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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED):
MARCH 12, 1998
----------------
MAC-GRAY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 011-13495 04-3361982
(STATE OR OTHER (COMMISSION FILE (I.R.S. EMPLOYER
JURISDICTION NUMBER) IDENTIFICATION NO.)
OF INCORPORATION)
----------------
22 WATER STREET, CAMBRIDGE, MA 02141
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(617) 492-4040
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On March 12, 1998, Mac-Gray Corporation, a Delaware corporation (the
"Registrant"), acquired Intirion Corporation, a Delaware corporation
("Intirion"), by way of the merger of MI Acquisition Corp. ("MIAC"), a
Delaware corporation and a wholly-owned subsidiary of the Registrant, with and
into Intirion pursuant to an Agreement and Plan of Merger, dated as of
December 22, 1997 (the "Agreement"), by and among the Registrant, Intirion,
MIAC and Robert P. Bennett.
In consideration, the Registrant issued, pursuant to the Agreement,
1,592,992 shares of its $.01 par value common stock (the "Registrant's Common
Stock") valued at approximately $29.5 million based upon the closing price of
the Registrant's Common Stock (NYSE: TUC) on March 12, 1998. Included within
the 1,592,992 of issued shares are 159,233 shares which are being held in
escrow to satisfy any potential claims in accordance with the Agreement. In
addition, the Registrant paid $1,033,125 in cash, $1,032,090 of which was paid
to the holder of Intirion's Senior Redeemable Preferred Stock and the balance
of which was paid in lieu of issuing fractional shares.
The funds used to pay the cash portion of the consideration were comprised
primarily of borrowings under the Registrant's $50 million revolving credit
facility with State Street Bank and Trust Company and CoreStates Bank.
Intirion is a supplier of combination refrigerator/freezer/microwave ovens
to multiple housing facilities such as colleges and universities, military
bases, economy hotels and motels and assisted living facilities. For the
twelve month period ended June 30, 1997, Intirion had total revenues of
$23,477,000. The merger is being accounted for as a pooling of interests.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS AND EXHIBITS*
PAGE
----
(a) Financial Statements of Business Acquired
Report of Independent Accountants................................ F-1
Consolidated Balance Sheet as of June 30, 1996 and 1997 and
December 31, 1997 (unaudited)................................... F-2
Consolidated Statement of Operations for the Years Ended June 30,
1995, 1996 and 1997 and for the Six Months Ended December 31,
1996 and 1997 (unaudited)....................................... F-3
Consolidated Statement of Changes in Stockholders' Deficit for
the Years Ended June 30, 1995, 1996 and 1997 and for the Six
Months Ended December 31, 1997 (unaudited)...................... F-4
Consolidated Statement of Cash Flows for the Years Ended June 30,
1995, 1996 and 1997 and for the Six Months Ended December 31,
1996 and 1997 (unaudited)....................................... F-5
Notes to Consolidated Financial Statements....................... F-6
(b) Pro Forma Financial Information
Pro Forma Unaudited Condensed Combined Financial Information..... F-18
Pro Forma Unaudited Condensed Combined Balance Sheet as of
December 31, 1997............................................... F-19
Pro Forma Unaudited Condensed Combined Statement of Operations
for the Years Ended December 31, 1997 and June 30, 1997......... F-20
Pro Forma Unaudited Condensed Combined Statement of Operations
for the Years Ended December 31, 1996 and June 30, 1996......... F-21
Pro Forma Unaudited Condensed Combined Statement of Operations
for the Years Ended December 31, 1995 and June 30, 1995......... F-22
Notes to the Pro Forma Unaudited Condensed Combined Financial
Information..................................................... F-23
Unaudited Pro Forma Combined Statement of Income for the year
Ended December 31, 1997......................................... F-25
- --------
* Capitalized terms used in the footnotes and the notes to the financial
statements and the pro forma financial statements and not defined therein
shall have the meanings ascribed to them in the Registrant's Registration
Statement on Form S-4 (Reg. No. 333-45899).
2
(c) Exhibits
EXHIBIT NO. DESCRIPTION
----------- ----------- ---
2.1 The Agreement and Plan of Merger, dated as of December
22, 1997, by and among Mac-Gray Corporation, MI
Acquisition Corp., Intirion Corporation and Robert P.
Bennett is incorporated by reference to the
Registration Statement on Form S-4 filed with the
Securities and Exchange Commission on February 9, 1998
(Reg. No. 333-45899).
3
SIGNATURES
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 hereunto duly authorized.
MAC-GRAY CORPORATION
/s/ Patrick A. Flanagan
By:__________________________________
Patrick A. Flanagan
Executive Vice President and
Secretary
Dated: March 12, 1998
4
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Intirion Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' deficit and
of cash flows present fairly, in all material respects, the financial position
of Intirion Corporation and its subsidiary at June 30, 1997 and 1996, and the
results of their operations and their cash flows for the three years in the
period ended June 30, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
August 22, 1997
F-1
INTIRION CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
JUNE 30,
---------------- DECEMBER 31,
1996 1997 1997
------- ------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents..................... $ -- $ -- $ --
Accounts receivables, net of allowance for
doubtful accounts of $42, $18 and $91 at June
30, 1996 and 1997 and December 31, 1997
(unaudited), respectively.................... 2,981 2,314 2,641
Inventories................................... 3,240 4,322 4,631
Prepaid expenses and other current assets..... 120 87 226
Income tax receivable......................... -- 20 20
Deferred income taxes......................... 23 23 23
------- ------- -------
Total current assets........................ 6,364 6,766 7,541
------- ------- -------
Fixed assets, net............................. 432 645 666
Rental equipment, net......................... 4,547 5,271 6,726
Other assets, net............................. 795 816 928
Deferred income taxes......................... 101 101 101
------- ------- -------
Total assets................................ $12,239 $13,599 $15,962
======= ======= =======
LIABILITIES, REDEEMABLE STOCK AND WARRANTS AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Demand line of credit......................... $ 3,374 $ 2,525 $ 4,742
Amounts due under inventory credit line....... -- 3,694 2,241
Current portion of subordinated notes
payable...................................... 134 153 160
Accounts payable and accrued expenses......... 5,143 3,448 2,325
Deferred rental revenue and customer
deposits..................................... 95 102 2,552
Income taxes payable.......................... 38 -- 5
------- ------- -------
Total current liabilities................... 8,784 9,922 12,025
------- ------- -------
Subordinated notes payable...................... 148 -- --
------- ------- -------
Commitments (Note 16)...........................
Redeemable stock and warrants (Note 10)......... 5,924 6,526 6,963
------- ------- -------
Stockholders' deficit:
Common stock, $.01 par value:
Authorized--2,500,000 shares
Issued--687,868 shares at June 30, 1996 and
1997 and
December 31, 1997
Outstanding--676,173 shares at June 30, 1996
and 1997 and 669,688 shares at December 31,
1997 (unaudited)........................... 7 7 7
Additional paid-in capital.................. 899 899 899
Accumulated deficit......................... (3,354) (3,586) (3,734)
Notes receivable from stock issuance........ (52) (52) --
------- ------- -------
(2,500) (2,732) (2,828)
Less--cost of 11,695 shares of common stock
held in treasury at June 30, 1996 and 1997
and 18,180 shares at December 31, 1997
(unaudited)................................ (117) (117) (198)
------- ------- -------
(2,617) (2,849) (3,026)
------- ------- -------
Total liabilities, redeemable stock and
warrants, and stockholders' deficit............ $12,239 $13,599 $15,962
======= ======= =======
The accompanying notes are an integral part of these financial statements
F-2
INTIRION CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------- ------------------
1995 1996 1997 1996 1997
------- ------- ------- -------- --------
(UNAUDITED)
Net product sales............... $13,573 $15,036 $20,034 $ 12,736 $ 11,789
Rental revenue.................. 2,069 2,797 3,443 1,286 1,566
------- ------- ------- -------- --------
15,642 17,833 23,477 14,022 13,355
------- ------- ------- -------- --------
Cost of product sales........... 9,296 10,247 13,870 8,824 7,908
Cost of rental revenue.......... 556 832 1,271 430 563
------- ------- ------- -------- --------
9,852 11,079 15,141 9,254 8,471
------- ------- ------- -------- --------
Gross profit.................... 5,790 6,754 8,336 4,768 4,884
Selling, general and
administrative expenses........ 5,735 6,168 7,490 3,938 4,272
Restructuring expenses.......... 276 -- -- -- --
------- ------- ------- -------- --------
Income (loss) from operations... (221) 586 846 830 612
Interest expense, net........... 153 398 454 200 314
------- ------- ------- -------- --------
Income (loss) before income
taxes.......................... (374) 188 392 630 298
Income tax expense.............. 26 49 22 19 9
------- ------- ------- -------- --------
Net income (loss)............. $ (400) $ 139 $ 370 $ 611 $ 289
------- ------- ------- -------- --------
Accretion and dividends
accrued on redeemable stock.. (456) (486) (602) (301) (437)
------- ------- ------- -------- --------
Income (loss) available to
common stockholders.......... $ (856) $ (347) $ (232) $ 310 $ (148)
======= ======= ======= ======== ========
Income Per Share Data:
Basic income (loss) per common
share (Note 14).............. $ (1.31) $ (.48) $ (.30) $ .40 $ (.19)
======= ======= ======= ======== ========
Dilutive income (loss) per
common share
(Note 14).................... $ (1.31) $ (.48) $ (.30) $ .34 $ (.19)
======= ======= ======= ======== ========
The accompanying notes are an integral part of these financial statements.
