<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, 1999 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 9, 1999 was $246,049,572.
Number of shares of Common Stock outstanding as of August 9, 1999:
24,480,813 shares.
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ELECTRO RENT CORPORATION
FORM 10-K ANNUAL REPORT
DOCUMENTS INCORPORATED BY REFERENCE
1. Pages 1 and 15 to 29 of the Annual Report to Security Holders for the
fiscal year ended May 31, 1999 (the "1999 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 7, 1999 (the "1999 Proxy Statement").
CROSS REFERENCE SHEET
Showing Location in 1999 Annual Report
and 1999 Proxy Statement of Information
Required by Items of Form 10-K
<TABLE>
<CAPTION>
Caption and Reference
Form 10-K Item in 1999 Annual Report ("AR")
Number and Caption or 1999 Proxy Statement ("PS")
------------------ ------------------------------
<S> <C>
PART II
5. Market for the Registrant's
Common Equity and Related
Shareholders Matters AR page 29
6. Selected Financial Data AR page 1
7. Management's Discussion and
Analysis of Financial
Condition and Results of
Operations AR pages 15 to 18
7A. Quantitative and Qualitative
Disclosure About Market Risk AR page 18
8. Financial Statements and
Supplementary Data AR pages 19 to 29
PART III
10. Directors and Executive
Officers of the Registrant PS pages 1 to 3
11. Executive Compensation PS pages 5 to 10
12. Security Ownership of
Certain Beneficial Owners
and Management PS pages 1 and 2
13. Certain Relationships and
Related Transactions PS page 4
</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,
IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," AND IN "QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK,"
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR
THOSE ANTICIPATED.
Item 1. Business.
Electro Rent Corporation (the "Company" or "Electro Rent") was
incorporated in California in 1965. The Company became a publicly held
corporation on March 31, 1980.
The Company primarily engages in the rental, lease and sale of
state-of-the-art electronic equipment. About 48% of the Company's equipment
portfolio at acquisition cost is composed of general purpose test and
measurement instruments purchased from leading manufacturers such as Hewlett
Packard and Tektronix. The remainder comprises personal computers and
workstations. Personal computer lines include those from Compaq, Dell, IBM,
Apple, and Toshiba; while workstations are purchased primarily from Sun
Microsystems and Hewlett Packard. A large part of its equipment portfolio is
rented or leased to Fortune 500 companies in the aerospace, defense, electronics
and telecommunications industries. Management believes that the Company's test
and measurement equipment is primarily used in research and development
activities and that a significant amount of this equipment is used in connection
with government-generated projects. The Company also rents equipment to
companies of various sizes representing a cross-section of American industry. No
customer accounted for more than 10% of the Company's revenues for the fiscal
year ended May 31, 1999. No significant portion of the Company's revenues are
currently derived from direct United States Government contracts.
An important aspect of the Company's equipment portfolio management is
the resale of equipment from the portfolio, generally three to five years after
purchase, which, on the average, have been at prices above book value. Such
sales have historically provided a substantial portion of revenues and operating
cash flow.
The Company services its customers through a network of equipment,
calibration and service centers in the United States and Canada
3
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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 Newcourt Technology Finance Group, a division of Newcourt
Financial; 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, 1999, Electro Rent and its subsidiary employed approximately
713 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. Approximately 24,800 square feet are currently
being leased to others, all of which will be available for future needs of the
Company. There is no additional space in the building available for leasing.
Electro Rent owns a facility in Wood Dale, Illinois containing
approximately 30,750 square feet. It houses the Company's Chicago sales office,
and currently has approximately 10,000 square feet available for lease.
The Company's building at 15385 Oxnard Street, Van Nuys, California
contains approximately 68,200 square feet, all of which is used by the Company.
It houses the Company's California warehouse and laboratory operations and Los
Angeles sales office.
As of May 31, 1999 Electro Rent had both sales offices and equipment,
calibration and service centers in the metropolitan areas of Atlanta, Boston,
Chicago and Los Angeles. Electro Rent also has sales offices in Albany, Atlanta,
Cleveland, Chicago, Dallas, Denver, Detroit, Houston, Kansas City, Minneapolis,
Montreal, New York/ Newark, Philadelphia, Phoenix, Portland (OR), Rochester, San
Diego, Seattle, Stamford, Toronto and Washington/Baltimore.
Electro Rent's facilities aggregate approximately 626,000 square feet.
Except for the corporate headquarters, the Chicago area facilities, and the
Oxnard Street building, all of the facilities are rented pursuant to leases for
up to five years for aggregate annual rentals of approximately $3,997,000 in
fiscal 1999. No rented facility is considered essential to the Company. The
Company considers its facilities to be in good condition, well maintained and
adequate for its needs.
Item 3. Legal Proceedings.
The Company is engaged in an arbitration proceeding with General
Electric Technology Management Services ("TMS") which involves a variety of
claims arising out of the November 1997 purchase by the Company of certain
assets and business of TMS.
