SECURITIES AND EXCHANGE COMMISSION
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
For the fiscal year ended December 31, 2001
Commission file number 0-13292
McGrath Rentcorp
5700 Las Positas Road, Livermore, CA 94550
Registrant’s telephone number: (925) 606-9200
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
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 þ No o
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. o
State the aggregate market value of voting stock, held by nonaffiliates of the registrant: $274,289,807 as of March 15, 2002.
At March 15, 2002, 12,455,859 shares of Registrant’s Common Stock were outstanding.
Exhibit index appears on page 50
TABLE OF CONTENTS
PART I" -->
PART IItem 1. Business" -->
Item 1. Business
General
McGrath RentCorp (the “Company”) is a California corporation organized in 1979. The Company is comprised of three business segments: “Mobile Modular Management Corporation” (“MMMC”), its modular building rental division, “RenTelco,” its electronic test equipment rental division, and “Enviroplex,” its majority-owned subsidiary classroom manufacturing business. The Company’s corporate offices are located in Livermore, California. In addition, branch operations for both rental divisions are conducted from this facility.
MMMC rents and sells modular buildings and accessories to fulfill customers’ temporary and permanent space needs in California and Texas. These units are used as temporary offices adjacent to existing facilities, and are used as classrooms, sales offices, construction field offices, health care clinics, child care facilities 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 year to year depending on customer demands and requirements.
The educational market is the largest segment of the modular business. MMMC provides classroom and specialty space needs serving schools from pre-school to post secondary grade levels. Fueled by increasing student population, insufficient funding for new school construction and aging school facilities, demand continues to be very strong in California. Within the educational market, rentals and sales to California public school districts by MMMC represent a significant portion of MMMC’s total revenues.
RenTelco rents and sells electronic test equipment nationally from two locations. The Plano, Texas location houses the Company’s communications and fiber optic test equipment inventory, calibration laboratory and eastern U.S. sales engineer and operations staffs. The Livermore, California location houses the Company’s general-purpose test equipment inventory, calibration laboratory and western U.S. sales engineer and operations staffs.
Communications and fiber optic test equipment is utilized by field technicians, engineers and installer contractors in evaluating voice, data and multimedia communications networks, installing optical fiber cabling and in the development of switch, network and wireless products. This test equipment is rented primarily to network systems companies, electrical contractors, local & long distance carriers and manufacturers of communications transmission equipment. RenTelco purchases communications test equipment from over 40 different manufacturers domestically and abroad.
Engineers, scientists and technicians utilize general-purpose test equipment 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, industrial, research and aerospace companies. Agilent (formerly Hewlett Packard), Tektronix and Acterna manufacture the majority of the Company’s general-purpose equipment.
McGrath RentCorp owns 81% 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 California public school districts. Enviroplex conducts its sales and manufacturing operations from its facility located in Stockton, California. Since inception, McGrath RentCorp has assisted Enviroplex in a variety of corporate functions such as accounting, human resources, facility improvements and insurance. McGrath RentCorp has not purchased significant quantities of manufactured product from Enviroplex. Enviroplex sales revenues were $15.0 million, $17.0 million and $11.2 million in 2001, 2000 and 1999, respectively.
The rental (by MMMC) and sale (by Enviroplex and MMMC) of modulars to California public school districts for use as portable classrooms, restroom buildings and administrative offices for kindergarten through
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Please see Note 8 to the Consolidated Financial Statements on page 37 for more information on the Company’s business segments.
The Company has 418 employees, of whom 48 are primarily administrative and executive personnel, and the remaining 370 are engaged in manufacturing or rental operations. Unions represent none of these employees. 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.
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 rents, sells or manufactures. The Company not only rents, sells and manufactures 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.”
On December 20, 2001, the Company entered into a merger agreement with a subsidiary of Tyco International Ltd. See “Merger Agreement with Tyco” on page 9.
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" -->
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. During 2001, the Company purchased 34% of its modular product from one manufacturer with multiple operations in several states. The Company believes that the loss of its primary manufacturer of modulars would not have a material adverse effect on its
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The modular product is manufactured to state building codes, has a low risk of obsolescence, and can be modified or reconfigured to accommodate a wide variety of customer needs. MMMC proactively manages its rental equipment and believes this insures the continued use of the modular product over its long life and, when sold, generates high sale proceeds relative to its capitalized cost. When rental equipment returns from a customer, the necessary repairs and preventative maintenance are performed prior to its next rental. Making these expenditures for repair and maintenance throughout the equipment’s life results in older equipment renting for similar rates as newer equipment. MMMC believes the condition of the equipment is a more significant factor in determining the rental rate and sale price than its age. Over the last three years, used equipment sold in the ordinary course of business has been on average 10 years old with sale proceeds averaging better than 95% of the equipment’s capitalized cost.
Marketing
The Company’s largest single demand is for temporary classroom and other educational space needs of public and private schools, colleges and universities. 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, several years ago, class size reduction (see “Classroom Rentals and Sales” below). Other customer use applications include sales offices, construction field offices, health care facilities, sanctuaries and child care services. Industrial, manufacturing, entertainment and utility companies, as well as governmental agencies commonly use large multi-modular complexes to serve their interim administrative and operations space needs. The modular product offers customers quick, cost-effective space solutions while conserving their capital. The Company’s branch and corporate offices, with the exception of RenTelco’s Plano facility and Enviroplex’s facility, 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 attracts customers through its dynamic web site at www.mobilemodularrents.com, and 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.
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, in-house customization services, rapid delivery, timely installation and maintenance of its units. Customers are able to view and select inventory for quote on MMMC’s website.
Rentals
Rental periods range from one month to ten years with a typical rental period of eighteen months. 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 obtaining the necessary use permits and the costs of insuring the unit, transporting the unit to the site, preparation of the site, installation of the unit, dismantle and return delivery of the unit to one of MMMC’s three inventory centers, and certain costs for customization. MMMC maintains the units in good working condition while on rent. Upon return, the units are inspected for damage and customers are billed for items considered beyond normal wear and tear. Generally, the units are then repaired for subsequent use. Repair and maintenance costs are expensed as incurred and can include floor tile repairs, roof maintenance, cleaning, painting and other cosmetic repairs. The costs of major refurbishment of equipment are capitalized to the extent the refurbishment significantly improves the quality and adds value or life to the equipment.
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At December 31, 2001, MMMC had 18,554 new or previously rented modulars in its rental fleet with an aggregate original cost including accessories of $281.2 million or an average cost per unit of $15,200. Utilization is calculated each month by dividing the cost of rental equipment on rent by the total cost of rental equipment, excluding new equipment inventory and accessory equipment. At December 31, 2001, fleet utilization was 86.2% and average fleet utilization during 2001 was 85.4%.
Sales
In addition to operating its rental fleet, MMMC sells modulars to customers. These sales arise out of its 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 2001, MMMC’s largest sale of modulars was for new classrooms to a school district for approximately $0.6 million. This sale represented approximately 4% of MMMC’s sales, 2% of the Company’s consolidated sales, and less than 1% of the Company’s consolidated revenues.
MMMC provides limited 90-day warranties on used modulars and passes through manufacturers’ one-year warranty 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 ReformAct of 1995. See “General” above for cautionary information with respect to such forward-looking statements.
Management estimates the business of renting relocatable modular offices is an industry that today has equipment on rent or available for rent in the United States with an aggregate original cost in excess of 4.0 billion dollars. Competition in the rental and sale of relocatable modular offices is intense. Two national firms are engaged in the rental of modulars, have many offices throughout the country and may have substantially greater financial resources than MMMC. Several hundred other companies are estimated to operate regionally throughout the country. MMMC operates primarily in California and Texas. 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 that part of the strategy for modulars should be to create facilities and infrastructure capabilities that its competitors cannot easily duplicate. The Company’s facilities and related infrastructure enable it to modify modulars 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 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 its 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 California public 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
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During 2001, Enviroplex’s largest sale was for $2.2 million of new classrooms to a school district. This sale represented 15% of Enviroplex’s sales, 6% of the Company’s consolidated sales and less than 2% of the Company’s consolidated revenues. All of Enviroplex’s sales occur in California, with most sales occurring directly with California public school districts.
