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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 0-13292
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MCGRATH RENTCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
CALIFORNIA 94-2579843
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5700 LAS POSITAS ROAD, LIVERMORE, CA 94550
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER: (925) 606-9200
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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<S> <C>
NONE NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF CLASS
COMMON STOCK
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of voting stock, held by nonaffiliates of
the registrant: $177,777,794 as of March 18, 1999.
At March 18, 1999, 13,576,448 shares of Registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
McGrath RentCorp's definitive Proxy Statement with respect to its Annual
Shareholders' Meeting to be held June 3, 1999, which will be filed with the
Securities and Exchange commission within 120 days after the end of its fiscal
year, is incorporated by reference into Part III, Items 10, 11, 12 and 13.
Exhibit index appears on page 35.
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PART I
ITEM 1. BUSINESS.
GENERAL
McGrath RentCorp ("MGRC") is a California corporation organized in 1979.
McGrath RentCorp and its majority owned subsidiary, Enviroplex, Inc.
("Enviroplex"), collectively referred to herein as the "Company", manufactures,
rents and sells relocatable modular offices and rents and sells electronic test
and measurement instruments with related accessories primarily in California and
Texas. The Company's corporate offices are located in Livermore, California. In
addition to the corporate offices, both modular and electronics operations are
conducted from this facility.
Under the trade name "Mobile Modular Management Corporation" ("MMMC"), the
Company rents and sells modular equipment and related accessories to fulfill
customers' temporary space needs. These units are used as temporary offices
adjacent to existing facilities, and are used as sales offices, construction
field offices, classrooms and for a variety of other purposes. MMMC purchases
the modulars from various manufacturers who build them to MMMC's design
specifications. MMMC operates from two branch offices in California and one in
Texas. Although MMMC's primary emphasis is on rentals, sales of modulars
routinely occur and can fluctuate quarter to quarter and from year to year
depending on customer demands and requirements. Rentals and sales to school
districts by MMMC represent a significant portion of MMMC's total revenues.
Under the trade name "McGrath-RenTelco", the Company conducts electronics
operations from Livermore, California and Richardson, Texas. Engineers,
scientists and technicians use these instruments in evaluating the performance
of their own electrical and electronic equipment, developing products,
controlling manufacturing processes and in field service applications. These
instruments are rented primarily to electronics, communications, network
systems, industrial, research and aerospace companies. The majority of
McGrath-RenTelco's rental inventory consists of instruments manufactured by
Hewlett-Packard and Tektronix.
MGRC owns 73.2% of Enviroplex, a California corporation organized in 1991.
Enviroplex manufactures portable classrooms built to the requirements of the
California Division of the State Architect ("DSA") and sells directly to school
districts. Enviroplex conducts its sales and manufacturing operations from its
facility located in Stockton, California. Since inception, MGRC has financed
Enviroplex's operations and assisted in a variety of corporate functions such as
accounting, human resources, facility improvements, and insurance. MGRC has not
purchased significant quantities of manufactured product from Enviroplex.
Enviroplex sales revenues were $20,672,000, $21,287,000 and $10,206,000 for
1998, 1997 and 1996, respectively.
The rental and sale of modulars to school districts for use as portable
classrooms, restroom buildings and administrative offices for kindergarten
through grade twelve (K-12) are a significant portion of the Company's revenues.
School business comprised approximately 45%, 52% and 37% of the Company's
consolidated rental and sales revenues for 1998, 1997 and 1996, respectively.
Please see Note 8 to the Consolidated Financial Statements on page 29 for
more information on the Company's business segments.
The Company has 376 employees, of whom 43 are primarily administrative and
executive personnel, and the remaining 333 are engaged in manufacturing or
rental operations. None of the employees are represented by unions. The
operations of the Company share common facilities, financing, senior management,
and operating and accounting systems which results in the efficient use of
overhead. Each product line has its own sales and technical personnel.
No single customer has accounted for more than 10% of the Company's total
revenues generated in any given year. The Company's business is not seasonal,
except for the rental and sale of classrooms, which is heaviest in the several
months prior to the opening of school each fall.
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The Company operates with a marketing sense throughout. The Company is
constantly searching for ways to streamline its service and to raise the quality
of each relocatable office, classroom or instrument it manufactures, rents or
sells. The Company not only manufactures, rents and sells products, it sells an
old-fashioned idea: Paying attention to our customers pays off.
The Company's common stock is traded on the NASDAQ National Market System
under the symbol "MGRC".
This Annual Report on Form 10-K contains statements which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear in a number of places.
Such statements can be identified by the use of forward-looking terminology such
as "believes", "expects", "may", "estimates", "will", "should", "plans" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
significant risks and uncertainties, and that actual results may vary materially
from those in the forward-looking statements as a result of various factors.
These factors include the effectiveness of management's strategies and
decisions, general economic and business conditions, new or modified statutory
or regulatory requirements and changing prices and market conditions. This
report identifies other factors that could cause such differences. No assurance
can be given that these are all of the factors that could cause actual results
to vary materially from the forward-looking statements.
RELOCATABLE MODULAR OFFICES
DESCRIPTION
Modulars are designed for use as temporary office space and may be moved
from one location to another. Modulars vary from simple single-unit construction
site offices to attractive multi-modular facilities, complete with wood
exteriors and mansard roofs. The rental fleet includes a full range of styles
and sizes. The Company considers its modulars to be among the most attractive
and well designed available. The units are constructed with wood siding,
sturdily built and physically capable of a useful life often exceeding 18 years.
Units are provided with installed heat, air conditioning, lighting, electricity
and floor covering, and may have customized interiors including partitioning,
carpeting, cabinetwork and plumbing facilities.
MMMC purchases new modulars from various manufacturers who build to MMMC's
design specifications. None of the principal suppliers are affiliated with the
Company. The Company believes that the loss of any one of these suppliers would
not have a material adverse effect on its operations.
MARKETING
The market for modulars is broad. Businesses which have a need for
additional space and have adjacent land or a parking lot are potential
customers. The Company's largest single demand is for temporary classrooms.
Management believes the demand for classrooms is caused by shifting and
fluctuating school populations, the lack of state funds for new construction,
the need for temporary classroom space during reconstruction of older schools
and, most recently, class size reduction (see "Classroom Rentals and Sales"
below). Other applications include sales offices, administrative offices for
health care facilities, universities and museums. Large multi-modular complexes
are used by manufacturing, entertainment, energy and utility companies, and
governmental agencies. The Company's branch offices, as well as the corporate
office, are housed in various sizes of modulars.
Since most of MMMC's customer requirements are to fill temporary space
needs, the Company's marketing emphasis is on rentals rather than sales. MMMC
solicits customers through extensive yellow-page advertising, telemarketing and
direct mail. Customers are encouraged to visit an inventory center to view
different models on display and to see a branch office, which itself is a
working example of a modular application.
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Because service is a major competitive factor in the rental of modulars,
MMMC offers quick response to requests for information, assistance in the choice
of a suitable size and floor plan, rapid delivery and timely maintenance of its
units, both prior to delivery of the unit and while it is on rent. MMMC has
sales and maintenance staffs trained in the Company's understanding of
excellence in service.
RENTALS
Rental periods range from one month to ten years with a typical rental
period of one year. Most rental agreements provide no purchase options; and when
a rental agreement does provide the customer with a purchase option, it is
generally on terms attractive to MMMC.
The customer is responsible for the costs of insuring the unit,
transporting the unit to the site, preparation of the site, installation of the
unit, dismantle and return of the unit to one of MMMC's three inventory centers
and certain costs for customization. MMMC maintains the units in good working
order while on rent. Upon return, the units are refurbished for subsequent use.
Refurbishment work can include floor tile repairs, roof maintenance, cleaning,
painting and other cosmetic repairs.
At December 31, 1998, MMMC had 15,139 new or previously rented modulars in
its rental fleet with an aggregate original cost including accessories of
$216,414,000 or an average cost per unit of $14,000. Utilization is calculated
each month by dividing the cost of rental equipment on rent by the total cost of
rental equipment, excluding accessory equipment. At December 31, 1998, fleet
utilization was 78.3% and average fleet utilization during 1998 (average of all
the monthly figures) was 77.6%. Excluding new equipment not previously rented,
fleet utilization at December 31, 1998 was 83.0% and average fleet utilization
during 1998 was 83.1%.
SALES
In addition to operating its rental fleet, MMMC sells modulars to customers
who have a permanent use for such units. These sales arise out of our marketing
efforts for the rental fleet. Such sales can be of either new units or used
units from the rental fleet, which permits an orderly turnover of older units.
During 1998, MMMC's largest sale of modulars was for new classrooms to a school
district for approximately $6,110,000 of which 69% of the total contract was the
demolition of existing buildings, site improvements and installation of new
classrooms. This sale represented approximately 26% of MMMC's sales, 12% of the
Company's consolidated sales, and 5% of the Company's consolidated revenues.
MMMC provides limited 90-day warranties on used modulars and passes through
manufacturers' warranties on new units. Warranty costs have not been significant
to MMMC's operations to date, and MMMC attributes this to its commitment to high
quality standards and regular maintenance programs.
In addition to MMMC's sales, the Company's subsidiary, Enviroplex,
manufactures and sells portable classrooms to school districts in California
(see "Classroom Sales by Enviroplex" below).
COMPETITION
This section contains statements that constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See "General" above for cautionary information with respect to such
forward-looking statements.
Competition in the rental and sale of relocatable modular offices is
intense. Many firms are engaged in the rental of modulars, and some have
substantially greater financial resources than MMMC. Significant competitive
factors in the rental business include availability, price, services,
reliability, appearance and functionality of the product. MMMC markets
high-quality, well constructed and attractive modulars. MMMC believes the
strategy for modulars calls for creating facility and infrastructure
capabilities that its competitors cannot duplicate. The Company has constructed
three new inventory facilities over the last few years. These facilities and
related infrastructure enable the Company to modify buildings efficiently and
cost effectively to meet its customers' needs. Management's goal is to be more
responsive at less expense. Management believes this strategy, together with its
emphasis on prompt and efficient customer service, gives MMMC a competitive
advantage. The Company is determined to offer quick response to requests for
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information, experienced assistance for the first-time user, rapid delivery and
timely maintenance of its units. The efficiency and responsiveness continues to
be enhanced by the Company's computer based relational database programs that
control its internal operations. MMMC anticipates strong competition in the
future and believes the process of improvement is ongoing.
CLASSROOM SALES BY ENVIROPLEX
This section contains statements that constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See "General" above for cautionary information with respect to such
forward-looking statements.
Enviroplex manufactures moment-resistant, rigid steel framed portable
classrooms built to the requirements of the DSA and sells directly to school
districts. The moment-resistant, rigid steel framed classroom is engineered to
have the structural columns support the weight of the building. This offers the
customer greater design flexibility as to overall classroom size and the
placement of doors and windows. Enviroplex fabricates most of the structural
steel component parts using only mill certified sheet steel. Enviroplex's
standard designs have been engineered for strength and durability using lighter
weight steel. Customers are offered a wide variety of the DSA pre-approved
classroom sizes and features with market established pricing which could save
them valuable time on their classroom project. Additional customization features
include restrooms, computer lab setups, interior offices, cabinetwork and
kitchen facilities.
Competition in the manufacture of DSA classrooms is broad, intense, and
highly competitive. Several manufacturers have greater capacity for production
and have been in business longer than Enviroplex. Larger manufacturers with
greater capacity have a larger appetite for the standard classroom while
Enviroplex caters to schools' requirements for more customized classrooms. The
remaining manufacturers are of a similar size or smaller and do not have the
production capacity nor the financial resources of Enviroplex.
Enviroplex manufactures solid, attractive classrooms. Through value
engineering, Enviroplex has simplified its manufacturing process by changing
materials, determining which components are made in-house versus purchased,
reducing the number of components and increasing the production efficiency at an
overall lower cost without sacrificing quality. Enviroplex's strategy is to
improve the quality and flexibility of its product. Enviroplex understands that
its customers want more than a quality classroom, competitively priced and
delivered on time, and believes its niche is providing customers with choices in
design flexibility and customization. Management believes this strategy gives
Enviroplex a competitive edge.
