ITEM 1. DESCRIPTION OF BUSINESS.
General
Mobile Mini, Inc. is a Delaware corporation capitalized effective December 31, 1993. From 1983 through 1993, the business operations of the Company were conducted as a sole proprietorship by Richard E. Bunger under the tradename "mobile mini storage systems" ("MMSS"). The business operations transferred to the Company were comprised of MMSS and a related corporation, Delivery Design Systems, Inc. ("DDS"). The Company's subsidiaries include DDS which formerly engaged in the business of designing, developing and manufacturing truck trailers and other delivery systems for the Company's portable storage containers and Mobile Mini I, Inc. which engages in the business of acquiring and maintaining certain of the Company's facilities. The business and assets of DDS were transferred to the Company in 1996.
The Company's operations commenced in Phoenix, Arizona, in 1983. By 1986 the portable storage concept had been proven and the business was expanded through an additional sales and leasing branch established in Tucson, Arizona. In 1988, the Company commenced operations in Rialto, California to service the greater Los Angeles area. In early 1990, the Company relocated its manufacturing facility from its original site in Phoenix to a heavy-industry zoned industrial park located near Maricopa, Arizona and administrative offices were established in Tempe, Arizona. In 1994, the Company opened a "satellite" branch in San Diego, California which is serviced from its Rialto "hub." Also in 1994, the Company opened operations in Texas by the establishment of hub locations in Houston and Dallas/Fort Worth. In early 1995, the Company opened satellite locations in the San Antonio and Austin metropolitan areas.
During the last few years, the Company has focused primarily on expanding its leasing operations, which provide higher margins and profitability than its other operations, see "Leasing Operations". In January of 1998 the Company acquired the assets of Nevada Storage Containers, a Las Vegas based container leasing and sales business.
Products
The Company designs and manufactures portable steel storage containers, portable offices and telecommunication shelters and acquires, refurbishes, and modifies ocean-going shipping containers for sale and lease as inland portable storage units. In addition, the Company designs and manufactures a variety of delivery systems to complement the Company's storage container sales and leasing activities. The Company has patented, proprietary or trade secret rights in all products it has designed and manufactured. The locking system for the Company's containers is patented and provides virtually impenetrable security to the storage container.
The Company's main product in its storage market segment is the portable steel storage container. The Company acquires used ocean-going cargo containers which it reconditions and retrofits with its patented locking system. To compensate for supply and price fluctuations associated with acquiring used ocean-going containers, the Company also manufactures various lines of new containers, featuring the Company's proprietary "W" or "stud wall" panels. Storage container units may be significantly modified and turned into portable offices, portable storage facilities, open-sided storage and retail facilities, as well as a large variety of other applications. In reconditioning and manufacturing its products, the Company uses, in addition to used ocean-going containers, commodity raw materials including steel, vinyl, wood, glass and other raw materials from various suppliers.
The Company leases and sells its storage containers to a wide variety of individual, business and governmental users. The Company's lease activities include both off-site and on-site leasing. "Off-site" leasing occurs when the Company leases a portable storage container which is then located at the customer's place of use. "On-site" leasing occurs when the Company stores the portable
container containing the customer's goods at one of the Company's facilities, which are similar to a standard mini-storage facility, but with increased security, ease of access and container delivery and pick-up service.
In mid-1995, Mobile Mini established a telecommunication shelter division to complement its storage container business, diversify its product line and target the domestic and international markets. The Company's telecommunication shelters, marketed under the name "Mobile Tele-structures", can be built in a vast variety of designs, sizes, strengths, exterior appearances and configurations. The Company has developed proprietary technology that makes these units very portable, lightweight, highly secure and virtually weather resistant. The Company intends to devote additional resources toward marketing this product.
The Company has developed technology to add a stucco finish to the exterior of its all steel buildings, making them more aesthetically appealing while retaining the strength and durability afforded by steel. This attribute is especially important to the Mobile Tele-structures operations, where telecommunication companies are under pressure to use shelters and towers that blend in with the locale at which they are located. The Company also introduced its ArmorKoat line of telecommunication shelters which feature a specially formulated concrete exterior coat to its steel shelters. This formulation increases the strength of the building and can meet the needs of customers that require concrete buildings.
The Company designs, develops and manufactures a complete proprietary line of truck trailers and other delivery systems utilized in connection with its storage container sales and leasing activities. The Company provides delivery and pick-up services for customers at their places of business, homes or other locations.
Business Restructuring
Prior to 1997, the Company was involved in the manufacture, sale and leasing of modular steel buildings in the state of Arizona. These buildings were used primarily as portable schools, but could be used for a variety of purposes. Although the Company believes its modular buildings were superior to the wood-framed buildings offered by its competitors, the Company was not able to generate acceptable margins on this product line. During 1996, the Company implemented a strategic restructuring program designed to concentrate management effort and resources and better position itself to achieve its strategic growth objectives. Accordingly, the Company's 1996 results include charges of $700,000 ($400,000 after tax, or $.06 per share) for costs associated with restructuring the Company's manufacturing operations and for other related charges. These charges were recorded in the fourth quarter of 1996, and were comprised of the write-down of assets used in the Company's discontinued modular building operations and related severance obligations ($300,000), and the write-down of other fixed assets ($400,000). By discontinuing its modular building operations, the Company is able to utilize the management resources and production capacity previously utilized by this division to expand the Company's telecommunications shelter business and its container leasing operations.
Marketing
The Company markets its storage containers both directly to the consumer and through its national dealer network. The Company has sales and leasing branches in Phoenix and Tucson, Arizona, San Diego and Rialto, California, Houston, Dallas, San Antonio and Austin, Texas and Las Vegas, Nevada. The Company services the greater Los Angeles, California area from its Rialto hub.
The Company sells and leases its storage containers directly to consumers from each of its branches. With respect to leases, the Company engages in both off-site and on-site leasing. Marketing for individual consumer sales and rentals is primarily through Yellow Page ads, direct mailings and customer referrals. The Company markets its Mobile Tele-structures products directly to telecommunication companies, as well as to companies providing turn-key installations of shelters and telecommunication towers.
Sales are also made through the Company's national dealer network which currently provides the Company's manufactured containers to 45 dealers for retail sale. Such dealers are in 69 separate locations in 24 states and two Canadian provinces. Marketing to dealers and potential dealers is primarily through direct solicitation, trade shows, trade magazine advertising and referrals. The dealers receive pre-fabricated containers which they assemble and paint. The Company provides training in assembly and marketing to its dealers. None of the dealers are employed by the Company, nor does any dealer have a long term requirements contract for the supply of pre-fabricated containers or any contract for training in assembly and marketing with the Company. The Company does, however, benefit from the use of its name by several dealers on the containers once they are constructed.
Leasing Operations
Since its founding, it has been the Company's primary goal to grow the container leasing portion of its business. This business, which involves the short-term leasing of a product with a long useful life and relatively low depreciation, offers higher margins than the Company's other products and services.
The Company has sought to grow its container leasing business by opening branch facilities in several cities in the Southwestern United States. When the Company opens a facility, it devotes substantial resources, including a sizable advertising budget, to the location. The new locations therefore typically generate losses in early years, but once the Company has added sufficient containers to cover the relatively high fixed costs, its operations generally become profitable. Historically, profitability is not expected until approximately one to three years after the new location is opened. The actual time to profitability depends upon numerous factors, including differences in container costs compared to historic cost levels, the level of competition in the new market, the development of additional storage containers in the market by competitors and other factors which are generally beyond the Company's control.
The Company plans to continue adding additional leased containers to existing locations in order to increase its profitability. During 1996, the Company obtained a revolving line of credit enabling it to substantially expand its container leasing operations. Borrowings available under the line of credit were increased to $40.0 million during 1997. Additionally, the Company completed a public offering during 1997 of 12% Senior Subordinated Notes. See, "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES". The Company increased containers on lease at December 31, 1997 by 33% from December 31, 1996. This increase was achieved at branch locations that had been in operation at December 31, 1996.
The Company's plan is to continue increasing its lease fleet at existing locations in 1998. Management believes that such an increase should substantially improve profitability in 1998, particularly if the cost of used ocean-going containers remains constant at year-end 1997 levels.
The Company intends to continue to expand its operations into additional cities on a controlled basis. Such expansion could be through new start up operations by the Company or through acquisitions of existing operations. Expansion through start up operations could have the effect of reducing net income during the early years of operations while the Company increases its lease fleet at these locations. Management plans to control the number of new start up locations and their cost, in order to minimize the effect on current year earnings. The Company has identified several potential new markets, and is investigating start up and acquisition possibilities in those markets. The Company acquired the assets of a Las Vegas, Nevada based container leasing and sales business in January 1998, and it is the Company's strategy to review potential acquisitions of container leasing businesses or their assets.
Financing
The Company has required increasing amounts of financing to support the growth of its business. This financing was required primarily to fund the acquisition of containers for the Company's lease fleet and to fund the acquisition of property, plant and equipment to support both the Company's container leasing and manufacturing operations.
The Company finances its operations and growth primarily through a credit agreement (the "Senior Credit Agreement") with BT Commercial Corporation, as Agent for a group of lenders (the "Lenders"). The Company entered into the Senior Credit Agreement in March 1996, as amended in 1997, in order to improve its cash flow, increase its borrowing availability and fund its continued growth. Under the terms of the Senior Credit Agreement, the Lenders currently provide the Company with a $40.0 million revolving line of credit and provided a $6.0 million term loan. Borrowings under the Senior Credit Agreement are secured by substantially all of the Company's assets.
The term loan is to be repaid over a five-year period. Interest accrues on the term loan at the Company's option at either prime plus 1.75% or the Eurodollar rate plus 3.25%. Borrowings under the term loan are payable monthly as follows (plus interest):
Months 1 through 12 (April 1996 - March 1997) $ 62,500 Months 13 through 24 (April 1997 - March 1998) 83,333 Months 25 through 60 (April 1998 - March 2001) 118,056
Additional principal payments equal to 75% of Excess Cash Flow, as defined in the term loan documents which constitute part of the Senior Credit Agreement, are required annually. As of December 31, 1997, no additional payment was required under this provision.
Available borrowings under the revolving line of credit are based upon the level of the Company's inventories, receivables and container lease fleet. The container lease fleet is appraised at least annually, and up to 90% of the lesser of cost or appraised orderly liquidation value may be included in the borrowing base. Interest accrues at the Company's option at either prime plus 1.5% or the Eurodollar rate plus 3% and is payable monthly or at the end of the term of any Eurodollar borrowing. The term of this revolving line of credit is three years, with a one-year extension option.
In connection with the closing of the Senior Credit Agreement, the Company terminated its line of credit with its previous lender, repaying all indebtedness under that line. In addition, the Company repaid other long-term debt and obligations under capital leases totaling $14.1 million. As a result, costs previously deferred related to certain indebtedness and prepayment penalties resulted in an extraordinary charge to earnings in 1996 of approximately $410,000 after benefit for income taxes.