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Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of the security holders of the Company.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Company's common stock is listed by the National Association of
Securities Dealers and is quoted on the NATIONAL MARKET SYSTEM OF NASDAQ. The
symbol is ELRC. The quarterly market price ranges for the common stock for the
two fiscal years ended May 31, 1999 as quoted on NASDAQ, shareholder information
and dividend information are set forth on page 29 of the 1999 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 1999 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 to 18 of the
1999 Annual Report is hereby incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks.
The information appearing under the caption Quantitative and Qualitative
Market Risk Disclosure on page 18 of the 1999 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 19 to 29 of the 1999 Annual
Report are hereby incorporated by reference.
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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 1999 Proxy Statement under the captions
Election of Directors (pages 1 to 3), Executive Officers (page 3), Compliance
With Section 16 of the Securities Exchange Act of 1934 (page 4), and
Transactions With Management (page 4), is hereby incorporated by reference.
Item 11. Executive Compensation.
Information appearing in the 1999 Proxy Statement under the caption
Executive Compensation (pages 5 to 10) 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 1999 Proxy Statement
(pages 1 to 3), and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information appearing in the 1999 Proxy Statement under the caption
Transactions With Management (page 4) 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 1999 Annual Report.
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<TABLE>
<CAPTION>
Page Number
-----------
1999 Annual
Item Report Form 10-K
---- ------ ---------
<S> <C> <C>
Consolidated Balance Sheets at
May 31, 1999 and 1998 20
Consolidated Statements of Income
for each of the three years in
the period ended May 31, 1999 19
Consolidated Statements of Shareholders'
Equity for each of the three years in
the period ended May 31, 1999 21
Consolidated Statements of Cash Flows
for each of the three years in the
period ended May 31, 1999 22
Notes to Consolidated Financial Statements 23 to 28
Report of Independent Public Accountants 29
Schedule for each of the three years in the
period ended May 31, 1999:
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
8
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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 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.
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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 incorporated by
reference to Exhibit 10(A) of the Annual Report (Form 10-K) for the fiscal year
ended May 31, 1998.
(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.
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(10)(E) A copy of the Electro Rent Corporation 1996 Stock Option Plan,
the Electro Rent Corporation Stock Option Agreement (Incentive Stock Options)
and the Electro Rent Corporation Stock Option Agreement (Nonstatutory Stock
Options) are incorporated by reference to Exhibits (10)(E)-(1), (2) and (3)
respectively to the Annual Report (Form 10-K) for the fiscal year ended May 31,
1996. A copy of AMENDMENT NUMBER ONE TO ELECTRO RENT CORPORATION 1996 STOCK
OPTION PLAN adopted November 1, 1996 is incorporated by reference to EXHIBIT
(10)(E) of the Annual Report (Form 10-K) for the fiscal year ended May 31, 1998.
(10)(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 1999 Annual Report, pages 19, 24 and 26.
(13) 1999 Annual Report. Only those portions of the 1999 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 corpora- tion.
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 15 to 29 of the Annual Report to Security Holders for
the fiscal year ended May 31, 1999 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 1999 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, 1999, 1998 and 1997
(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> <C>
Allowance for doubtful
receivables
1999 $4,715 $2,714 $1,595 $5,834
1998 $1,773 $3,158 $ 216 $4,715
1997 $1,464 $ 717 $ 408 $1,773
</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 23, 1999. 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 23, 1999
Daniel Greenberg
/s/ William Weitzman President, Chief Operating
- -------------------------- Officer and Director August 23, 1999
William Weitzman
/s/ Craig R. Jones Chief Financial Officer August 23, 1999
- -------------------------
Craig R. Jones
/s/ Gerald D. Barrone Director August 23, 1999
- -------------------------
Gerald D. Barrone
Director August 23, 1999
- -------------------------
Nancy Y. Bekavac
Director August 23, 1999
- -------------------------
Joseph J. Kearns
/s/ S. Lee Kling Director August 23, 1999
- -------------------------
S. Lee Kling
/s/ Michael R. Peevey Director August 23, 1999
- -------------------------
Michael R. Peevey
/s/ Will Richeson, Jr. Director August 23, 1999
- -------------------------
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 26, 1999
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, 1999
and 1998, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended May 31,
1999. 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended May 31, 1999 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Los Angeles, California
August 6, 1999
14
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FINANCIAL HIGHLIGHTS 1999
<TABLE>
<CAPTION>
MAY 31,
--------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) 1999 1998 1997 1996 1995
========================================================
<S> <C> <C> <C> <C> <C>
Revenues $269,739 $255,505 $150,500 $141,137 $121,354
Costs of revenues and depreciation 139,338 122,080 66,433 64,600 57,759
Selling, administrative and general expenses 77,612 69,099 42,439 37,792 36,907
Interest 11,999 9,506 829 2,230 2,457
--------------------------------------------------------
Income before income taxes 40,790 54,820 40,799 36,515 24,231
Income taxes 16,725 22,476 16,726 14,872 9,667
--------------------------------------------------------
Net income $ 24,065 $ 32,344 $ 24,073 $ 21,643 $ 14,564
========================================================
Earnings per share
Basic $ 0.98 $ 1.33 $ 1.01 $ 0.91 $ 0.62
Diluted $ 0.96 $ 1.29 $ 0.97 $ 0.88 $ 0.60
Shares used in per share calculation:
Basic 24,443 24,305 23,952 23,680 23,539
Diluted 25,004 25,141 24,868 24,708 24,348
Total assets $368,708 $457,896 $188,213 $171,428 $162,909
Bank borrowings $107,500 $226,900 $ 4,200 $ 16,800 $ 36,100
Shareholders' equity $196,174 $172,009 $139,220 $114,623 $ 92,188
Shareholders' equity per common share $ 8.01 $ 7.04 $ 5.79 $ 4.81 $ 3.92
</TABLE>
1
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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 million, at acquisition cost, at May 31,
1999 essentially unchanged from 1998 year end. During the three years ended May
31, 1999, the Company made payments for equipment purchases totaling $223
million, excluding the acquired TMS equipment of $193 million, resulting in a
net increase in the equipment portfolio at acquisition cost of $227 million for
the three-year period. The Company has three principal sources of liquidity:
cash flows provided by operating activities, proceeds from the sale of equipment
from its portfolio, and external funds, historically provided by bank
borrowings. As the following table illustrates, cash flows from operating
activities and proceeds from the sale of equipment have been more than
sufficient to fund the Company's operations.
