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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2000 COMMISSION FILE NUMBER 0-13292
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MCGRATH RENTCORP
(Exact name of registrant as specified in its Charter)
CALIFORNIA 94-2579843
(State or other jurisdiction of (I.R.S. Employer
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 3, 2000, 12,311,080 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)
- ------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
(in thousands, except per share amounts) 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------
REVENUES
Rental ................................................... $ 24,876 $ 20,117 $ 69,104 $ 58,195
Rental Related Services .................................. 6,694 4,511 13,990 10,045
-------- -------- -------- --------
Rental Operations ..................................... 31,570 24,628 83,094 68,240
Sales .................................................... 22,830 11,584 39,838 27,655
Other .................................................... 243 445 723 895
-------- -------- -------- --------
Total Revenues ............................ 54,643 36,657 123,655 96,790
-------- -------- -------- --------
COSTS AND EXPENSES
Direct Costs of Rental Operations
Depreciation .......................................... 6,111 5,072 17,212 14,491
Rental Related Services ............................... 3,712 2,237 7,768 5,400
Other ................................................. 4,882 4,180 13,369 10,844
-------- -------- -------- --------
Total Direct Costs of Rental Operations ... 14,705 11,489 38,349 30,735
Costs of Sales ........................................... 16,260 8,474 27,996 19,521
-------- -------- -------- --------
Total Costs ............................... 30,965 19,963 66,345 50,256
-------- -------- -------- --------
Gross Margin .......................... 23,678 16,694 57,310 46,534
Selling and Administrative ............................... 5,540 4,024 15,022 12,212
-------- -------- -------- --------
Income from Operations ................................ 18,138 12,670 42,288 34,322
Interest ................................................. 2,361 1,721 6,465 4,818
-------- -------- -------- --------
Income Before Provision for Income Taxes .............. 15,777 10,949 35,823 29,504
Provision for Income Taxes ............................... 6,153 4,225 13,971 11,508
-------- -------- -------- --------
Income Before Minority Interest ....................... 9,624 6,724 21,852 17,996
Minority Interest in Income of Subsidiary ................ 580 88 716 142
-------- -------- -------- --------
Income before Effect of Accounting Change ............. 9,044 6,636 21,136 17,854
Cumulative Effect of Accounting Change,
net of tax benefit of $833 ........................... -- -- -- (1,367)
-------- -------- -------- --------
Net Income ............................................... $ 9,044 $ 6,636 $ 21,136 $ 16,487
======== ======== ======== ========
Earnings Per Share:
Basic
Income before Cumulative Effect of Accounting Change... $ 0.73 $ 0.51 $ 1.71 $ 1.33
Cumulative Effect of Accounting Change, net of tax..... -- -- -- (0.10)
-------- -------- -------- --------
Net Income ............................................ $ 0.73 $ 0.51 $ 1.71 $ 1.23
======== ======== ======== ========
Diluted
Income before Cumulative Effect of Accounting Change $ 0.73 $ 0.50 $ 1.70 $ 1.31
Cumulative Effect of Accounting Change, net of tax .... -- -- -- (0.10)
-------- -------- -------- --------
$ 0.73 $ 0.50 $ 1.70 $ 1.21
======== ======== ======== ========
Shares Used in Per Share Calculation:
Basic .................................................... 12,308 13,067 12,371 13,430
Diluted .................................................. 12,402 13,220 12,463 13,593
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The accompanying notes are an integral part of these consolidated financial
statements.
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MCGRATH RENTCORP
CONSOLIDATED BALANCE SHEETS
(unaudited)
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SEPTEMBER 30, DECEMBER 31,
----------------------------
(in thousands) 2000 1999
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ASSETS
Cash ..................................................... $ 1,941 $ 490
Accounts Receivable, less allowance for doubtful
accounts of $650 in 2000 and 1999 ..................... 42,648 25,095
Rental Equipment, at cost:
Relocatable Modular Offices ........................... 259,437 238,449
Electronic Test Instruments ........................... 86,813 72,832
--------- ---------
346,250 311,281
Less Accumulated Depreciation ......................... (102,980) (94,103)
--------- ---------
Rental Equipment, net ................................. 243,270 217,178
--------- ---------
Land, at cost ............................................ 19,303 19,303
Buildings, Land Improvements, Equipment and Furniture,
at cost, less accumulated depreciation of $6,476
in 2000 and $5,116 in 1999 ............................ 32,964 31,668
Prepaid Expenses and Other Assets ........................ 5,245 3,988
--------- ---------
Total Assets ................................ $ 345,371 $ 297,722
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes Payable ......................................... $ 127,400 $ 110,300
Accounts Payable and Accrued Liabilities .............. 34,705 24,811
Deferred Income ....................................... 13,507 9,511
Minority Interest in Subsidiary ....................... 3,552 2,836
Deferred Income Taxes ................................. 59,140 54,861
--------- ---------
Total Liabilities ........................... 238,304 202,319
--------- ---------
Shareholders' Equity:
Common Stock, no par value -
Authorized -- 40,000 shares
Outstanding -- 12,309 shares in 2000 and
12,546 shares in 1999 ....................... 8,644 8,755
Retained Earnings ..................................... 98,423 86,648
--------- ---------
Total Shareholders' Equity .................. 107,067 95,403
--------- ---------
Total Liabilities and Shareholders' Equity... $ 345,371 $ 297,722
========= =========
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The accompanying notes are an integral part of these consolidated financial
statements.
