<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, 1999
OR
___TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the transition period from _______ to _______
COMMISSION FILE NUMBER 1-13495
-------
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 May 14, 1999:
Class Number of shares
----- ----------------
Common Stock, $.01 Par Value 12,625,428
<PAGE>
INDEX
-----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1999 (unaudited) and
December 31, 1998
Consolidated Income Statements (unaudited) for the Three Months
Ended March 31, 1999 and 1998
Consolidated Statement of Stockholders' Equity for the Three
Months Ended March 31, 1999 (unaudited)
Consolidated Statements of Cash Flows (unaudited) for the Three
Months Ended March 31, 1999 and 1998
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 SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31,
December 31, 1998 1999 (Unaudited)
------------------- -------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,181 $ 8,117
Trade receivables, net of allowance for doubtful accounts 8,298 6,577
Inventory of finished goods 5,266 5,202
Prepaid expenses and other current assets 6,728 6,742
------------------- -------------------
Total current assets 26,473 26,638
Property, plant and equipment, net 69,208 72,083
Intangible assets, net 65,249 64,138
Prepaid commissions and other assets 10,590 11,694
------------------- -------------------
Total assets $171,520 $174,553
=================== ===================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 2,444 $ 2,497
Redeemable common stock (Note 2) 7,644 -
Trade accounts payable and accrued expenses 8,706 8,570
Accrued commissions 7,133 7,976
Deferred revenues and deposits 3,386 1,933
------------------- -------------------
Total current liabilities 29,313 20,976
Long-term debt and capital lease obligations 70,559 81,330
Deferred income taxes 7,472 7,832
Deferred retirement obligation 957 931
Other liabilities 278 210
Commitments and contingencies (Note 5) - -
Stockholders' equity:
Preferred stock of Mac-Gray Corporation ($.01 par value, 5 - -
million shares authorized, no shares outstanding)
Common stock of Mac-Gray Corporation ($.01 par value, 30 million 128 134
shares authorized, 12,843,728 and 13,443,754 shares issued and
12,781,628 and 12,655,628 shares outstanding at December 31,
1998 and March 31, 1999, respectively)
Additional capital 60,896 68,535
Retained earnings 2,623 3,998
------------------- -------------------
63,647 72,667
Less common stock in treasury (706) (9,393)
------------------- -------------------
Total stockholders' equity 62,941 63,274
------------------- -------------------
Total liabilities and stockholders' equity $171,520 $174,553
=================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
MAC-GRAY CORPORATION
CONSOLIDATED INCOME STATEMENTS (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
March 31,
--------------------------------------
1998 1999
---------------- ----------------
<S> <C> <C>
Revenue:
Route revenue $ 19,732 $ 27,825
Sales revenue 6,689 7,510
Other 1,568 2,044
---------------- ----------------
Total 27,989 37,379
Cost of revenue:
Route related expenses 12,786 19,007
Depreciation and amortization 2,824 4,292
Cost of product sales 4,666 4,849
----------------- -----------------
Total cost of revenue 20,276 28,148
----------------- -----------------
Gross margin 7,713 9,231
----------------- -----------------
Operating expenses:
Selling, general and administration 4,388 5,423
Merger-related costs 884 -
----------------- -----------------
Total operating expenses 5,272 5,423
----------------- -----------------
Income from operations 2,441 3,808
Interest and other expense, net (295) (1,448)
----------------- -----------------
Income before provision for income taxes 2,146 2,360
Provision for income taxes (1,154) (985)
----------------- -----------------
Net income before accretion and dividends on
redeemable preferred stock 992 1,375
Accretion and dividends on redeemable preferred
stock 62 -
----------------- -----------------
Net income available to common stockholders $ 930 $ 1,375
================= =================
Net income per common share - basic $ 0.08 $0.11
================= =================
Weighted average common shares outstanding 12,188 12,751
================= =================
Net income per common share - diluted $ 0.07 $0.11
================= =================
Weighted average common shares outstanding - diluted 12,657 12,776
================= =================
</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 Treasury Stock
------------------------- -------------------------
Retained
