1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998MARCH 31, 1999
COMMISSION FILE NUMBER 0-13292
------------------------------------------------------
MCGRATH RENTCORP
(Exact name of registrant as specified in its Charter)
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
---------------------------------------
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 [ ]
At November 5, 1998, 14,000,862May 14, 1999, 13,466,098 shares of Registrant's Common Stock
were outstanding.
================================================================================
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTSSTATEMENTS.
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER
SEPTEMBER 30, 30,MARCH 31,
----------------------------
----------------------------(in thousands, except per share amounts) 1999 1998
1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
REVENUESRevenues
Rental $ 18,385,02618,979 $ 16,067,741 $ 52,705,894 $ 45,138,55216,981
Rental Related Services 4,061,774 3,357,762 9,011,659 8,131,644
------------ ------------ ------------ ------------2,434 2,223
-------- --------
Rental Operations 22,446,800 19,425,503 61,717,553 53,270,19621,413 19,204
Sales 21,787,334 25,675,496 42,973,129 51,621,9276,863 7,952
Other 244,360 251,130 612,450 760,524
------------ ------------ ------------ ------------218 194
-------- --------
Total Revenues 44,478,494 45,352,129 105,303,132 105,652,647
------------ ------------ ------------ ------------
COSTS AND EXPENSES28,494 27,350
-------- --------
Costs and Expenses
Direct Costs of Rental Operations
Depreciation 4,617,674 3,649,571 12,274,597 10,537,3444,666 3,847
Rental Related Services 1,942,766 1,638,057 5,151,252 4,875,0591,338 1,664
Other 3,655,957 2,649,772 10,216,041 7,494,923
------------ ------------ ------------ ------------3,133 3,025
-------- --------
Total Direct Costs of Rental Operations 10,216,397 7,937,400 27,641,890 22,907,3269,137 8,536
Costs of Sales 15,580,968 17,878,601 29,553,147 35,533,649
------------ ------------ ------------ ------------4,860 5,249
-------- --------
Total Costs 25,797,365 25,816,001 57,195,037 58,440,975
------------ ------------ ------------ ------------13,997 13,785
-------- --------
Gross Margin 18,681,129 19,536,128 48,108,095 47,211,67214,497 13,565
Selling and Administrative 4,560,456 4,962,291 12,103,999 12,008,656
------------ ------------ ------------ ------------4,199 3,705
-------- --------
Income from Operations 14,120,673 14,573,837 36,004,096 35,203,01610,298 9,860
Interest 1,685,905 1,042,716 4,719,635 2,905,047
------------ ------------ ------------ ------------1,516 1,451
-------- --------
Income Before Provision for Income Taxes 12,434,768 13,531,121 31,284,461 32,297,9698,782 8,409
Provision for Income Taxes 4,899,299 5,445,015 12,326,078 12,796,659
------------ ------------ ------------ ------------3,447 3,313
-------- --------
Income Before Minority Interest 7,535,469 8,086,106 18,958,383 19,501,3105,335 5,096
Minority Interest in Income of Subsidiary 447,125 383,752 928,004 797,821
------------ ------------ ------------ ------------(36) 128
-------- --------
Net Income $ 7,088,3445,371 $ 7,702,354 $ 18,030,379 $ 18,703,489
============ ============ ============ ============4,968
======== ========
Earnings Per Share:
Basic $ 0.500.39 $ 0.51 $ 1.27 $ 1.25
============ ============ ============ ============0.34
-------- --------
Diluted $ 0.500.38 $ 0.51 $ 1.25 $ 1.23
============ ============ ============ ============0.34
-------- --------
Shares Used in Per Share Calculation:
Basic 14,062,112 15,015,918 14,217,977 15,001,462
============ ============ ============ ============13,820 14,436
Diluted 14,231,078 15,242,764 14,405,525 15,192,887
============ ============ ============ ============13,991 14,635
- ------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------The accompanying notes are an integral part of these
consolidated financial statements.
