** **

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM 10-K**

 
| **(Mark One)** | ** ** | ** **                                                          |
|----------------|------------|---------------------------------------------------------------------|
| **ý**     | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE** |
| ** **     | ** ** | **SECURITIES  EXCHANGE ACT OF 1934**                                |
| ** **     | ** ** | ** **                                                          |
| ** **     | ** ** | **For the  fiscal year ended December 31, 2004**               |
| ** **     | ** ** | ** **                                                          |
| ** **     | ** ** | **OR**                                                              |
| ** **     | ** ** | ** **                                                          |
| **o**          | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF** |
| ** **     | ** ** | **THE  SECURITIES EXCHANGE ACT OF 1934**                            |

 

**For thetransition period from              to              **

 

**CommissionFile Number:  033-78954**

 

**SCOTSMANHOLDINGS, INC.**

(Exact name ofRegistrant as specified in its Charter)

 
| **Delaware**                                                     | ** ** | **52-1862719**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) | ** ** | (I.R.S. Employer  Identification No.) |
| * *                                                         | ** ** | ** **                            |
| **8211  Town Center Drive  Baltimore, Maryland**                 | ** ** | **21236**                             |
| (Address of  principal executive offices)                        | ** ** | (Zip Code)                            |

 

Registrants’ telephonenumber, including area code:  **(410) 931-6000**

 

Securities registeredpursuant to Section 12(b) of the Act:

 
| **Title of each class** | ** ** | **Name of each exchange on which registered** |
|-------------------------|------------|-----------------------------------------------|
| None                    |       | None                                          |

 

Securitiesregistered pursuant to Section 12(g) of the Act:

 

**None**

(Title of class)

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  **Yes****o    No  ****ý***

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K.  ý

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Act).  **Yes  ****o  No  ****ý**

 

There are no shares ofthe Registrant’s common stock held by non-affiliates of the Registrant.

 

As of March 30, 2005, 6,194,799shares of common stock (“common stock”) of the Registrant were outstanding.  There were 143,907 shares of common stockheld by non-affiliates of the Registrant. * The registrant is a voluntary filerand not subject to the filing requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934.  Theregistrant has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months as if itwere subject to such filing requirements.

 

 

----

 

**SAFE HARBOR STATEMENT – CAUTIONARY NOTICEREGARDING FORWARD-LOOKING STATEMENTS**

 

Some of the statements in this Form 10-Kfor the year ended December 31, 2004 constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended (the “Securities Act”), and Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements involveknown and unknown risks, uncertainties and other factors, which may causeactual results to differ materially from future results expressed or implied bythese forward-looking statements. These factors include, among others, thefollowing:  substantial leverage and ourability to service debt; changing market trends in the modular space industry;general economic and business conditions including a prolonged or substantialrecession; our ability to finance fleet and branch expansion and to locate andfinance acquisitions; our ability to implement our business and growth strategyand maintain and enhance our competitive strengths; our ability to obtainfinancing for general corporate purposes; intense industry competition;availability of key personnel; industry over-capacity; and changes in, or thefailure to comply with, government regulations. No assurance can be given as tofuture results and neither we nor any other person assumes responsibility forthe accuracy and completeness of these forward-looking statements.Consequently, you should not place undue reliance on these forward-lookingstatements, which speak only as of the date hereof. We undertake no obligationto publicly release the result of any revision to these forward-lookingstatements that may be made to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events.

 

1

----

 

**PART I**

 

**Item 1.****           Business**

 

# **General**

 

We are currently the leading national provider ofmobile and modular building solutions in North America with units leasedthrough a network of branch offices located throughout the United States,Canada, and certain parts of Mexico. Our mobile office units provide highquality, cost-effective relocatable space solutions to approximately 25,000customers in 450 industries, including construction, education, commercial andindustrial and government. Our leasing operations have generated recurringrevenues, high levels of repeat business and an average existing lease durationof approximately 23 months. In addition to our core leasing operations, wesell new and previously leased mobile office units and provide delivery,installation and other ancillary products and services.

 

Our mobile office fleet is generally comprised ofstandardized, versatile products that can be configured to meet a wide varietyof customer needs. The units are fitted with axles and hitches and are towed tovarious locations. Most units are wood frame mounted on a steel chassis,contain materials used in conventional buildings and are equipped with airconditioning and heating, electrical outlets and, where necessary, plumbingfacilities. Mobile office units are durable and generally have an estimateduseful life of 20 years. Storage products are windowless and are typicallyused for secure storage space.  There aregenerally two types: ground-level entry storage containers and storage trailerswith axles and wheels.  The basic storageunit features a roll-up or swing door at one end.  Units are made of heavy exterior metals forsecurity and water tightness.  Storageproducts generally have an estimated useful life of 20 years also. The averageage of our mobile office units is approximately 9 years while the average ageof the storage units is approximately 11 years. The average age of the total fleet is approximately 9 years.

 

From 1997 to 2004, we increased revenues at a compoundannual growth rate, or “CAGR,” of 11.2% to $497.9 million. Over the sameperiod, cash flow from operating activities increased at a CAGR of 8.3% to$56.9 million.  The number of lease fleetunits increased 102% to 95,000 units for the same period. We have achieved thisgrowth by expanding our lease fleet through factory purchases and acquisitions,expanding our branch network, increasing ancillary high margin services andproduct lines and improving fleet management.

 

We believe that the NorthAmerican modular space industry (excluding manufacturing operations)approximates $3 billion in revenue. This is primarily driven by positivedemographic trends, economic expansion, an increase in the number ofapplications for modular space and a greater recognition of the product’spositive attributes. By outsourcing their space needs, our customers are ableto achieve flexibility, preserve capital for core operations, and convert fixedcosts into variable costs. The portable storage industry is expanding due toincreasing awareness of the advantages of portable storage products. Theseadvantages include convenience, immediate accessibility, better security, andlower price.  Storage units are a highlycomplementary product offering to users of mobile offices.

 

2

----

 

# **History**

 

Scotsman Holdings,Inc. (“Holdings”) was incorporated under the laws of Delaware in November 1993for the purpose of acquiring Williams Scotsman, Inc. (“Scotsman” individually; “theCompany” or “we” collectively with Holdings). Holdings conducts business solely as a holding company.  Its only significant asset is the capitalstock of Scotsman. Therefore, Holdings is dependent upon the cash flows ofScotsman for all of its cash needs.

 

Scotsman was formed by the 1990 merger of WilliamsMobile Offices, Inc., referred to as “Williams,” and ScotsmanManufacturing, Inc.  Both companieswere founded in the mid-1940s. At the time of the combination, Williamshad 17 offices located in 13 Eastern states and 15,000 rental units.  Scotsman Manufacturing, Inc. had 11offices located in four Western states and 7,500 rental units.  Both Williams and Scotsman Manufacturing, Inc.had mobile office leasing as well as manufacturing and modular buildingoperations.  Subsequent to the merger, wemade the strategic decision to close our manufacturing facilities and focus oncore 

leasing activities. In December 1993, Odyssey Partners, L.P.,together with management, acquired all of the common stock of Holdings, whichowns 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 commonstock for an aggregate of approximately $293.8 million in cash andapproximately $21.8 million in promissory notes which were repaid in January 1998and (ii) issued 1,475,410 shares of common stock for an aggregate ofapproximately $135.0 million in cash. Such amounts have not been restated for the three-for-one stock splitgranted by Holdings in December 1997. Pursuant to the May 1997 recapitalization, an investor group, whichincluded affiliates of The Cypress Group L.L.C. and Keystone, Inc.,acquired a significant equity stake in Holdings. In related transactions, Holdingsand Scotsman refinanced their outstanding indebtedness.  The transactions described above arecollectively referred to herein as the “1997 Recapitalization”.

 

**Expansion and Acquisitions**

 

Since the 1997 Recapitalization, we have added several100% owned subsidiaries, including Willscot Equipment LLC or “Willscot”, SpaceMaster 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 1997as part of the 1997 Recapitalization of our company and WSC was formed in April 1998to begin our expansion into the Canadian marketplace.  We acquired SMI, a privately held Georgiacorporation, on September 1, 1998 for total consideration of $272.7million adding approximately 12,800 units to our lease fleet.  On February 1, 1999, we acquiredEvergreen, a privately held Washington corporation with a 2,000 unit mobileoffice fleet, for $36.2 million.  TNT wasacquired in August of 2000 for $8.6 million and added 1,000 units to ourlease fleet.  SMI, Evergreen and TNTcurrently have no assets or operations.

 

In addition, we have completed several assetacquisitions over the past five years as a complement to our internal fleetgrowth and branch expansion.  Wepurchased the sales and leasing business of Mckinney Mobile Modular, or “Mckinney,”a privately held California corporation with a fleet of 1,600 units, on February 1,2001 for total consideration of $26.1 million. On July 31, 2002 we acquired the mobile office and storage productfleet of Northgate Industries Ltd., an Edmonton, Alberta-based Canadian companythat was involved in the leasing of mobile offices to industrial markets.  The transaction added over 500 units for anet purchase price of $7.0 million.  On May 29,2003 we purchased the mobile office leasing fleet business of AFA LocationsInc, a Montreal-based Canadian company. The purchase price was  $3.2 million and the transaction addedapproximately 300 units.

 

On March 26, 2004, we acquired nearly 3,800relocatable Division of State Architect (DSA) classroom units located in thestate of California from Transport International Pool, Inc. (d/b/a GEModular Space) for approximately $43.5 million. On July 28, 2004, we,through Scotsman’s 100% owned subsidiary, Williams Scotsman Europe, S.L.,acquired an 8.5% minority interest in Wiron Construcciones Modulares, SA.,(Wiron) headquartered in Parla, Spain for approximately $4.7 million. On November 17,2004 we purchased the mobile office leasing fleet business of J. Leo ChartrandInc., a Montreal-based Canadian company. The purchase price was approximately$1.9 million and the transaction added approximately 160 units.  During 2004, we entered the Mexican marketthrough the formation of a 100% owned subsidiary and the establishment of abranch office in Monterrey, Mexico.

 

## **Competitive Strengths**

## ** **

*Market Leadership.*We believe weare one of two national operators competing in the highly fragmented modularspace industry and are aleading national provider of mobile and modular building solutions for theconstruction, education, commercial, healthcare, and government markets. Otherthan our national competitor, we believe our lease fleet is more thanthree times larger than that of our next largest competitor.

 

3

----

 

*National Presence and Customer Diversity.*Ournational presence provides us with the benefits of (1) customer andgeographic diversification, (2) less sensitivity to regional economic downturns,(3) the ability to redeploy units within our branch network to optimizeutilization levels in response to regional economic downturns, which reducesthe need for new unit purchases and (4) economies of scale. We haveapproximately 25,000 customers, the largest of which accounted for only 1.3% of2004 revenues.

 

*Effective Fleet Management.*Ourlease fleet is actively managed to maximize customer satisfaction, optimizefleet utilization and improve fleet quality and flexibility.  Our proprietary management information systemprovides comprehensive fleet statistics and lease information that allows us toeffectively monitor and allocate our units through our branch network.

 

We maintain a number of fleet management initiativesdesigned to improve operations and increase profitability, including (1) standardizationof products, (2) maintaining fleet quality, and (3) portability offleet. These initiatives are outlined in more detail below:

 

•                  *Emphasis on Standardization of Products*. We focus on maintaining a standardized lease fleetthrough a combination of new fleet

 

purchasingguidelines and the conversion of any non-standard units into more standardconfigurations. Product standardization allows us to easily 

 

modifyour structures to meet specific customer needs and thus increase utilization.Conversions of existing units from non-standard to standardized units can becompleted, on average, at less than the cost of purchasing new units. Overall,we believe that the majority of our fleet is comprised of standardized, highlyversatile products.

 

•                  *Fleet Quality*. Because we believe that rental rates are, to a greater extent, basedupon physical condition rather than age, we monitor our fleet on a regularbasis through periodic refurbishments, as well as the sale of idle units fromour fleet, as deemed necessary. These activities allow us to manage fleetquality and composition.

 

•                  *Portability of Fleet and Fleet Redeployment*. We benefit greatly from our nationwidefranchise and inventory management systems by actively redeploying excess fleetto areas of higher customer demand. The portability and standardized nature ofthe units allow them to be relocated to surrounding areas at relatively lowcost, thus allowing us to minimize the purchase of new fleet units. As part ofour fleet purchasing and conversion activities, we generally have our unitsbuilt or converted to meet industrialized building codes for use in severalsurrounding states, thus allowing them to be redeployed as necessary.

 

*DedicatedMarketing and Customer Service.*Through extensive marketingand customer service programs, we focus on maintaining and expanding long-termcustomer relationships. We also maintain a full-service support staff at thelocal level to prepare units for lease and maintain units while on lease. As aresult of this extensive customer service, our leasing operations havegenerated recurring revenues due to high levels of repeat business.

 

*Experienced Management.*Since1997, the current management team has doubled the size of our fleet andincreased the size of our branch network, both organically and throughselective strategic acquisitions. Management holds personal equity investments equivalent to approximatelya 12% share of Holdings on a fully diluted basis. We believe that thisrepresents a significant economic commitment to and a bona fide confidence inour 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 competeand to expand our coverage to additional local markets.  To achieve market leadership, we haveimplemented a strategy which emphasizes (1) superior service, (2) awell-maintained, readily-available and versatile lease fleet, (3) effectivefleet management using proprietary information systems, and (4) targetedmarketing through an experienced and motivated sales force.  Our branch offices are distributed throughoutthe United States, Canada, and certain parts of Mexico and are located in amajority of the major metropolitan areas in the United States.

 

Management’s business andgrowth strategy includes the following:

 

*Fleet andBranch Expansion.*  Weplan to continue to benefit from the industry’s favorable long-term growthtrends by increasing customer penetration and fleet size in existingmarkets.  In addition, we plan to openbranches in new markets where positive business fundamentals exist.  From January 1, 2000 to December 31,2004, we increased the number of units from approximately 79,600 to 95,000 as aresult of general fleet expansion and to a much lesser extent, throughacquisitions.

 

4

----

 

*SelectiveFleet Acquisitions.*  Tocomplement our internal fleet and branch expansion, we plan to continue to benefitfrom the industry’s fragmentation and expand our geographic coverage by makingselective acquisitions of mobile offices and storage product lease fleets.  Typically, there is a low cost of integratingacquired units which have existing leases that generate immediaterevenues.  From January 1, 2000 to December 31,2004, we made seven acquisitions of approximately 7,800 units for a total fleetpurchase price of $84.3 million.  Unitsadded through acquisitions have accounted for approximately 22% of the value ofour total fleet purchases during this period.

 

*Storageand Ancillary Products.* We continue to diversify our product offerings and deliver ancillaryproducts and services to leverage our existing branch network.  Since January 1, 2000, we have grown ourstorage product fleet, which provides secure storage space, from 15,200 unitsto 19,600 at December 31, 2004. Ancillary products and services include the rental of steps, furniture,ramps and security systems; sales of parts and supplies; and charges forgranting insurance waivers and for damage billings.

 

*EducationMarket Trends*.  Theeducation market accounted for approximately 28% of our 2004 revenues. Webelieve that the education market offers growth opportunities as a result ofthe following: (1) state and local governmental pressures to find cost effectiveways to expand classroom capacity, (2) increased interstate and intrastatemigrations necessitating rapid expansion of education space and (3) thepredicted growth of the school age population.

 

## **Products**

## ** **

Our products can be used to meet a variety of customerneeds. Sample applications include classrooms, construction site offices,temporary office space, sales offices and special events headquarters. Ourmobile office fleet ranges from single-unit facilities to section modularstructures, which combine two or more units into one structure for applicationsthat require more space. Units typically range in size from 8 to 14 feet inwidth and 16 to 70 feet in length and are generally wood frame mounted on asteel chassis, constructed using a steel frame and undercarriage with anexterior of wood or aluminum. The units are fitted with axles and hitches andare towed to various locations. Most units contain materials used inconventional buildings and are equipped with air conditioning and heating,electrical outlets and, where necessary, plumbing facilities. Mobile officeunits are extremely durable and generally have an estimated economic usefullife of 20 years.  During 2004, theaverage purchase price for new mobile office units (excluding storage products)was $15,300 and the average mobile office unit was leased for approximately$300 per month, although rates vary depending upon size, product type, featuresand geographic region. Products have varying lease terms, with averagecontractual terms of 13 months. However, most customers retain the productfor a longer period as evidenced by an average existing lease duration of23 months at December 31, 2004.

 

Our specific product offerings are described below:

 

*Single-Wide Mobile Offices.*Single-widemobile offices are the most functional and versatile units in our lease fleet.Units typically have “open interiors” which can be modified using movablepartitions. Single-wide mobile offices include tile floors, airconditioning/heating units, partitions and, if requested, toilet facilities.

 

*Section Modulars.*Section modularsare two or more units combined into one structure. Interiors are customized tomatch the customer needs. Examples of section modular units includehospital diagnostic annexes, special events headquarters, golf pro shops andlarger general commercial offices.

 

*Classrooms.*Classroom units aregenerally standard single- or double-wide units adapted specifically for use byschool systems or universities. Classroom units usually feature chalkboards andteaching aids, air conditioning/heating units, windows along side-walls and, ifrequested, toilet facilities.

 

*Sales Offices.*Sales offices aremarketed to businesses that require site located space for sales presentations.Exteriors are typically wood-sided with some models offering recessed frontentries. Our “Executive Line” sales offices are larger, more expensive versionsof the standard sales office with more amenities.

 

5

----

 

*Storage Products.*Storageproducts are windowless and are typically used for secure storage space. Thereare generally two types: ground-level entry storage containers and storagetrailers with axles and wheels. The basic storage unit features a roll-up orswing door at one end. Units are made of heavy exterior metals for security andwater tightness.

 

## **Branch Network**

## ** **

As a key element to our market leadership strategy, wemaintain a network of over 90 branch offices throughout the United States,Canada, and certain parts of Mexico. This network enables us to increase ourproduct availability and customer service within our regional and localmarkets. Customers benefit because they are provided with (1) improvedservice availability, (2) reduced time to occupancy, (3) betteraccess to sales representatives, (4) the ability to inspect units prior torental and (5) lower freight costs which are typically paid by thecustomer. We benefit because we are able to spread regional overhead andmarketing costs over a larger lease base, redeploy units within our branchnetwork to optimize utilization, discourage potential competitors by providingample local supply and offer profitable short-term leases which would not beprofitable without a local market presence.

 

Management believes geographic diversification of ourbranch network mitigates economic and operating risk. In 2004, the northeast,mid-Atlantic, southeast, south central, west, north central and Canadianregions accounted for 18%, 12%, 22%, 10%, 22%, 10%, and 6% of our revenues,respectively.  During 2004, we enteredthe Mexican market through the formation of a 100% owned subsidiary and theestablishment of a branch office in Monterrey, Mexico.  While we anticipate future revenue growthopportunities in this market, revenues for 2004 were not significant.  For the year ended December 31, 2004,94% of our consolidated revenues were generated from U.S. operations.

 

Our branches are generally headed by a dedicatedbranch manager. Our branch system is supervised by seven regional managers andan executive vice president who collectively average 23 years of industryexperience and 10 years with our company. Management believes it is important to encourage employees to achieve revenueand profit levels and to provide a high level of service to our customers.Approximately 30% of the regional managers’ compensation is based upon thefinancial performance of their branches and approximately 45% of branchmanagers’ compensation is tied to budgeted adjusted EBITDA levels. Sales representatives’compensation is commission driven and based on the gross profits of businesswritten.

 

## **Operations**

## ** **

*Leasing.*Leasing revenue is afunction of average monthly rental rate, fleet size and utilization. We monitorfleet utilization at each branch. For 2004, average fleet utilization wasapproximately 80%. While we adjust our pricing to respond to local competitionin our markets, we believe that we generally achieve a rental rate equal to orabove that of our competitors because of the quality of our products and ourhigh level of customer service.

 

As part of our leasing operations, we sell used mobileoffice units from our lease fleet either at fair market value or, to a muchlesser extent, pursuant to pre-established lease purchase options included inthe terms of our lease agreements. Due in part to an active fleet maintenanceprogram, our units maintain a significant percentage of their original valuewhich includes the cost of the units as well as costs of significantimprovements made to the units.

 

*New Unit Sales.*New unit salesinclude sales of newly-manufactured mobile office units. We do not generallypurchase new units for resale until we have obtained firm purchase orders(which are generally non-cancelable) for such units. New mobile units aregenerally purchased more heavily in the late spring and summer months due toseasonal classroom and construction market requirements.

 

*Delivery and Installation.*Weprovide delivery, site-work, installation and other services to our customersas part of our leasing and sales operations. Revenues from delivery, site-workand installation result from the transportation of units to a customer’slocation, site-work required prior to installation and installation of themobile units which have been leased or sold. Typically units are placed ontemporary foundations constructed by our service technicians, and servicepersonnel will also generally install our ancillary products. We also deriverevenues from tearing down and removing units once a lease expires.

 

6

----

 

*Other.*We also derive revenuefrom the sale of other products and services, including rental of steps,furniture and ramps; sales of parts, supplies and security systems; and chargesfor granting insurance waivers (i.e., charging a fee to customers who do notprovide their own insurance certificate).

 

## **Capital Expenditures andAcquisitions**

## ** **

We closely monitor fleet capital expenditures, whichinclude fleet purchases and capitalizable costs of improvements to existingunits. Generally, fleet purchases are controlled by field and corporateexecutives, and must pass our fleet purchasing policy guidelines (which includeensuring that utilization rates and unrentable units levels are reviewed foracceptability, that redeployment, refurbishment and conversion options havebeen evaluated, and that specific return on investment criteria have beenevaluated.) We purchase our units through approximately 70 third-partysuppliers (most suppliers have only one factory, which generally serves amarket within 300 to 400 miles), with no significant dependence on anysupplier. The top three suppliers of units for 2004 represented approximately32% of all fleet purchases, and the top ten suppliers represented approximately60% of all fleet purchases. We believe that we have an excellent workingrelationship with our suppliers.

 

We believe that our fleet purchases are flexible andcan be adjusted to match business needs and prevailing economic conditions. Weare not “locked in” to long-term purchase contracts with manufacturers and canmodify our capital spending activities to meet customer demand. For example,our fleet capital expenditures increased from approximately $40.8 million in2002 to approximately $53.3 million in 2003 and then to approximately $79.9million in 2004.

 

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 willadjust its fleet spending patterns as acquisition opportunities becomeavailable.  For example, on March 26,  2004, we acquired nearly 3,800 relocatableDSA classroom units located in the state of California from TransportInternational Pool, Inc. (d/b/a GE Modular Space) for approximately $43.5million. We consider the purchase of these assets an asset purchase rather thanan acquisition of a business because in many cases, the customer base of theleased units acquired was duplicative of our existing customer base, and we didnot acquire employees, physical facilities, sales force, or other businessrelated items.

 

**Marketing**

 

In addition to opening new branches, we use a numberof marketing tools to generate new business and customers. By maintaining adetailed and updated customer and prospect tracking system, marketing and salespersonnel generally can identify when a particular customer or prospecttypically utilizes our products and may contact such customer or prospectregarding their future needs.

 

Through our marketing and sales efforts we havesuccessfully expanded the uses for our products. For example, since 1993, thenumber of industries (as measured by Standard Industrial Classification “SIC”code) that lease or purchase our products has increased from 360 to 450.Additionally, we expect to continue to increase our penetration of otherindustries that would benefit from the usage of our products. See “—CustomerBase.”

 

Developing new customers is an integral part of thesales process and is monitored through the use of quarterly goals for eachemployee with sales responsibility. In addition to our prospect trackingdatabases, we conduct direct mail campaigns and are a heavy user of printadvertising, including the yellow pages and customer trade publications.We have developed a toll-free telephone number network so that our customerscan call and speak to a sales representative in the branch location nearest thesite where the call was placed. In addition, we participate in numerousregional and national trade shows, and our sales personnel participate in localtrade groups and associations. We also design marketing campaigns targeted atspecific market niches.

 

We also have a national accounts program whichcurrently includes approximately 300 national accounts and we continue topursue other national account relationships. The relationships are coordinatedby a national account manager and serviced by the branch network. Due to ourbroad geographic capabilities, this program allows us to further differentiateourselves from many of our “mom-and-pop” competitors by providing consistentservice on a national basis.

 

7

----

 

## **Customer Base**

## ** **

We continually seek to expand our customer base andthe applications for our products. Our customer base is comprised ofapproximately 25,000 companies, which operate in approximately 450 industries.We believe that the construction, education, commercial/industrial and other, andgovernment industries accounted for approximately 28%, 28%, 24%, and 7%,respectively, of total revenues in 2004, and that no other industry accountedfor more than 3% of total revenues in 2004. During 2004, no single customeraccounted for more than 2% of our total revenues and our top ten customersaccounted for approximately 7% of total revenues.

 

Our key customer industries as categorized by SIC Code are as follows:

 

*Commercial/Industrial and Other.*Thiscategory includes a variety of industries and product uses which help diversifyour revenue stream. Common examples include: entertainment, recreation,transportation terminals, recycling, retail and fast food establishments, metalprocessing and refining and disaster relief. Although there are a number ofdifferent industries in this category, we believe that no single industryincluded in this category was material to us in 2004.

 

*Construction.*We provide officeand storage space to a broad array of contractors associated with bothresidential and nonresidential buildings, commercial offices and warehouses;highway, street, bridge and tunnel contractors; water, sewer, communication andpower line contractors; and special construction trades, including glass,glazing and demolition. We believe our construction customer base ischaracterized by a wide variety of contractors, who are associated withoriginal construction as well as capital improvements in the commercial,institutional, residential and municipal arenas.

