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 June 30, 1999
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 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 August 13, 1999:
Class Number of shares
----- ----------------
Common Stock, $.01 Par Value 12,625,428
INDEX
-----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1999
(unaudited) and December 31, 1998
Condensed Consolidated Income Statements (unaudited) for the
Three and Six Months Ended June 30, 1999 and 1998
Condensed Consolidated Statement of Stockholders' Equity for the
Six Months Ended June 30, 1999 (unaudited)
Condensed Consolidated Statements of Cash Flows (unaudited) for
the Six Months Ended June 30, 1999 and 1998
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 4. Submission of Matters to Security Holders
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)
JUNE 30,
DECEMBER 31, 1999
1998 (unaudited)
------------------ ----------------
ASSETS
Current assets:
Cash and cash equivalents $6,181 $5,767
Trade receivables, net of allowance for doubtful accounts 8,298 7,093
Inventory of finished goods 5,266 8,364
Prepaid expenses and other current assets 6,728 7,955
------------------ ----------------
Total current assets 26,473 29,179
Property, plant and equipment, net 69,208 73,388
Intangible assets, net 65,249 66,053
Prepaid commissions and other assets 10,590 15,232
------------------ ----------------
Total assets $171,520 $183,852
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease
obligations $2,444 $2,669
Redeemable common stock (Note 6) 7,644 -
Trade accounts payable and accrued expenses 8,706 11,889
Accrued commissions 7,133 6,826
Deferred revenues and deposits 3,386 507
------------------ ----------------
Total current liabilities 29,313 21,891
Long-term debt and capital lease obligations 70,559 88,746
Deferred income taxes 7,472 8,318
Deferred retirement obligation 957 904
Other liabilities 278 216
Commitments and contingencies (Note 4) - -
Stockholders' equity:
Preferred stock of Mac-Gray Corporation ($.01 par value, 5
million shares authorized, no shares outstanding) - -
Common stock of Mac-Gray Corporation ($.01 par value, 30
million shares authorized, 12,843,728 and 13,443,754
shares issued and 12,781,628 and 12,625,428 shares
outstanding at December 31, 1998 and June 30, 1999,
respectively) 128 134
Additional capital 60,896 68,535
Retained earnings 2,623 4,728
------------------ ----------------
63,647 73,397
Less common stock in treasury (706) (9,620)
------------------ ----------------
Total stockholders' equity 62,941 63,777
------------------ ----------------
Total liabilities and stockholders' equity $171,520 $183,852
================== ================
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 Six months ended
June 30, June 30,
1998 1999 1998 1999
---------- ---------- ---------- ----------
Revenue:
Route revenue $21,977 $22,791 $41,709 $50,616
Sales revenue 9,236 12,398 15,925 19,908
Other 1,655 2,084 3,223 4,128
---------- ---------- ---------- ----------
Total revenue 32,868 37,273 60,857 74,652
---------- ---------- ---------- ----------
Cost of revenue:
Route related expenses 14,936 16,331 27,722 35,338
Depreciation and amortization 3,338 4,505 6,162 8,797
Cost of product sales 6,336 8,468 11,002 13,317
---------- ---------- ---------- ----------
Total cost of revenue 24,610 29,304 44,886 57,452
---------- ---------- ---------- ----------
Gross margin 8,258 7,969 15,971 17,200
---------- ---------- ---------- ----------
Operating expenses:
Selling, general and administration 4,513 5,048 8,901 10,471
Merger-related costs - - 884 -
---------- ---------- ---------- ----------
Total operating expenses 4,513 5,048 9,785 10,471
---------- ---------- ---------- ----------
Income from operations 3,745 2,921 6,186 6,729
Interest and other expense, net (969) (1,587) (1,264) (3,035)
---------- ---------- ---------- ----------
Income before provision for income taxes 2,776 1,334 4,922 3,694
Provision for income taxes 740 604 1,895 1,589
---------- ---------- ---------- ----------
Net income before accretion and dividends on
redeemable preferred stock 2,036 730 3,027 2,105
Accretion and dividends on redeemable
preferred stock - - 62 -
---------- ---------- ---------- ----------
Net income available to common stockholders $2,036 $730 $2,965 $2,105
========== ========== ========== ==========
Net income per common share--basic $0.16 $0.06 $0.24 $0.17
========== ========== ========== ==========
Weighted average common shares outstanding 12,590 12,636 12,390 12,693
========== ========== ========== ==========
Net income per common share--diluted $0.16 $0.06 $0.23 $0.17
========== ========== ========== ==========
Weighted average common shares outstanding
diluted 13,018 12,636 12,838 12,693
========== ========== ========== ==========
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
----------------------------------------------------------------------------------
Balance, December 31, 1998 12,781,628 $128 $60,896 $2,623 62,100 $ (706) $62,941
Net income 2,105 2,105
Repurchase of redeemable common
stock 6 7,639 600,026 (7,645) -
Repurchase of common stock (156,200) 156,200 (1,269) (1,269)
----------------------------------------------------------------------------------
Balance, June 30, 1999 12,625,428 $134 $68,535 $4,728 818,326 $(9,620) $63,777
==================================================================================
