<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 June 30, 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
-------
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 June 30, 1998:
Class Number of shares
----- ----------------
Common Stock, $.01 Par Value 12,812,092
<PAGE>
INDEX
-----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1998 (unaudited) and
December 31, 1997
Consolidated Income Statement for the Three and Six Months
Ended June 30, 1998 and 1997 (unaudited)
Consolidated Statement of Stockholders' Equity for the Six
Months ended June 30, 1998 (unaudited)
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 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 4. Submission of Matters to a Vote of Security Holders
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>
JUNE 30, DECEMBER 31,
1998 1997
---- ----
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,047 $ 3,774
Trade receivables, net of allowance for doubtful accounts 8,141 6,570
Inventory of finished goods 7,318 7,208
Deferred income taxes 400 571
Prepaid expenses and other current assets 3,499 2,377
----------- -----------
Total current assets 25,405 20,500
Property, plant and equipment, net 59,234 43,615
Intangible assets, net 65,430 28,648
Prepaid commissions and other assets 8,826 5,080
----------- -----------
Total assets $158,895 $97,843
=========== ===========
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,411 $ 7,922
Current portion of capital lease obligations 481 476
Accounts payable 6,622 7,825
Accrued commissions 6,229 5,585
Accrued expenses 3,465 2,631
Deferred revenues and deposits 795 102
----------- -----------
Total current liabilities 20,003 24,541
Long-term debt 64,659 5,395
Long-term capital lease obligations 569 491
Deferred income taxes 5,254 5,329
Deferred retirement obligation 1,000 1,052
Other liabilities 360 429
Commitments and contingencies (Note 6) - -
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, 12,812,092 (unaudited) and 12,285,568 shares issued and
outstanding at June 30, 1998 and December 31, 1997, respectively) 128 123
Additional capital 60,562 52,524
Accumulated deficit (1,437) (4,345)
----------- -----------
Total stockholders' equity 59,253 48,302
----------- -----------
Total liabilities, redeemable stock and stockholders' equity $ 158,895 $ 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 PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $32,868 $ 25,074 $ 60,857 $ 52,311
Cost of revenue:
Commissions 9,535 7,383 18,689 14,639
Route expenditures 5,401 3,651 9,033 6,791
Depreciation and amortization 3,338 2,339 6,162 4,229
Cost of product sales 6,336 5,096 11,002 12,469
-------- -------- -------- --------
Total cost of revenue 24,610 18,469 44,886 38,128
-------- -------- -------- --------
Operating expenses:
General and administration 1,688 1,497 3,486 3,197
Sales and marketing 2,603 2,502 5,012 5,014
Depreciation 222 298 403 487
Merger-related costs - - 884 -
-------- -------- -------- --------
Total operating expenses 4,513 4,297 9,785 8,698
-------- -------- -------- --------
Income from operations 3,745 2,308 6,186 5,485
Interest expense, net (948) (941) (1,263) (1,630)
Other income (expense), net (21) 43 (1) 39
-------- -------- -------- --------
Income before provision for income taxes 2,776 1,410 4,922 3,894
Provision for income taxes 740 73 1,895 251
-------- -------- -------- --------
Net income before accretion and dividends on
redeemable preferred stock $ 2,036 $ 1,337 $ 3,027 $ 3,643
-------- -------- -------- --------
Accretion and dividends on redeemable preferred stock - 80 62 160
-------- -------- -------- --------
Net income available to common stockholders $ 2,036 $ 1,257 $ 2,965 $ 3,483
======== ======== ======== ========
Net income per common share $ 0.16 $ 0.17 $ 0.24 $ 0.46
======== ======== ======== ========
Weighted average common shares outstanding 12,590 7,554 12,390 7,554
======== ======== ======== ========
Net income per common share-assuming dilution $ 0.16 $ 0.16 $ 0.23 $ 0.45
======== ======== ======== ========
Weighted average common shares outstanding-assuming dilution 13,018 7,908 12,838 7,797
======== ======== ======== ========
PRO FORMA TAX ADJUSTED DATA (NOTE 7):
Income before provision for income taxes $ 1,410 $ 3,894
Provision for income taxes 564 1,558
======== ========
Pro forma tax adjusted net income $ 846 $ 2,336
======== ========
Pro forma tax adjusted net income available to common
stockholders $ 766 $ 2,176
======== ========
Pro forma tax adjusted net income available to common
stockholders per common share $ 0.10 $ 0.29
======== ========
Pro forma tax adjusted net income available to common
stockholders per common share - assuming dilution $ 0.10 $ 0.28
======== ========
<CAPTION>
Pro forma three Pro forma six