 

*Education.*Rapid andunpredictable shifts in populations within states often necessitate quickexpansion of education facilities particularly in elementary and secondaryschools. State and local governmental budgetary pressures, as well as classroomsize reduction legislation, and refurbishment of existing facilities, have mademobile offices, especially multi-sectional offices, a convenient andcost-effective way to expand classroom, laboratory and library capacity. Ourquality products are well suited for educational institutions, which demand ahigh level of maintenance and service support.

 

*Government.*Governmental usersconsist of federal, state and local public sector organizations such as theUnited States Environmental Protection Agency and state highwayadministrations. We have enjoyed particular success in focused niches such asprisons and jails, courthouses, military installations, national securitybuildings and NASA facilities. Our strategy of concentrated regional focus hasbeen particularly successful in gaining business from local governmentalcustomers.

 

*Professional Services.*Customersin this category include professionals from a broad array of industry sectorsincluding engineering, architectural, accounting, legal, insurance and sales.

 

*Healthcare.*Healthcare customersare frequent users of multi-sectional facilities as administrative offices,waiting rooms, MRI and other diagnostic annexes adjacent to existing hospitals.

 

*Utilities.*Mobile offices havetraditionally been leased to utilities involved in electrical service, naturalgas distribution and production, and other energy-related services. Units areused as meeting rooms, reception and visitor centers, security offices and,during periods of utility plant reconstruction, as facilities to house theoperations staff.

 

*Chemical and Pharmaceutical.*Chemicaland pharmaceutical companies have been long-time users of temporary officespace. Mobile offices are particularly well suited for laboratory usage wherespace is needed for the duration of a specific project or for an off-site orisolated laboratory.

 

8

----

 

## **Fleet ManagementInformation Systems**

## ** **

Our fleet information system is instrumental to ourlease fleet management and targeted marketing efforts and allows management tomonitor operations at our branches on a daily, weekly, and monthly basis. Leasefleet information is updated daily at the branch level and verified through amonthly physical inventory by branch personnel. This provides management withon-line access to utilization, lease fleet unit levels and rental revenues bybranch or geographic region. In addition, an electronic file for each unitshowing its lease history and current location/status is maintained in theinformation system. Branch sales people utilize the system to obtaininformation regarding unit availability. The database tracks individual unitsby 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 localenvironmental, health and safety laws and regulations in connection with ouroperations. We believe that we are in substantial compliance with these lawsand regulations. In addition to compliance costs, we may incur costs related toalleged environmental damage associated with past or current properties ownedor leased by us. We believe that our liability, if any, for any environmentalremediation will not have a material adverse effect on our financial condition.However, we cannot be certain that the discovery of currently unknown mattersor conditions, new laws and regulations, or stricter interpretations ofexisting environmental laws will not have a material adverse effect on ourbusiness or operations in the future.

 

A portion of our units are subject to regulation incertain states under motor vehicle and similar registrations and certificate oftitle statutes. We believe that we have complied in all material respects withall motor vehicle registration and similar certificate of title statutes instates where such statutes clearly apply to mobile office units. We have nottaken actions under such statutes in states where it has been determined thatsuch statutes do not apply to mobile office units. However, in certain states,the applicability of such statutes to our mobile office units is not clearbeyond doubt. Due to the difficulty, expense and burden of complying with allpossible motor vehicle and certificate of title requirements in such states, wedo not take action to comply with every possible motor vehicle and similarregistration and certificate of title requirement in such jurisdictions. Ifadditional registration and related requirements are deemed to be necessary insuch states or if the laws in such states or other states were to change torequire us to comply with such requirements, we could be subject to additionalcosts, fees and taxes as well as administrative burdens in order to comply withsuch statutes and requirements. We do not believe the effect of such compliancewill be material to our business and financial condition.

 

## **Competition**

## ** **

Although our competition varies significantly bymarket, the modular space industry, in general, is highly competitive. Wecompete primarily in terms of product availability, customer service and price.We believe that our reputation for customer service and our ability to offer awide selection of units suitable for various uses at competitive prices allowsus to compete effectively. However, our primary competitor, GE Capital ModularSpace, is less leveraged, has greater market share or product availability insome markets and has greater financial resources and pricing flexibility thanus.

 

## **Employees**

## ** **

As of December 31, 2004 we had approximately1,250 employees. None of our employees are covered by a collective bargainingagreement. Management believes its relationship with our employees is good. Wehave never experienced any material labor disruption and are unaware of anyefforts or plans to organize our employees.

 

9

----

 

# **Risk Factors**

# ** **

## **Risks Relating to OurIndebtedness**

 

*Our substantial debt couldadversely affect our financial health.*

 

We have a substantialamount of debt. As of December 31, 2004, we had $1.0 billion ofindebtedness.

 

Our substantial debt could have important consequencesincluding:

 

•                                          making our company more vulnerable to general adverseeconomic and industry conditions;

 

•                                          limiting our ability to obtain additional financingfor future working capital, capital expenditures, strategic acquisitions andother general corporate requirements;

 

•                                          exposing us to interest rate fluctuations because theinterest on the debt under our credit facility is at variable rates;

 

•                                          requiring us to dedicate a substantial portion of ourcash flow from operations to payments on our debt, thereby reducing theavailability of our cash flow for operations and other purposes;

 

•                                          limiting our flexibility in planning for, or reactingto, changes in our business; and

 

•                                          placing us at a competitive disadvantage compared toany competitors that have less debt.

 

*Holdings is a holding company with no materialbusiness operations of its own.*

 

Holdings is a holding company with no materialbusiness operations.  Holdings’ most significantasset is the capital stock of Scotsman. Holdings conducts virtually all of its business operations throughScotsman.  Accordingly, its only materialsources of cash are dividends that are derived from earnings and cash flowgenerated by Scotsman.  Scotsman mightnot generate sufficient earnings and cash flow to pay dividends in thefuture.  Indebtedness under Scotsman’scredit facility, 9.875% senior notes, and 10.0% senior secured notes may limitor prohibit the payment of dividends to Holdings.

 

*We may incur additional debt.*

 

We and our subsidiaries may be able to incursubstantial additional indebtedness in the future. The terms of the indenturesgoverning our 9.875% senior notes due in 2007 and our 10.0% senior securednotes due in 2008 (collectively referred to as the “Senior Notes”) permit us toincur a substantial amount of additional debt and our credit facility willpermit additional borrowings under certain circumstances. As of December 31,2004, we had $187.2 million of additional borrowing base (collateral)availability under our credit agreement. However, the consolidated leverage ratio covenant limits our borrowingavailability under the credit agreement at December 31, 2004 to $65.1million. Accordingly, this additional indebtedness, if issued, could furtherexacerbate all the risks described above.

 

*The indentures governing theSenior Notes and our credit facility contain various covenants which limit thediscretion of our management in operating our business and could prevent us fromengaging in some beneficial activities.*

 

The indentures governing the Senior Notes and ourcredit facility contain various restrictive covenants that limit our management’sdiscretion in operating our business. In particular, these agreements limit ourability to, among other things:

 

•                                          incur additional debt or guaranteeobligations;

 

•                                          grant liens on assets;

 

•                                          make restricted payments (includingpaying dividends on, redeeming, repurchasing or retiring our capital stock);

 

•                                          make investments or acquisitions;

 

•                                          sell assets;

 

•                                          engage in transactions with affiliates;and

 

•                                          merge, consolidate or transfersubstantially all of our assets.

 

In addition, our credit facility also requires us tomaintain certain financial ratios and limits our ability to make capitalexpenditures.  If we fail to comply withthe restrictions of the indentures governing the Senior Notes, our creditfacility or any other subsequent financing agreements, a default may allow thecreditors, if the agreements so provide, to accelerate the related debt as wellas any other debt to which a cross-acceleration or cross-default provisionapplies. In addition, the lenders may be able to terminate any commitments theyhad made to supply us with further funds.

 

 

10

----

 

*Our ability to service our debtrequires a significant amount of cash.*

 

To service our debt, we require a significant amountof cash.  Our ability to generate cash,make scheduled payments or to refinance our obligations depends on our successfulfinancial and operating performance. We cannot assure you that our operatingperformance, cash flow and capital resources will be sufficient for payment ofour debt in the future.  Our financialand operating performance, cash flow and capital resources depend uponprevailing economic conditions, and certain financial, business and otherfactors, many of which are beyond our control. These factors include, amongothers:

 

•                                          economic and competitive conditionsaffecting the modular space industry;

 

•                                          operating difficulties, increasedoperating costs or pricing pressures we may experience; and

 

•                                          a decline in the resale value of ourunits.

 

Our estimated debt service obligations for 2005 are$93.1 million, based on (1) the projected average outstanding balanceof our Senior Notes for 2005, (2) an interest rate of approximately 6% onour projected average outstanding variable rate debt for 2005 and (3) scheduledterm loan repayments in 2005.  Our annualdebt service obligations will increase by $3.1 million per year for each1% increase in interest rates, based on the balance of variable rate debtoutstanding at December 31, 2004. If our cash flow and capital resources are insufficient to fund our debtservice obligations, we may be forced to reduce or delay capital investments,sell material assets or operations, obtain additional capital or restructureour debt. In the event that we are required to dispose of material assets oroperations 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 anysuch transaction could be completed.  See“Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources.”

 

## **Risks Relating to OurBusiness**

## ** **

*Elements of our business aresensitive to general economic conditions.*

 

A portion of our revenues are derived from customerswho are in industries and businesses that are cyclical in nature and subject tochanges in general economic conditions, such as the construction industry. Inaddition, because we conduct our operations in a variety of markets, we aresubject to economic conditions in each of these markets. While we are beginningto see improvement in the market place, our business was adversely impacted byoverall soft economic conditions over the past several years, which affectedour construction customers primarily, and state budget issues in certain partsof the country that have affected our education customers.

 

Although we believe that certain of our operatingstrategies and industry characteristics may help to mitigate the effects ofeconomic downturns, general economic downturns or localized downturns inmarkets where we have operations, including any downturns in the constructionindustry, could have a material adverse effect on us and our business, resultsof operations and financial condition. In addition, at the present time we areunable 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 theforegoing economic or political events could have a material adverse effect onour results of operations and financial condition.

 

*We face significant competitionin the modular space industry.*

 

Although our competition varies significantly bymarket, the modular space industry, in general, is highly competitive. Wecompete primarily in terms of product availability, customer service and price.We believe that our reputation for customer service and our ability to offer awide selection of units suitable for various uses at competitive prices allowsus to compete effectively. However, our primary competitor, GE Capital ModularSpace, is less leveraged, has greater market share or product availability insome markets, and has greater financial resources and pricing flexibility thanwe do.

 

 

11

----

 

*An investor group controls a majorityof our board of directors.*

 

An investor group, which includes affiliates of TheCypress Group L.L.C., and Keystone, Inc., beneficially owns in theaggregate approximately 82% of the outstanding common stock of Holdings.Holdings in turn owns 100% of Scotsman outstanding voting securities. As aresult, the investor group has the ability to control our management, policiesand financing decisions, to elect a majority of the members of our board ofdirectors and to control the vote on all matters coming before ourstockholders.

 

*We may not be able to remarketunits returning from leases.*

 

Our typical lease terms, which include contractualprovisions requiring customers to retain units on lease for, on average,13 months, actually have an average existing lease duration of23 months.  Because our customersgenerally 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 havecontractual lease terms expiring within six months.  Should a significant number of our leasedunits be returned during any short period of time, a large supply of unitswould need to be remarketed. Our failure to effectively remarket a large influxof units returning from leases could have a material adverse effect on ourfinancial performance and our ability to continue expanding our fleet.

 

*We are dependent on key personnel.*

 

Our continued successwill depend largely on the efforts and abilities of our executive officers andcertain other key employees.  If, for anyreason, these officers or key employees do not remain with us, our operationscould be adversely affected until suitable replacements with appropriateexperience can be found.

 

*A write-off of all or a part ofour goodwill would adversely affect our operating results and net worth.*

 

We have significantintangible assets related to goodwill, which represents the excess of the totalpurchase price of our acquisitions over the fair value of the net assetsacquired. As of December 31, 2004, we had $170.4 million ofunamortized goodwill on our balance sheet, which represented 13.3% of our totalassets.  Through December 31, 2001,we amortized goodwill on a straight-line basis over the estimated period offuture benefit of 20 to 40 years. In July 2001, the Financial AccountingStandards Board (FASB) issued SFAS No. 142, *Goodwill andOther Intangible Assets. *SFASNo. 142 requires that, effective January 1, 2002, goodwill not beamortized but rather that it be reviewed annually for impairment. In the eventimpairment is identified, a charge to earnings would be recorded. We determinedthat goodwill was not impaired for the fiscal year ended December 31,2004.  Although it does not affect ourcash flow, a write-off in future periods of all or a part of our goodwill wouldadversely affect our operating results and net worth.

 

**Item 2.****           Properties**

 

Our headquarters, whichwe own, is a three-story modular office structure located on 3.1 acres insuburban Baltimore, Maryland.  Ourcompany is comprised of over 90 branches located throughout the United States,Canada, and certain parts of Mexico. We lease approximately 71% of our branchproperties and we own the balance. Management believes that none of our branch properties, individually, ismaterial to our operations.

 

**Item 3.****           Legal Proceedings**

 

Currently, we areinvolved in various lawsuits and claims arising out of the normal course of itsbusiness. The nature of the our business is such that disputes occasionallyarise with vendors including suppliers and subcontractors, and customers overwarranties, contract specifications and contract interpretations among otherthings.  We assess these matters on acase-by-case basis as they arise. Reserves are established, as required, basedon our assessment of our exposure.  Wehave insurance policies to cover general liability and workers compensationrelated claims. In the opinion of management, the ultimate amount of liabilitynot covered by insurance, if any, under pending litigation and claims will nothave a material adverse effect on our financial position or operating results.

 

Forfurther discussion of legal proceedings, see Note 8 of the Notes to theConsolidated Financial Statements.

 

**Item 4.****           Submission of Mattersto a Vote of Security Holders**

 

None.

 

 

12

----

 

**PART II**

 

**Item 5.**           Marketfor Registrant’s Common Equity, and Related Shareholder Matters and IssuerPurchases of Equity Securities

** **

There is no establishedpublic trading market for Holdings’ common stock.

 

## **Item 6.**           Selected Financial Data

## ** **

The following tables summarize selected historical financial data whichshould be read in conjunction with “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and the audited financialstatements appearing elsewhere herein. The selected historical financial data set forth below has been derivedfrom the audited financial statements.

 
| ** **                                    | ** ** | **Year Ended December 31,**                     | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                             | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                    | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| **Statement of Operations Data:**             |       |                                                 |       |   |   |   |   |   |   |   |   |
| Revenues:                                     |       |                                                 |       |   |   |   |   |   |   |   |   |
| Leasing                                       |       | $                                                    | 222,867    |   | $ | 213,976 |   | $ | 227,106 |   | $ | 238,151 |   | $ | 220,547 |   |
| Sales:                                        |       |                                                 |       |   |   |   |   |   |   |   |   |
| New  units                                    |       | 86,344                                               |       | 71,635 |   | 98,927 |   | 91,114 |   | 73,291 |   |
| Rental  equipment                             |       | 29,355                                               |       | 20,734 |   | 23,951 |   | 22,212 |   | 21,571 |   |
| Delivery  and installation                    |       | 116,106                                              |       | 91,318 |   | 101,034 |   | 97,342 |   | 79,097 |   |
| Other                                         |       | 43,253                                               |       | 37,980 |   | 41,429 |   | 40,214 |   | 35,000 |   |
| Total                                         |       | $                                                    | 497,925    |   | $ | 435,643 |   | $ | 492,447 |   | $ | 489,033 |   | $ | 429,506 |   |
|                                          |       |                                                 |       |   |   |   |   |   |   |   |   |
| Gross  profit:                                |       |                                                 |       |   |   |   |   |   |   |   |   |
| Leasing                                       |       | $                                                    | 122,202    |   | $ | 119,148 |   | $ | 137,588 |   | $ | 156,504 |   | $ | 151,094 |   |
| Sales:                                        |       |                                                 |       |   |   |   |   |   |   |   |   |
| New  units                                    |       | 13,459                                               |       | 12,224 |   | 16,363 |   | 15,945 |   | 13,023 |   |
| Rental  equipment                             |       | 6,459                                                |       | 4,373 |   | 5,787 |   | 5,326 |   | 5,266 |   |
| Delivery  and installation                    |       | 15,045                                               |       | 12,462 |   | 16,494 |   | 19,003 |   | 19,427 |   |
| Other                                         |       | 33,648                                               |       | 29,706 |   | 31,528 |   | 31,840 |   | 28,417 |   |
| Total                                         |       | $                                                    | 190,813    |   | $ | 177,913 |   | $ | 207,760 |   | $ | 228,618 |   | $ | 217,227 |   |
|                                          |       |                                                 |       |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses |       | $                                                    | 83,407     |   | $ | 76,297 |   | $ | 85,779 |   | $ | 82,573 |   | $ | 76,872 |   |
| Other  depreciation and amortization          |       | 14,787                                               |       | 13,869 |   | 13,438 |   | 18,845 |   | 17,474 |   |
| Interest                                      |       | 92,444                                               |       | 87,174 |   | 85,208 |   | 85,486 |   | 91,860 |   |
| Held for sale  impairment charge              |       | —                                               |       | 19,386 |   | — |   | — |   | — |   |
| Casualty loss                                 |       | —                                               |       | — |   | — |   | 1,500 |   | — |   |
|                                          |       |                                                 |       |   |   |   |   |   |   |   |   |
| Income (loss)  before income taxes            |       | 175                                                  |       | (18,813 | ) | 23,335 |   | 40,214 |   | 31,021 |   |
| Income tax  expense (benefit)                 |       | 3,586                                                |       | (7,131 | ) | 8,137 |   | 17,585 |   | 14,938 |   |
| Net income  (loss)                            |       | $                                                    | (3,411     | ) | $ | (11,682 | ) | $ | 15,198 |   | $ | 22,629 |   | $ | 16,083 |   |
| Net income  (loss) per common share-basic     |       | $                                                    | (0.55      | ) | $ | (1.89 | ) | $ | 2.45 |   | $ | 3.65 |   | $ | 2.60 |   |
| Net income  (loss) per common share-diluted   |       | $                                                    | (0.55      | ) | $ | (1.89 | ) | $ | 2.32 |   | $ | 3.46 |   | $ | 2.46 |   |

 
| ** **                                           | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands)**  | ** ** |
| **Balance Sheet Data:**                              |       |                        |       |   |   |   |   |   |   |   |   |
| Rental  equipment, net (1)                           |       | $                           | 880,723    |   | $ | 828,078 |   | $ | 828,927 |   | $ | 866,867 |   | $ | 799,994 |   |
| Total  assets                                        |       | 1,284,611                   |       | 1,205,685 |   | 1,229,767 |   | 1,244,986 |   | 1,145,901 |   |
| Revolving  credit facility & long-term debt |       | 1,009,486                   |       | 962,178 |   | 984,345 |   | 1,022,972 |   | 959,110 |   |
| Stockholder’s  equity (deficit)                 |       | 21,147                      |       | 18,374 |   | 19,273 |   | (1,279 | ) | (22,578 | ) |
|                                                      |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

13

----

 

**Selected Quarterly Financial Data(Unaudited):**

 
| **(In  thousands except per share data)**   | ** ** | **Year ended December 31, 2004** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|
| **Quarter**                                 | ** ** | **First**                             | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** | **Year** | ** ** |
| Revenues                                    |       | $                                     | 106,911    |   | $ | 124,234 |   | $ | 138,106 |   | $ | 128,674 |   | $ | 497,925 |   |
| Gross  profit                               |       | 43,816                                |       | 46,149 |   | 49,342 |   | 51,506 |   | 190,813 |   |
| Income  (loss) before income taxes          |       | (3,007                                | )          | (491 | ) | 1,550 |   | 2,123 |   | 175 |   |
| Net  income (loss)                          |       | (1,865                                | )          | (305 | ) | 958 |   | (2,199 | ) | (3,411 | ) |
| Net  income (loss) per common share-basic   |       | $                                     | (0.30      | ) | $ | (0.05 | ) | $ | 0.15 |   | $ | (0.35 | ) | $ | (0.55 | ) |
| Net  income (loss) per common share-diluted |       | $                                     | (0.30      | ) | $ | (0.05 | ) | $ | 0.15 |   | $ | (0.35 | ) | $ | (0.55 | ) |

 
| **(In  thousands except per share data)**   | ** ** | **Year ended December 31, 2003** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|
| **Quarter**                                 | ** ** | **First**                             | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** | **Year** | ** ** |
| Revenues                                    |       | $                                     | 100,248    |   | $ | 107,327 |   | $ | 116,659 |   | $ | 111,409 |   | $ | 435,643 |   |
| Gross  profit                               |       | 43,958                                |       | 44,356 |   | 45,402 |   | 44,197 |   | 177,913 |   |
| Held  for sale charge                       |       | —                                |       | — |   | — |   | 19,386 |   | 19,386 |   |
| Income  (loss) before income taxes          |       | 110                                   |       | 2,554 |   | (584 | ) | (20,893 | ) | (18,813 | ) |
| Net  income (loss)                          |       | 65                                    |       | 1,532 |   | (352 | ) | (12,927 | ) | (11,682 | ) |
| Net  income (loss) per common share-basic   |       | $                                     | 0.01       |   | $ | 0.25 |   | $ | (0.06 | ) | $ | (2.09 | ) | $ | (1.89 | ) |
| Net  income (loss) per common share-diluted |       | $                                     | 0.01       |   | $ | 0.25 |   | $ | (0.06 | ) | $ | (2.09 | ) | $ | (1.89 | ) |

 

----

(1)               As of December 31,2004, 2003, and 2002 the net balance of rental equipment excludes certain rentalunits, which no longer merit further investment pursuant to a strategicdisposal initiative adopted in December 2003.  The balance of these excluded held for saleunits as of December 31, 2003 and 2002 was $0.4 million and $21.2 million,respectively.  The balance of theseexcluded held for sale units as of December 31, 2004 was not material. The2003 and 2002 rental equipment balances presented in the balance sheet andherein were adjusted in accordance with SFAS No. 144, *Accountingfor the**Impairment or Disposal ofLong-Lived Assets*.  See Note 11to the Consolidated Financial Statements-Assets Held for Sale.

 

14

----

 

**Item 7.****           Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

The following discussionregarding our financial condition and results of operations for the three yearsended December 31, 2004 should be read in conjunction with the moredetailed information and financial statements included elsewhere herein.  Certain statements in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” areforward-looking statements.  See “SafeHarbor Statement-Cautionary Notice Regarding Forward-Looking Statements”.

 

**Business Overview**

 

We derive our revenues and earnings from the leasingand sale of mobile office and storage units, delivery and installation of thoseunits and the provision of other ancillary products and services.  Leasing operations, which primarily comprisethe 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 ourlease 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 theavailability of the total cash proceeds received and reported as a cash flowinvesting activity and generally results in the reporting of gross profit onsuch sales.  New unit sales revenues arederived from the sale of new mobile offices, similar to those units leased byus.  Revenues from delivery andinstallation result from activities related to the transportation andinstallation of and site preparation for both leased and sold products.  Other revenues are derived from otherproducts and services including: rental of steps, furniture, ramps and securitysystems; sales of parts and supplies; and charges for granting insurancewaivers.

 

While we are beginning to see improvement in themarket place, our business was adversely impacted by overall soft economicconditions over the past several years, which affected our constructioncustomers primarily, and state budget issues in certain parts of the countrythat have affected our education customers. Although a portion of our business is with customers in industries suchas these that are cyclical in nature and/or subject to changes in generaleconomic conditions, we believe that certain characteristics of the modularspace industry and our operating strategies should help to mitigate the effectsof economic downturns. These characteristics include (1) our typical leaseterms, which include contractual provisions requiring customers to retain unitson lease for, on average, 13 months, and have an average existing leaseduration of 23 months, (2) the flexibility and low  cost offered to our customers by leasingwhich may be an attractive alternative to capital purchases, (3) our ability toredeploy units during regional recessions, (4) the diversity of our industryexposure and (5) the geographic balance of our operations.

 

In the ordinary course ofbusiness, we acquire leasing and related businesses.  On November 17, 2004 we purchased themobile office leasing business of J. Leo Chartrand Inc, a Montreal-basedCanadian company. The purchase price was approximately $1.9 million and thetransaction added approximately 160 units. On July 28, 2004, we, through Scotsman’s100% owned subsidiary, Williams Scotsman Europe, S.L., acquired forapproximately $4.7 million, which includes acquisition-related costs, an 8.5%minority interest in Wiron Construcciones Modulares, SA., (Wiron) headquarteredin Parla, Spain.  Wiron is the secondlargest modular space provider in Spain with branches located in all majorcities throughout the country.

 

On March 26, 2004, we acquired nearly 3,800relocatable DSA classroom units located in the State of California fromTransport International Pool, Inc. (d/b/a GE Modular Space) forapproximately $43.5 million. The assets were acquired using available fundsunder our revolving credit facility. The acquisition included the purchase ofunits, equipment associated with these classroom units as well as rights underall outstanding leases related to these classroom units and certain otherassets. We did not acquire employees, physical facilities, sales force, orother business related items. In addition, the customer base, which isprimarily related to public and private educational institutions in the Stateof California, is similar to, and in many cases duplicative of, our existingcustomer base. As a result, we consider the purchase of these assets an assetpurchase rather than an acquisition of a business.  The average age of the units acquired isapproximately 6 years while the remaining depreciable lives range from 2 to 19years with an average remaining life of approximately 14 years.  Operating leases assumed in the transactionhave an average contractual life of less than two years, however we expect asignificant number of these units to either continue on a month-to-month basisor be re-leased.

