1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 0-13292 ---------- MCGRATH RENTCORP (Exact name of registrant as specified in its Charter) <TABLE> <S> <C> CALIFORNIA 94-2579843 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) </TABLE> 5700 LAS POSITAS ROAD, LIVERMORE, CA 94550 (Address of principal executive offices) Registrant's telephone number: (925) 606-9200 ---------- Securities registered pursuant to Section 12(b) of the Act: <TABLE> <CAPTION> Title of each class Name of each exchange on which registered - ------------------- ----------------------------------------- <S> <C> NONE NONE </TABLE> Securities registered pursuant to Section 12(g) of the Act: Title of Class -------------- COMMON STOCK ---------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of voting stock, held by nonaffiliates of the registrant: $142,890,197 as of March 17, 2000. At March 17, 2000, 12,328,382 shares of Registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE McGrath RentCorp's definitive Proxy Statement with respect to its Annual Shareholders' Meeting to be held May 31, 2000, which will be filed with the Securities and Exchange commission within 120 days after the end of its fiscal year, is incorporated by reference into Part III, Items 10, 11, 12 and 13. Exhibit index appears on page 35.
2 PART I ITEM 1. BUSINESS. GENERAL McGrath RentCorp ("MGRC") is a California corporation organized in 1979. McGrath RentCorp and its majority owned subsidiary, Enviroplex, Inc. ("Enviroplex"), collectively referred to herein as the "Company", manufactures, rents, and sells relocatable modular offices and rents and sells communications, fiber optic and electronic test equipment with related accessories primarily in California and Texas. The Company's corporate offices are located in Livermore, California. In addition to the corporate offices, certain branch functions are conducted from this facility. Under the trade name "Mobile Modular Management Corporation" ("MMMC"), the Company rents and sells modular equipment and related accessories to fulfill customers' temporary space needs. These units are used as temporary offices adjacent to existing facilities, and are used as sales offices, construction field offices, classrooms and for a variety of other purposes. MMMC purchases the modulars from various manufacturers who build them to MMMC's design specifications. MMMC operates from two branch offices in California and one in Texas. Although MMMC's primary emphasis is on rentals, sales of modulars routinely occur and can fluctuate quarter to quarter and from year to year depending on customer demands and requirements. Rentals and sales to school districts by MMMC represent a significant portion of MMMC's total revenues. Under the trade name "McGrath-RenTelco", the Company rents and sells electronic equipment from Livermore, California and Richardson, Texas. Engineers, scientists and technicians use these instruments in evaluating the performance of their own electrical and electronic equipment, developing products, controlling manufacturing processes and in field service applications. These instruments are rented primarily to electronics, communications, network systems, industrial, research and aerospace companies. The majority of McGrath-RenTelco's rental inventory consists of instruments manufactured by Hewlett-Packard and Tektronix. MGRC owns 73.2% of Enviroplex, a California corporation organized in 1991. Enviroplex manufactures portable classrooms built to the requirements of the California Division of the State Architect ("DSA") and sells directly to school districts. Enviroplex conducts its sales and manufacturing operations from its facility located in Stockton, California. Since inception, MGRC has assisted Enviroplex in a variety of corporate functions such as accounting, human resources, facility improvements, and insurance. MGRC has not purchased significant quantities of manufactured product from Enviroplex. Enviroplex sales revenues were $11,150,000, $20,672,000, and $21,287,000 for 1999, 1998, and 1997, respectively. The rental and sale of modulars to school districts for use as portable classrooms, restroom buildings and administrative offices for kindergarten through grade twelve (K-12) are a significant portion of the Company's revenues. School business comprised approximately 34%, 45%, and 52% of the Company's consolidated rental and sales revenues for 1999, 1998, and 1997 respectively. Please see Note 8 to the Consolidated Financial Statements on page 29 for more information on the Company's business segments. The Company has 364 employees, of whom 41 are primarily administrative and executive personnel, and the remaining 323 are engaged in manufacturing or rental operations. None of the employees are represented by unions. The operations of the Company share common facilities, financing, senior management, and operating and accounting systems which results in the efficient use of overhead. Each product line has its own sales and technical personnel. No single customer has accounted for more than 10% of the Company's total revenues generated in any given year. The Company's business is not seasonal, except for the rental and sale of classrooms, which is heaviest in the several months prior to the opening of school each fall. 1
3 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". This Annual Report on Form 10-K contains statements which constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places. Such statements can be identified by the use of forward-looking terminology such as "believes", "expects", "may", "estimates", "will", "should", "plans" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. These factors include the effectiveness of management's strategies and decisions, general economic and business conditions, new or modified statutory or regulatory requirements and changing prices and market conditions. This report identifies other factors that could cause such differences. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. RELOCATABLE MODULAR OFFICES DESCRIPTION Modulars are designed for use as temporary office space and may be moved from one location to another. Modulars vary from simple single-unit construction site offices to attractive multi-modular facilities, complete with wood exteriors and mansard roofs. The rental fleet includes a full range of styles and sizes. The Company considers its modulars to be among the most attractive and well designed available. The units are constructed with wood siding, sturdily built and physically capable of a useful life often exceeding 18 years. Units are provided with installed heat, air conditioning, lighting, electricity and floor covering, and may have customized interiors including partitioning, carpeting, cabinetwork and plumbing facilities. MMMC purchases new modulars from various manufacturers who build to MMMC's design specifications. None of the principal suppliers are affiliated with the Company. During 1999, the Company purchased 51% 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 operations, however the Company could experience higher prices and longer lead times for modular product until other manufacturers increased their capacity. MARKETING The market for modulars is broad. Businesses which have a need for additional space and have adjacent land or a parking lot are potential customers. The Company's largest single demand is for temporary classrooms. Management believes the demand for classrooms is caused by shifting and fluctuating school populations, the lack of state funds for new construction, the need for temporary classroom space during reconstruction of older schools and, most recently, class size reduction (see "Classroom Rentals and Sales" below). Other applications include sales offices, administrative offices for health care facilities, universities and museums. Large multi-modular complexes are used by manufacturing, entertainment, energy and utility companies, and governmental agencies. The Company's branch offices, as well as the corporate office, are housed in various sizes of modulars. Since most of MMMC's customer requirements are to fill temporary space needs, the Company's marketing emphasis is on rentals rather than sales. MMMC solicits customers through extensive yellow-page advertising, telemarketing and direct mail. Customers are encouraged to visit an inventory center to view different models on display and to see a branch office, which itself is a working example of a modular application. Because service is a major competitive factor in the rental of modulars, MMMC offers quick response to requests for information, assistance in the choice of a suitable size and floor plan, rapid delivery and timely 2
4 maintenance of its units, both prior to delivery of the unit and while it is on rent. MMMC has sales and maintenance staffs trained in the Company's understanding of excellence in service. RENTALS Rental periods range from one month to ten years with a typical rental period of one year. Most rental agreements provide no purchase options; and when a rental agreement does provide the customer with a purchase option, it is generally on terms attractive to MMMC. The customer is responsible for the costs of insuring the unit, transporting the unit to the site, preparation of the site, installation of the unit, dismantle and return of the unit to one of MMMC's three inventory centers and certain costs for customization. MMMC maintains the units in good working order while on rent. Upon return, the units are refurbished for subsequent use. Refurbishment work can include floor tile repairs, roof maintenance, cleaning, painting and other cosmetic repairs. At December 31, 1999, MMMC had 16,230 new or previously rented modulars in its rental fleet with an aggregate original cost including accessories of $238,449,000 or an average cost per unit of $14,700. Utilization is calculated each month by dividing the cost of rental equipment on rent by the total cost of rental equipment, excluding accessory equipment. At December 31, 1999, fleet utilization was 78.1% and average fleet utilization during 1999 was 78.4%. Excluding new equipment not previously rented, fleet utilization at December 31, 1999 was 80.2% and average fleet utilization during 1999 was 81.6%. SALES In addition to operating its rental fleet, MMMC sells modulars to customers who have a permanent use for such units. These sales arise out of 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 1999, MMMC's largest sale of modulars was for new classrooms to a school district for approximately $1,004,000. This sale represented approximately 6% of MMMC's sales, 3% 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' warranties on new units. Warranty costs have not been significant to MMMC's operations to date, and MMMC attributes this to its commitment to high quality standards and regular maintenance programs. In addition to MMMC's sales, the Company's subsidiary, Enviroplex, manufactures and sells portable classrooms to school districts in California (see "Classroom Sales by Enviroplex" below). COMPETITION This section contains statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. See "General" above for cautionary information with respect to such forward-looking statements. Competition in the rental and sale of relocatable modular offices is intense. Many firms are engaged in the rental of modulars, and some have substantially greater financial resources than MMMC. Significant competitive factors in the rental business include availability, price, services, reliability, appearance and functionality of the product. MMMC markets high-quality, well constructed and attractive modulars. MMMC believes 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 the process of improvement is ongoing. 3