Enviroplex purchases raw materials from a variety of suppliers. Each
component part has multiple suppliers. Enviroplex believes the loss of any one
of these suppliers would not have a material adverse affect on its operations.
CLASSROOM RENTALS AND SALES
The rental and sales of modulars to public school districts for use as
portable classrooms, restroom buildings and administrative offices for
kindergarten through grade twelve (K-12) are a significant portion of the
Company's revenues. The following table shows the approximate percentages
schools are of the Company's modular rental and sales, and of its consolidated
rental and sales revenues for the past five years:
SCHOOLS AS A PERCENTAGE OF RENTAL AND SALES REVENUES
<TABLE>
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PERCENTAGE OF: 1998 1997 1996 1995 1994
-------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Modular Rental Revenues 44% 45% 40% 34% 38%
Modular Sales Revenues 78% 74% 54% 38% 24%
Consolidated Rental and Sales Revenues 45% 52% 37% 27% 27%
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</TABLE>
The increases shown for 1996 and 1997 can be attributed to the Class Size
Reduction Program instituted by the state of California. School districts were
given great incentive to reduce class size in the lower grades
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from a typical 30 students to no greater than 20 students. This highly popular
program created a great demand for both purchasing and renting classroom
buildings.
In California (where most of the Company's rentals to public school
districts have occurred), school districts are permitted to purchase only
portable classrooms built to the requirements of the DSA. However, school
districts may rent classrooms that meet either the Department of Housing ("DOH")
or the DSA requirements. Prior to 1988 the majority of the classrooms in the
Company's rental fleet were built to the DOH requirements, and since 1988 the
majority of new classrooms have been built to the DSA requirements. In 1988,
California adopted a law which limits the term for which school districts may
rent portable classrooms built to DOH standards to three years (under a waiver
process), and which also requires the school board to indemnify the State
against any claims arising out of the use of such classrooms. As a consequence,
the tendency is for school districts to rent the DOH classrooms for shorter
periods and to rent the DSA classrooms for longer periods. In 1993, a new law
went into effect that allowed school districts which already had DOH classrooms
to continue to rent them for an additional three years (i.e. up to six years in
total). New orders for DOH classrooms placed after 1992 were restricted to the
three year limitation as before. However, still newer legislation has been
adopted that eliminates the issuance of new waivers after September 30, 1997 but
extends all existing waivers until September 30, 2000. Regulations are in place
that allow the ongoing use of the DOH classrooms to meet the shorter term space
needs of school districts for periods up to 24 months, provided they receive a
"Temporary Certification" from the DSA.
The Company's DOH classrooms are also suitable for rent to non-school
customers for commercial uses; however, the 24' x 40' standard classrooms are
not as popular for commercial use. The following table shows the comparison of,
and shift from 24' x 40' standard DOH classrooms to DSA classrooms marketed to
school districts as of December 31, 1998, 1997, 1996, 1995 and 1994. Please note
how the inventory has shifted to the DSA classrooms.
CLASSROOM COMPARISON
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<TABLE>
<CAPTION>
DECEMBER 31,
(dollar amounts in thousands) ----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
24' x 40' Standard DOH Classrooms
Rental Equipment, at cost, on rent $ 12,704 $ 13,960 $ 13,738 $ 10,449 $ 13,114
Rental Equipment, at cost, off rent 2,249 765 1,834 5,015 3,258
-------- -------- -------- -------- --------
Total Rental Equipment, at cost $ 14,953 $ 14,725 $ 15,572 $ 15,464 $ 16,372
-------- -------- -------- -------- --------
Total Rental Equipment, net book
value $ 7,368 $ 7,849 $ 8,952 $ 9,324 $ 10,650
-------- -------- -------- -------- --------
Utilization (year-end)(1) 85.0% 94.8% 88.2% 67.6% 80.1%
-------- -------- -------- -------- --------
DSA Classrooms
Rental Equipment, at cost, on rent $ 55,697 $ 44,452 $ 26,488 $ 17,454 $ 18,644
Rental Equipment, at cost, off rent 2,724 1,308 611 3,653 1,829
-------- -------- -------- -------- --------
Total Rental Equipment, at cost $ 58,421 $ 45,760 $ 27,099 $ 21,107 $ 20,473
-------- -------- -------- -------- --------
Total Rental Equipment, net book
value $ 50,630 $ 39,535 $ 22,399 $ 17,115 $ 17,304
-------- -------- -------- -------- --------
Utilization (year-end)1 95.3% 97.1% 97.7% 82.7% 91.1%
-------- -------- -------- -------- --------
</TABLE>
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(1) Utilization is calculated as of December 31, by dividing the original cost
of equipment on rent by the original cost of all equipment in the rental
equipment category, excluding new classrooms not previously rented and
accessory equipment.
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ELECTRONIC TEST AND MEASUREMENT INSTRUMENTS
DESCRIPTION
The Company's rental inventory includes electronic instruments such as
oscilloscopes, spectrum analyzers, logic analyzers, signal generators, frequency
counters, protocol analyzers, cable locators, fiber optic and sonet equipment.
The Company also rents electronic instruments from other rental companies and
re-rents the instruments to customers.
At December 31, 1998, the Company had an aggregate cost of electronics
rental inventory and accessories of $66,573,000. Utilization is calculated each
month by dividing the cost of the rental equipment on rent by the total cost of
the rental equipment, excluding accessory equipment. At December 31, 1998
utilization was 51.5%, and the average utilization during 1998 (average of the
monthly figures) was 54.6%. The Company rents electronics equipment for a
typical rental period of one to six months at monthly rental rates ranging from
approximately 3.0% to 10.0% of the current manufacturers' list price. The
Company depreciates its equipment over 5 to 8 years.
The Company endeavors to keep its equipment fresh and attempts to sell
equipment so that the majority of the inventory is less than five years old. The
Company generally sells used equipment after approximately four years of service
to permit an orderly turnover and replenishment of the electronics inventory. In
1998, approximately 22% of the electronics revenues were derived from sales. The
largest electronics sale during 1998 represented less than 1% of the Company's
consolidated revenues.
MARKET
The business of renting electronic test and measurement instruments is an
industry which today has equipment on rent or available for rent in the United
States with an aggregate original cost of several hundred million dollars. While
there is a broad customer base for the rental of such instruments, most rentals
are to electronics, communications, network systems, industrial, research and
aerospace companies. The Company markets its electronics equipment throughout
the United States and has expanded its sales staff to include outside sales
representatives.
The Company believes that customers rent electronic test and measurement
instruments for many reasons. Customers frequently need equipment for short-term
projects, for backup to avoid costly downtime and to evaluate new products.
Delivery times for the purchase of such equipment can be lengthy; thus, renting
allows the customer to obtain the equipment expeditiously. The Company also
believes that a substantial portion of electronic test and measurement
instruments is used for research and development projects where the relative
certainty of rental costs can facilitate cost control and be useful in bidding
for government contracts. Finally, as is true with the rental of any equipment,
renting rather than purchasing may better satisfy the customer's budgetary
constraints.
The industry is dominated by three major companies. One of these companies
is much larger than the Company, has substantially greater financial resources
and is well established in the industry with a large inventory of equipment,
several branch offices and experienced personnel.
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PRODUCT HIGHLIGHTS
The following table shows the revenue components, percentage of total
revenues, rental equipment (at cost), rental equipment (net book value), number
of relocatable modular offices, year-end and average utilization, average rental
equipment (at cost), annual yield on average rental equipment (at cost) and
gross margin on sales by product line for the past five years.
PRODUCT HIGHLIGHTS
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<CAPTION>
YEAR ENDED DECEMBER 31,
(dollar amounts in thousands) ----------------------------------------------------
1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
RELOCATABLE MODULAR OFFICES
(operates under MMMC and Enviroplex)
Revenues
Rental $ 47,957 $ 41,514 $ 31,931 $ 31,577 $ 33,386
Rental Related Services 11,007 9,898 8,399 7,527 7,893
-------- -------- -------- -------- --------
Total Modular Rental Operations 58,964 51,412 40,330 39,104 41,279
-------- -------- -------- -------- --------
Sales -- MMMC 23,171 33,522 14,359 6,572 9,039
Sales -- Enviroplex 20,672 21,287 10,206 4,775 --
-------- -------- -------- -------- --------
Total Modular Sales 43,843 54,809 24,565 11,347 9,039
-------- -------- -------- -------- --------
Other 448 656 885 1,415 1,055
-------- -------- -------- -------- --------
Total Modular Revenues $103,255 $106,877 $ 65,780 $ 51,866 $ 51,373
======== ======== ======== ======== ========
Percentage of Total Revenues 76.2% 79.2% 73.9% 72.8% 75.2%
Rental Equipment, at cost (year-end) $216,444 $196,133 $158,377 $150,389 $148,111
Rental Equipment, net book value (year-end) $156,790 $142,816 $110,014 $106,266 $109,392
Number of Units (year-end) 15,139 14,240 11,582 10,868 10,892
Utilization (year-end)(1) 78.3% 78.7% 78.6% 71.0% 78.3%
Average Utilization(1) 77.6% 79.7% 72.1% 73.9% 79.3%
Average Rental Equipment, at cost $204,914 $172,680 $151,818 $149,371 $144,847
Annual Yield on Average Rental Equipment, at cost 23.4% 24.0% 21.0% 21.1% 23.0%
Gross Margin on Sales 30.8% 31.2% 30.7% 29.3% 28.7%
ELECTRONIC TEST AND MEASUREMENT INSTRUMENTS
(operates under McGrath-RenTelco)
Revenues
Rental $ 24,010 $ 20,174 $ 17,055 $ 14,486 $ 12,763
Rental Related Services 521 380 319 268 265
-------- -------- -------- -------- --------
Total Electronics Rental Operations 24,531 20,554 17,374 14,754 13,028
Sales 7,201 7,212 5,610 4,492 3,661
Other 441 333 241 161 233
-------- -------- -------- -------- --------
Total Electronics Revenues $ 32,173 $ 28,099 $ 23,225 $ 19,407 $ 16,922
======== ======== ======== ======== ========
Percentage of Total Revenues 23.8% 20.8% 26.1% 27.2% 24.8%
Rental Equipment, at cost (year-end) $ 66,573 $ 50,351 $ 43,335 $ 35,168 $ 29,732
Rental Equipment, net book value (year-end) $ 43,238 $ 31,270 $ 27,279 $ 21,342 $ 17,852
Utilization (year-end)(1) 51.5% 52.6% 51.8% 53.8% 55.6%
Average Utilization(1) 54.6% 54.9% 54.9% 55.2% 56.0%
Average Rental Equipment, at cost $ 56,859 $ 46,483 $ 39,335 $ 32,255 $ 27,754
Annual Yield on Average Rental Equipment, at cost 42.2% 43.4% 43.4% 44.9% 46.0%
Gross Margin on Sales 32.9% 33.2% 37.3% 39.6% 40.2%
TOTAL REVENUES $135,428 $134,976 $ 89,005 $ 71,273 $ 68,295
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</TABLE>
(1) Utilization is calculated each month by dividing the cost of rental
equipment on rent by the total cost of rental equipment, excluding accessory
equipment. The average utilization for the year is the average of the
monthly utilization figures.
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ITEM 2. PROPERTIES.
The Company currently conducts its operations from five locations.
Inventory centers, at which relocatable modular offices are displayed,
refurbished and stored are located in Livermore, California (San Francisco Bay
Area), Mira Loma, California (Los Angeles Area) and Pasadena, Texas (Houston
Area). These three branches conduct rental and sales operations from
multi-modular offices, serving as working models of the Company's product.
Electronic test and measurement instrument rental and sales operations are
conducted from the Livermore facility and from a facility in Richardson, Texas
(Dallas Area). The Company's majority owned subsidiary, Enviroplex, manufactures
portable classrooms from its facility in Stockton, California (San Francisco Bay
Area).
The following table sets forth for each property the total acres, square
footage of office space, square footage of warehouse space and total square
footage at December 31, 1998. Except as noted, all properties are owned by the
Company.