1
3
MCGRATH RENTCORP
CONSOLIDATED BALANCE SHEETS
(unaudited)
- ----------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
------------------------------
(in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------
Assets
Cash $ 4,749 $ 857
Accounts Receivable, less allowance for doubtful
accounts of $650 in 1999 and 1998 15,717 21,811
Rental Equipment, at cost:
Relocatable Modular Offices 218,335 216,414
Electronic Test Instruments 66,686 66,573
--------- ---------
285,021 282,987
Less Accumulated Depreciation (86,013) (82,959)
--------- ---------
Rental Equipment, net 199,008 200,028
--------- ---------
Land, at cost 18,953 18,953
Buildings, Land Improvements, Equipment and Furniture,
at cost, less accumulated depreciation of $4,210
in 1999 and $3,858 in 1998 31,791 31,460
Prepaid Expenses and Other Assets 4,558 5,567
--------- ---------
Total Assets $ 274,776 $ 278,676
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Notes Payable $ 101,450 $ 97,000
Accounts Payable and Accrued Liabilities 20,161 22,964
Deferred Income 2,753 5,574
Minority Interest in Subsidiary 2,548 2,584
Deferred Income Taxes 48,609 45,160
--------- ---------
Total Liabilities 175,521 173,282
--------- ---------
Shareholders' Equity:
Common Stock, no par value --
Authorized -- 40,000 shares
Outstanding -- 13,463 shares in 1999 and
13,970 shares in 1998 7,824 8,138
Retained Earnings 91,431 97,256
--------- ---------
Total Shareholders' Equity 99,255 105,394
--------- ---------
Total Liabilities and Shareholders' Equity $ 274,776 $ 278,676
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
2
3
MCGRATH RENTCORP
CONSOLIDATED BALANCE SHEETS
(unaudited)
- ------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
------------- -------------
1998 1997
- -----------------------------------------------------------------------------------------
ASSETS
Cash $ 546,775 $ 537,875
Accounts Receivable, less allowance for doubtful
accounts of $650,000 in 1998 and 1997 26,720,545 21,794,028
Rental Equipment, at cost:
Relocatable Modular Offices 209,507,315 196,132,895
Electronic Test Instruments 60,747,136 50,350,777
------------- -------------
270,254,451 246,483,672
Less Accumulated Depreciation (79,793,338) (72,398,374)
------------- -------------
Rental Equipment, net 190,461,113 174,085,298
------------- -------------
Land, at cost 20,495,975 20,495,975
Buildings, Land Improvements, Equipment and Furniture,
at cost, less accumulated depreciation of $3,983,826
in 1998 and $3,177,213 in 1997 31,566,195 28,921,513
Prepaid Expenses and Other Assets 5,140,947 6,557,534
------------- -------------
Total Assets $ 274,931,550 $ 252,392,223
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes Payable $ 100,000,000 $ 82,000,000
Accounts Payable and Accrued Liabilities 21,312,813 27,047,173
Deferred Income 7,347,482 6,928,532
Minority Interest in Subsidiary 2,507,403 1,523,058
Deferred Income Taxes 42,714,887 36,247,956
------------- -------------
Total Liabilities 173,882,585 153,746,719
------------- -------------
Shareholders' Equity:
Common Stock, no par value -
Authorized -- 40,000,000 shares
Outstanding -- 14,000,862 shares in 1998 and
14,521,790 shares in 1997 7,648,364 7,756,054
Retained Earnings 93,400,601 90,889,450
------------- -------------
Total Shareholders' Equity 101,048,965 98,645,504
------------- -------------
Total Liabilities and Shareholders' Equity $ 274,931,550 $ 252,392,223
============= =============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
3
4
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
- --------------------------------------------------------------------------------------
NINE------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------MARCH 31,
----------------------------
(in thousands) 1999 1998
1997
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:Cash Flow from Operating Activities:
Net Income $ 18,030,3795,371 $ 18,703,4894,968
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 13,380,816 11,191,4515,059 4,202
Gain on Sale of Rental Equipment (4,396,941) (5,453,700)(1,313) (1,389)
Proceeds from Sale of Rental Equipment 11,247,675 14,756,2223,567 3,512
Change In:
Accounts Receivable (4,926,517) (5,929,848)6,094 1,470
Prepaid Expenses and Other Assets 1,416,587 (4,097,182)1,009 (794)
Accounts Payable and Accrued Liabilities (4,988,358) 7,313,283(3,056) (10,636)
Deferred Income 418,950 2,086,436(2,821) 972
Deferred Income Taxes 6,466,931 757,389
------------ ------------3,448 3,299
-------- --------
