1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION JUNE 25, 1999
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K/A
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AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 0-13292
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MCGRATH RENTCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-2579843
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5700 LAS POSITAS ROAD, LIVERMORE, CA 94550
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER: (925) 606-9200
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF CLASS
COMMON STOCK
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of voting stock, held by nonaffiliates of
the registrant: $177,777,794 as of March 18, 1999.
At March 18, 1999, 13,576,448 shares of Registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
McGrath RentCorp's definitive Proxy Statement with respect to its Annual
Shareholders' Meeting to be held June 3, 1999, which will be filed with the
Securities and Exchange commission within 120 days after the end of its fiscal
year, is incorporated by reference into Part III, Items 10, 11, 12 and 13.
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2
The following items appearing in the Annual Report on Form 10-K for McGrath
RentCorp (the Company), as originally filed March 31, 1999, are hereby amended.
ITEM 6. SELECTED FINANCIAL DATA.
The following item amends the original filing as to the Selected Financial
Data Table by deleting Cash Flow from Operating Activities and Cash Flow Per
Common Share for Basic and Diluted.
The following table summarizes the Company's selected financial data for
the five years ended December 31, 1998 and should be read in conjunction with
the more detailed Consolidated Financial Statements and related notes reported
in Item 8.
SELECTED CONSOLIDATED FINANCIAL DATA
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(dollar and share amounts in thousands,
YEAR ENDED DECEMBER 31,
----------------------------------------------------
except per share data)
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Operations Data
Revenues
Rental $ 71,967 $ 61,688 $ 48,986 $ 46,063 $ 46,149
Rental Related Services 11,528 10,278 8,718 7,795 8,158
-------- -------- -------- -------- --------
Rental Operations 83,495 71,966 57,704 53,858 54,307
Sales 51,044 62,021 30,175 15,839 12,700
Other 889 989 1,126 1,576 1,288
-------- -------- -------- -------- --------
Total Revenues 135,428 134,976 89,005 71,273 68,295
-------- -------- -------- -------- --------
Costs and Expenses
Direct Costs of Rental Operations
Depreciation 16,862 14,358 12,456 11,539 11,018
Rental Related Services 6,531 6,287 5,515 5,024 5,707
Other 13,390 10,375 8,703 7,370 7,544
-------- -------- -------- -------- --------
Total Direct Costs of Rental
Operations 36,783 31,020 26,674 23,933 24,269
Cost of Sales 35,189 42,550 20,532 10,735 8,634
-------- -------- -------- -------- --------
Total Costs 71,972 73,570 47,206 34,668 32,903
-------- -------- -------- -------- --------
Gross Margin 63,456 61,406 41,799 36,605 35,392
Selling and Administrative 16,220 15,957 13,147 10,459 10,747
-------- -------- -------- -------- --------
Income from Operations 47,236 45,449 28,652 26,146 24,645
Interest 6,326 4,070 2,887 2,831 2,166
-------- -------- -------- -------- --------
Income before Provision for Income
Taxes 40,910 41,379 25,765 23,315 22,479
Provision for Income Taxes 16,010 16,323 9,885 9,375 9,475
-------- -------- -------- -------- --------
Income before Minority Interest 24,900 25,056 15,880 13,940 13,004
Minority Interest in Income of
Subsidiary 1,005 1,011 358 97 --
-------- -------- -------- -------- --------
Net Income $ 23,895 $ 24,045 $ 15,522 $ 13,843 $ 13,004
-------- -------- -------- -------- --------
Net Income Per Common Share:
Basic $ 1.69 $ 1.60 $ 1.03 $ 0.87 $ 0.79
Diluted $ 1.67 $ 1.58 $ 1.01 $ 0.86 $ 0.77
Shares Used in Per Share Calculation:
Basic 14,163 14,982 15,102 15,949 16,559
Diluted 14,349 15,181 15,306 16,168 16,831
Cash Dividends Declared Per Common
Share(1) $ 0.40 $ 0.32 $ 0.28 $ 0.24 $ 0.22
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(1) Dividends for 1994 includes $0.055 per share declared in January 1995.
1
3
SELECTED CONSOLIDATED FINANCIAL DATA (continued)
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(dollar and share amounts in thousands,
YEAR ENDED DECEMBER 31,
----------------------------------------------------
except per share data)
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Balance Sheet Data (at period end)
Rental Equipment, net $200,028 $174,086 $137,292 $127,608 $127,244
Total Assets $278,676 $252,392 $200,035 $175,130 $169,923
Notes Payable $ 97,000 $ 82,000 $ 53,850 $ 37,080 $ 35,950
Shareholders' Equity $105,394 $ 98,646 $ 88,808 $ 85,893 $ 83,839
Shares Outstanding 13,970 14,522 14,820 15,540 16,137
Book Value Per Share $ 7.54 $ 6.79 $ 5.99 $ 5.53 $ 5.14
Debt (Notes Payable) to Equity 0.92 0.83 0.61 0.43 0.43
Return on Average Equity 24.0% 24.5% 18.0% 16.4% 16.1%
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following item amends the original filing as to the Consolidated
Statements of Cash Flows by reclassifying the Proceeds from Sale of Rental
Equipment from Cash Flows from Operating Activities to Cash Flow from Investing
Activities and changing the respective subtotals.
