-----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, CNu/f/kujrHrjnfLDJWbjYkRu5b9CMSE1RFEKG6SeqK+/vpV+87NEdt1B5aOQ4s9 4aKVVFI8woTs2nQCiWBuAA== 0000891618-99-002874.txt : 19990628 0000891618-99-002874.hdr.sgml : 19990628 ACCESSION NUMBER: 0000891618-99-002874 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990625 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCGRATH RENTCORP CENTRAL INDEX KEY: 0000752714 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 942579843 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-13292 FILM NUMBER: 99652412 BUSINESS ADDRESS: STREET 1: 5700 LAS POSITAS RD CITY: LIVERMORE STATE: CA ZIP: 94550 BUSINESS PHONE: 5102762626 MAIL ADDRESS: STREET 1: 5700 LAS POSITAS RD STREET 2: 5700 LAS POSITAS RD CITY: LIVERMORE STATE: CA ZIP: 94550 10-K405/A 1 FORM 10-K405/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION JUNE 25, 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 - -------------------------------------------------------------------------------- FORM 10-K/A - -------------------------------------------------------------------------------- AMENDMENT NO. 1 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 0-13292 - -------------------------------------------------------------------------------- MCGRATH RENTCORP (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 94-2579843 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 5700 LAS POSITAS ROAD, LIVERMORE, CA 94550 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER: (925) 606-9200
- -------------------------------------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: TITLE OF CLASS COMMON STOCK - -------------------------------------------------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of voting stock, held by nonaffiliates of the registrant: $177,777,794 as of March 18, 1999. At March 18, 1999, 13,576,448 shares of Registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE McGrath RentCorp's definitive Proxy Statement with respect to its Annual Shareholders' Meeting to be held June 3, 1999, which will be filed with the Securities and Exchange commission within 120 days after the end of its fiscal year, is incorporated by reference into Part III, Items 10, 11, 12 and 13. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 The following items appearing in the Annual Report on Form 10-K for McGrath RentCorp (the Company), as originally filed March 31, 1999, are hereby amended. ITEM 6. SELECTED FINANCIAL DATA. The following item amends the original filing as to the Selected Financial Data Table by deleting Cash Flow from Operating Activities and Cash Flow Per Common Share for Basic and Diluted. The following table summarizes the Company's selected financial data for the five years ended December 31, 1998 and should be read in conjunction with the more detailed Consolidated Financial Statements and related notes reported in Item 8. SELECTED CONSOLIDATED FINANCIAL DATA - --------------------------------------------------------------------------------
(dollar and share amounts in thousands, YEAR ENDED DECEMBER 31, ---------------------------------------------------- except per share data) 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Operations Data Revenues Rental $ 71,967 $ 61,688 $ 48,986 $ 46,063 $ 46,149 Rental Related Services 11,528 10,278 8,718 7,795 8,158 -------- -------- -------- -------- -------- Rental Operations 83,495 71,966 57,704 53,858 54,307 Sales 51,044 62,021 30,175 15,839 12,700 Other 889 989 1,126 1,576 1,288 -------- -------- -------- -------- -------- Total Revenues 135,428 134,976 89,005 71,273 68,295 -------- -------- -------- -------- -------- Costs and Expenses Direct Costs of Rental Operations Depreciation 16,862 14,358 12,456 11,539 11,018 Rental Related Services 6,531 6,287 5,515 5,024 5,707 Other 13,390 10,375 8,703 7,370 7,544 -------- -------- -------- -------- -------- Total Direct Costs of Rental Operations 36,783 31,020 26,674 23,933 24,269 Cost of Sales 35,189 42,550 20,532 10,735 8,634 -------- -------- -------- -------- -------- Total Costs 71,972 73,570 47,206 34,668 32,903 -------- -------- -------- -------- -------- Gross Margin 63,456 61,406 41,799 36,605 35,392 Selling and Administrative 16,220 15,957 13,147 10,459 10,747 -------- -------- -------- -------- -------- Income from Operations 47,236 45,449 28,652 26,146 24,645 Interest 6,326 4,070 2,887 2,831 2,166 -------- -------- -------- -------- -------- Income before Provision for Income Taxes 40,910 41,379 25,765 23,315 22,479 Provision for Income Taxes 16,010 16,323 9,885 9,375 9,475 -------- -------- -------- -------- -------- Income before Minority Interest 24,900 25,056 15,880 13,940 13,004 Minority Interest in Income of Subsidiary 1,005 1,011 358 97 -- -------- -------- -------- -------- -------- Net Income $ 23,895 $ 24,045 $ 15,522 $ 13,843 $ 13,004 -------- -------- -------- -------- -------- Net Income Per Common Share: Basic $ 1.69 $ 1.60 $ 1.03 $ 0.87 $ 0.79 Diluted $ 1.67 $ 1.58 $ 1.01 $ 0.86 $ 0.77 Shares Used in Per Share Calculation: Basic 14,163 14,982 15,102 15,949 16,559 Diluted 14,349 15,181 15,306 16,168 16,831 Cash Dividends Declared Per Common Share(1) $ 0.40 $ 0.32 $ 0.28 $ 0.24 $ 0.22 - ----------------------------------------------------------------------------------------------
