-----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, Kr3T6fMsVL4LHYBdEU/aKdWLA32h4Z0HiCrJA3OzS0mN2kfQiOWewk9XlLT1zzx5 szcKZixU6iOcsqSdaTm1ig== /in/edgar/work/20000828/0000950148-00-001908/0000950148-00-001908.txt : 20000922 0000950148-00-001908.hdr.sgml : 20000922 ACCESSION NUMBER: 0000950148-00-001908 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000531 FILED AS OF DATE: 20000828 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELECTRO RENT CORP CENTRAL INDEX KEY: 0000032166 STANDARD INDUSTRIAL CLASSIFICATION: [7359 ] IRS NUMBER: 952412961 STATE OF INCORPORATION: CA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-09061 FILM NUMBER: 711192 BUSINESS ADDRESS: STREET 1: 6060 SEPULVEDA BLVD CITY: VAN NUYS STATE: CA ZIP: 91411-2512 BUSINESS PHONE: 8187872100 MAIL ADDRESS: STREET 1: 6060 SEPULVEDA BLVD CITY: VAN NUYS STATE: CA ZIP: 91411 10-K 1 e10-k.txt FORM 10-K 1 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 May 31, 2000 Commission File No. 0-9061 ELECTRO RENT CORPORATION A California corporation I.R.S. Employer Identification No. 95-2412961 6060 Sepulveda Boulevard Van Nuys, California 91411-2512 (Address of principal executive offices) Registrant's telephone number, including area code: (818) 786-2525 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock without par value. 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 amendments to this Form 10-K. [ ]. The aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant as of August 14, 2000 was $240,141,711. Number of shares of Common Stock outstanding as of August 14, 2000: 24,341,611 shares. 2 ELECTRO RENT CORPORATION FORM 10-K ANNUAL REPORT DOCUMENTS INCORPORATED BY REFERENCE 1. Pages 1 and 13 to 27 of the Annual Report to Security Holders for the fiscal year ended May 31, 2000 (the "2000 Annual Report") are incorporated by reference in this Form 10-K Annual Report. 2. Proxy Statement for the Annual Meeting of Shareholders to be held on October 12, 2000 (the "2000 Proxy Statement"). CROSS REFERENCE SHEET Showing Location in 2000 Annual Report and 2000 Proxy Statement of Information Required by Items of Form 10-K
Caption and Reference Form 10-K Item in 2000 Annual Report ("AR") Number and Caption or 2000 Proxy Statement ("PS") ------------------ ------------------------------ PART II 5. Market for the Registrant's Common Equity and Related Shareholders Matters AR page 27 6. Selected Financial Data AR page 1 7. Management's Discussion and Analysis of Financial Condition and Results of Operations AR pages 13 to 15 7A. Quantitative and Qualitative Disclosure About Market Risk AR page 15 8. Financial Statements and Supplementary Data AR pages 16 to 26 PART III 10. Directors and Executive Officers of the Registrant PS pages 2 and 3 11. Executive Compensation PS pages 6 to 9 12. Security Ownership of Certain Beneficial Owners and Management PS pages 1 and 2 13. Certain Relationships and Related Transactions PS page 5
2 3 PART I THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WHICH REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. IN THIS REPORT, THE WORDS "ANTICIPATE," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE," AND OTHER SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED IN "BUSINESS" BELOW, IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND IN "QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK," THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED. Item 1. Business. Electro Rent Corporation (the "Company" or "Electro Rent") was incorporated in California in 1965. The Company became a publicly held corporation on March 31, 1980. The Company primarily engages in the rental, lease and sale of state-of-the-art electronic equipment. About 51% of the Company's equipment portfolio at acquisition cost is composed of general purpose test and measurement instruments purchased from leading manufacturers such as Agilent Technologies and Tektronix. The remainder comprises personal computers and workstations. Personal computer lines include those from Compaq, Dell, IBM, Apple, and Toshiba; while workstations are purchased primarily from Sun Microsystems and Hewlett Packard. A large part of its equipment portfolio is rented or leased to Fortune 500 companies in the aerospace, defense, electronics and telecommunications industries. Management believes that the Company's test and measurement equipment is primarily used in research and development activities and that a significant amount of this equipment is used in connection with government-generated projects. The Company also rents equipment to companies of various sizes representing a cross-section of American industry. No customer accounted for more than 10% of the Company's revenues for the fiscal year ended May 31, 2000. No significant portion of the Company's revenues are currently derived from direct United States Government contracts. An important aspect of the Company's equipment portfolio management is the resale of equipment from the portfolio, generally three to five years after purchase, which, on the average, have been at prices above book value. Such sales have historically provided a substantial portion of revenues and operating cash flow. The Company services its customers through a network of equipment, calibration and service centers in the United States and Canada 3 4 which are linked by an on-line computer system. These centers also function as depots for the sale of used equipment. Data Rentals/Sales, Inc., a California corporation, and Genstar Rental Electronics, Inc., a Delaware corporation, formerly wholly owned subsidiaries of the Company, have been merged into the Company and are operated as divisions of the Company. In April 1998 the Company sold its interest in its Japanese venture with Nas-Fritzke International Corp. Since it acquired the rental business of General Electric Technology Management Services in November 1997, Electro Rent has become one of the larger companies in the highly competitive electronic equipment rental and lease business. Independent industry publications have identified a number of major competitors, including Technology Rentals & Services, a division of CIT Group; Agilent Lease & Finance Division; Telogy; and Continental Resources. Since the larger of these firms are divisions of large corporations, these firms have access to greater financial and other resources than does the Company. Electro Rent's business is relatively non-seasonal except for the third quarter months of December, January and February, when rental activity declines because a number of customers close for extended Christmas-New Year vacation. In addition, the shortness of February results in a reduced level of rental billing. Electro Rent purchases the majority of its equipment from leading suppliers of electronic equipment. The research and development, manufacturing and marketing trends and activities of the Company's major suppliers tend to shape the nature of the rental and lease demand of the Company's customers and the availability of equipment. As a result, Electro Rent's business is significantly affected by the continued research and development, manufacturing and financial condition of its major suppliers, particularly Agilent Technologies. Electro Rent believes that its relationships with its major suppliers are good. Because of the volume of its purchases and its long-term purchase arrangements, the Company obtains favorable price discounts. At May 31, 2000, Electro Rent and its subsidiary employed approximately 654 individuals. None of the employees is a member of a labor union. Electro Rent considers its employee relations to be satisfactory and provides standard employee benefits and pays certain of the costs of employee education. 