INDEX PAGE
----- ----
Report of Independent Public Accountants 3
Consolidated Financial Statements
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996 4
Consolidated Balance Sheets as of December 31, 1998, 1997
and 1996 5
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996 6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 7
Notes to Consolidated Financial Statements 8
2
4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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To the Shareholders and Board of Directors of McGrath RentCorp:
We have audited the accompanying consolidated balance sheets of McGrath
RentCorp (a California corporation) and subsidiary as of December 31, 1998 and
1997, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. 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
misstatements. 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 McGrath RentCorp as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
San Francisco, California ARTHUR ANDERSEN LLP
February 17, 1999
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MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF INCOME
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YEAR ENDED DECEMBER 31,
-------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
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REVENUES
Rental $ 71,967 $ 61,688 $48,986
Rental Related Services 11,528 10,278 8,718
-------- -------- -------
Rental Operations 83,495 71,966 57,704
Sales 51,044 62,021 30,175
Other 889 989 1,126
-------- -------- -------
Total Revenues 135,428 134,976 89,005
-------- -------- -------
COSTS AND EXPENSES
Direct Costs of Rental Operations
Depreciation 16,862 14,358 12,456
Rental Related Services 6,531 6,287 5,515
Other 13,390 10,375 8,703
-------- -------- -------
Total Direct Costs of Rental Operations 36,783 31,020 26,674
Cost of Sales 35,189 42,550 20,532
-------- -------- -------
Total Costs 71,972 73,570 47,206
-------- -------- -------
Gross Margin 63,456 61,406 41,799
Selling and Administrative 16,220 15,957 13,147
-------- -------- -------
Income from Operations 47,236 45,449 28,652
Interest 6,326 4,070 2,887
-------- -------- -------
Income before Provision for Income Taxes 40,910 41,379 25,765
Provision for Income Taxes 16,010 16,323 9,885
-------- -------- -------
Income before Minority Interest 24,900 25,056 15,880
Minority Interest in Income of Subsidiary 1,005 1,011 358
-------- -------- -------
Net Income $ 23,895 $ 24,045 $15,522
======== ======== =======
Earnings Per Share:
Basic $ 1.69 $ 1.60 $ 1.03
-------- -------- -------
Diluted $ 1.67 $ 1.58 $ 1.01
-------- -------- -------
Shares Used in Per Share Calculation:
Basic 14,163 14,982 15,102
Diluted 14,349 15,181 15,306
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The accompanying notes are an integral part of these consolidated financial
statements.
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6
MCGRATH RENTCORP
CONSOLIDATED BALANCE SHEETS
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DECEMBER 31,
--------------------
(IN THOUSANDS) 1998 1997
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ASSETS
Cash $ 857 $ 538
Accounts Receivable, less allowance for doubtful
accounts of $650 in 1998 and 1997 21,811 21,794
Rental Equipment, at cost:
Relocatable Modular Offices 216,414 196,133
Electronic Test Instruments 66,573 50,351
-------- --------
282,987 246,484
Less Accumulated Depreciation (82,959) (72,398)
-------- --------
Rental Equipment, net 200,028 174,086
-------- --------
Land, at cost 18,953 20,496
Buildings, Land Improvements, Equipment and Furniture,
at cost, less accumulated depreciation of $3,858 in 1998
and $3,177 in 1997 31,460 28,922
Prepaid Expenses and Other Assets 5,567 6,556
-------- --------
Total Assets $278,676 $252,392
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes Payable $ 97,000 $ 82,000
Accounts Payable and Accrued Liabilities 22,964 27,046
Deferred Income 5,574 6,929
Minority Interest in Subsidiary 2,584 1,523
Deferred Income Taxes 45,160 36,248
-------- --------
Total Liabilities 173,282 153,746
-------- --------
Shareholders' Equity:
Common Stock, no par value --
Authorized -- 40,000 shares
Outstanding -- 13,970 shares in 1998 and
14,522 shares in 1997 8,138 7,757
Retained Earnings 97,256 90,889
-------- --------
Total Shareholders' Equity 105,394 98,646
-------- --------
Total Liabilities and Shareholders' Equity $278,676 $252,392
======== ========
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The accompanying notes are an integral part of these consolidated financial
statements.