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MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
(In thousands) 2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ............................................................. $ 21,136 $ 16,487
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization ....................................... 18,574 15,749
Write Off of Rental Equipment ....................................... 980 --
Cumulative Effect of Accounting Change, net of tax .................. -- 1,367
Gain on Sale of Rental Equipment .................................... (4,779) (4,424)
Change In:
Accounts Receivable .............................................. (17,552) (1,518)
Prepaid Expenses and Other Assets ................................ (1,258) 537
Accounts Payable and Accrued Liabilities ......................... 10,392 2,588
Deferred Income .................................................. 3,996 4,018
Deferred Income Taxes ............................................ 4,279 7,535
-------- --------
Net Cash Provided by Operating Activities ..................... 35,768 42,339
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of Rental Equipment ........................................... (52,377) (35,327)
Purchase of Land, Buildings, Land Improvements, Equipment & Furniture... (2,656) (1,848)
Proceeds from Sale of Rental Equipment ................................. 12,871 12,198
-------- --------
Net Cash Used in Investing Activities ......................... (42,162) (24,977)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings Under Notes Payable ..................................... 17,100 11,700
Net Proceeds from the Exercise of Stock Options ........................ 75 616
Repurchase of Common Stock ............................................. (4,379) (25,486)
Payment of Dividends ................................................... (4,951) (4,610)
-------- --------
Net Cash Provided by (Used in) Financing Activities ........... 7,845 (17,780)
-------- --------
Net Increase (Decrease) in Cash ............................... 1,451 (418)
Cash Balance, Beginning of Period .......................................... 490 857
-------- --------
Cash Balance, End of Period ................................................ $ 1,941 $ 439
======== ========
Interest Paid During the Period ............................................ $ 6,777 $ 5,345
======== ========
Income Taxes Paid During the Period ........................................ $ 9,692 $ 3,973
======== ========
Dividends Declared but not yet Paid ........................................ $ 1,723 $ 1,523
======== ========
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The accompanying notes are an integral part of these consolidated financial
statements.
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MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 1. CONSOLIDATED FINANCIAL INFORMATION
The consolidated financial information for the nine months ended September
30, 2000 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, 2000 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. SUBSEQUENT EVENT - NOTES PAYABLE
Notes payable consists of an unsecured line of credit and $40,000,000 of
Senior Notes. In October 2000, the Company amended its unsecured line of credit
agreement with its banks to increase the bank facility from $100,000,000 to
$120,000,000. All other terms and conditions remained the same.
