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, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
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COMMISSION FILE NUMBER 1-13495
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MAC-GRAY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-3361982
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
22 WATER STREET, CAMBRIDGE, MASSACHUSETTS 02141
(Address of principal executive offices) (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 No X/1/
--- ---
The number of shares outstanding of each of the issuer's classes of
common stock as of the close of business on October 31, 1997:
Class Number of Shares
----- ----------------
Common Stock, $.01 Par Value 11,579,826
- -----------------------------------
/1/ The registrant has been subject to such filing requirements for less
than 90 days
INDEX
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Combined Balance Sheets at September 30,
1997 (unaudited) and December 31, 1996
Condensed Combined Statements of Income for
the Three and Nine Months Ended September 30,
1997 and 1996 (unaudited)
Condensed Combined Statement of Stockholders'
Equity at September 30, 1997 (unaudited) and
December 31, 1996
Condensed Combined Statements of Cash Flows
for the Nine Months Ended September 30, 1997
and 1996 (unaudited)
Notes to Condensed Combined Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signature
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Mac-Gray Corporation
Combined Balance Sheet
(Dollars in thousands, except share and per share data)
- --------------------------------------------------------------------------------
December 31, September 30,
1996 1997
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 2,844 $ 3,922
Trade receivables, net of allowance for doubtful accounts 1,640 2,757
Available-for-sale security 343 343
Inventory of finished goods 1,509 1,886
Prepaid expenses and other current assets 1,699 3,417
-------- --------
Total current assets 8,035 12,325
Property, plant and equipment, net 31,912 35,180
Intangible assets, net 11,491 22,333
Prepaid commissions and other assets 2,670 4,024
-------- --------
Total assets $ 54,108 $ 73,862
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long term debt and capital lease obligations $ 4,293 $ 1,693
Accounts payable 3,876 2,541
Accrued commissions 4,940 4,860
Accrued expenses 995 1,856
-------- --------
Total current liabilities 14,104 10,950
Long-term debt and capital lease obligations 23,518 37,666
Deferred income tax liabilities 647 740
Deferred retirement obligation 1,156 1,080
Other liabilities -- 575
Redeemable common stock, 612,026 shares -- 7,797
Stockholders' equity:
Common stock of Mac-Gray Co., Inc.
($1 par value; 200,000 shares authorized,
154,275 shares issued and 100,000 outstanding) 154
Partners' capital 2,413 --
Common stock of Mac-Gray Corporation ($.01 par value;
30,000,000 shares authorized, 6,367,800 shares
issued and outstanding) -- 64
Retained earnings 20,788 14,732
Net unrealized gain on available-for-sale security, net of tax 258 258
Less: 54,275 shares held in treasury, at cost (8,930) --
-------- --------
Total stockholders' equity 14,683 15,054
-------- --------
Total liabilities and stockholders' equity $ 54,108 $ 73,862
======== ========
The accompanying notes are an integral
part of these financial statements.
Mac-Gray Corporation
Combined Statement of Income
(Dollars in thousands, except share and per share data)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
1996 1997 1996 1997
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue $ 15,833 $ 19,879 $ 44,858 $ 58,167
---------- ---------- ---------- ----------
Cost of revenue:
Commissions 6,711 7,901 18,334 22,540
Laundry route expenditures 2,692 2,810 7,292 9,041
Depreciation and amortization 1,559 2,144 4,274 5,918
Cost of equipment sales 1,135 2,058 3,415 5,889
---------- ---------- ---------- ----------
Total cost of revenue 12,097 14,913 33,315 43,388
---------- ---------- ---------- ----------
Operating expenses:
General and administration 959 1,427 2,833 3,504
Sales and marketing 1,120 1,173 2,660 3,868
Depreciation 181 228 423 611
---------- ---------- ---------- ----------
Total operating expenses 2,260 2,828 5,916 7,983
---------- ---------- ---------- ----------
Income from operations 1,476 2,138 5,627 6,796
Interest expense, net (615) (929) (1,329) (2,327)
Other income (expense), net (55) (33) (90) (29)
---------- ---------- ---------- ----------
Income before provision for income taxes 806 1,176 4,208 4,440
Provision for income taxes (76) (113) (332) (345)
---------- ---------- ---------- ----------
Net income $ 730 $ 1,063 $ 3,876 $ 4,095
========== ========== ========== ==========
Pro Forma Net Income Per Common Share (Note 4) $ .16 $ .62
========== ==========
Pro Forma Weighted Average Common Shares
Outstanding (Note 4) 6,588,618 6,588,618
========== ==========
Unaudited pro forma as adjusted data (Note 4):
Income before provision for income taxes $ 806 $ 1,176 $ 4,208 $ 4,440
Provision for income taxes (322) (470) (1,683) (1,776)
---------- ---------- ---------- ----------
Pro forma as adjusted net income $ 484 $ 706 $ 2,525 $ 2,664
========== ========== ========== ==========
Pro forma as adjusted net income per common share $ .11 $ .40
========== ==========
The accompanying notes are an integral
part of these financial statements.