Net Cash Provided by Operating Activities 36,649,522 39,327,499
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:17,358 5,604
-------- --------
Cash Flow from Investing Activities:
Purchase of Rental Equipment (35,501,146) (41,240,592)(5,901) (9,888)
Purchase of Land, Buildings, Land Improvements,
Equipment and Furniture (3,750,901) (6,498,689)
------------ ------------(724) (784)
-------- --------
Net Cash Used in Investing Activities (39,252,047) (47,739,281)
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:(6,625) (10,672)
-------- --------
Cash Flow from Financing Activities:
Net Borrowings Under Lines of Credit 18,000,000 11,950,000Notes Payable 4,450 15,747
Net Proceeds from the Exercise of Stock Options 214,632 556,894-- 183
Repurchase of Common Stock (11,617,155) --(9,894) (8,795)
Payment of Dividends (3,986,052) (3,439,447)
------------ ------------(1,397) (1,162)
-------- --------
Net Cash Provided (Used) by Financing
Activities 2,611,425 9,067,447
------------ ------------(6,841) 5,973
-------- --------
Net Increase in Cash 8,900 655,6653,892 905
Cash Balance, Beginning of Period 537,875 686,333
------------ ------------857 538
-------- --------
Cash Balance, End of Period $ 546,7754,749 $ 1,341,998
============ ============1,443
======== ========
Interest Paid During the Period $ 4,442,5932,075 $ 2,859,790
============ ============1,440
======== ========
Income Taxes Paid During the Period $ 5,523,542(8) $ 8,274,674
============ ============14
======== ========
Dividends Declared but not yet Paid $ 1,400,0861,616 $ 1,201,753
============ ============1,414
======== ========
- ------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these
consolidated financial statements.
43
5
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998MARCH 31, 1999
NOTE 1. CONSOLIDATED FINANCIAL INFORMATION
The consolidated financial information for the ninethree months ended September 30, 1998March
31, 1999 has not been audited, but in the opinion of management, all adjustments
(consisting of only normal recurring accruals, consolidation and eliminating
entries) necessary for the fair presentation of the consolidated results of
operations, financial position, and cash flows of McGrath RentCorp (the
"Company") have been made. The consolidated results of the ninethree months ended
September 30, 1998March 31, 1999 should not be considered as necessarily indicative of the
consolidated results for the entire year. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's latest Form 10-K.
NOTE 2. NOTES PAYABLE
On July 31, 1998,In April 1999, the Company restructured a portion of its debt to a
fixed rate by completing a private placement of $40,000,000 of 6.44% senior
notes due in 2005 through BancAmerica Robertson Stephens. Interest on the notes
is due semi-annually in arrears and the principal is due in 5 equal installments
commencing on July 31, 2001. Upon completion of the private placement, the
Company repaid a $15,000,000 interim loan with one of its banks. The remainder
of the proceeds was applied to reduce the existing revolver.
In August 1998, the Company reduced its capacity to borrow underamended its unsecured line of credit
agreement (the "Agreement") with its banks from $90,000,000 to $75,000,000.reduce the minimum shareholders'
equity requirement to allow further repurchases of the Company's common stock.
The Agreement requires the Company to maintain shareholders' equity of not less
than $85,000,000 plus 50% of all net income generated subsequent to March 31,
1999 plus 90% of any new stock issuance proceeds. All other terms and conditions
under this facility remained the same.
In addition,NOTE 3. BUSINESS SEGMENTS
The Company defines its business segments based on the nature of
operations for the purpose of reporting under Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). The Company's three reportable segments are Mobile
Modular Management Corporation (Modulars), McGrath-RenTelco (Electronics), and
Enviroplex. The operations of these three segments are described in the notes to
the consolidated financial statements included in the Company's latest Form
10-K. 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 extendeddoes not report total
assets by business segment. Summarized financial information for the expiration date of its $3,000,000 committed line of
credit facility related to its cash management services to June 30,three
months ended March 31, 1999 and allowed the $10,000,000 of uncommitted optional facilities to expire.