<TABLE>
<CAPTION>
THREE YEARS ENDED
--------------------------------------------------
(IN THOUSANDS) 1997 1998 1999 MAY 31, 1999
==================================================
<S> <C> <C> <C> <C>
Cash flows from operating activities(1) $ 68,749 $ 67,902 $ 163,675 $ 300,326
Proceeds from sale of equipment 18,424 32,262 31,134 81,820
Total cash flows available for equipment purchases 87,173 100,164 194,809 382,146
Payments for equipment purchases (73,014) (76,927) (73,406) (223,347)
Net increase (decrease) in bank borrowings(2) (12,600) 227,700 (119,400) 95,700
Net increase (decrease) in equipment portfolio at acquisition cost 25,192 201,845 (50) 226,987
</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 171% 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 increase in fiscal 1999 cash flows from operating activities relates
primarily to the full year effect of the TMS acquisition on depreciation and
amortization and improved collections of accounts receivable. Although cash
flows from operating activities are expected to continue at a high level, they
are likely to be lower than in fiscal 1999.
The market for test and measurement equipment and personal computers declined
during fiscal 1999, and as a result, expenditures for equipment decreased.
Although expenditures for rental equipment are expected to increase in fiscal
2000, bank borrowings are likely to continue declining at a significant but
lower rate. At May 31, 1999, the Company had $160.0 million of available
borrowing capacity under its line of credit with a syndication of 21 commercial
banks, of which $52.5 million was unused.
Inflation generally has favorably influenced the Company's results of operations
by enhancing the sale prices of its used equipment. Lower inflation rates and
newer, less expensive equipment with similar or better specifications could
result, over a period of several years, in lower relative prices for used
electronic equipment with a negative impact on margins and earnings. Prices of
new and used electronic test equipment have not consistently followed the
overall inflation rate. Prices of new and used personal computers and
workstations have consistently declined for the past three years. Because
management is unable to predict the advances in technology and the rate of
inflation for the next several years, it is not possible to estimate the impact
of these factors on the Company's earnings.
FISCAL 1999 COMPARED WITH FISCAL 1998
Total revenues for the year ended May 31, 1999 increased 6% to $269.7 million
from $255.5 million, reflecting the full year inclusion of TMS which was
acquired on November 14, 1997. Revenues were lower than expected due largely to
attrition of TMS customers and a generally weak market following the acquisition
of TMS, which continued through fiscal 1999. Rental and lease revenues increased
7% to $233.7 million and sales of equipment and other revenues decreased 3% to
$36.0 million.
Depreciation of equipment as a percentage of rental and lease revenues increased
from 39% in fiscal 1998 to 45% in fiscal 1999. This increase is primarily due to
lower equipment utilization following the TMS acquisition, an acceleration of
depreciation for personal
15
<PAGE> 3
computers implemented at the beginning of fiscal 1999, and an increased
proportion of personal computer operating leases in the acquired TMS equipment
pool which generally have lower billing rates than rentals.
Costs of revenues other than depreciation primarily includes the cost of
equipment sales, which increased from 77% of equipment sales in fiscal 1998 to
88% of equipment sales in fiscal 1999. This increase is primarily attributable
to a weak market for both personal computers and test and measurement equipment
and an increased proportion of personal computer sales, especially during the
first half of fiscal 1999.
Selling, general and administrative expenses totaled $77.6 million or 29% of
total revenues for fiscal 1999, as compared to $69.1 million or 27% of total
revenues for fiscal 1998. The increase in the expense ratio reflects significant
quarter-to-quarter revenue declines experienced during the first three quarters
of fiscal 1999. The Company responded to these revenue declines with cost
reductions beginning in the second quarter, bringing the expense ratio down from
32% in the first quarter of fiscal 1999 to 27% in the fourth quarter of fiscal
1999.
As a result of the changes in revenues, operating costs and expenses discussed
above, earnings before interest and income taxes were $52.8 million or 20% of
total revenues for fiscal 1999 compared to $64.3 million or 25% of total
revenues for fiscal 1998.