5 CLASSROOM SALES BY ENVIROPLEX This section contains statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. See "General" above for cautionary information with respect to such forward-looking statements. Enviroplex manufactures moment-resistant, rigid steel framed portable classrooms built to the requirements of the DSA and sells directly to school districts. The moment-resistant, rigid steel framed classroom is engineered to have the structural columns support the weight of the building. This offers the customer greater design flexibility as to overall classroom size and the placement of doors and windows. Enviroplex fabricates most of the structural steel component parts using only mill certified sheet steel. Enviroplex's standard designs have been engineered for strength and durability using lighter weight steel. Customers are offered a wide variety of the DSA pre-approved classroom sizes and features with market established pricing which could save them valuable time on their classroom project. Additional customization features include restrooms, computer lab setups, interior offices, cabinetwork and kitchen facilities. During 1999, Enviroplex's largest sale was for $1,596,000 of new classrooms to a school district. This sale represented 14% of Enviroplex's sales, 4% of the Company's consolidated sales and 1% of the Company's consolidated revenues. 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 which 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 The rental and sales of modulars to public school districts for use as portable classrooms, restroom buildings and administrative offices for kindergarten through grade twelve (K-12) are a significant portion of the Company's revenues. The following table shows the approximate percentages schools are of the Company's modular rental and sales revenues, and of its consolidated rental and sales revenues for the past five years: SCHOOLS AS A PERCENTAGE OF RENTAL AND SALES REVENUES <TABLE> <CAPTION> Percentage of: 1999 1998 1997 1996 1995 - -------------- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Modular Rental Revenues 48% 44% 45% 40% 34% Modular Sales Revenues 52% 78% 74% 54% 38% Consolidated Rental and Sales Revenues 34% 45% 52% 37% 27% </TABLE> The increased sales shown for 1998, 1997 and 1996 can be attributed to the Class Size Reduction Program instituted by the state of California. School districts were given great incentive to reduce class size in the lower grades from a typical 30 students to no greater than 20 students. This highly popular program created a great demand for both purchasing and renting classroom buildings. 4
6 In California (where most of the Company's rentals to public school districts have occurred), school districts are permitted to purchase only portable classrooms built to the requirements of the DSA. However, school districts may rent classrooms that meet either the Department of Housing ("DOH") or the DSA requirements. Prior to 1988 the majority of the classrooms in the Company's rental fleet were built to the DOH requirements, and since 1988 almost all new classrooms have been built to the DSA requirements. In 1988, California adopted a law which limited the term for which school districts may rent portable classrooms built to DOH standards to three years (under a waiver process), and which also required the school board to indemnify the State against any claims arising out of the use of such classrooms. In 1993, a new law went into effect that allowed school districts which already had DOH classrooms to continue to rent them for an additional three years (i.e. up to six years in total). New orders for DOH classrooms placed after 1992 were restricted to the three year limitation as before. In 1996, legislation was adopted that eliminated the issuance of new waivers after September 30, 1997. Prior to September 30, 1997, additional legislation was passed to extend all existing waivers until September 30, 2000. At December 31, 1999, the net book value of DOH classrooms represented approximately 2% of the total assets of the Company and management believes that actions it has taken will mitigate the impact of the expiration. Currently, regulations are in place that allow the ongoing use of the DOH classrooms to meet the shorter term space needs of school districts for periods up to 24 months, provided they receive a "Temporary Certification" from the DSA. 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. The Company's DOH classrooms are also suitable for rent to non-school customers for commercial uses; however, the 24' x 40' standard classrooms are not as popular for commercial use. The following table shows the comparison of, and shift from, 24' x 40' standard DOH classrooms to DSA classrooms marketed to school districts as of December 31, 1999, 1998, 1997, 1996 and 1995. Please note how the inventory has shifted to the DSA classrooms. <TABLE> <CAPTION> CLASSROOM COMPARISON - ----------------------------------------------------------------------------------------------------- (dollar amounts in thousands) DECEMBER 31, ------------------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> 24' X 40' STANDARD DOH CLASSROOMS Rental Equipment, at cost, on rent $10,483 $12,704 $13,960 $13,738 $10,449 Rental Equipment, at cost, off rent 4,320 2,249 765 1,834 5,015 ------- ------- ------- ------- ------- Total Rental Equipment, at cost $14,803 $14,953 $14,725 $15,572 $15,464 ------- ------- ------- ------- ------- Total Rental Equipment, net book value $ 6,783 $ 7,368 $ 7,849 $ 8,952 $ 9,324 ------- ------- ------- ------- ------- Utilization (year-end)(1) 70.8% 85.0% 94.8% 88.2% 67.6% ------- ------- ------- ------- ------- DSA CLASSROOMS Rental Equipment, at cost, on rent $72,248 $55,697 $44,452 $26,488 $17,454 Rental Equipment, at cost, off rent 5,488 2,724 1,308 611 3,653 ------- ------- ------- ------- ------- Total Rental Equipment, at cost $77,736 $58,421 $45,760 $27,099 $21,107 ------- ------- ------- ------- ------- Total Rental Equipment, net book value $66,833 $50,630 $39,535 $22,399 $17,115 ------- ------- ------- ------- ------- Utilization (year-end)(1) 92.9% 95.3% 97.1% 97.7% 82.7% ------- ------- ------- ------- ------- - ----------------------------------------------------------------------------------------------------- </TABLE> (1) Utilization is calculated as of December 31, by dividing the original cost of equipment on rent by the original cost of all equipment in the rental equipment category, excluding new classrooms not previously rented and accessory equipment. 5
7 ELECTRONIC TEST AND MEASUREMENT INSTRUMENTS DESCRIPTION The Company's rental inventory includes electronic instruments such as oscilloscopes, spectrum analyzers, logic analyzers, signal generators, frequency counters, protocol analyzers, cable locators, fiber optic and sonet equipment. The Company also rents electronic instruments from other rental companies and re-rents the instruments to customers. At December 31, 1999, the Company had an aggregate cost of electronics rental inventory and accessories of $72,832,000. Utilization is calculated each month by dividing the cost of the rental equipment on rent by the total cost of the rental equipment, excluding accessory equipment. At December 31, 1999 utilization was 54.4%, and the average utilization during 1999 was 53.8%. 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 1999, approximately 26% of the electronics revenues were derived from sales. The largest electronics sale during 1999 represented 1% of electronics sales and less than 1% of the Company's consolidated revenues. MARKET The business of renting electronic test and measurement instruments is an industry which today has equipment on rent or available for rent in the United States with an aggregate original cost 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, industrial, research and aerospace companies. The Company markets its electronic equipment throughout the United States. 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 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. 6
8 PRODUCT HIGHLIGHTS The following table shows the revenue components, percentage of total revenues, rental equipment (at cost), rental equipment (net book value), number of relocatable modular offices, year-end and average utilization, average rental equipment (at cost), annual yield on average rental equipment (at cost) and gross margin on sales by product line for the past five years. <TABLE> <CAPTION> PRODUCT HIGHLIGHTS - ----------------------------------------------------------------------------------------------------------------- (dollar amounts in thousands) YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> RELOCATABLE MODULAR OFFICES (operates under MMMC and Enviroplex) Revenues Rental $ 51,622 $ 47,957 $ 41,514 $ 31,931 $ 31,577 Rental Related Services 12,542 11,007 9,898 8,399 7,527 -------- -------- -------- -------- -------- Total Modular Rental Operations 64,164 58,964 51,412 40,330 39,104 -------- -------- -------- -------- -------- Sales -- MMMC 16,100 23,171 33,522 14,359 6,572 Sales -- Enviroplex 11,150 20,672 21,287 10,206 4,775 -------- -------- -------- -------- -------- Total Modular Sales 27,250 43,843 54,809 24,565 11,347 -------- -------- -------- -------- -------- Other 500 448 656 885 1,415 -------- -------- -------- -------- -------- Total Modular Revenues $ 91,914 $103,255 $106,877 $ 65,780 $ 51,866 ======== ======== ======== ======== ======== Percentage of Total Revenues 70.7% 76.2% 79.2% 73.9% 72.8% Rental Equipment, at cost (year-end) $238,449 $216,444 $196,133 $158,377 $150,389 Rental Equipment, net book value (year-end) $171,166 $156,790 $142,816 $110,014 $106,266 Number of Units (year-end) 16,230 15,139 14,240 11,582 10,868 Utilization (year-end)(1) 78.1% 78.3% 78.7% 78.6% 71.0% Average Utilization(1) 78.4% 77.6% 79.7% 72.1% 73.9% Average Rental Equipment, at cost $227,235 $204,914 $172,680 $151,818 $149,371 Annual Yield on Average Rental Equipment, at cost 22.7% 23.4% 24.0% 21.0% 21.1% Gross Margin on Sales 29.5% 30.8% 31.2% 30.7% 29.3% ELECTRONIC TEST AND MEASUREMENT INSTRUMENTS (operates under McGrath-RenTelco) Revenues Rental $ 27,132 $ 24,010 $ 20,174 $ 17,055 $ 14,486 Rental Related Services 501 521 380 319 268 -------- -------- -------- -------- -------- Total Electronics Rental Operations 27,633 24,531 20,554 17,374 14,754 Sales 9,789 7,201 7,212 5,610 4,492 Other 626 441 333 241 161 -------- -------- -------- -------- -------- Total Electronics Revenues $ 38,048 $ 32,173 $ 28,099 $ 23,225 $ 19,407 ======== ======== ======== ======== ======== Percentage of Total Revenues 29.3% 23.8% 20.8% 26.1% 27.2% Rental Equipment, at cost (year-end) $ 72,832 $ 66,573 $ 50,351 $ 43,335 $ 35,168 Rental Equipment, net book value (year-end) $ 46,012 $ 43,238 $ 31,270 $ 27,279 $ 21,342 Utilization (year-end)(1) 54.4% 51.5% 52.6% 51.8% 53.8% Average Utilization(1) 53.8% 54.6% 54.9% 54.9% 55.2% Average Rental Equipment, at cost $ 68,420 $ 56,859 $ 46,483 $ 39,335 $ 32,255 Annual Yield on Average Rental Equipment, at cost 39.7% 42.2% 43.4% 43.4% 44.9% Gross Margin on Sales 29.7% 32.9% 33.2% 37.3% 39.6% TOTAL REVENUES $129,962 $135,428 $134,976 $ 89,005 $ 71,273 - ----------------------------------------------------------------------------------------------------------------- </TABLE> (1) Utilization is calculated each month by dividing the cost of rental equipment on rent by the total cost of rental equipment, excluding accessory equipment. The average utilization for the year is calculated using the average of the monthly equipment figures. 7