 

On May 29, 2003, weacquired the leasing business of AFA Locations Inc.  On July 31, 2002, we acquired theleasing business of Northgate Industries Ltd.  See Note 3 of the Notes to Consolidated Financial Statements.

 

In the fourth quarterof  2003 we implemented a strategicinitiative to dispose of selected rental units in our lease fleet which wedetermined no longer merited further investment.  In accordance with Statement of FinancialAccounting Standards  (SFAS) No. 144,*Accounting for the Impairment or Disposal of LongLived Assets*, we planned to sell to one or more buyers approximately2,900 units.   As of December 31,2004, we have sold greater than 90% of the selected rental units and theremaining net book value of such units amounts to less than $0.1 million.  See Note 11 to the Notes to ConsolidatedFinancial Statements for further discussion.

 

 

15

----

 

**Critical Accounting Policies andEstimates**

 

*General*.  This discussion and analysis of our financialcondition and results of operations is based upon our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingentliabilities.  (See Note 2 of the Notes toConsolidated Financial Statements.) On an on-going basis, we evaluateestimates, including those related to depreciation of rental equipment,allowance for doubtful accounts, contingencies, goodwill impairment, and incometaxes. We base our estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from othersources.  Actual results may differ fromthese estimates under different assumptions or conditions. We believe thefollowing critical accounting policies affect our more significant judgmentsand estimates used in the preparation of the consolidated financial statements.

 

*Depreciationof rental equipment*. We depreciate rental equipment over itsestimated useful life, after giving effect to an estimated salvage value. Theuseful life of our rental equipment is determined based on our estimate of theperiod over which the asset will generate revenue (generally 20 years), and theresidual value (typically 50% of original cost) is determined based on ourestimate of the expected value we could realize from the asset after thisperiod. The lives and residual values are subject to periodic evaluation andmay be affected by, among other factors, changes in building codes,legislation, regulations, local permitting and internal factors which mayinclude, but are not limited to, changes in equipment specifications ormaintenance policies. If these estimates change in the future, we may berequired to recognize increased or decreased depreciation expense for theseassets.

 

*Allowancefor doubtful accounts*. We are required to estimate the collectibility of our tradereceivables.  Accordingly, allowances fordoubtful accounts are maintained for estimated losses resulting from theinability of our customers to make required payments.  We evaluate a variety of factors in assessingthe ultimate realization of these receivables including the currentcredit-worthiness of customers.  Theallowance for doubtful accounts is determined based on historical collectionresults, days sales outstanding trends, and a review of specific past due receivables.  If the financial condition of our customerswere to deteriorate, resulting in an impairment of their ability to makepayments, additional allowances may be required, resulting in decreased netincome.

 

*Contingencies*.  We maintain insurance coverage for ouroperations and employees with appropriate aggregate, per occurrence anddeductible limits as we reasonably determine is necessary or prudent withcurrent operations and historical experience. The majority of these coverages have large deductible programs whichallow for potential improved cash flow benefits based on our loss controlefforts.  Our current per incidentdeductibles are $125,000 for employee group health insurance and $500,000 forworker’s compensation, auto, and general liability each. We expense thedeductible portion of the individual claims. However, we generally do not know the full amount of our exposure to adeductible in connection with any particular claim during the fiscal period in whichthe claim is incurred and for which we must make an accrual for the deductibleexpense.  We make these accruals based ona combination of the claims review by our staff and our insurance companies,and, periodically, the accrual is reviewed and adjusted based on our lossexperience.  A high degree of judgment isrequired in developing these estimates of amounts to be accrued, as well as inconnection with the underlying assumptions. In addition, our assumptions will change as our loss experience is developed.  All of these factors have the potential forsignificantly impacting the amounts we have previously reserved in respect ofanticipated deductible expenses, and we may be required in the future toincrease or decrease amounts previously accrued.

 

We are subject toproceedings, lawsuits, and other claims related to environmental, product andother matters, and are required to assess the likelihood of any adversejudgments or outcomes to these matters as well as potential ranges of probablelosses.  As noted above, we have insurance policies to cover generalliability and workers compensation related claims. A determination ofthe amount of net reserves required, if any, for these contingencies is madeafter analysis of each individual matter. The required reserves may change in the future due to new developmentsin each matter or changes in approach such as a change in settlement strategyin dealing with these matters.

 

 

16

----

 

*GoodwillImpairment*.  At December 31,2004, we had approximately $170.4 million of goodwill.  Goodwill is initially measured as the excessof the cost of an acquired business over the fair value of the identifiable netassets acquired. We do not amortize goodwill, but rather review our carryingvalue for impairment annually, and whenever an impairment indicator isidentified. The goodwill impairment test involves a two-step approach. Underthe first step, we determine the fair value of each reporting unit to whichgoodwill has been assigned. The geographic component units of the company forpurposes of the impairment test have been aggregated into a single reportingunit because they have similar economic characteristics.  We compare the fair value of the reportingunit to the company’s carrying value, including goodwill.  We estimate the fair value of our reportingunit by utilizing published market operating data multiples of similar publiclytraded companies.  If the estimated fairvalue exceeds the carrying value, no impairment loss is recognized. If thecarrying value exceeds the fair value, goodwill is considered potentiallyimpaired and the second step is completed in order to measure the impairmentloss. Under the second step, we calculate the implied fair value of goodwill bydeducting the fair value of all tangible and intangible net assets, includingany unrecognized intangible assets, of the reporting unit from the fair valueof the reporting unit as determined in the first step.  We then compare the implied fair value ofgoodwill to the carrying value of goodwill. If the implied fair value ofgoodwill is less than the carrying value of goodwill, we recognize animpairment loss equal to the difference.

 

*IncomeTaxes*.  We are requiredto estimate income taxes in each of the jurisdictions in which we operate.  The process involves estimating actualcurrent tax expense along with assessing temporary differences resulting fromdiffering treatment of items for book and tax purposes.  These timing differences result in deferredtax assets and liabilities, which are included in our consolidated balancesheet.  We have considered future taxableincome and ongoing tax planning strategies in assessing the need for thevaluation allowance. As of December 31, 2004, our deferred tax assets were$121.1 million, net of a valuation allowance of $5.2 million, and our deferredtax liabilities were $271.5 million.  Ourdeferred tax assets consist primarily of future tax benefits associated withour net operating loss carryovers. We have recorded a valuation allowance of$5.2 million based on the pending expiration in the next few years of netoperating loss carryovers that we estimate we will not be able to fullyuse.  These net operating loss carryoversfor income tax purposes have been largely created by originating deductibletemporary differences in depreciation expense of our lease fleet.  We expect that our taxable income in futureperiods will increase significantly as these differences reverse, allowing usto utilize substantially all of our net operating loss carryovers. If our operatingresults were to deteriorate and our future taxable income was insufficient toutilize these net operating loss carryovers before they expire, we would berequired to increase the valuation allowance that we have recorded for ourdeferred tax assets.

 

**Results of Operations**

 

*2004Compared With 2003.* Revenues for the year ended December 31, 2004 were $497.9 million;a $62.3 million or 14.3% increase from revenues of $435.6 million in the sameperiod of 2003.  The increase resultedfrom a $24.8 million or 27.1% increase in delivery and installation revenues, a$14.7 million or 20.5% increase in sales of new units, an $8.9 million or 4.2%increase in leasing revenue, an $8.6 million or 41.6% increase in sales ofrental equipment and a $5.3 million or 13.9% increase in other revenue from thesame period of 2003.  The increases insales of new units and corresponding increase in delivery and installationrevenues are largely due to continued growth in the education industry weserve, particularly in the southeast and west regions of the country.

 

In addition, delivery andinstallation revenues increased over 2003 as a result of increased modularconstruction sitework activities in the northeast and south central regions ofthe country.  The 4.2% increase in leasingrevenue for the year ended December 31, 2004 resulted from an increase ofapproximately 3,000 units on rent, which includes our purchase of Californiaclassroom units in the first quarter 2004. Average fleet utilization of approximately 80% for the year ended December 31,2004 was up approximately 3% from the same period of the prior year.  Of this increase, 2.5% is attributed to thestrategic initiative previously discussed. The average monthly rental rate forthe year ended December 31, 2004 remained flat at $250 in comparison withthe prior year. Increased used sales activity, particularly in the west andsoutheast regions of the country, resulted in increased sales of rentalequipment for the year ended December 31, 2004 as compared to the same periodof 2003.  Other revenue increased 13.9%in 2004 due primarily to the $3.3 million, net of damages relating tosettlement of insurance claims resulting from a series of hurricanes in thesoutheast region of the United States occurring during the third quarter of2004 (see discussion below) and an increase in steps and ramp revenues. Duringthe year ended December 31, 2003, other revenue included $1.0 million ofprofit related to the sale of a branch facility.

 

Gross profit for the yearended December 31, 2004 was $190.8 million, a $12.9 million or 7.3%increase from the same period of 2003. Gross profit margin percentage from the sales of new units, and deliveryand installation decreased by 1.5% and 0.6%, respectively, due primarily tooverall competitive pricing pressures and lower margins on certain modularconstruction projects in the northeast region of the country.  Gross profit margin from the sales of rentalequipment and other revenue increased by $2.1 million and $3.9 million,respectively, primarily due to an increase in sales of rental equipment andother revenue described above.  Leasinggross profit and leasing gross profit margin percentage for the year increasedby $3.1 million and 0.9%, respectively, as compared to the same period of 2003,primarily due to leasing revenue improvements described above, partially offsetby increased maintenance and refurbishment costs.

 

 

17

----

 

Selling, general and administrative expenses(SG&A) for the year ended December 31, 2004 increased approximately$7.1 million or 9.3% to $83.4 million from $76.3 million for the year ended December 31,2003.  This increase is primarilyassociated with increased employee-related costs, business insurance, marketingrelated and professional fees.  Also,during the fourth quarter, we recorded a charge of approximately $0.9 millionresulting from the write-off of deferred costs in connection with thesuspension of negotiations related to a European acquisition target.

 

As previously described, in the fourth quarter of2003, we implemented a strategic initiative to dispose of selected rental unitsin our lease fleet which were determined to no longer merit furtherinvestment.  A $19.4 million impairmentcharge was recorded in 2003 to reflect the write-down of these assets to theirestimated fair value (less costs to sell). As of December 31, 2004, we have disposed of substantially all ofthese units.  The effects on thefinancial statements for the year ended December 31, 2004 of disposing ofthese units was not material.

 

During the third quarter of 2004, approximately 500mobile office and storage units, with a book value of approximately $3.4million, were destroyed as a result of several hurricanes experienced in thesoutheast region of the United States. The majority of these units were not on rent. In addition, approximately200 units as well as certain other Company assets were damaged during thestorms. The total costs related to these storms approximate $4.6 million.  As of December 31, 2004, we have agreedto a preliminary settlement with our insurance companies of approximately $7.9million to cover losses from these storms, of which, $5.0 million was receivedas of December 31, 2004.  During thefourth quarter, we recorded in other revenue approximately $3.3 millionrepresenting the realized gain from the involuntary conversion of these assets.

 

Interest expense for the year ended December 31,2004 increased by $5.3 million or 6.0% to $92.4 million from $87.2 million in thesame period of 2003 due primarily to the incremental interest expense incurredon the $150.0 million of 10.0% senior secured notes. The net proceeds of thenotes were used to pay off portions of the term loan and revolving creditfacility debt in August 2003.  Thisincremental interest expense was partially offset by a $61.6 million or 17.2%decrease in the average credit facility debt over the same period of 2003. Alsoincluded in the 2003 interest expense was a write-off of deferred financingcosts in the amount of $2.5 million.

 

For the year ended December 31,2004 and 2003, income tax expense (benefit) was $3.6 million and ($7.1)million, respectively.  The increase inour effective tax rate for the year ended December 31, 2004 was impactedprimarily by a change in the estimate of the future effects of state incometaxes on deferred income tax balances resulting from a change in the estimatedincome apportionment among states in which we do business. The effective incometax rate also differs from the U.S. Federal statutory income tax rate becausewe have not recognized a benefit for net operating loss carryforwards generatedfrom our operations in Mexico and Europe due to uncertainties surrounding theirultimate realization.

 

*2003Compared With 2002.*  Revenuesin 2003 were $435.6 million, an approximately $56.8 million or 11.5% decreasefrom revenues of $492.4 million in 2002. The decrease resulted from a $27.3 million or 27.6% decrease in sales ofnew units, a $13.1 million or 5.8% decrease in leasing revenue, a $9.7 millionor 9.6% decrease in delivery and installation revenues, a $3.4 million or 8.3%decrease in other revenues and a $3.2 million or 13.4% decrease in sales ofrental equipment.  Sales of new units anddelivery and installation revenues decreases are largely due to marketsluggishness associated with the 2003 economy and competitive pricingpressures. In addition, state budget issues in certain parts of the countryhave affected operating results for the year ended December 31, 2003 by producingdelays in several significant modular classroom projects. The decrease inleasing revenues is due to a decrease of approximately 1,200 units on rent andcontinued soft economic conditions, which resulted in competitive pricingpressures.  The average monthly rentalrate 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 theyear ended December 31, 2003, which was relatively flat as compared to thesame period in the prior year. The decrease in sales of rental equipment forthe year ended December 31, 2003 is the result of the non-recurrence in2003 of several large classroom sales which occurred in the prior year.  The decrease in other revenue is the resultof declines in sales and leasing revenue mentioned above.

 

Gross profit in2003 was $177.9 million, a $29.8 million or 14.4% decrease from 2002 grossprofit of $207.8 million.  The decreaseresulted from a $18.4 million or 13.4% decrease in leasing gross profit, a $4.0million or 24.4% decrease in delivery and installation gross profit, a $4.1million or 25.3% 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 inleasing revenue described above and a decline in leasing margins from 59.4% in2002 to 54.6% in 2003.  The decrease inmargin percentage was attributable to the decrease in leasing revenue coupledwith increased refurbishment and maintenance expenses as compared to 2002.  The decrease in gross profit related to salesof new units, delivery and installation, and sales of rental equipment in 2003resulted from the decrease in revenues described above.

 

 

18

----

 

SG&A was $76.3million and $85.8 million for the years ended December 31, 2003 and 2002,respectively.  The overall decrease inSG&A of $9.5 million or 11.1% was achieved by continuing our cost controlinitiatives, primarily reductions in personnel related costs as well as a $4.5million decrease in non-cash stock compensation expense.  In 2003, we adopted the provisions of SFAS No. 148,*Accounting for Stock-based Compensation-Transitionand 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 $0.8 million and $5.3million, respectively.

 

Interest expenseincreased by 2.3% to $87.2 million in 2003 from $85.2 million in 2002.  This increase is the result of theaccelerated amortization by $2.5 million of deferred financing costs related tothe partial extinguishment of commitments under our credit agreement and theincremental 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 portionsof the term loan and revolving credit facility debt. These increases werepartially offset by (a) a decrease of approximately 10 basis points ineffective 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.

 

As described earlier, inthe fourth quarter of 2003 we implemented a strategic initiative to dispose ofselected rental units in our lease fleet which we determined no longer meritfurther investment.  A $19.4 millionimpairment charge was recorded to reflect the write-down of these assets to theirestimated fair value (less costs to sell).

 

The income tax expense (benefit) decreased from anexpense of $8.1 million in 2002 to a benefit of $7.1 million in 2003, primarilydue to the impairment charge associated with the strategic initiative todispose of certain rental units of  $19.4million, which reduced income before taxes during the current year. Theeffective tax rate for 2003 was 37.9%, up from 34.9% in 2002.  The higher rate is primarily attributable toincreases in the local tax rates in 2003 in the Canadian provinces in which weoperate as well as the reversal of certain valuation allowances in 2002.

 

**Liquidity and Capital Resources**

 

Holdings conductsvirtually all of its business operations through Scotsman.  Accordingly, its only material sources ofcash are dividends that are derived from earnings and cash flow generated byScotsman.  Indebtedness under Scotsman’scredit facility, 9.875% senior notes, and 10.0% senior secured notes may limitor prohibit the payment of dividends to Holdings.

 

During 2002, 2003 and2004, our principal sources of funds consisted of cash flow from operating andfinancing sources.  Cash flow fromoperating activities of $95.3 million in 2002, $74.2 million in 2003 and $56.9million in 2004 were largely generated by the rental of units from our lease fleet,the associated delivery and installation services from rental and salesactivities and other products.  Theapproximate $17.4 million decrease in cash flow from operating activities forthe year ended December 31, 2004 was substantially the result of increasedreceivables related to increased classroom sales, particularly in the west andsoutheast regions of the country, partially offset by an increase in payablesand other accrued expenses. The increase in accounts payable and other accruedexpenses resulted primarily from the timing of related payments. Other factorsthat contributed to the decrease in net cash provided by operating activitiesfrom 2003 to 2004 included increases in SG&A, and an increase in paidinterest resulting from the incremental interest expense discussed above.

 

The $21.1 milliondecrease in cash flow from operating activities for the year ended December 31,2003 as compared to the same period for 2002 is primarily related to thedecrease in revenues, partially offset by an increase in accounts payable. Theincrease in accounts payable resulted primarily from the timing of relatedpayments.  The decrease in revenues waslargely due to market sluggishness and competitive pricing pressures. Inaddition, state budget issues in certain parts of the country affectedoperating results for the year ended December 31, 2003 by producing delaysin several significant modular classroom projects.

 

Cash flow used ininvesting activities was $36.1 million in 2002, $43.6 million in 2003 and $102.9million in 2004.  Our primary capitalexpenditures are for the discretionary purchase of new units for the leasefleet and units purchased through acquisitions. In June 2003, we acquired for $3.3 million a Canadian company whilein March 2004, we acquired nearly 3,800 relocatable classrooms located inthe state of California for approximately $43.5 million. In August 2004,we made an investment in a mobile office company, headquartered in Spain, forapproximately $4.7 million.  See Note 3to the financial statements for further discussion of the California purchaseand the Spain acquisition. We seek to maintain our lease fleet in goodcondition at all times and we generally increase the size of our lease fleetonly in those local or regional markets experiencing economic growth andestablished unit demand.  Our fleetacquisition strategy includes increasing our fleet size in accordance withcustomer demand and the related business conditions of the time.

 

 

19

----

 

The following table setsforth our investment in our lease fleet for the periods indicated.

 
| ** **                                                          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                          | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                          | ** ** | **(Dollars in millions)**        | ** ** |
| Gross  capital expenditures for rental equipment:                   |       |                             |       |   |   |   |   |
| New  units and betterments                                          |       | $                                | 79.9       |   | $ | 53.3 |   | $ | 40.8 |   |
| Purchase  of California classroom fleet                             |       | 43.5                             |       | — |   | — |   |
| Purchase  price allocated to fleet of acquired businesses           |       | 1.2                              |       | 2.6 |   | 6.3 |   |
|                                                                |       | 124.6                            |       | 55.9 |   | 47.1 |   |
| Proceeds  from sale of used rental equipment                        |       | (29.4                            | )          | (20.7 | ) | (24.0 | ) |
|                                                                |       |                             |       |   |   |   |   |
| Net  capital expenditures for rental equipment                      |       | $                                | 95.2       |   | $ | 35.2 |   | $ | 23.1 |   |
|                                                                |       |                             |       |   |   |   |   |
| Other  direct leasing costs included in the statement of operations |       | $                                | 51.8       |   | $ | 45.7 |   | $ | 43.7 |   |

 

We believe we can managethe capital requirements of our lease fleet, and thus our cash flow, throughthe careful monitoring of our lease fleet additions.

 

Our maintenance andrefurbishment program is designed to maintain the value of lease fleet unitsand realize rental rates and operating cash flows from older units comparableto those from newer units.  The sale ofrental equipment helps preserve the overall quality of our lease fleet andenhances cash flow.  Generally, costs ofimprovements and betterments aggregating less than $1,000 per unit are expensedas incurred.  Expenditures thatsignificantly extend the economic useful life of a unit or that materiallyalter a unit’s configuration are capitalized.

 

Other capitalexpenditures of $11.9 million, $7.6 million and $8.1 million in 2002, 2003 and2004, respectively, consist of items not directly related to the lease fleet,such as branch buildings, land, equipment, leasehold improvements andmanagement information systems.

 

Net cash (used in) provided by financing activitieswas ($59.3) million in 2002, ($30.6) million in 2003, and $46.2 million in2004.  Net cash used in financingactivities for 2003 and 2002 consisted largely of net repayments of debt underour revolving credit facility and term loan and in 2002, included $20.3 millionfor deferred financing costs relating to the issuance of additional 9.875%senior notes and the new credit facility. Net cash provided by financing activities for 2004 consisted ofadditional net borrowings under our revolving credit facility, which were usedto supplement cash flow from operating activities in the funding of capitalexpenditures, as well as the $43.5 million California fleet purchase asdescribed above.

 

At December 31, 2004 we had $549.2 million of9.875% senior notes due in 2007, $308.4 million in term loan and revolvingcredit facility debt due in 2006 and $150.0 million of 10.0% senior securednotes due in 2008.

 

The $150.0 million aggregate principal amount of 10.0%senior secured notes were issued in August 2003.  We used the net proceeds of $145.4 millionreceived from that offering to repay $27.5 million of the term loan under ourcredit agreement and repay $117.9 million of borrowings and terminatecommitments under our revolving credit facility. The 10.0% senior secured notesare fully and unconditionally guaranteed on a senior secured second lien basisby the following 100% owned subsidiaries of Scotsman: Space MasterInternational, Inc., Evergreen Mobile Company, Truck & TrailerSales, Inc. and Williams Scotsman of Canada, Inc.  Willscot, also a 100% owned subsidiary ofScotsman, has fully and unconditionally guaranteed the senior secured notes ona subordinated secured second lien basis. These 100% owned subsidiaries of Scotsman act as joint and severalguarantors of the senior secured notes. The 10.0% senior secured notes are due August 15, 2008 withinterest payable semi-annually on February 15 and August 15 of eachyear.  On August 15, 2006, the 10.0%senior secured notes will become redeemable at our option at a redemption priceof 105.0% of the principal amount thereof plus accrued interest during the 12-monthperiod beginning August 15, 2006 and 102.5% of the principal amountthereof plus accrued interest beginning August 15, 2007.

 

Our 9.875% senior notes are fully and unconditionallyguaranteed on a senior unsecured basis by the following 100% owned subsidiariesof Scotsman: Space Master International, Inc., Evergreen Mobile Company,Truck & Trailer Sales, Inc. and Williams Scotsman of Canada, Inc.  Willscot has fully and unconditionallyguaranteed the 9.875% senior notes on a subordinated basis.  These 100% owned subsidiaries of Scotsman,act as joint and several guarantors of the 9.875% senior notes. The 9.875%senior notes are due June 1, 2007 with interest payable semi-annually on June 1and December 1 of each year.  The9.875% senior notes are currently redeemable at our option at a redemptionprice of 100% of the principal amount thereof plus accrued interest.

 

Borrowings under our credit facility of $308.4 millioninclude $206.3 million in term loans and a $102.1 million revolving creditfacility at December 31, 2004. Excess borrowing base (collateral) availability calculated in accordancewith the credit agreement was $187.2 million at December 31, 2004.  However, the consolidated leverage ratiocovenant further limits our excess borrowing availability at December 31,2004 to $65.1 million.  In order to meetour future cash requirements, we intend to use internally generated funds andto borrow under our credit facility. We believe we will have sufficientliquidity under our revolving line of credit and from cash generated fromoperations to fund our operations for the next 12 months.  Our credit facility matures December 2006and our 9.875% senior notes and 10.0% senior secured notes mature in 2007 and2008, respectively.  It is expected thatwe will refinance outstanding obligations under these agreements prior to theirmaturities.  Until such time, we expectthat funds from operations will be sufficient to satisfy debt servicerequirements related to these obligations.

 

 

20

----

 

Our credit agreementcontains restrictions on the amount of dividends that Scotsman can pay toHoldings and requires compliance with certain financial covenants includingcapital expenditures, an interest coverage ratio, a leverage ratio and fleetutilization levels.  We amended certainof these financial covenants in August 2003 and September 2004.  As of December 31, 2004, the permittedmaximum leverage ratio as defined in the credit agreement was 6.75:1. Thepermitted maximum leverage ratio will remain at 6.75:1 until June 30, 2005at which time it decreases to 6.60:1. The leverage ratio decreases thereafterover time to 6.25:1 at September 30, 2006. The required utilization ratewas 74% and increases to 75% after December 31, 2004 and the minimuminterest coverage ratio was 1.70:1 at December 31, 2004. In addition, the September 2004amendment (1) reduced the total revolving commitments under the creditfacility to $300.0 million from $342.0 million and (2) reduced the annuallimitation on capital expenditures to $175.0 million in each of 2005 and 2006,from $235.0 million and $250.0 million, respectively.  The failure to comply with the requiredcovenants would result in us not being able to borrow under the creditagreement and would result in a default under the credit agreement.  We are currently in compliance with allfinancial covenants.