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MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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COMMON STOCK TOTAL
---------------------- RETAINED SHAREHOLDERS'
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SHARES AMOUNT EARNINGS EQUITY
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BALANCE AT DECEMBER 31, 1995> 15,540 $8,913 $76,980 $ 85,893
Net Income -- -- 15,522 15,522
Repurchase of Common Stock (841) (2,111) (6,668) (8,779)
Common Stock Issued or Reserved Under
Long-Term Stock Bonus Plan 21 198 -- 198
Repurchase of Common Stock in Connection
with the Exercise of Stock Options (28) (298) -- (298)
Exercise of Stock Options 128 459 -- 459
Dividends Declared of $0.28 Per Share -- -- (4,187) (4,187)
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BALANCE AT DECEMBER 31, 1996 14,820 7,161 81,647 88,808
Net Income -- -- 24,045 24,045
Repurchase of Common Stock (502) (507) (10,038) (10,545)
Common Stock Issued or Reserved Under
Long-Term Stock Bonus Plan 28 497 -- 497
Exercise of Stock Options 176 606 -- 606
Dividends Declared of $0.32 Per Share -- -- (4,765) (4,765)
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BALANCE AT DECEMBER 31, 1997 14,522 7,757 90,889 98,646
Net Income -- -- 23,895 23,895
Repurchase of Common Stock (620) (340) (11,907) (12,247)
Common Stock Issued or Reserved Under
Long-Term Stock Bonus Plan 37 485 -- 485
Exercise of Stock Options 31 236 -- 236
Dividends Declared of $0.40 Per Share -- -- (5,621) (5,621)
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BALANCE AT DECEMBER 31, 1998 13,970 $8,138 $97,256 $105,394
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The accompanying notes are an integral part of these consolidated financial
statements.
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MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
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YEAR ENDED DECEMBER 31,
--------------------------------
(IN THOUSANDS) 1998 1997 1996
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Cash Flows from Operating Activities:
Net Income $ 23,895 $ 24,045 $ 15,522
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 18,794 15,771 13,483
Gain on Sale of Rental Equipment (5,404) (6,622) (4,816)
Change In:
Accounts Receivable (17) (1,874) (6,719)
Prepaid Expenses and Other Assets 991 (4,161) (499)
Accounts Payable and Accrued Liabilities (3,850) 13,166 3,477
Deferred Income (1,354) 1,702 (740)
Deferred Income Taxes 8,912 (622) 2,381
-------- -------- --------
Net Cash Provided by Operating Activities 41,967 41,405 22,089
-------- -------- --------
Cash Flow from Investing Activities:
Purchase of Rental Equipment (51,159) (62,277) (29,925)
Purchase of Land, Buildings, Land Improvements,
Equipment and Furniture (4,041) (10,594) (8,366)
Proceeds from Sale of Land, Buildings
and Land Improvements 2,190 -- --
Proceeds from Sale of Rental Equipment 13,759 17,748 12,599
-------- -------- --------
Net Cash Used in Investing Activities (39,251) (55,123) (25,692)
-------- -------- --------
Cash Flow from Financing Activities:
Net Borrowings under Bank Lines of Credit (25,000) 28,150 16,770
Borrowings under Private Placement 40,000 -- --
Net Proceeds from the Exercise of Stock Options 236 606 161
Repurchase of Common Stock (12,247) (10,545) (8,779)
Payment of Dividends (5,386) (4,641) (4,084)
-------- -------- --------
Net Cash Provided by (Used in) Financing
Activities (2,397) 13,570 4,068
-------- -------- --------
Net Increase (Decrease) in Cash 319 (148) 465
Cash Balance, Beginning of Period 538 686 221
-------- -------- --------
Cash Balance, End of Period $ 857 $ 538 $ 686
======== ======== ========
Interest Paid During the Period $ 5,407 $ 4,010 $ 2,833
======== ======== ========
Income Taxes Paid During the Period $ 7,098 $ 16,945 $ 7,540
======== ======== ========
Dividends Declared but not yet Paid $ 1,397 $ 1,162 $ 1,038
======== ======== ========
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The accompanying notes are an integral part of these consolidated financial
statements.
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MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BUSINESS
McGrath RentCorp is a California corporation organized in 1979. McGrath
RentCorp and its majority owned subsidiary, Enviroplex, Inc. ("Enviroplex"),
collectively referred to herein as the "Company", manufactures, rents and sells
relocatable modular offices and rents and sells electronic test and measurement
instruments with related accessories primarily in California and Texas. The
Company's corporate offices are located in Livermore, California. In addition to
the corporate offices, both modular and electronics operations are conducted
from this facility.
