revenue Recognition
The Company's revenue recognition policy is to recognize rental income ratably over the month on a daily basis. Billings for periods extending beyond the month end are recorded as deferred income. Sales revenue is recognized at the time the units are delivered and installed, with the exception of long-term construction-type sales contracts for which revenue is recognized under the percentage of completion method. Under this method, income is recognized based on the incurred costs to date compared to estimated total costs. All other revenue is recognized when related services have been performed. Where applicable, the Company's revenue recognition policy takes into consideration the guidance of Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. The Company has determined that for the majority of arrangements with multiple deliverables, the Company meets the criteria to account for these deliverables separately.
(m) Foreign Currency Translation
The financial statements of Scotsman's foreign subsidiary for which the local currency is the functional currency has been translated into U.S. dollars in accordance SFAS No. 52 - Foreign Currency Translation. All balance sheet accounts have been translated using the exchange rate in effect at the balance sheet date. Income statement amounts have been translated using the average exchange rates during the year. The gains and losses resulting from the changes in exchange rates from year to year have been reported in other comprehensive income. The effect on the consolidated statements of operations of all transaction gains and losses is insignificant for all years presented.
(n) Reclassifications
Certain prior year amounts have been reclassified to conform to current year presentation. Certain amounts in the statement of cash flow have been reclassified to reflect the effects of changes in foreign currency exchange rates.
Scotsman Holdings, Inc. and Subsidiary Notes to Consolidated Financial Statements
3. Property and Equipment
Property and equipment consist of the following: December 31 2003 2002 -----------------------------------
Land $ 19,286 $ 19,441 Buildings and improvements 33,231 33,145 Furniture and equipment 73,373 65,515 ----------------------------------- 125,890 118,101 Less accumulated depreciation 45,140 37,852 ----------------------------------- Net property and equipment $ 80,750 $ 80,249 ===================================
Scotsman Holdings, Inc. and Subsidiary Notes to Consolidated Financial Statements
4. Goodwill and Other Intangible Assets (continued)
As required by SFAS No. 142, the results of the prior years have not been restated. A reconciliation of net income as if SFAS No. 142 had been adopted as of January 1, is presented below for the three years ended December 31, 2003, 2002, and 2001, respectively.
2003 2002 2001 ---- ---- ----
Reported net (loss) income $(11,682) $15,198 $22,629 Add back: Goodwill and Other Intangible amortization (net of tax) -- -- 4,735 ------ ------ ----- Adjusted net (loss) income $(11,682) $15,198 $27,364 ====== ====== ======
Earnings per share basic: Reported net (loss) income $ (1.89) $ 2.45 $ 3.65 ==== ==== ==== Adjusted net (loss) income $ (1.89) $ 2.45 $ 4.42 ==== ==== ====
Earnings per share diluted: Reported net (loss) income $ (1.89) $ 2.32 $ 3.46 ==== ==== ==== Adjusted net (loss) income $ (1.89) $ 2.32 $ 4.19 ==== ==== ====
5. Revolving Credit Facility and Long-Term Debt
Debt consists of the following: December 31 2003 2002 ----------------------------------
Borrowings under revolving credit facility $ 54,940 $ 197,691 Term loan 208,428 238,200 9.875% senior notes, due June 2007 net of unamortized discount of $1,189 in 2003 and $1,546 in 2002 548,810 548,454 10.0% senior secured notes due August 2008 150,000 -- ---------------------------------- $ 962,178 $ 984,345 ==================================
Scotsman Holdings, Inc. and Subsidiary Notes to Consolidated Financial Statements
5. Revolving Credit Facility and Long-Term Debt (continued)
In August 2003, the Company issued $150.0 million of 10.0% senior secured notes due 2008. The Company used the net proceeds of $145.4 million received from that offering to repay $27.5 million of the term loan under its credit agreement and repay $117.9 million of borrowings and terminate commitments under its revolving credit facility. In accordance with SFAS No. 145 - Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Correction, $1.5 million (net of tax of approximately $1 million) in deferred financing costs related to the extinguished debt was immediately amortized in 2003 and included in interest expense. The impact of the debt extinguishment to earnings per basic share and earnings per diluted share was $.25 and $.25, respectively, for 2003.
The 10.0% senior secured notes are fully and unconditionally guaranteed on a senior secured second lien basis by the Company's 100% owned subsidiaries: Space Master International, Inc., Evergreen Mobile Company, Truck & Trailer Sales, Inc. and Williams Scotsman of Canada, Inc. Willscot, also a 100% owned subsidiary of Scotsman, has fully and unconditionally guaranteed the senior secured notes on a subordinated secured second lien basis. These 100% owned subsidiaries act as joint and several guarantors of the senior secured notes. See Note 1 Organization and Basis of Presentation for a description of the operations of Willscot. The 10.0% senior secured notes are due August 15, 2008 with interest payable semi-annually on February 15 and August 15 of each year. On August 15, 2006, the 10.0% senior secured notes will become redeemable at the option of the Company, at a redemption price of 105.0% during the 12-month period beginning August 15, 2006 and 102.5% beginning August 15, 2007.
In February 2002, the Company issued $150.0 million of additional 9.875% senior notes under its existing indenture, which were issued at a price of 98.75%. Net proceeds from the issuance were used to permanently repay the outstanding balance of the term loan ($58,050 plus accrued interest) and to reduce outstanding borrowings under the then existing revolving credit facility. The Company's 9.875% senior notes are fully and unconditionally guaranteed on a senior unsecured basis by the Company's 100% owned subsidiaries, Space Master International, Inc., Evergreen Mobile Company, Truck & Trailer Sales, Inc. and Williams Scotsman of Canada, Inc. Willscot has fully and unconditionally guaranteed the 9.875% senior notes on a subordinated basis. These 100% owned subsidiaries (Guarantor Subsidiaries), act as joint and several guarantors of the9.875% senior notes. 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 June 1, 2003, the 9.875% senior notes became redeemable at the option of the Company, at a redemption price of 102.469% during the 12-month period beginning June 1, 2003 and 100% thereafter.
Scotsman Holdings, Inc. and Subsidiary Notes to Consolidated Financial Statements
5. Revolving Credit Facility and Long-Term Debt (continued)
On March 26, 2002, the Company entered into a new credit facility, the net proceeds from which were used to refinance its existing credit facility. This credit agreement provided for a $460.0 million revolving credit facility, a $210.0 million term loan, both maturing on December 31, 2006, and up to an additional $30.0 million in term or revolver commitments. In accordance with SFAS No. 145, $1.0 million (net of tax of approximately $.6 million) in deferred financing costs related to this refinancing was amortized immediately in 2002 and included in interest expense, resulting in an impact to earnings per basic share and earnings per diluted share of $.24 and $.23, respectively.
Interest on borrowings under the revolver is payable at a rate of either prime plus 1.75% or the Eurodollar rate plus 3.0%. The weighted average interest rates of the revolver under the credit agreement were 4.50% and 4.74% at December 31, 2003 and 2002, respectively. Principal payments due on the term loan are equal to 1% per year payable quarterly through September 30, 2006 with the balance due on December 31, 2006. Interest on the term loan is payable at a rate of either prime plus 1.75% or the Eurodollar rate plus 3.00%. The weighted average interest rates of the term loan under the credit agreement were 4.24% and 4.75% at December 31, 2003 and 2002, respectively.
Borrowings under the new 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. The credit agreement contains restrictions on the amount of dividends that the Company can pay to Holdings and requires compliance with certain financial covenants including capital expenditures, interest coverage, and leverage and fleet utilization levels. In August 2003, the Company amended these financial ratios by (1) increasing the permitted maximum leverage ratio, (2) decreasing the required utilization rate, and (3) decreasing the minimum interest coverage ratio. These steps are geared toward improving the company's underlying liquidity, profitability, and performance. The failure to maintain the required ratios would result in the Company not being able to borrow under the credit agreement and, if not cured within the grace periods, would result in a default under the credit agreement. The Company is currently in compliance with all financial covenants.
The Company's unused line of revolving credit at December 31, 2003 was $287.1 million. Borrowing base (collateral) availability calculated in accordance with the credit agreement was $231.4 million at December 31, 2003; however, Consolidated Leverage Ratio covenant restrictions further limited the Company's borrowing availability at December 31, 2003 to $57.9 million. In order to meet future cash requirements, the Company intends to use internally generated funds and to borrow under its credit facility. The Company believes it will have sufficient liquidity under its revolving line of credit and from cash generated from operations to fund its operations for the next 12 months.
Scotsman Holdings, Inc. and Subsidiary Notes to Consolidated Financial Statements
5. Revolving Credit Facility and Long-Term Debt (continued)
At December 31, 2003 and 2002, the fair value of debt was approximately $983,118 and $944,641, respectively.
Letter of credit obligations at December 31, 2003 and 2002 were approximately $8,098 and $5,172 million, respectively.
Maturities of long term debt during the years subsequent to December 31, 2003 are as follows:
2004 $ 2,121 2005 2,121 2006 259,126 2007 548,810 2008 150,000
The individual short-term contracts of the revolving credit facility come due in accordance with the terms of each contractual borrowing under the credit facility, which vary from 30 to 180 days. The Company intends to reborrow funds, as deemed available in accordance with the covenants and restrictions outlined in the Company's credit agreement, until the revolving credit facility expires in June 2006.
Scotsman Holdings, Inc. and Subsidiary Notes to Consolidated Financial Statements
6. 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 2003 2002 -------------------------
Deferred tax liabilities: Cost basis in excess of tax basis of assets and accelerated tax depreciation: Rental equipment $256,329 $256,986 Property and equipment 737 1,042 Other 977 2,582 ------------------------- Total deferred tax liabilities 258,043 260,610 ------------------------- Deferred tax assets: Allowance for doubtful accounts 338 423 Rents billed in advance 7,296 7,893 Stock option compensation 4,206 3,911 Deferred compensation 521 537 Net operating loss carryovers 100,719 93,963 Alternative minimum tax credit carryovers 1,759 1,759 Other 614 565 ------------------------- 115,453 109,051 Less: valuation allowance (4,802) (3,400) ------------------------- Total deferred tax assets 110,651 105,651 ------------------------- Net deferred tax liabilities $147,392 $154,959 =========================
At December 31, 2003, the Company had net operating loss carryovers available for federal and foreign income tax purposes of $240,647 (net of related valuation allowance). These net operating loss carryovers expire at various dates from 2004 to 2023. Also, alternative minimum tax credit carryovers of approximately $1,759, are available without expiration limitations.
