McGrath Rentcorp Form 10-K
Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549


Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

Commission file number 0-13292

McGrath Rentcorp

(Exact name of registrant as specified in its Charter)
     
California
  94-2579843
(State or other jurisdiction
of incorporation or organization)
  (I.R.S. Employer
Identification No.)

5700 Las Positas Road, Livermore, CA 94550

(Address of principal executive offices)

Registrant’s telephone number: (925) 606-9200


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


      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 þ          No o

      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. o

      State the aggregate market value of voting stock, held by nonaffiliates of the registrant: $274,289,807 as of March 15, 2002.

      At March 15, 2002, 12,455,859 shares of Registrant’s Common Stock were outstanding.

      Exhibit index appears on page 50




TABLE OF CONTENTS

PART I
Item 1. Business
RELOCATABLE MODULAR OFFICES
PRODUCT HIGHLIGHTS
MERGER AGREEMENT WITH TYCO
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
EXHIBIT 10.1.2
EXHIBIT 10.2.3
EXHIBIT 10.3
EXHIBIT 10.5.2
EXHIBIT 10.6
EXHIBIT 10.7
EXHIBIT 10.8
EXHIBIT 10.9
EXHIBIT 23
EXHIBIT 99


Table of Contents

PART I

Item 1.     Business

General

      McGrath RentCorp (the “Company”) is a California corporation organized in 1979. The Company is comprised of three business segments: “Mobile Modular Management Corporation” (“MMMC”), its modular building rental division, “RenTelco,” its electronic test equipment rental division, and “Enviroplex,” its majority-owned subsidiary classroom manufacturing business. The Company’s corporate offices are located in Livermore, California. In addition, branch operations for both rental divisions are conducted from this facility.

      MMMC rents and sells modular buildings and accessories to fulfill customers’ temporary and permanent space needs in California and Texas. These units are used as temporary offices adjacent to existing facilities, and are used as classrooms, sales offices, construction field offices, health care clinics, child care facilities and for a variety of other purposes. MMMC purchases the modulars from various manufacturers who build them to MMMC’s design specifications. MMMC operates from two branch offices in California and one in Texas. Although MMMC’s primary emphasis is on rentals, sales of modulars routinely occur and can fluctuate quarter to quarter and year to year depending on customer demands and requirements.

      The educational market is the largest segment of the modular business. MMMC provides classroom and specialty space needs serving schools from pre-school to post secondary grade levels. Fueled by increasing student population, insufficient funding for new school construction and aging school facilities, demand continues to be very strong in California. Within the educational market, rentals and sales to California public school districts by MMMC represent a significant portion of MMMC’s total revenues.

      RenTelco rents and sells electronic test equipment nationally from two locations. The Plano, Texas location houses the Company’s communications and fiber optic test equipment inventory, calibration laboratory and eastern U.S. sales engineer and operations staffs. The Livermore, California location houses the Company’s general-purpose test equipment inventory, calibration laboratory and western U.S. sales engineer and operations staffs.

      Communications and fiber optic test equipment is utilized by field technicians, engineers and installer contractors in evaluating voice, data and multimedia communications networks, installing optical fiber cabling and in the development of switch, network and wireless products. This test equipment is rented primarily to network systems companies, electrical contractors, local & long distance carriers and manufacturers of communications transmission equipment. RenTelco purchases communications test equipment from over 40 different manufacturers domestically and abroad.

      Engineers, scientists and technicians utilize general-purpose test equipment 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, industrial, research and aerospace companies. Agilent (formerly Hewlett Packard), Tektronix and Acterna manufacture the majority of the Company’s general-purpose equipment.

      McGrath RentCorp owns 81% 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 California public school districts. Enviroplex conducts its sales and manufacturing operations from its facility located in Stockton, California. Since inception, McGrath RentCorp has assisted Enviroplex in a variety of corporate functions such as accounting, human resources, facility improvements and insurance. McGrath RentCorp has not purchased significant quantities of manufactured product from Enviroplex. Enviroplex sales revenues were $15.0 million, $17.0 million and $11.2 million in 2001, 2000 and 1999, respectively.

      The rental (by MMMC) and sale (by Enviroplex and MMMC) of modulars to California public school districts for use as portable classrooms, restroom buildings and administrative offices for kindergarten through

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grade twelve (K–12) are a significant portion of the Company’s revenues. The business from this market segment comprised approximately 34%, 35% and 34%, of the Company’s consolidated rental and sales revenues for 2001, 2000 and 1999, respectively.

      Please see Note 8 to the Consolidated Financial Statements on page 37 for more information on the Company’s business segments.

      The Company has 418 employees, of whom 48 are primarily administrative and executive personnel, and the remaining 370 are engaged in manufacturing or rental operations. Unions represent none of these employees. The operations of the Company share common facilities, financing, senior management, and operating and accounting systems, which results in the efficient use of overhead. Each product line has its own sales and technical personnel.

      No single customer has accounted for more than 10% of the Company’s total revenues generated in any given year. The Company’s business is not seasonal, except for the rental and sale of classrooms, which is heaviest in the several months prior to the opening of school each fall.

      The Company operates with a marketing sense throughout. The Company is constantly searching for ways to streamline its service and to raise the quality of each relocatable office, classroom or instrument it rents, sells or manufactures. The Company not only rents, sells and manufactures products, it sells an old-fashioned idea: Paying attention to our customers pays off.

      The Company’s common stock is traded on the NASDAQ National Market System under the symbol “MGRC.”

      On December 20, 2001, the Company entered into a merger agreement with a subsidiary of Tyco International Ltd. See “Merger Agreement with Tyco” on page 9.

      This Annual Report on Form 10-K contains statements which constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places. Such statements can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “estimates”, “will”, “should”, “plans” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. These factors include the effectiveness of management’s strategies and decisions, general economic and business conditions, new or modified statutory or regulatory requirements and changing prices and market conditions. This report identifies other factors that could cause such differences. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements.

RELOCATABLE MODULAR OFFICES

Description

      Modulars are designed for use as temporary office space and may be moved from one location to another. Modulars vary from simple single-unit construction site offices to attractive multi-modular facilities, complete with wood exteriors and mansard roofs. The rental fleet includes a full range of styles and sizes. The Company considers its modulars to be among the most attractive and well designed available. The units are constructed with wood siding, sturdily built and physically capable of a useful life often exceeding 18 years. Units are provided with installed heat, air conditioning, lighting, electricity and floor covering, and may have customized interiors including partitioning, carpeting, cabinetwork and plumbing facilities.

      MMMC purchases new modulars from various manufacturers who build to MMMC’s design specifications. None of the principal suppliers are affiliated with the Company. During 2001, the Company purchased 34% of its modular product from one manufacturer with multiple operations in several states. The Company believes that the loss of its primary manufacturer of modulars would not have a material adverse effect on its

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operations, however the Company could experience higher prices and longer lead times for modular product until other manufacturers increased their capacity.

      The modular product is manufactured to state building codes, has a low risk of obsolescence, and can be modified or reconfigured to accommodate a wide variety of customer needs. MMMC proactively manages its rental equipment and believes this insures the continued use of the modular product over its long life and, when sold, generates high sale proceeds relative to its capitalized cost. When rental equipment returns from a customer, the necessary repairs and preventative maintenance are performed prior to its next rental. Making these expenditures for repair and maintenance throughout the equipment’s life results in older equipment renting for similar rates as newer equipment. MMMC believes the condition of the equipment is a more significant factor in determining the rental rate and sale price than its age. Over the last three years, used equipment sold in the ordinary course of business has been on average 10 years old with sale proceeds averaging better than 95% of the equipment’s capitalized cost.

Marketing

      The Company’s largest single demand is for temporary classroom and other educational space needs of public and private schools, colleges and universities. Management believes the demand for classrooms is caused by shifting and fluctuating school populations, the lack of state funds for new construction, the need for temporary classroom space during reconstruction of older schools and, several years ago, class size reduction (see “Classroom Rentals and Sales” below). Other customer use applications include sales offices, construction field offices, health care facilities, sanctuaries and child care services. Industrial, manufacturing, entertainment and utility companies, as well as governmental agencies commonly use large multi-modular complexes to serve their interim administrative and operations space needs. The modular product offers customers quick, cost-effective space solutions while conserving their capital. The Company’s branch and corporate offices, with the exception of RenTelco’s Plano facility and Enviroplex’s facility, are housed in various sizes of modulars.

      Since most of MMMC’s customer requirements are to fill temporary space needs, the Company’s marketing emphasis is on rentals rather than sales. MMMC attracts customers through its dynamic web site at www.mobilemodularrents.com, and extensive yellow page advertising, telemarketing and direct mail. Customers are encouraged to visit an inventory center to view different models on display and to see a branch office, which itself is a working example of a modular application.

      Because service is a major competitive factor in the rental of modulars, MMMC offers quick response to requests for information, assistance in the choice of a suitable size and floor plan, in-house customization services, rapid delivery, timely installation and maintenance of its units. Customers are able to view and select inventory for quote on MMMC’s website.

Rentals

      Rental periods range from one month to ten years with a typical rental period of eighteen months. Most rental agreements provide no purchase options; and when a rental agreement does provide the customer with a purchase option, it is generally on terms attractive to MMMC.

      The customer is responsible for obtaining the necessary use permits and the costs of insuring the unit, transporting the unit to the site, preparation of the site, installation of the unit, dismantle and return delivery of the unit to one of MMMC’s three inventory centers, and certain costs for customization. MMMC maintains the units in good working condition while on rent. Upon return, the units are inspected for damage and customers are billed for items considered beyond normal wear and tear. Generally, the units are then repaired for subsequent use. Repair and maintenance costs are expensed as incurred and can include floor tile repairs, roof maintenance, cleaning, painting and other cosmetic repairs. The costs of major refurbishment of equipment are capitalized to the extent the refurbishment significantly improves the quality and adds value or life to the equipment.

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      At December 31, 2001, MMMC had 18,554 new or previously rented modulars in its rental fleet with an aggregate original cost including accessories of $281.2 million or an average cost per unit of $15,200. Utilization is calculated each month by dividing the cost of rental equipment on rent by the total cost of rental equipment, excluding new equipment inventory and accessory equipment. At December 31, 2001, fleet utilization was 86.2% and average fleet utilization during 2001 was 85.4%.

Sales

      In addition to operating its rental fleet, MMMC sells modulars to customers. These sales arise out of its marketing efforts for the rental fleet. Such sales can be of either new units or used units from the rental fleet, which permits an orderly turnover of older units. During 2001, MMMC’s largest sale of modulars was for new classrooms to a school district for approximately $0.6 million. This sale represented approximately 4% of MMMC’s sales, 2% of the Company’s consolidated sales, and less than 1% of the Company’s consolidated revenues.

      MMMC provides limited 90-day warranties on used modulars and passes through manufacturers’ one-year warranty on new units. Warranty costs have not been significant to MMMC’s operations to date, and MMMC attributes this to its commitment to high quality standards and regular maintenance programs.

      In addition to MMMC’s sales, the Company’s subsidiary, Enviroplex, manufactures and sells portable classrooms to school districts in California (see “Classroom Sales by Enviroplex” below).

Competition

      This section contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. See “General” above for cautionary information with respect to such forward-looking statements.

      Management estimates the business of renting relocatable modular offices is an industry that today has equipment on rent or available for rent in the United States with an aggregate original cost in excess of 4.0 billion dollars. Competition in the rental and sale of relocatable modular offices is intense. Two national firms are engaged in the rental of modulars, have many offices throughout the country and may have substantially greater financial resources than MMMC. Several hundred other companies are estimated to operate regionally throughout the country. MMMC operates primarily in California and Texas. Significant competitive factors in the rental business include availability, price, services, reliability, appearance and functionality of the product. MMMC markets high quality, well constructed and attractive modulars. MMMC believes that part of the strategy for modulars should be to create facilities and infrastructure capabilities that its competitors cannot easily duplicate. The Company’s facilities and related infrastructure enable it to modify modulars efficiently and cost effectively to meet its customers’ needs. Management’s goal is to be more responsive at less expense. Management believes this strategy, together with its emphasis on prompt and efficient customer service, gives MMMC a competitive advantage. The Company is determined to offer quick response to requests for information, experienced assistance for the first-time user, rapid delivery and timely maintenance of its units. The efficiency and responsiveness continues to be enhanced by the Company’s computer based relational database programs that control its internal operations. MMMC anticipates strong competition in the future and believes its process of improvement is ongoing.

Classroom Sales by Enviroplex

      This section contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. See “General” above for cautionary information with respect to such forward-looking statements.

      Enviroplex manufactures moment-resistant, rigid steel framed portable classrooms built to the requirements of the DSA and sells directly to California public school districts. The moment-resistant, rigid steel-framed classroom is engineered to have the structural columns support the weight of the building. This offers the customer greater design flexibility as to overall classroom size and the placement of doors and

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windows. Enviroplex fabricates most of the structural steel component parts using only mill certified sheet steel. Enviroplex’s standard designs have been engineered for strength and durability using lighter weight steel. Customers are offered a wide variety of DSA pre-approved classroom sizes and features with market established pricing, saving them valuable time on their classroom project. Customization features include restrooms, computer lab setups, interior offices, cabinetwork and kitchen facilities.

      During 2001, Enviroplex’s largest sale was for $2.2 million of new classrooms to a school district. This sale represented 15% of Enviroplex’s sales, 6% of the Company’s consolidated sales and less than 2% of the Company’s consolidated revenues. All of Enviroplex’s sales occur in California, with most sales occurring directly with California public school districts.

      Since Enviroplex’s customers are predominantly California public school districts, Enviroplex markets directly to these schools through telemarketing, targeted mailings and participation in the annual CASH (Coalition for Adequate School Housing) tradeshow. Enviroplex also attracts customers through its website at www.enviroplexinc.com where customers are able to view a variety of DSA approved floor plans. Customers are encouraged to tour the manufacturing facility to experience the production process and examine the quality product built.

      Competition in the manufacture of DSA classrooms is broad, intense, and highly competitive. Several manufacturers have greater capacity for production and have been in business longer than Enviroplex. Larger manufacturers with greater capacity have a larger appetite for the standard classroom while Enviroplex caters to schools’ requirements for more customized classrooms. The remaining manufacturers are of a similar size or smaller and do not have the production capacity nor the financial resources of Enviroplex.

      Enviroplex manufactures solid, attractive classrooms. Through value engineering, Enviroplex has simplified its manufacturing process by changing materials, determining which components are made in-house versus purchased, reducing the number of components and increasing the production efficiency at an overall lower cost without sacrificing quality. Enviroplex’s strategy is to improve the quality and flexibility of its product. Enviroplex understands that its customers want more than a quality classroom, competitively priced and delivered on time, and believes its niche is providing customers with choices in design flexibility and customization. Management believes this strategy gives Enviroplex a competitive edge.

      Enviroplex provides a one-year warranty on equipment manufactured. Warranty costs have not been significant to Enviroplex’s operations to date that can be attributed to Enviroplex’s dedication to manufacturing and delivering a quality, problem-free product.

      Enviroplex purchases raw materials from a variety of suppliers. Each component part has multiple suppliers. Enviroplex believes the loss of any one of these suppliers would not have a material adverse affect on its operations.

Classroom Rentals and Sales to California Public Schools (K-12)

      The rental and sales of modulars to California 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. The following table shows the approximate percentages these schools are of the Company’s modular rental and sales revenues, and of its consolidated rental and sales revenues for the past five years:

     California Public Schools (K-12) as a Percentage of Rental and Sales Revenues

                                         
Percentage of: 2001 2000 1999 1998 1997






Modular Rental Revenues
    49 %     47 %     48 %     44 %     45 %
Modular Sales Revenues
    54 %     61 %     52 %     78 %     74 %
Consolidated Rental and Sales Revenues
    34 %     35 %     34 %     45 %     52 %

      The increased modular sales percentage shown for 1998 and 1997 can be attributed to the Class Size Reduction Program instituted by the State of California. School districts were given great incentive to reduce

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class size in the lower grades from 30 students to no greater than 20 students. This highly popular program created a great demand for both purchasing and renting classroom buildings and was essentially implemented by the end of 1999. In 2000, the increased modular sales percentages resulted from new requirements beyond Class Size Reduction by school districts.

Legislation

      In California (where most of the Company’s educational rentals have occurred), school districts are permitted to purchase only portable classrooms built to the requirements of the DSA. However, school districts may rent classrooms that meet either the Department of Housing (“DOH”) or DSA requirements. In 1988, California adopted a law which limited the term for which school districts may rent portable classrooms built to DOH standards for up to three years (under a waiver process), and also required the school board to indemnify the State against any claims arising out of the use of such classrooms. Prior to 1988 the majority of the classrooms in the Company’s rental fleet were built to the DOH requirements, and since 1988 almost all new classrooms have been built to the DSA requirements. During the 1990’s additional legislation was passed extending the use of these DOH classroom buildings under the waiver process through September 30, 2000.

      In 2000, new California legislation was passed allowing for DOH classroom buildings already in use for classroom purposes as of May 1, 2000 to be utilized until September 30, 2007, provided various upgrades were made to their foundation and ceiling systems. School districts have until August 31, 2002 to make the necessary modifications to extend their usage of these buildings. To the extent that school districts elect not to proceed with retrofitting these existing buildings on rent and return the equipment, rental income levels could be impacted negatively. Currently, regulations and policies are in place that allow for the ongoing use of DOH classrooms from the Company’s inventory to meet shorter term space needs of school districts for periods up to 24 months, provided they receive a “Temporary Certification” or “Temporary Exemption” from the DSA. As a consequence, the tendency is for school districts to rent the DOH classrooms for shorter periods and to rent the DSA classrooms for longer periods. At December 31, 2001, the net book value of DOH classrooms represented less than 2.6% of the net book value of modular rental equipment and less than 1.5% of the total assets of the Company, and the utilization of these DOH classrooms was at 85.1%.

ELECTRONIC TEST AND MEASUREMENT INSTRUMENTS

Description

      The Company’s communications and fiber optics rental inventory includes fiber, telecom, SONET, ATM, broadcast, copper, line simulator, microwave, network and transmission test equipment. The general-purpose inventory includes oscilloscopes, amplifiers, spectrum, network and logic analyzers, and CATV, component measurement, industrial, signal source, microprocessor development and power source test equipment. The Company also rents electronic instruments from other rental companies and re-rents the instruments to customers.

      At December 31, 2001, the Company had an aggregate cost of electronics rental inventory and accessories of $95.4 million. Utilization is calculated each month by dividing the cost of the rental equipment on rent by the total cost of the rental equipment, excluding accessory equipment. During 2001, utilization trended down from 63.5% as of December 31, 2000 to 34.4% as of December 31, 2001 reflecting broad-based weakness in the telecommunications industry. Average utilization during 2001 was 50.4%. Generally, the Company targets utilization levels in a range between 50% and 55%. The Company rents electronic equipment for a typical rental period of one to six months at monthly rental rates ranging from approximately 3.0% to 10.0% of the current manufacturers’ list price. The Company depreciates its equipment over 5 to 8 years.

      The Company endeavors to keep its equipment fresh and attempts to sell equipment so that the majority of the inventory is less than five years old. The Company generally sells used equipment after approximately four years of service to permit an orderly turnover and replenishment of the electronics inventory. In 2001, approximately 19% of the electronics revenues were derived from sales. The largest electronics sale during

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2001 represented 3% of electronics sales and less than 1% of the Company’s consolidated sales and consolidated revenues.

Market

      The business of renting electronic test and measurement instruments is an industry which today has equipment on rent or available for rent in the United States with an aggregate original cost in excess of a half billion dollars. While there is a broad customer base for the rental of such instruments, most rentals are to electronics, communications, network systems, electrical contractor, installer contractor, industrial, research and aerospace companies.

      The Company markets its electronic equipment throughout the United States. RenTelco attracts customers through its dynamic web site at www.rentelco.com, an extensive telemarketing program, trade show participation and direct mail campaigns.

      The Company believes that customers rent electronic test and measurement instruments for many reasons. Customers frequently need equipment for short-term projects, for backup to avoid costly downtime and to evaluate new products. Delivery times for the purchase of such equipment can be lengthy; thus, renting allows the customer to obtain the equipment expeditiously. The Company also believes that a substantial portion of electronic test and measurement instruments is used for research and development projects where the relative certainty of rental costs can facilitate cost control and be useful in bidding for government contracts. Finally, as is true with the rental of any equipment, renting rather than purchasing may better satisfy the customer’s budgetary constraints.

      The industry consists primarily of three major companies. One of these companies is much larger than the Company, has substantially greater financial resources and is well established in the industry with a large inventory of equipment, several branch offices and experienced personnel.

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PRODUCT HIGHLIGHTS

      The following table shows the revenue components, percentage of rental and total revenues, rental equipment (at cost), rental equipment (net book value), number of relocatable modular offices, year-end and average utilization, average rental equipment (at cost), annual yield on average rental equipment (at cost) and gross margin on rental revenues and sales by product line for the past five years.

Product Highlights

                                             
Year Ended December 31,

2001 2000 1999 1998 1997





(Dollar amounts in thousands)
Relocatable Modular Offices
                                       
(operating under MMMC and Enviroplex)
                                       
Revenues
                                       
 
Rental
  $ 63,542     $ 56,779     $ 51,622     $ 47,957     $ 41,514  
 
Rental Related Services
    17,117       16,462       12,542       11,007       9,898  
     
     
     
     
     
 
   
Total Modular Rental Operations
    80,659       73,241       64,164       58,964       51,412  
     
     
     
     
     
 
 
Sales — MMMC
    15,758       23,831       16,100       23,171       33,522  
 
Sales — Enviroplex
    14,993       16,992       11,150       20,672       21,287  
     
     
     
     
     
 
   
Total Modular Sales
    30,751       40,823       27,250       43,843       54,809  
     
     
     
     
     
 
 
Other
    644       423       500       448       656  
     
     
     
     
     
 
   
Total Modular Revenues
  $ 112,054     $ 114,487     $ 91,914     $ 103,255     $ 106,877  
     
     
     
     
     
 
Percentage of Rental Revenues
    63.1 %     59.8 %     65.5 %     66.6 %     67.3 %
Percentage of Total Revenues
    70.3 %     69.7 %     70.7 %     76.2 %     79.2 %
Rental Equipment, at cost (year-end)
  $ 281,203     $ 261,081     $ 238,449     $ 216,444     $ 196,133  
Rental Equipment, net book value (year-end)
  $ 197,764     $ 187,059     $ 171,166     $ 156,790     $ 142,816  
Number of Units (year-end)
    18,554       17,555       16,230       15,139       14,240  
Utilization (year-end)(1)
    86.2 %     84.9 %     80.2 %     83.0 %     83.0 %
Average Utilization(1)
    85.4 %     82.3 %     81.6 %     83.1 %     81.6 %
Average Rental Equipment, at cost(2)
  $ 272,339     $ 238,408     $ 213,571     $ 186,865     $ 161,821  
Annual Yield on Average Rental Equipment, at cost
    23.3 %     23.8 %     24.2 %     25.7 %     25.7 %
Gross Margin on Rental Revenues
    55.2 %     50.2 %     55.3 %     56.2 %     59.0 %
Gross Margin on Sales
    30.9 %     28.0 %     29.5 %     30.8 %     31.2 %
Electronic Test and Measurement Instruments
                                       
(operating under RenTelco)
                                       
Revenues
                                       
 
Rental
  $ 37,180     $ 38,152     $ 27,132     $ 24,010     $ 20,174  
 
Rental Related Services
    710       723       501       521       380  
     
     
     
     
     
 
   
Total Electronics Rental Operations
    37,890       38,875       27,633       24,531       20,554  
 
Sales
    8,784       10,201       9,789       7,201       7,212  
 
Other
    666       595       626       441       333  
     
     
     
     
     
 
   
Total Electronics Revenues
  $ 47,340     $ 49,671     $ 38,048     $ 32,173     $ 28,099  
     
     
     
     
     
 
Percentage of Rental Revenues
    36.9 %     40.2 %     34.5 %     33.4 %     32.7 %
Percentage of Total Revenues
    29.7 %     30.3 %     29.3 %     23.8 %     20.8 %
Rental Equipment, at cost (year-end)
  $ 95,419     $ 92,404     $ 72,832     $ 66,573     $ 50,351  
Rental Equipment, net book value (year-end)
  $ 57,758     $ 60,343     $ 46,012     $ 43,238     $ 31,270  
Utilization (year-end)(1)
    34.4 %     63.5 %     54.4 %     51.5 %     52.6 %
Average Utilization(1)
    50.4 %     61.4 %     53.8 %     54.6 %     54.9 %
Average Rental Equipment, at cost
  $ 97,715     $ 82,401     $ 68,420     $ 56,859     $ 46,483  
Annual Yield on Average Rental Equipment, at cost
    38.0 %     46.3 %     39.7 %     42.2 %     43.4 %
Gross Margin on Rental Revenues
    56.6 %     63.8 %     59.5 %     61.5 %     61.7 %
Gross Margin on Sales
    32.7 %     32.6 %     29.7 %     32.9 %     33.2 %
Total Revenues
  $ 159,394     $ 164,158     $ 129,962     $ 135,428     $ 134,976  


(1)  Utilization is calculated each month by dividing the cost of the rental equipment on rent by the total cost of rental equipment, excluding new equipment inventory and accessory equipment. Average Utilization is calculated using the average costs for the year.
 
(2)  Average rental equipment, at cost for modulars excludes new equipment inventory and accessory equipment.

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MERGER AGREEMENT WITH TYCO

      On December 20, 2001, the Company entered into an agreement (the “Merger Agreement”) with a subsidiary of Tyco International Ltd. (“Tyco”). Under the terms of the Merger Agreement, the Company would be merged into the Tyco subsidiary, with the Tyco subsidiary continuing as the surviving corporation and as a wholly-owned subsidiary of Tyco (the “Merger”). Tyco has guaranteed (the “Guarantee”) the obligations of its subsidiary under the Merger Agreement. The Merger Agreement provides that the consideration to be paid by Tyco will be in the form of cash and Tyco common shares. The Company’s shareholders are to have the right to elect what percentage of their consideration is to be paid in cash and what percentage is to be paid in Tyco common shares, subject to the limitation that no less than 50% and no more than 75% of the aggregate consideration to be paid to all shareholders be in the form of Tyco common shares. If the Company’s shareholders in total elect to receive more cash or more Tyco common shares than these limits allow, the Company’s shareholders that elect the consideration that exceeds the relevant limit will receive a combination of cash and Tyco common shares.

      Subject to this limitation, McGrath shareholders electing to receive cash will receive $38.00 for each share of the Company’s Common Stock; shareholders electing to receive Tyco common shares will receive a fraction (the “Exchange Ratio”) of a Tyco common share, determined by dividing $38.00 by the average trading price of Tyco’s common shares for the five trading days ending on the fourth trading day prior to the date of the Company’s shareholders meeting to consider approval of the Merger. The Merger Agreement provides, however, that Tyco may terminate the agreement if its average share price is less than $45.00 at the time of the calculation of the Exchange Ratio, unless the Company agrees to a fixed Exchange Ratio of .8444 of a Tyco common share for each share of the Company’s stock, or the parties agree to some other Exchange Ratio. At the time the Merger Agreement was entered into, Tyco’s share price was $57.20 per share. As of March 15, 2002, the closing price of Tyco common shares was $33.41.

      Certain officers and directors of the Company owning approximately 24% of the outstanding shares of the Company’s Common Stock have entered into agreements (“Shareholder Agreements”) pursuant to which such shareholders agreed, among other things, to vote their shares of the Company’s Common Stock in favor of the Merger.

      The consummation of the Merger is subject to the approval of the shareholders of the Company, the receipt of necessary approvals under United States and any applicable foreign antitrust laws, and other conditions.

      On March 12, 2002, CIT Group Inc., a subsidiary of Tyco formerly known as Tyco Capital Corporation, filed a General Form for Registration of Securities on Form 10 in connection with a proposed distribution of 100% of the shares of its common stock to Tyco shareholders. CIT Group’s Form 10 states that, prior to developing its current plan to distribute the common stock of CIT Group, Tyco intended to integrate the Company’s business with CIT Group’s business. The Form 10 also states that if Tyco’s acquisition of the Company is completed pursuant to the Merger Agreement, Tyco currently would expect to retain McGrath as part of Tyco’s business.

      The Merger Agreement may be terminated by either Tyco or the Company if the Merger is not consummated by June 30, 2002. Although Tyco filed a registration statement with respect to the Merger with the SEC on January 8, 2002, the SEC has not yet declared the registration statement effective. Approval of the Company’s shareholders cannot be sought until the SEC declares the registration statement effective. If the registration statement does not become effective in time for the Company to obtain shareholder approval prior to June 30, 2002, each party may have the right to terminate the Merger Agreement. In addition, if the market price for Tyco common shares is below $45 per share, the Company may elect to not agree to a fixed Exchange Ratio and Tyco will have the right to terminate the Merger Agreement. In light of these circumstances, including Tyco’s announced intention to restructure its business and divest itself of the CIT Group, the Company believes there is no assurance that the Merger will be consummated.

      The Merger Agreement (with the Guarantee) was attached as Exhibit 99.1, and the form of Shareholder Agreement was attached as Exhibit 99.2, to the Company’s Current Report on Form 8-K filed with the SEC

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on December 26, 2001. The foregoing description of the Merger, the Merger Agreement, the Guarantee and the Shareholder Agreements does not purport to be a complete description and is qualified by reference to the full text of those documents attached as exhibits to the Company’s Current Report on Form 8-K.

Item 2.     Properties

      The Company currently conducts its operations from five locations. Inventory centers, at which relocatable modular offices are displayed, refurbished and stored are located in Livermore, California (San Francisco Bay Area), Mira Loma, California (Los Angeles Area) and Pasadena, Texas (Houston Area). These three branches conduct rental and sales operations from multi-modular offices, serving as working models of the Company’s product. Electronic test and measurement instrument rental and sales operations are conducted from the Livermore facility and from a facility in Plano, Texas (Dallas Area). The Company’s majority owned subsidiary, Enviroplex, manufactures portable classrooms from its facility in Stockton, California (San Francisco Bay Area).

      During 2000, the Company developed a 39,110 square foot office and warehouse facility on 2.6 acres of land in Plano, Texas. RenTelco relocated its operations from Richardson, Texas to the new Plano facility in September 2000 and currently occupies half of the constructed space. The Company has subleased the remaining half of the facility on a five-year lease beginning in March 2001.

      The following table sets forth for each property the total acres, square footage of office space, square footage of warehouse space and total square footage at December 31, 2001. The Company owns all properties, except as noted in footnote 4 of the Facilities table below.

     Facilities

                                   
Square Footage

Total Acres Office Warehouse Total




Corporate Offices
                               
 
Livermore, California(1)
          9,840             9,840  
Relocatable Modular Offices
                               
 
Livermore, California(1)(2)
    139.7       7,680       53,440       61,120  
 
Mira Loma, California
    78.5       7,920       45,440       53,360  
 
Pasadena, Texas
    50.0       3,868       24,000       27,868  
Electronic Test and Measurement Instruments
                               
 
Livermore, California(1)
          8,400       7,920       16,320  
 
Plano, Texas(3)
    2.6       28,337 (3)     10,773       39,110  
Enviroplex, Inc.
                               
 
Stockton, California(4)
    16.9 (4)     5,825 (4)     120,080 (4)     125,905  
Other
                               
 
Corona, California(5)
    10.4                    
 
Arlington, Texas(6)
    1.8       1,680       2,387       4,067  
     
     
     
     
 
      302.9       73,550       264,040       337,590  
     
     
     
     
 


(1)  The modular office complex in Livermore, California is 33,840 square feet and includes the Corporate offices and both modulars and electronics branch operations.
 