FACILITIES
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<TABLE>
<CAPTION>
SQUARE FOOTAGE
---------------------------------------------
TOTAL ACRES OFFICE WAREHOUSE TOTAL
----------- ------ --------- -------
<S> <C> <C> <C> <C>
CORPORATE OFFICES
Livermore, California(1) -- 9,840 -- 9,840
RELOCATABLE MODULAR OFFICES
Livermore, California(1, 2) 139.7 7,680 53,440 61,120
Mira Loma, California 78.5 7,920 45,440 53,360
Pasadena, Texas 50.0 3,868 24,000 27,868
ELECTRONIC TEST AND MEASUREMENT INSTRUMENTS
Livermore, California(1) -- 8,400 7,920 16,320
Richardson, Texas(3) -- 2,640 3,971 6,611
ENVIROPLEX, INC.
Stockton, California 13.9 3,365 102,050 105,415
OTHER
Corona, California(4) 10.4 -- -- --
Arlington, Texas(5) 1.8 1,680 2,387 4,067
----- ------ ------- -------
294.3 45,393 239,208 284,601
===== ====== ======= =======
</TABLE>
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(1) The modular office complex in Livermore, California is 33,840 square feet
and includes the Corporate offices and both modulars and electronics branch
operations.
(2) Of the 139.7 acres owned, 2.2 acres with an 8,000 square foot warehouse
facility is rented out to a third party through March, 2008, and 35.8 acres
are undeveloped.
(3) Leased office and warehouse space through April 1999, currently negotiating
extension through April, 2000.
(4) Facility is for sale or lease.
(5) Facility rented out to a third party on a month to month basis.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
8
<PAGE> 10
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded in the NASDAQ National Market System
under the symbol "MGRC".
The market price (as quoted by NASDAQ) and cash dividends declared, per
share of the Company's common stock, by calendar quarter for the past two years
were as follows:
<TABLE>
<CAPTION>
STOCK ACTIVITY
- ---------------------------------------------------------------------------------------------------
1998 1997
------------------------------------ ------------------------------------
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $24.75 $24.50 $23.56 $24.50 $28.50 $24.75 $21.25 $15.63
Low $13.88 $16.88 $19.00 $19.25 $20.00 $18.75 $14.13 $12.25
Close $22.00 $17.00 $21.13 $19.88 $24.50 $22.88 $20.50 $14.94
Dividends Declared $ 0.10 $ 0.10 $ 0.10 $ 0.10 $ 0.08 $ 0.08 $ 0.08 $ 0.08
- ---------------------------------------------------------------------------------------------------
</TABLE>
As of March 18, 1999, the Company's common stock was held by approximately
117 shareholders of record, which does not include shareholders whose shares are
held in street or nominee name. The Company believes that when holders in street
or nominee name are added, the number of holders of the Company's common stock
exceeds 500.
The Company has declared a quarterly dividend on its common stock every
quarter since 1990. Subject to its continued profitability and favorable cash
flow, the Company intends to continue the payment of quarterly dividends.
In March 1999, the Company issued an aggregate of 33,486 shares of its
common stock to Dennis C. Kakures and Thomas J. Sauer, both officers of the
Company, pursuant to the Company's Long-Term Stock Bonus Plan (as described in
the Company's Proxy Statement). Under the same Plan, the Company had issued to
the same two officers an aggregate of 36,840 shares of common stock in April
1998, and 28,000 shares in April 1997. These issuances were exempt from the
registration requirements of the Securities Act of 1933 by virtue of section
4(2) thereof and Regulation 230.506.
During 1996, the Company issued an aggregate of 128,494 shares of its
common stock to key employees of the Company upon exercises of incentive stock
options held by the employees under the Company's 1987 Incentive Stock Option
Plan. These issuances were exempt from the registration requirements of the
Securities Act of 1933 by virtue of section 4(2) thereof and Regulation 230.506.
The Plan was registered under the Securities Act of 1933 at the end of 1996, and
all stock issuances upon exercise of options thereafter were registered.
9
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes the Company's selected financial data for
the five years ended December 31, 1998 and should be read in conjunction with
the more detailed Consolidated Financial Statements and related notes reported
in Item 8.
SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(dollar and share amounts in thousands,
YEAR ENDED DECEMBER 31,
----------------------------------------------------
except per share data)
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operations Data
Revenues
Rental $ 71,967 $ 61,688 $ 48,986 $ 46,063 $ 46,149
Rental Related Services 11,528 10,278 8,718 7,795 8,158
-------- -------- -------- -------- --------
Rental Operations 83,495 71,966 57,704 53,858 54,307
Sales 51,044 62,021 30,175 15,839 12,700
Other 889 989 1,126 1,576 1,288
-------- -------- -------- -------- --------
Total Revenues 135,428 134,976 89,005 71,273 68,295
-------- -------- -------- -------- --------
Costs and Expenses
Direct Costs of Rental Operations
Depreciation 16,862 14,358 12,456 11,539 11,018
Rental Related Services 6,531 6,287 5,515 5,024 5,707
Other 13,390 10,375 8,703 7,370 7,544
-------- -------- -------- -------- --------
Total Direct Costs of Rental
Operations 36,783 31,020 26,674 23,933 24,269
Cost of Sales 35,189 42,550 20,532 10,735 8,634
-------- -------- -------- -------- --------
Total Costs 71,972 73,570 47,206 34,668 32,903
-------- -------- -------- -------- --------
Gross Margin 63,456 61,406 41,799 36,605 35,392
Selling and Administrative 16,220 15,957 13,147 10,459 10,747
-------- -------- -------- -------- --------
Income from Operations 47,236 45,449 28,652 26,146 24,645
Interest 6,326 4,070 2,887 2,831 2,166
-------- -------- -------- -------- --------
Income before Provision for Income
Taxes 40,910 41,379 25,765 23,315 22,479
Provision for Income Taxes 16,010 16,323 9,885 9,375 9,475
-------- -------- -------- -------- --------
Income before Minority Interest 24,900 25,056 15,880 13,940 13,004
Minority Interest in Income of
Subsidiary 1,005 1,011 358 97 --
-------- -------- -------- -------- --------
Net Income $ 23,895 $ 24,045 $ 15,522 $ 13,843 $ 13,004
-------- -------- -------- -------- --------
Cash Flow From Operating Activities $ 55,726 $ 59,153 $ 34,688 $ 32,611 $ 34,566
======== ======== ======== ======== ========
Net Income Per Common Share:
Basic $ 1.69 $ 1.60 $ 1.03 $ 0.87 $ 0.79
Diluted $ 1.67 $ 1.58 $ 1.01 $ 0.86 $ 0.77
Cash Flow Per Common Share:
Basic $ 3.93 $ 3.95 $ 2.30 $ 2.04 $ 2.09
Diluted $ 3.88 $ 3.90 $ 2.27 $ 2.02 $ 2.05
Shares Used in Per Share Calculation:
Basic 14,163 14,982 15,102 15,949 16,559
Diluted 14,349 15,181 15,306 16,168 16,831
Cash Dividends Declared Per Common
Share(1) $ 0.40 $ 0.32 $ 0.28 $ 0.24 $ 0.22
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Dividends for 1994 includes $0.055 per share declared in January 1995.
10
<PAGE> 12
SELECTED CONSOLIDATED FINANCIAL DATA (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(dollar and share amounts in thousands,
YEAR ENDED DECEMBER 31,
----------------------------------------------------
except per share data)
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (at period end)
Rental Equipment, net $200,028 $174,086 $137,292 $127,608 $127,244
Total Assets $278,676 $252,392 $200,035 $175,130 $169,923
Notes Payable $ 97,000 $ 82,000 $ 53,850 $ 37,080 $ 35,950
Shareholders' Equity $105,394 $ 98,646 $ 88,808 $ 85,893 $ 83,839
Shares Outstanding 13,970 14,522 14,820 15,540 16,137
Book Value Per Share $ 7.54 $ 6.79 $ 5.99 $ 5.53 $ 5.14
Debt (Notes Payable) to Equity 0.92 0.83 0.61 0.43 0.43
Return on Average Equity 24.0% 24.5% 18.0% 16.4% 16.1%
- ----------------------------------------------------------------------------------------------
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULT OF OPERATIONS
GENERAL
Revenues are derived primarily from the rental of relocatable modular
offices and electronic test and measurement instruments. The Company has
expanded the rental inventory of relocatable modular offices and electronic
instruments. This expansion has been funded through internal cash flow, private
placement of long-term debt and conventional bank financing.
The major portion of the Company's revenue is derived from rental
operations comprising approximately 62% of consolidated revenues in 1998 and 59%
of consolidated revenues for the three years ended December 31, 1998. Over the
past three years modulars comprised 71% of the cumulative rental operations, and
electronics comprised 29% of the cumulative rental operations.
The Company sells both modular and electronic equipment, which is new,
previously available for rent, or manufactured by its majority owned subsidiary,
Enviroplex. In the case of some modular equipment, the Company acts as a dealer
of relocatable modular offices and is licensed as a dealer by governmental
agencies in California and Texas. Revenues from sales of both modular and
electronic equipment have comprised approximately 38% of the Company's
consolidated revenues in 1998 and 40% of the Company's consolidated revenues
over the last three years. During these three years, modular sales represented
86% and electronic sales represented 14%.
The rental and sale of modulars to public school districts is a significant
part of the Company's business. School business comprised 45%, 52% and 37% of
the Company's consolidated rental and sales revenues for 1998, 1997 and 1996.
The increases in the Company's sales and rental revenues in both 1997 and 1996
can be attributed to the Class Size Reduction Program implemented by the state
of California in 1996 (see "Business -- Relocatable Modular Offices -- Classroom
Rentals and Sales" above).
11
<PAGE> 13
The following table sets forth for the periods indicated the results of
operations as a percentage of revenues and the percentage of changes in such
items as compared to the indicated prior period:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
PERCENT OF REVENUES PERCENT CHANGE
-------------------------------------- ----------------------
THREE YEARS YEAR ENDED DECEMBER 31, 1998 OVER 1997 OVER
1998 - 1996 1998 1997 1996 1997 1996
-------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Rental 51% 53% 46% 55% 17% 26%
Rental Related Services 8 9 8 10 12 18
---- ---- ---- ----
Rental Operations 59 62 54 65 16 25
Sales 40 38 46 34 (18) 106
Other 1 nm nm 1 nm nm
---- ---- ---- ----
Total Revenues 100 100 100 100 nm 52
---- ---- ---- ----
Costs and Expenses
Direct Costs of Rental Operations
Depreciation 12 12 11 14 17 15
Rental Related Services 5 5 5 6 4 14
Other 9 10 7 10 29 19
---- ---- ---- ----
Total Direct Costs of Rental
Operations 26 27 23 30 19 16
Cost of Sales 27 26 32 23 (17) 107
---- ---- ---- ----
Total Costs 53 53 55 53 (2) 56
---- ---- ---- ----
Gross Margin 47 47 45 47 3 47
Selling and Administrative 13 12 12 15 2 21
---- ---- ---- ----
Income from Operations 34 35 33 32 4 59
Interest 4 5 2 3 55 41
---- ---- ---- ----
Income before Provision for Income
Taxes 30 30 31 29 (1) 61
Provision for Income Taxes 12 12 12 12 (2) 65
---- ---- ---- ----
Income before Minority Interest 18 18 19 17 (1) 58
Minority Interest in Income of
Subsidiary nm nm 1 nm nm nm
---- ---- ---- ----
Net Income 18 18 18 17 nm 55
- ---------------------------------------------------------------------------------------------------------
</TABLE>
nm = not meaningful
FISCAL YEARS 1998 AND 1997
This section contains statements that constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See "General" above for cautionary information with respect to such
forward-looking statements.