F-3
INTIRION CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
COMMON STOCK
-------------------------- NOTE
ADDITIONAL RECEIVABLE TOTAL
NUMBER OF PAR PAID-IN FROM STOCK ACCUMULATED TREASURY STOCKHOLDERS'
SHARES VALUE CAPITAL ISSUANCE DEFICIT STOCK DEFICIT
--------- ----- ---------- ---------- ----------- -------- -------------
Balance at June 30,
1994................... 644,068 $ 6 $752 $ -- (2,151) $ -- $(1,393)
Accretion and dividends
accrued on redeemable
stock.................. (456) (456)
Issuance of common stock
pursuant to the
exercise of options.... 21,400 1 61 (62)
Net loss................ (400) (400)
------- --- ---- ----- ------- ----- -------
Balance at June 30,
1995................... 665,468 7 813 (62) (3,007) (2,249)
Accretion and dividends
accrued on redeemable
stock.................. (486) (486)
Issuance of common stock
pursuant to the
exercise of options.... 13,400 52 (52)
Issuance of common stock
pursuant to the
exercise of warrants... 9,000 34 34
Purchase of treasury
stock.................. 62 (117) (55)
Net income.............. 139 139
------- --- ---- ----- ------- ----- -------
Balance at June 30,
1996................... 687,868 7 899 (52) (3,354) (117) (2,617)
Accretion and dividends
accrued on redeemable
stock.................. (602) (602)
Net income.............. 370 370
------- --- ---- ----- ------- ----- -------
Balance at June 30,
1997................... 687,868 7 899 (52) (3,586) (117) (2,849)
Accretion and dividends
accrued on redeemable
stock (unaudited)...... (437) (437)
Purchase of treasury
stock (unaudited)...... 52 (81) (29)
Net income (unaudited).. 289 289
------- --- ---- ----- ------- ----- -------
Balance at December 31,
1997 (unaudited)....... 687,868 $ 7 $899 $ -- $(3,734) $(198) $(3,026)
======= === ==== ===== ======= ===== =======
The accompanying notes are an integral part of these financial statements.
F-4
INTIRION CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA )
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------- ------------------
1995 1996 1997 1996 1997
------- ------- ------- -------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIV-
ITIES:
Net income (loss)............... $ (400) $ 139 $ 370 $ 611 $ 289
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and amortization.. 740 1,079 1,343 784 777
Net (gain) loss on sale of
rental equipment.............. (61) (32) 68 (171) (133)
Proceeds from sales of rental
equipment..................... 210 107 656 516 371
Noncash interest income........ -- (5) -- -- --
Noncash interest expense....... -- -- -- 17 7
Changes in operating assets and
liabilities, net of the ef-
fects of acquisitions:
(Increase) decrease in accounts
receivable.................... 1,043 (1,630) 667 (78) (327)
(Increase) decrease in invento-
ries.......................... (2,600) 603 (1,082) 940 (309)
(Increase) decrease in prepaid
expenses and other current as-
sets.......................... (89) 74 33 (95) (168)
Increase in income tax receiv-
able.......................... -- -- (20) (78) --
Increase in other assets....... (5) (51) (122) (44) (170)
Increase (decrease) in accounts
payable and accrued expenses.. 1,260 1,954 (1,695) (4,072) (1,123)
Increase (decrease) in income
taxes payable................. 22 (4) (38) (33) 5
Increase in deferred rental
revenue and customer depos-
its........................... 37 41 7 2,212 2,450
------- ------- ------- -------- --------
Net cash provided by operating
activities................... 157 2,275 187 509 1,669
------- ------- ------- -------- --------
CASH FLOWS FROM INVESTING ACTIV-
ITIES:
Purchase of fixed assets........ (226) (284) (404) (269) (136)
Purchases of rental equipment... (3,474) (2,091) (2,499) (2,375) (2,297)
Acquisition of business......... (357) -- -- -- --
------- ------- ------- -------- --------
Net cash used for investing
activities................... (4,057) (2,375) (2,903) (2,644) (2,433)
------- ------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIV-
ITIES:
Advances (payments) under demand
line of credit, net............ 3,080 294 (849) 89 2,217
Borrowings (payments) under in-
ventory credit line............ -- -- 3,694 2,046 (1,453)
Amounts advanced under employee
notes.......................... -- (50) -- -- --
Repayments of capital lease ob-
ligations...................... (9) -- -- -- --
Repayments of subordinated notes
payable........................ (111) (122) (129) -- --
Proceeds from issuance of common
stock.......................... -- 34 -- -- --
Payment of dividends on Series A
redeemable convertible
preferred stock................ -- (72) -- -- --
------- ------- ------- -------- --------
Net cash provided by financing
activities................... 2,960 84 2,716 2,135 764
------- ------- ------- -------- --------
Net decrease in cash............ (940) (16) -- -- --
Cash, beginning of period....... 956 16 -- -- --
------- ------- ------- -------- --------
Cash, end of period............. $ 16 $ -- $ -- $ -- $ --
======= ======= ======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest......... $ 160 $ 387 $ 388 $ 152 $ 363
======= ======= ======= ======== ========
Cash paid for income taxes..... $ -- $ 53 $ 80 $ 230 $ 4
======= ======= ======= ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
During the year ended June 30, 1995, the Company issued 21,400 shares of
common stock pursuant to the exercise of stock options in exchange for a
promissory note in the amount of $62 (Note 11).
During the year ended June 30, 1996, the Company issued 13,400 shares of
common stock pursuant to the exercise of stock options in exchange for
promissory notes in the amount of $52. The Company accepted 11,695 shares of
common stock as payment for certain promissory notes and accrued interest in
the amount of $117. (Note 11). The Company issued 90,000 shares of common
stock subject to redemption pursuant to the exercise of warrants using a
cashless exercise feature.
During the six months ended December 31, 1997 (unaudited), the Company
accepted 6,485 shares of common stock as payment for certain promissory notes
and accrued interest in the amount of $81 (Note 11).
The accompanying notes are an integral part of these financial statements.
F-5
INTIRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
1. NATURE OF BUSINESS
Originally incorporated as MicroFridge, Inc., Intirion Corporation (the
"Company") is engaged in the development, distribution, rental and sale of
multi-purpose appliances to commercial and residential markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of these
financial statements are as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of Intirion
Corporation and its wholly owned subsidiary, MFI Leasing, Inc. All significant
intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Revenue Recognition, Accounts Receivable and Concentration of Credit Risk
Revenue from product sales is recognized upon shipment of the product.
Rental revenue is recognized ratably over the related contractual period,
which is less than one year. The Company offers limited duration warranties
for its products and, at time of sale, provides reserves for all estimated
warranty costs.