Since Enviroplex’s customers are predominantly California public school districts, Enviroplex markets directly to these schools through telemarketing, targeted mailings and participation in the annual CASH (Coalition for Adequate School Housing) tradeshow. Enviroplex also attracts customers through its website at www.enviroplexinc.com where customers are able to view a variety of DSA approved floor plans. Customers are encouraged to tour the manufacturing facility to experience the production process and examine the quality product built.
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 provides a one-year warranty on equipment manufactured. Warranty costs have not been significant to Enviroplex’s operations to date that can be attributed to Enviroplex’s dedication to manufacturing and delivering a quality, problem-free product.
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 to California Public Schools (K-12)
The rental and sales of modulars to California 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 these schools are of the Company’s modular rental and sales revenues, and of its consolidated rental and sales revenues for the past five years:
California Public Schools (K-12) as a Percentage of Rental and Sales Revenues
The increased modular sales percentage shown for 1998 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
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Legislation
In California (where most of the Company’s educational rentals 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 DSA requirements. In 1988, California adopted a law which limited the term for which school districts may rent portable classrooms built to DOH standards for up to three years (under a waiver process), and also required the school board to indemnify the State against any claims arising out of the use of such classrooms. Prior to 1988 the majority of the classrooms in the Company’s rental fleet were built to the DOH requirements, and since 1988 almost all new classrooms have been built to the DSA requirements. During the 1990’s additional legislation was passed extending the use of these DOH classroom buildings under the waiver process through September 30, 2000.
In 2000, new California legislation was passed allowing for DOH classroom buildings already in use for classroom purposes as of May 1, 2000 to be utilized until September 30, 2007, provided various upgrades were made to their foundation and ceiling systems. School districts have until August 31, 2002 to make the necessary modifications to extend their usage of these buildings. To the extent that school districts elect not to proceed with retrofitting these existing buildings on rent and return the equipment, rental income levels could be impacted negatively. Currently, regulations and policies are in place that allow for the ongoing use of DOH classrooms from the Company’s inventory to meet shorter term space needs of school districts for periods up to 24 months, provided they receive a “Temporary Certification” or “Temporary Exemption” from the DSA. 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. At December 31, 2001, the net book value of DOH classrooms represented less than 2.6% of the net book value of modular rental equipment and less than 1.5% of the total assets of the Company, and the utilization of these DOH classrooms was at 85.1%.
ELECTRONIC TEST AND MEASUREMENT INSTRUMENTS
The Company’s communications and fiber optics rental inventory includes fiber, telecom, SONET, ATM, broadcast, copper, line simulator, microwave, network and transmission test equipment. The general-purpose inventory includes oscilloscopes, amplifiers, spectrum, network and logic analyzers, and CATV, component measurement, industrial, signal source, microprocessor development and power source test equipment. The Company also rents electronic instruments from other rental companies and re-rents the instruments to customers.
At December 31, 2001, the Company had an aggregate cost of electronics rental inventory and accessories of $95.4 million. 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. During 2001, utilization trended down from 63.5% as of December 31, 2000 to 34.4% as of December 31, 2001 reflecting broad-based weakness in the telecommunications industry. Average utilization during 2001 was 50.4%. Generally, the Company targets utilization levels in a range between 50% and 55%. The Company rents electronic 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 2001, approximately 19% of the electronics revenues were derived from sales. The largest electronics sale during
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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 in excess of a half billion dollars. While there is a broad customer base for the rental of such instruments, most rentals are to electronics, communications, network systems, electrical contractor, installer contractor, industrial, research and aerospace companies.
The Company markets its electronic equipment throughout the United States. RenTelco attracts customers through its dynamic web site at www.rentelco.com, an extensive telemarketing program, trade show participation and direct mail campaigns.
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 consists primarily of 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" -->
PRODUCT HIGHLIGHTS
The following table shows the revenue components, percentage of rental and 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 rental revenues and sales by product line for the past five years.
Product Highlights
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MERGER AGREEMENT WITH TYCO" -->
MERGER AGREEMENT WITH TYCO
On December 20, 2001, the Company entered into an agreement (the “Merger Agreement”) with a subsidiary of Tyco International Ltd. (“Tyco”). Under the terms of the Merger Agreement, the Company would be merged into the Tyco subsidiary, with the Tyco subsidiary continuing as the surviving corporation and as a wholly-owned subsidiary of Tyco (the “Merger”). Tyco has guaranteed (the “Guarantee”) the obligations of its subsidiary under the Merger Agreement. The Merger Agreement provides that the consideration to be paid by Tyco will be in the form of cash and Tyco common shares. The Company’s shareholders are to have the right to elect what percentage of their consideration is to be paid in cash and what percentage is to be paid in Tyco common shares, subject to the limitation that no less than 50% and no more than 75% of the aggregate consideration to be paid to all shareholders be in the form of Tyco common shares. If the Company’s shareholders in total elect to receive more cash or more Tyco common shares than these limits allow, the Company’s shareholders that elect the consideration that exceeds the relevant limit will receive a combination of cash and Tyco common shares.
Subject to this limitation, McGrath shareholders electing to receive cash will receive $38.00 for each share of the Company’s Common Stock; shareholders electing to receive Tyco common shares will receive a fraction (the “Exchange Ratio”) of a Tyco common share, determined by dividing $38.00 by the average trading price of Tyco’s common shares for the five trading days ending on the fourth trading day prior to the date of the Company’s shareholders meeting to consider approval of the Merger. The Merger Agreement provides, however, that Tyco may terminate the agreement if its average share price is less than $45.00 at the time of the calculation of the Exchange Ratio, unless the Company agrees to a fixed Exchange Ratio of .8444 of a Tyco common share for each share of the Company’s stock, or the parties agree to some other Exchange Ratio. At the time the Merger Agreement was entered into, Tyco’s share price was $57.20 per share. As of March 15, 2002, the closing price of Tyco common shares was $33.41.
Certain officers and directors of the Company owning approximately 24% of the outstanding shares of the Company’s Common Stock have entered into agreements (“Shareholder Agreements”) pursuant to which such shareholders agreed, among other things, to vote their shares of the Company’s Common Stock in favor of the Merger.
The consummation of the Merger is subject to the approval of the shareholders of the Company, the receipt of necessary approvals under United States and any applicable foreign antitrust laws, and other conditions.
On March 12, 2002, CIT Group Inc., a subsidiary of Tyco formerly known as Tyco Capital Corporation, filed a General Form for Registration of Securities on Form 10 in connection with a proposed distribution of 100% of the shares of its common stock to Tyco shareholders. CIT Group’s Form 10 states that, prior to developing its current plan to distribute the common stock of CIT Group, Tyco intended to integrate the Company’s business with CIT Group’s business. The Form 10 also states that if Tyco’s acquisition of the Company is completed pursuant to the Merger Agreement, Tyco currently would expect to retain McGrath as part of Tyco’s business.
The Merger Agreement may be terminated by either Tyco or the Company if the Merger is not consummated by June 30, 2002. Although Tyco filed a registration statement with respect to the Merger with the SEC on January 8, 2002, the SEC has not yet declared the registration statement effective. Approval of the Company’s shareholders cannot be sought until the SEC declares the registration statement effective. If the registration statement does not become effective in time for the Company to obtain shareholder approval prior to June 30, 2002, each party may have the right to terminate the Merger Agreement. In addition, if the market price for Tyco common shares is below $45 per share, the Company may elect to not agree to a fixed Exchange Ratio and Tyco will have the right to terminate the Merger Agreement. In light of these circumstances, including Tyco’s announced intention to restructure its business and divest itself of the CIT Group, the Company believes there is no assurance that the Merger will be consummated.
The Merger Agreement (with the Guarantee) was attached as Exhibit 99.1, and the form of Shareholder Agreement was attached as Exhibit 99.2, to the Company’s Current Report on Form 8-K filed with the SEC
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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 Plano, Texas (Dallas Area). The Company’s majority owned subsidiary, Enviroplex, manufactures portable classrooms from its facility in Stockton, California (San Francisco Bay Area).
During 2000, the Company developed a 39,110 square foot office and warehouse facility on 2.6 acres of land in Plano, Texas. RenTelco relocated its operations from Richardson, Texas to the new Plano facility in September 2000 and currently occupies half of the constructed space. The Company has subleased the remaining half of the facility on a five-year lease beginning in March 2001.