NOTE 3. BUSINESS SEGMENTS
The Company defines its business segments based on the nature of operations
for the purpose of reporting under Statement of Financial Accounting Standard
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). The Company's three reportable segments are Mobile Modular
Management Corporation (Modulars), 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, 2000 and 1999 for the Company's reportable segments is shown
in the following table:
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(in thousands) MODULARS(1) ELECTRONICS(2) ENVIROPLEX CONSOLIDATED
----------- -------------- ---------- ------------
NINE MONTHS ENDED SEPTEMBER 30,
2000
- ----
Rents .................................................. $ 41,843 $ 27,261 $ -- $ 69,104
Rental Related Services ................................ 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 (Income) .............................. 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
Average Rental Equipment, at cost ...................... 248,097 79,853 -- 327,950
Utilization (period end)(3)............................. 82.0% 65.1%
Average Utilization(3).................................. 79.1% 60.7%
Average Monthly Yield on Average Rental Equipment,
at cost.............................................. 1.87% 3.79%
1999
- ----
Rents .................................................. $ 38,284 $ 19,911 $ -- $ 58,195
Rental Related Services ................................ 9,673 372 -- 10,045
Sales and Other Revenues ............................... 12,897 7,908 7,745 28,550
Total Revenues ......................................... 60,854 28,191 7,745 96,790
Depreciation on Rental Equipment ....................... 7,886 6,605 -- 14,491
Interest Expense (Income) .............................. 3,720 1,247 (149) 4,818
Income before Income Taxes ............................. 18,381 10,286 837 29,504
Rental Equipment Acquisitions .......................... 25,186 10,141 -- 35,327
Accounts Receivable, net (period end) .................. 13,037 9,010 1,281 23,328
Rental Equipment, at cost (period end) ................. 235,603 69,094 -- 304,697
Average Rental Equipment, at cost ...................... 224,069 67,428 -- 291,497
Utilization (period end)(3)............................. 80.0% 59.9%
Average Utilization(3).................................. 78.3% 53.0%
Average Monthly Yield on Average Rental Equipment,
at cost............................................. 1.90% 3.28%
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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 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, 2000 AND 1999
The Company's core rental businesses grew significantly. Rental revenues
for the three and nine months ended September 30, 2000 increased $4,759,000
(24%) and $10,909,000 (19%) over the comparative periods in 1999. Mobile Modular
Management Corporation ("MMMC") contributed $3,559,0000 and RenTelco contributed
$7,350,000 of the nine-month increase. MMMC's rental revenues increased as a
result of having an average of $19,994,000 more equipment on rent compared to a
year earlier even though the average monthly yield for all modular equipment has
declined from 1.90% in 1999 to 1.87% in 2000. At September 30, 2000, modular
utilization, excluding new equipment inventory, was 83.7% and average
utilization for the nine months ended September 30, 2000 and 1999 was 81.7% and
81.9%, respectively. RenTelco's rental revenue increase can be attributed to
strong communication equipment rental activity, which resulted in an average of
$12,536,000 more equipment on rent compared to a year earlier. Additionally, the
average monthly yield for all electronics equipment increased from 3.28% in 1999
to 3.79% in 2000. At September 30, 2000, electronics utilization was 65.1% and
average utilization for the nine months ended September 30, 2000 and 1999 was
60.7% and 53.0%, respectively.
Rental related services revenues for the three and nine months ended
September 30, 2000 increased $2,183,000 (48%) and $3,945,000 (39%) over the
comparative periods in 1999. One large project in the third quarter with
extensive modification and site related work accounted for 37% of the
three-month increase and 21% of the nine-month increase. Gross margin on rental
related services for the nine-month period decreased from 46.2% in 1999 to 44.5%
in 2000.
Sales for the three and nine months ended September 30, 2000 increased
$11,246,000 (97%) and $12,183,000 (44%) as compared to the same periods in 1999
with most of the sales growth attributed to Enviroplex. Consolidated gross
margin on sales for the nine months ended September 30, 2000 was 29.7% compared
to 29.4% for the same period in 1999. Sales continue to occur routinely as a
normal part of the Company's rental business; however, these sales can fluctuate
from quarter to quarter and year to year depending on customer demands,
requirements and funding.
Enviroplex's backlog of orders as of September 30, 2000 and 1999 was
$1,944,000 and $4,595,000, respectively. Backlog is not significant in MMMC's
modular business or in RenTelco's electronics business.
Depreciation on rental equipment for the three and nine months ended
September 30, 2000 increased $1,039,000 (20%) and $2,721,000 (19%) over the
comparative periods in 1999 due to higher amounts of rental equipment. For the
nine months ended September 30, 2000, average modular rental equipment, at cost,
increased $24,028,000 (11%) and average electronics rental equipment, at cost,
increased $12,425,000 (18%) over the 1999 comparative period.
Other direct costs of rental operations for the three and nine months ended
September 30, 2000 increased $702,000 (17%) and $2,525,000 (23%) over the same
periods in 1999 primarily due to an $1,170,000 write-off of rental equipment
including disposal costs in the second and third quarters identified as
equipment which was beyond economic repair. Additionally, higher maintenance and
repair expenses of the modular fleet contributed to these increases.
Selling and administrative expenses for the three and nine months ended
September 30, 2000 increased $1,516,000 (38%) and $2,810,000 (23%) over the
comparative periods in 1999 primarily due to higher personnel and benefit costs,
including performance and incentive bonuses.
Interest expense for the three and nine months ended September 30, 2000
increased $640,000 (37%) and $1,647,000 (34%) over the 1999 comparative periods
as a result of a higher average borrowing level and a higher average
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interest rate in 2000. The average debt increase during the last twelve months
primarily resulted from rental equipment purchases.