The accompanying notes are an integral part of these financial statements
5
MAC-GRAY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Six Months Ended June 30,
1998 1999
----------- ----------
Cash flows from operating activities:
Net income $3,027 $2,105
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Depreciation and amortization 6,605 9,264
Gain on sale of assets (252) (207)
Deferred income taxes 96 284
(Increase) decrease in accounts receivable (1,263) 1,206
Decrease (increase) in inventory 2,081 (3,994)
Increase in prepaid expenses and other assets (4,865) (7,366)
Increase in accounts payable, accrued commissions and
accrued expenses 1,396 2,786
Decrease in deferred revenues and customer deposits (1,757) (2,880)
----------- ----------
Net cash flows provided by operating activities 5,068 1,198
----------- ----------
Cash flows from investing activities:
Capital expenditures (6,108) (8,280)
Acquisition of businesses (48,269) (3,000)
Proceeds from sale of property and equipment 872 587
----------- ----------
Net cash flows used in investing activities (53,505) (10,693)
----------- ----------
Cash flows from financing activities:
Payments on long-term debt and capital lease obligations (1,218) (1,359)
Advances on line-of-credit, net 51,987 19,354
Contribution of capital and proceeds from sale of common stock 13 -
Dividends paid (72) -
Purchase of redeemable common stock - (7,645)
Repurchase of common stock - (1,269)
----------- ----------
Net cash flows provided by financing activities 50,710 9,081
----------- ----------
Increase (decrease) in cash and cash equivalents 2,273 (414)
Cash and cash equivalents, beginning of period 3,774 6,181
----------- ----------
Cash and cash equivalents, end of period 6,047 5,767
=========== ==========
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 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 June 30,
1999 and December 31, 1998 and the results of its operations and cash flows for
the three and six month periods ended June 30, 1999 and 1998. 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 1998 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. The Company also
sells, services and leases commercial laundry equipment to commercial
laundromats and institutions. The majority of the Company's purchases of coin
route laundry equipment is from one supplier.
2. LONG TERM DEBT
The 1998 Senior Secured Credit Facility provides for borrowings under a
revolving line of credit of up to $90,000.
This 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 Company
was in compliance with the terms of the credit agreement as of June 30, 1999.
The balance outstanding under this credit facility was $85,020 at June 30, 1999.
Long term debt also includes various notes payable totaling $3,806 at December
31, 1998 and $3,405 at June 30, 1999 and various unsecured notes payable to
former shareholders totaling $1,631 at December 31, 1998 and $1,252 at June 30,
1999.
3. DEFERRED RETIREMENT OBLIGATION
The deferred retirement obligation at June 30, 1999 and December 31, 1998
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 June 30, 1999 and December
31, 1998 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.
7
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 June 30, 1999
-------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------------- ------------------- -------------
Net income available to common stockholders--basic $730 12,636 $0.06
================= =================== =============
Net income available to common stockholders--diluted $730 12,636 $0.06
================= =================== =============
For the Three Months Ended June 30, 1998
-------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------------- ------------------- -------------
Net income available to common stockholders--basic $2,036 12,590 $0.16
================= =================== =============
Effect of dilutive securities:
Stock options 269
Contingent shares 159
-------------------
Net income available to common stockholders--diluted $2,036 13,018 $0.16
================= =================== =============
For the Six Months Ended June 30, 1999
-------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------------- ------------------- -------------
Net income available to common stockholders--basic $2,105 12,693 $0.17
================= =================== =============
Net income available to common stockholders--diluted $2,105 12,693 $0.17
================= =================== =============
For the Six Months Ended June 30, 1998
-------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------------- ------------------- -------------
Net income per common share:
Net Income $3,027
Less: Accretion and dividends on redeemable preferred
stock 62
-----------------
Net income available to common stockholders--basic $2,965 12,390 $0.24
================= =================== =============
Effect of dilutive securities:
Stock options 289
Contingent shares 159
-------------------
Net income available to common stockholders--diluted $2,965 12,838 $0.23
================= =================== =============
8
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Contingent shares represented common shares held in escrow related to the
merger with Intirion Corporation (MicroFridge(R)) which was accounted for as a
pooling of interests. In March 1999, these shares were released from escrow to
the former Intirion shareholders.
