<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, 1998 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 10, 1998 was $372,817,878.
Number of shares of Common Stock outstanding as of August 10, 1998:
24,416,424 shares. This number and the other share numbers herein reflect the
two-for-one stock split in the form of a 100% stock dividend declared April 9,
1998 payable May 12, 1998 to shareholders of record April 30, 1998.
<PAGE> 2
ELECTRO RENT CORPORATION
FORM 10-K ANNUAL REPORT
DOCUMENTS INCORPORATED BY REFERENCE
1. Pages 1 and 13 to 26 of the Annual Report to Security Holders for the
fiscal year ended May 31, 1998 (the "1998 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 8, 1998 (the "1998 Proxy Statement").
CROSS REFERENCE SHEET
Showing Location in 1998 Annual Report
and 1998 Proxy Statement of Information
Required by Items of Form 10-K
<TABLE>
<CAPTION>
Caption and Reference
Form 10-K Item in 1998 Annual Report ("AR")
Number and Caption or 1998 Proxy Statement ("PS")
------------------ ------------------------------
<S> <C>
PART II
5. Market for the Registrant's
Common Equity and Related
Shareholders Matters AR page 26
6. Selected Financial Data AR page 1
7. Management's Discussion and
Analysis of Financial
Condition and Results of
Operations AR pages 13 and 14
8. Financial Statements and
Supplementary Data AR pages 15 to 26
PART III
10. Directors and Executive
Officers of the Registrant PS pages 2 to 4
11. Executive Compensation PS pages 5 to 11
12. Security Ownership of
Certain Beneficial Owners
and Management PS pages 2 and 3
13. Certain Relationships and
Related Transactions PS page 5
</TABLE>
2
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PART I
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS
WHICH REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND
FINANCIAL PERFORMANCE. IN THIS REPORT, THE WORDS "ANTICIPATE," "BELIEVES,"
"EXPECTS," "INTENDS," "FUTURE," AND OTHER SIMILAR EXPRESSIONS IDENTIFY
FORWARD-LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED IN "BUSINESS" BELOW
AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS," THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR THOSE ANTICIPATED.
Item 1. Business.
Electro Rent Corporation (the "Company" or "Electro Rent") was incorporated
in California in 1965. The Company became a publicly held corporation on March
31, 1980.
The Company primarily engages in the short-term rental of state-of-the-art
electronic equipment. About 40% of the Company's equipment portfolio is composed
of general purpose test and measurement instruments purchased from leading
manufacturers such as Hewlett Packard and Tektronix. The remainder, and a
growing portion of the equipment portfolio, comprises personal computers and
workstations. Personal computer lines include those from Compaq, Dell, Apple,
and Toshiba; while workstations are purchased primarily from Sun Microsystems
and Hewlett Packard. A large part of its equipment portfolio is rented or leased
to Fortune 500 companies in the aerospace, 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, 1998. 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
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which are linked by an on-line computer system. These centers also function as
depots for the sale of used equipment.
Data Rentals/Sales, Inc., a California corporation, and Genstar Rental
Electronics, Inc., a Delaware corporation, formerly wholly owned subsidiaries of
the Company, have been merged into the Company and are operated as divisions of
the Company.
In April 1998 the Company sold its interest in its Japanese venture with
Nas-Fritzke International Corp.
Since it acquired the rental business of General Electric Technology
Management Services in November 1997, Electro Rent has become one of the larger
companies in the highly competitive electronic equipment rental and lease
business. Independent industry publications have identified a number of major
competitors, including A T & T Capital Instrument and Data Services, a division
of A T & T Capital Corporation; Hewlett-Packard Financial Remarketing Division;
Telogy; and Continental Resources. Since the larger of these firms are divisions
of large corporations, these firms have access to greater financial and other
resources than does the Company.
Electro Rent's business is relatively non-seasonal except for the third
quarter months of December, January and February, when rental activity declines
because a number of customers close for extended Christmas-New Year vacation. In
addition, the shortness of February results in a reduced level of rental
billing.
Electro Rent purchases the majority of its equipment from leading suppliers
of electronic equipment. The research and development, manufacturing and
marketing trends and activities of the Company's major suppliers tend to shape
the nature of the rental and lease demand of the Company's customers and the
availability of equipment. As a result, Electro Rent's business is significantly
affected by the continued research and development, manufacturing and financial
condition of its major suppliers, particularly 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
arrangements, the Company obtains favorable price discounts.
At May 31, 1998, Electro Rent and its subsidiary employed approximately 893
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.
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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, 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.
The Company's building at 15385 Oxnard Street, Van Nuys, California
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 formerly leased to others is
now being used by the Company.
As of May 31, 1998 Electro Rent had both sales offices and equipment,
calibration and service centers in the metropolitan areas of Atlanta, Boston,
Chicago, Los Angeles and San Francisco. Electro Rent also has sales offices in
Albany, Austin, Cleveland, Dallas, Denver, Detroit, Fairfax, Houston, Kansas
City, Minneapolis, Montreal, New York/Newark, Ottawa, Philadelphia, Phoenix,
Portland (OR), Raleigh, Rochester, San Diego, Seattle, Stamford, Toronto and
Washington/ Baltimore.
Electro Rent's facilities aggregate approximately 694,906 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 $2,405,000 in
fiscal 1998. 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.
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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, 1998 as quoted on NASDAQ, shareholder information
and dividend information are set forth on page 26 of the 1998 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 1998 Annual Report, is hereby
incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Information appearing under the above caption on pages 13 and 14 of the
1998 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 15 to 26 of the 1998 Annual
Report are hereby incorporated by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.
Nothing to report.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information appearing in the 1998 Proxy Statement under the captions
Election of Directors (pages 2 and 3), Executive Officers (page
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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 1998 Proxy Statement under the caption
Executive Compensation (pages 5 to 9) is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Information concerning the ownership of the Company's securities by the
principal holders and by management is set forth in the 1998 Proxy Statement
(pages 2 and 3), and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information appearing in the 1998 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 1998 Annual Report.
<TABLE>
<CAPTION>
Page Number
-----------
1998 Annual
Item Report Form 10-K
---- ----------- ---------
<S> <C> <C>
Consolidated Balance Sheets at
May 31, 1998 and 1997 16
Consolidated Statements of Income
for each of the three years in
the period ended May 31, 1998 15
</TABLE>
7
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<TABLE>
<CAPTION>
Page Number
-----------
1998 Annual
Item Report Form 10-K
---- ----------- ---------
<S> <C> <C>
Consolidated Statements of Shareholders'
Equity for each of the three years in
the period ended May 31, 1998 17
Consolidated Statements of Cash Flows
for each of the three years in the
period ended May 31, 1998 18
Notes to Consolidated Financial Statements 19 to 25
Report of Independent Public Accountants 26
Schedule for each of the three years in the
period ended May 31, 1998:
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.
