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 September 30, 2013
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 |
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04-3361982 |
(State or other jurisdiction incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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404 WYMAN STREET, SUITE 400 |
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WALTHAM, MASSACHUSETTS |
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02451-1212 |
(Address of principal executive offices) |
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(Zip Code) |
Registrants telephone number, including area code: (781) 487-7600
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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated Filer o |
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Accelerated Filer x |
Non-Accelerated Filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 4, 2013, 14,748,558 shares of common stock of the registrant, par value $.01 per share, were outstanding.
PART I |
FINANCIAL INFORMATION |
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3 | ||
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Condensed Consolidated Balance Sheets at December 31, 2012 and September 30, 2013 |
3 |
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4 | |
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6 | |
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7 | |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
19 | |
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27 | ||
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28 | ||
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28 | ||
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30 |
MAC-GRAY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share data)
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December 31, |
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September 30, |
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2012 |
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2013 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
14,328 |
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$ |
13,537 |
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Trade receivables, net of allowance for doubtful accounts |
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5,835 |
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6,704 |
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Inventory of finished goods, net |
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1,284 |
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2,144 |
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Deferred income taxes |
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1,148 |
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1,148 |
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Prepaid facilities management rent and other current assets |
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9,476 |
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11,633 |
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Total current assets |
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32,071 |
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35,166 |
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Property, plant and equipment, net |
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129,947 |
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143,699 |
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Goodwill |
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57,737 |
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58,185 |
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Intangible assets, net |
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169,640 |
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164,395 |
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Prepaid facilities management rent and other assets |
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12,014 |
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14,307 |
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Total assets |
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$ |
401,409 |
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$ |
415,752 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Current portion of long-term debt and capital lease obligations |
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$ |
1,201 |
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$ |
1,587 |
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Trade accounts payable |
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9,189 |
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10,369 |
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Accrued facilities management rent |
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20,930 |
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20,390 |
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Accrued expenses and other current liabilities |
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13,677 |
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18,663 |
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Total current liabilities |
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44,997 |
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51,009 |
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Long-term debt and capital lease obligations |
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190,969 |
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196,141 |
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Deferred income taxes |
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46,770 |
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45,133 |
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Other liabilities |
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1,386 |
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1,178 |
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Total liabilities |
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284,122 |
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293,461 |
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Commitments and contingencies (Note 6) |
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Stockholders equity: |
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Preferred stock ($.01 par value, 5 million shares authorized, no shares issued or outstanding) |
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Common stock ($.01 par value, 30 million shares authorized, 14,516,074 issued and outstanding at December 31, 2012, and 14,734,072 issued and outstanding at September 30, 2013) |
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145 |
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147 |
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Additional paid in capital |
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89,706 |
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92,918 |
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Accumulated other comprehensive loss |
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(130 |
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Retained earnings |
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27,566 |
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29,226 |
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Total stockholders equity |
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117,287 |
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122,291 |
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Total liabilities and stockholders equity |
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$ |
401,409 |
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$ |
415,752 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
MAC-GRAY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2012 |
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2013 |
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2012 |
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2013 |
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Revenue: |
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Laundry facilities management revenue |
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$ |
74,372 |
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$ |
75,002 |
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$ |
229,316 |
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$ |
229,357 |
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Commercial laundry equipment sales |
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3,501 |
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4,509 |
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10,620 |
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10,968 |
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Total revenue |
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77,873 |
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79,511 |
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239,936 |
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240,325 |
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Cost of revenue: |
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Cost of laundry facilities management revenue |
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52,600 |
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53,925 |
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160,840 |
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161,659 |
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Depreciation and amortization |
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10,706 |
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10,878 |
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31,536 |
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32,230 |
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Cost of commercial laundry equipment sales |
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2,827 |
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3,665 |
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8,675 |
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8,932 |
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Total cost of revenue |
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66,133 |
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68,468 |
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201,051 |
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202,821 |
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Gross margin |
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11,740 |
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11,043 |
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38,885 |
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37,504 |
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Operating expenses: |
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General and administration |
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4,303 |
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4,261 |
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15,506 |
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13,452 |
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Sales and marketing |
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2,772 |
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2,733 |
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8,435 |
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8,945 |
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Depreciation and amortization |
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216 |
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178 |
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626 |
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554 |
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Incremental costs of proxy contests |
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377 |
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770 |
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Transaction costs |
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420 |
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597 |
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Gain on sale of assets, net |
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(57 |
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(114 |
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(97 |
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(269 |
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Total operating expenses |
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7,234 |
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7,478 |
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24,847 |
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24,049 |
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Income from operations |
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4,506 |
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3,565 |
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14,038 |
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13,455 |
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Interest expense, including the change in fair value of non-hedged interest rate derivative instruments and amortization of deferred financing costs |
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1,931 |
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1,147 |
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7,235 |
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4,100 |
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Loss on early extinguishment of debt |
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3,762 |
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54 |
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Income before provision for income taxes |
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2,575 |
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2,418 |
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3,041 |
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9,301 |
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Income tax expense |
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1,104 |
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961 |
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1,285 |
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3,714 |
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Net income |
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1,471 |
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1,457 |
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1,756 |
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5,587 |
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Other comprehensive gain, net of tax: |
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Unrealized gain on derivative instruments |
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173 |
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493 |
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130 |
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Comprehensive income |
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$ |
1,644 |
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$ |
1,457 |
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$ |
2,249 |
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$ |
5,717 |
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Earnings per share basic |
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$ |
0.10 |
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$ |
0.10 |
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$ |
0.12 |
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$ |
0.38 |
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Earnings per share diluted |
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$ |
0.10 |
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$ |
0.09 |
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$ |
0.12 |
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$ |
0.37 |
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Weighted average common shares outstanding - basic |
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14,447 |
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14,715 |
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14,396 |
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14,634 |
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Weighted average common shares outstanding - diluted |
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15,134 |
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15,405 |
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15,078 |
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15,206 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
MAC-GRAY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (Unaudited)
(In thousands, except share data)
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Accumulated |
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Common Stock |
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Additional |
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Other |
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Number |
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Paid In |
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Comprehensive |
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Comprehensive |
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Retained |
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of shares |
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Value |
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Capital |
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Loss |
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Income |
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Earnings |
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Total |
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Balance, December 31, 2012 |
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14,516,074 |
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$ |
145 |
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$ |
89,706 |
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$ |
(130 |
) |
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$ |
27,566 |
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$ |
117,287 |
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Net income |
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$ |
5,587 |
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5,587 |
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$ |
5,587 |
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Other comprehensive income: |
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Unrealized gain on derivative instrument and reclassification, net of tax of $79 (Note 3) |
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130 |
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130 |
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$ |
130 |
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Comprehensive income |
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$ |
5,717 |
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Options Exercised |
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64,096 |
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1 |
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597 |
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$ |
598 |
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Stock issuance - Employee |
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Stock Purchase Plan |
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24,162 |
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274 |
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$ |
274 |
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Non-cash stock compensation expense |
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1,945 |
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$ |
1,945 |
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Dividends paid, $.2625 per share |
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(3,851 |
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$ |
(3,851 |
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Stock grants |
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129,740 |
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1 |
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396 |
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(76 |
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$ |
321 |
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Balance, September 30, 2013 |
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14,734,072 |
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$ |
147 |
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$ |
92,918 |
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$ |
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$ |
29,226 |
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$ |
122,291 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
MAC-GRAY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
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Nine months ended |
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2012 |
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2013 |
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Cash flows from operating activities: |
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Net income |
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$ |
1,756 |
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$ |
5,587 |
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Adjustments to reconcile net income to net cash flows provided by operating activities: |
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Depreciation and amortization |
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32,162 |
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32,784 |
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Amortization of deferred financing costs |
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356 |
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262 |
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Loss on early extinguishment of debt |
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1,220 |
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54 |
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Decrease in allowance for doubtful accounts and lease reserves |
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(41 |
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(15 |
) | ||
Gain on disposition of assets |
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(97 |
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(269 |
) | ||
Stock grants |
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392 |
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321 |
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Gain on change in fair value of interest rate derivatives |
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(360 |
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(196 |
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Gain loss on change in fair value of fuel commodity derivatives |
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(43 |
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(20 |
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Decrease in deferred income taxes |
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(1,298 |
) |
(1,424 |
) | ||
Non-cash stock compensation |
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2,024 |
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1,945 |
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Increase in accounts receivable |
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(405 |
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(854 |
) | ||
Increase in inventory |
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(685 |
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(860 |
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Increase in prepaid facilities management rent and other assets |
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(3,232 |
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(7,204 |
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Increase (decrease) in accounts payable, accrued facilities management rent, accrued expenses and other liabilities |
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(1,682 |
) |
5,330 |
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Net cash flows provided by operating activities |
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30,067 |
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35,441 |
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Cash flows from investing activities: |
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Capital expenditures |
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(25,269 |
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(30,799 |
) | ||
Payments for acquisitions |
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(5,128 |
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Proceeds from sale of assets |
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177 |
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335 |
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Net cash flows used in investing activities |
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(25,092 |
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(35,592 |
) | ||
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Cash flows from financing activities: |
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Payments on capital lease obligations |
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(1,010 |
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(1,217 |
) | ||
Payment on senior notes |
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(100,000 |
) |
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Payments on secured revolving credit facility |
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(169,592 |
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(75,976 |
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Borrowings on secured revolving credit facility |
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289,978 |
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79,911 |
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Payments on secured term credit facility |
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(18,750 |
) |
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Proceeds from exercise of stock options |
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588 |
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598 |
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Proceeds from issuance of common stock |
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300 |
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274 |
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Debt acquisition and amendment costs |
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(1,497 |
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(379 |
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Cash dividend paid |
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(2,629 |
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(3,851 |
) | ||
Repurchase of common stock |
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(2,000 |
) |
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Net cash flows used in financing activities |
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(4,612 |
) |
(640 |
) | ||
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Increase (decrease) in cash and cash equivalents |
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363 |
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(791 |
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Cash and cash equivalents, beginning of period |
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13,881 |
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14,328 |
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Cash and cash equivalents, end of period |
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$ |
14,244 |
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$ |
13,537 |
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Supplemental cash flow activities:
During the nine months ended September 30, 2012 and 2013, the Company acquired various assets under capital lease agreements totaling $770 and $2,840, respectively.
During the nine months ended September 30, 2013, the Company acquired the assets of certain laundry facilities management businesses. The fair value of the net assets acquired and goodwill amounted to $5,847 with $5,128 paid in cash and $719 incurred as a liability in the form of a future cash payment.
The accompanying notes are an integral part of these condensed consolidated financial statements.
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except 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 normal, recurring adjustments), which are necessary to present fairly the Companys financial position, the results of its operations, and its cash flows. These unaudited condensed consolidated financial statements should be read in conjunction with the Companys 2012 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, 2012. 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 equipment located in 44 states throughout the United States, as well as the District of Columbia. The Companys principal client base is the multi-unit housing market, which consists of apartments, condominium units, colleges and universities. The Company also sells and services commercial laundry equipment to commercial laundromats, multi-housing properties and institutions. The majority of the Companys purchases of laundry equipment are from one supplier.
For information on a significant event, see Note 13, Subsequent Events.