(2)  Of the 139.7 acres, 2.2 acres with an 8,000 square foot warehouse facility is rented out to a third party through March 2008, 2.2 acres to a third party through October 2005 and 35.8 acres are undeveloped.
 
(3)  The office and warehouse facility was completed and occupied in October 2000. Of the 28,337 square feet of office space, 19,152 square feet was rented to a third party through February 2006.

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(4)  Of the 19.9 acres, 6 acres are rented through June 2002. The leased facility includes 2,460 square feet of office space and 18,030 square feet of warehouse space.
 
(5)  Facility is for sale or lease.
 
(6)  Facility rented out to a third party on a month to month basis.

Item 3.     Legal Proceedings

      None.

Item 4.     Submission of Matters to a Vote of Security Holders

      Not applicable.

PART II

 
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

      The Company’s common stock is traded in the NASDAQ National Market System under the symbol “MGRC”.

      The market price (as quoted by NASDAQ) and cash dividends declared, per share of the Company’s common stock, by calendar quarter for the past two years were as follows:

 
Stock Activity
                                                                 
2001 2000


4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q








High
  $ 37.69     $ 26.70     $ 27.50     $ 22.50     $ 19.88     $ 19.88     $ 18.13     $ 17.88  
Low
  $ 20.01     $ 20.22     $ 21.63     $ 17.63     $ 15.00     $ 15.00     $ 14.00     $ 14.88  
Close
  $ 37.52     $ 21.51     $ 24.14     $ 21.88     $ 19.38     $ 19.00     $ 17.00     $ 15.88  
Dividends Declared
  $ 0.16     $ 0.16     $ 0.16     $ 0.16     $ 0.14     $ 0.14     $ 0.14     $ 0.14  

      As of March 15, 2002, the Company’s common stock was held by approximately 95 shareholders of record, which does not include shareholders whose shares are held in street or nominee name. The Company believes that when holders in street or nominee name are added, the number of holders of the Company’s common stock exceeds 500.

      The Company has declared a quarterly dividend on its common stock every quarter since 1990. Subject to its continued profitability and favorable cash flow, the Company intends to continue the payment of quarterly dividends.

      Subsequent to March 15, 2002, the Company will issue an aggregate of 6,736 shares of its common stock to Dennis C. Kakures and Thomas J. Sauer, both officers of the Company, pursuant to the Company’s Long-Term Stock Bonus Plan. (See “Item 11. Executive Compensation — Long Term Stock Bonus Plans” below for description.) Under the same Plan, the Company had issued to the same two officers an aggregate of 4,948 shares of common stock in March 2001, 20,920 shares of common stock in March 2000 and 33,486 shares of common stock in March 1999. These issuances were exempt from the registration requirements of the Securities Act of 1933 by virtue of section 4(2) thereof and Regulation 230.506.

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Item 6.     Selected Financial Data

      The following table summarizes the Company’s selected financial data for the five years ended December 31, 2001 and should be read in conjunction with the more detailed Consolidated Financial Statements and related notes reported in Item 8 below.

                                                 
Year Ended December 31,

2001 2000 1999 1998 1997





(Dollar and share amounts in thousands, except per share data)
Selected Consolidated Financial Data
                                       
Operations Data
                                       
Revenues
                                       
 
Rental
  $ 100,722     $ 94,931     $ 78,754     $ 71,967     $ 61,688  
 
Rental Related Services
    17,827       17,185       13,043       11,528       10,278  
     
     
     
     
     
 
   
Rental Operations
    118,549       112,116       91,797       83,495       71,966  
 
Sales
    39,535       51,024       37,039       51,044       62,021  
 
Other
    1,310       1,018       1,126       889       989  
     
     
     
     
     
 
     
Total Revenues
    159,394       164,158       129,962       135,428       134,976  
     
     
     
     
     
 
Costs and Expenses
                                       
 
Direct Costs of Rental Operations
                                       
   
Depreciation
    27,270       23,850       19,780       16,862       14,358  
   
Rental Related Services
    10,654       9,304       7,153       6,531       6,287  
   
Other
    17,298       18,250       14,284       13,390       10,375  
     
     
     
     
     
 
     
Total Direct Costs of Rental Operations
    55,222       51,404       41,217       36,783       31,020  
 
Cost of Sales
    27,172       36,256       26,078       35,189       42,550  
     
     
     
     
     
 
     
Total Costs
    82,394       87,660       67,295       71,972       73,570  
     
     
     
     
     
 
       
Gross Margin
    77,000       76,498       62,667       63,456       61,406  
 
Selling and Administrative
    24,955       19,982       17,103       16,220       15,957  
     
     
     
     
     
 
   
Income from Operations
    52,045       56,516       45,564       47,236       45,449  
 
Interest
    7,078       8,840       6,606       6,326       4,070  
     
     
     
     
     
 
   
Income before Provision for Income Taxes
    44,967       47,676       38,958       40,910       41,379  
 
Provision for Income Taxes
    17,807       19,762       14,874       16,010       16,323  
     
     
     
     
     
 
   
Income before Minority Interest
    27,160       27,914       24,084       24,900       25,056  
 
Minority Interest in Income of Subsidiary
    482       670       251       1,005       1,011  
     
     
     
     
     
 
   
Income before Effect of Accounting Change
    26,678       27,244       23,833       23,895       24,045  
 
Cumulative Effect of Accounting Change, net of tax(1)
                (1,367 )            
     
     
     
     
     
 
Net Income
  $ 26,678     $ 27,244     $ 22,466     $ 23,895     $ 24,045  
     
     
     
     
     
 

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Year Ended December 31,

2001 2000 1999 1998 1997





(Dollar and share amounts in thousands, except per share data)
Earnings Per Share:
                                       
 
Basic
                                       
   
Income before Cumulative Effect of Accounting Change
  $ 2.18     $ 2.21     $ 1.80     $ 1.69     $ 1.60  
   
Cumulative Effect of Accounting Change, net of tax(1)
                (0.10 )            
     
     
     
     
     
 
   
Net Income
  $ 2.18     $ 2.21     $ 1.70     $ 1.69     $ 1.60  
     
     
     
     
     
 
 
Diluted
                                       
   
Income before Cumulative Effect of Accounting Change
  $ 2.14     $ 2.19     $ 1.78     $ 1.67     $ 1.58  
   
Cumulative Effect of Accounting Change, net of tax(1)
                (0.10 )            
     
     
     
     
     
 
   
Net Income
  $ 2.14     $ 2.19     $ 1.68     $ 1.67       1.58  
     
     
     
     
     
 
Shares Used in Per Share Calculation:
                                       
 
Basic
    12,232       12,334       13,235       14,163       14,982  
 
Diluted
    12,495       12,428       13,383       14,349       15,181  
Cash Dividends Declared Per Common Share
  $ 0.64     $ 0.56     $ 0.48     $ 0.40     $ 0.32  
Pro Forma Amounts Assuming Change had been in effect during 1998 and 1997
                                       
 
Net Income
  $ 26,678     $ 27,244     $ 23,833     $ 23,697     $ 23,816  
 
Earnings Per Share — Basic
  $ 2.18     $ 2.21     $ 1.80     $ 1.67     $ 1.59  
 
Earnings Per Share — Diluted
  $ 2.14     $ 2.19     $ 1.78     $ 1.65     $ 1.57  
Balance Sheet Data (at period end)
                                       
Rental Equipment, at cost
  $ 376,622     $ 353,485     $ 311,281     $ 282,987     $ 246,484  
Rental Equipment, net
  $ 255,522     $ 247,402     $ 217,178     $ 200,028     $ 174,086  
Total Assets
  $ 354,884     $ 357,246     $ 297,722     $ 278,676     $ 252,392  
Notes Payable
  $ 104,140     $ 126,876     $ 110,300     $ 97,000     $ 82,000  
Shareholders’ Equity
  $ 131,595     $ 108,958     $ 95,403     $ 105,394     $ 98,646  
Shares Issued and Outstanding
    12,335       12,125       12,546       13,970       14,522  
Book Value Per Share
  $ 10.67     $ 8.99     $ 7.60     $ 7.54     $ 6.79  
Debt (Total Liabilities) to Equity
    1.70       2.28       2.12       1.64       1.56  
Debt (Notes Payable) to Equity
    0.79       1.16       1.16       0.92       0.83  
Return on Average Equity
    22.0 %     26.7 %     22.7 %     24.0 %     24.5 %


(1)  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — General” below for a discussion of the change in accounting method for rental revenue recognition in response to SAB No. 101.

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

Results of Operations

     General

      Revenues are derived primarily from the rental of relocatable modular offices and electronic test and measurement instruments. The Company has expanded the rental inventory of relocatable modular offices and electronic instruments. This expansion has been primarily funded through internal cash flow and conventional bank financing.

      The major portion of the Company’s revenue is derived from rental operations comprising approximately 74% of consolidated revenues in 2001 and 72% of consolidated revenues for the three years ended December 31, 2001. Over the past three years modulars comprised 68% of the cumulative rental operations, and electronics comprised 32% of the cumulative rental operations.

      Most of the Company’s leases with customers are accounted for as operating leases in accordance with Statement of Financial Standards (“SFAS”) No. 13, and as such, rental revenue is recognized on a straight-line basis over the term of the lease. Effective January 1, 1999, rental revenue is recognized ratably over the month on a daily basis. Rental billings for periods extending beyond the month end are recorded as deferred income. In prior years, only rental billings extending beyond a one-month billing period were recorded as deferred income (i.e. partial month billings for days beyond month end were not deferred). The new method of recognizing revenue was adopted after the Company undertook a review of its revenue recognition policies after the Securities and Exchange Commission issued its Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition.” The effect is reported as a change in accounting method in accordance with Accounting Principles Board Opinion (“APB”) No. 20, “Accounting Changes.” In 1999, the cumulative effect of changing to a new method of accounting effective January 1, 1999 was to decrease net income by $1.4 million (net of taxes of $0.9 million) or $0.10 per diluted share.

      The Company sells both modular and electronic equipment that is new, previously available for rent, or manufactured by its majority owned subsidiary, Enviroplex. In the case of some modular equipment, the Company acts as a dealer of relocatable modular offices and is licensed as a dealer by governmental agencies in California and Texas. Sales and other revenues of both modular and electronic equipment have comprised approximately 26% of the Company’s consolidated revenues in 2001 and 28% of the Company’s consolidated revenues over the last three years. During these three years, modular sales and other revenues represented 77% and electronic sales represented 23%.

      The rental and sale of modulars to California public school districts is a significant part of the Company’s business. The business from this market segment comprised 34%, 35% and 34% of the Company’s consolidated rental and sales revenues for 2001, 2000 and 1999. (See “Item 1. Business — Relocatable Modular Offices — Classroom Rentals and Sales” above.)

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      The following table sets forth for the periods indicated the results of operations as a percentage of revenues and the percentage of changes in such items as compared to the indicated prior period:

                                                         
Percent of Revenues

Percent Change

Three Year Ended December 31,
Years
2001 over 2000 over
2001-1999 2001 2000 1999 2000 1999






Revenues
                                               
 
Rental
    61 %     63 %     58 %     61 %     6 %     21 %
 
Rental Related Services
    11       11       10       10       4       32  
     
     
     
     
                 
     
Rental Operations
    72       74       68       71       6       22  
 
Sales
    28       25       31       28       (23 )     38  
 
Other
    nm       1       1       1       nm       nm  
     
     
     
     
                 
     
Total Revenues
    100 %     100 %     100 %     100 %     (3 )%     26 %
     
     
     
     
                 
Costs and Expenses
                                               
 
Direct Costs of Rental Operations Depreciation
    16       17       15       15       14       21  
   
Rental Related Services
    6       7       6       6       15       30  
   
Other
    11       11       10       11       (5 )     28  
     
     
     
     
                 
     
Total Direct Costs of Rental Operations
    33       35       31       32       7       25  
Cost of Sales
    19       17       22       20       (25 )     39  
     
     
     
     
                 
   
Total Costs
    52       52       53       52       (6 )     30  
     
     
     
     
                 
       
Gross Margin
    48       48       47       48       1       22  
Selling and Administrative
    14       15       13       13       25       17  
     
     
     
     
                 
   
Income from Operations
    34       33       34       35       (8 )     24  
Interest
    5       5       5       5       (20 )     34  
     
     
     
     
                 
   
Income before Provision for Income Taxes
    29       28       29       30       (6 )     22  
Provision for Income Taxes
    12       11       12       11       (10 )     33  
     
     
     
     
                 
   
Income before Minority Interest
    17       17       17       19       (3 )     16  
Minority Interest in Income of Subsidiary
    nm       nm       nm       1       nm       nm  
     
     
     
     
                 
   
Income before Effect of Accounting Change
    17       17       17       18       (2 )     14  
Cumulative Effect of Accounting Change, net of tax
    nm       nm       nm       1       nm       nm  
   
Net Income
    17 %     17 %     17 %     17 %     (2 )%     21 %


nm = not meaningful

 
      Fiscal Years 2001 and 2000

      This section contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. See “General” above for cautionary information with respect to such forward-looking statements.

      Rental revenues increased $5.8 million (6%) over 2000, with MMMC increasing $6.8 million and RenTelco decreasing $1.0 million. MMMC benefited from another year of strong classroom demand in California while RenTelco suffered its first year-over-year decline in rental revenues due to continued broad-based weakness in the telecommunications industry. For MMMC as of December 31, 2001, modular utilization was 86.2% and modular equipment on rent increased by $21.5 million compared to a year earlier.

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Average utilization for modulars, excluding new equipment not previously rented, increased from 82.3% in 2000 to 85.4% in 2001 while the annual yield declined slightly from 23.8% to 23.3% as a result of lower rental rates due a change in the mix of business. For RenTelco, electronics utilization trended down during the year from 63.5% at December 31, 2000 to 34.4% at December 31, 2001, and electronics equipment on rent decreased by $25.7 million compared to a year earlier as demand weakened for this short-term rental product. Average utilization for electronics decreased from 61.4% in 2000 to 50.4% in 2001 with the annual yield decreasing from 46.3% in 2000 to 38.0% in 2001. Looking forward, the Company intends to proactively sell its underutilized electronics rental inventory in 2002.

      Depreciation on rental equipment in 2001 increased $3.4 million (14%) over 2000, with MMMC increasing $0.9 million and RenTelco increasing $2.5 million due to additional rental equipment purchased during 2001 and 2000. For MMMC, as rental revenues increased 12%, depreciation expense increased 8% and average modular equipment, at cost, increased 8% or $21.1 million over 2000 resulting in depreciation as a percentage of rental revenues declining slightly from 22% in 2000 to 21% in 2001. For RenTelco, as rental revenues declined 3%, depreciation expense increased 22% and average electronics equipment, at cost, increased $15.3 million (19%) over 2000 resulting in depreciation as a percentage of revenues increasing from 30% in 2000 to 37% in 2001. Other direct costs of rental operations decreased $1.0 million (5%) from 2000 primarily due to $1.9 million of impairment losses recorded in 2000 on rental equipment that was beyond economic repair (such a charge did not occur in 2001) offset by increased maintenance and repair expenses of the modular fleet. Consolidated gross margin on rents increased slightly from 55.7% in 2000 to 55.8% in 2001.

      Rental related services revenues in 2001 increased $0.6 million (4%) over 2000 as a result of a higher volume of modular equipment movements and site requirements in 2001. Gross margin on these services decreased from 45.9% in 2000 to 40.2% in 2001.

      Sales in 2001 decreased $11.5 million (23%) from 2000 primarily as a result of lower sales volume by both MMMC and Enviroplex. MMMC sales volume decreased $8.1 million due to the occurrence of several significant sales in 2000 and Enviroplex sales decreased $2.0 million due to lower order volume. Sales continue to occur routinely as a normal part of the Company’s rental business; however, these sales can fluctuate from quarter to quarter and year to year depending on customer requirements and funding. Consolidated gross margin on sales increased from 28.9% in 2000 to 31.3% in 2001.

      Enviroplex’s backlog of orders as of December 31, 2001 and 2000 was $4.9 million and $6.8 million, respectively. Typically, in the California classroom market, booking activity for the first half of the year provides the most meaningful information towards determining order levels to be produced for the entire year. (Backlog is not significant in MMMC’s modular business or in RenTelco’s electronic business.)

      Selling and administrative expenses in 2001 increased $5.0 million (25%) over 2000. The increase is due primarily to nonrecurring expenses of $1.9 million related to the Merger Agreement with Tyco (see “Item 1. Business — Merger Agreement with Tyco” page 10), increases in bad debt expense of $1.1 million, web maintenance and development costs of $0.8 million, depreciation and amortization expense of $0.5 million and personnel and benefit costs of $0.2 million.

      Interest expense in 2001 decreased $1.8 million (20%) from 2000 as a result of 2% lower debt levels and 19% lower average interest rates over a year earlier.

      Income before provision for taxes in 2001 decreased $2.7 million (6%) from 2000 and net income decreased $0.6 million (2%) with earnings per diluted share decreasing 2% from $2.19 per diluted share in 2000 to $2.14 per diluted share in 2001. The lower percentage decrease for net income is due to a higher effective tax rate of 41.5% in 2000 as compared to 39.6% in 2001. The higher effective tax rate in 2000 resulted from recording a true-up of the state income tax accrual rate.

      Excluding merger-related expenses, net income and earnings per share would have increased from $27.2 million and $2.19 per diluted share in 2000 to $27.8 million and $2.23 per diluted share in 2001.

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      Fiscal Years 2000 and 1999

      Rental revenues increased $16.2 million (21%) over 1999, with MMMC contributing $5.2 million and RenTelco contributing $11.0 million of the increase. As of December 31, 2000, rental equipment on rent increased for MMMC by $30.7 million and for RenTelco by $19.0 million compared to a year earlier. Average utilization for modulars, excluding new equipment not previously rented, increased from 81.6% in 1999 to 82.3% in 2000 while the annual yield declined slightly for modulars from 24.2% to 23.8% as a result of lower rental rates due to the mix of business activity. Average utilization for electronics increased dramatically from 53.8% in 1999 to 61.4% in 2000 with electronics annual yield increasing from 39.7% in 1999 to 46.3% in 2000 resulting from increased market demand.

      Depreciation on rental equipment in 2000 increased $4.1 million (21%) over 1999 due to additional rental equipment purchased during 2000 and 1999. The average modular rental equipment, at cost, increased $23.9 million (11%) and average electronics rental equipment, at cost, increased $14.0 million (20%) over 1999. Other direct costs of rental operations increased $4.0 million (28%) over 1999 primarily due to the $1.9 million of impairment losses recorded on rental equipment that was beyond economic repair and increased maintenance and repair expenses of the modular fleet. Consolidated gross margin on rents declined slightly from 56.8% in 1999 to 55.7% in 2000.

      In the second quarter of 2000, management began a comprehensive program to evaluate its strategies with regard to off-rent modular equipment. All off-rent equipment was inspected over the remainder of 2000 and decisions about whether to invest additional dollars to repair the equipment for rental or sale, or whether to scrap the equipment were made. As a result of the process, an impairment charge of $1.9 million was recorded. Management continues to proactively manage its off-rent inventory and will record impairment charges if the projected future cash flows from rental or sales of equipment are insufficient to cover its net book value of the equipment.

      Rental related services revenues in 2000 increased $4.1 million (32%) over 1999 as a result of a higher volume of modular equipment movements and site requirements in 2000. Gross margins on these services increased slightly from 45.2% in 1999 to 45.9% in 2000.

      Sales in 2000 increased $14.0 million (38%) over 1999 as a result of three significant sales by MMMC accounting for 56% of the increase and a $5.8 million increase in sales by Enviroplex to school districts. During 2000, the Company’s largest sale was recorded during the third and fourth quarter for new classrooms to a school district for approximately $4.4 million and represented 9% of its sales. Sales continue to occur routinely as a normal part of the Company’s rental business; however, these sales can fluctuate from quarter to quarter and year to year depending on customer requirements and funding. Consolidated gross margin on sales declined slightly from 29.6% in 1999 to 28.9% in 2000.

      Enviroplex’s backlog of orders as of December 31, 2000 and 1999 was $6.8 million and $12.6 million, respectively. Typically, in the California classroom market, booking activity for the first half of the year provides the most meaningful information towards determining order levels to be produced for the entire year. (Backlog is not significant in MMMC’s modular business or in RenTelco’s electronic business.)

      Selling and administrative expenses in 2000 increased $2.9 million (17%) over 1999. The increase is due primarily to increases in salaries, incentive and performance bonuses, benefits and hiring costs during 2000. As a percentage of revenues, selling and administrative expenses for 2000 remained consistent with 1999.

      Interest expense in 2000 increased $2.2 million (34%) over 1999 as a result of 17% higher debt levels and 15% higher average interest rates over a year earlier. During 2000, the higher debt levels resulted from capital investments other than rental equipment, payment of dividends and repurchases of common stock.

      Income before provision for taxes in 2000 increased $8.7 million (22%) from 1999 and net income before effect of the accounting change increased $3.4 million (14%). The lower percentage increase for net income before effect of the accounting change is due to a higher effective tax rate of 41.5% in 2000 as compared to 38.1% in 1999. The higher effective tax rate in 2000 resulted from recording a true-up of the state income tax accrual rate.

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      Net income increased 21% from $22.5 million in 1999 to $27.2 million in 2000 with earnings per diluted share increasing 30% from $1.68 per diluted share in 1999 to $2.19 per diluted share in 2000. Last year’s comparative net income included a one-time accounting charge of $1.4 million or $0.10 per diluted share. Excluding the impact of the one-time accounting charge, net income for 1999 would have been $23.8 million or $1.78 per diluted share resulting in comparative net income increasing 14% and diluted earnings per share increasing 23% in 2000.

     Liquidity and Capital Resources

      This section contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. See “General” above for cautionary information with respect to such forward-looking statements.

      The Company’s rental businesses are capital intensive, with significant capital expenditures required to maintain and grow the rental assets. During the last three years, the Company has financed its working capital and capital expenditure requirements through cash flow from operations, proceeds from the sale of rental equipment and from bank borrowings. As the following table indicates, cash flow provided by operating activities and proceeds from sales of rental equipment have been sufficient to fund the rental equipment purchases in the past three years.

     Funding of Rental Asset Growth

                                 
Year Ended December 31,

Three Year
2001 2000 1999 Totals




(Amounts in thousands)
Cash Provided by Operating Activities
  $ 58,938     $ 49,966     $ 53,235     $ 162,139  
Proceeds from the Sale of Rental Equipment
  $ 18,015     $ 18,380     $ 16,352     $ 52,747  
Total Cash Available for Purchase of Rental Equipment
  $ 76,953     $ 68,346     $ 69,587     $ 214,886  
Notes Payable Increase (Decrease)
  $ (22,736 )   $ 16,576     $ 13,300     $ 7,140  
Purchases of Rental Equipment
  $ 46,877     $ 67,389     $ 47,310     $ 161,576  

      In addition to increasing its rental assets, the Company has invested in other capital expenditures of $1.6 million in 2001, $3.4 million in 2000 and $2.3 million in 1999, and has used significant cash to provide returns to its shareholders, both in the form of cash dividends and by stock repurchases. The Company has made purchases of shares of its common stock from time to time in the over-the-counter market (NASDAQ) and/or through privately negotiated, large block transactions under an authorization of the Board of Directors. Shares repurchased by the Company are canceled and returned to the status of authorized but unissued stock. As of March 15, 2002, 805,800 shares remain authorized for repurchase. The following table summarizes the dividends paid and the repurchases of the Company’s common stock during the past three years.

     Dividend and Repurchase Summary

                                 
Year Ended December 31,

Three Year
2001 2000 1999 Totals




(Amounts in thousands, except per share data)
Cash Dividends Paid
  $ 7,582     $ 6,675     $ 6,134     $ 20,391  
Shares Repurchased
          451       1,550       2,001  
Average Price Per Share
  $     $ 16.33     $ 18.21     $ 17.78  
Aggregate Purchase Price
  $     $ 7,364     $ 28,212     $ 35,576  
Total Cash Returned to Shareholders
  $ 7,582     $ 14,039     $ 34,346     $ 55,967  

      As the Company’s assets have grown, it has been able to negotiate increases in the borrowing limit under its general bank line of credit, which limit is currently $120.0 million. The Company decreased its borrowings under this line by $25.3 million during the year, and at December 31, 2001, the outstanding borrowings under this line were $69.5 million. In addition to the $120.0 million line of credit, the Company has a $5.0 million

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committed line of credit facility related to its cash management services of which $2.6 million was outstanding as of December 31, 2001. The Company had a total liabilities to equity ratio of 1.70 to 1 and 2.28 to 1 as of December 31, 2001 and 2000, respectively; and the debt (notes payable) to equity ratio was 0.79 to 1 and 1.16 to 1 at December 31, 2001 and 2000, respectively. Although no assurance can be given, the Company believes it will continue to be able to negotiate higher limits on its general bank lines of credit adequate to meet capital requirements not otherwise met by operational cash flows and long term debt.

      In July 1998, the Company completed a private placement of $40.0 million of 6.44% Senior Notes due in 2005. Interest on the notes is due semi-annually in arrears and the principal is due in five equal installments, which commenced on July 15, 2001. The outstanding balance at December 31, 2001, was $32.0 million.

      Please see the Company’s Consolidated Statements of Cash Flows on 26 for a more detailed presentation of the sources and uses of the Company’s cash.

      The Company does not have any material commitments or obligations requiring the expenditure of cash in the future inconsistent with its expenditures in the periods reported herein. In June 2001, the Company settled a lawsuit, which had been brought against it and seventeen other defendants alleging failure to warn about certain chemicals associated with the building materials used in portable classrooms in California. As part of the settlement, the Company agreed to use alternative building materials. (Please see the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 8, 2001 for further details of this settlement.) The Company believes this will not have a material adverse effect on its costs of operations and does not expect an adverse impact on its liquidity. The Company believes that its needs for working capital and capital expenditures through 2001 and beyond will be adequately met by operational cash flow, proceeds from sale of rental equipment, and bank borrowings. Sales occur routinely as a normal part of the Company’s rental business. However, these sales can fluctuate from year to year depending on customer requirements and funding. Although the net proceeds received from sales may fluctuate from year to year, the Company believes its liquidity will not be adversely impacted because it believes it has the ability to increase its bank borrowings and to reduce materially the amount of cash it uses to purchase rental equipment, pay dividends and repurchase its common stock in the future if a need to conserve cash should arise unexpectedly.

     Critical Accounting Policies

      This section contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. See “General” above for cautionary information with respect to such forward-looking statements.

      In response to the Securities and Exchange Commission’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” the Company identified the most critical accounting principles upon which its financial status depends. The Company determined the critical principles by considering accounting policies that involve the most complex or subjective decisions or assessments. The Company has identified its most critical accounting policies are related to rental equipment depreciation, maintenance and repair, and impairment. Descriptions of these accounting policies are found in both the notes to the consolidated financial statements and at relevant sections in this management’s discussion and analysis.

      Depreciation — The estimated useful lives and estimated residual values used for rental equipment are based on the Company’s experience as to the economic useful life and sale value of its products. Additionally, to the extent information is publicly available, the Company also compares its depreciation policies to other companies with similar rental products for reasonableness.

      The lives and residual values of rental equipment are subject to periodic evaluation. For modular equipment, external factors to consider may include, but are not limited to, changes in legislation, regulations, building codes, local permitting, supply or demand and internal factors may include, but are not limited to, changes in equipment specifications or maintenance policies. For electronics equipment, external factors to consider may include, but are not limited to, technological advances, changes in manufacturers’ selling prices, supply or demand and internal factors may include, but are not limited to, changes in equipment specifications or maintenance policies.

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      Changes in useful lives or residual values will impact depreciation expense and any gain or loss from the sale of used equipment. Depending on the magnitude of such changes, the impact on the financial statements could be significant.

      In the first quarter of 2002, the Company continued to evaluate its rental equipment depreciation and residual value policies. A decision was made in the first quarter 2002 that effective January 1, 2002, the Company would prospectively increase its modular rental equipment residual value from 18% to 50%. Additionally, effective January 1, 2002, the estimated useful life of $16.3 million of optical equipment would be prospectively changed from seven to five years.

      Maintenance and Refurbishment — Maintenance and repairs are expensed as incurred. The direct material and labor costs of value-added additions or major refurbishment of modular offices are capitalized to the extent the refurbishment significantly improves the quality and adds value or life to the equipment. Judgement is involved as to when these costs should be capitalized. The Company’s policies narrowly limit the capitalization of value-added items to specific additions such as restrooms, 40 and 60-foot sidewalls and ventilation up-grades. Only major refurbishment costs incurred near the end of the estimated useful life of the rental equipment, which extend its useful life, are capitalized. Changes in these policies could impact the Company’s financial results.

      Impairment — The carrying value of the Company’s rental equipment is its capitalized cost less accumulated depreciation. To the extent events or circumstances indicate that the carrying value cannot be recovered, an impairment loss is recognized to reduce the carrying value to fair value. The Company determines fair value based upon the condition of the equipment and the projected net cash flows from its sale considering current market conditions. Additionally, if the Company decides to sell or otherwise dispose of the rental equipment, it is carried at the lower of cost or fair value less costs to sell or dispose. Due to uncertainties inherent in the valuation process and the economy, it is reasonably possible that actual results of operating and disposing of rental equipment could be materially different than current expectations.

     Market Risk

      This section contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. See “General” above for cautionary information with respect to such forward-looking statements.

      The Company currently has no material derivative financial instruments that expose the Company to significant market risk. The Company is exposed to cash flow and fair value risk due to changes in interest rates with respect to its notes payable. The table below presents principal cash flows and related weighted average interest rates of the Company’s notes payable at December 31, 2001 by expected maturity dates. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date.

                                                 
2002 2003 2004 2005 Total Fair Value






(Dollar amounts in thousands)
Fixed Rate
  $ 8,000     $ 8,000     $ 8,000     $ 8,000     $ 32,000     $ 32,000  
Average Interest Rate
    6.44 %     6.44 %     6.44 %     6.44 %     6.44 %        
Variable Rate
  $     $     $ 72,140     $     $ 72,140     $ 72,140  
Average Interest Rate
                3.20 %           3.20 %        

     Impact of Inflation

      Although the Company cannot precisely determine the effect of inflation, from time to time it has experienced increases in costs of rental equipment, manufacturing costs, operating expenses and interest. Because most of its rentals are relatively short term, the Company has generally been able to pass on such increased costs through increases in rental rates and selling prices.

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Item 8.     Financial Statements and Supplementary Data

           
Index Page


Report of Independent Public Accountants
    22  
Consolidated Financial Statements
       
 
Consolidated Statements of Income for the Years Ended December 31, 2001, 2000 and 1999
    23  
 
Consolidated Balance Sheets as of December 31, 2001 and 2000
    24  
 
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2001, 2000 and 1999
    25  
 
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999
    25  
Notes to Consolidated Financial Statements
    26  

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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, 2001 and 2000, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of McGrath RentCorp and Subsidiary as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

      As explained in Note 2 to the consolidated financial statements, the Company changed its method of accounting for rental revenue effective January 1, 1999 whereby all rental revenues are recognized ratably over the month on a daily basis.