Number of Additional earnings Number
Shares Value capital (deficit) of shares Cost Total
--------- ----- ---------- --------- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 12,781,628 $128 $60,896 $2,623 62,100 $ (706) $62,941
Net income (comprehensive income) - - - 1,375 - - 1,375
Repurchase of redeemable common stock - 6 7,639 600,026 (7,645) -
Repurchase of common stock (126,000) - - - 126,000 (1,042) (1,042)
---------------------------------------------------------------------------------------------
Balance, March 31, 1999 12,655,628 $134 $68,535 $3,998 788,126 $(9,393) $63,274
=============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
MAC-GRAY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------
1998 1999
---------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 992 $ 1,375
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Depreciation and amortization 3,005 4,525
Provision for doubtful accounts - 317
Gain on sale of assets (128) (44)
Deferred income taxes 374 451
Decrease in accounts receivable 174 1,404
Increase in inventory (407) (1,443)
Increase in prepaid expenses and other assets (895) (2,552)
Increase (decrease) in accounts payable,
accrued commissions and accrued expenses (3,089) 613
Decrease in deferred revenues and customer
deposits (1,115) (1,453)
-------------- ---------------
Net cash flows (used in) provided by
operating activities (1,089) 3,193
-------------- ----------------
Cash flows from investing activities:
Capital expenditures (2,253) (3,327)
Acquisition of businesses (1,223) -
Proceeds from sale of property and equipment 428 146
-------------- ----------------
Net cash flows used in investing activities (3,048) (3,181)
-------------- ----------------
Cash flows from financing activities:
Payments on long-term debt and capital lease
obligations (4,174) (595)
Advances on line-of-credit, net 8,931 11,206
Contribution of capital and proceeds from sale
of common stock 13 -
Dividends paid (72) -
Purchase of redeemable common stock - (7,645)
Repurchase of common stock - (1,042)
-------------- ----------------
Net cash flows provided by financing
activities 4,698 1,924
-------------- ----------------
Increase in cash and cash equivalents 561 1,936
Cash and cash equivalents, beginning of period 3,774 6,181
-------------- ----------------
Cash and cash equivalents, end of period $ 4,335 $ 8,117
============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Mac-Gray Corporation
Notes to Consolidated Financial Statements (unaudited)
(In thousands, except per share data)
1. Basis of Presentation
In the opinion of the management of Mac-Gray Corporation (the "Company" or
"Mac-Gray"), the accompanying unaudited consolidated financial statements
contain all adjustments (consisting of only normal, recurring adjustments) which
are necessary to present fairly the Company's financial position as of March 31,
1999 and December 31, 1998 and the results of its operations and cash flows for
the three month periods ended March 31, 1999 and 1998. 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
1998 audited consolidated financial statements filed with the Securities and
Exchange Commission in its Annual Report on Form 10-K. The results for interim
periods are not necessarily indicative of the results to be expected for the
full year.
The company generates the majority of its revenue from card and coin-operated
laundry and reprographics equipment located in the Northeastern, Midwestern and
Southeastern United States. A large portion of its revenue is also derived from
the sale and lease of the Company's MicroFridge(R) product lines. The Company's
principal customer base is the multi-housing market, which consists of
apartments, condominium units, colleges and universities. The Company also
sells, services and leases commercial laundry equipment to commercial
laundromats and institutions. The majority of the Company's purchases of coin
route laundry equipment is from one supplier.
2. Redeemable Common Stock
In January 1999, the Company repurchased all of the remaining redeemable
common stock outstanding at the end of 1998. The redeemable common stock was
issued in April 1997 in conjunction with the Company's acquisition of Sun
Services of America, Inc. and R. Bodden Coin-Op Laundry, Inc. The redemption
amounted to 600,026 shares and a total cash outlay of $7,645. At December 31,
1998 the amount payable under the redemption agreement was recorded as a current
liability on the Company's balance sheet. The shares have been placed in
treasury by the Company.
3. Long Term Debt
The 1998 Credit Facility provides for borrowings under a revolving line of
credit of up to $90,000.