2. Long-Term Debt
On February 29, 2012, the Company entered into an Amended and Restated Senior Secured Credit Agreement (as amended, the 2012 Credit Agreement). On May 17, 2013, the Company entered into Amendment No. 1 to the Amended and Restated Senior Secured Credit Agreement. The 2012 Credit Agreement provides for borrowings up to $250,000 under a revolving credit facility (the Revolver). The 2012 Credit Agreement matures on May 17, 2018. The 2012 Credit Agreement also provides for Swingline Loans of up to $10,000 (the Swingline Loans) and any Swingline Loans will reduce the borrowings available under the Revolver. Subject to certain terms and conditions, the 2012 Credit Agreement gives the Company the option to increase the Revolver or establish one or more new term loans, provided that the aggregate commitments under the 2012 Credit Agreement cannot exceed $350,000. The 2012 Credit Agreement 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 the capital stock of its subsidiaries. Outstanding indebtedness under the 2012 Credit Agreement bears interest at a fluctuating rate equal to (i) in the case of Eurodollar rate loans, the LIBOR rate plus an applicable percentage, ranging from 1.25% to 2.00% per annum (currently 2.00%), determined by reference to our consolidated total leverage ratio, and (ii) in the case of base rate loans and swingline loans, the higher of (a) the federal funds rate plus 0.50%, (b) the annual rate of interest announced by Bank of America, N.A. as its prime rate, or (c) for each day, the floating rate of interest equal to LIBOR for a one month term quoted for such date (the highest of which is defined as the Base Rate), plus, in each case, an applicable percentage, ranging from 0.25% to 1.00% per annum (currently 1.00%), determined by reference to our consolidated total leverage ratio.
The Company pays a commitment fee equal to a percentage of the actual daily-unused portion of the Revolver under the 2012 Credit Agreement. This percentage is determined quarterly by reference to the Companys consolidated total leverage ratio and ranges between 0.25% per annum and 0.40% per annum (currently 0.40%). For purposes of the calculation of the commitment fee, letters of credit are considered usage under the Revolver, but swingline loans are not considered usage under the Revolver.
The 2012 Credit Agreement includes certain financial and operational covenants, including restrictions on paying dividends and other distributions, making certain acquisitions and incurring indebtedness, and requires that the Company maintain certain financial ratios. The most significant financial ratios that the Company is required to maintain include a consolidated total leverage ratio of not greater than 3.75 to 1.00 (3.50 to 1.00 as of December
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share data)
2. Long-Term Debt (continued)
31, 2013 and thereafter) and a consolidated cash flow coverage ratio of not less than 1.20 to 1.00. The Company was in compliance with all financial covenants at September 30, 2013.
During the first quarter of 2012, the Company incurred deferred financing costs of $1,497 associated with the 2012 Credit Agreement and wrote off unamortized deferred financing costs of $133 associated with the Companys 2008 credit facility.
During the second quarter of 2013, the Company incurred deferred financing costs of $379 and wrote off unamortized deferred financing costs of $54 associated with Amendment No. 1 to the 2012 Credit Agreement.
As of September 30, 2013, there was $193,680 outstanding under the Revolver and $1,380 in outstanding letters of credit. The available balance under the Revolver was $54,940 at September 30, 2013. The average interest rates on the borrowings outstanding under the 2012 Credit Agreement at September 30, 2012 and 2013 were 3.65% and 2.00%, respectively, including the applicable spread paid to the banks and, for 2012, the effect of the interest rate swap agreements tied to the debt (see Note 3 for discussion on Fair Value Measurements).
On August 16, 2005, the Company issued senior unsecured notes in the amount of $150,000 with the fixed interest rate of 7.625%. On October 21, 2011, the Company redeemed $50,000 of the senior notes by utilizing $51,271 of availability under its 2008 credit facility, as amended. The Company paid a premium of $1,271 as well as interest accrued through the date of redemption and wrote off unamortized deferred financing costs of $623 associated with this redemption. On March 30, 2012, the Company redeemed the remaining $100,000 of the senior notes by utilizing $103,495 of availability under the 2012 Credit Agreement and paying a premium of $2,542 as well as interest accrued through the date of redemption. The Company wrote off the remaining $1,087 of unamortized deferred financing costs associated with this redemption.
Interest expense associated with the Companys long term debt for the three and nine months ended September 30, 2012 and 2013 is comprised of the following:
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Three months ended |
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Nine months ended |
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September 30, |
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September 30, |
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2012 |
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2013 |
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2012 |
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2013 |
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|
|
|
|
|
| ||||
Interest expense |
|
$ |
1,966 |
|
$ |
1,063 |
|
$ |
7,239 |
|
$ |
4,034 |
|
Change in the fair value of non-hedged interest rate derivative instruments |
|
(125 |
) |
|
|
(360 |
) |
(196 |
) | ||||
Amortization of deferred financing costs |
|
90 |
|
84 |
|
356 |
|
262 |
| ||||
Interest expense, including change in fair value of non-hedged interest rate derivative instruments and amortization of deferred financing costs |
|
$ |
1,931 |
|
$ |
1,147 |
|
$ |
7,235 |
|
$ |
4,100 |
|
Capital lease obligations are comprised primarily of the Companys fleet of vehicles which totaled $2,425 and $4,048 at December 31, 2012 and September 30, 2013, respectively.
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share data)
2. Long-Term Debt (continued)
Required payments under the Companys long-term debt and capital lease obligations are as follows:
|
|
Amount |
| |
2013 (three months) |
|
$ |
255 |
|
2014 |
|
1,021 |
| |
2015 |
|
969 |
| |
2016 |
|
956 |
| |
2017 |
|
847 |
| |
Thereafter |
|
193,680 |
| |
|
|
$ |
197,728 |
|
The Company historically has not needed sources of financing other than its internally generated cash flow, revolving credit facilities, and senior notes to fund its working capital, capital expenditures, and smaller acquisitions. The Company anticipates that its cash flow from operations and revolving credit facilities will be sufficient to meet its anticipated cash requirements for at least the next twelve months.
3. Fair Value Measurements
The Company has adopted accounting guidance regarding fair value measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs, other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect the reporting entitys own assumptions.
The following table summarizes the basis used to measure certain financial assets and financial liabilities at fair value on a recurring basis in the balance sheet:
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share data)
3. Fair Value Measurements (continued)
|
|
|
|
Basis of Fair Value Measurments |
| ||||||||
|
|
Balance at |
|
Quoted |
|
Significant |
|
Significant |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Fuel commodity derivatives (included in current liabilities) |
|
$ |
17 |
|
$ |
|
|
$ |
|
|
$ |
17 |
|
The Company entered into standard International Swaps and Derivatives Association (ISDA) interest rate swap agreements (Swap Agreements) to manage the interest rate associated with its debt. The interest rate Swap Agreements matured on April 1, 2013. Under these agreements the Company received a variable rate of LIBOR plus a markup and paid a fixed rate. The Company recognized a non-cash unrealized gain of $405 for the three months ended September 30, 2012, and a non-cash unrealized gain of $406 and $1,235 for the nine months ended September 30, 2013 and 2012, respectively, on the interest rate Swap Agreements as a result of the change in the fair value.
On September 23, 2011 the Company entered into a fuel commodity derivative to manage the fuel cost of its fleet of vehicles. The derivative was effective January 1, 2012 and expired December 31, 2012. On September 19, 2012 the Company entered into an additional fuel commodity derivative. The derivative was effective January 1, 2013 and expires December 31, 2013. The derivative has a monthly notional amount of 80 thousand gallons from January 1, 2013 through December 31, 2013 for a total notional amount of 960 thousand gallons. The Company has a put price of $3.26 per gallon and a strike price of $3.90 per gallon. The Company recognized a non-cash unrealized gain of $29 and $67 for the three months ended September 30, 2013 and 2012, respectively, and a non-cash unrealized gain of $20 and $43 for the nine months ended September 30, 2013 and 2012, respectively, on these fuel commodity derivatives as a result of the change in the fair value.
The fair value of the fuel commodity derivative is based on market assumptions and quoted pricing and is considered a Level 3 item.
The fuel commodity derivative activity for the nine months ended September 30, 2013 is as follows:
Balance, December 31, 2012 |
|
$ |
(37 |
) |
Realized gains |
|
|
| |
Unrealized gains |
|
20 |
| |
Settlements |
|
|
| |
Balance, September 30, 2013 |
|
$ |
(17 |
) |
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share data)
3. Fair Value Measurements (continued)
The Company determines the fair value of the amount outstanding under its 2012 Credit Facility using Level 2 inputs. The fair value of the 2012 Credit Agreement at September 30, 2013 approximates carrying value.
During the first quarter of 2012, as a result of the senior note redemption (Note 2), the Company no longer qualified for hedge accounting treatment on its only effective interest rate swap agreement. Accordingly, the amount included in Accumulated Other Comprehensive Loss at the time hedge accounting was lost was reclassified as an earnings charge through the maturity date of the derivative. This charge to interest expense, when combined with an interest rate swap agreement that previously lost hedge accounting treatment, amounted to $210 for the nine months ended September 30, 2013 compared to $280 and $875 for the three and nine months ended September 30, 2012, respectively.
The tables below display the impact the Companys derivative instruments had on the Condensed Consolidated Balance Sheets as of December 31, 2012 and September 30, 2013 and the Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2012 and 2013.
Fair Values of Derivative Instruments
|
|
Liability Derivatives |
| ||||||||
|
|
December 31, 2012 |
|
September 30, 2013 |
| ||||||
|
|
Balance Sheet |
|
Fair Value |
|
Balance Sheet |
|
Fair Value |
| ||
|
|
|
|
|
|
|
|
|
| ||
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
| ||
Fuel commodity derivatives |
|
Accrued expenses |
|
$ |
37 |
|
Accrued expenses |
|
$ |
17 |
|
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share data)
3. Fair Value Measurements (continued)
The Effect of Derivative Instruments on the Consolidated Statements of Income and Comprehensive Income
for the three months ended September 30, 2012 and 2013
Derivatives in |
|
Amount of Loss |
|
Location of Loss |
|
Amount of Loss |
|
Derivatives Not |
|
Location of |
|
Amount of Gain or (Loss) |
| ||||||||||||
Hedging |
|
September 30, |
|
(Effective |
|
September 30, |
|
Hedging |
|
Income on |
|
September 30, |
| ||||||||||||
Relationships |
|
2012 |
|
2013 |
|
Portion) |
|
2012 |
|
2013 |
|
Instruments |
|
Derivative |
|
2012 |
|
2013 |
| ||||||
Interest rate contracts: |
|
|
|
|
|
Interest expense, including the change in the fair value of non-hedged derivative instruments: |
|
|
|
|
|
Interest rate contracts: |
|
Interest expense, including the change in the fair value of non-hedged derivative instruments: |
|
|
|
|
| ||||||
Unrealized |
|
$ |
|
|
$ |
|
|
Unrealized |
|
$ |
(280 |
) |
$ |
|
|
|
|
Unrealized |
|
$ |
405 |
|
$ |
|
|
Realized |
|
|
|
|
|
Realized |
|
|
|
|
|
|
|
Realized |
|
(444 |
) |
|
| ||||||
Total |
|
$ |
|
|
$ |
|
|
Total |
|
$ |
(280 |
) |
$ |
|
|
|
|
Total |
|
$ |
(39 |
) |
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fuel commodity derivatives: |
|
|
|
|
|
Cost of revenue: |
|
|
|
|
|
Fuel commodity derivatives: |
|
Cost of revenue: |
|
|
|
|
| ||||||
Unrealized |
|
$ |
|
|
$ |
|
|
Unrealized |
|
$ |
|
|
$ |
|
|
|
|
Unrealized |
|
$ |
67 |
|
$ |
29 |
|
Realized |
|
|
|
|
|
Realized |
|
|
|
|
|
|
|
Realized |
|
14 |
|
|
| ||||||
Total |
|
$ |
|
|
$ |
|
|
Total |
|
$ |
|
|
$ |
|
|
|
|
Total |
|
$ |
81 |
|
$ |
29 |
|
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except share data)
3. Fair Value Measurements (continued)
The Effect of Derivative Instruments on the Consolidated Statements of Income and Comprehensive Income
for the nine months ended September 30, 2012 and 2013
Derivatives in |
|
Amount of Loss Recognized |
|
Location of Loss |
|
Amount of Loss |
|
Derivatives Not |
|
Location of |
|
Amount of Gain or (Loss) |
| ||||||||||||
Hedging |
|
September 30, |
|
(Effective |
|
September 30, |
|
Hedging |
|
Income on |
|
September 30, |
| ||||||||||||
Relationships |
|
2012 |
|
2013 |
|
Portion) |
|
2012 |
|
2013 |
|
Instruments |
|
Derivative |
|
2012 |
|
2013 |
| ||||||
Interest rate contracts: |
|
|
|
|
|
Interest expense, including the change in the fair value of non-hedged derivative instruments: |
|
|
|
|
|
Interest rate contracts: |
|
Interest expense, including the change in the fair value of non-hedged derivative instruments: |
|
|
|
|
| ||||||
Unrealized |
|
$ |
(67 |
) |
$ |
|
|
Unrealized |
|
$ |
(875 |
) |
$ |
(210 |
) |
|
|
Unrealized |
|
$ |
1,235 |
|
$ |
406 |
|
Realized |
|
(162 |
) |
|
|
Realized |
|
(162 |
) |
|
|
|
|
Realized |
|
(1,178 |
) |
(398 |
) | ||||||
Total |
|
$ |
(229 |
) |
$ |
|
|
Total |
|
$ |
(1,037 |
) |
$ |
(210 |
) |
|
|
Total |
|
$ |
57 |
|
$ |
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fuel commodity derivatives: |
|
|
|
|
|
Cost of revenue: |
|
|
|
|
|
Fuel commodity derivatives: |
|
Cost of revenue: |
|
|
|
|
| ||||||
Unrealized |
|
$ |
|
|
$ |
|
|
Unrealized |
|
$ |
|
|
$ |
|
|
|
|
Unrealized |
|
$ |
43 |
|
$ |
20 |
|
Realized |
|
|
|
|
|
Realized |
|
|
|
|
|
|
|
Realized |
|
47 |
|
|
| ||||||
Total |
|
$ |
|
|
$ |
|
|
Total |
|
$ |
|
|
$ |
|
|
|
|
Total |
|
$ |
90 |
|
$ |
20 |
|
4. Acquisitions
During 2013, the Company acquired the assets of certain laundry facilities management businesses for total consideration of $5,847. Payments totaling $5,128 were made at the closings and the balance for one of the acquisitions is to be paid within nine months if certain conditions are met. The acquisitions have been reflected in the accompanying condensed consolidated financial statements from the dates of the acquisitions and have been accounted for as business combinations. The preliminary allocations of the total purchase price of the acquisitions are as follows: contract rights $3,397, equipment $1,375, non-compete agreement $220 and goodwill $855. The ultimate purchase price allocations are subject to the finalization of the asset values as of the date of the acquisitions. The operating results of the businesses are included in the accompanying unaudited condensed consolidated statements of income and comprehensive income from the dates of acquisitions. Pro forma results of the acquired companies are not included as they have been deemed immaterial to the Company.