 

 

For the year ended December 31,2004, our actual consolidated leverage ratio was 6.34:1 as compared to themaximum covenant requirement of 6.75:1 and our actual consolidated interestcoverage ratio was 1.84:1 as compared to the minimum covenant requirement of1.70:1. The consolidated interest coverage ratio was calculated by dividing ConsolidatedEBITDA (as defined in our credit agreement) of approximately $157.1 million forthe twelve month period ended December 31, 2004 by cash interest expenseof approximately $85.5 million as defined in the credit agreement.  The consolidated leverage ratio wascalculated by dividing the December 31, 2004 consolidated debt balance ofapproximately $1,009.5 million by Consolidated EBITDA for the twelve monthperiod ended December 31, 2004.  Forconsolidated leverage ratio calculation purposes Consolidated EBITDA for thetwelve months ended December 31, 2004 was approximately $159.2 million,which in accordance with our credit agreement, was adjusted to includeapproximately $2.1 million, relating to entities we acquired during thecalculation period.

 

Consolidated EBITDA asdefined in our credit agreement represents the trailing 12 months consolidatednet income plus consolidated interest, taxes, depreciation and amortizationexpenses, and excludes gains and losses on sales of fixed assets and any othernon-cash items.  It is used indetermining our compliance with the financial ratios required by our agreement.Consolidated EBITDA should not be considered in isolation or as a substitute tocash flow from operating activities, net income or other measures ofperformance prepared in accordance with generally accepted accountingprinciples or as a measure of a company’s profitability or liquidity.

 

Although not required byour credit agreement, if our cash flow from operating activities for the twelvemonths ended December 31, 2004, the most directly comparable GAAP measureto Consolidated EBITDA, were used in these calculations instead of ConsolidatedEBITDA, our leverage ratio and interest coverage ratio would have been 17.8:1and .66:1, respectively.

 

The table below reconciles Consolidated EBITDA,calculated pursuant to the credit agreement, for the twelve months ended December 31,2004 to cash flow from operating activities, the most directly comparable GAAPmeasure (in thousands).

 
| ** **                                                                  | ** ** | **Twelve Months Ended  December 31, 2004** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| Consolidated  EBITDA                                                        |       | $ 159,201(a)                               |       |
| Increase  in receivables, net                                               |       | (20,127)                                        |       |
| Increase  in accounts payable and accrued expenses                          |       | 22,036                                          |       |
| Interest  paid                                                              |       | (84,903)                                        |       |
| Increase  in other assets                                                   |       | (10,328)                                        |       |
| Increase  in other liabilities                                              |       | 2,924                                           |       |
| Gain  on sale of rental equipment (including realized gain from hurricanes) |       | (9,816)                                         |       |
| Pro  forma EBITDA impact of acquisitions                                    |       | (2,124)                                         |       |
| Cash  flow from operating activities                                        |       | $ 56,863(a)                                |       |
|                                                                        |       |                                            |       |
| Other  Data:                                                                |       |                                            |       |
| Cash  flow used in investing activities                                     |       | $ (102,937)                                |       |
| Cash  flow provided by financing activities                                 |       | $ 46,193                                   |       |

 

----

(a) In accordance withthe provisions of the credit agreement, Holdings’ consolidated financialresults are to be used in the calculation of the covenant compliance ratios.

 

 

21

----

 

**Off-Balance Sheet Arrangements**

 

We have no materialoff-balance sheet arrangements.

 

 

**Contractual Obligations**

 

A summary of oursignificant contractual obligations is as follows (in thousands):

 
| ** **                                      | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------------------|------------|------------|------------|----------------------------|------------|
| **Contractual  Obligations**                    | ** ** | **Total**  | ** ** | **Less than  1 year**      | ** ** | **1 – 3 years** | ** ** | **3 – 5 years** | ** ** | **After 5  years** | ** ** |
| Long  term debt obligations (a)                 |       | $          | 905,474    |                       | $          | 2,121 |   | $ | 753,353 |   | $ | 150,000 |   | $ | — |   |
|                                            |       |       |       |                       |       |   |   |   |   |   |   |
| Capital  lease obligations                      |       | 2,864      |       | 374                        |       | 748 |   | 652 |   | 1,090 |   |
|                                            |       |       |       |                       |       |   |   |   |   |   |   |
| Revolving  credit facility (a)                  |       | 102,130    |       | —                     |       | 102,130 |   | — |   | — |   |
|                                            |       |       |       |                       |       |   |   |   |   |   |   |
| Operating  leases (b)                           |       | 28,043     |       | 9,640                      |       | 11,465 |   | 4,492 |   | 2,446 |   |
|                                            |       |       |       |                       |       |   |   |   |   |   |   |
| Sale  and rental equipment purchase obligations |       | 21,258     |       | 21,258                     |       | — |   | — |   | — |   |
|                                            |       |       |       |                       |       |   |   |   |   |   |   |
| Total  contractual obligations                  |       | $          | 1,059,769  |                       | $          | 33,393 |   | $ | 867,696 |   | $ | 155,144 |   | $ | 3,536 |   |

 

----

(a)          Asmore fully described in Note 6 to Consolidated Financial Statements, we haveborrowed $102.1 million under the revolving credit facility as of December 31,2004.  We also have a $206.3 million termloan, and $549.2 million and $150.0 million of 9.875% and 10.0% Senior Notes,respectively, outstanding as of December 31, 2004.

 

(b)         Inaccordance with SFAS No. 13, *Accounting for Leases*,operating lease obligations are not reflected in the balance sheet.  See Operating Leases Item 8. FinancialStatements and Supplementary Data – Notes to Consolidated Financial Statements– Note 8 Commitments and Contingencies for additional information.

 

# **Theamount of unused revolving credit line, which matures in accordance with theterms of our credit facility agreement on December 31, 2006, was $197.9million at December 31, 2004 and the amount of standby letters of credit,which will expire in 2005, was $10.7 million at December 31, 2004.**

# ** **

# **Seasonality**

# ** **

Although demand fromcertain of our customers is somewhat seasonal, our operations as a whole arenot seasonal to any significant extent.

 

**Inflation**

 

We believe that inflation has not had a material effect on our resultsof operations.  However, an inflationaryenvironment could materially increase interest rates on our floating ratedebt.  The price of rental equipment soldby us and the replacement cost of such units could also increase in such anenvironment.  Our standard leasegenerally provides for annual rental rate escalation at the inflation rate asdetermined 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 byutilizing certain hedging mechanisms, although we are under no obligation to doso.

 

 

22

----

 

**Item 7a Quantitative andQualitative Disclosures about Market Risk**

 

Market risk is the risk of loss to future earnings, tofuture values, or to future cash flows that may result from the changes in theprice of financial instruments.  We areexposed to financial market risks, including changes in foreign currencyexchange rates and interest rates. Exposure to market risks related to operating activities is managedthrough our regular operating and financing activities.

 

*ForeignCurrency Risk*

 

We are exposed to foreigncurrency translation risks.  We do notenter into contracts or financial instruments to manage this risk. The exposurerelated to fluctuations in the exchange rates on the local currency of Scotsman’s100% owned Canadian, Mexican, and European subsidiaries, Williams Scotsman Inc.of Canada, Williams Scotsman Mexico S. de R.L. de C.V., and Williams ScotsmanEurope, S.L. are not significant to overall operations.  The effect of changes in the exchange ratehas been separately identified in the cash flow statement.

 

*Interest Rate Risk*

 

The table below providesinformation about our financial instruments that are sensitive to interest ratechanges:

 

Year of Maturityat December 31, 2004

(in thousands)

 
| ** **                                                                   | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009+** | ** ** | **Total** | ** ** | **Fair Value** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-----------|------------|-----------|------------|----------------|------------|
|                                                                         |       |     |       |     |       |     |       |     |       |      |       |      |       |           |       |
| Variable  Rate Debt                                                          |       | $        | 2,121      |     | $          | 306,316  |       | $        | —     |      | $          | —    |       | $              | —     |   | $ | 308,437 |   | $ | 308,437 |   |
| Average  Interest Rate                                                       |       | 5.18     | %          | 5.30     | %          | —   |       | —   |       | —    |       |      |       |           |       |
|                                                                         |       |     |       |     |       |     |       |     |       |      |       |      |       |           |       |
| Fixed  Rate Debt                                                             |       | 221      |       | 238      |       | 549,424  |       | 150,276  |       | 890       |       | 701,049   |       | 727,382        |       |
| Average  Interest Rate (includes imputed interest related to capital leases) |       | 6.74     | %          | 6.74     | %          | 9.87     | %          | 9.99     | %          | 6.74      | %          |      |       |           |       |
|                                                                              |            |          |            |          |            |          |            |          |            |           |            |           |            |                |            |  |  |  |  |  |  |  |

 

 

23

----

 

**Item8.  Financial Statements andSupplementary Data**

 
| ** **                                                                                                             | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|
| **INDEX TO  FINANCIAL STATEMENTS**                                                                                     | **Page**   |
|                                                                                                                   |       |
| Scotsman Holdings, Inc. and Subsidiaries:                                                                              |       |
|                                                                                                                   |       |
| Report  of Independent Registered Public Accounting Firm                                                               | 25         |
|                                                                                                                   |       |
| Consolidated Balance  Sheets as of December 31, 2004 and 2003                                                          | 26         |
|                                                                                                                   |       |
| Consolidated  Statements of Operations for the years ended December 31, 2004, 2003 and 2002                            | 27         |
|                                                                                                                   |       |
| Consolidated  Statements of Changes in Stockholders’ Equity for the years ended December  31, 2004, 2003 and 2002 | 28         |
|                                                                                                                   |       |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002                            | 29         |
|                                                                                                                   |       |
| Notes to  Consolidated Financial Statements                                                                            | 30-42      |
|                                                                                                                   |       |
| **INDEX  TO FINANCIAL STATEMENTS SCHEDULES**                                                                           |       |
|                                                                                                                   |       |
| Scotsman Holdings, Inc. and Subsidiary:                                                                                |       |
|                                                                                                                   |       |
| Schedule  I – Condensed Financial Information of Registrant                                                       | 59-60      |
|                                                                                                                   |       |
| Schedule  II - Valuation and Qualifying Accounts                                                                       | 61         |

 

All schedules notlisted have been omitted either because they are not required or, if required,the required information is included elsewhere in the financial statements ornotes thereto.

 

24

----

 

**Report of Independent Registered Public AccountingFirm**

** **

Board of Directors

Scotsman Holdings, Inc.

 

We have audited theaccompanying consolidated balance sheets of Scotsman Holdings, Inc. andsubsidiaries as of December 31, 2004 and 2003, and the relatedconsolidated statements of operations, changes in stockholders’ equity and cashflows for each of the three years in the period ended December 31,2004.  Our audits also included thefinancial statement schedules listed in the Index at Item 8.  These financial statements and schedules arethe responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statementsand schedules based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are 

free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting.  Ouraudit included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Scotsman Holdings, Inc.and subsidiaries at December  31, 2004 and  2003, and the consolidatedresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2004, in conformity with U.S. generallyaccepted accounting principles.  Also, inour opinion, the related financial statement schedules, when considered inrelation to the basic financial statements taken as a whole, presents fairly inall material respects the information set forth therein.

 

As discussed in Note 2 tothe consolidated financial statements, effective January 1, 2003 theCompany changed its method of accounting for stock-based compensation.

 
|                         | /s/ Ernst &  Young LLP |   |
|------------------------------|---------------------------------|--------|
|                         |                            |
| Baltimore, Maryland          |                            |
|  February 18, 2005 |                            |

 

25

----

 

Scotsman Holdings, Inc. andSubsidiaries

Consolidated BalanceSheets

 
| ** **                                                                                           | ** ** | **December 31** | ** **    |
|------------------------------------------------------------------------------------------------------|------------|----------------------|---------------|
| ** **                                                                                           | ** ** | **2004**             | ** **    | **2003** | ** ** |
| ** **                                                                                           | ** ** | **(In thousands)**   | ** **    |
| **Assets**                                                                                           |       |                 |          |   |   |
| Cash                                                                                                 | ** ** | **$**                | **939**       |   | $ | 387 |   |
| Trade  accounts receivable, net of allowance for doubtful accounts of $606 in 2004  and $862 in 2003 | ** ** | **76,579**           |          | 55,841 |   |
| Prepaid  expenses and other current assets                                                           | ** ** | **38,330**           |          | 34,315 |   |
| Rental  equipment, net of accumulated depreciation of $253,892 in 2004 and $224,794  in 2003         | ** ** | **880,723**          |          | 828,078 |   |
| Property  and equipment, net                                                                         | ** ** | **79,951**           |          | 80,750 |   |
| Deferred  financing costs, net                                                                       | ** ** | **16,667**           |          | 22,868 |   |
| Goodwill                                                                                             | ** ** | **170,423**          |          | 169,913 |   |
| Other  intangible assets, net                                                                        | ** ** | **2,894**            |          | 2,575 |   |
| Other  assets                                                                                        | ** ** | **18,105**           |          | 10,958 |   |
| Total  assets                                                                                        | ** ** | **$**                | **1,284,611** |   | $ | 1,205,685 |   |
|                                                                                                 | ** ** | ** **           |          |   |   |
| **Liabilities and stockholders’ equity**                                                        |       |                 |          |   |   |
| Accounts  payable                                                                                    | ** ** | **$**                | **42,225**    |   | $ | 29,505 |   |
| Accrued  expenses and other current liabilities                                                      | ** ** | **39,963**           |          | 29,951 |   |
| Rents  billed in advance                                                                             | ** ** | **21,375**           |          | 18,295 |   |
| Revolving  credit facility                                                                           | ** ** | **102,130**          |          | 54,940 |   |
| Long-term  debt, net                                                                                 | ** ** | **907,356**          |          | 907,238 |   |
| Deferred  income taxes                                                                               | ** ** | **150,415**          |          | 147,392 |   |
| Total  liabilities                                                                                   | ** ** | **1,263,464**        |          | 1,187,321 |   |
|                                                                                                 |       |                 |          |   |   |
| Stockholders’  equity:                                                                          |       |                 |          |   |   |
| Common  stock, $.01 par value. Authorized 10,000,000 shares; issued 9,507,407 in 2004  and 2003      | ** ** | **95**               |          | 95 |   |
| Additional  paid-in capital                                                                          | ** ** | **240,741**          |          | 240,005 |   |
| Retained  earnings                                                                                   | ** ** | **62,170**           | ** **    | 65,581 |   |
| Cumulative  foreign currency translation adjustment                                                  | ** ** | **14,079**           |          | 8,621 |   |
|                                                                                                 | ** ** | **317,085**          |          | 314,302 |   |
| Less  treasury stock - 3,312,608 common shares in 2004 and 2003, at cost                             | ** ** | **(295,938**         | )             | (295,938 | ) |
| Total  stockholders’ equity                                                                     | ** ** | **21,147**           |          | 18,364 |   |
| Total  liabilities and stockholders’ equity                                                     | ** ** | **$**                | **1,284,611** |   | $ | 1,205,685 |   |

 

*See accompanying notes.*

 

26

----

 

Scotsman Holdings, Inc. andSubsidiaries

ConsolidatedStatements of Operations

 
| ** **                                                                                  | ** ** | **Year ended December 31**              | ** **  |
|---------------------------------------------------------------------------------------------|------------|----------------------------------------------|-------------|
| ** **                                                                                  | ** ** | **2004**                                     | ** **  | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                  | ** ** | **(In thousands except  per share amounts)** | ** **  |
| **Revenues**                                                                                |       |                                         |        |   |   |   |   |
| Leasing                                                                                     | ** ** | **$**                                        | **222,867** |   | $ | 213,976 |   | $ | 227,106 |   |
| Sales:                                                                                      |       |                                         |        |   |   |   |   |
| New  units                                                                                  | ** ** | **86,344**                                   |        | 71,635 |   | 98,927 |   |
| Rental  equipment                                                                           | ** ** | **29,355**                                   |        | 20,734 |   | 23,951 |   |
| Delivery  and installation                                                                  | ** ** | **116,106**                                  |        | 91,318 |   | 101,034 |   |
| Other                                                                                       | ** ** | **43,253**                                   |        | 37,980 |   | 41,429 |   |
| Total  revenues                                                                             | ** ** | **497,925**                                  |        | 435,643 |   | 492,447 |   |
|                                                                                        |       |                                         |        |   |   |   |   |
| **Cost of sales and services**                                                              |       |                                         |        |   |   |   |   |
| Leasing:                                                                                    |       |                                         |        |   |   |   |   |
| Depreciation  and amortization                                                              | ** ** | **48,888**                                   |        | 49,097 |   | 45,834 |   |
| Other  direct leasing costs                                                                 | ** ** | **51,777**                                   |        | 45,731 |   | 43,684 |   |
| Sales:                                                                                      |       |                                         |        |   |   |   |   |
| New  units                                                                                  | ** ** | **72,885**                                   |        | 59,411 |   | 82,564 |   |
| Rental  equipment                                                                           | ** ** | **22,896**                                   |        | 16,361 |   | 18,164 |   |
| Delivery  and installation                                                                  | ** ** | **101,061**                                  |        | 78,856 |   | 84,540 |   |
| Other                                                                                       | ** ** | **9,605**                                    |        | 8,274 |   | 9,901 |   |
| Total  costs of sales and services                                                          | ** ** | **307,112**                                  |        | 257,730 |   | 284,687 |   |
| Gross  profit                                                                               | ** ** | **190,813**                                  |        | 177,913 |   | 207,760 |   |
|                                                                                        |       |                                         |        |   |   |   |   |
| Selling,  general and administrative expenses                                               | ** ** | **83,407**                                   |        | 76,297 |   | 85,779 |   |
| Other  depreciation and amortization                                                        | ** ** | **14,787**                                   |        | 13,869 |   | 13,438 |   |
| Interest,  including amortization of deferred financing costs of $6,959, $8,789 and  $7,948 | ** ** | **92,444**                                   |        | 87,174 |   | 85,208 |   |
| Held  for sale impairment charge                                                            | ** ** | **—**                                   |        | 19,386 |   | — |   |
| Total  operating expenses                                                                   | ** ** | **190,638**                                  |        | 196,726 |   | 184,425 |   |
|                                                                                        |       |                                         |        |   |   |   |   |
| Income  (loss) before income taxes                                                          | ** ** | **175**                                      |        | (18,813 | ) | 23,335 |   |
| Income  tax expense (benefit)                                                               | ** ** | **3,586**                                    |        | (7,131 | ) | 8,137 |   |
|                                                                                        |       |                                         |        |   |   |   |   |
| Net  (loss) income                                                                          | ** ** | **$**                                        | **(3,411**  | **)** | $ | (11,682 | ) | $ | 15,198 |   |
|                                                                                        |       |                                         | ** **  |   |   |   |   |
| (Loss)  earnings per common share - basic                                                   | ** ** | **$**                                        | **(0.55**   | **)** | $ | (1.89 | ) | $ | 2.45 |   |
| (Loss)  earnings per common share - assuming dilution                                       | ** ** | **$**                                        | **(0.55**   | **)** | $ | (1.89 | ) | $ | 2.32 |   |

 

*See accompanying notes.*

 

27

----

 

Scotsman Holdings, Inc.and Subsidiaries

ConsolidatedStatements of Changes in Stockholders’ Equity

 
| ** **                                   | ** ** | ** ** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings  Accumulated  Deficit** | ** ** | **Accumulated  Other****Comprehensive****(Loss) Income** | ** ** | **Treasury Stock** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|----------------------------------------------|------------|------------|------------|----------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------|------------|--------------------|------------|---------------------------------------|------------|
| ** **                                   |
| **Common Stock**                             |
| **Shares**                                   | ** ** | **Amount** |
|                                         |       |       |       |                             |       | ** **                                   | ** ** | ** **                                               | ** ** | ** **         |       |                                  |       |   |   |
| Balance  at January 1, 2002             |       | 6,197      |       | $                                | 95         |                                         | $          | 233,926                                                  |       | $                  | 62,065     |                                  | $          | (1,505 | ) | (295,860 | ) | $ | (1,279 | ) |
| Comprehensive  income:                       |       |       |       |                             |       |                                         |       |                                                     |       |               |       |                                  |       |   |   |
| Net  income                                  |       | —     |       | —                           |       | —                                       |       | 15,198                                                   | ** ** | **—**         |       | —                                |       | 15,198 |   |
| Foreign  currency translation adjustment     |       | —     | ** ** | **—**                       | ** ** | **—**                                   | ** ** | **—**                                               |       | 119                |       | —                                |       | 119 |   |
| Comprehensive  income                        |       |       |       |                             |       |                                         |       |                                                     |       |               |       |                                  |       | 14,038 |   |
| Non-cash  stock option compensation expense  |       | —     |       | —                           |       | 5,313                                        |       | —                                                   | ** ** | **—**         |       | —                                |       | 5,313 |   |
| Purchase  of 1,800 shares of treasury shares |       | (2         | )          | —                           |       | —                                       |       | —                                                   |       | **—**         |       | (78                                   | )          | (78 | ) |
| Balance  at December 31, 2002           |       | 6,195      |       | 95                               |       | 239,239                                      |       | 77,263                                                   |       | (1,386             | )          | (295,938                              | )          | 19,273 |   |
| Comprehensive  loss:                         |       |       |       |                             |       |                                         |       |                                                     |       |               |       |                                  |       |   |   |
| Net  loss                                    |       | —     |       | —                           |       | —                                       |       | (11,682                                                  | )          | —             |       | —                                |       | (11,682 | ) |
| Foreign  currency translation adjustment     |       | —     |       | —                           |       | —                                       |       | —                                                   |       | 10,007             |       | —                                |       | 10,007 |   |
| Comprehensive  loss                          |       |       |       |                             |       |                                         |       |                                                     |       |               |       |                                  |       | 17,598 |   |
| Non-cash  stock option compensation expense  |       | —     |       | —                           |       | 766                                          |       | —                                                   |       | —             |       | —                                |       | 766 |   |
| Balance  at December 31, 2003           |       | 6,195      |       | 95                               |       | 240,005                                      |       | 65,581                                                   |       | 8,621              |       | (295,938                              | )          | 18,364 |   |
| Comprehensive  income:                       | ** ** | ** ** | ** ** | ** **                       | ** ** | ** **                                   | ** ** | ** **                                               | ** ** | ** **         | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Net  loss                                    | ** ** | **—** | ** ** | **—**                       | ** ** | **—**                                   | ** ** | **(3,411**                                               | **)**      | **—**         | ** ** | **—**                            | ** ** | **(3,411** | **)** |
| Foreign  currency translation adjustment     | ** ** | **—** | ** ** | **—**                       | ** ** | **—**                                   | ** ** | **—**                                               |       | **5,458**          | ** ** | **—**                            | ** ** | **5,458** | ** ** |
| Comprehensive  income                        | ** ** | ** ** | ** ** | ** **                       | ** ** | ** **                                   | ** ** | ** **                                               | ** ** | ** **         | ** ** | ** **                            | ** ** | **20,411** | ** ** |
| Non-cash  stock option compensation expense  | ** ** | **—** | ** ** | **—**                       | ** ** | **736**                                      | ** ** | **—**                                               | ** ** | **—**         | ** ** | **—**                            | ** ** | **736** | ** ** |
| Balance  at December 31, 2004           | ** ** | **6,195**  | ** ** | **$**                            | **95**     | ** **                                   | **$**      | **240,741**                                              | ** ** | **$**              | **62,170** | ** **                            | **$**      | **14,079** | ** ** | **(295,938** | **)** | **$** | **21,147** | ** ** |

 

*See accompanying notes.*

 

28

----

 