The Company sells its products primarily to academic institutions and the
U.S. government. The Company rents its products primarily to academic
institutions and students at academic institutions. Ongoing credit evaluations
of customers' financial condition are performed, and collateral is not
required. The Company maintains reserves for potential credit losses and such
losses, in the aggregate, have not exceeded management's expectations.
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market and consist primarily of finished goods.
Fixed Assets and Rental Equipment
Fixed assets and rental equipment are recorded at cost and depreciated using
the straight-line method over their estimated useful lives. Tooling costs are
depreciated using the units-of-production method. Repair and maintenance costs
are expensed as incurred.
Intangible Assets
Included in other assets are intangible assets (primarily customer lists) of
$901 and $1,008 at June 30, 1996 and 1997, respectively, that were acquired by
the Company. These intangible assets are being amortized on a straight-line
basis ranging from 5 to 10 years. Accumulated amortization totaled $185 and
$286 at June 30, 1996 and 1997, respectively.
Marketing Costs
The Company's marketing costs relating to rental revenue include direct
response advertising campaigns conducted by the Company's marketing group
which include payments for printing, postage and other costs
F-6
INTIRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
incurred to originate accounts. Based on the criteria established in SOP 93-7
"Reporting on Advertising Costs," the Company has expensed these costs as
incurred. Amounts charged to advertising expense and included in selling,
general and administrative expenses totaled $136, $444 and $698 for the fiscal
years 1995, 1996 and 1997, respectively.
Stock-based Compensation
The Company accounts for stock-based compensation awards to employees in
accordance with Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees", and related interpretations. Since
it is the Company's policy to grant options with an exercise price equal to
the fair value of the underlying stock on the grant date, no compensation cost
has been recognized for employee options under the Company's stock option
plan. In June 1996, the Company adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-based Compensation" (Note 12).
Income Taxes
The Company utilizes the asset and liability method of accounting for income
taxes, as set forth in Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires the recognition
of deferred taxes for the difference between the financial statement and tax
bases of assets and liabilities utilizing current tax rates. Deferred tax
assets are recognized, net of any valuation allowance, for deductible
temporary differences and operating loss carryforwards. Deferred tax expense
represents the change in the deferred tax asset or liability balances.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Income (Loss) Per Common Share
The Company accounts for income (loss) per share in accordance with
Statement of Accounting Standard No. 128, "Earnings Per Share" ("SFAS 128").
SFAS 128 requires the presentation of basic income per share and diluted
income per share ("EPS"). Basic EPS includes no dilution and is computed by
dividing net income or loss available to common shareholders by the weighted-
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution of securities that could share in the earnings
of an entity. Diluted EPS has been calculated using the treasury stock method.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year financial statement presentation. These reclassifications had no impact
on net income for prior years.
Unaudited Interim Financial Statements
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for the fair
presentation of the financial position of the Company at December 31, 1997 and
the results of operations and cash flows of the Company for the six months
ended December 31, 1996 and 1997 as presented in the accompanying financial
statements. Results of operations for interim periods are not necessarily
indicative of results of operations for the full fiscal year.
F-7
INTIRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
3. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of accounts receivable, demand line of credit, amounts
due under inventory credit line, accounts payable and accrued expenses, and
subordinated debt approximate fair value, because of their short maturity or
holding period.
4. RESTRUCTURING EXPENSE
During the year ended June 30, 1995, the Company recorded a restructuring
charge of approximately $276. The restructuring charge consisted primarily of
termination payments paid to thirteen employees and other costs incurred as a
part of the Company's plan to restructure its sales force. All amounts
recorded in conjunction with this restructuring were paid prior to June 30,
1995.
5. FIXED ASSETS AND RENTAL EQUIPMENT
Fixed assets, net consist of the following:
JUNE 30,
DEPRECIABLE ------------
LIVES 1996 1997
------------- ----- -----
Furniture and fixtures........................... 2-7 years $ 192 $ 336
Computer software and equipment.................. 3-5 years 458 539
Tooling costs.................................... 250,000 units 212 271
Vehicles......................................... 5 years 10 10
----- -----
872 1,156
Less--Accumulated depreciation................... (440) (511)
----- -----
$ 432 $ 645
===== =====
The Company has entered into agreements to provide rental appliances to
various customers. Rental equipment of $4,547 and $5,271 at June 30, 1996 and
1997, respectively, net of accumulated amortization of $1,437 and $2,168,
respectively, represents equipment rented to various academic institutions and
individuals under renewable contracts of various lengths. Rental equipment is
being depreciated over the estimated useful life of the equipment of 7 years.
Depreciation expense totaled $693, $988 and $1,242 for fiscal years 1995,
1996 and 1997, respectively. During 1997, the Company changed its estimate on
the useful lives on furniture and fixtures to properly reflect the lives of
newer assets purchased in 1996 and 1997. The effect of this change resulted in
a reduction of 1997 depreciation expense of $81.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
JUNE 30,
-------------
1996 1997
------ ------
Accounts payable............................................... $4,485 $2,823
Bonus.......................................................... 156 254
Commission..................................................... 98 109
Warranty....................................................... 131 128
Other.......................................................... 273 134
------ ------
$5,143 $3,448
====== ======
F-8
INTIRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
7. DEMAND LINE OF CREDIT
At June 30, 1996 and 1997 and December 31, 1997 (unaudited), the Company had
outstanding borrowings of $3,374, $2,525 and $4,742, respectively, pursuant to
a secured demand line of credit agreement with a bank that allows for maximum
borrowings of $6,300 at June 30, 1997 and $7,500 at December 31, 1997
(unaudited). At June 30, 1996 and 1997, under the working capital component of
the agreement, borrowings are restricted to the lesser of (i) $4,800 or (ii)
the sum of (a) 80% of the eligible accounts receivable, as defined, and 50% of
eligible inventory, as defined, and (b) 50% of issued and undrawn documentary
purchase letters of credit advanced by the bank. The working capital component
bears interest at 1% plus the greater of (i) the bank's base rate or (ii) the
sum of (a) .5% and (b) the average rate on overnight Federal funds
transactions (9.25%, 9.5% and 9.5% at June 30, 1996 and 1997 and December 31,
1997 (unaudited), respectively). At June 30, 1996 and 1997, under the rental
asset component of the agreement, borrowings are restricted to the lesser of
(i) $1,500 or (ii) 70% of the eligible rental equipment, as defined, plus 50%
of outstanding rental letters of credit advanced by the bank. The rental asset
component bears interest at 1.5% plus the greater of (i) the bank's base rate
or (ii) the sum of (a) .5% and (b) the average rate on overnight Federal funds
transactions (9.75%, 10.0% and 10.0% at June 30, 1996 and 1997 and December
31, 1997 (unaudited), respectively). Interest expense in 1995, 1996 and 1997
totaled $124, $393 and $330, respectively. Borrowings under the line of credit
agreement are secured by substantially all assets of the Company. On November
28, 1997, the Company amended the secured demand line of credit agreement to
increase the borrowing bases to $5,500 and $2,000 relating to the working
capital and rental asset components, respectively.
8. INVENTORY CREDIT LINE
At June 30, 1997 and December 31, 1997 (unaudited), the Company had
outstanding borrowings of $3,694 and $2,241, pursuant to a secured demand line
with the Company's primary supplier relating to the purchase of finished
goods. The line bears interest on balances greater than 30 days at prime rate
plus 1% (9.5%) at June 30, 1997 and December 31, 1997 (unaudited). Interest
expense totaled $93 for fiscal year 1997.
9. SUBORDINATED NOTES PAYABLE
In connection with the acquisition of certain assets in 1994, the Company
issued three non-interest bearing notes with an aggregate amount payable of
$650. The notes are payable in four annual installments of $163, commencing in
March 1995. As the notes are non-interest bearing, they were recorded by the
Company at their present value on the date of acquisition using an interest
rate of 10%. These notes are subordinate to the demand line of credit (see
Note 7).
