<PAGE> 1
1
EXHIBIT 13
FINANCIAL HIGHLIGHTS 2000
<TABLE>
<CAPTION>
May 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands, except per share information)
<S> <C> <C> <C> <C> <C>
REVENUES $241,793 $269,739 $255,505 $150,500 $141,137
Costs of revenues and depreciation 131,125 139,338 122,080 66,433 64,600
Selling, administrative and
general expenses 65,104 77,612 69,099 42,439 37,792
Interest 5,465 11,999 9,506 829 2,230
-------- --------- --------- --------- ---------
Income before income taxes 40,099 40,790 54,820 40,799 36,515
Income taxes 15,237 16,725 22,476 16,726 14,872
-------- -------- -------- -------- --------
NET INCOME $ 24,862 $ 24,065 $ 32,344 $ 24,073 $ 21,643
======== ======== ======== ======== ========
EARNINGS PER SHARE:
Basic $ 1.01 $ 0.98 $ 1.33 $ 1.01 $ 0.91
Diluted $ 1.00 $ 0.96 $ 1.29 $ 0.97 $ 0.88
SHARES USED IN PER SHARE CALCULATION:
Basic 24,571 24,443 24,305 23,952 23,680
Diluted 24,972 25,004 25,141 24,868 24,708
TOTAL ASSETS $306,435 $368,708 $457,896 $188,213 $171,428
BANK BORROWINGS $ 21,800 $107,500 $226,900 $ 4,200 $ 16,800
SHAREHOLDERS' EQUITY $221,665 $196,174 $172,009 $139,220 $114,623
SHAREHOLDERS' EQUITY PER COMMON SHARE $ 9.00 $ 8.01 $ 7.04 $ 5.79 $ 4.81
</TABLE>
<PAGE> 2
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is capital intensive, with substantial capital
expenditures required to maintain the equipment pool. Electro Rent's rental and
lease equipment portfolio totaled $444 million, at acquisition cost, at May 31,
2000 decreasing $24 million from last year. During the three years ended May 31,
2000, the Company made payments for equipment purchases totaling $232 million,
excluding the acquired TMS equipment of $193 million, resulting in a net
increase in the equipment portfolio at acquisition cost of $178 million for the
three-year period. The Company has three principal sources of liquidity: cash
flows provided by operating activities, proceeds from the sale of equipment from
its portfolio, and external funds, historically provided by bank borrowings. As
the following table illustrates, cash flows from operating activities and
proceeds from the sale of equipment have been more than sufficient to fund the
Company's operations.
<TABLE>
<CAPTION>
Three Years Ended
------------------
1998 1999 2000 May 31, 2000
--------- --------- --------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Cash flows from operating activities(1) $ 67,902 $ 163,675 $ 127,771 $ 359,348
Proceeds from sale of equipment 32,262 31,134 37,016 100,412
Total cash flows available for equipment purchases 100,164 194,809 164,787 459,760
Payments for equipment purchases (76,927) (73,406) (81,802) (232,135)
Net increase (decrease) in bank borrowings(2) 222,700 (119,400) (85,700) 17,600
Net increase (decrease) in equipment portfolio
at acquisition cost 201,845 (50) (23,958) 177,837
</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 198% of the funds required for equipment
purchased during the three-year period. Rental and lease revenues have been
significantly supplemented as a source of cash flow by proceeds from the sale of
equipment from Electro Rent's portfolio. Management believes that cash flows
from operating activities, proceeds from the sale of equipment and its borrowing
capacity (see Note 2 of Notes to Consolidated Financial Statements) will be
sufficient to fund the Company's operations. Additionally, the Company believes
that it currently has low leverage ratios for a firm in the rental and leasing
business.
The decrease in fiscal 2000 cash flows from operating activities relates
primarily to lower depreciation and amortization which is associated with the
reduced equipment portfolio. Changes in accounts payable, accounts receivable,
and accrued expenses also contributed to this decrease.
The market for test and measurement equipment appeared to strengthen during
fiscal 2000, and as a result, expenditures for equipment increased. Bank
borrowings are likely to be repaid in full during the first half of fiscal 2001,
and cash is likely to accumulate thereafter. At May 31, 2000, the Company had
$40.0 million of available borrowing capacity under its line of credit with a
syndicate of 21 commercial banks, of which $18.2 million was unused.