4 5 Item 2. Properties. Electro Rent's corporate headquarters and Los Angeles sales office are located at 6060 Sepulveda Boulevard, Van Nuys, California. The building contains approximately 84,500 square feet of office space. Approximately 24,800 square feet are currently being leased to others, all of which will be available for future needs of the Company. There is no additional space in the building available for leasing. Electro Rent owns a facility in Wood Dale, Illinois containing approximately 30,750 square feet. It currently is unoccupied and listed for sale. The Company's building at 15385 Oxnard Street, Van Nuys, California contains approximately 68,200 square feet, all of which is used by the Company. It houses the Company's California warehouse and laboratory operations. As of May 31, 2000 Electro Rent had both sales offices and equipment calibration and service centers in the metropolitan areas of Atlanta, Chicago and Los Angeles. Electro Rent also has sales offices in Atlanta, Boston, Cleveland, Chicago, Dallas, Denver, Detroit, Houston, Kansas City, Minneapolis, Montreal, New York/Newark, Philadelphia, Phoenix, Portland (OR), Rochester, San Diego, San Francisco, Seattle, Stamford, Toronto and Washington/Baltimore. Electro Rent's facilities aggregate approximately 554,000 square feet. Except for the corporate headquarters, the Chicago area facilities, and the Oxnard Street building, all of the facilities are rented pursuant to leases for up to five years for aggregate annual rentals of approximately $3,630,000 in fiscal 2000. No rented facility is considered essential to the Company. The Company considers its facilities to be in good condition, well maintained and adequate for its needs. Item 3. Legal Proceedings. The Company is engaged in an arbitration proceeding with General Electric Technology Management Services ("TMS") which involves a variety of claims arising out of the November 1997 purchase by the Company of certain assets and business of TMS. 5 6 Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of the security holders of the Company. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. The Company's common stock is listed by the National Association of Securities Dealers and is quoted on the NATIONAL MARKET SYSTEM OF NASDAQ. The symbol is ELRC. The quarterly market price ranges for the common stock for the two fiscal years ended May 31, 2000 as quoted on NASDAQ, shareholder information and dividend information are set forth on page 27 of the 2000 Annual Report and are incorporated herein by reference. None of the Company's preferred shares are issued and outstanding. Item 6. Selected Financial Data. The summary of the selected financial data referred to as Financial Highlights, appearing on page 1 of the 2000 Annual Report, is hereby incorporated by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Information appearing under the above caption on pages 13 to 15 of the 2000 Annual Report is hereby incorporated by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risks. The information appearing under the caption Quantitative and Qualitative Market Risk Disclosure on page 15 of the 2000 Annual Report is hereby incorporated by reference. Item 8. Financial Statements and Supplementary Data. The Company's consolidated financial statements together with the report thereon of Arthur Andersen LLP appearing on pages 16 to 26 of the 2000 Annual Report are hereby incorporated by reference. 6 7 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. Nothing to report. PART III Item 10. Directors and Executive Officers of the Registrant. Information appearing in the 2000 Proxy Statement under the captions Election of Directors (page 2), Executive Officers (page 3), Compliance With Section 16 of the Securities Exchange Act of 1934 (page 5), and Transactions With Management (page 5), is hereby incorporated by reference. Item 11. Executive Compensation. Information appearing in the 2000 Proxy Statement under the caption Executive Compensation (pages 6 to 9) is hereby incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information concerning the ownership of the Company's securities by the principal holders and by management is set forth in the 2000 Proxy Statement (pages 1 and 2), and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. Information appearing in the 2000 Proxy Statement under the caption Transactions With Management (page 5) is hereby incorporated by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) The following financial statements and financial statement schedule covered by the Report of Independent Public Accountants are filed as a part of this report and are included or incorporated herein by reference to the following page or pages of the 2000 Annual Report. 7 8
Page Number ----------- 2000 Annual Item Report Form 10-K ---- ----------- --------- Consolidated Balance Sheets at May 31, 2000 and 1999 17 Consolidated Statements of Income for each of the three years in the period ended May 31, 2000 16 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended May 31, 2000 18 Consolidated Statements of Cash Flows for each of the three years in the period ended May 31, 2000 19 Notes to Consolidated Financial Statements 20 to 26 Report of Independent Public Accountants 27 Schedule for each of the three years in the period ended May 31, 2000: II - Valuation and qualifying accounts 12 Consent and Report of Independent Public Accountants 14
All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of a schedule, or because the information required is included in the financial statements or related notes. (b) Reports on Form 8-K. During the last quarter of the period covered by this Annual Report, Form 10-K, the Registrant did not file and was not required to file any Current Reports on Form 8-K. (c) Exhibits listed by numbers corresponding to Exhibit Table of Item 601 of Regulation S-K. (3) Articles of Incorporation (Restated) and bylaws are incorporated by reference to Exhibits 1.2 and 6.1, respectively, of Registration Statement (Form S-14), File No. 2-63532. A copy of the Restated Articles of Incorporation and the Certificate of Amendment of 8 9 Restated Articles of Incorporation filed October 24, 1988 are incorporated by reference to Exhibit (3) to the Annual Report (Form 10-K) for the fiscal year ended May 31, 1989. A copy of the Certificate of Amendment of Restated Articles of Incorporation filed October 15, 1997 is filed as Exhibit (3) to the Annual Report (Form 10-K) for the fiscal year ended May 31, 1999. A copy of the amendment to the bylaws adopted October 6, 1994 is incorporated by reference to the Annual Report (Form 10-K) for the fiscal year ended May 31, 1995. A copy of the amendment to the bylaws adopted November 15, 1996 is incorporated by reference to Exhibit (3) of the Annual Report (Form 10-K) for the fiscal year ended May 31, 1997. (10)(A) The ELECTRO RENT CORPORATION EMPLOYEE STOCK OWNERSHIP AND SAVINGS PLAN, JUNE 1, 1985 