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, 2001. The Company owns all properties, except as noted in footnote 4 of the Facilities table below.
Facilities
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Item 3. Legal Proceedings
None.Item 4. Submission of Matters to a Vote of Security Holders" -->
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.PART II" -->
PART IIItem 5. Market for Registrant’s 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:
As of March 15, 2002, the Company’s common stock was held by approximately 95 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.
Subsequent to March 15, 2002, the Company will issue an aggregate of 6,736 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. (See “Item 11. Executive Compensation — Long Term Stock Bonus Plans” below for description.) Under the same Plan, the Company had issued to the same two officers an aggregate of 4,948 shares of common stock in March 2001, 20,920 shares of common stock in March 2000 and 33,486 shares of common stock in March 1999. 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.
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Item 6. Selected Financial Data" -->
Item 6. Selected Financial Data
The following table summarizes the Company’s selected financial data for the five years ended December 31, 2001 and should be read in conjunction with the more detailed Consolidated Financial Statements and related notes reported in Item 8 below.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" -->
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
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 primarily funded through internal cash flow and conventional bank financing.
The major portion of the Company’s revenue is derived from rental operations comprising approximately 74% of consolidated revenues in 2001 and 72% of consolidated revenues for the three years ended December 31, 2001. Over the past three years modulars comprised 68% of the cumulative rental operations, and electronics comprised 32% of the cumulative rental operations.
Most of the Company’s leases with customers are accounted for as operating leases in accordance with Statement of Financial Standards (“SFAS”) No. 13, and as such, rental revenue is recognized on a straight-line basis over the term of the lease. Effective January 1, 1999, rental revenue is recognized ratably over the month on a daily basis. Rental billings for periods extending beyond the month end are recorded as deferred income. In prior years, only rental billings extending beyond a one-month billing period were recorded as deferred income (i.e. partial month billings for days beyond month end were not deferred). The new method of recognizing revenue was adopted after the Company undertook a review of its revenue recognition policies after the Securities and Exchange Commission issued its Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition.” The effect is reported as a change in accounting method in accordance with Accounting Principles Board Opinion (“APB”) No. 20, “Accounting Changes.” In 1999, the cumulative effect of changing to a new method of accounting effective January 1, 1999 was to decrease net income by $1.4 million (net of taxes of $0.9 million) or $0.10 per diluted share.
The Company sells both modular and electronic equipment that 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. Sales and other revenues of both modular and electronic equipment have comprised approximately 26% of the Company’s consolidated revenues in 2001 and 28% of the Company’s consolidated revenues over the last three years. During these three years, modular sales and other revenues represented 77% and electronic sales represented 23%.
The rental and sale of modulars to California public school districts is a significant part of the Company’s business. The business from this market segment comprised 34%, 35% and 34% of the Company’s consolidated rental and sales revenues for 2001, 2000 and 1999. (See “Item 1. Business — Relocatable Modular Offices — Classroom Rentals and Sales” above.)
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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:
nm = not meaningful
Rental revenues increased $5.8 million (6%) over 2000, with MMMC increasing $6.8 million and RenTelco decreasing $1.0 million. MMMC benefited from another year of strong classroom demand in California while RenTelco suffered its first year-over-year decline in rental revenues due to continued broad-based weakness in the telecommunications industry. For MMMC as of December 31, 2001, modular utilization was 86.2% and modular equipment on rent increased by $21.5 million compared to a year earlier.
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Depreciation on rental equipment in 2001 increased $3.4 million (14%) over 2000, with MMMC increasing $0.9 million and RenTelco increasing $2.5 million due to additional rental equipment purchased during 2001 and 2000. For MMMC, as rental revenues increased 12%, depreciation expense increased 8% and average modular equipment, at cost, increased 8% or $21.1 million over 2000 resulting in depreciation as a percentage of rental revenues declining slightly from 22% in 2000 to 21% in 2001. For RenTelco, as rental revenues declined 3%, depreciation expense increased 22% and average electronics equipment, at cost, increased $15.3 million (19%) over 2000 resulting in depreciation as a percentage of revenues increasing from 30% in 2000 to 37% in 2001. Other direct costs of rental operations decreased $1.0 million (5%) from 2000 primarily due to $1.9 million of impairment losses recorded in 2000 on rental equipment that was beyond economic repair (such a charge did not occur in 2001) offset by increased maintenance and repair expenses of the modular fleet. Consolidated gross margin on rents increased slightly from 55.7% in 2000 to 55.8% in 2001.
Rental related services revenues in 2001 increased $0.6 million (4%) over 2000 as a result of a higher volume of modular equipment movements and site requirements in 2001. Gross margin on these services decreased from 45.9% in 2000 to 40.2% in 2001.
Sales in 2001 decreased $11.5 million (23%) from 2000 primarily as a result of lower sales volume by both MMMC and Enviroplex. MMMC sales volume decreased $8.1 million due to the occurrence of several significant sales in 2000 and Enviroplex sales decreased $2.0 million due to lower order volume. 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 requirements and funding. Consolidated gross margin on sales increased from 28.9% in 2000 to 31.3% in 2001.
Enviroplex’s backlog of orders as of December 31, 2001 and 2000 was $4.9 million and $6.8 million, respectively. Typically, in the California classroom market, booking activity for the first half of the year provides the most meaningful information towards determining order levels to be produced for the entire year. (Backlog is not significant in MMMC’s modular business or in RenTelco’s electronic business.)
Selling and administrative expenses in 2001 increased $5.0 million (25%) over 2000. The increase is due primarily to nonrecurring expenses of $1.9 million related to the Merger Agreement with Tyco (see “Item 1. Business — Merger Agreement with Tyco” page 10), increases in bad debt expense of $1.1 million, web maintenance and development costs of $0.8 million, depreciation and amortization expense of $0.5 million and personnel and benefit costs of $0.2 million.
Interest expense in 2001 decreased $1.8 million (20%) from 2000 as a result of 2% lower debt levels and 19% lower average interest rates over a year earlier.
Income before provision for taxes in 2001 decreased $2.7 million (6%) from 2000 and net income decreased $0.6 million (2%) with earnings per diluted share decreasing 2% from $2.19 per diluted share in 2000 to $2.14 per diluted share in 2001. The lower percentage decrease for net income is due to a higher effective tax rate of 41.5% in 2000 as compared to 39.6% in 2001. The higher effective tax rate in 2000 resulted from recording a true-up of the state income tax accrual rate.
Excluding merger-related expenses, net income and earnings per share would have increased from $27.2 million and $2.19 per diluted share in 2000 to $27.8 million and $2.23 per diluted share in 2001.
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Rental revenues increased $16.2 million (21%) over 1999, with MMMC contributing $5.2 million and RenTelco contributing $11.0 million of the increase. As of December 31, 2000, rental equipment on rent increased for MMMC by $30.7 million and for RenTelco by $19.0 million compared to a year earlier. Average utilization for modulars, excluding new equipment not previously rented, increased from 81.6% in 1999 to 82.3% in 2000 while the annual yield declined slightly for modulars from 24.2% to 23.8% as a result of lower rental rates due to the mix of business activity. Average utilization for electronics increased dramatically from 53.8% in 1999 to 61.4% in 2000 with electronics annual yield increasing from 39.7% in 1999 to 46.3% in 2000 resulting from increased market demand.
Depreciation on rental equipment in 2000 increased $4.1 million (21%) over 1999 due to additional rental equipment purchased during 2000 and 1999. The average modular rental equipment, at cost, increased $23.9 million (11%) and average electronics rental equipment, at cost, increased $14.0 million (20%) over 1999. Other direct costs of rental operations increased $4.0 million (28%) over 1999 primarily due to the $1.9 million of impairment losses recorded on rental equipment that was beyond economic repair and increased maintenance and repair expenses of the modular fleet. Consolidated gross margin on rents declined slightly from 56.8% in 1999 to 55.7% in 2000.
In the second quarter of 2000, management began a comprehensive program to evaluate its strategies with regard to off-rent modular equipment. All off-rent equipment was inspected over the remainder of 2000 and decisions about whether to invest additional dollars to repair the equipment for rental or sale, or whether to scrap the equipment were made. As a result of the process, an impairment charge of $1.9 million was recorded. Management continues to proactively manage its off-rent inventory and will record impairment charges if the projected future cash flows from rental or sales of equipment are insufficient to cover its net book value of the equipment.