9 ITEM 2. PROPERTIES. The Company currently conducts its operations from five locations. Inventory centers, at which relocatable modular offices are displayed, refurbished and stored are located in Livermore, California (San Francisco Bay Area), Mira Loma, California (Los Angeles Area) and Pasadena, Texas (Houston Area). These three branches conduct rental and sales operations from multi-modular offices, serving as working models of the Company's product. Electronic test and measurement instrument rental and sales operations are conducted from the Livermore facility and from a facility in Richardson, Texas (Dallas Area). The Company's majority owned subsidiary, Enviroplex, manufactures portable classrooms from its facility in Stockton, California (San Francisco Bay Area). During 1999, the Company purchased 2.6 acres of land in Plano, Texas for the development of a 40,000 square foot office and warehouse facility. The primary purpose for constructing the new facility is to relocate the currently rented Richardson, Texas electronics operation. The Company intends to rent out approximately half the facility. Construction of the facility started in January 2000 and will be completed by July 2000 at an estimated cost of $2,000,000. 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, 1999. Except as noted, all properties are owned by the Company. <TABLE> <CAPTION> FACILITIES - ------------------------------------------------------------------------------------------------- Square Footage ----------------------------------------------- Total Acres Office Warehouse Total ----- ------- --------- ------- <S> <C> <C> <C> <C> CORPORATE OFFICES Livermore, California(1) -- 9,840 -- 9,840 RELOCATABLE MODULAR OFFICES Livermore, California(1, 2) 139.7 7,680 53,440 61,120 Mira Loma, California 78.5 7,920 45,440 53,360 Pasadena, Texas 50.0 3,868 24,000 27,868 ELECTRONIC TEST AND MEASUREMENT INSTRUMENTS Livermore, California(1) -- 8,400 7,920 16,320 Richardson, Texas(3) -- 2,640 3,971 6,611 Plano, Texas(4) 2.6 -- -- -- ENVIROPLEX, INC. Stockton, California 13.9 3,365 102,050 105,415 OTHER Corona, California(5) 10.4 -- -- -- Arlington, Texas(6) 1.8 1,680 2,387 4,067 ----- ------- ------- ------- 296.9 45,393 239,208 284,601 ===== ======= ======= ======= - ------------------------------------------------------------------------------------------------- </TABLE> (1) The modular office complex in Livermore, California is 33,840 square feet and includes the Corporate offices and both modulars and electronics branch operations. (2) Of the 139.7 acres owned, 2.2 acres with an 8,000 square foot warehouse facility is rented out to a third party through March, 2008, and 35.8 acres are undeveloped. (3) Leased office and warehouse space through April 2000, subsequently rented on a month to month basis. (4) 40,000 square foot office and warehouse facility under construction with expected completion in July 2000 (5) Facility is for sale or lease. (6) Facility rented out to a third party on a month to month basis. ITEM 3. LEGAL PROCEEDINGS. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 8
10 PART II ITEM 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: <TABLE> <CAPTION> STOCK ACTIVITY - -------------------------------------------------------------------------------------------------- 1999 1998 ------------------------------------ ------------------------------------ 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q ------ ------ ------ ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> <C> <C> High $19.00 $20.38 $20.50 $22.50 $24.75 $24.50 $23.56 $24.50 Low $15.88 $17.63 $17.13 $16.75 $13.88 $16.88 $19.00 $19.25 Close $17.50 $18.00 $20.00 $18.25 $22.00 $17.00 $21.13 $19.88 Dividends Declared $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.10 $ 0.10 $ 0.10 $ 0.10 - -------------------------------------------------------------------------------------------------- </TABLE> As of March 17, 2000, the Company's common stock was held by approximately 108 shareholders of record, which does not include shareholders whose shares are held in street or nominee name. The Company believes that when holders in street or nominee name are added, the number of holders of the Company's common stock exceeds 500. The Company has declared a quarterly dividend on its common stock every quarter since 1990. Subject to its continued profitability and favorable cash flow, the Company intends to continue the payment of quarterly dividends. In March 2000, the Company issued an aggregate of 20,920 shares of its common stock to Dennis C. Kakures and Thomas J. Sauer, both officers of the Company, pursuant to the Company's Long-Term Stock Bonus Plan (as described in the Company's Proxy Statement). Under the same Plan, the Company had issued to the same two officers an aggregate of 33,486 shares of common stock in March 1999 and 36,840 shares of common stock in April 1998. 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. 9
11 ITEM 6. SELECTED FINANCIAL DATA. The following table summarizes the Company's selected financial data for the five years ended December 31, 1999 and should be read in conjunction with the more detailed Consolidated Financial Statements and related notes reported in Item 8. <TABLE> <CAPTION> SELECTED CONSOLIDATED FINANCIAL DATA - ------------------------------------------------------------------------------------------------------------------------- (dollar and share amounts in thousands, except per share data) Year Ended December 31, -------------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> Operations Data Revenues Rental $ 78,754 $ 71,967 $ 61,688 $ 48,986 $ 46,063 Rental Related Services 13,043 11,528 10,278 8,718 7,795 --------- --------- --------- --------- --------- Rental Operations 91,797 83,495 71,966 57,704 53,858 Sales 37,039 51,044 62,021 30,175 15,839 Other 1,126 889 989 1,126 1,576 --------- --------- --------- --------- --------- Total Revenues 129,962 135,428 134,976 89,005 71,273 --------- --------- --------- --------- --------- Costs and Expenses Direct Costs of Rental Operations Depreciation 19,780 16,862 14,358 12,456 11,539 Rental Related Services 7,153 6,531 6,287 5,515 5,024 Other 14,284 13,390 10,375 8,703 7,370 --------- --------- --------- --------- --------- Total Direct Costs of Rental Operations 41,217 36,783 31,020 26,674 23,933 Cost of Sales 26,078 35,189 42,550 20,532 10,735 --------- --------- --------- --------- --------- Total Costs 67,295 71,972 73,570 47,206 34,668 --------- --------- --------- --------- --------- Gross Margin 62,667 63,456 61,406 41,799 36,605 Selling and Administrative 17,103 16,220 15,957 13,147 10,459 --------- --------- --------- --------- --------- Income from Operations 45,564 47,236 45,449 28,652 26,146 Interest 6,606 6,326 4,070 2,887 2,831 --------- --------- --------- --------- --------- Income before Provision for Income Taxes 38,958 40,910 41,379 25,765 23,315 Provision for Income Taxes 14,874 16,010 16,323 9,885 9,375 --------- --------- --------- --------- --------- Income before Minority Interest 24,084 24,900 25,056 15,880 13,940 Minority Interest in Income of Subsidiary 251 1,005 1,011 358 97 --------- --------- --------- --------- --------- Income before Effect of Accounting Change 23,833 23,895 24,045 15,522 13,843 Cumulative Effect of Accounting Change, net of tax(1) (1,367) -- -- -- -- --------- --------- --------- --------- --------- Net Income $ 22,466 $ 23,895 $ 24,045 $ 15,522 $ 13,843 ========= ========= ========= ========= ========= Earnings Per Share: Basic Income before Cumulative Effect of $ 1.80 $ 1.69 $ 1.60 $ 1.03 $ 0.87 Accounting Change Cumulative Effect of Accounting Change, net of tax(1) (0.10) -- -- - -- --------- --------- --------- --------- --------- Net Income $ 1.70 $ 1.69 $ 1.60 $ 1.03 $ 0.87 ========= ========= ========= ========= ========= Diluted Income before Cumulative Effect of $ 1.78 $ 1.67 $ 1.58 $ 1.01 $ 0.86 Accounting Change Cumulative Effect of Accounting Change, net of tax(1) (0.10) -- -- - -- --------- --------- --------- --------- --------- Net Income $ 1.68 $ 1.67 $ 1.58 $ 1.01 $ 0.86 ========= ========= ========= ========= ========= Shares Used in Per Share Calculation: Basic 13,235 14,163 14,982 15,102 15,949 Diluted 13,383 14,349 15,181 15,306 16,168 Cash Dividends Declared Per Common Share $ 0.48 $ 0.40 $ 0.32 $ 0.28 $ 0.24 Pro Forma Amounts Assuming Change had been in effect during 1998, 1997, 1996 and 1995 Net Income $ 23,833 $ 23,697 $ 23,816 $ 15,400 $ 13,863 Earnings Per Share - Basic $ 1.80 $ 1.67 $ 1.59 $ 1.02 $ 0.87 Earnings Per Share - Diluted $ 1.78 $ 1.65 $ 1.57 $ 1.01 $ 0.86 - ------------------------------------------------------------------------------------------------------------------------- </TABLE> 10
12 <TABLE> <CAPTION> SELECTED CONSOLIDATED FINANCIAL DATA (continued) - ----------------------------------------------------------------------------------------------------------------- (dollar and share amounts in thousands, except per share data) Year Ended December 31, ------------------------------------------------------------------------ 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> Balance Sheet Data (at period end) Rental Equipment, net $217,178 $200,028 $174,086 $137,292 $127,608 Total Assets $297,722 $278,676 $252,392 $200,035 $175,130 Notes Payable $110,300 $ 97,000 $ 82,000 $ 53,850 $ 37,080 Shareholders' Equity $ 95,403 $105,394 $ 98,646 $ 88,808 $ 85,893 Shares Issued and Outstanding 12,546 13,970 14,522 14,820 15,540 Book Value Per Share $ 7.60 $ 7.54 $ 6.79 $ 5.99 $ 5.53 Debt (Notes Payable) to Equity 1.16 0.92 0.83 0.61 0.43 Return on Average Equity 22.7% 24.0% 24.5% 18.0% 16.4% - ----------------------------------------------------------------------------------------------------------------- </TABLE> (1) See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Fiscal Years 1999 and 1998" below for a discussion of the change in accounting method for rental revenue recognition in response to SAB No. 101. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULT OF OPERATIONS GENERAL Revenues are derived primarily from the rental of relocatable modular offices and electronic test and measurement instruments. The Company has expanded the rental inventory of relocatable modular offices and electronic instruments. This expansion has been funded through internal cash flow, private placement of long-term debt and conventional bank financing. The major portion of the Company's revenue is derived from rental operations comprising approximately 71% of consolidated revenues in 1999 and 62% of consolidated revenues for the three years ended December 31, 1999. Over the past three years modulars comprised 71% of the cumulative rental operations, and electronics comprised 29% of the cumulative rental operations. The Company sells both modular and electronic equipment 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. Revenues from sales of both modular and electronic equipment have comprised approximately 28% of the Company's consolidated revenues in 1999 and 37% of the Company's consolidated revenues over the last three years. During these three years, modular sales represented 84% and electronic sales represented 16%. The rental and sale of modulars to public school districts is a significant part of the Company's business. School business comprised 34%, 45%, and 52% of the Company's consolidated rental and sales revenues for 1999, 1998, 1997. The increases in the Company's sales and rental revenues in 1997 can be attributed primarily to the Class Size Reduction Program implemented by the state of California in 1996. Sales revenues declined significantly in 1999 and 1998 as school districts' demand for classrooms declined as school districts finished implementing the Class Size Reduction Program. (See "Business - Relocatable Modular Offices - Classroom Rentals and Sales" above.) 11
13 The following table sets forth for the periods indicated the results of operations as a percentage of revenues and the percentage of changes in such items as compared to the indicated prior period: <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------- Percent of Revenues Percent Change --------------------------------------- ---------------- Three Years Year Ended December 31, 1999 over 1998 over 1999-1997 1999 1998 1997 1998 1997 --------------------------------------- ---------------- <S> <C> <C> <C> <C> <C> <C> Revenues Rental 53% 61% 53% 46% 9% 17% Rental Related Services 9 10 9 8 13 12 --- --- --- --- Rental Operations 62 71 62 54 10 16 Sales 37 28 38 46 (27) (18) Other 1 1 nm nm nm nm --- --- --- --- Total Revenues 100% 100% 100% 100% (4)% nm --- --- --- --- Costs and Expenses Direct Costs of Rental Operations Depreciation 13 15 12 11 17 17 Rental Related Services 5 6 5 5 10 4 Other 9 11 10 7 7 29 --- --- --- --- Total Direct Costs of Rental Operations 27 32 27 23 12 19 Cost of Sales 26 20 26 32 (26) (17) --- --- --- --- Total Costs 53 52 53 55 (6) (2) --- --- --- --- Gross Margin 47 48 47 45 (1) 3 Selling and Administrative 12 13 12 11 5 2 --- --- --- --- Income from Operations 35 35 35 34 (4) 4 Interest 5 5 5 3 4 55 --- --- --- --- Income before Provision for Income Taxes 30 30 30 31 (5) (1) Provision for Income Taxes 12 11 12 12 (7) (2) --- --- --- --- Income before Minority Interest 18 19 18 19 (3) (1) Minority Interest in Income of Subsidiary nm 1 nm 1 nm nm --- --- --- --- Income before Effect of Accounting Change 18 18 18 18 nm nm Cumulative Effect of Accounting Change, net of tax nm 1 nm nm nm nm --- --- --- --- --- --- Net Income 18% 17% 18% 18% (6%) nm - -------------------------------------------------------------------------------------------------------------------- </TABLE> nm = not meaningful FISCAL YEARS 1999 AND 1998 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. As anticipated, during 1999 increased revenues from rental operations have significantly offset the decline in sales revenues. However, net income for 1999 was reduced by the impact of both a noncash pre-tax compensation charge of $885,000, as well as a one-time, noncash, after-tax charge of $1,367,000 reflecting the cumulative effect through December 31, 1998 of the Company's change in accounting method for rental revenues as of January 1, 1999. After considering the impact of these two charges, net income for 1999 was $22,466,000, or $1.68 per diluted share compared to last year's reported net income of $23,895,000, or $1.67 per diluted share. Excluding the impact of these two charges, net income in 1999 would have been $24,361,000, or $1.82 per diluted share. Assuming the newly adopted accounting method had been in effect in 1998, net income for 1998 would have been $23,697,000, or $1.65 per diluted share, and comparative earnings per diluted share would have increased 10% in 1999 as a result of higher earnings and fewer outstanding shares. 12