ScotsmanHoldings, Inc. and Subsidiaries

ConsolidatedStatements of Cash Flows

 
| ** **                                                                                | ** ** | **Year ended December 31** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                | ** ** | **2004**                        | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                | ** ** | **(In thousands)**              | ** ** |
| **Cash flows from operating activities**                                                  |       |                            |       |   |   |   |   |
| Net  (loss) income                                                                        | ** ** | **$**                           | **(3,411** | **)** | $ | (11,682 | ) | $ | 15,198 |   |
| Adjustments  to reconcile net (loss) income to net cash provided by operating activities: |       |                            | ** ** |   |   |   |   |
| Depreciation  and amortization                                                            | ** ** | **70,634**                      | ** ** | 71,755 |   | 66,614 |   |
| Amortization  of bond discount                                                            | ** ** | **357**                         | ** ** | 357 |   | 327 |   |
| Provision  for bad debts                                                                  | ** ** | **2,248**                       | ** ** | 2,286 |   | 3,692 |   |
| Deferred  income tax expense (benefit)                                                    | ** ** | **3,137**                       | ** ** | (7,640 | ) | 7,759 |   |
| Non-cash  stock option compensation expense                                               | ** ** | **736**                         | ** ** | 766 |   | 5,313 |   |
| Gain  on insurance recovery                                                               | ** ** | **(3,373**                      | **)**      | — |   | — |   |
| Non-cash  held for sale impairment charge                                                 | ** ** | **—**                      | ** ** | 19,386 |   | — |   |
| Gain  on sale of rental equipment                                                         | ** ** | **(6,459**                      | **)**      | (4,373 | ) | (5,787 | ) |
| Gain  (loss) on sale of fixed assets                                                      | ** ** | **(7**                          | **)**      | (810 | ) | 50 |   |
| (Increase)  decrease in net trade accounts receivable                                     | ** ** | **(22,375**                     | **)**      | 6,881 |   | 6,695 |   |
| Increase  in accounts payable and accrued expenses and other current liabilities          | ** ** | **22,261**                      | ** ** | 6,161 |   | 2,103 |   |
| Other                                                                                     | ** ** | **(6,885**                      | **)**      | (8,871 | ) | (6,685 | ) |
| Net  cash provided by operating activities                                                | ** ** | **56,863**                      | ** ** | 74,216 |   | 95,279 |   |
| ** **                                                                                |       |                            |       |   |   |   |   |
| **Cash flows from investing activities**                                                  |       |                            |       |   |   |   |   |
| Rental  equipment additions                                                               | ** ** | **(79,867**                     | **)**      | (53,307 | ) | (40,814 | ) |
| Proceeds  from sales of rental equipment                                                  | ** ** | **29,355**                      | ** ** | 20,734 |   | 23,951 |   |
| Proceeds  from insurance recovery                                                         | ** ** | **5,000**                       | ** ** | — |   | — |   |
| Acquisition  of businesses, net of cash acquired                                          | ** ** | **(5,791**                      | **)**      | (3,434 | ) | (7,308 | ) |
| Purchase  of California classroom fleet                                                   | ** ** | **(43,572**                     | **)**      | — |   | — |   |
| Purchase  of property and equipment, net                                                  | ** ** | **(8,062**                      | **)**      | (7,632 | ) | (11,948 | ) |
| Net  cash used in investing activities                                                    | ** ** | **(102,937**                    | **)**      | (43,639 | ) | (36,119 | ) |
|                                                                                      |       |                            | ** ** |   |   |   |   |
| **Cash flows from financing activities**                                                  |       |                            | ** ** |   |   |   |   |
| Proceeds  from debt                                                                       | ** ** | **553,938**                     | ** ** | 597,379 |   | 1,123,473 |   |
| Repayment  of debt                                                                        | ** ** | **(506,987**                    | **)**      | (619,903 | ) | (1,162,427 | ) |
| Increase  in deferred financing costs                                                     | ** ** | **(757**                        | **)**      | (8,041 | ) | (20,263 | ) |
| Net  cash provided by (used in) financing activities                                      | ** ** | **46,193**                      | ** ** | (30,566 | ) | (59,295 | ) |
|                                                                                      |       |                            | ** ** |   |   |   |   |
| Effect  of exchange rate changes                                                          | ** ** | **433**                         | ** ** | (53 | ) | (22 | ) |
| Net  increase (decrease) in cash                                                          | ** ** | **352**                         | ** ** | (42 | ) | (157 | ) |
|                                                                                      |       |                            | ** ** |   |   |   |   |
| Cash  at beginning of period                                                              | ** ** | **387**                         | ** ** | 429 |   | 586 |   |
| Cash  at end of period                                                                    | ** ** | **$**                           | **939**    | ** ** | $ | 387 |   | $ | 429 |   |
|                                                                                      |       |                            | ** ** |   |   |   |   |
| Supplemental  cash flow information:                                                      |       |                            | ** ** |   |   |   |   |
| Cash  paid for income taxes                                                               | ** ** | **$**                           | **665**    | ** ** | $ | 451 |   | $ | 573 |   |
| Cash  paid for interest                                                                   | ** ** | **$**                           | **84,903** | ** ** | $ | 74,608 |   | $ | 76,744 |   |
|                                                                                           |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*See accompanying notes.*

 

29

----

 

ScotsmanHoldings, Inc. and Subsidiaries

Notesto Consolidated Financial Statements

(Dollars inthousands, except per share amounts)

December 31,2004

 

**1.  Organization and Basis of Presentation**

 

Scotsman Holdings, Inc. (Holdings) was organized in November 1993 forthe purpose of acquiring Williams Scotsman Inc. (Scotsman).  The operations of Holdings and its subsidiary(collectively “the Company”), consist of the leasing and sale of mobileoffices, storage products, and their delivery and installation.  The Company’soperations include Scotsman’s 100% owned subsidiaries, Willscot Equipment, LLC(Willscot), Williams Scotsman of Canada, Inc., Williams Scotsman Mexico S.de R.L. de C.V., and Williams Scotsman Europe S.L. Willscot, a special purposesubsidiary, was formed in May 1997; its operations are limited to theleasing of its mobile office units to the Company under a master lease.  Additionally, Willscot has entered into amanagement agreement with the Company whereby it pays a fee to the Company inan amount equal to the rental and other income (net of depreciation expense) itearns from the Company.  Therefore,Willscot earns no net income.

 

The operations of theCompany consist primarily of the leasing and sale of mobile offices, modularbuildings and storage products (equipment) and their delivery and installationthroughout the United States, Canada, and certain parts of Mexico.

 

**2.  Summary of Significant Accounting Policies**

 

**(a)****                      Use ofEstimates**

 

The preparation of thefinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes.  Actual results coulddiffer from these estimates.

 

**(b)****                      Principlesof Consolidation**

 

The accompanyingconsolidated financial statements include the accounts of Holdings and Scotsman’s100% owned subsidiaries.  Significantintercompany accounts and transactions have been eliminated in consolidation.

 

## **(c)**                      Fair Value of Financial Instruments

## ** **

Because of theirshort-term nature, the amounts reported in the consolidated balance sheet forcash, receivables, the revolving credit facility and accounts payableapproximate fair value. The investment in Wiron is not readily marketable andit is not practicable to estimate its fair value. The fair value of long-termdebt is based on quoted market prices. As of December 31, 2004 and 2003, the fair market value and cost ofthe Company’s long-term debt, net were $933,689 and $928,178, and $907,356 and$907,238, respectively.  The Company doesnot have a significant amount of credit risk associated with the fair value ofits assets and liabilities.

 

**(d)****                      AccountsReceivable and Allowance for Doubtful Accounts**

 

TheCompany’s accounts receivable consist of amounts due from customers throughoutthe United States, Canada, and certain parts of Mexico.  Collateral isgenerally not required. The Company provides for the allowance for doubtfulaccounts receivable through a charge to operations in amounts equal to theestimated losses expected to be incurred in collection of the accounts. The estimated losses are based on historical collection experience, dayssales outstanding trends, and a review of specific past due receivables. Customer accounts are written-offagainst the allowance for doubtful accounts when an account is determined to beuncollectible.

 

**(e)****                      LeasingOperations**

 

Equipment is leasedgenerally under operating leases and, occasionally, under sales-type leasearrangements.  Operating lease termsgenerally range from 3 months to 60 months, and contractually averagedapproximately 13 months at December 31, 2004.  Rents billed in advance are initiallydeferred and recognized as revenue over the term of the operating leases.Rental equipment is depreciated by the straight-line method using an estimatedeconomic useful life generally of 10 to 20 years and an estimated residualvalue of typically 50%.

 

30

----

 

ScotsmanHoldings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Costs of improvements andbetterments are capitalized, whereas costs of replacement items, repairs andmaintenance are expensed as incurred. Costs incurred for equipment to meet particular lease specifications arecapitalized and depreciated over the lease term.  However, costs aggregating less than $1 perunit are generally expensed as incurred.

######  

**(f)****                        Propertyand Equipment**

 

Property and equipment isstated at cost. Depreciation is computed by the straight-line method overestimated useful lives ranging from 15 to 40 years for buildings andimprovements and 3 to 10 years for furniture and equipment.  Maintenance and repairs are charged toexpense as incurred.

 

**(g)****                     DeferredFinancing Costs**

 

Direct and incrementalcosts of obtaining debt are capitalized and amortized using the straight-linemethod, which approximates the effective interest rate method, over the term ofthe related debt.

 

**(h)****                     Goodwill**

 

Goodwill is initiallymeasured as the excess of the cost of an acquired business over the fair valueof the identifiable net assets acquired. The Company does not amortizegoodwill, but rather reviews its carrying value for impairment annually, andwhenever an impairment indicator is identified.

 

The goodwill impairment test involves a two-stepapproach. Under the first step, the Company determines the fair value of eachreporting unit to which goodwill has been assigned. The geographic componentunits of the Company for purposes of the impairment test have been aggregatedinto a single reporting unit because they have similar economiccharacteristics.  The Company comparesthe fair value of the reporting unit to its carrying value, including goodwill.The Company estimates the fair value of its reporting unit by utilizing market operatingdata multiples of similar publicly traded companies.  If the estimated fair value exceeds thecarrying value, no impairment loss is recognized. If the carrying value exceedsthe fair value, goodwill is considered potentially impaired and the second stepis completed in order to measure the impairment loss. Under the second step,the Company calculates the implied fair value of goodwill by deducting the fairvalue of all tangible and intangible net assets, including any unrecognized intangibleassets, of the reporting unit from the fair value of the reporting unit asdetermined in the first step. The Company then compares the implied fair valueof goodwill to the carrying value of goodwill. If the implied fair value ofgoodwill is less than the carrying value of goodwill, the Company recognizes animpairment loss equal to the difference.

 

31

----

Scotsman Holdings,Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

**(i)****                        OtherIntangible Assets**

 

Intangible assets consist principally of non-competeagreements and customer relationships acquired in business combinations.  These intangible assets are amortized usingthe straight-line method over their estimated useful lives ranging from 24months to 228 months.

 

**(j)****                        Impairmentof Long-Lived Assets**

 

Long-lived assets,including amortizable intangible assets, are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset or group of assets may not be fully recoverable.  These events or changes in circumstances mayinclude a significant deterioration of operating results, changes in businessplans, or changes in anticipated future cash flows.  If an impairment indicator is present, theCompany evaluates recoverability by a comparison of the carrying amount of theassets to future undiscounted net cash flows expected to be generated by the assets.  Assets are grouped at the lowest level forwhich there is identifiable cash flows that are largely independent of the cashflows generated by other asset groups. If the assets are impaired, the impairment recognized is measured by theamount by which the carrying amount exceeds the fair value of the assets.  Fair value is generally determined byestimates of discounted cash flows.  Thediscount rate used in any estimate of discounted cash flows would be the raterequired for a similar investment of like risk.

 

Assets to be disposed ofare reported at the lower of carrying value or fair values, less estimatedcosts of disposal.

 

**(k)****                    Stock-basedCompensation**

 

Prior to 2003, the Company accounted for stock optionsusing variable plan accounting and the intrinsic value method under AccountingPrinciples Board Opinion No. 25,  *Accounting for Stock Issued to Employees*(APB No. 25)and related interpretations.  Stock-basedemployee compensation expense for stock options of $5,313 was recorded in 2002as a result of a modification made for the continuation of certain employees’options after their termination of employment.

 

Effective January 1, 2003, the Company adoptedthe fair value recognition provisions of SFAS No. 123 (SFAS No. 123),*Accounting for Stock-Based Compensation*.The Company selected the modified prospective method of adoption described inSFAS No. 148, *Accounting forStock–Compensation-Transition and Disclosure* (SFAS No. 148).  Gross compensation cost recognized in 2004and 2003 of $736 and $766, respectively, is the same as that which would havebeen recognized had the fair value method of SFAS No. 123 been appliedfrom its original effective date.  Inaccordance with the modified prospective method of adoption, results for yearsprior to 2003 have not been restated.

 

 

32

----

 

Scotsman Holdings,Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Pro forma information required by SFAS No. 123has been determined as if the Company had accounted for its employee stockoptions under the fair value method during each year presented in the financialstatements.  The stock compensationexpense for each period presented was determined using a straight-linedattribution method over the vesting period.

 
| ** **                                        | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net  (loss) income, as reported                   |       | $                                | (3,411     | ) | $ | (11,682 | ) | $ | 15,198 |   |
| Add:  Stock compensation- net of tax, as reported |       | 447                              |       | 476 |   | 3,460 |   |
| Deduct:  Stock compensation- net of tax           |       | (447                             | )          | (476 | ) | (939 | ) |
| Pro  forma net (loss) income                      |       | $                                | (3,411     | ) | $ | (11,682 | ) | $ | 17,719 |   |
| (Loss)  earnings per share:                       |       |                             |       |   |   |   |   |
| As  Reported - basic                              |       | $                                | (0.55      | ) | $ | (1.89 | ) | $ | 2.45 |   |
| Pro  forma                                        |       | $                                | (0.55      | ) | $ | (1.89 | ) | $ | 2.86 |   |
|                                              |       |                             |       |   |   |   |   |   |   |   |
| As  Reported - fully diluted                      |       | $                                | (0.55      | ) | $ | (1.89 | ) | $ | 2.32 |   |
| Pro  forma                                        |       | $                                | (0.55      | ) | $ | (1.89 | ) | $ | 2.71 |   |

 

The weighted average fairvalue of options granted in 2004, 2003, and 2002 were $19.44, 20.77, and 21.76,respectively.   The following assumptionswere used to compute these fair values using the Cox Ross Rubinstein binomialmodel at each grant date in accordance with SFAS No. 148 adoptionstandards:

 
| ** **               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk-free  interest rate |       | 3.85     | %          | 2.97     | %          | 3.80     | %          |
| Expected  life in years  |       | 5.00     |       | 5.00     |       | 5.00     |       |
| Volatility               |       | 42.9     | %          | 45.2     | %          | 46.2     | %          |
| Dividend  yield          |       | 0        | %          | 0        | %          | 0        | %          |

 

During 2004 and 2003, amodification was made for the continuation of certain employees’ options aftertheir termination from the Company.  Theweighted average fair value of their modified options, risk free interest rateat the modification date, expected life and volatility (as estimated based upona historical average of comparable stock indices) was $30.16, 2.78%, 3.11years, and 39.9% for 2004 and $35.10, 2.06%, 3.81 years, and 45.3% for 2003,respectively.

 

**(l)****                        IncomeTaxes**

 

Deferred tax assets andliabilities are recognized for the estimated future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities aremeasured using enacted tax rates in effect for the year in which thosetemporary differences are expected to be recovered or settled.  The effect on deferred tax assets andliabilities of a change in tax rates is recognized in net income in the periodthat includes the enactment date.

 

**(m)****                  Advertisingcosts**

 

Advertising costs areexpensed as incurred.  Advertisingexpense for the years ended December 31, 2004, 2003, and 2002 was $4,345,$3,935, and $4,189, respectively, and is included in selling, general, andadministrative expenses in the consolidated statements of operations.

 

**(n)****                     EarningsPer Share**

 

###### The following table sets forth the components of the weighted-averageshares outstanding for the basic and diluted earnings per share computations:

 
| ** **                        | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|-----------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Weighted-average  shares-basic    |       | 6,194,799 |       | 6,194,799 |       | 6,195,184 |       |
|                              |       |      |       |      |       |      |       |
| Effect of  employee stock options |       | —    |       | —    |       | 347,776   |       |
|                              |       |      |       |      |       |      |       |
| Weighted-average  shares-diluted  |       | 6,194,799 |       | 6,194,799 |       | 6,542,960 |       |

 

 

Common stockequivalents of approximately 341,000 and 355,000 were excluded from theweighted average shares-diluted total for the years ended December 31, 2004 and2003, respectively, due to their anti-dilutive nature, which resulted from theCompany’s net loss for such periods.

 

**(o)****                      RevenueRecognition**

 

The Company earns revenuefrom leasing, sales of new and used rental equipment, and delivery andinstallation services.  Where applicable,the Company’s revenue recognition policy takes into consideration the guidanceof Emerging Issues Task Force (EITF) Issue No. 00-21, *Revenue Arrangements with Multiple Deliverables*.

 

Revenue from delivery andinstallation services associated with rental activities is generally recognizedupon their completion, as the Company has objective evidence of the fair valueof the remaining equipment leasing element of the arrangements. This evidenceconsists of rental rates associated with units leased without correspondingdelivery and installation services. Leasing revenue is recognized ratably over the lease term.  Billings in excess of earned revenue isrecorded as deferred revenue in the balance sheet caption, “rents billed inadvance.”

 

33

----

 

Scotsman Holdings,Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Revenue from the sale ofnew units and used rental equipment, including delivery and installationrevenue, is generally recognized at the time the units are installed.  Certain arrangements to sell units under long-termconstruction-type sales contracts are recognized under the percentage ofcompletion method.  Under this method, income is recognized in proportionto the incurred costs to date under the contract compared to estimated totalcosts.

 

Sales of new units aretypically covered by warranties provided by the manufacturer of productssold.  The Company provides a limited 30-daywarranty for certain sales of rental equipment. The Company’s warranty expense is estimated and accrued at the time ofsale.  Warranty expense was not materialfor the years ended December 31, 2004, 2003 and 2002.

 

**(p)****                      ForeignCurrency Translation**

 

The financial statementsof Scotsman’s foreign subsidiaries for which the local currency is thefunctional currency have been translated into U.S. dollars in accordance SFAS No. 52,*Foreign Currency Translation*.  Assets and liabilities have been translatedusing the exchange rate in effect at the balance sheet date.  Income statement amounts have been translatedusing the average exchange rates during the year.  Translation gains and losses resulting fromthe changes in exchange rates from year-to-year have been reported in othercomprehensive income.  The effect on theconsolidated statements of operations of all transaction gains and losses isinsignificant for all years presented.

 

**(q)****                      BusinessSegment**

 

The Company manages itsoperations on a geographic basis.  Financial results of geographic regionsare aggregated into one reportable segment since their operations have similareconomic characteristics. These characteristics include similar products andservices, processes for delivering these services, type or class of customer,and long-term average gross margins.

 

**(r)****                      RecentAccounting Pronouncements**

 

On December 16,2004, the Financial Accounting Standards Board (FASB) issued Statement ofFinancial Accounting Standard (SFAS) No. 123 (revised 2004), Share-BasedPayment (SFAS No. 123(R)), which is a revision of FASB Statement No. 123,*Accounting for Stock-Based Compensation*.Generally, the approach in SFAS No.  123 ( R ) is similar to the approachdescribed in SFAS No. 123, except that, among other things, it requires (1) thatthe fair value method be employed for measuring employee compensation fromstock options rather than the intrinsic value method allowed under SFAS No. 123,(2) that forfeitures be estimated upon the grant date of employee stockoptions, and (3) that any excess tax benefits on stock compensation berecognized as a financing activity rather than an operating activity within thestatement of cash flows.  As the Companycurrently applies the fair value method under SFAS No. 123, the Companydoes not anticipate that the adoption of SFAS No. 123 ( R) will have amaterial impact on its financial statements. The Company intends to elect the modified prospective method of adoptingthe provisions of SFAS No. 123( R ) during the third quarter of 2005.

 

**(s)****                      Reclassifications**

 

Certain prior yearamounts have been reclassified to conform to the current year presentation. Theeffect of these reclassifications is not material to the consolidated financialstatements.

 

**3.  Acquisitions**

 

**Minority Investment in WironConstrucciones Modulares, SA**

 

On July 28, 2004, the Company, through Scotsman’s 100% ownedsubsidiary, Williams Scotsman Europe, S.L., acquired an 8.5% minority interestin Wiron Construcciones Modulares, SA., (Wiron) headquartered in Parla, Spainand secured a right of first refusal to acquire any or all of the shares ofWiron in the future.  Wiron is the secondlargest modular space provider in Spain with branches located in all majorcities throughout the country. The Company acquired its 8.5% minority interestfor approximately $4.7 million, which includes acquisition related costs and isincluded in other assets in the consolidated balance sheet.  The Company accounts for this minorityinvestment using the cost method.

 

# **Purchase of California Classroom Units**

# ** **

On March 26, 2004, the Company acquired nearly 3,800 relocatable DSA classroom units located in the state of California from Transport International Pool, Inc. (d/b/a GE Modular Space) for approximately $43.5 million. The assets were acquired using available funds under the Company’s revolving credit facility.

 

34

 

Scotsman Holdings,Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

The acquisition includedthe purchase of units, equipment associated with these classroom units as wellas rights under all outstanding leases related to these classroom units andcertain other assets. The Company did not acquire employees, physicalfacilities, sales force, or other business related items. In addition, thecustomer base, which is primarily related to public and private educationalinstitutions in the State of California, is similar to, and in many casesduplicative of, the Company’s existing customer base. As a result, the Companyconsiders the purchase of these assets an asset purchase rather than anacquisition of a business.

 

**Acquisition of AFA Locations Inc.**

 

On May 29, 2003, theCompany acquired AFA Locations Inc. (AFA), a privately-held, Montreal,Canadian-based company that was involved in the leasing of mobile offices builtby the manufacturing operations of AFA’s consolidated entity.  The purchase of the leasing business resultedin the acquisition of approximately 300 units at a value of approximately $2.6million and the related customer base. The transaction was accounted for underthe purchase method of accounting with a net purchase price of approximately$3.2 million and $0.6 million of goodwill. The acquisition was financed with borrowings under the Company’s creditfacility.

 

**Acquisition of NorthgateIndustries Ltd.**

 

On July 31, 2002 the Company acquired the mobile office andstorage product fleet of Northgate Industries Ltd., an Edmonton, Alberta-basedCanadian company that was involved in the leasing of mobile offices toindustrial markets.  The transaction wasaccounted for under the purchase method of accounting with a net purchase priceof approximately $7.0 million being allocated to the identifiable net assetsacquired of approximately $6.6 million with the excess of $0.4 millionrepresenting goodwill.  The purchaseprice allocation was based upon estimates of the fair value of the net assetsacquired.  The acquisition, which addedover 500 units at a value of approximately $6.3 million, was financed withborrowings under the Company’s credit facility.

 

**4.   Property and Equipment**

 

Property and equipmentconsist of the following:

 
| ** **                     | ** ** | **December 31** | ** ** |
|--------------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2004**             | ** ** | **2003** | ** ** |
| Land                           | ** ** | **$**                | **19,286** |   | $ | 19,286 |   |
| Buildings  and improvements    | ** ** | **40,229**           |       | 33,231 |   |
| Furniture  and equipment       | ** ** | **74,371**           |       | 73,373 |   |
| ** **                     |       | **133,886**          |       | 125,890 |   |
| Less  accumulated depreciation | ** ** | **53,935**           |       | 45,140 |   |
| Net  property and equipment    | ** ** | **$**                | **79,951** |   | $ | 80,750 |   |

 

Depreciation expense, including that of capital leases, related toproperty and equipment was $9,112, $8,229, and $7,206 for the years ended December 31,2004, 2003, and 2002, respectively.

 

###### **5.  OtherIntangible Assets**

 

The following tablesummarizes the balances of other intangible assets:

 
| ** **              | ** ** | **December 31, 2004**  | ** ** | **December 31, 2003**    | ** ** |
|-------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Book  Value** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Book  Value** | ** ** |
| Amortizable:            |       |                        |       |                          |       |   |   |   |   |   |   |   |   |
| Non-compete  agreements |       | $                           | 4,505      |                          | $          | 2,988 |   | $ | 1,517 |   | $ | 3,514 |   | $ | 2,421 |   | $ | 1,093 |   |
| Customer  relationships |       | 2,000                       |       | 623                           |       | 1,377 |   | 2,000 |   | 518 |   | 1,482 |   |
|                    |       | $                           | 6,505      |                          | $          | 3,611 |   | $ | 2,894 |   | $ | 5,514 |   | $ | 2,939 |   | $ | 2,575 |   |

######  

35

----

 

Scotsman Holdings,Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Amortization expense was approximately $0.7 million in both 2004 and2003. Covenants not-to-compete and customer relationships are being amortizedon a straight-line basis over periods of 24 to 228 months. The weighted averageremaining life of these identified intangible assets is 86 months. Amortizationexpense relating to these identified intangibles for each of the next fiveyears is as follows:

 

| 2005       |   | $   | 741    | ** ** |
|------------|--------|-----|--------|------------|
| 2006       |   | 408 |   |
| 2007       |   | 330 |   |
| 2008       |   | 284 |   |
| 2009       |   | 167 |   |
| Thereafter |   | 964 |   |

 

**6.  Revolving Credit Facility and Long-Term Debt**

 

Debt consists of thefollowing:

 
| ** **                                                                                               | ** ** | **December 31** | ** **    |
|----------------------------------------------------------------------------------------------------------|------------|----------------------|---------------|
| ** **                                                                                               | ** ** | **2004**             | ** **    | **2003** | ** ** |
|                                                                                                     |       |                 |          |   |   |
| Borrowings  under revolving credit facility                                                              | ** ** | **$**                | **102,130**   |   | $ | 54,940 |   |
| Term  loan                                                                                               | ** ** | **206,307**          |          | 208,428 |   |
| 9.875%  senior notes, due June 2007 net of unamortized discount of $833 in 2004  and $1,189 in 2003 | ** ** | **549,167**          |          | 548,810 |   |
| 10.0%  senior secured notes due August 2008                                                         | ** ** | **150,000**          |          | 150,000 |   |
| Capital  lease obligations                                                                               | ** ** | **1,882**            |          | — |   |
| ** **                                                                                               |       | **$**                | **1,009,486** |   | $ | 962,178 |   |

 

In August 2003, theCompany issued $150.0 million aggregate principal amount of 10.0% seniorsecured notes due in 2008.  The Companyused 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 $117.9million of borrowings and terminate commitments under its revolving creditfacility.  In accordance with SFAS No. 145,*Rescission of FASB Statements No. 4, 44, and64, Amendment of FASB Statement No. 13, and Technical Correction*,$1.5 million (net of tax of approximately $1 million) in deferred financingcosts related to the extinguished debt was immediately amortized in 2003 andincluded in interest expense.  The impactof the debt extinguishment to earnings per share basic and earnings per sharediluted was $0.24 and $0.24, respectively for 2003.