Rental related services revenues in 2000 increased $4.1 million (32%) over 1999 as a result of a higher volume of modular equipment movements and site requirements in 2000. Gross margins on these services increased slightly from 45.2% in 1999 to 45.9% in 2000.
Sales in 2000 increased $14.0 million (38%) over 1999 as a result of three significant sales by MMMC accounting for 56% of the increase and a $5.8 million increase in sales by Enviroplex to school districts. During 2000, the Company’s largest sale was recorded during the third and fourth quarter for new classrooms to a school district for approximately $4.4 million and represented 9% of its sales. 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 requirements and funding. Consolidated gross margin on sales declined slightly from 29.6% in 1999 to 28.9% in 2000.
Enviroplex’s backlog of orders as of December 31, 2000 and 1999 was $6.8 million and $12.6 million, respectively. Typically, in the California classroom market, booking activity for the first half of the year provides the most meaningful information towards determining order levels to be produced for the entire year. (Backlog is not significant in MMMC’s modular business or in RenTelco’s electronic business.)
Selling and administrative expenses in 2000 increased $2.9 million (17%) over 1999. The increase is due primarily to increases in salaries, incentive and performance bonuses, benefits and hiring costs during 2000. As a percentage of revenues, selling and administrative expenses for 2000 remained consistent with 1999.
Interest expense in 2000 increased $2.2 million (34%) over 1999 as a result of 17% higher debt levels and 15% higher average interest rates over a year earlier. During 2000, the higher debt levels resulted from capital investments other than rental equipment, payment of dividends and repurchases of common stock.
Income before provision for taxes in 2000 increased $8.7 million (22%) from 1999 and net income before effect of the accounting change increased $3.4 million (14%). The lower percentage increase for net income before effect of the accounting change is due to a higher effective tax rate of 41.5% in 2000 as compared to 38.1% in 1999. The higher effective tax rate in 2000 resulted from recording a true-up of the state income tax accrual rate.
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Net income increased 21% from $22.5 million in 1999 to $27.2 million in 2000 with earnings per diluted share increasing 30% from $1.68 per diluted share in 1999 to $2.19 per diluted share in 2000. Last year’s comparative net income included a one-time accounting charge of $1.4 million or $0.10 per diluted share. Excluding the impact of the one-time accounting charge, net income for 1999 would have been $23.8 million or $1.78 per diluted share resulting in comparative net income increasing 14% and diluted earnings per share increasing 23% in 2000.
Liquidity and Capital Resources
The Company’s rental businesses are capital intensive, with significant capital expenditures required to maintain and grow the rental assets. During the last three years, the Company has financed its working capital and capital expenditure requirements through cash flow from operations, proceeds from the sale of rental equipment and from bank borrowings. As the following table indicates, cash flow provided by operating activities and proceeds from sales of rental equipment have been sufficient to fund the rental equipment purchases in the past three years.
Funding of Rental Asset Growth
In addition to increasing its rental assets, the Company has invested in other capital expenditures of $1.6 million in 2001, $3.4 million in 2000 and $2.3 million in 1999, and has used significant cash to provide returns to its shareholders, both in the form of cash dividends and by stock repurchases. 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. As of March 15, 2002, 805,800 shares remain authorized for repurchase. The following table summarizes the dividends paid and the repurchases of the Company’s common stock during the past three years.
Dividend and Repurchase Summary
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, which limit is currently $120.0 million. The Company decreased its borrowings under this line by $25.3 million during the year, and at December 31, 2001, the outstanding borrowings under this line were $69.5 million. In addition to the $120.0 million line of credit, the Company has a $5.0 million
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In July 1998, the Company completed a private placement of $40.0 million of 6.44% Senior Notes due in 2005. Interest on the notes is due semi-annually in arrears and the principal is due in five equal installments, which commenced on July 15, 2001. The outstanding balance at December 31, 2001, was $32.0 million.
Please see the Company’s Consolidated Statements of Cash Flows on 26 for a more detailed presentation of the sources and uses of the Company’s cash.
The Company does not have any material commitments or obligations requiring the expenditure of cash in the future inconsistent with its expenditures in the periods reported herein. In June 2001, the Company settled a lawsuit, which had been brought against it and seventeen other defendants alleging failure to warn about certain chemicals associated with the building materials used in portable classrooms in California. As part of the settlement, the Company agreed to use alternative building materials. (Please see the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 8, 2001 for further details of this settlement.) The Company believes this will not have a material adverse effect on its costs of operations and does not expect an adverse impact on its liquidity. The Company believes that its needs for working capital and capital expenditures through 2001 and beyond will be adequately met by operational cash flow, proceeds from sale of rental equipment, and bank borrowings. Sales occur routinely as a normal part of the Company’s rental business. However, these sales can fluctuate from year to year depending on customer requirements and funding. Although the net proceeds received from sales may fluctuate from year to year, the Company believes its liquidity will not be adversely impacted because it believes it has the ability to increase its bank borrowings and to reduce materially the amount of cash it uses to purchase rental equipment, pay dividends and repurchase its common stock in the future if a need to conserve cash should arise unexpectedly.
Critical Accounting Policies
In response to the Securities and Exchange Commission’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” the Company identified the most critical accounting principles upon which its financial status depends. The Company determined the critical principles by considering accounting policies that involve the most complex or subjective decisions or assessments. The Company has identified its most critical accounting policies are related to rental equipment depreciation, maintenance and repair, and impairment. Descriptions of these accounting policies are found in both the notes to the consolidated financial statements and at relevant sections in this management’s discussion and analysis.
Depreciation —The estimated useful lives and estimated residual values used for rental equipment are based on the Company’s experience as to the economic useful life and sale value of its products. Additionally, to the extent information is publicly available, the Company also compares its depreciation policies to other companies with similar rental products for reasonableness.
The lives and residual values of rental equipment are subject to periodic evaluation. For modular equipment, external factors to consider may include, but are not limited to, changes in legislation, regulations, building codes, local permitting, supply or demand and internal factors may include, but are not limited to, changes in equipment specifications or maintenance policies. For electronics equipment, external factors to consider may include, but are not limited to, technological advances, changes in manufacturers’ selling prices, supply or demand and internal factors may include, but are not limited to, changes in equipment specifications or maintenance policies.
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Changes in useful lives or residual values will impact depreciation expense and any gain or loss from the sale of used equipment. Depending on the magnitude of such changes, the impact on the financial statements could be significant.
In the first quarter of 2002, the Company continued to evaluate its rental equipment depreciation and residual value policies. A decision was made in the first quarter 2002 that effective January 1, 2002, the Company would prospectively increase its modular rental equipment residual value from 18% to 50%. Additionally, effective January 1, 2002, the estimated useful life of $16.3 million of optical equipment would be prospectively changed from seven to five years.
Maintenance and Refurbishment —Maintenance and repairs are expensed as incurred. The direct material and labor costs of value-added additions or major refurbishment of modular offices are capitalized to the extent the refurbishment significantly improves the quality and adds value or life to the equipment. Judgement is involved as to when these costs should be capitalized. The Company’s policies narrowly limit the capitalization of value-added items to specific additions such as restrooms, 40 and 60-foot sidewalls and ventilation up-grades. Only major refurbishment costs incurred near the end of the estimated useful life of the rental equipment, which extend its useful life, are capitalized. Changes in these policies could impact the Company’s financial results.
Impairment —The carrying value of the Company’s rental equipment is its capitalized cost less accumulated depreciation. To the extent events or circumstances indicate that the carrying value cannot be recovered, an impairment loss is recognized to reduce the carrying value to fair value. The Company determines fair value based upon the condition of the equipment and the projected net cash flows from its sale considering current market conditions. Additionally, if the Company decides to sell or otherwise dispose of the rental equipment, it is carried at the lower of cost or fair value less costs to sell or dispose. Due to uncertainties inherent in the valuation process and the economy, it is reasonably possible that actual results of operating and disposing of rental equipment could be materially different than current expectations.
Market Risk
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. The table below presents principal cash flows and related weighted average interest rates of the Company’s notes payable at December 31, 2001 by expected maturity dates. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date.
