<PAGE>
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 March 31, 1998
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 March 31, 1998:
Class Number of shares
----- ----------------
Common Stock, $.01 Par Value 13,174,118
<PAGE>
INDEX
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1998 (unaudited) and
December 31, 1997
Consolidated Income Statement for the Three Months Ended
March 31, 1998 and 1997 (unaudited)
Consolidated Statement of Stockholders' Equity for the three
months ended March 31, 1998 (unaudited)
Consolidated Statements of Cash Flows for the three Months
Ended March 31, 1998 and 1997 (unaudited)
Notes to Consolidated 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
<PAGE>
Item 1. Financial Statements
MAC-GRAY CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------------- ----------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,335 $ 3,774
Trade receivables, net of allowance for doubtful accounts 6,723 6,570
Inventory of finished goods 7,934 7,208
Deferred income taxes 357 571
Prepaid expenses and other current assets 3,358 2,377
-------- -------
Total current assets 22,707 20,500
Property, plant and equipment, net 45,012 43,615
Intangible assets, net 28,229 28,648
Prepaid commissions and other assets 5,002 5,080
-------- -------
Total assets $100,950 $97,843
======== =======
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 5,289 $ 7,922
Current portion of capital lease obligations 440 476
Accounts payable 3,508 7,825
Accrued commissions 5,642 5,585
Accrued expenses 2,683 2,631
Deferred revenues and deposits 1,437 102
-------- -------
Total current liabilities 18,999 24,541
Long-term debt 13,829 5,395
Long-term capital lease obligations 551 491
Deferred income taxes 5,488 5,329
Deferred retirement obligation 1,026 1,052
Other liabilities 260 429
Commitments and contingencies (Note 4) - -
Redeemable common stock, 612,026 shares 7,797 7,797
Senior redeemable preferred stock - 4,507
Stockholders' equity:
Preferred stock of Mac-Gray Corporation ($.01 par value, 5,000,000 shares
authorized, no shares outstanding) - -
Common stock of Mac-Gray Corporation ($.01 par value, 30,000,000 shares
authorized, 12,562,092 (unaudited) and 12,285,568 shares issued and
outstanding at March 31, 1998 and December 31, 1997, respectively) 126 123
Additional capital 56,346 52,524
Accumulated deficit (3,472) (4,345)
-------- -------
Total stockholders' equity 53,000 48,302
-------- -------
Total liabilities, redeemable stock and stockholders' equity $100,950 $97,843
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
MAC-GRAY CORPORATION
CONSOLIDATED INCOME STATEMENT (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Pro forma three
Three months ended months ended
March 31, March 31,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Revenue $27,989 $27,237 $22,658
Cost of revenue:
Commissions 9,154 7,256 7,256
Route expenditures 3,632 3,246 2,976
Depreciation and amortization 2,824 1,874 2,082
Cost of product sales 4,666 7,282 3,776
------- ------- -------
Total cost of revenue 20,276 19,658 16,090
------- ------- -------
Operating expenses:
General and administration 1,798 1,701 1,647
Sales and marketing 2,409 2,522 2,136
Depreciation 181 178 167
Merger-related costs 884 - -
------- ------- -------
Total operating expenses 5,272 4,401 3,950
------- ------- -------
Income from operations 2,441 3,178 2,618
Interest expense, net (315) (689) (648)
Other income (expense), net 20 (4) (4)
------- ------- -------
Income before provision for income taxes 2,146 2,485 1,966
Provision for income taxes (1,154) (178) (166)
------- ------- -------
Net income before accretion and dividends on redeemable
preferred stock $ 992 $ 2,307 $ 1,800
------- ------- -------
Accretion and dividends on redeemable preferred stock $ 62 $ 161 $ 124
------- ------- -------
Net income available to common stockholders $ 930 $ 2,146 $ 1,676
======= ======= =======
Net income per common share $0.08 $0.28 $0.22
======= ======= =======
Weighted average common shares outstanding 12,188 7,554 7,554
======= ======= =======
