<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, 2000
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 August 11, 2000:
Class Number of Shares
----- ----------------
Common Stock, $.01 Par Value 12,634,943
<PAGE>
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2000
(unaudited) and December 31, 1999
Condensed Consolidated Income Statements (unaudited) for the
Three and Six Months Ended June 30, 2000 and 1999
Condensed Consolidated Statement of Stockholders' Equity for
the Six Months Ended June 30, 2000 (unaudited)
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Six Months Ended June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
(unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II OTHER INFORMATION
Item 4. Submission of Matters to Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signature
2
<PAGE>
Item 1. Financial Statements
MAC-GRAY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,566 $ 5,638
Trade receivables, net of allowance for doubtful accounts 8,551 9,504
Inventory of finished goods 6,521 4,587
Prepaid expenses and other current assets 9,496 8,492
--------- ---------
Total current assets 31,134 28,221
Property, plant and equipment, net 78,581 75,891
Intangible assets, net 55,533 53,443
Prepaid route rent and other assets 15,717 18,188
========= =========
Total assets $ 180,965 $ 175,743
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 2,408 $ 7,185
Trade accounts payable and accrued expenses 14,905 13,288
Accrued route rent 8,354 8,053
Deferred revenues and deposits 3,354 724
--------- ---------
Total current liabilities 29,021 29,250
Long-term debt and capital lease obligations 84,421 75,951
Deferred income taxes 10,406 11,919
Deferred retirement obligation 853 801
Other liabilities 125 73
Commitments and contingencies (Note 4) -- --
Stockholders' equity:
Preferred stock of Mac-Gray Corporation ($.01 par value, 5
million shares authorized, no shares outstanding) -- --
Common stock of Mac-Gray Corporation ($.01 par value, 30 million shares
authorized, 13,443,754 issued and 12,627,753 outstanding at December 31,
1999, and 13,443,754 issued and 12,633,228 outstanding at June 30, 2000) 134 134
Additional capital 68,540 68,498
Accumulated Deficit (2,935) (1,347)
--------- ---------
65,739 67,285
Less common stock in treasury, at cost (9,600) (9,536)
--------- ---------
Total stockholders' equity 56,139 57,749
========= =========
Total liabilities and stockholders' equity $ 180,965 $ 175,743
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
MAC-GRAY CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 2000 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue $37,273 $39,086 $74,652 $76,299
Cost of revenue:
Cost of route revenues 16,331 18,096 35,338 36,739
Depreciation and amortization 4,505 4,862 8,797 9,591
Cost of products sold 8,468 7,540 13,317 13,062
------- ------- ------- -------
Total cost of revenue 29,304 30,498 57,452 59,392
------- ------- ------- -------
Selling, general and administration expenses 5,048 5,327 10,471 10,889
------- ------- ------- -------
Income from operations 2,921 3,261 6,729 6,018
Interest and other expenses, net 1,587 1,502 3,035 3,083
------- ------- ------- -------
Income before provision for income taxes 1,334 1,759 3,694 2,935
------- ------- ------- -------
Provision for income taxes 604 786 1,589 1,347
------- ------- ------- -------
Net Income $ 730 $ 973 $ 2,105 $ 1,588
======= ======= ======= =======
Net income per common share - basic $ 0.06 $ 0.08 $ 0.17 $ 0.13
======= ======= ======= =======
Weighted average common shares outstanding - basic 12,636 12,632 12,693 12,631
======= ======= ======= =======
Net income per common share - diluted $ 0.06 $ 0.08 $ 0.17 $ 0.13
======= ======= ======= =======
Weighted average common shares outstanding - diluted 12,636 12,633 12,693 12,632
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
MAC-GRAY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Common stock Treasury Stock
Number Value Additional Retained Number Cost Total
of shares capital earnings of shares
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 12,627,753 $134 $68,540 ($2,935) 816,001 ($9,600) $56,139
Net income 1,588 1,588
Stock granted 5,475 (42) (5,475) 64 22
------------------------------------------------------------------------------------
Balance, June 30, 2000 12,633,228 $134 $68,498 ($1,347) 810,526 ($9,536) $57,749
====================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
MAC-GRAY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 2000
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,105 $ 1,588
Adjustments to reconcile net income to net cash flows provided by
operating activities:
Depreciation and amortization 9,264 10,186
Gain on sale of assets (207) (233)
Deferred income taxes 284 1,274
Decrease (increase) in accounts receivable 1,206 (953)
