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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 JUNE 30, 2001 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
5700 LAS POSITAS ROAD, LIVERMORE, CA 94550
(Address of principal executive offices)
Registrant's telephone number: (925) 606-9200
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] [No]
At August 8, 2001, 12,291,822 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
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(in thousands, except per share amounts) 2001 2000 2001 2000
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REVENUES
Rental $25,768 $22,847 $51,875 $44,228
Rental Related Services 4,317 3,974 8,495 7,296
------- ------- ------- -------
Rental Operations 30,085 26,821 60,370 51,524
Sales 11,347 10,315 17,068 17,008
Other 305 233 581 480
------- ------- ------- -------
Total Revenues 41,737 37,369 78,019 69,012
------- ------- ------- -------
COSTS AND EXPENSES
Direct Costs of Rental Operations
Depreciation 6,742 5,745 13,162 11,101
Rental Related Services 3,028 2,324 5,370 4,056
Other 3,754 4,706 8,462 8,487
------- ------- ------- -------
Total Direct Costs of Rental Operations 13,524 12,775 26,994 23,644
Costs of Sales 7,671 6,915 11,519 11,736
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Total Costs 21,195 19,690 38,513 35,380
------- ------- ------- -------
Gross Margin 20,542 17,679 39,506 33,632
Selling and Administrative 5,679 4,787 11,476 9,482
------- ------- ------- -------
Income from Operations 14,863 12,892 28,030 24,150
Interest 1,853 2,160 3,997 4,104
------- ------- ------- -------
Income Before Provision for Income Taxes 13,010 10,732 24,033 20,046
Provision for Income Taxes 5,178 4,186 9,565 7,818
------- ------- ------- -------
Income Before Minority Interest 7,832 6,546 14,468 12,228
Minority Interest in Income of Subsidiary 217 157 218 136
------- ------- ------- -------
Net Income $ 7,615 $ 6,389 $14,250 $12,092
======= ======= ======= =======
Earnings Per Share:
Basic $ 0.63 $ 0.52 $ 1.17 $ 0.97
Diluted $ 0.62 $ 0.52 $ 1.16 $ 0.97
Shares Used in Per Share Calculation:
Basic 12,178 12,305 12,162 12,402
Diluted 12,378 12,393 12,336 12,494
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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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JUNE 30, DECEMBER 31,
--------- ------------
(in thousands) 2001 2000
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ASSETS
Cash $ 572 $ 643
Accounts Receivable, less allowance for doubtful
accounts of $850 in 2001 and $650 in 2000 39,669 45,687
Rental Equipment, at cost:
Relocatable Modular Offices 274,670 261,081
Electronic Test Instruments 100,187 92,404
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374,857 353,485
Less Accumulated Depreciation (114,375) (106,083)
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Rental Equipment, net 260,482 247,402
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Land, at cost 19,303 19,303
Buildings, Land Improvements, Equipment and Furniture,
at cost, less accumulated depreciation of $7,785
in 2001 and $6,815 in 2000 33,154 33,233
Prepaid Expenses and Other Assets 11,177 10,978
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Total Assets $ 364,357 $ 357,246
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes Payable $ 122,500 $ 126,876
Accounts Payable and Accrued Liabilities 39,984 37,012
Deferred Income 13,562 19,241
Minority Interest in Subsidiary 3,724 3,506
Deferred Income Taxes 64,676 61,653
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Total Liabilities 244,446 248,288
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Shareholders' Equity:
Common Stock, no par value -
Authorized -- 40,000 shares
Outstanding -- 12,202 shares in 2001 and
12,125 shares in 2000 9,587 8,971
Retained Earnings 110,324 99,987
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Total Shareholders' Equity 119,911 108,958
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Total Liabilities and Shareholders' Equity $ 364,357 $ 357,246
========= =========
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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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SIX MONTHS ENDED JUNE 30,
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(in thousands) 2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 14,250 $ 12,092
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and Amortization 14,132 12,001
Impairment Loss Related to Rental Equipment -- 698
Gain on Sale of Rental Equipment (3,037) (3,355)
Change In:
Accounts Receivable 6,018 (2,059)
Prepaid Expenses and Other Assets (199) (1,714)
Accounts Payable and Accrued Liabilities 2,923 4,968
Deferred Income (5,679) (901)
Deferred Income Taxes 3,023 118
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Net Cash Provided by Operating Activities 31,431 21,848
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of Rental Equipment (31,409) (34,932)
Purchase of Land, Buildings, Land Improvements, Equipment and Furniture (891) (1,497)
Proceeds from Sale of Rental Equipment 8,204 8,833
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Net Cash Used in Investing Activities (24,096) (27,596)
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CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings (Payments) Under Notes Payable (4,376) 15,500
Net Proceeds from the Exercise of Stock Options 616 62
Repurchase of Common Stock -- (4,379)
Payment of Dividends (3,646) (3,228)
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Net Cash Provided by (Used in) Financing Activities (7,406) 7,955
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Net Increase (Decrease) in Cash (71) 2,207
Cash Balance, Beginning of Period 643 490
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Cash Balance, End of Period $ 572 $ 2,697
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Interest Paid During the Period $ 4,415 $ 4,064
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Income Taxes Paid During the Period $ 6,542 $ 7,700
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Dividends Declared but not yet Paid $ 1,966 $ 1,723
======== ========
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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
JUNE 30, 2001
NOTE 1. CONSOLIDATED FINANCIAL INFORMATION
The consolidated financial information for the six months ended June 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 six months ended June
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 does not own any derivative instruments, and as such, the implementation
of this statement did not have a material impact on the Company's financial
position or result of operations.