Net income per common share--assuming dilution $0.07 $0.28 $0.22
======= ======= =======
Weighted average common shares outstanding--assuming dilution 12,657 7,686 7,686
======= ======= =======
PRO FORMA TAX ADJUSTED DATA (NOTE 5):
Income before provision for income taxes $2,485 $ 1,966
Provision for income taxes (802) (787)
------- -------
Pro forma tax adjusted net income $1,683 $ 1,179
======= =======
Pro forma tax adjusted net income
available to common stockholders $1,522 $ 1,055
======= =======
Pro forma tax adjusted net income available
to common stockholders per common share $0.20 $0.14
======= =======
Pro forma tax adjusted net income available to
common stockholders per common share--assuming dilution $0.20 $0.14
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
MAC-GRAY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Common stock
--------------- Retained
Number of Additional earnings
shares Value capital (deficit) Total
------ ----- ------- --------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 12,285,568 $123 $52,524 $(4,345) $48,302
Net income available to common
stockholders - - - 930 930
Inclusion of Intirion's net equity
activity for the six months
ended December 31, 1997 - - (13) 15 2
Exchange of Intirion preferred
shares for Mac-Gray common
stock 275,224 3 3,821 - 3,824
Intirion dividends paid - - - (72) (72)
Options exercised 1,300 - 14 - 14
---------- -------- ------- ------- -------
Balance, March 31, 1998 12,562,092 $126 $56,346 $(3,472) $53,000
========================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
MAC-GRAY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1998 1997
----- ----
Cash flows from operating activities:
<S> <C> <C>
Net income $ 992 $ 2,307
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,005 2,052
(Gain) loss on sale of assets (128) 47
Deferred income taxes 374 -
Decrease (increase) in accounts receivable 174 (862)
Decrease (increase) in inventory (407) 1,773
Increase in prepaid expenses and other assets (895) (1,389)
Decrease in accounts payable,
accrued commissions and accrued expenses (3,089) (4,705)
(Decrease) increase in deferred rental revenue and customer deposits (1,115) 3,278
------- -------
Net cash flows (used in) provided by operating
activities (1,089) 2,501
------- -------
Cash flows from investing activities:
Capital expenditures (2,253) (4,231)
Acquisition of businesses (1,223) -
Proceeds from sales of property and
equipment 428 533
------- -------
Net cash flows used in investing
activities (3,048) (3,698)
------- -------
Cash flows from financing activities:
Principal payments on long-term debt and
capital lease obligations (4,174) (505)
Advances on line-of-credit, net of debt assumed 8,931 2,360
Contribution of capital and proceeds from sale of common stock 13 -
Cash dividends paid (72) (224)
------- -------
Net cash flows provided by financing
activities 4,698 1,631
------- -------
Increase in cash and cash
equivalents 561 434
Cash and cash equivalents, beginning of period 3,774 2,844
------- -------
Cash and cash equivalents, end of period $ 4,335 $ 3,278
======= =======
</TABLE>
Supplemental Information:
No cash adjustment is reflected in the 1998 amounts for the period July 1
through December 31, 1997 for Intirion, since Intirion's ending cash balance at
June 30, 1997 and December 31, 1997 was $0.
The accompanying notes are an integral part of these financial statements
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION
In the opinion of management of Mac-Gray Corporation (the "Company" or "Mac-
Gray"), the accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal, recurring accruals) which are, in the
opinion of management, necessary to present fairly the Company's financial
position as of March 31, 1998 and December 31, 1997 and the results of its
operations and cash flows for the three month periods ended March 31, 1998 and
1997. The unaudited interim 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 consolidated financial statements should be read in conjunction with
the Company's fiscal 1997 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.
