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, 1999
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 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 November 12, 1999:
Class Number of shares
----- ----------------
Common Stock, $.01 Par Value 12,627,753
INDEX
-----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1999
(unaudited) and December 31, 1998
Condensed Consolidated Income Statements (unaudited) for the
Three and Nine Months Ended September 30, 1999 and 1998
Condensed Consolidated Statement of Stockholders' Equity for
the Nine Months Ended September 30, 1999 (unaudited)
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Nine Months Ended September 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 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,
1998 1999
-------------- ---------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,181 $ 8,879
Trade receivables, net of allowance for doubtful accounts 8,298 8,490
Inventory of finished goods 5,266 5,229
Prepaid expenses and other current assets 6,728 9,725
--------- ---------
Total current assets 26,473 32,323
Property, plant and equipment, net 69,208 78,342
Intangible assets, net 65,249 64,894
Prepaid commissions and other assets 10,590 15,952
--------- ---------
Total assets $ 171,520 $ 191,511
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease
obligations $ 2,444 $ 3,252
Redeemable common stock (Note 6 ) 7,644 -
Trade accounts payable and accrued expenses 8,706 11,079
Accrued commissions 7,133 7,777
Deferred revenues and deposits 3,386 4,272
--------- ---------
Total current liabilities 29,313 26,380
Long-term debt and capital lease obligations 70,559 91,011
Deferred income taxes 7,472 8,765
Deferred retirement obligation 957 879
Other liabilities 278 208
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 13,443,754 128 134
shares issued and 12,781,628 and 12,627,753 shares
outstanding at December 31, 1998 and September 30,
1999, respectively)
Additional capital 60,896 68,540
Retained earnings 2,623 5,187
--------- ---------
63,647 73,861
Less common stock in treasury, at cost (706) (9,593)
--------- ---------
Total stockholders' equity 62,941 64,268
--------- ---------
Total liabilities and stockholders' equity $ 171,520 $ 191,511
========= =========
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,
1998 1999 1998 1999
-------- -------- -------- -------
Revenue:
Route revenue 24,312 25,275 66,021 75,891
Sales revenue 11,504 9,535 27,429 29,443
Other 1,037 995 4,260 5,123
--------- --------- --------- ----------
Total revenue $ 36,853 $ 35,805 $ 97,710 $ 110,457
--------- --------- --------- ----------
Cost of revenue:
Route related expenses 16,908 17,555 44,630 52,893
Depreciation and amortization 3,559 4,337 9,721 13,134
Cost of product sales 7,697 6,242 18,699 19,559
--------- --------- --------- ----------
Total cost of revenue 28,164 28,134 73,050 85,586
--------- --------- --------- ----------
Gross margin 8,689 7,671 24,660 24,871
--------- --------- --------- ----------
Operating expenses:
Selling, general and administration 4,345 5,543 13,246 16,014
Merger-related costs - - 884 -
--------- --------- --------- ----------
Total operating expenses 4,345 5,543 14,130 16,014
--------- --------- --------- ----------
Income from operations 4,344 2,128 10,530 8,857
Interest and other expense, net (1,434) (1,349) (2,698) (4,384)
--------- --------- --------- ----------
Income before provision for income taxes 2,910 779 7,832 4,473
Provision for income taxes 1,259 313 3,154 1,902
--------- --------- --------- ----------
Net income before accretion and dividends on
redeemable preferred stock $ 1,651 $ 466 $ 4,678 $ 2,571
--------- --------- --------- ----------
Accretion and dividends on redeemable preferred
stock - - 62 -
--------- --------- --------- ----------
Net income available to common stockholders $ 1,651 $ 466 $ 4,616 $ 2,571
========= ========= ========= ==========
Net income per common share--basic $ 0.13 $ 0.04 $ 0.37 $ 0.20
========= ========= ========= ==========
Weighted average common shares outstanding 12,654 12,628 12,479 12,672
========= ========= ========= ==========
Net income per common share--diluted $ 0.13 $ 0.04 $ 0.36 $ 0.20
========= ========= ========= ==========
Weighted average common shares outstanding
diluted 13,011 12,628 12,897 12,681
========= ========= ========= ==========
The accompanying notes are an integral part of these financial statements
4
MAC-GRAY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
Common stock Treasury Stock
Number Additional Retained Number Cost Total
of shares Value capital earnings of shares
---------------------------------------------------------------------------------------
Balance, December 31, 1998 12,781,628 $128 $60,896 $2,623 62,100 $ (706) $62,941
Net income (unaudited) 2,571 2,571
