Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

 

ý  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2004

 

OR

 

o  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 incorporation or organization)		(I.R.S. Employer 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   ý    No   o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)

 

Yes   o    No   ý

 

The number of shares outstanding of each of the issuer’s classes of
common stock as of the close of business on November 9, 2004:

 

Class		Number of shares
Common Stock, $.01 Par Value		12,782,089

 

 

INDEX

 

PART I	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets at December 31, 2003 and September 30, 2004 (unaudited)
		Condensed Consolidated Income Statements (unaudited) for the Three and Nine Months Ended September 30, 2003 and 2004
		Condensed Consolidated Statement of Stockholders’ Equity (unaudited) for the Nine Months Ended September 30, 2004
		Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2003 and 2004
		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
	Item 4.	Controls and Procedures
PART II	OTHER INFORMATION
	Item 6.	Exhibits
	Signature

 

2

 

Item 1.    Financial Statements

 

MAC-GRAY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

		December 31, 2003			September 30, 2004
					(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	5,296		$	7,404
Trade receivables, net of allowance for doubtful accounts		9,067			7,608
Inventory of finished goods		4,858			4,383
Prepaid expenses, facilities rent and other current assets		10,466			10,144
Total current assets		29,687			29,539
Property, plant and equipment, net		76,621			90,988
Intangible assets, net		45,289			71,794
Prepaid expenses, facilities rent and other assets		10,408			10,486
Total assets		$	162,005		$	202,807
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt and capital lease obligations		$	3,619		$	6,108
Trade accounts payable and accrued expenses		11,436			13,511
Accrued facilities rent		8,380			10,407
Deferred revenues and deposits		1,005			986
Total current liabilities		24,440			31,012
Long-term debt and capital lease obligations		47,254			74,719
Deferred income taxes		20,720			22,671
Deferred retirement obligation		437			359
Other liabilities		425			372
Commitments and contingencies (Note 6)		—			—
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, 13,449,354 issued and 12,579,494 outstanding at December 31, 2003, and 13,443,754 issued and 12,772,889 outstanding at September 30, 2004)		134			134
Additional paid in capital		68,561			68,568
Accumulated other comprehensive (loss) income		(372		)	393
Retained earnings		9,439			11,545
		77,762			80,640
Less: common stock in treasury, at cost		(9,033		)	(6,966		)
Total stockholders’ equity		68,729			73,674
Total liabilities and stockholders’ equity		$	162,005		$	202,807

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

 

MAC-GRAY CORPORATION

CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)

(In thousands, except per share data)

 

		Three months ended September 30,						Nine months ended September 30,
		2003			2004			2003			2004
Revenue:
Facilities management revenue		$	25,928		$	33,233		$	80,556		$	103,028
Sales		11,266			10,940			27,961			29,329
Other		102			74			781			661
Total revenue		37,296			44,247			109,298			133,018
Cost of revenue:
Cost of facilities management revenues		17,714			22,606			54,601			69,735
Depreciation and amortization		3,931			5,126			12,480			15,458
Cost of product sold		8,087			7,795			20,190			20,851
Total cost of revenue		29,732			35,527			87,271			106,044
Gross margin		7,564			8,720			22,027			26,974
Operating expenses:
Selling, general and administration expenses		5,501			6,389			16,121			18,876
Loss on early extinguishment of debt		—			—			381			183
Gain on sale of assets		(55		)	(35		)	(88		)	(1,342		)
Total operating expenses		5,446			6,354			16,414			17,717
Income from operations		2,118			2,366			5,613			9,257
Interest and other expense, net		(807		)	(1,060		)	(2,096		)	(3,183		)
Gain on sale of lease receivables		836			—			836			—
Income before provision for income taxes		2,147			1,306			4,353			6,074
Provision for income taxes		920			554			1,847			2,606
Net income		$	1,227		$	752		$	2,506		$	3,468
Net income per common share - basic		$	0.10		$	0.06		$	0.20		$	0.27
Net income per common share – diluted		$	0.10		$	0.06		$	0.20		$	0.27
Weighted average common shares outstanding - basic		12,624			12,747			12,659			12,676
Weighted average common shares outstanding – diluted		12,772			13,114			12,715			13,059

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

 