During 2003, a valuation allowance of $3,400 related to precapitalization loss carryover limitations was reversed pursuant to changes in IRS guidelines. Also during 2003, a net operating loss of $774 expired. A valuation allowance of $4,802 was recorded based on the potential expiration of additional net operating loss carryovers.
Scotsman Holdings, Inc. and Subsidiary Notes to Consolidated Financial Statements
6. Income Taxes (continued)
Income tax expense (benefit) consists of the following:
Years ended December 31 2003 2002 2001 ----------------------------------
Current Federal $ -- $ -- $ -- State 400 292 210 International 109 86 42 ---------------------------------- $ 509 $ 378 $ 252 ---------------------------------- Deferred Federal $ (8,178) $ 6,459 $ 13,683 State (1,357) 1,078 2,278 International 1,895 222 1,372 ---------------------------------- $ (7,640) $ 7,759 $ 17,333 ---------------------------------- Total income taxes $ (7,131) $ 8,137 $ 17,585 ==================================
The provision for income taxes is reconciled to the amount computed by applying the Federal corporate tax rate of 35% to income before income taxes as follows:
Years ended December 31 2003 2002 2001 ---------------------------------
Income tax at statutory rate $ (6,585) $ 8,167 $14,076 State income taxes, net of federal tax (654) 889 1,618 Amortization of intangible assets 47 70 1,776 Other 61 (989) 115 --------------------------------- $ (7,131) $ 8,137 $17,585 =================================
The components of (loss) income from consolidated operations before income taxes is as follows:
Years ended December 31 2003 2002 2001 -----------------------------------------
United States $(23,700) $ 19,470 $37,876 International 4,887 3,865 2,338 ----------------------------------------- $(18,813) $23,335 $40,214 =========================================
Scotsman Holdings, Inc. and Subsidiary Notes to Consolidated Financial Statements
7. Commitments and Contingencies
The Company is obligated under noncancelable operating leases of certain equipment, vehicles and parcels of land. At December 31, 2003 approximate future minimum rental payments are as follows:
2004 $10,342 2005 8,579 2005 5,718 2006 3,596 2007 2,004 Thereafter 2,367 -----
Total minimum future lease payments $32,606 =======
Rent expense was $13,155, in 2003, $12,901, in 2002, and $11,490, in 2001.
The Company is involved in various lawsuits and claims arising out of the normal course of its business. In addition, the Company has insurance policies to cover general liability and workers compensation related claims. In the opinion of management, the ultimate amount of liability not covered by insurance, if any, under pending litigation and claims will not have a materially adverse effect on the financial position or operating results of the Company.
8. 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 up to the dollar limit described in Section 402(g) of the Code ($12,000 in 2003). All amounts deferred under this salary reduction feature are fully vested. In accordance with the Economic Growth and Tax Relief Act of 2001, the Plan also allows employees over the age of 50 to contribute an additional $2,000 as a "catch-up contribution."
The 401(k) Plan has a "matching" contribution feature under which the Company may contribute a percentage of the amount deferred by each participant, excluding the "catch-up contribution." Such percentage, if any, is determined by the Board of Directors at their discretion. The Plan also has a "profit sharing" feature, under which the Company may contribute, at its discretion, an additional amount allocable to the accounts of active participants meeting the aforementioned eligibility requirements. Contributions made by the Company on behalf of a 401(k) Plan participant vest ratably during the first five years of employment and 100% thereafter. Matching contributions by the Company to the 401(k) Plan were approximately $261 in 2003, $668 in 2002, and $587 in 2001. The Company temporarily eliminated the 401(k) employer match in April 2003 as part of a cost reduction initiative. No contributions have been made by the Company under the profit-sharing feature. The Company has adopted a Deferred
Scotsman Holdings, Inc. and Subsidiary Notes to Consolidated Financial Statements
8. Employee Benefit Plans (continued)
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, 2003 and 2002, the total amount deferred under this plan, including earnings, was approximately $726 and $649, respectively.
Holdings has adopted stock option plans for certain key employees of the Company. In 2003 the Company adopted the 2003 Employee Stock Option Plan (the "2003 plan") which allowed for up to 230,000 options to be granted. Under the 1997 Employee Stock Option Plan (the "1997 Plan"), up to 479,500 options to purchase Holdings' outstanding common stock could be granted. The 1997 plan was subsequently amended and restated in 1998 (the "Amended and Restated 1997 Employee Stock Option Plan"). Prior to the 1997 recapitalization, the Company had adopted the 1994 Employee Stock Option Plan (the "1994 plan") for certain key employees. All options outstanding under the 1994 plan became fully vested in conjunction with the recapitalization. The three stock option plans are referred to collectively as the "Stock Option Plans."
The options under the Stock Option Plans are granted with an exercise price equal to the fair value of the shares as of the date of grant. Fifty percent of the options granted vest ratably over five years, and fifty percent vest based on the Company meeting certain financial goals over the same five periods. All options expire 10 years from the date of grant. The options were granted with an exercise price equal to the fair value of the shares as of the date of grant.
A summary of stock option activity and related information for the years ended December 31 follows:
2003 2002 2001 --------------------- ------------------------- -------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ---------- ------ ---------- ----- --------- ----- Beginning balance 1,118,990 $23.87 1,125,140 $23.87 1,120,540 $23.56
Granted 196,450 50.67 6,300 50.67 23,300 50.67 Canceled - - - - - - Forfeited (53,850) (37.60) (12,450) (37.60) (18,700) (38.45) ---------- ------ ----------- ------ --------- ----- Ending balance 1,261,590 23.87 1,118,990 23.87 1,125,140 23.87
Exercisable at end of year 979,963 20.69 986,500 20.69 975,506 20.26
Scotsman Holdings, Inc. and Subsidiary Notes to Consolidated Financial Statements
8. Employee Benefit Plans (continued)
Exercise prices for options outstanding as of December 31, 2003 are detailed in the following table.
- -------------------------------------------------------------------------------
Weighted Average Exercise Shares Outstanding at Shares Exercisable at Remaining Price December 31, 2003 December 31, 2003 Contractual Life - ------------------------------------------------------------------------------- $ 4.59 72,000 72,000 1.2 years $ 9.60 274,650 274,650 2.2 years $18.39 266,490 266,490 3.2 years $30.50 322,150 282,483 4.0 years $50.67 326,300 84,340 5.0 years - -------------------------------------------------------------------------------
At December 31, 2003, the Company had approximately 1,341,000 shares of common stock reserved for the exercise of outstanding stock options and additional stock options authorized for granting under existing stock option plans.
9. Related Party Transactions
During 2003, 2002 and 2001, Scotsman paid dividends of approximately $55, $133, and $60, respectively, to Holdings primarily to fund normal operating expenses.
Scotsman Holdings, Inc. and Subsidiary Notes to Consolidated Financial Statements
10. Assets Held for Sale
Given recent economic trends, the Company implemented a strategic initiative to dispose of selected rental units in its lease fleet which the Company has determined no longer merit further investment. In accordance with SFAS No. 144 - Accounting for the Impairment or Disposal of Long Lived Assets, the Company plans to sell to one or more buyers approximately 2,900 units within a year of December 31, 2003, the effective date of the disposal initiative. Accordingly, the Company recorded a $19.4 million impairment charge in the fourth quarter of 2003 to reflect the write-down of these assets to their estimated fair value (less costs to sell). These units have been removed from the lease fleet equipment and classified separately as "Held for Sale" assets which are included in other assets on the consolidated balance sheet as of December 31, 2003. The December 31, 2002 amount of "Held for Sale" units has also been reclassed on the balance sheet for comparative purposes in accordance with SFAS No. 144.
As of December 31, 2003 and 2002, assets classified as "Held for Sale" related to the strategic initiative were $394 and $21,160.
11. Sale of Finance Leases
On June 27, 2003, the Company completed the sale of a portion of its finance lease portfolio at approximately book value. The total purchase price was $4.6 million and the net proceeds from sale were used to pay down borrowings under the Company's revolving credit facility. The leases sold, which were deemed not to be a part of the Company's core business, will continue to be serviced by the Company on behalf of the buyer.
12. Change in Accounting Estimate
In October 2002, the Company changed its estimated residual value from 50% of capitalized costs to $1 for certain classroom units. Additionally, the remaining estimated useful life for a portion of these units was reduced to 45 months. The effect of this change in estimate is an increase in depreciation expense of approximately $2,400, a decrease in net income of $1,460, and a decrease in earnings per basic share and earnings per diluted share of $.24 and $.24, respectively, for the year ended December 31, 2003.
Scotsman Holdings, Inc. and Subsidiary Notes to Consolidated Financial Statements
13. Prepaid Expenses and Other Current Assets and Accrued Expenses
Prepaid expenses and other current assets consists of the following as of December 31:
2003 2002 ---- ---- Cost in excess of billings, net $ 11,827 $ 6,323 Inventories 13,036 13,036 Prepaid expenses 8,878 5,524 ----- ------ Prepaid expenses and other current assets $33,741 $ 24,883 ====== ======
Accrued expenses consists of the following as of December 31:
2003 2002 ---- ---- Payroll and employee benefits $ 8,147 $ 8,283 Accrued interest 11,454 8,226 Other liabilities 9,776 12,651 ----- ------ Accrued expenses $ 29,377 $ 29,160 ====== ======
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, 2003 and 2002, and the related consolidated statements of operations, changes in stockholder's equity (deficit) and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 8. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Williams Scotsman, Inc. and subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Notes 1 and 4 to the Consolidated Financial Statements, effective January 1, 2002 the Company changed its method of accounting for goodwill and other intangible assets.
As discussed in Note 2 to the Consolidated Financial Statements, effective January 1, 2003 the Company changed its method of accounting for stock-based compensation.
/s/ Ernst & Young LLP Baltimore, Maryland
February 6, 2004
Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) December 31, 2003 and 2002
1. Organization and Basis of Presentation
Williams Scotsman, Inc. (the Company) is a 100% owned subsidiary of Scotsman Holdings, Inc. (Holdings), a corporation, which was organized in November 1993 for the purpose of acquiring the Company. The Company's operations include its 100% owned subsidiaries, Willscot Equipment, LLC (Willscot), and Williams Scotsman of Canada, Inc. Willscot, a special purpose subsidiary, was formed in May 1997; its operations are limited to the leasing of its mobile office units to the Company under a master lease. 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. These 100% owned subsidiaries are guarantors of the Company's credit facility as more fully discussed in Note 5.
The operations of the Company consist primarily of the leasing and sale of mobile offices, modular buildings and storage products (equipment) and their delivery and installation throughout the United States and Canada.
Acquisition of AFA Locations Inc.