On April 17, 1997, Mac-Gray Co., Inc. and Mac-Gray, L.P. were reorganized to
create Mac-Gray. Mac-Gray 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 Mac-Gray's common stock.
Concurrently, Mac-Gray, L.P. was merged with and into Mac-Gray Co., Inc. which
continues to operate as a wholly owned subsidiary of Mac-Gray and is now known
as Mac-Gray Services, Inc. The unaudited March 31, 1998 financial statements are
reflective of the reorganization of the Company, and also include the combined
results of Sun Services of America, Inc. and R. Bodden Coin-Op Laundry, Inc.,
for the period subsequent to the acquisition on April 17, 1997.
On March 12, 1998, Intirion Corporation ("Intirion") was acquired by Mac-Gray in
a transaction accounted for as a pooling of interests. The accompanying
consolidated financial statements have been prepared to give retroactive effect
to the pooling transaction and include the accounts of Mac-Gray, Intirion and
their respective wholly owned subsidiaries. Mac-Gray issued 1,592,992 shares of
common stock and paid $1,033 in cash in exchange for all of the outstanding
equity securities of Intirion. Costs directly associated with the pooling
transaction of $884 were incurred in the three months ended March 31, 1998.
These costs include legal, accounting and severance costs directly associated
with the pooling transaction and are classified as merger-related costs on the
income statement. Additionally, $123 of sales and marketing expenses and $66 of
general and administrative expenses incurred by Intirion Corporation in the
three months ended March 31, 1998 are considered to be non-recurring as they
were directly attributable to the individuals whose employment was terminated
subsequent to the transaction.
Due to the differing year ends of Mac-Gray and Intirion, financial information
for dissimilar periods has been combined in the consolidated financial
statements. As such, the historical annual financial statements were restated
by combining the June 30 financial statements of Intirion with the December 31
financial statements of Mac-Gray. Intirion's results of operations for its
three months ended September 30, 1996 were combined with Mac-Gray's results of
operations for the three months ended March 31, 1997, and Intirion's balance
sheet at June 30, 1997 was combined with Mac-Gray's balance sheet at December
31, 1997. Pro forma consolidated results of operations for the three months
ended March 31, 1997 have also been presented. Pro forma consolidated data
reflects the results of operations for the three months ended March 31, 1997 for
Mac-Gray consolidated with the three months ended March 31, 1997 for Intirion
and has been presented for informational purposes.
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
No adjustments to the net assets of the combining companies were required to
adopt the same accounting practices and there were no intercompany transactions
between Mac-Gray and Intirion prior to the combination. During the current
quarter, an adjustment was required to record Intirion's net equity activity for
the six months ended December 31, 1997 in order to change the fiscal year of
Intirion from June to December. This adjustment is presented on the
consolidated statement of stockholders' equity.
The following table reconciles the revenues and net income previously reported
by Mac-Gray prior to the Intirion combination to the results currently reported
in the 10-Q.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------
March 31, 1997 September 30, 1996 March 31, 1997
Mac-Gray Intirion as Reported
-------------- ------------------- ---------------
<S> <C> <C> <C>
Net Revenues $18,834 $8,403 $27,237
Net Income (Loss) $ 1,805 $ 502 $ 2,307
<CAPTION>
Three Months Ended
---------------------------------------------------
March 31, 1997 March 31, 1997 March 31, 1997
Mac-Gray Intirion (pro forma)
-------------- ------------------ --------------
<S> <C> <C> <C>
Net Revenues $18,834 $3,824 $22,658
Net Income (Loss) $ 1,805 $ (5) $ 1,800
</TABLE>
2. LONG TERM DEBT
On April 17, 1997, Mac-Gray entered into a credit agreement (the 1997 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. The balance
outstanding under the Credit Facility was $8,254 and $0 at March 31, 1998 and
December 31, 1997, respectively. The interest rate was 8.0% at March 31, 1998
and December 31, 1997.