California's Class Size Reduction Program (a law enacted in July 1996)
provided for facility and operational funding for the reduction of classroom
size to 20 pupils for kindergarten through third grade. Due to the anticipated
increase in demand for the DSA classrooms at the time, MMMC increased its supply
of the DSA classrooms resulting in significantly higher levels of sales and
rentals to school districts in 1997 and 1998. In late 1997 and continuing into
1998, as the industry's capacity to produce classrooms increased and the school
districts' demand for new classrooms decreased, school districts were more often
able to purchase new classrooms directly from manufacturers rather than from
MMMC. MMMC's sales of new classrooms declined from $18,795,000 in 1997 to
$10,187,000 in 1998. Included in the 1998 MMMC classroom sales is one project
that accounted for 60% of the sales volume. The Company does not anticipate such
a classroom sale will be repeated in 1999 for MMMC. Management believes MMMC's
new classroom sales will be minimal in 1999 as a result of the industry's
capacity to meet the school districts' demand for classrooms. The decline in new
classroom sales could be offset to some degree by an increase in sales to
schools purchasing classrooms that are currently on rent, depending on the
schools' funding and long-term requirements. DSA manufacturers also produced
significant quantities of classrooms for rental companies in 1998, many of which
12
<PAGE> 14
are yet to be rented. MMMC may experience competitive pricing pressures in 1999
for new rentals of classrooms as a result of the existing supply of classrooms
available for rent.
Enviroplex's sales of manufactured classrooms declined slightly in 1998 to
$20,672,000 from $21,287,000 in 1997. With the passage of California's
Proposition 1A (School Facilities Bond) in November 1998, Enviroplex will
continue to have increased opportunities since its core business is to
manufacture and sell classrooms directly to school districts. Management
believes even though Enviroplex will continue to have increased opportunities in
1999, competition for orders will be fierce with the additional industry
capacity.
Rental revenues increased $10,279,000 (17%) over 1997, with MMMC
contributing $6,443,000 and McGrath-RenTelco contributing $3,836,000 of the
increase. The significant rental revenue increase by MMMC resulted from the
large quantities of equipment shipped to schools in the latter part of 1997. The
McGrath-RenTelco rental revenue increase resulted from additional market
penetration including telemarketing and regional sales efforts on the East
Coast. As of December 31, 1998, rental equipment on rent increased for MMMC by
$17,760,000 and for McGrath-RenTelco by $7,759,000 compared to a year earlier.
Average utilization for modulars declined from 79.7% in 1997 to 77.6% in 1998
resulting in a comparable decline in modulars annual yield from 24.0% to 23.4%.
Average utilization for electronics declined slightly from 54.9% in 1997 to
54.6% in 1998 with electronics annual yield declining from 43.4% in 1997 to
42.2% in 1998 resulting primarily from competitive pricing pressures.
Rental related services revenues in 1998 increased $1,250,000 (12%), over
1997. Gross margins on these services increased from 38.8% in 1997 to 43.4% in
1998.
Sales in 1998 declined $10,977,000 (18%) due to fewer new classroom sales
to school districts by MMMC. Enviroplex and McGrath-RenTelco sales volumes each
declined slightly from 1997 and added to MMMC's expected decline in new
classroom sales. Consolidated gross margin on sales declined slightly from 31.4%
in 1997 to 31.1% in 1998. The single largest sale was for $6,110,000 by MMMC to
a school district during the third quarter of 1998 consisting of new classrooms
of which 69% of the total contract was for demolition of existing buildings,
site improvements and installation of the new classrooms. This sale was unique
as to the volume of new classrooms sold in conjunction with the amount of site
work performed and is not likely to be repeated in the future. Sales continue to
occur routinely as a normal part of the Company's rental business; however,
these sales can fluctuate from quarter to quarter and year to year depending on
customer demands, requirements and funding. Enviroplex's backlog of orders as of
December 31, 1998 and 1997 was $1,468,000 and $11,435,000, respectively.
Management believes schools delayed placing orders until allocation of funds
from the $9.2 billion bond measure, which passed in November, 1998, was
determined. Additional orders have been taken by Enviroplex since December 31,
1998, and the backlog as of March 12, 1999 was $4,070,000. (Backlog is not
significant in MMMC's modular business nor in the Company's electronic
business.)
Depreciation on rental equipment in 1998 increased $2,504,000 (17%) over
1997 due to additional rental equipment purchased during 1998. Average rental
equipment, at cost, during 1998 increased 19%. Other direct costs of rental
operations increased $3,015,000 (29%) over 1997 primarily due to increased
maintenance and repair expenses of the modular fleet. Additionally, during 1997,
a significant number of school customers opted to include upfront charges in the
rental rate resulting in higher amortization expense of these related upfront
costs over the lease term in the subsequent periods.
Selling and administrative expenses in 1998 increased $263,000 (2%) over
1997. During 1998, the primary factors contributing to increased selling and
administrative expenses were higher expenses for facility and equipment
depreciation ($585,000) and personnel and benefit costs ($539,000) offset by
fewer bad debt write-offs ($220,000), fewer legal and consulting expenses
($214,000), and eliminated facility rental, cleanup and moving expenses
($253,000).
Interest expense in 1998 increased $2,256,000 (55%) over 1997 as a result
of higher average borrowing levels in 1998. The debt increase funded in part the
rental equipment purchases made during 1998.
13
<PAGE> 15
Income before provision for taxes in 1998 decreased $469,000 (1%) from 1997
while net income decreased $150,000 from 1997. Basic earnings per share
increased 6% from $1.60 in 1997 to $1.69 in 1998 due to fewer shares
outstanding.
FISCAL YEARS 1997 AND 1996
This section contains statements that constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See "General" above for cautionary information with respect to such
forward-looking statements.
California's Class Size Reduction Program (a law enacted in July 1996)
provided for facility and operational funding for the reduction of classroom
size for kindergarten through third grade to 20 pupils. The Company's
consolidated revenues increased $45,971,000 (52%) in 1997 over 1996 with
approximately $35,591,000 (77%) of the revenue increase related to California's
Class Size Reduction Program. Of the $35,591,000 revenue increase, $5,909,000
came from MMMC's increase in rental revenue, $18,601,000 came from MMMC's
increase in sales revenue, and $11,081,000 came from Enviroplex's increase in
sales revenue. MMMC sold $6,204,000 of classrooms in 1996, of which $3,896,000
were new. In 1997, MMMC sales of classrooms rose to $24,805,000, of which
$18,795,000 were new. But in late 1997, as the industry's capacity to produce
classrooms increased and the school districts demand for new classrooms
decreased, school districts were more often able to purchase new classrooms
directly from manufacturers rather than from MMMC. All of Enviroplex's sales of
$10,206,000 in 1996 and $21,287,000 in 1997 were of new classrooms manufactured
by Enviroplex.
Enviroplex's backlog of orders was $11,435,000 as of December 31, 1997, as
compared to $11,309,000 on the same date a year earlier. (Backlog is not
significant in MMMC's modular business nor in the Company's electronic
business.)
Rental revenues increased $12,702,000 (26%) over 1996, with MMMC
contributing $9,583,000 and electronics contributing $3,119,000. Average
utilization for modulars increased from 72.1% in 1996 to 79.7% in 1997 resulting
in an increase in modulars annual yield from 21.0% to 24.0% of average equipment
cost. Average utilization for electronics (54.9%) and annual yield (43.4%)
remained the same for 1997 as it was in 1996.
Rental related services in 1997 increased $1,560,000 (18%) over 1996. A
majority of the increase is due to one commercial project with significant site
work requirements. The gross margin on rental related services increased
slightly from 36.7% in 1996 to 38.8% in 1997.
Sales in 1997 increased $31,846,000 (106%) over 1996 as a result of the
Class Size Reduction Program in California. During 1997, the Company's largest
sale was for new classrooms to a school district for approximately $3,759,000
and represented 6% of its sales. Gross margin on sales declined slightly from
32.0% in 1996 to 31.4% in 1997. Sales continue to occur routinely as a normal
part of the Company's rental business; however, these sales can fluctuate from
quarter to quarter and year to year depending on customer demands and
requirements.
Depreciation on rental equipment increased $1,902,000 (15%) in 1997 over
1996 due to the additional rental equipment purchased during 1997. Rental
equipment, at cost, increased 22% during 1997. Other direct costs of rental
operations increased $1,672,000 (19%) due to increased material, repair and
direct labor expenses ($1,075,000) related to the school business activity.
Additionally, more customers requested that certain lease costs be charged to
them in the rental rate rather than as a one time charge. This resulted in
higher amortization expense of lease costs ($483,000) for items recovered in the
customer's rental rate.
Selling and administrative expenses increased $2,810,000 (21%) in 1997 over
1996. The increased school business has translated into higher personnel costs.
Personnel costs increased $1,753,000 over 1996 resulting from additional staff
for sales and support, increased temporary contract labor, and increased sales
and performance bonuses.
14
<PAGE> 16
Interest expense increased $1,183,000 (41%) in 1997 over 1996 as a result
of 45% higher average borrowing levels offset slightly by lower interest rates
in 1997. The debt increase funded in part the significant rental equipment
purchases made during 1997.
Income before provision for income taxes increased $15,614,000 (61%) in
1997 over 1996 while net income increased $8,523,000 (55%). The lower percentage
increase for net income in 1997 is due to the increase in minority interest in
income of Enviroplex combined with a higher effective tax rate in 1997 of 39.4%
compared to 38.4% in 1996. Basic earnings per share increased 55% from $1.03 in
1996 to $1.60 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
This section contains statements that constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See "General" above for cautionary information with respect to such
forward-looking statements.
The Company requires substantial capital in order to maintain an available
inventory of relocatable modular offices and electronic test and measurement
instruments necessary to satisfy customer requirements in a timely manner. In
1998, as in prior years, the primary use of cash was for the purchase of rental
equipment. During the last three years, the growth of the rental inventory has
been financed primarily by cash flow from operations, private placement of
long-term debt and bank borrowings. During 1998, the Company demonstrated its
strong cash flow by increasing rental assets by $36,503,000, repurchasing
$12,247,000 of common stock and paying dividends of $5,386,000, while increasing
its debt by only $15,000,000 during the year.
In July, 1998, the Company completed a private placement of $40,000,000 of
6.44% Senior Notes due in 2005. Interest on the notes is due semi-annually in
arrears and the principal is due in 5 equal installments commencing on July 15,
2001. The outstanding balance at December 31, 1998 was $40,000,000.
The Company believes that bank borrowings will continue to be a source of
funds for the purchase of rental equipment. As the Company's assets have grown,
it has been able to negotiate increases in the borrowing limit under its general
bank line of credit to its current $75,000,000 limit. At December 31, 1998, the
outstanding borrowings under this line were $57,000,000. In addition to the
$75,000,000 line of credit, the Company has a $3,000,000 committed line of
credit facility related to its cash management services. Although no assurance
can be given, the Company believes it will continue to be able to negotiate
higher limits on its general bank line of credit adequate to meet capital
requirements not otherwise met by operational cash flows.
The Company had a total liabilities to equity ratio of 1.64 to 1 and 1.56
to 1 as of December 31, 1998 and 1997, respectively. The debt (notes payable) to
equity ratio was 0.92 to 1 and 0.83 to 1 at December 31, 1998 and 1997,
respectively.
The Company has made purchases of shares of its common stock from time to
time in the over-the-counter market (NASDAQ) and/or through privately
negotiated, large block transactions under an authorization of the Board of
Directors. Shares repurchased by the Company are canceled and returned to the
status of authorized but unissued stock. The following table summarizes the
repurchases of the Company's common stock during 1998, 1997, 1996 and the three
year totals as to the number of shares, the aggregate purchase price and the
average price per share.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------- THREE YEAR
1998 1997 1996 TOTALS
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Shares Repurchased 619,550 502,408 841,100 1,963,058
Aggregate Purchase Price $12,247,000 $10,545,000 $8,779,000 $31,571,000
Average Price Per Share $ 19.77 $ 20.99 $ 10.44 $ 16.08
- ----------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 17
In February and March 1999, the Company repurchased 427,400 shares of its
outstanding common stock for an aggregate purchase price of $7,813,000 (or an
average price of $18.28 per share). On March 18, 1999, the Company's Board of
Directors authorized the repurchase of up to 1,000,000 shares of its common
stock.
The Company believes that its needs for working capital and capital
expenditures through 1999 and beyond will be adequately met by cash flow and
bank borrowings.
