1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 --------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1998 COMMISSION FILE NUMBER 0-13292 --------------- MCGRATH RENTCORP (Exact name of registrant as specified in its Charter) CALIFORNIA 94-2579843 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 5700 LAS POSITAS ROAD, LIVERMORE, CA 94550 (Address of principal executive offices) Registrant's telephone number: (925) 606-9200 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] At November 5, 1998, 14,000,862 shares of Registrant's Common Stock were outstanding. ================================================================================
2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MCGRATH RENTCORP CONSOLIDATED STATEMENTS OF INCOME (unaudited) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------ THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER SEPTEMBER 30, 30, ---------------------------- ---------------------------- 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> REVENUES Rental $ 18,385,026 $ 16,067,741 $ 52,705,894 $ 45,138,552 Rental Related Services 4,061,774 3,357,762 9,011,659 8,131,644 ------------ ------------ ------------ ------------ Rental Operations 22,446,800 19,425,503 61,717,553 53,270,196 Sales 21,787,334 25,675,496 42,973,129 51,621,927 Other 244,360 251,130 612,450 760,524 ------------ ------------ ------------ ------------ Total Revenues 44,478,494 45,352,129 105,303,132 105,652,647 ------------ ------------ ------------ ------------ COSTS AND EXPENSES Direct Costs of Rental Operations Depreciation 4,617,674 3,649,571 12,274,597 10,537,344 Rental Related Services 1,942,766 1,638,057 5,151,252 4,875,059 Other 3,655,957 2,649,772 10,216,041 7,494,923 ------------ ------------ ------------ ------------ Total Direct Costs of Rental Operations 10,216,397 7,937,400 27,641,890 22,907,326 Costs of Sales 15,580,968 17,878,601 29,553,147 35,533,649 ------------ ------------ ------------ ------------ Total Costs 25,797,365 25,816,001 57,195,037 58,440,975 ------------ ------------ ------------ ------------ Gross Margin 18,681,129 19,536,128 48,108,095 47,211,672 Selling and Administrative 4,560,456 4,962,291 12,103,999 12,008,656 ------------ ------------ ------------ ------------ Income from Operations 14,120,673 14,573,837 36,004,096 35,203,016 Interest 1,685,905 1,042,716 4,719,635 2,905,047 ------------ ------------ ------------ ------------ Income Before Provision for Income Taxes 12,434,768 13,531,121 31,284,461 32,297,969 Provision for Income Taxes 4,899,299 5,445,015 12,326,078 12,796,659 ------------ ------------ ------------ ------------ Income Before Minority Interest 7,535,469 8,086,106 18,958,383 19,501,310 Minority Interest in Income of Subsidiary 447,125 383,752 928,004 797,821 ------------ ------------ ------------ ------------ Net Income $ 7,088,344 $ 7,702,354 $ 18,030,379 $ 18,703,489 ============ ============ ============ ============ Earnings Per Share: Basic $ 0.50 $ 0.51 $ 1.27 $ 1.25 ============ ============ ============ ============ Diluted $ 0.50 $ 0.51 $ 1.25 $ 1.23 ============ ============ ============ ============ Shares Used in Per Share Calculation: Basic 14,062,112 15,015,918 14,217,977 15,001,462 ============ ============ ============ ============ Diluted 14,231,078 15,242,764 14,405,525 15,192,887 ============ ============ ============ ============ </TABLE> - ------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. 2
3 MCGRATH RENTCORP CONSOLIDATED BALANCE SHEETS (unaudited) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------ SEPTEMBER 30, DECEMBER 31, ------------- ------------- 1998 1997 - ----------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Cash $ 546,775 $ 537,875 Accounts Receivable, less allowance for doubtful accounts of $650,000 in 1998 and 1997 26,720,545 21,794,028 Rental Equipment, at cost: Relocatable Modular Offices 209,507,315 196,132,895 Electronic Test Instruments 60,747,136 50,350,777 ------------- ------------- 270,254,451 246,483,672 Less Accumulated Depreciation (79,793,338) (72,398,374) ------------- ------------- Rental Equipment, net 190,461,113 174,085,298 ------------- ------------- Land, at cost 20,495,975 20,495,975 Buildings, Land Improvements, Equipment and Furniture, at cost, less accumulated depreciation of $3,983,826 in 1998 and $3,177,213 in 1997 31,566,195 28,921,513 Prepaid Expenses and Other Assets 5,140,947 6,557,534 ------------- ------------- Total Assets $ 274,931,550 $ 252,392,223 