On May 29, 2003 the Company acquired AFA Locations Inc. (AFA), a privately-held, Montreal, Canadian-based company that was involved in the leasing of mobile offices built by the manufacturing operations of AFA's consolidated entity. The purchase of the leasing business resulted in the acquisition of approximately 300 units at a value of approximately $2.6 million and the related customer base. The transaction was accounted for under the purchase method of accounting with a net purchase price of $3.2 million and $.6 million of goodwill. The acquisition was financed with borrowings under the Company's credit facility.
Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation (continued)
Acquisition of Northgate Industries Ltd
On July 31, 2002 the Company acquired the mobile office and storage product fleet of Northgate Industries Ltd., an Edmonton, Alberta-based Canadian company that was involved in the leasing of mobile offices to industrial markets. The transaction was accounted for under the purchase method of accounting with a net purchase price of $7.0 million being allocated to the identifiable net assets acquired of $6.6 million with the excess of $.4 million representing goodwill. The purchase price allocation was based upon estimates of the fair value of the net assets acquired. The acquisition, which added over 500 units at a value of approximately $6.3 million, was financed with borrowings under the Company's credit facility.
Acquisition of Mckinney Mobile Modular
On February 1, 2001, the Company acquired the mobile office sales and leasing business of Mckinney Mobile Modular, a privately held California corporation (Mckinney) in a transaction accounted for under the purchase method of accounting. Total consideration for the acquisition of Mckinney was approximately $26.1 million, including the repayment of existing indebtedness of Mckinney. The purchase price paid was allocated to the identifiable assets acquired of $21.6 million with the excess of $5.5 million representing goodwill and other intangible assets. The purchase price allocation was based upon the estimates of the fair value of the assets acquired. The acquisition, which added over 1,600 units at a value of approximately $21.4 million, was financed with borrowings under the Company's then existing credit facility.
Recent Accounting Pronouncements
Stock-based Compensation. In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148 - Accounting for Stock-Based Compensation - Transition and Disclosure, effective for fiscal years ending after December 15, 2002. Effective January 1, 2003, the Company adopted the provisions SFAS No. 148. See Note 2 Summary of Significant Accounting Policies - Stock-based Compensation for further discussion of SFAS No. 148.
Goodwill and other intangible assets. In June 2001, the FASB issued SFAS No. 141 - - Business Combinations, and SFAS No. 142 - Goodwill and Other Intangible Assets .. SFAS No. 141 applies to all business combinations with a closing date after June 30, 2001. SFAS No. 141 also eliminates the pooling-of-interests-method of accounting and further clarifies the criteria for recognition of intangible assets separately from goodwill. There was no material effect upon adoption of SFAS No. 141, which was adopted on December 1, 2001. See Note 2 Summary of Significant Accounting Policies-Goodwill and Other Intangible Assets for
Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation (continued)
Recent Accounting Pronouncements (continued)
further discussion of SFAS No. 142, which was adopted on January 1, 2002. Also see Note 4, Goodwill and Other Intangible Assets.
2. Summary of Significant Accounting Policies
(a) Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States 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) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its 100% owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.
(c) Accounts Receivable and Allowance for Doubtful Accounts
The Company's accounts receivable consist of amounts due from customers throughout the United States and Canada. Collateral is generally not required. The Company provides an allowance for doubtful accounts receivable by a charge to operations in amounts equal to the estimated losses expected to be incurred in collection of the accounts. The estimated losses are based on historical collection experience, days sales outstanding trends, and an ongoing review of specific customers and a review of the current status of the existing receivables. Customer accounts are written off against the allowance for doubtful accounts when an account is determined to be uncollectible.
Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
(d) Leasing Operations
Equipment is leased generally under operating leases and, occasionally, under sales-type lease arrangements. Operating lease terms generally range from 3 months to 60 months, and contractually averaged approximately 13 months at December 31, 2003. 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 generally of 10 to 20 years and an estimated residual value of typically 50%.
Costs of improvements and betterments are capitalized, whereas costs of replacement items, repairs and maintenance are expensed as incurred. Costs incurred for equipment to meet particular lease specifications are capitalized and depreciated over the lease term. However, costs aggregating less than $1 per unit are generally expensed as incurred.
(e) Property and Equipment
Property and equipment is stated at cost. Depreciation is computed by the straight-line method over estimated useful lives ranging from 15 to 40 years for buildings and improvements and 3 to 10 years for furniture and equipment. Maintenance and repairs are charged to expense as incurred.
(f) Deferred Financing Costs
Costs of obtaining debt are amortized using the straight-line method which approximates the effective interest rate method over the term of the debt.
(g) Goodwill and Other Intangible Assets
The excess of cost over fair values of net assets acquired in purchase transactions has been recorded as goodwill. In accordance with SFAS No. 142, goodwill (and intangible assets deemed to have indefinite lives) is no longer amortized but is subject to annual impairment tests in accordance with the Statement. Prior to the adoption of this standard, goodwill was amortized on a straight-line basis over 20 to 40 years. The Company performed the first of these required tests during 2002 and determined that the evaluation for impairment each year would be performed as of October 1. For 2003 and 2002, goodwill was determined not to be impaired. On a periodic basis, the Company evaluates the carrying value of its intangible assets to
Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
(g) Goodwill and Other Intangible Assets (continued)
assets to determine if the facts and circumstances suggest that intangible assets may be impaired. If this review indicates that intangible assets may not be recoverable, as determined by the undiscounted cash flow of the Company over the remaining amortization period, the Company's carrying value of intangible assets would be reduced by the estimated shortfall of cash flows, on a discounted basis. Intangible assets with finite lives are amortized over their estimated useful lives ranging from 24 to 228 months, with a remaining weighted average useful life of 110 months.
(h) Stock-based Compensation
Prior to 2003, the Company accounted for its issuance of stock options and any modifications thereof using variable plan accounting and the intrinsic value method under Accounting Principles Board Opinion No. 25 - Accounting for Stock Issued to Employees (APB No.25) and related interpretations. Stock-based employee compensation expense (income) for stock options of $5,313 and $(278) was reflected in net income for the years ended December 31, 2002 and 2001, respectively. The 2002 compensation expense resulted from a modification made for the continuation of certain employees' options after their termination from the Company.
Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123 - Accounting for Stock-Based Compensation. The Company selected the modified prospective method of adoption described in SFAS No. 148. Compensation cost recognized in 2003 of $766 is the same as that which would have been recognized had the fair value method of SFAS No. 123 been applied from its original effective date. In accordance with the modified prospective method of adoption, results for prior years have not been restated.
Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
(h) Stock-based Compensation (continued)
Pro forma information required by SFAS No. 123 has been determined as if the Company had accounted for its employee stock options under the fair value method during each year presented in the financial statements. The stock compensation expense for each period presented was determined using a straight-lined attribution method over the vesting period
Year Ended December 31, ---------------------- 2003 2002 2001 ---- ---- ---- Net (loss) income, reported $(11,646) $15,235 $22,666 Add: Stock compensation- net of tax reported 476 3,460 (156) Deduct: Stock compensation-net of tax fair value-based (476) (939) (637) --- --- --- Pro forma net (loss) income $(11,646) $17,756 $21,873 ====== ====== ====== (Loss) Earnings per share: Reported $ (3.51) $ 4.59 $ 6.83 ==== ==== ==== Pro forma $ (3.51) $ 5.35 $ 6.59 ==== ==== ====
The weighted average fair value of options granted in 2003, 2002, and 2001 were $20.77, 21.76, and 25.19, respectively. The following assumptions were used to compute these fair values using the Cox Ross Rubinstein binomial model at grant date in accordance with SFAS No. 148 adoption standards:
2003 2002 2001 ---- ---- ---- Risk-free interest rate 2.97% 3.80% 4.50% Expected life in years 5.00 5.00 5.00 Volatility 45.2% 46.2% 51.6% Dividend Yield 0% 0% 0%
During 2003, a modification was made for the continuation of certain employees options after their termination from the Company. The weighted average of the fair value of their modified options, risk free interest rate at modification date, expected life and volatility was $35.10, 2.06%, 3.81 years, and 45.3%, respectively.
For purposes of the pro forma disclosures above, the estimated fair values of options granted are amortized to expense over the options' vesting period.
Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
(i) 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.
(j) Advertising costs
Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2003, 2002, and 2001 was $3,935, $4,189, and $4,538, respectively and is included in selling, general, and administrative expenses in the consolidated statements of operations.
(k) Earnings Per Share
Earnings per share is computed based on weighted average number of common shares outstanding of 3,320,000 shares for 2003, 2002 and 2001.
(l) Revenue Recognition
The Company's revenue recognition policy is to recognize rental income ratably over the month on a daily basis. Billings for periods extending beyond the month end are recorded as deferred income. Sales revenue is recognized at the time the units are delivered and installed, with the exception of long-term construction-type sales contracts for which revenue is recognized under the percentage of completion method. Under this method, income is recognized based on the incurred costs to date compared to estimated total costs. All other revenue is recognized when related services have been performed. Where applicable, the Company's revenue recognition policy takes into consideration the guidance of Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. The Company has determined that for the majority of arrangements with multiple deliverables, the Company meets the criteria to account for these deliverables separately.
Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
(m) Foreign Currency Translation
The financial statements of the Company's foreign subsidiary for which the local currency is the functional currency has been translated into U.S. dollars in accordance SFAS No. 52 - Foreign Currency Translation. All balance sheet accounts have been translated using the exchange rate in effect at the balance sheet date. Income statement amounts have been translated using the average exchange rates during the year. The gains and losses resulting from the changes in exchange rates from year to year have been reported in other comprehensive income. The effect on the consolidated statements of operations of all transaction gains and losses is insignificant for all years presented.
(n) Reclassifications
Certain prior year amounts have been reclassified to conform to current year presentation. Certain amounts in the statement of cash flow have been reclassified to reflect the effects of changes in foreign currency exchange rates.
3. Property and Equipment
Property and equipment consist of the following: December 31 2003 2002 -----------------------------------
Land $ 19,286 $ 19,441 Buildings and improvements 33,231 33,145 Furniture and equipment 73,373 65,515 ----------------------------------- 125,890 118,101 Less accumulated depreciation 45,140 37,852 ----------------------------------- Net property and equipment $ 80,750 $ 80,249 ===================================
Depreciation expense related to property and equipment was $8,229, $7,206, $7,942 for the years ended December 31, 2003, 2002, and 2001, respectively.
Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements
4. Goodwill and Other Intangible Assets (continued)
As required by SFAS No. 142, the results of the prior years have not been restated. A reconciliation of net income as if SFAS No. 142 had been adopted as of January 1, is presented below for the three years ended December 31, 2003, 2002, and 2001, respectively.