MARKET RISK
This section contains statements that constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See "General" above for cautionary information with respect to such
forward-looking statements.
The Company currently has no material derivative financial instruments
which expose the Company to significant market risk. The Company is exposed to
cash flow and fair value risk due to changes in interest rates with respect to
its notes payable. The table below presents principal cash flows and related
weighted average interest rates of the Company's notes payable at December 31,
1998 by expected maturity dates. Weighted average variable rates are based on
implied forward rates in the yield curve at the reporting date.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
(dollar amounts in thousands)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2004 AND FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
------- ------- ------- ------ ------ ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate $ -- $ -- $ 8,000 $8,000 $8,000 $16,000 $40,000 $40,000
Average Interest Rate 6.44% 6.44% 6.44% 6.44% 6.44% 6.44% 6.44%
Variable Rate $14,250 $28,500 $14,250 $ -- $ -- $ -- $57,000 $57,000
Average Interest Rate 6.37% 6.37% 6.37% -- -- -- 6.37%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
YEAR 2000
This section contains statements that constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See "General" above for cautionary information with respect to such
forward-looking statements.
The "Year 2000" issue is the result of computer programs using two digits
rather than four to determine the applicable year. This could affect
date-sensitive calculations that treat "00" as the year 1900 rather than the
year 2000. An assessment of the Company's exposure related to Year 2000 issues
has been completed and it is not expected to have a significant impact on the
Company.
The Company initiated a number of major system projects in 1997 and 1998 to
upgrade core computer hardware, networking and software systems. These projects
are replacing existing systems as opposed to simply fixing Year 2000 problems.
Most of these projects have been completed and are operational; the balance is
expected to be operational by September 1999. Capitalized expenditures for this
process totaled $1,200,000 for the two year period ending December 31, 1998 for
external labor, hardware and software costs. This amount includes the cost of
new software applications installed as a result of strategic replacement
projects. Prior to December 31, 1998, the Company did not separately track the
internal costs incurred related to Year 2000 issues or the system conversions
described above. Such internal costs are principally the related payroll costs
for its information systems personnel and are not necessarily considered
incremental costs to the Company. Effective January 1, 1999, the Company will
begin to track these internal costs in accordance with Statement of Position
98-1, "Accounting for the costs of computer Software Developed or Obtained for
Internal Use." The Company has a capital budget of approximately $800,000 for
completion of its system upgrades, of which approximately $300,000 is expected
to be related to internal costs. All future costs will be funded from operating
cash flow.
The Company does not significantly rely on "embedded technology" in its
critical processes. Embedded technology, which means microprocessor-controlled
devices as opposed to multi-purpose computers, does control some building and
security operations, such as electric power management, ventilation, and
building
16
<PAGE> 18
access. All building facilities are presently being evaluated, and the Company
expects all systems using embedded technology to be confirmed as Year 2000 ready
by June 1999. The electronics test and measurement rental equipment has been
evaluated, and it appears only minor quantities of equipment pose a Year 2000
problem. If deemed important, some equipment may be upgraded. The Company asks
its customers to seek definitive Year 2000 compliance guidance directly from the
equipment manufacturers.
The Company cannot predict the likelihood of a significant disruption of
its customer's or supplier's businesses or the economy as a whole, either of
which could have a material adverse impact on the Company. However, because the
market for the Company's products is comprised of numerous customers with a
variety of sizes and levels of sophistication, the noncompliance with Year 2000
of any one would not be expected to have a detrimental impact on the Company's
financial position or results of operations. As a normal course of business, the
Company seeks to maintain multiple suppliers where possible. The Company
continues to communicate with vendors, customers, suppliers, service providers,
and government agencies to monitor their compliance.
The Company presently believes that its Year 2000 exposures will not
present a material adverse risk to the Company's future consolidated results of
operations, liquidity, and capital resources. However, if all systems are not
completed in a timely manner, or the level of timely compliance by key suppliers
or service providers is not sufficient, the Year 2000 issue could have a
material adverse effect on the Company's operations. This includes, but is not
limited to, delays of equipment shipments resulting in loss of revenues,
increased operating costs, loss of customers and suppliers, or other significant
disruptions to the Company's business.
The Company's contingency plan includes (1) all critical computer operating
and financial data will be backed-up and printed at key dates to provide the
basis for a manual system, if necessary, (2) in the event a significant number
of customers are unable to issue payments, the Company has sufficient liquidity
with its existing line of credit to function adequately, and (3) the Company
continues to look for multiple suppliers and is also evaluating power and
communication alternatives in the event of a loss of service. The contingency
plan is enhanced by the fact that existing management has been in place since
before computer systems were used.
IMPACT OF INFLATION
Although the Company cannot precisely determine the effect of inflation,
from time to time it has experienced increases in costs of rental equipment,
manufacturing costs, operating expenses and interest. Because most of its
rentals are relatively short term, the Company has generally been able to pass
on such increased costs through increases in rental rates and selling prices.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
INDEX PAGE
----- ----
<S> <C>
Report of Independent Public Accountants 18
Consolidated Financial Statements
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996 19
Consolidated Balance Sheets as of December 31, 1998, 1997
and 1996 20
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996 21
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 22
Notes to Consolidated Financial Statements 23
</TABLE>
17
<PAGE> 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of McGrath RentCorp:
We have audited the accompanying consolidated balance sheets of McGrath
RentCorp (a California corporation) and subsidiary as of December 31, 1998 and
1997, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of McGrath RentCorp as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
San Francisco, California ARTHUR ANDERSEN LLP
February 17, 1999
18
<PAGE> 20
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Rental $ 71,967 $ 61,688 $48,986
Rental Related Services 11,528 10,278 8,718
-------- -------- -------
Rental Operations 83,495 71,966 57,704
Sales 51,044 62,021 30,175
Other 889 989 1,126
-------- -------- -------
Total Revenues 135,428 134,976 89,005
-------- -------- -------
COSTS AND EXPENSES
Direct Costs of Rental Operations
Depreciation 16,862 14,358 12,456
Rental Related Services 6,531 6,287 5,515
Other 13,390 10,375 8,703
-------- -------- -------
Total Direct Costs of Rental Operations 36,783 31,020 26,674
Cost of Sales 35,189 42,550 20,532
-------- -------- -------
Total Costs 71,972 73,570 47,206
-------- -------- -------
Gross Margin 63,456 61,406 41,799
Selling and Administrative 16,220 15,957 13,147
-------- -------- -------
Income from Operations 47,236 45,449 28,652
Interest 6,326 4,070 2,887
-------- -------- -------
Income before Provision for Income Taxes 40,910 41,379 25,765
Provision for Income Taxes 16,010 16,323 9,885
-------- -------- -------
Income before Minority Interest 24,900 25,056 15,880
Minority Interest in Income of Subsidiary 1,005 1,011 358
-------- -------- -------
Net Income $ 23,895 $ 24,045 $15,522
======== ======== =======
Earnings Per Share:
Basic $ 1.69 $ 1.60 $ 1.03
-------- -------- -------
Diluted $ 1.67 $ 1.58 $ 1.01
-------- -------- -------
Shares Used in Per Share Calculation:
Basic 14,163 14,982 15,102
Diluted 14,349 15,181 15,306
- ---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE> 21
MCGRATH RENTCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
DECEMBER 31,
--------------------
(IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 857 $ 538
Accounts Receivable, less allowance for doubtful
accounts of $650 in 1998 and 1997 21,811 21,794
Rental Equipment, at cost:
Relocatable Modular Offices 216,414 196,133
Electronic Test Instruments 66,573 50,351
-------- --------
282,987 246,484
Less Accumulated Depreciation (82,959) (72,398)
-------- --------
Rental Equipment, net 200,028 174,086
-------- --------
Land, at cost 18,953 20,496
Buildings, Land Improvements, Equipment and Furniture,
at cost, less accumulated depreciation of $3,858 in 1998
and $3,177 in 1997 31,460 28,922
Prepaid Expenses and Other Assets 5,567 6,556
-------- --------
Total Assets $278,676 $252,392
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes Payable $ 97,000 $ 82,000
Accounts Payable and Accrued Liabilities 22,964 27,046
Deferred Income 5,574 6,929
Minority Interest in Subsidiary 2,584 1,523
Deferred Income Taxes 45,160 36,248
-------- --------
Total Liabilities 173,282 153,746
-------- --------
Shareholders' Equity:
Common Stock, no par value --
Authorized -- 40,000 shares
Outstanding -- 13,970 shares in 1998 and
14,522 shares in 1997 8,138 7,757
Retained Earnings 97,256 90,889
-------- --------
Total Shareholders' Equity 105,394 98,646
-------- --------
Total Liabilities and Shareholders' Equity $278,676 $252,392
======== ========
- ----------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE> 22
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
COMMON STOCK TOTAL
---------------------- RETAINED SHAREHOLDERS'
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SHARES AMOUNT EARNINGS EQUITY
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995> 15,540 $8,913 $76,980 $ 85,893
Net Income -- -- 15,522 15,522
Repurchase of Common Stock (841) (2,111) (6,668) (8,779)
Common Stock Issued or Reserved Under
Long-Term Stock Bonus Plan 21 198 -- 198
Repurchase of Common Stock in Connection
with the Exercise of Stock Options (28) (298) -- (298)
Exercise of Stock Options 128 459 -- 459
Dividends Declared of $0.28 Per Share -- -- (4,187) (4,187)
- -----------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 14,820 7,161 81,647 88,808
Net Income -- -- 24,045 24,045
Repurchase of Common Stock (502) (507) (10,038) (10,545)
Common Stock Issued or Reserved Under
Long-Term Stock Bonus Plan 28 497 -- 497
Exercise of Stock Options 176 606 -- 606
Dividends Declared of $0.32 Per Share -- -- (4,765) (4,765)
- -----------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 14,522 7,757 90,889 98,646
Net Income -- -- 23,895 23,895
Repurchase of Common Stock (620) (340) (11,907) (12,247)
Common Stock Issued or Reserved Under
Long-Term Stock Bonus Plan 37 485 -- 485
Exercise of Stock Options 31 236 -- 236
Dividends Declared of $0.40 Per Share -- -- (5,621) (5,621)
- -----------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 13,970 $8,138 $97,256 $105,394
- -----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE> 23
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------
(IN THOUSANDS) 1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 23,895 $ 24,045 $ 15,522
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 18,794 15,771 13,483
Gain on Sale of Rental Equipment (5,404) (6,622) (4,816)
Proceeds from Sale of Rental Equipment 13,759 17,748 12,599
Change In:
Accounts Receivable (17) (1,874) (6,719)
Prepaid Expenses and Other Assets 991 (4,161) (499)
Accounts Payable and Accrued Liabilities (3,850) 13,166 3,477
Deferred Income (1,354) 1,702 (740)
Deferred Income Taxes 8,912 (622) 2,381
-------- -------- --------
Net Cash Provided by Operating Activities 55,726 59,153 34,688
-------- -------- --------
Cash Flow from Investing Activities:
Purchase of Rental Equipment (51,159) (62,277) (29,925)
Purchase of Land, Buildings, Land Improvements,
Equipment and Furniture (4,041) (10,594) (8,366)
Proceeds from Sale of Land, Buildings
and Land Improvements 2,190 -- --
-------- -------- --------
Net Cash Used in Investing Activities (53,010) (72,871) (38,291)
-------- -------- --------
Cash Flow from Financing Activities:
Net Borrowings under Bank Lines of Credit (25,000) 28,150 16,770
Borrowings under Private Placement 40,000 -- --
Net Proceeds from the Exercise of Stock Options 236 606 161
Repurchase of Common Stock (12,247) (10,545) (8,779)
Payment of Dividends (5,386) (4,641) (4,084)
-------- -------- --------
Net Cash Provided by (Used in) Financing
Activities (2,397) 13,570 4,068
-------- -------- --------
Net Increase (Decrease) in Cash 319 (148) 465
Cash Balance, Beginning of Period 538 686 221
-------- -------- --------
Cash Balance, End of Period $ 857 $ 538 $ 686
======== ======== ========
Interest Paid During the Period $ 5,407 $ 4,010 $ 2,833
======== ======== ========
Income Taxes Paid During the Period $ 7,098 $ 16,945 $ 7,540
======== ======== ========
Dividends Declared but not yet Paid $ 1,397 $ 1,162 $ 1,038
======== ======== ========
- ---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE> 24
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BUSINESS
McGrath RentCorp is a California corporation organized in 1979. McGrath
RentCorp and its majority owned subsidiary, Enviroplex, Inc. ("Enviroplex"),
collectively referred to herein as the "Company", manufactures, rents and sells
relocatable modular offices and rents and sells electronic test and measurement
instruments with related accessories primarily in California and Texas. The
Company's corporate offices are located in Livermore, California. In addition to
the corporate offices, both modular and electronics operations are conducted
from this facility.
