-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DPuGXRBMe/c4uB2fpMm7/+ulTX1O0oZRpuN6Igj39l1GKahoEbpWeIjG9Rkk6Z99 IhF0D/gsZ5j3N+0sPOM6VQ== 0000032166-98-000001.txt : 19980115 0000032166-98-000001.hdr.sgml : 19980115 ACCESSION NUMBER: 0000032166-98-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971130 FILED AS OF DATE: 19980114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELECTRO RENT CORP CENTRAL INDEX KEY: 0000032166 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 952412961 STATE OF INCORPORATION: CA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-09061 FILM NUMBER: 98506849 BUSINESS ADDRESS: STREET 1: 6060 SEPULVEDA BLVD CITY: VAN NUYS STATE: CA ZIP: 91411-2512 BUSINESS PHONE: 8187872100 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED NOVEMBER 30, 1997 COMMISSION FILE NUMBER 0-9061 ELECTRO RENT CORPORATION Exact name of registrant as specified in its charter CALIFORNIA 95-2412961 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6060 SEPULVEDA BOULEVARD VAN NUYS, CALIFORNIA 91411-2501 (Address of principal executive offices) (Zip code) (818) 786-2525 (Registrant's telephone number, including area code) 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 At January 12, 1998 registrant had 12,056,692 shares of common stock outstanding. ELECTRO RENT CORPORATION FORM 10-Q NOVEMBER 30, 1997 TABLE OF CONTENTS Page Part I: FINANCIAL INFORMATION Condensed Consolidated Statements of Income for the Three Months and Six Months Ended November 30, 1997 and 1996 3 Condensed Consolidated Balance Sheets at November 30, 1997 and May 31, 1997 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended November 30, 1997 and 1996 5 Notes to Condensed Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II: OTHER INFORMATION 12 SIGNATURES 13 Page 2 ELECTRO RENT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (000 omitted except per share data)
Three Months Ended Six Months Ended November 30 November 30 1997 1996 1997 1996 -------- -------- --------- --------- Revenues: Rentals and leases $ 42,394 $ 32,491 $ 76,786 $ 64,871 Sales of equipment and other revenues 8,082 5,487 12,607 11,251 -------- -------- --------- --------- Total revenues 50,476 37,978 89,393 76,122 -------- -------- --------- --------- Costs and expenses: Depreciation of equipment 15,116 11,144 26,731 22,151 Costs of revenues other than depreciation 8,135 5,233 12,292 10,796 Selling, general and administrative expenses 13,980 10,343 25,188 20,522 Interest 983 232 1,096 532 -------- -------- --------- --------- Total costs and expenses 38,214 26,952 65,307 54,001 -------- -------- --------- --------- Income before income taxes 12,262 11,026 24,086 22,121 Income taxes 5,027 4,521 9,874 9,069 -------- -------- --------- --------- Net income $ 7,235 $ 6,505 $ 14,212 $ 13,052 ======== ======== ========= ========= Net income per common and common equivalent share $ 0.58 $ 0.52 $ 1.14 $ 1.05 ======== ======== ========= ========= Average common and common equivalent shares outstanding 12,538 12,429 12,541 12,427 ======== ======== ========= ========= See accompanying notes to condensed consolidated financial statements.
Page 3 ELECTRO RENT CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (000 omitted) ASSETS
November 30 May 31 1997 1997 --------- --------- Cash $ 2,539 $ 2,207 Accounts receivable, net 38,831 19,968 Rental and lease equipment, net of accumulated depreciation 333,713 139,377 Other property, net of accumulated depreciation and amortization 28,762 19,438 Goodwill, net 45,587 3,135 Other 9,955 4,088 --------- --------- $ 459,387 $ 188,213 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Bank borrowings $ 251,000 $ 4,200 Accounts payable 17,676 20,096 Accrued expenses 23,784 11,001 Deferred income taxes 13,399 13,696 --------- --------- Total liabilities 305,859 48,993 --------- --------- Shareholders' equity Common stock 10,061 9,965 Retained earnings 143,467 129,255 --------- --------- Total shareholders' equity 153,528 139,220 --------- --------- $ 459,387 $ 188,213 ========= ========= See accompanying notes to condensed consolidated financial statements.