The 1998 Credit Facility restricts payments of dividends and other
distributions, restricts the Company from making certain acquisitions and
incurring indebtedness, and requires it to maintain certain financial ratios.
The Company was in compliance with the terms of the credit agreement as of March
31, 1999. The balance outstanding under the 1998 Credit Facility was $76,884 at
March 31, 1999. Long term debt also includes various notes payable totaling
$3,806 at December 31, 1998 and $3,613 at March 31, 1999 and various unsecured
notes payable to former shareholders totaling $1,631 at December 31, 1998 and
$1,439 at March 31, 1999.
<PAGE>
Mac-Gray Corporation
Notes to Consolidated Financial Statements (unaudited)
(In thousands, except per share data)
4. Deferred Retirement Obligation
The deferred retirement obligation at March 31, 1999 and December 31, 1998
relates to payments due to a former shareholder of the Company in connection
with a retirement agreement which provides for annual payments of $104 until the
death of the former shareholder. The liability at March 31, 1999 and December
31, 1998 has been estimated based upon the life expectancy of the former
shareholder utilizing actuarial tables.
5. Commitments and Contingencies
The Company is involved in various litigation proceedings arising in the
normal course of business. In the opinion of management, the Company's ultimate
liability, if any, under pending litigation would not materially affect its
financial condition or the results of its operations.
6. Earnings Per Share
A reconciliation of the weighted average number of common shares outstanding
is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 1999
-------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------------- ------------------- -------------
<S> <C> <C> <C>
Net income available to common stockholders basic $1,375 12,751 $0.11
================= =================== =============
Effect of dilutive securities:
Stock options 25
-------------------
Net income available to common stockholders diluted $1,375 12,776 $0.11
================= =================== =============
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 1998
-------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------------- ------------------- -------------
<S> <C> <C> <C>
Net income per common share:
Net Income $ 992
Less: Accretion and dividends on redeemable preferred 62
stock
Net income available to common stockholders basic $ 930 12,188 $0.08
================= =================== =============
Effect of dilutive securities:
Stock options 310
Contingent shares 159
-------------------
Net income available to common stockholders diluted $ 930 12,657 $0.07
================= =================== =============
</TABLE>
Contingent shares represented common shares held in escrow related to the
merger with Intirion Corporation (MicroFridge(R)) which was accounted for as a
pooling of interests. In March 1999, these shares were released from escrow to
the former Intirion shareholders.
<PAGE>
Mac-Gray Corporation
Notes to Consolidated Financial Statements (unaudited)
(In thousands, except per share data)
7. Repurchase of common stock
On October 29, 1998, the Board of Directors authorized the Company to
repurchase up to $8,000 of its common stock through the open market. During the
three months ended March 31, 1999 the Company repurchased 126,000 shares for a
total cash outlay of $1,042. Since the inception of the plan, the Company has
repurchased 188,100 shares at a total cost of $1,748.
Also included in treasury stock are 600,026 shares of common stock purchased
under a redemption agreement related to the 1997 acquisition of Sun Services.
The total cost of these shares amounted to $7,645 and was paid during the
quarter ended March 31, 1999.
8. Segment Information
The Company operates three business units which are based on the Company's
different product and service categories: Laundry, MicroFridge(R) and
Reprographics. These three business units have been aggregated into two
reportable segments ("Laundry and Reprographics" and "MicroFridge(R)"). The
Laundry and Reprographics business units have been aggregated into one
reportable segment (Laundry and Reprographics) since the long-term financial
performance of these divisions are affected by similar economic conditions. The
Laundry segment provides coin and card-operated laundry equipment to multiple
housing facilities such as apartment buildings, colleges and universities and
public housing complexes. The Laundry business unit also operates as a
distributor of and provides service to commercial laundry equipment in public
laundromats, as well as institutional purchasers, including hospitals,
restaurants and hotels, for use in their own on-premise laundry facilities. The
Reprographics business unit provides coin and card-operated reprographics
equipment to academic and public libraries. The MicroFridge(R) segment sells and
leases its own proprietary line of refrigerator/freezer/microwave oven
combinations to a customer base which includes colleges and universities,
government, hotel, motel and assisted living facilities.