RESTATEMENT, and the ELECTRO RENT CORPORATION EMPLOYEE STOCK OWNERSHIP AND SAVINGS PLAN TRUST AGREEMENT, are incorporated by reference to Exhibits 10(A)-(1) and 10(A)-(2) of the Registrant's Annual Report (Form 10-K) for the fiscal year ended May 31, 1985. A copy of AMENDMENT NO. ONE to the RESTATED ESOSP is incorporated by reference to Exhibit (10)(A) of Registrant's Annual Report (Form 10-K) for the fiscal year ended May 31, 1987. A copy of the ELECTRO RENT CORPORATION EMPLOYEE STOCK OWNERSHIP AND SAVINGS PLAN, RESTATED AS OF JUNE 1, 1989 is incorporated by reference to Exhibit (10)(A) of the Annual Report (Form 10-K) for the fiscal year ended May 31, 1989. Copies of the following documents amending and supplementing the ESOSP and ESOP as heretofore amended are incorporated by reference to Exhibit (10)(A)-(1) to (7) of the Annual Report (Form 10-K) for the fiscal year ended May 31, 1995: ADOPTION AGREEMENT FOR THE VANGUARD PROTOTYPE 401(k) SAVINGS PLAN dated August 1, 1994. ELECTRO RENT CORPORATION SAVINGS PLAN TRUST AGREEMENT dated September 1, 1994. ELECTRO RENT SAVINGS PLAN SUPPLEMENT TO THE VANGUARD PROTOTYPE 401(k) SAVINGS PLAN ADOPTION AGREEMENT dated September 24, 1994. SECOND AMENDMENT TO ELECTRO RENT CORPORATION EMPLOYEE STOCK OWNERSHIP & SAVINGS PLAN (RESTATED AS OF JUNE 1, 1989) dated as of June 1, 1991. THIRD AMENDMENT TO ELECTRO RENT CORPORATION EMPLOYEE STOCK OWNERSHIP AND SAVINGS PLAN (RESTATED AS OF JUNE 1, 1989) dated June 15, 1994. FOURTH AMENDMENT TO ELECTRO RENT CORPORATION SAVINGS PLAN (RESTATED AS OF JUNE 1, 1989) dated September 1, 1994. 9 10 ELECTRO RENT CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN TRUST AGREEMENT dated September 1, 1994. A copy of the GE Rentals Supplement to the Vanguard Prototype 401(k) Savings Plan Adoption Agreement adopted October 10, 1997 is incorporated by reference to Exhibit 10(A) of the Annual Report (Form 10-K) for the fiscal year ended May 31, 1998. (10)(C) A copy of the ELECTRO RENT CORPORATION SUPPLEMENTAL RETIREMENT PLAN is incorporated by reference to Exhibit (10)(C) of Registrant's Annual Report (Form 10-K) for the fiscal year ended May 31, 1987. (10)(D) The EXECUTIVE EMPLOYMENT AGREEMENT between the Company and Daniel Greenberg, Chairman of the Board of Directors and Chief Executive Officer, and between the Company and William Weitzman, President and Chief Operating Officer, each originally entered into December 15, 1986 and amended November 22, 1988 by AMENDMENT NO. ONE TO EXECUTIVE EMPLOYMENT AGREEMENT was each further amended and restated as of July 15, 1992. A copy of each EXECUTIVE EMPLOYMENT AGREEMENT (AMENDED AND RESTATED AS OF JULY 15, 1992) is incorporated by reference to Exhibits (10)(D)-(1) and (10)(D)-(2) of Registrant's Annual Report (Form 10-K) for the fiscal year ended May 31, 1993. (10)(E) A copy of the Electro Rent Corporation 1990 Stock Option Plan, the Electro Rent Corporation Stock Option Agreement (Incentive Stock Option) and the Electro Rent Corporation Stock Option Agreement (Nonstatutory Option) are incorporated by reference to Exhibits (10)(E)-(1), (10)(E)-(2) and (10)(E)-(3), respectively to the Annual Report (Form 10-K) for the fiscal year ended May 31, 1990. A copy of AMENDMENT NUMBER ONE TO ELECTRO RENT CORPORATION 1990 STOCK OPTION PLAN adopted October 3, 1991 is incorporated by reference to Exhibit (10)(E) of the Annual Report (Form 10-K) for the fiscal year ended May 31, 1992. A copy of AMENDMENT NUMBER TWO TO ELECTRO RENT CORPORATION 1990 STOCK OPTION PLAN adopted April 11, 1995 is incorporated by reference to Exhibit (10)(E) of the Annual Report (Form 10-K) for the fiscal year ended May 31, 1995. (10)(E) A copy of the Electro Rent Corporation 1996 Stock Option Plan, the Electro Rent Corporation Stock Option Agreement (Incentive Stock Options) and the Electro Rent Corporation Stock Option Agreement (Nonstatutory Stock Options) are incorporated by reference to Exhibits (10)(E)-(1), (2) and (3) respectively to the Annual Report (Form 10-K) for the fiscal year ended May 31, 1996. A copy of AMENDMENT NUMBER ONE TO ELECTRO RENT CORPORATION 1996 STOCK OPTION PLAN adopted November 1, 1996 is incorporated by reference to EXHIBIT (10)(E) of the Annual Report (Form 10-K) for the fiscal year ended May 31, 1998. 10 11 (10)(E) A copy of the Electro Rent Corporation 1996 Director Option Plan and the Electro Rent Corporation Stock Option Agreement for the 1996 Director Option Plan are incorporated by reference to Exhibits (10)(E)-(4) and (5) respectively to the Annual Report (Form 10-K) for the fiscal year ended May 31, 1996. (11) Statement re computation of per share earnings is incorporated by reference to the 2000 Annual Report, pages 16 and 23. (13) 2000 Annual Report. Only those portions of the 2000 Annual Report to security holders expressly incorporated hereby by reference are deemed "filed." (21) Subsidiaries of the Registrant. Genstar Rental Electronics, Inc., a Canadian corporation (formerly a subsidiary of Genstar Rental Electronics, Inc., a Delaware corporation). Electro Rent de Mexico S.A. de C.V., a Mexican corporation. Data Rentals/Sales, Inc., a California corporation, and Genstar Rental Electronics, Inc., a Delaware corporation, the Registrant's formerly wholly owned subsidiaries, have been merged into the Registrant, their parent, by statutory merger. Their functions are conducted by divisions of Electro Rent. (22) Pages 1 and 16 to 26 of the Annual Report to Security Holders for the fiscal year ended May 31, 2000 are appended hereto as Exhibit 22 hereof and are being electronically filed with this Form 10-K Annual Report. (d) Schedule of Financial Statements Required by Regulation S-X which is excluded from the 2000 Annual Report by Rule 14 a 3(b) (1): 11 12 ELECTRO RENT CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years Ended May 31, 2000, 1999 and 1998 (in thousands)
Balance at Additions Balance Beginning Charged to at End Description of Year Income Deductions* of Year ----------- --------- ---------- ---------- ------- Allowance for doubtful receivables 2000 $5,834 $1,610 $2,578 $4,866 1999 $4,715 $2,714 $1,595 $5,834 1998 $1,773 $3,158 $ 216 $4,715
*Represents accounts written off against the allowance, net of recoveries. 12 13 SIGNATURES Pursuant to the requirements of Sections 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. Electro Rent Corporation Dated: August 21, 2000. By /s/ Daniel Greenberg -------------------------------------- Daniel Greenberg, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date /s/ Daniel Greenberg Chairman of the Board August 21, 2000 - ------------------------- and Chief Executive Officer Daniel Greenberg /s/ William Weitzman President, Chief Operating August 21, 2000 - ------------------------- Officer and Director William Weitzman /s/ Craig R. Jones Chief Financial Officer August 21, 2000 - ------------------------- Craig R. Jones Director August 21, 2000 - ------------------------- Gerald D. Barrone Director August 21, 2000 - ------------------------- Nancy Y. Bekavac Director August 21, 2000 - ------------------------- Joseph J. Kearns /s/ S. Lee Kling Director August 21, 2000 - ------------------------- S. Lee Kling /s/ Michael R. Peevey Director August 21, 2000 - ------------------------- Michael R. Peevey /s/ Will Richeson, Jr. Director August 21, 2000 - ------------------------- Will Richeson, Jr.