(Increase) decrease in inventory (3,994) 1,956
Increase in prepaid expenses and other assets (7,366) (2,062)
Increase (decrease) in accounts payable, accrued route rent and
accrued expenses 2,786 (1,918)
Decrease in deferred revenues and customer deposits (2,880) (2,630)
-------- --------
Net cash flows provided by operating activities 1,198 7,208
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,280) (5,628)
Acquisition of businesses (3,000) --
Proceeds from sale of property and equipment 587 1,629
-------- --------
Net cash flows used in investing activities (10,693) (3,999)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations (1,359) (1,410)
Advances (payments) on line-of-credit, net 19,354 (2,727)
Purchase of redeemable common stock (7,645) --
Repurchase of common stock (1,269) --
-------- --------
Net cash flows provided by (used in) financing activities 9,081 (4,137)
-------- --------
Decrease in cash and cash equivalents (414) (928)
Cash and cash equivalents, beginning of period 6,181 6,566
======== ========
Cash and cash equivalents, end of period $ 5,767 $ 5,638
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION
In the opinion of the management of Mac-Gray Corporation (the "Company" or
"Mac-Gray"), the accompanying unaudited condensed consolidated financial
statements contain all adjustments (consisting of only normal, recurring
adjustments) which are necessary to present fairly the Company's financial
position as of June 30, 2000 and December 31, 1999 and the results of its
operations and cash flows for the three and six month periods ended June 30,
2000 and 1999. The unaudited interim condensed consolidated financial statements
do not include all information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles. These unaudited condensed consolidated financial statements should
be read in conjunction with the Company's fiscal 1999 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 laundry equipment is from one supplier.
2. LONG TERM DEBT
On June 29, 2000 the Company refinanced its outstanding Senior Secured
Credit Facility with a group of banks. This transaction retired the April 23,
1998 Senior Facility which was due to convert to a term loan in April 2001.
This new revolving line of credit and term loan Facility (the "2000
Senior Secured Credit Facility") provides for borrowings of up to $100,000.
The 2000 Senior Secured Credit Facility provides for borrowings under a
three-year revolving line of credit of up to $65,000, and includes a
five-year $35,000 Senior Secured Term Loan Facility.
Outstanding indebtedness under the 2000 Senior Secured Credit Facility
bears interest, at the Company's option, at a rate equal to the i) prime rate
plus 0.25%, or ii) LIBOR plus 2.25%. If certain financial ratio targets are met
in 2001 and beyond, these interest rate applicable margins will decrease.
The 2000 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 2000 Senior Secured Credit Facility is collateralized 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 2000 Senior
Secured Credit Facility is subject to certain financial and operational
covenants with which the Company was in compliance at June 30, 2000.
The 2000 Senior Secured Credit Facility contains a commitment fee equal to
one quarter of one percent (0.25%) per annum of the average daily unused portion
of the Credit Facility.
7
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
As of June 30, 2000, the available balance of the 2000 Senior Secured
Credit Facility was $20,921.
The 2000 Senior Secured Credit Facility Term Loan portion amortizes as
follows:
<TABLE>
<CAPTION>
<S> <C>
2000 .......................................................... $ 2,500
2001 .......................................................... 5,500
2002 .......................................................... 6,500
2003 .......................................................... 7,500
2004 .......................................................... 8,500
2005 .......................................................... 4,500
-------
$35,000
=======
</TABLE>
Long-term debt also includes various notes payable totaling $2,955 at
December 31, 1999, and $2,066 at June 30, 2000, and various unsecured notes
payable to former shareholders totaling $987 at December 31, 1999, and $809 at
June 30, 2000.
3. DEFERRED RETIREMENT OBLIGATION
The deferred retirement obligation at June 30, 2000 and December 31, 1999
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, 2000 and December 31,
1999 has been estimated based upon the life expectancy of the former shareholder
utilizing actuarial tables.
4. COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation proceedings arising in the
normal course of business. In the opinion of management, the Company's ultimate
liability, if any, under pending litigation would not materially affect its
financial condition or the results of its operations.