There are no intersegment revenues.
The table below presents information about the reported operating income of
Mac-Gray for the three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Three months ended March 31, 1999
-------------------------------------------------------
Laundry and
Reprographics MicroFridge(R) Total
------------- -------------------- ------------
<S> <C> <C> <C>
Revenues $30,688 $6,691 $37,379
Gross margin 6,852 2,379 9,231
</TABLE>
<TABLE>
<CAPTION>
Three months ended March 31, 1998
-------------------------------------------------------
Laundry and
Reprographics MicroFridge(R) Total
------------- -------------------- ------------
<S> <C> <C> <C>
Revenues $23,407 $4,582 $27,989
Gross margin 5,990 1,723 7,713
</TABLE>
<PAGE>
Mac-Gray Corporation
Notes to Consolidated Financial Statements (unaudited)
(In thousands, except per share data)
The following are reconciliations to corresponding totals in the accompanying
consolidated financial statements:
<TABLE>
<CAPTION>
1998 1999
------------------ --------------
<S> <C> <C>
Income
Total gross margin for reportable segments $ 7,713 $ 9,231
Operating expenses (5,272) (5,423)
Interest expense, net (315) (1,407)
Other expense, net 20 (41)
------------------ --------------
Income before provision for income taxes $ 2,146 $ 2,360
================== ==============
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------------ --------------
<S> <C> <C>
Assets
Laundry $123,054 $122,551
MicroFridge(R) 19,767 19,382
------------------ --------------
Total for reportable segments 142,821 141,933
Corporate (1) 28,212 32,224
Deferred income taxes 487 396
------------------ --------------
Total assets $171,520 $174,553
================== ==============
</TABLE>
(1) Principally cash, prepaid expenses and property, plant & equipment.
9. Comprehensive Income
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130. "Reporting Comprehensive Income" (SFAS 130) in
June 1997. The Company adopted SFAS 130 for fiscal 1998. SFAS 130 requires
presentation of certain information related to comprehensive income. For the
three months ended March 31, 1999 and 1998, the Company had no other
comprehensive income as defined by SFAS 130, therefore there is no impact on the
Company's balance sheet and income statement.
<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.
The following discussion and analysis should be read in conjunction with the
financial statements and related notes thereto presented elsewhere in this
report and with the annual financial statements and related notes previously
filed by Mac-Gray with the SEC on its Annual Report on Form 10-K.
Overview
Mac-Gray derives its revenue principally through the operation and maintenance
of amenities in multiple housing units, including laundry and MicroFridge(R)
products. Mac-Gray also operates card and coin-operated reprographics equipment
in academic and public libraries. Mac-Gray operates laundry rooms,
reprographics equipment and MicroFridge(R) equipment under long-term leases with
property owners, colleges and universities and governmental agencies. Mac-
Gray's Laundry Route business consists of approximately 160,000 laundry
machines, operated in over 25,000 multiple housing laundry rooms located in 29
states. Mac-Gray's reprographics business consists of approximately 2,200
machines concentrated in the northeast, Florida and Texas. Mac-Gray's
MicroFridge(R) business consists of leased units located throughout the United
States as well as sales of its MicroFridge(R) product line.
Mac-Gray also derives revenue as a distributor and servicer of commercial
laundry equipment manufactured by Maytag Corporation, and sells laundry
equipment manufactured by American Dryer, The Dexter Company, and Whirlpool
Corporation. Additionally, the Company sells or rents laundry equipment to
hospitals, restaurants, hotels and similar institutional users that operate
their own on-premise laundry facilities.
Redeemable Common Stock
In January 1999 the Company repurchased all of the remaining redeemable common
stock outstanding at the end of 1998. The redeemable common stock was issued in
April 1997 in conjunction with the Company's acquisition of Sun Services of
America, Inc. and R. Bodden Coin-Op Laundry, Inc. The redemption amounted to
600,026 shares and a total cash outlay of $7.6 million. The shares have been
placed in treasury by the Company.