(1) Dividends for 1994 includes $0.055 per share declared in January 1995. 1 3 SELECTED CONSOLIDATED FINANCIAL DATA (continued) - --------------------------------------------------------------------------------
(dollar and share amounts in thousands, YEAR ENDED DECEMBER 31, ---------------------------------------------------- except per share data) 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Balance Sheet Data (at period end) Rental Equipment, net $200,028 $174,086 $137,292 $127,608 $127,244 Total Assets $278,676 $252,392 $200,035 $175,130 $169,923 Notes Payable $ 97,000 $ 82,000 $ 53,850 $ 37,080 $ 35,950 Shareholders' Equity $105,394 $ 98,646 $ 88,808 $ 85,893 $ 83,839 Shares Outstanding 13,970 14,522 14,820 15,540 16,137 Book Value Per Share $ 7.54 $ 6.79 $ 5.99 $ 5.53 $ 5.14 Debt (Notes Payable) to Equity 0.92 0.83 0.61 0.43 0.43 Return on Average Equity 24.0% 24.5% 18.0% 16.4% 16.1% - ----------------------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following item amends the original filing as to the Consolidated Statements of Cash Flows by reclassifying the Proceeds from Sale of Rental Equipment from Cash Flows from Operating Activities to Cash Flow from Investing Activities and changing the respective subtotals.
INDEX PAGE ----- ---- Report of Independent Public Accountants 3 Consolidated Financial Statements Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 4 Consolidated Balance Sheets as of December 31, 1998, 1997 and 1996 5 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 7 Notes to Consolidated Financial Statements 8
2 4 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - -------------------------------------------------------------------------------- To the Shareholders and Board of Directors of McGrath RentCorp: We have audited the accompanying consolidated balance sheets of McGrath RentCorp (a California corporation) and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of McGrath RentCorp as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. San Francisco, California ARTHUR ANDERSEN LLP February 17, 1999 3 5 MCGRATH RENTCORP CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 - --------------------------------------------------------------------------------------------- REVENUES Rental $ 71,967 $ 61,688 $48,986 Rental Related Services 11,528 10,278 8,718 -------- -------- ------- Rental Operations 83,495 71,966 57,704 Sales 51,044 62,021 30,175 Other 889 989 1,126 -------- -------- ------- Total Revenues 135,428 134,976 89,005 -------- -------- ------- COSTS AND EXPENSES Direct Costs of Rental Operations Depreciation 16,862 14,358 12,456 Rental Related Services 6,531 6,287 5,515 Other 13,390 10,375 8,703 -------- -------- ------- Total Direct Costs of Rental Operations 36,783 31,020 26,674 Cost of Sales 35,189 42,550 20,532 -------- -------- ------- Total Costs 71,972 73,570 47,206 -------- -------- ------- Gross Margin 63,456 61,406 41,799 Selling and Administrative 16,220 15,957 13,147 -------- -------- ------- Income from Operations 47,236 45,449 28,652 Interest 6,326 4,070 2,887 -------- -------- ------- Income before Provision for Income Taxes 40,910 41,379 25,765 Provision for Income Taxes 16,010 16,323 9,885 -------- -------- ------- Income before Minority Interest 24,900 25,056 15,880 Minority Interest in Income of Subsidiary 1,005 1,011 358 -------- -------- ------- Net Income $ 23,895 $ 24,045 $15,522 ======== ======== ======= Earnings Per Share: Basic $ 1.69 $ 1.60 $ 1.03 -------- -------- ------- Diluted $ 1.67 $ 1.58 $ 1.01 -------- -------- ------- Shares Used in Per Share Calculation: Basic 14,163 14,982 15,102 Diluted 14,349 15,181 15,306 - ---------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 4 6 MCGRATH RENTCORP CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------- DECEMBER 31, -------------------- (IN THOUSANDS) 1998 1997 - ---------------------------------------------------------------------------------- ASSETS Cash $ 857 $ 538 Accounts Receivable, less allowance for doubtful accounts of $650 in 1998 and 1997 21,811 21,794 Rental Equipment, at cost: Relocatable Modular Offices 216,414 196,133 Electronic Test Instruments 66,573 50,351 -------- -------- 282,987 246,484 Less Accumulated Depreciation (82,959) (72,398) -------- -------- Rental Equipment, net 200,028 174,086 -------- -------- Land, at cost 18,953 20,496 Buildings, Land Improvements, Equipment and Furniture, at cost, less accumulated depreciation of $3,858 in 1998 and $3,177 in 1997 31,460 28,922 Prepaid Expenses and Other Assets 5,567 6,556 -------- -------- Total Assets $278,676 $252,392 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Notes Payable $ 97,000 $ 82,000 Accounts Payable and Accrued Liabilities 22,964 27,046 Deferred Income 5,574 6,929 Minority Interest in Subsidiary 2,584 1,523 Deferred Income Taxes 45,160 36,248 -------- -------- Total Liabilities 173,282 153,746 -------- -------- Shareholders' Equity: Common Stock, no par value -- Authorized -- 40,000 shares Outstanding -- 13,970 shares in 1998 and 14,522 shares in 1997 8,138 7,757 Retained Earnings 97,256 90,889 -------- -------- Total Shareholders' Equity 105,394 98,646 -------- -------- Total Liabilities and Shareholders' Equity $278,676 $252,392 ======== ======== - ----------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 