Inflation generally has favorably influenced the Company's results of operations
by enhancing the sale prices of its used equipment. Lower inflation rates and
newer, less expensive equipment with similar or better specifications could
result, over a period of several years, in lower relative prices for used
electronic equipment with a negative impact on margins and earnings. Prices of
new and used electronic test equipment have not consistently followed the
overall inflation rate. Prices of new and used personal computers and
workstations have consistently declined for the past three years. Because
management is unable to predict the advances in technology and the rate of
inflation for the next several years, it is not possible to estimate the impact
of these factors on the Company's earnings.
<PAGE> 3
14
FISCAL 2000 COMPARED WITH FISCAL 1999
Total revenues for the year ended May 31, 2000 decreased 10% to $241.8 million
from $269.7 million, reflecting the continued decline in the demand for personal
computers, and the greater than expected contraction of the combined business
after the acquisition of TMS in fiscal 1998. Rental and lease revenues decreased
15% to $199.0 million. However, sales of equipment and other revenues increased
19% to $42.8 million reflecting greater liquidation of equipment returning from
leases.
Depreciation of equipment as a percentage of rental and lease revenues increased
from 45% in fiscal 1999 to 48% in fiscal 2000. This increase is primarily due to
lower equipment utilization, caused by continued weakness in the personal
computer business, and an acceleration of depreciation for personal computers
implemented at the beginning of fiscal 1999.
Costs of revenues other than depreciation primarily includes the cost of
equipment sales, which decreased from 88% of equipment sales in fiscal 1999 to
82% of equipment sales in fiscal 2000. This decrease is primarily attributable
to the sale of more fully depreciated personal computers in fiscal 2000.
Selling, general and administrative expenses totaled $65.1 million or 27% of
total revenues for fiscal 2000, as compared to $77.6 million or 29% of total
revenues for fiscal 1999. The decrease in the expense ratio primarily reflects
an employee reduction of approximately 8% resulting from a restructuring of the
sales organization, and lower freight costs achieved through improved equipment
management.
As a result of the changes in revenues, operating costs and expenses discussed
above, earnings before interest and income taxes were $45.6 million or 19% of
total revenues for fiscal 2000 compared to $52.8 million or 20% of total
revenues for fiscal 1999.
Interest expense decreased to $5.5 million in fiscal 2000 from $12.0 million in
fiscal 1999. The decrease results from further repayments of bank borrowings
used to finance the TMS acquisition in November 1997.
FISCAL 1999 COMPARED WITH FISCAL 1998
Total revenues for the year ended May 31, 1999 increased 6% to $269.7 million
from $255.5 million, reflecting the full year inclusion of TMS which was
acquired on November 14, 1997. Revenues were lower than expected due largely to
attrition of TMS customers and a generally weak market following the acquisition
of TMS, which continued through fiscal 1999. Rental and lease revenues increased
7% to $233.7 million and sales of equipment and other revenues decreased 3% to
$36.0 million.
Depreciation of equipment as a percentage of rental revenues increased from 39%
in fiscal 1998 to 45% in fiscal 1999. This increase is primarily due to lower
equipment utilization following the TMS acquisition, an acceleration of
depreciation for personal computers implemented at the beginning of fiscal 1999,
and an increased proportion of personal computer operating leases in the
acquired TMS equipment pool which generally have lower rates than rentals.
Costs of revenues other than depreciation primarily includes the cost of
equipment sales, which increased from 77% of equipment sales in fiscal 1998 to
88% of equipment sales in fiscal 1999. This increase is primarily attributable
to a weak market for both personal computers and test and measurement equipment
and an increased proportion of personal computer sales, especially during the
first half of fiscal 1999.
Selling, general and administrative expenses totaled $77.6 million or 29% of
total revenues for fiscal 1999, as compared to $69.1 million or 27% of total
revenues for fiscal 1998. The increase in the expense ratio reflects significant
quarter-to-quarter revenue declines experienced during the first three quarters
of fiscal 1999. The Company responded to these revenue declines with cost
reductions beginning in the second quarter, bringing the expense ratio down from
32% in the first quarter of fiscal 1999 to 27% in the fourth quarter of fiscal
1999.
As a result of the changes in revenues, operating costs and expenses discussed
above, earnings before interest and income taxes were $52.8 million or 20% of
total revenues for fiscal 1999 compared to $64.3 million or 25% of total
revenues for fiscal 1998.
