<PAGE> 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, 1997 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 11, 1997 was $273,289,174.
Number of shares of Common Stock outstanding as of August 11, 1997:
12,050,571 shares.
<PAGE> 2
ELECTRO RENT CORPORATION
FORM 10-K ANNUAL REPORT
DOCUMENTS INCORPORATED BY REFERENCE
1. Pages 3 and 19 to 28 of the Annual Report to Security Holders for
the fiscal year ended May 31, 1997 (the "1997 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 9, 1997 (the "1997 Proxy Statement").
CROSS REFERENCE SHEET
Showing Location in 1997 Annual Report
and 1997 Proxy Statement of Information
Required by Items of Form 10-K
<TABLE>
<CAPTION>
Caption and Reference
Form 10-K Item in 1997 Annual Report ("AR")
Number and Caption or 1997 Proxy Statement ("PS")
------------------ ------------------------------
PART II
<S> <C>
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 15 and 16
8. Financial Statements and
Supplementary Data AR pages 17 to 26
PART III
10. Directors and Executive
Officers of the Registrant PS pages 2 to 4
11. Executive Compensation PS pages 5 to 10
12. Security Ownership of
Certain Beneficial Owners
and Management PS pages 2 to 4
13. Certain Relationships and
Related Transactions PS page 5
</TABLE>
2
<PAGE> 3
PART I
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 short-term rental of state-
of-the-art electronic equipment. About 50% of the Company's equipment portfolio
is composed of general purpose test and measurement instruments and
microprocessor development systems purchased from leading manufacturers such as
Hewlett Packard, Tektronix, Intel and Texas Instruments. The remainder, and a
growing portion of the equipment portfolio, comprises personal computers and
workstations. Personal computer lines include those from IBM, Compaq, Apple,
Dell and Toshiba; while workstations are purchased primarily from Sun
Microsystems, Hewlett Packard and Digital Equipment. A large part of its
equipment portfolio is rented or leased to Fortune 500 companies in the
aerospace, electronics and defense industries. Management believes that the
Company's equipment is primarily used in research and development activities and
that a significant amount of its 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, 1997. 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 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., formerly a wholly owned subsidiary of the
Company, has been merged into the Company and is operated as a division of the
Company.
3
<PAGE> 4
Genstar Rental Electronics, Inc., a Delaware corporation, formerly a
wholly owned subsidiary of the Company, was merged into the Company as of May
31, 1997.
On December 12, 1985 the Company entered into a joint venture agreement
with Nas-Fritzke International Corp. to form Nippon Electro Rent Co., Ltd. for
the purpose of renting and selling test and measurement equipment and
microcomputers in Japan. The Company's original joint venture interest of 25%
was reduced to 15% in March 1991, and further reduced to 3.6% in October 1996.
Electro Rent is 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 A T & T
Capital Instrument and Data Services, a division of A T & T Capital Corporation;
G.E. Technology Management Services (G.E. Rents), a division of General Electric
Corporation; Hewlett- Packard; 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 Hewlett-Packard.
Electro Rent believes that its relationships with its major suppliers
are good. Because of the volume of its purchases and its long-term purchase
commitments, the Company obtains favorable price discounts.
At May 31, 1997, Electro Rent and its subsidiary employed approximately
505 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
<PAGE> 5
Item 2. Properties.
Electro Rent's corporate headquarters are located at 6060 Sepulveda
Boulevard, Van Nuys, California. The building contains approximately 84,500
square feet of office space. Approximately 39,700 square feet are currently
being leased, 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 houses the Company's Chicago operations.
In March 1994 Electro Rent purchased a building at 15385 Oxnard Street,
Van Nuys, California. The building contains approximately 68,200 square feet. A
portion of the building is being utilized to house the Company's California
warehouse and laboratory operations. Approximately 34,000 square feet of the
building are leased to others until needed by the Company.
As of May 31, 1997 Electro Rent had both sales offices and equipment,
calibration and service centers in the metropolitan areas of Boston, Chicago and
Los Angeles. Electro Rent also has sales offices in Atlanta, Cleveland, Dallas,
Denver, Detroit, Houston, Minneapolis, Montreal, New York/Newark, Ottawa,
Phoenix, Portland (OR), Rochester, San Diego, San Francisco, Seattle, Toronto
and Washington/Baltimore.
Electro Rent's facilities aggregate approximately 325,534 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 $1,062,000 in
fiscal 1997. 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.
Nothing to report.
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.
5
<PAGE> 6
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, 1997 as quoted on NASDAQ, shareholder information
and dividend information are set forth on page 27 of the 1997 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 1997 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 15 and 16 of the
1997 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 17 to 26 of the 1997
Annual Report are hereby incorporated by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Nothing to report.