Under the trade name "Mobile Modular Management Corporation", the Company
rents and sells modular equipment and related accessories from two branch
offices located in California and one located in Texas. The Company purchases
the modulars from various manufacturers who build them to the Company's design
specifications. Although Mobile Modular Management Corporation's primary
emphasis is on rentals, sales of modulars occur routinely and can fluctuate
quarter to quarter and from year to year depending on customer demands and
requirements.
Under the trade name "McGrath-RenTelco", the Company conducts electronics
operations from Livermore, California and Richardson, Texas. Engineers,
scientists and technicians use these instruments in evaluating the performance
of their own electrical and electronic equipment, developing products,
controlling manufacturing processes and in field service applications. These
instruments are rented primarily to electronics, communications, network
systems, industrial, research and aerospace companies. The majority of
McGrath-RenTelco's rental inventory consists of instruments manufactured by
Hewlett-Packard and Tektronix.
McGrath RentCorp owns 73.2% of Enviroplex, a California corporation
organized in 1991. Enviroplex manufactures portable classrooms built to the
requirements of the California Division of the State Architect ("DSA") and sells
directly to school districts. Enviroplex conducts its sales and manufacturing
operations from one facility located in Stockton, California.
The rental and sale of modulars to public school districts for use as
portable classrooms, restroom buildings and administrative offices for
kindergarten through grade twelve (K-12) are a significant portion of the
Company's revenues. School business comprised approximately 45%, 52% and 37% of
the Company's consolidated rental and sales revenues for 1998, 1997 and 1996,
respectively. The increase in the Company's sales revenues in 1997 was
attributed to the Class Size Reduction Program implemented by the state of
California in 1996.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of McGrath
RentCorp and Enviroplex. All significant intercompany accounts and transactions
are eliminated.
REVENUES
Rental revenue is recognized under the "operating method" of accounting for
the majority of leases. Rental billings for more than one month are recorded as
deferred income and recognized as rental revenue when earned.
Rental related services revenue is primarily associated with relocatable
modular office leases and consists of billings to customers for delivery,
installation, modifications, skirting, additional site related work, and return
delivery and dismantle. Revenue related to these services is recognized in the
period the services are performed and accepted.
Sales revenue is recognized upon delivery of the equipment to the customer.
Certain leases meeting the requirements of Statement of Financial Accounting
Standards ("SFAS") No. 13, "Accounting for Leases", are accounted for as sales
type leases. For these leases, sales revenue and the related accounts receivable
are recognized upon execution of the leases and unearned interest is recognized
over the lease term on a basis which results in a constant rate of return on the
unrecovered lease investment (see Note 4).
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MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DEPRECIATION AND MAINTENANCE
Rental equipment, buildings, land improvements, equipment and furniture are
depreciated on a straight-line basis for financial reporting purposes and on an
accelerated basis for income tax purposes. The costs of major refurbishment of
relocatable modular offices are capitalized to the extent the refurbishment
significantly improves the quality and adds value or life to the equipment. Land
improvements consist of development costs incurred to build storage and
maintenance facilities at each of the relocatable modular branch offices. The
following estimated useful lives and residual values are used for financial
reporting purposes:
RENTAL EQUIPMENT:
Relocatable modular offices 7 to 18 years, 0% to 18% residual value
Electronic test instruments 5 to 8 years, no residual value
Buildings, land improvements, equipment and
furniture 5 to 50 years, no residual value
Maintenance and repairs are expensed as incurred.
OTHER DIRECT COSTS OF RENTAL OPERATION
Other direct costs of rental operations primarily relate to costs
associated with relocatable modular offices and include equipment supplies and
repairs, direct labor, amortization of lease costs included in the rental rate,
property and liability insurance, property taxes, and business and license fees.
WARRANTY SERVICE COSTS
Sales of new relocatable modular offices, electronic test equipment and
related accessories not manufactured by the Company are typically covered by
warranties provided by the manufacturer of the products sold. The Company
provides limited 90-day warranties for certain sales of used rental equipment
and a one-year warranty on equipment manufactured by Enviroplex. Although the
Company's policy is to provide reserves for warranties when required for
specific circumstances, the Company has not found it necessary to establish such
reserves to date.
INCOME TAXES
Provision has been made for deferred income taxes based upon the amount of
taxes payable in future years, after considering changes in tax rates and other
statutory provisions that will be in effect in those years (see Note 6).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the carrying amounts of its financial instruments
(cash and notes payable) approximate fair value.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions in determining reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during each period
presented. Actual results could differ from those estimates.
EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed as net income divided by the
weighted average number of shares of common stock outstanding for the reported
period, excluding the dilutive effects of stock options and other potentially
dilutive securities. Diluted EPS is computed as net income divided by the
weighted average number of shares outstanding of common stock and common stock
equivalents for the reported period. Common stock equivalents result from
dilutive stock options computed using the treasury stock method with
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MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the average share price for the reported period. The weighted average number of
options outstanding at December 31, 1998, 1997 and 1996 were 186,624, 199,215
and 203,414, respectively.