<PAGE> 4
15
Interest expense increased to $12.0 million in fiscal 1999 from $9.5 million in
fiscal 1998. The increase is the result of the full year effect of additional
bank borrowings used to finance the TMS acquisition in November 1997.
YEAR 2000
Many computer programs and microprocessors were designed and developed without
consideration of the impact of the transition to the year 2000. As a result,
these programs and microprocessors may not be able to differentiate between the
year "1900" and "2000"; the year 2000 may be recognized as the two-digit number
"00". If not corrected, this could have caused difficulties in obtaining
accurate system data and support.
The Company has purchased numerous computer systems since its inception. The
Company's owned software and hardware is substantially Year 2000 compliant. The
costs associated with such compliance were not material to the Company's
liquidity or results of operations. Further, the Company's critical third party
software was generally Year 2000 compliant, with minor issues, and was capable
of functioning after December 31, 1999.
QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES
The Company's primary market risk exposure is interest rate risk, primarily
related to its borrowings under its unsecured revolving credit facility.
However, a changing interest rate environment does not necessarily impact the
Company's margins since the effects of higher or lower borrowing costs may be
reflected in the rates on newly rented and leased assets. The Company attempts
to reduce this risk by utilizing derivative financial instruments, namely
interest rate caps and swaps, pursuant to Company policies. All derivative
financial instruments are for purposes other than trading.
The table below presents the principal (or notional) amounts and related
weighted average interest rates of the Company's bank borrowings and derivative
financial instruments by expected maturity dates. The table reflects expected
maturities as of May 31, 2000 and does not reflect changes which could arise
after that time. There are no expected maturities after May 31, 2001. The
Company's ultimate realized gain or loss with respect to interest rate
fluctuations will depend on exposures that arise during the respective period,
the Company's hedging strategies at the time, and actual interest rates.
<TABLE>
<CAPTION>
Year Ended
May 31, 2001 Fair Value
------------ ----------
(in thousands, except percentages)
<S> <C> <C>
Bank Borrowings
Principal amount(a) $21,800 $21,800
Average interest rate(b) VR%
Interest Rate SWAP
Notional amount(c) $25,000 $ 149
Rate to be paid by the Company 5.939%
Rate to be received by the Company 3-month
LIBOR
</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 $40.0 million at May 31, 2000. Interest on
the line of credit is payable in accordance with the applicable London
Interbank Offering Rate (LIBOR) agreement or quarterly, and accrues, at the
Company's option, either at the LIBOR plus margin (as defined) or the Base
Rate (as defined). The weighted average interest rate for the Company's
outstanding bank borrowings at May 31, 2000 was 7.0%. For the year ended
May 31, 2000, 1999 and 1998, the weighted average interest rate on bank
borrowings was 6.4%, 6.2% and 6.3%, respectively.
(b) Variable Rate (VR) based on LIBOR plus margin or Base Rate as defined in
the Credit Agreement.
(c) In December 1997, the Company entered into one 3-year floating rate to
fixed rate interest rate swap agreement in the notional amount of $25.0
million. The impact of this contract on interest expense for fiscal years
2000, 1999 and 1998 was immaterial.
The Company is also subject to foreign currency rate risk relating to rentals
and leases denominated in Canadian dollars. The Company has determined that
hedging of these assets is not cost effective and instead attempts to minimize
currency exposure risk through working capital management. The Company does not
believe that any foreseeable change in currency rates would have a material
effect on its financial position or results of operations.