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Notes Payable $ 100,000,000 $ 82,000,000 Accounts Payable and Accrued Liabilities 21,312,813 27,047,173 Deferred Income 7,347,482 6,928,532 Minority Interest in Subsidiary 2,507,403 1,523,058 Deferred Income Taxes 42,714,887 36,247,956 ------------- ------------- Total Liabilities 173,882,585 153,746,719 ------------- ------------- Shareholders' Equity: Common Stock, no par value - Authorized -- 40,000,000 shares Outstanding -- 14,000,862 shares in 1998 and 14,521,790 shares in 1997 7,648,364 7,756,054 Retained Earnings 93,400,601 90,889,450 ------------- ------------- Total Shareholders' Equity 101,048,965 98,645,504 ------------- ------------- Total Liabilities and Shareholders' Equity $ 274,931,550 $ 252,392,223 ============= ============= </TABLE> - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. 3
4 MCGRATH RENTCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) <TABLE> <CAPTION> - -------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1998 1997 - ------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 18,030,379 $ 18,703,489 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 13,380,816 11,191,451 Gain on Sale of Rental Equipment (4,396,941) (5,453,700) Proceeds from Sale of Rental Equipment 11,247,675 14,756,222 Change In: Accounts Receivable (4,926,517) (5,929,848) Prepaid Expenses and Other Assets 1,416,587 (4,097,182) Accounts Payable and Accrued Liabilities (4,988,358) 7,313,283 Deferred Income 418,950 2,086,436 Deferred Income Taxes 6,466,931 757,389 ------------ ------------ Net Cash Provided by Operating Activities 36,649,522 39,327,499 ------------ ------------ CASH FLOW FROM INVESTING ACTIVITIES: Purchase of Rental Equipment (35,501,146) (41,240,592) Purchase of Land, Buildings, Land Improvements, Equipment and Furniture (3,750,901) (6,498,689) ------------ ------------ Net Cash Used in Investing Activities (39,252,047) (47,739,281) ------------ ------------ CASH FLOW FROM FINANCING ACTIVITIES: Net Borrowings Under Lines of Credit 18,000,000 11,950,000 Net Proceeds from the Exercise of Stock Options 214,632 556,894 Repurchase of Common Stock (11,617,155) -- Payment of Dividends (3,986,052) (3,439,447) ------------ ------------ Net Cash Provided (Used) by Financing Activities 2,611,425 9,067,447 ------------ ------------ Net Increase in Cash 8,900 655,665 Cash Balance, Beginning of Period 537,875 686,333 ------------ ------------ Cash Balance, End of Period $ 546,775 $ 1,341,998 ============ ============ Interest Paid During the Period $ 4,442,593 $ 2,859,790 ============ ============ Income Taxes Paid During the Period $ 5,523,542 $ 8,274,674 ============ ============ Dividends Declared but not yet Paid $ 1,400,086 $ 1,201,753 ============ ============ </TABLE> - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. 4
5 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 NOTE 1. CONSOLIDATED FINANCIAL INFORMATION The consolidated financial information for the nine months ended September 30, 1998 has not been audited, but in the opinion of management, all adjustments (consisting of only normal recurring accruals, consolidation and eliminating entries) necessary for the fair presentation of the consolidated results of operations, financial position, and cash flows of McGrath RentCorp (the "Company") have been made. The consolidated results of the nine months ended September 30, 1998 should not be considered as necessarily indicative of the consolidated results for the entire year. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's latest Form 10-K. NOTE 2. NOTES PAYABLE On July 31, 1998, the Company restructured a portion of its debt to a fixed rate by completing a private placement of $40,000,000 of 6.44% senior notes due in 2005 through BancAmerica Robertson Stephens. Interest on the notes is due semi-annually in arrears and the principal is due in 5 equal installments commencing on July 31, 2001. Upon completion of the private placement, the Company repaid a $15,000,000 interim loan with one of its banks. The remainder of the proceeds was applied to reduce the existing revolver. In August 1998, the Company reduced its capacity to borrow under its unsecured line of credit with its banks from $90,000,000 to $75,000,000. All other terms and conditions under this facility remained the same. In addition, the Company extended the expiration date of its $3,000,000 committed line of credit facility related to its cash management services to June 30, 1999 and allowed the $10,000,000 of uncommitted optional facilities to expire. NOTE 3. STOCK OPTIONS The Company adopted a 1998 Stock Option Plan (the "1998 Plan"), effective March 9, 1998, under which 2,000,000 shares are reserved for the grant of options to purchase common stock to directors, officers, key employees and advisors 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, 242,000 options have been granted with exercise prices ranging from $20.25 to $20.81. Of the 242,000 options granted, key employees received 192,000. The options become exercisable during term of the related option agreement and expire ten years after grant. 5