months ended months ended
June 30, June 30,
1997 1997
---- ----
<S> <C> <C>
Revenue $ 25,084 $ 47,742
Cost of revenue:
Commissions 7,383 14,639
Route expenditures 3,482 6,465
Depreciation and amortization 2,328 4,414
Cost of product sales 5,255 9,027
------- --------
Total cost of revenue 18,448 34,545
------- --------
Operating expenses:
General and administration 1,532 3,179
Sales and marketing 2,722 4,818
Depreciation 328 528
Merger-related costs - -
------- --------
Total operating expenses 4,582 8,525
------- --------
Income from operations 2,054 4,672
Interest expense, net (1,039) (1,687)
Other income (expense), net 43 39
------- --------
Income before provision for income taxes 1,058 3,024
Provision for income taxes 69 235
------- --------
Net income before accretion and dividends on
redeemable preferred stock $ 989 $ 2,789
------- --------
Accretion and dividends on redeemable preferred stock 80 160
------- --------
Net income available to common stockholders $ 909 $ 2,629
======= ========
Net income per common share $ 0.12 $ 0.35
======= ========
Weighted average common shares outstanding 7,554 7,554
======= ========
Net income per common share-assuming dilution $ 0.11 $ 0.34
======= ========
Weighted average common shares outstanding-assuming dilution 7,908 7,797
======= ========
PRO FORMA TAX ADJUSTED DATA (NOTE 7):
Income before provision for income taxes $ 1,058 $ 3,024
Provision for income taxes 423 1,210
======= ========
Pro forma tax adjusted net income $ 635 $ 1,814
======= ========
Pro forma tax adjusted net income available to common
stockholders $ 555 $ 1,654
======= ========
Pro forma tax adjusted net income available to common
stockholders per common share $ 0.07 $ 0.22
======= ========
Pro forma tax adjusted net income available to common
stockholders per common share - assuming dilution $ 0.07 $ 0.21
======= ========
</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 - - - 2,965 2,965
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
Shares of Mac-Gray Common stock issued in
conjunction with the acquisition of
Copico 250,000 2 4,216 4,218
Intirion dividends paid - - - (72) (72)
Options exercised 1,300 - 14 - 14
---------- ---- ------- ------- -------
Balance, June 30, 1998 12,812,092 $128 $60,562 $(1,437) $59,253
========== ==== ======= ======= =======
</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>
Six Months Ended
June 30,
------------------------------------
1998 1997
------------ -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,027 $ 3,643
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6605 4,689
(Gain) loss on sale of assets (252) 48
Deferred income taxes 96 93
Increase in accounts receivable (1,263) (135)
Decrease in inventory 2081 1,110
Increase in prepaid expenses and other assets (4,865) (1,566)
Increase (decrease) in accounts payable,
accrued commissions and accrued expenses 1,396 (4,623)
(Decrease) increase in deferred rental revenue and customer deposits (1,757) 2,217
-------- --------
Net cash flows provided by operating
activities 5,068 5,476
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,108) (5,575)
Acquisition of businesses, net of cash acquired (48,269) (4,958)
Proceeds from sales of property and
equipment 872 542
-------- --------
Net cash flows used in investing
activities (53,505) (9,991)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and
capital lease obligations (1,166) (1,168)
Principal payments on deferred retirement obligations (52) (44)
Retirement of line of credit and term loan (18,646)
Advances on credit facility, net of debt assumed 51,987 27,364
Contribution of capital and proceeds from sale of common stock 13
Cash dividends paid (72) (3,173)
-------- --------
Net cash flows provided by financing
activities 50,710 4,333
-------- --------
Increase (decrease) in cash and cash equivalents 2,273 (182)
Cash and cash equivalents, beginning of period 3,774 2,850
-------- --------
Cash and cash equivalents, end of period 6,047 2,668
======== ========
</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 (UNAUDITED)
(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 adjustments) which are, in the
opinion of management, necessary to present fairly the Company's financial
position as of June 30, 1998 and December 31, 1997 and the results of its
operations and cash flows for the three and six month periods ended June 30,
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
and in conjunction with the Company's restated fiscal 1997 audited consolidated
financial statements filed with the SEC on Form S-1 filed on June 10, 1998 which
were restated as a result of the acquisition of Intirion Corporation which was
accounted for as a pooling of interests. 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.