Mac-Gray Corporation
Combined Statement of Stockholders' Equity
(Dollars in thousands, except share and per share data)
- --------------------------------------------------------------------------------
Common stock Net unrealized
----------------------- gains (losses)
Number of Partners' Retained on security,
shares Value capital earnings net of tax
Balance, December 31, 1996 154,275 $ 154 $ 2,413 $ 20,788 $ 258
Net income (unaudited) -- -- -- 4,095 --
Elimination of capital structure (Note 1) (154,275) (154) (2,413) (6,363) --
Reorganization of the Company (Note 1) 6,367,800 64 -- (64) --
Net change in unrealized gains (losses) on
available-for-sale securities, net of tax
(unaudited) -- -- -- -- --
Dividends (unaudited) -- -- -- (3,724) --
--------- ----- ------- -------- ------
Balance, September 30, 1997 (unaudited) 6,367,800 $ 64 $ -- $ 14,732 $ 258
========= ===== ======= ======== ======
Treasury stock
-------------------------
Number of
shares Value Total
Balance, December 31, 1996 54,275 $ (8,930) $ 14,683
Net income (unaudited) -- -- 4,095
Elimination of capital structure (Note 1) (54,275) 8,930 --
Reorganization of the Company (Note 1) -- -- --
Net change in unrealized gains (losses) on
available-for-sale securities, net of tax
(unaudited) -- -- --
Dividends (unaudited) -- -- (3,724)
-------- -------- --------
Balance, September 30, 1997 (unaudited) -- $ -- $ 15,054
======== ======== ========
The accompanying notes are an integral
part of these financial statements.
Mac-Gray Corporation
Combined Statement of Cash Flows
(Dollars in thousands, except share and per share data)
- --------------------------------------------------------------------------------
Nine Months Ended Nine Months Ended
September 30, September 30,
1996 1997
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 3,876 $ 4,095
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and Amortization 4,697 6,529
Loss on sale of assets 42 --
Deferred income taxes -- 93
(Increase) in accounts receivable (339) (1,073)
Decrease (increase) in inventory 204 (66)
(Increase) in prepaid expenses and other assets (617) (3,036)
(Decrease) in accounts payable, accrued
commissions and accrued expenses (124) (1,527)
-------- --------
Net cash flows provided by operating activities 7,739 5,015
-------- --------
Cash flows from investing activities:
Capital expenditures (4,917) (5,563)
Acquisition of businesses (Note 2) (13,687) (4,958)
Proceeds from sales of property and equipment 51 --
-------- --------
Net cash flows used in investing activities (18,553) (10,521)
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt and
capital lease obligations (5,398) (2,787)
Principal payments on deferred retirement obligations (76) (76)
Retirement line of credit and term loan -- (19,511)
Advances on line-of-credit, net 18,521 32,982
Contribution of capital 744 --
Cash dividends paid (3,273) (3,724)
Casc paid to repurchase shares of common stock (125) --
Cash paid for refinancing of long term debt (75) (300)
-------- --------
Net cash flows provided by
financing activities 10,318 6,584
-------- --------
(Decrease) increase in cash and cash equivalents (496) 1,078
Cash and cash equivalents, beginning of year 3,882 2,844
-------- --------
Cash and cash equivalents, end of year $ 3,386 $ 3,922
======== ========
The accompanying notes are an integral
part of these financial statements.