6. REPURCHASE OF COMMON STOCK
On October 29, 1998, the Board of Directors authorized the Company to
repurchase up to $8,000 of its common stock through the open market. During the
three months ended June 30, 1999 the Company repurchased 30,200 shares for a
total cash outlay of $227. Since the inception of the plan, the Company has
repurchased 218,300 shares at a total cost of $1,975.
Also included in treasury stock are 600,026 shares of common stock purchased
under a redemption agreement related to the 1997 acquisition of Sun Services.
The total cost of these shares amounted to $7,645.
7. 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 proprietary line of refrigerator/freezer/microwave oven
combinations to a customer base which includes colleges and universities,
government, hotel, motel and assisted living facilities.
There are no intersegment revenues.
9
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The table below presents information about the reported condensed financial
statements of Mac-Gray for the three and six months ended June 30, 1999 and
1998.
FOR THE THREE FOR THE THREE FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
------------- ------------- ------------- ------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1999 1998 1999
Revenues:
Laundry and Reprographics 25,568 27,561 48,975 58,249
MicroFridge(R) 7,300 9,712 11,882 16,403
------------- ------------- ------------- ------------
Total 32,868 37,273 60,857 74,652
Gross Margin
Laundry and Reprographics 5,776 4,487 11,768 11,337
MicroFridge(R) 2,482 3,482 4,203 5,863
------------- ------------- ------------- ------------
Total 8,258 7,969 15,971 17,200
Operating Expense 4,513 5,048 9,785 10,471
Interest and other expenses,
net 969 1,587 1,264 3,035
------------- ------------- ------------- ------------
Income before provision for
taxes 2,776 1,334 4,922 3,694
------------- ------------- ------------- ------------
December 31, June 30,
1998 1999
------------------ --------------
Assets
Laundry $123,054 $121,860
MicroFridge(R) 19,767 26,041
------------------ --------------
Total for reportable segments 142,821 147,901
Corporate (1) 28,212 34,901
Deferred income taxes 487 1,050
------------------ --------------
Total assets $171,520 $183,852
================== ==============
(1) Principally cash, prepaid expenses and property, plant & equipment.
10
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
8. COMPREHENSIVE INCOME
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130. "Reporting Comprehensive Income" (SFAS 130) in
June 1997. The Company adopted SFAS 130 for fiscal 1998. SFAS 130 requires
presentation of certain information related to comprehensive income. For the
three and six months ended June 30, 1999 and 1998, the Company had no other
comprehensive income as defined by SFAS 130, therefore there is no impact on the
Company's balance sheet and income statement.
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:
implementation of acquisition strategy; integration of acquired businesses;
ability to meet future capital requirements; dependence upon certain suppliers;
lease renewals; retention of senior executives; market acceptance of new
products and services; 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(R)
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(R) equipment under long-term leases with property
owners, colleges and universities and governmental agencies. Mac-Gray's Laundry
Route business consists of approximately 166,000 laundry machines, operated in
over 25,000 multiple housing laundry rooms located in 29 states. Mac-Gray's
reprographics business is conducted in approximately 2,200 locations
concentrated in the northeast, Florida and Texas. Mac-Gray's MicroFridge(R)
business consists of leased units located throughout the United States as well
as sales of its MicroFridge(R) product line.
Mac-Gray also derives revenue as a distributor and servicer of commercial
laundry equipment. Additionally, the Company sells or rents laundry equipment to
hospitals, restaurants, hotels and similar institutional users that operate
their own on-premise laundry facilities.