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except share data)
5. Goodwill and Intangible Assets
Goodwill and intangible assets consist of the following:
|
|
As of December 31, 2012 |
| |||||||
|
|
Cost |
|
Accumulated |
|
Net Book Value |
| |||
|
|
|
|
|
|
|
| |||
Goodwill |
|
$ |
57,737 |
|
|
|
$ |
57,737 |
| |
|
|
$ |
57,737 |
|
|
|
$ |
57,737 |
| |
Intangible assets: |
|
|
|
|
|
|
| |||
Trade name |
|
$ |
14,050 |
|
$ |
|
|
$ |
14,050 |
|
Non-compete agreements |
|
2,277 |
|
2,272 |
|
5 |
| |||
Contract rights |
|
228,783 |
|
75,372 |
|
153,411 |
| |||
Distribution rights |
|
1,623 |
|
946 |
|
677 |
| |||
Deferred financing costs |
|
1,796 |
|
299 |
|
1,497 |
| |||
|
|
$ |
248,529 |
|
$ |
78,889 |
|
$ |
169,640 |
|
|
|
As of September 30, 2013 |
| |||||||
|
|
Cost |
|
Accumulated |
|
Net Book Value |
| |||
|
|
|
|
|
|
|
| |||
Goodwill |
|
$ |
58,185 |
|
|
|
$ |
58,185 |
| |
|
|
$ |
58,185 |
|
|
|
$ |
58,185 |
| |
Intangible assets: |
|
|
|
|
|
|
| |||
Trade Name |
|
$ |
14,050 |
|
$ |
|
|
$ |
14,050 |
|
Non-compete agreements |
|
2,137 |
|
1,932 |
|
205 |
| |||
Contract rights |
|
232,090 |
|
84,066 |
|
148,024 |
| |||
Distribution rights |
|
1,623 |
|
1,068 |
|
555 |
| |||
Deferred financing costs |
|
1,672 |
|
111 |
|
1,561 |
| |||
|
|
$ |
251,572 |
|
$ |
87,177 |
|
$ |
164,395 |
|
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except share data)
5. Goodwill and Intangible Assets (continued)
Estimated future amortization expense of intangible assets consists of the following:
2013 (three months) |
|
$ |
3,051 |
|
2014 |
|
12,202 |
| |
2015 |
|
12,193 |
| |
2016 |
|
12,193 |
| |
2017 |
|
12,058 |
| |
Thereafter |
|
97,934 |
| |
|
|
$ |
149,631 |
|
Amortization expense of intangible assets for the nine months ended September 30, 2012 and 2013 was $9,121 and $9,095, respectively.
Intangible assets primarily consist of various non-compete agreements, and contract rights recorded in connection with acquisitions. The deferred financing costs were incurred in connection with our senior secured credit facility and our senior notes and are amortized from five to ten years. The non-compete agreements are amortized using the straight-line method over the life of the agreements, which range from five to fifteen years. Contract rights are amortized using the straight-line method over fifteen to twenty years. The life assigned to acquired contracts is based on several factors, including: (i) the historical renewal rate of the contract portfolio for the most recent years prior to the acquisition, (ii) the number of years the average contract has been in the contract portfolio, (iii) the overall level of client satisfaction within the contract portfolio, and (iv) our ability to maintain comparable renewal rates in the future. The contract rights acquired are aggregated for purposes of calculating their fair value upon acquisition due to the fact that there are thousands of individual contracts in each market. No single contract accounts for more than 2% of the revenue of any acquired portfolio and the contracts are homogeneous. The fair values of acquired portfolios are established based upon discounted cash flows generated by the acquired contracts. The fair values of the contracts are allocated to asset groups, comprised of the Companys geographic markets, based on an estimate of relative fair value.
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 Companys ultimate liability, if any, under pending litigation would not materially affect its financial condition or the results of its operations or cash flows.
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except share data)
7. Earnings Per Share
|
|
Three months ended |
|
Nine months ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
2012 |
|
2013 |
|
2012 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income |
|
$ |
1,471 |
|
$ |
1,457 |
|
$ |
1,756 |
|
$ |
5,587 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average number of common shares outstanding - basic |
|
14,447 |
|
14,715 |
|
14,396 |
|
14,634 |
| ||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
| ||||
Stock options and restricted stock units |
|
687 |
|
690 |
|
682 |
|
572 |
| ||||
Weighted average number of common shares outstanding - diluted |
|
15,134 |
|
15,405 |
|
15,078 |
|
15,206 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Earnings per share - basic |
|
$ |
0.10 |
|
$ |
0.10 |
|
$ |
0.12 |
|
$ |
0.38 |
|
Earnings per share - diluted |
|
$ |
0.10 |
|
$ |
0.09 |
|
$ |
0.12 |
|
$ |
0.37 |
|
There were 921,000 and 587,000 shares under option plans that were excluded from the computation of diluted earnings per share for the three months ended September 30, 2013 and 2012, and 882,000 and 548,000 shares under option plans that were excluded from the computation of diluted earnings per share for the nine months ended September 30, 2013 and 2012, respectively due to their anti-dilutive effects.
8. Stock Compensation
For the three and nine months ended September 30, 2013, the Company incurred stock compensation expense of $809 and $2,579, respectively. The allocation of stock compensation expense is consistent with the allocation of the participants salaries and other compensation expenses.
At September 30, 2013, options for 626,000 shares and 164,000 restricted shares have been granted but have not yet vested.
Compensation expense related to unvested options and restricted shares will be recognized in the following years:
2013 (three months) |
|
$ |
778 |
|
2014 |
|
1,191 |
| |
2015 |
|
661 |
| |
2016 |
|
84 |
| |
|
|
$ |
2,714 |
|
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except share data)
9. Income Taxes
The following table presents the income tax expense and the effective income tax rates for the three and nine months ended September 30, 2012 and 2013:
|
|
Three months ended |
|
Nine months ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
2012 |
|
2013 |
|
2012 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income tax expense |
|
$ |
1,104 |
|
$ |
961 |
|
$ |
1,285 |
|
$ |
3,714 |
|
Effective tax rate |
|
43 |
% |
40 |
% |
42 |
% |
40 |
% | ||||
The effective income tax rate on operations is based upon the estimated income for the year and adjustments, if any, resulting from tax audits or other tax contingencies.
The changes in the effective tax rates for the three and nine months ended September 30, 2012 and 2013 are the result of the relative impact of permanent differences due to changes in estimated pretax annual profits.
At September 30, 2013, the uncertain tax positions recognized by the Company in the consolidated financial statements were not material.
10. New Accounting Pronouncements
In February 2013, the FASB issued new guidance which requires disclosure of information about significant reclassification adjustments from accumulated other comprehensive income in a single note or on the face of the financial statements. This guidance became effective for the company in 2013. Adoption of this standard, which is related to disclosure only, did not have an impact on the companys consolidated financial position, results of operations or cash flows.
No other new accounting pronouncement issued or effective during the fiscal year has had or is expected to have a material impact on the Consolidated Financial Statements.
11. Payment of dividends
The Companys Board of Directors declared quarterly dividends of $0.0875 per share payable on April 1, 2013, July 1, 2013, and October 1, 2013 to stockholders of record at the close of business on March 15, 2013, June 17, 2013, and September 16, 2013, respectively. All dividends were paid prior to September 30, 2013 and have been reflected in the current financial statements.
12. Repurchase of Common Stock
On December 21, 2011, the Companys Board of Directors authorized a share repurchase program under which the Company is authorized to purchase up to an aggregate of $2,000 of its common stock. The Company repurchased 133,333 shares during the first quarter of 2012 under the plan for a total cash outlay of $2,000, thereby completing the repurchase program.
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except share data)
13. Subsequent Events
On October 14, 2013, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with CSC ServiceWorks Holdings, Inc., CSC ServiceWorks, Inc. (CSC), Spin Holdco Inc. (Spin) and CSC Fenway, Inc. (Merger Sub) that provides for the merger of Mac-Gray with Merger Sub, a wholly-owned subsidiary of Spin, which is a wholly-owned subsidiary of CSC. Pursuant to and upon the closing of the transaction, CSC will acquire all of the outstanding common stock of Mac-Gray for $21.25 per share, payable in cash and the Company will become a wholly-owned subsidiary of Spin. Completion of the transaction is subject to certain closing conditions including the adoption and approval of the merger agreement by Mac-Grays stockholders, regulatory approval, and other customary closing conditions. Mac-Gray expects the transaction to be completed in the first half of 2014. Following completion of the transaction, Mac-Grays common stock will be delisted from the New York Stock Exchange and will no longer trade publicly. A description of the Merger Agreement is contained in the Companys current report on Form 8-K filed with the SEC on October 15, 2013, and a copy of the Merger Agreement is filed as Exhibit 2.1 to such report.
