FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
___TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from _______ to _______
COMMISSION FILE NUMBER 1-13495
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MAC-GRAY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction
incorporation or organization)
04-3361982
(I.R.S. Employer Identification No.)
22 WATER STREET, CAMBRIDGE, MASSACHUSETTS
(Address of principal executive offices)
02141
(Zip Code)
617-492-4040
(Registrant's telephone number, including area code)
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 ___
The number of shares outstanding of each of the
issuer's classes of common stock as of the close date
of business on November 13, 2000:
CLASS NUMBER OF SHARES
----- ----------------
Common Stock, $.01 Par Value 12,637,639
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2000 (unaudited) and December 31, 1999
Condensed Consolidated Income Statements (unaudited) for the Three and Nine Months Ended
September 30, 2000 and 1999
Condensed Consolidated Statement of Stockholders' Equity for the Nine Months Ended September
30, 2000 (unaudited)
Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended
September 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signature
2
Item 1. Financial Statements
MAC-GRAY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
1999 2000
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $6,566 $7,523
Trade receivables, net of allowance for doubtful accounts 8,551 10,628
Inventory of finished goods 6,521 3,921
Prepaid expenses and other current assets 9,496 9,148
------------------- ------------------
Total current assets 31,134 31,220
Property, plant and equipment, net 78,581 77,523
Intangible assets, net 55,533 53,253
Prepaid route rent and other assets 15,717 17,537
------------------- ------------------
Total assets $180,965 $179,533
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations $2,408 $6,977
Trade accounts payable and accrued expenses 14,905 13,921
Accrued route rent 8,354 8,456
Deferred revenues and deposits 3,354 2,794
------------------- ------------------
Total current liabilities 29,021 32,148
Long-term debt and capital lease obligations 84,421 75,591
Deferred income taxes 10,406 12,356
Deferred retirement obligation 853 775
Other liabilities 125 48
Commitments and contingencies (Note 4) - -
Stockholders' equity:
Preferred stock of Mac-Gray Corporation ($.01 par value, 5 - -
million shares authorized, no shares outstanding)
Common stock of Mac-Gray Corporation ($.01 par value, 30 134 134
million shares authorized, 13,443,754 issued and 12,627,753
outstanding at December 31, 1999, and 13,443,754 issued and
12,634,943 outstanding at September 30, 2000)
Additional capital 68,540 68,485
Retained earnings (deficit) (2,935) (488)
------------------- ------------------
65,739 68,131
Less common stock in treasury, at cost (9,600) (9,516)
------------------- -----------------
Total stockholders' equity 56,139 58,615
------------------- ------------------
Total liabilities and stockholders' equity $180,965 $179,533
=================== ==================
The accompanying notes are an integral part of these financial statements
3
MAC-GRAY CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three months ended Nine months ended
September 30, September 30,
1999 2000 1999 2000
---- ---- ---- ----
Revenue $35,805 $39,186 $110,457 $115,485
Cost of revenue:
Cost of route revenues 17,555 17,493 52,893 54,232
Depreciation and amortization 4,337 4,392 13,134 13,983
Cost of products sold 6,242 8,461 19,559 21,523
------------- ------------ ------------- -------------
Total cost of revenue 28,134 30,346 85,586 89,738
------------- ------------ ------------- -------------
Selling, general and administration expenses 5,543 5,384 16,014 16,273
------------- ------------ ------------- -------------
Income from operations 2,128 3,456 8,857 9,474
Interest and other expenses, net 1,349 1,880 4,384 4,963
------------- ------------ ------------- -------------
Income before provision for income taxes 779 1,576 4,473 4,511
------------- ------------ ------------- -------------
Provision for income taxes 313 717 1,902 2,064
------------- ------------ ------------- -------------
Net income $466 $859 $2,571 $2,447
============= ============ ============= =============
Net income per common share - basic $0.04 $0.07 $0.20 $0.19
============= ============ ============= =============
Weighted average common shares outstanding - basic 12,628 12,635 12,672 12,633
============= ============ ============= =============
Net income per common share - diluted $0.04 $0.07 $0.20 $0.19
============= ============ ============= =============
Weighted average common shares outstanding - diluted 12,628 12,635 12,681 12,633
============= ============ ============= =============
The accompanying notes are an integral part of these financial statements
4
MAC-GRAY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF
STOCKHOLDERS' EQUITY (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Common stock Treasury Stock