MAC-GRAY CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)

(In thousands, except share data)

 

													Accumulated
													Other
		Common Stock					Additional						Comprehensive						Treasury Stock
		Number					Paid In			Retained			(Loss)			Comprehensive			Number
		of shares		Value			Capital			Earnings			Income			Income			of shares		Cost			Total
Balance, December 31, 2003		13,449,354		$	134		$	68,561		$	9,439		$	(372	)				869,860		$	(9,033	)	$	68,729
Net income		—		—			—			3,468			—			$	3,468		—		—			3,468
Other comprehensive income:
Unrealized gain on derivative instruments and reclassification adjustment, net of tax of $510 (Note 4)		—		—			—			—			765			765			—		—			765
Comprehensive income		—		—			—			—			—			$	4,233		—		—			—
Options exercised		2,000		—			7			(1,112		)	—						(163,033	)	1,694			589
Retirement of treasury stock		(7,600	)	—			—			(79		)	—						(7,600	)	79			—
Stock issuance - Employee Stock Purchase Plan		—		—			—			(152		)	—						(23,855	)	247			95
Stock granted to directors		—		—			—			(19		)	—						(4,507	)	47			28
Balance, September 30, 2004		13,443,754		$	134		$	68,568		$	11,545		$	393					670,865		$	(6,966	)	$	73,674

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

 

MAC-GRAY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands, except share data)

 

		Nine months ended September 30,
		2003			2004
Cash flows from operating activities:
Net income		$	2,506		$	3,468
Adjustments to reconcile net income to net cash flows provided by operating activities, net of effects of acquisition:
Depreciation and amortization		13,332			16,241
Loss on early extinguishment of debt		381			183
Provision for doubtful accounts and lease reserves		31			212
Gain on sale of assets		(924		)	(1,342		)
Director stock grants		38			28
Non-cash interest expense		260			1,035
Deferred income taxes		75			1,745
(Decrease) increase in accounts receivable		(2,236		)	1,247
Decrease in inventory		38			1,279
Increase in prepaid expenses, facilities rent and other assets		(1,472		)	(1,193		)
Increase in accounts payable, accrued facilities rent and accrued expenses		2,860			3,561
(Decrease) increase in deferred revenues and customer deposits		62			(19		)
Net cash flows provided by operating activities		14,951			26,445
Cash flows from investing activities:
Capital expenditures		(11,520		)	(14,618		)
Payments for acquisitions, net of cash acquired		(1,015		)	(40,672		)
Proceeds from sale of lease receivables		3,284			—
Proceeds from sale of assets		273			2,174
Net cash flows used in investing activities		(8,978		)	(53,116		)
Cash flows from financing activities:
Payments on long-term debt and capital lease obligations		(1,438		)	(1,108		)
Borrowing on mortgage note payable, net		—			3,920
Payments on 2000 Senior Secured Credit Facility, net		(54,500		)
Borrowings on 2003 Senior Secured Credit Facility, net		54,001			25,580
Financing costs		(409		)	(297		)
Payments for termination of derivative instruments		(3,037		)	—
Payments for repurchase of common stock		(551		)	—
Proceeds from exercise of stock options		19			589
Proceeds from issuance of common stock		66			95
Net cash flows (used in) provided by financing activities		(5,849		)	28,779
(Decrease) increase in cash and cash equivalents		124			2,108
Cash and cash equivalents, beginning of period		5,016			5,296
Cash and cash equivalents, end of period		$	5,140		$	7,404

 

Supplemental disclosure of non-cash investing and financing activities: During the nine months ended September 30, 2003 and 2004, the Company acquired various vehicles under capital lease agreements totaling $1,292 and $1,484, respectively.

 

The Company retired 7,600 shares of treasury stock at a cost of $79 during the nine months ended September 30, 2004.

