UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(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, 2002
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 of business on August 13, 2002:
Class Number of shares
----- ----------------
Common Stock, $.01 Par Value 12,671,009
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2002
(unaudited) and December 31, 2001
Condensed Consolidated Income Statements (unaudited) for the
Three and Six Months Ended June 30, 2002 and 2001
Condensed Consolidated Statement of Stockholders' Equity for
the Six Months Ended June 30, 2002 (unaudited)
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Six Months Ended June 30, 2002 and 2001
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 a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signature
2
Item 1. Financial Statements
MAC-GRAY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, June 30,
2001 2002
---- ----
Assets (unaudited)
Current assets:
Cash and cash equivalents $5,225 $5,780
Trade receivables, net of allowance for doubtful accounts 7,729 7,451
Inventory of finished goods 4,557 5,155
Prepaid expenses and other current assets 9,772 9,357
----------------- ----------------
Total current assets 27,283 27,743
Property, plant and equipment, net 75,598 73,372
Intangible assets, net 47,912 46,543
Prepaid expenses, route rent and other assets 17,102 15,745
----------------- ----------------
Total assets $167,895 $163,403
================= ================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt and capital lease obligations $7,647 $7,766
Trade accounts payable and accrued expenses 9,478 11,483
Accrued route rent 7,990 7,746
Deferred revenues and deposits 1,973 689
----------------- ----------------
Total current liabilities 27,088 27,684
Long-term debt and capital lease obligations 62,572 55,034
Deferred income taxes 15,105 16,318
Deferred retirement obligation 645 593
Other liabilities 1,911 1,990
Commitments and contingencies (Note 4) - -
Stockholders' equity:
Preferred stock of Mac-Gray Corporation ($.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 12,649,318
outstanding at December 31, 2001, and 13,443,754 issued and
12,654,663 outstanding at June 30, 2002) 134 134
Additional capital 68,540 68,540
Accumulated other comprehensive loss (1,911) (1,770)
Retained earnings 3,158 4,164
----------------- ----------------
69,921 71,068
Less common stock in treasury, at cost (9,347) (9,284)
----------------- ----------------
Total stockholders' equity 60,574 61,784
----------------- ----------------
Total liabilities and stockholders' equity $167,895 $163,403
================= ================
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 Six months ended
June 30, June 30,
2001 2002 2001 2002
---- ---- ---- ----
Revenue:
Route revenue 25,761 25,592 54,032 53,448
Sales 9,387 11,412 17,896 19,143
Other 1,426 1,084 2,866 2,255
------------- ------------- ------------- --------------
Total revenue $36,574 $38,088 $74,794 $74,846
------------- ------------- ------------- --------------
Cost of revenue:
Cost of route revenues 18,350 17,937 37,813 36,887
Depreciation and amortization 4,973 4,287 9,893 8,468
Cost of product sold 6,385 7,737 12,278 13,245
------------- ------------- ------------- --------------
Total cost of revenue 29,708 29,961 59,984 58,600
------------- ------------- ------------- --------------
Selling, general and administration expenses 4,892 5,687 10,230 10,960
------------- ------------- ------------- --------------
Income from operations 1,974 2,440 4,580 5,286
Interest and other expense, net 1,304 975 2,810 1,945
------------- ------------- ------------- --------------
Income before provision for income taxes and effect of
change in accounting principle 670 1,465 1,770 3,341
Provision for income taxes 351 609 871 1,382
------------- ------------- ------------- --------------
Net income before effect of change in accounting
principle 319 856 899 1,959
Effect of change in accounting principle - net of taxes - - - (906)
------------- ------------- ------------- --------------
Net income $319 $856 $899 $1,053
============= ============= ============= ==============
Net income per common share before the effect of change
in accounting principle - basic and diluted $0.03 $0.07 $0.07 $0.15
============= ============= ============= ==============
Net income per common share - basic and diluted $0.03 $0.07 $0.07 $0.08
============= ============= ============= ==============
Weighted average common shares outstanding - basic 12,644 12,653 12,642 12,652
============= ============= ============= ==============
Weighted average common shares outstanding - diluted 12,646 12,664 12,645 12,658
============= ============= ============= ==============
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 Comprehensive Treasury Stock