  ARTHUR ANDERSEN LLP

San Francisco, California

February 8, 2002

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MCGRATH RENTCORP

 
CONSOLIDATED STATEMENTS OF INCOME
                                 
Year Ended December 31,

2001 2000 1999



(In thousands, except per share
amounts)
Revenues
                       
 
Rental
  $ 100,722     $ 94,931     $ 78,754  
 
Rental Related Services
    17,827       17,185       13,043  
     
     
     
 
   
Rental Operations
    118,549       112,116       91,797  
 
Sales
    39,535       51,024       37,039  
 
Other
    1,310       1,018       1,126  
     
     
     
 
       
Total Revenues
    159,394       164,158       129,962  
     
     
     
 
Costs and Expenses
                       
 
Direct Costs of Rental Operations
                       
   
Depreciation
    27,270       23,850       19,780  
   
Rental Related Services
    10,654       9,304       7,153  
   
Other
    17,298       18,250       14,284  
     
     
     
 
       
Total Direct Costs of Rental Operations
    55,222       51,404       41,217  
 
Cost of Sales
    27,172       36,256       26,078  
     
     
     
 
       
Total Costs
    82,394       87,660       67,295  
     
     
     
 
       
Gross Margin
    77,000       76,498       62,667  
 
Selling and Administrative
    24,955       19,982       17,103  
     
     
     
 
   
Income from Operations
    52,045       56,516       45,564  
 
Interest
    7,078       8,840       6,606  
     
     
     
 
   
Income before Provision for Income Taxes
    44,967       47,676       38,958  
 
Provision for Income Taxes
    17,807       19,762       14,874  
     
     
     
 
   
Income before Minority Interest
    27,160       27,914       24,084  
 
Minority Interest in Income of Subsidiary
    482       670       251  
     
     
     
 
   
Income before Effect of Accounting Change
    26,678       27,244       23,833  
 
Cumulative Effect of Accounting Change, net of tax Benefit of $883
                (1,367 )
     
     
     
 
 
Net Income
  $ 26,678     $ 27,244     $ 22,466  
     
     
     
 
Earnings Per Share:
                       
   
Basic
                       
     
Income before cumulative effect of accounting change
  $ 2.18     $ 2.21     $ 1.80  
     
Cumulative effect of accounting change, net of tax
                (0.10 )
     
     
     
 
     
Net Income
  $ 2.18     $ 2.21     $ 1.70  
     
     
     
 
   
Diluted
                       
     
Income before cumulative effect of accounting change
  $ 2.14     $ 2.19     $ 1.78  
     
Cumulative effect of accounting change, net of tax
                (0.10 )
     
     
     
 
     
Net Income
  $ 2.14     $ 2.19     $ 1.68  
     
     
     
 
Shares Used in Per Share Calculation:
                       
   
Basic
    12,232       12,334       13,235  
   
Diluted
    12,495       12,428       13,383  

The accompanying notes are an integral part of these consolidated financial statements.

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MCGRATH RENTCORP

 
CONSOLIDATED BALANCE SHEETS
                       
December 31,

2001 2000


(In thousands)
ASSETS
Cash
  $ 4     $ 643  
Accounts Receivable, less allowance for doubtful accounts of $1,250 in 2001 and $650 in 2000
    36,896       45,687  
Rental Equipment, at cost:
               
 
Relocatable Modular Offices
    281,203       261,081  
 
Electronic Test Instruments
    95,419       92,404  
     
     
 
      376,622       353,485  
 
Less Accumulated Depreciation
    (121,100 )     (106,083 )
     
     
 
 
Rental Equipment, net
    255,522       247,402  
     
     
 
Land, at cost
    19,303       19,303  
Buildings, Land Improvements, Equipment and Furniture, at cost, less accumulated depreciation of $8,465 in 2001 and $6,815 in 2000
    32,479       33,233  
Prepaid Expenses and Other Assets
    10,680       10,978  
     
     
 
     
Total Assets
  $ 354,884     $ 357,246  
     
     
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
               
 
Notes Payable
  $ 104,140     $ 126,876  
 
Accounts Payable and Accrued Liabilities
    30,745       37,012  
 
Deferred Income
    18,473       19,241  
 
Minority Interest in Subsidiary
    2,946       3,506  
 
Deferred Income Taxes
    66,985       61,653  
     
     
 
     
Total Liabilities
    223,289       248,288  
     
     
 
Shareholders’ Equity:
               
 
Common Stock, no par value —
               
   
Authorized — 40,000 shares
               
   
Issued and Outstanding — 12,335 shares in 2001 and 12,125 shares in 2000
    12,794       8,971  
 
Retained Earnings
    118,801       99,987  
     
     
 
     
Total Shareholders’ Equity
    131,595       108,958  
     
     
 
     
Total Liabilities and Shareholders’ Equity
  $ 354,884     $ 357,246  
     
     
 

The accompanying notes are an integral part of these consolidated financial statements.

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MCGRATH RENTCORP

 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
                                   
Common Stock Total

Retained Shareholders’
Shares Amount Earnings Equity




(In thousands, except per share amounts)
Balance at December 31, 1998
    13,970     $ 8,138     $ 97,256     $ 105,394  
 
Net Income
                22,466       22,466  
 
Repurchase of Common Stock
    (1,550 )     (1,381 )     (26,831 )     (28,212 )
 
Noncash Compensation
    35       1,343             1,343  
 
Exercise of Stock Options
    91       655             655  
 
Dividends Declared of $0.48 Per Share
                (6,243 )     (6,243 )
     
     
     
     
 
Balance at December 31, 1999
    12,546       8,755       86,648       95,403  
 
Net Income
                27,244       27,244  
 
Repurchase of Common Stock
    (451 )     (327 )     (7,037 )     (7,364 )
 
Noncash Compensation
    20       454             454  
 
Exercise of Stock Options
    10       89             89  
 
Dividends Declared of $0.56 Per Share
                (6,868 )     (6,868 )
     
     
     
     
 
Balance at December 31, 2000
    12,125       8,971       99,987       108,958  
 
Net Income
                26,678       26,678  
 
Issuance of Common Stock to Increase Interest In Subsidiary
    85       2,061             2,061  
 
Noncash Compensation
    6       551             551  
 
Exercise of Stock Options
    119       1,211             1,211  
 
Dividends Declared of $0.64 Per Share
                (7,864 )     (7,864 )
     
     
     
     
 
Balance at December 31, 2001
    12,335     $ 12,794     $ 118,801     $ 131,595  
     
     
     
     
 

The accompanying notes are an integral part of these consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 
Year Ended December 31,

2001 2000 1999



(In thousands)
Cash Flow from Operating Activities:
                       
 
Net Income
  $ 26,678     $ 27,244     $ 22,466  
 
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
                       
   
Depreciation and Amortization
    29,632       25,716       21,474  
   
Impairment Loss Related to Rental Equipment
          1,689        
   
Cumulative Effect of Accounting Change, net of tax
                1,367  
   
Provision for Losses on Accounts Receivable
    600              
   
Noncash Compensation
    551       454       1,343  
   
Gain on Sale of Rental Equipment
    (6,528 )     (6,755 )     (5,971 )
   
Change In:
                       
     
Accounts Receivable
    8,191       (20,592 )     (3,284 )
     
Prepaid Expenses and Other Assets
    1,315       (6,990 )     1,579  
     
Accounts Payable and Accrued Liabilities
    (6,065 )     12,678       1,990  
     
Deferred Income
    (768 )     9,730       1,687  
     
Deferred Income Taxes
    5,332       6,792       10,584  
     
     
     
 
       
Net Cash Provided by Operating Activities
    58,938       49,966       53,235  
     
     
     
 
Cash Flow from Investing Activities:
                       
 
Purchase of Rental Equipment
    (46,877 )     (67,389 )     (47,310 )
 
Purchase of Land, Buildings, Land Improvements, Equipment and Furniture
    (1,608 )     (3,430 )     (2,253 )
 
Proceeds from Sale of Rental Equipment
    18,015       18,380       16,352  
     
     
     
 
       
Net Cash Used in Investing Activities
    (30,470 )     (52,439 )     (33,211 )
     
     
     
 
Cash Flow from Financing Activities:
                       
 
Net Borrowings (Repayments) under Bank Lines of Credit
    (22,736 )     16,576       13,300  
 
Net Proceeds from the Exercise of Stock Options
    1,211       89       655  
 
Repurchase of Common Stock
          (7,364 )     (28,212 )
 
Payment of Dividends
    (7,582 )     (6,675 )     (6,134 )
     
     
     
 
       
Net Cash Provided by (Used in) Financing Activities
    (29,107 )     2,626       (20,391 )
     
     
     
 
       
Net Increase (Decrease) in Cash
    (639 )     153       (367 )
Cash Balance, Beginning of Period
    643       490       857  
     
     
     
 
Cash Balance, End of Period
  $ 4     $ 643     $ 490  
     
     
     
 
Interest Paid During the Period
  $ 7,629     $ 8,504     $ 6,473  
     
     
     
 
Income Taxes Paid During the Period
  $ 12,475     $ 12,970     $ 4,290  
     
     
     
 
Dividends Declared but not yet Paid
  $ 1,981     $ 1,699     $ 1,506  
     
     
     
 

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

      On December 20, 2001, McGrath RentCorp (the “Company”) announced that a definitive agreement (the “Merger Agreement”) providing for the merger of the Company with and into Tyco Acquisition Corp. 33, a direct, wholly-owned subsidiary of Tyco International Ltd. (“Tyco”), had been executed by the Company and the Tyco subsidiary. The Merger Agreement provides that the consideration to be paid by Tyco will be in the form of cash and Tyco common shares. If the Company’s shareholders in total elect to receive more cash or more Tyco shares than these limits allow, the Company’s shareholders that elect the consideration that exceeds the relevant limit will receive a combination of cash and Tyco shares. The Company’s shareholders are to have the right to elect what percentage of their consideration is to be paid in cash and what percentage is to be paid in Tyco common shares, subject to the limitation that no less than 50% and no more than 75% of the aggregate consideration to be paid to all shareholders be in the form of Tyco common shares. Subject to this limitation, the Company’s shareholders electing to receive cash will receive $38.00 for each share of the Company’s common stock; shareholders electing to receive Tyco common shares will receive a fraction (the “Exchange Ratio”) of a Tyco common share, determined by dividing $38.00 by the average trading price of Tyco’s common shares for the five trading days ending on the fourth trading day prior to the date of the Company’s shareholders meeting to consider approval of the Merger. The Merger Agreement provides, however, that Tyco may terminate the agreement if its average share price is less than $45.00 at the time of the calculation of the Exchange Ratio, unless the Company agrees to a fixed Exchange Ratio of 0.8444 Tyco common shares for each share of the Company’s stock, or the parties agree to some other Exchange Ratio. The proposed merger transaction is discussed in, and a copy of the Merger Agreement is attached to, the Company’s Form 8-K filed with the SEC on December 26, 2001. In 2001, the Company incurred merger-related costs of $1,893,000, which are included in selling and administrative expenses.

      The Company is a California corporation organized in 1979. The Company is comprised of three business segments: “Mobile Modular Management Corporation” (“MMMC”), its modular building rental division, “RenTelco,” its electronic test equipment rental division, and “Enviroplex,” its majority-owned subsidiary classroom manufacturing business. The Company’s corporate offices are located in Livermore, California. In addition, branch operations for both rental divisions are conducted from this facility.

      MMMC rents and sells modular buildings and accessories to fulfill customers’ temporary and permanent space needs in California and Texas. These units are used as temporary offices adjacent to existing facilities, and are used as classrooms, sales offices, construction field offices, health care clinics, child care facilities and for a variety of other purposes. MMMC purchases the modulars from various manufacturers who build them to MMMC’s design specifications. MMMC operates from two branch offices in California and one in Texas. Although MMMC’s primary emphasis is on rentals, sales of modulars routinely occur and can fluctuate quarter to quarter and year to year depending on customer demands and requirements. Rentals and sales to school districts by MMMC represent a significant portion of MMMC’s total revenues. The educational market is the largest segment of the modular business. Within the educational market, rentals and sales to California public school districts by MMMC represent a significant portion of MMMC’s total revenues.

      RenTelco rents and sells electronic test equipment nationally from two locations. The Plano, Texas location houses the Company’s communications and fiber optic test equipment inventory, calibration laboratory and eastern U.S. sales engineer and operations staffs. The Livermore, California location houses the Company’s general-purpose test equipment inventory, a calibration laboratory and western U.S. sales engineer and operations staffs. Communications and fiber optic test equipment is used by field technicians, engineers and installer contractors in evaluating voice, data and multimedia communications networks, installing optical fiber cabling and in the development of switch, network and wireless products. This test equipment is rented primarily to network systems companies, electrical contractors, local & long distance carriers and manufacturers of communications transmission equipment. RenTelco purchases communications test equipment from over 40 different manufacturers domestically and abroad. Engineers, scientists and technicians use general-

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

purpose test equipment 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, industrial, research and aerospace companies. The majority of general-purpose equipment is manufactured by Agilent (formerly Hewlett Packard), Tektronix and Acterna.

      Until June 30, 2001 McGrath RentCorp owned 73% of Enviroplex, a California corporation organized in 1991. In July 2001, the Company acquired an additional 8% interest in Enviroplex for 85,366 shares of Company stock. The Company now owns 81% of Enviroplex. Enviroplex manufactures portable classrooms built to the requirements of the California Division of the State Architect (“DSA”) and sells directly to California public school districts. Enviroplex conducts its sales and manufacturing operations from its facility located in Stockton, California.

      The rental and sale of modulars to California 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. The business from this market segment comprised approximately 34%, 35% and 34% of the Company’s consolidated rental and sales revenues for 2001, 2000, and 1999, respectively.

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

      Most of the Company’s leases with customers are accounted for as operating leases in accordance with Statement of Financial Standards (“SFAS”) No. 13, and as such, rental revenue is recognized on a straight-line basis over the term of the lease. Effective January 1, 1999, rental revenue is recognized ratably over the month on a daily basis. Rental billings for periods extending beyond the month end are recorded as deferred income. In prior years, only rental billings extending beyond a one-month billing period were recorded as deferred income (i.e. partial month billings for days beyond month end were not deferred). The new method of recognizing revenue was adopted after the Company undertook a review of its revenue recognition policies after the Securities and Exchange Commission issued its Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition.” The effect is reported as a change in accounting method in accordance with Accounting Principles Board Opinion (“APB”) No. 20, “Accounting Changes.” In 1999, the cumulative effect of changing to a new method of accounting effective January 1, 1999 was to decrease net income by $1,367,000 (net of taxes of $883,000) or $0.10 per diluted share.

      Rental related services revenue is primarily associated with relocatable modular office leases, consists of billings to customers for delivery, installation, modifications, skirting, additional site related work, and return delivery and dismantle, and are an integral part of the negotiated lease agreement with the customer. Revenue related to these services is recognized on a straight-line basis over the term of the lease in accordance with SFAS No. 13.

      Sales revenue is recognized upon delivery and installation of the equipment to the customer. Certain leases meeting the requirements of 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 lease 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 and accessories
  3 to 18 years, 0% to 18% residual value
 
Electronic test instruments and accessories
  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.
   

     Impairment

      The Company continually evaluates the carrying value of rental equipment in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets”. Under SFAS 121, rental equipment is reviewed for impairment whenever events or circumstances have occurred that would indicate the carrying amount may not be fully recoverable. If the carrying amount is not fully recoverable, an impairment loss is recognized to reduce the carrying amount to fair value. The Company determines fair value based upon the condition of the equipment and the projected net cash flows from its sale considering current market conditions. Additionally, if the Company decides to sell or otherwise dispose of the rental equipment, it is carried at the lower of cost or fair value less costs to sell or dispose. In 2000, an impairment charge primarily related to modular equipment identified as beyond economic repair of $1,927,000, including disposal costs, was recorded in the Company’s consolidated statements of income in other direct costs of rental operations.

     Costs of Rental Related Services

      Costs of rental related services are primarily associated with relocatable modular office leases, consist of costs for services to be provided under the negotiated lease agreement for delivery, installation, modifications, skirting, additional site related work, and return delivery and dismantle. Costs related to these services are recognized on a straight-line basis over the term of the lease in accordance with SFAS No. 13.

     Other Direct Costs of Rental Operations

      Other direct costs of rental operations primarily relate to costs associated with modular operations and include equipment supplies and repairs, direct labor, property and liability insurance, property taxes, and business and license fees. These costs also include impairment losses and the amortization of certain lease costs included in the negotiated rental rate with the customer.

     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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     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, accounts receivable, accounts payable and notes payable) approximate fair value.

     Use of Estimates

      The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 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 period. Common stock equivalents result from dilutive stock options computed using the treasury stock method with the average share price for the reported period. The weighted average number of dilutive options outstanding at December 31, 2001, 2000 and 1999 were 263,054, 94,247 and 147,789, respectively.

     Comprehensive Income

      SFAS No. 130, “Reporting Comprehensive Income,” establishes standards to measure all changes in equity that result from transactions and other economic events other than transactions with shareholders. Comprehensive income is the total of net income and all other non-shareholder changes in equity. Other than net income, the Company has no comprehensive income.

     Accounting for Derivatives

      On January 1, 2001, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS No. 138, which establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Company does not own any derivative instruments, and as such, the implementation of this statement did not have a material impact on the Company’s financial position or result of operations.

     Business Combinations, Goodwill and Other Intangible Assets

      In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. SFAS No. 142 establishes new guidelines for accounting for goodwill and other intangible assets. In accordance with SFAS No. 142, goodwill associated with acquisitions consummated after June 30, 2001 is not amortized. The Company implemented the provisions of SFAS No. 141 and 142 in 2001.

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MCGRATH RENTCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     New Accounting Pronouncements

      In June 2001, the FASB approved for issuance SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and that the associated asset retirement costs be capitalized as part of the carrying value of the related long-lived asset. SFAS No. 143 will be effective January 1, 2003 for the Company. Management does not expect this standard to have a material impact on the Company’s consolidated financial position or results of operations.

      In August 2001, the FASB approved for issuance SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 broadens the presentation of discontinued operations to include more transactions and eliminates the need to accrue for future operating losses. Additionally, SFAS No. 144 prohibits the retroactive classification of assets as held for sale and requires revisions to the depreciable lives of long-lived assets to be abandoned. SFAS No. 144 will be effective January 1, 2002 for the Company. Management is does not expect this standard to have a material impact on the Company’s consolidated financial position or results of operations.

     Reclassifications

      Certain prior period amounts have been reclassified to conform to current year presentation.

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 credit losses inherent in the accounts receivable 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 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 a 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,

2001 2000


(In thousands)
Gross minimum lease payments receivable
  $ 4,910     $ 7,063  
Less — unearned interest
    (894 )     (1,233 )
     
     
 
Net investment in sales type lease receivables
  $ 4,016     $ 5,830  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      As of December 31, 2001, the future minimum lease payments to be received in 2002 and thereafter are as follows:

           
Year Ended December 31,

(In thousands)
2002
  $ 3,144  
2003
    1,130  
2004
    397  
2005
    173  
2006
    52  
2007 and thereafter
    14  
     
 
 
Total minimum future lease payments
  $ 4,910  

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, 2001 was $32,000,000. 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 an aggregate amount not to exceed $15,000,000 paid by the Company to repurchase its common stock after June 30, 1998, (restricted equity at December 31, 2001 was $87,335,000), (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. As of December 31, 2001, the Company was in compliance with all covenants related to these notes.

      The Company has an unsecured line of credit agreement (the “Agreement”) expiring June 30, 2004 that permits it to borrow up to $120,000,000, of which $69,500,000 was outstanding as of December 31, 2001. The Agreement requires the Company to pay interest at prime or, at the Company’s election, at 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 $100,000,000 plus 50% of all net income generated subsequent to June 30, 2001 plus 90% of any new stock issuance proceeds (restricted equity at December 31, 2001 was $106,214,000), (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 principal payments plus the most recent twelve months interest expense) of not less than 1.15 to 1. As of December 31, 2001, the Company was in compliance with all covenants related to this Agreement.

      In addition to the $120,000,000 unsecured line of credit, the Company has a $5,000,000 revolving line of credit (at prime rate) related to its cash management services of which $2,640,000 was outstanding as of December 31, 2001. This line of credit related to its cash management services will expire on June 30, 2004.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following information relates to the lines of credit for each of the following periods:

                 
Year Ended December 31,

2001 2000


(Dollar amounts in
thousands)
Maximum amount outstanding
  $ 93,373     $ 88,090  
Average amount outstanding
  $ 81,595     $ 79,861  
Weighted average interest rate
    5.55 %     7.57 %
Effective interest rate at end of period
    3.20 %     7.62 %
Prime interest rate at end of period
    4.75 %     9.50 %

Note 6.     Income Taxes

      The provision for income taxes is comprised of the following:

                           
Current Deferred Total



(In thousands)
Year Ended December 31,
                       
2001
                       
 
Federal
  $ 10,090     $ 4,097     $ 14,187  
 
State
    2,385       1,235       3,620  
     
     
     
 
    $ 12,475     $ 5,332     $ 17,807  
     
     
     
 
2000
                       
 
Federal
  $ 10,644     $ 3,649     $ 14,293  
 
State
    2,326       3,143       5,469  
     
     
     
 
    $ 12,970     $ 6,792     $ 19,762  
     
     
     
 
1999
                       
 
Federal
  $ 3,067     $ 8,972     $ 12,039  
 
State
    1,223       729       1,952  
     
     
     
 
    $ 4,290     $ 9,701     $ 13,991  
     
     
     
 

      In 1999, the total provision for income taxes includes a provision on income before taxes of $14,874,000 and a tax benefit of $883,000 included with the cumulative effect of accounting change on the consolidated statements of income.

      The reconciliation of the federal statutory tax rate to the Company’s effective tax rate is as follows:

                         
Year Ended December 31,

2001 2000 1999



Federal statutory rate
    35.00 %     35.00 %     35.00 %
State taxes, net of federal benefit
    5.23       7.46       3.46  
Other
    (0.63 )     (1.01 )     (0.35 )
     
     
     
 
      39.60 %     41.45 %     38.11 %
     
     
     
 

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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 consolidated balance sheets:

                 
Year Ended
December 31,

2001 2000


(In thousands)
Excess of tax over book depreciation
  $ 75,148     $ 67,697  
State income taxes
    (5,122 )     (4,699 )
Accrued liabilities not currently deductible
    (1,240 )     (948 )
Revenue deferred for financial reporting purposes
    (2,462 )     (2,161 )
Other, net
    661       1,764  
     
     
 
    $ 66,985     $ 61,653  
     
     
 

Note 7.     Common Stock and Stock Options

      In July 2001, the Company entered into a Stock Exchange Agreement with the minority shareholders of Enviroplex to increase its ownership in Enviroplex from 73% to 81%. The Company exchanged 85,366 shares of its common stock for 8% of Enviroplex. The transaction was recorded using purchase accounting and was valued at $2,061,000 based on the Company’s closing price of $24.14 per share on June 29, 2001. Prior to the transaction, the cost basis of Enviroplex’s assets and liabilities approximated the fair value of those assets and liabilities. The excess paid over fair value of $1,065,000 was allocated to intangible assets of $88,000 and goodwill of $977,000. In accordance with SFAS 142, goodwill is not being amortized and will be evaluated for impairment annually. The Company does not have any other goodwill or intangible assets.

      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, 629,000 options have been granted with exercise prices ranging from $15.63 to $25.55. As of December 31, 2001, options have been exercised for the purchase of 23,325 shares, options for 79,000 shares have been terminated, and options for 526,675 remain outstanding. Most of these options vest over 5 years and expire 10 years after grant. To date, no options have been issued to any of the Company’s advisors. As of December 31, 2001, 1,450,000 options remained available to issue under the 1998 plan.

      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. As of December 31, 2001, options for 101,818 with an exercise price of $10.75 per share remain outstanding. 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.

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MCGRATH RENTCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Option activity and options exercisable including weighted average exercise price for the three years ended December 31, 2001 are as follows:

                                                 
Year Ended December 31,

2001 2000 1999



Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price






Options outstanding at January 1
    659,610     $ 15.87       516,522     $ 15.53       541,122     $ 13.83  
Options granted during the year
    96,500       19.55       187,000       16.94       103,500       18.25  
Options exercised during the year
    (119,117 )     10.17       (9,948 )     8.93       (91,250 )     7.18  
Options terminated during the year
    (8,500 )     20.25       (33,964 )     18.76       (36,850 )     18.74  
     
             
             
         
Options outstanding at December 31
    628,493       17.64       659,610       15.87       516,522       15.53  
     
             
             
         
Options exercisable at December 31
    234,458       17.67       246,530       14.11       172,407       13.22  
     
             
             
         

      The following table indicates the options outstanding and options exercisable by exercise price with the weighted average remaining contractual life for the options outstanding and the weighted average exercise price at December 31, 2001:

                                         
Options Outstanding Options Exercisable


Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Price 12/31/01 Life (Years) Price 12/31/01 Price






$10.75
    101,818       4.50     $ 10.75       48,358     $ 10.75  
 15.63
    20,000       8.33       15.63       6,000       15.63  
 15.94
    12,000       8.92       15.94       2,400       15.94  
 17.00
    142,500       8.83       17.00       28,500       17.00  
 18.25
    97,675       7.92       18.25       37,075       18.25  
 19.38
    12,500       8.75       19.38       3,125       19.38  
 19.75
    75,000       9.17       19.75             19.75  
 20.25
    10,000       6.50       20.25       8,500       20.25  
 20.81
    130,000       6.25       20.81       94,000       20.81  
 21.69
    10,000       6.67       21.69       6,500       21.69  
 25.10
    5,000       9.67       25.10             25.10  
 25.55
    12,000       9.92       25.55             25.55  
     
                     
         
 10.75 - 25.55
    628,493       7.44       17.64       234,458       17.67  

      SFAS 123 “Accounting for Stock-Based Compensation” became effective for the Company in 1996. As allowed by SFAS 123, the Company has elected to continue to follow APB 25 “Accounting for Stock Issued to Employees” 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. However, APB 25 requires recognition of noncash compensation when the Company repurchases stock acquired by an employee through the exercise of an incentive stock option. During 1999, the Company repurchased 80,000 shares of stock at $18.00 per share from an employee who had acquired the stock at $6.94 per share through the exercise of a stock option, resulting in the recognition of noncash compensation expense of $885,000. The noncash compensation of

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MCGRATH RENTCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$885,000 is included in the Company’s consolidated statements of income in selling and administrative expense in 1999.

      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 2001, 2000 and 1999 grants are as follows:

                         
Year Ended December 31,

2001 2000 1999



Risk-free interest rates
    5.0 %     5.9 %     6.3 %
Expected dividend yields
    1.7 %     2.9 %     2.7 %
Expected volatility
    36.0 %     26.5 %     27.8 %
Expected option life (in years)
    7.5       7.5       7.5  

      The fair value of the options granted are $1,949,000, $2,115,000 and $1,888,000 during the year ended December 31, 2001, 2000 and 1999, respectively. The weighted average fair value of grants are $8.31, $5.03 and $5.93 during the year ended 2001, 2000 and 1999, respectively.

      The following pro forma net income and earnings per share data are computed for the years ended December 31, 2001, 2000 and 1999 as if compensation cost for the stock options granted subsequent to 1995 had been determined consistent with SFAS 123:

                             
Year Ended December 31,

2001 2000 1999



(In thousands, except per share
amounts)
Net Income
  $ 26,678     $ 27,244     $ 22,466  
Pro Forma net income
    26,094       26,826       22,043  
 
Earnings Per Share
                       
   
Basic
    2.18       2.21       1.70  
   
Diluted
    2.14       2.19       1.68  
 
Pro Forma Earnings Per Share
                       
   
Basic
    2.13       2.17       1.67  
   
Diluted
    2.09       2.16       1.65  

      In 1985, the Company established an Employee Stock Ownership Plan. Under the terms of the plan, as amended, 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 cash contribution of $400,000 was approved for 2001, $800,000 for 2000 and $750,000 for 1999.

      In 1991, the Board of Directors adopted a Long-Term Stock Bonus Plan (the “1990 LTB Plan”) under which shares of common stock may be granted to officers and key employees. The stock bonuses granted under the 1990 LTB Plan are evidenced by written Stock Bonus Agreements covering specified performance periods. The 1990 LTB Plan provides for the grant of stock bonuses upon achievement of certain financial goals during a specified period. Stock bonuses earned under the 1990 LTB Plan vest over four years from the grant date contingent on the employee’s continued employment with the Company. As of December 31, 2001, 210,243 shares of common stock have been granted, of which 184,731 shares are vested. The 1990 LTB Plan expired in December 1999 and no further grants of common stock can occur under the 1990 LTB Plan. In 2000, the Board of Directors adopted a Long-Term Stock Bonus Plan (the “2000 LTB Plan”) under which 400,000 shares of common stock are reserved for grant to officers and key employees. The terms of the 2000 LTB Plan are the same as the 1990 Plan described above. Estimated future grants of 40,521 shares of

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MCGRATH RENTCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

common stock are authorized by the Board of Directors to be issued under the 2000 LTB Plan in the event the Company reaches its highest level of achievement. As of December 31, 2001, no shares of common stock had yet been granted or vested under the 2000 LTB Plan. Compensation expense for 2001, 2000 and 1999 under the plans was $551,000, $454,000 and $458,000, respectively, and is based on a combination of the anticipated number of shares to be granted, the amount of vested shares previously issued and fluctuations in market price of the Company’s common stock. As of December 31, 2001, 2000 and 1999, the unvested shares were 25,512, 40,409, and 61,346, respectively, with the related weighted average grant-date fair value of these unvested shares of $23.13, $20.45 and $20.23 per share, respectively.

      From time to time, 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 1999, the Company repurchased 1,549,526 shares of common stock for an aggregate repurchase price of $28,212,000 or an average price of $18.21 per share. In 2000, the Company repurchased 450,942 shares of common stock for an aggregate repurchase price of $7,364,000 or an average price of $16.33 per share. There were no repurchases of common stock during 2001. As of December 31, 2001, 805,800 shares remain authorized for repurchase.