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.
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Item 8. Financial Statements and Supplementary Data" -->
Item 8. Financial Statements and Supplementary Data
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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, 2001 and 2000, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of McGrath RentCorp and Subsidiary as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
As explained in Note 2 to the consolidated financial statements, the Company changed its method of accounting for rental revenue effective January 1, 1999 whereby all rental revenues are recognized ratably over the month on a daily basis.
San Francisco, California
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MCGRATH RENTCORP
The accompanying notes are an integral part of these consolidated financial statements.
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Note 1. Organization and Business
On December 20, 2001, McGrath RentCorp (the “Company”) announced that a definitive agreement (the “Merger Agreement”) providing for the merger of the Company with and into Tyco Acquisition Corp. 33, a direct, wholly-owned subsidiary of Tyco International Ltd. (“Tyco”), had been executed by the Company and the Tyco subsidiary. The Merger Agreement provides that the consideration to be paid by Tyco will be in the form of cash and Tyco common shares. If the Company’s shareholders in total elect to receive more cash or more Tyco shares than these limits allow, the Company’s shareholders that elect the consideration that exceeds the relevant limit will receive a combination of cash and Tyco shares. The Company’s shareholders are to have the right to elect what percentage of their consideration is to be paid in cash and what percentage is to be paid in Tyco common shares, subject to the limitation that no less than 50% and no more than 75% of the aggregate consideration to be paid to all shareholders be in the form of Tyco common shares. Subject to this limitation, the Company’s shareholders electing to receive cash will receive $38.00 for each share of the Company’s common stock; shareholders electing to receive Tyco common shares will receive a fraction (the “Exchange Ratio”) of a Tyco common share, determined by dividing $38.00 by the average trading price of Tyco’s common shares for the five trading days ending on the fourth trading day prior to the date of the Company’s shareholders meeting to consider approval of the Merger. The Merger Agreement provides, however, that Tyco may terminate the agreement if its average share price is less than $45.00 at the time of the calculation of the Exchange Ratio, unless the Company agrees to a fixed Exchange Ratio of 0.8444 Tyco common shares for each share of the Company’s stock, or the parties agree to some other Exchange Ratio. The proposed merger transaction is discussed in, and a copy of the Merger Agreement is attached to, the Company’s Form 8-K filed with the SEC on December 26, 2001. In 2001, the Company incurred merger-related costs of $1,893,000, which are included in selling and administrative expenses.
The Company is a California corporation organized in 1979. The Company is comprised of three business segments: “Mobile Modular Management Corporation” (“MMMC”), its modular building rental division, “RenTelco,” its electronic test equipment rental division, and “Enviroplex,” its majority-owned subsidiary classroom manufacturing business. The Company’s corporate offices are located in Livermore, California. In addition, branch operations for both rental divisions are conducted from this facility.
MMMC rents and sells modular buildings and accessories to fulfill customers’ temporary and permanent space needs in California and Texas. These units are used as temporary offices adjacent to existing facilities, and are used as classrooms, sales offices, construction field offices, health care clinics, child care facilities 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 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. The educational market is the largest segment of the modular business. Within the educational market, rentals and sales to California public school districts by MMMC represent a significant portion of MMMC’s total revenues.
RenTelco rents and sells electronic test equipment nationally from two locations. The Plano, Texas location houses the Company’s communications and fiber optic test equipment inventory, calibration laboratory and eastern U.S. sales engineer and operations staffs. The Livermore, California location houses the Company’s general-purpose test equipment inventory, a calibration laboratory and western U.S. sales engineer and operations staffs. Communications and fiber optic test equipment is used by field technicians, engineers and installer contractors in evaluating voice, data and multimedia communications networks, installing optical fiber cabling and in the development of switch, network and wireless products. This test equipment is rented primarily to network systems companies, electrical contractors, local & long distance carriers and manufacturers of communications transmission equipment. RenTelco purchases communications test equipment from over 40 different manufacturers domestically and abroad. Engineers, scientists and technicians use general-
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
purpose test equipment 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, industrial, research and aerospace companies. The majority of general-purpose equipment is manufactured by Agilent (formerly Hewlett Packard), Tektronix and Acterna.
Until June 30, 2001 McGrath RentCorp owned 73% of Enviroplex, a California corporation organized in 1991. In July 2001, the Company acquired an additional 8% interest in Enviroplex for 85,366 shares of Company stock. The Company now owns 81% of Enviroplex. Enviroplex manufactures portable classrooms built to the requirements of the California Division of the State Architect (“DSA”) and sells directly to California public school districts. Enviroplex conducts its sales and manufacturing operations from its facility located in Stockton, California.
The rental and sale of modulars to California 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 business from this market segment comprised approximately 34%, 35% and 34% of the Company’s consolidated rental and sales revenues for 2001, 2000, and 1999, respectively.
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
Most of the Company’s leases with customers are accounted for as operating leases in accordance with Statement of Financial Standards (“SFAS”) No. 13, and as such, rental revenue is recognized on a straight-line basis over the term of the lease. Effective January 1, 1999, rental revenue is recognized ratably over the month on a daily basis. Rental billings for periods extending beyond the month end are recorded as deferred income. In prior years, only rental billings extending beyond a one-month billing period were recorded as deferred income (i.e. partial month billings for days beyond month end were not deferred). The new method of recognizing revenue was adopted after the Company undertook a review of its revenue recognition policies after the Securities and Exchange Commission issued its Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition.” The effect is reported as a change in accounting method in accordance with Accounting Principles Board Opinion (“APB”) No. 20, “Accounting Changes.” In 1999, the cumulative effect of changing to a new method of accounting effective January 1, 1999 was to decrease net income by $1,367,000 (net of taxes of $883,000) or $0.10 per diluted share.
Rental related services revenue is primarily associated with relocatable modular office leases, consists of billings to customers for delivery, installation, modifications, skirting, additional site related work, and return delivery and dismantle, and are an integral part of the negotiated lease agreement with the customer. Revenue related to these services is recognized on a straight-line basis over the term of the lease in accordance with SFAS No. 13.
Sales revenue is recognized upon delivery and installation of the equipment to the customer. Certain leases meeting the requirements of 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 lease 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).
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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:
Impairment
The Company continually evaluates the carrying value of rental equipment in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets”. Under SFAS 121, rental equipment is reviewed for impairment whenever events or circumstances have occurred that would indicate the carrying amount may not be fully recoverable. If the carrying amount is not fully recoverable, an impairment loss is recognized to reduce the carrying amount to fair value. The Company determines fair value based upon the condition of the equipment and the projected net cash flows from its sale considering current market conditions. Additionally, if the Company decides to sell or otherwise dispose of the rental equipment, it is carried at the lower of cost or fair value less costs to sell or dispose. In 2000, an impairment charge primarily related to modular equipment identified as beyond economic repair of $1,927,000, including disposal costs, was recorded in the Company’s consolidated statements of income in other direct costs of rental operations.
Costs of Rental Related Services
Costs of rental related services are primarily associated with relocatable modular office leases, consist of costs for services to be provided under the negotiated lease agreement for delivery, installation, modifications, skirting, additional site related work, and return delivery and dismantle. Costs related to these services are recognized on a straight-line basis over the term of the lease in accordance with SFAS No. 13.
Other Direct Costs of Rental Operations
Other direct costs of rental operations primarily relate to costs associated with modular operations and include equipment supplies and repairs, direct labor, property and liability insurance, property taxes, and business and license fees. These costs also include impairment losses and the amortization of certain lease costs included in the negotiated rental rate with the customer.
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.
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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, accounts receivable, accounts payable and notes payable) approximate fair value.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in determining reported amounts of assets 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 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 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 dilutive options outstanding at December 31, 2001, 2000 and 1999 were 263,054, 94,247 and 147,789, respectively.
Comprehensive Income
SFAS No. 130, “Reporting Comprehensive Income,” establishes standards to measure all changes in equity that result from transactions and other economic events other than transactions with shareholders. Comprehensive income is the total of net income and all other non-shareholder changes in equity. Other than net income, the Company has no comprehensive income.
Accounting for Derivatives
On January 1, 2001, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS No. 138, which establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Company does not own any derivative instruments, and as such, the implementation of this statement did not have a material impact on the Company’s financial position or result of operations.
