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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
COMMISSION FILE NUMBER 0-13292
MCGRATH RENTCORP
(Exact name of registrant as specified in its Charter)
CALIFORNIA 94-2579843
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5700 LAS POSITAS ROAD, LIVERMORE, CA 94550
(Address of principal executive offices)
Registrant's telephone number: (925) 606-9200
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Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
At November 8, 2001, 12,315,874 shares of Registrant's Common Stock were
outstanding.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
(in thousands, except per share amounts) 2001 2000 2001 2000
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REVENUES
Rental $ 25,100 $ 24,876 $ 76,975 $ 69,104
Rental Related Services 5,051 6,694 13,546 13,990
-------- -------- -------- --------
Rental Operations 30,151 31,570 90,521 83,094
Sales 11,895 22,830 28,963 39,838
Other 360 243 941 723
-------- -------- -------- --------
Total Revenues 42,406 54,643 120,425 123,655
-------- -------- -------- --------
COSTS AND EXPENSES
Direct Costs of Rental Operations
Depreciation 7,133 6,111 20,295 17,212
Rental Related Services 2,871 3,712 8,241 7,768
Other 4,742 4,882 13,204 13,369
-------- -------- -------- --------
Total Direct Costs of Rental Operations 14,746 14,705 41,740 38,349
Costs of Sales 8,207 16,260 19,726 27,996
-------- -------- -------- --------
Total Costs 22,953 30,965 61,466 66,345
-------- -------- -------- --------
Gross Margin 19,453 23,678 58,959 57,310
Selling and Administrative 5,599 5,540 17,075 15,022
-------- -------- -------- --------
Income from Operations 13,854 18,138 41,884 42,288
Interest 1,748 2,361 5,745 6,465
-------- -------- -------- --------
Income Before Provision for Income Taxes 12,106 15,777 36,139 35,823
Provision for Income Taxes 4,818 6,153 14,383 13,971
-------- -------- -------- --------
Income Before Minority Interest 7,288 9,624 21,756 21,852
Minority Interest in Income of Subsidiary 124 580 342 716
-------- -------- -------- --------
Net Income $ 7,164 $ 9,044 $ 21,414 $ 21,136
======== ======== ======== ========
Earnings Per Share:
Basic $ 0.58 $ 0.73 $ 1.76 $ 1.71
Diluted $ 0.58 $ 0.73 $ 1.73 $ 1.70
Shares Used in Per Share Calculation:
Basic 12,280 12,308 12,202 12,371
Diluted 12,456 12,402 12,376 12,463
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The accompanying notes are an integral part of these consolidated financial
statements.
1
MCGRATH RENTCORP
CONSOLIDATED BALANCE SHEETS
(unaudited)
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SEPTEMBER 30, DECEMBER 31,
------------- ------------
(in thousands) 2001 2000
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ASSETS
Cash $ 464 $ 643
Accounts Receivable, less allowance for doubtful
accounts of $1,000 in 2001 and $650 in 2000 45,870 45,687
Rental Equipment, at cost:
Relocatable Modular Offices 279,002 261,081
Electronic Test Instruments 99,534 92,404
--------- ---------
378,536 353,485
Less Accumulated Depreciation (118,580) (106,083)
--------- ---------
Rental Equipment, net 259,956 247,402
--------- ---------
Land, at cost 19,303 19,303
Buildings, Land Improvements, Equipment and Furniture,
at cost, less accumulated depreciation of $8,414
in 2001 and $6,815 in 2000 33,077 33,233
Prepaid Expenses and Other Assets 12,766 10,978
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Total Assets $ 371,436 $ 357,246
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes Payable $ 116,100 $ 126,876
Accounts Payable and Accrued Liabilities 33,043 37,012
Deferred Income 23,273 19,241
Minority Interest in Subsidiary 2,805 3,506
Deferred Income Taxes 68,864 61,653
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Total Liabilities 244,085 248,288
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Shareholders' Equity:
Common Stock, no par value -
Authorized -- 40,000 shares
Outstanding -- 12,311 shares in 2001 and
12,125 shares in 2000 11,833 8,971
Retained Earnings 115,518 99,987
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Total Shareholders' Equity 127,351 108,958
--------- ---------
Total Liabilities and Shareholders' Equity $ 371,436 $ 357,246
========= =========
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The accompanying notes are an integral part of these consolidated financial
statements.
