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Post: The Daily Activist Stock for 12/19/2011 is Mac-Gray

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12-19-11 02:22 AM - Post#6019     Description Filed with the SEC from Dec 01 to Dec 07: Mac-Gray (TUC) On Dec. 5, Moab Capital Partners sent a letter to Mac-Gray, a laundry-facilities management contractor, expressing its intention to nominate a slate of directors. The letter was sent, Moab said, after it received no response to a Nov. 10 letter. Moab also disclosed that it now owns 1,135,957 shares (7.9%). BUSINESS OVERVIEW Overview Unless the context requires otherwise, all references in this report to "we," "our," "Mac-Gray," the "Company," or "us" means Mac-Gray Corporation and its subsidiaries and predecessors. Mac-Gray Corporation was founded in 1927 and reincorporated 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 university residence halls, public housing complexes, and hotels and motels. Based on our ongoing survey of colleges and universities, we believe that we are the largest provider of such services to the college and university market in the United States. We derive our revenue principally as a laundry facilities management contractor for the multi-unit housing industry. We manage laundry rooms under long-term leases with property owners, property management companies and colleges and universities. We refer to these leases as "laundry leases", or "management contracts," and this business as "laundry facilities management business." In 2010, 95% of our consolidated revenue from continuing operations was derived from our laundry facilities management business. As of December 31, 2010, our laundry facilities management business had revenue-generating laundry equipment operating in 43 states and the District of Columbia. Our laundry equipment sales business sells and services commercial laundry equipment manufactured by Whirlpool Corporation, Dexter Laundry Company, American Dryer Corporation, and Primus Laundry Company. This business sells commercial laundry equipment primarily to retail laundromats, hotels and similar institutional users that operate their own on-premise laundry facilities. We refer to this business as our "commercial laundry equipment sales business." On February 5, 2010, we sold our MicroFridge® (Intirion Corporation) business to Danby Products. The following discussion excludes the financial results from our discontinued operations unless otherwise noted. The results from all prior periods have been reclassified to conform to this presentation. Laundry Facilities Management Business For the years ended December 31, 2009 and 2010, our laundry facilities management business accounted for approximately 95% of our total revenue from continuing operations, and 94% and 95% of our gross margin from continuing operations, respectively. Through our laundry facilities management business, we act as a laundry facilities management contractor with property owners or managers. We lease space within a property, in some instances improve the leased space with flooring, ceilings and other improvements ("betterments") and then install and service the laundry equipment and collect the payments. The property owner or manager is usually responsible for maintaining, cleaning, and securing the premises and payment of utilities. Under our long-term leases, we typically receive the exclusive right to provide and service laundry equipment within a multi-unit housing property in exchange for a negotiated percentage of the total revenue collected. We refer to this percentage as "facilities management rent." In each of the past five years, we have retained approximately 97% of our equipment base per year. Our gross additions to our equipment base for each of the years ended December 31, 2009 and 2010 through internally generated growth equaled 2%. Our additions, net of lost business, were -2% for the year ended December 31, 2009 and -1% for the year ended December 31, 2010. The machine base not retained is primarily attributable to contracts the Company has chosen not to renew due to unacceptable profit margins (including some acquired contracts that did not meet our performance criteria) and to a lesser degree, to property owners who chose to self-operate. We believe that our ability to maintain the relative size of our equipment base is indicative of our service of, and attention to, property owners and managers. We also provide our customers with proprietary technologies such as LaundryView™, LaundryLinx™, ChangePoint™ and our Client Resource Center, and we continue to invest in research and development of such technologies. We generally have the ability to set and adjust the vend pricing for our equipment based upon local market conditions. We have centralized our administrative and marketing operations at our corporate headquarters in Waltham, Massachusetts. We also operate sales and/or service centers in Alabama, Arizona (two locations), Colorado, Connecticut, Florida (two locations), Georgia, Illinois, Louisiana, Maine, Maryland, Massachusetts, New Jersey, New Mexico, New York (two locations), North Carolina, Oregon, Tennessee (two locations), Texas (three locations), Utah, Virginia, and Washington. We also generate revenue by leasing equipment to laundry customers who choose neither to purchase equipment nor to become a laundry facilities management customer, but instead wish to maintain their own laundry rooms. This leasing business generated revenue of $5 million for each of the years ended December 31, 2009 and 2010, and is included in the laundry facilities management business. Our laundry facilities management business has certain intrinsic characteristics in both its industry and its customer base, including the following: Revenue. We operate as a laundry facilities management contractor under long-term leases and other arrangements with property owners or managers. Our efforts are designed to maintain these customer relationships over the long-term. Our typical leases have an initial average term of approximately seven years, with the potential to renew if mutually agreed upon by us and the owner or manager. Renewal of a lease usually involves renegotiated terms and new equipment. In each of the past five years, we have retained contracts representing approximately 97% of our equipment base per year. Customers. As of February 1, 2011, we provided laundry equipment and related services to approximately 86,000 laundry rooms located in 43 states throughout the continental United States and the District of Columbia. As of February 1, 2011, no customer contract accounted for more than 1% of our laundry facilities management revenue. We serve customers in multi-unit housing facilities, including apartment buildings, college and university residence halls, condominiums, public-housing complexes, military bases and hotels and motels. 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 12% of the laundry facilities management revenue for 2010. Academic facilities management revenue is derived substantially during the school year in the first, second and fourth calendar quarters. Conversely, during the third calendar quarter when most colleges and universities are not in session, the Company increases its operating and capital expenditures when it has its greatest product installation activities in the college market. Competition. The laundry facilities management industry is highly competitive, capital intensive and requires the delivery of reliable and prompt services to customers. We believe that customers consider a number of factors in selecting a laundry facilities management contractor, such as customer service, reputation, facilities management rent rates (including incentives), advance rents, range of products and services, and technology. We believe that different types of customers assign varied weight to each of these factors and that no one factor alone determines a customer's selection of a laundry facilities management contractor. Within any given geographic area, we may compete with local independent operators, regional and multi-regional operators. The industry is highly fragmented; consequently, we have grown by acquisitions, as well as through new equipment placement. We believe that we are the second largest laundry facilities management contractor in North America. Impact of Occupancy Rates. Our laundry facilities management revenue is affected by apartment and condominium occupancy rates. Occupancy rates in the multi-unit housing industry are affected by several factors. These factors include local economic conditions, local employment levels, mortgage interest rates as they relate to first-time homebuyers, and the supply of apartments in specific markets. We are somewhat protected from revenue decreases caused by declining occupancy rates due to the variation of markets served, the various types of multi-unit housing facilities therein, and the percentage of revenue derived from colleges and universities. We monitor independent market research data regarding trends in occupancy rates in our markets to better understand laundry facilities revenue trends and variations. Suppliers. We currently purchase a large majority of the equipment that we use in our laundry facilities management business from Whirlpool Corporation ("Whirlpool".) In addition, we derive a portion of our revenue from our position as a distributor of Whirlpool manufactured appliances. We have maintained