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6

 

Mac-Gray Corporation

Notes to Condensed Consolidated Financial Statements (unaudited)

(In thousands, except per share data)

 

1.     Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and the instructions to Form 10-Q and rule 10-01 of Regulation S-X.  The unaudited interim condensed consolidated financial statements do not include all information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America.  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, the results of its operations, and its cash flows.  These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s 2003 audited consolidated financial statements filed with the Securities and Exchange Commission in its Annual Report on Form 10-K for the year ended December 31, 2003.  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/coin-operated laundry equipment located in the Northeastern, Midwestern and Southeastern United States.  A significant portion of its revenue is also derived from the sale of the Company’s MicroFridge^® product lines.  The Company’s principal customer base is the multi-housing market, which consists of apartments, condominium units, colleges and universities, military bases, hotels and motels.  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 are from one supplier.  The Company also derives a small portion of its revenue from card/coin-operated reprographic equipment.

 

2.     Long Term Debt

 

On June 24, 2003, the Company entered into a Senior Secured Credit Facility with a group of banks.  This transaction retired both the June 2000 Revolving Line of Credit and the June 2000 Senior Secured Term Loan Facility, which were due to expire in July 2004 and June 2005, respectively.  On January 16, 2004, the Company and its group of banks amended the June 24, 2003 Senior Secured Credit Facility.

 

The amended Revolving Line of Credit and Term Loan Facility (the “2003 Senior Secured Credit Facility”) provides for borrowings up to $105,000 with borrowings under a Revolving Line of Credit of up to $70,000 maturing December 31, 2006 and a $35,000 Senior Secured Term Loan Facility maturing December 31, 2008. The Senior Secured Term Loan Facility requires quarterly payments of $1,250 and a final payment of the remaining principal balance due at maturity.  In addition to the scheduled quarterly payments on the Senior Secured Term Loan Facility, the Company is required to pay an amount equal to 50% of Excess Cash Flow, as defined, for each fiscal year if the Funded Debt Ratio (as defined) for each of the preceding four fiscal quarters is less than 1.50 to 1.00.  This payment is first used to reduce the Senior Secured Term Loan Facility with any remaining amounts used to reduce the Revolving Line of Credit.  No Excess Cash Flow payment was required at December 31, 2003.

 

Outstanding indebtedness under the 2003 Senior Secured Credit Facility bears interest, at the Company’s option, at a rate equal to the prime rate, or LIBOR plus 1.75%.  The Applicable LIBOR margin may be adjusted quarterly based on certain financial ratios.  The average interest rate at December 31, 2003 and September 30, 2004 was 4.1% and 4.4%, respectively.

 

7

 

The 2003 Senior Secured Credit Facility is collateralized by a blanket lien on the assets of the Company and each of its subsidiaries, except for its corporate headquarters, as well as a pledge by the Company of all of the capital stock of its subsidiaries. The 2003 Senior Secured Credit Facility includes certain financial and operational covenants. The most restrictive financial ratio is a minimum level of debt service coverage.  The Company was in compliance with all financial covenants at September 30, 2004.

 

The 2003 Senior Secured Credit Facility contains a commitment fee which is calculated as a percentage of the average daily-unused portion of the 2003 Senior Secured Credit Facility. This percentage may be adjusted quarterly based on the Funded Debt Ratio.  As of September 30, 2004, the Company’s commitment fee was equal to 0.375%.

 

As of September 30, 2004, there was $31,250 outstanding under the term loan, $43,023 outstanding under the revolving line of credit, and $21 in outstanding letters of credit.  The available balance under the revolving line of credit was $26,956 at September 30, 2004.

 

Required payments under the 2003 Senior Secured Credit Facility are as follows:

 

2004 (3 months)		$	1,250
2005		5,000
2006		48,023
2007		5,000
2008		15,000
Thereafter		—
		$	74,273

 

Concurrent with the June 24, 2003 refinancing and the January 16, 2004 amendment to the 2003 Senior Secured Credit Facility, the Company expensed approximately $381 and $183 in deferred financing costs, respectively.

 

On March 4, 2004, the Company obtained a $4,000 mortgage loan on its corporate headquarters in Cambridge, Massachusetts.  The loan bears interest at a rate of LIBOR plus 1.50%, has a twenty-five year amortization, which includes quarterly payments of $40 plus interest beginning in June 2004, and has a balloon payment of $3,280 due upon its maturity on December 31, 2008.  As of September 30, 2004, there was $3,920 outstanding under the mortgage loan and the interest rate was 4.59%.  The loan is cross defaulted to the 2003 Senior Secured Credit Facility.