Through Intirion, the Company had outstanding borrowings of $1,994 at March 31,
1998 and $2,525 at December 31, 1997, pursuant to a secured demand line of
credit agreement with a bank that allows for maximum borrowings of $7,500 at
March 31, 1998 and December 31, 1997. Through Intirion, the Company also had
outstanding borrowings of $1,460 at March 31, 1998 and $3,694 at December 31,
1997, pursuant to a secured demand line with Intirion's primary supplier
relating to the purchase of finished goods.
Long term debt also includes various notes payable totaling $5,210 at March 31,
1998 and $4,538 at December 31, 1997, and various unsecured notes payable to
former shareholders totaling $2,200 at March 31, 1998 and $2,560 at December 31,
1997.
3. DEFERRED RETIREMENT OBLIGATION
The deferred retirement obligation at March 31, 1998 and December 31, 1997
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 March 31, 1998 and December
31, 1997 has been estimated based upon the life expectancy of the former
shareholder utilizing actuarial tables.
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. COMMITMENTS AND CONTINGENCIES
Guarantee of Indebtedness At December 31, 1997, Mac-Gray Co., Inc. was a
guarantor on a line of credit for a customer in the amount of $706, and recorded
a contingency reserve of $250 for estimated losses on the guarantee. The
guarantee was secured by a pledge of the borrowing company's assets. During the
three months ended March 31, 1998, the customer defaulted on the line of credit
and the Company succeeded to the assets and assumed the liabilities of the
customer in accordance with the guarantee and related agreements. At March 31,
1998, the fair market value of the customer's assets and a liability of $677
were recorded on the Company's financial statements and a loss was recorded
against the reserve. In April 1998, the customer's liability to its creditor was
paid in full by Mac-Gray.
5. PRO FORMA TAX ADJUSTED DATA
Pro forma tax adjusted data reflects adjustments to the consolidated statements
of income for the three months ended March 31, 1997. Such adjustments consider
the effect of the Company's operations as if the Company was subject to federal
and state income taxes on a corporate level. Prior to the Company's initial
public offering, it operated as a Subchapter S corporation. As such, its income
was not subject to federal taxation at the corporate level. The pro forma
income tax provision and pro forma net income have been calculated as if the
Company was subject to income taxation as a C corporation during the entire
year.
6. EARNINGS PER SHARE
Mac-Gray adopted Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (SFAS 128) in 1997. In conjunction with the adoption of this
standard, Mac-Gray has complied with Staff Accounting Bulletin No. 98 (SAB 98)
issued by the Securities and Exchange Commission. Accordingly, earnings per
share data have been restated for all periods presented to give effect to both
pronouncements.
7. SUBSEQUENT EVENTS
Long Term Debt On April 17, 1998, the outstanding bank debt of Intirion in the
amount of $1,948 was retired using funds drawn on the 1997 Credit Facility. On
April 23, 1998, the outstanding debt under the 1997 Credit Facility was
refinanced under a new revolving line of credit and term loan facility (the 1998
Senior Secured Credit Facility). 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. Outstanding indebtedness under the
1998 Senior Secured 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 Cost of Funds (COF)
plus the applicable margin. The 1998 Senior Secured Credit Facility restricts
payments of dividends and other distributions, restricts the Company from making
certain acquisitions and incurring indebtedness, and requires it to maintain
certain financial ratios. The 1998 Senior Secured Credit Facility is secured by
pledges of the capital sock of the Company's subsidiaries and a lien on the
assets of the Company.
On April 23, 1998, Mac-Gray acquired one hundred percent of the outstanding
capital stock of Copico, Inc. ("Copico"). Copico is a provider of card and
coin-operated reprographics equipment and services to the academic and public
library markets in New England, New York and Florida. The purchase price was
250,000 shares of Mac-Gray common stock and $10,950 in cash, less the assumption
of certain debt. The acquisition was accounted for as a purchase transaction.