6
<PAGE> 7
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information appearing in the 1997 Proxy Statement under the captions
Election of Directors (pages 2 and 3), Executive Officers (page 4), Compliance
With Section 16 of the Securities Exchange Act of 1934 (page 4), and
Transactions With Management (page 5), is hereby incorporated by reference.
Item 11. Executive Compensation.
Information appearing in the 1997 Proxy Statement under the caption
Executive Compensation (pages 5 to 8) 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 1997 Proxy Statement
(pages 2 and 3), and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information appearing in the 1997 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 1997 Annual Report.
7
<PAGE> 8
<TABLE>
<CAPTION>
Page Number
1997 Annual
Item Report Form 10-K
<S> <C> <C>
Consolidated Balance Sheets at
May 31, 1997 and 1996 18
Consolidated Statements of Income
for each of the three years in
the period ended May 31, 1997 17
Consolidated Statements of Shareholders'
Equity for each of the three years in
the period ended May 31, 1997 19
Consolidated Statements of Cash Flows
for each of the three years in the
period ended May 31, 1997 20
Notes to Consolidated Financial Statements 21 to 26
Report of Independent Public Accountants 27
Schedule for each of the three years in the period ended May 31, 1997:
II - Valuation and qualifying accounts 12
Consent and Report of Independent Public
Accountants 14
</TABLE>
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.
8
<PAGE> 9
(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 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 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 filed as Exhibit (3) to this Annual
Report.
(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.
9
<PAGE> 10
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.
ELECTRO RENT CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN TRUST AGREEMENT
dated September 1, 1994.
(10)(B) The 1980 Stock Option Plan and form of Stock Option Agreement
are incorporated by reference to Exhibits 1.1 and 2, respectively, of
Registration Statement (Form S-8), File No. 2-70763.
The Incentive Stock Option Plan (as Amended and Restated to July 8,
1982) and Amendment No. One to Stock Option Agreement are incorporated by
reference to Exhibit (10)(B) of the Annual Report (Form 10-K) for the fiscal
year ended May 31, 1982. Amendment No. One to the Plan as Amended and Restated
and the Stock Option Agreement, Non-Qualified Stock Options are incorporated by
reference to Exhibit 10(B) of the Annual Report (Form 10-K) for the fiscal year
ended May 31, 1984.
(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
10
<PAGE> 11
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 filed as EXHIBIT (10)(E) to this Annual
Report.
(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 1997 Annual Report, pages 17 and 21.
(13) 1997 Annual Report. Only those portions of the 1997 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., the Registrant's formerly wholly owned
subsidiary, has been merged into the Registrant, its parent, by statutory
merger. Its functions are conducted by a division of Electro Rent.
11
<PAGE> 12
Genstar Rental Electronics, Inc., a Delaware corporation, was
merged into Registrant, its parent, as of May 31, 1997.
(22) Pages 1 and 17 to 26 of the Annual Report to Security Holders for
the fiscal year ended May 31, 1997 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 1997 Annual Report by Rule 14 a 3(b) (1):
ELECTRO RENT CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended May 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
Balance
at Additions Balance
Beginning Charged to at End
Description of Year Income Deductions* of Year
----------- --------- ---------- ----------- -------
Allowance for doubtful
receivables
<S> <C> <C> <C> <C>
1997 $1,464 $ 717 $ 408 $1,773
1996 $1,240 $ 682 $ 458 $1,464
1995 $1,140 $ 244 $ 144 $1,240
</TABLE>
*Represents accounts written off against the allowance, net of recoveries.
12
<PAGE> 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 22, 1997. 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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Daniel Greenberg Chairman of the Board
- ------------------------- and Chief Executive Officer August 22, 1997
Daniel Greenberg
/s/ William Weitzman President, Chief Operating
- ------------------------- Officer and Director August 22, 1997
William Weitzman
/s/ Craig R. Jones Chief Financial Officer August 22, 1997
- -------------------------
Craig R. Jones
/s/ Gerald D. Barrone Director August 22, 1997
- -------------------------
Gerald D. Barrone
/s/ Nancy Y. Bekavac Director August 22, 1997
- -------------------------
Nancy Y. Bekavac
- ------------------------- Director August 22, 1997
Joseph J. Kearns
/s/ S. Lee Kling Director August 22, 1997
- -------------------------
S. Lee Kling
/s/ Michael R. Peevey Director August 22, 1997
- -------------------------
Michael R. Peevey
/s/ Will Richeson, Jr. Director August 22, 1997
- -------------------------
Will Richeson, Jr.