2003 2002 2001 ---- ---- ----
Reported net (loss) income $(11,646) $15,235 $22,666 Add back: Goodwill and Other Intangible amortization (net of tax) -- -- 4,735 ------ ------ ----- Adjusted net (loss) income $(11,646) $15,235 $27,401 ====== ====== ======
Earnings per share: Reported net (loss) income $ (3.51) $ 4.59 $ 6.83 ==== ==== ==== Adjusted net (loss) income $ (3.51) $ 4.59 $ 8.25 ==== ==== ====
5. Revolving Credit Facility and Long-Term Debt
Debt consists of the following: December 31 2003 2002 ----------------------------------
Borrowings under revolving credit facility $ 54,940 $ 197,691 Term loan 208,428 238,200 9.875% senior notes, due June 2007 net of unamortized discount of $1,189 in 2003 and $1,546 in 2002 548,810 548,454 10.0% senior secured notes due August 2008 150,000 -- ---------------------------------- $ 962,178 $ 984,345 ==================================
Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements
5. Revolving Credit Facility and Long-Term Debt (continued)
In August 2003, the Company issued $150.0 million of 10.0% senior secured notes due 2008. The Company used the net proceeds of $145.4 million received from that offering to repay $27.5 million of the term loan under its credit agreement and repay $117.9 million of borrowings and terminate commitments under its revolving credit facility. In accordance with SFAS No. 145 - Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Correction, $1.5 million (net of tax of approximately $1 million) in deferred financing costs related to the extinguished debt was immediately amortized in 2003 and included in interest expense. The impact of the debt extinguishment to earnings per share was $.45 for 2003.
The 10.0% senior secured notes are fully and unconditionally guaranteed on a senior secured second lien basis by the Company's 100% owned subsidiaries: Space Master International, Inc., Evergreen Mobile Company, Truck & Trailer Sales, Inc. and Williams Scotsman of Canada, Inc. Willscot, also a 100% owned subsidiary, has fully and unconditionally guaranteed the senior secured notes on a subordinated secured second lien basis. These 100% owned subsidiaries act as joint and several guarantors of the senior secured notes. See Note 1 Organization and Basis of Presentation for a description of the operations of Willscot. The 10.0% senior secured notes are due August 15, 2008 with interest payable semi-annually on February 15 and August 15 of each year. On August 15, 2006, the 10.0% senior secured notes will become redeemable at the option of the Company, at a redemption price of 105.0% during the 12-month period beginning August 15, 2006 and 102.5% beginning August 15, 2007.
In February 2002, the Company issued $150.0 million of additional 9.875% senior notes under its existing indenture, which were issued at a price of 98.75%. Net proceeds from the issuance were used to permanently repay the outstanding balance of the term loan ($58,050 plus accrued interest) and to reduce outstanding borrowings under the then existing revolving credit facility. The Company's 9.875% senior notes are fully and unconditionally guaranteed on a senior unsecured basis by the Company's 100% owned subsidiaries, Space Master International, Inc., Evergreen Mobile Company, Truck & Trailer Sales, Inc. and Williams Scotsman of Canada, Inc. Willscot has fully and unconditionally guaranteed the 9.875% senior notes on a subordinated basis. These 100% owned subsidiaries (Guarantor Subsidiaries), act as joint and several guarantors of the9.875% senior notes. 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 June 1, 2003, the 9.875% senior notes became redeemable at the option of the Company, at a redemption price of 102.469% during the 12-month period beginning June 1, 2003 and 100% thereafter.
Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements
5. Revolving Credit Facility and Long-Term Debt (continued)
On March 26, 2002, the Company entered into a new credit facility, the net proceeds from which were used to refinance its existing credit facility. This credit agreement provided for a $460.0 million revolving credit facility, a $210.0 million term loan, both maturing on December 31, 2006, and up to an additional $30.0 million in term or revolver commitments. In accordance with SFAS No. 145, $1.0 million (net of tax of approximately $.6 million) in deferred financing costs related to this refinancing was amortized immediately in 2002 and included in interest expense, resulting in an impact to earnings per share of $.30.
Interest on borrowings under the revolver is payable at a rate of either prime plus 1.75% or the Eurodollar rate plus 3.0%. The weighted average interest rates of the revolver under the credit agreement were 4.50% and 4.74% at December 31, 2003 and 2002, respectively. Principal payments due on the term loan are equal to 1% per year payable quarterly through September 30, 2006 with the balance due on December 31, 2006. Interest on the term loan is payable at a rate of either prime plus 1.75% or the Eurodollar rate plus 3.00%. The weighted average interest rates of the term loan under the credit agreement were 4.24% and 4.75% at December 31, 2003 and 2002, respectively.
Borrowings under the new 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. The credit agreement contains restrictions on the amount of dividends that the Company can pay to Holdings and requires compliance with certain financial covenants including capital expenditures, interest coverage, and leverage and fleet utilization levels. In August 2003, the Company amended these financial ratios by (1) increasing the permitted maximum leverage ratio, (2) decreasing the required utilization rate, and (3) decreasing the minimum interest coverage ratio. These steps are geared toward improving the company's underlying liquidity, profitability, and performance. The failure to maintain the required ratios would result in the Company not being able to borrow under the credit agreement and, if not cured within the grace periods, would result in a default under the credit agreement. The Company is currently in compliance with all financial covenants.
The Company's unused line of revolving credit at December 31, 2003 was $287.1 million. Borrowing base (collateral) availability calculated in accordance with the credit agreement was $231.4 million at December 31, 2003; however, Consolidated Leverage Ratio covenant restrictions further limited the Company's borrowing availability at December 31, 2003 to $57.9 million. In order to meet future cash requirements, the Company intends to use internally generated funds and to borrow under its credit facility. The Company believes it will have sufficient liquidity under its revolving line of credit and from cash generated from operations to fund its operations for the next 12 months.
Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements
5. Revolving Credit Facility and Long-Term Debt (continued)
At December 31, 2003 and 2002, the fair value of debt was approximately $983,118 and $944,641, respectively.
Letter of credit obligations at December 31, 2003 and 2002 were approximately $8,098 and $5,172 million, respectively.
Maturities of long term debt during the years subsequent to December 31, 2003 are as follows:
2004 $ 2,121 2005 2,121 2006 259,126 2007 548,810 2008 150,000
The individual short-term contracts of the revolving credit facility come due in accordance with the terms of each contractual borrowing under the credit facility, which vary from 30 to 180 days. The Company intends to reborrow funds, as deemed available in accordance with the covenants and restrictions outlined in the Company's credit agreement, until the revolving credit facility expires in June 2006.
Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements
6. 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 2003 2002 -------------------------
Deferred tax liabilities: Cost basis in excess of tax basis of assets and accelerated tax depreciation: Rental equipment $256,329 $256,986 Property and equipment 737 1,042 Other 977 2,582 ------------------------- Total deferred tax liabilities 258,043 260,610 ------------------------- Deferred tax assets: Allowance for doubtful accounts 338 423 Rents billed in advance 7,296 7,893 Stock option compensation 4,206 3,911 Deferred compensation 521 537 Net operating loss carryovers 95,207 88,471 Alternative minimum tax credit carryovers 1,759 1,759 Other 615 565 ------------------------- 109,942 103,559 Less: valuation allowance (4,802) (3,400) ------------------------- Total deferred tax assets 105,140 100,159 ------------------------- Net deferred tax liabilities $152,903 $160,451 =========================
At December 31, 2003, the Company had net operating loss carryovers available for federal and foreign income tax purposes of $235,136 (net of related valuation allowance). These net operating loss carryovers expire at various dates from 2004 to 2023. Also, alternative minimum tax credit carryovers of approximately $1,759, are available without expiration limitations.
During 2003, a valuation allowance of $3,400 related to precapitalization loss carryover limitations was reversed pursuant to changes in IRS guidelines. Also during 2003, a net operating loss of $774 expired. A valuation allowance of $4,802 was recorded based on the potential expiration of additional net operating loss carryovers.
Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements
6. Income Taxes (continued)
Income tax expense (benefit) consists of the following:
Years ended December 31 2003 2002 2001 ----------------------------------
Current Federal $ -- $ -- $ -- State 400 290 210 International 110 86 42 ---------------------------------- $ 510 $ 376 $ 252 ---------------------------------- Deferred Federal $ (8,159) $ 6,481 $ 13,703 State (1,357) 1,078 2,278 International 1,895 222 1,372 ---------------------------------- $ (7,621) $ 7,781 $ 17,353 ---------------------------------- Total income taxes $ (7,111) $ 8,157 $ 17,605 ==================================
The provision for income taxes is reconciled to the amount computed by applying the Federal corporate tax rate of 35% to income before income taxes as follows:
Years ended December 31 2003 2002 2001 ---------------------------------
Income tax at statutory rate $( 6,565) $ 8,187 $14,096 State income taxes, net of federal tax (654) 889 1,618 Amortization of intangible assets 47 70 1,776 Other 61 (989) 115 --------------------------------- $ (7,111) $ 8,157 $17,605 =================================
The components of (loss) income from consolidated operations before income taxes is as follows:
Years ended December 31 2003 2002 2001 -----------------------------------------
United States $(23,644) $ 19,527 $37,933 International 4,887 3,865 2,338 ----------------------------------------- $(18,757) $23,392 $40,271 =========================================
Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements
7. Commitments and Contingencies
The Company is obligated under noncancelable operating leases of certain equipment, vehicles and parcels of land. At December 31, 2003 approximate future minimum rental payments are as follows:
2004 $10,342 2005 8,579 2005 5,718 2006 3,596 2007 2,004 Thereafter 2,367 -----
Total minimum future lease payments $32,606 =======
Rent expense was $13,155, in 2003, $12,901, in 2002, and $11,490, in 2001.
The Company is involved in various lawsuits and claims arising out of the normal course of its business. In addition, the Company has insurance policies to cover general liability and workers compensation related claims. In the opinion of management, the ultimate amount of liability not covered by insurance, if any, under pending litigation and claims will not have a materially adverse effect on the financial position or operating results of the Company.
8. 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 up to the dollar limit described in Section 402(g) of the Code ($12,000 in 2003). All amounts deferred under this salary reduction feature are fully vested. In accordance with the Economic Growth and Tax Relief Act of 2001, the Plan also allows employees over the age of 50 to contribute an additional $2,000 as a "catch-up contribution."