REDEEMABLE COMMON STOCK
In January 1999 the Company repurchased all of its outstanding redeemable
stock. 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
YEAR 2000
The Company continues to research and test potential year 2000 ("Y2K")
problems within its software and systems. During 1998 the Company contracted
with an outside consultant to assist in the evaluation of Y2K preparedness.
Through June 30, 1999 the Company has not incurred significant costs directly
associated with Y2K evaluations and corrections. The Company does not expect to
incur significant costs moving forward to rectify any Y2K issues. Should any Y2K
issues be identified in the coming months which the Company believes could
remain unresolved into the latter stages of 1999, the Company will develop
contingency plans. Such contingency plans may include increasing inventories to
prevent delays in new equipment installations, and the temporary addition of
staff to facilitate manual processing of information.
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
THREE AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 1998.
Revenue. Revenue increased by $4,405, or 13%, to $37,273 for the three months
ended June 30, 1999 from the three months ended June 30, 1998. Revenue increased
by $13,795, or 23%, to $74,652 for the six months ended June 30, 1999 from the
six months ended June 30, 1998. This increase is related to an increase in route
revenue, which is made up of money collected through coin- and card-operated
equipment, of $814, or 4%, from the three months ended June 30, 1998, and
$8,907, or 21%, from the six months ended June 30, 1998, due to the expansion of
existing operations and the additional revenues from the route businesses
acquired during 1998. Sales revenue increased $3,162, or 34%, from the three
months ended June 30, 1998, and $3,983, or 25%, from the six months ended June
30, 1998, due to increases in sales of both laundry equipment and the
MicroFridge(R) division.
Route Related Expenses. Route related expenses include commissions 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 increased $1,395, or 9%, to $16,331 for the three months
ended June 30, 1999 from the three months ended June 30, 1998, and $7,616, or
27%, to $35,338 for the six months ended June 30, 1999 from the six months ended
June 30, 1998. This increase was primarily related to an increase in commissions
expense which is tied to the increase in route revenue. The increase is also
related to an increase in the Company's machine base which is a result of both
internal growth and acquisitions made during the second quarter of 1998. The
Company has expanded into territories where there has been no previously
established infrastructure. As a result, operating costs relative to revenue in
these new areas are higher than normal. In June 1999 the Company acquired a
laundry route business of approximately 4,000 machines in the greater Chicago
area. Due to the density of the Company's present route business in this market,
these machines should help to raise the Company's operating margins.
Depreciation and Amortization. Depreciation and amortization increased by
$1,167, or 35%, to $4,505 for the three months ended June 30, 1999 from the
three months ended June 30, 1998, and $2,635, or 43%, to $8,797 for the six
months ended June 30, 1999 from the six months ended June 30, 1998. The increase
was primarily attributable to the acquisitions of businesses during the second
quarter of 1998 which resulted in additional machines to depreciate, as well as
an increase in intangible assets to amortize. Depreciation also increased as a
result of the increase in the Company's machine base due to internal growth.
Selling, General and Administration. Selling, general and administration
expenses increased by $535, or 12%, to $5,048 for the three months ended June
30, 1999 from the three months ended June 30, 1998, and $1,570, or 18%, to
$10,471 for the six months ended June 30, 1999 from the six months ended June
30, 1998. The increase was primarily attributable to an increase in sales staff,
sales commissions earned as a result of internal expansion in the route business
and the increase of MicroFridge(R) sales as well as certain non-recurring
charges associated with the development of new integrated marketing materials.
13
Interest and Other Expense. Interest and other expense, net of interest and
other income, increased by $618, or 64%, to $1,587 for the three months ended
June 30, 1999 from the three months ended June 30, 1998, and $1,771, or 140%, to
$3,035 for the six months ended June 30, 1999 from the six months ended June 30,
1998. This increase is primarily related to an increase in outstanding
borrowings which are related to the significant acquisition activity in the
second quarter of 1998. Interest expense is also impacted by borrowings used to
repurchase shares of the Company's common stock during the fourth quarter of
1998 and the first six months of 1999.
Provision for Income Taxes. The provision for income taxes decreased by $136,
or 18%, to $604 for the three months ended June 30, 1999 from the three months
ended June 30, 1998, and $306, or 16%, to $1,589 for the six months ended June
30, 1999 from the six months ended June 30, 1998. These decreases are due to
corresponding decreases in taxable income in each of these periods. The
effective tax rate is higher for the three and six months ended June 30, 1999
than it was for the three and six months ended June 30, 1998, due to a tax
benefit of $370,000 associated with the acquisition of the MicroFridge(R)
division in the second quarter of 1998.