Interest expense increased to $12.0 million in fiscal 1999 from $9.5 million in
fiscal 1998. The increase is the result of the full year effect of additional
bank borrowings used to finance the TMS acquisition in November 1997.
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 test and measurement equipment rental and lease demand appears to
result from continuing defense industry consolidation and pressure related to
the worldwide uncertainty created by the crisis in Asia. Weakness in personal
computer rental and lease demand stems from greater fluctuation in
manufacturers' prices and price points than usual.
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 expense ratio 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, earnings before interest and income taxes 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.
16
<PAGE> 4
YEAR 2000 COMPLIANCE
General. The computer systems issue relating to dates beyond 1999 is the result
of many computer programs being written to use and store dates with only the
last two digits of the applicable year. As a result, these programs may assume
that all two digit dates are twentieth century dates. This could result in
system failure, anomalous system behavior or incorrect system reporting. System
failure could, in turn, temporarily affect the Company's ability to process
customer transactions, interface with vendors and engage in similar normal
business activities.
The Company has assessed how it may be impacted. The Company has formulated and
begun implementation of a plan to address all known aspects of the issue. The
Company has already completed a substantial portion of this plan and is on
schedule to fully complete the plan by September 1999.
Software Information Systems. Software information systems consist of the
Company's base financial and operations system (internally-developed PERFECT
system), other smaller scale software applications and other programs developed
internally. All of these systems were found to be substantially Year 2000
compliant with immaterial associated costs.
Vendor Provided Computer Hardware and Operating Systems. Vendor provided
computer hardware and operating systems include all data center equipment (Sun
Microsystems Enterprise 6000) and networks (Novell and Microsoft NT). All of
these systems were found to be substantially Year 2000 compliant with the
exception of the Sun 6000 operating system. This was upgraded in February 1999
with immaterial associated costs.
Communications Systems. Communications systems include all data center equipment
and software systems used to support external communications with customers,
employees, suppliers and business partners, and all corporate equipment and
software systems used to support internal business management communications.
Corporate communications systems have been recently replaced and/or upgraded.
Each significant component of these communications systems has been tested and
all were found to be substantially Year 2000 compliant with immaterial
associated costs. The Company is currently evaluating communications systems at
each of its field offices and will make any necessary replacements and/or
upgrades by September 1999. The Company does not expect any associated costs to
be material.
Suppliers and Other Business Partners. This area of the plan called for all
significant suppliers and other business partners to be monitored for Year 2000
readiness. The Company is not currently aware of any single vendor or business
partner with Year 2000 compliance issues that could have a material impact on
the Company. Year 2000 business transaction tests of all significant direct
interfaces with vendors and other business partners will be completed by
September 1999. The Company can provide no assurance that Year 2000 compliance
will be successfully implemented by all of its suppliers.
Rental and Lease Equipment Pool. The Company has reviewed its rental and lease
equipment pool to determine whether its use and market value may be materially
adversely affected by the Year 2000 conversion. The Company may encounter Year
2000 risk as a result of the Year 2000 failure of equipment rented, leased or
sold by the Company. The Company may face claims from customers and their end
users arising in connection with bodily injury, property damage and business
interruption as a result of a Year 2000 failure in equipment provided by the
Company. Based on the Company's standard rental and lease agreements, the
Company believes that it would not be liable for such claims. However, there can
be no assurance that such claims will not be brought against the Company.
Additionally, Year 2000 may have an impact on the fair market value of the
Company's rental and lease equipment pool for which the manufacturer does not
make available a Year 2000 compliance upgrade path or in the event an available
Year 2000 upgrade is cost prohibitive relative to the market value of the
equipment. Although the Company is still in the process of evaluating any
potential Year 2000 market value risks, nothing has come to the Company's
attention that would lead it to believe that the amounts the Company will
ultimately realize would result in gross margins materially different from
current levels.
Contingency Planning. The Company has determined that a comprehensive
contingency plan is not required to address the risk of operational problems and
costs likely to result from a failure by the Company or by a supplier or
business partner to address Year 2000 readiness. The Company believes that
failure will not alone adversely affect the continuity of the core business. The
Company believes its current state of readiness is on schedule with a
conservative plan to be substantially Year 2000 compliant by September
17
<PAGE> 5
1999 and that business risks have been minimized. However, there can be no
guarantee that Year 2000 compliance issues not yet identified or fully addressed
will not materially affect the Company's operations or expose it to third party
liability.
QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES
The Company's primary market risk exposure is interest rate risk, primarily
related to its borrowings under its unsecured revolving credit facility.
However, a changing interest rate environment does not necessarily impact the
Company's margins since the effects of higher or lower borrowing costs may be
reflected in the rates on newly rented and leased assets. The Company attempts
to reduce this risk by utilizing derivative financial instruments, namely
interest rate caps and swaps, pursuant to Company policies. All derivative
financial instruments are for purposes other than trading.