</TABLE>
13
<PAGE> 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 28, 1997
14
<PAGE> 15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in Electro Rent
Corporation's annual report to shareholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated August 1, 1997. Our audit
was made for the purpose of forming an opinion on those statements taken as a
whole. The schedule listed in the index above is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
Los Angeles, California
August 1, 1997
15
<PAGE> 1
EXHIBIT (3)
ELECTRO RENT CORPORATION
ACTION BY UNANIMOUS WRITTEN CONSENT OF
BOARD OF DIRECTORS
(November 15, 1996)
--------------------------------------
Pursuant to Section 9 of ARTICLE III of the Bylaws of ELECTRO RENT
CORPORATION, a California corporation, the following action is taken by the
unanimous written consent of the directors with the same force and effect as the
unanimous vote of the directors at a meeting held pursuant to the Bylaws:
RESOLVED that the second grammatical paragraph of Section 2 of
ARTICLE III of the By-Laws of this corporation be and the same
hereby is amended to read as follows:
"Subject to the foregoing provisions for changing the
number of directors, the number of directors of this
corporation has been fixed at eight (8)."
DATED: November 15, 1996.
/s/ Gerald D. Barrone /s/ Nancy Y. Bekavac
- ----------------------------- -----------------------------
Gerald D. Barrone Nancy Y. Bekavac
/s/ Daniel Greenberg /s/ Joseph J. Kearns
- ----------------------------- -----------------------------
Daniel Greenberg Joseph J. Kearns
/s/ Michael R. Peevey /s/ Will Richeson, Jr.
- ----------------------------- -----------------------------
Michael R. Peevey Will Richeson, Jr.
/s/ William Weitzman
-----------------------------
William Weitzman
<PAGE> 1
EXHIBIT (10)(E)
ELECTRO RENT CORPORATION
ACTION BY UNANIMOUS WRITTEN CONSENT OF
BOARD OF DIRECTORS
(November 1, 1996)
Pursuant to Section 9 of ARTICLE III of the Bylaws of ELECTRO RENT
CORPORATION, a California corporation, the following action is taken by the
unanimous written consent of the directors with the same force and effect as the
unanimous vote of the directors at a meeting held pursuant to the Bylaws:
RESOLVED that pursuant to Section 12 of the Electro Rent
Corporation 1996 Stock Option Plan (the "Plan") subsection
"(o)" of Section 7 of the Plan be and it hereby is amended to
read as follows:
"(o) Formula For Award of Options to Non-Employee
Directors.
"Each non-employee director shall receive
Options for 3,000 Shares the first year of his or her
incumbency as a director of the Corporation, and
shall receive Options for 2,000 Shares the second
year of his or her incumbency as a director of the
Corporation; provided, however, that no such director
shall receive Options for more than 5,000 Shares, and
all such directors in the aggregate shall not receive
Options for more than 84,375 Shares. Such Options
shall be granted automatically in accordance with the
following schedule: the grant for the first year
shall be made on the date of the first regular or
special meeting of the Board (excluding meetings by
telephone and action by unanimous written consent);
and the grant for the second year shall be made one
year after the grant for the first year. The Exercise
Price of each Option so granted shall be the Fair
Market Value on the date of grant."
<PAGE> 2
RESOLVED FURTHER that said Amendment shall be designated as
"AMENDMENT NUMBER ONE TO ELECTRO RENT CORPORATION 1996 STOCK
OPTION PLAN."
DATED: November 1, 1996.
/s/ Gerald D. Barrone
-----------------------------------
Gerald D. Barrone
/s/ Nancy Y. Bekavac
-----------------------------------
Nancy Y. Bekavac
/s/ Daniel Greenberg
-----------------------------------
Daniel Greenberg
/s/ Joseph J. Kearns
-----------------------------------
Joseph J. Kearns
/s/ Michael R. Peevey
-----------------------------------
Michael R. Peevey
/s/ Will Richeson, Jr.
-----------------------------------
Will Richeson, Jr.
/s/ William Weitzman
-----------------------------------
William Weitzman
<PAGE> 1
EXHIBIT 22
FINANCIAL HIGHLIGHTS 1997
<TABLE>
<CAPTION>
MAY 31,
-------------------------------------------------
1996 1995 1994 1993
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) 1997
- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $150,500 $141,137 $121,354 $111,458 $102,656
Costs of revenues and depreciation 66,433 64,600 57,759 56,190 53,595
Selling, administrative and
general expenses 42,439 37,792 36,907 33,902 34,439
Interest 829 2,230 2,457 1,870 2,136
-------- -------- -------- -------- --------
Income before income taxes 40,799 36,515 24,231 19,496 12,486
Income taxes 16,726 14,872 9,667 7,896 4,994
-------- -------- -------- -------- --------
Income before cumulative effect of
accounting change 24,073 21,643 14,564 11,600 7,492
Cumulative effect of change in accounting
for income taxes -- -- -- -- 2,591
-------- -------- -------- -------- --------
Net income $ 24,073 $ 21,643 $ 14,564 $ 11,600 $ 10,083
======== ======== ======== ======== ========
Earnings per common and common equivalent share:
Income before cumulative effect of
accounting change $ 1.94 $ 1.75 $ 1.20 $ .97 $ .57
Cumulative effect of change in
accounting for income taxes -- -- -- -- .19
-------- -------- -------- -------- --------
Net income $ 1.94 $ 1.75 $ 1.20 $ .97 $ .76
======== ======== ======== ======== ========
Average common and common
equivalent shares outstanding 12,400 12,350 12,157 12,008 13,259
Total assets $188,213 $171,428 $162,909 $135,048 $142,076
Bank borrowings $ 4,200 $ 16,800 $ 36,100 $ 25,900 $ 38,900
10% subordinated debentures -- -- -- -- $ 5,192
Shareholders' equity $139,220 $114,623 $ 92,188 $ 77,532 $ 65,822
Shareholders' equity per common share $ 11.57 $ 9.61 $ 7.83 $ 6.59 $ 5.61
</TABLE>
1
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ELECTRO RENT
AND RESULTS OF OPERATIONS CORPORATION
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 $266,624,000, at acquisition cost, at May 31,
1997 as compared with $241,432,000 at May 31, 1996. The increase in rental and
lease equipment primarily resulted from the high level of purchases, partially
offset by sales and the retirement of fully depreciated and obsolete equipment.