MANAGEMENTS 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. Additional statements identified by words such as will, likely, may, believe, expect, anticipate, intend, seek, designed, develop, would, future, can, could, outlook and other expressions that are predictions of or indicate future events and trends and which do not relate to historical matters, also identify forward-looking statements. These forward-looking statements reflect our 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 our expectations. Factors that could cause or contribute to such differences include, but are not limited to, the following:
· our ability to satisfy the closing conditions set forth in our recently announced merger agreement with CSC ServiceWorks, including obtaining stockholder approval and antitrust clearance;
· the ability of the parties to consummate our recently announced transaction with CSC ServiceWorks;
· debt service requirements under our existing and future indebtedness;
· availability of cash flow to finance capital expenditures;
· our ability to renew laundry leases with our clients;
· competition in the laundry facilities management industry;
· our ability to maintain relationships with our suppliers;
· our ability to maintain adequate internal controls over financial reporting;
· our ability to consummate acquisitions and successfully integrate the businesses we acquire;
· increases in multi-unit housing sector apartment vacancy rates and condominium conversions;
· our ability to protect our intellectual property and proprietary rights and create new technology;
· our ability to retain our key personnel and attract and retain other highly skilled employees;
· decreases in the value of our intangible assets;
· our ability to comply with current and future environmental regulations;
· actions of our controlling stockholders;
· provisions of our charter and bylaws that could discourage takeovers; and
· those factors discussed under Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2012 and our other filings with the Securities and Exchange Commission (SEC).
Our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements, and accordingly, we can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations or financial condition. In view of these uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. We assume no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
In this Quarterly Report on Form 10-Q, unless the context suggests otherwise, references to the Company, Mac-Gray, we, us, our and similar terms refer to Mac-Gray Corporation and its subsidiaries. We own or license several registered and unregistered trademarks, including Mac-Gray®, Web®, Hof, Automatic Laundry Company, Intelligent Laundry®, LaundryView®, LaundryLinx, PrecisionWash, TechLinx, VentSnake, LaundryAudit, e-issues, Change Point® , The Campus Clothes Line®, Digital Laundry is here. ®, Life Just Got Easier®, and The Laundry Room Experts® .
Overview
Mac-Gray Corporation was founded in 1927 and re-incorporated in Delaware in 1997. Since its founding, Mac-Gray has grown to become the second largest laundry facilities management contractor in the United States. Through our portfolio of card and coin-operated laundry equipment located in laundry facilities across the country, we provide laundry convenience to residents of multi-unit housing, such as apartment buildings, condominiums, colleges and universities, public housing complexes, and hotels and motels in 44 states and the District of Columbia. Based on our ongoing survey of colleges and universities, we believe we are the largest provider of such services to the college and university market in the United States.
Our business model is built on a stable demand for laundry services, combined with long-term leases, strong client relationships, a broad client base, and predictable capital needs. For the three and nine months ended September 30, 2013, our total revenue was $79,511 and $240,325, respectively. Approximately 95% of our total revenue for the three and nine month period was generated by our facilities management business. We generate facilities management revenue primarily by entering into long-term leases with property owners or property management companies for the exclusive right to install and maintain laundry equipment in common area laundry rooms within their properties in exchange for a negotiated portion of the revenue we collect. As of September 30, 2013, approximately 83% of our installed equipment base was located in laundry facilities subject to long-term leases, which have a weighted average remaining term of approximately five years. Our capital costs are typically incurred in connection with new or renewed leases, and include investments in laundry equipment and card and coin-operated systems, incentive payments to property owners or property management companies, and expenses to refurbish laundry facilities. Our capital costs consist primarily of a large number of relatively small amounts, which are associated with our entry into or renewal of leases. Our capital needs other than for laundry leases are not significant. Accordingly, our capital needs are predictable and largely within our control. For the three and nine months ended September 30, 2013, we incurred $10,960 and $30,799 of capital expenditures, respectively. In addition, we made incentive payments of $2,196 and $5,281 in the three and nine months ended September 30, 2013 to property owners and property management companies in connection with obtaining our lease arrangements.
Through our commercial equipment sales and services business, we generate revenue by selling commercial laundry equipment. For the three and nine months ended September 30, 2013, our commercial laundry equipment sales business generated approximately 6% and 5% of our total revenue, respectively, and 8% and 5% of our gross margin, respectively. We anticipate that tight credit markets for our clients will continue to challenge our ability to maintain and grow our revenue from laundry equipment sales.
One of the key challenges we face is maintaining and expanding our client base in a competitive industry. Approximately 8% to 10% of our laundry room leases are up for renewal each year. Within any given geographic area, Mac-Gray may compete with local independent operators, regional operators and multi-region operators as well as property owners and property management companies who self-operate their laundry facilities. We devote substantial resources to our sales efforts and are focused on continued innovation in order to distinguish us from our competitors.
Our Board of Directors declared quarterly dividends of $0.0875 per share payable on April 1, 2013, July 1, 2013, and October 1, 2013 to stockholders of record at the close of business on March 15, 2013, June 17, 2013, and September 16, 2013, respectively. All dividends were paid prior to September 30, 2013 and have been reflected in the current financial statements.
On April 5, 2013 the Companys Board of Directors voted to terminate the Companys shareholder rights plan with American Stock Transfer & Trust Company, LLC (AST), as of the close of business April 8, 2013. In order to effect the termination, the Company and AST entered into an Amendment and Termination of Shareholder Rights Agreement, dated as of April 8, 2013, which caused the rights to purchase Series A Junior Participating Cumulative Preferred Stock issued pursuant to the Shareholder Rights Agreement, dated as of September 8, 2009, by and between the Company and AST, to expire as of April 8, 2013.
On February 29, 2012, we entered into an Amended and Restated Senior Secured Credit Agreement (as amended,
the 2012 Credit Agreement). On May 17, 2013, we entered into Amendment No. 1 to the Amended and Restated Senior Secured Credit Agreement. The 2012 Credit Agreement provides for borrowings up to $250,000 under a revolving credit facility (the Revolver).
On March 1, 2013, we acquired a laundry facilities management business in the southeastern region of the United States for total consideration of $2,737.
On May 2, 2013, we acquired a laundry facilities management business in the southwestern region of the United States for total consideration of $1,326.
On June 28, 2013 we acquired a laundry facility in the northeastern region of the United States for total consideration of $619.
On September 27, 2013 we acquired a laundry facilities management business in the northeastern region of the United States for total consideration of $1,165.
On October 14, 2013, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with CSC ServiceWorks Holdings, Inc., CSC ServiceWorks, Inc. (CSC), Spin Holdco Inc. (Spin) and CSC Fenway, Inc. (Merger Sub) that provides for the merger of Mac-Gray with Merger Sub, a wholly-owned subsidiary of Spin, which is a wholly-owned subsidiary of CSC. Pursuant to and upon the closing of the transaction, CSC will acquire all of the outstanding common stock of Mac-Gray for $21.25 per share, payable in cash and the Company will become a wholly-owned subsidiary of Spin. Completion of the transaction is subject to certain closing conditions including the adoption and approval of the merger agreement by Mac-Grays stockholders, regulatory approval, and other customary closing conditions. Mac-Gray expects the transaction to be completed in the first half of 2014. Following completion of the transaction, Mac-Grays common stock will be delisted from the New York Stock Exchange and will no longer trade publicly. A description of the Merger Agreement is contained in the Companys current report on Form 8-K filed with the SEC on October 15, 2013, and a copy of the Merger Agreement is filed as Exhibit 2.1 to such report.
Results of Operations (Dollars in thousands)
Three and nine months ended September 30, 2013 compared to three and nine months ended September 30, 2012.
The information presented below for the three and nine months ended September 30, 2013 and 2012 is derived from our unaudited condensed consolidated financial statements and related notes included elsewhere in this report:
|
|
For the three months ended September 30, |
| |||||||||
|
|
|
|
|
|
Increase |
|
% |
| |||
|
|
2012 |
|
2013 |
|
(Decrease) |
|
Change |
| |||
Laundry facilities management revenue |
|
$ |
74,372 |
|
$ |
75,002 |
|
$ |
630 |
|
1 |
% |
Commercial laundry equipment sales revenue |
|
3,501 |
|
4,509 |
|
1,008 |
|
29 |
% | |||
Total revenue |
|
$ |
77,873 |
|
$ |
79,511 |
|
$ |
1,638 |
|
2 |
% |
|
|
For the nine months ended September 30, |
| |||||||||
|
|
|
|
|
|
Increase |
|
% |
| |||
|
|
2012 |
|
2013 |
|
(Decrease) |
|
Change |
| |||
Laundry facilities management revenue |
|
$ |
229,316 |
|
$ |
229,357 |
|
$ |
41 |
|
0 |
% |
Commercial laundry equipment sales revenue |
|
10,620 |
|
10,968 |
|
348 |
|
3 |
% | |||
Total revenue |
|
$ |
239,936 |
|
$ |
240,325 |
|
$ |
389 |
|
0 |
% |
Revenue
Total revenue increased by $1,638, or 2%, to $79,511 for the three months ended September 30, 2013 compared to $77,873 for the three months ended September 30, 2012. Total revenue increased by $389, or less than 1%, to $240,325 for the nine months ended September 30, 2013 compared to $239,936 for the nine months ended September 30, 2012.
Laundry facilities management revenue. Laundry facilities management revenue increased by $630, or 1%, to $75,002 for the three months ended September 30, 2013 compared to $74,372 for the three months ended September 30, 2012. Laundry facilities management revenue increased by $41, or less than 1%, to $229,357 for the nine months ended September 30, 2013 compared to $229,316 for the nine months ended September 30, 2012. The increase in revenue for the three months ended September 30, 2013 compared to the three months ended September 30, 2012 is attributable to the cumulative impact of our vend price management initiatives, same location usage increases, and new equipment placements. The lack of growth in revenue in the nine months ended September 30, 2013 compared to the same period in the prior year is attributable, in part, to there being one additional operating day in 2012 due to it being a leap year. We have also reduced our portfolio of equipment by a small number as compared to the comparable period in 2012, primarily in unprofitable and less profitable locations, which also has resulted in reduced revenue. The reduced revenue was mitigated in part by our vend price management initiatives.
Commercial laundry equipment sales. Revenue in the commercial laundry equipment sales business increased by $1,008, or 29%, to $4,509 for the three months ended September 30, 2013 compared to $3,501 for the three months ended September 30, 2012. Revenue in the commercial laundry equipment sales business increased by $348, or 3%, to $10,968 for the nine months ended September 30, 2013 compared to $10,620 for the nine months ended September 30, 2012. Sales in the commercial laundry equipment sales business are sensitive to the strength of the local economy, the availability and cost of financing to small businesses, consumer confidence, and local permitting and therefore, tend to fluctuate significantly from period to period.