The table below presents the principal (or notional) amounts and related
weighted average interest rates of the Company's bank borrowings and derivative
financial instruments by expected maturity dates. The table reflects expected
maturities as of May 31, 1999 and does not reflect changes which could arise
after that time. There are no expected maturities after May 31, 2001. The
Company's ultimate realized gain or loss with respect to interest rate
fluctuations will depend on exposures that arise during the respective period,
the Company's hedging strategies at the time, and actual interest rates.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) 2000 2001 TOTAL FAIR VALUE
==========================================================
<S> <C> <C> <C> <C>
Bank Borrowings
Principal amount(a) $70,000 $37,500 $107,500 $107,500
Average interest rate(b) VR% VR% VR%
Interest Rate CAPs
Notional amount(c) $75,000 $75,000
Weighted-average fixed rate(c) 7.0% 7.0%
Interest Rate SWAP
Notional amount(d) $25,000 $ 25,000 $ (164)
Rate to be paid by the Company 5.939% 5.939%
Rate to be received by the Company 3-month 3-month
LIBOR LIBOR
</TABLE>
(a) Bank borrowings consist of the Company's unsecured revolving line of
credit (see Note 2 to Notes to Consolidated Financial Statements), which
provided for total available credit of $160.0 million at May 31, 1999.
Interest on the line of credit is payable in accordance with the
applicable London Interbank Offering Rate (LIBOR) agreement or quarterly,
and accrues, at the Company's option, either at the LIBOR plus margin (as
defined) or the Base Rate (as defined). The weighted average interest rate
for the Company's outstanding bank borrowings at May 31, 1999 was 5.4%.
For the year ended May 31, 1999, 1998 and 1997, the weighted average
interest rate on bank borrowings was 6.2%, 6.3% and 6.8%, respectively.
(b) Variable Rate (VR) based on LIBOR plus margin or Base Rate as defined in
the Credit Agreement.
(c) In December 1997 the Company entered into three 2-year interest rate cap
agreements, each with a notional amount of $25.0 million and a fixed rate
of 7.0%
(d) In December 1997, the Company entered into one 3-year floating rate to
fixed rate interest rate swap agreement in the notional amount of $25.0
million. The impact of this contract on interest expense for fiscal years
1999 and 1998 was immaterial.
The Company is also subject to foreign currency rate risk relating to rentals
and leases denominated in Canadian dollars. The Company has determined that
hedging of these assets is not cost effective and instead attempts to minimize
currency exposure risk through working capital management. The Company does not
believe that any foreseeable change in currency rates would have a material
effect on its financial position or results of operations.
18
<PAGE> 6
ELECTRO RENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) 1999 1998 1997
================================
<S> <C> <C> <C>
Revenues:
Rentals and leases $233,682 $218,289 $129,181
Sales of equipment and other revenues 36,057 37,216 21,319
--------------------------------
Total revenues 269,739 255,505 150,500
--------------------------------
Costs and expenses:
Depreciation of equipment 106,051 85,232 46,342
Costs of revenues other than depreciation 33,287 36,848 20,091
Selling, administrative and general expenses 77,612 69,099 42,439
Interest 11,999 9,506 829
--------------------------------
Total costs and expenses 228,949 200,685 109,701
--------------------------------
Income before income taxes 40,790 54,820 40,799
Income taxes 16,725 22,476 16,726
--------------------------------
Net income $ 24,065 $ 32,344 $ 24,073
================================
Earnings per share:
Basic $ 0.98 $ 1.33 $ 1.01
Fully diluted $ 0.96 $ 1.29 $ 0.97
Shares used in per share calculation:
Basic 24,443 24,305 23,952
Fully diluted 25,004 25,141 24,868
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
19
<PAGE> 7
ELECTRO RENT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
---------------------
(IN THOUSANDS, EXCEPT SHARE INFORMATION) 1999 1998
=====================
<S> <C> <C>
Assets
Cash $ 4,039 $ 2,281
Accounts receivable, net of allowance for doubtful accounts of $5,834 and $4,715 45,874 66,518
Rental and lease equipment, net of accumulated depreciation of $239,102 and $175,421 229,317 293,048
Other property, net of accumulated depreciation and amortization of $10,789 and $8,822 22,651 25,867
Goodwill, net of amortization of $7,967 and $6,090 61,469 63,346
Other 5,358 6,836
---------------------
$368,708 $457,896
====================
Liabilities and Shareholders' Equity
Liabilities:
Bank borrowings $107,500 $226,900
Accounts payable 21,555 20,733
Accrued expenses 26,725 21,749
Deferred income taxes 16,754 16,505
---------------------
Total liabilities 172,534 285,887
---------------------
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:
1999 -- 24,475,749; 1998 -- 24,416,424 10,510 10,410
Retained earnings 185,664 161,599
---------------------
Total shareholders' equity 196,174 172,009
---------------------
$368,708 $457,896
====================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
20
<PAGE> 8
ELECTRO RENT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
THREE YEARS ENDED MAY 31, 1999
------------------------------------------------------
COMMON STOCK
-------------------------------
NUMBER RETAINED
(IN THOUSANDS) OF SHARES AMOUNT EARNINGS
======================================================
<S> <C> <C> <C>
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
Exercise of stock options, net 60 100 --
Net income for the year ended May 31, 1999 -- -- 24,065
------------------------------------------------------
Balance, May 31, 1999 24,476 $10,510 $185,664
======================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
21
<PAGE> 9
ELECTRO RENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------------------
(IN THOUSANDS) 1999 1998 1997
=============================================
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 24,065 $ 32,344 $ 24,073
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 110,831 88,278 47,824
Provision for losses on accounts receivable 2,714 3,111 717
Gain on sale of equipment (3,644) (7,503) (5,350)