 

The 10.0% senior securednotes are fully and unconditionally guaranteed on a senior secured second lienbasis by the following 100% owned subsidiaries of Scotsman: Space MasterInternational, Inc., Evergreen Mobile Company, Truck & TrailerSales, 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 asubordinated secured second lien basis. These 100% owned subsidiaries of Scotsman act as joint and severalguarantors of the senior secured notes. The 10.0% senior secured notes are due August 15, 2008 withinterest payable semi-annually on February 15 and August 15 of eachyear.  On August 15, 2006, the 10.0%senior secured notes will become redeemable at the option of the Company, at aredemption price of 105.0% of the principal amount thereof plus interest duringthe 12-month period beginning August 15, 2006 and 102.5% beginning August 15,2007.

 

The Company’s 9.875%senior notes are fully and unconditionally guaranteed on a senior unsecuredbasis by the following 100% owned subsidiaries of Scotsman, Space MasterInternational, Inc., Evergreen Mobile Company, Truck & TrailerSales, Inc. and Williams Scotsman of Canada, Inc.  Willscot has fully and unconditionallyguaranteed the 9.875% senior notes on a subordinated basis.  These 100% owned subsidiaries of Scotsman,act as joint and several guarantors of the 9.875% senior notes. The 9.875%senior notes are due June 1, 2007 with interest payable semi-annually on June 1and December 1 of each year.  The9.875% senior notes are currently redeemable at the option of the Company at aredemption price of 100% of the principal amount thereof plus accrued interest.

 

On March 26, 2002, the Company entered into itscredit facility, the net proceeds from which were used to refinance its thenexisting credit facility.  This creditagreement provided for a $460.0 million revolving credit facility, a $210.0million term loan, both maturing on December 31, 2006, and up to anadditional $30.0 million in term or revolver commitments. In accordance withSFAS No. 145, $1.0 million (net of tax of approximately $0.6 million) indeferred financing costs related to this refinancing was amortized immediatelyin 2002 and included in interest expense, resulting in an impact to earningsper share basic and earnings per share diluted of $0.14 and $0.16, respectively.  As of December 31, 2004 and 2003, thetotal revolving credit facility commitment was $300.0 million and $342.1million, respectively.

 

36

----

 

Scotsman Holdings,Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Interest on borrowings under the revolver is payableat a rate of either prime plus 1.75% or the Eurodollar rate plus 3.0%.  The weighted average interest rates of therevolver under the credit agreement were 5.55% and 4.50% at December 31,2004 and 2003, respectively.  Principalpayments due on the term loan are equal to 1% per year payable quarterlythrough September 30, 2006, with the balance due on December 31,2006.  Interest on the term loan ispayable at a rate of either prime plus 1.75% or the Eurodollar rate plus3.00%.  The weighted average interestrates of the term loan under the credit agreement were 5.18% and 4.24% at December 31,2004 and 2003, respectively.

 

Borrowings under thecredit facility are secured by a first priority lien on and security interestin the Company’s rental equipment, accounts receivable and property andequipment and other assets.  The creditagreement contains restrictions on the amount of dividends that Scotsman canpay to Holdings and requires compliance with certain financial covenantsincluding capital expenditures, interest coverage, and leverage and fleetutilization levels.  The Company iscurrently in compliance with all financial covenants.

 

The Company’s unused line of revolving credit at December 31, 2004and 2003 was $197.9 million and $287.1 million, respectively. Excess borrowingbase (collateral) availability calculated in accordance with the creditagreement was $187.2 million and $231.4 million at December 31, 2004 and2003, respectively; however, consolidated leverage ratio covenant restrictionsfurther limited the Company’s excess borrowing availability at December 31,2004 and 2003 to $65.1 million and $57.9 million, respectively.  In order to meet future cash requirements,the Company intends to use internally generated funds and to borrow under itscredit facility. The Company believes it will have sufficient liquidity underits revolving line of credit and from cash generated from operations to fundits operations for at least the next 12 months.

 

Letter of credit obligations at December 31, 2004 and 2003 wereapproximately $10,670 and $8,098, respectively.

 

Maturities of debt duringthe years subsequent to December 31, 2004 are $2,342 in 2005, $306,554 in2006, $549,424 in 2007, $150,276 in 2008, $198 in 2009, and $690 thereafter.

 

**7.   Income Taxes**

 

Deferred income taxes related to temporary differences between the taxbases of assets and liabilities and the respective amounts reported in thefinancial statements are summarized as follows:

 
| ** **                                                                     | ** ** | **December 31** | ** **  |
|--------------------------------------------------------------------------------|------------|----------------------|-------------|
| ** **                                                                     | ** ** | **2004**             | ** **  | **2003** | ** ** |
| Deferred  tax liabilities:                                                     | ** ** | ** **           | ** **  | ** ** | ** ** |
| Cost  basis in excess of tax basis of assets and accelerated tax depreciation: |       |                 |        |   |   |
| Rental  equipment                                                              | ** ** | **$**                | **267,761** | ** ** | $ | 256,329 |   |
| Property  and equipment                                                        | ** ** | **2,682**            | ** **  | 737 |   |
| Other                                                                          | ** ** | **1,081**            | ** **  | 977 |   |
| Total  deferred tax liabilities                                                | ** ** | **271,524**          | ** **  | 258,043 |   |
|                                                                           | ** ** | ** **           | ** **  |   |   |
| Deferred  tax assets:                                                          |       |                 | ** **  |   |   |
| Allowance  for doubtful accounts                                               | ** ** | **244**              | ** **  | 338 |   |
| Rents  billed in advance                                                       | ** ** | **8,608**            | ** **  | 7,296 |   |
| Stock  option compensation                                                     | ** ** | **4,566**            | ** **  | 4,206 |   |
| Deferred  compensation                                                         | ** ** | **453**              | ** **  | 521 |   |
| Net  operating loss carryovers                                                 | ** ** | **109,380**          | ** **  | 100,719 |   |
| Alternative  minimum tax credit carryovers                                     | ** ** | **1,760**            | ** **  | 1,759 |   |
| Other                                                                          | ** ** | **1,330**            | ** **  | 614 |   |
| ** **                                                                     |       | **126,341**          | ** **  | 115,453 |   |
| Less:  valuation allowance                                                     | ** ** | **(5,232**           | **)**       | (4,802 | ) |
| Total  deferred tax assets                                                     | ** ** | **121,109**          | ** **  | 110,651 |   |
| Net  deferred tax liabilities                                                  | ** ** | **$**                | **150,415** | ** ** | $ | 147,392 |   |

 

At December 31, 2004, the Company had net operating losscarryovers available for federal and foreign income tax purposes ofapproximately $275.0 million.  These netoperating loss carryovers expire at various dates from 2005 to 2024.

 

37

----

 

Scotsman Holdings,Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

During 2003, a valuation allowance of $3,400 related topre-recapitalization loss carryover limitations was reversed pursuant tochanges in published IRS guidance.  Netoperating loss carryovers in the amount of $774 and $371 expired in 2003 and2004, respectively. A valuation allowance of $5,232 was recorded based on thepotential expiration of additional net operating loss carryovers. Alternativeminimum tax credit carryovers of approximately $1,760 are available withoutexpiration limitations.

 

Income tax expense(benefit) consists of the following:

 
| ** **          | ** ** | **Year ended December 31** | ** ** |
|---------------------|------------|---------------------------------|------------|
| ** **          | ** ** | **2004**                        | ** ** | **2003** | ** ** | **2002** | ** ** |
| Current             |       |                            |       |   |   |   |   |
| Federal             | ** ** | **$**                           | **—** |   | $ | — |   | $ | — |   |
| State               | ** ** | **412**                         |       | 400 |   | 292 |   |
| Foreign             | ** ** | **150**                         |       | 109 |   | 86 |   |
| ** **          |       | **562**                         |       | 509 |   | 378 |   |
| Deferred            |       |                            |       |   |   |   |   |
| Federal             | ** ** | **562**                         |       | (8,178 | ) | 6,459 |   |
| State               | ** ** | **117**                         |       | (1,357 | ) | 1,078 |   |
| Foreign             | ** ** | **2,345**                       |       | 1,895 |   | 222 |   |
| ** **          |       | **3,024**                       |       | (7,640 | ) | 7,759 |   |
|                |       |                            |       |   |   |   |   |
| Total  income taxes | ** ** | **$**                           | **3,586**  |   | $ | (7,131 | ) | $ | 8,137 |   |

 

The provision for incometaxes is reconciled to the amount computed by applying the Federal statutorycorporate tax rate of 35% to income before income taxes as follows:

 
| ** **                                                                                     | ** ** | **Year ended December 31** | ** ** |
|------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                     | ** ** | **2004**                        | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                           |       |                            |       |   |   |   |   |
| Income  tax at statutory rate                                                                  | ** ** | **$**                           | **61**     |   | $ | (6,585 | ) | $ | 8,167 |   |
| State  income taxes, net of federal tax benefit                                                | ** ** | **344**                         |       | (654 | ) | 889 |   |
| Amortization  of intangible assets                                                             | ** ** | **—**                      |       | 47 |   | 70 |   |
| Change  in valuation allowance                                                                 | ** ** | **430**                         |       | — |   | — |   |
| Cumulative  change in deferred taxes from increase in estimated effective U.S. state tax  rate |       | **2,549**                       |       | — |   | — |   |
| Other  (including effect of foreign operations)                                                | ** ** | **202**                         |       | 61 |   | (989 | ) |
| ** **                                                                                     |       | **$**                           | **3,586**  |   | $ | (7,131 | ) | $ | 8,137 |   |

 

During 2004, the incometax expense increased by $2,549 related to a change in the estimate of thefuture effects of state income taxes on cumulative temporary differences,resulting from a change in the estimated income apportionment among states inwhich the Company does business.

 

The components of income(loss) from consolidated operations before income taxes is as follows:

 
| ** **     | ** ** | **Year ended December 31** | ** ** |
|----------------|------------|---------------------------------|------------|
| ** **     | ** ** | **2004**                        | ** ** | **2003** | ** ** | **2002** | ** ** |
|           |       |                            |       |   |   |   |   |
| United  States | ** ** | **$**                           | **(5,759** | **)** | $ | (23,700 | ) | $ | 19,470 |   |
| Foreign        | ** ** | **5,934**                       | ** ** | 4,887 |   | 3,865 |   |
| ** **     |       | **$**                           | **175**    | ** ** | $ | (18,813 | ) | $ | 23,335 |   |

 

38

----

 

Scotsman Holdings,Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

**8.  Commitments and Contingencies**

 

The Company is obligatedunder noncancelable leases of certain equipment, vehicles and parcels ofland.  At December 31, 2004approximate future minimum rental payments are as follows:

 
| ** **                           | ** ** | **Operating Leases** | ** ** | **Capital Leases** | ** ** |
|--------------------------------------|------------|----------------------|------------|--------------------|------------|
| 2005                                 |       | $                    | 9,640      |               | $          | 374 |   |
| 2006                                 |       | 6,846                |       | 374                |       |
| 2007                                 |       | 4,619                |       | 374                |       |
| 2008                                 |       | 2,789                |       | 374                |       |
| 2009                                 |       | 1,703                |       | 278                |       |
| Thereafter                           |       | 2,446                |       | 1,090              |       |
|                                 |       | $                    | 28,043     |               | 2,864      |   |
| Less  Amounts representing interest  |       | —               |       | (982               | )          |
| Total  minimum future lease payments |       | $                    | 28,043     |               | $          | 1,882 |   |

 

Rent expense was $12,869, in 2004, $13,155, in 2003, and $12,901, in2002.

 

The Company maintainsinsurance coverage for its operations and employees with appropriate aggregate,per occurrence and deductible limits as the Company reasonably determines isnecessary or prudent with current operations and historical experience.  The majority of these coverages have largedeductible amounts which allow for potential improved cash flow benefits basedon the Company’s loss control efforts. The current per incident deductibles are $125 for employee group healthinsurance and $500 for worker’s compensation, auto, and general liability,respectively.

 

The Company expenses the deductible portion of the individualclaims.  However, the Company generallydoes not know the full amount of its exposure to a deductible in connectionwith any particular claim during the fiscal period in which the claim isincurred and for which the Company must make an accrual for the deductibleexpense.  The Company makes theseaccruals based on a combination of the claims review by its staff and insurancecompanies, and, periodically, the accrual is reviewed and adjusted based on theCompany’s loss experience.  A high degreeof judgment is required in developing these estimates of amounts to be accrued,as well as in connection with the underlying assumptions.  In addition, the Company’s assumptions willchange as its loss experience is developed. All of these factors have the potential for significantly impacting theamounts the Company has previously reserved in respect of anticipateddeductible expenses, and the Company may be required in the future to increaseor decrease amounts previously accrued.

 

Currently, the Company isinvolved in various lawsuits and claims arising out of the normal course of itsbusiness. The nature of the Company’s business is such that disputesoccasionally arise with vendors, including suppliers and subcontractors, andcustomers over warranties, contract specifications and contract interpretationsamong other things. The Company assesses these matters on a case-by-case basisas they arise. Reserves are established, as required, based on the Company’sassessment of its exposure. As noted above, the Company has insurance policiesto cover general liability and workers compensation related claims. In theopinion of management, the ultimate amount of liability not covered byinsurance, if any, under pending litigation and claims will not have a materialadverse effect on the financial position or operating results of the Company.

 

In May 2002, theCompany brought action against a customer to recover approximately $0.2 millionallowed to the Company on a construction project.  In December 2002, this customercounterclaimed against the Company and filed claims against varioussubcontractors and suppliers to the project alleging breach of various warrantiesand negligence among other things. The customer has asserted that it is seekingto recover its direct losses related to this $2.6 million project as well asother damages.  The case is currently indiscovery.  The Company believes that itis reasonably possible that the customer will be awarded some damages from thedispute; however, the amount of such damages cannot be determined at thistime.  To the extent that the Company isultimately liable to the customer, the Company believes it has adequate insurancecoverage to apply to its portion of the claim. The Company, with its insurance carriers, continues to vigorously defenditself in this matter.

 

In January 2003, theCompany was awarded a contract to construct and renovate classrooms in anelementary school located in New Jersey. The Company contracted with varioussubcontractors for certain components of the project. During the course of theconstruction, the modular units were impacted by weather conditions, includingtorrential rains, from which the units were not properly protected by thesubcontractors performing the work. As a result, damage to the units resulted.In order to ensure that these damages would be repaired and completed inadvance of the school term, the Company promptly repaired the damage. As of 

 

39

----

 

Scotsman Holdings,Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

December 31, 2004,the Company expects to be reimbursed for damages totaling approximately $1.6million. These costs are included in prepaid expenses and other current assetsin the Company’s consolidated balance sheet. The Company and its legal counselhave determined that the subcontractors are responsible for the damages, andare currently seeking full recovery for costs incurred from the partiesinvolved. In addition, the Company has builders risk insurance to cover someportion of the claim. The Company is pursuing these claims vigorously andbelieves that it will recover the amount of its repair costs.

 

**9. 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 Sections401(a), 401(k), and 401(m) of the Internal Revenue Code of 1986 (theCode).  The 401(k) Plan coverssubstantially all employees and permits participants to contribute up to thedollar limit described in Section 402(g) of the Code ($13 in 2004).All amounts deferred under this salary reduction feature are fully vested. Inaccordance with the Economic Growth and Tax Relief Act of 2001, the Plan alsoallows employees over the age of 50 to contribute an additional $3 as a “catch-upcontribution.”

 

The 401(k) Plan has a “matching”contribution feature under which the Company may contribute a percentage of theamount deferred by each participant, excluding the “catch-up contribution.”  Such percentage, if any, is determined byCompany management at its discretion. The Plan also has a “profit sharing”feature, under which the Company may contribute, at its discretion, anadditional amount allocable to the accounts of active participants meeting theaforementioned eligibility requirements. Company contributions to the 401(k) Plan participant vest ratably duringthe first five years of a participant’s employment and 100% thereafter.Matching contributions by the Company to the 401(k) Plan were approximately$315 in 2004, $261 in 2003, and $668 in 2002. The Company temporarilyeliminated the 401(k) employer match in April 2003 as part of a costreduction initiative.  On January 1,2004, the Company reinstated the employer match program for 401(k)contributions.  No contributions havebeen made by the Company under the profit-sharing feature.

 

The Company has adopted aDeferred Compensation Plan for Executives which is meant to be an unfundeddeferred compensation plan maintained for a select group of management withinthe meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of theEmployee Retirement Income Security Act of 1974.  This plan allows key employees to defer aspecified amount of their compensation until termination or upon the occurrenceof other specified events.  All amountscredited to participants’ accounts are deemed invested in the investmentvehicles of the employee’s choice.  As ofDecember 31, 2004 and 2003, the total amount deferred under this plan,including earnings, was approximately $541 and $726, respectively.

 

Holdings has adopted stock option plans for certain key employees ofthe 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. Underthe 1997 Employee Stock Option Plan (the “1997 Plan”), up to 479,500 options topurchase Holdings’ outstanding common stock could be granted. The 1997 plan wassubsequently amended and restated in 1998 (the “Amended and Restated 1997Employee Stock Option Plan”). Prior to the 1997 Recapitalization, the Companyhad adopted the 1994 Employee Stock Option Plan (the “1994 plan”) for certainkey employees. All options outstanding under the 1994 plan became fully vestedin conjunction with the 1997 Recapitalization. The three stock option plans are referred to collectively as the “StockOption Plans.”

 

The options under the Stock Option Plans are granted with an exerciseprice equal to the estimated fair value of the shares as of the date ofgrant.  Fifty percent of the optionsgranted vest ratably over five years, and fifty percent vest based on theCompany meeting certain financial goals over the same five periods.  All options expire 10 years from the date ofgrant.  The options were granted with anexercise 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 theyears ended December 31 follows:  

 
| ** **                  | ** ** | **2004**      | ** ** | **2003**                               | ** ** | **2002**    | ** ** |
|-----------------------------|------------|---------------|------------|----------------------------------------|------------|-------------|------------|
| ** **                  | ** ** | **Options**   | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                        |       |          |       |                                   |       |        |       |   |   |   |   |   |   |
| Beginning  balance          | ** ** | **1,261,590** | ** ** | **$**                                  | **27.50**  |        | 1,118,990  |   | $ | 23.87 |   | 1,125,140 |   | $ | 23.87 |   |
| Granted                     | ** ** | **70,850**    | ** ** | **50.67**                              |       | 196,450     |       | 50.67 |   | 6,300 |   | 50.67 |   |
| Forfeited                   | ** ** | **(33,700**   | **)**      | **(48.61**                             | **)**      | (53,850     | )          | (36.64 | ) | (12,450 | ) | (37.60 | ) |
| Ending  balance             | ** ** | **1,298,740** | ** ** | **28.22**                              |       | 1,261,590   |       | 27.50 |   | 1,118,990 |   | 23.87 |   |
|                        |       |          |       |                                   |       |        |       |   |   |   |   |   |   |
| Exercisable  at end of year | ** ** | **999,954**   | ** ** | **21.83**                              |       | 979,963     |       | 21.18 |   | 986,500 |   | 20.69 |   |
|                             |            |               |            |                                        |            |             |            |  |  |  |  |  |  |  |  |  |

 

40

----

 

Scotsman Holdings,Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Exercise prices foroptions outstanding as of December 31, 2004 are detailed in the followingtable.

 
| **Exercise  Price** | ** ** | **Shares Outstanding at  December 31, 2004** | ** ** | **Shares Exercisable at  December 31, 2004** | ** ** | **Weighted Average  Remaining  Life** | ** ** |
|---------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------|------------|
| $                   | 4.59       |                                              |       | 72,000                                            |       |                                  | 72,000     |   |   | 0.2 years |   |
| $                   | 9.60       |                                              |       | 274,650                                           |       |                                  | 274,650    |   |   | 1.2 years |   |
| $                   | 18.39      |                                              |       | 266,490                                           |       |                                  | 266,490    |   |   | 2.2 years |   |
| $                   | 30.50      |                                              |       | 318,700                                           |       |                                  | 279,764    |   |   | 3.0 years |   |
| $                   | 50.67      |                                              |       | 366,900                                           |       |                                  | 107,050    |   |   | 4.8 years |   |

 

At December 31,2004, the Company had approximately 1,342,000 shares of common stock reservedfor the exercise of outstanding stock options and additional stock optionsauthorized for granting under existing stock option plans.

 

**10.****             Related PartyTransactions**

 

During 2004, 2003 and2002, Scotsman paid dividends to Holdings of approximately $86, $55, and $133, respectively,primarily to fund normal operating expenses.

 

**11.****             Assets Held for Sale**

 

In December 2003, the Company implemented a strategic initiativeto dispose of selected units in its rental fleet which the Company haddetermined no longer merit further investment. The Company planned to sell to one or more buyers approximately 2,900units.   In accordance with SFAS No. 144,*Accounting for the Impairment or Disposal of LongLived Assets*, the Company recorded a $19.4 million impairment chargein the fourth quarter of 2003 to reflect the write-down of these assets totheir estimated fair value (less costs to sell).  These units were removed from rentalequipment and reclassified separately in other assets in the consolidatedbalance sheet.  As of December 31,2004 and 2003, assets classified as held for sale related to the strategicinitiative were $39 and $394, respectively. The effect on the net loss for the year ended December 31, 2004 ofdisposing of these units was not material.

 

**12.****             Hurricane Damage andRecovery**

** **

During the third quarterof 2004, approximately 500 mobile office and storage units, the majority ofwhich were not on rent, with a book value of approximately $3.4 million weredestroyed as a result of several hurricanes experienced in the southeast regionof the United States.  In addition,approximately 200 units as well as certain other Company assets were damaged.The total costs related to these storms approximate $4.6 million.  As of December 31, 2004, the Company hasagreed to a preliminary settlement with its insurance companies ofapproximately $7.9 million to cover losses from these storms, of which $5.0million was received as of December 31, 2004.  During the fourth quarter of 2004, theCompany recorded in other revenues approximately $3.3 million, representing therealized gain from the involuntary conversion of these assets.

 

41

----

 

Scotsman Holdings, Inc.and Subsidiaries

Notes to Consolidated Financial Statements

 

**13.****             Prepaid Expenses andOther Current Assets and Accrued Expenses and Other Current Liabilities**

 

Prepaid expenses andother current assets consists of the following as of December 31:

 
| ** **                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
| Cost  in excess of billings on modular construction |       | $        | 8,132      |     | $          | 12,401 |   |
| Inventories                                         |       | 16,558   |       | 13,036   |       |
| Prepaid  expenses                                   |       | 13,640   |       | 8,878    |       |
| Prepaid  expenses and other current assets          |       | $        | 38,330     |     | $          | 34,315 |   |

 

Accrued expenses andother current liabilities consists of the following as of December 31:

 
| ** **                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
| Payroll  and employee benefits                      |       | $        | 9,273      |     | $          | 9,423 |   |
| Accrued  interest                                   |       | 12,341   |       | 11,454   |       |
| Billings  in excess of cost on modular construction |       | 4,188    |       | 574      |       |
| Other  liabilities                                  |       | 14,161   |       | 8,500    |       |
| Accrued  expenses and other current liabilities     |       | $        | 39,963     |     | $          | 29,951 |   |

 

**14.****             Subsequent Events**

 

On February 24, 2005, the Company acquired Mobile Space Inc., aChicago-based company that leased and sold mobile office units.  This purchase resulted in the acquisition ofapproximately 640 units and the related customer base. The transaction wasaccounted for under the purchase method of accounting with a purchase price of$4.8 million.  The acquisition wasfinanced with borrowings under the Company’s credit facility.

 

42

----

 

**Item 9.****                      Changesin and Disagreements with Accountants on Accounting and Financial Disclosure**

 

Not applicable.

 

**Item 9A.****              Controlsand Procedures**

 

(a)                                         Disclosurecontrols and procedures.

 

Our ChiefExecutive Officer and Chief Financial Officer have concluded, based on theirevaluation, as of the end of the period covered by this report, that ourdisclosure controls and procedures (as defined in the Securities Exchange Actof 1934 Rules 13a – 15(e) and 15d – 15(e)) are (1) effective to ensure thatinformation required to be disclosed by us in reports filed or submitted by usunder the Securities Exchange Act of 1934, as amended, is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms, and (2) designed to ensure that information required to be disclosedby us in such reports is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure.

 

(b)                                        Changesin internal control over financial reporting.

 

There has been nochange in the Company’s internal control over financial reporting (as definedin the Securities Exchange Act of 1934 Rules 13a-15(f) and 15d-15(f)) thatoccurred during the fourth fiscal quarter that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

It should be noted thatany system of controls, however well designed and operated, can provide onlyreasonable, and not absolute, assurance that the objectives of the system willbe met.  In addition, the design of anycontrol system is based in part upon certain assumptions about the likelihoodof future events.  Because of these andother inherent limitations of control systems, there is only reasonableassurance that our controls will succeed in achieving their stated goals underall potential future conditions.

 

# **Item 9B.  OtherInformation**

# ** **

**Option****Extension Amendment**

 

On March 25, 2005,the Scotsman Holding’s Board of Directors approved an Option ExtensionAmendment (the Amendment) related to the Scotsman Holdings, Inc. 1994Employee Stock Option Plan (the Plan). This Amendment extends the expiration date of options to purchase 58,200shares of common stock at an exercise price of $4.59 that are scheduled toexpire on March 30, 2005 to March 1, 2007.  Under the terms of the Amendment, if aneligible option remains outstanding after March 30, 2005, it canthereafter be exercised only on a single day which shall be the earlier of March 1,2007 or the date of certain other events such as death or disability of theoption holder or the occurrence of other events specified in theAmendment.  Eligible options affected bythe Amendment are options issued by Scotsman Holdings, Inc. 1994 EmployeeStock Option Plan which meets all of the following conditions: the option wasissued on March 31, 1995; the original term of the option was scheduled toexpire on March 30, 2005; and the option was outstanding but not yetexercised at the start of business on March 30, 2005. Named ExecutiveOfficers affected by the Amendment and options held affected by the Amendmentare as follows: Gerard E. Holthaus, 23,400 options; Joseph F. Donegan, 5,850options; William C. LeBuhn, 10,500 options and John B. Ross, 900 options.