Business Combinations, Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. SFAS No. 142 establishes new guidelines for accounting for goodwill and other intangible assets. In accordance with SFAS No. 142, goodwill associated with acquisitions consummated after June 30, 2001 is not amortized. The Company implemented the provisions of SFAS No. 141 and 142 in 2001.
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New Accounting Pronouncements
In June 2001, the FASB approved for issuance SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and that the associated asset retirement costs be capitalized as part of the carrying value of the related long-lived asset. SFAS No. 143 will be effective January 1, 2003 for the Company. Management does not expect this standard to have a material impact on the Company’s consolidated financial position or results of operations.
In August 2001, the FASB approved for issuance SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 broadens the presentation of discontinued operations to include more transactions and eliminates the need to accrue for future operating losses. Additionally, SFAS No. 144 prohibits the retroactive classification of assets as held for sale and requires revisions to the depreciable lives of long-lived assets to be abandoned. SFAS No. 144 will be effective January 1, 2002 for the Company. Management is does not expect this standard to have a material impact on the Company’s consolidated financial position or results of operations.
Reclassifications
Certain prior period amounts have been reclassified to conform to current year presentation.
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 credit losses inherent in the accounts receivable 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 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 a 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:
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As of December 31, 2001, the future minimum lease payments to be received in 2002 and thereafter are as follows:
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, 2001 was $32,000,000. 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 an aggregate amount not to exceed $15,000,000 paid by the Company to repurchase its common stock after June 30, 1998, (restricted equity at December 31, 2001 was $87,335,000), (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. As of December 31, 2001, the Company was in compliance with all covenants related to these notes.
The Company has an unsecured line of credit agreement (the “Agreement”) expiring June 30, 2004 that permits it to borrow up to $120,000,000, of which $69,500,000 was outstanding as of December 31, 2001. The Agreement requires the Company to pay interest at prime or, at the Company’s election, at 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 $100,000,000 plus 50% of all net income generated subsequent to June 30, 2001 plus 90% of any new stock issuance proceeds (restricted equity at December 31, 2001 was $106,214,000), (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 principal payments plus the most recent twelve months interest expense) of not less than 1.15 to 1. As of December 31, 2001, the Company was in compliance with all covenants related to this Agreement.
In addition to the $120,000,000 unsecured line of credit, the Company has a $5,000,000 revolving line of credit (at prime rate) related to its cash management services of which $2,640,000 was outstanding as of December 31, 2001. This line of credit related to its cash management services will expire on June 30, 2004.
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The following information relates to the lines of credit for each of the following periods:
Note 6. Income Taxes
The provision for income taxes is comprised of the following:
In 1999, the total provision for income taxes includes a provision on income before taxes of $14,874,000 and a tax benefit of $883,000 included with the cumulative effect of accounting change on the consolidated statements of income.
The reconciliation of the federal statutory tax rate to the Company’s effective tax rate is as follows:
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The following table shows the tax effect of the Company’s cumulative temporary differences included in net deferred income taxes on the Company’s consolidated balance sheets:
Note 7. Common Stock and Stock Options
In July 2001, the Company entered into a Stock Exchange Agreement with the minority shareholders of Enviroplex to increase its ownership in Enviroplex from 73% to 81%. The Company exchanged 85,366 shares of its common stock for 8% of Enviroplex. The transaction was recorded using purchase accounting and was valued at $2,061,000 based on the Company’s closing price of $24.14 per share on June 29, 2001. Prior to the transaction, the cost basis of Enviroplex’s assets and liabilities approximated the fair value of those assets and liabilities. The excess paid over fair value of $1,065,000 was allocated to intangible assets of $88,000 and goodwill of $977,000. In accordance with SFAS 142, goodwill is not being amortized and will be evaluated for impairment annually. The Company does not have any other goodwill or intangible assets.
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. Under the 1998 Plan, 629,000 options have been granted with exercise prices ranging from $15.63 to $25.55. As of December 31, 2001, options have been exercised for the purchase of 23,325 shares, options for 79,000 shares have been terminated, and options for 526,675 remain outstanding. Most of these options vest over 5 years and expire 10 years after grant. To date, no options have been issued to any of the Company’s advisors. As of December 31, 2001, 1,450,000 options remained available to issue under the 1998 plan.
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. As of December 31, 2001, options for 101,818 with an exercise price of $10.75 per share remain outstanding. 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.
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Option activity and options exercisable including weighted average exercise price for the three years ended December 31, 2001 are as follows:
The following table indicates the options outstanding and options exercisable by exercise price with the weighted average remaining contractual life for the options outstanding and the weighted average exercise price at December 31, 2001:
SFAS 123 “Accounting for Stock-Based Compensation” became effective for the Company in 1996. As allowed by SFAS 123, the Company has elected to continue to follow APB 25 “Accounting for Stock Issued to Employees” 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. However, APB 25 requires recognition of noncash compensation when the Company repurchases stock acquired by an employee through the exercise of an incentive stock option. During 1999, the Company repurchased 80,000 shares of stock at $18.00 per share from an employee who had acquired the stock at $6.94 per share through the exercise of a stock option, resulting in the recognition of noncash compensation expense of $885,000. The noncash compensation of
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$885,000 is included in the Company’s consolidated statements of income in selling and administrative expense in 1999.
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 2001, 2000 and 1999 grants are as follows:
The fair value of the options granted are $1,949,000, $2,115,000 and $1,888,000 during the year ended December 31, 2001, 2000 and 1999, respectively. The weighted average fair value of grants are $8.31, $5.03 and $5.93 during the year ended 2001, 2000 and 1999, respectively.
The following pro forma net income and earnings per share data are computed for the years ended December 31, 2001, 2000 and 1999 as if compensation cost for the stock options granted subsequent to 1995 had been determined consistent with SFAS 123:
In 1985, the Company established an Employee Stock Ownership Plan. Under the terms of the plan, as amended, 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 cash contribution of $400,000 was approved for 2001, $800,000 for 2000 and $750,000 for 1999.
In 1991, the Board of Directors adopted a Long-Term Stock Bonus Plan (the “1990 LTB Plan”) under which shares of common stock may be granted to officers and key employees. The stock bonuses granted under the 1990 LTB Plan are evidenced by written Stock Bonus Agreements covering specified performance periods. The 1990 LTB Plan provides for the grant of stock bonuses upon achievement of certain financial goals during a specified period. Stock bonuses earned under the 1990 LTB Plan vest over four years from the grant date contingent on the employee’s continued employment with the Company. As of December 31, 2001, 210,243 shares of common stock have been granted, of which 184,731 shares are vested. The 1990 LTB Plan expired in December 1999 and no further grants of common stock can occur under the 1990 LTB Plan. In 2000, the Board of Directors adopted a Long-Term Stock Bonus Plan (the “2000 LTB Plan”) under which 400,000 shares of common stock are reserved for grant to officers and key employees. The terms of the 2000 LTB Plan are the same as the 1990 Plan described above. Estimated future grants of 40,521 shares of
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common stock are authorized by the Board of Directors to be issued under the 2000 LTB Plan in the event the Company reaches its highest level of achievement. As of December 31, 2001, no shares of common stock had yet been granted or vested under the 2000 LTB Plan. Compensation expense for 2001, 2000 and 1999 under the plans was $551,000, $454,000 and $458,000, respectively, and is based on a combination of the anticipated number of shares to be granted, the amount of vested shares previously issued and fluctuations in market price of the Company’s common stock. As of December 31, 2001, 2000 and 1999, the unvested shares were 25,512, 40,409, and 61,346, respectively, with the related weighted average grant-date fair value of these unvested shares of $23.13, $20.45 and $20.23 per share, respectively.
From time to time, 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 1999, the Company repurchased 1,549,526 shares of common stock for an aggregate repurchase price of $28,212,000 or an average price of $18.21 per share. In 2000, the Company repurchased 450,942 shares of common stock for an aggregate repurchase price of $7,364,000 or an average price of $16.33 per share. There were no repurchases of common stock during 2001. As of December 31, 2001, 805,800 shares remain authorized for repurchase.