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 and six months ended December 31, 1996 were combined with Mac-Gray's
results of operations for the three and six months ended June 30, 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 and six months ended June 30, 1997 have also been presented. Pro
forma consolidated data reflects the results of operations for the three and six
months ended June 30, 1997 for Mac-Gray consolidated with the three and six
months ended June 30, 1997 for Intirion and has been presented for informational
purposes.
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(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 previous
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
-------------------------------------------------
June 30, 1997 December 31, 1996 June 30, 1997
Mac-Gray Intirion as Reported
------------- ------------------ --------------
<S> <C> <C> <C>
Net Revenues $19,454 $ 5,620 $25,074
Net Income $ 1,227 $ 110 $ 1,337
<CAPTION>
Six Months Ended
-------------------------------------------------
June 30, 1997 December 31, 1996 June 30, 1997
Mac-Gray Intirion as Reported
------------- ----------------- --------------
<S> <C> <C> <C>
Net Revenues $38,288 $14,023 $52,311
Net Income $ 3,032 $ 611 $ 3,643
<CAPTION>
Pro Forma Three Months Ended
-------------------------------------------------
June 30, 1997 June 30, 1997 June 30, 1997
Mac-Gray Intirion (pro forma)
------------- ----------------- --------------
<S> <C> <C> <C>
Net Revenues $19,454 $ 5,630 $25,084
Net Income (Loss) $ 1,227 $ (238) $ 989
<CAPTION>
Pro Forma Six Months Ended
-------------------------------------------------
June 30, 1997 June 30, 1997 June 30, 1997
Mac-Gray Intirion as Reported
------------- ----------------- --------------
<S> <C> <C> <C>
Net Revenues $38,288 $ 9,454 $47,742
Net Income (Loss) $ 3,032 $ (243) $ 2,789
</TABLE>
2. LONG TERM DEBT
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 for the outstanding balance at the
date of conversion. 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.
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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
stock of the Company and its subsidiaries and the assets of the Company. The
balance outstanding under the 1998 Senior Secured Credit Facility was $58,970 at
June 30, 1998.
Through Intirion, the Company had outstanding borrowings of $0 at June 30, 1998
and $2,525 at December 31, 1997. All outstanding borrowings of Intirion
Corporation were repaid by Mac-Gray subsequent to the merger and the line of
credit agreement was terminated.
Long term debt also includes various notes payable totaling $6,017 at June 30,
1998 and $4,538 at December 31, 1997, and various unsecured notes payable to
former shareholders totaling $2,083 at June 30, 1998 and $2,560 at December 31,
1997.
3. MERGERS AND ACQUISITIONS
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.
The pro forma results of operations assuming this acquisition had occurred at
January 1, 1997 would not have differed materially from the results of
operations reported.
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. Amerivend is a provider of card and coin-operating laundry rooms in
multiple housing facilities. The acquisition was accounted for as a purchase
transaction.
The unaudited June 30, 1998 financial statements include the results of Copico
and Amerivend for the period subsequent to the acquisition. Goodwill amounting
to $35,819 was recorded in connection with these acquisitions.
The following supplemental pro forma financial information reflects the
Amerivend Acquisition as if it occurred on January 1, 1997.
<TABLE>
<CAPTION>
Unaudited Unaudited
Supplemental Pro Supplemental Pro
Forma Results for Forma Results for
the Six Months Ended the Six Months Ended
June 30, 1997 June 30, 1998
-----------------------------------------------
<S> <C> <C>
Revenue $61,393 $66,955
Net Income $ 4,162 $ 3,555
Pro Forma tax adjusted net income
available to common stockholders $ 5,096 $ 3,282
Pro Forma tax adjusted net income
Per Share $ 0.67 $ 0.26
Pro Forma tax adjusted net income
Per Share - assuming dilution $ 0.65 $ 0.26
</TABLE>
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. DEFERRED RETIREMENT OBLIGATION
The deferred retirement obligation at June 30, 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 June 30, 1998 and December 31,
1997 has been estimated based upon the life expectancy of the former shareholder
utilizing actuarial tables.