The Company was able to increase purchases of computers and test equipment while
at the same time improving equipment management, resulting in increased average
equipment utilization for fiscal 1997. During the three years ended May 31,
1997, the Company made payments for equipment purchases totaling $180,715,000,
resulting in a net increase in the equipment portfolio at acquisition cost of
$66,110,000 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.
<TABLE>
<CAPTION>
1995 1996 THREE YEARS ENDED
--------------------------------
(IN THOUSANDS) 1997 MAY 31, 1997
-------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities(1) $ 46,746 $ 58,104 $ 68,749 $ 173,599
Proceeds from sale of equipment 18,622 18,543 18,424 55,589
Payments for equipment purchases (54,053) (53,648) (73,014) (180,715)
Net decrease in bank borrowings(2) (4,653) (19,300) (12,600) (36,553)
Net increase in equipment portfolio at
acquisition cost 27,302 13,616 25,192 66,110
</TABLE>
(1)For the components of cash flows from operating activities, see the
Consolidated Statements of Cash Flows.
(2)Excludes Genstar debt assumed at acquisition.
As indicated by the table, cash flows from operating activities and proceeds
from sale of equipment provided 127% 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 for the foreseeable
future. Additionally, the Company believes that it currently has low leverage
ratios for a firm in the rental and leasing business and, if necessary,
additional credit could be obtained to finance growth.
The market for traditional test and measurement equipment increased modestly
in the last three fiscal years, enabling the Company to increase total volume.
Expenditures for this type of equipment have increased and are expected to
continue at a high level. With the anticipated growth in rentals of personal
computers and workstations, the Company is projecting purchases of this
equipment to increase. In spite of projected high levels of future
expenditures for rental equipment, bank borrowings are likely to continue
declining.
In connection with its 3.6% interest in the Nippon Electro Rent (NER) joint
venture, the Company guaranteed 200 million yen of NER's bank debt as of May
31, 1997. In accordance with a negotiated schedule, the Company's loan
guarantee was eliminated on July 1, 1997.
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.
15
<PAGE> 3
FISCAL 1997 COMPARED WITH FISCAL 1996
Total revenues for the year ended May 31, 1997 increased by 7% from $141,137,000
to $150,500,000, reflecting continued improvement in rentals and leases, as
sales remained stable. Rental revenues increased by 5% to $109,231,000 in fiscal
1997 primarily as a result of business expansion in personal computers and
workstations, including the effect of purchasing LDI Computer Rentals in March
1996. Lease revenues increased by 31% to $19,950,000 in fiscal 1997 primarily
due to continued demand for personal computer operating leases which provide
large companies flexibility in responding to obsolescence risk. Sales of used
equipment in fiscal 1997 remained essentially unchanged at $18,424,000.
Depreciation increased by 7% to $46,342,000 in fiscal 1997 primarily due to
higher equipment levels and a continuing shift in the equipment pool to personal
computers which have shorter depreciable lives. Costs of revenues other than
depreciation decreased by 5% to $20,091,000 primarily due to lower parts
expense related to the personal computer business. Selling, administrative and
general expenses increased by 12% to $42,439,000 in fiscal 1997 as a result of
increased business activity and a need to build depth in the organization.
Interest expense decreased by 63% to $829,000 in fiscal 1997 as a result of a
decline in bank borrowings made possible by increased cash flows from operating
activities, in spite of a substantial increase in equipment purchases. As a
result of the above, net income increased to $24,073,000 for fiscal 1997 from
$21,643,000 in the prior year, an 11% increase.