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 $82.5 million was outstanding as of June 30, 2001. The
Agreement requires the Company to pay interest at prime or, at the Company's
election, at other rate options available under the Agreement. In addition, the
Company pays a commitment fee on the daily average unused portion of the
available line. Among other restrictions, the Agreement requires (i) the Company
to maintain shareholders' equity of not less than $100.0 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 June 30, 2001.
NOTE 4. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
year presentation.
NOTE 5. SUBSEQUENT EVENT
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.
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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 six months ended June 30, 2001 and 2000 for the
Company's reportable segments is shown in the following table:
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(in thousands) MODULARS(1) ELECTRONICS(2) ENVIROPLEX CONSOLIDATED
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SIX MONTHS ENDED JUNE 30,
2001
Rental Revenues $ 30,653 $ 21,222 $ -- $ 51,875
Rental Related Services Revenues 8,090 405 -- 8,495
Sales and Other Revenues 7,454 4,501 5,694 17,649
Total Revenues 46,197 26,128 5,694 78,019
Depreciation on Rental Equipment 6,427 6,735 -- 13,162
Interest Expense 2,978 1,220 (201) 3,997
Income before Income Taxes 12,583 10,507 943 24,033
Rental Equipment Acquisitions 17,955 13,454 -- 31,409
Accounts Receivable, net (period end) 22,084 12,479 5,106 39,669
Rental Equipment, at cost (period end) 274,670 100,187 -- 374,857
Utilization (Period end)(3) 84.9% 49.3%
Average Utilization(3) 85.1% 57.0%
2000
Rental Revenues $ 27,380 $ 16,848 $ -- $ 44,228
Rental Related Services Revenues 6,931 365 -- 7,296
Sales and Other Revenues 7,036 5,347 5,105 17,488
Total Revenues 41,347 22,560 5,105 69,012
Depreciation on Rental Equipment 5,821 5,280 -- 11,101
Interest Expense 3,139 1,117 (152) 4,104
Income before Income Taxes 10,696 8,733 617 20,046
Rental Equipment Acquisitions 20,028 14,904 -- 34,932
Accounts Receivable, net (period end) 12,330 10,564 4,260 27,154
Rental Equipment, at cost (period end) 252,381 81,626 -- 334,007
Utilization (Period end)(3) 82.4% 65.4%
Average Utilization(3) 81.0% 58.8%
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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 SIX MONTHS ENDED JUNE 30, 2001 AND 2000
Rental revenues for the three and six months ended June 30, 2001
increased $2.9 million (13%) and $7.6 million (17%) over the comparative periods
in 2000. Mobile Modular Management Corporation ("MMMC") contributed $3.2 million
and RenTelco contributed $4.4 million of the six-month increase. MMMC's rental
revenues increased as a result of strong classroom demand in California. As of
June 30, 2001, an average of $29.4 million more modular equipment was on rent
compared to a year earlier with the average monthly yield for all modular
equipment increasing from 1.98% in 2000 to 2.01% in 2001. At June 30, 2001,
modular utilization, excluding new equipment inventory, was 84.9% and average
utilization for the six months ended June 30, 2001 and 2000 was 85.1% and 81.0%,
respectively. RenTelco's rental revenue increased a modest 13% over the second
quarter of 2000, but declined by 6% from the levels achieved during the first
quarter of 2001, reflecting the broad-based weakness in the telecommunications
industry. As of June 30, 2001, an average of $9.8 million more electronics
equipment was on rent compared to a year earlier with the average monthly yield
for all electronics equipment increasing from 3.64% in 2000 to 3.66% in 2001. At
June 30, 2001, electronics utilization was 49.3% compared to 65.4% a year
earlier and average utilization for the six months ended June 30, 2001 and 2000
was 57.0% and 58.8%, respectively.
Depreciation on rental equipment for the three and six months ended
June 30, 2001 increased $1.0 million (17%) and $2.1 million (19%) over the
comparative periods in 2000 due to higher amounts of rental equipment. For the
six months ended June 30, 2001, average modular rental equipment, at cost,
increased $23.0 million (9%) and average electronics rental equipment, at cost,
increased $19.7 million (26%) over the 2000 comparative period. Other direct
costs of rental operations for the three months ended June 30, 2001 decreased
$1.0 million (20%) primarily due to an impairment write-off of $832,000 in the
year earlier period of rental equipment beyond economic repair. For the
six-month comparative period these costs remained approximately the same.