NOTE 3. 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 ofCompany's reportable segments is
shown in 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 1998 Plan, 242,000
options have been granted with exercise prices ranging from $20.25 to $20.81. Of
the 242,000 options granted, key employees received 192,000. The options become
exercisable during term of the related option agreement and expire ten years
after grant.following table:
4
6
- -----------------------------------------------------------------------------------------------------------------
(in thousands) MODULARS ELECTRONICS ENVIROPLEX CONSOLIDATED
-------- ----------- ---------- ------------
THREE MONTHS ENDED MARCH 31,
1999
Rental Operation Revenues $ 14,882 $ 6,531 $ -- $ 21,413
Sales and Other Revenues 2,688 2,395 1,998 7,081
Total Revenues 17,570 8,926 1,998 28,494
Depreciation on Rental Equipment 2,498 2,168 -- 4,666
Interest Expense 1,161 399 (44) 1,516
Income before Income Taxes 5,824 3,174 (216) 8,782
Rental Equipment Acquisitions 2,465 3,436 -- 5,901
Accounts Receivable, net (period end) 6,554 7,379 1,784 15,717
Rental Equipment, at cost (period end) 218,335 66,686 -- 285,021
1998
Rental Operation Revenues $ 13,656 $ 5,548 $ -- $ 19,204
Sales and Other Revenues 2,102 2,696 3,348 8,146
Total Revenues 15,758 8,244 3,348 27,350
Depreciation on Rental Equipment 2,191 1,656 -- 3,847
Interest Expense 1,094 325 32 1,451
Income before Income Taxes 4,631 3,013 765 8,409
Rental Equipment Acquisitions 5,642 4,246 -- 9,888
Accounts Receivable, net (period end) 7,034 7,070 6,220 20,324
Rental Equipment, at cost (period end) 200,067 52,341 -- 252,408
- ---------------------------------------------------------------------------------------------------------------
5
67
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Quarterly Report on Form 10-Q 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.
THREE AND NINE MONTHS ENDED SEPTEMBER 30,MARCH 31, 1999 AND 1998 AND 1997
Rental revenues for the three and nine months ended September 30, 1998March 31, 1999 increased
$2,317,285 (14%$1,998,000 (12%) and $7,567,342 (17%), respectively, over the comparative periodsperiod in 1997. Of the nine-month increase,1998, with Mobile Modular
Management Corporation ("MMMC") contributed $5,046,487 (67%) increasing from
$30,311,031 to $35,357,518contributing $1,018,000 and ELECTRONICS contributed $2,520,855 (33%)
increasing from $14,827,521 to $17,348,376. The significantMcGrath-RenTelco
contributing $980,000. MMMC's rental revenue
increase by MMMC resulted from the large quantitiesrevenues increased as a result of equipment shipped to
schools in the latter part of 1997 and the ELECTRONICS rental revenue increase
resulted in part from market penetration by telemarketing and regional sales
efforts on the East Coast. As of September 30, 1998, rentalhaving
$17,182,000 more equipment on rent
increased for MMMC by $19,224,379 and for ELECTRONICS increased by $4,961,500 compared to a year earlier. AverageFor Modulars,
average monthly yield of 1.93% and average utilization for ELECTRONICS during the first
nine months increased from 54.7% in 1997 to 55.0% in 1998 and increased for
modulars from 81.0% in 1997 to 82.7% in 1998,of 82.2%, exclusive of new
equipment not previously rented.rented, were approximately the same for each period
reported. McGrath-RenTelco's rental revenues increased as a result of having
$4,724,000 more equipment on rent compared to a year earlier offset by an
average monthly yield decline from 3.53% in 1998 to 3.20% in 1999. Electronics
average utilization for the first quarter declined from 55.5% in 1998 to 51.3%
in 1999.
Rental related services revenues for the three and nine months ended September 30, 1998March 31,
1999 increased $704,102 (21%$211,000 (9%) and $880,015 (11%), respectively, as compared to the same periodsperiod in 1997.1998 as a result
of higher volume of modular equipment movements and site requirements in 1999.
Gross margins on these services for the quarter increased from 40% to 43%25% in 1998 forto
45% in 1999 due to the comparative nine-month period.mix of services performed in 1999 and approximates the
1998 annual gross margin of 43%.
Sales for the three and nine months ended September 30, 1998March 31, 1999 declined $3,888,162 (15%$1,089,000
(14%) and $8,648,798 (17%), respectively, as compared to the same periodsperiod in 19971998 primarily due to fewer new classroom sales by
Enviroplex of manufactured classrooms to school districts by MMMC.