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
On April 24, 1998, Mac-Gray acquired one hundred percent of the outstanding
capital stock of Amerivend Corporation and the assets of Amerivend Southeast
Corporation for approximately $33,500 in cash, including the payment of certain
debt. The acquisition was accounted for as a purchase transaction.
8. NEW ACCOUNTING PRONOUNCEMENTS
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 requires
presentation of certain information related to comprehensive income. For the
three months ended March 31, 1998 and 1997, 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.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131), which requires that certain additional
information related to operating segments be reported. The Company will adopt
SFAS 131 for fiscal year ending December 31, 1998, as disclosure of this
information for interim periods is not required in the year of adoption.
<PAGE>
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 including the consolidated results of Intirion for all
periods presented, and the combined results of Sun Services of America, Inc.
and R. Bodden Coin-Op Laundry, Inc., for the period subsequent to the
acquisition on April 17, 1997 (the Sun Services Acquisition). 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 with the SEC
on its Annual Report on Form 10-K.
OVERVIEW
- --------
Mac-Gray 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, condominiums and public housing
complexes. Mac-Gray operates its laundry rooms under long-term leases with
property owners, colleges and universities and governmental agencies. The
leases typically grant Mac-Gray 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. Mac-Gray's Laundry Route
business consists of approximately 120,000 laundry machines, operated in over
17,000 multiple housing laundry rooms located in 26 states east of the Rocky
Mountains.
Mac-Gray also derives revenue as a distributor and servicer of commercial
laundry equipment manufactured by Maytag Corporation, and sells laundry
equipment manufactured by American Dryer, The Dexter Company, and Whirlpool
Corporation 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
On March 12, 1998, Mac-Gray completed its acquisition of Intirion, which has
been accounted for as a pooling of interests. Through Intirion, the Company
sells its proprietary MicroFridge(R) product which is a combination
refrigerator/freezer/microwave oven utilizing patented circuitry. The product is
marketed throughout the United States to colleges and universities, the federal
government, mid range hotels and motels and to builders of assisted living
facilities. All of Intirion's products are manufactured by outside suppliers. In
addition, Intirion also rents its products on a year to year basis to students
living in college and university residence halls.
RECENT DEVELOPMENTS
- -------------------
On April 23, 1998, the Company's existing credit facility was refinanced under a
new revolving credit and term loan facility (the 1998 Senior Secured Credit
Facility). See "Liquidity and Capital Resources."
Pursuant to a stock purchase agreement dated March 31, 1998, Mac-Gray acquired
one hundred percent of the capital stock of Copico, Inc. (Copico) on April 23,
1998 for 250,000 shares of Mac-Gray common stock and $10.95 million in cash,
less the assumption of certain debt. Founded in 1978, Copico is a major
provider of card and coin-operated reprographics equipment and services to the
academic and public library
<PAGE>
markets in New England, New York and Florida. Copico provides and services
copiers, laser printers and microform reader-printers for the libraries of
colleges, universities and graduate schools. Copico also is the sole provider
of reprographics services to the New York public library system, as well as
other public libraries. Copico had revenues of approximately $7.1 million for
its fiscal year ended January 31, 1998 and has operations facilities in Canton,
Massachusetts, New York, New York, and Miramar, Florida. Mac-Gray funded the
cash portion of the purchase price by drawing on the 1998 Senior Secured Credit
Facility. See "Liquidity and Capital Resources".
Pursuant to a stock purchase agreement dated March 4, 1998, Mac-Gray acquired
one hundred percent of the outstanding capital stock of Amerivend Corporation
and the assets of Amerivend Southeast Corporation (collectively, Amerivend) on
April 24, 1998 for approximately $33.5 million in cash, including the payment of
certain debt. Amerivend is a provider of card and coin-operated laundry
equipment in Florida and Georgia. Amerivend is also the principal distributor
of Maytag commercial laundry products in Alabama, Georgia and Florida. Founded
in 1959, Amerivend had 1997 revenues of $18.6 million and has offices in Miami,
Orlando, and Tampa, Florida and Atlanta, Georgia. The purchase price was funded
by drawing on the 1998 Senior Secured Credit Facility. See "Liquidity and
Capital Resources".