8
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
5. EARNINGS PER SHARE
A reconciliation of the weighted average number of common shares
outstanding is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended June 30, 2000
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net income available to common stockholders - basic $ 973 12,632 $0.08
====== ====== =====
Effect of dilutive securities:
Stock options 1
------
Net income available to common stockholders - diluted $ 973 12,633 $0.08
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended June 30, 1999
-------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- -----------
<S> <C> <C> <C>
Net income available to common stockholders - basic $ 730 12,636 $0.06
====== ====== =====
Net income available to common stockholders - diluted $ 730 12,636 $0.06
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 2000
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net income available to common stockholders - basic $1,588 12,631 $0.13
====== ====== =====
Effect of dilutive securities:
Stock options 1
------
Net income available to common stockholders - diluted $1,588 12,632 $0.13
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1999
-------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- -----------
<S> <C> <C> <C>
Net income available to common stockholders - basic $2,105 12,693 $0.17
====== ====== =====
Net income available to common stockholders - diluted $2,105 12,693 $0.17
====== ====== =====
</TABLE>
9
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
6. 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.
Revenue for the Reprographics business unit totaled $1,666 and $1,400 for
the three months ended June 30, 2000 and 1999, respectively. For the six months
ended June 30, 2000 revenue was $3,500, as compared to $3,285 for the same
period in 1999. Operational similarities in the Laundry and Reprographics
business units create several synergies which, for reporting purposes, makes it
difficult to estimate separate gross margins.
There are no intersegment revenues.
The table below presents information about the reported operating income of
Mac-Gray for the three and six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
-------------------------------------------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 2000 1999 2000
<S> <C> <C> <C> <C>
Revenues:
Laundry and Reprographics $27,561 $30,107 $58,249 $61,229
MicroFridge(R) 9,712 8,979 16,403 15,070
--------------- --------------- -------------- ---------------
Total 37,273 39,086 74,652 76,299
Gross Margin:
Laundry and Reprographics 4,487 5,328 11,337 11,614
MicroFridge(R) 3,482 3,260 5,863 5,293
--------------- --------------- -------------- ---------------
Total 7,969 8,588 17,200 16,907
Selling, general and
administrative expenses 5,048 5,327 10,471 10,889
Interest and other expenses, net 1,587 1,502 3,035 3,083
--------------- --------------- -------------- ---------------
Income before provision for taxes $ 1,334 $ 1,759 $ 3,694 $ 2,935
--------------- --------------- -------------- ---------------
</TABLE>
10
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
---------------- ------------
<S> <C> <C>
Assets
Laundry and Reprographics $ 131,700 $ 126,308
MicroFridge(R) 16,863 17,624
---------------- ------------
Total for reportable segments 148,563 143,932
Corporate (1) 31,765 30,936
Deferred income taxes 637 875
================ ============
Total assets $180,965 $175,743
================ ============
</TABLE>
(1) Principally cash, prepaid expenses and property, plant & equipment.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a non
compensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
11
<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: ability to meet future capital requirements; dependence
upon certain suppliers; lease renewals; retention of senior executives; market
acceptance of new products and services; implementation of acquisition strategy;
integration of acquired businesses; 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 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 equipment under long-term
leases with property owners, colleges and universities and governmental
agencies. Mac-Gray's laundry services business consists of laundry equipment
located in 30 states and the District of Columbia. Mac-Gray's reprographics
business is concentrated in the northeast, Florida and Texas. Mac-Gray's
MicroFridge business consists of leased units located throughout the United
States as well as sales of its MicroFridge product line.
Mac-Gray also derives revenue as a distributor of commercial laundry
equipment manufactured by Maytag Corporation and other laundry equipment
manufacturers. 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.
The MicroFridge division derives revenue through the sale and rental of its
MicroFridge products to colleges and universities, military bases, assisted
living facilities and the hotel and motel market.
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.
12
<PAGE>
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
THREE AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE AND SIX MONTHS
ENDED JUNE 30, 1999.