FISCAL 1996 COMPARED WITH FISCAL 1995
Total revenues for the year ended May 31, 1996 increased by 16% from
$121,354,000 to $141,137,000, reflecting continued improvement in rentals and
leases and stabilization of equipment sales at the prior year level. Rental
revenues increased by 15% to $104,286,000 in fiscal 1996 as a result of business
expansion in personal computers, workstations and test and measurement
equipment, the full year effect of the Genstar acquisition which was included in
operating results for eight months in fiscal 1995, and the acquisition of LDI
Computer Rentals on March 29, 1996. Lease revenues increased by 52% to
$15,209,000 in fiscal 1996 primarily due to continued demand for personal
computer operating leases which provide large companies flexibility in
responding to obsolescence risk. Although sales of used equipment of $18,543,000
in fiscal 1996 were at about the same level as the prior year, it was due to
higher personal computer sales being offset by lower sales of test and
measurement equipment which experienced increased rental utilization.
Depreciation increased by 17% to $43,510,000 in fiscal 1996 primarily due to the
full year inclusion of Genstar, higher equipment levels and a continuing shift
in the equipment pool to personal computers which have shorter depreciable
lives. Costs of revenues other than depreciation increased by 3% to $21,090,000
in fiscal 1996 primarily due to higher maintenance and repair expenses
associated with the personal computer business. Selling, administrative and
general expenses increased by 2% to $37,792,000 in fiscal 1996 to support the
higher business activity. Interest expense decreased by 9% to $2,230,000 in
fiscal 1996 as a result of a decline in bank borrowings made possible by
increased cash flows from operating activities. As a result of the above, net
income increased to $21,643,000 for fiscal 1996 from $14,564,000 in the prior
year, a 49% increase.
16
<PAGE> 4
CONSOLIDATED STATEMENTS OF INCOME ELECTRO RENT CORPORATION
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------
1996 1995
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Rentals and leases $129,181 $119,495 $100,467
Sales of equipment and other revenues 21,319 21,642 20,887
-------- -------- --------
Total revenues 150,500 141,137 121,354
-------- -------- --------
Costs and expenses:
Depreciation of equipment 46,342 43,510 37,228
Costs of revenues other than depreciation 20,091 21,090 20,531
Selling, administrative and general expenses 42,439 37,792 36,907
Interest 829 2,230 2,457
-------- -------- --------
Total costs and expenses 109,701 104,622 97,123
-------- -------- --------
Income before income taxes 40,799 36,515 24,231
Income taxes 16,726 14,872 9,667
-------- -------- --------
Net income $ 24,073 $ 21,643 $ 14,564
======== ======== ========
Net income per common and common equivalent share $ 1.94 $ 1.75 $ 1.20
======== ======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
17
<PAGE> 5
CONSOLIDATED BALANCE SHEETS ELECTRO RENT CORPORATION
<TABLE>
<CAPTION>
MAY 31,
---------
1996
(IN THOUSANDS, EXCEPT SHARE INFORMATION) 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 2,207 $ 1,394
Accounts receivable, net of allowance for doubtful
accounts of $1,773 and $1,464 19,968 20,598
Rental and lease equipment, net of accumulated
depreciation of $127,247 and $119,226 139,377 122,206
Other property, net of accumulated depreciation and
amortization of $6,630 and $5,774 19,438 19,323
Other 7,223 7,907
-------- --------
$188,213 $171,428
======== ========
Liabilities and Shareholders' Equity
Liabilities:
Bank borrowings $ 4,200 $ 16,800
Accounts payable 20,096 16,433
Accrued expenses 11,001 11,876
Deferred income taxes 13,696 11,696
-------- --------
Total liabilities 48,993 56,805
-------- --------
Commitments and contingencies
Shareholders' equity
Preferred stock, $1 par - shares authorized 1,000,000; none issued -- --
Common stock, no par - shares authorized 20,000,000; issued and outstanding:
1997 - 12,035,496; 1996 - 11,921,576 9,965 9,441
Retained earnings 129,255 105,182
-------- --------
Total shareholders' equity 139,220 114,623
-------- --------
$188,213 $171,428
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
18
<PAGE> 6
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ELECTRO RENT CORPORATION
<TABLE>
<CAPTION>
THREE YEARS ENDED MAY 31, 1997
--------------------------------------------------------------
COMMON STOCK
--------------------------------- CUMULATIVE
RETAINED TRANSLATION
(IN THOUSANDS) NUMBER OF SHARES AMOUNT EARNINGS ADJUSTMENT
- ---------------------------------------------
<S> <C> <C> <C> <C>
Balance, May 31, 1994 11,763 $ 8,553 $ 68,979 $ --
Exercise of stock options 11 44 -- --
Net income for the year ended May 31, 1995 -- -- 14,564 --
Translation adjustment -- -- -- 48
------ --------- -------- ---------
Balance, May 31, 1995 11,774 8,597 83,543 48
Exercise of stock options 148 844 -- --
Repurchase of common stock -- -- (4) --
Net income for the year ended May 31, 1996 -- -- 21,643 --
Translation adjustment -- -- -- (48)
------ --------- -------- ---------