(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 Certificate of
Amendment of Restated Articles of Incorporation filed October 15, 1997 is filed
as Exhibit (3) to this Annual Report. 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
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May 31, 1995. A copy of the amendment to the bylaws adopted November 15, 1996 is
incorporated by reference to Exhibit (3) of the Annual Report (Form 10-K) for
the fiscal year ended May 31, 1997.
(10)(A) The ELECTRO RENT CORPORATION EMPLOYEE STOCK OWNERSHIP AND SAVINGS
PLAN, JUNE 1, 1985 RESTATEMENT, and the ELECTRO RENT CORPORATION EMPLOYEE STOCK
OWNERSHIP AND SAVINGS PLAN TRUST AGREEMENT, are incorporated by reference to
Exhibits 10(A)-(1) and 10(A)-(2) of the Registrant's Annual Report (Form 10-K)
for the fiscal year ended May 31, 1985. A copy of AMENDMENT NO. ONE to the
RESTATED ESOSP is incorporated by reference to Exhibit (10)(A) of Registrant's
Annual Report (Form 10-K) for the fiscal year ended May 31, 1987.
A copy of the ELECTRO RENT CORPORATION EMPLOYEE STOCK OWNERSHIP AND SAVINGS
PLAN, RESTATED AS OF JUNE 1, 1989 is incorporated by reference to Exhibit
(10)(A) of the Annual Report (Form 10-K) for the fiscal year ended May 31, 1989.
Copies of the following documents amending and supplementing the
ESOSP and ESOP as heretofore amended are incorporated by reference to Exhibit
(10)(A)-(1) to (7) of the Annual Report (Form 10-K) for the fiscal year ended
May 31, 1995:
ADOPTION AGREEMENT FOR THE VANGUARD PROTOTYPE 401(k) SAVINGS PLAN
dated August 1, 1994.
ELECTRO RENT CORPORATION SAVINGS PLAN TRUST AGREEMENT dated
September 1, 1994.
ELECTRO RENT SAVINGS PLAN SUPPLEMENT TO THE VANGUARD PROTOTYPE
401(k) SAVINGS PLAN ADOPTION AGREEMENT dated September 24, 1994.
SECOND AMENDMENT TO ELECTRO RENT CORPORATION EMPLOYEE STOCK
OWNERSHIP & SAVINGS PLAN (RESTATED AS OF JUNE 1, 1989) dated as of June 1, 1991.
THIRD AMENDMENT TO ELECTRO RENT CORPORATION EMPLOYEE STOCK OWNERSHIP
AND SAVINGS PLAN (RESTATED AS OF JUNE 1, 1989) dated June 15, 1994.
FOURTH AMENDMENT TO ELECTRO RENT CORPORATION SAVINGS PLAN (RESTATED
AS OF JUNE 1, 1989) dated September 1, 1994.
ELECTRO RENT CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN TRUST
AGREEMENT dated September 1, 1994.
A copy of the GE Rentals Supplement to the Vangard Prototype 401(k)
Savings Plan Adoption Agreement adopted October 10, 1997 is filed as Exhibit
10(A) to this Annual Report.
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<PAGE> 10
(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, NonQualified 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 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
10
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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 1998 Annual Report, pages 15, 20 and 22.
(13) 1998 Annual Report. Only those portions of the 1998 Annual
Report to security holders expressly incorporated hereby by reference are deemed
"filed."
(21) Subsidiaries of the Registrant.
Genstar Rental Electronics, Inc., a Canadian corporation
(formerly a subsidiary of Genstar Rental Electronics, Inc., a Delaware
corporation).
Electro Rent de Mexico S.A. de C.V., a Mexican corporation.
Data Rentals/Sales, Inc., a California corporation, and
Genstar Rental Electronics, Inc., a Delaware corporation, the Registrant's
formerly wholly owned subsidiaries, have been merged into the Registrant, their
parent, by statutory merger. Their functions are conducted by divisions of
Electro Rent.
(22) Pages 1 and 13 to 26 of the Annual Report to Security Holders
for the fiscal year ended May 31, 1998 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 1998 Annual Report by Rule
14 a 3(b) (1):
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ELECTRO RENT CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended May 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Balance
at Additions Balance
Beginning Charged to at End
Description of Year Income Deductions* of Year
----------- ------- ------ ----------- -------
<S> <C> <C> <C> <C>
Allowance for doubtful
receivables
1998 $1,773 $3,158 $216 $4,715
1997 $1,464 $ 717 $408 $1,773
1996 $1,240 $ 682 $458 $1,464
</TABLE>
*Represents accounts written off against the allowance, net of recoveries.
12
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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, 1998. 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
Daniel Greenberg and Chief Executive Officer August 22, 1998
/s/ WILLIAM WEITZMAN
- ------------------------- President, Chief Operating
William Weitzman Officer and Director August 22, 1998
/s/ CRAIG R. JONES
- ------------------------- Chief Financial Officer August 22, 1998
Craig R. Jones
/s/ GERALD D. BARRONE
- ------------------------- Director August 22, 1998
Gerald D. Barrone
/s/ NANCY Y. BEKAVAC
- ------------------------- Director August 22, 1998
Nancy Y. Bekavac
/s/ JOSEPH J. KEARNS
- ------------------------- Director August 22, 1998
Joseph J. Kearns
/s/ S. LEE KLING
- ------------------------- Director August 22, 1998
S. Lee Kling
/s/ MICHAEL R. PEEVEY
- ------------------------- Director August 22, 1998
Michael R. Peevey
/s/ Will Richeson, Jr.
- ------------------------- Director August 22, 1998
Will Richeson, Jr.
</TABLE>
13
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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.
Arthur Andersen LLP
Los Angeles, California
August 27, 1998
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 7, 1998. 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 the responsibility of Company's management and 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.
Arthur Andersen LLP
Los Angeles, California
August 7, 1998
14
<PAGE> 1
EXHIBIT 3
STATE OF CALIFORNIA
[LOGO]
SECRETARY OF STATE
I, BILL JONES, Secretary of State of the State of California, hereby
certify:
That the attached transcript has been compared with the record on file
in this office, of which it purports to be a copy, and that it is full, true
and correct.