Cost of revenue
|
|
For the three months ended September 30, |
| |||||||||
|
|
|
|
|
|
Increase |
|
% |
| |||
|
|
2012 |
|
2013 |
|
(Decrease) |
|
Change |
| |||
Cost of laundry facilities management revenue |
|
$ |
52,600 |
|
$ |
53,925 |
|
$ |
1,325 |
|
3 |
% |
Depreciation and amortization related to operations |
|
10,706 |
|
10,878 |
|
172 |
|
2 |
% | |||
Cost of commercial laundry equipment sales |
|
2,827 |
|
3,665 |
|
838 |
|
30 |
% | |||
Total cost of revenue |
|
$ |
66,133 |
|
$ |
68,468 |
|
$ |
2,335 |
|
4 |
% |
|
|
For the nine months ended September 30, |
| |||||||||
|
|
|
|
|
|
Increase |
|
% |
| |||
|
|
2012 |
|
2013 |
|
(Decrease) |
|
Change |
| |||
Cost of laundry facilities management revenue |
|
$ |
160,840 |
|
$ |
161,659 |
|
$ |
819 |
|
1 |
% |
Depreciation and amortization related to operations |
|
31,536 |
|
32,230 |
|
694 |
|
2 |
% | |||
Cost of commercial laundry equipment sales |
|
8,675 |
|
8,932 |
|
257 |
|
3 |
% | |||
Total cost of revenue |
|
$ |
201,051 |
|
$ |
202,821 |
|
$ |
1,770 |
|
1 |
% |
Cost of laundry facilities management revenue. Cost of laundry facilities management revenue includes rent paid to clients as well as those costs associated with installing and servicing equipment and costs of collecting, counting, and depositing facilities management revenue. Cost of laundry facilities management revenue increased by $1,325, or 3%, to $53,925 for the three months ended September 30, 2013 as compared to $52,600 for the three months ended September 30, 2012. Cost of laundry facilities management revenue increased by $819, or 1%, to $161,659 for the nine months ended September 30, 2013 as compared to $160,840 for the nine months ended September 30, 2012. As a percentage of laundry facilities management revenue, cost of laundry facilities management revenue was 72% and 71% for the three months ended September 30, 2013 and 2012, respectively, and 70% for each of the nine months ended September 30, 2013 and 2012. Laundry facilities management rent increased by 1%, or $547, to $37,079 for the three months ended September 30, 2013, compared to $36,532 for the three months ended September 30, 2012. Laundry facilities management rent decreased by less than 1%, or $114, to $112,640 for the
nine months ended September 30, 2013 compared to $112,754 for the nine months ended September 30, 2012, directly attributable to the changes in facilities management revenue. Laundry facilities management rent as a percentage of laundry facilities management revenue was 50.2 % and 49.9 % for the three months ended September 30, 2013 and 2012, respectively, and 49.8 % and 50 % for the nine months ended September 30, 2013 and 2012, respectively. Laundry facilities management rent can be affected by new and renewed laundry leases and by other factors such as the amount of incentive payments and laundry room betterments invested in new or renewed laundry leases. As we vary the amount invested in a facility, the laundry facilities management rent, as a function of laundry facilities management revenue, can vary. Other costs of laundry facilities management revenue increased by $778, or 5%, to $16,846 for the three month ended September 30, 2013 compared to $16,068 for the three months ended September 30, 2012. Other costs of laundry facilities management revenue increased by $933, or 2%, to $49,019 for the nine months ended September 30, 2013 compared to $48,086 for the nine months ended September 30, 2012. These increases were primarily attributable to increases in labor costs and health insurance costs. A significant percentage of other costs of laundry facilities management revenue are fixed costs which do not fluctuate with changes in revenue.
Depreciation and amortization related to operations. Depreciation and amortization related to operations increased by $172, or 2%, to $10,878 for the three months ended September 30, 2013 as compared to $10,706 for the three months ended September 30, 2012. Depreciation and amortization related to operations increased by $694, or 2%, to $32,230 for the nine months ended September 30, 2013 as compared to $31,536 for the nine months ended September 30, 2012. The increase in depreciation and amortization for the three and nine months ended September 30, 2013 as compared to the three and nine months ended September 30, 2012 is attributable to an increase in our capital spending on new and renegotiated accounts beginning in 2012 compared to the two prior years, where we closely managed capital investment in light of the uncertain economy. We expect to continue to increase our capital spending and expect depreciation expense to continue to increase.
Cost of laundry equipment sales. Cost of commercial laundry equipment sales consists primarily of the cost of laundry equipment, parts and supplies sold, as well as salaries, warehousing and distribution expenses. Cost of commercial laundry equipment sales increased by $838, or 30%, to $3,665 for the three months ended September 30, 2013 as compared to $2,827 for the three months ended September 30, 2012. Cost of commercial laundry equipment sales increased by $257, or 3%, to $8,932 for the nine months ended September 30, 2013 as compared to $8,675 for the nine months ended September 30, 2012. As a percentage of sales, cost of product sold was 81% for each of the three months ended September 30, 2013 and 2012, and 81% and 82% for the nine months ended September 30, 2013 and 2012, respectively. The change in cost of sales for the three and nine months ended September 30, 2013 compared to the same period ending September 30, 2012 is a direct result of the change in revenue, product mix and price increases by the manufacturer. Operating expenses were essentially unchanged in total.
Operating expenses
General and administration, sales and marketing, related depreciation and amortization, incremental proxy costs, and transaction costs. General and administration, sales and marketing, related depreciation and amortization, incremental proxy costs, and transaction costs increased by $301, or 4%, to $7,592 for the three months ended September 30, 2013 as compared to $7,291 for the three months ended September 30, 2012. General and administration, sales and marketing, related depreciation and amortization, incremental proxy costs, and transaction costs decreased by $626, or 3%, to $24,318 for the nine months ended September 30, 2013 as compared to $24,944 for the nine months ended September 30, 2012. As a percentage of total revenue, these expenses were 10% and 9% for the three months ended September 30, 2013 and 2012, respectively, and 10% for each of the nine months ended September 30, 2013 and 2012. The increase in expenses for the three months ended September 30, 2013 compared to the same period in 2012 is primarily attributable to costs related to our recently announced agreement for the merger of the Company. The decrease in expenses for the nine months ended September 30, 2013 compared to the same period in 2012 is primarily related to a decrease in legal costs partially offset by an increase in marketing and sales related costs as well as transaction costs.
Gain on sale of assets
The gains of $114 and $57 for the three months ended September 30, 2013 and 2012, respectively, and the gains of $269 and $97 for the nine months ended September 30, 2013 and 2012, respectively, are from the sale of vehicles and other fixed assets in the normal course of business.
Income from operations
Income from operations decreased by $941, or 21%, to $3,565, for the three months ended September 30, 2013 compared to $4,506 for the three months ended September 30, 2012 and decreased by $583, or 4%, to $13,455 for the nine months ended September 30, 2013 compared to $14,038 for the nine months ended September 30, 2012 due primarily to the cumulative effect of the reasons discussed above.
Interest expense, including the change in the fair value of non-hedged derivative instruments and amortization of deferred financing costs
Interest expense, including the change in the fair value of non-hedged derivative instruments and amortization of deferred financing costs, decreased by $784, or 41%, to $1,147 for the three months ended September 30, 2013, as compared to $1,931 for the three months ended September 30, 2012. Interest expense, including the change in the fair value of non-hedged derivative instruments and amortization of deferred financing costs, decreased by $3,135, or 43%, to $4,100 for the nine months ended September 30, 2013, as compared to $7,235 for the nine months ended September 30, 2012. This decrease in interest expense for the three and nine months ended September 30, 2013 was primarily the result of retiring our 7.625% fixed rate senior notes by utilizing our 2012 Credit Agreement at lower interest rates as well reduced pricing under our 2012 credit agreement and the maturity of our interest rate derivatives. Interest expense, excluding the change in fair value of non-hedged derivative instruments and amortization of deferred financing costs, was $1,063 and $1,966 for the three months ended September 30, 2013 and 2012, respectively, a decrease of $903, or 46%. Interest expense, excluding the change in fair value of non-hedged derivative instruments and amortization of deferred financing costs, was $4,034 and $7,239 for the nine months ended September 30, 2013 and 2012, respectively, a decrease of $3,205, or 44%. Interest expense, excluding the change in fair value of non-hedged derivative instruments and amortization of deferred financing costs, includes interest paid in connection with our derivative instruments through their maturity date. This amounted to $444 for the three months ended September 30, 2012, and $398 and $1,340 for the nine months ended September 30, 2013 and 2012, respectively.
Interest expense associated with the companys long term debt is comprised of the following:
|
|
Three months ended |
|
Nine months ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
2012 |
|
2013 |
|
2012 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Interest expense |
|
$ |
1,966 |
|
$ |
1,063 |
|
$ |
7,239 |
|
$ |
4,034 |
|
Change in the fair value of non-hedged interest rate derivative instruments |
|
(125 |
) |
|
|
(360 |
) |
(196 |
) | ||||
Amortization of deferred financing costs |
|
90 |
|
84 |
|
356 |
|
262 |
| ||||
Interest expense, including change in fair value of non-hedged interest rate derivative instruments and amortization of deferred financing costs |
|
$ |
1,931 |
|
$ |
1,147 |
|
$ |
7,235 |
|
$ |
4,100 |
|
During the first quarter of 2012, as a result of the senior note redemption (Note 2), the Company no longer qualified for hedge accounting treatment on its only effective interest rate swap agreement. Accordingly, the amount included in Accumulated Other Comprehensive Loss at the time hedge accounting was lost was reclassified as an earnings charge through the maturity date of the derivative. This charge to interest expense, when combined with an interest rate swap agreement that previously lost hedge accounting treatment, amounted to $210 for the nine months ended September 30, 2013 compared to $280 and $875 for the three and nine months ended September 30, 2012, respectively.
Loss on early extinguishment of debt
Loss on early extinguishment of debt amounted to $3,762 for the nine months ended September 30, 2012 and includes the premium of $2,542 we incurred for the early redemption of our senior unsecured notes and $1,087 of unamortized deferred financing costs associated with the redemption. We also wrote off $133 of unamortized deferred financing costs associated with our 2008 credit facility. Loss on early extinguishment of
debt amounted to $54 for the nine months ended September 30, 2013 which consists of a write off of unamortized deferred financing costs associated with Amendment No. 1 to the 2012 Credit Agreement.
Income tax expense
Income tax expense decreased by $143 to $961 for the three months ended September 30, 2013 compared to $1,104 for the three months ended September 30, 2012. Income tax expense increased by $2,429 to $3,714 for the nine months ended September 30, 2013 compared to $1,285 for the nine months ended September 30, 2012. The decrease in the three months is the result of the decrease in pre-tax income to $2,418 for the three months ended September 30, 2013, compared to the $2,575 for the three months ended September 30, 2012. The increase in the nine months is the result of the increase in pre-tax income to $9,301 for the nine months ended September 30, 2013, compared to the $3,041 for the nine months ended September 30, 2012. The effective tax rate decreased to 40% for the three months ended September 30, 2013, compared to 43% for the same period in 2012. The effective tax rate decreased to 40% for the nine months ended September 30, 2013, compared to 42% for the same period in 2012. The change in the effective rate for the three and nine months ended September 30, 2013 compared to the effective tax rate for the three and nine months ended September 30, 2012 is the result of the change in permanent tax differences as a percentage of pretax income.
Net income
As a result of the foregoing, net income decreased by $14 to $1,457 for the three months ended September 30, 2013 compared to $1,471 for the same period ended September 30, 2012. Net income increased by $3,831 to $5,587 for the nine months ended September 30, 2013 compared to $1,756 for the same period ended September 30, 2012
Seasonality
We experience moderate seasonality as a result of our operations in the college and university market. Revenues derived from the college and university market represented approximately 15% of our total laundry facilities management revenue. Academic facilities management and rental revenues are derived substantially during the school year in the first, second and fourth calendar quarters. Conversely, our operating and capital expenditures have historically been higher during the third calendar quarter when we install a large amount of equipment while colleges and universities are generally on summer break.
Liquidity and Capital Resources (Dollars in thousands)
We believe that we can satisfy our working capital requirements and funding of capital needs with internally generated cash flow and, as necessary, borrowings from our revolving credit facility described below. Capital expectations for the year ending December 31, 2013, including contract incentive payments, are currently expected to be between $36,000 and $39,000. In the nine months ended September 30, 2013, spending on capital expenditures was $30,799 and spending on contract incentives was $5,281. The capital expenditures for 2013 are primarily composed of laundry equipment installed in connection with new client leases and the renewal of existing leases.
We historically have not needed sources of financing other than our internally generated cash flow and revolving credit facilities to fund our working capital, capital expenditures and smaller acquisitions. As a result, we anticipate that our cash flow from operations and revolving credit facilities will be sufficient to meet our anticipated cash requirements for at least the next twelve months.
Our current long-term liquidity needs are principally the repayment of borrowings under our 2012 Credit Agreement. We are unable to project with certainty whether our long-term cash flow from operations will be sufficient to repay our long-term debt when it comes due. We anticipate that we will need to refinance some portion of this indebtedness when it reaches maturity. We cannot make any assurances that such financing would be available on reasonable terms, if at all.
For the three and nine months ended September 30, 2013, our source of cash was primarily from operating activities and debt borrowings. Our primary uses of cash for the three and nine months ended September 30, 2013 were the purchase of new laundry equipment, payments for acquisitions, and the payment of dividends. We
anticipate that we will continue to use cash flows provided by operating activities to finance working capital needs, debt service, and capital expenditures.