5 7 MCGRATH RENTCORP CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------- COMMON STOCK TOTAL ---------------------- RETAINED SHAREHOLDERS' (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SHARES AMOUNT EARNINGS EQUITY - ----------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995> 15,540 $8,913 $76,980 $ 85,893 Net Income -- -- 15,522 15,522 Repurchase of Common Stock (841) (2,111) (6,668) (8,779) Common Stock Issued or Reserved Under Long-Term Stock Bonus Plan 21 198 -- 198 Repurchase of Common Stock in Connection with the Exercise of Stock Options (28) (298) -- (298) Exercise of Stock Options 128 459 -- 459 Dividends Declared of $0.28 Per Share -- -- (4,187) (4,187) - ----------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 14,820 7,161 81,647 88,808 Net Income -- -- 24,045 24,045 Repurchase of Common Stock (502) (507) (10,038) (10,545) Common Stock Issued or Reserved Under Long-Term Stock Bonus Plan 28 497 -- 497 Exercise of Stock Options 176 606 -- 606 Dividends Declared of $0.32 Per Share -- -- (4,765) (4,765) - ----------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 14,522 7,757 90,889 98,646 Net Income -- -- 23,895 23,895 Repurchase of Common Stock (620) (340) (11,907) (12,247) Common Stock Issued or Reserved Under Long-Term Stock Bonus Plan 37 485 -- 485 Exercise of Stock Options 31 236 -- 236 Dividends Declared of $0.40 Per Share -- -- (5,621) (5,621) - ----------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 13,970 $8,138 $97,256 $105,394 - -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 6 8 MCGRATH RENTCORP CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------- (IN THOUSANDS) 1998 1997 1996 - --------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Income $ 23,895 $ 24,045 $ 15,522 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 18,794 15,771 13,483 Gain on Sale of Rental Equipment (5,404) (6,622) (4,816) Change In: Accounts Receivable (17) (1,874) (6,719) Prepaid Expenses and Other Assets 991 (4,161) (499) Accounts Payable and Accrued Liabilities (3,850) 13,166 3,477 Deferred Income (1,354) 1,702 (740) Deferred Income Taxes 8,912 (622) 2,381 -------- -------- -------- Net Cash Provided by Operating Activities 41,967 41,405 22,089 -------- -------- -------- Cash Flow from Investing Activities: Purchase of Rental Equipment (51,159) (62,277) (29,925) Purchase of Land, Buildings, Land Improvements, Equipment and Furniture (4,041) (10,594) (8,366) Proceeds from Sale of Land, Buildings and Land Improvements 2,190 -- -- Proceeds from Sale of Rental Equipment 13,759 17,748 12,599 -------- -------- -------- Net Cash Used in Investing Activities (39,251) (55,123) (25,692) -------- -------- -------- Cash Flow from Financing Activities: Net Borrowings under Bank Lines of Credit (25,000) 28,150 16,770 Borrowings under Private Placement 40,000 -- -- Net Proceeds from the Exercise of Stock Options 236 606 161 Repurchase of Common Stock (12,247) (10,545) (8,779) Payment of Dividends (5,386) (4,641) (4,084) -------- -------- -------- Net Cash Provided by (Used in) Financing Activities (2,397) 13,570 4,068 -------- -------- -------- Net Increase (Decrease) in Cash 319 (148) 465 Cash Balance, Beginning of Period 538 686 221 -------- -------- -------- Cash Balance, End of Period $ 857 $ 538 $ 686 ======== ======== ======== Interest Paid During the Period $ 5,407 $ 4,010 $ 2,833 ======== ======== ======== Income Taxes Paid During the Period $ 7,098 $ 16,945 $ 7,540 ======== ======== ======== Dividends Declared but not yet Paid $ 1,397 $ 1,162 $ 1,038 ======== ======== ======== - ---------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 7 9 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION AND BUSINESS McGrath RentCorp is a California corporation organized in 1979. McGrath RentCorp and its majority owned subsidiary, Enviroplex, Inc. ("Enviroplex"), collectively referred to herein as the "Company", manufactures, rents and sells relocatable modular offices and rents and sells electronic test and measurement instruments with related accessories primarily in California and Texas. The Company's corporate offices are located in Livermore, California. In addition to the corporate offices, both modular and electronics operations are conducted from this facility. Under the trade name "Mobile Modular Management Corporation", the Company rents and sells modular equipment and related accessories from two branch offices located in California and one located in Texas. The Company purchases the modulars from various manufacturers who build them to the Company's design specifications. Although Mobile Modular Management Corporation's primary emphasis is on rentals, sales of modulars occur routinely and can fluctuate quarter to quarter and from year to year depending on customer demands and requirements. Under the trade name "McGrath-RenTelco", the Company conducts electronics operations from Livermore, California and Richardson, Texas. Engineers, scientists and technicians use these instruments in evaluating the performance of their own electrical and electronic equipment, developing products, controlling manufacturing processes and in field service applications. These instruments are rented primarily to electronics, communications, network systems, industrial, research