The 401(k) Plan has a "matching" contribution feature under which the Company may contribute a percentage of the amount deferred by each participant, excluding the "catch-up contribution." Such percentage, if any, is determined by the Board of Directors at their discretion. The Plan also has a "profit sharing" feature, under which the Company may contribute, at its discretion, an additional amount allocable to the accounts of active participants meeting the aforementioned eligibility requirements. Contributions made by the Company on behalf of a 401(k) Plan participant vest ratably during the first five years of employment and 100% thereafter. Matching contributions by the Company to the 401(k) Plan were approximately $261 in 2003, $668 in 2002, and $587 in 2001. The Company temporarily eliminated the 401(k) employer match in April 2003 as part of a cost reduction initiative. No contributions have been made by the Company under the profit-sharing feature. The Company has adopted a Deferred
Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements
8. Employee Benefit Plans (continued)
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, 2003 and 2002, the total amount deferred under this plan, including earnings, was approximately $726 and $649, respectively.
Holdings has adopted stock option plans for certain key employees of the Company. In 2003 the Company adopted the 2003 Employee Stock Option Plan (the "2003 plan") which allowed for up to 230,000 options to be granted. Under the 1997 Employee Stock Option Plan (the "1997 Plan"), up to 479,500 options to purchase Holdings' outstanding common stock could be granted. The 1997 plan was subsequently amended and restated in 1998 (the "Amended and Restated 1997 Employee Stock Option Plan"). Prior to the 1997 recapitalization, the Company had adopted the 1994 Employee Stock Option Plan (the "1994 plan") for certain key employees. All options outstanding under the 1994 plan became fully vested in conjunction with the recapitalization. The three stock option plans are referred to collectively as the "Stock Option Plans."
The options under the Stock Option Plans are granted with an exercise price equal to the fair value of the shares as of the date of grant. Fifty percent of the options granted vest ratably over five years, and fifty percent vest based on the Company meeting certain financial goals over the same five periods. All options expire 10 years from the date of grant. The options were granted with an exercise price equal to the fair value of the shares as of the date of grant.
A summary of stock option activity and related information for the years ended December 31 follows:
2003 2002 2001 --------------------- ------------------------- -------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ---------- ------ ---------- ----- --------- ----- Beginning balance 1,118,990 $23.87 1,125,140 $23.87 1,120,540 $23.56
Granted 196,450 50.67 6,300 50.67 23,300 50.67 Canceled - - - - - - Forfeited (53,850) (37.60) (12,450) (37.60) (18,700) (38.45) ---------- ------ ----------- ------ --------- ----- Ending balance 1,261,590 23.87 1,118,990 23.87 1,125,140 23.87
Exercisable at end of year 979,963 20.69 986,500 20.69 975,506 20.26
Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements
8. Employee Benefit Plans (continued)
Exercise prices for options outstanding as of December 31, 2003 are detailed in the following table.
- -------------------------------------------------------------------------------
Weighted Average Exercise Shares Outstanding at Shares Exercisable at Remaining Price December 31, 2003 December 31, 2003 Contractual Life - ------------------------------------------------------------------------------- $ 4.59 72,000 72,000 1.2 years $ 9.60 274,650 274,650 2.2 years $18.39 266,490 266,490 3.2 years $30.50 322,150 282,483 4.0 years $50.67 326,300 84,340 5.0 years - -------------------------------------------------------------------------------
At December 31, 2003, the Company had approximately 1,341,000 shares of common stock reserved for the exercise of outstanding stock options and additional stock options authorized for granting under existing stock option plans.
Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements
10. Related Party Transactions
During 2003, 2002 and 2001, the Company paid dividends of approximately $55, $133, and $60, respectively, to Holdings primarily to fund normal operating expenses.
11. Assets Held for Sale
Given recent economic trends, the Company implemented a strategic initiative to dispose of selected rental units in its lease fleet which the Company has determined no longer merit further investment. In accordance with SFAS No. 144 - Accounting for the Impairment or Disposal of Long Lived Assets, the Company plans to sell to one or more buyers approximately 2,900 units within a year of December 31, 2003, the effective date of the disposal initiative. Accordingly, the Company recorded a $19.4 million impairment charge in the fourth quarter of 2003 to reflect the write-down of these assets to their estimated fair value (less costs to sell). These units have been removed from the lease fleet equipment and classified separately as "Held for Sale" assets which are included in other assets on the consolidated balance sheet as of December 31, 2003. The December 31, 2002 amount of "Held for Sale" units has also been reclassed on the balance sheet for comparative purposes in accordance with SFAS No. 144.
As of December 31, 2003 and 2002, assets classified as "Held for Sale" related to the strategic initiative were $394 and $21,160.
12. Sale of Finance Leases
On June 27, 2003, the Company completed the sale of a portion of its finance lease portfolio at approximately book value. The total purchase price was $4.6 million and the net proceeds from sale were used to pay down borrowings under the Company's revolving credit facility. The leases sold, which were deemed not to be a part of the Company's core business, will continue to be serviced by the Company on behalf of the buyer.
13. Change in Accounting Estimate
In October 2002, the Company changed its estimated residual value from 50% of capitalized costs to $1 for certain classroom units. Additionally, the remaining estimated useful life for a portion of these units was reduced to 45 months. The effect of this change in estimate is an increase in depreciation expense of approximately $2,400 and a decrease in net income of $1,460 or $.44 per share, for the year ended December 31, 2003, respectively.
Williams Scotsman, Inc. and Subsidiaries Notes to Consolidated Financial Statements
14. Prepaid Expenses and Other Current Assets and Accrued Expenses
Prepaid expenses and other current assets consists of the following as of December 31:
2003 2002 ---- ---- Cost in excess of billings, net $ 11,827 $ 6,323 Inventories 13,036 13,036 Prepaid expenses 8,878 5,524 ----- ------ Prepaid expenses and other current assets $33,741 $ 24,883 ====== ======
Accrued expenses consists of the following as of December 31:
2003 2002 ---- ---- Payroll and employee benefits $ 8,147 $ 8,283 Accrued interest 11,454 8,226 Other liabilities 9,764 12,637 ----- ------ Accrued expenses $ 29,365 $ 29,146 ====== ======
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.
Item 9A. Controls and Procedures
(a) Disclosure controls and procedures.
Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation, as of the end of the period covered by this report, that our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a - 15(e) and 15d - 15(e)) are (1) effective to ensure that material information required to be disclosed by us in reports filed or submitted by us under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (2) designed to ensure that material information required to be disclosed by us in such reports is accumulated, organized and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting.
There has been no change in the Company's internal control over financial reporting (as defined in the Securities Exchange Act of 1934 Rules 13a-15(f) and 15d-15(f)) that occurred during the fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their stated goals under all potential future conditions.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Directors and Officers
Our directors and executive officers are as follows:
Name Age Position Gerard E. Holthaus...... 54 President and Chief Executive Officer; Director and Chairman of the Board James N. Alexander...... 44 Director Michael F. Finley....... 42 Director Steven B. Gruber........ 46 Director Brian Kwait............. 42 Director David P. Spalding....... 49 Director Joseph F. Donegan....... 53 Executive Vice President - U.S. Field Operations John C. Cantlin......... 55 Senior Vice President and Chief Financial Officer William C. LeBuhn....... 41 Senior Vice President and Chief Administrative Officer Dean T. Fisher.......... 57 Vice President - Operations Sonney Taragin.......... 50 Vice President - Information Services John B. Ross............ 55 Vice President and General Counsel Joseph J. Vecchiolla.... 44 Vice President, Marketing and Corporate Communications
The directors are elected annually and serve until their successors are duly elected and qualified. No director of Holdings receives any fee for attendance at Board of Directors meetings or meetings of Committees of the Board of Directors. Outside directors are reimbursed for their expenses for any meeting attended.
Executive officers of Holdings are elected by the Board of Directors and serve at the discretion of the Board of Directors.
Gerard E. Holthaus was elected Chairman of the Board in April 1999 and has been our President and Chief Executive Officer since April 1997. He has been with our 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 to that. He has served as a director since June 1994. Before joining our 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. He also serves on the Board of Directors of The Baltimore Life Companies.
James N. Alexander was elected as a director of Holdings in May 1997. Mr. Alexander has been a Managing Partner of Oak Hill Investment Management and its predecessors (see Item 12
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
All of the issued and outstanding shares of Common Stock of the Company are owned by Holdings. The following table sets forth certain information regarding the beneficial ownership of Holdings' Common Stock as of December 31, 2003 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, (iii) each executive officer named in the Summary Compensation Table, and (iv) all executive officers and directors as a group.
Shares of Name Common Stock Percentage - ---- ------------ ---------- Cypress Merchant Banking Partners L.P.(1)(2)(3) c/o The Cypress Group L.L.C. 65 East 55th Street New York, NY 10022 ............. 2,431,523 39.25%
Cypress Offshore Partners L.P.(1)(2)(3) Bank of Bermuda (Cayman) Limited P.O. Box 513 G.T. Third Floor British American Tower George Town, Grand Cayman Cayman Islands, B.W.I....................... 125,939 2.03
Scotsman Partners, L.P.(2)(3)(4) 201 Main Street Fort Worth, TX 76102 ...................... 2,557,462 41.28
Odyssey Investment Partners Fund, LP(3)(5) 280 Park Avenue New York, NY 10017 ...................... 716,536 11.57
James N. Alexander(6) ...................... --- --- Michael F. Finley(7) ...................... --- --- Steven B. Gruber(6) ...................... --- --- Brian Kwait(8)................................... --- --- David P. Spalding(7)............................. --- --- Gerard E. Holthaus (9)(10)(11)................... 319,013 4.93 Joseph F. Donegan (9)(10)(11).................... 107,375 1.70 William C. LeBuhn (9)(10)(11).................... 97,650 1.55 John C. Cantlin (9)(10)(11)...................... 2,000 .03 Joseph J. Vecchiolla (9)(10)(11)................. 1,000 .02
All executive officers and directors as a group (11) (13 persons)............. 596,113 8.84
(1) Cypress Merchant Banking Partners L.P. and Cypress Offshore Partners L.P. are controlled by The Cypress Group L.L.C. or affiliates thereof. Certain executives of The Cypress Group L.L.C., including Messrs. Jeffrey Hughes, James Singleton, David Spalding and James Stern, may be deemed to share beneficial ownership of the shares shown as beneficially owned by Cypress Merchant Banking Partners L.P. and Cypress Offshore Partners L.P. Each of such individuals disclaims beneficial ownership of such shares.
(2) Does not include shares beneficially owned by members of management, as to which the Investor Group (as defined herein) has an irrevocable proxy.