F-9
INTIRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
10. REDEEMABLE STOCK AND WARRANTS
Redeemable stock and warrants consist of the following:
JUNE 30,
------------- DECEMBER 31
1996 1997 1997
------ ------ -----------
(UNAUDITED)
Preferred stock, $.01 par value;
Authorized--200,000 shares
Issued and outstanding--100,000 senior redeemable
preferred shares,
at issuance cost plus accumulated accretion and
accrued dividends of $480, $800 and $1,088 at June
30, 1996 and 1997 and December 31, 1997
(unaudited), respectively......................... $4,187 $4,507 $4,795
Issued and outstanding--40,000 Series A redeemable
convertible preferred shares, at issuance cost
plus accumulated accretion and accrued dividends
of $912, $1,194 and $1,343 at June 30, 1996 and
1997 and December 31, 1997 (unaudited),
respectively...................................... 1,467 1,749 1,898
Common stock put warrants.......................... 75 75 75
Common stock subject to redemption, $.01 par value,
90,000 shares issued and outstanding at June 30,
1996 and 1997 and December 31, 1997, respectively,
at issuance cost plus accumulated accretion....... 195 195 195
------ ------ ------
$5,924 $6,526 $6,963
====== ====== ======
Senior Redeemable Preferred Stock
In April 1994, the Company issued 100,000 shares of Senior Redeemable
Preferred Stock ("Senior Stock") with detachable common stock warrants to
purchase 267,284 shares of common stock at $12.50 per share.
The Company is required to redeem one third of the outstanding Senior Stock
annually, over a three-year period beginning in April 1999 at a redemption
price equal to $40.00 per share, plus accrued but unpaid dividends (the
"Liquidation Value"). This redemption obligation is being accreted through
April 2001 by charges to accumulated deficit. In the event of an initial
public offering of the common stock of the Company subsequent to January 1,
1997 which yields gross underwriting proceeds of $10,000 (a "Qualified IPO"),
the Company is required to redeem the Senior Stock at a redemption price per
share equal to $40 per share plus all accrued and unpaid dividends. The
Company may also be required to redeem the Senior Stock prior to April 1999 at
the Liquidation Value upon the occurrence of certain defined events.
Holders of the Senior Stock are initially entitled to one vote for each
share of common stock which may be purchased by the common stock warrants held
by the holders of the Senior Stock, subject to certain adjustments in the
event the Senior Stock is redeemed. An affirmative vote of not less than two-
thirds of the outstanding Senior Stock is required to approve certain actions,
as defined in the Senior Stock agreement, by the Company.
In the event of dissolution, liquidation or winding up of the Company, the
holders of Senior Stock have liquidation preference over all other preferred
and common stockholders and are entitled to $40.00 per share, plus accrued but
unpaid dividends.
Cumulative dividends of 6.0% per annum are payable when and if declared by
the Board of Directors, upon mandatory redemption or upon liquidation. The
Senior Stock Purchase Agreement requires the maintenance of certain financial
and non-financial covenants, the more restrictive of which require the
maintenance of specific levels of tangible net worth and limit the annual
amount of common stock the Company may repurchase. Since
F-10
INTIRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
June 30, 1996, the Company has not been in compliance with certain covenants.
Under the terms of the Senior Stock Purchase Agreement, the dividend rate
increased by 2%. The Senior Stock has dividend preference over all other
classes of stock. Cash dividends not to exceed $36 per year may be paid to the
holders of the Series A Redeemable Convertible Preferred Stock under certain
conditions, so long as a like dividend is paid to the holders of the Senior
Stock. During 1996, cash dividends of $72 were paid to the holders of the
Series A Redeemable Convertible Preferred Stock. The holders of the Senior
Stock waived their rights to payment of a like dividend. No dividends were
paid in 1997.
Series A Redeemable Convertible Preferred Stock
In connection with the issuance of the Senior Stock, the holders of the
Series A Redeemable Convertible Preferred Stock ("Preferred Stock") agreed to
extend the redemption period of the Preferred Stock. As a result, the holders
of the Preferred Stock may require the Company to repurchase up to one third
of the preferred shares per year during the period from April 22, 2002 through
April 22, 2004. The repurchase price of such shares shall be: (i) the greater
of (a) ten times the earnings per share (on a fully diluted basis) for the
four quarters preceding the quarter such repurchase occurs or (b) if the
Company has cumulative net income for the period January 1, 1992 through the
redemption date of at least $1,000, $15.00 per share, plus interest compounded
at 17% per annum plus (ii) any accrued but unpaid dividends. This redemption
obligation has been calculated using an interest rate of 17%, compounded
annually, plus accrued, but unpaid dividends and is being accreted through the
redemption dates by charges to accumulated deficit.
Each share of Preferred Stock may be converted at any time at the option of
the stockholder into six shares of common stock of the Company. At June 30,
1997, the Company has reserved 240,000 shares of common stock for the
conversion of all shares of the Preferred Stock.
The holders of the Preferred Stock are entitled to the number of votes equal
to the number of whole shares of common stock into which the shares of
Preferred Stock could be converted. In addition, certain decisions and
transactions, as described in the Preferred Stock agreement, require the
approval of at least two-thirds of the preferred stockholders.
In the event of the liquidation of the Company, the holders of the Preferred
Stock will be entitled to receive, in preference to any distribution to the
holders of common stock, an amount equal to the greater of (i) $15.00 per
share, plus any accrued but unpaid dividends or (ii) an amount per share which
would have been payable had each share been converted to common stock
immediately prior to the dissolution of the Company.
The holders of the Preferred Stock are entitled to receive cumulative
dividends at an annual rate of $.90 per share.
COMMON STOCK PUT WARRANTS AND COMMON STOCK SUBJECT TO REDEMPTION
In connection with the issuance of the Preferred Stock, the Company issued
warrants for the purchase of 120,000 shares of common stock with an exercise
price of $2.50 per share. These warrants were exercised in 1996 using a
cashless exercise feature. The holders of this stock can require the Company
to repurchase up to one third of the shares per year during the period from
April 22, 2002 through April 22, 2004. The repurchase price of such shares is
the greater of (a) ten times earnings per share (on a fully diluted basis) for
the four quarters preceding the quarter such repurchase occurs or (b) the
amount that would be paid as a liquidation distribution on the Preferred
Stock, plus any accrued but unpaid dividends on the Preferred Stock. The
Company's maximum future redemption obligation at June 30, 1997 is $370, which
is being accreted through the redemption dates by charges to accumulated
deficit.
F-11
INTIRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
In connection with the issuance of the Senior Stock, the Company issued
warrants for the purchase of 267,284 shares of common stock (the "Warrant
Shares"). The warrants are exercisable at an initial price of $12.50 per
share, subject to reduction upon the occurrence of certain events. For
financial accounting purposes, a value of $75 was ascribed to the warrants.
The holders of the warrants may require the Company to repurchase up to one
third of the Warrant Shares per year during the period from April 22, 1999
through April 22, 2001. The repurchase price of such shares shall be the
greater of (a) the book value of the Warrant Shares, as defined, (b) the
average daily closing price for twenty days prior to the repurchase, if the
common stock is publicly traded or (c) a third party sale value, less the
exercise price of the warrant. In certain circumstances, the Company may also
call the warrants prior to the repurchase period. At June 30, 1997, the
Company had no future redemption obligation as management believed that the
repurchase price of the Warrant Shares was approximately zero. In the event a
redemption obligation arises, this redemption obligation will be accreted
through the repurchase dates by charges to accumulated deficit.
11. STOCKHOLDERS' DEFICIT
Common Stock Warrants
In connection with the issuance of common stock during 1990, the Company
issued warrants for the purchase of 9,000 shares of common stock at an
exercise price of $3.75. These warrants were exercised during 1996.
In connection with the issuance of subordinated debt in 1993, the Company
issued warrants for the purchase of 37,500 shares of common stock. The
warrants are exercisable at $5.00 per share and expire in March 1998. The
value ascribed to the warrants was not significant.