Under the trade name "Mobile Modular Management Corporation", the Company
rents and sells modular equipment and related accessories from two branch
offices located in California and one located in Texas. The Company purchases
the modulars from various manufacturers who build them to the Company's design
specifications. Although Mobile Modular Management Corporation's primary
emphasis is on rentals, sales of modulars occur routinely and can fluctuate
quarter to quarter and from year to year depending on customer demands and
requirements.
Under the trade name "McGrath-RenTelco", the Company conducts electronics
operations from Livermore, California and Richardson, Texas. Engineers,
scientists and technicians use these instruments in evaluating the performance
of their own electrical and electronic equipment, developing products,
controlling manufacturing processes and in field service applications. These
instruments are rented primarily to electronics, communications, network
systems, industrial, research and aerospace companies. The majority of
McGrath-RenTelco's rental inventory consists of instruments manufactured by
Hewlett-Packard and Tektronix.
McGrath RentCorp owns 73.2% of Enviroplex, a California corporation
organized in 1991. Enviroplex manufactures portable classrooms built to the
requirements of the California Division of the State Architect ("DSA") and sells
directly to school districts. Enviroplex conducts its sales and manufacturing
operations from one facility located in Stockton, California.
The rental and sale of modulars to public school districts for use as
portable classrooms, restroom buildings and administrative offices for
kindergarten through grade twelve (K-12) are a significant portion of the
Company's revenues. School business comprised approximately 45%, 52% and 37% of
the Company's consolidated rental and sales revenues for 1998, 1997 and 1996,
respectively. The increase in the Company's sales revenues in 1997 was
attributed to the Class Size Reduction Program implemented by the state of
California in 1996.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of McGrath
RentCorp and Enviroplex. All significant intercompany accounts and transactions
are eliminated.
REVENUES
Rental revenue is recognized under the "operating method" of accounting for
the majority of leases. Rental billings for more than one month are recorded as
deferred income and recognized as rental revenue when earned.
Rental related services revenue is primarily associated with relocatable
modular office leases and consists of billings to customers for delivery,
installation, modifications, skirting, additional site related work, and return
delivery and dismantle. Revenue related to these services is recognized in the
period the services are performed and accepted.
23
<PAGE> 25
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Sales revenue is recognized upon delivery of the equipment to the customer.
Certain leases meeting the requirements of Statement of Financial Accounting
Standards ("SFAS") No. 13, "Accounting for Leases", are accounted for as sales
type leases. For these leases, sales revenue and the related accounts receivable
are recognized upon execution of the leases and unearned interest is recognized
over the lease term on a basis which results in a constant rate of return on the
unrecovered lease investment (see Note 4).
DEPRECIATION AND MAINTENANCE
Rental equipment, buildings, land improvements, equipment and furniture are
depreciated on a straight-line basis for financial reporting purposes and on an
accelerated basis for income tax purposes. The costs of major refurbishment of
relocatable modular offices are capitalized to the extent the refurbishment
significantly improves the quality and adds value or life to the equipment. Land
improvements consist of development costs incurred to build storage and
maintenance facilities at each of the relocatable modular branch offices. The
following estimated useful lives and residual values are used for financial
reporting purposes:
RENTAL EQUIPMENT:
<TABLE>
<S> <C>
Relocatable modular offices 7 to 18 years, 0% to 18% residual value
Electronic test instruments 5 to 8 years, no residual value
Buildings, land improvements, equipment and
furniture 5 to 50 years, no residual value
</TABLE>
Maintenance and repairs are expensed as incurred.
OTHER DIRECT COSTS OF RENTAL OPERATION
Other direct costs of rental operations primarily relate to costs
associated with relocatable modular offices and include equipment supplies and
repairs, direct labor, amortization of lease costs included in the rental rate,
property and liability insurance, property taxes, and business and license fees.
WARRANTY SERVICE COSTS
Sales of new relocatable modular offices, electronic test equipment and
related accessories not manufactured by the Company are typically covered by
warranties provided by the manufacturer of the products sold. The Company
provides limited 90-day warranties for certain sales of used rental equipment
and a one-year warranty on equipment manufactured by Enviroplex. Although the
Company's policy is to provide reserves for warranties when required for
specific circumstances, the Company has not found it necessary to establish such
reserves to date.
INCOME TAXES
Provision has been made for deferred income taxes based upon the amount of
taxes payable in future years, after considering changes in tax rates and other
statutory provisions that will be in effect in those years (see Note 6).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the carrying amounts of its financial instruments
(cash and notes payable) approximate fair value.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions in determining reported amounts of assets
24
<PAGE> 26
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during each period presented. Actual results could differ from those estimates.
EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed as net income divided by the
weighted average number of shares of common stock outstanding for the reported
period, excluding the dilutive effects of stock options and other potentially
dilutive securities. Diluted EPS is computed as net income divided by the
weighted average number of shares outstanding of common stock and common stock
equivalents for the reported period. Common stock equivalents result from
dilutive stock options computed using the treasury stock method with the average
share price for the reported period. The weighted average number of options
outstanding at December 31, 1998, 1997 and 1996 were 186,624, 199,215 and
203,414, respectively.
NOTE 3. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of trade accounts receivable. The Company sells
primarily on 30-day terms, individually performs credit evaluation procedures on
its customers on each transaction and will require security deposits or personal
guarantees from its customers when a significant credit risk is identified.
Historically, the Company has not incurred significant credit related losses,
however, an allowance for potential credit losses is maintained. Typically, most
customers are established companies or are publicly funded entities located in
California or Texas. Although no one customer accounts for more than 10% of the
Company's consolidated revenues, credit risk exists in trade accounts receivable
primarily due to the significant amount of business transacted with the
California public school districts (K-12) which represents a significant portion
of the Company's revenues (see Note 1). The lack of fiscal funding or
significant reduction of funding from the State of California to the public
schools could have a material adverse effect on the Company.
NOTE 4. SALES TYPE LEASE RECEIVABLES
The Company has entered into several sales type leases. The minimum lease
payments receivable and the net investment included in accounts receivable for
such leases are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
December 31,
(in thousands) ------------------
1998 1997
------- -------
<S> <C> <C>
Gross minimum lease payments receivable $ 5,935 $ 5,339
Less -- unearned interest (1,246) (1,012)
------- -------
Net investment in sales type lease receivables $ 4,689 $ 4,327
- ---------------------------------------------------------------------
</TABLE>
As of December 31, 1998, the future minimum lease payments to be received
in 1999 and thereafter are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------
(in thousands)
<S> <C>
YEAR ENDED DECEMBER 31,
1999 $3,229
2000 1,377
2001 690
2002 362
2003 156
2004 and thereafter 121
------
Total minimum future lease payments $5,935
- ----------------------------------------------------
</TABLE>
25
<PAGE> 27
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. NOTES PAYABLE
On July 31, 1998, the Company completed a private placement of $40,000,000
of 6.44% Senior Notes due in 2005. Interest on the notes is due semi-annually in
arrears and the principal is due in 5 equal installments commencing on July 15,
2001. The outstanding balance at December 31, 1998 was $40,000,000. Among other
restrictions, the agreement requires (i) the Company to maintain a minimum net
worth of $80,000,000 plus 25% of all net income generated subsequent to June 30,
1998, less a maximum of $15,000,000 paid by the Company to repurchase its common
stock after June 30, 1998, (restricted equity at December 31, 1998 is
$80,801,000), (ii) a fixed coverage charge of not less than 2.0 to 1.0, (iii) a
rolling fixed charges coverage ratio of not less than 1.5 to 1.0, and (iv)
senior debt not to exceed 275% of consolidated net worth and consolidated total
debt not to exceed 300% of consolidated net worth.
The Company maintains an unsecured line of credit agreement, as amended,
(the "Agreement") with its banks which expires on June 30, 1999 and permits it
to borrow up to $75,000,000 of which $57,000,000 was outstanding as of December
31, 1998. The Agreement requires the Company to pay interest at prime or, at the
Company's election, other rate options available under the Agreement. In
addition, the Company pays a commitment fee on the daily average unused portion
of the available line. Among other restrictions, the Agreement requires (i) the
Company to maintain shareholders' equity of not less than $77,800,000 plus 50%
of all net income generated subsequent to June 30, 1997 plus 90% of any new
stock issuance proceeds (restricted equity at December 31, 1998 is $96,269,000),
(ii) a debt-to-equity ratio (excluding deferred income taxes) of not more than 3
to 1, (iii) interest coverage (income from operations compared to interest
expense) of not less than 2 to 1 and (iv) debt service coverage (earnings before
interest, taxes, depreciation and amortization compared to the following year's
pro forma debt service) of not less than 1.15 to 1.0. If the Company does not
amend or renegotiate the present Agreement for an additional time period prior
to its expiration date, the principal amount outstanding at that time will be
converted to a two-year term loan with principal due and payable in eight (8)
consecutive quarterly installments.
In addition to the $75,000,000 unsecured line of credit, the Company has a
$3,000,000 committed line of credit facility (at prime rate) related to its cash
management services of which none was outstanding as of December 31, 1998. This
committed line related to its cash management services will expire on June 30,
1999.
The following information relates to the lines of credit for each of the
following periods:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
(dollar amounts in thousands) -------------------------
1998 1997
-------- -------
<S> <C> <C>
Maximum amount outstanding $103,500 $82,000
Average amount outstanding $ 79,326 $60,601
Weighted average interest rate 6.41% 6.50%
Effective interest rate at end of period 6.37% 6.70%
Prime interest rate at end of period 7.75% 8.50%
- ---------------------------------------------------------------------
</TABLE>
26
<PAGE> 28
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. INCOME TAXES
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
CURRENT DEFERRED TOTAL
(in thousands) ------- -------- -------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31,
- ---------------------------------------
1998
Federal $ 5,526 $7,736 $13,262
State 1,572 1,176 2,748
------- ------ -------
$ 7,098 $8,912 $16,010
======= ====== =======
1997
Federal $14,075 $ (809) $13,266
State 2,870 187 3,057
------- ------ -------
$16,945 $ (622) $16,323
======= ====== =======
1996
Federal $ 6,032 $2,219 $ 8,251
State 1,472 162 1,634
------- ------ -------
$ 7,504 $2,381 $ 9,885
======= ====== =======
- -----------------------------------------------------------------------
</TABLE>
The reconciliation of the federal statutory tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate 35.00% 35.00% 35.00%
State taxes, net of federal benefit 4.37 4.80 4.12
Other (0.24) (0.35) (0.75)
----- ----- -----
39.13% 39.45% 38.37%
- ---------------------------------------------------------------------
</TABLE>
The following table shows the tax effect of the Company's cumulative
temporary differences included in net deferred income taxes on the Company's
Balance Sheets:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
(in thousands) ------------------------
1998 1997
------- -------
<S> <C> <C>
Excess of tax over book depreciation $51,417 $44,859
State income taxes (3,245) (3,095)
Accrued liabilities not currently
deductible (146) (1,189)
Revenue deferred for financial reporting
purposes (1,598) (1,733)
Other, net (1,268) (2,594)
------- -------
$45,160 $36,248
- ---------------------------------------------------------------------
</TABLE>
NOTE 7. COMMON STOCK AND STOCK OPTIONS
The Company adopted a 1998 Stock Option Plan (the "1998 Plan"), effective
March 9, 1998, under which 2,000,000 shares are reserved for the grant of
options to purchase common stock to directors, officers, key employees and
advisors of the Company. The plan provides for the award of options at a price
not less than the fair market value of the stock as determined by the Board of
Directors on the date the options are granted.