On February 29, 2012, we entered into an Amended and Restated Senior Secured Credit Agreement (as amended, the 2012 Credit Agreement). On May 17, 2013, we entered into Amendment No. 1 to the Amended and Restated Senior Secured Credit Agreement. The 2012 Credit Agreement provides for borrowings up to $250,000 under a revolving credit facility (the Revolver). The 2012 Credit Agreement matures on May 17, 2018. The 2012 Credit Agreement also provides for Swingline Loans of up to $10,000 (the Swingline Loans) and any Swingline Loans will reduce the borrowings available under the Revolver. Subject to certain terms and conditions, the 2012 Credit Agreement gives the Company the option to increase the Revolver or establish one or more new term loans, provided that the aggregate commitments under the 2012 Credit Agreement cannot exceed $350,000. The 2012 Credit Agreement 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 the capital stock of its subsidiaries. Outstanding indebtedness under the 2012 Credit Agreement bears interest at a fluctuating rate equal to (i) in the case of Eurodollar rate loans, the LIBOR rate plus an applicable percentage, ranging from 1.25% to 2.00% per annum (currently 2.00%), determined by reference to our consolidated total leverage ratio, and (ii) in the case of base rate loans and swingline loans, the higher of (a) the federal funds rate plus 0.50%, (b) the annual rate of interest announced by Bank of America, N.A. as its prime rate, or (c) for each day, the floating rate of interest equal to LIBOR for a one month term quoted for such date (the highest of which is defined as the Base Rate), plus, in each case, an applicable percentage, ranging from 0.25% to 1.00% per annum (currently 1.00%), determined by reference to our consolidated total leverage ratio.
We pay a commitment fee equal to a percentage of the actual daily-unused portion of the Revolver under the 2012 Credit Agreement. This percentage is determined quarterly by reference to the Companys consolidated total leverage ratio and ranges between 0.25% per annum and 0.40% per annum (currently 0.40%). For purposes of the calculation of the commitment fee, letters of credit are considered usage under the Revolver, but swingline loans are not considered usage under the Revolver.
The 2012 Credit Agreement includes certain financial and operational covenants, including restrictions on paying dividends and other distributions, making certain acquisitions and incurring indebtedness, and requires that we maintain certain financial ratios. The most significant financial ratios that we are required to maintain include a consolidated total leverage ratio of not greater than 3.75 to 1.00 (3.50 to 1.00 as of December 31, 2013 and thereafter) and a consolidated cash flow coverage ratio of not less than 1.20 to 1.00. We were in compliance with all financial covenants at September 30, 2013.
As of September 30, 2013, there was $193,680 outstanding under the Revolver and $1,380 in outstanding letters of credit. The available balance under the Revolver was $54,940 at September 30, 2013. The average interest rates on the borrowings outstanding under the 2012 Credit Agreement at September, 2013 and 2012 were 2.00% and 3.65%, respectively, including the applicable spread paid to the banks and, for 2012, the effect of the interest rate swap agreements tied to the debt (see Note 3 for discussion on Fair Value Measurements).
On October 21, 2011, we redeemed $50,000 of our 7.625% senior notes by utilizing $51,271 of availability under our prior credit facility. On March 30, 2012, we redeemed the remaining $100,000 of our senior notes by utilizing $103,495 of availability under the 2012 Credit Agreement.
Operating Activities
For the nine months ended September 30, 2013 and 2012, net cash flows provided by operating activities were $35,441 and $30,067, respectively. Cash flows from operations consists primarily of facilities management revenue and equipment sales, offset by the cost of facilities management revenues, cost of product sold, and general, administration, sales and marketing expenses. The most significant changes to cash flows for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012 are an increase in net income, an increase in accounts payable, accrued facilities management rent, accrued expenses and other liabilities offset in part by an increase in prepaid facilities management rent and other assets and a decrease in the loss on early extinguishment of debt. The increase in accounts payable, accruals and other liabilities is reflective of increased equipment purchases and an increase in the provision for taxes. The increase in prepaid facilities management rent and other assets is attributable to an increase in incentive advances to our route clients as part of the execution of new and renegotiated contracts.
Investing Activities
For the nine months ended September 30, 2013 and 2012, net cash flows used in investing activities were $35,592 and $25,092, respectively. Capital expenditures for the nine months ended September 30, 2013 were $30,799 for the acquisition of laundry equipment and $5,128 for acquisitions. Capital expenditures for the nine months ended September, 2012 were $25,269 primarily for the acquisition of laundry equipment for new and renewed lease locations.
Financing Activities
For the nine months ended September 30, 2013 and 2012, net cash flows used in financing activities were $640 and $4,612, respectively. Cash flows used in financing activities consist of the payments of dividends, debt acquisition costs, and, in 2012, the repurchase of common stock, offset by changes in long term debt.
Contractual Obligations
A summary of our contractual obligations and commitments related to our outstanding long-term debt and future minimum lease payments related to our vehicle fleet, warehouse rent and facilities management rent as of September 30, 2013 is as follows:
|
|
|
|
Interest on |
|
|
|
|
|
|
|
|
| ||||||
Fiscal |
|
Long-term |
|
variable rate |
|
Facilites rent |
|
Capital lease |
|
Operating lease |
|
|
| ||||||
Year |
|
debt |
|
debt (1) |
|
commitments |
|
commitments |
|
commitments |
|
Total |
| ||||||
2013(three months) |
|
$ |
|
|
$ |
966 |
|
$ |
5,029 |
|
$ |
255 |
|
$ |
862 |
|
$ |
7,112 |
|
2014 |
|
|
|
3,865 |
|
15,356 |
|
1,021 |
|
3,404 |
|
$ |
23,646 |
| |||||
2015 |
|
|
|
3,865 |
|
12,007 |
|
969 |
|
3,132 |
|
$ |
19,973 |
| |||||
2016 |
|
|
|
3,865 |
|
10,428 |
|
956 |
|
2,445 |
|
$ |
17,694 |
| |||||
2017 |
|
|
|
3,865 |
|
8,545 |
|
847 |
|
2,021 |
|
$ |
15,278 |
| |||||
Thereafter |
|
193,680 |
|
1,612 |
|
27,781 |
|
|
|
4,014 |
|
$ |
227,087 |
| |||||
Total |
|
$ |
193,680 |
|
$ |
18,038 |
|
$ |
79,146 |
|
$ |
4,048 |
|
$ |
15,878 |
|
$ |
310,790 |
|
(1) Represents interest on the outstanding balance on our 2012 Credit Agreement. Our average interest rate was 2.00% at September 30, 2013.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
We are exposed to a variety of risks, including changes in interest rates on some of our borrowings and the change in fuel prices. In the normal course of our business, we manage our exposure to these risks as described below. We do not engage in trading market-risk sensitive instruments for speculative purposes.
Interest rates
The table below provides information about our debt obligations that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The fair market value of long-term debt approximates book value at September 30, 2013.
(in thousands) |
|
2013 |
|
2014 |
|
2015 |
|
2016 |
|
2017 |
|
Thereafter |
|
Total |
| |||||||
Variable rate |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
193,680 |
|
$ |
193,680 |
|
Average interest rate |
|
|
|
|
|
|
|
|
|
|
|
2.00 |
% |
2.00 |
% | |||||||
We had entered into standard International Swaps and Derivatives Association interest rate swap agreements to manage the interest rate associated with our debt. The interest rate Swap Agreements matured on April 1, 2013. Under these agreements, we received a variable rate of LIBOR plus a markup and paid a fixed rate. We recognized a non-cash unrealized gain of $405 for the three months ended September 30, 2012, and a non-cash unrealized
gain of $406 and $1,235 for the nine months ended September 30, 2013 and 2012, respectively, on the interest rate swap agreements.
On September 23, 2011, we entered into a fuel commodity derivative to manage the fuel cost on our fleet of vehicles. The derivative was effective January 1, 2012 and expired December 31, 2012. On September 19, 2012 we entered into an additional fuel commodity derivative. The derivative is effective January 1, 2013 and expires December 31, 2013. The derivative has a monthly notional amount of 80 thousand gallons from January 1, 2013 through December 31, 2013 for a total notional amount of 960 thousand gallons. We have a put price of $3.26 per gallon and a strike price of $3.90 per gallon. We recognized a non-cash unrealized gain of $29 and $67 for the three months ended September 30, 2013 and 2012, respectively, and a non- cash unrealized gain of $20 and $43 for the nine months ended September 30, 2013 and 2012, respectively, on these fuel commodity derivatives as a result of the change in the fair value.
The fair value of the fuel commodity derivative is based on market assumptions and a quoted price from the counter party and is considered a Level 3 item.
During the first quarter of 2012, as a result of our senior note redemption, we no longer qualified for hedge accounting treatment on our only effective interest rate swap agreement. Accordingly, the amount included in Accumulated Other Comprehensive Loss at the time hedge accounting was lost was reclassified as an earnings charge through April 1, 2013, the maturity date of the derivative. This charge to interest expense, when combined with an interest rate swap agreement that previously lost hedge accounting treatment, amounted to $210 for the nine months ended September 30, 2013 compared to $280 and $875 for the three and nine months ended September 30, 2012, respectively.
CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, an evaluation was carried out by our management, with the participation of our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based upon that evaluation, our chief executive officer and chief financial officer concluded that these disclosure controls and procedures were effective as of September 30, 2013 in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.
Changes in internal controls. In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
There have been no material changes in our risk factors from those disclosed in Part 1, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, except to the extent previously updated or to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors. The risks described in our annual report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
3.1 |
|
Amended and Restated Certificate of Incorporation (1) |
3.2 |
|
Amendment No. 1 to Amended and Restated Certificate of Incorporation (2) |
3.3 |
|
Certificate of Amendment of Amended and Restated Certificate of Incorporation of Mac-Gray Corporation (3) |
3.4 |
|
Amended and Restated By-laws of Mac-Gray Corporation (4) |
3.5 |
|
Amendment No. 1 to Amended and Restated By-laws of Mac-Gray Corporation (5) |
3.6 |
|
Amendment No. 2 to Amended and Restated By-laws of Mac-Gray Corporation (6) |
3.7 |
|
Executive Severance Agreement, dated as of July 18, 2013, by and between Mac-Gray |
|
|
Corporation and Sheffield J. Halsey, Jr. (7)** |
31.1 |
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (7) |
31.2 |
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (7) |
32.1 |
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (7) |
101 |
|
The following financial statements from the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income and Comprehensive Income, (iii) the Condensed Consolidated Statements of Stockholders Equity, (iv) the Condensed Consolidated Statements of Cash Flows and (v) related notes, tagged as blocks of text. (7) |
** Management compensatory plan or arrangement
(1) Previously filed as an exhibit to Mac-Grays Registration Statement on Form S-1filed on August 14, 1997 (File No. 333-33669).
(2) Previously filed as an exhibit to Mac-Grays Form 10-K filed on March 14, 2011.
(3) Previously filed as an exhibit to Mac-Grays Form 8-K filed on June 5, 2013.
(4) Previously filed as an exhibit to Mac-Grays Form 8-K filed on November 7, 2008.
(5) Previously filed as an exhibit to Mac-Grays Form 8-K/A filed on October 29, 2010.
(6) Previously filed as an exhibit to Mac-Grays Form 8-K filed on June 27, 2013.
(7) Filed herewith.
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 |
November 8, 2013 |
/s/ Michael J. Shea |
|
Michael J. Shea |
|
Executive Vice President, Chief Financial Officer and Treasurer |
Exhibit 3.7
EXECUTIVE SEVERANCE AGREEMENT
AGREEMENT made as of this 18th day of July, 2013 by and between Mac-Gray Corporation, a Delaware corporation with its principal place of business in Waltham, Massachusetts (the Company), and Sheffield J. Halsey, Jr. (the Executive).
1. Purpose. The Company considers it essential to the best interests of its stockholders to promote and preserve the continuous employment of key management personnel. The Board of Directors of the Company (the Board) recognizes, however, that, as is the case with many publicly held corporations, the possibility of a Change in Control (as defined in Section 2 hereof) exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. Therefore, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Companys management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control. Nothing in this Agreement shall be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company.