The Senior Credit Agreement contains several financial covenants and minimum required utilization rates in its lease fleet, limits on capital expenditures, acquisitions, changes in control, the incurrence of additional debt and the repurchase of common stock, and prohibits the payment of dividends.
The Company has also financed its operations through the issuance and sale of its equity and debt securities. In February 1994, the Company completed its initial public offering. Net proceeds to the Company totaled approximately $7 million. In December 1995, the Company received net proceeds of $4.1 million, through a private placement of 50,000 shares of Series A Convertible Preferred Stock, $.01 par value, $100 stated value ("Series A"). Pursuant to the terms of the Series A, all 50,000 shares of Series A were converted into 1,904,324 shares of the Company's common stock at an average conversion rate of $2.63 per share during the first quarter of 1996. In July 1997, the Company completed a private placement of $3.0 million of 12% senior subordinated notes (the "Bridge Notes") and warrants to purchase 50,000 shares of Mobile Mini, Inc. common stock at $5.00 per share. The Bridge Notes were due the earlier of July 31, 2002, or on the refinancing of the Bridge Notes on substantially similar terms. In October 1997, the Company issued $6.9 million of 12% Senior Subordinated Notes ("Notes") with redeemable warrants to purchase 172,500 shares of the Company's common stock at $5.00 per share. The Notes are due November 1, 2002, and requires the Company to establish an interest reserve escrow account (Reserve Account) and to maintain in the reserve account, while any of the Notes are outstanding, an amount equal to six months interest on the Notes based on the principal amount outstanding. Interest is payable semi-annually on May 1 and November 1 of each year, commencing May 1, 1998. From the proceeds of the sale of the Notes, the Company repaid the $3.0 million in Bridge Notes and accrued interest and reduced the borrowings outstanding under the revolving line under the Senior Credit Agreement with the remainder of the net proceeds. The warrants issued to the Bridge Note lender were canceled, in exchange for 15,000 shares of common stock. Because the Notes were offered as part of a unit with Redeemable Warrants, a portion of the original offering price for a unit was allocated to the Notes and a portion to the Redeemable Warrants based on their respective fair market values. The resulting discount increases the effective interest rate of the Notes and is being amortized to interest expense over the life of the Notes. These equity and debt issuances provided additional capital in conjunction with obtaining the financing available under the Senior Credit Agreement. In February 1998, the Company realized proceeds of approximately $5.2 million on the exercise of warrants issued in connection with its initial public offering in 1994.
Patents, Tradenames and Trade Secrets
The Company has eight patents issued by and four patents pending with the U.S. Patent and Trademark Office related to the design and application of its products. The Company may process other patent applications for additional products developed currently or in the future, to the extent the Company deems such applications appropriate. "mobile mini" and "mobile mini storage systems" are registered trade names and service marks in the United States and Canada.
The patents as well as the various state trade secrets acts afford proprietary protection to the Company's products, including the unique locking system and design of its manufactured products. The Company has in place at its manufacturing facility, several access control and proprietary procedure policies to meet the requirements of protecting its trade secrets under applicable law. The Company follows a policy of aggressively pursuing claims of patent, tradename, service mark and trade secret infringement. The Company does not believe that its products and trademarks or other confidential and proprietary rights infringe upon the proprietary rights of third parties. There can be no assurance, however, that third parties will not assert infringement claims against the Company in the future. The successful assertion of rights and the defense of infringement claims could have a material adverse affect on the Company's business, results of operations and financial condition. There can be no assurance that the Company will have sufficient
resources to sustain expensive or protracted legal actions to protect its proprietary rights or, alternatively, to defend claims of infringement.
Customers
The market for the Company's products can generally be divided into four distinct areas -- retail, residential, commercial and institutional/governmental. Revenues are derived from either rentals or sales directly to customers or through sales to the Company's dealers.
The Company's customer profile is diverse and does not rely on one industry. Instead, the Company targets several different markets within various geographic areas. As of December 31, 1997, the Company's leasing and sales clients fall into the following categories and approximate percentages: (i) with respect to leasing: retail and wholesale businesses, 47%; homeowners, 17%; construction, 24%; institutions, 7%; government, industrial and other, 5%; (ii) with respect to sales: retail and wholesale businesses, 42%; homeowners, 6%; construction, 13%; institutions, 21%; government, industrial and other, 18%.
Customers utilize the Company's storage units in a variety of ways. For example, retail companies use the Company's storage units for extra warehousing of inventory and records; real estate development companies utilize the Company's products to securely store equipment, tools and materials; and governmental agencies such as the U.S. Armed Forces and the U.S. Drug Enforcement Agency lease and buy the Company's high-security, portable storage units to store equipment and other goods.
Competition
The Company competes with its products and services in several market segments, and the Company knows of no one entity that is in direct competition with the Company in all its market segments. With respect to its on-site leasing activities, the Company competes directly with conventional mini-storage warehouse facilities and the pick-up and delivery services offered by certain of these facilities in the localities in which it operates. Some of the Company's on-site leasing competitors include Door to Door Storage, Public Storage, U-Haul and Shurgard Storage Centers. With respect to off-site leasing and sales, the Company has several competitors, which include Haulaway, Mobile Storage, National Security Containers, and a large number of smaller competitors. The Company believes that its products, services, pricing and manufacturing capabilities allow it to compete favorably in each of the on-site leasing, off-site leasing and sales segments of the Company's markets in the areas it currently operates.
The Company's Mobile Tele-structures division competes against several competitors that supply shelters, the largest of which the Company believes to be Fibrebond Corporation, the Rohn division of UNR Industries and Andrew Corporation.
Management believes that the Company has a number of competitive advantages both in terms of products and operations. Among its product's patented features is the locking system which serves to meet the customer's primary concern, security. Based on reports from customers who have suffered burglary attempts, the Company's locking system is extremely difficult to defeat. The Company's delivery trailers have largely been designed and built by the Company and certain key features have patent potential which the Company may pursue. These proprietary delivery systems, which are specifically designed to transport, load and unload containers, allow the Company to deliver containers economically in otherwise inaccessible locations.
Operationally, the Company manufactures containers from raw steel as an alternative to using ocean-going containers. In the event ocean-going containers are in short supply or become uneconomical to retrofit to the needs of the Company, the Company can manufacture its own container product. The Company will continue to manufacture new storage units for inclusion primarily in its sales inventory and also in its lease fleet.
The Company's ability to continue to compete favorably in each of its markets is dependent upon many factors, including the market for used ocean-going containers and the costs of steel. Management believes that the Company's container manufacturing capabilities make the Company less susceptible than its competitors to ocean-going container price fluctuations, particularly since the cost of used containers is affected by many factors, only one of which is the cost of steel from which the Company can manufacture new containers. The Company has begun to purchase its raw steel directly from steel mills, lowering its average cost of steel.
The Company believes that competition in each of its markets may increase significantly in the future. It is possible that such competitors will have greater marketing and financial resources than the Company. As competition increases, significant pricing
pressure and reduced profit margins may result. Prolonged price competition, along with other forms of competition, could have a material adverse affect on the Company's business and results of operations. Additionally, as the Company continues to expand its operations in different regions, start up costs incurred reduce the Company's overall profit margins.
Employees
As of March 18, 1998, the Company had approximately 800 full time employees at all of its locations. The Company believes that its continued success depends on its ability to attract and retain highly qualified personnel. The Company's employees are not represented by a labor union and the Company has no knowledge of any current organization activities. The Company has never suffered a work stoppage and considers its relations with employees to be good.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company has four manufacturing centers located in Maricopa, Arizona, Rialto, California, and Houston and Dallas/Fort Worth, Texas. Sales and leasing are conducted from Phoenix, Rialto, Houston and Dallas/Fort Worth, and five other locations. The Company's administrative and sales offices are located in Tempe, Arizona.
The Company's primary manufacturing center is located in a heavy-industry zoned industrial park near Maricopa, Arizona, approximately 30 miles south of Phoenix. The facility is seven years old and is located on an approximate 45 acre industrial site. Twenty-three acres of this site were purchased from Richard E. Bunger in 1996. See, "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." The facility includes nine manufacturing buildings, totaling approximately 158,000 square feet, which house manufacturing, assembly, construction, painting and vehicle maintenance operations.
The Phoenix, Arizona sales and leasing branch services the Phoenix metropolitan area from its approximately 9.8 acre facility, of which approximately 7 acres are leased. All Phoenix marketing and any on-site storage is conducted from this site. Approximately 3.4 acres are owned by the Company, approximately 5.0 acres are leased from non-affiliated parties and the remaining 1.4 acres are owned by members of the Bunger family and are under lease at what management believes to be competitive market rates. See, "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
The Rialto, California sales and leasing hub is approximately 10 acres in size, with three industrial shops used for modification of ocean-going containers, assembly of the Company's manufactured containers and on-site leases. The Rialto facility serves as the Company's southern California hub and supports the San Diego branch. The Rialto site is owned by Mobile Mini Systems, Inc., a separate corporation owned by Richard E. Bunger, and is leased to the Company at what management believes to be competitive market rates. See "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
The Texas operations are supported by hub facilities in Houston and Dallas/Fort Worth. Both facilities contain manufacturing centers, sales and leasing operations and on-site storage facilities. The Houston facility is located on seven acres with six buildings totaling approximately 34,400 square feet. The Dallas/Fort Worth facility, which is owned by the Company, is located on 17 acres with six buildings totaling approximately 36,600 square feet.
The Company's administrative and sales offices are located in Tempe, Arizona. The facilities are leased by the Company from an unaffiliated third party and have approximately 28,800 square feet of space which the Company anticipates will meet its needs for the near-term. The Company's lease term is through December 2000.
In addition to its administrative offices and manufacturing facilities, the Company has facilities used for sales, leasing and onsite storage. As of March 1, 1998, the major properties owned or leased by the Company are listed in the table below:
(1) Pledged pursuant to the Senior Credit Agreement. See, "ITEM 1. DESCRIPTION OF BUSINESS - Financing." (2) Leased by the Company from an affiliate of Richard E. Bunger. See, "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." (3) Of the 14 acres comprising these sites, 3.4 acres are owned by the Company and 1.5 acres are subject to long-term leases from members of the Bunger family. See, "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." (4) 2.7 acres are leased by the Company from members of the Bunger family and 2.3 acres are leased from a non-affiliate of the Company. See "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." (5) A community of the Austin, Texas metropolitan area. (6) A portion of the land and buildings under lease are currently subleased to a non-affiliated party.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
In April 1997, the Company entered into a stock purchase agreement with an individual who had agreed to work for the Company. Under the stock purchase agreement, the individual was to purchase 500,000 shares of common stock on July 1, 1997. On June 30, 1997, at the individual's request, the Company extended the closing date to July 3, 1997. The individual did not tender funds by the extended closing date. In July 1997, the Company brought an action in US District Court for the District of Arizona to have the court declare the Company's obligations under the stock purchase agreement terminated. The individual opposes the Company's request, and has requested that the Company be ordered to perform under the stock purchase or, alternatively, pay him damages, including treble damages. In addition, the individual has filed a counterclaim alleging constructive discharge. The Company is vigorously pursuing the action and does not believe it will have any material impact on the financial condition or the results of operations of the Company.