 
Note 8.      Business Segments

      The Company defines its business segments based on the nature of operations for the purpose of reporting under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” The Company’s three reportable segments are MMMC (Modulars), RenTelco (Electronics), and Enviroplex. The operations of each of these segments are 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, deferred income and customer security deposits. The Company does not report total

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MCGRATH RENTCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

assets by business segment. Summarized financial information for the years ended December 31, 2001, 2000 and 1999 for the Company’s reportable segments is shown in the following table:

                                 
Modulars Electronics Enviroplex Consolidated




(In thousands)
Year Ended December 31,
                               
2001
                               
Rental Operations Revenues
  $ 80,659     $ 37,890     $     $ 118,549  
Sales and Other Revenues
    16,402       9,450       14,993       40,845  
Total Revenues
    97,061       47,340       14,993       159,394  
Depreciation on Rental Equipment
    13,489       13,781             27,270  
Interest Expense (Income)
    5,321       2,135       (378 )     7,078  
Income before Merger Related Expenses and Provision for Income Taxes
    28,216       15,963       2,681       46,860  
Rental Equipment Acquisitions
    30,323       16,554             46,877  
Accounts Receivable, net (year-end)
    22,969       8,957       4,970       36,896  
Rental Equipment, at cost (year-end)
    281,203       95,419             376,622  
 
2000
                               
Rental Operations Revenues
  $ 73,241     $ 38,875     $     $ 112,116  
Sales and Other Revenues
    24,254       10,796       16,992       52,042  
Total Revenues
    97,495       49,671       16,992       164,158  
Depreciation on Rental Equipment
    12,546       11,304             23,850  
Interest Expense (Income)
    6,725       2,459       (344 )     8,840  
Income before Provision for Income Taxes
    23,565       20,454       3,657       47,676  
Rental Equipment Acquisitions
    36,017       31,372             67,389  
Accounts Receivable, net (year-end)
    28,816       12,902       3,969       45,687  
Rental Equipment, at cost (year-end)
    261,081       92,404             353,485  
 
1999
                               
Rental Operations Revenues
  $ 64,164     $ 27,633     $     $ 91,797  
Sales and Other Revenues
    16,600       10,415       11,150       38,165  
Total Revenues
    80,764       38,048       11,150       129,962  
Depreciation on Rental Equipment
    10,811       8,969             19,780  
Interest Expense (Income)
    5,097       1,724       (215 )     6,606  
Income before Provision for Income Taxes
    23,838       13,641       1,479       38,958  
Rental Equipment Acquisitions
    30,443       16,867             47,310  
Accounts Receivable, net (year-end)
    11,334       9,691       4,070       25,095  
Rental Equipment, at cost (year-end)
    238,449       72,832             311,281  

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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, 2001 is summarized below:

                                             
2001

First Second Third Fourth Year





(In thousands, except per share amounts)
Operations Data
                                       
 
Rental revenues
  $ 26,107     $ 25,768     $ 25,100     $ 23,747     $ 100,722  
 
Total revenues
    36,282       41,737       42,406       38,969       159,394  
 
Gross margin
    18,964       20,542       19,453       18,041       77,000  
 
Income from operations
    13,167       14,863       13,854       10,161       52,045  
 
Income before income taxes
    11,023       13,010       12,106       8,828       44,967  
 
Net income
    6,635       7,615       7,164       5,264       26,678  
 
Earnings per share:
                                       
   
Basic
  $ 0.55     $ 0.63     $ 0.58     $ 0.43     $ 2.18  
   
Diluted
  $ 0.54     $ 0.62     $ 0.58     $ 0.42     $ 2.14  
 
Dividends declared per share
  $ 0.16     $ 0.16     $ 0.16     $ 0.16     $ 0.64  
 
Shares used in per share calculation:
                                       
   
Basic
    12,147       12,178       12,280       12,322       12,232  
   
Diluted
    12,285       12,378       12,456       12,615       12,495  
Balance Sheet Data
                                       
 
Rental equipment net
  $ 253,196     $ 260,482     $ 259,956     $ 255,522     $ 255,522  
 
Total assets
    353,889       364,357       371,436       354,884       354,884  
 
Notes payable
    121,300       122,500       116,100       104,140       104,140  
 
Shareholders’ equity
    113,913       119,911       127,351       131,595       131,595  

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Table of Contents

MCGRATH RENTCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                                             
2000

First Second Third Fourth Year





Operations Data
                                       
 
Rental revenues
  $ 21,381     $ 22,847     $ 24,876     $ 25,827     $ 94,931  
 
Total revenues
    31,643       37,369       54,643       40,503       164,158  
 
Gross margin
    15,953       17,679       23,678       19,188       76,498  
 
Income from operations
    11,258       12,892       18,138       14,228       56,516  
 
Income before income taxes
    9,314       10,732       15,777       11,853       47,676  
 
Net income
    5,703       6,389       9,044       6,108       27,244  
 
Earnings per share:
                                       
   
Basic
  $ 0.46     $ 0.52     $ 0.73     $ 0.50     $ 2.21  
   
Diluted
  $ 0.45     $ 0.52     $ 0.73     $ 0.50     $ 2.19  
 
Dividends declared per share
  $ 0.14     $ 0.14     $ 0.14     $ 0.14     $ 0.56  
 
Shares used in per share calculation:
                                       
   
Basic
    12,500       12,305       12,308       12,223       12,334  
   
Diluted
    12,593       12,393       12,402       12,335       12,428  
Balance Sheet Data
                                       
 
Rental equipment net
  $ 222,695     $ 234,832     $ 243,270     $ 247,402     $ 247,402  
 
Total assets
    301,823       321,955       345,371       357,246       357,246  
 
Notes payable
    114,000       125,800       127,400       126,876       126,876  
 
Shareholders’ equity
    95,024       99,733       107,067       108,958       108,958  

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Table of Contents

Item 9.     Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

      Not applicable.

PART III

Item 10.     Directors and Executive Officers of the Registrant

Directors

                     
Name Age Principal Occupation Director Since




William J. Dawson
    47     Investor, retired executive     1998  
Robert C. Hood
    61     Investor, retired executive     1999  
Joan M. McGrath
    65     Businesswoman     1982  
Robert P. McGrath
    68     Chairman of the Board and Chief Executive Officer of the Company     1979  
Delight Saxton
    55     Senior Vice President of the Company     1982  
Ronald H. Zech
    58     Chairman of the Board, President and Chief Executive Officer of GATX Corporation     1989  

      William J. Dawson was elected a director of the Company in 1998, and he serves on its Audit and Executive Compensation Committees. From 1993 through 1998, Mr. Dawson was a Managing Director of Volpe Brown Whelan, LLC, an investment banking firm, where he was responsible for corporate finance activities in the healthcare industry. From 1998 through 2001, Mr. Dawson was Corporate Senior Vice President, Business Development of McKesson HBOC, Inc., a large healthcare services company, with responsibility for mergers & acquisitions and venture capital investments. Mr. Dawson is now retired.

      Robert C. Hood was elected a director of the Company in 1999. Mr. Hood serves on the Board’s Audit and Executive Compensation Committees. From 1996 to 1999, Mr. Hood was Executive Vice President and Chief Financial and Administrative Officer of Excite, Inc., an Internet portal company. Mr. Hood is now retired.

      Joan M. McGrath joined the Company in 1980 and has been a director since 1982. Ms. McGrath served as a Vice President of the Company from 1982 through 1994, at which time she resigned that position. She continues to be an employee of the Company with responsibilities in training sales, supervisory and management personnel and general management.

      Robert P. McGrath is the founder of the Company. He has been a director and its Chief Executive Officer since the Company’s formation in 1979, and its Chairman of the Board since 1988. He also served as the Company’s President through 1994 and as its Chief Financial Officer through 1993. He is a member of the Executive Compensation Committee of the Company’s Board of Directors.

      Delight Saxton has been with the Company since its inception in 1979, and a director since 1982. She served as Secretary of the Company from 1982 to 1999, its Treasurer from 1982 to 1989, its Vice President of Administration from 1989 to 1997, and its Chief Financial Officer from 1993 to 1999. She has been a Senior Vice President of the Company since 1997. She is responsible for facility development and general management.

      Ronald H. Zech was elected a director of the Company in 1989, and he serves on its Audit and Executive Compensation Committees. In 1994, Mr. Zech was elected President and Chief Operating Officer of GATX Corporation, a New York Stock Exchange listed company. In 1995, he was elected Chief Executive Officer of that corporation, and in 1996 was elected its Chairman of the Board. GATX provides specialized finance and leasing solutions for customers and partners worldwide. Mr. Zech also serves on the Board of Directors of The PMI Group, Inc., a New York Stock Exchange listed company engaged in the business of providing private mortgage insurance.

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Table of Contents

Executive Officers

             
Name Age Position Held with the Company



Robert P. McGrath
    68     Chairman of the Board and Chief Executive Officer
Dennis C. Kakures
    45     President and Chief Operating Officer
Delight Saxton
    55     Senior Vice President
Thomas J. Sauer
    45     Vice President and Chief Financial Officer
Scott A. Alexander
    41     Vice President
Randle F. Rose
    44     Vice President of Administration and Secretary
Laura C. Cissell
    37     Vice President

      Robert P. McGrath and Delight Saxton are also directors of the Company and descriptions of them appear under “Directors” above.

      Dennis C. Kakures joined the Company in 1982 as Sales and Operations Manager of the Company’s Northern California office. He became a Vice President of the Company in 1987, Chief Operating Officer in 1989, Executive Vice President in 1993, and President in 1995.

      Thomas J. Sauer joined the Company in 1983 as its Accounting Manager, served as its Controller from 1987 to 1999, became Treasurer in 1989, a Vice President in 1995, and Chief Financial Officer in 1999. Mr. Sauer is responsible for accounting, financial reporting, corporate taxes, and the Company’s relationships with its bankers and auditors.

      Scott A. Alexander joined the Company in 1982 as a sales representative, became a Branch Manager in 1990, and a Vice President in 1997. Mr. Alexander is responsible for the operation of the Mobile Modular Division.

      Randle F. Rose joined the Company in 1997 as its Vice President of Administration, and was elected Secretary of the Company in 1999. Mr. Rose is responsible for administration of human resources, risk management, MIS, real estate and facilities. For the three years prior to joining the Company, Mr. Rose was Vice President, Finance of Ardenbrook, Inc., a real estate company.

      Laura C. Cissell joined the Company in 1988 as a marketing representative, became Marketing Manager in 1994, and received several promotions thereafter culminating in being elected a Vice President in 2000. Ms. Cissell is responsible for the operations of the RenTelco Division.

      Each executive officer of the Company serves at the pleasure of the Board of Directors.

Compliance with § 16(a) of the Securities Exchange Act of 1934

      The members of the Board of Directors, the executive officers of the Company, and persons who hold more than 10% of the Company’s outstanding Common Stock are subject to the reporting requirements of § 16(a) of the Securities Exchange Act of 1934 which require them to file reports with respect to their ownership of the Company’s Common Stock and their transactions in such Common Stock. Based upon (i) the copies of the § 16(a) reports the Company received from such persons during or with respect to 2001, and (ii) written representations received from all such persons that no annual Form 5 reports were required to be filed by them with respect to 2001, the Company believes that all reporting requirements under § 16(a) for 2001 were met in a timely manner by its directors, executive officers and greater than 10% shareholders.

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Table of Contents

Item 11.     Executive Compensation

Summary Compensation Table

      The following table sets forth the compensation earned by the Company’s Chief Executive Officer and the Company’s other four most highly compensated executive officers for services rendered in all capacities to the Company for each of the last three years.

                                                   
Long-Term
Annual Compensation Compensation
Name and

All Other
Principal Position Year Salary Bonus Awards(1) Payout(2) Compensation(3)







Robert P. McGrath
    2001     $ 430,000     $ 42,116                 $ 5,469  
 
Chairman and Chief
    2000       424,000       295,663                   12,437  
 
Executive Officer
    1999       385,000       111,024                   12,579  
Dennis C. Kakures
    2001       320,000       31,197     $ 30,466     $ 268,250       5,469  
 
President and Chief
    2000       280,000       192,442       11,606       299,569       12,437  
 
Operating Officer
    1999       250,000       70,481       55,388       268,864       12,579  
Thomas J. Sauer
    2001       200,000       15,631       20,111       170,308       5,469  
 
Vice President and
    2000       185,000       101,973       7,576       191,912       12,437  
 
Chief Financial Officer
    1999       165,000       35,560       36,155       172,547       12,579  
Scott A. Alexander
    2001       157,000       85,778                   5,469  
 
Vice President
    2000       145,000       51,500                   12,437  
      1999       133,000       22,085                   12,579  
Randle F. Rose
    2001       112,500       28,047                   4,601  
 
Vice President of
    2000       105,000       26,094                   9,145  
 
Administration, Secretary
    1999       90,000       17,071                   8,648  


(1)  Upon an award of stock bonus shares under the Company’s Long Term Stock Bonus Plans, 20% of such shares are vested in the participant and the remaining 80% vest over the next four years contingent upon the participant remaining in the employ of the Company. See “Long Term Stock Bonus Plans” below. The figures shown in the column designated “Awards” are the values of the vested 20% shares of the Company’s Common Stock earned by the executive officers under the Plan, calculated based on the market value of the Common Stock as of the end of the respective years. Dividends are paid to the officer with respect to shares earned by him, whether or not vested. As the unvested shares subsequently vest, their values are shown in the column designated “Payout.”
 
(2)  The figures shown in the column designated “Payout” are the values of the shares of the Company’s Common Stock previously earned by the executive officers under the Company’s Long-Term Stock Bonus Plans in a prior year which vested during the year shown. The values are calculated based on the market value of the Common Stock as of the end of the year in which it was originally earned.
 
(3)  The figures shown in the column designated “All Other Compensation” represent the executive officer’s share of the allocation of the Company’s contribution to the Company’s Employee Stock Ownership Plan for that year, and his share of any re-allocations of forfeited benefits during that year (see “Employee Stock Ownership Plan” below).

Employee Stock Ownership Plan

      The Company’s Employee Stock Ownership Plan (“ESOP”) is intended to qualify as an employee stock ownership plan as defined in Section 4975(e)(7) of the Internal Revenue Code, and as a stock bonus plan under Section 401(a) of the Internal Revenue Code. The Company created a trust under the ESOP to hold plan assets, with Union Bank of California, N.A. acting as trustee. The Company may amend or terminate the ESOP at any time. In July 2001, the Company amended the ESOP to name Delight Saxton and Thomas J. Sauer as Trustees in place of Union Bank of California. All assets acquired by the trust are administered by a Plan Committee composed of Nanci Clifton, Edward Diaz, Brian Jensen, Thomas J. Sauer, Delight Saxton and Sandy Waggoner (all Company employees) for the exclusive benefit of employees who are participants in the ESOP and their designated beneficiaries.

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      Employees, who are 21 years or older, are entitled to participate in the ESOP when they have completed one year of service to the Company by June 30 of any year. As of December 31, 2001, 232 employees of the Company were participants in the ESOP. Allocations to each eligible participant’s trust account are made each year from Company contributions, trust income or loss and re-allocations of forfeited ESOP benefits if the participant remains employed throughout the year and has worked a minimum number of hours or his employment has terminated due to death or retirement (as that term is defined in the ESOP) during that year. Allocations are made based upon each participant’s compensation from the Company and time employed by the Company. As provided by law, a participant’s interest in the ESOP becomes 20% vested after three years of service and will continue to vest at 20% per year thereafter until it is fully vested after the seventh year or upon death or total disability. The vesting schedule will be accelerated and the Company’s contributions and ESOP allocations will be modified if the ESOP becomes a “top heavy plan” under federal tax laws.

      In general, Company contributions are immediately tax deductible by the Company, but participants do not recognize income for tax purposes until distributions are made to them. The Company’s Board of Directors determines the amount of Company contributions to the ESOP in cash, Company stock or other property each year with consideration for federal tax laws. The Company’s Board of Directors has authorized a $400,000 cash contribution to the ESOP for the 2001 plan year, and the Company had made an aggregate of $3,050,000 cash contributions for the four years prior to that. Employees may not make contributions to the ESOP. Contributions in cash are used to purchase Company stock; however, other investments may be made and loans may be incurred by the ESOP for the purchase of Company stock.

      The Plan Committee has determined that cash dividends paid by the Company on shares of the Company’s Common Stock held by the ESOP shall be paid out to the participants. The Plan Committee has the right to revoke this decision at any time.

1987 Incentive Stock Option Plan

      The Company has a 1987 Incentive Stock Option Plan (the “1987 Plan”) under which options have been granted to key employees of the Company for the purchase of its Common Stock. Options granted under the 1987 Plan are intended to qualify as incentive stock options as that term is defined in Section 422 of the Internal Revenue Code of 1986, as amended. The 1987 Plan authorized the issuance of an aggregate of 2,000,000 shares of the Company’s Common Stock under options. As of March 15, 2002, options for an aggregate of 852,000 shares had been granted to 28 key employees at exercise prices ranging between $3.06 and $10.75 per share; and of such options granted, options have been exercised for the purchase of 713,155 shares, options for 60,162 shares have been terminated, and options for 78,683 shares remain outstanding. The 1987 Plan is now terminated by its terms, and no further options will be granted under it; however, the options held by key employees for 78,683 shares still outstanding remain exercisable in accordance with the terms of those options. None of the Company’s executive officers listed in the “Summary Compensation Table” above were granted, exercised or held an option during 2001 under the 1987 Plan.

1998 Stock Option Plan

      The Company has a 1998 Stock Option Plan (the “1998 Plan”) that authorizes the issuance of an aggregate of 2,000,000 shares of the Company’s Common Stock under options to officers, key employees, directors and other persons who provide valuable services to the Company or its subsidiaries. Options granted under the 1998 Plan may be either incentive stock options as defined in Section 422 of the Internal Revenue Code of 1986, as amended, or options which are not incentive stock options (“non-qualified options”). As of March 15, 2002, options for an aggregate of 557,000 shares have been granted to 63 key employees at exercise prices ranging between $15.625 and $25.10 per share; and of such options granted, options have been exercised for the purchase of 121,120 shares, options for 69,000 shares have been terminated, and options for 366,880 shares remain outstanding. In addition to these options to key employees, options for an aggregate of 72,000 shares have been granted to outside directors of the Company at exercise prices ranging between $15.938 and $25.55 per share; and of such options granted, no options have been exercised, options for 10,000 shares have been terminated, and options for 62,000 remain outstanding. 1,450,000 shares remain available in the 1998

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Plan for future option grants. In the event there is a “change in control” of the Company and the option holder is thereafter terminated within two years, the exercise rights under his or her option shall accelerate and become fully vested. With the exception of the information set forth below, none of the Company’s executive officers listed in the “Summary Compensation Table” above exercised or held an option during 2001 under the 1998 Plan.
                                 
Number of Shares Underlying Value of Unexercised In-the-
Shares Acquired Value Unexercised Options at Year End Money Options at Year End
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable





Randle F. Rose
    0       0       21,000/29,000     $ 373,770/$576,030  

Long-Term Stock Bonus Plans

      The Company’s [1990] Long-Term Stock Bonus Plan reserved 400,000 shares of the Company’s Common Stock for bonuses to be granted to officers and other key employees to provide incentives for high levels of performance and unusual efforts to improve the financial performance of the Company. This Plan terminated on December 31, 1999. In 2000, the Board of Directors and shareholders of the Company adopted the McGrath RentCorp 2000 Long-Term Stock Bonus Plan to replace the prior plan, and under which another 400,000 shares of the Company’s Common Stock are reserved for bonuses to be granted to officers and key employees under conditions substantially the same as the prior plan. Stock Bonus Agreements have been entered into with Dennis C. Kakures, the Company’s President and Chief Operating Officer, and Thomas J. Sauer, the Company’s Vice President and Chief Financial Officer. To date, Messrs. Kakures and Sauer are the only persons who have received Stock Bonus Agreements. From 1990 through 2000, each Agreement provided for a stock bonus to the officer dependent upon the return on equity realized for the Company’s shareholders over a three-year period, and starting with Agreements entered into in 1998, also dependent upon the growth in the Company’s net income over that three-year period before taking into account any income derived from or expenses attributable to interest, income taxes, depreciation and/or amortization (“EBITDA”). Starting in 2001, each Agreement provided for a stock bonus to the officer dependent upon the growth in the Company’s EBITDA after subtracting its debt. The Agreements also provide that the right to receive any stock bonus earned is subject to vesting over a four-year period contingent upon the officer remaining in the employ of the Company; however, in the event there is a “change in control” of the Company and the officer is thereafter terminated, his right to receive any stock bonus earned is accelerated and becomes fully vested. Messrs. Kakures and Sauer were awarded stock bonuses based upon the Company’s performance over the three-year period ended December 31, 2001. The following table sets forth certain information with respect to the stock bonuses awarded. The “Values” in the table are calculated based on the market value of the shares of Common Stock as of December 31, 2001.

                                                     
As of 12/31/01 Will Vest at December 31,


Name Earned Vested 2002 2003 2004 2005







Dennis C. Kakures
  Shares     4,058       812       812       812       811       811  
    Value   $ 152,256     $ 30,466     $ 30,466     $ 30,466     $ 30,429     $ 30,429  
Thomas J. Sauer
  Shares     2,678       536       536       536       535       535  
    Value   $ 100,479     $ 20,111     $ 20,111     $ 20,111     $ 20,073     $ 20,073  

      The Company has entered into further Stock Bonus Agreements with both Mr. Kakures and Mr. Sauer, under which an estimate of 40,521 shares in additional stock bonuses could be awarded if the Company’s performance goals over the successive three-year periods ending December 31, 2002 and 2003 are met. An estimated 359,479 shares remain available in the 2000 Plan for future bonus grants.

Compensation Committee Interlocks and Insider Participation in Compensation Decisions

      No member of the Company’s Executive Compensation Committee has a compensation committee interlocking relationship (as defined by the Securities and Exchange Commission). One member of the Committee, Robert P. McGrath, is an employee and officer of the Company, and he has participated in deliberations of the Committee concerning executive officer compensation.

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Compensation of Directors

      Each director who is not also an officer or employee of the Company was compensated for his services as a director at the rate of $16,000 per annum plus an additional fee of $750 per meeting for attendance at the meetings of the Board of Directors or one of its Committees (in the event a Committee meeting is held in conjunction with a Board meeting, only one $750 fee is paid to the director). Mr. Dawson and Mr. Zech each received $24,250 for his services as a director of the Company during 2001, and Mr. Hood received $25,000 for his services as a director during 2001. All directors, including those who are officers or employees of the Company, are reimbursed for expenses incurred in connection with attending Board or Committee meetings.

      In addition to cash compensation, the three outside directors of the Company during 2001 (Messrs. Dawson, Hood and Zech) each received a non-qualified stock option under the Company’s 1998 Stock Option Plan for the purchase of 4,000 shares of the Company’s common stock at an exercise price of $25.55 per share.

Item 12.     Security Ownership of Certain Beneficial Owners and Management

      The following table sets forth certain information regarding each person who is known by the Company to be the beneficial owner of more than 5% of the outstanding Common Stock of the Company, each of the directors, the chief executive officer and the other four most highly compensated officers of the Company, and all officers and directors as a group as of March 15, 2002. The table is presented in accordance with the rules of the Securities and Exchange Commission and, accordingly, in several instances beneficial ownership of the same shares is attributed to more than one person.

                   
Beneficial Ownership

Number of Percentage of
Name Shares Outstanding



Robert P. and Joan M. McGrath(1)(2)
    2,175,413       17.5 %
 
McGrath RentCorp
               
 
5700 Las Positas Road
               
 
Livermore, CA 94550
               
Dimensional Fund Advisors, Inc.(3)
    735,600       5.9 %
 
1299 Ocean Avenue, 11th Floor
               
 
Santa Monica, CA 90401
               
Dennis C. Kakures(2)(4)
    300,343       2.4 %
Delight Saxton(2)
    316,716       2.5 %
Thomas J. Sauer(2)(4)
    253,226       2.0 %
Scott A. Alexander(2)
    192,193       1.5 %
Randle F. Rose(2)(5)
    26,092       *  
Ronald H. Zech(5)
    18,750       *  
William J. Dawson(5)
    12,000       *  
Robert C. Hood(5)
    5,700       *  
All Executive Officers and Directors as a group (11 persons)(1)(2)(4)(5)
    3,339,267       26.7 %


  * Denotes less than 1%.
 
(1)  Includes 319,006 shares held by two organizations controlled by Mr. and Mrs. McGrath; however, they disclaim any beneficial interest in such shares.
 
(2)  Includes the shares held by the McGrath RentCorp Employee Stock Ownership Plan for benefit of the named individual. The number of shares included is 56,367 shares for Mr. McGrath, 31,290 shares for Ms. McGrath, 49,034 shares for Mr. Kakures, 42,716 shares for Ms. Saxton, 36,852 shares for Mr. Sauer, 41,191 shares for Mr. Alexander, 1,092 shares for Mr. Rose, and 265,426 shares for all executive officers

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as a group. These shares are included because beneficiaries under the Plan hold sole voting power over the shares (whether or not rights to the shares have vested).

(3)  Dimensional Fund Advisors Inc. (“Dimensional”), an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, furnishes investment advice to four investment companies registered under the Investment Company Act of 1940, and serves as investment manager to certain other investment vehicles, including commingled group trusts. (These investment companies and investment vehicles are the “Portfolios.”) In its role as investment advisor and investment manager, Dimensional possessed both investment and voting power over 735,600 shares of McGrath RentCorp stock as of December 31, 2001. The Portfolios own all securities reported in this statement, and Dimensional disclaims beneficial ownership of such securities.
 
(4)  Includes unvested shares issued to the named individual under the McGrath RentCorp Long-Term Stock Bonus Plan, which shares are subject to return to the Company under certain circumstances. The number of shares included is 15,424 shares for Mr. Kakures, 10,088 shares for Mr. Sauer, and 25,512 shares for all executive officers as a group.
 
(5)  Includes 58,000 shares, which are the portions of outstanding stock options held by two officers and three directors that will be exercisable over the next 60 days.

Item 13.     Certain Relationships and Related Transactions

Indemnification Agreements

      The Company has entered into Indemnification Agreements with each of its directors and executive officers. These Agreements require the Company to indemnify its officers or directors against expenses and, in certain cases, judgment, settlement or other payments incurred by the officer or director in suits brought by the Company, derivative actions brought by shareholders and suits brought by other third parties. Indemnification has been granted under these Agreements to the fullest extent permitted under California law in situations where the officer or director is made, or threatened to be made, a party to the legal proceeding because of his or her service to the Company.

Control

      By virtue of their positions in the Company and ownership of the Company’s Common Stock, Robert P. McGrath and Joan M. McGrath may be deemed “control persons” of the Company as that term is defined under the Securities Act of 1933, as amended.

Family Relationships

      There are no family relationships between any director or executive officer of the Company except that Robert P. McGrath and Joan M. McGrath are husband and wife

Merger Agreement with Tyco

      Concurrently with the execution of the merger agreement between the Company and a subsidiary of Tyco International Ltd. (“Tyco”) (See “Item 1. Business – Merger Agreement with Tyco” above), Robert P. McGrath, the Chairman of the Board and Chief Executive Officer of the Company, entered into a Transitional Services Agreement with the Company, dated December 20, 2001, but to be effective only upon the consummation of the proposed merger. This Transitional Services Agreement provides that Mr. McGrath will continue to provide services to the Company for a period of three months following the closing of the merger, and in consideration thereof he will receive the same base salary and benefits that he received before the merger and a retention bonus of $1,000,000. At the same time, Mr. McGrath and Joan M. McGrath, his wife and a director of the Company, entered into Confidentiality and Non-Competition Agreements with the Company and a subsidiary of Tyco by which they agreed not to compete with the Company for a period of five years following the consummation of the merger. The Transitional Services Agreement is filed as Exhibit 10.7 hereto, and the Confidentiality and Non-Competition Agreements are filed as Exhibits 10.8 and 10.9 hereto. The foregoing descriptions of the Transitional Services Agreement and the Confidentiality and Non-

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Competition Agreements do not purport to be complete descriptions and are qualified by reference to the full text of those agreements attached hereto.

PART IV

 
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

      (a) Index of documents filed as part of this report:

  1. The following Consolidated Financial Statements of McGrath RentCorp are included in Item 8.
           
Page of this report

Report of Independent Public Accountants
    22  
Consolidated Financial Statements
       
 
Consolidated Statements of Income for the Years Ended December 31, 2001, 2000 and 1999
    23  
 
Consolidated Balance Sheets as of December 31, 2001 and 2000
    24  
 
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2001, 2000 and 1999
    25  
 
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999
    26  
 
Notes to Consolidated Financial Statements
    27  

           2.     Financial Statement Schedules. None

           3.     Exhibits. See Index of Exhibits on page 49 of this report.

      (b) Reports on Form 8-K. A Current Report on Form 8-K was filed by the Company on December 26, 2001, by which the Company reported entering into the Merger Agreement with Tyco.

      Schedules and exhibits required by Article 5 of Regulation S-X other than those listed are omitted because they are not required, are not applicable, or equivalent information has been included in the consolidated financial statements, and notes thereto, or elsewhere herein.

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SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  MCGRATH RENTCORP

  by:  /s/ ROBERT P. MCGRATH
 
  Robert P. McGrath
  Chairman of the Board
  and Chief Executive Officer

Date: March 18, 2002

      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/ WILLIAM J. DAWSON

William J. Dawson
  Director   March 18, 2002
 
/s/ ROBERT C. HOOD

Robert C. Hood
  Director   March 18, 2002
 
/s/ JOAN M. MCGRATH

Joan M. McGrath
  Director   March 18, 2002
 
/s/ ROBERT P. MCGRATH

Robert P. McGrath
  Chairman of the Board and Chief Executive Officer   March 18, 2002
 
/s/ THOMAS J. SAUER

Thomas J. Sauer
  Vice President and Chief Financial Officer
(Chief Accounting Officer)
  March 18, 2002
 
/s/ DELIGHT SAXTON

Delight Saxton
  Senior Vice President and Director   March 18, 2002
 
/s/ RONALD H. ZECH

Ronald H. Zech
  Director   March 18, 2002

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McGRATH RENTCORP

INDEX TO EXHIBITS

             
Number Description Method of Filing



  2.1     Agreement and Plan of Merger, dated as of December 20, 2001, by and between Tyco Acquisition Corp. 33 and McGrath RentCorp   Filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed December 26, 2001, and incorporated herein by reference.
  2.1.1     Guarantee of Tyco International Ltd. (to Agreement and Plan of Merger), dated as of December 20, 2001   Filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed December 26, 2001, and incorporated herein by reference.
  2.1.2     Exemplar Shareholder Agreement entered into by and between Tyco Acquisition Corp. 33 and certain shareholders of McGrath RentCorp   Filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K, filed December 26, 2001, and incorporated herein by reference.
  3.1     Articles of Incorporation of McGrath RentCorp   Filed as exhibit 19.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1988 (filed August 14, 1988), and incorporated herein by reference.
  3.1.1     Amendment to Articles of Incorporation of McGrath RentCorp   Filed as exhibit 3.1 to the Company’s Registration Statement on Form S-1 (filed March 28, 1991 Registration No. 33-39633), and incorporated herein by reference.
  3.1.2     Amendment to Articles of Incorporation of McGrath RentCorp   Filed as exhibit 3.1.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997 (filed March 31, 1998), incorporated herein by reference.
  3.2     Amended and Restated By-Laws of McGrath RentCorp   Filed as exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1990 (filed March 28, 1991), incorporated herein by reference.
  3.2.1     Amendment of By-Laws of McGrath RentCorp   Filed as exhibit 3.2.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997 (filed March 31, 1998), incorporated herein by reference.
  3.2.2     Amendment of By-Laws of McGrath RentCorp   Filed as exhibit 3.2.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998 (filed March 31, 1999, amended June 25, 1999), incorporated herein by reference.
  3.2.3     Amendment of By-Laws of McGrath RentCorp   Filed as exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (filed May 14, 1999, amended June 25, 1999) and incorporated herein by reference.
  3.2.4     Amendment of By-Laws of McGrath RentCorp   Filed as exhibit 3.2.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 (filed March 27, 2000), incorporated herein by reference.

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Number Description Method of Filing



  4.1     Note Purchase Agreement   Filed as exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (filed November 12, 1998), and incorporated herein by reference.
  4.1.1     Schedule of Notes with Sample Note   Filed as exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (filed August 11, 1998), and incorporated herein by reference.
  4.1.2     Amended Schedule of Notes with Sample Note   Filed as exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 (filed August 8, 2001), and incorporated herein by reference.
  4.2     Second Amended and Restated Credit Agreement June 2001   Filed as exhibit 4.1 to the company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 (filed August 8, 2001), and incorporated herein by reference.
  4.3     $5,000,000 Committed Credit Facility June 2001   Filed as exhibit 4.2 to the company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 (filed August 8, 2001), and incorporated herein by reference.
  10.1     McGrath RentCorp 1987 Incentive Stock Option Plan   Filed as exhibit 19.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1988 (filed August 14, 1988), and incorporated herein by reference.
  10.1.1     Exemplar Form of the Incentive Stock Option Agreement   Filed as exhibit 19.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1988 (filed August 14, 1988), and incorporated herein by reference.
  10.1.2     Schedule of Options Granted to Officers under 1987 Plan.   Filed herewith.
  10.2     McGrath RentCorp 1998 Stock Option Plan   Filed as exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (filed November 12, 1998), and incorporated herein by reference.
  10.2.1     Exemplar Incentive Stock Option for Employees Under the 1998 Stock Option Plan   Filed as exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (filed November 12, 1998), and incorporated herein by reference.
  10.2.2     Exemplar Non-Qualified Stock Option for Directors under the 1998 Stock Option Plan   Filed as exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (filed November 12, 1998), and incorporated herein by reference.
  10.2.3     Schedule of Options Granted to Officers and Directors under 1998 Plan.   Filed herewith.
  10.3     Exemplar Form of the Directors, Officers and Other Agents Indemnification Agreements   Filed herewith.