Page 4 ELECTRO RENT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (000 omitted)
Six Months Ended November 30 1997 1996 --------- --------- Cash flows from operating activities: Net income $ 14,212 $ 13,052 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 27,608 22,875 Provision for losses on accounts receivable 419 367 Gain on sale of equipment (2,480) (2,872) Change in operating assets and liabilities: Increase in accounts receivable (11,933) (1,613) Increase (decrease) in other assets (3,387) 276 Decrease in accounts payable (994) (983) Increase (decrease) in accrued expenses 6,199 (1,164) Decrease in deferred income taxes (297) (271) --------- --------- Net cash provided by operating activities 29,347 29,667 --------- --------- Cash flows from investing activities: Payment for acquisition of business (239,212) - Proceeds from sale of equipment 10,937 9,786 Payments for purchase of rental and lease equipment (46,656) (36,656) Payments for purchase of other property (980) (226) --------- --------- Net cash used in investing activities (275,911) (27,096) --------- --------- Cash flows from financing activities: Increase (decrease) in short-term bank borrowings 246,800 (4,100) Proceeds from issuance of common stock 96 322 --------- --------- Net cash provided by (used in) financing activities 246,896 (3,778) --------- --------- Net increase (decrease) in cash 332 (1,207) Cash at beginning of period 2,207 1,394 --------- --------- Cash at end of period $ 2,539 $ 187 ========= ========= See accompanying notes to condensed consolidated financial statements. Page 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 -- Basis of Presentation - ----------------------------------- The unaudited consolidated financial statements are condensed and do not contain all information required by generally accepted accounting principles to be included in a full set of financial statements. The condensed consolidated financial statements include Electro Rent Corporation and the accounts of its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. The information furnished reflects all adjustments which are, in the opinion of management, necessary to a fair statement of the financial position and the results of operations of the Company. All such adjustments are of a normal recurring nature. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note 2 -- Net Income Per Common and Common Equivalent Share - ----------------------------------- Earnings per share were computed based on the weighted average number of common and common equivalent shares outstanding of 12,538,000 and 12,429,000 for the three month periods ended November 30, 1997 and 1996 and 12,541,000 and 12,427,000 for the the six month periods ended November 30, 1997 and 1996. Note 3 -- Interest and Income Taxes Paid - ------------------------------------------- Total interest paid during the six month periods ended November 30, 1997 and 1996 was $568,000 and $527,000, respectively. Total income taxes paid during the six month period ended November 30, 1997 was $11,701,000 compared to $10,035,000 during the same period in the prior year. Interest and income taxes will vary from amounts recorded in the financial statements. Note 4 -- Noncash Investing and Financing Activities - ------------------------------------------------------- The Company acquired equipment totaling $11,674,000 and $19,405,000 as of November 30, 1997 and May 31, 1997, respectively, and $13,244,000 and $15,832,000 as of November 30, 1996 and May 31, 1996, respectively, which was paid for during subsequent quarters. Note 5 -- Capital Leases - ---------------------------- The Company has certain customer leases providing bargain purchase options with a portion of lease revenue deferred until option exercise. At November 30, 1997 investment in sales-type leases of $670,000 net of deferred interest of $39,000 is included in other assets. Interest income is recognized over the life of the lease using the interest method. Page 6 Note 6 -- Acquisition - ---------------------------- On November 14, 1997, the Company acquired the computer and test and measurement rental business of GE Capital Technology Management Services (TMS), a business engaged in renting, leasing and selling computers, workstations and general purpose test and measurement equipment. TMS' finance leasing business was not purchased. The initial purchase price based on TMS' estimated tangible net assets at November 14, 1997, was $239.2 million, payable in cash. The purchase price is subject to adjustment as a result of an audit of net tangible assets to be completed within 90 days of closing. Financing for the transaction was achieved through short-term borrowings under a $330 million reducing revolving credit facility dated as of November 14, 1997. The acquisition has been accounted for by the purchase method and, accordingly, the results of operations of TMS have been included with those of the Company since the date of acquisition. The purchase price has been allocated to assets and liabilities based on preliminary estimates of fair value as of the date of acquisition. The final allocation of the purchase price will be determined when appraisals and other studies are completed. As part of the purchase price allocation, the Company recorded a reserve for estimated costs to be incurred in the consolidation of duplicate TMS facilities and termination of employment of certain members of the TMS management and staff who will not be replaced. Based on the allocation of the purchase price over the net assets acquired, goodwill of approximately $41,379,000 was recorded. Such goodwill is being amortized on a straight-line basis over 40 years. The purchase price has been allocated as follows (in thousands): Accounts receivable $ 7,349 Rental and lease equipment 194,542 Other property 10,990 Other assets 1,784 Goodwill 41,379 Accounts payable (10,248) Accrued expenses (6,584) $ 239,212
The following unaudited pro forma summary for the six month periods ended November 30, 1997 and 1996, combines the consolidated results of operations of the Company and TMS as if the acquisition had occurred at the beginning of the respective fiscal years after giving effect to certain adjustments, including amortization of goodwill, depreciation charges, estimated changes in interest expense due to acquisition debt, and related income tax effects. The historical financial data of the Company included in the pro forma summary is as of the periods presented. The historical financial data of TMS included in the pro forma summary for the six months ended November 30, 1997 and 1996 are for the six months ended September 30, 1997 and 1996 (unaudited), respectively. The historical financial data of TMS for the six months ended September 30, 1997 has been adjusted on a pro rata basis to reflect the effect of the TMS acquisition date. The pro forma results have been prepared for comparative purposes only and do not purport to indicate the results of operations which would actually have occurred had the combination been in effect on the dates indicated, or which may occur in the future. Furthermore, no effect has been Page 7 given in the pro forma information for operating and synergistic benefits that are expected to be realized through the combination of the businesses.