Mac-Gray Corporation
Notes to Combined Financial Statement
(Dollars in thousands, except share and per share data)
- --------------------------------------------------------------------------------
1. Basis of Presentation
In the opinion of Mac-Gray Corporation (the "Company"), the accompanying
unaudited Combined Financial Statements contain all adjustments
(consisting of only normal, recurring accruals) which are, in the
opinion of management, necessary to present fairly its financial
position as of September 30, 1997 and December 31, 1996 and the results
of its operations and cash flows for the three and nine month periods
ended September 30, 1997 and 1996. The unaudited interim combined
financial statements do not include all information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles. These combined
financial statements should be read in conjunction with the Company's
fiscal 1996 audited combined financial statements. The results for
interim periods are not necessarily indicative of the results to be
expected for the full year.
On April 17, 1997, Mac-Gray Co., Inc. and Mac-Gray, L.P. were
reorganized to create Mac-Gray Corporation (the Parent). The Parent
acquired all of the outstanding common stock of Mac-Gray Co., Inc. and
all of the outstanding limited partnership interest of Mac- Gray, L.P.
in exchange for 6,367,800 shares of the Parent's common stock.
Concurrently, Mac-Gray, L.P. was merged with and into Mac-Gray Co., Inc.
which will continue to operate as a wholly owned subsidiary of the
Parent. The authorized capital stock of the Parent consists of
30,000,000 shares of common stock, $0.01 par value per share, and
5,000,000 shares of undesignated preferred stock issuable in series by
the Board of Directors of the Parent. The unaudited September 30, 1997
financial statements are reflective of the reorganization of the
Company.
2. Acquisitions
On April 17, 1997, the Parent acquired in exchange for 612,026 shares of
its common stock, (approximate value of $7,797), approximately $2,170 in
cash, $850 of a deferred payment obligation, and assumption of
approximately $2,787 in debt, each of Sun Services of America, Inc. and
R. Bodden Coin-Op-Laundry, Inc. (collectively, Sun Services). The shares
of the Parent's common stock are redeemable by the shareholder under
certain circumstances. The redeemable common stock has been valued at a
contractual put price of $12.74 per common share.
Sun Services of America, Inc. and R. Bodden Coin-Op-Laundry were 100%
owned by the same shareholder. The Parent acquired all of the
outstanding capital stock of Sun Services, which was accounted for
pursuant to the purchase method of accounting. Based upon preliminary
purchase accounting, goodwill of approximately $11,600 arose from this
transaction, which will be amortized over 20 years.
The results of Sun Services' operations are reflected in the unaudited
September 30, 1997 financial statements subsequent to the date of
acquisition.
The following unaudited pro forma condensed combined statements of
income for the nine months ended September 30, 1996 and 1997 have been
adjusted to reflect the Sun Services Acquisition for the nine months
ended September 30, 1996 as if it occurred on January 1, 1996. For the
nine months ended September 30, 1997, the historical results of Sun
Services for the period from April 1, 1997 through April 16, 1997 have
not been included and are not material to the Company.