IN WITNESS WHEREOF, I execute
this certificate and affix
the Great Seal of the State
of California this
-------------------------------
[THE GREAT SEAL OF THE STATE
OF CALIFORNIA LOGO]
/s/ BILL JONES
Secretary of State
EXHIBIT (3)
<PAGE> 2
ELECTRO RENT CORPORATION
CERTIFICATE OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION
WILLIAM WEITZMAN and STEVEN MARKHEIM certify that:
1. They are the president and secretary, respectively, of ELECTRO
RENT CORPORATION, a California Corporation.
2. Paragraph (a) of ARTICLE III of the Restated Articles of
Incorporation of this corporation is amended to read as follows:
"(a) The corporation is authorized to issue two classes of
shares designated "Preferred Stock" and "Common Stock," respectively.
The number of shares of Preferred Stock authorized to be issued is
1,000,000 having a par value of $1.00 per Preferred Share and the
number of shares of Common Stock authorized to be issued is 40,000,000
without par value."
3. The foregoing amendment of the Restated Articles of Incorporation
has been duly approved by the board of directors.
4. The foregoing amendment of the Restated Articles of Incorporation
has been duly approved by the required vote of shareholders of the common
shares in accordance with Section 902 of the Corporations Code. The total
number of outstanding shares of the corporation is 12,050,571. The number of
shares voting in favor of the amendment equaled or exceeded the vote required.
The percentage of votes required was more than 50%.
We further declare under penalty of perjury under the laws of the State
of California that the matters set forth in this certificate are true and
correct of our own knowledge.
Date: October 9, 1997.
/s/ WILLIAM WEITZMAN /s/ STEVEN MARKHEIM
- --------------------------------- [SEAL] ---------------------------------
William Weitzman, President Steven Markheim, Secretary
EXHIBIT (3)
<PAGE> 1
Exhibit (10)(A)
ELECTRO RENT CORPORATION SAVINGS PLAN
GE RENTALS SUPPLEMENT TO THE
VANGUARD PROTOTYPE 401(k) SAVINGS PLAN ADOPTION AGREEMENT
This Supplement to the Vanguard Prototype 401(k) Savings Plan Adoption
Agreement (the "Adoption Agreement") for the Electro Rent Savings Plan (the
"Plan") amends the Adoption Agreement to allow eligible employees of General
Electric Capital Technology Management Service Corporation ("GE Rentals"),
certain assets of which will be acquired by Electro Rent Corporation, (1) to
become participants in the Plan on other than the Plan's normal entry dates,
(2) to receive credit under the Plan for eligibility and vesting purposes for
service with GE Rentals as if it were service with Electro Rent Corporation,
and (3) to roll over directly to the Plan their distributable interests in the
GE Savings and Security Program. Accordingly, the Plan will remain an
individually-designed plan consisting of the following documents:
(a) the Vanguard Prototype 401(k) Savings Plan (the "Prototype") as
modified by all Supplements,
(b) the Adoption Agreement as modified by this and all other
Supplements, and
(c) any Trust Agreement for the Plan.
<PAGE> 2
AMENDMENT OF ADOPTION AGREEMENT
Section 1(c) COMMENCEMENT OF PARTICIPATION
Notwithstanding anything in the Adoption Agreement or the Prototype to
the contrary, the Entry Date of a person who, as determined under the
acquisition agreement between General Electric Capital Technology
Management Services Corporation ("GE Rentals"), GE Capital Corporation,
and Electro Rent Corporation, is considered an employee actively at work
for GE Rentals immediately prior to the closing of the GE Rentals
acquisition and who immediately thereafter becomes an Employee of Electro
Rent Corporation, shall be the date the individual becomes an Employee of
Electro Rent Corporation if he or she meets the participation
requirements of Sections 1(a) and (b) of the Adoption Agreement on that
date, taking into account Section 1(d) below. If such a person does not
then meet those participation requirements, his or her Entry Date shall
be determined in accordance with the normal provisions of the Adoption
Agreement and the Prototype, as modified below.
Section 1(d) SERVICE WITH PREDECESSOR EMPLOYERS
GE Rentals shall be treated as a predecessor employer to Electro Rent
Corporation. Accordingly, service with GE Rentals by an Employee
described in Section 1(c) above shall be treated as service with Electro
Rent Corporation for both eligibility and vesting purposes. The Years of
Service credited to an Employee for his or her service with GE Rentals
shall be calculated under the elapsed time service crediting rules of
Article 16 of the Prototype (see the Supplement to the Prototype).
<PAGE> 3
Section 4A Direct Rollovers
Pursuant to Plan Section 4.8, The Plan Administrator shall permit Employees
described in Section 1(c) above to roll over directly to the Plan their
distributable interests in the GE Savings and Security Program.