6 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 Rental revenues for the three and nine months ended September 30, 1998 increased $2,317,285 (14%) and $7,567,342 (17%), respectively, over the comparative periods in 1997. Of the nine-month increase, Mobile Modular Management Corporation ("MMMC") contributed $5,046,487 (67%) increasing from $30,311,031 to $35,357,518 and ELECTRONICS contributed $2,520,855 (33%) increasing from $14,827,521 to $17,348,376. The significant rental revenue increase by MMMC resulted from the large quantities of equipment shipped to schools in the latter part of 1997 and the ELECTRONICS rental revenue increase resulted in part from market penetration by telemarketing and regional sales efforts on the East Coast. As of September 30, 1998, rental equipment on rent increased for MMMC by $19,224,379 and for ELECTRONICS increased by $4,961,500 compared to a year earlier. Average utilization for ELECTRONICS during the first nine months increased from 54.7% in 1997 to 55.0% in 1998 and increased for modulars from 81.0% in 1997 to 82.7% in 1998, exclusive of new equipment not previously rented. Rental related services revenues for the three and nine months ended September 30, 1998 increased $704,102 (21%) and $880,015 (11%), respectively, as compared to the same periods in 1997. Gross margins increased from 40% to 43% in 1998 for the comparative nine-month period. Sales for the three and nine months ended September 30, 1998 declined $3,888,162 (15%) and $8,648,798 (17%), respectively, as compared to the same periods in 1997 due to fewer new classroom sales to school districts by MMMC. Enviroplex and ELECTRONICS sales volumes increased 9% and 6%, respectively, over the 1997 comparative nine-month period which partially offset MMMC's expected decline in new classroom sales. (See 1997 Form 10-K Management Discussion and Analysis for Fiscal Years 1997 and 1996.) Consolidated gross margin on sales remained constant at 31% for 1997 and 1998. The single largest sale was for $6,109,692 by MMMC to a school district during the third quarter of 1998 consisting of new classrooms of which 69% of the total contract was the demolition of existing buildings, site improvements and installation of the new classrooms. This sale was unique as to the volume of new classrooms sold in conjunction with the amount of site work performed and is not likely to be repeated in the future. Sales continue to occur routinely as a normal part of the Company's rental business; however, these sales can fluctuate from quarter to quarter and year to year depending on customer demands and requirements. Depreciation on rental equipment for the three and nine months ended September 30, 1998 increased $968,103 (27%) and $1,737,253 (16%) over the comparative periods in 1997 as a result of additions to the rental equipment of both modulars and electronics. Rental equipment, at cost, increased 18% between September 30, 1997 and September 30, 1998. Other direct costs of rental operations for the three and nine months ended September 30, 1998 increased $1,006,185 (38%) and $2,721,118 (36%) over the comparative periods in 1997 primarily due to increased maintenance and repair expenses of the modular fleet. Additionally, during 1997, a significant number of customers opted to include upfront charges in the rental rate resulting in higher amortization expense of these related upfront costs over the lease term in the subsequent periods. Selling and administrative expenses for the three and nine months ended September 30, 1998 decreased $401,835 (8%) and increased $95,343 (1%), respectively, compared to the same periods in 1997. Even though selling and administrative expenses for the nine month comparative period were approximately the same, the three-month comparative period declined by 8% primarily due to higher expenses for facility and equipment depreciation ($174,819) and personnel and benefit costs ($176,883) offset by reduced performance and incentive bonuses ($528,384), fewer bad debt writeoffs ($114,023), and eliminated facility rental, cleanup and moving expenses ($114,215). Interest expense for the three and nine months ended September 30, 1998 increased $643,189 (62%) and $1,814,588 (62%) over the comparative periods in 1997 as a result of higher average borrowing 6