The Company is not a party to any other legal proceeding other than various claims and lawsuits arising in the normal course of its business which, in the opinion of the Company's management, are not individually or collectively material to its business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meting of the stockholders of the Company was held on November 12, 1997, in Phoenix, Arizona. On the record date for the annual meeting, 6,739,324 shares of the common stock were outstanding and eligible to be voted. The table below briefly describes the proposals and results from the annual meeting of stockholders.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock trades on the Nasdaq Stock Market under the symbol "MINI." Prior to December 26, 1995, the Common Stock was traded on the Nasdaq SmallCap Marketsm. The following table sets forth, for the indicated periods, the high and low sale prices for the Common Stock as reported by the Nasdaq Stock Market. The Company had approximately 76 holders of record of its Common Stock on March 1, 1998. The Company believes it has in excess of 400 beneficial owners of its Common Stock.
FISCAL YEARS 1997 AND 1996
1997 1996 --------------- ---------------
HIGH LOW HIGH LOW ---- --- ---- ---
Quarter ended March 31, $3.625 $3.000 $4.375 $2.875 Quarter ended June 30, 4.500 3.000 4.437 3.375 Quarter ended September 30, 5.375 4.437 4.375 2.812 Quarter ended December 31, 6.438 5.000 4.250 3.000
Holders of the Common Stock are entitled to receive such dividends as may be declared by the Board of Directors of the Company. To date, the Company has neither declared nor paid any cash dividends on its Common Stock, nor does the Company anticipate that cash dividends will be paid in the foreseeable future. Additionally, the Senior Credit Agreement prohibits the payment of dividends. The Company intends to apply any earnings to the expansion and development of its business.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes certain selected financial data of the Company and is qualified in its entirety by the more detailed consolidated financial statements and notes thereto appearing elsewhere herein. The data has been derived from the consolidated financial statements of the Company audited by Arthur Andersen LLP, independent public accountants.
(1) Prior to 1994, the Company's predecessor was operated as a sole proprietorship. Per share information is therefore calculated on a proforma basis assuming that the only common stock outstanding was that issued to Richard E. Bunger at the time the Company was capitalized and all significant transactions for the transfer of assets to the Company have been eliminated for the proforma statements.
(2) Certain amounts have been reclassified to conform with the current year's presentation.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
General
The Company was founded in 1983 and operated only in the Phoenix, Arizona area until 1986. In 1986 it expanded to Tucson, Arizona, in 1988 to southern California, in 1994 to Texas and in 1998 to Nevada. From inception through 1988, the Company exclusively engaged in the refabrication of ocean-going cargo containers, which it leased to the public for storage containers and portable offices. In 1989, the Company began to sell containers. Contributing to growth of sales revenues was the development of a national distribution system (referred to by the Company as the national dealer network), manufacture of new Company designed containers from raw steel as an alternative and supplement to the refabrication of ocean-going containers, the manufacture of modular steel buildings (discontinued in 1996; see "ITEM 1. DESCRIPTION OF BUSINESS - BUSINESS RESTRUCTURING") and special order products which the Company leases and sells to schools, governmental entities and others, and the development of the telecommunication shelter division which commenced operations in mid-year 1995.
The leasing of containers has become the more significant portion of the Company's business and is contributing to the Company's growth. Since 1993, the number of units at the Company's leasing locations has increased by the following percentages as compared to the preceding year:
December 31, ------------
1993 38% 1994 62% 1995 32% 1996 18% 1997 33%
As the leasing operations are the most profitable of the Company's operations, management plans to increase the level of these operations, especially at existing locations. In addition, the Company expects to open additional facilities through acquisitions or the start up of new locations on a controlled basis at locations which management believes can become profitable over a relatively short period of time.
The Company manufactures and/or refurbishes containers for use in its lease fleet. Containers are transferred to the lease fleet at cost, without recognizing any manufacturing profit on the value added to the refurbished containers or new containers. In addition, the Company's container lease fleet has been acquired over the last 15 years. During parts of this period, raw container prices were significantly lower than they are today. An appraisal of the fair market value of the container lease fleet performed in 1997 resulted in a total fair market value of approximately $64,500,000. This exceeds the carrying value of the containers by approximately $15,800,000 at December 31, 1997. In accordance with generally accepted accounting principals, this differential is not recognized in the Company's financial statements.
Uncertainties faced by the Company include variances in start up costs for new storage locations, the availability of acquisitions on terms acceptable to the Company, competition in new markets, and the opportunity cost of deploying sufficient containers in a new market to reach economic viability. While the Company has experience in entering new market areas and conducts preliminary market research to assure itself that viable markets exist, there can be no assurance of success when expanding into new markets. However, unlike fixed mini-storage facilities, the Company does have the ability to relocate its portable storage containers to other markets to adjust for market demand.
Results of Operations
The following table sets forth, for the periods indicated, the percentage, as a percent of total revenue, of certain items in the Consolidated Financial Statements of the Company, included elsewhere herein. The table and the discussion below should be read in conjunction with the Consolidated Financial Statements and Notes thereto.
Fiscal 1997 Compared to Fiscal 1996
The Company's business plan in 1997 was focused on increasing its number of containers on lease at existing branch locations because the incremental lease revenue results in higher margins. In addition, the Company increased prices on container sales and withdrew from the low margin modular building business.
Revenues for the year ended December 31, 1997 increased 8.6% to $46,083,000 from $42,426,000 during 1996. Revenues from the Company's leasing operations were $24,870,000 which represents a 39.1% increase from 1996 leasing revenues of $17,876,000. This increase resulted from a 33% increase in the number of containers on lease, and an increase in ancillary lease revenue per container resulting from the introduction of the Company's new loss limitation waiver program. Sales of the Company's products decreased by 13.1%, primarily due to the discontinuation of the modular building operations. This decline in sales was offset, to some extent, by an approximate $2,200,000 increase in the sale of telecommunication shelters.
During 1997 the Company implemented price increases on the sale of containers through its branches and through the National Dealer Program. These actions, together with the withdrawal from the low margin modular building business, caused a substantial increase in gross margins on sales. As a result, cost of containers and other sales as of percentage of container and other sales decreased to 70.9% from 84.4% during 1996.
Leasing, selling and general expenses increased 34.2% to $20,585,000 compared to $15,343,000 in the prior year. This increase was attributable to increased leasing related expenses associated with the 33% increase in the number of containers out on lease, increased commission levels offered to dealers in connection with the leasing of containers and increased expenses associated with developing an infrastructure for future growth.
Depreciation and amortization increased to 4.9% of revenues in 1997 compared to 4.0% in 1996. The increase reflects the increase in the Company's container lease fleet and support equipment for manufacturing and maintaining the lease fleet and operational equipment at all the sales and leasing locations.
The Company recorded a restructuring charge in 1996 of $700,000. There was no similar charge in 1997.
Operating margins increased from 11.2% in 1996 to 18.9% in 1997 as a result of change in the Company's focus to its leasing business, as well as the increased gross margins on sales.
Interest expense increased to $5,035,000 in 1997 compared to $3,894,000 in 1996. The increase in interest expense includes the additional interest related to the 40.8% increase in the Company's average balance of debt outstanding compared to 1996 and the amortization of debt issuance costs. The increase in the Company's average outstanding debt is partially related to the issuance in 1997 of $6.9 million of subordinated notes and increased borrowings under the Senior Credit Agreement to finance the growth in the container lease fleet. The weighted average interest rate decreased 0.75% in 1997 to 9.45% from 10.2% in 1996, excluding amortization of deferred loan costs. Including amortization of deferred loan costs, the weighted average interest rate was 10.61% and 11.56% for 1997 and 1996, respectively.
The Company generated net income of $2,200,000, or $0.32 per share diluted, in 1997 compared to net income before extraordinary item of $481,000, or $0.07 per share diluted in 1996. This increase is primarily a result of the 39.1% increase in leasing revenues in 1997 and a 14% increase in gross margin on sales in 1997 as compared with 1996. The Company recorded a $700,000 restructuring charge in 1996. Excluding the 1996 restructuring charge, earnings before extraordinary item were approximately $873,000, or $0.13 per share diluted.
In 1996, the Company prepaid approximately $14.1 million of debt and capital lease obligations in connection with entering into the Senior Credit Agreement. As a result, in 1996 the Company recognized an extraordinary charge to earnings of $410,000, or $0.06 per share, net of the benefit of income taxes.
Fiscal 1996 Compared to Fiscal 1995
Revenues for the year ended December 31, 1996 increased to $42,426,000 from $40,184,000 during 1995. Revenues during 1995 included $3,645,000 of container sale revenue recorded under sale-leaseback transactions. The revenue from sale-leaseback transactions was offset by an equal cost of container sales and did not produce any gross margin. The Company did not enter into sale-leaseback transactions during 1996. Excluding the effect of these sale-leaseback transactions, revenues increased by 16.1% from 1995 to 1996, primarily the result of increases in both sales and leasing revenues generated from existing branch locations and the sale of certain used modular buildings that had been previously leased. The Texas operations, which commenced in late 1994, sustained growth and contributed 8.5% and 15.8% to the Company's container sales and leasing revenues, respectively, during 1996 as compared to 7.0% and 9.6%, respectively, in 1995. The dealer and telecommunication shelter division contributed 25.5% and 4.1%, respectively, of the sales revenues in 1996 as compared to 27.2% and 5.8%, respectively, in 1995. Revenues related to container and modular building sales and leasing activities increased 14.5% and 11.7%, respectively, from the prior year, exclusive of container sale revenue recorded under sale-leaseback transactions.
Excluding the effect of sale-leaseback transactions, cost of container and modular building sales as a percentage of container and modular building sales increased to 84.4% compared to 74.8% for the prior year. This increase is attributable to the mix of products sold, a shortage in supply of used containers, which caused an increase in the acquisition cost of these containers, an increase in sales of manufactured new containers which typically result in lower margins to the Company, and an accounting refinement in the Company's allocation of certain indirect manufacturing costs.
Excluding the effect of sale-leaseback transactions, leasing, selling and general expenses were 36.2% of total revenue in 1996, compared to 41.5% in 1995. The decrease primarily resulted from the continued efficiencies obtained by the Company's Texas operations, which were in their start up phase during 1995, and to the Company passing certain ancillary expenses on to customers.
The Company recorded a restructuring charge (See "ITEM 1. DESCRIPTION OF BUSINESS.- BUSINESS RESTRUCTURING") of $700,000 or 1.6% of total revenue in 1996. There was no similar charge in 1995.
Income from operations was $4,743,000 in 1996 compared to $4,585,000 in 1995. Excluding the restructuring charge, income from operations would have been 12.8% of total revenue in 1996 as compared to 11.4% in 1995.
Interest expense increased to $3,894,000 in 1996 compared to $3,212,000 in 1995. This increase in interest expense was primarily the result of a 51.4% increase in the average balance of debt outstanding compared to 1995, along with the related amortization of debt issuance costs, partially offset by a decrease of 3.0% in the Company's weighted average borrowing rate resulting from lower interest rates under the Company's Senior Credit Agreement. The additional debt in 1996 was incurred in order to finance the substantial increase in the Company's equipment and container lease fleet in 1996.