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Number Description Method of Filing



  10.4     Long-Term Stock Bonus Plan.   Filed as exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1990 (filed March 28, 1991), and incorporated herein by reference.
  10.4.1     Exemplar Long-Term Stock Bonus Agreement under Long-Term Stock Bonus Plan.   Filed as exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1990 (filed March 28, 1991), and incorporated herein by reference.
  10.5     2000 Long-Term Stock Bonus Plan.   Filed as exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (filed March 30, 2001), and incorporated herein by reference.
  10.5.1     Exemplar Long-Term Stock Bonus Agreement under 2000 Long-Term Stock Bonus Plan utilized for the 2000-2002 Programs.   Filed as exhibit 10.4.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (filed March 30, 2001), and incorporated herein by reference.
  10.5.2     Exemplar Long-Term Stock Bonus Agreement under 2000 Long-Term Stock Bonus Plan utilized for Programs starting in 2001.   Filed herewith.
  10.6     Enviroplex Stock Exchange Agreement dated June 2, 2001, by and between McGrath RentCorp, Joe G. Sublett and Donald M. Curtis   Filed herewith.
  10.7     Transitional Services Agreement, dated as of December 20, 2001, by and between McGrath RentCorp and Robert P. McGrath   Filed herewith.
  10.8     Confidentiality and Non-Competition Agreement, dated as of December 20, 2001, by and between McGrath RentCorp, Tyco Acquisition Corp. 33 and Robert P. McGrath   Filed herewith.
  10.9     Confidentiality and Non-Competition Agreement, dated as of December 20, 2001, by and between McGrath RentCorp, Tyco Acquisition Corp. 33 and Joan M. McGrath   Filed herewith.
  23     Written Consent of Arthur Andersen, LLP   Filed herewith.
  99     Letter Pursuant to Temporary Note 3T   Filed herewith.

      The exhibits listed above may be obtained from McGrath RentCorp, 5700 Las Positas Road, Livermore, California 94550-7800 upon written request. Each request should specify the name and address of the requesting person and the title of the exhibit or exhibits desired. A reasonable fee for copying any exhibit requested plus postage will be charged by McGrath RentCorp prior to furnishing such exhibit(s).

      See the Investor Relations section of Corporate Information at for the Company’s most recent SEC filings

52

<PAGE>
                                                                  Exhibit 10.1.2




            1987 PLAN OPTIONS GRANTED TO CURRENT OFFICERS - 1987 PLAN


<TABLE>
<CAPTION>
                                            NUMBER OF            EXERCISE
NAME                  GRANT DATE            OPTIONS*             PRICE *
----                  ----------            ---------            --------

<S>                   <C>                  <C>                  <C>   
Laura C. Cissell      June 13, 1996         20,000               $10.75
</TABLE>


   * Split Adjusted

                                 





<PAGE>
                                                                  Exhibit 10.2.3


           OPTIONS GRANTED TO CURRENT OFFICERS / DIRECTORS - 1998 PLAN


<TABLE>
<CAPTION>
                                                   NUMBER OF     EXERCISE
NAME                      GRANT DATE               OPTIONS       PRICE
----                      ----------               ---------     ---------
<S>                       <C>                     <C>           <C>   
Laura C. Cissell          March 9, 1998            10,000        20.810
Randle F. Rose            March 9, 1998            20,000        20.810

Ronald H. Zech            June 11, 1998            10,000        20.250

William J. Dawson         August 17, 1998          10,000        21.688

William J. Dawson         December 22, 1999         4,000        18.250
Robert C. Hood            December 22, 1999        10,000        18.250
Ronald H. Zech            December 22, 1999         4,000        18.250

Laura C. Cissell          October 31, 2000         45,000        17.000
Randle F. Rose            October 31, 2000         30,000        17.000

William J. Dawson         November 8, 2000          4,000        15.938
Robert C. Hood            November 8, 2000          4,000        15.938
Ronald H. Zech            November 8, 2000          4,000        15.938

William J. Dawson         November 16, 2001         4,000        25.550
Robert C. Hood            November 16, 2001         4,000        25.550
Ronald H. Zech            November 16, 2001         4,000        25.550

</TABLE>





<PAGE>
                                                                    Exhibit 10.3


                                MCGRATH RENTCORP

                            INDEMNIFICATION AGREEMENT

        This Indemnification Agreement (the "Agreement") is entered into,
effective as of December 11, 2001, between McGrath RentCorp, a California
corporation, and Xxxxxx Xxxxxx ("Xxxxxx").

        Whereas, it is essential to McGrath RentCorp to retain and attract, as
directors, officers and other agents, the most capable persons available; and

        Whereas, Xxxxxx is a director and/or officer or other agent of McGrath
RentCorp; and

        Whereas, both McGrath RentCorp and Xxxxxx recognize the increased risk
of litigation and other claims currently being asserted against directors,
officers and other agents of corporations; and

        Whereas, in recognition of Xxxxxx's need for substantial protection
against personal liability in order to enhance Xxxxxx's continued and effective
service to McGrath RentCorp, and in order to induce Xxxxxx to provide services
to McGrath RentCorp as a director, officer or other agent, McGrath RentCorp
desires to provide in this Agreement for the indemnification of, and the
advancing of expenses to, Xxxxxx to the fullest extent (whether partial or
complete) permitted by law (regardless of any amendment to or revocation of any
Bylaws of McGrath
 RentCorp or any change in the ownership of McGrath RentCorp or
the composition of its Board of Directors) and, to the extent insurance is
maintained, for the coverage of Xxxxxx under McGrath RentCorp's general and/or
directors' and officers' liability insurance policies; and

        Whereas, Xxxxxx is relying upon the rights afforded him under this
Agreement in continuing in his position with McGrath RentCorp;

        NOW, THEREFORE, in consideration of the above premises and of Xxxxxx
continuing to serve McGrath RentCorp directly or, at its request, with another
enterprise, and intending to be legally bound hereby, the parties agree as
follows:

                             1. CERTAIN DEFINITIONS

        As used in this Agreement, the capitalized terms listed below shall have
the meaning ascribed to them as follows:

        1.1 "BOARD" means the Board of Directors of McGrath RentCorp.

        1.2 A "CHANGE IN CONTROL" shall be deemed to have occurred if:

               1.2.1 at any time after the effective date of this Agreement, any
"person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), other than a trustee or other fiduciary
holding securities under an employee benefit plan of McGrath RentCorp or a
corporation owned directly or indirectly by the stockholders of McGrath RentCorp
in substantially the same proportions as their ownership of stock of McGrath
RentCorp, becomes the "Beneficial Owner" (as defined in Rule 13d-3 under said
Act), directly or indirectly, of securities of McGrath RentCorp representing 30%
or more of the total voting power represented by McGrath RentCorp's then
outstanding Voting Securities; or

               1.2.2 during any period of two consecutive years after the
effective date of this Agreement (or if two years have not elapsed since the
effective date of this Agreement, such shorter period), individuals who at the
beginning of such period constitute the Board and any new director whose
election by the Board or nomination for election by McGrath RentCorp's
stockholders was approved by a vote of at least two-thirds (2/3) of the
directors then still in office, who either were directors at the beginning of
the period or whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority thereof; or

               1.2.3 anytime after the effective date of this Agreement, the
stockholders of McGrath RentCorp approve a merger or consolidation of McGrath
RentCorp with any other corporation, other than a merger or consolidation which
results in the Voting Securities of McGrath RentCorp outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into Voting Securities of the surviving entity) at least 80% of
the total voting power represented by the Voting Securities of McGrath RentCorp
or such surviving entity outstanding immediately after such merger or
consolidation and such plan of merger or consolidation is not abandoned or
otherwise terminated before completion; or

<PAGE>

               1.2.4 anytime after the effective date of this Agreement, the
stockholders of McGrath RentCorp approve a plan of complete liquidation of
McGrath RentCorp or an agreement for the sale or disposition by McGrath RentCorp
(in one transaction or a series of transactions) of all or substantially all of
McGrath RentCorp's assets and such plan or agreement is not abandoned or
otherwise terminated before completion.

        1.3 "EXPENSES" shall be broadly construed and shall mean any expense,
liability or loss, including but not limited to attorneys' fees, judgments,
fines, ERISA excise taxes, penalties, amounts paid or to be paid in settlement,
any interest, assessments or other charges imposed thereon, any federal, state,
local or foreign taxes imposed as a result of the actual or deemed receipt of
any payments under this Agreement, and all other costs and obligations, paid or
incurred or accrued in connection with investigating, defending, being a witness
in, or participating in (including on appeal), or preparing for any of the
foregoing in, any Proceeding relating to any Indemnifiable Event or enforcing a
right to indemnification under this Agreement, Section 317 of the California
Corporations Code or otherwise. "Expenses" shall also include the amount of any
reasonable retainer required for Xxxxxx to retain competent counsel to defend
him in any Proceeding relating to any Indemnifiable Event.

        1.4 An "INDEMNIFIABLE EVENT" is any event or occurrence that takes place
either prior to or after the execution of this Agreement, related to the fact
Xxxxxx:

               1.4.1 is or was a director, an officer, an employee or an agent
of McGrath RentCorp; or

               1.4.2 is or was serving at the request of McGrath RentCorp as a
director, officer, employee, trustee, agent or fiduciary of another foreign or
domestic corporation, partnership, joint venture, employee benefit plan, trust
or other enterprise; or

               1.4.3 is or was a director, officer, employee or agent of a
foreign or domestic corporation that is a predecessor corporation of McGrath
RentCorp or of another enterprise at the request of such predecessor
corporation; and is related to anything done or not done by Xxxxxx in any such
capacity, whether or not the basis of the Proceeding is alleged action in an
official capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent of McGrath
RentCorp, as described in subsections 1.4.1 through 1.4.3 above.

        1.5 "INDEPENDENT COUNSEL" is an attorney, law firm or member of a law
firm, experienced in matters of corporate law, selected by Xxxxxx and approved
by McGrath RentCorp (which approval shall not be unreasonably withheld), and who
has not otherwise performed services for McGrath RentCorp, Xxxxxx or any other
party to the Proceeding giving rise to a claim for indemnification hereunder
(other than in connection with other indemnification matters) within the last
five years; provided, however, Independent Counsel shall not include any person
or entity who, under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing either McGrath
RentCorp or Xxxxxx in an action to determine Xxxxxx's rights under this
Agreement. In the event that one or more persons seeking indemnification and/or
advancement of expense under indemnification agreements with McGrath RentCorp
substantially the same as this Agreement has or have selected independent
counsel, the person so selected shall serve as Independent Counsel with respect
to Xxxxxx unless Xxxxxx has a reasonable belief that the person so serving as
independent counsel with respect to such other persons has a conflict of
interest with respect to Xxxxxx, does not meet the requirement for Independent
Counsel set forth in this Section 1.5, or is otherwise not an appropriate choice
to serve as Independent Counsel with respect to Xxxxxx.

        1.6A "PROCEEDING" is any threatened, pending or completed action
(including an action by or in the right of McGrath RentCorp), suit or
proceeding, or any inquiry, hearing or investigation, whether conducted by
McGrath RentCorp or any other party, Xxxxxx in good faith believes might lead to
the institution of any such action, suit or proceeding, whether civil, criminal,
administrative, investigative or other.

        1.7 The "REVIEWING PARTY" is any appropriate person or body consisting
of a member or members of the Board or any other person or body appointed by the
Board, none of whom is a party to the particular Proceeding with respect to
which Xxxxxx is seeking indemnification; provided, however, after a Change in
Control (other than a Change in Control approved by a majority of directors of
the Board who were directors immediately prior to such Change in Control), the
Reviewing Party shall be Independent Counsel.

        1.8 "VOTING SECURITIES" are any securities of McGrath RentCorp that vote
generally in the election of directors.

                            2. AGREEMENT TO INDEMNIFY

        2.1 GENERAL AGREEMENT.

               2.1.1 In the event Xxxxxx was, is or becomes a party to, or
witness or other participant in, or is threatened to be made a party to, or
witness or other participant in, a Proceeding by reason of (or arising in part
out of) an Indemnifiable Event,

<PAGE>

McGrath RentCorp shall indemnify Xxxxxx from and against any and all Expenses to
the fullest extent permitted by law, as the same exists or may hereafter be
amended or interpreted (but in the case of any such amendment or interpretation,
only to the extent such amendment or interpretation permits McGrath RentCorp to
provide broader indemnification rights than were permitted prior thereto). The
parties hereto intend that this Agreement shall provide for indemnification and
the advancement of Expenses to the fullest extent permitted by law,
notwithstanding that such action is not specifically authorized by other
provisions of this Agreement, by McGrath RentCorp's Articles of Incorporation or
Bylaws, or by statute.

               2.1.2 The rights to receive indemnification and the advancement
of Expenses under this Agreement are not exclusive of any other rights to which
Xxxxxx may be entitled or subsequently entitled under any law, statute or rule,
McGrath RentCorp's Articles of Incorporation or Bylaws, by vote of the
shareholders or the Board or otherwise.

               2.1.3 To the extent that a change in applicable law, statute or
rule (including without limitation by judicial decision) permits greater
indemnification by agreement than would be afforded currently under McGrath
RentCorp's Articles of Incorporation or Bylaws, applicable law or this
Agreement, it is the intent of the parties that Xxxxxx enjoy by this Agreement
the greater benefits so afforded by such change. In the event of any change in
any applicable law, statute or rule (including without limitation by judicial
decision) which narrows the right of a California corporation to indemnify a
director, officer, employee or agent of the corporation, such changes, to the
extent not otherwise required by such applicable law, statute or rule to be
applied to this Agreement, shall have no effect on this Agreement or the
parties' rights and obligations hereunder.

        2.2 PARTIAL INDEMNIFICATION. If Xxxxxx is entitled under any provision
of this Agreement to indemnification by McGrath RentCorp for some or a portion
of Expenses, but not, however, for the total amount thereof, McGrath RentCorp
shall nevertheless indemnify Xxxxxx for the portion thereof to which Xxxxxx is
entitled.

        2.3 PROHIBITED INDEMNIFICATION. Subject only to Section 2.4 below, if
applicable, no indemnification nor Expense Advance (as defined below) pursuant
to this Agreement shall be paid by McGrath RentCorp:

               2.3.1 In connection with any Proceeding initiated by Xxxxxx
against McGrath RentCorp or any director or officer of McGrath RentCorp (other
than by way of defense, counter claim or cross claim which arises by reason of
or in part out of an Indemnifiable Event), unless: (a) McGrath RentCorp has
joined in, or the Board has consented to, the initiation of such Proceeding; (b)
the Proceeding is one to enforce indemnification rights under this Agreement or
any other agreement or insurance policy or under McGrath RentCorp's Articles of
Incorporation or Bylaws; or (c) the Proceeding is instituted after a Change in
Control and Independent Counsel has approved its initiation;

               2.3.2 On account of any Proceeding in which judgment is rendered
against Xxxxxx for an accounting of profits made from the purchase or sale by
Xxxxxx of securities of McGrath RentCorp pursuant to the provisions of Section
16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions
of any federal, state or local laws;

               2.3.3 To the extent Xxxxxx settles or otherwise disposes of a
Proceeding or causes the settlement or disposal of a Proceeding without McGrath
RentCorp's express prior written consent (which shall not be unreasonably
withheld), unless Xxxxxx receives court approval for such settlement or other
disposition where McGrath RentCorp had the opportunity to oppose Xxxxxx's
request for such court approval or the settlement is approved by Independent
Counsel;

               2.3.4 With regard to any judicial award if McGrath RentCorp was
not given a reasonable and timely opportunity, at its expense, to participate in
the defense of such action unless McGrath RentCorp's participation in such
Proceeding was barred by this Agreement or the court in such Proceeding; or

               2.3.5 For any acts, omissions, transactions or circumstances for
which indemnification is prohibited by applicable state or federal law.

For convenience only, a copy of Sections 204(a)(10), 204(a)(11) and 317 of the
California Corporations Code, the principal provisions which limit Xxxxxx's
right to indemnification, is included as Appendix A hereto. Xxxxxx is cautioned
that indemnification may be further limited by any changes to such laws or any
other applicable law. MCGRATH RENTCORP IS NOT OBLIGATED TO NOTIFY XXXXXX OF ANY
SUCH CHANGES. Further, McGrath RentCorp and Xxxxxx are advised that the
Securities and Exchange Commission believes indemnification for liabilities
arising under federal securities laws is against public policy and is,
therefore, unenforceable.

        2.4 MANDATORY INDEMNIFICATION. Notwithstanding any other provision of
this Agreement, to the extent Xxxxxx has been successful on the merits (within
the meaning of Section 317(d) of the California Corporations Code) in defense of
any Proceeding relating in whole or in part to an Indemnifiable Event or in
defense of any issue or matter therein, Xxxxxx shall be indemnified against all
Expenses incurred in connection therewith.

<PAGE>

                               3. EXPENSE ADVANCES

        3.1 ADVANCE OF EXPENSES TO XXXXXX. Expenses incurred by Xxxxxx in any
Proceeding for which indemnification may be sought under this Agreement shall be
advanced by McGrath RentCorp to Xxxxxx within twenty (20) business days after
receipt by McGrath RentCorp of a statement or statements from Xxxxxx requesting
such advance and reasonably evidencing the Expenses incurred by Xxxxxx (each an
"Expense Advance" and collectively, "Expense Advances"). Any dispute as to
whether and to what extent Xxxxxx shall be entitled to Expense Advances shall be
determined by the Reviewing Party upon submission by Xxxxxx or McGrath RentCorp,
and the provisions of Sections 6.2 through 6.4 below shall apply.

        3.2 REPAYMENT OF EXPENSES BY XXXXXX. If it is ultimately determined that
Xxxxxx is not entitled to be indemnified by McGrath RentCorp, Xxxxxx hereby
agrees to repay any Expense Advances advanced by McGrath RentCorp under Section
3.1 above. Xxxxxx agrees to execute any further agreements regarding the
repayment of Expense Advances as McGrath RentCorp may reasonably request prior
to receiving any such advances. Ultimate determination as to whether or not
Xxxxxx is entitled to be indemnified shall be made in accordance with Section 6
below.

                   4. INDEPENDENT COUNSEL; THE REVIEWING PARTY

        4.1 WRITTEN OPINIONS. Any opinion required in this Agreement to be given
by the Reviewing Party or by Independent Counsel shall be given in writing to
McGrath RentCorp and Xxxxxx concurrently.

        4.2 EXPENSES OF INDEPENDENT COUNSEL. McGrath RentCorp agrees to bear the
reasonable fees and expenses of Independent Counsel, irrespective of the
determination as to Xxxxxx's entitlement to indemnification. McGrath RentCorp
further agrees to indemnify such counsel fully against any and all expenses
(including attorneys' fees), claims, liabilities, losses and damages arising out
of or relating to this Agreement or the engagement of such Independent Counsel
pursuant to this Agreement.

                    5. NOTIFICATION AND DEFENSE OF PROCEEDING

        5.1 NOTICE OF CLAIM. Xxxxxx shall give written notice to McGrath
RentCorp promptly after Xxxxxx has actual knowledge of any Proceeding as to
which indemnity may be sought under this Agreement. The failure of Xxxxxx to
give written notice, as provided in this Section 5.1, shall not relieve McGrath
RentCorp of its obligations to provide indemnification under this Agreement or
otherwise, unless and only to the extent that such failure or delay materially
prejudices McGrath RentCorp.

        5.2 DEFENSE. With respect to any Proceeding, McGrath RentCorp will be
entitled to participate in the Proceeding at its own expense. Except as
otherwise provided below, to the extent McGrath RentCorp so desires, it may,
upon delivery of written notice to Xxxxxx, assume the defense of any Proceeding
with counsel reasonably satisfactory to Xxxxxx. However, McGrath RentCorp shall
not be entitled to assume the defense of any Proceeding (i) brought by or on
behalf of McGrath RentCorp, or (ii) as to which Xxxxxx has reasonably determined
there may be a conflict of interest between Xxxxxx and McGrath RentCorp in the
defense of the Proceeding and Xxxxxx does in fact assume and conduct the
defense.

               5.2.1 If McGrath RentCorp assumes the defense, Xxxxxx shall
furnish such information as he may possess regarding Xxxxxx or the Proceeding in
question that McGrath RentCorp may reasonably request and as may be required in
connection with the defense or settlement of such Proceeding and shall fully
cooperate with McGrath RentCorp in every other respect. Except as provided in
Section 5.3 below, if McGrath RentCorp assumes the defense of the Proceeding,
McGrath RentCorp shall take all necessary steps in good faith to defend, settle
or otherwise dispose of the Proceeding.

               5.2.2 After written notice from McGrath RentCorp to Xxxxxx of its
election to assume the defense of any Proceeding, McGrath RentCorp will not be
liable to Xxxxxx under this Agreement or otherwise for any Expenses subsequently
incurred by Xxxxxx in connection with the defense of such Proceeding other than
reasonable costs of investigation or as otherwise provided in clauses (i)
through (iv) below. Xxxxxx shall have the right to employ Xxxxxx's own counsel
in such Proceeding, but all Expenses related thereto incurred after written
notice from McGrath RentCorp of its assumption of the defense shall be at
Xxxxxx's expense, unless: (i) the employment of counsel by Xxxxxx has been
authorized by McGrath RentCorp; (ii) Xxxxxx has reasonably determined there may
be a conflict of interest between Xxxxxx and McGrath RentCorp in the defense of
the Proceeding; (iii) after a Change in Control, the employment of counsel by
Xxxxxx has been approved by Independent Counsel; or (iv) McGrath RentCorp shall
not, in fact, assume and conduct the defense of such Proceeding within a
reasonable time after giving written notice of its election to assume the
defense of such Proceeding.

               5.2.3 Any Expenses incurred by McGrath RentCorp in defense of the
Proceeding under this Section 5.2 (except in a situation described in clause
(i), (ii) or (iv) of Section 5.2.2) shall be considered Expenses advanced by
McGrath RentCorp to Xxxxxx under Section 3 above.

<PAGE>

        5.3 LIMITATION ON MCGRATH RENTCORP'S DISPOSITION OF ANY PROCEEDING.
McGrath RentCorp may consent to a settlement or other disposition of all or any
part of any Proceeding which McGrath RentCorp is defending under Section 5.2
above without first obtaining the written consent of Xxxxxx, provided (i)
McGrath RentCorp shall not settle any Proceeding in any manner that would impose
any penalty or limitation on Xxxxxx without Xxxxxx's written consent, except for
a monetary obligation fully indemnified by McGrath RentCorp, and (ii) any
settlement or other disposition does not cause Xxxxxx to lose any material right
to indemnification under this Agreement.

                      6. INDEMNIFICATION PROCESS AND APPEAL

        6.1 INITIAL REQUEST AND DETERMINATION.

               6.1.1 To obtain payment(s) of Expenses under this Agreement,
Xxxxxx shall submit to McGrath RentCorp a written request(s) therefor, including
such documentation and information as is reasonably available to Xxxxxx and is
reasonably necessary to determine whether and to what extent Xxxxxx is entitled
to such payment(s). A determination as to whether and to what extent a requested
payment is proper shall be made by the Reviewing Party as soon as practicable,
and (if applicable) payment thereof shall be made by McGrath RentCorp as soon as
practicable thereafter, but in each case no later than thirty (30) business days
after receipt of the initial written request, except in the case of Expense
Advances, the determination and payment of which (if applicable) shall be made
no later than twenty (20) business days after written request by Xxxxxx is
presented to McGrath RentCorp.

               6.1.2 McGrath RentCorp may initiate a determination from the
Reviewing Party as to whether and to what extent Xxxxxx is entitled to
indemnification at any time after final resolution of the Proceeding for which
indemnity is claimed hereunder, subject to Xxxxxx's rights to require such
determination as set forth above.

               6.1.3 Xxxxxx shall cooperate with the Reviewing Party making the
determination with respect to Xxxxxx's entitlement to indemnification, including
providing to such person(s) or body any documentation or information which is
not privileged or otherwise protected from disclosure and which is reasonably
available to Xxxxxx and reasonably necessary for such determination. All
reasonable Expenses incurred by Xxxxxx in so cooperating with the person(s) or
body making such determination shall be borne by McGrath RentCorp, irrespective
of the determination as to Xxxxxx's entitlement to indemnification.

        6.2 SUIT TO ENFORCE RIGHTS. Regardless of any action or inaction by the
Reviewing Party, if Xxxxxx has not received payment of an Expense Advance after
making a request therefor in accordance with Section 3.1 above or full
indemnification of Expenses after making a demand therefor in accordance with
Section 6.1 above within sixty (60) days of such request or demand, Xxxxxx shall
have the right to enforce his indemnification rights under this Agreement by
commencing litigation in any court in the State of California having subject
matter jurisdiction thereof and in which venue is proper seeking an initial
determination by the court or challenging any determination by the Reviewing
Party or any aspect thereof. Likewise, McGrath RentCorp may seek an initial
determination by the court or challenge any determination by the Reviewing Party
in the manner set forth above. McGrath RentCorp and Xxxxxx each hereby consent
to service of process and to appear in any such proceeding. Any determination by
the Reviewing Party not challenged by Xxxxxx or McGrath RentCorp through legal
action within two years after final resolution of the Proceeding shall be
binding on McGrath RentCorp and Xxxxxx. The remedy provided for in this Section
6 shall be in addition to any other remedies available to Xxxxxx or McGrath
RentCorp in law or equity.

        6.3 DEFENSE TO INDEMNIFICATION, BURDEN OF PROOF, PRESUMPTIONS AND
EQUITABLE RELIEF.

               6.3.1 It shall be a defense to any action brought by Xxxxxx or
McGrath RentCorp concerning enforceability of this Agreement that it is not
permissible under applicable law for McGrath RentCorp to indemnify Xxxxxx for
the amount claimed.

               6.3.2 In connection with any action or determination by any
Reviewing Party or otherwise as to whether Xxxxxx is entitled to be indemnified
hereunder, the burden of proving such a defense or determination shall be on
McGrath RentCorp.

               6.3.3 Neither the failure of the Reviewing Party or McGrath
RentCorp (including its Board, Independent Counsel or stockholders) to have made
a determination prior to the commencement of such action by Xxxxxx that
indemnification of the claimant is proper under the circumstances because he has
met any particular standard of conduct or had any particular belief, nor an
actual determination by the Reviewing Party or McGrath RentCorp (including its
Board, Independent Counsel or stockholders) that Xxxxxx has not met such
applicable standard of conduct or did not have such belief, shall be a defense
to the action or create a presumption Xxxxxx has not met the applicable standard
of conduct.

<PAGE>

               6.3.4 For purposes of this Agreement, the termination of any
claim, action, suit or proceeding by judgment, order, settlement (whether with
or without court approval) or conviction, or upon a plea of nolo contendere or
its equivalent shall not create a presumption Xxxxxx did not meet any particular
standard of conduct or have any particular belief or that a court has determined
indemnification is not permitted by applicable law.

               6.3.5 McGrath RentCorp agrees that its failure to make
indemnification payments or Expense Advances to Xxxxxx shall cause irreparable
damage to Xxxxxx, the exact amount of which is impossible to ascertain, and for
this reason agrees that Xxxxxx shall be entitled to such injunctive or other
equitable relief as shall be necessary to adequately provide for such reasonably
anticipated payments, said right to be in addition to all other rights or
remedies available to Xxxxxx hereunder.

        6.4 INDEMNIFICATION FOR EXPENSES INCURRED IN ENFORCING RIGHTS. McGrath
RentCorp shall indemnify Xxxxxx against any and all Expenses and, if requested
by Xxxxxx, shall (within twenty (20) business days of such request) advance such
Expenses to Xxxxxx that are incurred by Xxxxxx in connection with any claim
asserted against or action brought by Xxxxxx against McGrath RentCorp for:

               6.4.1 indemnification of Expenses or payment of Expense Advances
by McGrath RentCorp under this Agreement or any other agreement or under
applicable law or McGrath RentCorp's Articles of Incorporation or Bylaws now or
hereafter in effect relating to indemnification for Indemnifiable Events; or

               6.4.2 recovery under directors' and officers' liability insurance
policies maintained by McGrath RentCorp; regardless of whether Xxxxxx ultimately
is determined to be entitled to such indemnification, Expense Advances or
insurance recovery, as the case may be.

                            7. INSURANCE; SUBROGATION

        7.1 LIABILITY INSURANCE. To the extent McGrath RentCorp maintains an
insurance policy or policies providing general and/or directors' and officers'
liability insurance, Xxxxxx shall be covered by such policy or policies, in
accordance with its or their terms, to the maximum extent of the coverage
available for any director, officer, employee or agent of McGrath RentCorp and
to the extent Xxxxxx occupies any such positions with McGrath RentCorp or any
other entity at the request of McGrath RentCorp.

        7.2 NO DUPLICATION OF PAYMENTS. McGrath RentCorp shall not be liable
under this Agreement to make any payment in connection with any claim made
against Xxxxxx to the extent Xxxxxx has otherwise received payment (under any
insurance policy, the Bylaws of McGrath RentCorp or otherwise) of the amounts
otherwise indemnifiable hereunder.

        7.3 SUBROGATION. In the event of payment under this Agreement, McGrath
RentCorp shall be subrogated to the extent of such payment to all of the rights
of recovery of Xxxxxx, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable McGrath RentCorp effectively to bring suit
to enforce such rights.

                             8. STANDARD PROVISIONS

        8.1 CONTINUING COVERAGE. The indemnification and the payment of Expense
Advances provided under this Agreement shall continue as to Xxxxxx for any
action taken or not taken while serving in an indemnified capacity pertaining to
an Indemnifiable Event even though Xxxxxx may have ceased to serve in such
capacity at the time of any Proceeding.

        8.2 ENTIRE AGREEMENT; REMEDIES CUMULATIVE. This Agreement constitutes
the entire agreement between the parties pertaining to the subject matter
contained herein and supersedes all prior and contemporaneous agreements,
representations and understandings of the parties, including in particular, that
certain Indemnification Agreement by and between the parties hereto dated
November 27, 2001. The rights and remedies provided in this Agreement and by law
shall be cumulative and the exercise of any particular right or remedy shall not
preclude the exercise of any other right or remedy in addition to, or as an
alternative of, such right or remedy.

        8.3 NOTICES. All notices, requests, demands and other communications
required or permitted under this Agreement shall be made in writing and shall be
deemed to have been duly given (i) on the date of service if served personally,
(ii) on the date of transmission if sent by facsimile transmission with printed
proof of electronic receipt, (iii) on the date of delivery if delivered by a
courier service with proof of delivery, or (iv) on the third business day after
mailing if mailed by first class mail, certified--return receipt requested,
postage prepaid, to the following addresses:

<PAGE>

        If to McGrath RentCorp, then to:    McGrath RentCorp
                                            5700 Las Positas Road
                                            Livermore, CA 94550
                                            Attn:  President
                                            Fax:   1-925-453-3200

        With a copy to:                     Christopher Ream, Esq.
                                            2600 El Camino Real, Suite 410
                                            Palo Alto, CA 94306-1719
                                            Fax:   1-650-856-8448

        If to Xxxxxx, then to:              Xxxxxx Xxxxxx
                                            McGrath RentCorp
                                            5700 Las Positas Road
                                            Livermore, CA 94550
                                            Fax:   1-925-453-3200

Any party hereto may change its address set forth above for notices by giving
notice to the other party hereto in accordance with the terms of this Section.

        8.4 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors (including any direct or indirect successor by purchase,
merger, consolidation or otherwise to all or substantially all of the business
and/or assets of McGrath RentCorp), assigns, spouses, heirs and personal and
legal representatives. McGrath RentCorp shall require and cause any successor
(whether direct or indirect by purchase, merger, consolidation or otherwise) to
all, or substantially all, of the business and/or assets of McGrath RentCorp
expressly to assume and agree to perform this Agreement in the same manner and
to the same extent that McGrath RentCorp would be required to perform if no such
succession had taken place. This Agreement may not be assigned without the prior
written consent of the other parties hereto, which consent shall not be
unreasonably withheld.