Balance, May 31, 1996 11,922 9,441 105,182 --
Exercise of stock options 113 524 -- --
Net income for the year ended May 31, 1997 -- -- 24,073 --
------ --------- -------- ---------
Balance, May 31, 1997 12,035 $ 9,965 $129,255 $ --
====== ========= ======== =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
19
<PAGE> 7
CONSOLIDATED STATEMENTS OF CASH FLOWS ELECTRO RENT CORPORATION
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------
1996 1995
(IN THOUSANDS) 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 24,073 $ 21,643 $ 14,564
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 47,824 44,891 38,740
Provision for losses on accounts receivable 717 682 244
Gain on sale of equipment (5,350) (5,526) (5,373)
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable (87) (2,935) 1,169
(Increase) decrease in other assets 357 122 (431)
Increase (decrease) in accounts payable 90 (1,558) (1,845)
Increase (decrease) in accrued expenses (875) 1,066 688
Increase (decrease) in deferred income taxes 2,000 (281) (1,010)
-------- -------- --------
Net cash provided by operating activities 68,749 58,104 46,746
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of equipment 18,424 18,543 18,622
Payments for acquisitions of businesses, net of cash acquired -- (1,881) (7,145)
Payments for purchase of rental and lease equipment (73,014) (53,648) (54,053)
Payments for purchase of other property (1,270) (1,648) (790)
-------- -------- --------
Net cash used in investing activities (55,860) (38,634) (43,366)
-------- -------- --------
Cash flows from financing activities:
Decrease in bank borrowings (12,600) (19,300) (4,653)
Proceeds from issuance of common stock 524 844 44
Payments for repurchase of common stock -- (4) --
-------- -------- --------
Net cash used in financing activities (12,076) (18,460) (4,609)
-------- -------- --------
Effect of exchange rate on cash -- (48) 48
-------- -------- --------
Net increase (decrease) in cash 813 962 (1,181)
Cash at beginning of year 1,394 432 1,613
-------- -------- --------
Cash at end of year $ 2,207 $ 1,394 $ 432
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
20
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ELECTRO RENT CORPORATION
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, workstations, personal computers and data communication
equipment 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 1997, 1996 and 1995 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 subsidiaries. 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.
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 by 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 and one-half to six years depending on the type of equipment.
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, 1997 and 1996
investment in sales-type leases of $667,000 and $1,150,000 net of deferred
interest of $44,000 and $73,000 is included in other assets. Interest income is
recognized over the life of the lease using the interest method.
Net Income Per Common and Common Equivalent Share:
Earnings per share are computed based on the weighted average number of common
and common equivalent shares outstanding of 12,400,227 in 1997, 12,349,543 in
1996 and 12,156,857 in 1995. Prior years' average shares have been restated to
give effect to the three-for-two stock split effected in the form of a 50% stock
dividend payable on August 18, 1995 to shareholders of record on July 31, 1995.
Cash Flow:
Supplemental disclosures of cash paid during the year for:
<TABLE>
<CAPTION>
1996 1995
(IN THOUSANDS) 1997
- -------------------------------------------------------
<S> <C> <C> <C>
Interest $ 851 $ 2,275 $ 2,364
Income taxes 15,764 13,640 9,786
</TABLE>
21
<PAGE> 9
Supplemental schedule of non-cash investing and financing activities:
The Company acquired equipment of $19,405,000, $15,832,000, and $10,143,000 at
May 31, 1997, 1996 and 1995, respectively, which was paid for during the
subsequent year.
- --------------------------------------------------------------------------------
NOTE 2: BORROWINGS
The Company's financing agreement provides for a $22,000,000 unsecured line of
credit. Unless renewed, the line of credit converts to a term loan on November
15, 1997, payable in 18 quarterly installments including interest, commencing
February 15, 1998. The outstanding balance under the line of credit was $200,000
at May 31, 1997. The agreement provides for commitment fees based on the unused
balance. The agreement also includes requirements regarding the financial
position of the Company, including minimum tangible net worth, debt coverage
ratios, limitations on the payment of dividends and debt-to-equity ratios. The
Company was in compliance with these covenants at May 31, 1997.
The Company has established additional unsecured borrowing arrangements with
various banks totalling $76,000,000. These uncommitted arrangements can be
withdrawn by the lenders at any time, at their option. There was $4,000,000
outstanding under these arrangements at May 31, 1997, with maturities ranging
from 1 to 15 days and at varying interest rates depending on the bank and term.