Number Value Additional Retained Number Cost Total
of shares capital earnings of shares
(deficit)
------------------------------------------------------------------------------------
Balance, December 31, 1999 12,627,753 $134 $68,540 ($2,935) 816,001 ($9,600) $56,139
Net income (unaudited) 2,447 2,447
Stock granted (unaudited) 7,190 (55) (7,190) 84 29
------------------------------------------------------------------------------------
Balance, September 30, 2000 (unaudited) 12,634,943 $134 $68,485 ($488) 808,811 ($9,516) $58,615
====================================================================================
The accompanying notes are an integral part of these financial statements
5
MAC-GRAY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
September 30,
1999 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,571 $ 2,447
Adjustments to reconcile net income to net cash flows provided by
operating activities:
Depreciation and amortization 13,835 14,890
Gain on sale of assets (328) (265)
Deferred income taxes 1,080 1,616
Increase in accounts receivable (192) (2,077)
(Increase) decrease in inventory (1,124) 2,600
Increase in prepaid expenses and other assets (8,627) (2,334)
Increase (decrease) in accounts payable, accrued route rent and 2,919 (882)
accrued expenses
Increase (decrease) in deferred revenues and customer deposits 886 (560)
-------- --------
Net cash flows provided by operating activities 11,020 15,435
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (17,358) (10,339)
Acquisition of business, net of cash acquired (3,050) -
Proceeds from sale of property and equipment 966 1,823
-------- --------
Net cash flows used in investing activities (19,442) (8,516)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations (2,105) (2,004)
Advances (payments) on line-of-credit, net 22,134 (2,980)
Cash paid for refinancing of long-term debt - (978)
Repurchase of common stock (1,269) -
Purchase of redeemable common stock (7,645) -
Proceeds from exercise of options 5 -
-------- --------
Net cash flows provided by (used for) financing activities 11,120 (5,962)
-------- --------
Increase in cash and cash equivalents 2,698 957
Cash and cash equivalents, beginning of period 6,181 6,566
-------- --------
Cash and cash equivalents, end of period $ 8,879 $ 7,523
======== ========
The accompanying notes are an integral part of these financial statements
6
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION
In the opinion of the management of Mac-Gray Corporation (the "Company" or
"Mac-Gray"), the accompanying unaudited condensed consolidated financial
statements contain all adjustments (consisting of only normal, recurring
adjustments) which are necessary to present fairly the Company's financial
position as of September 30, 2000 and December 31, 1999 and the results of its
operations and cash flows for the three and nine month periods ended September
30, 2000 and 1999. The unaudited interim condensed consolidated financial
statements do not include all information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's fiscal 1999 audited
consolidated financial statements filed with the Securities and Exchange
Commission in its Annual Report on Form 10-K. The results for interim periods
are not necessarily indicative of the results to be expected for the full year.
The Company generates the majority of its revenue from card and
coin-operated laundry and reprographics equipment located in the Northeastern,
Midwestern and Southeastern United States. A large portion of its revenue is
also derived from the sale and lease of the Company's MicroFridge(R) product
lines. The Company's principal customer base is the multi-housing market, which
consists of apartments, condominium units, colleges and universities, military
bases, hotels and motels. The Company also sells, services and leases commercial
laundry equipment to commercial laundromats and institutions. The majority of
the Company's purchases of laundry equipment is from one supplier.
2. LONG TERM DEBT
On June 29, 2000 the Company refinanced its outstanding Senior Secured
Credit Facility with a group of banks. This transaction retired the April 23,
1998 Senior Facility which was due to convert to a term loan in April 2001.
This new revolving line of credit and term loan Facility (the "2000 Senior
Secured Credit Facility") provides for borrowings of up to $100,000. The 2000
Senior Secured Credit Facility provides for borrowings under a three-year
revolving line of credit of up to $65,000, and includes a five-year $35,000
Senior Secured Term Loan Facility.
Outstanding indebtedness under the 2000 Senior Secured Credit Facility
bears interest, at the Company's option, at a rate equal to the i) prime rate
plus 0.25%, or ii) LIBOR plus 2.25%. If certain financial ratio targets are met
in 2001 and beyond, these interest rate applicable margins will decrease.
The 2000 Senior Secured Credit Facility restricts payments of dividends and
other distributions, restricts the Company from making certain acquisitions and
incurring indebtedness, and requires it to maintain certain financial ratios.