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
AND PRO FORMA THREE MONTHS ENDED MARCH 31, 1997
Due to the differing year ends of Mac-Gray and Intirion, the three months ended
March 31, 1997 represents consolidated results for the period from January, 1997
through March, 1997 for Mac-Gray consolidated with the three month period from
July, 1996 through September, 1996 for Intirion. The pro forma three months
ended March 31, 1997 represents consolidated results for the period from
January, 1997 through March, 1997 for both Mac-Gray and Intirion. The three
months ended March 31, 1998 represents consolidated results for the period from
January, 1998 through March, 1998 for both Mac-Gray and Intirion.
Revenue. Revenue increased by $752,000, or 3%, to $27,989,000 for the three
months ended March 31, 1998 from $27,237,000 for the three months ended March
31, 1997. Revenue increased by $5,331,000, or 24%, from $22,658,000 for the pro
forma three months ended March 31, 1997. Route Revenue increased $3,837,000, due
to the expansion of existing operations and the additional revenues from the
laundry route businesses acquired during 1997. Product sales decreased by
$3,976,000, from the three months ended March 31, 1997 to the three months ended
March 31, 1998. This decrease was a result of the comparison of dissimilar
periods for 1997 and 1998, since Intirion historically experiences stronger
product sales to the college and university market during the period from July
to September than during January through March. Product sales from the pro
forma three months ended March 31, 1997 to the three months ended March 31, 1998
increased by $1,266,000. This increase was primarily due to the increase in
existing business, as a result of increased sales and marketing efforts, and
from sales by the businesses acquired during 1997. Rental Revenue increased by
$891,000 to $1,568,000 for the three months ended March 31, 1998 from the three
months ended March 31, 1997, and by $228,000 from the pro forma three months
ended March 31, 1997.
Commissions. Commissions increased by $1,898,000, or 26%, to $9,154,000 for the
three months ended March 31, 1998 from $7,256,000 for the three months ended
March 31, 1997. This increase was primarily attributable to an increase in
Route Revenue, since commissions are generally paid based upon a percentage of
revenue earned in the Company's laundry rooms.
<PAGE>
Route Expenditures. Route expenditures, which are primarily variable expenses
which change with the increases and decreases in revenue and include costs
associated with installing and servicing machines, as well as the costs of
collecting, counting and depositing the revenue, increased by $386,000, or 12%,
to $3,632,000 for the three months ended March 31, 1998 from $3,246,000 for the
three months ended March 31, 1997, and by $656,000 or 22% for the pro forma
three months ended March 31, 1997. The increase was due to the general
increase in revenue, which resulted in increased servicing, collecting, counting
and depositing activity, and to the addition of branch locations as a result of
acquisitions. The costs for the three months ended March 31, 1997 were higher
than the costs for the pro forma three months ended March 31, 1997 due to the
historically higher costs incurred by Intirion during the period from July
through September for the rental program to the college and university market.
Depreciation and Amortization. Depreciation and amortization includes
depreciation and amortization 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 46%, to $3,005,000 for the three
months ended March 31, 1998 from $2,052,000 for the three months ended March 31,
1997, and by $756,000 from the pro forma three months ended March 31, 1997. The
increase was primarily attributable to the acquisitions of businesses during
1997, which resulted in additional machines to depreciate, as well as an
increase in intangible assets to amortize, and the placement of additional
machines at the Company's existing locations.
Cost of Product Sales. Cost of product sales decreased by $2,616,000, or 36%,
to $4,666,000 for the three months ended March 31, 1998 from $7,282,000 for the
three months ended March 31, 1997, and increased by $890,000 from the pro forma
three months ended March 31, 1997. These changes correspond to the changes in
product sales revenue.