14 Rental revenue is recognized under the "operating method" of accounting for the majority of leases. 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 period were recorded as deferred income. The new method of recognizing revenue was adopted in response to the Security and Exchange Commission's 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." 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. The pro forma amounts shown on the consolidated statements of income have been adjusted as if the new method of revenue recognition had been in effect for all periods presented. Rental revenues increased $6,787,000 (9%) over 1998, with MMMC contributing $3,665,000 and McGrath-RenTelco contributing $3,122,000 of the increase. As of December 31, 1999, rental equipment on rent increased for MMMC by $16,586,000 and for McGrath-RenTelco by $5,331,000 compared to a year earlier. Even though average utilization for modulars increased from 77.6% in 1998 to 78.4% in 1999, the annual yield declined for modulars from 23.4% to 22.7% as a result of lower rental rates due to competition. Average utilization for electronics declined slightly from 54.6% in 1998 to 53.8% in 1999 with electronics annual yield declining from 42.2% in 1998 to 39.7% in 1999 resulting primarily from competitive pricing pressures. Rental related services revenues in 1999 increased $1,515,000 (13%), over 1998 as a result of a higher volume of modular equipment movements and site requirements in 1999. Gross margins on these services increased from 43.4% in 1998 to 45.2% in 1999. Sales in 1999 declined $14,005,000 (27%) primarily due to a reduction in sales of manufactured classrooms by Enviroplex to school districts from the high levels in 1998 caused by California's Class Size Reduction Program. Further, increased business levels for Enviroplex anticipated from the $9.2 billion California bond measure, which passed in November 1998, did not materialize in 1999. The single largest sale in 1999 was by Enviroplex for $1,596,000 of new classrooms to a school district. Sales continue to occur routinely as a normal part of the Company's rental business; however, these sales can fluctuate from quarter to quarter and year to year depending on customer demands, requirements and funding. Consolidated gross margin on sales declined slightly from 31.1% in 1998 to 29.6% in 1999 due to the lower margin classroom projects sold during 1999. Enviroplex's backlog of orders as of December 31, 1999 and 1998 was $12,626,000 and $1,468,000, respectively. (Backlog is not significant in MMMC's modular business or in McGrath-RenTelco's electronic business.) Depreciation on rental equipment in 1999 increased $2,918,000 (17%) over 1998 due to additional rental equipment purchased during 1999. The average modular rental equipment, at cost, increased $22,321,000 (11%) and average electronics rental equipment, at cost, increased $11,561,000 (20%) over 1998. Other direct costs of rental operations increased $894,000 (7%) over 1998 primarily due to increased maintenance and repair expenses of the modular fleet. Additionally, during 1998 as in the prior year, a significant number of school customers opted to include upfront charges in the rental rate resulting in higher amortization expense of these related upfront costs over the lease term in subsequent periods. Selling and administrative expenses in 1999 increased $883,000 (5%) over 1998. 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 a noncash compensation expense of $885,000. Interest expense in 1999 increased $280,000 (4%) over 1998 as a result of higher average borrowing levels in 1999 offset by a lower weighted average interest rate. The debt increase funded part of the significant rental equipment purchases made during 1999. Income before provision for taxes in 1999 decreased $1,952,000 (5%) from 1998 while net income before effect of the accounting change only decreased $62,000 (less than 1%) from 1998. The lower percentage decrease for net income before effect of the accounting change is due to the decrease in the minority interest in income of Enviroplex combined with a lower effective tax rate in 1999 of 38.1% compared to 39.1% in 1998 as more business is derived outside of California. 13
15 FISCAL YEARS 1998 AND 1997 California's Class Size Reduction Program (a law enacted in July 1996) provided for facility and operational funding for the reduction of classroom size to 20 pupils for kindergarten through third grade. Due to the anticipated increase in demand for the DSA classrooms at the time, MMMC increased its supply of the DSA classrooms resulting in significantly higher levels of sales and rentals to school districts in 1997 and 1998. In late 1997 and continuing into 1998, as the industry's capacity to produce classrooms increased and the school districts' demand for new classrooms decreased, school districts were more often able to purchase new classrooms directly from manufacturers rather than from MMMC. MMMC's sales of new classrooms declined from $18,795,000 in 1997 to $10,187,000 in 1998. Included in the 1998 MMMC classroom sales is one project that accounted for 60% of the sales volume. Rental revenues increased $10,279,000 (17%) over 1997, with MMMC contributing $6,443,000 and McGrath-RenTelco contributing $3,836,000 of the increase. The significant rental revenue increase by MMMC resulted from the large quantities of equipment shipped to schools in the latter part of 1997. The McGrath-RenTelco rental revenue increase resulted from additional market penetration including telemarketing and regional sales efforts on the East Coast. As of December 31, 1998, rental equipment on rent increased for MMMC by $17,760,000 and for McGrath-RenTelco by $7,759,000 compared to a year earlier. Rental related services revenues in 1998 increased $1,250,000 (12%), over 1997. Gross margins on these services increased from 38.8% in 1997 to 43.4% in 1998. Sales in 1998 declined $10,977,000 (18%) due to fewer new classroom sales to school districts by MMMC. Enviroplex and McGrath-RenTelco sales volumes each declined slightly from 1997 and added to MMMC's expected decline in new classroom sales. The single largest sale was for $6,110,000 by MMMC to a school district during the third quarter of 1998 consisting of new classrooms of which 69% of the total contract was for demolition of existing buildings, site improvements and installation of the new classrooms. This sale was unique as to the volume of new classrooms sold in conjunction with the amount of site work performed and is not likely to be repeated in the future. Depreciation on rental equipment in 1998 increased $2,504,000 (17%) over 1997 due to additional rental equipment purchased during 1998. Average rental equipment, at cost, during 1998 increased 19%. Other direct costs of rental operations increased $3,015,000 (29%) over 1997 primarily due to increased maintenance and repair expenses of the modular fleet. Additionally, during 1997, a significant number of school customers opted to include upfront charges in the rental rate resulting in higher amortization expense of these related upfront costs over the lease term in the subsequent periods. Selling and administrative expenses in 1998 increased $263,000 (2%) over 1997. During 1998, the primary factors contributing to increased selling and administrative expenses were higher expenses for facility and equipment depreciation ($585,000) and personnel and benefit costs ($539,000) offset by fewer bad debt write-offs ($220,000), fewer legal and consulting expenses ($214,000), and eliminated facility rental, cleanup and moving expenses ($253,000). Interest expense in 1998 increased $2,256,000 (55%) over 1997 as a result of higher average borrowing levels in 1998. The debt increase funded in part the rental equipment purchases made during 1998. Income before provision for taxes in 1998 decreased $469,000 (1%) from 1997 while net income decreased $150,000 from 1997. Basic earnings per share increased 6% from $1.60 in 1997 to $1.69 in 1998 due to fewer shares outstanding. LIQUIDITY AND CAPITAL RESOURCES This section contains statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. See "General" above for cautionary information with respect to such forward-looking statements. In 1999, as in prior years, the Company's primary use of cash has been investing in its growth by purchasing additional rental inventory of relocatable modular offices and electronic test and measurement instruments to satisfy 14
16 customer requirements. During 1999, the Company purchased $47,310,000 of equipment to add to its inventory available for rent to customers. During the last three years, this growth in the rental inventory has been financed by cash flow from operations, private placement of long-term debt and bank borrowings. The Company's operations produced a positive cash flow of $53,235,000 during 1999 as compared to $41,967,000 and $41,405,000 during 1998 and 1997 respectively. In July, 1998, the Company completed a private placement of $40,000,000 of 6.44% Senior Notes due in 2005. Interest on the notes is due semi-annually in arrears and the principal is due in five equal installments commencing on July 15, 2001 (and thus, the outstanding balance at December 31, 1999, was $40,000,000). Bank borrowings have long been a source of funds for the Company's purchase of rental equipment. As the Company's assets have grown, it has been able to negotiate increases in the borrowing limit under its general bank lines of credit, which limit is currently $100,000,000. The Company increased its borrowings under this line by $13,300,000 during the year, and at December 31, 1999, the outstanding borrowings under this line were $70,300,000. In addition to the $100,000,000 line of credit, the Company has a $5,000,000 committed line of credit facility related to its cash management services. The Company had a total liabilities to equity ratio of 2.12 to 1 and 1.64 to 1 as of December 31, 1999 and 1998, respectively; and the debt (notes payable) to equity ratio was 1.16 to 1 and 0.92 to 1 at December 31, 1999 and 1998, respectively. Although no assurance can be given, the Company believes it will continue to be able to negotiate higher limits on its general bank lines of credit adequate to meet capital requirements not otherwise met by operational cash flows and long term debt. In addition to increasing its rental inventory assets, the Company also used $2,253,000 to add to its other fixed assets, 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 17, 2000, 1,000,000 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. <TABLE> <CAPTION> DIVIDEND AND REPURCHASE SUMMARY - ------------------------------------------------------------------------------------------- (dollar and share amounts in thousands, except per share data) Year Ended December 31, ----------------------------------- Three Year 1999 1998 1997 Totals ------- ------- ------- ------- <S> <C> <C> <C> <C> Cash Dividends Paid $ 6,134 $ 5,386 $ 4,641 $16,161 Shares Repurchased 1,550 620 502 2,672 Average Price Per Share $ 18.21 $ 19.77 $ 20.99 $ 19.09 Aggregate Purchase Price $28,212 $12,247 $10,545 $51,004 Total Cash Returned to Shareholders $34,346 $17,633 $15,186 $67,165 - ------------------------------------------------------------------------------------------- </TABLE> Please see the Company's Consolidated Statements of Cash Flows on page 21 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. The Company believes that its needs for working capital and capital expenditures through 2000 and beyond will be adequately met by operational cash flow, bank borrowings and long-term debt. The Company believes that it has the ability 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. 15