Enviroplexdistricts. MMMC and
ELECTRONICSMcGrath-RenTelco's sales volumes increased 9% and 6%, respectively, overwere consistent with the 19971998 comparative
nine-month period which partially offset MMMC's expected
decline in new classroom sales. (See 1997 Form 10-K Management Discussion and
Analysis for Fiscal Years 1997 and 1996.)period. Consolidated gross margin on sales remained constant at 31%declined for 1997 and 1998. The single largest sale was for
$6,109,692 by MMMCthe quarter from 34% in
1998 to a school district29% in 1999 due to Enviroplex's lower margin on classrooms sold during
the thirdfirst quarter of 1998
consisting of new classrooms of which 69% of the total contract was the
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.1999. 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.
Enviroplex's backlog of orders as of March 31, 1999 and 1998 was
$4,042,000 and $14,322,000, respectively. Management believes schools have
delayed placing orders until allocation of funds from the $9.2 billion
California bond measure, which passed in November 1998, is determined.
Enviroplex has taken additional orders since March 31, 1999 and the backlog as
of May 7, 1999 was $5,969,000. Backlog is not significant in MMMC's modular
business or in McGrath-RenTelco's electronics business.
Depreciation on rental equipment for the three and nine months ended September 30, 1998March 31,
1999 increased $968,103 (27%) and $1,737,253 (16%$819,000 (21%) over the comparative periodsperiod in 1997 as a result of additions1998 due to the
additional rental equipment of
both modulars and electronics. Rentalpurchased during 1998. Modular rental equipment, at
cost, increased 18%9% and Electronics rental equipment, at cost, increased 27%
between September 30, 1997March 31, 1998 and September 30, 1998.March 31, 1999. Other direct costs of rental
operations for the three and nine months ended September 30, 1998 increased $1,006,185 (38%) and $2,721,118 (36%$108,000 (4%) over the comparative periodsfirst quarter in 19971998 primarily due
to increased maintenance and repair expensescosts of the modular fleet.
Additionally, during 1997, a significant number of 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.equipment.
Selling and administrative expenses increased $494,000 (13%) for the
three and nine months ended September 30, 1998 decreased $401,835 (8%) and increased $95,343 (1%),
respectively,March 31, 1999 compared to the same periodsperiod in 1997. Even though selling and
administrative expenses for the nine month comparative period were approximately
the same, the three-month comparative period declined by 8%1998 primarily
due to higher expenses for facility and equipment depreciation ($174,819) and personnel
and benefit costs ($176,883) offset by reduced performance and incentive bonuses
($528,384), fewer bad debt writeoffsexpense ($114,023), and eliminated facility rental,
cleanup and moving292,000) resulting from an unusual
6
8
write-off of $282,000. Additionally, higher advertising expenses ($114,215).83,000) for
brochure development, web page design, and yellow page advertising contributed
to the increase in selling and administrative expenses.
Interest expense for the three and nine months ended September 30, 1998March 31, 1999 increased
$643,189 (62%) and $1,814,588 (62%$65,000 (4%) over 1998 as a result of a higher average borrowing level offset by
a lower average interest rate in 1999. The debt increase funded part of the
comparative periodssignificant rental equipment purchases made during 1998.
Income before provision for taxes for the three months ended March 31,
1999 increased $373,000 (4%) from $8,409,000 in 19971998 to $8,782,000 in 1999
while net income increased $403,000 (8%) from $4,968,000 in 1998 to $5,371,000
in 1999. The higher percentage increase for net income in 1999 is due to the
decrease in minority interest in income of Enviroplex combined with a lower
effective tax rate in 1999 of 39.25% compared to 39.40% in 1998. Earnings per
share for the three months ending March 31, 1999 increased 13% over the same
period in 1998 from $0.34 per share to $0.39 per share as a result of higher
average borrowing
6
7
levels in 1998. The debt increase was primarily due to rental equipment
purchases made during 1997earnings and 1998.
Net income for the three and nine months ended September 30, 1998
decreased slightly as compared to the comparative periods in 1997. Earnings per
share decreased slightly for the three-month and increased for the nine-month
periods in 1998 to $0.50 per share and $1.27 per share, respectively, due to
fewer shares outstanding.outstanding shares.
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 the statement at the beginning of this Item for cautionary
information with respect to such forward-looking statements.