a relationship with Whirlpool and its predecessor, Maytag Corporation, since 1927, and either party upon written notice may terminate these agreements. Our relationship with Whirlpool is governed by purchase and distribution agreements and a termination of, or substantial revision of the terms of, the contractual arrangements or business relationships with Whirlpool could have a material adverse effect on the Company's business, results of operations, financial condition and prospects. Commercial Laundry Equipment Sales Business Through our commercial laundry equipment sales and services business, we are a significant distributor for several commercial laundry equipment manufacturers, primarily Whirlpool. We do not manufacture any of the commercial laundry equipment that we sell. As an equipment distributor, we sell commercial laundry equipment to public retail laundromats, as well as to the multi-unit housing industry. In addition, we sell commercial laundry equipment directly to institutional purchasers, such as hotels for use in their own on-premise laundry facilities. We are certified by the manufacturers to service the commercial laundry equipment that we sell. Installation and repair services are provided on an occurrence basis, not on a contractual basis. Related revenue is recognized at the time the installation service, or other service, is provided to the customer. For each of the years ended December 31, 2009 and 2010, our commercial laundry equipment sales business accounted for approximately 5% of our total revenue. Employee Base As of February 9, 2011, the Company employed 876 full-time employees. No employee is covered by a collective bargaining agreement and the Company believes that its relationship with its employees is good. Operating Characteristics We maintain a corporate staff as well as centralized finance, human resources, legal services, information technology, marketing, and customer service departments. Regionally, we maintain service centers and warehouses staffed by local management, service technicians, collectors, and warehouse personnel. Backlog Due to the nature of our laundry facilities management business, backlogs do not exist. There is no significant backlog of orders in our commercial laundry equipment sales business. Contact Information We file our annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K with the Securities and Exchange Commission, or "SEC." Our reports filed with the SEC are available at the SEC's website at www.sec.gov and are available free of charge at the Investor Relations section of the Company's website at www.macgray.com as soon as reasonably practicable after filing with the SEC. The information contained on our website is not included as a part of, or incorporated by reference into, this annual report on Form 10-K. Our corporate offices are located at 404 Wyman Street, Suite 400, Waltham, Massachusetts, 02451-1212. Our telephone number is (781) 487-7600, our fax number is (781) 487-7606, and our email address for investor relations is ir@macgray.com. CEO BACKGROUND Edward F. McCauley has been a director of the Company since March 2004. Mr. McCauley is retired. Over a thirty-six year career at Deloitte & Touche, LLP, one of the world's largest public accounting firms, Mr. McCauley served as Lead Audit Partner or Advisory Partner for a number of Fortune 500 companies, non-profit and regulated enterprises. He retired from Deloitte & Touche in 2001. Mr. McCauley is a director and Audit Committee Chair of Salary.com, Inc., a NASDAQ company and provider of software as a service (SAAS) compensation solutions and Harvard Pilgrim Healthcare, Inc., a large private health insurance company. Mr. McCauley has a BS in accounting from St. Joseph's University. As a retired Partner from Deloitte & Touche and a CPA, Mr. McCauley brings many years of experience in accounting and SEC regulations to the Company. He served many complex enterprises while with Deloitte & Touche, and presently serves as Chairman of our Audit Committee. Mr. McCauley's extensive financial accounting knowledge is an invaluable asset to our Board. David W. Bryan has been a director of the Company since March 2004. Mr. Bryan is retired. Mr. Bryan was the CEO of Capsized, Inc., an Internet specialty retailer, from 1999 - 2001 and CEO of Avedis Zildjian Company Inc., a leading manufacturer of musical instruments, from 1995 to 1999. Prior to 1995, Mr. Bryan spent twelve years in executive positions at Sara Lee Corporation, a Fortune 50 consumer products company, where his positions included Vice President and Corporate Officer responsible for strategic planning and business development and President of Aris-Isotoner Company, a $200 million subsidiary. Mr. Bryan served as a director of the Avedis Zildjian Company Inc. and Electrolux Corporation. Mr. Bryan received his B.A. from Colby College and an MBA from Columbia University. Mr. Bryan brings to the Board, and to the Company's Compensation Committee he chairs, considerable experience in executive management in both public and private companies including marketing and sales, strategic planning, new business development. and corporate development. Mary Ann Tocio has been a director of the Company since November 2006. Ms. Tocio currently is President, Chief Operating Officer and a director of Bright Horizons Family Solutions LLC, the world's largest provider of employer-supported childcare, early education and work/life solutions. Ms. Tocio has been employed by Bright Horizons since 1992, has been President and COO since 2000 and has been a director of Bright Horizons since 2001. Prior to joining Bright Horizons, Ms. Tocio had several years of experience managing a multi-site service organization and more than 20 years of experience in the health care industry. Ms. Tocio is a director of Harvard Pilgrim Healthcare, Inc. where she serves as Vice-Chair of the board and also serves on its finance committee and nominating and governance committee. Ms. Tocio previously served on the board of directors of Zany Brainy, Inc., a NASDAQ company and specialty retailer of high quality educational toys and books. Ms. Tocio received her MBA from Simmons College School of Management. Ms. Tocio brings to our Board executive leadership experience and extensive operational management expertise in service industries for both public and private companies. The Bright Horizons experience is particularly valuable to Mac-Gray, with that company's similar decentralized, locally branch based structure. Thomas E. Bullock has served as Chairman of the Board since June 2009 and has been a director of the Company since November 2000. Mr. Bullock is retired and serves as a member of the Board of Directors of Transfair USA, a fair-trade certification company working with farmers in 38 countries. Mr. Bullock was previously a director of Zildjian Cymbals. From 1997 to 2000, Mr. Bullock was President and Chief Executive Officer ("CEO") of Ocean Spray Cranberries, Inc., a global manufacturer and distributor of fruit juice and fruit products. Prior to 1997, Mr. Bullock held various senior roles with Ocean Spray for 21 years. Mr. Bullock graduated from St. Joseph's University with a BS degree in marketing. Mr. Bullock's extensive management experience as President and CEO of a nearly $2 billion major corporation and his many years of marketing and sales experience, both international and domestic, make him a very valuable member of the Board with outstanding skills and experience in executive leadership and management. William F. Meagher, Jr. has been a director of the Company since May 2007. Prior to his retirement in 1998, Mr. Meagher was Managing Partner of the Boston office of Arthur Andersen, LLP, an international accounting firm, where he served as engagement partner on engagements in the transportation, construction, technology and manufacturing industries. Mr. Meagher was employed by Arthur Andersen, LLP for 38 years. Mr. Meagher serves on the Board of Directors of SkillSoft, PLC, a NASDAQ company and a provider of business performance software and is chair of its Audit Committee. Mr. Meagher is a Trustee of Dana Farber Cancer Institute and Living Care Villages of Massachusetts, Inc. Mr. Meagher formerly served on the Board of Dover Saddlery, Inc. Mr. Meagher graduated with a BS degree in accounting from Holy Cross College. Mr. Meagher's many years of experience as an office managing partner and audit partner at Arthur Andersen, LLP, his extensive financial accounting knowledge and experience with accounting principles, financial reporting rules and regulations, as well as his experience overseeing the financial reporting process of large public companies from an independent auditor's perspective and as a board member and audit committee member of other public companies makes him an invaluable member of the Audit Committee. Alastair G. Robertson has been a director of the Company since June 2008. Mr. Robertson currently has his own leadership consulting company known as Motivation for Leadership. In addition, Mr. Robertson is a global advisor to Evolve Management Partners, an international change management and leadership consulting firm. Mr. Robertson joined Evolve Management Partners in 2004 as a partner and remained a partner until late 2007, when he became an advisor. Prior to advising Evolve Management Partners, Mr. Robertson was a senior partner for seven years with Accenture Ltd., a management consulting, technology