Depreciation and amortization increased to 4.0% of revenues in 1996, from 3.3% in 1995, and is directly related to the expansion of the Company's manufacturing facility along with the substantial growth in the Company's lease fleet and additional support equipment at the Company's sales and leasing locations.
The Company had income before extraordinary item of $481,000, or $.07 per share diluted, in 1996, compared to net income of $777,000 or $.16 per share diluted in 1995 before the effect of dividends on the Company's Series A Convertible Preferred Stock of $(.25) per share diluted (see notes 1 and 11 of the Notes to Consolidated Financial Statements). This decrease primarily resulted from the $700,000 restructuring charge recorded by the Company in the fourth quarter of 1996, discussed above. See "Item 1. DESCRIPTION OF BUSINESS - BUSINESS RESTRUCTURING". Excluding this charge, 1996 earnings before extraordinary item were approximately $873,000, or $.13 per share. The weighted average common and common equivalent shares outstanding at the end of 1996 increased by 39% from the prior year due to the issuance of additional common stock in 1996 pursuant to the conversion of the Series A Convertible Preferred Stock, issued during the fourth quarter of 1995, which was converted to common stock in 1996.
The Company prepaid approximately $14.1 million of debt and capital leases in connection with entering into the Senior Credit Agreement in March 1996. As a result, the Company recognized an extraordinary charge to earnings of $410,000, or $.06 per share, net of the benefit for income taxes, as a result of this early extinguishment of debt. The Company also incurred financing costs of $2,000,000 in connection with the Senior Credit Agreement, which have been deferred and are being amortized over the term of the Senior Credit Agreement.
Quarterly Results of Operations
The following table reflects certain selected unaudited quarterly operating results of the Company for each of the eight quarters through the quarter ended December 31, 1997. The Company believes that all necessary adjustments have been included to present fairly the quarterly information when read in conjunction with the Consolidated Financial Statements included elsewhere herein. The operating results for any quarter are not necessarily indicative of the results for any future period.
QUARTERLY RESULTS OF OPERATIONS
Quarterly results can be affected by a number of factors, including the timing of orders, customer delivery requirements, production delays, inefficiencies, the mix of product sales and leases, raw material availability and general economic conditions.
Seasonality
Demand for off-site container leases is stronger from September through December due to increased needs for storing inventory for the holiday season by the Company's retail customers. Containers used by these customers are often returned early in the following year, usually causing a lower than normal occupancy rate for the Company during the first quarter. The occupancy levels have historically ranged from a low of 82% to a high of 95%. These seasonable fluctuations created a marginal decrease in cash flow for each of the first quarters during the past several years.
Liquidity and Capital Resources
The Company required increased amounts of financing to support the growth of its business during the last several years. This financing has been required primarily to fund the acquisition and manufacture of containers for the Company's lease fleet, the acquisition of property, plant and equipment and the expansion of the Company's manufacturing facilities.
In February 1998, the Company received proceeds of $5.2 million in connection with the exercise of warrants to purchase 1,046,000 shares of common stock at $5.00 per share. These warrants had been issued in connection with the Company's initial public offering in 1994.
In October 1997, the Company issued $6.9 million of 12% Senior Subordinated Notes ("Notes") with redeemable warrants to purchase 172,500 shares of the Company's common stock at $5.00 per share. The Notes are due November 1, 2002. From the net proceeds of the sale of the Notes, the Company repaid $3.0 million in bridge notes issued in July 1997 and reduced the borrowings outstanding under the revolving line of credit under the Senior Credit Agreement with the remainder of the net proceeds. Because the Notes were offered as part of a unit with Redeemable Warrants, a portion of the original offering price for a unit was allocated to the Notes and a portion to the Redeemable Warrants based on their respective fair market values. The resulting discount increases the effective interest rate of the Notes and is being amortized to interest expense over the life of the Notes.
The indenture related to the Notes requires the Company to comply with certain covenants including maintaining a specific tangible net worth, a maximum total funded indebtedness ratio and a maximum senior funded indebtedness ratio. The Company has been in compliance with the financial covenants at all determination dates.
In order to improve its cash flow, increase its borrowing availability and fund its continued growth, in March 1996 the Company entered into the Senior Credit Agreement with BT Commercial Corporation, as Agent for a group of lenders (the "Lenders"). Under the terms of the Senior Credit Agreement, the Lenders provided the Company with a $35.0 million revolving line of credit, amended in 1997 to $40.0 million, and a $6.0 million term loan. Borrowings under the Senior Credit Agreement are secured by substantially all of the Company's assets.
Borrowings under the term loan are to be repaid over a five-year period. Interest accrues on the term loan at the Company's option at either prime plus 1.75% or the Eurodollar rate plus 3.25%. Borrowings under the term loan are payable monthly as follows (plus interest):
Months 1 through 12 (April 1996 - March 1997) . . . $ 62,500 Months 13 through 24 (April 1997 - March 1998) . . . 83,333 Months 25 through 60 (April 1998 - March 2001) . . . 118,056
Additional principal payments equal to 75% of Excess Cash Flow, as defined in the term loan documents which constitute part of the Senior Credit Agreement, are required annually. As of December 31, 1997, no additional payment was required under this provision.
Available borrowings under the revolving line of credit are based upon the level of the Company's inventories, receivables and container lease fleet. The container lease fleet will be appraised at least annually, and up to 90% of the lesser of cost or appraised orderly liquidation value may be included in the borrowing base. Interest accrues at the Company's option at either prime plus 1.5% or the Eurodollar rate plus 3% and is payable monthly or at the end of the term of any Eurodollar borrowing period. The term of this revolving line of credit is three years, with a one-year extension option. As of December 31, 1997, $35.9 million of borrowings were outstanding and approximately $4.1 million of additional borrowing was available under the revolving line of credit. At March 18, 1998, $35.1 million of borrowings were outstanding and approximately $4.9 million of additional borrowing was available.
The Senior Credit Agreement contains several financial covenants including a minimum tangible net worth requirement, a minimum fixed charge coverage ratio, a maximum ratio of debt-to-equity, minimum operating income levels and minimum required utilization rates. In addition, the Senior Credit Agreement contains limits on capital expenditures, acquisitions, changes in control, the incurrence of additional debt, and the repurchase of common stock, and prohibits the payment of dividends. The Company has been in compliance with such financial covenants at all determination dates.
During 1997, the Company's operations provided cash flow of $6,077,000, compared to utilizing $1,390,000 in 1996. The improvement in cash flow resulted primarily from improved operating results achieved in 1997. Cash flow in 1996 was adversely affected by a reduction of accounts payables partially offset by an increase in leasing receivables which typically have a longer turnover period.
During 1997, the Company invested $19,219,000 in equipment and the container lease fleet. This amount is net of $2,447,000 in container sales and equipment financing.
Cash flow from financing activities totaled $13,410,000 during 1997. This was the result of increased borrowings, under the revolving line of credit, to finance container lease fleet and equipment acquisitions, and the issuance of the Notes, partially offset by the principal payments on indebtedness and additional financing costs incurred.
The Company believes that its current capitalization, together with borrowings available under the Senior Credit Agreement, is sufficient to maintain its current level of operations and permit a modest level of growth. However, should demand for the Company's products continue to grow at a significant rate, the Company would be required to secure additional financing through additional borrowings, debt or equity offerings, or a combination of these sources to meet this demand. The Company believes that such financing will be available; however, there is no assurance that any such financings will be obtained or obtained on terms acceptable to the Company.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Company issued and sold $6,900,000 of 12% Senior Subordinated Notes due 2002 and Redeemable Warrants to purchase shares of the Company's common stock, in October 1997, in a public offering subject to its Registration Statement dated August 26, 1997, as amended (Securities and Exchange Commission ("SEC") File Number 333-34413). That Registration Statement and the Prospectus dated October 8, 1997, which is a part of it (the "Prospectus"), include a section entitled "Risk Factors," which describes certain factors that may affect future operating results of the Company. That section is hereby incorporated by reference in this Report. Those factors should be considered carefully in evaluating an investment in the Company's Common Stock or other securities. You may obtain a copy of the Prospectus by request to the Company's Investor Relations Department by phone, at (602) 894-6311, or by mail at Mobile Mini, Inc., 1834 West Third Street, Tempe, Arizona 85281. The Prospectus is also available through the SEC's EDGAR Database on the World Wide Web through the SEC's Internet address at "http://www.sec.gov."
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
The statements contained in this Report which are not historical facts may be deemed to contain forward-looking statements with respect to events, the occurrence of which involve risks and uncertainties, including, without limitation, demand for the Company's products and services. The continued availability to the Company of adequate financing, the ability of the Company to manage its growth, and other risks or other uncertainties detailed in the Company's SEC filing, including the Prospectus.
Year 2000 Compliance
The Company has recently upgraded its primary system using software that has been certified by the vendor to be fully compliant with the Year 2000 transactions. The Company has begun to test this software for such compliance and is developing a plan to assure that all other Company systems are Year 2000 compliant. Such plan will include testing all computers and making sure all software is upgraded to versions that are Year 2000 compliant. The Company does not anticipate any material impact to its financial condition or results of operations as a result of any failure by the Company to have systems that are Year 2000 compliant. The Company does not believe that a failure of its customers to be Year 2000 compliant will have a material adverse effect on the Company, since the principal effect which the Company foresees is late payments if customer computer systems fail to track the correct date.
The Company is advised by the Agent under the Senior Credit Agreement that the Year 2000 is not expected to cause delays or other effects in connection with transactions thereunder.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX
Report of Independent Public Accountants 20
Financial Statements-
Consolidated Balance Sheets - December 31, 1997 and 1996 21
Consolidated Statements of Operations - For the Years Ended December 31, 1997, 1996 and 1995 22
Consolidated Statements of Stockholders' Equity - For the Years Ended December 31, 1997, 1996 and 1995 23
Consolidated Statements of Cash Flows - For the Years Ended December 31, 1997, 1996 and 1995 24
Notes to Consolidated Financial Statements - December 31, 1997 and 1996 25
Financial Statement Schedule -
Valuation and Qualifying Accounts - For the Years Ended 47 December 31, 1997, 1996 and 1995
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mobile Mini, Inc.:
We have audited the accompanying consolidated balance sheets of MOBILE MINI, INC. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mobile Mini, Inc. and subsidiaries as of December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of the financial statements is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Phoenix, Arizona, February 25, 1998.
MOBILE MINI, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
The accompanying notes are an integral part of these consolidated balance sheets.
MOBILE MINI, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The accompanying notes are an integral part of these consolidated statements.
MOBILE MINI, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years ended December 31, 1997, 1996 and 1995
The accompanying notes are an integral part of these consolidated statements.