(3) Under the Investor Stockholders Agreement (as defined herein), the Cypress Stockholders (as defined herein), Scotsman Partners, L.P., and Odyssey Investment Group (as defined herein) have agreed to vote their shares for certain nominees for director and other matters and the Cypress Stockholders, Scotsman Partners, L.P., and Odyssey Investment Group have agreed to restrict the transfer of their shares subject to certain exceptions. See "Certain Relationships and Related Transactions--Investor Stockholders Agreement."
(4) The shares of Holdings Common Stock beneficially owned by Scotsman Partners, L.P. may be deemed to be owned by J. Taylor Crandall, Group 31, Inc. ("Group 31") and Arbor Scotsman, L.P. ("AS"). Mr. Crandall is the sole stockholder of Group 31, which is the general partner of AS, which, in turn, is the general partner of Scotsman Partners, L.P. Group 31 and AS disclaim such beneficial ownership. The address of Mr. Crandall, Group 31 and AS is the same as Scotsman Partners. Mr. Crandall is a Managing Partner of Oak Hill Capital Management, Inc.
(5) Includes 1,461 shares that are beneficially owned by Odyssey Coinvestors, LLC, an affiliate of Odyssey Investment Partners, LLC (together, "Odyssey Investor Group"). The General Partner of Odyssey Investment Partners Fund, LP is Odyssey Capital Partners, LLC a Delaware limited liability company (the "General Partner of Odyssey") and the Managing Member of Odyssey Coinvestors, LLC is Odyssey Investment Partners, LLC, a Delaware limited liability company. Paul D. Barnett, Stephen Berger, William Hopkins, Brian Kwait and Muzzi Mirza are Managing Members of Odyssey Capital Partners, LLC and Odyssey Investment Partners, LLC, and, therefore, may each be deemed to share voting and investment power with respect to 716,536 shares and votes deemed to be owned by the General Partner of Odyssey and Odyssey Investment Partners, LLC. Each Messrs. Barnett, Berger, Hopkins, Kwait and Mirza disclaims beneficial ownership of such shares.
(6) Such person's address is c/o Scotsman Partners, L.P.
(7) Such person's address is c/o Cypress Merchant Banking Partners L.P.
(8) Such person's address is c/o Odyssey Investment Partners Fund, LP.
(9) Such person's address is c/o 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."
(11) Includes 280,913, 103,775, 94,650, 2,000, and 1,000 shares held as options by Messrs. Holthaus, Donegan, LeBuhn, Cantlin, and Vecchiolla, respectively. All executive officers as a group includes 549,913 shares held as options.
Equity Compensation Plan Information
Number of securities Number of securities Weighted-average remaining available to be issued upon exercise price for future issuance exercise of of outstanding under equity Plan Category outstanding options options compensation plans - -------------------------------------------------------------------------------- Equity compensation plans approved by security holders 1,261,590 $23.87 27,250
Equity compensation plans approved by security holders N/A N/A N/A
Item 13.
Item 13. Certain Relationships and Related Transactions
The Recapitalization
Holdings, the Odyssey Investor Group, certain other existing stockholders of Holdings, certain partnerships affiliated with The Cypress Group L.L.C. and Scotsman Partners, L.P. are parties to a Recapitalization Agreement dated April 11, 1997 pursuant to which the Recapitalization occurred. See "Business - Recapitalization".
Stockholders' Agreement
Cypress Merchant Banking Partners, L.P., Cypress Offshore Partners, L.P., Scotsman Partners, L.P. (collectively the "Investor Group"), the Management Stockholders and Holdings are parties to a Management Stockholders' and Optionholders' Agreement dated as of September 14, 1998 (the "Stockholders' Agreement"), which contains certain rights and restrictions with respect to the transfer of each Management Stockholder's shares of Common Stock. The Stockholders' Agreement prohibits the transfer of any shares of Common Stock by Management Stockholders (other than sales required in connection with the disposition of all shares of Common Stock owned by the Investor Group and its affiliates) until the earlier of twelve months after an initial public offering of the equity of Holdings for designated officers (and sixty days after an initial public offering for non-designated officers) or the day after the Investor Group and its affiliates have disposed of more than 33-1/3% of the shares of Common Stock originally acquired by the Investor Group, and thereafter, the aggregate number of shares which may be transferred by each Management Stockholder in any calendar year (other than certain required sales) may not exceed 25% of the number of shares acquired pursuant to the Subscription Agreement between Holdings and such Management Stockholder plus the number of any shares acquired pursuant to the exercise of stock purchase options. In addition, the Stockholders' Agreement restricts the transfer of shares of Common Stock by each Management Stockholder for a period of five years from the date of purchase of such shares, except certain permitted transfers and transfers pursuant to an effective registration statement or in accordance with Rule 144 under the Securities Act. Upon the expiration of such five-year period, subject to the foregoing restrictions, each Management Stockholder may transfer his shares after giving to the Investor Group and Holdings, a right of first refusal to purchase such shares.
Each Management Stockholder has the right (and in limited circumstances the obligation) to sell his shares in connection with certain dispositions of shares by the Investor Group and the right to cause his shares to be included in certain registrations of Common Stock on behalf of the Investor Group. In addition, upon termination of any Management Stockholder's employment, Holdings may elect to require such Management Stockholder to sell to Holdings all of his shares.
Investor Stockholders Agreement
On May 22, 1997, Holdings, certain partnerships affiliated with The Cypress Group, L.L.C. (the "Cypress Stockholders") and Scotsman Partners, L.P. (together with the Cypress Stockholders and, including their permitted transferees, the "Investor Stockholders") and the Odyssey Investor Group, BT Investment Partners, Inc. and certain other stockholders (together with their permitted transferees and the Investor Stockholders, the "Stockholders") entered into an investor stockholders agreement, which was subsequently amended on September 1, 1998 (the "Investor Stockholders Agreement").
Under the terms of the Investor Stockholders Agreement, unless otherwise agreed to by the Investor Stockholders, the board of directors of Holdings (the "Board of Directors") will consist of nine directors: three persons nominated by the Cypress Stockholders, three persons nominated by Scotsman Partners, one person nominated by Odyssey Investment Group, the Chairman of the Board of Directors of Holdings and the President of Holdings. Each of Cypress Stockholders, Scotsman Partners and Odyssey Investment Group is entitled to remove and replace any or all of their respective designees on the Board of Directors and each is entitled to remove the director or directors who are the Chairman of the Board of Holdings and the President of Holdings in accordance with the provisions of the Investor Stockholders Agreement. If the Holdings Common Stock held by either the Cypress Stockholders or Scotsman Partners is reduced to an amount less than 20% of the outstanding Holdings Common Stock, but 5% or more of the outstanding Holdings Common Stock, the Cypress Stockholders or Scotsman Partners, as the case may be, will be entitled to designate one director. Each of the Cypress Stockholders or Scotsman Partners will lose the right to designate any directors when the Cypress Stockholders or Scotsman Partners, as the case may be, no longer holds at least 5% of the outstanding Holdings Common Stock. From and after the date that Odyssey Investment Group owns less than 5% of the outstanding Holdings Common Stock, it will no longer be entitled to designate any director for election or removal. If any of Cypress Stockholders, Scotsman Partners and Odyssey Investment Group is entitled to designate a lesser number of directors pursuant to the Investor Stockholders Agreement, then they will vote their shares to cause the number of the entire Board of Directors to be reduced by the number of directors they are no longer entitled to designate.
Under the Investor Stockholders Agreement, until such time as either the Cypress Stockholders or the Scotsman Partners is no longer entitled to designate three directors, without the approval of a majority of the directors designated by each of the Cypress Stockholders and Scotsman Partners, respectively, Holdings will not take certain actions (including mergers, consolidations, sales of all or substantially all assets, electing or removing the Chairman or President of Holdings, issuing securities, incurring certain indebtedness, making certain acquisitions, approving operating and capital budgets and other major transactions).
Under the Investor Stockholders Agreement, prior to the consummation of an initial public offering of Holdings Common Stock (an "IPO"), each Stockholder will have the right to acquire shares of Holdings Common Stock in connection with certain new issuances of Holdings Common Stock, on the same terms and conditions, for the amount necessary to allow the participating Stockholder to maintain its percentage holding of the outstanding Holdings Common Stock.
The Investor Stockholders Agreement contains provisions limiting the ability of Stockholders to transfer their shares in certain circumstances. Among other provisions, the Investor Stockholders Agreement includes (i) rights of first offer in favor of the Investor Stockholders with respect to proposed transfers of shares to a third party and (ii) tag-along rights in favor of each Stockholder pursuant to which a selling Stockholder would be required to permit
the other Stockholders to participate on a proportional basis in a transfer of shares to a third party. Also, if one or more Stockholders holding at least 60% of the outstanding Holdings Common Stock determine to sell shares to a third party, in certain circumstances such Stockholders have the right to require the other Stockholders to sell their shares to such third party.
Under the Investor Stockholders Agreement, the Stockholders have the right to require the Company to register their shares of Holdings Common Stock under the Securities Act in certain circumstances, including upon a demand of certain of the Stockholders.
The Investor Stockholders Agreement (other than the registration rights provisions) will terminate (unless earlier terminated as specified in the Investor Stockholders Agreement) upon the earlier of (i) May 22, 2007 and (ii) completion of an IPO.
Item 14.
Item 14. Principal Accountant Fees and Services
Audit Fees
The aggregate audit fees billed for professional services rendered by Ernst & Young LLP for the audit of the Company's annual financial statements and financial statements included in the Company's Quarterly Reports on Form 10-Q for the years ended December 31, 2003 and 2002 were approximately $298,000 and approximately $250,000, respectively.
Tax Fees
The aggregate fees billed for all tax services rendered by Ernst & Young LLP for the years ended December 31, 2003 and 2002 were approximately $92,000, and $201,000, respectively. Tax services principally include tax compliance, tax advice and planning (including foreign tax services, as well as tax planning strategies for the preservation of net operating loss carryforwards).
Audit Related Fees
The aggregate audit related fees billed for professional services rendered by Ernst & Young LLP for the audit of the Company's 401K plan for the years ended December 31, 2003 and 2002 were $11,000 and $10,000, respectively.
All Other Fees
None.
Pre-Approval Policies and Procedures
The Audit Committee has adopted the following guidelines regarding the engagement of the Company's independent auditor to perform services for the Company. For audit services (including audits of the Company's employee benefit plan), the independent auditor will provide the Committee with an engagement letter each year prior to commencement of the audit services outlining the scope of the audit services proposed to be performed during the fiscal year. If the terms of the engagement letter are agreed to by the Committee, the engagement letter will be formally accepted. Non-audit services will require pre-approval from the Audit Committee.