The 2000 Senior Secured Credit Facility is collateralized by a blanket lien on
the assets of the Company and each of its subsidiaries, as well as a pledge by
the Company of all of the capital stock of its subsidiaries. The 2000 Senior
Secured Credit Facility is subject to certain financial and operational
covenants with which the Company was in compliance at September 30, 2000.
The 2000 Senior Secured Credit Facility contains a commitment fee equal to
one quarter of one percent (0.25%) per annum of the average daily unused portion
of the Credit Facility.
7
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
As of September 30, 2000, the available balance of the 2000 Senior Secured
Credit Facility was $20,961.
The 2000 Senior Secured Credit Facility Term Loan portion amortizes as
follows:
2000.................................................... $ 2,500
2001.................................................... 5,500
2002.................................................... 6,500
2003.................................................... 7,500
2004.................................................... 8,500
2005.................................................... 4,500
-------
$35,000
=======
Long-term debt also includes various notes payable totaling $2,955 at
December 31, 1999, and $2,509 at September 30, 2000, and various unsecured notes
payable to former shareholders totaling $987 at December 31, 1999, and $428 at
September 30, 2000.
3 DEFERRED RETIREMENT OBLIGATION
The deferred retirement obligation at September 30, 2000 and December 31,
1999 relates to payments due to a former shareholder of the Company in
connection with a retirement agreement which provides for annual payments of
$104 until the death of the former shareholder. The liability at September 30,
2000 and December 31, 1999 has been estimated based upon the life expectancy of
the former shareholder utilizing actuarial tables.
4. COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation proceedings arising in the
normal course of business. In the opinion of management, the Company's ultimate
liability, if any, under pending litigation would not materially affect its
financial condition or the results of its operations.
8
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
5. EARNINGS PER SHARE
A reconciliation of the weighted average number of common shares
outstanding is as follows:
For the Three Months Ended September 30, 2000
--------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ----------------- -----------
Net income available to common stockholders - basic $ 859 12,635 $ 0.07
============== ================= ===========
Net income available to common stockholders - diluted $ 859 12,635 $ 0.07
============== ================= ===========
For the Three Months Ended September 30, 1999
--------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ----------------- -----------
Net income available to common stockholders - basic $ 466 12,628 $ 0.04
============== ================= ===========
Net income available to common stockholders - diluted $ 466 12,628 $ 0.04
============== ================= ===========
For the Nine Months Ended September 30, 2000
--------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ----------------- -----------
Net income available to common stockholders - basic $ 2,447 12,633 $ 0.19
============== ================= ===========
Net income available to common stockholders - diluted $ 2,447 12,633 $ 0.19
============== ================= ===========
For the Nine Months Ended September 30, 1999
--------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ----------------- -----------
Net income available to common stockholders - basic $ 2,571 12,672 $ 0.20
============== ================= ===========
Effect of dilutive securities:
Stock options 9
-----------------
Net income available to common stockholders - diluted $ 2,571 12,681 $ 0.20
============== ================= ===========
9
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
6. SEGMENT INFORMATION
The Company operates three business units which are based on the Company's
different product and service categories: Laundry, MicroFridge(R) and
Reprographics. These three business units have been aggregated into two
reportable segments ("Laundry and Reprographics" and "MicroFridge(R)"). The
Laundry and Reprographics business units have been aggregated into one
reportable segment (Laundry and Reprographics) since the long-term financial
performance of these divisions are affected by similar economic conditions. The
Laundry segment provides coin and card-operated laundry equipment to multiple
housing facilities such as apartment buildings, colleges and universities and
public housing complexes. The Laundry business unit also operates as a
distributor of and provides service to commercial laundry equipment in public
laundromats, as well as institutional purchasers, including hospitals,
restaurants and hotels, for use in their own on-premise laundry facilities. The
Reprographics business unit provides coin and card-operated reprographics
equipment to academic and public libraries. The MicroFridge(R) segment sells and
leases its own patented and proprietary line of refrigerator/freezer/microwave
oven combinations to a customer base which includes colleges and universities,
government, hotel, motel and assisted living facilities.
Revenue for the Reprographics business unit totaled $1,288 and $1,551 for
the three months ended September 30, 2000 and 1999, respectively. For the nine
months ended September 30, 2000 revenue was $4,788, as compared to $4,836 for
the same period in 1999. Operational similarities in the Laundry and
Reprographics business units create several synergies which, for reporting
purposes, makes it difficult to estimate separate gross margins.
There are no intersegment revenues.
The table below presents information about the reported operating income of
Mac-Gray for the three and nine months ended September 30, 2000 and 1999.