        8.5 MODIFICATION; WAIVER; SUPERSEDURE. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute, a waiver of any other provision hereof, whether or
not similar, nor shall any waiver constitute a continuing waiver. No waiver of
any of the provisions of this Agreement shall be binding unless in the form of a
writing signed by the party against whom enforcement of the waiver is sought.
Except as specifically provided herein, neither the failure to exercise nor any
delay in exercising any right or remedy hereunder shall constitute a waiver
thereof.

        8.6 CONSTRUCTION.

               8.6.1 The titles and subtitles used in this Agreement are used
for convenience only and are not to be considered in construing or interpreting
this Agreement.

               8.6.2 A reference herein to any section shall be deemed to
include a reference to every section the number of which begins with the number
of the section specifically referred to (e.g., a reference to Section 1.2
includes a reference to Sections 1.2, 1.2.1, 1.2.2, 1.2.3 and 1.2.4).

               8.6.3 Any reference in this Agreement to the indemnity provisions
of the Bylaws of McGrath RentCorp, to the California Corporations Code or to any
applicable law shall refer to such provisions as they shall be amended from time
to time or to any successor provision(s).

               8.6.4 Any ambiguous terms in this Agreement will not be construed
against McGrath RentCorp for drafting this Agreement.

        8.7 APPLICABLE LAW. This Agreement, and all rights, remedies,
liabilities, powers and duties of the parties to this Agreement, is to be
construed in accordance with and governed by the internal laws of the State of
California without giving effect to any choice of law rule that would cause the
application of the laws of any jurisdiction other than the internal laws of the
State of California to the rights and duties of the parties.

        8.8 SEVERABILITY. If any provision (or portion thereof) of this
Agreement shall be held by a court of competent jurisdiction to be invalid, void
or otherwise unenforceable, the remaining provisions shall remain enforceable to
the fullest extent

<PAGE>

permitted by law. Furthermore, to the fullest extent possible, the provisions of
this Agreement (including, without limitation, each portion of this Agreement
containing any provision held to be invalid, void or otherwise unenforceable,
that is not itself invalid, void or unenforceable) shall be construed so as to
give effect to the intent manifested by the provision held invalid, void or
unenforceable.

        8.9 LEGAL ADVICE. XXXXXX IS AWARE THAT THIS AGREEMENT WAS PREPARED BY
COUNSEL FOR MCGRATH RENTCORP. BY SIGNING BELOW, XXXXXX ACKNOWLEDGES THAT HE HAS
BEEN ADVISED TO SEEK INDEPENDENT COUNSEL TO REVIEW THIS AGREEMENT ON HIS BEHALF
PRIOR TO THE EXECUTION OF THIS AGREEMENT AND HAS HAD ADEQUATE TIME TO DO SO.

        8.10 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but both of which
together shall constitute one and the same instrument.

        IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.

                                     MCGRATH RENTCORP

                                     by
----------------------                  ---------------------------------------
XXXXXX  XXXXXX                       Robert P. McGrath, Chief Executive Officer


                                   APPENDIX A

                          CALIFORNIA CORPORATIONS CODE

SECTION 204(a)(10) Provisions eliminating or limiting the personal liability of
a director for monetary damages in an action brought by or in the right of the
corporation for breach of a director's duties to the corporation and its
shareholders, as set forth in Section 309, provided, however, that (A) such a
provision may not eliminate or limit the liability of directors (i) for acts or
omissions that involve intentional misconduct or a knowing and culpable
violation of law, (ii) for acts or omissions that a director believes to be
contrary to the best interests of the corporation or its shareholders or that
involve the absence of good faith on the part of the director, (iii) for any
transaction from which a director derived an improper personal benefit, (iv) for
acts or omissions that show a reckless disregard for the director's duty to the
corporation or its shareholders in circumstances in which the director was
aware, or should have been aware, in the ordinary course of performing a
director's duties, of a risk of serious injury to the corporation or its
shareholders, (v) for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
corporation or its shareholders, (vi) under Section 310, or (vii) under Section
316, (B) no such provision shall eliminate or limit the liability of a director
for any act or omission occurring prior to the date when the provision becomes
effective, and (C) no such provision shall eliminate or limit the liability of
an officer for any act or omission as an officer, notwithstanding that the
officer is also a director or that his or her actions, if negligent or improper,
have been ratified by the directors.

SECTION 204(a)(11) A provision authorizing, whether by bylaw, agreement, or
otherwise, the indemnification of agents (as defined in Section 317) in excess
of that expressly permitted by Section 317 for those agents of the corporation
for breach of duty to the corporation and its stockholders, provided, however,
that the provision may not provide for indemnification of any agent for any acts
or omissions or transactions from which a director may not be relieved of
liability as set forth in the exception to paragraph (10) or as to circumstances
in which indemnity is expressly prohibited by Section 317.

SECTION 317

    (a) For the purposes of this section, "agent" means any person who is or was
a director, officer, employee or other agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another foreign or domestic corporation, partnership, joint venture,
trust or other enterprise, or was a director, officer, employee or agent of a
foreign or domestic corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of the predecessor
corporation; "proceeding" means any threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or investigative; and
"expenses" includes without limitation attorneys' fees and any expenses of
establishing a right to indemnification under subdivision (d) or paragraph (4)
of subdivision (e).

    (b) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the corporation to procure a judgment in its favor)
by reason of the fact that the person is or was an agent of the corporation,
against expenses, judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with the proceeding if that person acted in
good faith and in a manner the person reasonably believed to be in the best
interests of the corporation and, in the case of a criminal proceeding, had no
reasonable cause to believe

<PAGE>

the conduct of the person was unlawful. The termination of any proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed to be
in the best interests of the corporation or that the person had reasonable cause
to believe that the person's conduct was unlawful.

    (c) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending, or
completed action by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that the person is or was an agent of the
corporation, against expenses actually and reasonably incurred by that person in
connection with the defense or settlement of the action if the person acted in
good faith, in a manner the person believed to be in the best interests of the
corporation and its shareholders.

    No indemnification shall be made under this subdivision for any of the
following:

        (1) In respect of any claim, issue or matter as to which the person
shall have been adjudged to be liable to the corporation in the performance of
that person's duty to the corporation and its shareholders, unless and only to
the extent that the court in which the proceeding is or was pending shall
determine upon application that, in view of all the circumstances of the case,
the person is fairly and reasonably entitled to indemnity for expenses and then
only to the extent that the court shall determine.

        (2) Of amounts paid in settling or otherwise disposing of a pending
action without court approval.

        (3) Of expenses incurred in defending a pending action which is settled
or otherwise disposed of without court approval.

    (d) To the extent that an agent of a corporation has been successful on the
merits in defense of any proceeding referred to in subdivision (b) or (c) or in
defense of any claim, issue, or matter therein, the agent shall be indemnified
against expenses actually and reasonably incurred by the agent in connection
therewith.

    (e) Except as provided in subdivision (d), any indemnification under this
section shall be made by the corporation only if authorized in the specific
case, upon a determination that indemnification of the agent is proper in the
circumstances because the agent has met the applicable standard of conduct set
forth in subdivision (b) or (c), by any of the following:

        (1) A majority vote of a quorum consisting of directors who are not
parties to such proceeding.

        (2) If such a quorum of directors is not obtainable, by independent
legal counsel in a written opinion.

        (3) Approval of the shareholders (Section 153), with the shares owned by
the person to be indemnified not being entitled to vote thereon.

        (4) The court in which the proceeding is or was pending upon application
made by the corporation or the agent or the attorney or other person rendering
services in connection with the defense, whether or not the application by the
agent, attorney or other person is opposed by the corporation.

    (f) Expenses incurred in defending any proceeding may be advanced by the
corporation prior to the final disposition of the proceeding upon receipt of an
undertaking by or on behalf of the agent to repay that amount if it shall be
determined ultimately that the agent is not entitled to be indemnified as
authorized in this section. The provisions of subdivision (a) of Section 315 do
not apply to advances made pursuant to this subdivision.

    (g) The indemnification authorized by this section shall not be deemed
exclusive of any additional rights to indemnification for breach of duty to the
corporation and its shareholders while acting in the capacity of a director or
officer of the corporation to the extent the additional rights to
indemnification are authorized in an article provision adopted pursuant to
paragraph (11) of subdivision (a) of Section 204. The indemnification provided
by this section for acts, omissions, or transactions while acting in the
capacity of, or while serving as, a director or officer of the corporation but
not involving breach of duty to the corporation and its shareholders shall not
be deemed exclusive of any other rights to which those seeking indemnification
may be entitled under any bylaw, agreement, vote of shareholders or
disinterested directors, or otherwise, to the extent the additional rights to
indemnification are authorized in the articles of the corporation. An article
provision authorizing indemnification "in excess of that otherwise permitted by
Section 317" or "to the fullest extent permissible under California law" or the
substantial equivalent thereof shall be construed to be both a provision for
additional indemnification for breach of duty to the corporation and its
shareholders as referred to in, and with the limitations required by, paragraph
(11) of subdivision (a) of Section 204 and a provision for additional
indemnification as referred to in the second sentence of this subdivision. The
rights to indemnity hereunder shall continue as to a person who has ceased to be
a director, officer, employee, or agent and shall inure to the benefit of the
heirs, executors, and administrators of the person. Nothing contained in this
section shall affect any right to indemnification to which persons other than
the directors and officers may be entitled by contract or otherwise.


<PAGE>

    (h) No indemnification or advance shall be made under this section, except
as provided in subdivision (d) or paragraph (4) of subdivision (e), in any
circumstance where it appears:

        (1) That it would be inconsistent with a provision of the articles,
bylaws, a resolution of the shareholders, or an agreement in effect at the time
of the accrual of the alleged cause of action asserted in the proceeding in
which the expenses were incurred or other amounts were paid, which prohibits or
otherwise limits indemnification.

        (2) That it would be inconsistent with any condition expressly imposed
by a court in approving a settlement.

    (i) A corporation shall have power to purchase and maintain insurance on
behalf of any agent of the corporation against any liability asserted against or
incurred by the agent in that capacity or arising out of the agent's status as
such whether or not the corporation would have the power to indemnify the agent
against that liability under this section. The fact that a corporation owns all
or a portion of the shares of the company issuing a policy of insurance shall
not render this subdivision inapplicable if either of the following conditions
are satisfied: (1) if the articles authorize indemnification in excess of that
authorized in this section and the insurance provided by this subdivision is
limited as indemnification is required to be limited by paragraph (11) of
subdivision (a) of Section 204; or (2) (A) the company issuing the insurance
policy is organized, licensed, and operated in a manner that complies with the
insurance laws and regulations applicable to its jurisdiction of organization,
(B) the company issuing the policy provides procedures for processing claims
that do not permit that company to be subject to the direct control of the
corporation that purchased that policy, and (C) the policy issued provides for
some manner of risk sharing between the issuer and purchaser of the policy, on
one hand, and some unaffiliated person or persons, on the other, such as by
providing for more than one unaffiliated owner of the company issuing the policy
or by providing that a portion of the coverage furnished will be obtained from
some unaffiliated insurer or reinsurer.

        (j) This section does not apply to any proceeding against any trustee,
investment manager, or other fiduciary of an employee benefit plan in that
person's capacity as such, even though the person may also be an agent as
defined in subdivision (a) of the employer corporation. A corporation shall have
power to indemnify such a trustee, investment manager, or other fiduciary to the
extent permitted by subdivision (f) of Section 207.


<PAGE>
                                                                  Exhibit 10.5.2

                                MCGRATH RENTCORP

                         2000 LONG-TERM STOCK BONUS PLAN

                                 XXXXX XXXXXXXX

                               2001-2003 PROGRAM

        This Agreement by and between Xxxxx Xxxxx ("Xxxxxx") and McGrath
RentCorp, a California corporation, provides that Xxxxxx is a participant in the
2001-2003 Program of the McGrath RentCorp 2000 Long-Term Stock Bonus Plan under
the following terms and conditions.

        1. INITIAL VALUES: LTB Base Points:           XXX
                           EBITDA Multiplier:         X.X
                           Strike Result:           XX.X%
                           Backward
                           Average EVPS:           $XX.XX

        2. DEFINITIONS. For purposes of this Agreement, the following terms will
have the following meanings ascribed to such terms below.

               2.1 "Average EVPS Increase Percentage" shall be calculated in the
manner set forth in Section 3.1.4 below.

               2.2 "Backward Average EVPS" shall be the number set forth in
Section 1 above. (The Backward Average EVPS set forth above was calculated by
adding together the EVPS for the years 1998, 1999 and 2000, and then dividing
that sum by three (3).)

               2.3 "Board" shall mean the Board of Directors of McGrath
RentCorp.

               2.4 "Change in Control" shall mean that there has been a
corporate merger or consolidation, a sale of all or substantially all of the
assets, or a purchase of outstanding shares that results in a corporation,
partnership, person or
 group of persons (which corporation, partnership, person
or group of persons is not affiliated with Robert P. McGrath) owning (i) more
than fifty percent (50%) of McGrath RentCorp's outstanding voting securities or
(ii) all or substantially all of its assets and business.

               2.5 "Debt" for any particular fiscal year shall mean the
aggregate amount as of the end of that fiscal year, without duplication, of all
of McGrath RentCorp's (1) obligations for borrowed money, (b) obligations
evidenced by bonds (other than assessment and other special bonds associated
with real property holdings), debentures, notes or other similar instruments,
(c) capitalized lease obligations, and (d) obligations or liabilities of others
secured by a lien on any of McGrath RentCorp's assets, whether or not such
obligation or liability is assumed.

               2.6 "EBITDA" for any particular fiscal year shall mean (1) the
Income from Operations of McGrath RentCorp for that year as disclosed in McGrath
RentCorp's published, audited financial statements for that year; plus (2)
Depreciation and Amortization for that year as disclosed in McGrath RentCorp's
audited financial statements for that year; plus (3) any other non-cash items of
expense included in such Income from Operations that are not reasonably expected
by McGrath RentCorp's management to settle in cash; and minus (4) any non-cash
items of income included in such Income from Operations that are not reasonably
expected by McGrath RentCorp's management settle in cash.

               2.7 "EBITDA Multiplier" shall be the number set forth in Section
1 above.

               2.8 "Enterprise Value" for any particular fiscal year shall be
calculated in the manner set forth in Section 3.1.1 below.

               2.9 "EVPS" for any particular fiscal year shall be calculated by
dividing the Enterprise Value for that year by the Number of Shares for that
year.

               2.10 "Forward Average EVPS" shall be calculated in the manner set
forth in Section 3.1.3 below.


<PAGE>

               2.11 "Xxxxxx Shares" shall mean all securities of McGrath
RentCorp now owned by Xxxxxx or hereafter acquired by him in any manner
whatsoever.

               2.12 "LTB Base Points" shall be the number set forth in Section 1
above.

               2.13 "LTB Final Points" shall be calculated in the manner set
forth in Section 3.1.5 below.

               2.14 "Number of Shares" for any particular fiscal year shall mean
the Shares Used In Per Share Calculation, Diluted as such figure is disclosed in
McGrath RentCorp's published, audited financial statements for that year.

               2.15 The "Option to Repurchase" is the option granted by Xxxxxx
in Section 6 below to McGrath RentCorp to purchase the Xxxxxx Shares.

               2.16 "Stock Bonus Allocation" shall be the number of shares of
McGrath RentCorp Common Stock allocated to Xxxxxx as a bonus under this Program,
as determined in accordance with Section 3.2 below.

               2.17 "Stock Value" as of a particular date shall mean the then
current fair market value of McGrath RentCorp's Common Stock determined by
calculating the average of the high and low prices reported for transactions in
such Common Stock for each of the five preceding days on which transactions
occurred on NASDAQ or any exchange on which the stock is then traded, as
reported by The NASDAQ Stock Market, Inc. In the event McGrath's Common Stock is
not then traded on NASDAQ or an exchange, the fair market value of the Common
Stock shall be determined by the Board in good faith.

               2.18 "Strike Result" shall be the number set forth in Section 1
above.

               2.19 A "Successor to McGrath RentCorp" shall be (i) any
corporation which is the surviving corporation in a merger or consolidation with
McGrath RentCorp, or (ii) any corporation, partnership or person(s) which
acquires all or substantially all of the assets of McGrath RentCorp in a
transaction wherein a majority of the employees of McGrath RentCorp continue to
be employed by such purchaser.

               2.20 "Termination of Employment" shall mean the termination of
Xxxxxx's employment with McGrath RentCorp (and its subsidiaries) for any reason
whatsoever, whether by voluntary resignation due to disability or otherwise, by
reason of Xxxxxx's death, or at the election of McGrath RentCorp for any reason
whatsoever. A leave of absence approved by the Board of Directors of McGrath
RentCorp shall not be considered to be a Termination of Employment for purposes
of this Agreement.

        3. CALCULATION OF STOCK BONUS ALLOCATION.

               3.1 Calculation of LTB Final Points. As soon as the audited
financial statements of McGrath RentCorp for the year ended December 31, 2003
have been published, the LTB Final Points shall be calculated as follows:

               3.1.1 Enterprise Value shall be calculated for each of the years
2001, 2002 and 2003 in accordance with the following formula: Enterprise Value =
(EBITDA * EBITDA Multiplier) - Debt.

               3.1.2 EVPS shall then be calculated for each of the years 2001,
2002 and 2003 by taking the Enterprise Value for that year and dividing it by
the Number of Shares for that year.

               3.1.3 Forward Average EVPS shall then be calculated by adding
together the EVPS for each of the years 2001, 2002 and 2003 calculated in
accordance with Section 3.1.2 above, and then dividing that sum by three (3).

               3.1.4 The Average EVPS Increase Percentage shall then be
calculated in accordance with the following formula: Average EVPS Increase
Percentage = (Forward Average EVPS - Backward Average EVPS) / Backward Average
EVPS.

               3.1.5 LTB Final Points are then calculated in accordance with the
following formula: LTB Final Points = LTB Base Points * (Average EVPS Increase
Percentage - Strike Result) * 100.

               3.2 Allocation of Stock Bonus. Xxxxxx shall be allocated one (1)
share of McGrath RentCorp Common Stock for each LTB Final Point, or portion
thereof, calculated in accordance with Section 3.1 above.

               3.2.1 The number of shares of McGrath RentCorp Common Stock to be
allocated to Xxxxxx pursuant to this Section 3.2 shall be proportionally
adjusted for any increase or decrease in the number of outstanding shares of
Common Stock of


<PAGE>

McGrath RentCorp resulting from a subdivision or consolidation of shares, or for
the payment of a stock dividend (but only on the Common Stock), or for any other
increase or decrease in the number of such shares effected without receipt of
consideration by McGrath RentCorp. Adjustments under this Section 3.2.1 shall be
determined by the Board, whose determination as to what adjustments shall be
made, and the extent thereof, shall be final, binding and conclusive.

        4. ISSUANCE OF SHARE CERTIFICATES.

               4.1 Issuance of Stock Certificates. As soon as reasonably
practical following the determination of Xxxxxx's Stock Bonus Allocation,
McGrath RentCorp shall cause five stock certificates to be issued in the name of
Xxxxxx, each one evincing twenty percent (20%) of the number of shares of
McGrath RentCorp Common Stock allocated to him as a Stock Bonus.

               4.2 Delivery of First Stock Certificate. McGrath RentCorp shall
deliver to Xxxxxx one (1) of the stock certificates issued in accordance with
Section 4.1 above.

               4.3 Delivery and Re-Delivery of Four Remaining Stock
Certificates. McGrath RentCorp shall deliver the remaining four (4) stock
certificates to Xxxxxx, and Xxxxxx shall promptly redeliver back to McGrath
RentCorp the four (4) stock certificates to be held by McGrath RentCorp for
later redelivery to Xxxxxx in accordance with, and subject to, the forfeiture
provisions set forth in Section 5 below.

               4.4 Option to Receive a Portion in Cash. With respect to the
shares of Common Stock delivered to Xxxxxx pursuant to Section 4.2 above, or
with respect to any shares redelivered to him in accordance with Section 5.2
below, Xxxxxx may elect, by written notice given to McGrath RentCorp not less
than ten (10) days nor more than thirty (30) days prior to the delivery or
redelivery of a certificate evincing such shares, to receive the Stock Value of
such shares in cash, in lieu of the issuance and delivery of such shares. For
purposes of determining the Stock Value of such shares, the Stock Value shall be
calculated as of the date of such notice.

               4.4.1 Notwithstanding the foregoing right to elect to receive
cash, the maximum amount of cash which Xxxxxx shall have the right to receive in
lieu of the issuance and delivery of shares shall be forty percent (40%) of the
aggregate Stock Value of Xxxxxx's entire Stock Bonus Allocation.

        5. FORFEITURE UPON TERMINATION OF EMPLOYMENT.

               5.1 Termination of Employment Prior to End of Program. In the
event of Xxxxxx's termination of employment prior to December 31, 2003, Xxxxxx
shall have no right to receive any Stock Bonus Allocation nor any certificates
evincing any shares of McGrath RentCorp Common Stock to be issued pursuant to
this Agreement.

               5.2 Subsequent Delivery of Stock Certificates. Provided Xxxxxx
has remained in the employ of McGrath RentCorp, or its subsidiaries,
continuously from the date hereof through the applicable subsequent certificate
delivery date, one certificate evincing twenty percent (20%) of the Stock Bonus
Allocation held in the possession of McGrath RentCorp in accordance with Section
4.3 above, shall be delivered to Xxxxxx on December 31, 2004, and another one of
the certificates shall be delivered to Xxxxxx each December 31 thereafter for as
long as Xxxxxx remains in the continuous employ of McGrath RentCorp, or its
subsidiaries, until December 31, 2007, at which time all five stock certificates
shall have been delivered to Xxxxxx.

               5.3 Termination of Employment Subsequent to December 31, 2003. In
the event of Xxxxxx's Termination of Employment subsequent to December 31, 2003,
Xxxxxx shall have the right to retain, subject to the Option to Repurchase set
forth in Section 6 below all share certificates evincing Stock Bonus Allocations
which had been delivered to him pursuant to Sections 4.2 or 5.2 above prior to
his Termination of Employment; however, upon his Termination of Employment, such
share certificates still held at that time by McGrath RentCorp pursuant to
Section 4.3 or 5.2 above shall be immediately forfeited by him, and the shares
evinced thereby shall be deemed canceled and returned to the status of
authorized but unissued shares of McGrath RentCorp, and Xxxxxx shall have no
further rights or claims thereto.

        6. OPTION TO REPURCHASE. Upon Termination of Employment, Xxxxxx shall,
and does hereby, offer for sale to McGrath RentCorp, all, but not less than all,
of the Xxxxxx Shares on the terms specified in this Section 6.

               6.1 Notice of Exercise. In order to exercise the Option to
Repurchase the Xxxxxx Shares, McGrath RentCorp shall give notice of its
intention to so exercise to Xxxxxx, or to his personal representative in the
event of his death or incapacity, within three (3) months following his
Termination of Employment.


<PAGE>

               6.2 Repurchase Price. The Repurchase Price for the repurchase of
the Xxxxxx Shares shall be the Stock Value as of the date of Termination of
Employment or as of the date of the giving of the notice of exercise of the
Option to Repurchase, with the election of which price shall apply being stated
in the notice of exercise.

               6.3 Terms of Payment. Payment of the Repurchase Price shall be
made at the time that the notice of exercise of the Option to Repurchase is
given. McGrath RentCorp may first offset against the Repurchase Price due to
Xxxxxx any amount of indebtedness owed by Xxxxxx to McGrath RentCorp. Payment of
the net amount of the Repurchase Price after the offset of indebtedness shall be
as follows:

        6.3.1 One-third (1/3) thereof in cash or by check; and

               6.3.2 The remaining two-thirds (2/3) thereof by means of the
delivery of a Promissory Note, bearing interest at the rate of nine percent (9%)
per annum on the unpaid principal amount, and payable in ten (10) equal annual
installments of principal plus accrued interest, commencing one year from the
date thereof. Such Note shall permit prepayment of any amount by McGrath
RentCorp at any time without penalty.

               6.4 Other Shareholders. McGrath RentCorp may assign, partially or
completely, its Option to repurchase to one or more of its shareholders, and
each such assignee shall have the right to repurchase the Xxxxxx Shares in his,
her or its own name and for his, her or its own account, all on the same terms
and conditions specified in this Section 6; provided, that the exercise of the
Option to Repurchase as so assigned shall result in the repurchase of all of the
Xxxxxx Shares.

               6.5 Restrictive Legend. The certificates evincing the Xxxxxx
Shares shall be endorsed with an appropriate legend referring to the Option to
Repurchase granted by this Section 6. Xxxxxx shall immediately cause to be
delivered to McGrath RentCorp all certificates evincing Xxxxxx Shares which are
currently outstanding so that they may be imprinted with such a legend. Such
certificates shall be returned to Xxxxxx after they have been imprinted with the
appropriate legend.

               6.6 Permitted Transfers. Notwithstanding the provisions of this
Section 6, nothing herein shall prevent Xxxxxx from making a bona fide sale or
gift of any of the Xxxxxx Shares.

        7. RESTRICTED ACTIVITIES.

               7.1 Unfair Trade Practices. Xxxxxx acknowledges that the success
of McGrath RentCorp's business as conducted depends to a large extent upon the
business practices and methods used by it and upon the knowledge of the needs,
preferences and particularities of each of its customers and suppliers, which
practices, methods and knowledge are continuously developed by McGrath RentCorp.
Xxxxxx further acknowledges that these practices, methods and knowledge
constitute trade secrets which are valuable assets belonging to McGrath
RentCorp. Accordingly, Xxxxxx agrees that, during his employment with McGrath
RentCorp and for a period of five (5) years immediately following his
Termination of Employment, he shall not, either directly or indirectly, (i)
disclose to any person, firm or corporation, or use himself in any way, any
trade secret of McGrath RentCorp (except as may be required in the course of his
employment with McGrath RentCorp and for its benefit), or (ii) call on, solicit,
divert or take away, or attempt to call on, solicit, divert or take away any
person, firm or corporation who is a customer of or a supplier to McGrath
RentCorp, or who is being solicited by McGrath RentCorp at the time of Xxxxxx's
Termination of Employment, or who had been a customer of or supplier to McGrath
RentCorp during the six months immediately preceding Xxxxxx's Termination of
Employment.

               7.2 Covenant Not to Compete. In order to protect the element of
good will purchased in part by payment of the Repurchase Price for the Xxxxxx
Shares, and as part of the consideration for the payment of the Repurchase Price
in the event McGrath RentCorp (or some of its shareholders) purchases all of the
Xxxxxx Shares, Xxxxxx agrees, for a period of two (2) years after such purchase,
not to engage or participate, or cause any other person, firm or corporation to
become engaged, in any activity or business within the geographical regions
within which McGrath RentCorp conducts its business as of the date of
Termination of Employment, either directly or indirectly, as an employee, agent,
representative, partner, owner, director, officer or investor, which is in the
same or similar business as McGrath RentCorp. For purposes of this Section 7.2,
a purchase of the Xxxxxx Shares shall be deemed to have occurred when McGrath
RentCorp (and/or other shareholders) tenders the Repurchase Price in accordance
with Section 6.3 above.

               7.3 Enforcement. Xxxxxx agrees that a violation on his part of
any of the terms of this Agreement shall cause irreparable damage, the exact
amount of which is impossible to ascertain, and for that reason agrees that
McGrath RentCorp (and/or the other shareholders) shall be entitled to a decree
of specific performance of the terms hereof and/or an injunction restraining
further violations; said right to be in addition to any other remedies available
under law.

        8. SUCCESSOR TO MCGRATH RENTCORP.


<PAGE>

               8.1 Assumption of Program Obligations by Successor. Any Successor
to McGrath RentCorp shall be required to assume the obligations then outstanding
under this Program, or in the alternative, to enter into a substitute program
which is approved and accepted by Xxxxxx in writing, which approval and
acceptance shall not be unreasonably withheld.

               8.2 Termination of Employment. As used in this Section 8 only,
"Termination of Employment" shall not include a termination of Xxxxxx's
employment by reason of his voluntary resignation due to disability or otherwise
or by reason of his death.

               8.3 Effect of Change in Control. In the event of a Termination of
Employment at the time of a Change in Control or thereafter,

               8.3.1 The share certificate delivery schedule set forth in
Sections 4 and 5 above shall accelerate and the full Stock Bonus Allocation
shall vest as of the date of such Termination of Employment notwithstanding
Section 5.3 above, and all share certificates then held by McGrath RentCorp
pursuant to Section 4.3 above shall be delivered to Xxxxxx; and

               8.3.2 In the event Xxxxxx's Termination of Employment is prior to
December 31, 2003, the calculation of the LTB Final Points in Section 3.1 above
shall be made as of the last fiscal quarter completed prior to the Termination
of Employment, with appropriate adjustments to the calculation therein of the
Average Return on Equity.

        9. MISCELLANEOUS PROVISIONS.

               9.1 Tax Withholding. McGrath RentCorp (or any of its subsidiaries
which employ Xxxxxx) shall have the right to deduct any sums that federal, state
or local tax law requires to be withheld with respect to the issuance of Common
Stock under this Program or as otherwise may be required by such laws. McGrath
RentCorp (or such subsidiary) may require, as a condition to issuing shares of
Common Stock under this Program, that Xxxxxx or his beneficiaries pay any sums
that federal, state or local tax law requires to be withheld with respect to
such issuance.

               9.2 Privileges of Stock Ownership. Xxxxxx shall not be entitled
to the privileges of stock ownership as to any shares of Common Stock which have
been allocated to him but for which certificates have not been issued and
delivered to him.

               9.3 Non-Transferability of Stock Bonus Allocation. The right
granted hereby to Xxxxxx to receive shares of McGrath RentCorp Common Stock
under certain circumstances shall be non-transferrable by Xxxxxx other than by
will or the laws of descent and distribution. McGrath RentCorp shall not be
liable for the debts, contracts or engagements of Xxxxxx or his beneficiaries,
and rights under this Program may not be taken in execution or by attachment or
garnishment, or by any other legal or equitable proceeding; nor shall Xxxxxx or
his beneficiaries have any right to assign, pledge or hypothecate any rights or
benefits hereunder.

               9.4 No Effect on Employment. Nothing contained in this Agreement
shall confer upon Xxxxxx any right to continue in the employ of McGrath RentCorp
(or its subsidiaries) or constituted any contract or agreement of employment.

               9.5 Governmental Regulations. This Program, the grant of Stock
Bonus Allocations and the issuance of Common Stock hereunder shall be subject to
all applicable rules and regulations of governmental authorities. At the time of
the issuance of any shares of Common Stock to Xxxxxx under this Program, and as
a condition to the issuance of such shares, Xxxxxx shall give such
representations and warranties in writing to McGrath RentCorp as its legal
counsel shall deem appropriate to insure compliance with applicable securities
laws and regulations. McGrath RentCorp may place upon the certificates evincing
the shares of Common Stock being issued legends referring to restrictions on
transfer as may be appropriate in connection with compliance with applicable
securities laws and regulations.