Mac-Gray Corporation
Notes to Combined Financial Statement
(Dollars in thousands, except share and per share data)
- --------------------------------------------------------------------------------
Company Pro Forma
Nine Months Nine Months
Ended Ended
September 30, Sun Services Pro Forma Acquisition September 30,
1996 Acquisitions Combined Adjustments 1996
Revenue $ 44,858 $ 4,875 $ 49,733 $ -- $ 49,733
Cost of Revenue 33,315 3,239 36,554 438 36,992
Operating Expenses 5,916 1,032 6,948 (206) 6,742
-------- -------- -------- -------- --------
Income from operations 5,627 604 6,231 (232) 5,999
======== ======== ======== ======== ========
Net Income $ 3,876 $ 417 $ 4,293 $ (232) $ 4,061
======== ======== ======== ======== ========
Company Pro Forma
Nine Months Nine Months
Ended Ended
September 30, Sun Services Pro Forma Acquisition September 30,
1997 Acquisitions Combined Adjustments 1997
Revenue $ 58,167 $ 2,032 $ 60,199 $ -- $ 60,199
Cost of Revenue 43,388 1,353 44,741 146 44,887
Operating Expenses 7,983 360 8,343 (69) 8,274
-------- -------- -------- -------- ----------
Income from operations 6,796 319 7,115 (77) 7,038
======== ======== ======== ======== ========
Net Income $ 4,095 $ 230 $ 4,325 $ (77) $ 4,248
======== ======== ======== ======== ==========
Pro Forma Net Income
Per Share $ .64
==========
Pro Forma Weighted Average
Common Shares Outstanding 6,588,618
==========
3. Initial Public Offering of Common Stock
Mac-Gray Corporation completed its initial public offering of 4,600,000
shares of common stock at $11 per share on October 22, 1997. Subsequent
to the offering, 11,579,826 shares of common stock are issued and
outstanding. The net proceeds from the sale of the common stock of
$47,058 have been used primarily to repay existing indebtedness
outstanding under the Credit Facility and to fund a distribution of
$9,000 of previously taxed but undistributed earnings to the Company's
shareholders of record as of October 16, 1997.
Upon consummation of the initial public offering, the Company's status
as an S Corporation automatically terminated and the Company is now
subject to federal and state income taxes. As a result, the Company will
recognize a non-recurring charge of approximately $4,300 in the fourth
quarter of 1997, as well as an addition of approximately $4,300 in net
deferred tax liabilities in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
4. Unaudited Pro Forma as Adjusted Information and Earnings Per Share
The unaudited pro forma as adjusted data reflects adjustments to the
combined statement of income for the three months ended September 30,
1996 and 1997 and for the nine months ended September 30, 1996 and 1997.
Such adjustments consider the effect on the Company's operations as if
the Company was subject to federal and state income taxes on a corporate
level. Accordingly, the pro forma income tax provision and pro forma as
adjusted net income have been calculated as if the Company was subject
to income taxation as a C corporation during all periods presented.
Given the capital structure of the Company, historical earnings per
share information is not considered meaningful or relevant and has not
been presented in the accompanying financial statements. Unaudited pro
forma net income per share was calculated by dividing the respective
unaudited pro forma net income amounts by the weighted average number of
shares of common and common equivalent shares outstanding, giving effect
to the exchange of shares between the Parent and the Company resulting
from the reorganization on April 17, 1997 described above, using the
treasury stock method. Common share equivalents consist of common stock
which may be issuable upon exercise of outstanding stock options. All
shares issued within twelve months of the initial public offering (Note
3), including common stock equivalents, are considered in computing
common and common share equivalents.
5. Deferred Retirement Obligation
The deferred retirement obligation at September 30, 1997 and December
31, 1996 relates to payments due to a shareholder of the Company in
connection with a retirement agreement which provides for annual
payments of $104 until the death of the shareholder.
Mac-Gray Corporation
Notes to Combined Financial Statement
(Dollars in thousands, except share and per share data)
- --------------------------------------------------------------------------------
The liability at September 30, 1997 and December 31, 1996 has been
estimated based upon life expectancy of the shareholder utilizing
actuarial tables.
6. Long-Term Debt
On April 17, 1997, the Parent entered into a credit agreement (the
Credit Facility) with a bank which provides for borrowings under (i) a
revolving line of credit and term loan facility and (ii) a revolving
working capital line of credit facility of up to $45,000 and $5,000,
respectively. Outstanding indebtedness under the Credit Facility bears
interest, at the Parent's option, at a rate equal to the prime rate plus
up to .5% or LIBOR plus 2.5% with the margin over the prime rate and
LIBOR decreasing after October 22, 1997 due to the initial public
offering of the Parent's common stock (Note 7). The Credit Facility
restricts payments of dividends and other distributions, restricts the
Parent from making certain acquisitions, incurring indebtedness and
requires it to maintain certain financial ratios. The Credit Facility is
secured by pledges of assets of the Parent and its subsidiaries. Bank
indebtedness of the Company outstanding prior to the effective date of
the Credit Facility was subsequently assumed under the Credit Facility.