Date Adopted:____________ ELECTRO RENT CORPORATION
By_______________________
Title____________________
-2-
<PAGE> 1
EXHIBIT 22
Electro Rent Corporation
FINANCIAL HIGHLIGHTS 1998
<TABLE>
<CAPTION>
May 31,
------------------------------------------------------------
(in thousands, except per share information) 1998 1997 1996 1995 1994
=============================================================================================================
<S> <C> <C> <C> <C> <C>
Revenues $255,505 $150,500 $141,137 $121,354 $111,458
Costs of revenues and depreciation 122,080 66,433 64,600 57,759 56,190
Selling, administrative and general expenses 69,099 42,439 37,792 36,907 33,902
Interest 9,506 829 2,230 2,457 1,870
------------------------------------------------------------
Income before income taxes 54,820 40,799 36,515 24,231 19,496
Income taxes 22,476 16,726 14,872 9,667 7,896
------------------------------------------------------------
Net income $ 32,344 $ 24,073 $ 21,643 $ 14,564 $ 11,600
============================================================
Earnings per share:
Basic $ 1.33 $ 1.01 $ .91 $ .62 $ .49
Diluted $ 1.29 $ .97 $ .88 $ .60 $ .48
Shares used in per share calculation:
Basic 24,305 23,952 23,680 23,539 23,501
Diluted 25,141 24,868 24,708 24,348 24,019
Total assets $457,896 $188,213 $171,428 $162,909 $135,048
Bank borrowings $226,900 $ 4,200 $ 16,800 $ 36,100 $ 25,900
Shareholders' equity $172,009 $139,220 $114,623 $ 92,188 $ 77,532
Shareholders' equity per common share $ 7.04 $ 5.79 $ 4.81 $ 3.92 $ 3.30
</TABLE>
<PAGE> 2
Electro Rent Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's business is capital intensive, with substantial capital
expenditures required to maintain the equipment pool. Electro Rent's rental and
lease equipment portfolio totaled $468,469,000, at acquisition cost, at May 31,
1998 as compared with $266,624,000 at May 31, 1997. The increase in rental and
lease equipment primarily resulted from the acquisition of GE Capital Technology
Management Services (TMS) on November 14, 1997, and a higher level of purchases,
partially offset by sales and the retirement of fully depreciated and obsolete
equipment. During the three years ended May 31, 1998, the Company made payments
for equipment purchases totaling $203,589,000, excluding the acquired TMS
equipment of $193,168,000 resulting in a net increase in the equipment portfolio
at acquisition cost of $240,653,000 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>
Three Years Ended
------------------------------------------------------
(in thousands) 1996 1997 1998 May 31, 1998
==================================================================================================================
<S> <C> <C> <C> <C>
Cash flows from operating activities(1) $ 58,104 $ 68,749 $ 68,505 $ 195,358
Proceeds from sale of equipment 18,543 18,424 32,262 69,229
Payments for equipment purchases (53,648) (73,014) (76,927) (203,589)
Net increase (decrease) in bank borrowings(2) (19,300) (12,600) 222,700 190,800
Net increase in equipment portfolio at acquisition cost 13,616 25,192 201,845 240,653
</TABLE>
(1) For the components of cash flows from operating activities, see the
Consolidated Statements of Cash Flows.
(2) Includes $240.8 million initial purchase price payment for TMS made on
November 14, 1997.
As indicated by the table, cash flows from operating activities and proceeds
from sale of equipment provided 130% of the funds required for equipment
purchased during the three-year period. Rental and lease revenues have been
significantly supplemented as a source of cash flow by proceeds from the sale of
equipment from Electro Rent's portfolio. Management believes that cash flows
from operating activities, proceeds from the sale of equipment and its borrowing
capacity (see Note 2 of Notes to Consolidated Financial Statements) will be
sufficient to fund the Company's operations. Additionally, the Company believes
that it currently has moderate leverage ratios for a firm in the rental and
leasing business.
The market for test and measurement equipment and personal computers declined
during fiscal 1998. Although expenditures for equipment increased for the year,
in relation to the larger equipment portfolio after the TMS acquisition,
expenditures have decreased and are expected to continue at a lower level.
Because of projected lower levels of future expenditures for rental equipment,
bank borrowings are likely to continue declining at a significant rate.
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.
Fiscal 1998 Compared with Fiscal 1997
Total revenues for the year ended May 31, 1998 increased 70% to $255.5 million
from $150.5 million, reflecting the acquisition of TMS on November 14, 1997.
Rental revenues increased 41% to $154.2 million, lease revenues increased 221%
to $64.1 million and sales of equipment and other revenues increased 75% to
$37.2 million. It is not possible to accurately determine the effects of the TMS
acquisition on revenues because of the almost immediate integration of all TMS
operations. Partially offsetting the additional revenue base initially provided
by the TMS acquisition were the effects of a significant number of acquired
rental contracts disputed by TMS customers, higher than expected attrition of
TMS customers and a generally weak market in the last half of the fiscal year.
Softness in the test and measurement equipment rental business appears to result
from continuing defense industry consolidation, cautious capital spending
budgets, and pressure related to the worldwide uncertainty created by the crisis
in Asia. Weakness in the personal computer rental business stems from greater
fluctuation in manufacturers' prices and price points than usual.
13
<PAGE> 3
Depreciation of equipment increased from 36% of rental and lease revenues in
fiscal 1997 to 39% of rental and lease revenues in fiscal 1998. This increase is
primarily due to lower equipment utilization since the TMS acquisition and an
increased proportion of lower yield personal computer operating leases in the
acquired TMS equipment pool.
Costs of revenues other than depreciation includes cost of equipment sales and
equipment parts and repair expenses. Cost of equipment sales increased from 71%
of equipment sales in fiscal 1997 to 77% of equipment sales in fiscal 1998. This
increase is primarily attributable to a weak market and an increased proportion
of personal computer sales. Equipment parts and repair expenses decreased from
5% of rental and lease revenues in fiscal 1997 to 4.3% of rental and lease
revenues in fiscal 1998, primarily due to declining PC parts prices and
increased bundling of PC parts in the platforms by manufacturers.
Selling, general and administrative expenses totaled $69.1 million or 27% of
total revenues for fiscal 1998 as compared to $42.4 million or 28% of total
revenues for fiscal 1997. This decrease reflects cost savings resulting from the
integration of TMS, including the elimination of redundant functions and
facilities.
As a result of the changes in revenues, operating costs and expenses discussed
above, operating earnings were $64.3 million or 25% of total revenues in fiscal
1998 compared to $41.6 million or 28% of total revenues in fiscal 1997.
Interest expense increased to $9.5 million in fiscal 1998 from $.8 million in
fiscal 1997. The increase is a result of additional bank borrowings used to
finance the TMS acquisition.
Fiscal 1997 Compared with Fiscal 1996
Total revenues for the year ended May 31, 1997 increased 7% to $150.5 million
from $141.1 million, reflecting continued improvement in rentals and leases, as
sales remained stable. Rental revenues increased 5% to $109.2 million, primarily
as a result of business expansion in personal computers, including the effect of
purchasing LDI Computer Rentals in March 1996. Lease revenues increased 31% to
$20.0 million 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 equipment and other revenues decreased
slightly to $21.3 million.
Depreciation of equipment was 36% of rental and lease revenues in fiscal 1996
and fiscal 1997. This was attributable to a consistent high utilization and mix
of the equipment pool.
Costs of revenues other than depreciation includes cost of equipment sales and
equipment parts and repair expenses. Cost of equipment sales increased from 70%
of equipment sales in fiscal 1996 to 71% of equipment sales in fiscal 1997. This
increase was primarily attributable to an increased proportion of personal
computer sales which provide lower margins. Equipment parts and repair expenses
decreased from 7.2% of rental and lease revenues in fiscal 1996 to 5% of rental
and lease revenues in fiscal 1997, primarily due to declining PC parts prices
and increased bundling of PC parts in the platforms by manufacturers.