General and Administration. General and administration expenses increased by
$97,000, or 6%, to $1,798,000 for the three months ended March 31, 1998 from
$1,701,000 for the three months ended March 31, 1997, and by $151,000 from the
pro forma three months ended March 31, 1997. These changes resulted from
increased professional fees incurred by Mac-Gray, and the addition of
administrative personnel at both Mac-Gray and Intirion to handle the business
growth.
Sales and Marketing. Sales and marketing expense decreased by $113,000, or 4%,
to $2,409,000 for the three months ended March 31, 1998 from $2,522,000 for the
three months ended March 31, 1997. This decrease resulted from the significant
temporary increase in Intirion's sales and marketing personnel necessary to
handle the strong sales to the college and university market during July through
September. Sales and marketing expense increased by $273,000 from the pro forma
three months ended March 31, 1997 to the three months ended March 31, 1998. The
increase was attributable to the expansion of the marketing department and an
increase in the number of field sales representatives.
Merger-Related Costs. One-time, non-recurring costs associated with the
acquisition of Intirion, which was accounted for as a pooling transaction,
totaled $884,000 in the three months ended March 31, 1998.
Interest Expense. Interest expense, net of interest income, decreased by
$374,000, or 54%, to $315,000 for the three months ended March 31, 1998 from
$689,000 for the three months ended March 31, 1997, and by $333,000 from the pro
forma three months ended March 31, 1997. A portion of the net proceeds received
from the Company's initial public offering (IPO) in October, 1997 were used to
reduce existing indebtedness of the Company under the 1997 Credit Facility (as
hereinafter defined) and resulted in reduced interest expense for the first
quarter of 1998.
Income Tax Expenses. Income tax expense increased by $976,000, to $1,154,000
for the three months ended March 31, 1998 from $178,000 for the three months
ended March 31, 1997 and by $988,000 from
<PAGE>
the pro forma three months ended March 31, 1997 due to the termination of Mac-
Gray's S corporation status concurrent with the IPO. Upon termination of the S
corporation status, Mac-Gray became subject to federal and state income taxes,
with a statutory rate of approximately 40%. As the historical income tax
provision for Mac-Gray prior to the termination of the S corporation status was
established only to provide for income taxes in states that do not recognize
Subchapter S corporations, the income tax provision recorded in the first
quarter of 1998 was significantly higher than the amount recorded in the
corresponding period in 1997. The effective tax rate of 54% for the quarter
ended March 31, 1998 exceeded the statutory rate primarily as a result of
certain merger-related costs which are not deductible for tax purposes.
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-five percent (35%)
of the Company's total revenue. Route and rental revenues are derived
substantially during the school year which includes the first, second and fourth
calendar quarters. Conversely, the Company increases its operating expenditures
during the third calendar quarter when colleges and universities are not in
session as a result of Mac-Gray's increased product installation activities.
Product sales to this market are also high during the third calendar quarter.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Mac-Gray's primary sources of cash have been operating activities, bank
borrowings, and the proceeds of the IPO. The Company's primary uses of cash
have been acquisitions, capital expenses including the purchase of new laundry
machines, Microfridge(R) equipment, and smart card based payment systems, the
payment of a dividend of $9,000,000 to the Company's shareholders prior to the
IPO in October, 1997 and the repayment of the 1997 Credit Facility. 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. Funds available under the 1998
Senior Secured Credit Facility were used as needed to finance the recent
acquisitions of Amerivend and Copico. The Company also anticipates that it will
use additional funds available to it under the 1998 Senior Secured Credit
Facility to finance additional possible acquisitions, larger capital
expenditures and, as needed, working capital.