2
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
(in thousands) 2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 21,414 $ 21,136
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and Amortization 21,962 18,574
Impairment Loss Related to Rental Equipment -- 980
Gain on Sale of Rental Equipment (4,977) (4,779)
Change In:
Accounts Receivable (183) (17,552)
Prepaid Expenses and Other Assets (769) (1,258)
Accounts Payable and Accrued Liabilities (3,899) 10,392
Deferred Income 4,032 3,996
Deferred Income Taxes 7,211 4,279
-------- --------
Net Cash Provided by Operating Activities 44,791 35,768
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of Rental Equipment (41,496) (52,377)
Purchase of Land, Buildings, Land Improvements, Equipment and Furniture (1,511) (2,656)
Proceeds from Sale of Rental Equipment 13,624 12,871
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Net Cash Used in Investing Activities (29,383) (42,162)
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CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings (Payments) Under Notes Payable (10,776) 17,100
Net Proceeds from the Exercise of Stock Options 801 75
Repurchase of Common Stock -- (4,379)
Payment of Dividends (5,612) (4,951)
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Net Cash Provided by (Used in) Financing Activities (15,587) 7,845
-------- --------
Net Increase (Decrease) in Cash (179) 1,451
Cash Balance, Beginning of Period 643 490
-------- --------
Cash Balance, End of Period $ 464 $ 1,941
======== ========
Interest Paid During the Period $ 6,721 $ 6,910
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Income Taxes Paid During the Period $ 7,208 $ 9,692
======== ========
Dividends Declared but not yet Paid $ 1,970 $ 1,723
======== ========
Stock Issued for Equity in Subsidiary $ 2,061 $ --
======== ========
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The accompanying notes are an integral part of these consolidated financial
statements.
3
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
NOTE 1. CONSOLIDATED FINANCIAL INFORMATION
The consolidated financial information for the nine months ended
September 30, 2001 has not been audited, but in the opinion of management, all
adjustments (consisting of only normal recurring accruals, consolidation and
eliminating entries) necessary for the fair presentation of the consolidated
results of operations, financial position, and cash flows of McGrath RentCorp
(the "Company") have been made. The consolidated results of the nine months
ended September 30, 2001 should not be considered as necessarily indicative of
the consolidated results for the entire year. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's latest Form 10-K.
NOTE 2. ACCOUNTING FOR DERIVATIVES
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), as amended by SFAS 138, which establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Company is not a party to any derivative instruments, and as such, the
implementation of this statement did not have a material impact on the Company's
financial position or result of operations.
NOTE 3. NOTES PAYABLE
In June 2001, the Company amended its unsecured line of credit agreement
(the "Agreement") with its banks that extended the expiration date of the
Agreement to June 30, 2004. The Agreement allows the Company to borrow $120.0
million of which $84.1 million was outstanding as of September 30, 2001. The
Agreement requires the Company to pay interest at prime or, at the Company's
election, at another rate option available under the Agreement. In addition, the
Company pays a commitment fee on the daily average unused portion of the
available line. Among other restrictions, the Agreement requires (i) the Company
to maintain shareholders' equity of not less than $100.0 million plus 50% of all
net income generated subsequent to June 30, 2001 plus 90% of any new stock
issuance proceeds, (ii) a debt-to-equity ratio (excluding deferred income taxes)
of not more than 3 to 1, (iii) interest coverage (income from operations
compared to interest expense) of not less than 2 to 1 and (iv) debt service
coverage (earnings before interest, taxes, depreciation and amortization
compared to the following year's principal payments plus the most recent twelve
months of interest expense) of not less than 1.15 to 1.
