10-K405/A: Annual report [Sections 13 and 15(d), S-K Item 405]
Published on June 25, 1999
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION JUNE 25, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
- --------------------------------------------------------------------------------
FORM 10-K/A
- --------------------------------------------------------------------------------
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 0-13292
- --------------------------------------------------------------------------------
MCGRATH RENTCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
- --------------------------------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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 X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of voting stock, held by nonaffiliates of
the registrant: $177,777,794 as of March 18, 1999.
At March 18, 1999, 13,576,448 shares of Registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
McGrath RentCorp's definitive Proxy Statement with respect to its Annual
Shareholders' Meeting to be held June 3, 1999, which will be filed with the
Securities and Exchange commission within 120 days after the end of its fiscal
year, is incorporated by reference into Part III, Items 10, 11, 12 and 13.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following items appearing in the Annual Report on Form 10-K for McGrath
RentCorp (the Company), as originally filed March 31, 1999, are hereby amended.
ITEM 6. SELECTED FINANCIAL DATA.
The following item amends the original filing as to the Selected Financial
Data Table by deleting Cash Flow from Operating Activities and Cash Flow Per
Common Share for Basic and Diluted.
The following table summarizes the Company's selected financial data for
the five years ended December 31, 1998 and should be read in conjunction with
the more detailed Consolidated Financial Statements and related notes reported
in Item 8.
SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------
(1) Dividends for 1994 includes $0.055 per share declared in January 1995.
1
SELECTED CONSOLIDATED FINANCIAL DATA (continued)
- --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following item amends the original filing as to the Consolidated
Statements of Cash Flows by reclassifying the Proceeds from Sale of Rental
Equipment from Cash Flows from Operating Activities to Cash Flow from Investing
Activities and changing the respective subtotals.
2
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, 1998 and
1997, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of McGrath RentCorp as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
San Francisco, California ARTHUR ANDERSEN LLP
February 17, 1999
3
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of these consolidated financial
statements.
4
MCGRATH RENTCORP
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial
statements.
5
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated financial
statements.
6
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial
statements.
7
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BUSINESS
McGrath RentCorp is a California corporation organized in 1979. McGrath
RentCorp and its majority owned subsidiary, Enviroplex, Inc. ("Enviroplex"),
collectively referred to herein as the "Company", manufactures, rents and sells
relocatable modular offices and rents and sells electronic test and measurement
instruments with related accessories primarily in California and Texas. The
Company's corporate offices are located in Livermore, California. In addition to
the corporate offices, both modular and electronics operations are conducted
from this facility.
Under the trade name "Mobile Modular Management Corporation", the Company
rents and sells modular equipment and related accessories from two branch
offices located in California and one located in Texas. The Company purchases
the modulars from various manufacturers who build them to the Company's design
specifications. Although Mobile Modular Management Corporation's primary
emphasis is on rentals, sales of modulars occur routinely and can fluctuate
quarter to quarter and from year to year depending on customer demands and
requirements.
Under the trade name "McGrath-RenTelco", the Company conducts electronics
operations from Livermore, California and Richardson, Texas. Engineers,
scientists and technicians use these instruments in evaluating the performance
of their own electrical and electronic equipment, developing products,
controlling manufacturing processes and in field service applications. These
instruments are rented primarily to electronics, communications, network
systems, industrial, research and aerospace companies. The majority of
McGrath-RenTelco's rental inventory consists of instruments manufactured by
Hewlett-Packard and Tektronix.
McGrath RentCorp owns 73.2% of Enviroplex, a California corporation
organized in 1991. Enviroplex manufactures portable classrooms built to the
requirements of the California Division of the State Architect ("DSA") and sells
directly to school districts. Enviroplex conducts its sales and manufacturing
operations from one facility located in Stockton, California.
The rental and sale of modulars to public school districts for use as
portable classrooms, restroom buildings and administrative offices for
kindergarten through grade twelve (K-12) are a significant portion of the
Company's revenues. School business comprised approximately 45%, 52% and 37% of
the Company's consolidated rental and sales revenues for 1998, 1997 and 1996,
respectively. The increase in the Company's sales revenues in 1997 was
attributed to the Class Size Reduction Program implemented by the state of
California in 1996.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of McGrath
RentCorp and Enviroplex. All significant intercompany accounts and transactions
are eliminated.