5. INCOME TAXES
The results of operations for the three and six months ended June 30, 1998
include a tax benefit of $370 due to the release of a valuation allowance on
certain tax assets available for use by Intirion. Based on the results of
operations of Intirion subsequent to the combination, management believes that
it is more likely than not that such assets will be realized.
6. 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.
7. PRO FORMA TAX ADJUSTED DATA
Pro forma tax adjusted data reflects adjustments to the consolidated statements
of income for the three and six months ended June 30, 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.
8. 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.
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
For the Three Months Ended June 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Pro forma net income per common share:
Net Income $2,036
Less: Accretion and dividends on redeemable preferred
stock -
----------------- ------------------- ------------
Net income available to common stockholders $2,036 12,590 $0.16
================= =================== ============
Effect of dilutive securities:
Stock options 269
Contingent shares 159
-------------------
Net income available to common stockholders - assuming
dilution $2,036 13,018 $0.16
================= =================== ============
<CAPTION>
For the Three Months Ended June 30, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
<S> <C> <C> <C>
Pro forma net income per common share:
Net Income $1,337
Less: Accretion and dividends on redeemable preferred
stock 80
-----------------
Net income available to common stockholders $1,257 7,554 $0.17
================= =================== ============
Effect of dilutive securities:
Stock options 222
Contingent shares 132
-------------------
Net income available to common stockholders - assuming
dilution $1,257 7,908 $0.16
================= =================== ============
<CAPTION>
For the Six Months Ended June 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Pro forma net income per common share:
Net Income $3,027
Less: Accretion and dividends on redeemable preferred
stock 62
-----------------
Net income available to common stockholders $2,965 12,390 $0.24
================= =================== ============
Effect of dilutive securities:
Stock options 289
Contingent shares 159
-------------------
Net income available to common stockholders - assuming
dilution $2,965 12,838 $0.23
================= =================== ============
</TABLE>
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Pro forma net income per common share:
Net Income $3,643
Less: Accretion and dividends on redeemable preferred
stock 160
-----------------
Net income available to common stockholders $3,483 7,554 $0.46
================= =================== ============
Effect of dilutive securities:
Stock options 111
Contingent shares 132
-------------------
Net income available to common stockholders - assuming
dilution $3,483 7,797 $0.45
================= =================== ============
</TABLE>
9. 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 June 30, 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. 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 155,000 laundry machines, operated in over
25,000 multiple housing laundry rooms located in 27 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 or through
long term leases directly with the universities.
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 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".
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-
<PAGE>
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".
The Company continues to evaluate the impact of year 2000 issues within its
systems. Based on the Company's assessment to date management does not believe
the issue will have a material impact on the business, its results of
operations, or its financial condition. The Company has not incurred and does
not expect to incur significant costs in identifying and resolving year 2000
issues.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 1997 AND PRO FORMA THREE AND SIX MONTHS ENDED JUNE 30, 1997
Due to the differing year ends of Mac-Gray and Intirion prior to the
combination, the three months ended June 30, 1997 represents consolidated
results for the period from April, 1997 through June, 1997 for Mac-Gray
consolidated with the three month period from September, 1996 through December,
1996 for Intirion. The six months ended June 30, 1997 represent the
consolidated results for the period January through June 1997 for Mac-Gray
consolidated with the six month period June through December 1996 for Intirion.
The pro forma three months ended June 30, 1997 represents consolidated results
for the period from April, 1997 through June, 1997 for both Mac-Gray and
Intirion. The three months ended June 30, 1998 represents consolidated results
for the period from April, 1998 through June, 1998 for both Mac-Gray and
Intirion.
Revenue. Revenue increased by $7,794,000, or 31%, to $32,868,000 for the three
months ended June 30, 1998 from $25,074,000 for the three months ended June 30,
1997. Revenue increased by $8,546,000, or 16%, to $60,857,000 for the six months
ended June 30, 1998 from $52,311,000 for the six months ended June 30, 1997.