17 MARKET RISK This section contains statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. See "General" above for cautionary information with respect to such forward-looking statements. The Company currently has no material derivative financial instruments which expose the Company to significant market risk. The Company is exposed to cash flow and fair value risk due to changes in interest rates with respect to its notes payable. The table below presents principal cash flows and related weighted average interest rates of the Company's notes payable at December 31, 1999 by expected maturity dates. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------ (dollar amounts in thousands) Year Ended December 31, -------------------------------------------------------------- 2005 and Fair 2000 2001 2002 2003 2004 Thereafter Total Value ----- ------- ------- ------ ------ ---------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Fixed Rate $ -- $ 8,000 $ 8,000 $8,000 $8,000 $8,000 $40,000 $40,000 Average Interest Rate 6.44% 6.44% 6.44% 6.44% 6.44% 6.44% 6.44% Variable Rate $ -- $17,575 $52,725 $ -- $ -- $ -- $70,300 $70,300 Average Interest Rate 7.11% 7.11% 7.11% -- -- 7.11% -- - ------------------------------------------------------------------------------------------------------------------ </TABLE> YEAR 2000 The Company experienced no disruption in operations due to the transition to the Year 2000. A number of major system projects were initiated in 1997, 1998 and 1999 to upgrade core computer hardware, networking and software systems. These projects replaced existing systems as opposed to simply fixing Year 2000 problems; they are now complete and operational. Capitalized expenditures for this process totaled $1,850,000 for the period January 1, 1997 to December 31, 1999 for external labor, hardware and software costs. This amount includes the cost of new software applications installed as a result of strategic replacement projects. Prior to December 31, 1998, the Company did not separately track the internal costs incurred related to Year 2000 issues or the system conversions described above. Such internal costs are principally the related payroll costs for its information systems personnel and are not necessarily considered incremental costs to the Company. Effective January 1, 1999, the Company began to track and capitalize these internal costs in accordance with Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." During 1999, the Company capitalized internal personnel costs of $300,000 for software development. There has been no material change in total cost estimates related to Year 2000 remediation efforts. There are no known trends or deferred capital spending related to Year 2000 issues that are likely to affect the Company's results of operations. IMPACT OF INFLATION Although the Company cannot precisely determine the effect of inflation, from time to time it has experienced increases in costs of rental equipment, manufacturing costs, operating expenses and interest. Because most of its rentals are relatively short term, the Company has generally been able to pass on such increased costs through increases in rental rates and selling prices. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. <TABLE> <CAPTION> INDEX PAGE - ----- ---- <S> <C> Report of Independent Public Accountants 17 Consolidated Financial Statements Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997 18 Consolidated Balance Sheets as of December 31, 1999, 1998 and 1997 19 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 20 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 21 Notes to Consolidated Financial Statements 22 </TABLE> 16
18 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, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of McGrath RentCorp as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. As explained in Note 2 to the consolidated financial statements, the Company changed its method of accounting for rental revenue whereby all rental revenues are recognized ratably over the month on a daily basis. San Francisco, California February 11, 2000 ARTHUR ANDERSEN LLP 17
19 MCGRATH RENTCORP CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Year Ended December 31, ------------------------------------------ (in thousands, except per share amounts) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> REVENUES Rental $ 78,754 $ 71,967 $ 61,688 Rental Related Services 13,043 11,528 10,278 --------- --------- --------- Rental Operations 91,797 83,495 71,966 Sales 37,039 51,044 62,021 Other 1,126 889 989 --------- --------- --------- Total Revenues 129,962 135,428 134,976 --------- --------- --------- COSTS AND EXPENSES Direct Costs of Rental Operations Depreciation 19,780 16,862 14,358 Rental Related Services 7,153 6,531 6,287 Other 14,284 13,390 10,375 --------- --------- --------- Total Direct Costs of Rental Operations 41,217 36,783 31,020 Cost of Sales 26,078 35,189 42,550 --------- --------- --------- Total Costs 67,295 71,972 73,570 --------- --------- --------- Gross Margin 62,667 63,456 61,406 Selling and Administrative 17,103 16,220 15,957 --------- --------- --------- Income from Operations 45,564 47,236 45,449 Interest 6,606 6,326 4,070 --------- --------- --------- Income before Provision for Income Taxes 38,958 40,910 41,379 Provision for Income Taxes 14,874 16,010 16,323 --------- --------- --------- Income before Minority Interest 24,084 24,900 25,056 Minority Interest in Income of Subsidiary 251 1,005 1,011 --------- --------- --------- Income before Effect of Accounting Change 23,833 23,895 24,045 Cumulative Effect of Accounting Change, net of tax benefit of $883 (1,367) -- -- --------- --------- --------- Net Income $ 22,466 $ 23,895 $ 24,045 ========= ========= ========= Earnings Per Share: Basic Income before cumulative effect of accounting change $ 1.80 $ 1.69 $ 1.60 Cumulative effect of accounting change, net of tax (0.10) -- -- --------- --------- --------- Net Income $ 1.70 $ 1.69 $ 1.60 ========= ========= ========= Diluted Income before cumulative effect of accounting change $ 1.78 $ 1.67 $ 1.58 Cumulative effect of accounting change, net of tax (0.10) -- -- --------- --------- --------- Net Income $ 1.68 $ 1.67 $ 1.58 ========= ========= ========= Shares Used in Per Share Calculation: Basic 13,235 14,163 14,982 Diluted 13,383 14,349 15,181 Pro Forma Amounts Assuming Accounting Change had been in effect during 1998 and 1997 Net Income $ 23,833 $ 23,697 $ 23,816 Earnings Per Share - Basic $ 1.80 $ 1.67 $ 1.59 Earnings Per Share - Diluted $ 1.78 $ 1.65 $ 1.57 - --------------------------------------------------------------------------------------------------------- </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 18
20 MCGRATH RENTCORP CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> December 31, -------------------------- (in thousands) 1999 1998 - --------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Cash $ 490 $ 857 Accounts Receivable, less allowance for doubtful accounts of $650 in 1999 and 1998 25,095 21,811 Rental Equipment, at cost: Relocatable Modular Offices 238,449 216,414 Electronic Test Instruments 72,832 66,573 --------- --------- 311,281 282,987 Less Accumulated Depreciation (94,103) (82,959) --------- --------- Rental Equipment, net 217,178 200,028 --------- --------- Land, at cost 19,303 18,953 Buildings, Land Improvements, Equipment and Furniture, at cost, less accumulated depreciation of $5,116 in 1999 and $3,858 in 1998 31,668 31,460 Prepaid Expenses and Other Assets 3,988 5,567 --------- --------- Total Assets $ 297,722 $ 278,676 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Notes Payable $ 110,300 $ 97,000 Accounts Payable and Accrued Liabilities 24,811 22,964 Deferred Income 9,511 5,574 Minority Interest in Subsidiary 2,836 2,584 Deferred Income Taxes 54,861 45,160 --------- --------- Total Liabilities 202,319 173,282 --------- --------- Shareholders' Equity: Common Stock, no par value -- Authorized -- 40,000 shares Issued and Outstanding -- 12,546 shares in 1999 and 13,970 shares in 1998 8,755 8,138 Retained Earnings 86,648 97,256 --------- --------- Total Shareholders' Equity 95,403 105,394 --------- --------- Total Liabilities and Shareholders' Equity $ 297,722 $ 278,676 ========= ========= - --------------------------------------------------------------------------------------- </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 19
21 MCGRATH RENTCORP CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------- Common Stock Total ----------------------- Retained Shareholders' (in thousands, except per share amounts) Shares Amount Earnings Equity - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> BALANCE AT DECEMBER 31, 1996 14,820 $ 7,161 $ 81,647 $ 88,808 Net Income -- -- 24,045 24,045 Repurchase of Common Stock (502) (507) (10,038) (10,545) Noncash Compensation 28 497 -- 497 Exercise of Stock Options 176 606 -- 606 Dividends Declared of $0.32 Per Share -- -- (4,765) (4,765) - ----------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 14,522 7,757 90,889 98,646 Net Income -- -- 23,895 23,895 Repurchase of Common Stock (620) (340) (11,907) (12,247) Noncash Compensation 37 485 -- 485 Exercise of Stock Options 31 236 -- 236 Dividends Declared of $0.40 Per Share -- -- (5,621) (5,621) - ----------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 13,970 8,138 97,256 105,394 Net Income -- -- 22,466 22,466 Repurchase of Common Stock (1,550) (1,381) (26,831) (28,212) Noncash Compensation 35 1,343 -- 1,343 Exercise of Stock Options 91 655 -- 655 Dividends Declared of $0.48 Per Share -- -- (6,243) (6,243) - ----------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1999 12,546 $ 8,755 $ 86,648 $ 95,403 - ----------------------------------------------------------------------------------------------------------- </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 20
22 MCGRATH RENTCORP CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Year Ended December 31, ---------------------------------------- (in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Cash Flow from Operating Activities: Net Income $ 22,466 $ 23,895 $ 24,045 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 21,474 18,309 15,274 Cumulative Effect of Accounting Change, net of tax 1,367 -- -- Noncash Compensation 1,343 485 497 Gain on Sale of Rental Equipment (5,971) (5,404) (6,622) Change In: Accounts Receivable (3,284) (17) (1,874) Prepaid Expenses and Other Assets 1,579 991 (4,161) Accounts Payable and Accrued Liabilities 1,990 (3,850) 13,166 Deferred Income 1,687 (1,354) 1,702 Deferred Income Taxes 10,584 8,912 (622) -------- -------- -------- Net Cash Provided by Operating Activities 53,235 41,967 41,405 -------- -------- -------- Cash Flow from Investing Activities: Purchase of Rental Equipment (47,310) (51,159) (62,277) Purchase of Land, Buildings, Land Improvements, Equipment and Furniture (2,253) (4,041) (10,594) Proceeds from Sale of Land, Buildings and Land Improvements -- 2,190 -- Proceeds from Sale of Rental Equipment 16,352 13,759 17,748 -------- -------- -------- Net Cash Used in Investing Activities (33,211) (39,251) (55,123) -------- -------- -------- Cash Flow from Financing Activities: Net Borrowings (Repayments) under Bank Lines of Credit 13,300 (25,000) 28,150 Borrowings under Private Placement -- 40,000 -- Net Proceeds from the Exercise of Stock Options 655 236 606 Repurchase of Common Stock (28,212) (12,247) (10,545) Payment of Dividends (6,134) (5,386) (4,641) -------- -------- -------- Net Cash Provided by (Used in) Financing Activities (20,391) (2,397) 13,570 -------- -------- -------- Net Increase (Decrease) in Cash (367) 319 (148) Cash Balance, Beginning of Period 857 538 686 -------- -------- -------- Cash Balance, End of Period $ 490 $ 857 $ 538 ======== ======== ======== Interest Paid During the Period $ 6,473 $ 5,407 $ 4,010 ======== ======== ======== Income Taxes Paid During the Period $ 4,290 $ 7,098 $ 16,945 ======== ======== ======== Dividends Declared but not yet Paid $ 1,506 $ 1,397 $ 1,162 ======== ======== ======== - ------------------------------------------------------------------------------------------------------------ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 21