REVENUES
Rental revenue is recognized under the "operating method" of accounting for
the majority of leases. Rental billings for more than one month are recorded as
deferred income and recognized as rental revenue when earned.
Rental related services revenue is primarily associated with relocatable
modular office leases and consists of billings to customers for delivery,
installation, modifications, skirting, additional site related work, and return
delivery and dismantle. Revenue related to these services is recognized in the
period the services are performed and accepted.
Sales revenue is recognized upon delivery of the equipment to the customer.
Certain leases meeting the requirements of Statement of Financial Accounting
Standards ("SFAS") No. 13, "Accounting for Leases", are accounted for as sales
type leases. For these leases, sales revenue and the related accounts receivable
are recognized upon execution of the leases and unearned interest is recognized
over the lease term on a basis which results in a constant rate of return on the
unrecovered lease investment (see Note 4).
8
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:
Maintenance and repairs are expensed as incurred.
OTHER DIRECT COSTS OF RENTAL OPERATION
Other direct costs of rental operations primarily relate to costs
associated with relocatable modular offices and include equipment supplies and
repairs, direct labor, amortization of lease costs included in the rental rate,
property and liability insurance, property taxes, and business and license fees.
WARRANTY SERVICE COSTS
Sales of new relocatable modular offices, electronic test equipment and
related accessories not manufactured by the Company are typically covered by
warranties provided by the manufacturer of the products sold. The Company
provides limited 90-day warranties for certain sales of used rental equipment
and a one-year warranty on equipment manufactured by Enviroplex. Although the
Company's policy is to provide reserves for warranties when required for
specific circumstances, the Company has not found it necessary to establish such
reserves to date.
INCOME TAXES
Provision has been made for deferred income taxes based upon the amount of
taxes payable in future years, after considering changes in tax rates and other
statutory provisions that will be in effect in those years (see Note 6).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the carrying amounts of its financial instruments
(cash and notes payable) approximate fair value.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions in determining reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during each period
presented. Actual results could differ from those estimates.
EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed as net income divided by the
weighted average number of shares of common stock outstanding for the reported
period, excluding the dilutive effects of stock options and other potentially
dilutive securities. Diluted EPS is computed as net income divided by the
weighted average number of shares outstanding of common stock and common stock
equivalents for the reported period. Common stock equivalents result from
dilutive stock options computed using the treasury stock method with
9
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the average share price for the reported period. The weighted average number of
options outstanding at December 31, 1998, 1997 and 1996 were 186,624, 199,215
and 203,414, respectively.
NOTE 3. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of trade accounts receivable. The Company sells
primarily on 30-day terms, individually performs credit evaluation procedures on
its customers on each transaction and will require security deposits or personal
guarantees from its customers when a significant credit risk is identified.
Historically, the Company has not incurred significant credit related losses,
however, an allowance for potential credit losses is maintained. Typically, most
customers are established companies or are publicly funded entities located in
California or Texas. Although no one customer accounts for more than 10% of the
Company's consolidated revenues, credit risk exists in trade accounts receivable
primarily due to the significant amount of business transacted with the
California public school districts (K-12) which represents a significant portion
of the Company's revenues (see Note 1). The lack of fiscal funding or
significant reduction of funding from the State of California to the public
schools could have a material adverse effect on the Company.
NOTE 4. SALES TYPE LEASE RECEIVABLES
The Company has entered into several sales type leases. The minimum lease
payments receivable and the net investment included in accounts receivable for
such leases are as follows:
As of December 31, 1998, the future minimum lease payments to be received
in 1999 and thereafter are as follows:
NOTE 5. NOTES PAYABLE
On July 31, 1998, the Company completed a private placement of $40,000,000
of 6.44% Senior Notes due in 2005. Interest on the notes is due semi-annually in
arrears and the principal is due in 5 equal installments commencing on July 15,
2001. The outstanding balance at December 31, 1998 was $40,000,000. Among other
restrictions, the agreement requires (i) the Company to maintain a minimum net
worth of $80,000,000 plus 25% of all net income generated subsequent to June 30,
1998, less a maximum of $15,000,000 paid by the Company to repurchase its common
stock after June 30, 1998, (restricted equity at December 31, 1998 is
$80,801,000), (ii) a fixed coverage charge of not less than 2.0 to 1.0, (iii) a
rolling fixed charges coverage ratio of not less than 1.5 to 1.0, and (iv)
senior debt not to exceed 275% of consolidated net worth and consolidated total
debt not to exceed 300% of consolidated net worth.