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable 17,930 (47,744) (87)
Decrease in other assets 1,478 1,657 357
Increase (decrease) in accounts payable 5,076 (9,141) 90
Increase (decrease) in accrued expenses 4,976 4,091 (875)
Increase in deferred income taxes 249 2,809 2,000
---------------------------------------------
Net cash provided by operating activities 163,675 67,902 68,749
---------------------------------------------
Cash flows from investing activities:
Proceeds from sale of equipment 31,134 32,262 18,424
Payments for acquisition of business -- (244,500) --
Payments for purchase of rental and lease equipment (73,406) (76,927) (73,014)
Payments for purchase of other property (345) (1,808) (1,270)
---------------------------------------------
Net cash used in investing activities (42,617) (290,973) (55,860)
---------------------------------------------
Cash flows from financing activities:
Increase (decrease) in bank borrowings (119,400) 222,700 (12,600)
Proceeds from issuance of common stock 100 445 524
---------------------------------------------
Net cash provided by (used in) financing activities (119,300) 223,145 (12,076)
---------------------------------------------
Net increase in cash 1,758 74 813
Cash at beginning of year 2,281 2,207 1,394
---------------------------------------------
Cash at end of year $ 4,039 $ 2,281 $ 2,207
=============================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
22
<PAGE> 10
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, personal computers and workstations purchased from leading
manufacturers. Another aspect of the Company's business is the sale of equipment
after its utilization for rental or lease. The Company's customers are primarily
located in the United States and operate in various industry segments including
aerospace and defense, telecommunications, consulting and computer technology.
During fiscal 1999, 1998 and 1997 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 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, 1999 and 1998
investment in sales-type leases of $893,000 and $1,431,000 net of deferred
interest of $65,000 and $82,000 is included in other assets. Interest income is
recognized over the life of the lease using the effective interest method.
Fair Value of Financial Instruments:
The carrying amount of cash and accounts receivable approximates fair value due
to the short maturity of these instruments. Bank borrowings bear interest at
rates that approximate the current market interest rates for similar instruments
and, accordingly, the carrying value approximates fair value.
Impairment of Assets:
The Company recognizes impairment losses on equipment held for rental and lease
when the expected future cash flows are less than the asset's carrying value, in
which case the asset is written down to its estimated recoverable value. The
Company also recognizes impairment losses on goodwill when expected future cash
flows from the related operations are less than the carrying value. The Company
has not recorded an impairment loss during any of the operating periods
presented in the accompanying financial statements.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of trade accounts receivable. The Company sells
primarily on 30-day terms, individually performs credit evaluation procedures on
its customers on each transaction and will require security deposits or personal
guarantees from its customers when a significant credit risk is identified.
Typically, most customers are large, established companies. Historically, the
Company has not incurred significant credit related losses; however, an
allowance for potential credit losses is maintained.
Derivative Financial Instruments:
The Company uses derivative financial instruments as a means of managing
interest-rate risk associated with current debt. The Company's interest rate
protection agreements generally consist of interest rate swap agreements and
interest cap agreements. These instruments are matched with variable rate debt,
and payments thereon are recorded on a settlement basis as an adjustment
23
<PAGE> 11
to interest expense. Premiums paid to purchase interest rate cap agreements are
amortized as an adjustment of interest expense over the life of the contract.
Derivative financial instruments are not held for trading purposes. (See Note 2
to Notes to Consolidated Financial Statements).
Net Income Per Common and Common Equivalent Share:
Basic earnings per share ("EPS") is computed as net income divided by the
weighted average number of shares of common stock outstanding for the reported
period, excluding the dilutive effects of stock options and other potentially
dilutive securities. Diluted EPS is computed as net income divided by the
weighted average number of shares outstanding of common stock and common stock
equivalents for the reported period. Common stock equivalents result from the
dilutive stock options computed using the treasury stock method with the average
share price for the reported period. 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.
Cash Flow:
Supplemental disclosures of cash paid during the year for:
<TABLE>
<CAPTION>
-------------------------------------
(IN THOUSANDS) 1999 1998 1997
=====================================
<S> <C> <C> <C>
Interest $12,144 $ 7,644 $ 851
Income taxes 10,409 21,887 15,764
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
The Company acquired equipment of $14,977,000, $19,231,000, and $19,405,000 at
May 31, 1999, 1998 and 1997, respectively, which was paid for during the
subsequent year.
New Accounting Pronouncements:
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 period in which they were recognized. This standard was
adopted by the Company in fiscal 1999 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 as amended is
effective for periods beginning after June 15, 2000 and will be adopted by the
Company in fiscal 2001. It is not expected that the adoption of this standard
will have an impact on the consolidated financial statements nor require
additional footnote disclosure since the Company does not expect to utilize
derivative instruments or participate in structured hedging activities in fiscal
2001.