In addition to the $120.0 million unsecured line of credit, the Company
entered into a new $5.0 million credit facility in June 2001 (at prime rate)
related to its cash management services which expires June 30, 2004. No amounts
were outstanding at September 30, 2001.
NOTE 4. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
year presentation.
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NOTE 5. STOCK EXCHANGE
In July 2001, the Company entered into a Stock Exchange Agreement with
the minority shareholders of Enviroplex to increase its ownership in Enviroplex
from 73.2% to 80.7%. The Company exchanged 85,366 shares of its common stock for
7.5% of Enviroplex. The transaction resulted in goodwill of $1.0 million and
other intangible assets of $0.1 million, which are included in Prepaid and Other
Assets. Goodwill has been accounted for in accordance with SFAS 142, "Goodwill
and Other Intangible Assets". As such the goodwill is not being amortized and
will be evaluated for impairment annually. Except as noted above the Company
does not have any goodwill or other intangible assets.
NOTE 6. BUSINESS SEGMENTS
The Company defines its business segments based on the nature of
operations for the purpose of reporting under SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information". The Company's three
reportable segments are Mobile Modular Management Corporation (Modulars),
RenTelco (Electronics), and Enviroplex. The operations of these three segments
are described in the notes to the consolidated financial statements included in
the Company's latest Form 10-K. As a separate corporate entity, Enviroplex
revenues and expenses are separately maintained from Modulars and Electronics.
Excluding interest expense, allocations of revenues and expenses not directly
associated with Modulars or Electronics are generally allocated to these
segments based on their pro-rata share of direct revenues. Interest expense is
allocated between Modulars and Electronics based on their pro-rata share of
average rental equipment, accounts receivable and customer security deposits.
The Company does not report total assets by business segment. Summarized
financial information for the nine months ended September 30, 2001 and 2000 for
the Company's reportable segments is shown in the following table:
5
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(in thousands) MODULARS(1) ELECTRONICS(2) ENVIROPLEX CONSOLIDATED
----------- -------------- ---------- ------------
NINE MONTHS ENDED SEPTEMBER 30,
2001
Rental Revenues $ 46,834 $ 30,141 $ -- $ 76,975
Rental Related Services Revenues 12,998 548 -- 13,546
Sales and Other Revenues 12,953 6,826 10,125 29,904
Total Revenues 72,785 37,515 10,125 120,425
Depreciation on Rental Equipment 9,976 10,319 -- 20,295
Interest Expense 4,280 1,736 (271) 5,745
Income before Income Taxes 20,234 14,115 1,790 36,139
Rental Equipment Acquisitions 25,804 15,692 -- 41,496
Accounts Receivable, net (period end) 30,190 11,144 4,536 45,870
Rental Equipment, at cost (period end) 279,002 99,534 -- 378,536
Utilization (Period end)(3) 86.2% 44.2%
Average Utilization(3) 85.3% 53.6%
2000
Rental Revenues $ 41,843 $ 27,261 $ -- $ 69,104
Rental Related Services Revenues 13,474 516 -- 13,990
Sales and Other Revenues 17,287 7,449 15,825 40,561
Total Revenues 72,604 35,226 15,825 123,655
Depreciation on Rental Equipment 9,090 8,122 -- 17,212
Interest Expense 4,941 1,761 (237) 6,465
Income before Income Taxes 17,648 14,295 3,880 35,823
Rental Equipment Acquisitions 30,226 22,151 -- 52,377
Accounts Receivable, net (period end) 23,942 11,624 7,082 42,648
Rental Equipment, at cost (period end) 259,437 86,813 -- 346,250
Utilization (Period end)(3) 83.7% 65.1%
Average Utilization(3) 81.7% 60.7%
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(1) Operates under the trade name Mobile Modular Management Corporation
(2) Operates under the trade name RenTelco
(3) Utilization is calculated each month by dividing the cost of rental
equipment on rent by the total cost of rental equipment excluding new
equipment inventory and accessory equipment. The average utilization for
the period is calculated using the average costs of rental equipment.