Revenue increased by $7,784,000, or 31%, from $25,084,000 for the pro forma
three months ended June 30, 1997. Revenue increased $13,115,000 for the pro
forma six months ended June 30, 1998. Route Revenue increased $5,875,000, due
to the expansion of existing operations and the additional revenues from the
route businesses acquired during 1998 and 1997. Product sales increased by
$1,664,000, from the three months ended June 30, 1997 to the three months ended
June 30, 1998. The increase is the result of increased MicroFridge sales to the
college market under sales type leases and general growth in the store sales
business. Product sales decreased by $2,312,000 from the six months ended June
30, 1997 to the six months ended June 30, 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 December than during January through June.
Product sales from the pro forma six months ended June 30, 1997 to the six
months ended June 30, 1998 increased by $3,128,000. 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 1998 and
1997.
Commissions. Commissions increased by $2,152,000, or 29%, to $9,535,000 for the
three months ended June 30, 1998 from $7,383,000 for the three months ended June
30, 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 route locations. Commission increased by $4,050,000, or
28%, to $18,689,000 for the six months ended June 30, 1998. This increase was
primarily attributable to an increase in Route Revenue. The Copico acquisition,
which was consummated in April resulted in a decrease in the commission
percentage paid.
<PAGE>
Route Expenditures. Route expenditures include costs associated with installing
and servicing machines, as well as the costs of collecting, counting and
depositing the revenue, increased by $1,750,000, or 48%, to $5,401,000 for the
three months ended June 30, 1998 from $3,651,000 for the three months ended June
30, 1997, and by $1,919,000 or 55% from the pro forma three months ended June
30, 1997. Route expenditures increased by $2,242,000, or 33%, to $9,033,000 for
the six months ended June 30, 1998 from $6,791,000 for the six months ended June
30, 1997, and by $2,568,000, or 40% from the pro forma six months ended June 30,
1997. The increase was due in part 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
increase was also attributable to the acquisitions made during 1998 for which
the fixed and variable cost mix associated with route expenditures is different
and causes increases in route expenditures relative to route revenue to rise
during the slower periods of the year which include the months from June through
August. The costs for the three and six months ended June 30, 1997 were higher
than the costs for the pro forma three and six months ended June 30, 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 include amounts
included as a component of cost of revenue, and amounts included as an operating
expense. Aggregate depreciation and amortization increased by 35%, to $3,560,000
for the three months ended June 30, 1998 from $2,637,000 for the three months
ended June 30, 1997, and by $904,000 from the pro forma three months ended June
30, 1997. Aggregate depreciation and amortization increased by 39%, to
$6,565,000 for the six months ended June 30, 1998 from $4,716,000 for the six
months ended June 30, 1997. The increase was primarily attributable to the
acquisitions of businesses during 1998 and 1997, which resulted in additional
machines to depreciate, as well as an increase in intangible assets to amortize,
and the increase in the Company's machine base due to internal growth.
Cost of Product Sales. Cost of product sales increased by $1,240,000, or 24%,
to $6,336,000 for the three months ended June 30, 1998 from $5,096,000 for the
three months ended June 30, 1997, and increased by $1,081,000 from the pro forma
three months ended June 30, 1997. Cost of product sales decreased by $1,467,000,
or 12%, to $11,002,000 for the six months ended June 30, 1998 from $12,469,000
for the six months ended June 30, 1997. These changes correspond to the changes
in product sales revenue.
General and Administration. General and administration expenses increased by
$191,000, or 13%, to $1,688,000 for the three months ended June 30, 1998 from
$1,497,000 for the three months ended June 30, 1997, and by $156,000 from the
pro forma three months ended June 30, 1997. General and administration expenses
increased by $289,000, or 9%, to $3,486,000 for the six months ended June 30,
1998 from$3,197,000 for the six months ended June 30, 1997, and by $307,000 form
the pro forma six months ended June 30, 1997. These changes resulted from the
addition of administrative personnel at both Mac-Gray and Intirion to handle the
business growth. General and administrative expenses grew at a slower rate than
revenues due to synergies in accounting and management.