The Company maintains an unsecured line of credit agreement, as amended,
(the "Agreement") with its banks which expires on June 30, 1999 and permits it
to borrow up to $75,000,000 of which $57,000,000 was outstanding as of December
31, 1998. The Agreement requires the Company to pay interest at prime or, at the
10
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's election, other rate options available under the Agreement. In
addition, the Company pays a commitment fee on the daily average unused portion
of the available line. Among other restrictions, the Agreement requires (i) the
Company to maintain shareholders' equity of not less than $77,800,000 plus 50%
of all net income generated subsequent to June 30, 1997 plus 90% of any new
stock issuance proceeds (restricted equity at December 31, 1998 is $96,269,000),
(ii) a debt-to-equity ratio (excluding deferred income taxes) of not more than 3
to 1, (iii) interest coverage (income from operations compared to interest
expense) of not less than 2 to 1 and (iv) debt service coverage (earnings before
interest, taxes, depreciation and amortization compared to the following year's
pro forma debt service) of not less than 1.15 to 1.0. If the Company does not
amend or renegotiate the present Agreement for an additional time period prior
to its expiration date, the principal amount outstanding at that time will be
converted to a two-year term loan with principal due and payable in eight (8)
consecutive quarterly installments.
In addition to the $75,000,000 unsecured line of credit, the Company has a
$3,000,000 committed line of credit facility (at prime rate) related to its cash
management services of which none was outstanding as of December 31, 1998. This
committed line related to its cash management services will expire on June 30,
1999.
The following information relates to the lines of credit for each of the
following periods:
NOTE 6. INCOME TAXES
The provision (benefit) for income taxes is comprised of the following:
The reconciliation of the federal statutory tax rate to the Company's
effective tax rate is as follows:
11
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table shows the tax effect of the Company's cumulative
temporary differences included in net deferred income taxes on the Company's
Balance Sheets:
NOTE 7. COMMON STOCK AND STOCK OPTIONS
The Company adopted a 1998 Stock Option Plan (the "1998 Plan"), effective
March 9, 1998, under which 2,000,000 shares are reserved for the grant of
options to purchase common stock to directors, officers, key employees and
advisors of the Company. The plan provides for the award of options at a price
not less than the fair market value of the stock as determined by the Board of
Directors on the date the options are granted. Under the 1998 Plan, 242,000
options have been granted with exercise prices ranging from $20.25 to $20.81.
The options vest over 5 years and expire 10 years after grant.
The Company adopted a 1987 Incentive Stock Option Plan (the "1987 Plan"),
effective December 14, 1987, under which options to purchase common stock may be
granted to officers and key employees of the Company. The plan provides for the
award of options at a price not less than the fair market value of the stock as
determined by the Board of Directors on the date the options are granted. Under
the 1987 Plan, options have been granted with an exercise price of $3.06, $6.94
and $10.75 per share. The options vest over 9.3 years and expire 10 years after
grant. The 1987 Plan expired in December 1997 and no further options can be
issued under this plan.
Option activity and options exercisable including weighted average exercise
price for the three years ended December 31, 1998 are as follows:
The weighted average remaining life of the 541,122 options outstanding at
December 31, 1998, is 6.8 years. As of December 31, 1998, 1,758,000 options can
be issued under the 1998 plan.
Statement of Financial Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") became effective for the Company in 1996. As allowed
by SFAS 123, the Company has elected to continue to follow Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") in
accounting for its stock option plans. Under APB 25, the Company does not
recognize compensation expense on the issuance of stock options because the
option terms are fixed and the exercise price equals the market price of the
underlying stock on the grant date.