NOTE 3. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of trade accounts receivable. The Company sells
primarily on 30-day terms, individually performs credit evaluation procedures on
its customers on each transaction and will require security deposits or personal
guarantees from its customers when a significant credit risk is identified.
Historically, the Company has not incurred significant credit related losses,
however, an allowance for potential credit losses is maintained. Typically, most
customers are established companies or are publicly funded entities located in
California or Texas. Although no one customer accounts for more than 10% of the
Company's consolidated revenues, credit risk exists in trade accounts receivable
primarily due to the significant amount of business transacted with the
California public school districts (K-12) which represents a significant portion
of the Company's revenues (see Note 1). The lack of fiscal funding or
significant reduction of funding from the State of California to the public
schools could have a material adverse effect on the Company.
NOTE 4. SALES TYPE LEASE RECEIVABLES
The Company has entered into several sales type leases. The minimum lease
payments receivable and the net investment included in accounts receivable for
such leases are as follows:
- ---------------------------------------------------------------------
December 31,
(in thousands) ------------------
1998 1997
------- -------
Gross minimum lease payments receivable $ 5,935 $ 5,339
Less -- unearned interest (1,246) (1,012)
------- -------
Net investment in sales type lease receivables $ 4,689 $ 4,327
- ---------------------------------------------------------------------
As of December 31, 1998, the future minimum lease payments to be received
in 1999 and thereafter are as follows:
- ----------------------------------------------------
(in thousands)
YEAR ENDED DECEMBER 31,
1999 $3,229
2000 1,377
2001 690
2002 362
2003 156
2004 and thereafter 121
------
Total minimum future lease payments $5,935
- ----------------------------------------------------
NOTE 5. NOTES PAYABLE
On July 31, 1998, the Company completed a private placement of $40,000,000
of 6.44% Senior Notes due in 2005. Interest on the notes is due semi-annually in
arrears and the principal is due in 5 equal installments commencing on July 15,
2001. The outstanding balance at December 31, 1998 was $40,000,000. Among other
restrictions, the agreement requires (i) the Company to maintain a minimum net
worth of $80,000,000 plus 25% of all net income generated subsequent to June 30,
1998, less a maximum of $15,000,000 paid by the Company to repurchase its common
stock after June 30, 1998, (restricted equity at December 31, 1998 is
$80,801,000), (ii) a fixed coverage charge of not less than 2.0 to 1.0, (iii) a
rolling fixed charges coverage ratio of not less than 1.5 to 1.0, and (iv)
senior debt not to exceed 275% of consolidated net worth and consolidated total
debt not to exceed 300% of consolidated net worth.
The Company maintains an unsecured line of credit agreement, as amended,
(the "Agreement") with its banks which expires on June 30, 1999 and permits it
to borrow up to $75,000,000 of which $57,000,000 was outstanding as of December
31, 1998. The Agreement requires the Company to pay interest at prime or, at the
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MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's election, other rate options available under the Agreement. In
addition, the Company pays a commitment fee on the daily average unused portion
of the available line. Among other restrictions, the Agreement requires (i) the
Company to maintain shareholders' equity of not less than $77,800,000 plus 50%
of all net income generated subsequent to June 30, 1997 plus 90% of any new
stock issuance proceeds (restricted equity at December 31, 1998 is $96,269,000),
(ii) a debt-to-equity ratio (excluding deferred income taxes) of not more than 3
to 1, (iii) interest coverage (income from operations compared to interest
expense) of not less than 2 to 1 and (iv) debt service coverage (earnings before
interest, taxes, depreciation and amortization compared to the following year's
pro forma debt service) of not less than 1.15 to 1.0. If the Company does not
amend or renegotiate the present Agreement for an additional time period prior
to its expiration date, the principal amount outstanding at that time will be
converted to a two-year term loan with principal due and payable in eight (8)
consecutive quarterly installments.
In addition to the $75,000,000 unsecured line of credit, the Company has a
$3,000,000 committed line of credit facility (at prime rate) related to its cash
management services of which none was outstanding as of December 31, 1998. This
committed line related to its cash management services will expire on June 30,
1999.