services and outsourcing company, heading their Global Leadership practice and jointly leading their Organization and Strategic Change practice, across many business sectors. Prior to that time, over a span of 17 years, Mr. Robertson held senior executive positions at Mars Incorporated, PepsiCo, Inc., and Pillsbury, each a global manufacturer and distributor of beverages, food and confectionaries. Mr. Robertson spent many years in the consumer products and food industries, in R&D, marketing and manufacturing roles, before commencing his 15 year consulting career in leadership development, governance practices, strategic change and organizational behavior. He is a specialist in the creation of tailor-made leadership strategies, building on motivational strengths, to change leadership behavior on a sustained basis, creating leadership for high performance. His clients have included CEO's across the globe. Additionally Mr. Robertson is a published author on global leadership trends, and regularly participates in leadership research projects. Mr. Robertson's expertise in leadership and governance practices is valuable to the Company in his role as a Board member and as Chair of the Governance and Nominating Committee. Christopher T. Jenny has been a director of the Company since July 2005. Mr. Jenny is currently President and Senior Partner with The Parthenon Group LLC, a Boston-based private management consulting and investment firm, and he is a member of the firm's executive committee. Prior to joining The Parthenon Group LLC in 1995, Mr. Jenny was a Partner with Bain & Company, Inc., a global business strategy consulting firm. Mr. Jenny graduated summa cum laude and Phi Beta Kappa with a BA in Mathematics from Dartmouth College and holds an MBA with high distinction from Harvard Business School. Mr. Jenny brings to the Board more than twenty years of experience as a consultant in business strategy, working specifically on issues related to business unit strategy, profit improvement and mergers and acquisitions. In addition, he has nearly a decade of experience as a senior operating executive, having managed portfolio companies for two of the nation's leading private equity firms. Bruce C. Ginsberg has been a Director of the Company since May 2009. From 2001 to the present, Mr. Ginsberg has been President, CEO and Director of MooBella Inc., a company that has developed an innovative ice cream dispensing system for foodservice operations. From 1999 to the present, Mr. Ginsberg has been the founder, President and sole stockholder of New England Ice Cream Corporation, a company that distributes nationally branded frozen desserts to retail, food service and machine vending accounts. Mr. Ginsberg earned his BS degree and MBA from Boston College. Mr. Ginsberg brings to the Board a sound understanding of the Company's business in terms of revenue generation, customer relations, procurement, human resources management, field asset management, control systems, branding and innovation. MANAGEMENT DISCUSSION FROM LATEST 10K Overview Mac-Gray was founded in 1927 and re-incorporated in Delaware in 1997. We derive our revenue principally as a laundry facilities management contractor for the multi-unit housing industry. We also derive revenue through the sales of commercial laundry equipment primarily to public retail laundromats, as well as to the multi-unit housing industry. In addition, we sell commercial laundry equipment directly to institutional purchasers such as hotels, for use in their own on-premise laundry facilities. Our core business model is built on a stable demand for laundry services, combined with long-term leases, strong customer relationships, a broad customer base and predictable capital needs. For the years ended December 31, 2009 and 2010, our total revenue was $325,924 and $320,011, respectively. Approximately 95% of our total revenue for these periods was generated by our laundry facilities management business. We generate laundry facilities management revenue primarily through long-term leases with property owners or property management companies granting us 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 December 31, 2010, approximately 87% of our installed machine base was located in laundry facilities subject to long-term leases, with a weighted average remaining term of approximately four 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/or expenses to refurbish laundry facilities. Our capital expenditures consist of a large number of relatively small amounts associated with our entry into or renewal of leases. Accordingly, our capital needs are predictable and largely within our control. For the years ended December 31, 2009 and 2010, we incurred $21,341 and $26,580 of capital expenditures, respectively. In addition, we make incentive payments to property owners and property management companies to secure our lease arrangements. We paid $1,807 and $3,045 in incentive payments in the years ended December 31, 2009 and 2010, respectively. In addition, through our Commercial Laundry Equipment Sales business, we generate revenue by selling commercial laundry equipment. For the years ended December 31, 2009 and 2010, our Commercial Laundry Equipment Sales business accounted for approximately 5% of our total revenue for both 2009 and 2010, and 6% and 5% of our gross margin for 2009 and 2010, respectively. We anticipate that tight credit markets for our customers will continue to challenge our ability to maintain or grow our revenue from laundry equipment sales. Our financial objective is to maintain and enhance profitability by retaining existing customers, adding customers in areas in which we currently operate, selectively expanding our geographic footprint and density through acquisitions, and controlling costs. One of the key challenges we face is maintaining and expanding our customer base in a competitive industry. We experience competition from other industry participants, including national, regional and local laundry facilities management operators and from property owners and property management companies who self-operate their laundry facilities. We devote substantial resources to our marketing and sales efforts and we focus on continued innovation in order to distinguish us from competitors. Apartment vacancy rates pose an additional challenge. We have begun to see some improvement in vacancy rates; however we expect vacancy rates above the historical norm to continue to have a negative impact, but to a lesser extent than in prior years, on our laundry facilities management business in 2011. Approximately 8% to 10% of our laundry room leases are up for renewal each year. Over the past five calendar years, we have been able to retain, on average, approximately 97% of our total installed equipment base each year. Our gross additions to our equipment base for each of the years ended December 31, 2009 and 2010 through internally generated growth equaled 2%. Our additions, net of lost business, were -2% for the year ended December 31, 2009 and -1% for the year ended December 31, 2010. The machine base not retained is primarily attributable to contracts we have has chosen not to renew due to unacceptable profit margins, (including some acquired contracts that did not meet our performance criteria,) and to a lesser degree, to property owners who chose to self-operate. On January 4, 2010, we entered into an interest rate swap agreement to manage the interest rate risk associated with our debt. The swap agreement effectively converts a portion ($100 million) of our fixed rate senior notes to a variable rate. Under this agreement, we receive the fixed rate on our senior notes (7.625%) and pay a variable rate of LIBOR plus the applicable margin charged by the banks. This swap agreement has an associated call feature that allows the counterparty to terminate this agreement at their option. On February 5, 2010, the Company sold its MicroFridge® (Intirion Corporation) business to Danby Products. The transaction was valued at approximately $11,500. Danby Products paid $8,500 in cash, and assumed existing liabilities and financial obligations of MicroFridge totaling approximately $3,000. Our discontinued operations are related solely to the sale of MicroFridge® (Intirion Corporation). Concurrent with this transaction, we paid $8,000 on our Secured Term Loan. On February 5, 2010, our Board of Directors approved the initiation of a quarterly dividend policy for our common stock. We had not previously paid dividends on any of our shares of capital stock. We paid aggregate dividends of $0.20 per share in 2010. On January 20, 2011, the Company's Board of Directors approved an increase to the quarterly dividend policy to $0.055 per share ($0.22 per share on an annualized basis). Results of Continuing Operations (Dollars in thousands, except per share data) On February 5, 2010, we sold our MicroFridge® (Intirion Corporation) business to Danby Products. The following discussion excludes the financial results from our discontinued operations unless otherwise noted. The information presented below for the years ended December 31, 2009 and 2010 is derived from our consolidated financial statements and related notes included in this report. Fiscal year ended December 31, 2010 compared to fiscal year ended December 31, 2009 Total revenue decreased by $5,913 or 2%, to $320,011 for the year ended December 31, 2010 compared to $325,924 for the year ended December 31, 