 

Long-term debt also includes various notes payable totaling $290 at December 31, 2003, and $6 at September 30, 2004.

 

8

 

3.     Acquisitions

 

On January 16, 2004, the Company acquired substantially all the assets of the eastern region of Web Service Company, Inc.  In addition, the Company sold certain of its laundry facilities management assets in several western states for approximately $2,000 to Web Service Company, Inc.  This sale resulted in a gain of approximately $1,218.  The acquisition has been reflected in the accompanying condensed consolidated financial statements from the date of acquisition, and has been accounted for as a purchase business combination in accordance with SFAS No. 141, “Business Combinations”.  The total purchase price of $41,422 has been allocated to the acquired assets and liabilities based on estimates of their related fair value.  The Company engaged an independent business appraisal firm to estimate the fair value of the assets acquired and to advise the Company on the proper allocation of the purchase price and the useful lives to be assigned where applicable.  A twenty-year amortization period has been assigned to the acquired contract rights and a five-year depreciation period was assigned to the acquired used laundry equipment.  The acquisition of these assets, which are primarily in the Company’s existing geographical markets, helps fulfill the Company’s strategic objective of increasing laundry equipment density, thereby achieving a higher level of operational efficiencies.

 

The total purchase price, including costs of acquisition of $387, was allocated as follows:

 

 

9

 

The following unaudited pro forma operating results of the Company assume the acquisition took place on January 1, 2003.  Such information includes adjustments to reflect additional depreciation, amortization and interest expense, and is not necessarily indicative of what the results of operations would have been or the results of operations in future periods.

 

		Three Months Ended September 30, 2003			Nine Months Ended September 30, 2003
Net revenue		$	44,442		$	131,556
Net income		754			1,366
Net income per share:
Basic		$	0.06		$	0.11
Diluted		$	0.06		$	0.11

 

4.     Derivative Instruments

 

As required by the 2003 Senior Secured Credit Facility, the Company has entered into standard International Swaps and Derivatives Association (“ISDA”) interest rate swap agreements (the “Swap Agreements”) to manage the interest rate risk associated with its 2003 Senior Secured Credit Facility.  The Company has also elected to enter into a swap agreement to coincide with the mortgage note payable.  The Company has designated its interest rate swap agreements as cash flow hedges.  The table below outlines the details of each swap agreement:

 

Date of Origin		Original Notional Amount			Fixed/ Amortizing		Notional Amount June 30, 2004				Expiration Date		Fixed Rate
Jun 24, 2003		$	20,000		Fixed		$		20,000		Jun 30, 2008		2.69	%
Jun 24, 2003		$	20,000		Amortizing		$	16,429			Jun 30, 2008		2.34	%
Feb 17, 2004		$	21,600		Fixed		$	21,600			Feb 17, 2007		2.58	%
Mar 8, 2004		$	4,000		Amortizing		$	3,920			Dec 31, 2008		3.09	%

 

In accordance with the Swap Agreements and on a quarterly basis, interest expense is calculated based on the floating 90-day LIBOR and the fixed rate.  If interest expense as calculated is greater based on the 90-day LIBOR, the financial institution pays the difference to the Company; if interest expense as calculated is greater based on the fixed rate, the Company pays the difference to the financial institution.  Depending on fluctuations in the LIBOR, the Company’s interest rate exposure and its related impact on interest expense and net cash flow may increase or decrease.  The Company is exposed to credit loss in the

 

10

 

event of non-performance by the counter party to the swap agreement; however, nonperformance is not anticipated.

 

The fair value of the Swap Agreements is the estimated amount that the Company would receive or pay to terminate the agreement at the reporting date, taking into account current interest rates and the credit worthiness of the counter party.  At December 31, 2003 and September 30, 2004, the fair value of the Swap Agreements, net of related taxes, was an unrealized gain of $556 and $710, respectively.  This amount has been included in other assets on the condensed consolidated balance sheet.