Common stock Other Income
Number Value Additional Retained Comprehensive Number Cost Total
of shares capital earnings Loss of shares
-------------------------------------------------------------------------------------------------
Balance, December 31, 2001 13,443,754 $134 $68,540 $3,158 ($1,911) $-- 794,436 $(9,347) $60,574
Net income 1,053 1,053 1,053
Other comprehensive income:
Unrealized derivative
instrument gain, net of
tax of $94 141 141 141
---------------
Comprehensive income $1,194
===============
Stock granted (47) (5,345) 63 16
------------------------------------------------------ ----------------------------
Balance, June 30, 2002 13,443,754 $134 $68,540 $4,164 ($1,770) 789,091 ($9,284) $61,784
====================================================== ============================
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)
Six Months Ended
June 30,
2001 2002
---- ----
Cash flows from operating activities:
Net income $899 $1,053
Adjustments to reconcile net income to net cash flows provided by
operating activities:
Depreciation and amortization 10,484 9,040
Effect of change in accounting principle 906
Gain on sale of assets (88) (223)
Deferred income taxes 434 1,002
Director stock grant 18 16
Decrease in accounts receivable 2,425 278
Increase in inventory (1,794) (598)
Decrease (increase) in prepaid expenses and other assets (704) 1,534
(Decrease) increase in accounts payable, accrued route rent and
accrued expenses (3,008) 1,407
Decrease in deferred revenues and customer deposits (2,045) (1,284)
------------- -------------
Net cash flows provided by operating activities 6,621 13,131
------------- -------------
Cash flows from investing activities:
Capital expenditures (4,885) (5,581)
Proceeds from sale of property and equipment 743 610
------------- -------------
Net cash flows used in investing activities (4,142) (4,971)
------------- -------------
Cash flows from financing activities:
Payments on long-term debt and capital lease obligations (949) (174)
Payments on line-of-credit, net (3,028) (7,379)
Principal payment on other liabilities (154) (52)
Proceeds from exercise of stock options 3 -
------------- -------------
Net cash flows used in financing activities (4,128) (7,605)
------------- -------------
(Decrease) increase in cash and cash equivalents (1,649) 555
Cash and cash equivalents, beginning of period 6,715 5,225
------------- -------------
Cash and cash equivalents, end of period $5,066 $5,780
============= =============
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 generally accepted accounting principles 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 generally accepted
accounting principles. 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 cash flows. These
unaudited condensed consolidated financial statements should be read in
conjunction with the Company's fiscal 2001 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, 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 is from one supplier.
2. Long Term Debt
The 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.
As of June 30, 2002, the amount available under the 2000 Senior Secured
Credit Facility was $24,127.
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, 2002.
The 2000 Senior Secured Credit Facility contains a commitment fee equal to
0.375% per annum of the average daily unused portion of the Credit Facility.
On June 7, 2002, the Company negotiated an extension of its revolving line
of credit to July 2, 2004. In connection with this extension of the revolving
line of credit, there were no other changes to the 2000 Senior Secured Credit
Facility.
In February 2000, the Company entered into two standard International Swaps
and Derivatives Association ("ISDA") interest rate swap agreements to manage the
interest rate risk associated with its Senior Credit Facility. Each agreement
has a notional amount of $20,000 and maturity dates in February 2003 and 2005.
The effect of the swap agreements is to limit the interest rate exposure to a
fixed rate of 7.38% and 7.42% for the three year and five year swaps,
respectively. On January 9, 2002, the Company
7
Mac-Gray Corporation
Notes to Condensed Consolidated Financial Statements (unaudited)
(In thousands, except per share data)
terminated the $20,000 swap that expired in 2003 and entered into a $20,000 swap
expiring in February 2004, with a fixed interest rate of 7.38% until February
2002, and 6.38% thereafter. The Company believes the risk associated with
extending this fixed rate is more than offset by the cash interest savings the
Company will realize. 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 event of non-performance by the other party to the swap agreement;
however, nonperformance is not anticipated.