7 levels in 1998. The debt increase was primarily due to rental equipment purchases made during 1997 and 1998. Net income for the three and nine months ended September 30, 1998 decreased slightly as compared to the comparative periods in 1997. Earnings per share decreased slightly for the three-month and increased for the nine-month periods in 1998 to $0.50 per share and $1.27 per share, respectively, due to fewer shares outstanding. LIQUIDITY AND CAPITAL RESOURCES The Company had total liabilities to equity ratio of 1.72 to 1 and 1.56 to 1 as of September 30, 1998 and December 31, 1997, respectively. The debt (notes payable) to equity ratio was 0.99 to 1 and 0.83 to 1 as of September 30, 1998 and December 31, 1997, respectively. The Company has made purchases of shares of its common stock from time to time in the over-the-counter market (NASDAQ) and/or through privately negotiated, large block transactions under an authorization of the Board of Directors. Shares repurchased by the Company are cancelled and returned to the status of authorized but unissued stock. As of November 5, 1998, the Company has repurchased 587,050 shares of its outstanding common stock during the year for an aggregate purchase price of $11,617,155 (or an average price of $19.79 per share). As of November 5, 1998, 852,400 shares remain authorized for repurchase. The Company believes that its needs for working capital and capital expenditures through 1998 and beyond will adequately be met by cash flow and bank borrowings. PART II OTHER INFORMATION ITEM 3. OTHER INFORMATION On September 18, 1998, the Company declared a quarterly dividend on its Common Stock; the dividend was $0.10 per share. Subject to its continued profitability and favorable cash flow, the Company intends to continue the payment of quarterly dividends. ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. <TABLE> <CAPTION> NUMBER DESCRIPTION METHOD OF FILING - ------ ----------- ---------------- <S> <C> <C> 4.1 Facility Reduction Letter for the Restated Credit Agreement Filed herewith. 4.2 Second Extension to the $3,000,000 Committed Credit Facility Filed herewith. 4.3 Note Purchase Agreement Filed herewith. 10.1 The 1998 Stock Option Plan Filed herewith. 10.2 Examplar of Incentive Stock Option for Employees Under the 1998 Stock Option Plan Filed herewith. </TABLE> 7
8 <TABLE> <CAPTION> NUMBER DESCRIPTION METHOD OF FILING - ------ ----------- ---------------- <S> <C> <C> 10.3 Examplar of Non-Qualified Stock Option for Directors under the 1998 Stock Option Plan Filed herewith. 10.4 Schedule of Options Granted to Members of the Board of Directors Filed herewith. 10.5 Examplar Form of Indemnification Agreement Filed herewith. 27 Financial Data Schedule Filed herewith. </TABLE> (b) Reports on Form 8-K. No reports on Form 8-K have been filed during the quarter for which this report is filed. SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Date: November 5, 1998 MCGRATH RENTCORP by: /s/ Delight Saxton -------------------------------------- Delight Saxton Senior Vice President, Chief Financial Officer (Chief Accounting Officer) and Secretary 8
9 ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT INDEX <TABLE> <CAPTION> NUMBER DESCRIPTION METHOD OF FILING - ------ ----------- ---------------- <S> <C> <C> 4.1 Facility Reduction Letter for the Restated Credit Agreement Filed herewith. 4.2 Second Extension to the $3,000,000 Committed Credit Facility Filed herewith. 4.3 Note Purchase Agreement Filed herewith. 10.1 The 1998 Stock Option Plan Filed herewith. 10.2 Examplar of Incentive Stock Option for Employees Under the 1998 Stock Option Plan Filed herewith. </TABLE> 9
10 <TABLE> <CAPTION> NUMBER DESCRIPTION METHOD OF FILING - ------ ----------- ---------------- <S> <C> <C> 10.3 Examplar of Non-Qualified Stock Option for Directors under the 1998 Stock Option Plan Filed herewith. 10.4 Schedule of Options Granted to Members of the Board of Directors Filed herewith. 10.5 Examplar Form of Indemnification Agreement Filed herewith. 27 Financial Data Schedule Filed herewith. </TABLE> 10