2. Change in Control. A Change in Control shall be deemed to have occurred in any one of the following events:
(a) any person, as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), (other than the Company, any of its subsidiaries, or any trustee, fiduciary or other person or entity holding securities under any employee benefit plan or trust of the Company or any of its subsidiaries), together with all Affiliates and Associates (as such terms are hereinafter defined) of such person, shall become the beneficial owner (as such term is defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing 25% (or in the case of a Grandfathered Person, the Grandfathered Percentage applicable to such Grandfathered Person (as such terms are hereinafter defined)) or more of the then outstanding shares of common stock of the Company (the Stock) (in either such case other than as a result of an acquisition of securities directly from the Company); or
(b) persons who, as of the date hereof, constitute the Companys Board of Directors (the Incumbent Directors) cease for any reason, including, without limitation, as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of the Board, provided that any person becoming a director of the Company subsequent to the date hereof whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors shall, for purposes of this Agreement, be considered as an Incumbent Director; provided, however, that there shall be excluded for consideration as an Incumbent Director any individual whose initial assumption of office occurred as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents, by or on behalf of a person other than the Board of Directors; or
(c) upon (A) any consolidation or merger of the Company where the shareholders of the Company, immediately prior to the consolidation or merger, do not, immediately after the consolidation or merger, beneficially own (as such term is defined in Rule 13d-3 of the Exchange Act), directly or indirectly, shares representing in the aggregate more than 50% of the voting shares of the corporation issuing cash or securities in the consolidation or merger (or of its ultimate parent corporation, if any), (B) any sale, lease, exchange or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of the Company or (C) the approval by the stockholders of the Company of any plan or proposal for the liquidation or dissolution of the Company.
(d) Notwithstanding the foregoing, a Change in Control shall not be deemed to have occurred for purposes of the foregoing clause (a) solely as the result of an acquisition of securities by the Company which, by reducing the number of shares of Stock outstanding, increases the proportionate number of shares of Stock beneficially owned by any person to 25% (or in the case of a Grandfathered Person, the Grandfathered Percentage applicable to such Grandfathered Person) or more of the shares of Stock then outstanding; provided, however, that if any such person shall at any time following such acquisition of securities by the Company become the beneficial owner of any additional shares of Stock (other than pursuant to a stock split, stock dividend, or similar transaction) and such person immediately thereafter is the beneficial owner of 25% (or in the case of a Grandfathered Person, the Grandfathered Percentage applicable to such Grandfathered Person) or more of the shares of Stock then outstanding, then a Change in Control shall be deemed to have occurred for purposes of the foregoing clause (a).
(e) For purposes of this Agreement, the following terms shall have the definitions set forth below:
(1) Family Stockholders shall mean any of The Evelyn C. MacDonald Family Trust (the ECM Trust), including The Evelyn C. MacDonald Family Trust for the benefit of Stewart G. MacDonald, Jr. (the ECM/SGM Trust), The Evelyn C. MacDonald Family Trust for the benefit of Sandra E. MacDonald (the ECM/SEM Trust) and The Evelyn C. MacDonald Family Trust for the benefit of Daniel W. MacDonald (the ECM/DWM Trust); Stewart G. MacDonald, Jr.; Sandra E. MacDonald; Daniel W. MacDonald; The Stewart G. MacDonald, Jr. 1984 Trust; The Stewart G. MacDonald, Jr. 2011 Trust; The Daniel W. MacDonald Revocable Living Trust (the DWM Revocable Trust); The New Century Trust; The Whitney E. MacDonald GST Trust-1997 (the WEM/GST Trust); The Jonathan S. MacDonald GST Trust-1997 (the JSM/GST Trust); The Robert C. MacDonald GST Trust-1997 (the RCM/GST Trust); Cynthia V. Doggett; The Richard G. MacDonald 2004 GST Exempt Irrevocable Trust, dated April 23, 2004; Chatham Viewpoints, LLC; the Sandra E. MacDonald 2005 Grantor Retained Annuity Trust; Peter C. Bennett, in his capacity as a trustee of the ECM Trust; R. Robert Woodburn, Jr., in his capacity as a trustee of the ECM Trust; Richard G. MacDonald, in his capacity as a trustee of the WEM/GST Trust, the JSM/GST Trust and the RCM/GST Trust; Gilbert M. Roddy, Jr., in his capacity as a trustee of the New Century Trust; the Charles E. Clapp, III custodial accounts for the benefit of Sawyer Doggett MacDonald,
Stewart Gray MacDonald, III, Tucker William MacDonald and Dylan Crowdis MacDonald; trustees of any of the foregoing trusts, and any other shareholder of the Company who is or becomes a party to the Stockholders Agreement.
(2) Grandfathered Percentage shall mean the percentage of the outstanding shares of Stock that a Grandfathered Person, together with all Affiliates and Associates of such Grandfathered Person, beneficially owns as of the Grandfathered Time plus an additional 3.0%. Notwithstanding the foregoing, in the event any Grandfathered Person shall sell, transfer, or otherwise dispose of any outstanding shares of Stock after the Grandfathered Time, the Grandfathered Percentage shall, subsequent to such sale, transfer or disposition, mean, with respect to such Grandfathered Person, the lesser of (i) the Grandfathered Percentage as in effect immediately prior to such sale, transfer or disposition or (ii) the percentage of outstanding shares of Stock that such Grandfathered Person beneficially owns immediately following such sale, transfer or disposition plus an additional 3.0%.
(3) Grandfathered Person shall mean any one or more of the following persons: (A) Stewart G. MacDonald, Jr. and his Affiliates and Associates, (B) Sandra E. MacDonald and her Affiliates and Associates, (C) Daniel W. MacDonald and his Affiliates and Associates, and (D) any other person who or which, together with all Affiliates and Associates of such person, is, as of the Grandfathered Time, the beneficial owner of 25% or more of the shares of Stock then outstanding. Notwithstanding anything to the contrary provided in this Agreement, any Grandfathered Person who after the Grandfathered Time becomes, for any reason, the beneficial owner of less than 25% of the shares of Stock then outstanding shall cease to be a Grandfathered Person.
(4) Grandfathered Time shall mean 9:00 a.m., Boston, Massachusetts time, on the date first set forth above.
(5) Stockholders Agreement shall mean the Stockholders Agreement, dated as of June 26, 1997, by and among the Company (f/k/a Mac-Gray II, Inc.) and the ECM/SGM Trust; the ECM/SEM Trust; the ECM/DWM Trust; Stewart G. MacDonald, Jr.; Sandra E. MacDonald; The Stewart G. MacDonald, Jr. 1984 Trust; the DWM Revocable Trust; the New Century Trust; the WEM/GST Trust; the JSM/GST Trust; the RCM/GST Trust; the WEM Gift Trust; the JSM Gift Trust; the RCM Gift Trust; Cynthia V. Doggett; the Richard G. MacDonald 2004 Irrevocable Trust; the Sandra E. MacDonald 2005 Grantor Retained Annuity Trust and certain other shareholders who are or may become parties thereto, as amended from time to time.
(6) Affiliate and Associate shall have the respective meanings ascribed to such terms in Rule 12b-2 of the Exchange Act, as in effect on the date of this Agreement; provided, however, that no person who is a director or officer of the Company shall be deemed an Affiliate or an Associate of any other director or officer of the Company solely as a result of his position as director or officer of the Company.
(f) For purposes of this Agreement, no Family Stockholder or any of its Affiliates or Associates shall be deemed to beneficially own any shares of Stock beneficially owned by any of
the other Family Stockholders as a result of such Family Stockholders execution of the Stockholders Agreement or any of such Family Stockholders rights thereunder, unless and until such time as such Family Stockholder actually purchases such shares of Stock through the exercise of its right of first offer, or otherwise, pursuant to the provisions of the Stockholders Agreement.
3. Terminating Event. A Terminating Event shall mean any of the events provided in this Section 3 occurring subsequent to a Change in Control as defined in Section 2:
(a) termination by the Company of the employment of the Executive with the Company for any reason other than (A) a willful act of dishonesty by the Executive with respect to any matter involving the Company or any subsidiary or affiliate, or (B) conviction of the Executive of a crime involving moral turpitude, or (C) the gross or willful failure by the Executive to substantially perform the Executives duties with the Company (other than any such failure after the Executive gives notice of termination for Good Reason), which failure is not cured within thirty (30) days after a written demand for substantial performance is received by the Executive from the Board which specifically identifies the manner in which the Board believes the Executive has not substantially performed the Executives duties, or (D) the failure by the Executive to perform his full-time duties with the Company by reason of his death or disability or (E) the willful failure of Executive to cooperate with a bona fide internal investigation or an investigation by regulatory or law enforcement authorities, after being instructed by the Company to cooperate, or the willful destruction or failure to preserve documents or other materials known to be relevant to such investigation or the willful inducement of others to fail to cooperate or to produce documents or other materials; provided, however, that a Terminating Event shall not be deemed to have occurred pursuant to this Section 3(a) solely as a result of the Executive being an employee of any direct or indirect successor to the business or assets of the Company, rather than continuing as an employee of the Company following a Change in Control. For purposes of clauses (A), (C) and (E) of this Section 3(a), no act, or failure to act, on the Executives part shall be deemed willful unless done, or omitted to be done, by the Executive without reasonable belief that the Executives act, or failure to act, was in the best interests of the Company and its subsidiaries and affiliates. For purposes of clause (D) of this Section 3(a), Section 6 and Section 8(b) hereof, disability shall mean the Executives incapacity due to physical or mental illness which has caused the Executive to be absent from the full-time performance of his duties with the Company for a period of six (6) consecutive months if the Company shall have given the Executive a Notice of Termination and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of his duties.
(b) termination by the Executive of the Executives employment with the Company for Good Reason. Good Reason shall mean the occurrence of any of the following events:
(i) an adverse change, not consented to by the Executive, in the nature or scope of the Executives responsibilities, authorities, powers, functions or duties from the responsibilities, authorities, powers, functions or duties exercised by the Executive immediately prior to the Change in Control; or
(ii) a reduction in the Executives annual base salary as in effect on the date hereof or as the same may be increased from time to time hereafter; or
(iii) the relocation of the Companys offices at which the Executive is principally employed immediately prior to the date of a Change in Control (the Current Offices) to any other location more than fifty (50) miles from the Current Offices, or the requirement by the Company for the Executive to be based anywhere other than the Current Offices, except for required travel on the Companys business to an extent substantially consistent with the Executives business travel obligations immediately prior to the Change in Control; or
(iv) the failure by the Company to pay to the Executive any portion of his compensation or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company within fifteen (15) days of the date such compensation is due without prior written consent of the Executive; or
(v) the failure by the Company to obtain an effective agreement from any successor to assume and agree to perform this Agreement, as required by Section 18.
4. Severance Payment. In the event a Terminating Event occurs within twenty-four (24) months after a Change in Control,
(a) the Company shall pay to the Executive an amount equal to two (2) times the sum of (i) the Executives average annual base salary over the three (3) fiscal years immediately prior to the Terminating Event (or the Executives annual base salary in effect immediately prior to the Change in Control, if higher) and (ii) the Executives average annual bonus over the three (3) fiscal years immediately prior to the Change in Control (or the Executives annual bonus for the last fiscal year immediately prior to the Change in Control, if higher), payable in one lump-sum payment no later than five (5) days following the Date of Termination (subject to Section 5(c)).
(b) the Company shall, regardless of whether the Company is unable to utilize Company-related benefit plans, continue to provide to the Executive certain benefits, including, without limitation, health, dental and life insurance on the same terms and conditions as though the Executive had remained an active employee, for twenty-four (24) months;
(c) the Company shall provide COBRA benefits to the Executive following the end of the period referred to in Section 4(b) above, such benefits to be determined as though the Executives employment had terminated at the end of such period; and
(d) the Company shall pay to the Executive all reasonable legal and arbitration fees and expenses incurred by the Executive in obtaining or enforcing any right or benefit provided by this Agreement, except in cases involving frivolous or bad faith litigation.