<PAGE>
Year 2000
The Company continues to research and test potential year 2000 ("Y2K")
problems within its software and systems. During 1998 the Company contracted
with an outside consultant to assist in the evaluation of Y2K preparedness.
Through March 31, 1999 the Company has not incurred significant costs directly
associated with Y2K evaluations and corrections. The Company does not expect to
incur significant costs moving forward to rectify any Y2K issues. Should any
Y2K issues be identified in the coming months which the Company believes could
remain unresolved into the latter stages of 1999, the Company will develop
contingency plans. Such contingency plans may include increasing inventories to
prevent delays in new equipment installations, and the temporary addition of
staff to facilitate manual processing of information.
Results of Operations (Dollars in thousands)
Three months ended March 31, 1999 compared to three months ended March 31, 1998.
Revenue. Revenue increased by $9,390, or 34%, to $37,379 for the three months
ended March 31, 1999 from the three months ended March 31, 1998. This increase
is related to an increase in route revenue, which is made up of money collected
through coin- and card-operated equipment, of $8,093, or 41%, from the three
months ended March 31, 1998 due to the expansion of existing operations and the
additional revenues from the route businesses acquired during 1998. Sales
revenue increased $821, or 12%, from the three months ended March 31, 1998, due
primarily to an increase in sales by the MicroFridge(R) division.
Route Related Expenses. Route related expenses include commissions paid to
route customers as well as those costs associated with installing and servicing
machines and the costs of collecting, counting and depositing route revenue.
Route related expenses increased $6,221, or 49%, to $19,007 for the three months
ended March 31, 1999 from the three months ended March 31, 1998. This increase
was primarily related to an increase in commissions expense which is tied to the
increase in route revenue. The increase is also related to an increase in the
Company's machine base which is a result of both internal growth and significant
acquisitions made during the second quarter of 1998. The Company is also
expanding into territories where there is no previously established
infrastructure. As a result, operating costs relative to revenue in these new
areas are higher than normal. The Company believes that, over time, expansion
in these new territories will begin to offset the overhead required to
establish a presence in a new area.
Depreciation and Amortization. Depreciation and amortization increased by
$1,468, or 52%, to $4,292 for the three months ended March 31, 1999 from the
three months ended March 31, 1998. The increase was primarily attributable to
the acquisitions of businesses during the second quarter of 1998 which resulted
in additional machines to depreciate, as well as an increase in intangible
assets to amortize. Depreciation also increased as a result of the increase in
the Company's machine base due to internal growth.
Selling, General and Administration. Selling, general and administration
expenses increased by $1,035, or 24%, to $5,423 for the three months ended March
31, 1999 from the three months ended March 31, 1998. The increase was primarily
attributable to an increase in sales staff, sales commissions earned as a result
of internal expansion in the route business as well as certain non-recurring
charges associated with the development of new comprehensive marketing
materials.
Interest and Other Expense. Interest and other expense, net of interest and
other income, increased by $1,153, or 391%, to $1,448 for the three months ended
March 31, 1999 from the three months ended March 31, 1998. This increase is
primarily related to an increase in outstanding borrowings which are related to
the significant acquisition activity in the second quarter of 1998. Interest
expense is also impacted by borrowings during 1999 used to repurchase shares of
the Company's common stock.
<PAGE>
Provision for Income Taxes. The provision for income taxes decreased by $169,
or 15%, to $985 for the three months ended March 31, 1999 from the three months
ended March 31, 1998. This decrease is due to costs associated with the March
12, 1998 Intirion acquisition which were not deductible for income tax purposes
and as such the effective tax rate for the first quarter of 1998 was greater
than the effective tax rate for the first quarter of 1999.
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 25% 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(R), to this market are also higher during the third calendar
quarter.
Liquidity and Capital Resources (Dollars in thousands)
Mac-Gray's primary sources of cash since December 31, 1998 have been operating
activities and bank borrowings. The Company's primary uses of cash have been
the purchase of redeemable common stock, other capital stock transactions and
capital expenses including the purchase of new laundry machines, MicroFridge(R)
equipment, and smart card based payment systems. The Company anticipates that
it will continue to use cash flow from its operating activities to finance
working capital needs, including interest payments on any outstanding
indebtedness, as well as capital expenditures. 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, the stock buyback program and, as needed, working capital.