On April 26, 1994, the Company issued a warrant in conjunction with the
acquisition of a business to purchase a total of 800 shares of its common
stock. The warrant is exercisable at $8.00 per share and expires in April
2004. The value ascribed to the warrant was not significant.
On April 30, 1997, the Company issued a warrant in conjunction with a sales
agreement to purchase a total of 5,000 shares of its common stock at a price
of $12.50 per share. The warrant is exercisable at the option of the holder
over a vesting period of five years. The value ascribed to the warrant was not
significant.
Nonqualified Stock Options
During 1989, the Company granted options to consultants of the Company to
purchase 20,000 shares of common stock. The options are exercisable at $2.50
per share and expire on March 31, 1999. At June 30, 1997, all such options are
exercisable. The value ascribed to the nonqualified stock options was not
significant.
At June 30, 1997, the Company has reserved 330,584 shares of common stock
for issuance upon the exercise of the nonqualified options and the common
stock warrants for common stock.
Notes Receivable for Stock Issuance
During 1995, the Company accepted a note receivable as consideration for the
purchase of 21,400 shares of common stock, pursuant to the exercise of
previously granted stock options. The note bears interest at 8% per annum and
is secured on a full-recourse basis by all of the holder's personal assets.
The Company accepted 6,295 shares with a value of $10.00 as payment of the
note, plus accrued interest. These shares are included in treasury stock.
During 1996, the Company accepted notes receivable as consideration for the
purchase of 13,400 shares of common stock, pursuant to the exercise of
previously granted stock options. The notes bear interest at 10% per
F-12
INTIRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
annum and are secured on a full-recourse basis by all of the holders' personal
assets. During the six months ended December 31, 1997, the Company accepted
4,716 shares (unaudited) with a value of $12.50 per share as payment of these
notes, plus accrued interest. These shares are included in treasury stock.
Treasury Stock
In addition to the item noted previously, treasury stock includes 5,400
shares of common stock with a value of $10.00 which were accepted as payment
for an outstanding loan, plus accrued interest, to a former employee. During
the six months ended December 31, 1997, the Company accepted 1,769 shares
(unaudited) with a value of $12.50 per share as payment for an outstanding
loan, plus accrued interest, to a former employee.
12. STOCK PLAN
During 1989, the Board of Directors adopted the 1989 Stock Plan (the
"Plan"). Under the Plan, directors, officers, employees and certain other
individuals may be awarded shares of common stock or granted options and
rights to purchase up to 200,000 shares of common stock of the Company.
Options granted may be either incentive stock options or non-qualified
options. In 1997, the Company amended the Plan to increase the number of
shares of common stock available for grant to 225,000.
Incentive stock options may be granted to any officer or employee at an
exercise price per share of not less than the fair market value per common
share on the date of such grant as determined by the Board of Directors (not
less than 110% of such value in the case of holders of 10% or more of the
total combined voting power of all classes of the Company's stock).
Non-qualified options may be granted to any employee, officer, director or
consultant at an exercise price per share of not less than the lesser of book
value per common share or fifty percent of the fair market value per common
share on the date of grant.
Options under the Plan are exercisable over periods determined by the Board
of Directors, not to exceed ten years from the date of grant. In the event of
termination of the optionee's relationship with the Company, vested options
not yet exercised terminate 90 days from the optionee's termination date.
Option activity under the Plan during the years ended June 30, 1996 and 1997
are summarized as follows:
YEAR ENDED JUNE 30,
-------------------------------------------------
1996 1997
------------------------ ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- -------------- -------- --------------
Outstanding at beginning of
period..................... 136,900 $ 6.07 148,950 $ 7.04
Granted................... 37,200 10.00 51,750 11.14
Exercised................. (13,400) 3.91 -- --
Cancelled................. (11,750) 8.54 (26,700) 9.68
-------- --------
Outstanding at period end... 148,950 7.04 174,000 7.82
======== ========
Options exercisable at pe-
riod end................... 66,600 4.45 81,390 5.21
-------- --------
Weighted average fair value
of options granted during
the period................. $ 2.42 $ 2.90
======== ========
Options available for future
grants..................... 15,650 15,600
======== ========
F-13
INTIRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
The following table summarizes information about employee options
outstanding and exercisable at June 30, 1997:
WEIGHTED
AVERAGE
REMAINING
RANGE OF NUMBER CONTRACTUAL NUMBER
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISABLE
--------------- ----------- ------------ -----------
$ 0.25.................................. 6,000 3 6,000
$ 2.50.................................. 22,000 3 16,760
$ 3.75.................................. 24,000 5 27,440
$ 8.00.................................. 29,700 7 17,220
$10.00.................................. 68,800 9 13,970
$12.50.................................. 23,500 10 --
------- ------
174,000 81,390
======= ======
FAIR VALUE DISCLOSURES
Had compensation cost for the Company's option plan been determined based on
the fair value at the grant dates, as prescribed in SFAS 123, the Company's
net income on a pro forma basis would have been as follows:
YEAR ENDED
JUNE 30,
-----------
1996 1997
----- -----
Net income
As reported.................................................... $ 139 $ 370
Pro forma...................................................... 125 326
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions for grants in 1996 and
1997: dividend yield of 0.0% for both years; risk-free interest rates of 5.7%
and 6.2% for 1996 and 1997, respectively; and a weighted-average expected
option term of 5 years for both years. Because additional option grants are
expected to be made each year and options vest over several years, the above
pro forma results are not representative of pro forma effects of reported net
income for future years.
13. INCOME TAXES
Income tax expense is summarized as follows:
YEAR ENDED
JUNE 30,
--------------
1995 1996 1997
---- ---- ----
Current
Federal..................................................... $16 $38 $16
State....................................................... 10 11 6
Deferred
Federal..................................................... -- -- --
State....................................................... -- -- --
--- --- ---
$26 $49 $22
=== === ===
F-14
INTIRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
Deferred tax assets and liabilities are as follows:
YEAR ENDED
JUNE 30,
--------------
1996 1997
------ ------
Deferred tax assets:
Net operating loss carryforwards........................... $1,037 $1,080
Alternative minimum tax credit carryforwards............... 106 50
Bad debt reserve........................................... 17 7
Inventory reserve.......................................... -- 37
Rental asset reserve....................................... 17 --
Amortization............................................... 53 53
------ ------
1,230 1,227
Deferred tax liabilities
Depreciation and amortization.............................. (597) (722)
Deferred revenue........................................... (6) (11)
------ ------
(603) (733)
Gross deferred tax assets.................................... 627 494
Deferred tax asset valuation allowance....................... (503) (370)
------ ------
Net deferred tax asset....................................... $ 124 $ 124
====== ======
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. Statutory federal rate to pretax
income as a result of the following differences:
YEAR ENDED
JUNE 30,
------------------
1995 1996 1997
----- ---- -----
Income tax provision (benefit) at the Statutory U.S.
tax rates............................................ $(127) $ 64 $ 134
Increase (decrease) in rates resulting from:
Change in valuation allowance....................... 133 (16) (133)
Nondeductible items................................. 13 (8) 15
State taxes, net.................................... 7 9 6
----- ---- -----
Income tax provision at the effective tax rates..... $ 26 $ 49 $ 22
===== ==== =====
At June 30, 1997, the Company has the following net operating loss
carryforwards available to reduce future federal taxable income:
Net operating loss carryforwards relating to losses incurred prior to
November 30, 1990, utilization limited to $170 per year............. $ 386
Net operating loss carryforwards relating to losses incurred in the
year ending December 31, 1994 and June 30, 1997, utilization not re-
stricted............................................................ 330
Net operating loss carryforwards relating to losses incurred in the
six months ended June 30, 1995, utilization limited to $304 through
2001................................................................ 1,826
------
$2,542
======
Subsequent ownership changes could further affect the limitations in future
years.