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ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Quarterly Report on Form 10-Q contains statements, which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear in a number of places.
Such statements can be identified by the use of forward-looking terminology such
as "believes", "expects", "may", "estimates", "will", "should", "plans" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
significant risks and uncertainties, and that actual results may vary materially
from those in the forward-looking statements as a result of various factors.
These factors include the effectiveness of management's strategies and
decisions, general economic and business conditions, new or modified statutory
or regulatory requirements and changing prices and market conditions. This
report identifies other factors that could cause such differences. No assurance
can be given that these are all of the factors that could cause actual results
to vary materially from the forward-looking statements.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Rental revenues for the three and nine months ended September 30, 2001
increased $0.2 million (less than 1%) and $7.9 million (11%) over the
comparative periods in 2000. Mobile Modular Management Corporation ("MMMC")
contributed $5.0 million and RenTelco contributed $2.9 million of the nine-month
increase. MMMC's rental revenues increased as a result of strong classroom
demand in California. For the nine months ending September 30, 2001, an average
of $28.0 million more modular equipment was on rent compared to a year earlier
with the average monthly yield for modular equipment increasing from 1.98% in
2000 to 2.02% in 2001. At September 30, 2001, modular utilization, excluding new
equipment inventory, was 86.2% and average utilization for the nine months ended
September 30, 2001 and 2000 was 85.3% and 81.7%, respectively. RenTelco's rental
revenue decreased 14% from the third quarter of 2000 and declined 13% from
second quarter of 2001 levels, reflecting continued broad-based weakness in the
telecommunications industry. For the nine months ending September 30, 2001, an
average of $4.2 million more electronics equipment was on rent compared to a
year earlier period, but with the average monthly yield for electronics
equipment decreasing from 3.82% in 2000 to 3.43% in 2001. At September 30, 2001,
electronics utilization was 44.2% compared to 65.1% a year earlier and average
utilization for the nine months ended September 30, 2001 and 2000 was 53.6% and
60.7%, respectively.
Depreciation on rental equipment for the three and nine months ended
September 30, 2001 increased $1.0 million (17%) and $3.1 million (18%) over the
comparative periods in 2000 due to higher amounts of rental equipment. For the
nine months ended September 30, 2001, average modular rental equipment, at cost,
increased $21.9 million (9%) and average electronics rental equipment, at cost,
increased $18.3 million (23%) over the 2000 comparative period. Other direct
costs of rental operations for the three and nine months ended September 30,
2001 declined slightly from both comparative periods in 2000. These declines are
due to impairment write-offs in 2000 for rental equipment beyond economic repair
that have not reoccurred in 2001, offset by increased modular repair and
maintenance costs. Consolidated gross margin on rents for the three month period
ending September 30, 2001 declined 6% from 55.8% in 2000 to 52.7% in 2001
primarily due to RenTelco's 14% decline in rental revenues combined with
increased depreciation expense as a result of higher equipment levels in 2001.
Consolidated gross margin on rents for the nine-month comparative period
improved slightly from 55.8% to 56.5%.
Rental related services revenues for the three and nine months ended
September 30, 2001 decreased $1.6 million (25%) and $0.4 million (3%) over the
comparative periods in 2000 due to fewer significant site-related projects in
the current quarter's modular rental activity. Gross margin on rental related
services for the nine-month period decreased from 44.5% in 2000 to 39.2% in
2001.
7
Sales for the three and nine months ended September 30, 2001 decreased
$10.9 million (48%) and $10.9 million (27%) as a result of the lower sales
volume by both MMMC and Enviroplex. For the comparative nine-month period, sales
revenues for MMMC declined from $17.0 million in 2000 to $12.5 million in 2001
due to several significant sales occurring in 2000. 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. For the comparative nine-month
period, sales revenues for Enviroplex have declined from $15.8 million in 2000
to $10.1 million in 2001 primarily due to project completion delays combined
with lower order volume. Consolidated gross margin on sales for the nine months
ended September 30, 2001 improved to 31.9% compared to 29.7% for the same period
in 2000.