Repurchase of redeemable
common stock (unaudited) 6 7,639 600,026 (7,645) -
Repurchase of common stock
(unaudited) (156,200) 156,200 (1,269) (1,269)
Stock granted and options
exercised (unaudited) 2,325 5 (7) (2,325) 27 25
---------------------------------------------------------------------------------------
Balance, September 30, 1999
(unaudited) 12,627,753 $134 $68,540 $5,187 816,001 $(9,593) $64,268
=======================================================================================
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,
1998 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,678 $ 2,571
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Depreciation and amortization 10,395 13,835
Loss (gain) on sale of assets 38 (328)
Deferred income taxes 277 1,080
Increase in accounts receivable (4,377) (192)
Decrease (increase) in inventory 2,962 (1,124)
Increase in prepaid expenses and other assets (8,852) (8,627)
Increase in accounts payable, accrued commissions and
accrued expenses 5,138 2,919
Increase in deferred revenues and customer deposits 2,785 886
--------- ---------
Net cash flows provided by operating activities 13,044 11,020
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (15,224) (17,358)
Acquisition of businesses, net of cash acquired (50,106) (3,050)
Proceeds from sale of property and equipment 1,712 966
--------- ---------
Net cash flows used in investing activities (63,618) (19,442)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations (1,213) (2,105)
Advances on line-of-credit, net 56,613 22,134
Contribution of capital and proceeds from sale of common stock 28 -
Dividends paid (72) -
Proceeds from exercise of options - 5
Purchase of redeemable common stock - (7,645)
Repurchase of common stock - (1,269)
--------- ---------
Net cash flows provided by financing activities 55,356 11,120
--------- ---------
Increase in cash and cash equivalents 4,782 2,698
Cash and cash equivalents, beginning of period 3,774 6,181
--------- ---------
Cash and cash equivalents, end of period 8,556 8,879
========= =========
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, 1999 and December 31, 1998 and the results of its
operations and cash flows for the three and nine month periods ended September
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. In July 1999, the Company obtained a
temporary increase in this revolving line of credit up to a maximum of $99
million in anticipation of potential working capital and acquisition needs. This
increase expires on November 24, 1999.
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
September 30, 1999. The balance outstanding under this credit facility was
$87,800 at September 30, 1999. Long term debt also includes various notes
payable totaling $3,806 at December 31, 1998 and $3,131 at September 30, 1999
and various unsecured notes payable to former shareholders totaling $1,631 at
December 31, 1998 and $1,164 at September 30, 1999.
3. DEFERRED RETIREMENT OBLIGATION
The deferred retirement obligation at September 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 September 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 results of operation.
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 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 Three Months Ended September 30, 1998
-------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------------- ------------------- -------------
Net income available to common stockholders--basic $ 1,651 12,654 $ 0.13
================= =================== =============
Effect of dilutive securities:
Stock options 198
Contingent shares 159
-------------------
Net income available to common stockholders--diluted $ 1,651 13,011 $ 0.13
================= =================== =============
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
================= =================== =============
For the Nine Months Ended September 30, 1998
-------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------------- ------------------- -------------
Net income per common share:
Net Income $ 4,678
Less: Accretion and dividends on redeemable preferred 62
stock -----------------
Net income available to common stockholders--basic $ 4,616 12,479 $ 0.37
================= =================== =============
Effect of dilutive securities:
Stock options 259
Contingent shares 159
-------------------
Net income available to common stockholders--diluted $ 4,616 12,897 $ 0.36
================= =================== =============
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 in the open market. During the
three months ended September 30, 1999 the Company did not repurchase any shares.
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 a 1997 acquisition. 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 nine months ended September 30, 1999
and 1998.