For the Six Months Ended November 30, 1997 1996 (In thousands, except per share data) Net revenues $ 200,250 $ 197,282 Net income $ 18,897 $ 20,651 Earnings per common share $ 1.51 $ 1.66 Average shares outstanding 12,541 12,427
Page 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------- Results of Operations - ---------------------------- Comparison of Three Months Ended November 30, 1997 and 1996 - ----------------------------------------------------------- Revenues Total revenues increased 32.9% to $50.5 million for the three months ended November 30, 1997 from $38.0 million for the three months ended November 30, 1996. Approximately $10.3 million or 27.1% of the percentage increase is attributed to the acquisition of GE Capital Technology Management Services (TMS). Rental and lease revenue for the three months ended November 30, 1997 was $42.4 million, a 30.5% increase from $32.5 million for the corresponding period in fiscal 1997. The TMS acquisition resulted in approximately $8.8 million or 26.9% of additional rental and lease revenue for the three months ended November 30, 1997, including the partial effect of the changing from TMS' accrual method of accounting for revenues to the Company's method of recognizing revenues when billed. The remaining 3.6% increase in rental and lease revenue reflects growth in operating leases of personal computers and rentals of test and measurement equipment. Sales of equipment and other revenues increased 47.3% to $8.1 million in the three months ended November 30, 1997 from $5.5 million in the quarter ended November 30, 1996. Approximately 27.3% of the percentage increase is a result of the TMS acquisition. Costs and Expenses Depreciation of equipment increased from 34.3% of rental and lease revenue in second quarter of fiscal 1997 to 35.7% of rental and lease revenue in fiscal 1998. This increase is a result of the change to an accelerated depreciation method for desktop computers that began in December 1996 and the increased proportion of lower yield personal computer operating leases in the acquired TMS equipment pool. Costs of revenues other than depreciation includes cost of equipment sales and equipment parts and repair expenses. Cost of equipment sales increased from 70.6% of equipment sales in the second quarter of fiscal 1997 to 86.1% of equipment sales in fiscal 1998. The majority of this increase is attributable to increased sales of personal computers with lower margins. Equipment parts and repair expenses decreased from 5.4% of rental and lease revenue in the second quarter of fiscal 1997 to 4.6% of rental and lease revenue in fiscal 1998, primarily due to declining PC parts prices and increased bundling of PC parts in the platforms by manufacturers. Selling, general and administrative expenses totaled $14.0 million or 27.7% of total revenues for the quarter ended November 30, 1997 as compared to $10.3 million or 27.2% of total revenues for the quarter ended November 30, 1996. The increase reflects the higher cost structure of TMS, including redundant functions and facilities which will be reduced during the remainder of the fiscal year. Operating Earnings As a result of the changes in revenues, operating costs and expenses discussed above, operating earnings were $13.2 million or 26.2% of total revenue in the second quarter of fiscal 1998 compared to $11.3 million or 29.6% of total revenue in the second quarter of fiscal 1997. Interest Expense Page 9 Interest expense for the quarter increased to $983,000 in fiscal 1998 from $232,000 in fiscal 1997. The increase is a result of additional bank borrowings used to finance the TMS acquisition. Comparison of Six Months Ended November 30, 1997 and 1996 - ----------------------------------------------------------- Revenues Total revenues increased 17.4% to $89.4 million for the six months ended November 30, 1997 from $76.1 million for the six months ended November 30, 1996. The acquisition of TMS contributed approximately $10.3 million or 13.5% of the percentage increase for the six months ended November 30, 1997. Rental and lease revenue for the six months ended November 30, 1997 was $76.8 million, an 18.4% increase from $64.9 million for the six months ended November 30, 1996. The acquisition of TMS resulted in approximately $8.8 million or 13.5% of additional rental and lease revenue for the six months ended November 30, 1997, including the partial effect of changing from TMS' accrual method of accounting for revenues to the Company's method of recognizing revenues when billed. The remaining 4.9% increase reflects growth in operating leases of personal computers and rentals of test and measurement equipment. Sales of equipment and other revenues increased 12.1% to $12.6 million in the six months ended November 30, 1997 from $11.3 million in the six months ended November 30, 1996. Without the TMS acquisition sales of equipment and other revenues would have declined by 1.2% for the six months ended November 30, 1997. Costs