The fair value of the interest rate swaps 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
counterparty. At June 30, 2002, the fair value of the interest rate swaps was a
loss of $1,990, net of related income taxes. The unrealized gain for the six
months ended June 30, 2002 of $141, net of related income taxes, was recorded as
a component of other comprehensive income. The fair value of the interest rate
swaps is included in other liabilities.
Required payments under the 2000 Senior Secured Credit Facility are as
follows:
2002........................................................ 7,000
2003........................................................ 8,000
2004........................................................ 45,670
-----------
$60,670
Long-term debt also includes various notes payable totaling $1,775 at
December 31, 2001, and $1,466 at June 30, 2002.
3. Adoption of FAS 142
On January 1, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142 ("FAS 142") - "Goodwill and Other
Intangible Assets." The Company engaged an independent third-party business
appraisal firm to assist in this process. After their review of information
provided by the Company and obtained from public sources, the outside firm
performed a fair market valuation of the Company's Laundry and Reprographics,
and MicroFridge(R) segments. These segments represent the Company's reporting
units under FAS 142. Upon the completion of this evaluation it was determined
that the fair value of the Laundry and MicroFridge(R) reporting units exceeded
their book value, therefore no impairment of goodwill occurred in these
reporting units. However, due to the continued decline in the services of the
reprographics reporting unit as a result of expanding use of the Internet in
college and public libraries, and access to free laser printers, the book value
of the reprographics reporting unit exceeded the fair value, resulting in a
non-cash write-off of the remaining book value of the reporting units goodwill
in the period ended March 31, 2002, of $906, or $0.07 per share. In accordance
with FAS 142, this has been recorded as the effect of a change in accounting
principle.
8
Mac-Gray Corporation
Notes to Condensed Consolidated Financial Statements (unaudited)
(In thousands, except per share data)
Following is the impact on earnings of implementing FAS 142 on the period
ended June 30, 2002, and what the impact on the same period in 2001 would have
been:
For the quarter ended
June 30,
-------------------------------------------------------------
2002 2002 per share 2001 2001 per share
-------------------------------------------------------------
Reported earnings $ 856 $ 0.07 $ 319 $ 0.03
Add: One-time charge to comply with new
accounting standard - net of taxes - - - -
---------- ------ ------ ------
856 0.07 319 0.03
Add: Goodwill amortization - net of taxes - - 494 0.03
---------- ------ ------ ------
$ 856 $ 0.07 $ 813 $ 0.06
---------- ------ ------ ------
For the six months ended
June 30,
-------------------------------------------------------------
2002 2002 per share 2001 2001 per share
-------------------------------------------------------------
Reported earnings $ 1,053 $ 0.08 $ 899 $ 0.07
Add: One-time charge to comply with new
accounting standard - net of taxes 906 0.07 - -
---------- ------ ------ ------
1,959 0.15 899 0.07
Add: Goodwill amortization - net of taxes - - 1,015 0.08
---------- ------ ------ ------
$ 1,959 $ 0.15 $ 1,914 $ 0.15
---------- ------ ------ ------
After the write-off of the goodwill associated with the reprographics
segment, the remaining goodwill, which will not be further amortized, and
intangible assets to be amortized, are:
As of June 30, 2002
--------------------------------------------------------------------
Cost Accumulated Net Book Value
Amortization
------------------- ------------------ -------------------
Goodwill:
Laundry $ 37,718 $ 37,718
MicroFridge(R) 1,330 1,330
------------------- -------------------
$ 39,048 $ 39,048
Intangible assets:
Laundry and reprographics
Non-compete agreements $ 4,482 $ 3,232 $ 1,250
Contract rights 9,060 3,716 5,344
MicroFridge(R)
Deferred financing costs 1,852 951 901
------------------- ------------------ -------------------
15,394 7,899 7,495
------------------- ------------------ -------------------
Total intangible assets $ 54,442 $ 7,899 $ 46,543
=================== ================== ===================
9
Mac-Gray Corporation
Notes to Condensed Consolidated Financial Statements (unaudited)
(In thousands, except per share data)
Estimated future amortization expense of intangible assets consists of the
following:
2002 (six months).......................................... $692
2003....................................................... 1,296
2004....................................................... 1,072
2005....................................................... 774
2006....................................................... 668
Thereafter................................................. 2,993
---------------
$7,495
===============
Amortization of intangible assets for the six months ended June 30, 2002
and 2001 was $681 and $742, respectively.