2009. Laundry facilities management revenue. Laundry facilities management revenue decreased by $4,988, or 2%, to $304,040 for the year ended December 31, 2010 compared to $309,028 for the year ended December 31, 2009. The decrease in revenue is attributable to the termination of contracts we have chosen not to renew, the decision of some customers to operate their own laundry rooms and reduced usage of our equipment in apartment building laundry rooms as a result of the continued level of higher apartment vacancy rates in some markets. These decreases are partially offset by our ability to add new contracts and our vend increase program. We have begun to see some decrease in vacancy rates; however we expect vacancy rates above the historical norm to continue to have a negative impact, but to a lesser extent than in prior years, on our laundry facilities management business in 2011. We track the change in revenue month over month and quarter over quarter in our markets to better understand the revenue trend for our multi-family housing customers. This analysis is used to enable us to respond to changing trends in different geographic markets and to enable us to better allocate capital spending. Commercial laundry equipment sales revenue. Revenue in the commercial laundry equipment sales business decreased $925, or 5%, to $15,971 for the year ended December 31, 2010 compared to $16,896 for the year ended December 31, 2009. Sales in the commercial laundry equipment sales business are sensitive to the strength of the local economy, consumer confidence, local permitting, and the availability and cost of financing to small businesses, and therefore, tend to fluctuate from period to period. We anticipate that tight credit markets for our customers will continue to challenge our ability to maintain or grow our revenue from laundry equipment sales in 2011. Cost of revenue Cost of laundry facilities management revenue. Cost of laundry facilities management revenue includes rent paid to customers as well as costs associated with installing and servicing machines, costs of collecting, counting, and depositing facilities management revenue and the costs of delivering and servicing rented facilities management equipment. Cost of laundry facilities management revenue decreased $773, or less than 1%, to $208,141 for the year ended December 31, 2010, as compared to $208,914 for the year ended December 31, 2009. The decrease is due primarily to decreased rent paid to customers as a result of lower revenues. These decreases were offset by higher transportation costs and branch operating expenses. As a percentage of facilities management revenue, cost of facilities management revenue was 68% for each of the years ended December 31, 2010 and 2009. Facilities management rent as a percentage of facilities management revenue was 49% and 48% for the years ended December 31, 2010 and 2009, respectively. Facilities management rent can be affected by new and renewed laundry leases, lease portfolios acquired 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 facilities management rent as a function of facilities management revenue can vary. Incentive payments and laundry room betterments are amortized over the life of the related lease. Depreciation and amortization related to operations. Depreciation and amortization related to operations decreased by $2,253, or 5%, to $46,013 for the year ended December 31, 2010 as compared to $48,266 for the year ended December 31, 2009. The decrease in depreciation and amortization for the year ended December 31, 2010 as compared to the same period in 2009 is primarily attributable to the fact that most of the equipment we acquired as part of the acquisitions we made in 2004 and 2005 was fully depreciated in 2009. The pool of equipment we acquired was assigned an average life of 5 years. Cost of commercial laundry equipment sales. Cost of commercial laundry equipment sales consists primarily of the cost of laundry equipment and parts and supplies sold, as well as salaries, warehousing and distribution expenses. Cost of commercial laundry equipment sales decreased by $547, or 4%, to $13,105 for the year ended December 31, 2010 as compared to $13,652 for the year ended December 31, 2009. As a percentage of sales, cost of commercial laundry equipment sales was 82% for the year ended December 31, 2010 compared to 81% in 2009. The gross margin in the commercial laundry equipment sales business unit decreased to 18% for the year ended December 31, 2010 as compared to 19% for the same period in 2009. The change in gross margin from period to period is primarily a function of the mix of products sold. Operating expenses General and administration, sales and marketing, related depreciation and amortization, and incremental proxy costs. General and administration, sales and marketing, related depreciation and amortization, and incremental proxy costs decreased by $58, or less than 1%, to $34,581 for the year ended December 31, 2010 as compared to $34,639 for the year ended December 31, 2009. As a percentage of total revenue, these expenses were 11% for the years ended December 31, 2010 and 2009. The decrease in expenses for the year ended December 31, 2010 as compared to December 31, 2009 is primarily attributable to a reduction in professional fees. Gain on sale of assets. The gain on sale of assets is primarily attributable to the gain on the sale of our facility in Tampa, Florida in 2009. It had been our objective to sell all operating facilities and property, thus increasing our flexibility relating to facility costs and locations. The sale of the Tampa facility completed the disposal of Company owned properties. Gain on sale of assets also includes the gain from the sale of vehicles and other non-inventory assets in the ordinary course of business. Income from continuing operations. Income from continuing operations decreased by $2,668, or 13%, to $18,433 for the year ended December 31, 2010 as compared to $21,101 for the year ended December 31, 2009. Excluding the gain on sale of real estate in 2009, income from continuing operations, as adjusted, decreased by $2,265 or 11% from $20,698 for the year ended December 31, 2009, to $18,433 for the year ended 2010. We have supplemented the consolidated financial statements presented according to generally accepted accounting principles (GAAP), using a non-GAAP financial measure of adjusted income from continuing operations. Non-GAAP financial measures are not in accordance with, or an alternative for, generally accepted accounting principles in the United States. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP financial measures, and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. Management believes presentation of this measure is useful to investors to enhance an overall understanding of our historical financial performance and future prospects. Adjusted income from continuing operations, which is adjusted to exclude certain gains and losses from the comparable GAAP income from operations, is an indication of our baseline performance before gains, losses or other charges that are considered by management to be outside of our core operating results. The presentation of this additional information is not meant to be considered in isolation or as a substitute for income from operations or other measures prepared in accordance with GAAP. Interest expense, including the change in the fair value of non-hedged derivative instruments Interest expense, including the change in the fair value of non-hedged derivative instruments, decreased by $5,354, or 29%, to $13,428 for the year ended December 31, 2010 as compared to $18,782 for the year ended December 31, 2009. The decrease is due to lower outstanding debt balances attributable to operations generating free cash flow, the $8,000 reduction in debt from the proceeds of the February 5, 2010 sale of Intirion Corporation, the interest rate savings achieved from the fixed to floating interest rate swap agreement we entered into during the first quarter of 2010, and the increase in the unrealized gain on interest rate protection contracts which do not qualify for hedge accounting. Interest expense, excluding the change in fair value of non-hedged derivative instruments was $14,882 and $19,675 for the years ended December 31, 2010 and 2009, respectively. Our average effective interest rates are not significantly affected by fluctuations in the market as a significant amount of our debt have fixed rates through our derivative instruments. Our average effective borrowing rate was 6.1% for the year ended December 31, 2010 as compared to 7.1% for the year ended December 31, 2009. We are party to interest rate swap agreements which we entered into to hedge the interest rates on our debt. Certain of these swap agreements do not qualify as cash flow hedges. In accordance with the guidelines for accounting for derivatives, non-cash gains of $1,454 and $893 have been recorded in the income statement for the years ended December 31, 2010 and 2009, respectively. Provision for income taxes The provision for income taxes increased by $898, or 70%, to $2,176 for the year ended December 31, 2010 compared to an expense of $1,278 for the year ended December 31, 2009. The increase is primarily the result of increased income before the provision for income taxes in 2010 compared to the income before provision for income taxes in 2009. The effective tax rate for 2010 is 43.4%. The effective