FOR THE THREE FOR THE THREE FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
---------------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 2000 1999 2000
Revenues:
Laundry and Reprographics $ 29,417 $ 29,323 $ 87,665 $ 90,552
MicroFridge(R) 6,388 9,863 22,792 24,933
----------------- ---------------- ----------------- ----------------
Total 35,805 39,186 110,457 115,485
Gross Margin:
Laundry and Reprographics 5,393 5,660 16,731 17,274
MicroFridge(R) 2,278 3,180 8,140 8,473
----------------- ---------------- ----------------- ----------------
Total 7,671 8,840 24,871 25,747
Selling, general and
administrative expenses 5,543 5,384 16,014 16,273
Interest and other expenses, net 1,349 1,880 4,384 4,963
----------------- ---------------- ----------------- ----------------
Income before provision for taxes $ 779 $ 1,576 $ 4,473 $ 4,511
----------------- ---------------- ----------------- ----------------
10
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The table below presents information about the reported balance sheet of
Mac-Gray at December 31, 1999 and September 30, 2000.
December 31, September 30,
1999 2000
(unaudited)
----------------- ----------------
Assets
Laundry and Reprographics $ 131,700 $ 123,000
MicroFridge(R) 16,863 23,188
----------------- ----------------
Total for reportable segments 148,563 146,188
Corporate (1) 31,765 32,374
Deferred income taxes 637 971
----------------- ----------------
Total assets $180,965 $179,533
================= ================
(1) Principally cash, prepaid expenses and property, plant & equipment.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a non
compensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The adoption
of FIN 44 did not have a material impact on the Company's financial position or
results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB 101 summarizes a number of the Staff's interpretations of the
application of generally accepted accounting principles to revenue recognition.
In June 2000, the SEC issued SAB No. 101B to defer the effective date of
implementation of SAB 101 until the fourth quarter of Fiscal 2000. The Company
does not expect the adoption of SAB 101 to have a material effect on its
financial position or results of operations.
In June 1998 the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. The provisions apply to fiscal years beginning after June
15, 2000. The Company is currently evaluating the impact of FAS 133 upon its
financial position and results of operations.
11
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include: ability to meet future capital requirements; dependence
upon certain suppliers; lease renewals; retention of senior executives; market
acceptance of new products and services; implementation of acquisition strategy;
integration of acquired businesses; and those factors discussed in Mac-Gray's
filings with the Securities and Exchange Commission ("SEC"). The historical
financial information presented herein represents the consolidated results of
Mac-Gray. The following discussion and analysis should be read in conjunction
with the financial statements and related notes thereto presented elsewhere in
this report and with the annual financial statements and related notes
previously filed by Mac-Gray with the SEC on its Annual Report on Form 10-K.
OVERVIEW
Mac-Gray derives its revenue principally through the operation and
maintenance of amenities in multiple housing units, including laundry and
MicroFridge products. Mac-Gray also operates card and coin-operated
reprographics equipment in academic and public libraries. Mac-Gray operates
laundry rooms, reprographics equipment and MicroFridge equipment under long-term
leases with property owners, colleges and universities and governmental
agencies. Mac-Gray's laundry services business consists of laundry equipment
located in 30 states and the District of Columbia. Mac-Gray's reprographics
business is concentrated in the northeast, Florida and Texas. Mac-Gray's
MicroFridge business consists of leased units located throughout the United
States as well as sales of its MicroFridge product line.
Mac-Gray also derives revenue as a distributor of commercial laundry
equipment manufactured by Maytag Corporation and other laundry equipment
manufacturers. Additionally, the Company sells or rents laundry equipment to
restaurants, hotels, health clubs and similar institutional users that operate
their own on-premise laundry facilities.
The MicroFridge division derives revenue through the sale and rental of its
MicroFridge products to colleges and universities, military bases, assisted
living facilities and the hotel and motel market.
REDEEMABLE COMMON STOCK
In January 1999 the Company repurchased all of the remaining redeemable
common stock outstanding at the end of 1998. The redeemable common stock was
issued in April 1997 in conjunction with the Company's acquisition of Sun
Services of America, Inc. and R. Bodden Coin-Op Laundry, Inc. The redemption
amounted to 600,026 shares and a total cash outlay of $7.6 million. The shares
have been placed in treasury by the Company.
12
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1999.
REVENUE. Revenue increased by $3,381, or 9%, to $39,186 for the three
months ended September 30, 2000 from the three months ended September 30, 1999.