MOBILE MINI, INC. Consolidated Statement of Cash Flows For the Years Ended December 31, 1997, 1996 and 1995
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
The Company issued 60,000 shares of common stock and 15,000 warrants to purchase Company's common stock in 1997 as consideration for services performed in connection with the Bridge Notes and the $6.9 million debt offering with an aggregate value of $357,675 (Note 6). Capital lease obligations of $548,697 and $1,851,336 during 1996 and 1995, respectively, were incurred in connection with lease agreements for containers and equipment. The Company did not enter into any capital lease obligations during 1997.
The accompanying notes are an integral part of these consolidated statements.
MOBILE MINI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) THE COMPANY, ITS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
Mobile Mini, Inc., a Delaware corporation, designs and manufactures portable steel storage containers and telecommunications shelters and acquires and refurbishes ocean-going shipping containers for sale and lease primarily in Arizona, California, Texas and Nevada. It also designs and manufactures a variety of delivery systems to compliment its storage container sales and leasing activities.
Principles of Consolidation
The consolidated financial statements include the accounts of Mobile Mini, Inc. and its wholly owned subsidiaries, Delivery Design Systems, Inc. ("DDS") and Mobile Mini I, Inc. (collectively the "Company"). All material intercompany transactions have been eliminated. Certain amounts in the accompanying financial statements have been reclassified to conform to current year's financial presentation.
Management's Plans
The Company has experienced rapid growth during the last several years with lease revenues increasing at a 41% compounded rate during the last four years. This growth related to both the opening of additional sales and leasing offices in California and Texas and to an increase in leasing revenues due to the expansion of the Company's container lease fleet.
As discussed more fully in Note 3, in March 1996, the Company entered into a $41.0 million credit agreement (the "Senior Credit Agreement") with BT Commercial Corporation, as Agent for a group of lenders (the "Lenders"). Initially, the Senior Credit Agreement provided a $6.0 million term loan facility and a $35.0 million line of credit. Initial borrowings under the Senior Credit Agreement of $22,592,000 were used to refinance a majority of the Company's then outstanding indebtedness with the more favorable terms available under the Senior Credit Agreement. The Company's revolving line of credit under the Senior Credit Agreement was increased from $35.0 million to $40.0 million during 1997. The Company intends to use its remaining borrowing availability, primarily to expand its container lease fleet and related operations.
The Company believes that its current capitalization, together with borrowings available under the Senior Credit Agreement, is sufficient to maintain its current level of operations and permit controlled growth and increased profitability. However, should demand for the Company's products continue to grow at a significant rate, the Company would be required to secure additional financing through additional borrowings, debt or equity offerings, or a combination of these sources. The Company believes that such financing will be available; however, there is no assurance that any such financings will be obtained or obtained on terms acceptable to the Company.
The Company's ability to obtain used containers for its lease fleet is subject in large part to the availability of these containers in the market. This is in part subject to international trade issues and the demand for containers in the ocean cargo shipping business. Should there be a shortage in supply of used containers, the Company could supplement its lease fleet with new manufactured containers. However, should there be an overabundance of these used containers available, it is likely that prices would fall. This could result in a reduction in the lease rates the Company could obtain from its container leasing operations. It could also cause the appraised orderly liquidation value of the containers in the lease fleet to decline. In such event, the Company's ability to finance its business through the Senior Credit Agreement would be severely limited as the maximum borrowing limit under that facility is based upon the appraised orderly liquidation value of the Company's container lease fleet.
The Company previously was involved in the manufacture, sale and leasing of modular steel buildings in the state of Arizona. These buildings were used primarily as portable schools, but could be used for a variety of purposes. Although the Company believes its modular buildings were superior to the wood-framed buildings offered by its competitors, the Company was not able to generate acceptable margins on this product line. During 1996, the Company implemented a strategic restructuring program designed to concentrate management effort and resources and better position itself to achieve its strategic growth objectives. As a result of this program, the Company's 1996 results include charges of $700,000 ($400,000 after tax, or $.06 per share) for costs associated with restructuring the Company's manufacturing operations and for other related charges. These charges were recorded in the fourth quarter of 1996, and were comprised of the write-down of assets used in the Company's discontinued modular building operations and related severance obligations ($300,000), and the write-down of other fixed assets ($400,000). By discontinuing its modular building operations, the Company will be able to utilize the management resources and production capacity previously utilized by this division to expand the Company's telecommunications shelter business and its container leasing operations.
Revenue Recognition
The Company recognizes revenue from sales of containers upon delivery. Revenue generated under container leases is recognized on a straight-line basis over the term of the related lease.
Revenue under certain contracts for the manufacture of modular buildings and telecommunication shelters is recognized using the percentage-of-completion method primarily based on contract costs incurred to date compared with total estimated contract costs. Provision for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Costs and estimated earnings in excess of billings on incomplete contracts is approximately $307,000 at December 31, 1997 and are included in receivables in the accompanying consolidated balance sheet. Costs and estimated earnings less billings on incomplete contracts of approximately $141,000 in 1996, represent amounts received in excess of revenue recognized and are included in accrued liabilities in the accompanying consolidated balance sheet.
Revenue for container delivery, pick-up and hauling is recognized as the related services are provided.
Concentrations of Credit Risk
Financial instruments which potentially expose the Company to concentrations of credit risk, as defined by Statement of Financial Accounting Standards ("SFAS") No. 105, consist primarily of receivables. Concentration of credit risk with respect to receivables are limited due to the large number of customers spread over a large geographic area in many industry segments. The Company's receivables related to its sales operations are generally secured by the related product sold to the customer. The Company's receivables related to its leasing operations are primarily small month-to-month amounts generated from both offsite and on site customers. The Company has the right to repossess the storage unit, including any customer goods, for failure of non payment.
The Company's sales and leasing customers by major category are presented below as a percentage of units leased/sold:
1997 1996 ------ ------
Leasing Sales Leasing Sales ------- ----- ------- -----
Retail and wholesale businesses 47% 42% 52% 54%
Construction 24% 13% 22% 12%
Institutions 7% 21% 4% 14%
Homeowners 17% 6% 17% 5%
Government, industrial and other 5% 18% 5% 15%
Cash and Cash Equivalents
Cash and cash equivalents at December 31, 1997 include $416,845 (including earned interest) in an interest reserve account as required under the Indenture (see Note 6) in connection with the issuance of 12% Senior Subordinated Notes and represents an amount equal to at least six months' interest based on the principal amount outstanding.
Inventories
Inventories are stated at the lower of cost or market, with cost being determined under the specific identification method. Market is the lower of replacement cost or net realizable value. Inventories at December 31 consist of the following:
1997 1996 ------ ------
Raw materials and supplies $3,241,962 $3,547,487 Work-in-process 631,399 288,986 Finished containers 874,955 1,161,909 ---------- ----------
$4,748,316 $4,998,382 ========== ==========
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is provided using the straight-line method over the assets' estimated useful lives. Salvage values are determined when the property is constructed or acquired and range up to 25%, depending on the nature of the asset. In the opinion of management, estimated salvage values do not cause carrying values to exceed net realizable value. Normal repairs and maintenance to property, plant and equipment are expensed as incurred.
Property, plant and equipment at December 31 consist of the following:
Property, plant and equipment includes assets acquired under capital leases of approximately $603,000 and $613,000, and accumulated amortization of approximately $107,000 and $65,000 at December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, substantially all property, plant and equipment has been pledged as collateral for notes payable obligations and obligations under capital leases (see Notes 3, 4 and 5).
Accrued Liabilities
Included in accrued liabilities in the accompanying consolidated balance sheets are customer deposits and prepayments totaling approximately $485,000 and $507,000 for the years ended December 31, 1997 and 1996, respectively.
Earnings (Loss) Per Share
During 1997, the Company adopted SFAS No. 128, Earnings per Share. Pursuant to SFAS No. 128, basic earnings per common share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the year. Diluted earnings (loss) per common share are determined assuming that options were exercised at the beginning of each year or at the time of issuance. No outstanding options were assumed to be exercised for purposes of calculating diluted earnings per share for the year ended December 31, 1995 as their effect was anti-dilutive. SFAS No. 128 is effective for financial statements for both interim and annual periods presented after December 15, 1997 and as a result, all prior period earnings per share (EPS) data presented has been restated.
Below are the required disclosures pursuant to SFAS No. 128 for the years ended December 31, 1997, 1996 and 1995:
Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by the Company using available market information and valuation methodologies. Considerable judgment is required in estimating fair values. Accordingly, the estimates may not be indicative of the amounts the Company could realize in a current market exchange.
The carrying amounts of cash, receivables and accounts payable approximate fair values. The carrying amounts of the Company's borrowing under the revolving line of credit and long-term debt instruments approximate fair value. The fair value of the Company's long-term debt and revolving line of credit is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
Deferred Financing Costs
Included in other assets are deferred financing costs of approximately $2,104,000 and $1,659,000 at December 31, 1997 and 1996, respectively. These costs of obtaining long-term financing are being amortized over the term of the related debt, using the straight-line method. The difference between amortizing the deferred financing costs using the straight-line method and amortizing such costs using the effective interest method is not material.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
(2) CONTAINER LEASE FLEET:
The Company has a container lease fleet consisting of refurbished or constructed containers and modular buildings that are leased to customers under operating lease agreements with varying terms. The containers on lease, excluding the modular buildings, are leased to customers under short term operating lease agreements. Depreciation is provided using the straight-line method over the containers' and modular buildings' estimated useful lives of 20 years with salvage values estimated at 70% of cost. In the opinion of management, estimated salvage values do not cause carrying values to exceed net realizable value. Containers and modular buildings included in the container lease fleet with an original loan value of approximately $9.2 million at December 31, 1997 and 1996, have been pledged as collateral for notes payable and obligations under capital leases. The balance of the containers are pledged as collateral under the Senior Credit Agreement (see Notes 3, 4 and 5). Normal repairs and maintenance to the containers and modular buildings are expensed as incurred.
Container lease fleet includes assets acquired under capital leases of approximately $8,255,000 and $8,043,000, and accumulated amortization of approximately $317,000 and $204,000 at December 31, 1997 and 1996, respectively.
(3) LINE OF CREDIT:
In March 1996, the Company entered into the Senior Credit Agreement. Under the terms of the Senior Credit Agreement, as amended, the Lenders have provided the Company with a $40.0 million revolving line of credit and a $6.0 million term loan. Borrowings under the Senior Credit Agreement are secured by substantially all of the Company's assets.
Available borrowings under the revolving line of credit are based upon the level of the Company's inventories, receivables and container lease fleet. The container lease fleet is appraised at lease annually, and up to 90% of the lesser of cost or appraised orderly liquidation value, as defined, may be included in the borrowing base. Interest accrues at the Company's option at either prime plus 1.5% or the Eurodollar rate plus 3% and is payable monthly. The term of this line of credit is three years, with a one-year extension option.
In connection with the closing of the Senior Credit Agreement, the Company terminated its line of credit with its previous lender, repaying all indebtedness under that line. In addition, the Company repaid other long-term debt and obligations under capital leases totaling $14.1 million. As a result, the Company recognized costs previously deferred related to certain indebtedness and prepayment penalties resulted in an extraordinary charge to earnings in 1996 of $410,000 after benefit for income taxes.