Selling, general and administrative expenses totaled $42.4 million or 28% of
total revenues for fiscal 1997 as compared to $37.8 million or 27% of total
revenues for fiscal 1996. This increase resulted from a need to build depth in
the organization.
As a result of the changes in revenues, operating costs and expenses discussed
above, operating earnings were $41.6 million or 28% of total revenues in fiscal
1997 compared to $38.7 million or 27% of total revenues in fiscal 1996.
Interest expense decreased to $.8 million in fiscal 1997 from $2.2 million in
fiscal 1996. The decrease resulted from a reduction in bank borrowings due to
strong cash flows.
Year 2000
The Company has implemented a program to attempt to assess, remediate and
mitigate the potential impact of the "Year 2000" problem throughout the Company.
A "Year 2000" problem will occur where date-sensitive software uses two digit
year date fields, sorting the year 2000 ("00") before the year 1999 ("99"). The
Year 2000 problem can arise in software, technology equipment, or any other
equipment or process that uses embedded software, resulting in data corruption
and processing errors.
The Company's program has been structured to address its internal computer
systems and applications, facilities, equipment portfolio, and continuity and
network services operations. In addition, the Company is attempting to monitor
the Year 2000 compliance status of its vendors, suppliers and service providers.
Management believes that Electro Rent's systems will be substantially Year 2000
ready prior to the commencement of the year 2000. The Company should not have
material business risk or costs from such Year 2000 issues provided the
Company's suppliers, vendors, service providers and customers, over which the
Company has no control, successfully address their own Year 2000 issues. The
Company will attempt to assess and monitor its suppliers, vendors, service
providers and customers Year 2000 remediation efforts.
14
<PAGE> 4
Electro Rent Corporation
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------------
(in thousands, except per share information) 1998 1997 1996
=====================================================================================
<S> <C> <C> <C>
Revenues:
Rentals and leases $218,289 $129,181 $119,495
Sales of equipment and other revenues 37,216 21,319 21,642
----------------------------------
Total revenues 255,505 150,500 141,137
----------------------------------
Costs and expenses:
Depreciation of equipment 85,232 46,342 43,510
Costs of revenues other than depreciation 36,848 20,091 21,090
Selling, administrative and general expenses 69,099 42,439 37,792
Interest 9,506 829 2,230
----------------------------------
Total costs and expenses 200,685 109,701 104,622
----------------------------------
Income before income taxes 54,820 40,799 36,515
Income taxes 22,476 16,726 14,872
----------------------------------
Net income $ 32,344 $ 24,073 $ 21,643
==================================
Earnings per share:
Basic $ 1.33 $ 1.01 $ 0.91
Diluted $ 1.29 $ 0.97 $ 0.88
Shares used in per share calculation:
Basic 24,305 23,952 23,680
Diluted 25,141 24,868 24,708
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE> 5
Electro Rent Corporation
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31,
---------------------
(in thousands, except share information) 1998 1997
=================================================================================================================
<S> <C> <C>
Assets
Cash $ 2,281 $ 2,207
Accounts receivable, net of allowance for doubtful accounts of $4,715 and $1,773 66,518 19,968
Rental and lease equipment, net of accumulated depreciation of $175,421 and $127,247 293,048 139,377
Other property, net of accumulated depreciation and amortization of $8,822 and $6,630 25,867 19,438
Goodwill and intangibles, net of amortization of $6,090 and $5,282 63,346 4,526
Other 6,836 2,697
---------------------
$457,896 $188,213
=====================
Liabilities and Shareholders' Equity
Liabilities:
Bank borrowings $226,900 $ 4,200
Accounts payable 20,733 20,096
Accrued expenses 21,749 11,001
Deferred income taxes 16,505 13,696
---------------------
Total liabilities 285,887 48,993
---------------------
Commitments and contingencies
Shareholders' equity
Preferred stock, $1 par -- shares authorized 1,000,000; none issued -- --
Common stock, no par -- shares authorized 40,000,000; issued and outstanding:
1998-- 24,416,424; 1997-- 24,070,992 10,410 9,965
Retained earnings 161,599 129,255
---------------------
Total shareholders' equity 172,009 139,220
---------------------
$457,896 $188,213
=====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE> 6
Electro Rent Corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Three Years Ended May 31, 1998
-------------------------------------------------------------
Common Stock
-------------------------- Cumulative
Number Retained Translation
(in thousands) of Shares Amount Earnings Adjustment
==================================================================================================================
<S> <C> <C> <C> <C>
Balance, May 31, 1995 23,548 $ 8,597 $ 83,543 $ 48
Exercise of stock options 296 844 -- --
Repurchase of common stock -- -- (4) --
Net income for the year ended May 31, 1996 -- -- 21,643 --
Translation adjustment -- -- -- (48)
-------------------------------------------------------------
Balance, May 31, 1996 23,844 9,441 105,182 --
Exercise of stock options 226 524 -- --
Net income for the year ended May 31, 1997 -- -- 24,073 --
-------------------------------------------------------------
Balance, May 31, 1997 24,070 9,965 129,255 --
Exercise of stock options, net 346 445 -- --
Net income for the year ended May 31, 1998 -- -- 32,344 --
-------------------------------------------------------------
Balance, May 31, 1998 24,416 $ 10,410 $ 161,599 $ --
=============================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 7
Electro Rent Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------------------------
(in thousands) 1998 1997 1996
============================================================================================================================
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 32,344 $ 24,073 $ 21,643
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 88,278 47,824 44,891
Provision for losses on accounts receivable 3,111 717 682
Gain on sale of equipment (7,503) (5,350) (5,526)
Change in operating assets and liabilities:
Increase in accounts receivable (47,744) (87) (2,935)
Decrease in other assets 1,657 357 122
Increase (decrease) in accounts payable (9,141) 90 (1,558)
Increase (decrease) in accrued expenses 4,091 (875) 1,066
Increase (decrease) in deferred income taxes 2,809 2,000 (281)
-------------------------------------
Net cash provided by operating activities 67,902 68,749 58,104
-------------------------------------
Cash flows from investing activities:
Proceeds from sale of equipment 32,262 18,424 18,543
Payments for acquisitions of businesses, net of cash acquired (244,500) -- (1,881)
Payments for purchase of rental and lease equipment (76,927) (73,014) (53,648)
Payments for purchase of other property (1,808) (1,270) (1,648)
-------------------------------------
Net cash used in investing activities (290,973) (55,860) (38,634)
-------------------------------------
Cash flows from financing activities:
Increase (decrease) in bank borrowings 222,700 (12,600) (19,300)
Proceeds from issuance of common stock 445 524 844
Payments for repurchase of common stock -- -- (4)
-------------------------------------
Net cash provided by (used in) financing activities 223,145 (12,076) (18,460)
-------------------------------------
Effect of exchange rate on cash -- -- (48)
-------------------------------------
Net increase in cash 74 813 962
Cash at beginning of year 2,207 1,394 432
-------------------------------------
Cash at end of year $ 2,281 $ 2,207 $ 1,394
=====================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 8
Electro Rent Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1: Summary of Significant Accounting Policies
Business and Organization:
Electro Rent Corporation primarily engages in the short-term rental and the
lease of state-of-the-art electronic equipment. The Company maintains an
equipment portfolio composed primarily of general purpose test and measurement
instruments, 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 1998, 1997 and 1996 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. Certain reclassifications have been made to make information
comparable between years.