tax rate is comprised of the federal statutory rate of 34%, the state rate net of federal taxes of 6.9%, permanent book/tax differences of 3.5% and changes to deferred rates and valuation reserves of -1%. The most significant reductions of the effective tax rate in 2010 compared to 2009 are lower state income taxes as a percentage of pretax income and a smaller change to the valuation allowance. Cost of revenue Cost of laundry facilities management revenue. Cost of laundry facilities management revenue includes rent paid to customers as well as costs associated with installing and servicing machines, costs of collecting, counting, and depositing laundry facilities management revenue and the costs of delivering and servicing rented facilities management equipment. Cost of laundry facilities management revenue increased $1,681, or 1%, to $208,914 for the year ended December 31, 2009, as compared to $207,233 for the year ended December 31, 2008. The increase is due primarily to the $803 increased rent associated with the increase in laundry facility management revenue resulting from the facilities management business we acquired from Automatic Laundry Company, Ltd. ("ALC") on April 1, 2008 as well as increased employee health insurance costs of $1,590. These increases were offset by cost control measures implemented by the Company. As a percentage of laundry facilities management revenue, cost of laundry facilities management revenue was 68% for each of the years ended December 31, 2009 and 2008. Facilities management rent as a percentage of laundry facilities management revenue was 48% and 49% for the years ended December 31, 2009 and 2008, respectively. Laundry facilities management rent can be affected by new and renewed laundry leases, lease portfolios acquired 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. Incentive payments and betterments are amortized over the life of the related lease. Depreciation and amortization related to operations. Depreciation and amortization related to operations increased by $1,105, or 2%, to $48,266 for the year ended December 31, 2009 as compared to $47,161 for the year ended December 31, 2008. The increase in depreciation and amortization for the year ended December 31, 2009 as compared to the same period in 2008 is primarily attributable to having a full year of depreciation and amortization in 2009 associated with the contract rights and equipment we acquired as part of our acquisition of a laundry facilities management business on April 1, 2008 compared to only nine months of such depreciation and amortization in the comparable period in 2008. Laundry facilities management equipment and contract rights are depreciated and amortized using the straight-line method. In addition, due to management's decision not to recondition and redeploy equipment that is in need of significant repairs and is not as energy efficient as newer equipment, we disposed of certain laundry equipment in 2009 and 2008 that had a remaining net book value of $662 and $642, respectively. These costs are included in depreciation expense. Cost of commercial laundry equipment sales. Cost of commercial laundry equipment sales consists primarily of the cost of laundry equipment and parts and supplies sold, as well as salaries, warehousing and distribution expenses. Cost of commercial laundry equipment sales decreased by $3,635, or 21%, to $13,652 for the year ended December 31, 2009 as compared to $17,287 for the year ended December 31, 2008. As a percentage of sales, cost of commercial laundry equipment sales was 81% for the year ended December 31, 2009 compared to 82% in 2008. The gross margin in the commercial laundry equipment sales business unit increased to 19% for the year ended December 31, 2009 as compared to 18% for the same period in 2008. The change in gross margin from period to period is primarily a function of the mix of products sold. Operating expenses General and administration, sales and marketing, related depreciation and amortization, and incremental proxy costs. General and administration, sales and marketing, related depreciation and amortization, and incremental proxy costs decreased by $286, or 1%, to $34,639 for the year ended December 31, 2009 as compared to $34,925 for the year ended December 31, 2008. Such decrease for the year ended December 31, 2009 includes incremental costs of our proxy contest of $971. Excluding these costs, the decrease would have been $1,257. As a percentage of total revenue these expenses were 11% for the years ended December 31, 2009 and 2008. The decrease in expenses for the year ended December 31, 2009 as compared to December 31, 2008 is primarily attributable to a reduction in professional fees and outside services. Loss on early extinguishment of debt. Effective April 1, 2008 and in conjunction with our acquisition of ALC, we amended our bank credit facilities. As a result of this amendment, a portion of the unamortized financing costs amounting to $207, which had been incurred as part of the prior credit facility, was expensed in 2008. Gain on sale of assets. The gain on sale of assets is primarily attributable to the gain on the sale of our facility in Tampa, Florida in 2009. It has been our objective to sell all operating facilities and property, thus increasing our flexibility relating to facility costs and locations. The sale of the Tampa facility completes the disposal of Company owned properties. Gain on sale of assets also includes the gain from the sale of vehicles and other non-inventory assets in the ordinary course of business. Income from continuing operations Income from continuing operations increased by $616, or 3%, to $21,101 for the year ended December 31, 2009 as compared to $20,485 for the year ended December 31, 2008. Excluding loss on early extinguishment of debt and the gain on sale of real estate, income from continuing operations, as adjusted, would have been $20,692 for the year ended December 31, 2008, compared to $20,698 for the year ended 2009. We have supplemented the consolidated financial statements presented according to generally accepted accounting principles (GAAP), using a non-GAAP financial measure of adjusted income from continuing operations. Non-GAAP financial measures are not in accordance with, or an alternative for, generally accepted accounting principles in the United States. The Company's non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP financial measures, and should be read only in conjunction with the Company's consolidated financial statements prepared in accordance with GAAP. Management believes presentation of this measure is useful to investors to enhance an overall understanding of our historical financial performance and future prospects. Adjusted income from continuing operations, which is adjusted to exclude certain gains and losses from the comparable GAAP income from operations, is an indication of our baseline performance before gains, losses or other charges that are considered by management to be outside of our core operating results. The presentation of this additional information is not meant to be considered in isolation or as a substitute for income from operations or other measures prepared in accordance with GAAP. MANAGEMENT DISCUSSION FOR LATEST QUARTER 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 business 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 43 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 customer relationships, a broad customer base, and predictable capital needs. For the three and nine months ended September 30, 2011, our total revenue was $78,492 and $239,374, 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, 2011, approximately 87% of our installed equipment base was located in laundry facilities subject to long-term leases, which have a weighted average remaining term of approximately four 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, 2011, we incurred $6,500 and $22,026 of capital expenditures, respectively. In addition, we made incentive payments of approximately $734 and $2,588 in the three and nine months ended September 30, 2011 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, 2011, our commercial laundry equipment sales business generated approximately 5% of our total revenue, and 8% and 5% of our gross margin, respectively. We anticipate that tight credit markets for our customers will continue to challenge our ability to maintain and grow our revenue from laundry equipment sales. Our current priorities include: (i) continuing to reduce funded debt, thereby improving debt leverage ratios and reducing interest expense, (ii) maintaining capital expenditures at the levels needed to sustain and grow the business, (iii) increasing facilities management operating efficiencies in all markets, particularly the ones that have been influenced by acquisition activity in the past five years, (iv) improving the profitability of individual laundry facilities management accounts that come up for contract renewal, and (v) continuing to look for acquisitions that complement our current footprint. One of the key challenges we face is maintaining and expanding our customer base in a competitive industry. Approximately 10% to 15% 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. On October 21, 2011, we redeemed $50,000 of our senior notes using approximately $51 million of availability under the revolver portion of its senior credit agreement. The redemption price for