23 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION AND BUSINESS McGrath RentCorp is a California corporation organized in 1979. McGrath RentCorp and its majority owned subsidiary, Enviroplex, Inc. ("Enviroplex"), collectively referred to herein as the "Company", manufactures, rents and sells relocatable modular offices and rents and sells communications, fiber optic and electronic test equipment with related accessories primarily in California and Texas. The Company's corporate offices are located in Livermore, California. In addition to the corporate offices, certain branch functions are conducted from this facility. Under the trade name "Mobile Modular Management Corporation", the Company rents and sells modular equipment and related accessories from two branch offices located in California and one located in Texas. The Company purchases the modulars from various manufacturers who build them to the Company's design specifications. Although Mobile Modular Management Corporation's primary emphasis is on rentals, sales of modulars occur routinely and can fluctuate quarter to quarter and from year to year depending on customer demands and requirements. Under the trade name "McGrath-RenTelco", the Company rents and sells electronic instruments from Livermore, California and Richardson, Texas. Engineers, scientists, technicians and field-service personnel use these instruments in evaluating the performance of their own electrical and electronic equipment, developing products, controlling manufacturing processes and in-field service applications. These instruments are rented primarily to electronics, communications, network systems, industrial, research and aerospace companies. The majority of McGrath-RenTelco's rental inventory consists of instruments manufactured by Hewlett-Packard and Tektronix. McGrath RentCorp owns 73.2% of Enviroplex, a California corporation organized in 1991. Enviroplex manufactures portable classrooms built to the requirements of the California Division of the State Architect ("DSA") and sells primarily to school districts. Enviroplex conducts its sales and manufacturing operations from one facility located in Stockton, California. The rental and sale of modulars to public school districts for use as portable classrooms, restroom buildings and administrative offices for kindergarten through grade twelve (K-12) are a significant portion of the Company's revenues. School business comprised approximately 34%, 45% and 52% of the Company's consolidated rental and sales revenues for 1999, 1998 and 1997, 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 Rental revenue is recognized under the "operating method" of accounting for the majority of leases. 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 period were recorded as deferred income. The new method of recognizing revenue was adopted in response to the Security and Exchange Commission's 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." 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. The pro forma amounts shown on the consolidated statements of income have been adjusted as if the new method of revenue recognition had been in effect for all periods presented. Rental related services revenue is primarily associated with relocatable modular office leases and consists of billings to customers for delivery, installation, modifications, skirting, additional site related work, and return delivery and dismantle. Revenue related to these services is recognized in the period the services are performed and accepted. 22
24 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Sales revenue is recognized upon delivery of the equipment to the customer. Certain leases meeting the requirements of Statement of Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases," are accounted for as sales type leases. For these leases, sales revenue and the related accounts receivable are recognized upon execution of the 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). DEPRECIATION AND MAINTENANCE Rental equipment, buildings, land improvements, equipment and furniture are depreciated on a straight-line basis for financial reporting purposes and on an accelerated basis for income tax purposes. The costs of major refurbishment of relocatable modular offices are capitalized to the extent the refurbishment significantly improves the quality and adds value or life to the equipment. Land improvements consist of development costs incurred to build storage and maintenance facilities at each of the relocatable modular branch offices. The following estimated useful lives and residual values are used for financial reporting purposes: Rental equipment: <TABLE> <S> <C> Relocatable modular offices 7 to 18 years, 0% to 18% residual value Electronic test instruments 5 to 8 years, no residual value Buildings, land improvements, equipment and furniture 5 to 50 years, no residual value </TABLE> Maintenance and repairs are expensed as incurred. OTHER DIRECT COSTS OF RENTAL OPERATION Other direct costs of rental operations primarily relate to costs associated with relocatable modular offices and include equipment supplies and repairs, direct labor, amortization of lease costs included in the rental rate, property and liability insurance, property taxes, and business and license fees. WARRANTY SERVICE COSTS Sales of new relocatable modular offices, electronic test equipment and related accessories not manufactured by the Company are typically covered by warranties provided by the manufacturer of the products sold. The Company provides limited 90-day warranties for certain sales of used rental equipment and a one-year warranty on equipment manufactured by Enviroplex. Although the Company's policy is to provide reserves for warranties when required for specific circumstances, the Company has not found it necessary to establish such reserves to date. INCOME TAXES Provision has been made for deferred income taxes based upon the amount of taxes payable in future years, after considering changes in tax rates and other statutory provisions that will be in effect in those years (see Note 6). FAIR VALUE OF FINANCIAL INSTRUMENTS The Company believes that the carrying amounts of its financial instruments (cash and notes payable) approximate fair value. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions in determining reported amounts of assets 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. 23
25 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) EARNINGS PER SHARE Basic earnings per share ("EPS") is computed as net income divided by the weighted average number of shares of common stock outstanding for the reported period, excluding the dilutive effects of stock options and other potentially dilutive securities. Diluted EPS is computed as net income divided by the weighted average number of shares outstanding of common stock and common stock equivalents for the reported period. Common stock equivalents result from dilutive stock options computed using the treasury stock method with the average share price for the reported period. The weighted average number of dilutive options outstanding at December 31, 1999, 1998 and 1997 were 147,789, 186,624 and 199,215, 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. 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 potential credit losses is maintained. Typically, most customers are established companies or are publicly funded entities located in California or Texas. Although no one customer accounts for more than 10% of the Company's consolidated revenues, credit risk exists in trade accounts receivable primarily due to the significant amount of business transacted with 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: <TABLE> <CAPTION> - ------------------------------------------------------------------------------- (in thousands) December 31, ---------------------- 1999 1998 ------- ------- <S> <C> <C> Gross minimum lease payments receivable $ 6,992 $ 5,935 Less - unearned interest (1,253) (1,246) ------- ------- Net investment in sales type lease receivables $ 5,739 $ 4,689 - ------------------------------------------------------------------------------- </TABLE> 24
26 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) As of December 31, 1999, the future minimum lease payments to be received in 2000 and thereafter are as follows: <TABLE> <CAPTION> - ----------------------------------------------------- (in thousands) Year Ended December 31, <S> <C> 2000 $ 4,460 2001 1,471 2002 642 2003 265 2004 101 2005 and thereafter 53 -------- Total minimum future lease payments $ 6,992 - ----------------------------------------------------- </TABLE> 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, 1999 was $40,000,000. Among other restrictions, the agreement requires (i) the Company to maintain a minimum net worth of $80,000,000 plus 25% of all net income generated subsequent to June 30, 1998, less 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, 1999 is $73,855,000), (ii) a fixed coverage charge of not less than 2.0 to 1.0, (iii) a rolling fixed charges coverage ratio of not less than 1.5 to 1.0, and (iv) senior debt not to exceed 275% of consolidated net worth and consolidated total debt not to exceed 300% of consolidated net worth. The Company maintains an unsecured line of credit agreement, as amended, (the "Agreement") with its banks which expires on June 30, 2001 and permits it to borrow up to $100,000,000 of which $70,300,000 was outstanding as of December 31, 1999. 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 $75,000,000 plus 50% of all net income generated subsequent to September 30, 1999 plus 90% of any new stock issuance proceeds (restricted equity at December 31, 1999 is $77,990,000), (ii) a debt-to-equity ratio (excluding deferred income taxes) of not more than 3 to 1, (iii) interest coverage (income from operations compared to interest expense) of not less than 2 to 1 and (iv) debt service coverage (earnings before interest, taxes, depreciation and amortization compared to the following year's pro forma debt service) of not less than 1.15 to 1.0. If the Company does not amend or renegotiate the present Agreement for an additional time period prior to its expiration date, the principal amount outstanding at that time will be converted to a two-year term loan with principal due and payable in eight (8) consecutive quarterly installments. In addition to the $100,000,000 unsecured line of credit, the Company has a $5,000,000 committed line of credit facility (at prime rate) related to its cash management services of which none was outstanding as of December 31, 1999. This committed line related to its cash management services will expire on June 30, 2000. 25