5. Additional Limitation.
(a) Anything in this Agreement to the contrary notwithstanding, in the event that any compensation, payment or distribution by the Company to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (the Severance Payments), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the Code), then the benefits payable under this Agreement shall be reduced (but not below zero) to the extent necessary so that the maximum Severance Payments shall not exceed the Threshold Amount. To the extent that there is more than one method of reducing the payments to bring them within the Threshold Amount, the payments and benefits shall be reduced in the following order: (1) cash payments not subject to Section 409A of the Code; (2) cash payments subject to Section 409A of the Code; (3) equity-based payments and acceleration; and (4) non-cash forms of benefits. To the extent any payment is to be made over time (e.g., in installments, etc.), then the payments shall be reduced in reverse chronological order.
For the purposes of this Section 5, Threshold Amount shall mean three (3) times the Executives base amount within the meaning of Section 280G(b)(3) of the Code and the regulations promulgated thereunder less one dollar ($1.00).
(b) The determination as to whether Section 5(a) shall apply to the Executive shall be made by a nationally recognized accounting firm selected by the Executive (the Accounting Firm), which shall provide detailed supporting calculations both to the Company and the Executive within fifteen (15) business days of the Date of Termination, if applicable, or at such earlier time as is reasonably requested by the Company or the Executive. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. The Company shall bear the costs of the Accounting Firm in connection with such firms services provided hereunder.
(c) Notwithstanding anything herein to the contrary, if at the time of the Executives separation from service with the Company, the Executive is a specified employee within the meaning of Section 409A of the Code and the regulations promulgated thereunder, and the Company notifies the Executive that, based on the advice of counsel, the deferral of the commencement of any severance benefits payable under this Agreement is necessary in order to comply with Section 409A of the Code, then the Company shall defer the commencement of the severance benefits (without any reduction) by a period of at least six (6) months after the Executives separation from service and any payments so deferred shall earn interest calculated at the short-term applicable federal rate as of the separation from service. Any severance benefits that would have been paid during such six-month period but for the provisions of the preceding sentence shall be paid in a lump sum to the Executive six (6) months and one (1) day after the Executives separation from service. The provisions of this Section 5(c) shall apply only to the extent required to avoid the Executives incurrence of any accelerated or additional tax under Section 409A of the Code.
(d) All in-kind benefits provided and expenses eligible for reimbursement under this Agreement shall be provided by the Company or incurred by the Executive during the time periods set forth in this Agreement. All reimbursements shall be paid as soon as administratively practicable, but in no event shall any reimbursement be paid after the last day of the taxable year
following the taxable year in which the expense was incurred. The amount of in-kind benefits provided or reimbursable expenses incurred in one taxable year shall not affect the in-kind benefits to be provided or the expenses eligible for reimbursement in any other taxable year. Such right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit.
6. Term. This Agreement shall take effect on the date first set forth above and shall terminate upon the earlier of (a) the termination by the Company of the employment of the Executive because of (A) a willful act of dishonesty by the Executive with respect to any matter involving the Company or any subsidiary or affiliate, or (B) conviction of the Executive of a crime involving moral turpitude, or (C) the gross or willful failure by the Executive to substantially perform the Executives duties with the Company, or (D) the failure by the Executive to perform his full-time duties with the Company by reason of his death or disability (as defined in Section 3(a)), or (E) the willful failure of Executive to cooperate with a bona fide internal investigation or an investigation by regulatory or law enforcement authorities, after being instructed by the Company to cooperate, or the willful destruction or failure to preserve documents or other materials known to be relevant to such investigation or the willful inducement of others to fail to cooperate or to produce documents or other materials, (b) the resignation or termination of the Executive for any reason prior to a Change in Control, (c) the termination by the Executive of the Executives employment with the Company after a Change in Control for any reason other than the occurrence of any of the events enumerated in Section 3(b)(i)-(v) of this Agreement, or (d) the date which is twenty-four (24) months after a Change in Control if the Executive is still employed by the Company.
7. Withholding. All payments made by the Company under this Agreement shall be net of any tax or other amounts required to be withheld by the Company under applicable law.
8. Notice and Date of Termination; Disputes; Etc.
(a) Notice of Termination. After a Change in Control and during the term of this Agreement, any purported termination of the Executives employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with this Section 8. For purposes of this Agreement, a Notice of Termination shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and the Date of Termination. Further, a Notice of Termination pursuant to one or more of clauses (A) through (C) or (E) of Section 3(a) hereof is required to include a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds (2/3) of the entire membership of the Board at a meeting of the Board (after reasonable notice to the Executive and an opportunity for the Executive, accompanied by the Executives counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the termination met the criteria set forth in one or more of clauses (A) through (C) or (E) of Section 3(a) hereof.
(b) Date of Termination. Date of Termination, with respect to any purported termination of the Executives employment after a Change in Control and during the term of this Agreement, shall mean (i) if the Executives employment is terminated for disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to
the full-time performance of the Executives duties during such 30-day period) and (ii) if the Executives employment is terminated for any other reason, the date specified in the Notice of Termination. In the case of a termination by the Company other than a termination pursuant to one or more of clauses (A) through (C) or (E) of Section 3(a) (which may be effective immediately), the Date of Termination shall not be less than thirty (30) days after the Notice of Termination is given. In the case of a termination by the Executive, the Date of Termination shall not be less than fifteen (15) days from the date such Notice of Termination is given. Notwithstanding Section 3(a) of this Agreement, in the event that the Executive gives a Notice of Termination to the Company, the Company may unilaterally accelerate the Date of Termination and such acceleration shall not result in a Terminating Event for purposes of Section 3(a) of this Agreement.
(c) No Mitigation. The Company agrees that, if the Executives employment by the Company is terminated during the term of this Agreement, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Sections 4(a) and (b) hereof. Further, the amount of any payment provided for in this Agreement shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company or otherwise.
(d) Settlement and Arbitration of Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled exclusively by arbitration in accordance with the laws of the Commonwealth of Massachusetts by three arbitrators, one of whom shall be appointed by the Company, one by the Executive and the third by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the American Arbitration Association in the City of Boston. Such arbitration shall be conducted in the City of Boston in accordance with the rules of the American Arbitration Association for commercial arbitrations, except with respect to the selection of arbitrators which shall be as provided in this Section 8(d). Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof.
9. Successor to Executive. This Agreement shall inure to the benefit of and be enforceable by the Executives personal representatives, executors, administrators, heirs, distributees, devisees and legatees. In the event of the Executives death after a Terminating Event but prior to the completion by the Company of all payments due him under Section 4(a) and (b) of this Agreement, the Company shall continue such payments to the Executives beneficiary designated in writing to the Company prior to his death (or to his estate, if the Executive fails to make such designation).
10. Enforceability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law.
11. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach.
12. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and delivered in person or sent by registered or certified mail, postage prepaid, to the Executive at the last address the Executive has filed in writing with the Company, or to the Company at its main office, attention of the Board of Directors.
13. Effect on Other Plans. An election by the Executive to resign after a Change in Control under the provisions of this Agreement shall not be deemed a voluntary termination of employment by the Executive for the purpose of interpreting the provisions of any of the Companys benefit plans, programs or policies. Nothing in this Agreement shall be construed to limit the rights of the Executive under the Companys benefit plans, programs or policies except as otherwise provided in Section 5 hereof, and except that the Executive shall have no rights to any severance benefits under any severance pay plan.
14. No Offset. The Companys obligation to make the payments provided for in this Agreement and otherwise perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company or any of its Affiliates may have against the Executive or others whether by reason of the Executives breach of this Agreement, subsequent employment of the Executive, or otherwise.
15. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes in all respects all prior agreements between the parties concerning such subject matter.
16. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by a duly authorized representative of the Company.
17. Governing Law. This is a Massachusetts contract and shall be construed under and be governed in all respects by the laws of the Commonwealth of Massachusetts.
18. Obligations of Successors. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place.
19. Confidential Information. The Executive shall never use, publish or disclose in a manner adverse to the Companys interests, any proprietary or confidential information relating to (a) the business, operations or properties of the Company or any subsidiary or other affiliate of
the Company, or (b) any materials, processes, business practices, technology, know-how, research, programs, customer lists, customer requirements or other information used in the manufacture, sale or marketing of any of the respective products or services of the Company or any subsidiary or other affiliate of the Company; provided, however, that no breach or alleged breach of this Section 19 shall entitle the Company to fail to comply fully and in a timely manner with any other provision hereof. Nothing in this Agreement shall preclude the Company from seeking money damages, or equitable relief by injunction or otherwise without the necessity of proving actual damage to the Company, for any breach by the Executive hereunder.
[remainder of page intentionally left blank]
IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company by its duly authorized officer, and by the Executive, as of the date first above written.
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MAC-GRAY CORPORATION | |
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By: |
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Name: |
Stewart MacDonald |
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Title: |
Chief Executive Officer |
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EXECUTIVE | |
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Name: |
Sheffield J. Halsey, Jr. |
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Title: |
Executive Vice President, Marketing |
Exhibit 31.1
MAC-GRAY CORPORATION
CERTIFICATION PURSUANT TO SECTION 302 OF
SARBANES-OXLEY ACT OF 2002
CERTIFICATIONS
I, Stewart G. MacDonald, Jr., Chief Executive Officer, certify that:
1. I have reviewed this report on Form 10-Q of Mac-Gray Corporation (the registrant);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 8, 2013 |
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/s/ Stewart G. MacDonald, Jr. |
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Stewart G. MacDonald, Jr. |
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Chief Executive Officer |
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(Principal Executive Officer) |
Exhibit 31.2
MAC-GRAY CORPORATION
CERTIFICATION PURSUANT TO SECTION 302 OF
SARBANES-OXLEY ACT OF 2002
CERTIFICATIONS
I, Michael J. Shea, Chief Financial Officer and Treasurer, certify that:
1. I have reviewed this report on Form 10-Q of Mac-Gray Corporation (the registrant);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 8, 2013 |
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/s/ Michael J. Shea |
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Michael J. Shea |
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Chief Financial Officer and Treasurer |
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(Principal Financial Officer) |
Exhibit 32.1
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 Quarterly Report on Form 10-Q for the fiscal period ended September 30, 2013 (the Report), of Mac-Gray Corporation (the Company) each of the undersigned, as the Chief Executive Officer and Chief Financial Officer of the Company, hereby certifies pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
· the Report fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (the Exchange Act); and
· the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
This certification is provided solely pursuant to 18 U.S.C. Section 1350 and Item 601(b)(32) of Regulation S-K (Item 601(b)(32)) promulgated under the Securities Act of 1933, as amended (the Securities Act), and the Exchange Act. In accordance with clause (ii) of Item 601(b)(32), this certification (A) shall not be deemed filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and (B) shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.
Dated: |
November 8, 2013 |
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/s/ Stewart G. MacDonald, Jr. |
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Name: Stewart G. MacDonald, Jr. |
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Title: Chief Executive Officer |
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Dated: |
November 8, 2013 |
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/s/ Michael J. Shea |
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Name: Michael J. Shea |
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Title: Chief Financial Officer |
New Accounting Pronouncements
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9 Months Ended |
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Sep. 30, 2013
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New Accounting Pronouncements | |
New Accounting Pronouncements | 10. New Accounting Pronouncements
In February 2013, the FASB issued new guidance which requires disclosure of information about significant reclassification adjustments from accumulated other comprehensive income in a single note or on the face of the financial statements. This guidance became effective for the company in 2013. Adoption of this standard, which is related to disclosure only, did not have an impact on the company’s consolidated financial position, results of operations or cash flows.
No other new accounting pronouncement issued or effective during the fiscal year has had or is expected to have a material impact on the Consolidated Financial Statements.
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