Revenue increased by $5,028, or 5%, to $115,485 for the nine months ended
September 30, 2000 from the nine months ended September 30, 1999. This increase
is related to an increase in route revenue, which is made up of money collected
through coin and card-operated equipment, of $547, or 2%, from the three months
ended September 30, 1999, and $2,505, or 3%, from the nine months ended
September 30, 1999, due primarily to additional revenue as a result of internal
growth of equipment placed in service and improved operating efficiencies in the
Laundry Route business. Sales revenue also increased $2,969, or 31%, from the
three months ended September 30, 1999, and $2,882, or 10%, from the nine months
ended September 30, 1999. This increase in the sales revenue for the three-month
period, as compared to 1999, is attributable to an increase in academic sales of
the MicroFridge division. For the nine-month period ended September 30, 2000
this increase in revenue is attributable to both Laundry and MicroFridge sales
being higher than for the same period in 1999. For the three-month and
nine-month periods ended September 30, 2000 rental income of both Laundry and
MicroFridge products has decreased as compared to the same period in 1999. This
decrease is due primarily to the conversion of rental units to sales of
MicroFridge units or Laundry route equipment contracts.
ROUTE RELATED EXPENSES. Route related expenses include rent paid to route
customers as well as those costs associated with installing and servicing
machines and the costs of collecting, counting and depositing route revenue.
Route related expenses decreased $62 to $17,493 for the three months ended
September 30, 2000 from the three months ended September 30, 1999, and increased
$1,339, or 3%, to $54,232 for the nine months ended September 30, 2000 from the
nine months ended September 30, 1999. The small decrease in route related
expenses for the three months ended September 30, 2000 compared to the same
period in the prior year occurred primarily through operating efficiencies. The
year-to-date increase was primarily related to an increase in route rent expense
which is tied to the increase in route revenue, and significant increases in
vehicle fuel expense, offset somewhat by operating efficiencies achieved.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$55, or 1%, to $4,392 for the three months ended September 30, 2000 from the
three months ended September 30, 1999, and $849, or 6%, to $13,983 for the nine
months ended September 30, 2000 from the nine months ended September 30, 1999.
The increase was primarily attributable to growth of the Company's machine base
associated with new laundry route contracts and new machines used to replace
existing equipment.
SELLING, GENERAL AND ADMINISTRATION. Selling, general and administration
expenses decreased by $159, or 3%, to $5,384 for the three months ended
September 30, 2000 from the three months ended September 30, 1999, and increased
$259, or 2% for the nine months ended September 30, 2000 from the nine months
ended September 30, 1999. The three-month decrease and the year-to-date increase
were the net of several changes in selling, general and administration spending,
including changes in salaries, associated taxes and benefits, temporary help and
outside services, and reserves for doubtful accounts.
INTEREST AND OTHER EXPENSE. Interest and other expense, net of interest and
other income, increased by $531, or 39%, to $1,880 for the three months ended
September 30, 2000 from the three months ended September 30, 1999, and increased
by $579, or 13%, to $4,963 for the nine months ended September 30, 2000 from the
nine months ended September 30, 1999. Although the average borrowing level of
the Company has decreased in the quarter ended September 30, 2000 as compared to
the same period a year ago, the combination of higher interest rates, and an
additional $10,000 made available but unused as compared to the previous loan,
accounts for the increase in interest and other expense.
13
During the second quarter of 2000, the Company concluded the sale of
outlying and inefficient laundry route assets, comprising approximately 850
machines, in 28 locations - OH, IN, KY, MO, IA, SD, and southern IL. This sale
represented a continuation of the Company's strategy of eliminating inefficient
business in areas with poor infrastructure density and therefore focusing on
improving profit margins, and resulted in a gain of $188 included in other
expenses.
PROVISION FOR INCOME TAXES. The provision for income taxes increased by
$404, or 129%, to $717 for the three months ended September 30, 2000 from the
three months ended September 30, 1999, and increased by $162, or 9%, for the
nine months ended September 30, 2000 from the nine months ended September 30,
1999. This increase is due to the corresponding increase in pre-tax income from
$779 for the three months ended September 30, 1999 to $1,576 for the third
quarter of 2000. The effective tax rate for the nine months ended September 30,
2000 is 45.8% as compared to 42.5% for the same period in 1999. This increase in
the effective tax rate is due to non-deductible expenses, primarily amortization
of intangible assets associated with acquired businesses, making up a larger
portion of total taxable income.