the notes was 102.542%. Under the terms of its credit agreement, Mac-Gray will pay an interest rate of LIBOR plus a spread of between 2% and 2.5% on the funds borrowed to redeem the notes. If there is not a significant change in LIBOR, we expect the cash payback on this strategy to be approximately six to eight months. The Company’s Board of Directors declared a dividend of $0.55 per share payable on October 1, 2011 to stockholders of record at the close of business on September 15, 2011. All dividends were paid and have been reflected in the current financial statements. On February 5, 2010, the Company sold its MicroFridge ® (Intirion Corporation) business to Danby Products. The following discussion excludes the financial results from our discontinued operations unless otherwise noted. Prior period results have been reclassified to conform to this presentation. reflected in the current financial statements. On February 5, 2010, the Company sold its MicroFridge ® (Intirion Corporation) business to Danby Products. The following discussion excludes the financial results from our discontinued operations unless otherwise noted. Prior period results have been reclassified to conform to this presentation. Cost of revenue Cost of laundry facilities management revenue. Cost of laundry facilities management revenue includes rent paid to customers 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 $1,165, or 2%, to $52,004 for the three months ended September 30, 2011 as compared to $50,839 for the three months ended September 30, 2010. Cost of laundry facilities management revenue increased by $2,727, or 2%, to $157,560 for the nine months ended September 30, 2011 as compared to $154,833 for the nine months ended September 30, 2010. As a percentage of laundry facilities management revenue, cost of laundry facilities management revenue was 70% and 69% for the three months ended September 30, 2011 and 2010, respectively, and 69% and 68% for the nine months ended September 30, 2011 and 2010, respectively. Laundry facilities management rent increased 2.2% and 1.3% for the three and nine months ended September 30, 2011 compared to the corresponding periods in 2010, directly attributable to the increase in facilities management revenue. Laundry facilities management rent as a percentage of laundry facilities management revenue was 49.0 % and 48.2% for the three months ended September 30, 2011 and 2010, respectively. Laundry facilities management rent as a percentage of laundry facilities management revenue was 48.8% and 48.6% for the nine months ended September 30, 2011 and 2010, 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 $393, or 2.6%, to $15,591 for the three months ended September 30, 2011 compared to $15,198 for the three months ended September 30, 2010. Other costs of laundry facilities management revenue increased by $1,296, or 2.9%, to $46,045 for the nine months ended September 30, 2011 compared to $44,749 for the nine months ended September 30, 2010. The increase in operating expenses for the three months ended September 30, 2011 compared to the same period in 2010 is attributable to cost increases associated with our fleet of vehicles, primarily fuel. The increase was offset, in part, by a reduction in the use of outside services and a reduction in occupancy costs. The increase in operating expenses for the nine months ended September 30, 2011 compared to the same period in 2010 is also attributable to cost increases associated with our fleet of vehicles and increased personnel costs. Depreciation and amortization related to operations. Depreciation and amortization related to operations decreased by $1,119, or 10%, to $10,568 for the three months ended September 30, 2011 as compared to $11,687 for the three months ended September 30, 2010. Depreciation and amortization related to operations decreased by $1,750, or 5%, to $32,512 for the nine months ended September 30, 2011 as compared to $34,262 for the nine months ended September 30, 2010.The decrease in depreciation and amortization for the three and nine months ended September 30, 2011 as compared to the same period in 2010 is attributable to the Company’s decision, in the past two years, to closely manage capital investment in light of the recent uncertain economy. We have begun to increase our capital spending and expect depreciation expense to begin to increase. The fact that much of the equipment we acquired as part of acquisitions we made in recent years was assigned a shorter average life than that assigned to new capital investment and is now fully depreciated has also contributed to lower depreciation expense. Cost of laundry equipment sales. Cost of commercial laundry equipment sales consists primarily of the cost of laundry equipment, and parts and supplies sold, as well as salaries, warehousing and distribution expenses. Cost of commercial laundry equipment sales decreased by $213, or 6%, to $3,144 for the three months ended September 30, 2011 as compared to $3,357 for the three months ended September 30, 2010. Cost of commercial laundry equipment sales decreased by $746, or 8%, to $8,722 for the nine months ended September 30, 2011 as compared to $9,468 for the nine months ended September 30, 2010. As a percentage of sales, cost of product sold was 75% and 77% for the three months ended September 30, 2011 and 2010, respectively, and 80% for the nine months ended September 30, 2011 and 2010, respectively. The decrease in cost of sales for the three and nine months ended September 30, 2011 compared to the same periods ending September 30, 2011 is a direct result of the decrease in revenue. Operating expenses were essentially unchanged in total. The gross margin in the commercial laundry equipment sales business unit was 25% and 23% for the three months ended September 30, 2011 and 2010, respectively, and 20% for the nine months ended September 30, 2011 and 2010, respectively. The fluctuation in gross margins in the three months ended September 30, 2011 compared to the same period in 2010 is due primarily to product mix. Operating expenses General and administration, sales and marketing, related depreciation and amortization, and incremental proxy costs. General and administration, sales and marketing, related depreciation and amortization, and incremental proxy costs decreased by $153, or 2%, to $8,207 for the three months ended September 30, 2011 as compared to $8,360 for the three months ended September 30, 2010. General and administration, sales and marketing, related depreciation and amortization, and incremental proxy costs increased by $652, or 3%, to $25,866 for the nine months ended September 30, 2011 as compared to $25,214 for the nine months ended September 30, 2010. As a percentage of total revenue, these expenses were 10% and 11% for the three months ended September 30, 2011 and 2010, respectively, and 11% for the nine months ended September 30, 2011 and 2010. The decrease in expenses for the three months and increase for the nine months ended September 30, 2011 as compared to the three and nine months ended September 30, 2010 is the net impact of changes in expenses incurred in several categories including personnel related expenses, professional fees and outside services. Gain on sale of assets The gains of $170 and $208 in the nine months ended September 30, 2011 and 2010, respectively, are from the sale of vehicles and other fixed assets in the normal course of business. Income from continuing operations Income from continuing operations increased by $489, or 12%, to $4,582 for the three months ended September 30, 2011 compared to $4,093 for the three months ended September 30, 2010 and increased by $168, or 1%, to $14,884 for the nine months ended September 30, 2011 compared to $14,716 for the nine months ended September 30, 2010 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 Interest expense, including the change in the fair value of non-hedged derivative instruments, increased by $773, or 29%, to $3,463 for the three months ended September 30, 2011, as compared to $2,690 for the three months ended September 30, 2010. This increase was the net of a $1,044 decrease in the unrealized gain on interest rate contracts that do not qualify for hedge accounting and a $271 decrease in interest on debt. Interest expense, including the change in the fair value of non-hedged derivative instruments, increased by $854, or 10%, to $9,506 for the nine months ended September 30, 2011, as compared to $8,652 for the nine months ended September 30, 2010. This increase was the net of a $2,325 decrease in the unrealized gain on interest rate contracts that do not qualify for hedge accounting and a $1,471 decrease in interest on debt. Interest expense, excluding the change in fair value of non-hedged derivative instruments, was $3,508 and $3,779 for the three months ended September 30, 2011 and 2010, respectively, a decrease of $271 or 7%. Interest expense, excluding the change in fair value of non-hedged derivative instruments, was $9,993 and $11,464 for the nine months ended September 30, 2011 and 2010, respectively, a decrease of $1,471 or 13%. The decreases in interest on debt are primarily attributable the expiration of two derivative instruments at December 31, 2010 which were at interest rates above current rates. The decrease in interest expense was also the result of favorable interest rates and the continued reduction in debt by the Company. One of our interest rate Swap Agreements