27
<PAGE> 29
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under the 1998 Plan, 242,000 options have been granted with exercise prices
ranging from $20.25 to $20.81. The options vest over 5 years and expire 10 years
after grant.
The Company adopted a 1987 Incentive Stock Option Plan (the "1987 Plan"),
effective December 14, 1987, under which options to purchase common stock may be
granted to officers and key employees of the Company. The plan provides for the
award of options at a price not less than the fair market value of the stock as
determined by the Board of Directors on the date the options are granted. Under
the 1987 Plan, options have been granted with an exercise price of $3.06, $6.94
and $10.75 per share. The options vest over 9.3 years and expire 10 years after
grant. The 1987 Plan expired in December 1997 and no further options can be
issued under this plan.
Option activity and options exercisable including weighted average exercise
price for the three years ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
1998 1997 1996
------------------ ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at January 1, 364,672 8.57 540,452 6.90 512,846 4.87
Options granted during the year 242,000 20.81 -- -- 160,000 10.75
Options exercised during the year (31,282) 7.55 (175,780) 3.44 (128,494) 3.58
Options terminated during the year (34,268) 12.93 -- -- (3,900) 6.94
------- ----- -------- ---- -------- -----
Options outstanding at December 31, 541,122 13.85 364,672 8.57 540,452 6.90
------- ----- -------- ---- -------- -----
Options exercisable at December 31, 171,877 8.55 153,362 7.45 278,422 4.79
- ----------------------------------------------------------------------------------------------------
</TABLE>
The weighted average remaining life of the 541,122 options outstanding at
December 31, 1998, is 6.8 years. As of December 31, 1998, 1,758,000 options can
be issued under the 1998 plan.
Statement of Financial Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") became effective for the Company in 1996. As allowed
by SFAS 123, the Company has elected to continue to follow Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") in
accounting for its stock option plans. Under APB 25, the Company does not
recognize compensation expense on the issuance of stock options because the
option terms are fixed and the exercise price equals the market price of the
underlying stock on the grant date.
In accordance with SFAS 123, the fair value of each option grant is
estimated at the date of grant using the Black-Scholes option pricing model. The
assumptions used in the 1998 and 1996 grants are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1996
---------------- ----------------
<S> <C> <C>
Risk-free interest rates 6.5% 8.5%
Expected dividend yields 2.0% 2.6%
Expected volatility 27.1% 17.2%
Expected option life (in
years) 7.5 10.0
- --------------------------------------------------------------------
</TABLE>
28
<PAGE> 30
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value of the options granted in 1998 and 1996 are $2,182,000,
$532,000 and $598,000 at December 31, 1998, 1997 and 1996, respectively.
The following pro-forma net income and earnings per share data are computed
as if compensation cost for the Stock Option Plan had been determined consistent
with SFAS 123:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
(in thousands, except per share amounts) ---------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net Income $23,895 $24,045 $15,522
Pro Forma net income 23,583 24,005 15,481
EPS
Basic 1.69 1.60 1.03
Diluted 1.67 1.58 1.01
Pro Forma EPS
Basic 1.67 1.60 1.03
Diluted 1.64 1.58 1.01
- ---------------------------------------------------------------------------
</TABLE>
In 1985, the Company established an Employee Stock Ownership Plan, as
amended. Under the terms of the plan, the Company makes annual contributions in
the form of cash or common stock of the Company to a trust for the benefit of
eligible employees. The amount of the contribution is determined annually by the
Board of Directors. A contribution of $750,000 was approved for 1998 and 1997
and $650,000 for 1996.
In 1991, the Board of Directors adopted a Long-Term Stock Bonus Plan (the
"LTB Plan") under which 400,000 shares of common stock are reserved for grant to
officers and key employees. The stock bonuses granted under the LTB Plan are
evidenced by written Stock Bonus Agreements covering specified performance
periods. The LTB Plan provides for the grant of stock bonuses upon achievement
of certain financial goals during a specified period. Stock bonuses earned under
the LTB Plan vest over 5 years from the grant date contingent on the employee's
continued employment with the Company. As of December 31, 1998, 172,408 shares
of common stock have been granted, of which 107,951 shares of common stock are
vested. Future grants of 41,109 shares of common stock are authorized by the
Board of Directors to be issued under the LTB Plan in the event the Company
reaches the highest level of achievement. Compensation expense for 1998, 1997
and 1996 under these plans was $485,000, $497,000 and $198,000 respectively, and
is based on a combination of the anticipated shares to be granted, the amount of
vested shares previously issued and fluctuations in market price of the
Company's common stock.
The Board of Directors has authorized the repurchase of shares of the
Company's outstanding common stock. These purchases are to be made in the
over-the-counter market and/or through large block transactions at such
repurchase price as the officers shall deem appropriate and desirable on behalf
of the Company. All shares repurchased by the Company are to be canceled and
returned to the status of authorized but unissued shares of common stock. In
1996, the Company repurchased 841,100 shares of common stock for an aggregate
repurchase price of $8,779,000 or an average price of $10.44 per share. In 1997,
the Company repurchased 502,408 shares of common stock for an aggregate
repurchase price of $10,545,000 or an average price of $20.99 per share. In
1998, the Company repurchased 619,550 shares of common stock for an aggregate
repurchase price of $12,247,000 or an average price of $19.77 per share. As of
December 31, 1998, 819,900 shares remain authorized for repurchase (see Note 10
below).
NOTE 8. BUSINESS SEGMENTS
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). The Company defined its business segments based
on the nature of operations for the purpose of reporting under SFAS 131. The
29
<PAGE> 31
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's three reportable segments are Mobile Modular Management Corporation
(Modulars), McGrath-RenTelco (Electronics), and Enviroplex. The operations of
each of these segments is described in Note 1, Organization and Business, and
the accounting policies of the segments are described in Note 2, Significant
Accounting Policies. As a separate corporate entity, Enviroplex revenues and
expenses are separately maintained from Modulars and Electronics. Excluding
interest expense, allocations of revenues and expenses not directly associated
with Modulars or Electronics are generally allocated to these segments based on
their pro-rata share of direct revenues. Interest expense is allocated between
Modulars and Electronics based on their pro-rata share of average rental
equipment, accounts receivable and customer security deposits. The Company does
not report total assets by business segment. Summarized financial information
for the years ended December 31, 1998, 1997, and 1996 for the Company's
reportable segments is shown in the following table:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
MODULARS ELECTRONICS ENVIROPLEX CONSOLIDATED
(in thousands) -------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1998
Rental Operation Revenues $58,964 $24,531 $ -- $ 83,495
Sales and Other Revenues 23,619 7,642 20,672 51,933
Total Revenues 82,583 32,173 20,672 135,428
Depreciation on Rental Equipment 9,398 7,464 -- 16,862
Interest Expense 4,802 1,505 19 6,326
Income before Income Taxes 23,133 11,875 5,902 40,910
Rental Equipment Acquisitions 28,970 22,189 -- 51,159
Accounts Receivable, net (year-end) 10,765 6,900 4,146 21,811
Rental Equipment, at cost (year-end) 216,414 66,573 -- 282,987
1997
Rental Operation Revenues $51,412 $20,554 $ -- $ 71,966
Sales and Other Revenues 34,178 7,545 21,287 63,010
Total Revenues 85,590 28,099 21,287 134,976
Depreciation on Rental Equipment 8,154 6,204 -- 14,358
Interest Expense 3,148 880 42 4,070
Income before Income Taxes 24,708 10,723 5,948 41,379
Rental Equipment Acquisitions 49,303 12,974 -- 62,277
Accounts Receivable, net (year-end) 10,449 6,567 4,778 21,794
Rental Equipment, at cost (year-end) 196,133 50,351 -- 246,484
1996
Rental Operation Revenues $40,330 $17,374 $ -- $ 57,704
Sales and Other Revenues 15,244 5,851 10,206 31,301
Total Revenues 55,574 23,225 10,206 89,005
Depreciation on Rental Equipment 7,265 5,191 -- 12,456
Interest Expense 2,221 580 86 2,887
Income before Income Taxes 15,026 8,700 2,039 25,765
Rental Equipment Acquisitions 16,246 13,679 -- 29,925
Accounts Receivable, net (year-end) 11,678 5,220 3,022 19,920
Rental Equipment, at cost (year-end) 158,377 43,335 -- 201,712
- ------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 32
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for each of the two years ended December
31, 1998 is summarized below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1998
(in thousands, except per share amounts) ----------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS DATA
Total revenues $ 27,350 $ 33,475 $ 44,478 $ 30,125 $135,428
Gross margin 13,565 15,863 18,680 15,348 63,456
Income from operations 9,860 12,024 14,120 11,232 47,236
Income before income taxes 8,409 10,441 12,434 9,626 40,910
Net income 4,968 5,974 7,088 5,865 23,895
Earnings per share:
Basic $ 0.34 $ 0.42 $ 0.50 $ 0.42 $ 1.69
Diluted $ 0.34 $ 0.42 $ 0.50 $ 0.41 $ 1.67
Dividends declared per share $ 0.10 $ 0.10 $ 0.10 $ 0.10 $ 0.40
BALANCE SHEET DATA
Rental equipment, net $178,003 $186,883 $190,461 $200,028 $200,028
Total assets 256,968 266,575 274,932 278,676 278,676
Notes payable 97,747 103,500 100,000 97,000 97,000
Shareholders' equity 93,587 97,168 101,049 105,394 105,394
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
1997
----------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS DATA
Total revenues $ 26,842 $ 33,459 $ 45,352 $ 29,323 $134,976
Gross margin 12,591 15,084 19,537 14,194 61,406
Income from operations 9,233 11,396 14,574 10,246 45,449
Income before income taxes 8,360 10,407 13,531 9,081 41,379
Net income 4,919 6,082 7,702 5,342 24,045
Earnings per share:
Basic $ 0.33 $ 0.41 $ 0.51 $ 0.36 $ 1.60
Diluted $ 0.33 $ 0.40 $ 0.51 $ 0.35 $ 1.58
Dividends declared per share $ 0.08 $ 0.08 $ 0.08 $ 0.08 $ 0.32
BALANCE SHEET DATA
Rental equipment, net $141,821 $146,343 $158,693 $174,086 $174,086
Total assets 206,221 222,940 237,963 252,392 252,392
Notes payable 52,000 65,000 65,800 82,000 82,000
Shareholders' equity 93,005 97,922 104,465 98,646 98,646
- ------------------------------------------------------------------------------------------
</TABLE>
NOTE 10. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
In February and March, 1999, the Company repurchased 427,400 shares of its
outstanding common stock for an aggregate purchase price of $7,813,000 (or an
average price of $18.28 per share). On March 18, 1999, the Company's Board of
Directors authorized the repurchase of up to 1,000,000 shares of its common
stock.
31
<PAGE> 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
McGrath RentCorp's definitive Proxy Statement with respect to its Annual
Shareholders' Meeting to be held June 3, 1999, which will be filed with the
Securities and Exchange Commission by not later than April 30, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
McGrath RentCorp's definitive Proxy Statement with respect to its Annual
Shareholders' Meeting to be held June 3, 1999, which will be filed with the
Securities and Exchange Commission by not later than April 30, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
McGrath RentCorp's definitive Proxy Statement with respect to its Annual
Shareholders' Meeting to be held June 3, 1999, which will be filed with the
Securities and Exchange Commission by not later than April 30, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
McGrath RentCorp's definitive Proxy Statement with respect to its Annual
Shareholders' Meeting to be held June 3, 1999, which will be filed with the
Securities and Exchange Commission by not later than April 30, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index of documents filed as part of this report:
1. The following Consolidated Financial Statements of McGrath RentCorp are
included in Item 8.
<TABLE>
<CAPTION>
PAGE OF
THIS REPORT
-----------
<S> <C>
Report of Independent Public Accountants 18
Consolidated Financial Statements
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996 19
Consolidated Balance Sheets as of December 31, 1998 and
1997 20
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996 21
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 22
Notes to Consolidated Financial Statements 23
</TABLE>
2. Financial Statement Schedules. None
3. Exhibits. See Index of Exhibits on page 35 of this report.
(b) Reports on Form 8-K. None.