Consolidated gross margin on rents for the three and six months increased from
54.3% and 55.7% in 2000 to 59.3% and 58.3% in 2001, respectively.
Rental related services revenues for the three and six months ended
June 30, 2001 increased $343,000 (9%) and $1.2 million (16%) over the
comparative periods in 2000 due to the increased modular rental activity. Gross
margin on rental related services for the six-month period decreased from 44.4%
in 2000 to 36.8% in 2001.
Sales for the three and six months ended June 30, 2001 increased $1.0
million (10%) and $60,000 (less than 1%) as compared to the same periods in
2000. Consolidated gross margin on sales for the six months ended June 30, 2001
was 32.5% compared to 31.0% for the same period 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
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funding. Looking forward, in a slowing economy, the Company would anticipate
fewer sales opportunities for the remainder of 2001 as companies, in an effort
to conserve capital, are less likely to purchase modular and electronics
equipment.
Enviroplex's backlog of orders as of June 30, 2001 and 2000 was $11.8
million and $12.3 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 six months ended
June 30, 2001 increased $892,000 (19%) and $2.0 million (21%) over the
comparative periods in 2000. The six-month increase is primarily due to higher
personnel and benefit costs of $777,000, increased web development and
maintenance costs of $413,000, higher bad debt expense of $196,000 and increased
consultant fees related to legal, accounting, and investor relations of
$198,000.
Interest expense for the three and six months ended June 30, 2001
decreased $307,000 (14%) and $107,000 (3%) over the 2000 comparative periods as
a result of lower average interest rates despite higher average borrowing level
in 2001. The higher debt levels funded part of the Company's capital
expenditures, payment of dividends and repurchases of common stock.
Income before provision for taxes for the three months ended June 30,
2001 increased $2.3 million (21%) while net income increased $1.2 million (19%)
to $7.6 million with earnings per diluted share increasing 19% from $0.52 per
share in 2000 to $0.62 per share in 2001. Income before provision for taxes for
the six months ended June 30, 2001 increased $4.0 million (20%) while net income
increased $2.2 million (18%) to $14.3 million with earnings per diluted share
increasing 20% from $0.97 per share in 2000 to $1.16 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 operations produced a positive cash flow from operations
for the six months ended June 30, 2001 of $31.4 million as compared to $21.9
million for the year earlier period primarily due to the reduction in the
accounts receivable. During 2001, the primary uses of cash have been to purchase
of $31.4 million of additional rental equipment to satisfy customer
requirements, other capital expenditures of $891,000, payment of dividends of
$3.6 million to the Company's shareholders, and debt reduction of $4.4 million.
The Company had total liabilities to equity ratios of 2.04 to 1 and 2.28
to 1 as of June 30, 2001 and December 31, 2000, respectively. The debt (notes
payable) to equity ratios were 1.02 to 1 and 1.16 to 1 as of June 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 August 8, 2001, 805,800 shares remain authorized for
repurchase.
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
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changes in interest rates with respect to its notes payable. As of June 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
On June 5, 2001 McGrath RentCorp announced the settlement of 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. were two of nineteen named defendants, all of whom are involved in the
portable classroom industry in the State of California. The parties reached an
accord whereby the settling defendants agreed to begin using alternative
buildings materials, including certain engineered wood products, adhesives,
caulks, tapes, mastics and glues, and to provide ventilation in the sub-roof
areas on all products ordered for manufacture after July 1, 2001. In addition,
the settling defendants agreed to issue certain advisories regarding the
availability of alternative materials and the advisability of airing out certain
types of carpeting upon installation. In refurbishing units, to the extent such
materials are needed, settling defendants will use those alternative building
materials and install sub-roof ventilation as appropriate. Defendants agreed to
pay $150,000 to As You Sow to be used for grant-making purposes in reducing
exposures to chemicals, and to increase consumer, worker and community awareness
of the health hazards posed by chemicals. Defendants also agreed to pay As You
Sow's fees and costs in bringing the action.
ITEM 3. OTHER INFORMATION
On May 30, 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.
NUMBER DESCRIPTION METHOD OF FILING
------ ----------- ----------------
4.1 Amended and Restated Credit Agreement Filed herewith.
4.2 $5,000,000 Committed Credit Facility 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.
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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 August 8, 2001 MCGRATH RENTCORP
By: /s/ Thomas J. Sauer
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Thomas J. Sauer
Vice President and Chief Financial Officer
(Chief Accounting Officer)
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EXHIBIT INDEX
NUMBER DESCRIPTION METHOD OF FILING
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4.1 Amended and Restated Credit Agreement Filed herewith.
4.2 $5,000,000 Committed Credit Facility Filed herewith.