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,
1998 1999 1998 1999
Laundry and Reprographics 29,221 29,417 78,196 87,665
MicroFridge(R) 7,632 6,388 19,514 22,792
------- ------- -------- --------
Total 36,853 35,805 97,710 110,457
Gross Margin
Laundry and Reprographics 6,257 5,393 18,021 16,731
MicroFridge(R) 2,432 2,278 6,639 8,140
------- ------- -------- --------
Total 8,689 7,671 24,660 24,871
Operating Expense 4,345 5,543 14,130 16,014
Interest and other expenses,
net 1,434 1,349 2,698 4,384
------- ------- -------- --------
Income before provision for
taxes 2,910 779 7,832 4,473
------- ------- -------- --------
December 31, 1998 September 30, 1999
------------------- --------------------
Assets
Laundry $ 123,054 $ 133,163
MicroFridge(R) 19,767 26,983
---------- ----------
Total for reportable segments 142,821 160,146
Corporate (1) 28,212 30,665
Deferred income taxes 487 700
---------- ----------
Total assets $ 171,520 $ 191,511
========== ==========
(1) Principally cash, prepaid expenses and property, plant & equipment.
10
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 167,000 laundry
machines, operated in over 36,000 multiple housing laundry rooms located in 32
states. Mac-Gray's reprographics business is conducted with approximately 2,300
copiers and related equipment concentrated in the northeast, Florida and Texas.
Mac-Gray's MicroFridge(R) business consists of leased units as well as sales of
its MicroFridge(R) product line. Presently MicroFridge(R) sells and leases its
product in 50 states and seven countries.
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
an acquisition. 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.
11
YEAR 2000
The Company has developed a comprehensive program to address its potential
exposure to the Year 2000 issue. Beginning in 1998, the Company contracted with
an outside consultant to assist in the evaluation of its information systems
Year 2000 preparedness. Through September 30, 1999, the Company has not incurred
significant costs directly associated with Year 2000 evaluations and
corrections, nor does it expect to incur any significant costs.
Year 2000 issues relative to information systems are being addressed as part
of the Company's initiative to upgrade and replace its accounting and operating
information systems.
The accounting and related systems have been purchased and their installation
conducted under the supervision of outside consultants. The vendors of these
systems have verified their Year 2000 compliance. Internal testing of these
systems is presently nearing completion. Systems which were not purchased from
suppliers have been developed by outside consultants and the Company's own
Information Systems staff. The Company has either completed or expects to
complete the replacement or upgrade of these systems by November 30, 1999.
Should any Year 2000 issues be identified which the Company believes could
remain unresolved into December of 1999, the Company will develop contingency
plans. Such contingency plans may include modifying and relying on existing
systems, 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1998.
Revenue. Revenue decreased by $1,048, or 3%, to $35,805 for the three months
ended September 30, 1999 from the three months ended September 30, 1998. Revenue
increased by $12,747, or 13%, to $110,457 for the nine months ended September
30, 1999 from the nine months ended September 30, 1998. This decrease in total
revenue for the three months ended September 30, 1999 was caused primarily by a
decrease in MicroFridge(R) and laundry equipment sales as compared to the same
period a year ago, offset somewhat by an increase in route revenue. The laundry
equipment sales were affected by product not being available from a major
supplier and the shortfall in MicroFridge(R) sales was the result of customer
delays in product acceptance on several large orders. The increase in total
revenues for the nine-month period ended September 30, 1999, as compared to the
same period a year ago, was due primarily to the expansion of existing
operations and the additional revenue from the route businesses acquired during
1998.
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 handling route revenue. Route related expenses
increased $647, or 4%, to $17,555 for the three months ended September 30, 1999
from the three months ended September 30, 1998, and $8,263, or 19%, to $52,893
for the nine months ended September 30, 1999 from the nine months ended
September 30, 1998. The increase in the three month period ended September 30,
1999 as compared to the same period in 1998, was primarily related to an
increase in the Company's machine base which is a result of both internal growth
and laundry routes acquired during the year. This increase is also related to an
increase in commissions expense which is tied to the increase in route revenue.