        10. STANDARD PROVISIONS.

               10.1 Notices. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed to
have been duly given (i) on the date of service if delivered personally, (ii) on
the date of transmission if sent by facsimile transmission with printed proof of
electronic receipt, (iii) on the date of delivery if delivered by a courier
service with proof of delivery, or (iv) on the third business day after mailing
if mailed by first class mail, certified, return receipt requested, postage
prepaid, to the following addresses:

               If to McGrath RentCorp, then to:  McGrath RentCorp
                                                 5700 Las Positas Road
                                                 Livermore, CA 94550
                                                 Attn: Corporate Secretary
                                                 Facsimile No.: 1-925-453-3200


<PAGE>

                                With a copy to:  Christopher Ream, Esq.
                                                 2600 El Camino Real, Suite 410
                                                 Palo Alto, CA 94306
                                                 Facsimile No.: 1-650-856-8448

                         If to Xxxxxx, then to:  Xxxxxx Xxxxxx
                                                 McGrath RentCorp
                                                 5700 Las Positas Road
                                                 Livermore, CA 94550
                                                 Facsimile No.: 1-925-453-3200

               10.2 Entire Agreement; Modification; Waiver. This Agreement
constitutes the entire agreement between the parties pertaining to the subject
matter contained herein and supersedes all prior and contemporaneous agreements,
representations and understandings of the parties. No supplement, modification
or amendment to this Agreement shall be binding unless executed in writing by
the party to be charged. No waiver of any of the provisions of this Agreement
shall be deemed, or shall constitute, a waiver of any other provision, whether
or not similar, nor shall any waiver constitute a continuing waiver. No waiver
shall be binding unless executed in writing by the party making the waiver.

               10.3 Remedies. The rights and remedies provided to any party
herein shall be cumulative and in addition to any other or further rights or
remedies available at law or in equity.

               10.4 Disputes. All disputes, controversies and claims arising out
of or relating to this Agreement, or the interpretation, construction,
performance or breach hereof shall be settled by arbitration in accordance with
the rules of the American Arbitration Association, regardless of whether one of
the parties fails or refuses to participate; and such arbitration shall take
place in Alameda County, State of California. Judgment upon the award rendered
by the arbitrator may be entered in any Court having jurisdiction thereof.
Notwithstanding the foregoing, either party hereby may bring an action in the
Superior Court of the State of California in and for Alameda County for
injunctive relief. In the event any court action is instituted, or a referral is
made to arbitration, to settle any dispute arising under this Agreement or to
enforce any right or obligation hereunder, the prevailing party shall be
entitled to recover its or his attorney fees and other expenses associated
therewith.

               10.5 Severability. In case any one or more of the provisions
contained in this Agreement shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, the meaning of such provision shall be
construed (to the extent feasible) so as to render the provisions valid and
enforceable, and if no feasible construction would save the provision, its
invalidity, illegality or unenforceability shall not affect any other provision
of this Agreement; rather this Agreement shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein.

               10.6 Governing Law. This Agreement shall be construed in
accordance with, and governed by, the laws of the State of California as applied
to contracts that are executed and performed entirely in California.

               10.7 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall be constitute one and the same instrument.

        IN WITNESS WHEREOF, this Agreement has been executed and delivered as of
the ________ day of November, 2001, by the undersigned Chairman of the Board and
Chief Executive Officer of McGrath RentCorp, thereunto duly authorized by the
Board of Directors of said corporation, and by Xxxxxx.

                                  MCGRATH RENTCORP

                                  BY
                                    -------------------------------------------
 
                                  ROBERT P. MCGRATH, CHAIRMAN OF THE BOARD
                                  AND CHIEF EXECUTIVE OFFICER
  
                                  ----------------------------------------------
                                  XXXXXXX  XXXXXX



<PAGE>
                                                                    Exhibit 10.6


                                MCGRATH RENTCORP

                       ENVIROPLEX STOCK EXCHANGE AGREEMENT

                                  JULY 2, 2001

                                Table of Contents


<TABLE>
<S>                                                                  <C>
1. Exchange of Stock...................................................3
   1.1   Exchange of Stock.............................................3
   1.2   Closing.......................................................3
   1.3   Deliverables..................................................3
   1.4   Tax Free Exchange.............................................3
2. Representations and Warranties of the Company.......................3
   2.1   Organization, Good Standing and Qualification.................3
   2.2   Authorization.................................................3
   2.3   Valid Issuance of Securities..................................3
   2.4   Disclosure....................................................3
   2.5   Brokers or Finders............................................4
   2.6   No Representation as to Value.................................4
   2.7   No Further Agreement..........................................4
3. Representations and Warranties of the Enviroplex Stockholders.......4
   3.1   Authorization.................................................4
   3.2   Disclosure of Information.....................................4
   3.3   Acquiring Entirely for Own Account............................4
   3.4   Restricted Securities.........................................4
   3.5   Legends.......................................................4
   3.6   Brokers or Finders............................................5
   3.7   No Representation as to Value.................................5
   3.8   No Further Agreement..........................................5
   3.9   Independent Advice............................................5
4. Conditions of the Enviroplex Stockholders' Obligations at Closing...5
   4.1   Agreement Signed; Others to Close.............................5
   4.2   Representations and Warranties................................5
   4.3   All Deliverables Ready........................................5
5. Conditions of the Company's Obligations at Closing..................5
   5.1   Agreement Signed..............................................5
   5.2   Representations and Warranties................................5
   5.3   All Deliverables Ready........................................5
6. Deliverables by the Company at Closing..............................5
7. Deliverables by the Enviroplex Stockholders at Closing..............6
8. Standard Provisions.................................................6
   8.1
   Further Assurances............................................6
   8.2   Survival of Warranties........................................6
   8.3   Finder's Fee..................................................6
   8.4   Fees and Expenses.............................................6
   8.5   Delays or Omissions...........................................6
   8.6   Entire Agreement..............................................6
   8.7   Construction and Titles.......................................6
   8.8   Severability..................................................6
   8.9   Governing Law.................................................7
   8.10  Confidentiality...............................................7
   8.11  Attorney's Fees...............................................7
   8.12  Mediation; Arbitration........................................7
   8.13  Corporate Securities Law......................................7
   8.14  Counterparts..................................................7

</TABLE>


Exhibits

Exhibit A   --   Schedule of Enviroplex Stockholders
Exhibit B-1 --   Spousal Consent (Sublett)
Exhibit B-2 --   Spousal Consent (Curtis)


<PAGE>

                                MCGRATH RENTCORP

                       ENVIROPLEX STOCK EXCHANGE AGREEMENT

        This Enviroplex Stock Exchange Agreement (the "Agreement") is made as of
the 2nd day of July, 2001 by and between McGrath RentCorp, a California
corporation (the "Company"), and each of the persons, severally and not jointly,
whose names are listed on Exhibit A attached hereto (each an "Enviroplex
Stockholder" and together the "Enviroplex Stockholders").

        The parties hereby agree as follows:

1.  Exchange of Stock.

        1.1 Exchange of Stock. Subject to the terms and conditions of this
Agreement, each Enviroplex Stockholder agrees to exchange at the Closing that
number of shares of Common Stock of Enviroplex, Inc., a California corporation
("Enviroplex") indicated with respect to such Enviroplex stockholder on Exhibit
A attached hereto, in consideration of the receipt of that number of shares of
the Company's Common Stock indicated with respect to such Enviroplex stockholder
on Exhibit A. Subject to the terms and conditions of this Agreement, the Company
agrees to issue to each Enviroplex stockholder at the Closing that number of
shares of the Company's Common Stock indicated with respect to such Enviroplex
stockholder on Exhibit A in consideration of the number of shares of Enviroplex
Common Stock indicated with respect to each such Enviroplex stockholder. The
shares of Common Stock of the Company issued to the Enviroplex Stockholders
pursuant to this Agreement shall be hereinafter referred to as the "McGrath
Stock." 

        1.2 Closing. The exchange of shares of Enviroplex Common Stock for the
McGrath Stock shall take place at the offices of Christopher Ream, Legal
Counsel, 2600 El Camino Real, Suite 410, Palo Alto, California 94306, at 2:00
p.m., on July 2, 2001 (which time and place are designated as the "Closing"), or
at such other time and place as the Company and the Enviroplex Stockholders
shall mutually agree upon orally or in writing.

        1.3 Deliverables. At the Closing, the Company shall deliver to each
Enviroplex Stockholder those items specified in Section 6 below, and each
Enviroplex Stockholder shall deliver to the Company those items specified in
Section 7 below.

        1.4 Tax Free Exchange. The parties hereto intend that the exchange of
the Enviroplex Common Stock for McGrath Stock shall be tax free to the
Enviroplex Stockholders; however, no representation or guaranty as to the tax
treatment of the proposed transaction is being given by any party hereto.

2. Representations and Warranties of the Company. The Company hereby represents
and warrants to each Enviroplex Stockholder that:

        2.1 Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of California. The Company has all requisite corporate power and
authority to execute and deliver this Agreement, to issue the McGrath Stock, and
to carry out the provisions of this Agreement.

        2.2 Authorization. All corporate action on the part of the Company, its
officers, directors and shareholders necessary for the authorization, execution
and delivery of this Agreement, the performance of all obligations of the
Company hereunder, and the authorization, issuance and delivery of the McGrath
Stock has been taken or will be taken prior to the Closing.

        2.3 Valid Issuance of Securities. The McGrath Stock being issued to the
Enviroplex Stockholders hereunder, when issued and delivered in accordance with
the terms hereof for the consideration expressed herein, will be duly and
validly issued, fully paid and nonassessable and free of restrictions on
transfer other than restrictions on transfer under applicable state and federal
securities laws. Subject in part to the truth and accuracy of each Enviroplex
Stockholder's representations set forth in Section 3 of this Agreement, the
offer, exchange and issuance of the McGrath Stock as contemplated by this
Agreement are exempt from registration requirements of any applicable state and
federal securities laws of the United States.

        2.4 Disclosure. The Company's Common Stock is publicly traded and
regulated by the Securities and Exchange Commission. Disclosures regarding the
Company are contained in its Annual Report to Shareholders for the year 2000,
its Proxy Statement mailed to shareholders of the Company with respect to the
Company's May 30, 2001 Shareholders' Meeting, its Annual Report on Form 10-K for
the year 2000 filed with the Securities and Exchange Commission, and its
Quarterly Report on form 10-Q for the quarter ended March 31, 2001 filed with
the Securities and Exchange Commission. Further information regarding the
Company has been made available from time to time in press releases to the
public and in quarterly "Earnings Conference Calls" open to the public.


<PAGE>

        2.5 Brokers or Finders. The Company has no contract, arrangement or
understanding with any broker, finder or other similar person with respect to
the transactions contemplated by this Agreement.

        2.6 No Representation as to Value. The Company makes no representation
as to either the value of the McGrath Stock or the value of the shares of
Enviroplex Common Stock being exchanged therefor.

        2.7 No Further Agreement. The Company has not entered into any agreement
with, or made any promises to, or received promises from, either of the
Enviroplex Stockholders or any other person with respect to the possible
disposition of any shares of Enviroplex Common Stock which will still be held
after the Closing by either of the Enviroplex Stockholders.

3. Representations and Warranties of the Enviroplex Stockholders. Each
Enviroplex Stockholder hereby represents and warrants to the Company, as to
himself and not as to other Enviroplex Stockholders, that:

        3.1 Authorization. Such Enviroplex Stockholder has full power and
authority to enter into this Agreement and to perform his obligations hereunder.
The Enviroplex Stockholder owns the shares of Enviroplex Common Stock to be
transferred to the Company pursuant to this Agreement free and clear of all
liens and encumbrances, holds full right, title, and interest therein, and no
other person holds any interest in such shares of stock.

        3.2 Disclosure of Information. Such Enviroplex Stockholder has received
in a reasonable time prior to the date hereof the Company's Annual Report to
Shareholders for the year 2000, the Company's Proxy Statement mailed to
shareholders of the Company with respect to the Company's May 30, 2001
Shareholders' Meeting, the Company's Annual Report on Form 10-K for the year
2000 filed with the Securities and Exchange Commission, and the Company's
Quarterly Report on form 10-Q for the quarter ended March 31, 2001 filed with
the Securities and Exchange Commission. The Enviroplex Stockholder is aware that
further information regarding the Company has been made from time to time in
press releases to the public and in quarterly "Earnings Conference Calls" open
to the public, and has had an opportunity to review the same. The Enviroplex
Stockholder believes he has received all the information he considers necessary
or appropriate for deciding whether to acquire the McGrath Stock. The Enviroplex
Stockholder further represents that he has had an opportunity to ask questions
and receive answers from the Company regarding the terms and conditions of the
offering of the McGrath Stock as well as the business, properties, prospects and
financial condition of the Company, and to obtain additional information (to the
extent the Company possessed such information or could acquire it without
unreasonable effort or expense) necessary to verify the accuracy of any
information furnished to such Enviroplex Stockholder. The Enviroplex Stockholder
has not relied upon any information regarding the transactions contemplated by
this Agreement other than as set forth in this Agreement.

        3.3 Acquiring Entirely for Own Account. This Agreement is made with the
Enviroplex Stockholder in reliance upon the Enviroplex Stockholder's
representation to the Company, which by the Enviroplex Stockholder's execution
of this Agreement he hereby confirms, that the McGrath Stock to be acquired by
him will be acquired for investment for his own account, not as a nominee or
agent, and not with a view to the resale or distribution of any part thereof,
and that the Enviroplex Stockholder has no present intention of selling,
granting any participation in, or otherwise distributing the same. By executing
this Agreement, the Enviroplex Stockholder further represents that he does not
presently have any contract, undertaking, agreement or arrangement with any
person to sell, transfer or grant participation to such person or to any third
person, with respect to any of the McGrath Stock.

        3.4 Restricted Securities. The Enviroplex Stockholder understands that
the McGrath Stock has not been, and will not be, registered under the Securities
Act of 1933 by reason of a specific exemption from the registration provisions
of the Securities Act which depends upon, among other things, the bona fide
nature of the investment intent and the accuracy of the Enviroplex Stockholder's
representations as expressed herein. The Enviroplex Stockholder understands that
the McGrath Stock are "restricted securities" under applicable U.S. federal and
state securities laws and regulations, and that pursuant to these laws, the
Enviroplex Stockholder must hold the McGrath Stock unless they are registered
with the Securities and Exchange Commission and qualified by state authorities
or an exemption from such registration and qualification requirements is
available. The Enviroplex Stockholder acknowledges that the Company has no
obligation to register or qualify the McGrath Stock for resale. The Enviroplex
Stockholder further acknowledges that if an exemption from registration or
qualification is available, it may be conditioned on various requirements
including, but not limited to, the time and manner of sale, the holding period
for the McGrath Stock, and requirements relating to the Company which are
outside of the Enviroplex Stockholder's control and which the Company is under
no obligation, and may not be able, to satisfy.

        3.5 Legends. The Enviroplex Stockholder understands that the
certificates evincing the McGrath Stock may bear the following legend:


<PAGE>

               "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
               REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN
               ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION
               WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR
               DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
               STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM
               SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
               REQUIRED UNDER THE SECURITIES ACT OF 1933."

        3.6 Brokers or Finders. The Enviroplex Stockholder has no contract,
arrangement or understanding with any broker, finder or other similar person
with respect to the transactions contemplated by this Agreement.

        3.7 No Representation as to Value. The Enviroplex Stockholder makes no
representation as to the value of the shares of Enviroplex Common Stock being
exchanged for the McGrath Stock.

        3.8 No Further Agreement. The Enviroplex Stockholder has not entered
into any agreement with, or made any promises to, or received promises from,
either the Company or any other person with respect to the possible disposition
of any shares of Enviroplex Common Stock which will still be held after the
Closing by either of the Enviroplex Stockholders.

        3.9 Independent Advice. The Company has recommended that the Enviroplex
Stockholders obtain independent legal, tax and accounting advice with respect to
the exchange contemplated by this Agreement; and the Enviroplex Stockholder has
had an opportunity to retain and obtain advice from his own legal, tax and
accounting counsel and advisors.

4. Conditions of the Enviroplex Stockholders' Obligations at Closing. The
obligations of each Enviroplex Stockholder to the Company under this Agreement
are subject to the fulfillment, on or before the Closing, of each of the
following conditions, unless otherwise waived (the waiver of any of the
following conditions shall not be effective against any Enviroplex Stockholder
who does not consent in writing thereto):

        4.1 Agreement Signed; Others to Close. This Agreement shall have been
duly executed and delivered by the Company and by all the Enviroplex
Stockholders, and all the Enviroplex Stockholders shall close the transaction
concurrently.

        4.2 Representations and Warranties. The representations and warranties
of the Company contained in Section 2 shall be true and correct in all material
respects on and as of the Closing, with the same effect as though such
representations and warranties had been made on and as of the date of the
Closing. No representation or warranty of the Company contained in this
Agreement when read together contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements
contained herein or therein not misleading in light of the circumstances under
which they were made.

        4.3 All Deliverables Ready. All documents and other items to be
delivered to the Enviroplex Stockholders at the Closing as specified in Section
6 below, shall be duly executed, ready for delivery to the Enviroplex
Stockholders, and in form and substance reasonably satisfactory to the
Enviroplex Stockholders.

5. Conditions of the Company's Obligations at Closing. The obligations of the
Company to each Enviroplex Stockholder under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:

        5.1 Agreement Signed. This Agreement shall have been duly executed and
delivered by all of Enviroplex Stockholders, and all the Enviroplex Stockholders
shall have satisfied all of the conditions of this Section 5 and shall be
prepared to close the transaction.

        5.2 Representations and Warranties. The representations and warranties
of each Enviroplex Stockholder contained in Section 3 shall be true and correct
in all material respects on and as of the Closing, with the same effect as
though such representations and warranties had been made on and as of the
Closing.

        5.3 All Deliverables Ready. All documents and other items to be
delivered to the Company at the Closing as specified in Section 7 below, shall
be duly executed, ready for delivery to the Company, and in form and substance
reasonably satisfactory to the Company's counsel.

6. Deliverables by the Company at Closing. At the Closing, the Company shall
deliver to each of the Enviroplex Stockholders a certificate evincing the
McGrath Stock being acquired by the Enviroplex Stockholder pursuant to this
Agreement.


<PAGE>

7. Deliverables by the Enviroplex Stockholders at Closing. At the Closing, each
Enviroplex Stockholder shall deliver to the Company a certificate evincing the
shares of Enviroplex Common Stock to be exchanged by the Enviroplex Stockholder
for the McGrath Stock pursuant to this Agreement; together with an Assignment
Separate From Certificate (Stock Power) providing for the transfer of said
shares to the Company. In the event the certificate tendered by the Enviroplex
Stockholder is for a number of shares greater than that to be transferred to the
Company, the Company, the Enviroplex Stockholder and Enviroplex shall cooperate
to ensure that Enviroplex issues back to the Enviroplex stockholder a
certificate for the balance of the shares of Enviroplex Common Stock remaining
after the transfer to the Company.

8.  Standard Provisions.

        8.1 Further Assurances. Each of the parties hereto shall execute and
deliver such instruments and take such other actions as the other parties may
reasonably request in order to carry out the intent of this Agreement.

        8.2 Survival of Warranties. Unless otherwise set forth in this
Agreement, the warranties, representations and covenants of the Company and the
Enviroplex Stockholders contained in or made pursuant to this Agreement shall
survive the execution and delivery of this Agreement and the Closing.

        8.3 Finder's Fee. Each party, severally and not jointly, represents that
it neither is nor will be obligated for any finder's, broker's or similar fee or
commission in connection with the transactions contemplated by this Agreement.
Each Enviroplex Stockholder, severally and not jointly, agrees to indemnify and
to hold harmless the Company and each of the other Enviroplex Stockholders from
any liability for any commission or compensation in the nature of a finder's,
broker's or similar fee (and the costs and expenses of defending against such
liability or asserted liability) for which such Enviroplex Stockholder is
responsible. The Company agrees to indemnify and hold harmless each Enviroplex
Stockholder from any liability for any commission or compensation in the nature
of a finder's, broker's or similar fee (and the costs and expenses of defending
against such liability or asserted liability) for which the Company or any of
its officers, employees or representatives is responsible.

        8.4 Fees and Expenses. Each party shall pay its own fees and expenses
incurred with respect to this Agreement and the transactions contemplated
hereby. 

        8.5 Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to any party under this Agreement, upon any breach or
default of any other party under this Agreement, shall impair any such right,
power or remedy of such non-breaching or non-defaulting party nor shall it be
construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any party of any
breach or default under this Agreement, or any waiver on the part of any party
of any provisions or conditions of this Agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
party, shall be cumulative and not alternative.

        8.6 Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto pertaining to the subject matter hereof, and any and
all other written or oral agreements relating to the subject matter hereof
existing between the parties hereto are expressly canceled.

        8.7 Construction and Titles. This Agreement has been negotiated between
the parties hereto, and the language hereof shall not be construed for or
against any party. The titles and subtitles used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement. A reference herein to any section shall be deemed to include a
reference to every subsection thereof. All pronouns contained herein, and any
variations thereof, shall be deemed to refer to the masculine, feminine or
neuter, singular or plural, as the identity of the parties hereto may require.

        8.8 Severability. If any provision of this Agreement is held to be
unenforceable under applicable law, it shall be interpreted, to the extent
possible, to enhance its enforceability in order to achieve the intent of the
parties to this Agreement. But if no feasible construction would save the
provision, the parties agree to renegotiate such provision in good faith. In the
event the parties cannot reach a mutually agreeable and enforceable replacement
for such provision, its invalidity, illegality or unenforceability shall not
affect any other provision of this Agreement; rather this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein; provided, however, no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party. The
invalidity of any provision of this Agreement as applied to certain
circumstances shall not affect the validity or enforceability of such provision
as applied to other circumstances or any other provisions of this Agreement.


<PAGE>

        8.9 Governing Law. This Agreement and all acts and transactions pursuant
hereto and the rights and obligations of the parties hereto are to be construed
in accordance with and governed by the laws of the State of California (as
permitted by Section 1646.5 of the California Civil Code or any similar
successor provision), without giving effect to any choice of law rule that would
cause the application of the laws of any jurisdiction other than the State of
California to the rights and duties of the parties hereto.

        8.10 Confidentiality. Each party hereto agrees that it shall at all
times keep confidential and not divulge, furnish or make accessible to anyone
any confidential information, knowledge or data concerning or relating to the
business or financial affairs of any other party hereto to which such party has
been or shall become privy by reason of this Agreement, discussions or
negotiations relating to the transactions contemplated hereby or thereby, except
with the prior written consent of such other party.

        8.11 Attorney's Fees. If any action at law or in equity (including
arbitration) is instituted to enforce or interpret the terms of this Agreement,
the prevailing party shall be entitled to reasonable attorney's fees, costs and
necessary disbursements in addition to any other relief to which such party may
be entitled.

        8.12 Mediation; Arbitration. Any controversy or claim arising out of or
relating to this Agreement, or the interpretation or breach hereof, shall be
referred to a neutral mediator agreed upon by the parties or selected pursuant
to the rules of Endispute, Inc. Each party shall bear its own expenses and
one-half of the expenses of the mediator. If after 90 days of the commencement
of mediation the controversy or claim has not been resolved, either party may
commence arbitration proceedings in Palo Alto, California in accordance with the
Commercial Arbitration Rules of the American Arbitration Association. If the
amount in controversy is $1,000,000 or more, the arbitration shall be held
before three arbitrators; otherwise, it shall be before a single arbitrator. In
any such arbitration proceedings, each party shall bear its own costs and
expenses and one-half of the expenses of the arbitrator(s); provided that the
arbitrator(s) shall have the authority, should he, she or they determine it
appropriate under the circumstances, to award reasonable attorneys fees and
costs to the prevailing party. Judgment upon the award rendered by the
arbitrator(s) shall be final and binding and may be entered in any court having
jurisdiction thereof.

        8.13 Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE
SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE
QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE
QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS
CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON
THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT.

        8.14 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.


<PAGE>

        The parties have executed this Enviroplex Stock Exchange Agreement as of
the date first written above by the undersigned, who have been duly authorized
to do so.

COMPANY:

MCGRATH RENTCORP

                                                      Address:

                                                         5700 Las Positas Road
                                                         Livermore, CA 94550
     By: 
        ----------------------------------------
               Dennis C. Kakures, President



     By: 
        ----------------------------------------
               Randle F. Rose, Secretary


ENVIROPLEX STOCKHOLDERS:

                                                      Address:

                                                         988 Doug Mitchell Place
                                                         Stockton, CA 95209

     --------------------------------------
             JOE G. SUBLETT

                                                      Address:

                                                         977 Stenton Way
                                                         Galt, CA 95632

     --------------------------------------
             DONALD M. CURTIS



<PAGE>




                                    EXHIBIT A

                       SCHEDULE OF ENVIROPLEX STOCKHOLDERS


<TABLE>
<CAPTION>
                                                                      Shares of McGrath
                                      Shares of Enviroplex           RentCorp Common Stock
Name of Enviroplex Stockholder    Common Stock to be Exchanged          to be Received
------------------------------    ----------------------------       ---------------------
<S>                               <C>                                <C>   
Joe G. Sublett                                      7,000                      77,605

Donald M. Curtis                                      700                       7,761

</TABLE>



<PAGE>

                                  EXHIBIT B-1
                                       TO
                                MCGRATH RENTCORP
                       ENVIROPLEX STOCK EXCHANGE AGREEMENT

                                 SPOUSAL CONSENT

        The undersigned does hereby certify that she is the spouse of Joe G.
Sublett, the individual who executed the above Enviroplex Stock Exchange
Agreement. I consent to and agree with the transaction contemplated in the
Agreement by which shares of Common Stock of Enviroplex, Inc. owned by my
husband will be exchanged for shares of Common Stock of McGrath RentCorp. I
agree to execute and deliver such documents as may be necessary to carry out the
intent of this Agreement. 

Dated: July 2, 2001.


                                           ------------------------------------
                                                      RITA A. SUBLETT


<PAGE>

                                  EXHIBIT B-2
                                       TO
                                MCGRATH RENTCORP
                       ENVIROPLEX STOCK EXCHANGE AGREEMENT

                                 SPOUSAL CONSENT

        The undersigned does hereby certify that she is the spouse of Donald M.
Curtis, the individual who executed the above Enviroplex Stock Exchange
Agreement. I consent to and agree with the transaction contemplated in the
Agreement by which shares of Common Stock of Enviroplex, Inc. owned by my
husband will be exchanged for shares of Common Stock of McGrath RentCorp. I
agree to execute and deliver such documents as may be necessary to carry out the
intent of this Agreement. 

Dated: July 2, 2001.


                                           ------------------------------------
                                                      AURILLA A. CURTIS


<PAGE>
                                                                    Exhibit 10.7


                         TRANSITIONAL SERVICES AGREEMENT

        TRANSITIONAL SERVICES AGREEMENT, dated as of December 20, 2001 but
effective as of the Effective Date (as defined below), by and among, MCGRATH
RENTCORP, a California corporation ("McGrath"), and Robert P. McGrath (the
"Executive").

        WHEREAS, McGrath and Tyco Acquisition Corp. 33, a Nevada corporation
("Acquisition"), have proposed to enter into an agreement and plan of merger
dated as of the date hereof (the "Merger Agreement"), pursuant to which McGrath
will merge (the "Merger") with and into Acquisition (references herein to the
"Company" shall mean McGrath, prior to consummation of the Merger, and
Acquisition, as successor to McGrath, following consummation of the Merger, as
applicable).

        WHEREAS, the Executive has served as the Chief Executive Officer of the
Company and performs services of a unique nature for the Company.

        WHEREAS, following the Merger, the Executive will no longer serve as the
Chief Executive Officer of the Company, but the Company desires to retain and
rely on the Executive for the performance of critical transitional services
following the Merger, promoting continuity of management at the Company,
assuring customers and other Company employees of stability
 at the Company and
providing operational and strategic direction for the Company (the "Services").

        WHEREAS, as described in this Agreement, the Company has determined to
offer the Executive certain benefits while the Executive is employed by the
Company, to provide an incentive to encourage the Executive to remain in the
employ of the Company so that the Company may receive his continued dedication
and to assure the continued availability of the Executive's advice and counsel
to the Company during the period immediately following the completion of the
Merger.

        WHEREAS, as of the date hereof, the Executive and the Company have
entered into a Confidentiality and Non-Competition Agreement (the
"Confidentiality Agreement"), and the Company has agreed to provide the
Executive with the benefits set forth herein as part of the consideration for
the Executive entering into the Confidentiality Agreement.

        WHEREAS, the Executive has agreed to continue to render services to the
Company pursuant to the terms and conditions hereinafter set forth.

        NOW, THEREFORE, in consideration of the respective agreements of the
parties contained herein, it is agreed as follows:

        1. Definitions. The following terms shall have their respective meanings
provided in this Section 1.

               1.1 "Affiliate" shall mean any entity, directly or indirectly,
controlled by, controlling or under common control with the Company or any
corporation or other entity acquiring, directly or indirectly, all or
substantially all the assets and business of the Company, whether by operation
of law or otherwise.

               1.2 "Successors and Assigns" shall mean, with respect to the
Company, a corporation or other entity acquiring all or substantially all the
assets and business of the Company (including this Agreement) whether by
operation of law or otherwise.

        2. Effective Date. The "Effective Date" of this Agreement shall be the
date of the Effective Time under the Merger Agreement.

        3. Retention Period. The Company hereby agrees to continue the Executive
in its employ, and the Executive hereby agrees to remain in the employ of the
Company, for the period commencing on the Effective Date and ending on the date
three (3) months after the Effective Date or such earlier period as may be
determined by the Company (the "Retention Period").

        4. Terms of Employment.

               (a) Position and Duties.

               (1) During the Retention Period, the Executive shall provide the
Services to the Company.

               (2) Excluding any periods of sick leave or vacation to which the
Executive is entitled, the Executive agrees to devote reasonable and customary
attention and time during the Retention Period to the business and affairs of
the Company and, to the extent necessary to discharge the responsibilities
assigned to the Executive hereunder, to use the Executive's reasonable best
efforts to perform faithfully and efficiently such responsibilities. It shall
not be a violation of this Agreement, however, for the Executive to (A) serve on
corporate, civic or charitable boards or committees, (B) deliver lectures,
fulfill speaking engagements or teach at educational institutions and (C) manage
personal investments, so long as such activities do not significantly interfere
with the performance of the Executive's responsibilities as an employee of the
Company in accordance with this Agreement.

               (b)  Compensation.

               (1) Base Salary. During the Retention Period, the Executive shall
receive a base salary payable at the same monthly rate as he was receiving
immediately prior to the Effective Date. The base salary shall be payable at
such intervals as the Company customarily makes its payroll payments.

               (2) Employee Benefits. During the Retention Period, the Executive
shall be entitled to such employee benefits as are comparable in the aggregate
to those provided to the Executive immediately prior to the Effective Date.

               (3) Retention Bonus. In consideration of the Executive's
performing services pursuant to this Agreement, the Executive shall receive
$1,000,000 (the "Retention Bonus") within 30 days after the expiration of the
Retention Period; provided, however, that if (i) the Executive is unable to
complete the Retention Period due to death or disability, or (ii) the Company
terminates the Executive's employment during the Retention Period for any reason
other than as the result of the


<PAGE>

Executive's commission or conviction of a felony or a guilty or nolo contendere
plea by the Executive with respect thereto, the Retention Bonus shall be paid
within 30 days after the date of such death or termination of employment due to
disability.

        5. Termination of Employment.

               (a) COBRA Coverage. Upon the termination of the Executive's
employment at the end of the Retention Period (or earlier if due to disability),
the Executive may elect continuation coverage under Section 4980B of the
Internal Revenue Code of 1986, as amended ("COBRA Coverage") at no cost to the
Executive.

               (b) Continued Health Coverage. Prior to the expiration the
Executive's COBRA Coverage, the Company shall provide the Executive with
assistance in selecting appropriate replacement medical and health insurance
coverage and, to the extent that the coverage selected is comparable to the
coverage provided under the Executive's COBRA Coverage, the Company shall pay
the premiums for such coverage until the third anniversary of the Executive's
termination of employment.

               (c) Computer Support. During the period ending on the third
anniversary of the Executive's termination of employment, the Company's
information services department shall provide support services to the Executive
on the same basis as such support services are provided to employees of the
Company.