The Company defines its business segments based on the nature of operations for the purpose of reporting under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” The Company’s three reportable segments are MMMC (Modulars), RenTelco (Electronics), and Enviroplex. The operations of each of these segments are 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, deferred income and customer security deposits. The Company does not report total
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assets by business segment. Summarized financial information for the years ended December 31, 2001, 2000 and 1999 for the Company’s reportable segments is shown in the following table:
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Note 9. Quarterly Financial Information (unaudited)
Quarterly financial information for each of the two years ended December 31, 2001 is summarized below:
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure" -->
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.PART III" -->
PART IIIItem 10. Directors and Executive Officers of the Registrant" -->
Item 10. Directors and Executive Officers of the Registrant
Directors
William J. Dawsonwas elected a director of the Company in 1998, and he serves on its Audit and Executive Compensation Committees. From 1993 through 1998, Mr. Dawson was a Managing Director of Volpe Brown Whelan, LLC, an investment banking firm, where he was responsible for corporate finance activities in the healthcare industry. From 1998 through 2001, Mr. Dawson was Corporate Senior Vice President, Business Development of McKesson HBOC, Inc., a large healthcare services company, with responsibility for mergers & acquisitions and venture capital investments. Mr. Dawson is now retired.
Robert C. Hood was elected a director of the Company in 1999. Mr. Hood serves on the Board’s Audit and Executive Compensation Committees. From 1996 to 1999, Mr. Hood was Executive Vice President and Chief Financial and Administrative Officer of Excite, Inc., an Internet portal company. Mr. Hood is now retired.
Joan M. McGrathjoined the Company in 1980 and has been a director since 1982. Ms. McGrath served as a Vice President of the Company from 1982 through 1994, at which time she resigned that position. She continues to be an employee of the Company with responsibilities in training sales, supervisory and management personnel and general management.
Robert P. McGrath is the founder of the Company. He has been a director and its Chief Executive Officer since the Company’s formation in 1979, and its Chairman of the Board since 1988. He also served as the Company’s President through 1994 and as its Chief Financial Officer through 1993. He is a member of the Executive Compensation Committee of the Company’s Board of Directors.
Delight Saxton has been with the Company since its inception in 1979, and a director since 1982. She served as Secretary of the Company from 1982 to 1999, its Treasurer from 1982 to 1989, its Vice President of Administration from 1989 to 1997, and its Chief Financial Officer from 1993 to 1999. She has been a Senior Vice President of the Company since 1997. She is responsible for facility development and general management.
Ronald H. Zech was elected a director of the Company in 1989, and he serves on its Audit and Executive Compensation Committees. In 1994, Mr. Zech was elected President and Chief Operating Officer of GATX Corporation, a New York Stock Exchange listed company. In 1995, he was elected Chief Executive Officer of that corporation, and in 1996 was elected its Chairman of the Board. GATX provides specialized finance and leasing solutions for customers and partners worldwide. Mr. Zech also serves on the Board of Directors of The PMI Group, Inc., a New York Stock Exchange listed company engaged in the business of providing private mortgage insurance.
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Executive Officers
Robert P. McGrath and Delight Saxton are also directors of the Company and descriptions of them appear under“Directors” above.
Dennis C. Kakuresjoined the Company in 1982 as Sales and Operations Manager of the Company’s Northern California office. He became a Vice President of the Company in 1987, Chief Operating Officer in 1989, Executive Vice President in 1993, and President in 1995.
Thomas J. Sauerjoined the Company in 1983 as its Accounting Manager, served as its Controller from 1987 to 1999, became Treasurer in 1989, a Vice President in 1995, and Chief Financial Officer in 1999. Mr. Sauer is responsible for accounting, financial reporting, corporate taxes, and the Company’s relationships with its bankers and auditors.
Scott A. Alexanderjoined the Company in 1982 as a sales representative, became a Branch Manager in 1990, and a Vice President in 1997. Mr. Alexander is responsible for the operation of the Mobile Modular Division.
Randle F. Rosejoined the Company in 1997 as its Vice President of Administration, and was elected Secretary of the Company in 1999. Mr. Rose is responsible for administration of human resources, risk management, MIS, real estate and facilities. For the three years prior to joining the Company, Mr. Rose was Vice President, Finance of Ardenbrook, Inc., a real estate company.
Laura C. Cisselljoined the Company in 1988 as a marketing representative, became Marketing Manager in 1994, and received several promotions thereafter culminating in being elected a Vice President in 2000. Ms. Cissell is responsible for the operations of the RenTelco Division.
Each executive officer of the Company serves at the pleasure of the Board of Directors.
Compliance with § 16(a) of the Securities Exchange Act of 1934
The members of the Board of Directors, the executive officers of the Company, and persons who hold more than 10% of the Company’s outstanding Common Stock are subject to the reporting requirements of § 16(a) of the Securities Exchange Act of 1934 which require them to file reports with respect to their ownership of the Company’s Common Stock and their transactions in such Common Stock. Based upon (i) the copies of the § 16(a) reports the Company received from such persons during or with respect to 2001, and (ii) written representations received from all such persons that no annual Form 5 reports were required to be filed by them with respect to 2001, the Company believes that all reporting requirements under § 16(a) for 2001 were met in a timely manner by its directors, executive officers and greater than 10% shareholders.
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Item 11. Executive Compensation" -->
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth the compensation earned by the Company’s Chief Executive Officer and the Company’s other four most highly compensated executive officers for services rendered in all capacities to the Company for each of the last three years.
Employee Stock Ownership Plan
The Company’s Employee Stock Ownership Plan (“ESOP”) is intended to qualify as an employee stock ownership plan as defined in Section 4975(e)(7) of the Internal Revenue Code, and as a stock bonus plan under Section 401(a) of the Internal Revenue Code. The Company created a trust under the ESOP to hold plan assets, with Union Bank of California, N.A. acting as trustee. The Company may amend or terminate the ESOP at any time. In July 2001, the Company amended the ESOP to name Delight Saxton and Thomas J. Sauer as Trustees in place of Union Bank of California. All assets acquired by the trust are administered by a Plan Committee composed of Nanci Clifton, Edward Diaz, Brian Jensen, Thomas J. Sauer, Delight Saxton and Sandy Waggoner (all Company employees) for the exclusive benefit of employees who are participants in the ESOP and their designated beneficiaries.
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Employees, who are 21 years or older, are entitled to participate in the ESOP when they have completed one year of service to the Company by June 30 of any year. As of December 31, 2001, 232 employees of the Company were participants in the ESOP. Allocations to each eligible participant’s trust account are made each year from Company contributions, trust income or loss and re-allocations of forfeited ESOP benefits if the participant remains employed throughout the year and has worked a minimum number of hours or his employment has terminated due to death or retirement (as that term is defined in the ESOP) during that year. Allocations are made based upon each participant’s compensation from the Company and time employed by the Company. As provided by law, a participant’s interest in the ESOP becomes 20% vested after three years of service and will continue to vest at 20% per year thereafter until it is fully vested after the seventh year or upon death or total disability. The vesting schedule will be accelerated and the Company’s contributions and ESOP allocations will be modified if the ESOP becomes a “top heavy plan” under federal tax laws.
In general, Company contributions are immediately tax deductible by the Company, but participants do not recognize income for tax purposes until distributions are made to them. The Company’s Board of Directors determines the amount of Company contributions to the ESOP in cash, Company stock or other property each year with consideration for federal tax laws. The Company’s Board of Directors has authorized a $400,000 cash contribution to the ESOP for the 2001 plan year, and the Company had made an aggregate of $3,050,000 cash contributions for the four years prior to that. Employees may not make contributions to the ESOP. Contributions in cash are used to purchase Company stock; however, other investments may be made and loans may be incurred by the ESOP for the purchase of Company stock.
The Plan Committee has determined that cash dividends paid by the Company on shares of the Company’s Common Stock held by the ESOP shall be paid out to the participants. The Plan Committee has the right to revoke this decision at any time.