 

On June 24, 2003, the Company terminated its two $20,000 interest rate swap agreements, which had been in effect since February 2000 and January 2002, respectively.  The January 2002 interest rate swap agreement was due to expire in February 2004 while the February 2000 interest rate swap agreement was due to expire in February 2005.  The Company paid $3,037 to terminate both the February 2000 and January 2002 swap agreements.  The accumulated other comprehensive losses related to the terminated interest rate swap agreements are reclassified against current period earnings in the same period the forecasted interest payments affect earnings.  Upon termination, there was $1,419, net of taxes of $946, included in accumulated other comprehensive loss.  The $88 associated with the January 2002 interest rate swap agreement was reclassified as an earnings charge through February 2004 and the $1,331 associated with the February 2000 interest rate swap agreement is being reclassified as an earnings charge through February 2005.

 

The changes in accumulated other comprehensive (loss) income relate entirely to the Company’s interest rate swap agreements.  The components of other comprehensive income are as follows:

 

		For the three months ended						For the nine months ended
		September 30, 2003			September 30, 2004			September 30, 2003			September 30, 2004
Unrealized gain on derivative instruments		$	533		$	195		$	965		$	240
Reclassification adjustment		388			333			513			1,035
Total other comprehensive income before income taxes		921			528			1,478			1,275
Income tax expense		(368		)	(211		)	(591		)	(510		)
Total other comprehensive income		$	553		$	317		$	887		$	765

 

11

 

5.     Goodwill and Other Intangible Assets

 

Goodwill, which will not be further amortized, and intangible assets to be amortized consist of the following:

 

		As of December 31, 2003
		Cost			Accumulated Amortization			Net Book Value
Goodwill:
Laundry		$	37,718					$	37,718
MicroFridge®		223						223
		37,941						37,941
Intangible assets:
Laundry and reprographics:
Non-compete agreements		4,532			$	3,812		720
Contract rights		9,832			4,652			5,180
MicroFridge®:
Customer lists		1,451			538			913
Deferred financing costs		921			386			535
		16,736			9,388			7,348
Total intangible assets		$	54,677		$	9,388		$	45,289

 

		As of September 30, 2004
		Cost			Accumulated Amortization			Net Book Value
Goodwill:
Laundry		$	37,718					$	37,718
MicroFridge®		223						223
		37,941						37,941
Intangible assets:
Laundry and reprographics
Non-compete agreements		4,580			$	3,999		581
Contract rights		38,092			6,143			31,949
MicroFridge®
Customer lists		1,451			613			838
Deferred financing costs		1,029			544			485
		45,152			11,299			33,853
Total intangible assets		$	83,093		$	11,299		$	71,794

 

12

 

Estimated future amortization expense of intangible assets consists of the following:

 

2004 (three months)		$	618
2005		2,472
2006		2,404
2007		2,261
2008		2,250
Thereafter		23,848
		$	33,853

 

Amortization expense of intangible assets for the nine months ended September 30, 2003 and 2004 was $1,044 and $1,922, respectively.

 

6.     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.

 

7.     New Accounting Pronouncements

 

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. FIN 46 requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. FIN 46, as revised in December 2003, must be applied at the end of periods ending after March 15, 2004, and is effective immediately for all new variable interest entities created or acquired after January 31, 2003. The adoption of the revised FIN 46 by the Company did not have any impact on the Company’s results of operations or financial position, as at this time the Company does not have a controlling interest in any variable interest entities. The Company will apply the consolidation requirement of FIN 46 in future periods if it should own any interest in any variable interest entity.

 

13

 

8.     Earnings Per Share

 

A reconciliation of the weighted average number of common shares outstanding is as follows:

 

		For the Three Months Ended September 30, 2003
		Income (Numerator)			Shares (Denominator)		Per Share Amount
Net income available to common stockholders – basic		$	1,227		12,624		$	0.10
Effect of dilutive securities:
Stock options					148
Net income available to common stockholders – diluted		$	1,227		12,772		$	0.10

 

		For the Three Months Ended September 30, 2004
		Income (Numerator)			Shares (Denominator)		Per- Share Amount
Net income available to common stockholders – basic		$	752		12,747		$	0.06
Effect of dilutive securities:
Stock options					367
Net income available to common stockholders – diluted		$	752		13,114		$	0.06

 

		For the Nine Months Ended September 30, 2003
		Income (Numerator)			Shares (Denominator)		Per Share Amount
Net income available to common stockholders – basic		$	2,506		12,659		$	0.20
Effect of dilutive securities:
Stock options					56
Net income available to common stockholders – diluted		$	2,506		12,715		$	0.20

 

		For the Nine Months Ended September 30, 2004
		Income (Numerator)			Shares (Denominator)		Per- Share Amount
Net income available to common stockholders – basic		$	3,468		12,676		$	0.27
Effect of dilutive securities:
Stock options					383
Net income available to common stockholders – diluted		$	3,468		13,059		$	0.27

 

There were 57 shares under option plans that were excluded from the computation of diluted earnings per share at September 30, 2003 and 2004 due to their anti-dilutive effects.