Weighted average interest rates under these unsecured lines were 5.78% at May
31, 1997 and 5.62% at May 31, 1996. Weighted average borrowings for the years
ended May 31, 1997 and 1996 were $10,425,000 and $26,867,000 with average
interest rates of 6.8% and 6.2%, respectively.
- --------------------------------------------------------------------------------
NOTE 3: INCOME TAXES
The Company accounts for income taxes in accordance with FASB Statement No.109.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1995
(IN THOUSANDS) 1997
<S> <C> <C> <C>
Currently payable
Federal $13,241 $ 12,017 $ 8,602
State 2,270 3,304 2,075
Deferred
Federal 1,037 (281) (1,000)
State 178 (168) (10)
-------------------------------------
$16,726 $ 14,872 $ 9,667
=====================================
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective tax
rate is as follows:
<TABLE>
<CAPTION>
1996 1995
1997
<S> <C> <C> <C>
Statutory federal rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 5.5 5.5 5.5
Other -- net 0.5 0.2 (0.5)
-----------------------------
Effective tax rate 41.0% 40.7% 40.0%
=============================
</TABLE>
22
<PAGE> 10
The tax effects of temporary differences that give rise to significant portions
of the net deferred tax liabilities at May 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1996
(IN THOUSANDS) 1997
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 728 $ 601
Net operating loss carryforwards 1,275 1,316
Finance lease income 391 345
Other 222 182
------------------------
2,616 2,444
------------------------
Deferred tax liabilities:
Accumulated depreciation (13,251) (11,372)
Deferred revenue (977) (677)
Other (2,084) (2,091)
------------------------
(16,312) (14,140)
------------------------
Net deferred tax liabilities $(13,696) $(11,696)
========================
</TABLE>
Net operating loss carryforwards for federal income tax reporting purposes
approximate $3,416,000 at May 31, 1997 and are available for use against taxable
income through 2006. The utilization of operating loss carryforwards is limited
to $344,000 per year for federal income tax reporting purposes.
- --------------------------------------------------------------------------------
NOTE 4: 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, 1997, with
remaining noncancellable lease terms of more than one year, is $23,766,000
before accumulated depreciation of $6,219,000 for a net book value of
$17,547,000.
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, 1997 is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<S> <C>
1998 $11,705
1999 7,700
2000 1,112
-------
$20,517
=======
</TABLE>
23
<PAGE> 11
- --------------------------------------------------------------------------------
NOTE 5: OTHER PROPERTY
Other property, at cost, consists of the following:
<TABLE>
<CAPTION>
1996
(IN THOUSANDS) 1997
<S> <C> <C>
Land $ 6,017 $ 6,017
Building 14,146 14,121
Furniture and other equipment 5,388 4,632
Leasehold improvements 517 327
------------------------
26,068 25,097
Less -- accumulated depreciation and amortization (6,630) (5,774)
------------------------
$ 19,438 $ 19,323
========================
</TABLE>
- --------------------------------------------------------------------------------
NOTE 6: ACQUISITIONS
On March 29, 1996, the Company purchased the assets of LDI Computer Rentals,
Inc., a wholly-owned subsidiary of LDI Corporation engaged in the business of
renting and selling personal computers. The purchase price was $2.3 million,
payable in cash and financed with short term bank borrowings. The excess of the
purchase price over the estimated fair value of the net assets acquired
(goodwill) of $180,000 is being amortized on a straight-line basis over 15
years. The acquisition has been accounted for by the purchase method and,
accordingly, the results of operations of LDI Computer Rentals have been
included with those of the Company from the date of acquisition.
On September 30, 1994, the Company purchased all of the outstanding stock of
Genstar Rental Electronics, Inc. (Genstar), a privately-held company engaged in
the business of renting, leasing and selling computers, workstations, and
general purpose test and measurement equipment. The cash purchase price was
$23.2 million, which included assumed debt of $14.9 million. Financing for the
transaction was achieved through additional short-term borrowings under Electro
Rent's existing line of credit. The acquisition has been accounted for by the
purchase method and, accordingly, the results of operations of Genstar have been
included with those of the Company since the date of acquisition. The purchase
price resulted in an excess of acquisition costs over net worth of $97,000. Such
excess and acquired intangibles of $4.3 million are being amortized on a
straight-line basis over twenty years.
- --------------------------------------------------------------------------------
NOTE 7: COMMITMENTS
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.
24
<PAGE> 12
Minimum payments under these leases, exclusive of property taxes and insurance,
are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<S> <C>
1998 $ 771
1999 414
2000 164
2001 36
2002 --
------
$1,385
======
</TABLE>
Rent expense was $1,285,000, $1,037,000, and $1,108,000 in 1997, 1996, and 1995,
respectively.
During 1997 the Company's interest in Nippon Electro Rent (NER), accounted for
using the cost method, was reduced from 15% to 3.6% as a result of an additional
capital contribution by the other joint venture partner. In connection with this
joint venture, the Company guaranteed up to 200 million yen at May 31, 1997.