REVENUE. Revenue increased by $1,813, or 5%, to $39,086 for the three
months ended June 30, 2000 from the three months ended June 30, 1999. Revenue
increased by $1,647, or 2%, to $76,299 for the six months ended June 30, 2000
from the six months ended June 30, 1999. This increase is related to an increase
in route revenue, which is made up of money collected through coin and
card-operated equipment, of $2,609, or 11%, from the three months ended June 30,
1999, and $1,958, or 4%, from the six months ended June 30, 1999, due primarily
to additional revenue as a result of internal growth of equipment placed in
service and two Midwest acquisitions made late in the second quarter of 1999,
improved operating efficiencies in the Laundry Route business, and improved
performance of the Reprographics business unit. Sales revenue decreased $783, or
6%, from the three months ended June 30, 1999, and $87, or 0.4%, from the six
months ended June 30, 1999, due to normal timing issues in the MicroFridge
division.
ROUTE RELATED EXPENSES. Route related expenses include rent paid to route
customers as well as those costs associated with installing and servicing
machines and the costs of collecting, counting and depositing route revenue.
Route related expenses increased $1,765, or 11%, to $18,096 for the three months
ended June 30, 2000 from the three months ended June 30, 1999, and $1,401, or
4%, to 36,739 for the six months ended June 30, 2000 from the six months ended
June 30, 1999. This increase was primarily related to an increase in route rent
expense which is tied to the increase in route revenue, and significant
increases in fuel expense.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$357, or 8%, to $4,862 for the three months ended June 30, 2000 from the three
months ended June 30, 1999, and $794, or 9%, to $9,591 for the six months ended
June 30, 2000 from the six months ended June 30, 1999. The increase was
primarily attributable to growth of the Company's machine base associated with
new laundry route contracts and new machines used to replace existing equipment.
Also affecting depreciation and amortization was the acquisitions of businesses
during the latter half of 1999.
SELLING, GENERAL AND ADMINISTRATION. Selling, general and administration
expenses increased by $279, or 6%, to $5,327 for the three months ended June 30,
2000 from the three months ended June 30, 1999, and $418, or 4% for the six
months ended June 30, 2000 from the six months ended June 30, 1999. The increase
was the net of several changes in selling, general and administration spending,
including increases in salaries, associated taxes and benefits, temporary help
and outside services, and reserves for doubtful accounts.
INTEREST AND OTHER EXPENSE. Interest and other expense, net of interest and
other income, decreased by $85, or 5%, to $1,502 for the three months ended June
30, 2000 from the three months ended June 30, 1999, and increased by $48, or 2%,
to $3,083 for the six months ended June 30, 2000 from the six months ended June
30, 1999. This decrease for the three-month period is primarily related to a
decrease in the Company's borrowing levels, offset by higher interest rates
during 2000.
During the second quarter of 2000, the Company concluded the sale of
outlying and inefficient laundry route assets, comprising approximately 850
machines, in 28 locations - OH, IN, KY, MO, IA, SD, and southern IL. This sale
represents a continuation of the Company's strategy of eliminating inefficient
business in areas with poor infrastructure density and therefore focusing on
improving profit margins, and resulted in a gain of $188 included in other
expenses.
PROVISION FOR INCOME TAXES. The provision for income taxes increased by
$182, or 30%, to $786 for the three months ended June 30, 2000 from the three
months ended June 30, 1999, and decreased by $242, or 15%, for the six months
ended June 30, 2000 from the six months ended June 30, 1999. This increase is
due to the corresponding increase in pre-tax income from $1,334 for the three
months ended June 30, 1999 to $1,759 for the second quarter of 2000. The
effective tax rate for the period ended June 30, 2000 is 44.7% as compared to
45.3% for the same period in 1999. This decrease in the effective tax rate is
due to non-deductible expenses,
13
<PAGE>
primarily amortization of intangible assets associated with acquired businesses,
making up a lower portion of total taxable income.
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, 1999 have been
operating activities and bank borrowings. The Company's primary uses of cash
have been the purchase of new laundry equipment, MicroFridge equipment,
reprographics 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. To help mitigate the effect of
possible higher interest rates in the future, on February 18, 2000, the Company
negotiated interest rate swaps that fixed the interest rates on $20,000 of
outstanding borrowings for 3 years and $20,000 of outstanding borrowings for 5
years.