 

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9.     Segment Information

 

The Company operates three business units which are based on the Company’s different product and service categories: Laundry, MicroFridge^® and Reprographics.  These three business units have been aggregated into two reportable segments (“Laundry and Reprographics” and “MicroFridge^®”).  The Laundry and Reprographics business units have been aggregated into one reportable segment since many operating functions of the laundry and reprographics operations are integrated.  The Laundry business unit 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 MicroFridge^® segment sells its own patented and proprietary line of refrigerator/freezer/microwave oven combinations to a customer base which includes colleges and universities, government, hotel, motel and assisted living facilities.  The MicroFridge^® segment also sells laundry equipment to the United States government.  The Reprographics business unit provides coin and card-operated reprographics equipment to academic and public libraries.

 

There are no intersegment revenues.

 

The tables below present information about the operations of the reportable segments of Mac-Gray for the three and nine months ended September 30, 2003 and 2004.  The information presented represents the key financial metrics that are utilized by the Company’s senior management in assessing the performance of each of the Company’s reportable segments.

 

For the three and nine months ended September 30, 2004, the Company has included sales of laundry equipment to the United States government in the MicroFridge^® division.  Prior to 2004, these sales were included in the laundry equipment sales results, which are included in the Laundry and Reprographics segment information.  For comparative purposes the Company has reclassified sales of laundry equipment to the United States government to be included in the MicroFridge^® division for the three and nine months ended September 30, 2003.  Sales of laundry equipment to the United States government were $639 and $336 for the three months ended September 30, 2003 and 2004, respectively, and $1,723 and $1,228 for the nine months ended September 30, 2003 and 2004, respectively.  The Company has elected to report United States government sales of laundry equipment in the MicroFridge^® business segment due to the following considerations:

 

•      The Company’s United States government business is developed and sold by employees of the MicroFridge^® division.

•      The order processing and other logistical functions related to these sales and deliveries are handled by employees of the MicroFridge^® division.

•      The management of the MicroFridge^® division is held accountable for the business relationships with the United States government, and report on the results of this business to senior management on a regular basis.

 

For these reasons, management is of the opinion it is more appropriate to report sales of laundry equipment to the United States government in the MicroFridge^® division for segment reporting purposes.

 

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		For the three months ended September 30, 2003			For the three months ended September 30, 2004			For the nine months ended September 30, 2003			For the nine months ended September 30, 2004
Revenue:
Laundry and Reprographics		$	30,320		$	36,321		$	91,181		$	112,922
MicroFridge®		6,976			7,926			18,117			20,096
Total		37,296			44,247			109,298			133,018
Gross margin:
Laundry and Reprographics		5,849			6,623			17,912			21,755
MicroFridge®		1,715			2,097			4,115			5,219
Total		7,564			8,720			22,027			26,974
Selling, general and administration expenses		5,501			6,389			16,121			18,876
Loss on early extinguishment of debt		—			—			381			183
Gain on sale of assets		(55		)	(35		)	(88		)	(1,342		)
Gain on sale of lease receivables		(836		)	—			(836		)	—
Interest and other expenses, net		807			1,060			2,096			3,183
Income before provision for income taxes		$	2,147		$	1,306		$	4,353		$	6,074

 

		December 31, 2003				September 30, 2004
Assets
Laundry and Reprographics		$		128,890		$	168,774
MicroFridge®		24,504				25,436
Total for reportable segments		153,394				194,210
Corporate (1)		6,003				6,200
Deferred income taxes		2,608				2,397
Total assets		$	162,005			$		202,807

 

(1)   Principally cash and cash equivalents, prepaid expenses and property, plant & equipment.

 

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