<PAGE> 5
16
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------------------------
<S> <C> <C> <C>
2000 1999 1998
-------- -------- --------
(in thousands, except per share information)
REVENUES:
Rentals and leases $199,022 $233,682 $218,289
Sales of equipment and other revenues 42,771 36,057 37,216
-------- -------- --------
Total revenues 241,793 269,739 255,505
-------- -------- --------
COSTS AND EXPENSES:
Depreciation of equipment 95,769 106,051 85,232
Costs of revenues other than depreciation 35,356 33,287 36,848
Selling, administrative and general expenses 65,104 77,612 69,099
Interest 5,465 11,999 9,506
-------- -------- --------
Total costs and expenses 201,694 228,949 200,685
-------- -------- --------
Income before income taxes 40,099 40,790 54,820
Income taxes 15,237 16,725 22,476
-------- -------- --------
Net income $ 24,862 $ 24,065 $ 32,344
======== ======== ========
Earnings per share:
Basic $ 1.01 $ 0.98 $ 1.33
Diluted $ 1.00 $ 0.96 $ 1.29
Shares used in per share calculation:
Basic 24,571 24,443 24,305
Diluted 24,972 25,004 25,141
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 6
17
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31,
------------------------
2000 1999
-------- --------
<S> <C> <C>
(in thousands, except
share information)
ASSETS
Cash $ 1,605 $ 4,039
Accounts receivable, net of allowance for doubtful accounts
of $4,866 and $5,834 29,862 45,874
Rental and lease equipment, net of accumulated depreciation
of $254,354 and $239,102 190,107 229,317
Other property, net of accumulated depreciation and amortization
of $10,409 and $10,789 20,608 22,651
Goodwill, net of accumulated amortization of $9,717 and $7,967 59,719 61,469
Other 4,534 5,358
-------- --------
$306,435 $368,708
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank borrowings $ 21,800 $107,500
Accounts payable 22,635 21,555
Accrued expenses 24,921 26,725
Net deferred income tax liability 15,414 16,754
-------- --------
Total liabilities 84,770 172,534
-------- --------
Commitments and contingencies
Shareholders' equity
Preferred stock, $1 par - shares authorized 1,000,000; none issued -- --
Common stock, no par - shares authorized 40,000,000;
issued and outstanding: 2000 - 24,634,585; 1999 - 24,475,749 11,139 10,510
Retained earnings 210,526 185,664
-------- --------
Total shareholders' equity 221,665 196,174
-------- --------
$306,435 $368,708
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 7
18
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Three years ended May 31, 2000
----------------------------------------
Common Stock
------------------------
Number Retained
of Shares Amount Earnings
--------- -------- --------
<S> <C> <C> <C>
(in thousands)
Balance, May 31, 1997 24,070 $ 9,965 $129,255
Exercise of stock options, net, including related tax effect 346 445 --
Net income for the year ended May 31, 1998 -- -- 32,344
------- -------- --------
Balance, May 31, 1998 24,416 10,410 161,599
Exercise of stock options, net, including related tax effect 60 100 --
Net income for the year ended May 31, 1999 -- -- 24,065
------- -------- --------
Balance, May 31, 1999 24,476 10,510 185,664
Exercise of stock options, net, including related tax effect 159 629 --
Net income for the year ended May 31, 2000 -- -- 24,862
------- -------- --------
Balance, May 31, 2000 24,635 $ 11,139 $210,526
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 8
19
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended May 31,
---------------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 24,862 $ 24,065 $ 32,344
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 100,655 110,831 88,278
Provision for losses on accounts receivable 1,265 2,714 3,111
Gain on sale of equipment (6,767) (3,644) (7,503)
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable 14,747 17,930 (47,744)
Decrease in other assets 43 1,478 1,657
Increase (decrease) in accounts payable (3,890) 5,076 (9,141)
Increase (decrease) in accrued expenses (1,804) 4,976 4,091
Increase (decrease) in net deferred income tax liability (1,340) 249 2,809
--------- --------- ---------
Net cash provided by operating activities 127,771 163,675 67,902
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 37,016 31,134 32,262
Payments for acquisition of business -- -- (244,500)
Payments for purchase of rental and lease equipment (81,802) (73,406) (76,927)
Payments for purchase of other property (348) (345) (1,808)
--------- --------- ---------
Net cash used in investing activities (45,134) (42,617) (290,973)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in bank borrowings (85,700) (119,400) 222,700
Proceeds from issuance of common stock 629 100 445
--------- --------- ---------
Net cash provided by (used in) financing activities (85,071) (119,300) 223,145
--------- --------- ---------
Net increase (decrease) in cash (2,434) 1,758 74
Cash at beginning of year 4,039 2,281 2,207
--------- --------- ---------
Cash at end of year $ 1,605 $ 4,039 $ 2,281
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 9
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Organization: Electro Rent Corporation primarily engages in the
short-term rental and the lease of state-of-the-art electronic equipment. The
Company maintains an equipment portfolio composed primarily of general purpose
test and measurement instruments, personal computers and workstations purchased
from leading manufacturers. Another aspect of the Company's business is the sale
of equipment after its utilization for rental or lease. The Company's customers
are primarily located in the United States and operate in various industry
segments including aerospace and defense, telecommunications, consulting and
computer technology. During fiscal 2000, 1999 and 1998 no customer accounted for
more than 10% of total revenues.