F-15
INTIRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
14. INCOME (LOSS) PER SHARE DISCLOSURES
FOR THE YEAR ENDED JUNE 30,
----------------------------------------------------------------------------------------------------
1995 1996 1997
-------------------------------- -------------------------------- --------------------------------
PER PER PER
LOSS SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARES
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------ ----------- ------------- ------
Net income
(loss)........... $(400) $ 139 $ 370
Less accretion and
dividends accrued
on redeemable
stock............ (456) (486) (602)
----- ----- -----
Loss available to
common
stockholders..... $(856) 653,629 $(1.31) $(347) 725,647 $(0.48) $(232) 777,872 $(.30)
===== ======= ====== ===== ======= ====== ===== ======= =====
FOR THE SIX MONTHS ENDED DECEMBER 31,
-----------------------------------------------------------------
1996 1997
-------------------------------- --------------------------------
PER PER
INCOME SHARES SHARE INCOME SHARES SHARES
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
Net income ............. $ 611 $ 289
Less accretion and divi-
dends accrued on
redeemable stock....... (301) (437)
----- -----
Income (loss) available
to common
stockholders........... $ 310 777,872 $.40 $(148) 777,872 $(.19)
===== ======= ==== ===== ======= =====
EFFECT OF DILUTIVE SECU-
RITIES
Put warrants............ 66,821
Nonqualified options.... 27,408
Warrants................ 18,910
Incentive stock op-
tions.................. 16,592
-------
Income available to
common stockholders
plus assumed
conversions............ $ 310 907,603 $.34
===== ======= ====
Preferred Stock (Note 10) was not included in the computation of dilutive
income (loss) per share for all periods presented because the effect of such
inclusion would be anti-dilutive.
Incentive and nonqualified stock options, put warrants and warrants to
purchase an aggregate of 590,284, 494,334, 512,384, and 522,084 shares of
common stock at June 30, 1995, 1996 and 1997 and December 31, 1997 (unaudited)
at various exercises prices ranging from $.25 to $12.50 were outstanding at
those dates but were not included in the computation of dilutive income (loss)
per common shares because the effect of such inclusion would be anti-dilutive.
15. SIGNIFICANT CUSTOMER
Net sales to a single customer totaled approximately $3,860 and $6,143 for
years ended June 30, 1996 and June 30, 1997, respectively, or approximately
26% and 31%, respectively, of the Company's net product revenues. There was no
one single customer which accounted for more than 10% of the Company's net
product revenues during the year ended June 30, 1995.
16. LEASE COMMITMENTS
The Company conducts a major part of its operations from leased facilities.
These facility leases are classified as operating leases for financial
accounting purposes. Rent expense under all of its operating leases
F-16
INTIRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
approximated $157, $113 and $155 for the years ended June 30, 1995, 1996 and
1997, respectively. Future minimum lease payments under all noncancellable
leases are as follows:
YEAR ENDED AGGREGATE
JUNE 30, ANNUAL RENTAL
---------- -------------
1998.................................................... $229
1999.................................................... 233
2000.................................................... 238
2001.................................................... 177
Thereafter.............................................. 89
17. RETIREMENT SAVINGS PLAN
In 1993, the Company adopted a defined contribution savings plan under
Section 401(k) of the Internal Revenue Code. This plan covers substantially
all employees who meet minimum age and service requirements and allows
participants to defer a portion of their annual compensation on a pre-tax
basis. Company contributions to the plan may be made at the discretion of the
Board of Directors. There were no contributions made to the plan by the
Company through June 30, 1997.
18. SUBSEQUENT EVENT (UNAUDITED)
On December 22, 1997, the Company signed an Agreement and Plan of Merger
with Mac-Gray Corporation. The merger is subject to applicable regulatory and
stockholder approvals. Management expects the merger to be consummated in
early 1998.
F-17
PRO FORMA UNAUDITED CONDENSED COMBINED FINANCIAL INFORMATION
The following pro forma unaudited financial information gives effect to the
Merger to be accounted for as a pooling of interests. The pro forma unaudited
condensed balance sheet presents the combined financial position of Mac-Gray
and Intirion as of December 31, 1997 assuming that the Merger had occurred as
of December 31, 1997. Such pro forma information is based upon the historical
balance sheet data of Mac-Gray and Intirion as of that date. The pro forma
unaudited condensed statement of operations gives effect to the proposed
Merger by combining the results of operations of Mac-Gray for the three years
ended December 31, 1997 with the results of operations of Intirion for the
three years ended June 30, 1997, respectively, on a pooling of interests
basis. The pro forma unaudited Mac-Gray condensed statement of operations data
for the year ended December 31, 1997 include the results of operations of Sun
Services as if the Sun Services Acquisition had occurred on January 1, 1997.
The historical results of Sun Services for the period from April 1, 1997 to
April 17, 1997 (the acquisition date) have not been included and are not
material to Mac-Gray. The unaudited pro forma combined statement of income for
Sun Services has been included following the notes to pro forma unaudited
condensed combined financial information. The operations of Intirion for the
six months ended December 31, 1997, resulting in net sales and net income of
$13,355,000 and $289,000, have not been included in the pro forma statements
of operations.
The pro forma unaudited financial information does not purport to represent
what Mac-Gray's financial position or results of operations would have
actually been had the Merger occurred at the beginning of the earliest period
presented or to project Mac-Gray's financial position or results of operations
for any future date or period. This pro forma unaudited financial information
should be read in conjunction with the historical financial statements and
notes thereto of Mac-Gray and Intirion included elsewhere in this
Prospectus/Proxy Statement.
F-18
MAC-GRAY CORPORATION
PRO FORMA UNAUDITED CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1997
MAC-GRAY INTIRION ADJUSTMENTS(A) COMBINED
-------- -------- -------------- --------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents....... $ 3,774 $ -- $(1,000) $ 2,774
Trade receivables, net.......... 4,256 2,641 -- 6,897
Inventory....................... 2,886 4,631 -- 7,517
Prepaid commissions and other
assets......................... 2,818 269 -- 3,087
------- ------- ------- -------
Total current assets.......... 13,734 7,541 (1,000) 20,275
------- ------- ------- -------
Property, plant & equipment, net.. 37,699 7,392 -- 45,091
Intangible assets, net............ 27,926 691 -- 28,617
Other assets...................... 5,015 338 -- 5,353
------- ------- ------- -------
Total assets...................... $84,374 $15,962 $(1,000) $99,336
======= ======= ======= =======
LIABILITIES, REDEEMABLE STOCK AND
WARRANTS AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current Liabilities:
Current portion of long-term
debt and line of credit
borrowings..................... $ 2,026 $ 7,143 $ -- $ 9,169
Accounts payable and accrued ex-
penses......................... 12,593 2,330 600 15,523
Deferred revenues and deposits.. -- 2,552 -- 2,552
------- ------- ------- -------
Total current liabilities..... 14,619 12,025 600 27,244
Long-term debt.................... 5,395 -- -- 5,395
Capital lease obligations......... 491 -- -- 491
Other liabilities................. 6,911 -- -- 6,911
------- ------- ------- -------
Total liabilities............. 27,416 12,025 600 40,041
------- ------- ------- -------
Redeemable stock and warrants..... 7,797 6,963 (6,963) 7,797
------- ------- ------- -------
Stockholders' equity (deficit)
Common Stock:
Mac-Gray Corporation.......... 110 -- 16 126
Intirion Corporation.......... -- 7 (7) --
Additional paid-in capital...... 51,035 899 5,756 57,690
Retained earnings (deficit)..... (1,984) (3,734) (600) (6,318)
Less-treasury stock at cost..... -- (198) 198 --
------- ------- ------- -------
Total stockholders' equity
(deficit).................... 49,161 (3,026) 5,363 51,498
------- ------- ------- -------
Total liabilities, redeemable
stock and warrants and
stockholders' equity (deficit)... $84,374 $15,962 $(1,000) $99,336
======= ======= ======= =======
- --------
(a) The pro forma condensed balance sheet gives effect to the proposed Merger
of Mac-Gray and Intirion by combining the respective balance sheets of the
two companies at December 31, 1997 on a pooling of interests basis. As
shown above, the accounts have been adjusted to reflect the issuance of
1,593,061 shares of Mac-Gray Common Stock and approximately $1,000,000 in
exchange for all of the outstanding securities of Intirion. The excess of
the value of Intirion securities received in exchange over the value of
Mac-Gray Common Stock issued has been credited to additional paid-in
capital. The accounts have also been adjusted to reflect estimated
transaction costs of approximately $600,000 associated with the proposed
Merger. See Note 3 on page F-23.