1987 Incentive Stock Option Plan
The Company has a 1987 Incentive Stock Option Plan (the “1987 Plan”) under which options have been granted to key employees of the Company for the purchase of its Common Stock. Options granted under the 1987 Plan are intended to qualify as incentive stock options as that term is defined in Section 422 of the Internal Revenue Code of 1986, as amended. The 1987 Plan authorized the issuance of an aggregate of 2,000,000 shares of the Company’s Common Stock under options. As of March 15, 2002, options for an aggregate of 852,000 shares had been granted to 28 key employees at exercise prices ranging between $3.06 and $10.75 per share; and of such options granted, options have been exercised for the purchase of 713,155 shares, options for 60,162 shares have been terminated, and options for 78,683 shares remain outstanding. The 1987 Plan is now terminated by its terms, and no further options will be granted under it; however, the options held by key employees for 78,683 shares still outstanding remain exercisable in accordance with the terms of those options. None of the Company’s executive officers listed in the “Summary Compensation Table” above were granted, exercised or held an option during 2001 under the 1987 Plan.
1998 Stock Option Plan
The Company has a 1998 Stock Option Plan (the “1998 Plan”) that authorizes the issuance of an aggregate of 2,000,000 shares of the Company’s Common Stock under options to officers, key employees, directors and other persons who provide valuable services to the Company or its subsidiaries. Options granted under the 1998 Plan may be either incentive stock options as defined in Section 422 of the Internal Revenue Code of 1986, as amended, or options which are not incentive stock options (“non-qualified options”). As of March 15, 2002, options for an aggregate of 557,000 shares have been granted to 63 key employees at exercise prices ranging between $15.625 and $25.10 per share; and of such options granted, options have been exercised for the purchase of 121,120 shares, options for 69,000 shares have been terminated, and options for 366,880 shares remain outstanding. In addition to these options to key employees, options for an aggregate of 72,000 shares have been granted to outside directors of the Company at exercise prices ranging between $15.938 and $25.55 per share; and of such options granted, no options have been exercised, options for 10,000 shares have been terminated, and options for 62,000 remain outstanding. 1,450,000 shares remain available in the 1998
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Long-Term Stock Bonus Plans
The Company’s [1990] Long-Term Stock Bonus Plan reserved 400,000 shares of the Company’s Common Stock for bonuses to be granted to officers and other key employees to provide incentives for high levels of performance and unusual efforts to improve the financial performance of the Company. This Plan terminated on December 31, 1999. In 2000, the Board of Directors and shareholders of the Company adopted the McGrath RentCorp 2000 Long-Term Stock Bonus Plan to replace the prior plan, and under which another 400,000 shares of the Company’s Common Stock are reserved for bonuses to be granted to officers and key employees under conditions substantially the same as the prior plan. Stock Bonus Agreements have been entered into with Dennis C. Kakures, the Company’s President and Chief Operating Officer, and Thomas J. Sauer, the Company’s Vice President and Chief Financial Officer. To date, Messrs. Kakures and Sauer are the only persons who have received Stock Bonus Agreements. From 1990 through 2000, each Agreement provided for a stock bonus to the officer dependent upon the return on equity realized for the Company’s shareholders over a three-year period, and starting with Agreements entered into in 1998, also dependent upon the growth in the Company’s net income over that three-year period before taking into account any income derived from or expenses attributable to interest, income taxes, depreciation and/or amortization (“EBITDA”). Starting in 2001, each Agreement provided for a stock bonus to the officer dependent upon the growth in the Company’s EBITDA after subtracting its debt. The Agreements also provide that the right to receive any stock bonus earned is subject to vesting over a four-year period contingent upon the officer remaining in the employ of the Company; however, in the event there is a “change in control” of the Company and the officer is thereafter terminated, his right to receive any stock bonus earned is accelerated and becomes fully vested. Messrs. Kakures and Sauer were awarded stock bonuses based upon the Company’s performance over the three-year period ended December 31, 2001. The following table sets forth certain information with respect to the stock bonuses awarded. The “Values” in the table are calculated based on the market value of the shares of Common Stock as of December 31, 2001.
The Company has entered into further Stock Bonus Agreements with both Mr. Kakures and Mr. Sauer, under which an estimate of 40,521 shares in additional stock bonuses could be awarded if the Company’s performance goals over the successive three-year periods ending December 31, 2002 and 2003 are met. An estimated 359,479 shares remain available in the 2000 Plan for future bonus grants.
Compensation Committee Interlocks and Insider Participation in Compensation Decisions
No member of the Company’s Executive Compensation Committee has a compensation committee interlocking relationship (as defined by the Securities and Exchange Commission). One member of the Committee, Robert P. McGrath, is an employee and officer of the Company, and he has participated in deliberations of the Committee concerning executive officer compensation.
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Compensation of Directors
Each director who is not also an officer or employee of the Company was compensated for his services as a director at the rate of $16,000 per annum plus an additional fee of $750 per meeting for attendance at the meetings of the Board of Directors or one of its Committees (in the event a Committee meeting is held in conjunction with a Board meeting, only one $750 fee is paid to the director). Mr. Dawson and Mr. Zech each received $24,250 for his services as a director of the Company during 2001, and Mr. Hood received $25,000 for his services as a director during 2001. All directors, including those who are officers or employees of the Company, are reimbursed for expenses incurred in connection with attending Board or Committee meetings.
In addition to cash compensation, the three outside directors of the Company during 2001 (Messrs. Dawson, Hood and Zech) each received a non-qualified stock option under the Company’s 1998 Stock Option Plan for the purchase of 4,000 shares of the Company’s common stock at an exercise price of $25.55 per share.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding each person who is known by the Company to be the beneficial owner of more than 5% of the outstanding Common Stock of the Company, each of the directors, the chief executive officer and the other four most highly compensated officers of the Company, and all officers and directors as a group as of March 15, 2002. The table is presented in accordance with the rules of the Securities and Exchange Commission and, accordingly, in several instances beneficial ownership of the same shares is attributed to more than one person.
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Item 13. Certain Relationships and Related Transactions
Indemnification Agreements
The Company has entered into Indemnification Agreements with each of its directors and executive officers. These Agreements require the Company to indemnify its officers or directors against expenses and, in certain cases, judgment, settlement or other payments incurred by the officer or director in suits brought by the Company, derivative actions brought by shareholders and suits brought by other third parties. Indemnification has been granted under these Agreements to the fullest extent permitted under California law in situations where the officer or director is made, or threatened to be made, a party to the legal proceeding because of his or her service to the Company.
Control
By virtue of their positions in the Company and ownership of the Company’s Common Stock, Robert P. McGrath and Joan M. McGrath may be deemed “control persons” of the Company as that term is defined under the Securities Act of 1933, as amended.
Family Relationships
There are no family relationships between any director or executive officer of the Company except that Robert P. McGrath and Joan M. McGrath are husband and wife
Merger Agreement with Tyco
Concurrently with the execution of the merger agreement between the Company and a subsidiary of Tyco International Ltd. (“Tyco”) (See “Item 1. Business – Merger Agreement with Tyco” above), Robert P. McGrath, the Chairman of the Board and Chief Executive Officer of the Company, entered into a Transitional Services Agreement with the Company, dated December 20, 2001, but to be effective only upon the consummation of the proposed merger. This Transitional Services Agreement provides that Mr. McGrath will continue to provide services to the Company for a period of three months following the closing of the merger, and in consideration thereof he will receive the same base salary and benefits that he received before the merger and a retention bonus of $1,000,000. At the same time, Mr. McGrath and Joan M. McGrath, his wife and a director of the Company, entered into Confidentiality and Non-Competition Agreements with the Company and a subsidiary of Tyco by which they agreed not to compete with the Company for a period of five years following the consummation of the merger. The Transitional Services Agreement is filed as Exhibit 10.7 hereto, and the Confidentiality and Non-Competition Agreements are filed as Exhibits 10.8 and 10.9 hereto. The foregoing descriptions of the Transitional Services Agreement and the Confidentiality and Non-
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PART IVItem 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K" -->
(a) Index of documents filed as part of this report:
2. Financial Statement Schedules. None
3. Exhibits.See Index of Exhibits on page 49 of this report.
(b) Reports on Form 8-K. A Current Report on Form 8-K was filed by the Company on December 26, 2001, by which the Company reported entering into the Merger Agreement with Tyco.
Schedules and exhibits required by Article 5 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.
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SIGNATURES" -->
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, 2002
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.
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McGRATH RENTCORP
INDEX TO EXHIBITS
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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 the Investor Relations section of Corporate Information at for the Company’s most recent SEC filings
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