The revolving line of credit balance outstanding at December 31, 1997, was approximately $35.9 million. The amount available for borrowing was approximately $4.1 million at December 31, 1997. Prior to the refinancing, the Company had available short-term lines of credit which bore interest at 1.5% over the prime rate. During 1997 and 1996, the weighted average interest rate under the lines of credit was 8.93% and 8.73%, respectively, and the average balance outstanding during 1997 and 1996 was approximately $32.2 million and $20.3 million, respectively.
The Senior Credit Agreement contains several covenants including a minimum consolidated tangible net worth requirement, a minimum fixed charge coverage ratio, a maximum ratio of debt to equity, minimum operating income levels and minimum required utilization rates. In addition, the Senior Credit Agreement contains limits on capital expenditures and the incurrence of additional debt, as well as prohibiting the payment of dividends.
Additional principal payments equal to 75% of Excess Cash Flow, as defined in the term loan documents which constitute part of the Senior Credit Agreement, are required annually. As of December 31, 1997, no additional payment was required under this provision.
(4) NOTES PAYABLE:
Notes payable at December 31 consist of the following:
Future maturities under notes payable are as follows:
Years ending December 31, -------------------------
1998 $ 1,937,680 1999 1,870,951 2000 1,772,540 2001 509,255 2002 32,623 --------- $6,123,049 =========
The Senior Credit Agreement contains restrictive covenants. See Note 3
(5) OBLIGATIONS UNDER CAPITAL LEASES:
The Company leases certain storage containers and equipment under capital leases expiring through 2001. Certain storage container leases were entered into under sale-leaseback arrangements with various leasing companies. The lease agreements provide the Company with a purchase option at the end of the lease term based on an agreed upon percentage of the original cost of the containers. These leases have been capitalized using interest rates ranging from approximately 8% to 14%. The leases are secured by storage containers and equipment under lease.
During 1995 and 1994, the Company entered into multi-year agreements (the "Leases") to lease a number of portable classrooms to school districts in Arizona. Subsequent to entering the leases, the Company "sold" the portable classrooms and assigned the Leases to an unrelated third party financial institution (the "Assignee"). In addition, the Company entered into Remarketing/Releasing Agreements (the "Agreements") with the Assignee. The Agreements provide that the Company will be the exclusive selling/leasing agent upon the termination of the aforementioned Leases for a period of 12 months. If the Company is successful in releasing the
buildings and the Assignee receives, via lease payments, an amount equal to the Base Price, as defined, plus any reimbursed remarketing costs of the Company, the Company has the option to repurchase the buildings for $1.00 each. If the Company sells any of the buildings, the Assignee shall receive from each sale that portion of the Base Price allocated to the building sold plus costs the Assignee has reimbursed to the Company plus interest on those combined amounts from the date of the Lease termination at the Assignee's prime rate plus 4%. Any sales proceeds in excess of this amount are to be remitted to the Company.
In the event the Company has not released or sold the buildings within 12 months of the termination of the Leases, the Assignee has the right to require the Company to repurchase the buildings for the Base Price plus all costs the Assignee has reimbursed to the Company plus interest thereon at the Assignee's prime rate plus 4% since the termination of the Lease. For financial reporting purposes these transactions were not recorded as sales but accounted for as collateralized borrowings in accordance with SFAS No. 13. For income tax purposes these transactions were treated as sales.
During 1996, leases on 15 of the buildings matured and the Company sold all 15 portable buildings in 1996 pursuant to the Agreements. The revenues from these sales are included in the accompanying statements of operations and the underlying capital lease obligations for these buildings were paid in full at December 31, 1996.
Future payments of obligations under capital leases:
Years ending December 31,
1998 $2,431,383 1999 2,405,222 2000 1,313,241 2001 54,418 --------- Total payments 6,204,264 Less: Amounts representing interest (832,661) --------- $5,371,603 =========
Certain obligations under capital leases contain financial covenants which include that the Company maintain a specified interest expense coverage ratio and a required debt to tangible net worth ratio.
Gains from sale-leaseback transactions have been deferred and are being amortized over the estimated useful lives of the related assets. Unamortized gains at December 31, 1997 and 1996, approximated $271,000 and $288,000, respectively, and are reflected as a reduction in the container lease fleet in the accompanying consolidated financial statements.
Included in the accompanying consolidated statements of operations are revenues of approximately $3,645,000 in 1995 for container sales under sale-leaseback transactions where no profit was recognized. The Company did not enter into any significant sale-leaseback transactions either in 1996 or 1997.
(6) 12% SENIOR SUBORDINATED NOTES:
In October 1997, the Company issued $6.9 million of 12% Senior Subordinated Notes ("Notes") with a scheduled maturity date of November 1, 2002 and which are considered unsecured obligations of the Company. The Notes were issued as part of a unit with Redeemable Warrants to purchase 172,500 shares of the Company's common stock at $5.00 per share. The Company is required to maintain an interest reserve account and to maintain in the reserve account, while any of the Notes are outstanding, an amount equal to six months interest on the Notes based on the principal amount outstanding. Interest is payable semi-annually on May 1 and November 1 of each year, commencing May 1, 1998. The Notes were issued in denominations and integral multiples of $5,000. Because the Notes were offered as part of a unit with Redeemable Warrants, a portion of the original offering price for a unit was allocated to the Notes and a portion to the Redeemable Warrants based on their respective fair market values. The resulting discount increases the effective interest rate of the Notes and is being amortized to interest expense over the life of the Notes.
As of December 31, 1997, the outstanding balance of the Notes was $6,647,874, net of the remaining unamortized discount of approximately $252,000.
In July 1997, the Company completed a private placement of $3.0 million of 12% senior subordinated notes (the "Bridge Notes") and warrants to purchase 50,000 shares of the Company's common stock at $5.00 per share. The Bridge Notes were due the earlier of July 31, 2002, or on the refinancing of the Bridge Notes on substantially similar terms. The Company used a portion of the proceeds from the sale of the Notes described above to repay the Bridge Notes in October of 1997. The Bridge Note lender received 15,000 shares of common stock as consideration for the cancellation of the warrants originally issued to the Bridge Note lender.
The Indenture governing the notes requires the Company to comply with certain covenants including maintaining a specific tangible net worth, a maximum total funded indebtedness ratio and a maximum senior funded indebtedness ratio.
(7) INCOME TAXES:
The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires the use of an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities at the tax rates in effect when these differences are expected to reverse.
The provision for income taxes at December 31, 1997, 1996 and 1995 consisted of the following:
1997 1996 1995 ---- ---- ----
Current $ - $ - $ - Deferred 1,467,000 377,596 610,341 --------- ------- ------- Total $1,467,000 $377,596 $610,341 ========= ======= =======
The components of the net deferred tax liability at December 31, are as follows:
A reconciliation of the federal statutory rate to the Company's effective tax rate for the years ended December 31 are as follows:
1997 1996 1995 ---- ---- ----
Statutory federal rate 34% 34% 34% State taxes, net of federal benefit 6 6 6 Other - 4 4 ---- ---- ---- 40% 44% 44% ==== ==== ====
The Company has a federal net operating loss carryover at December 31, 1997 of approximately $10,775,000 which expires if unused in years 2008 to 2012.
As a result of stock ownership changes during 1996 and 1997, it is possible that the Company has undergone one or more changes in ownership which can limit the amount of net operating loss that is currently available as a deduction. Such limitation could result in the Company being required to pay tax currently because only a portion of the net operating loss is available. Management believes that it will fully realize its net operating loss carryforward and that a valuation reserve is not necessary at December 31, 1997.
(8) TRANSACTIONS WITH RELATED PARTIES:
Effective December 31, 1993, Richard E. Bunger, an executive officer, director and founder of the Company, contributed substantially all of the assets and liabilities of MMSS and the stock of DDS to the Company in exchange for 2,700,000 shares of Common Stock and the assumption of certain liabilities by the Company. Such liabilities include liabilities associated with the MMSS assets and operations and certain income tax liabilities of Mr. Bunger and an affiliate arising from the MMSS operations occurring prior to January 1, 1994. Such income tax liabilities were estimated at $428,000 which were subsequently paid by the Company. Deferred income tax liabilities associated with the assets contributed, established at $2,393,000, were also required to be recognized by the Company in connection with such capitalization. The Company will indemnify and defend Mr. Bunger against loss or expense related to all liabilities assumed by the Company and for any contingent liabilities arising from past operations. Prior to the capitalization of the Company, Mr. Bunger personally guaranteed the Company's lines of credit and other material debts. These obligations have subsequently been extinguished through payment by the Company.
The Company leases a portion of the property comprising its Phoenix location and the property comprising its Tucson location from Mr. Bunger's five children. Annual base payments under these leases total approximately $66,000 with an annual adjustment based on the Consumer Price Index. The term of each of these leases will expire on December 31, 2003. Additionally, the Company leases its Rialto, California facility from Mobile Mini Systems, Inc., an affiliate, wholly owned by Mr. Bunger, for total annual base payments of $204,000, with annual adjustments based on the Consumer Price Index. The Rialto lease is for a term of 15 years expiring on December 31, 2011. Management believes the rental rates reflect the fair market value of these properties. The Company purchased certain leased property at its Maricopa, Arizona facility from Mr. Bunger on March 29, 1996, for a purchase price of $335,000, which management believes reflected the fair market value of the property. All ongoing and future transactions with affiliates will be on terms no less favorable than could be obtained from unaffiliated parties and will be approved by a majority of the independent and disinterested directors.
The Company obtains services throughout the year from Skilquest, Inc., a company engaged in sales and management support programs. Skilquest, Inc. is owned by Carolyn Clawson, the daughter of Mr. Richard E. Bunger and sister to Steven G. Bunger. The Company made aggregate payments of approximately $73,000 to Skilquest, Inc. in 1997 which the Company believes reflects the fair market value for the services performed.
(9) BENEFIT PLANS:
Stock Option Plan
In August 1994, the Company's board of directors adopted the Mobile Mini, Inc. 1994 Stock Option Plan ("the Plan"). Under the terms of the Plan, both incentive stock options ("ISOs"), which are intended to meet the requirements of Section 422 of the Internal Revenue Code, and non-qualified stock options may be granted. ISOs may be granted to the officers and key personnel of the Company. Non-qualified stock options may be granted to the Company's directors and key personnel, and to providers of various services to the Company. The purpose of the Plan is to provide a means of performance-based compensation in order to attract and retain qualified personnel and to provide an incentive to others whose job performance or services affect the Company.
Under the Plan, as amended in 1997, options to purchase a maximum of 750,000 shares of the Company's common stock may be granted. The exercise price for any option granted under the Plan may not be less than 100% (110% if the option is an ISO granted to a stockholder who at the time the option is granted owns stock comprising more than 10% of the total combined voting power of all classes of stock of the Company) of the fair market value of the common stock at the time the option is granted. The option holder may pay the exercise price in cash or by delivery of previously acquired shares of common stock of the Company that have been held for at least six months.