Income before provision for taxes for the three months ended September 30,
2000 increased $4,828,000 (44%) from $10,949,000 to $15,777,000 while net income
increased $2,408,000 (36%) from $6,636,000 to $9,044,000 or $0.23 per diluted
share over the comparative period in 1999. Income before provision for taxes for
the nine months ended September 30, 2000 increased $6,319,000 (21%) from
$29,504,000 to $35,823,000 while net income increased $4,649,000 (28%) from
$16,487,000 to $21,136,000 or $0.49 per diluted share over the comparative
period in 1999. The higher percentage increase in year-to-date net income is
partially due to the impact of a one-time charge of $1,367,000 recognized in the
first quarter of 1999 representing the cumulative effect of an accounting
change, net of tax. Excluding the impact of this one-time charge, net income for
the nine months ended September 30, 1999 was $17,854,000 or $1.31 per diluted
share resulting in comparative earnings increasing 18% and comparative earnings
per share increasing 30% in 2000.
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 operations produced a positive cash flow for the nine months
ended September 30, 2000 of $35,768,000 as compared to $42,339,000 for the year
earlier period. During 2000, the primary uses of cash have been to purchase
additional rental inventory to satisfy customer requirements, to repurchase
shares of the Company's common stock on the open market, and to pay dividends to
the Company's shareholders.
The Company had total liabilities to equity ratios of 2.23 to 1 and 2.12 to
1 as of September 30, 2000 and December 31, 1999, respectively. The debt (notes
payable) to equity ratios were 1.19 to 1 and 1.16 to 1 as of September 30, 2000
and December 31, 1999, respectively. Both ratios have increased since December
31, 1999 partially as a result of the Company's stock repurchase program.
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 the nine months ended September
30, 2000 the Company repurchased 265,360 shares of its outstanding common stock
for an aggregate purchase price of $4,379,000 (or an average price of $16.50 per
share). As of November 3, 2000, 975,500 shares remain authorized for repurchase.
The Company believes that its needs for working capital and capital
expenditures through 2000 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, 2000, the Company believes that the carrying
amounts of its financial instruments (cash and notes payable) approximate fair
value.
YEAR 2000
This section contains statements that constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See the statement at the beginning of this Item for cautionary
information with respect to such forward-looking statements.
The Company experienced no disruption in operations due to 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. 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.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
McGrath RentCorp has been named along with a number of other companies as a
defendant in a lawsuit alleging a failure to warn about certain chemicals
associated with building materials used in portable classrooms in California.
The lawsuit was filed by As You Sow, a corporation that has served as a
plaintiff in numerous lawsuits alleging similar failures to warn. The Company
and its subsidiary Enviroplex, Inc. are two of nineteen named defendants, all of
whom are involved in the portable classroom industry in the State of California.
While the plaintiff alleges that materials used to construct portable classrooms
require certain warnings, there is no allegation that any individual has
suffered any injury or harm. The plaintiff does not allege that any particular
classroom leased, sold or manufactured by the Company or Enviroplex has exposed
anyone to any such chemicals; and the Company believes that in fact none of the
portable classrooms it leases or sells and none of the portable classrooms
manufactured by Enviroplex pose any health risk. The Company believes the
lawsuit is without merit, and it intends to defend against the suit vigorously.
The lawsuit was filed in the Superior Court of the State of California for
the County of San Francisco on July 7, 2000. The complaint seeks a court
injunction ordering the defendants to post warning signs in portable classrooms,
recovery of a fine of $2,500 for each failure to post a warning sign where
required, and recovery of monies the defendants may have made by selling or
leasing classrooms without appropriate warnings. Plaintiff also asks for payment
of attorneys' fees.
ITEM 3. OTHER INFORMATION
On August 24, 2000, the Company declared a quarterly dividend on its Common
Stock; the dividend was $0.14 per share. Subject to its continued profitability
and favorable cash flow, the Company intends to continue the payment of
quarterly dividends.
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
NUMBER DESCRIPTION METHOD OF FILING
------ ----------- ----------------
4.1 Amendment No. 2 to the Credit Agreement Filed herewith.
27.1 Financial Data Schedule Filed herewith.
(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 3, 2000 MCGRATH RENTCORP
By: /s/ Thomas J. Sauer
-------------------------------------
Thomas J. Sauer
Vice President and Chief Financial
Officer (Chief Accounting Officer)
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EXHIBIT INDEX
NUMBER DESCRIPTION
------ -----------
4.1 Amendment No. 2 to the Credit Agreement
27.1 Financial Data Schedule