The outstanding balance on the Credit Facility was $31,159 at September
30, 1997. The balance outstanding under the prior revolving bank credit
facility and credit agreement was $17,668 at December 31, 1996. The
interest rate for $22,000 of the balance at September 30, 1997 was
8.125% and $9,159 was 9.00%.
Long term debt also includes various notes payable totaling $1,122 at
September 30, 1997 and $1,259 at December 31, 1996, and various
unsecured notes payable to former shareholders totaling $6,236 at
September 30, 1997 and $8,440 at December 31, 1996.
7. Commitments and Contingencies
Guarantee of Indebtedness - At September 30, 1997, Mac-Gray Co., Inc. is
a guarantor on a line-of-credit for a customer in the amount of $689.
The customer has incurred substantial losses in its last three fiscal
years ended December 31, 1996. While the guarantee is secured by a
pledge of the borrowing company's assets, it is uncertain if those
assets and profits from continuing operations will be adequate to retire
the line-of-credit. The Company has recorded a contingency reserve of
$250 at September 30, 1997 and December 31, 1996, for estimated losses
on the guarantee. In management's opinion, the range of the estimated
loss to be incurred in connection with the Company's guarantee of the
customer's line-of-credit in excess of the amount recorded at September
30, 1997 will not have a material adverse impact on the results of
operations or the financial position of the Company.
Litigation - 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.
Mac-Gray Corporation
Notes to Combined Financial Statement
(Dollars in thousands, except share and per share data)
- --------------------------------------------------------------------------------
8. 1997 Stock Option Plan
In April 1997, the Parent adopted the 1997 Stock Option and Incentive
Plan (the 1997 Plan). The terms of the 1997 Plan are substantially the
same as the terms of the 1996 Plan that was adopted by Mac-Gray Co.,
Inc. in December 1996. Concurrent with the reorganization of the
Company, the options issued pursuant to the 1996 Plan were assumed by
the Parent under the 1997 Plan and the 1996 Plan was terminated. The
options assumed by the Parent under the 1997 Plan were reflective of the
exchange of common stock between the Parent and Mac-Gray Co., Inc.
Accordingly, 556,350 options with an exercise price of $9.99 per share
issued pursuant to the 1996 Plan were assumed by the Parent under the
1997 Plan. Prior to August 1997, 7,500 options were forfeited by
terminated employees. The exercise price of the remaining 548,850
options was adjusted to $8.80 in August 1997, in order to restore the
economic position of the option holders as a result of the $9,000
distribution (Note 3). In August 1997, the Company also granted 89,490
new options under the plan with an exercise price of $9.25.
The 1997 Stock Plan provides for the issuance of up to the greater of
750,000 shares or ten percent of the then outstanding shares of common
stock. Subsequent to the initial public offering (Note 3), a total of
1,157,982 shares of common stock are reserved for issuance under the
1997 Stock Plan, of which 638,340 shares are subject to outstanding
options, and 519,642 remain available for issuance.
9. Subsequent Events
Acquisition of Laundry Route Assets
On October 1, 1997 the Company acquired the assets of a laundry route in
Florida for a purchase price of approximately $2,000 in cash. On
November 4, 1997 the Company acquired the assets of a laundry route in
Georgia for a purchase price of approximately $5,000 in cash. Both of
these acquisitions will be accounted for pursuant to the purchase method
of accounting during the fourth quarter of 1997.
10. New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
"Statement of Financial Accounting Standards No. 128, Earnings per Share
(SFAS 128)." This Statement will be effective for both interim and
annual periods ending after December 15, 1997. SFAS 128 replaces APB
Opinion 15 and related interpretations (APB 15). SFAS 128 simplifies the
computation of earnings per share (EPS) by replacing the presentation of
primary earnings per share with a presentation of basic EPS. Basic EPS
includes no dilution and is computed by dividing net income by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution of securities that could
share in the earnings of an entity, similar to fully diluted EPS under
APB 15.