13 14 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statement No. 3-37692. /s/ Arthur Andersen LLP Arthur Andersen LLP Los Angeles, California August 25, 2000 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Electro Rent Corporation: We have audited the accompanying consolidated balance sheets of Electro Rent Corporation (a California corporation) and subsidiaries as of May 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended May 31, 2000. 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 misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Electro Rent Corporation and subsidiaries as of May 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2000 in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Arthur Andersen LLP Los Angeles, California August 1, 2000 14 EX-13 2 ex13.txt EXHIBIT 13 1 1 EXHIBIT 13 FINANCIAL HIGHLIGHTS 2000
May 31, ------------------------------------------------------------------------ 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (in thousands, except per share information) REVENUES $241,793 $269,739 $255,505 $150,500 $141,137 Costs of revenues and depreciation 131,125 139,338 122,080 66,433 64,600 Selling, administrative and general expenses 65,104 77,612 69,099 42,439 37,792 Interest 5,465 11,999 9,506 829 2,230 -------- --------- --------- --------- --------- Income before income taxes 40,099 40,790 54,820 40,799 36,515 Income taxes 15,237 16,725 22,476 16,726 14,872 -------- -------- -------- -------- -------- NET INCOME $ 24,862 $ 24,065 $ 32,344 $ 24,073 $ 21,643 ======== ======== ======== ======== ======== EARNINGS PER SHARE: Basic $ 1.01 $ 0.98 $ 1.33 $ 1.01 $ 0.91 Diluted $ 1.00 $ 0.96 $ 1.29 $ 0.97 $ 0.88 SHARES USED IN PER SHARE CALCULATION: Basic 24,571 24,443 24,305 23,952 23,680 Diluted 24,972 25,004 25,141 24,868 24,708 TOTAL ASSETS $306,435 $368,708 $457,896 $188,213 $171,428 BANK BORROWINGS $ 21,800 $107,500 $226,900 $ 4,200 $ 16,800 SHAREHOLDERS' EQUITY $221,665 $196,174 $172,009 $139,220 $114,623 SHAREHOLDERS' EQUITY PER COMMON SHARE $ 9.00 $ 8.01 $ 7.04 $ 5.79 $ 4.81
2 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Company's business is capital intensive, with substantial capital expenditures required to maintain the equipment pool. Electro Rent's rental and lease equipment portfolio totaled $444 million, at acquisition cost, at May 31, 2000 decreasing $24 million from last year. During the three years ended May 31, 2000, the Company made payments for equipment purchases totaling $232 million, excluding the acquired TMS equipment of $193 million, resulting in a net increase in the equipment portfolio at acquisition cost of $178 million for the three-year period. The Company has three principal sources of liquidity: cash flows provided by operating activities, proceeds from the sale of equipment from its portfolio, and external funds, historically provided by bank borrowings. As the following table illustrates, cash flows from operating activities and proceeds from the sale of equipment have been more than sufficient to fund the Company's operations.
Three Years Ended ------------------ 1998 1999 2000 May 31, 2000 --------- --------- --------- ------------ (in thousands) Cash flows from operating activities(1) $ 67,902 $ 163,675 $ 127,771 $ 359,348 Proceeds from sale of equipment 32,262 31,134 37,016 100,412 Total cash flows available for equipment purchases 100,164 194,809 164,787 459,760 Payments for equipment purchases (76,927) (73,406) (81,802) (232,135) Net increase (decrease) in bank borrowings(2) 222,700 (119,400) (85,700) 17,600 Net increase (decrease) in equipment portfolio at acquisition cost 201,845 (50) (23,958) 177,837
(1) For the components of cash flows from operating activities, see the Consolidated Statements of Cash Flows. (2) Includes $240.8 million initial purchase price payment for TMS made on November 14, 1997. As indicated by the table, cash flows from operating activities and proceeds from sale of equipment provided 198% of the funds required for equipment purchased during the three-year period. Rental and lease revenues have been significantly supplemented as a source of cash flow by proceeds from the sale of equipment from Electro Rent's portfolio. Management believes that cash flows from operating activities, proceeds from the sale of equipment and its borrowing capacity (see Note 2 of Notes to Consolidated Financial Statements) will be sufficient to fund the Company's operations. Additionally, the Company believes that it currently has low leverage ratios for a firm in the rental and leasing business. The decrease in fiscal 2000 cash flows from operating activities relates primarily to lower depreciation and amortization which is associated with the reduced equipment portfolio. Changes in accounts payable, accounts receivable, and accrued expenses also contributed to this decrease. The market for test and measurement equipment appeared to strengthen during fiscal 2000, and as a result, expenditures for equipment increased. Bank borrowings are likely to be repaid in full during the first half of fiscal 2001, and cash is likely to accumulate thereafter. At May 31, 2000, the Company had $40.0 million of available borrowing capacity under its line of credit with a syndicate of 21 commercial banks, of which $18.2 million was unused. Inflation generally has favorably influenced the Company's results of operations by enhancing the sale prices of its used equipment. Lower inflation rates and newer, less expensive equipment with similar or better specifications could result, over a period of several years, in lower relative prices for used electronic equipment with a negative impact on margins and earnings. Prices of new and used electronic test equipment have not consistently followed the overall inflation rate. Prices of new and used personal computers and workstations have consistently declined for the past three years. Because management is unable to predict the advances in technology and the rate of inflation for the next several years, it is not possible to estimate the impact of these factors on the Company's earnings. 3 14 FISCAL 2000 COMPARED WITH FISCAL 1999 Total revenues for the year ended May 31, 2000 decreased 10% to $241.8 million from $269.7 million, reflecting the continued decline in the demand for personal computers, and the greater than expected contraction of the combined business after the acquisition of TMS in fiscal 1998. Rental and lease revenues decreased 15% to $199.0 million. However, sales of equipment and other revenues increased 19% to $42.8 million reflecting greater liquidation of equipment returning from leases. Depreciation of equipment as a percentage of rental and lease revenues increased from 45% in fiscal 1999 to 48% in fiscal 2000. This increase is primarily due to lower equipment utilization, caused by continued weakness in the personal computer business, and an acceleration of depreciation for personal computers implemented at the beginning of fiscal 1999. Costs of revenues other than depreciation primarily includes the cost of equipment sales, which decreased from 88% of equipment sales in fiscal 1999 to 82% of equipment sales in fiscal 2000. This decrease is primarily attributable to the sale of more fully depreciated personal computers in fiscal 2000. Selling, general and administrative expenses totaled $65.1 million or 27% of total revenues for fiscal 2000, as compared to $77.6 million or 29% of total revenues for fiscal 1999. The decrease in the expense ratio primarily reflects an employee reduction of approximately 8% resulting from a restructuring of the sales organization, and lower freight costs achieved through improved equipment management. As a result of the changes in revenues, operating costs and expenses discussed above, earnings before interest and income taxes were $45.6 million or 19% of total revenues for fiscal 2000 compared to $52.8 million or 20% of total revenues for fiscal 1999. Interest expense decreased to $5.5 million in fiscal 2000 from $12.0 million in fiscal 1999. The decrease results from further repayments of bank borrowings used to finance the TMS acquisition in November 1997. FISCAL 1999 COMPARED WITH FISCAL 1998 Total revenues for the year ended May 31, 1999 increased 6% to $269.7 million from $255.5 million, reflecting the full year inclusion of TMS which was acquired on November 14, 1997. Revenues were lower than expected due largely