PART IV
Item 15.
Item 15. 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.
On November 6, 2003, Williams Scotsman furnished a Form 8-K under Item 12 relating to the press release announcing its results of operations for the three and nine months ended September 30, 2003.
(c) Exhibits
Exhibit Number
2.1 -- Recapitalization Agreement, dated as of April 11, 1997. (Incorporated by reference to Exhibit 2 of the Company's Form 8-K dated May 22, 1997.)
2.2 -- Stock Purchase Agreement, dated as of July 23, 1998.(Incorporated by reference to Exhibit 2 of the Company's Form 8-K dated September 1, 1998.)
3.1 -- Certificate of Incorporation of Williams Scotsman, Inc.,as amended. (Incorporated by reference to Exhibit 3(i) of the Company's Form 8-K dated November 27, 1996).
3.2 -- By-laws of Williams Scotsman, Inc. (Incorporated by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-l by the Company) (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 the Company's Registration Statement on Form S-4 filed on September 25, 1997 by the Company) (Commission File No. 333-30753).
4.1.1 -- First Supplemental Indenture, dated as of September 1, 1998 (incorporated by reference to Exhibit 4.1.1 of Williams Scotsman's Registration Statement on Form S-4 (file no. 333-86482)).
4.1.2 -- Second Supplemental Indenture, dated as of February 4, 1999 (incorporated by reference to Exhibit 4.1.2 of Williams Scotsman's Registration Statement on Form S-4 (file no. 333-86482)).
4.1.3 -- Third Supplemental Indenture, dated as of June 29, 2001 (incorporated by reference to Exhibit 4.1.3 of Williams Scotsman's Registration Statement on Form S-4 (file no. 333-86482)).
4.1.4 -- Fourth Supplemental Indenture, dated as of March 26, 2002 (incorporated by reference to Exhibit 4.1.4 of Williams Scotsman's Registration Statement on Form S-4 (file no. 333-86482)).
4.2 -- Registration Rights Agreement, dated as of August 18, 2003, among the Company, the Guarantors named there in, the Subordinated Guarantor named therein and Deutsche Bank Securities Inc., Bank of America Securities LLC, CIBC World Market Corp. and Fleet Securities, Inc., as initial purchasers (incorporated by reference to Exhibit 4.2 to the Form S-4 filed on October 3, 2003 by the Company (Commission file no. 333-109448)).
4.3 -- Indenture, dated as of August 18, 2003 among the Company, the Guarantors named therein, the Subordinated Guarantor named therein and the U.S. Bank National Association as trustee, including exhibits thereto, the form of the initial note and the form of the exchange note (incorporated by reference to Exhibit 4.3 to the Form S-4 filed on October 3, 2003 by the Company (Commission file no. 333-109448)).
4.4 -- Amended and Restated U.S. Pledge Agreement, dated as of March 26, 2002 and amended and restated as of August 18, 2003, among Scotsman Holdings, Inc., the Company, the Guarantors named therein, the Subordinated Guarantor named therein and Deutsche Bank Trust Company Americas, and acknowledged by U.S. Bank National Association as the trustee (incorporated by reference to Exhibit 4.4 to the Form S-4 filed on October 3, 2003 by the Company (Commission file no. 333-109448)).
4.5 -- Amended and Restated U.S. Security Agreement, dated as of March 26, 2002, and amended and restated as of August 18, 2003, among Scotsman Holdings, Inc., the Company, the Guarantors named therein, the Collateral Agent and acknowledged by the Trustee (incorporated by reference to Exhibit 4.5 to the Form S-4 filed on October 3, 2003 by the Company (Commission file no. 333-109448)).
4.6 -- Canadian Security Agreement among Williams Scotsman of Canada, Deutsche Bank Trust Company America, Truck & Trailer Sales, Inc., Evergreen Mobile Company and BT Commercial Corporation (incorporated by reference to Exhibit 4.6 to the Form S-4 filed on October 3, 2003 by the Company (Commission file no. 333-109448)).
4.7 -- Intercreditor Agreement among Deutsche Bank Trust Company Americas and U.S. Bank National Association (incorporated by reference to Exhibit 4.7 to the Form S-4 filed on October 3, 2003 by the Company (Commission file no. 333-109448)).
10.1 -- Investor Stockholders Agreement, dated as of May 22, 1997, among Scotsman Partners, L.P., Cypress Merchant Banking Partners, L.P., Cypress Offshore Partners, L.P., Odyssey Partners, L.P., Barry P. Gossett, BT Investment Partners, Inc. and certain other stockholders. (Incorporated by reference to Exhibit 10.3 of the Company's Registration Statement on Form S-4 (Commission File No.333-30753)).
10.2 -- Amendment No. 1 to Investor Stockholders Agreement, dated as of September 1, 1998, among Scotsman Partners, L.P. Cypress Merchant Banking Partners, L.P., Cypress Offshore Partners, L.P., Odyssey Partners, L.P., Barry P. Gossett, BT Investment Partners, Inc. and certain other stockholders. (Incorporated by reference to Exhibit 10.3 of the Company's 1998 Form 10-K.)
10.3 -- Management Stockholders' and Optionholders' Agreement, dated as of September 14, 1998, among Scotsman Partners, L.P., Cypress Merchant Banking Partners, L.P., Cypress Offshore Partners, L.P., and certain management stockholders of Holdings. (Incorporated by reference to Exhibit 10.4 of the Company's annual report on Form 10-K for the year ended December 31, 1998.)
10.4 -- 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)).
10.5 -- Scotsman Holdings, Inc. 1994 Employee Stock Option Plan. (Incorporated by reference to Exhibit 10.11 of the Company's annual report on Form 10-K for the year ended December 31, 1994).
10.6 -- Scotsman Holdings, Inc. Amended and Restated 1997 Employee Stock Option Plan. (Incorporated by reference to Exhibit 10.7 of the Company's annual report on Form 10-K for the year ended December 31, 1998.)
10.7 -- Credit Agreement, dated as of March 26, 2002, by and among Scotsman Holdings, Inc., Williams Scotsman, Inc., various financial institutions named therein, Bankers Trust Company, as administrative agent, Fleet Capital Corporation and Congress Financial Corporation as Co-Syndication Agents, Bank of America, N.A. and GMAC Business Credit, LLC as Co-Documentation Agents, and Deutsche Banc Alex. Brown Inc. as Sole Lead Arranger and Sole Book Manager. (Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-4 (Commission File No. 333-86482)).
10.8 -- First Amendment dated as of February 27, 2003 to Credit Agreement dated as of March 26, 2002. (Incorporated by reference to Exhibit 10.12 of the Company's annual report on Form 10-K for the year ended December 31, 2002.)
10.9 -- Severance Agreement and General Release for Gerard E. Keefe dated October 11, 2002 (Incorporated by reference to Exhibit 10.13 of the Company's annual report on Form 10-K for the year ended December 31, 2002.)
10.10 -- Severance Agreement and General Release for J. Collier Beall dated June 3, 2002(Incorporated by reference to Exhibit 10.14 of the Company's annual report on Form 10-K for the year ended December 31, 2002.)
10.11 -- Second Amendment dated as of August 11, 2003, among Scotsman Holdings, Inc., the Company, the lenders from time to time party to the credit agreement and Deutsche Bank Trust Company Americas, as Administrative Agent (incorporated by reference to Exhibit 10.1 of the Company's Current report on Form 8-K dated August 27, 2003)
10.12 -- Third Amendment dated as of December 22, 2003, among Scotsman Holdings, Inc., the Company, the lenders from time to time party to the credit agreement and Deutsche Bank Trust Company Americas, as Administrative Agent . (Incorporated by reference to Exhibit 10.12 of Williams Scotsman Inc.'s annual report on Form 10-k dated March, 24, 2004.)
10.13 -- Scotsman Holdings 2003 Employee Stock Option Plan (Incorporated by reference to Exhibit 10.13 of Williams Scotsman Inc.'s annual report on Form 10-k dated March, 24, 2004.)
21.1 -- Subsidiaries of Registrant: Williams Scotsman Inc.
31.1 -- Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Gerard E. Holthaus, Chief Executive Officer of the Company.
31.2 -- Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for John C. Cantlin, Chief Financial Officer of the Company.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SCOTSMAN HOLDINGS, INC. By: /s/ Gerard E. Holthaus -------------------------- Gerard E. Holthaus Chief Executive Officer
Dated: March 25, 2004
SCOTSMAN HOLDINGS, INC. By: /s/ John C. Cantlin ----------------------- John Cantlin Chief Financial Officer
Dated: March 25, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Capacity Date - --------------------------- ------------------------------- -------------- /s/ Gerard E. Holthaus Chairman, President, Chief March 25, 2004 - ---------------------- Gerard E. Holthaus Executive Officer and Director (principal executive officer)
/s/ John C. Cantlin Chief Financial Officer March 25, 2004 - --------------------------- John C. Cantlin (principal financial and accounting officer)
/s/ James N. Alexander Director March 25, 2004 - ------------------------- James N. Alexander
/s/ Michael F. Finley Director March 25, 2004 - ---------------------------- Michael F. Finley
/s/ Steven B. Gruber Director March 25, 2004 - --------------------------- Steven B. Gruber
/s/ Brian Kwait Director March 25, 2004 - ------------------------------ Brian Kwait
/s/ David P. Spalding Director March 25, 2004 - --------------------------- David P. Spalding
Supplemental Information to Be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act:
No annual report of proxy material for the fiscal year ended December 31, 2003 has been, nor will be, sent to security holders.