Basis of Presentation: The consolidated financial statements include Electro
Rent Corporation and its wholly owned subsidiary. All intercompany balances and
transactions have been eliminated.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition: Rental and lease revenue is billed and recognized on a
monthly basis. Other revenue consists of billings to customers for equipment
sales, delivery, or repairs, which is recognized in the period in which the
respective equipment is shipped or the services are performed.
Rental and Lease Equipment and Other Property: Assets are stated at cost. Upon
retirement or disposal of assets, the cost and the related allowance for
depreciation are eliminated from the accounts and any gain or loss is
recognized. Depreciation of rental and lease equipment and other property is
computed using the straight-line and sum-of-the-years'-digits methods over the
estimated useful lives of the respective equipment. New rental and lease
equipment is depreciated over three to seven years, and used equipment over two
to six years, depending on the type of equipment. Normal maintenance and repairs
are expensed as incurred.
Capital Leases: The Company has certain customer leases providing bargain
purchase options, which are accounted for as sales-type leases. At May 31, 2000
and 1999 investment in sales-type leases of $1,380,000 and $893,000 net of
deferred interest of $82,000 and $65,000 is included in other assets. Interest
income is recognized over the life of the lease using the effective interest
method.
Fair Value of Financial Instruments: The carrying amount of cash and accounts
receivable approximates fair value due to the short maturity of these
instruments. Bank borrowings bear interest at rates that approximate the current
market interest rates for similar instruments and, accordingly, the carrying
value approximates fair value.
Impairment of Assets: The Company recognizes impairment losses on equipment held
for rental and lease when the expected future cash flows are less than the
asset's carrying value, in which case the asset is written down to its estimated
recoverable value. The Company would recognize impairment losses on goodwill
when expected future cash flows from the related operations are less than the
carrying value.
Concentration of Credit Risk: Financial instruments that potentially subject the
Company to concentration of credit risk consist primarily of trade accounts
receivable. The Company sells primarily on 30-day terms, performs credit
evaluation procedures on each customer's individual transactions and requires
security deposits or personal guarantees from its customers when significant
credit risks are identified. Typically, most customers are large, established
firms. Historically, the Company has not incurred significant credit related
losses. An allowance for potential credit losses is maintained.
<PAGE> 10
21
Derivative Financial Instruments: The Company uses derivative financial
instruments as a means of managing interest-rate risk associated with current
debt. The Company's interest rate protection agreements generally consist of
interest rate swap agreements and interest rate cap agreements. These
instruments are matched with variable rate debt, and payments thereon are
recorded on a settlement basis as an adjustment to interest expense. Premiums
paid to purchase interest rate cap agreements are amortized as an adjustment of
interest expense over the life of the contract. Derivative financial instruments
are not held for trading purposes. (See Note 2 to Notes to Consolidated
Financial Statements).
Net Income Per Common and Common Equivalent Share: Basic earnings per share
("EPS") is computed as net income divided by the weighted average number of
shares of common stock outstanding for the reported period, excluding the
dilutive effects of stock options and other potentially dilutive securities.
Diluted EPS is computed as net income divided by the weighted average number of
shares outstanding of common stock and common stock equivalents for the reported
period. Common stock equivalents result from the dilutive stock options computed
using the treasury stock method.
Cash Flow: Supplemental disclosures of cash paid during the year for:
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
(in thousands)
Interest $ 4,545 $12,144 $ 7,644
Income taxes 17,030 10,409 21,887
</TABLE>
Supplemental disclosure of non-cash investing and financing activities: The
Company acquired equipment of $19,947,000, $14,977,000, and $19,231,000 at May
31, 2000, 1999 and 1998, respectively, which was paid for during the subsequent
year.
New Accounting Pronouncements: During 1998, the Financial Accounting Standards
Board issued SFAS No. 133, "Accounting for Derivative Instruments and for
Hedging Activities," which establishes new standards for reporting derivative
and hedging information. The standard as amended in SFAS 137 is effective for
periods beginning after June 15, 2000 and will be adopted by the Company in
fiscal 2001. It is not expected that the adoption of this standard will have a
significant impact on the consolidated financial statements.