Mac-Gray Corporation
Notes to Combined Financial Statement
(Dollars in thousands, except share and per share data)
- --------------------------------------------------------------------------------
In June of 1997, the Financial Accounting Standards Board issued
"Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (SFAS 130) and No. 131, Disclosures About Segments
of an Enterprise and Related Information (SFAS 131)." In accordance with
these statements, the Company plans to implement SFAS 130 which requires
presentation of certain information related to comprehensive income and
SFAS 131 which requires that certain additional information related to
operating segments be reported during fiscal year 1998.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations contain "forward-looking" information (as
defined in the Private Securities Litigation Reform Act of 1995). The words
"believe," "expect," "anticipate," "intend," "estimate", "assume" and other
similar expressions which are predictions of or indicate future events and
trends and which do not relate to historical matters identify forward-looking
statements. Reliance should not be placed on forward-looking statements because
they involve known and unknown risks, uncertainties and other factors, which are
in some cases beyond the control of the Company and may cause the actual
results, performance or achievements of the Company to differ materially from
anticipated future results, performance or achievements expressed or implied by
such forward-looking statements.
For discussion identifying important factors that could cause actual
results to differ materially from those anticipated in forward-looking
statements, see the Company's filings with the Securities and Exchange
Commission, particularly the "Risk Factors" discussion in the Company's
Registration Statement on Form S-1 (No. 333-33669) which was declared effective
on October 16, 1997. Such factors include, without limitation, risks to the
Company presented by implementation of acquisition strategy, integration of
acquired businesses, significant capital expenditures, competition and
dependence upon lease renewals, certain suppliers and senior executives.
The Company derives its revenue principally through the operation and
maintenance of card and coin-operated laundry rooms in multiple housing
facilities, such as apartment buildings, colleges and universities and public
housing complexes. The Company operates its laundry rooms under long-term leases
with property owners, colleges and universities and governmental agencies. The
leases typically grant the Company the exclusive right to operate laundry rooms
on the lessor's premises for a fixed term, which is generally seven to ten
years, in exchange for a percentage of the revenue collected. The Company also
derives revenue as a distributor and servicer of commercial laundry equipment
manufactured by Maytag Corp., and sells laundry equipment manufactured by
American Dryer, Dexter and Whirlpool to provide several alternatives in machine
type, cost and capacity. 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.
Results of Operations
Revenue. Revenue increased by $4,046,000, or 26%, to $19,879,000 for the
three months ended September 30, 1997 from $15,833,000 for the comparable months
in 1996, and by $13,309,000, or 30%, to $58,167,000 for the nine months ended
September 30, 1997 from $44,858,000 for the same period in 1996. Laundry Route
Revenue increased $2,765,000 for the quarter and $9,847,000 year to date, due to
expansion of existing operations and the additional revenues from the laundry
route businesses acquired during 1996 and 1997. Sales of equipment increased by
$1,281,000 for the quarter and $3,462,000 year to date, due to growth of revenue
from existing distributorships and the distributorships acquired during 1996 and
1997. The Company believes that its increased focus on sales and marketing
efforts since mid-1996 has had a significant impact on the growth of revenue
from existing laundry routes and distributorships.
Cost of Revenues. Commissions increased by $1,190,000, or 18% for the
third quarter of 1997 from the third quarter of 1996, and by $4,206,000, or 23%
on a year to date basis in 1997 from 1996. This increase was primarily
attributable to an increase in Laundry Route Revenue, since commissions are
generally paid based upon a percentage of revenue earned in the Company's
laundry rooms
Laundry Route expenditures increased by $118,000, or 4%, to $2,810,000
for the third quarter of 1997 from $2,692,000 for the third quarter of 1996. On
a year to date basis, Laundry Route expenditures increased $1,749,000, or 24%,
from 1996 to 1997. This increase was due to the general increase in revenue,
which resulted in increased servicing, collecting, counting and depositing
activity, as well as increased levels of expenses associated with improving
service in some of the acquired businesses.
Cost of equipment sales increased by $923,000 for the three months ended
September 30, 1997 from $1,135,000 in 1996, and by $2,474,000, or 72% for the
nine months ended September 30. 1997 from $3,415,000 in 1996. This increase was
a direct result of increased equipment sales.