NOTE 2: BORROWINGS
On November 14, 1997, in connection with the acquisition of the net tangible
assets of GE Capital Technology Management Services, the Company obtained a
$330,000,000 unsecured revolving line of credit with a syndicate of twenty-one
banks which expires on November 14, 2000. The agreement called for mandatory
reductions of the available line of credit of $10,000,000 on May 31, 1998,
$10,000,000 on November 30, 1998 and $20,000,000 on May 31, 1999, and allows for
voluntary reductions. At May 31, 1999, the line of credit had been reduced to
$160,000,000. Interest under the line of credit is determined at the time of
borrowing and, at the Company's option, can be based on a base rate, LIBOR or
other variable rates. The line of credit requires the payment of a facility fee,
and includes requirements regarding the level of the Company's tangible net
worth, interest coverage ratios and leverage ratios. At May 31, 1999,
$107,500,000 was outstanding under this line. The weighted average interest rate
under this line was 5.4% at May 31, 1999. Weighted average borrowing for the
year ended May 31, 1999 was $167,800,000 with an average interest rate of 6.2%.
Derivative Positions -- The Company has entered into interest rate protection
agreements. The Company's exposure under these agreements is limited to the
impact of variable interest rate fluctuations and the periodic settlement of
amounts due under these agreements if the other parties fail to perform. The
Company does not anticipate nonperformance by the counterparties, which are
major financial institutions.
24
<PAGE> 12
The following interest rate protection agreements were held as of May 31, 1999
and 1998 (in thousands, except percentages):
<TABLE>
<CAPTION>
------------------------------------------------------
NOTIONAL INTEREST
DESCRIPTION AMOUNT EXPIRATION DATES RATE
======================================================
<S> <C> <C> <C>
Interest rate cap agreement $ 25,000 December 1999 7.000%
Interest rate cap agreement 25,000 December 1999 7.000%
Interest rate cap agreement 25,000 December 1999 7.000%
Interest rate swap agreement 25,000 December 2000 5.939%
---------
$ 100,000
=========
</TABLE>
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) 1999 1998 1997
=====================================
<S> <C> <C> <C>
Currently payable
Federal $14,064 $16,789 $13,241
State 2,412 2,878 2,270
Deferred
Federal 213 2,398 1,037
State 36 411 178
-------------------------------------
$16,725 $22,476 $16,726
=====================================
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective tax
rate is as follows:
<TABLE>
<CAPTION>
----------------------------------
1999 1998 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 0.5 0.5
----------------------------------
Effective tax rate 41.0% 41.0% 41.0%
==================================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the net deferred tax liabilities at May 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
-------------------------
(IN THOUSANDS) 1999 1998
=========================
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 2,392 $ 1,935
Net operating loss carryforwards 1,019 1,144
Other 828 439
-------------------------
4,239 3,518
-------------------------
Deferred tax liabilities:
Accumulated depreciation and amortization (16,210) (15,373)
Deferred revenue (2,214) (2,029)
Other (2,569) (2,621)
-------------------------
(20,993) (20,023)
-------------------------
Net deferred tax liabilities $(16,754) $(16,505)
=========================
</TABLE>
Net operating loss carryforwards for federal income tax reporting purposes
approximate $2,912,000 at May 31, 1999 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.
25
<PAGE> 13
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) 1999 1998 1997
=====================================
<S> <C> <C> <C>
Denominator:
Denominator for basic earnings per share --
weighted average common shares outstanding 24,443 24,305 23,952
Effect of dilutive securities -- options 561 836 916
-------------------------------------
25,004 25,141 24,868
=====================================
Net income $24,065 $32,344 $24,073
=====================================
Earnings per share:
Basic $ 0.98 $ 1.33 $ 1.01
=====================================
Diluted $ 0.96 $ 1.29 $ 0.97
=====================================
</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, 1999, with
remaining noncancellable lease terms of more than one year, is $46,007,000
before accumulated depreciation of $14,619,000 for a net book value of
$31,388,000. 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, 1999 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
=======
<S> <C>
2000 $27,933
2001 14,661
2002 1,641
-------
$44,235
=======
</TABLE>
NOTE 6: OTHER PROPERTY
Other property, at cost, consists of the following:
<TABLE>
<CAPTION>
-------------------------
(IN THOUSANDS) 1999 1998
=========================
<S> <C> <C>
Land $ 6,985 $ 6,017
Buildings 13,667 14,304
Furniture and other equipment 9,770 11,210
Leasehold improvements 3,018 3,158
-------------------------
33,440 34,689
Less -- accumulated depreciation and amortization (10,789) (8,822)
-------------------------
$ 22,651 $ 25,867
=========================
</TABLE>
26
<PAGE> 14
NOTE 7: ACQUISITIONS
On November 14, 1997, the Company acquired the computer and test and measurement
rental business of GE Capital Technology Management Services (TMS), a business
engaged in renting, leasing and selling computers, workstations and general
purpose test and measurement equipment. The initial purchase price based on TMS'
estimated net tangible assets at November 14, 1997, was $240.8 million, payable
in cash. The purchase price is subject to adjustment as a result of the
Company's objections to the audited statement of net tangible assets and other
claims currently in arbitration. The acquisition has been accounted for by the
purchase method and, accordingly, the results of operations of TMS have been
included with those of the Company since the date of acquisition. The initial
purchase price has been allocated to assets and liabilities based on their fair
value as of the date of acquisition. Final allocation of the purchase price will
be determined when the actual purchase price is settled by arbitration. Based on
the allocation of initial purchase price over the net assets acquired, goodwill
of approximately $59,628,000 was recorded. Such goodwill is being amortized on a
straight-line basis over 40 years.