This guarantee was eliminated as of July 1, 1997. The Company's guarantee of NER
bank debt at May 31, 1997 and May 31, 1996 was $1,875,000, and $2,775,000,
respectively, at the exchange rate in effect on those dates.
- --------------------------------------------------------------------------------
NOTE 8: STOCK OPTION PLANS
The Company has Stock Option Plans (the "Plans") which authorize the Board of
Directors to grant options for not more than 1,058,750 shares of the Company's
common stock, of which 296,257 were available for future grants at May 31, 1997.
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% stockholder. The Plans provide for a
variety of vesting dates with the majority of the options vesting at a rate of
25% per year over a period of four years from the date of grant. All outstanding
options expire at dates ranging from August 1997 to January 2007. The following
table summarizes certain information relative to options for common stock after
adjustment for stock splits.
<TABLE>
<CAPTION>
1997 1996
------------------------------ ------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
<S> <C> <C> <C> <C>
Options outstanding, beginning of year 707,310 $ 6.84 774,658 $ 5.55
Granted 58,837 23.85 80,115 17.13
Exercised (113,922) 4.64 (145,775) 5.68
Forfeited (2,238) 5.30 (1,688) 6.83
---------------------------------------------------------------------
Options outstanding, end of year 649,987 $ 8.75 707,310 $ 6.84
=====================================================================
Options exercisable at end of year 525,340 $ 6.15 556,882 $ 5.35
</TABLE>
25
<PAGE> 13
The following summarizes information regarding stock options outstanding at May
31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ---------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$ 3.85 - $ 5.83 287,330 2.9 $ 4.82 287,330 $ 4.82
$ 6.58 - $ 8.72 223,695 5.4 6.79 218,068 6.78
$17.13 - $24.25 138,962 8.7 19.97 19,942 18.32
------------------------------------------------------------------------------------
649,987 5.0 $ 8.75 525,340 $ 6.15
====================================================================================
</TABLE>
The Company adopted Statement of Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" (FAS 123) in fiscal 1997. The effect of FAS 123 for
the years presented in the financial statements is not significant.
- --------------------------------------------------------------------------------
NOTE 9: 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
$503,000, $495,000, and $368,000 were made for 1997, 1996 and 1995,
respectively.
- --------------------------------------------------------------------------------
NOTE 10: QUARTERLY INFORMATION (UNAUDITED)
Quarterly information is as follows:
<TABLE>
<CAPTION>
TOTAL INCOME NET INCOME
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) REVENUES BEFORE TAXES INCOME PER SHARE
<S> <C> <C> <C> <C>
Fiscal Year 1997
First Quarter $ 38,144 $11,095 $ 6,547 $ 0.53
Second Quarter 37,978 11,026 6,505 0.52
Third Quarter 36,804 9,899 5,841 0.47
Fourth Quarter 37,574 8,779 5,180 0.42
--------------------------------------------
$150,500 $40,799 $24,073 $ 1.94
============================================
Fiscal Year 1996
First Quarter $ 34,361 $ 8,905 $ 5,254 $ 0.43
Second Quarter 34,563 9,169 5,410 0.44
Third Quarter 33,911 8,262 4,933 0.40
Fourth Quarter 38,302 10,179 6,046 0.48
--------------------------------------------
$141,137 $36,515 $21,643 $ 1.75
============================================
</TABLE>
26
<PAGE> 14
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, 1997 and
1996, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended May 31, 1997.
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
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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended May 31,
1997 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Los Angeles, California
August 1, 1997
- --------------------------------------------------------------------------------
Capital Stock, Shareholders and Cash Dividend Information
The common stock of the Company is quoted on NASDAQ under the symbol ELRC. There
were approximately 649 shareholders of record at August 11, 1997. 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.
<TABLE>
<CAPTION>
FISCAL YEAR 1997 FISCAL YEAR 1996
--------------------------- --------------------------
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First Quarter $25 $21 1/2 $18 1/4 $14 1/6
Second Quarter 24 3/4 22 21 1/2 16 3/4
Third Quarter 25 1/4 21 1/2 22 3/4 19 3/4
Fourth Quarter 25 3/4 22 1/2 25 21 1/4
</TABLE>
27
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 2,207
<SECURITIES> 0
<RECEIVABLES> 21,741
<ALLOWANCES> 1,773
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 292,692
<DEPRECIATION> 133,877
<TOTAL-ASSETS> 188,213
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 9,965
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 188,213
<SALES> 21,319
<TOTAL-REVENUES> 150,500
<CGS> 20,091
<TOTAL-COSTS> 108,872
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 829
<INCOME-PRETAX> 40,799
<INCOME-TAX> 16,726
<INCOME-CONTINUING> 24,073
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,073
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.94
</TABLE>