to attrition of TMS customers and a generally weak market following the acquisition of TMS, which continued through fiscal 1999. Rental and lease revenues increased 7% to $233.7 million and sales of equipment and other revenues decreased 3% to $36.0 million. Depreciation of equipment as a percentage of rental revenues increased from 39% in fiscal 1998 to 45% in fiscal 1999. This increase is primarily due to lower equipment utilization following the TMS acquisition, an acceleration of depreciation for personal computers implemented at the beginning of fiscal 1999, and an increased proportion of personal computer operating leases in the acquired TMS equipment pool which generally have lower rates than rentals. Costs of revenues other than depreciation primarily includes the cost of equipment sales, which increased from 77% of equipment sales in fiscal 1998 to 88% of equipment sales in fiscal 1999. This increase is primarily attributable to a weak market for both personal computers and test and measurement equipment and an increased proportion of personal computer sales, especially during the first half of fiscal 1999. Selling, general and administrative expenses totaled $77.6 million or 29% of total revenues for fiscal 1999, as compared to $69.1 million or 27% of total revenues for fiscal 1998. The increase in the expense ratio reflects significant quarter-to-quarter revenue declines experienced during the first three quarters of fiscal 1999. The Company responded to these revenue declines with cost reductions beginning in the second quarter, bringing the expense ratio down from 32% in the first quarter of fiscal 1999 to 27% in the fourth quarter of fiscal 1999. As a result of the changes in revenues, operating costs and expenses discussed above, earnings before interest and income taxes were $52.8 million or 20% of total revenues for fiscal 1999 compared to $64.3 million or 25% of total revenues for fiscal 1998. 4 15 Interest expense increased to $12.0 million in fiscal 1999 from $9.5 million in fiscal 1998. The increase is the result of the full year effect of additional bank borrowings used to finance the TMS acquisition in November 1997. YEAR 2000 Many computer programs and microprocessors were designed and developed without consideration of the impact of the transition to the year 2000. As a result, these programs and microprocessors may not be able to differentiate between the year "1900" and "2000"; the year 2000 may be recognized as the two-digit number "00". If not corrected, this could have caused difficulties in obtaining accurate system data and support. The Company has purchased numerous computer systems since its inception. The Company's owned software and hardware is substantially Year 2000 compliant. The costs associated with such compliance were not material to the Company's liquidity or results of operations. Further, the Company's critical third party software was generally Year 2000 compliant, with minor issues, and was capable of functioning after December 31, 1999. QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES The Company's primary market risk exposure is interest rate risk, primarily related to its borrowings under its unsecured revolving credit facility. However, a changing interest rate environment does not necessarily impact the Company's margins since the effects of higher or lower borrowing costs may be reflected in the rates on newly rented and leased assets. The Company attempts to reduce this risk by utilizing derivative financial instruments, namely interest rate caps and swaps, pursuant to Company policies. All derivative financial instruments are for purposes other than trading. The table below presents the principal (or notional) amounts and related weighted average interest rates of the Company's bank borrowings and derivative financial instruments by expected maturity dates. The table reflects expected maturities as of May 31, 2000 and does not reflect changes which could arise after that time. There are no expected maturities after May 31, 2001. The Company's ultimate realized gain or loss with respect to interest rate fluctuations will depend on exposures that arise during the respective period, the Company's hedging strategies at the time, and actual interest rates.
Year Ended May 31, 2001 Fair Value ------------ ---------- (in thousands, except percentages) Bank Borrowings Principal amount(a) $21,800 $21,800 Average interest rate(b) VR% Interest Rate SWAP Notional amount(c) $25,000 $ 149 Rate to be paid by the Company 5.939% Rate to be received by the Company 3-month LIBOR
(a) Bank borrowings consist of the Company's unsecured revolving line of credit (see Note 2 to Notes to Consolidated Financial Statements), which provided for total available credit of $40.0 million at May 31, 2000. Interest on the line of credit is payable in accordance with the applicable London Interbank Offering Rate (LIBOR) agreement or quarterly, and accrues, at the Company's option, either at the LIBOR plus margin (as defined) or the Base Rate (as defined). The weighted average interest rate for the Company's outstanding bank borrowings at May 31, 2000 was 7.0%. For the year ended May 31, 2000, 1999 and 1998, the weighted average interest rate on bank borrowings was 6.4%, 6.2% and 6.3%, respectively. (b) Variable Rate (VR) based on LIBOR plus margin or Base Rate as defined in the Credit Agreement. (c) In December 1997, the Company entered into one 3-year floating rate to fixed rate interest rate swap agreement in the notional amount of $25.0 million. The impact of this contract on interest expense for fiscal years 2000, 1999 and 1998 was immaterial. The Company is also subject to foreign currency rate risk relating to rentals and leases denominated in Canadian dollars. The Company has determined that hedging of these assets is not cost effective and instead attempts to minimize currency exposure risk through working capital management. The Company does not believe that any foreseeable change in currency rates would have a material effect on its financial position or results of operations. 5 16 CONSOLIDATED STATEMENTS OF INCOME
Year Ended May 31, -------------------------------------------- 2000 1999 1998 -------- -------- -------- (in thousands, except per share information) REVENUES: Rentals and leases $199,022 $233,682 $218,289 Sales of equipment and other revenues 42,771 36,057 37,216 -------- -------- -------- Total revenues 241,793 269,739 255,505 -------- -------- -------- COSTS AND EXPENSES: Depreciation of equipment 95,769 106,051 85,232 Costs of revenues other than depreciation 35,356 33,287 36,848 Selling, administrative and general expenses 65,104 77,612 69,099 Interest 5,465 11,999 9,506 -------- -------- -------- Total costs and expenses 201,694 228,949 200,685 -------- -------- -------- Income before income taxes 40,099 40,790 54,820 Income taxes 15,237 16,725 22,476 -------- -------- -------- Net income $ 24,862 $ 24,065 $ 32,344 ======== ======== ======== Earnings per share: Basic $ 1.01 $ 0.98 $ 1.33 Diluted $ 1.00 $ 0.96 $ 1.29 Shares used in per share calculation: Basic 24,571 24,443 24,305 Diluted 24,972 25,004 25,141
The accompanying notes are an integral part of these consolidated financial statements. 6 17 CONSOLIDATED BALANCE SHEETS