NOTE 8: COMMITMENTS
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 $2,212
2000 1,750
2001 1,385
2002 890
2003 633
------
$6,870
======
</TABLE>
Rent expense was $3,997,000, $2,405,000, $1,285,000 in 1999, 1998 and 1997,
respectively.
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 136,545 were available for future grants at May 31, 1999.
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 June 2001 to November 2008. The following
table summarizes certain information relative to options for common stock after
adjustment for stock splits.
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ---------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
====================================================================================
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 1,369,880 $ 8.32 1,299,974 $ 4.37 1,414,620 $ 3.42
Granted 33,767 13.23 454,578 14.91 117,674 11.93
Exercised (65,500) 2.70 (384,672) 2.76 (227,844) 2.32
Forfeited (32,376) 16.14 -- -- (4,476) 2.65
------------------------------------------------------------------------------------
Options outstanding, end of year 1,305,771 $ 8.54 1,369,880 $ 8.32 1,299,974 $ 4.38
====================================================================================
Options exercisable at end of year 869,924 $ 5.99 756,438 $ 3.98 1,050,680 $ 3.08
Weighted-average fair value of options
granted during year $ 7.62 $ 7.62 $ 5.88
</TABLE>
27
<PAGE> 15
The following summarizes information regarding stock options outstanding at May
31, 1999:
<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>
$ 2.41-$ 4.83 579,624 3.0 $ 3.04 579,624 $ 3.04
$ 7.23-$12.05 290,206 6.9 9.95 171,609 9.60
$12.06-$24.11 435,941 7.4 14.93 118,691 15.17
-----------------------------------------------------------------------------------------
1,305,771 5.3 $ 8.54 869,924 $ 5.99
=========================================================================================
</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.
Pro forma net earnings and earnings per share information, as required by
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation," has been determined as if the Company had accounted
for employee stock options under SFAS 123's fair value method. The fair value of
these options was estimated at grant date using a Black-Scholes option pricing
model with the following weighted-average assumptions for fiscal 1999, 1998, and
1997, respectively: risk-free interest rates of 4.9, 5.9, and 6.3 percent;
dividend yield of 0 percent; expected option life of 7.6, 6.6, and 6.0 years;
and volatility of 47.1, 41.4, and 39.8 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 1999, 1998 and 1997 were $23,045,000,
$31,583,000 and $23,849,000, and pro forma net earnings per share were $.93,
$1.26 and $.96, 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
$899,000, $713,000, and $503,000 were made for 1999, 1998 and 1997,
respectively.
NOTE 11: QUARTERLY INFORMATION (UNAUDITED)
Quarterly information is as follows:
<TABLE>
<CAPTION>
INCOME PER SHARE
-------------------
TOTAL INCOME NET
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) REVENUES BEFORE TAXES INCOME BASIC DILUTED
===================================================================
<S> <C> <C> <C> <C> <C>
Fiscal Year 1999
First Quarter $ 72,601 $ 6,358 $ 3,751 $0.15 $0.15
Second Quarter 68,993 11,109 6,555 0.27 0.26
Third Quarter 64,812 11,561 6,821 0.28 0.27
Fourth Quarter 63,333 11,762 6,938 0.28 0.28
------------------------------------------------------------------
$269,739 $40,790 $24,065 $0.98 $0.96
===================================================================
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
===================================================================
</TABLE>
28
<PAGE> 16
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, 1999 and
1998, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended May 31, 1999.
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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended May 31,
1999 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN
Arthur Andersen LLP
Los Angeles, California
August 6, 1999
CAPITAL STOCK, SHAREHOLDERS AND CASH DIVIDEND INFORMATION
The common stock of the Company is quoted on NASDAQ under the symbol ELRC. There
were approximately 570 shareholders of record at August 9, 1999. 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 1999 FISCAL YEAR 1998
------------------------ -------------------------
HIGH LOW HIGH LOW
========================================================
<S> <C> <C> <C> <C>
First Quarter $24 3/4 $12 3/4 $14 9/16 $11 5/8
Second Quarter 14 3/4 9 3/4 19 1/4 12 13/16
Third Quarter 16 1/8 9 1/2 21 1/4 17 1/2
Fourth Quarter 13 15/16 9 1/4 26 1/2 20 1/4
</TABLE>
29
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 4,039
<SECURITIES> 0
<RECEIVABLES> 51,708
<ALLOWANCES> 5,834
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 501,859
<DEPRECIATION> 249,891
<TOTAL-ASSETS> 368,708
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 10,510
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 368,708
<SALES> 36,057
<TOTAL-REVENUES> 269,739
<CGS> 33,287
<TOTAL-COSTS> 216,950
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,999
<INCOME-PRETAX> 40,790
<INCOME-TAX> 16,725
<INCOME-CONTINUING> 24,065
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,065
<EPS-BASIC> 0.98
<EPS-DILUTED> 0.96
</TABLE>