SEASONALITY
The Company experiences 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.
Laundry and reprographics route revenues are derived substantially during the
school year which includes the first, second and fourth calendar quarters.
Conversely, during the third calendar quarter when colleges and universities are
not in session, operating expenses increase as a result of Mac-Gray's increased
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, 1998 have been operating
activities and bank borrowings. The Company's primary uses of cash have been the
purchase of redeemable common stock, other capital stock transactions and
capital expenses including the purchase of new laundry machines, MicroFridge(R)
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 on any outstanding indebtedness, as
well as capital expenditures.
Cash flows provided by operations were $1,198 and $5,068 for the six months
ended June 30, 1999 and 1998, respectively. Cash flow from operations consists
primarily of route revenue, product sales, laundry equipment service revenue,
and rental revenue, offset by commissions, route expenditures, cost of product
sales, cost of rental revenue and selling, general and administration expenses.
The decrease in cash provided by operations for the six-month period ended June
30, 1999 was due primarily to the increase in inventory purchases and the timing
of such purchases as compared to prior year to prepare for summer installations
of equipment on college campuses.
Cash used in investing activities was $10,693 and $53,505 for the six months
ended June 30, 1999 and 1998 respectively. Capital expenditures related to
equipment acquisition were $8,280 and $6,108 for the six months ended June 30,
1999 and 1998, respectively. Cash flows related to business acquisitions were
$3,000 and $48,269 for the six months ended June 30, 1999 and 1998,
respectively.
Net cash flows from financing activities were $9,081 and $50,710 for the six
months ended June 30, 1999 and 1998, respectively. Financing activities for
those periods consist primarily of proceeds from and repayments of bank
borrowings, capital stock transactions, and payments. Capital stock transactions
in 1999 include the use of $7,645 to purchase redeemable common stock and $1,269
used to repurchase shares of common stock.
14
The 1998 Senior Secured Credit Facility provides for borrowings under a
revolving line of credit of up to $90,000, and converts to a term loan after
three years for the balance outstanding at the date of convergence. The term
loan has a weighted five year amortization schedule with a balloon payment due
after the second year of the term loan. Outstanding indebtedness under the 1998
Credit Facility bears interest at the Company's option, at a rate equal to the
prime rate minus .5% or LIBOR plus the applicable margin (either (i)1.5% for
loans outstanding which aggregate less than $50,000, or (ii) 1.75% for loans
outstanding which exceed $50,000), or the Cost of Funds rate plus the applicable
margin. The interest rate in effect at June 30, 1999 was approximately 6.5%. The
1998 Credit Facility imposes certain financial and operational covenants on the
Company, including restrictions on indebtedness, certain capital expenditures,
investments and acquisitions and on the Company's ability to pay dividends and
to make distributions. The 1998 Credit Facility, under certain limited
circumstances, also restricts the payment of dividends and other distributions
as well as certain acquisitions and investments. The 1998 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. The Company was in compliance with the terms of the credit
agreement as of June 30, 1999.
The Company believes that 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 1998 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 1998 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 is
needed, and can not be obtained on terms favorable to the Company, if at all,
the Company's ongoing capital improvement efforts and acquisition activity will
likely be reduced or delayed as cash generated from operating activities is used
for operating expenses and debt service.
INFLATION
The Company does not believe that its financial performance has been
materially affected by inflation.
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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, 1998.
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PART II OTHER INFORMATION
Item 4. Submission of Matters to Security Holders
(a) The Company held its annual meeting of stockholders on May 19,
1999, and the following directors were voted on:
(b) Jerry A. Schiller
The following directors continued on in office after the annual
stockholders meeting:
Stewart G. MacDonald, Jr.
William M. Crozier, Jr.
Eugene B. Doggett
John P. Leydon
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
----------- -----------
27.1 Financial Data Schedule for the six months ended
June 30, 1999
(b) Reports on Form 8-K
On June 18, 1999, the Company filed a Form 8-K announcing the
adoption of a Shareholder Rights Agreement.
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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
August 16, 1999 /s/ Michael J. Shea
----------------------------------
Michael J. Shea
Executive Vice President, Chief
Financial Officer and Treasurer
(On behalf of registrant and as
principal financial officer)
18