The following information relates to the lines of credit for each of the
following periods:
- ---------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
(dollar amounts in thousands) -------------------------
1998 1997
-------- -------
Maximum amount outstanding $103,500 $82,000
Average amount outstanding $ 79,326 $60,601
Weighted average interest rate 6.41% 6.50%
Effective interest rate at end of period 6.37% 6.70%
Prime interest rate at end of period 7.75% 8.50%
- ---------------------------------------------------------------------
NOTE 6. INCOME TAXES
The provision (benefit) for income taxes is comprised of the following:
- -----------------------------------------------------------------------
CURRENT DEFERRED TOTAL
(in thousands) ------- -------- -------
YEAR ENDED DECEMBER 31,
- ---------------------------------------
1998
Federal $ 5,526 $7,736 $13,262
State 1,572 1,176 2,748
------- ------ -------
$ 7,098 $8,912 $16,010
======= ====== =======
1997
Federal $14,075 $ (809) $13,266
State 2,870 187 3,057
------- ------ -------
$16,945 $ (622) $16,323
======= ====== =======
1996
Federal $ 6,032 $2,219 $ 8,251
State 1,472 162 1,634
------- ------ -------
$ 7,504 $2,381 $ 9,885
======= ====== =======
- -----------------------------------------------------------------------
The reconciliation of the federal statutory tax rate to the Company's
effective tax rate is as follows:
- ---------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997 1996
----- ----- -----
Federal statutory rate 35.00% 35.00% 35.00%
State taxes, net of federal benefit 4.37 4.80 4.12
Other (0.24) (0.35) (0.75)
----- ----- -----
39.13% 39.45% 38.37%
- ---------------------------------------------------------------------
11
13
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table shows the tax effect of the Company's cumulative
temporary differences included in net deferred income taxes on the Company's
Balance Sheets:
- ---------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
(in thousands) ------------------------
1998 1997
------- -------
Excess of tax over book depreciation $51,417 $44,859
State income taxes (3,245) (3,095)
Accrued liabilities not currently
deductible (146) (1,189)
Revenue deferred for financial reporting
purposes (1,598) (1,733)
Other, net (1,268) (2,594)
------- -------
$45,160 $36,248
- ---------------------------------------------------------------------
NOTE 7. COMMON STOCK AND STOCK OPTIONS
The Company adopted a 1998 Stock Option Plan (the "1998 Plan"), effective
March 9, 1998, under which 2,000,000 shares are reserved for the grant of
options to purchase common stock to directors, officers, key employees and
advisors of the Company. The plan provides for the award of options at a price
not less than the fair market value of the stock as determined by the Board of
Directors on the date the options are granted. Under the 1998 Plan, 242,000
options have been granted with exercise prices ranging from $20.25 to $20.81.
The options vest over 5 years and expire 10 years after grant.
The Company adopted a 1987 Incentive Stock Option Plan (the "1987 Plan"),
effective December 14, 1987, under which options to purchase common stock may be
granted to officers and key employees of the Company. The plan provides for the
award of options at a price not less than the fair market value of the stock as
determined by the Board of Directors on the date the options are granted. Under
the 1987 Plan, options have been granted with an exercise price of $3.06, $6.94
and $10.75 per share. The options vest over 9.3 years and expire 10 years after
grant. The 1987 Plan expired in December 1997 and no further options can be
issued under this plan.
Option activity and options exercisable including weighted average exercise
price for the three years ended December 31, 1998 are as follows:
- ----------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
1998 1997 1996
------------------ ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------
Options outstanding at January 1, 364,672 8.57 540,452 6.90 512,846 4.87
Options granted during the year 242,000 20.81 -- -- 160,000 10.75
Options exercised during the year (31,282) 7.55 (175,780) 3.44 (128,494) 3.58
Options terminated during the year (34,268) 12.93 -- -- (3,900) 6.94
------- ----- -------- ---- -------- -----
Options outstanding at December 31, 541,122 13.85 364,672 8.57 540,452 6.90
------- ----- -------- ---- -------- -----
Options exercisable at December 31, 171,877 8.55 153,362 7.45 278,422 4.79
- ----------------------------------------------------------------------------------------------------
The weighted average remaining life of the 541,122 options outstanding at
December 31, 1998, is 6.8 years. As of December 31, 1998, 1,758,000 options can
be issued under the 1998 plan.
Statement of Financial Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") became effective for the Company in 1996. As allowed
by SFAS 123, the Company has elected to continue to follow Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") in
accounting for its stock option plans. Under APB 25, the Company does not
recognize compensation expense on the issuance of stock options because the
option terms are fixed and the exercise price equals the market price of the
underlying stock on the grant date.
12
14
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In accordance with SFAS 123, the fair value of each option grant is
estimated at the date of grant using the Black-Scholes option pricing model. The
assumptions used in the 1998 and 1996 grants are as follows:
- --------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1996
---------------- ----------------
Risk-free interest rates 6.5% 8.5%
Expected dividend yields 2.0% 2.6%
Expected volatility 27.1% 17.2%
Expected option life (in
years) 7.5 10.0
- --------------------------------------------------------------------
The fair value of the options granted in 1998 and 1996 are $2,182,000,
$532,000 and $598,000 at December 31, 1998, 1997 and 1996, respectively.