 

43

----

 

**PART III**

 

**Item 10.****                                                    Directorsand Executive Officers of the Registrant**

 

**Directors and Officers**

 

# **Our directors and executive officers are as follows:**

 
| **Name**           | ** ** | **Age** | ** ** | **Position**                                                               |
|--------------------|------------|---------|------------|----------------------------------------------------------------------------|
| Gerard E. Holthaus |       | 55      |       | President and Chief  Executive Officer; Director and Chairman of the Board |
| James N. Alexander |       | 45      |       | Director                                                                   |
| Michael F. Finley  |       | 43      |       | Director                                                                   |
| Steven B. Gruber   |       | 47      |       | Director                                                                   |
| Brian Kwait        |       | 43      |       | Director                                                                   |
| James L. Singleton |       | 49      |       | Director                                                                   |
| Joseph F. Donegan  |       | 54      |       | Executive Vice  President - U.S. Field Operations                          |
| Robert C. Singer   |       | 49      |       | Senior Vice President  and Chief Financial Officer                         |
| William C. LeBuhn  |       | 42      |       | Senior Vice President  and Chief Administrative Officer                    |
| John B. Ross       |       | 56      |       | Vice President and  General Counsel                                        |

 

The directors are electedannually and serve until their successors are duly elected and qualified.  No member of our Board of Directors (the “Board”),who also serves as a member of the Board of Williams Scotsman Inc., receives any feefor attendance at Board meetings or meetings of the Committees of theBoard.  Outside directors are reimbursedfor their expenses for any meeting attended.

 

Executive officers of the Company are elected by theBoard 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 Presidentand Chief Executive Officer since April 1997. He has been with our companysince June 1994, and served as President and Chief Operating Officer from October 1995to April 1997 and was Executive Vice President and Chief Financial Officerprior to that. He has served as a director since June 1994. Before joiningour company, Mr. Holthaus served as Senior Vice President of MNC Financial,Inc. from April 1988 to June 1994. From 1971 to 1988, Mr. Holthauswas associated with the accounting firm of Ernst and Young LLP (Baltimore), wherehe served as a partner from 1982 to 1988. He also serves on the Board of Directors of The Baltimore LifeCompanies, a mutual life insurance company and FTI Consulting, Inc, a corporatefinance/restructuring, forensic and litigation consulting and economicconsulting business.

 

*James N.Alexande*r was elected as a director of the Board in May1997.  Mr. Alexander has been a ManagingPartner of Oak Hill Investment Management and its predecessors (see Item 12Security Ownership of Certain Beneficial Owners and Management) since June 2001,a Partner of Oak Hill Capital Management since February 1999, and a VicePresident of Keystone Inc. since August 1995.  Mr. Alexander serveson the Board of Directors of  230 ParkInvestors, L.L.C.  He previously worked at Goldman, Sachs & Co., wherehe was a Vice President in the fixed income division from August 1993 to July 1995.

 

*Michael F. Finley* was elected as a director of the Board in May1997. Mr. Finley has been a Managing Director of Cypress Group L.L.C.  (“Cypress”) since 1998 and has been a memberof Cypress since its formation in April 1994.  Mr. Finley is also a director ofCommunications & Power Industries, Inc., Affinia Group Inc., andCooper-Standard Automotive Inc. Prior to joining Cypress, he was a VicePresident in the Merchant Banking Group at Lehman Brothers Inc.

 

*Steven B. Gruber* was elected as adirector of the Board in February 2002. From February 1999 to present, Mr. Gruber has been a ManagingPartner of Oak Hill Capital Management, Inc., From March 1992 to presenthe has been a Managing Director of Oak Hill Partners, Inc.  From February 1994 to present, Mr.Gruber has also been an officer of Insurance Partners Advisors, L.P., aninvestment advisor to Insurance Partners, L.P. From October 1992 to present, he has been a Vice President ofKeystone, Inc.  Mr. Gruber is also adirector of American Skiing Company, Blackboard, Inc., Travel Centers ofAmerica, Inc. and several private companies, related to Keystone, Inc. and OakHill Capital Partners L.P.

 

*Brian Kwait* was elected as a director of the Board in September 1998and also served in that capacity from December 1993 through May 1997.   Mr. Kwait is a Member and Managing Principalof Odyssey Investment Partners, LLC since April 1997 and was a Principalof Odyssey Partners, LP from August 1989 to March 1997.

 

*James L. Singleton,*aformer director of the Company between May 1997 and April 2001, accepted aposition on the Board, effective February 28, 2005. Mr. Singleton iscurrently the Co - Chairman of Cypress and has been a founding member of thatcompany since April 1994. He has served on several boards and is currentlya director of WESCO International, ClubCorp, Danka Business Systems, and MeowMix.  Mr. Singleton will serve on theCompany’s compensation committee.

 

*Joseph F. Donegan*has been Executive Vice President of U.S. Field Operations since May 2001. Hewas Senior Vice President and Northern Division Manager of our company since September 1996and served as the Northeast Region Manager prior to that. Mr. Donegan’sresponsibilities include the implementation of corporate policies, attainmentof branch profitability, fleet utilization management and development ofpersonnel for the entire United States branch network. Mr. Donegan has 29 yearsof experience within the industry, and 20 years with Williams Scotsman.

 

 

44

----

 

*Robert C. Singer* has been SeniorVice President and Chief Financial Officer since February 28, 2005.  Prior to joining our Company, Mr. Singer hadbeen Senior Vice President and Chief Financial Officer of TESSCO TechnologiesInc. since 1999.  From 1983-1999, Mr.Singer held progressive executive financial positions with McCormick andCompany, Inc.

 

*William C. LeBuhn*has been Senior Vice President and Chief Administrative Officer since March 2002with responsibilities for Marketing, Human Resources, Legal and InformationSystems.  He formerly served as VicePresident - Marketing and Human Resources from July 1999 to March 2002,and was Vice President of Human Resources from January 1994 to July 1999.  Mr. LeBuhn’s primary responsibilities includethe strategic direction and coordination of multiple business units.  Prior to joining our company, Mr. LeBuhn wasHR Manager for Sherwin-Williams’ Eastern Division from 1992 to January 1994,Director of HR for Consolidated International Insurance Group, Inc. from 1988to 1992, and HR Officer for Meridian Bancorp from 1984 to 1988.

 

*John B.Ross* has been Vice President and General Counsel for theCompany since February 1995.  Priorto joining the Company, Mr. Ross was Corporate Counsel for MNC LeasingCorporation from 1983 to 1991 and Special Assets Counsel for MNC Financial,Inc. from 1991 to 1993.  Prior to joiningMNC Leasing Corporation and during the period from 1993 to 1995, he was engagedin the private practice of law in North Carolina and Maryland, respectively.

 

## **Audit Committee FinancialExpert**

 

The Audit Committee (the“Committee”), comprised of certain members of the Board, is designated tooversee the financial reporting process of the Board.  The Board has determined that Michael F.Finley, a member of the Committee, qualifies as an audit committee financialexpert as defined by SEC rules.  Mr.Finley is not an independent director.  Becausethe Company is not listed on an exchange, the Company has chosen to use thedefinition of “independence” for audit committee members as such term is usedby the New York Stock Exchange listing standards.

 

# **Code of Ethics and Form 10-K**

 

We have adopted a Code ofEthics that applies to our chief executive officer, chief financial officer(the principal financial and accounting officer), controller, and personsperforming similar functions.  Copies ofthe Code of Ethics, as well as our consolidated financial statements on Form10-K (which is filed with the Securities and Exchange Commission) are availablefree of charge by writing to John B. Ross, Vice President and General Counselat 8211 Town Center Drive, Baltimore, MD 21236.

 

**Item 11.**

 

**Executive Compensation**

 

The following table setsforth certain information concerning the compensation paid or accrued for thelast three completed fiscal years of our Chief Executive Officer and our fournext highly compensated executive officers (the “Named Executive Officers”)during 2004.

 
| ** **                                              | ** ** | **Annual Compensation (1)** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                              | ** ** | **Year**                    | ** ** | **Annual  Compensation  Salary ($)** | ** ** | **Bonus  (2) ($)** | ** ** | **Securities  Underlying  Options (#)** | ** ** | **All Other  Compensation  ($) (3)** | ** ** |
| Gerard  E. Holthaus                                     |       |                        |       |   |   |   |   |   |   |   |   |
| President and  Chief Executive Officer                  |       | 2004                        |       | $ | 496,884 |   | $ | 162,000 |   | — |   | $ | 6,108 |   |
|                                                    |       | 2003                        |       | 461,784 |   | — |   | 54,000 |   | 6,275 |   |
|                                                    |       | 2002                        |       | 452,692 |   | 116,250 |   | — |   | 9,183 |   |
|                                                    |       |                        |       |   |   |   |   |   |   |   |   |
| Joseph  F. Donegan                                      |       |                        |       |   |   |   |   |   |   |   |   |
| Executive Vice  President-U.S. Field Operations         |       | 2004                        |       | 331,675 |   | 58,500 |   | — |   | 2,165 |   |
|                                                    |       | 2003                        |       | 331,573 |   | — |   | 20,000 |   | 2,651 |   |
|                                                    |       | 2002                        |       | 321,490 |   | 37,500 |   | — |   | 4,885 |   |
|                                                    |       |                        |       |   |   |   |   |   |   |   |   |
| William  C. Lebuhn                                      |       |                        |       |   |   |   |   |   |   |   |   |
| Senior Vice  President and Chief Administrative Officer |       | 2004                        |       | 176,425 |   | 57,600 |   | — |   | 1,443 |   |
|                                                    |       | 2003                        |       | 165,178 |   | — |   | 13,000 |   | 1,363 |   |
|                                                    |       | 2002                        |       | 159,423 |   | 42,750 |   | — |   | 4,111 |   |
|                                                    |       |                        |       |   |   |   |   |   |   |   |   |
| Sonney  Taragin                                         |       |                        |       |   |   |   |   |   |   |   |   |
| Vice  President-Information Technology                  |       | 2004                        |       | 137,015 |   | 26,250 |   | 5,000 |   | 1,312 |   |
|                                                    |       | 2003                        |       | — |   | — |   | — |   | — |   |
|                                                    |       | 2002                        |       | — |   | — |   | — |   | — |   |
|                                                    |       |                        |       |   |   |   |   |   |   |   |   |
| John  B. Ross                                           |       |                        |       |   |   |   |   |   |   |   |   |
| Vice  President-General Counsel                         |       | 2004                        |       | 128,154 |   | 26,250 |   | 2,000 |   | 1,282 |   |
|                                                    |       | 2003                        |       | 118,518 |   | 18,900 |   | — |   | 1,020 |   |
|                                                    |       | 2002                        |       | 116,260 |   | 26,250 |   | — |   | 3,031 |   |
|                                                         |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |

 

45

----

 

**SummaryCompensation Table**

 
| ** **                                                | ** ** | **Annual Compensation (1)** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                | ** ** | **Year**                    | ** ** | **Annual  Compensation  Salary ($)** | ** ** | **Bonus  (2) ($)** | ** ** | **Securities  Underlying  Options (#)** | ** ** | **All Other  Compensation ($)  (3)** | ** ** |
|                                                      |       |                        |       |   |   |   |   |   |   |   |   |
| Joseph  J. Vecchiolla                                     |       |                        |       |   |   |   |   |   |   |   |   |
| Former Vice  President of                                 |       | 2004                        |       | 171,510 |   | 22,500 |   | 2,500 |   | 1,640 |   |
| Marketing and  Corporate Communications                   |       | 2003                        |       | 153,057 |   | — |   | 5,000 |   | 587 |   |
|                                                      |       | 2002                        |       | 91,119 |   | — |   | 5,000 |   | 760 |   |
|                                                      |       |                        |       |   |   |   |   |   |   |   |   |
| John  C. Cantlin                                          |       |                        |       |   |   |   |   |   |   |   |   |
| Former Senior  Vice President and Chief Financial Officer |       | 2004                        |       | 192,058 |   | — |   | — |   | 1,841 |   |
|                                                      |       | 2003                        |       | 298,584 |   | — |   | 20,000 |   | 606 |   |
|                                                      |       | 2002                        |       | — |   | — |   | — |   | — |   |

 

----

(1)          As permitted by rulesestablished by the Securities and Exchange Commission, no amounts are shownwith respect to certain perquisites where such amounts do not in the aggregateexceed the lesser of 10% of salary plus bonus or $50,000.

 

(2)          Effective February 2004,the Compensation Committee of the Board approved the 2004 Management IncentivePlan to be paid during the first quarter of 2005.  Annual bonuses are paid to key managementpersonnel pursuant to a formula tied to annual budgeted EBITDAperformance.  If the targeted performanceis achieved, a bonus is paid in an amount equal to a fixed dollar amount.  If performance exceeds targeted levels,bonuses may be paid at an accelerated rate based on a formula not to exceed 2.5times the fixed dollar amount.  Ifminimum targets are not achieved, no bonuses are paid.  Annual bonuses for Scotsman’s Chief ExecutiveOfficer, and all other Executive Officers, including the five highest paidexecutive officers, are reviewed and approved by the Compensation Committee.

 

(3)          Represents employermatch under the 401(k) plan, and for Mr. Holthaus, the amount includes adisability insurance premium of $4,058 in each of 2004, 2003 and 2002.

 

Joseph J. Vecchiolla

 

Joseph Vecchiolla served as VicePresident of Marketing and Corporate Communications with the Company from June 2002to October 2004.  Hisresponsibilities included brand management, business development, advertising,marketing and public relations. Prior to joining us, Mr. Vecchiolla founded thefull-service advertising agency Bradley Media Group.  On October 27, 2004, Mr. Vecchiolla accepted a vice president offield operations position within the Company’s mid-Atlantic region.

 

# **RobertC. Singer**

# ** **

Robert C. Singer’semployment as Chief Financial Officer commenced on February 28, 2005.  Under the terms of an employment agreement,effective March 25, 2005, Mr. Singer will receive a base compensation of$300,000, incentive bonus targets of $125,000, a signing bonus of $100,000 tobe paid in 2005, and grants of 30,000 stock options in 2005 at a grant price of$50.67.  The employment agreement alsoprovides him with twelve months base pay should his employment relationship endother than for death or for cause (as defined in the agreement).  In addition, Mr. Singer will be subject tovarious confidentiality, non-interference and non-solicitation restrictions.

 

Former Employees

 

John C. Cantlin

 

Mr. Cantlin wasemployed as the Chief Financial Officer of the Company until September 16,2004.  At the time that his employmentended, his base annual salary was $257,500. No post-employment agreements were negotiated between the Company andMr. Cantlin at the time of his resignation.

 

46

----

 

Sonney Taragin

 

Effective January 21, 2005, the Company hasentered into a Severance Agreement and General Release (the “Agreement”) withSonney Taragin, the Company’s former Vice President-Information Technology.  Under the terms of the Agreement, the Companyis required to pay Mr. Taragin, in addition to any amounts earned but not yetpaid to him, the equivalent of six (6) months of his base salary through October 31,2005, an automobile allowance through July 31, 2005 plus $26,250 as hismanagement incentive for the year ended December 31, 2004.  Mr. Taragin is entitled to medical coverageunder the Company’s medical plans until October 31, 2005. The Agreementalso provides for outplacement services equivalent to $6,000. Further, theAgreement contains a provision prohibiting Mr. Taragin from disclosing anyconfidential information of the Company.

 

**OptionGrants in Last Fiscal Year**

 

The following tablecontains information covering the number and value of stock options of Holdingsgranted to the Named Executive Officers during the last fiscal year ended December 31,2004.

 
| **Name**            | ** ** | **Number of  securities  underlying  options (1)** | ** ** | **Percent of total  options granted  to employees in  fiscal year** | ** ** | **Exercise price** | ** ** | **Expiration date** | ** **            | **Grant date  present value of  options (2)** | ** ** |
|---------------------|------------|----------------------------------------------------|------------|---------------------------------------------------------------------|------------|--------------------|------------|---------------------|-----------------------|-----------------------------------------------|------------|
| Gerard  E. Holthaus |       | —                                             |       | 0                                                                   | %          | $                  | —     |                | —                |                                          | $          | — |   |
|                |       |                                               |       |                                                                |       |               |       |                |                  |                                          |       |
| Joseph  F. Donegan  |       | —                                             |       | 0                                                                   | %          | —             |       | —              |                  | —                                        |       |
|                |       |                                               |       |                                                                |       |               |       |                |                  |                                          |       |
| William  C. Lebuhn  |       | —                                             |       | 0                                                                   | %          | —             |       | —              |                  | —                                        |       |
|                |       |                                               |       |                                                                |       |               |       |                |                  |                                          |       |
| Sonney  Taragin     |       | 5,000                                              |       | 7                                                                   | %          | $                  | 50.67      |                | January 1,  2014 |                                          | $          | 97,200 |   |
|                |       |                                               |       |                                                                |       |               |       |                |                  |                                          |       |
| John  B. Ross       |       | —                                             |       | 0                                                                   | %          | —             |       | —              |                  | —                                        |       |

 

----

(1)          Fifty percent of theoptions granted vest ratably over the next five years and fifty percent vestbased on the Company meeting certain financial goals over the same fiveperiods.  All options expire 10 yearsfrom the effective date of grant.

 

(2)          The grant date fairvalue of the options noted above was $18.98 and was calculated using the CoxRoss Rubinstein binomial model valuation method with the following assumptions:

 

•                  anexpected volatility of 43.3%

 

•                  arisk free rate of return of 3.07%

 

•                  adividend yield of 0%, and

 

•                  anexpected life of 5 years.

 

47

----

 

**AggregatedOption Exercises in Last Fiscal Year and**

**FiscalYear-End Option Values**

 

The following tablecontains information covering the number and value of unexercised stock optionsof Holdings held by the Named Executive Officers at the end of the fiscal year.

 
| **Name**            | ** ** | **Number of Securities  Underlying Unexercised  Options at  Fiscal Year End (1)  Exercisable/Unexercisable (2)** | ** ** | **Value of Unexercised  In-the-Money Options  At Fiscal Year End ($)  Exercisable/Unexercisable(3)** | ** **              |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|-------------------------|
|                |       |                                                                                                             |       |                                                                                                 |                    |
| Gerard  E. Holthaus |       | 286,313 / 62,178                                                                                                 |       |                                                                                                 | $10,192,494 /  $544,815 |   |   |
|                |       |                                                                                                             |       |                                                                                                 |                    |   |   |
| Joseph  F. Donegan  |       | 105,875 / 22,975                                                                                                 |       |                                                                                                 | 3,721,262 /  208,529    |   |   |
|                |       |                                                                                                             |       |                                                                                                 |                    |   |   |
| William  C. LeBuhn  |       | 95,950 / 16,050                                                                                                  |       |                                                                                                 | 3,545,112 /  157,428    |   |   |
|                |       |                                                                                                             |       |                                                                                                 |                    |   |   |
| Sonney  Taragin     |       | 500 / 4,500                                                                                                      |       |                                                                                                 | 2,925 / 26,325          |   |   |
|                |       |                                                                                                             |       |                                                                                                 |                    |   |   |
| John  B. Ross       |       | 66,000 / 4,900                                                                                                   |       |                                                                                                 | 2,862,215 /  71,022     |   |   |

 

----

(1)                                  Nooptions were exercised by the Named Executive Officers during fiscal 2004.

(2)                                  Foroptions granted under the 1997 Plan, 50% vest ratably over five years and 50%vest ratably based on the Company meeting certain financial targets over thesame five periods.  All other optionsbecame fully vested in conjunction with the 1997 Recapitalization.

(3)                                  Basedon the fair market stock value of $56.52 at December 31, 2004.

 

**Scotsman Holdings, Inc. 1994Employee Stock Option Plan**

 

In March 1995, astock option plan was adopted for certain of our key employees.  All options outstanding under the 1994 planbecame fully vested in conjunction with the 1997 Recapitalization.  The options are exercisable for a period of10 years from date of grant.

 

**Scotsman Holdings, Inc. Amendedand Restated 1997 Employee Stock Option Plan**

 

In December 1997, astock option plan was adopted for certain of our key employees, which wasamended and restated in December 1998. Under the 1997 plan, up to 479,500 options to purchase Holdings’ commonstock may be granted.

 

## **Scotsman Holdings, Inc.2003 Employee Stock Option Plan**

## ** **

In January 2003, astock option plan was adopted. Under the 2003 plan, up to 230,000 options topurchase Holdings’ common stock may be granted. Fifty percent of the options granted vest ratably over five years andfifty percent vest ratably based on the Company meeting certain financialtargets over the same five periods.  Alloptions expire 10 years from the date of grant.

 

In May 2004, January 2003,and December 2002, 70,850, 196,450, and 6,300 options, respectively, weregranted under the stock option plans at an offer price of $50.67 per share.

 

**401(k)/Defined Contribution Plan**

 

The 401(k) Plan, asdiscussed in greater detail in Note 9 to the Notes to the ConsolidatedFinancial Statements, has a “profit sharing” feature, under which we maycontribute, at our discretion, an additional amount which is allocated to theaccounts of active participants who have been employed for 12 consecutivemonths by the Company, who have completed 1,000 hours of service during thePlan Year and who are employed on the last day of the year, based on suchparticipants’ compensation for the year. The vesting schedule for these contributions is identical to thatfor matching contributions, as discussed in greater detail in Note 9 to theNotes to the Consolidated Financial Statements.

 

A participant’s401(k) Plan benefits generally are payable upon the participant’s death,disability, retirement, or other termination of employment.  Payments under the 401(k) Plan are madein a lump sum.

 

In 2004, we made matchingcontributions to the 401(k) Plan participants in an aggregate amount of$314,542.

 

For further discussion of our 401(k) definedcontribution plan, see Note 9 to the Notes to the Financial Statements.

 

48

----

 

**Deferred Compensation Plan forExecutives**

 

During 1997, we adopted adeferred compensation plan for executives (the “Plan”) which is meant to be anunfunded deferred compensation plan maintained for a select group of managementwithin the meaning of Sections 201(2), 301(a)(3) and 401 (a)(1) of the EmployeeRetirement Income Security Act of 1974. The Plan allows key employees to defer a specified amount of theircompensation until termination or upon the occurrence of other specifiedevents.  All amounts credited toparticipants’ accounts are deemed invested in the investment vehicles of theemployee’s choice.  As of December 31,2004, the total amount deferred under this Plan, including earnings, was$540,453.

 

**Compensation Committee Interlocksand Insider Participation**

 

During 2004, theCompensation Committee was comprised of two outside directors: David P.Spalding and Steven B. Gruber.  EffectiveFebruary 2005, Mr. Spalding resigned from the Board of Directors and theCompensation Committee.  James L.Singleton replaced Mr. Spalding on the Board and the Compensation Committee.

 

Steven B. Gruber has beendesignated to serve on our Board of Directors by Scotsman Partners, L.P., whichowns approximately 41% of our outstanding common stock.  Mr. Gruber is aManaging Partner of Oak Hill Capital Management, Inc., which is  theinvestment advisor to Oak Hill Capital Partners, L.P. and Oak Hill CapitalManagement Partners, L.P. (collectively, the”Oak Hill Partnerships”). Scotsman Partners, L.P. and the Oak Hill Partnerships are relatedparties.  Mr . Gruber also is the Chairman of the Board of Exl ServiceHoldings, Inc.  (“EXL”), which is majority-owned by the Oak HillPartnerships.  EXL provides consulting assistance to us in connection withour Sarbanes- Oxley compliance program.  In 2004,  we paid EXL $26,000in fees and expense reimbursements. Except for Mr. Gruber’s relationship withEXL, no member of the Committee has any interlocking or insider relationshipwith the Company which is required to be reported under the applicable rulesand regulations of the Securities and Exchange Commission.

 

49

----

 

**Item 12.****                                                    SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters**

 

The following table sets forth certain informationregarding the beneficial ownership of Holdings’ common stock as of December 31,2004 by (i) all persons owning of record or beneficially to the knowledge ofthe Company 5% or more of the issued and outstanding Holdings common stock,(ii) each director individually, (iii) each executive officer named in theSummary Compensation Table, and (iv) all executive officers and directors as agroup.

 
| **Name**                                                           | ** ** | **Shares of  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) (12)                                         |       | —                      |       | —         |       |
| Gerard  E. Holthaus (9)(10)(11)                                    |       | 324,413                     |       | 5.01           |       |
| Joseph  F. Donegan (9)(10)(11)                                     |       | 109,475                     |       | 1.74           |       |
| William  C. LeBuhn (9)(10)(11)                                     |       | 98,950                      |       | 1.57           |       |
| John  B. Ross (9)(10)(11)                                          |       | 67,500                      |       | 1.08           |       |
| Sonney  Taragin (9)(10)(11)                                        |       | 500                         |       | .01            |       |
|                                                               |       |                        |       |           |       |
| All  executive officers and directors as a group (11) (13 persons) |       | 602,888                     |       | 8.93           |       |

 

50

----

 

----

(1)                                  CypressMerchant Banking Partners L.P. and Cypress Offshore Partners L.P. arecontrolled by The Cypress Group L.L.C. or affiliates thereof.  Certain executives of The Cypress GroupL.L.C., including Messrs. Jeffrey Hughes, James Singleton, David Spalding andJames Stern, may be deemed to share beneficial ownership of the shares shown asbeneficially owned by Cypress Merchant Banking Partners L.P. and CypressOffshore Partners L.P.  Each of suchindividuals disclaims beneficial ownership of such shares.