May 31, ------------------------ 2000 1999 -------- -------- (in thousands, except share information) ASSETS Cash $ 1,605 $ 4,039 Accounts receivable, net of allowance for doubtful accounts of $4,866 and $5,834 29,862 45,874 Rental and lease equipment, net of accumulated depreciation of $254,354 and $239,102 190,107 229,317 Other property, net of accumulated depreciation and amortization of $10,409 and $10,789 20,608 22,651 Goodwill, net of accumulated amortization of $9,717 and $7,967 59,719 61,469 Other 4,534 5,358 -------- -------- $306,435 $368,708 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Bank borrowings $ 21,800 $107,500 Accounts payable 22,635 21,555 Accrued expenses 24,921 26,725 Net deferred income tax liability 15,414 16,754 -------- -------- Total liabilities 84,770 172,534 -------- -------- Commitments and contingencies Shareholders' equity Preferred stock, $1 par - shares authorized 1,000,000; none issued -- -- Common stock, no par - shares authorized 40,000,000; issued and outstanding: 2000 - 24,634,585; 1999 - 24,475,749 11,139 10,510 Retained earnings 210,526 185,664 -------- -------- Total shareholders' equity 221,665 196,174 -------- -------- $306,435 $368,708 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 7 18 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three years ended May 31, 2000 ---------------------------------------- Common Stock ------------------------ Number Retained of Shares Amount Earnings --------- -------- -------- (in thousands) Balance, May 31, 1997 24,070 $ 9,965 $129,255 Exercise of stock options, net, including related tax effect 346 445 -- Net income for the year ended May 31, 1998 -- -- 32,344 ------- -------- -------- Balance, May 31, 1998 24,416 10,410 161,599 Exercise of stock options, net, including related tax effect 60 100 -- Net income for the year ended May 31, 1999 -- -- 24,065 ------- -------- -------- Balance, May 31, 1999 24,476 10,510 185,664 Exercise of stock options, net, including related tax effect 159 629 -- Net income for the year ended May 31, 2000 -- -- 24,862 ------- -------- -------- Balance, May 31, 2000 24,635 $ 11,139 $210,526 ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 8 19 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended May 31, --------------------------------------------- 2000 1999 1998 --------- --------- --------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 24,862 $ 24,065 $ 32,344 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 100,655 110,831 88,278 Provision for losses on accounts receivable 1,265 2,714 3,111 Gain on sale of equipment (6,767) (3,644) (7,503) Change in operating assets and liabilities: (Increase) decrease in accounts receivable 14,747 17,930 (47,744) Decrease in other assets 43 1,478 1,657 Increase (decrease) in accounts payable (3,890) 5,076 (9,141) Increase (decrease) in accrued expenses (1,804) 4,976 4,091 Increase (decrease) in net deferred income tax liability (1,340) 249 2,809 --------- --------- --------- Net cash provided by operating activities 127,771 163,675 67,902 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of equipment 37,016 31,134 32,262 Payments for acquisition of business -- -- (244,500) Payments for purchase of rental and lease equipment (81,802) (73,406) (76,927) Payments for purchase of other property (348) (345) (1,808) --------- --------- --------- Net cash used in investing activities (45,134) (42,617) (290,973) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in bank borrowings (85,700) (119,400) 222,700 Proceeds from issuance of common stock 629 100 445 --------- --------- --------- Net cash provided by (used in) financing activities (85,071) (119,300) 223,145 --------- --------- --------- Net increase (decrease) in cash (2,434) 1,758 74 Cash at beginning of year 4,039 2,281 2,207 --------- --------- --------- Cash at end of year $ 1,605 $ 4,039 $ 2,281 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 9 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business and Organization: Electro Rent Corporation primarily engages in the short-term rental and the lease of state-of-the-art electronic equipment. The Company maintains an equipment portfolio composed primarily of general purpose test and measurement instruments, personal computers and workstations purchased from leading manufacturers. Another aspect of the Company's business is the sale of equipment after its utilization for rental or lease. The Company's customers are primarily located in the United States and operate in various industry segments including aerospace and defense, telecommunications, consulting and computer technology. During fiscal 2000, 1999 and 1998 no customer accounted for more than 10% of total revenues. Basis of Presentation: The consolidated financial statements include Electro Rent Corporation and its wholly owned subsidiary. All intercompany balances and transactions have been eliminated. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition: Rental and lease revenue is billed and recognized on a monthly basis. Other revenue consists of billings to customers for equipment sales, delivery, or repairs, which is recognized in the period in which the respective equipment is shipped or the services are performed. Rental and Lease Equipment and Other Property: Assets are stated at cost. Upon retirement or disposal of assets, the cost and the related allowance for depreciation are eliminated from the accounts and any gain or loss is recognized. Depreciation of rental and lease equipment and other property is computed using the straight-line and sum-of-the-years'-digits methods over the estimated useful lives of the respective equipment. New rental and lease equipment is depreciated over three to seven years, and used equipment over two to six years, depending on the type of equipment. Normal maintenance and repairs are expensed as incurred. Capital Leases: The Company has certain customer leases providing bargain purchase options, which are accounted for as sales-type leases. At May 31, 2000 and 1999 investment in sales-type leases of $1,380,000 and $893,000 net of deferred interest of $82,000 and $65,000 is included in other assets. Interest income is recognized over the life of the lease using the effective interest method. Fair Value of Financial Instruments: The carrying amount of cash and accounts receivable approximates fair value due to the short maturity of these instruments. Bank borrowings bear interest at rates that approximate the current market interest rates for similar instruments and, accordingly, the carrying value approximates fair value. Impairment of Assets: The Company recognizes impairment losses on equipment held for rental and lease when the expected future cash flows are less than the asset's carrying value, in which case the asset is written down to its estimated recoverable value. The Company would recognize impairment losses on goodwill when expected future cash flows from the related operations are less than the carrying value. 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, performs credit evaluation procedures on each customer's individual transactions and requires security deposits or personal guarantees from its customers when significant credit risks are identified. Typically, most customers are large, established firms. Historically, the Company has not incurred significant credit related losses. An allowance for potential credit losses is maintained. 10 21 Derivative Financial Instruments: The Company uses derivative financial instruments as a means of managing interest-rate risk associated with current debt. The Company's interest rate protection agreements generally consist of interest rate swap agreements and interest rate cap agreements. These instruments are matched with variable rate debt, and payments thereon are recorded on a settlement basis as an adjustment to interest expense. Premiums paid to purchase interest rate cap agreements are amortized as an adjustment of interest expense over the life of the contract. Derivative financial instruments are not held for trading purposes. (See Note 2 to Notes to Consolidated Financial Statements). Net Income Per Common and Common Equivalent 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 the dilutive stock options computed using the treasury stock method. Cash Flow: Supplemental disclosures of cash paid during the year for:
2000 1999 1998 ------- ------- ------- (in thousands) Interest $ 4,545 $12,144 $ 7,644 Income taxes 17,030 10,409 21,887