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.
5. New Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets"
("FAS 142"). FAS 142 requires that goodwill and certain intangible assets,
including those recorded in past business combinations, no longer be amortized
to earnings, but instead be tested for impairment at least annually. The
provisions of FAS 142 are effective for fiscal years beginning after December
15, 2001, and was adopted by the Company, as required, on January 1, 2002.
In August, 2001, the FASB issued Financial Accounting Standard No. 143,
"Accounting for Asset Retirement Obligations," ("FAS 143") which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. FAS 143 is required to be adopted for fiscal years beginning after June
15, 2002. Management does not expect the adoption of this standard to have any
impact on the Company's financial position or results of operations.
In October, 2001, the FASB issued Financial Accounting Standard No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets," ("FAS 144").
FAS 144 supercedes FASB Statement No. 121 ("FAS 121"), "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of."
FAS 144 applies to all long-lived assets (including discontinued operations) and
consequently amends Accounting Principles Board Opinion No. 30 ("APB 30"),
"Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business." FAS 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001, and was adopted by the Company,
as required, on January 1, 2002. The adoption of this standard did not have any
impact on the Company's financial position or results of operations.
10
Mac-Gray Corporation
Notes to Condensed Consolidated Financial Statements (unaudited)
(In thousands, except per share data)
6. Earnings Per Share
A reconciliation of the weighted average number of common shares
outstanding is as follows:
For the Three Months Ended June 30, 2002
--------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ----------------- -----------
Net income available to common stockholders - basic $ 856 12,653 $ 0.07
============== ================= ===========
Effect of dilutive securities:
Stock options 11
-----------------
Net income available to common stockholders - diluted $ 856 12,664 $ 0.07
============== ================= ===========
For the Three Months Ended June 30, 2001
--------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ----------------- -----------
Net income available to common stockholders - basic $ 319 12,644 $ 0.03
============== ================= ===========
Effect of dilutive securities:
Stock options 2
-----------------
Net income available to common stockholders - diluted $ 319 12,646 $ 0.03
============== ================= ===========
For the Six Months Ended June 30, 2002
--------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ----------------- -----------
Net income available to common stockholders - basic $ 1,053 12,652 $ 0.08
============== ================= ===========
Effect of dilutive securities:
Stock options 6
-----------------
Net income available to common stockholders - diluted $ 1,053 12,658 $ 0.08
============== ================= ===========
For the Six Months Ended June 30, 2001
--------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ----------------- -----------
Net income available to common stockholders - basic $ 899 12,642 $ 0.07
============== ================= ===========
Effect of dilutive securities:
Stock options 3
-----------------
Net income available to common stockholders - diluted $ 899 12,645 $ 0.07
============== ================= ===========
11
Mac-Gray Corporation
Notes to Condensed Consolidated Financial Statements (unaudited)
(In thousands, except per share data)
7. 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 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 Reprographics business
unit provides coin and card-operated reprographics equipment to academic and
public libraries. The MicroFridge(R) segment sells and leases 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.
There are no intersegment revenues.
12
Mac-Gray Corporation
Notes to Condensed Consolidated Financial Statements (unaudited)
(In thousands, except per share data)
The table below presents information about the reported operating income of
Mac-Gray for the three and six months ended June 30, 2002 and 2001.