Cash flows provided by (used in) operations were $3,193 and ($1,089) for the
three months ended March 31, 1999 and 1998, respectively. Cash flow from
operations consists primarily of route revenue, product sales, laundry equipment
service revenue, and rental revenue, offset by commissions, route expenditures,
cost of product sales, cost of rental revenue and selling, general and
administration expenses. The increase from 1998 to 1999 is attributable to an
overall improvement in the Company's financial performance that is further
enhanced by an increase in depreciation and amortization which is a non-cash
expense.
Cash used in investing activities was $3,181 and $3,048 for the three months
ended March 31, 1999 and 1998 respectively. Capital expenditures were $3,327
and $2,253 for the three months ended March 31, 1999 and 1998, respectively.
Cash used in investing activities for the three months ended March 31, 1998 also
included $1,223 related to business acquisistions.
Net cash flows from financing activities were $1,924 and $4,698 for the three
months ended March 31, 1999 and 1998, respectively. Financing activities for
those periods consist primarily of proceeds from and repayments of bank
borrowings, capital stock transactions, and payments of dividends. Capital
stock transactions in 1999 include the use of $7,645 to purchase redeemable
common stock.
The 1998 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. The term
loan has a weighted five year amortization schedule with a balloon payment due
after the second year of the term loan. Outstanding indebtedness under the 1998
Credit Facility bears interest at the Company's option, at a rate equal to the
prime rate minus .5% or LIBOR plus the applicable margin (either (i)1.5% for
loans outstanding which aggregate less than $50,000, or (ii) 1.75% for loans
outstanding which exceed $50,000), or the Cost of Funds rate plus the applicable
margin. The interest rate in effect at March 31, 1999 was approximately 6.7%.
The 1998 Credit Facility imposes certain financial and operational covenants on
the Company, including restrictions on indebtedness, certain capital
<PAGE>
expenditures, investments and acquisitions and on the Company's ability to pay
dividends and to make distributions. The 1998 Credit Facility, under certain
limited circumstances, also restricts the payment of dividends and other
distributions as well as certain acquisitions and investments. The 1998 Credit
Facility is secured by a blanket lien on the assets of the Company and each of
its subsidiaries, as well as a pledge by the Company of all of the capital stock
of its subsidiaries. The Company was in compliance with the terms of the credit
agreement as of March 31, 1999.
The Company believes that the amount available under the 1998 Credit Facility
and cash flow generated by operations will be sufficient to fund the Company's
normal working capital needs and capital expenditures for the foreseeable
future. In addition, to the extent that the Company were to borrow all amounts
then available to it under the 1998 Credit Facility in connection with one or
more acquisitions or in connection with significant capital expenditures, either
in the short-term or in the long-term, management believes that cash generated
from operating activities will be sufficient to fund the Company's operating
expenses and debt service needs for the foreseeable future. Additional
financing, under the 1998 Credit Facility or otherwise, may, however, be
required in connection with an acquisition or acquisitions which the Company may
consummate in the future. To the extent that any such additional financing is
needed, and can not be obtained on terms favorable to the Company, if at all,
the Company's ongoing capital improvement efforts and acquisition activity will
likely be reduced or delayed as cash generated from operating activities is used
for operating expenses and debt service.
Inflation
The Company does not believe that its financial performance has been
materially affected by inflation.
Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to a variety of risks, including changes in interest
rates on its borrowings. There have been no material changes in market risk
exposures from the information disclosed in the Form 10-K for the year ended
December 31, 1998.
<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
----------- -----------
27.1 Financial Data Schedule for the three months ended
March 31, 1999
(b) Reports on Form 8-K
None
<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 17, 1999 /s/ Michael J. Shea
--------------------
Michael J. Shea
Executive Vice President, Chief
Financial Officer and Treasurer
(On behalf of registrant and as principal
financial officer)
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