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Schedule I - Condensed Financial Information of Registrant
Condensed Balance Sheets December 31, ------------------------- 2003 2002 ---- ---- (in thousands)
Assets Cash $ -- $ 2 Investment in subsidiary (4,591) 7,110 Deferred income taxes 5,512 5,492 ----- ------ $ 921 $ 12,604 ===== ======
Liabilities and Stockholders' Equity Accrued expenses $ 13 $ 14
Stockholders' deficit: Common stock 95 95 Additional paid-in capital 229,101 229,101 Retained earnings 67,650 79,332 ------- ------- 296,846 308,528 Treasury stock (295,938) (295,938) ------- ------- 908 12,590 ------- ------- $ 921 $ 12,604 ======= =======
Condensed Statements of Operations Year Ended December 31, --------------------------------- 2003 2002 2001 ---- ---- ---- (In thousands)
Revenue $ -- $ -- $ --
Selling, general and administrative expenses 56 57 57 Interest -- -- -- ----- ------ ------ 56 57 57
Loss before income taxes (56) (57) (57) Income tax benefit 20 20 20
Loss before equity in earnings of subsidiary ------ ------ ------ and extraordinary item (36) (37) (37)
Equity in (loss) earnings of subsidiary (11,646) 15,235 22,666 ------ ------ ------ Net (loss) income $(11,682) $15,198 $ 22,629 ====== ====== ======
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Schedule I - Condensed Financial Information of Registrant, Continued
Statement of Cash Flows Year Ended December 31, ------------------------------- 2003 2002 2001 ---- ---- ---- (in thousands) Cash flows from operating activities: Net (loss) income $(11,682) $15,198 $22,629 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Deferred income tax benefit (20) (20) (20) Undistributed loss (earnings) of subsidiary 11,646 (15,235) (22,666) Other (1) 2 --
Net cash used in operating ------- ------ ------ activities (57) (55) (57) ------- ------ ------
Cash flows from financing activities: Dividends received from subsidiary 55 133 60 Payments to acquire treasury stock (--) (78) (4)
Net cash provided by ------ ------ ------ financing activities 55 55 56 ------ ------ ------ Net decrease in cash (2) (--) (1) Cash at beginning of period 2 2 3 ------ ------ ------ Cash at end of period $ -- $ 2 $ 2 ====== ====== ======
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Schedule II - Valuation and Qualifying Accounts
Year ended December 31, ---------------------------- 2003 2002 2001 ---- ---- ---- (In thousands) Allowance for Doubtful Accounts: Balance at beginning of the period $1,071 $1,298 $ 983 Provision charged to expense 2,286 3,692 4,204 Accounts receivable written-off, net of recoveries (2,495) (3,919) (3,889) ----- ----- -----
Balance at end of the period $ 862 $1,071 $1,298 ===== ===== =====
EXHIBITS TO FORM 10-K SCOTSMAN HOLDINGS, INC. EXHIBIT INDEX
Exhibit No. Description of Document
2.1 -- Recapitalization Agreement, dated as of April 11, 1997. (Incorporated by reference to Exhibit 2 of the Company's Form 8-K dated May 22, 1997.)
2.2 -- Stock Purchase Agreement, dated as of July 23, 1998.(Incorporated by reference to Exhibit 2 of the Company's Form 8-K dated September 1, 1998.)
3.1 -- Certificate of Incorporation of Williams Scotsman, Inc.,as amended. (Incorporated by reference to Exhibit 3(i) of the Company's Form 8-K dated November 27, 1996).
3.2 -- By-laws of Williams Scotsman, Inc. (Incorporated by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-l by the Company) (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 the Company's Registration Statement on Form S-4 filed on September 25, 1997 by the Company) (Commission File No. 333-30753).
4.1.1 -- First Supplemental Indenture, dated as of September 1, 1998 (incorporated by reference to Exhibit 4.1.1 of Williams Scotsman's Registration Statement on Form S-4 (file no. 333-86482)).
4.1.2 -- Second Supplemental Indenture, dated as of February 4, 1999 (incorporated by reference to Exhibit 4.1.2 of Williams Scotsman's Registration Statement on Form S-4 (file no. 333-86482)).
4.1.3 -- Third Supplemental Indenture, dated as of June 29, 2001 (incorporated by reference to Exhibit 4.1.3 of Williams Scotsman's Registration Statement on Form S-4 (file no. 333-86482)).
4.1.4 -- Fourth Supplemental Indenture, dated as of March 26, 2002 (incorporated by reference to Exhibit 4.1.4 of Williams Scotsman's Registration Statement on Form S-4 (file no. 333-86482)).
4.2 -- Registration Rights Agreement, dated as of August 18, 2003, among the Company, the Guarantors named there in, the Subordinated Guarantor named therein and Deutsche Bank Securities Inc., Bank of America Securities LLC, CIBC World Market Corp. and Fleet Securities, Inc., as initial purchasers (incorporated by reference to Exhibit 4.2 to the Form S-4 filed on October 3, 2003 by the Company (Commission file no. 333-109448)).
4.3 -- Indenture, dated as of August 18, 2003 among the Company, the Guarantors named therein, the Subordinated Guarantor named therein and the U.S. Bank National Association as trustee, including exhibits thereto, the form of the initial note and the form of the exchange note (incorporated by reference to Exhibit 4.3 to the Form S-4 filed on October 3, 2003 by the Company (Commission file no. 333-109448)).
4.4 -- Amended and Restated U.S. Pledge Agreement, dated as of March 26, 2002 and amended and restated as of August 18, 2003, among Scotsman Holdings, Inc., the Company, the Guarantors named therein, the Subordinated Guarantor named therein and Deutsche Bank Trust Company Americas, and acknowledged by U.S. Bank National Association as the trustee (incorporated by reference to Exhibit 4.4 to the Form S-4 filed on October 3, 2003 by the Company (Commission file no. 333-109448)).
4.5 -- Amended and Restated U.S. Security Agreement, dated as of March 26, 2002, and amended and restated as of August 18, 2003, among Scotsman Holdings, Inc., the Company, the Guarantors named therein, the Collateral Agent and acknowledged by the Trustee (incorporated by reference to Exhibit 4.5 to the Form S-4 filed on October 3, 2003 by the Company (Commission file no. 333-109448)).
4.6 -- Canadian Security Agreement among Williams Scotsman of Canada, Deutsche Bank Trust Company America, Truck & Trailer Sales, Inc., Evergreen Mobile Company and BT Commercial Corporation (incorporated by reference to Exhibit 4.6 to the Form S-4 filed on October 3, 2003 by the Company (Commission file no. 333-109448)).
4.7 -- Intercreditor Agreement among Deutsche Bank Trust Company Americas and U.S. Bank National Association (incorporated by reference to Exhibit 4.7 to the Form S-4 filed on October 3, 2003 by the Company (Commission file no. 333-109448)).
10.1 -- Investor Stockholders Agreement, dated as of May 22, 1997, among Scotsman Partners, L.P., Cypress Merchant Banking Partners, L.P., Cypress Offshore Partners, L.P., Odyssey Partners, L.P., Barry P. Gossett, BT Investment Partners, Inc. and certain other stockholders. (Incorporated by reference to Exhibit 10.3 of the Company's Registration Statement on Form S-4 (Commission File No.333-30753)).
10.2 -- Amendment No. 1 to Investor Stockholders Agreement, dated as of September 1, 1998, among Scotsman Partners, L.P. Cypress Merchant Banking Partners, L.P., Cypress Offshore Partners, L.P., Odyssey Partners, L.P., Barry P. Gossett, BT Investment Partners, Inc. and certain other stockholders. (Incorporated by reference to Exhibit 10.3 of the Company's 1998 Form 10-K.)
10.3 -- Management Stockholders' and Optionholders' Agreement, dated as of September 14, 1998, among Scotsman Partners, L.P., Cypress Merchant Banking Partners, L.P., Cypress Offshore Partners, L.P., and certain management stockholders of Holdings. (Incorporated by reference to Exhibit 10.4 of the Company's annual report on Form 10-K for the year ended December 31, 1998.)
10.4 -- 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)).
10.5 -- Scotsman Holdings, Inc. 1994 Employee Stock Option Plan. (Incorporated by reference to Exhibit 10.11 of the Company's annual report on Form 10-K for the year ended December 31, 1994).
10.6 -- Scotsman Holdings, Inc. Amended and Restated 1997 Employee Stock Option Plan. (Incorporated by reference to Exhibit 10.7 of the Company's annual report on Form 10-K for the year ended December 31, 1998.)
10.7 -- Credit Agreement, dated as of March 26, 2002, by and among Scotsman Holdings, Inc., Williams Scotsman, Inc., various financial institutions named therein, Bankers Trust Company, as administrative agent, Fleet Capital Corporation and Congress Financial Corporation as Co-Syndication Agents, Bank of America, N.A. and GMAC Business Credit, LLC as Co-Documentation Agents, and Deutsche Banc Alex. Brown Inc. as Sole Lead Arranger and Sole Book Manager. (Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-4 (Commission File No. 333-86482)).
10.8 -- First Amendment dated as of February 27, 2003 to Credit Agreement dated as of March 26, 2002. (Incorporated by reference to Exhibit 10.12 of the Company's annual report on Form 10-K for the year ended December 31, 2002.)
10.9 -- Severance Agreement and General Release for Gerard E. Keefe dated October 11, 2002 (Incorporated by reference to Exhibit 10.13 of the Company's annual report on Form 10-K for the year ended December 31, 2002.)
10.10 -- Severance Agreement and General Release for J. Collier Beall dated June 3, 2002(Incorporated by reference to Exhibit 10.14 of the Company's annual report on Form 10-K for the year ended December 31, 2002.)
10.11 -- Second Amendment dated as of August 11, 2003, among Scotsman Holdings, Inc., the Company, the lenders from time to time party to the credit agreement and Deutsche Bank Trust Company Americas, as Administrative Agent (incorporated by reference to Exhibit 10.1 of the Company's Current report on Form 8-K dated August 27, 2003)
10.12 -- Third Amendment dated as of December 22, 2003, among Scotsman Holdings, Inc., the Company, the lenders from time to time party to the credit agreement and Deutsche Bank Trust Company Americas, as Administrative Agent . (Incorporated by reference to Exhibit 10.12 of Williams Scotsman Inc.'s annual report on Form 10-k dated March, 24, 2004.)
10.13 -- Scotsman Holdings 2003 Employee Stock Option Plan (Incorporated by reference to Exhibit 10.13 of Williams Scotsman Inc.'s annual report on Form 10-k dated March, 24, 2004.)
21.1 -- Subsidiaries of Registrant: Williams Scotsman Inc.
31.1 -- Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Gerard E. Holthaus, Chief Executive Officer of the Company.
31.2 -- Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for John C. Cantlin, Chief Financial Officer of the Company.
Exhibit 31.1 CERTIFICATIONS
I, Gerard E. Holthaus, Chief Executive Officer, certify, that:
(1) I have reviewed this annual report on Form 10-K of Scotsman Holdings, Inc.;
(2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
(3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
(4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
(5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
/s/ Gerard E. Holthaus Gerard E. Holthaus Chief Executive Officer
March 25, 2004
Exhibit 31.2 CERTIFICATIONS
I, John C. Cantlin, Chief Financial Officer, certify, that:
(1) I have reviewed this annual report on Form 10-K of Scotsman Holdings, Inc.;
(2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
(3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
(4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
(5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
/s/ John C. Cantlin ------------------------ John C. Cantlin Chief Financial Officer
March 25, 2004