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 or amortization are eliminated from the
accounts and any gain or loss is recognized. Depreciation and amortization 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 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, 1998 and 1997
investment in sales-type leases of $1,431,000 and $667,000 net of deferred
interest of $82,000 and $44,000 is included in other assets. Interest income is
recognized over the life of the lease using the interest method.
Fair Value of Financial Instruments:
The carrying amount of cash and accounts receivable approximates fair value due
to the short maturity of these instruments. Bank borrowings bear interest at
rates that approximate the current market interest rates for similar instruments
and, accordingly, the carrying value approximates fair value.
Cash Flow:
Supplemental disclosures of cash paid during the year for:
<TABLE>
<CAPTION>
-------------------------------------------
(in thousands) 1998 1997 1996
================================================================================
<S> <C> <C> <C>
Interest $ 7,644 $ 851 $ 2,275
Income taxes 21,887 15,764 13,640
</TABLE>
Supplemental schedule of non-cash investing and financing activities: The
Company acquired equipment of $19,231,000, 19,405,000 and $15,832,000 at May 31,
1998, 1997 and 1996, respectively, which was paid for during the subsequent
year.
19
<PAGE> 9
Earnings per Share:
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share," ("EPS") at May 31, 1998, which requires the Company
to report basic and diluted EPS. Basic EPS is computed by dividing net income by
the weighted average number of common shares outstanding for the year. Diluted
EPS reflects the potential dilution that could occur if the Company's common
stock options were exercised or issued as of the earlier of the beginning of
each year or the date of issuance. Prior years' average shares have been
restated to give effect to the two-for-one stock split effected in the form of a
100% stock dividend payable on May 12, 1998 to shareholders of record on April
30, 1998.
New Accounting Pronouncements:
During 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which requires companies to report financial and descriptive information about
its reportable operating segments in the interim and annual financial
statements. It is effective for annual periods beginning after December 15, 1997
and will be adopted by the Company in fiscal 1999. It is not expected that the
adoption of this standard will have an impact on the consolidated financial
statements.
During 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which requires companies to report all changes in equity during a period, except
those resulting from investment by owners and distribution to owners, in a
financial statement for the period in which they are recognized. This standard
is effective for periods beginning after December 15, 1997 and will be adopted
by the Company in fiscal 1999. It is not expected that the adoption of this
standard will have an impact on the consolidated financial statements nor
require additional footnote disclosure since the Company currently does not have
any non-owner changes in equity.
During 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure," which requires additional disclosure regarding a company's
capital structure. This standard was adopted in fiscal 1998 and had no impact on
the consolidated financial statements.
During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities," which establishes new standards for
reporting derivative and hedging information. The standard is effective for
periods beginning after June 15, 1999 and will be adopted by the Company in
fiscal 2001. It is not expected that the adoption of this standard will have an
impact on the consolidated financial statements nor require additional footnote
disclosure since the Company does not currently utilize derivative instruments
or participate in structured hedging activities.
- --------------------------------------------------------------------------------
Note 2: Borrowings
On November 14, 1997, in connection with the acquisition of the net tangible
assets of GE Capital Technology Management Services, the Company obtained a
$330,000,000 unsecured revolving line of credit with a syndicate of twenty-one
banks which expires on November 14, 2000. The agreement calls for mandatory
reductions of the line of credit of $10,000,000 on May 31, 1998, $10,000,000 on
November 30, 1998 and $20,000,000 on May 31, 1999, and allows for voluntary
reductions. At May 31, 1998, the line of credit had been reduced to
$280,000,000. Interest under the line of credit is determined at the time of
borrowing and, at the Company's option, can be based on a base rate, LIBOR or
other variable rates. The line of credit requires the payment of a facility fee,
and includes requirements regarding the level of the Company's tangible net
worth, interest coverage ratios and leverage ratios. The Company was in
compliance with these covenants at May 31, 1998. At May 31, 1998, $226,900,000
was outstanding under this line. The weighted average interest rate under this
line was 6.3% at May 31, 1998. Weighted average borrowing for the period ended
May 31, 1998 was $241,840,000 with an average interest rate of 6.3%.
The Company had a financing agreement with a bank which provided for a
$22,000,000 unsecured line of credit which was terminated on November 14, 1997.
The agreement required a commitment fee based on the unused balance, and
included requirements regarding the level of the Company's tangible net worth,
debt coverage ratios and debt-to-equity ratios. The outstanding balance under
this committed line of credit was $200,000 at May 31, 1997.
The Company had established additional unsecured borrowing arrangements with
various banks which also were terminated on November 14, 1997. There was
$4,000,000 outstanding under these uncommitted arrangements at May 31, 1997,
with maturities ranging from 1 to 15 days at varying interest rates depending on
the bank and term. The weighted average interest rate under these unsecured
lines was 5.78% at May 31, 1997. Weighted average borrowings for the years ended
May 31, 1998 and 1997 were $7,880,000 and $10,425,000 with average interest
rates of 6.6% and 6.8%, respectively.