NOTE 2: BORROWINGS
On November 14, 1997, in connection with the acquisition of the net tangible
assets of GE Capital Technology Management Services, the Company obtained a
$330,000,000 unsecured revolving line of credit with a syndicate of twenty-one
banks which expires on November 14, 2000. The agreement called for mandatory
reductions of the available line of credit of $10,000,000 on May 31, 1998,
$10,000,000 on November 30, 1998 and $20,000,000 on May 31, 1999, and allows for
voluntary reductions. At May 31, 2000, the line of credit had been reduced to
$40,000,000. Interest under the line of credit is determined at the time of
borrowing and, at the Company's option, can be based on a base rate, LIBOR or
other variable rates. The line of credit requires the payment of a facility fee,
and includes requirements regarding the level of the Company's tangible net
worth, interest coverage ratios and leverage ratios. At May 31, 2000,
$21,800,000 was outstanding under this line. The weighted average interest rate
under this line was 7.0% at May 31, 2000. Weighted average borrowing for the
year ended May 31, 2000 was $62,500,000 with an average interest rate of 6.4%.
Derivative Positions -- The Company has entered into interest rate protection
agreements. The Company's exposure under these agreements is limited to the
impact of variable interest rate fluctuations and the periodic settlement of
amounts due under these agreements if the other parties fail to perform. The
Company does not anticipate nonperformance by the counterparties, which are
major financial institutions.
As of May 31, 2000 and 1999 the Company held one interest rate swap agreement
with a notional amount of $25,000,000, interest rate of 5.939% and expiration
date of December 2000. As of May 31, 1999, the Company held three interest rate
cap agreements, each with a notional amount of $25,000,000, interest rate of 7%
and expiration date of December 1999.
<PAGE> 11
22
NOTE 3: INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(in thousands) 2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Current
Federal $ 14,505 $ 14,064 $ 16,789
State 2,072 2,412 2,878
Deferred
Federal (1,172) 213 2,398
State (168) 36 411
-------- -------- --------
$ 15,237 $ 16,725 $ 22,476
======== ======== ========
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective tax
rate is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Statutory federal rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 5.0 5.5 5.5
Other -- net (2.0) 0.5 0.5
---- ---- ----
Effective tax rate 38.0% 41.0% 41.0%
==== ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the net deferred tax liabilities at May 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
(in thousands) 2000 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 1,946 $ 2,392
Net operating loss carryforwards 877 1,019
Other 1,551 828
-------- --------
4,374 4,239
-------- --------
Deferred tax liabilities:
Accumulated depreciation and amortization (15,723) (16,210)
Deferred revenue (2,153) (2,214)
Other (1,912) (2,569)
-------- --------
(19,788) (20,993)
-------- --------
Net deferred tax liabilities $(15,414) $(16,754)
======== ========
</TABLE>
Net operating loss carryforwards for federal income tax reporting purposes
approximate $2,557,000 at May 31, 2000 and are available for use against taxable
income through 2006. The utilization of operating loss carryforwards is limited
to $355,000 per year for federal income tax reporting purposes.
<PAGE> 12
23
NOTE 4: COMPUTATION OF EARNINGS PER SHARE
Following is a reconciliation of the numerator and denominator used in the
computation of basic and diluted EPS:
<TABLE>
<CAPTION>
(in thousands, except per share data) 2000 1999 1998
------- ------ ------
<S> <C> <C> <C>
Denominator:
Denominator for basic earnings per share -- weighted average
common shares outstanding 24,571 24,443 24,305
Effect of dilutive securities -- options 401 561 836
------- ------- --------
24,972 25,004 25,141
======= ======= =======
Net income $24,862 $24,065 $32,344
======= ======= =======
Earnings per share:
Basic $ 1.01 $ 0.98 $ 1.33
======= ======= =======
Diluted $ 1.00 $ 0.96 $ 1.29
======= ======= =======
</TABLE>
Certain options to purchase the Company's common stock were not included in the
computation of diluted earnings per share because to do so would have been
antidilutive. The quantity of such options is 510,137, 429,267 and 1,068,188 at
May 31, 2000, 1999, and 1998 respectively.
NOTE 5: RENTALS UNDER NONCANCELLABLE OPERATING LEASES
In addition to short-term rentals, equipment is leased to customers under
various operating leases that expire over the next three years. These leases
provide the lessee with the option of renewing the agreement for periods of up
to twelve months or purchasing the equipment at fair market value at the end of
the initial or renewal term.
The Company's cost of equipment under operating leases at May 31, 2000, with
remaining noncancellable lease terms of more than one year, is $26,577,000
before accumulated depreciation of $11,082,000 for a net book value of
$15,495,000.