Cash flows provided by operations were $7,208 and $1,198 for the six months
ended June 30, 2000 and 1999, respectively. Cash flow from operations consists
primarily of route revenue, product sales, laundry equipment service revenue,
and rental revenue, offset by route rent, route expenditures, cost of product
sales, cost of rental revenue, general and administration expenses and sales and
marketing expenses. The increase from 1999 to 2000 is primarily attributable to
an overall improvement in the Company's financial performance, improved
management of working capital, in particular operating practices which led to
inventory reductions of $1,956 since December 31, 1999, and an increase in
depreciation and amortization which is a non-cash expense.
Cash used in investing activities was $3,999 and $10,693 for the six months
ended June 30, 2000 and 1999, respectively. Capital expenditures were $5,628 and
$8,280 for the six months ended June 30, 2000 and 1999, respectively. The
decrease in capital expenditures was due to less equipment placed in service and
the average cost of leases decreasing in the second quarter of 2000 as compared
to the same period a year ago.
Net cash flows from financing activities consist primarily of proceeds from
and repayments of bank borrowing, netting to a reduction of the revolving line
of credit and other debt. Cash used in financing activities was $4,137 for the
six months ended June 30, 2000 and consisted of repayments of bank borrowings
and payment of other long-term debt. For the six months ended June 30, 1999
financing activities consisted primarily of proceeds from and repayment of bank
borrowing and capital stock transactions. Capital stock transactions in the
period ended June 30, 1999 included the use of $7,645 of borrowings to purchase
redeemable common stock.
On June 29, 2000, the Company completed a new Senior Secured Credit
Facility. The new facility for $100,000, which was arranged by FleetBoston
Robertson Stephens, Inc., replaced the $90,000-Senior Credit Facility which had
been in place since April 1998 and was scheduled to convert to a term loan in
2001. The banks involved in the new Facility are Fleet National Bank as Agent,
Citizens Bank of Massachusetts, Banknorth Group, and KeyBank National
Association. It is not anticipated that this additional borrowing capacity will
be required for funding the operations of the Company, but rather will allow the
Company additional flexibility for future investments in the Laundry Route
business. At June 30, 2000 the Company's use of the Facility was $79,079. The
Company was in compliance with the terms of the Facility as of June 30, 2000.
The blended interest rate in effect at June 30, 2000 was approximately 8.3%.
14
<PAGE>
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company is exposed to a variety of risks, including changes in interest
rates on its borrowings. There have been no material changes in market risk
exposures from the information disclosed in the Form 10-K for the year ended
December 31, 1999.
15
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to Security Holders
(a) The Company held its annual meeting of stockholders on May 24,
2000.
(b) The following directors were reelected:
Stewart G. MacDonald, Jr.
Eugene B. Doggett
The following directors continued on in office after the annual
stockholders meeting:
John P. Leydon
William M. Crozier, Jr.
Jerry A. Schiller
(c) The only matter voted upon at the annual meeting was the
election of two Directors to hold office until the annual
meeting of stockholders to be held in 2003. The vote cast
was tabulated using 77 proxies representing 11,504,160 shares,
or 85.57 percent of the eligible voting shares. The results of
the vote were as follows:
<TABLE>
<CAPTION>
Director Number of Shares/votes
-------- ----------------------------------------
For Withheld Authority
<S> <C> <C>
Stewart G. MacDonald, Jr. 8,366,471 3,137,689
Eugene B. Doggett 11,441,839 62,321
</TABLE>
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
----------- -----------
10.1 Revolving Credit and Term Loan Agreement,
dated June 29, 2000, between Mac-Gray
Corporation, Mac-Gray Services Inc., and
Interion Corporation, Fleet National
Bank and the other lending institutions
named herein, and KeyBank National
Association, as Documentation Agent,
and FleetBoston Robertson Stephens Inc.,
as Arranger
10.2 Form of Pledge Agreement
10.3 Form of Security Agreement
10.4 Form of Revolving Credit Note
10.5 Form of Term Note
27.1 Financial Data Schedule for the six months
ended June 30, 2000
(b) Reports on Form 8-K
None
16
<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 14, 2000
/S/ MICHAEL J. SHEA
--------------------
Michael J. Shea
Executive Vice President, Chief
Financial Officer and Treasurer
(On behalf of registrant and as
principal financial officer)
17