Enviroplex's backlog of orders as of September 30, 2001 and 2000 was
$8.6 million and $1.9 million, respectively. Backlog is not significant in
MMMC's modular business or in RenTelco's electronics business.
Selling and administrative expenses for the three and nine months ended
September 30, 2001 increased $59,000 (1%) and $2.1 million (14%) over the
comparative periods in 2000. The nine-month increase is primarily due to
increased web development and maintenance costs of $694,000, higher bad debt
expense of $647,000, increased depreciation expense of $305,000 and increased
consultant fees related to legal, accounting, and investor relations of
$207,000.
Interest expense for the three and nine months ended September 30, 2001
decreased $613,000 (26%) and $720,000 (11%) over the 2000 comparative periods
primarily due to lower average interest rates for 2001 as compared to 2000.
Income before provision for taxes for the three months ended September
30, 2001 decreased $3.7 million (23%) while net income decreased $1.9 million
(21%) to $7.2 million with earnings per diluted share decreasing 21% from $0.73
per share in 2000 to $0.58 per share in 2001. Income before provision for taxes
for the nine months ended September 30, 2001 increased $0.3 million (1%) while
net income increased $0.3 million (1%) to $21.4 million with earnings per
diluted share increasing 2% from $1.70 per share in 2000 to $1.73 per share in
2001.
LIQUIDITY AND CAPITAL RESOURCES
This section contains statements that constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See the statement at the beginning of this Item for cautionary
information with respect to such forward-looking statements.
The Company's cash flow from operations plus the proceeds from the sale
of rental equipment increased $9.8 million (20%) for the nine months ended
September 30, 2001 from $48.6 million in 2000 to $58.4 million in 2001. The
total cash available for the nine-month period increased as a result of
increased earnings exclusive of depreciation and amortization expense of $3.7
million, the net change in the accounts receivable and accounts payable of $3.1
million, and the extension of an estimated tax payment of $2.4 million by the
IRS. During 2001, the primary uses of cash have been to purchase $41.5 million
of additional rental equipment to satisfy customer requirements, payment of
dividends of $5.6 million to the Company's shareholders, and debt reduction
of $10.8 million.
The Company had total liabilities to equity ratios of 1.92 and 2.28 to 1
as of September 30, 2001 and December 31, 2000, respectively. The debt (notes
payable) to equity ratios were 0.91 to 1 and 1.16 to 1 as of September 30, 2001
and December 31, 2000, respectively. Both ratios have decreased since December
31, 2000 as a result of earnings and debt reduction.
The Company has made purchases of shares of its common stock from time
to time in the over-the-counter market (NASDAQ) and/or through privately
negotiated, large block transactions under an authorization of the Board of
Directors. Shares repurchased by the Company are cancelled and returned to the
status of authorized but unissued stock. During 2001, no shares have been
repurchased. As of November 8, 2001, 805,800 shares remain authorized for
repurchase.
8
The Company believes that its needs for working capital and capital
expenditures through 2001 and beyond will be adequately met by cash flow and
bank borrowings.
MARKET RISK
The Company currently has no material derivative financial instruments
that expose the Company to significant market risk. The Company is exposed to
cash flow and fair value risk due to changes in interest rates with respect to
its notes payable. As of September 30, 2001, the Company believes that the
carrying amounts of its financial instruments (cash and notes payable)
approximate fair value.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 3. OTHER INFORMATION
On August 23, 2001, the Company declared a quarterly dividend on its
Common Stock; the dividend was $0.16 per share. Subject to its continued
profitability and favorable cash flow, the Company intends to continue the
payment of quarterly dividends.
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Date: November 8, 2001 MCGRATH RENTCORP
By: /s/ Thomas J. Sauer
---------------------------------
Thomas J. Sauer
Vice President and Chief Financial
Officer
(Chief Accounting Officer)
9