32
<PAGE> 34
Schedules and exhibits required by Article 7 of Regulation S-X other than
those listed are omitted because they are not required, are not applicable, or
equivalent information has been included in the consolidated financial
statements, and notes thereto, or elsewhere herein.
33
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 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.
Date: March 18, 1999 MCGRATH RENTCORP
by: /s/ Robert P. McGrath
------------------------------------
Robert P. McGrath
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates as indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Robert P. McGrath Chairman of the Board and Chief Executive March 18, 1999
- ------------------------------------ Officer
Robert P. McGrath
/s/ Delight Saxton Senior Vice President, Chief Financial March 18, 1999
- ------------------------------------ Officer (Chief Accounting Officer),
Delight Saxton Secretary and Director
/s/ Joan McGrath Director March 18, 1999
- ------------------------------------
Joan McGrath
</TABLE>
34
<PAGE> 36
MCGRATH RENTCORP
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION METHOD OF FILING
- ------ ----------- ----------------
<S> <C> <C>
3.1 Articles of Incorporation of Filed as exhibit 19.1 to the Company's Quarterly Report on
McGrath RentCorp Form 10-Q for the quarter ended June 30, 1988 (filed August
14, 1988), and incorporated herein by reference.
3.1.1 Amendment to Articles of Filed as exhibit 3.1 to the Company's Registration
Incorporation of McGrath Statement on Form S-1 (filed March 28, 1991 Registration
RentCorp No. 33-39633), and incorporated herein by reference.
3.1.2 Amendment to Articles of Filed as exhibit 3.1.2 to the Company's Annual Report on
Incorporation of McGrath Form 10-K for the year ended December 31, 1997 (filed March
RentCorp 31, 1998), incorporated herein by reference.
3.2 Amended and Restated By-Laws Filed as exhibit 3.1 to the Company's Annual Report on Form
of McGrath RentCorp 10-K for the year ended December 31, 1990 (filed March 28,
1991), incorporated herein by reference.
3.2.1 Amendment of By-Laws of Filed as exhibit 3.2.1 to the Company's Annual Report on
McGrath RentCorp Form 10-K for the year ended December 31, 1997 (filed March
31, 1998), incorporated herein by reference.
3.2.2 Amendment of By-Laws of Filed herewith.
McGrath RentCorp
4.1 Amended and Restated Credit Filed as exhibit 4.1 to the Company's Quarterly Report on
Agreement Form 10-Q for the quarter ended June 30, 1997 (filed August
1, 1997), and incorporated herein by reference.
4.1.1 First Amendment to the Filed as exhibit 4.1.1 to the Company's Annual Report on
Restated Credit Agreement Form 10-K for the year ended December 31, 1997 (filed March
31, 1998), incorporated herein by reference.
4.1.2 Second Amendment to the Filed as exhibit 4.1.2 to the Company's Annual Report on
Restated Credit Agreement Form 10-K for the year ended December 31, 1997 (filed March
31, 1998), incorporated herein by reference.
4.1.3 Third Amendment to the Filed as exhibit 4.1 to the Company's Quarterly Report on
Restated Credit Agreement Form 10-Q for the quarter ended March 31, 1998 (filed May
13, 1998), incorporated herein by reference.
4.1.4 Facility Reduction Letter for Filed as exhibit 4.1 to the Company's Quarterly Report on
Restated Credit Agreement Form 10-Q for the quarter ended September 30, 1998 (filed
November 12, 1998), incorporated herein by reference.
4.2 $3,000,000 Committed Credit Filed as exhibit 4.1 to the Company's Quarterly Report on
Facility Form 10-Q for the quarter ended September 30, 1997 (filed
November 11, 1997), and incorporated herein by reference.
4.2.1 First Extension $3,000,000 Filed as exhibit 4.1 to the Company's Quarterly Report on
Committed Credit Facility Form 10-Q for the quarter ended June 30, 1998 (filed August
11, 1998), and incorporated herein by reference.
4.2.2 Second Extension $3,000,000 Filed as exhibit 4.2 to the Company's Quarterly Report on
Committed Credit Facility Form 10-Q for the quarter ended September 30, 1998 (filed
November 12, 1998), and incorporated herein by reference.
4.3 Note Purchase Agreement Filed as exhibit 4.3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998 (filed
November 12, 1998), and incorporated herein by reference.
4.3.1 Schedule of Notes with Sample Filed as exhibit 4.3 to the Company's Quarterly Report on
Note Form 10-Q for the quarter ended June 30, 1998 (filed August
11, 1998), and incorporated herein by reference.
4.4 $5,000,000 Optional Credit Filed as exhibit 4.2 to the Company's Annual Report on Form
Facility with Union Bank of 10-K for the year ended December 31, 1996 (filed March 31,
California, N.A. 1997), and incorporated herein by reference.
4.4.1 First Extension to the Filed as exhibit 4.3.1 to the Company's Annual Report on
$5,000,000 Optional Credit Form 10-K for the year ended December 31, 1997 (filed March
Facility with Union Bank of 31, 1998), incorporated herein by reference
California, N.A.
4.4.2 Second Extension to the Filed as exhibit 4.2 to the Company's Quarterly Report on
$5,000,000 Optional Credit Form 10-Q for the quarter ended June 30, 1997 (filed August
Facility with Union Bank of 1, 1997), and incorporated herein by reference.
California, N.A.
</TABLE>
35
<PAGE> 37
<TABLE>
<CAPTION>
NUMBER DESCRIPTION METHOD OF FILING
- ------ ----------- ----------------
<S> <C> <C>
4.4.3 Third Extension to the Filed as exhibit 4.2 to the Company's Quarterly Report on
$5,000,000 Optional Credit Form 10-Q for the quarter ended September 30, 1997 (filed
Facility with Union Bank of November 11, 1997), and incorporated herein by reference.
California, N.A.
4.4.4 Fourth Extension to the Filed as exhibit 4.2 to the Company's Quarterly Report on
$5,000,000 Optional Credit Form 10-Q for the quarter ended June 30, 1998 (filed August
Facility with Union Bank of 11, 1998), and incorporated herein by reference.
California, N.A.
4.5 $5,000,000 Optional Credit Filed as exhibit 4.3 to the Company's Quarterly Report on
Facility with Fleet Bank, N.A. Form 10-Q for the quarter ended September 30, 1997 (filed
November 11, 1997), and incorporated herein by reference.
4.6 $15,000,000 Short Term Filed as exhibit 4.2 to the Company's Quarterly Report on
Business Loan Agreement Form 10-Q for the quarter ended March 31, 1998 (filed May
13, 1998), incorporated herein by reference.
10.1 The McGrath RentCorp 1987 Filed as exhibit 19.3 to the Company's Quarterly Report on
Incentive Stock Option Plan Form 10-Q for the quarter ended June 30, 1988 (filed August
14, 1988), and incorporated herein by reference.
10.1.1 Exemplar of the Form of the Filed as exhibit 19.3 to the Company's Quarterly Report on
Incentive Stock Option Form 10-Q for the quarter ended June 30, 1988 (filed August
Agreement 14, 1988), and incorporated herein by reference.
10.2 The 1998 Stock Option Plan Filed as exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998 (filed
November 12, 1998), and incorporated herein by reference.
10.2.1 Examplar of Incentive Stock Filed as exhibit 10.2 to the Company's Quarterly Report on
Option for Employees Under the Form 10-Q for the quarter ended September 30, 1998 (filed
1998 Stock Option Plan November 12, 1998), and incorporated herein by reference.
10.2.2 Examplar of Non-Qualified Filed as exhibit 10.3 to the Company's Quarterly Report on
Stock Option for Directors Form 10-Q for the quarter ended September 30, 1998 (filed
under the 1998 Stock Option November 12, 1998), and incorporated herein by reference.
Plan
10.2.3 Schedule of Options Granted to Filed as exhibit 10.4 to the Company's Quarterly Report on
Members of the Board of Form 10-Q for the quarter ended September 30, 1998 (filed
Directors November 12, 1998), and incorporated herein by reference.
10.3 Exemplar of the Form of the Filed as exhibit 19.5 to the Company's Quarterly Report on
Directors, Officers and Other Form 10-Q for the quarter ended June 30, 1988 (filed August
Agents Indemnification 14, 1988), and incorporated herein by reference.
Agreements
10.3.1 Examplar Form of Filed as exhibit 10.5 to the Company's Quarterly Report on
Indemnification Agreement Form 10-Q for the quarter ended September 30, 1998 (filed
November 12, 1998), and incorporated herein by reference.
10.4 Long-Term Stock Bonus Plan Filed as exhibit 10.3 to the Company's Annual Report on
together with Exemplar Long- Form 10-K for the year ended December 31, 1990 (filed March
Term Stock Bonus Agreement 28, 1991), and incorporated herein by reference.
27 Financial Data Schedule Filed electronically.
</TABLE>
The exhibits listed above may be obtained from McGrath RentCorp, 5700 Las
Positas Road, Livermore, California 94550-7800 upon written request. Each
request should specify the name and address of the requesting person and the
title of the exhibit or exhibits desired. A reasonable fee for copying any
exhibit requested plus postage will be charged by McGrath RentCorp prior to
furnishing such exhibit(s).
See http://www.sec.gov/edaux/formlynx.htm for the Company's most recent
filings.
36
<PAGE> 1
EXHIBIT 3.2.2
MCGRATH RENTCORP
ACTION BY THE BOARD OF DIRECTORS
BY UNANIMOUS WRITTEN CONSENT
AUGUST 17, 1998
The undersigned, constituting all of the directors of McGrath RentCorp, a
California corporation, do hereby adopt and consent to the following resolutions
by unanimous written consent pursuant to Section 3.13 of the corporation's
Bylaws.
AMENDMENT OF BYLAWS
RESOLVED: Section 3.2 of the Bylaws of this Corporation is hereby amended
to read in its entirety as follows:
"3.2 NUMBER OF DIRECTORS. The number of directors of this corporation
shall be not less than four (4) nor more than seven (7). The exact number
of directors shall be six (6) until changed, within the limits specified
above, by an amendment to this Section 3.2 duly adopted by either the Board
of Directors or the shareholders. The indefinite number of directors may be
changed, or a definite number fixed without provision for an indefinite
number, by an amendment to this Section 3.2 adopted by the vote or written
consent of a majority of the outstanding shares entitled to vote."
The undersigned, constituting all of the directors of this corporation, do
hereby consent to the adoption of the preceding resolutions as of the date first
written above. This Action by Unanimous Written Consent may be executed in any
number of counterparts, each of which shall signify the consent of the signing
director, but all of which, taken together, shall constitute one and the same
Action.
<TABLE>
<S> <C>
- -------------------------------------------- --------------------------------------------
BRYANT J. BROOKS, Director DELIGHT SAXTON, Director
- -------------------------------------------- --------------------------------------------
JOAN M. MCGRATH, Director RONALD H. ZECH, Director
- --------------------------------------------
ROBERT P. MCGRATH, Director
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCGRATH
RENTCORP FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 857
<SECURITIES> 0
<RECEIVABLES> 22,461
<ALLOWANCES> (650)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 337,258<F1>
<DEPRECIATION> 86,817<F2>
<TOTAL-ASSETS> 278,676
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 8,138
<OTHER-SE> 97,256
<TOTAL-LIABILITY-AND-EQUITY> 278,676
<SALES> 135,428
<TOTAL-REVENUES> 135,428
<CGS> 71,972
<TOTAL-COSTS> 71,972
<OTHER-EXPENSES> 16,220
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,326
<INCOME-PRETAX> 40,910
<INCOME-TAX> 16,010
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,895<F3>
<EPS-PRIMARY> 1.69
<EPS-DILUTED> 1.67
<FN>
<F1>Includes rental equipment, Land, Buildings, Land Improvements, Furniture and
Equipment.
<F2>Accumulated depreciation related to PP&E footnote above.
<F3>Net income includes reduction of minority interest in income of subsidiary.
</FN>
</TABLE>