 

(2)                                  Doesnot include shares beneficially owned by members of management, as to which theInvestor Group (as defined herein) has an irrevocable proxy.

 

(3)                                  Underthe Investor Stockholders Agreement (as defined herein), the CypressStockholders (as defined herein), Scotsman Partners, L.P., and OdysseyInvestment Group (as defined herein) have agreed to vote their shares forcertain nominees for director and other matters and the Cypress Stockholders,Scotsman Partners, L.P., and Odyssey Investment Group have agreed to restrictthe transfer of their shares subject to certain exceptions.  See “Certain Relationships and RelatedTransactions—Investor Stockholders Agreement.”

 

(4)                                  Theshares of Holdings Common Stock beneficially owned by Scotsman Partners, L.P.may be deemed to be owned by J. Taylor Crandall and Group 31, Inc. (“Group 31”).  Mr. Crandall is the sole stockholder of Group31, which is the general partner of Scotsman Partners, L.P.  Group 31 disclaims such beneficialownership.  The address of Mr. Crandalland Group 31 is the same as Scotsman Partners. Mr. Crandall is a Managing Partner of Oak Hill Capital Management, Inc.

 

(5)                                  Includes1,461 shares that are beneficially owned by Odyssey Coinvestors, LLC, anaffiliate of Odyssey Investment Partners, LLC (together, “Odyssey InvestorGroup”).  The General Partner of OdysseyInvestment Partners Fund, LP is Odyssey Capital Partners, LLC a Delawarelimited liability company (the “General Partner of Odyssey”) and the ManagingMember of Odyssey Coinvestors, LLC is Odyssey Investment Partners, LLC, a Delawarelimited liability company.  Paul D.Barnett, Stephen Berger, William Hopkins, Brian Kwait and Muzzi Mirza areManaging Members of Odyssey Capital Partners, LLC and Odyssey InvestmentPartners, LLC, and, therefore, may each be deemed to share voting andinvestment power with respect to 716,536 shares and votes deemed to be owned bythe General Partner of Odyssey and Odyssey Investment Partners, LLC.  Each Messrs. Barnett, Berger, Hopkins, Kwaitand Mirza disclaims beneficial ownership of such shares.

 

(6)                                  Suchperson’s address is c/o Scotsman Partners, L.P.

 

(7)                                  Suchperson’s address is c/o Cypress Merchant Banking Partners L.P.

 

(8)                                  Suchperson’s address is c/o Odyssey Investment Partners Fund, LP.

 

51

----

 

(9)           Suchperson’s address is c/o the address of the Company’s principal executiveoffices.

 

(10)         Eachmember of management is a party to the Stockholders’ Agreement whereby he orshe has agreed to limit the transferability of his or her shares.  See “Certain Relationships and RelatedTransactions—Stockholders’ Agreement.”

 

(11)         Includes286,313, 105,875, 95,950, 66,000, and 500 shares held as options by Messrs. Holthaus,Donegan, LeBuhn, Ross, and Taragin, respectively.  All executive officers as a group includes556,688 shares held as options.

 

(12)         JamesL. Singleton replaced David P. Spalding on the Company’s Board of Directors in February 2005.

 

**EquityCompensation Plan Information**

 

The following table sets forth information regarding outstanding optionsas of December 31, 2004.

 
| **Plan  Category**                                          | ** ** | **Number of Shares to  be Issued Upon  Exercise of  Outstanding Options** | ** ** | **Weighted  Average Exercise  Price of  Outstanding  Options** | ** ** | **Number of  Shares  Remaining  Available for  Future Issuance  under equity  compensation  plans (excluding  stock options) (3)** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by stockholders (1)     |       | 613,140                                                                   |       | $                                                              | 12.83      |                                                                                                                               | —     |   |
|                                                        |       |                                                                      |       |                                                           |       |                                                                                                                               |       |
| Equity  compensation plans not approved by stockholders (2) |       | 386,814                                                                   |       | 36.08                                                          |       | —                                                                                                                             |       |
|                                                             |            |                                                                           |            |                                                                |            |                                                                                                                                    |            |  |

 

----

(1)   Consistsof the Holdings’ 1994 Employee Stock Option Plan.  See Note 9 to the Notes to the ConsolidatedFinancial Statements for further discussion of the material terms of this plan.

 

(2)   Consistsof two plans: Holdings’ 1997 Employee Stock Option Plan and 2003 Employee StockOption Plan.  See Note 9 to the Notes tothe Consolidated Financial Statements for further discussion of the materialterms of these plans.

 

(3)   TheCompany has no other equity compensation plans that are required to bedisclosed in this column.

 

52

----

 

**Item 13.****         CertainRelationships and Related Transactions**

 

**Stockholders’ Agreement**

 

Cypress Merchant BankingPartners, L.P., Cypress Offshore Partners, L.P., Scotsman Partners, L.P.(collectively the “Investor Group”), the management stockholders and Holdingsare parties to a Management Stockholders’ and Optionholders’ Agreement dated asof September 14, 1998 (the “Stockholders’ Agreement”), which containscertain rights and restrictions with respect to the transfer of each managementstockholder’s shares of Common Stock. The Stockholders’ Agreement prohibits the transfer of any shares ofCommon Stock by management stockholders (other than sales required inconnection with the disposition of all shares of Common Stock owned by the InvestorGroup and its affiliates) until the earlier of twelve months after an initialpublic offering (“IPO”) of the equity of Holdings for designated officers (andsixty days after an initial public offering for non-designated officers) or theday 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, andthereafter, the aggregate number of shares which may be transferred by eachManagement Stockholder in any calendar year (other than certain required sales)may not exceed 25% of the number of shares acquired pursuant to theSubscription Agreement between Holdings and such management stockholder plusthe number of any shares acquired pursuant to the exercise of stock purchaseoptions.  In addition, the Stockholders’Agreement restricts the transfer of shares of Common Stock by each managementstockholder for a period of five years from the date of purchase of suchshares, except certain permitted transfers and transfers pursuant to aneffective registration statement or in accordance with Rule 144 under theSecurities Act.  Upon the expiration ofsuch five-year period, subject to the foregoing restrictions, each managementstockholder may transfer his shares after giving to the Investor Group andHoldings, a right of first refusal to purchase such shares.

 

Each managementstockholder has the right (and in limited circumstances the obligation) to sellhis shares in connection with certain dispositions of shares by the InvestorGroup and the right to cause his shares to be included in certain registrationsof Common Stock on behalf of the Investor Group.  In addition, upon termination of anymanagement stockholder’s employment, Holdings may elect to require such managementstockholder 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 “CypressStockholders”) and Scotsman Partners, L.P. (together with the CypressStockholders and, including their permitted transferees, the “InvestorStockholders”) 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 amendedon September 1, 1998 (the “Investor Stockholders Agreement”).

 

Under the terms of theInvestor Stockholders Agreement, unless otherwise agreed to by the InvestorStockholders, the board of directors of Holdings (the “Holdings Board ofDirectors”) will consist of nine directors: three persons nominated by theCypress Stockholders, three persons nominated by Scotsman Partners, one personnominated by Odyssey Investment Group, the Chairman of the Holdings Board ofDirectors and the President of Holdings, respectively. Each of CypressStockholders, Scotsman Partners and Odyssey Investment Group is entitled toremove and replace any or all of their respective designees on the HoldingsBoard of Directors and each is entitled to remove the director or directors whoare the Chairman of the Holdings Board of Directors and the President ofHoldings in accordance with the provisions of the Investor Stockholders Agreement.  If the Holdings Common Stock held by eitherthe Cypress Stockholders or Scotsman Partners is reduced to an amount less than20% of the outstanding Holdings Common Stock, but 5% or more of the outstandingHoldings Common Stock, the Cypress Stockholders or Scotsman Partners, as thecase may be, will be entitled to designate only one director.  Each of the Cypress Stockholders or ScotsmanPartners will lose the right to designate any directors when the Cypress Stockholdersor Scotsman Partners, as the case may be, no longer holds at least 5% of theoutstanding Holdings Common Stock.  Fromand after the date that Odyssey Investment Group owns less than 5% of theoutstanding Holdings Common Stock, it will no longer be entitled to designateany director for election or removal.  Ifany of Cypress Stockholders, Scotsman Partners and Odyssey Investment Group isentitled to designate a lesser number of directors pursuant to the InvestorStockholders Agreement, then they will vote their shares to cause the number ofthe entire Holdings Board of Directors to be reduced by the number of directorsthey are no longer entitled to designate.

 

Under the InvestorStockholders Agreement, until such time as either the Cypress Stockholders orthe Scotsman Partners is no longer entitled to designate three directors,without the approval of a majority of the directors designated by each of theCypress Stockholders and Scotsman Partners, respectively, Holdings will nottake certain actions (including mergers, consolidations, sales of all orsubstantially all assets, electing or removing the Chairman or President ofHoldings, issuing securities, incurring certain indebtedness, making certainacquisitions, approving operating and capital budgets and other majortransactions).

 

53

----

 

Under the InvestorStockholders Agreement, prior to the consummation of an initial public offeringof Holdings Common Stock, each Stockholder will have the right to acquireshares of Holdings Common Stock in connection with certain new issuances ofHoldings Common Stock, on the same terms and conditions, for the amountnecessary to allow the participating Stockholder to maintain its percentageholding of the outstanding Holdings Common Stock.

 

The Investor StockholdersAgreement contains provisions limiting the ability of Stockholders to transfertheir shares in certain circumstances. Among other provisions, the Investor Stockholders Agreement includes (i) rightsof first offer in favor of the Investor Stockholders with respect to proposedtransfers of shares to a third party and (ii) tag-along rights in favor ofeach Stockholder pursuant to which a selling Stockholder would be required topermit the other Stockholders to participate on a proportional basis in atransfer of shares to a third party. Also, if one or more Stockholders holding at least 60% of theoutstanding Holdings Common Stock determine to sell shares to a third party, incertain circumstances such Stockholders have the right to require the otherStockholders to sell their shares to such third party.

 

Under the InvestorStockholders Agreement, the Stockholders have the right to require the Companyto register their shares of Holdings Common Stock under the Securities Act incertain circumstances, including upon a demand of certain of the Stockholders.

 

The Investor StockholdersAgreement (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 anIPO.

 

Certain Employment Arrangements

 

Mr. John T. Moore, Jr., is employed asManager of Field Reporting for the Company and is the son-in-law of the Company’sPresident and Chief Executive Officer. For 2004, Mr. Moore received salary and bonus totaling $80,573 andother employment benefits, including 401(k) contributions by the Company.  His salary and benefits were consistent withthose provided to other employees of the Company holding comparable positions.

 

Other

 

For a discussion of other related party transactions,see Item 11, Compensation Committee Interlocks and Insider Participation.

 

**Item 14.**** Principal Accounting Fees andServices**

 

###### Audit Fees

######  

The aggregate audit fees billed for professional services rendered byErnst & Young LLP, the Company’s independent registered publicaccounting firm, for the audit of the Company’s annual financial statements andfinancial statements included in the Company’s Quarterly Reports on Form 10-Qfor the years ended December 31, 2004 and 2003 were approximately $231,000and approximately $298,000, respectively.

 

Audit Related Fees

 

The aggregate audit related fees billed for professional servicesrendered by Ernst & Young LLP for the year ended December 31,2004 were approximately $314,000 for due diligence services related to theWiron minority interest acquisition and the California fleet purchase, and forthe audit of the Company’s 401K plan. For the year ended December 31,2003, the aggregate audit related fees were $11,000 for the audit of theCompany’s 401K plan.

 

Tax Fees

 

The aggregate fees billed for all tax services rendered by Ernst &Young LLP for the years ended December 31, 2004 and 2003 wereapproximately $17,000, and $92,000, respectively.  Tax services principallyinclude tax compliance, tax advice and planning (including foreign taxservices, as well as tax planning strategies for the preservation of netoperating loss carryforwards).

 

All Other Fees

 

None.

 

Pre-ApprovalPolicies and Procedures

 

The Audit Committee has adopted the followingguidelines regarding the engagement of the Company’s independent auditor toperform services for the Company.  Foraudit services (including audits of the Company’s employee benefit plan), theindependent auditor will provide the Audit Committee with an engagement lettereach year prior to commencement of the audit services outlining the scope ofthe audit services proposed to be performed during the fiscal year.  If the terms of the engagement letter areagreed to by the Audit Committee, the engagement letter will be formallyaccepted.  Non-audit services willrequire pre-approval from the Audit Committee.

 

54

----

 

**PART IV**

 

**Item 15.****                               Exhibitsand Financial Statement Schedules.**

 

(a)                                  FinancialStatements and Financial Statement Schedule (2).  See Index to Financial Statements andSupplemental Schedules at Item 8 of this Annual Report on Form 10-K.

 

(b)                                 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                     |  — | 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)).                                                                                    |
|                    |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.3                     |  — | 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)). |
|                    |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.4                     |  — | 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)).                                                                                                |
|                    |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.5                     |  — | 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)).                                                                                                                                                                  |
|                    |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.6                     |  — | 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)).                                                                                                                                                                                                                                                                    |
|                         |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |

 

55

----

 
| 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 for the year ended December 31, 2003)                                                                                                                                                                                                                                       |

 

56

----

 
| 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 for the  year ended December 31, 2003)                                                                                                                                                                                        |
|--------|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |         |                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.14  |  — | Severance Agreement and  General Release for Sonney Taragin dated January 21, 2005 (incorporated by  reference to Exhibit 10.14 of Williams Scotsman, Inc.’s annual report on Form  10-K for the year ended December 31, 2004)                                                                                                                                                                       |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.15  |  — | Employment Agreement  for Robert C. Singer dated March 25, 2005 (incorporated by reference to  Exhibit 10.15 of Williams Scotsman, Inc.’s annual report on Form 10-K for the  year ended December 31, 2004)                                                                                                                                                                                          |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.16  |  — | Form agreement of Stock  Option Plan Grant (incorporated by reference to Exhibit 10.16 of Williams  Scotsman, Inc.’s annual report on Form 10-K for the year ended December 31,  2004)                                                                                                                                                                                                               |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.17  |  — | Fourth Amendment dated  as of September 24, 2004, among Scotsman Holdings In., 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 10.2 of the Company’s quarterly report on Form 10-Q  for the three and nine months ended September 30, 2004) |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                                      |
| 21.1   |  — | Subsidiaries of  Registrant: Willscot Equipment, LLC, Space Master International, Inc.,  Evergreen Mobile Company, Truck & Trailer Sales, Inc. and  Williams Scotsman of Canada, Inc., Williams Scotsman Mexico S. de R.L.  de C.V., and Williams Scotsman Europe, S.L.                                                                                                           |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                                      |
| 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 Robert C. Singer,  Chief Financial Officer of the Company.                                                                                                                                                                                                                                                              |

 

57

----

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
| ** **                  | **SCOTSMAN HOLDINGS, INC.** |
|-----------------------------|-----------------------------|
| ** **                  | By:                         |  /s/ Gerard E. Holthaus |   |
|                        | Gerard E. Holthaus          |
|                        | Chief Executive Officer     |
|                        |                        |
|                        |                        |
| Dated: March 30,  2005 |                        |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

 
| **Name**               | ** ** | **Capacity**                     | ** **                  | **Date** |
|------------------------|------------|----------------------------------|-----------------------------|----------|
|                   |       |                             |                        |     |
| /s/ Gerard E. Holthaus |       |                             | Chairman, President,  Chief |     | March 30, 2005 |
| Gerard E. Holthaus     |       | Executive Officer, and  Director |                        |     |
|                   |       | (principal executive  officer)   |                        |     |
|                   |       |                             |                        |     |
| /s/ Robert C. Singer   |       |                             | Senior Vice President,  and |     | March 30, 2005 |
| Robert C. Singer       |       | Chief Financial Officer          |                        |     |
|                   |       | (principal financial  and        |                        |     |
|                   |       | accounting officer)              |                        |     |
|                   |       |                             |                        |     |
| /s/ James N. Alexander |       |                             | Director                    |     | March 30, 2005 |
| James N. Alexander     |       |                             |                        |     |
|                   |       |                             |                        |     |
| /s/ Michael F. Finley  |       |                             | Director                    |     | March 30, 2005 |
| Michael F. Finley      |       |                             |                        |     |
|                   |       |                             |                        |     |
| /s/ Steven B. Gruber   |       |                             | Director                    |     | March 30, 2005 |
| Steven B. Gruber       |       |                             |                        |     |
|                   |       |                             |                        |     |
| /s/ Brian Kwait        |       |                             | Director                    |     | March 30, 2005 |
| Brian Kwait            |       |                             |                        |     |
|                   |       |                             |                        |     |
| /s/ James L. Singleton |       |                             | Director                    |     | March 30, 2005 |
| James L. Singleton     |       |                             |                        |     |
|                        |            |                                  |                             |          |  |  |  |  |  |  |

 

58

----

 

SCOTSMAN HOLDINGS,INC. AND SUBSIDIARIES

 

Schedule I - CondensedFinancial Information of Registrant

 
| ** **                                          | ** ** | **December 31,**   | ** ** |
|-----------------------------------------------------|------------|--------------------|------------|
| **Condensed  Balance Sheets**                       | ** ** | **2004**           | ** ** | **2003** | ** ** |
| ** **                                          | ** ** | **(in thousands)** | ** ** |
| Assets                                              |       |               |       |   |   |
| Cash                                                |       | $                  | 4          |   | $ | — |   |
| Investment in  subsidiary                           |       | (8,041             | )          | (4,591 | ) |
| Deferred income  taxes                              |       | 5,536              |       | 5,512 |   |
|                                                |       | $                  | (2,501     | ) | $ | 921 |   |
|                                                |       |               |       |   |   |
| Liabilities and Stockholders’ (Deficit) Equity |       |               |       |   |   |
|                                                |       |               |       |   |   |
| Accrued expenses                                    |       | $                  | 2          |   | $ | 13 |   |
|                                                |       |               |       |   |   |
| Stockholders’  deficit:                        |       |               |       |   |   |
| Common stock                                        |       | 95                 |       | 95 |   |
| Additional  paid-in capital                         |       | 229,101            |       | 229,101 |   |
| Retained  earnings                                  |       | 64,239             |       | 67,650 |   |
|                                                |       | 293,435            |       | 296,846 |   |
| Treasury stock                                      |       | (295,938           | )          | (295,938 | ) |
|                                                |       | (2,503             | )          | 908 |   |
|                                                |       | $                  | (2,501     | ) | $ | 921 |   |

 
| ** **                                                           | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------|------------|
| **Condensed  Statements of Operations**                              | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                           | ** ** | ** **                  | ** ** | **(In thousands)** | ** ** | ** ** | ** ** |
| Revenue                                                              |       | $                           | —     |   | — |   | $ | — |   |
|                                                                 |       |                        |       |   |   |   |   |
| Selling, general  and administrative expenses                        |       | 71                          |       | 56 |   | 57 |   |
| Interest                                                             |       | —                      |       | — |   | — |   |
|                                                                 |       | 71                          |       | 56 |   | 57 |   |
|                                                                 |       |                        |       |   |   |   |   |
| Loss before  income taxes                                            |       | (71                         | )          | (56 | ) | (57 | ) |
| Income tax  benefit                                                  |       | 25                          |       | 20 |   | 20 |   |
|                                                                 |       |                        |       |   |   |   |   |
| Loss before  equity in earnings of subsidiary and extraordinary item |       | (46                         | )          | (36 | ) | (37 | ) |
|                                                                 |       |                        |       |   |   |   |   |
| Equity in (loss)  earnings of subsidiary                             |       | (3,365                      | )          | (11,646 | ) | 15,235 |   |
| Net (loss)  income                                                   |       | $                           | (3,411     | ) | $ | (11,682 | ) | $ | 15,198 |   |
|                                                                      |            |                             |            |  |  |  |  |  |  |  |

 

59

----

 

SCOTSMAN HOLDINGS, INC.AND SUBSIDIARIES

 

Schedule I - CondensedFinancial Information of Registrant, Continued

 
| ** **                                                                            | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **Statement  of Cash Flows**                                                          | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                            | ** ** | ** **                  | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Cash flows from  operating activities:                                                |       |                        |       |   |   |   |   |
| Net (loss)  income                                                                    |       | $                           | (3,411     | ) | $ | (11,682 | ) | $ | 15,198 |   |
| Adjustments to  reconcile net (loss) income to net cash used in operating activities: |       |                        |       |   |   |   |   |
| Deferred income  tax benefit                                                          |       | (25                         | )          | (20 | ) | (20 | ) |
| Undistributed  loss (earnings) of subsidiary                                          |       | 3,365                       |       | 11,646 |   | (15,235 | ) |
| Other                                                                                 |       | (11                         | )          | (1 | ) | 2 |   |
|                                                                                  |       |                        |       |   |   |   |   |
| Net cash used in  operating activities                                                |       | (82                         | )          | (57 | ) | (55 | ) |
|                                                                                  |       |                        |       |   |   |   |   |
| Cash flows from  financing activities:                                                |       |                        |       |   |   |   |   |
| Dividends  received from subsidiary                                                   |       | 86                          |       | 55 |   | 133 |   |
| Payments to  acquire treasury stock                                                   |       | (—                     | )          | (— | ) | (78 | ) |
|                                                                                  |       |                        |       |   |   |   |   |
| Net cash  provided by financing activities                                            |       | 86                          |       | 55 |   | 55 |   |
|                                                                                  |       |                        |       |   |   |   |   |
| Net increase  (decrease) in cash                                                      |       | 4                           |       | (2 | ) | (— | ) |
| Cash at  beginning of period                                                          |       | —                      |       | 2 |   | 2 |   |
| Cash at end of  period                                                                |       | $                           | 4          |   | $ | — |   | $ | 2 |   |

 

60

----

 

SCOTSMAN HOLDINGS,INC. AND SUBSIDIARIES

 

Schedule II -Valuation and Qualifying Accounts

 
| ** **                                          | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                          | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                          | ** ** | **(In  thousands)**              | ** ** |
| Allowance  for Doubtful Accounts:                   |       |                             |       |   |   |   |   |
| Balance  at beginning of the period                 |       | $                                | 862        |   | $ | 1,071 |   | $ | 1,298 |   |
| Provision  charged to expense                       |       | 1,946                            |       | 2,286 |   | 3,692 |   |
| Accounts  receivable written-off, net of recoveries |       | (2,202                           | )          | (2,495 | ) | (3,919 | ) |
|                                                |       |                             |       |   |   |   |   |
| Balance  at end of the period                       |       | $                                | 606        |   | $ | 862 |   | $ | 1,071 |   |
|                                                |       |                             |       |   |   |   |   |
| Valuation  Allowance For Deferred Tax Assets:       |       |                             |       |   |   |   |   |
| Balance  at beginning of year                       |       | $                                | 4,802      |   | $ | 3,400 |   | $ | 3,400 |   |
| Provision  charged to expense                       |       | 430                              |       | 1,402 |   | — |   |
| Balance  at end of year                             |       | $                                | 5,232      |   | $ | 4,802 |   | $ | 3,400 |   |

 

61

----

 

EXHIBITS TO FORM 10-KSCOTSMAN 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                  |  — | 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)).                                                                                    |
|                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.3                  |  — | 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)). |
|                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.4                  |  — | 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)).                                                                                                |
|                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.5                  |  — | 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)).                                                                                                                                                                   |
|                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.6                  |  — | 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)).                                                                                       |
|                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                      |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |  |  |

 

 

62

----

 
| 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 the Company’s annual report on Form 10-K  for the year ended December 31, 2003.)                                                                                                                                                                                                                                                  |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 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 for the  year ended December 31, 2003.)                                                                                                                                                                                                                                                                                                                                                                                                                           |

 
| 10.14  |  — | Severance Agreement and  General Release for Sonney Taragin dated January 21, 2005 (incorporated by  reference to Exhibit 10.14 of Williams Scotsman, Inc.’s annual report on Form  10-K for the year ended December 31, 2004)                                                                                                                                                                              |
|--------|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |         |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.15  |  — | Employment Agreement  for Robert C. Singer dated March 25, 2005 (incorporated by reference to  Exhibit 10.15 of Williams Scotsman, Inc.’s annual report on Form 10-K for the  year ended December 31, 2004)                                                                                                                                                                                                 |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.16  |  — | Form agreement of Stock  Option Plan Grant (incorporated by reference to Exhibit 10.16 of Williams  Scotsman, Inc.’s annual report on Form 10-K for the year ended December 31,  2004)                                                                                                                                                                                                                      |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.17  |  — | Fourth Amendment dated  as of September 24, 2004, 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 10.2 of the Company’s quarterly report on Form 10-Q  for the three and nine months ended September 30, 2004) |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 21.1   |  — | Subsidiaries of  Registrant: Willscot Equipment, LLC, Space Master International, Inc.,  Evergreen Mobile Company, Truck & Trailer Sales, Inc., Williams  Scotsman of Canada, Inc., Williams Scotsman Mexico S. de R.L. de C.V.,  and Williams Scotsman Europe, S.L.                                                                                                                     |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 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 Robert C. Singer,  Chief Financial Officer of the Company.                                                                                                                                                                                                                                                                     |

 

63

----