A schedule of minimum future rentals to be received on noncancellable operating
leases with remaining lease terms of more than one year as of May 31, 2000 is as
follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
2001 $14,622
2002 8,014
2003 1,144
-------
$23,780
=======
</TABLE>
<PAGE> 13
24
NOTE 6: OTHER PROPERTY
Other property, at cost, consists of the following:
<TABLE>
<CAPTION>
(in thousands) 2000 1999
-------- ---------
<S> <C> <C>
Land $ 6,985 $ 6,985
Buildings 13,525 13,667
Furniture and other equipment 7,821 9,770
Leasehold improvements 2,686 3,018
-------- --------
31,017 33,440
Less -- accumulated depreciation and amortization (10,409) (10,789)
-------- --------
$ 20,608 $ 22,651
======== ========
</TABLE>
NOTE 7: ACQUISITIONS
On November 14, 1997, the Company acquired the computer and test and measurement
rental business of GE Capital Technology Management Services (TMS), a business
engaged in renting, leasing and selling computers, workstations and general
purpose test and measurement equipment. The initial purchase price based on TMS'
estimated net tangible assets at November 14, 1997, was $240.8 million, payable
in cash. The purchase price is subject to adjustment as a result of the
Company's objections to the audited statement of net tangible assets and other
claims currently in arbitration. The acquisition has been accounted for by the
purchase method and, accordingly, the results of operations of TMS have been
included with those of the Company since the date of acquisition. The initial
purchase price has been allocated to assets and liabilities based on their fair
value as of the date of acquisition. Final allocation of the purchase price will
be determined when the actual purchase price is settled by arbitration. Based on
the allocation of initial purchase price over the net assets acquired, goodwill
of approximately $59,628,000 was recorded. Such goodwill is being amortized on a
straight-line basis over 40 years.
NOTE 8: COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities under various operating leases. Most of
the lease agreements provide the Company with the option of renewing its lease
at the end of the initial lease term, at the fair rental value, for periods of
up to five years. In most cases, management expects that in the normal course of
business facility leases will be renewed or replaced by other leases.
Minimum payments under these leases, exclusive of property taxes and insurance,
are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
2001 $2,253
2002 1,971
2003 1,109
2004 568
2005 168
------
$6,069
======
</TABLE>
Rent expense was $3,630,000, $3,997,000, and $2,405,000 in 2000, 1999, and 1998,
respectively.
The Company from time to time is involved in various disputes. Any amounts
received by the Company are recorded as income when received. It is management's
opinion that none of the open matters at May 31, 2000 will have a material
adverse effect on the Company's financial position.
<PAGE> 14
25
NOTE 9: STOCK OPTION PLANS
The Company has stock Option Plans (the "Plans") which authorize the Board of
Directors to grant options for 2,117,500 shares of the Company's common stock,
of which 173,805 were available for future grants at May 31, 2000. The Plans
provide for both incentive stock options, which may be granted only to
employees, and nonstatutory stock options, which may be granted to directors and
consultants who are not employees. Pursuant to the Plans, options have been
granted to directors, officers and key employees at prices not less than 100% of
the fair market value at the date of grant. Options are exercisable at various
dates over a ten-year period from the date of grant or a five-year period in the
case of an employee who is also a 10 percent stockholder. The Plans provide for
a variety of vesting dates with the majority of the options vesting at a rate of
25 percent per year over a period of four years from the date of grant. All
outstanding options expire at dates ranging from June 2001 to November 2008. The
following table summarizes certain information relative to options for common
stock after adjustment for stock splits.