Depreciation and Amortization. Depreciation and amortization includes
depreciation and amortization expense which is included as a component of cost
of revenue, as well as depreciation which is included as an operating expense.
Aggregate depreciation and amortization increased by $632,000, or 36%, to
$2,372,000 for the three months ended September 30, 1997 from $1,740,000 for the
same period in 1996, and by $1,832,000, or 39%, to $6,529,000 for the nine
months ended September 30, 1997 from $4,697,000 for the same period in 1996.
This increase was primarily attributable to the acquisition of Laundry Route
businesses and the placement of additional machines on the Company's existing
Laundry Routes. The total number of machines increased by 19,000 from September,
1996 to approximately 113,000 total machines as of September, 1997.
Operating Expenses. General and administration expenses increased by
$468,000 for the three months ended September 30, 1997 from $959,000 in 1996,
and by $671,000, or 24% for the nine months ended September 30, 1997. This
increase was attributable to an increase in legal and accounting fees and to the
hiring of additional clerical and administrative staff to support the increase
in the Company's business.
Sales and marketing expense increased by $53,000 for the three months
ended September 30. 1997 from $1,120,000 in 1996, and by $1,208,000, or 45% for
the nine months ended September 30, 1997. This increase was attributable to the
expansion of the marketing department, led by the hiring of an experienced
national marketing executive in the third quarter of 1996, and an increase in
the number of field sales representatives.
Interest Expense. Net interest expense increased $314,000, or 51 %, to
$929,000 for the three months ended September 30, 1997 from $615,000 in 1996,
and by $998,000, or 75 % for the nine months ended September 30, 1997. This
increase was primarily attributable to the increased borrowings incurred to
finance the acquisitions made during 1996 and 1997.
Income Tax Expense. Income tax expense increased by $37,000 for the three
months ended September 30, 1997 from 1996, and by $13,000, or 4% for the nine
months ended September 30, 1997. The effective income tax rate for the nine
months ended 1996 was 7.9% compared to 7.8% for 1997. As the historical income
tax provision was established only to provide for income taxes in states that do
not recognize Subchapter S corporations, the statutory income tax rate for 1996
and 1997 was 6%. The effective rate differed from the statutory rate in 1996 and
1997 due to expenses recorded for book purposes that are not deductible for
income tax purposes.
The statutory income tax rate utilized by the Company during the periods
presented is not indicative of the approximately 40% statutory income tax rate
that will be utilized upon termination of the Company's S corporation status on
October 16, 1997.
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 thirty percent
(30%) of the Company's total revenue. These revenues are derived substantially
during the school year which includes the first, second and fourth quarters.
Conversely, the Company increases its operating expenditures during the third
quarter when colleges and universities are not in session as a result of the
Company's increased machine installation activities.
Liquidity and Capital Resources
The Company's primary sources of cash have been operating activities and
bank borrowings. The Company's primary uses of cash have been the seven
acquisitions consummated since May 1996 and for capital expenses including the
purchase of new laundry machines 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 on its
outstanding indebtedness, as well as capital expenditures. The Company does,
however, anticipate that it will also use funds available to it under the Credit
Facility (as defined below) to finance possible acquisitions, larger capital
expenditures and, as needed, working capital.
Cash flow from operations was $5,015,000 and $7,739,000 for the nine
months ended September 30, 1997 and 1996, respectively. Cash flow from
operations consists primarily of Laundry Route Revenue, distributorship and
laundry equipment service revenue, commissions, Laundry Route expenditures, cost
of equipment sales,
general and administration expenses and sales and marketing expenses. The
Company has also incurred costs in connection with the initial public offering
process.
Cash used in investing activities was $10,521,000, and $18,553,000 for the
nine months ended September 30, 1997 and 1996, respectively. The Company
invested $4,958,000 and $13,687,000 for the nine months ended September 30, 1997
and 1996, respectively, in connection with the seven acquisitions consummated
during such periods.
Capital expenditures were $5,563,000 and $4,917,000 for the nine months
ended September 30, 1997 and 1996, respectively.