For the nine months ended September 30, 1999, the increase of route related
expenses, as compared to the same period a year ago, is a result of both
internal growth and acquisitions. The Company has expanded into territories
where there has been no previously established operating infrastructure. As a
result, operating costs relative to revenue in these new areas are higher than
elsewhere. In the second and third quarters of 1999, the Company has changed its
expansion strategy to focus more on its primary markets. As a result, the
Company has acquired a laundry route business in the Chicago area, a primary
market, and sold routes in parts of the country outside of its primary markets.
Depreciation and Amortization. Depreciation and amortization increased by
$778, or 22%, to $4,337 for the three months ended September 30, 1999 from the
three months ended September 30, 1998, and $3,413, or 35%, to $13,134 for the
nine months ended September 30, 1999 from the nine months ended
12
September 30, 1998. The increase for the three months ended September 30, 1999,
as compared to the same period in 1998, was primarily attributed to internal
growth in the number of machines placed in service. For the nine-month period
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.
Cost of Product Sales. Cost of product as a percent of sales revenue improved
2% to 65% for the three months ended September 30, 1999 from the three months
ended September 30, 1998, and 2% to 66% for the nine months ended September 30,
1999 from the nine months ended September 30, 1998. The variance is primarily
due to changes in the sales mix of MicroFridge(R) academic and hotel product
lines.
Selling, General and Administration. Selling, general and administration
expenses increased by $1,198, or 28%, to $5,543 for the three months ended
September 30, 1999 from the three months ended September 30, 1998, and $2,768,
or 21%, to $16,014 for the nine months ended September 30, 1999 from the nine
months ended September 30, 1998. The increase in the quarter ended September 30,
1999, as compared to the same quarter in 1998, was due primarily to non-
recurring charges including those associated with a potential acquisition. For
the nine-month period ended September 30, 1999, as compared to the same period a
year ago, selling, general and administration expenses increased due to the non-
recurring charges in the third quarter, an increase in sales commissions
associated with additional machines placed in service and expenses relating to
the development of new integrated marketing materials.
Interest and Other Expense. Interest and other expense, net of interest and
other income, decreased by $85, or 6%, to $1,349 for the three months ended
September 30, 1999 from the three months ended September 30, 1998, and increased
$1,686, or 62%, to $4,384 for the nine months ended September 30, 1999 from the
nine months ended September 30, 1998. For the nine-month period ended September
30, 1999, as compared to the same period in 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 two
quarters of 1999.
Provision for Income Taxes. The provision for income taxes decreased by $946,
or 75%, to $313 for the three months ended September 30, 1999 from the three
months ended September 30, 1998, and $1,252, or 40%, to $1,902 for the nine
months ended September 30, 1999 from the nine months ended September 30, 1998.
These decreases are due to corresponding decreases in taxable income in each of
these periods.
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
capital expenses including the purchase of new laundry and reprographics
machines, MicroFridge(R) equipment, and smart card based payment systems, the
purchase of redeemable common stock, and other capital stock transactions. 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 $11,020 and $13,044 for the nine months
ended September 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 nine-month period
ended September 30, 1999 was due primarily to
13
the increase in inventory purchases, and the decrease in net income for the
first nine months of 1999, as compared to the same period of 1998.
Cash used in investing activities was $19,442 and $63,618 for the nine months
ended September 30, 1999 and 1998 respectively. Capital expenditures related to
equipment purchases were $17,358 and $15,224 for the nine months ended September
30, 1999 and 1998, respectively. Cash flows related to business acquisitions
were $3,050 and $50,106 for the nine months ended September 30, 1999 and 1998,
respectively.
Net cash flows from financing activities were $11,120 and $55,356 for the nine
months ended September 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.
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 in April
2001 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. In July 1999, the Company obtained a temporary
increase in this revolving line of credit to $99 million in anticipation of
possible working capital and acquisition needs. This increase expires on
November 24, 1999. Outstanding indebtedness under the 1998 Credit Facility and
its amendment bear interest at the Company's option, (a) at a rate equal to the
prime rate minus .5% or (b) 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 September 30, 1999 was approximately
6.8%. 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, make distributions and maintain certain financial ratios. 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 September 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 cannot 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 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 nine months ended September 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
November 15, 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)
17