<TABLE>
<CAPTION>
2000 1999 1998
-------------------------- ------------------------- -------------------------
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 1,305,771 $ 8.54 1,369,880 $ 8.32 1,299,974 $ 4.37
Granted 9,618 12.94 33,767 13.23 454,578 14.91
Exercised (167,664) 2.92 (65,500) 2.70 (384,672) 2.76
Forfeited (46,878) 14.47 (32,376) 16.14 -- --
--------- ------ --------- ------ --------- ------
Options outstanding, end of year 1,100,847 $ 9.19 1,305,771 $ 8.54 1,369,880 $ 8.32
========= ====== ========= ====== ========= ======
Options exercisable at end of year 866,597 $ 7.83 869,924 $ 5.99 756,438 $ 3.98
Weighted-average fair value of
options granted during year $ 6.44 $ 7.62 $ 7.62
</TABLE>
The following summarizes information regarding stock options outstanding at May
31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ 2.64 - $ 3.42 398,460 2.0 $ 3.04 398,460 $ 3.04
$ 4.36 - $12.94 302,120 5.5 9.74 264,870 9.51
$13.87 - $24.11 400,267 6.3 14.88 203,267 15.03
--------- --- ------ ------- ------
1,100,847 4.5 $ 9.19 866,597 $ 7.83
========= === ====== ======= ======
</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 2000, 1999, and
1998, respectively: risk-free interest rates of 5.8, 4.9, and 5.9 percent;
dividend yield of 0 percent; expected option life of 5.0, 7.6, and 6.6 years;
and volatility of 47.8, 47.1, and 41.4 percent.
<PAGE> 15
26
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the 4-year average vesting period of the options.
The Company's pro forma net earnings for 2000, 1999 and 1998 were $23,994,000,
$23,045,000 and $31,583,000, and pro forma net earnings per share were $.97,
$.93 and $1.26, respectively. These pro forma amounts include amortized fair
values attributable to options granted after May 31, 1996 only, and therefore
are not representative of future pro forma amounts.
NOTE 10: SAVINGS PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains a Savings Plan (401(k)) and a frozen Employee Stock
Ownership Plan (ESOP). Employees become eligible to participate in the 401(k)
after one year of employment. The Company has the option to match contributions
of participants at a rate management determines each year. For participants with
three or more years of service, the Company also may elect to make additional
discretionary matching contributions in excess of the rate elected for
participants with less than three years of service.
The Board of Directors determines the amount to be contributed annually to the
401(k) in cash, provided that such contributions shall not exceed the amount
deductible for federal income tax purposes. Cash contributions to the 401(k) of
$756,000, $899,000, and $713,000 were made for 2000, 1999, and 1998,
respectively.
NOTE 11: QUARTERLY INFORMATION (UNAUDITED)
Quarterly information is as follows:
<TABLE>
<CAPTION>
Earnings 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 2000
First Quarter $ 62,753 $ 10,425 $ 6,464 $0.26 $0.26
Second Quarter 61,465 9,846 6,105 0.25 0.24
Third Quarter 59,089 8,692 5,389 0.22 0.22
Fourth Quarter 58,486 11,136 6,904 0.28 0.28
-------- -------- -------- ----- -----
$241,793 $ 40,099 $ 24,862 $1.01 $1.00
======== ======== ======== ===== =====
Fiscal Year 1999
First Quarter $ 72,601 $ 6,358 $ 3,751 $0.15 $0.15
Second Quarter 68,993 11,109 6,555 0.27 0.26
Third Quarter 64,812 11,561 6,821 0.28 0.27
Fourth Quarter 63,333 11,762 6,938 0.28 0.28
-------- -------- -------- ----- -----
$269,739 $ 40,790 $ 24,065 $0.98 $0.96
======== ======== ======== ===== =====
</TABLE>
<PAGE> 16
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Electro Rent Corporation:
We have audited the accompanying consolidated balance sheets of Electro Rent
Corporation (a California corporation) and subsidiaries as of May 31, 2000 and
1999, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended May 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Electro Rent Corporation and
subsidiaries as of May 31, 2000 and 1999, and the results of its operations and
its cash flows for each of the three years in the period ended May 31, 2000 in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
-------------------------
Arthur Andersen LLP
Los Angeles, California
August 1, 2000
CAPITAL STOCK, SHAREHOLDERS AND CASH DIVIDEND INFORMATION
The common stock of the Company is quoted on NASDAQ under the symbol ELRC. There
were approximately 503 shareholders of record at August 4, 2000. The following
table sets forth, for the period shown the high and low closing sale prices in
the NASDAQ National Market System as reported by NASDAQ.
<TABLE>
<CAPTION>
Fiscal Year 2000 Fiscal Year 1999
------------------------- --------------------------
High Low High Low
-------- --------- --------- -------
<S> <C> <C> <C> <C>
First Quarter $13 $10-3/4 $24-3/4 $12-3/4
Second Quarter 13 10-1/2 14-3/4 9-3/4
Third Quarter 12 10-11/16 16-1/8 9-1/2
Fourth Quarter 12-3/8 9-7/8 13-15/16 9-1/4
</TABLE>