Sales and Marketing. Sales and marketing expense increased by $101,000, or 4%,
to $2,603,000 for the three months ended June 30, 1998 from $2,502,000 for the
three months ended June 30, 1997. This increase resulted from the addition of
marketing personnel at Mac-Gray to bring in house duties previously performed by
outside enterprises. Sales and marketing expense decreased by $2,000, to
$5,012,000 for the six months ended June 30, 1998 from $5,014,000 for the six
months ended June 30, 1997. Sales and marketing expense decreased by $119,000
from the pro forma three months ended June 30, 1997 to the three months ended
June 30, 1998. This decrease was due to a reduction in sales and marketing
personnel at Intirion. Sales and marketing expense increased by $194,000 from
the pro forma six months ended June 30, 1997 to the six months ended June 30,
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 six months ended June 30, 1998.
<PAGE>
Interest Expense. Interest expense, net of interest income, decreased by
$367,000, or 23%, to $1,263,000 for the six months ended June 30, 1998 from
$1,630,000 for the six months ended June 30, 1997, and decreased by $424,000
from the pro forma six months ended June 30, 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 $667,000, to $740,000 for
the three months ended June 30, 1998 from $73,000 for the three months ended
June 30, 1997 and by $671,000 from the pro forma three months ended June 30,
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%.
The results of operations for the three and six months ended June 30, 1998
include a tax benefit of $370,000 due to the release of a valuation allowance on
certain tax assets available for use by Intirion. Based on the results of
operations of Intirion subsequent to the combination, management believes that
it is more likely than not that such assets will be realized.
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, principally MicroFridge, to this market are also high during the
third calendar quarter.
LIQUIDITY AND CAPITAL RESOURCES
Mac-Gray's primary sources of cash since December 31, 1997 have been operating
activities and bank borrowings. The Company's primary uses of cash have been
business acquisitions, 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. Funds available under
the 1998 Senior Secured Credit Facility were used as needed to finance the
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 provided by operations were $5,068,000 and $5,476,000 for the six
months ended June 30, 1998 and 1997, respectively. 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 $53,505,000 and $9,991,000 for the six
months ended June 30, 1998 and 1997 respectively. Mac-Gray invested $48,269,000
in connection with the Intirion merger and the acquisitions of Amerivend and
Copico as well as a small route acquisition during the six months ended June 30,
1998. Capital expenditures were $6,108,000 and $5,575,000 for the six months
ended June 30, 1998 and 1997, respectively.
Net cash flows from financing activities were $50,710,000 and $4,333,000 for the
six months ended June 30, 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. The increase
is a result of borrowings used to fund the Amerivend and Copico acquisitions in
1998.
<PAGE>
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, under certain limited
circumstances, also restricts the payment of dividends and other distributions
as well as certain acquisitions and investments. 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. The Company was in compliance with the terms of the credit
agreement as of June 30, 1998.
In connection with the Sun Services Acquisition in April, 1997, the Company
issued 612,026 shares of redeemable common stock to the owner of Sun Services.
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 such rights. These rights expire on October 21, 2000. In the event such
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 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, 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 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its annual meeting of stockholders on June 2,
1998, and the following directors were voted on:
(b) Patrick A. Flanagan
John P. Leydon
The following directors continued on in office after the annual
stockholders meeting:
Stewart Gray MacDonald, Jr.
Neil F. MacLellan, III
John S. Olbrych
Jeffrey C. Huenink
Jerry A. Schiller
Eugene B. Doggett
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 April 23, 1998, the Company filed a Form 8-K announcing the
signing of a definitive agreement to acquire 100 percent of the
outstanding stock of Copico, Inc.
On May 5, 1998, the Company filed a Form 8-K to announce the
consummation of the acquisition of Copico, Inc. on April 23, 1998.
The Form 8-K also reported the acquisition of Amerivend Corporation
on April 24, 1998.
On June 15, 1998, the Company filed a Form 8-K to provide the
required condensed financial information for the month ended April
30, 1998 as a result of the merger with Intirion Corporation.
<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
August 12, 1998 /s/ John S. Olbrych
--------------------
John S. Olbrych
Treasurer and Chief Financial Officer
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