Cash flows (used in) provided by operations were ($1,089,000) and $2,501,000 for
the three months ended March 31, 1998 and 1997, respectively, including
dissimilar periods in 1997. Cash flow from operations consists primarily of
route revenue, product sales, laundry equipment service revenue, and rental
revenue, commissions, route expenditures, cost of product sales, cost of rental
revenue, general and administration expenses and sales and marketing expenses.
The Company also incurred costs as a result of the Mac-Gray and Intirion pooling
transaction.
Cash used in investing activities was $3,048,000 and $3,698,000 for the three
months ended March 31, 1998 and 1997 respectively. Mac-Gray invested
$1,223,000 in connection with the Intirion merger and a small route acquisition
during the three months ended March 31, 1998. Capital expenditures were
$2,253,000 and $4,231,000 for the three months ended March 31, 1998 and 1997,
respectively.
Net cash flows from financing activities were $4,698,000 and $1,631,000 for the
three months ended March 31, 1998 and 1997, respectively. Financing activities
for those periods consist primarily of proceeds from and repayments of bank
borrowings, capital stock transactions, and payments of dividends.
Until April 23, 1998, the Company maintained a $50 million revolving line of
credit with State Street Bank and Trust Company and CoreStates Bank, N.A. (the
"1997 Credit Facility"). The Company was in material compliance with all
covenants of that facility, or received a written waiver with respect to any
<PAGE>
non-compliance therewith, for the three months ended March 31, 1998. On April
23, 1998, the Company refinanced the amounts outstanding under the 1997 Credit
Facility with the proceeds of a new revolving line of credit and term loan
facility (the 1998 Senior Secured Facility) with State Street Bank and Trust
Company, CoreStates Bank, N.A. and BankBoston, N.A. The 1998 Senior Secured
Credit Facility provides for borrowings under a revolving line of credit of up
to $90,000,000, and converts to a term loan after three years. 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 Senior
Secured 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 $50,000,000, or (ii) 1.75% for
loans outstanding which exceed $50,000,000), or the Cost of Funds (COF) rate
plus the applicable margin. The 1998 Senior Secured 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 Senior Secured 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 in April, 1997, the Company
issued 612,026 shares of Common Stock to the owner of Sun Services. As a
privately owned Company issuing shares of its 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 initial public offering on
October 22, 1997, the Call Rights and certain of the Put Rights terminated. 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 the 1998
Senior Secured 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 1997 Credit Facility. A $9,000,000 dividend of previously taxed earnings to
the Company's shareholders prior to the IPO, which was paid in October, 1997,
was also funded from the proceeds of the offering. The proceeds of the offering
were also used to provide partial funding for two laundry route acquisitions
which were completed in October and November,1997.
The Company believes that the amount available under the 1998 Senior Secured
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 Senior Secured 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 Senior Secured Credit Facility or
otherwise, may,
<PAGE>
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.
INFLATION
The Company does not believe that its financial performance has been materially
affected by inflation.
<PAGE>
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 Financial Data Schedule
(b) Reports on Form 8-K
On March 5, 1998, the Company filed a Form 8-K announcing the signing of a
Stock and Asset Purchase Agreement, pursuant to which it will acquire one
hundred percent of the outstanding capital stock of Amerivend Corporation
and the assets of Amerivend Southeast Corporation.
On March 17, 1998, the Company filed a Form 8-K to announce the
consummation of the merger with Intirion Corporation on March 12, 1998. The
Form 8-K also reported the effect of the implementation of SAB 98 on fiscal
1997 earnings per share.
On March 24, 1998, the Company filed a Form 8-K to provide the required
financial statements and pro forma information as a result of the merger
with Intirion Corporation. Included in the filing were financial statements
for Intirion Corporation for the years ended June 30, 1995, 1996 and 1997
and for the six months ended December 31, 1997, and pro forma financial
information for December 31, 1997 combining the entities on a pooling of
interests basis.
<PAGE>
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
May 14, 1998 /s/ John S. Olbrych
--------------------
John S. Olbrych
Treasurer and Chief Financial Officer
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