Net cash flows (uses) from financing activities, consisting primarily of
proceeds from and repayments of bank borrowings and payments of dividends, were
$6,584,000 and $10,318,000 for the nine months ended September 30, 1997 and
1996, respectively. The Company also utilized $125,000 as a portion of the
consideration paid in connection with the redemption of 2,275 shares of its
Common Stock as of January 1, 1996.
The Company maintains a $50 million revolving line of credit under its
Credit Facility with State Street Bank and Trust Company and CoreStates Bank
("Credit Facility"). Outstanding indebtedness under the Credit Facility
currently bears interest, at the Company's option, at a rate equal to the prime
rate plus 0.5% or LIBOR plus 2.5%. Borrowings under the Credit Facility totalled
$31 million as of September 30, 1997. Following consummation of the Company's
initial public offering on October 22, 1997, indebtedness under the Credit
Facility will bear interest, at the Company's option, at a rate equal to the
prime rate minus 0.5% or LIBOR plus 2.0%. The Credit Facility imposes certain
financial covenants on the Company, and the Company was in material compliance
with all such covenants, or received a written waiver with respect to any non-
compliance therewith, as of the quarter ended September 30, 1997. The Credit
Facility, under certain limited circumstances, also restricts the payment of
dividends and other distributions as well as certain acquisitions and
investments. The Credit Facility is secured 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.
In connection with the Sun Services Acquisition, the Company issued
612,026 shares of Common Stock to the owner of Sun Services. As a privately
owned Company issuing shares of its redeemable Common Stock which, at that
point, were substantially illiquid, the Company provided the Sun Services owner
with rights (the "Put Rights") to require the Company to repurchase the shares
of Common Stock issued by the Company as consideration in the acquisition. The
Company also received certain rights (the "Call Rights") to repurchase such
shares of Common Stock. Upon consummation of the Company's initial public
offering on October 22, 1997, the Call Rights and certain of the Put Rights
terminated. Following consummation of the offering, the Company remains
obligated to repurchase shares of Common Stock at a price of $12.74 per share in
the event the holder or holders of such shares elect to exercise the Put Rights.
Such remaining Put Rights expire on October 21, 2000. The Put Rights, if
exercised, would require the Company to purchase up to 612,026 shares of Common
Stock, at a purchase price of $12.74 per share, representing an aggregate
purchase price of up to approximately $7.8 million. In the event such Put Rights
are exercised, the Company would likely fund the purchase price for such shares
of Common Stock by incurring additional indebtedness under its Credit Facility.
The net proceeds from the initial public offering consummated on October
22, 1997 enabled the Company to repay its existing outstanding indebtedness
under the credit facility. A $9,000,000 dividend to shareholders in October,
1997 was also funded from the proceeds of the offering. A laundry route
acquisition for approximately $2,000,000 in October and another for
approximately $5,000,000 in November have also been funded from the proceeds of
the offering. The Company believes that the proceeds of the offering, together
with the amount available under the Credit Facility and cash flow generated by
operations will be sufficient to fund the Company's normal working capital needs
and capital expenditures for the foreseeable future. In addition, to the extent
that the Company were to borrow all amounts then available to it under the
Credit Facility in connection with one or more acquisitions or in connection
with significant capital expenditures, either in the short-term or in the long-
term, management believes that cash generated from operating activities will be
sufficient to fund the Company's operating expenses and debt service needs for
the foreseeable future. Additional financing, under the Credit Facility or
otherwise, may, however, be required in connection with an acquisition or
acquisitions which the Company may consummate in the future. To the extent that
any such additional financing was needed, and could not be obtained on terms
favorable to the Company, if at all, the Company's ongoing capital improvement
efforts and acquisition activity would likely be reduced or delayed as cash
generated from operating activities is used for operating expenses and debt
service.
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:
EXHIBIT NO. DESCRIPTION
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27 Financial Data Schedule
(b) No reports on Form 8-K have been filed with the Commission during
the period covered by this Form 10-Q.
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 thereunto duly authorized.
MAC-GRAY CORPORATION
November 14, 1997 /s/ John S. Olbrych
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John S. Olbrych
Treasurer and Chief Financial Officer