27 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The following information relates to the lines of credit for each of the following periods: <TABLE> <CAPTION> - ----------------------------------------------------------------------------- (dollar amounts in thousands) Year Ended December 31, ------------------------------ 1999 1998 ----------- ----------- <S> <C> <C> Maximum amount outstanding $ 70,300 $ 103,500 Average amount outstanding $ 62,646 $ 79,326 Weighted average interest rate 6.08% 6.41% Effective interest rate at end of period 7.11% 6.37% Prime interest rate at end of period 8.50% 7.75% - ----------------------------------------------------------------------------- </TABLE> NOTE 6. INCOME TAXES The provision (benefit) for income taxes is comprised of the following: <TABLE> <CAPTION> - ---------------------------------------------------------------------- (in thousands) Current Deferred Total -------- -------- -------- <S> <C> <C> <C> Year Ended December 31, 1999 Federal $ 3,067 $ 8,972 $ 12,039 State 1,223 729 1,952 -------- -------- -------- $ 4,290 $ 9,701 $ 13,991 -------- -------- -------- 1998 Federal $ 5,526 $ 7,736 $ 13,262 State 1,572 1,176 2,748 -------- -------- -------- $ 7,098 $ 8,912 $ 16,010 -------- -------- -------- 1997 Federal $ 14,075 $ (809) $ 13,266 State 2,870 187 3,057 -------- -------- -------- $ 16,945 $ (622) $ 16,323 - ---------------------------------------------------------------------- </TABLE> 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: <TABLE> <CAPTION> - --------------------------------------------------------------------------- Year Ended December 31, --------------------------------- 1999 1998 1997 --------------------------------- <S> <C> <C> <C> Federal statutory rate 35.00% 35.00% 35.00% State taxes, net of federal benefit 3.46 4.37 4.80 Other (0.35) (0.24) (0.35) ----- ----- ----- 38.11% 39.13% 39.45% - --------------------------------------------------------------------------- </TABLE> 26
28 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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: <TABLE> <CAPTION> - -------------------------------------------------------------------------------- (in thousands) Year Ended December 31, ------------------------ 1999 1998 -------- -------- <S> <C> <C> Excess of tax over book depreciation $ 58,112 $ 51,417 State income taxes (3,333) (3,245) Accrued liabilities not currently deductible (73) (146) Revenue deferred for financial reporting purposes (2,753) (1,598) Other, net 2,908 (1,268) -------- -------- $ 54,861 $ 45,160 - -------------------------------------------------------------------------------- </TABLE> NOTE 7. COMMON STOCK AND STOCK OPTIONS The Company adopted a 1998 Stock Option Plan (the "1998 Plan"), effective March 9, 1998, under which 2,000,000 shares are reserved for the grant of options to purchase common stock to directors, officers, key employees and advisors of the Company. The plan provides for the award of options at a price not less than the fair market value of the stock as determined by the Board of Directors on the date the options are granted. Under the 1998 Plan, 345,500 options have been granted with exercise prices ranging from $18.25 to $20.81. The 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, 1999, 1,654,500 options remain 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. Under the 1987 Plan, options have been granted with an exercise price of $3.06, $6.94 and $10.75 per share. The options vest over 9.3 years and expire 10 years after grant. The 1987 Plan expired in December 1997 and no further options can be issued under this plan. Option activity and options exercisable including weighted average exercise price for the three years ended December 31, 1999 are as follows: <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, -------------------------------------------------------------------------------- 1999 1998 1997 ---------------------- --------------------- ----------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- <S> <C> <C> <C> <C> <C> <C> Options outstanding at January 1, 541,122 13.83 364,672 8.57 540,452 6.90 Options granted during the year 103,500 18.25 242,000 20.81 -- -- Options exercised during the year (91,250) 7.18 (31,282) 7.55 (175,780) 3.44 Options terminated during the year (36,850) 18.74 (34,268) 12.93 -- -- ------- ------- ------- Options outstanding at December 31, 516,522 15.53 541,122 13.85 364,672 8.57 ------- ------- ------- Options exercisable at December 31, 172,407 13.22 171,877 8.55 153,362 7.45 - -------------------------------------------------------------------------------------------------------------------------- </TABLE> 27
29 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 1999: <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable ------------------------------------ ----------------------------- Weighted Average Weighted Number Remaining Average Number Weighted Outstanding Contractual Exercise Exercisable Average Exercise Price at 12/31/99 Life (Years) Price at 12/31/99 Exercise Price -------------- ----------- ------------ ----- ----------- -------------- <S> <C> <C> <C> <C> <C> 6.94 82,172 1.75 6.94 63,107 6.94 10.75 131,350 6.50 10.75 42,600 10.75 18.25 103,500 9.92 18.25 -- 18.25 20.25 15,500 8.50 20.25 12,000 20.25 20.81 174,000 8.25 20.81 52,200 20.81 21.69 10,000 8.67 21.69 2,500 21.69 ------- ------- 6.94 - 21.69 516,522 7.12 15.53 172,407 13.22 - --------------------------------------------------------------------------------------------- </TABLE> 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 $885,000 is included in the Company's consolidated statements of income in selling and administrative expense. 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 1999 and 1998 grants are as follows: <TABLE> <CAPTION> - --------------------------------------------------------- Year Ended December 31, ----------------------- 1999 1998 ---- ---- <S> <C> <C> Risk-free interest rates 6.3% 6.5% Expected dividend yields 2.7% 2.0% Expected volatility 27.8% 27.1% Expected option life (in years) 7.5 7.5 - --------------------------------------------------------- </TABLE> The fair value of the options granted subsequent to 1995 are $2,422,000, $2,249,000 and $532,000 at December 31, 1999, 1998 and 1997, respectively. 28
30 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The following pro forma net income and earnings per share data are computed as if compensation cost for the Stock Option Plan had been determined consistent with SFAS 123: <TABLE> <CAPTION> - -------------------------------------------------------------------------------- (in thousands, except per share amounts) Year Ended December 31, ------------------------------------------- 1999 1998 1997 -------- -------- -------- <S> <C> <C> <C> Net Income $ 22,466 $ 23,895 $ 24,045 Pro Forma net income 22,043 23,583 24,005 EPS Basic 1.70 1.69 1.60 Diluted 1.68 1.67 1.58 Pro Forma EPS Basic 1.67 1.67 1.60 Diluted 1.65 1.64 1.58 - -------------------------------------------------------------------------------- </TABLE> In 1985, the Company established an Employee Stock Ownership Plan, as amended. Under the terms of the plan, the Company makes annual contributions in the form of cash or common stock of the Company to a trust for the benefit of eligible employees. The amount of the contribution is determined annually by the Board of Directors. A cash contribution of $750,000 was approved in each year for 1999, 1998 and 1997. In 1991, the Board of Directors adopted a Long-Term Stock Bonus Plan (the "LTB Plan") under which 400,000 shares of common stock are reserved for grant to officers and key employees. The stock bonuses granted under the LTB Plan are evidenced by written Stock Bonus Agreements covering specified performance periods. The LTB Plan provides for the grant of stock bonuses upon achievement of certain financial goals during a specified period. Stock bonuses earned under the LTB Plan vest over 5 years from the grant date contingent on the employee's continued employment with the Company. As of December 31, 1999, 198,559 shares of common stock have been granted, of which 137,211 shares are vested. Future grants of 35,364 shares of common stock are authorized by the Board of Directors to be issued under the LTB Plan in the event the Company reaches the highest level of achievement. The LTB Plan expired in December 1999 and no further grants of common stock can occur under the LTB Plan. Compensation expense for 1999, 1998 and 1997 under these plans was $458,000, $485,000 and $497,000 respectively, and is based on a combination of the anticipated shares to be granted, the amount of vested shares previously issued and fluctuations in market price of the Company's common stock. As of December 31, 1999, 1998, and 1997, the unvested shares were 61,348, 64,457 and 57,709, respectively, with the related weighted average grant-date fair value of these unvested shares of $20.23, $20.42 and $18.10 per share, respectively. 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 1997, the Company repurchased 502,408 shares of common stock for an aggregate repurchase price of $10,545,000 or an average price of $20.99 per share. In 1998, the Company repurchased 619,550 shares of common stock for an aggregate repurchase price of $12,247,000 or an average price of $19.77 per share. 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. As of December 31, 1999, 685,940 shares remain authorized for repurchase. NOTE 8. BUSINESS SEGMENTS As of January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company defined its business segments based on the nature of operations for the purpose of reporting under SFAS 131. The Company's three reportable segments are Mobile Modular Management 29
31 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Corporation (Modulars), McGrath-RenTelco (Electronics), and Enviroplex. The operations of each of these segments is described in Note 1, Organization and Business, and the accounting policies of the segments are described in Note 2, Significant Accounting Policies. As a separate corporate entity, Enviroplex revenues and expenses are separately maintained from Modulars and Electronics. Excluding interest expense, allocations of revenues and expenses not directly associated with Modulars or Electronics are generally allocated to these segments based on their pro-rata share of direct revenues. Interest expense is allocated between Modulars and Electronics based on their pro-rata share of average rental equipment, accounts receivable and customer security deposits. The Company does not report total assets by business segment. Summarized financial information for the years ended December 31, 1999, 1998, and 1997 for the Company's reportable segments is shown in the following table: <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------- (in thousands) Modulars Electronics Enviroplex Consolidated -------- ----------- ---------- ------------ <S> <C> <C> <C> <C> YEAR ENDED DECEMBER 31, 1999 Rental Operations Revenues $ 64,164 $27,633 $ -- $ 91,797 Sales and Other Revenues 16,600 10,415 11,150 38,165 Total Revenues 80,764 38,048 11,150 129,962 Depreciation on Rental Equipment 10,811 8,969 -- 19,780 Interest Expense (Income) 5,097 1,724 (215) 6,606 Income before Provision for Income Taxes 23,838 13,641 1,479 38,958 Rental Equipment Acquisitions 30,443 16,867 -- 47,310 Accounts Receivable, net (year-end) 11,334 9,691 4,070 25,095 Rental Equipment, at cost (year-end) 238,449 72,832 -- 311,281 1998 Rental Operations Revenues $ 58,964 $24,531 $ -- $ 83,495 Sales and Other Revenues 23,619 7,642 20,672 51,933 Total Revenues 82,583 32,173 20,672 135,428 Depreciation on Rental Equipment 9,398 7,464 -- 16,862 Interest Expense 4,802 1,505 19 6,326 Income before Provision for Income Taxes 23,133 11,875 5,902 40,910 Rental Equipment Acquisitions 28,970 22,189 -- 51,159 Accounts Receivable, net (year-end) 10,765 6,900 4,146 21,811 Rental Equipment, at cost (year-end) 216,414 66,573 -- 282,987 1997 Rental Operations Revenues $ 51,412 $20,554 $ -- $ 71,966 Sales and Other Revenues 34,178 7,545 21,287 63,010 Total Revenues 85,590 28,099 21,287 134,976 Depreciation on Rental Equipment 8,154 6,204 -- 14,358 Interest Expense 3,148 880 42 4,070 Income before Provision for Income Taxes 24,708 10,723 5,948 41,379 Rental Equipment Acquisitions 49,303 12,974 -- 62,277 Accounts Receivable, net (year-end) 10,449 6,567 4,778 21,794 Rental Equipment, at cost (year-end) 196,133 50,351 -- 246,484 - -------------------------------------------------------------------------------------------------- </TABLE> 30