The Plan is administered by the compensation committee of the board of directors which determines whether such options will be granted, whether such options will be ISOs or non-qualified options, which directors, officers, key personnel and service providers will be granted options, the restrictions upon the forfeitablity of such options and the number of options to be granted, subject to the aggregate maximum number set forth above. Each option granted must terminate no more than 10 years from the date it is granted.
The board of directors may amend the Plan at any time, except that approval by the Company's shareholders may be required for any amendment that increases the aggregate number of shares which may be issued pursuant to the Plan, changes the class of persons eligible to receive such options, modifies the period within which the options may be granted, modifies the period within which the options may be exercised or the terms upon which options may be exercised, or increases the material benefits accruing to the participants under the Plan. Unless previously terminated by the board of directors, the Plan will terminate in November, 2003, but any option granted thereunder will continue throughout the term of such option.
The Company accounts for its stock-based compensation plan under APB No. 25, under which no compensation expense has been recognized in the accompanying financial statements for stock-based employee awards. All stock options have been granted with an exercise price equal to or greater than the fair value of the Company's common stock on the date of grant. The Company adopted SFAS No. 123 for disclosure purposes in fiscal 1996. For purposes of SFAS No. 123, the fair value of each option granted has been estimated at the date of the grant using the Black-Scholes option pricing model using the following assumptions:
Risk free interest rates range 6.0 to 6.6% Expected holding period 4.0 years Dividend rate 0.0% Expected volatility 55.4%
Under these assumptions, the fair value of the stock options granted was $190,570 and $99,418 for the years ended December 31, 1997 and 1996, respectively. These amounts would be amortized on the straight-line basis as compensation expense, over the average holding period of the options. If the Company had accounted for stock options consistent with SFAS No. 123, utilizing the assumptions detailed above, the Company's net income (loss) and earnings (loss) per share would have been reported as follows at December 31:
1997 1996 1995 ---------- ---------- ---------- Net income As reported $2,200,396 $ 70,222 $ (473,205) Pro forma 2,086,054 14,548 (505,034) Basic EPS: As reported $ 0.33 $ 0.01 $ (0.10) Pro forma 0.31 0.00 (0.10) Diluted EPS: As reported $ 0.32 $ 0.01 $ (0.10) Pro forma 0.31 0.00 (0.10)
The effect of applying SFAS No. 123 for providing pro forma disclosures is not likely to be representative of the effect on reported net income (loss) or earnings (loss) per share for future years, because options vest over several years, additional stock options are generally awarded in each year, and SFAS No. 123 has not been applied to options granted prior to January 1, 1995.
The following summarizes the activities under the Company's stock option plan at December 31, 1997, 1996 and 1995:
Options outstanding and exercisable by price range as of December 31, 1997 are as follows:
401(k) Plan
In 1995, the Company established a contributory retirement plan (the "401(k) Plan") covering eligible employees with at least one year of service. The 401(k) Plan is designed to provide tax-deferred income to the Company's employees in accordance with the provisions of Section 401(k) of the Internal Revenue Code.
The 401(k) Plan provides that each participant may annually contribute 2% to 15% of their respective salary, not to exceed the statutory limit. The Company may make a qualified non-elective contribution in an amount as determined by the Company. Under the terms of the 401(k) Plan, the Company may also make discretionary profit sharing contributions. Profit sharing contributions are allocated among participants based on their annual compensation. Each participant has the right to direct the investment of their funds among certain named plans. The Company did not make any qualified non-elective contributions or profit sharing contributions to the 401(k) Plan during 1996 or 1995. In 1997 the Company contributed 10% of the employees contributions up to a maximum of $500 per employee.
(10) COMMITMENTS AND CONTINGENCIES:
As discussed more fully in Note 8, the Company is obligated under noncancelable operating leases with related parties. The Company also leases its corporate offices and other properties, as well as operating equipment from third parties under noncancelable operating
leases. Rent expense under these agreements was approximately $932,000, $649,000, and $515,000 for the years ended December 31, 1997, 1996, and 1995, respectively. Total future commitments under all noncancelable agreements for the years ended December 31, are approximately as follows:
1998 $ 999,000 1999 1,003,000 2000 943,000 2001 758,000 2002 582,000 Thereafter 3,201,000 --------- $7,486,000 =========
In April 1997, the Company entered into a stock purchase agreement with an individual who had agreed to work for the Company. Under the stock purchase agreement, the individual was to purchase 500,000 shares of common stock on July 1, 1997. On June 30, 1997, at the individual's request, the Company extended the closing date to July 3, 1997. The individual did not tender funds by the extended closing date. In July 1997, the Company brought an action in US District Court for the District of Arizona to have the court declare the Company's obligations under the stock purchase agreement terminated. The individual opposes the Company's request, and has requested that the Company be ordered to perform under the stock purchase or, alternatively, pay him damages, including treble damages. In addition, the individual has filed a counterclaim alleging constructive discharge. The Company is vigorously pursuing the action and does not believe it will have any material impact on the financial condition or the results of operations of the Company.
The Company is involved in certain administrative proceedings arising in the normal course of business. In the opinion of management, the Company's potential exposure under the pending administrative proceedings is adequately provided for in the accompanying financial statements and any adverse outcome will not have a material impact on the Company's results of operations or its financial condition.
(11) STOCKHOLDERS' EQUITY:
Initial Public Offering
In February 1994, the Company successfully completed an initial public offering of 937,500 Units, each Unit consisting of two shares of common stock and one detachable warrant (the "Warrants") for the purchase of one share of common stock for $5.00 per share, which expired on February 17, 1998. An additional 130,000 Units were sold in March 1994 pursuant to the underwriters' over-allotment option. Net proceeds to the Company totaled $7,027,118.
The Company also granted the underwriters a warrant ("Underwriters' Warrant") for the purchase of an additional 93,750 Units. The Underwriters' Warrant is exercisable for four years, commencing on February 17, 1995, at an exercise price of $12.00 per unit. As of December 31, 1997, none of the Warrants or Underwriters' Warrants had been exercised.
Series A Convertible Preferred Stock
In December 1995, the Company completed the private placement of 50,000 shares of Series A Convertible Preferred Stock ("Series A"), $.01 par value, $100 stated value, for aggregate net proceeds of $4.1 million. Pursuant to the terms of the Series A, all 50,000 shares of Series A were converted into 1,904,324 shares of the Company's common stock at an average conversion rate of $2.63 per share during the first quarter of 1996, at which time all such shares of the Series A convertible Preferred Stock became authorized but unissued shares of Preferred Stock which may be reissued.
In connection with the issuance of the Series A the Company recorded a preferred stock dividend of $1,250,000 at December 31, 1995 in accordance with the accounting treatment announced by the staff of the SEC at the March 13, 1997 meeting of the Emerging Issues Task Force whereas the Series A had "beneficial conversion" features which permitted the holder to convert their holdings to common shares at a fixed discount off of the market price of the common shares when converted. The effect of the dividend resulted
in a decrease in earnings per share applicable to common shareholders of $.25, however, the recognition in the calculation of earnings (loss) per share did not have any effect on the cash flows of the Company.
Redeemable Warrants
Redeemable Warrants to purchase 187,500 shares of the Company's common stock at $5.00 per share (subject to adjustment as described below) were issued in connection with the issuance of the Notes (Note 6). A portion of the original offering price was allocated to the Notes and the Redeemable Warrants based on their relative fair values. The Redeemable Warrants first become exercisable on March 1, 1998. The expiration date of the Redeemable Warrants is November 1, 2002. After October 13, 1999, the Company has the right to redeem the Redeemable Warrants at any time after the date that the closing price of the common stock has equaled or exceeded $8.75 per share for a period of 20 consecutive trading days. The redemption price is $0.05 per Redeemable Warrant.
The number of shares of common stock for which a Redeemable Warrant is exercisable and the purchase price thereof are subject to adjustment from time to time upon the occurrence of certain events, including, among other things, certain dividends and distributions and issuances of shares of common stock at a price below the market price. A Redeemable Warrant does not entitle the holder thereof to receive any dividends paid on common stock nor does a holder of Redeemable Warrants, as such, have any rights of a stockholder of the Company.
(12) SUBSEQUENT EVENTS:
On January 20, 1998 the Company acquired the assets of Nevada Storage Containers ("NSC"), a Las Vegas based container leasing and sales business. The purchase price included approximately $1.4 million in cash and approximately 85,000 shares of the Company's common stock. The Company acquired NSC's containers under lease to customers and other operating equipment. Under the purchase agreement, the shares of common stock will not be issued until one year after the closing date.
As of their expiration date of February 17, 1998, 1,046,212 of the 1,067,500 warrants issued in connection with the Company's initial public offering in February 1994, have been exercised for an equal amount of shares of the Company's common stock. The Company received proceeds of approximately $5.2 million which the Company intends to use for working capital purposes.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below are the names and ages of and other relevant information about the directors and executive officers of the Company.
Richard E. Bunger, age 60, has served as the Chairman of the Board and a Director since the Company's inception in 1983. He also served as the Company's Chief Executive Officer and President from inception through April 1997. Since April 1997, Mr. Bunger has served as the Company's Director of Product Research and Market Development. Mr. Bunger has been awarded approximately 70 patents, many related to portable storage technology. For a period of approximately 25 years prior to founding the Company, Mr. Bunger owned and operated Corral Industries Incorporated, a worldwide designer/builder of integrated animal production facilities, and a designer/builder of mini storage facilities.
Steven G. Bunger, age 36, has served as Chief Executive Officer and President since April 1997 and is a founding Director of the Company. Prior to April 1997, Mr. Bunger served as the Company's Chief Operating Officer and was responsible for overseeing all of the Company's operations and sales activities with overall responsibility for advertising, marketing and pricing. Mr. Bunger graduated from Arizona State University in 1986 with a BA - Business Administration. He is the son of Richard E. Bunger.
Lawrence Trachtenberg, age 41, Executive Vice President and Chief Financial Officer, General Counsel, Secretary, Treasurer and Director, joined the Company in December 1995. Mr. Trachtenberg is primarily responsible for all accounting, banking and related financial matters for the Company. Mr. Trachtenberg is admitted to practice law in the States of Arizona and New York and is a Certified Public Accountant in New York. Prior to joining the Company, Mr. Trachtenberg served as Vice President and General Counsel at Express America Mortgage Corporation, a mortgage banking company, from February 1994 through September 1995 and as Vice President and Chief Financial Officer of Pacific International Services Corporation, a corporation engaged in car rentals and sales, from March 1990 through January 1994. Mr. Trachtenberg received his Juris Doctorate from Harvard Law School in 1981 and his BA - Accounting/Economics from Queens College City University of New York 1977.
Burton K. Kennedy Jr., age 50, Senior Vice President of Sales and Marketing, was originally with the Company's predecessor from March 1986 when the Company had only a few hundred units to September 1991 when the Company had grown to several thousand units and rejoined the Company July of 1996. Mr. Kennedy has the overall responsibility for all branch lease and sale operations and also directs the acquisition of container inventory. From September 1993 through June 1996, Mr. Kennedy served in various executive positions with National Security Containers, a division of Cavco, Inc. From April 1992 through August 1993 he was a working partner in American Bonsai.