12
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In accordance with SFAS 123, the fair value of each option grant is
estimated at the date of grant using the Black-Scholes option pricing model. The
assumptions used in the 1998 and 1996 grants are as follows:
The fair value of the options granted in 1998 and 1996 are $2,182,000,
$532,000 and $598,000 at December 31, 1998, 1997 and 1996, respectively.
The following pro-forma net income and earnings per share data are computed
as if compensation cost for the Stock Option Plan had been determined consistent
with SFAS 123:
In 1985, the Company established an Employee Stock Ownership Plan, as
amended. Under the terms of the plan, the Company makes annual contributions in
the form of cash or common stock of the Company to a trust for the benefit of
eligible employees. The amount of the contribution is determined annually by the
Board of Directors. A contribution of $750,000 was approved for 1998 and 1997
and $650,000 for 1996.
In 1991, the Board of Directors adopted a Long-Term Stock Bonus Plan (the
"LTB Plan") under which 400,000 shares of common stock are reserved for grant to
officers and key employees. The stock bonuses granted under the LTB Plan are
evidenced by written Stock Bonus Agreements covering specified performance
periods. The LTB Plan provides for the grant of stock bonuses upon achievement
of certain financial goals during a specified period. Stock bonuses earned under
the LTB Plan vest over 5 years from the grant date contingent on the employee's
continued employment with the Company. As of December 31, 1998, 172,408 shares
of common stock have been granted, of which 107,951 shares of common stock are
vested. Future grants of 41,109 shares of common stock are authorized by the
Board of Directors to be issued under the LTB Plan in the event the Company
reaches the highest level of achievement. Compensation expense for 1998, 1997
and 1996 under these plans was $485,000, $497,000 and $198,000 respectively, and
is based on a combination of the anticipated shares to be granted, the amount of
vested shares previously issued and fluctuations in market price of the
Company's common stock.
The Board of Directors has authorized the repurchase of shares of the
Company's outstanding common stock. These purchases are to be made in the
over-the-counter market and/or through large block transactions at such
repurchase price as the officers shall deem appropriate and desirable on behalf
of the Company. All shares repurchased by the Company are to be canceled and
returned to the status of authorized but unissued shares of common stock. In
1996, the Company repurchased 841,100 shares of common stock for an aggregate
repurchase price of $8,779,000 or an average price of $10.44 per share. In 1997,
the Company repurchased 502,408 shares of common stock for an aggregate
repurchase price of $10,545,000 or an average price of $20.99 per share. In
1998, the Company repurchased 619,550 shares of common stock for an aggregate
repurchase price of $12,247,000 or an average price of $19.77 per share. As of
December 31, 1998, 819,900 shares remain authorized for repurchase (see Note 10
below).
13
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. BUSINESS SEGMENTS
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). The Company defined its business segments based
on the nature of operations for the purpose of reporting under SFAS 131. The
Company's three reportable segments are Mobile Modular Management Corporation
(Modulars), McGrath-RenTelco (Electronics), and Enviroplex. The operations of
each of these segments is described in Note 1, Organization and Business, and
the accounting policies of the segments are described in Note 2, Significant
Accounting Policies. As a separate corporate entity, Enviroplex revenues and
expenses are separately maintained from Modulars and Electronics. Excluding
interest expense, allocations of revenues and expenses not directly associated
with Modulars or Electronics are generally allocated to these segments based on
their pro-rata share of direct revenues. Interest expense is allocated between
Modulars and Electronics based on their pro-rata share of average rental
equipment, accounts receivable and customer security deposits. The Company does
not report total assets by business segment. Summarized financial information
for the years ended December 31, 1998, 1997, and 1996 for the Company's
reportable segments is shown in the following table:
14
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for each of the two years ended December
31, 1998 is summarized below:
NOTE 10. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
In February and March, 1999, the Company repurchased 427,400 shares of its
outstanding common stock for an aggregate purchase price of $7,813,000 (or an
average price of $18.28 per share). On March 18, 1999, the Company's Board of
Directors authorized the repurchase of up to 1,000,000 shares of its common
stock.
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to the
Annual Report on Form 10-K for the year ended December 31, 1998 to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: June 23, 1999 MCGRATH RENTCORP
by: /s/ Robert P. McGrath
------------------------------------
Robert P. McGrath
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates as indicated.
16