32 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarterly financial information for each of the two years ended December 31, 1999 is summarized below: <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) 1999 ----------------------------------------------------------- First Second Third Fourth Year --------- -------- -------- -------- --------- <S> <C> <C> <C> <C> <C> OPERATIONS DATA Rental revenues $ 19,059 $ 19,019 $ 20,117 $ 20,559 $ 78,754 Total revenues 28,574 31,559 36,657 33,172 129,962 Gross margin 14,577 15,263 16,694 16,133 62,667 Income from operations 10,378 11,274 12,670 11,242 45,564 Income before income taxes 8,862 9,693 10,949 9,454 38,958 Income before effect of accounting change 5,420 5,798 6,636 5,979 23,833 Cumulative effect of accounting change, net of tax (1,367) -- -- -- (1,367) Net income 4,053 5,798 6,636 5,979 22,466 Earnings per share: Basic Income before cumulative effect of accounting change $ 0.39 $ 0.43 $ 0.51 $ 0.47 $ 1.80 Cumulative effect of accounting change, net of tax (0.10) -- -- -- (0.10) --------- -------- -------- -------- --------- Net Income $ 0.29 $ 0.43 $ 0.51 $ 0.47 $ 1.70 ========= ======== ======== ======== ========= Diluted Income before cumulative effect of accounting change $ 0.39 $ 0.43 $ 0.50 $ 0.47 $ 1.78 Cumulative effect of accounting change, net of tax (0.10) -- -- -- (0.10) --------- -------- -------- -------- --------- Net Income $ 0.29 $ 0.43 $ 0.50 $ 0.47 $ 1.68 ========= ======== ======== ======== ========= Dividends declared per share $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.48 ========= ======== ======== ======== ========= Shares used in per share calculation: Basic 13,820 13,403 13,067 12,649 13,235 Diluted 13,991 13,568 13,220 12,751 13,383 BALANCE SHEET DATA Rental equipment net $ 199,008 $205,797 $213,089 $217,178 $ 217,178 Total assets 274,776 286,700 292,889 297,722 297,722 Notes payable 101,450 102,900 108,700 110,300 110,300 Shareholders' equity 97,937 99,476 92,274 95,403 95,403 - ----------------------------------------------------------------------------------------------------------------------- </TABLE> 31
33 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (continued) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) 1998 ----------------------------------------------------------- First Second Third Fourth Year --------- -------- -------- -------- --------- <S> <C> <C> <C> <C> <C> OPERATIONS DATA Rental Revenues $ 16,981 $ 17,340 $ 18,385 $ 19,261 $ 71,967 Total revenues 27,350 33,475 44,478 30,125 135,428 Gross margin 13,565 15,863 18,680 15,348 63,456 Income from operations 9,860 12,024 14,120 11,232 47,236 Income before income taxes 8,409 10,441 12,434 9,626 40,910 Net income 4,968 5,974 7,088 5,865 23,895 Earnings per share: Basic $ 0.34 $ 0.42 $ 0.50 $ 0.42 $ 1.69 Diluted $ 0.34 $ 0.42 $ 0.50 $ 0.41 $ 1.67 Dividends declared per share $ 0.10 $ 0.10 $ 0.10 $ 0.10 $ 0.40 Shares used in per share calculation: Basic 14,436 14,122 14,062 13,996 14,163 Diluted 14,635 14,213 14,231 14,173 14,349 Pro forma amounts assuming accounting change had been in effect during 1998: Net income $ 4,941 $ 5,923 $ 6,988 $ 5,845 $ 23,697 Earnings per share: Basic $ 0.34 $ 0.42 $ 0.50 $ 0.42 $ 1.67 Diluted $ 0.34 $ 0.42 $ 0.49 $ 0.41 $ 1.65 BALANCE SHEET DATA Rental equipment, net $178,003 $186,883 $190,461 $200,028 $200,028 Total assets 256,968 266,575 274,932 278,676 278,676 Notes payable 97,747 103,500 100,000 97,000 97,000 Shareholders' equity 93,587 97,168 101,049 105,394 105,394 - ----------------------------------------------------------------------------------------------------------------------- </TABLE> ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated by reference to McGrath RentCorp's definitive Proxy Statement with respect to its Annual Shareholders' Meeting to be held May 31, 2000, which will be filed with the Securities and Exchange Commission by not later than May 1, 2000. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to McGrath RentCorp's definitive Proxy Statement with respect to its Annual Shareholders' Meeting to be held May 31, 2000, which will be filed with the Securities and Exchange Commission by not later than May 1, 2000. 32
34 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to McGrath RentCorp's definitive Proxy Statement with respect to its Annual Shareholders' Meeting to be held May 31, 2000, which will be filed with the Securities and Exchange Commission by not later than May 1, 2000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to McGrath RentCorp's definitive Proxy Statement with respect to its Annual Shareholders' Meeting to be held May 31, 2000, which will be filed with the Securities and Exchange Commission by not later than May 1, 2000. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Index of documents filed as part of this report: 1. The following Consolidated Financial Statements of McGrath RentCorp are included in Item 8. <TABLE> <CAPTION> PAGE OF THIS REPORT ----------- <S> <C> Report of Independent Public Accountants 17 Consolidated Financial Statements Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997 18 Consolidated Balance Sheets as of December 31, 1999 and 1998 19 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 20 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 21 Notes to Consolidated Financial Statements 22 </TABLE> 2. Financial Statement Schedules. None 3. Exhibits. See Index of Exhibits on page 35 of this report. (b) Reports on Form 8-K. None. 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. 33
35 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Date: March 17, 2000 MCGRATH RENTCORP by: /s/ Robert P. McGrath --------------------------- Robert P. McGrath Chairman of the Board and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES AS INDICATED. <TABLE> <CAPTION> NAME TITLE DATE ---- ----- ---- <S> <C> <C> /s/ William J. Dawson Director March 17, 2000 - -------------------------- William J. Dawson /s/ Robert C. Hood Director March 17, 2000 - -------------------------- Robert C. Hood /s/ Joan M. McGrath Director March 17, 2000 - -------------------------- Joan M. McGrath /s/ Robert P. McGrath Chairman of the Board and March 17, 2000 - -------------------------- Chief Executive Officer Robert P. McGrath /s/ Thomas J. Sauer Vice President - -------------------------- and Chief Financial Officer March 17, 2000 Thomas J. Sauer (Chief Accounting Officer) /s/ Delight Saxton Senior Vice President and Director March 17, 2000 - -------------------------- Delight Saxton /s/ Ronald H. Zech Director March 17, 2000 - -------------------------- Ronald H. Zech </TABLE> 34
36 MCGRATH RENTCORP INDEX TO EXHIBITS <TABLE> <CAPTION> NUMBER DESCRIPTION METHOD OF FILING - ------ ----------- ---------------- <S> <C> <C> 3.1 Articles of Incorporation of McGrath RentCorp Filed as exhibit 19.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988 (filed August 14, 1988), and incorporated herein by reference. 3.1.1 Amendment to Articles of Incorporation of Filed as exhibit 3.1 to the Company's Registration Statement on McGrath RentCorp Form S-1 (filed March 28, 1991 Registration No. 33-39633), and incorporated herein by reference. 3.1.2 Amendment to Articles of Incorporation of Filed as exhibit 3.1.2 to the Company's Annual Report on Form 10-K McGrath RentCorp for the year ended December 31, 1997 (filed March 31, 1998), incorporated herein by reference. 3.2 Amended and Restated By-Laws of McGrath Filed as exhibit 3.1 to the Company's Annual Report on Form 10-K for RentCorp the year ended December 31, 1990 (filed March 28, 1991), incorporated herein by reference. 3.2.1 Amendment of By-Laws of McGrath RentCorp Filed as exhibit 3.2.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (filed March 31, 1998), incorporated herein by reference. 3.2.2 Amendment of By-Laws of McGrath RentCorp Filed as exhibit 3.2.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (filed March 31, 1999, amended June 25, 1999), incorporated herein by reference. 3.2.3 Amendment of By-Laws of McGrath RentCorp Filed as exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (filed May 14, 1999, amended June 25, 1999) and incorporated herein by reference. 3.2.4 Amendment of By-Laws of McGrath RentCorp Filed herewith. 4.1 Amended and Restated Credit Agreement Filed as exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (filed August 1, 1997), and incorporated herein by reference. 4.1.1 First Amendment to the Restated Credit Filed as exhibit 4.1.1 to the Company's Annual Report on Form 10-K Agreement for the year ended December 31, 1997 (filed March 31, 1998), incorporated herein by reference. 4.1.2 Second Amendment to the Restated Credit Filed as exhibit 4.1.2 to the Company's Annual Report on Form 10-K Agreement for the year ended December 31, 1997 (filed March 31, 1998), incorporated herein by reference. 4.1.3 Third Amendment to the Restated Credit Filed as exhibit 4.1 to the Company's Quarterly Report on Form 10-Q Agreement for the quarter ended March 31, 1998 (filed May 13, 1998), incorporated herein by reference. 4.1.4 Facility Reduction Letter for Restated Credit Filed as exhibit 4.1 to the Company's Quarterly Report on Form 10-Q Agreement for the quarter ended September 30, 1998 (filed November 12, 1998), incorporated herein by reference. 4.1.5 Fourth Amendment to the Restated Credit Filed as exhibit 4.1 to the Company's Quarterly Report on Form 10-Q Agreement for the quarter ended March 31, 1999 (filed May 14, 1999, amended June 25, 1999) and incorporated herein by reference. 4.1.6 Amended and Restated Credit Agreement Filed as exhibit 4.1 to the company's Quarterly Report on Form 10-Q June, 1999 for the quarter ended June 30, 1999 (filed August 11, 1999) and incorporated herein by reference. 4.1.7 First Amendment to the Restated Credit Filed herewith. Agreement June, 1999 4.2 Note Purchase Agreement Filed as exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (filed November 12, 1998), and incorporated herein by reference. 4.2.1 Schedule of Notes with Sample Note Filed as exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (filed August 11, 1998), and incorporated herein by reference. 10.1 The McGrath RentCorp 1987 Incentive Stock Filed as exhibit 19.3 to the Company's Quarterly Report on Form 10-Q Option Plan for the quarter ended June 30, 1988 (filed August 14, 1988), and incorporated herein by reference. 10.1.1 Exemplar of the Form of the Incentive Stock Filed as exhibit 19.3 to the Company's Quarterly Report on Form 10-Q Option Agreement for the quarter ended June 30, 1988 (filed August 14, 1988), and incorporated herein by reference. 10.2 The 1998 Stock Option Plan Filed as exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (filed November 12, 1998), and incorporated herein by reference. </TABLE> 35
37 <TABLE> <S> <C> <C> 10.2.1 Exemplar of Incentive Stock Option for Filed as exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for Employees Under the 1998 Stock Option Plan the quarter ended September 30, 1998 (filed November 12, 1998), and incorporated herein by reference. 10.2.2 Exemplar of Non-Qualified Stock Option for Filed as exhibit 10.3 to the Company's Quarterly Report on Form 10-Q Directors under the 1998 Stock Option Plan for the quarter ended September 30, 1998 (filed November 12, 1998), and incorporated herein by reference. 10.2.3 Schedule of Options Granted to Members of the Filed as exhibit 10.4 to the Company's Quarterly Report on Form 10-Q Board of Directors for the quarter ended September 30, 1998 (filed November 12, 1998), and incorporated herein by reference. 10.2.4 Schedule of Options Granted to Members of the Filed herewith. Board Of Directors 10.3 Exemplar of the Form of the Directors, Filed as exhibit 19.5 to the Company's Quarterly Report on Form 10-Q Officers Other Agents Indemnification for the quarter and ended June 30, 1988 (filed August 14, 1988), Agreements and incorporated herein by reference. 10.3.1 Exemplar Form of Indemnification Agreement Filed as exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (filed November 12, 1998), and incorporated herein by reference. 10.4 Long-Term Stock Bonus Plan together with Filed as exhibit 10.3 to the Company's Annual Report on Form 10-K Exemplar Long-Term Stock Bonus Agreement for the year ended December 31, 1990 (filed March 28, 1991), and incorporated herein by reference. 23 Written Consent of Arthur Andersen, LLP Filed herewith. 27 Financial Data Schedule Filed electronically. </TABLE> The exhibits listed above may be obtained from McGrath RentCorp, 5700 Las Positas Road, Livermore, California 94550-7800 upon written request. Each request should specify the name and address of the requesting person and the title of the exhibit or exhibits desired. A reasonable fee for copying any exhibit requested plus postage will be charged by McGrath RentCorp prior to furnishing such exhibit(s). See http://www.sec.gov/edaux/formlynx.htm for the Company's most recent filings. 36