and Expenses Depreciation of equipment increased from 34.1% of rental and lease revenue in first six months of fiscal 1997 to 34.8% of rental and lease revenue in fiscal 1998. This increase is a result of the change to an accelerated depreciation method for desktop computers that began in December 1996 and the increased proportion of lower yield personal computer operating leases in the acquired TMS equipment pool. Costs of revenues other than depreciation includes cost of equipment sales and equipment parts and repair expenses. Cost of equipment sales increased from 70.1% of equipment sales in the first six months of fiscal 1997 to 77.3% of equipment sales in fiscal 1998. The majority of this increase is attributable to increased sales of personal computers with lower margins. Equipment parts and repair expenses decreased from 6.0% of rental and lease revenue in the first six months of fiscal 1997 to 5.0% of rental and lease revenue in fiscal 1998, primarily due to declining PC parts prices and increased bundling of PC parts in the platforms by manufacturers. Selling, general and administrative expenses totaled $25.2 million or 28.2% of total revenues for the six months ended November 30, 1997 as compared to $20.5 million or 27.0% of total revenues for the six months ended November 30, 1996. The increase reflects the higher cost structure of TMS, including redundant functions and facilities which will be reduced during the remainder of the fiscal year. Operating Earnings As a result of the changes in revenues, operating costs and expenses discussed above, operating earnings were $25.2 million or 28.2% of total revenue in the first six months of fiscal 1998 compared to $22.7 million or 29.8% of total revenue in the first six months of fiscal 1997. Interest Expense Page 10 Interest expense for the six months increased to $1,096,000 in fiscal 1998 from $532,000 in fiscal 1997. The increase is a result of additional bank borrowings used to finance the TMS acquisition. Purchases of Rental and Lease Equipment Payments for the purchase of equipment totaled $46.7 million in the six months ended November 30, 1997, an increase of 27.3% from $36.7 million purchased in the six months ended November 30, 1996. The increase supports the growth in equipment rental revenues and replenishes equipment which has been sold or disposed of. Liquidity and Capital Resources - ---------------------------- The Company's primary capital requirements are purchases of rental and lease equipment and debt service. The Company purchases equipment throughout each year to replace equipment which has been sold and to maintain adequate levels of rental equipment to meet existing and new customer needs. As the Company's growth strategies continue to be implemented, equipment purchases are expected to increase. During the six months ended November 30, 1997 and 1996 net cash provided by operating activities was $29.3 million and $29.7 million, respectively. During the six months ended November 30, 1997 and 1996 net cash used in investing activities was $275.9 million and $27.1 million, respectively. In fiscal 1998, approximately $239.2 million was used for the acquisition of TMS. The remaining cash used in investing activities consists primarily of purchases of rental and lease equipment. During the six months ended November 30, 1997 net cash provided in financing activities was $246.9 million, of which approximately $239.2 million was borrowed to acquire TMS. During the six months ended November 30, 1996 net cash used in financing activities was $3.8 million. The Company has available a revolving line of credit of $330 million, subject to certain borrowing base restrictions, to meet acquisition and expansion needs as well as working capital and general corporate requirements. The Company had borrowings of $251 million under the Credit Facility at November 30, 1997. Page 11 Part II. OTHER INFORMATION - ---------------------------- Items 1. through 3. - ---------------------------- Nothing to report. Item 4. Submission of Matters to a Vote of Security Holders Nothing to report. Item 5. - ---------------------------- Nothing to report. Item 6. Exhibits and Reports on Form 8-K - ------------------------------------------- (b) Reports of Form 8-K Page 12 On November 26, 1997 a Report of Form 8-K was filed, relating to the acquisition of the computer and test and measurement equipment rental business of GE Capital Technology Management Services, a division of GE Capital Services. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. ELECTRO RENT CORPORATION DATED: January 14, 1997 /s/ Craig R. Jones Craig R. Jones Vice President and Chief Financial Officer Page 13 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 MAY-31-1998 JUN-1-1997 NOV-30-1997 6-MOS 2,539 0 40,758 1,927 0 0 508,274 145,799 459,387 0 0 0 0 10,061 0 459,387 12,607 89,393 12,292 64,211 0 0 1,096 24,086 9,874 14,212 0 0 0 14,212 1.14 1.14
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