See notes to pro forma unaudited condensed combined financial information.
F-19
MAC-GRAY CORPORATION
PRO FORMA UNAUDITED CONDENSED COMBINED
STATEMENT OF OPERATIONS
YEAR ENDED
---------------------
DECEMBER 31, JUNE 30,
1997 1997
------------ --------
PRO FORMA PRO FORMA
MAC-GRAY(A) INTIRION ADJUSTMENTS COMBINED
------------ -------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue.......................... $83,402 $23,477 $-- $106,879
Cost of Revenue.................. 62,270 15,141 -- 77,411
------- ------- ---- --------
Gross Profit..................... 21,132 8,336 -- 29,468
Operating expenses............... 10,658 7,490 -- 18,148
------- ------- ---- --------
Operating Income................. 10,474 846 -- 11,320
Other income (expense), net...... (2,429) (454) -- (2,883)
------- ------- ---- --------
Income before income taxes....... 8,045 392 -- 8,437
Provision for income taxes(b).... (5,206) (22) -- (5,228)
------- ------- ---- --------
Net income....................... $ 2,839 $ 370 $-- $ 3,209
======= ======= ==== ========
Accretion and dividends accrued
on redeemable stock............. -- (602) 602 --
------- ------- ---- --------
Net income (loss) available to
common stockholders............. $ 2,839 $ (232) $602 $ 3,209
======= ======= ==== ========
Net income (loss) per common
share (Note 5).................. $ 0.39 $ (0.30) $ 0.36
======= ======= ========
Weighted average common shares
outstanding (Note 5)............ 7,263 778 8,856
======= ======= ========
Net income (loss) per common
share--assuming dilution (Note
5).............................. $ 0.38 $ (0.30) $ 0.36
======= ======= ========
Weighted average common shares
outstanding--assuming dilution
(Note 5)........................ 7,391 778 8,984
======= ======= ========
Tax adjusted net income (loss)
available to common stockholders
(Note 4)........................ $ 4,827 $ (232) $602 $ 5,197
======= ======= ==== ========
Tax adjusted net income (loss)
per common share (Note 5)....... $ 0.66 $ (0.30) $ 0.59
======= ======= ========
Tax adjusted net income (loss)
per common share--assuming
dilution (Note 5)............... $ 0.65 $ (0.30) $ 0.58
======= ======= ========
- --------
(a) Includes the results of Sun Services as if the Sun Services Acquisition had
occurred on January 1, 1997. The unaudited pro forma combined statement of
income for Sun Services has been included following the notes to pro forma
unaudited condensed combined financial information.
(b) The 1997 provision for income taxes includes a non-recurring charge of
$4,037 as a result of the termination of Mac-Gray's S corporation status.
See notes to pro forma unaudited condensed combined financial information.
F-20
MAC-GRAY CORPORATION
PRO FORMA UNAUDITED CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED
---------------------
DECEMBER 31, JUNE 30,
1996 1996
------------ -------- PRO FORMA
MAC-GRAY INTIRION ADJUSTMENTS COMBINED
------------ -------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue.......................... $64,427 $17,833 $ -- $82,260
Cost of Revenue.................. 48,120 11,079 -- 59,199
------- ------- ------ -------
Gross Profit..................... 16,307 6,754 -- 23,061
Operating expenses............... 8,272 6,168 -- 14,440
------- ------- ------ -------
Operating Income................. 8,035 586 -- 8,621
Other income (expense), net...... (2,043) (398) -- (2,441)
------- ------- ------ -------
Income before income taxes....... 5,992 188 -- 6,180
Provision for income taxes....... (465) (49) -- (514)
------- ------- ------ -------
Net income....................... $ 5,527 $ 139 $ -- $ 5,666
======= ======= ====== =======
Accretion and dividends accrued
on redeemable stock............. -- (486) 486 --
------- ------- ------ -------
Net income (loss) available to
common stockholders............. $ 5,527 $ (347) $ 486 $ 5,666
======= ======= ====== =======
Net income (loss) per common
share (Note 5).................. $ 0.87 $ (0.48) $ 0.71
======= ======= =======
Weighted average common shares
outstanding (Note 5)............ 6,368 726 7,961
======= ======= =======
Net income (loss) per common
share--assuming dilution (Note
5).............................. $ 0.87 $ (0.48) $ 0.71
======= ======= =======
Weighted average common shares
outstanding--assuming dilution
(Note 5)........................ 6,368 726 7,961
======= ======= =======
Tax adjusted net income (loss)
available to common stockholders
(Note 4)........................ $ 3,595 $ (347) $ 486 $ 3,734
======= ======= ====== =======
Tax adjusted net income (loss)
per common share (Note 5)....... $ 0.56 $ (0.48) $ 0.47
======= ======= =======
Tax adjusted net income (loss)
per common share-assuming
dilution (Note 5)............... $ 0.56 $ (0.48) $ 0.47
======= ======= =======
See notes to pro forma unaudited condensed combined financial information.
F-21
MAC-GRAY CORPORATION
PRO FORMA UNAUDITED CONDENSED COMBINED
STATEMENT OF OPERATIONS
YEAR ENDED
---------------------
DECEMBER 31, JUNE 30,
1995 1995
------------ -------- PRO FORMA
MAC-GRAY INTIRION ADJUSTMENTS COMBINED
------------ -------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue.......................... $50,710 $15,642 -- $66,352
Cost of Revenue.................. 36,559 9,852 -- 46,411
------- ------- ------ -------
Gross profit..................... 14,151 5,790 -- 19,941
Operating expenses............... 6,887 5,735 -- 12,622
Restructuring charge............. -- 276 -- 276
------- ------- ------ -------
Operating Income................. 7,264 (221) -- 7,043
Other income (expense), net...... (1,120) (153) -- (1,273)
------- ------- ------ -------
Income before income taxes....... 6,144 (374) -- 5,770
Provision for income taxes....... (374) (26) -- (400)
------- ------- ------ -------
Net income (loss)................ $ 5,770 $ (400) -- $ 5,370
======= ======= ====== =======
Accretion and dividends accrued
on redeemable stock............. -- (456) 456 --
------- ------- ------ -------
Net income (loss) available to
common stockholders............. $ 5,770 $ (856) $ 456 $ 5,370
======= ======= ====== =======
Net income (loss) per common
share (Note 5).................. $ 0.91 $ (1.31) $ 0.67
======= ======= =======
Weighted average common shares
outstanding (Note 5)............ 6,368 654 7,961
======= ======= =======
Net income (loss) per common
share--assuming dilution (Note
5).............................. $ 0.91 $ (1.31) $ 0.67
======= ======= =======
Weighted average common shares
outstanding--assuming dilution
(Note 5)........................ 6,368 654 7,961
======= ======= =======
Tax adjusted net income (loss)
available to common stockholders
(Note 4)........................ $ 3,686 $ (856) $ 456 $ 3,286
======= ======= ====== =======
Tax adjusted net income (loss)
per common share (Note 5)....... $ 0.58 $ (1.31) $ 0.41
======= ======= =======
Tax adjusted net income (loss)
per common share-assuming
dilution (Note 5)............... $ 0.58 $ (1.31) $ 0.41
======= ======= =======
See notes to pro forma unaudited condensed combined financial information.
F-22
NOTES TO PRO FORMA UNAUDITED CONDENSED COMBINED FINANCIAL INFORMATION
1. The pro forma unaudited condensed combined financial information reflects
the issuance of shares of Mac-Gray Common Stock for all of the issued and
outstanding shares of Intirion Series A Preferred Stock, Intirion Common
Stock, $12.50 Warrants, $5.00 Warrants, Intirion Options and Miscellaneous
Warrants and the issuance of cash and shares of Mac-Gray Common Stock for all
of the issued and outstanding shares of Intirion Senior Preferred Stock in
connection with the proposed Merger assuming that 1,317,837 shares of Mac-Gray
Common Stock were issued in exchange for all of the issued and outstanding
shares of Intirion Series A Preferred Stock, Intirion Common Stock, $12.50
Warrants, $5.00 Warrants, Miscellaneous Warrants and Intirion Options and
assuming that 275,224 shares of Mac-Gray Common Stock and approximately $1
million was issued in exchange for all of the issued and outstanding shares of
Intirion Senior Preferred Stock.