The following pro-forma net income and earnings per share data are computed
as if compensation cost for the Stock Option Plan had been determined consistent
with SFAS 123:
- ---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
(in thousands, except per share amounts) ---------------------------------
1998 1997 1996
------- ------- -------
Net Income $23,895 $24,045 $15,522
Pro Forma net income 23,583 24,005 15,481
EPS
Basic 1.69 1.60 1.03
Diluted 1.67 1.58 1.01
Pro Forma EPS
Basic 1.67 1.60 1.03
Diluted 1.64 1.58 1.01
- ---------------------------------------------------------------------------
In 1985, the Company established an Employee Stock Ownership Plan, as
amended. Under the terms of the plan, the Company makes annual contributions in
the form of cash or common stock of the Company to a trust for the benefit of
eligible employees. The amount of the contribution is determined annually by the
Board of Directors. A contribution of $750,000 was approved for 1998 and 1997
and $650,000 for 1996.
In 1991, the Board of Directors adopted a Long-Term Stock Bonus Plan (the
"LTB Plan") under which 400,000 shares of common stock are reserved for grant to
officers and key employees. The stock bonuses granted under the LTB Plan are
evidenced by written Stock Bonus Agreements covering specified performance
periods. The LTB Plan provides for the grant of stock bonuses upon achievement
of certain financial goals during a specified period. Stock bonuses earned under
the LTB Plan vest over 5 years from the grant date contingent on the employee's
continued employment with the Company. As of December 31, 1998, 172,408 shares
of common stock have been granted, of which 107,951 shares of common stock are
vested. Future grants of 41,109 shares of common stock are authorized by the
Board of Directors to be issued under the LTB Plan in the event the Company
reaches the highest level of achievement. Compensation expense for 1998, 1997
and 1996 under these plans was $485,000, $497,000 and $198,000 respectively, and
is based on a combination of the anticipated shares to be granted, the amount of
vested shares previously issued and fluctuations in market price of the
Company's common stock.
The Board of Directors has authorized the repurchase of shares of the
Company's outstanding common stock. These purchases are to be made in the
over-the-counter market and/or through large block transactions at such
repurchase price as the officers shall deem appropriate and desirable on behalf
of the Company. All shares repurchased by the Company are to be canceled and
returned to the status of authorized but unissued shares of common stock. In
1996, the Company repurchased 841,100 shares of common stock for an aggregate
repurchase price of $8,779,000 or an average price of $10.44 per share. In 1997,
the Company repurchased 502,408 shares of common stock for an aggregate
repurchase price of $10,545,000 or an average price of $20.99 per share. In
1998, the Company repurchased 619,550 shares of common stock for an aggregate
repurchase price of $12,247,000 or an average price of $19.77 per share. As of
December 31, 1998, 819,900 shares remain authorized for repurchase (see Note 10
below).
13
15
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. BUSINESS SEGMENTS
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). The Company defined its business segments based
on the nature of operations for the purpose of reporting under SFAS 131. The
Company's three reportable segments are Mobile Modular Management Corporation
(Modulars), McGrath-RenTelco (Electronics), and Enviroplex. The operations of
each of these segments is described in Note 1, Organization and Business, and
the accounting policies of the segments are described in Note 2, Significant
Accounting Policies. As a separate corporate entity, Enviroplex revenues and
expenses are separately maintained from Modulars and Electronics. Excluding
interest expense, allocations of revenues and expenses not directly associated
with Modulars or Electronics are generally allocated to these segments based on
their pro-rata share of direct revenues. Interest expense is allocated between
Modulars and Electronics based on their pro-rata share of average rental
equipment, accounts receivable and customer security deposits. The Company does
not report total assets by business segment. Summarized financial information
for the years ended December 31, 1998, 1997, and 1996 for the Company's
reportable segments is shown in the following table:
- ------------------------------------------------------------------------------------------
MODULARS ELECTRONICS ENVIROPLEX CONSOLIDATED
(in thousands) -------- ----------- ---------- ------------
YEAR ENDED DECEMBER 31,
1998
Rental Operation Revenues $58,964 $24,531 $ -- $ 83,495