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,
2001 2002 2001 2002
Revenues:
Laundry and Reprographics $29,747 $31,286 $63,173 $63,888
MicroFridge(R) 6,827 6,802 11,621 10,958
--------------- --------------- -------------- ---------------
Total 36,574 38,088 74,794 74,846
Gross Margin:
Laundry and Reprographics 4,603 6,117 11,149 13,060
MicroFridge(R) 2,263 2,010 3,661 3,186
--------------- --------------- -------------- ---------------
Total 6,866 8,127 14,810 16,246
Selling, general and
administrative expenses 4,892 5,687 10,230 10,960
Interest and other expenses, net 1,304 975 2,810 1,945
--------------- --------------- -------------- ---------------
Income before provision for taxes
and effect of change in accounting
principle $ 670 $ 1,465 $ 1,770 $ 3,341
--------------- --------------- -------------- ---------------
December 31, June 30,
2001 2002
---------------- ------------
Assets
Laundry and Reprographics $136,994 $ 132,478
MicroFridge(R) 23,569 22,185
---------------- ------------
Total for reportable segments 160,563 154,663
Corporate (1) 6,488 7,685
Deferred income taxes 844 1,055
---------------- ------------
Total assets $167,895 $163,403
================ ============
(1) Principally cash, prepaid expenses and property, plant & equipment.
13
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. These
forward-looking statements reflect the Company's current views about future
events and financial performance. Investors should not rely on forward-looking
statements because they are subject to a variety of factors that could cause
actual results to differ materially from the Company's expectations. Factors
that could cause or contribute to such differences include, but are not limited
to, ability to meet future capital requirements to replace equipment and
implement new technology; dependence upon certain suppliers, such as Maytag
Corporation; 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 for
the year ended December 31, 2001.
Overview
Mac-Gray derives its revenue principally through the operation and
maintenance of laundry equipment in multi-housing units, including laundry and
MicroFridge(R) products. Mac-Gray also operates card/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 services segment is comprised of revenue-generating laundry machines,
operated in approximately 31,000 multi-housing laundry rooms located in 30
states and the District of Columbia. Mac-Gray's reprographics segment is
concentrated in the northeastern United States, the Mid-Atlantic, Florida and
the Midwest.
Mac-Gray also derives revenue as a distributor and servicer of commercial
laundry equipment manufactured by Maytag Corporation, and also sells laundry
equipment manufactured by American Dryer Corp., The Dexter Company, and
Whirlpool Corporation. 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(R) segment derives revenue through the sale and rental of
its MicroFridge(R) products to colleges and universities, military bases, the
hotel and motel market, and assisted living facilities.
14
Results of Operations (Dollars in thousands)
Three and six months ended June 30, 2002 compared to three and six months ended
June 30, 2001.
Revenue.
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2001 2002 2001 2002
------------- ------------ ------------ -------------
Laundry $ 28,176 $ 29,800 $ 59,986 $ 60,807
Reprographics 1,571 1,486 3,187 3,081
------------- ------------ ------------ -------------
Total Laundry & Reprographics 29,747 31,286 63,173 63,888
MicroFridge(R)equipment sales 5,909 6,239 9,782 9,805
MicroFridge(R)rental 918 563 1,839 1,153
------------- ------------ ------------ -------------
Total MicroFridge(R) 6,827 6,802 11,621 10,958
------------- ------------ ------------ -------------
Total revenue $ 36,574 $ 38,088 $ 74,794 $ 74,846
============= ============ ============ =============
Revenue increased by $1,514, or 4%, from $36,574 to $38,088 for the three
months ended June 30, 2002 from the three months ended June 30, 2001. Revenue
increased by $52 from $74,794 to $74,846 for the six months ended June 30, 2002
from the six months ended June 30, 2001. The primary reasons for the increase in
revenue for the quarter and six months ended June 30, 2002 as compared to the
same periods in 2001 were increases in laundry commercial sales and
MicroFridge(R) sales. The increase in the sales of laundry equipment was
primarily due to further penetration of the government military market. The
MicroFridge(R) segment has exceeded prior year revenue in the academic and
military markets. These MicroFridge(R) increases versus the second quarter of
2001 were created in part by the success of the Company at targeting and selling
to colleges and universities, which we believe, had delayed capital spending for
over a year. The MicroFridge(R) hotel division failed to reach its level of 2001
second quarter sales. We believe this decrease in hotel sales as compared to
last year continue to be due to less construction and a very cautious investment
approach in the hotel industry, which has been the market condition since the
third quarter of 2001. Laundry route revenue for the quarter and six months
ended June 30, 2002 is essentially the same as in 2001 for the same periods due
to the timing of replacing terminated unprofitable accounts. The MicroFridge(R)
rental revenue continues to decrease, as compared to last year, as a result of
the planned program to discontinue renting units to students, which has been
less profitable for the Company, and shifting this revenue stream to equipment
sales.