SEASONALITY
The Company experiences moderate seasonality as a result of its significant
operations in the college and university market. Revenues derived from the
college and university market represent approximately 25% of the Company's total
revenue. Route and rental revenues are derived substantially during the school
year which includes the first, second and fourth calendar quarters. Conversely,
the Company typically increases its operating expenditures and college-related
capital expenditures during the third calendar quarter when colleges and
universities are not in session and the Company increases its product
installation activities. Product sales, principally MicroFridge(R), to this
market are also higher during the third calendar quarter.
LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN THOUSANDS)
Mac-Gray's primary sources of cash since December 31, 1999 have been
operating activities and bank borrowings. The Company's primary uses of cash
have been the purchase of new laundry equipment, MicroFridge equipment,
reprographics equipment and smart card based payment systems. The Company
anticipates that it will continue to use cash flow from its operating activities
to finance working capital needs, including interest payments and principal
amortization on any outstanding indebtedness, as well as capital expenditures.
To help mitigate the effect of possible higher interest rates in the future, on
February 18, 2000, the Company negotiated interest rate swaps that fixed the
interest rates on $20,000 of outstanding borrowings for 3 years and $20,000 of
outstanding borrowings for 5 years.
Cash flows provided by operations were $15,435 and $11,020 for the nine
months ended September 30, 2000 and 1999, respectively. Cash flow from
operations consists primarily of route revenue, product sales, laundry equipment
service revenue, and rental revenue, offset by route rent, route expenditures,
cost of product sales, cost of rental revenue, general and administration
expenses and sales and marketing expenses. The increase from 1999 to 2000 is
primarily attributable to an overall improvement in the Company's financial
performance, improved management of working capital, in particular operating
practices which led to inventory reductions of $2,600 since December 31, 1999,
and an increase in depreciation and amortization which is a non-cash expense.
Cash used in investing activities was $8,516 and $19,442 for the nine
months ended September 30, 2000 and 1999, respectively. Capital expenditures
were $10,339 and $17,358 for the nine months ended September 30, 2000 and 1999,
respectively. The decrease in capital expenditures was due to less equipment
placed in service and the average cost of leases decreasing in the nine months
ended September 30, 2000 as compared to the same period a year ago.
Net cash flows from financing activities consist primarily of proceeds from
and repayments of bank borrowing, netting to a reduction of the revolving line
of credit and other debt. Cash used in financing activities was $5,962 for the
nine months ended September 30, 2000 and consisted of repayments of bank
borrowings and payment of other long-term debt. For the nine months ended
September 30, 1999 financing activities consisted
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primarily of proceeds from and repayment of bank borrowing and capital stock
transactions. Capital stock transactions in the period ended September 30, 1999
included the use of $7,645 of borrowings to purchase redeemable common stock.
On June 29, 2000, the Company completed a new Senior Secured Credit
Facility. The new facility for $100,000, which was arranged by FleetBoston
Robertson Stephens, Inc., replaced the $90,000-Senior Credit Facility which
had been in place since April 1998 and was scheduled to convert to a term
loan in 2001. The new Facility provides for borrowings under a three-year
rovolving line of credit of up to $65,000, and includes a five-year $35,000
Senior Secured Term Loan Facility. The banks involved in the new Facility are
Fleet National Bank as Agent, Citizens Bank of Massachusetts, Banknorth
Group, and KeyBank National Association. It is not anticipated that this
additional borrowing capacity will be required for funding the operations of
the Company, but rather will allow the Company additional flexibility for
future investments in the Laundry Route business. At September 30, 2000 the
Company's use of the Facility was $79,039. Outstanding indebtedness bears
interest, at the Company's option, at a rate equal to the i) prime rate plus
0.25%, or ii) LIBOR plus 2.25%. If certain financial ratio targets are met in
2001 and beyond, these interest rate applicable margins will decrease. The
Company was in compliance with the terms of the Facility as of September 30,
2000. The blended interest rate in effect at September 30, 2000 was
approximately 8.4%.
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Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company is exposed to a variety of risks, including changes in interest
rates on its borrowings. There have been no material changes in market risk
exposures from the information disclosed in the Form 10-K for the year ended
December 31, 1999.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are being filed as part of this Form 10-Q:
27.1 Financial Data Schedule for the nine months ended September
30, 2000
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
MAC-GRAY CORPORATION
November 13, 2000 /s/ Michael J. Shea
--------------------
Michael J. Shea
Executive Vice President, Chief
Financial Officer and Treasurer
(On behalf of registrant and as principal
financial officer)
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