20
<PAGE> 10
- --------------------------------------------------------------------------------
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>
--------------------------------------------
(in thousands) 1998 1997 1996
===============================================================================
<S> <C> <C> <C>
Currently payable
Federal $ 16,789 $ 13,241 $ 12,017
State 2,878 2,270 3,304
Deferred
Federal 2,398 1,037 (281)
State 411 178 (168)
--------------------------------------------
$ 22,476 $ 16,726 $ 14,872
============================================
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective tax
rate is as follows:
<TABLE>
<CAPTION>
------------------------------------
1998 1997 1996
===============================================================================
<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 0.5 0.2
------------------------------------
Effective tax rate 41.0% 41.0% 40.7%
====================================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the net deferred tax liabilities at May 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
---------------------------
(in thousands) 1998 1997
===============================================================================
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 1,935 $ 728
Net operating loss carryforwards 1,144 1,275
Finance lease income 177 391
Other 262 222
---------------------------
3,518 2,616
---------------------------
Deferred tax liabilities:
Accumulated depreciation (15,247) (13,251)
Deferred revenue (2,029) (977)
Other (2,747) (2,084)
---------------------------
(20,023) (16,312)
---------------------------
Net deferred tax liabilities $(16,505) $(13,696)
===========================
</TABLE>
Net operating loss carryforwards for federal income tax reporting purposes
approximate $3,267,000 at May 31, 1998 and are available for use against taxable
income through 2006. The utilization of operating loss carryforwards is limited
to $355,000 per year for federal income tax reporting purposes.
21
<PAGE> 11
- --------------------------------------------------------------------------------
Note 4: Computation of Earnings per Share
Following is a reconciliation of the numerator and denominator used in the
computation of basic and diluted EPS:
<TABLE>
<CAPTION>
----------------------------------------
(in thousands, except per share data) 1998 1997 1996
=====================================================================================================================
<S> <C> <C> <C>
Denominator:
Denominator for basic earnings per share -- weighted average common
shares outstanding 24,305 23,952 23,680
Effect of dilutive securities-- stock options 836 916 1,028
----------------------------------------
Denominator for diluted earnings per share 25,141 24,868 24,708
========================================
Net income $ 32,344 $ 24,073 $ 21,643
========================================
Earnings per share:
Basic $ 1.33 $ 1.01 $ 0.91
========================================
Diluted $ 1.29 $ 0.97 $ 0.88
========================================
</TABLE>
- --------------------------------------------------------------------------------
Note 5: Rentals Under Noncancellable Operating Leases
In addition to short-term rentals, equipment is leased to customers under
various operating leases that expire over the next three years. These leases
provide the lessee with the option of renewing the agreement for periods of up
to twelve months or purchasing the equipment at fair market value at the end of
the initial or renewal term.
The Company's cost of equipment under operating leases at May 31, 1998, with
remaining noncancellable lease terms of more than one year, is $83,179,000
before accumulated depreciation of $16,725,000 for a net book value of
$66,454,000.
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, 1998 is as
follows:
<TABLE>
<CAPTION>
(in thousands)
================================================================================
<S> <C>
1999 $52,897
2000 32,667
2001 5,368
-------
$90,932
=======
</TABLE>
- --------------------------------------------------------------------------------
Note 6: Other Property
Other property, at cost, consists of the following:
<TABLE>
<CAPTION>
-------------------------
(in thousands) 1998 1997
=================================================================================
<S> <C> <C>
Land $ 6,017 $ 6,017
Buildings 14,304 14,146
Furniture and other equipment 11,210 5,388
Leasehold improvements 3,158 517
-------------------------
34,689 26,068
Less - accumulated depreciation and amortization (8,822) (6,630)
-------------------------
$ 25,867 $ 19,438
=========================
</TABLE>
22
<PAGE> 12
- --------------------------------------------------------------------------------
Note 7: Acquisitions
On November 14, 1997, the Company acquired the computer and test and measurement
rental business of GE Capital Technology Management Services (TMS), a business
engaged in renting, leasing and selling computers, workstations and general
purpose test and measurement equipment. TMS's finance leasing business was not
purchased. The initial purchase price based on TMS's estimated net tangible
assets at November 14, 1997, was $240.8 million, payable in cash. The final
purchase price is currently under negotiation with TMS as provided for in the
acquisition agreement. Financing for the transaction was achieved through
short-term borrowings under a new $330 million reducing revolving credit
facility dated as of November 14, 1997.
The acquisition has been accounted for by the purchase method and, accordingly,
the results of operations of TMS have been included with those of the Company
since the date of acquisition. The purchase price has been allocated to assets
and liabilities based on preliminary estimates of fair value as of the date of
acquisition. The final allocation of the purchase price will be determined when
purchase price negotiations, appraisals and other studies are completed. As part
of the purchase price allocation, the Company recorded in goodwill a reserve for
estimated costs to be incurred in the consolidation of duplicate TMS facilities
and termination of employment of certain members of the TMS management and staff
who will not be replaced. Based on the allocation of the purchase price over the
net assets acquired, goodwill of approximately $59,628,000 was recorded. Such
goodwill is being amortized on a straight-line basis over 40 years.
The following unaudited pro forma financial information combines the
consolidated results of operations of the Company and TMS as if the acquisition
had occurred at the beginning of the respective fiscal years after giving effect
to certain adjustments, including amortization of goodwill, depreciation
charges, estimated changes in interest expense due to acquisition debt, and
related income tax effects. The pro forma results have been prepared for
comparative purposes only and do not purport to indicate the results of
operations which would actually have occurred had the combination been in effect
on the dates indicated, or which may occur in the future. Furthermore, no effect
has been given in the pro forma information for operating and synergistic
benefits that may be realized through the combination of the businesses.
<TABLE>
<CAPTION>
------------------------
(in thousands, except per share data) (unaudited) 1998 1997
=================================================================================
<S> <C> <C>
Net revenues $366,362 $393,170
Net income $ 36,821 $ 34,197
Earnings per share:
Basic $ 1.51 $ 1.43
Diluted $ 1.46 $ 1.38
Shares used in per share calculation:
Basic 24,305 23,952
Diluted 25,141 24,868
</TABLE>
- --------------------------------------------------------------------------------
Note 8: 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.
Minimum payments under these leases, exclusive of property taxes and insurance,
are as follows:
<TABLE>
<CAPTION>
(in thousands)
================================================================================
<S> <C>
1999 $2,476
2000 1,670
2001 1,239
2002 910
2003 499
------
$6,794
======
</TABLE>
23
<PAGE> 13
Rent expense was $2,404,670, $1,285,000 and $1,037,000 in 1998, 1997 and 1996,
respectively.
During 1998, the Company sold its interest in Nippon Electro Rent (NER) to
another joint venture partner and eliminated its guarantee of NER bank
borrowings. At May 31, 1997, the Company's guarantee was $1,875,000 at the
exchange rate in effect on that date.