The Company had a total liabilities to equity ratio of 1.721.77 to 1 and
1.561.64 to 1 as of September 30, 1998March 31, 1999 and December 31, 1997,1998, respectively. The debt
(notes payable) to equity ratio was 0.991.02 to 1 and 0.830.92 to 1 as of September 30,
1998March 31, 1999
and December 31, 1997,1998, 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 cancelled and returned to the
status of authorized but unissued stock. As of November 5, 1998,During the three months ended March 31,
1999, the Company has
repurchased 587,050540,400 shares of its outstanding common stock during the year for
an aggregate purchase price of $11,617,155$9,893,562 (or an average price of $19.79$18.31 per
share). On March 18, 1999, the Board of Directors authorized the repurchase of
up to 1,000,000 shares of its common stock. As of November 5, 1998, 852,400May 14, 1999, 887,000 shares
remain authorized for repurchase.
The Company believes that its needs for working capital and capital
expenditures through 19981999 and beyond will adequately be 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 the statement at the beginning of this Item for cautionary
information with respect to such forward-looking statements.
The Company currently has no material derivative financial instruments
that 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. As of March 31, 1999, the Company believes that the carrying
amounts of its financial instruments (cash and notes payable) approximate fair
value.
YEAR 2000
This section contains statements that constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See the statement at the beginning of this Item for cautionary
information with respect to such forward-looking statements.
7
9
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 $1,400,000 for the period January 1, 1997
to March 31, 1999 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 began 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 estimates approximately
$600,000 for completion of its system upgrades for the remainder of 1999, of
which approximately $200,000 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 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 customers' or suppliers' businesses or the economy as a whole, either of
which could have a material adverse impact on the Company. However, because the
markets for the Company's products are 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, if necessary, for a manual system, (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.
8
10
PART II OTHER INFORMATION
ITEM 3. OTHER INFORMATION
On SeptemberMarch 18, 1998,1999, the Company declared a quarterly dividend on its
Common Stock; the dividend was $0.10$0.12 per share. Subject to its continued
profitability and favorable cash flow, the Company intends to continue the
payment of quarterly dividends.
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
NUMBER DESCRIPTION METHOD OF FILING
- ------ ----------- ----------------
3.1 Amendment of By-Laws of McGrath RentCorp Filed herewith.
4.1 Facility Reduction Letter forFourth Amendment to the Restated Credit Agreement Filed herewith.
4.2 Second Extension to the $3,000,000 Committed
Credit Facility Filed herewith.
4.3 Note Purchase Agreement Filed herewith.
10.1 The 1998 Stock Option Plan Filed herewith.
10.2 Examplar of Incentive Stock Option for
Employees Under the 1998 Stock Option Plan Filed herewith.
7
8
NUMBER DESCRIPTION METHOD OF FILING
- ------ ----------- ----------------
10.3 Examplar of Non-Qualified Stock Option for
Directors under the 1998 Stock Option Plan Filed herewith.
10.4 Schedule of Options Granted to Members of
the Board of Directors Filed herewith.
10.5 Examplar Form of Indemnification Agreement Filed herewith.
2727.1 Financial Data Schedule Filed herewith.
(b) Reports on Form 8-K.
No reports on Formform 8-K have been filed during the quarter for which this
report is filed.
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: November 5, 1998May 14, 1999 MCGRATH RENTCORP
by: /s/ Delight Saxton
---------------------------------------------------------------------------
Delight Saxton
Senior Vice President, Chief
Financial Officer (Chief Accounting
Officer) and Secretary
89
9
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits11
EXHIBIT INDEX
NUMBER DESCRIPTION METHOD OF FILING
- ------ ----------- ----------------
3.1 Amendment of By-Laws of McGrath RentCorp Filed herewith.
4.1 Facility Reduction Letter forFourth Amendment to the Restated Credit Agreement Filed herewith.
4.2 Second Extension to the $3,000,000 Committed
Credit Facility Filed herewith.
4.3 Note Purchase Agreement Filed herewith.
10.1 The 1998 Stock Option Plan Filed herewith.
10.2 Examplar of Incentive Stock Option for
Employees Under the 1998 Stock Option Plan Filed herewith.
9
10
NUMBER DESCRIPTION METHOD OF FILING
- ------ ----------- ----------------
10.3 Examplar of Non-Qualified Stock Option for
Directors under the 1998 Stock Option Plan Filed herewith.
10.4 Schedule of Options Granted to Members of
the Board of Directors Filed herewith.
10.5 Examplar Form of Indemnification Agreement Filed herewith.
2727.1 Financial Data Schedule Filed herewith.
10