               (d) No Other Severance. The payment of the Retention Bonus and
the payments and benefits provided for in this Section 5 shall be in lieu of any
other severance pay to which the Executive may be entitled under the Company'
severance plan or any other plan, agreement or arrangement of the Company or any
of its Affiliates.

        6. Right of Repayment. In the event that the Executive should violate
the Confidentiality Agreement, the Executive shall, upon request of the Company
repay to the Company the Retention Bonus paid pursuant to Section 4(b)(3).

        7. Notice. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
if and when delivered personally or by overnight courier to the parties at the
following addresses or sent by electronic transmission, with confirmation
received, to the facsimile numbers specified below:

               If to the Company:   McGrath RentCorp.
                                    5700 Las Positas Road
                                    Livermore, CA 94550
                                    Attention: President

                                    and

                                    Tyco Acquisition Corp. 33
                                    c/o Tyco International (US) Inc.
                                    One Tyco Park
                                    Exeter, NH 03833
                                    Attention: President

                 If to Executive:   Robert  P. McGrath

                  with a copy to:

or at such other address as shall be indicated to either party in writing by
like notice. Notice of change of address shall be effective only upon receipt.

        8. Nature of Rights. Except as provided in Section 5(d), nothing in this
Agreement shall prevent or limit the Executive's continuing or future
participation in any benefit, bonus, incentive or other plan or program provided
by the Company or any Affiliate of the Company and for which the Executive may
qualify, nor, except as explicitly provided herein, shall anything herein limit
or reduce such rights as the Executive may have under any other agreements with
the Company or any Affiliate of the Company. Amounts which are vested benefits
or which the Executive is otherwise entitled to receive under any plan or
program of the Company or any Affiliate of the Company shall be payable in
accordance with such plan or program, except as explicitly modified by this
Agreement.

        9. Modification, Waiver; Remedies Cumulative. No provision of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing and signed by the Executive and the
Company. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreement or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by any party
which are not expressly set forth in this Agreement.



<PAGE>


        10.   Successors; Binding Agreement.

        (a) This Agreement shall not be assigned by operation of law or
otherwise, except that all or any of the rights of the Company and its
Affiliates hereunder may be assigned to and enforced by the Company and its
Affiliates; provided that no such assignment shall relieve the assigning party
of its obligations hereunder. This Agreement shall be binding upon and shall
inure to the benefit of the Company and its Successors and Assigns. The Company
shall require its Successors and Assigns to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession or assignment had
taken place.

        (b) Neither this Agreement nor any right or interest hereunder shall be
assignable or transferable by the Executive, his beneficiaries or legal
representatives, except by will or by the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal personal representative.

        (c) This Agreement shall be binding upon and inure solely to the benefit
of each party hereto, and nothing in this Agreement, express or implied, is
intended to or shall confer upon any other person any right, benefit or remedy
of any nature whatsoever under or by reason of this Agreement, except that the
Affiliates of the Company are intended third-party beneficiaries of this
Agreement.

        11.Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the State of California.

        12.Entire Agreement. Subject to the next sentence, this Agreement
constitutes the entire agreement between the parties hereto, and supersedes all
prior agreements, if any, understandings and arrangements, oral or written,
between the parties hereto, with respect to the subject matter hereof, provided
however, that this Agreement does not supercede the Confidentiality Agreement.

        13.Counterparts. This Agreement may be executed in counterparts, and by
the different parties hereto in separate counterparts (by facsimile or original
signature), each of which when executed shall be deemed to be an original but
all of which taken together shall constitute one and the same agreement.

        14.WAIVER OF JURY TRIAL. EACH OF MCGRATH AND THE EXECUTIVE HEREBY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ALL RIGHTS TO TRIAL
BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT,
TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE
TRANSACTIONS CONTEMPLATED HEREBY.

        15. Termination. This Agreement shall terminate and be of no further
force and effect if the Merger Agreement shall terminate without the Merger
having been consummated.

        IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.

                                                  MCGRATH RENTCORP



                                                  By:
                                                     --------------------------
                                                  Name:
                                                  Title:





                                                  -----------------------------
                                                  Robert P. McGrath



<PAGE>
                                                                    Exhibit 10.8


                  CONFIDENTIALITY AND NON-COMPETITION AGREEMENT

               CONFIDENTIALITY AND NON-COMPETITION AGREEMENT, dated as of
December 20, 2001 but effective as of the Effective Time (as defined below), by
and among, MCGRATH RENTCORP ("McGrath"), TYCO ACQUISITION CORP. 33 ("Acquiror"),
a direct, wholly-owned subsidiary of Tyco International Ltd. ("Tyco"), and
Robert P. McGrath ("Shareholder").

               WHEREAS, McGrath and Acquiror have proposed to enter into a
merger agreement dated as of the date hereof (the "Merger Agreement") pursuant
to which McGrath will merge with and into Acquiror, with the surviving
corporation being a wholly-owned subsidiary of Tyco; and

               WHEREAS, Shareholder is a founding and substantial shareholder of
McGrath and will receive considerable monetary and other benefits by reason of
the consummation of the transactions contemplated by the Merger Agreement; and

               WHEREAS, McGrath and Acquiror wish to preserve the confidential
information of McGrath and to protect against Shareholder using his skills,
knowledge, experience, ideas and influence for the benefit of the competitors of
McGrath and its affiliates; and

               WHEREAS, Shareholder is willing to enter into an agreement to
provide such protection to
 McGrath, its successor and affiliates upon the terms
and conditions set forth in this Agreement and understands that Shareholder's
agreement to the terms set forth herein is a critical inducement to the entering
into the Merger Agreement by the parties thereto; and

               WHEREAS, as a condition of its entering into the Merger
Agreement, Acquiror has requested Shareholder to agree to enter into this
Agreement, and Shareholder is executing this Agreement as an inducement to
Acquiror to enter into and execute the Merger Agreement.

               NOW, THEREFORE, in consideration of the execution and delivery by
Acquiror of the Merger Agreement and the mutual covenants, conditions and
agreements contained herein and therein, and intending to be legally bound
hereby, the parties agree as follows:

        1. Definitions.

           "Business" means (i) the business of designing, manufacturing,
refitting, supplying, selling, leasing and renting modular buildings and
accessories and (ii) the business of renting, leasing and selling electronic
testing and measurement equipment, in each case as now or hereafter (during the
Non-Competition Period) conducted by the Company or any of its affiliates.

           "Business Affiliate" means any affiliate of the Company (including
Tyco and its subsidiaries) now or hereafter engaged in the Business.

           "Company" means McGrath and Acquiror as successor to McGrath
following the Merger and includes their respective subsidiaries.

           "Competing Business" mean any business engaged in any of the
activities constituting or included within the Business.

           "Confidential information" means and includes the following items
that relate to or are connected with the Business: (i) the name and address of
any customer, vendor or affiliate of the Company or any Business Affiliate and
any information concerning the transactions or relations of any customer, vendor
or affiliate of the Company or any Business Affiliate with the Company or any
Business Affiliate or any of its shareholders, directors, officers, employees,
agents, consultants, representatives and/or personnel; (ii) any information
concerning any product, technology or procedure employed by the Company or any
Business Affiliate but not generally known to its customers, vendors or
competitors, or under development by or being tested by the Company or any
Business Affiliate but not at the time offered generally to its customers or
vendors; (iii) any information relating to computer software or systems used by
the Company or any Business Affiliate other than off-the-shelf software and
systems furnished by third party vendors; (iv) any business plans, budgets,
advertising or marketing plans, pricing or marketing methods, sales margins,
cost of goods, cost of material, capital structure, operating results, or
borrowing arrangements of the Company or any Business Affiliate; (v) any
information belonging to customers, vendors or affiliates of the Company or any
Business Affiliate or any other person which the Company or any


<PAGE>

Business Affiliate has agreed to hold in confidence; (vi) know-how, trade
secrets, technical data, designs, processes and formulae of the Company or any
Business Affiliate; (vii) any other information which is generally regarded as
confidential or proprietary; and (viii) all written, graphic, electronic and
other materials and records relating to any of the foregoing. Information that
is not novel or copyrighted or patented may nonetheless be proprietary
information; provided, however, that "confidential information" does not include
information generally available to and known by the public (other than by reason
of a breach of this Agreement).

           "Effective Time" means the effective time of the merger contemplated
by the Merger Agreement.

           "Non-Competition Period" means the period beginning on the date of
the Effective Time and ending on the fifth anniversary of that date.

           "Territory" means the United States of America.

        2. Acknowledgement. Shareholder acknowledges, as the basis for his
covenants and agreements contained in this Agreement:

           (i) the accuracy of each of the Recitals above;

           (ii) that the Business is intensely competitive and Shareholder's
        former and current position with the Company has exposed, and will
        continue to expose, Shareholder to knowledge and possession of
        confidential information of the Company and/or its Business Affiliates;

           (iii) that the confidential information constitutes a sensitive and
        protectable business interest of the Company and/or its Business
        Affiliates, as the case may be;

           (iv) that the direct and indirect disclosure of any such confidential
        information to existing or potential competitors of the Company and its
        Business Affiliates, as well as the engaging by Shareholder in any of
        the other activities prohibited by this Agreement, would place the
        Company and its Business Affiliates at a competitive disadvantage and
        would do damage, monetary or otherwise, to the operations, goodwill,
        prospects and competitive position of the Company and its Business
        Affiliates; and

           (v) that Shareholder's engaging in any of the activities prohibited
        by this Agreement would constitute improper appropriation and/or use of
        and harm to the tangible and intangible property of the Company and its
        Business Affiliates.

        3. Confidentiality.

           (a) Shareholder shall not, directly or indirectly, whether
individually, as a director, stockholder, owner, partner, employee, principal or
agent of any business, or in any other capacity, make known, disclose, furnish,
make available or utilize any of the confidential information of the Company or
any Business Affiliate other than in the proper performance of his duties as an
officer, employee or consultant of the Company or such Business Affiliate.

           (b) Nothing in this Agreement shall prevent Shareholder from
disclosing any confidential information as required by a court of competent
jurisdiction or other administrative or legislative body; provided that prior to
disclosing any of the confidential information to a court or other
administrative or legislative body, Shareholder shall promptly notify the
Company or its Business Affiliate, as the case may be, shall cooperate with the
Company or such Business Affiliate in obtaining a protective order or other
means of protecting the confidentiality of the confidential information and
shall disclose only that information that is legally required to be disclosed.
The Company shall reimburse Shareholder for his reasonable expenses involved in
such cooperation and, if such cooperation requires more than 10 hours of
Shareholder's time, the Company and Shareholder shall agree on appropriate
remuneration to Shareholder.

           (c) Shareholder agrees promptly to return all confidential
information in his possession, including all photocopies, extracts, summaries,
memoranda, documents, data, records, notes, designs, drawings, and other written
information, samples and models and any such information stored electronically
on tapes, computer disks or in any other manner, to the Company at any time upon
request by the Company or to or at the request of any Business Affiliate, as the
case may be.

        4.  Non-Competition.


<PAGE>

        During the Non-Competition Period, Shareholder shall not, directly or
indirectly, own, manage, operate, join, control, participate in, invest in or
otherwise be connected or associated in a like manner with any Competing
Business in the Territory, in any manner, including as an officer, director,
employee, partner, consultant, advisor, proprietor, manager, trustee or
investor; provided, however, that nothing contained in this Agreement shall
prevent Shareholder from owning less than five percent (5%) of the voting stock
of a publicly held corporation for investment purposes.

        5. Non-Solicitation.

        During the Non-Competition Period, Shareholder will not, directly or
indirectly, for his benefit or for the benefit of any other person, firm or
entity or otherwise:

           (i) persuade or seek to persuade any customer of the Company or any
        Business Affiliate to cease to do business or to reduce the amount of
        business which the customer has customarily done or contemplates doing
        with the Company or any Business Affiliate, whether or not the
        relationship between the Company or any Business Affiliate and such
        customer, supplier, or independent contractor was originally established
        in whole or in part by the efforts of Shareholder;

           (ii) seek to employ or engage, or assist anyone else to seek to
        employ or engage, any person who, at the relevant time, is in the employ
        of the Company or any Business Affiliate, or, as an independent
        contractor provides material engineering, marketing, sales, financial or
        management consulting services in connection with the business of the
        Company or any Business Affiliate; or

           (iii) interfere in any manner in the relationship of the Company or
        any Business Affiliate with any of its customers, suppliers, or
        independent contractors, whether or not the relationship between the
        Company or any Business Affiliate and such customer, supplier, or
        independent contractor was originally established in whole or in part by
        the efforts of Shareholder.

        6. Non-Disparagement.

        During the Non-Competition Period, Shareholder will not, directly or
indirectly, for his benefit or for the benefit of any other person, firm or
entity or otherwise:

           (i) make any statements or comments of a defamatory or disparaging
        nature to third parties regarding the Company or any Business Affiliate
        or its or their officers, directors, personnel, products or services; or

           (ii) take any action which is intended, or would reasonably be
        expected, to harm the Company or any Business Affiliate or its
        reputation or which would reasonably be expected to lead to unwanted or
        unfavorable publicity to the Company or any Business Affiliate.

        7. Other Obligations. The obligations of Shareholder under this
Agreement are in addition to, and not in derogation of, any other obligations or
duties that Shareholder may have or owe towards the Company or any Business
Affiliate, including, without limitation, pursuant to any employment agreement
or arrangement or by law as a present or former officer and/or director of the
Company.

        8. Specific Performance. Shareholder acknowledges that the Company and
its Business Affiliates would sustain irreparable injury in the event of a
violation by Shareholder of any of the provisions of this Agreement, and by
reason thereof Shareholder consents and agrees that if Shareholder violates any
of the provisions of this Agreement, in addition to any other remedies
available, the Company or its Business Affiliate, as the case may be, shall be
entitled to a decree specifically enforcing such provisions, and shall be
entitled to a temporary and permanent injunction restraining Shareholder from
committing or continuing any such violation, from any court of competent
jurisdiction, without the necessity of proving actual damages, posting any bond,
or seeking arbitration in any forum.

        9. Enforceability. Shareholder acknowledges and agrees that due to the
uniqueness of his role with the Company, his services and position, the nature
of the confidential information he possesses or will possess and the benefits
that he will receive by reason of the transaction contemplated by the Merger
Agreement, the covenants set forth herein are reasonable and necessary for the
protection of the business and goodwill of the Company and its Business
Affiliates. Nevertheless, in the event that any court of competition
jurisdiction determines that any provisions of this Agreement are unreasonable
in respect of its geographic boundaries, scope or term, such court is empowered
and authorized to amend or modify the provisions of this Agreement to the
minimum extent necessary in order to render such provisions valid, lawful and
enforceable. Should any provision of this Agreement be held or declared invalid,
unlawful or unenforceable, such


<PAGE>

invalidity, unlawfulness or unenforceability shall not in any way affect the
validity, lawfulness or enforceability of any other provision of this Agreement.

        10. Entire Agreement. This Agreement sets forth the entire agreement
between the parties with respect to its subject matter and merges and supersedes
all prior discussions, agreements and understandings of every kind and nature
between any of them and neither party shall be bound by any term or condition
other than as expressly set forth or provided for in this Agreement. This
Agreement may not be changed or modified nor may any of its provisions be
waived, except by an agreement in writing, signed by the parties hereto.

        11. Waiver. The failure of the Company or any Business Affiliate to
enforce any of its terms, provisions or covenants shall not be construed as a
waiver of the same or of the right of the Company or such Business Affiliate to
enforce the same. Waiver by the Company or any Business Affiliate of any breach
or default by Shareholder of any term or provision of this Agreement shall not
operate as a waiver of any other breach or default.

        12. Notices. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
if and when delivered personally or by overnight courier to the parties at the
following addresses or sent by electronic transmission, with confirmation
received, to the facsimile numbers specified below:

               If to the Company:   McGrath RentCorp.
                                    5700 Las Positas Road
                                    Livermore, CA 94550
                                    Attention:  President

               If to Acquiror:      Tyco Acquisition Corp. 33
                                    c/o Tyco International (US) Inc.
                                    One Tyco Park
                                    Exeter, NH 03833
                                    Attention:  President

               If to Shareholder:   Robert P. McGrath
                                    #2 Sixth Ave
                                    San Francisco, CA 9418

               with a copy to:      Morrison & Foerster LLP
                                    425 Market Street
                                    San Francisco, CA 94105
                                    Attention: Walter Stella, Esq.

or at such other address as shall be indicated to either party in writing by
like notice. Notice of change of address shall be effective only upon receipt.

        13. Successors and Assigns. This Agreement shall inure to the benefit
of, and shall be enforceable by, the Company, any Business Affiliate and their
respective successors and assigns.

        14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without regard to conflicts
of law principles.

        15. Headings. The section headings contained herein are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.

        16. Counterparts. This Agreement may be executed in counterparts (by
original or facsimile signature), each of which shall be deemed an original for
all purposes but which, together, shall constitute one and the same instrument.

        17. Effectiveness. This Agreement, and all rights and obligations of the
parties hereunder, shall become effective at the Effective Time and shall
terminate if the Merger Agreement is terminated in accordance with its terms
without consummation of the offer and merger transactions contemplated thereby.


<PAGE>

        IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.

                                           MCGRATH RENTCORP



                                           By:
                                              --------------------------------
                                           Name:
                                           Title:


                                           TYCO ACQUISITION CORP. 33

                                           By: 
                                              --------------------------------
                                           Name:
                                           Title:


                                           SHAREHOLDER


                                           -----------------------------------
                                           Name:  Robert P. McGrath



<PAGE>
                                                                    Exhibit 10.9

                  CONFIDENTIALITY AND NON-COMPETITION AGREEMENT

           CONFIDENTIALITY AND NON-COMPETITION AGREEMENT, dated as of December
20, 2001 but effective as of the Effective Time (as defined below), by and
among, MCGRATH RENTCORP ("McGrath"), TYCO ACQUISITION CORP. 33 ("Acquiror"), a
direct, wholly-owned subsidiary of TYCO INTERNATIONAL LTD. ("Tyco"), and Joan M.
McGrath ("Shareholder").

           WHEREAS, McGrath and Acquiror have proposed to enter into a merger
agreement dated as of the date hereof (the "Merger Agreement") pursuant to which
McGrath will merge with and into Acquiror, with the surviving corporation being
a wholly-owned subsidiary of Tyco; and

           WHEREAS, Shareholder is a founding and substantial shareholder of
McGrath and will receive considerable monetary and other benefits by reason of
the consummation of the transactions contemplated by the Merger Agreement; and

           WHEREAS, McGrath and Acquiror wish to preserve the confidential
information of McGrath and to protect against Shareholder using her skills,
knowledge, experience, ideas and influence for the benefit of the competitors of
McGrath and its affiliates; and

           WHEREAS, Shareholder is willing to enter into an agreement to provide
such protection to McGrath,
 its successor and affiliates upon the terms and
conditions set forth in this Agreement and understands that Shareholder's
agreement to the terms set forth herein is a critical inducement to the entering
into the Merger Agreement by the parties thereto; and

           WHEREAS, as a condition of its entering into the Merger Agreement,
Acquiror has requested Shareholder to agree to enter into this Agreement, and
Shareholder is executing this Agreement as an inducement to Acquiror to enter
into and execute the Merger Agreement.

           NOW, THEREFORE, in consideration of the execution and delivery by
Acquiror of the Merger Agreement and the mutual covenants, conditions and
agreements contained herein and therein, and intending to be legally bound
hereby, the parties agree as follows:

        1. Definitions.

           "Business" means (i) the business of designing, manufacturing,
refitting, supplying, selling, leasing and renting modular buildings and
accessories and (ii) the business of renting, leasing and selling electronic
testing and measurement equipment, in each case as now or hereafter (during the
Non-Competition Period) conducted by the Company or any of its affiliates.

           "Business Affiliate" means any affiliate of the Company (including
Tyco and its subsidiaries) now or hereafter engaged in the Business.

           "Company" means McGrath and Acquiror as successor to McGrath
following the Merger and includes their respective subsidiaries.

           "Competing Business" mean any business engaged in any of the
activities constituting or included within the Business.

           "Confidential information" means and includes the following items
that relate to or are connected with the Business: (i) the name and address of
any customer, vendor or affiliate of the Company or any Business Affiliate and
any information concerning the transactions or relations of any customer, vendor
or affiliate of the Company or any Business Affiliate with the Company or any
Business Affiliate or any of its shareholders, directors, officers, employees,
agents, consultants, representatives and/or personnel; (ii) any information
concerning any product, technology or procedure employed by the Company or any
Business Affiliate but not generally known to its customers, vendors or
competitors, or under development by or being tested by the Company or any
Business Affiliate but not at the time offered generally to its customers or
vendors; (iii) any information relating to computer software or systems used by
the Company or any Business Affiliate other than off-the-shelf software and
systems furnished by third party vendors; (iv) any business plans, budgets,
advertising or marketing plans, pricing or marketing methods, sales margins,
cost of goods, cost of material, capital structure, operating results, or
borrowing arrangements of the Company or any Business Affiliate; (v) any
information belonging to customers, vendors or affiliates of the Company or any
Business Affiliate or any other person which the Company or any

<PAGE>

Business Affiliate has agreed to hold in confidence; (vi) know-how, trade
secrets, technical data, designs, processes and formulae of the Company or any
Business Affiliate; (vii) any other information which is generally regarded as
confidential or proprietary; and (viii) all written, graphic, electronic and
other materials and records relating to any of the foregoing. Information that
is not novel or copyrighted or patented may nonetheless be proprietary
information; provided, however, that "confidential information" does not include
information generally available to and known by the public (other than by reason
of a breach of this Agreement).

           "Effective Time" means the effective time of the merger contemplated
by the Merger Agreement.

           "Non-Competition Period" means the period beginning on the date of
the Effective Time and ending on the fifth anniversary of that date.

           "Territory" means the United States of America.

        2. Acknowledgement.  Shareholder acknowledges, as the basis for her
covenants and agreements contained in this Agreement:

           (i) the accuracy of each of the Recitals above;

           (ii) that the Business is intensely competitive and Shareholder's
        former and current position with the Company has exposed, and will
        continue to expose, Shareholder to knowledge and possession of
        confidential information of the Company and/or its Business Affiliates;

           (iii) that the confidential information constitutes a sensitive and
        protectable business interest of the Company and/or its Business
        Affiliates, as the case may be;

           (iv) that the direct and indirect disclosure of any such confidential
        information to existing or potential competitors of the Company and its
        Business Affiliates, as well as the engaging by Shareholder in any of
        the other activities prohibited by this Agreement, would place the
        Company and its Business Affiliates at a competitive disadvantage and
        would do damage, monetary or otherwise, to the operations, goodwill,
        prospects and competitive position of the Company and its Business
        Affiliates; and

           (v) that Shareholder's engaging in any of the activities prohibited
        by this Agreement would constitute improper appropriation and/or use of
        and harm to the tangible and intangible property of the Company and its
        Business Affiliates.

        3. Confidentiality.

           (a) Shareholder shall not, directly or indirectly, whether
individually, as a director, stockholder, owner, partner, employee, principal or
agent of any business, or in any other capacity, make known, disclose, furnish,
make available or utilize any of the confidential information of the Company or
any Business Affiliate other than in the proper performance of her duties as an
officer, employee or consultant of the Company or such Business Affiliate.

           (b) Nothing in this Agreement shall prevent Shareholder from
disclosing any confidential information as required by a court of competent
jurisdiction or other administrative or legislative body; provided that prior to
disclosing any of the confidential information to a court or other
administrative or legislative body, Shareholder shall promptly notify the
Company or its Business Affiliate, as the case may be, shall cooperate with the
Company or such Business Affiliate in obtaining a protective order or other
means of protecting the confidentiality of the confidential information and
shall disclose only that information that is legally required to be disclosed.
The Company shall reimburse Shareholder for her reasonable expenses involved in
such cooperation and, if such cooperation requires more than 10 hours of
Shareholder's time, the Company and Shareholder shall agree on appropriate
remuneration to Shareholder.

           (c) Shareholder agrees promptly to return all confidential
information in her possession, including all photocopies, extracts, summaries,
memoranda, documents, data, records, notes, designs, drawings, and other written
information, samples and models and any such information stored electronically
on tapes, computer disks or in any other manner, to the Company at any time upon
request by the Company or to or at the request of any Business Affiliate, as the
case may be.

        4. Non-Competition.



<PAGE>

        During the Non-Competition Period, Shareholder shall not, directly or
indirectly, own, manage, operate, join, control, participate in, invest in or
otherwise be connected or associated in a like manner with any Competing
Business in the Territory, in any manner, including as an officer, director,
employee, partner, consultant, advisor, proprietor, manager, trustee or
investor; provided, however, that nothing contained in this Agreement shall
prevent Shareholder from owning less than five percent (5%) of the voting stock
of a publicly held corporation for investment purposes.

        5. Non-Solicitation.

        During the Non-Competition Period, Shareholder will not, directly or
indirectly, for her benefit or for the benefit of any other person, firm or
entity or otherwise:

           (i) persuade or seek to persuade any customer of the Company or any
        Business Affiliate to cease to do business or to reduce the amount of
        business which the customer has customarily done or contemplates doing
        with the Company or any Business Affiliate, whether or not the
        relationship between the Company or any Business Affiliate and such
        customer, supplier, or independent contractor was originally established
        in whole or in part by the efforts of Shareholder;

           (ii) seek to employ or engage, or assist anyone else to seek to
        employ or engage, any person who, at the relevant time, is in the employ
        of the Company or any Business Affiliate, or, as an independent
        contractor provides material engineering, marketing, sales, financial or
        management consulting services in connection with the business of the
        Company or any Business Affiliate; or

           (iii) interfere in any manner in the relationship of the Company or
        any Business Affiliate with any of its customers, suppliers, or
        independent contractors, whether or not the relationship between the
        Company or any Business Affiliate and such customer, supplier, or
        independent contractor was originally established in whole or in part by
        the efforts of Shareholder.

        6. Non-Disparagement.

        During the Non-Competition Period, Shareholder will not, directly or
indirectly, for her benefit or for the benefit of any other person, firm or
entity or otherwise:

           (i) make any statements or comments of a defamatory or disparaging
        nature to third parties regarding the Company or any Business Affiliate
        or its or their officers, directors, personnel, products or services; or

           (ii) take any action which is intended, or would reasonably be
        expected, to harm the Company or any Business Affiliate or its
        reputation or which would reasonably be expected to lead to unwanted or
        unfavorable publicity to the Company or any Business Affiliate.

        7. Other Obligations. The obligations of Shareholder under this
Agreement are in addition to, and not in derogation of, any other obligations or
duties that Shareholder may have or owe towards the Company or any Business
Affiliate, including, without limitation, pursuant to any employment agreement
or arrangement or by law as a present or former officer and/or director of the
Company.

        8. Specific Performance. Shareholder acknowledges that the Company and
its Business Affiliates would sustain irreparable injury in the event of a
violation by Shareholder of any of the provisions of this Agreement, and by
reason thereof Shareholder consents and agrees that if Shareholder violates any
of the provisions of this Agreement, in addition to any other remedies
available, the Company or its Business Affiliate, as the case may be, shall be
entitled to a decree specifically enforcing such provisions, and shall be
entitled to a temporary and permanent injunction restraining Shareholder from
committing or continuing any such violation, from any court of competent
jurisdiction, without the necessity of proving actual damages, posting any bond,
or seeking arbitration in any forum.

        9. Enforceability. Shareholder acknowledges and agrees that due to the
uniqueness of her role with the Company, her services and position, the nature
of the confidential information she possesses or will possess and the benefits
that she will receive by reason of the transaction contemplated by the Merger
Agreement, the covenants set forth herein are reasonable and necessary for the
protection of the business and goodwill of the Company and its Business
Affiliates. Nevertheless, in the event that any court of competition
jurisdiction determines that any provisions of this Agreement are unreasonable
in respect of its geographic boundaries, scope or term, such court is empowered
and authorized to amend or modify the provisions of this Agreement to the
minimum extent necessary in order to render such provisions valid, lawful and
enforceable. Should any provision of this Agreement be held or declared invalid,
unlawful or unenforceable, such


<PAGE>

invalidity, unlawfulness or unenforceability shall not in any way affect the
validity, lawfulness or enforceability of any other provision of this Agreement.

        10. Entire Agreement. This Agreement sets forth the entire agreement
between the parties with respect to its subject matter and merges and supersedes
all prior discussions, agreements and understandings of every kind and nature
between any of them and neither party shall be bound by any term or condition
other than as expressly set forth or provided for in this Agreement. This
Agreement may not be changed or modified nor may any of its provisions be
waived, except by an agreement in writing, signed by the parties hereto.

        11. Waiver. The failure of the Company or any Business Affiliate to
enforce any of its terms, provisions or covenants shall not be construed as a
waiver of the same or of the right of the Company or such Business Affiliate to
enforce the same. Waiver by the Company or any Business Affiliate of any breach
or default by Shareholder of any term or provision of this Agreement shall not
operate as a waiver of any other breach or default.

        12. Notices. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
if and when delivered personally or by overnight courier to the parties at the
following addresses or sent by electronic transmission, with confirmation
received, to the facsimile numbers specified below:

           If to the Company:   McGrath RentCorp.
                                5700 Las Positas Road
                                Livermore, CA 94550
                                Attention:  President

           If to Acquiror:      Tyco Acquisition Corp. 33
                                c/o Tyco International (US) Inc.
                                One Tyco Park
                                Exeter, NH 03833
                                Attention:  President

           If to Shareholder:   Joan M. McGrath
                                #2 Sixth Ave
                                San Francisco, CA 9418

           with a copy to:      Morrison & Foerster LLP
                                425 Market Street
                                San Francisco, CA 94105
 
                                Attention: Walter Stella, Esq.

or at such other address as shall be indicated to either party in writing by
like notice. Notice of change of address shall be effective only upon receipt.

        13. Successors and Assigns. This Agreement shall inure to the benefit
of, and shall be enforceable by, the Company, any Business Affiliate and their
respective successors and assigns.

        14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without regard to conflicts
of law principles.

        15. Headings. The section headings contained herein are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.

        16. Counterparts. This Agreement may be executed in counterparts (by
original or facsimile signature), each of which shall be deemed an original for
all purposes but which, together, shall constitute one and the same instrument.

        17. Effectiveness. This Agreement, and all rights and obligations of the
parties hereunder, shall become effective at the Effective Time and shall
terminate if the Merger Agreement is terminated in accordance with its terms
without consummation of the offer and merger transactions contemplated thereby.


<PAGE>

        IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.

                                            MCGRATH RENTCORP



                                            By:
                                               --------------------------------
                                            Name:
                                            Title:


                                            TYCO ACQUISITION CORP. 33

                                            By: 
                                               --------------------------------
                                            Name:
                                            Title:


                                            SHAREHOLDER

                                            -----------------------------------
                                            Name: Joan M. McGrath



<PAGE>

                                                                      Exhibit 23




                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

        As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K into the Company's
previously filed Registration Statement File No. 333-6112 and 333-74089.

                                                   Arthur Andersen LLP

San Francisco, California
March 18, 2002





<PAGE>
                                                                      Exhibit 99

               LETTER TO COMMISSION PURSUANT TO TEMPORARY NOTE 3T



Securities and Exchange Commission
Washington, D.C.  20549

March 18, 2002

Gentlemen:

Pursuant to temporary note 3T, McGrath RentCorp has obtained a letter of
representation from Arthur Andersen stating that the December 31, 2001 audit was
subject to their quality control system for the U.S. accounting and auditing
practice to provide reasonable assurance that the engagement was conducted in
compliance with professional standards, that there was appropriate continuity of
Arthur Andersen personnel working on the audit, availability of national office
consultation, and availability of personnel at foreign affiliates of Arthur
Andersen to conduct the relevant portions of the audit.

Very truly yours,

McGrath RentCorp



By  /s/  Thomas J. Sauer
Thomas J. Sauer, Chief Financial Officer