Route Related Expenses. Route related expenses include rent paid to route
clients as well as those costs associated with installing and servicing machines
and the costs of collecting, counting and depositing route revenue. Route
related expenses decreased $413, or 2%, to $17,937 for the three months ended
June 30, 2002 from the three months ended June 30, 2001, and $926, or 2%, to
$36,887 for the six months ended June 30, 2002 from the six months ended June
30, 2001. These decreases in route related expenses for the quarter and six
months ended June 30, 2002 correspond to improvements in the percentage of rent
and other related expenses to revenue. These improvements have occurred in part
as new and renegotiated route contracts have lower rent rates payable to
property owners, or managers and, in part as programs to reduce labor and other
operating expenses are successful.
Depreciation and Amortization. Depreciation and amortization decreased by
$686, or 14%, to $4,287 for the three months ended June 30, 2002 from the three
months ended June 30, 2001, and $1,425, or 14%, to $8,468 for the six months
ended June 30, 2002 from the six months ended June 30, 2001. The decrease was
primarily attributable to the exclusion of goodwill amortization of $706 and
$1,412 for the quarter and six months ended June 30, 2002 as compared to the
prior year, pursuant to FAS 142.
15
Cost of product sold. Cost of product sold consists primarily of the cost
of laundry equipment, MicroFridge(R) equipment, parts and supplies sold. Cost of
product sold increased $1,352, or 21%, to $7,737 for the three months ended June
30, 2002 from the three months ended June 30, 2001, and $967, or 8%, to $13,245
for the six months ended June 30, 2002 from the six months ended June 30, 2001.
This variance from 2001 is primarily the result of increased sales of laundry
and MicroFridge(R) equipment for the second quarter and year to date. As a
percentage of total equipment sales, cost of sales has remained the same as 2001
for both periods.
Selling, General and Administration Expenses. Selling, general and
administration expenses increased by $795, or 16%, to $5,687 for the three
months ended June 30, 2002 from the three months ended June 30, 2001, and $730,
or 7% for the six months ended June 30, 2002 from the six months ended June 30,
2001. This increase is attributable primarily to increases in reserves for
doubtful accounts and salesmen's commissions. The increase in the reserve for
doubtful accounts as compared to the second quarter of 2001 was deemed necessary
as the Company's hotel customer base continues to experience difficulties caused
by the decrease in domestic travel. Salesmen's commissions have increased as
compared to the second quarter of 2001 as a result of increases in laundry and
MicroFridge(R) equipment sales. Also included in administration expenses for the
first six months of 2002 were the consulting and accounting fees associated with
implementing FAS 142.
Interest and Other Expense. Interest and other expense, net of interest and
other income, decreased by $329, or 25%, to $975 for the three months ended June
30, 2002 from the three months ended June 30, 2001, and $865, or 31%, to $1,945
for the six months ended June 30, 2002 from the six months ended June 30, 2001.
This decrease is attributable primarily to a decrease in the Company's funded
debt balance, and lower interest rates charged the Company during 2002 as
compared to a year ago. The current and long term portions of funded debt and
capital lease obligations have decreased $11,080 since June 30, 2001, from
$73,880 to $62,800. Also included in interest expense for the six months ended
June 30, 2002 is a loss of $220 to the decrease in the fair market value of the
January 2002 interest rate swap agreement.
Provision for Income Taxes. The provision for income taxes increased by
$258, or 73%, to $609 for the three months ended June 30, 2002 from the three
months ended June 30, 2001, and $511, or 59%, for the six months ended June 30,
2002 from the six months ended June 30, 2001. This increase is due to the
corresponding increase in taxable income from $670 for the three months ended
June 30, 2001 to $1,465 for the three months ended June 30, 2002 and from $1,770
for the six months ended June 30, 2001 to $3,341 for the six months ended June
30, 2002. As a percentage of income before the provision for income taxes, tax
expense has decreased from 52% and 49% for the three and six month periods ended
June 30, 2001 to 41% for the same periods in 2002. This decrease in the
effective tax rate is due to non-deductible expenses, primarily goodwill, making
up a smaller portion of total taxable income as a result of the adoption of FAS
142 on January 1, 2002.