George E. Berkner, age 63, Director, became a member of the Board of Directors of the Company in December, 1993. From August, 1992 to present, Mr. Berkner has been the Vice President of AdGraphics, Inc., a computer graphics company. From May, 1990 to August, 1992, Mr. Berkner was a private investor. From February, 1972 until May, 1990, Mr. Berkner was the President and Chief Executive Officer of Gila River Products, a plastics manufacturer with 155 employees. Mr. Berkner is also a director of Auto X-Ray, Inc. Mr. Berkner graduated from St. Johns University with a BA-Economics/Business in 1956.
Ronald J. Marusiak, age 50, Director, became a member of the Board of Directors of the Company in February 1996. From January 1988 to present, Mr. Marusiak has been the Division President of Micro-Tronics, Inc., a corporation engaged in precision machining and tool and die building for companies throughout the U.S. Mr. Marusiak is the co-owner of R2B2 Systems, Inc., a computer hardware and software company. Mr. Marusiak is also a director of W.B. McKee Securities Inc. Mr. Marusiak received a Masters of Science in Management from LaVerne University in 1979 and graduated from the United States Air Force Academy in 1971.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's officers and directors, and persons who beneficially own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and change in ownership with the Securities and Exchange Commission (the "SEC") and The Nasdaq Stock Market. Such reports are filed on Form 3, Form 4, and Form 5 under the Exchange Act. Officers, directors and greater than ten-percent shareholders are required by Exchange Act regulations to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the Company believes that, during fiscal year ended December 31, 1997 all officers, directors, and greater than ten-percent beneficial owners complied with the applicable Section 16(a) filing requirements.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Compensation Summary of Executive Officers
The following table sets forth certain compensation paid or accrued by the Company during the fiscal year ended December 31, 1997 to the Chairman of the Board and executive officers of the Company whose salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
- --------------------
(1) The Company provides Mr. Bunger with the use of a Company-owned vehicle and a $2 million life insurance policy. The amount shown represents the Company's estimate of costs borne by it in connection with the vehicle, including fuel, maintenance, license fees and other operating costs (approximately $4,100 for such years) and the life insurance premiums paid by the Company.
(2) Mr. Steven Bunger and Mr. Trachtenberg are each paid $5,000 per year in consideration of their respective non-compete agreements. Mr. Bunger entered into such agreement after the commencement of the 1995 fiscal year.
(3) Mr. Kennedy is paid $5,000 per year in consideration of his non-compete agreement. Mr. Kennedy entered into such agreement upon the commencement of his employment with the Company in July, 1996. In 1996, Mr. Kennedy received a sign-up incentive in connection with his employment and such non-compete agreement.
Option Grants
The following table sets forth certain information regarding the grant and exercise of options to the Named Officers in 1997.
OPTION GRANTS IN FISCAL YEAR 1997
(1) This disclosure is provided pursuant to Item 402(c) of Regulation S-K and assumes that the actual stock price appreciation over the maximum remaining option terms (10 years) will be at the assumed 5% and 10% levels.
Option Exercises and Values
The following table sets forth certain information regarding the exercise and values of options held by the Named Officers as of December 31,
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
(1) All the exercisable options were exercisable at a price less than the last reported sale price of the Common Stock ($5.812) on the Nasdaq Stock Market on December 31, 1997.
Employment Agreements
The Company provides Mr. Richard Bunger with a $2 million life insurance policy, a Company owned vehicle, and all the employee benefits provided to the Company's executive employees.
Although the Company has not entered into any long-term employment contracts with any of its employees, the Company has entered into numerous agreements with key employees which are terminable at will, with or without cause, including agreements with Steven G. Bunger, Lawrence Trachtenberg and Burton K. Kennedy Jr. Each of these agreements contains a covenant not to compete for a period of two years after termination of employment and a covenant not to disclose confidential information of a proprietary nature to third parties.
The Company had numerous bonus and incentive arrangements with several employees during 1997, including Mr. Richard Bunger, Mr. Steven G. Bunger, Mr. Trachtenberg and Mr. Kennedy. These agreements included an incentive program to provide financial awards for an increase in revenues or for the attainment of quotas. These compensation agreements were evaluated by an independent executive compensation consulting organization and effective January 1, 1997, these above named employees were compensated in 1997 based on commensurate fair market salaries plus an incentive program.
Compensation of Directors
The Company's directors (other than directors who are officers of the Company) received cash compensation for service on the Board of Directors and committees thereof in the amount of $500 per quarterly meeting. Prior to August 1, 1997, non-employee directors had the right to receive options to acquire 3,000 shares of Common Stock on each August 1 while serving as members of the compensation committee; from and after August 1, 1997, this was increased to 7,500 shares of common stock on each August 1.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of March 18, 1998 with respect to the beneficial ownership of the Company's Common Stock by each shareholder known by the Company to be the beneficial owner of more than five percent of its outstanding Common Stock, by each director who owns shares of the Company's Common Stock, and by all executive officers and directors as a group. Each person named has sole voting and investment power with respect to all of the shares indicated, except as otherwise noted.
* Less than 1%.
(1) The inclusion herein of any shares of Common Stock does not constitute an admission of beneficial ownership of such shares, but are included in accordance with rules of the Securities and Exchange Commission. (2) Includes shares of Common Stock subject to options which are presently exercisable or which may become exercisable within 60 days of March 18, 1998. (3) Includes 2,290,000 shares owned by REB/BMB Family Limited Partnership and 83,000 shares subject to exercisable options. Mr. Bunger disclaims any beneficial ownership of shares held by REB/BMB Family Limited Partnership in excess 1,894,379. All shares held by Mr. Bunger are held as community property. (4) Includes 82,000 shares owned by Bunger Holdings, L.L.C., 166,174 shares owned by REB/BMB Family Limited Partnership 1,779 shares and 53,000 shares subject to exercisable options. Of the 166,174 shares owned by REB/BMB Family Limited Partnership, 80,150 are held for members of Mr. Bunger's immediate family. (5) Includes 7,191 shares and 53,000 shares subject to exercisable options. (6) Includes: (a) 12,400 shares held by Mr. Marusiak's children; (b) 11,050 shares held by Mr. Marusiak and his wife (c) 92,500 shares held by Micro-Tronics, Inc.'s Profit Sharing Plan and Trust (the "Plan") of which Mr. Marusiak is Trustee and Plan Administrator. Mr. Marusiak disclaims any beneficial ownership of 80% of the shares held by the Plan, as his pro rata ownership interest is limited to 20% of the Plan's assets; and (d) 8,625 shares subject to exercisable options.. (7) Includes 9,000 shares, and 14,625 shares subject to exercisable options. (8) Richard E. Bunger and his wife, Barbara M. Bunger, are the general partners of REB/BMB Family Limited Partnership. (9) The members of Bunger Holdings, L.L.C. are Steven G. Bunger, Carolyn Clawson, Michael Bunger, Jennifer Blackwell and Susan Keating, each a child of Richard E. Bunger. (10) Furnished in reliance upon information set forth in a Schedule 13G dated February 10, 1998 and filed by Kennedy Capital Management, Inc. ("KCMI") with the Securities and Exchange Commission. KCMI is an Investment Advisor registered under the Investment Advisors Act of 1940 according to information set forth in its Schedule 13G. As of December 31, 1997, KCMI was a beneficial owner of more than five percent of the Company's Common Stock. Subsequently, publicly held warrants were converted to approximately 1,046,200 shares of common stock, increasing the number of outstanding shares of common stock to approximately 7,845,700 shares.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company leases certain of its business locations from affiliates of Mr. Richard E. Bunger, including his children. Mr. Bunger is an executive officer, director and founder of the Company. The Company entered into an agreement, effective January 1, 1994, to lease a portion of the property comprising its Phoenix location and the property comprising its Tucson location from Richard E. Bunger's five children. Total annual base lease payments under these leases currently equal $66,000, with annual adjustment based on the consumer price index. Lease payments in fiscal year 1997 equaled $71,824. The term of each of these leases will expire on December 31, 2003. Prior to 1994, these properties were leased by the Company's predecessor at annual rental payments equaling $14,000. Additionally, the Company entered into an agreement effective January 1, 1994 to lease its Rialto facility from Mobile Mini Systems, Inc. for total annual base lease payments of $204,000 with annual adjustments based on the consumer price index. This lease agreement was extended for and additional five years during 1996. Lease payments in fiscal year 1997 equaled $222,000. Prior to 1994, the Rialto site was leased to the Company's predecessor at an annual rate of $132,000. Management believes the increase in rental rates reflect the fair market rental value of these properties. Prior to the effectiveness of the written leases, the terms were approved by the Company's independent and disinterested directors.
In March 1994 the Company's manufacturing facility in Maricopa, Arizona needed additional acreage to expand its manufacturing capabilities and began using approximately 22 acres of property owned by Richard E. Bunger. The Company leased this property from Mr. Bunger with annual payments of $40,000 with an annual adjustment based on the Consumer Price Index. The Company purchased the property from Mr. Bunger on March 29, 1996 for a purchase price of $335,000, which management believes reflected the fair market value of the property.
The Company obtains services throughout the year from Skilquest, Inc., a company engaged in sales and management support programs. Skilquest, Inc. is owned by Carolyn Clawson, the daughter of Mr. Richard E. Bunger and sister to Steven G. Bunger. The Company made aggregate payments of approximately $73,000 to Skilquest, Inc. in 1997 which the Company believes reflects the fair market value for the services performed.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report:
(1) The financial statements required to be included in this Report are included in ITEM 8 of this Report.
(2) The following financial statement schedule for the years ended December 31, 1997, 1996 and 1995 is submitted herewith: Schedule II - Valuation and Qualifying Accounts All other schedules have been omitted because they are not applicable or not required.
(3) Exhibits
All other exhibits are omitted as the information required is inapplicable
(1) Incorporated by reference to the Registrant's Registration Statement on Form SB-2 (No. 33-71528-LA), as amended (2) Incorporated by reference to the Registrant's Registration Statement on Form S-2 (No. 333-34413) (3) Incorporated by reference from the Registrant's Form 10-QSB for the quarter ended September 30, 1994 (4) Incorporated by reference from the Registrant's Form 10-KSB for the fiscal year ended December 31, 1994 (5) Incorporated by reference from the Registrant's Form 10-KSB for the fiscal year ended December 31, 1995 (6) Incorporated by reference to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1996 (7) Incorporated by reference to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1997 (b) Reports on Form 8-K
None
SCHEDULE II
MOBILE MINI, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
December 31, ------------ 1997 1996 1995 ------ ------ ------
Allowance for doubtful accounts:
Balance at beginning of year $268,181 $157,659 $256,022 Provision charged to expense 1,104,863 502,065 382,653 Write-offs (480,052) (391,543) (481,016) -------- -------- --------
Balance at end of year $892,992 $268,181 $157,659 ======== ======== ========
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.