The following table summarizes the Intirion Exchangeable Securities (other
than the Intirion Senior Preferred Stock) and identifies the shares of Mac-
Gray Common Stock to be issued in the exchange. The table excludes the
estimated 275,224 shares of Mac-Gray Common Stock and approximately $1 million
to be issued in exchange for the Intirion Senior Preferred Stock as these
shares are not common equivalent shares of Intirion Common Stock and are being
exchanged for a combination of Mac-Gray Common Stock and cash. The equivalent
number of common shares presented below represents the incremental number of
Intirion shares to be issued using the treasury stock method.
INTIRION NUMBER OF EQUIVALENT NUMBER OF MAC-GRAY COMMON
SECURITIES SHARES COMMON SHARES STOCK TO BE ISSUED
- ---------- --------- -------------------- ------------------
Series A Preferred........... 40,000 240,000 263,690
Common Stock................. 759,688 759,688 834,674
Warrants and Options......... 506,484 199,756 219,473
--------- ---------
Total........................ 1,199,444 1,317,837
========= =========
Calculated Exchange Ratio.... 1.10
=========
The pro forma unaudited combined condensed balance sheet gives effect to the
proposed Merger by combining the respective balance sheets of Mac-Gray and
Intirion at December 31, 1997 on a pooling of interests basis. The excess of
the value of Intirion shares received in exchange over the value of Mac-Gray
shares issued ($5,756,000) has been credited to additional paid-in capital.
The pro forma unaudited combined condensed statements of operations give
effect to the proposed Merger by combining the results of operations of Mac-
Gray for the three years ended December 31, 1997 with the results of
operations of Intirion for the three years ended June 30, 1997, respectively,
on a pooling of interests basis. The pro forma unaudited condensed combined
statement of operations for the year ended December 31, 1997 also gives effect
to Mac-Gray's acquisition of Sun Services on April 17, 1997, in a transaction
accounted for as a purchase, and includes the results of operations of Sun
Services as if it had occurred on January 1, 1997.
2. There were no transactions between Mac-Gray and Intirion during any of
the periods presented.
3. Mac-Gray and Intirion expect to incur aggregate transaction costs of
approximately $600,000 associated with the proposed Merger, primarily in the
quarter in which the proposed Merger will be consummated. The pro forma
condensed combined balance sheet as of December 31, 1997 has been adjusted to
reflect these costs, most of which will not be deductible for corporate income
tax purposes. These estimated costs are not reflected in the pro forma
unaudited condensed combined statement of operations. The amount of these
costs is a preliminary estimate and therefore is subject to change.
4. Prior to the IPO, Mac-Gray was not subject to corporate federal income
tax as all taxable income was passed through to the stockholders and was
reported on their personal tax returns. Accordingly, the results of Mac-Gray
through October 16, 1997 do not include any corporate federal income tax
provisions.
F-23
The pro forma information on the accompanying unaudited condensed combined
statement of operations reflects the estimated results of operations as if
Mac-Gray had been subject to corporate income taxes during the periods
presented. A similar pro forma calculation has been included in Mac-Gray's
historical financial statements, as more fully described in Note 15 of Mac-
Gray's Consolidated Financial Statements. Similar adjustments were not made
for Intirion, as Intirion was subject to corporate federal income tax for all
periods presented.
5. The pro forma unaudited combined net income per share amounts are based
on the weighted average number of shares of common stock and common stock
equivalents issued and outstanding of Mac-Gray and Intirion for each period
and have been restated to give effect to the adoption of Statement of
Financial Accounting Standards No. 128 (SFAS 128) and Staff Accounting
Bulletin No. 98 (SAB 98). Shares of Intirion have been adjusted to the
equivalent shares of Mac-Gray Common Stock for each period presented. Net
income per share amounts for Mac-Gray are reflective of the Mac-Gray
Combination.
F-24
The following unaudited pro forma combined statement of income for the year
ended December 31, 1997 has been adjusted to reflect the Sun Services
Acquisition as if it occurred on January 1, 1997. For the year ended December
31, 1997, the historical results of Sun Services for the period from April 1,
1997 through April 16, 1997 have not been included and are not material to
Mac-Gray.
MAC-GRAY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
COMPANY PRO FORMA
YEAR ENDED YEAR ENDED
DECEMBER 31, SUN SERVICES PRO FORMA ACQUISITION DECEMBER 31,
1997 ACQUISITION (1) COMBINED ADJUSTMENTS 1997
------------ --------------- --------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue................. $81,370 $2,032 $83,402 $ $83,402
Cost of revenue:
Commissions........... 31,717 797 32,514 32,514
Laundry route
expenditures......... 12,232 183 12,415 12,415
Depreciation and
amortization......... 8,635 209 8,844 146 (2) 8,990
Cost of equipment
sales ............... 8,187 164 8,351 8,351
------- ------ ------- ---- -------
Total cost of
revenue............ 60,771 1,353 62,124 146 62,270
------- ------ ------- ---- -------
Operating expenses:
General and
administration....... 4,699 307 5,006 (69)(3) 4,937
Sales and marketing... 5,165 47 5,212 5,212
Depreciation.......... 503 6 509 509
------- ------ ------- ---- -------
Total operating
expenses........... 10,367 360 10,727 (69) 10,658
------- ------ ------- ---- -------
Income from operations.. 10,232 319 10,551 (77) 10,474
Interest expense...... (2,521) (89) (2,610) (2,610)
Other income
(expense), net....... 181 -- 181 181
------- ------ ------- ---- -------
Income before provision
for income taxes....... 7,892 230 8,122 (77) 8,045
Provision for income
taxes(4)............. (5,206) -- (5,206) (5,206)
------- ------ ------- ---- -------
Net income.............. $ 2,686 $ 230 $ 2,916 $(77) $ 2,839
======= ====== ======= ==== =======
Net income (loss) per
common share (Note 5).. $ 0.39
=======
Weighted average common
shares outstanding
(Note 5)............... 7,263
=======
Net income (loss) per
common share--assuming
dilution (Note 5)...... $ 0.38
=======
Weighted average common
shares outstanding--
assuming dilution
(Note 5)............... 7,391
=======
Pro forma tax adjusted
net income(5).......... $ 4,735 $ 138 $ 4,873 $(46) $ 4,827
======= ====== ======= ==== =======
Pro forma tax adjusted
net income per common
share(6)............... $ 0.66
=======
Pro forma tax adjusted
net income per common
share-assuming
dilution(6)............ $ 0.65
=======
- --------
(1) For the year ended December 31, 1997, the historical results of Sun
Services for the period from April 1, 1997 to April 16, 1997 have not been
included and are not material to Mac-Gray.
(2) Reflects increased amortization, due to Mac-Gray application of purchase
accounting in the Sun Services Acquisition, in which the excess of the
purchase price over the fair value of the net assets acquired was
allocated to goodwill and is being amortized over twenty years.
(3) Reflects the decrease in general and administration expenses due to the
reduction of Sun Services executive compensation costs as a result of
certain agreements entered into in connection with the Sun Services
Acquisition.
(4) The 1997 provision for income taxes includes a non-recurring charge of
$4,037 as a result of the termination of Mac-Gray's S corporation status.
(5) Pro forma tax adjusted net income has been adjusted to give effect to Mac-
Gray's operations as if Mac-Gray were subject to federal and state income
taxes on a corporate level (at an estimated income tax of 40%) during the
periods presented.
(6) Mac-Gray adopted Statement of Financial Accounting Standards No. 128 (SFAS
128) in 1997. In conjunction with the adoption of this standard, the
Company has complied with Staff Accounting Bulletin No. 98 (SAB 98)
recently issued by the SEC. Accordingly, earnings per share data have been
restated for all periods presented to give effect to both pronouncements.
Earnings per share data are reflective of the Mac-Gray Combination for all
periods presented.
F-25