- --------------------------------------------------------------------------------
Note 9: Stock Option Plans
The Company has Stock Option Plans (the "Plans") which authorize the Board of
Directors to grant options for not more than 2,117,500 shares of the Company's
common stock, of which 137,936 were available for future grants at May 31, 1998.
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 October 2001 to March 2008. The following
table summarizes certain information relative to options for common stock after
adjustment for stock splits.
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
==============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning
of year 1,299,974 $ 4.37 1,414,620 $ 3.42 1,549,316 $ 2.78
Granted 454,578 14.91 117,674 11.93 160,230 8.57
Exercised (384,672) 2.76 (227,844) 2.32 (291,550) 2.84
Forfeited -- -- (4,476) 2.65 (3,376) 3.42
----------------------------------------------------------------------------------------
Options outstanding, end
of year 1,369,880 $ 8.32 1,299,974 $ 4.38 1,414,620 $ 3.42
========================================================================================
Options exercisable at end
of year 756,438 $ 3.98 1,050,680 $ 3.08 1,113,764 $ 2.68
Weighted-average fair value of
options granted during year $ 7.62 $ 5.88 $ 3.99
</TABLE>
The following summarizes information regarding stock options outstanding at May
31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------- ------------------------------------
Weighted Average
Number Remaining Weighted Average Number Weighted Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
$ 2.65 - $ 4.36 645,124 3.9 $ 3.00 645,124 $ 3.00
$ 8.56 - $12.13 279,256 7.6 9.99 111,314 9.63
$13.88 - $20.50 445,500 9.4 14.97 -- --
---------------------------------------------------------------------------------------------------
1,369,880 6.4 $ 8.32 756,438 $ 3.98
===================================================================================================
</TABLE>
Pro Forma Information
The Company applies the intrinsic-value-based method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in
accounting for employee stock options. Accordingly, compensation expense is
recognized only when options are granted with a discounted exercise price. Any
such compensation expense is recognized ratably over the associated service
period, which is generally the option vesting term.
24
<PAGE> 14
Pro forma net earnings and earnings per share information, as required by
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation," has been determined as if the Company had accounted
for employee stock options under SFAS 123's fair value method. The fair value of
these options was estimated at grant date using the Black-Scholes option pricing
model with the following weighted-average assumptions for fiscal 1998, 1997 and
1996, respectively: risk-free interest rates of 5.9, 6.3 and 5.8 percent;
dividend yield of 0 percent; expected option life of 6.6, 6.0 and 5.7 years; and
volatility of 41.4, 39.8 and 39.0 percent.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the 4-year average vesting period of the options.
The Company's pro forma net earnings for 1998, 1997 and 1996 were $31,583,000,
$23,849,000 and $21,568,000, pro forma basic earnings per share were $1.30,
$1.00 and $.91, respectively, and pro forma diluted earnings per share were
$1.26, $.96 and $.88, respectively. These pro forma amounts include amortized
fair values attributable to options granted after May 31, 1996 only, and
therefore are not representative of future pro forma amounts.
- --------------------------------------------------------------------------------
Note 10: Savings Plan and Employee Stock Ownership Plan
The Company maintains a Savings Plan (401(k)) and a frozen Employee Stock
Ownership Plan (ESOP). Employees become eligible to participate in the 401(k)
after one year of employment. The Company has the option to match contributions
of participants at a rate management determines each year. For participants with
three or more years of service, the Company also may elect to make additional
discretionary matching contributions in excess of the rate elected for
participants with less than three years of service.
The Board of Directors determines the amount to be contributed annually to the
401(k) in cash, provided that such contributions shall not exceed the amount
deductible for federal income tax purposes. Cash contributions to the 401(k) of
$713,000, $503,000, and $495,000, were made for 1998, 1997 and 1996,
respectively.
- --------------------------------------------------------------------------------
Note 11: Quarterly Information (Unaudited)
Quarterly information is as follows:
<TABLE>
<CAPTION>
Earnings Per Share
Total Income ------------------------
(in thousands, except per share information) Revenues Before Taxes Net Income Basic Diluted
============================================================================================================================
<S> <C> <C> <C> <C> <C>
Fiscal Year 1998
First Quarter $ 38,917 $ 11,824 $ 6,977 $ 0.29 $ 0.28
Second Quarter 50,476 12,262 7,235 0.30 0.29
Third Quarter 85,192 18,036 10,640 0.43 0.42
Fourth Quarter 80,920 12,698 7,492 0.31 0.30
------------------------------------------------------------------------
$255,505 $ 54,820 $ 32,344 $ 1.33 $ 1.29
========================================================================
Fiscal Year 1997
First Quarter $ 38,144 $ 11,095 $ 6,547 $ 0.27 $ 0.26
Second Quarter 37,978 11,026 6,505 0.27 0.26
Third Quarter 36,804 9,899 5,841 0.25 0.24
Fourth Quarter 37,574 8,779 5,180 0.22 0.21
------------------------------------------------------------------------
$150,500 $ 40,799 $ 24,073 $ 1.01 $ 0.97
========================================================================
</TABLE>
25
<PAGE> 15
Electro Rent Corporation
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, 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 May 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
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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended May 31,
1998 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
Los Angeles, California
August 7, 1998
- --------------------------------------------------------------------------------
Capital Stock, Shareholders and Cash Dividend Information
The common stock of the Company is quoted on NASDAQ under the symbol ELRC. There
were approximately 600 shareholders of record at August 10, 1998. 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 1998 Fiscal Year 1997
---------------------------- ---------------------------
High Low High Low
==============================================================================================
<S> <C> <C> <C> <C>
First Quarter $14 9/16 $11 5/8 $12 1/2 $10 3/4
Second Quarter 19 1/4 12 13/16 12 3/8 11
Third Quarter 21 1/4 17 1/2 12 5/8 10 3/4
Fourth Quarter 26 1/2 20 1/4 12 7/8 11 1/4
</TABLE>
26
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 2,281
<SECURITIES> 0
<RECEIVABLES> 71,233
<ALLOWANCES> 4,715
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 503,158
<DEPRECIATION> 184,243
<TOTAL-ASSETS> 457,896
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 10,410
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 457,896
<SALES> 37,216
<TOTAL-REVENUES> 255,505
<CGS> 36,848
<TOTAL-COSTS> 191,179
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,506
<INCOME-PRETAX> 54,820
<INCOME-TAX> 22,476
<INCOME-CONTINUING> 32,344
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,344
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.29
</TABLE>