qualifies as a cash flow hedge while the others do not. The changes in the fair value of the interest rate Swap Agreements that do not qualify for hedge accounting treatment are recognized in the income statement in the period in which the changes occur. The effective portion of the interest rate Swap Agreement that qualifies for hedge accounting is included in Other Comprehensive Loss in the period in which change occurs, while the ineffective portion, if any, is recognized in income in the period in which the change occurs. During the first quarter of 2010 the Company no longer qualified for hedge accounting treatment for one of its interest rate swap agreements. Accordingly, the amount included in Accumulated Other Comprehensive Loss at the time hedge accounting was lost must be reclassified as an earnings charge through the maturity date of the derivative. This charge amounted to $100 and $199 for the three months ended September 30, 2011 and 2010, respectively, and $371 and $1,083 for the nine months ended September 30, 2011 and 2010, respectively. The remaining balance of $230 associated with this interest rate swap, and included in Accumulated Other Comprehensive Loss, will be charged against income through the maturity date of the interest rate swap agreement on April 1, 2013. Provision for income taxes The provision for income taxes decreased by $62 to $515 for the three months ended September 30, 2011 compared to the provision for income taxes of $577 for the three months ended September 30, 2010. The provision for income taxes decreased by $333 to $2,204 for the nine months ended September 30, 2011 compared to the provision for income taxes of $2,537 for the nine months ended September 30, 2010. The decrease is the result of the decrease in pre-tax income to $1,119 and $5,378 for the three and nine months ended September 30, 2011, respectively, compared to the pre-tax income of $1,403 and $6,064 for the three and nine months ended September 30, 2010, respectively. The effective tax rate decreased to 41.0% from 41.8% for the nine months ended September 30, 2011, compared to the same period in 2010. The changes in the effective rate for the three and nine months ended September 30, 2011 are the result of the relative impact of permanent differences due to changes in estimated pretax annual profits, principally a result of charges that will occur in the fourth quarter related to the redemption of the senior notes. Income from continuing operations, net As a result of the foregoing, income from continuing operations, net decreased by $222 to $604 for the three months ended September 30, 2011 compared to $826 for the same period ended September 30, 2010. Income from continuing operations, net decreased by $353 to $3,174 for the nine months ended September 30, 2011 compared to $3,527 for the same period ended September 30, 2010. Income from discontinued operations, net Income from discontinued operations, net, excluding loss on disposal was $44 for the nine months ended September 30, 2010. The Company sold its MicroFridge®( Intirion Corporation) business on February 5, 2010. 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 13% 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 requirements for the year ending December 31, 2011, including contract incentive payments, are currently expected to be between $33,000 and $36,000. In the nine months ended September 30, 2011, spending on capital expenditures was $ 22,026 and contract incentives was $2,588. The capital expenditures for 2011 are primarily composed of laundry equipment installed in connection with new customer 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 including the impact that the redemption of the senior notes will have on our revolving credit facilities. However, we may require external sources of financing for any significant future acquisitions. Further, our senior secured credit facilities mature in April 2013 and our senior notes mature in August 2015. We anticipate that we will need to refinance some portion of our indebtedness or otherwise amend the terms when they reach maturity. CONF CALL Michael Shea Thank you, Kirsten. Good morning, everyone. Thanks for joining us on today's call. Before we begin, please note that the various remarks we may make on this conference call about the company's future expectations, plans and prospects constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements. As a result of various factors, including those discussed in our annual and quarterly reports on file with the Securities and Exchange Commission. I would also like to remind you that during our call today, we will be discussing non-GAAP financial measures, income from continuing operations as adjusted, earnings per share from continuing operations as adjusted, EBITDA from continuing operations and EBITDA from continuing operations as adjusted. Please see the tables that follow our consolidated statements of operations in today's press release for a reconciliation of net income to adjusted net income, EBITDA from continuing operations and adjusted EBITDA from continuing operations. A copy of the press release has also been submitted as an exhibit to an 8-K we filed with the SEC. With that, let me turn the call over to Stewart. Stewart MacDonald Thanks, Mike, and thank you everyone for joining us this morning. The first quarter continued in the challenging environment we have seen in our industry and for Mac-Gray starting in late 2006. We have spoken on our past conference calls about the effects that record level apartment vacancy rates are having on our business. These include lowering the usage of our equipment, reducing our ability to institute then price increases, and negatively influencing the renegotiation process with property owners and managers. In Q1, we experienced more of the same, although we did see some positive signs in individual markets. As we stated in today's press release, it appears that apartment vacancy rates in some markets may, and I stress the conditional “may”, have begin to peak. According to the independent REIS industry data, the first quarter US apartment vacancy rates were unchanged from Q4 at 8%. While this still represents the highest level of vacancies in 25 years, it was the first time in several years that the nationalized vacancy rate did not increase over the prior quarter. The reason for this is that a number of markets have begun to stabilize and some markets have actually begun to see some improvement compared with last year. Another leading industry metric, that being rent rates, also showed positive signs in some markets. However, the most important driver of apartment vacancy rates is the local unemployment rate, and the apartment industry believes that until the employment picture substantially improves we will likely see only incremental improvements in vacancy rates and their effects on us. So that's the environment that we're continuing to deal with and that serves as background to our first quarter results. Given those continuing conditions in the multifamily housing environment, we are relatively pleased with the solid performance we delivered in Q1. Revenue from continuing operations declined 4.4% with our core, excuse me, – laundry facilities management business revenue down 2.9%. Our same location revenue in Q1 was down 2.2% year-over-year, which is a slower rate of decline than we had seen recently. From a regional perspective, the northeast continues to be our strongest performing region, while the southwest continues to be our weakest. This was primarily due to the Arizona market, which declined 13% compared with a year ago. Unfortunately, our guess, and that is the industry experts, is that the housing environment there will remain somewhat uncertain during the current furor over the recently passed law that deals with illegal immigrants. Overall, we are seeing more locations that are used in this analysis begin to stabilize and we are seeing pockets of same location growth in certain markets, among them, New York and Atlanta. Within our commercial laundry equipment business, sales were 26% lower over the same period in 2009. As customers continue to extend the life of equipment while the economy and the credit environment are curtailing the opening of new Laundromats. Looking at our bottom line, our adjusted income from continuing operations before taxes was essentially flat with last year. Based on the steady pay down of our debt balance and the 100 million swap agreements that Mike detailed on our Q4 call, we reduced our interest expense by $1.2 million or 22% from Q1 of a year ago. We've also done an effective job at controlling and reducing our costs wherever possible. SG&A costs were down year-over-year. Capital expenditures, which I'll talk more about in a minute, were also down significantly totaling 3.2 million in the quarter versus 8.2 million a year ago. Taken together, the reduction in operating costs and lower capital spending resulted in very strong cash flow during the quarter. Despite lower revenue, our free cash flow in the quarter increased by 20% from the prior year. As a result, we were able to reduce our funded debt by $17.3 million in Q1, which does include the $8.5 million in proceeds from our Q1 sale of our MicroFridge division. In the past 12 months, we have reduced our funded debt balance by more than $44 million. If you look further back to our most recent major acquisition exactly two years ago, we have