Supplemental disclosure of non-cash investing and financing activities: The Company acquired equipment of $19,947,000, $14,977,000, and $19,231,000 at May 31, 2000, 1999 and 1998, respectively, which was paid for during the subsequent year. New Accounting Pronouncements: During 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and for Hedging Activities," which establishes new standards for reporting derivative and hedging information. The standard as amended in SFAS 137 is effective for periods beginning after June 15, 2000 and will be adopted by the Company in fiscal 2001. It is not expected that the adoption of this standard will have a significant impact on the consolidated financial statements. NOTE 2: BORROWINGS On November 14, 1997, in connection with the acquisition of the net tangible assets of GE Capital Technology Management Services, the Company obtained a $330,000,000 unsecured revolving line of credit with a syndicate of twenty-one banks which expires on November 14, 2000. The agreement called for mandatory reductions of the available line of credit of $10,000,000 on May 31, 1998, $10,000,000 on November 30, 1998 and $20,000,000 on May 31, 1999, and allows for voluntary reductions. At May 31, 2000, the line of credit had been reduced to $40,000,000. Interest under the line of credit is determined at the time of borrowing and, at the Company's option, can be based on a base rate, LIBOR or other variable rates. The line of credit requires the payment of a facility fee, and includes requirements regarding the level of the Company's tangible net worth, interest coverage ratios and leverage ratios. At May 31, 2000, $21,800,000 was outstanding under this line. The weighted average interest rate under this line was 7.0% at May 31, 2000. Weighted average borrowing for the year ended May 31, 2000 was $62,500,000 with an average interest rate of 6.4%. Derivative Positions -- The Company has entered into interest rate protection agreements. The Company's exposure under these agreements is limited to the impact of variable interest rate fluctuations and the periodic settlement of amounts due under these agreements if the other parties fail to perform. The Company does not anticipate nonperformance by the counterparties, which are major financial institutions. As of May 31, 2000 and 1999 the Company held one interest rate swap agreement with a notional amount of $25,000,000, interest rate of 5.939% and expiration date of December 2000. As of May 31, 1999, the Company held three interest rate cap agreements, each with a notional amount of $25,000,000, interest rate of 7% and expiration date of December 1999. 11 22 NOTE 3: INCOME TAXES The provision for income taxes consists of the following:
(in thousands) 2000 1999 1998 -------- -------- -------- Current Federal $ 14,505 $ 14,064 $ 16,789 State 2,072 2,412 2,878 Deferred Federal (1,172) 213 2,398 State (168) 36 411 -------- -------- -------- $ 15,237 $ 16,725 $ 22,476 ======== ======== ========
A reconciliation of the statutory federal income tax rate to the effective tax rate is as follows:
2000 1999 1998 ---- ---- ---- Statutory federal rate 35.0% 35.0% 35.0% State taxes, net of federal benefit 5.0 5.5 5.5 Other -- net (2.0) 0.5 0.5 ---- ---- ---- Effective tax rate 38.0% 41.0% 41.0% ==== ==== ====
The tax effects of temporary differences that give rise to significant portions of the net deferred tax liabilities at May 31, 2000 and 1999 are as follows:
(in thousands) 2000 1999 -------- -------- Deferred tax assets: Allowance for doubtful accounts $ 1,946 $ 2,392 Net operating loss carryforwards 877 1,019 Other 1,551 828 -------- -------- 4,374 4,239 -------- -------- Deferred tax liabilities: Accumulated depreciation and amortization (15,723) (16,210) Deferred revenue (2,153) (2,214) Other (1,912) (2,569) -------- -------- (19,788) (20,993) -------- -------- Net deferred tax liabilities $(15,414) $(16,754) ======== ========
Net operating loss carryforwards for federal income tax reporting purposes approximate $2,557,000 at May 31, 2000 and are available for use against taxable income through 2006. The utilization of operating loss carryforwards is limited to $355,000 per year for federal income tax reporting purposes. 12 23 NOTE 4: COMPUTATION OF EARNINGS PER SHARE Following is a reconciliation of the numerator and denominator used in the computation of basic and diluted EPS:
(in thousands, except per share data) 2000 1999 1998 ------- ------ ------ Denominator: Denominator for basic earnings per share -- weighted average common shares outstanding 24,571 24,443 24,305 Effect of dilutive securities -- options 401 561 836 ------- ------- -------- 24,972 25,004 25,141 ======= ======= ======= Net income $24,862 $24,065 $32,344 ======= ======= ======= Earnings per share: Basic $ 1.01 $ 0.98 $ 1.33 ======= ======= ======= Diluted $ 1.00 $ 0.96 $ 1.29 ======= ======= =======
Certain options to purchase the Company's common stock were not included in the computation of diluted earnings per share because to do so would have been antidilutive. The quantity of such options is 510,137, 429,267 and 1,068,188 at May 31, 2000, 1999, and 1998 respectively. NOTE 5: RENTALS UNDER NONCANCELLABLE OPERATING LEASES In addition to short-term rentals, equipment is leased to customers under various operating leases that expire over the next three years. These leases provide the lessee with the option of renewing the agreement for periods of up to twelve months or purchasing the equipment at fair market value at the end of the initial or renewal term. The Company's cost of equipment under operating leases at May 31, 2000, with remaining noncancellable lease terms of more than one year, is $26,577,000 before accumulated depreciation of $11,082,000 for a net book value of $15,495,000. A schedule of minimum future rentals to be received on noncancellable operating leases with remaining lease terms of more than one year as of May 31, 2000 is as follows:
(in thousands) 2001 $14,622 2002 8,014 2003 1,144 ------- $23,780 =======
13 24 NOTE 6: OTHER PROPERTY Other property, at cost, consists of the following:
(in thousands) 2000 1999 -------- --------- Land $ 6,985 $ 6,985 Buildings 13,525 13,667 Furniture and other equipment 7,821 9,770 Leasehold improvements 2,686 3,018 -------- -------- 31,017 33,440 Less -- accumulated depreciation and amortization (10,409) (10,789) -------- -------- $ 20,608 $ 22,651 ======== ========
NOTE 7: ACQUISITIONS 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. The initial purchase price based on TMS' estimated net tangible assets at November 14, 1997, was $240.8 million, payable in cash. The purchase price is subject to adjustment as a result of the Company's objections to the audited statement of net tangible assets and other claims currently in arbitration. 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 initial purchase price has been allocated to assets and liabilities based on their fair value as of the date of acquisition. Final allocation of the purchase price will be determined when the actual purchase price is settled by arbitration. Based on the allocation of initial purchase price over the net assets acquired, goodwill of approximately $59,628,000 was recorded. Such goodwill is being amortized on a straight-line basis over 40 years. NOTE 8: COMMITMENTS AND CONTINGENCIES The Company leases certain facilities under various operating leases. Most of the lease agreements provide the Company with the option of renewing its lease at the end of the initial lease term, at the fair rental value, for periods of up to five years. In most cases, management expects that in the normal course of business facility leases will be renewed or replaced by other leases. Minimum payments under these leases, exclusive of property taxes and insurance, are as follows:
(in thousands) 2001 $2,253 2002 1,971 2003 1,109 2004 568 2005 168 ------ $6,069 ======
Rent expense was $3,630,000, $3,997,000, and $2,405,000 in 2000, 1999, and 1998, respectively. The Company from time to time is involved in various disputes. Any amounts received by the Company are recorded as income when received. It is management's opinion that none of the open matters at May 31, 2000 will have a material adverse effect on the Company's financial position. 14 25 NOTE 9: STOCK OPTION PLANS The Company has stock Option Plans (the "Plans") which authorize the Board of Directors to grant options for 2,117,500 shares of the Company's common stock, of which 173,805 were available for future grants at May 31, 2000. The Plans provide for both incentive stock options, which may be granted only to employees, and nonstatutory stock options, which may be granted to directors and consultants who are not employees. Pursuant to the Plans, options have been granted to directors, officers and key employees at prices not less than 100% of the fair market value at the date of grant. Options are exercisable at various dates over a ten-year period from the date of grant or a five-year period in the case of an employee who is also a 10 percent stockholder. The Plans provide for a variety of vesting dates with the majority of the options vesting at a rate of 25 percent per year over a period of four years from the date of grant. All outstanding options expire at dates ranging from June 2001 to November 2008. The following table summarizes certain information relative to options for common stock after adjustment for stock splits.