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 and inventory levels 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 source of cash since December 31, 2001 has been funds
generated from operating activities. The Company's primary uses of cash have
been the purchase of new laundry equipment, MicroFridge(R) equipment,
reprographics equipment, card based payment systems, and reduction of bank debt.
The Company anticipates that it will continue to use cash flow from its
operating activities to finance working capital needs, including interest and
principal 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. On January 9, 2002, the
Company terminated the $20,000 swap that was to expire in 2003 and entered into
a $20,000 swap expiring in February 2004, bearing a lower interest rate. The
Company has calculated the impact on earnings of the swap in compliance with FAS
133. For the six months ended June 30, 2002, the effect on income was a charge
of $220.
16
Cash flows provided by operations were $13,131 and $6,621 for the six
months ended June 30, 2002 and 2001, 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 2001 to 2002 is primarily
attributable to the increase in net income and the ordinary changes in working
capital.
Cash used in investing activities was $4,971 and $4,142 for the six months
ended June 30, 2002 and 2001, respectively. Capital expenditures were $5,581 and
$4,885 for the six months ended June 30, 2002 and 2001, respectively. The
increase in capital expenditures was due to more laundry equipment being placed
in service and replaced in the six-month period ending June 30, 2002 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, capital lease obligations, and other long-term
debt, netting to a reduction of the revolving line of credit and other debt of
$7,605 for the six months ending June 30, 2002. This decrease was due to an
increase in net income and improved overall management of working capital.
The 2000 Senior Secured Credit Facility provides for borrowings of up to
$100,000 consisting of borrowings under a three-year revolving line of credit of
up to $65,000 and a five-year $35,000 Senior Secured Term Loan Facility.
Primarily through principal payments made quarterly since the inception of the
2000 Senior Secured Credit Facility, the $35,000 Senior Secured Term Loan
Facility has been reduced to $20,300. As of June 30, 2002, the amount available
under the 2000 Senior Secured Credit Facility was $24,127. The average interest
rate was approximately 5.9% for the period ended June 30, 2002, compared with
approximately 7.9% for the period ended June 30, 2001.
17
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, 2001.
18
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its annual meeting of stockholders on May
22, 2002.
(b) The following directors were reelected:
Thomas E. Bullock
Jerry A. Schiller
The following directors continued on in office after the annual
stockholders meeting:
Stewart G. MacDonald, Jr.
John P. Leydon
William M. Crozier, Jr.
(c) The only matter voted upon at the annual meeting was the election
of the two Directors to hold office until the annual meeting of
stockholders to be held in 2005. The vote cast was tabulated using
proxies representing 8,123,268 shares, or 63.2 percent of the
eligible voting shares. The results of the vote were as follows:
Election/Approval Number of Shares/Votes
For Against Abstained
Thomas E. Bullock 8,006,418 116,850 0
Jerry A. Schiller 7,929,818 193,450 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 June 7, 2002 Second Amendment to Revolving Credit and Term
Loan Agreement.
(b) Reports:
None
19
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, 2002 /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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CERTIFICATION PURSUANT TO
18 U.S.C. section. 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
In connection with the filing of the Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 2002 (the "Report") by each of the undersigned
officers of Mac-Gray Corporation (the "Company"), the undersigned, as the Chief
Executive Officer and Chief Financial Officer of the Company, hereby certifies
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
o the Report fully complies with the requirements of Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934; and
o the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: August 14, 2002 /s/ Stewart G. MacDonald, Jr.
--------------- ------------------------------
Name: Stewart G. MacDonald, Jr.
Title: Chief Executive Officer
Dated: August 14, 2002 /s/ Michael J. Shea
--------------- ------------------------------
Name: Michael J. Shea
Title: Chief Financial Officer
21