Sales and Other Revenues 23,619 7,642 20,672 51,933
Total Revenues 82,583 32,173 20,672 135,428
Depreciation on Rental Equipment 9,398 7,464 -- 16,862
Interest Expense 4,802 1,505 19 6,326
Income before Income Taxes 23,133 11,875 5,902 40,910
Rental Equipment Acquisitions 28,970 22,189 -- 51,159
Accounts Receivable, net (year-end) 10,765 6,900 4,146 21,811
Rental Equipment, at cost (year-end) 216,414 66,573 -- 282,987
1997
Rental Operation Revenues $51,412 $20,554 $ -- $ 71,966
Sales and Other Revenues 34,178 7,545 21,287 63,010
Total Revenues 85,590 28,099 21,287 134,976
Depreciation on Rental Equipment 8,154 6,204 -- 14,358
Interest Expense 3,148 880 42 4,070
Income before Income Taxes 24,708 10,723 5,948 41,379
Rental Equipment Acquisitions 49,303 12,974 -- 62,277
Accounts Receivable, net (year-end) 10,449 6,567 4,778 21,794
Rental Equipment, at cost (year-end) 196,133 50,351 -- 246,484
1996
Rental Operation Revenues $40,330 $17,374 $ -- $ 57,704
Sales and Other Revenues 15,244 5,851 10,206 31,301
Total Revenues 55,574 23,225 10,206 89,005
Depreciation on Rental Equipment 7,265 5,191 -- 12,456
Interest Expense 2,221 580 86 2,887
Income before Income Taxes 15,026 8,700 2,039 25,765
Rental Equipment Acquisitions 16,246 13,679 -- 29,925
Accounts Receivable, net (year-end) 11,678 5,220 3,022 19,920
Rental Equipment, at cost (year-end) 158,377 43,335 -- 201,712
- ------------------------------------------------------------------------------------------
14
16
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for each of the two years ended December
31, 1998 is summarized below:
- ----------------------------------------------------------------------------------------------
1998
(in thousands, except per share amounts) ----------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
----------------------------------------------------
OPERATIONS DATA
Total revenues $ 27,350 $ 33,475 $ 44,478 $ 30,125 $135,428
Gross margin 13,565 15,863 18,680 15,348 63,456
Income from operations 9,860 12,024 14,120 11,232 47,236
Income before income taxes 8,409 10,441 12,434 9,626 40,910
Net income 4,968 5,974 7,088 5,865 23,895
Earnings per share:
Basic $ 0.34 $ 0.42 $ 0.50 $ 0.42 $ 1.69
Diluted $ 0.34 $ 0.42 $ 0.50 $ 0.41 $ 1.67
Dividends declared per share $ 0.10 $ 0.10 $ 0.10 $ 0.10 $ 0.40
BALANCE SHEET DATA
Rental equipment, net $178,003 $186,883 $190,461 $200,028 $200,028
Total assets 256,968 266,575 274,932 278,676 278,676
Notes payable 97,747 103,500 100,000 97,000 97,000
Shareholders' equity 93,587 97,168 101,049 105,394 105,394
- ------------------------------------------------------------------------------------------
1997
----------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
----------------------------------------------------
OPERATIONS DATA
Total revenues $ 26,842 $ 33,459 $ 45,352 $ 29,323 $134,976
Gross margin 12,591 15,084 19,537 14,194 61,406
Income from operations 9,233 11,396 14,574 10,246 45,449
Income before income taxes 8,360 10,407 13,531 9,081 41,379
Net income 4,919 6,082 7,702 5,342 24,045
Earnings per share:
Basic $ 0.33 $ 0.41 $ 0.51 $ 0.36 $ 1.60
Diluted $ 0.33 $ 0.40 $ 0.51 $ 0.35 $ 1.58
Dividends declared per share $ 0.08 $ 0.08 $ 0.08 $ 0.08 $ 0.32
BALANCE SHEET DATA
Rental equipment, net $141,821 $146,343 $158,693 $174,086 $174,086
Total assets 206,221 222,940 237,963 252,392 252,392
Notes payable 52,000 65,000 65,800 82,000 82,000
Shareholders' equity 93,005 97,922 104,465 98,646 98,646
- ------------------------------------------------------------------------------------------
NOTE 10. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
In February and March, 1999, the Company repurchased 427,400 shares of its
outstanding common stock for an aggregate purchase price of $7,813,000 (or an
average price of $18.28 per share). On March 18, 1999, the Company's Board of
Directors authorized the repurchase of up to 1,000,000 shares of its common
stock.
15
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to the
Annual Report on Form 10-K for the year ended December 31, 1998 to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: June 23, 1999 MCGRATH RENTCORP
by: /s/ Robert P. McGrath
------------------------------------
Robert P. McGrath
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates as indicated.
NAME TITLE DATE
---- ----- ----
/s/ Robert P. McGrath Chairman of the Board and Chief Executive June 23, 1999
- ------------------------------------ Officer
Robert P. McGrath
/s/ Delight Saxton Senior Vice President and Director June 23, 1999
- ------------------------------------
Delight Saxton
/s/ Thomas J. Sauer Vice President and Chief Financial Officer June 23, 1999
- ------------------------------------ (Chief Accounting Officer)
Thomas J. Sauer
/s/ Joan McGrath Director June 23, 1999
- ------------------------------------
Joan McGrath
16