lowered our funded debt by 83 million over that two year period. And I should point out that we achieved this during a two-year period that included one of the worst recessions in our nation's history and the very toughest environment our industry has faced. Before turning the call over to Mike, I wanted to spend just a few moments talking about our capital management. It is essentially two components that make up our capital spending each quarter, possible upfront incentive payments on a minority of deals and the equipment that is going to be installed under the contract. In Q1, our capital spending was only $3.2 million less than half of what it was in Q1 of '09. There were a few factors behind this number which was even lower than what we had budgeted. Part of the reason for our low capital spend in Q1 was essentially timing. The other factors behind the amount spent were more discretionary. We continue to adhere to our philosophy that it makes more sense in the current recessionary environment to use our free cash flow to reduce debt and to put our capital potentially at risk or to agree to single-digit return on long-term contracts. When I say at risk, I should explain. As we mentioned on our Q4 call, the financial pressure that some property owners are under due to their high vacancy rates is causing them to seek oversized incentive payments from all their vendors. That's an upfront cost we are not willing to make and trying to then recover that investment over a long period is a risk that we are not willing to take. We are continuing to maintain our financial discipline rather than sign off on seven to 10-year contracts that are not a sound investment of capital. The other item that factors into our capital spend is the equipment installations, which actually makes up approximately 90% of our capital budget. Another reason for the low amount of capital spend in Q1 is the successful program I outlined on our last call where we are redeploying underutilized equipment in the field in the successful contract renewals. In doing so, and by doing so we are preserving the capital that we would have otherwise spent on new equipment. We are continuing with this program, although it may not have as large an affect as it has had in the past couple of quarters where we have successfully redeployed a large amount of equipment into more profitable properties. Looking out at the remainder of 2010, we expect our capital spending to increase from the unusually low Q1 level. We plan to focus our investments in markets that we determine to be the most attractive based on potential upside or a level of predictability. Our goal remains to maintain the relative size of portfolio as we continue to weather this difficult period. As vacancy rates improve and our markets begin to normalize, we will again shift our focus from preserving the portfolio to growing it once again. In the meantime, we will continue to further tighten our belts on expenses where we can. We will not, however, reduce the quality of our service. Initiatives we have underway across the various components of our business have proven effective at offsetting some of the revenue decline. Ultimately, however, the costs in our core business are relatively in elastic so we will need to see our revenues begin to turn upward at some point. We continue to expect the laundry facilities management business to be a lagging indicator to any general economic recovery as it will take some time for that recovery to filter through to vacancy rates. The record is clear that the most dramatic influence on vacancy rates is an improvement in regional employments. And the only surety of a healthy and dependable job market will change people's attitudes toward their housing—toward their housing decisions. With that said, there have been some small signs that vacancy rates may be turning the corner. If that holds true, we would expect our same location revenue to potentially improve later in the year or early next year. We also expect our commercial equipment sales business to remain under pressure in the near-term due to the very tight credit environment. Regardless of how much longer it takes for the economic recovery to filter into housing behavior, we remain confident in our long-term outlook. Our core business has fully proven its resilience during the past several years and has shown that it can continue to generate substantial cash flow even in times of recession. Given that cash flow, our primary objectives for 2010 remain the maintenance – to maintain the size of our portfolio, to continue to steadily reduce our funded debt and to take advantage of any attractive acquisition opportunities. With that, I will turn the call over to Mike for his financial review. Michael Shea Thank you, Stewart. Total revenue from continuing operations for the first quarter decreased to $81.5 million from $85.3 million in Q1 of last year. The apartment vacancy issue that Stewart discussed affected our performance. Revenue from our laundry facilities management business decreased 2.9% in Q1 to $78.5 million from $80.9 million in the comparable period a year ago. On a percentage basis, our laundry's facilities management business accounted for 96% of our total revenue from continuing operations in the quarter. As Stewart mentioned, Q1 revenue for our commercial laundry equipment sales were down 26% compared with the same period in 2009. Our gross margin from continuing operations decreased $1.2 million to $15.6 million on an absolute basis. On a percentage basis, gross margin fell by five basis points to 19.1% of revenue compared to 19.6% of revenue in Q1 of 2009. The gross margin percentage decline is directly attributable to lower revenue for the quarter both in facilities management and equipment sales. Due to our lower revenue and the primarily fixed nature of our costs, SG&A expense as a percentage were 10.3% of revenue this quarter compared with 9.9% of revenue in Q1 of 2009. On an absolute basis, however, we did lower our year-over-year SG&A costs by $64,000 before one-time charges. I should point out that you will see in this quarter’s income statement incremental proxy related costs. Last year we had $378,000 in expenses and this year it is 97,000 through March 31. Due to the fact that dissidents have submitted a slate of board candidates and two other proposals, the board is obligated to protect the interest of the company and its shareholders by obtaining additional legal advice and hiring a proxy solicitor. On the bottom line, we reported Q1 net income from continuing operations of $1.5 million or $0.11 per diluted share compared with net income of 1.9 million or $0.14 per diluted share in Q1 of 2009. Net loss from discontinued operations, which was our MicroFridge business, were $0.02 per share compared with net income from discontinued operations of $0.03 per share last year. Total EPS was $0.09 in Q1 of 2010 compared with $0.16 in the year ago period. Please refer to table one of the press release for adjustments to net income from continuing operations. After you exclude the affect of derivatives, gain on sale of real estate and incremental proxy costs from both periods, adjusted net income from continuing operations in Q1 of 2010 was 1.7 million or $0.12 per diluted share compared with $1.8 million or $0.13 per diluted share for the same period in 2009. Q1 EBITDA from continuing operations as adjusted declined to $18.6 million. As a percentage of revenue, EBITDA from continuing operations as adjusted was 22.8% for Q1 2010 compared with 24.5% in the same period a year ago. We have included a reconciliation of net income from continuing operations to EBITDA from continuing operations as adjusted in today's press release. Our interest expense in the first quarter decreased $1.1 million or 22.3% to $3.9 million from 5 million in the first quarter of '09. This significant decrease is the result of steady pay down of our funded debt, along with the favorable effect of $100 million interest rate swap agreement we signed at the beginning of the quarter. Our tax rate for the first quarter of 2010 was 47% compared with 44% in the first quarter of 2009. As I point out each quarter, our tax rate can fluctuate a few percentage points whenever we have low income or a small loss. Our actual cash taxes paid are always minimal due to using accelerated depreciation available for calculating taxable income. Net cash flow provided by operating activities in the first quarter was $11.7 million compared with $7.7 million in the first quarter of '09, an increase of over 50%. Capital expenditures, including incentive payments and capital leases, for Q1 of 2010 decreased to $3.2 million compared with $8.2 million in Q1 of '09 and $4.7 million in the fourth quarter of '09. As Stewart mentioned, our capital spending was down in Q1 as a result of our cautious approach to current market conditions and the timing of some contract renewals. During the quarter we reduced our funded debt balance by $17.3 million. At quarter end, our total funded debt was $246.6 million. Our total leverage defined as funded debt divided by trailing 12-month EBITDA as adjusted, has approved to – has improved to approximately 3.3 times. Those debt numbers I just referred to do not include cash and cash equivalents of $18.8 million at March 31, 2010, the majority of which represents cash in machines out in the field. With that, Stewart and I would like to answer any questions you may have.