2000 1999 1998 -------------------------- ------------------------- ------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------- --------- --------- -------- --------- --------- Options outstanding, beginning of year 1,305,771 $ 8.54 1,369,880 $ 8.32 1,299,974 $ 4.37 Granted 9,618 12.94 33,767 13.23 454,578 14.91 Exercised (167,664) 2.92 (65,500) 2.70 (384,672) 2.76 Forfeited (46,878) 14.47 (32,376) 16.14 -- -- --------- ------ --------- ------ --------- ------ Options outstanding, end of year 1,100,847 $ 9.19 1,305,771 $ 8.54 1,369,880 $ 8.32 ========= ====== ========= ====== ========= ====== Options exercisable at end of year 866,597 $ 7.83 869,924 $ 5.99 756,438 $ 3.98 Weighted-average fair value of options granted during year $ 6.44 $ 7.62 $ 7.62
The following summarizes information regarding stock options outstanding at May 31, 2000:
Options Outstanding Options Exercisable --------------------------------------- ------------------------- Weighted Average Weighted Weighted Remaining Average Average Number Contractual Exercise Number Exercise Range of Exercise Prices Outstanding Life Price Exercisable Price ----------- ----------- --------- ----------- --------- $ 2.64 - $ 3.42 398,460 2.0 $ 3.04 398,460 $ 3.04 $ 4.36 - $12.94 302,120 5.5 9.74 264,870 9.51 $13.87 - $24.11 400,267 6.3 14.88 203,267 15.03 --------- --- ------ ------- ------ 1,100,847 4.5 $ 9.19 866,597 $ 7.83 ========= === ====== ======= ======
Pro Forma Information: The Company applies the intrinsic-value-based method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for employee stock options. Accordingly, compensation expense is recognized only when options are granted with a discounted exercise price. Any such compensation expense is recognized ratably over the associated service period, which is generally the option vesting term. Pro forma net earnings and earnings per share information, as required by Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," has been determined as if the Company had accounted for employee stock options under SFAS 123's fair value method. The fair value of these options was estimated at grant date using a Black-Scholes option pricing model with the following weighted-average assumptions for fiscal 2000, 1999, and 1998, respectively: risk-free interest rates of 5.8, 4.9, and 5.9 percent; dividend yield of 0 percent; expected option life of 5.0, 7.6, and 6.6 years; and volatility of 47.8, 47.1, and 41.4 percent. 15 26 For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the 4-year average vesting period of the options. The Company's pro forma net earnings for 2000, 1999 and 1998 were $23,994,000, $23,045,000 and $31,583,000, and pro forma net earnings per share were $.97, $.93 and $1.26, respectively. These pro forma amounts include amortized fair values attributable to options granted after May 31, 1996 only, and therefore are not representative of future pro forma amounts. NOTE 10: SAVINGS PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN The Company maintains a Savings Plan (401(k)) and a frozen Employee Stock Ownership Plan (ESOP). Employees become eligible to participate in the 401(k) after one year of employment. The Company has the option to match contributions of participants at a rate management determines each year. For participants with three or more years of service, the Company also may elect to make additional discretionary matching contributions in excess of the rate elected for participants with less than three years of service. The Board of Directors determines the amount to be contributed annually to the 401(k) in cash, provided that such contributions shall not exceed the amount deductible for federal income tax purposes. Cash contributions to the 401(k) of $756,000, $899,000, and $713,000 were made for 2000, 1999, and 1998, respectively. NOTE 11: QUARTERLY INFORMATION (UNAUDITED) Quarterly information is as follows:
Earnings per share Total Income Net ------------------- (in thousands, except per share information) Revenues Before Taxes Income Basic Diluted -------- ------------ -------- ------- -------- Fiscal Year 2000 First Quarter $ 62,753 $ 10,425 $ 6,464 $0.26 $0.26 Second Quarter 61,465 9,846 6,105 0.25 0.24 Third Quarter 59,089 8,692 5,389 0.22 0.22 Fourth Quarter 58,486 11,136 6,904 0.28 0.28 -------- -------- -------- ----- ----- $241,793 $ 40,099 $ 24,862 $1.01 $1.00 ======== ======== ======== ===== ===== Fiscal Year 1999 First Quarter $ 72,601 $ 6,358 $ 3,751 $0.15 $0.15 Second Quarter 68,993 11,109 6,555 0.27 0.26 Third Quarter 64,812 11,561 6,821 0.28 0.27 Fourth Quarter 63,333 11,762 6,938 0.28 0.28 -------- -------- -------- ----- ----- $269,739 $ 40,790 $ 24,065 $0.98 $0.96 ======== ======== ======== ===== =====
16 27 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Electro Rent Corporation: We have audited the accompanying consolidated balance sheets of Electro Rent Corporation (a California corporation) and subsidiaries as of May 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended May 31, 2000. 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 misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Electro Rent Corporation and subsidiaries as of May 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2000 in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP - ------------------------- Arthur Andersen LLP Los Angeles, California August 1, 2000 CAPITAL STOCK, SHAREHOLDERS AND CASH DIVIDEND INFORMATION The common stock of the Company is quoted on NASDAQ under the symbol ELRC. There were approximately 503 shareholders of record at August 4, 2000. The following table sets forth, for the period shown the high and low closing sale prices in the NASDAQ National Market System as reported by NASDAQ.
Fiscal Year 2000 Fiscal Year 1999 ------------------------- -------------------------- High Low High Low -------- --------- --------- ------- First Quarter $13 $10-3/4 $24-3/4 $12-3/4 Second Quarter 13 10-1/2 14-3/4 9-3/4 Third Quarter 12 10-11/16 16-1/8 9-1/2 Fourth Quarter 12-3/8 9-7/8 13-15/16 9-1/4
EX-27 3 ex27.txt FINANCIAL DATA SCHEDULE
5 1,000 12-MOS MAY-31-2000 JUN-01-1999 MAY-31-2000 1,605 0 34,728 4,866 0 0 475,478 264,763 306,435 0 0 0 0 11,139 0 306,435 42,771 241,793 35,356 196,229 0 0 5,465 40,099 15,237 24,862 0 0 0 24,862 1.01 1.00
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