and aerospace companies. The majority of McGrath-RenTelco's rental inventory consists of instruments manufactured by Hewlett-Packard and Tektronix. McGrath RentCorp owns 73.2% of Enviroplex, a California corporation organized in 1991. Enviroplex manufactures portable classrooms built to the requirements of the California Division of the State Architect ("DSA") and sells directly to school districts. Enviroplex conducts its sales and manufacturing operations from one facility located in Stockton, California. The rental and sale of modulars to public school districts for use as portable classrooms, restroom buildings and administrative offices for kindergarten through grade twelve (K-12) are a significant portion of the Company's revenues. School business comprised approximately 45%, 52% and 37% of the Company's consolidated rental and sales revenues for 1998, 1997 and 1996, respectively. The increase in the Company's sales revenues in 1997 was attributed to the Class Size Reduction Program implemented by the state of California in 1996. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of McGrath RentCorp and Enviroplex. All significant intercompany accounts and transactions are eliminated. REVENUES Rental revenue is recognized under the "operating method" of accounting for the majority of leases. Rental billings for more than one month are recorded as deferred income and recognized as rental revenue when earned. Rental related services revenue is primarily associated with relocatable modular office leases and consists of billings to customers for delivery, installation, modifications, skirting, additional site related work, and return delivery and dismantle. Revenue related to these services is recognized in the period the services are performed and accepted. Sales revenue is recognized upon delivery of the equipment to the customer. Certain leases meeting the requirements of Statement of Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases", are accounted for as sales type leases. For these leases, sales revenue and the related accounts receivable are recognized upon execution of the leases and unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease investment (see Note 4). 8 10 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DEPRECIATION AND MAINTENANCE Rental equipment, buildings, land improvements, equipment and furniture are depreciated on a straight-line basis for financial reporting purposes and on an accelerated basis for income tax purposes. The costs of major refurbishment of relocatable modular offices are capitalized to the extent the refurbishment significantly improves the quality and adds value or life to the equipment. Land improvements consist of development costs incurred to build storage and maintenance facilities at each of the relocatable modular branch offices. The following estimated useful lives and residual values are used for financial reporting purposes: RENTAL EQUIPMENT: Relocatable modular offices 7 to 18 years, 0% to 18% residual value Electronic test instruments 5 to 8 years, no residual value Buildings, land improvements, equipment and furniture 5 to 50 years, no residual value
Maintenance and repairs are expensed as incurred. OTHER DIRECT COSTS OF RENTAL OPERATION Other direct costs of rental operations primarily relate to costs associated with relocatable modular offices and include equipment supplies and repairs, direct labor, amortization of lease costs included in the rental rate, property and liability insurance, property taxes, and business and license fees. WARRANTY SERVICE COSTS Sales of new relocatable modular offices, electronic test equipment and related accessories not manufactured by the Company are typically covered by warranties provided by the manufacturer of the products sold. The Company provides limited 90-day warranties for certain sales of used rental equipment and a one-year warranty on equipment manufactured by Enviroplex. Although the Company's policy is to provide reserves for warranties when required for specific circumstances, the Company has not found it necessary to establish such reserves to date. INCOME TAXES Provision has been made for deferred income taxes based upon the amount of taxes payable in future years, after considering changes in tax rates and other statutory provisions that will be in effect in those years (see Note 6). FAIR VALUE OF FINANCIAL INSTRUMENTS The Company believes that the carrying amounts of its financial instruments (cash and notes payable) approximate fair value. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions in determining reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during each period presented. Actual results could differ from those estimates. EARNINGS PER SHARE Basic earnings per share ("EPS") is computed as net income divided by the weighted average number of shares of common stock outstanding for the reported period, excluding the dilutive effects of stock options and other potentially dilutive securities. Diluted EPS is computed as net income divided by the weighted average number of shares outstanding of common stock and common stock equivalents for the reported period. Common stock equivalents result from dilutive stock options computed using the treasury stock method with 9 11 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the average share price for the reported period. The weighted average number of options outstanding at December 31, 1998, 1997 and 1996 were 186,624, 199,215 and 203,414, respectively. NOTE 3. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of trade accounts receivable. The Company sells primarily on 30-day terms, individually performs credit evaluation procedures on its customers on each transaction and will require security deposits or personal guarantees from its customers when a significant credit risk is identified. Historically, the Company has not incurred significant credit related losses, however, an allowance for potential credit losses is maintained. Typically, most customers are established companies or are publicly funded entities located in California or Texas. Although no one customer accounts for more than 10% of the Company's consolidated revenues, credit risk exists in trade accounts receivable primarily due to the significant amount of business transacted with the California public school districts (K-12) which represents a significant portion of the Company's revenues (see Note 1). The lack of fiscal funding or significant reduction of funding from the State of California to the public schools could have a material adverse effect on the Company. NOTE 4. SALES TYPE LEASE RECEIVABLES The Company has entered into several sales type leases. The minimum lease payments receivable and the net investment included in accounts receivable for such leases are as follows:
- --------------------------------------------------------------------- December 31, (in thousands) ------------------ 1998 1997 ------- ------- Gross minimum lease payments receivable $ 5,935 $ 5,339 Less -- unearned interest (1,246) (1,012) ------- ------- Net investment in sales type lease receivables $ 4,689 $ 4,327 - ---------------------------------------------------------------------
As of December 31, 1998, the future minimum lease payments to be received in 1999 and thereafter are as follows:
- ---------------------------------------------------- (in thousands) YEAR ENDED DECEMBER 31, 1999 $3,229 2000 1,377 2001 690 2002 362 2003 156 2004 and thereafter 121 ------ Total minimum future lease payments $5,935 - ----------------------------------------------------
NOTE 5. NOTES PAYABLE On July 31, 1998, the Company completed a private placement of $40,000,000 of 6.44% Senior Notes due in 2005. Interest on the notes is due semi-annually in arrears and the principal is due in 5 equal installments commencing on July 15, 2001. The outstanding balance at December 31, 1998 was $40,000,000. Among other restrictions, the agreement requires (i) the Company to maintain a minimum net worth of $80,000,000 plus 25% of all net income generated subsequent to June 30, 1998, less a maximum of $15,000,000 paid by the Company to repurchase its common stock after June 30, 1998, (restricted equity at December 31, 1998 is $80,801,000), (ii) a fixed coverage charge of not less than 2.0 to 1.0, (iii) a rolling fixed charges coverage ratio of not less than 1.5 to 1.0, and (iv) senior debt not to exceed 275% of consolidated net worth and consolidated total debt not to exceed 300% of consolidated net worth. The Company maintains an unsecured line of credit agreement, as amended, (the "Agreement") with its banks which expires on June 30, 1999 and permits it to borrow up to $75,000,000 of which $57,000,000 was outstanding as of December 31, 1998. The Agreement requires the Company to pay interest at prime or, at the 10 12 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Company's election, other rate options available under the Agreement. In addition, the Company pays a commitment fee on the daily average unused portion of the available line. Among other restrictions, the Agreement requires (i) the Company to maintain shareholders' equity of not less than $77,800,000 plus 50% of all net income generated subsequent to June 30, 1997 plus 90% of any new stock issuance proceeds (restricted equity at December 31, 1998 is $96,269,000), (ii) a debt-to-equity ratio (excluding deferred income taxes) of not more than 3 to 1, (iii) interest coverage (income from operations compared to interest expense) of not less than 2 to 1 and (iv) debt service coverage (earnings before interest, taxes, depreciation and amortization compared to the following year's pro forma debt service) of not less than 1.15 to 1.0. If the Company does not amend or renegotiate the present Agreement for an additional time period prior to its expiration date, the principal amount outstanding at that time will be converted to a two-year term loan with principal due and payable in eight (8) consecutive quarterly installments. In addition to the $75,000,000 unsecured line of credit, the Company has a $3,000,000 committed line of credit facility (at prime rate) related to its cash management services of which none was outstanding as of December 31, 1998. This committed line related to its cash management services will expire on June 30, 1999. The following information relates to the lines of credit for each of the following periods:
- --------------------------------------------------------------------- YEAR ENDED DECEMBER 31, (dollar amounts in thousands) ------------------------- 1998 1997 -------- ------- Maximum amount outstanding $103,500 $82,000 Average amount outstanding $ 79,326 $60,601 Weighted average interest rate 6.41% 6.50% Effective interest rate at end of period 6.37% 6.70% Prime interest rate at end of period 7.75% 8.50% - ---------------------------------------------------------------------
NOTE 6. INCOME TAXES The provision (benefit) for income taxes is comprised of the following:
- ----------------------------------------------------------------------- CURRENT DEFERRED TOTAL (in thousands) ------- -------- ------- YEAR ENDED DECEMBER 31, - --------------------------------------- 1998 Federal $ 5,526 $7,736 $13,262 State 1,572 1,176 2,748 ------- ------ ------- $ 7,098 $8,912 $16,010 ======= ====== ======= 1997 Federal $14,075 $ (809) $13,266 State 2,870 187 3,057 ------- ------ ------- $16,945 $ (622) $16,323 ======= ====== ======= 1996 Federal $ 6,032 $2,219 $ 8,251 State 1,472 162 1,634 ------- ------ ------- $ 7,504 $2,381 $ 9,885 ======= ====== ======= - -----------------------------------------------------------------------
The reconciliation of the federal statutory tax rate to the Company's effective tax rate is as follows:
- --------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------- 1998 1997 1996 ----- ----- ----- Federal statutory rate 35.00% 35.00% 35.00% State taxes, net of federal benefit 4.37 4.80 4.12 Other (0.24) (0.35) (0.75) ----- ----- ----- 39.13% 39.45% 38.37% - ---------------------------------------------------------------------
11 13 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table shows the tax effect of the Company's cumulative temporary differences included in net deferred income taxes on the Company's Balance Sheets:
- --------------------------------------------------------------------- YEAR ENDED DECEMBER 31, (in thousands) ------------------------ 1998 1997 ------- ------- Excess of tax over book depreciation $51,417 $44,859 State income taxes (3,245) (3,095) Accrued liabilities not currently deductible (146) (1,189) Revenue deferred for financial reporting purposes (1,598) (1,733) Other, net (1,268) (2,594) ------- ------- $45,160 $36,248 - ---------------------------------------------------------------------
NOTE 7. COMMON STOCK AND STOCK OPTIONS The Company adopted a 1998 Stock Option Plan (the "1998 Plan"), effective March 9, 1998, under which 2,000,000 shares are reserved for the grant of options to purchase common stock to directors, officers, key employees and advisors of the Company. The plan provides for the award of options at a price not less than the fair market value of the stock as determined by the Board of Directors on the date the options are granted. Under the 1998 Plan, 242,000 options have been granted with exercise prices ranging from $20.25 to $20.81. The options vest over 5 years and expire 10 years after grant. The Company adopted a 1987 Incentive Stock Option Plan (the "1987 Plan"), effective December 14, 1987, under which options to purchase common stock may be granted to officers and key employees of the Company. The plan provides for the award of options at a price not less than the fair market value of the stock as determined by the Board of Directors on the date the options are granted. Under the 1987 Plan, options have been granted with an exercise price of $3.06, $6.94 and $10.75 per share. The options vest over 9.3 years and expire 10 years after grant. The 1987 Plan expired in December 1997 and no further options can be issued under this plan. Option activity and options exercisable including weighted average exercise price for the three years ended December 31, 1998 are as follows:
- ---------------------------------------------------------------------------------------------------- Year Ended December 31, -------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- 1998 1997 1996 ------------------ ------------------- ------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - ---------------------------------------------------------------------------------------------------- Options outstanding at January 1, 364,672 8.57 540,452 6.90 512,846 4.87 Options granted during the year 242,000 20.81 -- -- 160,000 10.75 Options exercised during the year (31,282) 7.55 (175,780) 3.44 (128,494) 3.58 Options terminated during the year (34,268) 12.93 -- -- (3,900) 6.94 ------- ----- -------- ---- -------- ----- Options outstanding at December 31, 541,122 13.85 364,672 8.57 540,452 6.90 ------- ----- -------- ---- -------- ----- Options exercisable at December 31, 171,877 8.55 153,362 7.45 278,422 4.79 - ----------------------------------------------------------------------------------------------------
The weighted average remaining life of the 541,122 options outstanding at December 31, 1998, is 6.8 years. As of December 31, 1998, 1,758,000 options can be issued under the 1998 plan. Statement of Financial Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") became effective for the Company in 1996. As allowed by SFAS 123, the Company has elected to continue to follow Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") in accounting for its stock option plans. Under APB 25, the Company does not recognize compensation expense on the issuance of stock options because the option terms are fixed and the exercise price equals the market price of the underlying stock on the grant date. 12 14 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In accordance with SFAS 123, the fair value of each option grant is estimated at the date of grant using the Black-Scholes option pricing model. The assumptions used in the 1998 and 1996 grants are as follows:
- -------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1996 ---------------- ---------------- Risk-free interest rates 6.5% 8.5% Expected dividend yields 2.0% 2.6% Expected volatility 27.1% 17.2% Expected option life (in years) 7.5 10.0 - --------------------------------------------------------------------
The fair value of the options granted in 1998 and 1996 are $2,182,000, $532,000 and $598,000 at December 31, 1998, 1997 and 1996, respectively. The following pro-forma net income and earnings per share data are computed as if compensation cost for the Stock Option Plan had been determined consistent with SFAS 123:
- --------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, (in thousands, except per share amounts) --------------------------------- 1998 1997 1996 ------- ------- ------- Net Income $23,895 $24,045 $15,522 Pro Forma net income 23,583 24,005 15,481 EPS Basic 1.69 1.60 1.03 Diluted 1.67 1.58 1.01 Pro Forma EPS Basic 1.67 1.60 1.03 Diluted 1.64 1.58 1.01 - ---------------------------------------------------------------------------
In 1985, the Company established an Employee Stock Ownership Plan, as amended. Under the terms of the plan, the Company makes annual contributions in the form of cash or common stock of the Company to a trust for the benefit of eligible employees. The amount of the contribution is determined annually by the Board of Directors. A contribution of $750,000 was approved for 1998 and 1997 and $650,000 for 1996. In 1991, the Board of Directors adopted a Long-Term Stock Bonus Plan (the "LTB Plan") under which 400,000 shares of common stock are reserved for grant to officers and key employees. The stock bonuses granted under the LTB Plan are evidenced by written Stock Bonus Agreements covering specified performance periods. The LTB Plan provides for the grant of stock bonuses upon achievement of certain financial goals during a specified period. Stock bonuses earned under the LTB Plan vest over 5 years from the grant date contingent on the employee's continued employment with the Company. As of December 31, 1998, 172,408 shares of common stock have been granted, of which 107,951 shares of common stock are vested. Future grants of 41,109 shares of common stock are authorized by the Board of Directors to be issued under the LTB Plan in the event the Company reaches the highest level of achievement. Compensation expense for 1998, 1997 and 1996 under these plans was $485,000, $497,000 and $198,000 respectively, and is based on a combination of the anticipated shares to be granted, the amount of vested shares previously issued and fluctuations in market price of the Company's common stock. The Board of Directors has authorized the repurchase of shares of the Company's outstanding common stock. These purchases are to be made in the over-the-counter market and/or through large block transactions at such repurchase price as the officers shall deem appropriate and desirable on behalf of the Company. All shares repurchased by the Company are to be canceled and returned to the status of authorized but unissued shares of common stock. In 1996, the Company repurchased 841,100 shares of common stock for an aggregate repurchase price of $8,779,000 or an average price of $10.44 per share. In 1997, the Company repurchased 502,408 shares of common stock for an aggregate repurchase price of $10,545,000 or an average price of $20.99 per share. In 1998, the Company repurchased 619,550 shares of common stock for an aggregate repurchase price of $12,247,000 or an average price of $19.77 per share. As of December 31, 1998, 819,900 shares remain authorized for repurchase (see Note 10 below). 13 15 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8. BUSINESS SEGMENTS As of January 1, 1998, the Company adopted Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). The Company defined its business segments based on the nature of operations for the purpose of reporting under SFAS 131. The Company's three reportable segments are Mobile Modular Management Corporation (Modulars), McGrath-RenTelco (Electronics), and Enviroplex. The operations of each of these segments is described in Note 1, Organization and Business, and the accounting policies of the segments are described in Note 2, Significant Accounting Policies. As a separate corporate entity, Enviroplex revenues and expenses are separately maintained from Modulars and Electronics. Excluding interest expense, allocations of revenues and expenses not directly associated with Modulars or Electronics are generally allocated to these segments based on their pro-rata share of direct revenues. Interest expense is allocated between Modulars and Electronics based on their pro-rata share of average rental equipment, accounts receivable and customer security deposits. The Company does not report total assets by business segment. Summarized financial information for the years ended December 31, 1998, 1997, and 1996 for the Company's reportable segments is shown in the following table:
- ------------------------------------------------------------------------------------------ MODULARS ELECTRONICS ENVIROPLEX CONSOLIDATED (in thousands) -------- ----------- ---------- ------------ YEAR ENDED DECEMBER 31, 1998 Rental Operation Revenues $58,964 $24,531 $ -- $ 83,495 Sales and Other Revenues 23,619 7,642 20,672 51,933 Total Revenues 82,583 32,173 20,672 135,428 Depreciation on Rental Equipment 9,398 7,464 -- 16,862 Interest Expense 4,802 1,505 19 6,326 Income before Income Taxes 23,133 11,875 5,902 40,910 Rental Equipment Acquisitions 28,970 22,189 -- 51,159 Accounts Receivable, net (year-end) 10,765 6,900 4,146 21,811 Rental Equipment, at cost (year-end) 216,414 66,573 -- 282,987 1997 Rental Operation Revenues $51,412 $20,554 $ -- $ 71,966 Sales and Other Revenues 34,178 7,545 21,287 63,010 Total Revenues 85,590 28,099 21,287 134,976 Depreciation on Rental Equipment 8,154 6,204 -- 14,358 Interest Expense 3,148 880 42 4,070 Income before Income Taxes 24,708 10,723 5,948 41,379 Rental Equipment Acquisitions 49,303 12,974 -- 62,277 Accounts Receivable, net (year-end) 10,449 6,567 4,778 21,794 Rental Equipment, at cost (year-end) 196,133 50,351 -- 246,484 1996 Rental Operation Revenues $40,330 $17,374 $ -- $ 57,704 Sales and Other Revenues 15,244 5,851 10,206 31,301 Total Revenues 55,574 23,225 10,206 89,005 Depreciation on Rental Equipment 7,265 5,191 -- 12,456 Interest Expense 2,221 580 86 2,887 Income before Income Taxes 15,026 8,700 2,039 25,765 Rental Equipment Acquisitions 16,246 13,679 -- 29,925 Accounts Receivable, net (year-end) 11,678 5,220 3,022 19,920 Rental Equipment, at cost (year-end) 158,377 43,335 -- 201,712 - ------------------------------------------------------------------------------------------
14 16 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarterly financial information for each of the two years ended December 31, 1998 is summarized below:
- ---------------------------------------------------------------------------------------------- 1998 (in thousands, except per share amounts) ---------------------------------------------------- FIRST SECOND THIRD FOURTH YEAR ---------------------------------------------------- OPERATIONS DATA Total revenues $ 27,350 $ 33,475 $ 44,478 $ 30,125 $135,428 Gross margin 13,565 15,863 18,680 15,348 63,456 Income from operations 9,860 12,024 14,120 11,232 47,236 Income before income taxes 8,409 10,441 12,434 9,626 40,910 Net income 4,968 5,974 7,088 5,865 23,895 Earnings per share: Basic $ 0.34 $ 0.42 $ 0.50 $ 0.42 $ 1.69 Diluted $ 0.34 $ 0.42 $ 0.50 $ 0.41 $ 1.67 Dividends declared per share $ 0.10 $ 0.10 $ 0.10 $ 0.10 $ 0.40 BALANCE SHEET DATA Rental equipment, net $178,003 $186,883 $190,461 $200,028 $200,028 Total assets 256,968 266,575 274,932 278,676 278,676 Notes payable 97,747 103,500 100,000 97,000 97,000 Shareholders' equity 93,587 97,168 101,049 105,394 105,394
- ------------------------------------------------------------------------------------------ 1997 ---------------------------------------------------- FIRST SECOND THIRD FOURTH YEAR ---------------------------------------------------- OPERATIONS DATA Total revenues $ 26,842 $ 33,459 $ 45,352 $ 29,323 $134,976 Gross margin 12,591 15,084 19,537 14,194 61,406 Income from operations 9,233 11,396 14,574 10,246 45,449 Income before income taxes 8,360 10,407 13,531 9,081 41,379 Net income 4,919 6,082 7,702 5,342 24,045 Earnings per share: Basic $ 0.33 $ 0.41 $ 0.51 $ 0.36 $ 1.60 Diluted $ 0.33 $ 0.40 $ 0.51 $ 0.35 $ 1.58 Dividends declared per share $ 0.08 $ 0.08 $ 0.08 $ 0.08 $ 0.32 BALANCE SHEET DATA Rental equipment, net $141,821 $146,343 $158,693 $174,086 $174,086 Total assets 206,221 222,940 237,963 252,392 252,392 Notes payable 52,000 65,000 65,800 82,000 82,000 Shareholders' equity 93,005 97,922 104,465 98,646 98,646 - ------------------------------------------------------------------------------------------
NOTE 10. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED) In February and March, 1999, the Company repurchased 427,400 shares of its outstanding common stock for an aggregate purchase price of $7,813,000 (or an average price of $18.28 per share). On March 18, 1999, the Company's Board of Directors authorized the repurchase of up to 1,000,000 shares of its common stock. 15 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment to the Annual Report on Form 10-K for the year ended December 31, 1998 to be signed on its behalf by the undersigned, thereunto duly authorized. Date: June 23, 1999 MCGRATH RENTCORP by: /s/ Robert P. McGrath ------------------------------------ Robert P. McGrath Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates as indicated.
NAME TITLE DATE ---- ----- ---- /s/ Robert P. McGrath Chairman of the Board and Chief Executive June 23, 1999 - ------------------------------------ Officer Robert P. McGrath /s/ Delight Saxton Senior Vice President and Director June 23, 1999 - ------------------------------------ Delight Saxton /s/ Thomas J. Sauer Vice President and Chief Financial Officer June 23, 1999 - ------------------------------------ (Chief Accounting Officer) Thomas J. Sauer /s/ Joan McGrath Director June 23, 1999 - ------------------------------------ Joan McGrath
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